Q3 2019 Earnings Call
This call at this time, all participant phone lines ARNA listen only mode. Later, there will be an opportunity for your questions. If you would like to queue up for a question today. Please press one followed by zero. If you should require assistance during the call. Please press Star then zero as a reminder, this conference is being recorded I would now like turn the call for.
So where do your host Michael Viola Senior Vice President Investor Relations. Please go ahead.
Thank you and good morning, everyone and welcome to our third quarter Conference call.
Mike <unk> head of Investor Relations for GE and joining me on the call today is Randall Stephenson Eightys, Chairman and CEO and John Stephens Agee's, Chief Financial Officer.
I'll begin with our 2019 progress in our third quarter results, but we want to spend most of our time today.
But for your guidance in capital allocations plans that we announced this morning.
And we'll take your questions before we begin or want to call your attention to our safe Harbor statement.
It says that some of the comments today maybe forward looking.
They are subject to risks and uncertainties results may differ materially and additional information is available on the Investor Relations website.
I also want to remind you that were in the quiet period for the FCC spectrum auction one of three so he can answer any questions about that today, there's always a earnings materials are available on the Investor Relations page of D.A.J.D. website that includes the news release investor briefing, AK etcetera, and so with that.
During the call over to Randall Stephenson.
Okay. Thanks, Mike Good morning, everyone. Thanks for joining us.
On slide three you'll see some of this listed last November we laid out our 2019 commitments and we challenged the team to deliver.
And they have.
Punch line for the quarter is that we remain on target to meet every single objective for the year.
We said leverage would be around two and a half times by year end.
And we're on track to hit that target.
We told you that full year Ie P.S. would grow in the low single digits Edward checking that box.
We said, we generate $26 billion or free cash flow.
And now we're tracking to 28 billion.
We said, we would remain very active on the portfolio from evaluating in executing opportunities to monetize $6 billion to $8 billion in non core assets and we have our current forecast is to realize $14 billion by year end.
We said that our wireless business would return to topline growth and it is year to date wireless service revenues are up nearly 2%.
We committed to stabilizing entertainment group EBITDA, despite the Directv top line pressures and through three quarters Entertainment group EBITDA is growing.
And we needed to do all of this while integrating water media hitting or synergy targets and introducing several new services.
So across the board, we're positioned to meet or exceed every commitment for the year.
In a few minutes I'll cover our three year plan, then you'll begin to understand why I feel good about meeting those commitments as well.
Before we get into that let me turn it over to John he'll go deeper into the quarter. So John Thanks, Randall when looking at our third quarter.
C. P. S was 94 cents.
More than 4% that up slightly for the year.
Israel mentioned, we're on track to reach our expected low single digit growth for the full year.
Revenues were down in the quarter due impart to tough year over year Comparables at Warner Brothers, along with video what FX impacts.
However, adjusted operating margin was up 30 basis points with gains in mobility Entertainment and Warner Media.
Our cash flows are on a record pace for the year.
Cash from operations came in at $11.4 billion.
And free cash flow was $6.2 billion in the quarter and nearly $21 billion year to date.
This puts us firmly on track to reach our full year target of free cash flow in the 28 billion dollar range.
Both from ongoing operations.
And including about $2 billion for full year of applying our working capital approach toward the media's assets.
The solid free cash flow comes even with strong capital investment Capex was 5.2 billion and total capital of vessel was $6 billion would include the $800 million a payment for prior vendor financing activity.
Israel said with asset sales as well as expected free cash flow in the fourth quarter.
We expect to hit our two that five times range net debt to adjusted EBITDA target by the end of year.
Let's now look at her segment operating results starting with our communications segment on slide six.
Starting with mobility.
Growing service revenues.
Adding phone subscribers, while increasing EBITDA.
Wireless service revenues grew by about 1% like water at approximately 2% year to date, and we expect that trend to continue into the fourth quarter.
EBITDA grew by 1.6% to $7.8 billion.
EBITDA margins expanded by 80 basis points with service margins of 55.7%.
During the quarter, we had 255000 phone net adds including more than 100000 postpaid at 154000 prepaid voice.
We also continued to stack up industry Awards.
Putting being named the nation's best wireless networks for the second here in a row and fastest for the third consecutive quarter.
These awards say at best.
Our network investment and spectrum deployment or paying off.
Let's now look at our Entertainment group.
One of our key priorities for 2019 was to stabilize entertainment groups EBITDA.
Year to date were up 2.3% with expense reductions outpacing video and legacy revenue losses.
Premium video and IP broadband ARPU is continue to grow our 300000, plus 18 T. fiber net adds helped drive broadband revenue growth.
We also expect that are premium video losses have peaked.
We had about 225000 net losses due to programming blackouts.
Gross adds were down about 400000.
The new hire intro pricing and credit thresholds.
As well as more targeted promotions.
And we continue to work through customers rolling off to your price logs.
Those video losses also impacted our broadband numbers, especially are bundled customers.
We did have more than 300000, ATP fiber net adds in the quarter.
And business wireline revenue trends improved year over year, thanks to strike.
Strategic and managed services.
That performance came even with about $80 million less intellectual property revenue when compared to the year ago quarter.
With our strong business wireless performance, our business solutions revenues grew by about 1%.
Let's move to water media in Latin America results, which are on slide seven.
One of media revenues largely reflect a comparison to a very strong revenue third quarter last year.
Which included strong television licensing revenue growth and a box office slate that includes several tests.
But Warner media operating margins expanded in the quarter.
Even with lower revenues Warner Brothers operating income.
Was up 2% to the lower film and TV production costs.
We also.
We'll have challenging comparisons to the fourth quarter.
We're off to a strong start with a box office success of choker, but remember the fourth quarter of last year included blockbuster movies, such as Oh man fantastic piece to that of stars Board.
Turner revenues were up on subscription revenue growth.
Partly offset by lower advertising and content licensing and other revenues.
But operating income was up almost 3%.
HBIO revenues and operating income saw double digit growth. Thanks to strong content sales driven by international licensing.
It feels third quarter is even more impressive.
When you consider the dish carriage this food in game of Thrones finale, both occurred at the second quarter.
Warner meal also delivered another incredible performance at this year's Emmy Awards.
Leading the industry with 39 Prime time, Emmys, and 15 news documentary Emmys.
For Latin America team continues to do an excellent job of reducing costs in a challenging foreign exchange environment.
That helped drive an EBITDA increase of more than 20%.
Large part of the increase was due to at 81 million dollar improvement in Mexico EBITDA.
We expect this trend to continue in Mexico, EBITDA to be positive to the fourth quarter.
We also had a nearly 600000 wireless subscribers.
In the quarter.
Those are third quarter highlights I'll now hand, it back to Randall to talk about our three year financial outlook and capital allocation plans that we announced this morning.
Randall Okay. Thanks, John So what do I want to do is talk to you about what you should expect over the next three years before we get into the numbers I want to begin with a broader discussion on our strategy. If you go to slide nine <unk> outlined this for you since 2012, we've made a series of strategic investments and those and.
Vestments had been aligned around two overarching trends.
First consumers will continue to spend more time viewing premium content.
And second.
Businesses and consumers will continue to demand more kind of activity more bandwidth and more mobility.
When we began pursuing this strategy, we saw in emerging world, which consumption of video and other premium content was no longer bound to your living room.
And everything we expect it has arrived and his arrive sooner than we or anyone else anticipated.
And now the foundational elements of our investment thesis are clear than ever.
It all starts with advanced high capacity that.
From our iPhone experience, we knew the mobile Internet Revolution in a world of streaming video would require much more capacity than people were anticipated.
So we began investing for future demand.
First we spent $20 billion on premium spectrum licenses now.
Next we acquired leap wireless, which gave us additional spectrum and cricket prepaid business.
We've doubled the size of that business and transformed from losing money to healthy margins.
Finally, we were selected to build and manage the first responder network to the United States government and this brought with it another layer of premium spectral capacity.
Over the last 18 months, we've been putting all this capacity into service and the performance results have been dramatic.
ATM team now has the fastest and most reliable wireless network in the U.S.
We've invested to extend these same capabilities south into Mexico in four years, we've built a high speed nationwide network and have doubled the customer base.
We've also been undertaking the most aggressive fiber deployment program in the U.S. since 2015 with over 20 million locations past.
Over the next three years, our strong spectrum position will allow for the lower lower capital intensity and that bodes well for growing operating margins.
The second essential element is direct customer relationships and we have about 170 million of them across mobile pay TV in broadband.
And that number reaches 370 million. When you include our digital properties, such as Cnn.com Bleacher report not or me.
As we prepare to launch HBIO, Max our direct customer relationships or are they asset that any streaming company would love to have.
Gaining scale a linear pay TV was a core rationale behind our Directv acquisition.
We realized a satellite business was mature and we anticipate a subscriber losses.
However, the content savings quickly turned our U verse pay TV business from loss to a profit.
And since we bought Directv It has generated healthy cash flows of over $4 billion per year or total of 22 billion in cash by the end of this year.
Third we were convinced that the value of premium content with increased significantly over time as consumer demand continued to grow the new forms of distribution emerge.
I think you've already seen that with some of the multiples paid for media companies. After we did our deal.
Vertically integrating content distribution is a future and we're seeing it across the board.
And last the vast distribution network and subscriber base brings unique viewer and customer insights.
Very pleased with our large advertising inventories at Directv and Turner and creating an AD tech platform is a unique opportunity.
And that we work every move we've made has been focused on building. These four critical capabilities.
So now as we conclude 2019, we are the clear leader and network performance in capacity, we have one of the Premier Entertainment companies in the world with a broad based presence in premium content direct customer relationships and I wouldn't trade places with anyone.
So if you turn to slide 10 or take a look at our three year outlook. Looking ahead, let me take you through the keys to our financial outlook to our capital allocation plan. It all this will drive compelling returns for our shareholders.
Let's start with the topline.
We expect total company revenues over the three year period to grow by one to two per cent per year.
This will be driven by strength in mobility.
Increased fiber penetration and Warner media.
As mentioned earlier, our wireless businesses now enjoying operating leverage for the investments made over the last five years.
Our water media cost synergies are on target.
EBITDA at 80 into Mexico is ramping.
They were identifying significant opportunities for margin improvement through ongoing cost evaluation and operational review.
Given our incremental investments at HBIO bags at 2020.
At our expectations for strong growth in equipment revenue driven by the Fiveg upgrade cycle, we expect our adjusted EBITDA margin to be stable and 2020 .
From there we will drive 200 basis points of EBITDA margin expansion by 2022 above the 2019 levels.
Improving margins 200 basis points will give us an EBITDA margin of 35% 2022.
And applying a 35% margin to a revenue basis grow we want to 2% per year produces an EBITDA lift in the neighborhood of $6 billion in 2022.
That includes our investment and HBIO Max.
The drivers for this EBITDA margin expansion, our order media cost synergies continued improvements in our wireless business continued EBITDA growth at 80 into Mexico, and our plan to take out that cost across the entire company.
In fact, we've hired bill Morrow, he's a special adviser and managing director of process servicing cost optimization, and he's leading or enterprise wide cost reduction initiatives.
Bill's been CEO large communication companies in the U.S. Europe and Australia.
He has a proven track record of creating best in class cost structures.
Still have full authority to examine and change our cost structure across the entire company to ensure that we achieved the targets or were outlining today.
Builds work, where we will be overseen by the board's corporate development, and Finance committee and myself and it will be above and beyond what we're already doing with network virtualization real estate consolidation in our other ongoing cost reduction initiatives.
Our free cash flow has grown significantly over the past few years. That's thanks in part to our Directv and time Warner deals being cash flow accretive on day one.
We expect free cash flow to be a $28 billion and 2020.
And then Cabo Max investment declines and we execute against our cost take out initiatives free cash flow will grow by more than $1 billion in 2021, and another $1 billion in 2022, reaching $30 billion to $32 billion in 2022.
Now, let me talk about our three year capital allocation framework.
Well continue to grow the dividends as we have since I joined the company.
Expect modest annual increases and the dividend payout ratio going below 50% in 2022.
After paying the dividend, we expect to use 50% to 70% of our free cash flow to retire about 70% of the shares we issued for the time Warner deal.
And we will continue to reduce debt going forward.
Target is that by 2022, our net debt to adjusted EBITDA ratio will be between two and two in a quarter times and we will have retired 100% of the debt we took on for Tidewater.
This is a very comfortable leverage ratio for us.
We routinely pruning the portfolio of assets, so don't contribute to our core strategy. In fact, when you conclude what we've done a 29 team.
We monetize more than $30 billion in non strategic assets over the last few years.
You should expect continued evaluation of our businesses and more progress on divesting assets that are no longer core to our fundamental mission.
As I mentioned earlier, we expect to realize about $14 billion in no non core asset monetizations at this year and we're targeting $5 billion to $10 billion next year.
This is a continuous process for us that is one of the areas in which our corporate development and Finance committee dedicate a tremendous amount of time and attention.
With the support of our board generally in the corporate development and Finance Committee in particular I've instructed our executive team to begin the next review of our portfolio.
So we're going to give you regular updates on our progress as we've done over the last year.
We're committed to an objective diligent and disciplined process will analyze the merits of each of our businesses individually.
And as a part of the whole.
So let me be clear we have no sacred cows, we're always open to making portfolio moves and Directv has been the source of a lot of public speculation in that regard.
As we said it will be an important piece of our strategy over the next three years, but no portion of our business has ever exempt from a continuous assessment for fit the performance will approach it with a fresh set of eyes and clarity around the rapidly evolving consumer environment, and we'll evaluate multiple options that includes partnerships and other structures.
Likewise, given the quality of our assets there will be no major acquisitions during the next several years.
With our financial outlook in the benefits of our capital allocation policy, we expect EPS growth in 2020 will be up low single digits.
So by 2022, we expect EPS to be between $4.50 and $4 an 80 cents.
That includes our investment HBIO back so between 15 to 20 cents per share 2020, and then 10 cents per share in 2021 and 2022.
And as you can see over the next three years revenue.
EBITDA and as all grow every single year.
Free cash flow is stable at 2020, and then grows and 2021 to 2022.
This plan will deliver both substantial and consistent financial improvements for the next three years.
Before I hand, it to John for his perspective on the three year plan I want to say a few words about what you'll see tomorrow at Warner Brothers Studios, and our investment the H. Veo Max platform.
This is a terrific product and I honestly can't wait for you to see it.
John Stankey and his water media team will take you through all aspects of the strategy the product in the rollout, including our revenue as subscriber expectations for the next five years.
We'll be investing to maximize the value of the service, which will drive growth and value to Warner media and to 80 and T. as a whole.
He'll Max is a terrific platform and we're aligned and making a great. While also being responsible with our capital value.
We will make the significant investments required to win in the marketplace, but will also hit our numbers and ensure that we deliver on the promises that were outlining for you here today.
I feel really good about this plan.
Highly confident hitting each of our three year objectives. So now I'll ask John to provide his perspective on our three year plan. So John Thanks, Randall, let's turn to slide 12, and dive a little deeper on some of the details of the three year plan.
We're expecting 1% to 2% revenue CAGR for the next three years.
On the operational side, we expect wireless service revenues to grow by more than 2% per year.
First that our network quality improvements and reseller initiatives all for growth opportunities for us.
We also expect Fiveg device adoption to boost equipment sales as we launch our nationwide Fiveg network in 2020.
We also expect to continue our broadband revenue growth to help offset legacy and video pressures.
We expect to see significant incremental growth during the planning period from HBIO, Max and targeted advertising from Zander.
Ramp of the good job of laying out our EBITDA and EBITDA margin growth plans.
Our incremental cost plan will contribute to the 200 basis points of EBITDA margin improvement.
One way, we plan to do that is to product simplification.
Our future video product set will focus on two platforms HBIO Max our subscription video on demand service, which you'll hear more about tomorrow.
At 18, TV, our live TV offering.
Turning to capital allocation plans, we expect to returned about $75 billion and value to shareholders over the next three years.
Through 30 billion of share retirements and 45 billion.
Dividends.
Our share retirement will be aggressive we expect to retire about 70% of the shares issued for the time Warner deal.
That's more than 10% of the company.
You heard our debt reduction target earlier, but let me repeat this year, we intend to target leverage between.
Two dozen zero times and to that to five times.
As CFO I'm very comfortable operating the business in that range.
Randall also mentioned that we overachieved on asset Monetizations this year, and we'll monetize more non core assets next year as we continue to analyze the merits of all of our businesses.
That's our through your outlook, but let's look at our 2020 guidance.
On slide 13.
Let me start by laying out, but all these financial projections take into consideration the impact of our investment in HBIO Max.
We expect revenue to be up low single digits, driven by growth from wireless service revenues and strong equipment revenues from the launch of Fiveg smartphones.
This revenue growth represents our best topline performance in several years and highlights the strong performance across our businesses.
We expect the base business will generate vps of $3.75 to 3090 cents per share.
When you have subtract the 15 to 20 cents per share of each feel Max investment.
We expect adjusted EPS growth.
In the $3.60 to $3.70 per share range.
Our share retirement program will be a big part of this growth.
We also expect consolidated EBITDA margin to be stable with 2019 levels, even with the impact from our H. feel Max investment and Fiveg smartphones being available next year.
Helping us keep it on Mars is stable will be wireless service revenue growth Warner media synergies and our cost initiatives.
Free cash flow is expected to be on the $28 billion range spot the same as this year, even with the HDL Max investment.
And our dividend payout ratio will be in the 50% range.
We'll continue to invest at leadership levels in 2020.
Expected gross capital investment in the $20 billion range.
We will continue to monetize our asset portfolio.
I expect $5 billion to $10 billion of asset Monetizations in 2020.
Let's next walk through the components of our three year EPS growth plan on slide 14.
As you can see from the chart our past the $4 in 50 cents to $4.80 a share is clear and achievable a large part of that expected growth.
As a result of share retirements that alone should get us about 40 cents a share.
Our enterprise wide cost reduction plans.
And Mexico profitability growth should that us another 25 cents.
Our remaining Warner media synergies adds another 20 cents.
We also include about 10 cents of H. Pmax investment.
In 2022.
That business should turn profitable after that.
The growth plan. So we just outlined for you provide real earnings opportunities.
When you combine our dividend yield.
Along with share retirements of more than 3% a year for the next three years.
That provides a yield of about eight to half percent per year and when you factor in EPS growth you get a solid double digit return.
Well, what or reiterate what Randall said earlier.
We have a high degree of confidence in delivering while these commitments.
We're hitting remarks in 2019 and feel very strongly that we will do it again with this three year plan.
Randall.
Okay, Thanks, John and before we get to Q today, I want to speak to just a couple of additional issues and you go to slide 15, we've listed days.
Over the last few years, we has continuously refreshed our board of directors that's been done under the leadership a map rose he's our independent lead director chair or nominating Committee.
Today, the average tenure of our independent directors is eight years.
One of our 12 independent directors 10 have joined the board since 2012.
This is the board that is directed our transformation into a modern media company.
And along the way we've added new directors with the skills and experience to inform and guide our business strategies that includes three director since 2015, with particularly strong backgrounds in large scale video distribution media and entertainment and digital media.
Looking ahead.
We have two directors retiring the next 18 months as a result, we have a natural opportunity to continue our board refreshment and add additional skill sets that align tightly with the objectives I outlined this morning.
In fact, we've been in discussion with some exciting candidates for some time, but in the coming days. Following our next regularly scheduled board meeting, we anticipate adding a new board member with deep expertise and technology, then executing strategic cost initiatives.
This new director will be added to the corporate development in Finance Committee, which has responsibility for overseeing our cost program and the evaluation of our portfolio and we will then add another director in 2020.
Finally, there's been a lot of speculation recently concerning my retirement.
The board and I have not yet said any formal plans for my retirement as CEO , but having been in the role for over 11 years, you can rest assured the board and I have begun detailed planning for when that date arrives.
We spent many years guiding the business to the strong position we have today for all the reasons I've described I believe we're on the threshold is something really remarkable in terms of the next chapter of ATM T. storied history.
I have every intention to being here and I will be here through 2020 to ensure that we hit the objectives. We've laid out today to drive significant growth in EBITDA margins and Sn to invest in growth areas and to retire all of a debt and most of the shares issued in the time Warner merger.
My goal and my strong belief is that this is going to drive significant long term value for our shareholders.
Now let me do this will be metallic colleague John Stankey, who was recently appointed COO.
He has a big job and his teams are working together to develop their joint plants and John is continuing to build his leadership teams across all three businesses.
The board and I have very high expectations for John I'm excited for him and I look forward to seeing him tackle his new responsibilities together, we're all about execution and delivering on our three year plan.
You should also understand that the board views leadership and CEO succession as one of its most important responsibilities to shareholders.
The Board's HR Committee, which is led by chair Beth Mooney oversees our talent management program and our succession planning process.
Under the HR committees leadership, the board's evaluation of all potential candidates for the CEO position has been underway for some time and it continues today.
Further whenever my transition as CEO does occur the board has already determined that it will separate the chairman and CEO positions.
This is an exciting time today TNT for all of our shareholders our customers our partners employees and investors.
The board in our entire management team and I placed the highest priority on generating value for our shareholders.
Following five plus years of heavy investment.
It's now time to reap the rewards that these investments and deliver some strong returns.
We believe that the plan we have taken you through today is going to deliver strong performance across all measures and that it should generate significant value creation in the near and long term.
The strategic transformation, we've been working on for several years has enabled us new plan.
And we've assembled the best set of capabilities to Axcelis, a modern media company.
The objectives, we have outlined today of is central to our plans for many months, even before we closed our acquisition of time order, but as you would expect our thinking is also benefited from robust engagement with our owners that includes Elliott management.
And given the shareholder interest in our engagement with the team at Elliot I'm happy to address as subject very directly here.
Over the past several weeks, Matt Rosen I have found our engage with elliott to be both constructive as well as helpful.
Among other things Elliot has met with the prospective new director that I mentioned earlier and as enthusiastic about that addition to our board following our next meeting.
These are smart people.
And they very much I understand the tremendous opportunity that we have to create substantial shareholder value.
As we move forward in the coming months the Gordon I look forward to continue our close collaboration with Elliot on strategy operational initiatives in our portfolio and to see through the value enhancing steps that I've laid out today.
I'm excited about our strategy and I'm very excited about this plan.
I want you to know that I'm all in on running this play and seeing us executed.
So I know you'd have a lot of questions and so we're going to open it up to Q a day, so Mike I'll turn it back to you.
Okay, Greg we are ready to take take questions and can you. Please give us those queuing instructions. Thanks. Thank you, ladies and gentlemen, if you'd like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question any anytime by repeating the one zero command if you're using the speakerphone. Please.
A couple of handset before pressing the numbers once again, if you have a question. Please press one then zero at this time and then one moment. Please for your first question.
Your first question comes from the line of David Barden from Bank of America. Please go ahead.
Congrats on the new plan.
So I guess randall or or John .
As we kind of think about this more prescriptive capital allocation plan that youve kind of outlined with respect to dividends and.
Stock buybacks could you kind of talk about how will that.
Wraps around the potential for.
Spectrum acquisition or kind of other opportunities.
And especially that dovetails with the kind of.
Commitment to the no acquisition.
Posture.
In the media World in particular, it seems like this is very much becoming a scale game. It would seem that more scale will be better. If this is the right strategy could you kind of wrap all this together for us in terms of how we kind of get the business developed in the right way well at the same time following through on these commitments for capital allocation. Thanks.
Hi, This is Randy I'm going to start and I'll, let John supplement what I'd say here, if there's anything else he wants to add.
What we have given you today is a cash flow forecasts and plan.
Builds around operational aspects that would allow us to do the shareholder returns as you heard us talk to todays, particularly around EPS accretion and such.
To the extent.
That we need to engage in spectrum acquisitions of some type and I have to be cautious because we're in a quiet period here, but what I, what I can give you confidence in what I'd tell you. We now have confidence and we developed a lot of muscle over the last couple of years.
On cleaning up the portfolio.
And I am very confident that portfolio cleanup and asset dispositions will more than offset anything we need to do in terms of spectrum acquisition. While we're committed to is this capital allocation as capital return plan, because we've been investing very aggressively over the last five six years to get us to this point and I just think.
We're in a very seminal point Dave.
We're now it's time to reap the rewards of what we've been doing and so drive margin expansion get the 1% to 2% revenue growth is going to generate incredible cash flow Capex comes in 2020 as you saw on John's numbers and so begin to reward the shareholders. These investments that we've been making over the last few years.
So bottom line, where we're committed to what we've laid out here in terms of capital returns when we talk about M&A. We've said no major M&A, we'd like the assets. We have I mean, this is really across the board a quality premium set of assets. If we have to do tuck in acquisitions here and there to supplement.
Capabilities like you saw the HBIO lag deal that we did Friday, the law or pardon me the Latin American.
HBIO property, that's a small acquisition, that's immediately accretive and and it just supplements what we're trying to do in Latin America, with our HBIO Max product and so you'll see those kind of things, but it turns a big M&A. We have no. These given the assets that we have right now.
Yes, Dave just just put it kind of a numerical perspective you know.
500 billion dollar balance sheet, finding 1% to 2% a year on our auto current basis is certainly that.
A reasonable goal and something we have high expectations to be able achieve.
From a practical standpoint, we've announced two deals Puerto Rico, and the CMV transaction It was announced yesterday.
Bigger provide about $3 billion that Kevin just next year. So we have a great I'd start to the.
No deals that are close next year, they will give us more cash things that we've already gotten done.
You can rest assured we got more of that and process and then with regard to spectrum weakness routes I can't comment on the 39 that that's underway with regard to see van and other future auction certainly will be interested.
As always are interested unfair.
Tons that provide as much spectrum.
Favorable to the marketplace. It allows all bidders to bid we think thats going to take some time, particularly with the C band and the FCC, but certainly we'd be interested by the same token there's a clear expectation will pay for with asset monetization on this on this balance sheet than we have that opportunity to do that.
Thanks for the color guys. Thanks, Thanks data.
Your next question comes from the line of Philip Cusick from JP Morgan. Please go ahead.
So around video have we hit the peak of losses in terms of near term video trends and how do you think about the impact of 18 T. T C launching versus the price increase of aged 18, 19, TV now recently and it looks like you plan to invest about one and a half to 2 billion NHP.
Max and 2020.
And about a billion a year for the fall in couple of years, how do you think about this level of investment to drive success in a market that's increasingly fall of competitive offers thanks.
Yes, Hi, Phil has Randall.
I think John mentioned in his comments that.
In terms of the video losses, particularly around the satellite products third quarter is the peak third quarter is we had a couple of significant.
Lack outs in terms of content and those blackouts drove some sizable subscriber losses and then we had the cleanup has been going all the customer base in terms of.
Prior promotions and so forth and so we have pretty much run to the end of those was a little bit more of the customer cleanup that will run into Q4.
But a lot the terms of the losses, there will be significantly improved in the fourth quarter and get better as we move into into next year.
As you think about the product portfolio going forward and you're seeing this in terms of the pricing moves that we're making but as we get into next year, you're basically going to see our traditional satellite platform, which has got to have a long life. I mean this this business continues to be really strong generates a lot of cash.
Hello.
I've said in my comments does more than $4 billion of free cash flow a year and $22 billion since we own the thing, but as we get into next year than you had the soft you'll have the satellite you'll have the software platforms and.
ATM TV is the standardized software platform and that will be our primary vehicle for going to market, particularly pairing it with our fiber product in our broadband product and then HBIO Max becomes the workforce for our video product as we move into next year and all of the muscle and the as you.
Can see and as you articulated the range of investment is going be hide HBIO. Max in terms of are we comfortable with that level and what you called a crowded field I actually think the field in terms of where we intend to play is not that crowded.
We intend to play.
At a significant level and we're starting with a product called HBIO.
Which has a very significant position in the marketplace and as you're going to see tomorrow.
We're investing heavily behind that brand and bringing additional content to bear and.
I actually feel very comfortable and I think tomorrow, Phil the let's all tomorrow is about is to get you comfortable that this is a unique product. This is a products going to be very different from anything else that you've seen in the market. So far. This is not Netflix. This is not Disney This is HBIO Max and it's going to have a very unique position in the marketplace and.
I would tell you we feel very comfortable.
At these investment levels that we can do something very very significant in the market and drive some significant subscriber gains. This is going to be a meaningful business to us over the next four or five years. So we're talking.
50 million subscriber business and I'm really really enthusiastic about this so the video.
Product gets really streamlined and simplified as we move into next year satellite and then software product and then one of the big cost initiatives and it's not inconsequential is John stake. He is bringing the video platforms. The software platforms. He will be standardizing all of these and as you can well guess ATM.
Maybe we have a development and cost associated with that HBIO Masters of technology development costs associated with that putting these on a standardized platform over the next couple of years drives significant savings as well so feel pretty good about the platform and the numbers should improve as we move forward.
Thanks, Phil clear the.
The 50 million you mentioned is that the current or forecast forecast, that's what we're forecasting domestic HBIO Max.
Over five years. Thanks.
Okay. Thanks. Thanks.
Greg will take next question. Your next question comes from the line of John HUD look from you'll be yes. Please go ahead.
Great. Thanks, maybe two questions one for one for John what for Randall I'm, John could you give us some more detail on the I guess, both both in both the near term and this for a longer term 200 basis points of margin improvement I.
I guess Randall just mentioned that some of it comes from.
Product simplification that within the entertainment segment, but can you talk a little about how you expect some of those cost initiatives to impact each of the segments should we should we expect continued improvement in wireless margins and and that enterprise and Mourner media and then for Randall I guess, what I guess, what today's announcements the company has addressed I'd say the majority.
You have to have the issues laid out in the Elliot letter one I didn't see though is with John Thank you taking on the role of COO.
What's the timeframe for him to relinquish leadership of debt, one or mediasite. Thanks.
Thanks, Jay Let me, let me take the first question on the 200 basis point improvement in margins as much let me give a base case, though we we are expecting improvement from mobility, we are expecting improvement from Mexico, we are expecting improvement from the water Mealor Warner media.
Cost synergies with that being said these additional costs such as there were talking about I would categorize and just a couple of three buckets one.
I think you'll see product simplification.
We'll see a big effort with bill in the team working with Jonathan and everyone across the enterprise on product simplification I think that should provide significant rewards secondly, I would tell you that theres still general administrative expense savings I think that opportunity continues to be there.
Got it remember that we've only got final court.
Clearance on the time Warner deals or six months ago, So we've got more opportunities and bringing that together.
Third the video platforms Randall mentioned this and this in the standardization of those platforms are bringing those platform cost and development capabilities together not only is a great new business result, but also an opportunity.
I think those are kind of three things I'd point to in a real quickly and real briefly we'll look at everything there are just like with the portfolio, there's no sacred cows.
But to give me just a more simple sense of it.
But $180 billion of revenue about $120 billion of Seo, we will give us as our $60 billion EBITDA. If we can mine out 1% to 2% of Rcs. We every year, that's in that billions and a half to 2 billion range and let's say, it's harder for ourselves, but you can give us.
A sense that that really gives us some comfort with regard to that overall 6 billion dollar EBITDA improvement.
Especially when you've got great progress and things like Mexico, Great progress in.
Mobility real improvements across the enterprise.
I would actually just depend a little bit to that we've we've we're going to now have bill Morrow.
And John Stankey.
Heading up and initiative to take these costs out the John just gave you the big blocks of what they will go. After these are two process improvement Hawks. They are probably as good as it gets anywhere in terms of streamlining process simplifying process and taking cost out and as you look at this plan of the areas that I have.
The lease concern that we will achieve setting objectives get costs out to get 200 basis points of margin expansion. This is probably the area fill the most comfortable with and so there are some big target areas in terms of what we go after to take these costs out stuff, we do and we do it really really well, we all have a lot of experience here, but.
Piece it will get done I don't let I'll spend a lot of time worrying about that one.
In terms of your question on water meta when will Josh. Thank you relinquished leadership award to me I don't anticipate fuel relinquish leadership award intermediates under his purview as COO and.
He's got a big job and he has been spending a lot of time.
Building his leadership team and then getting the right people have the right spots and getting HBIO stood up I would tell you on the water media side.
I think what he has done over there in terms of building the team. That's there the hires he has made and Bob Green glad you're going to get our full dose of Bob Greenblatt Tomorrow as he launches CHP OMEX product. This was an impressive guy he's got great media chops been around lot of experience and sarnoff coming into run Warner Brothers I mean, just.
Really really impressive higher as you think about Warner media I have no doubt you'll find the right person for that job as well so feel really good about the team the John's Assembly and feel really confident about where is going.
Thanks, Thanks, John .
Your next question comes from the line of Simon Flannery from Morgan Stanley . Please go ahead.
Great. Thank you very much good morning, so coming back to the buyback could you talk a little bit about the timing of the buyback.
I think you're saying 9% of fees outstanding over a three year period, but how should we think about that flowing through in Q4. In 2021 is is there really a number in terms of 20 425 billion of dollars or.
Its number of shares what's the kind of what you're the messaging here and then coming back to the last question on costs.
Is there a timeframe for belmiro to complete his evaluation and to come back to you and the board and then potentially to two off Swift fab more clarity around the buckets diving into the things we've just been.
Going over at a high level. Thank you.
So I was John let me take on the share retirement.
A question first off really go back and look at the time Warner transaction. It was about 1.1 billion shares even take 70%. It's about the 750 million range of shares that's the coming Thats a communication we intended.
I would suggest to you that we havent laid out a specific timeline for you know how much each day, how much each month or quarter.
We're going through that process now, but I wouldn't be surprised if it is somewhat front end loaded or at least front end loaded in individual years.
I would tell you we are very respectful of the commitments, we made to get into the two that five range and we're going to do that and I want to make sure. This doesn't change that just like we're going to do this year.
Retirement, consistent with getting into that to two times to $2 to five times do feel really come from an operating the business at that level. So it's in particularly in today's interest rate environment, and our cash flow environment feel very comfortable with it.
But we're going to respect that and make sure we do that with regard to you.
The process for buybacks as you can imagine we're looking in everything from accelerated share repurchases to open market purchases to other transactional aspects, but I do think it's fair to assume.
That.
We would focus on trying to front end load or try to do more earlier and within a year.
Do you not expected to be food. Additionally, within the three years.
As I expect we're going to be successful this plan.
We will see our stock price change and as it changes our dividend.
Cash cost of that equity gets adjusted downward and so you have to continually evaluate the total.
Cost in total investment in total.
Decision, making process.
It's a fairly direct decision making process today.
And we will continue to evaluate that but that's how we're thinking about it.
And feel very comfortable about getting it done it's just a matter of getting the process.
Implemented and moving forward nothing to announce on how many shares we may or may not by the fourth quarter, but clearly the commentary we put out that says.
Some share retirements or in the mix for the fourth quarters, a fair statement.
Correct.
Okay on on the on the cost initiatives side I mean.
Once again I would say this.
This has been going on for awhile.
We have been going through this process.
Bill Maher, what we've been talking to Bill model for Awhile and knowing that we wanted to bring on several of those talent flow skill sets.
So we will give him some time to get us.
It on the ground, but we expect them to hit the ground running.
We will.
Have plans in place an identified opportunities already that we will start operationalizing as soon as soon as possible many of those things before the end of this year.
If you're asking about when they'll show up in the financial statements.
And the cost synergies the savings I would expect that they're going to be somewhat backend loaded they want all show up in the first year.
Specifically, because they'll they'll be some investments and some time to get the plans put into operation within our $20 billion capital number we've set aside some.
Resources for those system investments in four of those activities, so feel comfortable about our ability to get those done within this plan.
But.
Well as well, we will show as much urgency as possible to get savings.
Starting with day one.
I would expect that they will be.
Certainly.
More backend loaded.
As as opposed to our bye.
Our stock retirement program, which may be more front end loaded. So we'll have some that are going to be quick is DNA. Those are areas, where you can generally give some pretty quick hits on costs, we've identified some of those areas.
Products simplification, those take a little longer because as John said, you've got to make some investments you remember the last time, though we took this on it was probably five years ago, Andy guys led the effort.
And that initiative over a couple of years generated almost $1 billion of cost savings. We're back at one of those moments here again, so I feel pretty confident they're going to use a big chunks of costs that we can get out of the two year timeframe than some others that'll you'll have not.
We will get them out into 2020 time horizon I think John .
But we we should just anticipate doing what you should expect Simon will give Q4 earnings will give you an update in terms of where we are at that stage Bill Morrow starts I think today.
I believe this was his first day and.
So we do want to give him a chance to get as seen on the ground, but as we begin to put the plans together and develop them well give you a status report on the Q4 earnings call and let you know where these are going.
Great. Thank you. Thanks.
The next next question. Please your next question comes from the line of Kannan Venkateshwar from Barclays. Please go ahead.
Thank you.
A couple if I could handle from your perspective, you've talked about and simplification of the product to basically to Brian Beatty NBP NHP on Max.
How are you thinking about that as for the portfolio given that you have a lot of other streaming brands as well as brands such as HBIO. When does your guidance contemplates some degree of cannibalization across your entire portfolio.
And then John from your perspective, you've talked about buyback potentially being frontend loaded and EBITDA potentially being the growth guidance being backend loaded.
We talk about the component so within that.
So things like partnership.
Potentially or Directv order, Patrick coming from Connor and so on so folks so one of the variables that go into.
Great and so if you could just highlight those thanks.
Yes, thanks going on on the video product simplification.
Cannibalization or mix shift I don't know how best to describe it but obviously as we.
Rolled the software products out and so ATM TV and this thin client product, we'll be rolling that out early next year. This is really a good product and it will become for a live streaming product. It will become the work horse, it's where the lion's share gross adds moved too.
Over the next couple of years and so.
That cannibalize, a satellite and replaces satellite, but we actually like if gross adds are coming in on that product Thats a good thing for us for a number of reasons.
It's a much lower cost point to put in place for the customer and as a result, it allows us to meet a much different price points in the market and liquid content cost continuing to escalate these price points or pricing a lot of customers out of the live streaming product and so we've just been very ambitious to get a new cost structure on our video.
Oh product that allow us to get people back into the live streaming product. Our research says are a lot of people that want a live streaming products, but it's just too expensive with though right content costs have gone. So this allows us to to get another product in the marketplace at a lower price point lower cost point good margins. So that's point number one.
HBIO Max HBIO, Max becomes our slot product for the future and you're going to hear a lot more about this tomorrow I don't want to steal stake he and his teams Thunder on this but HBIO Max becomes the as Svod platform for ATM T. as we move forward into the future and what you should expect.
As as we get into the future. This will be day, one but over time that platform becomes the platform through which we also deliver livestream TV. So you want an S. Vod service HBIO Max great overtime.
We look forward to to bringing a wide element is HBIO backs as well. So this thing gets more and more simplified and we ultimately get down to where we have two products. The traditional satellite which will be there for a long time and then.
Our streaming product, which will be premised on the H. Veo Max platform and again, you're going to hear a lot more about this tomorrow night and I look forward to senior there.
Hi, good as John with regard to.
The buybacks and EBITDA discussion on the buyback side as I discussed before the ability to get cash get the stock at Ed.
Very attractive prices from a cost cash cost to capital will be our focus and and I do expect it to be fairly on EBITDA side I would not use the term back end loaded on the EBITDA side gains because I would suggest to you. This mobility is growing today and will continue to grow in 2020.
Mexico, If you look at and we expect Mexico to be EBITDA positive in the fourth quarter, if and when we achieve that well have a cloud of 300 million dollar just under 300 million dollar improvement in Mexico as EBITDA. This year and we expect those trends to continue next year. If you look at the water media cost savings of product programs that are.
We apply as John Thank you. This team already have those employees and you see those growing next year, we've got a significant number of items that would propelling EBITDA improvement, which will propel our standalone.
EPS guidance that we suggested the achieving the reason for.
Next year being flattish so to speak on EBITDA margins is because we're making close to a 2 billion dollar investment NHL Max Thats. The 15 to 20 cents. That's on their schedules vps. So I think if they were choosing to make an investment for a long term.
Product of the long term winning product that is going to be very important to us.
So that that aspect of it as I said, we'll have some quick answers Randall said was one quick hits on the cost initiatives led by Bill Morrow, but the full scope of his ability to get all the savings is going to take is going to cover over years, but our EBITDA next year.
Hey, with inclusive of our $2 billion investment or in that range.
Nashville Axis is flattish if you would take that.
Full 1% growth in our EBITDA that wouldn't that right there would be about half that twoq that growth at 200 basis way growth, we're talking about for the full three years. So this is.
Long term investment a good decision, making process like we've done with our acquisition of spectrum like we've done with our build out of a wireless our like we've done with our fiber play.
We believe this is a very good long term decision.
Thank you very much question take the next question Greg.
Your next question comes from the line of Brett Feldman from Goldman Sachs. Please go ahead.
Thanks for taking the question I want to talk a bit more about wireless you, you've obviously talked a lot about the benefits of the first then investment you flagged the 50% increase in network capacity through the additional spectrum. You've also expanded your distribution both into the first net or to purchase monitor community as well as into some new rural markets and those two things combined you would assume.
And we're going to start creating some churn benefits because his network quality some gross add benefits because of the expanded distribution.
I'm, just curious where are we in terms of starting to see that in your performance. You've obviously had a pretty solid phone net adds do you think that theres an opportunity for that to keep inflecting is that the real driver of the service revenue CAGR you've put out there are there other elements, we should be considering its restructure our models as well thanks.
Thanks. Good question, let me try and go out at this one and asked Randall jump in to help me Adam first of all with regard to the service revenue increases.
And the overall performance the business.
The additional spectrum capacity.
The ability to put in new technologies like carrier aggregation into produced on those kinds of technological improvements as well as this one touch build opportunity. We have with first said, which is give us a big lead on getting towers, fiveg enabled and getting our network ready to be national Fiveg not redemption those are all.
The base of what we're doing when you look at.
Our postpaid business you Didnt, you're right, we have phone growth voice growth in the third quarter 100000, that's the best we've had in five years I think it does have something to do with the quality of our network. This fees or I also think as some of the do it through the great offers that we have the and the efforts of our folks you saw another strong quarter of prepaid.
We're on track to take virtually our show we're going to have a share of the prepaid net adds a share that equates to the total growth in the market.
So we're doing really well with our cricket brand. It continues to be seller, we've seen great churn reduction that's going to help with revenue.
Question point with our reseller point, we had stepped away from the reseller business because of capacity issues for the last four quarters. Our resellers revenues were essentially flat. So we're now moving towards and with this new capacity from first that we're now at the opportunity to have a real growth from that reseller perspective, where we're very interested in that and then you continue this.
What's happening with connected devices, Aiotv and quite frankly with Fiveg plus the millimeter wave based fiveg services for businesses as well as our overall Fiveg services for businesses feel really good about those are the things are going to make up that service revenue growth.
I'll also tell you we continue to see customers buying up the unlimited there continue to buy our quality insurance programs are there more expensive phones.
And then on on the non service side, you will see the step up to Fiveg equipment, mainly handsets, particularly for US we expect to be measurable to share. So you put all that together, it's really really very good those customer handset.
Well also bring some cost with but what they do is give us opportunity to lock in that customer and refresh successor in may allow the customers see this really significant network advantage, we have and so.
Feel good about all those that's how we're thinking about mobility at the same time, they're going through efficiencies and.
Efforts will look at product simplification are offering simplification there all of those kinds of things will continue to help keep.
Margins heading into right direction.
What I said a quick follow up that was helpful. You mentioned the reseller business in putting more emphasis on that because of your capacity improvement one of the key reseller communities you really haven't addresses the cable in Dnos considering the improvement in your network capacity are you strategically opening supporting that customer base.
Yes, we would actually be open to that so you should assume that that's something we'd be open to and not just cable guys. But there are number of people on the reseller space that are reaching out and so it's just John said it got a lot of capacity now this network and worth are quite an evolution in this industry.
Where we ask how do you monetize most efficiently capacity and so we're going to look at all those channels.
Thank you one last thing right on the to pass I want to make sure. We have would have put in almost 60 megahertz spectrum nationwide on a base of about 100. So it's a significant increase there secondly, all the technology changes the carrier aggregation and others have increased our special so those are our throughput.
Capacity significantly and then this ability to to one touch it put a fiveg the conversion from a threeg network of some of our older I was fortunate over into the size you that Rick is also going to increase so we've got only at increased capacity just from the spectral that's the easiest way to think about it but.
On the other steps and our teams doing is dramatically improving our capabilities and so we have a significant advantage.
Over our competitors that have an ability to compete.
Because of that advantage.
Appreciate the color. Okay. Thanks, Thanks, Greg Greg will take one last question.
On that question comes from the line of Michael Rollins from Citi. Please go ahead.
Thanks.
Just curious.
Described had the keen evaluated the value of share buybacks relative to some incremental investments in the operations for example, accelerating investments fiber to the home.
Especially after subscriber gains that you highlighted recently in that segment.
And then just separately in key in bundling video when its wireless subscribers in some form for some time can you describe the results you're seeing and how that impacts both customer acquisition and retention. Thanks.
Yes, Hi, Mike This Randall.
As we think about share buybacks and capital expenditures actually we're still going to invest at a 20 billion dollar level next year and Thats I'm quite confident we'll be by order of magnitude the most aggressive investment in the industry and.
We have been on a.
Very aggressive.
Plan for deploying fiber and we put in a very short period of time 20 million locations passed with fiber and we are somewhere between 20% to 25% penetrated in that than that.
Footprint and the next couple of years are going to be about penetrating it's really about penetration that doesn't mean, we're stopping fiber deployment fiveg requires us to continue deploying fiber we have business customers, who have expectations that we we deploy fiber into business locations and what that does this creates capillaries. If we then.
Spanned off of it so you're going to continue to see the capillary of fiber in this company expand its just not going to expand at the pace. We've been going on it's been on a torrid pace I went to great I would suggest it's been the most aggressive in the United States now it's time to reap the rewards of what we've done and let's go penetrate the market.
As you think about the video bundles.
The strong is this is something I find very encouraging I don't think we put metrics out on this thank you, we'll probably talk about it tomorrow, but the most powerful video bundle, we have with our mobile business is HBIO.
In terms of what it does to churn and retention and.
The reason I think thats very exciting is now think about HBIO, Max and taking that product to a different level and it's going to be something different and now bundling that with our mobile business and the impacts on churn. We believe are going to be very very powerful. So we're very excited about putting wireless with HBIO Maggie.
HBIO Max is a natural.
Bundled with our obviously, our video business, whether its directv or ATM TTB, it's a great bundle with our broadband business, particularly the fiber business. So we're we're really bullish right now on how HBIO Max gets leveraged across the footprint when you look.
At HBIO today.
Keep in mind, we really only owned the asset post.
Appeal by the courts since February so about eight months is how long it's been under our per view in a very short period of time ATM T has moved by order of magnitude is into the position as the largest distributor of HBIO and if you look at the number two distributor were 62% higher penetrated in the number two distributor.
So we think HBIO is a very powerful platform to bundle with our various distribution properties and you turn HBIO and HBIO Max it becomes even more exciting so.
Thanks for the question Mike Okay. Thanks, Greg that that ends our culinary session.
So if I could I was just close out by first of all thanking everybody for joining the call.
Look this is a this is an aggressive three year plan, but I got to tell you. This a three year plan. We spent a lot of time over the last few months, putting together and as I keep saying, it's time to reap the rewards of the investments we made over the last few my years and so as a very exciting time for us the capital allocation plan is very exciting and we're really excited about.
HBO, Max and I'm really hopeful to see everybody here in L.A. Tomorrow night to preview this product and see what we had to offer at Warner media. So thanks again for joining US we'll talk to you tomorrow.
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