AT&T Completes Time Warner Acquisition; Agrees to Acquire AppNexus; Reports Second-Quarter Results

July 24, 2018

DALLAS--(BUSINESS WIRE)--Jul 24, 2018--“It was an exciting quarter for AT&T as we completed the acquisition of Time Warner on June 14 and created a modern media company built around premium content, 170 million direct-to-customer relationships, advertising technology and high-speed networks,” said Randall Stephenson, AT&T chairman and CEO. 2

“Time Warner joins us coming off an impressive second-quarter. Turner turned in solid subscription and advertising revenue growth, Warner Bros. is in high gear with a record number of series in production, and HBO delivered strong subscriber revenue growth.

“Since we closed the Time Warner deal, we’ve also announced an agreement to acquire ad-tech leader AppNexus, which will be an important step to strengthen our leadership in advanced TV advertising.

“Our goal is to reshape the way media and entertainment work for consumers, and you will see us continue to do exactly that.”

AT&T Inc. ( NYSE:T ) reported solid wireless results in the second quarter, including postpaid phone gains, continued strong prepaid phone growth and stable postpaid churn. On a GAAP basis, service revenue declined; however, on a comparable basis service revenue grew. Including the acquisition of Time Warner in mid-June, AT&T reported consolidated revenue growth on a comparable basis, which offset pressure from its entertainment and business segments, and strong earnings and free cash flow growth.

Strong subscriber gains: 3.8 million total wireless net adds 3.1 million in U.S., driven by connected devices and prepaid756,000 in Mexico219,000 total video net adds (U.S. and Latin America) U.S. wireless results: Service revenue growth on a comparable basis46,000 postpaid phone net adds with continued strong year-over-year improvementContinued prepaid growth with 356,000 phone net addsNearly 400,000 branded smartphones added to baseSecond-quarter postpaid phone churn of 0.82% Entertainment Group results: 342,000 DIRECTV NOW net adds to reach more than 1.8 million subscribers80,000 total video net adds; total video customer base stable with DIRECTV NOW; AT&T WatchTV launched76,000 IP broadband net adds; 23,000 total broadband net adds; more than 9 million customer locations passed with fiberAdWorks continues double-digit revenue growth Time Warner acquisition closed on June 14; full second-quarter results include: HBO and Turner year-over-year subscription revenue growthTurner ad revenues up 3%Record number of series in production at Warner Bros.166 Primetime Emmy Awards nominations

Consolidated Financial Results

AT&T adopted new U.S. accounting standards as required that deal with revenue recognition (ASC 606), post-employment benefit costs and certain cash receipts on installment receivables. These changes impact the company’s income statements and cash flows. With the adoption of ASC 606, the company made a policy decision to record Universal Service Fees (USF) and other regulatory fees on a net basis. The company is providing comparable results in addition to GAAP to help investors better understand the impact on financials from ASC 606 and the policy decision. Historical income statements and cash flows have been recast to show only the impact of the adoption of the other two accounting standards.

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.

AT&T’s consolidated revenues for the second quarter totaled $39.0 billion versus $39.8 billion in the year-ago quarter, primarily due to the impact of ASC 606 which included netting of approximately $900 million of USF with operating expenses. On a comparative basis, declines in domestic video and legacy wireline services were offset by adding approximately $1.1 billion from Time Warner net of eliminations and growth in wireless, strategic business services and advertising. On a comparative basis, revenues were $39.9 billion, an increase of 0.2% primarily due to the second-quarter close of the Time Warner acquisition.

Operating expenses were $32.5 billion versus $33.3 billion, primarily due to the netting of USF and other regulatory fee revenues and the deferral of commissions under ASC 606. Excluding those impacts, operating expenses were $34.0 billion, an increase of about $700 million due to inclusion of Time Warner results, content cost pressure and higher wireless equipment costs partially offset by cost efficiencies.

Versus results from the second quarter of 2017, operating income was $6.5 billion, stable versus the year-ago quarter; and operating income margin was 16.6% versus 16.4%. On a comparative basis, operating income was $5.9 billion and operating income margin was 14.8%. When adjusting for a non-cash actuarial gain on benefit plans, amortization, merger- and integration-related expenses and other items, operating income was $8.2 billion, or $7.7 billion on a comparative basis, versus $8.1 billion in the year-ago quarter and operating income margin was 21.1%, or 19.2% on a comparative basis, versus 20.3% in the year-ago quarter.

Second-quarter net income attributable to AT&T was $5.1 billion, or $0.81 per diluted share, versus $3.9 billion, or $0.63 per diluted share, in the year-ago quarter. Adjusting for a $0.21 non-cash actuarial gain on benefit plans and $0.31 of costs for amortization, merger- and integration-related expenses and other items, earnings per diluted share was $0.91 compared to an adjusted $0.79 in the year-ago quarter, a 15.2% increase.

Cash from operating activities was $10.2 billion, and capital expenditures were $5.1 billion. Capital 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.

2018 Outlook1

AT&T expects in 2018:

Raising adjusted EPS to high end of the $3.50 range Raising free cash flow to high end of the $21 billion range; inclusive of all deal and integration costs Capital Investment of approximately $25 billion; $22 billion net of expected FirstNet reimbursements and vendor financing

______________________________________ 1Adjustments 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.2Represents cumulative video-capable D2C relationships across the following services: Postpaid, prepaid and reseller wireless; US and LatAm pay-TV, including DIRECTV NOW; Mexico wireless; and US consumer broadband.

*About AT&T

AT&T Inc. (NYSE:T) is a diversified, global leader in telecommunications, media and entertainment, and technology. It executes in the market under four operating units. WarnerMedia’s HBO, Turner and Warner Bros. divisions are world leaders in creating premium content, operate the world’s largest TV and film studio, and own a world-class library of entertainment. AT&T Communications provides more than 100 million U.S. consumers with entertainment and communications experiences across TV, mobile and broadband services. Plus, it serves more than 3 million business customers with high-speed, highly secure connectivity and smart solutions. AT&T International provides pay-TV services across 11 countries and territories in Latin America and the Caribbean, and is the fastest growing wireless provider in Mexico, serving consumers and businesses. AT&T ad and analytics provides marketers with innovative, targeted, data-driven advertising solutions around premium video content.

AT&T products and services are provided or offered by subsidiaries and affiliates of AT&T Inc. under the AT&T brand and not by AT&T Inc. Additional information is available at about.att.com. © 2018 AT&T Intellectual Property. All rights reserved. AT&T, the Globe logo and other marks are trademarks and service marks of AT&T Intellectual Property and/or AT&T affiliated companies. All other marks contained herein are the property of their respective owners.

Cautionary Language Concerning Forward-Looking Statements

Information set forth in this news release contains financial estimates and other forward-looking statements that are subject to risks and uncertainties, and actual results might differ materially. A discussion of factors that may affect future results is contained in AT&T’s filings with the Securities and Exchange Commission. AT&T disclaims any obligation to update and revise statements contained in this news release based on new information or otherwise.

This news release may contain certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures are available on the company’s website at https://investors.att.com.

Discussion and Reconciliation of Non-GAAP Measures

We believe the following measures are relevant and useful information to investors as they are part of AT&T’s internal management reporting and planning processes and are important metrics that management uses to evaluate the operating performance of AT&T and its segments. Management also uses these measures as a method of comparing performance with that of many of our competitors.

Certain amounts have been conformed to the current period’s presentation, including our adoption of new accounting standards; ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” and ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash; and our realignment of certain responsibilities and operations within our segments, the most significant of which is to report wireless accounts with employer discounts in our Consumer Mobility segment.

Free Cash Flow

Free cash flow is defined as cash from operations minus Capital expenditures. Free cash flow after dividends is defined as cash from operations minus Capital expenditures and dividends. Free cash flow dividend payout ratio is defined as the percentage of dividends paid to free cash flow. We believe these metrics provide useful information to our investors because management views free cash flow as an important indicator of how much cash is generated by routine business operations, including Capital expenditures, and makes decisions based on it. Management also views free cash flow as a measure of cash available to pay debt and return cash to shareowners.


Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies. For AT&T, EBITDA excludes other income (expense) – net, and equity in net income (loss) of affiliates, as these do not reflect the operating results of our subscriber base or operations that are not under our control. Equity in net income (loss) of affiliates represents the proportionate share of the net income (loss) of affiliates in which we exercise significant influence, but do not control. Because we do not control these entities, management excludes these results when evaluating the performance of our primary operations. EBITDA also excludes interest expense and the provision for income taxes. Excluding these items eliminates the expenses associated with our capital and tax structures. Finally, EBITDA excludes depreciation and amortization in order to eliminate the impact of capital investments. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA is not presented as an alternative measure of operating results or cash flows from operations, as determined in accordance with U.S. generally accepted accounting principles (GAAP).

EBITDA service margin is calculated as EBITDA divided by service revenues.

When discussing our segment results, EBITDA excludes equity in net income (loss) of affiliates, and depreciation and amortization from segment contribution. For our supplemental presentation of our combined domestic wireless operations (AT&T Mobility) and our supplemental presentation of the Mexico Wireless and Latin America operations of our International segment, EBITDA excludes depreciation and amortization from operating income.

These measures are used by management as a gauge of our success in acquiring, retaining and servicing subscribers because we believe these measures reflect AT&T’s ability to generate and grow subscriber revenues while providing a high level of customer service in a cost-effective manner. Management also uses these measures as a method of comparing segment performance with that of many of its competitors. The financial and operating metrics which affect EBITDA include the key revenue and expense drivers for which segment managers are responsible and upon which we evaluate their performance. Management uses Mexico Wireless EBITDA in evaluating profitability trends after our two Mexico wireless acquisitions in 2015, and our investments in building a nationwide LTE network by end of 2018. Management uses Latin America EBITDA in evaluating the ability of our Latin America operations to generate cash to finance its own operations.

We believe EBITDA Service Margin (EBITDA as a percentage of service revenues) to be a more relevant measure than EBITDA Margin (EBITDA as a percentage of total revenue) for our Consumer Mobility segment operating margin and our supplemental AT&T Mobility operating margin. We also use wireless service revenues to calculate margin to facilitate comparison, both internally and externally with our wireless competitors, as they calculate their margins using wireless service revenues as well.

There are material limitations to using these non-GAAP financial measures. EBITDA, EBITDA margin and EBITDA service margin, as we have defined them, may not be comparable to similarly titled measures reported by other companies. Furthermore, these performance measures do not take into account certain significant items, including depreciation and amortization, interest expense, tax expense and equity in net income (loss) of affiliates. Management compensates for these limitations by carefully analyzing how its competitors present performance measures that are similar in nature to EBITDA as we present it, and considering the economic effect of the excluded expense items independently as well as in connection with its analysis of net income as calculated in accordance with GAAP. EBITDA, EBITDA margin and EBITDA service margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP.

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