Ladies and gentlemen, thank you for standing by. Welcome to the AT&T Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Following the presentation, the call will be open for questions. [Operator Instructions]. 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 third quarter call. I’m Amir Rozwadowski, Head of Investor Relations for AT&T. Joining me on the call today are John Stankey, our CEO; and John Stephens, our Chief Financial Officer. Before we begin, I need to call your attention to our Safe Harbor statement, which says that some of our comments today may be forward-looking. As such, they are subject to risks and uncertainties. Results may differ materially. And additional information is available on the Investor Relations Web site. And as always, our earnings materials are also available on the Investor Relations page of the AT&T Web site. I also want to remind you that we are in the quiet period for the NCC spectrum auction 107, so we cannot address any questions about that today. With that, I’ll turn the call over to John Stankey. John?

Thanks, Amir, and good morning, everyone. I hope you’re all healthy and doing well and thank you for joining us this morning. John and I are going to keep our comments brief so we can spend more time taking your questions, so let’s start with Slide 3. First, our industry leading network is the driver of our strong wireless, customer accounts and our healthy broadband and enterprise trends. Our high-quality network underpins our connectivity business and our commitment to customers. Ookla last week ranked AT&T #1 for having the fastest nationwide 5G network and for the seventh quarter in a row, we won the overall fastest wireless network and were named fastest wireless network for iPhones in the third quarter. J.D. Power last month named us tops in customer satisfaction for residential Internet service in every region we offer that service. The net promoter scores we’re achieving with our fiber products are materially better than cables and are helping drive increasing penetration rates across our markets. I'm really pleased with the great execution from our AT&T communications team led by Jeff McElfresh under some really challenging circumstances. Second, the transformation of our business continues and is on track with how we set this up for you a year ago. The organization has been working to reduce costs, streamline distribution, remove redundancies, and simplify processes and support functions. Our focus is supporting added customer value with an improved customer experience. Accordingly, these efficiencies are being plowed back into growth in our market focus areas. And third, we're committed to further strengthening our balance sheet and maintaining our deliberate capital allocation. We've made material progress this year with our debt management, while generating solid free cash flow to support our dividend. John will provide more detail, but you're seeing a sharply focused capital structure that is strong, resilient, and efficient. We also have a very pragmatic view of the broader economic picture and the COVID driven challenges we faced in some segments, particularly WarnerMedia. In a COVID environment with a tough theatrical business, we made important organizational moves that further position us for growth in direct to consumer streaming. Through the pandemic, we continue to invest in HBO Max and continue to grow total HBO and HBO Max subscribers. I'm pleased with how the WarnerMedia team is responding to a challenging environment. In closing, we recognize that we have more work to do in executing on our vision and earning the loyalty of our customers and investors. I believe this quarter shows we've taken the first few steps in the right direction, but there's more opportunity ahead. With that, I'll turn it over to John to quickly review the details of the quarter.

Thanks, John, and good morning, everyone. As John said, during the third quarter, we made progress on our business priorities as you can see in our subscriber gains. Wireless growth was stronger than we've seen in quite some time. We added more than 1 million postpaid subscribers, including 645,000 postpaid phones. We also saw solid growth in AT&T fiber subscribers with more than 350,000 fiber net ads, and our HBO Max activation base more than doubled in the first full quarter since we launched the business. We now have 38 million U.S. HBO Max and HBO subscribers and 57 million premium subscribers globally. Our cost transformation continues on track. We’re already seeing savings achieved from benefit efficiencies and organizational alignments. Our focus on refining our distribution is also paying off. We shifted some stores to third party dealers, closed others and we've also been able to streamline our customer experience, especially our digital sales and simplify processes. We've been very deliberate in managing our debt and focusing on our cash flow. So far this year, we have refinanced more than 60 billion of debt at historically low rates, with about 30 billion of debt coming due through 2025. This has lowered our near-term debt maturities giving us ample financial flexibility in the years ahead. We now expect free cash flow of 26 billion or higher with a full year dividend payout ratio percentage in the high 50s. Slide 6 illustrates the success we've had this quarter in our market focused areas. As mentioned, postpaid phone adds were strong. A big factor was postpaid phone churn of 0.69%, our best ever. Prepaid churn was less than 3% and Cricket churn was even lower than that. Improved postpaid churn was driven by the strength of our network and straightforward pricing plans, including…

Operator, we’re ready to take the first question.

Thank you. [Operator Instructions]. Your first question comes from the line of John Hodulik from UBS. Please go ahead.

Okay, great. Thanks, guys. Maybe on the subscriber side, obviously solid results really across the board and especially in wireless. Is there anything you guys can point to that really drove the gross add improvement that we saw on a year-to-year basis and the better churn? And do you think those results are sustainable? And then also on the fiber side, John, you've talked about repositioning the company around wireless fiber and software entertainment. How should we think about the footprint expansion of your guys’ fiber network? Obviously, you grew a lot with the requirements for DirecTV, but how should we look at that over the next few years? Thanks.

Good morning, John. How are you? So, first, on the subscriber side, I think the answer is it's hard work and really good work. This is something that's been in the making for a period of time where the team has been focused on a variety of different strategies, and I'm not going to point to any one thing. I think we've done a number of things very well, including reengineering our distribution. We have a much broader approach to distribution today and a more effective approach in terms of efficiency of what it's bringing in. You heard John address some of that in his comments. We have been very, very focused on making sure we give value to our right customers. And data has helped us do that. And some of the gain you're seeing is that we're able to segment the portions of the market that we think we have issues to address on a value basis, and get the right kind of dynamics out to those customers through the right kind of distribution. That's working, because we have been very deliberate over the last several years, building a much higher quality network, starting with the FirstNet construct. And that higher quality network has removed a reason for customers to leave, because they're satisfied with the service that they're getting on the network infrastructure, as COVID hit and the wireless networks became much more suburban-oriented than urban-oriented, our strength in low band spectrum are literally undisputed strength and volume of low band spectrum has helped because the suburban experience is oftentimes a more distributed experience. And when you think about penetrating inside buildings, you need low band spectrum to do that. Mid band is not going to do that in a suburban environment nor is millimeter wave, at…

Great. Thanks, John.

Next question?

Your next question comes from the line of Phil Cusick from JPMorgan. Please go ahead.

Hi, guys. Thanks. John, can you talk about priorities for next year? It sounds and you just said like you want to build more fiber? Does that mean that CapEx needs to be higher or can you really source that out of wireless CapEx coming down? And it's great to see video losses were lower, even after we normalized out the pledge customers. What were the drivers of that improvement and how does DirecTV fit into the company's plans? Is there anything you can say about these reports of a sale? Thank you.

So we're not giving our guidance on capital for next year at this point. I will tell you that we feel comfortable that we can manage the cash flow equation effectively and do what I just said. I'm not concerned about that part of it. We’ll come out a little bit later this year and we'll give you the guidance and lay out those numbers for you. But I feel really comfortable. If you kind of look at what's going on in these customer accounts certainly help. I think you're aware we're working really hard on the cost equation around here and that's helping us invest in some of the work we're doing in the markets. We have a very different build in front of us and we've traditionally had I think – if you think about what we've historically been doing on the fiber side, we've had to light up new central offices, kind of new geographic areas, which tends to be a little bit more expensive, have an opportunity to do some really economic fill-in and shorten the cycle from investment to cash that we can factor in on this. So we'll give you some direction next year, but I don't think you're going to see an appreciable change in our trajectory as we go through this. And we'll fill in the blanks for you coming forward here. On the video side, we've been focused on high-value customers. And so some of this, what you're seeing is, when we made this shift to kind of get out of the promotional dynamic and frankly others in the industry got out of a promotional dynamic where the VMPDs decided to go to a first price that's a little bit more reflective of their cost structure, that normalized a lot of…

Thanks, John.

Thanks. Can we move to the next question?

Your next question comes from the line of Simon Flannery from Morgan Stanley. Please go ahead.

Great. Thank you very much. Good morning. On Warner, I wonder if you could just help us think about how things are progressing on the theatrical – the production for TV and movies and how you're thinking about that evolving and any big changes you might have there in terms of how we should think about the future post COVID? And then a capital allocation question. I think, John, you talked about the importance of the dividend and the track record of dividend growth. But it looks like you're not really getting paid for the dividend in the current market. How do you balance that versus, say, buybacks? Obviously, you've got spectrum options coming up that’s deleveraging. You've addressed a lot of the near-term maturities. So I’d love to think about the priorities and how you think about the order of preference there. Thanks.

Hi, Simon. So on the Warner side, I'm breathing easier. I think everybody's breathing easier. That's probably a bad analogy in the COVID environment. Feel much better about the restart of production. We exited, to kind of give you a rough idea, probably about 180 productions of some way, shape or form or underway in February before the pandemic hit. And I would tell you, roughly, probably – I haven't looked at the numbers in the last week or so, but I think we had about 130 productions up and running in some shape or form last week. So we're well back into that ramp back up. I don't think we have to get back to 180 by the way. There's some stuff we've rationalized, but we're starting to figure out how to do this. We clearly have gotten through most of the hurdles from a civic perspective where the geographies that we operate and produce in are working with us on what the constructs are, and there's no barriers to actually having to work, perform. I think we've got the right fields and unions squared away and we built in the right processes around testing. We're far enough into and far enough along with work that's going on where the confidence level of employees is growing day-by-day that we can in fact protect the safety of individuals and still get work done. So feel good about where that's at. I think we're out of the woods at this point from being dead cold in the middle of the pandemic to one where we feel like we can get ours produced and brought forward, and that's going to help our products. Most importantly, it's going to help HBO Max. Theatrical work is underway as well. We're doing the work for…

No. Simon, we've got the balance sheet and the debt towers, the debt maturities in really good shape, a lot of flexibility not only over the near term as we spelled out in the slides but quite frankly over the long term. So feel very good about that. The bond market has responded very well to it. We’ll continue to reduce our debt levels, but we've got a lot of flexibility going forward. And so I feel good about that. The one thing I'd say is, this all starts with a cash flow number and the resiliency of our products and services, the resiliency of our customers as they continue to pay us on a timely basis for our services is really, really important. That's the core of it. It’s what John talked about when he's talking about low churn and it gives us a basis for all of this. So we feel very good about where we're going.

Thanks for the color. Thank you.

We're going to move to the next question.

Your next question comes from the line of David Barden from Bank of America. Please go ahead.

Hi, guys. Good morning. Thanks for taking the questions.

Good morning, David.

Hi, guys. So, I guess, John Stephens, I guess this question is related to the guidance. So a couple of questions around it. So, at the beginning of the year, the math of kind of a low 60% dividend payout ratio was cash flows in the kind of $23 billion to $25 billion range. Now it's north of 26 billion. And so can we talk about some of the drivers of that? What part of that is related to lower CapEx as a function of vendor financing? What are the cash tax expectations that go into that? And what are the working capital expectations related to the iPhone promotions that John Stankey was talking about earlier kind of affecting that number, and kind of the exit trajectory into next year? And then I guess you're particularly qualified to answer the other question, which is – which we're getting a lot, which is if there's a dem sweep and the Biden tax proposal goes through, what does that mean for AT&T who was one of the biggest beneficiaries of tax reform under the current administration? How could that change cash flow outlook for AT&T? Thanks.

Yes. So first thing, David, let me go back on the cash flow side. It really does [indiscernible] our customers. And when we came out with our guidance for the year, there was uncertainty and lack of visibility with regard to COVID. So we were careful and prudent with that. It turns out our – and you can see it in the third quarter balance sheet, you can see it in the third quarter results, our collection rates have been very good. The resiliency of the products, appreciation for the service, we're getting paid on a timely basis and at very good levels. And so that's the first point. The second point is across the board, there's been working capital efforts, whether it's managing receivables, managing payables, whether it's tax payments, that all has been done. Some of that came out of the CARES Act with the benefits of, for example, deferring payroll tax payments or deferring income tax payments that were allowed by the CARES Act, all of that's been taken into account. I think we normally have a history of being very focused on working capital and focused on cash flow. When we come back to it though, the resiliency of the products and services, the growth and mobility, the growth in fiber, the strong performance in HBO Max, is all leading us to a better revenue stream situation such that I feel really comfortable about going to that 26 billion or better number. Now, there's still uncertainty. And so there's not a specific number we can pay. And quite frankly, we'll see how sales go in the working capital impacts of the iPhone launch, feel really good about that. But that's the basis for where we came up to it. All the pieces you mentioned are a…

Thank you.

We're going to move to the next question.

Thank you, David.

Your next question comes from the line of Brett Feldman from Goldman Sachs. Please go ahead.

Yes, thanks. I'm actually going to follow up on something that John was just sort of alluding to because you talked earlier about the opportunity to drive higher penetration of the 14 million homes passed with fiber that you have already. But you know, this might be a slightly outdated statistic. I think there's something like 60 million customer locations in your landline region. So you're maybe only passing 25% of them today with fiber, which would imply you could meaningfully expand the availability of your fiber product in your addressable market, if you were to sort of step on the gas there. So what are the conditions that would encourage you to meaningfully expand that fiber footprint? Does it have to be something on the policy side or are there operating items you have greater control over such that you’d be willing to meaningfully increase the fiber related CapEx?

Brett, that’s a good question. Thank you. I would tell you this. Obviously, winning policy in the country where it stands right now is attractive for investment and infrastructure and attractive for investment in fiber. And we think we've had the right kind of formula around that. And I would expect that if there is a new administration, there may be a lens put on that. They may want to put their pen to how they want to tweak it. And certainly there's some broader things that need to be done in this country, addressing some of the more hard to serve areas in the digital divide dynamics that make that a worthwhile thing for people to have discussion on. I would tell you, I don't think we need policy to get better. We just need to ensure that the policy doesn't whipsaw back to someplace that is inconsistent with incenting investment in infrastructure, because I believe right now there is to your point a large incentive for people to go and continue to put money into infrastructure investment, and we would be one of those to do that. I think good things come from that when we do it. We employ a lot of very meaningful middle class jobs that pay people well that come with benefits, that allow them to do great things in their lives and better their family's lives. And I think everybody from a policy perspective would look to that and say that's the exact kind of jobs we want. They're the ones that are good for this economy and good for people and have all the characteristics that nobody debase We want to see the American worker experience. What I would say from a perspective of step on the gas and what we are…

Thank you.

Thanks, Brett.

Your next question comes from the line of Kannan Venkateshwar from Barclays. Please go ahead.

Thank you. A couple of questions [ph]. Firstly, when you think about the fiber business, I guess the growth that’s rising yesterday and growth that you guys reported today and then we also have some forward-looking guidance from the cable companies, which also demonstrates strong growth today. And we look at the overall broadband market, the penetration rates don't have a lot of room to grow overall across the entire market, but everybody is growing really fast. So, I guess, could you give us some color in terms of what the growth source is, if it's not coming from others in the industry? Is it things like people moving into vacation homes or a different level of occupancy? So if you could give us some color on the growth sources, that would be very helpful and of course with sustainability on the back of that? And secondly, I guess, the NFL is in the midst of negotiating all their rights. Could you give us some sense of what your priorities are with respect to sports rights and how you view that going forward? Thanks.

Kannan, so first and foremost, we are a share taker and that's where a lot of our growth comes from. I think we've characterized for you that when we are 36 months into penetration on the fiber infrastructure we put in place, we move nearly 10 share points. And that's – we don't do that often in a product and that's one of the reasons why I think if we're smart about how we deploy more fiber and do it the right way, we think there's a strong economic equation here. And when you have a product that's perceived as being a better product from the customer base and I shared that with you in my opening comments about what our net promoter score metrics are for our subscriber base, that's a good place to be. That's what helps it. And certainly one of the dynamics that has helped the performance and the perception of our products in the COVID environment as we all sat around for a number of years talking about what is the killer app that drove upstream demand, because we knew the Achilles’ heel of certain networks that have been built was restricted upstream bandwidth? Well, the answer is a pandemic. And the reality of everybody moving home and sitting on video calls all day, all of a sudden upstream bandwidth has become pretty important in homes and fiber, given its symmetrical characteristics, is great. And the dynamic around that I think has been incredibly helpful and I expect that our share growth and our opportunity to do well will come from the symmetrical nature of our architecture that we put in place. And then you can go through a whole bunch of other things that help it out, which is attractive bundling. You got a…

Thank you.

Next question?

Your next question comes from the line of Michael Rollins from Citi. Please go ahead.

Thanks and good morning. Two if I could. First, I was curious if you could quantify some of the cost-cutting benefits in the third quarter and then size that opportunity of how it might flow through over the next one to two years? And then separately, one of the responses to the pandemic seems to be an acceleration of companies going digital and just software-based solutions. I was curious if you can unpack for the business wireline segment, how you think about those opportunities for AT&T to try to take advantage of that acceleration relative to some of the risks you may also have from legacy revenue and any lagging cyclical impacts as companies try to respond to the recession?

Yes. So, Mike, let me – it’s good to hear from you. I'll take the second part of that and then ask John to maybe round out the first part of your question. So, managing through the legacy wireline issues in our business segment, that's not anything new. In fact, I think I'd like to kind of declare we're on the downhill side of that issue. My point of view on what matters to our business subscribers moving forward is great connectivity and great infrastructure and more and more, it's a mix of what they need for their core networks matched with what they need for their wireless services. And not an insignificant part of our strength in our subscriber numbers have come from us marrying those two things together. We're doing much better in the wireless space on customers that we sell other network to. And I believe we have opportunity to do more. And it gets back to my point of view of where we put our fiber and how we deal with the midmarket and how we connect the midmarket to the core fixed infrastructure that they need to use for major parts of their business and marry it to the reality that all businesses are mobile in some way, shape, or form right now. I think that's our sweet spot moving forward and that's where our growth can come from, and that's where we have the team focused right now. And so I think the play in business is a core conductivity play. It gets back to my comments that we are in a very unique position, that if we put that fiber in because of the products and services that we have on core complex network connectivity that we do so well on with highly secure corporate networks, whether they be midsize or large, plus then what you pick up in the smaller segment of the market for unmanaged broadband connections that come off the back of that fiber mixed with our strength of wireless, that's a winning combination for us. And that's where we should be focused and in fact that's where we are focused right now. And that's what the enterprise organization is spending their time and energy on and how we're equipping our distribution, how we're setting up our distribution channels that both can sell wireless and basic fiber connectivity into these areas and that will be our meat and potatoes and what that business is built on. And I think that there's nothing more complicated about it than that.

John, let me just add. Mike, to your question, we added close to 400,000 non-phone postpaid net adds. A lot of that were the kind of devices that business, education uses. And so we're seeing what you were discussing, we are seeing that aspect in our postpaid numbers already. Additionally, we had about 4 million connected devices and other connections in the quarter. So what you're referring to is happening today at different levels certainly of ARPUs, but we are very well connected. And the last thing I’d say in on the FirstNet business that we have, a lot of the connections, the 1.7 million connections we have, some of those are those connected devices as opposed to just the phone aspect of it. So it's happening now and we're responding and I feel good about it. With regard to the cost cutting activities, let me just point out. We set a target of about $6 billion. We talked about that target last – beginning of the year and in October on a movement forward. We are continuing to work towards that goal. We've seen some immediate benefits already and John referred to it. Our review of our distribution capabilities are pushed towards digital, which is a more streamlined, simpler approach, improving the quality of that. The teams’ made great progress that customers are happy with realigning our stores. We had the opportunity that we had two state mandates well over 1,000 stores closed that we made and we had a timing opportunity to adjust that and to shift some of that to authorized agents at a lower cost, relocate and close some stores to be very efficient. That's going on. We told you before that we had virtualized close to 75% of our network activities, we're continuing to do…

Great.

Thanks very much. And we have time for one last question, operator.

Okay. That question comes from the line of Doug Mitchelson from Credit Suisse. Please go ahead.

Terrific. Good morning. Thanks for sneaking me in. For John Stankey, a few questions bundled together. I know the HBO Max initiative is a big initiative for you. If you can update us five months in on learning so far, engagement churn, the like? And if you can give us any context you're willing to around the international launches next year, how much of the world will be launched? And you mentioned the advertising-based service. I'm not sure if you're prepared to discuss how that will be different from the existing HBO Max? And then tailing onto that, if you don't mind, could you carry that into the state of play for the pay TV bundle? Given that in theory, the HBO Max initiative puts pressure on the pay TV bundle, but over at DirecTV and AT&T TV are trying to hold the bundle together. Do you see accelerating cord cutting in the future from the current 5% decline level across traditional and virtual MVPDs, given what you're doing and what you see and streaming across the industry, that would be helpful? Thanks so much.

Sure, Doug. Let me see if I can kind of tick them off. So on Max, I would say absent the pandemic, the game is played out much the way we expected it to play out. The piece of the pandemic has put a little bit of a struggle on us. The customer acquisition game is an originals game. The customer retention game in that spot is a library game. Our library is performing incredibly strong relative to our customer base. In fact, we shared with you we had an objective of how many minutes a day we wanted the customer to engage with Max. We've well exceeded our expectations on that and it's on the strength of a library. And the best part about that is it's largely our owned library, what we already own the intellectual property on. It's not what we're releasing from others. I think in our top 10 library shows right now, there's one leased piece of content, maybe two that make it into the top 10. The rest is our own intellectual property. So the pandemic put us in a tough spot on originals. We didn't have the funnel. We were running the market and the pandemic got away with it. We couldn't finish a lot of the work that we had underway. It's that stream of new originals that allows you to kind of grow the customer base, and the team has done a really good job of doing that. I'm not disappointed. We're well ahead of what our initial plans were that we laid out for you a year ago in October. But nonetheless, we know we probably could have done better if we had the right kind of lineup of robust originals that we had originally slated, and that will now…

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.