AT&T Inc (T) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AT&T Fourth Quarter 2018 Earnings Call. (Operator Instructions). I'd also like to remind you that this conference is being recorded.

I would now like to turn the conference over to our host, Michael Viola, Senior Vice President of Investor Relations. Please go ahead, sir.

Okay. Thanks, Leah. Good morning, everyone, and welcome to the fourth quarter conference call. As Leah said, I'm Mike Viola. I'm Head of Investor Relations here at AT&T. Joining me on the call today is Randall Stephenson, AT&T's Chairman and CEO; and John Stephens, AT&T's CFO. Randall's going to provide an overall business update as well as discuss our 2019 business initiatives. John's going to cover results, along with the 2019 outlook, and then we'll get to a Q&A session.

Before we begin, I need to call your attention to our safe harbor statement. It says that some of our comments today may be forward-looking. They're subject to risks and uncertainties, and results may differ materially. And I'd tell you that additional information is available on the Investor Relations website.

I also need to remind you that we're in the quiet period for the FCC Spectrum Auctions 101/102, so we can't address any questions about that today. So as always, our earnings materials are available on the Investor Relations website. It includes our news release, 8-K, investor briefing, associated schedules, et cetera.

And so with that, I'd like to now turn the call over to AT&T's Chairman and CEO, Randall Stephenson.

Okay. Thanks, Mike. I'm going to start on Slide 4 of the deck with a brief overview, and then I'm going to give some highlights for the past year. And I would characterize our results as basically doing exactly what we committed during our Analyst Day in November, and in fact, I would say we're ahead of schedule in each of our key priorities.

And as we've said, our top priority for 2019 is driving down the debt from the Time Warner acquisition. And I couldn't be more pleased with how we closed the year. We generated record free cash flow of $7.9 billion in the fourth quarter, with the dividend payout as a percent of free cash flow below 50%.

Our full year free cash flow was also an all-time record, even with near-record capital spending. For the full year, our dividend payout as a percent of free cash flow was 60%, and that allowed us to increase the dividend in December for the 35th consecutive year.

So while I'm pleased with our financial results for the quarter, we also feel good about the progress we made during 2018 on all of our strategic imperatives. First, we finally closed Time Warner, and we have brought together the leaders in content and distribution. And as committed, this transaction has been accretive since day 1. And as John is going to discuss shortly, WarnerMedia had a terrific fourth quarter.

We also launched Xandr, our advertising business. Then following our acquisition of AppNexus, Brian Lesser and his team are integrating that platform. They're applying Xandr's customer insights to Turner's ad inventory. And with fourth quarter revenues growing at 26%, our enthusiasm around this opportunity is continuing to build.

In terms of our networks, our quality and performance are on a very strong trajectory. GWS named us the best network in the most comprehensive study that's been conducted. We introduced the first standards-based mobile 5G network in parts of 12 cities last month, and our FirstNet deployment just finished the year well ahead of schedule.

We also accelerated our fiber deployment, and we now reach 11 million customer locations in addition to 8 million business locations. As a result, our broadband business grew by over 6% in the quarter. And it's really important to note that this fiber deployment is foundational to our 5G network.

And I would highlight a couple of other items on this slide. First, strong wireless performance, with growth in both revenue and EBITDA; WarnerMedia's continued strong growth in revenue and margins; in our Latin America business, which grew subscribers in Mexico and in Rio; and last, our total company pro forma EBITDA grew by 7.2% for the quarter.

If you go to the next slide, you're going to see our key priorities for 2019. There's no surprises. It's what we discussed back in November, and our top priority is to delever the balance sheet. We have strong operational momentum coming out of 2018, and this is going to allow us to reduce our debt and continue our strong record for paying dividends.

And it's important to note that we're doing all of this while investing at industry-leading levels in fiber, 5G and FirstNet. We expect to continue growing wireless service revenues. The Entertainment Group, that's obviously our heaviest lift for 2019, but we're on a path to stabilize EBITDA in 2019, and we're actually quite confident that you're going to see significant improvement in the first quarter. The focus at WarnerMedia is delivering the merger synergies and continuing to build on our 2018 momentum.

And in the back half of the year, we plan to launch a premium SVOD service that's featuring content from all of our WarnerMedia brands, specifically Warner Bros., HBO and Turner. And then last, Xandr, and it's quickly scaling its capabilities into the ad inventories of Turner, our Mobility business and all of our TV and over-the-top products. So we're -- that's where we're focused on 2019. We do feel very good about our ability to deliver in each of these areas.

And so with that, I'm now going to turn it over to our CFO, John Stephens, and he'll take you through the results. So John?

Thanks, Randall. Good morning, everyone, and thanks for being on the call. Let me begin with our financial summary, which is on Slide 7. As we've done in previous quarters, we'll be referring to comparable results for most of our segments in the next few slides.

For 2018, AT&T was required to adopt new accounting standards that deal with revenue recognition, pension costs and installment receivables. These changes impact our income statement's cash flows. At the same time, the company made a policy decision to record universal service fees and other regulatory fees on a net basis. And I'm happy to add, this should be the last quarter we'll have to open the call this way, as we've rolled through a full year of these accounting changes.

Let me start with earnings. Adjusted fourth quarter EPS was $0.86, up more than 10% for the quarter and more than 15% for the year. For the quarter, WarnerMedia's and Mobility's strong performance drove these results. The benefit from the adoption of revenue recognition standards was generally offset by a higher effective tax rate and foreign exchange pressures.

Consolidated revenue came in at $48 billion, up 15%, thanks mostly to the acquisition of Time Warner. Gains in Mobility and WarnerMedia were offset by declines in legacy services, the impact of the transition in our video business and foreign exchange pressure from Latin America.

On a comparable basis, fourth quarter wireless equipment revenue was down by $500 million year-over-year due to fewer smartphone sales. When you look on a comparative pro forma basis, revenues were down year-over-year due entirely to lower wireless equipment revenue and foreign exchange pressure. In fact, without those impacts, revenues were positive.

Operating income showed solid growth, and adjusted consolidated operating margins continued to expand, up 450 basis points, with strong growth in Mobility and WarnerMedia margins. For the full year, adjusted operating income margins grew by 220 basis points. That growth comes even with margin pressure from the customer transition in our video business.

One housekeeping item that's related to the Mobility preferred equity interest we contributed to our pension plan back in 2013, that preferred return, about $140 million in the fourth quarter, is now reflected in noncontrolling interest on the income statement, with an offset in other income.

Earnings and margins showed strong growth, but perhaps the best measure of our financial success is our cash flows, where we turned in record results. Let's look at that on Slide 8.

Both our cash from operations and free cash flow hit record levels for the full year. This is really important. We're a company that depends on strong cash flows to meet our business goals. We need strong cash like we had this past year to invest in our business, to meet our commitments to delever and to continue our long and proud history of returning value to shareholders.

Free cash flow was a record $22.4 billion in 2018, that's up 36%, with $7.9 billion of that coming in the fourth quarter. This does include a $1.3 billion receipt from our FirstNet contract and reflects our results in managing vendor payables, accounts receivable and a variety of other working capital efforts. It also includes the impact of a nearly $500 million of voluntary contributions to our benefit plans that we made in the fourth quarter. That dropped our full year dividend payout ratio to 60% in 2018.

This strong free cash flow comes with near-record capital investment. Year in, year out, we're a little leader in capital investment in the U.S. 2018 was no different as we invested nearly $23 billion if you include the FirstNet capital for which we were reimbursed.

Equally important to us is our ability to pay a strong dividend. Investors expect one from us. Our strong free cash flow has allowed us to pay a solid dividend since we became a stand-alone company in 1983, and we have consistently raised that dividend for 35 years.

Our ability to generate strong cash flow is also a critical part of our commitment to improve our leverage position. Let me give you an update on that on Slide 9.

You know the leverage commitments we've made? Our goal was to get to the 2.9 range by the end of '18. So we did that by paying down about $9 billion since we've closed the Time Warner deal. Our next goal is to drop that even lower to the 2.5 range by the end of this year. Our strong free cash flow in 2018 gives us confidence we'll achieve our 2019 free cash flows and be able to significantly delever. We expect about $12 billion in free cash flow after dividends in '19. We've committed to use that to pay down debt. That alone will get us to the 2.6 range by the end of the year.

We've also been very thoughtful in delevering and finding ways to monetize our large asset portfolio. We've made several moves in recent years, most recently, closing the $1.1 billion sale of our data centers. And we've identified billions of dollars of other monetizable assets. We have a large amount of office buildings and raw land that we've identified for potential sale. Our Hulu investment is another opportunity. With more than $500 billion in total assets, we will continue to look for ways to monetize our asset portfolio and keep you updated on our progress.

Our merger synergies will also contribute. They remain on target, $1.5 billion in costs and $1 billion in revenue for a $2.5 billion run rate by the end of 2021. Bottom line, our financial strength allows us to achieve our leverage targets, continue to invest in our business and continue to return solid dividends to our shareholders.

Let's now talk results, starting with our communication segment. That information is on Slide 10. Communication segment, which consists of our Mobility, Entertainment and Business Wireline units. Together, this segment grew EBITDA and expanded EBITDA margins by 120 basis points, driven by great performance in Mobility. Obviously, we were sharply focused on profitability last quarter, and our Mobility results point to our success.

Service revenues grew by $400 million or nearly 3% in the quarter. EBITDA was up more than 13% or more than $800 million, and we had our highest-ever fourth quarter EBITDA service margin of 48.6%. That's up 450 basis points over last year and was driven by service revenue growth, disciplined promotions, lower volumes and continued cost improvement.

We were strategic with promotions, able to turn them on or off quickly to effectively compete. We won't hesitate to compete where we see an opportunity, especially for high-value customers. But even with the strong performance, we had 134,000 postpaid phone net adds in the quarter with 467,000 branded smartphones added to our base.

We also saw our cost discipline in our prepaid business. That includes holding the line against uneconomical equipment promotions by our competitors. Even with our spending discipline, prepaid phones grew in the quarter, thanks to the strength of Cricket, where we added about 240,000 subscribers, which more than offset a loss from AT&T prepaid.

Prepaid revenue growth was solid, and earlier this month, Cricket passed the 10 million subscriber mark, doubling our subscriber base since we acquired the company in 2014. And momentum continues to be strong. Please note, about 60% of our Cricket net adds have characteristics that generate value, similar to what we see from many of our postpaid customers.

We also made significant strides in our network evolution in the fourth quarter. Randall told you about our network leadership and 5G introduction. With the additional spectrum we're adding, carrier aggregation and other network improvements, 5G Evolution is producing better speeds for our customers today when compared to standard LTE. Our FirstNet deployment is reaching critical mass and providing a tailwind for our results.

Now let's look at our Entertainment Group results and the steps we're taking to bring EBITDA stability. Our year-over-year revenue climb slowed by nearly $300 million, and the EBITDA growth rate showed a sequential improvement even in a seasonally pressured fourth quarter. This was driven primarily by a reduction in customers on the 2-year promotions in the fourth quarter as well as improvement in DTV Now profitability.

We expect revenue performance to continue throughout the year, helping stabilize EBITDA in 2019. We are confident we will stabilize EBITDA this year and expect to see real improvement in year-over-year EBITDA results starting in the first quarter.

A more tailored, data-driven approach with promotions is making an impact. 6 months ago, we had 0.5 million customers on highly discounted DIRECTV NOW offers, generally offers that require the customer to pay $10 a month for the service. At the end of the year, essentially, none of these customers remained on those offers. Eliminating these promotions for low-value, high-churn customers clearly elevated subscriber losses in the quarter, but it had a positive impact on streaming ARPUs and lowered content costs. In fact, DTV Now ARPU was up about $10 sequentially from the third quarter.

Our fiber footprint continues to grow. We now passed more than 11 million customers locations with fiber and are on our way to hit the 14 million locations later this year. This will extend our fiber network to 22 million locations when we include business. Subscribers on our fiber network increased by more than 1 million last year, driving the number of total broadband customers in our fiber footprint to substantially more than 3 million. And the longer we have fiber in the market, the higher our penetration rates go. This performance is helping drive broadband revenue growth, another key focus in our drive to EBITDA stability. And as always, we're laser focused on costs, all costs, including content. That too will play a big role in stabilizing EBITDA.

Cost efficiencies on the story in Business Wireline, strategic business services continued to grow, and it's a $12 billion-plus annualized business that helps offset the continuing legacy revenue declines. Our focus on cost initiatives allows us to deliver margins even with the legacy revenue decline.

Now let's look at WarnerMedia's fourth quarter results. That information is on Slide 11. WarnerMedia revenues grew nearly 6%, with double-digit operating income in all 3 business units. Warner Bros. earned the spotlight this quarter. It had a great cash generation year and solid growth across both its theatrical and television business.

We had a great theatrical fourth quarter on the back of a strong slate of movies, including Aquaman, A Star Is Born, Fantastic Beasts: The Crimes of Grindelwald and The Mule. Aquaman passed the $1 billion mark in global box office receipts to date, and the critically acclaimed film, A Star Is Born, has racked up 8 Oscar nominations. This helped propel Warner Bros. to its best quarterly and full year operating income ever.

Turner saw solid gains in subscription revenues. Subscription revenues continued to grow, thanks to higher domestic affiliate rates, that's even with foreign exchange pressure at Turner's international networks. Total Turner advertising rates continued to be solid even while ratings declined. Domestic ad revenues declined 6% due to lowered delivery across various Turner networks, primarily for kids and young adults. International ad revenues were essentially flat when adjusting for the foreign exchange pressure. However, Turner's operating income was up nearly 21%, reflecting solid expense control from solid management of programming and marketing expenses in the quarter.

HBO results were impacted by a carriage dispute but still saw a double-digit operating income in the quarter. Subscription revenues were down 3%, primarily due to the dispute. Without that dispute, subscription revenues would have been up slightly. Content and other revenues were up 17% due to higher international licensing revenues. HBO's operating income was up 29% due to a sharp focus on expense control and lower programming and distribution costs. Even with the ongoing carriage dispute, we expect HBO to grow revenues in 2019.

As a final note, WarnerMedia companies continue to be recognized for their excellence in producing high-quality entertainment. WarnerMedia received 11 Academy Award nominations, including 8 for A Star Is Born, this comes on top of 4 Golden Globe awards earlier this month.

Now let's look at Xandr and Latin America, results are on Slide 12. Xandr, our new advertising and analytics business, continues to execute at a high level. Total revenues were up 49% or 26% excluding AppNexus. Much of that growth can be attributed to a strong political ad season, but even without that, revenues continued to grow significantly. EBITDA grew 17%, and EBITDA margins continued to be very strong.

The integration of AppNexus is on track. AppNexus has best-in-class technology and data capabilities that strengthen our premium advertising marketplace. We're moving quickly to integrate the Xandr marketplace across AT&T. Much of AT&T's programmatic spending is moving to the Xandr platform, driving efficiencies on how we activate campaigns. At the same time, our digital inventories enabled on our platform and with our data driving better yield and higher demand. We started making the Xandr data available for Turner's ad inventory, and we're optimistic about this opportunity.

Xandr's advanced advertising marketplace is built to power the industry, with rich data, technology and talent. Our success across AT&T gives distributors, publishers and buyers confidence to work with us. Already, Altice and Frontier are on board, and we're working to add more. We powered $2 billion of advertising spend through our digital platform, most of which is from third parties.

Moving into the international side of the business. Our Latin America operations had a strong subscriber growth quarter, but we continued to deal with foreign exchange pressures.

Total Latin America revenues and EBITDA were down year-over-year, primarily due to foreign exchange. Without that foreign exchange impact and excluding Venezuela, revenues would have grown 2% on a comparable basis.

In Mexico, we had 1 million new subscribers and more than 3.2 million for the full year. We now have more than 18 million customers in total. Service revenues in Mexico were down, largely due to the decision we made to shut down a wholesale business that we inherited from Nextel as well as some FX pressure. Without those impacts, service revenues were up year-over-year.

EBITDA was impacted by higher operational expense, including a significant amount of nonrecurring items. In pay TV, fourth quarter subscriber net adds were 198,000, with gains largely in the South region. Total subscribers at the end of the quarter were 13.8 million. While FX did impact our Latin America's satellite operations, the business continued to be profitable and generate cash.

Now let's look at our 2019 guidance on Slide 13. Our guidance remains unchanged from what we've said at our November Analyst Meeting. Free cash flow will be our most important financial metric. We expect free cash flow in the $26 billion range in 2019, and we'll keep our dividend payout ratio solid in the high 50% range. As we discussed earlier, we are tightly focused on achieving 2.5x net debt-to-adjusted EBITDA range by the end of the year.

We will also continue to expect to invest at high levels in our business, with gross capital investment in the $23 billion range. That's before reducing that investment by the $1 billion of FirstNet spending, which we expect to be reimbursed for (sic, see press release: "Excludes expected FirstNet reimbursements in the $1 billion range.")

While we expect the year-over-year impact of the new revenue recognition standard to be a headwind to earnings, we still expect adjusted EPS growth in the low single digits for 2019. We expect our effective tax rate in 2019 to be approximately 23% excluding any onetime items.

That's our presentation. Now I'll turn it back to Mike for a question-and-answer session.

Okay. We're ready for the questions. And so Leah, if you can open up the lines and get started.

(Operator Instructions) Our first question is from the line of John Hodulik with UBS.

Can we talk a little bit about sub trends, both in the entertainment space and the wireless space? Maybe just to feed off your comments on Entertainment, it sounds like with the majority of those customers coming off promotions that now losses should really start to slow. But at the same time, you've got some price-ups on the satellite side. So is it fair to say that those losses could increase? Some color there. Also on the broadband side, with the fiber build-out, what do you expect in terms of trends there as we look out into '19? And then maybe on Wireless, just wondering if, in your view, the -- you saw some nice postpaid handset growth despite the fact that you've pulled back on advertising and promotions. Do you think that you can maintain this level of growth with this low level of spending? And are you starting to see any growth from the first responder community?

So John, this is Randall. I'll start, and John Stephens can interrupt or append as we go through this. But look, we told everybody back in November that we were going to be laser focused on driving down debt and driving cash flow. And we pulled all the levers you would expect. And if you start with the TV business, we had come over the last couple of years getting the DIRECTV NOW, the streaming product, into the marketplace, and we had multiple offers out in the marketplace. And it's been a year, 1.5 years of learning what the market demand was going to be and what the market engagement, customer engagement with the product was going to be. And as we matured the product and as we came out of midyear, we just looked at the customer segment, and there was a customer segment at the low-end, very promotional pricing, who were not engaging on the product. We didn't -- we don't yet have the Xandr platform stood up to really monetize meaningfully on the digital side, the streaming side and advertising revenue. And we said, "Until we get all those pieces in place, let's pull that promotional aspect out." And so we told you, in November, there were 500,000 of those customers on the promotional pricing. And we started allowing those customers to attrit out. That obviously has a significant impact on dilution. The product has been dilutive in 2018. This is one of the main drivers of the dilution. And this is also one of the primary triggers as we move into 2019 to getting us to EBITDA stability, as we begin to get the promotional subscribers out. And now we have a customer base that's left on the streaming that's growing, the remaining customer base is growing, and it's a highly engaged customer base. It has good churn characteristics. And so we actually like where we are in terms of how we're positioning the streaming product. And as I said, it's a major driver to how we get to EBITDA stability next year. On the traditional linear side, these trends are in line with what you should expect as we go forward. It's a -- we're not going to be overly promotional to try to drive growth in this except where we have a good, strong broadband footprint, particularly a fiber footprint. And where we bundled this product with fiber, we have really good characteristics. We have good churn characteristics. The lifetime value of that customer segment is really, really high, retaining over index on wireless penetration where we have the TV product with our fiber and our broadband product. So we're going to continue down the path that you saw in the fourth quarter. Now the fiber product, we will finish the lion's share of the build by midyear. We'll be at 14 million locations passed with our fiber footprint. You're seeing now the impact as we move our customers into the fiber footprint. You're not seeing the overall broadband subscribers grow, but as people migrate to fiber, you're seeing a significant lift in ARPU. And literally, we had 6% broadband growth in the fourth quarter with no overall subscriber growth. We added, what, John, 250,000 fiber customers roughly?

Roughly, yes.

In the quarter. We think those trends can continue. In fact, we think those trends are very achievable. And so this is one of those areas -- as we deploy fiber, we've been doing this long enough now, the penetrations that you achieve are -- they're a little bit mechanical. You know very, very much what to expect, what penetration rates to expect and what periods of time and what ARPU lifts to get. So this is another one of the key elements on how you get the Entertainment Group to stable EBITDA. You continue growing this fiber revenue stream and moving ARPUs up as people move to fiber. And then on the Wireless side, yes, we feel that we can sustain Wireless where we are without having to step up significantly on promotional costs or advertising. But this is the approach we've taken to wireless, particularly in the situation where we are where we're moving aggressively to drive cash flow and pay down debt, is we will surge promotions as necessary in the marketplace. And that's what we did in the fourth quarter. And then we will make sure we keep our high-quality customer base in check and that we will do what we need to do to keep the customer base in check. But I like how the team is executing here. They've really rationalized their targeted marketing. They're doing a really good job in terms of focusing on the customer bases we want to retain. I love what's happening in the prepaid base on Cricket. Cricket continues to have really strong momentum. We did, I think, 240,000 Cricket subscriber adds in the quarter. What we saw offsetting that is our AT&T branded prepaid, which we sell in our AT&T stores. We saw some loss there, and it appears that we may be losing some of that prepaid customer base to other companies' postpaid customers. And so we're seeing a little bit of migration, so we'll play with that and shore that up. But that's one of those where the market got incredibly promotional on the prepaid side during 4Q, and we remained disciplined in terms of the amount of promotion we put into handset cost, gave our customers a good value proposition, and Cricket volumes, I think, showed it. Do you have anything to say?

Yes, I'd probably just add a couple of things. On DTV, I think there's one thing to point out. I mean, we had the 2-year price lock. We came off that starting in April. We migrated a bunch of that -- a bunch of those customers up to market-based pricing, which has caused some churn, and that's what you're seeing in the quarter. We've got about 2 million of those customers left. It's really important that we get those up to market pricing, but as we do that, that'll cause some churn, some pressure on net additions. So that's why we're expecting what we're expecting with regard to getting through that. But once again, that's a key piece to the profitability. Specifically on the AT&T prepaid or rental side, let me just give you one example. We have a phone that was being offered by our competitors for $100 that we know the cost was $250. So $150 subsidy just on the equipment all for a prepaid customer. We decided not to do that. We knew it. We're aware of it. That caused the pressure in -- that was one of the reasons, but a good example with the reasons of some of the pressure in the AT&T prepaid. By the same token, our Cricket brand continues to do really well both on churn, and we're growing revenues in the prepaid space in total. So we feel really good about that. And your FirstNet question, the build-out's going great. We're 40% at the end of last year, at the end of '18, well ahead of schedule. We're seeing great quality for all our customers as well as our new first responder customers received the effects of 5G Evolution be real and in customers' hands today, which is making a difference. We do have about 450,000 FirstNet qualified customers from about 5,000 organizations or departments that have signed up for it. A significant amount of those early adopters were migrations, so maybe close to 2/3 or 60% or so. But we are now getting a lot of new adds. And as this build-out gets past the existing 40% into 50%, 60% and 70%, so to speak, as we continue to make that progress, I think you'll see us begin to grow that new customer share and numbers significantly. So we really do view that as a tailwind for the whole business as it improves existing customers' quality, speeds, throughput, but it also gives us visibility, which we've been successful at. Steve's done a good job with -- of gaining new customers.

Well, we did an interesting experiment or demonstration is probably the right word on New Year's Eve at Times Square with our FirstNet network. We invited the first responder community to come to Times Square in the middle of the night when the crowds were massive at Times Square and used the First Responder Network and see what kind of speeds they would get on a fully-loaded network. And I will tell you the first responder community that saw it was quite impressed, and we have some high expectations on where FirstNet goes this year and next year.

It's the line of Simon Flannery with Morgan Stanley.

Just continuing on FirstNet. Where does the build go throughout '19 and '20? When do you think you're pretty much done with that? And related to that build-out, I think you said at CES that you plan to have nationwide standards-based mobile 5G in 2020. Can you just talk a little bit more about those plans and -- that'll put you in a pretty strong position. And how should we expect your ability to monetize that?

Okay. So we have standards-based mobile 5G today with regard to 12 targets at the end of the year. And I think by the end of the first quarter, early here in the year, we'll start to get that in '19 as we've announced. Mike, make sure I'm correct on that. So we're working that. We're that first with that mobile-standards 5G. If you will, it works hand-in-glove with the FirstNet build. So as we've said before, as we go to a site now and put the antenna up, put the radios up, retune it for the 700, we're also doing the physical work necessary to make it ready for 5G from a software upgrade perspective. And so you're connecting the FirstNet with the 5G, and the 5G Evolution is really spot on, Simon. As I said, we're at 40% at the end of the year. I would suggest to you, we will continue at a comparable pace that we were last year. For most of this year, I won't suggest to you, I won't give you a specific number. I will tell you there will be some -- they did a phenomenal job at overperforming last year. So I'm not going to hold them up to those standards, but we are clearly on track to get this thing done well before the 5-year and to get the vast -- get the majority of the country covered by 2020 when that mobile -- standards-based mobile 5G network is available. With regard to that too, we're selling that service, we're providing that service today with regard to a hotspot or a puck. We expect the phone to be available -- a couple of phones available this year, and one of those phones to be -- work both backwards and forwards with regard to the standard LTE existing low band as well as the millimeter wave. So yes, we do believe that provides us a significant advantage. The importance for me though is that as this FirstNet build goes, this spectrum goes up, as carrier aggregation and the 256 QAM and all the other technological improvements go into place, our existing customer base is going to get the benefits of that in their service. We think that will be great for attracting customers, allowing us to compete on a rational basis as well as key to retaining customers. So I hope I answered your question there, but it is an evolution. It is real. It affects our customers. As we roll it out, it gives them better service, and it does give us that lead for 2020 as phones come out to make this widely available in the coming year.

So are you dedicating a portion of your WCS or AWS to the standards-based 5G? How is that going to work?

I'll let the technology guys get to that in-depth. But I wouldn't say that we're going to dedicate it -- I'd say that we're going to make it available. But I will leave my network technology guys to make sure I don't mislead in that answer.

And that's the line of Brett Feldman with Goldman Sachs.

You noted earlier the success that you have when you're able to sell a video product and a broadband product in the same footprint. You're doing a great job with fiber, but even when you're done with the fiber build, it's going to be a little over 10% of the homes in the country that you can serve with fiber. But you are building a nationwide 5G network, and we've seen or at least one of your competitors already leverage their early phase of 5G to launch a residential 5G product. I was hoping you could give us some updated thoughts around whether you think that's a large addressable opportunity for AT&T to be a residential fixed wireless 5G provider. And do you think you have the resources you need to do that? Or would you have to acquire more spectrum or more fiber or something along those lines?

Yes. Brett, this is Randall. I would say over time, 3- to 5-year time horizon, unequivocally, 5G will serve as a broadband -- a fixed broadband replacement product. I am very convicted that, that will be the case. And we are, obviously, on a standards-based path. We want a standards-based path that is mobile-first. But just like every other product evolution on mobility, this won't play out the same. We -- back in the '90s, everybody was saying wireless would never serve as a substitute for fixed line voice because there wasn't sufficient capacity. Well, it is a substitute for voice. We said the same thing on broadband in terms of would the wireless device serve as a broadband replacement broadly, and the iPhone and LTE really began to make that a reality. And then as we look at 5G, will you have enough capacity to have a good broadband product that serves as a streaming service or all of your DIRECTV NOW, your Netflix, et cetera? I absolutely am convinced that we will have that capacity, particularly as we turn up millimeter wave spectrum. That's where the capacity and the performance comes from, and that's where you'll begin to see a true replacement opportunity for fixed line broadband. So I have little doubt that in the 3- to 5-year time horizon, you'll start to see substitution of wireless for fixed line broadband.

Brett, the only thing I'd add is right now, we have, as we've mentioned, 10 million Cricket customers but, in total, close to 15 million prepaid customers. And quite frankly, I think many of them may be using their phone and our broadband connections or mobile broadband connections for their service today. So I'd say that as -- I know that's not exactly on point with your question, but it's a reality today. It's a matter of how this migrates. And it goes back to why all the spectrum we're putting up, this increasing our spectral capacity by 50% through FirstNet efforts by building it with an expectation to software load 5G on it. All of that is so important because we'll be the ones best positioned to take advantage of those opportunities as they play out, which we think will be over the next few years, as Randall said, 3- to 5-year time frame.

Ironically, one of the top use cases, early use cases for 5G are businesses wanting to deploy 5G as effectively their LAN environment. And so think about a wireless plug-and-play environment, so that is truly a wireless replacing fixed line as a high-speed Internet solution. So yes, this will play itself out that way, Brett.

That's the line of Philip Cusick with JPMorgan.

First, following up on video. Randall, can you confirm that the regular-priced DIRECTV NOW base is growing? And are those positive EBITDA at this point? And then second, as you think about advertising this year, can you help us think about how you expect that? Should we -- given your advertising efforts, can we expect this to grow substantially faster than the industry overall?

Yes. So on the DIRECTV NOW, video, if you pull the promotional customers -- customer losses out, the other customer base grew. And...

And Phil, the simplest way to think about that is take 500,000 out of our numbers, which is they're all gone or they've stepped up to the full-service, full-priced plan. So yes, our full-priced customers grew.

And the ARPU, you heard John say, ARPU in the quarter sequentially is up $10, over $10 per line. And so I don't know that I could represent we're EBITDA positive yet but...

But we haven't disclosed any of that information. But those -- but we are up $11 sequentially, $10 year-over-year, but we're up sequentially in ARPU.

And on advertising, Xandr, do I expect we will outperform the market? Absolutely. I would be sorely disappointed if we did not outperform the market. If you look at fourth quarter, a streaming TV advertising business grew 26%. I mean, it is radically outperforming the market now. And so I have little concern that we will be able to outgrow the market. That's one of Brian Lesser's key objectives, is to make sure that we're building an advertising business for video that will grow faster than the market. And we're gaining more and more conviction around this the further we get into it.

I'd say, Phil, those are really important, but the ability to take the advertising data from Xandr and the information, the data insights and provide it to Turner and allow that to be used in a kind of a merger, kind of a synergistic way to improve that advertising over there to give the Turner team that opportunity to have that information to better sell theirs' is just as exciting for me as the advertising insights are for DTV Now.

We've talked in the past about the advertising inflection point really not coming until 2020 when all the pieces were in place. Randall, do you think that, that's happening more quickly? Or is this still a year of development?

It's a year of development, Phil. You'll see a strong trend on Xandr advertising. We're continuing to grow well beyond industry levels. But when we get to the really big opportunity, which is what John Stephens has articulated here, and that is beginning to leverage our customer insights into the Turner ad inventory, that's going to be more 2020 where you start to see those results really play out and also as more and more people want to participate in the marketplace. The more success we have, the more we're seeing people come to us and want to bring their inventory to bear in the marketplace and use the customer insights as well.

And Phil, the 2020 year for me, too, is a very optimistic year because it'll be another political year. And those political years are good for our advertising business, too. So I'd just say that. So yes, getting all this done and getting it all ready for that time frame and having it up and running could be very beneficial for us.

That's the line of David Barden with Bank of America.

I think I want to ask the analog to John's question on subs, which is on ARPU. Could we kind of talk a little bit about, on the wireless ARPU, what were the drivers of the sequential step-down? I think we heard from Verizon that storm credits were an issue, also potentially FirstNet migrations might've been a contributor. I just wanted to kind of see where we think that's going to go in '19. And then second, on the linear video ARPU, up $7 sequentially. That's typical to see it up with the SUNDAY TICKET, but we know that there is a promotional price component to that. So if you could kind of disaggregate those 2 forces so we can kind of guesstimate where we could see the ARPU kind of land in 2019? And then the last one, if I could, on the broadband ARPU, it's up 6% year-over-year but, sequentially, not growing. And I was trying to understand kind of which of those is the more informative, the sequential trend or the year-over-year trend in growth?

Yes. So let me start with the DTV. You're right. One, there is an impact with the SUNDAY TICKET; two, there is an impact from discounts; but three, there is an impact from the fact that we've been doing this 2-year pricing initiative since the second quarter, late second quarter, such that, that is going into effect. So all 3 of those things are going in as well as when you become less promotional, generally speaking, the promotions are revenue-based. So as we work through, if you will, the existing promotions, you'll see that change in ARPU. So there what I'm really saying is, 3 or 4 different moving parts. But in essence, we feel very good about where that process is going. It is causing some challenges on customer accounts on both DIRECTV and DIRECTV NOW, but we're comfortable with where that's going, and it's a necessary part of that EBITDA stabilization process. With regard to Mobility on the postpaid ARPU side, I would suggest to you that the changes are, if you will, from a prior year basis, are pretty significant, very good. We feel good about that. And we've seen what -- the market reaction seems to be accepting that. That has to do with buying up into bigger plans, into premium to get AT&T Watch but also some of our cost structures past these that have gone on. With regard to the sequential piece of that, there is some impacts from prior years in credits and so forth. I view those as not significant change. I think on a year-over-year basis, our postpaid ARPU is up probably about $1.50, and I think there's about a $0.10 difference sequentially. So I feel good about where we're going as we continue to add customers. So I'm not -- I don't think of that as an inflection point at all. I think of it as a continued very good performance on a year-over-year basis and a good stepping off point. I'm not sure if I missed anything else. We'll see -- on the broadband base, we'll continue -- the key is to, first, get them on the fiber products because there's lower churn, higher retention; secondly, get them higher-speed, so they buy up. When you get to a 6% year-over-year increase and you get to the point where you start to lap that, which we will do in the second half of next -- of 2019, I wouldn't expect to have those same kinds of ARPU growth. It just doesn't work that way, but we are seeing improvement in that. And you see it in the total revenue piece, which is where we're really focused on. We had mentioned earlier that we're continuing to see -- after 18 months, we're getting over 1/3, close to 40% penetration in those build space, and after 3 years, we're getting over 50% penetration in that fiber-build space. So we've got a lot of opportunity left. I think we've mentioned, we only have -- we have over 3 million customers, but we've built into 11 million. So there's a lot of growth left, not only in converting but also in growing total customers. So we feel good about all those. I'm -- hopefully, I'm answering your questions directly as I can.

The other element that kind of factors into John's commentary on broadband, we expect good growth on broadband next year. But part of it is the legacy low-speed broadband base is pretty much attritted down to a very low number. So a lot of that attrition ought to fall off next year as well. So we think broadband's set up for another pretty good year next year.

That's the line of Michael Rollins with Citi.

Two if I could. First, when you target bending the cost curve for video content in the DIRECTV business, is the growth to just slow the growth of programming cost? Or are you targeting an actual drop in total programming costs over the next few years? And maybe within that context, how do you look at exclusive agreements, like the one that you have with the NFL SUNDAY TICKET? And then just backing up to a higher level, when you look at the target of $26 billion of free cash flow for 2019, as you've exited 2018, are there any changes in the contributors with respect to operations, financing costs, taxes or even what you may contribute to benefit plans?

Well, I'll start with the content cost piece, Michael, and then I'll let John talk to you about the cash flow composition and decompose that for you a little bit. But the answer to your question on the content cost curve is the objective, as content deals come up, is to move the needle, and it's not one-size-fits-all. There are some pieces of content that we look at the value of the content to the customer versus the price we pay, and we say that content has to come down in terms of cost. There are some where the customer engagement is high, and so it might be hard to take the content costs down. But the objective is to keep the equation in balance. And you cannot have a business model where subscribers are declining and you continue to increase costs by 7% and 8%. And so far, the content deals that we've been through, we've had some very good success to getting rationalization for those content costs. And so this is a not inconsequential part of the equation to getting to EBITDA stable as well in 2019. And so far, early indications are we think this is an equation we can balance, and it should be a healthy contributor to it. What we have to do is the customer is just not willing to pay more for the content as the content costs have been increasing over the last few years. And so we've got to get the content cost growth in line with what the customers are willing to pay. And the customers are willing to pay virtually no additional money right now, so the content costs have to reflect that. So we'll be very assertive as we go through the course of this year and try to control the spend on content costs. And then there's another element to it, and John Donovan and his team are being very smart about this and, particularly, on the over-the-top pieces. But what content has to be included in packages? You can control your margins and your content costs by getting the packages more rightsized to the customers. And so can you bring content costs down to keep margins in check by rightsizing the packages for the customer? So there's a lot of really smart, analytical work being done there to how can we help our customers by getting the packages rightsized as well. John, do you want to talk about cash flow?

So thinking about cash flow, Mike, let me try it this way. If you start off with 2018 as kind of your base, a couple of things: one, we won't have the merger deal-related costs. Those will go away because we've got the deal done; secondly, we'll have a full year of Time Warner, so you add that back in. And Time Warner for 6 months this year, it was about $2 billion of free cash flow. And the deal cost in total and all the interest, everything else, was about $2 billion in the first half of the year. Secondly, you'll have -- or next, you'll have -- we'll begin to see some merger integration synergy benefits. We'll have some costs to putting those into place. So I don't want to overplay that. But it will be a positive generator. That's kind of the viewpoint from the deal. On interest expense in total, of course, we'll see some interest expense from the deal cost for the full year. I take that into account when I talk about WarnerMedia generation. What you'll see though from us is a paydown of debt, reducing interest expense, offset by some of the spectrum that we've been capitalizing interest on is now being put into service very quickly by our FirstNet network team. And so as we put that into service, we'll have more of that go to expense. So those 2 will act to offset each other in some way. We expect to have some higher cash taxes this year. As you know, this past year because of tax reform and the impacts that were retroactive, we had very low, if any, tax payments this year. And so we'll see that go up. And then quite frankly, as we were this year and as we were last year, the benefit plan funding is -- we've got no requirements for any benefit plan funding, pension or otherwise. We're very healthy in those. And I think you can see that on our balance sheet, but we'll be strategic, we'll be targeted, like we were at the end of this year, to take advantage of our strong cash position and to provide some -- a messaging, not only to our employees about how important it is and how we're going to stand by it, but also efficiency from a tax perspective and getting some tax deductions and so forth. So hopefully, I answered your question. I think you're probably focused on interest expense that's got 2 items: less capitalized interest on spectrum, so a higher interest expense from that; lower interest expense as we pay down debt. Taxes will be up from a very low level this year. Full year of Time Warner, no deal costs expected or something -- nothing of significance. And then merger integration benefits, offsetting or hoping to offset merger and integration project costs. I hope I've been as thorough as I can, but I think it gives you a way to build to -- it makes it easy to see the $26 billion is within our achievability range.

It's the line of Amy Yong with Macquarie.

I guess, one on Warner. It seems like a lot of us look at the streaming landscape, and it looks like it's getting a lot more competitive. You have NBC launching in 2020. How are you positioning Warner, the streaming services? And is the focus going to be on sub-growth or ad, advertising? I guess, hand-in-hand with this question, how are you thinking about your content allocation decisions? How do you balance license and revenue to someone like a Netflix versus holding it back for your own use?

Amy, this is Randall. Look, we have really high expectations for our streaming service. We don't think there is going to be a proliferation of these that will succeed over time. But those who have very, very strong IP, deep libraries of IP are the ones that we think are going to succeed over time. And so that's what we are focused on. We are strong believers in what John Stankey likes to call 2-sided business models, subscription and commercial-free elements, like HBO and like Netflix. There is a demand, and the customers have become accustomed to advertising-free subscription services, and we think HBO and a lot of the Warner Bros. content that's really premium content will fit into that mold. But there are other elements where advertising-supported models we think are going to be important to keep prices down, to keep costs for the consumer down and to actually fund additional content acquisition and purchasing. Xandr is a big part of making that model work. So our model will be a 2-sided model, with a heavy subscription service but some ad-supported elements to it as well. In terms of the decision-making on what to do with premium content as content deals come up, there's not going to be a cookie-cutter approach to this, Amy. I don't think all content is equal in that decision-making process. You saw some of the elements of Friends when the Friends rights came up from Netflix late last year. There is a situation where you ask yourself the question, "how important is it to have that content on an exclusive basis versus allowing others to license and using it?" And the decision on that is one that Kevin Tsujihara and John Stankey do a lot of analytics and thinking about, but that was one where we said exclusivity is probably not that critical on that type of content, but it's critical to have on our platform. So we did license it to Netflix, as you saw, but on a nonexclusive basis. And so each of these decisions on significant content like that are going to be evaluated in terms of how critical is it to our platform to have it as exclusive versus the economics of licensing it to others. So more to come, but we actually do believe that having a 100- or, call it, a 90-year inventory of incredible IP is a really important thing. And when you look out at the landscape in terms of what is being consumed on a lot of the other aggregators on streaming products, you would be surprised how much of that is Warner Bros'. intellectual property. And so we're going to be making some decisions over the coming 2, 3 years on which of that property would be brought in and which to be sold on a nonexclusive basis.

It's the line of Walter Piecyk from BTIG.

You guys are putting a lot of spectrum in, in the network, which obviously is going to improve performance. In the last couple of quarters, your churn has been up a little bit. Verizon, obviously, had decent gross adds. When do you think the impact of that additional spectrum will show up in some subscriber growth, either in terms of gross adds or maybe lower churn?

I think, Walter, you're going to see that as we get into second and third quarter this year, as the broad base of our customers begin to experience and realize the effects of the spectrum being put in, and that's really going to be scaling as we get into second and third quarter of this year. And it is going to be a discernible difference from a customer experience standpoint as we turn it up. And it's going to be a discernible difference for the customer without the customer having to change handsets. The lion's share of our customers will just experience this as we turn it up. And so as John Stephens has pointed out, we're deploying FirstNet across the country. As we deploy FirstNet, we turn all the spectrum up, so that FirstNet becomes a driver for our overall customer base experiencing this benefit. And so we have a lot of conviction that this is going to be a step change improvement. Our customers will experience it, and it's going to be a significant help in terms of driving churn down. Add to that, as the FirstNet deployment happens, as we're getting this kind of performance, we have some fairly strong expectations on customer adds from FirstNet. So the gross add engine, if you will, the customer add engine, we think FirstNet is going to be a significant driver of customer additions as we move into second, third and fourth quarter of this year. So we have some high expectations that what we're doing on the network that this is important. It's unique. It's differentiated, and it's going to drive serious customer impacts as we get into the year.

Thanks for that color on timing. And also, just a second question, I wanted to go back to the Investor Day. On the Entertainment Group, you had that nice slide that showed you -- showed how you're going to stabilize EBITDA at $10 billion. One of the things at the bottom was that the video subs was going to maintain at 25 million from the start of '18 to the end of '19 -- or excuse me, the end of '18 to the end of '19. Is that really necessary to hit your $10 billion target? And just given kind of the sub losses this quarter and kind of what you're talking about as far as the impact of promotions, it seems like that might be challenging to hit. So is it really necessary to hit 25 million subs in order to generate $10 billion in EBITDA in the Entertainment Group?

Yes. If I could bring some clarity to that, Walter, and that is a big part of that 25 million was WatchTV, which is our very low-end content offering for our mobile subscribers. And that's a very low ARPU product, but it's a profitable product. And it's one that we expect there will be a lot of those added during the course of the year. There are 500,000 of those accounts established right now. We're not yet calling them subscribers until we see behaviorally how they engage with the product and what kind of profitability we have. But that is a significant part of the 25 million. We do expect some continued, obviously, losses on the linear video. We talked about that, and we will achieve EBITDA stability even with the continued attrition of our traditional linear video subscribers. Does that help?

It does.

Okay. So listen, I want to thank everybody for joining us today. '18 was a solid year. It was basically doing what we told you we were going to do at the analyst conference. And as I mentioned at the outset, I feel like we can check the box. We are doing exactly what we said. We feel very good about getting to 2019 and stabilizing enterprise -- Entertainment Group EBITDA margins. We feel really good about the Wireless business. It's a year of execution, delivering on cash flow and delivering on debt paydown and delivering our returns of capital to our shareholders. So we thank you for joining us and look forward to speaking with you later. Thanks a lot.

Thank you all.

Thanks, everybody.

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