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Investor Briefing Q2 2018 AT&T EARNINGS Investor Briefing No. 301 | UPDATED AUGUST 27, 2018 Investor Briefing Q2 2018 AT&T EARNINGS Contents Consolidated Results 3 Nj The company’s consolidated results include 16 days of Time Warner results for the second quarter. Time Warner’s total second-quarter results on a historical basis are located on AT&T’s Investor Relations website. Pro forma schedules are expected to be filed in August. Business Solutions 6 Entertainment Group 8 Consumer Mobility 11 International 12 AT&T Mobility 13 Highlights 16 Financial and Operational Information 20 Discussion and Reconciliation 35 of Non-GAAP Measures Investor Briefing Q2 2018 AT&T EARNINGS Consolidated Results AT&T Completes Time Warner Acquisition; Agrees to Acquire AppNexus; Reports Second-Quarter Results Consolidated results include 16 days of Time Warner results for the second quarter Company Updates 2018 Guidance1 Nj Diluted EPS of $0.81 as reported compared to Nj Raising adjusted EPS to high end of $3.50 range $0.63 in the year-ago quarter Nj Raising free cash flow to high end of $21 billion Nj Adjusted EPS of $0.91 compared to $0.79 in the range (inclusive of all deal and integration costs) year-ago quarter Nj Capital Investment of approximately $25 billion; Nj Consolidated revenues of $39.0 billion $22 billion net of expected FirstNet Nj Cash from operations of $10.2 billion, up 17.5% reimbursements and vendor financing Nj Capital expenditures of $5.1 billion Nj Free cash flow of $5.1 billion, up 46.4% Nj Strong subscriber gains: Nj Entertainment Group results: 3.8 million total wireless net adds 342,000 DIRECTV NOW net adds to reach more than 1.8 million subscribers 3.1 million in U.S., driven by connected devices and prepaid 80,000 total video net adds; total video customer base stable with 756,000 in Mexico DIRECTV NOW; AT&T WatchTV launched 219,000 total video net adds (U.S. and Latin America) 76,000 IP broadband net adds; 23,000 total broadband net adds; more than 9 million Nj U.S. wireless results: customer locations passed with fiber Service revenue growth on a AdWorks continues double-digit comparable basis revenue growth 46,000 postpaid phone net adds with continued strong year-over-year Nj Time Warner acquisition closed on June 14; improvement full second-quarter results include: Continued prepaid growth with HBO and Turner year-over-year 356,000 phone net adds subscription revenue growth Nearly 400,000 branded smartphones Turner ad revenue up 3% added to base Record number of series in Second-quarter postpaid phone production at Warner Bros. churn of 0.82% 166 Primetime Emmy Awards nominations 3 CONTENTS Investor Briefing Q2 2018 AT&T EARNINGS Consolidated Results CONSOLIDATED FINANCIAL RESULTS Operating expenses were $32.5 billion versus $33.3 billion, primarily due to the netting of USF and other AT&T adopted new U.S. accounting standards as regulatory fee revenues and the deferral of required that deal with revenue recognition (ASC 606), commissions under ASC 606. Excluding those post-employment benefit costs and certain cash impacts, operating expenses were $34.0 billion, receipts on installment receivables. These changes an increase of about $700 million due to inclusion impact the company’s income statements and cash of Time Warner results, content cost pressure and flows. With the adoption of ASC 606, the company higher wireless equipment costs partially offset made a policy decision to record Universal Service Fees by cost efficiencies. (USF) and other regulatory fees on a net basis. The company is providing comparable results in addition to Operating income was $6.5 billion, stable versus the GAAP to help investors better understand the impact year-ago quarter; and operating income margin was on financials from ASC 606 and the policy decision. 16.6% versus 16.4%. On a comparative basis, operating Historical income statements and cash flows have been income was $5.9 billion and operating income margin recast to show only the impact of the adoption of the was 14.8%. When adjusting for a non-cash actuarial other two accounting standards. gain on benefit plans, amortization, merger- and integration-related expenses and other items, operating The company’s consolidated results include 16 days of income was $8.2 billion, or $7.7 billion on a comparative basis, Time Warner results for the second quarter. Time versus $8.1 billion in the year-ago quarter and operating Warner’s total second-quarter results on a historical income margin was 21.1%, or 19.2% on a comparative basis are located on AT&T’s Investor Relations website. basis, versus 20.3% in the year-ago quarter. Pro forma schedules are expected to be filed in August. Second-quarter net income attributable to AT&T AT&T’s consolidated revenues for the second quarter was $5.1 billion, or $0.81 per diluted share, versus totaled $39.0 billion versus $39.8 billion in the year- $3.9 billion, or $0.63 per diluted share, in the year- ago quarter, primarily due to the impact of ASC 606 ago quarter. Adjusting for a $0.21 non-cash actuarial which included netting of $900 million of USF with gain on benefit plans and $0.31 of costs for operating expenses. On a comparative basis, declines amortization, merger- and integration-related in domestic video and legacy wireline services were expenses and other items, earnings per diluted offset by adding approximately $1.1 billion from share was $0.91 compared to an adjusted $0.79 in Time Warner net of eliminations and growth in the year-ago quarter, a 15.2% increase. wireless, strategic business services and advertising. On a comparative basis, revenues were $39.9 billion, Cash from operating activities was $10.2 billion, an increase of 0.2% primarily due to the second- and capital expenditures were $5.1 billion. Capital quarter close of the Time Warner acquisition. investment included about $275 million in FirstNet capital costs and reflects about $300 million in FirstNet reimbursements. Free cash flow — cash from operating activities minus capital expenditures — was $5.1 billion for the quarter. Consolidated Revenues IN BILLIONS $41.7 Adjusted Earnings Per Share $39.8 $39.7 $39.9 $39.0 $0.91 $38.0 $0.85 $0.79 $0.78 $0.74 2Q17 3Q17 4Q17 1Q18 2Q18 2Q18 Historical Accounting Method 2Q17 3Q17 4Q17 1Q18 2Q18 4 CONTENTS Investor Briefing Q2 2018 AT&T EARNINGS Consolidated Results Cash from Operations IN BILLIONS $10.8 $10.2 $9.5 $8.7 v $8.9 $5.3 v $5.1 v $5.1 $6.1 $5.2 $5.6 $5.1 $4.5 $3.5 $2.8 2Q17 3Q17 4Q17 1Q18 2Q18 Free Cash Flow CAP EX 2018 OUTLOOK1 AT&T expects in 2018: Nj Raising adjusted EPS to high end of the $3.50 range Nj Raising free cash flow to high end of the $21 billion range; inclusive of all deal and integration costs Nj Capital Investment of approximately $25 billion; $22 billion net of expected FirstNet reimbursements and vendor financing 1 Adjustments include a non-cash mark-to-market benefit plan gain/loss, merger-related interest expense, merger integration and amortization costs and other adjustments. We expect the mark-to-market adjustment which is driven by interest rates and investment returns that are not reasonably estimable at this time, to be the largest of these items. Accordingly, we cannot provide a reconciliation between forecasted adjusted diluted EPS and reported diluted EPS without unreasonable effort. 5 CONTENTS Investor Briefing Q2 2018 AT&T EARNINGS Business Solutions The Business Solutions segment provides both wireless and wireline services to business customers. AT&T’s wireless and wired networks provide complete communications solutions to these customers. AT&T’s business customer revenues include results from enterprise, public sector, wholesale and small/midsize customers. Effective Jan. 1, 2018, wireless subscribers who participate in employer-sponsored plans have been moved to Revenues & EBITDA Margin* IN BILLIONS Consumer Mobility from Business Solutions. Historical $9.9 results have been recast to reflect that change. $9.7 $9.6 $9.1 $9.1 $9.4 FINANCIAL HIGHLIGHTS 38.6% 37.4% 36.8% 36.0% 38.0% Total second-quarter revenues from business 35.8% customers were $9.1 billion, down 6.2% versus the year-earlier quarter due to the impact of ASC 606 $3.6 $3.6 revenue recognition and declines in legacy wireline $3.5 $3.5 $3.4 $3.4 services which were partially offset by increases in 2Q17 3Q17 4Q17 1Q18 2Q18 2Q18 Historical strategic business services and wireless. On a Accounting Revenues EBITDA EBITDA Margin comparative basis, revenues were $9.4 billion, down 2.4%. Method *Prior quarters have been recast to remove certain hosting colocation operations pending divestiture. Nj Second-quarter operating expenses were $7.1 billion, down 5.7%, or essentially flat on a comparative basis, versus the second quarter of 2017. Operating BUSINESS WIRELESS FINANCIAL RESULTS income totaled $2.0 billion, down 8.0%, or down Business wireless revenues were $2.4 billion, up 2.1% 11.4% on a comparative basis, year over year with year over year due to higher equipment revenues. On IP revenue growth and cost efficiencies partially a comparative basis, revenues were up 4.2% driven by offsetting declines in legacy services, higher growth in both service and equipment revenues. FirstNet expenses and higher wireless sales costs. Nj Wireless service revenues were down 8.7% year Nj Second-quarter operating income margin was over year on a reported basis, reflecting revenue 21.6%, or 20.0% on a comparative basis, with recognition including changes in USF recording declines in legacy services and higher FirstNet net.
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