AT&T Inc (T) — Q3 2019 Earnings Call Transcript

Thank you, and good morning, everyone, and welcome to our third quarter conference call. I'm Mike Viola, Head of Investor Relations for AT&T. And joining me on the call today is Randall Stephenson, AT&T's Chairman and CEO; and John Stephens, AT&T's Chief Financial Officer. We'll begin with our 2019 progress and our third quarter results, but we want to spend most of our time today on the 3 year guidance and capital allocation plans that we announced this morning, then we'll take your questions. Before we begin, I want to call your attention to our safe harbor statement. It says that some of the 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 want to remind you that we're in the quiet period for the FCC's Spectrum Auction 103, so we can't answer any questions about that today. And as always, our earnings materials are available on the Investor Relations page of the AT&T website. That includes the news release, investor briefing, 8-K, etc. And so with that, I'll turn the call over to Randall Stephenson.

Okay. Thanks, Mike, and good morning, everyone. Thanks for joining us. On Slide 3, you'll see some of this listed. Last November, we laid out our 2019 commitments and we challenged the team to deliver, and they have. The punchline for the quarter is that we remain on target to meet every single objective for the year. We said leverage would be around 2.5 times by year-end, and we're on track to hit that target. We told you that full year EPS would grow in the low single digits, and we're checking that box. We said we'd generate $26 billion of free cash flow, and now we're tracking to $28 billion. We said we would remain very active on the portfolio front, evaluating and executing opportunities to monetize $6 billion to $8 billion in non-core assets, and we have. Our current forecast is to realize $14 billion by year-end. We said that our wireless business would return to top line growth, and it has. Year-to-date, wireless service revenues are up nearly 2%. We committed to stabilizing Entertainment Group EBITDA despite the DIRECTV top line pressures, and through 3 quarters, Entertainment Group EBITDA is growing. And we needed to do all of this while integrating WarnerMedia, hitting our synergy targets and introducing several new services. So across the board, we're positioned to meet or exceed every commitment for the year. In a few minutes, I'll cover our 3 year plan, and you'll begin to understand why I feel good about meeting those commitments as well. But before we get into that, let me turn it over to John, and he'll go deeper into the quarter. So John?

Thanks, Randall. When looking at our third quarter, adjusted EPS was $0.94, up more than 4% and up slightly for the year. As Randall mentioned, we're on track to reach our expected low single-digit growth for the full year. Revenues were down in the quarter due in part to tough year-over-year comparables at Warner Bros., along with video and FX impacts. However, adjusted operating margin was up 30 basis points with gains in Mobility, entertainment and WarnerMedia. Our cash flows are on a record pace for the year. Cash from operations came in at $11.4 billion, and free cash flow was $6.2 billion in the quarter and nearly $21 billion year-to-date. This puts us firmly on track to reach our full year target of free cash flow in the $28 billion range, both from ongoing operations and including about $2 billion from a full year of applying our working capital approach to WarnerMedia's assets. This solid free cash flow comes even with strong capital investment. CapEx was $5.2 billion, and total capital investment was $6 billion when you include the $800 million of payments for prior vendor financing activity. As Randall said, with asset sales as well as expected free cash flow in the fourth quarter, we expect to hit our 2.5 times net debt-to-adjusted EBITDA target by the end of the year. Let's now look at our segment operating results, starting with our Communications segment on Slide 6. Starting with Mobility. We're growing service revenues and adding phone subscribers while increasing EBITDA. Wireless service revenues grew by about 1% in the quarter and approximately 2% year-to-date, and we expect that trend to continue into the fourth quarter. EBITDA grew by 1.6% to $7.8 billion, and EBITDA margins expanded by 80 basis points with service margins of 55.7%. During the quarter, we had 255,000 phone net adds, including more than 100,000 postpaid and 154,000 prepaid voice. We also continue to stack up industry awards, including being named the nation's best wireless network for the second year in a row and fastest for the third consecutive quarter. These awards say it best: Our network investment and spectrum deployment are paying off. Let's now look at our Entertainment Group. One of our key priorities for 2019 was to stabilize Entertainment Group's EBITDA. Year-to-date, we're up 2.3% with expense reductions outpacing video and legacy revenue losses. Premium video and IP broadband ARPUs continue to grow. Our 300,000-plus AT&T Fiber net adds helped drive broadband revenue growth. We also expect that our premium video losses have peaked. We had about 225,000 net losses due to programming blackouts. Our gross adds were down about 400,000 due to new, higher intro pricing and credit thresholds, as well as more targeted promotions, and we continue to work through customers rolling off 2-year price locks. Those video losses also impacted our broadband numbers, especially our bundled customers, but we did have more than 300,000 AT&T Fiber net adds in the quarter. And Business Wireline revenue trends improved year-over-year, thanks to strength in strategic and managed services. That performance came even with about $80 million less of intellectual property revenue when compared to the year-ago quarter. With our strong business wireless performance, our Business Solutions revenues grew by about 1%. Let's move to WarnerMedia and Latin America results, which are on Slide 7. WarnerMedia revenues largely reflect a comparison to a very strong revenue third quarter last year, which includes strong television licensing revenue growth and a box office slate that includes several hits. But WarnerMedia operating margins expanded in the quarter. Even with lower revenues, Warner Bros. operating income was up 2% due to lower film and TV production costs. We also will have challenging comparisons to the fourth quarter. We're off to a strong start with the box office success of Joker. But remember, the fourth quarter of last year included blockbuster movies such as Aquaman, Fantastic Beasts 2, and A Star is Born. Turner revenues were up on subscription revenue growth, partly offset by lower advertising and content licensing and other revenues, but operating income was up almost 3%. HBO revenues and operating income saw double-digit growth, thanks to strong content sales driven by international licensing. HBO's third quarter is even more impressive when you consider the DISH carriage dispute and Game of Thrones finale both occurred in the second quarter. WarnerMedia also delivered another incredible performance at this year's Emmy Awards, leading the industry with 39 primetime Emmys and 15 news and documentary Emmys. Our Latin America team continues to do an excellent job of reducing costs in a challenging foreign exchange environment that helped drive an EBITDA increase of more than 20%. A large part of the increase was due to an $81 million improvement in Mexico EBITDA. We expect this trend to continue and Mexico EBITDA to be positive in the fourth quarter, and we also added nearly 600,000 wireless subscribers in the quarter. Those are our third quarter highlights. I'll now hand it back to Randall to talk about our 3-year financial outlook and capital allocation plan that we announced this morning. Randall?

Okay. Thanks, John. So what I want to do is talk to you about what you should expect over the next 3 years. Before we get into the numbers, I want to begin with a broader discussion on our strategy. If you go to Slide 9, we'll outline this for you. Since 2012, we've made a series of strategic investments, and those investments have been aligned around two overarching trends. First, consumers will continue to spend more time viewing premium content; and second, businesses and consumers will continue to demand more connectivity, more bandwidth, and more mobility. When we began pursuing this strategy, we saw an emerging world in which the consumption of video and other premium content was no longer bound to your living room. And everything we expected has arrived, and it has arrived sooner than we or anyone else anticipated. And now the foundational elements of our investment thesis are clearer than ever. It all starts with advanced high-capacity networks. From our iPhone experience, we knew the mobile Internet revolution in a world of streaming video would require much more capacity than people were anticipating, so we began investing for future demand. First, we spent $20 billion on premium spectrum licenses. Next, we acquired Leap Wireless, which gave us additional spectrum; and Cricket's prepaid business. We've doubled the size of that business and transformed it from losing money to healthy margins. And finally, we were selected to build and manage the First Responder Network for the United States government, and this brought with it another layer of premium spectrum capacity. Over the last 18 months, we've been putting all this capacity into service, and the performance results have been dramatic. AT&T now has the fastest and most reliable wireless network in the U.S. We've invested to extend these same capabilities south into Mexico. In 4 years, we built a high-speed nationwide network and have doubled the customer base. We've also been undertaking the most aggressive fiber deployment program in the U.S. since 2015 with over 20 million locations passed. Over the next 3 years, our strong spectrum position will allow for lower capital intensity, and that bodes well for growing operating margins. The second essential element is direct customer relationships, and we have about 170 million of them across mobile, pay TV, and broadband. And that number reaches 370 million when you include our digital properties such as cnn.com, Bleacher Report, and Otter Media. As we prepare to launch HBO Max, our direct customer relationships are an asset that any streaming company would love to have. Gaining scale in linear pay TV was the core rationale behind our DIRECTV acquisition. We realized the satellite business was mature and we anticipated subscriber losses. However, the content savings quickly turned our U-verse pay TV business from loss to a profit. And since we bought DIRECTV, it has generated healthy cash flows of over $4 billion per year or a total of $22 billion in cash by the end of this year. Third, we were convinced that the value of premium content would increase significantly over time as consumer demand continued to grow and new forms of distribution emerged. And I think you've already seen that with some of the multiples paid for media companies after we did our deal. Vertically integrating content and distribution is the future, and we're seeing it across the board. And last, the vast distribution network and subscriber base brings unique viewer and customer insights. Pairing these with our large advertising inventories at DIRECTV and Turner and creating an ad tech platform is a unique opportunity, and every move we've made has been focused on building these four critical capabilities. So now as we conclude 2019, we are the clear leader in network performance and capacity. We have one of the premier entertainment companies in the world with a broad-based presence in premium content and direct customer relationships, and I wouldn't trade places with anyone. So if you turn to Slide 10, I want to take a look at our 3-year outlook. Looking ahead, let me take you through the keys to our financial outlook and our capital allocation plan. And all this will drive compelling returns for our shareholders. I'm going to start with the top line. We expect total company revenues over the 3-year period to grow by 1% to 2% per year. This will be driven by strength in Mobility, increased fiber penetration, and WarnerMedia. As mentioned earlier, our wireless business is now enjoying operating leverage from investments made over the last 5 years. Our WarnerMedia cost synergies are on target and EBITDA at AT&T Mexico is ramping, and we're identifying significant opportunities for margin improvement through ongoing cost evaluation and operational review. Given our incremental investments in HBO Max in 2020 and our expectations for strong growth in equipment revenue driven by the 5G upgrade cycle, we expect our adjusted EBITDA margin to be stable in 2020. From there, we will drive a 200 basis points of EBITDA margin expansion by 2022, above the 2019 levels. Improving margins by 200 basis points will give us an EBITDA margin of 35% in 2022. And applying a 35% margin to a revenue base that's growing 1% to 2% per year produces an EBITDA lift in the neighborhood of $6 billion in 2022, and that includes our investment in HBO Max. The drivers for this EBITDA margin expansion are: WarnerMedia cost synergies, continued improvements in our wireless business, continued EBITDA growth at AT&T Mexico, and our plan to take out costs across the entire company. In fact, we've hired Bill Morrow. He's a Special Adviser and Managing Director of Process Service and Cost Optimization, and he's leading our enterprise-wide cost-reduction initiative. Bill has been CEO of large communication companies in the U.S., Europe, and Australia, and he has a proven track record of creating best-in-class cost structures. He'll have full authority to examine and change our cost structure across the entire company to ensure that we achieve the targets that we're outlining today. Bill's work will be overseen by the Board's Corporate Development and Finance Committee and myself. And it will be above and beyond what we're already doing with network virtualization, real estate consolidation, and our other ongoing cost-reduction initiatives. Our free cash flow has grown significantly over the past few years, and that's thanks in part to our DIRECTV and Time Warner deals being cash flow-accretive on day 1. We expect free cash flow to be at $28 billion in 2020. And as the HBO Max investment declines and we execute against our cost take-out initiatives, free cash flow will grow by more than $1 billion in 2021 and another $1 billion in 2022, reaching $30 billion to $32 billion in 2022. Now let me talk about our 3-year capital allocation framework. We'll continue to grow the dividend as we have since I joined the company. Expect modest annual increases and a dividend payout ratio going below 50% in 2022. After paying the dividend, we expect to use 50% to 70% of our free cash flow to retire about 70% of the shares we issued for the Time Warner deal. And we will continue to reduce debt going forward. Our target is that by 2022, our net debt-to-adjusted EBITDA ratio will be between 2 and 2.25 times, and we'll have retired 100% of the debt we took on for Time Warner. This is a very comfortable leverage ratio for us. We have routinely pruned the portfolio of assets that don't contribute to our core strategy. In fact, when you conclude what we've done in 2019, we've monetized more than $30 billion in non-strategic assets over the last few years. You should expect continued evaluation of our businesses and more progress on divesting assets that are no longer core to our fundamental mission. As I mentioned earlier, we expect to realize about $14 billion in non-core asset monetizations this year, and we're targeting $5 billion to $10 billion next year. This is a continuous process for us. It is one of the areas in which our Corporate Development and Finance Committee dedicates a tremendous amount of time and attention. With the support of our Board generally and the Corporate Development and Finance Committee in particular, I've instructed our executive team to begin the next review of our portfolio. So we're going to give you regular updates on our progress as we've done over the last year. We're committed to an objective, diligent, and disciplined process. We'll analyze the merits of each of our businesses individually and as a part of the whole. But let me be clear, we have no sacred cows. We're always open to making portfolio moves, and DIRECTV has been the source of a lot of public speculation in that regard. As we've said, it will be an important piece of our strategy over the next 3 years. But no portion of our business is ever exempt from a continuous assessment for fit and performance. We'll approach it with a fresh set of eyes and clarity around the rapidly evolving consumer environment, and we'll evaluate multiple options. That includes partnerships and other structures. Likewise, given the quality of our assets, there will be no major acquisitions during the next several years. With our financial outlook and the benefits of our capital allocation policy, we expect EPS growth in 2020 will be up low single digits. But by 2022, we expect EPS to be between $4.50 and $4.80. That includes our investment in HBO Max of between $0.15 and $0.20 per share in 2020 and then $0.10 per share in 2021 and 2022. And as you can see, over the next 3 years, revenue, EBITDA, and EPS all grow every single year. Free cash flow is stable in 2020 and then grows in 2021 and 2022. This plan will deliver both substantial and consistent financial improvements for the next 3 years. And before I hand it to John for his perspective on the 3-year plan, I want to say a few words about what you'll see tomorrow at Warner Bros. Studios and our investment in the HBO Max platform. This is a terrific product, and I honestly can't wait for you to see it. John Stankey and his WarnerMedia team will take you through all aspects of the strategy, the product, and the rollout, including our revenue and subscriber expectations for the next 5 years. We'll be investing to maximize the value of the service, which will drive growth and value to WarnerMedia and to AT&T as a whole. HBO Max is a terrific platform, and we're aligned in making it great while also being responsible with our capital and value. We'll make the significant investments required to win in the marketplace, but we'll also hit our numbers and ensure that we deliver on the promises that we're outlining for you here today. I feel really good about this plan, and I'm highly confident in hitting each of our 3-year objectives. So now I'll ask John to provide his perspective on our 3-year plan. So John?

Thanks, Randall. Let's turn to Slide 12 and dive a little deeper on some of the details of the 3-year plan. We're expecting 1% to 2% revenue CAGR for the next 3 years. On the operational side, we expect wireless service revenues to grow by more than 2% per year. FirstNet, our network quality improvement, and reseller initiatives, all offer growth opportunities for us. We also expect 5G device adoption to boost equipment sales as we launch our nationwide 5G network in 2020. We also expect to continue our broadband revenue growth to help offset legacy and video pressures. And we expect to see significant incremental growth during the planning period from HBO Max and targeted advertising from Xandr. Randall did a good job of laying out our EBITDA and EBITDA margin growth plans. Our incremental cost plan will contribute to the 200 basis points of EBITDA margin improvement. One way we plan to do that is through product simplification. Our future video product set will focus on 2 platforms: HBO Max, our subscription video-on-demand service, which you'll hear more about tomorrow; and AT&T TV, our live TV offering. Turning to capital allocation plans. We expect to return about $75 billion in value to shareholders over the next 3 years through $30 billion of share retirements and $45 billion in dividends. Our share retirement will be aggressive. We expect to retire about 70% of the shares issued for the Time Warner deal. That's more than 10% of the company. You heard our debt reduction target earlier, but let me repeat it here: We intend to target leverage between 2.0 times and 2.25 times. As CFO, I'm very comfortable operating the business in that range. Randall also mentioned that we overachieved on asset monetizations this year, and we'll monetize more non-core assets next year as we continue to analyze the merits of all of our businesses. That's our 3-year outlook, but let's look at our 2020 guidance on Slide 13. Let me start by laying out that all these financial projections take into consideration the impact of our investment in HBO Max. We expect revenue to be up low single digits driven by growth from wireless service revenues and strong equipment revenues from the launch of 5G smartphones. This revenue growth represents our best top-line performance in several years and highlights the strong performance across our businesses. We expect the base business will generate EPS of $3.75 to $3.90 per share. When you subtract the $0.15 to $0.20 per share of HBO Max investment, we expect adjusted EPS growth in the $3.60 to $3.70 per share range. Our share retirement program will be a big part of this growth. We also expect consolidated EBITDA margin to be stable with 2019 levels, even with the impact from our HBO Max investment and 5G smartphones being available next year. Helping us keep EBITDA margins stable will be wireless service revenue growth, WarnerMedia synergies, and our cost initiatives. Free cash flow is expected to be in the $28 billion range. It's about the same as this year even with the HBO Max investment. And our dividend payout ratio will be in the 50% range. We'll continue to invest at leadership levels in 2020 with expected gross capital investment in the $20 billion range. And we'll continue to monetize our asset portfolio. We expect $5 billion to $10 billion of asset monetizations in 2020. Let's next walk through the components of our 3-year EPS growth plan on Slide 14. As you can see from the chart, our path to $4.50 to $4.80 a share is clear and achievable. A large part of that expected growth is a result of share retirements. That alone should get us about $0.40 a share. Our enterprise-wide cost-reduction plans and Mexico profitability growth should net us another $0.25. Our remaining WarnerMedia synergies adds another $0.20. We also include about $0.10 of HBO Max investment in 2022. That business should turn profitable after that. The growth plans that we've just outlined for you provide real earnings opportunities. When you combine our dividend yield along with share retirements of more than 3% a year for the next 3 years, that provides a yield of about 8.5% per year. And when you factor in EPS growth, you get a solid double-digit return. I want to reiterate what Randall said earlier. We have a high degree of confidence in delivering on these commitments. We're hitting our marks in 2019 and feel very strongly that we will do it again with this 3-year plan. Randall?

Okay. Thanks, John. And before we get to Q&A, I want to speak to just a couple of additional issues. And if you go to Slide 15, we've listed these. Over the last few years, we have continuously refreshed our Board of Directors. It's been done under the leadership of Matt Rose. He's our Independent Lead Director, Chair of our Nominating Committee. Today, the average tenure of our independent directors is 8 years. And of our 12 independent directors, 10 have joined the Board since 2012. This is the Board that has directed our transformation into a modern media company. And along the way, we've added new directors with the skills and experience to inform and guide our business strategies. That includes 3 directors since 2015 with particularly strong backgrounds in large-scale video distribution, media and entertainment, and digital media. Looking ahead, we have 2 directors retiring in the next 18 months. As a result, we have a natural opportunity to continue our Board refreshment and add additional skill sets that align tightly with the objectives I outlined this morning. In fact, we've been in discussions with some exciting candidates for some time. And in the coming days, following our next regularly scheduled Board meeting, we anticipate adding a new Board member with deep expertise in technology and executing strategic cost initiatives. This new director will be added to the Corporate Development and Finance Committee, which has responsibility for overseeing our cost program and the evaluation of our portfolio. And we'll then add another director in 2020. And finally, there's been a lot of speculation recently concerning my retirement. The Board and I have not yet set any formal plans for my retirement as CEO, but having been in the role for over 11 years, you can rest assured the Board and I have begun detailed planning for when that date arrives. We've spent many years guiding the business to the strong position we have today, and for all the reasons I've described, I believe we're on the threshold of something really remarkable in terms of the next chapter of AT&T's storied history. I have every intention of being here, and I will be here through 2020 to ensure that we hit the objectives we've laid out today: to drive significant growth in EBITDA margins and EPS and to invest in growth areas and to retire all the debt and most of the shares issued in the Time Warner merger. My goal and my strong belief is that this is going to drive significant long-term value for our shareholders. And helping me do this will be my talented colleague, John Stankey, who was recently appointed COO. He has a big job, and his teams are working together to develop their joint plans, and John is continuing to build his leadership teams across all 3 businesses. The Board and I have very high expectations for John. I'm excited for him, and I look forward to seeing him tackle his new responsibilities. Together, we're all about execution and delivering on our 3-year plan. You should also understand that the Board views leadership and CEO succession as one of its most important responsibilities to shareholders. The Board's HR Committee, which is led by Chair Beth Mooney, oversees our talent management program and our succession planning process. Under the HR Committee's leadership, the Board's evaluation of all potential candidates for the CEO position has been underway for some time, and it continues today. Further, whenever my transition as CEO does occur, the Board has already determined that it will separate the Chairman and the CEO positions. This is an exciting time at AT&T for all of our shareholders, customers, partners, employees, and investors. The Board and our entire management team and I place the highest priority on generating value for our shareholders. Following 5-plus years of heavy investment, it's now time to reap the rewards of these investments to deliver some strong returns. We believe that the plan we've taken you through today is going to deliver strong performance across all measures and that it should generate significant value creation in the near and the long term. The strategic transformation we've been working on for several years has enabled this new plan, and we've assembled the best set of capabilities to excel as a modern media company. The objectives we have outlined today have been central to our plans for many months, even before we closed our acquisition of Time Warner. But as you would expect, our thinking has also benefited from robust engagement with our owners, and that includes Elliott Management. And given the shareholder interest in our engagement with the team at Elliott, I'm happy to address that subject very directly here. Over the past several weeks, Matt Rose and I have found our engagement with Elliott to be both constructive as well as helpful. Among other things, Elliott has met with the prospective new director that I mentioned earlier and is enthusiastic about that addition to our Board following our next meeting. These are smart people, and they very much understand the tremendous opportunity we have to create substantial shareholder value. As we move forward in the coming months, the Board and I look forward to continuing our close collaboration with Elliott on strategy, operational initiatives in our portfolio, and to see through the value-enhancing steps that I've laid out today. I'm excited about our strategy, and I'm very excited about this plan. And I want you to know that I'm all in on running this play and seeing us execute it. So I know you have a lot of questions, and so we're going to open it up to Q&A. So Mike, I'll turn it back to you.

Okay. Greg, we are ready to take questions. And can you please give us those Q&A instructions? Thanks.

Congrats on the new plan. So I guess, Randall or John, as we kind of think about this more prescriptive capital allocation plan that you've kind of outlined with respect to dividends and stock buybacks, could you kind of talk about how that wraps around the potential for spectrum acquisition or kind of other opportunities? And especially that dovetails with the kind of commitment to the no-acquisition posture. In the media world in particular, it seems like this is very much becoming a scale game. It would seem that more scale would be better if this is the right strategy. Could you kind of wrap all this together for us in terms of how we kind of get the business developed in the right way while at the same time following through on these commitments for capital allocation? Thanks.

Yes, Dave. This is Randall. I'm going to start, and I'll let John supplement what I say here if there's anything else he wants to add. But what we have given you today is a cash flow forecast and plan, built around operational aspects that would allow us to do the shareholder returns that you heard us talk to today, particularly around EPS accretion and such. To the extent that we need to engage in spectrum acquisitions of some type, and I have to be cautious because we're in a quiet period here. But what I can give you confidence in, and what I'd tell you we now have confidence in, we developed a lot of muscle over the last couple of years on cleaning up the portfolio. And I am very confident that portfolio cleanup and asset dispositions will more than offset anything we need to do in terms of spectrum acquisition. So what we're committed to is this capital allocation, this capital return plan, because we've been investing very aggressively over the last 5 or 6 years to get us to this point. And I just think we're in a very seminal point, Dave, point where now it's time to reap the rewards of what we've been doing. And so drive margin expansion, get the 1% to 2% revenue growth, it's going to generate incredible cash flow. CapEx comes in, in 2020 as you saw in John's numbers and so begin to reward to shareholders these investments that we've been making over the last few years. So bottom line, we're committed to what we've laid out here in terms of capital returns. When we talk about M&A, we've said no major M&A. We like the assets we have. I mean this is really, across the board, a quality, premium set of assets. If we have to do tuck-in acquisitions here and there to supplement capabilities, like you saw the HBO LAG deal that we did Friday, the L.A. - or pardon me, the Latin American HBO property. That's a small acquisition that's immediately accretive, and it just supplements what we're trying to do in Latin America with our HBO Max product. And so you'll see those kind of things. But in terms of big M&A, we have no needs given the assets that we have right now.

Yes, Dave, just to put a numerical perspective. $500 billion balance sheet, finding 1% to 2% a year on a recurring basis is certainly a reasonable goal and something we have high expectations to be able to achieve. From a practical standpoint, we've announced two deals, Puerto Rico and the CME transaction was announced yesterday. They're going to provide about $3 billion in capital just next year, so we have a great head start to the deals that will close next year that will give us more cash, things that we've already gotten done. And you can rest assured we got more of that in process. And then with regard to spectrum, as Randall said, can't comment on the ongoing auction. With regard to the C-band and the other future auctions, certainly we'll be interested. As always, we're interested in fair auctions that provide as much spectrum available to the marketplace and allows all bidders to bid. We think that's going to take some time, particularly with the C-band and the FCC. But certainly, we'd be interested. By the same token, there's a clear expectation we'll pay for it with asset monetizations on this balance sheet, that we have that opportunity to do that.

Thanks for the color, guys. Thanks.

So around video, have we hit the peak of losses in terms of near-term video trends? And how do you think about the impact of AT&T TV launching versus the price increase of AT&T TV Now recently? And it looks like you plan to invest about $1.5 billion to $2 billion in HBO Max in 2020 and about $1 billion a year for the following couple of years. How do you think about this level of investment to drive success in a market that's increasingly full of competitive offers? Thanks.

Phil, this is Randall. John touched on this earlier when he mentioned that the video losses, especially with the satellite product, peaked in the third quarter. During that quarter, we experienced a few significant content blackouts which led to notable subscriber losses. Additionally, we have been addressing some previous promotions impacting our customer base, and we’re nearing the end of that cleanup process. There might be a small amount of this cleanup extending into Q4, but overall, we expect the losses to improve considerably in the fourth quarter and continue to get better into next year. As you consider our product portfolio for the future, you'll see us making pricing adjustments. Next year, our traditional satellite platform will remain strong and continue generating substantial cash flow, contributing over $4 billion annually and totaling $22 billion since we acquired it. Moving into next year, we will focus on the satellite platform and the software platforms, with AT&T TV serving as our standardized software platform. This will be essential for our market strategy, especially when combined with our fiber and broadband products. HBO Max will be the backbone of our video offering as we proceed into next year. We're making significant investments in HBO Max, which, as you noticed, will be our primary focus even in a competitive landscape. I believe the areas we’re focused on aren't as crowded as perceived; we're committed to playing at a high level, starting with HBO, which has a strong market position. Tomorrow, we will unveil our commitment to this brand with more content. I am quite confident that what we’ll present is unique; HBO Max is distinct from Netflix or Disney and will hold a significant position in the market. We are comfortable at the current investment level and believe we can achieve substantial market presence and subscriber growth. We aim to build a business with about 50 million subscribers, and I'm genuinely excited about this opportunity. As we transition into next year, our video product will become more streamlined and straightforward with satellite and software offerings. One major cost initiative involves standardizing our video and software platforms under John Stankey’s direction, which will lead to significant savings over time. Overall, I feel optimistic about the platform, and we anticipate improved numbers as we move forward.

Randall, just to be clear, the 50 million you mentioned, is that current or forecast?

Forecast. That's what we're forecasting, domestic HBO Max over 5 years.

Great, thanks. Maybe two questions. One for John and one for Randall. John, could you give some more detail on the - I guess both the near term and the sort of the longer term 200 basis points of margin improvement? I guess Randall just mentioned that some of it comes from product simplification within the entertainment segment. But can you talk a little bit about how you expect some of those cost initiatives to impact each of the segments? Should we expect continued improvement in wireless margins and in enterprise and WarnerMedia? And then for Randall, I guess with today's announcements, the company has addressed, I'd say, the majority of the issues laid out in the Elliott letter. What I didn't see though is with John Stankey taking on the role of COO, what's the time frame for him to relinquish leadership of the WarnerMedia asset? Thanks.

Thanks, John. I'll address the first question regarding the 200 basis points improvement in margins. We anticipate growth from Mobility, Mexico, and the WarnerMedia cost synergies. Specifically, I see a few key areas for these additional cost synergies. First, we expect significant rewards from product simplification, with Bill and the team collaborating with John and others on this effort. Second, we still have opportunities for savings in general administrative expenses, especially since we finalized the Time Warner deal only six months ago. Finally, there's potential with our video platforms. Standardizing these platforms and integrating their costs, development, and capabilities not only enhances business results but also presents further opportunities. In summary, we are evaluating everything without any sacred cows. For perspective, with approximately $180 billion in revenue and $120 billion in cost of goods sold, we achieve about $60 billion in EBITDA. If we can reduce 1% to 2% of our cost of goods sold annually, that translates to around $1.5 billion to $2 billion. While I’m not setting a specific target, this gives us confidence in achieving the overall $6 billion EBITDA improvement, particularly given the progress in Mexico, Mobility, and improvements across the enterprise.

I would actually just append a little bit into that. We're going to now have Bill Morrow and John Stankey heading up an initiative to take these costs out, that John just gave you the big blocks of what they will go after. These are two process improvement hawks. They are probably as good as it gets anywhere in terms of streamlining process, simplifying process, and taking cost out. And as you look at this plan of the areas that I have the least concern that we will achieve, setting objectives to get cost out, to get 200 basis points of margin expansion, this is probably the area I feel the most comfortable with. And so there's some big target areas in terms of what we go after to take these costs out. This is stuff we do, and we do it really, really well. We all have a lot of experience here. The cost piece, it'll get done. I don't spend a lot of time worrying about that one. In terms of your question on WarnerMedia, when will John Stankey relinquish leadership of WarnerMedia, I don't anticipate he will relinquish leadership in WarnerMedia. It's under his purview of COO. And he's got a big job, and he has been spending a lot of time building his leadership team and getting the right people in the right spots and getting HBO stood up. I would tell you on the WarnerMedia side, I think what he has done over there in terms of building the team that's there, the hires he has made, Bob Greenblatt, you're going to get a full dose of Bob Greenblatt tomorrow, and as he launches the HBO Max product. This is an impressive guy. He's got great media chops, been around, a lot of experience. Ann Sarnoff coming in to run Warner Bros. I mean just a really, really impressive hire. As you think about WarnerMedia, I have no doubt he'll find the right person for that job as well. So feel really good about the team that John's assembling, and I feel really confident about where he's going.

Thanks, guys.

Thank you very much. Good morning. Regarding the buyback, could you provide some details about its timing? I believe you mentioned a plan for 9% of the outstanding shares over a three-year period. How should we expect this to impact Q4 and 2020? Is there a specific figure, like $25 billion or a certain number of shares? What message are you trying to convey here? Additionally, concerning costs, is there an expected timeline for Bill Morrow to finish his evaluation and present his findings to you and the Board, which would then provide us with more detailed insights into the discussed areas? Thank you.

This is John. I will address the share retirement question. Regarding the Time Warner transaction, it involved approximately 1.1 billion shares. If we consider 70%, we're looking at around 750 million shares. That's our intention. While we haven't provided a specific timeline detailing daily, monthly, or quarterly amounts, we are currently working on that process. However, it might be somewhat front-end loaded, or at least front-end loaded in individual years. We are respectful of our commitments to reach the 2.5 range, and we will fulfill that. I want to emphasize that this will not alter our plan, just as we intend to handle this share retirement in line with achieving a ratio of 2 to 2.25 times. We are comfortable operating the business at that level, especially given the current interest rate environment and our cash flow situation. We will ensure this is executed properly. As for the buyback process, we are exploring options including accelerated share repurchases, open market purchases, and other transactional strategies. It's reasonable to assume we will aim to front-end load our efforts and try to achieve more early on. I do not anticipate this process being smooth within the year. Over the next three years, as I expect this plan to succeed, we will see our stock price fluctuate. As the stock price changes, the cost of equity impacts our dividend and we need to continually assess the total investment and decision-making process. Today, our decision-making process is quite clear, and we will keep evaluating that. We are committed to moving forward with these plans. As for the number of shares we might buy in the fourth quarter, there’s nothing to announce yet, but it's fair to say that some share retirements are indeed part of our fourth-quarter plans. On the cost initiative side, we have been undergoing this process for some time. We’ve been in discussions with Bill Morrow, who we wanted because of his expertise and skills. We expect him to quickly begin implementing our plans and we have already identified opportunities that we can start operationalizing soon, many of which will be in place by the end of this year. If you are wondering when these synergies and savings will be reflected in our financial statements, I expect they will be more back-end loaded. Not all benefits will appear in the first year because some investments are needed and time is required to put these plans into action. Within our $20 billion capital budget, we've allocated resources for these system investments. We are confident in our ability to execute these plans. While we will strive to initiate savings from day one, the realization of these will be more back-end loaded compared to our stock retirement program, which could be more front-end loaded.

We'll have certain areas where we can quickly reduce costs. We've pinpointed those areas. Product simplification will take longer since it requires investments. The last time we tackled this was around five years ago, led by Andy Geisse, which resulted in nearly $1 billion in cost savings over a few years. We're at a similar juncture now, and I'm confident we can eliminate significant costs within a two-year timeframe, with some others addressed by 2020. We anticipate proceeding with these plans and will provide an update on our Q4 earnings call. Today marks Bill Morrow's first day, and we want to give him some time to acclimate. As we finalize our plans, we'll update you on the Q4 earnings call regarding their progress.

Thank you. I have a couple of questions. Randall, you've mentioned the focus on simplifying the product to primarily two brands: AT&T TV and HBO Max. How do you plan to manage the rest of your portfolio, considering you have several other streaming brands and HBO? Does your guidance take into account any potential cannibalization across the entire portfolio? John, you've indicated that buybacks might be more heavily front-loaded while EBITDA growth could be more back-end loaded. Can you explain the factors involved in that, particularly regarding partnerships at DIRECTV or financing from Turner and so on? What variables contribute to that guidance? Please highlight those for us.

Thank you, Kannan. Regarding the simplification of our video product and the potential for cannibalization or shifts in our product mix, as we launch our software products, including AT&T TV and our offering for the Korean market early next year, we're confident in their performance. This product is poised to become our primary solution for live streaming, capturing a significant portion of new additions in the coming years. While this will replace our satellite offerings, we view the influx of new subscribers to this product positively for several reasons. It has a lower cost associated with customer setup, allowing us to be more competitive in our pricing. However, with rising content costs, many customers find the current pricing of live streaming products prohibitive. Therefore, we are determined to reshape our video product's cost structure to make it more accessible. Research indicates a strong demand for live streaming options, but current prices are too high. By introducing a more cost-effective product, we can improve margins and attract more customers. As for HBO Max, it will become our subscription video on demand (SVOD) service moving forward, and you'll hear more detailed plans about this tomorrow. I don’t want to take away from what Stankey and his team will share, but HBO Max is set to become the primary SVOD platform for AT&T. In the future, while it won’t be immediate, we anticipate integrating live streaming elements into HBO Max, creating a streamlined offering. Ultimately, we envision having two products: traditional satellite, which will remain for some time, and our streaming service based on the HBO Max platform. More updates will be shared tomorrow night, and I am excited to discuss this further.

Kannan, it's John. Regarding buybacks and EBITDA, our focus will be on acquiring shares at attractive prices while managing cash effectively, and I anticipate this being front-loaded. As for EBITDA, I wouldn't describe it as back-end loaded, as Mobility is currently experiencing growth that will extend into 2020. We expect Mexico to be EBITDA positive in the fourth quarter, which could lead to nearly a $300 million improvement in EBITDA for the year, with expectations for that trend to continue next year. The cost savings from WarnerMedia are already in place through John Stankey and his team, and we anticipate those will grow next year. There are numerous factors driving EBITDA improvement, which will support our standalone EPS guidance. Next year's EBITDA margins may appear flat due to a nearly $2 billion investment in HBO Max, which corresponds to the $0.15 to $0.20 noted in our EPS schedules. We view this investment in a long-term, winning product as crucial to our strategy. While we will see some quick wins from Bill Morrow's cost initiatives, the full impact will unfold over the years. Our EBITDA for next year, factoring in the HBO Max investment, might be flat, but excluding that, we'd see around 1% growth in EBITDA, contributing to the overall growth we're targeting for the next three years. This investment aligns with our long-term decision-making, similar to our acquisition of spectrum and our wireless and fiber build-outs. We believe this is a solid long-term choice.

I want to talk a bit more about wireless here. You've obviously talked a lot about the benefits of the FirstNet investment you flagged, the 50% increase in network capacity through the additional spectrum. You've also expanded your distribution both into the FirstNet or the first responder community as well as in just some new rural markets. And those two things combined, you would assume, are going to start creating some churn benefits because of the network quality, some gross add benefits because of the expanded distribution. And I'm just curious, where are we in terms of starting to see that in your performance? You've obviously had pretty solid phone net adds. Do you think that there's an opportunity for that to keep inflecting? Is that the real driver of the service revenue CAGR you've put out there? Or are there other elements we should be considering as we structure our models as well?

No, thanks for the question. Let me address it this way and ask Randall to assist. First, regarding the increase in service revenue and the overall business performance, the added spectrum capacity and the integration of new technologies like carrier aggregation are crucial, as are the opportunities we have with FirstNet to rapidly equip our towers for 5G and prepare our network for a national rollout next year. These factors form the foundation of our strategy. In terms of our postpaid business, you're correct; we recorded growth in phone and voice in the third quarter, achieving 100,000 adds, which is our best performance in five years. This success is related to the quality and speed of our network and the attractive offers provided by our team. We also experienced another strong quarter in the prepaid sector, and we are on track to secure a significant share of the net adds in the prepaid market, aligning with overall market growth. Our Cricket brand continues to perform well, showing a reduction in churn which will positively impact revenue. We are at a pivotal moment with our reseller operations; previously, we stepped back due to capacity constraints, and our reseller revenue has been flat for the past four quarters. However, with the new capacity from FirstNet, we now have genuine growth opportunities in the reseller space. Additionally, we’re optimistic about the growth in connected devices, IoT, and our 5G+ services, particularly the millimeter wave-based offerings for businesses. These elements will contribute to our service revenue growth. Moreover, customers are increasingly opting for unlimited plans and purchasing quality insurance for their more expensive devices. On the equipment side, particularly regarding 5G handsets, we anticipate capturing measurable market share. While these customer handsets may incur some associated costs, they provide us with opportunities to secure and refresh customer relationships, showcasing our substantial network advantages. Overall, we are optimistic about these factors in the Mobility segment. At the same time, we are focusing on efficiencies and simplifying our product offerings, which will help maintain margin improvement.

Can I ask a quick follow-up? That was helpful. You mentioned the reseller business and putting more emphasis on that because of your capacity improvement. One of the key reseller communities you really haven't addressed is the cable MVNOs. Considering the improvement in your network capacity, are you strategically open to supporting that customer base?

Absolutely.

Yes. We would actually be open to that. So you should assume that, that's something we'd be open to. And not just cable guys, but there are a number of people in the reseller space that are reaching out. And it's just as John said, we got a lot of capacity now in this network, and we're at the point of evolution in this industry where we ask, how do you monetize most efficiently, capacity? And so we're going to look at all those channels.

One last thing, Brett, regarding capacity, I want to clarify that we have added almost 60 megahertz of spectrum nationwide on a base of about 100. This represents a significant increase. Additionally, all the technology advancements, including carrier aggregation and others, have greatly enhanced our throughput capacity. The transition from a 3G network and some of our older 4G infrastructure to a 5G network will also contribute to increased capacity. Thus, we not only have increased capacity from the spectrum; that’s the simplest way to view it, but all the other initiatives the network team is implementing are greatly enhancing our capabilities. This gives us a considerable edge over our competitors and allows us to compete effectively because of this advantage.

Greg, we'll take one last question.

Just curious if you could describe how the team evaluated the value of share buybacks relative to some incremental investments in the operations, for example, accelerating investments in fiber-to-the-home, especially after the subscriber gains that you've highlighted recently in the segment? And then just separately, AT&T has been bundling video with its wireless subscribers in some form for some time. Can you describe the results that you're seeing and how that impacts both customer acquisition and retention?

Mike, this is Randall. As we consider share buybacks and capital expenditures, we plan to invest at a $20 billion level next year, which I believe will be the most aggressive investment in the industry. We have been actively deploying fiber and have reached 20 million locations in a short time. Currently, we are between 20% and 25% penetrated in that area, which we will focus on increasing. This does not mean we will cease fiber deployment, as 5G necessitates ongoing fiber investment, and our business customers have expectations for fiber at their locations. This creates a network of infrastructure that we can further expand. While the pace of our fiber expansion will moderate, it has been unprecedented in the United States. Now, it's time to capitalize on our efforts and penetrate the market more deeply. Regarding video bundles, I find it encouraging that our strongest video offering in conjunction with our mobile business is HBO, particularly concerning its impact on customer churn and retention. The potential to leverage HBO Max and enhance that product is exciting, especially when bundled with our mobile services. This integration will significantly affect churn rates. HBO Max fits well with our video offerings, including DIRECTV and AT&T TV, and it complements our broadband, especially fiber services. We're optimistic about leveraging HBO Max across our footprint. Keep in mind that AT&T has only owned HBO for about eight months, yet in this brief time, we have become the largest distributor of HBO. Our penetration is 62% higher than that of the second-largest distributor, making HBO a powerful platform for bundling with our distribution channels. Transforming HBO into HBO Max makes it even more appealing. Thank you for your question, Mike.

Okay. Greg, that ends our Q&A session.

I want to conclude by thanking everyone for joining the call. This is an ambitious three-year plan that we've dedicated significant time to developing in recent months. I believe it's time to start reaping the benefits of the investments we've made over the past few years. This is an exciting moment for us. The capital allocation plan is promising, and we are thrilled about HBO Max. I'm looking forward to seeing everyone in L.A. tomorrow night for the product preview and to showcase what we have to offer at WarnerMedia. Thank you once again for joining us, and we'll talk tomorrow.