AT&T Inc (T) — Q3 2021 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to our third quarter call. I'm Amir Rozwadowski, Head of Investor Relations for AT&T. Joining me on the call today are John Stankey, our CEO; and Pascal Desroches, our CFO. Also joining us for the Q&A portion of our call are Jeff McElfresh, the CEO of our Communications Group; and Jason Kilar, CEO for WarnerMedia. Before we begin, I need to call your attention to our safe harbor statement. It says that some of our comments today may be forward-looking. As such, they are subject to risks and uncertainties described in AT&T's SEC filings. Results may differ materially. Additional information is available on the Investor Relations website. As always, our earnings materials are on our website. I also want to remind you that we are in the quiet period for the FCC Spectrum Auction 110. So unfortunately, we can’t answer questions about that today. With that, I'll turn the call over to John Stankey. John?

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. 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 will also 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 $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 showing that our momentum is real and sustainable. Let me now turn it over to Pascal to discuss the details of the quarter. Pascal?

Thank you, John, and good morning, everyone. Before we get to our consolidated results, let's look at the progress in our market focus areas on Slide 5. As John mentioned, we continued our strong customer momentum in the third quarter with 928,000 postpaid phone net adds. That's our best net adds quarter in over 10 years. Customers like the strength of our network and our consistent simple offers. Gross adds are up, churn is low, and we continue to take share and grow our customer base. Our Fiber base also continues to expand. Broadband revenues grew by more than 7%, and we now have 5.7 million AT&T Fiber customers, with 3.4 million of them on 1-gig connections. And we saw sequential growth in our Fiber net adds with most of those new to AT&T. Let's now look at our HBO Max, HBO global subscribers. As we said last quarter, most of the subscriber additions for the remainder of the year are expected to come from our lower ARPU international base. We've reached nearly 70 million global subscribers, thanks to growth in our international markets. As previously announced, domestic subscribers were down due to our proactive decision to shut down the Amazon wholesale platform. This was partially offset by new wholesale relationships. Retail subscriber growth slowed on the timing of new content, but we expect retail subscriber growth to accelerate in the fourth quarter due to a strong content slate. We have new seasons of Succession and Curb Your Enthusiasm debuting, the return of Sex and the City, as well as the much-anticipated premieres of Dune, King Richard, and The Matrix Resurrection. Given our upcoming content slate and expanding global footprint, we expect to end the year at the higher end of our year-end global subscriber target. Now let's turn to Slide 6 for our consolidated financial results. The third quarter results reflect the closing of the DIRECTV transaction after the first month of the quarter. We're a smaller Company today than we were at the beginning of the quarter, and that is reflected in our results. Excluding DIRECTV revenues, revenues were up about $1.7 billion or 5%, thanks to growth in our market focus areas. Gains in Mobility, WarnerMedia, and Consumer Wireline more than offset declines in Business Wireline and from the disposition of other businesses. Adjusted EPS for the quarter was $0.87, that's up more than 14% year-over-year. In addition to merger amortization adjustments for the quarter, adjustments were made to exclude our proportionate share of DIRECTV intangible amortization, a gain on the sale of Playdemic, and an actuarial gain of benefit plans. When you exclude DIRECTV from both periods, adjusted EBITDA was up 3% year-over-year, mostly due to growth in Mobility and strong growth at WarnerMedia, reflecting partial recovery from the pandemic and the timing of sports costs. Cash from operations came in at $9.9 billion for the quarter. Spending was up both year-over-year and sequentially with CapEx of $4.7 billion and growth capital investments totaling $5.7 billion. Free cash flow was $5.2 billion inclusive of year-over-year increases of $850 million in CapEx and $1.7 billion investment in WarnerMedia cash content. Year-to-date, our content investment has increased by more than $4 billion. Additionally, our leverage position also benefited from $10 billion in asset monetization in the quarter, including our DIRECTV TPG transaction. Let's now look at our segment operating results, starting with our communication business on Slide 7. Our Mobility business continues to gain steam. Revenues were up 7%, with service revenues growing 4.6%. Postpaid phone churn remained at record low levels, and we had record postpaid phone growth. Prepaid also continued to be a solid performer for us, especially our Cricket brand. We added 249,000 prepaid phones in the quarter. Prepaid phone churn is less than 3%, with quarter churn even lower. Mobility EBITDA is up nearly $300 million or 3.6% year-over-year, driven by growth in service revenues and transformation savings. We expect that growth to accelerate in the fourth quarter. This growth came even with increased volumes, 3G shutdown costs of nearly $200 million, higher costs associated with the return of the iPhone launch into the third quarter, and without a material return in international roaming. We expect similar quarterly 3G shutdown costs through the first quarter of 2022. Business Wireline continues to deliver consistent margins in the high 30s and solid EBITDA. The business did see some difficult year-over-year comparison given pandemic-related benefits experienced last year. We have been very aggressive in proactively rationalizing our portfolio of low-margin products. This creates incremental pressure on our near-term revenues, but at the same time, it allows us to focus on our core network and transport services products. It will take several quarters for us to work through this initiative, but as we lap the beginning of this process that began late last year, we should see improving revenue trends in Business Wireline. Our fiber growth was solid. We had our highest fiber gross adds ever, and we continue to win share wherever we have fiber; we added 289,000 fiber customers in the quarter. More than 70% of fiber net adds are new AT&T broadband customers and we discuss this great confidence as we continue to build up our fiber footprint. Last quarter, we reached a major inflection point in our consumer wireline business where broadband revenue growth now surpasses legacy decline. Total consumer wireline revenues are up again this quarter, growing 3.4%. This quarter also reached an inflection point on broadband profits as EBITDA grew 3.8%. We expect sequential EBITDA growth in the fourth quarter, but it will be a tougher year-over-year comparison due to a one-time pandemic-related benefit in last year's fourth quarter. Let's move to WarnerMedia results which are on Slide 8. WarnerMedia revenues were up 14% led by strong D2C growth and content licensing. Direct-to-consumer subscription revenues grew about 25% reflecting the continued success of HBO Max. Content and other revenues were up 32%, reflecting higher TV licensing and the recovery of TV production and theatrical releases. Advertising revenues were down nearly 12%, mostly due to the timing of sports. You may recall that the prior year third quarter included the restart of the NBA season and the playoffs, which returned to a more traditional schedule this year. This lowered sports costs in the quarter, which helped WarnerMedia grow EBITDA by 13.5%. The third quarter also included the impact of more than $200 million in DIRECTV advertising revenue-sharing costs. With the close of the DIRECTV transaction, WarnerMedia continues to represent and sell DIRECTV advertising inventory and now compensates DIRECTV through a revenue-sharing arrangement. This revenue share is now recorded as an expense to WarnerMedia. We launched HBO Max in Latin America late June and have had incredible success. Next week, we are launching new international markets in Spain and the Nordic region with more new markets to come in 2022. Now before we get to your questions, just a few words about guidance. Three quarters into the year, we feel good about customer momentum and where we stand relative to our guidance provided last quarter. With our strong performance, we now expect full-year adjusted EPS to be at the high end of our previous guidance of low to mid-single-digit growth range. And that's with significant costs expected to be incurred in launching HBO Max in Europe. Additionally, we expect more than $350 million of advertising sharing costs associated with WarnerMedia's new advertising sharing arrangement with DIRECTV, as well as continued costs associated with shutting down our 3G network. Also, keep in mind, last year's fourth quarter benefited from the advertising associated with the U.S. presidential election. And as mentioned earlier, we are on track with our free cash flow target of around $26 billion as well. In addition to the fourth quarter being a traditionally stronger free cash flow quarter, we expect a FirstNet reimbursement of approximately $1 billion, lower year-over-year costs from the iPhone launch, moving up to the third quarter this year, and DIRECTV cash distribution of approximately $800 million. Amir, that's our presentation. We're now ready for the Q&A.

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

Good morning, everyone. With the shift in the consumer market, it's clear that the business segment is preventing the communications sector from achieving positive EBITDA. I know you faced some challenging comparisons, and I appreciate your comments on the revenue growth improvement, Pascal. When can we expect to see some improvement in EBITDA? Any details you can provide that would help us understand when the communications business will start growing EBITDA would be helpful. Additionally, Jason, could you share any insights on the AVOD launch this summer? It appears that you added between 6 million and 7 million HBO Max subscribers globally after accounting for the losses from Amazon. Is that accurate? Also, does the content release schedule you referred to enable you to build on that subscriber number as we head into the final quarter of the year? Thank you.

Hey, John, let me start before Jason jumps in. Overall, here's the way to think about. We haven't given specific guidance on the overall communications Company yet, which is what I think you're asking about. But I said in my commentary that we expect Mobility, the biggest part of our business to accelerate growth from here. I also said that, while sequentially, we have some tough comps. For the fourth quarter Consumer Wireline, we expect sequential growth in that business. Business Wireline, we talked about some of the issues we're facing. So when you think about all those things, you should get a sense that from here, the momentum of the business continues. And we feel really good about it, our customers are growing, our revenues are growing, and we continue to take costs out of the business. So over time, it's going to translate to improvement in, not only top line, but we will see profit growth.

John, I'll jump in. This is Jason regarding the AVOD question. We are pleased with the launch in June, and this marks our first full quarter. We are satisfied with the subscriber response and believe that advertising helps reduce the price and enhance the value of an HBO Max subscription, making it a strategic move. We are excited about its potential. It's worth mentioning that until the end of this year, the ad-supported version of HBO Max does have a few exclusions, such as the movies Matrix, King Richard, and Dune, which won't be included until late January 2022. Overall, we are pleased with the results and optimistic about the future. You also inquired about our results considering the exit from Amazon Prime Video channels. While we haven't disclosed the number of subscribers that came from Amazon Prime Video channels, we are very happy with this quarter. We've experienced growth of 1.9 million worldwide, and despite the Amazon exit, which we see as a strategic move similar to decisions made by Disney and Netflix, we feel very good about the quarter.

Great. Thanks, guys.

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

Hey, guys. Thanks. I wonder if you can talk on your view on the wireless industry. Clearly, your business you've talked about is accelerating. But there's a thesis out there that there are huge subsidies for consumers that are damaging industry health. Do you think investors are wrong on that, and that the wireless industry is healthy? And with churn low, does it make sense to back off a bit on growth to push margin? Thanks.

Yeah. Hey, Phil, this is Jeff. Good morning. To address that question, I'd kind of back up 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 fifth consecutive quarter where we have driven some momentum in gaining share. Our net add strength here in the quarter at 928,000 compares to what we produced back in 2019 in the third quarter of 101,000. 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 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 remained consistent in our offers to the market over the last 13 months, if you will. This really enables the AT&T frontline team members to master their craft, delivering a higher level of service. 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 scale here. In the third quarter, we posted the highest net add quarter since launching the program. We've arrived at a position of leadership and strength in the law enforcement segment under that public safety sector. All in all, it's been the operational changes we've made at AT&T that have driven really strong momentum in our customer counts. The promotions that you referred to are just one element of this broader strategy. 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. 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. I can tell you that those who have participated in our promotional offers have a higher LTV, a better churn rate, and a higher satisfaction score than those who have not. We know this is driving accretive value. The industry is healthy. Better than that, the new accounts to AT&T, those who are joining us from our competitors, 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 from 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. It's also, I think, important to note that the cost of these promotions, as one element of our strategy, runs through our service revenue. The cost of those promotions runs 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 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, I'll just add on that. We're not participating or taking EBB dollars on our postpaid subscribers. In terms of telecommunications in general, there's clearly a stronger consumer out there because of some of the things that the federal government has done with the pandemic to prop up household income, and that can't last forever. However, if you examine where we are in the infrastructure bill, and you think about what is moving from a federal policy perspective on building better infrastructure, whether or not Congress gets that through of course is a question. But you work under the assumption that there seems to be some bipartisan view that we need to do the right things around infrastructure, and then broadband and connectivity to the Internet seems to come at the top of the list. I would expect that there's going to be some more federal money that moves into the industry next year. Some of it comes in the form of a direct subsidy to what's considered to be low-income households. That definition of low-income households is a fairly generous definition. It's 200% of the poverty line in the bill as it was proposed or written. When you start thinking about that, does that mean that a household, at least in terms of making decisions on telecommunications purchases, might be in a stronger position next year? If the economy continues to be reasonably strong, I don't worry about all of a sudden seeing a reversal or turnaround in the aggregate spending power on telecommunication services.

I appreciate the depth of your answer. I would just like to follow up and mention that everybody seems to be quite impressed with AT&T's results over the last year. However, the market indicates that investors may not hold the same belief. This isn’t specifically about AT&T alone, but if you observe the stock prices of AT&T, Verizon, and T-Mobile together, it’s clear that investors are significantly discounting the terminal value of these companies. Providing more details on this over time could be very helpful.

I think our job is to do what we say we're going to do each quarter and continue to meet our commitments and carry it through. Ultimately over time, when the cash shows up, it tends to get reflected in the stock price.

Thanks, guys.

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

Great. Thank you very much. Good morning. Thanks for the update on the WarnerMedia transaction. I wonder if you could give us a little bit more on when we might learn more about the final structure of the deal at the dividend policy, etc. Any color there would be great. And then on the supply chain, can you just revisit the fiber build pacing on the 2.5 million and just general commentary on what you're seeing in the supply chain and how that's impacting both fiber and 5G rollouts? Thanks.

Sure, Simon. It's nice to hear you. Thanks for joining us today. 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. 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. We're getting into the window where we know we're in the final back-and-forth to try to get either a consent decree or approval, whichever comes first, to get the transaction moving forward. You probably know well from past history 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. Once we have some visibility around that, we can step back at that moment and look at where the stock price is, how things are standing in the market at that time, and start 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. 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 shareholders' pocket in the right way. 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. Of course, there will be notice 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. Regarding the fiber build, you know what, the first thing I would probably share with everybody is, we're on this path to substantially increase our fiber footprint. That stretches across both our consumer and our business base. I think as you know 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 one, where we went through a multi-year ramp on Fiber builds that we started executing around the 2015 timeframe. They always 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 are many permitting agencies and all kinds of things that go on. Getting everybody ginned up and ready to go at scale sometimes takes some steps, but at the end of the day, we always get there. I think what's important for 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 are capital-efficient ways for us to even take that up a little bit further and do more, but we will get there. I'd 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. 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 we guided down to 2.5 million this year? The answer to that is yes, it's coming in interesting places. The great news is that when you're the scale player in the market, we work through those faster and with the preferred position compared to others. We're seeing that occur, whether it's chipsets for gateways and the homes that are necessary to put a Wi-Fi infrastructure and a modem 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 we guided down was that one of our fiber providers was struggling to get 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 ultimately connect homes into the network. There are pre-assembled components that come in 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 have, in fact, an awful lot of infrastructure, if not all of the 2.5 million that will be placed. However, there is a connector piece of that infrastructure that moves from the optical node that ultimately ties that into the distribution neighborhood, which we're running a little bit short on right now. It's literally a very small section of fiber that splices into the larger distribution. It's frankly the larger distribution that's harder to deploy. There are more labor hours in it. It 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 many plans in place to get that done and complete the work. 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. If for some reason we fall a little short, we're not talking about missing a 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 one more of those on the network. We feel good about the ramp. We're going to continue to ramp, and we're going to continue to give you insights into the new homes that are coming in. We also believe we are in a very unique position given that we are the largest provider and builder of fiber out there right now, we are in a strong position in the industry and what we can command in that supply chain, and we've secured the right relationships to get that done.

Thanks for the color, John.

Operator, if we can move to the next question.

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 of 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 experience shaped your view on the role of the theatrical distribution in sort of a post-COVID, DTC driven world? Thanks.

Sure thing, Brett. Very much appreciate the questions. In terms of your first question, our approach is consistent with what our approach was a quarter ago, two quarters ago, three quarters ago. What I mean by that is that for us it's business as usual. We're going to be launching in six countries next week in Europe, and we're very excited about that. We've also publicly announced several other European country launches in 2022. Our approach is very much what it had been before, and we're excited. If you take a look at the Latin America results, the expansion across the globe can bring. Regarding your second question about our motion picture slate and what we have learned, I'll state the obvious, which is not unique to us, is that we're in the middle of a pandemic, and it obviously presents unique circumstances. As you know well, we've been very much leading and the first over the wall, so to speak, regarding bringing our 2021 slate to customers in a way that can work for them, but also worked for exhibition and our participants. What we've learned is that motion pictures continue to matter. We believe they're going to matter for decades to come, and we're probably investing in them. In terms of the road forward, we've committed to 2022, and that's the visibility we have. It's a combination of two things; one side will be a certain slate of motion pictures that will have an exclusive theatrical run, 45 days. That's quite a bit different from where things were five years ago in terms of the theatrical run; then they will come to HBO Max. We're also going to have a slate of motion pictures from Warner Brothers that will come directly to HBO Max on day one. Those are the answers to your two questions, Brett. Thank you for asking.

I’d 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. 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. HBO Max is the foundation of that business moving forward. The combined Company will continue to go to market, and everything we do right now to improve that product and add customers is a step in the right direction and the consistent direction of how the closed and combined business goes. We all want the shareholders who own a substantial portion of that Company moving forward to have a valuable asset, one that's growing and successful in the next generation of media. We believe we need to do the right things right now to ensure that the business is well-positioned to make that happen.

Thank you.

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

Thank you all for taking my questions. First, Pascal, I wanted to address the industry's growth in average revenue per user, specifically how we’ve seen a shift from meter plans to unlimited and from unlimited to premium unlimited. You mentioned that now that we’ve reached the end of the first year of the promotional retention discounts, we’re seeing the amortization of those discounts reflected in a 60 basis point year-over-year decline in ARPU. Could you help us understand how these two dynamics might interact in the coming years, considering these promotional discounts could present a headwind as they accumulate, while also recognizing the potential for core growth? The second question is regarding the initiatives you’ve implemented over the past year to enhance the business revenue trajectory. Could you provide an overview of what changes have occurred and the anticipated impact on the business outlook? Thank you.

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

Correct.

Okay. Let me start, and Jeff will probably chime in on a few items. Remember, as we've said, the promotions that we are doing, one, not all customers are taking them, so that's a big factor to keep in mind. Two, yes, the amortization is growing, but the cash ARPU is there. When you couple the increased 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. There will be some slight degradation in ARPU, but 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 to rationalize low profit margin products and services, and that effort continues. The goal would be, over time, for more and more of our services in the enterprise space to come from our core connectivity product, whether it be wireless or fiber. That's where the growth is going to come from. 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.

Thanks, Pascal. If you look at our Business Wireline business as a reported segment, we are moving many of our enterprise customers through a product mix shift. We've been doing this for a while. I think it's important to note that unlike others, we don't report a consolidated business P&L that includes wireless. We are actually seeing a shift to wireless for many services, as many of our customers have moved up and over in the pandemic. As just a general observation, more specifically, in the three parts of our business, we're getting to subscriber growth, revenue growth, and then EBITDA growth. We're at the cusp of getting our Business Wireline business to move in that direction. It's going to take some time because it will require some product mix and product development work. Specifically, areas of the business markets that we, at AT&T, serve less of or underrepresented, are in more of the medium-sized businesses in the mid-market. These customers are more inclined to use shared broadband served up by Fiber. Our business service class services that we sell to our top-end enterprise accounts are a bit more bespoke in specific networks that are not necessarily attractive to the mid-markets. We have been making moves to shift the product mix into mid, as John mentioned earlier, as our fiber expansion, not just for consumer but also for business, begins to take footing. You'll see us shift shares of our revenue in Business Wireline more transactional-based and down market with the execution that we know we can deliver. It's going to take a few quarters as we work through it. The cost transformation that we are undertaking inside the communications Company, as Pascal mentioned, about halfway through the $6 billion aggregate for the firm. The back half of the transformation program really brings in more operating efficiencies in our Business Wireline segment that we'll see start to accrete to EBITDA growth in that part of our business.

Thanks for answering the question.

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

Thanks, and good morning. Just wanted to follow up, and forgive me if you mentioned a little of this earlier, but I just wanted to unpack this a little bit further. In terms of the Wireless business, what you're seeing in terms of the right plan participation for unlimited plans and the higher value plans, and how much opportunity is in front of the Company to upsell customers on these higher-value plans that you've been marketing. Then just secondly, back in March at the Analyst Day, AT&T set a goal for net debt to end the year at $154 billion at three times leverage, which infers, you can just divide the three into the net debt, it's about $51.3 billion of EBITDA. Since then, it seems like your cost-cutting program is moving faster. Just curious, if you can give us an update on these goals. And is that the right bouncing off point to think about the AT&T EBITDA without DIRECTV for 2021? Thanks.

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. 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 have not migrated into those rate plans. We expect that to continue pretty much on course and speed for 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 move into a new rate plan. We'll continue to execute that. So that's got room to run for the next many, several quarters. That's not something that's going to dry up in the short term.

Mike, there are a couple of points to consider. Although we are not updating our guidance, we are comfortable with it. To understand the performance of our core business after DTV and WarnerMedia, I believe all the relevant information is available. We have shared WarnerMedia results separately, making them easy to analyze. In terms of DTV, we have provided detailed pro forma information. It's important to remember that when calculating net debt to EBITDA, we use the trailing twelve months. Some of this includes DTV for part of the year while excluding it for another part. This is how we arrived at the three times in the guidance we provided. Other than that, our guidance remains unchanged. We believe this should give you a good understanding, and if there are any further inquiries, our IR team can assist you.

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

Thank you. So I guess if I could just dig into 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. 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? You guys have been building out Fiber for a while as a part of the DTV deal, and some of that was overlapped with your DSL footprint, but in that overlap, you did not seem to get the same amount of success that you're getting right now. If you could just expand on the differences in go-to-market as well as the customer cohorts that you're targeting and how you expect that to evolve, that would be useful. Thanks.

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. In fact, the gross additions that we had in our fiber business in the third quarter were roughly around 500,000, the 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. Our marketing organization is tactically out in the markets driving early 30, 60, 90-day rates at two times the levels that we saw in the prior build. We are including wireless as a bundled opportunity for us in this part of our footprint. I’d cite that about 7 out of 10 additions to our Fiber network in this last quarter were new accounts to AT&T; therefore, it gives us an opportunity to drive Mobility growth as well in the footprints where we built it.

Can I just emphasize something Jeff said and maybe we'll quibble a little bit with your characterization of the previous success on the last build. There was really not much new fiber build from about 2018 at the end of 2018; there was a little bit of a hiatus period there. I would tell you that a lot of the results you're seeing right now are indicative of a much better execution by the team. We're going back in and working in some of the asset base to actually improve performance overall. Now at the midpoint of this year, you've now seen some of your inventory come into play, and we're getting a lot better, as Jeff just described, at moving through penetration rates faster. If we sustain that, it’s going to make the business case an even stronger one because one of the big sensitivities to payback is rate to penetration. If we can keep that going, it can be dramatically better than what we think is already a pretty attractive business case. The last point I would make is that the nice part about this build in many instances is that we're filling in areas that we maybe didn't complete previously. As that fill-in occurs, you get some effectiveness on marketing messages, the ability to go into a market with a distinct value proposition effectively communicated, how you deal with your distribution channels through that. We'll probably be a little bit more effective and efficient given the base of customers we have as we build out and fill in over the next several quarters.

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?

We are currently pleased with the demand for our top-tier product, which outperforms our nearest competitor by 4.5 times in quality and value. Our focus is on rapidly expanding our Fiber infrastructure to provide customers with gigabit-level speeds at an attractive price. As long as our market offerings continue to attract customers, I do not foresee any changes to our strategy.

Got it. Thank you, guys.

Thanks for answering the question, Kannan. Operator, if we can move to the next caller.

Great. Thank you. Can you walk us through your fixed wireless strategy and what percentage of the demand do you think for that product comes from enterprises versus consumer? I'm also curious about the outlook for wholesale on Wireless. You potentially lose some share against the TracFone over time, but what about wholesale deals with either Lex like that to try and boost that business? Thanks.

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 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?

On the wholesale side and in Wireless, we might lose some market share over time with the TracFone deal. What are your thoughts on expanding that business, perhaps by offering wholesale deals to smaller companies that are developing broadband, to increase wholesale revenue over time?

For sure, with all of our network assets, we're looking to maximize the yield. Because of the investments that we've made in Wireless, we have ample capacity in our broad network architecture and infrastructure. We announced previously with DISH, which, by the way, is operationally up and running. We've successfully integrated our systems with the DISH systems and are now providing connections into their distribution network. We're going to look to ramp that into B&O offerings for DISH over the course of '22 and beyond. Remember that's a 10-year deal as long-term. Based on that move, you should expect that we are interested in serving all forms of traffic, as long as they are accretive to our shareholders and our business, and I would expect you'll see us as a participant in that. 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.

Right. Great. That's helpful, thanks.

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

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 are there any others that will be fairly material as well? Just real quickly, John, in one of your comments, you mentioned going from 3 million to 5 million homes passed per year with Fiber. I just hadn't heard that 5 million number before, is that new or is that always there? Is that just simply intended to get you to catch up 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.

Colby, I've been clear from the beginning that our goal is to execute effectively and deliver results that impress you. I firmly believe there are further opportunities for us to develop infrastructure that attracts business. I trust this management team will prove to the market that we can achieve this. I believe we have the potential to operate at a capacity of 5 million a year in our field, and I think we can reach that target. The way we get there, how we scale up, and the timeframe will depend on the results we share with you and the progress we make. We'll continue to push forward. I'm encouraging the management team to consider how to scale their operations, manage their business, size it effectively, and establish vendor relationships to facilitate our growth. Regarding the financial guidance for cash flow in 2022 and 2023, many of you are wondering if we can reach that level. It's important to note that some cost-saving measures will positively impact our bottom line and help us achieve that target. While the initial phase of our program has improved our market effectiveness and customer growth, the latter stage focuses on achieving better efficiency that enhances our cash flow. That's the key to our strategy. We're also implementing structural changes for longer-term challenges, like updating our IT infrastructure and data systems, which are more complex and require more time but offer significant operational leverage once completed. Jeff, please share any additional insights you may have on the timing.

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

Thank you all for joining us this morning. I appreciate your questions and interest in the business. As I mentioned at the beginning of the call, this quarter has shown consistency in focus and execution. I am pleased with our overall progress and how the team is performing. Despite a lot of moving parts and some distractions, both our communications and media teams have done an exceptional job of staying focused on their objectives. This makes me even more excited for the future, especially as we work through the process and some distractions fade away. I believe the potential for these teams is limitless as they continue to improve their execution. Regarding my views on the markets we are involved in, I am actually quite optimistic. There is a significant amount of investment flowing into these industries due to the vital importance and value that customers derive from connectivity moving forward. In the communications sector, we are entering what I would call a golden age of connectivity. I feel confident about this because there are intelligent operators in this industry who are investing wisely, knowing they can achieve returns. Demand in these sectors is strong, and I believe that potential structural changes from government programs could further boost that demand. If policies are crafted effectively, we could see substantial progress in the communications industry, benefiting everyone involved. On the media front, we are uniquely positioned with what we have achieved. When we launched HBO Max, we aimed to create a focused product with high quality and a distinct brand. External evaluations show that as our team has found its footing and continued to enhance the quality of the product and platform, especially throughout the pandemic, we have seen significant engagement, viewership, nominations, and awards from third parties recognizing our efforts. I believe this unique combination, when paired with Discovery, will only enhance our capabilities, establishing it as an essential platform for consumers globally and generating significant value in the process. As we conclude the year, I look forward to sharing more updates with you and wish you all a great fourth quarter and happy holidays if we don’t connect before then.