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AT&T INC. Technology Investment Outlook: FY 2016 – 2017

AT&T’s vision is to move from being a telecom service provider to become the first integrated solutions provider in the US. The combination of local and long-haul fiber, data centers and a nationwide LTE network gives it an advantage in mobile data services over its competitors. The company has two pronged strategy to build its network capacity and increase its product portfolio especially when revenues from traditional voice services continue to decline and customers switch to wireless or VoIP services.

Building blocks, technology changes and expanding network assets The company has invested in network upgrade and bandwidth expansion to support bandwidth demand from upcoming solutions in virtual reality, virtual private network, video streaming, cloud, big data and Internet of things (IoT) solutions. AT&T is collaborating with Ericsson and Intel to work on 5G starting 2Q16 with

technologies such as millimeter waves, network function virtualization (NFV) and software-defined networking (SDN) among the key inputs. SDN strategy was announced in 2014 to virtualize 75% of network by 2020. The company is expected to virtualize 30% by 2016, to support 5G and lower the data delivery costs.

Secured spectrum footprint in the government auction, providing it the network capacity for TV Everywhere plans, challenging traditional Pay TV operators in the US. AT&T currently has approximately ~40MHz of WCS spectrum it can deploy.

GigaPower footprint expansion by Fiber to the building (FTTB) and Fiber to the home (FTTH), to over 1mn customer locations in 2015 and will continue to expand network.

LTE replacing 2G expected to increase from 355mn point of presence (POPs) in North America in 2015 to 385mn by end of 2016. It will also invest ~US$3bn on expansion plan to expand LTE coverage to ~100m POPs in Mexico by 2018.

Looking to expand its video portfolio after acquisition of Direct TV. AT&T’s video expansion strategy to integrate with its existing portfolio presents an opportunity to increase topline numbers. According to Nielsen research in 2015, ~130mn people were watching videos on mobile devices in the US. Acquisition of Direct TV and Quickplay Media, Inc. will help leverage portfolio of programming and streaming platforms and add to the existing U-verse service. Also, this will offer enhanced experience to its existing customers. AT&T smartphone subscribers have ~2x higher ARPU than feature phone customers, proving increased smartphone penetration to benefit content streaming. Internet of things (IoT) continues to be a major initiative for AT&T. The carrier currently has over 26m devices connected including over 5.8m cars connected its network.

127.4 128.8 132.4 146.8 162.3

19.73 21.23 21.43 20.02 21.49 $0

$50$100$150$200

2012 2013 2014 2015 LTM Jun2016Revenue Capital Expenditure

Business Solutions

44%

Entertainment Group31%

Consumer Mobility21%

International4%

64.8 71.3 73.2

121.0 119.6

$0$20$40$60$80

$100$120$140

2012 2013 2014 2015 Jun-16Net Debt ($bn)

AT&T31%

Verizon44%

Sprint13%

T Mobile12%

Integrated Solutions

Introduce 5G

FTTB/ FTTH

SDN/ NFV

Direct TVInternet of Things

2G to LTE

Spectrum Footprint

Revenue share for the big four telecom firms in the US

Net Debt Position for AT&T ($bn)

Revenue Segment for AT&T – LTM Jun16

Revenue Vs Capital Expenditure for AT&T ($bn)

Source: Q4 2015 Earnings Conference Call Jan 2016 (LINK); Q1 2016 earnings call (LINK); 5G Roadmap (LINK); Nielsen (LINK)

Finished deployment for Project Velocity IP in FY14 AT&T Technology Investment Focus

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Industry investment focus – testing the Application Service Provider model Telecom service providers in general have investment focus towards up-gradation and expansion of network capacity and start deployment of 5G in medium term in the US. All companies are looking for new revenue opportunities as the legacy communications business is experiencing slowdown. Operators are developing new ecosystems in video and the IoT by leveraging their network and scaling existing platforms. While Verizon acquired AOL in FY15 with an investment rationale to expand in digital video-over-wireless connection, AT&T’s acquisition of DirecTV and Quickplay Media, Inc. along with combination of local and long-haul fiber and LTE expansion offers an advantage in data services. Verizon has been investing on prepositioning for the 5G technology (started testing in end of FY15) and has invested in AWS-3 spectrum, partially funded by leasing its communication tower rights to American Tower in FY15. Sprint started roll out of LTE plus in the US in 2015 and is also collaborating with partners and other companies on the 5G opportunity. The company is well-positioned for 5G with spectrum holdings of over 160 MHz of 2.5 spectrum on average across the top 100 US markets, giving Sprint more high band capacity than any other carrier in the US. The company is focused towards network densification and has majority of its capital expenditure invested on its network for FY16. Cable operators becoming aggressive in Pay TV segment, OTT is a threat Traditional cable providers such as Comcast are relying on X1 platform to compete with the OTT (over-the-top) services. As a direct competition from QuickPlay (AT&T), go90 (Verizon) and Netflix, the company is investing on its X1 platform. However partial availability of cloud on the platform, slow roll out and high fee are factors that are making users to drift away from Comcast services. In FY15 capital expenditure for Comcast in cable communication segment was primarily focused on customer premises equipment, including X1 and wireless gateways, increased investment in network infrastructure to increase network capacity, as well as continued investment to expand Business Services. AT&T’s strategy to become an integrated solutions provider in the US has primarily been driven by a shift in the business model from being a legacy telecom communication company. Its recent investment in platforms, technologies and acquisitions has a vision to expand its platform, venture into application services and integrate its solutions across platforms. The company is well placed in terms of its technology investment strategy of network densification and FTTH / FTTB deployment, and has started to leverage the improved bandwidth by enhancing its video platform, investing in IoT and integrating its B2B solutions. Telecom companies globally are following similar strategy to move to become an application service provider, who will be an important link in the technology value chain being adopted by different industries and integrated into their products and solutions.

FY12 FY13 FY14 FY15AT&T 15.5% 16.5% 16.2% 13.6%Verizon 14.0% 13.8% 13.5% 13.5%Sprint 12.1% 22.8% 17.4% 21.7%T Mobile 14.7% 16.4% 14.5% 14.0%Comcast 7.9% 8.4% 8.9% 9.4%Time Warner14.5% 14.5% 18.0% 18.8%Vodafone 13.9% 16.5% 21.8% 21.0%Telefonica 16.5% 15.8% 20.0% 20.3%

15.5% 16.5% 16.2%

13.6%14.0% 13.8% 13.5% 13.5%12.1%

22.8%

17.4%

21.7%

14.7% 16.4%14.5% 14.0%

10%12%14%16%18%20%22%24%

FY12 FY13 FY14 FY15AT&T Verizon Sprint T Mobile Average

15.5%16.5% 16.2%

13.6%

7.9% 8.4% 8.9% 9.4%

14.5% 14.5%

18.0% 18.8%

4%6%8%

10%12%14%16%18%20%

FY12 FY13 FY14 FY15AT&T Comcast Time Warner Average

15.5%16.2%

13.6%13.9%

16.5%

21.8%21.0%

16.5%15.8%

20.0% 20.3%

12%

14%

16%

18%

20%

22%

24%

FY12 FY13 FY14 FY15AT&T Vodafone Telefonica Average

Capital Expenditure as % of Revenue: Telecom

Capital Expenditure as % of Revenue

Capital Expenditure as % of Revenue: Pay TV

Capital Expenditure as % of Revenue: International

Source: Verizon acquisition of AOL (LINK); Verizon offloading tower rights (LINK); Comcast earnings call Q415 (LINK); Sprint (LINK); Verizon (LINK ).

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Risks/ weaknesses to service providers approach AT&T investment in technology and strategy to integrate its solutions has potential to leverage the upside to all its business segments. However, the company’s primary challenge is to complete its SDN network and fiber expansion according to the planned timelines. Also, the planned FCC spectrum auction in 2016 and its allocation will be a key to its deployment strategy for its Direct TV content for next two to four years. The nature of FCC’s incentive auction means spectrum will only get sold if TV stations decide to give up their rights to airwaves they currently hold. Therefore it might not be possible to estimate how much spectrum will actually be available for the carriers. Vendor opportunities are expected to arise primarily in the fiber and 5G deployment. AT&T already has contracts for many of its required products and services with terms of two to five years and therefore vendor opportunities may be limited. However introduction of next generation hardware to compete with cable's recent initiatives like Xfinity and Spectrum are expected to create demand for new generation set-tops, routers, and interface to be deployed by 2018. Also, planned deployment of 5G in medium term presents opportunities for both hardware and IT service companies. AT&T is already collaborating with Ericsson and Intel to work its 5G deployment. The company has moved away from using specialized, proprietary hardware that was tightly coupled with vendor software and is instead focused on using virtualized software on less-expensive commodity hardware. Expansion of Fiber-to-the-Home coverage will create continued demand for Gigabit-capable Passive Optical Networks (GPON) equipment and Ethernet Aggregation equipment from suppliers. The company plans to increase the footprint to 2mn customers by end of 2016 from 1mn in the end of 2015.

Source: Q4 2015 Earnings Conference Call Jan 2016 (LINK); Q1 2016 earnings call (LINK).