Market Overview

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

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Consolidated results include 16 days of Time Warner results for
the second quarter

  • Diluted EPS of $0.81 as reported compared to $0.63 in the year-ago
    quarter
  • Adjusted EPS of $0.91 compared to $0.79 in the year-ago quarter
  • Consolidated revenues of $39.0 billion
  • Cash from operations of $10.2 billion, up 17.5%
  • Capital expenditures of $5.1 billion
  • Free cash flow of $5.1 billion, up 46.4%

Company Updates 2018 Guidance1

  • Raising adjusted EPS to high end of $3.50 range
  • Raising free cash flow to high end of $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

Note: AT&T's second-quarter earnings conference call will be webcast
at 4:30 p.m. ET on Tuesday, July 24, 2018. The webcast and related
materials will be available on AT&T's Investor Relations website at
https://investors.att.com.

"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.
((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 prepaid
      • 756,000 in Mexico
    • 219,000 total video net adds (U.S. and Latin America)
  • U.S. wireless results:
    • Service revenue growth on a comparable basis
    • 46,000 postpaid phone net adds with continued strong
      year-over-year improvement
    • Continued prepaid growth with 356,000 phone net adds
    • Nearly 400,000 branded smartphones added to base
    • Second-quarter postpaid phone churn of 0.82%
  • Entertainment Group results:
    • 342,000 DIRECTV NOW net adds to reach more than 1.8 million
      subscribers
    • 80,000 total video net adds; total video customer base stable with
      DIRECTV NOW; AT&T WatchTV launched
    • 76,000 IP broadband net adds; 23,000 total broadband net adds;
      more than 9 million customer locations passed with fiber
    • AdWorks 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 growth
    • Turner 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.

2
Represents 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.

 
Free Cash Flow and Free Cash Flow Dividend Payout Ratio
 

Dollars in millions

       

Three Months Ended

   

Six Months Ended

June 30, June 30,
            2018       2017       2018       2017
Net cash provided by operating activities $ 10,229     $ 8,705 $ 19,176     $ 17,670
Less: Capital expenditures           (5,108 )       (5,208 )       (11,226 )       (11,223 )
Free Cash Flow           5,121         3,497         7,950         6,447  
 
Less: Dividends paid           (3,074 )       (3,012 )       (6,144 )       (6,021 )
Free Cash Flow after Dividends         $ 2,047       $ 485       $ 1,806       $ 426  
Free Cash Flow Dividend Payout Ratio           60.0 %       86.1 %       77.3 %       93.4 %
 

EBITDA

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.

 
EBITDA, EBITDA Margin and EBITDA Service Margin
 
Dollars in millions         Three Months Ended     Six Months Ended
June 30, June 30,
            2018       2017       2018       2017
Net Income $ 5,248     $ 4,014 $ 10,007     $ 7,588
Additions:
Income Tax (Benefit) Expense 1,532 2,056 2,914 3,860
Interest Expense 2,023 1,395 3,794 2,688
Equity in Net (Income) Loss of Affiliates 16 (14 ) 7 159
Other (Income) Expense - Net (2,353 ) (925 ) (4,055 ) (1,413 )
Depreciation and amortization           6,378         6,147         12,372         12,274  
EBITDA           12,844         12,673         25,039         25,156  
 
Total Operating Revenues 38,986 39,837 77,024 79,202
Service Revenues 33,773 36,538 67,419 72,994
 
EBITDA Margin 32.9 % 31.8 % 32.5 % 31.8 %
EBITDA Service Margin           38.0 %       34.7 %       37.1 %       34.5 %
 
 
Supplemental EBITDA, EBITDA Margin and EBITDA Service Margin
 
Dollars in millions        

Three Months

Ended

            June 30, 2018
Net Income $ 4,823
Additions:
Income Tax (Benefit) Expense 1,394
Interest Expense 2,023
Equity in Net (Income) Loss of Affiliates 16
Other (Income) Expense - Net (2,353 )
Depreciation and amortization           6,378  
EBITDA           12,281  
 
Total Operating Revenues 39,909
Service Revenues 35,163
 
EBITDA Margin 30.8 %
EBITDA Service Margin           34.9 %
 
 
Segment EBITDA, EBITDA Margin and EBITDA Service Margin
 

Dollars in millions

       

Three Months Ended

   

Six Months Ended

June 30, June 30,
            2018       2017       2018       2017
Consumer Mobility Segment                                    
Segment Contribution $ 4,978     $ 4,739 $ 9,633     $ 9,269
Additions:
Depreciation and amortization           1,806         1,716         3,613         3,432  
EBITDA           6,784         6,455         13,246         12,701  
 
Total Segment Operating Revenues 14,869 15,091 29,855 29,897
Service Revenues 11,853 12,467 23,465 24,932
 
Segment Operating Income Margin 33.5 % 31.4 % 32.3 % 31.0 %
EBITDA Margin 45.6 % 42.8 % 44.4 % 42.5 %
EBITDA Service Margin 57.2 % 51.8 % 56.5 % 50.9 %
                                     
Business Solutions Segment                                    
Segment Contribution $ 1,961 $ 2,131 $ 4,024 $ 4,294
Additions:
Equity in Net (Income) Loss of Affiliates (1 ) - - -
Depreciation and amortization           1,487         1,483         2,945         2,943  
EBITDA           3,447         3,614         6,969         7,237  
 
Total Segment Operating Revenues 9,063 9,667 18,179 19,288
 
Segment Operating Income Margin 21.6 % 22.0 % 22.1 % 22.3 %
EBITDA Margin 38.0 % 37.4 % 38.3 % 37.5 %
                                     
Entertainment Group Segment                                    
Segment Contribution $ 1,432 $ 1,630 $ 2,767 $ 3,200
Additions:
Equity in Net (Income) Loss of Affiliates 20 12 11 18
Depreciation and amortization           1,346         1,458         2,658         2,878  
EBITDA           2,798         3,100         5,436         6,096  
 
Total Segment Operating Revenues 11,650 12,661 23,227 25,262
 
Segment Operating Income Margin 12.5 % 13.0 % 12.0 % 12.7 %
EBITDA Margin 24.0 % 24.5 % 23.4 % 24.1 %
                                     
International Segment                                    
Segment Contribution $ (150 ) $ (32 ) $ (261 ) $ (132 )
Additions:
Equity in Net (Income) of Affiliates (15 ) (25 ) (15 ) (45 )
Depreciation and amortization           313         311         645         601  
EBITDA           148         254         369         424  
 
Total Segment Operating Revenues 1,951 2,026 3,976 3,955
 
Segment Operating Income Margin -8.5 % -2.8 % -6.9 % -4.5 %
EBITDA Margin           7.6 %       12.5 %       9.3 %       10.7 %
 
 
 
Supplemental AT&T Mobility EBITDA, EBITDA Margin and EBITDA
Service Margin
 

Dollars in millions

       

Three Months Ended

   

Six Months Ended

June 30, June 30,
            2018       2017       2018       2017
AT&T Mobility                                    
Operating Income $ 5,506     $ 5,376 $ 10,664     $ 10,596
Add: Depreciation and amortization           2,113         1,988         4,208         3,980  
EBITDA           7,619         7,364         14,872         14,576  
 
Total Operating Revenues 17,282 17,455 34,637 34,552
Service Revenues 13,682 14,471 27,085 28,939
 
Operating Income Margin 31.9 % 30.8 % 30.8 % 30.7 %
EBITDA Margin 44.1 % 42.2 % 42.9 % 42.2 %
EBITDA Service Margin           55.7 %       50.9 %       54.9 %       50.4 %
 
 
 
Supplemental Latin America EBITDA and EBITDA Margin
 

Dollars in millions

Three Months Ended

Six Months Ended

June 30, June 30,
            2018       2017       2018       2017
International - Latin America                                    
Operating Income $ 52 $ 141 $ 200 $ 218
Add: Depreciation and amortization           186         222         391         436  
EBITDA           238         363         591         654  
 
Total Operating Revenues 1,254 1,361 2,608 2,702
 
Operating Income Margin 4.1 % 10.4 % 7.7 % 8.1 %
EBITDA Margin           19.0 %       26.7 %       22.7 %       24.2 %
 
 
 
Supplemental Mexico EBITDA and EBITDA Margin
 

Dollars in millions

Three Months Ended

Six Months Ended

June 30, June 30,
            2018       2017       2018       2017
International - Mexico                                    
Operating Income (Loss) $ (217 ) $ (198 ) $ (476 ) $ (395 )
Add: Depreciation and amortization           127         89         254         165  
EBITDA           (90 )       (109 )       (222 )       (230 )
 
Total Operating Revenues 697 665 1,368 1,253
 
Operating Income Margin -31.1 % -29.8 % -34.8 % -31.5 %
EBITDA Margin           -12.9 %       -16.4 %       -16.2 %       -18.4 %
 
 
 
 

Adjusting Items

Adjusting items include revenues and costs we consider nonoperational in
nature, such as items arising from asset acquisitions or dispositions.
We also adjust for net actuarial gains or losses associated with our
pension and postemployment benefit plans due to the often significant
impact on our fourth-quarter results, unless earlier remeasurement is
required (we immediately recognize this gain or loss in the income
statement, pursuant to our accounting policy for the recognition of
actuarial gains and losses.) Consequently, our adjusted results reflect
an expected return on plan assets rather than the actual return on plan
assets, as included in the GAAP measure of income.

The tax impact of adjusting items is calculated using the effective tax
rate during the quarter except for adjustments that, given their
magnitude, can drive a change in the effective tax rate, reflect the
actual tax expense or combined marginal rate of approximately 38% for
transactions prior to tax reform and 25% for transactions after tax
reform.

 
 
Adjusting Items

 

Dollars in millions

   

Three Months Ended

 

Six Months Ended

June 30, June 30,
        2018     2017     2018     2017
Operating Expenses    
Time Warner and other merger costs 321 78 388 119
Employee separation costs 133 60 184 60
Natural disaster costs - - 104 -
DIRECTV merger integration costs - 123 - 250
Mexico merger integration costs - 80 - 119
(Gain) loss on transfer of wireless spectrum - (63 ) - (181 )
Foreign currency devaluation       18       98       43       98  
Adjustments to Operations and Support Expenses       472       376       719       465  
Amortization of intangible assets       1,278       1,170       2,340       2,372  
Adjustments to Operating Expenses       1,750       1,546       3,059       2,837  
Other
Merger-related interest and fees1 636 158 1,029 267
Actuarial (gain) loss (1,796 ) (259 ) (2,726 ) (259 )
(Gain) loss on sale of assets,

impairments and other adjustments

      48       (36 )     48       221  
Adjustments to Income Before Income Taxes       638       1,409       1,410       3,066  
Tax impact of adjustments 44 445 217 1,001
Tax related items       (96 )     -       (96 )     -  
Adjustments to Net Income     $ 690     $ 964     $ 1,289     $ 2,065  

1 Includes interest expense incurred on debt issued,
redemption premiums and interest income earned on cash held prior
to the close of merger transactions.

 
 

Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted
EBITDA, Adjusted EBITDA margin, Adjusted EBITDA service margin and
Adjusted diluted EPS are non-GAAP financial measures calculated by
excluding from operating revenues, operating expenses and income tax
expense certain significant items that are non-operational or
non-recurring in nature, including dispositions and merger integration
and transaction costs. Management believes that these measures provide
relevant and useful information to investors and other users of our
financial data in evaluating the effectiveness of our operations and
underlying business trends.

Adjusted Operating Revenues, Adjusted Operating Income, Adjusted
Operating Income Margin, Adjusted EBITDA, Adjusted EBITDA margin,
Adjusted EBITDA service margin and Adjusted diluted EPS should be
considered in addition to, but not as a substitute for, other measures
of financial performance reported in accordance with GAAP. AT&T's
calculation of Adjusted items, as presented, may differ from similarly
titled measures reported by other companies.

 
 
Adjusted Operating Income, Adjusted Operating Income Margin,

Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA
Service Margin

 

Dollars in millions

   

Three Months Ended

 

Six Months Ended

June 30, June 30,
        2018     2017     2018     2017
Operating Income $ 6,466   $ 6,526 $ 12,667   $ 12,882
Adjustments to Operating Expenses       1,750       1,546       3,059       2,837  
Adjusted Operating Income       8,216       8,072       15,726       15,719  
                           
EBITDA 12,844 12,673 25,039 25,156
Adjustments to Operations and Support Expenses       472       376       719       465  
Adjusted EBITDA       13,316       13,049       25,758       25,621  
WarnerMedia Operating Income       1,236             3,047        
Pro Forma
Additions:
Depreciation and amortization 168 339
Merger costs       548             694  
WarnerMedia Adjusted EBITDA 1,952 4,080
WarnerMedia segment income (post acquisition) (451 ) (451 )

WarnerMedia segment depreciation and amortization (post
acquisition)

(30 ) (30 )
WarnerMedia merger costs (post acquisition) (159 ) (159 )
Film and television cost amortization (release prior to June 14)       1,324             2,693  
Pro Forma Adjusted EBITDA 1       15,952             31,891  
 
Total Operating Revenues 38,986 39,837 77,024 79,202
Service Revenues 33,773 36,538 67,419 72,994
 
Operating Income Margin 16.6 % 16.4 % 16.4 % 16.3 %
Adjusted Operating Income Margin 21.1 % 20.3 % 20.4 % 19.8 %
Adjusted EBITDA Margin 34.2 % 32.8 % 33.4 % 32.3 %
Adjusted EBITDA Service Margin 39.4 % 35.7 % 38.2 % 35.1 %
 
Supplemental Results under Historical Accounting Method
Operating Income 5,903
Adjustments to Operating Expenses       1,750  
Adjusted Supplemental Operating Income       7,653  
 
EBITDA 12,281
Adjustments to Operations and Support Expenses       472  
Adjusted Supplemental EBITDA       12,753  
 
Supplemental Operating Revenues 39,909
 
Adjusted Supplemental Operating Income Margin 19.2 %
Adjusted Supplemental EBITDA margin 32.0 %
                           

1 Pro Forma Adjusted EBITDA reflects the combined
results operations of the combined company based on the historical
financial statements of AT&T and Time Warner, after giving effect
to the merger and certain adjustments, and is intended to reflect
the impact of the Time Warner acquisition on AT&T. WarnerMedia
operating income, depreciation and amortization expense and merger
costs are provided on Item 7.01 Form 8-K filed by AT&T on July 24,
2018. Pro Forma adjustments are to (1) remove the duplication of
operating results for the 16-period in which AT&T also reported
Time Warner results and (2) to recognize the purchase accounting
classification of released content as intangible assets and
accordingly reclassify associated content amortization from
operating expense to amortization expense. Intercompany revenue
and expense eliminations net and do not impact EBITDA.

 
 
Adjusted Diluted EPS

 

   

Three Months Ended

 

Six Months Ended

June 30, June 30,
        2018     2017     2018     2017
Diluted Earnings Per Share (EPS) $ 0.81   $ 0.63 $ 1.56   $ 1.19
Amortization of intangible assets 0.16 0.13 0.29 0.26
Merger items1 0.14 0.05 0.20 0.08
(Gain) loss on sale of assets, impairments and other adjustments2 0.01 0.01 0.05 0.03
Actuarial (gain) loss3       (0.21 )     (0.03 )     (0.33 )     (0.03 )
Adjusted EPS     $ 0.91     $ 0.79     $ 1.77     $ 1.53  
Year-over-year growth - Adjusted       15.2 %           15.7 %      
Weighted Average Common Shares Outstanding

with Dilution (000,000)

      6,374       6,184       6,277       6,185  

1 Includes combined merger integration items and
merger-related interest income and expense, and redemption
premiums.

2 Includes natural disaster, employee-related, and
other costs.

3 Includes adjustments for actuarial gains or losses
associated with our postemployment benefit plans, which we
immediately recognize in the income statement, pursuant to our
accounting policy for the recognition of actuarial gains/losses.
We recorded an actuarial gain of $930 million in the first quarter
of 2018 associated with our postretirement plan and a gain of
$1,796 million in the second quarter associated with our pension
plan. As a result, adjusted EPS reflects (1) in the first quarter
and for the first six months, an expected return on plan assets of
$77 million (based on an average expected return on plan assets of
5.75% for our VEBA trusts), rather than the actual return on plan
assets of $31 million loss (VEBA return of -3.08%) and (2) in the
second quarter and for the first six months, an expected return on
plan assets of $754 million (based on an average expected return
on plan assets of 7.00% for our Pension trusts), rather than the
actual return on plan assets of $186 million loss (Pension return
of -0.56%), both of which are included in the GAAP measure of
income.

 
 
 

Net Debt to Pro Forma Adjusted EBITDA

Net Debt to EBITDA ratios are non-GAAP financial measures frequently
used by investors and credit rating agencies and management believes
these measures provide relevant and useful information to investors and
other users of our financial data. Our Net Debt to Pro Forma Adjusted
EBITDA ratio is calculated by dividing the Net Debt by Annualized Pro
Forma Adjusted EBITDA. Net Debt is calculated by subtracting cash and
cash equivalents and certificates of deposit and time deposits that are
greater than 90 days, from the sum of debt maturing within one year and
long-term debt. Annualized Pro Forma Adjusted EBITDA is calculated by
annualizing the year-to-date Pro Forma Adjusted EBITDA.

 
 
Net Debt to Pro Forma Adjusted EBITDA
 
Dollars in millions      
Three Months Ended
Mar. 31,     Jun. 30,    
          2018       2018       YTD 2018
Pro Forma Adjusted EBITDA $ 15,939 $ 15,952 $ 31,891
Add back severance (51 ) (133 ) (184 )
Net Debt Pro Forma Adjusted EBITDA 15,888 15,819 31,707
Annualized Pro Forma Adjusted EBITDA 63,414
End-of-period current debt 21,672
End-of-period long-term debt 168,495
Total End-of-Period Debt 190,167
Less: Cash and Cash Equivalents 13,523
Net Debt Balance                         176,644  
Annualized Net Debt to Pro Forma Adjusted EBITDA Ratio                         2.79  
 
 
 

Supplemental Operational Measures

We provide a supplemental discussion of our domestic wireless operations
that is calculated by combining our Consumer Mobility and Business
Solutions segments, and then adjusting to remove non-wireless
operations. The following table presents a reconciliation of our
supplemental AT&T Mobility results.

 
 
Supplemental Operational Measure
 
        Three Months Ended
  June 30, 2018       June 30, 2017
           

Consumer

Mobility

     

Business

Solutions

      Adjustments1       AT&T Mobility  

Consumer

Mobility

     

Business

Solutions

      Adjustments1       AT&T Mobility
Operating Revenues                        
Wireless service $ 11,853 $ 1,829 $ - $ 13,682 $ 12,467 $ 2,004 $ - $ 14,471
Strategic services - 3,039 (3,039 ) - - 2,958 (2,958 ) -
Legacy voice and data services - 2,723 (2,723 ) - - 3,423 (3,423 ) -
Other services and equipment - 888 (888 ) - - 922 (922 ) -
Wireless equipment           3,016       584       -         3,600   2,624       360       -         2,984
Total Operating Revenues           14,869       9,063       (6,650 )       17,282   15,091       9,667       (7,303 )       17,455
 
Operating Expenses
Operations and support 8,085 5,616 (4,038 ) 9,663 8,636 6,053 (4,598 ) 10,091
EBITDA 6,784 3,447 (2,612 ) 7,619 6,455 3,614 (2,705 ) 7,364
Depreciation and amortization           1,806       1,487       (1,180 )       2,113   1,716       1,483       (1,211 )       1,988
Total Operating Expenses           9,891       7,103       (5,218 )       11,776   10,352       7,536       (5,809 )       12,079
Operating Income         $ 4,978     $ 1,960     $ (1,432 )     $ 5,506     $ 4,739     $ 2,131     $ (1,494 )     $ 5,376

1 Business wireline operations reported in Business
Solutions segment.

 
 
Supplemental Operational Measure
Six Months Ended
  June 30, 2018   June 30, 2017
           

Consumer

Mobility

     

Business

Solutions

      Adjustments1       AT&T Mobility  

Consumer

Mobility

     

Business

Solutions

      Adjustments1       AT&T Mobility
Operating Revenues
Wireless service $ 23,465 $ 3,620 $ - $ 27,085 $ 24,932 $ 4,007 $ - $ 28,939
Strategic services - 6,109 (6,109 ) - - 5,862 (5,862 ) -
Legacy voice and data services - 5,561 (5,561 ) - - 6,971 (6,971 ) -
Other services and equipment - 1,727 (1,727 ) - - 1,800 (1,800 ) -
Wireless equipment           6,390       1,162       -         7,552   4,965       648       -         5,613
Total Operating Revenues           29,855       18,179       (13,397 )       34,637   29,897       19,288       (14,633 )       34,552
 
Operating Expenses
Operations and support 16,609 11,210 (8,054 ) 19,765 17,196 12,051 (9,271 ) 19,976
EBITDA 13,246 6,969 (5,343 ) 14,872 12,701 7,237 (5,362 ) 14,576
Depreciation and amortization           3,613       2,945       (2,350 )       4,208   3,432       2,943       (2,395 )       3,980
Total Operating Expenses           20,222       14,155       (10,404 )       23,973   20,628       14,994       (11,666 )       23,956
Operating Income         $ 9,633     $ 4,024     $ (2,993 )     $ 10,664     $ 9,269     $ 4,294     $ (2,967 )     $ 10,596

1 Business wireline operations reported in Business
Solutions segment.

 
 
 

Supplemental International

We provide a supplemental presentation of the Mexico Wireless and Latin
America operations within our International segment. The following table
presents a reconciliation of our International segment.

 
 
Supplemental International
 
        Three Months Ended
  June 30, 2018     June 30, 2017
            Latin America       Mexico       International   Latin America       Mexico       International
Operating Revenues                
Video service $ 1,254 $ - $ 1,254 $ 1,361 $ - $ 1,361
Wireless service - 417 417 - 535 535
Wireless equipment           -       280         280     -       130         130  
Total Operating Revenues           1,254       697         1,951     1,361       665         2,026  
 
Operating Expenses
Operations and support 1,016 787 1,803 998 774 1,772
Depreciation and amortization           186       127         313     222       89         311  
Total Operating Expenses           1,202       914         2,116     1,220       863         2,083  
Operating Income (Loss)           52       (217 )       (165 )   141       (198 )       (57 )
Equity in Net Income of Affiliates           15       -         15     25       -         25  
Segment Contribution         $ 67     $ (217 )     $ (150 )     $ 166     $ (198 )     $ (32 )
 
 
 
Supplemental International
Six Months Ended
  June 30, 2018 June 30, 2017
            Latin America       Mexico       International   Latin America       Mexico       International
Operating Revenues
Video service $ 2,608 $ - $ 2,608 $ 2,702 $ - $ 2,702
Wireless service - 821 821 - 1,010 1,010
Wireless equipment           -       547         547     -       243         243  
Total Operating Revenues           2,608       1,368         3,976     2,702       1,253         3,955  
 
Operating Expenses
Operations and support 2,017 1,590 3,607 2,048 1,483 3,531
Depreciation and amortization           391       254         645     436       165         601  
Total Operating Expenses           2,408       1,844         4,252     2,484       1,648         4,132  
Operating Income (Loss)           200       (476 )       (276 )   218       (395 )       (177 )
Equity in Net Income of Affiliates           15       -         15     45       -         45  
Segment Contribution         $ 215     $ (476 )     $ (261 )     $ 263     $ (395 )     $ (132 )
 
 
 
 

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