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Ladies and gentlemen, thank you for standing by.
Welcome to the AT&T Second Quarter 2018 Earnings Call.
At this time, all of your participant phone lines are in a listen-only mode.
Later, we'll conduct a question-and-answer session, instructions will be given at that
time.
(Operator Instructions) I would now like to turn the conference over
to our host, Michael Viola, Senior VP, IR.
Please go ahead.
Okay, thanks for Lori and good afternoon, everyone.
Welcome to the second quarter conference call.
As Lori said, I'm Mike Viola, Head of IR, for AT&T.
This is our first call, first earnings call, after we closed our acquisition of Time Warner
and we're broadcasting this call from WarnerMedia headquarters in New York.
So we told you earlier, we are going to use this call not only to discuss the quarter
but we're also going to provide more details on our strategy and to do that, we've brought
together the CEO, CFO and four business leaders of our business units.
Today's agenda is going to begin with John Stephens who will cover AT&T and Time Warner's
second quarter financial results as well as update our outlook and guidance.
Randall will provide our strategic perspective of the business and then each of the business
unit leaders will take (inaudible) will about their second quarter results and give a perspective
of their businesses going forward.
After that, the entire team will be available to participate in the Q&A session.
I'd like to mention one save the date item.
We plan to host sell-side meeting on the evening of November 29 and followed by a buy-side
meeting that next morning on the 30, both will be here in New York and all the folks
on this call will join us for those meeting.
So please mark the calendars and more details to come.
Now before I turn the call over to John, I need to call your attention to our safe harbor
statement.
It says that some of the comments today will be forward looking and as such is subject
to risks, uncertainties.
Results may differ materially.
In addition, information is available on the Investor Relations website.
I will also need to remind you that we're in the quiet period for the FCC CAF-II auction.
So we can't address any questions about that today.
As always, our earnings materials are available on the Investor Relations page of the AT&T
website that includes the new release, 8-K, investor briefing, other associated schedules.
And available on our website are materials on WarnerMedia's full second quarter that
includes trading schedules and other important documents.
And so now I'd like to turn the call over to AT&T's CFO, John Stephens.
Thanks, Mike and hello everyone and thanks for being on the call today.
Let me begin with our financial summary, which is on slide five.
I think most of you know that FASB has been very very busy this past year, implementing
a number of accounting standards five of which have direct impact on AT&T.
Those includes standards that deal with revenue recognition, pension reporting, impacts on
cash flow reporting.
These changes impact our income statements and cash flows at the same time the Company
made a policy decision to record Universal Service Fees net as an offset to our regulatory
fees.
We are working hard to help you understand these changes.
So in addition to the GAAP financial information, we're providing comparable historical results
to help you better understand the impact on financials from revenue recognition and the
policy decisions as well as Time Warner's second quarter results on a historical basis.
We will be referring to these historical results in our comparisons during this call.
Now, let's start with EPS.
We continued to show strong adjusted EPS growth, up more than 15% for both the quarter and
year-to-date.
Tax reform continues to have a positive impact on EPS as does the adoption of revenue recognition.
We also had about $0.02 of help from the 16 days we owned Time Warner, which we have renamed
on WarnerMedia.
The WarnerMedia earnings contribution was slightly more than what you might expect for
such a short period.
But if you know, financial results can be uneven and we saw that in the second quarter.
Consolidated revenue came in at $39 billion, down slightly from a year ago, but that includes
about $900 million of pressure from how we are now accounting for USF fees on a net basis.
When you look on a comparable basis, revenues were up slightly.
That's mostly due to 2 weeks of Time Warner revenues, but also helped by gains in wireless
and AdWorks.
We continue to use our tax reform savings to invest in and grow our customer base.
As John Donovan will discuss these investments help drive postpaid phone growth and significant
year-over-year improvement in prepaid phone net adds, continued growth in consumer broadband
customers even in a seasonally challenging quarter and solid subscriber growth in total
video customers.
Adjusted consolidated operating margins in the quarter were up year-over-year on a reported
basis, but down on a comparable one.
Solid smartphone sales drove some of the pressured margins.
But the biggest factor continues to be customer transition to over-the-top video.
Let's have a look at free cash flow.
It was a strong $5.1 billion for the quarter, up substantially both year-over-year and sequentially.
Year-to-date, our cash from operations and free cash flow is up about $1.5 billion which
makes us very comfortable with our free cash flow guidance for the full year.
Our cash flows also reflect the timing differences between spending 4% and the reimbursements
we received from the organization.
This usually trails spending by several months.
Year-to-date, that comes to more than $100 million of free cash flow pressure.
Capital spending for the quarter was $5.1 billion or $5.4 billion before the $300 million
of FirstNet reimbursements we did receive in the quarter.
Let's now cover financial results from operations beginning on slide 6.
AT&T domestic mobility operations are divided between the business solutions and consumer
wireless segments.
For comparison purposes, we're providing supplemental information for our total US wireless operations.
Our wireless business turned in very good results.
Year-over-year service revenue turned positive.
Margins remained strong.
And we had phone growth in both postpaid and prepaid.
Total revenues were up year-over-year, thanks to gains in both service and equipment revenues.
Also service revenues were up almost 2% sequentially.
Strong sales and BYOD supported that growth.
Our upgrade rate was down year-over-year, but our equipment revenues were up reflecting
customers' purchasing habit and their choice of more expensive devices.
But even with these strong sales, margins were very good with service margins coming
in over 50% on a comparable basis.
Looking ahead, we expect positive service revenue growth for the full year on a comparable
basis.
Turning to our Entertainment Group, we continue to see the impact of the video transition
in our revenues and margins.
This will take a while to work through and we expect it to continue for the rest of the
year.
But we are seeing some sequential stability in both revenues and margins.
We're making changes to drive revenues and effectively manage the transition.
We are getting through some promotional pricing that impacted revenues in the past and we
now have some new features on our next generation platform that will drive additional revenue
opportunities, such as cloud DVR, a more robust VOD experience with new pay-per-view options
and an additional stream capability.
John Donovan is going to walk you through those plans in a few minutes.
Also helping is AdWorks which continues to grow at a double-digit rate and is now an
annualized revenue stream of over $1.8 billion.
Moving to our Business Solutions group, revenues were down as gains in wireless and strategic
business services helped to offset declines in legacy services.
Business wireless had strong growth, up more than 4%, this is driven by both equipment
and service revenues.
Wireline revenues were down more than 4% year-over-year.
We still expect tax reform to produce a lift in communications spend but we just haven't
seen it yet.
Wireline EBITDA margins were up slightly on a comparable basis.
Cost efficiencies continue to offset pressure from legacy products and our investments in
FirstNet.
In our international business solid customer performance helped to offset currency pressures.
Revenues were stable year-over-year, while margins were pressured by World Cup expenses
as well as foreign exchange.
Now let's look at Time Warner second quarter financials on slide seven.
Time Warner had strong growth at all operating divisions on a comparable basis.
This includes strong subscription revenue growth at both Turner and HBO.
Turner also showed solid advertising revenue growth of 3%.
Adjusted operating income was $1.8 billion driven by increases at Warner and HBO.
Now, for some housekeeping items.
With recent FASB accounting rules, the Time Warner merger and purchase price accounting
rules there is going to be a lot of new information included in our results.
We're going to do our best to make that easy for you to understand.
First, we'll file pro formas with the SEC in August.
Second, we have posted the full second quarter results for Time Warner on our Investor Relations
website.
This includes the Time Warner historical results, trending schedules, all the information you
are accustomed to seeing.
Finally as you're updating your models keep in mind the following.
Results will continue to be reported at the divisional level but there are certain things
that will be eliminated in the corporate and other segment, including about $3 billion
of annual inter-company contract revenues and purchase accounting impact on customer
base and deferred production costs.
We're very excited at Time Warner is part of the AT&T family and the WarnerMedia is
part of the AT&T family and John Stankey is going to provide more insights and highlights
in a few minutes.
Now let's look at our 2018 outlook with Time Warner included.
We're raising adjusted earnings per share growth to the upper end of the $3.50 range
with WarnerMedia included.
Year-to-date, we're already seeing 15% growth.
In fact, the tax reform, improving wireless service and advertising revenues as well as
the addition of Time Warner supports strong adjusted EPS growth even with the additional
shares issued as part of the deal.
Looking at free cash flow, our free cash flow guidance at the beginning of the year was
stand-alone.
We expect most of the benefit of the Time Warner free cash flow for last half of the
year about $2 billion will be absorbed by integration and deal costs, including severance
cost, retention centers, legal fees, bankers cost and interest expense prior to close.
When you consider those items, and slightly lower cash capital spending we're raising
expected free cash flow to be upper end of $21 billion range with dividend coverage in
the low 60% range and that's even with the additional shares and dividend responsibility
from the merger with Time Warner.
Now then we are halfway through the year, we also have a better view of CapEx.
Capital investment is expected to be in $25 billion range, but that'll be $22 billion
of CapEx on our cash flow statements after you net out our FirstNet reimbursements and
some of the vendor financing opportunities that our team has pursued.
A primary focus for us this year and the next few years is deleveraging the business.
We have a strong business that generates a ton of cash and EBITDA and we are very confident
in the deleveraging targets that we have given you.
Let me recap them now.
Net debt to EBITDA is projected in the 2.9 times range by the end of this year and in
2.5 range by the end of next year.
To reach that target, we expect EBITDA growth.
We use excess cash to pay down debt and as always, we'll continue to look for ways that
monetize down strategic assets.
You've seen that recently with the data center deal and our pending sale of broadcast 600
spectrum.
We expect to return to historic debt levels in 1.8x range by the end of 2022.
That's the financial summary.
Now I'll turn it over to Randall.
Randall?
Thanks, John, and it was an exciting quarter.
After 600 days of reviews and litigation, we did finally complete the acquisition of
Time Warner and then just a few days later, we announced our agreement to acquire AppNexus.
And if you're not familiar with AppNexus, it's one of the top ad technology companies
around.
And as John mentioned, we renamed Time Warner to WarnerMedia, so we'll be referring to that
as WarnerMedia from here forward.
And as John Stankey will cover later, they had a really strong second quarter.
We couldn't be pleased -- more pleased with the condition Jeff left the Company with this.
We've now assembled the key elements of a modern media company and it all begins with
owning a wide array of premium content because we are absolutely convinced that there is
nothing that drives customer engagement like high quality premium content.
And whether it's Netflix, Amazon, Google, Disney or Comcast, everybody is now pursuing
the same thing.
How do you deliver great media and entertainment experiences to our customers.
And I think the recent valuations of media companies are reinforcing this point.
But we couldn't be any happier with the range and quality of brands that we now own.
For live programming, it doesn't get any better than CNN for news and for sports, we have
the NBA, March Madness, NFL Sunday Ticket, Major League Baseball and PGA.
And for original premium subscription content, there is nobody better than HBO or cable networks
and Turner are among the best and they are performance well.
And for content creation, our production studio at Warner Brothers is the gold standard and
they possess one of the deepest IP libraries around.
And when you talk about digital content, we now own the CNN.com digital brads and these
are the most visited websites in the world.
And I am pleased to report we are media properties and we have what we think are a terrific set
of digital assets and bottom line we absolutely love this portfolio.
But just owning great content is no longer sufficient.
The modern media company must develop extensive direct to consumer relationships.
And we think pure a wholesale business models for media companies will be really tough to
sustain over time.
And when you look across our wireless, pay TV and our broadband businesses, we now have
more than 170 million direct to consumer relationships.
And these relationships are critical as we begin developing new media experiences for
all kinds of different audiences.
And the 170 million relationships provides invaluable insights for new advertising models.
And that's exactly what's behind our investment in ad technology.
Today we use our data insights and we deliver ads on DIRECTV and when we do this, our advertising
yields improve by 3 to 5x.
And as you are going to hear from Brian Lesser shortly that business grew 16% in the second
quarter.
Now Turner has an ad inventory that's three times the size of our DIRECTV inventory.
And as we acquired the same data to that inventory, we expect a significant lift and AppNexus,
that acquisition is all about improving our capabilities and reducing our time to market
here.
So you take these three elements, premium content, 170 million direct to consumer relationships
and great ad technology and then you combine those with our high speed networks and we
think all of this is a game changer.
Bringing these four elements together has changed the way we think about our customer
value proposition.
We spend our time now thinking about how to combine these elements to create unique customer
experiences.
How do we combine the best content wherever you are and make it easy to find and consume,
what are the new products that combine content and connectivity, how do we create personalized
content experiences, including personalized ads that you find useful.
So hopefully you're beginning to see why we're so excited about putting all of these capabilities
together.
Now we knew the WarnerMedia deal was not going to be like any other we had done.
It's a vertical bolt on with the media business and a media business obviously has very distinct
culture, talent, and business models.
So last fall in anticipation of the merger, we reorganized the Company into four separate
businesses and you can see those in the next slide.
What we've done is push the core staff functions and the decision making out into the business
units and we left behind a very small staff at corporate.
And this is all about increasing speed and efficiency at each of these businesses but
at the same time we need to foster cross-platform coordination to generate the synergies that
John Stankey will be touching on next.
Today, we're going to change the earnings call around a little bit as John Stephens
pointed out.
We're going to give you a chance to hear from each of these business unit leaders and then
when they finish we're going to stay on the phone and answer any questions that you have
and then John Stankey is going to lead us off.
John is the Head of WarnerMedia, then you are going to next hear from John Donovan who
heads up AT&T Communications and then Brian Lesser, he is the Head of our Advertising
and Analytics business and he's going to walk you through his plans and then finally, you'll
hear from Lori Lee who heads up our Latin American businesses and she's going to take
you through an update on really the great market momentum that we're experiencing in
Mexico and also talk about the latest on our Latin American TV business.
So with that, I am now going to hand it over to John Stankey.
John?
Thanks, Randall.
Good afternoon to all of you.
I have been on the job now a little bit more than a month that during the time I've had
the opportunity to meet with various leadership teams of WarnerMedia and I think it's a surprise
what I found is what I believe to be an unmatched dedication to producing unique and engaging
content across film, television, sports and journalism.
Looking forward to my continued work with this team, and I think we have great opportunities
in front of us to further harness the exceptional content and capabilities of WarnerMedia.
John gave you the financial highlights of WarnerMedia's second quarter, but let me dig
in deeper and you'll see those results on Slide 13.
Time Warner's last quarter as a standalone company had strong revenue gains at Turner,
HBO and Warner Brothers.
Turner saw solid growth with gains in both subscription and advertising revenues.
Subscription revenues benefited from higher domestic rates and growth at Turner's international
networks.
Subscriber counts have been stable, thanks to growth in virtual MVPDs, with three of
the top five ad supported cable networks among adults 18 to 49 in Primetime, the Turner networks
are proving popular in every video bundle, as evidenced by their inclusion in every major
live OTT provider.
Turner's sports properties helped drive strong advertising revenue growth in the second quarter
led by the NBA on TNT broadcasts.
HBO also delivered solid revenue growth in the quarter.
Subscriber revenues were up 13% due to strong US subscriber growth and gains in international
markets.
Higher television revenues helped drive strong revenue growth at Warner Brothers.
Warner Brothers TV looks to build on that success with more than 75 TV series in production
for the 2018, 2019 season.
That is the studio's largest number of TV series in production at one time ever.
Here's another good indicator of what kind of quarter and year WarnerMedia has had.
WarnerMedia companies HBO, Turner, Warner Brothers, received 166 Emmy nominations which
included 22 nominations for HBO's Game of Thrones alone, followed by 21 nominations
for Westworld which is produced for HBO by Warner Brothers, a real twofer for us.
These nominations speak to the caliber of the talent and dedication to quality across
the company.
My congratulations go to the entire WarnerMedia team for their exceptional creative achievements.
During the roughly six weeks, since we closed the deal on June 14, we've been working strategically
to integrate the two companies.
That includes client applying the data analytics from AT&T's distribution to Turner ad inventory.
As you know this is one of the benefits of combining our two businesses.
You've seen the success of the AdWords Group using targeted advertising for DIRECTV and
U-verse.
Now we have three times the ad inventory to work with.
We believe we can get meaningful CPM improvement in what Turner sees today.
And Brian Lesser will explain in a few minutes, we expect this is only the beginning of our
success.
We've also moved quickly to position WarnerMedia content on AT&T distribution platforms.
We intend to push the WarnerMedia consumer brands, even further across all platforms.
We've been busy with the basic blocking and tackling that comes with any merger integrating
corporate and staff functions, getting our infrastructure systems to work together and
aligning corporate management.
We will look to achieve synergies with our advertising spend and other procurement areas
are getting better rates from vendors and suppliers.
For example AT&T was not the primary telecom supplier for Time Warner.
Now we begin that transition for WarnerMedia.
These types of efforts will help us to deliver on the $2.5 billion in merger synergies we
promise.
While this has been going on, we've been very deliberate in shaping some long term initiatives
that we think will add even greater value.
We develop proper plans on where we want to go next with WarnerMedia and have several
goals that we want to accomplish.
First, we want to increase our investment in premium content.
HBO's name is synonymous with quality entertainment.
The creative talent at HBO is the best in the industry.
My goal is to give the HBO team the resources to green light additional projects already
in the development funnel.
We want to invest more in original content while still retaining the high quality and
unique brand position of HBO.
This will further strengthen the HBO brand, enhance the customer experience, improve churn
and drive more engagement with some of our most valued customers.
Second, we plan to further develop and nurture our direct to consumer distribution including
HBO NOW.
That will include enhancing existing platforms as well as delivering premium content to the
more than 170 million direct-to-consumer relationships across AT&T's video, mobile and broadband
platforms in the United States and Latin America.
We also plan to add even greater value to these relationships by focusing, aggregating
and incorporating more WarnerMedia intellectual property.
And third, we also are looking at our international markets and exploring ways to maximize our
content globally to create greater value.
We believe there's a lot of opportunity that remains in this area.
Obviously, we're very early in the game when it comes to implementing our plans but we're
off to a good start and look to quicken the pace as we move past close.
Now, I'd like to turn it over to John Donovan for details on AT&T's Communications second
quarter results.
John?
Thanks John.
I'm really excited about WarnerMedia coming into our portfolio, because it strengthens
our ability to innovate across our businesses like content with content -- I am sorry, connectivity.
So if we discuss if -- AT&T Communications operating results will start on Slide 16.
Our Wireless business turned in an impressive quarter.
John Stephens told you about the service revenue growth and strong margins but we also had
strong subscriber gains and continued our low postpaid phone churn.
For the quarter, we added 46,000 postpaid phones.
That makes 9 consecutive quarters of year-over-year improvement.
We had our best prepaid quarter in 9 quarters with 453,000 prepaid net adds.
This includes 356,000 phone net adds.
We had a record connected device net add quarter as well, adding 3 million new devices.
Churn continues to run at near record low levels.
Postpaid phone churn was 0.82% just 3 basis points higher than last year's all-time record.
And we had record low prepaid churn, thanks to our multiline plan penetration and auto
bill pay.
These customer gains and low churn are showing up in our service revenue where we churn positive
both sequentially and year-over-year on a comparative basis.
With the unlimited launch well behind us and targeted promotional activity, we saw service
revenue improve each month in the quarter and we're on track to grow service revenue
for the full year on a comparable basis.
And we maintain comparable service margins above 50% again this quarter.
Moving over to our entertainment group, we continue to see total video subscriber gains
as we move through the transition of our video business.
We had 80,000 total video net adds in the quarter with gains in DTV NOW and U-verse
more than offsetting losses in DIRECTV.
We also turned in solid broadband gains.
Our entertainment group had 76,000 IP broadband net adds with 23,000 total broadband net adds.
That's their seventh consecutive quarter of broadband growth.
About 95% of our consumer broadband base is now on our IP broadband as our transition
from DSL is drawing to a close.
Our fiber build continues at a fast clip now passing more than 9 million customer locations.
And we expect that this time next year to reach 14 million locations.
This gives us a long runway for broadband growth.
We're doing very well in our fiber markets including a 246,000 net increase in subs on
our fiber network in the second quarter.
Now I'd like to update you on several of the key initiatives we have underway, so we'll
turn to Slide 17.
Evolving our video portfolio is top priority for us.
We believe we are well positioned as our customers move toward a more personalized set of streaming
products.
Our new platform was launched in May as the DIRECTV NOW user interface and it's now live
on all supported device operating systems and it's been well received with strong engagement
by customers.
It offers a new cloud-based DVR and more robust video-on-demand experience with new pay-per-view
options.
Over time, it will bring additional advertising and data insight opportunities.
This new video platform gives us flexibility to adapt to the market with new offerings
and products.
Late in the quarter, we added our third video offering called WatchTV, a small package of
30 live channels and 15,000 on-demand titles.
We include WatchTV in our unlimited more wireless plans, where you can purchase it for $15 a
month, making it perfect for customers who want video but not at the cost of a large
factors.
This complements DIRECTV NOW, where we continue to see success in attracting cord cutters
and cord nevers.
And later this year, we will begin testing a premium product extension which is a streaming
product that will give the full DIRECTV experience over any broadband, ours or competitors.
It will have additional benefits of an improved search and discovery feature and an enhanced
user interface.
We're excited that this will complement our topend product for those who don't want or
can't have a satellite dish.
Our Open Video platform also dovetails nicely with our ongoing focus on driving the industry's
leading cost structure.
The new platform is low touch with lower acquisition cost as streaming services become a bigger
part of our business.
Digital sales are a cost efficient way of customer engagement and we're seeing double
digit growth in our digital sales and service.
We're also seeing operating expense savings from our move to a virtualized software defined
network.
More than 55% of our network functions were virtualized at the end of 2017 and we're well
on our way to meet or exceed our goal of 75% virtualize by 2020.
These and other cost management initiatives have helped drive 13 straight quarters of
cost reductions in our technology and infrastructure group.
Finally, I'd like to give an update on our FirstNet build and other network investments.
our FirstNet network build is accelerating, we expect to have between 12,000 and 15,000
band, 14 sites on air, by the end of this year 2018, and we're ahead of our contractual
commitment.
And don't forget when we're putting in equipment for FirstNet, we're also deploying our AWS
and WCS spectrum utilizing the One Touch One Tower approach.
This approach allows all customers access to our improved network.
FirstNet also gives us an opportunity to sell to first responders.
So far more than 1,500 public safety agencies across 52 states and territories have joined
FirstNet, nearly doubling the network's adoption since April.
In addition to our efforts with FirstNet, 5G and 5G evolution work continues its development
in several different areas that will pave the way to the next generation of higher speeds
for our customers.
We now have 5 key evolution in more than 140 markets covering nearly 100 million people
with theoretical peak speeds of at least 400 megabits per second with plans to cover 400
plus markets by the end of this year.
Our millimeter wave Mobile 5G trials are also going well and we're on track to launch service
in parts of 12 markets by the end of this year.
With that, I'll now turn it over to Brian Lesser to discuss our Advertising and Analytics
business.
Brian?
Thank you John, and good afternoon, everyone.
As Randall mentioned, a critical component of the modern media company is a dynamic advertising
business, one that can deliver on the promise of making advertising relevant, engaging and
actually matter to consumers and make it work harder for advertisers and make it more valuable
and optimized for publishers.
I think about this simply.
The course of the Ad industry has been set by a series of defining moments.
The rise of broadcast networks, the proliferation of cable networks and the Pay-TV bundle, digital
advertising and its ability to target audiences.
We sit here again today and yet another point that will define advertising for years to
come.
The pain points are obvious.
Traditional advertising doesn't satisfy what both consumers and brands are looking for.
Brands are frustrated with lack of access to data, lack of confidence in targeting and
measurement and nontransparent ad tech costs.
The industry talks about video convergence but no tangible examples yet have emerged
to deliver a unified buy-side and sell-side platform.
So while the timing for disrupting the ad industry is right, you must have the assets
to execute.
And there is no doubt that AT&T is uniquely positioned to lead this disruption.
In our view, successful ad marketplaces must have 4 key assets.
Number one, it's premium content, sports, news, original programming, we love our position
with Turner content along with the scale portfolio of ad inventory.
Number two is distribution.
Customers dictate how and where they consume content.
Likewise, a relevant ad marketplace must be able to reach customers where they are, whether
it's a 50 foot screen in a theater or a three inch screen in your pocket.
Number three is data, AT&T has access to expansive data sets on costumer behavior and preferences.
170 million direct-to-consumer relationships across its wireless, video and broadband businesses.
40 million set top boxes, 20 million connected cars and that's just for starters.
But data needs to be activated to have value.
We're building targeting and measurement capabilities that will bring greater value to consumers,
advertisers and publishers.
And number four is technology.
Content distribution and data must be integrated on a best-in-class ad technology platform.
That's the rationale for our recent announcement to acquire AppNexus.
This is the best-in-class independent advertising marketplace supported by the best talent in
the industry.
We cannot wait to combine our teams and partner to make advertising matter to consumers.
It is important to note, we're not starting from a standstill.
With the AT&T advertising analytics and Turner have executed fabulously by using data and
technology to fuel growth.
AT&T advertising analytics is consistently delivering double digit revenue growth, including
16% growth in the second quarter.
We will employ the same momentum and scale to deliver on our vision.
So in closing, our plan is nothing short of leading the industry in creating a premium
advertising marketplace across both TV and digital, by quickly integrating AT&T assets
including AppNexus.
It's this unique moment in time coupled with this unique set of assets, that gives me confidence
in our path forward.
With that, I will hand it over to Lori Lee to talk about our Latin American operations.
Thank you, Brian.
The advertising opportunities that Brian laid out apply to Latin America as well.
We have more than 30 million direct-to-consumer relationships and we plan to run the same
place with the LatAm business that we will be using in the United States.
It won't happen overnight, but the opportunity is definitely there.
When we discuss our second quarter results, those details are on Slide 21.
Starting with our Mexico wireless operations, we turned in another strong subscriber quarter
with more than 750,000 net ads.
That totals more than 3 million new customer in the past 12 months, doubling our subscriber
base to 16.4 million since entering Mexico just three years ago.
During that time, we've built a world-class LTE network and developed a marketing presence
reflecting the AT&T brand.
Our network build is in the final stages as we close in uncovering 100 million people.
We've rebranded 3,000 stores and have approximately 6,000 total retail locations, expanding our
marketing presence in distribution and we've upgraded and integrated our different billing
system.
All this puts us in a great position to add customers and revenues at a lower cost.
We're also making a lot of progress in improving our financials.
Operationally, we're pushing on all fronts to exit the year EBITDA positive.
In our Vrio Pay-TV business, currency devaluation have impacted our financial results, but the
strength of our subscriber base and our profitability remains consistent.
That continue to be true in the second quarter.
The World Cup drove strong subscriber growth of 140,000 with particularly strong gains
in prepaid.
We finished the quarter with 13.7 million Pay-TV subscribers, a number that has held
fairly steady since we acquired the business.
The World Cup did drive higher expenses in the quarter, but we continue to drive profitability
and positive free cash flow year-to-date.
Now I'll turn it back to Mike for Q&A.
Okay, thanks Lori.
Operator, we are ready to take questions.
Our first question is from John Hodulik, UBS.
I think I'm going to bounce around a little bit.
But maybe first for John Donovan, the wireless business, looks
like EBITDA was down about 0.7%, I think on a like-for-like basis.
But obviously you returned to growth in subscribers and some margin improvement.
Should we be expecting that segment -- you say your biggest to return to EBITDA growth
as we look forward?
And then maybe one for Brian and then and then for John Stankey.
Brian, we've heard a lot about addressable advertising, 3% percent growth this quarter
on the advertising line.
What are some of the milestones that we should expect and maybe the timing on when this addressable
advertising opportunity starts to take hold within these numbers?
And then lastly, John Stankey, obviously you've got some press recently in terms of the interview
you did about the new WarnerMedia.
Could you talk a little bit about the size of that HBO spend.
I think the HBO spend about $2 billion, you are competing with companies that spend $8
billion a year, much bigger numbers.
I mean how should we think of that in terms of the overall financial profile of the company?
And maybe if you could elaborate on the other B2C efforts you may have.
I think we've heard about the DC Universe and HBO NOW, but if there's any other sort
of initiatives we should be looking for?
Thanks.
Hey John, It's John and I'll start with the question wireless and EBITDA.
We've had now three quarters in a row where our year-over-year comparison on subscriber
growth was very good.
We crossed over that all important date where we got a lot of the reseller stuff behind
us and we've crossed over the date for the unlimited plans and you've seen a lot of momentum
in pre-paid which has really become a really nice business for us right now.
We're in a really good rhythm there, firing on all cylinders.
And so, what we're seeing right now in this quarter, John mentioned in his opening remarks
that we were stronger each month of the quarter within the quarter.
We're starting to see us roll over some of those earlier events and now we're beginning
to get strengthen.
And so because we -- in each month of this quarter strengthen subscriber accounts, we
also have had some pricing moves, calibration of pricing if you will, that made us consistent
with our value proposition in the marketplace.
So we expect that we'll have growth for the year and the EBITDA margins to improve.
John, I'll take the next part of your question.
This is Brian Lesser.
So you asked about milestones in the advertising business.
I think it's important to know that we have close to a $2 billion advertising business
outside of what we just acquired in Turner and that advertising business was growing
15% in the second quarter.
So we're already showing the value of data and technology on our advertising business.
I think in terms of going forward, you should look for some things that we've already mentioned
here in this call.
Number one; our ability to increase the yield on the inventory that we have now within Turner
and WarnerMedia more broadly, and also increased value to the firm but also value to publishers,
advertisers and the consumers.
You'll see us to continue to develop the ad platform AppNexus.
Once we close that deal it's an important milestone for us, But you'll have to have
to lean in and develop additional technologies around that platform.
And then third is, our ability to partner with other media companies outside of AT&T.
In some ways, our success will depend on our ability to attract additional sources of inventory
to reach critical mass for advertisers.
So John, let me just amplify the last piece that Brian gave.
Data that we've had within the AT&T Company applying to AdWorks has already been moved
over into the Turner team to begin applying into existing inventory that we have using
the same techniques were piloted in selling the two minutes of advertising that the AT&T
team has across the broader inventory of Turner.
So that's near-term.
That's not a milestone issue, that's today, we're starting to look at those business cases
and how we would do that.
The teams have already come up with a variety of different initiatives around that including
-- we've found out that Brian had a great opportunity to do addressable advertising
in the pharmaceutical space and some of the pharmaceutical companies wanted 90 second
avails (0:06:55) and he didn't have 90 seconds of inventory.
So we're bridging Turner inventory with what used to be the AT&T inventory so that we can
have new addressable products to bring in.
So that there is benefit to that data that is occurring now even without the broad mechanization
and intelligence and platform work that Brian brought to the table that he just discussed.
So on direct-to-consumer, what I will tell you is what we know about this space is, it
requires scale and you mentioned that there is a number of different initiatives underway
within the WarnerMedia companies and they're all good within their own right, but they
all generate what I would consider to be relatively small scaled audiences.
A company our size, we want to be generating audiences in the tens of millions, not in
the single digits millions.
And so, the way I would think about our direct-to-consumer efforts over time is it's better together.
So lot of very strong brands in the family to generate interest among groups of audiences.
And on a standalone basis, they're not as powerful as they are when they're brought
together and you can assemble the genre of content and bring them together on one platform,
a one experience with aggregates and get scale.
So over time, what you should think about how we're going to approach the discrete brands
that we have is ultimately unify them in a more consistent and more focused experience
that starts to bring some scale in.
Still very important properties.
They still need to be developed.
We've got to get the formula right for them, but over time, we want the strength of them
to come together.
In terms of your reference to the new cycles on HBO, it wasn't an interview, I think it
was internal discussion that was (inaudible) but I would tell you I don't believe that
it effectively characterize what we are about.
What we are about, as I said is, we have a tremendous amount of great projects already
in the funnel that as the HBO team and Richard would describe it, they have not been in a
position to say yes to, because of constraints on certain resources.
And what we're attempting to do is open up those constraints on very high top quality
projects that we think will balance out the schedule so that we have a more engaging experience
with HBO throughout the course of the year that will improve the fact that we can see
especially on the digital platforms, we have customers jumping in and out based on scheduling.
If we can smooth that schedule, we can drive churn down or improved retention and our additional
subscriber growth.
So I'm not going to give you the exact investment number, but the way I would think about it
is, we will make decisions to reinvest some of the efficiencies that we pick up from combining
these companies together and aligning them in a little different fashion.
We may give back a margin point or so in the near term as we grow the subscriber base as
we reinvest in it, but it's going to be a very responsible investment and great projects
that we've already scooped out, we already have rights for, we want to get into the development
funnel and the team feels very, very comfortable that we can flex up on our development in
a way that we think rounds up the schedule very nicely.
John, this is Randall.
Well, this merger is different in terms that it's a vertical merger.
There are certain aspects to the playbook that you just heard John describe, that are
being exactly the same and that it generates synergies, and then reinvest a significant
portion of those synergies back into your capabilities and your product, direct-to-consumer
and deeper HBO content.
It's just part of parcel to that and that's little
different to what we've done in the past and you should probably expect to see it happen
here as well.
And we go to Simon Flannery with Morgan Stanley.
Please go ahead.
For John Stephens, John in the past you'd given some guidance with DIRECTV on the medium
term on EPS.
Can you give us any color about the benefit of Time Warner or WarnerMedia in a full year
in 2019, how should we be thinking about that, given the upside to guidance this year?
And then on the balance sheet, what are you assuming in terms of getting to 2.5% around
additional divestitures and about things like Spectrum acquisitions or is that just run
rate with what you have right now?
Thanks A couple of things Simon, thanks for the question.
First of all, on beginning to -- on the 2.5 times by the end of next year, that's driven
mainly by run rate with regard to cash flows, taking the cash flows above the dividends
and paying down debt.
Secondly, it is important to achieve the synergies, particularly the EBITDA boosting synergies
and the growth that we're seeing and some of the growth that we're seeing in wireless
and customer additions, so that we get a higher EBITDA number.
While we have, normally, plans for asset sale and constantly look at underutilized assets
for monetization; for example, the data centers, the broadcast spectrum 600, which is couple
of billion dollars right there that we have under contract and waiting for approvals today.
We'll continue to do that.
If you want to give us scope to it, as of today we have about a $500 billion in total
assets and so finding a few more opportunities to monetize asset seems to be very reasonable
on top of the things that we've commonly done with regard to the real estate and other underutilized
business and spectrum.
So that batch, I'm not giving you a specific number on asset sales, but as we've proven
this year we're going to continue to do that.
With regard to EPS guidance specifically around the acquisition of -- say it this way, first
and foremost, the point is, is that WarnerMedia, Time Warner WarnerMedia is nearly accretive;
revenues, free cash flow, EPS.
We've seen it already, so that guidance that we've given, we'd expect that we're standing
by that and continue to expect that and have started to prove that out already.
Secondly, we're not going to give a specific guidance with regard to Time Warner's impact,
but I'd suggest in this way, if you think about $3.50 EPS range for offset means $3.40
and $3.60, and we've just said that we expect to be the high end of that range.
So that I'll give you an indication of using your own estimates, others estimates where
we were what we expected to be for the rest of the year.
I will point out that the $0.02 we've got in the second quarter or two weeks was, as
I said, uneven and specifically because the NBA contract for playoffs.
All that content was extended before we merged and the Golden State Warriors won the championship
on June 8, so that context expense was recognized before relative deals, so we have some higher
profitability in those 16 days you might otherwise expect.
But I'd expect profitability to continue, no matter what.
We will give specific EPS guidance for 2019 in the coming months.
I would just suggest that we are continue to expect this transaction to be accretive
revenue free cash flow and EPS.
We go to Phil Cusick, JPMorgan.
Please proceed.
One for Brian, can you talk about really what has to be done here to realize the addressable
attrition?
And what's the timing of this coming through to accelerate the numbers and start to be
really material on the Company?
Can this impact 2019 or are we really talking about 2020?
And how do you see the potential to reduce the ad load while you raise CPMs?
Thanks for the question Phil.
In terms of timing, as John Stankey outlined, there are some things that we can do immediately
to start to add value to Turner add inventory and that's already in motion and so if we
think there are short term value there in 2018, I would say, in terms of the overall
addressable opportunity, that's a little bit further out.
We have work to do in terms of building the technology platform.
But the good news there is because of the amount of inventories that exist within DIRECTV,
also within WarnerMedia, we can prove out the value of AT&T data and the investments
that we're making in technology plus the evolution of our direct to consumer relationship that
John Donovan talked about.
So I think (inaudible) to really start to extract value from inside AT&T using our inventory
across DIRECTV and WarnerMedia in 2018.
And then in 2019, we're going to partner very effectively across other sources of inventory
to bring value.
Phil, it's John Stankey, if I could add to that.
I mean, I want to point out Brian humbly here in the sense, we're starting to get 16% revenue
growth on those ads DIRECTV viewers footprint and that possibility those ads watched by
the same people who once watched the Turner ads.
So we've got proof that this works.
Secondly, when the AppNexus deal closes, we'll have the ability to take our internal activity
and put it on that supply-side platform that will be within our control, so we are optimistic
about the opportunities to get value out of the AppNexus's platform.
We've got DOJ approval for it, and we're waiting to get some Otter country proof and hope to
close it before the next time we speak, certainly but I'm optimistic about that too.
So Brain has a got a lot of things going and heading in the right direction.
And in terms of the outlook?
And in terms of the outlook, so our objective Phil, is not just to improve advertising as
it exists today, but to also improve the experience for consumers.
We're in a unique position to do that because of our vertical integration, because we have
content and we have that direct-to-consumer relationship over a traditional television
and over a mobile phone, over other mobile devices.
We can start to do things in terms of innovating the ad experience.
As an example, you will see us start to introduce products across the rest of this year and
obviously into the next year, where the consumer watching television has a better experience
that is less interruptive.
Imagine a DIRECTV customer watching the big screen on their living room wall and instead
of seeing a traditional ad break, they see an icon on a car in a movie that they're interested
in or in a show that they're interested in, and then we have the ability to create a seamless
ad experience on their mobile device, which is on the coffee table or in their pocket
Pause real time content to interact with a better ad experience and therefore deliver
more relevant content to our customer and to the consumer more broadly.
That has the ability, number one, to be a better experience for our customers and consumers,
a better business for us because those ad units will generate a higher CPM and a higher
yield and a better experience for advertisers and the media company representing the content.
So that's really our objective, is to start to innovate because of our access to data
technology and the direct-to-customer relationship.
Phil I would just comment this notion of more innovative ad formats is critical, it's not
just lighter ad load, well that's important and we'd like to achieve it.
I think what we all understand is that viewing habits are moving away, in many instances,
from the linear feed.
And so, my goal working with distributors such as my partner here at the table, who
is a large distributor of my product is just also start to take these better software-driven
platforms that they have and lay out more on-demand content for them, that allows for
what used to be liner content to be available and stacked in other formats.
And then, attached to that, the right kind of advertising that isn't loading that on-demand
content with the same commercial loads but is also highly targeted and customized to
the particular experience that the individuals going through.
We saw how mobilizing and moving to the TV everywhere raised consumption of the traditional
linear fare.
I think we have another opportunity to take a fairly mature Pay-Tv product and extend
the runway even further by being more aggressive and trying to incent the distributors to carry
more depth in library.
We go to John Janedis with Jefferies.
One for John Stankey, maybe a follow up on HBO.
As you know, domestic subs have been in the $30 million or maybe $35-million-or-so range
over the past few years and you've talked about the content investment fund.
Will there be a more aggressive direct-to-consumer push that perhaps would include maybe a Turner
bundle or maybe a change to more wholesale deals with existing distributors?
And is there any consideration to reset the price which has largely remained steady as
many of your peers have been more promotional?
Thank you.
So, I would tell you that our wholesale distributors remain a really important part of our product
and we want to make the product better to improve its performance for their businesses
as well as the HBO brand overall and as I indicated, we'd like to, for example, improve
our turn characteristics like getting a more complete annual schedule that has people fully
incented to stand the product and not jump in and out of it as various content comes
and goes through course of the year and we think we've got some good steps that we can
take in that regard that will help our sub-counts to continue to grow through our traditional
distribution channel.
I do believe that as we invest in the platform itself, the direct-to-consumer platform and
improve some of the technical capabilities associated with it, that our features that
can be brought to bear in a typical OTT SVOD environment that we can also increase the
distribution of the digital versions of the product that they go direct on retail.
And so we want to run that play as well.
I will tell you that I don't think that's a -- what I would call right now a step function
change over the next couple months, but we can incrementally get better on our current
run rates by having some success in that regard.
In terms of what other content can be paired with HBO and maybe a more broad offer, I think
we have a number of distributors out there that have some great ideas around how they
might want to match HBO as a very particular content offerings.
And as I've said, I want to look at the depth of our WarnerMedia offerings that we have
and get better together and understand how we can bring some of our WarnerMedia brands
and our other curated options into a more focused direct-to-consumer strategy that I
think as we start to get our strategy together on that, move forward on it, you could see
that step function increase in more retailer oriented customers.
And we go to Brett Feldman with Goldman Sachs.
Please go ahead.
One of the stronger trends we saw in this quarter was a nice improvement in postpaid
phone ARPU and actually some of your peers we've seen something similar so far this quarter.
Also, if we look at the market and we look at some of the pricing moves you've made and
others have made, there's an introduction of higher price points?
It's not only price increases but it's really just if you pay more, you'll get more.
So I was hoping maybe you could just expand in terms of what your customers are asking
for, why you've identified a cohort that is showing a willingness to pay more for more
and how durable you think this trend might be?
Yes, Brett, you've been obviously watching our commercials.
That whole ideas and more and so what we're trying to do is differentiate the product
in ways that don't have to do with speeds, megabytes or rack rate pricing and so what
we're really focused on is product engagement.
The value of any customer will be based on the combination of price and the value that
they used for.
And that's why I would say, from a consumer perspective, our strength in consumer has
been heavily in the bundling of video with wireless.
So we see increased engagement where we're finding that people find a lot of value for
it.
And then, we're kind of spreading the offers to fit budgets and engagement and so you've
seen that in wireless and I would point out to you that that pattern may look familiar
in video, that we're trying to find various price points, engagements and content combinations
that fit everybody's budget so that everybody views that they're getting value and they
do that not just by focused on megabytes and pricing.
So I think that it's not an accidental trend that we stumbled onto.
It was actually a strategy that centered on that DIRECTV merger that we were pushing in
and that fits very well with this next step with WarnerMedia and our sister over there
provides us a lot of flexibility.
So I do think it's a trend, I do think that if we succeed when we succeed, others will
follow and make some of the moves in their own and I think that right now we see the
most important thing which was an engagement in customer delight for the product improving
and that, to us, translates to value and we're going to price to value, and so I think the
industry will continue hopefully to take -- to look at that and we rationalize the result
of that.
So we're going to continue down this path more of it rather than less of it and expect
it to be successful.
A quick follow up, if you don't mind.
Obviously the plans, it include lot of content tend to be at the higher prices and you clearly
see that helps ARPU, are you seeing that they're also helping churn?
Yes, if you look at the churn this year was again 3 bps up over but I think that compared
to the industry we did really well; compared to seasonality, we did really well and the
number that we're comparing to last year was our all-time low.
So I do think that it's a strategy that's working for consumers and therefore working
for us and that is the currency that we're after there, because you could start to trade
some things that customers' value higher than the ARPU differential.
So we are carefully managing this portfolio.
Same strategy on wireless and in video.
We'll go to David Barden with Bank of America Merrill Lynch.
Randall, I guess my first question would be; as a telco
guy, the media industry is definite not my wheelhouse yet, but if I'm watching what's
happening out there, we've got Fox deciding that they're not big enough to be a competitor
in the media industry, so they're selling.
And we've got two large competitors in Comcast and Disney who feel in order to be competitive
with the Netflix's and Google's of the world, they need to get even bigger.
And so I guess my question for you is kind of how comfortable do you feel with the scale
that you have now in the content business and are you on the cusp of having a global
strategy that's going to kind of try to compete with those other larger content houses, that'd
be my first one, if I could.
And then the second one John will be for you.
We've been hearing a lot about the directionality of the deal about how we take the information
from your side of the business.
We bring it over to Brian and let him crunch through it and sell it into Turner.
But as you sit there and look at what WarnerMedia, could mean to your business, the broadband
business, the mobile business, even the business-business, kind of what do you see as the opportunities?
And if you could give us some examples, it will be super helpful.
Thanks.
Hi David, this is Randall.
I'll go first and I'll hand it over to John Donovan.
You said John, it's just not very descriptive (multiple speakers) but I'll directed that
to John Donovan when I'm finished.
In terms of what you're seeing happened in the landscape, the media landscape, it's fascinating
to us.
We expected some time back, this is exactly what you would see happening, that you would
begin to see media companies consolidate and people would see the importance of scale and
changing models, changing distribution models and so forth.
And so it's hard to imagine, but it was back in 2016, when we actually did this deal and
so it was early in 2016 when we were asking ourselves if you believe that's going to happen,
if you believe that your networks are going to be able to distribute seamlessly premium
content, if you believe that your information in your distribution business is really valuable,
it can drive different advertising models, then you probably ought to move fast and own
media and as we've look at a scan of what opportunities are out there that Time Warner
jumped out.
It's just the obvious choice.
It was the one scale player that had a great scale distribution platform, it had great
scale in terms of advertising inventory and cable networks, it had the scale position
in terms of content creation with Warner Brothers and it was just the obvious partner for us
and everything else was a distant second.
And so from the -- to answer your question directly, we feel really good about what we
have.
And then you add to it the digital properties and CNN being off the charts, great digital
property, you fit all the CNN and digital properties together, they are the most accessed
digital news sites in the world.
And so putting all this capability data, AdTech and so forth together within the media company,
we think is a really, really great combination and we could not be happier that we moved
first.
I think moving first, you rarely forget you rarely regret it, when you see an industry
trend happen.
So we saw this one happen, we were first and we think we got the best business that was
on the -- that was actually in the media space.
So we feel really good about it.
JD, you want to talk about integration of content?
Sure, thanks.
So Dave, we had 600 days to think about this and when you form your synergies, you deal
with some of the straightforward things that John Stankey talked about.
But we, over the last year or so, as we started to put wireless and video together and saw
the trend I talk about earlier start to manifest, we are learning as an integrated carrier cycle
-- I circle back and say when we bought DIRECTV, remember we talked about bundling up and what
lot of skepticism about the value of bundling up versus it being just a price discount,
and I got to tell you, you start to look at the economics of churn reduction and you start
to learn how these currencies pass back and forth, you see the same opportunities here.
You see -- because the killer app right now on broadband and on wireless is video.
So as you start to look at what customer's place value on and you move from buying and
reselling or worse, being completely out of that market and you go to owner's economics,
we really have always had a good sense of what customers are using and doing on our
network.
So to be able to value that into pricing and start to trade off these currencies that we
learned over the last three years of how do you trade off an acquisition dollar for a
dollar of content?
How do you tradeoff a customer install cost versus the churn reduction?
We've got some solid muscle now to know how those economics move around.
So we are really thrilled about what the content business can mean for us in simple ways.
Store traffic, one of our wireless strengths is that our close rates in stores are up.
We want more traffic in the store.
If we have a technical release from the studio, we can find a way to integrate in the stores
and drive traffic, we found a synergy.
So, basic things that video does like drive traffic and hours of consumption become assets
for us to acquire value in ARPU and retain customers and we really are getting our strides
to figure out how to move those currencies across franchises.
So we're really thrilled about what this can do for broadband and for mobility.
David, let me just -- so just, I want to flip your first question around slightly, I don't
worry about scale and content.
I mentioned at the outset of this discussion that we're going to do 70 TV shows for the
industry this year out of Warner Brothers, didn't even talk about what the incremental
number of series will be coming out of HBO, which is very unique, high-value, premium
content that's targeted.
Our ability as a Company to do decide to produce content at scale that matters is probably
second to none in the industry and that's at a rate that I'm not sure others operate
at or are just coming close to that.
I think the race is on for stealing customer bases, not scale on media content.
We're in a good shape on our ability to scale media content and we start with our 170 million
customer relationships in that race to have at-scale customer base to sell to.
So I don't worry about that dynamic.
You know and to add to Stankey's comment, the 170 million add to it, what John has over
in WarnerMedia, when we talked about cnn.com being the most frequented news site in the
world.
You put cnn.com, the Otter Media, Bleacher Reports together, there's another I believe
almost 200 million monthly users, unique monthly users on each of those sites and so this is
already a big scale direct-to-consumer business and so now what can you do with HBO on some
of the Warner content in terms of taking it directly to the consumer as well that add
the owners' economics that John Donovan just spoke of and the ability to have owner's economics
moving across these platforms, pretty exciting.
And we go to Mike McCormack, Guggenheim Securities.
John Donovan, just maybe some questions regarding entertainment margins, some puts and takes
as we think about the second half.
Obviously we had some NFL cost are going to uptick.
But what should we be thinking about a sustainability in that sort of 24% type of range?
And then, secondly I guess question -- I guess just for actually maybe John Donovan and John
Stankey, just thinking about the WatchTV product, I guess firstly, any sort of early takeaways
from that product, how successful it is?
And then also, can you use that as a model for more integration with the Time Warner
or WarnerMedia assets and how far can you take that without risking legacy linear distribution
revenue?
Thanks.
Yes, thanks Mike.
A lot of questions nested in there, I'll try to be brief and have you ask follow ups if
I miss anything.
If you start with the video margins, you see this the beginning of the evolution of our
products that we're trying to get them, as I mentioned earlier, into affordability slots
where you get high engagement and therefore high value for the money.
One of the things that is not well a published as you think about these, they have stream
count differentials.
So they fit into different viewing pattern.
So WatchTV, that's a single stream product.
The DIRECTV NOW having two with pay up to three.
Obviously the linear TV products the satellite delivered and what we are going to be coming
out with here in beta next quarter in the early stages which is a broadband delivered
version of it.
Now all of a sudden you have a whole series of price points.
And so, you saw at the beginning of what we're doing to reshape DIRECTV NOW.
DIRECTV NOW is a placed order in the market until the deal was finished.
A placed order in the market that products try to do too much and too little.
So we try to stretch it down on price, we try to stretch it up in value, but overtime
we think that there will need to hit various price points and get the right package bundled
in there so customers find value for it.
So you saw the first moves that we added, vertical capabilities on top of it, a third
stream and when we got Cloud DVR and enhanced the product we put the price into the market
rate for that price.
So we've seen DIRECTV NOW, we just had a very strong quarter of DIRECTV NOW ads.
So a highlight for you that when you net all of this drama out for a minute on sub-counts
and we start there, we were at 25 million subscribers when we bought DIRECTV, we're
at 25 million subscribers now.
The customers we lost in cord nevers and cord cutters we've replaced with products that
fit their affordability range.
We watched cannibalization closely roughly 15% to 17% on every given -- in any given
month is the cannibalization rate.
But one-third of those are listed in our linear TV product as very likely to churn, because
of their engagement and with the cost of that.
So we are watching that very closely we're slotting these products into affordability
and engagement range where we get the value of it and I'll point out to you how we procure
content and watch TV if there's a variable nature to its cost?
It is profitable and reasonably comparable to the traditional margins of the business
on a percentage of revenue basis and so the real question that we're learning as we go
once we get out of linear TV and get into open video which is software based TV, how
much does the category grow because we're getting cord nevers, cord cutters but also
we're getting redundant accounts where it's becoming a personal video product where a
team with a more personalized approach can build a playlist and stack their favorites
in a way that it becomes a one Stream product; that is the playlist will behave much like
music.
So when you start to look at addressable markets, you look at the ARPU available, the margins
and then you add the owners economics which is Brian Lesser getting higher CPMs and John
Stanky having owners economics on a portion of that video cost, now these margin start
to blend up into much higher territory.
So we'd look very closely at the blended margin and the movement between these ROMs all while
keeping an eye to make sure our subscriber counts keep us at that 25% to 30% share player
in the marketplace.
And so that's how we're thinking about the strategies and the margins and last thing
I'll point out, is that on those lower end products on a revenue basis, I'll remind you
that the acquisition cost is much lower because it's much more heavily a digitally acquired
product and also the SAC costs are lower, the cost of deploying and the cost to maintain
is much lower.
So over time as we build those volumes up, those are products that will get scalable
margins.
I'll stop there and see if I missed anything.
Alright, this is John Stephens, really great job on that.
I'll give it to you this, but first of all Mike, we're not giving out specific guidance
on margins on any of the specific business as I mentioned before when I think Simon asked
me a question with regard to Time Warner specific EPS impact.
Well, what I will tell is that, JD talked about, the fact that we're being able to move
DTV NOW's deliverables.
Cloud DVR's, streams, pay-per-view, future data insights and other opportunities is going
to provide revenue opportunity.
Secondly, the fact you get the 4 products that are going to cut down on the subscriber
acquisition cost moving from a satellite, the only truck that shows up now is now one
of our trucks that hang a dish with maybe the UPS and the (inaudible) client in the
future.
All of those things give us the expectation that we can see the margins continue to improve.
As our advertising team continues to learn more and get more effective, those advertising
revenues will help out on that entertainment margins.
So all of those things are giving us optimism as we go forward.
With that being said, we've got -- traditionally have tough compares with the NFL content so
for the rest of the year, so we're not giving specific guidance on margins for the third
and fourth quarter.
Well aware of the improvement in the some of the stabilization of the operating contributions
to the entertainment group.
We're -- we notice that.
We're aware of it.
The team's working hard to achieve that.
But we'll keep this process going to see overall improvement on a year-over-year basis coming
in 2019 and that's when we'd expect to see it.
That's Mike Rollins with Citi.
Please go ahead.
Two if I could.
How do you view your sports rights between Sunday Ticket for DTV and NBA for Turner as
sustainable points of differentiation through your media strategy?
And how important is it to take those content right and put them into your emerging, evolving
direct to consumer strategy in platforms?
Let me -- I'll answer on behalf of the Turner side of things, and Scotts (ph) and John can
certainly address the NFL relationship on DIRECTV.
The -- look, I view the right sports rights as being critical to our strategy over time.
And I view the right sports rights with leagues that want to participate in a manner that
is reflective of how platforms are evolving and how technology is evolving and how consumers
are changing their consumption patterns as being the right partners to work with.
And I feel pretty good about the partners that we have at Turner and their flexibility
to sit out and look at new models, new approaches to how they put their content in front of
consumers, how they think about the importance of digital and their products and the speed
at which they're willing to move around those things.
Our advertising business is a healthier business, with sports in the mix.
I think you saw that in the second quarter numbers.
Those are largely powered by the great performance of the NBA and the wonderful product that
they have and their great partners.
And so I think it would be very important for us to continue to manage that portfolio
and have the right mix of sports and general entertainment in our portfolio that's attractive
to customers in the linear format.
And we'll continue to do that going forward.
Now that mix may change a little bit over time.
Different options may show up.
But the acid test is going to be -- I think sports that are well-received by customers,
that are valued properly, that are flexible in how they work with distribution rights
and technology and that work in today's fast-paced and dynamic society in terms of how they are
consumed.
I don't know -- this is Randall, Mike, and I don't know if there is much to add as it
relates to NFL.
I think John's statement just characterize what it is that we look for in terms of what's
important when you think about sports programming.
And it's really critical when you think about our business, where everything is growing,
where John Stankey is growing direct-to-consumer, where John Donovan is building platforms that
are streaming platforms, where Brian Lessers' monetization opportunities for advertising
are tied to streaming capabilities that will probably be our opportunities.
So finding sports programming that fits within those directions where we as a company are
going are really, really important.
And I would also say, just as we get more targeted, just sort of -- one way to think
about it is -- a sports lover in the future is not going to be the segmentation.
It's going to be a Red Sox fan, a Yankee fan who spends winters in Tampa.
So these things have been acquisition tools over time.
They're much more retention and engagement tools now that fit in that profile I mentioned
earlier.
And so we're going to really be trying to innovate on all of these things that are very
segment-specific.
And I think you're going to see us really get creative in what we do going forward.
Okay, very good.
Listen, that wraps up what we wanted to cover with you this evening.
I appreciate everybody joining us.
What I would sum it up by saying is, we've had a few months of distraction.
And make no mistake about it, it's been a bit of a distraction for both businesses,
the WarnerMedia as well as the AT&T side, that is behind us.
And we are executing, and I feel like we're executing very well.
On the communications business side, the momentum is gaining as you're seeing service revenues
are up, subscriber metrics are improving, margins are improving.
I feel really good about how that team is executing.
The WarnerMedia side, I couldn't be happier with the position of the company is in, the
business is in, and it's going quite well.
Our LatAM business -- Mexico -- it's going on all cylinders.
It's been aggressive on pricing down there.
But we are staying the course.
We're competing aggressively.
We're gaining a lot of momentum and have a strong path and a good line of sight to profitability
and stay-tuned on advertising.
I could not be more excited about the opportunity here for advertising, the ad tech acquisitions
we've made.
So thanks again for joining us and look forward to seeing and talking to everybody again.