AT&T Inc. (T) Presents at UBS Conference (Transcript)

AT&T Inc. (NYSE:T) UBS Conference December 4, 2018 8:00 AM ET

Executives

Randall Stephenson - Chairman and Chief Executive Officer

Analysts

John Hodulik - UBS

John Hodulik

Good morning. I'm John Hodulik, the telecom and media analyst here at UBS. And very pleased to announce that our morning keynote speaker is the Chairman and CEO of AT&T, Randall Stephenson. Randall, thanks for being here.

Randall Stephenson

Thanks, John. Do you mind – is there a Safe Harbor they can put up on the screen or something. I need to just cover that.

If not, I'm going to make some statements that may have forward-looking projections and estimates, and so you can go out and check it out on our website of ATT.com. There it is.

John Hodulik

There it is right there. Perfect. Well, again, thanks for joining us, Randall. Maybe a good place to start would be if you could share with us what you believe are the key takeaways for the analyst day that you guys at AT&T held for us last Thursday.

Randall Stephenson

We kind of ambushed, didn't we? You and I set this up, but I would come out here many, many months ago and then we had a little lawsuit that got in the way and ended up closing and having to do an analyst. We did an analyst conference last week right in front of John. So, preempted a little bit.

But I'm just going to do a two-minute flyby in terms of the highlights of what we covered. And the main thing that I wanted to start out with is there's a lot of attention being paid to our results, particularly the new media piece, as well as the video side of the business, which 2018 has been a difficult year for our video business.

And so, the main thing to kind of put in context was recognize what the composition of AT&T is today, and this is a company that is driven by our mobility business. It makes up half of the company's profitability, well over 40% of the revenues or about 40% of revenues.

And so, the company goes as the mobility business goes. And the mobility business is going quite well right now. It grew 5% last quarter. And it actually has some very good momentum that we see continuing into the fourth quarter and we think will play out through 2019.

So, after mobility, now the second largest business we have is Warner Media, the media business, and it's about 17% of the company's profitability and it had another – it had a very good quarter in Q3. It grew about 7%.

And then, what people overlook, our next largest business is our enterprise business, makes up about 17% of our EBITDA. While the revenues kind of bounce around in this business, people kind of forget that this is a very steady contributor to our profitability and even more so to our cash flows. Makes up 17% of our profit.

And then, finally, you get to what we call entertainment group, our video and broadband business, which makes up about 15% of the company's profits. But if you look at the video piece, it’s about half of that. It’s about 7% of the company's profitability and it has had a difficult 2018. We’ve been investing aggressively in this business.

Fiber deployment – in fact, probably the most aggressive fiber program in the United States over the last three or four years. That program finishes mid-year 2019, and those capital requirements begin to drop off dramatically in 2019.

We've also been investing, as you know, a lot in an over-the-top streaming product. It’s been very dilutive. We've learned a lot over the last couple of years; and last half of 2018 has been about getting that product right and getting the dilution under control, getting the pricing right, getting the content cost right.

And so, we’re entering 2019 in a very different place. And so, where this particular business unit has been declining double-digits EBITDA throughout the course of this year, in 2019, we feel pretty good that we can get that to flat. And we think flat is a good place to get because we’ve got to go through flat to get to positive, right? So, 2019, we feel good that we can get that to flat.

And so, you put it all together, what we basically summarized for the analysts last week is we have a business that we think is very healthy, it's growing, key variables are growing; and in 2019, it will generate $26 billion of free cash flow.

And we did take on some debt to do the Time Warner deal, and that debt has gotten a lot of attention. We told the Street when we took the debt on that it would take us a year to a year-and-a-half to get the debt back to comfortable levels.

And so, at $26 billion of free cash flow, we’ll pay a $14 billion dividend and have $12 billion to apply to debt. And I told the group last week and I'll tell you here, if you hear nothing else from me today, hear me say that the discretionary cash flow is going to go to pay down debt over the next 14 months.

As a result, just by applying that cash flow to our debt, we will exit 2019 at about 2.6 times debt to EBITDA just by using our discretionary cash flow.

And we have a number of asset sales that are queued up, $6 billion to $8 million, we feel comfortable we’ll hit those levels. And after those asset sales, we should end 2019 at 2.5 times roughly debt to EBITDA, which is a very comfortable level for us.

So, bottom line, we feel comfortable with the dividend. We feel comfortable with our ability to manage the debt. And we’re going to invest another $23 billion next year and still generate $26 billion of free cash flow. So, those are kind of the punchlines, John.

John Hodulik

Great. Well, let’s dig into each one of the segments. As you said, wireless, it will be the starting point. We’ve got it at about 53% of total EBITDA if we look out into 2019. The competitive environment feels pretty good right now. Certainly, that's what we've been writing. Does it feel the same to you and how sustainable do you think the sort of market conditions are right now?

Randall Stephenson

I've been in this industry a long time and it is always intensely competitive. And particularly when you're around the holiday season, it feels intensely competitive.

But the competition tends to be more promotional in nature and people putting buy one, get one free promotions and handset promotions and that type of thing. And so, you're having that play out in the market right now significantly.

All that said, we like how the business is performing, the wireless business. If you just kind of do a quick scan, we’re now at a place in the third quarter where our postpaid business subscribers grew, prepaid subscribers grew very well, churn continues to be really, really low, ARPUs are growing. So, revenues are growing, so EBTIDA is growing. So, we really feel good about where this business is right now.

You can move to IoT, Internet of Things. Added 3.5 million IoT connections last quarter. Connected cars, that's doing really, really well. People are subscribing up to broadband subscriptions in the connected cars. I think we added a million of those.

And so, we’re in a really good place in the mobility and we like how we’re performing in the market.

John Hodulik

FirstNet was a big win for you guys couple of years back. You're deploying it now. It seems as if you're incurring some of the costs associated with it and not yet seeing any of the real benefits in terms of new capacity, subscriber growth. How do you expect FirstNet to sort of change your wireless business and when should we start to see some of those benefits?

Randall Stephenson

Yeah. FirstNet, this is something, back in 2016, our board said, this is a priority. We need to go win this thing. And so, we made a full-court press to pursue the FirstNet bid and win. And there were so many variables to it that drove us to do this.

First and foremost, the first responder community, we have a very low share of that market. And so, the ability to be able to build a nationwide first responder network and pursue that market opportunity was really, really important.

The second is, it required us to build out a nationwide first responder network which meant we were going to have to go climb every cell tower in the United States to deploy this network. And so, we are all about doing this early on, John, to your point.

So, we have completed one-third of the network build as of last quarter. One-third of the way through. We’re there six months earlier than what the contract requires with the government to do.

But here's what's important. We have also, over the last few years, accumulated a significant portfolio of spectrum. And to deploy that spectrum requires you to climb every cell tower.

While we’re climbing every cell tower to deploy FirstNet, we’re doing two other things. We’re turning up all of not only the FirstNet spectrum that we got, but all of this other spectrum that we've acquired over the last few years.

So, as we climb these cell towers, we turn up the spectrum. By the time we get to end of 2019, we will have increased the capacity on AT&T's network by 50%. You just have to pause and think about – I always have to pause and think about this. The entire AT&T wireless network capacity is going to increase over the next 14 months by 50%. That’s huge.

And so, you think about the spectrum that we've accumulated. When you buy spectrum, a lot of people don't realize this, but your business case is generally how much capital can you avoid if you own spectrum. So, rather than building more cell towers, you have spectrum.

As we put this spectrum up over 2019, we begin to realize what I'll call a spectrum dividend, meaning our capital requirements – once this spectrum is deployed, our capital requirements for the foreseeable future drop dramatically.

So, that's a really important variable at FirstNet. The other variable at FirstNet is, every time we climb that cell tower, we’re also putting up 5G antennas. So, think about one climb. One climb, you're getting the FirstNet capacity put in place, the tower ready for FirstNet. You're putting up 5G antennas and you’re deploying all this spectrum.

So, now that we have the 5G antennas up on this power, we’re at a place where when 5G is ready, which we’ll be doing this second half of this year, last part of this year, all it requires is a software upgrade to turn 5G on.

So, this is a big deal. So, early on, one-third of the US covered. We now have 3,600 agencies around the United States that have signed up with FirstNet and we have 250,000 subscribers on FirstNet. And so, this is a big deal. I have really, really high expectations in terms of what it does for our 5G deployment, what it does for network quality and capacity over the next few months and then just a new business market for us to pursue.

John Hodulik

And you brought up 5G. Obviously, that’s a big topic here at the conference. How quickly, I guess, do you see the 5G ecosystem evolving? Do you think of them more as a sort of purely mobile product? Obviously, there’s competitors out there that are thinking of it sort of as both mobile and fixed. How does AT&T sort of view the 5G opportunity? And maybe what the competitive environment look like if you look out a year or two as the market transitions to 5G?

Randall Stephenson

I'm probably about as energized about 5G as any technology innovation that we've ever deployed. It's such a radical game changer to have the kind of capacity, performance of a network with – I'm going to exaggerate, but no latency. It’s effectively a no-latency network. So, the always-on conductivity is really, really important.

Between here and there, you're going to see an evolution. I think you used that term. In fact, we have a technology term, we’re calling it 5G Evolution. As we go through the last part of this year and 2019, we will be deploying 5GE, 5G Evolution, which means all this spectrum I told you about that we’re hanging up, there's a technology called carrier aggregation that allows us to kind of make that spectrum – I'm going to oversimplify it, but like a single channel of spectrum. You get that kind of throughput. You get that kind of performance.

We’re deploying that technology and some other technology, MIMO and 256 QAM, the punchline of all that, all that means is, if you have an iPhone 8 or an iPhone X or a Samsung 8 or later, as we deploy this, 400 markets by the time we exit this year will have 400 meg theoretical speeds on this network.

Now, you load it up, you're not going to get 40 meg, but this is step change improvement in speeds. So, 400 markets, by end of this year, they will roll this out through 2019.

And so, you're going to see between now and just deployment of 5G in the millimeter wave spectrum some rather radical increases in the performance of these networks, of our network, and a huge amount of our customers that have, like I said, iPhone 8 or newer or Samsung 8 or newer handsets will experience these speeds. And so, we’re rolling that out right now as we’re doing all this other work at the cell site and so forth.

While all that's going on, as I mentioned, 5G antennas are being hung on the cell towers, and we are deploying small cell footprints and turning up millimeter wave spectrum. And so, we’ll have that turned up in 12 markets, 5G turned up in 12 markets, parts of 12 markets this year.

We are focused, John, to your point on mobility, more specifically standards-based mobility. I'm a big believer in getting the standards right, international standards right and then build and deploy into international standards because you just get the scale and the efficiency of manufacturers and so forth around it.

So, that is what we’re deploying. It is a mobile-centric offering and I'm a huge believer in mobility. Everything that we talk about and do is mobility. Will there be fixed line substitute applications here? Absolutely.

I do think the path Verizon is pursuing, I think that's going to be a really good service. I see no reason why it shouldn't be. You're going to get that kind of throughput on these things. So, gig speeds in a 5G environment is good. That's not our priority.

Our early priority for 5G will be enterprise applications. And so, we’re already having a lot of interest in people pursuing robotic plants, the ability to do networking in robotic plants and so forth.

Because, if you think about it, if you have a wide area network that has 1 gig type throughputs, then if you're a CIO or somebody who run a manufacturing facility or an administrative office, why do you need a LAN once you have that kind of throughput and that kind of capacity.

And so, we think business applications are going to be really important. And, obviously, we’re all talking about autonomous cars. You cannot talk autonomous cars until you can conceive of a network with no latency. I don't know about you, but I don't want to get in a driverless car if there’s a lot of latency in a network. So, those kind of things.

And then, virtual and augmented reality, we’re investing and spending a lot in delivering augmented and virtual reality applications here.

John Hodulik

Okay. Now, let's turn to Warner Media. In Warner Media, you've acquired an asset in an industry that’s undergoing some massive change. And one of the biggest changes is the size of the budgets of your competitors, the spending that’s going on in terms of content.

Now, as a content creator, I’ll start with, how will Warner Media navigate securing the content it needs given the high demand in the industry for talent as budgets of these non-traditional players continues to grow?

Randall Stephenson

If you think about Warner Media, so Warner Bros., HBO and Turner, we spend within there at levels that rival anybody on original content creation.

Warner Bros., I think the number is it’s created 70 scripted series last year. Now, they sell those or do those for others. Netflix is a big customer of Warner Bros. So, Warner Bros. –or Warner Media has a rather massive content creation budget.

And so, the question that you ask over time is, is there some kind of capital reallocation? Probably. But the goal of John Stankey and Warner Media is not to become another Netflix and not to create a direct-to-consumer product that rivals Netflix in terms of being a warehouse of content.

I compared Netflix one time to Walmart, not derogatorily. It was taken derogatorily. But when I'm shopping and I say I need something XYZ, I go to Walmart. Well, if you're looking for video content regardless of what it is, people will go to Netflix because it's just a warehouse, and it’s an impressive warehouse of content. That is not our ambition.

Our ambition is to have a direct-to-consumer product. I think all media companies are coming to grips with the reality that you better establish a relationship directly with your audiences because this idea of being able to distribute solely through wholesale relationships, if that’s your plan, those business models are getting disrupted aggressively.

And so, what is the product that we need in the marketplace that we can achieve a very high penetration of content with our audiences. So, John Stankey and his team have developed a game plan. It's a direct-to-consumer product that he’s bringing to market. It will be centered off the HBO platform. And then, think about HBO which is – it starts off with just a core platform of movies, what you see on HBO today, predominantly movies, but then think about the HBO, as you know it today with original scripted series, Game of Thrones and so forth, a second layer, and then think about a third layer where we have an incredible IP library in Warner Bros. It’s an amazing library in Warner Bros. of movies, of scripted series.

You saw an article this morning. And I think Ted was here yesterday from Netflix. I believe he mentioned “Friends,” that they re-signed “Friends.” That’s a Warner Bros. property. They re-signed it on a non-exclusive basis. What does that mean? It means “Friends” can go on to our platform as well.

So, think about the kind of content and kids programming that we can bring to bear with a direct-to-consumer offering. And again, it's not a pervasive library of content warehouse like Netflix, but we think it is a very impressive product that will achieve very high penetration. Our expectations are very high for this product. So, going to market with something without – we’re not going to have to spend another $11 billion to rival Netflix. We think we have enough IP and enough capability that we can put a product together that will be very, very attractive.

John Hodulik

To that point, you guys have talked about ramping some spending on the HBO side.

Randall Stephenson

Right.

John Hodulik

Is there additional sort of expenses to ramp up the original content spend for these sort of three D2C efforts as well?

Randall Stephenson

So, the key variable where we think we need to invest in terms of original new content is in the HBO platform itself. And then, we have said we’re going to invest more in HBO. And Richard Plepler is pretty excited. He knows programming. He knows how to put together programming that will attract audiences.

And so, with the additional investment, we’re very confident that we’re going to have an HBO product that’s even more fulsome, a full year of content and so forth rather than a very lumpy content schedule and programming schedule. So, we will invest there.

And as you go forward, we will probably invest in more third-party content over time. But at the early go-down, it’s good to be largely in the HBO product. And then, obviously, there will be some investment in the platform itself to stand up the platform.

But all of this, we feel very comfortable that we can meet it within the guidance of $26 billion free cash flow. And so, you will see us put some more investment in 2019.

John Hodulik

And should we think of these D2C platforms as more US based or do you expect, over time, for them to be global? And then, secondly, should we expect HBO and Warner Bros. content, we talked about “Friends” and the non-exclusivity there, how should we think of – because you've got a lot of licensing and syndication revenues within Warner Media, how should we expect that to progress over time? Do you expect a lot of that content to come back to these platforms?

Randall Stephenson

Yeah. So, the first question, is this a US-only platform? In the beginning, yes. But the brands and the content that we own in Warner Media is attractive globally. It really plays well everywhere. And so, you'd like this to be a global platform, but it’s not as simple as just saying, we’re going to go do that because there are a lot of complicated relationships where this content is being distributed around the globe, and some of those are very deep and very important relationships, like Sky. They have, in their lineup, a lot of HBO content. So, you can’t just go put a product out there tomorrow. We’re going to have to figure this out.

And so, some of these distribution relationships are very, very important and you don't want to disrupt them. So, it will probably be very market specific, what markets can you go into and launch this kind of product, what markets will it take more time to kind of work through some of these issues, but there's not a one-size-fits-all answer when you get outside the United States because Warner Media has a lot of very complicated relationships outside the US.

In terms of the licensing agreements, we’ve talked about an example already – “Friends” – where that's content that we would definitely want on our platform. And it's, obviously, very important to Netflix as well. So, it’s kind of a logical situation. Is it necessary that it be exclusive to Warner Media on their product? Not always. Not necessary. It’s just important that we have the content.

There are probably going to be decisions to be made with every one of these licenses, and I don't – just like the international side, as I kind of talked to the guys about this and gals about this and understand a lot of these licensing deals, this is another one where probably every deal is going to be a little bit different. And because there is different needs and different demands for other distributors of our content, we want to be very mindful of existing distributors of our content, not do things that disrupt their business models, but still give us a product that is highly valuable. When a customer is making their decision for an SVOD product, we believe most customers will have a livestream product and probably two or three SVOD products. We want to be one of those two or three SVOD products. And so, how do we build that in. So, each one of these licensing deals is going to be a unique animal in and of itself.

John Hodulik

Maybe lastly on Warner Media, is there anything you can tell us about the appeals process? I believe the oral arguments start later this week.

Randall Stephenson

On the 6^th.

John Hodulik

On the 6^th, okay. Sort of your thoughts there, anything you can tell us.

Randall Stephenson

So, the government, obviously, appealed the AT&T/Time Warner deal and a schedule has been set up. The Appellate Court in Washington DC, Circuit Court, will hear oral arguments on the appeal that – I think that’s Thursday, right? Thursday.

And, basically, what they have done is given each side 30 minutes to present their oral arguments and then they will take the case and rule on it. They haven't given a schedule. We expect it will be in the first quarter. I’ll be very surprised if it’s not in the first quarter.

When there is an appeal of a ruling like this, what the appellate court is looking for are errors in law. Very rarely are they looking for did the judge get the facts right or not. They rely on the judge. They defer to the judge. They're looking for, did the judge make an error in law. And as you might guess, during the trial, we had a number of appellate lawyers in the courtroom every day watching for those situations. And we feel like Judge Leon who wrote this order wrote a pretty tight order and it was an order that was very fact-specific, the plaintiff is specific to the AT&T/Time Warner case, and so we feel like we have an order by the judge that should stand up well in the appellate review. And so, we’re anxious to get this piece of it behind us.

John Hodulik

Makes sense. Now, turning to EG the entertainment group, can you explain to us AT&T's video segment strategy? And then, as you look at sort of multichannel video and SVOD and D2C, how do you expect the market to evolve and where you think it eventually goes?

Randall Stephenson

So, the days of media companies accumulating massive amounts of content and creating different channels for this content, and they'll have some really great content and they'll tell distributors if you want that content, you’ve got to take this other stuff, and shoving what I call oversized bundles of content down on to consumer, those days are gone. The ability to force that kind of oversize bundling of content on to the consumer – the consumer's willingness to pay has just evaporated.

And we think every media company and every distributor is going to have to have a much different portfolio of video products to meet this customer need. And so, this is one of the things we've been working very, very hard on. And by the time we get to mid-year 2019, this portfolio will be largely in place.

And it starts, as you might guess, with – look, there is a segment of the market that wants a big package of content that is sport-centric, that is 4K, multi-room configurations for their home, that’s a sizable market and that market is going to be there for a long time. DIRECTV meets that end of the market better than anybody. We love our Sunday ticket. We love our sports programming in there. We love how it's a 4K-friendly technology. That technology will be there for quite some time. But there are a large number of customers who are just saying we’re not paying those kind of prices.

And so, we have developed what we call – it’s an over-the-top thin client service that we’re trialing in the market right now. We’ll be in the market, I think, late first quarter is the current timing. Late first quarter with this product. So, a thin client. You just plug it into USB port in your TV and it's run over anybody's broadband. It doesn't matter whose broadband it is. It is a DIRECTV offering with a thinner package of content at a lower price point. It doesn't have a lot of installation costs. You don't have to send somebody out to the home. It can be self-installed. The user interface and the guide are very easy to navigate. That will be in the marketplace, again, first quarter. Much lower price point.

Our current product, DIRECTV NOW, then the content out. Get the content that’s really relevant to a particular customer segment that wants a lower price offering. We’re talking $50 to $60 price offering here.

We’ve learned this product. We think we know this market really, really well. We had a lot of success. We built a 2 million sub base. But we’re asking that DIRECTV product – DIRECTV NOW product to do too much work. So, we’re thinning out the content, getting the price point right and getting it to where it’s profitable. And that'll be in a different segment of the market.

And then, there's WatchTV, $15 a month, entertainment-centric bundle of content. A very different model for how we pay the programmers. But for doing Time Warner, that deal, you probably couldn't have gotten this deal done because we have changed the model for how we pay programmers for the content. And at $15, we have a product that we make decent margins on that our customers really like. It’s proving to be very powerful in reducing wireless churn because that’s how you sell it. You just bundle it in with your wireless product. And so, premium, all the way down to a $15 product for very cost-conscious customers who want livestreamed entertainment and news. And then, standing up the SVOD product that we talked about earlier, having a video on demand product, purely on-demand. We think we have a portfolio that meets virtually every segment of the market, and that's where we’ll be mid-2019. That'll be the portfolio.

John Hodulik

As it relates to content, we had a sports panel here yesterday that was really interesting, talking about the importance of sports content as especially entertainment dollars get spent by these online platforms.

NFL Sunday Ticket is, obviously, a big property of yours. Are you guys fully leveraging that product as much as you can within the satellite business? Is there other ways to monetize that? Or conversely, is it something that doesn't really fit in the portfolio as you see it evolving going forward?

Randall Stephenson

So, it's become somewhat of a churn management product, right? There is a segment of our customer base that – they love that product and they demand that product and it's really, really important to them.

The problem with some of these sports rights – Sunday Ticket would be a classic example – is these folks are very savvy at the rights surrounding these products. And so, you're limited – we’re limited in terms of how else we can distribute that product.

We think that we could have an incredible amount of success if we could distribute that product through our DIRECTV NOW platform, but those rights are restricted. And so, when it's limited to a satellite delivery platform, it’s kind of limited usefulness, right? As the world changes and more and more people are streaming this content on the move, on the go, on smaller devices, on different screens, then we think it’s really important for these rights to evolve as well. But, right now, it's pretty much a churn retention product.

John Hodulik

At the Analyst Day last week, Brian Lesser was there, talked about the addressable advertising opportunity. You guys have shown some upside with AdWorks. It’s an advertising business inside and a lot of success there growing double-digits. When can we start to see some of that inventory in Turner sort of move into that addressable category and start to see the lift from that revenue line?

Randall Stephenson

Just to level-set everybody, we had, as John pointed out, a lot of success on selling addressable advertising into the inventory, the ad inventory that we have within DIRECTV. And if you're not familiar with the industry, CNN has 16 minutes per hour of commercials, advertisement. And when CNN does a deal with a distributor, Comcast or DIRECTV, that usually – you set prices and you give that distributor 2 minutes of that 16-minute inventory.

So, in DIRECTV, we had this 2 minutes out of the 16 minutes of various programs where we go to market with that inventory. And by using addressable, meaning we have the set-top data in terms of what our customers watch, when they watch, where they are when they watch it, we have a lot of insights on our customers that we anonymize, we aggregate the appropriate place, there is no direct attribution to any one human being with the way we do our advertising, but taking this data and the location-based data from the mobile devices and so forth, we are actually growing that advertising revenue. It’s growing 22% in the third quarter.

Now, think about this. That's an advertising stream that is on a subscriber base that’s shrinking 3% or 4% year-over-year. So, the subscriber base, the viewer base is shrinking. The advertising revenues from that is growing at 22%. Now, that's an amazing phenomenon, all right? And that's given us a lot of conviction that, when you look at Turner, the other 14 minutes of this advertising inventory, Turner has a massive inventory of advertising, can you begin to get targeted in the Turner inventory like you are in the DIRECTV inventory.

This is really important because what advertisers have said is that they love the digital advertising platforms because they're so targeted, because they are addressable, because you can design campaigns and have feedback loops on campaigns, but advertisers also say we like the premium video side, we like attaching our brands to the premium video side. It’s just not as efficient and it doesn't work as well as that digital stuff.

So, if you can make the media side, the premium video advertising load perform for advertisers the way we do on DIRECTV and the way Google and Facebook do on digital, we think there's a sizable market. And there’s some significant advertising yield.

So, John's question is, when can you put that Turner advertising inventory to work. You'll start to see it this year. And it's going to take a while to get the technology built. So, what we’re doing on DIRECTV, we’re able to do without a lot of technology because it’s just not a ton of money. It’s like $1.5 billion, $2 billion revenue stream. When you think about Turner, that's a $4 billion revenue stream. This has to be automated. You have to have programmatic capabilities where advertisers can go in and programmatically design an advertising campaign and place advertising and so forth into a marketplace where sellers of advertisers and buyers of advertisers come together.

We made an acquisition right after we closed the Time Warner deal, AppNexus, which is probably one of the premium exchanges for advertisers where buyers and sellers come together. They have a sell-side platform, a buy-side platform. We’re investing heavily in getting this ready to put to work for the Turner inventory. This will take, to get this really scaled, a couple of years.

But that said, we will be able to begin monetizing some of the Turner ad inventory without all the automation in 2019. And, hopefully, you’ll start to see some of those results in 2019.

John Hodulik

Got you. Maybe with our remaining time, just a couple of questions more on the consolidated business. Starting with CapEx, you guys have guided for another $23 billion in growth CapEx spending. But, earlier, we started off talking about the spectrum dividend. We've got the fiber spend slowing down. We’ve got the Mexican LTE network slowing down. How should we look at that CapEx budget going forward? Is there a more upward pressure or more downward pressure?

Randall Stephenson

Oh, it’s downward. Capital intensity in the business should decline over the next few years and you just rattled through them. This fiber build has been impressive over the last three year-and-a-half years. We built out 14 million homes with fiber. And I don't think anybody's done anything close to that over the last few years. So, we really taper that off second half of the year. We completed by June. So, second half of the year, those capital requirements drop off.

Mexico, we have built, throughout the country of Mexico, a nationwide LTE network. We cover 100 million people. And we will finish that build December. We will effectively pass 100 million people this year. And so, those capital requirements drop off significantly. And then, as John and I now have both mentioned, this spectrum dividend is not inconsequential. As we get past 2019, you will see the capital requirements from just capacity lift. We’ll still be investing heavily in 5G and fiber to the cell towers and to small cells for 5G. So, that will continue. But in terms of just broad macro capacity and coverage, the spectrum dividend is sizable as we get past 2019.

So, this begins first part of 2019. It begins to improve throughout 2019. And 2020, the capital intensity really begins to lighten for the next few years.

John Hodulik

Got you. Another key sort of, I think, element coming out of the Analyst Day was the sort of definitive focus on the 2.5 times leverage target by year-end 2019. How should we think your longer-term sort of leverage target? Where do you expect that leverage to go over time?

Randall Stephenson

I'm laser focused right now on the 2.5 times. We have to get there by end of 2019. And so, we have built a plan to do exactly that. What’s magic about 2.5 times? It’s just a comfortable level for us, all right? I get to 2.5 times and we have our debt ladders now staged out. For the next four years, $12 billion maturity is what we’re staring at. And that happens to coincide with what our discretionary cash flow is year-in and year-out. And so, you say if there's economic downturns and whatnot, we can manage through the debt for the next four or five years very easily, especially at 2.5 times. 2.5 times is still heavy in our view for a company our size. That’s $150 billion of debt.

And while on a ratio basis, it doesn’t disturb you. It’s just $150 billion of debt is a lot. A world where it seems like black swans seem to appear every year, right? And so, we want to continue driving that down over the next few years to more historic levels. We've articulated a desire to get to the 1.8 times in, I think, 2022. I don't know exactly what pace we get there, but we want to drive back down to those historic levels over time.

John Hodulik

Okay. And wrapping up, so you've guided to $26 billion in free cash flow. You've got $12 billion in maturities. You've got about $14.5 billion dividend to fund each year. Give where the company is positioned, given how all these segments come together, how are you feeling in terms of the sustainability of the business and the ability to delever as you just laid out over time?

Randall Stephenson

John, that’s an interesting question. I get this one a lot. And, in fact, I read about a lot, not from you, but I read others who talk about we’re going to be capital constrained over the next few years because of the debt and because of the dividend.

I’ll repeat, 2019, we will – more likely than not at $23 billion – be the largest investor in the United States of America again. It won’t change. We’re going to invest aggressively to do all the things we've been talking about. So, the idea that somehow the dividend is constraining our investment, it’s just not true. The idea that the debt is constraining our investment is not true. We’ll invest $23 billion. And after the $23 billion, generate $26 billion of free cash flow. That leaves – take $14 billion for a dividend, that leaves $12 billion for debt reduction. It’s very manageable. And while the debt load is high, the EBITDA is amazing. The cash generation potential and capacity of this business is very unique.

In fact, I think when you look at the EBITDA E of this combined company, probably Apple is the only US company that’s larger. If there’s others, it’s not going to be by orders of magnitude larger. So, it has an incredible cash generating capacity. We feel like we’re managing it quite well. The capital allocation strategy is well set. Get the debt down. The dividend is an important variable for our owners. I have no intention of changing the dividend philosophy of this company and I have no intention of changing the reality that we are a top-tier investor in this industry because I have always believed that, if you're not a top-tier investor, you will not be a top-tier player in this industry. So, we feel really good about the capital positioning of the company and our plans going forward.

Question-and-Answer Session

Q - John Hodulik

Randall Stephenson

Good to see you, John. Thanks. Thanks, everybody.

John Hodulik

Thanks for coming.