Operator:

Welcome to AT&T's Second Quarter 2024 Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference call over to your host, Brett Feldman, Senior Vice President of Finance and Investor Relations. Please go ahead.

John Stankey:

Thank you, Brett. I appreciate you joining the call. Hard to believe we are already halfway through the year, but we are and our team delivered solid second quarter results as we continue to grow the right way by efficiently adding high-value wireless and broadband subscribers. Our strong start to the year is built on the foundation of what our team has accomplished over the past four years. As a result of this hard work, we're now repositioned around our connectivity strengths. This puts us on a clear path to becoming the leading provider of converged 5G and fiber services. Since Pascal will go through the quarter in detail, I'd like to spend some time highlighting how our team's execution of our investment-led strategy is driving consistent results. In Mobility, we delivered 419,000 postpaid phone net adds in the second quarter and 768,000 during the first half of the year. This put us modestly ahead of last year's pace despite ongoing wireless market normalization. And we're not just growing customers. Our Mobility EBITDA grew by more than 5% in the second quarter, driven by more than 3% growth in service revenue and 100 basis points of service margin expansion. We're delivering consistent results by keeping the customer at the center of everything we do. It's a winning play that we continue to run. The efficient first-half growth we achieved in our Mobility business positions us well for the back half of the year when we expect higher activity levels driven by the availability of new devices and features, seasonal purchasing activity, and promotional cycles. In Consumer Wireline, we added broadband subscribers for the fourth consecutive quarter, driven by consistent growth in AT&T Fiber and early success with AT&T Internet Air. Once again, this story is about growing both customers and profitability as our Consumer Wireline business delivered more than 7% EBITDA growth during the second quarter. This was driven by approximately 18% growth in fiber revenues and improved operating leverage as we transition from legacy networks to advanced broadband infrastructure. While some portions of our business are still being pressured as customers transition off legacy voice and data services, our significant investment in 5G and fiber and consistent execution is driving durable growth across the large majority of our business. I expect this performance to continue, putting us on track to deliver on our full-year financial guidance. The durable trends in 5G and fiber are being driven by more than the solid individual execution within each business. We believe the success of our fiber business is driving growth in mobility and vice-versa as consumers increasingly prefer to purchase mobility and broadband together as a converged service. For example, today, nearly four out of every 10 AT&T Fiber households also choose AT&T as their wireless provider. As a result, our share of postpaid phone subscribers within the AT&T Fiber footprint is about 500 basis points higher than our national average. In our fiber business, we continue to achieve key penetration milestones faster than we anticipated and considerably faster than the fiber providers that do not operate wireless networks based on publicly available data. A key reason for the strong performance is our ability to sell fiber to our mobile customers. Additionally, we're able to reach new broadband customers through our substantial mobile distribution channels. The key point here is that our proven ability to drive higher share in both mobility and broadband through converged service penetration is the true benefit of owning and operating both 5G and fiber networks at scale. Over time, we expect this to drive greater returns on invested capital in both our mobility and broadband businesses than either would be expected to achieve as standalone operations. While our convergent strategy began with a focus on our owned fiber footprint, we also see attractive opportunities to expand the availability of AT&T Fiber, and our converged offers outside of it. This includes the continued scaling of our Gigapower joint venture and through capital-light arrangements with other providers of commercial open-access fiber networks. We expect the continued expansion of AT&T Fiber, both in-footprint and outside of it will enable us to drive significant growth with converged customers. Ultimately, our convergence strategy closely aligns with our primary focus over the last four years, growing in a durable, sustainable and efficient way. We still have a lot to accomplish as we execute this strategy, but I am encouraged by our momentum and see a long runway of growth with 5G and fiber together. More importantly, I like the distance between us and our competitive set with respect to our positioning to organically address more customers more profitably. Our commitment to our investment-led strategy has played a pivotal role in our success and made AT&T the largest capital investor in the U.S. connectivity infrastructure since 2019. In addition to our ongoing network investment, we continue to reduce our net debt and leverage due to a combination of higher EBITDA and growing free cash flow. We expect these trends to continue and remain on pace to meet our target of net-debt-to-adjusted EBITDA in the 2.5 times range in the first half of next year. This should provide us with greater financial flexibility to support sustained investment in growth, as well as enhanced shareholder returns. We're excited about what all this means for the future of AT&T. And given that our direction remains constant and our performance consistent, I'm going to avoid belaboring what we've been discussing for a number of quarters now. I turn it over to Pascal. Pascal?

Brett Feldman:

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

John Hodulik:

Great. Thanks, guys. A couple if I could. First, John, you talked about higher activity levels in the second half in wireless, and obviously, there's a lot of concern about upgrade rates with the new iPhone. I mean, are the comments that you made just a function of sort of typical seasonality, are you expecting sort of a new upgrade sort of initiative? And what does that mean? If so, what does that mean for the levels of churn we've been seeing in profitability and sort of overall competition in the space? That's number one. And then number two, you had some comments about Gigapower and the potential open-access relationships. As it relates to Gigapower, any color you can give us on how that relationship or partnership is doing in terms of rollout and customer uptake? And then is there room for more of these relationships with other third-party open access providers? Are you talking to anyone else and how big could that opportunity be? Thanks.

Pascal Desroches:

You know, John, I would just add one thing. When you look at our performance for the overall Company as well as Mobility, we are running ahead halfway through the year of the full-year guidance that we gave. And so whatever the environment is, I feel like we are incredibly well-positioned for it.

John Hodulik:

Thanks, gentlemen.

Operator:

Our next question comes from Simon Flannery of Morgan Stanley. Please go ahead.

John Stankey:

Good morning, Simon. On ACP, I think we indicated to you probably last quarter, maybe even the quarter before.

John Stankey:

Yes, that we would be effective at working through this. We didn't see it as being material or significant. And I characterize that we saw no reason we continue to be able to deliver on our commitments back to you. And that is in fact happening and will happen. We are most of the way through the ACP effect. Has there been an effect, sure, a little bit. It's not the sole reason we're a little bit down on fixed broadband this quarter. There's other reasons moves are continuing to be a bit suppressed is one of them. Seasonally, second quarter tends to be down a bit. But we had a little bit of an impact because of some adjustments that were made going through that. But the vast majority of our customers, most importantly, we know who these customers are, right, because we know that they're getting the discount are through a transition process and we feel fine about it. I'm pretty proud and pleased with how our prepaid business performed this quarter. It had some impacts from ACP associated with it. But I think if you look at where we were with churn and where we were with gross adds and net adds in that space, I think we came through it and demonstrated that we had good-quality customers who still need to use the service one way or the other and we've accommodated them. So we still got a couple of people hanging out there on some what I will call transitional promotions. I expect that there'll be a little bit of shrink in some of those transitional promotions. They're all following our expectations as we calculated what we thought the impacts are going to be. They're all consistent with the guidance that we have been giving you. So I wish we hadn't had to go through this with our customer base. We did, but I think we've handled it well and we're largely through the impacts at this juncture and moving on to do other good growth. In terms of where we are, we've been very clear that we'll give you kind of an update on our capital allocation strategy as we approach this 2.5 times adjusted net debt to EBITDA ratio in the first half of next year. I would expect that as we go through our normal cycle toward the end of the year here as we start to give guidance for next year, you'll get what you need in terms of moving forward. And I don't think there's going to be any shocks in this. Our priorities remain the same. We want to make sure we can continue to grow the business. That's first and foremost. I want to leave a business to whoever sits in my chair later that has a good strong sustainable franchise that can be healthy and that the next generation of individuals that work at this Company feel confident and proud about where the Company is going to go. And we'll invest in a way that we make sure that we have that capability and that kind of a franchise built. Then of course, we want to continue to maintain our commitments to our bondholders and our dividend, and those are what I would say the top three. But as you know, we'll have some optionality to go beyond that as we get into next year. And I think we'll be very deliberate about that. The Board is being very deliberate about it right now. We're spending multiple cycles on it. We're spending a lot of time looking at scenarios. I think we'll continue to invest in growth in this business at some level in some way, but I also believe we have optionality to change our formula around how we return to shareholders. And I think you'll see us employ the right approach to that.

Operator:

Our next question will come from the line of Jim Schneider of Goldman Sachs. Please go ahead.

John Stankey:

Hi, good morning, Jim. So our fiber targets as Simon alluded to earlier, it's 30 million passings by next year. And we're well on our way to doing that, and you can check the box if that's going to occur. And as I just said, I expect that with what we've been seeing and the performance of fiber, and I've been pretty clear about this for our in-region organically developed and built fiber, our returns on the overall investment portfolio have been better than we expected when we kind of started into this process in the call it the 2014-'15 timeframe. And we're giving you some additional insight this quarter as you now understand what some of the strengths are as we get into these markets where we begin to have some scale in the fiber footprint that we can jointly market, both wireless and fixed together. So that's a really powerful combination for us. And that return characteristic, I would say is still call it in the early innings. We still have a ways to go. As you saw by the numbers we put out there, it's great progress. It's clearly, I think probably the strongest in the industry, but there's still a lot of headroom in there. And I think to the extent that we fine-tune that play and we begin to bring in some of the product innovation that we want that's joint between these things and the service innovation, we can do even better and improve that return. Hence, you know my comment to Simon's or my answer to Simon's question, do I think we're going to continue to invest in growth moving forward and move beyond 30 million passings? I think the answer to that is probably exactly what that number is in pace. We'll give you a little bit more color as we get into the latter part of this year and make sure that we've got the Board 100% where we -- we're all in the same mindset around that. And as I said, we're going through that process right now to make sure we're deliberate. I think one of the things that you should keep in mind as we go through that is what I said to John. We have a lot of tools of which we can go in and put a good converged offer in place and a lot of ways to do it. And I think because our financial returns have been as strong as they are, there's a lot of capital out there available and people want to enable partner and there's a lot of ways we can go about doing this, whether that's through capital-light approaches with straight wholesale and becoming a good partner to others that are building or doing partnership arrangements or doing organic build. And I think we're going to take advantage of all three and we can do that in a way that drives really good returns back into the business that everybody looks at and says that makes a lot of sense. In terms of where we are on the Internet Air run rate, you should expect that we're going to continue to grow and you'll see improvements in our rates associated with that. But I don't want you to take that and say that that's an artifact of a change in strategy. We are executing the strategy we put out. And again, I don't want to sound like a broken record, but I've articulated that our strategy is a bit different than others. We're not broadly offering Internet Air everywhere we do business. We're being selective in how we do that. We're doing it in places where it makes sense to aid our transition from legacy technology to new technology that helps us take cost out of the business. We're doing it in places where we have very fallow capacity that we can be confident will be long-lived in nature and not something that we end up having to incrementally invest in two years out after we sell into the market. We're doing it, as I said last quarter, any place the right business customer wants to buy it will sell it. And that means whether we've got capacity or not, the business product is a different product. The business product has different usage characteristics. The business product has different ARPU characteristics and the business product has different characteristics around how you can bundle and serve multiple products together. And so I feel very comfortable in a nationwide offer on business that when we pick up the right customer there and how we employ that capability, either for primary or backup that we can profitably add it to other portfolios into our service offerings and reinvest in it in a way that makes sense for the business. So you'll continue to see us scale further in the business market. We're still getting the distribution tuned and honed in that space, and I would expect you see improvement in our numbers in the business segment as we move forward in the coming quarters.

Brett Feldman:

Are you ready for the next question, operator?

David Barden:

Hi, guys. Thanks so much for taking the questions. John, I wanted to maybe go back to something you just said, which was that there's a race to convergence in the market. And I think that not everyone agrees that that's a true statement, that maybe it's more of a race for AT&T to exploit the opportunity it has in its footprint to converge as much as possible. You mentioned that you've got a 500 basis point market-share advantage in the areas where you've deployed fiber. Could you kind of share more data that would support your argument that there should be a race to convergence that AT&T is in a unique position to take advantage of these economics beyond simply market share? And then if I could, the second question would be there's been a series of events over the course of the year, network outages, data breaches, disclosures about previous data breaches. Is there anything that we need to know about how that's impacting either your go-to-market or the possibility of future financials? Thank you.

David Barden:

Thanks, John.

Operator:

Our next question comes from the line of Sebastiano Petti of JPMorgan. Please go ahead.

Pascal Desroches:

Hi, Sebastiano. In terms of the payment we expect to make is we've said -- we reported late last year that we were entering into a new agreement and that as part of that, we'd be phasing out one of these -- one of one of our vendors. And we expected some level of determination payment associated with that. And whether or not that was contemplated in our guidance, I'm not going to get into but we are very comfortable sitting here today that we are going to be able to pay that and still deliver on our full-year commitments.

Brett Feldman:

I think we're ready for our next question, operator.

Michael Rollins:

Thanks and good morning. Two topics, if I could. First, on Mobility, just curious if you could further unpack where the strength in the postpaid phone net adds came from during the quarter, and if you're seeing any changes in the competitive landscape with some of the adjustments to the promotional strategies from some of the cable and M&O competitors? And second, on the cost structure, curious if you could share your progress on the multi-year cost-cutting targets, and how you're looking at the durability for EBITDA growth on a consolidated basis to potentially outpace the consolidated service revenue performance. Thanks.

Brett Feldman:

All right, operator, we have time for one more question.

Bryan Kraft:

Thanks. Good morning. I have a question just on the industry. Investors are growing concerned over the potential for a volume slowdown in the wireless industry, and also that perhaps the industry has taken as much pricing power as it can for a while, leaving minimal room for further pricing actions. I just want to ask, what are you seeing in the market as it relates to these issues? Do you share any of these concerns on either volumes or pricing power? Thank you.

John Stankey:

So thank you for your time and thank you for your interest in AT&T, and I hope everybody enjoys the balance of their summer.

Operator:

Ladies and gentlemen, that does conclude our conference call for today. On behalf of today's panel, we'd like to thank you for your participation in today's teleconference call, and have a wonderful day. You may now disconnect.

Operator:

[Call Starts Abruptly] 2024 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Following the presentation, the call will be opened for questions. [Operator Instructions] And as a reminder, this conference call is being recorded. I would like to turn the conference call over to your host, Brett Feldman, Senior Vice President, Finance and Investor Relations. Please go ahead.

John Stankey:

Thanks, Brett. I appreciate you all joining us this morning. We started the year with a solid first quarter, as we continue to make steady progress on our investment-led strategy, being the best connectivity provider through 5G and fiber. We're growing the right way by adding valuable long-term wireless and broadband subscribers. Since Pascal will cover first quarter results in detail, I'd like to spend some time highlighting how our strategic priorities are enabling us to deliver positive results and build a long runway for sustainable growth. When you look under the hood, it's clear that our largest and most powerful EBITDA growth engine mobility is running well. Our strength and value proposition help us deliver 349,000 postpaid phone net adds in the first quarter. We now have about 71.6 million high value postpaid phone subscribers, which is up 1.5 million from a year ago, and these aren't empty calorie additions. Our results reflect the quality of our customer growth with higher ARPU, higher adjusted operating income, improved margins and lower postpaid churn. We're also growing efficiently, thanks to our consistent and simple go-to market strategy. Our postpaid phone churn of 0.72% was our lowest first quarter churn ever on record. And once again, we expect to report the lowest postpaid phone churn among the major service providers this quarter. This highlights the value customers place on the wireless service we provide and the continued strength of our best deals for everyone's strategy. Now let's move to fiber, which is our fastest growing engine. The story here is familiar and one we like. Where we have fiber, we win, and we're bringing fiber to more Americans than anyone else. Since the first quarter of last year, we passed about 2.4 million locations with fiber and now passed more than 27 million consumer and business locations. Over the last year, we grew our AT&T fiber consumer subscriber base by about 1.1 million to nearly 8.6 million customers. This includes 252,000 AT&T fiber net additions in the first quarter. As a result of our established fiber success in early AT&T Internet Air subscriber growth, we've grown our consumer broadband subscriber base for three consecutive quarters, and we expect this trend to continue. We're even more excited about the converging power of 5G and fiber together, where we have AT&T Fiber, our strong national 5G wireless brand provides us the opportunity to be customers single converged provider seamlessly connecting them both in the home and on the go. We're able to deliver convergence at a level that none of our peers can match, as we're the only provider that benefits from owners' economics and scale with both 5G and fiber. This all matters because convergence presents clear benefits. When a customer has both our wireless and fiber products, we see a meaningful improvement in churn and net promoter scores. This ultimately translates to much higher lifetime values for converged customers. We are also making great progress on ensuring more Americans have access to high-speed Internet. Just this month, we expanded our commitment to $5 billion over this decade to help bridge the digital divide in our country. We've already contributed to connecting approximately 5 million Americans, and our goal is to help connect 25 million people in total by 2030. We believe that connecting changes everything and that we must collectively address the communications capabilities of our country's needs for the next century not the last one. To make this happen, we need sound policy, that's done, right, and our teams are working hard to make that happen. The future of connectivity is critical to advancing our society. That's why we're focused on growing and evolving our networks. As a result of these efforts the areas, where we're investing most heavily through 5G and fiber are performing very well. For a perspective, in 2023, mobility and consumer wireline together represented more than 80% of revenue and about 85% of EBITDA in our communications segment. This means, we're growing the large majority of our business and driving improved operating leverage across it. We expect this to continue. However, we still have legacy elements of our business that we're in the midst of transitioning, particularly in business wireline. In the quarter, business wireline EBITDA was down 16.5%, as the industrywide secular decline of legacy voice continues. While the wholesale market is stabilized, the reality is that businesses are transitioning to mobile and cloud-based services at an accelerated rate, as post pandemic workplace restructuring takes hold. We see the benefits from this connectivity transition in business solutions, where wireless service revenues grew 4.6% in the first quarter, outpacing our overall mobility services revenue growth. While we continue to actively work our legacy transition strategies to end of life products, reduce our operating footprint and eliminate fixed costs, we're advancing several cost savings and productivity initiatives to align with this reality, such as vendor and management workforce rationalization. We also strongly believe that the future focused area of business solutions aligns well with our core connectivity competencies and we continue to build out a connectivity portfolio with real long-term growth opportunity. Take FirstNet. This prioritized service for first responders shows what we're able to accomplish when we focus on growing our business in areas, where we have traditionally under indexed. Additionally, our continued 5G and fiber expansion will enable new growth when paired with broader distribution. We have relationships with nearly 2.5 million business customers today and an opportunity to win with more small to medium sized businesses. One way we intend to meet small and medium businesses connectivity needs is with our new fixed wireless service, AT&T Internet Air for business. We believe this is a durable national play with business because it's able to serve as a reliable 5G powered primary Internet Connection, where fiber is not available in remote locations when temporary access is needed or with small and medium businesses that don't require always on video streaming. While it's still early, we've been very pleased with the solid demand we're seeing from businesses. Given our success, growing core connectivity, we're focused on furthering the AT&T value proposition in ways that matter to our business customers and security is at the top of their list. That's why we introduced AT&T Dynamic Defense, which provides built-in security controls on top of worldclass access. The takeaway is that we're well positioned to capitalize on emerging connectivity opportunities with businesses thanks to the strong relationships we have with almost all the Fortune 1000 and our leading position in fiber and the fact we operate the largest wireless network in the US. Our business wireline operations transformation will not be a linear process and we're going through the heaviest lift right now. However, our strong momentum across our growth areas of mobility and broadband is allowing us to outpace legacy declines and drive positive consolidated results and we remain on track to deliver on all the consolidated financial guidance we shared in January. Now let's spend a moment on our second priority of being effective and efficient in everything we do. Last year, we set a new target for an incremental $2 billion plus in run rate cost savings by mid-2026. This came on top of the $6 billion plus run rate cost savings target we achieved last year. The continued adoption of AI is not only helping us make progress on this goal, but also benefiting our employee and customer experiences. This focus on efficiency is translating into improved operating leverage despite continued elevated inflation. You can see this in our cash operating expenses, which were down year-over-year in the first quarter contributing to adjusted EBITDA margin expansion of 170 basis points. This brings me to our final priority, which is our deliberate and balanced approach to capital allocation. As we indicated would happen, our capital investment levels have come down year-over-year, as we move past the peak of our 5G rollout. Still, we remain a top investor in America's connectivity and continued to expand fiber at a steady pace. Even with this continued investment, we delivered first quarter free cash flow of $3.1 billion compared to $1 billion a year ago. This aligns with the expectations we shared for more ratable quarterly free cash flow, which we've accomplished by efficiently growing EBITDA, improving cash conversion and reducing our short-term financing balances. Our strong free cash flow has also enabled us to pay down debt. We finished the first quarter with net debt to adjusted EBITDA of 2.9 times and continue to expect to reach our target in the 2.5 times range in the first half of 2025. So it's clear we're operating well against our business priorities, and as a result, we're growing share with 5G and fiber. In mobility, we've been increasing our share of wireless service revenue growth even without the benefit of fixed wireless, which is reported in consumer wireline. We also expect that this will be the 11th time in the last 13 quarters, where we deliver the industry's lowest postpaid phone churn. In consumer wireline, we're outpacing cable, as we add broadband customers. This is driven by AT&T fiber, which is consistently captured over one-third of broadband net adds across major providers for the past three years. So, in summary, across the services and technologies most important to the future, 5G and fiber were performing well and growing our share in a healthy industry environment. This gives me confidence in our strategy and tells me our team is making solid progress on our priorities. With that, I'll turn it over to Pascal. Pascal?

Brett Feldman:

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

Simon Flannery:

Great. Thank you very much. Good morning. Good to hear the reiteration of the 2.5 leverage target for early next year. It would be great if you could just go through how you're thinking about the various capital allocation alternatives, buybacks, dividend growth, deleveraging, the 10 million to 15 million fiber adds BEAD investments. Any other considerations? And how we should think about the profile, presumably this time, next year, we will be having a more fulsome conversation. But anything more you could add around that would be great. And then just housekeeping on the outage. Maybe you could just size the credit for us? And was there any impact on net adds in the quarter? Thanks.

Simon Flannery:

Good morning.

Simon Flannery:

Excellent. Anything on BEAD? Yeah.

John Stankey:

Nothing that I think you know as I said last quarter, Simon, I think BEAD is a 2025 issue. It's not a 2024 issue. It doesn't feel like it's moving in any particular way. All that fast at the state level. And as I've also indicated, it's pretty clear to me that there's places, where we're going to be more energized about playing and places, where we're going to be less energized about playing based on how various states are approaching this. And I don't think there's anything right now, I can tell you point blank, we won't be coming back in with any revisions to our guidance or anything like that, that is relevant to 2024. I think as we through this year, there may be some incremental things that we talk about in 2025 in terms of how we choose to reinvest capital and where we choose to go. But it's not anything that I see right now that's front and center.

Brett Feldman:

All right. We'll take our next question now, operator.

John Hodulik:

Hey, thanks, again. Good morning, guys. First, it's sort of a follow-up to Simon's question on the data breach. That's a sort of a second quarter issue, but just want to make sure to see if there's any impact that you saw early in the quarter from the data breach. And then certainly, one of the themes that we're seeing here in the first quarter is the low upgrades and low churn environment. Do you expect that to continue despite the fact that we may have a sort of AI device launch later this year? And does that low churn environment give the industry and AT&T, in particular, pricing power as you look into the rest of the year? Thanks.

John Hodulik:

Great. Thanks, John.

Operator:

Peter Supino of Wolfe Research. Please go ahead.

Pascal Desroches:

Hey, Peter, Pascal. How are you? In terms of EBIT and you're talking about operating income, that's inclusive of the depreciation, correct?

Pascal Desroches:

Remember, we guided that as a result of the Ericsson Open RAN deal, we would have accelerated depreciation associated with some of the equipment that was previously in our network that we were going to depreciate over shorter lines. That's a dynamic you're seeing come through there. I feel really good about the overall expense management and overall cost profile and you see that coming through in our EBITDA margin expansion in that business.

Peter Supino:

Understood. Thank you.

Operator:

Bryan Kraft of Deutsche Bank. Please go ahead.

John Stankey:

Good morning, Bryan. You've answered your question. It's intentional with the strategy. I'm more than happy to take gross in places, where I think I can drive gross profitably. And I think in some cases, we have to think about how much people are paying for growth, and then we also have to think about gross and we have to think about whether or not that gross really has yield on it, if it's what the end user is paying ultimately when they come on a network. And so, I think some of the numbers ultimately are what I refer to in my opening remarks, a bit low calorie. I don't really want to play in the low calorie space. I want to make sure I'm getting my fair share of the high calorie subscribers, and that's why we're focused on share of service revenues as maybe being a better benchmark of is the company balancing its growth in the right way? And when you think about how we balance our budget and what we do internally is we're pretty rigorous around asking ourselves those questions and the segments we attack, how we go after and the longevity. And look churn's a key driver when you're investing for that growth. And I'll take lower churn all the time. I don't think that's a bad sign necessarily. I'm perfectly okay with where we stand on that front. We've talked previously, Bryan, that one of the things I like about where we've been in the market and that I think is, frankly, sustainable probably 1.5 years ago or 2 years ago, most of the questions on this call is where's the growth coming from? And I kept saying the growth was balanced. It's coming from a lot of different segments. We're seeing it come from different parts of the business community, and we're giving you the fact that our business growth has been strong. We like what we're picking up in the residential environment, in the consumer environment, and where we see our growth coming from there in terms of what we're taking. So we have a pretty balanced approach to our distribution right now that I think that diversity is helpful. It diversifies our portfolio. It diversifies the base. And that's one of the reasons why the churn numbers are as strong as they are.

Brett Feldman:

Operator, we're ready for the next question?

David Barden:

Hey, guys, thanks so much for taking the question. I guess, first, a follow-up question, if I could. John, thank you for your comments about kind of having digested the impact of the outage, but the postpaid phone ARPU was obviously down about a little over 1% in the quarter, and I'm assuming at least some, if not all, of that had to do with the credit and the GAAP accounting for that. And so, I was wondering if we could get a -- maybe Pascal, a jumping off point from where ARPU really is if we normalize for that credit. And then second, another kind of housekeeping question is, with the sale of Sky Mexico back to, I think Televisa, what happens now? Like how does that affect the reporting, as we think about the rest of the year? Thank you.

John Stankey:

Sky Mexico.

John Stankey:

It's a non-event.

David Barden:

Great. And then just one follow-up, if I could. Pascal, you said that we should expect a 20% rate of kind of run rate decline in DTV cash contributions on an annual basis, on a kind of go-forward basis? Is that the?

Operator:

[Operator Instructions]

David Barden:

I'm here. I'm listening.

David Barden:

All of it.

David Barden:

Appreciate it, guys. Thank you so much.

Operator:

Michael Rollins of Citi. Please go ahead.

Pascal Desroches:

Okay. Mike, thank you for the question. Good morning. So first, as it relates to our segment level guidance, one, relative to the start of the year, as I noted in my comments, I anticipate business wireline will be a little bit worse than we thought, principally because of an acceleration of legacy voice decline. So putting that down in the mid-teens. But look you saw the strong start to both our mobility business including the record low churn. And consumer wireline, I mean, we delivered over 14% of EBITDA growth. And the dynamics for both, we would anticipate -- what you saw in Q1, we would anticipate being there for the balance of this year. Those businesses are operating really well. The transformation work, we've done the last few years is really setting us up to have margin expansion in those businesses, and we feel really good about the trajectory of those two businesses. Business wireline is, at an earlier point, in the product transition. And while we are growing fiber revenues, and as John mentioned, AT&T Internet Air for business, that's going to grow. And of course, the wireless business relationships will also grow, but those will be offset by legacy declines and we're confident we can manage through that in the balance of the year and still deliver on around 3%.

Brett Feldman:

Great. Thanks, Mike. We'll go ahead for the next question.

Sebastiano Petti:

Thank you. A couple of quick housekeeping questions. John, I think you talked about the balance growth on the mobility side. You have cited those are some underpenetrated segments. I was hoping you can give us an update on the opportunity there, I think SMB value and fiber selling on the mobility side. When do you expect to see some of the share gains, I guess, within some of these segments? Is that more of a -- is that -- could we see that within '24? Does that take some time to build '25 and beyond? And then on the business wireline side, I think, obviously, some focus there on the EBITDA trajectory, but you mentioned you are accelerating some cost cutting initiatives. Would that be within the context of the $2 billion cost cutting program? Or should we maybe think of these as additive to that program? Thank you.

Sebastiano Petti:

Following up quickly, just on Mike's question about the ACP. Obviously, access from AT&T program was a portion within the commitment that you made earlier in the month. Do you see this as an opportunity to leaning in perhaps on access from AT&T as an opportunity to gain some share from ACP subs, who may be churning from peers? Or do you see this is an opportunity to lean in a little bit into the low-income segments to drive greater adoption of broadband over time?

Brett Feldman:

Operator, we're going to take our next question.

Frank Louthan:

Great. Thank you. I want to delve in on the business side. First, can you give us your overall read on the economy and your outlook there? And then, secondly, what is sort of the endgame on the business wireline side? It continues to kind of decline. Is there a bottom there? And can you give us maybe a split between what's left in that revenue that's voice versus other data services to get an idea of where the weakness might be? Thanks.

Brett Feldman:

All right. Operator, we have time for one last question.

Walter Piecyk:

Thanks. John, I just want to get your kind of refreshed views on the fixed wireless market. If you look at Verizon, they've added a percentage point of overall wireless growth using fixed wireless. T-Mobile has added, I think, 160 basis points. We're seeing advertisements for, I guess, I think what you call free air or something like that. What do you think in terms of the growth opportunity here? And if you were able to get some additional spectrum or maybe even with your existing spectrum, as you've seen the usage from some of your early learnings, can this be as broad of an opportunity for you as it's been for Verizon and T-Mobile?

Brett Feldman:

All right. Well, thank you, everyone, for joining us. Operator, you can go ahead and close out the call.

Operator:

Thank you for standing by. Welcome to AT&T's Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Following the presentation, the call will be opened for questions. [Operator Instructions] And as a reminder, this conference is being recorded. I would like to turn the conference call over to your host, Amir Rozwadowski, Senior Vice President of Finance and Investor Relations. Please go ahead, sir.

John Stankey:

Thanks, Amir. I appreciate you all joining us today and my best wishes for a productive and healthy year ahead to all of you. We finished 2023 with a strong fourth quarter as we made substantial progress on our strategy of being America's best high performance network provider. We showed again in the fourth quarter and throughout 2023 that we're delivering consistent, positive operating and financial results, including sustained margin expansion and annual free cash flow growth. To do this, we work to grow the right way, invest at historic levels in best-in-class 5G and fiber assets, and deliver the best network to more customers in more places, all while simplifying our operations to drive efficiency while enhancing the customer experience. As a result, we're now positioned to provide our growing customer base with the best communications technologies to meet their ever growing need for connectivity supporting sustainable growth. We are deliberately allocating capital to expand and enhance our networks and improve financial flexibility to drive incremental shareholder returns. Since Pascal will cover the fourth quarter results in detail later on, I'd like to highlight some of our full year accomplishments and long-term business trends. Let's start with wireless. For the full year, we delivered more than 1.7 million postpaid phone net additions with strong service revenue growth and continued historically low postpaid phone churn, all while maintaining healthy ARPUs. Taking a step back, it's clear how far our investment-led strategy has taken us from where we stood only three years ago. Since the start of 2021, we've substantially improved our mobility position and brand perception. We went from losing wireless share to growing our share of subscribers. As a result, we increased our postpaid phone base by more than 10% to more than 71.2 million subscribers. This represents our best three year stretch of postpaid phone net add growth in more than a decade. During the same three year time span, we've added to our share of industry wireless service revenue growth, increased our annual wireless service revenues by more than $7.5 billion, and grew mobility EBITDA by about $4 billion. This level of sustained success requires contributions from across the company, including our network team that continues to enhance and expand our 5G and fiber networks. Our mid-band 5G network is now available to more than 210 million people, offering faster speeds and an enhanced experience. We're also bringing more fiber to Americans than anyone else. This excites me because where we build fiber, we win. Over the past three years, we went from passing about 18 million consumer and business locations to now passing more than 26 million locations. As we continue to expand our reach, we're growing our fiber base. With 1.1 million AT&T fiber net adds in 2023, we've generated more than 1 million AT&T fiber net adds annually for six straight years. Over the past three years, we've grown AT&T fiber subscribers by 3.4 million or by nearly 70% to more than 8.3 million. This success reflects new customer wins and lower churn, trends that we see as sustainable. The financial benefits we continue to realize through our fiber focus are significant. Compared to 2020, we've more than doubled our fiber revenues to over $6.2 billion in 2023, and our broadband ARPU climbed more than 20% as customers continue to seek higher value plans with faster speeds. In addition to delivering high margin revenue growth, fiber is more energy efficient, requires less maintenance, and customers keep the service longer. Therefore, as we scale our fiber footprint, we expect to continue to drive margin expansion. This flywheel of faster subscriber growth, higher revenues, and expanding margins gives us confidence in our ability to repeat similar levels of fiber fuel growth in the future. In summary, our mobility and consumer wireline businesses are growing in a sustainable fashion. We're now a highly competitive wireless brand and the leading fiber brand. We've increased customer satisfaction, improved networks and are the best positioned to drive long-term returns as the convergence trend develops. Now let's shift to our second goal of improving efficiencies. Last July, we announced we achieved our $6 billion plus run rate cost savings target well ahead of schedule. We then set a new target for an incremental $2 billion plus in run rate cost savings by mid-2026. We're making strong early progress on this target. Importantly, we're seeing the benefits from these cost reduction efforts increasingly fall to the bottom line. This is translating into improved operating leverage, as evidenced by the adjusted EBITDA margin expansion we delivered in 2023. Going forward, we expect margin expansion to continue. I'm proud of the progress the team has made in streamlining our business. We now have further confidence in our ability to deliver on our promised goals. Turning to our last key priority. The benefits from our capital allocation strategy are meaningful and evident in our results. We were again a top investor in America's connectivity through our 5G and fiber networks in 2023. Even with our elevated levels of investment, we delivered better than expected full year free cash flow of $16.8 billion, which is above our previously raised guidance. Furthermore, we achieved this significantly higher free cash flow while simultaneously reducing our short-term obligations. We reduced our vendor financing obligations by $3.3 billion in 2023, all while making more than $2 billion of non-recurring spectrum clearing payments. With a year end net debt to adjusted EBITDA ratio now below 3 times, and the improved flexibility in 2024 to dedicate more cash to debt reduction, we are confident in our path to achieve the 2.5 times range in the first half of 2025. So overall, I'm proud of what our teams accomplished in 2023. Our strong fourth quarter to end the year accomplished all of our stated 2023 objectives. We replicated our success in 2022 again in 2023, exactly like we said we would. Moving to 2024, it should be no surprise that our plan is to do it again. Again, here's how we'll build off our momentum in the year ahead. In mobility, we expect to continue our success with adding quality customers on the strength of our go-to-market approach and elevated customer value proposition. We also intend to improve our performance by targeting underpenetrated segments like value oriented customers and small to medium sized businesses as well as better penetrating our expanding fiber customer base. As we do this, we'll take the same disciplined approach by remaining steadfast on profitable growth. Where we build fiber, customers love the value and service we offer, and accordingly, we become the favorite to win. We'll continue to extend our lead as the company that reaches more homes and businesses with fiber. We remain on track to pass our 30 million plus consumer and business fiber location target by the end of 2025. As I mentioned last month, the better than expected returns we are seeing on our fiber investments potentially expands the opportunity to go beyond our initial target by roughly 10 million to 15 million additional locations. This also assumes similar build parameters and a regulatory environment that remains attractive to building infrastructure. And in areas where we don't yet have fiber, AT&T Internet Air allows us to better serve customers in select markets with fixed wireless Internet access. We also expect 2024 to be the prove-it year for our Gigapower initiative, and we plan to explore other unique opportunities to extend the AT&T brand on a converged basis beyond our traditional footprint. The good news is that no one is better suited to answer the call for converged connectivity than AT&T. We already have North America's largest wireless network and the nation's largest and fastest growing fiber network. There is simply no debate that 5G and fiber are hands down the best connectivity technologies available and we are the only provider that benefits from owners' economics at scale on both technologies. Why is this so important? Traffic on our network has continued to increase in excess of 30% each year over the past three years. Our position with the most pervasive U.S. fiber footprint, the largest wireless network, puts us in the unique position to grow at an advantaged marginal cost structure. At AT&T, we're making the right moves to deliver high performance converged networking at a scale and breadth second to none in the United States. We're doing this by continuing our investment in scaled, flexible, and an increasingly open networks that address customers' needs to get on the Internet no matter where or how they are situated. Our existing strength and presence in literally every market segment from the largest multinational corporations to the most basic consumer allows us to effectively scale and commercialize the right solution with the right technology at the right price. Accordingly, we're well positioned to grow high performance networking that seamlessly combines fiber, mobile and fixed wireless, and satellite technology in the most secure and effective package desired by our customers. This is all part of orienting the company to put the customer first and prioritize simplicity in everything we do to further our growth and become more efficient in 2024. This includes enhancing our digital and self-service channels that are increasingly being supported by AI. This work will help shape the effortless and personalized customer experiences required for a truly converged future. AI-driven efficiencies are also another significant leg of our cost savings efforts as we make progress on achieving our announced incremental $2 billion plus run rate savings target by mid-2026. In summary, we have the right formula to continue the improved operating momentum established over the last three years. I'm pleased with our momentum exiting 2023 and remain optimistic about where AT&T is positioned in the broader industry as we enter a year that I suspect will shape the direction of our industry in the decade to come. With that, I'll turn it over to Pascal. Pascal?

Amir Rozwadowski:

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

John Hodulik:

Great. Thanks. Good morning, guys. First, thanks for other detail on the free cash flow. Pascal. But can we focused on the sustainability of the postpaid phone growth in '24 . You added 1.7 million subs that gross adds were down a bit in the fourth quarter. I guess, first, could you talk about the momentum you're seeing here, here in the first quarter and how competition shaping up? And then John, you talked about these under-penetrated markets these three segments value, SME and conversion. Any color you can give us in terms of how big of an opportunity, those underpenetrated segments are in our, how you expect to adjust that year and '24? Thanks.

John Hodulik:

Got it. Thanks, John.

Simon Flannery:

Great. Thank you very much. Good morning. Wanted to come back to the balance sheet. We're now looking at sort of this time next year or near the -- where you hit your 2.5 times first half of '25, so it's getting closer. How are you weighing at this point the opportunities to either buy back stock or to attack that 10 million to 15 million additional fiber homes or delever further? It would be great to get your thoughts on that. And then if you can give us anything on your ACP exposure and how that might play out and your latest thoughts on BEAD, that would be great.

Simon Flannery:

Good morning.

Simon Flannery:

Great. Thanks for the color.

Phil Cusick:

Hi, guys. Thank you. John, maybe talk about pricing in wireless this year. Verizon just ran through another one. It seems like the inflation driven wave of general consumer price increases is slowing. Do you think there's more room to take a little more price in the postpaid space? And then maybe just expand on the AT&T Air effort. How much does this scale over time and how many more markets do you think are possible this year? Thank you.

Phil Cusick:

Thanks, John.

David Barden:

Hey, guys. Thanks so much for taking the questions. I guess the first one, Pascal, if you could kind of elaborate a little bit on the range of the free cash flow guidance. Is it dependent largely on where capital investment lands within that 21 to 22 or are there other potential moving parts that we don't see in that equation? And I guess related to that, maybe John, the end of the year, you had 26 million fiber homes passed. The goal is 30 million by 2025. Obviously you've got a choice to kind of continue to kind of deploy the way you've been doing, which puts you closer to that 30 million by the end of this year, or you could throttle it back in an effort to contain the capital investment out the door and support the free cash flow guide. Could you kind of elaborate a little bit on the game plan there? Thank you.

John Stankey:

Dave, the way I would tell you, I go back to the question that was asked earlier about capital allocation, what we need to do. And I would say first and foremost, you've got to understand, we've given you guidance. We've made a set of commitments. Those are important to us. That's what we need to deliver. And whatever decision making we ultimately undertake has got to be within that context of ensuring that we're consistent in delivering back to you and our commitments. What I would tell you, it's not just making a decision of, well, are there incremental homes you can go get with fiber. There are opportunities to present ourselves -- present themselves to our business in a variety of different places where we have a choice to say, well, we're a little ahead of plan or we were a little more efficient, should we do something else here or there and we'll take advantage of those things every time they pop up. And I would tell you, very comfortable we're going to meet our commitment to you of 30 million passings, but I don't know, we could see something happen where we get a vendor's circumstance like we've seen in wireless, where somebody comes in and changes pricing and we get more efficiency out of something, or we see great results coming back in on the Gigapower side, and we decide that's a better place to go and allocate a little bit more capital. All those things are evolving. We'll weigh them, we'll make decisions, and we'll come back in and we'll tell you what we're going to do, all within the context of we want to make sure we're consistent in meeting our commitments back to you.

Operator:

And Michael Rollins of Citi. Please go ahead.

John Stankey:

Good morning, Michael. Happy to. So look, the economy has proven resilient. I expect the economy is probably going to continue to be reasonably resilient moving into this year. It's an election year. Not that I'm a great soothsayer of what it's going to drive in terms of policy, but it seems like there's wins lining up that, like you would expect, moving into an important election year, policy will probably be such that it favors, trying to keep growth in the right place. And I think that will probably take what was a bit of a tenuous situation last year in terms of the rate of inflation decline and what that might do to growth rates and move us through a 2024 that's probably going to continue to be one where we perk along and see the economy growing. Our expectations are that we're going to see some kind of uptick in growth. We think the combination of a little bit higher than probably target level inflations and -- inflation and what's going on in aggregate in the economy, it's going to keep it a little bit tampered down, but it's something that we expect to still see to be relatively productive. We haven't seen anything with the consumer that suggests they're not paying their bills or not in a position to continue to buy services from us. We certainly don't see anything in business formation right now that causes us any degree of concern at this juncture. So by and large, I think we feel like we're in a pretty good place moving into 2024, absent what I would call big exogenous variables in the global system that occurs. We feel like policy will probably line up pretty well. On the business wireline side, I think there's a couple things I'd first say is, one, what was not the right stuff in the fourth quarter that we have to kind of acknowledge, one -- Pascal mentioned in his comments, we had nearly $100 million of one-time stuff that didn't repeat. That's certainly fully explainable, something we expected would be the case. The piece that probably I don't think we nailed at the beginning of the planning cycle for '23 that ended up transpiring over the course of '24 that further impacted that segment was wholesale revenues were weaker than what we expected. Those are important revenues in the segment because they tend to be higher margin, more resilient subscription-based services. There's been a fair amount going on in the industry relative to restructuring of access services and wholesale. Some of it's been driven through M&A consolidation, some of it's through technology. We are through, we believe, the worst of that now. We've had two years of having to kind of deal with a lot of that repositioning and renegotiation of contracts. We think we're in a pretty good position where our visibility for '24 is better than where we have been, and don't expect that we're going to have quite the pressure we saw from that side of things that is a bit different from a forecasting and fundamentals perspective. And then I go to how we have to execute differently. I've given a fair amount of information and focus on we're really shifting into the mid-market and trying to be a much more effective provider into the mid-market, and we are in fact seeing the green shoots of that occurring. It's moving a little slower than I might like. It requires us to open up entirely new distribution channels. It requires us to cultivate new relationships with ways to represent our products than what we've traditionally done, through what I would call direct owned and operated channels, requires us to rebundle and repackage the products a bit differently to be effective in that space of which we've been doing. And that requires us to do things like reprice, change systems, build capabilities for third parties to work with. We are making progress and we're seeing that. We're starting to see that instantiate itself in fiber-driven revenues that are coming on the products and services we want to sell, which are connectivity-based products and services. And so we're going to continue to run those plays. We've got to get a little bit better at it. But I'd also say step back and realize that while we report segment wise for wireline only, you should understand that the business marketplace is an important marketplace to us. And on a combined basis, wireless and wireline, we're still growing EBITDA in that segment. And some of it is being driven from the goodness of more and more businesses are able to run the core of their company on a wireless infrastructure. And you're seeing some of that put the pressure on the wireline side of the business, but we're benefiting from that on the pickup on the other side. And when we talk about things like fixed wireless asset and AT&T Internet Air being an opportunity for us, we will be in a much better position this year on the catch to do some of that. And frankly, that's not a trajectory move and a structural move that I think is a bad one for us over the long run. So that's kind of how I view the segment moving in. And we still think our brand plays incredibly well. We can walk in and have credibility. We've got the right products that ultimately customers want if we can get them distributed properly. And I have high optimism that as convergence becomes more important, we will distinguish ourselves further in the mid-market.

Amir Rozwadowski:

Thanks very much, Mike. Operator, we've got time for one more question.

Tim Horan:

Sorry about that. Can you talk about the longer term capital intensity, what you're kind of thinking currently? And I guess there's a lot of moving parts with free cash flow. Maybe a sense, can you grow free cash flow off of this year? It seems like you can and it seems like your capital intensity is still relatively high versus your peers. Just some color around longer term free cash flow growth. Thanks.

Pascal Desroches:

No. Look, the investments we've been making obviously are working, and as I look forward, we've said it, we expect to operate at mid-teens capital intensity long term, and we're committed to that. We're also committed to having a capital allocation plan that also looks for other ways to deliver value to shareholders.

A - John Stankey:

Well, thanks. Appreciate everybody sticking with us, and I apologize about some of the longer prepared remarks at the front end, but that's not atypical as we try to give you some guidance and visibility into the business, and appreciate you enduring that. I would just reiterate what I said in my opening remarks that I thought 2023 was an incredibly solid year for us from an execution perspective at AT&T. I'm incredibly proud across the board of what we've done and the formula in optimizing the various parts of the business as we move through it. It's as solid, a fundamental year at AT&T as I can remember in recent history, certainly in a very long time. If I think about those fundamentals, you see them manifested all the way through the balance sheet and our cash flow statement. And I think that's the most important thing to kind of step back from and realize this business enters 2024 in a very, very strong and healthy position. I'm excited about where we enter 2024. We've taken great steps to simplify our business. We still have some more work to do in that regard, but we are entirely focused on the future right now, and it's a future that I believe lines up incredibly well for the asset base of AT&T as consumer tastes are changing, as we're seeing the move to convergence, as we see the growth that's occurring and the importance of high performance networking that I believe AT&T has the asset base and the positioning to move with where this future is going. And that's why I'm so optimistic about what we have in front of us. And I think we're going to get to a very exciting place to start a 2025 where we have the choices in front of us that we would like to have and we've worked so hard to get. I'll give you one final housekeeping thing before we separate. This is Amir's last call with us. We've worked him hard the last three years, and I guess like any thoroughbred that we work hard, we need to send him on to his next chapter, and we're excited about what he's going to be able to do for us as we give him a new opportunity to show what he's been able to do and learn about the business. And as a result of that, I hope you join me in welcoming Brett Feldman to AT&T. A couple of you might know Brett. He's been around a little bit. We're delighted to add Brett, and as good a job as Amir has done, and it's really hard to fill those Air Jordans, I'm sure Brett will do an exceptional job of that. We think it'll be a great addition to the management team and we'll continue to work hard to keep you in the loop moving forward. So thank you all very much for your time this morning, and we'll see you in 90 days.

Operator:

Thank you for standing by. Welcome to AT&T's Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Following the presentation, the call will be open for questions. [Operator Instructions] And as a reminder, this conference is being recorded. I would like to turn the conference call over to our host, Mr. Amir Rozwadowski, Senior Vice President of Finance and Investor Relations. Please go ahead.

John Stankey:

Thanks, Amir, and good morning everyone. I appreciate you joining us. At the start of this year, we articulated a plan in which our deliberate investment in 5G and fiber would help grow our customer base in a profitable manner. Strong results we share today represent the latest proof that our strategy is working and sets us up for continued sustainable and profitable growth. We're meeting rising data demand with best-in-class 5G and fiber solutions. This is not only expanding our durable customers. 5G and fiber solutions. This is not only expanding our durable customer base, but also delivering attractive returns. The results we're seeing only strengthen our conviction in continuing to invest to bring these next generation technologies to even more Americans. We're tracking in line to meet or beat our consolidated financial targets and we're raising our full year adjusted EBITDA and free cash flow guidance today. Our goal has been to invest and grow the business in a manner that progressively differentiates the AT&T asset base in our industry, and we're doing exactly that. In wireless, our consistent go-to-market approach continues to expand our base of high-value subscribers. Our results show that our best deal for everyone approach continues to resonate with customers. For example, in September, we saw the strongest iPhone pre-orders we've had in many years, despite competing promotions with higher subsidies allowing lower value device trade-ins. This is a testament to both the simplicity of our offers and the strength of our consistent and straightforward value proposition, as well as the quality of our network. The tail of the tape is clear. Customers are staying with us longer and spending more with us. Just take a look at our consistent low churn, increasing ARPUs, and improving returns. Why? Because we're providing more value to customers. For example, the vast majority of people taking our iPhone promotions are signing up for our highest value plans, even though it's not a promo requirement. In fact, our highest value unlimited plan is our fastest growing plan. In addition, our network has never been better in terms of its size and quality as we continue to enhance the largest wireless network in North America and expand the nation's most reliable 5G network. It's no surprise that when you combine our high-value customer growth and rising revenues per user, we continue to grow profits in our wireless business as evidenced by our highest ever EBITDA on record. Turning to fiber, the story remains the same. Where we build fiber, we win. We win by delivering the undisputed best broadband solution on the planet, improving our brand position, gaining broadband share, and by improving our mobile share. Our strategy is working. We just delivered nearly 300,000 high quality net adds this quarter against a muted backdrop of household move activity. In addition, the returns on our fiber investment continue to improve from our initial assumptions. We're exceeding our expectations for penetration in new markets. Additionally, the accretive mix shift to higher value fiber plans has driven our fiber ARPU up nearly 9% year-over-year. Look no further than how fiber is fueling a surge in broadband revenue growth. Consumer Wireline has transformed from a declining business to one that is delivering strong, consistent growth. We offer a superior product that has room to improve on all the levers that drive margin performance as we scale. No matter where we put fiber, we're the preferred broadband provider. In August, we selectively launched AT&T Internet Air, our fixed wireless product. We view this service as yet another tool in our connectivity toolbox. While it will primarily act as a targeted catch product, we've been pleased with the positive early reception and have already added about 25,000 subscribers, pushing us back into positive territory for overall net broadband growth of 15,000 subscribers in the quarter. Meanwhile, we're only in the very early stages of reaping the long-term benefits from the inevitable convergence of 5G and fiber. Where we've deployed fiber, we're seeing an uptick in Mobility growth. Additionally, AT&T customers with fiber and wireless service have our lowest churn and the highest lifetime values to match. As the one player scaling both wireless and fiber networks, we're well positioned to be the provider of choice for the ubiquitous connectivity that consumers want. And importantly, we're positioned to do this at the lowest unit economic costs, establishing a long runway for sustainable returns. To enhance our network capabilities, we're powering experiences built for the high speed connected everywhere world we now live in. One example is our work with Cisco to deliver the next evolution in collaboration for those working on the go. By tapping into the fast speeds and low latency of 5G, we've seamlessly extended Webex Calling capabilities to mobile phones, simplifying connectivity for a mobile workforce. We feel strongly that this is just the beginning of what's possible. At the same time that we're reinvigorating customer growth, we are also operating more efficiently across our business. This is a core component of the 120 basis point margin improvement we saw in adjusted EBITDA compared to the third quarter of 2022. You can also see the benefits of our $1.5 billion of incremental cash from operations over the first three quarters compared to the same period a year ago. We're off to a strong start as we execute on our plan to generate $2 billion plus of incremental cost savings within the next three years and we're confident in our ability to achieve this goal. We're executing our legacy wireline transformation as we scale our 5G and fiber networks. Over time, we expect this evolution to drive significant operating efficiencies as we sunset legacy infrastructure that no longer meets our customers' needs. We're also aligning our operating footprint and work environment to mirror our streamlining focus on 5G and fiber. These steps are important enablers to further improve our collaboration, eliminate organizational redundancies, and fully utilize the innovative technologies that improve how we work. And while we're still in the very early stages of Generative AI, we're already seeing tangible AI-driven improvements in productivity and cost savings. Measurable progress has been made with lowering customer support costs, unlocking software development efficiencies, and improving our network design effectiveness. We expect these capabilities to play a key role in our continued efforts to achieve our future cost savings objectives. This takes us to the final priority, and that's how we're putting our improving operating leverage to work. In the third quarter, we reduced our net debt by more than $3 billion and are on track to achieve our 2.5 times net debt to adjusted EBITDA target by the first half of 2025. Less net debt allows us to continue investing in AT&T's durable connectivity businesses and enhance our ability to deliver additional shareholder returns once we reach our long-term target. Our focus remains steady on allocating capital to create best-in-class experiences for customers, drive sustainable, profitable growth, and deliver long-term value for shareholders. Over the last few years, our investment-led strategy has delivered tangible benefits to, and financial returns from, our growing and high-value customer pool in both Mobility and broadband. We've expanded our nationwide 5G network and are on track to reach 200 million people or more with mid-band 5G spectrum by the end of the year. We're also on track to pass 30 million plus fiber locations by the end of 2025. We now have about 24 million fiber locations that we're able to serve on our network with additional opportunities to provide service through our Gigapower joint venture with BlackRock or BEAD funding opportunities. Given the returns we're seeing, we continue to believe leaning into attractive return profile of 5G in the fiber business make good strategic and economic sense. At the same time, we remain committed to our dividend payout level and expect its credit quality to consistently improve. In fact, we've already generated more than enough cash to meet our annualized dividend even before the fourth quarter, which is generally our highest cash generation quarter. Demand for better and faster broadband connectivity is growing exponentially. With the largest wireless network in North America and as the nation's largest fiber Internet provider, we're providing best-in-class 5G and fiber services to meet that demand. It's clear the fundamentals of our business have never been stronger, and they'll only grow stronger as we continue to scale our networks, simplify our customers' connected lives, and deepen our engagement with them. With that, I'll turn it over to Pascal. Pascal?

Amir Rozwadowski:

Thank you very much, Pascal. Operator, we'll take the first question.

Brett Feldman:

Thanks for taking the question. Two, if you don't mind. The first one is, I was hoping we could get your early insights on what drives the uptake of Internet Air, the demo where it's resonating. And I'm also curious how you are deciding which of your in-region markets where it makes sense to launch that product and maybe whether you're starting to reconsider whether there's opportunities to identify the same condition out of region. And then just a question for Pascal, I'm curious why you did not increase your adjusted EPS guidance for the year in conjunction with your EBITDA guidance? Thank you.

Pascal Desroches:

Hey, Brett. Here's what I would say first and foremost, don't read too much into this. We couldn't be happier with the performance of the overall company. And remember, when we gave EPS guidance, we gave a pretty broad [indiscernible] range. I think it's fair to say we are tracking towards the upper end of that range. But there's more variability in things like capitalized interest, non-cash pensions. So it's really just a question on our part, but all in all, we feel really good about the overall performance of the business.

Operator:

Our next question will come from the line of Simon Flannery of Morgan Stanley. Please go ahead.

John Stankey:

Hi, Simon. I don't know if I'll be able to give you the exact number you want, but what I will tell you is the ARPU growth is being driven largely by migration into higher speed plans where customers are moving up in the continuum. Plus we've been managing the base of some of our embedded stuff at the low end with some pricing adjustments that we've made that's helped. So the spread from bottom to top of the customer base is a little tighter spread than it used to be in aggregate. But by and large, we've got customers that are choosing to migrate up on speed, and I would tell you, there's a long way for that to run, because as you know, as we're deploying today, at a minimum on the new build, we're putting in 5 gig networks. And so, we've got a lot of customers that have a lot of room to go from maybe their migration into a 1 gig product and ultimately moving up to a 2.5 or a 5 gig product as their needs adjust and when they decide they want to do that. So I would also tell you, when you look at where we're selling on average price per bid, relative to others in the industry, we tend to sell at a bit of a discount, which we're okay with right now. I've outlined before why we think that's a pretty decent strategy at this juncture and allows us to get the faster penetration the way we want to do it. And I think it's also going to help us as we move into some bundling strategies moving forward that it gives us a lot of opportunity and flexibility as to how we think about putting those products together without taking any margin erosion in the approach. So I feel really good that we've got a lot of headroom. I think I would also point out that on the expense side of the equation, we are still scaling. You see it happening each quarter, we're getting better, but in a lot of these metropolitan areas that we're building, we're not quite at optimal scale yet. That's where our build is focused as we move forward, which is to fill in and make sure that we get footprints and numbers of homes passed and workforce sizing that is kind of in an optimal structure. And when we do that, we take cost per down as a result of that. We take cost per down in our acquisition costs. We take cost per down in our ongoing maintenance costs. So you should also understand that from a margin accretion perspective, it's not just about driving the ARPU up, it's about us also getting more efficient and effective on the cost line of how we operate that business. On DTV, we're running the business incredibly well. It's generating the cash that our partnership was designed to generate. The team is very focused on what they're doing. The plan for the first two years that we've been in is basically not only tracked to what we expected, but is outperforming what we expected. I think the focus in that mature business has been really good. We're very satisfied with the trajectory of how it's operating. We're extremely satisfied with how the management team is executing the plan that we set up. They're very focused on what their mission is over the next couple of years. My point of view is we continue to run the play we set up, something else came along that made sense, fine, would examine it, but right now, our management team is focused on operating the business.

John Stankey:

Other than the wheels of government turn slowly, not really. It's in the process and we've been working actively. I would say there's a couple states that are a little bit further ahead than the other states in the country. If you want to call them bellwether, they're bellwether from the sense of that is they're getting ready to file and submit their applications. It's exposing a couple of the areas where clarification needs to occur in the process about how the regs are to be applied, how the bids are to be evaluated. That process of getting that clarification between the industry, broadly the state and the Federal government is underway and I think that's where the action is right now. That clarification will hopefully allow the states that are maybe second, third, fourth in the queue to be a little bit more precise in their applications, and I suspect that once some of these issues are resolved, there'll be a little less back and forth and a little bit more of the [rote] (ph), respond to the application and move forward. As I've said before, I'm not optimistic that there's customers that are paying monies on BEAD supported infrastructure builds that impact the 2024 financial plan. I think this is going to be a 2025 plus thing when you kind of look at the aggregate portions of the build, the private capital that comes in, and ultimately customers that come on the network and start buying services that might not have been buying services before.

Operator:

Our next question will come from the line of John Hodulik of UBS. Please go ahead.

John Stankey:

I'd be happy to have Pascal give you the non-answer on guidance for free cash flow next year, but -- I'm just kidding, John. We'll give you a little texture on it, I guess. On the wireless side, look, I think at the second quarter call last year, or last quarter, when we talked about where we were on our momentum in the market, we articulated what had occurred. We pointed back to specifically one particular account that we had had some churn and that drove a little bit of an anomaly. We indicated to you that we felt pretty good about our momentum in the market and that we expected a normalized third quarter in our performance. And I believe you can look at the tail of the tape here and see that there's a normalized third quarter in our performance and nobody else is reported, but from the best of what I can glean in our sensing mechanisms that are out of the market, we're kind of back into a ratable share position and I think that's actually a preferred position because the way we think about this is I'm actually more interested in growing our share of revenues as opposed to just our share of raw number of customers. And I think we're doing as good a job of that in the industry as anybody, we're bringing on highly accretive customers and we continue to see our share of industry revenues improve at a better rate than the share of our actual subscriber counts, which tells me that I think we're focused on those profitable customers and bringing in the right customers. I would tell you the churn numbers as you indicate them, we're very happy with them. They're very strong, they're very solid. So despite what's being reported by MVNOs or cable, our base is incredibly stable, and you can see what's happening on our growth side that's ultimately driving the net numbers. If you step back and think about that in aggregate, if we're growing ARPUs, and if we're growing accretive customers, and if our churn is stable, look, I think I'm okay with what's going on. I think that's a good formula. And when I think about where we get ready to approach the fourth quarter, we're kind of right on plan of what we expected to see happen. We're optimistic about the quarter. We think we're set up well in terms of our staffing levels, our positioning in the market, resources and supplies that we have. We think the product is a relevant product, so no matter what the economic environment is, I don't see anything that's going to necessarily impact the category. I think it's a very popular category for gift giving and what needs to go on. So I would expect we have a strong seasonal fourth quarter like we typically have in the industry and I don't see that changing right now. Pascal, do you want to give us some texture on free cash flow?

John Hodulik:

Got it. Thanks for the color, guys.

Phil Cusick:

Maybe under the category of pushing my luck, on CapEx, it's been trending down through the year. The last few years you've actually had lower CapEx in the fourth quarter and vendor comments are that things are going to slow more. Should we be looking for a big bounce in the fourth quarter for some reason to get to $24 billion or maybe that is a little high at this point?

Phil Cusick:

If I can, one more. On the fiber side, how are you finding the business doing in terms of shaking customers out of cable given the low-move environment? Are you doing anything different to pull customers away or is this just sort of steadily working?

Phil Cusick:

Since you mention it, what is that first 18-month penetration at this point?

Phil Cusick:

Thank you. Bye, John.

Michael Rollins:

Thanks and good morning. Two, if I could as well. First, could you discuss the factors behind the slowing wireless device upgrade rate, how it's impacting the financials, and could this go even lower in the future? And then secondly, just an update on where AT&T is on the run rate cost cutting targets and if you could size the potential for additional savings over the next one to three years?

Michael Rollins:

Thanks.

Craig Moffett:

Hi, thank you. I want to stay with the topic you were just discussing about upgrade rates and things and just try to get a sense of what you're seeing in terms of the new iPhone launch and what that might mean for margins in the fourth quarter. And then just a second question if I could just to clarify your remarks earlier on the BEAD program. As it does ramp up in what now sounds more likely to be 2025, would you expect that that would be, to some degree, a substitute for some of your fiber builds that are currently thought of as competitive overbuilds, or would they be a supplement to competitive overbuilds?

Craig Moffett:

Very helpful. Thank you.

David Barden:

Hey, guys. Thanks for taking the questions. John, a big part of the growth that AT&T and the sector has enjoyed has come from the pricing lever. And you guys were early in calling out pricing as something that had to move to reflect inflation in the economy. But as you look ahead into 2024, given the realities of the cable industry's presence here now, and maybe the gravity that they represent from a pricing perspective, could you kind of opine a little bit on how you see the price lever being a part of the, kind of, short to medium term growth story for AT&T? And then maybe also, second question if I could, would be kind of any, obviously we just saw the new FCC net neutrality NPRM come out. I'm wondering if there's anything new in there that you see that you incrementally agree or disagree with, based on what we kind of went through with Wheeler on this topic? Thank you.

David Barden:

Got to get you going in the morning, John.

David Barden:

Thanks, John. I appreciate the comments.

Operator:

Our last question will come from the line of Frank Louthan of Raymond James. Please go ahead, sir.

John Stankey:

Hi, Frank. On the business side, here's how I would kind of rank the overall impact. One, the most significant impact that is occurring in the fixed wireline business is what I will call the secular change of technology. So it's the managed complex networking shift toward SDN, which means, provision raw bandwidth and use software, and there's an effectiveness and efficiency issue that comes on with that. You shift -- you may keep a customer, you continue to do business with a customer, but you don't shift that technology dollar for dollar. That's probably our most significant. The second part is our decision to exit certain product sets that are low margin and are inconsistent with our ability to sell that core transport in that secular shifting environment whereas before when we were engineering and provisioning highly complex and managed networks, we oftentimes had to bundle and bring things together which to win the business, which oftentimes led us to distribute and layer on top of that other products and services. In this more of a streamlined focused approach on transport and the accretive aspects of transport, the second dynamic that's occurring is us backing away from kind of layering on the resale of some of those services. I would tell you that the dynamic around business demand is a relatively small if non-existent dynamic in what's happening overall in our revenues. I think there's still a healthy demand in business and I would point out that while we report on fixed business segments specifically, when you look at our aggregate business performance, it's a very different story. So if you were to kind of take our wireless business component and add it to the fixed business, you have a relatively flat dynamic that's going on and that's largely because of the growth in wireless and I actually think we're on the front end right now of many businesses now understanding that wireless technology is their next strategic frontier of how they engineer their processes in their company. And I'm actually pretty bullish that what we saw in the early days of VPN were managed networks and managed capabilities and supported capabilities on complex networks were a big growth cycle in enterprise customers. I think we're going to see the same things start to emerge on the wireless side, and I think that's just going to be growth. And when we have the presence we do in these large customers, the fact that we're calling on them with one set of services and we can sell both sets of services is really important for us despite some of the secular headwinds we're taking and the technology shift out on the fixed side.

Operator:

Ladies and gentlemen, that does include our conference call for today. We'd like to thank you for participating in today's earnings conference call. Thank you for using our service. Have a wonderful day. You may now disconnect.

Operator:

Thank you for standing by. Welcome to AT&T Second Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. [Operator Instructions] Following the presentation, the call will be opened for questions. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference call over to our host, Amir Rozwadowski, Senior Vice President, Finance and Investor Relations. Please go ahead.

John Stankey:

Thanks, Amir, and good morning, everyone. I appreciate you joining us. I'd like to open our discussion today by sharing that at the half way point of the year our performance and results are tracking entirely consistent with the guidance we provided to you. In fact, Pascal shares the specifics with you, I think you'll conclude that our performance continues to demonstrate our strategy is on track to achieve the objectives we outlined three years ago

John Stankey:

Before we open it up for Q&A I’d like to briefly comment on the telecommunication industries handling of lead-clad cables in our networks. As background, it’s well understood that lead-clad cables are used broadly in our nation’s infrastructure today. From power cables to telecommunication cables lead has used to protect interior wires from exposure to the elements, because lead is very stable and it doesn’t rust. The practice is long been known and its risks of exposure to those in close contact to it has been regulated by Federal and State authorities for decades. Generally the telecommunications industry began to phase out placement of new lead-clad telecom cables in the 1950s. However, lead-clad cables are so durable that they continue to be used in our power grid, in our railway systems and in our industry and some of these cables still provide important customer voice and data services, including connecting 911 service, fire alarms, and other central monitoring stations. We take the concerns raised very seriously as there is no higher priority than the health and safety of our employees and the communities where we live and work period. We believe that a deliberate review in collaboration with the EPA and our industry partners with reliable science at the forefront is the responsible way to evaluate this issue. Independent experts, longstanding science have given us no reason to believe these cables pose a public health risk. In our own prior testing which we shared publicly confirms the established science. Still, to be responsive to any concerns raised by recent reporting, we're doing additional testing at selected sites and we're working cooperatively with the Environmental Protection Agency to provide them the information needed to conduct a thorough assessment of the issue using the most up to date reliable science. We're very proud of our track record, along with our union partners in addressing employee safety for those who perform maintenance and repair work on these cables. We fully comply with the established regulatory standards and science related to potential lead exposure for workers and meet or exceed state and federal OSHA requirements for our employees who work with lead. In the abundance of caution, one extra measure we've taken is to expand our existing practice of providing testing for employees involved in cable removal, and have added a voluntary testing program for any employee who works with or has worked with lead-clad cables. We're offering the testing on company time and at company expense. Rest assured, that if there's new and reliable information for us to consider, we will constructively work with others in our industry, scientific experts and government agencies to do what we always endeavor to do, which is act responsibly. I hope the information that we've been providing including that lead-clad cables make up a small part of our network with the majority underground encased and protective conduit serves as helpful background on the topic. We've always done the right thing related to lead cables. We're doing the right thing today based on current science and protocols. And will do the right thing should current scientific techniques develop new and reliable evidence that warrants a change and approach. With that said, we're now ready for questions. Amir?

Operator:

[Operator Instructions] Our first question will come from the line of Brett Feldman of Goldman Sachs. Please go ahead.

John Stankey:

Hi, Brett. Good morning. Look, I would tell you, I feel really comfortable with where things are. I like to kind of tick through your questions. Given the second quarter issue we had with one account, I don't have another one of those sitting in front of us that I wherever concerned about. I would say more broadly, the market demonstrates a bit more resiliency than probably what I would have expected in the fourth quarter of, say, last year. We're certainly not seeing the kind of frothiness that was around in 2020 and 2021. But volumes and activity in the market is good. We do our own adjustments for some of the reported numbers. I don't know that every net add in the market is equivalent to the other, so we kind of look at the ones that are economic valuable. But even when we make those adjustments, I think demand has been pretty solid in the market. To your point, there were a lot of structural changes in people's offers. In the second quarter they came roughly at about the same time. When new messaging gets put into the market, we saw what we typically saw, which is a little bit of a freezing that occurs as consumers process what new offers are out there. And of course, like you, we sat and watched and wanted to know what the ultimate reaction was going to be. And I would tell you, we've kind of moved through that freezing period and I see a situation where we exited the quarter in a very, very good place. A place that's consistent with what we would have expected given the value propositions and offers we've had in the markets over the past of years. So I feel fine about where things are going. I think that consumer continues to show signs that they're pretty healthy right now. I don't see anything that gives me near term concern about demand. I don't know what happens down the road. It's anybody's guess what the economy does. I've had a fairly conservative bent on that. I think it served us well. I'll keep that conservative bent as we manage the business going through the balance of the year, but the market is certainly supporting, I think, healthy growth and the industry is, I think, even better news, responding well to that growth. I see players investing and I see them making moves to make sure that they can recover returns on those investments. And that's good for all of us. I think it's good for the industry overall and it's good for consumers and the services that they're getting.

Operator:

Our next question will come from the line of John Hodulik of UBS. Please go ahead.

John Stankey:

So John, good morning. I don't see a need for us to -- if it wasn't clear from my last comment. There was a little bit of shift that occurred in the second quarter. Part of it was new account, part of it was new offers in the market. We've seen a normalization. And we think what we have out in the market is performing very well. And I go back to comments I've made repetitively in previous quarters. We've been very focused segment wise around where we're choosing to get our activity. And I don't know that broad promotions is necessarily been the primary or by any means, the exclusive means of us getting customers. We've been really deliberate. You look at some of our business results, we just shared with you some of our FirstNet growth. We know the channel is in the consumer market that we can go to to intercept the right kind of traffic. And we've seen really good results as we've kind of gotten into the early part of the second quarter relative to that. So I feel like the market is healthy, I feel like our tactics continue to be durable and they're performing well. We have been very focused on insuring that we're getting the right kind of growth. I don't want empty calorie growth. We want customers to come in and pay good recurring rates that are going to stay with us a long period of time. We have opportunities where we can co-market multiple products into a customer, which makes them even stickier and drives up lifetime values. Those are all very right places for us to go spend time and energy, and we feel very comfortable about that. So I don't feel a need, when you say a need to respond, you're not going to see some dramatic shift in our approach or what we're messaging or how we're going about things. On the pricing side, I think as you know, I've been very deliberate. We don't pre announce any pricing and we don't really talk publicly about changes. But there have been, as I said earlier, I think a lot of efforts in the industry by everybody to ensure that they're getting returns on the level of investments that they're making back into their networks and their business. And you're well aware of what we've done in the past. And we've been really successful and really deliberate and really calculated in how we've done that. That's how we've managed to keep our churn at the levels that we have, while at the same time continuing to get some ARPU accretion in our business. I think you should expect that we're capable in managing the large subscriber base that we have and we look for opportunities to alter that value equation back to the customer where they perceive that they're getting a better value and better service and something more and it accretes into the business in terms of us being able to grow ARPUs. And we certainly have [indiscernible] we'll do that. We do that as a normal course. Sometimes those moves are a little bit more obvious to you. Sometimes they're a little less. But we'll continue to manage the business effectively moving forward and feel really comfortable about our growth characterizations that we've given you in our guidance and what we're going to see in accretion and service revenues. And as you can see, our profitability numbers has been really, really strong. And that all comes from managing the complete equation. I think we're doing a pretty good job of that.

Operator:

Our next question will come from the line of Simon Flannery of Morgan Stanley. Please go ahead.

Pascal Desroches:

Hey, Simon. How are you? Good morning. Yes, as we said, we gave pretty clear guidance that we would be around the same levels as we were last year. In the first half of the year, we spent $12.3 billion to $12.4 billion. And by definition, that is, we're more than halfway through a roughly $24 billion spend. So that's -- the guidance hasn't changed. And importantly, as we think about how efficient our deployment of spectrum has been, that's been one of the things that when we came into the year, we understood that the spectrum that we had acquired was deploying and are propagating much more efficiently And that was in the estimates that we provided. And we're seeing that continue in all of our plans for the year, whether it be the level of coverage or -- and the level of homes passed in fiber, all those remain on track. So we feel really good about the progress.

Simon Flannery:

And any thoughts on 2024 in terms of POP coverage and overall CapEx levels?

Pascal Desroches:

Yes. Simon, just to be clear, I said it in my commentary. We are past peak investment as we exit this year. And we'll give our guidance at the same time as we usually do. But clearly, we don't expect to be at the levels of capital you've seen us invest in 2022 and 2023.

Operator:

Our next question will come from the line of Phil Cusick of JPMorgan. Please go ahead.

Pascal Desroches:

Phil, Good morning. Through the end of the second quarter, we are at around $175 million POPs covered, well on track to deliver on the $200 million we had guided to earlier in the year.

Philip Cusick:

Sorry, John, I wasn't clear. I was asking about the fiber a little bit softer in the second quarter?

Philip Cusick:

Seasonally stronger.

Philip Cusick:

Thanks, John.

Michael Rollins:

Hi. Good morning. Just curious if you can give us an update on your longer-term thoughts of where you want to see your fiber and broadband footprint relative to your historic ILEC footprint? And how you're thinking about the programs such as [indiscernible] and ACP influencing those longer-term aspirations?

Michael Rollins:

Yes, that's very helpful. And just maybe one other sub-question that, does fixed wireless play a different role than you previously described in your broadband aspirations?

Michael Rollins:

Thank you.

David Barden:

Thanks for taking the question. I guess it has to be me that's going to ask this question. John, and I'm sure you have a bunch of talking points in front of you. So, the lead situation. So in the last 50 or 70 years, has there been a federal state or municipal organization that's ever flagged this issue to AT&T that put it on the radar screen in a way that maybe we all should have known about? And then second, has there ever been a material amount of claims that somehow people were harmed by the existence of this lead in your network? And then people are throwing numbers around. When you talk to the credit rating agencies, what do they think? How do you talk about this issue to them and what it means to your leverage situation? And then finally, how does this issue affect how you think about capital allocation of the dividend? Thanks

David Barden:

Okay, John. Thank you.

Peter Supino:

Hi. Thank you. I wanted to ask about Consumer Wireline segment margins. Thinking about the longer run, could you just update us on the time line for legacy network shutdowns? And are there permanent differences between the long-term heading of your margins in that business and those of pure-play broadband businesses? Thanks.

Peter Supino:

Thank you very much [indiscernible]

Operator:

Our last question will come from the line of Frank Louthan of Raymond James. Please go ahead.

John Stankey:

I'm sorry, Frank, could you rephrase the second part of that question again, so I just kind of -- you clipped a bit.

John Stankey:

Yes. So we haven't changed any of our guidance, Frank, on 30 million locations passed by 25 million. And I may be not understanding the subtlety of your question. I think we just told you we passed in the remarks, 20 million locations -- so we're -- am I missing what you're asking there?

Pascal Desroches:

Frank, I'm not sure what you're referring to when you say the 15 million. Just to be clear, right now, between business and consumer we are passing around 24 million homes and with the vast majority of that, obviously, being consumers. And as John alluded to, our plans haven't changed. We feel really good about the pace at which we're building. And when we build, we feel really good about the take rates that we're seeing. So all in all, these things are pursuing according to our plan.

Amir Rozwadowski:

Thanks very much, Frank. Operator, that's all the time we have for questions.

Operator:

Thank you for standing by. Welcome to AT&T's First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would like to turn the conference call over to our host, Amir Rozwadowski, Senior Vice President, Finance and Investor Relations. Please go ahead.

John Stankey:

Thanks, Amir, and good morning, everyone. I appreciate you joining us. Earlier today, we shared our first quarter results, which again illustrate how we're meeting our commitment to grow high-quality, durable 5G and fiber customer relationships. Thanks to a consistent discipline and return focused go-to-market approach, our team is balancing customer growth with profitable long-term value creation as we connect people to greater possibility. And I'm particularly proud of the quality of our subscriber additions. Despite high promotional activity seen in parts of our industry, we continue to achieve consistently low churn levels while increasing the take rate of our high-value 5G and fiber plans. We believe our results demonstrate that the customer-centric strategy we launched almost three years ago continues to deliver the right mix of quality subscriber and profit growth that will prove sustainable over the longer term. So let me highlight some of our progress. Let's start with mobility. In January, I shared that we anticipated industry demand trends would continue to normalize to pre-pandemic levels. However, we still expect it to grow both postpaid phone subscribers and wireless profits, thanks to investments in our customer experience, distribution channels and network, and that's exactly what our teams delivered. We had 424,000 postpaid phone net adds in the first quarter and continued to grow wireless service revenues, EBITDA and postpaid phone ARPU, all while maintaining historically low churn. Checking the box for each of these success metrics paints a clear picture of what sustainable, profitable wireless growth looks like. We've now had more than 11 straight quarters of 400,000 postpaid phone net adds or better, and we've totaled 2.6 million postpaid phone net adds over the past four quarters. We're pursuing longer-term growth by remaining committed to fostering durable relationships that solve customer pain points and bring great value to our customers. We're executing well on our disciplined go-to-market strategy that centers around putting the customer first and takes advantage of our improved distribution. We also continue to hone our ability to deliver targeted solutions that provide real value to customers in our historically underpenetrated segments, like first responders, as well as small and medium businesses. This approach establishes a long-term growth trajectory that thoughtfully balances customer additions with profitable returns. Now let's turn to our fiber business. Quarter after quarter, our teams proved that wherever we build fiber, we win. And the first quarter was no exception, with 272,000 AT&T fiber net adds. This marks 13 straight quarters with more than 200,000 net adds. These net adds were a significant achievement with a number of household moves, a key growth metric for fiber sales, decreasing nationwide. As we noted at the end of last year, our fiber subscribers now outnumber non-fiber and DSL subscribers. We now have about 7.5 million AT&T fiber subscribers, with the fiber adoption and margin expansion driving Consumer Wireline revenue and EBITDA growth. We believe that AT&T offers the best wired Internet service available anywhere, that this elevated AT&T fiber experience is providing a strong tailwind. So overall, across both 5G and fiber, I'm very happy with the high-quality subscriber adds we achieved in the quarter, and these long-term customer relationships provide a great and profitable revenue stream now and into the future. Even in the midst of increased macroeconomic uncertainty, we're executing more sharply and efficiently after repositioning our operations around our connectivity strengths. We remain on track to achieve our $6 billion plus cost savings run rate target by the end of the year, if not sooner. As we mentioned before, the benefits from these efforts are expected to increasingly fall to the bottom line. While we've largely delivered what we set out to accomplish three years ago, our journey has only raised our confidence that we can continue to evolve and improve. In fact, we believe we can further accelerate cost takeouts as we progress through the year. Part of this entails transforming our network as we ultimately replace our copper services footprint with best-in-class fiber connectivity, and where it makes sense for customers, replacement products built on our wireless network. Think about a cost structure that's no longer anchored to legacy network technologies and software stacks. For example, in addition to all of fiber's enhanced resiliency and its superior transport characteristics, we're already seeing that fiber uses less energy, costs less to maintain and requires fewer service dispatches. And as we reduce our copper services footprint and related legacy infrastructure, we expect to consistently improve our margins, grow EBITDA and, ultimately, improve our capital efficiency. Another contributing element relies on unlocking new capabilities that make it easier to collaborate and get work done by leaning into our digital transformation. We're seeing this already come to life through early trials in our collaboration with NVIDIA, where we're testing the use of artificial intelligence to improve fleet dispatches so our field technicians can better serve customers. Separately, we're using AI to match customers with the right customer care support path, resulting in more effective issue resolution. We think this is only the tip of the spear of what's possible. Now let's turn to our final priority, which centers on how we're allocating capital, we continue to invest in our 5G and fiber networks at record levels in order to deliver long-term sustainable earnings growth. Our goal is to build a network that not only meets today's demands but will serve the needs of our customers for decades to come. This is at the core of what we do and who we are as a company, it's also why we continue to be one of America's largest capital investors. We're investing in our connectivity infrastructure, and using our team's proven expertise to not only maintain our network advantages but to advance it, and we're doing this while moving forward on our commitment to provide more Americans with access to reliable high-speed broadband. We plan to actively pursue bead funding to support the transition of our wireline footprint and expect to be a significant participant in public private partnerships. And while we're clearly committed to investing in our networks, we also remain focused on the strengthening of our balance sheet and reducing our net debt. We expect to increase cash generation over time, which will allow us to continue delivering an attractive dividend with improving credit quality. And by executing on the simplified capital allocation framework, we expect to improve our financial flexibility in the long run. This will provide us with the opportunity to take additional actions, such as investing to accelerate our business growth or generating incremental values and returns for our shareholders. Now before I wrap up, I'd like to quickly touch on some developments we're seeing in the macroeconomic environment. We started the year with the expectation that we'd be operating against a less-predictable macro backdrop. This belief has proven true thus far. And what we're seeing is in line with the expectations we built into our guidance in January, including a moderation of growth for wireless services. We expected to transition back to more historical cost of debt. That is certainly underway, with the added dose of tighter credit availability to some segments of the economy. I'm clearly not breaking any ground with these observations, but this is why we have been focused on reducing our leverage and optimizing our use of capital over the last few years. As the economy adjusts to a likely period of tighter capital availability and higher interest rates, I take comfort in the state of our business for two reasons. The first is the heavy lifting we did to strengthen our balance sheet over the last several years. We've reduced our debt, taking advantage of the prior low interest rate environment on our remaining debt and managed our debt towers for the next several years. As a result, more than 95% of our debt is now fixed at an average rate of 4.1%. The second is the repositioning of our business to focus on exclusively communication services, particularly 5G and fiber. As the last few years have demonstrated, the solutions we provide are more critical than ever before, and we only expect the demand for purpose-built, best-in-class Internet access to grow. The resiliency of the services we provide, coupled with our improved financial flexibility, provide us with the right tool set to navigate the economic environment. We remain on track to deliver the 2023 financial and operating commitments we made to our shareholders at the start of the year. However, should the need arise, we feel comfortable using the tools we have at our disposal to align our actions with a more challenging economic backdrop, whether that's accelerating cost transformation actions, being more deliberate with our capital spend or increasing our liquidity. To conclude my remarks, I'd simply reemphasize that I'm proud of how our team started the year. Last quarter, I said that our approach and strategy for 2023 was to do it again. In the first quarter of the year, our teams have done just that. With that, I'll turn it over to Pascal. Pascal?

Amir Rozwadowski:

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

Philip Cusick:

Let's start with free cash flow. Given the 2Q free cash flow guide down last year, what can you add to your comments already to get investors comfortable that we aren't walking into another one of those?

Philip Cusick:

Maybe if I can follow up there, and forgive me if this is a little amateurish, but just looking at the balance sheet as of June '22, net debt today is $3 billion higher than it was nine months ago. Given all the things that are happening, I understand there are other uses of cash, but is there a point at which the cash generation over and above the dividend starts to actually pay down the net debt of the Company.

Operator:

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

John Stankey:

Sure, Simon. Look, everything is going great. It's no concerns whatsoever about ability to execute the build supply chain spine, resourcing and capabilities within the vendor community is all good. Teams are executing well. I don't think I have any different commentary of, yes, there's been a little bit of inflationary pressure in some places. By far and away, it's all manageable. It's nothing that blows the business case. In fact, when you offset the cost per living unit increases against what is actually turning out to be faster penetration and higher ARPU than what we had in the, I would call, the fundamental business case, and when we started this process, it's well offset anything we have to worry about in terms of first cost. So, I would tell you from a perspective of we feel very comfortable with what we've told you about our $30 million commitment and where we're going with that. That's not the thing that's taking my time or keeping me up at night. Where we are in terms of our execution, I would probably take my hat off to a couple of individuals in the Company that have been working very hard in this area. And I would tell you, relative to what we spend and how we're going about doing it, I think we're doing a much better job of penetrating our base faster than we are, as I just mentioned. I think that gives us confidence. I've shared with all of you before that one of the three major impacts to improving payback in a fiber business case is if you can penetrate faster than what your expectations are and bring cash flows forward that has an outsized impact on the NBV of the case and the ultimate payback, and we're seeing that happen. Now I would tell you, look, we're building in places that are fiber hungry. And so, I think our effectiveness is indicative of the success of the market and the receptiveness of the market. I don't know if you get three years out on the build if it stays that way, we'll have to continue to watch that. But I think the tactics and the techniques that we've developed collectively as a team between how we promote the brand, what our operations folks do to raise awareness, how we capture those customers, the way we're marketing to them, the effectiveness at which we're marketing to them, I really like what we're seeing. And I think as we continue in this path, we're on the learning curve, and we're going to get better because we're on that learning curve, and we're getting scale on what we're doing. And that's all goodness. On the GigaPower side, we're in good shape. We're very close to closing on the transaction. You should expect that imminently. We're trying to do it the right way and feel very comfortable we're going to get it done the right way. I will also tell you we have our first -- even though the transaction hasn't closed, we have our first live customer up in one of our markets. So, we are in place with all the infrastructure that we need to be able to sell and support customers through our channels. And I want to stress, we are the first seller of product on that infrastructure, and it's not an insignificant accomplishment for us to be able to have everything through the processes of activating our distribution channels and out of region markets so that they can talk to customers and sell and support the product and service, and we can drive the kind of penetration that we want to drive in that infrastructure. So, we feel really good about the progress there. And I will just tell you anecdotally, as I've work around the organization I felt very strongly about our competency and our ability to go and start doing this. I like the energy I see in the teams that are involved in it who feel probably even more confident than I do about it. And they have a lot of motivation to do well there, and I think that's going to serve us well as we move forward.

John Stankey:

Yes, nothing's changed in my commentary here, Simon. We're out in the market today. We have a consumer product that's there that we've recently brought into play. We are in the process of scaling it so that we make sure that we do it the right way. And we are going to use it where we think we can offer a customer a better set of services than what they currently have, especially when we have an opportunity to go and use it to hold as we're going to build fiber over the next couple of years and come in behind it. Where we have that network capacity, to your point, we are adding spectrum in. We have places where we have [Indiscernible] capacity, and it's a smart play for us to do that to keep a customer in the family, also uses an opportunity, in some cases, to cross-sell and add wireless into the portfolio as we do that. And we will run that play in consumer where it makes sense to run that. And we're seeing good feedback from our customers that we've put out the product with in the consumer space. We are seeing substantial improvements in their service levels. That's a good thing, and we feel that, that's the right way to kind of target and use the product. On the other side of the equation, as I've said many times before, this product is incredibly well suited to parts of the business segment. It's not only well suited in the near term, but it can be a long-term viable product, given the characteristics of how businesses use data depending on the type of segment you're serving. And we've had really good success in business deploying the product. We will continue to deploy it. And feel really good about it in that regard that when we match the product to the right user profile, the right segment profile, it can be a very, very viable opportunity for a sustainable and effective product. And we're seeing that, in fact, play out in the market right now.

John Hodulik:

Great. Maybe a question similar to Phil's first question on free cash flow but related to EBITDA. You guys did 3.9% growth this quarter against 3% guidance, but you've got some easy comps on the wireless side. So anything you can tell us about sort of the color you have or the sort of confidence you have in hitting that 3% number. You also called out some storm costs in California, any other sort of one-timers inside of these numbers that can give us more comments? And then lastly, on the cost side, you guys have been aggressive taking out headcount. And John, you mentioned potentially accelerating the headcount or the cost-reduction initiative. So just any additional color there, is there more headcount to go? How far through the 6 billion are you? And should we see that translate into better margins?

John Stankey:

So John, West Coast, I think, is pretty well publicized in what went on out there relative to the rains, and we still have a large, I'll call it, legacy footprint that ultimately we're spending a lot of time and energy and working our way out of. And you see what happens still when you get a lot of wetness on copper, it just doesn't work well. And I think this is one of the things that gives us a high degree of confidence we have opportunities for additional cost takeout in this business. As we reposition to 5G and fiber, that cost structure we still carry. And I'm really pleased we made some changes about a year ago in how we organize within the business and how we focus on our operating cost structure that is putting the right kind of exposure on how we execute around that cost migration. So this is partly an answer to your question of what was unusual and also what we expect to do moving forward beyond the $6 billion. We will now start to see some momentum build in that regard as we begin to shutter legacy costs in the business, and I think we're making the steps that need to be made to be able to do that on a geography basis, as opposed to we don't need to see the last customer disappear before costs start to come out of the business. And so, we have much better instrumentation I think we're building the muscles around how to do this. It's not easy stuff. I will admit to that. I would -- I wish we didn't have to spend as much time and energy on it, but we are. And I think we're getting it into a place that I've watched this business for years, that the flywheel will start to turn and we'll get the benefits out of it. And I feel really good about that. And I think that's when I talk about moving beyond the $6 billion. One of it is it's the fundamental restructuring of the business and getting to the backside of that. You may have noticed as well to show you how serious we are about this and how aggressively we're working it. We met a large filing that's public in California about restructuring the regulatory construct in California. That proceeding will take place over the course of the next year. And it's one that we've been working really hard with policymakers out there to do it the right way, make sure that we step up to serving customers in a way that accomplishes public policy objectives, while at the same time, positions the business well for a sustainable, cost structure and incentive investment in the state moving forward. And I'm confident that we can move through that process. The last thing I'll just comment on in the first quarter, you probably saw that the weather patterns broadly across the United States were pretty challenging. And so while they were most pronounced on the West Coast, we were chasing a lot of issues broadly with ice and a variety of power dynamics that we're moving on. And I would say just generally speaking, it was not a friendly quarter to operating costs just to deal with the things that we need to deal with to make sure the network keeps running. And I think we came through it in pretty good shape relative to our commitments. And I think that's one of the things that we believe will be in good shape from a cash production perspective as we move through the year.

Brett Feldman:

Two, the first one is actually a quick follow-up to John's question and the second one is on wireless. So the follow-up is, with regards to your headcount reductions, typically there are costs associated with your workforce whether its severance or other separation costs. I don't think you're adding that back to your adjusted financials. So I'm just curious if you could potentially size what the impact of those costs have been? And then on wireless, as you noted, you're expecting this normalization of wireless sector trends, you've already seen some of that in the first quarter. I'm curious how that's impacting the way you go to market. In other words, have you resized your advertising and your marketing budgets? Have you, in any way, narrow the scope of who's eligible for some of your best offers? And you're also coming up on almost a one-year anniversary of the last time you took some price. I'm curious how you're thinking about pricing power in this environment.

John Stankey:

Brett, what I would tell you on the go-to-market side is, there really hasn't been any change at all. In fact, I think the headline is we're doing what we've been doing. And we're going after customers that we think are profitable customers, and we're doing it in the same way. And some of that is just a matter of I think the variable piece of it is when you're doing subsidy on a customer-by-customer basis, there's, of course, adjustment in that. So as you see volumes come down, certain equipment costs and the like are going to resize themselves to those volumes. But when you start thinking about how we're promoting in the market, I won't say that there's going to be any substantial changes in anything that you see on distribution channel costs or go-to-market costs that would be anything different than the variable cost of moving from volume of 700,000 net adds to 400,000 net adds that might flow through things like commissions and equipment costs, et cetera, that are pretty typical. Look, we continue to always look for places where we can manage the value equation. And we opened with some of the comments in the prepared remarks, deliberately to demonstrate to you that, I think, we do a pretty effective job of that. If there's something I would ask you not to lose is we're coming off the most profitable quarter and most lucrative EBITDA generation in our wireless business in its history and it's got the goodness of low churn, higher ARPU and customer growth. And that equation is there, and we're managing it deliberately. And you don't just pull one lever to make that happen. There's all kinds of things that have to come together and the recipe, one of which is where you have opportunities to move customers up a continuum or you have opportunities where you may be are priced differently to market, you use those levers. And we'll continue to do that as we move through the year. And I think our confidence in doing that is indicative of the guidance that we've given you as we move through it. We dynamically watch credit in the market. That's -- it's algorithmic in many instances. We do things as we go through the year. We're looking at a variety of different things in a variety of different segments, and we adjust. That's not new to this moment in time. That's something we do kind of dynamically as we run the Company. We've been making adjustments to different segments and different offers consistently. And I would say, look, as we move through the year, if circumstances change or we see particular segments being stressed in different ways, well, we'll do things to adjust the availability of certain offers in certain places, yes. And have we done that and is that just a normal course of business? Yes to that as well.

Michael Rollins:

Just curious if you could unpack a little bit more of the slowdown in wireless postpaid phone performance in terms of the industry impact versus what you're seeing in the share of gross adds. And within that context, if you could provide some color on the activity levels that you're seeing between the consumer and the business segments.

Pascal Desroches:

Mike, one other point just to underscore. When we look at some of the key measures like porting ratios, our level of churn, those would all suggest, as John said, we are doing just on relative to the overall population of growth that is out there in the industry. So, we feel really good about our performance, and it's really in line and consistent with our expectations of a normalization of consumer demand that we expected to come in 2023.

David Barden:

I guess two, if I could. The first one, Pascal, thank you for sharing the supplemental free cash flow walk to the adjusted EBITDA number, I think that one of the things that stands out there is the negative $2.7 billion working capital. And if I wanted to look at this page and think about how it looked for the full year 2023 based on your prior comments, that working capital number would have to be positive, which is a huge change, and it's very hard for us on our side of the fence to really model and understand and see. So if you could be as granular as possible about explaining how that changes over the course of the year would be super helpful. And then, John, if I could ask you a question. Something material that's changed over the course of this quarter is that DISH has kind of become a distressed security, both in the equity and in the bond markets. And I think that -- my question is, has that changed your calculus about the potential for a DTV-DISH combination? And/or is that a potential opportunity for new spectrum acquisition if that were to come about, or is new spectrum not really a priority for your capital allocation? I'd love to hear your thoughts on how that evolution it's impacting your thinking?

John Stankey:

Dave, on your commentary on DISH, I don't want us stipulate necessarily to your characterization. I'm sure Charlie probably doesn't stipulate to them. But first of all, I've never really commented on my point of view of what the calculus is in the combination of DIRECTV and DISH, and I don't expect to do that today. It's just not something we typically speculate on. I think Charlie has been the one that largely had commentary on that. He's certainly entitled to do that. So you might be a better person to ask, and in the circumstances, he's probably far more intimate to his business than I am. Look, I think we step back all the time and ask ourselves what's the structure of the industry moving forward and what's going to occur. And I think I would just say the best way to maybe sometimes predict the future is look at the past, which is when there's been valuable spectrum available through any form or fashion, whether it is the decision to do a combination of a business, like what we did with LEAP, or whether it's doing things at auction that we think are responsible and appropriate, we think that we always want to make those investments with the sustainability of the business. If there were to be a spectrum reordering for whatever reason, either from auction or asset changes or whatever, would we be -- we understand it, want to understand if there's elements of that, that are more effective than us putting capital into the network to build density and those types of things, we'll continue to evaluate that and make appropriate decisions as we can moving forward. And it's -- I'm not going to go into the details of how we think about what the scenarios are and what we can play out, but you can guess that given the amount of money that's involved in it and the importance to the business, that we're constantly evaluating those things and determining what scenarios might play out, what we might do and what makes sense for the Company.

Frank Louthan:

Can you characterize the threshold that you have to hit for FirstNet to remain within the government guidelines, will be the first question. The second was sort of excluding the 30 million home capacity with fiber and excluding California, what percentage of the rest of your footprint are you free from a regulatory perspective to replace the copper with fixed wireless or some form or something else like that?

Frank Louthan:

I was under the impression there was a certain number of subscribers needed to hit for the FirstNet over a certain time period. Just curious where you are on that relative to the number of subscribers you have in the network today?

Operator:

And our next question comes from the line of Walter Piecyk with LightShed Partners. Please go ahead.

John Stankey:

Walt, the answer is, look, I think all wireless providers are going to be instrumental to making this happen. And I believe you've heard me talk about the reality is 5G becomes pervasive and actually operates in the way 5G was intended to operate from a design perspective, which is you have the kind of ubiquity and the radio that's out there. You have actually the additional spectrum that gives you the right level of performance as 5G stand-alone cores are perfected so that they work the way they were intended to work, which, as with any new technology, that's been a little bit of a journey to get them to actually operate in the right way with the radio access layer given the complexity of the radio access layer in the United States, things like augmented reality are going to, in fact, become the opportunity of what are the new services that can come in place. And I don't think it's going to be unique to AT&T. I think our competitors are going to do the same thing, and we're all building networks that are capable of supporting that. And we will, as we have in the past, probably be one of the types of channels that help distribute these additional devices that people ultimately will use in new ways. And more than likely, there are going to be things that are nice add-ons to family plans. And as I talked about, the reality of usage going up on these networks and why it's so important to have a fixed cost structure, these are the kind of things that I think are really, really important. Because if you're in a variable dynamic and all of a sudden the new device shows up and becomes part of the family plan that drives another couple of gigabits of usage and you're paying on a variable basis, that's not going to be a comfortable place to be when the realities of the next generation of applications come in 5G. And I expect that's going to happen. You -- I know you do a lot of homework, you know what the manufacturers are working on right now. We know what the manufacturers are working on right now, and we know when they're likely to come about, they're going to come about when these networks are scaled. The networks are going to be scaled as we exit this year. And I think you're going to start to see the new application to start to pop up as a result of that.

John Stankey:

Well, we use the term durable wall for a reason, which is I don't want to just -- I don't want to spend empty calories for something that 18 months from now or 24 months from now, just looks like a bone acre. And I'm trying to keep the business focused on doing the things that are the hard things that position the infrastructure for the next decade. And so, I've been pretty consistent in my remarks, which is there are going to be places in our network where we have underutilized capacity and I don't have fixed infrastructure, and there's going to be segments where that underutilized capacity can best be used where it's durable. I mentioned earlier in the call, there are many businesses that have usage profiles where I believe fixed wireless bundled in with other wireless services is a very durable offer, and it will be durable for a long period of time to come. There are certain consumer segments where that's durable, but it's not most consumer segments, in my view. And so, we will continue to take advantage of that, where I have confidence that the customer acquisition cost will be worth maintaining the relationship with the customer and will sustain itself. I just -- we were looking at our fiber in service lives, for example, of what's going on right now, and our fiber in service lines are extending over our traditional copper and service lines because it's a great product and people want to keep it. And I know what those in-service lines are. And I know how long people keep that product in service. And the great thing is, when they hold it for 4.5, 5 years, I can scale the product over that period of time, and it's highly profitable. And we need to think about every customer we bring on in that regard, and we're being very diligent in how we allocate our customer investment and our network infrastructure and our capital infrastructure in a way that we're trying to bring on those durable relationships. Again, I would point you back to the churn numbers that we've been putting up on both product sets, and we're trying to be true to that in what we're doing. And to the extent that you do that to subscription base, it plays out well for you over time. And it's just about being deliberate and disciplined in making sure that happens.

John Stankey:

So, I appreciate everybody joining us this quarter. From my point of view, it was a solid quarter that set us off on the right path to deliver to you what we've committed for this year. We are focused on something very, very basic. It's executing in our markets while we're continuing to restructure the cost of the business, and position our infrastructure for the future, as I just wrapped up with what I said with Walt. And I feel really good about the way we're able to do that. In many respects, I kind of look at what we did operationally this quarter, and I characterize it as uneventful. And as we talk about with the management team right now having a few uneventful things occur when we get to call the plays and operate and execute in the fashion that we designed is absolutely what we want to achieve as a management team as a company and I feel like we're making strides to do that. Thanks for being with us today. I hope you all have a good rest of the spring.

Operator:

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T conferencing service. You may now disconnect.

Operator:

Thank you for standing by. Welcome to AT&T's Fourth Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to turn the conference call over to our host, Amir Rozwadowski, Senior Vice President of Finance and Investor Relations. Please go ahead.

John Stankey :

Thanks, Amir, and Happy New Year, everyone. I appreciate you joining us today, and I hope you enjoyed a restful and healthy holiday season. And at the conclusion of this call, I'm declaring the statute of limitations on this being the New Year has run out. I'll share upfront that our commentary is a bit longer than usual. However, we thought it was important to provide a bit more clarity on our business today, primarily our fiber strategy since we haven't had an opportunity to discuss our December Gigapower joint venture announcement. Still, we'll ensure we have enough time to get to most of your questions. As I reflect on not only this past year, but the past 2.5 years, it's clear that our teams have worked diligently to refocus AT&T around a connectivity strategy that has simplified our company and positioned it for sustainable growth. Our results over the past 10 quarters demonstrate we are on our way to delivering the full promise of the strategy. We're operating a streamlined and return-focused business with an improved profit trajectory that's committed to generating sustained cash earnings growth while delivering an attractive dividend. Underpinning all of our actions is a deep desire to connect our customers with greater possibility through 5G and fiber. And importantly, we're assembling the right assets, talent and capital structure to offer an experience and value proposition that customers appreciate. Our fourth quarter results are the latest example of how our teams continue to consistently deliver for our customers. We finished 2022 with strong momentum in growing customer relationships. As you can see from our profitability trends, we're growing them in the right way. So let me highlight some of our progress. Let's start with wireless. We delivered 656,000 postpaid phone net adds in the fourth quarter and nearly 2.9 million postpaid phone net adds for the full year. And over the past 2.5 years, we've increased our postpaid phone base by nearly 7 million to 69.6 million subscribers which represents our best 10-quarter stretch of wireless growth in more than a decade. During the same 10 quarter time span, we've grown wireless service revenues, EBITDA and also increased our postpaid phone ARPU by nearly $1. And while others may have jumped the gun to claim that they were the only ones to reduce churn in the fourth quarter on a year-over-year basis, we also lowered our fourth quarter postpaid and postpaid phone churn without offering richer promotions or free line giveaways. We consider this yet another data point highlighting that our comprehensive approach to improving the entire customer experience is working from our simplified go-to-market strategy, to our better network experience, to our focused market segmentation practices. On top of that, our growth was not only robust but profitable with 2022 being the most profitable year ever for our Mobility business. We expect profit growth to continue in 2023 as we benefit from the investments we've made in our business over the last 2.5 years. Our network teams have also consistently outpaced our mid-band 5G spectrum rollout objective. In fact, we now reach 150 million mid-band 5G POPs, more than double our initial 2022 year-end target. Our goal remains to deploy our spectrum efficiently and in a manner that supports traffic growth. In the markets where we have broadly deployed mid-band 5G, 25% of our traffic in these areas already takes advantage of our mid-band spectrum. Now let's move to fiber, where we build fiber, we continue to win. We had more than 1.2 million AT&T Fiber net adds last year. The fifth straight year we've totaled more than 1 million AT&T Fiber net adds. And after 2.9 million AT&T Fiber net adds over the last 2.5 years, we've now reached an inflection point where our fiber subscribers outnumber are non-fiber DSL subscribers. The financial benefits of our fiber focus are also becoming increasingly apparent as full year fiber revenue growth of nearly 29% has led to sustainable revenue and profit growth in our Consumer Wireline business. As we scale our fiber footprint, we also expect to drive margin expansion. In summary, we're enhancing and expanding our networks while extending our long runway for sustainable growth. And I'm very happy with the high quality and consistent customer adds we achieved last year. We've emphasized that our plan was to grow customer relationships in a thoughtful and responsible way grounded by an enhanced value proposition that resonated with customers. That's exactly what our teams have done quarter after quarter. In addition to growing customer relationships, we've executed some of the most challenging actions associated with repositioning our operations. We've doubled down on our cost transformation. We've now achieved more than $5 billion of our $6 billion plus cost savings run rate target. In 2023, you can expect the benefits from these efforts to increasingly fall to the bottom line. In fact, you've already seen the benefits of this cost transformation beginning to translate into operating leverage despite inflationary pressures. Our teams did an excellent job implementing pricing actions and business efficiencies to offset continued inflationary impacts, impacts we anticipate will be with us in the near to midterm. Part of tapping into these efficiencies entails improving acquisition costs and further streamlining our operations and distribution. Another part entails rationalizing our wireline copper infrastructure and reinvesting those savings into fiber and wireless where we're seeing improving returns. As we look at our last priority, we also continue to generate meaningful levels of free cash flow even with record levels of investment. This gives us confidence in our ability to continue delivering an attractive dividend today and in the future, while also improving the credit quality of that dividend as we expect to increase our cash generation over time. We strengthened our balance sheet last year, reducing our net debt by about $24 billion. So as we close 2022, I'm proud of what the AT&T team accomplished despite a competitive market and challenging macro environment. Turning to 2023, what's our strategy? Well, it's simple. Do it again. What exactly does that mean? It means we're focused on the same three operational and business priorities we set in place 2.5 years ago. As I've mentioned time and again, our North Star remains solely focused on becoming the best connectivity provider with 5G and fiber. We're confident we can achieve this because in wireless, we'll maintain our focus on building durable and sustainable customer growth in a rational, return-focused manner. Just as we've done over the past 10 quarters, we'll continue to take a disciplined approach to selectively target underpenetrated areas of the consumer and business marketplace and improve the perception and execution of our value proposition. We also expect to continue our 5G expansion, reaching more than 200 million people with mid-band 5G by the end of 2023. In wired broadband, we have the nation's largest and fastest-growing fiber Internet, and we expect continued healthy subscriber growth as we grow our fiber footprint. As we keep expanding our subscriber base will drive efficiencies in everything we do. This includes consistently elevating our customer experience through the improved durability and reliability of our 5G and fiber networks. When we couple our evolving networks with further enhancements to our distribution and digital and self-service channels will make a competitive customer experience even more appealing. We expect to realize additional benefits from our consistent go-to-market strategy and lower cost structures. We also benefit from our improved brand perception, strong fiber and wireless asset base, broad distribution and converged product offers. Additionally, we have a clear line of sight to achieving our $6 billion plus cost savings run rate target by the end of this year. We expect even more of these savings to fall to the bottom line as the year progresses. With that improved performance, we remain focused on further strengthening the balance sheet by using cash after dividends to reduce debt as we progress toward our target of a 2.5x range for net debt to adjusted EBITDA. Our commitment to providing an attractive annual dividend also remains firm. As our CapEx is expected to moderate exiting this year, following the peak investment levels of 2022 and 2023, we expect the credit quality of our dividend to improve on the back of our higher free cash flow and improved financial flexibility. In summary, we feel confident that our growth and profit trends are sustainable despite the uncertain macroeconomic backdrop. As I stated previously, we continue to expect that we will be operating in a challenging macroeconomic environment where wireless industry growth is likely to return to more normalized levels. The resiliency of the services we provide are time-tested and only growing in importance. When you couple this resiliency with the investments we've made to our networks and proven go-to-market strategy, we're confident in our ability to navigate potential economic headwinds that may emerge and our improving financial flexibility only further strengthens that confidence. Now I'd like to take a moment to touch upon our fiber strategy by quickly level setting on how I'm thinking about the success we've had, our plans for the next few years and how we'll hold ourselves accountable. Similar to the early days of wireless, we consider fiber a multiyear opportunity that will transform the way consumers' and businesses' growing connectivity needs are met in the ensuing decade and beyond. For AT&T, we segment this opportunity into three distinct buckets based on the specific input parameters and return dynamics each one possesses. The first is our in-footprint build where we can take advantage of our existing infrastructure, deep insights on both the customer base and competitive landscape and our market presence in order to take share and deliver attractive returns. We believe our performance over the last few years supports the wisdom of allocating our capital to these opportunities with sustainable and solid return characteristics. As we stated previously, we currently size this opportunity is passing 30 million-plus consumer and business locations within our existing wireline footprint by the end of 2025. We finished last year with approximately 24 million fiber locations passed, including businesses, of which more than 22 million locations are sellable, which we define as our ability to serve. Our build to these locations is providing great returns, as you can see from our growing fiber revenues and ARPUs. As a general rule, about 5% of consumer locations passed may not be immediately sellable, primarily due to timing factors such as building access, construction or vacancies. Over time, we expect more of this inventory to become addressable for sale. We remain on track to reach our target of 30 million plus passed locations by the end of 2025. The simple math would suggest 2 million to 2.5 million consumer and business locations passed annually moving forward. As we previously shared, build targets will vary quarter-to-quarter in any given year based on how the market is evolving. The second bucket is availing ourselves of partnership opportunities to not only expand but also accelerate our coverage in excess of that 30 million-plus location target. This is where our recent Gigapower joint venture announcement with a BlackRock infrastructure fund resides. While this deal is not yet closed, we're very excited about the expected benefit. Through this endeavor, Gigapower plans to use a best-in-class operating team to deploy fiber to an initial 1.5 million locations, and I would expect that number to grow over time. This innovative risk-sharing collaboration will allow us to prove out the viability of a different investment thesis that expanding our fiber reach not only benefits our fiber business, but also our mobile penetration rates. But what makes me most enthusiastic about this endeavor is that we believe Gigapower provides us long-term financial flexibility and strategic optionality and what we believe is the definitive access technology for decades to come, all while sustaining near-term financial and shareholder commitments. If I were to draw parallel to this partnership approach, I'm reminded the early days of wireless where the race to grow footprint was somewhat time-bound and facilitated by a similar approach ultimately culminating in today's national networks. The last bucket is framed by opportunities to connect people who previously did not have access to best-in-class technologies through broadband stimulus and BEAD funding. As I shared before, we truly believe that connectivity is a bridge to possibility in helping close the digital divide by focusing on access to affordable high-speed Internet is a top priority of AT&T. The intent of these government programs is to provide the necessary funding and support to allow both AT&T and the broader service provider community that means to invest alongside the government at the levels needed to achieve the end state of a better connected America. As the year progresses, we expect to gain more clarity around additional opportunities that exist, none of which are included in the 30 million plus fiber location target I mentioned. As we compete for the subsidy, we'll bring our operational and market experience to compete for contracts in a disciplined manner. In doing so, we may be the only participant that has the ability to bid as part of an embedded wireline operation, a scaled national wireless provider and Gigapower may participate as a focused and flexible commercial open access wireline fiber network. We think this will prove to be a winning combination in pursuit of attractive growth. The bottom line is this. Our commitment to fiber is at the core of our strategy. In footprint, we're on track to deliver our 30 million plus location commitment and we're building the strategic and financial capabilities to take advantage of further opportunities as they emerge. To wrap up, regardless of what transpires in the macroeconomy in the year ahead, we remain confident in the resiliency of the services our customers depend on in their daily lives. I believe our plan for the year rings true to who we are at our core. For almost 150 years, AT&T has invested heavily into connecting our country. And in the process of doing so, we provided a spark for innovation that connects people to greater possibility. This year, we'll continue to honor this heritage by significantly investing in best-in-class technology to build on a foundation for the future of our country's evolving connectivity needs, needs that we expect to grow significantly in the coming years. With that, I'll turn it over to Pascal. Pascal?

Amir Rozwadowski :

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

Brett Feldman :

I think I'll start off with a follow-up here on the outlook that you provided. I appreciate some of the color that Pascal provided about the different operating segments. Maybe at a higher level, could you give us a sense as to what you mean by a more difficult operating environment? In other words, to what extent does the outlook for this year anticipate maybe a recession or ongoing inflationary pressures? And then I imagine one of the questions we’ll be getting today are, what are some of the key swing factors? And so if we were to use your adjusted EBITDA guidance as an example, what's the scenario that gets you to 3% growth and what could be the swing factors that might take that into the or higher category?

Pascal Desroches :

Yes. Brett, the only other thing I would add is, look, we've assumed in our outlook a more normalized industry growth environment. So to the extent it's more than that or less than that, that could be a swing factor. But the thing that I think is important, and I said this in my comments there is, whatever the environment is, we expect to perform relatively well versus the peer set.

John Hodulik :

Maybe just a couple of quick follow-ups on capital uses. Pascal, you may have said this in your remarks, but what's driving the $2 billion in working capital savings this year? And what are your confidence behind that? And then could you remind us on the working -- on the CapEx side, obviously, $24 billion again this year. But just what was the longer term sort of view? When can we expect that to start to come down? And what do you guys think of as a more normalized sort of CapEx, especially given what you have now with Gigapower and all the fiber initiatives?

John Hodulik :

Got it. And then the CapEx?

Operator:

And our next question comes from the line of Phil Cusick with JPMorgan.

John Stankey :

Phil. So first of all, as I mentioned in my comments, I view the fiber portfolio as that, a portfolio. It's a portfolio of options for us to look at where the return characteristics are most optimal on how we deploy capital around that. And I'm trying to be pretty overt in my commentary to all of you that we understand that we need to be very disciplined in demonstrating to all of you that each of those portfolio decisions and how we put capital against that is, in fact, driving acceptable returns. I'm very mindful of the fact that the Gigapower announcement is a model that the investor base is unfamiliar with. This is something different and something new. And I want to be very sensitive to the fact, just like we did when we were deploying in-region fiber and stepping up our investments. I've tried to be transparent with all of you around what our progress has been on the key drivers of the economic return of that investment. We've been sharing pretty aggressively things with you like ARPUs and penetration rates and a variety of other things that give you the confidence that in fact, that that's a sustainable, smart long-term investment. This new Gigapower model is a bit different. And I think it would be normal for any of you to look at it and say, gee, it's going to return at the same level. And so to demonstrate to you that I'm serious about ensuring that every incremental investment decision we make in this look, 1.5 million homes, you may say, well, that's not a lot. It's over $1 billion of investment to be able to go do this. We set up this first tranche to be able to come back to you over the course of 18 months and give you information that raises your confidence and in fact, we are driving the returns on this in the way that we anticipate them to be attractive and the management team that has been put in place and how the partnership is set up is intended to do exactly that. We will be in the market very, very soon right after the announcement. I intend to have 12 months of penetration information that I can bring back to you. And you can bet that when we're successful doing this and we demonstrate to you that we have the numbers to back it up that it won't necessarily still be 1.5 million. I would also tell you, I want to be thoughtful about, as I've made the comment what is it that we should own and operate 100% to ourselves and what we want to do within the partnership, just like we might have done when we were building wireless infrastructure a couple of decades ago. And if we hit the ball out of the park and things are great, we may choose to do some of this in-house and on our own and not necessarily subjected to a partnership. On the other hand, if we need more scale and we need to move faster, we have a vehicle now that's set up that we can move very quickly to increase the amount of funding and the amount of capacity that's in that entity to take advantage of that. And so we're going to have data that we can come back to you with, and we'll, I think, do the right thing and try to make sure that you're moving along with us every step of the way. And I just see this as another tool that gives me a lot of flexibility and a lot of options. Relative to the in-region fiber side of things, as I said, I'm looking for a portfolio of returns. And what I tried to stress in my opening remarks is, I'm giving you a characterization right now of what we think are high-return options within the 30 million passings that we committed to and what that looks like, and I've tried to clarify because I know some of you have been trying to do the math on it. But we have these other options now. I want to balance out what I think the return characteristics will be through the Gigapower initiative and we are going to now see some volume and capacity coming in out of region -- or excuse me, out of the 30 million build that will be subject to BEAD funding. And some of that subsidy may have a very different return characteristics than some of the stuff we're doing organically in region right now. And I want to have options open to understand that and look at that aspect of the portfolio as well. And I think we'll get clarity on that is on the end of the third quarter of this year that we start to see where we're successful in bidding for that money, how much it is, what kind of a build line do we put on the business in terms of having to add capacity to get the bill accomplished and how does it fit into the kind of operating territories that we think set us up for a geography and a footprint that's intelligent for us to operate moving forward. So that's kind of how I think about it in aggregate, and I'll let Pascal pick up your question on the free cash flow clarification.

Phil Cusick :

John, if I can follow up on one. Start to be a split. Do you look at Gigapower and BEAD spending as alternative places to spend your capital and effectively now slowing the organic pace to get to that 30 million?

Pascal Desroches :

But to be clear, Phil, this -- the BEAD money and the Gigapower are incremental to the 30 million.

Operator:

Our next question comes from the line of Simon Flannery with Morgan Stanley.

John Stankey :

Sure. So Simon, I'll be -- I've got to be careful about how much the partnership. It's a partnership structure, it's an entirely separate partnership structure, so you shouldn't expect to see any of the financials pull-through on a balance sheet structure for us, you should expect it to come in is investment income. We'll give you characterizations of the success of that and as it carries forward and you should think about this as both partners carrying equal weight in the execution of the entity. I think that probably gives you a good enough sense of how it carries through. And if you have something else you want to push on, I can try to give you a little more color. The BEAD timing, my point of view is I think there is -- there's been enough information put out there right now. We're going to go through a clarification cycle on the first set of data. I think that's moving along at a reasonably good cliff right now. And I think, frankly, the bigger states, those that have a more robust staffing capability are being pretty prompt and aggressive in working through getting that data set squared away. I would agree with you that there's going to be some states that are maybe a little bit slower than others, but my gut is when you're thinking about kind of the 80-20 rule, the bigger states, they're going to have the bulk of the funding are pretty zoned in on this, and they're moving pretty aggressively to get the process underway. And while there may be some smaller states that take a little bit longer to get their act together or are waiting to see how models develop in some of the more lead states that have bigger staffs to consider these things and then kind of be fast followers. I don't think that's going to inhibit some of the more aggressive states and being in the process and us being in a situation where in the third quarter, there's going to be monies starting to flow down from the Federal government and being turned back to the states for execution. So I don't think you're going to see any substantial shovels on the ground and certainly, customers being served in any substantial way this year. But I do think you're going to see projects and monies awarded before we exit this year, and you will see those volumes start to come online as we move into periods of 2024, and I expect that those will be concentrated in some of the bigger states that have more robust staff that can move through this fairly quickly. And pretty much have a view of how they want to go about doing this. They're just trying to get the data to fit into the process. As I've said before, we view fixed wireless as being a tool in the toolbox that we can use to deal with opportunities in areas that are less densely populated. We'll have our next rendition of the product in the market this year. There will be places where we view it as being an acceptable substitute for fiber deployment. They tend to be -- they are going to be less densely populated areas where it makes sense to do that. We have a plan as to how we want to test our assumptions around that. We will deploy and take advantage of that. I think it can have an opportunity to help us on some of the long-standing hybrid fiber copper base that we have that maybe has some speed challenges, and it will probably help us manage some of the churn characteristics associated with that, and I would expect to use it in that case. And then I would also add, look, there's a lot of businesses that maybe aren't in those less densely populated areas where this will be a perfectly acceptable and strong product, given the nature of how their business runs and what they need for their daily data needs and service needs. And so I do expect that we're going to have an opportunity to complement some of our strength in wireless distribution into the business market to provide a more robust fixed broadband alternative, fixed wireless broadband alternative to those customers, and bundle and package it in where it makes sense.

Simon Flannery :

Okay. Great. And are you contributing anything to it? Any capital, any assets? Yes.

Operator:

And our next question comes from the line of David Barden with Bank of America.

John Stankey :

Sure, Dave. How are you? I don't agree with your thesis at its point. I absolutely 100% dismiss your thesis. And I don't think that's how the market is structured and functioning today by any stretch of the imagination. I think our -- I go back and I look at our performance over the last 2.5 years, first of all, I would tell you, I think the industry is a lot more healthy than many who would like to trying to come up with this narrative? Is competition up? Or is it destroying itself? I mean I see a pretty consistently competitive industry over this period of time. And I tend to look at it not just on customer counts, but I look at things like both wholesale and retail revenues and how that's flowing through to service revenues. And I see a relatively balanced dynamic in the industry, but the math would tell you that balance dynamic would suggest we've been picking up a bit of share when it's all said and done. And I don't think that's a benefit of the number moving from whatever you assume the normal stasis is $7.5 million to $9 million. In fact, I would say of customers that are paying a reasonable monthly bill, we've taken more than our fair share, and I'm more interested in taking revenue share and profitability share than I am necessarily just taking a subscriber share. And I think our numbers would suggest that we've seen an ever improving trend over the 2.5 years in our ability to do that. So I don't submit to your point of view that if the "industry normalizes" we revert back to kind of where we were three years ago. I think where we are is because of how we're performing today, not what was going on three years ago, and that's kind of how I think about it. What I would tell you, Dave, is I don't think there's a windfall that comes in on restructuring of legacy costs. And I've I think I've been on this theme for a little while. I mean we've been working this issue pretty aggressively since the day I came into the job, and I would say we had to start formulating the plans when I came in, but now we have a very robust and functioning organization that we're doing this kind of day in and day out. And I spend more time talking about investing in the new business and the growth that we can get on sustainable fiber and a 5G infrastructure than I do on talking about what we are taking out of service, but we are taking stuff out of service. And so when we start managing things like our energy costs down, it's because we're decommissioning equipment and taking it off the copper grid when we are able to manage our dispatches down and show you improvements in our operating dynamics on dispatches. It's because we have a smaller footprint to manage. We are doing this day in and day out. And our pace at which we're doing it is accelerating. We've -- I've given you some hints along the way about the number of products that we've shuttered and when we shuttered those products, it starts to take operating costs out of the business. This is part of what we have in our forecast to you to continue to improve our operating costs. So you're seeing this operating leverage start to come into the business, and it's partly contributed to the fact that we're managing through these legacy costs. And as we give you the forecast for cash this year, when we talk about improvements in our overall cost structure, some of it is coming on the backs of what we're doing here. And I'm very well aware of where our cost structure is on a comparative basis to others that we compete with in the industry, some of which do not have the hybrid asset structure that we have of both fixed and mobile. And we are on this mission to ensure that we're not operating any of that at a disadvantage over the next three, four and five years. And I think you're going to just see this ratably come in over that period of time as we work through what is -- it's frankly a bit of a painstaking process to go through. It's central office by central office line by line, customer by customer, but it needs to be done. I think it can be done in a way that makes us a better and healthier business where we have a great hybrid of a fabulous fiber footprint with a fabulous wireless network that is ultimately the future of how customers are going to buy together, and I like that. I think that hard work will be rewarded in that regard, but I will fully admit, we are creating new intellectual property here around how you get to this space. And I'm choosing to do it organically internally, not through a front-end private equity transaction that puts a little bit of cash in my pocket but ultimately has the value of it accrue to somebody else over the hard work of three, four and five years.

Craig Moffett :

I want to stay, if I could, with this topic of your portfolio of broadband, John, if I think about your kind of overall Mobility national footprint, it sort of maps with today roughly call it, 16%, 17% of the country already overbuilt with fiber, another 10% or 12% to be overbuilt with fiber. Can you just talk about how you think about the consumer value proposition in those different segments where you have wireless that doesn't have a fiber component where it does? And then -- and what role fixed wireless might play to sort of round out that consumer value proposition.

Amir Rozwadowski:

Thanks very much, Craig. Operator we have time for one last question.

Michael Rollins :

Just thinking a little bit more about the wireless growth opportunity, can you share with us how AT&T is doing with the uptiering of customers onto unlimited and premium unlimited plans? And then given some of the comments on inflation, are there opportunities for AT&T to update wireless and fiber pricing again this year? And are any of those opportunities included in the guidance?

Pascal Desroches :

No, I think that's all well said.

Operator:

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.

Operator:

Thank you for standing by. Welcome to AT&T's Third Quarter 2022 Earnings Call. [Operator Instructions]. I would like to turn the conference call over to our host, Amir Rozwadowski, Senior Vice President, Finance and Investor Relations. Please go ahead.

John Stankey:

Thanks, Amir. Good morning, everyone. This morning, we shared our third quarter results, which, yet again, demonstrate our strong execution in delivering critical connectivity services to our customers. Earlier this month, we saw just how vital these services truly are. In the devastating aftermath of Hurricane Ian, the ability to connect with others proved to be invaluable to so many people. And our teams were, yet again, some of the very first to arrive on the scene, working tirelessly for our customers. The effort they made, along with first responders, supported by FirstNet, to keep our network running in some of the hardest hit areas was nothing short of heroic. I'm really grateful for their sacrifices, and all of AT&T is proud of their efforts. I'd also like to say thank you to our teams for their solid execution in deploying our mid-band 5G spectrum and building out best-in-class fiber-based access solutions. As you can see from our results, we continue to deliver strong customer growth on the back of our focused 5G and fiber strategy. The demand for fast and reliable 5G and fiber is at an all-time high, and our disciplined and consistent go-to-market strategy continues to resonate. In addition, as we begin to lap investments we need to optimize our networks, improve our distribution and transform our business, we're now seeing the benefits of our growth fall to the bottom line, as we suggested they would and as evidenced by accelerating adjusted EBITDA growth. Let me dive in a bit. In Mobility, we posted another strong quarter of growth by adding 708,000 postpaid phone net adds. As I stated in prior quarters, our consistent results are being driven by an improved value proposition, better network experience and our ability to meet our customers where their needs are. We're creating efficiencies through our distribution, and acquisition costs are improving. This is helping us drive further gains in operating leverage. This past quarter, our teams delivered across 3 key performance measurements

Amir Rozwadowski:

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

Philip Cusick:

I guess, first, Pascal, the free cash flow bridge to $14 billion, just to reiterate, help us think about that as we go into the fourth quarter. You need at least $6 billion, and you said CapEx, it sounds like it's coming down. That's a good part of it. And then as we think about next year, for what you can give us, how should we think about things like taxes, pension as well as the industry overall? And I know you don't want to update it, but given how much the world has changed, is that $20 billion free cash flow guide even relevant anymore?

Operator:

Our next question comes from the line of Brett Feldman with Goldman Sachs.

John Stankey:

Brett, I appreciate the question. Certainly, a bigger fiber footprint allows us to improve our relative net add performance in broadband. I think the short answer to your question is, for the next several quarters, we'll be in this dance around, what I would call, at least on the subscriber counts, something close to near 0. But you ought to understand, as Pascal just indicated to you, our yields on fiber customers are, of course, much better than our copper customers. Combination of ARPU, churn characteristics and, frankly, the operating performance profile, which, I know you've observed that there's still room for our margin expansion in the Consumer Wireline business and that we should be looking at that relative to others in the industry. And I think that's an accurate observation over time as we continue to scale the business, that we'll continue to improve profitability in it. But we still have several quarters of working through the dynamic of getting the legacy dynamics out of the business and focusing on the new infrastructure and the growth, and that's a journey we're committed to. And I think you're seeing that it's got strong economic promise as we move through that and continue to increase the size of the fiber base. I don't know that I could add a whole lot to you on your question about what we might think about in terms of doing other fiber builds that are out of our operating territory. First of all, I'm not going to acknowledge your comment specifically on some of the speculation that's shown up in the media. But I think I have shared most recently when I was in Arizona, and we were doing the work in Mesa, that we're evaluating it under many of the same sort of criteria and circumstances that we look at within our existing operating footprint. Number one, can we go in and be the first fiber provider in that area? Two, do we believe it's a market where the brand is going to perform, and we'll get the rate and pace of penetration that we need to make an economic return on it? Three, can we build because of the dynamics around a particular municipality or area cost effectively and quickly with a relatively low overhead around that and get, what I would call, an operating scale in that geography that warrants the fixed cost infrastructure start-up? And then finally, do we think that there's some interplay in terms of having the asset and improving value in our wireless business as we operate in the area as well, and it marries into our distribution? So to the extent that we found opportunities like that, that had as competitive returns is building in our region, I think the management team would have to evaluate those types of things and think about how it moves forward on them. And I would tell you, as I've indicated as well, that there will be some federal subsidy monies coming in, in places, and we should use that same set of criteria in that same model as we think about are there opportunities for us to pair our capital with possibly a public capital to open up opportunities that we might not have pursued otherwise.

Simon Flannery:

John, you opened your comments mentioning the world faced a period of uncertainty. You've been looking at that for a little while. It would be great if you could, and Pascal, update us on what you're seeing real time, both on the business side in terms of cutting back IT budgets, et cetera, and how that may evolve over the next few quarters as they deal with some of the stresses from inflation demand? And then on the consumer side, obviously, you've called out the DSO issue last quarter. Good to hear the free cash flow reiterated this quarter. So perhaps you could update us on payment trends on bad debts and how we should think about churn here as your sort of pricing increases sort of mature going forward?

Operator:

And our next question comes from the line of John Hodulik with UBS.

John Stankey:

So John, I think our visibility is really good. I mean we run a subscription-based business. And as you know, those customer relationships tend to be pretty sticky relationships. And we have every ability to understand how we're bringing the customer in today and at what profitability level they're coming in. We understand the base and how the base is performing. I think we have reasonable ways to look at some of the dynamics that change around things like roaming and have visibility toward those impacts and how they're going to work through. You just heard my commentary with Simon on some of the bigger drivers of profitability in the subscription business around churn and how we think about the dynamics associated with that. So when I look at our ability to kind of understand why we're getting operating momentum, we communicated to you at the beginning of the year that you should expect the back half story on this, and you're seeing the back half story. And now we're in the middle of the fourth quarter right now, we're obviously aware of what our numbers are right now. And I would say, we have confidence that we're going to be able to deliver those continued leverage dynamics that we talked about. So I feel pretty good about our visibility on that subscription base. And we've built a quality subscription base and brought in quality customers that are now starting to give us that profitability lift as well as we have visibility into our cost structure and all the work that we've done around that. And as I've said since the beginning of the year that we would start to see some of that move to the bottom line as we stabilized our promotional position in the market, which, I think, you've seen us do, and we are still maintaining market momentum with that. And so I feel really good about it. I don't know that anything has changed in fixed wireless. As I said repetitively that it has a place in our portfolio. That place is not broad-scale deployment in every operating territory and geography that we operate in. We -- the way I would characterize it, I'd rather take 1 million new fiber customers a year than 1 million new fixed wireless customers a quarter. The value equation of those 1 million fiber customers is a far superior value equation for the long haul for our shareholders. And as a result of that, we're focused on ensuring that we can continue to grow our fiber footprint and bring on those high-value, sustainable durable relationships where we're able to have a network infrastructure that matches consumer consumption dynamics now and into the future. Fixed wireless will be that answer in a small number of geographies and applications and homes. It will not be to our entire nationwide base. And so investing shareholder money at the front end right now just to drive top line growth that I don't think is sustainable over a 3-, 4-, 5-year period is not the best use of my management team's time and the best use of our scarce capital. The best use of it is to put it against putting in durable infrastructure, continuing to bring on high-value wireless customers, build our wireless network to be really effective in the next set of applications that are going to be necessary to bring the promise of 5G to life as we start to see the dynamics of autonomy and vehicles emerge, some of the medical monitoring capabilities, private 5G that starts to work into the enterprise space. We want our wireless network to be ready to service those workloads and do it in a pristine fashion because we think those revenues will come back with the kind of margin characteristics that we've typically operated the wireless business at. And so I feel really comfortable with our balance about that, and we'll use fixed wireless as we move into next year, where it's appropriate to use it, but it will not be broad scale. Pascal, did I miss anything from your perspective there?

Operator:

And our next question comes from the line of David Barden with Bank of America.

Pascal Desroches:

Okay. In terms of, first, the interest rate environment. One of the things that we did, Dave, over the last 2, 3 years is to really reconstruct our maturity towers and took advantage of historically low interest rates we were seeing coming out of the pandemic. As a result, right now, we have a debt tower -- a series of debt outstanding that are yielding around 4% on average, and 95% of it is fixed. And if you look at our maturities over the next several years, our free cash flows after dividend could largely handle those. In the instance that there are slightly higher towers, we can always roll on a short-term basis. But what we've done is we've reconstructed the way we are managing capital such that we can really continue to delever over the next several years without any meaningful need to go out to the market to raise debt. So that interest rate. In terms of pension mark-to-market, in terms of pension, big picture from a cash standpoint. For the foreseeable future, let's talk the next decade, there's probably no need to fund the pension plan. Now with that said, there is, with the discount rate coming down, we've had some -- going up, we've had some big gains that we normalized out of our reported earnings. On a -- going through next year, I would expect higher pension expense because of the fact that now we have -- we're going to be discounting at higher interest rates. But all in all, those are noncash pieces that, when we think about the long-term profile of operating this company, the fact -- what's most important to us is that there is no need to go fund the pension plan for the foreseeable future. And in terms of the DISH MVNO, it's not a meaningful contributor this year. We would anticipate, as we look out the next several years, it should ramp up. And we feel really good about the overall arrangement with this.

Michael Rollins:

Just to dig in a little bit more to wireless. In the presentation, it was flagged that the business wireless service revenue grew 8% year-over-year, and I think the total was around 6%. So curious if you can unpack a bit more of the differences in trends that you're seeing between the business side of wireless and the consumer side of wireless? And then as you're talking about the next stages of 5G and the opportunities, I was reading in the press release that you're flagging the success of IoT and connected device volumes. I'm curious if you can unpack that a little bit more in terms of, I think the automotive industry was one place you referenced in the release on success. Where are you seeing success in those verticals? And are you seeing any kind of inflection in the near to medium term where this B2B IoT opportunity could become more for AT&T and the industry?

Michael Rollins:

It's very helpful. And I was just thinking, just even on the top line service revenue side, with the business service revenue growth faster than the overall and then implicitly consumer, is that something that you would expect to continue where this business is just going to be a bigger contributor to the wireless business going forward?

Operator:

And our next question comes from the line of Kannan Venkateshwar with Barclays.

John Stankey:

So Kannan, let me take the first part of your question, and then I'll let Pascal do some cleanup here. So first of all, what you should expect is that, over the life cycle of a build -- and I think we've been pretty clear on giving you insights into this. Let's call it, the first 30% of penetration goes relatively quickly, and the next 20% takes a little bit longer. And so it would be natural that as we build, that when you kind of get yourself to a 30% penetration rate, you're going to see that curve start to slow down a bit, and that's to be expected. I think the biggest change that's occurred in penetration is how quickly we're getting to the 20% level versus historic numbers. And as we shared with you previously, we've kind of doubled our pace to penetration on the front end of that curve. And I've also shared with you that if you look at a typical return characteristic cash flow analysis of the investment of fiber, there are effectively 3 big things that drive that return dynamic and how effective the returns are, one of which is rate of penetration. And when we did the original assumptions on kind of our fiber business case, we had a much more ratable and deliberate ramp into that first 30% of subscribers in the business case. And now what we managed to do is we managed to effectively take a year off the cycle to get to the 20% mark. That is a huge impact on accelerating cash flows to the front end of the business case. And it has a meaningful impact on the characterization of returns, even if you don't increase the ultimate assumption of what the terminal penetration is. And so I would tell you, we've already kind of had success in that regard. We've characterized that for you. But we've not made any assumptions at that once you hit that 30% level that the back end is going to go any faster. And so I think you're going to see a degree of penetration slowdown as we kind of hit that 30%, and that's to be expected. It's been historic. And that doesn't mean it's a bad thing. It just takes a little bit longer to kind of get to what I would call as the market norm and kind of stability of how we expect shares to be allocated between the various players in the market. So hopefully, that gives you a little bit of sense on that. We don't publicly disclose the transfer rates and kind of what's going on there, Kannan. But look, you've got enough public information that we shared with you. I think you pretty well can conclude that if we're turning in the kind of numbers we're turning in, that there's got to be a meaningful percentage of that total fiber increase number that's coming from competitors in order to deliver the number. And we watch it. We track it closely. I think both are good, right? Because what we know that any customer we move from legacy or embedded infrastructure over to fiber becomes a new established long-term customer with us. They're not going anywhere once we get them on fiber. But most importantly, we don't turn in the kind of numbers we communicated to you this quarter, unless we're doing something that's moving share in the market. And we all know where that share has to come from. It's coming from -- in almost all cases, the embedded cable provider.

Operator:

Our next question comes from the line of Frank Louthan with Raymond James.

John Stankey:

Frank, thanks for asking the quarterly question on what's sustainable. It was sustainable for another quarter, and that's been 2.5 years now. And I'll let you know next quarter if it's 2 years, 2.75 years. So I feel really comfortable with where we are. I think you're seeing the strategy play out. I look at where the market sits today, and I'll reiterate what I said earlier in the call. We're not the one out there with $1,000 for new iPhones right now. We are at a different place than I believe both of our primary competitors. And I also characterized for you, you need to understand a lot of our growth is not coming from what we have as offers that we're communicating in the market. Mike's question is a really important question, looking at the consumer business mix. And when we think about how we're spending our promotional dollars, I characterized for you in the Goldman conference that there's a lot of other aspects of promotion, how advertising gets done, how heavy you have to be to communicate your message. If you're doing a more promotional stance, what you have to do in your channels to incent people to sell and change things, the formula and the mix we have is a very competitive formula and mix right now across consumer and business, across our mix of promotional strategies or distribution partners. And one should not just simply say, because the lead offer that's being communicated in mass advertising is x, ask whether or not that's sustainable. The question is, are our customer acquisition costs sustainable? You're seeing the profitability improvement. You're seeing the ARPU improvement, and I think that's a pretty sustainable equation. I'm not going to comment on the fiber JV structure. I will make an observation, Frank. It's my duty to always keep my mind open to new ideas. It's my responsibility in running the business that if there's an opportunity for us to do something that's in our wheelhouse, that's in the strength of the capabilities that we have as a company, and it's core and foundational to our brand to try to ensure that we seize those opportunities and move forward on them. We certainly have a past practice. The wireless business was built with partners. I think you should understand and look back, and we've done that effectively in the past. And things that we've done, and we've done it in a responsible way for shareholders, and it's been a means for us to think differently about how footprint expansion can be done. We've certainly used that kind of an approach before. We understand how the approach works. I think about it in aspects to all kinds of elements of our business, and I've got to keep an open mind to those things moving forward.

Walter Piecyk:

John, when I look at postpaid, which is probably the prior focus on revenue for the company, you've increased revenue, or it's accelerated for the past 8 quarters. So I guess, when I look at the first part of that, you kind of referenced that in the last question, we were talking about how everyone was talking about the handset promotions. You saw very good subscriber growth, and that's sustained. And now when we look at the past year, it's been in part on price increases to some of the legacy plans. So now you've got to this, whatever, where you're 6% growth in postpaid. If you just sustain that going forward, that will probably beat consensus. You probably don't need to sustain it, but when you look at '23, is it going to be a component of more price increases? Or do you think subscribers are going to help you for growth in? And my second question, which is related, is part of the ARPU increase for others was bundling in Netflix or, for your case, HBO Max, that you cut, and I think in June 1 for new customers. Maybe that's been helping your profitability, I don't know, but is there an opportunity to repack some of these streaming services into your offers in order to get ARPU even higher?

Amir Rozwadowski:

Thanks very much for the question, Walt. And thank you, everyone, for your participation and interest in AT&T. With that, we'll conclude the call and look forward to connecting again post our fourth quarter results.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to AT&T's Second Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to turn the conference call over to our host, Amir Rozwadowski, Senior Vice President of Finance and Investor Relations. Please go ahead.

John Stankey :

Thanks, Amir. And good morning, everyone. Thank you for joining us today. Last quarter, I shared that AT&T had entered a new era with the right asset base capabilities and financial structure to become America's best broadband provider. I'm happy to share this morning that we're continuing our progress, improving our infrastructure and expanding our customer base across our twin engines of growth, 5G and Fiber. We saw historic levels of second quarter net additions, thanks to our discipline and consistent go-to-market strategy and solid execution, building fiber and deploying our mid-band 5G spectrum assets. In Mobility, we brought in the most second quarter postpaid phone net adds in more than a decade, just like last quarter, building on our momentum from 2021. It’s noteworthy that we've sustained this momentum in a highly competitive environment. Industry growth in the first half of 2022 has been stronger than the expectations I shared with you late last year. In our view, this strong performance reinforces that our success is not solely promotion-led, but instead reflective of our improved value proposition in the market. Even though better-than-anticipated customer growth metrics resulted in some higher-than-expected success-based investment, ARPU and profitability in 2Q improved and we expect that trend line to accelerate in the second half of the year. As Pascal will discuss shortly, we're, in fact, increasing our service revenue growth guidance for 2022. In Fiber, we continue to invest in building out a premium network, drive a great build velocity and deliver on our stated expectations for accelerated customer growth through improved penetration rates. We're finding success in serving more customers in new and existing markets, with what we believe is the best wired Internet offering available. This is evidenced by our more than 300,000 second quarter AT&T Fiber net adds, marking our 10th straight quarter with more than 200,000 Fiber net adds. The strength and value of the AT&T Fiber experience is enabling us to increase share in our Fiber footprint and convert more IP broadband Internet subscribers to Fiber subscribers. Ultimately, our Fiber strategy is a sustainable and long-term technology play that will support key macro trends. We expect to see a continuation of favorable ARPU trends, as we expand the availability of what we believe is a best-in-class network with a multi-decade lifespan. So I'm very pleased with the strong customer growth we're seeing. Our success only reinforces the improved value proposition we're providing. And we expect our investment in top-tier technology to translate into strong resiliency for our services for years to come. Over the last 8 quarters, we've achieved an industry-best 6 million postpaid phone net adds, while adding nearly 2.3 million AT&T Fiber customers, increasing our Fiber subscriber base by more than 50%. I'm also very proud with the progress our teams have made in rapidly expanding our 5G and fiber footprints. I'm pleased to say that we've achieved our target of covering 70 million mid-band POPs, 2 quarters ahead of our year-end target, and are now on track to approach 100 million mid-band POPs by the end of this year. And our expanded Consumer Wireline fiber footprint now gives us the ability to serve 18 million customer locations. This is an increase of nearly 2 million from the start of the year. Our teams are running hard to deliver these world-class services to our customers. And we expect our commitment to investing in our core connectivity networks to serve as the foundation for AT&T's growth for decades to come. Moving to our second major priority. It's more important than ever, we'd be effective and efficient across our operations. The dispositions we executed over the last 2 years provide us with operating flexibility to adjust, as needed, what is proving to be an increasingly pressured economic backdrop without requiring us to materially compromise on our investment priorities and financial obligations. We have strong visibility on achieving more than $4 billion of our $6 billion transformation cost savings run rate target by the end of this year. As we shared before, we've initially reinvested these savings to fuel growth in our core connectivity businesses. However, as we enter the back half of this year, we expect these savings to start to contribute to the bottom line. As you're likely aware, we're taking proactive measures, such as selective pricing adjustments, to address as much of the very real inflationary pressures that are clearly impacting all parts of our economy. The pricing strategy we implemented is being executed in a proactive and methodical way that enables some of our longest-standing customers the opportunity to take advantage of our most robust offers, while also ensuring that we're responding to the real-time cost pressures in our business. I believe we've navigated this difficult reality effectively and, thus far, are seeing results that are consistent with our expectations, although not sufficient to cover all inflationary impacts. Last quarter, I shared that we're seeing inflationary pressures. And we estimate those to be more than $1 billion above the elevated cost expectations embedded into our outlook. We're clearly operating in different times, and the macroeconomic backdrop is evolving in a dynamic manner. Still, we're confident in our ability to emerge in this chapter, a stronger company, thanks to our position as one of the world's largest-scaled telecom operators, our improved underlying financial flexibility, the cost reduction initiatives we have in place, the essential nature of the services we provide and our pricing actions that help partially offset these impacts. With that said, the current environment is not easy to predict. We're seeing more pressure on Business Wireline than expected. And on the consumer side of our business, we're seeing an increase in bad debt to slightly higher than pre-pandemic levels as well as extended cash collection cycles. However, it's important to note that historical patterns in previous economic cycles suggest customers have managed their accounts similar to what we're experiencing today. In fact, we feel even better about the resiliency of our services, given the elevated importance of connectivity in everyone's lives. We view this cycle no differently and still expect customers will pay their bills, albeit a little less timely. Furthermore, as I mentioned before, we feel better about our underlying financial flexibility that we have in quite a while. This is why we're confident, we can maintain our focus for growth over the long term by investing in the future of connectivity through 5G and fiber. It's our belief that near-term cyclical economic uncertainty does not warrant a retrenchment in the deployment of long-lived assets. The long-term economic justification for these investments remain sound. And timing of the market development supports our intent to invest through this cycle. Importantly, we maintained our focus on paying down debt, with the $40 billion in proceeds from the completion of the WarnerMedia Discovery transaction in April, helping us to significantly reduce our net debt in the quarter. I'd also like to touch on free cash flow directly. While free cash did come in lower than we expected this quarter, there were several notable factors that drove this. The first is the timing of higher success-based investments on the back of our robust customer growth. Additionally, we front-end loaded our capital investment plans in order to kick-start our growth initiatives. We expect these plans to seasonally moderate through the course of the year, as we achieve our $24 billion in capital investment plan. And I'm pleased we've been able to effectively manage our supply chain and front-end load some of our work this year. In addition to these investment-driven impacts, we're seeing some longer collection cycles and inflationary costs that we've not been successful in fully offsetting. These cash flow impacts, along with expectations for a more tempered economic climate in the latter half of the year, have led us to adjust our cash flow expectations for the full year, even with our expected material improvements over the next 2 quarters. The key takeaway is that we understand the emerging economic pressures on our business and feel confident in our ability to manage through them while, at the same time, investing for the long-term benefit of our customers and shareholders. While we're not immune to the pressures impacting the broader economy, the repositioning of our business to focus on core connectivity solutions, the underlying financial flexibility achieved through a significant reduction of our debt and the ability to invest in access technologies built for the long term allows us to opportunistically maneuver through this economic climate. Finally, I want to take a moment to discuss our Business Wireline unit and our focused efforts to reposition the asset. There is a sizable base of business revenue coming from legacy voice and data services. This business is increasingly facing secular pressures as customers replace traditional voice services with mobile and other collaboration solutions. On the data front, VPN and legacy transport services are being impacted by technology transitions to software-based solutions. Today, approximately half of our segment revenue comes from these types of services. Last quarter, we shared that we're experiencing additional government sector pressure related to the reallocation of spending priorities. This pressure, tied to the timing and restructuring of government spending, continued in 2Q. While we're hopeful that some spending will return and the Enterprise Infrastructure Solutions contract volumes and share gains will offset pricing reductions over time, we consider it prudent to reset expectations. It's worth noting that approximately 20% of the year-over-year Business Wireline revenue declines in the second quarter were due to government spending impacts. Lastly, we saw inflation and wholesale network access charges we incur to provide services to customers outside of our footprint due to contractual resets. This cost pressure resulted in more than 20% of the segment's year-over-year EBITDA decline. This pressure will be managed through opportunities to operate more efficiently movement of traffic to alternate providers, symmetrical wholesale pricing adjustments and natural product migration trends. Looking ahead, these developments only strengthen our resolve in executing our transformation, including actions to accelerate cost takeouts and simplify our product portfolio. We expect these actions to mitigate the year-over-year pressure in this segment's profitability over time. But we now expect Business Wireline EBITDA declines in the low double digits this year. And our expectation for stabilization extends to the back half of 2024. However, we remain confident in our efforts to reposition the segment. The deployment of fiber is leading to an acceleration of growth each quarter in our connectivity solutions, which delivered close to 15% growth this quarter. Our fiber expansion also provides us with the ability to gain market share in SMB, which is an underpenetrated segment for us. Moreover, we continue to utilize our business relationships to expand opportunities in Mobility. Since last year, we've taken more than 1 full point of share in the business Mobility space. Our focus on Fiber and 5G continues to gain traction. And we expect to use our strong enterprise and growing SMB relationships to take advantage of opportunities as they expand. We know this transformation won't happen overnight, but similar to our turnarounds in Mobility and Consumer Wireline, we're confident we have the right strategy in place and in our ability to execute it successfully. I'll now turn it over to Pascal to discuss the details for the quarter. Pascal?

Amir Rozwadowski:

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

John Hodulik:

[Technical Difficulty]

John Hodulik:

Okay. Can you hear me now?

John Hodulik:

Okay. Yes, 2 parts. First, on the -- I guess, for Pascal. [Technical Difficulty].

John Hodulik:

Okay.

Simon Flannery :

Just coming back to the 2023 free cash flow. Can you help us a little bit with the CapEx? Is that still expected to be about $24 billion before dropping off the following year, especially given that you've said you've pulled forward some of the 5G spend. And I guess any updated thoughts on what you want to do in terms of fiber? Are you going to continue at this 3.5 million, 4 million homes or locations a year, and you're going to stop at 30 million? What's the latest thought there? And then you've referenced DIRECTV a couple of times. I just want to make clear, has anything changed at DIRECTV? Or is this just a quarterly kind of cadence of the payments? Or are you still expecting the same distributions that you put out in your guidance for the '22 and '23 as overall?

Simon Flannery :

Great. And just a quick follow-up. On the price increases, what's your early read of what customers are doing? Are they paying the extra $6 or $12? Are they migrating to unlimited plans? Is that accretive or not? And any surprises on churn?

Operator:

Our next question will come from Brett Feldman with Goldman Sachs.

John Stankey:

Brett, first of all, I'd say that our most recent experience in looking at kind of a challenged cycle is probably coming out of the 2008 recession and the dynamic around it. And as I indicated in my earlier remarks, we've evaluated that. We look at that. And that was a pretty stressed time, if you recall. And I don't know that I can exactly predict what's going to occur over the next year or so. But my guess is it probably won't be quite as shocking as that cycle is, what's occurred in a worst-case scenario. And we go back and we look at patterns and behaviors that have occurred in those cycles and evaluated them. And the other great thing we know that today is we have far better data than we've ever had that's more dynamic in how we do algorithmic scoring and things like that, that allow us to be even more effective in managing customer risk. So I think we feel pretty comfortable that we've got a reasonable record of data that allows us to do some projection on that as we start to see these things move. And as I said, this typically is not an issue of people not paying. It's an issue of when they pay. And I don't believe there's anything in our credit scoring and how we've looked at our customer base coming in that would cause those trends to be dramatically different than a previous period. In terms of how we go to market, I think we had a fantastic quarter. And I don't know that I want to go to market any differently than the quarter that we've put on the board. In fact, looking at many of your commentaries, you've been articulating that others have been much more aggressive in the market and probably leaning in to promotional activity in a heavier way. And I would say, I would characterize our approach as being much more tempered and consistent with the past. And we have not really responded to that increased promotional activity that we're seeing from others in the market right now. We've kind of been continuing to play our game. And we've put up a record quarter or a second quarter for ourselves in the 10-year period. And as I've told you before, we like each of these incremental subscribers we're bringing in. We think the economics of them are very strong, albeit there is investment at the front end to bring them on to the network. But I'm not going to shy away from that kind of growth. I don't know what the overall market is going to do for the next several quarters. I expect it will be, as I said in my comments, a bit more tepid as maybe economic stress comes in. But I've been saying that we expected it to be a little bit slower for the better part of 9 months now. And it hasn't materialized yet. We'll take the growth if it comes in. I expect it's going to slow a little bit. And I'm going to continue to play our game as long as it's working, and it's working right now.

Operator:

Our next question will come from the line of Phil Cusick with JPMorgan.

John Stankey:

Phil, so let me touch on these first. And then Pascal can come in and backfill to the extent you wishes to do so. So customer trends -- first of all, I don't want to go down a path on stuff we haven't disclosed. But the first part of July, as you'd expect, tends to be a little bit more suppressed because it's a high holiday and vacation period. And that's what I would call seasonal and cyclical, and we certainly saw a little bit of that occurring. But I've not seen anything in the market right now that suggests we're seeing a move away from what the first half of the year represented. And I think kind of moving into the second part of your question, I hate to describe it this way, but I think we got a little bit of a tale of 2 cities going on here. And when you see 9% inflation, it tends to hit those in the low end of the market really, really hard. And it's difficult when you walk up to the gas pump and have to fill the car, and you get the electric bill coming in and you see the kind of step-ups that people are seeing. And I think there's an adjustment period that goes on. The flip side is you've got another segment of the population that banked a lot of money during the pandemic. They weren't traveling. They weren't dining out. They were feeling a little bit more flush. And they're making different decisions. And as you know, our postpaid base is probably skewed a little bit more to the higher socioeconomic dynamics and probably a bit more insulated. But there is a portion of the base that clearly is starting to adjust to this dynamic that there's higher calls on their cash in any given quarter. And they're having to adjust betting patterns and behaviors and prioritization of how they order bills. And I think we're seeing that there's a little bit of that starting to occur. As Pascal said, it's not alarming in the way it's happening, but it is moving out collection cycles a bit, as we typically see when this type of stress starts to show up. And that's what the working capital issue is around it. So I would tell you, I don't see anything in here that would be out of pattern for this occurring. I think you've got 2 different parts of the economy, though, that are working in different ways. And how they develop over the course of the next several quarters is a little bit of a visibility issue, to be candid with you. And I don't know, if you'd asked me 6 months ago, we would be seeing 9% inflation annualized? I don't think I would have picked it as being that strong, but here we are. And now the question is, how fast do we eradicate it and what rate? And if you have a good pick on that or good insights, then I can probably be a little bit more precise than what I think '23 brings. I think what's important to understand is -- Pascal articulated in his comments is the fundamentals of the business are really strong. We feel really good about some of the mechanical things that will improve cash flow yields into '23. That's not going to change. But what happens in the overall economic pattern is a bit uncertain. And without seeing how the Fed reacts, how fast we see the curve starting to abate on the inflation side, trying to make that pick right now just feels like it's a bit of an overreach. And so I think we're reserving the right to get a little bit more visibility on '23 to declare. But I think the strong improvement dynamics are what I would call mechanical and the performance of the business is supporting the fact that we're going to see that improved conversion on cash flow as we move through the year. And then finally, on your question about the plans is, look, we still have a lot of streaming services in our base that we're using. We're trying a couple of different things. Part of this has been segment driven to look at opportunities for us to address areas that we think there is potential for stronger growth. And we shifted the mix of our plan and what we gave away, so to speak, in some of the benefits, especially as we were executing the price changes that we have talked about previously. And we felt that this quarter, and where we stood at working on things like more generous hotspot capabilities and better roaming moving into the summer, might be a better play in the market. And I would tell you, we kind of like what we saw in our results, despite a lot of the changes by others in the industry in terms of what their value proposition is to customers. And it feels like it was a good pivot and rotation at this moment for what we needed to do with the kind of changes we were making broadly in our plants. That doesn't mean that, that's the strategy forever. And it doesn't mean it's the strategy for the rest of the year. As we move through the summer months and we get through the peak travel periods and we look at what other options we have, we could choose to do something different in what we decide to do from a promotional perspective and what we choose to bring in as part of the bundles moving forward. I don't think anything should be viewed as static. And I think entertainment, as part of a wireless bundle, is probably something that's going to be around with us in this industry for a good period of time because I think customers -- certain customers resonate with it. And HBO Max is a great product. We like the fact that we're kind of viewed as being the place to come to get it. And when it's right for us to put that up in the front line to do that, we'll continue to do that.

Michael Rollins:

So a follow-up and a question. When you're discussing some of the impact that your customers are experiencing this inflationary environment, can you talk about how AT&T is using the ACP program, the size of it, and the opportunity to use that, which may be different than some past cycles customers had deal with potentially tougher macro climate? And then secondly, just in terms of the infrastructure money that's out there, can you give us an update on your expectations for the size of the opportunity that AT&T could pursue?

Operator:

That question will come from David Barton with Bank of America.

Pascal Desroches:

Okay. Let me try hitting all of those. And obviously, John can chime in. First, look, the thing to keep in mind is the second -- we pay devices, for example, probably a quarter to 1.5 quarter after the sale has happened. So for Q2, as an example, we're paying for the last part of Q4 and Q1. So in Q -- for the back half of the year, it's going to be largely activity from the back half of Q2 and Q3. So the holiday sales and the upgrade season, we're going to pay for that in the first half of 2023. And so mechanically, we have really good visibility in terms of the payments that we are likely going to make in the back half of the year. But overall, given the strong growth we had in the first half of the year, our overall device payments for the year are higher than we anticipated, which candidly, this is a very good -- it's a very good situation because we think this is attractive growth, and we feel really good about it. As it relates to CapEx, our fiber build was front-end loaded for the year. Remember, last year, we had some supply chain disruptions. And it took us a while to ramp. We got good exit velocity and exiting 2021, and that continued. And in the first half of the year, we delivered 2 million locations passed. So we feel really good about that. In terms of our and deployment and the pace of that, nothing has changed. We said we were guided to $24 billion of capital. That remains the case. So we're not spending any more capital than we thought for the year. And remind me the last part of your question?

Pascal Desroches:

Days sales outstanding. So in terms of DSOs, here's what we know. This is a trend that is relatively nascent. It is probably 6 weeks or so that we start to see an uptick in days sales outstanding. Is it a trend? Is it going to get worse? We don't know, but here's what we do know. We do know that, as John alluded to, in prior recessions, customers may have paid late but they paid us. So there's nothing to suggest given the mission-critical nature of our services that customers won't pay us because they're going to want to maintain connectivity. So in that regard, we think it is a timing issue. And I think in this macro environment, I'm not going to call whether it's going to get much, much worse than where we are today. But we're taking a prudent view and not assuming it's going to get better, given all the uncertainty.

Operator:

That question will come from the line of Frank Louthan with Raymond James.

John Stankey:

Frank, look, we've been pretty clear on the dividend policy as to what we're doing. And the board ultimately makes this call and this decision. And as I've said before, we set this at what we think is an incredibly attractive return in the market right now. And I think we are still standing there relative to the yield on the stock. As I said, the Board will evaluate dividends, along with other choices in front of us to return to shareholders. As we've indicated, our priority right now is to get the balance sheet where we want it, which is a full rush and push to getting to 2.5x, and then we can evaluate what other options are at that point in time. And those other options will range from whether or not we want to do something on dividend policy or something we want to invest more back into the business or whether we want to push on some buybacks. And those decisions will be weighted at the time when we have those options in front of us and evaluate the market as to where it stands. Our intent is to ensure that we're returning a good and competitive dividend out to our shareholders, which we have today. And we'll continue to be mindful of that as we go forward and we see the stock price adjust in what occurs in the value of the business. On the ABS side, look, I think as you've heard, the repositioning of the asset is -- it's a multi-quarter. This set of processes and approach are backing away from lower-margin products is relatively straightforward. I say relatively because we can make the decision to do it at the front end. Obviously, in this customer base, we have contracts that sometimes extend for multiple years in a period of time, where we then have to kind of go through a wind-down and wrap-up cycle once we stop selling something. And we're in the middle of that occurring. But the process of choosing not to drive new sales at the front end has been a relatively straightforward set of decisions. And I feel like we're executing reasonably well around that piece of it. We have dropped the number of products we have in the market pretty demonstrably over the last 1.5 years. And we'll continue down that path. And I think it's that reduction in complexity that will allow us to then scale up what's essential to have a viable franchise moving forward in a robust and growing franchise moving forward, which is one centered on moving product that is on our owned and operated infrastructure. And what's right about our segment here that I want to stress is we report a little bit differently than some of our peers. We do not report a consolidated business entity in both wireless and wireline services. You should understand, a lot of our strength in the wireless business is coming from our success in our Enterprise business. It's coming from increases in the public sector, in our success of what we've done with FirstNet. It's coming from our success in penetrating deeper into our Enterprise accounts with wireless services. We're really pleased with the share gains that we've seen in Enterprise moving forward, where we believe we have the opportunities in the mid-market. And the low end of the market and the attractive part about that is it's a [2/4]. It's not only getting more transport on the fiber infrastructure we're deploying, but we are underpenetrated in the wireless space as we move into those accounts. So when we deploy fiber and we have an opportunity to talk to mid-market customers about putting more of their transport on AT&T, we also oftentimes get the opportunity to talk to them about moving their wireless account as well. And that's an attractive opportunity for us. It requires us to tune our distribution differently. That's a slower process. And we've been making progress around it. You heard Pascal talk about the growth that we're seeing in our Fiber products. We're seeing some progress in the wireless space in the mid-market, but we're not up to where we need to be yet. We will get there. We play very well in that space. Our brand plays very well in that space. We know how to sell product in that space, but it's getting the engine kind of hitting all at all 8 cylinders. It's going to take us couple more quarters than what we expected, but I'm optimistic we can get there. It's the right asset base. It's the right brand. We know how to approach these customers. And we will make that happen.

Tim Horan:

Two questions. Could you just elaborate a little bit more on the wireline side of the business market? What are you replacing your legacy virtual private line networks with? The same thing with voice. Are you – I guess, are you retaining these customers? Do you have a product for them? Is it just a lower ARPU issue? And then secondly, on the CapEx, we’re hearing CapEx equipment costs, labor costs are up 10%, 15%. I know you gave your guidance out quite a while ago for next year. I guess how are you offsetting those price increases that we’re hearing about out there in keeping your CapEx flat?

Tim Horan:

Thank you.

Operator:

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using AT&T conferencing service. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to AT&T's First Quarter 2022 Earnings Call. At this time, all participants are in listen-only mode. [Operator Instructions] Following the presentation, the call will be opened for questions. [Operator Instructions] And as a reminder, this conference is being recorded. I would like to turn the conference over to our host, Amir Rozwadowski, Senior Vice President, Finance and Investor Relations. Please go ahead.

John Stankey:

Thanks, Amir, and good morning to all of you. I appreciate you joining us this morning. Two weeks ago, we reached a major milestone in the repositioning of our business with the completion of the WarnerMedia Discovery transaction less than 11 months after announcing the deal. I'd like to thank everyone who played a role in getting this across the finish line in good time and with a little drama, just as we promised you. I'd also like to share how proud we are of the entire WarnerMedia team. David inherits an organization with one of the best global portfolios of beloved intellectual property, a team with unparalleled talent, and one of the few truly global direct-to-consumer players, as evidenced by the continued growth in HBO Max and HBO subscribers, which closed this quarter at nearly 77 million globally, up 3 million from last quarter and nearly 13 million year-over-year. We're excited about the potential for continued HBO Max growth as the service launches in more new territories. Warner Bros. Discovery is well-positioned to lead the transformation we're seeing unfold across the media and entertainment landscape. And like many of my fellow AT&T shareholders who own a stake in this new and promising enterprise, we're excited to continue to watch their success and the value they create as one of the leading global media companies. So, let me turn to AT&T and the new era and opportunities ahead of us. Our transaction marks a critical step in the repositioning of our business. We're now able to focus intensely on what we believe will be multiyear secular tailwinds in connectivity. We now have the right asset base and financial structure to devote our energy to becoming America's best broadband provider. Over a five-year period, we expect a five-fold data increase on our networks and we plan to capitalize on the growing desire from consumers and businesses for ubiquitous access to best-in-class connectivity solutions. The results we've achieved the past seven quarters, all while undergoing a significant repositioning of our business, give me confidence that we can accomplish this goal. Our first quarter financial results are consistent with our expectations and once again demonstrate that our teams are executing well against our consistent business priorities. We're seeing record levels of net additions in Mobility and consistently strong AT&T Fiber growth, thanks to our disciplined and consistent go-to-market strategy. In Mobility, our strong network performance, simplified offers and improving customer experience brought in the most first quarter postpaid phone net adds in more than a decade, surpassing last year's then decade best first quarter total. And we're confident we can continue this momentum in a disciplined manner, given our subscriber success has come from diversified channels that span consumers and businesses. In Fiber, we continue our great build velocity and now have the ability to serve 17 million customer locations. This expansion continues to allow our business to grow. And this quarter, we achieved overall broadband subscriber and revenue growth as our Fiber net adds more than offset legacy non-fiber broadband losses. I'm pleased with the improved fiber momentum we're seeing with our multi-gig plans launched early in the first quarter. It's also noteworthy that we're experiencing improved subscriber growth following the introduction of our straightforward pricing across the fiber portfolio, which does away with discounted introductory pricing. This improvement in share gains suggest that consumers are finding value and higher quality services when they're made available to them. So taking a step back, let's review our progress over the last seven quarters. During that time, we've added industry best subscriber totals of more than 5.3 million in postpaid phones and nearly 2 million in AT&T Fiber, as our fast-growing fiber revenues now make up nearly half of our Consumer Wireline broadband revenues. This is real and sustainable momentum. We also continue to emphasize effectiveness and efficiency across our operations. As we shared at our Analyst Day last month, we expect to achieve more than $4 billion of our $6 billion cost savings run rate target by the end of this year. Our focus on driving efficiencies continues to show tangible results from our network build-out to customer experience. As we told you, we're initially reinvesting these savings to fuel growth in our core connectivity businesses. However, as we move to the back half of this year, we expect these savings to start to fall to the bottom line. Our success over the past seven quarters can also be attributed to our focus on better recognizing and delivering on what customers want. Our Mobility and Fiber Net Promoter Scores are up year-over-year and near historically low churn levels across all businesses demonstrate how our improvements to the customer experience are real and delivering a positive impact. Our Business Wireline unit continues its transformation. As we move through this year, we had planned to accelerate the pace at which we reposition the business, as we focus our energy on growing repeatable core connectivity and transport solutions where we have onerous economics. At the same time, we'll continue to rationalize reselling low-margin, third-party products and services. The expansion of our fiber footprint is enabling our business portfolio to target significant opportunities in the small and medium business market, allowing us to capture a greater portion of the opportunities in core transport and connectivity. In addition, as we open up relationships with more customers, we'll have incremental opportunities to continue our growth in business wireless. We expect to take advantage of these near-term opportunities to help stabilize our Business Wireline unit, as we simplify the portfolio and grow connectivity with small- to medium-sized businesses complementing our leading enterprise position. As we thoughtfully fuel growth for service is powered by our owned and operated connectivity assets, we're also being deliberate in how we allocate our capital. We've taken significant steps to improve our financial flexibility, and we're now in a much better place to grow our business, as we significantly invest in the future of connectivity through 5G and fiber. With the completion of the WarnerMedia-Discovery transaction, we've monetized more than $50 billion of assets since the beginning of 2021. And with this transaction, we reduced our net debt by approximately $40 billion in April. As we share, we feel as though we're really well suited to navigate this unique moment in time. This leaves us in a much better position to pay down debt. In fact, we've already addressed some of our near-term maturities and paid off over $10 billion in bank loans. This improved financial posture gives us the flexibility to carefully and prudently use the balance of the WarnerMedia proceeds to reduce our outstanding debt by opportunistically using the evolving higher rate environment to redeem debt securities at lower prices, while also working to reduce cash interest. In addition, our expectations for continued strong cash generation provide us with incremental capabilities to reduce leverage, while still paying an attractive dividend yield near the top of the Fortune 500. This improved financial flexibility also allows us to pursue durable and sustainable growth opportunities that offer future upside for customers and shareholders. If you couldn't tell, I'm proud of all the work the team has accomplished to reposition the business over the last seven quarters and could not be more excited about this next chapter for AT&T. I know our teams are thrilled about the momentum we're generating with our deliberate and focused approach in attracting and retaining customers. I'll now turn it over to Pascal to discuss the details of the quarter. Pascal?

Amir Rozwadowski:

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

John Hodulik:

Great. Good morning, guys. A couple of questions on margins, if you could. First, maybe on the consumer side, numbers were a little bit better than we thought. I mean if you look back to 2019, you guys were generating margins in the sort of 39%, 40% range. Given the change in the business and the mix there and the higher ARPUs, do you think you can eventually get back to those kind of levels? And then I guess on the other side of the ledger, consumer – or the business segment continues to be weaker than expected, thanks for the color there. But how much visibility do you have in the improvement in the margins and the declines there? Any other color on that sort of rationalization of the portfolio you guys keep talking about? And should we see this improvement even if we see some economic headwinds later in the year?

Pascal Desroches:

And John, I'd add to that, if you go in and you kind of decompose what's in the transformation program and where we're targeting improvements in our operations in our business and things like reduction of call center activity that ultimately moves online, et cetera, all those things feed directly into that business that will -- it will allow us to scale that into the right kind of margin structure that I think we've historically been accustomed to, given the long-live nature of the asset base that we're deploying. To answer your question on the business side, I'll tell you what we have visibility to, we share with you, our move is to be driving harder owned and operated infrastructure into the lower end of the mid part of the market. And in order to do that, that's highly correlated to where we're deploying new fiber or where we have existing infrastructure deployed. We have good visibility to that part of it. So, we know, as we deploy what we open up in terms of new market opportunity. In some cases, in order to get that market, we're shifting our distribution channels. So, there is work going on around how we ultimately position to distribute the product both directly through our own sales force, as well as through other third parties. That's an execution issue. While we have control over how we progress on that, obviously, any time you scale up new channels and you work through things, there's things that you run into they are unexpected or that allow you to move left to right that you have to adjust to. But that's nothing new, that's the kind of thing we work with. And I think in terms of working through those issues, they usually are cycles that matter from a quarter or two. They're not the kind of things that you hit a brick wall and can't work your way through. That's the area that I would say, maybe we don't have perfect visibility over, but it's a question of whether you trust we can execute? And I would tell you, my view is we know how to do these kinds of things. I think I shared with you in the Analyst Day one thing that is very clear as we walk into the segment with the AT&T brand on the product and service, it's incredibly well received. And as I mentioned in my opening remarks, when we walk into these customers and we have the opportunity to talk to them about a new product, it oftentimes leads to a second discussion about possibly moving other parts of their services, like wireless, in that transaction. And that's the power of us in the business segment being able to go in with a complete portfolio of owned and operated wireless and direct fixed transport.

Amir Rozwadowski:

Thanks very much, John. Operator, if we could move to the next question.

Michael Rollins:

Thanks and good morning. As you look at the postpaid phone volume growth in the quarter, how much of that do you attribute to better market share versus just better overall industry growth? And can you frame how the economics of these mobile postpaid phone customers are evolving when you consider the ARPU, churn as well as the cost of acquisition?

Pascal Desroches:

Mike, I would also just add, as a reminder, our fastest growing plan is our Unlimited Elite, which is our top-tier plan. So that tells you the quality of what's happening in the overall wireless base.

Operator:

Brett Feldman, Goldman Sachs. Please go ahead.

John Stankey:

Sure, Brett. How are you? So look, there is no question there's wage inflation in the environment. And frankly, it's 7% inflation. There is no question there's pressures across a broad segment of goods and services and we're not insulated from that. I don't think anybody in the industry is insulated from that, and it's not a good position for the overall economy to be in. And I think from a policy perspective, it needs to be addressed. We were pretty deliberate when we did planning for 2022, acknowledging that we expected we'd see some wage inflation. And we compared to previous years as we built the plan, we assumed upticks in wages as a result of that. And we did several revisions late in the planning cycle that I would say those amounts added something with the B [ph] into overall cost structure into our expectations around that. We're in the middle of -- as you know, we have labor contracts. Labor contracts are extended and ultimately program out wage increases. And we have the luxury in some cases, given the way the current wage market or job market is set up, that people stick around and work here because we have great benefits for middle class folks and they often go beyond the wage that somebody gets paid. And as a result of that, we've been managing through the dynamics of the wage, the labor market pretty well. I will tell you, we're in the middle of some negotiations right now. Those negotiations are likely to land in a place that I think is consistent with how we built the plan this year, which was a stepped-up wage level from previous historic levels. I'm not happy about the fact that wages are rising as fast as they are. We're having to deal with it. It is going to drive a bit of an uptick in what I would call per individual wages. The good news is we're doing a lot of investment in other forms of mechanization and automation in our business. And some of that investment is helping us keep a lid on some of the wage related inflation costs. I would also point out that as you look at other parts of our business where people deploy long lived infrastructure like fiber networks, wages are a portion of that deployment cost, not all of that deployment cost and they are capitalized and they are taken over the life of a product that stays in service for many, many, many years. So well, obviously, we'd like to pay less in wages. It's not the end of the world, when we're seeing a little bit of an uptick. It's a small portion of the cost of deployment and we can ultimately recover that over the long-life cycle of the product, especially if prices ultimately go up in the market. Now to your question of pricing, I'm not going to give away or announce anything here that -- it's not appropriate to do that. But I'll go back to the comments I made a couple of weeks ago, which is broadly across the board in the economy right now, we are seeing inflationary pressures and the consumer is seeing that every place they go. It's my belief, if we do not see some moderation in this fairly quickly that, I think every business in the United States is going to be dealing with the cost of inputs. And I don't see the wireless industry being immune from that nor any other industry being immune from that. And as I shared earlier, there's a lot of different ways you can deal with price adjustments. There's a lot of different tactics and approaches you can use. But when we're looking at the customer base as satisfied as we are, when we look at a customer base with some of the value we've been putting back into the product and service over time, when we look at our current churn levels do we believe we're in a position, if we're forced into a situation where we have to start maybe taking some price that we can do that and move it through? Our history would suggest that we know how to do that, and we can do that. And we'll be very smart and judicious as we have to apply it. But running this business and not sitting here and evaluating where we have options to move on pricing and be successful, I wouldn't be doing my job properly. And I want to maybe go back to a comment I made in my opening remarks. If you look at what we've done in our fiber product this last quarter. We went to a simplified price structure, I want everybody to understand what this means. We are not out in the market right now selling on 12-month promotional pricing on broadband. We are selling the customer on a stable price to the duration of the relationship with us. In many cases, we're in the market at a minimum of $10 higher to the promotional price that cable or the other broadband competitors have in the market. And our volumes were still stellar and they're continuing to grow, and we're doing incredibly well in that market. And it's a reflection of the value of the product and the service that we're bringing in that we're able to do that. It's an example of us being able to smartly understand where there's value and where there's opportunity for us to work the overall value equation, including price to be able to manage our business effectively and we'll continue to do that.

John Stankey:

Thanks very much, Brett. Operator can you shift to next question?

Phil Cusick:

Hey, a couple of follow-ups first. Let's dig into the postpaid phone adds a little more this quarter. Was there any impact from your own 3G shutdown on the reported adds? And what about the shutdown of T-Mobile CDMA network? Do you see any impact there in the first quarter or maybe second quarter?

Pascal Desroches:

Yes. Phil, just as a reference point, 300,000 of the net adds this quarter were from FirstNet. Again, nothing to do with the 3G migrations.

Pascal Desroches:

We feel really good about how the business is performing. And we guided to 3% plus. As you've heard from John previously, this management team is in the realm of trying to put up guidance on a conservative end of a spectrum. With that said, the one thing I would remind you, as you move through next quarter, we're going to have a full three-month impact of the 3G migration, so that is going to hit ARPU some. But we feel really good about the overall pace of the business and how we're executing.

Amir Rozwadowski:

Thanks very much. Operator, if we can move to the next question.

Simon Flannery:

Great. Thank you very much. I wonder if you could talk about C-band a little bit. I think you said that you would be ramping the deployments later this year. If you could just give us some updates on when we expect that to really start scaling and what you're seeing in the supply chain then. And there's been a lot written about fixed wireless recently, and we've seen some good momentum in that market. As you get the C-band up, what do you think in terms of out-of-market opportunities or even the opportunity to upgrade some of your DSL base that may not be getting fiber anytime soon or non-fiber based? Thanks.

Simon Flannery:

Right. Thank you.

Operator:

David Barden, Bank of America. Please go ahead.

John Stankey:

Hi, Dave. Let me give the front end. I'll try to do all three of them and Pascal can jump in and offer anything he wants. I think we're a dividend competitor moving forward, meaning I want the dividend to remain at a competitive level relative to others out in the market, which means I'll pay attention to the yield of the dividend. As we've told you, as we move past 2023 and we start to think about what we do with discretionary capital, as we have the balance sheet where we want it to be, the Board is going to evaluate where the best returns come back into the business. And there's a lot of choices at that point. That could be what we choose to do on equity, could be choose on what we choose to do with dividend, it could be choose -- could be choices on we make -- what we make within the deployment on new business opportunities within the business for organic growth. We'll evaluate those in the complete portfolio where we stand and the relative competitiveness of the value proposition of the AT&T equity with others in the market and adjust accordingly. And so to answer your question, we'll pay attention to the yield, but I don't necessarily intend to every quarter look at it and say my expectation is that I have to grow the dividend in any given quarter relative to not answering the question of how do we stand competitively in the market and whether or not we think we've got the right kind of mix of how we're investing our capital and deploying it within the business. When you ask about refreshing the go-to-market plan, it could possibly be two things you're driving that. One could be comments I've made about what we're doing to refine the brand. If that's kind of the angle that you're going after, is that where your question is?

John Stankey:

Well, there'll be a change when it doesn't work, and it's working just fine. And I'm probably not going to tell you what the change is going to be when it doesn't work anymore because that would kind of be self-defeating. But it's working just fine. And I would have guessed maybe last year that we might be hitting a point where we had to think about it differently, we're not. And I think that's great. We have thoughts on where our next path will go, if we need to go down that path. But we're not at that point at this juncture. I love the momentum we're seeing. I think it was a great quarter. I like what we're seeing right now. And I like that we're watching others having to, in any given week or month, adjust their approach in the market while we continue to do exactly what we're doing. And as we continue to have the opportunity to grow our footprint between the two services, it opens up even more opportunity for us to do things on a combined basis that we're seeing really good progress on. Admittedly, our new footprint is still relatively small. It will grow over time. But I'm really excited about what that means for us moving forward in the future. And I think as I would stress, one of the things that's really important to understand is we're not getting our growth just through one set of go-to-market actions here. I know you're focused and you're thinking about what we're doing in the consumer space right now. But I want to stress, FirstNet has been really strong for us. What we're doing in the business customers that we have close relationships have been really strong for us. We're going to see us start to grow in some wholesale revenues later this year that we have not had in our mix up to this point in time. So our growth portfolio is a balanced portfolio and it's not hinging on any one strategy. And I've been saying this all along, you need to understand that there's not any one thing we're doing, it's a variety of things that we're doing on distribution that are adding up to the sum total of this and feel good about that. Your last question on financial relationship with Warner Bros. Discovery, we expect there's going to continue to be a relationship with Warner Bros. Discovery going forward. I expect that, that relationship will still be important to both companies. But I don't expect over time that it's going to be ultimately exclusive. I think Warner Bros. Discovery will want flexibility to be able to do things with a variety of players in the market. I think I understand why they'd want to do that. I think there are things that AT&T can do to accommodate that and still have the right value proposition for our customers moving forward. But I still expect there'll be a strong trading relationship given what we've had in the market is a portion of the success that we've had in being able to keep and retain customers moving forward. And we'll fine-tune that a bit as we move forward and make sure it's right for both companies. But I don't expect that it will continue to be what I call a captive or exclusive arrangement. Pascal, do you want to add anything?

John Stankey:

Thanks very much, operator we can shift to the next question.

Doug Mitchelson:

Thanks so much. Sort of, John, following up on the media side with regards to media streaming piracy, is there a place for AT&T to gain any economics by helping streaming services reduce piracy, given the breadth of your broadband footprint? I mean, Netflix losing $50 billion in market cap yesterday suggests there might be value to the streamers. And I would think it would be important to the value you're giving your customers of HBO or however that evolves? And to help size that, how much password sharing did you see with HBO in the US? And then if I could just sort of follow up, Pascal, I just wanted a clarification. The CapEx guide, $20 billion of cash spend plus paying down $4 billion of vendor financing in 2022, what should we anticipate for CapEx purchased on new vendor finance? Thank you, both.

Pascal Desroches :

Hey, Doug, here's the way I think about. We haven't provided guidance specifically on how much better financing commitments will enter into each year, but we provided overall cash payment guidance. And so we provided for 2022 and 2023, both years is $24 billion. So anything we do this year, we'd have to pay next year and that would be captured in that $24 billion guide. And so while we haven't provided guidance, you should have a pretty good sense about where the overall trajectory should be.

John Stankey:

Thank you very much Doug. And time for one last question operator.

Walt Piecyk :

Thanks. Pascal, I was hoping to unpack some of the fiber comments you made earlier. You talked about rising subscriber growth over the course of the year. And then, John, you talked about basically higher ARPUs or basically charging $10 higher than cable. I guess first, when you look at the 289 that you did this quarter, what was the mix of conversions from your own customers versus taking it from other competitors that are out there? And then secondly, in terms of Fiber, if you think about higher pricing, are you still seeing that kind of the penetration rate after year one and year two that we've historically seen when other companies have built out fiber, or is the higher pricing changing kind of the penetration rate that you think you can achieve for a second, third year of rolling out these new services?

Walt Piecyk:

Thanks. And apparently, I guess the high split investments, if you can call it that by cable, is not really helping to fight those sheer shifts. Can I just switch to wireless, John? You mentioned about wholesale as another component of growth. And then I looked at the wholesale revenue this quarter, and it didn't move much from Q1. I guess that just implies that you're in the very early stages of the shift of that DISH wholesale traffic to your network. How do we expect that to ramp? Is it linear? Is it -- I know you've already started to connect to DISH. How should that play out over the course of 2022 and 2023?

Amir Rozwadowski:

Thanks very much, Walt. And with that, I'll turn it over to John for some final comments.

Operator:

Ladies and gentlemen, that does conclude our conference call for today. On behalf of today's panel, we'd like to thank you for your participation, and thank you for using AT&T. Have a wonderful day. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to AT&T's Fourth Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. [Operator Instructions]. Following the presentation, the call will be open for questions. [Operator Instructions]. And as a reminder, this conference is being recorded. I would like to turn the conference call over to our host, Amir Rozwadowski, Senior Vice President, Finance and Investor Relations. Please go ahead.

John Stankey:

Thanks, Amir, and good morning, everyone. I hope you're all doing well, and a belated Happy New Year to all of you. 1.5 years ago, we began simplifying our business strategy to reposition AT&T for growth. As you can imagine, this was a significant undertaking requiring us to not only focus our operational efforts toward growing customers, but also doing so in a manner that set us up for an improved profit trajectory in the coming years. Simultaneously, we took on the task of structuring our communications, video and media businesses in a manner that ensured their future success with the right capital structures, access to capital and most importantly, the ability to drive better returns in a manner consistent with their respective market opportunities. I'm pleased with the results our teams delivered last quarter, last year, and for the last six quarters while this repositioning was underway. We finished last year with strong momentum in growing customer relationships, achieving outstanding yearly subscriber growth across Mobility, fiber and HBO Max. In Mobility, strong network performance and a consistent go-to-market strategy helped us lead the industry with about 3.2 million postpaid phone net adds. That's more customers than we added in the prior 10 years combined. We achieved this growth the right way with full year Mobility EBITDA up about $1 billion. In fiber, we ended the year with a great build velocity, passing more than 2.6 million additional customer locations. We added more than 1 million fiber subscribers for the fourth consecutive year, and full year broadband revenues were up 6.5% as we returned our Consumer Wireline business to revenue growth. We also surpassed our high-end guidance for global HBO Max and HBO subscribers, adding 13.1 million subscribers in 2021, more than any year in HBO's history. HBO Max and HBO now reaches a base of 73.8 million subscribers globally. WarnerMedia is well positioned as a dynamic global business. In addition to growing customer relationships, we also continue to make great progress in repositioning our operations to be more effective and efficient. We achieved more than half of our $6 billion cost savings run rate target, which we've reinvested into operations supporting our growth. This includes simplifying and enhancing our customer experience, which has resulted in higher customer self-service, lower customer churn and greatly improved Mobility NPS and industry-leading fiber NPS. We also continue to rationalize our low-margin Business Wireline services as we reinvest savings into segments that support improving returns. And you're familiar with the significant steps we've taken to reposition the company's assets for future success from our U.S. video assets in Vrio to our pending WarnerMedia transaction. Together, these and other asset monetizations will generate more than $50 billion, and AT&T shareholders will own 71% of one of the world's foremost media companies in the new Warner Bros. Discovery at close. We also continue to generate meaningful levels of free cash flow, nearly $27 billion in 2021, a number we feel good about when looking at our business after the WarnerMedia transaction. So to summarize, we did what we said we were going to do last year. I'm really proud of what our team has accomplished, and we're very pleased with the momentum we have. Turning the page to this year, we'll be consistent in focusing on these same three operational and business priorities. Now that our asset disposition initiatives are largely complete, I expect we'll take our execution to the next level. To that end, we're encouraged with how the process for the WarnerMedia deal is progressing and now expect the transaction to close in the second quarter. Going forward, we aim to be America's best broadband provider powered by 5G and fiber and defined by greater ubiquity, reliability, capacity and speed. We're confident we can achieve that because in wireless, our focus will be continuing our subscriber momentum while increasing the pace of our 5G deployment. We're confident in our ability to compete with 5G and our disciplined approach to selectively targeting and taking share in underpenetrated segments of the consumer and business marketplace. While we're still in the quiet period, I can share that we're very pleased with the results of Spectrum Auction 110. We received 40 megahertz of quality mid-band spectrum that we can begin to put into service this year, and we plan to efficiently deploy it with our C-band spectrum using just one tower climb. We're on track to cover 200 million POPs using mid-band spectrum by the end of 2023. And our network is only going to get better as we effectively deploy our new spectrum holdings. In wired broadband, we have the fastest-growing fiber network and expect to capitalize on the expansion of our fiber footprint and accelerate subscriber growth. The best-in-class experience we provide is getting even better with our multi-gig rollout, which brings the fastest Internet to AT&T fiber customers with symmetrical 2-gig and 5-gig speed tiers. This will truly differentiate how our customers experience the Internet. Coming off an outstanding year with HBO Max, we plan to hand off the business with a strong exit velocity, and we look to further our international momentum and deliver more world-class content for viewers. When the deal closes, the investments made in both content and HBO Max growth, coupled with strong execution by the team, will ensure Warner Bros. Discovery is positioned as a leading global media company with the depth of content and the capabilities required to lead in the next era of media. As we expand our customer base, we'll continue to responsibly remove costs from the business. We have a clear line of sight to achieving more than 2/3 of our $6 billion cost savings run rate target by the end of this year. And importantly, we expect the CD savings start to fall to our bottom line beginning in the back half of the year. Our increased ability to reinvest in our business will fuel growth and allow us to deliver an even better customer experience as we further improve NPS and sustain low churn levels. As we expand our fiber reach, we'll be orienting our business portfolio to leverage this opportunity and stabilize our Business Wireline unit by growing connectivity with small to midsized businesses. We also plan to use our strong fiber and wireless asset base, broad distribution and converged product offers to strengthen our overall market position. We're now at the dawn of a new age of connectivity where customers want more consolidated and integrated offers, and we're well positioned to meet that demand. Our 5G network is already the best and most reliable. And it will be enhanced by our accelerated fiber expansion in 5G spectrum deployment, a great reputation for advanced and reliable networking and our expertise to bring it all together for the customer. We remain laser-focused on reducing debt, and we'll strengthen our balance sheet by using proceeds from the WarnerMedia transaction to achieve a 2.5x net debt to adjusted EBITDA by the end of 2023. We also expect to remain a top dividend-paying company after deal close, with a dividend payout in the $8 billion to $9 billion range where anywhere in that range should rank us among the best dividend yields in corporate America. We're now in the middle innings of our transformation, and the momentum we have is real and sustainable. We're well positioned post deal close to have a capital structure and balance sheet that puts us in an attractive position relative to our peers. In addition, we believe it provides us with the financial flexibility to invest significantly in our business and the flexibility to pursue additional shareholder value creation initiatives over time. We look forward to giving you more detail at our virtual analyst event, which we expect to host in March. And now, I'll turn it over to Pascal. Pascal?

Amir Rozwadowski:

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

Simon Flannery:

Great. Thank you very much. Good morning. John, good to hear the updated timing on the deal close. Can you perhaps update us on your conversations with the regulators, and what gives you the confidence to move that up? And when do you expect to give us the clarity on how the deal will be structured, what the dividend policy will be? Is that going to be in the March meeting? And then if you could just give us color on what we should be expecting with the CapEx this year. What's the 5G build-out this year? What's the fiber build-out this year? Any color there would be great.

Simon Flannery:

Okay. And on the fiber side?

Operator:

Our next question comes from the line of Brett Feldman with Goldman Sachs.

John Stankey:

It's a good question, Brett. As we move through this year, I think you'll see us very definitively rotate into a position. First of all, I would tell you the strength of the period of time is, in fact, that we've been on these offers for a period of time. And I don't view that as being something I'm concerned about. I actually view it as something that we're really pleased about. It's basic, fundamental, easy for the customer to understand that we see no evidence whatsoever that we're losing traction in the value proposition that we have. And in fact, I would point to what we did this week on our broadband offer and trying to go in with an everyday simple pricing construct. And the reason we're doing that is based on what we learned from our wireless business, which is something that's very straightforward for the consumer to understand over time allows us to gain the right kind of momentum in the market that's sustainable. It drives up customer satisfaction. It allows us to be consistent in our messaging that we carry out to the market. It ensures that every one of our employees knows the line and doesn't have to relearn something every 30 days, 60 days, 90 days. And so we're very comfortable with the messaging we have right now. We're very comfortable that it still has room to run. And when we talk about a focused, simplified business moving forward, part of what we're attempting to do is move our entire product portfolio into a position that we can represent it in a similar fashion. And so this week's move in our fixed broadband products is really important when you think about lining that up and carrying that message forward. When I think about how we communicate more effectively around the brand, I think you've heard me allude to this in some previous conversations that there's a lot of things that I think the AT&T brand is very strong and does very, very well in the market

John Hodulik:

First, Pascal, thanks for the -- all that color on the guidance and per segment. But can you give us -- can you let us know what the guidance for '22 assumes for RemainCo EBITDA growth? And then drilling down a little bit further, obviously, you guys cut the losses on the business side. And it sounds like you expect sort of further improvement maybe in the second half of next year. Could you walk us through sort of what's going on in that business segment to sort of rationalize it? And do you foresee the possibility of that segment returning to EBITDA growth by the end of the year? And then maybe for John, just maybe following up on those comments. When do you expect to have these converged offers in the market? And is that what you're talking about in terms of refining the message around the brand, selling a package of fixed and mobile services?

Pascal Desroches:

Sure thing. Look, as you know, John, we did not give specific EBITDA guidance, but I think you can get pretty close with some of the information that we've given. Here are some of the dynamics to think about in each of our major businesses for RemainCo. Mobility, while we expect some comparison issues early in the year, we feel really good about the organic trends in that business. We expect continued growth in wireless service revenues. We -- transformation continues, and we expect some operating leverage from that. So we feel really good about the trajectory that the Mobility business is on. I think you can get a pretty good sense for where that should land given our wireless service revenue growth, given our fourth quarter performance, we feel really good. Consumer Wireline, the word here is scale. As this -- we feel really good about the build we had in 2021. As that business scales, the operating leverage is really good. You couple that with transformation, the Consumer Wireline segment is also expected to grow. As you just heard from John, Business Wireline, we expect losses to moderate as we make our way through the year, but we don't expect that segment to grow. You layer on top of that an expectation of continued transformation savings on corporate and other. You can get a pretty fair sense that overall, the business is going to be, on an EBITDA basis, flattish to up modestly.

Michael Rollins:

I'm curious if you could dive a little further into the wireless business? And specifically, if you growth guidance of 3% plus with respect to how you're thinking about volume, the opportunities to improve ARPU and any contributions that you would expect from a DISH wholesale deal that you previously announced? And then just separately on a higher level in terms of the asset mix, John, you mentioned that you were largely done with asset disposition. And just curious if there's any further exploration of optimizing the wireline footprint or thinking about the future opportunities for your DTV business and where that may better fit strategically over time?

John Stankey:

So Michael, on your second question, so we set up the DIRECTV structure deliberately. And when I say we're through the asset disposition, I think the distinction I would draw there is the management team that -- of AT&T RemainCo is not going to be distracted with having to work through additional work on restructuring the asset base of the company in the near term. And that doesn't mean that the independent DIRECTV company and the management team that is operating that over there might not choose to do something in their business. I don't know of anything. I'm not announcing anything. But what I'm trying to distinguish is if that entity decided that there was value to be created to restructure their business in some way, shape or form, it is a distinctive group of individuals that would be involved in doing that and executing it. And it would not cause the AT&T management team to have to spend cycles and energy working through those kinds of issues. And so I think that's the distinction I'm trying to draw, not to suggest that the DIRECTV asset per se is frozen in time or not. In terms of your question on the wireline footprint, we spend a lot of time far back as 2012 and constantly revisiting and relooking how we wanted to work through the transition of our business. And I'm not a big believer right now that us going out and taking the less utilized parts of our wireline footprint and sending them out to somebody at a steep discount and continuing to have to do things like operationally provide services to that entity for many, many years to come on infrastructure, IT systems, et cetera, that have to be maintained is the right thing for a healthy and sustainable business. My point of view is that as a management team that runs networks and what we do around here, our job should be to rationalize those assets in an effective way and do it in the best interest of our shareholders. And you've heard me talk about that. When I talk about transformation and shutting down products and thinking about how we become a company that offers products on fiber, what's going on behind the scenes on that is actually backing away and moving deliberately through a process of taking products that served us incredibly well, that have been the mainstay of this company for a period of time and doing in a very, very smart and tactical way this shutdown and sunset of those. And as we sunset them, take the high cost operating model that supports them away. And so when we talk about transformation and we talk about getting savings from shutting down applications and IT infrastructure and product sunset, that's really walking away from square miles and infrastructure and costs and all the things that have seen their better day. And so we intend to ultimately capture that value and return it to the shareholder, not do it in a front-end loaded transaction that's highly discounted, that leaves us saddled with distracting operating models that don't allow us to be a focused broadband fiber provider offering the best products available in the market.

David Barden:

I guess my first one for you, John, we saw about 2.5x more fiber homes passed in 2020. But over the course of the year, fiber net adds didn't really accelerate. And so as we look at even more acceleration in fiber, when should we start to see the acceleration in fiber net adds? And what's the typical lag time from a passing to a selling opportunity? And Pascal, I guess I was a little surprised to see the $4 billion growth capital investment premium over CapEx because I think over most of the year, we've been talking about maybe weaning ourselves off of that number. And I think that it raises the question as we look into 2023 and people have been, as you know, trying to bridge from this year's 26 to the 2023 $20 billion guidance given the higher CapEx and the loss of the $3 billion WarnerMedia cash contribution, how much vendor financing is baked into that 20 that maybe we hadn't been thinking about?

David Barden:

Got it.

David Barden:

And Pascal, if I could just -- a quick follow-up on that. So if -- what you're saying is that in March of 2021, when you were contemplating not using as much vendor financing and you set the $20 billion free cash flow guide for 2023, are you saying that now that vendor financing is too attractive not to take that whatever CapEx number was in that $20 billion free cash flow number will fall replaced by vendor financing and that $20 billion free cash flow guide is actually going to be higher?

Operator:

And our next question comes from the line of Phil Cusick with JPMorgan.

John Stankey:

Sure, Phil. Let me give you maybe some color on the front end and then we can go through. So first of all, as you know, there's a lot of moving parts on the ARPU side of things. One moving part is international ARPUs are different than domestic ARPUs. And if you think about the growth internationally where that's going to be a large part of the growth moving forward, given the new markets we're opening up and the natural penetration that occurs, given the product is sized differently and starts from a different place, you're going to see that have an impact. Generally speaking, those ARPUs internationally are a bit lower than the domestic ARPUs. Second point, we've had launched, as I said earlier in my comments, the ad-supported product. And I expect the ad-supported product as a percentage of mix domestically in the U.S. to increase this year. Part of that will be because the products had a little bit of a different characteristic where the subscription product had access to first-run movies. The ad-supported product did not. Effective January 1, products are identical now. And as a result of that, I expect there'll be some customers that choose to go the ad-supported route that may have gone the subscription route before. However, what will happen is it's not that one is less accretive than the other. The subscription line will possibly dilute a bit, but the advertising line will increase. So when you look at the customer overall, they're no less profitable. It just books to 2 different places on the P&L. And our goal, and in fact, what we are seeing today, we are indifferent as to what the customer chooses. Frankly, maybe in some cases, it's a bit more accretive if they go the ad-supported route. So I think you just need to look at your geography of how that plays out more than anything else relative to the domestic side. Look, we expect domestic growth to be more suppressed than international growth as we move forward. We're in a great position. We are sitting at a large domestic base with a very high ARPU. And the nice part about that is, we said this was going to happen, and it happened. We said the market was going to come to us on pricing. And lo and behold, we are no longer the high-priced offer in the market. And the nice part about that is we think it will allow us to have domestic growth as we move forward. But the base is in a really, really good place as a result of that. We don't have the struggles that maybe some other products that came in at very low prices are going to have to kind of try to move up that ARPU continuum. It's about being very diligent in adding customers at a moderated pace. And I think if you go back to our Analyst Day in 2019, whenever we did that, and we gave you our domestic point of view of what that growth is going to look like, it was a very measured and moderated point of view because starting with mid-40 million-ish customers allowed us to be very different given the ARPUs that we had around them. And then finally, we made that hard decision on Amazon to your point. We felt it was the right decision. I feel it was the right decision. I think it will even be more the right decision in a post discovery environment as the offer only gets stronger that's in the market and the content that's available. At the end of the day, you want full control of your customers. And I'm confident with the strength of the offer that will be in the market, those customers are all going to come back into the offer. It may take a couple of quarters for that to happen. But there will eventually be a product out there that they're going to look at and say they want to be part of. And better to have them there where you have direct access control of them, can market to them, know what they're doing than to have it be in some black box where you absolutely have no idea what somebody else is doing with aggregating your content and your exposure to the customer. And I would point that out again. That is what our customer base is. There are a lot of entities out there growing "direct-to-consumer customers" that are behind the screen of the Amazon marketplace that really are Amazon's direct-to-consumer customers. They are not the media company's direct-to-consumer customers. Pascal, did you want to add anything on the EBITDA side?

Amir Rozwadowski:

Thanks very much, Phil. Operator? And we have time for one last question.

Kannan Venkateshwar:

So Pascal, maybe one on free cash flow and a bit on the tender. But probably on the free cash flow side, if you think about the $20 billion kind of a number for this year, could you help us understand the breakdown? I mean, there's been some pushback, billion number may not be a real number clearly on the back of the telecom business. So if you could help us understand how much of the contribution comes from the DIRECTV, the Xandr bit as well as potential cash flow reversal because you might now get paid for HBO distribution instead of absorbing the working capital impact. So if you could just help us understand that, that would be useful. And then the other source of confusion, I think, has been the impact of vendor and the relationship across the 3 assets, across DIRECTV, AT&T as well as WarnerMedia. So if you could just understand the puts and takes. I mean, what went away with the Microsoft transaction, how much of cash flow comes in to AT&T and what moves out to DIRECTV, that would be useful to contextualize the cash flow number?

Kannan Venkateshwar:

Okay. And could I just ask one follow-up on HBO? On the Amazon deal, that probably caused some volatility in the quarter, but revenues were sequentially down even though subscribers were up and the ARPU was also quite weak sequentially. But when you think about the sequential impact -- sequential revenue trends from here on, is that decline a one-time kind of a decline? How should we think about the cadence from here on?

Amir Rozwadowski:

Thanks very much, Kannan. I'll turn it over to John for some final comments.

Operator:

And that does conclude your conference for today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to AT&T's Third Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. [Operator Instructions] Following the presentation, the call will be open for questions. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Amir Rozwadowski, Senior Vice President, Finance and Investor Relations. Please go ahead.

John Stankey:

Thanks, Amir. Good morning, everyone. Thanks for joining us. I'll be brief because the quarter is largely more of the same. This marks the fifth consecutive quarter of consistent progress since we articulated our simplified business strategy and how we plan to measure our progress going forward. The close of the DIRECTV transaction this quarter is another important step we've completed to reposition AT&T. I acknowledge this makes for some extra cycles on comparative analysis. And as we continue to do so, there'll be fewer moving parts to assess and better visibility and clarity. In the meantime, it's important not to lose sight of the success we're having, deploying capital into our areas of strategic focus. Bottom line, we're accelerating our historical rates of customer growth in Mobility, Fiber and HBO Max, and customer satisfaction is improving across the board with lower churn and higher NPS scores. Mobility is delivering more postpaid phone customers on a rolling 12-month run rate than it has in the prior decade. Our Fiber products are recognized as best-in-class. As we expand our Fiber footprint, we're delivering a superior service, and we're growing our share. We're already nearing the low-end of our 2021 guidance for global HBO Max and HBO subscribers, despite our long-planned intent to no longer cede customer control to Amazon's channels offering. Additionally, customer growth can be attributed in part to our ability to mine out significant cost savings from our operations and reinvest them back into the business. The results are driving Mobility and Consumer Wireline EBITDA growth that we expect to be complemented by margin expansion, as our transformation work matures. We have clear line of sight to achieving at least half of our $6 billion cost savings run rate target by the end of this year, driven by success with a number of initiatives that we believe also will support improving returns in the coming years. Whether they stem from nearly $1 billion of savings from streamlining our field operations, a similar level of savings from changes made to our procurement processes, or a $0.5 billion of savings from the rationalization of our retail store footprint. Our focus on driving out inefficiencies is showing tangible results. These are just a few of the most significant programs underway. More initiatives that we expect will drive incremental savings and operating leverage are in the investment and implementation phase. Finally, as I mentioned, we've closed the DIRECTV transaction and continue to expect the WarnerMedia deal to close by mid-year 2022. With these and other dispositions, we monetized or announced plans to monetize more than $55 billion of assets over the past year. The last five quarters have been a period of repositioning our business while also delivering operational results. With that repositioning nearing completion, that will afford even more focus on continued execution and improved performance. We're on track to reach our full-year free cash flow guidance in the $26 billion range and we expect to hit the high-end of our adjusted EPS guidance. We're in the early innings of transforming the Company and believe that we have significant opportunity ahead of us to expand, share in our focus areas and drive better returns, including sustained earnings growth. We continue to strive to earn your confidence one quarter at a time, delivering operating performance and shows our momentum is real and sustainable. Let me now turn it over to Pascal to discuss the details of the quarter. Pascal?

Amir Rozwadowski:

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

John Hodulik:

Good morning, guys. With the inflection in the consumer market, the business segment is clearly what's keeping the communications business from generating positive EBITDA. And I know you guys had some tough comps and Pascal, thanks for the comments on the revenue growth improvement. But when can we see -- start to see some EBITDA improvement? Any sort of color or granularity you can give there that get us to the point where the communications business is growing EBITDA. And then maybe for Jason, can you give us any color on the AVOD launch this summer? And it looks like you guys added 6 million to 7 million HBO Max subs globally if you net out the Amazon losses. Is that - a, is that in the ballpark? And b, does the content release schedule that you guys mentioned, does it allow you to sort of build on that number as we go into the last quarter of the year? Thanks.

John Hodulik:

Thanks.

John Hodulik:

Great. Thanks, guys

Operator:

And our next question comes from the line of Phil Cusick with JPMorgan. Please go ahead.

Jeff Mc Elfresh:

Yeah. Hey, Phil, this is Jeff. Good morning.

Jeff Mc Elfresh:

To address that question, I'd kind of backup for a second and look at the health of our Wireless business in the context of the overall industry and tell you that our strategy is working here at AT&T as we've demonstrated, it's the 5th consecutive quarter where we have driven some momentum in gaining share. Our net add strength here in the quarter at 928,000, that compares to what we have produced back in 2019 in the third quarter of 101,000. And we're driving strong service revenue growth and we just posted the largest total EBITDA that we've generated out of the Wireless business segment. The best part about it, Phil, is that our customers are telling us that we're doing a good job. These churn levels that are low are a signal to the service and the value that we're offering, and our NPS feedback that we've received is the highest that we've ever received. The sustainability of what we've done here in AT&T, I think, is really important to understand more broadly. It's a question that keeps coming up about our growth, relative to competition in the general market. It's important to note that we've optimized our distribution channels. We've expanded the reach of it and we're now addressing new segments that we were not addressing earlier, and that's helping us drive some of our customer momentum. But in combination to that, Phil, we've simplified our rate plans and we've remained consistent in our offers to the market over the last 13 months, if you will. And this really enables the AT&T frontline team members to master their craft, deliver a higher level of service. And that -- this can't be overlooked, this is a key component to what's driving momentum for us at AT&T in our business. I'd also point to things like our FirstNet program. We're starting to reach some scale here. Third quarter, we posted the highest net add quarter since launching the program. And we've arrived at a position of leadership and strength in the law enforcement segment under that public safety sector. And so all in all, it's been the operational changes that we've made at AT&T that has driven really strong momentum in our customer counts. The promotions that you referred to, there's an aspect of promotion that's just one element of this broader strategy. And it's important to note that not all of our customers that are with us, that upgrade or that join us from competitors, take advantage of the promotional offers that you see in the market. We've been at this for a little over a year now. And I can tell you I've studied the characteristics of the customers that have taken the promotion versus those that have not taken the promotion in our customer base. And here's what I can tell you, that those that have participated in our promotional offers have a higher LTV, a better churn and a higher satisfaction score than those that have not. And so, we know this is driving accretive value. The industry is healthy. And better than that, the new accounts to AT&T, those that are joining us from our competitors, they exhibit the same kind of characteristics in their financials, higher LTVs, better churn, and higher satisfaction than our base. So it's not just that we are adding more customers, we know based on these metrics that we see that we are adding high-value customers and don't believe that this is driven uniquely by any kind of subsidy or extra cash flow that happens to be in the marketplace of the general market. It's also, I think, important to fill the note that the cost of these promotions as one element of our strategy, it runs through our service revenue. The cost of those promotions run through that in amortization, and so for us to be able to post this kind of growth in the quarter, in this competitive market, and drive this kind of solid performance in subscriber revenue, accounting for any cost of the promotions gives us confidence that we're creating value. I would take this kind of quarter all day long in the competitive market, and I'm certain that our shareholders are going to be happy with it.

Phil Cusick:

I appreciate the depth of your answer. I would only follow-up -- and Jeff, I think everybody has been pretty impressed with the results of AT & T over the last year. I would only follow up that the market is telling you that investors don't believe it. Not necessarily about AT&T, but look at the stock price of AT&T Verizon and T-Mobile together. And investors are discounting the terminal value of these Company is pretty massively. And so more detail on that over time might be really helpful.

Phil Cusick:

Thanks, guys.

Operator:

And our next question comes from the line of Simon Flannery with Morgan Stanley. Please go ahead.

John Stankey:

Sure, Simon. It's nice to hear you. Thanks for joining us today.

John Stankey:

The general progress on the deal, I think is consistent with what we would have expected as we walked into it. As we indicated in our opening remarks, we're moving through the steps with the various regulatory agencies, both domestically in the U.S. and outside the U.S. Those processes are moving along at the pace we would've expected. I don't see any surprises around it, as you might guess, regulatory agencies are doing their typical thorough overview around that. And we feel really comfortable around the back-and-forth and what's been produced, the timelines and the milestones we've hit around those things. I would not expect that we would be giving details around our view of the construct of the deal until we're a little further along in that process and we have some degree of visibility that we know that there is going to be a positive affirmation of the deal coming out. and we're getting into that. Let's call it the window where we know we're in the final back-and-forth could try to get either a consent decree or approval, whichever comes out of it, to get the transaction moving forward. You probably are going around the deals long enough to know that we're not at that point right now and we're probably not going to be at that point until we get into the early part of next year. And once we have some visibility around that and we can step back at that moment, look at where the stock price is, how things are standing in the market at that point in time. And we're starting to get down to that window where people would need to make a decision, then we'll be giving you some visibility around what we think the right path forward is around that. And obviously, we want to see what also transpires here in Washington over the next couple of months. There's chances that policy may change around how different types of distributions or different approaches get taxed and all that has to be factored into our overall equation of how do we get value back into the shareholder's pocket in the right way. And the more information we have around that, the better informed that'll be, and I think the better it will be for shareholders as they move through it. But of course, there will be noticed before we close the transaction. I just wouldn't expect that it's going to be months and months and months before we'd close the transaction because we obviously want some degree of regulatory certainty. And where we are with the bill, you know what, the first thing I would probably share with everybody is, we're on this path to substantially increase our fiber foot print and that stretches across both our consumer and our business base. And I think as you known from past history, this is not uncommon for us to go through these ramps of infrastructure builds. We've done that many times before. We've recently been through 1 where we went through a multi-year ramp on Fiber builds that we started executing around the 2015 timeframe. They always, as you move through the front end of them, have a few moments where they're a little bit lumpy and a little bit rocky, because that's the nature of it. These are inherently large civil construction projects and they're spread out across many municipalities and there's many permitting agencies and all kinds of things that go on. And getting everybody ginned up and ready to go at scale sometimes takes some steps, but the end of the day, we always get there. And I think what's important for the investors to understand is we're on this march to get ourselves into a position where we can deploy fiber at scale and move from where we are right now, which is we want an objective of about 3 million passing a year and we'll ultimately probably ramp that into 5. We're looking at other options to see if there is capital efficient ways for us to even take that up a little bit further and do more, but we will get there. And I would ask that we probably not rotate on any given 90-day period as to whether or not it was a good 90 days or a bad 90 days. It's a question around whether or not we scale this up and get to the point that we're starting to deliver new homes into the inventory in a regular fashion, and I'm absolutely convinced that the organization is doing that. Are we seeing some supply stress right now in certain places as part of the reason why we guided down to 2.5 million this year? The answer to that is, yes, it's coming in interesting places. But the great news is when you are the scale player in the market, we work through those faster and with the preferred position than others. And we're seeing that occur, whether its chip sets for gateways and the homes that are necessary to put a Wi-Fi infrastructure and a motive in place, or it's Fiber components that are necessary or access to civil engineering. I think we're working through all those in a respectable fashion. I can give you an example right now. One of the reasons that we had to kind of deal with a guide down was one of our fiber providers was struggling a little bit in getting us the prefabricated portions of the infrastructure that go out into the distribution plant. The last mile, if you will, the parts that go up and down alleys and streets that ultimately connect homes into the network. And there is pre -assembled components that come in that, that are pre -spliced, that are put out into the network as we receive them from the manufacturer. We have worked through a lot of those issues and we in fact have an awful lot of infrastructure, if not all of the 2.5 million that will be placed, but there is a connector piece of that infrastructure that moves from the optical node that ultimately ties that in to the distribution neighborhood, which we're running a little bit short on right now. And it's literally a very small section of fiber that splices in the larger distribution. It's frankly the larger distribution that's harder to deploy. There's more labor hours in it. It's what requires more permits and more activity out in neighborhoods. But it's that little connector piece that we're a little bit short on right now. We're working through with the manufacturer in a cooperative way. We have a lot of plans in place to get that done and get the work completed. But it's one of those things where it's going to be nip and tuck right up until the end of everything we put in. But if for some reason we fall a little short on that, we're not talking about missing the substantial portion of the labor, we're talking about missing a connector that has to be put in that can bring up a lot of houses every time we put 1 more of those on the network. So we feel good about the ramp. We're going to continue to ramp or we're going to continue to give you insights to the new homes that are coming in. And we also believe we're in a very unique position given that we are the largest provider and builder of fiber out there right now that we're in strength in the industry and what we can command. And that's supply chain and we've secured the right relationships to get that done.

Amir Rozwadowski:

Operator, if we can move to the next question.

Brett Feldman:

Yeah, thanks. And two more for Jason. Last month at our Communacopia Conference, David Zaslav indicated that they would likely be taking a bit of a more targeted approach to deploying Discovery Plus ahead of the merger closing. I'm curious, have you or do you intend to modify the rollout or go-to-market plans on HBO Max ahead of the merger? And if so, can you give us an example what that means? I guess I'm just curious whether the current run rate of subscriber growth might actually understate the underlying momentum of the business if you were going to market the way you would expect after the merger. And then the second question is, you're nearly a year into the stay-in - date strategy with HBO Max and theaters. I'm curious what you've learned, maybe the biggest surprise and then more broadly, how has this experienced shape your view on the role of the theatrical distribution in sort of a post COVID, DTC driven world. Thanks.

John Stankey:

Put an exclamation point on your first question, which is, we absolutely believe and did this transaction with the notion that we're moving this business forward in a direct-to-consumer marketplace, and it's required that you get to scale. And I've said multiple times that we're in a window here where that's a foot race, and it's an important foot race. So there's no pulling the foot off the accelerator on that regard. HBO Max is the foundation of that business moving forward and how the combined Company will continue to go to market and everything that we do right now to make that product better and add customers is a step in the right direction and the consistent direction of where the closed and combined business goes. And we all want the shareholders that own a substantial portion of that Company moving forward, to have a valuable asset, one that's growing and one that will be successful in the next-generation of media. And we believe we've got to do the right things right now to make sure that the business is well-positioned, to make that happen.

Amir Rozwadowski:

Thanks very much, Brett. Operator can we shift to the next question.

David Barden:

Hey, guys. Thanks so much for taking the questions -- 2, if I could. The first one, Pascal, I think, for you; the way that the industry is growing ARPU has been moving meter plans to unlimited, unlimited to premium unlimited. You called out that now that we're at the end of year 1 of the promotional retention discounts that you guys are offering, the amortization of those discount in ARPU is starting to be felt in a 60 basis point year-over-year decline.

Pascal Desroches:

Dave, on the latter question, you're talking about Business Wireline?

Pascal Desroches:

Okay. Let me start, and Jeff will probably chime in on a few items. Remember, as we -- as we've said, the promotions that we are doing, 1, not all customers are taking them, so that's a big factor to keep in mind. 2, yes, the amortization is growing, but the ARPU -- the cash ARPU, is there. And when you couple the increased -- the continued vibrant cash ARPU with the expense work that we are doing in the middle of the P&L, we expect to grow both top line and bottom line as we move forward. And yeah, there will be some slight degradation in ARPU, but if -- when you look at our overall ARPU, we're still at the high end of the industry, so that's a consideration to keep in mind. These are very profitable lifetime value subscribers. As it relates to Business Wireline, we started about a year ago, started to rationalize low profit margin products and services, and that effort continues. The goal would be, over time, more and more of our services in the enterprise space are going to come from our core connectivity product, whether it be wireless or fiber. And that's where the growth is going to come. And it's a process we are partway through, but we think as you get through the latter part of this year to early next year, the comps get a little bit easier. I'll ask Jeff to chime in.

David Barden:

Thanks for answering the question.

Operator:

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

Jeff Mc Elfresh:

Mike, I'll take the first part of your question. This is Jeff. There still remains a large opportunity within our base of customers to work them through a more value -- higher end of our rate plans. And you're seeing that play out in postpaid phone ARPU. Pascal touched on this a second ago. If you think about maintaining the industry-leading, the highest ARPU of any player in the market, even though we're the third player in wireless, being able to do that with some of these promotional offers that are part of our strategy, gives us confidence that we're working our base and our customers up the ARPU stack into higher-value unlimited rate plans. We still have large portions of our subscriber base that we have not migrated into those rate plans. And so we expect that to continue pretty much on the course and speed of what the customer wants. We're not driving or forcing any unnatural behavior there. We're letting the customers choose when it's time for them to take advantage of an offer or to move into a new rate plan. And we'll continue to execute that. So that's got a room to run for the next mini, several quarters. That's not something that's going to dry up in the short-term.

Amir Rozwadowski:

Thanks very much, Mike. Operator, if we can move to the next question.

Kannan Venkateshwar:

Thank you. So I guess if I could just dig in to the fiber business a little bit more. Is there any change in terms of the go-to-market strategy? I think you guys tweaked the pricing plans, if I'm not wrong, during Q3. But more broadly, if you could give us some color around what part of this origination also includes bundles with wireless and the acceleration in growth in fiber?

Jeff Mc Elfresh:

Kannan, hey, it's Jeff. What has been our difference in go-to-market strategy? We are executing at a faster pace in this build than we did in the prior build. Our -- in fact, the gross additions that we had in our fiber business in the third quarter, roughly around 500,000, highest ever. Our network engineering teams are getting the fiber laid into the ground, into customer homes, in a cycle time that's about 30% faster than our prior build. And our market or -- marketing organization is tactically out in the markets driving early 30, 60, 90 day [Indiscernible] rates at 2x the levels that we saw in the prior build. We are absolutely including wireless as a bundled opportunity for us in this part of our footprint. And I'd cite that about 7 out of 10 additions to our Fiber network in this last quarter were new accounts to AT&T, and therefore, give us an opportunity to go drive Mobility growth as well. in the footprints where we built it.

Kannan Venkateshwar:

Got it. Can I just follow-up? I mean, in terms of your go-to-market strategy in Wireless, the device promotions obviously helped quite a bit over the course of the last year. When we look at the broadband side of the business, the current pricing structure and the promotional structure that you have, should we basically think of that as the operating steady-state or are you thinking more broadly about potentially a different kind of pricing and promotional structure to accelerate this growth?

Kannan Venkateshwar:

Got it. Thank you, guys.

Operator:

Our next question comes from the line of Frank Louthan with Raymond James. Please go ahead.

Jeff Mc Elfresh:

Hey, Frank, it's Jeff. Right now for our broadband business, as you know, we're focused on fiber, but we do offer some fixed wireless services and it's predominantly focused today in the enterprise segment where most of those clients are looking for a 4G or 5G wireless backhaul. We are experimenting, as is everyone else, in leveraging our scale d wireless network to maybe augment pocket scenarios with some fixed wireless. but it honestly is not a lead product for us, and we won't make that top of the funnel for our broadband services. Your second part of the question was what, Frank?

Jeff Mc Elfresh:

Well, for sure, all of our network assets, we're looking to maximize the yield. And because of the investments that we've made in Wireless, Frank, we've got ample capacity sitting inside of our broad network architecture and infrastructure. And so akin to what we have announced previously with DISH, which by the way is operationally up and running. We've successfully integrated our systems with the DISH systems and now providing connections into their distribution network, and we're going to look to ramp that in B&O offering for DISH over the course of the '22 and beyond. Remind you that's 10-year deals as long term. And so based on that move, you should expect that we are interested in serving all forms of traffic, so long as they are accretive to our share owners and to our business, and I would expect you'll see us as a participant in that. If you look also -- one last comment, Frank, if you look at historically, we've been pretty underrepresented in resale or wholesale in our run rates of our business, and so it's been an area of focus for the team and we'll look to grow that line in our business.

Amir Rozwadowski:

Thanks very much, Frank. Operator, we have time for one last question.

Colby Synesael:

Great, thank you. Just wanted to follow up on the $6 billion cost reduction initiative. How long will it take to achieve that the back half of that goal? Secondly, would you expect this to actually result in margin accretion or will the majority of this be reinvested? And then I guess third on that, what segments are we really going to see that show up in that? You mentioned, I think, Business Wireline, But is there any others that will be fairly material, as well? And just real quickly, John, in one of your comments, you mentioned going from 3 million to 5 million homes pass per year with Fiber. I just hadn't heard that 5 million number before, is that new or is that always there? And is that just simply intended to get you to catch up to get to that 30 million home pass long-term goal or is there an expectation that you're going to go well beyond that 30 million that you had previously mentioned? Thank you.

Jeff Mc Elfresh:

Yeah. And it's not only impacting our Business Wireline part of the franchise, Colby, it's all 3 reported segments. I think we've been investing heavily in these transformation initiatives to go drive growth and improve our cost structure and our effectiveness as an organization. Simply put, we have been hard at work inside of the Company preparing for a better execution and a better operating performance. And we're seeing signs of that in our Wireless business, we're seeing signs of this now in our Consumer Wireline business, and I tell you that the Business Wireline begins to feather in as we move into the back half of the program.

Operator:

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to AT&T's Second Quarter 2021 Earnings Call. At this time all participants are in a listen-only mode. [Operator Instructions] Following the presentation, the call will be open for questions. [Operator Instructions] And as a reminder, this conference is being recorded. I would like to turn the conference call over to your host, Amir Rozwadowski, Senior Vice President, Finance and Investor Relations. Please go ahead.

John Stankey:

Good morning, everyone, and thanks for being with us. At the risk of being repetitive or I guess consistent, depending on your take, the framework for what I want to cover today should be familiar to you. It's been four quarters since we articulated a simplified strategy in how we planned on evaluating our success going forward based on three priorities. First, we wanted to grow subscriber relationships through our three market focus areas of 5G, Fiber, and HBO Max. Second, we initiated an effort to transform our business to be effective and efficient in everything we do so that we could allocate increased resources to support these focus areas. And third, we committed to deliberate capital allocation to support increased investment growth, improve returns, narrow our operating focus, and restore flexibility to our balance sheet. To achieve these priorities, we made some difficult near-term decisions to set our businesses up for success in the coming years. And that success is defined by improving our competitive position through the investment in best-in-class products and experiences for our customers. By doing so, we believe the execution of this strategy will drive better returns and profitable long-term growth. Let's look at what we've achieved in the past year on slide four. We've made notable progress on each of our priorities. In wireless, we're gaining share, lowering churn, and had our best 12 months of postpaid phone net adds in more than a decade. And we just posted record quarterly wireless EBITDA. In fiber, customers have similarly responded to the combination of a premium service at attractive prices, and we've grown our base by more than one million subscribers. By year-end, we'll have expanded our fiber footprint by three million consumer and business customer locations. And just over a year after launch, we've grown our domestic HBO Max and HBO subscribers by 10.7 million. We transformed HBO from a $6 billion business that was not growing to an $8 billion run rate business that grew at nearly 40% this quarter. We've also made solid initial progress in our cost transformation efforts, which have produced $2 billion in savings that we've reinvested into our core growth areas. We're streamlining our operations and effectively growing digital fulfillment channels. Our NPS scores have improved significantly, and our fiber customers continue to rate us number one in customer satisfaction. Churn levels have dropped substantially too. Our second quarter postpaid phone churn matched a record low. And in broadband, we had our lowest churn on record and the highest second quarter fiber gross adds ever. At WarnerMedia, we continue to deliver great content. In the first-half of the year, we introduced hit series such as Mare of Easttown and Hacks. And our lineup in the back-half of the year is even stronger with new seasons of popular series such as Succession, Raised by Wolves, Curb Your Enthusiasm, and Love Life. That's on top of the day-and-date movies we'll have on the platform such as Space Jam

Amir Rozwadowski:

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

John Hodulik:

Okay, great, thanks. Good morning, guys. Anything you could tell us about the details of the wholesale deal with Dish, specifically just any thoughts, I know Pascal, you mentioned that it would affect revenues in '22, but just do you guys expect to take all of the traffic on to your network and maybe if you could give us a sense on when it should start to migrate or over what timeframe do you see that? And then also, as part of that announcement, there is some details about some spectrum that you guys could utilize from Dish, is that the 700 megahertz spectrum that you'd have access to, and maybe if you could give us some details on how quickly that could be put into -- it could be lit up and sort of used by AT&T Mobility, would be great. Thanks.

Jeff McElfresh:

John, I think you covered the broad strokes of it, I would just say the cadence between the two organizations and getting ready to begin migrating this traffic towards the latter part of this year, and ongoing into 2022 has been very positive, I think the comments from the operation have been that the AT&T network has got the capacity and the coverage with all of the investments that we've made over the last several years, we can actually afford to do something like this and not worry so much about our spectrum position. And our technology migration that we've got experience in and upgrading from 4G to 5G and making those transitions seamless is something I think the Dish organization is looking forward to working with us on.

John Hodulik:

Got you, okay. It sounds good, guys. Thanks.

Operator:

We do have a question from the line of Simon Flannery with Morgan Stanley. Please go ahead.