John Stephens, AT&T chief financial officer, spoke today at the Morgan Stanley European Technology, Media & Telecommunications conference in Barcelona. Stephens reiterated the company’s guidance for 2018. For the full year, AT&T expects to deliver:

  • Adjusted EPS at the high end of the $3.50 range1
  • Free cash flow at the high end of the $21 billion range
  • Capital investment in the $22 billion range, net of FirstNet reimbursements and vendor financing.

As AT&T looks to 2019 and beyond, it is focused on several areas:

  • Driving solid results in a competitive wireless environment. AT&T’s U.S. wireless service revenues grew on a comparable basis in both the second and third quarters of 2018, and the company expects growth — also on a comparable basis — for full-year 2018. This revenue growth is supporting strong wireless EBITDA margins. The company added 1.1 million branded smartphones in the third quarter of 2018 and nearly half-a-million prepaid phone net adds. The company previously said that many of its new prepaid subscribers have lifetime values comparable to its postpaid subscriber base, and these additions helped drive prepaid revenues up nearly
    7% year over year.
  • Integration of WarnerMedia and the creation of a modern media company. In its first full quarter as part of AT&T, WarnerMedia had strong results and was accretive by $0.05 to AT&T’s earnings per share in 3Q18. The company continues to expect a $2.5 billion run rate in synergies by the end of 2021. The addition of WarnerMedia has given AT&T high-quality, premium content to better compete. The company expects this combination to drive a virtuous cycle in which the combination of premium content with direct-to-consumer relationships will drive additional customer engagement and data to drive better advertising and monetization models. And Xandr, the company’s advertising and analytics business, will use data, a large inventory of advertising and an ad tech platform to make premium video advertising more relevant and valuable. All of this is combined with first-class networks designed to deliver content in new and innovative ways.
  • Maintaining its capital allocation strategy and deleveraging. AT&T remains focused on investing in growth while returning value to shareholders via its dividend and strengthening its balance sheet. The company expects to reach leverage ratios in the 2.9x range by the end of 2018, trending to the 2.5x range by year-end 2019 and to historical levels by the end of 2022. The company expects to support its deleveraging plans by growing free cash flows, which are expected to be at a run rate of $25 billion exiting 2018; improving EBITDA through merger synergies and improved operational performance; and monetizing non-core assets, such as real estate. Stephens also said that AT&T has an opportunity to reduce capital intensity as its Mexico LTE build and its U.S. fiber build wind down. At the same time, AT&T is prudently managing its near-term maturities and refinancing risks and expects to end 2018 with $48 billion in debt maturing through 2022, an average of $12 billion annually, down from $76 billion at the close of the Time Warner transaction.
  • Building the FirstNet network. AT&T is ahead of schedule on its FirstNet build, and its network has performed well during recent storms, such as Hurricanes Florence and Michael. This strong performance has allowed the company to support its customers, including first responders, as well as customers of other carriers that experienced outages. More than 3,600 agencies representing more than 250,000 subscribers have signed on to FirstNet, and the company expects flow share gains going forward. AT&T expects its FirstNet build to improve network quality, speeds and capabilities, and to increase the company’s retail footprint across the nation. As it deploys spectrum and builds new sites, the company expects its spectrum capacity at the end of 2019 will be 50% higher than in 2016, excluding millimeter wave. And AT&T expects $1.3 billion in FirstNet reimbursements in the fourth quarter of 2018.
  • Deploying its 5G network. AT&T expects to be the first U.S. company to introduce standards-based mobile 5G service in parts of 12 cities by the end of 2018 and plans to expand to parts of 19 cities in early 2019. The company expects its 5G investment will not increase capital intensity and does not expect 5G to generate material revenues in 2019. Even as it prepares for standards-based 5G, AT&T is deploying new technologies that are increasing speeds and capabilities on its LTE network. It expects to have rolled out these faster speeds in more than 400 cities by the end of 2018 and plans to expand to more than 100 additional cities in early 2019.
  • Improving EBITDA margins in its Entertainment Group business unit. The company expects improved revenue trends as it moves to market-based pricing for DIRECTV NOW and a significant subset of its video base rolls off 2-year price locks in 2019. While the move to market pricing may increase churn and subscriber losses, the company expects that it will contribute to improved margins. The company also expects growth in broadband revenues as it completes its U.S. fiber build and more subscribers choose its higher-ARPU fiber product. The company has found that its market share increases the longer its fiber offerings have been available – up to about 50% market share after 3 years. At the same time, AT&T said it will continue to focus on managing costs in its Entertainment Group unit. 

Stephens addressed the U.S. Department of Justice appeal of the U.S. District Court decision that allowed AT&T and Time Warner to complete their merger earlier this year. He said that AT&T’s legal team is working on the appeal, allowing management to focus on running the business. Oral arguments have been scheduled for December 6, and the company continues to expect resolution in the first quarter of 2019.

AT&T will hold a meeting with analysts on November 29. The event will be broadcast live via the internet, and additional details will be announced prior to the meeting.