AT&T Inc (T) — Q1 2019 Earnings Call Transcript

Okay. Thanks, Greg. Good morning, everyone, and welcome to the first quarter conference call. As Greg said, I'm Mike Viola, I’m Head of Investor Relations here at AT&T. Joining me on the call today is Randall Stephenson, AT&T's Chairman and CEO; and John Stephens, AT&T's Chief Financial Officer. Rand is going to provide an update of the key 2019 initiatives, then John is going to cover our operating results. Then, of course, we will follow that with a Q&A. Before we begin, I need to call your attention to our Safe Harbor statement. It says that some of our comments today may be forward-looking. As such, they’re subject to risks and uncertainties, results may differ materially and 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, spectrum auctions 101 and 102, so we can't address any questions about that today. And as always, our earnings materials are available on the IR page of the AT&T website, and that includes the news release, investor briefing, 8-K, associated schedules, etc. And so now, I'd like to turn the call over to Randall Stephenson.

Okay. Thanks, Mike. And we do appreciate you joining us this morning. I came to you back in January and I outlined six priorities for 2019, and we have those again listed on the third slide. But if I could quickly summarize, what I would tell you is in all six of these areas we're either on track or well ahead of schedule. And the first one, as you remember, I told you that paying down the $40 billion in debt that we took on to acquire Time Warner that that would be our top priority, and we are on target to retire 75% of that by year-end. This quarter, we generated free cash flow of $5.9 billion and brought our net debt down by $2.3 billion. And that puts us well on track for generating at least $26 billion of free cash flow for the full-year. And then already here in the second quarter, we’ve sold our stakes in Hulu and Hudson Yards. That generated an additional $3.6 billion of cash. And then John Stephens’ team is doing their typical great job. They’re driving down working capital and restructuring some collateral arrangements, and this is also adding significant cash flow and it’s giving us very clear line of sight to reaching our target of $6 billion to $8 billion from asset monetizations, so bottom line, we committed to driving our net debt to EBITDA ratio to around 2.5x by year-end, and we are right on track for achieving that. Second priority was mobility, and we had another really strong quarter, and it continues to grow and build momentum with customers. Our wireless service revenues increased by 2.9%. EBITDA grew and that’s even with some significant accounting pressures. Our postpaid and prepaid phones grew very nicely and churn remains low across both products. So, all in all, I'd have to tell you, I’m very pleased with our wireless performance. And then stabilizing profitability of our entertainment group, this was a must do for us this year. And John Donovan and his team are exceeding expectations. And not only are they stabilizing EBITDA, but they’re growing it by nearly 7%. There was a small one-time item in there from a carriage dispute settlement, but even removing that, growth was very healthy, I think around 5% excluding that. And so, that was led by 8% growth in broadband revenues. I got to tell you our fiber product, the AT&T fiber product is doing very well in the marketplace. On the cost side, the team is doing terrific work on controlling content costs, promotion costs, and all the other operating costs. And then, finally, some aggressive customer segmentation and targeting are driving some higher video ARPUs. And so, I think what you should expect is as we work through the year, we will continue to see declines in traditional TV subs, particularly those areas where we can't bundle with broadband, but as we get into the second half of the year, we roll out our thin client video product. There will be a much lower price product in the marketplace. What I think you'll see is subscriber losses should lessen as we get into 2020. And then I think the DIRECTV NOW customer base, that’s our streaming over the top product. That should be pretty stable for the rest of the year. We might see some slight customer losses in the second quarter as the price increases continue to flow through. The second half of the year should be decent. Bottom line, I remain comfortable that we are either going to meet or exceed our entertainment group EBITDA target for the full-year and that’s going to lay the groundwork for continued stability as we move beyond 2019. At WarnerMedia, it's been a really strong start to the year. Revenue growth was solid. Operating income grew by double digits. Our merger-related synergies are on track and we expect to hit $700 million in run rate by the end of this year. Stankey and his team have reorganized the business to compete in a world of streaming and streaming content. We brought in some great new talent, like Bob Greenblatt. He is a known commodity. He is running WarnerMedia Entertainment, and is also leading the SVOD development project for us. And I got to tell you, I think he is one of the best around and I couldn't be more excited to have him on board. Bob and his team's top priority is to develop our new SVOD service. And as we’ve discussed, this is a service that will be centered on HBO and significantly enhanced by the Warner Bros. library, which is a very, very deep and prolific library. The closer we get to launching this service, the more excited I get. We are planning a WarnerMedia Day for everybody in the September to October timeframe, and we’re bringing all the executive team across from WarnerMedia and we're going to give you a detailed look at the product, and that includes the breadth of new and existing content. So just stay tuned for that and we're making significant investments here and we think our customers are going to love this product. Now every facet of our strategy is built on a foundation of world-class connectivity. And a few years ago, we set out to build the best video delivery platform in the world, and we invested billions of dollars securing spectrum licenses, and we made it among our highest priorities to go after and win FirstNet. That’s the national network for first responders. And today, our FirstNet build has now passed the halfway mark and it is running well ahead of schedule. We now have more than 7,000 agencies signed up across the country with more than 570,000 subscribers, and those numbers are growing. This initiative along with our vast portfolio of spectrum has catapulted AT&T into the leadership position in network quality. Over the last few months, AT&T has been recognized as both the best as well as the fastest wireless network, and FirstNet has enabled us to accelerate our 5G and fiber build out. Our 5G service is now in parts of 19 cities and we will have 5G coverage nationwide next year. We are the only carrier to offer 5G service to businesses and consumers, and we're well ahead of our competition here. And our AT&T fiber network now surpasses 20 million locations, that's both consumers and businesses. And in short, our network investments are paying off and we're not done yet. Finally, Brian Lesser and his team continue to grow Xandr, that's our advertising business. Revenues were up 26% including the AppNexus acquisition. They had strong EBITDA margins and we're continuing to invest in new product development capabilities as we integrate more of Turner's ad inventory. So, we're very pleased with the progress we're making. Our strategy is working. Our key initiatives are on track and you can expect strong execution on these priorities as we continue in the quarters ahead. 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.

Thanks, Randall, good morning, everyone. Again, thanks for being on the call today. Let me begin with our financial summary on Slide 5. Adjusted EPS was $0.86 in the quarter. WarnerMedia continues to be accretive. Mobility is adding customers and we saw EBITDA growth in our Entertainment group. Offsetting these positive signs was about $400 million non-cash impact from the reversal of revenue recognition and fulfillment deferrals. We expect those headwinds to continue throughout the year and we’ve included all those in our guidance. Adjusted earnings included a higher interest expense from the Time Warner acquisition and the non-cash impact of lower capitalized interest as we continue to put additional spectrum into service in our mobility business. During the quarter, we also had a mark-to-market adjustment to our pension plan based on our expected distributions for the coming year. The $0.05 impact reflects lower interest rates even though we significantly exceeded our returns on plant asset assumptions. Consolidated revenues came in at $44.8 billion, up 18%. Thanks mostly to the acquisition of Time Warner. The gains in mobility service revenues, WarnerMedia and broadband were offset by a foreign exchange impact of approximately $550 million and lower U.S. wireless equipment sales of about $175 million as well as a little bit of ongoing legacy product pressure. When you look at our pro forma basis, revenues were down slightly due entirely to the impact of foreign exchange and lighter equipment revenues. Without those impacts, revenues were up. Operating income showed solid growth and adjusted consolidated operating margins were 21.4% or up 170 basis points with strong growth in the WarnerMedia and mobility segments and significant improvement in our Entertainment group. EG's first quarter EBITDA puts us in solid shape to meet or be our full-year EBITDA target for EG. Our cash flows also continued to be impressive. Let's look at those in Slide 6. Both our cash from operations and free cash flow saw strong growth. Cash from operations was up 24%, mostly reflecting WarnerMedia. Free cash flow was $5.9 billion. The addition of WarnerMedia operations obviously made an impact. For example, our securitization efforts got a lift to more than $1 billion from adding WarnerMedia to our program. This helped to overcome $700 million in pressure from income taxes, where in the first quarter of last year we received a significant refund from the December 2017 passage of tax reform. When you look at our free cash flow for the past 12 months, we are well over $25 billion. And with a full year of Time Warner, we have confidence in meeting or exceeding our $26 billion range cash flow guidance. Our dividend payout of free cash flow was about 63% in the first quarter, another healthy amount. We also continue to invest at high levels. Our reporting CapEx was $5.2 billion and total capital investment was right at $6 billion when you include $800 million of payments from vendor financing arrangements. We have been receiving favorable payment terms from several suppliers, which allow us to be more efficient with our spending. And you see that at our capital investment in the quarter. We had $700 million of equipment assets put in service during the first quarter that we won't have to pay for and aren't included in our CapEx number because of these new vendor financing activity. As a reminder, payments made under our vendor financing obligations are classified in the cash flow statement as financing activities, not investing activities. I will get into more detail about our leverage little later, but our net debt declined a solid $2.3 billion in the quarter. In addition to strong free cash flow in the quarter, we amended many of our collateral support agreements with our lenders, which allows us to reclaim most of the collateral posted for our foreign currency hedges. The net result was more than $1 billion in cash return to us, fully offsetting our vendor financing payments. And we don't expect to post much additional collateral during the five years of these arrangements. In fact, we expect to get another $300 million or more in collateral return to us in the second quarter. Let's now look at our segment operating results, starting with communications on Slide 7. Mobility turned in another solid quarter with service revenue growth, solid margins and postpaid and prepaid phone growth. Our Entertainment Group got off to a good start and stabilizing EBITDA for the year. In fact, we grew at nearly 7% in the quarter, thanks to broadband revenues growing more than 8% and tight cost controls. In fact, our broadband growth exceeded our legacy revenue change in the quarter. Communication revenues were up slightly when you exclude lower equipment revenues from the fewer smartphone upgrades. And margins were up 20 basis points even with the accounting headwinds and lower business wireline EBITDA. Business continues to be impacted by legacy declines and then transition to a low margin services. The first quarter had a tough year-over-year compare and this year we had higher deferral amortization and a wholesale business customer default, but we still posted $2.5 billion of EBITDA for the quarter. Now let's take a deeper look at our mobility results on Slide 8. Solid service revenue growth drove wireless revenue gain even as equipment revenues reached the lowest upgrade rate in our history. Service revenues grew by nearly $400 million or 2.9% in the quarter and EBITDA grew by about 2% even with non-cash accounting headwinds of $200 million and subscriber gains in postpaid and prepaid phones. We grew postpaid phone net adds by 80,000 in the quarter, a significant improvement compared to a year-ago and FirstNet continued to be a tailwind to customer growth. In prepaid, we had 85,000 phone net adds, our 17th consecutive quarter of growth. We continue to be strategic here as well, focusing on the high-value prepaid market. Cricket is our flagship brand in prepaid. It generated strong subscriber growth and had its lowest ever quarterly churn rate of less than 3%, down more than 60 basis points year-over-year. Prepaid revenue growth was solid, up more than 6%. We now have more than 10 million Cricket subscribers, double what we had when we acquired the company in 2014 with more than 17 million total prepaid customers under the umbrella of AT&T. Randall already mentioned our many network achievements, but I will also point out that the percentage of new FirstNet customers is shifting to more customers new to AT&T and fewer migrations. Let's now look at our Entertainment Group results on Slide 9. The headline in Entertainment Group is growing EBITDA and operating contribution. And we’re confident we will meet or exceed our target of stabilizing EG EBITDA for the full-year. EBITDA grew by more than $180 million and margins expanded by 180 basis points to 24.7%, reversing a trend that we saw last year as the chart shows. A few things drove that improvement. First was good expense control both on content cost moderation from some recent renewals and operational cost such as lower advertising and promotional spending. Also we had a one-time settlement of a prior year carriage dispute that helped the first quarter by about $40 million. So even without that one-time event, we had growth of over 5%. Third, our video ARPU increased as we focused on higher value customers, reduce promotions, and moved our pricing to market for both premium and over the top service offerings. Advertising revenues also continue to grow. Our premium ARPU grew for the first time in five quarters, up more than 2%, and DIRECTV NOW ARPU was up more than $10 year-over-year. The number of premium TV customers on a 2-year price lock promotion declined by about 700,000 in the quarter. We still have about 1.6 million customers left on that pricing and we work through those for the rest of the year. Our focus is on the long-term value customers. Secular declines and pricing moves we've made did result in fewer gross adds and 544,000 fewer video subscribers. Changes to packaging and pricing in DIRECTV NOW impacted over the top net adds as well, but it was significantly less than the fourth quarter. Broadband revenues grew by more than 8% and contributed to EBITDA stability and growth. We’ve seen continued ARPU improvement in both video and broadband for the past year, helping us stabilize and grow EBITDA. We expect IP broadband ARPU growth to continue, but somewhat more moderate rates as we lap the step up that we saw in the second quarter of last year. We gained nearly 300,000 AT&T fiber customers in the quarter, bringing the total in service to more than 3 million and we now passed more than 12 million customer locations with fiber. For the quarter, we added 45,000 broadband customers. During the quarter, we updated our billing process for the premium video and broadband customers. Customers are now billed and receive service for the full month when they stay in the last month of service, which is consistent with our content cost and mobility customer policies as well as the rest of the industry. This generated additional revenues for us and gave us additional time to win back customers. Customers in service at the end of the period were higher because of this change, about 117,000 subscribers in premium TV and 38,000 in broadband. We expect the video net add challenges we saw in the first quarter will continue. Achieving EBITDA growth in the first quarter was a tremendous accomplishment for our Entertainment Group team. We continue to have confidence that we will meet or exceed our EBITDA target for the full-year. Let's move to WarnerMedia's first quarter results, which are on Slide 10. WarnerMedia continues to exceed our expectations and had a strong start to the year. Revenue growth was up more than 3% and operating income once again showed double-digit growth and nearly 12% with gains in all three units, and WarnerMedia continues to be accretive to both earnings and free cash flow. Warner Bros revenue grew by nearly 9%. Theatrical revenues increased primarily due to carryover revenue from Aquaman. Television revenues increased primarily due to higher initial telecast revenues. HBO revenues declined mainly related to a carriage dispute with one of our distributors, but still realized operating income growth for the quarter. HBO's operating income was up due to lower programming costs. We continue to increase investment in high-quality content. However, programming costs declined primarily due to the timing of content releases and some lower amortization expenses. Turner revenues were down slightly, subscription revenues continue to grow. Thanks to higher domestic affiliate rates. But this revenue growth was offset by ad revenue declines, primarily from the every other year shift of the NCAA Final Four games. We were the Final Four games in the first quarter last year and reported all that ad revenue. This year CBS reported that. In years which CBS broadcast the Final Four games, we reported our share as participation interest, not as ad revenue. That explains virtually all the difference in our ad revenues. With that, Turner's operating income was up 7%. WarnerMedia set for a solid year with the final season of Game of Thrones underway and viewership is breaking records. More than 17 million people tuned in for the season premiere and to date more than 27 million people have watched the episode. In fact, we added more HBO Now subscribers in the week leading up to the Season 8 premiere of Game of Thrones than in any other week in the service's history. Those numbers will show up in the second quarter customer accounts. We also had another successful airing of March Madness; the NBA playoffs are going full steam on TNT. Warner Bros. Shazam! opened earlier this month and is doing well at both the domestic and international box office. And later this year, we have our next Godzilla movie, It Chapter 2 and the Joker, to name just a few of the great movies slated to be released. Now let's look at Xandr and Latin America results on Slide 11. Still very much in the early days for Xandr, but it continues to execute and expand. Revenues were up more than 26%, including AppNexus, our strongest first quarter growth in the last three years. Growth rates in this business tend to be seasonal and event-driven such as election days with growing growth ramping throughout the year. EBITDA margins continued to be strong and we continue to invest in developing our advertising platforms. We are making progress, integrating the Xandr marketplace across all of AT&T. Xandr is now helping optimize Turner inventory. Xandr will also be working with Viacom as a result of our recent content negotiations, so we’re excited about that. We’ve discussed many times the potential joint benefits of blending premium content with our data and distribution to take advantage of targeted and relevant advertising opportunities. These agreements can help distributors, content providers, and most importantly, help our customers. Turning to Latin America, we continue to deal with foreign exchange and local economy challenges. Total Latin America revenues and EBITDA were down year-over-year, primarily due to those pressures. But on a constant currency basis and excluding Venezuela, revenues would have grown 0.3% on a comparable basis. In Mexico, we saw solid service revenue growth, which was offset by lower handset sales in the quarter. We are making good progress on our goal to achieve profitability in Mexico. We still have plans for more improvement; EBITDA improved by $58 million year-over-year. We are improving operating income and maintain line of sight for EBITDA breakeven in the second half of the year. Coming into 2019, we adjusted our subscriber base in Mexico to reflect the impact of a double count from certain third-party distributors and the sunset of 2G services. We continue to take operational steps to improve the quality of our sales and profitability. This includes focusing on higher-value customers, adjustments to dealer commission structures, reduction in the subsidies, and targeted price increases. Each of these changes improves the long-term value of our business, but puts pressure on volume comparisons. Even with our focus on higher-value customers, we continue to grow our subscriber base of nearly 18 million subscribers. Given our focus on quality, we expect to see continued net add growth as churn improves. Foreign exchange significantly affected Vrio, but revenues were flat sequentially. If you look at the results in constant currency, revenues were up year-over-year and the business continues to be profitable and generate positive cash flow. The beginning of the year, customer base was adjusted for the prior year after we identified and shut off a group of nonpaying customers. Vrio net adds were down, but our total subscriber base remained stable from a year ago. Now before we get to your questions, let me give you an update on deleveraging, that's on Slide 12. As you know, our goal is to get to the 2.5x net debt to EBITDA range by the end of this year through free cash flow, asset sales, and overall cash management, and we are off to a really good start. First, our free cash flow, working capital, and collateral agreement initiatives helped us reduce net debt by $2.3 billion in the first quarter. Remember, the first quarter is usually our toughest quarter for free cash flow. We still expect our free cash flow after dividends to generate about $12 billion this year and expect to use it to pay down the debt. Second, we’ve had significant asset sales that put us well on our way to our asset monetization target and it includes the sale of our interest in Hulu for $1.4 billion, which closed on April 15 and the pending $2.2 billion sale of our interest in Hudson Yards, which was just announced. This puts us in solid position to meet our leverage target of the 2.5x range by the end of the year. We are sharply focused on this. The teams have done a superb job so far and we expect that to continue through the rest of this year. Mike, with that, we're ready to take some questions.

Okay. Thanks, John. Greg, we will start with the Q&A and we will take our first question please.

Thanks, everyone. I have a couple of questions regarding EG. First, John, the adjusted EBITDA growth of 5% was significantly better than we anticipated. We had assumed, based on the price changes, that trends would improve later in the year compared to the first half. Can you explain how we should view the timing of these improvements as the price increases take effect? Additionally, regarding traditional subscriber losses, we noted the 661 figure this quarter, considering the adjustment of $117,000. Is this the correct way to interpret that? Randall, you mentioned in your comments that things would get better in the second half, while John, you indicated there would still be challenges. What should we expect in terms of the progression here? Should we treat the 661 this quarter as a baseline for future losses? Furthermore, with the 1.6 million still on promotion, what can we expect regarding their churn rate? How should we approach that line going forward? Thank you.

Yes. So, John, let me clarify this. I'll let Randall address what I may not have explained clearly. First, regarding EBITDA, we saw significant growth. We did have a one-time adjustment of about $40 million, but the EBITDA growth approached $200 million, so that adjustment was only a small part of the total. Overall, it was quite positive. We are pleased with that growth and confident in our goal of stability. While we are not raising our guidance, Randall has mentioned, and I agree, that it’s evident we’re on track not only to meet but potentially exceed that target, so we're just being cautious in our statements. John Hodulik: Got it. We will continue to balance our operations and measure costs while targeting high-value customers, which gives us flexibility, and we remain on track. Although I wouldn't suggest you can draw a straight line for the future, I feel confident about our EBITDA growth. That's my best attempt at a direct answer, and we feel very positive about it. We still anticipate meeting our guidance. I understand why you might think we will exceed it, and we will see how that unfolds. We are sticking with our current guidance, knowing we are outperforming in many areas. Regarding the subscriber losses, I believe the 544 figure is accurate. While we pointed out changes in billing, remember that this is an ongoing item that gets refreshed, so it doesn't represent a loss or an adjustment every quarter. In the second quarter, it simply refreshes. It's essentially a timing issue that occurs once. We also implemented annual price increases in January, which affected all our customers and impacted linear service. Approximately 700,000 customers were affected by the two-year price lock. As we progress through the year, we won't have another annual price increase, which means that the effect on customer accounts will not be present to the same degree. Additionally, we've reduced the number of price locks from about 2.4 million at the beginning of the year down to 1.6 million, so as we continue with this process, the impact will lessen. We expect this process to continue until November, marking two years since the last offer. A lot of this activity will happen in the second quarter, which differentiates the first quarter from the rest of the year in terms of the annual price increase and the significant group of 700,000 customers affected by the two-year price lock. Randall, do you have anything to add?

Yes, on the subscriber losses, I’ve said particularly on DIRECTV NOW, our streaming product, that we’ve put the price increases and we’ve seen the effect of that in the fourth quarter and the first quarter. Second quarter, you'll see that moderate, and I actually believe second half of the year based on what we're seeing in terms of uptake in the market on the new platform and the new product, and we should have a decent second half of the year on DIRECTV NOW. On the traditional premium product DIRECTV, I said you should expect to continue seeing losses as we move through this year, but we will be launching the thin client in the second half of the year, which think of that as our satellite replacement product. And why this is so important? It allows us to get into the market at a lower price point. When you look at the DIRECTV churn, it's interesting. What you see is not people at the high end in terms of ARPUs that are churning. It's disproportionally at the low end and where we don't have broadband. And so this thin client gives us an opportunity to meet that low end with a better price point and this should start to moderate the subscriber losses. And particularly as we get into 2020, we think this product is going to have a really good appeal for people down market in terms of their expectations of video pricing.

Okay. Thanks, guys.

Greg, we will take the next question please.

Hey, guys. Thanks for taking the questions. I guess, first kind of a bigger picture question with respect to the DTC strategy, Randall, or John Stankey, if he's on. A couple of weeks ago we saw Disney launch a DTC product or announce a launch with lower-than-expected pricing, bigger than expected losses. Numbers came down and the stock jumped 10% because people were looking at this as kind of a standalone Netflix being incubated inside Disney. And I was wondering if you guys could kind of address how you guys think about how the market would react to a similar announcement at AT&T? And if you could at this stage kind of dissect a little bit about what you think is good and strong about the Disney platform announcement and what maybe vulnerable about their approach and opportunities you see for yourself to come into that market. I guess, kind of on a related topic, could you talk a little bit about what if anything the Hulu sale might mean to the financials of the business. My guess is that you'll kind of see less losses from that flowing through to the earnings statement? And if you could kind of size that, that will be helpful for us. Thanks so much.

David, this is Randall. Regarding Hulu, we're experiencing fewer losses and lower capital requirements. We received $1.4 billion in cash, and with that, our capital goals are no longer a concern. As for the Disney launch, I was impressed by their efforts. The market response suggests that there is confidence in Disney's ability to deliver original content and leverage their extensive library, strong brand, and the licensing they intend to reclaim. This has shown the market that their direct-to-consumer offering is a viable product with broad appeal globally. I believe this situation is informative. You'll be able to form your own opinion in September and October about what we will be introducing. For premium content, think of the HBO brand. Regarding the breadth of content, consider the Warner Bros. library and its depth, along with our robust original content production capabilities. We're quite optimistic about the volume and variety of content we can provide, which we believe will resonate well with customers. We'll share more details soon, including our expectations for this product and its pricing. We aren't ready to disclose everything yet, as there's still much to do. Bob Greenblatt is actively involved, and I can assure you that we are feeling very positive about what we can bring to the market, especially following the Disney announcement, which has only increased our optimism.

Thanks, Randall.

Thank you, David.

Okay. Greg, we will take the next question. Thanks.

Great. Thank you very much. I wonder if you could turn to wireless. Perhaps you could just update us on the outlook on the wireless service revenues for the rest of the year, another good performance and the ads turning around despite churn continuing to be a little bit higher year-over-year. So talk us through the network improvements how you’re going to market to take advantage of that, and how that should shape during the year-end? Any updated color on the 5G rollout? We haven't really seen a lot on the commercial site. So when do we see more kind of opportunities in terms of pricing plans and so forth? Is that when the sub 6 gigahertz chipsets come out? Thanks.

Sure, Simon. Let me take a shot at it and ask Randall to support me. First, our outlook for wireless revenue remains positive. I stand by our guidance and expect new service revenues. We saw impressive growth of nearly 3%, specifically 2.9%, in the first quarter. It’s worth noting that we experienced some service revenue growth in the second quarter last year, making the comparisons a bit tougher in the second and third quarters of this coming year due to last year's performance, but I still expect growth despite these tougher comparisons. Secondly, we anticipate growth because we expect to add new customers. In fact, this first quarter marked the first time in five years that we achieved positive growth in postpaid phone subscriptions, alongside solid growth in prepaid phones with approximately 170,000 voice additions in the first quarter. This is a significant achievement for us, demonstrating our positive impact in the marketplace. Our reseller losses remain minimal, which is another positive for our service revenue. From a network improvement standpoint, Randall noted the multiple awards we've received. Those familiar with our presentations know we consistently test speeds before our events, and we’ve been receiving positive feedback from investors. This improvement is significantly influencing our ability to attract and retain customers. However, establishing this message in the market will take some time, and we are optimistic that we will see substantial benefits later in the year. As of the end of the first quarter, we have completed 53% of our network build-out for FirstNet, and we aim to reach 60% by the end of the third quarter, which is a key billing and payment milestone with FirstNet authority. As previously discussed, we expect to manage this reimbursement process effectively and we are ahead of schedule, with our team performing excellently. Utilizing the spectrum may have caused some interest expense pressure, but it's benefiting the network quality. 5G is now operational in 19 markets using the 39 gigahertz millimeter wave technology. We plan to expand this to cover a couple hundred million in our 5G evolution network by the end of this year, and by the end of next year, we expect to cover over 200 million of our population. Our plans for 5G are progressing well. As mentioned earlier, we don’t anticipate revenue from this until next year and the following year, but we are actively working on several initiatives in various sectors, including hospitals and manufacturing centers, as well as developing automated campuses for our larger clients. We are seeing promising advancements in those areas. From a revenue standpoint, while we remain optimistic and are leading in 5G, the revenue benefits should start materializing over the next year, leading into 2021.

I would like to add that the wireless segment is where I find the most satisfaction in our business. This has been a long-awaited achievement, as we've invested billions in enhancing our network quality. We've dedicated tens of billions of dollars to building our spectrum portfolio, and launching FirstNet has allowed us to activate that spectrum across the country, resulting in the impacts we anticipated. This change is redefining our value proposition for customers, focusing on quality, speed, and video delivery. We're not engaging in aggressive promotions or pricing strategies to attract customers; our growth is happening organically due to our implemented strategy. The 5G evolution of our products, as we activate this spectrum and introduce new technology like MIMO, is having the desired effect on the market, much to the dismay of our competitors. Our customers are experiencing impressive speed test results, with speeds ranging from 80 to 150 megabits per second, marking a significant leap in product capability. This is having the exact impact we aimed for. Out of all the areas I'm currently assessing, this is the one I’m most pleased with. Additionally, I'm also pleased with the stabilization and growth of the Entertainment Group's EBITDA, which gives us a strong sense of confidence. Overall, this milestone is a significant achievement for us.

Great. Thank you.

Thanks, Simon. Greg, ready for the next question.

Hey, guys. Thanks.

Hi, Phil.

Can you provide two follow-ups? First, can you elaborate on the wireless growth and detail what FirstNet is contributing to the subline? Secondly, could you discuss your relationship with the NFL, particularly regarding the exclusivity of the Sunday Ticket? Thank you.

Sure. We're experiencing significant success with FirstNet, even though only 50% of the national network build is completed. We've added 570,000 subscribers, and we're seeing a notable increase in new subscribers rather than just migrations. The FirstNet community is responding well to our attractive offers for their families, and we're finding that for every FirstNet subscriber, we're bringing in about two family members. This has had a considerable positive effect on our subscriber growth, with network quality being a major driver. FirstNet will remain a crucial strategic focus for us in the upcoming years, and we're even more enthusiastic about it than when we initially won the bid. Regarding the NFL, while there are limitations on what we can discuss, we expect to maintain exclusivity moving forward with DIRECTV. You may have noticed the NFL network is no longer available on our U-verse platform. We have a substantial investment in the NFL through DIRECTV, but our rights to the Sunday ticket are exclusive to that platform. Customers who are passionate about the NFL usually are more concentrated on DIRECTV. There are costs associated with the NFL network, and since our customers can access NFL Draft coverage on ABC and Thursday night games on Fox, it made less sense to keep the NFL network on U-verse, especially as it could not transport the Sunday ticket. This change will help us reduce some content costs while still providing our customers access to NFL content through other avenues. If they're really dedicated NFL fans, we'll transition them to DIRECTV.

Got it. Thank you. And at one point you had talked about bending the content cost curve on DIRECTV. You re-signed Viacom. Is there something coming that you think might bend that curve, or we should be looking at it sort of linear from here?

We generally have nondisclosures regarding these deals, but I can share that the content costs and agreements we've negotiated recently have been significant. We feel confident about our position, and the margins in the Entertainment Group reflect that. Overall, I am pleased with the progress that John Donovan and his team are making on the upcoming content deals and their efforts to adjust them for distribution across our various platforms while managing costs effectively.

Remember, the ability to collaborate with our partners is essential. The content distributors hold more advertising minutes than we do as distributors. If we can leverage our advertising resources to enhance our average revenue per user and increase our advertising income, similar to the growth seen with Xandr, we can present this opportunity to the content providers. There is a solution that allows them to enhance their advertising revenues without raising content costs, benefiting all parties involved, including consumers. We are particularly enthusiastic about our work with Viacom. As mentioned, we are collaborating with Viacom through Xandr on these types of initiatives. The solutions we are developing aim to benefit the distributors, content providers, and advertisers alike. Our team is dedicated to this effort, and we believe there are viable solutions that will serve everyone's interests.

Thanks, Phil. Greg, we will take the next question, please.

Thanks for taking the question. On the slide where you show your fiber broadband net adds, what we can see is that there's been gradual improvement in that performance which makes sense because you’ve been building out the fiber network. I was hoping you could give us just a little bit more insight into what’s driving that? For example, to what extent has the mix of that then shifting from upgrades to maybe winning new customers. How do you see that trending as you complete the fiber build out? And if you can give us any insight into the success you've had at bundling that fiber with some of your other products, that will be really helpful. Thank you.

Yes. Brett, let me address that. I appreciate you bringing this up, as it connects to our previous discussion. When we look at the Entertainment Group margins overall, broadband is a significant factor contributing to growth. As I mentioned earlier, broadband growth this year compared to last exceeded the challenges we faced from local voice and other equipment revenue. Specifically, fiber is performing well and is driving improvements in EBITDA margin for the Entertainment Group. We also expect to see continued revenue growth in broadband throughout the year, even as wireless comparisons become more challenging in the second and third quarters, but we still anticipate ARPU and revenue growth, which we feel positive about. Yes, we've maintained around 25% of the available fiber. Regardless of whether we roll out 1 million or 1.5 million per quarter, we consistently utilize 25% of that, as we continue to add capacity, which we aim to complete in line with FCC requirements by July. After that, we’ll be able to penetrate the market more effectively. Keeping a 25% penetration rate is solid while we're adding considerable amounts of fiber. We're seeing positive results in areas where we have video, wireless, and fiber bundled together, giving us the chance to gain market share in broadband. We are witnessing early migrations of existing customers, and as we move past this stage, we expect to attract more users and take more market share, as we've previously indicated. By the end of June and into July, I expect we will reach around 14 million or just under, fulfilling our FCC requirement and totaling 22 million customer locations. We anticipate that 14 million will quickly maintain the 25% penetration rate and increase further as we align our market share with our competitors by converting more customers. Let me pause there and see if Randall has anything to add or if there's anything I overlooked.

No, I think you covered it well. This is probably one of the more exciting areas of the business in terms of where we have invested heavily and now we are seeing the fruits of the investment and getting to 25% penetration, that's almost mechanical. To be candid with you, whenever we go into a neighborhood and turn up fiber, 25% comes fast and 50% is eminently achievable. And we actually think we can hopefully get beyond 50% as we continue to get this build completed. And I’m telling you where we get AT&T fiber, a video product and a mobile product, churn rates just drop. And the value effect of that is really, really powerful. Customers will love it and the services were all premium services and so this is going to be a really important element of us as we go through the rest of this year in 2020 in terms of keeping the Entertainment Group EBITDA stable.

Thank you.

Thanks, Brett.

Hi, everyone. Thanks. I wanted to make a brief comment on the wireless business. It seems like you were quite aggressive with the buy one get one offers in the first quarter. FirstNet is definitely having a positive effect, but how should we consider the balance between promotional activity, margin, and phone net adds moving forward through 2019? Also, regarding the active broadband side, could you provide some insight on the revenue allocation changes? How does the current spot pricing in broadband compare to a year ago? Thanks.

Let me address the first question. Regarding the mobility margins and the perception of BOGOs, it's important to note that our equipment revenues have significantly decreased. This could impact our promotions related to BOGOs. Looking at our results, service revenues increased by about $375 million to $400 million, and our EBITDA was approximately $130 million to $350 million. Additionally, there were about $200 million in noncash accounting adjustments related to revenue recognition and amortization. Out of the $375 million service revenue, almost $350 million contributed to the bottom line after accounting adjustments. Therefore, we feel confident about controlling costs, being prudent with advertising, and managing promotional expenses. We are pleased with our net customer additions and our strategic approach focused on customer value. I want to emphasize that this has been a careful process. The value of FirstNet, the quality experience we deliver, the opportunities it presents, and our expanding geographic coverage through new store openings are all contributing factors. Although some investments appear in the expense line rather than CapEx, we are increasing our store presence in areas where we already operate. Based on FirstNet, our strong results from the first quarter, and our expanding distribution, we are optimistic about the future of our wireless segment.

I would like to emphasize John's point regarding the promotional activity in relation to FirstNet's growth. FirstNet plays a significant role in driving subscriber growth, and we have been carefully moderating our promotional efforts in this area. The offers we introduce and adjust are made selectively based on our observations of the market and the competitive landscape. However, the recent fluctuations we have experienced have largely been due to our commitment to quality and maintaining our margins. Moreover, our mobility segment is benefiting from this momentum, and we are very pleased with the results.

Regarding the IP broadband aspect, I’d like to mention that our published ARPU this quarter is a little over 50 dollars, which reflects about 8% growth. However, when compared to the next quarter, there will be a noticeable increase year-over-year as we transition from the first quarter to the second quarter of last year. This isn’t an indication of sensitivity regarding the project's success; we are quite confident in it. As we continue to expand our fiber service, we believe our customers will seek higher speeds and be willing to pay a reasonable price for them. Therefore, we remain optimistic. We're just being cautious when making numerical comparisons. In the first quarter of last year, both wireless and broadband saw an increase in ARPU numbers in the transition to the second quarter, and we want to ensure that our comparisons are accurate.

Very good. And Randall, can you maybe just comment, we’re seeing a lot of price increases across the board and over the top streaming video products. How does DIRECTV now sort of set up against that and in this landscape how do you view price elasticity for your customer?

Yes, Mike, we made our move on OTT pricing and rationalizing the whole content lineup for our OTT product in the fourth quarter. And you've now seen most of the other players that have a streaming product out there follow. And I think we're getting to a place where the product, we all look at. So, okay, this is a sustainable place if you can get the advertising revenues to where we think we can get them. This was probably a sustainable level. It is, as you're seeing highly price-sensitive. This is a segment of the market that had by and large left the linear product market, because of pricing. And so as we came in with a $40 product, you saw a significant uptake and it was largely people who had left the market. And as you begin to move the pricing and try to get the profit equation right, you saw some fallout, but now we're in the market at this $50 price point and we’re early on in terms of getting the new platform out there. It came out I think very end of March, but we're seeing good uptake on the new platform, the new pricing. As I said during the second quarter, you may still see the OTT product to be negative in terms of subscribers, as we continue to experience price increases on the base. But what we're seeing on the uptake of the new product with a new price point is giving us confidence. So we get to the second half of the year, this thing ought to do decent growth. And so we're actually optimistic, but it is a very price-sensitive product, Mike. Make no mistake about it.

Thanks, Mike. Greg, we will take one last question.

Hi. Thanks and good morning. First, regarding the performance of full fiber subscribers after the upgrade compared to the decrease in customers using DSL and fiber-to-the-node, what is your perspective on how many homes ultimately need full fiber capability and how quickly you aim to achieve that? Secondly, you mentioned growth in fixed broadband ARPU as customers opt for higher-speed packages. Do you see a long-term opportunity in the wireless segment to adjust the pricing model and implement higher prices for increased bit rates, especially with the rollout of 5GE and eventually full 5G?

Yes. On the 5G piece, Mike, I will be very surprised. If as we move into wireless, the pricing regime and wireless doesn’t look something like the pricing regime you see in fixed line. If you can offer gig speed, there are some customers that are willing to pay a premium for 500 meg to a gig speed and so forth. So I expect that to be the case. We are two or three years away from seeing that play out. Right now from a 5G standpoint, what we're seeing in terms of adoption tends to be business. In fact, it's exclusively business for us right now. Its serving as a LAN replacement product and we're having really impressive demand where we turn up the 5G service from businesses basically saying, we want to put a router in, and it becomes their LAN replacement. And so now as you begin to think about equipment, whether it be handsets or tablets or laptops that have 5G modems within them, which that will happen starting this year and really pick up over the next year, then that truly does become a LAN replacement. You don't even need the router at that stage. And so, the idea that just like business customers pay more for more speed in a fixed line environment, we expect that there is going to be demand and that there will be price differentiation for speed as you move into a 5G environment. In terms of fiber upgrades, we have as you know, over the last 3, plus 4 years have the most aggressive fiber deployment program probably in the United States. And so we've been going at a really hot rate in putting fiber out. As I mentioned earlier, I think it was to Mike McCormick's question, the adoption on fiber deployment in terms of taking market share and customer upgrades is fairly mechanical. It doesn't take a rocket scientist to figure out what this looks like as you deploy fiber. And so while we're going to kind of finish off this first phase of our fiber deployment between 5G and FirstNet and just our natural desire and preference for fiber on new builds, you’re going to see fiber continue to be pushed into this network. And as business locations demand fiber, you’re just going to see a capillary of fiber deployment continue over the next 4 or 5 years. And it's not going to go at the same pace you’ve been seeing for last four, but it's going to continue. And I don't see that stopping. So I see our fiber opportunity just continuing to grow as we move 2020 through 2025. Thanks for the questions, Mike.

Thank you.

Okay. Well, listen, I appreciate everybody joining us. And once again, punchline to this quarter is we have basically done exactly what we told you we would do at the Analyst Day and then again our January guidance. Debt reduction is right on track. Asset sales and asset monetizations are right on track. Our free cash flow forecast is actually ahead of schedule and Entertainment Group is on track and actually ahead of schedule as well. So stay tuned. We will be getting more details to you in terms of our WarnerMedia Day to come in the September to October timeframe. And I appreciate your time and look forward to talking to you again. Thank you.

Thanks.