AT&T Reports First-Quarter Results

AT&T
Inc. (NYSE:T)
reported solid Mobility and WarnerMedia results in the first quarter,
including wireless service revenue growth and postpaid phone net adds,
and grew operating income and EBITDA in the Entertainment Group.

“Our first-quarter results show that we’re delivering on what we
promised,” said Randall Stephenson, AT&T chairman and CEO. “We’re on
plan to meet our de-leveraging goals with strong free cash flow and
asset sales. We grew Entertainment Group EBITDA in the quarter and are
confident we’ll meet or exceed our full-year target. FirstNet deployment
continues ahead of schedule. And we are recognized for having the
nation’s best wireless network¹, as well as the fastest
network².

“All this speaks volumes about our focus on our strategic priorities and
our ability to grow our Mobility, WarnerMedia and emerging Xandr
businesses. Our teams are executing well and have turned in a good
performance to start the year.”

First-Quarter Results

Communications Highlights

• Mobility:
  • Service revenues up 2.9%; operating income and EBITDA growth with
    postpaid phone and prepaid net adds
  • 179,000 postpaid smartphone net adds in the U.S.
    • 80,000 postpaid phone net adds
  • 96,000 prepaid net adds of which 85,000 are phones
• Entertainment Group:
  • 13% operating income growth with solid ARPU gains
  • 6.9% EBITDA growth as company targets stability
  • Focus on long-term value customer base
    • 22.4 million premium TV subscribers – 544,000 net loss
    • 1.5 million DIRECTV NOW subscribers – 83,000 net loss
  • Nearly 300,000 AT&T Fiber gains; 45,000 broadband net adds with
    broadband revenue growth of more than 8%
  • 12.4 million customer locations passed with fiber

WarnerMedia Highlights

• Solid revenue growth with strong operating income growth with gains in
  all business units
  • Turner subscription revenue growth
  • HBO digital subscriber growth continued as last season of Game
    of Thrones begins
  • Strong Warner Bros. revenue and operating income growth

Latin America Highlights

• 93,000 Mexico wireless net adds

Xandr Highlights

• Advertising revenues grew by 26.4% largely due to the AppNexus
  acquisition

Consolidated Financial Results

AT&T’s consolidated revenues for the first quarter totaled $44.8 billion
versus $38.0 billion in the year-ago quarter, up 17.8%, primarily due to
the Time Warner acquisition. Declines in legacy wireline services, Vrio,
wireless equipment and domestic video were more than offset by the
addition of WarnerMedia, domestic wireless services and Xandr. Operating
expenses were $37.6 billion versus $31.8 billion in the year-ago
quarter, an increase of about $5.8 billion due to the Time Warner
acquisition and higher commission amortization from adopting new
accounting standards last year, partially offset by lower wireless
equipment costs and cost efficiencies.

Operating income was $7.2 billion versus $6.2 billion in the year-ago
quarter, primarily due to the Time Warner acquisition, with operating
income margin of 16.1% versus 16.3%. When adjusting for amortization,
merger- and integration-related expenses and other items, operating
income was $9.6 billion versus $7.5 billion in the year-ago quarter, and
operating income margin was 21.4% versus 19.7% in the year-ago quarter
due to the acquisition of Time Warner.

First-quarter net income attributable to AT&T was $4.1 billion, or $0.56
per diluted share, versus $4.7 billion, or $0.75 per diluted share, in
the year-ago quarter. Adjusting for $0.30, which includes
merger-amortization costs, merger- and integration-related expenses, a
non-cash actuarial loss on benefit plans and other items, earnings per
diluted share was $0.86 compared to an adjusted $0.85 in the year-ago
quarter.

Cash from operating activities was $11.1 billion, and capital
expenditures were $5.2 billion. Capital investment – which consists of
capital expenditures plus cash payments for vendor financing – totaled
$6.0 billion, which includes about $800 million of cash payments for
vendor financing. Free cash flow — cash from operating activities minus
capital expenditures — was $5.9 billion for the quarter.

¹ Based on GWS OneScore Sept. 2018

² Based on analysis by Ookla^® of
Speedtest Intelligence^® data average download
speeds for Q1 2019

*About AT&T

AT&T Inc. (NYSE:T)
is a diversified, global leader in telecommunications, media and
entertainment, and technology. It executes in the market under four
operating units. WarnerMedia’s HBO, Turner and Warner Bros. divisions
are world leaders in creating premium content, operate one of the
world’s largest TV and film studios, and own a world-class library of
entertainment. AT&T Communications provides more than 100 million U.S.
consumers with entertainment and communications experiences across TV,
mobile and broadband services. Plus, it serves nearly 3 million business
customers with high-speed, highly secure connectivity and smart
solutions. AT&T Latin America provides pay-TV services across 11
countries and territories in Latin America and the Caribbean, and is the
fastest growing wireless provider in Mexico, serving consumers and
businesses. Xandr provides marketers with innovative and relevant
advertising solutions for consumers around premium video content and
digital advertising through its AppNexus platform.

AT&T products and services are provided or offered by subsidiaries and
affiliates of AT&T Inc. under the AT&T brand and not by AT&T Inc.
Additional information is available at about.att.com. © 2019 AT&T
Intellectual Property. All rights reserved. AT&T, the Globe logo and
other marks are trademarks and service marks of AT&T Intellectual
Property and/or AT&T affiliated companies. All other marks contained
herein are the property of their respective owners.

Cautionary Language Concerning Forward-Looking Statements

Information set forth in this news release contains financial estimates
and other forward-looking statements that are subject to risks and
uncertainties, and actual results might differ materially. A discussion
of factors that may affect future results is contained in AT&T’s filings
with the Securities and Exchange Commission. AT&T disclaims any
obligation to update and revise statements contained in this news
release based on new information or otherwise.

This news release may contain certain non-GAAP financial measures.
Reconciliations between the non-GAAP financial measures and the GAAP
financial measures are available on the company’s website at https://investors.att.com.

Discussion and Reconciliation of Non-GAAP Measures

We believe the following measures are relevant and useful information to
investors as they are part of AT&T’s internal management reporting and
planning processes and are important metrics that management uses to
evaluate the operating performance of AT&T and its segments. Management
also uses these measures as a method of comparing performance with that
of many of our competitors. These measures should be considered in
addition to, but not as a substitute for, other measures of financial
performance reported in accordance with U.S. generally accepted
accounting principles (GAAP).

Free Cash Flow

Free cash flow is defined as cash from operations minus capital
expenditures. Free cash flow after dividends is defined as cash from
operations minus capital expenditures and dividends. Free cash flow
dividend payout ratio is defined as the percentage of dividends paid to
free cash flow. We believe these metrics provide useful information to
our investors because management views free cash flow as an important
indicator of how much cash is generated by routine business operations,
including capital expenditures, and makes decisions based on it.
Management also views free cash flow as a measure of cash available to
pay debt and return cash to shareowners.

Cash Paid for Capital Investment

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

EBITDA

Our calculation of EBITDA, as presented, may differ from similarly
titled measures reported by other companies. For AT&T, EBITDA excludes
other income (expense) – net, and equity in net income (loss) of
affiliates, as these do not reflect the operating results of our
subscriber base or operations that are not under our control. Equity in
net income (loss) of affiliates represents the proportionate share of
the net income (loss) of affiliates in which we exercise significant
influence, but do not control. Because we do not control these entities,
management excludes these results when evaluating the performance of our
primary operations. EBITDA also excludes interest expense and the
provision for income taxes. Excluding these items eliminates the
expenses associated with our capital and tax structures. Finally, EBITDA
excludes depreciation and amortization in order to eliminate the impact
of capital investments. EBITDA does not give effect to cash used for
debt service requirements and thus does not reflect available funds for
distributions, reinvestment or other discretionary uses. EBITDA is not
presented as an alternative measure of operating results or cash flows
from operations, as determined in accordance with U.S. generally
accepted accounting principles (GAAP).

EBITDA service margin is calculated as EBITDA divided by service
revenues.

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

These measures are used by management as a gauge of our success in
acquiring, retaining and servicing subscribers because we believe these
measures reflect AT&T’s ability to generate and grow subscriber revenues
while providing a high level of customer service in a cost-effective
manner. Management also uses these measures as a method of comparing
operating performance with that of many of its competitors. The
financial and operating metrics which affect EBITDA include the key
revenue and expense drivers for which management is responsible and upon
which we evaluate performance.

We believe EBITDA Service Margin (EBITDA as a percentage of service
revenues) to be a more relevant measure than EBITDA Margin (EBITDA as a
percentage of total revenue) for our Mobility business unit operating
margin. We also use wireless service revenues to calculate margin to
facilitate comparison, both internally and externally with our wireless
competitors, as they calculate their margins using wireless service
revenues as well.

There are material limitations to using these non-GAAP financial
measures. EBITDA, EBITDA margin and EBITDA service margin, as we have
defined them, may not be comparable to similarly titled measures
reported by other companies. Furthermore, these performance measures do
not take into account certain significant items, including depreciation
and amortization, interest expense, tax expense and equity in net income
(loss) of affiliates. Management compensates for these limitations by
carefully analyzing how its competitors present performance measures
that are similar in nature to EBITDA as we present it, and considering
the economic effect of the excluded expense items independently as well
as in connection with its analysis of net income as calculated in
accordance with GAAP. EBITDA, EBITDA margin and EBITDA service margin
should be considered in addition to, but not as a substitute for, other
measures of financial performance reported in accordance with GAAP.

Adjusting Items

Adjusting items include revenues and costs we consider non-operational
in nature, such as items arising from asset acquisitions or
dispositions. We also adjust for net actuarial gains or losses
associated with our pension and postemployment benefit plans due to the
often significant impact on our fourth-quarter results, unless earlier
remeasurement is required (we immediately recognize this gain or loss in
the income statement, pursuant to our accounting policy for the
recognition of actuarial gains and losses). Consequently, our adjusted
results reflect an expected return on plan assets rather than the actual
return on plan assets, as included in the GAAP measure of income.

The tax impact of adjusting items is calculated using the effective tax
rate during the quarter except for adjustments that, given their
magnitude, can drive a change in the effective tax rate, reflect the
actual tax expense or combined marginal rate of approximately 25% for
transactions after tax reform.

¹ Includes interest expense incurred on debt issued,
redemption premiums and interest income earned on cash held prior to the
close of merger transactions.

Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted
EBITDA, Adjusted EBITDA margin, Adjusted EBITDA service margin and
Adjusted diluted EPS are non-GAAP financial measures calculated by
excluding from operating revenues, operating expenses and income tax
expense certain significant items that are non-operational or
non-recurring in nature, including dispositions and merger integration
and transaction costs. Management believes that these measures provide
relevant and useful information to investors and other users of our
financial data in evaluating the effectiveness of our operations and
underlying business trends.

Adjusted Operating Revenues, Adjusted Operating Income, Adjusted
Operating Income Margin, Adjusted EBITDA, Adjusted EBITDA margin,
Adjusted EBITDA service margin and Adjusted diluted EPS should be
considered in addition to, but not as a substitute for, other measures
of financial performance reported in accordance with GAAP. AT&T’s
calculation of Adjusted items, as presented, may differ from similarly
titled measures reported by other companies.

¹ Includes combined merger integration items and
merger-related interest income and expense, and redemption premiums.

² Includes gains on transactions, natural disaster
adjustments and charges, and employee-related and other costs.

³ Includes adjustments for actuarial gains or losses ($432
million loss in the first quarter of 2019) associated with our pension
benefit plan, which we immediately recognize in the income statement,
pursuant to our accounting policy for the recognition of actuarial
gains/losses. As a result, adjusted EPS reflects an expected return on
plan assets of $816 million (based on an average expected return on plan
assets of 7.00% for our pension trust), rather than the actual return on
plan assets of $2.8 billion (actual return of 5.8% for the quarter),
included in the GAAP measure of income.

Pro Forma Net Debt to Adjusted EBITDA

Net Debt to EBITDA ratios are non-GAAP financial measures frequently
used by investors and credit rating agencies and management believes
these measures provide relevant and useful information to investors and
other users of our financial data. Our Net Debt to Pro Forma Adjusted
EBITDA ratio is calculated by dividing the Net Debt by the sum of the
most recent four quarters Pro Forma Adjusted EBITDA. Net Debt is
calculated by subtracting cash and cash equivalents and certificates of
deposit and time deposits that are greater than 90 days, from the sum of
debt maturing within one year and long-term debt.

¹ As reported in AT&T’s Form 8-K filed July 24, 2018, October
24, 2018 and January 30, 2019.

² Includes the purchase accounting reclassification of
released content amortization of $491 million pro forma and $98 million
reported by AT&T in the second quarter of 2018, $772 million reported in
the third quarter of 2018, $545 million reported by AT&T in the fourth
quarter of 2018 and $150 million reported by AT&T in the first quarter
of 2019.

Supplemental Operational Measures

We provide a supplemental discussion of our business solutions
operations that is calculated by combining our Mobility and Business
Wireline operating units, and then adjusting to remove non-business
operations. The following table presents a reconciliation of our
supplemental Business Solutions results.

¹ Non-business wireless reported in the Communication segment
under the Mobility business unit.

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