At the Deutsche Bank Media, Telecom and Business Services Conference, John Stephens, senior executive vice president and chief financial officer, AT&T discussed the company’s plans for 2018 and beyond. Mr. Stephens said AT&T remains confident that it is on the right track to get its wireline business services back to positive growth as more customers transition to next-generation strategic services like SD-WAN and Carrier Ethernet. However, the drag from legacy services will continue to be an issue for the near term. He then outlined the company’s priorities for 2018, which include closing its pending acquisition of Time Warner and investing $23 billion in capital to build the best gigabit network in the United States.
On the entertainment side of the business, AT&T plans to launch the next generation of its DIRECTV Now video streaming service in the first half of 2018. The new platform will include features like cloud DVR and a third video stream. Additional features expected to launch later in 2018 include pay-per-view functionality and more video on demand. Note that DIRECT TV Now can operate over a wireline or wireless network with sufficient bandwidth to support video streaming. Stephens said during the interview:
“……Giving us this opportunity to come up with a new platform later in this first half of this year, the second-generation plant for giving customers Cloud DVR, additional ability to pay per view and most sporting events and movies, and all kinds of other capabilities is what we’re seeing here, that’s what we want to do with regard to that entertain business and transitioning and we’re confident that we’re on the right track and it’s going quite well.”
The company’s 2018 plans also include improved profitability in its wireless operations in Mexico and, after the Time Warner acquisition closes, deployment of a new advertising and analytics platform that will use the company’s customer data to bring new, data-driven advertising capabilities within premium video. And, as always, AT&T remains laser-focused on maintaining an industry-leading cost structure.
AT&T’s investment plans include deployment of the FirstNet network, America’s first nationwide public safety broadband network specifically designed for our nation’s police, firefighters, EMS and other first responders.
“We were 56 out of 56, 50 states, 5 territories and the districts, probably all choose to put their public safety network, their FirstNet, their first responder network with AT&T, so that’s thrilling for us, that gives us the full funding of the program, it gives us the full authority to be the public service provider for the country, we’re really proud of that, and only because of the business aspects that’s serving our fellow citizens and being able to participate in the honorable job of saving lives and protecting people. So we’re really jazzed up about that.
Secondly, our plans were made last year for how to build out, and we’ve now been given the authority and the official build plans, approved build plans from the FirstNet authority. We spend last year investing in the core network, I think if people filed us in the fourth quarter; they said we actually got a $300 million reimbursement from the FirstNet authority for the expenditures we incurred last year. So the relentless preemption, the prioritized service refers to prices for police and fire and handling some emergency medical personal; all of that’s been done and now we’re out deploying the network, not only the 700 but also our AWS and WCS, our inventoried network that we now get to put into service on a very economic basis because we can do one tower client, we have the crane out there once, we have the people out there once and they’ve put all three pieces of spectrum at it once.”
The company will also enhance wireless network quality and capacity and plans to be the first to launch mobile “5G” service in 12 cities by the end of the year. AT&T announced in February that Atlanta, GA; Dallas and Waco, TX. will be among its first “5G” markets.
“We think about 5G is 5G evolution and I say that because it’s really important to put it all in perspective. So we think FirstNet, put WCS, AWS with 700 band 14 [ph], and use carrier aggregation and you use forward [indiscernible]; we’ve done that kind of test without the 700, we did that in San Francisco, we got 750 mag speeds in the City of San Francisco on this new network, this new 5G evolution; it’s using the LTE technology, it’s using the existing network but all this new technology. So if you think about that evolution now, when you lower that network hub, those 750 theoretical speeds might go down to 150 or 100 or somewhere down but tremendous speed even on a loaded network; so that’s the first step, we’re doing that now extensively and we’re going to do more of that as we build the first step that work out and put the 700 band in. So that’s the first step for us in this evolution.
Second, people might not think about this way but for us absolutely critical is the fiber bill. We’re taking a lot of fiber out to the Prime [ph], we’re taking a lot of fiber out to business locations, currently we have about 15 million locations with fiber between business and consumer, and by July next year, we’ll have about 22 million, about 8 million business, about 14 million to the Prime if you will, for consumers. So fiber is the key, and it’s a key not only delivering to the home or to the business but for the backhaul support. So if you’re an integrated carrier like we are and you’re building this fiber to go to the home, you’re going to pass the tower, you’re going to get fiber to that tower, you’re going to pass the business location, shopping mall, strip center, you’re going to build out to those.
So 5G is the second stage, we’ve got to think all the inter-gig this is the ability to deliver broadband overall electrical power lines, we’re testing that, we’ll see how that goes, that’s another step. If you think about using millimeter wave to do backhaul for small cells in really congested areas, we have high traffic volumes, you want to take a lot of traffic off, we have tested that, we have used millimeter wave to do that, we can do that. If you think about millimeter wave to do fixed wireless; so from the ally to my home, we have tested that we have the capability to do that, the challenges on that is where do you take it from the ally, where do you offload it, give it on to the network at what those costs are, but we can do that.
Lastly, you will see us put 5G into the core network. All of those things that were going to have to be measured by one of the chipsets ready for the handsets, we expect the chipsets might be next year, handset will come after that but we’re looking at the historically slow upgrade timeframe for phones. We had a couple of quarters last year that the upgrade rates were about 4%, that would equate the 25 quarters before your phone base turned over in an extreme example; so suggesting that things are going to be in the core network, it’s going to take a while, we’ll have pucks [ph] out by the end of the year, that will help but you have to have balance with regard to this.
When you think about those business cases, you think about those augmented reality and virtual reality and robotics and autonomous cars and things on the edge, those are going to be really important, that’s where the business cases will take us but we’ve got a long way to go before we get there. As we build FirstNet, we have been good fortunate being able to so to speak build the network house and leave the room for our 5G capability so that when it’s ready, we can just plug it in to do it with software defined network design, we had a great advantage for that but we’re going to have to make sure we have all of the equipment, not only switching equipment, the radio, the antenna but also the handset equipment before we start — if you will over-indexing on the revenues opportunities, they will be there, we will lead in the gigabit network.
We’ll have the best one because what FirstNet provides us and what the technology developments have allowed us and we will use 5G in that network but I want to be careful about how we think about when it’s going to be — you’re going to have a device in your hand and walking around on a normal kind of usage basis using 5G.”
Stephens said that AT&T reaches about 15 million customer locations with fiber. This includes more than 7 million consumer customer locations and more than 8 million business customer locations within 1,000 feet of AT&T’s fiber footprint. He expects this to increase to about 22 million locations by mid-2019.
For 2018, AT&T expects organic adjusted earnings per share growth in the low single digits, driven by improvements in wireless service revenue trends, improving profitability from its international operations, cost structure improvements from its software defined network/network function virtualization efforts and lower depreciation versus 2017.
Like earlier quarters, the challenges in the fourth quarter for AT&T came from declines in legacy services like Frame Relay and ATM. The company noted that fourth-quarter declines in legacy products were partially offset by continued growth in strategic business services. Total business wireline revenues were $7.4 billion, down 3.5% year-over-year but up sequentially.
Stephens said that more AT&T customers are adopting next-gen services, creating a new foundation for wireline business revenue growth.
“What’s happened is our customers have embraced the strategic services,” Stephens said. “Strategic services are over a $12 billion annual business and are over 42% or so of our revenue and are still growing quickly.”
Indeed, AT&T’s fourth-quarter strategic business services revenues grew by nearly 6%, or $176 million, versus the year-earlier quarter. These services represent 42% of total business wireline revenues and more than 70% of wireline data revenues and have an annualized revenue stream of more than $12 billion. This growth helped offset a decline of more than $400 million in legacy service revenues in the quarter.
Stopping short of forecasting overall wireline business service revenue growth, Stephens said that AT&T will eventually see a point where strategic services will surpass legacy declines.
“As we get past this inflection point where strategic services are growing at a faster than the degradation of legacy, we can get to a point where we are growing revenues,” Stephens said. “We’re not predicting that but we see the opportunity to do that.”
To achieve these business services revenue goals, AT&T’s business sales team is taking a two-pronged approach: retaining legacy services or converting them to strategic services.
While wireline business services continue to be a key focus for AT&T, the service provider is not surprisingly looking at ways to leverage its wireless network to help customers solve issues in their business. The wireless network can be used to support a business customer’s employee base while enabling IoT applications like monitoring of a manufacturing plant or a trucking fleet. Stephens expanded on the role of IoT to close out the interview:
“…you (‘ve) got to realize that if you build this FirstNet network out, things like IoT, things like coverage for business customers, things like the ability to connect factories that are automated, the robotics that have to have wireless connectivity to a controlled center for business customers, all improves dramatically and with that comes this opportunity to sell these wireless services. When you’re in — with the CIO and you can solve his security business, you can solve his big pipe of strategic services but you can also solve some wireless issues that his HR guy has for his connectivity for his employees, you can solve some issues that his engineering department has because they want to get real-time information about how their products are working out, whether it’s a car or a jet engine or a tractor, how it’s working in the field in real-time or you can give them new product and services demand for their internal sources like their pipelines or their shipping fleet.
This IoT capability can solve a lot of issues, you can make that CIO as the success factor for all his related peers, that’s a great thing to great solutions approach to business and that’s what we’re trying to do. Our team is trying to provide solutions for the business customers and we think having those two things together are really important.”