AT&T Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the AT&T Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. If you should require assistance during the call, please press star then zero, and an operator will assist you offline. Following the presentation, the call will be open for questions. If you would like to ask a question, please press one and then zero, and you will be placed into the question queue. If you are in the question queue and would like to withdraw your question, you can do so by pressing 1 and then 0. And as a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Amir Rozwedowski, 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 Rozwedowski, Head of Investor Relations for AT&T. Joining me on the call today are John Stanky, AT&T's Chief Executive Officer, and John Stevens, our Chief Financial Officer. John will provide opening comments, followed by John Stevens, covering second quarter results and our liquidity and capital position. After that, John Stanky will come back with a business transformation update and discuss the HBO Max 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 may be forward-looking. As such, they're 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 AT&T website. I also want to remind you that we are in the quiet period for the SEC Spectrum Auction 105, so we cannot address any questions about that today. With that, I'll turn the call over to John Stanky. John?

Thanks, Amir. I'm delighted to have you on board. You know, you delivered that safe harbor statement much better than Mike Biola ever did. Seriously. We appreciate the great job Mike did leading our team for many years and working side by side with him. I'm going to miss seeing him 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 COVID-19, which I expect are going to be with us for some time. We're planning and operating under the assumption that significant accommodations for COVID 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 and 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 and businesses that form the foundation for how we live and work. Second, as a software-based entertainment provider, we deliver compelling entertainment experiences through HBO Max, and ATT TV, giving us the opportunity to establish meaningful relationships with the majority of US households. And third, the fantastic stories we tell and share on 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 connectivity and great content along with better value and service to drive more customer engagement across all of AT&T. Our goal is to give our customers a reason to actively engage with us every day. In fact, multiple times a day. Every touchpoint represents a chance to learn more about what they want. And bringing connectivity and engagement together will allow for the crucial insights to guide future investment and open new opportunities for subscription and 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 in our execution. As part of our transformation initiative, we have more than 50 different work streams underway that 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 and targeted investment to achieve growth in those key products I mentioned. Our success relies on AT&T becoming a more agile and efficient company that's able to meet our customers' needs in 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, and affiliate and advertising sales. That allowed us to work together across Warner Media and all of AT&T to successfully launch HBO Max. A few months ago, we took the next step and move Zander to WarnerMedia so we could accelerate our progress in building software-based entertainment platforms supported by both subscription and advertising, like the AVOD version of HBO Max we plan to launch next year. Last month, we made changes on how we're organized and operate at AT&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 AT&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, 5G, which is nationwide as of today, FirstNet, and HBO 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 60s, 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 they're no longer core to our business. Now let me offer my perspective on the quarter before I turn it over to John Stevens 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 COVID limited our ability to go into some customers' homes for installs. Our software-based entertainment businesses performed well. ATT 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. HBO Max had a strong launch on track to hit its targets we laid out for you last fall. We're already seeing how HBO Max can increase our broadband ads, and increased wireless ARPU. Obviously, COVID had a significant impact on our WarnerMedia segment with advertising revenues, content production, and 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 WarnerMedia 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 COVID impacts from incremental costs related to compassion pay and production delays and lost revenues from foregone international roaming and delayed theatrical releases. Combined, COVID had a $0.09 a share impact to second quarter EPS. Adjustments for the quarter include an 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 COVID impacts. The severance accrual reflects the workforce adjustments we're making as part of our cost reduction and transformation plans. Cash impacts from these 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 COVID. This was mostly due to the absence of theatrical and television releases. and lower advertising from delayed sports programming and a slow economy. Lower international rolling revenues impacted mobility. In our reported results, foreign exchange had an impact of about $500 million in 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 COVID 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. 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. Plus, we invested an additional $1 billion in new 5G spectrum in the quarter. And we invested nearly $400 million in HBO Max, in line 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 and Business Wireline remained resilient. Mobility had another good quarter. Even with the impact of COVID, Equipment revenue helped offset declines in service revenues, which were down due to a decline in international roaming revenue and waived overage and late fees. Without those COVID 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 and service margins expanding, and that's inclusive of COVID impacts. Our total reported phone growth was essentially flat We had more than 135,000 prepaid phone net ads that helped offset a decline in postpaid phone. Our quarterly subscriber counts for the postpaid wireless, video, and broadband reflect an estimate for customers who will likely disconnect service once the Keep America Connected pledge ends. In short, we're treating these subscribers as disconnects in the second quarter. While this impacts net ads, churn, and service revenues, we believe this is the most transparent and accurate way to account for this. About 340,000 of our post-paid 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 190,000 post-paid phone net ads and much lower churn. 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 our elite package that includes HBO Max. In our entertainment group, we had lower video and advertising revenues. This includes an estimated $300 million impact on both revenue and EBITDA from COVID from lower advertising demand and lower commercial volumes. AT&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 220,000 AT&T fiber subscribers and the number of customers opting for gigabit speeds increased by more than 750,000 in the quarter. We now have 4.3 million AT&T fiber customers with nearly 2 million of them on one gigabit speeds. I should point out our total broadband numbers do not include 159,000 subscribers who are counted as disconnects, even though they remained active on our network through the Keep America Connected 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 and margins expanded by 90 basis points. Revenues were consistent with recent trends as slower declines in legacy products were partially offset by a growth in strategic and managed services. This EBITDA 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 back that out, revenue would have been down just 1.7% and EBITDA would have grown. Let's move to WarnerMedia and Latin America results, which are on slide seven. As John mentioned, the COVID impact is most evident in our WarnerMedia results. Altogether, COVID 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 WarnerMedia was the successful launch of HBO Max, which John will cover in more detail in just a minute. Turning to our Latin America operations, foreign exchange was a major factor as we're slowly economies and the onset of COVID. Mexico was impacted by lower equipment sales from COVID related stores closures. This also impacted prepaid customers' ability to renew their service. Even with this, Mexico EBITDA improved year over year. Brie also continues to work against significant economic and foreign exchange headwinds, which have become even stiffer with COVID. But even in this challenging economic environment, Rio 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 Rio's 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 remained 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 we'll hit our full-year goal of a 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 FirstNet build continues to run ahead of plan. We expect additional network benefits as our 5G build is expected to reach nationwide coverage today. The network and the entire FirstNet team has done a great job. in building out our 5G network. We've been active in the bond market. Rates are low, demand is healthy, and we used 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, making our debt obligations for the next few years very manageable. We'll continue to be disciplined with debt management Ongoing liability management strategies are actively being considered to maintain and improve flexibility and reduce risk. We have several other levers we can pull to optimize our capital structure. We expect to close about $2 billion in pending sales from CME, 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 interests. 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 HBO Max. John?

Thanks, John. Let me give you more detail about our business transformation on slide nine. If anything, COVID has led us to ramping these efforts. We're moving forward on the 50 work streams 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 is much to do over the next couple of years. A workforce realignment and reduction of labor costs is underway. We restructured some of our benefit plans earlier in the year, and we made several moves to streamline operations. Within the communications business, We're also streamlining our distribution. The closure of retail stores during COVID gave us a unique opportunity to review our retail and third-party distribution capabilities. Some of our least productive stores won't reopen. Other locations will shift to independent distributors. And we're enhancing our online and omnichannel capabilities to align with how customers want to do business with us. Our market and product focus will drive simplification into our operations and resize our operating and technology footprint, all while taking further advantage of our evolution to cloud and virtualized services. Our shift to software-based entertainment with ATT TV is validating our assumptions on customer self-install. We expect this, coupled with the growth of our fiber-based broadband subscribers, 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 and 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, but work remains to further streamline the functions that support those directly serving customers. Bottom line, we're off to a good start on our transformation work. We have management teams in place on each of our major initiatives and a senior level governance structure to guide and resource this 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 HBO Max launch on slide 10. First, I want to give full credit to the entire HBO 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 WarnerMedia. The platform performed 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 HBO Max subscribers, activations and revenues. HBO Max's diverse library of content appeals to everyone in the family, letting us reach a much broader demographic than our traditional HBO service. With that broader appeal, we've been able to expand beyond the traditional HBO subscriber base. We finished the quarter with 36.3 million U.S. subscribers to HBO Max and HBO, 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 HBO Now, clearly demonstrating the strength of our library and our success broadening the appeal of the product to more family members. It's our WarnerMedia-owned content that's at the top of the viewing list, And that's driving the majority of the total hours consumed on the platform. In the streaming business, your content library is the key to keeping customers, but it's the new originals that drive subscriber acquisition. With COVID shutting down content production in March, we've been challenged to get all the originals on the platform that we planned. But we like the early reception of what we've been able to get in front of the customer base thus far. We launched Max with six new originals. All were found in the top 25 viewed series on the platform. By August, we'll have 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 to fire back up 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 online as critical to making our 2021 subscriber plan. One month after launch, HBO Max had about 3 million retail subscribers and 4.1 million subscribers had activated their Max account. Of those, more than 1 million were wholesale subscribers through AT&T. As you might expect, we're seeing more rapid activation with subscribers who are active users of the HBO 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 HBO Max with 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'll recall this, coupled with the 5G 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 HBO Max available to consumers through nearly every content distributor in the United States. We've tried repeatedly to make HBO Max available to all customers using Amazon Fire devices, including those customers that have purchased HBO via Amazon. Unfortunately, Amazon has taken an approach of treating HBO Max and 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 to stream HBO Max on those devices. Amir, that's our presentation. We're now ready to go to the Q&A.

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

Thank you. As a reminder, if you'd like to ask a question, please press 1 and 0. Your first question comes from the line of John Hudlick from UBS. Please go ahead.

Thanks, guys. Maybe if we could drill down into the entertainment segment a little bit. John Stevens, I think you mentioned something about sort of the non-cash piece that may have affected sort of EBITDA on a year-over-year basis. We could get more color on that. And then anything you guys can tell us on volume trends? I realize there's a real lack of visibility as we look into the second half. But, you know, the video losses got a little bit better, even with the KC. pulled out, but just how you see sort of video and broadband trends as we look out into the second half of the year would be great. Thanks.

Thanks, John. Thanks for your question. Let me give you a couple of thoughts as John joined in. One point is we did get a little bit better on the customer trends, and that did include, I think it was 91,000, if you will, accrued disconnects. Customers were still providing service. So if you back that out, it was a step down. It was an improvement. But we're in the middle of a pandemic, and so we're being real careful with how we address this situation. Secondly, we were real pleased with the AT&T TV rollout. It has been successful. It is working. Once again, because of the pandemic, some of the in-home installs and some of that activity has been limited. So once again, we're cautious as we come out of that. To specifically reference, we amortize installment costs like the whole industry does, and because of AT&T TV, those installment costs from a cash basis are going down, but the amortization of prior installment costs are still here, and we've taken a more conservative view on the lifing of those. So those costs are up year over year. So when you adjust for that, we actually had cash to actually grow when you make that adjustment. But for COVID, we would have saw an increase. So it's a challenging business. Continue to focus on cost savings and continue to generate a lot of cash out of it. But the important piece is this utilization of AT&T TV Now. and taking into that overall strategy of software-based entertainment programs. John, you want to add anything to that?

John, there's clearly gross pressure, and I'd offer a couple thoughts around this. Our churn on the base approved again sequentially, and that's even with the Keep America Connected adjustment in there. And so the base dynamic is actually getting better in the teams customers and servicing them in the right way. But the gross pressures are pretty significant. I would say to the extent a reason comes back for people to engage in pay TV, such as sports returning, where 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. Now, what I really like about what I see about our opportunity, if we start seeing that growth recover, is, as we shared with you, the ATT TV response has been really strong. Customers like the product. It's a much better product to use. It's clearly something that allows us to attack more of the market, given the lower SAC costs that John described. And the broadband attachment has been far superior to where we were with the previous product set, and I think that's one of the reasons you saw the sequential improvement 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, and that's going to probably correlate to what we see on the sports portfolio.

Thanks, guys.

Thanks, Ken.

Your next question comes from the line of Phil Cusick from J.P. 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 asked them for payment? And can you quantify at all how much revenue you didn't recognize from those customers in the second quarter?

Yeah, let me give you this cheat sheet way of doing it.

I think about it as a, I think the most conservative way is just taking a month's revenue on a postpaid customer, and you guys have the ARPU numbers, so you can understand what that revenue would be like. I'd also try to give you that focus in our detailed schedules that we provided. We provided a recommendation of what we saw as the revenue pressure and mobility from COVID. It's included in there, and I think that revenue for the for the quarter was $250 million, inclusive of the international roaming and these kinds of payments. So what I would suggest to you is that's the easiest way to calculate it. A couple of things. One, we're actively contacting, working with, and trying to retain these customers, and certainly we haven't given up on them and they haven't given up on us. So Clearly, we are hopeful of retaining many of these customers, but since they're not paying us, our rules would, our accounting processes, our transparency processes would tell us just to treat these as disconnects. I know some others in the industry have different views on it. They may push this off to the third quarter later in the year or may make base adjustments and so forth. We're just not doing that. We're just taking it up front and laying it out for you, not only on wireless devices, but on video and on broadband. And I point those out because the video and the broadband numbers are measurable also, 91,000 video and almost 160,000 on broadband. But hopefully I explained, I mean, if you think about that postpaid number, one month's revenues, you know, at a normal ARPU kind of gives you 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, you've been contacting these customers regularly. What's been the response? Can you give us any kind of hit rate or what they look like in terms of responding with some ability to pay?

Yeah, so there's been generally a positive response. I will tell you, we assumed that we'd get some of these customers back in this accrual, just so you know that. I mean, there isn't as much as accrual that we would win some of those back. We're doing a little bit better than that accrual, but it's still too early. We still have a significant number And quite frankly, I want to point out, we refer to this as the Keep America Connected programs or pledges. There's a number of them out there. There's not only at the federal SEC level, but there's a number of them out there at the state-by-state level. So this is something that will be with us through the whole quarter.

Okay.

I'm not going to give you a specific number, Phil. I'm honest. I just would tell you on all three segments, we are working really hard to retain those customers.

Okay, but doing a little better than your accrual. That's good. One other if I can. Can you quantify at all the sports cost amortization that will probably come back given the league's plans for the third quarter? We saw really great margins from Turner this quarter. I want to make sure I understand where we should be ready for that to go in the third quarter.

Yeah, I think if you look at what we spelled out in the best indication, that's going to be what we spelled out in the COVID schedules where we listed out those impacts. But you're right, Phil. We will have sports costs come back in for the NBA particularly, and we'll have those revenues come back. And as we expressed to you, those just two pieces of direct costs are generally leave a pressure on the business. And we got relieved of that pressure in the first quarter because of the delays. And now we'll recognize that accounting in the third quarter here. So we will see that. And I think you see the biggest piece of that really showing up in the COVID schedules that we disclosed.

Thanks, John.

Thank you, Phil.

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

Okay, great. Good morning. Thanks so much. John, I think you said COVID is going to be with us for a while. Could you just give us a little color on what's happening in the wireless stores today? How are sales comparing to a year ago levels? Are you getting back even with maybe some of the rollbacks we've seen in some of the southern states as well? And what's going on on the business wireline side? Those results were very strong. How are those conversations going today? And then you outlined the transformation benefits, $6 billion. Perhaps just help us understand how is that going to be fairly rateable over the next three years? Any color around timing would be great.

Sure. How are you doing, Simon? First of all, traffic has bounced back in the stores pretty well. It's still not quite entirely back. You know, you have pockets where it's maybe back to normal other shared with you, we're now giving customers other options on how to fulfill. So in some cases, using omni-channel capabilities or doing work online and simply rolling by the front of the store to pick something up. But I'd say by and large, I don't feel in any way, shape, or form we're impeded in retail relative to what customers wish to do with us. And it's just a matter of what we're seeing generally in the broader population of people being out and about. We're starting to see a little bit of life coming back into the handset cycle right now. I'd expect a little bit later this year there'll probably be some new product in the market from certain manufacturers that is going to further stimulate some store traffic and feel like we're dealing with it fairly effectively. So not really worried about the retail dynamic at this point, and I think it's recovering reasonably well. The biggest wild card on that is what's happening in states that are pressured a little bit with COVID. Hopefully, as people try to get the infection rate under control, it's not an entire lockdown again. From my point of view, that doesn't seem to be necessary. My observation is we're able to manage the dynamics in retail pretty well in terms of safety and how people do business. There's other activities that are probably the higher risk things, but who knows? As we all know, the decision-making is not always as clean and factual as it 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 would say that I would expect it will be hard to sustain that level into third quarter, and we've expected, you know, we kind of forecasted that and how we've characterized for you how the year shapes up. You know, we're going to see pressure, especially in the lower end of the business market. We've already taken a fair amount of it. If you look in the entertainment segment, you know, we were really heavy in bars and restaurants and that we have and they've been hit really hard and a lot of them have not come back. And then in the data services side and telephone services side, for the small end of the market, I expect there's going to be continued pressure there. Now, if there's a silver lining relative to our portfolio, I think as you're aware, our enterprise segment is probably more oriented to mid and larger businesses, generally speaking, overall. I think they'll be in a 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 going to see some pressure on that as we move into the third quarter and what that does for our performance there. And I think we've got it pigeonholed pretty well relative to how we've set expectations with you on cash moving through the year. On where we are with our – Six billion efforts. You know, I think what you – I wouldn't say it's ratable. The way I would say is, you know, we've got probably some short-term things we were able to do early in the cycle. 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 that we put out that is directly tied to our plans around what we're doing for some of the efficiency work and restructuring that's going on. You kind of see the midterm where maybe it drops off a little bit as we're working some of the technology initiatives and business improvement initiatives that take a period of cycle as you move through software development that's necessary. And then as you get into the latter part, those bounce in and start to occur. So I'm not going to call it an inverted V. It's not that, but you get a lot up front. you see a little bit of softening and then it pops up in the tail end that comes back in. So it may be risk adjusted in that fashion. Right.

That's helpful. Thank you.

Next question. Next question comes from the line of David Barton from bank of America. Please go ahead.

Hey guys, thanks so much for taking the questions. Um, uh, this one might be for either one of the two Johns. Um, 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 in 21 or not? And then the second question is, I guess, related to the wireless business. I guess maybe this one's for John Stevens. Two forces are the pressure from overage and roaming the revenue line offset a little bit by the equipment on the lower equipment velocities. And then also you have this hazard pay for the union forces. Could you kind of talk about which of these forces is going to be stronger? Is the hazard pay going away and that's going to give you a lift? Is the equipment going to accelerate and that's going to be a pressure? When does the roaming come back? If we could get some color on those moving forces, it would be helpful. Thank you.

Dave, thanks for the question. Let me take the second one first. With regard to mobility, think about it this way. John just mentioned that he feels good about our retail space. If you look at the equipment revenue in the second quarter, it actually grew, and that was from a rebound in our retail stores and our equipment sales rebounds. That's because they're open, and this hazard pay and some of the issues with regard to what we've done on mobility are ebbing, and we're opening. Secondly, I will tell you that on the overall mobility, we grew even that, even with those costs of the pandemic, even with the pressure from international roaming, the pressure from waiving late fees or overage charges, and pressure from Connect America. So from my perspective, we're in very good shape with those things to work through those even currently, but going forward. And the big piece of that is we've had a lot of cost initiatives that allow for us to grow that. Even with those additional costs from COVID, as you say, the battle pay, so to speak, we were able to keep costs in line and grow EBITDA. So From my perspective, I think we're in a very good position. And as we work through the Connect America, Keep America Connected groups, as we get to more stable environment, we feel very good about where the mobility business is going. It's been a tremendous cash generator. So I feel good about that.

On the question, Dave, regarding where we are on stock buyback, I would tell you it's too early to call anything. And the board... is going to sit down in their annual planning cycle in September. Broadly speaking, we're going to look at capital allocation. And we've shared with you that our concerns around visibility remain. Clearly, as I indicated in my opening remarks with COVID being with us for a long period of time, and we're going to be in this up and down dynamic it's too early to tell exactly what's going to occur. And I expect as we get into the latter part of the third quarter, maybe we have a little bit better visibility of what 21 looks like and what the circumstances are. And we'll spend time at the board in September talking about that broadly and looking at the investment opportunities that are in front of us and how we want to deploy capital and 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.

We've been really successful in managing the debt towers and managing the cost of our debt. We did about $17 billion in issuances in the last month and using that to retire previously issued debt at better interest rates with better timing and spreads, much more manageable towers. So we're very active, and quite frankly, the bond market has responded quite well. Our yields are as low as, you know, as competitive for us as I've ever seen. So I would tell you we're very active in the capital markets, just imagine at that time, and I think the markets have responded well to that. So I just add that in. That's been a real focus, 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 to return to some of the priorities, John, that you discussed at the beginning of the call, and just two questions on that. First, you described being a broadband provider as the first priority. What does that mean for the pace at which you want to expand fiber to the home or gigabit access to the home if you can use other technologies such as 5G? And the second question was on your second priority, which was the focus on being a software-based entertainment provider. And you mentioned AT&T TV as part of that opportunity. To be successful with AT&T TV, does AT&T need to own the DirecTV satellite video business? Thanks.

Hi, Mike. Thanks for the question. So on the broadband side, look, I have an appetite to – impact of building footprint on fiber, and I think I've indicated that before, and I wouldn't quite pigeonhole it in the way you asked the question relative to households. I have an appetite to build fiber that serves a combination of our needs in the consumer space, what we need to do to deploy 5G, and what can help our business segment. And really, the unique position we're in as a business is have lines of business in all those areas and that should give us leverage in fiber deployment that i think others you know that are either only a fixed line provider and reselling wireless services or those that are only wireless providers and trying to deploy more fiber intensive 5g networks uh 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, you know, we should be getting yields off of every lineal foot of fiber we put in that nobody else can achieve. And so as I think about this and as we're working it 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, you know, the net effect of that will be there will be communities that we build. I personally do not believe that 5G is a replacement in the near term for suburban residential single-family living units is an optimal strategy. I think it's going to be a tough one to beat when there's embedded gigabit-capable fixed-line networks in place. I think there's clearly going to be stuff on the margin that makes sense around that, but I I don't believe in the near term that 5G is the right fixed line replacement strategy and what I would call the typical single family home infrastructure. And look, if it ultimately moves that way and we start to see the technology stabilizing, we're as well positioned as anybody to pivot to that. We certainly got the spectrum and the assets to make that happen, but I'm just not of the mindset right now that that's the optimal place to win in the market. You know, on the software-based side, I think what I've shared with you is that, you know, my belief is that ultimately you're coming together with one distribution platform for entertainment. Today we've kind of seen SVOD and pay TV platforms grow up independently, and there's good reasons why that's occurred 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 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 about the fact that we want a platform with a lot of customers on it that is capable of either delivering general entertainment content under an SBOT construct or whatever is that appropriate mix of, you know, live linear moving forward. And I think that's probably the optimal way to meet customer needs, you know, as we go forward. Do I think that, you know, satellite's necessary to respond in that area? I mean, you can go back and look at comments I made, I think, very early on, you know, post-transaction of DirecTV that, We didn't necessarily make that move because we love satellite as a technology to deliver premium entertainment-based video content. We like the customer base. It was an opportunity to move that customer base into the right technology platforms moving forward. That's clearly where we're investing and what we're doing right now, which is building those software platforms that can deliver either live or on-demand entertainment-based content and have that relationship with the customer, use the data and the analytics we pull from that, and hopefully bridge off other services that those platforms can ultimately deliver. And I don't necessarily view satellite technology as a place that's necessary to make that happen.

Thank you.

Thanks, Mike.

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

Yeah, thanks for taking the question. You know, one of the areas where we've seen a real difficulty driving a reopening is in moviegoing. You've already had to adjust Tenet a couple times. You've acknowledged it's going to be a very different release than we've historically seen. You know, in light of the uncertainty around getting back to normal with that experience, and also with the direct platform you now have in HBO Max, can you talk about whether you think there's an opportunity or a need to evolve your film release and windowing schedule, and in particular, whether you think HBO Max could be a much more important launch point for your films going forward. Thank you.

Sure, Brett. Look, I think I said last quarter that I fully expected that coming out of COVID, I would be surprised if the industry as a whole didn't see some adjustment in the theatrical construct. And I also made the point that, look, I think theatrical still has an absolute important role moving forward. There's just some content that is going to be more enjoyable and better to see in theaters than, you know, in 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 when theaters are going to reopen. Just like I'm not sure I can say I know exactly when schools are going to reopen and what the circumstances are going to be around it, And there's no question that the longer this goes on, there's going to be some content on the margin that we look at and say it may be better served to be distributed in another construct or a different construct. I love the fact that we have that option now. I love the reality that we've been able to build a platform that we can get leverage and capabilities out of any content we build, theatrical or otherwise, and pick the platform and where we go with it. So do I think that there could be some things that we did originally chartered and built for a theatrical release that maybe migrates into an SBOD construct? Sure, I think that could occur. Is it going to happen on a movie like Tenet or... You know, something like Wonder Woman, I'd be very surprised if that would be the case. In fact, I can assure you on Tenet that's not going to be the case. So I think we're just going to take it a piece at a 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 future production slate where we've retooled it for what would have probably been a theatrical release that we're choosing to execute the movie as what's going to be a direct streaming construct. So, yeah, I think there are going to be some shifts as we move forward here.

Thank you.

Thanks, Brad. Your next question comes from the line of Mike McCormick from Guggenheim. Please go ahead.

Hey, guys, thanks. Maybe just a quick one on the wireless revenue slash ARPU. What were you guys seeing out there as far as customers potentially trading down to lower plans, given the work from home environment and most things being Wi-Fi-based instead? And then back, I guess, on the business wireline side, have you guys seen any slowdown in decision-making on the enterprise side? We've seen that. historically in economic downturns and getting some whispers out there on that, just wondering what you're seeing. And then if you don't mind, John Stevens, on the working capital side, just the pacing in the back half and working capital.

Let me just take the front end of that, and then John can come in and do the cleanup here. You know, frankly, quite the opposite right now in our post-paid business of what's occurring. We are, you know, I think we indicated in some of the comments that we are already seeing the dynamic of the attach rate of the better unlimited and the hierarchical unlimited plans increasing. And I made that point deliberately because this is where HBO Max and wireless come together nicely. We're giving customers a reason to go up in the more robust unlimited plans, and we're already seeing that penetration increase. We shared with you in October that That was an important driver through a combination of the incentives we would give people on the 5G network to buy into the upper-end unlimited plans, as well as how Max complements those. And, you know, we are seeing that success with Max, so check the box on the front end of that. And once we have the right kind of equipment showing up on the 5G side, I think we will see that momentum continue and carry forward. So... I think wireless has become more indispensable to customers in the work and home environment, not less. They're relying more on their devices. They're using them more. It's an important utility and tool for them to execute the mix of their personal and business lives. And so the trend has actually been really good around that. On the enterprise side, as I mentioned earlier, I think that it's going to directly correlate 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, you know, heavier to the mid-net market, as I talked about. And as the airline industry continues to move through its challenges, you know, our customer base is going to move through its challenges. As the hospitality industry moves through its challenges, Our customer base is going to move through its challenges, and we're going to work with them in going through that dynamic because they're important customers to ours, and we have longstanding relationships. And as I said, I would expect that third and fourth quarter, we're going to see some pressure in that segment as a result of that. I think we've done a reasonable job of trying to forecast what that's going to look like, but I can't believe that we're going to see tailwinds, you know, as we kind of get through that dynamic. And John, if you want to.

Yeah, let me just get a little bit of, if you look at the post-paid ARPU, we're seeing the growth that John's talking about when you take into account the fact that the international roaming or the COVID impact. So that's how you see it. And that HBO Max has been a good attachment, a good opportunity for us to grow those elite packages and people moving up. So we've been really, you know, we've been pleased with the way the wireless business is going and With your question, Mike, on working capital, you know, traditionally we're the second half of the year weighted towards free cash flow and so forth, and I wouldn't expect this year to be any different other than the fact that everything this year is different because of COVID. We continue to have a really focus on working capital free cash flow. I will tell you that in the second quarter, we saw some you know, good activity on accounts receivables and collections and so forth. I wouldn't suggest that it's better than any prior years, but it was, I will say, better or as good as I would have expected in a pandemic situation. With that being said, you know, we're continuing to watch things carefully, continue to focus on working capital generation ideas, and, you know, we're kind of watching every nickel and watching our receivables All that being said, we're on good track. We had a 50% dividend-payout ratio this quarter. We're on track full year, year-to-date. We're on track already, and we usually have better second halves than we do first halves, so I feel really good about the commitments and are really targeting the low end of the 60s for the payout ratio. We're striving to beat that target. Last thing I'll tell you, that is still with $20 billion of CapEx investment, and I want to make sure we reiterate that. The cash flows that we're getting are coming from the operations of the business, not from cutting CapEx. We're staying in line with CapEx.

Thank you very much, Mike. We'll turn it over to John for some final remarks.

Thanks very much, everybody, for being with us today. I appreciate the discussion and the questions, and You know, what I would say overall, the quarter represented what I thought was some, you know, solid execution in a really challenging environment. And I don't expect we're going to see much change in the third quarter around those challenges that are in front of us. But the cash flow numbers were very, very encouraging. And certainly, you know, what I take a lot of heart in, I thought the team did a great job on the launch of HBO Max. And I think that was... in a unique position to have a lot of optionality as we move forward and reshape the media business. I expect we're going to be dealing with some of these economic challenges in the COVID environment as we move forward here. And as you heard, we're operating accordingly, including pushing a lot harder on what we need to do on the cost and efficiency side to get our business positioned to do this. We'd be doing it anyway. but clearly the uncertainty of the environment moving forward makes that more important to us. We're blessed to have a very resilient subscription business, and we'll continue to lean on that and use those cash flows to invest wisely moving forward. As you heard John talk about the fact we remain committed to putting our capital against the areas where we think there is an opportunity to grow this business moving forward. and come out of the backside of this pandemic stronger than where we came in. And we're going to continue to do that and move forward. So appreciate you being with us today. Hope you all stay safe and enjoy the rest of your summer.

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.