Q2 2020 AT&T Inc Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the ATM T. second quarter 2020 earnings Conference call. At this time all participants are in listen only mode. If you should require assistance during the call. Please press Star then zero and operator will assist you offline following the presentation Nicole.
We will be open for questions. If you would like to ask a question. Please press one and then zero you will be placed into the question Q. If you are in the question Q and would like to withdraw. Your question you can do so by pressing one and then zero and as a reminder, this conference is being recorded I would now like to turn the conference over to your host Amir Rozwadowski.
Senior Vice President Finance and Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to our second quarter Conference call I'm Amir Rozwadowski head of Investor Relations Radian team joining me on the call today are John Thank you aging Tiv, Chief Executive Officer, and John Stephens, Our Chief Financial Officer, John will provide opening comments followed by John Steven cover.
And second quarter results, and our liquidity and capital position after that John. Thank you, we'll come back with a business transformation update and discussed BHP OMEX launch then we'll take your questions.
Before we begin I need to 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 and uncertainties results may differ materially additional information is available on the Investor Relations website.
And as always our earnings materials are also available on the Investor Relations page of the agency website.
I also want to remind you that we are in the quiet period for the FCC spectrum auction 105. So we cannot address any question about that today with that I'll turn the call over to John Thank you John.
Thanks, Amir I'm delighted to have you onboard to you delivered that safe Harbor statement much better than might buy all ever did.
Seriously.
We appreciate the great job might did leading our IR team for many years on working side by side with them I'm going to miss seeing them around and where she and his family all the best in their retirement.
So good morning, everyone. I Hope you are all doing well as we continue to live with the impacts of covert 19.
Which I expect are going to be with us for some time.
We're planning on the operating under the assumption that significant accommodations for co that will be the business norm well into next year.
The unfortunate reality simply sharpens, our focus and strengthens our resolve on the business transformation path we chartered.
And the investment focus we've adopted.
Given that let me walk you through our priorities moving forward.
As a company.
Our purpose is to create connection.
We create connection with each other with what people on businesses need to thrive every day.
And with stories and experiences that matter.
That purpose leads us to our market focus.
First as a broadband provider our high speed fiber and wireless broadband networks connect the people in businesses that form the foundation for how we live in a work.
Second.
As a software based entertainment provider, we deliver compelling entertainment experiences through HBIO, Max and 80 TV.
Even as the opportunity to establish meaningful relationships with the majority of U.S. households.
And third.
Fantastic stories, we tell ensuring our platforms drive direct customer engagement and insights and create emotional attachments that can drive long lasting customer loyalty across our product set.
We're executing our plans to provide great conductivity and great content, along with better value in service to drive more customer engagement across all of the TNT.
Our goal is to give our customers a reason to actively engaged with US every day in fact multiple times a day every touch point represents a chance to learn more about what they want.
And bringing connectivity in engagement together.
We will allow for the crucial insights to guide future investment and opened new opportunities.
For subscription and advertising supported products.
So that's our setup.
And that's the way you'll hear is talking about things going forward.
To grow we know we have to be more effective and efficient and our execution.
As part of our transformation initiative.
We have more than 50 different workstreams underway, the will enhance not only how we work together.
But how we deliver improved service levels and greater value for our customers, including competitive pricing that drives market momentum in targeted investment to achieve growth in those key products I mentioned.
Our success relies on 18, T., becoming a more agile and efficient company, that's able to meet our customers' needs in the highly competitive and quickly evolving markets.
Our transformation began with the new operating model, we put in place at Warner Media last year to organize our teams around entertainment networks live programming content production in affiliate and advertising sales.
That allowed us to work together across Warner media and all of a TNT to successfully launch HBIO Max.
A few months ago, we took the next step and moves Zander to Warner media. So we could accelerate our progress in building software based entertainment platforms supported by both subscription and advertising like Dave Odd version of HBIO, Max We plan to launch next year.
Last month, we made changes on how we're organized and operate at 18 T. communications to improve our focus on customer service.
Simplify and rationalize our product portfolio around our growth areas and the operate with more speed and efficiency.
I fully expect that the 18 T that emerges from this transformation work will look different than what we know today.
We couldn't make this transition without a solid balance sheet.
And a deliberate capital allocation plan.
We have strong cash flows that allow us to allocate capital effectively.
We're continuing to invest significantly in our growth areas of fiber fiveg, which is nationwide as of today.
First net and HBIO Max.
We remain committed to our dividend, which we've increased for 36 consecutive years, we finished the quarter with a dividend payout ratio of about 50%.
We expect to end the year with our payout ratio in the sixties likely at the low end of that range.
We continue to reduce our near term debt obligations.
And maintain high quality debt metrics.
Finally, we remain committed to an ongoing disciplined review of our portfolio of businesses and assets.
To identify those we can monetize because there are no longer core to our business.
Now, let me offer my perspective on a quarter before I turn it over to John Stephens to walk you through the details.
Our core subscription businesses proved to be resilient in the face of the economic downturn.
Our mobility and business wireline segments performed well and we grew EBITDA margins in both areas.
We continued to add new fiber customers, though co. There's limited our ability to go into some customers homes for installs.
Our software based entertainment businesses performed well.
80, TV subscriber growth in its first full quarter was better than we expected.
And it's our highest performing video product on customer satisfaction double the level of our legacy TV services.
Feel Max had a strong launch on track to hit its targets, we laid out for you last fall.
We're already seeing how HBIO Max can increase our broadband adds an increase wireless ARPU.
Obviously.
So that had a significant impact on our Warner media segment with advertising revenues.
Content production in theaters all shut down.
We'll talk more about that a little later in the presentation.
But I cannot imagine being at this moment absent the moves we made last year to reconfigure, our Warner media operations and refocus the business on the growing an important direct to consumer opportunity.
With that I'll turn it over to John.
Thanks, John and good morning, everyone.
Our financial summary for the quarter begins on slide five.
Adjusted EPS was 83 cents a share.
Net income included cobot impacts.
From incremental costs related to compassion pay and production delays and lost revenues from forgone international roaming and delayed theatrical releases.
Combined.
Cold It had a nine cents a share impact to second quarter, yes.
Adjustments for the quarter included overall accrual for severance and a noncash write down of real goodwill based on the overall economic conditions in Latin America, foreign exchange rates and cold it impacts.
The severance accrual reflects the port force adjustments, we're making as part of our cost reduction and transformation plans.
Cash and passionately severances will occur over the next several quarters.
Revenues were down from a year ago, including an estimated $2.8 billion of lost or deferred revenues.
Impact from coated.
This was mostly due to the absence of theatrical television releases and lower advertising from delayed sports programming at a slow economy.
Lower international Rolling revenues impacted mobility.
In our reported results.
Foreign exchange had an impact of about $500 million and lower revenues.
Primarily in our Latin Americas segment.
Corresponding expense reductions offset most of the impact on operating income.
In fact.
Adjusted operating income margins or essentially flat.
But were up when excluding cobot impacts.
Cash flow is impressive.
Even during the pandemic.
Cash from operations came in at more than 12 billion and free cash flow came in at 7.6 billion.
A variety of items supported cash, including solid accounts receivable collections and some benefits from the cares Act.
And we continue to invest in our growth areas Capex was 4.5 billion with gross capital investment at around 5 billion, a difference primarily attributable to the timing of vendor payments.
Yes, we invested an additional 1 billion in new Fiveg spectrum in the quarter.
And we invested nearly 4 million in HBIO Max.
Inline with our full year estimate of $2 billion.
We were active in the debt markets during the quarter.
Managing our towers for financial flexibility.
And allowing us to take advantage of historically low interest rates.
We'll talk more about that in a moment.
Let's look at our segment operating results starting with our communications segment on slide six.
Our subscription business led by mobility broadband business wireline remain resilient.
Mobility had another good quarter, even with the impact of cobot.
Equipment revenue helped offset declines in service revenues.
Which were down due to a decline in.
International roaming revenue and waived overage in late fees.
Without those cobot impacts we estimate service revenue would have grown more than 2%.
Even with many of our stores being closed during much of the quarter.
Mobility equipment revenues grew.
With growth in digital sales and a strong rebound as stores reopened late in the quarter.
Mobility EBITDA continues to be a solid story.
EBITDA of 7.8 billion was up year over year with both EBITDA margins in service margins, expanding and that's inclusive of cobot impacts.
Our total reported phone growth was essentially flat.
We had more than a 135000 prepaid phone net adds that helped offset the decline in postpaid phone.
Our quarterly subscriber counts for the postpaid wireless video and broadband.
Reflect that estimate for customers, who will likely disconnect service once the keep America connected pledge ends.
In short we're treating Lee subscribers is disconnects in the second quarter.
While this impacts net adds churn and service revenues.
We believe this is the most transparent inaccurate way to account for this.
About 340000 of our postpaid phone subscribers were counted as disconnects, even though they were still on our network.
If you add those back to our results. We would have had about 190000 postpaid phone net adds and much lower charge.
Postpaid phone churn was down two basis points, even with the keep America connected accrual.
We also had a record low prepaid churn of under 3%.
The popularity of our unlimited plans also increased.
Thanks in part to art elite package that includes HBIO Max.
In our Entertainment group, we had lower video and advertising revenues.
This includes an estimated 300 million dollar impact on both revenue and EBITDA from coal bid from lower advertising demand and lower commercial volumes.
18, T. TV gains helped offset premium video losses.
And at the same time had about a 90% attach rate.
With our broadband services.
Premium video losses remained about the same as the first quarter.
Broadband customers continue to look for faster speeds.
We added more than 220018 t. fiber subscribers.
In a number of customers opting for gigabit speeds increased by more than 750000 in the quarter.
We now have 4.3 million 18, t. fiber customers.
Nearly 2 million of them on one gigabit speeds.
I should point out our total broadband numbers do not include 159000 subscribers.
Who are counted as disconnects.
Even though they remained active on our network through the keep America conducted program.
We continue to drive ARPU growth in both video and IP broadband.
In fact premium video ARPU was up more than 6% as we continue to focus on long term value customers.
Business wireline performance was solid as enterprise customers trusted the reliability and flexibility of our network.
EBITDA was essentially stable year over year end margins expanded by 90 basis points.
Revenues were consistent with recent trends.
A slower declines in legacy products or partially offset by growth in strategic and managed services.
This event Das strength was even more impressive when you consider that a year ago, we had an IP sale, which helped both revenue and EBITDA results.
If you backed that out revenue would have been down just 1.7% and EBITDA would have grown.
Let's move to order media and Latin America results, which are on slide seven.
As John mentioned, the coal that impact as most evident in our water media results.
Altogether covert had about a billion and a half dollar revenue impact in the quarter lower expenses resulted in a favorable impact on EBITDA.
The biggest news of the quarter from water media was the successful launch of H. feel Max which John will cover in more detail just a minute.
Turning to Orlando America operations Foreign exchange was a major factor.
As were slow.
Economies and the onset of covert.
Mexico was impacted by lower equipment sales from coal did relate in store closures.
It's also impacted prepaid customers ability to renew their service.
Even with this Mexico EBITDA improved year over year.
Great also continues to work against significant economic and foreign exchange headwinds, which have become even stiffer with coated.
Even in this challenging economic environment.
Well continues to generate positive EBITDA and cash flow on a constant currency basis.
We closed our Venezuela operations in the quarter to comply with sanctions of U.S. laws.
This had minimal impact on Brios financial results, but did reduce its subscriber base.
Now, let's go to slide eight for an update on capital structure.
We exited the quarter with a very strong financial position cash flows were strong our capital allocation remain focused and we may large strides in effectively managing our debt portfolio.
Our strong free cash flow in the quarter gives us even greater confidence that will hit our full year goal, although total dividend payout ratio in the 60% range.
Likely at the low end of that range.
We also continue to invest we now expect gross capital investment to come in at the $20 billion range for the full year consistent with our original 2020 guidance.
The first that build continues to run ahead of plan.
We expect additional network benefits as our Fiveg build is expected to reach nationwide coverage today.
The network in the entire first that team has done a great job.
And building out our Fiveg network.
We've been active in the bond market rates are low demand is healthy.
And we use this opportunity to issue about 17 billion in long term debt at rates significantly below our average cost of debt.
This allowed us to materially reduce our near term debt towers. The here debt obligations for the next few years very manageable.
We will continue to be disciplined with debt management.
Ongoing liability management strategies are actively being incented to maintain and improved flexibility and reduce risk.
We have several other levers we can pull to optimize our capital structure, we expect to close about $2 billion and pending sales from see any real estate and tower Monetizations. This year. We also expect to close or Puerto Rico wireless sales soon with those funds used to redeem some preferred interest.
And you should expect us to continue exploring other opportunities.
And I would like to turn it back to Jan for an update on our business transformation and H. PLX Jan.
Thanks, John Let me give you more detail about our business transformation on slide nine.
If anything Cove. It has led us to ramping these efforts we're moving forward on the 50, Workstreams I mentioned earlier, which we believe can generate $6 billion in savings over three years.
We've made good progress in hitting our short term objectives, but there's much to do over the next couple of years.
Our workforce realignment and reduction of labor costs is underway.
We restructured some of our benefit plans earlier in the year, we made several moves to streamline operations.
Within the communications business, we're also streamlining our distribution.
The closure of retail stores during coded gave us unique opportunity to review, our retail and third party distribution capabilities.
Some of our lease productive stores won't riocan.
Other locations will shift to independent distributors.
And we're enhancing our online and omni channel capabilities to align with how customers want to do business with us.
Our market and product focus will drive simplification into our operations and re size our operating in technology footprint all wall, taking further advantage of our evolution to cloud and Virtualized services.
Our shift the software based entertainment with 80, TV is validating our assumptions on customer self install.
We expect this coupled with the growth of our fiber based broadband subscribers.
I will improve service levels and reduce field operating costs.
We're also giving our call center representatives improved capabilities to streamline and enhance the sales and service function.
And we're rationalizing the modernizing our billing and collection systems.
Last.
We're pursuing incremental opportunities to take out additional costs around corporate functions across the company.
As I mentioned earlier, we've had some success in this regard.
Work remains the further streamline the functions that support those directly serving customers.
Bottom line rock do good start on our transformation work.
We have management teams in place on each of our major initiatives in the senior level governance structure to guide and resources work.
We're in great shape to do exactly what we said we're going to do.
Now.
I want to provide you with an update on the success of our HBIO Max launch on slide 10.
First I want to give full credit.
To the entire HBIO, Max team, which put together a flawless launch I'm extremely proud of their efforts and accomplishments.
We effectively established a new distribution framework for water media.
Platform perform superbly.
Activations were strong and the content is world class and the team developed and launched the service in a short time frame and managed to get it all over the finish line in the middle of a pandemic.
We're right on track with the targets, we discussed with you last fall for HBIO AMAG subscribers Activations and revenues.
HBIO Max's diverse library of content Appeals. The every one of the family letting us reach a much broader demographic than our traditional HBIO service.
And with that broader appeal, we've been able to expand beyond the traditional HBIO subscriber base. We finished the quarter with 36.3 million use subscribers the HBIO Max and HBIO up from 34.6 million at the end of last year.
Customer engagement has exceeded our expectations.
It's the early days, but the average number of weekly hours spent viewing Max is 70% more than on HBIO now clearly demonstrating the strength of our library and our success broadening the appeal of the product to more family members.
It's our water media and content that's at the top of the view enlist and that's driving the majority of the total hours consumed on the platform.
And the streaming business.
Your content library is the key to keeping customers.
But it's the new originals that drives subscriber acquisition.
With Covance shutting down content production in March we have been challenged to get all the originals on the platform that we plan.
But we like the early reception of what Weve been able to get in front of the customer base thus far.
We launched Max was six new originals.
All we are found in the top 25 you'd series on the platform.
By August was 21, new original series on Max.
Which we expect to sustain our near term acquisition efforts.
Like everyone else in the industry, we're working on ways to resume production and we hope to see that engine start the fire backup next month.
Having said that it's one of our more challenging things, we're doing to respond to the pandemic.
And it's going to take time to return to our February production levels.
We view getting our production back on line is critical to making our 2021 subscriber plan.
One month after launch HBIO, Max had about 3 million retail subscribers.
And 4.1 million subscribers had activated their Max account.
Of those more than 1 million, we're wholesale subscribers through a TNT.
You might expect we're seeing more rapid activation with subscribers who are active users of the HBIO digital offers.
But we still have work to do to educate and motivate the exclusively linear subscriber base and we'll continue to work with our wholesale partners to drive these activation rates.
We're also bundling HBIO Max the some of our premium wireless and fiber plans.
We're seeing a positive pull through that's at or better than the wireless unlimited plan step up assumptions, we shared with you in October.
You will recall this coupled with the Fiveg handset upgrade cycle was one of the key drivers through growing wireless service revenues in the latter half of the year.
Finally, we worked hard to make HBIO Max available to consumers through nearly every content distributor in the United States.
We've tried repeatedly to make eight spiromax available to all customers using Amazon fire devices, including those customers that have purchased HBIO via Amazon.
Unfortunately.
Amazon has taken an approach to treating HBIO Max in its customers differently than how they've chosen to treat other services and their customers.
We're glad to have agreements in place with among others, Apple TV and Google Chromecast to give customers the right the stream HBIO Max on those devices.
Amir.
That's our presentation, we're now ready to go to the QNX.
Operator, we're ready to take the first question.
Thank you as a reminder, if you'd like to ask a question. Please press. One then zero. Your first question comes from the line of John Hodulik from you'll be US. Please go ahead.
Thanks, guys.
It is a good drill down into the entertainment segment a little bit.
It seems I think you mentioned some.
About sort of the noncash piece.
Affected.
For the EBITDA on a year over year basis, you get give more color on that and then anything you guys can tell us on Trent volume trends I realize there's a real lack of visibility as we look into the second half but.
The video losses got a little bit better even with the Casey.
The out.
But just how you see sort of video.
And broadband trends as we look out to the second half for the year be great. Thanks.
Thanks, John Thanks for your question, let me give you a couple of churn join in.
One point as we think it a little bit better or the customer trends and that did include I think is 91000.
If you will accrue disconnect customers were still providing service. So if you back that out. It was there was a stepped out it was an improvement.
For the middle of a pandemic and so we're being real careful.
With that how we address the situation.
Finally, we were real pleased with the HDTV rollout it is.
As the success of the Cubs.
It is working.
Or whats good because a pandemic somebody in a whole installs and some that activity has been limited so lets given we're cautious as we as we come out of that third.
Typically referenced we amortize installment costs like the whole industry does and because of 18 ptv those install the cost from a cash basis are going down.
But the amortization of priors selling costs are still here and we're taking a more conservative view on the.
Lighting of those so those costs are up year over year. So when you when you adjust for that we actually had cash EBITDA actually grow when you make that adjustment.
But for but for cold that we would assign increase so.
It is challenging business continue to focus on cost savings and continue to generate a lot of cash out of it.
But the important pieces this utilization at 18, TV now and taking into that overall strategy of software based entertainment programs Johnny early on anything.
John the Theres clearly gross pressure.
And I would offer a couple thoughts around those are churn on the base.
Again sequentially.
And that's even with the keep American connected adjustment in there. So the base dynamic is actually getting better the team's doing a nice job.
Give you the right customers and servicing them in the right way.
Gross pressures are pretty significant I would say to the extent to reason comes back for people to engage in HCV, such as sports, returning where others. There's some feeling of something that they're missing.
If that doesn't recover it's going to continue to pressure throughout the balance of this year no what I really like about what I see better opportunity. If we start seeing that grows recover as we shared with you. This 82 TV.
Yes, it's been really strong.
Customers like the product, it's a much better product use.
It is clearly something that allows us to attack more of the market given the lower sac costs as John described and the broadband attachment is that our security where we were the previous products I think thats one of the reasons you saw the sequential improvement in in fiber is.
Forward here, so no I think that dynamic is going to be good for us as we move through the year, but I really hate to see some reason for a customer want to get into the pay TV product, that's going to probably correlating to what we see a sports portfolio.
Yeah, He's got that thanks Jen.
Your next question comes from the line of Phil Cusick from JP Morgan. Please go ahead.
Hey, guys. Thanks, a lot.
So still on the pledge what's been the response from those customers in July as you ask them for payment.
And he can you quantify at all how much revenue you didn't recognize from those customers and the second quarter.
Yeah I was there let me give you the chichi way of doing I think about it.
It goes consumer awareness is taking amongst revenue on a postpaid customer and you guys have the ARPU numbers. So you can understand what what that revenue would be like I'm not also.
Give me that focus in our detailed schedules.
We provided we provided a reconciliation of what we saw as the revenue pressure in mobility coated. It's included in there and I think that revenue for the.
For the quarter was square a 50 million.
Inclusive of international roaming and.
These these kinds of payments so what I would suggest to you is that the easiest way to calculate.
Couple of things one we're we're actively contacting working with and trying to retain these customers and certainly.
We haven't given up on the M&A and given up on us so.
Clearly we are hopeful oh pertaining many of these customers, but since they're not paying us. Our rules would are counting processes are transparency processes would tell us to treat these as disconnect I know some others in the industry have different views on it there you know me hey.
I would push to talk to the third Florida later in the year or May make base adjustments and so forth. We're just not doing that we're just taking up front and laying it out for you not only on wireless but on video and on broadband and I point. This out because the video the broadband numbers or or measurable also 91000 video in 100, almost 260000 broadband.
Okay I explain I mean, if you think about that postpaid number one month revenues.
At a normal ARPU kind of gives an indication of the kind of money we're talking about.
Yeah. So I'm just curious so three weeks into July as I expect you think contacting these customers. What's been the response can you give us any kind of hit rate or or what they look like in terms of.
Responding with some ability to pay.
Yeah, So there's still.
Generally a positive response I would say, we like we assume that we'd get some of these customers back in this accrual just so you know that I mean, there is an I guess, there's this puts us grow that we would win some moves but no we're doing a little bit better than that accrual will but it's still too early we still had a significant number out there and quite frankly I want to put out.
We refer to this is the keep America connected programs well pledges theres a number of them out there there is not only at the federal as you see level, but there's a number of out there at the state by state level. So just to sum it will be with us through the quarter.
Okay, I wonder if I give you answered so now you're giving a specific number fill and on it but.
I just I just would tell you at all three segments, we are working really hard to retain those customers.
Okay, but doing a little better than your accrual that's good wonderful other if I can can you quantify it all the sports cost amortization.
That will probably come back given the leaks plans for the third quarter I. Just we saw a really great margins from Turner. This quarter I, just want I want to make sure I understand where we should be ready for that to go in the third quarter.
Yes, I think if you if you look at what we spelled out of the in the best indication that can be what we spelled out in Oh, kobin schedules, where we lifted out those impacts, but you're right. Phil we will have a sport.
Cost.
Come back again for the mph, particularly and and we'll have those revenues come back and as we expressed to you noticed just two pieces of direct costs I'm generally leave a pressure on the business.
And we got relieved to that pressure the second quarter or the first quarter because of the delays and now we'll recognize that accounting in the second cool in the third quarter here. So we will see that and I think you see the the biggest piece of that really showing up in the covert schedules on the than we do we disclosed.
Thanks, John.
Thank you.
Your next question comes from the line of Simon Flannery from Morgan Stanley. Please go ahead.
Okay, great. Good morning. Thanks, so much on John I think you said, a cobot is gonna be with us for a while could you just give us a little color on what's happening in the wireless stores. Today, However sales comparing to your ago levels are you getting back even with maybe some of the rollbacks. We've seen in a couple of some of the southern states as well and what's going on on the business wireline side those.
Results are very strong how are those conversations going and then you outlined the transformation benefit 6 billion, perhaps just help us understand how is that going to be fairly ratable over the next three years any color around timing for great.
Sure Oh, you're doing some of the first of all traffic is almost back.
In the stores are pretty well, it's still not quite entirely back you know you have pockets words, maybe back to normal other pockets words suppressed the part of it is as we shared with you know during customers other options on how to fulfill so in some cases using an omni channel.
Abilities are doing work on line and simply ruling by the front of the store to pick something up but you.
No I'd say by and large I don't feel in any way shape or form repeated in retail relative to what customers, who wish to do with us and it's just a matter of you know what we're seeing generally in the broader population of people being up about.
No, we're starting to see a little bit alive coming back into the handsets cycle right now.
I would expect a little bit later this year will probably be some new product in the market from certain manufacturers. The you know is going to further stimulates store traffic.
I feel like we're dealing with it fairly effectively so I'm not really worried about the retail dynamic at this point and that it gets recovered reasonably well.
The biggest wildcard on that is what's happening in states that are pressured a little bit covert.
Hopefully as people try to get the infection rate under control, it's not an entire walk down again.
From my point of view that doesn't seem to be necessary.
My observation as we're able to manage the dynamics of retail pretty well terms the safety of and how people do business. There's other activities that are probably the higher risks things, but who knows.
As we all those the decision making is not always is quickly in fact shows that needs to be in those cases, so we're going to have to see where that goes on the business side.
We had a strong quarter and I wouldn't say that.
I would expect it'll be hard to sustain that level into the third quarter than we've expected, we kind of forecasted that.
Oh, we characterize for you how the year shapes up.
You know, we're going to see pressure, especially in the lower end business market, we've already taken a fair amount of it or if you look at theater payments segment.
We were really heavy in bars, and restaurants and some of the pay TV services, we are than they've been hit really hard and a lot of them if not come back and that in the data services side.
Services side for the small or the market I expect there's going to be continued pressure there now.
If there is a silver lining relative to our portfolio.
As you're aware or enterprise segment is probably more warhead amid larger businesses generally speaking overall, I think they'll be able to better position to sustain what's going to be a tough economic environment, but you know that business does cycle with how the economy moves and we're gonna see some pressure on that as we move into the third quarter and.
What that does for performance there and I think we've got it it's pretty well relative to how we set expectations with you on on cash moving through the year.
On where we are with.
Our 6 billion efforts.
You know I think what you I wouldn't say is ratable as the way I would say is we've got probably some short term things where it will do early in the cycle.
So you're starting to see that momentum come in you clearly see we're doing some work right now on the reserves, we set up for some restructuring we put out that is directly tied to our plans around what we're doing for some of the efficiency work in restructuring that's going on.
You kind of see the mid term or maybe you know it drops off a little bit is we're working some of the technology initiatives and business improvement initiatives. It take you through a period of cycle as you move through software development. That's necessary and then you know as you get into the latter part those balance and and start to occur. So you know I'm not.
I'm going to call. It you know it inverted V. It's not that but you get a lot of fraud, you see a little bit of softening in them that pops up in the tail when it comes back in so it maybe risk adjusted in that fashion.
Right.
That's helpful. Thank you.
[laughter].
Next question.
Your next question comes from a line of David Barden from Bank of America. Please go ahead.
Hey, guys. Thanks, so much for taking the questions.
This one might be hurt either one of the to John's.
Could you guys address the timing and or criteria and some of the kind of political considerations about restarting the buyback program and whether it's a certainty that that buyback program comes back and 21 or not and then the second question is I guess.
Related to the wireless business I guess.
Maybe this one for John Stephens the.
Two forces are the crusher from overage in roaming revenue line offset a little bit by the equipment.
On the the lower equipment velocity.
And then also you have this hazard pay for the Union forces could you kinda talk about which of these forces is gonna be stronger is hazard pay going away and that's going to give you lift equipment going to accelerate and that's going to be a pressure a when did the roaming come back if we get some color on those moving parts it'd be helpful. Thank you.
Ooh, Dave Thanks for the question Louise Let me say mid cycle, one first with regard to.
Well go to think about it this way I'm trying to just mentioned you know that we you know he feels good about our retail space. If you look at equipment revenue in the second quarter. It actually grew and that was from a rebound in our retail stores and our equipment sales in rebound that's because they're open end this hazard pay it.
Some of the issues with regard to what we've done on mobility or Abbott and where you know we're opening.
Secondly, I would tell you that on the overall mobility, we grew EBITDA, even with those costs are the pandemic, even with the pressure from.
International roaming the pressure from waving late fees are overage charges and pressure from the can connect America. So from my perspective were very good shape as those things to work through those even currently but but going forward and the big piece that is we've got a lot of cost initiatives.
That will allow for us to grow that even with those additional costs from coded as you say the battle pay so to speak we were able to keep costs aligning the ROE EBITDA. So well my perspective, I think what a very good position and as we work through the.
Connect America keep America conducted a groups as we get for US you know stable environment, we feel very good about where are the mobility business is going it's it's been a tremendous cash generator. So.
Feel good about that on the question, Dave regarding where we are a stock buyback I would tell you it's too early to call anything and.
Or is going to sit down and their annual planning cycle in September broadly speaking, we're going to look at capital allocation and.
[noise], we've shared with you that our concerns around visibility for being clearly as I indicated in my opening remarks with coal is being with us for a long period of time, and we're going to be in those up and down dynamic.
It's too early to tell exactly what's going to occur and I expect as we get into the.
The latter part of the third quarter, maybe we have a little bit better visibility. It wasn't 21 looks like and what circumstances are and will spend time with the board September talking about that Broadway in looking at the investment opportunities are in front of us and how we want to deploy capital.
The best way to give the right returns back, but I'm not going to prognosticate, one way or the other on that at this point.
Yeah, you did one thing today, we've been really successful and managing the debt towers and managing the cost.
Of our agenda data, we did about $17 billion issuances, the last month and using that to retire previously issued debt it better interest rates with better timing in spreads much more manageable towers. So we're very active and quite frankly, the bond market has responded quite well our yields are as most.
It is competitive for us as I've ever seen.
So I would tell you we're very active in the capital markets just imagine that's tied in and I think the markets have responded well to that and I'm sorry, just I'd just add that and that's that's been a real focus there and it will continue to be a focus of ours.
Great. Thank you guys.
Your next question comes from the line of Michael Rollins from Citi. Please go ahead.
Hi, Thanks, and good morning, I was hoping a return kid some of the priorities John that you discussed at the beginning of the call and just two questions on that first you described broadband being a broadband providers first priority what does that mean for the pace at which you want to expand fiber to home.
Gigabit access to the home if you can use other technology such as Fiveg.
The second question was on your second priority, which is the focus on being a software based entertainment provider and you mentioned 18, TTB as part of that opportunity could be successful with 18, T. TV is 18 t. need to own Directv satellite video be.
Thanks.
Hi, Mike Thanks for the question so on the broadband so I would look good I have a appetite to.
The effective building footprint on fiber and I think I've indicated that before and I wouldn't be quite pigeon hole in the way you asked a question.
Relative to households, I have an appetite to build fiber that serves [noise].
Combination of our needs in the consumer space, what we need to do the deployed fiveg and what.
So our business segment and really the unique position rent as a businesses, we have lines of business and all those areas and that should give us leverage in fiber deployment that I'd think others. You know that are either only a fixed line provider and reselling wireless services or those that are only wireless.
Providers and tried to deploy more fiber intensive fiveg networks.
Don't enjoy and you know my my investment thesis and my point of view on our company is that if we do our engineering correctly, and we think about our planning properly.
We should begin to yields off of every lineal footage fiber, we put in that nobody else can achieve.
So as I think about this and as we're working on through from a planning perspective right now it's how we get the leverage across all three segments not just the homes that we pass although I do know the net effect of that won't be there will be communities that we bill.
I personally do not believe that you know fiveg. He is a replacement in the near term for suburban residential single family living units is a you know an optimal strategy I think it's a it's going to be a tough one to be when there's an embedded gigabit.
Capable fixed line networks in place. So you know I think there is clearly going to be stuff on the margin that makes sense around that but I I don't believe in the near term that Ah you know fiveg. He is the de right fixed line replacement strategy is what I would call. The you know tipping.
No single family home infrastructure, and a lot of it ultimately moves that way and we started to see the technology stabilizing worst well position does anybody to pivot to that we certainly got the spectrum in the assets to make that happen, but I'm I'm just not of the mindset right now that that's the optimal play.
I used to went on the market.
You know on the software based side I think what I've shared with you is it my belief is that ultimately you're coming together with one distribution platform for entertainment today, we've kind of seen as father pay TV platforms grew up independently and there's good reasons why that's occurred.
<unk> up to this point in time.
But there's no reason, we should think that over the long haul that once customers are aggregated on one platform or the other that live stays separate from on demand in general entertainment content and that we're going to see these products ultimately come together. So when I talk about software based entertainment I think.
The fact that you want a platform with a lot of customers on it that is capable of either deliver in general entertainment content under an asphalt construct or whatever is that appropriate mix of as you know live linear moving forward and I think thats, probably the optimal way to meet customer needs. A you know as as we go forward.
Do I think that Ah you know satellites necessary to respond in that area.
Can you go back and what your comments I made I think very early on you know post transaction of Directv that we didnt necessarily make that move because we love satellite as a technology to deliver premium entertainment based video content, we like the customer base, what was an opportunity to move that customer base.
Listen to the right technology platforms moving forward and.
That's clearly were invest where we're investing in what we're doing right now which is building no software platforms that can deliver either live or no on demand entertainment based content and add that relationship with the customer uses data in the analytics reports on that and hopefully bridge off other services that those platforms going Alton.
Well, they deliver and I don't necessarily view satellite technology is a place it's necessary to make that happen.
Thank you thanks Bye.
Your next question comes from the line of Brett Feldman from Goldman Sachs. Please go ahead.
Yeah. Thanks for taking the question you know what are the areas, where we've seen a real difficulty driving a reopening of the movie going you you've already hatchi, Jeff tenant a couple of times you'd acknowledge is gonna be very different releasing we've historically seen you know in light of the uncertainty around getting back to normal without experience and also with the.
Direct platform you'd have an H.B. emax can you talk about what do you think there's an opportunity where you need to evolve your film release and windowing schedule and in particular, what do you think hbr Max could be a much more important launch point quicker films going forward. Thank you.
Sure Great look I think it said last quarter that I fully expect is it coming out to cope with it I wouldn't be surprised if the industry as a whole didn't see some adjustment.
Into the in the theatrical construct and I also made the point that look I think theatrical still has.
Absolute important role moving forward, there's just some content.
It is going to be more enjoyable and better to see in theaters, then and the living room.
And we fully believe that and we want to work with our theatrical partners and our exhibitors to ensure that you know we work with them and try to get through this very difficult period.
However, you know I don't know theaters are going to reopen I'd just like I'm not sure I'd say I know exactly when schools are going to reopen and what circumstances are going to be around it.
And Ah Theres no question that the longer. This goes on there is going to be go some content on the margin. If we look at say a it may be better served to be distributed at another construct or a different construct a I love. The fact, we have that option now I love the reality that.
We've been able to build a platform that a you know we can get leveraging capabilities out of any content rebuild theatrical or otherwise and pick the platform in where we go with it. So do I think that there could be you know some things that we get originally chartered and built.
Before theatrical releases, maybe migrates into an S pod constructs.
Sure I think that could occur is there going to happen on you know a movie like tenet or you know something like Wonder woman I would be very surprised if that would be the case.
In fact, I can assure you on China, that's not going to be the case.
So I think we're just going to take a piece of the time, it's nice to have the optionality and as I shared with you in the last earnings call. When we looked at the slate we already have moved some of our you know future production sleeve, where we've retooled it for what would have probably been a theatrical releases that a word.
Using to two execute the movie is what's going to be a direct streaming con construct so yeah. I think there are going to be some shifts as we see as we move forward here.
Thank you thanks, Brad.
Your next question comes from the line of Mike Mccormack from Guggenheim. Please go ahead.
Hey, guys. Thanks, maybe just a quick one on the wireless no revenue slash ARPU, what do you guys sitting out there as far as customers potentially trading down to lower plans.
Given the work from home environment, and most things being watched by basin instead.
And then back and I used in the business wireline side, you can assume any slowdown in decision, making on the enterprise side, we see that historically and economic downturns and getting some whispers out there on that just wondering what you're saying I'm going to keep in mind or John Stephens, the working capital side, but just the pacing in the back half on working capital.
Let me just take the front end of that in and then John can come in and due to clean up here.
Frankly quite the opposite right now in our postpaid business what's occurring.
We are you know I think we indicated in some of the comments we are already seen the dynamic of the attach rate of the better unlimited in the higher ARPU unlimited plans increasing.
And I made that point deliberately because you know this is where each deal Max and wireless come together nicely, we're giving customers a reason to go up in the more robust unlimited plans and we're we're already seeing that penetration increase we shared with you in October.
That was an important driver being combination of the incentives we would give people on the fiveg network to buying into the upper end unlimited plans as well as Hell Max complements those and you know, we're seeing that success with Max or check the box on the front end to that and once we have the right kind of.
Equipment showing up on the five Gi side, I think we will see that momentum continuing carry forward. So or you know I think wireless has become more indispensable to customers and the work in home environment not less they're relying more on their devices that are using them more it.
The important.
Utility in tool for them to execute the mix of their personal and business lives and so the trend is actually been really good around that on the enterprise side as I mentioned earlier, you know I think that its going to directly correlates to what happens in the economy overall as we move forward.
You know the good news is we service a lot of important economic segments in our enterprise business and we are skewed heavier to the mid not market as I talked about in it as the airline industry continues to move through its challenges you know our customer base is going to move through its challenges is the hospitality industry moves roots.
Colleges, our customer base is going to move through its challenges and we're going to work with them and going through that dynamic because they're important customers doors that we have long standing relationships and as I said I would expect a third and fourth quarter, we're going to see some pressure in that segment. As a result of that I think we've we've done a reasonable job of trying to forecast what that.
It's going to look like but I can't believe if we're going to see Tailwinds you know as we got to get to that dynamic and John If you want to yeah. Let me, let me just keep it little bit or if you look at the postpaid ARPU. We're seeing the growth agenda is talking about when you take into account. The fact that the international roaming or the cultivate impact. So that's how you see it and that each field access Bennett.
Good attachment a good opportunity for us to grow.
Those only packages as people move it up so we've been really you know we were pleased with the way the wireless businesses go on with Mr. with your your question Mike on on working capital you know were traditionally worth second half the year weighted towards a free cash flow and so forth and I wouldn't expect fishing really different others.
It did everything this year is different because of co that we continue to have really focus on and working capital free cash. So oh, let's say that into the second quarter, we saw some.
Good activity on accounts receivables and collections and so forth Oh I wouldn't suggest that it's better than any prior years, but it was I will say better or as goes I would've expected in a pandemic situation.
With that with that being said, we you know we're continuing to watch things carefully continue to focus on working capital generation ideas and you know what kind of watched every nickel or watch their receivables all that you know all that being said we're on a good track what have you know 50%.
Dividend payout ratio. This quarter you know we're on track full year year to date, we're on track already and we usually a better second half. So when you first half so feel really good about the commitments and I really targeting the low end of the sixties the payout ratio we're striving.
To beat that target.
Lastly, I will tell you that is still with 20 day on the Capex investment and now what do they should we reiterate that the cash flows that we're getting and are coming from the operations the business not from cutting Capex first we're staying in line with Capex. So.
Thank you very much like.
Well turn it over to John for some final remarks, thanks, very much everybody for being with US today appreciate the discussion on the questions and.
What I would say overall the quarter, representing what I thought was some solid execution in a really challenging environment night I don't expect we're going to see much changed in the third quarter around those challenges that are in front of us but.
The cash flow numbers were very very encouraging in certainly you know what I'd take a lot of hard and I thought the team did a great job on the launch of HBIO facts that I think that puts us in a unique position. They have a lot of optionality as we move forward and reshape the media business.
Expect we're gonna be dealing with some of these economic challenges in the co bid environment as we move forward here. It is you heard we're operating accordingly, including pushing a lot harder or a little we need to do on the cost and and efficiency side to get our business position to do this we'd be doing it anyway, but clearly the uncertain.
Neither environment moving for makes that more important to us.
We were blessed to have a very resilient subscription business and we will continue to lean on that and use those cash flows do invest wisely moving forward as you heard John talk about back we remain committed to put in our capital against the areas, where we think there's an opportunity to grow this business moving forward and come out of.
The back side of this pandemic, a stronger than where we where we came in and we're going to continue to do that moved forward. So appreciate you being with US today I Hope you all stay safe and enjoy the rest of your summer.
Ladies and gentleman that does conclude your conference for today. Thank you for your participation in for using 18 key teleconference. You may now disconnect.
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Ladies and gentlemen, thank you for standing by welcome to the 18 <unk> second quarter 2020 earnings Conference call. At this time all participants are in listen only mode. If you should require assistance during the call. Please press Star then zero and operator will assist you offline.
Following the presentation coal will be open for questions. If you would like to ask a question. Please press one and then zero you will be placed into the question too. If you are in the question Q and would like to withdraw. Your question you can do so by pressing one and then zero and as a reminder, this conference is being recorded I would now like to turn the conference over to your host.
Amir Rozwadowski senior Vice President Finance and Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to our second quarter Conference call I'm Amir Rozwadowski head of Investor Relations Radian team joining me on the call today are John Sankey, 18 piece, Chief Executive Officer, and John Stephens, Our Chief Financial Officer.
John will provide opening comments, followed by John Stephens, covering second quarter results, and our liquidity and capital position.
After that John figure will come back for the business transformation update and discuss the H.B. OMEX launch then we'll take your question.
Before we begin I need to 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 and uncertainties.
Results may differ materially.
Additional information is available on the Investor Relations website.
And as always our earnings materials are also available on the Investor Relations page of the 18th your website.
I also want to remind you that we are quite period for the FCC spectrum auction. One oclock. So we cannot address any question about that today with that I'll turn the call over to John Thank you John.
Thanks, Amir I'm delighted to have you onboard <unk> you know you delivered the safe Harbor statement much better than like by all ever did seriously.
We appreciate the great job my good leading our IR team for many years on working side by side with them I'm going to Miss seen them around and wish he and his family all the best in their retirement.
So good morning, everyone I hope, you're all doing well as we continue to live with the impacts of Cove at 19.
Which I expect are going to be with us for some time.
We're planning on the operating under the assumption that significant accommodations for coated will be the business norm.
Well into next year.
The unfortunate reality simply sharpens, our focus and strengthens our resolve on the business transformation pathway chartered.
And the investment focus we've adopted.
Given that let me walk you through our priorities moving forward.
As a company.
Our purpose is to create connection.
We create connection with each other with what people want businesses need to thrive every day.
And with stories on experiences that matter.
That purpose leads us to our market focus.
Connect the people in businesses that form the foundation for how we live in a work.
Second.
As a software based entertainment provider, we deliver compelling entertainment experiences through HBIO, Max and 80 TV.
Given us the opportunity to establish a meaningful relationships with the majority of U.S. households.
Third.
Fantastic stories, we tell unsure on our platforms drive direct customer engagement and insights and create emotional attachment that can drive long lasting customer loyalty across our product set.
We're executing our plans to provide great conductivity and great content, along with better value and service to drive more customer engagement across all of the TNT.
Our goal is to give our customers a reason to actively engaged with US every day in fact multiple times a day every touch point represents a chance to learn more about what they want.
And bringing connectivity and engagement together.
I will allow for the crucial insights to guide future investment and opened new opportunities.
For subscription in the advertising supported products.
So that's our setup.
And that's the way you'll hear us talking about things going forward.
To grow.
We know we have to be more effective and efficient and our execution.
As part of our transformation initiative.
We have more than 50 different workstreams underway, the will enhance not only how we work together.
But how we deliver improved service levels and greater value for our customers, including competitive pricing that drives market momentum.
Targeted investment to achieve growth than those key products I mentioned.
Our success relies on 18, t., becoming a more agile and efficient company, that's able to meet our customers' needs and the highly competitive and quickly evolving markets.
Our transformation began with the new operating model, we put in place at Warner Media last year to organize our teams around the entertainment networks live programming content production and affiliate and advertising sales.
That allowed us to work together across Warner media and all of a TNT to successfully launch HBIO Max.
A few months ago, we took the next step and moves danner to Warner media. So we could accelerate our progress and building software based entertainment platforms supported by both subscription in advertising like the bought version of Hbr Max We plan to launch next year.
Last month, we made changes on how we're organized and operate at 18 T. communications to improve our focus on customer service.
Simplify and rationalize our product portfolio around our growth areas and operate with more speed and efficiency.
I fully expect that the 18 T that emerges from this transformation work will look different than what we know today.
We couldn't make this transition without a solid balance sheet.
And a deliberate capital allocation plan.
We have strong cash flows that allow us to allocate capital effectively.
We're continuing to invest significantly in our growth areas of fiber fiveg, which is nationwide as of today.
Firstnet and HBIO Max.
We remain committed to our dividend, which we've increased for 36 consecutive years.
Finished the quarter with a dividend payout ratio of about 50%.
We expect to end the year with our payout ratio in the sixties likely at the low end of that range.
We continue to reduce our near term debt obligations.
And maintain high quality debt metrics.
Finally, we remain committed to an ongoing discipline review of our portfolio of businesses and assets.
To identify those we can monetize.
Because there are no longer core to our business.
Now, let me off from my perspective on the quarter before I turn it over to John Stephens to walk you through the details.
Our core subscription businesses proved to be resilient in the face of the economic downturn.
Our mobility and business wireline segments performed well and we grew EBITDA margins in both areas.
We continue to add new fiber customers, though covert limited our ability to go into some customers homes for installs.
Our software based entertainment businesses performed well.
ATP TV subscriber growth in its first full quarter was better than we expected.
It's our highest performing video product on customer satisfaction double the level of our legacy TV services.
H.B. all Max had a strong launch on track to hit its targets, we laid out for you last fall.
We're already seeing how each veo Max can increase our broadband adds.
An increase wireless ARPU.
Obviously coal that had a significant impact on our Warner media segment with advertising revenues content production in theaters all shut down.
We'll talk more about that a little later in the presentation.
But I cannot imagine being at this moment absent the moves we made last year to reconfigure, our water media operations and refocus the business on the growing and important direct to consumer opportunity.
With that.
I'll turn it over to John.
Thanks, John and good morning, everyone.
Our financial summary for the quarter begins on slide five.
Adjusted EPS was 83 cents a share.
That included cobot impacts.
Some incremental costs related to compassion pay and production delays.
And lost revenues from forgone international roaming and delayed theatrical releases.
Bind Cove, it had a nine cents a share impact to second quarter NPS.
Adjustments for the quarter included overall accrual for severance and a non cash write down of real goodwill based on the overall economic conditions in Latin America, foreign exchange rates and coal that impacts.
The severance accrual reflects the workforce adjustments, we're making as part of our cost reduction and transformation plans.
Cash impassioned severances will occur over the next several quarters.
Revenues were down from a year ago, including an estimated $2.8 billion of lost or deferred revenues.
Packed cobot.
It was mostly due to the absence of theatrical television releases and lower advertising from delayed sports programming at a slow economy.
Lower international roaming revenues impact in mobility.
In our reported results.
Foreign exchange had an impact of about $500 billion and lower revenues.
Primarily in our Latin America segment.
Corresponding expense reductions offset most of the impact on operating income.
In fact.
Adjusted operating income margins were essentially flat.
But were up when excluding cobot impacts.
Cash flow was impressive.
Even during the pandemic.
Cash from operations came in at more than 12 billion and free cash flow came in at 7.6 billion.
A variety of items supported cash.
Including solid accounts receivable collections and some benefits from the cares Act.
We continue to invest in our growth areas Capex was 4.5 billion with gross capital investment at around 5 billion, a difference primarily attributable to the timing of underpayments.
Plus we invested an additional 1 billion in new Fiveg spectrum in the quarter.
And we invested nearly 4 million in HBIO Max.
Align with our full year estimate of $2 billion.
We were active in the debt markets during the quarter, managing our towers for financial flexibility and allowing us to take advantage of historically low interest rates.
We'll talk more about that in a moment.
Let's look at our segment operating results starting with our communication segment on slide six.
Our subscription business led by mobility broadband business wireline remain resilient.
Mobility had another good quarter.
Even with the impact of cobot.
The equipment revenue helped offset declines in service revenues.
Which were down due to a decline in.
International roaming revenue and waived overage in late fees.
Without those cobot impacts we estimate service revenue would have grown more than 2%.
Even with many of our stores being closed during much of the quarter.
Mobility equipment revenues grew.
Growth in digital sales in a strong rebound.
Stores reopened late in the quarter.
Well below the EBITDA continues to be a solid story.
EBITDA of 7.8 billion was up year over year with both EBITDA margins in service margins, expanding and that's inclusive of cobot impacts.
Our total reported phone growth was essentially flat.
We had more than 135000 prepaid phone net adds that helped offset the decline in postpaid phone.
Our quarterly subscriber counts for the postpaid wireless video and broadband.
Reflect that estimate for customers, who will likely disconnect service once the keep America connected pledge ends.
In short we're treating lease subscribers is disconnects in the second quarter.
Well this impacts net adds churn and service revenues.
We believe this is the most transparent and accurate way to account for this.
About 340000 of our postpaid phone subscribers were counted as disconnects, even though they were still on our network.
If you add those back to our results we would have had about 190000.
Most paid phone net adds and much lower churn.
Postpaid phone churn was down two basis points, even with that keep America connected accrual.
We also had a record low prepaid churn.
Under 3%.
The popularity of our unlimited plans also increased.
Thanks in part touring the leap package that includes HBIO Max.
In our Entertainment group, we had lower video and advertising revenues.
This includes an estimated 300 million dollar impact on both revenue and EBITDA from co bid from lower advertising demand and lower commercial volumes.
18 team TV gains helped offset premium video losses.
And at the same time had about a 90% attach rate.
With our broadband services.
Premium video losses remained about the same as the first quarter.
Broadband customers continue to look for faster speeds.
We added more than 220018 t. fiber subscribers.
In a number of customers opting for gigabit speeds increased by more than 750000.
In the corner.
We now have 4.3 million 18 team fiber customers.
Nearly 2 million to them on one gigabit speeds.
I should point out our total broadband numbers do not include 159000 subscribers.
Who are counted as disconnects.
Even though they remained active on our network through that keep America conducted program.
We continue to drive ARPU growth in both video and IP broadband.
In fact premium video ARPU was up more than 6% as we continue to focus on long term value customers.
Business wireline performance was solid.
Enterprise customers trusted the reliability and flexibility of our network.
EBITDA was essentially stable year over year and margins expanded by 90 basis points.
Revenues were consistent with recent trends.
Slower declines in legacy products were partially offset by growth in strategic and managed services.
This EBITDA strength was even more impressive when you consider that a year ago.
And IP sale, which helped both revenue and EBITDA results.
If you back that out revenue would have been down just 1.7% an EBITDA would have grown.
Let's move to water media and Latin America results, which are on slide seven.
As John mentioned, the cobot impact as most evident in our Warner media results altogether Cobot had about a billion and a half dollar revenue impact in the quarter.
Lower expenses resulted in a favorable impact on EBITDA.
The biggest news in the quarter from Warner Media was the successful launch of H., PL, Max which John will cover in more detail in just a minute.
Turning to our Latin America operations Foreign exchange was a major factor.
Yes were slow.
Economies and the onset of Cove it.
Mexico was impacted by lower equipment sales from coal bid relate in store closures.
It's also impacted prepaid customers ability to renew their service.
Even with this Mexico EBITDA improved year over year.
We also continues to work against significant economic and foreign exchange headwinds, which have become even stiffer with covance, but even in this challenging economic environment.
You know continues to generate positive EBITDA and cash flow on a constant currency basis.
We closed our Venezuela operations for the quarter to comply with sanctions of U.S. laws.
This had minimal impact on Reos financial results, but did reduce it subscriber base.
Now, let's go to slide eight for an update on capital structure.
We exited the quarter with a very strong financial position cash flows were strong our capital allocation remain focused and we made large strides in effectively managing our debt portfolio.
Our strong free cash flow in the quarter gives us even greater confidence that will hit our full year goal of a total dividend payout ratio in the 60% range.
Finally at the low end of that range.
We also continue to invest we now expect gross capital investment to come in at the 20 billion dollar range for the full year consistent with our original 2020 guidance.
The first that build continues to run ahead of plan.
We expect additional network benefits as our Fiveg build is expected to reach nationwide coverage today.
The network and the entire first that team has done a great job.
In building out our Fiveg network.
We've been active in the bond market rates are low demand is healthy.
And we use this opportunity to issue about 17 billion and long term debt at rates significantly below our average cost of debt.
This allowed us to materially reduce our near term debt towers, they hear debt obligations for the next few years very manageable.
We'll continue to be disciplined with debt management.
Ongoing liability management strategies are after leaving incented to maintain and improve flexibility and reduce risk.
We have several other levers we can pull to optimize our capital structure.
Expect to close about $2 billion and pending sales from seeing me real estate and tower Monetizations. This year. We also expect to close our Puerto Rico wireless sales soon with those funds used to redeem some preferred interest.
And you should expect us to continue exploring other opportunities.
And I would like to turn it back to John for an update on our business transformation and H. PLX.
Yes.
Thanks, John Let me give you more detail about our business transformation on slide nine.
If anything coal that has led us to ramping these efforts we're moving forward on the 50, Workstreams I mentioned earlier, which we believe can generate $6 billion in savings over three years.
We've made good progress and hitting our short term objectives, but there's much to do over the next couple of years.
Our workforce realignment and reduction of labor costs is underway.
We restructured some of our benefit plans earlier in the year.
We made several moves to streamline operations.
Within the communications business.
We're also streamlining our distribution.
The closure of retail stores during coated gave us unique opportunity to review, our retail and third party distribution capabilities.
Some of our lease productive stores won't riocan.
Other locations will shift independent distributors.
And we're enhancing our online and omnichannel capabilities to align with our customers want to do business with us.
Our market and product focus will drive simplification into our operations and we size our operating in technology footprint, all while taking further advantage of our evolution to cloud and Virtualized services.
Our shift to software based entertainment with 80, TV is validating our assumptions on customer self install.
We expect this.
Coupled with the growth of our fiber based broadband subscribers.
Well improve service levels and reduce field operating costs.
We're also given our call center representatives improved capabilities to streamline and enhance the sales and service function.
And we're rationalizing the modernizing our billing and collection systems.
Last.
We're pursuing incremental opportunities to take out additional costs around corporate functions across the company.
As I mentioned earlier, we've had some success in this regard.
Work remains to further streamline the functions that support those directly serving customers.
Bottom line rock do a good start on our transformation work.
We have management teams in place on each of our major initiatives in the senior level governance structure to guide and resources work.
We're in great shape to do exactly what we said we're going to do.
Now.
I want to provide you with an update on the success of our HBIO Max launch on slide 10.
First I want to give full credit.
The entire HBIO, Max team, which put together a flawless launch I'm extremely proud of their efforts and accomplishments.
We effectively established a new distribution framework for Warner media.
Platform perform superbly.
Activations were strong.
The content is world class and the team developed and launched the service in the short timeframe and manage to get it all over the finish line in the middle of a pandemic.
We're right on track with the targets, we discussed with you last fall for HBIO Mac subscribers Activations and revenues.
H. feel Max's diverse library of content Appeals. The every one of the family letting us reach a much broader demographic than our traditional HBIO service.
With that broader appeal, we've been able to expand beyond the traditional HBIO subscriber base. We finished the quarter with 36 point Threemillion U.S. subscribers, the HBIO, Max and HBIO up from 34.6 million at the end of last year.
Customer engagement has exceeded our expectations.
It's the early days, but the average number of weekly hours spent viewing Max is 70% more than on HBIO now clearly demonstrating the strength of our library and our success broadening the appeal of the product to more family members.
It's our Warner media own content, that's at the top of the viewing list and that's driving the majority of the total hours consumed on the platform.
And the streaming business.
Content library is the key to keeping customers.
It's the new originals that drives subscriber acquisition.
With Covance shutting down content production in March we have been challenged to get all the originals on the platform that we plan.
But we like the early reception of what Weve been able to get in front of the customer base thus far.
We launched Max was six new originals.
All were found in the top 25 you'd series on the platform.
By August was 21, new original series on Max.
Which we expect to sustain our near term acquisition efforts.
Like everyone else in the industry, we're working on ways to resume production and we hope to see that engine start the fire back up next month.
Having said that one of our more challenging things, we're doing to respond to the pandemic.
And it's going to take time to return to our February production levels.
We view getting our production back on line is critical to making our 2021 subscriber plan.
One month after launch HBIO, Max had about 3 million retail subscribers.
And 4.1 million subscribers activated their Max account.
Of those more than 1 million, we're wholesale subscribers through 18 tea.
As you might expect we're seeing more rapid activation with subscribers who are active users of the HBIO digital offers.
But we still have work to do to educate and motivate the exclusively linear subscriber base and we'll continue to work with our wholesale partners to drive these activation rates.
We're also bundling HBIO Mac some of our premium wireless and fiber plans.
We're seeing a positive pull through that's at or better than the wireless unlimited plans step up assumptions, we share with you in October.
You will recall this coupled with the Fiveg handset upgrade cycle was one of the key drivers to growing wireless service revenues in the latter half of the year.
Finally, we worked hard to make each field Max available to consumers through nearly every content distributor in the United States.
We've tried repeatedly to make eight spiromax available to all customers using an Amazon fire devices, including those customers that have purchased HBIO via Amazon.
Fortunately.
Amazon is taking that approach of treating HBIO, Max and its customers differently, how they've chosen to treat other services and their customers.
We're glad to have agreements in place with among others Apple TV.
Google Chromecast give customers the right the stream HBIO Max on those devices.
Amir.
That's our presentation, we're now ready to go to the QNX.
Operator, we're ready to take the first question.
Thank you as a reminder, if you'd like to ask a question. Please press. One then zero. Your first question comes from the line of John Hodulik from UBI US. Please go ahead.
Thanks, guys.
Maybe you could drill down into the entertainment segment, a little bit.
It seems I think you mentioned so.
About sort of the noncash piece.
Affected.
The EBITDA on a year over year basis, you get give more color on that and then anything you guys can tell us on track volume trends I realize there's a real lack of visibility as we look into the second half but.
The video losses got a little bit better even with the Casey.
The out.
But just how you see sort of video.
And broadband trends as we look out to the second half of the year great. Thanks.
Thanks, John Thanks for your question, let me give you a couple of thoughts as John join in.
One point as we think it a little bit better on the customer trends and that did include I think it's 91000.
If you will accrue disconnect customers were still providing the service. So if you back that out of it was was the step that it wasn't improvement.
For the middle of a pandemic and so we're being real careful with with how we address the situation.
Secondly, we were real pleased with it TV rollout it is.
It has been successful the Cubs.
It is working.
Were once again because the pandemic.
Some of the in the home installed and some that activity has been limited so let's get it we're cautious as we as we come out of that third.
Typically referenced we amortize installment costs like all industry does and because of 18 ptv those install the cost from a cash basis are going down.
But the amortization of priors some costs are still here and we're taking a more conservative view on the.
Lighting of those so those costs are up year over year. So when you when you adjust for that we actually had cash EBITDA actually grow when you make that adjustment.
But for but for Coke and we would have saw an increase so.
Well I mean challenging business continue to focus on cost savings and continue to generate a lot of cash out of it.
But the important pieces this utilization of 18, TTB now and taking into that overall strategy of software based entertainment programs.
John.
Yes, John the Theres clearly gross crusher.
And I would offer a couple thoughts around those are churn on the base.
Again sequentially.
Yeah, that's even with the keep American connected adjustment in there. So the base dynamic is actually getting better the team's doing a nice job.
Keep in the right customers and servicing them at the right way.
The gross pressures are pretty significant I would say to the extent to reason comes back for people to engage in pay TV such as sports return anywhere.
There's some feeling of something that they're missing.
If that doesn't recover or it's going to continue to pressure throughout the balance of this year no what I really like about what I see better opportunity. We start assume that gross recover as we shared with you. The 82 TV response has been really strong.
Customers like the product.
A much better product use its clearly something that allows us to attack more the market given the lower second costs as John described.
The broadband attachment is far superior to where we were the previous products I think thats one of the reasons you saw the sequential improvement in.
In fiber as we move forward here so.
I think that dynamic is going to be good for us as we move through the year, but I really need to see some reason for a customer to want to get into the pay TV product that's going to probably correlate took what we see on sports portfolio.
Got it these guys that thanks Jen.
Your next question comes from the line of Phil Cusick from JP Morgan. Please go ahead.
Hey, guys. Thanks, a lot.
So still on the pledge what's been the response from those customers in July as you ask on for payment.
Can you quantify at all how much revenue you didnt recognize from those customers on the second quarter.
Yeah, Let me give you the tissue way of doing I think about it I think the most consumer awareness is picking up on spreads we ought to postpaid customer and you guys have the ARPU numbers. So you can understand what what that revenue would be like but also.
Give you that focus in our detailed schedules.
We provided we provided a reconciliation of what we saw revenue pressure and mobility coated. It's included in there and I think that revenue for the.
For the quarter was 450 million.
Inclusive of international roaming and.
These these kinds of payment so.
What I would suggest to you is that the easiest way to calculated.
Couple of things, one well, we're actively contacting working with and trying to retain these customers and certainly.
We haven't given up on them and they have given up on us so.
The clearly we are hopeful oh pertaining many of these customers, but since they're not paying us. Our rules would are kind of processes are transparency processes would tell us is treaties as disconnect I know some others in the industry have different views on it there you know me hey.
No push to talk to the third part related to the year or may make base adjustments and so forth. We're just not doing that we're just taking on Friday laying it out for you that not only on wireless but on video and on broadband.
So that gives the video the broadband numbers for our measurable also 91000 video in 100, almost 260000 broadband.
Oh I explain I mean, if you think about that postpaid number one months revenues.
At a normal ARPU kind of gives an indication of the kinda money we're talking about.
Yeah. So I'm just curious what three weeks into July as I expect you think contacting these customers what spend their response can you give us any kind of hit rate or or what they look like in terms of.
Responding with some ability to pay.
Yes so.
Generally positive response.
Hey, we like we assume that we'd get some of these customers back in this accrual. So you know that I mean, there isn't I guess first as such this growing we would've been suppose but now we're doing a little bit better than non accrual will well, but it's still too early we still have a significant number out there and quite frankly I want to win that we refer to this was the keep a mirror.
Connected programs, well pledges theres, a number of them out there.
Not only to find unless you see level, but there's a number of out there at the state by state level. So this is sanofi whether through the order.
Okay I wonder.
Well now you're giving a specific number fill an honest but.
I just would tell you at all three segments, we're working really hard to retain those customers.
Okay, but doing a little better than your accrual that's good wonderful other if I can can you quantify it all the sports cost amortization.
That will probably come back given the leaks plans for the third quarter I, just we saw a really.
Great margins from Turner this quarter I, just want I want to make sure I understand where we should be ready for that to go in the third quarter.
Yes, I think if you if you look at what we spelled out of the in the the best indication that can be what we spelled out in Oh, kobin schedules, where we lifted out.
Those impacts.
Yes, you're right. So we will have a sports.
Oh, yes.
Come back yet for the FDA, particularly and and we'll have those revenues come back.