AT&T Inc (T) — Q1 2022 Earnings Call Transcript

Thank you and good morning, everyone. Welcome to our first 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. 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're 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. And as always, our earnings materials are on our website. With that, I'll turn the call over to John Stankey. John?

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 suggests 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 better 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 services 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.

Thank you, John, and good morning, everyone. Let's start by taking a look at our first quarter consolidated financial summary on Slide 5. It's important to note that our first quarter consolidated results include the contributions of WarnerMedia and that last year's first quarter included results of our US Video business and Vrio. Accordingly, our reported results do not provide a clear reflection of our business on a forward-looking basis. So let me quickly cover a few key points before reviewing the financial results of our new stand-alone AT&T operations on the next slide. On a consolidated basis, including a full quarter of WarnerMedia, our adjusted EPS for the quarter was $0.77 compared to $0.85 in the first quarter of 2021. In addition to merger amortization, adjustments for the quarter were made to exclude our proportionate share of DIRECTV intangible amortization and a gain in our benefit plans. Year-over-year earnings declines were primarily driven by WarnerMedia and to a lesser extent, certain one-time costs in the Communications segment. The declines in earnings at WarnerMedia reflect increased investments incurred in launching CNN+ and expanding new territories at HBO Max. HBO Max and HBO now reached an impressive global subscriber base of nearly 77 million. WarnerMedia's results were also impacted by the advertising sharing agreement entered into with DIRECTV upon its separation in last year's third quarter and the termination of HBO Max's wholesale agreement with Amazon late last year. When excluding revenues from our US Video business and Vrio from the prior year quarter, AT&T consolidated revenues were $38.1 billion, up 1.6% or $600 million year-over-year. Cash from operations came in at $5.7 billion for the quarter. Overall spending was up with capital investments totaling $6.3 billion. Free cash flow was $700 million for the quarter. WarnerMedia had declines of $2.6 billion in free cash flow year-over-year. This decline was driven by $1.2 billion in lower year-over-year securitization of receivables in advance of the transaction, $600 million in higher cash content spend, increased investments in HBO Max's global footprint and ramp-up for the CNN+ launch, as well as NHL right payments and other working capital changes. Now let's look at our financials for the new standalone AT&T on Slide 6. On a comparative like-for-like basis, our financial results for the quarter are in line with our expectations for how we expect the year to trend. However, our subscriber metrics came in better than we expected as market conditions remain strong. This gives us confidence in the annual guidance provided at our recent Analyst Day. Revenues were $29.7 billion, up 2.5% or $700 million year-over-year, driven by wireless and broadband revenue growth, partially offset by declines in Business Wireline. Adjusted EBITDA was flattish year-over-year, as lower retained video costs were offset by peak impact from our 3G network shutdown, continued success-based investments in wireless and fiber, and the launch of MultiGig fiber plans. We remain confident that Q1 will be the trough in our year-over-year adjusted EBITDA trajectory. We continue to expect the year-over-year trendline to progressively improve through the year. On a comparative basis, adjusted EPS for the quarter was $0.63 versus $0.58 in the first quarter of 2021 due to higher equity income from DIRECTV and lower interest expense. Cash from operations came in at $7.7 billion for the quarter. Overall spending was up year-over-year with standalone AT&T capital investments of $6.1 billion. Free cash flow was $2.9 billion. As expected, cash flow this quarter was affected by several factors. First, higher capital investments as we ramp fiber deployment and prepare to deploy our 5G mid-band spectrum bands in the back half of the year. Second, the absorption of 3G shutdown impact. Third, increased employee incentive compensation benefits paid in Q1. Fourth, lower proceeds from securitizations. DIRECTV cash distributions were $1.8 billion in the quarter, which is modestly better than the $1.5 billion contribution in last year's first quarter. We continue to expect about $4 billion distribution from DIRECTV for the year, so we do expect some moderation. Given that Q1 is a seasonally low quarter for free cash flow and many of the factors impacting free cash are not expected to repeat, we remain confident in the guidance we provided to you during our Analyst Day to achieve free cash flow in the $16 billion range for the year and on a standalone basis. Looking forward, we expect to incur restructuring charges over the next few quarters as we continue to execute our transformation initiatives. The cash impact of these charges has already been contemplated in our full year free cash flow guidance. Now, let's turn to our subscriber results for our market-focused areas on slide seven. Diving a bit deeper into our business unit level performance, the story continues to be simple and straightforward. The consistent, disciplined go-to-market strategy we implemented almost two years ago continues to work very well, and we're delivering strong momentum and growing customer relationships with 5G and fiber. In the quarter, we had 691,000 postpaid phone net adds. As John said, this marks our best first quarter in more than a decade. This total also excludes impacts of 3G network shutdown of more than 400,000 postpaid phones. Consistent with industry practice, we have treated this reduction as an adjustment of our base at the beginning of the period. Churn also remained near historically low levels, thanks in part to our improving NPS, which is being driven by an enhanced customer experience, the strength of our network, and our consistent and simple offers. We're growing our customer base with this disciplined approach. Our teams have maintained a strong focus on growing the right way with high-quality intake and by investing in existing customers. As mentioned in March, we're focused on incentivizing customers to shift to our current unlimited rate plans, which are designed for the 5G era and to better meet each customer's unique needs and provide greater value to both existing and new customers. Looking at AT&T Fiber, our customer base continues to grow as we expand availability of the best access technology across our footprint. We had 289,000 AT&T Fiber net adds in the first quarter and we expect to accelerate growth from here. To say we're excited about the underlying momentum of the business would be an understatement. Where we have Fiber, we win and gain share and our deployment plans remain on track. We now have 6.3 million AT&T Fiber customers, up 1.1 million compared to a year ago and we expect customer momentum to accelerate from these already stepped-up levels. We continue to see strong demand for AT&T Fiber as customers seek out faster broadband speeds at an attractive price. And our fiber churn remains low as AT&T Fiber continues to offer a great experience and a consistently high Net Promoter Score. Now let's take a deeper look at our Communications segment operating results, starting with Mobility on slide 8. Our Mobility business continues its record level momentum. Revenues were up 5.5%, with service revenues growing 4.8% due to subscriber growth. Impressively, this growth in service revenue comes despite impact on service revenue of our 3G shutdown and without a material return of international roaming revenues. Consistent with our comments on Analyst Day, Mobility EBITDA declined 1.8% year-over-year, largely due to a number of one-time related factors. EBITDA was negatively impacted by over $300 million due to 3G shutdown costs and the absence of FirstNet and CAF II reimbursement. We remain confident in our stated expectations for Mobility adjusted EBITDA trajectory to improve through the course of the year as these impacts moderate through the balance of the year. Overall, we continue to see healthy Mobility demand. While our guidance does not factor in industry demand levels replicating the strength that we experienced in 2021, our Q1 results came in better than anticipated. Both our postpaid phone and prepaid phone churn remained near record low levels despite a modest uptick among lower-income cohorts as certain pandemic benefits wear off. Now let's turn to our operating results for Consumer and Business Wireline on slide 9. Our fiber growth was solid as we continue to win share where we have fiber. Even with expected declines from copper-based broadband services, our total Consumer Wireline revenues are up again this quarter, growing 2% due to higher broadband ARPU and fiber revenue growth. Our fiber ARPU was approximately $60 with gross addition intake ARPU in the $65 to $70 range. We expect overall fiber ARPU to continue to improve as more customers roll off promotional pricing and onto simplified pricing constructs we introduced earlier this year. In addition, with the launch of our new multi-gig speeds in January, we have even more opportunity to move customers to higher speed tiers. Over time, we expect these factors to serve as a tailwind to the trajectory of our fiber ARPU. We also continue to accelerate our fiber footprint build and now have the ability to serve 17 million customer locations. As you heard us share on Analyst Day, our plans center on pivoting from copper-based products to fiber. As we make this pivot, we expect positive EBITDA growth in 2022, driven by growth in broadband revenues. Also, to help provide you with greater insight into the performance of our Consumer Wireline fiber operations, we've provided additional metrics in our trending materials that can be found on our IR website. Looking at Business Wireline, we continue to execute on our rationalization of low-margin products in our portfolio. In the first quarter, we experienced some impacts from the timing of government sector demand due to the delays in passing the federal budget, which caused deeper than expected revenue declines. However, we expect demand to rebound later this year. While the rationalization of our Business Wireline portfolio creates incremental pressure on our near-term revenues, it also allows us to focus on our owned and operated connectivity services as well as growing 5G and fiber integrated solutions. Both areas, business 5G and fiber, continue to perform well, benefiting our Mobility segment with Business Solutions wireless service revenue growth of 8.4% and a sequential increase in our FirstNet wireless base by about 300,000. We remain comfortable with our guidance of Business Wireline EBITDA down mid-single digits in 2022. Shifting to slide 10, I'd like to reiterate our overall capital allocation framework moving forward. With the completion of the WarnerMedia transaction, AT&T received $40.4 billion in cash and WarnerMedia's retention of certain existing debt. Additionally, AT&T shareholders received 1.7 billion shares of Warner Bros. Discovery, representing 71% of the new company. This transaction greatly strengthens our balance sheet and provides us with financial flexibility going forward. We now have a simplified capital allocation framework. First, we plan to invest in our strategic focus areas: 5G and Fiber. As previously said, we expect stand-alone AT&T capital investments of $24 billion in 2022 and 2023. Starting in 2024, we expect our capital investment to begin tapering to around the $20 billion range as we surpass peak levels of investments in 5G and transformation. The completion of the WarnerMedia transaction also marks a significant step towards achieving our established goal for net debt to adjusted EBITDA in the 2.5 times range by the end of 2023. We've shared, as we get closer to this target, we expect our financial flexibility to improve. This increases our ability to pursue other ways to deliver incremental value for our shareholders. As previously said, we expect to deliver annual total dividends of around $8 billion, which represents $1.11 per common share. This remains an attractive dividend and places AT&T among the very best dividend-yielding stocks in the US. Now, let's take a step back and look at the free cash flow generation expected from our business. As outlined at our Analyst Day, we expect to generate in the range of $20 billion of free cash flow in 2023. After paying dividends and non-controlling interest commitments, we expect to have at least $10 billion of cash remaining. And beyond 2023, this pace of cash generation will be helped by the tapering down of our capital investment. This is why we continue to feel very comfortable with our capital allocation plans. As I've stated, we're in a much stronger financial position to pay down debt. And at the end of the first quarter, more than 90% of our debt portfolio was fixed and we do not have near-term needs to issue debt. In April, we improved our net debt by about $40 billion and paid down over $10 billion in bank loans, providing us with a lot more financial flexibility. We also provided notice that we plan to redeem an additional $12.5 billion of bonds by mid-May, reducing our near-term maturities. For the balance of the WarnerMedia proceeds, we plan to reduce our outstanding debt by focusing on pay down of commercial paper to improve our liquidity and opportunistically, using the higher-rate environment to redeem debt at lower prices. So we feel really confident in our ability to pay down our current debt maturities in an effective manner and reach our goal for net debt to adjusted EBITDA. 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.

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 kinds 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?

Good morning, John. How are you? Starting with Consumer Wireline, it's important to remember that in repositioning this business, we have been investing in our Fiber footprint and expanding into new areas. Going forward, as the business gains subscribers, we expect margins to continue improving. Our cost base remains relatively fixed after laying down fiber, so we anticipate enhancements over time. While we haven't provided specific margin guidance, we have a strong long-term outlook for this business. Comparing with others in the industry, margins are indeed quite favorable.

John, I'd like to emphasize that if you analyze the transformation program and our targeted operational improvements, such as reducing call center activity by shifting it online, all those factors contribute directly to our business. This will enable us to scale into a margin structure similar to what we've traditionally experienced, considering the long-term nature of our asset base. In response to your question about the business side, I can share what we have visibility into. Our goal is to enhance our owned and operated infrastructure in the lower and mid-market segments. This is closely linked to where we are installing new fiber or have existing infrastructure. We understand the new market opportunities that arise as we deploy our services. To capture these opportunities, we're adjusting our distribution channels. Work is ongoing to determine how we will distribute our products directly through our sales team and also via third parties. While we manage our progression in this area, there might be unforeseen challenges that arise when scaling new channels. However, these are not insurmountable obstacles, but rather issues we need to navigate. Typically, these challenges are temporary and can influence us for a quarter or two, but do not prevent us from making progress. While we may not have complete visibility, you can trust in our ability to execute. I believe that we are well-equipped to handle these tasks. During our Analyst Day, it became clear that our offerings under the AT&T brand are being very well received. As I mentioned earlier, when we engage with customers about a new product, it often leads to discussions about extending other services, like wireless, into that relationship. This demonstrates our strength in the business sector, as we can present a comprehensive portfolio of both wireless and direct fixed transport services.

Got it. Okay. Thanks for the color.

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

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?

Mike, certainly. Since we're the first to report, we don't have insight into how others will present their results this quarter. However, based on our data analysis, we have a perspective on the market trends. I can confidently say that we believe the overall market remains strong. We are observing consistent volumes comparable to what we experienced in 2021 regarding gross additions in the market. We had anticipated a slight decline this year based on our previous estimates, but so far, through the first quarter, that hasn't happened. I suspect that after everyone reports, the trends may align with previous quarters concerning overall flow share for our business. I don't want to be overly optimistic, as I could be surprised by others' results. But based on my market observations, I haven't noticed a significant change in flow share this quarter compared to earlier quarters. I'm particularly pleased about this, especially given the promotional activities from last year's fourth quarter that we chose not to pursue. We have maintained consistent strategies into this first quarter while others have been more aggressive. We are not engaging in buy-one-get-one promotions or offering significant incentives to switch, which others are using in the market. Our approach has remained steady. Regarding overall economics, our average revenue per user remains very stable, just as we anticipated, despite the influx of new customers. Moreover, as we discussed at Analyst Day, our cost per gross addition is improving, as our fixed costs are being distributed across a larger subscriber base. This is a positive trend. Our churn rates are also very strong, showing that our customer lifecycle is performing better than in the past. This indicates increased value. Overall, we are confident that the economics of our customer base are consistent with what they were one, two, or three quarters ago, and we are eager to continue acquiring these customers.

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.

Thanks very much, Michael. If we can move to the next question, operator.

Thanks. And it's actually sort of a two-part question on inflation. The first part is we saw one of your competitors earlier this week announce they were going to be increasing or have increased minimum wage for their retail workforce and a big part of their customer-facing workforce. So I was hoping you can maybe comment on what you're seeing in terms of labor cost and labor supply and whether or what you've anticipated in your outlook for this year for inflationary cost pressures on the workforce? And then second, John, I think you've made some comments recently that if you did see inflationary pressures persist, you might look at what your pricing was, and I think it was implied that you could take price up. I was hoping you could maybe just elaborate on how you think about your pricing model if we were to remain in a sustained inflationary environment? And what gives you confidence you can execute a degree of pricing leverage even as the market remains competitive? Thank you.

Sure, Brett. How are you? There's definitely wage inflation in the current environment, with an inflation rate around 7%. We are experiencing pressures across various goods and services, and we are not exempt from that. It's not a favorable situation for the overall economy, and it needs to be addressed from a policy angle. When we planned for 2022, we anticipated some wage inflation and accounted for potential increases in wages compared to previous years. We made several adjustments late in the planning process that added to our overall cost expectations. Currently, we're in the midst of labor contract negotiations, which will likely result in wage increases. While I'm not pleased about the rapid rise in wages, we're managing it and it will lead to a small increase in average wages per employee. The good news is that we are investing in automation and mechanization, which is helping to mitigate some wage-related inflation costs. It's also important to note that when deploying long-lived infrastructure, such as fiber networks, wages are just one part of the total cost, and these costs are spread over many years. So, while we'd prefer to see lower wage costs, a slight uptick is manageable, especially if market prices rise. Regarding pricing, I won’t disclose anything specific, but I mentioned previously that inflationary pressures are widespread, and consumers are feeling the effects. If we don't see a quick moderation in inflation, every business in the U.S. will be affected by input costs, including the wireless industry. We have various ways to handle price adjustments, and given our satisfied customer base and the value we're providing, we believe we could implement necessary price increases if needed. Our history shows that we can effectively manage pricing. Additionally, I want to highlight a change we've made in our fiber product in the last quarter by simplifying our pricing structure. We are not selling on 12-month promotional prices anymore; instead, we offer stable pricing for the duration of the customer relationship. Often, our prices are at least $10 higher than competitors' promotional offers in the broadband market, yet our sales volumes have been strong and continue to grow. This reflects the value of the product and service we're delivering, and it demonstrates our ability to understand value and adjust pricing appropriately to manage our business effectively. We will keep aiming to do that.

Thank you.

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

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?

Phil, the short answer is no on the first one. As you know, we don't – when we count net adds, a migration of the 3G customer to another service plan isn't a net add; that's just the migration. And so there wouldn't be any impact to that. And as we've shared with you, we restated our base numbers. Those are out there for you to see. And I would actually say, this is probably one of the best air interface transitions I've ever seen. When I think about the shutdown of the 2G network and now the shutdown of the 3G network on a proportional basis and the number of subscribers and what we're able to do here, I think the team executed incredibly well. Relative to the flow share in the market today, I think, we have seen over the last several quarters, Sprint has had an issue for T-Mobile to migrate and manage. And I know they're having to touch that base as they're shutting down the CDMA network and moving things through. And any time you do that, that can be disruptive to a customer base. And I think we've benefited in some flow share from Sprint customers who have been evaluating what they want to do and see AT&T as a good choice and a good value as they make that decision to whether or not they want to get a new handset and who they want to get it with. And there has been an element of that in the flow share in the market over, not just this last quarter, but several quarters as this has been going on. And there was an element of it in this quarter, but I don't think it was anything that was out of pattern from what we saw in previous quarters.

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.

Okay. And then second, if I can. You’ve projected over 3% growth in wireless service revenue, but you achieved 4.8% this quarter. Are there any factors in the numbers that could cause a significant slowdown, aside from the usual comparisons? Thank you.

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.

Thanks, Pascal.

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

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.

Hi, Simon. The scaling on C-band is currently underway and will persist. As we mentioned, we are deploying mid-year when we have the appropriate equipment for our OneTouch work between the two different spectrum bands. This allows us to access the tower once and make the necessary adjustments. We are capable of doing preparatory work, and we can begin our spending to ensure we are well-positioned for scaling and to ramp up quickly as we reach mid-year. You’re already seeing some of this reflected in our capital numbers this quarter, and it will continue to grow as we move through the middle of the year. This sets us up for a rapid increase in the second half of the year to meet our POP targets that we previously shared with you during the Analyst Day. Regarding the supply chain, I remain cautious. While I don’t want to declare that we’re completely secure, I do believe some supply chain pressures are developing within the industry, particularly concerning chip manufacturing as it returns to key OEMs. However, keep in mind that the North American market is very profitable for equipment providers globally. If we were to rank these markets, North America stands out as the most lucrative. Consequently, if there are supply constraints, equipment manufacturers are likely to prioritize this profitable market, which might result in other regions experiencing lower availability of equipment and services. At present, we feel confident about the situation. Our vendors assure us they can meet our build expectations, and we have conducted thorough diligence on our equipment. We don’t just accept their word; we analyze sourcing for key components, understanding that even the smallest issues can lead to setbacks. We are optimistic about the harder components, like chips, and believe they will be delivered as projected. Although global supply chains remain delicate and unexpected issues can arise, we are actively managing those risks. Regarding fixed wireless, we have already acquired hundreds of thousands of subscribers. We actively employ this service, particularly in business segments where our customers find it to be the most effective solution. We anticipate continued opportunities for fixed wireless deployment moving forward, and our network will support this after we complete the mid-band deployment. However, it will be used specifically where appropriate. We do not plan to implement fixed wireless in dense urban areas where we can build fiber infrastructure and provide broadband, especially as we predict increasing traffic demands and higher performance expectations over the next five years. We are observing the performance of our Fiber and copper customer bases and do not believe that a product delivering under 100 megabits will remain competitive in these urban settings, given consumer expectations. Nevertheless, in rural regions, fixed wireless is likely to be the optimal method to deliver substantial bandwidth to customers. We see potential in that market, particularly in areas previously served by ADSL where fixed wireless can vastly improve opportunities. Additionally, government subsidies in less densely populated regions may make fixed wireless the preferred solution. While there may be niche customers who could benefit from specialized products, I don’t consider that to be significant in terms of the overall market. Our performance data supports that when we blanket an area with robust fiber broadband service, we achieve strong results in the market.

Right. Thank you.

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

Thank you for taking my questions. I have a few high-level inquiries regarding the new AT&T, or perhaps the old AT&T, depending on your perspective. First, is the new AT&T positioned to be a dividend yielder or a dividend grower? Second, John, during the Analyst Day, you mentioned your plan to refresh AT&T's go-to-market strategy after the separation. Could you provide any updates or expectations on that front? Finally, Pascal, could you explain how the financial relationship between AT&T and WarnerMedia Discovery will function moving forward, particularly regarding offerings like providing HBO Max for free in the wireless business? That information would be very helpful. Thank you.

Hi, Dave. Let me start by addressing all three points, and Pascal can add anything he likes. I believe we are positioning ourselves as a competitive dividend payer, which means I want our dividend to be at a level that is appealing compared to others in the market, so I'll be mindful of the dividend yield. As we've mentioned, as we move beyond 2023 and consider how to allocate our discretionary capital, the Board will assess where we can achieve the best returns for the business. There are many options at that stage, including decisions related to equity, dividends, or investments in new business opportunities for organic growth. We'll review our entire portfolio and the competitiveness of AT&T's equity value proposition compared to others in the market and make adjustments as needed. In response to your question, we will focus on the yield, but I don’t necessarily plan to look at it every quarter with the expectation of increasing the dividend each time without considering our competitive standing in the market and whether our capital investments align properly within the business. Regarding refreshing our go-to-market plan, it could involve two aspects you're hinting at. One might be what I've previously discussed about refining the brand. If that’s the direction of your question, is that what you're referring to?

I think more specifically, John, the market's seen your kind of – and you highlight this as a positive, your very consistent go-to-market plan on customer retention, the new and existing customer, hence that upgrade plan. It's been pretty solid for almost two years now. And I think you hinted that there would be a change. And I think people were interested in hearing a little bit more about it.

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 has 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 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?

The only point, Dave, I'd say on your first question on the dividend yield growth. We've said this, the way we're thinking about generating returns going forward, dividends are only one part of it. We're going to hold ourselves accountable to growing earnings at the stock price. And it's a mix of overall return to our shareholders. And that's what we are looking to optimize over time.

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

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.

Doug, if I reflect back around three years, I made several observations about the SVOD business. One key point was that managing customer subscriptions is crucial for the long-term sustainability of the business. At that time, some in the industry suggested that widespread password sharing was beneficial for these products, but I had a more skeptical view on that. This perspective informed much of our thinking when developing the HBO Max product. We aimed to provide customers with flexibility while preventing significant abuse of the system. While I won't go into all the specifics, we designed several features that align with our user agreement, detailing how the service can be used. We've enforced these guidelines in a manner that is sensitive to customer needs, and feedback has been largely positive. Each month, we monitor how users engage with the service and have the tools to address any significant abuse. I believe that managing this issue is primarily the responsibility of the application owners, not the broadband providers. I don't foresee us marketing a solution to help others manage this, as sufficient tools already exist. From our own experience, we've effectively managed this in the interest of the product. I'll now hand it over to Pascal to address the second part of the question.

Hey, Doug, here's the way I think about. We haven't provided guidance specifically on how much vendor 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.

All right. Thanks a lot.

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

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 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?

Yes, let me address your question, and Pascal can add his insights if needed. First, we do not disclose specific metrics about our subscriber mix. However, it's important to note that we are experiencing significant growth in new subscribers to AT&T. Our aggregate market share numbers in broadband have shown a substantial increase over the last three years. Achieving equivalent market share through fiber growth in such a short time frame necessitates taking customers from competitors. If you analyze cash flows and footprint expansion over the past three years, it's clear we are gaining market share at an unprecedented rate. We have invested heavily in our infrastructure, and this has contributed to our success in attracting new customers. We also report our total revenues and track growth and decline in both fiber and copper bases, which allows you to see the movement from copper to fiber. I'm very pleased with our competitive performance; there is nothing indicating a need to limit our market penetration, which is actually accelerating. Currently, we are achieving second-year penetration rates in the first year of our new builds. This success is due to a combination of factors, including our strong product offering and improved marketing strategies that attract early adopters more effectively. This positively impacts the business's overall economics, and if we maintain this momentum, we may need to reassess the fiber business case's financials because accelerating penetration could significantly enhance returns. Additionally, we have no expectations that this growth will stall by year three. Importantly, we are not raising prices; instead, we are providing a better customer experience by eliminating promotional pricing, which is a common pain point. Customers dislike the price increases that typically occur after a promotional period, and our straightforward pricing model ensures they won't see a price hike after twelve months. They know upfront what their costs will be, leading to higher satisfaction and better outcomes, which is reflected in our data.

Thank you. It seems that the significant investments made by cable are not effectively countering the ongoing shifts in the market. John, can I ask about the wireless aspect? You previously mentioned wholesale as a growth driver. However, I noticed that the wholesale revenue this quarter didn't change much from Q1, which suggests that the transition of DISH’s wholesale traffic to your network is still in its early stages. How do you anticipate this to develop? Will it increase gradually? I know you’ve begun connecting with DISH. How do you see this evolving throughout 2022 and 2023?

That's an accurate assumption, Walt. It has to do with the ramp directly from DISH. And I think the way you should think about this, it's public information that I think DISH got a little bit of a reprieve from T-Mobile on some of the legacy network availability and some help on that slowed down the front end a little bit. And I think you're aware of where DISH is in their deployment and debugging their network so that it actually can function and work properly. I think they recently announced a milestone as to what they're doing around that. Those two things are the drivers of when that transition occurs, a combination of when those customers need to move off of another network as well as, as DISH starts to move people onto their network, new customers coming in, those all play in the wholesale arrangement as that volume starts to ramp. So, I think a surrogate for understanding that trend line, we'll be watching the loading of new customers onto DISH's new network capabilities.

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

Just really briefly to all of you. First of all, thanks for joining us today. And I really want to extend my thanks and appreciation to all of you on the call. I know it's been going on internally at AT&T in terms of the number of filings, and schedules we've had to develop, the information we've had to put out over the course of the last month or so. And I know that, that puts a lot of work on all of you to kind of parse through that, get through this transition that we've been working through as a business. I want to extend my appreciation for your patience in that regard. And what I can promise is it should settle down here a little bit going forward. And I'm as excited about that as I'm sure you are. So, thanks very much for being with us today, and we'll talk to you again in 90 days.