AT&T at Morgan Stanley Conference Notes

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A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Randall Stephenson – CEO

Comcast/Time Warner is a blockbuster deal

” a little transaction that was announced Comcast/Time Warner, and that’s a blockbuster deal from our standpoint. It’s an industry redefining deal from our standpoint.”

“And we’ve spent a lot of time obviously reviewing the transaction and it creates an impressive business. In fact it’s a business that’s going to cover 80% of the households in the U.S., the footprint will and it’s going to be vertically integrated with content.”

We think it’s going to get done

“We think it’s going to have a rather wholesome regulatory review process, we anticipate that. But our studying of this is that it probably gets done.”

Europe under-invested in mobile data

“On the mobile Internet, it seemed very obvious to us that the next logical stopping point for it to take-off was Europe. And Europe way under invested for quite some period of time in terms of LTE and so forth. And we just really thought given the demographic profile of Europe, it will take-off in Europe.”

Opportunities with global SIM

“As you see these investments happening, you may kind of begin to think the window maybe closing on perhaps only wireless assets, but there are still other opportunities in Europe and the Global SIM, we’ve talked about it a lot, but we have been out in front on establishing and developing a Global SIM, that still gives us opportunities to take advantage of a European expansion of LTE and technology and I believe you will see around the world, automobile manufacturers, for example, picking a single carrier to deliver their capabilities around the globe by virtue of the Global SIM.”

T-mobile made 2013 interesting

“So 2013 was, it was kind of a fascinating year for me, because you reflect back on 2013 and we came into the year expecting, disruptive behavior in the competitive environment. The player that proved to be most disruptive was not the one that we expected, but nonetheless, we’ve got what we expect coming into the year and what you now see happening in the U.S. is interesting and that is four national competitors competing at every level, I mean we’re competing aggressively on price, competing on devices, we’re competing on customer service and retail experience.”

You have four competitors competing aggressively, unlike anywhere in the world

“But what is unique and really different about the U.S. is to have four national competitors, all competing aggressively on network quality and network differentiation and I think this is really fascinating, four nation-wide carriers deploying the latest technology and investing very, very aggressively and you don’t see that happening anywhere else in the world’

We are making the price of the handset more transparent

“Now all of the sudden, we are bring you some transparency to what the price of that handset, the cost of that handset is and letting the customer make a decision that if you would like to buy the handset, then there is an exchange of that in different value proposition that lower pricing on the recurring revenue streams that are available and the customers are overwhelmingly choosing that equation.”

We’re starting to finance the handset. People are really liking that

“Now we’re financing those handsets to a large degree. Our next product is basically a handset financing program where the customer finances the handset over 12 months to 18 months and get some much lower price point and customers are loving this.”

We have a clear line of sight to the subsidy equation changing very quickly

“we actually think that the industry is at a place where you can actually see line of site to the subsidy equation just fundamentally changing in a very short period of time and who would have thought, right.”

Video and data explosion means the industry needs more spectrum

” that said, we are going to need – the industry is going to need another round of Spectrum.”

“The big one, the big auction that the industry is paying a lot of attention to is the broadcast Spectrum, that’s expected to come to market in 2015 and this one is no lay-up in terms of execution for anybody.”

“I think the FCC has a very, very difficult task in front of them. This auction is a triple bank shot and to pull it off, is going to test their metal and their capability to execute on this. Tom Wheeler is a very bright man. He understands what he has in front of him, but to get the buyers and the sellers at a place where the clearing prices create blocks of Spectrum that are truly a value to the carriers is going to be difficult.”

Industry had already landed on net neutrality. It worked for everyone

“I think it’s not a consequential issue. The industry had landed on a net neutrality approach that I think was healthy for content providers, it was healthy for the tech sector, it was healthy for the industry and it was a concept we had landed on.”

Change never happens as fast as people expect but then is always bigger than anyone expected

It’s funny in this industry. Every time a disruptive capability comes along, we all anticipate how big it’s going to be and everybody gears up for a major transition. Whether it was VoIP on the fixed line side or wireless substitution, wireless to wireline, it never happens as fast as everybody expects, but when it does happen, it happens bigger than everybody expects and I think over-the-top video will be a case of that.”

Barriers are going to come down

“We’ve got an industry trying to dictate where the content is consumed, those barriers are going to come down and those models are going to change and what we are about AT&T is trying to facilitate that.”

We think Netflix is a good thing for the industry

“we think Netflix is a good thing for the industry and accommodating and Netflix capability is very important to us and so it’s something very encouraging and we would like to see growth.”

Global SIM explanation

“Global SIM is basically a sim that you can put in to any device that will work anywhere around the world and if you are somebody creating, either you develop some device or an automobile and you want to develop a capability to leverage these LTE networks, you don’t want to develop with a sim that works in the United States, one sim in one platform and different sim in a different platform that works in Europe and a different one that works in Asia, but it’d be nice to have one sim that you can deploy one time it works in all devices around the world and so we worked aggressively to develop Global SIM technology and we are deploying it in the number of different areas with the various MDN folks.”

15 million connected cars in 2015

“Probably, the easiest one to grasp and that has the best line of site for the industry is the connected car and we have been very aggressively building a platform for this over the last three years and in fact as you look at the various manufacturers now, 2015 in the Unites States there are going to be 15 million cars manufactured roughly 50% of those will have this connected capability in them. We are now contracted AT&T with 40% of those will be on the AT&T network using an AT&T sim”

Internet of everything

“So connecting the car we think is very important, connecting the house and then we think is really important. When you think of M2M devices that do monitoring within the home become very, very inexpensive to manufacture and to deploy within the home when it’s wireless-based, LTE-based and so everything from water sensors, the temperature sensors, the light controls, hatchback controls so forth.”

Pilots of digital life product have been well received

“Equipping the home and monitoring the home wirelessly, this becomes a very, very interesting proposition. We are launched in 63 markets, with our Digital Life product and this has been really interesting, an eye opening. The customer reception to this has been off the charge is good, it’s the highest in NPS scores that we track in our company on this product and this capability.”

General Electric wants everything networked

“General Electric is being very progressive as they think M2M and they want everything that they manufacture to be networked and networked wirelessly, everything from jet engines to generation equipment and so forth diagnostic type work, sensors and so forth. So everything they do will be networked.”

Virtualization for the network, software defined networks

“you think about what has transpired in the datacenter over the last few years with cloud technology where you virtualize what’s going on inside the data center and you drive the hardware costs down and software, because of the driving factor in the data center and we have driven efficiencies into the data center that are 50% and 60% productivity efficiencies in the data center.

Think about taking that same capability now and pushing it into the network. That’s what we are talking about with the user defined network”

By virtue of building our own cloud we’re becoming a large cloud player

“just by virtue of our own internal operations, we become one of largest scale cloud players in the world, right. And now, we are leveraging that and then moving it into our retail operations and selling those cloud services as well.”

Our view of cloud is it’s a commodity but an important one

“My view of the cloud, it’s we need to be aggressive, we are going to invest aggressively, but cloud is somewhat of another commodity service, and it’s not any inconsequential commodity service.”

“as we bundle or combine cloud technology with VPN, the churn rate of our VPN services drops by two-thirds, all right. So it’s a very important element of the purchasing decision as a business.’

The cloud itself isn’t a great Return on capital opportunity

“And so we think it’s very critical that we invest here, that we have the capability, we have state-of-the-art capability, but just cloud in of itself, selling cloud is, it’s not like a wonderful great return opportunity, but it’s a very important part of the overall product package that the customer is going to expect.”

Competitive environment may be influencing stock

“the industry has gone through a year of kind of a shake-up in terms of competitive environment and lot of commentary about how AT&T was the focus of the new maverick competitors so forth and so there has been an impact from that without a doubt and obviously anytime there is M&A speculation, there has an effect on the stock, but at the end of the day, the dividend and casual characteristics of the business, we think are very, very solid and with it, we feel like I said very, very good about buying the stock in $32.”

Capex coming down

“2014 is the peak year as I have said. So you would expect CapEx to move down in 2015 and I don’t think we have characterized that, quantification of that, but we do expect it to move down.”

We’re still spending a lot. It’s the nature of our business

“f you take your model and take revenues and multiply by 15% or 16%, do a click and drag out as far as you want to go that’s kind of telecom and I don’t want to envision that changing radically although I think we’re kind of at peak end of that range right now. “