Welcome to the AT&T Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Michael Viola, Senior Vice President of Investor Relations. Please, go ahead.

Thank you, and good morning, everyone. Welcome to our fourth quarter conference call. I'm Mike Viola, Head of Investor Relations for AT&T. And joining me on the call today is Randall Stephenson, AT&T's Chairman and CEO; John Stankey, Chief Operating Officer for AT&T; and John Stephens, AT&T's Chief Financial Officer. Randall will begin the call with a brief overview of the 2019 accomplishments and a look at our three-year plans. John Stephens will then discuss fourth quarter results and then John Stankey will walk you through key areas of our 2020 operating plan. John Stephens will then close the presentation with an update on our capital allocation plan and 2020 financial guidance. Then we'll take your questions. Before I begin, I want to call your attention to our safe harbor statement, which says that, some of our comments today may be forward-looking and as such, they're subject to risks and uncertainties. Results may differ materially and additional information is available on the Investor Relations website. I also want to remind you that we're in the quiet period for the FCC Spectrum Auction 103, so we cannot 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 our news release, investor briefing, 8-K and other associated schedules. And so, with that, I'm going to turn the call over to Randall Stephenson. Randall?

Thanks, Mike. I want to start on slide three to close out 2019. And coming into 2019, we laid out a detailed plan for the year and that plan was the series of specific steps necessary to exit 2019 on a path of sustained growth. A simple summary on slide three is that we met or exceeded every single one of those objectives and the road map is set for the next three years. I told you that our top priority for 2019 was to reduce our debt and exit the year at around 2.5 times debt to EBITDA, done. We have now reduced net debt by about $30 billion since we closed Time Warner. And at the end of 2019, our net debt to adjusted EBITDA was about 2.5 times. We gave you the formula for exactly what it would take to get to this debt level. First, we would need to generate $26 billion of free cash flow, done. We exceeded that handily, generating a record $29 billion for the year. Second, we would need to monetize non-strategic assets and generate $6 billion to $8 billion of cash, done. We actually generated nearly $18 billion, more than double our target. And we've already announced an additional $2 billion, which will close in 2020. On adjusted EPS, we came in right on plan, low single-digit growth. At WarnerMedia, we achieved the 2019 merger synergies and we're preparing to launch HBO Max in May. Growing wireless service revenues was critical and those revenues were up nearly 2% for the full year. We stabilized Entertainment Group EBITDA and brought in our capital investment right on plan. And after sustained investment in our network, AT&T exited 2019 with the best and fastest wireless network in the United States. Our 5G network covers…

Thanks, Randall. Let me begin with the financial summary on slide 6. As Randall mentioned, we hit or exceeded all our 2019 targets. Let's take a closer look. We grew earnings. Adjusted EPS was $0.89, up 3.5% for the quarter and up 1.4% for the full year. Cash from operations came in strong at $11.9 billion for the quarter and $48.7 billion for the year. Free cash flow was a record $29 billion for the full-year, up 30%. The addition of WarnerMedia made an impact as did adding their receivables to our securitization efforts. Our ability to generate cash continues to provide a strong foundation for our capital allocation plan. We continue to aggressively invest. CapEx was nearly $20 billion for the full year and total gross capital investment was $23.7 billion, when you include our investments in FirstNet and other vendor payments. And without the impact of foreign exchange and forgone licensing revenue in advance of our HBO Max launch, fourth quarter and full year revenues would have been $48 billion and about $184 billion, representing growth in both the quarter and the year. Even with these items, operating income margins were stable in the quarter and up 70 basis points for the year. All in all, a very good year as we hit our 2019 targets. Let's now look at our segment operating results starting with our Communications segment on slide 7. In our Communications segment, mobility continues to build momentum and deliver solid results. Service revenue grew by about 2% in the quarter and for the year. EBITDA grew both in the quarter and for the year. And EBITDA margins expanded by 40 basis points for the year, while service margins were stable even with a heavily promotional fourth quarter. Postpaid phone growth was solid adding 229,000…

Thanks, John, and good morning, everyone. Starting on slide 10. These are the four key areas of our 2020 operating plan where we'll be focused in executing to drive our performance. I'll go into some detail on each of these over the next few minutes but I'll give you the headlines first. Number one is continuing our momentum in mobility because we expect mobility will continue to be the biggest driver of revenue growth and profitability and be a key factor in meeting our 2020 goals. Second, a successful launch of HBO Max is critical to our plans in each of the next three years. Many of you are with us for the Analyst Day in October and have seen firsthand why we're so excited about HBO Max and the opportunities it gives us. We're right on track to launch it in May. Third, is growing our broadband revenues by increasing our fiber penetration. Key to this will be bundling our fiber broadband offer with AT&T TV, which is delivered over our software based video architecture. And finally, we're laser focused on improving both the effectiveness and the efficiency of our overall operations and as a result, driving additional costs out of the business. Let me dive into each of these four drivers beginning with mobility on slide 11. Last year our wireless network was recognized as the nation's best and also fastest thanks in part to our FirstNet build. In fact, we did a few of our own spot test in December to see how our existing nationwide 5G evolution network compared to the 5G network one of our competitors rolled out last month. In three out of the four test cities, our network had faster speeds and lower latency on average. The point is our strong spectrum position…

Thanks, John. Strengthen our balance sheet was our top priority last year and our teams did an excellent job of reducing debt and monetizing our asset portfolio. This allowed us to begin retiring shares at the end of last year while still meeting our net debt ratio goals. In 2020, you can expect that momentum to continue. It all starts with strong free cash flows. We had record free cash flow last year and expect to be in a similar range this year. We achieved this even with some voluntary funding for retiree medical costs and higher tax payments in the fourth quarter. We also overachieved on asset monetizations. We expect to do another $5 billion to $10 billion net monetizations this year with significant efforts already underway. At the same time, we continue to evolve our capital structure. We added more preferred to our capital stack last year when we monetized more than $6 billion of our long-term tower purchase options. And we also issued $1.2 billion of traditional preferred stock. The publicly traded preferred stock is new to us but there is a market for it and it provides investors another alternative to invest with AT&T. In fact, these shares are currently trading at a premium to par. Investors are looking for secured dependable returns, which is exactly what this offers. And dividend rates at less than our common stock dividend yield make it attractive for us. The tower preferreds also allow us to use very long-term assets to generate cash in a tax-efficient manner. We also continue to be focused on our three-year debt reduction targets. Depending on the timing of share retirements and asset monetizations, you will see our net debt to adjusted EBITDA ratios fluctuate throughout the year but we expect to continue reducing debt…

Operator, we'll take the first question.

Thank you. [Operator Instructions] Your first question comes from the line of John Hodulik. Please, go ahead.

Great. Thank you. Maybe a couple of questions for John Stankey. Yes. Thanks for the commentary on the entertainment sub trends, but maybe a little bit more clarity. I mean, first of all, you saw a slowdown in fiber adds in the quarter. What was driving that? And, I guess, in conjunction with the guidance for sort of more improvement in the back end of the year, do you expect that trend to reverse? Or when -- how do you expect those adds to sort of play out over the course of the year? And what drives the acceleration? And then, in terms of the HBO Max guidance, the $500 million in incremental expense we saw in 2019, does that impact your guidance for the $2 billion in 2020? Thanks.

Hi, John. Happy New Year. So, first of all, fourth quarter of 2019, fourth quarter is seasonally a slower quarter. December is a pretty slow month in general for home-based services, given the dynamics of the holiday and the like, so that's part of the contribution to the issue of the slowdown. The second is, our gross add performance on video wasn't strong. You see the subscriber trends. As we've shared with you, as we move through this year and we start shifting to AT&T TV, our gross add performance starts to get much stronger. And naturally, when you're able to put AT&T TV, a software-based product with fiber, it's a much more natural combination than a satellite dish and fiber. And so, as we start to roll out AT&T TV now in markets and we move in, we're going to see much stronger performance on the fiber side. I'll tell you, as I look at where we are right now in current customer trends, I feel pretty good that that's, in fact, the case and we're going to be where we need to be on that. Frankly, it's not a hard sell. It's a great product. It's a product that customers like. I think, we could do very well with it and I don't expect that we're going to see that continue through. So, that's what I would tell you. You're going to see recovery in 2020. On the Max side, we gave you a range on what to expect in 2020 in terms of dilution, that we're not changing any of that range. The range is a range for a reason. There's a lot of moving parts on Max introduction. It's a combination of both, going to market with subscribers and it's a product that's going to continue to grow over the coming years. And we're going to be looking in the market for opportunities for other content acquisition and the like. And it's entirely possible, we may be opportunistic, or look at something and we want the management team to have that flexibility to be able to balance those things out. We have subscriber growth coming and things are working well with our strategies. We make it a little heavier on trying to build up subscribers and what we expected. I think, that's the nature of building a new and subscription-oriented business. And so, that range is important that we have the flexibility for the management team to do what they want to do. We feel very strongly we're going to get back that investment as we build this new distribution platform over the coming years, that's why we're doing this. We like the dynamic of ultimately having some control of those customers and being in a position where we can manage that life cycle going forward. And we think it's a good smart long-term investment.

Okay. Thanks, John.

Your next question comes from the line of Philip Cusick. Please go ahead.

Hi, guys. Thanks. John, can you update us on the WarnerMedia strategy from here away from Max? We see video industry bundled units declining pretty quickly even away from you as you decelerate. How does that change your thoughts on Turner over time and the strategic value there? And then can you also give us an update on the low-value video subs that are remaining in the base and how those should come out over the next few quarters? Thanks very much.

Sure. Happy to do that Phil. So, if you step back and think about the position we sit in the -- what I would call the traditional pay TV universe, I mean everybody knows it's in transition. And it's a mature product that's kind of working its way through the back end of a life cycle. But I like where we stand in that and that our total percentage of cost of goods sold in that space relative to the size of the bundle that the customer buys is not huge. Our network portfolio is a fairly concentrated network portfolio. If you think about it the bulk of our profitability comes from three primary networks, its TNT, TBS, and CNN. And I think if you look at trends, we all know that general entertainment content and the bundle is not performing as well and the nice part about our two general entertainment networks TNT and TBS, these are really hybrids. They're a combination of general entertainment and sports. And so they historically perform at the upper end of desirability from a ratings perspective and attractiveness from an advertisers' perspective because of that mix of content that we have. So, one having more contained portfolio; and two, having that mix of content I think is important to basically ride through this transition and have some resiliency. And my view of what's been happening in most carriage agreement negotiations, as we go back out in the market and renew things is our distributors see that and understand that those are important networks to carry forward. And we're continuing to see that people place value on those things even in a more skinny down or a smaller pay TV universe moving forward and feel pretty good about that. Now, let's be clear, the…

That’s helpful. Thanks, John.

Thanks.

Take the next question Greg.

Your next question comes from the line of Simon Flannery. Please go ahead.

Great, good morning. Thank you. Randall, we put out a lot of targets here for 2020 and beyond. Perhaps you could just share about how the executive incentives are being set up for the year, what the KPIs and metrics are. I know last year deleveraging was I think 25% of the short -- or 20% of the short-term comp. So any color you could give around what the two or three key focuses are for the year? And then one for John Stankey, you talked about the investment in the network, the capacity there. I think in the past you've talked about the opportunities in the wholesale market. Perhaps you could just give us an update on how things are going there and the opportunity perhaps to sign up some cable companies. Thanks.

Hi, Simon this is Randall. Yeah, as you articulated and for those who aren't familiar, coming into 2019 I told all of you that our number one priority for 2019 was to reduce our debt and get our leverage ratios down to 2.5 times debt-to-EBITDA. And it was going to require strong cash flow generation, selling some non-core assets. All that was instrumental in getting there. And to really drive at home and get the focus for the management team as you said, we set that debt-to-EBITDA target as a significant amount of executive compensation and mission accomplished. I think the team executed at an amazing level in terms of identifying asset opportunities to dispose, getting those things driven through the process, negotiated actually getting good prices for all of those assets and then driving just strong cash flows and some impressive working capital opportunities we're taking advantage of and these working capital initiatives that are put in place are not one and done. What we're most excited about are these are working capital initiatives that are repeatable. And so I feel really good about our ability to generate in 2020 even with the HBO Max investments another $28 billion of free cash flow. Coming into this year, the debt objective of 2.5 times isn't what we're working towards. What we're working towards is making sure we're continuing to generate the cash flow to execute the broader capital allocation strategy, meaning more specifically retiring the shares we issued for Time Warner. And as both John Stephens and I articulated in our opening comments that is a focus, and our objective is to retire at least 250 million additional shares this year. We'll get about 100 million of those knocked out in the first quarter. And there's at least 150 million more to be coming in the back part of the year that will generate nice EPS accretion as we move throughout the course of the year. And so all that said, the management team is going to be focused on hitting these earnings objectives that we've laid out for you and the cash flow targets. And that's what compensation will be really focused on. And I think it's going to be effective in generating the cash we need to execute the share buyback programs and the overall capital allocation strategy.

Simon thanks for asking the question, because I think it highlights a really important aspect of how we're going to grow wireless revenues next year, because we already have that strength as you indicated the network performance and that perception. As we do research out the market is now starting to grow amongst the customer base. I think we have some plans to even fine-tune our brand positioning messages as we move into this year a little bit more. And we know that as we move that perception, which is happening right now, we see momentum in subscriber growth. And so we've got just pure subscriber economics that are going to help us there, make some shifts in distribution. We've got the tailwinds of FirstNet behind us, which are starting to help us dramatically. And I think the coverage improvements that occur as we get into the second phase of FirstNet will allow us to move through that. And then we talked about just a few minutes ago what we're doing on the upgrade cycles and the Max launch. There's a lot of good things moving our direction what I would call the core organic part of the wireless business to grow revenues. And frankly over the last several years, our wholesale business had been a bit of a headwind in our wireless business, because we didn't have the flash capacity that we've now been able to turn up with these key investments over the last 1.5 years. We're now in a much different position than we've historically been and where we've had to be very guarded about our wholesale position largely because we needed capacity to support our retail base. And we're now, I think in a position in the industry when I look at what has to happen…

Simon to add to what John said, this is the first year that we've had stable reseller revenues throughout the year. And in fact sequentially, we grew reseller revenues and in year-over-year and the fourth quarter. So what John is talking about, we are not only well positioned for, but it's starting in a small way right now but with the opportunity to make much bigger. It's already occurring and it's contributing to that service revenue growth that we've had both in the quarter and the year.

Thanks.

Thanks Simon. We’ll take the next question.

Your next question comes from the line of David Barden.

Hey guys. Thanks for taking the question. I guess two, first John Stankey your -- it sounds like you guys really have bought into this idea of 5G smartphone super cycle. And I feel like that is not a consensus view. I know that there's a lot of debate about it internally here between our tech guys and our chipset guys and our phone guys. And so if you could kind of give us some perspective on where that conviction comes from that that we're going to get enough of a boost in demand for products that, I don't know that the consumers really understand it's a lot different than what they're already buying that would be super helpful? And then John Stephens, could you walk us through the science behind this kind of new embrace of the preferred securities? Because it seems a little odd to be buying back stock, but then at the same time issuing preferred stock and debt has deductible interest and preferreds don't. And so I think that there's some confusion as to kind of what the net benefit to the equity holder is of kind of looking at preferreds and capital stack? Thank you.

Dave so I don't know that I would use the term super cycle. I don't look at the plan and say, we're expecting a super cycle. But we are expecting an increase or a step-up in what's occurring. And look I think that the foundation of that assumption is based on we've done a couple of different area interface changes. We did the UMTS air interface change. We did the LTE air interface change. And I think there were similar discussions going on at that point in time. Well will somebody really need the increased LTE speed over UMTS? It works perfectly fine. And I would tell you we do see this step-up occur because naturally speaking people have a tendency to sit around and run speed test on their devices. And when somebody next to them is getting better performance, it raises awareness amongst the subscriber base. And I expect that there's going to be a certain number of folks who look at that and just say because that device performs better because these new devices have access to a much broader swath of bands it's going to perform better. And we are going to see a degree of uptick simply because the subscriber base is going to notice that there is a degree of performance etcetera as a result of that. Secondly as I said we're going to be driving some of this ourselves. We're going to be out there with some pretty aggressive promotion on HBO Max and we're going to be tying these to our better plans. And when you look at what we're assuming in our business plan for the year, our increases in the number of customers moving into unlimited aren't crazy silly step function changes. They're more of the trend and taking advantage of the fact that we are going to put more advertising dollars into the market to support Max and support 5G. And we'll get some nominal uptick in what those migrations into our higher-value unlimited plans are. So we want to stimulate some of that. We're coming off of historic lows of upgrades. And we think the market is set up to basically go through renewal cycle given, how we're promoting. It's coming at the end of the year in the holiday season. There's going to be better networks out there. We do expect there's going to be an uptick in the upgrade cycle. Super cycle maybe a little bit too strong a word than an uptick yes.

Got it.

And just to add to what John said, we have had three years here of very low upgrade rates. Just to some extent people are going to need new phones. And so this is just also this aging of the phone base has been occurring over multiple years. Secondly, this is the first time we're going to have a 5G network up and running and available before the devices are out, the next-generation networks in there. And as John made very clear, the HBO Max and other products we have they would really meld well. The convergence of all three of those things is going to be really attractive for us. With regard to the science of a preferred it's simply this. The market is open to it. Investors want it. They like this certainty. At today's rates, our preferred that's out there is actually trading below 5% yield about a 4.7%, 4.8%. I am seeing it today about a 4.8% yield. So that's lower cash cost than our common dividend, so that saves us money there. Secondly, as you know they don't share in the common profits of it. Third, it's a diversification for us. And so it gives us an opportunity to go into a different investor base. So just like we had done over the last 10 years have really diversified our debt base. This gives us an opportunity to diversify our shareholder base. And we believe that that's good for everybody and also allows us to bring in the volume or the quantum of common shares that are out there. Additionally, when you look at the preferred partnership interest that we've done and the preferred interest, we've done there, that has a very efficient – those dividend costs are much lower, because they're very tax efficient. So those costs get well below 4%. And once again, they allow us to give recognition to assets that people may not have realized. For example, our tower receivables and over $6 billion worth of real option cash that we have a high likelihood of getting, I don't know that anybody was paying much attention to that. Now it gives us the opportunity to put that spotlight that we really already achieved that value. So – but the clear science of the preferred is; one, the dividend costs are lower than our common; second, they're stable and our common is going to continue to grow; third, it gets us to another market segment, another investor base which is helpful; and fourth, that allows us to reduce the reliance on the common share base that's out there. For that perspective, we feel very good about. I feel like it's a really – it's a good move for all of our shareholders.

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

Your next question comes from the line of Michael Rollins. Please go ahead.

Thanks and good morning. If you fast forward to the end of your financial plan in 2022 given the CapEx that you've articulated, can you frame what the network capabilities are going to look like for 5G mobile, fixed wireless broadband coverage, and fiber-to-the-home coverage? And then secondly, can you just unpack a little more of what you see driving the strength in industry wireless postpaid phone net add? And as you look at your own customer trend are you seeing any meaningful differences in customers and markets that have 5G evolution versus those that haven't received it yet? Thanks.

Sure. So, Mike, let me see, if I can hit a combination of things you laid out. So first of all, I think one of the significant shifts you'll see in 2022 by the time we get to that point and a lot of this is being driven by work on FirstNet is I think we'll be in a much better position on macro coverage and not only from a number of square miles, but I think you're going to see the improvement in core interior performance given how we densify things to support our FirstNet subscribers and the agencies we have there. And as I said, this is really – where last year was a year of us getting coverage – macro coverage in place kind of getting the umbrella, the footprint turned up this year is where we do a lot of the – make the network better stuff. So we've been doing all the site acquisition, all the fill-in. And we start turning up sites and just going to make the network better. It's going to make the network better on the inside of a building that's going to make the network better in terms of the square miles that are covered. And when you add that to the great spectrum position that you're already seeing and the wonderful reviews of speed and performance that we're getting back on test today, that only makes things stronger. Secondly we are as you know in filling with millimeter wave and we've already turned up over 30 markets with millimeter wave. We're continuing to increase that footprint. And we're going to be very opportunistic of where we can do that. We're in a unique position especially in the places where we offer wireline businesses that we can densify on a…

Thanks Mike. Great. We'll take one more question.

Okay. That question comes from the line of Kannan Venkateshwar. Please go ahead.

Thank you. A couple if I could. Firstly, I mean, when you think about the decline rates of video at DIRECTV, although it will moderate over the course of 2020 based on your guidance. If at some point, DIRECTV becomes smaller than say Comcast and because of the video losses and those lines cross, is there any kind of an impact on your programming cost because of the most stable nation clauses and others that you get on account of your scale? And how does that impact margins if it does? And secondly, when you think about the attach rates for broadband in video homes, could you give us a sense of what that is? And within the base of homes that you've lost as a result of the promotional loss last year, is it in line with the average? Or is it higher or lower? That will help us get a sense of where trends are. Thanks.

So, the short answer to your first question Kannan is, no. We -- first of all, as you're aware, we went through a fairly significant renegotiation cycle over the last 12 months, so those are all baked in the bag through the next three to five years depending on the nature of the particular content and I don't see any exposure in any of those agreements. I would suggest we're not going to continue to pay at the best part of the rate card given the size and the scale of our business as we move forward. I think frankly, what's more likely to happen in pay TV moving forward is what I talked about earlier, where I think there'll be some pruning and trimming of offers in the market. As folks move forward to manage their cost of goods sold on programming costs, it will be dropping or shifting away from less traffic networks. I think that's going to be a bigger driver of cost structure than renegotiation or anything around that. But we're pretty well baked in that regard. As you know, one of the things we're working through is, we have a step-up in our content cost as a result of that significant renegotiation work we did last year. We're going to have to work through that in 2020. And then in the subsequent years '21, '22, you'll see us on what I would call more industry traditional step-ups year-over-year in programming costs. But we're in the bag on those things and I think we're in pretty good shape. On the broadband attach rates, the attach rates in footprint where we offer broadband are extremely high and they haven't changed. We would expect to see a modest step-up as we move away from satellite combined with broadband and get into our software product distributed over broadband. Those sales rates, I think will help us on gross not necessarily a significant change in attach rates. When we are successful selling, we typically attach both. The reality is, is we want more gross. We don't necessarily want to change the attach rate. We get more gross by the fact that for example in footprint, solid 10% of those subscribers have line of sight related issues on satellite. They won't have that on the software-driven product. That helps us on gross intake and that's one of those things that help us -- helps us as we move through this year change those subscriber trends.

Okay. This is Randall. First of all, I just want to thank everybody for joining us again this morning for the call and your interest in AT&T. We're coming from off of 2019 where we told you exactly what we're going to do. And in terms of debt repayment, operational performance et cetera, capital allocation, we checked every box. We've now given you our playbook for 2020 through 2022. It's a playbook that we feel very confident that we can achieve. We're now gaining momentum in our wireless business, which we feel very good about that. We have a capital allocation plan that we have a high degree of confidence and we'll be able to execute over the next three years. And we have a media business that's performing at a very high level even in an industry that's in transition. And with HBO Max coming and the investment we're making there, we're confident that it's just another growth vehicle for this business over the next three years. So, bottom line, we have a plan that we think stacks up very nicely. We're confident in our ability to execute. We love the management team and look forward to 2020. Again, thank you for joining us this morning.

Thanks.

Ladies and gentlemen, that does conclude your conference for today. Thank you, for your participation and for using AT&T teleconferencing. You may now disconnect.