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  • Ladies and gentlemen, thank you for standing by.

  • 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.

  • And I think the recent valuations of media companies are reinforcing this point.

  • But we couldn't be any happier with the range and quality of brands that we now own.

  • For live programming, it doesn't get any better than CNN for news and for sports, we have

  • the NBA, March Madness, NFL Sunday Ticket, Major League Baseball and PGA.

  • And for original premium subscription content, there is nobody better than HBO or cable networks

  • and Turner are among the best and they are performance well.

  • And for content creation, our production studio at Warner Brothers is the gold standard and

  • they possess one of the deepest IP libraries around.

  • And when you talk about digital content, we now own the CNN.com digital brads and these

  • are the most visited websites in the world.

  • And I am pleased to report we are media properties and we have what we think are a terrific set

  • of digital assets and bottom line we absolutely love this portfolio.

  • But just owning great content is no longer sufficient.

  • The modern media company must develop extensive direct to consumer relationships.

  • And we think pure a wholesale business models for media companies will be really tough to

  • sustain over time.

  • And when you look across our wireless, pay TV and our broadband businesses, we now have

  • more than 170 million direct to consumer relationships.

  • And these relationships are critical as we begin developing new media experiences for

  • all kinds of different audiences.

  • And the 170 million relationships provides invaluable insights for new advertising models.

  • And that's exactly what's behind our investment in ad technology.

  • Today we use our data insights and we deliver ads on DIRECTV and when we do this, our advertising

  • yields improve by 3 to 5x.

  • And as you are going to hear from Brian Lesser shortly that business grew 16% in the second

  • quarter.

  • Now Turner has an ad inventory that's three times the size of our DIRECTV inventory.

  • And as we acquired the same data to that inventory, we expect a significant lift and AppNexus,

  • that acquisition is all about improving our capabilities and reducing our time to market

  • here.

  • So you take these three elements, premium content, 170 million direct to consumer relationships

  • and great ad technology and then you combine those with our high speed networks and we

  • think all of this is a game changer.

  • Bringing these four elements together has changed the way we think about our customer

  • value proposition.

  • We spend our time now thinking about how to combine these elements to create unique customer

  • experiences.

  • How do we combine the best content wherever you are and make it easy to find and consume,

  • what are the new products that combine content and connectivity, how do we create personalized

  • content experiences, including personalized ads that you find useful.

  • So hopefully you're beginning to see why we're so excited about putting all of these capabilities

  • together.

  • Now we knew the WarnerMedia deal was not going to be like any other we had done.

  • It's a vertical bolt on with the media business and a media business obviously has very distinct

  • culture, talent, and business models.

  • So last fall in anticipation of the merger, we reorganized the Company into four separate

  • businesses and you can see those in the next slide.

  • What we've done is push the core staff functions and the decision making out into the business

  • units and we left behind a very small staff at corporate.

  • And this is all about increasing speed and efficiency at each of these businesses but

  • at the same time we need to foster cross-platform coordination to generate the synergies that

  • John Stankey will be touching on next.

  • Today, we're going to change the earnings call around a little bit as John Stephens

  • pointed out.

  • We're going to give you a chance to hear from each of these business unit leaders and then

  • when they finish we're going to stay on the phone and answer any questions that you have

  • and then John Stankey is going to lead us off.

  • John is the Head of WarnerMedia, then you are going to next hear from John Donovan who

  • heads up AT&T Communications and then Brian Lesser, he is the Head of our Advertising

  • and Analytics business and he's going to walk you through his plans and then finally, you'll

  • hear from Lori Lee who heads up our Latin American businesses and she's going to take

  • you through an update on really the great market momentum that we're experiencing in

  • Mexico and also talk about the latest on our Latin American TV business.

  • So with that, I am now going to hand it over to John Stankey.

  • John?

  • Thanks, Randall.

  • Good afternoon to all of you.

  • I have been on the job now a little bit more than a month that during the time I've had

  • the opportunity to meet with various leadership teams of WarnerMedia and I think it's a surprise

  • what I found is what I believe to be an unmatched dedication to producing unique and engaging

  • content across film, television, sports and journalism.

  • Looking forward to my continued work with this team, and I think we have great opportunities

  • in front of us to further harness the exceptional content and capabilities of WarnerMedia.

  • John gave you the financial highlights of WarnerMedia's second quarter, but let me dig

  • in deeper and you'll see those results on Slide 13.

  • Time Warner's last quarter as a standalone company had strong revenue gains at Turner,

  • HBO and Warner Brothers.

  • Turner saw solid growth with gains in both subscription and advertising revenues.

  • Subscription revenues benefited from higher domestic rates and growth at Turner's international

  • networks.

  • Subscriber counts have been stable, thanks to growth in virtual MVPDs, with three of

  • the top five ad supported cable networks among adults 18 to 49 in Primetime, the Turner networks

  • are proving popular in every video bundle, as evidenced by their inclusion in every major

  • live OTT provider.

  • Turner's sports properties helped drive strong advertising revenue growth in the second quarter

  • led by the NBA on TNT broadcasts.

  • HBO also delivered solid revenue growth in the quarter.

  • Subscriber revenues were up 13% due to strong US subscriber growth and gains in international

  • markets.

  • Higher television revenues helped drive strong revenue growth at Warner Brothers.

  • Warner Brothers TV looks to build on that success with more than 75 TV series in production

  • for the 2018, 2019 season.

  • That is the studio's largest number of TV series in production at one time ever.

  • Here's another good indicator of what kind of quarter and year WarnerMedia has had.

  • WarnerMedia companies HBO, Turner, Warner Brothers, received 166 Emmy nominations which

  • included 22 nominations for HBO's Game of Thrones alone, followed by 21 nominations

  • for Westworld which is produced for HBO by Warner Brothers, a real twofer for us.

  • These nominations speak to the caliber of the talent and dedication to quality across

  • the company.

  • My congratulations go to the entire WarnerMedia team for their exceptional creative achievements.

  • During the roughly six weeks, since we closed the deal on June 14, we've been working strategically

  • to integrate the two companies.

  • That includes client applying the data analytics from AT&T's distribution to Turner ad inventory.

  • As you know this is one of the benefits of combining our two businesses.

  • You've seen the success of the AdWords Group using targeted advertising for DIRECTV and

  • U-verse.

  • Now we have three times the ad inventory to work with.

  • We believe we can get meaningful CPM improvement in what Turner sees today.

  • And Brian Lesser will explain in a few minutes, we expect this is only the beginning of our

  • success.

  • We've also moved quickly to position WarnerMedia content on AT&T distribution platforms.

  • We intend to push the WarnerMedia consumer brands, even further across all platforms.

  • We've been busy with the basic blocking and tackling that comes with any merger integrating

  • corporate and staff functions, getting our infrastructure systems to work together and

  • aligning corporate management.

  • We will look to achieve synergies with our advertising spend and other procurement areas

  • are getting better rates from vendors and suppliers.

  • For example AT&T was not the primary telecom supplier for Time Warner.

  • Now we begin that transition for WarnerMedia.

  • These types of efforts will help us to deliver on the $2.5 billion in merger synergies we

  • promise.

  • While this has been going on, we've been very deliberate in shaping some long term initiatives

  • that we think will add even greater value.

  • We develop proper plans on where we want to go next with WarnerMedia and have several

  • goals that we want to accomplish.

  • First, we want to increase our investment in premium content.

  • HBO's name is synonymous with quality entertainment.

  • The creative talent at HBO is the best in the industry.

  • My goal is to give the HBO team the resources to green light additional projects already

  • in the development funnel.

  • We want to invest more in original content while still retaining the high quality and

  • unique brand position of HBO.

  • This will further strengthen the HBO brand, enhance the customer experience, improve churn

  • and drive more engagement with some of our most valued customers.

  • Second, we plan to further develop and nurture our direct to consumer distribution including

  • HBO NOW.

  • That will include enhancing existing platforms as well as delivering premium content to the

  • more than 170 million direct-to-consumer relationships across AT&T's video, mobile and broadband

  • platforms in the United States and Latin America.

  • We also plan to add even greater value to these relationships by focusing, aggregating

  • and incorporating more WarnerMedia intellectual property.

  • And third, we also are looking at our international markets and exploring ways to maximize our

  • content globally to create greater value.

  • We believe there's a lot of opportunity that remains in this area.

  • Obviously, we're very early in the game when it comes to implementing our plans but we're

  • off to a good start and look to quicken the pace as we move past close.

  • Now, I'd like to turn it over to John Donovan for details on AT&T's Communications second

  • quarter results.

  • John?

  • Thanks John.

  • I'm really excited about WarnerMedia coming into our portfolio, because it strengthens

  • our ability to innovate across our businesses like content with content -- I am sorry, connectivity.

  • So if we discuss if -- AT&T Communications operating results will start on Slide 16.

  • Our Wireless business turned in an impressive quarter.

  • John Stephens told you about the service revenue growth and strong margins but we also had

  • strong subscriber gains and continued our low postpaid phone churn.

  • For the quarter, we added 46,000 postpaid phones.

  • That makes 9 consecutive quarters of year-over-year improvement.

  • We had our best prepaid quarter in 9 quarters with 453,000 prepaid net adds.

  • This includes 356,000 phone net adds.

  • We had a record connected device net add quarter as well, adding 3 million new devices.

  • Churn continues to run at near record low levels.

  • Postpaid phone churn was 0.82% just 3 basis points higher than last year's all-time record.

  • And we had record low prepaid churn, thanks to our multiline plan penetration and auto

  • bill pay.

  • These customer gains and low churn are showing up in our service revenue where we churn positive

  • both sequentially and year-over-year on a comparative basis.

  • With the unlimited launch well behind us and targeted promotional activity, we saw service

  • revenue improve each month in the quarter and we're on track to grow service revenue

  • for the full year on a comparable basis.

  • And we maintain comparable service margins above 50% again this quarter.

  • Moving over to our entertainment group, we continue to see total video subscriber gains

  • as we move through the transition of our video business.

  • We had 80,000 total video net adds in the quarter with gains in DTV NOW and U-verse

  • more than offsetting losses in DIRECTV.

  • We also turned in solid broadband gains.

  • Our entertainment group had 76,000 IP broadband net adds with 23,000 total broadband net adds.

  • That's their seventh consecutive quarter of broadband growth.

  • About 95% of our consumer broadband base is now on our IP broadband as our transition

  • from DSL is drawing to a close.

  • Our fiber build continues at a fast clip now passing more than 9 million customer locations.

  • And we expect that this time next year to reach 14 million locations.

  • This gives us a long runway for broadband growth.

  • We're doing very well in our fiber markets including a 246,000 net increase in subs on

  • our fiber network in the second quarter.

  • Now I'd like to update you on several of the key initiatives we have underway, so we'll

  • turn to Slide 17.

  • Evolving our video portfolio is top priority for us.

  • We believe we are well positioned as our customers move toward a more personalized set of streaming

  • products.

  • Our new platform was launched in May as the DIRECTV NOW user interface and it's now live

  • on all supported device operating systems and it's been well received with strong engagement

  • by customers.

  • It offers a new cloud-based DVR and more robust video-on-demand experience with new pay-per-view

  • options.

  • Over time, it will bring additional advertising and data insight opportunities.

  • This new video platform gives us flexibility to adapt to the market with new offerings

  • and products.

  • Late in the quarter, we added our third video offering called WatchTV, a small package of

  • 30 live channels and 15,000 on-demand titles.

  • We include WatchTV in our unlimited more wireless plans, where you can purchase it for $15 a

  • month, making it perfect for customers who want video but not at the cost of a large

  • factors.

  • This complements DIRECTV NOW, where we continue to see success in attracting cord cutters

  • and cord nevers.

  • And later this year, we will begin testing a premium product extension which is a streaming

  • product that will give the full DIRECTV experience over any broadband, ours or competitors.

  • It will have additional benefits of an improved search and discovery feature and an enhanced

  • user interface.

  • We're excited that this will complement our topend product for those who don't want or

  • can't have a satellite dish.

  • Our Open Video platform also dovetails nicely with our ongoing focus on driving the industry's

  • leading cost structure.

  • The new platform is low touch with lower acquisition cost as streaming services become a bigger

  • part of our business.

  • Digital sales are a cost efficient way of customer engagement and we're seeing double

  • digit growth in our digital sales and service.

  • We're also seeing operating expense savings from our move to a virtualized software defined

  • network.

  • More than 55% of our network functions were virtualized at the end of 2017 and we're well

  • on our way to meet or exceed our goal of 75% virtualize by 2020.

  • These and other cost management initiatives have helped drive 13 straight quarters of

  • cost reductions in our technology and infrastructure group.

  • Finally, I'd like to give an update on our FirstNet build and other network investments.

  • our FirstNet network build is accelerating, we expect to have between 12,000 and 15,000

  • band, 14 sites on air, by the end of this year 2018, and we're ahead of our contractual

  • commitment.

  • And don't forget when we're putting in equipment for FirstNet, we're also deploying our AWS

  • and WCS spectrum utilizing the One Touch One Tower approach.

  • This approach allows all customers access to our improved network.

  • FirstNet also gives us an opportunity to sell to first responders.

  • So far more than 1,500 public safety agencies across 52 states and territories have joined

  • FirstNet, nearly doubling the network's adoption since April.

  • In addition to our efforts with FirstNet, 5G and 5G evolution work continues its development

  • in several different areas that will pave the way to the next generation of higher speeds

  • for our customers.

  • We now have 5 key evolution in more than 140 markets covering nearly 100 million people

  • with theoretical peak speeds of at least 400 megabits per second with plans to cover 400

  • plus markets by the end of this year.

  • Our millimeter wave Mobile 5G trials are also going well and we're on track to launch service

  • in parts of 12 markets by the end of this year.

  • With that, I'll now turn it over to Brian Lesser to discuss our Advertising and Analytics

  • business.

  • Brian?

  • Thank you John, and good afternoon, everyone.

  • As Randall mentioned, a critical component of the modern media company is a dynamic advertising

  • business, one that can deliver on the promise of making advertising relevant, engaging and

  • actually matter to consumers and make it work harder for advertisers and make it more valuable

  • and optimized for publishers.

  • I think about this simply.

  • The course of the Ad industry has been set by a series of defining moments.

  • The rise of broadcast networks, the proliferation of cable networks and the Pay-TV bundle, digital

  • advertising and its ability to target audiences.

  • We sit here again today and yet another point that will define advertising for years to

  • come.

  • The pain points are obvious.

  • Traditional advertising doesn't satisfy what both consumers and brands are looking for.

  • Brands are frustrated with lack of access to data, lack of confidence in targeting and

  • measurement and nontransparent ad tech costs.

  • The industry talks about video convergence but no tangible examples yet have emerged

  • to deliver a unified buy-side and sell-side platform.

  • So while the timing for disrupting the ad industry is right, you must have the assets

  • to execute.

  • And there is no doubt that AT&T is uniquely positioned to lead this disruption.

  • In our view, successful ad marketplaces must have 4 key assets.

  • Number one, it's premium content, sports, news, original programming, we love our position

  • with Turner content along with the scale portfolio of ad inventory.

  • Number two is distribution.

  • Customers dictate how and where they consume content.

  • Likewise, a relevant ad marketplace must be able to reach customers where they are, whether

  • it's a 50 foot screen in a theater or a three inch screen in your pocket.

  • Number three is data, AT&T has access to expansive data sets on costumer behavior and preferences.

  • 170 million direct-to-consumer relationships across its wireless, video and broadband businesses.

  • 40 million set top boxes, 20 million connected cars and that's just for starters.

  • But data needs to be activated to have value.

  • We're building targeting and measurement capabilities that will bring greater value to consumers,

  • advertisers and publishers.

  • And number four is technology.

  • Content distribution and data must be integrated on a best-in-class ad technology platform.

  • That's the rationale for our recent announcement to acquire AppNexus.

  • This is the best-in-class independent advertising marketplace supported by the best talent in

  • the industry.

  • We cannot wait to combine our teams and partner to make advertising matter to consumers.

  • It is important to note, we're not starting from a standstill.

  • With the AT&T advertising analytics and Turner have executed fabulously by using data and

  • technology to fuel growth.

  • AT&T advertising analytics is consistently delivering double digit revenue growth, including

  • 16% growth in the second quarter.

  • We will employ the same momentum and scale to deliver on our vision.

  • So in closing, our plan is nothing short of leading the industry in creating a premium

  • advertising marketplace across both TV and digital, by quickly integrating AT&T assets

  • including AppNexus.

  • It's this unique moment in time coupled with this unique set of assets, that gives me confidence

  • in our path forward.

  • With that, I will hand it over to Lori Lee to talk about our Latin American operations.

  • Thank you, Brian.

  • The advertising opportunities that Brian laid out apply to Latin America as well.

  • We have more than 30 million direct-to-consumer relationships and we plan to run the same

  • place with the LatAm business that we will be using in the United States.

  • It won't happen overnight, but the opportunity is definitely there.

  • When we discuss our second quarter results, those details are on Slide 21.

  • Starting with our Mexico wireless operations, we turned in another strong subscriber quarter

  • with more than 750,000 net ads.

  • That totals more than 3 million new customer in the past 12 months, doubling our subscriber

  • base to 16.4 million since entering Mexico just three years ago.

  • During that time, we've built a world-class LTE network and developed a marketing presence

  • reflecting the AT&T brand.

  • Our network build is in the final stages as we close in uncovering 100 million people.

  • We've rebranded 3,000 stores and have approximately 6,000 total retail locations, expanding our

  • marketing presence in distribution and we've upgraded and integrated our different billing

  • system.

  • All this puts us in a great position to add customers and revenues at a lower cost.

  • We're also making a lot of progress in improving our financials.

  • Operationally, we're pushing on all fronts to exit the year EBITDA positive.

  • In our Vrio Pay-TV business, currency devaluation have impacted our financial results, but the

  • strength of our subscriber base and our profitability remains consistent.

  • That continue to be true in the second quarter.

  • The World Cup drove strong subscriber growth of 140,000 with particularly strong gains

  • in prepaid.

  • We finished the quarter with 13.7 million Pay-TV subscribers, a number that has held

  • fairly steady since we acquired the business.

  • The World Cup did drive higher expenses in the quarter, but we continue to drive profitability

  • and positive free cash flow year-to-date.

  • Now I'll turn it back to Mike for Q&A.

  • Okay, thanks Lori.

  • Operator, we are ready to take questions.

  • Our first question is from John Hodulik, UBS.

  • I think I'm going to bounce around a little bit.

  • But maybe first for John Donovan, the wireless business, looks

  • like EBITDA was down about 0.7%, I think on a like-for-like basis.

  • But obviously you returned to growth in subscribers and some margin improvement.

  • Should we be expecting that segment -- you say your biggest to return to EBITDA growth

  • as we look forward?

  • And then maybe one for Brian and then and then for John Stankey.

  • Brian, we've heard a lot about addressable advertising, 3% percent growth this quarter

  • on the advertising line.

  • What are some of the milestones that we should expect and maybe the timing on when this addressable

  • advertising opportunity starts to take hold within these numbers?

  • And then lastly, John Stankey, obviously you've got some press recently in terms of the interview

  • you did about the new WarnerMedia.

  • Could you talk a little bit about the size of that HBO spend.

  • I think the HBO spend about $2 billion, you are competing with companies that spend $8

  • billion a year, much bigger numbers.

  • I mean how should we think of that in terms of the overall financial profile of the company?

  • And maybe if you could elaborate on the other B2C efforts you may have.

  • I think we've heard about the DC Universe and HBO NOW, but if there's any other sort

  • of initiatives we should be looking for?

  • Thanks.

  • Hey John, It's John and I'll start with the question wireless and EBITDA.

  • We've had now three quarters in a row where our year-over-year comparison on subscriber

  • growth was very good.

  • We crossed over that all important date where we got a lot of the reseller stuff behind

  • us and we've crossed over the date for the unlimited plans and you've seen a lot of momentum

  • in pre-paid which has really become a really nice business for us right now.

  • We're in a really good rhythm there, firing on all cylinders.

  • And so, what we're seeing right now in this quarter, John mentioned in his opening remarks

  • that we were stronger each month of the quarter within the quarter.

  • We're starting to see us roll over some of those earlier events and now we're beginning

  • to get strengthen.

  • And so because we -- in each month of this quarter strengthen subscriber accounts, we

  • also have had some pricing moves, calibration of pricing if you will, that made us consistent

  • with our value proposition in the marketplace.

  • So we expect that we'll have growth for the year and the EBITDA margins to improve.

  • John, I'll take the next part of your question.

  • This is Brian Lesser.

  • So you asked about milestones in the advertising business.

  • I think it's important to know that we have close to a $2 billion advertising business

  • outside of what we just acquired in Turner and that advertising business was growing

  • 15% in the second quarter.

  • So we're already showing the value of data and technology on our advertising business.

  • I think in terms of going forward, you should look for some things that we've already mentioned

  • here in this call.

  • Number one; our ability to increase the yield on the inventory that we have now within Turner

  • and WarnerMedia more broadly, and also increased value to the firm but also value to publishers,

  • advertisers and the consumers.

  • You'll see us to continue to develop the ad platform AppNexus.

  • Once we close that deal it's an important milestone for us, But you'll have to have

  • to lean in and develop additional technologies around that platform.

  • And then third is, our ability to partner with other media companies outside of AT&T.

  • In some ways, our success will depend on our ability to attract additional sources of inventory

  • to reach critical mass for advertisers.

  • So John, let me just amplify the last piece that Brian gave.

  • Data that we've had within the AT&T Company applying to AdWorks has already been moved

  • over into the Turner team to begin applying into existing inventory that we have using

  • the same techniques were piloted in selling the two minutes of advertising that the AT&T

  • team has across the broader inventory of Turner.

  • So that's near-term.

  • That's not a milestone issue, that's today, we're starting to look at those business cases

  • and how we would do that.

  • The teams have already come up with a variety of different initiatives around that including

  • -- we've found out that Brian had a great opportunity to do addressable advertising

  • in the pharmaceutical space and some of the pharmaceutical companies wanted 90 second

  • avails (0:06:55) and he didn't have 90 seconds of inventory.

  • So we're bridging Turner inventory with what used to be the AT&T inventory so that we can

  • have new addressable products to bring in.

  • So that there is benefit to that data that is occurring now even without the broad mechanization

  • and intelligence and platform work that Brian brought to the table that he just discussed.

  • So on direct-to-consumer, what I will tell you is what we know about this space is, it

  • requires scale and you mentioned that there is a number of different initiatives underway

  • within the WarnerMedia companies and they're all good within their own right, but they

  • all generate what I would consider to be relatively small scaled audiences.

  • A company our size, we want to be generating audiences in the tens of millions, not in

  • the single digits millions.

  • And so, the way I would think about our direct-to-consumer efforts over time is it's better together.

  • So lot of very strong brands in the family to generate interest among groups of audiences.

  • And on a standalone basis, they're not as powerful as they are when they're brought

  • together and you can assemble the genre of content and bring them together on one platform,

  • a one experience with aggregates and get scale.

  • So over time, what you should think about how we're going to approach the discrete brands

  • that we have is ultimately unify them in a more consistent and more focused experience

  • that starts to bring some scale in.

  • Still very important properties.

  • They still need to be developed.

  • We've got to get the formula right for them, but over time, we want the strength of them

  • to come together.

  • In terms of your reference to the new cycles on HBO, it wasn't an interview, I think it

  • was internal discussion that was (inaudible) but I would tell you I don't believe that

  • it effectively characterize what we are about.

  • What we are about, as I said is, we have a tremendous amount of great projects already

  • in the funnel that as the HBO team and Richard would describe it, they have not been in a

  • position to say yes to, because of constraints on certain resources.

  • And what we're attempting to do is open up those constraints on very high top quality

  • projects that we think will balance out the schedule so that we have a more engaging experience

  • with HBO throughout the course of the year that will improve the fact that we can see

  • especially on the digital platforms, we have customers jumping in and out based on scheduling.

  • If we can smooth that schedule, we can drive churn down or improved retention and our additional

  • subscriber growth.

  • So I'm not going to give you the exact investment number, but the way I would think about it

  • is, we will make decisions to reinvest some of the efficiencies that we pick up from combining

  • these companies together and aligning them in a little different fashion.

  • We may give back a margin point or so in the near term as we grow the subscriber base as

  • we reinvest in it, but it's going to be a very responsible investment and great projects

  • that we've already scooped out, we already have rights for, we want to get into the development

  • funnel and the team feels very, very comfortable that we can flex up on our development in

  • a way that we think rounds up the schedule very nicely.

  • John, this is Randall.

  • Well, this merger is different in terms that it's a vertical merger.

  • There are certain aspects to the playbook that you just heard John describe, that are

  • being exactly the same and that it generates synergies, and then reinvest a significant

  • portion of those synergies back into your capabilities and your product, direct-to-consumer

  • and deeper HBO content.

  • It's just part of parcel to that and that's little

  • different to what we've done in the past and you should probably expect to see it happen

  • here as well.

  • And we go to Simon Flannery with Morgan Stanley.

  • Please go ahead.

  • For John Stephens, John in the past you'd given some guidance with DIRECTV on the medium

  • term on EPS.

  • Can you give us any color about the benefit of Time Warner or WarnerMedia in a full year

  • in 2019, how should we be thinking about that, given the upside to guidance this year?

  • And then on the balance sheet, what are you assuming in terms of getting to 2.5% around

  • additional divestitures and about things like Spectrum acquisitions or is that just run

  • rate with what you have right now?

  • Thanks A couple of things Simon, thanks for the question.

  • First of all, on beginning to -- on the 2.5 times by the end of next year, that's driven

  • mainly by run rate with regard to cash flows, taking the cash flows above the dividends

  • and paying down debt.

  • Secondly, it is important to achieve the synergies, particularly the EBITDA boosting synergies

  • and the growth that we're seeing and some of the growth that we're seeing in wireless

  • and customer additions, so that we get a higher EBITDA number.

  • While we have, normally, plans for asset sale and constantly look at underutilized assets

  • for monetization; for example, the data centers, the broadcast spectrum 600, which is couple

  • of billion dollars right there that we have under contract and waiting for approvals today.

  • We'll continue to do that.

  • If you want to give us scope to it, as of today we have about a $500 billion in total

  • assets and so finding a few more opportunities to monetize asset seems to be very reasonable

  • on top of the things that we've commonly done with regard to the real estate and other underutilized

  • business and spectrum.

  • So that batch, I'm not giving you a specific number on asset sales, but as we've proven

  • this year we're going to continue to do that.

  • With regard to EPS guidance specifically around the acquisition of -- say it this way, first

  • and foremost, the point is, is that WarnerMedia, Time Warner WarnerMedia is nearly accretive;

  • revenues, free cash flow, EPS.

  • We've seen it already, so that guidance that we've given, we'd expect that we're standing

  • by that and continue to expect that and have started to prove that out already.

  • Secondly, we're not going to give a specific guidance with regard to Time Warner's impact,

  • but I'd suggest in this way, if you think about $3.50 EPS range for offset means $3.40

  • and $3.60, and we've just said that we expect to be the high end of that range.

  • So that I'll give you an indication of using your own estimates, others estimates where

  • we were what we expected to be for the rest of the year.

  • I will point out that the $0.02 we've got in the second quarter or two weeks was, as

  • I said, uneven and specifically because the NBA contract for playoffs.

  • All that content was extended before we merged and the Golden State Warriors won the championship

  • on June 8, so that context expense was recognized before relative deals, so we have some higher

  • profitability in those 16 days you might otherwise expect.

  • But I'd expect profitability to continue, no matter what.

  • We will give specific EPS guidance for 2019 in the coming months.

  • I would just suggest that we are continue to expect this transaction to be accretive

  • revenue free cash flow and EPS.

  • We go to Phil Cusick, JPMorgan.

  • Please proceed.

  • One for Brian, can you talk about really what has to be done here to realize the addressable

  • attrition?

  • And what's the timing of this coming through to accelerate the numbers and start to be

  • really material on the Company?

  • Can this impact 2019 or are we really talking about 2020?

  • And how do you see the potential to reduce the ad load while you raise CPMs?

  • Thanks for the question Phil.

  • In terms of timing, as John Stankey outlined, there are some things that we can do immediately

  • to start to add value to Turner add inventory and that's already in motion and so if we

  • think there are short term value there in 2018, I would say, in terms of the overall

  • addressable opportunity, that's a little bit further out.

  • We have work to do in terms of building the technology platform.

  • But the good news there is because of the amount of inventories that exist within DIRECTV,

  • also within WarnerMedia, we can prove out the value of AT&T data and the investments

  • that we're making in technology plus the evolution of our direct to consumer relationship that

  • John Donovan talked about.

  • So I think (inaudible) to really start to extract value from inside AT&T using our inventory

  • across DIRECTV and WarnerMedia in 2018.

  • And then in 2019, we're going to partner very effectively across other sources of inventory

  • to bring value.

  • Phil, it's John Stankey, if I could add to that.

  • I mean, I want to point out Brian humbly here in the sense, we're starting to get 16% revenue

  • growth on those ads DIRECTV viewers footprint and that possibility those ads watched by

  • the same people who once watched the Turner ads.

  • So we've got proof that this works.

  • Secondly, when the AppNexus deal closes, we'll have the ability to take our internal activity

  • and put it on that supply-side platform that will be within our control, so we are optimistic

  • about the opportunities to get value out of the AppNexus's platform.

  • We've got DOJ approval for it, and we're waiting to get some Otter country proof and hope to

  • close it before the next time we speak, certainly but I'm optimistic about that too.

  • So Brain has a got a lot of things going and heading in the right direction.

  • And in terms of the outlook?

  • And in terms of the outlook, so our objective Phil, is not just to improve advertising as

  • it exists today, but to also improve the experience for consumers.

  • We're in a unique position to do that because of our vertical integration, because we have

  • content and we have that direct-to-consumer relationship over a traditional television

  • and over a mobile phone, over other mobile devices.

  • We can start to do things in terms of innovating the ad experience.

  • As an example, you will see us start to introduce products across the rest of this year and

  • obviously into the next year, where the consumer watching television has a better experience

  • that is less interruptive.

  • Imagine a DIRECTV customer watching the big screen on their living room wall and instead

  • of seeing a traditional ad break, they see an icon on a car in a movie that they're interested

  • in or in a show that they're interested in, and then we have the ability to create a seamless

  • ad experience on their mobile device, which is on the coffee table or in their pocket

  • Pause real time content to interact with a better ad experience and therefore deliver

  • more relevant content to our customer and to the consumer more broadly.

  • That has the ability, number one, to be a better experience for our customers and consumers,

  • a better business for us because those ad units will generate a higher CPM and a higher

  • yield and a better experience for advertisers and the media company representing the content.

  • So that's really our objective, is to start to innovate because of our access to data

  • technology and the direct-to-customer relationship.

  • Phil I would just comment this notion of more innovative ad formats is critical, it's not

  • just lighter ad load, well that's important and we'd like to achieve it.

  • I think what we all understand is that viewing habits are moving away, in many instances,

  • from the linear feed.

  • And so, my goal working with distributors such as my partner here at the table, who

  • is a large distributor of my product is just also start to take these better software-driven

  • platforms that they have and lay out more on-demand content for them, that allows for

  • what used to be liner content to be available and stacked in other formats.

  • And then, attached to that, the right kind of advertising that isn't loading that on-demand

  • content with the same commercial loads but is also highly targeted and customized to

  • the particular experience that the individuals going through.

  • We saw how mobilizing and moving to the TV everywhere raised consumption of the traditional

  • linear fare.

  • I think we have another opportunity to take a fairly mature Pay-Tv product and extend

  • the runway even further by being more aggressive and trying to incent the distributors to carry

  • more depth in library.

  • We go to John Janedis with Jefferies.

  • One for John Stankey, maybe a follow up on HBO.

  • As you know, domestic subs have been in the $30 million or maybe $35-million-or-so range

  • over the past few years and you've talked about the content investment fund.

  • Will there be a more aggressive direct-to-consumer push that perhaps would include maybe a Turner

  • bundle or maybe a change to more wholesale deals with existing distributors?

  • And is there any consideration to reset the price which has largely remained steady as

  • many of your peers have been more promotional?

  • Thank you.

  • So, I would tell you that our wholesale distributors remain a really important part of our product

  • and we want to make the product better to improve its performance for their businesses

  • as well as the HBO brand overall and as I indicated, we'd like to, for example, improve

  • our turn characteristics like getting a more complete annual schedule that has people fully

  • incented to stand the product and not jump in and out of it as various content comes

  • and goes through course of the year and we think we've got some good steps that we can

  • take in that regard that will help our sub-counts to continue to grow through our traditional

  • distribution channel.

  • I do believe that as we invest in the platform itself, the direct-to-consumer platform and

  • improve some of the technical capabilities associated with it, that our features that

  • can be brought to bear in a typical OTT SVOD environment that we can also increase the

  • distribution of the digital versions of the product that they go direct on retail.

  • And so we want to run that play as well.

  • I will tell you that I don't think that's a -- what I would call right now a step function

  • change over the next couple months, but we can incrementally get better on our current

  • run rates by having some success in that regard.

  • In terms of what other content can be paired with HBO and maybe a more broad offer, I think

  • we have a number of distributors out there that have some great ideas around how they

  • might want to match HBO as a very particular content offerings.

  • And as I've said, I want to look at the depth of our WarnerMedia offerings that we have

  • and get better together and understand how we can bring some of our WarnerMedia brands

  • and our other curated options into a more focused direct-to-consumer strategy that I

  • think as we start to get our strategy together on that, move forward on it, you could see

  • that step function increase in more retailer oriented customers.

  • And we go to Brett Feldman with Goldman Sachs.

  • Please go ahead.

  • One of the stronger trends we saw in this quarter was a nice improvement in postpaid

  • phone ARPU and actually some of your peers we've seen something similar so far this quarter.

  • Also, if we look at the market and we look at some of the pricing moves you've made and

  • others have made, there's an introduction of higher price points?

  • It's not only price increases but it's really just if you pay more, you'll get more.

  • So I was hoping maybe you could just expand in terms of what your customers are asking

  • for, why you've identified a cohort that is showing a willingness to pay more for more

  • and how durable you think this trend might be?

  • Yes, Brett, you've been obviously watching our commercials.

  • That whole ideas and more and so what we're trying to do is differentiate the product

  • in ways that don't have to do with speeds, megabytes or rack rate pricing and so what

  • we're really focused on is product engagement.

  • The value of any customer will be based on the combination of price and the value that

  • they used for.

  • And that's why I would say, from a consumer perspective, our strength in consumer has

  • been heavily in the bundling of video with wireless.

  • So we see increased engagement where we're finding that people find a lot of value for

  • it.

  • And then, we're kind of spreading the offers to fit budgets and engagement and so you've

  • seen that in wireless and I would point out to you that that pattern may look familiar

  • in video, that we're trying to find various price points, engagements and content combinations

  • that fit everybody's budget so that everybody views that they're getting value and they

  • do that not just by focused on megabytes and pricing.

  • So I think that it's not an accidental trend that we stumbled onto.

  • It was actually a strategy that centered on that DIRECTV merger that we were pushing in

  • and that fits very well with this next step with WarnerMedia and our sister over there

  • provides us a lot of flexibility.

  • So I do think it's a trend, I do think that if we succeed when we succeed, others will

  • follow and make some of the moves in their own and I think that right now we see the

  • most important thing which was an engagement in customer delight for the product improving

  • and that, to us, translates to value and we're going to price to value, and so I think the

  • industry will continue hopefully to take -- to look at that and we rationalize the result

  • of that.

  • So we're going to continue down this path more of it rather than less of it and expect

  • it to be successful.

  • A quick follow up, if you don't mind.

  • Obviously the plans, it include lot of content tend to be at the higher prices and you clearly

  • see that helps ARPU, are you seeing that they're also helping churn?

  • Yes, if you look at the churn this year was again 3 bps up over but I think that compared

  • to the industry we did really well; compared to seasonality, we did really well and the

  • number that we're comparing to last year was our all-time low.

  • So I do think that it's a strategy that's working for consumers and therefore working

  • for us and that is the currency that we're after there, because you could start to trade

  • some things that customers' value higher than the ARPU differential.

  • So we are carefully managing this portfolio.

  • Same strategy on wireless and in video.

  • We'll go to David Barden with Bank of America Merrill Lynch.

  • Randall, I guess my first question would be; as a telco

  • guy, the media industry is definite not my wheelhouse yet, but if I'm watching what's

  • happening out there, we've got Fox deciding that they're not big enough to be a competitor

  • in the media industry, so they're selling.

  • And we've got two large competitors in Comcast and Disney who feel in order to be competitive

  • with the Netflix's and Google's of the world, they need to get even bigger.

  • And so I guess my question for you is kind of how comfortable do you feel with the scale

  • that you have now in the content business and are you on the cusp of having a global

  • strategy that's going to kind of try to compete with those other larger content houses, that'd

  • be my first one, if I could.

  • And then the second one John will be for you.

  • We've been hearing a lot about the directionality of the deal about how we take the information

  • from your side of the business.

  • We bring it over to Brian and let him crunch through it and sell it into Turner.

  • But as you sit there and look at what WarnerMedia, could mean to your business, the broadband

  • business, the mobile business, even the business-business, kind of what do you see as the opportunities?

  • And if you could give us some examples, it will be super helpful.

  • Thanks.

  • Hi David, this is Randall.

  • I'll go first and I'll hand it over to John Donovan.

  • You said John, it's just not very descriptive (multiple speakers) but I'll directed that

  • to John Donovan when I'm finished.

  • In terms of what you're seeing happened in the landscape, the media landscape, it's fascinating

  • to us.

  • We expected some time back, this is exactly what you would see happening, that you would

  • begin to see media companies consolidate and people would see the importance of scale and

  • changing models, changing distribution models and so forth.

  • And so it's hard to imagine, but it was back in 2016, when we actually did this deal and

  • so it was early in 2016 when we were asking ourselves if you believe that's going to happen,

  • if you believe that your networks are going to be able to distribute seamlessly premium

  • content, if you believe that your information in your distribution business is really valuable,

  • it can drive different advertising models, then you probably ought to move fast and own

  • media and as we've look at a scan of what opportunities are out there that Time Warner

  • jumped out.

  • It's just the obvious choice.

  • It was the one scale player that had a great scale distribution platform, it had great

  • scale in terms of advertising inventory and cable networks, it had the scale position

  • in terms of content creation with Warner Brothers and it was just the obvious partner for us

  • and everything else was a distant second.

  • And so from the -- to answer your question directly, we feel really good about what we

  • have.

  • And then you add to it the digital properties and CNN being off the charts, great digital

  • property, you fit all the CNN and digital properties together, they are the most accessed

  • digital news sites in the world.

  • And so putting all this capability data, AdTech and so forth together within the media company,

  • we think is a really, really great combination and we could not be happier that we moved

  • first.

  • I think moving first, you rarely forget you rarely regret it, when you see an industry

  • trend happen.

  • So we saw this one happen, we were first and we think we got the best business that was

  • on the -- that was actually in the media space.

  • So we feel really good about it.

  • JD, you want to talk about integration of content?

  • Sure, thanks.

  • So Dave, we had 600 days to think about this and when you form your synergies, you deal

  • with some of the straightforward things that John Stankey talked about.

  • But we, over the last year or so, as we started to put wireless and video together and saw

  • the trend I talk about earlier start to manifest, we are learning as an integrated carrier cycle

  • -- I circle back and say when we bought DIRECTV, remember we talked about bundling up and what

  • lot of skepticism about the value of bundling up versus it being just a price discount,

  • and I got to tell you, you start to look at the economics of churn reduction and you start

  • to learn how these currencies pass back and forth, you see the same opportunities here.

  • You see -- because the killer app right now on broadband and on wireless is video.

  • So as you start to look at what customer's place value on and you move from buying and

  • reselling or worse, being completely out of that market and you go to owner's economics,

  • we really have always had a good sense of what customers are using and doing on our

  • network.

  • So to be able to value that into pricing and start to trade off these currencies that we

  • learned over the last three years of how do you trade off an acquisition dollar for a

  • dollar of content?

  • How do you tradeoff a customer install cost versus the churn reduction?

  • We've got some solid muscle now to know how those economics move around.

  • So we are really thrilled about what the content business can mean for us in simple ways.

  • Store traffic, one of our wireless strengths is that our close rates in stores are up.

  • We want more traffic in the store.

  • If we have a technical release from the studio, we can find a way to integrate in the stores

  • and drive traffic, we found a synergy.

  • So, basic things that video does like drive traffic and hours of consumption become assets

  • for us to acquire value in ARPU and retain customers and we really are getting our strides

  • to figure out how to move those currencies across franchises.

  • So we're really thrilled about what this can do for broadband and for mobility.

  • David, let me just -- so just, I want to flip your first question around slightly, I don't

  • worry about scale and content.

  • I mentioned at the outset of this discussion that we're going to do 70 TV shows for the

  • industry this year out of Warner Brothers, didn't even talk about what the incremental

  • number of series will be coming out of HBO, which is very unique, high-value, premium

  • content that's targeted.

  • Our ability as a Company to do decide to produce content at scale that matters is probably

  • second to none in the industry and that's at a rate that I'm not sure others operate

  • at or are just coming close to that.

  • I think the race is on for stealing customer bases, not scale on media content.

  • We're in a good shape on our ability to scale media content and we start with our 170 million

  • customer relationships in that race to have at-scale customer base to sell to.

  • So I don't worry about that dynamic.

  • You know and to add to Stankey's comment, the 170 million add to it, what John has over

  • in WarnerMedia, when we talked about cnn.com being the most frequented news site in the

  • world.

  • You put cnn.com, the Otter Media, Bleacher Reports together, there's another I believe

  • almost 200 million monthly users, unique monthly users on each of those sites and so this is

  • already a big scale direct-to-consumer business and so now what can you do with HBO on some

  • of the Warner content in terms of taking it directly to the consumer as well that add

  • the owners' economics that John Donovan just spoke of and the ability to have owner's economics

  • moving across these platforms, pretty exciting.

  • And we go to Mike McCormack, Guggenheim Securities.

  • John Donovan, just maybe some questions regarding entertainment margins, some puts and takes

  • as we think about the second half.

  • Obviously we had some NFL cost are going to uptick.

  • But what should we be thinking about a sustainability in that sort of 24% type of range?

  • And then, secondly I guess question -- I guess just for actually maybe John Donovan and John

  • Stankey, just thinking about the WatchTV product, I guess firstly, any sort of early takeaways

  • from that product, how successful it is?

  • And then also, can you use that as a model for more integration with the Time Warner

  • or WarnerMedia assets and how far can you take that without risking legacy linear distribution

  • revenue?

  • Thanks.

  • Yes, thanks Mike.

  • A lot of questions nested in there, I'll try to be brief and have you ask follow ups if

  • I miss anything.

  • If you start with the video margins, you see this the beginning of the evolution of our

  • products that we're trying to get them, as I mentioned earlier, into affordability slots

  • where you get high engagement and therefore high value for the money.

  • One of the things that is not well a published as you think about these, they have stream

  • count differentials.

  • So they fit into different viewing pattern.

  • So WatchTV, that's a single stream product.

  • The DIRECTV NOW having two with pay up to three.

  • Obviously the linear TV products the satellite delivered and what we are going to be coming

  • out with here in beta next quarter in the early stages which is a broadband delivered

  • version of it.

  • Now all of a sudden you have a whole series of price points.

  • And so, you saw at the beginning of what we're doing to reshape DIRECTV NOW.

  • DIRECTV NOW is a placed order in the market until the deal was finished.

  • A placed order in the market that products try to do too much and too little.

  • So we try to stretch it down on price, we try to stretch it up in value, but overtime

  • we think that there will need to hit various price points and get the right package bundled

  • in there so customers find value for it.

  • So you saw the first moves that we added, vertical capabilities on top of it, a third

  • stream and when we got Cloud DVR and enhanced the product we put the price into the market

  • rate for that price.

  • So we've seen DIRECTV NOW, we just had a very strong quarter of DIRECTV NOW ads.

  • So a highlight for you that when you net all of this drama out for a minute on sub-counts

  • and we start there, we were at 25 million subscribers when we bought DIRECTV, we're

  • at 25 million subscribers now.

  • The customers we lost in cord nevers and cord cutters we've replaced with products that

  • fit their affordability range.

  • We watched cannibalization closely roughly 15% to 17% on every given -- in any given

  • month is the cannibalization rate.

  • But one-third of those are listed in our linear TV product as very likely to churn, because

  • of their engagement and with the cost of that.

  • So we are watching that very closely we're slotting these products into affordability

  • and engagement range where we get the value of it and I'll point out to you how we procure

  • content and watch TV if there's a variable nature to its cost?

  • It is profitable and reasonably comparable to the traditional margins of the business

  • on a percentage of revenue basis and so the real question that we're learning as we go

  • once we get out of linear TV and get into open video which is software based TV, how

  • much does the category grow because we're getting cord nevers, cord cutters but also

  • we're getting redundant accounts where it's becoming a personal video product where a

  • team with a more personalized approach can build a playlist and stack their favorites

  • in a way that it becomes a one Stream product; that is the playlist will behave much like

  • music.

  • So when you start to look at addressable markets, you look at the ARPU available, the margins

  • and then you add the owners economics which is Brian Lesser getting higher CPMs and John

  • Stanky having owners economics on a portion of that video cost, now these margin start

  • to blend up into much higher territory.

  • So we'd look very closely at the blended margin and the movement between these ROMs all while

  • keeping an eye to make sure our subscriber counts keep us at that 25% to 30% share player

  • in the marketplace.

  • And so that's how we're thinking about the strategies and the margins and last thing

  • I'll point out, is that on those lower end products on a revenue basis, I'll remind you

  • that the acquisition cost is much lower because it's much more heavily a digitally acquired

  • product and also the SAC costs are lower, the cost of deploying and the cost to maintain

  • is much lower.

  • So over time as we build those volumes up, those are products that will get scalable

  • margins.

  • I'll stop there and see if I missed anything.

  • Alright, this is John Stephens, really great job on that.

  • I'll give it to you this, but first of all Mike, we're not giving out specific guidance

  • on margins on any of the specific business as I mentioned before when I think Simon asked

  • me a question with regard to Time Warner specific EPS impact.

  • Well, what I will tell is that, JD talked about, the fact that we're being able to move

  • DTV NOW's deliverables.

  • Cloud DVR's, streams, pay-per-view, future data insights and other opportunities is going

  • to provide revenue opportunity.

  • Secondly, the fact you get the 4 products that are going to cut down on the subscriber

  • acquisition cost moving from a satellite, the only truck that shows up now is now one

  • of our trucks that hang a dish with maybe the UPS and the (inaudible) client in the

  • future.

  • All of those things give us the expectation that we can see the margins continue to improve.

  • As our advertising team continues to learn more and get more effective, those advertising

  • revenues will help out on that entertainment margins.

  • So all of those things are giving us optimism as we go forward.

  • With that being said, we've got -- traditionally have tough compares with the NFL content so

  • for the rest of the year, so we're not giving specific guidance on margins for the third

  • and fourth quarter.

  • Well aware of the improvement in the some of the stabilization of the operating contributions

  • to the entertainment group.

  • We're -- we notice that.

  • We're aware of it.

  • The team's working hard to achieve that.

  • But we'll keep this process going to see overall improvement on a year-over-year basis coming

  • in 2019 and that's when we'd expect to see it.

  • That's Mike Rollins with Citi.

  • Please go ahead.

  • Two if I could.

  • How do you view your sports rights between Sunday Ticket for DTV and NBA for Turner as

  • sustainable points of differentiation through your media strategy?

  • And how important is it to take those content right and put them into your emerging, evolving

  • direct to consumer strategy in platforms?

  • Let me -- I'll answer on behalf of the Turner side of things, and Scotts (ph) and John can

  • certainly address the NFL relationship on DIRECTV.

  • The -- look, I view the right sports rights as being critical to our strategy over time.

  • And I view the right sports rights with leagues that want to participate in a manner that

  • is reflective of how platforms are evolving and how technology is evolving and how consumers

  • are changing their consumption patterns as being the right partners to work with.

  • And I feel pretty good about the partners that we have at Turner and their flexibility

  • to sit out and look at new models, new approaches to how they put their content in front of

  • consumers, how they think about the importance of digital and their products and the speed

  • at which they're willing to move around those things.

  • Our advertising business is a healthier business, with sports in the mix.

  • I think you saw that in the second quarter numbers.

  • Those are largely powered by the great performance of the NBA and the wonderful product that

  • they have and their great partners.

  • And so I think it would be very important for us to continue to manage that portfolio

  • and have the right mix of sports and general entertainment in our portfolio that's attractive

  • to customers in the linear format.

  • And we'll continue to do that going forward.

  • Now that mix may change a little bit over time.

  • Different options may show up.

  • But the acid test is going to be -- I think sports that are well-received by customers,

  • that are valued properly, that are flexible in how they work with distribution rights

  • and technology and that work in today's fast-paced and dynamic society in terms of how they are

  • consumed.

  • I don't know -- this is Randall, Mike, and I don't know if there is much to add as it

  • relates to NFL.

  • I think John's statement just characterize what it is that we look for in terms of what's

  • important when you think about sports programming.

  • And it's really critical when you think about our business, where everything is growing,

  • where John Stankey is growing direct-to-consumer, where John Donovan is building platforms that

  • are streaming platforms, where Brian Lessers' monetization opportunities for advertising

  • are tied to streaming capabilities that will probably be our opportunities.

  • So finding sports programming that fits within those directions where we as a company are

  • going are really, really important.

  • And I would also say, just as we get more targeted, just sort of -- one way to think

  • about it is -- a sports lover in the future is not going to be the segmentation.

  • It's going to be a Red Sox fan, a Yankee fan who spends winters in Tampa.

  • So these things have been acquisition tools over time.

  • They're much more retention and engagement tools now that fit in that profile I mentioned

  • earlier.

  • And so we're going to really be trying to innovate on all of these things that are very

  • segment-specific.

  • And I think you're going to see us really get creative in what we do going forward.

  • Okay, very good.

  • Listen, that wraps up what we wanted to cover with you this evening.

  • I appreciate everybody joining us.

  • What I would sum it up by saying is, we've had a few months of distraction.

  • And make no mistake about it, it's been a bit of a distraction for both businesses,

  • the WarnerMedia as well as the AT&T side, that is behind us.

  • And we are executing, and I feel like we're executing very well.

  • On the communications business side, the momentum is gaining as you're seeing service revenues

  • are up, subscriber metrics are improving, margins are improving.

  • I feel really good about how that team is executing.

  • The WarnerMedia side, I couldn't be happier with the position of the company is in, the

  • business is in, and it's going quite well.

  • Our LatAM business -- Mexico -- it's going on all cylinders.

  • It's been aggressive on pricing down there.

  • But we are staying the course.

  • We're competing aggressively.

  • We're gaining a lot of momentum and have a strong path and a good line of sight to profitability

  • and stay-tuned on advertising.

  • I could not be more excited about the opportunity here for advertising, the ad tech acquisitions

  • we've made.

  • So thanks again for joining us and look forward to seeing and talking to everybody again.

Ladies and gentlemen, thank you for standing by.

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AT&T 2018年第2四半期決算カンファレンスコール (AT&T Q2 2018 Earnings Conference Call)

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    lawrence に公開 2021 年 01 月 14 日
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