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AT&T Inc. (NYSE:T)

Piper Jaffray Technology, Media and Telecommunications Conference Call

March 12, 2013 8:30 AM ET

Executives

Steve Caniano – VP, Hosting Services

Analysts

Chris Larsen – Piper Jaffray

Chris Larsen – Piper Jaffray

Good morning, everybody. For those who don’t know me, I’m Chris Larsen. I’m the telecom and Internet services analyst at Piper Jaffray. I want to thank everybody for coming out to Piper’s Third Annual TMT Conference. I want to thank everybody for moving their schedules and making time to be here. As you know, we had to postpone our conference from last November due to Hurricane Sandy and the dangling crane.

So, I want to thank everybody for making time to move their schedules from November to March. I think it worked out in the end. Other than today’s rainy weather, which is not my favorite, but this conference is actually set to be the largest TMT conference we’ve ever hosted at Piper and by a large margin. Just to give you some statistics, investor sign-ups are up over 100% from our November 2011 conference. Our one-on-ones are 2X what we had ever done in terms of conferences for TMT. And we have over 1,000 registered attendees, in fact, people closing in on 1,200 as we speak. So, this is a great conference, and I want to thank everybody for coming out and making it the success that hopefully it’ll wind up being. And thank you on behalf of myself and Piper Jaffray.

As a reminder, on your schedule, there’s a cocktail hour at 5:00 PM. That cocktail hour is open to everybody, and it’s at the front registration. So, it’s really a great way to, at the end of the day, compare notes with some of your colleagues, talk to hopefully some of the Piper analysts and maybe some of the management teams you didn’t get to have a one-on-one with. So, there’s going to be a number of us there, and we do hope you all can join us for a free drink on Piper.

So, lastly, if you do need anything, the conference group at the front is terrific, just ask them. But you didn’t come here to hear me say that. You came here to hopefully listen to what Steve Caniano and I have to say. For those of you who don’t know Steve, I actually first met Steve who is the VP of Hosting, Managed Applications and Cloud Solutions at AT&T. I used to think of Steve as he’s the cloud guy. He’s in charge of cloud for the world’s largest phone company. So, when I think about important people in the cloud space, Steve comes top of my mind. So, we’re really happy to have him here.

I first met Steve in 2009 in Secaucus, New Jersey; exciting times when you think about the cloud, that’s exactly what I always think of Secaucus; obviously, not everybody has been to Secaucus but it’s beautiful this time of year.

At the time, it was a data-center-focused visit and we sat down with him. One of the interesting things he said at the time was we’re building cloud into the network at the time in 2009. This is August of 2009 we put cloud into the network, what’s this guy talking about? No one was really thinking about the cloud. So, three years, four years before everybody else was thinking about it, they were building it into their network. Now, when I sit back and look back on that, that’s one of the most interesting things I think about.

So, with that, Steve, I’ve met you, I know a little bit about you, but maybe not everybody here knows just how big cloud is and your managed services and the data center business is at AT&T. Maybe you can just give us a sense for how big that classifies – that falls.

Steve Caniano

Sure, Chris, and thank you. Good morning, everyone. Let me just start out with a reference of our Safe Harbor on the screen, as you can see. I won’t read this obviously but just want to remind everyone that I may make some forward-looking statements today. There are obviously risks to those statements and anyone needing further info can reference our website regarding the Safe Harbor.

Thanks for having me this morning. I appreciate your kind words. And as you said, I like to think of myself as the cloud guy as well, trying to build the business at AT&T, which is an important piece of our business services portfolio. Cloud, for us, is a portfolio approach. We’ve been in the hosting business for probably some 15 or so years. We’re a global service provider. We provide services out of our 38 global data centers or IDCs as we call them. And we have a full capability set from colocation through managed services through managed applications which have, over time, started to evolve to a more on-demand model.

So, traditionally, in the hosting business, we had more dedicated type solutions which we supported for customers. We’re seeing that move, over time, to more of a virtualized solution set, more real-time needs. And as you described earlier, we’ve done a lot to integrate those services with our network, creating what we call a network-enabled cloud.

Chris Larsen – Piper Jaffray

Well it’s interesting you mentioned that, it’s a transition, I think in 2009, when we saw your data center which was a huge facility, 90% of the space at that time was for managed – was for multi-tenant data center for space – space and power rented by customers. How’s that changed over the last couple of years?

Steve Caniano

Yes. We’ve had a significant shift by design towards our services business and the services in all dimensions, from our managed services of infrastructure, through our managed application business which has been a very successful area for us. We manage, for example, customers’ mission-critical applications for their enterprise apps, things like Oracle and SAP.

One of the biggest bright spots for us is eCommerce, and we support probably 100 or more of the largest e-tailers in the world for their mission-critical shopping experience. And in those instances, we’re operating the website as an extension of the customer team. So, we are connected both from a planning perspective, as well as a technical and operational perspective, understanding their key initiatives and ensuring that their infrastructure, their operation will meet the needs of their business, whether that’s the latency required in the experience of the shopping cart, whether that’s ensuring that the new promotion or new product they’re launching is going to be able to be satisfied through the holiday shopping season.

Chris Larsen – Piper Jaffray

And it’s interesting, throughout dinner last night – we had dinner last night, and every time I talk to you, you constantly use the term solution which is a much different approach than we’ll hear from a lot of other data center or cloud customers. Constantly, I hear AT&T talking about a solution as opposed to an individual service. It’s a very different approach.

You’re network-centric, obviously. AT&T is a network company. We’ve been – many data-center investors have had it beaten into our heads that the true carrier neutral is the way to go. Maybe you could talk about what is it that your customers are coming into, what types of customers are coming into you saying, I don’t care about network-neutral, I want AT&T. What types of customers do you see?

Steve Caniano

Well, you’ve described it well with your comment about customers who are looking for solutions, and that’s what we see as well. So, from our customer perspective, the network is a part of that solution, but they’re looking for an integrated proposition. So, for example, they want to be able to seamlessly run their applications across our global network backbone, extend those applications more so now than ever through a mobility-based solutions set to customers that are increasingly wanting to access those applications on a mobile device, a tablet, a smartphone, et cetera. And tying that all together in an enterprise fashion with a level of service that you can rely on to run critical business applications is a solution that’s in our mind.

And so, for that, we think you need a network-centric value proposition which is the approach we’ve taken to cloud. Cloud for us is not about infrastructure as I think you alluded to. It’s about services. And it’s about having an infrastructure built into our networking fabric that allows us to build services from and create solutions for customers.

Chris Larsen – Piper Jaffray

You talked about solutions. You talked about data center, space, hosting, cloud; let me talk a little bit about hybrid and what is it – when a customer comes into the hybrid solution, what is it they’re buying? And how does that get served off?

Steve Caniano

Well, cloud, I would say, which I believe we’re still in the relatively early days of adoption for, really got its start in the enterprise itself, in what we call private cloud. Customers have tried to get more out of their own data centers or, in some cases, add up service providers like us by hosting in a dedicated fashion with us and virtualizing those environments.

So they built, as you might hear in the industry, a private cloud or tried to optimize the private resources they had through virtualization to get more bang for the buck. What we’re starting to see is that as customers create new applications, as they look to expand or globalize their businesses, there’s a need to go beyond the data center. At some point, you have to look as well as to what’s your core competency and where you want to focus your limited resources and look at service providers as well for part of that solution. And that creates inherently a hybrid-type configuration where you need to tie different solutions together.

You probably, if you’re a large-enough company, will have your own data center of some sort. So, you will use a service provider like us for a dedicated deployment. But how do you extend that into other geographies? How do you extend that into other functional cases if you’re using, let’s say, a SaaS provider, for example, to do your CRM? How do you link that back into your core systems? We think much of that as a network solution set. And so that creates the hybrid configurations that I think are certainly indicative of the future architectures we’ll see.

Chris Larsen – Piper Jaffray

What types of services am I doing on the cloud or solutions in the cloud versus what I might want to do on my dedicated? And do a lot of your customers – you’ve said they run their own data centers. Does that mean that they’ve got a big data center somewhere and they’re really only using you for a portion of their space?

Steve Caniano

I think it varies by type of customer.

Chris Larsen – Piper Jaffray

Okay.

Steve Caniano

The largest customers out there, the Global 500, may have large enough IT shops and investments in physical data center assets that in those instances, they may do some of their own running of a data center. More and more so, and especially, I think as you move below that segment of the market, customers are not about wanting to run data centers. That’s not a core competency that most customers have. Quite frankly, it’s not a good use of their capital.

So, they want to focus on how they can differentiate their businesses, what new initiatives they can launch for their customers, what new applications are going to essentially drive their top line. And something like data center is the infrastructure that you obviously need because it’s got to run effectively for you to launch those initiatives. But you don’t need to run it. And so, there’s a sourcing opportunity there. And I think that’s one for the industry as a whole, as more and more customers focus on their core businesses and look to service providers who are cloud-based solutions of all types, be they dedicated, virtualized, or hybrid in between.

Chris Larsen – Piper Jaffray

A lot has been made of the coming operating system wars or the current wars that are going on right now. Your big VM shop, I think the term used was BCDC which is not a music group but a level of usage of the MWeb, but you are also on the OpenStack Board. Maybe you can talk about where you think the OS wars are heading.

Steve Caniano

Yes, I think it’s an exciting time and it’s evolving time, as you say. Today, if you look at the private cloud world, you would see a predominance of VMware-based systems. I think they have something on the order of 70-ish percent of that market, depending on which analyst you believe. However, we are seeing very much interest in the OpenStack community around some of the innovation that’s happening in that space, more of a crowd-sourcing model, which we’re pretty excited about because the innovations are happening really to launch I think a pretty effective CloudStack.

We’re doing our own innovation around that CloudStack, which is where we think we could most differentiate, for example, around the network enablement by marrying up, as you described earlier, our network capability set with the cloud capability set. And so, that’s where we see our biggest value. By participating with OpenStack, we think we can leverage the larger community development. So, we increase our innovation capability. We think that, over time, that has the potential to reduce unit costs, which everybody cares about, to drive to a more efficient infrastructure model and then we can differentiate with our service model around that. So, I think that will evolve over time. We’re a participant on both sides of that because we think customers ultimately will be looking for choice and we, as a service provider, want to offer the choices that they want.

Chris Larsen – Piper Jaffray

It’s interesting that you led the innovation as opposed to the cost of getting away from VMware which is when many people talk about OpenStack, there’s – well, it’s freeware so we don’t have to pay VM. But you actually led with the fact that it’s innovative and it might be something different as opposed to can I save $100, a license or whatever, I just find it very interesting.

There is talk that VMware might have its own offering, how do you see that playing out and maybe you could talk just a little bit whether it’s VM or it’s – we’ve got Microsoft out there with an offering. We’ve got Amazon Web Services. It seems like it’s a crowded space, but how do you see it all shaking out?

Steve Caniano

Well, cloud, as was hosting, is a very fragmented market. I mean, there’s not a majority shareholder per se in that space. Some of the guys that you mentioned and many others are active players across a complex landscape. So, basically, I think that’s very much playing to the hybrid scenario that you described. I think realistically, today, there’ll be quite a few clouds that are successful. We certainly believe we’ll be one with our capability set but we see that it’s a complex market.

There are also many specialty products out there. I mean, look at some of the SaaS-based applications that are kind of specialty in what they do. There are many use cases for that for customers. And just in the infrastructure space as well, there’s all types of different offers from pure infrastructure-as-a-service on a public cloud to a higher-order enterprise grade services with managed service capabilities such as we offer and everything in between.

As it relates to VMware, who’s been a very good partner of ours in terms of creation of our services and even, I’d say, the marketing of those services, we do quite a bit in terms of point of sale together, I don’t know what their next step is relative to aspirations in the service provider space. I would tell you, from experience, that that’s a complex and challenging marketplace, and it’s not something you tread on lightly and just become a global service provider.

Chris Larsen – Piper Jaffray

Right. Yes. And we’ve seen Microsoft struggle for a while with their reserve product and seeing a lot of people get into it. Now, one of the big news events in the last two weeks has been a price cut that Rackspace introduced. And truth be told, I think it was a little bit more a marketing flare than it was, hey, by the way, we’re having a problem with our product, but I think it was interesting to see Rackspace, who’s never really led with price and has always sort of – price was the secondary event for them, come out and cut pricing. Maybe you could just talk a little bit about what you’re seeing in terms of pricing and how do you think that all shakes out in the cloud world?

Steve Caniano

Well, I think, certainly, cost and price for services is always paramount for customers. So, you can’t ignore that. I think you’ve got to be competitive. I think, first and foremost, you need to be competitive with what it takes for a customer to do it themselves, which is often a benchmark that we find ourselves in, and then obviously the larger marketplace at large.

I think some of the commodity price changes you’re seeing, though, particularly in the public cloud, I think, are a little overplayed. You’re looking at one piece part of a solutions set that maybe people latch on to. But I think you have to look at what is the true total cost of ownership when you’re assessing what it’s going to cost you. So, it’s a – cost of VM, for example, is reduced by $0.01, what does that really mean for the customer? What are the other elements they need to buy to put that together? What about the network cost, for example?

Chris Larsen – Piper Jaffray

What about access to it...

Steve Caniano

What about the services cost...

Chris Larsen – Piper Jaffray:...and the storage. And the...

Steve Caniano

Exactly. So, I think you have to look at integration of that at a TCO level, as a customer, and really understand the total picture. It’s easy to get attention by making price cuts in the market at a commodity level but what does it really mean to you.

Chris Larsen – Piper Jaffray

And we’ve got about five minutes left and I want to – well, perfect. We do have a question from the audience. Go ahead.

Question-and-Answer Session

Unidentified Analyst

Yes. Could you tell us how big your revenues are for your segments, and then I assume (inaudible) AWS?

Chris Larsen – Piper Jaffray

And just for the webcast, I’ll repeat the question which is, can you give a revenue size for your business and do you offer a public cloud service?

Steve Caniano

Yes. We don’t discretely disclose the revenue of this business. We disclose it as part of the business services, strategic services bucket, which includes a number of other growth services. And so, I can’t give you specific revenue number but we are one of the largest service providers of our type in the marketplace. As it relates to services, yes we do, we have multi-tenant services for things like compute-as-a-service, storage-as-a-service which are critical infrastructure elements. Now, we will differentiate them from something like an AWS in that we deliver those in a network-enabled fashion.

We certainly do support public Internet access to those type services. But where we really believe we have a secret sauce is by integration of something like computing-as-a-service with our network-based VPNs and literally delivering kind of the best of both worlds so that a customer who has an enterprise-grade MPLS network can on-demand access compute resources within the construct of that network, and then we can build our service model around that. And that’s a pretty unique value proposition. It is a multi-tenant solution like some of the other public cloud models but we think of it as highly differentiated than an enterprise play.

Unidentified Analyst

You’ve had been in the CDN space previously, sold your business to Akamai in Q4. Can you talk about what were the justifications for it now that you’re (inaudible)? What does that mean to you?

Chris Larsen – Piper Jaffray

And just for the webcast, the question was on the CDN business and Akamai.

Steve Caniano

Yes. Relative to the CDN business, I would look at that as a buy-versus-build for us and a time-to-market play. We created a pretty unique relationship with Akamai including a go-to-market. So, the two teams will be collaborating at point of sale. It’s driving more traffic out to our network. It’s allowing us to offer a more scaled CDN capability as a feature set of our network. And we saw that as a win-win.

Chris Larsen – Piper Jaffray

Anyone else from the audience? Okay. I’m going to go back to my question, one of the things we talked about off this Akamai, you’d partnered with Akamai, you’ve also partnered with IBM who is another one of the largest, if not the largest provider of solutions. Can you talk about how that relationship works and how do you go to market with them and at the same time you have to compete with them? Maybe just talk a little bit about that.

Steve Caniano

Yes. IBM and AT&T have been long-standing business partners, very successful for both firms. Generally, it’s been around incorporation of our network solutions and their strategic outsourcing services. And we’ve collaborated with our sales teams for a long period of time.

Both firms have been looking at our collective customer set as they reshape their businesses for cloud. And the value proposition I just described around our network-enabled cloud where we married our compute capabilities with our VPNs to create an enterprise platform. IBM also saw a value in that, and they’re dealing with some of the largest customers in the world and complex enterprise challenges. SLAs are critical, reliability, performance, things of that nature.

And so they were very interested in extending the network-enabled platform we have built for ourselves into their flagship enterprise cloud service. They have a service called SmartCloud Enterprise+, which is their managed infrastructure-as-a-service. And much as we did with our own compute-as-a-service, we integrated through joint development, the AT&T network-enabled cloud and our VPN solutions set, with IBM’s SCE+.

We are collaborating as we have for many years at a customer level in selling that service. But in essence, what that does from an AT&T perspective is it positions our network as the enterprise platform for cloud. So, a customer who’s on net, linking their global locations now has access dynamically to both the AT&T cloud resources on demand as well as the IBM resources on demand. So, you can see where that becomes a very powerful customer value prop. From our standpoint, it’s strategic in that we play a larger role in the cloud ecosystem.

Chris Larsen – Piper Jaffray

So, get your fingers into more pockets and spread that reach out.

Steve Caniano

And it extends the value of our service for customers.

Chris Larsen – Piper Jaffray

Right. Piper Jaffray has run a number of CIO Surveys and the biggest pushback for getting into the cloud seems to be security. Maybe you could, with the last minute and a half, talk about what is your view of the biggest pushback for not going into the cloud and how were you addressing the security issue?

Steve Caniano

Yes. Well, I think that is certainly one of the big issues, I’d say. Control is another kind of 1A issue there, and the two are interrelated. But security concerns come in all sorts. I mean, we see the number one security concern being, I don’t want to run my business on the public Internet, for example, and send my critical business apps back and forth on an open network, right?

So, that’s one of the fundamental rationales for why we created the Virtual Private Cloud. They’re a network-enabled cloud which allows customers to basically get the value of cloud through a network they already trust to run their critical business apps by integrating that technology with on-demand computing, for example, and creating hybrid configurations to private clouds like a VMware-based cloud, for example.

A customer basically can think about their data center or their cloud as private even though it’s extended virtually through the network in a hybrid configuration. It’s as secure as any other transaction that they would have run on that network for many years and run their businesses on. So, that’s one example but it’s an important one.

Chris Larsen – Piper Jaffray

And it’s the trusted brand of AT&T that gives you some of that leg up?

Steve Caniano

Absolutely. I think we have a reputation for service, for network-based security, which I think we do second to none, and incorporation of that as a core element of our service is what we’re about.

Chris Larsen – Piper Jaffray

We’re actually now officially over time. I want to thank Steve for coming. I want to thank everybody for listening. This was certainly helpful for me. And then in this room, after this will be the optical networking panel. So, thank you, everybody and thank you, again, Steve.

Steve Caniano

Thank you, Chris. My pleasure.

Chris Larsen – Piper Jaffray

That’s great.

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