John Stephens, chief financial officer of AT&T Inc. (NYSE:T), spoke today at the Bank of America Merrill Lynch Media, Communications & Entertainment conference in Los Angeles. While there, he discussed the company’s plans for the remainder of 2019 and into 2020.  

Executing the Strategy

Stephens said the company is focused on executing its strategy to create more value for WarnerMedia’s great content by pairing it with massive direct-to-consumer distribution that is already driving higher penetration for WarnerMedia content like HBO. AT&T is unique in the industry with its capabilities across content, distribution and advertising. The three businesses are working together at an accelerated pace and coordinating on key initiatives like the launch of HBO Max in spring 2020.

2019 Operational Priorities

In the first half of 2019, AT&T did exactly what the company said it would do at its late 2018 analyst event. And the company expects to continue delivering on these commitments throughout the year. Wireless service revenues were up 2.6% through the first half of 2019 with expectations for continued quarter-over-quarter growth in the second half of the year, even with strong quarterly results from 2018. Entertainment Group EBITDA was up nearly 4% in the first half of the year, and AT&T continues to expect full-year stability. AT&T continues to expect WarnerMedia run-rate synergies to reach $700 million by the end of the year and is moving forward with plans to launch HBO Max in spring 2020.

And AT&T’s strong network performance continued. AT&T has been recognized as having the nation’s best wireless network for the 2^nd straight year and fastest wireless network for the 2^nd straight quarter. The company’s FirstNet build is ahead of schedule, and AT&T continues to lead in 5G. AT&T plans to have 5G in parts of 29 cities by yearend and nationwide 5G coverage on sub-6 GHz spectrum by the first half of 2020.

Third-Quarter 2019 and 2020 Expectations

AT&T expects some trends to affect consolidated revenues in the third quarter of 2019: lower wireless equipment revenues driven by continued low upgrade rates, but with no impact on margins; a tough comparison to a number of second-half 2018 hit movies at Warner Bros., which the company expects to lower WarnerMedia revenues by about $400 million, but with no overall impact to the company’s 2019 EPS guidance; and continued adverse foreign exchange impacts in Latin America, but with offsetting effects on operating expenses.

In its Entertainment Group, the company continued to execute on its deliberate strategy to manage costs and focus on high-value customers to stabilize EG EBITDA. Coming into the year, the company expected some tough content negotiations, specifically for retransmission deals. Stephens said the company has been holding a hard line in negotiations, which is allowing it to achieve its content cost management goals. In the third quarter, Stephens said the company expects an incremental 300,000 to 350,000 premium video losses above the previous quarter’s premium video results, driven by: aggressively managing costs with retransmission negotiations, some of which resulted in content provider black outs; and from limiting promotional pricing.

In 2020, AT&T expects premium TV subscriber trends to improve due to far fewer customers on promotional pricing and the nationwide launch of AT&T TV, which delivers a premium streaming experience. Other factors that may help improve Entertainment Group EBITDA beyond 2019 include: broadband growth due to increased fiber penetration and availability of higher speeds; a higher-quality video and broadband customer base with lower churn and higher ARPU; continued cost management; advertising growth from Xandr and less pressure from declining legacy products.

Also beyond 2019, AT&T sees catalysts for sustained growth in wireless revenues from postpaid smartphone growth; FirstNet expansion; higher unlimited plan penetration; Cricket subscriber growth; less pressure from reseller; and 5G leadership.

De-leveraging and Capital Allocation

Stephens said AT&T is on track with its de-leveraging plans and expects to meet its 2.5x net debt-to-adjusted EBITDA leverage target by EOY through free cash flow and asset monetization. Stephens said given the company’s confidence in reaching its leverage target, investors should expect share buybacks will be in the mix this year.

He said the company continues to expect to raise between $6 billion and $8 billion — net of spectrum or other acquisitions — by the end of 2019. Stephens said the company’s asset monetization opportunities include optionality with its tower portfolios in the United States and Mexico and that, in addition to $2.2 billion in real estate already sold, real estate valued at about $500 million is up for sale. AT&T also continues to expect free cash flow in the $28 billion range for full-year 2019.

AT&T announces third-quarter 2019 results on Wednesday, October 23 followed by WarnerMedia Day in Los Angeles on October 29. The company’s second-quarter 2019 results are available here.