Welcome to the AT&T Second Quarter 2018 Earnings Call.

At this time, all of your participant phone lines are in a listen-only mode.

Later, we'll conduct a question-and-answer session, instructions will be given at that

time.

(Operator Instructions) I would now like to turn the conference over

to our host, Michael Viola, Senior VP, IR.

Please go ahead.

Okay, thanks for Lori and good afternoon, everyone.

Welcome to the second quarter conference call.

As Lori said, I'm Mike Viola, Head of IR, for AT&T.

This is our first call, first earnings call, after we closed our acquisition of Time Warner

and we're broadcasting this call from WarnerMedia headquarters in New York.

So we told you earlier, we are going to use this call not only to discuss the quarter

but we're also going to provide more details on our strategy and to do that, we've brought

together the CEO, CFO and four business leaders of our business units.

Today's agenda is going to begin with John Stephens who will cover AT&T and Time Warner's

second quarter financial results as well as update our outlook and guidance.

Randall will provide our strategic perspective of the business and then each of the business

unit leaders will take (inaudible) will about their second quarter results and give a perspective

of their businesses going forward.

After that, the entire team will be available to participate in the Q&A session.

I'd like to mention one save the date item.

We plan to host sell-side meeting on the evening of November 29 and followed by a buy-side

meeting that next morning on the 30, both will be here in New York and all the folks

on this call will join us for those meeting.

So please mark the calendars and more details to come.

Now before I turn the call over to John, I need to call your attention to our safe harbor

statement.

It says that some of the comments today will be forward looking and as such is subject

to risks, uncertainties.

Results may differ materially.

In addition, information is available on the Investor Relations website.

I will also need to remind you that we're in the quiet period for the FCC CAF-II auction.

So we can't address any questions about that today.

As always, our earnings materials are available on the Investor Relations page of the AT&T

website that includes the new release, 8-K, investor briefing, other associated schedules.

And available on our website are materials on WarnerMedia's full second quarter that

includes trading schedules and other important documents.

And so now I'd like to turn the call over to AT&T's CFO, John Stephens.

Thanks, Mike and hello everyone and thanks for being on the call today.

Let me begin with our financial summary, which is on slide five.

I think most of you know that FASB has been very very busy this past year, implementing

a number of accounting standards five of which have direct impact on AT&T.

Those includes standards that deal with revenue recognition, pension reporting, impacts on

cash flow reporting.

These changes impact our income statements and cash flows at the same time the Company

made a policy decision to record Universal Service Fees net as an offset to our regulatory

fees.

We are working hard to help you understand these changes.

So in addition to the GAAP financial information, we're providing comparable historical results

to help you better understand the impact on financials from revenue recognition and the

policy decisions as well as Time Warner's second quarter results on a historical basis.

We will be referring to these historical results in our comparisons during this call.

Now, let's start with EPS.

We continued to show strong adjusted EPS growth, up more than 15% for both the quarter and

year-to-date.

Tax reform continues to have a positive impact on EPS as does the adoption of revenue recognition.

We also had about $0.02 of help from the 16 days we owned Time Warner, which we have renamed

on WarnerMedia.

The WarnerMedia earnings contribution was slightly more than what you might expect for

such a short period.

But if you know, financial results can be uneven and we saw that in the second quarter.

Consolidated revenue came in at $39 billion, down slightly from a year ago, but that includes

about $900 million of pressure from how we are now accounting for USF fees on a net basis.

When you look on a comparable basis, revenues were up slightly.

That's mostly due to 2 weeks of Time Warner revenues, but also helped by gains in wireless

and AdWorks.

We continue to use our tax reform savings to invest in and grow our customer base.

As John Donovan will discuss these investments help drive postpaid phone growth and significant

year-over-year improvement in prepaid phone net adds, continued growth in consumer broadband

customers even in a seasonally challenging quarter and solid subscriber growth in total

video customers.

Adjusted consolidated operating margins in the quarter were up year-over-year on a reported

basis, but down on a comparable one.

Solid smartphone sales drove some of the pressured margins.

But the biggest factor continues to be customer transition to over-the-top video.

Let's have a look at free cash flow.

It was a strong $5.1 billion for the quarter, up substantially both year-over-year and sequentially.

Year-to-date, our cash from operations and free cash flow is up about $1.5 billion which

makes us very comfortable with our free cash flow guidance for the full year.

Our cash flows also reflect the timing differences between spending 4% and the reimbursements

we received from the organization.

This usually trails spending by several months.

Year-to-date, that comes to more than $100 million of free cash flow pressure.

Capital spending for the quarter was $5.1 billion or $5.4 billion before the $300 million

of FirstNet reimbursements we did receive in the quarter.

Let's now cover financial results from operations beginning on slide 6.

AT&T domestic mobility operations are divided between the business solutions and consumer

wireless segments.

For comparison purposes, we're providing supplemental information for our total US wireless operations.

Our wireless business turned in very good results.

Year-over-year service revenue turned positive.

Margins remained strong.

And we had phone growth in both postpaid and prepaid.

Total revenues were up year-over-year, thanks to gains in both service and equipment revenues.

Also service revenues were up almost 2% sequentially.

Strong sales and BYOD supported that growth.

Our upgrade rate was down year-over-year, but our equipment revenues were up reflecting

customers' purchasing habit and their choice of more expensive devices.

But even with these strong sales, margins were very good with service margins coming

in over 50% on a comparable basis.

Looking ahead, we expect positive service revenue growth for the full year on a comparable

basis.

Turning to our Entertainment Group, we continue to see the impact of the video transition

in our revenues and margins.

This will take a while to work through and we expect it to continue for the rest of the

year.

But we are seeing some sequential stability in both revenues and margins.

We're making changes to drive revenues and effectively manage the transition.

We are getting through some promotional pricing that impacted revenues in the past and we

now have some new features on our next generation platform that will drive additional revenue

opportunities, such as cloud DVR, a more robust VOD experience with new pay-per-view options

and an additional stream capability.

John Donovan is going to walk you through those plans in a few minutes.

Also helping is AdWorks which continues to grow at a double-digit rate and is now an

annualized revenue stream of over $1.8 billion.

Moving to our Business Solutions group, revenues were down as gains in wireless and strategic

business services helped to offset declines in legacy services.

Business wireless had strong growth, up more than 4%, this is driven by both equipment

and service revenues.

Wireline revenues were down more than 4% year-over-year.

We still expect tax reform to produce a lift in communications spend but we just haven't

seen it yet.

Wireline EBITDA margins were up slightly on a comparable basis.

Cost efficiencies continue to offset pressure from legacy products and our investments in

FirstNet.

In our international business solid customer performance helped to offset currency pressures.

Revenues were stable year-over-year, while margins were pressured by World Cup expenses

as well as foreign exchange.

Now let's look at Time Warner second quarter financials on slide seven.

Time Warner had strong growth at all operating divisions on a comparable basis.

This includes strong subscription revenue growth at both Turner and HBO.

Turner also showed solid advertising revenue growth of 3%.

Adjusted operating income was $1.8 billion driven by increases at Warner and HBO.

Now, for some housekeeping items.

With recent FASB accounting rules, the Time Warner merger and purchase price accounting

rules there is going to be a lot of new information included in our results.

We're going to do our best to make that easy for you to understand.

First, we'll file pro formas with the SEC in August.

Second, we have posted the full second quarter results for Time Warner on our Investor Relations

website.

This includes the Time Warner historical results, trending schedules, all the information you

are accustomed to seeing.

Finally as you're updating your models keep in mind the following.

Results will continue to be reported at the divisional level but there are certain things

that will be eliminated in the corporate and other segment, including about $3 billion

of annual inter-company contract revenues and purchase accounting impact on customer

base and deferred production costs.

We're very excited at Time Warner is part of the AT&T family and the WarnerMedia is

part of the AT&T family and John Stankey is going to provide more insights and highlights

in a few minutes.

Now let's look at our 2018 outlook with Time Warner included.

We're raising adjusted earnings per share growth to the upper end of the $3.50 range

with WarnerMedia included.

Year-to-date, we're already seeing 15% growth.

In fact, the tax reform, improving wireless service and advertising revenues as well as

the addition of Time Warner supports strong adjusted EPS growth even with the additional

shares issued as part of the deal.

Looking at free cash flow, our free cash flow guidance at the beginning of the year was

stand-alone.

We expect most of the benefit of the Time Warner free cash flow for last half of the

year about $2 billion will be absorbed by integration and deal costs, including severance

cost, retention centers, legal fees, bankers cost and interest expense prior to close.

When you consider those items, and slightly lower cash capital spending we're raising

expected free cash flow to be upper end of $21 billion range with dividend coverage in

the low 60% range and that's even with the additional shares and dividend responsibility

from the merger with Time Warner.

Now then we are halfway through the year, we also have a better view of CapEx.

Capital investment is expected to be in $25 billion range, but that'll be $22 billion

of CapEx on our cash flow statements after you net out our FirstNet reimbursements and

some of the vendor financing opportunities that our team has pursued.

A primary focus for us this year and the next few years is deleveraging the business.

We have a strong business that generates a ton of cash and EBITDA and we are very confident

in the deleveraging targets that we have given you.

Let me recap them now.

Net debt to EBITDA is projected in the 2.9 times range by the end of this year and in

2.5 range by the end of next year.

To reach that target, we expect EBITDA growth.

We use excess cash to pay down debt and as always, we'll continue to look for ways that

monetize down strategic assets.

You've seen that recently with the data center deal and our pending sale of broadcast 600

spectrum.

We expect to return to historic debt levels in 1.8x range by the end of 2022.

That's the financial summary.

Now I'll turn it over to Randall.

Randall?

Thanks, John, and it was an exciting quarter.

After 600 days of reviews and litigation, we did finally complete the acquisition of

Time Warner and then just a few days later, we announced our agreement to acquire AppNexus.

And if you're not familiar with AppNexus, it's one of the top ad technology companies

around.

And as John mentioned, we renamed Time Warner to WarnerMedia, so we'll be referring to that

as WarnerMedia from here forward.

And as John Stankey will cover later, they had a really strong second quarter.

We couldn't be pleased -- more pleased with the condition Jeff left the Company with this.

We've now assembled the key elements of a modern media company and it all begins with

owning a wide array of premium content because we are absolutely convinced that there is

nothing that drives customer engagement like high quality premium content.

And whether it's Netflix, Amazon, Google, Disney or Comcast, everybody is now pursuing

the same thing.

How do you deliver great media and entertainment experiences to our customers.