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| AT&T Inc. |(T – NYSE) |$31.94 |

Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.

Reason for Report: 1Q18 Earnings Update

Prev. Ed.: Dec 1, 2017; 3Q17 Earnings Update

Brokers’ Recommendations: Positive: 40.0% (8 analysts); Neutral: 60.0% (12); Negative: 0.00% (0) Prev. Ed.: 7; 13; 0

Brokers’ Target Price: $40.05 (↓$0.91 from the last edition; 19 analysts) Brokers’ Avg. Expected Return: 25.4%

Executive Summary

AT&T Inc. (T) is the largest telecommunication services company in the U.S. It provides local and long-distance wireline services along with wireless and data communications.

Of the 20 firms covering the stock, 12 provided neutral ratings while eight assigned positive ratings. None of the firms provided a negative rating. The target prices range from $35.00 to $54.00, with the average being $40.05.

The following is a summarized opinion of the diverse brokerage viewpoints:

Cautious: Neutral or equivalent outlook (12/20 firms): The firms remain concerned about lofty investments and intense competition within wireless segments as these would hurt margins going forward. The firms believe that large-scale, transformational M&A often has inherent risks and challenges, which could negate the cost synergies. However, the firms believe that in addition to Next plans, customer transition from 3G to 4G LTE is leading to higher data consumption and average revenue per user (ARPU). Further, the completion of the DIRECTV acquisition should likely boost AT&T’s video business, going forward. Moreover, launch of Flexible DIRECTV packages, signing of various content distribution deals, initiatives in the Internet of Things (IoT) space and investments in the Mexican telecom market raise optimism. Growth in business data service and machine-to-machine space will also fuel growth. However, the firms are concerned about intensified pricing competition, new device financing plans and other promotional strategies that might weigh on earnings. Moreover, regulatory concerns and foreign currency exchange woes might continue to hurt performance.

Bullish: Buy or equivalent outlook (8/20 firms): These brokerage firms recommend the stock to growth-and income-oriented investors, given the company’s attractive valuation and higher dividend yield. The firms expect AT&T to experience strong growth with its combination of U-verse, DIRECTV’s satellite TV and GigaPower Internet service; which will allow AT&T to provide both traditional cable TV service as well as mobile video streaming service. Apart from continuous investments in LTE and consumer video services, the company is concentrating on business data services, which are expected to deliver solid returns. They also expect the acquisition of DIRECTV and Mexico wireless properties to drive the company’s top and bottom line. The firms further believe that AT&T’s launch of Flexible DIRECTV packages, advancements in the IoT space and strong performance in the connected car segment given its association with top-tier car companies bode well for the long term.

The firms believe the following additional factors should also be taken into consideration for investing in the stock:

• AT&T is the largest wireline operator supported by the success of U-verse and fiber-to-the-node platform and the second largest wireless carrier. It is also the leader in WiFi (wireless broadband) connectivity, which is also a key growth driver.

• AT&T has completed the buildout of its LTE network and aims to cover more than 385 million people and businesses by the end of this year.

• The company seeks to divest underperforming assets like directories and rural access lines to improve its growth profile.

General Outlook

The firms expect AT&T’s long-term fundamentals to be strong. Meanwhile, the company expects its Business Solutions segment to deliver robust growth and is confident about its newest software-defined network services. The company expects to derive significant synergies from the DIRECTV acquisition. Further, the company believes mobile broadband with IP infrastructure, cloud services and undertaking of initiatives in the IoT and connected cars space are great opportunities for business expansion.

May 3, 2018

Overview

Based in San Antonio, TX, AT&T Inc. (T) is one of the world's largest telecommunication companies and is the largest in the United States. AT&T is recognized as a world leader in providing IP-based communications services to businesses and the U.S. leader in wireless, high speed Internet access, voice and cloud-based services. In Jul 2015, AT&T completed the acquisition of satellite TV operator DIRECTV for $48.5 billion, in a cash-and-stock deal. With this, the company scaled up to the highest position in the U.S. pay-TV market.

Post the DIRECTV acquisition, the company has restructured its operating segments into four new divisions, effective from the quarter ended Sep 30, 2015. The new segments are: (1) Business Solutions, (2) Entertainment and Internet Services, (3) Consumer Mobility, and (4) International.

The firms have identified the following factors for evaluating the investment merits of T:

|Key Positive Arguments |Key Negative Arguments |

|Compelling Fundamentals: The company’s digital network is one of the most |Competitive Threats: The company's wireline business faces competition |

|technologically advanced in the industry, with sophisticated and reliable digital |from competitive local exchange carriers, wireless carriers, long distance|

|transport and access capabilities throughout the world. |providers, and cable operators. |

|Growth in Wireless Market: AT&T’s leadership in mobile broadband will continue as |Macroeconomic Environment: Telecom industries are highly vulnerable to the|

|it upgrades its network and rolls out faster 3G and 4G speeds. |macroeconomic environment, and subject to risks from changes in |

|Investments in Mexico: Notably, Mexico is the largest economy in the |technology, government regulation and exposure to economic cycles. |

|Latin-American region and holds massive growth potential as the wireless |Employee Problems: Pension benefits expense continues to affect the |

|penetration rate in the country is relatively low. Thus, AT&T’s investments in the|company’s earnings. Roughly, two-third of the company’s total employees |

|region are expected to reap significant benefits. |are represented by Communications Workers of America (CWA) and |

|Growth in Cloud Computing and Hotel WiFi: Entry into these businesses will provide|International Brotherhood of Electrical Workers (IBEW). |

|a massive boost to AT&T’s revenue and future growth. |Technology: If AT&T is unable to sustain its current level of innovation |

|High Dividend: Rise in dividend along with the share repurchase program reflects |in technology, it will likely lose customers to its competitors. Major |

|the company’s confidence in its ability to generate strong cash flows. |planned investments are required for continuous technology upgrade. |

Further information is available at its website:

Note: AT&T’s fiscal year ends on Dec 31.

May 3, 2018

Long-Term Growth

The firms expect AT&T to witness growth in its largest segment, Business Solutions. The company is working on a number of strategies to tap opportunities in the wireless data market and currently operates the nation's fastest mobile broadband network through LTE and High-Speed Packet Access Plus (HSPA+) technologies. LTE-based 4G networks are the standard technology and the life-blood for operators across the world. LTE, as the biggest growth driver in the telecom industry, will facilitate companies to boost market share in the future.

The firms expect positive business trends based on the robust growth of high-speed broadband in the business space and U-Verse video business. In the coming months, growth will be driven by strong business revenues and enhanced strategic services. Enhanced speed and better network coverage will add business opportunities within high-speed broadband segment from the small and medium business customers.

The firms believe that AT&T is strong on the back of wireless opportunities. AT&T is gearing up to launch the first standards-based mobile 5G services to consumers in multiple U.S. markets by the end of 2018. AT&T has been working hard since 2017 and laying the foundation for mobile 5G network. The company has completed network upgradation in 23 major cities. In January 2017, AT&T joined Ericsson and Qualcomm to test the initial 3GPP 5G NR specification in the second half of 2017. In August 2017, AT&T deployed 5G technology trials in three new cities — Waco, TX; Kalamazoo, MI; and South Bend, IN. In December 2017, AT&T initiated its largest 5G fixed wireless trial in Waco, TX, partnering with the home and lifestyle brand Magnolia. The company claims it to be the largest trial in terms of mobile traffic. Notably, completion of 3rd Generation Partnership Project’s (3GPP) first implementable 5G New radio (NR) specification has set the stage for the global mobile industry to start full-scale development of 5G NR for large-scale trials and commercial deployments in 2019. 5G, which is the next phase of mobile telecommunication standards, marks a revolution in the field of communications and technology.

The firms are pretty optimistic about the FirstNet project. The FirstNet Project is the first dedicated nationwide wireless network for first responders, which is likely to drive AT&T’s prospects in 2018. AT&T and the First Responder Network Authority (FirstNet) revealed the inclusion of 50 states, two U.S. territories and Washington DC in the FirstNet project. As part of the 25-year contract, FirstNet will provide AT&T with a swath of 20 MHz of spectrum in the 700 MHz frequency band for the entire duration. AT&T will also be given success-based payments of $6.5 billion over the next five years to design and build the network. The company is expected to spend around $40 billion over the life of the contract to build, deploy, operate and maintain the network. AT&T has projected that this contract will create more than 10,000 jobs over the next two years. This contract can be considered a necessary boost to the company’s profile. Per the deal, AT&T will be able to use this highly valuable spectrum for both commercial and consumer purposes. This is why several industry researchers believe that the FirstNet project may come as a boon to cell tower operators such as American Tower and SBA Communications.

The firms are looking forward to the completion of the Time Warner deal. Since the announcement of the AT&T-Time Warner $85.4 billion cash-and-stock deal in October 2016, the industry has been rife with speculation over whether the deal will get regulatory approval. The pending merger has been approved by antitrust officials in 17 countries and is waiting for the same from Brazil and the United States. AT&T has gained approval from the European Commission, an institution of the European Union (EU) and from the Mexican telecommunications and broadcasting services regulator, Federal Telecommunications Institute (IFT) for this pending deal. However, the deal awaits further clearances from other regulatory bodies. Post a lawsuit filed by the U.S. Department of Justice (DOJ) in November 2017, the companies have further extended the closure date to Jun 21, 2018, to clear regulatory issues. This is the fourth instance when the termination date has been changed. If the proposed merger finally goes through, the combined entity will become a major player in the consolidated telecom-media space. The proposed merger with Time Warner will provide AT&T a portfolio of lucrative contents.

Meanwhile, AT&T is also forging ahead in the Internet of Things (IoT) space with its strategic partnerships and initiatives, which should allow it to boost the performance of its enterprise segment and also enhance service offerings. On Feb 26, 2017, AT&T announced a new agreement with Avnet Inc. to integrate AT&T’s Internet of Things (IoT) managed services with Avnet’s Global LTE IoT Starter Kit. We believe the new agreement will enable Avnet to scale up its business and enhance service offerings that garner significant market traction. The deal with China Mobile to enable IoT should help AT&T global business customers connect and deploy their assets and offerings in the Chinese market. The company has been signing agreements with industries like automotive, agriculture, energy, healthcare, aviation, security, supply chain logistics and transportation, thereby gaining a leading position in the space. AT&T now has over 28 million devices connected to its network. Moreover, the company is a leader in connected cars space and the company has completed a deal with Ford that it believes is going to connect at least 10 million cars over the next five years.

The firms, thus, apprehend that this could restrict incumbent players like AT&T from owning a substantial part of the spectrum, in turn, hurting its business prospects. Moreover, T-Mobile is constantly mounting pressure on AT&T with respect to wireless spectrum procurement. Recently, the company asked FCC to reject the purchase of low-band spectrum by AT&T from East Kentucky Network through a secondary market transaction.

In addition, for the successful completion of the deal, AT&T has made a few commitments to the FCC. Per the promises made, AT&T will provide its fiber-based Internet service to a minimum of 12.5 million locations. The company will also provide low-priced fixed broadband service to all low-income families who are eligible for the government's Supplemental Nutrition Assistance Program in all 21 states. The retail terms put forth for AT&T's fixed broadband Internet services will have little advantage for its own online video programming services. However, AT&T may continue the discounted integrated bundled services of video and high-speed Internet. Most importantly, AT&T will no longer challenge the Net Neutrality laws recently adopted by the FCC.

May 3, 2018

Target Price/Valuation

Provided below is a summary of target price/valuation:

|Rating Distribution |

|Positive |40.00%( |

|Neutral |60.00%↓ |

|Negative |0.0%↔ |

|Average Target Price |$40.05↓ |

|High Target Price |$54.00↔ |

|Low Target Price |$35.00↓ |

|No. of Analysts giving target price/Total |19/20 |

Risks to the target price include competition from cable and wireless operators, adverse regulatory decisions by the Federal Communications Commission (FCC) and at state level. Inability to refinance debt on favorable terms, eroding subscriber growth, continued access line losses, high capital spending requirements, labor relations, increasing pricing pressure, continued wireless and cable substitution, and securing access to more spectrum under reasonable terms are other such factors.

Recent Events

On Apr 25, 2018, AT&T announced 1Q18 financial results. Highlights are as follows:

▪ Adjusted earnings per share of 85 cents missed the Zacks Consensus Estimate of 87 cents in the reported quarter.

▪ Quarterly GAAP revenues were $38,038 million, missing the Zacks Consensus Estimate of $39,452 million.

On Mar 26, 2018, AT&T announced plans to roll out 60,000 white box routers over the next several years across its entire wireless network in the United States. The telco successfully completed its first live field trial with white box equipment on Mar 28, 2017. Disaggregated Network Operating System (dNOS) will be the network operating system for the white box routers. The white box routers will be coordinated using the Open Network Automation Platform (ONAP).

On Mar 12, 2018, AT&T announced plans to deploy Open Reconfigurable Optical Add/Drop Multiplexer (ROADM) and optical SDN initiatives to its live network. The deployment will be done using multiple vendors and an optical SDN controller integrated into AT&T’s Enhanced Control, Orchestration, Management and Policy (ECOMP) virtualization platform, the first of which will be done in Dallas.

On Mar 6, 2018, AT&T announced that in collaboration with Aira, it is developing and testing a solution designed to help people who are blind or have low vision better manage their prescription medication. The companies are working through the AT&T Foundry to develop the solution.

On Jan 31, 2018, AT&T announced the reportedly terminating ownership of multiple millimeter wave spectrum (mmWave) licenses gained from the acquisition of FiberTower in February 2017. The company is returning the licenses to the FCC. Since, millimeter wave spectrum is likely to play a major role in the deployment of 5G infrastructure, loss of millimeter wave spectrum licenses raises questions over AT&T's plans to offer standards-based mobile 5G services in U.S. markets.

Revenue

Consolidated revenues decreased 3.4% year over year to $38,038 million, primarily due to decline in legacy services, adverse impact of the transition of video from linear to over-the-top services and divesture of low-margin businesses. Revenues also missed the Zacks Consensus Estimate of $39,452 million.

Of the total, Services revenues were $33,646 million, down 7.7% year over year. Equipment revenues were $4,392 million, up 51%.

The details of the revenue segments are as follows:

Business Solutions (24.1% of total revenue in 1Q18): This segment provides wireless and wireline services to business as well as individual subscribers through employer-sponsored plans.

Total revenues were $9,185 million, down 5.2% year over year due to adoption of new accounting standards that deal with revenue recognition. Of this, Wireless service revenues totaled $1,791 million, down 10.6% year over year owing to the impact of revenue recognition and customer shifts to unlimited data plans. Wireless Equipment revenues totaled $578 million compared with $288 million in the prior-year quarter. Strategic services revenues were $3,138 million, up 5.5% due to solid performance in VPNs, Ethernet, cloud, hosting, IP conferencing, voice over IP, dedicated internet, IP broadband and security services. Legacy voice and data services contributed $2,839 million, declining 20% as customers moved to upgraded products. Other service & equipment generated $839 million, down 4.4%.

Entertainment and Internet Services (30.4%): This segment provides video, high-speed broadband and voice services to residential customers in the U.S. Notably, DIRECTV’s U.S. operations fall under this segment.

Total revenues grossed $11,577 million, down 8.1% year over year as performance of all businesses was relatively poor. Video entertainment revenues were $8,359 million, down 7.3% due to a decline in linear TV subscribers. High-Speed Internet revenues were $1,878 million, down 3.2% led by legacy DSL decline, simplified pricing and bundle discount. Legacy voice and data services contributed $819 million, down 20.6%. Equipment and Other service generated $521 million, down 14.4%.

Consumer Mobility (39.4%): This segment provides triple-play (voice, video and high-speed Internet) wireless service to consumer, wholesale and resale subscribers in the U.S. AT&T’s home monitoring service is part of this segment.

Total revenues were $14,986 million, up 1.2% year over year, driven by higher postpaid equipment sales (up 44.1% to $3,374 million), partially offset by lower postpaid service revenues (down 6.8% to $11,612 million).

International (5.3%): This segment comprises DIRECTV’s Latin American operations and AT&T’s business in Mexico. Notably, AT&T is currently expanding its operations in Mexico after its acquisitions of Grupo Iusacell and Nextel Mexico.

Total revenues were $2,025 million, up 5% year over year, owing to solid performance in Mexico. Video entertainment revenues were $1,354 million, up 1% while Wireless service revenues were $404 million, down 14.9% due to a shutdown of a wholesale business in fourth-quarter 2017. Wireless equipment revenues were $267 million, up 136.3% driven by higher market penetration.

Margins

According to the company press release, total operating expenses in 1Q18 were $31,837 million compared with $33,009 million in the prior-year quarter. Operating income was $6,201 million compared with $6,356 million in the year-ago quarter. EBITDA was 12,195 million compared with $12,483 million in the prior-year quarter.

Operating income for Business Solutions was $2,085 million compared with $2,187 million in the year-ago quarter largely due to decline in legacy services, higher FirstNet expenses and higher wireless sales costs. Operating margin was 22.7% compared with 22.6% in the prior-year quarter. EBITDA was $3,547 million compared with $3,652 million in the year-ago quarter, for respective margins of 38.6% and 37.7%.

Operating income for Entertainment Group was $1,326 million in the reported quarter compared with $1,576 million in the prior-year quarter, leading to respective margins of 11.5% and 12.5%. EBITDA was $2,638 million compared with $2,996 million in the year-ago quarter for respective margins of 22.8% and 23.8%. The year-over-year decrease in margins was primarily due to TV content-cost pressure, decline in legacy services, fewer linear subscribers and new video platform expenses.

Operating income for Consumer Mobility was $4,655 million, up 2.8% year over year for margins of 31.1% compared with 30.6% in the prior-year quarter. EBITDA was $6,462 million compared with $6,246 million in the year-ago quarter for respective margins of 43.1% and 42.2%. The year-over-year improvement in margins was largely due to higher volume and cost efficiencies.

Operating loss in International segment was $111 million compared with a loss of $120 million in the year-ago quarter due to continued investment in customer acquisition and higher depreciation. EBITDA was $221 million compared with $170 million in the year-ago quarter for respective margins of 10.9% and 8.8%, largely driven by continued margin expansion in Latin America.

Earnings

On a GAAP basis, AT&T reported net income of $4,662 million or 75 cents per share compared with $3,469 million or 56 cents per share in the year-ago quarter. Excluding non-recurring items, adjusted earnings were 85 cents per share compared with 74 cents in the year-earlier quarter. The figure, however, missed the Zacks Consensus Estimate of 87 cents.

Outlook

For 2018, AT&T reiterated its earlier guidance of adjusted earnings of $3.50 per share with free cash flow of about $21 billion. Notably, the company keeps on generating sufficient cash through monetization of assets and remains committed to shareholders return via dividend payment and share repurchases.

May 3, 2018

|Research Analyst |Supriyo Bose |

|Copy Editor | |

|Content Ed. | |

|QCA | Supriyo Bose |

|No. of brokers reported/Total brokers |19/20 |

|Reason for Update |1Q18 Earnings |

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Zacks Investment Research Page 7

May 3, 2018

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