AT&T Chief Financial Officer John Stephens described to analysts at an Oppenheimer Tech Conference how the company is on track to virtualize its network and will continue to be the “connectors to the cloud.”  The strategic relationship between FirstNet and 5G was highlighted along with a forecast that 5G will bring “pragmatic” and innovative applications to IoT connections. The AT&T CFO noted twoenterprise 5G projects already underway. Stephens cited programs in Austin, Texas, and Chicago, Illinois as well as AT&T’s FirstNet network contract.

Here are a few selected excerpts of Mr. Stephens’ Oppenheimer conference Q & A talk:

First thing, we’re been working on what I call software-ification, although I’m not sure that’s found in Webster’s dictionary. But the taking our network functions and virtualizing them or creating a software-defined network, we’ve been doing that for 5 years. We’re on track to get 75% of our network functions virtualized by the end of next year. We’ve been on this path for a while.

We’ll continue to be the connectors to the cloud, that transport companies to the cloud, not only business from IBM and Microsoft in our partnerships there, but quite frankly in being the go-to-market partners for those companies as they sell their services to other cloud users, to their other customers. So we feel good about that aspect of it, and that’s really important. And that’s a logical evolution of this path that John Donovan and his team have been on for 5 years. And have really — they’ve really done dramatic
things with reducing our cost. So we feel real good about that.

The winning of the FirstNet contract was important to us because it enabled us to do a number of things. We had some AWS-3 and some WCS spectrum that we had, so to speak, in the warehouse that we hadn’t deployed. We had 700 spectrum, Band 14 from FirstNet, which the government was requiring us to deploy. And then we got a whole new set of technologies that were coming out, 256 QAM and 4-way MIMO and carrier aggregation. They were particularly important to us because of our diverse spectrum portfolio. So we got the FirstNet contract and we had to touch a tower, have to go out on the network. And we decided, with this contract, now is the time to, so to speak, do everything. Put all the spectrum in service, that’s the 60 megahertz. In some towers, it’s 50, some towers, it’s 60, but it’s 60 megahertz of new spectrum that was generally unused that we’re putting in.

For LTE, we have about 150 megahertz by the end of this year on average nationwide. And our nearest competitor on sub-6 has about — in-service, has about 2/3 that amount. So we have 50% increase over our competitors. But we — but at the same time, carrier aggregation, 256 QAM, all of these — 4-way MIMO, all these technologies, we’re able to put the capabilities into the network. And phones were coming out, had been out in some cases, and were coming out that had these capabilities. So not only we’re getting more spectrum, but the phones would work better on that spectral highway. That was all being done.

In addition, we made the decision that we’re spending the capital today, and that’s included, it has been in our numbers for a while now, that we’re putting up equipment that’s 5G-enabled. So when the 5G software for the core network (“5G” mobile packet core today is LTE’s EPC) is available, which we had hoped later this year, certainly next year, we will upgrade a significant part, not all, but a significant part of our network, core network, to 5G through a software upgrade. So we may have to go to the tower but we don’t have to climb the tower. We have to touch the computers at the base, but there’s no — we don’t necessarily need a crane and all of that. So it’s a very efficient upgrade.

So when you think about that, it will be a national — a nationwide coverage, 200 million POPS by the middle of the next year. And certainly, we’d hoped to do it faster. But our commitment on the record is by the middle of next year and the first half of next year. We’re at 60% of our FirstNet buildout as of June. We’re shooting to be 70% at the end of the year. That’s our expectations. I will tell you, the network team has surprised me many times before. And over the last few years, it’s always been to the good. They’ve always gotten more done than we expected.

To give you a sense of it, the 60% completion in June is 9 months ahead of schedule for the FirstNet authority. So we’re working very hard to make them proud of us, happy with us, work with us to get this done, so it’s important. And that 60% coverage is a geographic base, so it includes both urban and rural. So if you think about the end of next year or end of this year being close to 70%, and then the mid part of next year having 200 million POPS covered with 5G. Our network, as it raced today, I did a test sitting in this chair last night, got 134 meg speeds on my phone.

Question: When is FirstNet complete in the construction process?

Stephens answer:  Yes, we have a 5-year contract. And so that we would have 3 years after this year to run. But I would be very hopeful we’d keep this 9-month lead and complete it much quicker. We’ll see how that goes. We’ll continue to work with the FirstNet authority on any kind of other additions, activities they want us to have.  But the great part about it is it improves network quality for customers today, for people walking around with regular phones. And that’s what we want to do. We want to take care of that customer base. We hope that reduces churn, increases satisfaction. Quite frankly, it’s going to lower cost because it’s going to make the use of our spectrum more efficient.

Secondly, we’ll go into a new customer base. We don’t serve the FirstNet community in a great way in the sense of we serve them with the highest quality, but we don’t serve them in a lot of numbers today, and we want to grow that. We have over 8,000 governmental departments, municipalities, cities have approved us. And that’s a process that continues on to get official approval. We have 700,000 FirstNet customers. About half of those were our customers before. Now we’re growing much faster, the new customer base. We’re excited about that. The market is 3 million guys who are firefighters, police officers, EMTs. But then there’s another 11 million group that are people who work, power company emergency employees, gas company emergency employees, hospital workers in emergency situations that will qualify. So it’s a huge 14 million human beings. And then you think about it, some are going to have tablets, some of them are going to have body cams, some of them will have drones, they all have husbands or children or families that can join in. So it’s a really great opportunity for us. So there’s that great opportunity, but it’s really great for our core 90 million customers, voice customers that we have today.

Question: When do you upgrade to 5G on the software upgrade?

Stephens answer: I expect 5G in the core would be in service in the middle of next year, in that kind of 200 million POP range. I don’t want to give anybody the impression it’s going to be every home and everyone. But by the same token, it will be dramatic coverage.

Stephens went on to say how the company’s pre-standard 5G network is being used by a hospital system in Chicago (see next paragraph) and by a manufacturer in Austin. He said initial applications will be very “pragmatic” and focused on process automation and the internet of things. The next step, he said, is matching technical service capabilities with applications as businesses explore, “How can we do this differently, how can we apply this more efficiently?”

In Chicago, AT&T is working with Rush University Medical Center and the Rush System for Health to explore how 5G and multi-access edge computing can benefit healthcare with a focus on streamlining internal data handling while improving patient experience. In Austin, AT&T is working with Samsung to test 5G for manufacturing in the company’s semiconductor fabrication facility. Applications are focused on improved “efficiency, safety, security and operational performance within the manufacturing industry,” according to AT&T.

Stephens said winning the FirstNet contract provided the opportunity “to do everything.” That includes deploying FirstNet’s 700 MHz spectrum while simultaneously putting AWS 3 and WCS spectrum into service, rolling out gigabit LTE features like 4X4 MIMO, 256 QAM and carrier aggregation and installing 5G-ready equipment.

Asked by Oppenheimer & Co.’s Tim Horan what the potential merger of Sprint and T-Mobile US means for AT&T, Stephens said, despite a consent decree from the U.S. Department of Justice, the deal still isn’t done. At a high-level, “Mergers are really hard. You’ve got to bring together two different cultures, two different customer bases. All of that is just hard to do and it’s expensive. So we’ll see what happens.”

Summing up, Stephens said: “For all the things I said about our wireless business, we’re ready to compete. It’s a competitive market today; it’ll be a competitive market tomorrow. We feel good about the ability to compete going forward.”

And what about growing AT&T’s total business in the next 4 years or 5 years?

Let me say it this way. We’re not making predictions about future years, but we do — we’re spending. We’re investing a lot of money in content, we’re investing a lot of money in capital. And that capital is — we’re getting a lot of this network rebuild. And as — and we’re investing in, like for example 5G, we’re investing in the equipment, the hard assets today. So we turn that up next year, and a lot of that will be software, so our capital intensity can go down. With that capital intensity going down, then you can see reasons for good support for great cash flows. And so we feel good about our cash flow position this year and we’re optimistic about where the business is going with regard to the ability to generate cash.

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