AT&T Inc (T) — Q4 2018 Earnings Call Transcript

Okay. Thanks, Lea. Good morning, everyone, and welcome to the fourth quarter conference call. As Willy said, I'm Mike Viola, Head of Investor Relations here at AT&T. Joining me on the call today is Randall Stephenson, AT&T's Chairman and CEO; John Stephens, AT&T's CFO. Randall is going to provide an overall business update, as well as discuss our 2019 business initiatives. John's going to cover results along with the 2019 outlook and then we'll get to a Question-and-answer session. Before we begin, I need to call your attention to our Safe Harbor statement. It says that some of the comments today may be forward-looking, they're subject to risk and uncertainty and results may differ materially, and I'd tell you that additional information is available on the Investor Relations website. I also need to remind you that we're in a quiet period for the FCC spectrum auctions, 101 and 102, so we can't address any questions about that today. So as always, our earnings materials are available on the Investor Relations website, including our news release, 8-K, investor briefing, associated schedules, et cetera. And so with that, I'd like to now turn the call over to AT&T’s Chairman and CEO Randall Stephenson.

Okay. Thanks, Mike. I'm going to start on Slide 4 of the deck with a brief overview and then I'm going to give some highlights for the past year. I would characterize our results as basically doing exactly what we committed during our Analyst Day in November, and in fact I would say we're ahead of schedule on each of our key priorities. As we said, our top priority for 2019 is driving down the debt from the Time Warner acquisition, and I couldn't be more pleased with how we closed the year. We generated record free cash flow of $7.9 billion in the fourth quarter, with the dividend payout as a percent of free cash flow below 50%. Our full year free cash flow was also an all-time record, even with near record capital spending. For the full year, our dividend payout as a percent of free cash flow was 60%, and that allowed us to increase the dividend in December for the 35th consecutive year. So while I'm pleased with our financial results for the quarter, we also feel good about the progress we made during 2018 on all of our strategic imperatives. First, we finally closed Time Warner, and we have brought together the leaders in content and distribution, and as committed, this transaction has been accretive since day one. And as John is going to discuss shortly, WarnerMedia had a terrific fourth quarter. We also launched Xandr, our advertising business, and then following our acquisition of AppNexus, Brian Lesser and his team are integrating that platform, applying Xandr’s customer insights to Turner's ad inventory, and with fourth quarter revenues growing at 26%, our enthusiasm around this opportunity is continuing to build. In terms of our networks, our quality and performance are on a very strong trajectory. GWS named us the best network in the most comprehensive study that's been conducted. We introduced the first standards-based mobile 5G network in parts of 12 cities last month, and our FirstNet deployments finished the year well ahead of schedule. We also accelerated our fiber deployment and we now reach 11 million customer locations in addition to 8 million business locations. As a result, our broadband business grew by over 6% in the quarter, and it's really important to note that this fiber deployment is foundational to our 5G network. I would highlight a couple of other items on this slide. First, strong wireless performance with growth in both revenue and EBITDA. WarnerMedia’s continued strong growth in revenue and margins. In our Latin American business which grew subscribers in Mexico and in Vrio. Lastly, our total company pro forma EBITDA grew by 7.2% for the quarter. If you go to the next slide, you're going to see our key priorities for 2019; there are no surprises. It's what we discussed back in November and our top priority is to delever the balance sheet. We have strong operational momentum coming out of 2018, and this is going to allow us to reduce our debt and continue our strong record for paying dividends. It's important to note that we're doing all of this while investing at industry-leading levels in fiber, 5G, and FirstNet. We expect to continue growing wireless service revenues. The entertainment group is obviously our heaviest lift for 2019; we are on a path to stabilize EBITDA in 2019, and we're actually quite confident that you’re going to see significant improvement in the first quarter. The focus at WarnerMedia is delivering the merger synergies and continuing to build on our 2018 momentum, and in the back half of the year we plan to launch a premium SVOD service that features content from all of our WarnerMedia brands, specifically Warner Brothers, HBO, and Turner. Lastly, Xandr is quickly scaling its capabilities into the ad inventories of Turner, our mobility business, and all of our TV and over-the-top product. So that’s what we’re focused on in 2019. We feel very good about our ability to deliver in each of these areas. And so with that, I'm now going to turn it over to our CFO, John Stephens, and he'll take you through the results. So, John.

Thanks, Randall. Good morning, everyone, and thanks for being on the call. Let me begin with our financial summary which is on Slide 7. As we've done in previous quarters, we'll be referring to comparable results for most of our segments for the next few slides. For 2018, AT&T was required to adopt new accounting standards that deal with revenue recognition, pension cost, and installment receivables. These changes impact our income statements and cash flows. At the same time, the company made a policy decision to record universal service fees and other regulatory fees on that basis. I’m happy to add this should be the last quarter we'll have to open the call this way, as we've rolled through a full year of these accounting changes. Let me start with earnings; adjusted fourth quarter EPS was $0.86, up more than 10% for the quarter and more than 15% for the year. For the quarter, WarnerMedia’s and Mobility’s strong performance drove these results. The benefits from the adoption of revenue recognition standards were generally offset by a higher effective tax rate and foreign exchange pressures. Consolidated revenue came in at $48 billion, up 15%, thanks mostly to the acquisition of Time Warner. Gains in Mobility and WarnerMedia were offset by declines in legacy services, the impact of the transition in our video business, and foreign exchange pressure from Latin America. On a comparable basis, fourth quarter wireless equipment revenue was down by $500 million year-over-year due to fewer smartphone sales. When you look on a comparative pro forma basis, revenues were down year-over-year due entirely to lower wireless equipment revenue and foreign exchange pressure. In fact, without those impacts, revenues were positive. Operating income showed solid growth, and adjusted consolidated operating margins continued to expand up 450 basis points, with strong growth in Mobility and WarnerMedia margins. For the full year, adjusted operating income margins grew by 220 basis points. That growth comes even with margin pressure from the customer transition in our video business. One housekeeping item related to the Mobility preferred equity interest we contributed to our pension plan back in 2013. That preferred return, about $140 million in the fourth quarter, is now reflected in non-controlling interest on the income statement with an offset in other income. Earnings and margins showed strong growth, but perhaps the best measure of our financial success is our cash flows where we turned in record results. Let's look at that on Slide 8. Both our cash from operations and free cash flow hit record levels for the full year. This is really important. For a company that depends on strong cash flows to meet our business goals, we need strong cash like we had this past year to invest in our business, to meet our commitments to delever, and to continue our long and proud history of returning value to shareholders. Free cash flow is a record $22.4 billion in 2018, that's up 36%, with $7.9 billion of that coming in the fourth quarter. This does include a $1.3 billion receipt from our FirstNet contract and reflects our results in managing vendor payables, accounts receivable, and a variety of other working capital efforts. It also includes the impact of nearly $500 million of voluntary contributions to our benefit plans that we made in the fourth quarter, which dropped our full year dividend payout ratio to 60% in 2018. The strong free cash flow comes with near record capital investment. Year in year out, we're a leader in capital investment in the US. 2018 was no different, as we invested nearly $23 billion including the FirstNet capital for which we were reimbursed. Equally important to us is our ability to pay a strong dividend. Investors expect one from us; strong free cash flows have allowed us to pay a solid dividend since we became a standalone company in 1983, and we have consistently raised that dividend for 35 years. Our ability to generate strong cash flow is also a critical part of our commitment to improve our leverage position. Let me give you an update on that on Slide 9. You know our leverage commitments we made; our goal was to get to the 2.9 range by the end of ‘18. Well, we did that by paying down about $9 billion since we closed the Time Warner deal. Our next goal is to drop that even lower to the 2.5 range by the end of this year. Our strong free cash flow in 2018 gives us confidence we'll achieve our 2019 free cash flows and be able to significantly delever. We expect about $12 billion in free cash flow after dividends in ‘19. We've committed to use that to pay down debt. That alone will get us to the 2.6 range by the end of the year. We've also been very thoughtful in delivering and finding ways to monetize our large asset portfolio. We've made several moves in recent years. Most recently, closing the $1.1 billion sale of our data centers and we've identified billions of dollars of other monetizable assets. We have a large amount of office buildings and raw land that we've identified for potential sale. Our Hulu investment is another opportunity with more than $500 billion in total assets. We'll continue to look for ways to monetize our asset portfolio and keep you updated on our progress. Our merger synergies will also contribute. They remain on target, $1.5 billion in cost, and $1 billion in revenue for a $2.5 billion run rate by the end of 2021. Bottom line, our financial strength allows us to achieve our leverage targets, continue to invest in our business, and continue to return solid dividends to our shareholders. Let's now talk results starting with our communication segment, that information is on Slide 10. The communications segment, which consists of our Mobility, entertainment, and business wireline units, together this segment grew EBITDA and expanded EBITDA margins by 120 basis points, driven by great performance in Mobility. Obviously, we were sharply focused on profitability last quarter, and our Mobility results point to our success. Service revenues grew by $400 million or nearly 3% in the quarter. EBITDA was up more than 13% or more than $800 million. We had our highest-ever fourth quarter EBITDA service margin of 48.6%, which is up 450 basis points over last year, and was driven by service revenue growth, disciplined promotions, lower volumes, and continued cost improvement. We were strategic with promotions able to turn them on and off quickly to effectively compete. We won't hesitate to be where we see an opportunity, especially for high value customers. But even with a strong performance, we had 134,000 postpaid phone net adds in the quarter with 467,000 branded smartphones added to our base. You also saw our cost discipline in our prepaid business, that includes holding the line against uneconomical equipment promotions by our competitors. Even with our spending discipline, prepaid phones grew in the quarter, thanks to the strength of cricket where we added about 240,000 subscribers, which more than offset a loss from AT&T prepaid. Prepaid revenue growth was solid and earlier this month, cricket passed the 10 million subscriber mark, doubling our subscriber base since we acquired the company in 2014, and momentum continues to be strong. Please note about 60% of our cricket net ads have characteristics that generate value similar to what we see from many of our postpaid customers. We also made significant strides in our network evolution in the fourth quarter. Randall told you about our network leadership in 5G introduction. With the additional spectrum we're adding, carrier aggregation, and other network improvements, 5G evolution is producing better speeds for our customers today when compared to standard LTE. Our first net deployment is reaching critical mass and providing a tailwind for our results. Now let's look at our Entertainment Group results and the steps we're taking to bring EBITDA stability. Our year-over-year decline slowed by nearly $300 million and EBITDA growth rates showed a sequential improvement even in a seasonally pressured fourth quarter. This was driven primarily by a reduction in customers on a two-year promotion in the fourth quarter, as well as improvement in DTV NOW profitability. We expect revenue performance to continue throughout the year helping stabilize EBITDA in 2019. We are confident we will stabilize EBITDA this year and expect to see real improvement in year-over-year EBITDA results starting in the first quarter. A more tailored data-driven approach with promotions is making an impact. Six months ago, we had half a million customers on highly discounted DIRECTV NOW offers, generally offers that required the customer to pay $10 a month for the service. At the end of the year, essentially none of these customers remained on those offers. Eliminating these promotions for low value, high churn customers clearly elevated subscriber losses of the quarter, but had a positive impact on streaming ARPUs and lowered content costs. In fact, DTV NOW ARPU was up about $10 sequentially from the third quarter. Our fiber footprint continues to grow. We now passed more than 1 million customer locations with fiber and are on our way to hit the 40 million locations later this year. This will extend our fiber network to 22 million locations when we include business. Subscribers on our fiber network increased by more than 1 million last year, driving the number of total broadband customers in our fiber footprint to substantially more than 3 million, and the longer we have fiber in the market, the higher our penetration rates go. This performance is helping drive broadband revenue growth, another key focus in our drive to EBITDA stability, and as always, we're laser-focused on costs, all costs including content. That too will play a big role in stabilizing EBITDA. Cost efficiencies are the story of business wireline; strategic business services continue to grow and at the $12 billion-plus annualized business that helps offset the continuing legacy revenue declines. Our focus on cost initiatives allows us to deliver margins even with the legacy revenue declines. Now let's look at WarnerMedia’s fourth quarter results, that information is on Slide 11. WarnerMedia revenues grew nearly 6% with double-digit operating income in all three business units. Warner Brothers are in the spotlight this quarter; it had a great cash generation year and saw growth across both its theatrical and television business. We had a great theatrical fourth quarter on the back of a strong slate of movies, including Aquaman, A Star Is Born, Fantastic Beasts: The Crimes of Grindelwald, and The Mule. Aquaman passed the $1 billion mark in global box office receipts to date, and the critically acclaimed film A Star Is Born has racked up eight Oscar nominations. This helped propel Warner Brothers to its best quarterly and full-year operating income ever. Turner saw solid gains in subscription revenues. Subscription revenues continue to grow thanks to higher domestic affiliate rates, even with foreign exchange pressure at Turner's international networks. Total Turner advertising rates continue to be solid even while ratings decline. Domestic ad revenues declined 6% due to lowered delivery across various Turner networks, primarily for kids and young adult. International ad revenues were essentially flat when adjusted for the foreign exchange pressure. However, Turner's operating income was up nearly 21%, reflecting solid expense control from solid management of programming and marketing expenses in the quarter. HBO results were impacted by a carriage dispute, but still saw double-digit operating income in the quarter. Subscription revenues were down 3%, primarily due to the dispute, and without that dispute, subscription revenues would have been up slightly. Content and other revenues rose 17% due to higher international revenues. HBO’s operating income was up 29% due to a sharp focus on expense control and lower programming and distribution costs. Even with the ongoing carriage dispute, we expect HBO to grow revenues in 2019. As a final note, WarnerMedia companies continue to be recognized for their excellence in producing high-quality entertainment. WarnerMedia received 11 Academy Award nominations, including A Star Is Born. This comes on top of four Golden Globe Awards earlier this month. Now let's look at Xandr and Latin America results on slide 12. Xandr, our new advertising and analytics business, continues to execute at a high level. Total revenues were up 49% or 26% excluding AppNexus. Much of that growth can be attributed to a strong political ad season, but even without that, revenues continue to grow significantly. EBITDA grew 17% and EBITDA margins continue to be very strong. The integration of AppNexus is on track. AppNexus heads best-in-class technology and data capabilities that strengthen our premium advertising marketplace. We're moving quickly to integrate the Xandr marketplace across AT&T. Much of AT&T’s programmatic spending is moving to the Xandr platform, driving efficiencies on how we activate campaigns. At the same time, our digital inventories enabled on our platform and with our data are driving better yield and higher demand. We started making digital data available for Turner's ad inventory and we're optimistic about this opportunity. Xandr’s advanced advertising marketplace is built to power the industry with rich data, technology, and talent. Our success across AT&T gives distributors, publishers, and buyers confidence to work with us. Already Altice and Frontier are onboard and we're working to add more. We power $2 billion of advertising spend through our digital platform, most of which is from third parties. Moving to the international side of the business, our Latin America operations had a strong subscriber growth quarter, but we continue to deal with foreign exchange pressures. Total Latin America revenues and EBITDA were down year-over-year, primarily due to foreign exchange. Without that foreign exchange impact and excluding Venezuela, revenues would have grown 2% on a comparable basis. In Mexico, we had a million new subscribers and more than 3.2 million for the full year. We now have more than 18 million customers in total. Service revenues in Mexico were down largely due to the decision we made to shut down a wholesale business that we inherited from Nextel, as well as some FX pressure. Without those impacts, service revenues were up year-over-year. EBITDA was impacted by operational higher expenses including a significant amount of non-recurring items. In Pay TV, fourth quarter subscriber net adds were 198,000, with gains largely in the South Region. Total subscribers at the end of the quarter were 13.8 million. While FX did impact our Latin America satellite operations, the business continued to be profitable and generate cash. Now let's look at our 2019 guidance on Slide 13. Our guidance remains unchanged from what we said in our November analyst meeting. Free cash flow will be our most important financial metric. We expect free cash flow to be in the $26 billion range in 2019, and we'll keep our dividend payout ratio solid in the high 50% range. As we discussed earlier, we are tightly focused on achieving 2.5 times net debt to adjusted EBITDA range by the end of the year. We will also continue to expect to invest at high levels in our business with growth capital investment in the $23 billion range, that’s before reducing that investment by the $1 billion of FirstNet spending, which we expect to be reimbursed. While we expect the year-over-year impact of the new revenue recognition standards to be a headwind to earnings, we still expect adjusted EPS growth in the low single digits for 2019. We expect our effective tax rate in 2019 to be approximately 23% excluding any one-time items. That’s our presentation. Now I’ll turn it back to Mike for a question-and-answer session.

Okay. We're ready for the questions, and so Lea, if you can open up the lines and get started.

Great. Thanks, guys. Can we talk a little bit about sub trends both in the entertainment space and the wireless space? Maybe just to feed off your comments on entertainment, it sounds like with the majority of those customers coming off promotions and now losses should really start to slow. But at the same time, you've got some price ups on the satellite side. So is it fair to say that those losses could increase in some color there? Also on the broadband side with the fiber buildout, what do you expect in terms of trends there as we look out into ’19? And then maybe on wireless, just wondering if in your view, you saw some nice postpaid handset growth despite the fact you've pulled back on advertising and promotions. And do you think that you can maintain this level of growth with this low level of spending? And are you starting to see any growth from the first responder community? Thanks.

So, John, this is Randall, I'll start and John Stephens can interrupt or append as we go through this. But look, we told everybody back in November that we were going to be laser-focused on driving down debt and driving cash flow, and we pulled all the levers you would expect. If you start with the TV business, we had come over the last couple of years getting DIRECTV NOW, the streaming product into the marketplace, and we had multiple offers out in the marketplace. It’s been a year, year and a half of learning what the market demand was going to be and customer engagement with the product. As we matured the product and as we came out of mid-year, we looked at the customer segment; there was a customer segment at the low end, very promotional pricing, who were not engaging with the product. We didn't yet have the Xandr platform stood up to really monetize meaningfully on the digital side, the streaming side, and advertising revenue. We said until we got all those pieces in place, let's pull that promotional aspect out. We told you in November there were 500,000 of those customers on the promotional pricing. We started allowing those customers to trade out that obviously has a significant impact on dilution. The product has been dilutive in 2018; this is one of the main drivers of the dilution, and this is also one of the primary triggers as we move into 2019 to getting us to EBITDA stability, as we begin to get the promotional subscribers out. Now we have a customer base that's left on the streaming that’s growing, remaining customer base is growing and is a highly engaged customer base with good churn characteristics. So we actually like where we are in terms of how we're positioning the streaming product. As I said, it's a major driver to how we get to EBITDA stability next year. On the traditional linear side, these trends are in line with what you should expect as we go forward. We're not going to be horridly promotional to try to drive growth in this, except where we have a good strong broadband footprint, particularly a fiber footprint, and where we bundle this product with fiber, we have really good characteristics; we have good churn characteristics. The lifetime value of that customer segment is really, really high. We tend to over-index on wireless penetration where we have the TV product with our fiber and our broadband product. So you know we're going to continue down the path that you saw in the fourth quarter. Now the fiber product, we will finish the lion’s share of the build by mid-year. We'll be at 14 million locations passed with our fiber footprint. You're seeing now the impact as we move our customers into the fiber footprint. You're not seeing the overall broadband subscribers grow, but as people migrate to fiber, you're seeing a significant lift in ARPU. We had 6% broadband growth in the fourth quarter with no overall subscriber growth. We added what, John? 250,000 fiber customers roughly?

Yes.

In the quarter, we think those trends can continue. In fact, we think those trends are very achievable. This is one of those areas as we deploy fiber; we've been doing this long enough now. The penetrations that you achieve are a little bit mechanical, you know very much what to expect, what penetration rates to expect, what periods of time and what ARPU lifts to get. This is another one of the key elements on how you get the Entertainment Group to stable EBITDA; you continue growing this fiber revenue stream and moving ARPUs up as people move to fiber. And then on the wireless side, yeah, we feel that we can sustain wireless where we are without having to step up significantly on promotional costs or advertising. But this is the approach we've taken to wireless, particularly in the situation we are or moving aggressively to drive cash flow and pay down debt is we will surge promotions as necessary in the marketplace, and that's what we did in the fourth quarter and then we will make sure we keep our high-quality customer base in check and we will do what we need to, to keep the customer base in check. But I like how the team is executing here. They've really rationalized their targeted marketing. They're doing a really good job in terms of focusing on the customer bases we want to retain. I love what happens - what's happening in the prepaid based on cricket. Cricket continues to have really strong momentum. We did, I think, 240,000 cricket subscriber adds in the quarter. What we saw offsetting that is our AT&T branded prepaid which we sell in our AT&T stores; we saw some loss there, and it appears that we may be losing some of that prepaid customer base to other companies' postpaid customers. So we're seeing a little bit of migration, so we'll play with that and ensure that up. But that's one of those where the market got incredibly promotional on the prepaid side during 4Q. We remain disciplined in terms of the amount of promotion we put into handset costs, gave our customers a good value proposition and cricket volumes I think showed it. Do you have anything...

So DTV, I think one thing to point out, I mean, we had the two-year price lock, we came off that starting in April. We migrated a bunch of those customers up to market-based pricing which has caused some churn and that's what you're seeing in the quarter. We got about 2 million of those customers left. It's really important that we get those up to market pricing. But as we do that, that'll cause some churn, some pressure on net additions. So that's why we're expecting what we're expecting with regard to getting through that. But once again that's a key piece to the profitability. Specifically on the AT&T prepaid that we announced, well let me just give you one example: we have a phone that was being offered by our competitors for $100 that we know the cost was $250, hence a $150 subsidy just on the equipment for a prepaid customer, we decided not to do that. We knew it. We were aware of it. That caused pressure, and that was one of the reasons but a good example of some of the pressure in the AT&T prepaid. By the same token, our cricket brand continues to do really well both on churn, and we're growing revenues in the prepaid space in total, so we feel really good about that. And your FirstNet question, the buildup is going great; we're at 40% at the end of last year, well ahead of schedule. We're seeing great quality for all our customers, as well as our new first responder customers. We're seeing the effects of 5G evolution be real and in customers’ hands today which is making a difference. We do have about 450,000 FirstNet qualified customers from about 5,000 organizations or departments that have signed up for it. A significant amount of those early adopters were migrations, so maybe close to two thirds or 60%, but we are now getting a lot of new ads. As this build-out gets past the existing 40% in the 50%, 60%, and 70%, so to speak, as we continue to make that progress, I think you'll see us begin to grow that new customer share and numbers significantly. We really do view that as a tailwind for the whole business as it improves existing customers' quality, speed, throughput, but it also gives us visibility which we've been successful at. Our teams had a good job with gaining new customers.

We did an interesting experiment or demonstration, or probably the right word, on New Year's Eve at Times Square with our FirstNet network. We invited the first responder community to come to Times Square in the middle of the night when the crowds were massive at Times Square and used the First responder network to see what kind of speeds they would get on a fully loaded network. I will tell you the first responder community that saw it was quite impressed, and we have some high expectations on where FirstNet goes this year and next year.

Okay. Thanks, guys.

We will take the next question, thanks.

All right. Thanks very much. Good morning. Just continuing on FirstNet, where does the build go throughout ‘19 and ’20? When do you think you're pretty much done with that? And related to that build out, I think you said at CES that you plan to have standards-based nationwide mobile 5G in 2020. Can you just talk a little bit more about those plans and that puts you in a pretty strong position then? How should we expect your ability to monetize that? Thank you.

We currently have standards-based mobile 5G in place across 12 markets by the end of the year, and I believe we will start to see improvements by the end of the first quarter or early this year. We announced that we would be ready by 2019, so we are actively working on this first phase of mobile standards 5G. This initiative aligns closely with the FirstNet build. As we set up new sites and install antennas and radios, we are also preparing for 5G with necessary physical work and software upgrades. We are integrating FirstNet with 5G, and I want to emphasize that the 5G Evolution is progressing well. By the end of the year, we expect to be at 40%, and I suggest we will maintain a similar pace to last year. While I won't provide specific numbers, I can say that we exceeded expectations last year, and I don't intend to hold our teams to those same standards. However, we are on track to complete the rollout ahead of the five-year timeline, aiming to cover most of the country by 2020 when the mobile standards-based mobile 5G network becomes available. Additionally, we are already selling and providing services related to this, including hotspots and PoC. We anticipate launching a couple of phones that will support both existing LTE and millimeter wave technologies. This offers us a significant advantage. As the FirstNet build progresses and technology improvements are implemented, our existing customers will notice enhancements in their service. We believe this will help us attract new customers and retain existing ones. I hope I addressed your question, and it's important to note that this is an ongoing evolution that will positively impact our customers as we roll it out, positioning us well for 2020 with new phone availability.

So are you dedicating a portion of your WCS or AWS to the standards-based 5G? How's that going to work?

I'll let the technology guys get that in depth, but I wouldn't say that we're going to dedicate it. I'd say that we're going to make it available, but I will leave my network technology guys to make sure I don't mislead in that answer.

Great. Thanks, John.

Thank you, Simon.

We take the next question please?

Thanks for taking the question. You noted earlier the success that you have when you're able to sell a video product and a broadband product in the same footprint. You're doing a great job with fiber but even when you're done with the fiber bill, that's only going to be a little over 10% of homes in the country that you can serve with fiber. But you are building a nationwide 5G network, and we've seen at least one of your competitors already leverage their early phase of 5G to launch a residential 5G product. I was hoping you could give us some updated thoughts around whether you think that's a large addressable opportunity for AT&T to be a residential fixed wireless 5G provider. And do you think you have the resources you need to do that, or would you have to acquire more spectrum or more fiber or something along those lines? Thank you.

Hi, Brett. This is Randall. I believe that in the next three to five years, 5G will definitely act as a broadband replacement product, and I am confident in this. We are following a standards-based approach that prioritizes mobile. Similar to past product advancements in mobility, this will unfold in a comparable manner. In the 90s, many claimed that wireless could never replace fixed line voice due to insufficient capacity, yet it has proven to be a substitute. We previously discussed broadband and whether wireless devices could broadly serve as a replacement; the introduction of the iPhone and LTE made that a reality. Looking at 5G, I am fully convinced that we will have the capacity to provide a strong broadband product that can support your streaming services like DIRECTV NOW and Netflix. This will be particularly true as we utilize millimeter wave spectrum, which will enhance capacity and performance, leading to genuine opportunities for fixed line broadband replacement. I have no doubt that within three to five years, you'll start to see wireless substituting fixed line broadband.

Brett, the only thing I’ll add is you know, right now we have, as we mentioned, 10 million Cricket customers, the total cost of 15 million prepaid customers. Quite frankly, I think many of them may be using their phone and our broadband connections or mobile broadband connections for their service today. So I say that not exactly on point with your question, but it's a reality today. It's a matter of how this migrates, and it goes back to why all the spectrum we're putting up is increasing our spectral capacity by 50% to FirstNet efforts by building it with an expectation to software load 5G on it. All of that is important because we'll be the ones best positioned to take advantage of those opportunities as they play out, which we think will be over the next few years, as Randall said, a three to five-year timeframe.

Ironically one of the top use cases, early use cases for 5G are businesses wanting to deploy 5G as effectively their land environment. Think about a wireless plug-and-play environment. That is truly a wireless replacing fixed line as a high-speed internet solution. This will play itself out that way, Brett.

Thanks.

Thanks, Brett. Lea, next question please?

Hi, guys. Thanks. First following up on video, Randall, can you confirm that the regular price DIRECTV NOW base is growing? And are those positive EBITDA at this point? And then second, as you think about advertising this year, can you help us think about how you expect that? Given your advertising x efforts, can we expect this to grow substantially faster than the industry overall?

Yeah. So on the DIRECTV NOW video, if you pull a promotional customers or customer losses out, the other customer base grew, and...

The simplest way to think about that is you take 500,000 out of our numbers, which are all gone or they stepped up to the full-service, full-price plan. So yes, you know our full-price customers grew.

The ARPU, you heard John say, ARPU in the quarter sequentially is up $10 over $10 per line. I don't know that I can represent we're EBITDA positive yet…

But we haven't disclosed any of that information, but we are up $11 sequentially, $10 year-over-year, but we're up sequentially in ARPU.

And on advertising, Xandr, do I expect we will outperform the market? Absolutely. I would be sorely disappointed if we did not outperform the market. If you look at fourth quarter streaming TV advertising business grew 26%. I mean, it is radically outperforming the market now. I have little concern that we won't be able to outgrow the market. That's one of Brian Lesser's key objectives is to ensure that we're building an advertising business for video that will grow faster than the market. We're gaining more and more conviction around this the further we get into it.

I’d say those are really important, but the ability to take the advertising data from Xandr and the insights and provide it to Turner, and allow that to be used as a synergistic way to improve that advertising over there to give the Turner team that opportunity to have that information to better sell theirs is just as exciting for me as the advertising insights are for DTV NOW.

We've talked in the past about the advertising inflection point really not coming until 2020 when all the pieces were in place. Randall, do you think that that's happening more quickly, or is this still a year of development?

It's a year of development, Phil. You'll see a strong trend in Xandr advertising. We’ll continue to grow well beyond industry levels, but when we reach the really big opportunity, as John Stephens has mentioned, and begin to leverage our customer insights into the Turner ad inventory, that's when you'll start to see those results play out more in 2020. As more individuals want to participate in the marketplace, our success brings more people to us, eager to bring their inventory to the marketplace and utilize the customer insights as well.

And so the 2020 year for me too is a very optimistic year because there will be another political year, and political years are good for our advertising business too. Just to say that, so yeah, getting all this done and getting it all ready for that timeframe and having it up and running could be very beneficial for us.

Got it.

Okay. Thanks, Phil. Ready for the next question, Lea.

Hey, guys. Thanks for taking the questions; appreciate it. I think I want to ask the analog to John's question on subs, which is on ARPU, could we kind of talk a little bit about on the wireless ARPU what were the drivers of the sequential step down? I think we heard from Verizon that storm credits were an issue, also potentially FirstNet migrations might have been a contributor. I just wanted to kind of see where we think that's going to go in ‘19. And then second on the linear video ARPU, up $7 sequentially; that's typical to see it up with the SUNDAY TICKET. But we know that there's a promotional price component to that. So if you could kind of disaggregate those two forces, so we can kind of guesstimate where we could see the ARPU kind of land in 2019? And then the last one, if I could, on the broadband ARPU, it's up 6% year-over-year, but sequentially not growing. I was trying to understand kind of which of those is the more informative, the sequential trend, or the year-over-year trend in growth? Thank you so much.

Let me start with DIRECTV. There is indeed an impact on the SUNDAY TICKET, and there are effects from discounts as well as from our two-year pricing initiative that started in the late second quarter. All these factors are contributing, along with the fact that reducing promotions generally means those promotions are revenue-based. So, what I am saying is that we have four different elements at play, but overall, we feel positive about the direction of this process. It is presenting some challenges for customer accounts on both DIRECTV and DIRECTV NOW, but we are comfortable with the direction it’s heading, as it is a necessary part of stabilizing our EBITDA. Regarding postpaid ARPU in mobility, the changes compared to last year are quite significant and positive. I feel confident about this. Market reactions indicate acceptance, which relates to customers opting for larger plans and the premium for AT&T Watch, along with adjustments to our previous cost structures. When it comes to sequential changes, there are some impacts from previous years and credits, but I consider these as not significantly altering our trajectory. Year-over-year, our postpaid ARPU has likely risen by about a dollar and a half, and sequentially, there’s around a $0.10 difference. I feel optimistic about our growth as we continue to gain customers; I do not see this as an inflection point but rather as a continuation of strong year-over-year performance and a solid foundation for the future. Regarding our broadband base, our focus is first on getting users onto fiber products, which have lower churn and higher retention. Next, we want to increase their speeds so they opt for higher plans. With a 6% year-over-year increase, once we start comparing with previous numbers, especially in the second half of 2019, I don't expect to see the same level of ARPU growth, as that typically doesn’t happen. However, we are observing improvements reflected in total revenue, which is our main focus. As mentioned, after 18 months, we are achieving close to 40% penetration in our built base, and after three years, that figure surpasses 50%. We still have significant opportunities ahead; while we have over 3 million customers in place, we’ve built out to accommodate 11 million. There is ample room for growth not just in conversions but also in expanding our total customer base. I hope I’ve addressed your question directly.

The other element that kind of factors into John's commentary on broadband, we expect good growth on broadband next year. Part of it is the legacy low-speed broadband base is pretty much traded down to a very low number, so a lot of that attrition ought to fall off next year as well. We think broadband is set up for another pretty good year next year.

Great. Thank you, guys.

Thanks, David. Our next question please?

Hi, thanks. Two if I could. First, when you target bending the cost curve for video content in the DIRECTV business is the growth to just slow the growth of programming costs, or are you targeting an actual drop in total programming costs over the next few years? And maybe within that context, how do you look at exclusive agreements like the one that you have with the NFL SUNDAY TICKET? And then backing up to a higher level, when you look at that target of $26 billion of free cash flow for 2019, as you've exited, 2018 are there any changes in the contributors with respect to operations, financing costs, taxes, or even what you may contribute to benefit plans? Thanks.

So I'll start with the content cost piece, Michael, and then I’ll let John talk to you about the cash flow composition and decompose that for you a little bit. But the answer to your question on the content cost piece is the objective as content deals come up is to move the needle, and it's not a one-size-fits-all. There are some pieces of content that we look at the value of the content to the customer versus the price we pay and we say that content has to come down in terms of cost. There's some where the customer engagement is high, so it might be hard to take the content cost down, but the objective is to keep the equation in balance. You cannot have a business model where subscribers are declining and you continue to increase costs by 7% and 8%. So far, the content deals that we've been through, we've had some very good success at getting rationalization for those content costs. This is not an inconsequential part of the equation to getting to EBITDA stability as well in 2019. Early indications are we think this is an equation we can balance and it should be a healthy contributor to it. What we have to do is the customer is just not willing to pay more for the content, as the content costs have been increasing over the last few years. We have to get the content cost growth in line with what the customer is willing to pay, and the customer is willing to pay virtually no additional money right now. So the content costs have to reflect that. We'll be very assertive as we go through the course of this year to try to control the spend on content cost. There's another element to it. John Donovan and his team are being very smart about this, particularly on the over-the-top pieces, but what content has to be included in packages. You can control your margins and your content costs by getting the packages more right-sized for the customers. Can you bring content costs down to keep margins in check by right-sizing the packages for the customer? A lot of really smart analytical work is being done there to how we can help our customers by getting the packages right-sized as well. John, you won't talk about cash flow.

So thinking about cash flow, Mike, let me approach it this way. If we consider 2018 as a baseline, there are a couple of points to note. First, we will no longer have the costs associated with the merger deal since that has been completed. Secondly, we will benefit from a full year of Time Warner, which contributed about $2 billion of free cash flow over the first six months this year, alongside similar costs for the same period. Next, we will start to see some benefits from merger integration synergies, although there will be costs associated with implementing these. I don't want to overemphasize this, but it will serve as a pathway forward from the deal. Regarding interest expenses, we will see some from the field costs for the whole year, which I factor in when discussing WarnerMedia generation. Our plan includes paying down debt and reducing interest expenses, though some capitalized interest related to the spectrum will soon transition to being an expense due to our FirstNet network team's expedited service deployment. These factors will offset each other to some extent. We anticipate higher cash taxes this year; last year’s tax reform led to very minimal tax payments, and we expect that to increase. Moreover, we are not currently required to fund any benefit plans, such as pensions, as we are in a strong position with those reflected in our balance sheet. We will strategically utilize our strong cash position to communicate to our employees the importance of our commitments while also optimizing tax actions. As for interest expenses, they are influenced by two factors: an increase in interest expenses due to less capitalized interest on the spectrum and a decrease as we pay down debt. Taxes will rise from last year's low levels, and with a full year of Time Warner and no significant deal costs anticipated, we hope to offset costs related to merger integration with the benefits from those projects. I believe this gives you a clearer picture of our projections, demonstrating that achieving the $26 billion target is realistic.

Thanks very much.

Thanks, Mike. Next question, Lea?

Thanks, and good morning. I just want on Warner. It seems like a lot of us look at the streaming landscape and it looks like it's getting a lot more competitive. You have NBC launching in 2020. How are you positioning Warner and the streaming services? And is the focus going to be on sub growth or advertising? I guess hand-in-hand with this question, how are you thinking about your content allocation decisions? How do you balance licensing revenue to someone like Netflix versus holding it back for your own use? Thanks.

Hi, Amy. This is Randall. We have very high expectations for our streaming service. We believe that only a few services with strong intellectual property and extensive libraries will thrive over time. Our focus is on these strengths. We believe in two-sided business models, like those used by HBO and Netflix, where subscription services offer commercial-free options. There is significant demand for ad-free subscription services, and we think HBO and much of the premium content from Warner Brothers will fit this mold. However, advertising-supported models will also be crucial to keep consumer prices low and to fund more content acquisition. Xandr will play an important role in making this model viable. Our approach will be a two-sided model with a robust subscription offering along with some advertising-supported options. Regarding decisions on premium content as deals arise, we won't apply a one-size-fits-all approach. Not all content holds the same value in our decision-making process. For example, when the rights to Friends came up from Netflix last year, we had to consider whether exclusivity was essential or if we could license it out and still make effective use of the content. Kevin Tsujihara and John Stankey conduct extensive analysis on these questions. We determined that exclusivity was not critical for that specific content, leading us to license it to Netflix on a non-exclusive basis. Each important content decision will be assessed based on how crucial exclusivity is for our platform versus the financial aspects of licensing to others. Over the next few years, we will make decisions about which properties to bring in and which to license non-exclusively. We believe having a large inventory of exceptional intellectual property is vital, and if you look at what other streaming aggregators are offering, you'll find a considerable amount of Warner Brothers content among them.

Okay…

Okay. Thanks for your question, Amy. We will take one last question.

Great. Thank you. You guys are putting in a lot of spectrum in the network which obviously is an improved performance. Last couple of quarters your churn has been up a little bit, Verizon obviously had decent gross ads. When do you think the impact of that additional spectrum will show up in some subscriber growth either in terms of gross adds or maybe lower churn?

I think, Walter, you're going to see that as we get into second and third quarter this year as the broad base of our customers begin to experience and realize the effects of the spectrum being put in. It's going to be scaling as we get into second and third quarter of this year and it is going to be a discernible difference from a customer experience standpoint as we turn it up, and it's going to be a discernible difference for the customer without the customer having to change handsets. The lion's share of our customers will just experience this as we turn it up. As John Randall Stephenson just pointed out, we're deploying FirstNet across the country; as we deploy FirstNet, we turn all this spectrum up so that FirstNet becomes a driver for our overall customer base experiencing this benefit. We have a lot of conviction that this is going to be a step change improvement. Our customers will experience it, and it's going to be a significant help in terms of driving churn down. Add to that, as the FirstNet deployment happens, we're getting this kind of performance, we have some fairly strong expectations on customer adds from FirstNet. So the gross add engine if you will, the customer ad engine, we think FirstNet is going to be a significant driver of customer additions as we move into the second, third, and fourth quarter of this year. We have some high expectations of what we're doing on the network, that this is important, unique, differentiated, and it's going to drive serious customer impacts as we get into the year.

Thanks for that color on timing. Also just a second question, I want to go back to the Investor Day, on the Entertainment Group, you had that nice slide that showed how you're going to stabilize EBITDA 10 billion. One of the things at the bottom with the video services is going to maintain a $25 million from the start of ‘18 to the end of the '19, or excuse me, end of ‘18 to the end of ‘19. Is that really necessary to hit your $10 billion target? Because giving kind of a sub losses this quarter and kind of what you're talking about as far as the impact of promotions, it seems like that might be challenging to hit. So is it really necessary to hit 25 million subs in order to generate $10 billion of EBITDA on the Entertainment Group?

Yes. If I could bring some clarity to that, Walter, and that is a big part of that $25 million was WatchTV, which is our very low-end content offering for our mobile subscribers, and that's a very low ARPU product, but it's a profitable product and it's one that we expect there will be a lot of those added during the course of the year. There are 500,000 of those accounts established right now. We're not yet calling them subscribers till we see behaviorally how they engage with the product and what kind of profitability we have. That is a significant part of the $25 million. We do expect some continued obviously losses on the linear video. We talked about that; we will achieve EBITDA stability even with the continued attrition of our traditional linear video subscribers. Does that help?

It does. Thank you very much.

Okay. Okay, so listen, I want to thank everybody for joining us today. 2018 was a solid year. It was basically doing what we told you we were going to do at the analyst conference. As I mentioned at the outset, I feel like we can check the box; we are doing exactly what we said. We feel very good about getting to 2019 and stabilizing enterprise Entertainment Group EBITDA margins. We feel really good about the wireless business. It's a year of execution, delivering on cash flow and delivering on debt pay down and delivering returns of capital to our shareholders. We thank you for joining us and look forward to speaking with you later. Thanks a lot.

Thank you, all.

Thanks, everybody.