AT&T INC. FINANCIAL REVIEW 2018 Selected Financial and Operating Data .............................................................. 18 Management’s Discussion and Analysis of Financial Condition and Results of Operations ......................................... 19 Consolidated Financial Statements ..................................................................... 60 . 17 . Selected Financial and Operating Data Dollars in millions except per share amounts At December 31 and for the year ended: 2018 2017 2016 2015 2014 Financial Data Operating revenues $170,756 $160,546 $163,786 $146,801 $132,447 Operating expenses $144,660 $140,576 $140,243 $126,439 $113,860 Operating income $ 26,096 $ 19,970 $ 23,543 $ 20,362 $ 18,587 Interest expense $ 7,957 $ 6,300 $ 4,910 $ 4,120 $ 3,613 Equity in net income (loss) of affiliates $ (48) $ (128) $ 98 $ 79 $ 175 Other income (expense) – net $ 6,782 $ 1,597 $ 1,081 $ 4,371 $ (4,794) Income tax (benefit) expense $ 4,920 $ (14,708) $ 6,479 $ 7,005 $ 3,619 Net Income $ 19,953 $ 29,847 $ 13,333 $ 13,687 $ 6,736 Less: Net Income Attributable to Noncontrolling Interest $ (583) $ (397) $ (357) $ (342) $ (294) Net Income Attributable to AT&T $ 19,370 $ 29,450 $ 12,976 $ 13,345 $ 6,442 Earnings Per Common Share: Net Income Attributable to AT&T $ 2.85 $ 4.77 $ 2.10 $ 2.37 $ 1.24 Earnings Per Common Share – Assuming Dilution: Net Income Attributable to AT&T $ 2.85 $ 4.76 $ 2.10 $ 2.37 $ 1.24 Cash and cash equivalents $ 5,204 $ 50,498 $ 5,788 $ 5,121 $ 8,603 Total assets $531,864 $444,097 $403,821 $402,672 $296,834 Long-term debt $166,250 $125,972 $113,681 $118,515 $ 75,778 Total debt $176,505 $164,346 $123,513 $126,151 $ 81,834 Capital expenditures1 $ 21,251 $ 21,550 $ 22,408 $ 20,015 $ 21,433 Dividends declared per common share $ 2.01 $ 1.97 $ 1.93 $ 1.89 $ 1.85 Book value per common share $ 26.63 $ 23.13 $ 20.22 $ 20.12 $ 17.40 Ratio of earnings to fixed charges 3.42 2.63 3.59 4.01 2.91 Debt ratio 47.7% 53.6% 49.9% 50.5% 47.5% Net debt ratio 46.2% 37.2% 47.5% 48.5% 42.6% Weighted-average common shares outstanding (000,000) 6,778 6,164 6,168 5,628 5,205 Weighted-average common shares outstanding with dilution (000,000) 6,806 6,183 6,189 5,646 5,221 End of period common shares outstanding (000,000) 7,282 6,139 6,139 6,145 5,187 Number of employees 268,220 254,000 268,540 281,450 243,620 1 Includes FirstNet reimbursements of $1,429 in 2018, $279 in 2017 and $0 in 2016-2014 (see Note 19). 18 . Management’s Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts OVERVIEW AT&T Inc. is referred to as “we,” “AT&T” or the “Company” We have four reportable segments: (1) Communications, throughout this document, and the names of the (2) WarnerMedia, (3) Latin America and (4) Xandr. Our particular subsidiaries and affiliates providing the segment results presented in Note 4 and discussed below services generally have been omitted. AT&T is a holding follow our internal management reporting. We analyze company whose subsidiaries and affiliates operate our segments based on segment operating contribution, worldwide in the telecommunications, media and which consists of operating income, excluding acquisition- technology industries. You should read this discussion related costs and other significant items and equity in net in conjunction with the consolidated financial statements income (loss) of affiliates for investments managed within and accompanying notes (Notes). We completed each segment. Each segment’s percentage calculation of the acquisition of Time Warner Inc. (Time Warner) total segment operating revenue and contribution is on June 14, 2018, and have included its results after that derived from our segment results table in Note 4 and may date. In accordance with U.S. generally accepted accounting total more than 100 percent due to losses in one or more principles (GAAP), operating results from Time Warner segments. Percentage increases and decreases that are prior to the acquisition are excluded. not considered meaningful are denoted with a dash. Percent Change 2018 vs. 2017 vs. 2018 2017 2016 2017 2016 Operating Revenues Communications $144,631 $150,378 $154,232 (3.8)% (2.5)% WarnerMedia 18,941 430 418 — 2.9 Latin America 7,652 8,269 7,283 (7.5) 13.5 Xandr 1,740 1,373 1,333 26.7 3.0 Corporate and other 1,191 1,279 1,731 (6.9) (26.1) Eliminations and consolidation (3,399) (1,183) (1,211) — 2.3 AT&T Operating Revenues 170,756 160,546 163,786 6.4 (2.0) Operating Contribution Communications 32,262 31,685 32,437 1.8 (2.3) WarnerMedia 5,695 62 96 — (35.4) Latin America (710) (266) (661) — 59.8 Xandr 1,333 1,202 1,233 10.9 (2.5) Segment Operating Contribution $ 38,580 $ 32,683 $ 33,105 18.0% (1.3)% The Communications segment accounted for The WarnerMedia segment accounted for approximately approximately 84% of our 2018 total segment operating 11% of our 2018 total segment operating revenues and revenues compared to 94% in 2017 and 84% of our 15% of our 2018 total segment operating contribution. 2018 total segment operating contribution as compared This segment develops, produces and distributes feature to 97% in 2017. This segment provides services to films, television, gaming and other content over various businesses and consumers located in the U.S. or in physical and digital formats. This segment contains the U.S. territories and businesses globally. Our business following business units: strategies reflect bundled product offerings that cut across product lines and utilize shared assets. This • Turner primarily operates multichannel basic segment contains the following business units: television networks and digital properties. • Home Box Office primarily operates multichannel • Mobility provides nationwide wireless service premium pay television services. and equipment. • Warner Bros. principally produces and distributes • Entertainment Group provides video, television shows, feature films and games. internet and voice communications services to residential customers. • Business Wireline provides advanced IP-based services (referred to as “strategic services”), as well as traditional voice and data services to business customers. 19 . Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Dollars in millions except per share amounts The Latin America segment accounted for approximately RESULTS OF OPERATIONS 4% of our 2018 total segment operating revenues Consolidated Results Our financial results are compared to 5% in 2017. This segment provides summarized in the following table. We then discuss entertainment and wireless services outside of the U.S. factors affecting our overall results for the past three This segment contains the following business units: years. Additional analysis is discussed in our “Segment • Vrio provides video services primarily to residential Results” section. We also discuss our expected revenue and customers using satellite technology. expense trends for 2019 in the “Operating Environment and Trends of the Business” section. Percentage increases • Mexico provides wireless service and equipment and decreases that are not considered meaningful are to customers in Mexico. denoted with a dash. Certain prior period amounts have been The Xandr segment accounted for approximately 1% of reclassified to conform to the current period’s presentation. our total segment operating revenues in 2018 and 2017 and 3% of our 2018 total segment operating contribution as compared to 4% in 2017. This segment provides advertising services. These services utilize data insights to develop higher-value targeted advertising. Percent Change 2018 vs. 2017 vs. 2018 2017 2016 2017 2016 Operating revenues Service $152,345 $145,597 $148,884 4.6% (2.2)% Equipment 18,411 14,949 14,902 23.2 0.3 Total Operating Revenues 170,756 160,546 163,786 6.4 (2.0) Operating expenses Operations and support 116,230 116,189 114,396 — 1.6 Depreciation and amortization 28,430 24,387 25,847 16.6 (5.6) Total Operating Expenses 144,660 140,576 140,243 2.9 0.2 Operating Income 26,096 19,970 23,543 30.7 (15.2) Interest expense 7,957 6,300 4,910 26.3 28.3 Equity in net income (loss) of affiliates (48) (128) 98 62.5 — Other income (expense) – net 6,782 1,597 1,081 — 47.7 Income Before Income Taxes 24,873 15,139 19,812 64.3 (23.6) Net Income 19,953 29,847 13,333 (33.1) —% Net Income Attributable to AT&T $ 19,370 $ 29,450 $ 12,976 (34.2)% —% OVERVIEW Operating revenues increased in 2018 and decreased Operations and support expenses increased in 2018 and in 2017. The increase in 2018 was primarily due to our 2017. The increase in 2018 was primarily due to business acquisition of Time Warner and growth in our Xandr acquisitions in 2018, higher content costs and higher segment. Partially offsetting the increases was our equipment costs related to wireless device sales and adoption of a new revenue accounting standard, which upgrades in our Communications segment. The increase included our policy election to record Universal Service was partially offset by our adoption of new accounting Fund (USF) fees on a net basis. Also offsetting revenues rules, which included our policy election to record USF were declines in our Communications segment, which fees on a net basis, and a prior year noncash charge continues to experience pressure from developing resulting from the abandonment of certain copper assets technology and shifts in customer behavior, partially offset that will not be necessary to support future network by increased equipment revenues.