AT&T Inc. (T) Q3 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the AT&T Third Quarter 2012 Earnings Release. (Operator Instructions) As a reminder, today’s call is being recorded. With that being said, I’ll turn the conference now to Susan Johnson. Please go ahead.

Thank you, John. Good morning, everyone, and welcome to our third quarter conference call. It’s great to have you with us this morning. I’m Susan Johnson, Head of Investor Relations for AT&T. Joining me on the call today is John Stephens, AT&T’s Chief Financial Officer, and Ralph de la Vega, AT&T’s President and CEO for Mobility. John will cover our consolidated and Wireline results, and Ralph will give us an update on our wireless business. Then we’ll follow with Qs & As. Let me remind you our materials are available on the Investor relations page of the AT&T website that’s www.att.com/investor.relations. I always need to cover our Safe Harbor statement, which is on Slide 3. This presentation and comments may contain forward-looking statements. They’re subject to risks. Results may differ materially. Details are in our SEC filings and on AT&T’s website. Before I turn the call over to John, let me quickly cover our consolidated financial summary, which is on Slide 4. Reported EPS for the quarter was $0.63, $0.02 higher than last year’s third quarter, and when you exclude our divested Ad Solutions unit we are up $0.03 or 5% for the quarter and 8% year to date. Revenue growth continues to be solid. When you exclude the divested Advertising Solutions business, consolidated revenues were up 2.6% year-over-year thanks to strong revenue growth in Wireless, continued gains in U-verse Services and growth in strategic business services. Consolidated margins were down slightly year-over-year due to higher smartphone sales. And cash flow was very impressive. In fact, it was at record levels. Cash flow from operating activities for the quarter totaled $11.5 billion. And free cash flow was $6.5 billion. We aggressively bought back shares as part of our repurchase program. Through the end of last week we have bought back more than 271 million shares for $9.4 billion. With that overview, I’ll now turn the call over to AT&T’s Chief Financial Officer, John Stephens. John?

Thank you, Susan, and good morning, everyone, and thank you for being with us today. Before we get to the detailed results, let’s start with a quick overview. Highlights are on Slide 5. During the quarter, we continued doing an excellent job of growing the business, transforming our revenue streams, and improving our cost structure. We had solid revenue growth, consolidated Wireless and Consumer Wireline. We grew earnings, and we had our best free cash flow ever, both in the quarter and year to date. We also took a significant step to improving our funding status for our pension plans. Last week we filed an application with the Department of Labor that seeks authorization to voluntarily contribute a $9.5 billion preferred equity interest in AT&T Mobility into the Pension Plan Trust. We see this is a win-win situation for investors, our employees, and our retirees. This will increase funding well above the required level by law and further assure the long-term health of our pension fund. We will collaborate with the Department of Labor to provide any details it might need, and work to obtain approval before the end of 2013. As we look at our operations, Wireless had another strong quarter. Ralph will give you more details in a moment, but the headline was strong revenue growth led by the Mobile Internet, including our strongest post-pain ARPU growth in six quarters. And U-verse continues to be a great success story for us. We continue to add subscribers at a rapid clip. We now have 7.4 million total U-verse subscribers, both TV and high-speed Internet. This drove our ninth consecutive quarter of consumer Wireline revenue growth and our strongest growth in more than four years. So the team is executing at a high level. Financial results are solid. We’ve taken steps to improve our capital structure, and all this puts us in a great position to continue delivering strong results as we finish the year. Let’s now take a look at detailed results starting with consolidated revenues on Slide 6. As you know, the sale of our Advertising Solutions business was completed earlier this year. If you exclude Ad Solutions, consolidated revenues were up $0.75 billion, or 2.6%. The drivers are Mobile Internet, strong performance with U-verse and continued strength in strategic business services. These growth drivers now account for 81% of our revenues in the third quarter. That’s up from 78% a year ago and 75% two years ago. This is up about $1.5 billion, or more than 6% year-over-year. We expect this mix shift to continue as we sharpen our focus on our growth drivers and continue to successfully transform our business. With that, I now would like to turn the call over to my good friend Ralph de la Vega, who will give us a Wireless update.

Thank you, John, and good morning, everyone. It’s great to be on the earnings call once again. Before we get to the Wireless highlights, I’d like to give you a quick update on some strategic moves we made during the quarter that position us for future growth; details are Slide 7. First, we introduced Mobile Share, our new data plans that allow customers to share buckets of data with up to 10 different devices; second, we accelerated our LTE build putting us ahead of schedule with our deployment plans; and finally, we announced an incredible new portfolio of 14 LTE devices that take advantage of that network including the launch of the iPhone 5. Let me give you a quick overview on Mobile Share. Since we first offered this in August, we have been really excited with the results. Customer response has been incredible, early take rates have been impressive, and in fact more than a third of Mobile Share subscribers are choosing the larger data plans of 10 GB or more. Plus, all customers love having the choice to take Mobile Share plans, keeping what they have, or choosing from one of our other usage-based data plans. Now let me provide more detail on our LTE deployment with our network update on Slide 8. We made tremendous progress with our LTE deployment in the third quarter. We’re well on pace to more than double our LTE coverage this year, already reaching more than 135 million pops. Download speeds for LTE network have been blazing fast with speeds up to 12 Mb per second, and in many markets average download speeds are even faster. You can see this LTE speed boost with our Android devices where average download speeds have increased more than 50% since the first of the year.…

Thank you, John. Let me turn it back to the operator. John, I think we’re now ready to take questions.

(Operator Instructions) And first on the line is Simon Flannery with Morgan Stanley. Please go ahead.

Okay. Thank you very much. Good morning. John, I wonder if you could just spend a couple of minutes just talking through the rationale behind the actions you are taking on improving the pension funding position and why you chose that solution versus, say, other solutions And then, Ralph, perhaps you could give us more color on the mobile share. What are you seeing in terms of changing behavior? Are people really starting to add more devices now such as tablets to their plans? And is the share decisions and the dilution, if any, sort of in line with expectations? Thanks.

Good morning, Simon, and thank you for your questions. With regard to the pension funding, quite frankly, it’s a fairly direct collection of issues that we’re trying to address. First and foremost, the company had made some commitments to our employees and retirees on pensions and we’re going to make sure we live up to those. Secondly, we wanted to resolve the issue not a year in time, but far into the future. Third, if we would have put a large amount of cash into the plan, there would’ve been challenges with how the fiduciaries would’ve invested that and where to put it, and what better place to put it than our own Wireless business So that was the backdrop of the idea. We’ve discussed this with representatives of the DoL and had positive conversations with them on the possibility. When you put it all together and you can, if you will, solve or resolve funding for many, many years to come in a very cash efficient manner and join your employees in a form of ownership in your best business, we believe it’s a win for everybody. I will tell you we were really thrilled by the comments of the CWA on their national office and their support for it. And as a sidebar, our response from our employees and our retiree base has been great. They’ve been thrilled by it. But those are the backdrops. It’s financially efficient. It’s cash efficient. But most importantly, it funds the commitments we’ve made to our employees and retirees for a long time to come. Ralph?

Thank you John. And Simon, the results from our mobile share plans are just fantastic. I am just thrilled with what we’ve seen early on. First of all, as we mentioned on the call, the take rate, 2 million in five weeks, is outstanding. The fact that a third or more of our sales are picking the 10 GB or higher plan says that the ARPU that we were expecting from these plants is actually higher than what we expected. So we don’t anticipate these plans being dilutive. And in fact, this is yet to play out, but they could be accretive. And you’re seeing ARPU, as we reported, reflect some of that. In addition to that, I mentioned something that’s also very unique is that we’re seeing about 15% of subscribers move from unlimited to mobile share plans. I think that more customers we have on usage-based plans the better we are. So I’m just really thrilled. What it really does for our future, Simon, is as we head into the fourth quarter, we’re going in with a nice pace of mobile share customers. And then we’re making available what I think is the industry’s best line up of tablets. They have the full lineup of Apple, the full lineup of Android, and then the exclusive launches for the Amazon Fire HD and for the Windows 8 tablets. So I think that we’re going to have a really nice quarter with significant additions of tablets as a result of our mobile share progress.

Thank you.

Our next question is from John Hodulik with UBS. Please go ahead.

Okay. Thanks, guys. Ralph, maybe a question for you on the Wireless side and the iPhone. Have you thus far into the quarter seen those supply constraints that you talked about that shifted the sales into the base from gross adds, has that changed at all, or do you have better visibility in terms of volumes into the holiday season? And have you seen that percentage that goes into the base versus into gross adds, has that started to shift? And then secondly, you listed a couple of drivers in terms of ARPU growth. The smartphone mix is one of them. You’re above the guidance right now. Do you think this is rate that can accelerate from here, or is this how we can expect ARPU trends to continue through the next couple of quarters?

John, I think that what is happening with supplies of iPhones during the launch is what we typically have experienced. In these first few weeks after launch, there typically is a supply constraint. And then it usually eases up, and I don’t expect this iPhone launch to be any different. We have seen what happens during an iPhone launch, there’s a huge spike in orders, and then they slow down, and then they get more reasonable because of the process that we use. And we’ve seen already that happen. So I feel very comfortable that we’re in a position where we’ll be able to add additional customers as supply becomes available. We actually have seen in days in which we have supply available reach 5,000 or 10,000 net adds in a day compared to days that we don’t. So we see that the net additions are fluctuation of inventory more so than anything else and we’re pretty confident like in other launches that, that inventory will become available and we’re going to do even better in the fourth quarter. In terms of the smartphone mix, I love what we have done. As we mentioned in the report, we have added 1.4 million smartphones in the quarter, which means we’ve actually converted customers as well, customers that were paying us feature phone revenues, and almost doubling their revenues to us as we add 1.4 million smartphones. So I’m very pleased with the mix. As we reported, we sold over 6 million smartphones in the quarter, which is up 1.2 million over a year ago and up 900,000 over the past quarter. So I feel really good that we’re improving the mix of smartphones, which is a platform for future growth. And which by the way, John, we look forward to our meeting with you on November 7 and talking to you beyond the current quarter and the current year how we’re going to use that smartphone platform to grow a host of other services that will allow us to grow ARPU.

Great. Thanks, guys.

Our next question is from Phil Cusick with JP Morgan. Please go ahead.

Hi, guys. Thanks. So I guess two, one for Ralph. First of all, the voice device is flat, it is driven my iPhone. But there is essentially no growth in the Voice business today, or in the industry overall. How you think about this going forward? Are people looking for voice growth? Are we just looking at it the wrong way and really we should be focused on tablets for industry growth going forward? Or do you think there’s a natural level of voice growth available in the industry? And then for John, you’re buying back stock at the quarter at an amazing pace, but you’re buying it back at multi-year highs on the stock. Are there other potential things to do with this cash, whether that be sort of invested back in the business and try and drive the business a little faster even? Or is that just not really possible or are there potentially acquisitions out there over the next year that you might start thinking about alternative uses? Thanks.

If you would, let me answer first then I’ll ask Ralph. First of all with regard to the stock buyback, I think one thing you have to take into account with regard to the process is, for example, the shares we bought earlier in the year, we’ve already saved $0.44 or $0.88 or $1.32 in dividends this year alone. Because of our dividend rate the cash that comes back to the company, comes and lowers the price issues very quickly. That’s one point. Two, we do a very disciplined approach at looking at our net present value of our cash flows out of our business and our business plans. We compare that to, quite frankly, what analysts and people think of the value of our stock. And then third, we compare it to our difference between our cash cost of debt and our cash cost of equity. It’s a very disciplined process and we follow it closely in making all our decisions to buy back shares. Third, we have great financial flexibility. I mean maybe it wasn’t forthright, but our debt ratios have actually come down. We continue to have great capacity in our balance sheet as we’ve lowered our net debt to EBITDA to 1.4 and our debt to equities well below 40%. So we’ve been buying back the shares with, so to speak, cash that would be sitting on the balance sheet. But you can see with what we’ve done with the spectrum and so forth that there is no lack of our ability to buy or to invest in our business. Were putting close to $14 billion in CapEx in the first three quarters. We’re investing in the business. Let me, I’m sorry, do you have a follow-up to that

No. That’s great.

And let me take the revenue question, though, too. And I understand the customer account issues and so forth, but I really want to make a point from simply a financial perspective, a finance guy’s perspective. Revenue growth is 6.6%. Service revenue growth is 4.5%. ARPU growth at 2.4%, and when you take out the data-only devices, ARPU growth at 3%. What’s not to like about a business in this economy that’s growing revenue like that, especially when things like to churn are down And network build plans are ahead of schedule And your quality of your network is operating continues to improve at a rapid rate There’s a lot of things to like here. And there’s a lot of different metrics to look at. I’ll let Ralph kind of realign whatever I said, but it’s really important from simply a finance perspective. Revenue growth in this environment at a 6% cliff is pretty impressive.

I’m glad that we keep our CFO happy. But actually it gets even better that what John told you because what I really love about what we’re taking in terms of an approach to our business is we’re taking this massive data growth and then we’re building products and services on top of that. One of the best examples I can give you is our launch of Digitize that will happen next year. And it, again, leverages this huge smartphone database and adds services on top of it and not just data access, but services that differentiate us from the competition. So you’re talking about connecting the home with service automation and security monitoring. We’re talking about connecting your car with all kinds of entertainment services. So I see this huge level of services that are over and above the basic access. And so I think that future growth is in data but also services that we’re going to layer on top of that great smartphone platform...

And then that data growth is why it’s so important that we’ve got almost 30 million of our customers on tier data plans. And then three-quarters of them are buying the higher priced plans. Keeping them happy and giving them the quality service they want.

That’s great. Thanks, guys.

Our next question is from Mike McCormack with Nomura Securities. Please go ahead.

Hi, guys. Thanks a lot. Maybe just this first question for Ralph, I know we’re digging in a lot on ARPU and voice trends, but thinking about the ARPU reacceleration, you guys had the lowest voice ARPU decline on a percentage basis since second quarter 2011. I’m just trying to get a sense of what you’re seeing. Are people not pricing down to the buckets now like they were over the past year or so? And is there also a connection potentially for just seeing less family plan pressures going forward? And then a second one for John, if I can, looking at the deferred taxes resulting from the pension change, how should we frame that looking at the share repo as we look into 2013? Thanks.

So, Mike, I think some of the things driving our pricing and the price moves we made almost a year ago where we increased our data pricing. And that is driving our revenue growth. But we’re also seeing people sign up for more data. And the fact is, as you sell more smartphones or more tablets, people need more data. And the fact that we have a base that I think is the largest base in the industry with usage-based data pricing means as usage goes up, we can see some of that lift also coming from additional ARPU. So not only do we feel good where we are, but I feel really good about where we’re going, because you have to have that base of usage base in order to be able to monetize the data growth that we foresee in the future.

Mike, it’s John. Specifically to Ralph’s point, our team addressed the voice and texting issues last year. And we went to a free mobile-to-mobile plan last year. And we looked through the effects of that, took that head-on and aggressively faced it. We’re seeing the benefits of those decisions and those strategies that our mobile team put in place paying off today in higher ARPU growth. With regard to deferred taxes in the pension plan, the pension plan contributions as all pension plan contributions are going to be deductible. And they’re going to provide tax benefits from that perspective. That was part of our decision-making. In the sense of lowering your cash taxes, you’re going to strengthen your balance sheet. You’re going to strengthen your cash flows. And that will all be taken into account as we make these regular evaluations of our buyback strategy. So certainly it will be taken into account. I don’t mean the climate will make a decision one way or the other, but it is an important piece of it. And quite frankly, in an environment where there is some hope that in the next few years corporate tax rates may come down, it’s important to take advantage of deductions at this time. I hope I was responsive.

Yeah. That’s great. Thanks, John. Thanks, Ralph.

And next we go to Michael Rollins with Citi Investment Research. Please go ahead.

Hi. Thanks for taking the questions. A question for Ralph and question for John, first Ralph, if you could talk about the change in customer behavior with respect to device replacement, if you go back historically, it seems like the average for years was 24 months plus or minus for a replacement cycle for a device. And it seems like it’s lengthening significantly here. I was wondering what your thought is on that. Is it just the change to upgrade fees or policies? Or is there something more profound happening where customers want to keep their devices for a longer period of time? And then, John, just going back to the enterprise side, you mentioned about some of the uncertainty clouding business decisions, and I was wondering what effect that has on pricing? Do you see some of your competitors trying to get more aggressive on pricing to force a decision from the customers in these RFP processes that you’re going through? Thanks.

Mike, this is Ralph. Let me address the issue on what we’re seeing with customer upgrade cycles. First of all, I think some of the policy changes that we put in definitely have impacted some of that behavior. And our approach is to give the customer a choice. If they want to get in earlier upgrade, they can do so by paying us an appropriate amount. But we also have done some research, Mike, that addresses that issue of, it’s just customer behavior in general changing, and we’re seeing a slight change. We do see some customers that don’t want to go through the upgrade process. And they’re very happy with their devices. It’s a smaller number than you would think, but we’re beginning to see a trend with some customers that they’re just as happy to keep the devices. If you look at some of the latest changes maybe they don’t perceive them as being so significant that they need to upgrade and go through that process. So, we’re seeing a slight change with a small number of customers that are holding onto the devices longer. And they’re real happy. They’re not churning. They’re staying with us, and that is also fine with us.

Mike, with regard to the enterprise side, on the competitive landscape and the uncertainty. Quite frankly, in individual contract and proposal situations, we may see some unique or unusual pricing, but across the board, we’re not seeing that. We’re seeing the decision-making process not being driven by the pricing aspect, but more being driven by this uncertainty. And so we have generally seen a rational, what I’ll describe as a rational pricing environment. I won’t tell you that it’s 100%. It will never be that. There will always be unique situations, but generally speaking, rational and the lack of buying decisions are based on the customers’ uncertainty of the environment.

Thanks very much.

Our next question is from Timothy Horan with Oppenheimer. Please go ahead.

Thanks, guys. I’m just following up on that, Ralph, to the specific subsidies for device, how do you see that kind of trending out in the next few years, and I guess particularly with the Android? It looks like it’s catching up to the iPhone a little bit. Can you see those subsidies come down? And maybe just on that point, is there any way really to reduce the subsidies on the iPhone? And then, John, would you be willing to go above the 1.5 times debt-to-EBITDA? It seems really conservative in this environment. Thanks.

Tim, we work every day to look for devices that cost less and carry less subsidy. And we’re definitely seeing some very nice devices these days that have all the features that customers want with less subsidy than we have seen actually in prior years. So we like the lineup that we have with Lumia devices coming in from Nokia. They are very nice devices, and they fit that same mold. So I see more and more devices coming to market that gives us the opportunity to continue to work on subsidies, which is something that is at the top of mine. But the way we want to do it, is to have a great device that customers love, that carry less subsidy for us. We’re not trying to scrimp on what we give the customer. So I feel very good that there’s going to be opportunities to drive that down in the future as result of this great technology that we’re seeing where the devices have great technology and they’re actually cheaper to make. And so we can pass some of those savings on to the consumer. And some of them we can use to actually reduce our subsidies.

Tim, with regard to the 1.5 times debt-to-EBITDA, quite frankly, we’re still operating in that environment and with that as a policy guideline. But with regards specifically to your question, I think you’re right on, I think it’s a very reasonable question to ask. Let me give you these insights. One is, we’ve been very aggressively refinancing our data as quickly as we can. We’ve called and refinanced over $8 billion worth of debt this year alone. So our average interest costs are coming down. You saw that in the third-quarter results. And even in the third quarter interest expense results we included some call premiums are included in the interest expense line or would’ve even been more favorable. So the interest-rate we’re paying comes down, which implies that there should be some flexibility with that net debt-to-EBITDA ratio. The reality of it is, at this point in time, our cash flows have been so strong that they have allowed us to buy back all the shares we’ve decided to buy back with existing cash, while not only holding but quite frankly, improving debt-to- EBITDA. But very directly, we actively look at it. We actively look at it, not just from the traditional debt ratios standards, but also from the cost of interest and how that might affect our ability to establish debt ratios. And we’ll continue to evaluate that. Right now we’re staying with our policy.

Thanks.

Our next question is from Jason Armstrong with Goldman Sachs. Please go ahead.

Great. Thanks. Good morning. A couple of questions, maybe first for John, just on cash flow the extra sort of $2 billion plus, and maybe you can help us think through granularity on the bridge to get there between sort of better operating profit level versus lower cash taxes, lower CapEx, et cetera? And then the second question is for Ralph. I think one of the most interesting stats in the release as you pointed to is that a third of mobile share subs taking 10 gigs or higher. When you look at that compared to wired broadband averages, which are sort of in that range, does this cause you to think differently about how these products compete with Wired? And maybe as an extension, as you guys look to review rural lines and prospects for sales divestitures or upgrading, if you’re seeing this type of acceptance on Wireless data, can this be an effective solution for home broadband maybe in rural territories? Thanks.

So, Jason, let me take the cash flow question on. We’re at 15 to 16 and we’re now at 18 or higher. So we’re raising our guidance $2 billion to $3 billion. If you want to look at where the pieces of that come from, certainly a piece of it comes from the fact that our network and our capital build guys are really being efficient with capital. They’re getting all their jobs done. In fact, they’re getting more ahead of plan, but they’re doing it was less. Our pricing unit costs are better. Our cycle times are better, just a whole lot of activity there. So a piece of that is going to come from certainly that, and we’re real pleased with that because I want to keep focused on they’re ahead of schedule with their build targets. Secondly, we’re putting a lot of emphasis on working capital management across the company. We certainly have a lot of experience on the tax side, and we’ve done that in that area and continue to do that, but we’re also doing it on management of receivables and prepaid expenses. Ralph’s team has done a great job of managing inventory. We continue to manage our payables process. And when you’re a company as large as us, where you commonly have $15 billion or so of receivables or $10 billion worth of payables, you can work effectively with your partners, with your customers with your vendors to really improve working capital. That’s where a lot of the improvement is coming from. And we believe we cannot only maintain that going forward, but I’m optimistic that we can continue to improve upon it.

And Jason, concerning the performance of our data plans and LTE in general compared to wired broadband, I am thrilled, first of all, with the performance of our network. We said it was averaging 5 to 12 Mb per second. But, quite frankly, it’s much higher in some markets. We are just being conservative on what to say, but when you compare it to even Wi-Fi in some cases, it’s even faster. So it is performing in an incredible, incredible way. And then to answer that, the response that we have seen in mobile share, say absolutely that I think there is a place where in some rural areas where I see the outline, that it could serve as an alternative to wired broadband. Certainly in terms of speed and reliability and flexibility, it is absolutely very, very possible. And were going to be talking to you about that on November 7, giving you more details about our thinking of how we can use this technology. And, quite frankly, the customer reception to the technology in terms of their willingness to pay for great quality data in large, large amounts on November 7 when we meet with you and give you more guidance on our future growth plans.

Okay. That’s helpful. Thank you.

Our next question is from David Barden with Bank of America. Please go ahead.

Hey, guys. Thanks for taking my question. Ralph, maybe two questions for you, if I could, first is one of the things that has really helped this sector and I think people get very comfortable with these stocks, has been the kind of fairly rational read improving price environment that the sectors enjoyed for the last year or so. But as we’ve pointed out here today, there is a slowness in the postpaid industry. Your net adds this quarter were 10% of what Verizon’s net adds were. And I’d like to get a sense as to kind of how you feel about that situation and what levers exist for AT&T to pull to move that more in your favor as opposed to letting Verizon kind of get all the industry growth that’s out there to be gotten? And then second, obviously, looking down market things are changing quite a bit with the T-Mobile PCS deal and soft bank trying to put $20 billion to work in the industry. Is there anything about these lower-end competitors trying to shore up their financial resources and their scale that makes you think differently about the next year or two about how AT&T’s behavior in terms of pricing and competition might be changing? Thanks a lot.

Let me first address the pricing rationale. And I think I’m very comfortable with the pricing that we’ve put in place. I think it’s very competitive, and I think these mobile share plans are very compelling to customers. And I think those that don’t put them in, in the industry will probably have to rethink down the road because I think the reception has been exceptional. We mentioned that this quarter was a bit unique for us, Dave, in that we had 10 days of an iPhone launch and in those first 10 days what we see is a preponderance of iPhone customers, existing iPhone customers, which happen to be the best customers we have, the most loyal, with the highest ARPU, sign up in record numbers and use up the available inventory. I think that’s actually a good sign, because it says that our customer base is loyal to AT&T and staying loyal to AT&T and it’s actually reflected in the postpaid churn numbers, which are the best postpaid churn numbers for any third quarter in the company’s history. So if you’re trying to grow customers, the first thing you got to do is retain your base and we’re doing that. When we get additional inventory and when we go into the fourth quarter with a great lineup of tablets and our mobile share base, I am very certain that we’re going to improve our performance compared to we were in the third quarter, in terms of net customer additions. But what I love about the strategy we have, Dave, is that we’re not reliant on connecting more people or playing the traditional postpaid net adds game. What we’re going to talk to you on November 7 is that we’re planning to grow the business by layering services, like…

And, John, I think we’ve got time for just one more question.

And that’ll be from the line of Brett Feldman with Deutsche Bank. Please go ahead.

Thanks for taking the question. You talked a little bit about some of the reasons why your capital spending’s running a bit lower this year. I’m wondering whether the capital efficiency of the LTE network is a part of that. Or if it’s just too early? And then, could you just remind us what’s involved in your initial LTE upgrade? If I remember this correctly, you’re touching a fairly significant number of your cell sites as part of this initial build-out process. The reason I’m asking, is I’m wondering if when you get to the tail end of this late next year, you might be set up to see your CapEx in Wireless move down a notch?

So, Brett, let me take a shot at it and I’ll ask Ralph to make sure we give you clarity with regard to the specifics of the network build. First and foremost, we are seeing efficiencies throughout our CapEx program from our procurement efforts, our price per unit efforts are a One AT&T cost initiative which we call our should costing process. What we’re seeing is across all network programs, but because LTE is such a large piece of the network spend this year, we are seeing it there. Secondly, with some prudent planning, both from our marketing sales guys on the demand aspect and our network guys on supply aspect of a quality network, we’ve been able to be really efficient with capacity that we’re building in our 3G and 4G network, as opposed to new capacity we’re building on LTE. And that’s worked quite well. I’d expect us to be able to continue to provide efficiency in this, I think they’ve done great work, but I think there’s more to come. I think it’ll get better. With regard to our LTE build, I believe we’ve publicly stated we’re touching 90% of the cell sites in any market that we convert to LTE. So we’re doing a, what I would consider a rather dense, a rather complete conversion. We’re not doing what some other companies are doing with regard to a more scarce build-out. I think that goes to the quality of speeds that Ralph talked about, where they are far in excess of the 5 MB to 12 MB speed that we had talked about previously.

Brett, I just wanted to add to what John has said, that our network team has done a fantastic job of building out great coverage, with great reliability, at a really low cost. In addition to that, the products and services that are rolling out are some of the best that we have seen. The iPhone 5, for example, has some of the lowest drop call rates in this network environment that we have seen of almost any phone. So we think as we move customers to our LTE network, it improves their service, it gives them great data, it actually improves the voice performance and at the same time, it relieves our HSPA plus network and the HSPA plus network gets better and we think that churn will be lower. So I’m very, very bullish on what this is going to do and we’re just getting started with the new products and services you’re going to see from us on the great LTE network that our team is building.

Thanks, Brett. As we close, I want to thank you for being with us this morning. We had a solid quarter, which gives strong momentum as we finish our year. That includes strong actual data growth in both Wireless and Wireline, solid earnings and record breaking cash flow and free cash flow results. Don’t forget, our next webcast will be a video webcast of our Analyst Conference on November 7. I hope you can join us then, as we discuss the strategic direction of our company. Thank you again, for being on the call and thanks, as always, for your interest in AT&T. Have a good day.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T’s Executive Teleconference Service. You may now disconnect.