AT&T Announces 3-Year Financial Guidance and Capital Allocation Plan

• Adjusted EPS¹ growth: $4.50 to $4.80 by 2022; includes HBO Max investment
• Revenue growth every year: 1% to 2% three-year CAGR²
• Adjusted EBITDA³ margin expansion: By 2022, 200 bps higher than 2019 levels; targeting 35% margins in 2022
• Free cash flow: $30 billion - $32 billion in 2022
• Dividend growth: Continued modest annual increases; dividends as % of free cash flow – less than 50%⁴ in 2022
• Capital Allocation: 50% - 70% of free cash flow post-dividend for retiring ~70% of shares issued for Time Warner deal
• Debt: Pay off 100% of acquisition debt from Time Warner deal; net-debt-to-adjusted EBITDA⁵ of 2.0x to 2.25x in 2022
• Portfolio Review: Continued disciplined review of portfolio: no major acquisitions
• Board: Continued Board refreshment with one prospective new director to be considered at next Board meeting and another in 2020; CEO transition not expected in 2020

2020 Outlook¹

AT&T expects in 2020:

• Revenue growth: of 1% to 2%;
• Adjusted EPS growth: $3.60 to $3.70, including HBO Max investment;
• Adjusted EBITDA margin: Stable with 2019;
• Free cash flow: Stable in $28 billion range;
• Dividend payout ratio: In low 50s% range⁴;
• Gross capital investment: In $20 billion range⁶;
• Monetization of assets: $5 billion to $10 billion

Third-Quarter Results

• Delivering on all 2019 commitments and guidance; share retirement begins 4Q19
• Diluted EPS: $0.50 as reported compared to $0.65 in year-ago quarter
• Adjusted EPS: $0.94 compared to $0.90 in year-ago quarter
• Consolidated Revenues: $44.6 billion
• Cash from operations: $11.4 billion
• Capital expenditures: $5.2 billion
• Free cash flow: $6.2 billion

Note: AT&T's third-quarter earnings conference call will be webcast at 8:30 a.m. ET on Monday, October 28, 2019. The webcast and related materials will be available on AT&T's Investor Relations website at https://investors.att.com.

AT&T Inc. ((T) announced its 3-year financial outlook and capital allocation plan, which it expects to drive significant growth in EBITDA margins and EPS, and allow the company to invest in growth areas, retire shares and continue to pay down debt.

"The strategic investments we've made over the last several years have given us the essential elements to meet growing demand for content and connectivity," said Randall Stephenson, AT&T chairman and CEO. "Our 3-year plan delivers both substantial and consistent financial improvements over the next 3 years. We grow revenues, EBITDA and EPS every single year, and free cash flow is stable next year, but then grows in both of the next two years, as well. And all of this is inclusive of our investment in HBO Max."

The 3-year financial guidance calls for 1% to 2% per year consolidated revenue growth and by 2022 an adjusted EBITDA margin of 35%, 200 bps higher than 2019 levels. Adjusted EBITDA margins are expected to be stable in 2020 and grow in 2021 and 2022, driven by our companywide cost-reduction plan, WarnerMedia synergies, continued Mobility growth and AT&T Mexico EBITDA growth. By targeting 35% EBITDA margins with revenue growth of 1% to 2%, the company expects about $6 billion of EBITDA growth in 2022, above 2019 EBITDA levels.

3-Year Capital Allocation Plan

The company's capital allocation plan for the next 3 years includes:

• Dividend Growth & Payout Ratio: Continued modest annual dividend growth; dividends as percent of free cash flow of less than 50% in 2022;
• Share Retirement: 50-70% of post-dividend free cash flow being used to retire about 70% of the shares issued for the Time Warner deal;
• Debt Reduction: Retiring 100% of the acquisition debt from the Time Warner deal; a net-debt-to-adjusted EBITDA ratio between 2.0x and 2.25x by 2022;
• Portfolio Review: Continued disciplined review of portfolio; no major acquisitions.

When combining AT&T's current dividend yield along with planned share repurchases averaging more than 3% per year for the next 3 years, that provides shareholders a yield of about 8.5% per year — and a solid double-digit return when expected EPS growth is included.

The company said it will continue to actively review its portfolio, analyze the merits of each business and monetize non-core assets. In 2019, the company expects to close about $14 billion from monetizing non-core assets. In 2020, the company expects to monetize $5 billion to $10 billion of non-strategic assets.

In addition, the company said it will continue to refresh its Board as two directors retire over the next 18 months. Subject to Board approval, the company expects to add a new director at its next Board meeting, followed by another director in 2020. In both cases, the Board will continue to select directors with skill sets that align with the objectives laid out today. The company also said that it expects Stephenson to remain CEO through at least 2020.

With its 3-year financial outlook and the benefits of its capital allocation plan, AT&T expects adjusted EPS in the $3.60 to $3.70 range in 2020 and by 2022 expects adjusted EPS to be between $4.50 and $4.80. These EPS expectations include HBO Max investment of about 15¢ to 20¢ per share in 2020, and then about 10¢ per share investment in 2021 and 2022.

• ¹Adjustments to 2020 and 2022 EPS include merger-related amortization in the range of $17.0 billion, a non-cash mark-to-market benefit plan gain/loss, merger integration 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 a significant item. Our 2022 EPS estimate assumes share retirements of approximately 40 cents, new cost initiatives and EBITDA growth in our Mexico operations of a combined 25 cents, WarnerMedia synergies of approximately 20 cents and organic growth opportunities, that we expect to be partially offset by dilution from HBO Max. Our EPS, free cash flow and EBITDA estimates depend on future levels of revenues and expenses which are not reasonably estimable at this time. Accordingly, we cannot provide a reconciliation between our non-GAAP metrics and the reported GAAP metrics without unreasonable effort.

"The objectives we have outlined today have been central to our plans for many months, even before we closed our acquisition of Time Warner. But, as you would expect, our thinking has also benefited from our engagement with our owners, including Elliott Management," said Stephenson. "I've found our engagement with Elliott to be constructive and helpful, and I look forward to continuing those conservations. These are smart people who very much appreciate the opportunity we have to create tremendous shareholder value."

Third-Quarter Results

Communications Highlights

• Mobility:
  • Service revenues up 0.7% in 3Q; up 1.9% year to date
  • 255,000 phone net adds (101,000 postpaid, 154,000 prepaid); 780,000 phone net adds year to date
  • Recognized again as the nation's fastest⁷ and best⁸ network
• Entertainment Group:
  • Operating income up 4.8% year to date with solid video and broadband ARPU gains
  • 2.3% year-to-date EBITDA growth as Company targets stability
  • Video subs impacted by focus on long-term value customer base and carriage disputes:
    • 20.4 million premium TV subscribers – 1,163,000 net loss
    • 1.1 million AT&T NOW subscribers – 195,000 net loss
  • IP broadband revenue growth of 3.5%; 318,000 AT&T Fiber gains

WarnerMedia Highlights

• HBO revenues up 10.6% on higher content sales and stable subscription revenues; operating income up 13.7%
• Turner revenues stable with expanding margins; operating income up 2.6%
• Warner Bros. margins expand despite challenging year-over-year comparison
• Industry-leading 39 Primetime Emmy Awards and 15 News and Documentary Emmy Awards
• WarnerMedia Day Oct. 29 to unveil HBO Max

Consolidated Financial Results

AT&T's consolidated revenues for the third quarter totaled $44.6 billion versus $45.7 billion in the year-ago quarter. Declines in revenues from legacy wireline services, WarnerMedia and domestic video, were partially offset by growth in strategic and managed business services, domestic wireless services and IP broadband. Operating expenses were $36.7 billion versus $38.5 billion in the year-ago quarter, down 4.6% due to lower intangible asset amortization, lower Entertainment Group costs, lower Warner Bros. film and TV production costs, and cost efficiencies.

Operating income was $7.9 billion versus $7.3 billion in the year-ago quarter, due to lower expenses outpacing revenue declines, with operating income margin of 17.7% versus 15.9%. When adjusting for amortization, merger- and integration-related expenses and other items, operating income was $9.9 billion versus $10.0 billion in the year-ago quarter, and operating income margin was 22.2% versus 21.9% in the year-ago quarter.

Third-quarter net income attributable to AT&T was $3.7 billion, or $0.50 per diluted share, versus $4.7 billion, or $0.65 per diluted share, in the year-ago quarter. Adjusting for $0.44, which includes a non-cash actuarial loss on benefit plans, merger-amortization costs, merger- and integration-related expenses and other items, earnings per diluted share was $0.94 compared to an adjusted $0.90 in the year-ago quarter.

Cash from operating activities was $11.4 billion, and capital expenditures were $5.2 billion. Capital investment – which consists of capital expenditures plus cash payments for vendor financing – totaled $6.0 billion, which includes about $800 million of cash payments for vendor financing. Free cash flow – cash from operating activities minus capital expenditures – was $6.2 billion for the quarter.

The company completed or announced $3.5 billion in non-core asset monetizations in the third quarter. For the full year, the company expects to close about $14 billion of asset monetizations and working capital initiatives. Net debt was reduced by $3.6 billion in the quarter and reduced by $12.7 billion year to date. Net-debt-to-adjusted EBITDA at the end of the third quarter was 2.66x.

²Compounded annual revenue growth
³EBITDA margin is operating income before depreciation and amortization, divided by total revenues
⁴Free cash flow dividend payout ratio is dividends divided by free cash flow
⁵Net Debt to EBITDA ratios are non-GAAP financial measures that are frequently used by investors and credit rating agencies to provide relevant and useful information. Our Net Debt to Adjusted EBITDA ratio is calculated by dividing the Net Debt by the sum of the most recent four quarters Adjusted EBITDA.
⁶Excludes expected FirstNet reimbursements in the $1 billion range; includes potential vendor financing.
⁷Based on analysis by Ookla^® of Speedtest Intelligence^® data average download speeds for Q3 2019
⁸Based on GWS OneScore Sept. 2019

*About AT&T

AT&T Inc. ((T) is a diversified, global leader in telecommunications, media and entertainment, and technology. It executes in the market under four operating units. WarnerMedia is a leading media and entertainment company that creates and distributes premium and popular content to global audiences through its consumer brands including: HBO, Warner Bros., TNT, TBS, truTV, CNN, DC Entertainment, New Line, Cartoon Network, Adult Swim, Turner Classic Movies and others. 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 nearly 3 million business customers with high-speed, highly secure connectivity and smart solutions. AT&T Latin America 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. Xandr provides marketers with innovative and relevant advertising solutions for consumers around premium video content and digital advertising through its AppNexus platform.

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. © 2019 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. These measures should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with U.S. generally accepted accounting principles (GAAP).

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.

Cash Paid for Capital Investment

In connection with capital improvements, we negotiate with some of our vendors to obtain favorable payment terms of 120 days or more, referred to as vendor financing, which are excluded from capital expenditures and reported in accordance with GAAP as financing activities. We present an additional view of cash paid for capital investment to provide investors with a comprehensive view of cash used to invest in our networks, product developments and support systems.

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, business unit and supplemental results, EBITDA excludes equity in net income (loss) of affiliates, and depreciation and amortization from operating contribution.

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 operating 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 management is responsible and upon which we evaluate performance.

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 Mobility business unit 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. For market comparability, management analyzes 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.

Adjusting Items

Adjusting items include revenues and costs we consider non-operational 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 results (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, in these cases we use the actual tax expense or combined marginal rate of approximately 25%.

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.

Constant Currency

Constant Currency is a non-GAAP financial measure that management uses to evaluate the operating performance of certain international subsidiaries by excluding or otherwise adjusting for the impact of changes in foreign currency exchange rates between comparative periods. We believe constant currency enhances comparison and is useful to investors to evaluate the performance of our business without taking into account the impact of changes to the foreign exchange rates to which our business is subject. To compute our constant currency results, we multiply or divide, as appropriate, our current year U.S. dollar results by the current year average foreign exchange rates and then multiply or divide, as appropriate, those amounts by the prior year average foreign exchange rates. In calculating amounts on a constant currency basis, for our Vrio business unit, we exclude our Venezuela subsidiary in light of the hyperinflationary conditions in Venezuela, which we do not believe are representative of the macroeconomics of the rest of the region in which we operate.