Q4 2019 Earnings Call
Welcome to the ATM T. fourth quarter earnings Conference call. At this time all participants are in listen only mode. Later, there will be a question answer session instructions will be given at that time, you should require assistance during the call. Please press Star then zero and an operator will assist you offline as a reminder, this conference is being recorded.
Now, let's turn the conference over to your host Michael Viola Senior Vice President of Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to our fourth quarter Conference call, Mike <unk> head of Investor Relations, Great TNT and joining me on the call today is Randall Stephenson Eightys chairman and CEO .
John Stinky, Chief operating officer for E G and John Stephens, Eightys, Chief Financial Officer.
Right. It will begin the call with a brief overview the 2019 accomplishments and look at our three year plans. John Stephens will then discuss fourth quarter results and then John Stankey will walk you through key areas of our 2020 operating plan John seems one close the presentation with an update on our capital allocation plan.
In 2020 financial guidance, then we'll take your questions.
Before I begin what a call your attention to our safe Harbor statement, which says that some of our comments today, maybe forward looking as such they are subject to risks uncertainties results may differ materially an additional information is available on the Investor Relations website. I also want to remind you that were in the quite period for the FCC spectrum auction wild three so we cannot address.
US any questions about that today.
As always our earnings materials are available on the Investor Relations page of the 18 de website.
That includes our news release Investor briefing 8-K in other associated schedules.
With that I'm going to turn the call over to Randall Stephenson Randall.
Thanks, Mike.
I want to start on slide three to close out 2019 coming into 2019, we laid out a detailed plan for the year.
And that plan was the series a specific steps necessary to exit 2019 on a path of sustained growth.
Civil summary of slide three is that we met or exceeded every single one of those objectives and the roadmap is set for the next three years.
Told you that our top priority for 2019 was to reduce our debt and exit the year at around two and a half times debt to EBITDA.
Doug we've now reduced net debt by about $30 billion. Since we closed time Warner and at the end of 20 918, our net debt to adjusted EBITDA was about two and a half times.
We gave you the formula for exactly what it would take to get to this debt level.
First we would need to generate $26 billion, a free cash flow.
No we exceeded that handily generating a record $29 billion for the year.
Second we would need to monetize non strategic assets and generate $6 billion to $8 billion of cash.
We actually generated nearly $18 billion more than double our target and we've already announced an additional $2 billion, which will close in 2020.
On an adjusted he P.S., we came in right on plan low single digit growth.
At Warner Media, we achieved the 2019 merger synergies and we're preparing to launch H.B. OMEX in may.
Growing wireless service revenues was critical and those revenues were up nearly 2% for the full year.
We stabilize entertainment group EBITDA and brought in our capital investment right on plan.
And after a sustained investment in our network ATM Ci exited 2019, with the best and fastest wireless network in the United States.
Our Fiveg network covers 15 billion people today, and we expect to have nationwide five you coverage in the second quarter.
As we look forward, our 2019 performance positions us well for the next three years.
Our plan is very straightforward and we'd laid it out for you on slide four.
We see revenue growth every year and expect a 1% to 2% three year CAGR through 2022.
By 2022, adjusted EBITDA margins expanded by 200 basis points adjusted EBITDA grows by about $6 billion free cash flow is between 30 and $32 billion and adjusted EPS grows to between $4, a 50 cents and $4 an 80 cents.
This is a plan that generates a lot of cash over the next three years and.
And the board has developed a very thoughtful capital allocation approach that will maintain a solid balance sheet and drive shareholder value.
First we'll continue to invest aggressively at at top tier levels into our core businesses.
We expect to invest $20 billion a 2020.
Leading it by GE is critical for 80, a deal we're not slowing down.
Were more than 75% complete owner Firstnet build and that will continue.
And we're continuing to deploy fiber.
In terms of our capital structure over the last 18 months. We retired the lions share of the debt we issued to acquire time water and we'll continue to pay down debt, but at a much slower pace.
Our cash will be focused over the next three years on retiring the shares we issued two acquired time.
By the end of 2022, we will have retired 100% of the debt and 70% of the shares from our time Warner transaction.
Fact, we retired 56 million of these shares in 2019.
We also plan to retire about 100 million more in the first quarter of this year do a 4 billion dollar accelerated share repurchase agreement.
By 20 to 42, our leverage target is a very comfortable net debt to adjusted EBITDA ratio of 2.0 to two to quarter times.
You can also expect us to continue streamlining our portfolio as we monetize additional assets of $5 billion to $10 billion. This year ended I said earlier, we've already executed agreements that will generate $2 billion. This year.
John Stephens will cover the specific steps in the plan later, but first he's going to cover our fourth quarter results. So I'll turn it over to you now John .
Thanks, Randall let me begin with the financial summary on slide six.
As Randall mentioned, we hit or exceeded all our 2019 targets, let's take a closer look.
We grew earnings adjusted EPS was 89 cents up 3.5% for the quarter.
Up 1.4% for the full year.
Cash from operations came in strong at 11.9 billion for like water and 48.7 billion for the year.
Free cash flow was a record $29 billion for the full year.
Up 30%.
The addition of Warner Media made an impact as did adding their receivables to our securitization efforts.
Our ability to generate cash continues to provide a strong foundation.
Our capital allocation plan.
We continue to aggressively invest capex was nearly 20 billion for the full year and total gross capital investment was 23.7 billion.
When you include our investments in first that and other vendor payments.
And without the impact of foreign exchange and forgotten licensing revenue in advance of our H. Bill Max launch.
Fourth quarter and full year revenues would have been 48 billion and about 184 billion representing growth in both the quarter ended the year.
Even with these items operating income margins were stable in the quarter end up 70 basis points for the year.
All in all a very good years, we hit our 2019 targets.
So look at our segment operating results starting with our communications segment on slide seven.
In our communication segment mobility continues to build momentum and deliver solid results.
Service revenue grew by about 2% in the quarter and for the year EBITDA grew both in the quarter and for the year.
And EBITDA margins expanded by 40 basis points for the year, well service margins were stable, even a with a heavily promotional fourth quarter.
Postpaid phone growth was solid.
Adding 229000 the quarter.
For the year, we had about 1 million phone net adds both postpaid and prepaid.
This strong performance was driven by our industry, leading network in came even while postpaid phone churn was up as competitors ramped up promotional efforts.
You should note total churn postpaid and prepaid combined improved year over year by 12 basis points.
As Randy mentioned, our entertainment group.
Full year target EBITDA stability.
Long term customer value continues to be our focus as we head into 2020.
That focus is self drive growth in video and IP broadband ARPU views.
18, T. fiber continues to grow adding nearly 200000 customers.
That brings us to nearly 4 million HCT fiber customers and we have lots of room left to grow.
Premium video that losses improved sequentially by more than 200000 subscribers.
Video losses continue to impact our broadband numbers, especially our bundled customers.
Our new simplified video offerings position us for the long term at our subscriber trends are improving.
Let's turn to business wireline.
The trends in business wireline continued to improve revenues grew sequentially and were down just 1.7% year over year.
And when you include wireless business solutions grew 1.1%.
EBITDA was relatively steady in the quarter and EBITDA margins were up 40 basis points.
Let's move to water media and Latin America results, which are on slide eight.
Morning, maybe had a great quarter when you consider the decision to forego content licensing revenue.
Subscriber revenue growth at both Turner and HBO combined with lower film and television production cost at Warner Bros, helped offset that pressure.
We made the strategic decision to give h. pmax exclusive streaming rights for top programs, including friends Big Bang theory, and other popular shows.
In the past we would have sold these externally.
Looking at the impact in the fourth quarter Warner Media revenues would have grown by about 10%. If he shows would have been sold in fact that 10% organic growth would represent water medias best growth rate in three years.
And EBITDA would have increased by about 300 million or about 11%.
Obviously this has an upfront cost for us, but we see this asset investment that makes h. feel Max even stronger.
Pay off over the long term.
The Big news in our Latin American operations is Mexico, turning EBITDA positive in the quarter.
The team has done an excellent job of reducing costs and growing revenue in a challenging environment.
Fourth quarter, Mexico, EBITDA improved nearly $200 million year over year and improved by more than 300 million for the full year.
We continue to press for further gains.
New wholesale agreement with Telefonica.
Add to both revenues and EBITDA.
Going forward, we expect continued improvement.
Frio continues to work against economic and foreign exchange headwinds.
But even in this environment it continues to be profitable and generate positive cash flows.
Now, let me turn it over to John Stankey to cover our 2020 operating plans and then I'll come back and discuss a capital allocation update.
Chad.
Thanks, John and good morning, everyone. Starting on slide 10. These are the four key areas of our 2020 operating plan, where we'll be focused in executing to drive our performance.
I'll go into some detail on each of these over the next few minutes, but I'll give you the headlines first.
Number one is continuing our momentum in mobility, because we expect mobility will continue to be the biggest driver revenue growth and profitability be a key factor in meeting our 2020 goals.
Second a successful launch of HBIO Max is critical to our plans in each of the next three years.
Many of you are with us for the analyst day in October and have seen first hand, why we're so excited about HBIO Max and the opportunities it gives us.
We're right on track to watch it in May.
Third is growing our broadband revenues by increasing our fiber penetration.
Key to this will be bundling, our fiber broadband offer with h. into TV, which is delivered over our software based video architecture.
And finally.
We're laser focused on improving both the effectiveness in the efficiency of our overall operations.
As a result, driving additional costs out of the business.
Let me dive into each of these four drivers beginning with mobility on slide 11.
Last year, our wireless network was recognized as the nation's best and also fastest thanks in part to our first and that Bill.
Correct.
We did a few of our own spot tests in December to see how our existing nationwide Fiveg evolution network compared to the Fiveg network one of our competitors rolled out last month.
Three out of the four test cities, our network had faster speeds at lower latency on average.
Point is our strong spectrum position gives us a leg up and allows us to execute a different fiveg deployment strategy than our competitors.
We have below and mid band spectrum to deploy Fiveg nationwide, we cover 50 million people today and expect to be nationwide in the second quarter.
We also have the millimeter wave spectrum, we need to deploy fiveg, plus and its gigabit speeds and super low latency to more densely populated cities.
35 cities today, and we're adding more this year.
There is an important point to be made here once we have fiveg nationwide.
As you know smartphone upgrades across the industry had been down for a while now in fact.
Coming off a record low upgrade rate for any fourth quarter in our history.
But fast forward to the back half of this year when popular fiveg smartphones and devices should be more available at scale.
You can expect higher upgrade rates and equipment revenue growth.
The timing for this upgrade cycle couldn't be more perfect. When you consider that will be offering each veo Max.
Our highest ARPU wireless plans with features tune for premium media consumption and at a time when people are coming into our stores to upgrade.
It's a natural opportunity to further the distribution of HBIO Max.
Adding new mobility subscribers in improving our wireless ARPU is.
HBIO Max's content has something for every one of the family and that makes it a natural fit for nearly 25 million postpaid accounts at average more than three lines per account.
As a result.
We expect our wireless service revenue growth rate to be higher in 2020 .
And after adding nearly 1 million phone net adds in 2019, both postpaid and prepaid.
We expect 2020 will be an even better year for net ads.
First net plays an important role here, we now serve more than 10001st responder agencies more than 1 million connections with first net.
We expect those numbers will grow nicely as our first net deployment reaches 80%.
New devices and capabilities come to market in the coming months.
We also expect a higher adoption of our unlimited plans.
Right, a little more than 50% penetration today.
But we expect the fiveg device upgrade cycle will bring into our stores lots of customers not on an unlimited plans today.
Increasing the adoption of our best Unlimited plans is obviously, an ARPU growth opportunity for us when you add into the mix the customers on select unlimited plans.
Good HBIO Max for free so.
It's a great opportunity to also improve our overall churn, which we've seen happen from given HBIO to current unlimited customers.
A reduction of one basis point of wireless churn across the base is worth about $100 million to us annually.
To sum it up we're expecting growth of more than 2% in mobility service revenues this year.
Let's go to slide 12.
In the headlines for why we believe HBIO Max will be a game changer for our customers.
For Eighttwenty.
I expect many of you were at the HBIO Max Analyst day in October .
You heard me talk about the three pillars required for success and streaming premier content technology platform and marketing and distribution.
Only 18 T. enters the space solid footing in all three.
My excitement confidence in the HBIO Max opportunities have only grown since then the team has made tremendous progress in every area.
We're on track to launch in May with a unique offering.
Quite simply we believe HBIO Max will be the highest quality premium as spot in the market the great experience.
Better duration at a higher percentage of culturally relevant offerings than competing products.
We're excited to launch HBIO, Max coming off the table one of one of our strongest awards seasons ever.
New and exciting breakthrough offerings, leading the way.
We captured in industry, leading 34, Emmys and six Golden Globe Awards.
Joker had more Academy award nominations than any other Phil highlighting our deep and diverse theatrical content.
The awards are only the latest indicator, we continue to create high quality culturally relevant content that appeals to a broad consumer base.
And our additional investment in great content is only going to expand the appeal of the service.
With Hbr Max law for consumers more than twice the amount of programming for the same prices HBIO today.
We're making great progress on the HBIO product platform as well.
Our controlled non public beta is getting solid reviews, and we're gaining invaluable feedback on important but subtle issues like user navigation and screen layout.
This work is no less important than award winning content.
Finally.
We continue to fine tune, our go to market plans consistent with unique position.
Which we enter the market.
Leveraging our extensive ATM to distribution and embedded base of more than 30 million domestic HBIO subscribers.
We're in active discussions across our potential distribution partners, both digital platforms and MVP. These.
We're making progress and we expect will have deals to announce prior to launch.
Our focus continues to be on providing a compelling value proposition for HBIO distribution partners and our mutual customers.
Our more than 10 million HBIO subscribers on 18 to distribution platforms will be offered immediate access to HBIO maxit launch.
So we'll get off to a fast start.
To drive incremental growth.
We have unique advantages when combining media and distribution, including our 170 million direct customer relationships across mobile.
Hey, TV and broadband.
Plus we have 55 100 retail stores, who will be focused on driving incremental HBIO Max adoption by bundling it with premium tier wireless broadband or pay TV offers.
We use 18 to customer insights for water media advertising analytics and Curations.
We have very high expectations for HBIO, Max and at the same time, we're thrilled about the possibilities of increasing the adoption of higher ARPU services and strengthening the long term value proposition of our highest quality and highest ARPU customers.
We fully expect HBIO Max will have a positive an immediate impact on the stickiness of our wireless and pay TV and broadband offerings.
Now, let's look at Entertainment group those details are on slide 13.
Our EG team delivered our target of stable EBITDA last year.
In 2020, you're going to see a supply the same high value customer centric focus.
While increasing our fiber customer base.
Launching a TNT TV.
We'll see higher amortization costs in the video business in the first quarter, which creates some tough year over year comparisons for UGI EBITDA, but on a cash from operations basis, we expect EG to be stable in 2020 versus last year.
We believe the greatest opportunity within IGI is to significantly grow our 18 to fiber customer base and broadband revenues.
We have 4 million fiber customers today.
Our recent fiber expansion gives us 14 million locations to sell into based on our fiber sales experience. We expect to exit 2022 with about 3 million more fiber customers than we have today.
Our total of about 7 million.
This will be a significant lift in market share compared to our traditional performance in our legacy hybrid fiber copper based footprint.
It represents an organic market share growth opportunity on an existing product.
The I've never experienced in my career.
Where we offer competitive broadband speeds you can expect that will lean into video acquisition.
Given the better economics of our improved product portfolio, including 18, GTV and HP OMEX.
All software based products with low acquisition costs.
Within our broadband footprint expected as we exit the year, our premium video subscriber declines will be more in line with overall video industry trends.
Looking or a total premium video customer base.
We expect to year over year improvements in subscriber losses.
Now, let's turn to slide 14 to talk about our efficiency and cost initiatives.
New work to improve the overall efficiency and effectiveness of our operations has progressed over the past few months.
We previously shared with you that we're targeting an additional 4% reduction in labor related costs.
Including benefits in contract employees in 2020 alone.
That work will ramp quickly and we plan for it to deliver $1.5 billion, an additional cost savings.
In fact, we've already identified and implemented about half of those savings.
Another significant opportunity for us is product and information technology rationalization.
We feel comfortable that we can generate another $2 billion of annual run rate efficiencies exiting 2022.
This will come from Binion, our product portfolio.
Simplifying our market offers rationalizing call centers.
Modernizing our information technology and enhancing the level of customer self support in addition.
Streamlining will have the added benefit of enhancing our market agility and ultimately lead to improved market effectiveness.
Our assessment work continues.
I expect in the next 90 days, we'll have additional efficiency initiatives underway for some of our network corporate sales and procurement functions.
I'll turn it back to John now offer is look at capital allocation 2020 financial guidance.
Thanks, John strengthen our balance sheet was our top priority last year at our teams did an excellent job of reducing debt and monetizing our asset portfolio.
That's allowed us to begin retiring shares at the end of last year, while still meeting our net debt ratio goals.
In 2020, you can expect that momentum to continue.
It all starts with strong free cash flows.
We had record free cash flow last year and expect to be in a similar range. This year.
We achieved this even with some voluntary funding for retiree medical costs and higher tax payments in the fourth quarter.
We also overachieved on asset Monetizations.
Expect to do another five to 10 billion net monetizations this year with significant efforts already underway.
At the same time, we continue to evolve our capital structure.
We added more preferred to our capital stack last year, when we monetized more than 6 billion of our long term tower purchase options.
And we also issued 1.2 billion of traditional preferred stock.
A publicly traded preferred stock is new to us.
But there is a market for it and it provides investors another alternative to invest with 18 TV.
In fact these shares arch currently trading at a premium to bar.
Investors are looking for secure dependable returns, which is exactly what this offers and dividend rates at less than our common stock dividend yield.
Make an attractive for us.
The tower prefer it's also allow us to use very long term assets to generate cash and the tax efficient manner.
We also continue to be focused on our three year debt reduction targets.
Depending on the timing of share retirements and asset Monetizations.
We'll see our net debt to adjusted EBITDA ratios fluctuate throughout the year.
Well, we expect to continuing reducing debt for the full year and intend to target leverage in the two to two and a quarter range by the end up 2022.
Our share retirement and began in earnest.
Told you we wanted to buy shares as early in the year as possible and that is what you're saying.
Thanks to our 4 billion dollar ANSR, we've already bought back about 85 billion shares in January and expect to see another 20 million in the remainder of the first quarter.
You can expect us to continue to buy back shares during the remainder of the year and meet or exceed our $250 million share retirement target for 2020.
That's on top of the 56 million shares we bought back in 2019.
We have a lot of levers, we can pull to optimize our capital structure, we're focused on managing debt and have a wealth of opportunities with our balance sheet as we showed last year.
You can expect us to continue to manage it in a prudent way, including issuing additional preferred shares now let me revisit our 2020 guidance on slide 17.
Our guidance remains consistent with what we told you in October this year more so than most our results will be more weighted to the second half of the year. For example in the first part of the year, we expect pressure from heavy HBIO Max investment, which you saw begin.
The fourth quarter.
And then EG higher content and noncash amortization costs.
Well as continued pressure on video subs.
But in the second half of the are you will see our momentum built for example share retirements have been aggressive and we will continue and EPS benefits will flow increasingly throughout the year.
H. feel Max will have launched leading to strong subscriber growth.
Run rate benefits of our cost reduction plans will be clearly visible.
Fiveg.
Fine with HP, OMEX will drive more upgrades and stronger wireless revenue growth later in the year.
Again, all of this has been factored into our full year guidance.
With that in mind.
Here's what we've committed to.
1% to 2% revenue growth.
Adjusted EPS of $3 to 60 cents to 3070 cents a share.
Stable adjusted EBITDA margins.
Free cash flow in the $28 billion range with our dividend payout ratio in the low fiftys.
Gross capital investment in the $20 billion range and this doesn't include our investments in content.
Continued debt reduction will share retirement of $250 million or more common shares in 2020.
And our net asset monetizations between five and $10 billion.
Mike that concludes our presentation.
We're now ready for Q, an operator, we'll take the first question.
Thank you, ladies and gentlemen, if you'd like to ask your question. Please press. One then zero on your telephone keypad. You mean withdraw your question any time by repeating the one zero command.
Once again, if you have a question. Please press one then zero and one moment. Please for your first question.
Your first question comes from the line of John Hodulik. Please go ahead.
Great. Thank you maybe a couple questions for John Thank you.
Yes, thanks for the commentary on the on the entertainment sub trends.
The main maybe a little bit more clarity I mean first of all the you saw a slowdown in fiber adds in the quarter.
What was driving that and I guess in conjunction with the guidance first sort of more improve in the back ended the year do you expect that trend to to reverse or win how do you do you expect those ads to sort of play out over the over the course of the year and what drives the acceleration and then.
In terms of the HBIO Max guidance.
The 500 million in incremental expense, we saw in 19, how does that impact your guidance for.
For the $2 billion and 20, Tony Thanks.
Hi, John Happy New year, So first of all on fourth quarter of 19 fourth quarter is seasonally.
Slower quarter December is a pretty slow month in general for home based services.
Given the dynamics of the holiday in Hawaii, So thats part of the contribution to the issue the slowdown.
The second is our gross AD performance on video wasn't strong you see the subscriber trends as we shared with you we move through this year and we start shifting to age into TV or gross AD performance starts to get much stronger and naturally when you're able to put ATM to TV a software.
This product with fiber, it's a much more natural combination satellite dish and fiber.
So as we start to roll out 80 into TV now in markets and we move then we're going to see much stronger performance on the fiber. So I don't Tony is I look at where we are right now in current customer trends I feel pretty good that that in fact, the case, some we're going to be where we need to be on that.
Frankly, it's not a hard so it's a great product, it's a product that customers like.
We can do very well what that and I don't expect that we're going to see that continue through so that's what I would tell you are going to see recovery or into warning on the back side. We gave you range on what to expect in 2020 in terms of dilution that we're not changing any of that range. The ranges arranged for a reason theres a lot of moving parts on.
Max introduction.
It's combination of both go into market with subscribers and it's a product that is going to continue to grow over the coming years, and we're going to be looking in the market for opportunities for other content acquisition in the life.
You know it's entirely possible, we may be opportunistic or look at something we want the management team to have that flexibility to be able to balance those things out we have subscriber growth coming in and things are working well with our strategies. We may go a little heavier on trying to build up subscribers on what we expected I think thats the nature of building a new.
Subscription oriented business and so that range is important we have the flexibility for the management team to do what they want to do.
We feel very strongly we're going to get back that investment as we built this new distribution platform over the coming years, that's why we're doing those we'd like the dynamic.
Ultimately, having some control those customers.
And being in a position, where we can manage that lifecycle going forward and we think it's a good smart long term investment.
Hey, Thanks, Jeff.
Hi.
Your next question.
Your next question comes from the line of Philip Cusick. Please go ahead.
Hey, guys. Thanks.
Yes, John can you update us on the Warner media strategy from here away from Max We see video industry.
Bundled units declining pretty quickly even away from U.S. Yoo decelerate, how does that change your thoughts on on Turner over time, the strategic value. There and then can you also give us an update on the low value video subs that are remaining in the base and how those should come out over the next few quarters. Thanks very much.
Sure happy to do that Phil so.
If you step back and think about the position where we sit in.
On the what I would call the traditional pay TV universe.
Everybody knows it's in transition.
Mature product, that's kind of working its way through the back end of a lifecycle, but I like where we stand on that and that our total percentage of cost to goods sold in that space relative to the size of the bundled with the customer buys is not huge our network portfolio is fairly concentrated network portfolio. If you think.
About the bulk of our profitability comes from three primary networks, it's TNT TBS and CNN and I think if you look at trends, we all know the general entertainment content in the bundle is not performing as well and the nice part about her to general Entertainment networks TNT and TBS.
Yes, it's a really hybrids or a combination of a general entertainment sports and so they historically performed at the upper end of desirability from a ratings perspective than attractiveness from an advertisers perspective because of that mix of content that we have so one I've been more contained portfolio into having.
Mix of content I think it's important to basically right through this transition and have some resiliency.
My view of what's been happening in most carriage agreement negotiations as we go back out in the market for a new things is.
Our distributors see that I understand that those are important networks to carry forward and we're continuing to see the people place value on those things even in a more skinnied down or smaller Paytv universe, moving forward and feel pretty good about that no let's be clear. The reason we're doing Max's we also.
No no that new distribution platforms need to be out there that are the growth platforms and that that match general entertainment content, how consumers want to see them in that that pivot between what we're doing with one of your networks and what we're doing with Max is a key part of the Warner Media strategy. It's a it's an important dance in choreography that we have.
Due to get that right and we feel we're positioned very well and make that happen. We spent a lot of time in the Investor day, explaining why we think it's a natural place to go.
Keith networks relevant what you should expect us to do we will continue to invest that in them, we'll continue to make sure that their viable for our distributors, but you'll see the content shift start to occur a little bit what we see with subscribers is it obviously they like good news and sports. They also.
Content socially relevant so probably a mix of starting to see a little bit more unscripted content come in things that caused people to go into the office and talk about it around the water cooler.
And that will probably start to supplant hours that might have been more general entertainment oriented content that you are going to see showing up on escalade platforms like HBIO Max moving forward and we think that that mix in conjunction with what we're doing with Max will allow us to ensure the content we're producing in our.
Great studios across our different brands will have a place to market that we can monetize with end users either through distributors in the traditional fashion or through direct to consumer constructs, where maybe we have a direct relationship with the customer.
On the subscriber pay TV low value construct.
Look were mostly through that I would tell you we've got a little bit more work to do on some promotional roll offs in the first quarter that.
It's going to continue to show up and when we shared as I shared earlier.
It's going to happen on subscriber trends that I think we'll be more at the rate of decline by the time, we exit this year.
You should expect you're going to see continuing improvement in our subscriber trends each quarter as we move through but I will tell you just can't flip a switch and get their overnight and that's why I'm kind of suggesting you should think run a glide path to get back to that ratable decline with subscriber base decline in the aggregate pay TV industry about it.
Time, we exit the year.
We're going to see probably our heaviest losses and first quarter.
When I look at what's happening from an operational performance perspective, and what the team is doing on gross add improvements what we're seeing in churn improvements the rollout of ATM to TV that really hit its stride in second quarter in terms of its availability across the customer base will start to see those subscriber trends incrementally improve.
As those capabilities started to roll into the base and we'll get to what I just indicated by the time, we exit the year.
That's helpful. Thanks, John .
The next question Greg.
Our next question comes from the line of Simon Flannery. Please go ahead.
Great. Good morning. Thank you Ron will put out a lot of targets here for 2020, Unbooked beyond perhaps you could just share about how.
Executive incentives are being set up for the year on what the key K.P. eyes on metrics are I know last year de leveraging was I think 25% or the short or 20% of the short term come. So any color you could give around what that two or three key focus our for the year and then one for John Stankey you talked about.
The investment and the network the capacity there I think in the past you've talked about the opportunities in the wholesale market. Perhaps you could just give us an update on how things are going there and the opportunity perhaps to sign ups and cable companies. Thanks.
Hi, Simon this Randall.
Yes, as you as you articulated and for those who are familiar coming into 2019.
Told all of you that our number one priority for 2019 was to reduce our debt.
At our leverage ratios down that two and a half times debt to EBITDA and it was going to require strong cash flow generation selling some noncore assets all that was instrumental in getting there and to really drive at home and get the focus of the management team. As you said, we set that debt to EBITDA target as.
A significant amount of executive compensation.
And mission accomplished I think the team executed at an amazing level in terms of identifying asset opportunities to dispose getting those things driven through the process negotiated actually getting good prices for all of those assets.
Then driving just strong cash flows.
So the impressive working capital.
Opportunities, we're taking advantage of these working capital.
Initiatives that are put in place or not one and done well I'm. Most excited about or these are working capital initiatives that are repeatable and so I feel really good about our ability to generate in 2020, even with the HBIO Max investment another $28 billion of free cash flow.
Coming into this year the debt.
Objective of 2.5 times is that what we're working towards what we're working towards is making sure. We're continuing to generate the cash flow to execute the broader capital allocation strategy, meaning more specifically.
Retiring the shares we issued for time Warner and as both John Stephens and I articulated at our opening comments that is a focus and our objective is to retire at least 250 million additional shares. This year, we'll get about 100 million of those knocked out of the first quarter and there's at least 150 more to become.
Moving in the back.
Part of the year that will generate nice EPS accretion as we move throughout the course of the year. So all that said the management team is going to be focused on hitting these earnings objectives that we've laid out for you.
And the cash flow targets and that's what compensation will be really focused on and I think it's going to be effective and generating the cash we need to execute the share buyback programs and the overall capital allocation strategy.
Simon Thanks for asking the question because I think it highlights are really important aspect of how we're going to grow wireless revenues next year.
Because we know we already have that strengthens you indicated that the network performance and that perception as we do research out the market is now starting to grow marks the customer base I think we have some plans to even fine tune our brand positioning messages as we move into this year, a little bit more and we know that as we move that perception.
Which is happening right now, we see momentum and subscriber growth and so we've got just pure subscriber economics that are going to help us there maybe some shifts in distribution. We've got the Tailwinds of first now behind us, which are starting to help us dramatically and I think the coverage improvements that occurs we.
The second phase of Firstnet will allow us to move through that and then we talked about just a few minutes ago, what we're doing on the upgrade cycles in the Max lots, there's a lot of good things moving our direction, what I would call the core organic part of the wireless business to grow revenues and frankly over the last several years, our wholesale business would be.
On a bit of a headwind in our wireless business because we didnt have the flush capacity that we have now been able to turn up with these key investments over the last year and a half we're now in a much different position than we've historically been and where we've had to be very guarded about our wholesale position largely because we needed capacity to.
Support our retail base and we're now I think in a position in the industry. When I look at what has to happen what people either.
Deal or no deal situation spectrum and their spectrum holdings that we are probably more flush than others in the industry and we can affect play in a different way in the wholesale space. We're not just focused on cable I think we want to do as I indicated previously the right deal the deal that's constructive for the industry in general.
Certainly if there was an opportunity to do something in that space, we might do it but theres a lot of other wholesale options out there that we expect going into and I expect we can step up to in the most accretive fashion possible.
What I would indicate to you that I think whether you believe 18 mobile sprint deal occurs where doesn't occur either way there are going to need to be partners in the industry that need to round out networks and do some things differently and we would also try to understand whether or not we have other partners in the industry emerging partners.
In the industry that we can help with on a wholesale side. So there are plenty of options for us to go and start pulling that wholesale lever and driving it up but I think that will be an incremental difference for us than what we've seen over the last couple of years, we've been managing that number down Simon to add to what John said. This is the first year we've had stable.
Reseller revenues throughout the year and in fact sequentially, we grew reseller revenues and year over year in the fourth quarter. So what John was talking about we are not really well positioned for but is starting in a small way right now, but with the opportunity to make it much bigger it's already occurring and it's contributing to that service revenue growth that we've had.
Both in the quarter end the year.
Hi, Thanks, Okay. Thanks, Greg will take the next question.
Next question comes from the line of David Barden. Please go ahead.
Hey, guys. Thanks for taking the questions I.
I guess two first John .
Thank you.
Your it sounds like you guys really have bought into this idea of Fiveg.
Smartphone Super cycle, and I feel like that is not a consensus view I know that theres a lot of debate about it internally here.
Between our tech guys and ours chipset, guys and our phone guys and so if you could kind of give us some perspective on where that conviction comes from that that we're going to get enough of a boost in demand for products that I don't know that the consumers really understand it's a lot different than what they're already buying.
There will be Super helpful and then.
John Stephens.
Could you walk us through the science.
Behind this kind of new embrace of the preferred securities because it seems a little odd to be buying back stock, but then that the same time issuing preferred stock.
And you know debt has deductible interest in.
Don't and so I think that there's some confusion as to what the net benefit to the equity holder is of kind of looking at preferred in the capital stack. Thanks.
Hi, Dave.
So I don't know that I would use the term super cycle I don't look at the plan and say, we're expecting a super cycle.
But we are expecting an increase or step up and what's occurring and look I think that the foundation of that assumption is based on we've done.
A couple of different air interface changes, we did you MTS or interface change we did the LT air interface change and I think there were similar discussions going on at that point in time will tell somebody really be the increase still to use feed overview and yes. It works perfectly fine and I would tell.
We do see this step up occur.
Because natural lease speaking people have a tendency to sit around and run speed tests on their devices and when somebody next to them.
Is getting better performance.
Raises awareness amongst the subscriber base and I expect that theyre going to be a certain number of folks who look at that just say because that device performs better because these new devices have access to a much broader swatch a bands it's going to perform better and we are going to see a degree of upticks simply because.
The subscriber base is going to notice that there is a degree of performance better as a result of that secondly, as I said, we're going to be driving some of this ourselves we're going to be out there with some pretty aggressive promotion on HBIO bags, and we're going to be tying these two are better plans and when you look at what we're assuming in our.
Business plan for the year.
Increases in the number of customers moving into unlimited aren't crazy silly step function changes there more of the trend and taking advantage of the fact that we are going to put more advertising dollars into the market. The support Maxim support Fiveg and we'll get some nominal uptick in what those those migrations.
Into our higher value unlimited plans are so we want to stimulate some of that we're coming off of historic lows of upgrades and we think the market is set up to basically go through renewal cycle, given how we're promoting that's coming at the end of the year in the holiday season, there's going to be better networks out there, we do expect theres going to be an uptick.
The upgrade cycle, Supercycle, maybe a little bit too stronger word, but an uptick yes.
Got it thanks, It had to what John said, we have had three years here a very low upgrade rates just to some extent people are going to need the phone.
So this is just also these this aging of the phone base has been occurring over multiple years. Certainly this is the first time, we're going have a fiveg network up and running and available before the devices are out the next generation networks and the there and as John made very clear the Hcl Max and other products would have are going to really meld well the convergence of all three of those.
Things is going to be really attractive for us.
With regard to the science of a preferred it simply.
Yes.
Market is open to it investors want it they like the certainty.
Today's rates.
Our our prefer the top theres actually trading below 5% yield about a 4.74 0.8 I haven't seen it today about a 4.8% yield so that's lower cash cost.
That our common dividend so that saves us money. There secondly, as you know they don't share on the common profits that sonatide diversification for us and so it gives us an opportunity to go into a different investor base. So you could just like we had done over the last 10 years. It really diversified our debt based this gives us opportunity diversify our shall we.
Base, and we believe that Thats good for everybody, but also allows us to bring in the volume or the quantum of common shares that are out there.
Additionally, when you look at the preferred partnership interest that we've done in the preferred.
Interest we've done there that has a very efficient those dividend costs are much lower.
Because they're very tax efficient so those costs get well below 4%.
And once again that allow us to give recognition to assets that people may not have realized for example, our tower receivables and over 6 billion dollars' worth of real option cash that we have a high likelihood of getting I don't know that anybody who is paying much attention that now because as you have to put that spotlight that we're really already achieved.
That value so, but the the clear signs of the preferred is one.
The dividend costs.
Our lower.
That our common.
They are stable and our common is going to continue to grow third it gets us to another market segment, another investor base, which is helpful and fourth it allows us to reduce the reliance on the common share base. That's out there for that perspective, we feel very good about feel like it's it's a really it's a good news for all of our shareholders.
Thanks, Thanks, Dave Greg will take the next question.
Your next question comes from the line of Michael Rollins. Please go ahead.
Thanks, and good morning.
You fast forward to the end of your financial plan in 2022.
Given the Capex that you've articulated can you frame what network capabilities are going to look like for Fiveg mobile.
Fixed wireless broadband coverage.
And fiber to the home coverage.
Then secondly can you just unpack a little more of what you see driving the strength.
Industry wireless postpaid phone net adds.
And as you look at your own customer trends.
Are you seeing any meaningful differences in customers in markets that have fiveg evolution versus those that haven't received it yet thanks.
Sure So Mike let me see if I can hit.
A combination of things you laid out so first of all.
I think one of the significant shifts you'll see 2022 by the time, we get to that point in a lot of this is being driven by work on Firstnet is I think we'll be in a much better position on macro coverage and not only from number square miles, but I think youre going to see the improvement.
In core interior performance, given how weve densify things to support our first net subscribers in the agencies, we have there and as I said. This is really where last year was a year of us getting coverage macro coverage in place kind of getting the umbrella the footprint turned up this year is where we do a lot of the main.
The network better stuff. So we've been doing all the site acquisition all fill line and we start turning up sites and just going to make the network better it's going to make the network better inside of the of a building thats going to make the network better in terms of the square miles that are covered and when you add that to the grade spectrum.
Vision that you're already seeing in the wonderful reviews of speed and performance that we're getting back on test today that only makes things stronger.
Secondly, we are as you know in filling with millimeter wave and we can already turned up over 30 markets with millimeter wave, we're continuing to increase that footprint and we're going to be very opportunistic at where we can do that were another unique position, especially in the places.
What we offer offer wireline businesses that we can densify aren't or fiber infrastructure and away, that's really economic and is advantageous to our cost structure as we move forward.
Millimeter wave bill and his where you're going to get unique performance characteristics. It will be obviously, probably more more pronounced in the urban areas of large cities.
Our plan right now as we're not as.
Optimistic as maybe some are on what I would call the fixed wireless replacement construct we obviously believe there'll be some part of the subscriber base.
Decide that they don't need a fixed broadband connection I.
I think thats going to take a couple of years the started to emerge when you get the density.
A little bit more robust I think as we see more mid band spectrum coming in place to support the millimeter wave and make the performance a little bit more consistent so I wouldn't tell you the nerve or any of our financial plans in our business plan. We're out there are expecting wonderful revenue increases.
From a portion of the fixed wireless space.
On what we do in the fixed space you should expect that we're going to continue to add to the wireless or to the excuse me the fiber footprint.
Right now were as we've shared with you our goal is to get a little better return out of what we've deployed because between consumer and business. We have about 20 million locations. We can be aggressively working penetration in and we think that we need to ensure we've got the write business practices and marketing practices to get the return.
On that footprint, that's there and as soon as I get indications the team is actually executing on that well and we have the right formula on it.
Oh, probably release the spickard on some additional bill.
You should expect just by natural growth of the population, you'll probably see somewhere between 350000 do a half million new fiber locations coming into the portfolio right. Now that is just kind of what I would call. The natural growth rate thats going to happen, if we step that up a little bit it'll be because.
We feel good about how we're executing on the embedded footprint, we have in place and we know exactly where the next incremental places we'd go and building I think it's entirely possible that this operating team could build another million to 2 million a year. If we felt like we had the operating momentum to do that on the post.
Hey trends look theres.
The difference between prepaid and postpaid is changing it's getting they're getting closer together.
We've been in a situation, where we frankly as we shared with you our prepaid base looks a lot more like a postpaid base in what may be the broader industry prepaid base looks like once we get these folks on.
Prepay once we get them on smartphones, we start seeing churn characteristics with multi line accounts that are that are very similar to what we have in postpaid. So I think as the economy is approved improved as the differences between the two products have gotten a little less so.
Our phones have worked their way into the prepaid base because of the cycle of maybe previous generation phones being available.
We see customers now starting to opt into a postpaid construct.
Does that reverse itself, if we see some economic headwinds and maybe it will become a little bit more.
Careful about what they do that's possible, but the net of it is when you look at whether a customer goes with our prepay offer our postpaid offer we have a lot of similar characteristics between the two if we can hit them in both places.
But we feel very comfortable that we can catch the transition if there's if there's more of a move to postpaid which is what I think it's occurring largely driven by economy in the way. The networks are performing in the differences between the two products. Thanks. Thanks, Mike Greg will take one more question. Okay that question comes from the line of non vision.
Sure. Please go ahead.
Thank you.
Couple if I could.
Firstly I mean, when you think about decline rates of video AD Directv.
Although it will moderate over the course of 2020 based on your guidance.
If at some point.
Directv becomes smaller than say, Comcast and because of the video losses and those lines Cross is it any kind of an impact on your programming costs because of the most favored nation clauses and others that you get on the kind of your scale and how does that impact margins if it does.
And secondly, when you think about the.
The attach rates for broadband.
In video homes could you give us a sense of what that is and dividend the base of homes that you've lost as it has added to the promotional rollouts last year is it inline with the average it as it had a lower and that will help us get a sense of where trends out. Thanks.
So the short answer to your first question is no.
We first of all as you're aware.
Fairly significant renegotiation cycle over the last 12 months.
So those are all baked in in the bag.
Next three to five years, depending on the nature of particular content.
And I don't see any exposure in any those agreements would suggest we're not going to continue to pay.
The best part of the rate card, given the size and scale of our business.
As we move forward I think frankly.
What's more likely to happen in pay TV moving forward as well I talked about earlier, where I think there'll be some pruning and TREVYENT of offers in the market is folks move forward to manage their cost of goods sold.
On programming costs, it will be dropping or shifting away from less traffic networks.
I think thats going to be a bigger driver of cost structure, then renegotiation or anything around that but.
We're we're pretty well baked in that regard as you know one of the things we're working through as we have a step up and our content costs. As a result of that significant renegotiation work, we did last year.
Going to have to work through that in 2020, and then in the subsequent years 20 122, you'll see us on what I would call for industry traditional step ups year over year on programming costs.
But we're in the bag on those things that I think we're in pretty good shape.
On the broadband attach rates the attach rates in footprint, where we offer broadband are extremely high.
And they havent changed.
We we would expect to see a modest step up as we move away from satellite combined with broadband and get into our software product distributed over broadband.
Sales rates I think will help us on gross not necessarily a significant change and attach rates. When we are successful selling we typically attach both.
The reality is as we want more gross we don't necessarily want to change the attach rate we get more grows by the fact that for example, and footprint solid 10% of those subscribers have line of sight related issues on satellite they won't have that on the software driven product that helps us on gross intake and thats.
One of those things that help us helps us as we move through this year change so subscriber trends.
Okay. This is Randall I first of all I just wanted to thank everybody for joining US again that this morning for the call and your interest in 80 anti we're coming off of 2019, we told you exactly what we're going to do and in terms of debt repayment operational performance et cetera capital allocation. We checked every box we've now give.
When you are playbook for 2020 through 2022, that's a playbook that we feel very confident that we could achieve we're now gaining momentum in our wireless business, which we feel very good about that we have the capital allocation plan that we had a high degree of confidence who will be able to execute over the next three years and and we have.
A media business is performing at a very high level, even in the industry Thats in transition and with HBIO next coming in the investment we're making there were confident that assist another growth vehicle for this business over the next three years. So bottom line. We have a plan that we think stacks up very nicely, we're confident in our ability to execute we love the management team.
And looking forward to 2020 again, thank you for joining us this morning.
Thanks.
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