AT&T Inc. (T) Q1 2018 Earnings Conference Call Transcript

T earnings call for the period ending March 31, 2018.

Motley Fool Staff
Motley Fool Staff
Apr 25, 2018 at 7:48PM
Energy, Materials, and Utilities
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AT&T, Inc. (NYSE:T)
Q1 2018 Earnings Conference Call
April 25, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the AT&T First Quarter of 2018 Earnings Call. At this time, all of your participant phone lines are in a listen-only mode, and later, there will be an opportunity here for your questions. Instructions will be given at that time. If you need any assistance during the call or presentation, please press * followed by 0 for us.

I would now like to turn the conference over to our host, Michael Viola, Senior Vice President of Investor Relations. Please go ahead, sir.

Michael Viola -- Senior Vice President of Investor Relations

Thank you, Justin. Good afternoon, everyone, and welcome to our first quarter conference call. Like Justin said, this is Mike Viola. I'm the Head of Investor Relations for AT&T. And joining me on the call today is John Stephens, AT&T's Chief Financial Officer.

John's going to cover our results and provide business updates, which will include progress on FirstNet, and then we'll follow that up with a Q&A session. As always, our earnings materials are available on the Investor Relations page of the AT&T website. That includes our news release, investor briefing, 8-K, and a variety of associated schedules.

Before we begin, I want to call your attention to our Safe Harbor statement. That says that some of our comments today may be forward-looking. As such, they're subject to risks and uncertainties, and those results may differ materially. And additional information is always available on the Investor Relations website. I also want to remind you that we're in the quiet period for the FCC CAP II auction, and so we can't address any questions about that today.

And so now, I'd like to turn the call over to AT&T's CFO, John Stephens.

John Stephens -- Chief Financial Officer

Thanks, Mike, and thanks for joining us on the call today. Let me begin with our financial summary, which is on slide three. As we mentioned late quarter and noted in an 8-K filed last month, AT&T was required to adopt several new accounting standards this year. These new accounting standards deal with reporting issues around revenue recognition, pension costs, financial instruments, and cash receipts on installment receivables. These changes have some impact on our income statements and our cash flows. And in connection with adopting the new standard on revenue recognition, the company will now record universal service and other regulatory fees on a net basis, consistent with how we have traditionally reported other pass-through items like sales taxes. This specific change will reduce both revenues and expenses by a little more than $900 million this quarter, but will -- they will not impact operating income or net income for the quarter.

In addition to GAAP, we're providing comparable historical results to help you better understand the impact on financials from revenue recognition. We will be referring to these historical results in our comparisons during this call.

Tax reform gave us the opportunity to invest and grow our customer base. These investments drove a significant year-over-year improvement in postpaid phone net ads, the second highest broadband quarter in three years, and solid growth in video as we transition our TV business. Our adjusted EPS for the quarter was $0.85, up about $0.15, with benefits from tax reform and revenue recognition offsetting the cost of investing in our growing customer base, and a small amount of pressure from the new financial instrument reporting rules.

Adjusted consolidated operating margins for the quarter were up year-over-year on a reported basis, but down on a comparable basis. Our increased sales activity this quarter drove much of the pressure we saw, as did continued transition of video from linear to over-the-top services. But at the same time, we did see margin improvements in business wireline and international.

Next, let's cover revenue, which was $38.9 billion, down from a year ago. Higher wireless equipment and strategic service revenues partially offset declines in legacy services, the ongoing impact of the video transition, and our decision to no longer pursue some low-margin businesses. Cash flow statements have been recast to show the impact of the new accounting standard with installment receivables, so year-over-year cash flow results are comparable.

The first quarter's traditionally our lowest free cash flow quarter, and this year's no different. Several items impacted free cash flow, including our annual employee bonus program, a larger than usual handset payment from the very strong gross ad and upright performance during the late holiday season in the fourth quarter and continuing into the first quarter. We also had unreimbursed FirstNet expenditures in this quarter. Offsetting some of this pressure was the tax refund we received in the first quarter, which was generated by the passage of the Tax Reform Act in late December of last year. We're still on plan to meet the free cash flow guidance we gave you in January. That guidance of free cash flow in the $21 billion range included the pressure from the receivables accounting change. Capital spending was $6.1 billion in the quarter.

Let's now take a look at our operations, starting with mobility, where the team turned in solid customer growth. Those details are on slide four. AT&T domestic mobility operations, as you know, are divided between the business solutions and consumer wireless segments. For comparison purposes, we're providing supplemental information for its total U.S. wireless operations. Strong sales activity in a usually quiet quarter help drive a turnaround in postpaid phone net ads. Postpaid phone net ads showed a more than 300,000 phone improvement compared to the year ago first quarter, which is now a more than 700,000 year-over-year improvement in the last two quarters. Prepaid phones also came in strong, with about 190,000 new subscribers. And that's helped our Cricket customer base grow. And today, it totals nine million customers. Congrats to our management team that runs Cricket.

And we increased our branded smartphone base by nearly 500,000, topping 73 million by the end of the quarter. Churn keeps improving. We had another record low first quarter postpaid phone churn of 0.84%, improving both year-over-year and sequentially. All together, we had more than 2.26 million new subscribers -- that's domestic subscribers -- with gains in postpaid, prepaid, and connected devices, more than offsetting our continued losses in resellers.

Revenues were up more than 3% in the quarter thanks to our strong smartphone sales, while service revenues were essentially flat sequentially. We're confident that service revenues will improve throughout the year. We still expect that we'll be positive for the full year on a comparable basis. There are several reasons for that. First, we're not through the toughest year-over-year compare, as we lap the introduction of unlimited plans that came out in the first quarter a year ago. We're adding postpaid, prepaid, and connected devices subscribers at rapid rates, and the pressure from resellers stabilizing. Recent new product offerings will also help. Our strong sales activity also had an impact on margins. Postpaid smartphone gross ads and upgrades increased by about 500,000 year-over-year. That's an upgrade rate of 4.3%, which was higher than last year. Still, service margins came in at 48.1% on a comparable basis.

Our long-term strategy to build our branded phone base and improve churn with bundled services continues to pay off. Postpaid smartphones have increased by almost $2 million in the last two years. Prepaid smartphones have also increased at a solid clip, growing by $3.4 million in the same timeframe. That's a more than $5 million gross in our overall domestic smartphone base. At the same time, a growing number of our existing mobility customers are bundling their wireless with our video and our broadband services. These are our most valuable customers, with churn significantly lower than single service customers. These results are very encouraging, and gives us the confidence to continue to carefully invest in our customer base.

Now, let's take a look at our entertainment group results on slide five. The positive impact of TV and broadband promotions and our ability to bundle services can be seen in our entertainment group results. Total video customers, broadband connections, and bundles all grew. DIRECTV NOW continues its solid run of subscriber growth. More than 300,000 DTV NOW subs were added in the first quarter, giving us nearly 1.5 million customers in service. This over-the-top video growth has helped us manage the industrywide transition of linear TV subscribers to over-the-top services.

Looking at total video subs, we actually have more subscribers today than we did two years ago because of the success of DIRECTV NOW. This is especially important at a time when the industry is seeing the increasing pressure from customers cutting the cord. Transitions such as this are never easy, but we have shown that we are able to do this time and time again, whether it be with our voice, our broadband, or our wireless services. We don't expect video to be any different. We do expect revenue and margin pressure as we manage through this, especially this year. But we're excited about DIRECTV NOW's product improvements, and our new user interface that we're beta testing right now and expect to roll out soon. This has cloud-based DVR capabilities and supports an additional video stream per account. Later this year, we expect a more robust VOD experience and new pay-per-view options to be released. These new services will add new revenue streams to help counter some of the revenue and margin pressure we are dealing with.

The over-the-top model also is low touch, with significantly lower subscriber acquisition costs and less capital investment. As we manage the over-the-top transition, we are completing our broadband transition from DSL to IP broadband. About 800,000 of our residential broadband customers are still on legacy DSL. That compares very favorably to about 4.5 million legacy DSL customers just for years ago. So, we are managing through this transition. This has helped drive growing broadband momentum for us. We had 154,000 high-speed broadband net ads in the quarter and 82,000 total broadband net ads. Our fiber build now passes more than eight million customer locations, nearly all consumer, and you see its impact on our broadband numbers. Customer response has been terrific. In areas where they have been marketing fiber for the last two years, our penetration rate is nearly 50%. That's quite a bit higher than in our non-fiber markets and leaves us a lot of room to run over the next couple years.

Now, let's look at business solution results on slide six. As a reminder, wireless subscribers, and specifically individual wireless subscribers, who buy off a company plan have been moved from business solutions to consumer mobility. Historical financials have been recast to reflect that change. Business solution revenues were down slightly, as gains in wireless and strategic business services help to offset declines in the legacy services. Wireless revenues were up nearly 4%. Equipment revenues were up with increased sales, while services revenues were essentially flat. Wireline revenues were down about 3% year-over-year, an improvement over recent quarters, and similar to what we saw in the fourth quarter. This improving trend in wireline is encouraging. And this comes before any expected bump from business activity that we might see with tax reform.

Another positive is the significant improvement in business wireline margins, where EBITDA grew year-over-year and margins were up 190 basis points on a comparative basis. The team continues to do a great job in driving cost management initiatives. We're also beginning to see operating expense savings from our move to a virtualized software defined network. More than 55% of our network functions were virtualized at the end of '17, and we expect to have 65% virtualized by the end of this year, well on our way to meet or exceed our goal of 75% virtualized by 2020.

Our international business also turned in another strong quarter, thanks to solid revenue gains in Mexico. These results are at the bottom of slide six. Revenues were up more than 7%. EBITDA was up significantly, thanks to strength in Latin American and improvements in Mexico. Subscriber growth continues to be strong in Mexico. We added more than 500,000 new subscribers in the quarter and more than three million in the past year, and now have 15.6 million customers in total. Reported service revenues were down slightly due to our first quarter decision to shut down a wholesale business that we inherited from Nextel. Without that roughly $90 million reduction in revenues, reported service revenues were up year-over-year. And our Latin America satellite operations continue to be profitable and generate positive free cash flow.

Over the last few quarters, we explored the possibility of issuing an IPO for our DIRECTV Latin America video properties, but ended up withdrawing our offer. We just didn't believe it was the right time to transact. Current market conditions obviously played a role, and trade, interest rates, market volatility, and foreign exchange all played their part. DIRECTV Latin America has been a steady performer for us, contributing both profitability and free cash flow. We'll continue to look for ways to unlock the value of those properties for investors, while increasing our optionality.

Now, I'd like to provide you updates on our Time Warner acquisition and our goal to build the world's premiere gigabyte network. Those details are on slide seven. I'm not sure I need to update anyone on the status of our bid to merge with Time Warner, but here's the latest. Both side are wrapping up their cases and are now preparing for closing arguments on April 30th. After that, we'll wait for the court's ruling. Based on the court's determination, we stand ready to close. Funding is in place, even after we settled a special mandatory redemption bond. There's not much more we can add at this point.

I'd also like to update you on our ongoing efforts to improve our networks. FirstNet continues its strong start. We launched the first and only nationwide FirstNet dedicated network core last month. This network core acts like the brains and nervous system of FirstNet, and is on physically separate hardware. Only FirstNet traffic will move through this core. This will serve as a springboard for ongoing innovation and advanced functionality, delivering value-added capabilities and benefits that commercial cores can't match. This includes always on access to priority and ruthless pre-emption. The FirstNet network also is open for FirstNet ready and FirstNet capable devices. These devices support all AT&T commercial LTE bands and the FirstNet Band 14, and meet band priority selection technical requirements. So far, nearly 650 agencies across 48 states and territories are already subscribing to FirstNet services. We see this as a real growth opportunity.

We've also started the heavy lifting of putting Band 14 on our towers. Over the next five years, we'll be putting Band 14 on tens of thousands of new and existing sites nationwide. We plan to touch about a third of our cell sites this year alone. Our new Crown Castle agreement will help us speed this process. The agreement simplifies and expands our long-term leasing deal for wireless network infrastructure. This will give us more flexibility as we deploy FirstNet as well as 5G technologies.

We're working hard to build something great for first responders. With the introduction of the FirstNet core, first responders finally have the network that they have been asking for and that they deserve. In addition to our efforts with FirstNet, 5G and 5G Evolution work continues its accelerated development in several different areas that will pave the way to the next generation of higher speeds and quality for customers. 5G Evolution is made up of carrier aggregation, 4x4 MIMO and 256 QAM technologies, along with LTE local assist access, or LTL-AA. These are building blocks toward the transition to 5G and will deliver speeds substantially faster than LTE. 5G evolution has now expanded to 141 markets, and we expect to reach more than 500 markets by the end of the year. Our fixed 5G trials also are providing valuable, real-world millimeter wave spectrum experiences both to businesses and residential customers. We're seeing gigabyte-plus speeds under line of sight conditions for distances up to 900 feet and with extremely low latency rates, some as low as nine milliseconds. These trials have shown that millimeter wave is able to penetrate foliage, glass, and even walls better than anticipated with no discernable signal performance impacts due to rain, slow, or other weather issues.

Granted, these are early results in trial conditions. But we are excited about what we have seen so far. The backbone for 5G or any wireless network is fiber. And our fiber network is extensive and growing. We're on track to surpass our commitment as part of the DIRECTV deal to build fiber to 12.5 million customer locations. We now reach more than eight million locations with fiber and plan to hit 10 million by the end of this year. This is in addition to the eight million business locations that we pass today within 1,000 feet with fiber. These 16 million locations and the more than one million route miles of fiber in our overall network are the backbone of our network and our move to 5G. With FirstNet, 5G, and fiber build, our network has never moved at a faster pace. We're excited about the progress we're making and even more excited about where our network will be in a very short time. That's it for my presentation. Mike, I'll turn it back over to you for Q&A.

Michael Viola -- Senior Vice President of Investor Relations

Okay, thanks. Justin, we're ready to take questions.

Questions and Answers:

Operator

Most certainly. Thank you. Ladies and gentlemen, if you'd like to queue up here for a question, please press * followed by 1 now for us. And just a reminder, if you are using speakerphone, it might be helpful to lift the handset before pressing those number keys. First, we have the line of John Hodulik of UBS. Your line is open.

John Hodulik -- UBS Securities -- Analyst

Okay. Thanks, guys. Maybe first starting on the entertainment group, really, on slide five. John, I just want to make sure I'm sort of reading this correctly in terms of the exhibit you put here, that sort of everything left of that vertical line is sort of historical accounting method, and if that's true, the way I'm reading it, can you just confirm that EBITDA?

John Stephens -- Chief Financial Officer

Yeah. So, the historical accounting method is effectively publishing first quarter 2018 results under the old rules so you've got comparability with last year's first quarter.

John Hodulik -- UBS Securities -- Analyst

Okay. And I guess, just doing that, it would seem that the entertainment EBITDA is down sort of in the range of about 19%, if you could sort of confirm that. And then on a sort of apples to apples basis. And then if so, will you just talk about sort of what's driving that pressure? You talked about DIRECTV satellite subs declining, and some of the expenditures you were going through to stand up DIRECTV NOW, and the marketing, and maybe the move to the new platform. How should we sort of expect those drivers to sort of evolve over the course of the year? You know, the satellite losses look like they're picking up on a year-over-year basis. Should we expect that to continue and put sort of further pressure against -- on those margins from that new sort of 22.8% level?

John Stephens -- Chief Financial Officer

Yeah, so a couple of things, John. First of all, I think on a year-over-year basis, our linear video losses are actually less. As you can see on the chart in the middle there, they're actually going on. So, that's an improvement. We've seen some improvement in our churn rate. And as we --

John Hodulik -- UBS Securities -- Analyst

I was just looking at the -- I was thinking of the satellite over satellite number, like the -- I think the -- is it 188 versus the, I think, zero you did a year ago. I guess the outlook -- yeah, I guess your traditional's gotten a little better, but how do you see the sort of satellite stuff evolving over the next 12 months?

John Stephens -- Chief Financial Officer

So, I think we're gonna continue to see new challenges in the satellite in the linear paid TV models we've talked about. We'll continue to see real opportunities to shift to the over-the-top and continue to grow DTV NOW. And then what we will see is as we come out with our new platform, the one that's in beta, and then quite frankly, some updates that we would hope to have by the end of this year, where you'll start seeing things like cloud DVR revenues; pay-per-view revenues, both sports and movies; some of the opportunities for additional streams; and then eventually, revenues for advertising and data insights, we'll see a replacement of the margins and growth in those margins on an extremely low capital expenditure basis. So, we'll transition through that. That's what our expectation is on that. Am I answering your question, John? That's what I'm trying to do.

John Hodulik -- UBS Securities -- Analyst

Yeah.

John Stephens -- Chief Financial Officer

That's how -- that's the process we're going through. It'll be challenging. It's hard work. It'll take us some time. Not expected to be completed this year, but we are optimistic about total video counts growing over 100,000 and the significant year-over-year improvement in total video, almost 300,000 improvement.

John Hodulik -- UBS Securities -- Analyst

Right. I guess, John, what I'm trying to get at is the sort of margin trajectory from here on a sort of new accounting methodology 22.8. Should we expect sort of a similar trajectory from this new level as we sort of look out through the year, or do we expect it to stabilize as we move through the year, just given all the sort of puts and takes?

John Stephens -- Chief Financial Officer

Yeah. I think we'll see some pressure throughout the year, but starting to stabilize at the end of the year.

John Hodulik -- UBS Securities -- Analyst

Okay. Thanks.

John Stephens -- Chief Financial Officer

I do think we'll see some ongoing pressure through the year.

John Hodulik -- UBS Securities -- Analyst

Okay.

John Stephens -- Chief Financial Officer

Thanks, John.

Michael Viola -- Senior Vice President of Investor Relations

We'll take our next question, Justin.

Operator

Sure. We have the line of Amir Rozwadowski of Barclays. Your line is open.

Amir Rozwadowski -- Barclays Capital -- Analyst

Thank you very much, and afternoon, John and Mike.

John Stephens -- Chief Financial Officer

Hi, Amir.

Amir Rozwadowski -- Barclays Capital -- Analyst

Hi. Wanted to touch base on the mobility segment. If we think about sort of the competitive landscape and your approach to the competitive landscape at this point, how should we think about sort of the trade-off of subscriber acquisition versus margins? To John's prior question, if we look at it on a like for like basis for mobility, we did see some pressure on a year-over-year basis against the historical margin structure, and just trying to think about the prospects for improving that going forward or how we should think about the puts and takes there.

John Stephens -- Chief Financial Officer

Yes, Amir, it's a good question. The way we're thinking about it is we're making the investments in the customer base from a, if you will, an initial basis. So, in things like BOGOs or offers on equipment, getting that and getting the customers in, and then having that ability to retain them for what is now 120 months, as opposed to moving toward a recruiting tool that would be based on service revenues that would occur every month. So, we're taking that investment on an upfront basis where we can identify it, taking that pressure through margins, certainly, but then knowing that we have this improving churn and this reliability, and the ability then to add other services, whether they be broadband, whether they be video, or whether they be wireless. That's how we're viewing it.

So, we've got kind of an ability to turn on and off our investment opportunity and our customers' growth. We've, so to speak, had it turned on in the fourth quarter last year and first quarter this year, but I think you've seen an over 700,000 smartphone improvement in the last two quarters over the prior years' two quarters. So, if we take responsibility for that investment today and get it over with, and then get the benefits not only over the ten years we own the -- the customer stays with us, but quite frankly, start getting the benefits from it in the very next quarter or the very next month as you have that investment behind you. That's how we're thinking about it. That's how we go about it.

I will tell you, we're trying different data informed offers, and we're exchanging them when we see things work or not work appropriately. And we'll continue to do that. But the best we can, we've focused on these investments in the customer base that revolve around getting everything upfront, knowing what the total cost is gonna be, and then moving forward. From a competitive environment, we've seen some moderating of the competitive environment over the last few months. There continues to be some changes in that and some offers that we see that we're never sure if they're temporary or permanent. But overall, we have seen some moderation of the environment, and we have, as you can see, performed really pretty well with really, really low postpaid churn, growth in prepaid, and really, really improved growth in the postpaid phone trends.

Amir Rozwadowski -- Barclays Capital -- Analyst

That's very helpful, John. And then, to your point on churn, we continue to see it decline on a year-over-year basis. What is your expectation through the course of the year? As you mentioned, we are seeing some changes in the competitive landscape. Is the expectation that you're able to continue to drive churn lower through the course of the year?

John Stephens -- Chief Financial Officer

Yeah. We haven't given specific effort to improve churn stability as it is, but we're sure striving to continue to improve churn over a year-over-year basis. Our strategy, though, really gets to what we've seen as when we're able to bundle it with another service, a broadband, a video, wireless, any two or three of those together, we see better churn. And so, we also have that, and that's a differentiating viewpoint or a differentiating capability that we have uniquely that others don't. And so, when we can do that, we do have some optimism about the ability to not only maintain these great churn levels, but even see some further improvement, like we did this quarter or sequentially in year-over-year.

Amir Rozwadowski -- Barclays Capital -- Analyst

Thank you very much for the increments of color.

John Stephens -- Chief Financial Officer

Yup, thanks.

Operator

Next, we have the line of Simon Flannery of Morgan Stanley. Your line is open.

Simon Flannery -- Morgan Stanley -- Analyst

Great. Thank you. Good afternoon, John. On the video programming, I think Randall reportedly made a comment around introducing an AT&T watch offering for $15.00 bundled with wireless. Maybe if you could just give us a little bit more color about that and what sort of timing we have around that? And then coming back to wireless, I know that the upgrade rate ticked up 4.3 from 3.9, and I think you'd in the past talked about going through this period of very low upgrade rate, and it could start to normalize over time. So, it would be great just to understand, was before three, do you think you're getting back to a more normal rate now, or any color around how long people are keeping handsets and renewing them? Thanks.

John Stephens -- Chief Financial Officer

Okay, thanks, Simon. Good question. So, first of all, our upgrade rate, and quite frankly, both the upgrade and the gross ads numbers, so we had about half a million more devices in the first quarter in the upgrade rates and the gross ads. So, we had a big step-up. I think that was due to a lot of things. It was due to great offers that the team put out. I think there was some kind of demand for new innovative devices, and there may have been some change in the fact that devices have gotten another quarter older and people wanted an upgrade. But I think the biggest driver was really our offers. That's one thing. Two, that cost of pressure with regard to expenses on this comparable basis. If you use the comparable basis, then a lot of those expenses, particularly with regard to BOGO type offers, might fall under the bottom line and cause the pressure there. And then, so that's a reality. On those, we're more than willing to pay that, if you will, make that investment to get the long-term and, quite frankly, the immediate short-term additional revenues.

I don't know that the upgrade rate itself because the age of devices has changed that much. I do believe our offers drove the increasing upgrade rate, and the new iPhones may have driven some of it because of the limitation and the lateness that they came in in the fourth quarter, and some of our customers using BOGOs to buy those in the first. So, that's how I view that. We'll continue to watch it. I don't believe we're gonna go back to the historic upgrade rates. I think those are clearly a matter of history. And even though the fact that we're talking about 4.3% being a big increase in the upgrade rate, and it gives you the sense of -- we used to talk about normal upgrade rates being a lot higher percentages.

With regard to the video programming, let me just add, as we move forward through this year and are able to continue to innovate, we'll have a lot of offers in wireless and broadband and video. One of those would be the one that you were referring to that Randall mentioned, a DTV watch type program. We'll leave it to my marketing and sales team to come out with the details on that. I know they're gonna do a lot better job of it than I could. But I think the more important message is that we are willing to innovate. We are willing to try some different things to grow the customer base in the right way and continue to grow the overall business on a bundled basis.

Simon Flannery -- Morgan Stanley -- Analyst

Sure. Thank you.

John Stephens -- Chief Financial Officer

Thank you.

Operator

Next, we have Mike McCormick of Guggenheim. Your line is open.

Michael McCormick -- Guggenheim -- Analyst

Hey guys. Thanks. John, really just circling back on the entertainment group and sort of pressures there, just thinking about -- I think Randall recently was quoted as comparing it to the legacy wireline voice business of old, and I don't think there's much argument that linear's under tremendous pressure. But as you look at that unit or that segment, how much of the cost is variable? And as you sort of think about the piece parts within that, which parts of it can you reduce sort of with the subcounts versus more structural fixed costs? And then on the content cost side, which I presume is mostly variable, what benefits are you guys getting as far as cost goes or negotiating power goes with the programmers for the DIRECTV NOW product?

John Stephens -- Chief Financial Officer

Yeah, again, Mike, good question. A couple of things. I guess I view all of our -- I view the cost this way. On the video entertainment piece of it, on the video side, that content is variable with regard to the packages we sell. But I also think there's some opportunity going forward to be variable with regard to within the packages. And I think -- and we've made reference to possibly some offers, possibly getting to a point where we have differentiated offers with different packages. We have some today continuing to do that. So, I think there is some, not only just based on the volume of customers, but also based on what the customers want to buy, and we'll continue to look for that.

On the high-speed Internet side or the broadband side, I would suggest to you what we've been building into, the $8 million fiber, right, quite frankly is something we still have a lot of selling to do into. And so, that capital's been spent in that capacity to serve is already out there. We're just in this process of growing this IP broadband base and serving it. So, I would suggest to you that that could be a change or provide new direction, particularly as we've gone through the legacy DSL conversions, which has really been absorbing us for the last few years.

On the legacy voice and data, those challenges continue to be there. Those costs are either -- have been managed out or continue to be managed out. That's how we think about this, but the real -- on the video side, the real growth here is gonna be in these alternative services, whether it's cloud DVRs, pay-per-views, data insights, advertising, doing those kinds of things while growing broadband at a high-speed level and continuing the success we've had. And then, as you look at that entertainment group, bundling the two of those together, but also bundling all of that with wireless. And so, that's the real strength in it. That's what makes it worth all the efforts that we're going through to transition it. So, it's not just one individual piece, but it's the collection of those pieces that make this very attractive.

Michael McCormick -- Guggenheim -- Analyst

Great. Thanks, John.

John Stephens -- Chief Financial Officer

Thank you.

Operator

Next, we have Brett Feldman of Goldman Sachs. Your line is open.

Brett Feldman -- Goldman Sachs -- Analyst

Hi, thanks for taking the question. The first one is just a quick housekeeping question. The new USF accounting, you noted that it's neutral to operating income. Can you clarify, is it also neutral to EBITDA? I think that might help some comparability. And then just coming back to the entertainment segment, the U-verse video base has been remarkably flat. Particularly, I think you added a customer, a couple customers this quarter. I was hoping maybe you could provide a little more insight as to why that is. And is that more directly tied to the adoption of your residential fiber product and perhaps what we're seeing the satellite trends? Thanks.

John Stephens -- Chief Financial Officer

A couple of things. One, yes on EBITDA, the USF revenue and expenses are both in the EBITDA calculations, so they will net to zero. It won't have change to EBITDA. I will tell you, though, Brett, to be clear, in prior years that USF revenue was in service revenues. And so, it impacted service EBITDA margins. Not EBITDA itself as a number, but the margins. We believe this will give you a better picture of what we actually collect from customers on our behalf versus what we collect on the customer -- the government's behalf, much like sales taxes, which we had never previously counted as service revenues. So, you're right, it does affect EBITDA operating income or EBITDA. The starting point, though, would be it would have an impact on service revenues.

Brett Feldman -- Goldman Sachs -- Analyst

Got it.

John Stephens -- Chief Financial Officer

The U-verse, I think essentially a couple of different things. One, the fiber build and the fiber capability, the broadband capability, make that natural bundle very good. Two, U-verse is in our historic legacy telephone company footprint, where we generally have very good wireless capability distribution, and have had actually better results in bundling when we have all aspects of that. So, that's another point. Brett, I would tell you the need to migrate U-verse into satellite to take advantage of differentiating content cost is ebbing, or is greatly reduced than possibly it was when we first merged with DIRECTV. All of those things are part of the process. And quite frankly, customer satisfaction with the U-verse product is probably the most important consideration, that people are happy. So, those are all things that contribute to that aspect.

Brett Feldman -- Goldman Sachs -- Analyst

Just a quick follow-up question. I think you had previous indicated that when the DIRECTV satellite product was being sold in your landline reach, and you were seeing better results there because you could bundle with broadband. Is that still playing out, or are you finding that the U-verse video product is still a much more natural bundle with your broadband offer?

John Stephens -- Chief Financial Officer

I won't say in comparison to the two, U-verse compared to satellite, but I will tell you that we do believe that we do better and have better churn stats when we can bundle video, both satellite and U-verse. U-verse kind of by definition. But satellite, we have better churn results and better customer experiences when we can bundle with our IP broadband. And to that point, just another reason for the fiber build and the opportunities that it presents, as well as -- like FirstNet will provide, quite frankly, all our satellite customers with regard to the potential for much better quality wireless service. So, all of that kind of plays together.

Brett Feldman -- Goldman Sachs -- Analyst

Thanks for taking the questions.

John Stephens -- Chief Financial Officer

Sure.

Operator

Next, we have the line of Philip Cusick of JPMorgan.

John Stephens -- Chief Financial Officer

Hi, Phil.

Philip Cusick -- JPMorgan Securities -- Analyst

Hi, guys. Thanks. Hi, John. First, a follow-up. You were fairly aggressive in the first quarter in wireless compared to previous first quarters, but a lot of those promotions fell away in April. Should we think about this as a new level of aggression for the full year, or are you just changing up the seasonality? And then the bigger question, John, the online and addressable advertising business seems to be under fire on a lot of fronts, and there's some increased investor preference lately for online subscription businesses. How do the headlines impact your thinking around AT&T's strategy of accruing content in the OTT transition and the trade you seem to be making of giving up subscription revenue to drive subscribers in an effort to build the targeted advertising opportunity? Thanks.

John Stephens -- Chief Financial Officer

So, Phil, with regard to aggressiveness, I would suggest to you, we had the capabilities to be aggressive in the first quarter. We did that. We tried different things. As you can tell, we did that in the fourth quarter too. And as you pointed you, we changed them as we've gone through to make sure we -- what we were doing was working and was getting the results -- not only just results, but the results we wanted. And we're continuing to focus on data informed decisions in that light. What I'd suggest to you is what you'll continue to see is something like the free offers that we've I guess recently put out in the marketplace in New York, where we're using video as an opportunity to attract customers; in Chicago, where we're using our capabilities with regard to broadband to attract customers; or in Los Angeles, where we're using wireless. We're trying to be market directed, market informed, and trying to put offers out that'll, if you will, make a difference. You can expect to continue to see us change some things, try some things. We might do a BOGO, and then we might do a second one is at 50% fee as opposed to a full BOGO. I think we recently did that with our wireless offering. So, you'll see us make changes on a regular basis. We're trying to, if you will, make sure we're willing to invest in this opportunity and the customer base to grow the business and the opportunities for long-term. I don't want to suggest that our, if you will, investment levels will continue to be at the same level they were in the first quarter. We'll go through that process as we go through the year and make the right decisions for the short-term and the long-term for the business. But I do expect we'll continue to look at things on a regular basis, as we've been doing even here in April.

With regard to the recent issues with regard to -- I'll call it customer data and customer, if you will, rights with regard to that data, we continue to respect our customers. We've been the guys who've been in the business of, if you will, simply put, unlisted numbers for a hundred years. We understand customers' data and privacy and how to deal with that. We're the ones who have pushed for a consumer bill of rights and pushed that legislation earlier this year, long before this became a headline story of the recent month. So, we continue to believe in, if you will, respecting your customers' privacy and treating them the right way will provide the long-term results. With that being said, we continue to believe in the processes and practices we have in place as being appropriate, and we continue to believe that there is a space for us as a trusted advisor and a trusted player in the data insights and data privacy space for our customers and for the advertisers who are clearly looking for a trusted partner in that space.

Philip Cusick -- JPMorgan Securities -- Analyst

Thanks, John.

John Stephens -- Chief Financial Officer

Thank you.

Operator

Next, we have the line of David Barton of Bank of America. Your line is open.

David Barton -- Bank of America -- Analyst

Hey, John. Thanks for taking the questions.

John Stephens -- Chief Financial Officer

Sure.

David Barton -- Bank of America -- Analyst

So, first question would be, if you could kind of maybe elaborate a little bit more on where we are kind of on the FirstNet go to market process. Have you stood up the sales force? If you have, what exactly are they selling and to who? And when can we think about the market share opportunity that you have there starting to feather into your kind of gross ad market share and net ad share in the market? And then the second is, a year ago first quarter, the postpaid phone net ad market was a couple 100,000 phones. If we look at what you and Verizon and Comcast have done and make a few educated guesses about T-Mobile and Sprint, year-over-year, that's gonna be three to four X this quarter. And if I looked at last quarter, it was actually up 50% year-over-year. What do you think is kind of driving this phenomenon, where the postpaid phone net ad market just seems to be kind of growing out of thin air? Is it the economy? Is it prepaid to postpaid migrations, DYOD? I'd love your theories there to kind of explain it, and then whether we can maybe assume it's gonna continue for the rest of the year or whether this is kind of a transitory effect. Thanks.

John Stephens -- Chief Financial Officer

So, I think it depends, David. I don't doubt -- let me say it this was. For us, we're both growing at an improved postpaid phone, improved 300,000, while we still had almost 200,000 -- that is, about 190,000, 200,000, but almost 200,000 prepaid net ads. So, for us, we're seeing continued good -- really good performance of prepaid, but really good performance in the smartphone. So, we're seeing a total growth in those phones. That's what we're seeing. I think others are seeing some conversion from prepaid to postpaid. I wouldn't -- that may be at the customer's decision just based on pricing opportunities or, if you will, plans that are out there. But we are seeing continued growth in both for us. I do understand your question, and we'll wait and see about what happens with the total marketplace. I don't have a total view of that marketplace. I don't think anybody does, because some of the companies haven't announced and so forth. But in our, if you will, piece of the marketplace, you saw us now with two quarters in a row, over the last two quarters, a 700,000 improvement in postpaid smartphones and continuing good performance, solid performance in prepaid. So, we are -- we believe that we're doing very well in the share part of the game.

I would also tell you there's other aspects of things in the postpaid net ads, as you all know -- whether tablets are going, whether and how people count watches and other devices. I'll leave that to you all to decide and to evaluate. But on the phones, we feel pretty good about getting good value for the investment plans we put out there, and a great opportunity to generate value short-term, the month after, with regard to the revenues these guys are gonna generate and over the long-term because of our churn being so low.

With regard to FirstNet, FirstNet's something that we're really excited about. We're very excited about getting the only, the exclusive authorized FirstNet core up and running last month. We really do believe that that's critical to be able to provide the services and to provide the quality of service that those first responders deserve and need. We had set up a FirstNet team last year. An individual by the name of Chris Sandbar runs that for us. We added marketing and staff and sales people. We've spent money, if you will, and time over the -- at least over the last nine months, if not longer -- almost a year, I guess, getting to know our potential clients, getting into the industry, making a bigger effort to be a known player. With regard to that, as I mentioned earlier, we've actually had about 600 or so, if you will, departments sign up with those. And those 600 departments came from over 48 states, because they can use -- we can provide FirstNet quality services on our existing LTE network once we've established this core, which we did last month. So, they can get relentless or ruthless pre-emption, and they can get priority services. And that can all work now. We can provide that.

Now, some of those folks that we signed up could have been our customers before and they just want to migrate to FirstNet, and that'll be part of the process. But quite frankly, I think we've been very pleased about the reception we've been given to at least talk to people that previously weren't our customers. And on a per person basis, if you will, somebody's a first line, first responder, you're thinking about two or three or potentially four connected points, whether it be a body cam, whether it be a phone, whether it be a tablet for their care, whether it be some drone or some other device they'd use. But you also look at it from the ability to contact with the smart cities, their employers, so to speak, and whether we can sell other services there. We're also looking for the in-house personnel, the dispatch people that work at the police stations, or other personnel, and whether we could have an opportunity to sell there. And then of course, there's always the friends and family approach.

So, we're very pleased. First of all, we've got a FirstNet team already set up. They're very active. They've already gotten a number of contracts done in over 40 states. And we continue to be very excited about it. We will get a significant amount of the Band 14 up this year, and we are expecting to at a minimum meet and hopefully exceed all the milestone requirements that FirstNet has given us. So, if I sound pretty positive about it, I am.

David Barton -- Bank of America -- Analyst

Thanks, John.

John Stephens -- Chief Financial Officer

Thank you.

Operator

Next, we have the line of Amy Yong of Macquarie. Your line is open.

Amy Yong -- Macquarie Bank -- Analyst

Thank you. Maybe if you could talk a little bit more about the advertising opportunity and size up the near-term marketing opportunity for us. How quickly do you think you could ramp this up? And then maybe some of the growth trends that we should be looking at for this year next. And then just very quickly on the 5G fixed wireless trials, how big is the residential broadband market opportunity as we think about '19 and beyond? Thanks.

John Stephens -- Chief Financial Officer

So, on the advertising, let me make sure I point out, this quarter, we were up 9% in revenues. We got a base of about $350 million a quarter, in that range. I don't have the specific number at my fingertips here. And we grew it about 9%. So, the team is actually proving that this works already with our existing, if you will, inventory of ads that we get as the distributor from the content folks. So, we're making it work. We're getting higher CPMs, and getting higher revenue streams, and making it more effective. We feel really good about that. As we go through this year, we hope to add a lot more inventory from underneath our umbrella of ownership companies to that. And we'd like to develop that. If you think about the overall digital market, I don't know the exact numbers, but I think last year, the overall digital advertising market in the U.S. was north of 60 billion, and some estimates put it in the 80 billion range.

We're not a -- what I would call, in that piece, a significant player. We believe that we can be. We have the capabilities to be. And we've made the investments, not only in the personnel and the team that Brian Lester's established, but we're also making the investments in the data capabilities and our big data engines inside our company today. So, we feel really good about that opportunity. If you think about linear TV and the opportunity to grow that revenue stream, if you think about digital and the opportunity to grow that, and then you think about the opportunity to take all of our digital insights and data insights and help advertisers make sure their advertising is working effectively and efficiently, we believe that there's a real opportunity there. So, all of that being done within the appropriate rules and data protection activities. So, we feel really good about that.

With regard to the fixed G wireless, if you will, our test has showed it can be done. We can do it. The opportunity there is something we'll have to prove out. We're not as excited about the business case. It's not as compelling yet for us as it may be for some. The reason we're still -- we don't see that, if you will, the question is, is to get that fixed wireless to the residential, you still have to have backhaul from where the -- you know, 1,000 feet away, 1,500 feet away, and you still have to have that backhaul infrastructure. So, that could be, depending upon your ability to successfully pick who's going to buy and how much you're gonna need, it's gonna be a very tricky business case. For us, with this extensive fiber negative, we will be able to have that backhaul. With this expansive FirstNet network, we'll be able to have that backhaul.

But quite frankly, if we've got FirstNet and we've got fiber there, it may be just as effective and maybe even a better quality product to give those customers fiber to the home. So, we're continuing to work at it. I just don't want to hold it out and say right now, we are more excited, as you can tell from the statements I've made about our FirstNet opportunity, about the fiber capabilities that we're building and selling into that, and quite frankly, about the overall 5G Evolution and 5G capabilities in our overall mobility network serving much of the mobile broadband demands that are out there, requirements that are out there.

Amy Yong -- Macquarie Bank -- Analyst

Great. Thank you.

John Stephens -- Chief Financial Officer

Thank you, Amy.

Michael Viola -- Senior Vice President of Investor Relations

And Justin, we'll take one more question.

Operator

Certainly. Last, we have the line of Frank Lapin of Raymond James. Your line is open.

Frank Louthan -- Raymond James & Associates -- Analyst

Great, thank you. Give us a little bit more color on maybe the free cash flow aspects in the entertainment business as you're switching more to the DIRECTV NOW product. That would be great. And then on the 5G, it seems the device is being available late '18. Can you give us a little bit more color on exactly what devices you're waiting for for before the launch? Thanks.

John Stephens -- Chief Financial Officer

Okay. With regard to the 5G, let me make this point. On the 5G Evolution, those devices are not only available now, many of our customers already have them. And so, the speeds we can do with 5G Evolution by putting up all our spectrum with regard to FirstNet, using four-way carrier aggregation, which allows us to band the spectrum that we've put up now all together, and having four-way MIMO, which is, if you will, an efficient and quick way to let customers access the network and exist the network. Those speeds are working today, and in our test in San Francisco, we got 750-meg speeds on our network. On a full network, that might be 10 to 20% of that level, but we believe we can get 100-meg speeds on our 5G Evolution network with handsets that are already out there today in people's hands and are coming through the rest of the handset manufacturer base over time. So, I just want to point that out. That's one of the reasons why the FirstNet, with the technology developments a carrier adds, and four-way MIMO with 256 QAM and all these other things combined, as well as the new spectrum, Band 14, gives us real excitement about the ability to serve customers really, really well.

On the 5G, I think by the end of this year, we'll have 5G networks up. The device that'll be out or devices that'll be out will probably be pucks and the ability to connect to a puck. And then we'd expect to see what I'll call handset devices or tablets, or those type of what I would -- I think many of us would normally think of as devices, those would be out in '19. And as Simon referenced earlier in the call, we've got, if we will, upgrade cycles that are some 5% a quarter, so there may be some time to getting those 5G handsets up and running, so to speak. So, we'll see how that goes, whether that changes the upgrade cycles or not. But all of that is, for us, points to this 5G Evolution can be a really beneficial thing for us, because that's available in many, many handsets today.

On the free cash flow side, if you will, Frank, I guess I'll say it this way, moving to the DTV NOW platform or moving to a thin client platform eventually for the home is really gonna change the free cash flow aspects because the upfront truck roll cost, the upfront, if you will, climb the roof costs, all of that can change, as well as some of the things with regard to billing and administrative costs, the fact that it's an automatic bill or it's a credit card bill. All of those things will change. But that's one of the attractivenesses of the DTV NOW, is the economics, about not having that upfront investment. That'll turn into savings from an upfront investment from a cash flow perspective. So, that's why this thing will -- we strongly believe it'll work long-term.

With regard to our first quarter free cash flow, I do want to make one point. First of all, first quarter's always low for us because of bonuses and other things. We had a huge handset sales in the fourth quarter and the first quarter. 500,000 up year-over-year in the first quarter, 700,000 up year-over-year in the fourth quarter. And many of those sales in the fourth quarter, we actually paid for the phones this quarter, because they were late in the quarter last year when they were sold. So, we had a lot of cash flow pressure from handsets that'll reverse itself. It'll wash itself out. And I just want to point that out. So, we feel good about our free cash flow. Keeping it in that $21 billion range is the guidance we've given, as well as keeping all of our guidance intact.

Frank Louthan -- Raymond James & Associates -- Analyst

Okay, great. Thank you.

John Stephens -- Chief Financial Officer

Thank you, Frank. With that, I want to thank everybody for being on the call today. Well, we're off to a fast start in 2018, both in growing our customer base and in building the world's premiere gigabyte network. We continue to add new subscribers in wireless broadband and video, and we are on track to turn wireless service revenues toward growth this year. The FirstNet build is kicking into gear, and we launched the nationwide FirstNet dedicated network core last month. We're working hard to build something great for first responders, and early response from our sales activities has been very positive. We're also moving full speed on our 5G Evolution, and expect to be the first U.S. carrier to introduce mobile 5G later this year.

Behind all this is our expanding fiber network, which is the backbone for all our networks, both wireless and wired. And of course, we optimistically await the conclusion of our Time Warner court case and the court's decision. One last thought. As you make your way home tonight, please remember, not text is worth a life. It can wait. Please be safe. Thanks again for being on the call, and as always, thank you for your interest in AT&T. Have a good evening.

Operator

Thank you, and that does conclude our conference for today. We thank you very much for your participation and for using AT&T's executive teleconference service. You may now disconnect.

Duration: 63 minutes

Call participants:

Michael Viola -- Senior Vice President of Investor Relations

John Stephens -- Chief Financial Officer

John Hodulik -- UBS Securities -- Analyst

Amir Rozwadowski -- Barclays Capital -- Analyst

Simon Flannery -- Morgan Stanley -- Analyst

Michael McCormick -- Guggenheim -- Analyst

Brett Feldman -- Goldman Sachs -- Analyst

Philip Cusick -- JPMorgan Securities -- Analyst

David Barton -- Bank of America -- Analyst

Amy Yong -- Macquarie Bank -- Analyst

Frank Louthan -- Raymond James & Associates -- Analyst

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