DALLAS, June 21, 2018 /PRNewswire/ — Randall Stephenson, AT&T Inc.* chairman and chief executive officer, and John Stephens, AT&T Inc. senior executive vice president and chief financial officer spoke today at the Wells Fargo Securities 2018 Telecom 5G Forum. They discussed the recent acquisition of Time Warner by AT&T and plans for the combined company.
Stephenson said that the Time Warner acquisition was the culmination of a strategy to build a modern media company around four critical elements:
- Premium content with wide distribution. AT&T is in a great position with regard to both subscription and ad-supported content. HBO, Turner and Warner Bros. combined with targeted digital properties like Bleacher Report and AT&T’s investment in Otter Media have the potential to drive viewer engagement to new levels.
- Direct-to-consumer relationships. A modern media company must have direct-to-consumer (D2C) relationships to remain relevant, innovate and build subscription- and ad-supported models. AT&T has more than 170 million1 D2C relationships across wireless, video and broadband, which provide valuable insights on how the company delivers content, what content it distributes and how it distributes that content.
- Advertising technology. It’s critical to use customer insights from D2C relationships to change the advertising model and make ads more relevant so they deliver higher yields and optimized loads. AT&T’s D2C relationships give the company insights regarding what customers are watching, where they’re watching it and at what times they’re watching. These insights can create incredible value for advertisers.
- High-speed networks. These networks must be able to deliver premium content to whatever screen the customer demands at the lowest cost per megabyte possible. This can include delivering content to homes, mobile devices and cars, and AT&T is investing in wireless build, fiber and new technologies like 5G to deliver a great viewing experience as demand continues to grow for 4K video and virtual and augmented reality.
Combined, these elements come together to help meet the needs of all 170 million D2C relationships — from price sensitive customers who prefer ad-supported lean bundles delivered over wireless to customers who prefer premium content bundles with a consistent user experience across all devices and who demand a great network experience to gamers who demand virtual reality on a 5G-like experience.
Regarding AT&T’s opportunity in advertising, Stephenson said he believes the company can scale its advanced TV advertising business. DIRECTV and U-verse already represent a nearly $1.8 billion annual revenue run rate, growing in the double digits. By using its D2C data, AT&T is generating yields 3-5x higher than the industry average. With the addition of Turner, AT&T adds inventory 3X its existing inventory, which gives the company scale to invest and even pursue M&A.
This will let AT&T build a real-time exchange for premium video advertising coordinated across mobile devices and TV screens. Ultimately, the company plans to deliver a value proposition for premium video advertising similar to that of digital advertising. And Stephenson said Brian Lesser, CEO of AT&T’s advertising & analytics business unit, is prepared to build a company that will lead to lower ad loads in programming but also more relevant and engaging ads delivered via smartphones.
Financial impacts of Time Warner
AT&T’s capital allocation strategy has not changed. Stephens reiterated that the first priority is to invest for growth. Secondly, the company remains committed to its quarterly dividend, which it has increased for 34 straight years.
Stephens said that AT&T’s final priority is to maintain a strong balance sheet and pay down debt to improve the company’s credit metrics. At the close of Time Warner, AT&T’s net-debt-to-adjusted-EBITDA ratio was in the 2.9x range. The company plans to reduce this to the 2.5x range by the end of the first year after close and to its historical range by the end of the fourth year after close.
Many of the company’s capital-intensive projects are well under way or are near completion, which will support AT&T’s de-levering goals. The company now markets its 100% fiber network to 9 million locations, well on its way to the 12.5 million commitment it made as part of the DIRECTV acquisition. In fact, AT&T expects to reach 14 million customer locations by mid-2019. Also within the next year, the company expects to be in the 40% to 50% range of its FirstNet buildout commitment. And AT&T’s 4G LTE build in Mexico is nearly complete. AT&T also expects continuing benefits from its software defined network (SDN) investments.
Stephens also highlighted the expected financial impacts of the Time Warner acquisition. He said the company expects significant synergies and other financial benefits. Specifically, AT&T expects the deal will:
- Contribute to adjusted earnings per share and free cash flow per share within 1 year of close.
- Improve AT&T’s dividend coverage, with a free cash flow payout ratio in the 60% range.
- Deliver synergies of $2.5 billion. As previously announced, AT&T expects $1.5 billion in annualized cost synergies by the end of 2021. These will include efficiencies at the corporate level as well as savings from marketing and advertising, procurement and content development. The company also expects $1 billion of annualized revenue synergies by the end of 2021, primarily from advertising.
AT&T is also providing the following updates. The company expects:
- Continued solid growth in its Mexico wireless operations in the second quarter of 2018 with as many as 700,000 net adds and improving churn. However, the strengthening U.S. dollar and volatility in foreign exchange rates are expected to pressure International segment results.
- Wireless service revenue growth for full-year 2018, on a comparable basis. The company expects wireless service revenues will be essentially flat in the second quarter of 2018.
- The transition of the video market to continue to negatively impact revenues and margins in the Entertainment Group. For the quarter, the company expects total video and broadband subscribers to increase, with DIRECTV NOW subscribers more than offsetting continued declines in traditional TV subscribers. Stephenson said that the mix will continue to shift to over-the-top video. Earlier today, the company announced new unlimited wireless plans — AT&T Unlimited &More Premium starting at $80 for the first line and AT&T Unlimited &More for $70 for one line or $40 per line for four lines— that include access to AT&T’s WatchTV service, the company’s newest video offering featuring 30+ live channels and more than 15,000 TV shows and movies on demand.2 Stephenson said the new product comes with attractive margins.
The company will provide pro forma financial statements no later than 71 days post close and will update guidance and provide additional information on the Time Warner acquisition on its second-quarter 2018 earnings call. AT&T’s second-quarter results will include Time Warner’s opening balance sheet and operations beginning on June 15, 2018, as well as transaction-related costs that could pressure free cash flow for the second quarter. As previously announced in a November 2016 SEC filing, the company expects to eliminate about $2.8 billion of intercompany revenues on an annualized basis. AT&T announces second-quarter earnings on July 24, 2018, after market close. Both Stephenson and Stephens will participate on the call, as well as John Stankey, CEO-WarnerMedia; John Donovan, CEO-AT&T Communications; and Brian Lesser, CEO of AT&T’s advertising and analytics business unit.
AT&T Inc. (NYSE: T) is a diversified, global leader in telecommunications, media and entertainment, and technology. It executes in the market under four operating units. WarnerMedia’s HBO, Turner and Warner Bros. divisions are world leaders in creating premium content, operate the world’s largest TV and film studio, and own a world-class library of entertainment. AT&T Communications provides more than 100 million U.S. consumers with entertainment and communications experiences across TV, mobile and broadband services. Plus, it serves more than 3 million business customers with high-speed, highly secure connectivity and smart solutions. AT&T International provides pay-TV services across 11 countries and territories in Latin America and the Caribbean, and is the fastest growing wireless provider in Mexico, serving consumers and businesses. AT&T ad and analytics provides marketers with innovative, targeted, data-driven advertising solutions around premium video content.
AT&T products and services are provided or offered by subsidiaries and affiliates of AT&T Inc. under the AT&T brand and not by AT&T Inc. Additional information is available at about.att.com. © 2018 AT&T Intellectual Property. All rights reserved. AT&T, the Globe logo and other marks are trademarks and service marks of AT&T Intellectual Property and/or AT&T affiliated companies. All other marks contained herein are the property of their respective owners.
Cautionary Language Concerning Forward-Looking Statements
Information set forth in this news release contains financial estimates and other forward-looking statements that are subject to risks and uncertainties, and actual results might differ materially. A discussion of factors that may affect future results is contained in AT&T’s filings with the U.S. Securities and Exchange Commission. AT&T disclaims any obligation to update and revise statements contained in this news release based on new information or otherwise.
This news release may contain certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures are available on the company’s website at https://investors.att.com.
1 Represents cumulative video-capable D2C relationships across the following services: Postpaid, prepaid and reseller wireless; US and LatAm pay-TV, including DIRECTV NOW; Mexico wireless; and US consumer broadband.
2 Prices after autopay and paperless bill discounts. Pricing on &More is $125 for 2 lines, $145 for 3 lines.
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SOURCE AT&T Inc.