AT&T Inc (T) — Q2 2018 Earnings Call Transcript

Okay. Thanks, Lori, and good afternoon, everyone. Welcome to the second quarter conference call. As Lori said, I'm Mike Viola, Head of Investor Relations here at AT&T. This is our first earnings call after we closed our acquisition of Time Warner, and we're broadcasting this call from WarnerMedia headquarters in New York. As we told you earlier, we're going to use this call not only to discuss the quarter, but we're also going to provide more details on our strategy. And to do that, we've brought together the CEO, CFO, and four business leaders of our business units. Today's agenda is going to begin with John Stephens, who will cover AT&T and Time Warner's second quarter financial results as well as update our outlook and guidance. Randall will provide a strategic perspective of the business. And then each of the business unit leaders will talk about their second quarter results and give a perspective of their businesses going forward. After that, the entire team will be available to participate in the Q&A session. I'd like to mention one save-the-date item. We plan to host a sell-side meeting on the evening of November 29 and followed by a buy-side meeting that next morning on the 30th. Both would be here in New York, and all the folks on this call will join us for those meetings. So please mark your calendars, and more details to come. Now before I turn the call over to John, I need to call your attention to our safe harbor statement. It says that some of the comments today will be forward-looking and, as such, are subject to risks and uncertainties. Results may differ materially. In addition, information is available on the Investor Relations website. I also need to remind you that we're in the quiet period from the FCC CAF-II auction, so we can't address any questions about that today. As always, our earnings materials are available on the Investor Relations page of the AT&T website. That includes the news release, 8-K, investor briefing, other associated schedules, and available on our website are materials on Warner Media's full second quarter. It includes trending schedule and other important documents. And so now I'd like to turn the call over to AT&T's Chief Financial Officer, John Stephens.

Thanks, Mike, and hello, everyone, and thanks for being on the call today. Let me begin with our financial summary, which is on Slide 5. I think most of you know the FASB has been very busy this past year implementing a number of accounting standards, five of which have direct impact on AT&T. Those include standards that deal with revenue recognition, pension reporting, and impacts on cash flow reporting. These changes impact our income statements and cash flow. At the same time, the company made a policy decision to record universal service fees net as an offset to our regulatory fees. We're working hard to help you understand these changes. So in addition to the GAAP financial information, we're providing comparable historical results to help you better understand the impact on the financials from revenue recognition and the policy decisions, as well as Time Warner's second quarter results on a historical basis. We will be referring to these historical results in our comparisons during the call. Now let's start with EPS. We continue to show strong adjusted EPS growth, up more than 15% for both the quarter and year-to-date. Tax reform continues to have a positive impact on EPS as does the adoption of revenue recognition. We also had about $0.02 of help from the 16 days we owned Time Warner, which we have renamed WarnerMedia. The WarnerMedia earnings contribution was slightly more than what you might expect for such a short period. But as you know, financial results can be uneven, and we saw that in the second quarter. Consolidated revenue came in at $39 billion, down slightly from a year ago, but that includes about $900 million of pressure from how we are now accounting for USF fees on a net basis. When you look on a comparable basis, revenues were up slightly, thanks mostly due to the two weeks of Time Warner revenue but also helped by gains in wireless and AdWorks. We continue to use our tax reform savings to invest in and grow our customer base. As John Donovan will discuss, these investments help drive post-paid phone growth and significant year-over-year improvement in prepaid phone net adds, continued growth in consumer broadband customers even in a seasonally challenging quarter, and solid subscriber growth in total video customers. Adjusted consolidated operating margins in the quarter were up year-over-year on a reported basis but down on a comparable one. Solid smartphone sales drove some of the pressure to margins, but the biggest factor continues to be customer transition to over-the-top video. Let's now look at free cash flow. It was a strong $5.1 billion for the quarter, up substantially both year-over-year and sequentially. Year-to-date, our cash from operations and free cash flow is up about $1.5 billion, which makes us very comfortable with our free cash flow guidance for the full year. Our cash flows also reflect the timing differences between spending for FirstNet and the reimbursements we received from the organization. This usually trails spending by several months. Year-to-date, that comes to more than $100 million of free cash flow pressure. Capital spending for the quarter was $5.1 billion or $5.4 billion before the $300 million of FirstNet reimbursements we did receive in the quarter. Let's now cover financial results from operations beginning on Slide 6. AT&T's domestic mobility operations are divided between the Business Solutions and consumer wireless segments. For comparison purposes, we're providing supplemental information for our total U.S. wireless operations. Our wireless business turned in very good results. Year-over-year service revenue turned positive. Margins remained strong, and we had phone growth in both post-paid and pre-paid. Total revenues were up year-over-year, thanks to gains in both service and equipment revenues. Also, service revenues were up almost 2% sequentially. Strong sales in BYOD supported that growth. Our upgrade rate was down year-over-year, but our equipment revenues were up, reflecting customers' purchasing habits and their choice of more expensive devices. But even with these strong sales, margins were very good with service margins coming in over 50% on a comparable basis. Looking ahead, we expect positive service revenue growth for the full year on a comparable basis. Turning to our Entertainment Group, we continue to see the impact of the video transition in our revenues and our margins. This will take a while to work through, and we expect it to continue the rest of the year. But we are seeing some sequential stability in both revenues and margins. We're making changes to drive revenues and effectively manage the transition. We're going to introduce some promotional pricing that impacted revenues in the past, and we now have new features on our next-generation platform that will drive additional revenue opportunities such as cloud DVR, a more robust VOD experience with new pay-per-view options and an additional stream capability. John Donovan is going to walk you through those plans in a few minutes. Also helping is AdWorks, which continues to grow at a double-digit rate and has now an annualized revenue stream of over $1.8 billion. Moving to our Business Solutions group, revenues were down as gains in wireless and strategic business services helped offset declines in legacy services. Business wireless with strong growth, up more than 4%. This is driven by both equipment and service revenues. Wireline revenues were down more than 4% year-over-year. We still expect tax reform to produce a lift in communication spend, but we just haven't seen it yet. Wireline EBITDA margins were up slightly on a comparable basis. Cost efficiencies continue to offset pressure from legacy products and our investments in FirstNet. In our International business, solid customer performance helped to offset currency pressures. Revenues were stable year-over-year, while margins were pressured by World Cup expenses as well as foreign exchange. Now let's look at Time Warner's second quarter financials on Slide 7. Time Warner had strong growth at all operating conditions on a comparable basis. This includes strong subscription revenue growth on both Turner and HBO. Turner also showed solid advertising revenue growth of 3%. Adjusted operating income was $1.8 billion, driven by increases at Warner and HBO. Now for some housekeeping items. With recent FASB accounting rules, the Time Warner merger and purchase price accounting rules, there's going to be a lot of new information included in our results. We're going to do our best to make that easy for you to understand. First, we'll file pro formas with the SEC in August. Second, we have posted the full second quarter results for Time Warner on our Investor Relations website. This includes the Time Warner historical results, trending schedules, all the information you're accustomed to seeing. Finally, as you're updating your models, keep in mind the following: Results will continue to be reported at the divisional level, but there are certain things that will be eliminated in the Corporate and Other segment, including about $3 billion of annual inter-company content revenues and purchase accounting impacts on customer base and deferred production costs. We're very excited that Time Warner is part of the AT&T family and WarnerMedia is part of the AT&T family, and John Stankey is going to provide more insights and highlights in a few minutes. Now let's look at our 2018 outlook with Time Warner included. We're raising adjusted earnings per share growth to the upper end of the $3.50 range with WarnerMedia included. Year-to-date, we're already seeing 15% growth. The impact of tax reform, improving wireless service and advertising revenues, as well as the addition of Time Warner support strong adjusted EPS growth even with the additional shares issued as part of the deal. Looking at free cash flow, our free cash flow guidance at the beginning of the year was standalone. We expect most of the benefit of the Time Warner free cash flow for the last half of the year, about $2 billion, will be absorbed by integration and deal costs, including severance costs, retention incentives, legal fees, bankers' costs, and interest expense prior to close. When you consider those items and slightly lower cash capital spending, we're raising expected free cash flow to the upper end of the $21 billion range with dividend coverage in the low 60% range, and that's even with the additional shares and dividend responsibility from the merger with Time Warner. Now that we are halfway through the year, we also have a better view of CapEx. Capital investment is expected to be in the $25 billion range, but that will be $22 billion of CapEx on our cash flow statements after you net out our FirstNet reimbursements and some of the vendor financing opportunities that our team has pursued. A primary focus for us this year and the next few years is deleveraging the business. We have a strong business that generates a ton of cash and EBITDA, and we are very confident in the deleveraging targets that we have given you. Let me recap them now. Net debt to EBITDA is projected to be in the 2.9x range by the end of this year and a 2.5 range by the end of next year. To reach that target, we expect EBITDA growth. We'll use excess cash to pay down debt, and as always, we'll continue to look for ways to monetize non-strategic assets. You've seen that recently with the data center deal and our pending sale of broadcast 600 spectrum. We expect to return to historic debt levels in the 1.8 times range by the end of 2022. That's the financial summary. Now I'll turn it over to Randall.

Okay. Thanks, John. And it was an exciting quarter. After 600 days of reviews and litigation, we did finally complete the acquisition of Time Warner. And then just a few days later, we announced our agreement to acquire AppNexus. And if you're not familiar with AppNexus, it's one of the top ad technology companies around. And as John mentioned, we've renamed Time Warner to WarnerMedia, so we'll be referring to that as WarnerMedia from here forward. And as John Stankey will cover later, they had a really strong second quarter. We couldn't be more pleased with the condition Jeff left the company with us. We've now assembled the key elements of a modern media company, and it all begins with owning a wide array of premium content because we are absolutely convinced that there is nothing that drives customer engagement like high-quality premium content. And whether it's Netflix, Amazon, Google, Disney, or Comcast, everybody is now pursuing the same thing: how do you deliver great media and entertainment experiences to our customers? And I think the recent valuations of media companies are reinforcing this point. But we couldn't be any happier with the range and quality of brands that we now own. For live programming, it doesn't get any better than CNN for news. And for sports, we have the NBA, March Madness, NFL SUNDAY TICKET, Major League Baseball, and PGA. And for original premium subscription content, there is nobody better than HBO. Our cable networks at Turner are among the best, and they're performing well. And for content creation, our production studio at Warner Bros. is the gold standard, and they possess one of the deepest IP libraries around. And when you talk about digital content, we now own the cnn.com digital brands, and these are the most visited websites in the world. And add Bleacher Report and the Otter Media properties, and we have what we think are a terrific set of digital assets. Bottom line, we absolutely love this portfolio. But just owning great content is no longer sufficient. The modern media company must develop extensive direct-to-consumer relationships, and we think pure wholesale business models for media companies will be really tough to sustain over time. And when you look across our wireless, pay TV, and our broadband businesses, we now have more than 170 million direct-to-consumer relationships. And these relationships are critical as we begin developing new media experiences for all kinds of different audiences. And then the 170 million relationships provide invaluable insights for new advertising models, and that's exactly what's behind our investment in ad technology. Today, we use our data insights to deliver ads on DIRECTV. And when we do this, our advertising yields improve by 3 to 5x. As you're going to hear from Brian Lesser shortly, that business grew 16% in the second quarter. Now Turner has ad inventory that's 3 times the size of our DIRECTV inventory, and as we apply the same data to that inventory, we expect a significant lift. At AppNexus, that acquisition is all about improving our capabilities and reducing our time to market here. So you take these three elements, premium content, 170 million direct-to-consumer relationships, and great ad technology, and then you combine those with our high-speed networks, and we think all of this is a game changer. Bringing these four elements together has changed the way we think about our customer value proposition. We spend our time now thinking about how to combine these elements to create unique customer experiences. How do we combine the best content wherever you are and make it easy to find and consume? What are the new products that combine content and connectivity? How do we create personalized content experiences, including personalized ads that you find useful? So hopefully, you begin to see why we're so excited about putting all of these capabilities together. Now we knew the WarnerMedia deal was not going to be like any other we had done. It's a vertical bolt-on with a media business. And the media business obviously has very distinct culture, talent, and business models. So last fall, in anticipation of the merger, we reorganized the company into 4 separate businesses, and you can see those on the next slide. What we've done is pushed the core staff functions and the decision-making out into the business units, and we left behind a very small staff at corporate. And this is all about increasing speed and efficiency at each of these businesses. But at the same time, we need to foster cross-platform coordination to generate the synergies that John Stankey will be touching on next. Today, we're going to change the earnings call around a little bit as John Stephens pointed out. We're going to give you a chance to hear from each of these business unit leaders. And then when they finish, we're going to stay on the phone and answer any questions that you have. And then John Stankey is going to lead us off. John is the Head of WarnerMedia. And then you're going to next hear from John Donovan, who heads up AT&T Communications; and then Brian Lesser, he's the Head of our Advertising & Analytics business. And he's going to walk you through his plans. And then finally, you'll hear from Lori Lee, who heads up our Latin American businesses. And she's going to take you through an update on the great market momentum that we're experiencing in Mexico and also talk about the latest on our Latin American TV business. So with that, I'm now going to hand it over to John Stankey.

Thanks, Randall. Good afternoon to all of you. I've been on the job now a little bit more than a month, but during that time, I've had the opportunity to meet with various leadership teams at WarnerMedia. And I don't think it's a surprise to any of you what I found, which I believe to be an unmatched dedication to producing unique and engaging content across film, television, sports, and journalism. Looking forward to my continued work with this team, and I think we have great opportunities in front of us to further harness the exceptional content and capabilities at WarnerMedia. John gave you the financial highlights of WarnerMedia's second quarter, but let me dig in deeper, and you'll see those results on Slide 13. Time Warner's last quarter as a stand-alone company had strong revenue gains in Turner, HBO, and Warner Bros. Turner saw solid growth with gains in both subscription and advertising revenues. Subscription revenues benefited from higher domestic rates and growth at Turner's international networks. Subscriber counts have been stable thanks to growth in virtual MVPDs with 3 of the top 5 ad-supported cable networks among adults 18 to 49 in primetime. The Turner Networks are proving popular in every video bundle as evidenced by their inclusion in every major live OTT provider. Turner Sports properties helped drive strong advertising revenue growth in the second quarter led by the NBA on TNT broadcast. HBO also delivered solid revenue growth in the quarter. Subscriber revenues were up 13% due to strong U.S. subscriber growth and gains in international markets. Higher television revenues helped drive strong revenue growth at Warner Bros. Warner Bros. TV looks to build on that success with more than 75 TV series in production for the 2018, '19 season. That is the studio's largest number of TV series in production at one time ever. Here's another good indicator of what kind of quarter and year WarnerMedia has had. WarnerMedia companies, HBO, Turner, Warner Bros. received 166 Emmy nominations, which include 22 nominations for HBO's Game of Thrones alone, followed by 21 nominations for Westworld, which is produced for HBO by Warner Bros., a real trooper for us. These nominations speak to the caliber of the talent and dedication to quality across the company. My congratulations go to the entire WarnerMedia team for their exceptional creative achievements. During the roughly six weeks since we closed the deal on June 14, we've been working strategically to integrate the two companies. That includes applying the data analytics from AT&T's distribution to the Turner ad inventory. As you know, this is one of the benefits of combining our two businesses. You've seen the success of the AdWorks group using targeted advertising for DIRECTV and U-verse. Now we have 3x the ad inventory to work with. We believe we can get meaningful CPM improvement in what Turner sees today. Brian Lesser will explain in a few minutes. We expect this is only the beginning of our success. We've also moved quickly to position WarnerMedia content on AT&T distribution platforms. We intend to push the WarnerMedia consumer brands even further across all platforms. We've been busy with the basic blocking and tackling that comes with any merger: integrating corporate and staff functions, getting our infrastructure systems to work together, and aligning corporate management. We'll look to achieve synergies with our advertising spend and other procurement areas by getting better rates from vendors and suppliers. For example, AT&T was not the primary telecom supplier for Time Warner. Now we begin that transition for WarnerMedia. These types of efforts will help us deliver on the $2.5 billion in merger synergies we promised. While all this has been going on, we've been very deliberate in shaping some long-term initiatives that we think will add even greater value. We developed thoughtful plans on where we want to go next with WarnerMedia and have several goals that we want to accomplish. First, we want to increase our investment in premium content. HBO's name is synonymous with quality entertainment. The creative talent at HBO is the best in the industry. My goal is to give the HBO team the resources to greenlight additional projects already in the development funnel. We want to invest more in original content while still retaining the high quality and unique brand position of HBO. This will further strengthen the HBO brand, enhance the customer experience, improve churn, and drive more engagement with some of our most valued customers. Second, we plan to further develop and nurture our direct-to-consumer distribution, including HBO NOW. That will include enhancing existing platforms, as well as delivering premium content to the more than 170 million direct-to-consumer relationships across AT&T's video, mobile, and broadband platforms in the United States and Latin America. We also plan to add even greater value to these relationships by focusing, aggregating, and incorporating more WarnerMedia intellectual property. And third, we also look at our international markets and explore ways to maximize our content globally to create greater value. We believe there's a lot of opportunity that remains in this area. Obviously, we're very early in the game when it comes to implementing our plans, but we're off to a good start and look to quicken the pace as we move past close. Now I'd like to turn it over to John Donovan for details on AT&T's Communications second quarter results.

Thanks, John. I'm really excited about WarnerMedia coming into our portfolio because it strengthens our ability to innovate across our businesses like content and connectivity. So if we discuss AT&T Communications operating results, we'll start on Slide 16. Our wireless business turned in an impressive quarter. John Stephens told you about the service revenue growth and strong margins, but we also had strong subscriber gains and continued our low post-paid churn. For the quarter, we added 46,000 post-paid phones. That makes nine consecutive quarters of year-over-year improvement. We had our best prepaid quarter in nine quarters with 453,000 prepaid net adds. This includes 356,000 phone net adds. We had a record connected device net add quarter as well, adding 3 million new devices. Churn continues to run at near-record low levels. Post-paid phone churn was 0.82%, just three basis points higher than last year's all-time record, and we have a record low prepaid churn, thanks to our multi-line plan penetration and auto bill pay. These customer gains and low churn are showing up in our service revenue, where we turned positive both sequentially and year-over-year on a comparative basis. With the unlimited launch well behind us and targeted promotional activity, we saw service revenue improve each month in the quarter, and we're on track to grow service revenue for the full year on a comparable basis. And we maintained comparable service margins above 50% again this quarter. Moving over to our Entertainment Group, we continue to see total video subscriber gains as we move through the transition of our video business. We had 80,000 total video net adds in the quarter with gains in DTV Now and U-verse more than offsetting losses in DIRECTV. We also turned in solid broadband gains. Our Entertainment Group had 76,000 IP broadband net adds with 23,000 total broadband net adds. That's their seventh consecutive quarter of broadband growth. About 95% of our consumer broadband base is now on our IP broadband as our transition from DSL is drawing to a close. Our fiber build continues at a fast clip, now passing more than 9 million customer locations, and we expect that this time next year to reach 14 million locations. This gives us a long runway for broadband growth. We're doing very well in our fiber markets, including a 246,000 net increase in subs on our fiber network in the second quarter. Now I'd like to update you on several key initiatives we have underway, so we'll turn to Slide 17. Evolving our video portfolio is a top priority for us. We believe we're well positioned as our customers move toward a more personalized set of streaming products. Our new platform was launched in May as the DIRECTV NOW user interface, and it's now live on all supported device operating systems and has been well-received with strong engagement by customers. It offers a new cloud-based DVR and a more robust video-on-demand experience with new pay-per-view options. Over time, it will bring additional advertising and data insight opportunities. This new video platform gives us flexibility to adapt to the market with new offerings and products. Late in the quarter, we added our third video offering called WatchTV, a small package of 30 live channels and 15,000 on-demand titles. We include WatchTV in our unlimited more wireless plans, where you can purchase it for $15 a month, making it perfect for customers who want video but not at the cost of a large package. This complements DIRECTV NOW, where we continue to see success in attracting cord cutters and cord severers. And later this year, we will begin testing a premium product extension, which is a streaming product that will give the full DIRECTV experience over any broadband, ours or competitors'. It will have the additional benefits of an improved search and discovery feature and an enhanced user interface. We're excited that this will complement our top-end product for those who don't want or can't have a satellite dish. Our open video platform also dovetails nicely with our ongoing focus on driving the industry's leading cost structure. The new platform is low touch with lower acquisition costs as streaming services become a bigger part of our business. Digital sales are a cost-efficient way of customer engagement, and we're seeing double-digit growth in our digital sales and service. We're also seeing 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 2017, and we're well on our way to meet or exceed our goal of 75% virtualized by 2020. These and other cost management initiatives have helped drive 13 straight quarters of cost reductions in our technology and infrastructure group. Finally, I'd like to give an update on our FirstNet build and other network investments. Our FirstNet network build is accelerating. We expect to have between 12,000 and 15,000 band 14 sites on air by the end of this year 2018, and we're ahead of our contractual commitment. And don't forget, when we're putting in equipment for FirstNet, we're also deploying our AWS and WCS spectrum, utilizing the one touch, one tower approach. This approach allows all customers access to our improved network. FirstNet also gives us an opportunity to sell to first responders. So far, more than 1,500 public safety agencies across 52 states and territories have joined FirstNet, nearly doubling the network's adoption since April. In addition to our efforts with FirstNet, 5G and 5G Evolution work continues its development in several different areas that will pave the way to the next generation of higher speeds for our customers. We now have 5G Evolution in more than 140 markets, covering nearly 100 million people with theoretical peak speeds of at least 400 megabits per second with plans to cover 400-plus markets by the end of this year. Our millimeter wave mobile 5G trials are also going well, and we're on track to launch service in parts of 12 markets by the end of this year. With that, I now turn it over to Brian Lesser to discuss our Advertising & Analytics business.

Thank you, John, and good afternoon, everyone. As Randall mentioned, a critical component of the modern media company is a dynamic advertising business, one that can deliver on the promise of making advertising relevant, engaging, and actually matter to consumers and make it work harder for advertisers and make it more valuable and optimized for publishers. I think about this simply. The course of the ad industry has been set by a series of defining moments: the rise of broadcast networks, the proliferation of cable networks, and the pay TV bundle, digital advertising and its ability to target audiences. We sit here again today at yet another point that will define advertising for years to come. The pain points are obvious. Traditional advertising doesn't satisfy what both consumers and brands are looking for. Brands are frustrated with lack of access to data, lack of competence in targeting and measurement, and non-transparent ad tech costs. The industry talked about video convergence, but no tangible examples yet have emerged to deliver a unified buy-side and sell-side platform. So while the timing for disrupting the ad industry is right, you must have the assets to execute, and there is no doubt that AT&T is uniquely positioned to lead this disruption. In our view, successful ad marketplaces must have two key assets: premium content, which includes sports, news, original programming; we love our position with Turner content along with the scaled portfolio of ad inventory. Number two is distribution. Customers dictate how and where they consume content. Likewise, a relevant ad marketplace must be able to reach customers where they are, whether it's a 50-foot screen in a theater or a 3-inch screen in your pocket. Number three is data. AT&T has access to expansive datasets on customer behavior and preferences. We have 170 million direct-to-consumer relationships across its wireless, video, and broadband businesses, 40 million set-top boxes, 20 million connected cars, and that's just for starters. But data needs to be activated to have value. We're building targeting and measurement capabilities that will bring greater value to consumers, advertisers, and publishers. Number four is technology. Content distribution and data must be integrated on a best-in-class ad technology platform. That's the rationale for our recent announcement to acquire AppNexus. This is a best-in-class independent advertising marketplace supported by the best talent in the industry. We cannot wait to combine our teams and partner to make advertising matter to consumers. It is important to note we are not starting from a standstill. Both AT&T Advertising & Analytics and Turner have executed fabulously by using data and technology to fuel growth. AT&T Advertising & Analytics is consistently delivering double-digit revenue growth, including 16% growth in the second quarter. We will employ the same momentum and scale to deliver on our vision. So in closing, our plan is nothing short of leading the industry and creating a premium advertising marketplace across both TV and digital by quickly integrating AT&T assets, including AppNexus. It's this unique moment in time, coupled with this unique set of assets, that gives me confidence in our path forward. With that, I will hand it over to Lori Lee to talk about our Latin American operation.

Thank you, Brian. The advertising opportunities that Brian laid out apply to Latin America as well. We have more than 30 million direct-to-consumer relationships, and we plan to run the same play with the LatAm business that we will be using in the United States. It won't happen overnight, but the opportunity is definitely there. Let me discuss our second quarter results. Those details are on Slide 21. Starting with our Mexico Wireless operations, we turned in another strong subscriber quarter with more than 750,000 net adds. That totaled more than 3 million new customers in the past 12 months, doubling our subscriber base to 16.4 million since entering Mexico just three years ago. During that time, we've built a world-class LTE network and developed a marketing presence reflecting the AT&T brand. Our network build is in the final stages as we close in on covering 100 million people. We have rebranded 3,000 stores and have approximately 6,000 total retail locations, expanding our marketing presence and distribution. And we've upgraded and integrated our different billing systems. All this puts us in a great position to add customers and revenues at a lower cost. We're also making a lot of progress in improving our financials. Operationally, we're pushing on all fronts to exit the year EBITDA positive. In our Vrio pay-TV business, currency devaluations have impacted our financial results, but the strength of our subscriber base and our profitability remains consistent. That continued to be true in the second quarter. The World Cup drove strong subscriber growth of 140,000 with particularly strong gains in prepaid. We finished the quarter with 13.7 million pay-TV subscribers, a number that has held fairly steady since we acquired the business. The World Cup did drive higher expenses in the quarter, but we continue to drive profitability and positive free cash flow year-to-date. Now I'll turn it back to Mike for Q&A.

Okay. Thanks, Lori. We are ready to take questions.

Thanks. And I think I'm going to bounce around a little bit. But maybe first for John Donovan, the wireless business, it looks like EBITDA was down about 0.7%, I think, on a like-for-like basis. But obviously, you returned to growth in subscribers and some margin improvement. Should we be expecting that segment still your biggest to return to EBITDA growth as we look forward? And then maybe one for Brian and then for John Stankey. Brian, we've heard a lot about addressable advertising, 3% growth this quarter on the advertising line. What are some of the milestones that we should expect and maybe the timing of when this addressable advertising opportunity starts to take hold within these numbers? And then lastly, John Stankey, the - you obviously got some press recently in terms of the interview you did about the new WarnerMedia. Could you talk a little bit about the size of that HBO spend? I think the HBO spends about $2 billion. You're competing with companies that spend $8 billion a year, much bigger numbers. I mean, how should we think of that in terms of the overall financial profile of the company? And maybe if you could elaborate on other D-to-C efforts you may have. We've heard about DC Universe and HBO NOW but if there's any other sort of initiatives we should be looking for? Thanks.

Hey, John, it's John Donovan. I'll start the question on wireless and EBITDA. We've had now three quarters in a row where our year-over-year compares on subscriber growth was very good. We crossed over that all-important date, where we got a lot of the reseller stuff behind us. We crossed over that date for the unlimited plans. And you've seen a lot of momentum in prepaid, which has really become a really nice business for us right now. We're in a really good rhythm there firing on all cylinders. And so what we're seeing right now in this quarter, John mentioned in his opening remarks that we were stronger each month of the quarter within the quarter. We're starting to see us roll over some of those earlier events, and now we're beginning to get strength in them. And so because we, in each month of this quarter, strengthened from subscriber counts, we also have some pricing moves, calibration of pricing, if you will, that made us consistent with our value proposition in the marketplace. So we expect that we'll have growth for the year and the EBITDA margins to improve.

John, I'll take the next part of your question. This is Brian Lesser. So you asked about milestones in the advertising business. I think it's important to know that we have posted a $2 billion advertising business outside of what we just acquired in Turner, and that advertising business was growing 16% in the second quarter. So we're already showing the value of data and technology on our advertising business. I think in terms of going forward, you should look for some things that we've already mentioned here in this call, number one, our ability to increase the yield on the inventory that we have now within Turner and WarnerMedia more broadly and also increase value to the firm but also value to publishers, advertisers, and the consumers. You'll see us continue to develop the ad platform. AppNexus, once we close that deal, is an important milestone for us, but you'll see us lean in and develop additional technologies around that platform. And then third is our ability to partner with other media companies outside of AT&T. In some ways, our success will depend on our ability to attract additional sources of inventory to reach critical mass for advertisers.

So John, let me just amplify the last piece that Brian gave. Data that we have had within the AT&T company applying to AdWorks has already been moved over into the Turner team to begin applying into existing inventory that we have using the same techniques we piloted in selling the two minutes of advertising that the AT&T team has across the broader inventory of Turner. So that's near-term. That's not a milestone issue. That's, today, we're starting to look at those business cases and how we would do that. Teams have already come up with a variety of different initiatives around that, including - we found out that Brian had a great opportunity to do addressable advertising in the pharmaceutical space, and some of the pharmaceutical companies wanted 90-second avails. And he didn't have 90 seconds of inventory. So we're bridging Turner inventory with what used to be AT&T inventory so that we can have new addressable products to bring in. So that's - there's benefit to that data that's occurring now even without the broad mechanization and intelligence and platform work that Brian brought to the table that's just discussed. So on direct to consumer, what I will tell you is what we know about this space is it requires scale. And you mentioned that there's a number of different initiatives underway within the WarnerMedia companies, and they're all good within their own right. But they all generate what I would consider to be relatively small scale audiences, company our size. We want to be generating audience. It's in the tens of millions, not in the single-digit millions. And so the way I would think about our direct-to-consumer efforts over time is it's better together. So a lot of very strong brands in the family that generate interest among groups of audiences, and on a stand-alone basis, they're not as powerful as they are when they're brought together. And you can assemble the genre of content and bring them together on one platform and one experience that aggregates and gets scale.

John, this is Randall. It - well, this merger is different in terms that it's a vertical merger. There are certain aspects of the playbook that you just heard John describe that they're going to be exactly the same in that it generates synergies, and then reinvest significant portion of those synergies back in to your capabilities and your products. Direct to consumer and deeper HBO content, it's just part and parcel to that. That's no different than what we've done in the past, and you should probably expect it's going to happen here as well. Thanks for your question. Lori, we’ll take the next question.

Great. Thank you very much. For John Stephens, John, in the past, you'd given some guidance with DIRECTV on the medium-term on EPS. Can you give us any color about the benefits of Time Warner or WarnerMedia in a full year '19? How should we be thinking about that given the upside to guidance this year? And then on the balance sheet, what are you assuming in terms of getting 2.5 around additional divestitures and about things like spectrum acquisitions? Or is that just run rate with what you have right now? Thanks.

A couple of things, Simon. Thanks for the questions. First of all, beginning to - on the 2.5x by the end of next year, that's driven mainly by run rate with regard to cash flows, taking the cash flows above the dividend and paying down debt. Secondly, it is important to achieve the synergies, particularly the EBITDA boosting synergies and the growth that we're seeing and some of the growth that we're seeing in wireless and customer additions so that we get a higher EBITDA number. Well, we have normally planned for asset sales and constantly look at underutilized assets for monetization, for example, the data centers, the broadcast spectrum 600, which is a couple of billion dollars right there, we have under contract and waiting for approvals today. We'll continue to do that. If you want to give a scope to it, as of today, we have about $500 billion in total assets. And so finding a few more opportunities to monetize assets seems to be very reasonable on top of the things that we've kind of commonly done with regard to real estate and other underutilized business in spectrum. So that batch, I'm not giving you any specific number on asset sales, but as we've proven this year, we're going to continue to do that. And with regard to EPS guidance specifically around the acquisition, I'll say it this way. First and foremost, the point is that WarnerMedia, Time Warner, is immediately accretive. Revenues, free cash flow, EPS, we've seen it already. So that guidance that we've given, we'd expect we're standing by that and continue to expect that and have started to prove that out already. Secondly, we're not going to give specific guidance with regards to Time Warner's impacts, but I'd suggest it this way. If you think about $3.50 EPS range, for us, that means $3.40 to $3.60. And we just said that we expect to be in the high end of that range. So that'll give you an indication of using your own estimates, others' estimates, where we were, what we expected to be for the rest of the year. I will point out that the $0.02 we've got in the second quarter for two weeks was, as I said, uneven, and specifically because the NBA contract for playoffs, all that content was extended before we merged. The Golden State Warriors won the championship on June 8, so that content expense was recognized before we got the deal. So we have some higher profitability in those 16 days than you might otherwise expect. But I'd expect profitability to continue no matter what. We'll give specific EPS guidance for '19 in the coming months. I would just suggest that we continue to expect this transaction to be accretive: revenue, free cash flow, and EPS.

Okay. Thanks, Simon. Lori, we’ll take the next question.

Hi, guys. Seems like we're going around in the same questions. But one for Brian. Can you talk about - clearly, what has to be done here to realize the addressable ad vision? And what's the timing of this coming through to accelerate the numbers and start to be really material on the company? Can this impact 2019, or are we really talking about 2020? And how do you see the potential to reduce the ad load while you raise CPMs? Thanks.

In terms of - thanks for the question, Phil. In terms of timing, as John Stankey outlined, there are some things that we can do immediately and start to add value to Turner ad inventory, and that's already in motion. And so we think there's short-term value there in 2018. I would say in terms of the overall addressable opportunity, that's a little bit further out. We have work to do in terms of building the technology platform. But the good news there is because of the amount of inventory that exists within DIRECTV, also within WarnerMedia, we can prove out the value of AT&T data and the investments that we're making in technology plus the evolution of our direct-to-consumer relationship that John Donovan talked about. So I think we still keep our losses to really start to extract value from inside AT&T using our inventory across DIRECTV and WarnerMedia in 2018. And then in 2019, we're going to start to partner very effectively across other sources of inventory to bring value.

In terms of the ad load, so our objective, Phil, is not just to improve advertising as it exists today but to also improve the experience for consumers. We're in a unique position to do that because of our vertical integration because we have content and we have that direct-to-consumer relationship over a traditional television, over a mobile phone, over other mobile devices. We can start to do things in terms of innovating the ad experience. As an example, you'll see us start to introduce products across the rest of this year and obviously, the next year, where the consumer watching television has a better experience that is less interruptive. Imagine a DIRECTV customer watching the big screen on their living room wall and instead of seeing a traditional ad break, they see an icon on a car in a movie that they're interested in or in a show that they're interested in. And then we have the ability to create a seamless ad experience on their mobile device, which is on the coffee table or in their pocket, pause real-time content to interact with a better ad experience and therefore, deliver more relevant content to our customer and to the consumer more broadly. That has the ability, number one, to be a better experience for our customers and consumers, a better business for us because those ad units will generate a higher CPM and a higher yield and a better experience for advertisers and the media company representing the content. So that's really our objective, is to start to innovate because of our access to data technology and the direct-to-customer relationship.

Operator, we’ll take the next question please.

Thank you. One for John Stankey. Maybe a follow-up on HBO. As you know, domestic subs have been in the 30 million to maybe 35 million or so range over the past few years. And you talked about the content investment. But will there be a more aggressive direct-to-consumer push that perhaps would include maybe a Turner bundle or maybe a change to more wholesale deals with existing distributors? And is there any consideration to reset the price, which has largely remained steady as many of your peers have been more promotional? Thank you.

Our wholesale distributors continue to play a crucial role in our product's success, and we aim to enhance the product to boost its performance for their businesses as well as the HBO brand. For instance, we want to refine our term characteristics by establishing a comprehensive annual schedule that encourages users to remain engaged with the product rather than jumping in and out based on fluctuating content. We believe there are effective steps we can take in this area that will support our subscriber numbers and further growth through our traditional distribution channel. Additionally, as we invest in the direct-to-consumer platform and enhance its technical capabilities, we can expand the distribution of digital versions of the product directly through retail channels. We aim to pursue this strategy as well. However, I think it's important to note that we're not anticipating a drastic change in the next few months, but we can gradually improve our current performance by finding success in these areas. Regarding potential content pairings with HBO and broader offers, many distributors have valuable ideas on how they would like to integrate HBO with their content offerings. I want to explore the depth of our WarnerMedia offerings to enhance our understanding of how we can incorporate some WarnerMedia brands and curated options into a more cohesive direct-to-consumer strategy. As this strategy develops and progresses, we may see a significant increase in retail-oriented customers.

Thanks. One of the stronger trends we saw in this quarter was a nice improvement in postpaid phone ARPU. And actually, some of your peers, we've seen something similar so far this quarter. Also, if we look at the market and we look at some of the pricing moves you've made, and others have made, there's an introduction of higher price points. It's not really price increases, but it's really just if you pay more, you'll get more. So I was hoping maybe you could just expand in terms of what your customers are asking for, why you've identified a cohort that has shown a willingness to pay more for more, and how durable do you think this trend might be?

Yes. Brett, you've been obviously watching our commercials. That whole idea and more. And so what we're trying to do is differentiate the product in ways that don't have to do with speeds, megabytes, or rack rate pricing. And so what we're really focused on is product engagement. The value of any customer will be based on the combination of the price and the value that they use for. And that's why I would say, from a consumer perspective, our strength in consumer has been heavily in the bundling of video with wireless. So we see increased engagement. We're finding that people find a lot of value for it, and then we're kind of spreading the offers to fit budgets and engagement. And so you've seen that in wireless. And I would point out to you that, that pattern may look familiar in video, and we're trying to find various price points, engagements, and content combinations that fit everybody's budget so that everybody views that they're getting value. And they do that not just by focusing on megabytes and pricing. So I think that it's not an accidental trend that we stumbled onto. It's actually a strategy that's centered in the DIRECTV merger that we were pushing in, and that fits very well with this next step with WarnerMedia. And our sister over there provides us a lot of flexibility. So I do think it's a trend. I do think that if we succeed - when we succeed, others will follow and make some of the moves in their own. And I think that right now we see the most important thing, which was engagement and customer delight for the product improving. And that, to us, translates to value, and we're going to price the value. And so I think the industry will continue, hopefully, to take - to look at that and we - rationalism result to that. So we're going to continue down this path, more of it rather than less of it, and expect to be successful.

A quick follow-up if you don't mind. Obviously, the plans that include a lot of content tend to be the higher prices, and you clearly see that helps ARPU. Are you seeing that they are also helping churn?

Yes. If you look at the churn, this year was again 3 bps up over. But I think that compared to the industry, we did really well. Compared to seasonality, we did really well, and the number that we're comparing to last year was our all-time low. So I do think that it's a strategy that's working for consumers and therefore, working for us. And that is the currency that we're after there because you could start to trade some things that customers value higher than the ARPU differential. So we are carefully managing this portfolio, same strategy in wireless and in video.

Hi, guys, thanks for taking the questions. Thanks for the expenses format on the call, I think it's super helpful. Randall, I guess, my first question would be the telco guy, the media industry is definitely not my wheelhouse yet. But if I'm watching what's happening out there, we've got Fox deciding that they're not big enough to be a competitor in the media industry, so they're selling. And we've got two large competitors in Comcast and Disney who feel, in order to be competitive with the Netflixes and the Googles of the world, they need to get even bigger. And so I guess, my question for you is kind of how do you - how comfortable, do you feel, with the scale that you have now in the content business? And are you on the cusp of having a global strategy that's going to kind of try to compete with those other larger content houses? That will be my first one, if I could. And then the second one, John, will be for you. We've been hearing a lot about the directionality of the deal about how we take the information from your side of the business, we bring it over to Brian and let him crunch through it and sell it into Turner. But as you sit there and look at what WarnerMedia could mean to your business, the broadband business, the mobile business, even the business-to-business, kind of what do you see as the opportunities? And if you could give us some examples, that would be super helpful. Thanks.

David, this is Randall. I'll begin and then pass it to John Donovan. You mentioned John, which isn't very descriptive, but I'll direct my comments to him once I'm finished. Regarding the media landscape, we find it very interesting. We anticipated some time ago that we would witness media companies consolidate and recognize the significance of scale along with changes in distribution models. It's hard to believe, but in 2016, when we made our deal, we were already asking ourselves if we believed that these changes would occur. If we thought our networks could distribute premium content seamlessly and that our information and distribution capabilities were valuable enough to support various advertising models, we needed to act quickly to own media. When we assessed the available opportunities, Time Warner stood out as the clear choice. It was the only significant player with a robust distribution platform, extensive advertising inventory, and established cable networks. In terms of content production, Warner Bros. also had an impressive scale. It was simply the best option for us, with all other options falling far behind. To answer your question directly, we are very pleased with what we have. Additionally, CNN is an exceptional digital property, and when you consider all of CNN's digital platforms combined, they rank as the most visited digital news sites globally. Therefore, merging this capability, data, and ad technology with the media company represents a fantastic combination, and we couldn't be happier about being the first to move. Acting quickly is often a wise choice when recognizing industry trends. We predicted this would happen, moved first, and believe we've secured the best business in the media sector. We're very satisfied with the outcome.

Thank you, Dave. We've had a lot of time to consider this. When creating synergies, we address some of the simple aspects that John mentioned. Over the past year, as we've started to combine our wireless and video services and observed the trends I mentioned earlier, we are gaining insights as an integrated carrier. Reflecting on our acquisition of DIRECTV, we initially discussed the concept of bundling and faced skepticism about its value beyond just price discounts. However, when analyzing the economics of reducing churn, we recognize similar opportunities. Currently, the key advantage in broadband and wireless is video. By understanding what customers value and shifting from merely buying and reselling to owning our economics, we have always had a clear awareness of how customers engage with our network. This allows us to incorporate that understanding into our pricing and effectively manage the balance between acquisition costs and churn reduction. We've developed a strong grasp of how these economics interact. We're excited about the potential of the content business in straightforward ways. Our store traffic has increased, and one of our strengths is that our sales conversion rates have improved. We want more customers visiting our stores. If there's a major release from a studio, and we can leverage it to drive store traffic, we've identified a synergy. Fundamental benefits of video, such as increasing traffic and consumption hours, help us enhance customer value and retention, and we are making significant progress in understanding how to shift these benefits across our services. We're genuinely enthusiastic about what this means for both broadband and mobility.

David, I would like to rephrase your initial question. I don't have concerns about the scale and content. As I mentioned earlier, we plan to produce 70 TV shows this year from Warner Bros. We haven't even included the additional series from HBO, which offers unique, high-value premium content. Our capacity to create content that scales and holds significance is likely unmatched in the industry, and we do this at a pace that I doubt many others can match. The competition is focused on expanding customer bases, rather than just increasing media content. We're in a solid position regarding our ability to scale media content, starting with 170 million customer relationships as we work towards a larger customer base to sell to. So, I'm not concerned about that aspect.

In addition to Stankey's comments, we've noted the 170 million customers and what John has shared regarding WarnerMedia. CNN.com is the most visited news site globally, and when you combine CNN.com with Otter Media and Bleacher Report, you approach nearly 200 million unique monthly users across these platforms. This demonstrates that we already have a significant direct-to-consumer business. Now, we are looking at how we can leverage HBO and other Warner content to engage directly with consumers, enhancing the owner's economics that John Donovan mentioned, and allowing us to capitalize on these opportunities across different platforms, which is quite exciting.

Hi, everyone. Thank you. John Donovan, I have some questions about the entertainment margin as we consider the second half of the year. Clearly, NFL costs will increase, but what should we consider regarding sustainability in the 24% range? Additionally, I have a question for John Donovan and John Stankey about the WatchTV product. Firstly, do you have any early insights on its success? Also, can this product serve as a model for more integration with Time Warner or WarnerMedia assets? How far can we take this without jeopardizing legacy linear distribution revenue? Thank you.

Thank you, Mike, for the questions. I’ll be brief, and please feel free to ask follow-ups if I miss anything. Starting with video margins, we are focusing on making our products affordable while ensuring high engagement and value for the money. It's important to note the differences in ad stream counts based on viewing patterns. WatchTV offers a single stream product, while DIRECTV NOW has two streams and the option for three. We also have traditional linear TV products delivered via satellite, and we will soon introduce a broadband version in beta next quarter. This will create a range of price points. What we’re doing is just the beginning of reshaping DIRECTV NOW, which currently serves as a placeholder in the market until the deal is finalized. The product was trying to do too much while also falling short in some areas.