AT&T Inc (T) — Q4 2022 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to our fourth quarter call. I'm Amir Rozwadowski, Head of Investor Relations for AT&T. Joining me today on the call 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 as well as our earnings materials are available on the Investor Relations website. With that, I'll turn the call over to John Stankey. John?

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

Thank you, John, and good morning, everyone. Since John already discussed the great momentum we have this past year in growing our customer base in 5G and fiber, I'd like to start by taking a look at our fourth quarter financial summary on Slide 8. First, as a reminder, with the close of the WarnerMedia transaction in April, historical financial results have been recast to present WarnerMedia and certain other divested businesses as discontinued operations. Therefore, where applicable, I will highlight our financial results on a comparative like-for-like basis. For the fourth quarter, revenues were up nearly 1%. On a comparative basis, revenues for the full year were up around 2%, largely driven by wireless service revenue and, to a lesser extent, broadband and Mexico. This was partly offset by a decline in Business Wireline. Adjusted EBITDA was up about 8% for the quarter. For the full year, adjusted EBITDA was up around 3.5% on a comparative basis as growth in Mobility, Consumer Wireline, and Mexico were partly offset by a decline in Business Wireline. Adjusted EPS from continuing operations was $0.61, up about 9% for the quarter primarily due to strong organic growth in Mobility and lower interest and benefit-related expenses. For the full year, adjusted EPS from continuing operations was $2.57, and I should note that we've taken a $24.8 billion noncash goodwill impairment charge in conjunction with our annual goodwill assessment, primarily due to increases in discount rates associated with the overall rise in interest rates. We also took a noncash charge of $1.4 billion to abandon certain conduit assets related to the ongoing rationalization of our copper network. Free cash flow for the quarter was $6.1 billion, including about $800 million in DIRECTV distributions. This is an improvement of $780 million year-over-year, even with a $1 billion lower distribution from DIRECTV and $500 million less in FirstNet capital reimbursements. We also delivered on our revised full-year guidance with free cash flow of $14.1 billion for the year. Cash from operating activities for our continuing operations came in at $10.3 billion for the quarter, up $2.3 billion year-over-year. For the quarter, capital expenditures were $4.2 billion, with capital investments of $4.7 billion. Full year capital investment marked an all-time high at $24.3 billion as we continue to make record investments in 5G and fiber. Now let's look at our Mobility segment operating results on Slide 9. For the fifth consecutive year, our Mobility business grew both revenues and EBITDA. Revenues were up 1.7% for the quarter and 4.5% for the year. Service revenues were up more than 5% for both the quarter and the year, driven by continued subscriber growth. This exceeds the raised annual guidance we provided to you last quarter. Mobility EBITDA was up about $740 million or more than 10% for the quarter, driven by growth in service revenues, transformation savings, and the absence of 3G network shutdown costs versus the fourth quarter of 2021. This was partially offset by higher bad debt levels. For the full year, Mobility EBITDA grew nearly 4%. Even as competitors introduce richer promotional offers during the holiday seasons, our consistent go-to-market approach once again drove our results. This gives us confidence that we have the right formula and structure in place to continue to grow customers, service revenues, and EBITDA at a healthy clip this year. Mobility postpaid phone ARPU was $55.43, up $1.37 or 2.5% year-over-year. ARPU growth continues to come in ahead of our expectation and largely reflects our targeted pricing actions, customers trading up to higher price unlimited plans, and improved roaming trends. As John previously mentioned, postpaid phone churn of 0.84% for the quarter declined year-over-year even as we were less promotional compared to our peers. We believe that this decline is reflective of our improved customer value proposition. In prepaid, our phone churn was less than 3%, driven by Cricket phone churn that was substantially lower than 3%. While we believe industry wireless subscriber volumes will continue to pace toward normalized levels this year, we also expect our consistent go-to-market strategy to help us deliver strong relative performance and ongoing customer growth. Now let's move to Consumer and Business Wireline results, which are on Slide 10. Let's start with Consumer Wireline. As John mentioned, our fiber customer growth and network expansion continue. Wherever we have fiber, we win share. We added 280,000 fiber customers even in a seasonally slow fourth quarter that was impacted by lower year-over-year household move activities and challenging December weather conditions. The increasing mix shift from legacy products to fiber drove strong broadband results, and we expect these trends to continue. Broadband revenues grew more than 7% year-over-year due to fiber subscriber growth and higher ARPU from the mix shift to fiber. Fiber ARPU was $64.82, up $2.20 sequentially, with intake ARPU now approaching $70. Consumer Wireline EBITDA grew over 20% for the quarter and nearly 10% for the full year due to growth in fiber revenues and transformation savings. Turning to Business Wirelines, EBITDA was relatively flat for the quarter due to $90 million in intellectual property transaction revenues and ongoing transformation savings as we continue to rationalize our portfolio of low-margin products. In fact, margins were up 110 basis points year-over-year, thanks to our transformation process. This rationalization process will continue in 2023 as we remain focused on the opportunities that our 5G and fiber expansion create in the small and midsized business category. Our Business Solution wireless services revenue grew more than 7%. This is very impressive given that we already have the second largest share and are growing faster than our peers. FirstNet wireless connections grew by 377,000 sequentially. Now let's move to Slide 11 for our 2023 financial guidance. Let me walk you through how we're thinking about operating expectations for 2023. First, we expect to continue to grow Mobility subscribers against a return to a more normalized industry growth. We also expect continued benefits from a larger subscriber base and improving ARPUs. This should result in wireless service revenue growth of 4% plus for the full year. For broadband, we expect revenue increases of 5% plus reflecting a higher mix shift to fiber with improving ARPUs, partially offset by continued legacy revenue declines. Overall, we expect to grow total revenues next year. However, as you all know, variability in equipment revenues driven by industry volumes could be a factor on consolidated top line trends as we think about EBITDA trends in 2023. We expect to grow Mobility EBITDA mid-single digits as our disciplined approach helps us grow our valuable subscriber base. In Business Wireline, we expect EBITDA to be down high single digits due to continued declines in legacy products, partially offset by incremental cost savings and increased fiber-based revenues. As you consider the first quarter for Business Wireline, it's worth noting that 2022 included a onetime incentive compensation benefit that will impact year-over-year comparisons. In Consumer Wireline, we expect to grow EBITDA in the mid-single-digit range, plus or minus, due to continued growth in fiber revenues and transformation savings, partly offset by continued declines in legacy copper subscribers. We expect to benefit from ongoing corporate cost reductions. Altogether, this yields consolidated adjusted EBITDA growth of 3% plus for the full year. When you think about adjusted EPS calculations, note that our guidance reflects nearly $0.20 on per share of headwinds associated with noncash pension costs related to higher interest rates and, to a lesser extent, lower spectrum interest capitalization. Importantly, we have no need to fund our pension plans for the foreseeable future. We also expect to incur more than $0.05 of noncash headwinds related to a higher effective tax rate of around 23% to 24%. Combined, these headwinds aggregate to about $0.25 year-over-year. Normalizing for these noncash items, our guidance would imply adjusted growth consistent with our expected growth in adjusted EBITDA. Given these assumptions, adjusted EPS is expected to be in the $2.35 to $2.45 range. We also expect adjusted equity income from DIRECTV to be about $3 billion for the year versus $3.4 billion in 2022. Here's what to consider when looking at our free cash flows for 2023. First, we expect adjusted EBITDA growth of 3% plus. Next, expect cash interest to be down about $500 million. Assume your cash taxes will be higher in 2023 versus 2022 to the tune of about $1 billion. Expected cash distributions from DIRECTV should be down about $1 billion. We continue to expect that 2022 and 2023 will be our peak investment year. So capital investment is expected to be consistent with 2022 levels. We also expect about $2 billion of working capital improvements, largely from lower deferrals and higher noncash amortization of deferred acquisition costs. As we mentioned earlier, we expect a more normalized industry growth volume, which is expected to help working capital as well. When you combine all these factors, you get to a free cash flow expectation of $16 billion or better. This is about twice as much as our current annualized dividend and more than enough to cover other commitments. Similar to last year, we expect greater free cash flow generation in the back half of the year based on higher capital investment levels and device payments in the first half of the year, as well as the timing of the annual incentive compensation payout. We will use our free cash flows to pay out our dividend and to pay down debt as we continue to progress towards our target of 2.5x net debt to adjusted EBITDA, which we anticipate will take place in early 2025. Lastly, the guidance we provided to you is based on our current reporting. We expect our segment reporting in 2023 will remain the same as last year. However, I'd like to note that we no longer plan to record prior service credit benefits to the individual business segments with a corporate elimination. Instead, it will only be recorded in other income. Overall, we are confident in our plan for the year. As John mentioned, it takes into account our expectations for a more normalized industry growth backdrop against continued challenges in the macro environment. Our confidence is underscored by the resiliency of the services we offer, the consistent strength of our go-to-market strategy, our ongoing momentum in core connectivity, and most importantly, our team's unwavering commitment to deliver best-in-class services to consumers and businesses alike. 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.

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

Hi, Brett. Let me go ahead, and I'll start and then Pascal can jump in. First of all, look at the foundation of what we're telling you is we've been I think, very conservative and thoughtful in the guidance we pulled together. It is a tough environment to predict. There's a lot of geopolitical things going on that I think anybody would have a hard time seeing and doing a crystal ball on, and that's probably the most difficult wildcard that I think we've tried to take a conservative stance of what we see in the economy today and what the foundation that's rested on is. We know that the services that we provide to customers are pretty resilient even during more challenged economic times. So we have a reasonably high confidence level that our customers are going to continue to want to use the product and pay us for it. I think if you go back and look at my public comments probably over a year ago, I've had a relatively conservative view of where I thought the economy was going to go. I've been fairly vocal that I think inflation is a tough thing to have a healthy economic environment and that's good for everybody and it creates some challenges in places. Ultimately, a lot of that came to pass. The good news is I think we're through the worst of it, and we see it easing. But as you heard from my comments, we've expected that we're going to continue dealing with some of that pressure as we move through this year. We don't have an outlook that says that we've solved the problem. We have an outlook that says we're going to continue to deal with pressures that are hitting some of our line items economically that we've got to account for and things like energy and some of the continued wage and employment pressures that we've had to deal with that will carry through and we have some longer-term contracts that didn't come up during the last year that we know are going to hit us this year in renewals that we have to factor into that. We've tried to do the best we can around it. I see the economy being relatively stable right now. We're not seeing anything that's causing us to be extremely concerned about it. But what happens later in the year, who knows? The point we've made is we've kind of assumed that we're not going to be in a robust growth environment as we make our way through the year. I would tell you if you're asking kind of what the swing factors are, I think the swing factor, frankly, is if there's some kind of a geopolitical disruption that's something significant that none of us anticipated or that we hope would never happen; it creates a disruptive event. That's probably the thing I'd look at and say, I couldn't predict it. I couldn't plan for it, and that's going to be the issue that we have to deal with that just pops up and isn't going to be just an AT&T issue.

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

I have a couple of quick follow-ups regarding capital uses. Pascal, you may have mentioned this earlier, but what is behind the $2 billion in working capital savings this year, and how confident are you in that? Also, can you give us an overview of the CapEx side, which is again set at $24 billion this year? What is the long-term outlook for that, and when can we expect it to start decreasing? What do you consider to be a more normalized level of CapEx, especially with the current investments in Gigapower and various fiber initiatives?

Sure thing, John. Here is the way I think about the $2 billion that I flagged in our guidance for 2023. The last several years, we've been growing our subscribers in wireless with that came some upfront acquisition costs. We've said for a while we expect that to level out in 2023. Once you have that leveling out, we are no longer going to be spending more each and every year than the prior year in acquisitions. So that leveling out, there is assets that are on the books associated with the deferred acquisition costs of those subscribers. That's going to be amortized; we have great visibility into that amortization, and that's obviously noncash because we spent the cash in the prior year. So that we have very good visibility to. If we grow more than last year in terms of wireless subscribers, that could be a swing factor, but I don't anticipate that.

Got it. And then the CapEx?

CapEx, the thing to keep in mind is we plan to be at peak levels in '22 and '23 because of the significant contributions that we are getting from DIRECTV in '22 and '23's CapEx is fairly meaningful amounts for spectrum deployment and transformation that will begin to moderate as we exit this year. We haven't updated the guide we provided at Investor Day, but clearly, we expect to trend down towards more normalized capital intensity as we exit this year.

Turning to fiber, Gigapower was a great announcement, but it was slightly smaller than we anticipated. John, how do you view the 1.5 million compared to the potential of that venture or similar models? Regarding your on-balance sheet fiber construction, which you mentioned is around $2 million to $2.5 million annually, it appears to be progressing at a slower pace than we previously discussed. Is there any change there? Lastly, to clarify on Pascal’s point about free cash flow, will working capital contribute $2 billion to free cash flow in '23, or is it just offsetting what was a $2 billion drag in '22?

First of all, I consider our fiber portfolio as a set of options to evaluate where the returns are most favorable for our capital deployment. I want to make it clear that we recognize the importance of being disciplined in our decisions regarding this portfolio and ensuring that our capital investments lead to acceptable returns. I understand that the Gigapower announcement is a new model that may be unfamiliar to our investors. I want to approach this with care, similar to how we managed our in-region fiber investments, and I've been open about our progress regarding the economic returns of that investment. We've shared details like average revenue per user and penetration rates to help you see that this is a sustainable long-term investment. The Gigapower model differs from what you might typically expect in terms of returns. To reassure you about our incremental investments in this venture, 1.5 million homes represents over $1 billion of investment. We've structured this initial phase to provide you with information over the next 18 months to build your confidence in the anticipated returns. The management team and partnership are geared towards achieving this goal. We plan to market this very soon after our announcement and I aim to provide 12 months of penetration data to support our success. If we succeed, it's possible that the scope could exceed 1.5 million homes. I also want to be mindful about determining what we should manage independently and what might be better suited for a partnership, similar to our wireless infrastructure approach from years ago. If we achieve outstanding results, we may decide to handle some of this ourselves instead of through a partnership. Conversely, if we need greater scale and speed, we now have a setup that allows us to swiftly increase funding and capacity. We’ll have data to share with you to ensure you're aligned with our progress. I see this as a flexible tool that provides us with numerous options. Regarding the in-region fiber aspect, I'm aiming for a diverse portfolio of returns. I've described the high-return options we see within our 30 million passings commitment. I've tried to clarify this because I know some of you are calculating the numbers. We now have additional options, and I want to assess the return characteristics of the Gigapower initiative compared to our organic in-region efforts. Some of the funding we'll pursue, particularly through BEAD, may yield very different returns than our current organic initiatives. I want to keep our options open to explore this aspect of the portfolio. I expect to have more clarity by the end of the third quarter on our success in securing that funding, the capacity additions we’ll need to achieve our business goals, and how this aligns with our operational territories and overall strategy moving forward. That's my overall perspective, and I’ll let Pascal address your question on the free cash flow clarification.

Hey, Phil, the straightforward way I view the majority of the $2 billion is that we have deferred acquisition costs recorded from previous years. This amortization will continue to be accounted for against EBITDA in 2023. These are noncash expenses impacting our results. So when we add that back to our EBITDA, it will increase the cash EBITDA generated by the business.

If I can follow up on one. Start to be a split. Do you look at Gigapower and BEAD spending as alternative places to spend your capital and effectively now slowing the organic pace to get to that 30 million? I've outlined the timeline for reaching the 30 million, and I don't expect that to change. We are committed to what I just shared with you. Therefore, I will not be providing any incremental revisions to the 30 million figure.

To clarify, Phil, the BEAD funding and Gigapower are additional to the 30 million.

Yes, if that's your question, 100%.

Great. If I could just stay on the broadband theme, if I could. Perhaps I think you talked perhaps about providing extra color on the financial construct of the BlackRock JV? Are you contributing any capital? Any assets how exactly should we expect that to flow through the financials? And John, on the BEAD, perhaps you just give us a reflection on the status of the process, the timing, how this is going to play out. I think there's been a lot of concerns about delays, the mapping process, the challenges and also some of the state broadband offices maybe not being ready to stand this up. So how do you see this evolving? And when do you think you can actually get shovels in the ground to get know what funding been awarded? And then just finally, getting to 30 million locations is great. What about the prebuilding with fiber with fixed wireless in some of those locations? I think you've talked about that. And how does fixed wireless play into some of that other 30 million plus locations that won't be getting fiber in the near term?

Sure. Simon, I need to be careful about discussing the partnership. It's a separate structure, so you shouldn't expect to see any financials on our balance sheet; instead, it will be recorded as investment income. We'll provide updates on its success as it progresses, and both partners will share equal responsibility in executing the venture. That should give you a clear understanding of how it unfolds. If you have more questions, I can provide additional details. Regarding the BEAD timing, I believe there is enough information available now. We're in a clarification phase for the initial data, which is moving along reasonably well. The larger states with more staffing capabilities are responding quickly and effectively. While some smaller states may take longer to organize, I believe the major states, which will receive the majority of funding, are focused and progressing rapidly. This shouldn’t slow down the more proactive states or our ability to start seeing funds flowing from the Federal government back to the states for implementation in the third quarter. However, I don't anticipate seeing significant projects starting this year. We will likely see funding awarded before the year ends, with projects commencing in 2024, primarily in larger states with adequate resources to expedite the process. I expect we'll be able to enhance our wireless distribution strengths in the business sector to offer a stronger fixed wireless broadband option to our customers and create bundles where it makes sense.

One other point on the capital structure for the JV to consider is that we do expect it to carry a meaningful amount of debt funding as well.

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

We have contributed some into the partnership. The reason you're going to see it get off the ground as quickly as it will and bring its first customers on in relatively short orders is because while we have been structuring and negotiating this, we've been doing a fair amount of work in parallel quietly. The partnership, as we've indicated, is already structured with the management team that's in place that has been doing a lot of work on the offer, knows the markets we're going to be in that have infrastructure and system setup that they can be ready to go on. This is probably one of the things our partner found attractive about this. It's a first-class management team with a lot of capabilities behind it, and we will take some credit for the contribution of that work that we've done within the scope of this year.

I wanted to revisit the idea of the wireless postpaid phone market returning to a state of normalcy. Many people notice the strong correlation between the significant increase in the industry to around 9 million postpaid phone adds annually over the past few years and AT&T's revitalized growth, as John mentioned, over the last 10 quarters. As a result, when discussing the industry's normalization, there seems to be a tendency to assume that any future growth will primarily benefit AT&T, given its recent successes. Can you discuss this perspective and whether it realistically influences your working capital and cash flow, or if you believe that any downturn would affect the industry more evenly? Additionally, John, you mentioned something in your prepared remarks that hasn’t been heavily discussed in the U.S. regarding copper decommissioning, particularly in light of your fiber initiative. In Canada, for example, it's a major topic due to excess copper plant infrastructure. Can you provide more details on this? Is it too soon to consider it a positive factor for 2024, or is it already noticeable?

Sure, Dave. How are you? I don't agree with your perspective at this time. I completely reject your viewpoint. I don't believe that's how the market is structured and functioning today. If I look back at our performance over the last two and a half years, I would say the industry is much healthier than some may suggest. Is competition increasing, or is it undermining itself? I see a consistently competitive industry throughout this period. I tend to evaluate not just based on customer counts but also on both wholesale and retail revenues and how that translates into service revenues. I observe a relatively balanced dynamic in the industry, and the numbers suggest we've been gaining some market share overall. I don't think that’s due to moving from an assumed normal of seven and a half million to nine million. In fact, among customers paying a reasonable monthly bill, we've captured more than our fair share, and I am more focused on gaining revenue and profitability share than merely subscriber share. Our figures indicate an improving trend over the last two and a half years in our ability to achieve that. I don’t subscribe to the idea that if the industry normalizes, we revert back to where we were three years ago. Our current position is due to our performance today, not what happened three years ago. Regarding legacy costs, I don’t expect a windfall from their restructuring. I've been emphasizing this for a while. We’ve been actively addressing this issue since I started, and we've been formulating plans that now put us in a well-functioning organization to execute this daily. I devote more time to discussing investments in new business opportunities and the growth potential from sustainable fiber and a 5G infrastructure than on what we are retiring from service, though we are indeed decommissioning equipment and removing it from the copper grid. Our reductions in energy costs and improvements in dispatch efficiency are due to managing a smaller operational footprint. We are continuously making progress in this area. The pace at which we are operating is increasing. I've shared insights about the number of products we've discontinued, which helps reduce operating costs. This contributes to what we project for ongoing improvements in our cost structure. You're beginning to see operating leverage come into play, partly because of how we manage legacy costs. When we provide cash forecasts for this year and discuss improvements to our cost structure, some of that is a result of our current efforts. I am keenly aware of our cost structure compared to others in the industry, some of whom don’t have the hybrid asset model we do, combining both fixed and mobile assets. We are committed to ensuring we're not at a disadvantage over the next several years. You will see this gradually come to fruition as we work through a somewhat painstaking process. It requires careful examination of each central office, line, and customer, but it's necessary. This can lead us to a better and healthier business, blending a strong fiber network with an excellent wireless network, which represents the future way customers will connect. I believe our hard work will be rewarded, but I acknowledge that we're developing new insights into navigating this space. I choose to grow this organically rather than through a front-end private equity deal that provides short-term cash but ultimately benefits someone else from our labor over the coming years.

I want to discuss your broadband portfolio. Considering your national footprint in Mobility, it seems that approximately 16% to 17% of the country already has excess fiber coverage, with an additional 10% to 12% expected to follow. Could you explain how you perceive the consumer value proposition in these different areas, specifically where you have wireless without fiber and where you have both? Additionally, what role do you see fixed wireless playing in enhancing that consumer value proposition?

Yes, Craig. I view the current situation as a significant opportunity, even though I hesitate to call it a land rush because installing fiber is a more complex and time-consuming process. However, we're definitely in a period where a significant portion of the United States will eventually have fiber connectivity. Looking ahead, customers will increasingly prefer to purchase all their connectivity needs from a single provider, and the distinction between fixed and mobile services will blur. As we move forward, I anticipate a shift in the industry landscape toward this model. To be well positioned for this transformation, having the best technology and quickly establishing a large footprint will make a significant difference in how we engage in the changes to come, leading to a stronger relative customer base. It’s crucial to own and operate these assets while controlling product offerings and costs to ensure progress. Building fiber infrastructure, while integrating it with wireless services, is an intentional and robust process that I’m committed to executing efficiently. My responsibility is to ensure that our investors feel confident that we are generating successful returns with our incremental investments. I believe fixed wireless has a role in our overall strategy, but I do not see it as a viable long-term solution for densely populated urban or suburban areas. When considering consumer behavior and demand trends over the next few years, I don’t believe this approach will effectively meet customer needs in the short term. The mobile network is crucial for delivering capabilities outside of fixed locations, but its bandwidth limitations must be acknowledged. Mobile data is more valuable and should be priced accordingly due to the dynamics of supply and demand. It is essential for my mobile network to provide premium solutions for mobile data when needed. If we manage our mobile network effectively, we can capitalize on high-value mobile opportunities that will emerge with advancements in 5G technology and the demand for real-time transmission everywhere.

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

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

Hi, Mike. I'm not going to discuss our pricing plans today. However, I want to emphasize that we have a skilled management team that understands the value we provide to our customers and our position in the market. We are always assessing whether we are receiving the maximum value in exchange from our customers across all our products and services. Last year, we identified some customers who were not leveraging our best plans with the latest features, and we worked with them to help them recognize that there were options available that provided better value, even if it meant paying a bit more. We executed this initiative exceptionally well and saw strong churn numbers during that process, which speaks to our effective management. I'm not reporting a decline in service revenues or addressing a significant customer loss; rather, we have reduced churn, which reflects the success of creating a mutually beneficial arrangement with our customers. We will continue to seek such opportunities across our portfolio. There will always be ways for us to enhance our customer’s experience and value. With the ongoing 5G replacement cycle, we have opportunities to discuss product and service upgrades with customers, helping them choose plans that best fit their needs. We anticipate making further progress in this area, contributing to the service revenue growth we have previously guided. This isn't an overwhelming challenge; we've been discussing our strategy with you for years, and we've consistently met our service revenue forecasts. It's important to note that the global economy has not fully bounced back from the pandemic. As travel begins to normalize, we expect an uptick in revenue from international roaming as more global visitors return. While Asia may take longer to recover, recent policy changes provide hope for a return to pre-pandemic conditions. We are optimistic about this progression and confident in our ability to help customers find value in our offerings. We have room to grow, which is reflected in our guidance, and we will continue to execute our strategy effectively. Pascal, do you have anything to add?

No, I think that's all well said.

I appreciate your time this morning. I'm really pleased with the year. I thought it was a strong, consistent execution year. I'm equally as pleased that we've done the right things to set us up for continued growth as we move through '23. I hope you feel the same. I know the management team is very focused on delivering what we shared with you this morning as our expectations. I feel really good about where our customer base is. As I mentioned just a few moments ago, to have churn levels in our wireless business running at the position they're in with the competitive intensity occurring in the industry to have the position we have with our broadband base on fiber and the customer satisfaction that's coming with it, I think bodes incredibly well even in an uncertain environment as we're moving forward. The good news is I think we can grow in both those places to continue to drive the kind of tempered indirect growth that we shared with you. We're looking forward to doing it again next year. I think we've got the right opportunities in place. There's a lot more that we know we can still do to run this business better, and we're about doing that to ensure that we deliver improved performance for you moving forward. Thank you very much. I hope you all have a great '23.