AT&T Inc (T) — Q1 2023 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, including 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 good morning, everyone. I appreciate you joining us. Earlier today, we shared our first quarter results, which again illustrate how we're meeting our commitment to grow high-quality, durable 5G and fiber customer relationships. Thanks to a consistent discipline and return-focused go-to-market approach, our team is balancing customer growth with profitable long-term value creation as we connect people to greater possibility. And I'm particularly proud of the quality of our subscriber additions. Despite high promotional activity seen in parts of our industry, we continue to achieve consistently low churn levels while increasing the take rate of our high-value 5G and fiber plans. We believe our results demonstrate that the customer-centric strategy we launched almost three years ago continues to deliver the right mix of quality subscriber and profit growth that will prove sustainable over the longer term. So let me highlight some of our progress. Let's start with mobility. In January, I shared that we anticipated industry demand trends would continue to normalize to pre-pandemic levels. However, we still expect it to grow both postpaid phone subscribers and wireless profits, thanks to investments in our customer experience, distribution channels, and network, and that's exactly what our teams delivered. We had 424,000 postpaid phone net adds in the first quarter and continued to grow wireless service revenues, EBITDA, and postpaid phone ARPU, all while maintaining historically low churn. Checking the box for each of these success metrics paints a clear picture of what sustainable, profitable wireless growth looks like. We've now had more than 11 straight quarters of 400,000 postpaid phone net adds or better, and we've totaled 2.6 million postpaid phone net adds over the past four quarters. We're pursuing longer-term growth by remaining committed to fostering durable relationships that solve customer pain points and bring great value to our customers. We're executing well on our disciplined go-to-market strategy that centers around putting the customer first and takes advantage of our improved distribution. We also continue to hone our ability to deliver targeted solutions that provide real value to customers in our historically underpenetrated segments, like first responders, as well as small and medium businesses. This approach establishes a long-term growth trajectory that thoughtfully balances customer additions with profitable returns. Now let's turn to our fiber business. Quarter after quarter, our teams proved that wherever we build fiber, we win. And the first quarter was no exception, with 272,000 AT&T fiber net adds. This marks 13 straight quarters with more than 200,000 net adds. These net adds were a significant achievement with a number of household moves, a key growth metric for fiber sales, decreasing nationwide. As we noted at the end of last year, our fiber subscribers now outnumber non-fiber and DSL subscribers. We now have about 7.5 million AT&T fiber subscribers, with the fiber adoption and margin expansion driving Consumer Wireline revenue and EBITDA growth. We believe that AT&T offers the best wired Internet service available anywhere, that this elevated AT&T fiber experience is providing a strong tailwind. So overall, across both 5G and fiber, I'm very happy with the high-quality subscriber adds we achieved in the quarter, and these long-term customer relationships provide a great and profitable revenue stream now and into the future. Even in the midst of increased macroeconomic uncertainty, we're executing more sharply and efficiently after repositioning our operations around our connectivity strengths. We remain on track to achieve our $6 billion plus cost savings run rate target by the end of the year, if not sooner. As we mentioned before, the benefits from these efforts are expected to increasingly fall to the bottom line. While we've largely delivered what we set out to accomplish three years ago, our journey has only raised our confidence that we can continue to evolve and improve. In fact, we believe we can further accelerate cost takeouts as we progress through the year. Part of this entails transforming our network as we ultimately replace our copper services footprint with best-in-class fiber connectivity, and where it makes sense for customers, replacement products built on our wireless network. Think about a cost structure that's no longer anchored to legacy network technologies and software stacks. For example, in addition to all of fiber's enhanced resiliency and its superior transport characteristics, we're already seeing that fiber uses less energy, costs less to maintain, and requires fewer service dispatches. And as we reduce our copper services footprint and related legacy infrastructure, we expect to consistently improve our margins, grow EBITDA and, ultimately, improve our capital efficiency. Another contributing element relies on unlocking new capabilities that make it easier to collaborate and get work done by leaning into our digital transformation. We're seeing this already come to life through early trials in our collaboration with NVIDIA, where we're testing the use of artificial intelligence to improve fleet dispatches so our field technicians can better serve customers. Separately, we're using AI to match customers with the right customer care support path, resulting in more effective issue resolution. We think this is only the tip of the spear of what's possible. Now let's turn to our final priority, which centers on how we're allocating capital. We continue to invest in our 5G and fiber networks at record levels in order to deliver long-term sustainable earnings growth. Our goal is to build a network that not only meets today's demands but will serve the needs of our customers for decades to come. This is at the core of what we do and who we are as a company. It's also why we continue to be one of America's largest capital investors. We're investing in our connectivity infrastructure, and using our team's proven expertise to not only maintain our network advantages but to advance it, and we're doing this while moving forward on our commitment to provide more Americans with access to reliable high-speed broadband. We plan to actively pursue funding to support the transition of our wireline footprint and expect to be a significant participant in public-private partnerships. And while we're clearly committed to investing in our networks, we also remain focused on strengthening our balance sheet and reducing our net debt. We expect to increase cash generation over time, which will allow us to continue delivering an attractive dividend with improving credit quality. And by executing on the simplified capital allocation framework, we expect to improve our financial flexibility in the long run. This will provide us with the opportunity to take additional actions, such as investing to accelerate our business growth or generating incremental values and returns for our shareholders. Now before I wrap up, I'd like to quickly touch on some developments we're seeing in the macroeconomic environment. We started the year with the expectation that we'd be operating against a less-predictable macro backdrop. This belief has proven true thus far. And what we're seeing is in line with the expectations we built into our guidance in January, including a moderation of growth for wireless services. We expected to transition back to a more historical cost of debt. That is certainly underway, with the added dose of tighter credit availability to some segments of the economy. I'm clearly not breaking any ground with these observations, but this is why we have been focused on reducing our leverage and optimizing our use of capital over the last few years. As the economy adjusts to a likely period of tighter capital availability and higher interest rates, I take comfort in the state of our business for two reasons. The first is the heavy lifting we did to strengthen our balance sheet over the last several years. We've reduced our debt, taking advantage of the prior low interest rate environment on our remaining debt and managed our debt structure for the next several years. As a result, more than 95% of our debt is now fixed at an average rate of 4.1%. The second is the repositioning of our business to focus on exclusively communication services, particularly 5G and fiber. As the last few years have demonstrated, the solutions we provide are more critical than ever before, and we only expect the demand for purpose-built, best-in-class Internet access to grow. The resiliency of the services we provide, coupled with our improved financial flexibility, provide us with the right toolset to navigate the economic environment. We remain on track to deliver the 2023 financial and operating commitments we made to our shareholders at the start of the year. However, should the need arise, we feel comfortable using the tools we have at our disposal to align our actions with a more challenging economic backdrop, whether that's accelerating cost transformation actions, being more deliberate with our capital spend, or increasing our liquidity. To conclude my remarks, I'd simply reemphasize that I'm proud of how our team started the year. Last quarter, I said that our approach and strategy for 2023 was to do it again. In the first quarter of the year, our teams have done just that. With that, I'll turn it over to Pascal. Pascal?

Thank you, John, and good morning, everyone. As you know, we typically provide a brief review of our subscriber trends at this point in our prepared remarks. But today, I'd like to zoom out and connect the dots on the progress we've made so far on our multiyear journey to reposition our core operations. Our goal has been to take advantage of the expected increase in demand for wireless and broadband connectivity by adding customers the right way, with a focus on long-term value. We recognize that in order to do that, we had to increase our investments in the business to enhance our customer value proposition and make more memorable and lasting connections with our customers. We understood that these investments would have a short-term impact on wireless ARPU and profits, but over time, would build durable customer relationships and deliver attractive returns. Over the last few quarters, you've started to see the full picture and the results of these efforts. In mobility, our largest business unit, we're growing subscribers and taking share. We also continue to see very healthy ARPU. This translates to growth in wireless service revenues and EBITDA, while improving margins. We've grown both revenues and EBITDA year-over-year for four consecutive quarters, and this past quarter was the best first quarter for mobility EBITDA in the Company's history. In Consumer Wireline, we've invested to increase our fiber footprint to provide customers with best-in-class access technology. Over the course of the past three years, we added about 6 million fiber locations that we can now serve. By doing this, we successfully transformed the business that was in secular decline into a growth business, with fiber growth outpacing legacy wireline declines. The consistency of our results across 5G and fiber provides us with confidence that our go-to-market approach is both sustainable and delivers attractive returns. These results are the outcome of the hard work our teams have done and show the value in what we've been working towards the last three years, and now it's about continuing to deliver quality growth with attractive returns. So again, we're clearly growing the right way and focused on the long term. Now let's turn to our first quarter financial summary on Slide 6. Consolidated revenues were up 1.4% in the first quarter, largely driven by wireless service revenues and to a lesser extent, Mexico and Consumer Wireline. This was partially offset by an expected decline in Business Wireline as well as lower mobility equipment revenues. Adjusted EBITDA was up 3.9% for the quarter as growth in mobility, Mexico and Consumer Wireline were partially offset by an expected decline in Business Wireline. Adjusted EPS was $0.60 compared to $0.63 in the year-ago quarter. In the quarter, there were about $0.06 of aggregated EPS headwinds from higher pension, lower DIRECTV equity income and a higher effective tax rate. This was partially offset by strong growth in mobility. Cash from operating activities came in at $6.7 billion versus $7.6 billion last year. This was largely due to the timing of working capital, which includes lower securitizations. As a reminder, the first quarter is typically the high watermark for device payments, and we expect payments to progressively get lower as we make our way through the balance of the year. Capital investments were $6.4 billion as we continue to make historically high levels of investments in 5G and fiber. Free cash flow for the quarter was $1 billion. This was consistent with our expectations and accounts for several seasonal and anticipated working capital impacts. We remain confident in our full-year outlook for free cash flow of $16 billion or better. This expectation is largely due to the timing of capital investments, device payments, and incentive compensation, which all peaked in the first quarter.

Let's look at our mobility operating results on Slide 7. Before we get started, we disclosed in early March that we modified our business unit reporting and no longer record prior service credits to our individual business units. Prior period business unit results have been recast for this change. There is no impact on consolidated operating income, as price service credits continue to be recorded in other income. Looking at our mobility results, revenues were up 2.5% and service revenues were up 5.2% driven by subscriber growth and higher ARPU. Mobility EBITDA was up $621 million or 8% for the quarter, driven by growth in subscribers, service revenue and the absence of 3G network shutdown costs versus the first quarter of 2022. Mobility postpaid phone ARPU was $55.05, up $1.05 or nearly 2% year-over-year. ARPU growth remains largely driven by higher ARPU on legacy plans from last year's pricing actions, a continued mix shift to higher-value rate plans, and a continued improvement in consumer international rolling trends. Postpaid phone churn remains low at 0.81% for the quarter. We believe our team's ongoing success can be largely attributed to the consistent investment we've made to build a fast and reliable 5G network and the actions we've taken to ensure our customers feel valued and appreciated. In prepaid, we had 40,000 phone net additions. Our total prepaid churn was below 3%, primarily driven by loyalty from cricket customers who stayed with us as a result of our value and reliability. Overall, I'm really pleased that the team achieved solid subscriber growth even against a moderation in industry demand. I'd like to also quickly acknowledge the strong results posted by our team in Mexico. We're very pleased with the performance of our Mexico wireless operations, which boosted strong revenue and steady profit growth, thanks to improved operational execution and scale.

Now let's move to Consumer and Business Wireline results, which are on Slide 8. Let's start with Consumer wireline where our growth was led by our investment in fiber, which is consistently yielding strong returns. We added 272,000 fiber customers in the quarter. This speaks to the quality of the service we're providing and the continued demand for the best Internet technology available today. With our fiber subscribers now outnumbering our non-fiber subscribers, the increasing mix shift from legacy products to fiber continues to drive strong broadband results. Broadband revenues grew by more than 7% year-over-year, including accelerated year-over-year fiber revenue growth of more than 30%. Fiber ARPU was $65.92, up more than $1 sequentially, with ARPU for new fiber customers at about $70. Customers are increasingly choosing to take advantage of the benefits offered by faster speed tiers, which is also supporting ARPU growth. Consumer Wireline EBITDA grew 3.2% for the quarter due to growth in fiber revenues and transformation savings, partially offset by higher storm costs on the West Coast, which hurt growth by about 250 basis points in the quarter. Overall, we could not be more confident in the future of our Consumer Wireline business, with fiber well positioned to lead our growth in the decade ahead.

Turning to Business Wireline. EBITDA was down $230 million year-over-year, which was in line with our expectations. This was partially driven by about $50 million in year-over-year comparability factors, including favorable compensation adjustments in the first quarter of last year. Our rationalization process in Business Wireline also continues as we remain focused on the opportunities that 5G and fiber expansion create, particularly for small and midsized businesses. Our Business Solutions service revenues grew nearly 7% despite a moderation in industry growth as we continue to grow faster than our peers. One driver of this growth continues to be FirstNet, where wireless connections grew by about 300,000 sequentially, about 40% of which are postpaid phones. Ultimately, we're making progress on transforming our Business Wireline operations. And when we normalize for one-time comparison items in the quarter, we still see the same underlying trends and continue to expect full year results aligned with what we guided in January. Now to wrap up my comments. I'll restate that we embedded expectations for a comparatively slower macro backdrop in our full year outlook and, therefore, remain on track to deliver on our full year guidance. We will continue to monitor the economy closely. And if we find ourselves operating in a more challenging macro environment than we anticipated, there are levers to pull. Ultimately, we feel like we have found the right formula to deliver sustainable results with profitable 5G and fiber subscriber gains. We've demonstrated this by growing consolidated EBITDA, improving ARPUs and growing broadband and wireless service revenues, with consistently low postpaid phone churn, and we are confident that this formula will continue to work. 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.

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

Phil, thank you for the question. Overall, we came in exactly as we anticipated. Remember, in my commentary at year-end when we gave guidance, we said that Q1 was going to be the low watermark for free cash flow for several reasons. One, it's the highest quarter of device payments. Recall, Q4 holiday sales is the heaviest volume for devices; we pay for those in Q1. You saw our capital spend is elevated relative to the annual guidance that we gave. And Q1 is the quarter we pay incentive compensation. When you factor all those things in, along with our expectations that we will continue to grow EBITDA, we feel really good about delivering $16 billion or better.

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

We expect net debt to decline this year and thereafter.

I wonder if you could just give us a little bit more color on the fiber. How is the build program going? I think I saw about 600,000 passings in the new locations on the consumer side, but just update us on that 2 million to 2.5 million build program. And also what you're seeing in terms of cohort penetration and take rates. You did slightly lower move activity, but how the kind of the 12-month, 24-month penetration rates are going. And then any updates on timing or structure around GigaPower would be great.

Everything is progressing exceptionally well. We have no concerns regarding our ability to manage the supply chain, resources, or our partnerships with vendors. Our teams are performing effectively, and while there has been some inflationary pressure, it is all manageable and does not impact our business case significantly. When we compare the rising costs against the quicker market penetration and higher average revenue per user than anticipated, it balances out any first-cost concerns. We are confident in our $30 million commitment and its direction, which isn't a source of worry for me. I must commend the hard work of several individuals in the company who have contributed significantly to this area. We are doing a much better job of penetrating our market quickly, which enhances our confidence. Rapid market penetration is crucial for improving payback in our fiber business model and it positively impacts our cash flows and overall value. Currently, we are focusing our efforts in high-demand areas for fiber, which is a good indication of market success. We are continuously monitoring future developments in the build strategy. The promotional tactics and techniques we have implemented as a team, including brand promotion and operational strategies for customer awareness and engagement, are yielding positive results. We are on a learning curve and expect to improve as we scale our efforts. On the GigaPower initiative, we are nearing the conclusion of the transaction, which should happen very soon. We're committed to doing it properly and feel confident about wrapping it up successfully. Although the transaction is not finalized yet, we have our first live customer in one of our markets, and all necessary infrastructure is in place for selling and supporting customers. It's a significant achievement for us to activate our distribution channels and reach customers efficiently. We are pleased with our progress, and I am encouraged by the competence and energy of our teams involved, who are highly motivated and confident, which will benefit us as we advance.

Great. And just one last thing. On fixed wireless, you're getting a lot more C-band spectrum and your 3.45 coming on. How are you thinking now about the copper catch, and then potentially out of region doing more in fixed wireless to address the desire for converged bundles?

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

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

John, I would describe the quarter as really solid, with nearly 4% growth. While there were 3G shutdowns in the prior year, there were also factors that positively influenced the results. When I consider all the one-time items, this growth aligns perfectly with our expectations of 3% or better that we established at the start of the year.

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

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

Brett, on the first part of your question, the thing to keep in mind is, as it relates to Q1, a lot of the headcount reduction we saw in Q1 was accrued for as of the end of the year that was in the prior year numbers. So, it really didn't impact Q1 materially. By and large, look, this is a program we've been on for the last several years. March will, we expect it to continue, and it's one that, in the normal course, will incur severance on those, but it's all pretty manageable within the context of this company.

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

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

Sure, Mike. First, I don't see anything significant to report. As we are the first to announce results, I don't have data from others to compare. However, we utilize the same resources to assess market conditions. My conclusion at this point is that the market is exhibiting proportional dynamics, which I consider to be the status quo. As developments unfold, I wouldn't be surprised if the ratios remain consistent with what we've observed in previous quarters, which is reassuring given our focus on the right customers. The value proposition remains strong. Regarding our customer base, we've noticed that consumers at the lower end of the market are making decisions typical of tighter financial situations. They may be keeping their devices for a longer period and delaying the choice to upgrade. This has resulted in a slight decline in traditional upgrade and shopping rates. In the business sector, there are several factors at play. During the COVID period, we experienced growth that exceeded expectations, largely as businesses sought solutions for operational changes, such as remote work and employee equipment. As workplaces return to normal and the economy stabilizes, some of those products and services are no longer necessary. Additionally, businesses are looking to operate more efficiently and may reduce staff, which impacts the wireless sector, affecting handsets and data cards. However, this aligns with our anticipated growth patterns for the industry. We continue to see robust growth in business services and are confident in our market position. As noted in our opening remarks, we are performing well in segments like public safety, which aligns with our expectations for this year.

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

Thank you for sharing the supplemental free cash flow walk to the adjusted EBITDA number, Pascal. One notable point is the negative $2.7 billion working capital. To understand how this looks for the full year 2023 based on your previous comments, that working capital figure would need to be positive, which represents a significant shift. It’s challenging for us to model and comprehend this change. Could you provide detailed explanations on how this evolves over the year? Additionally, John, regarding the recent developments, DISH has taken on a distressed status in both equity and bond markets. Has this affected your evaluation of a possible DTV-DISH combination? Also, is there an opportunity for new spectrum acquisition if that were to materialize, or is new spectrum not prioritized in your capital allocation? I would appreciate your insights on how this evolution is influencing your perspective.

Dave, here's what I would point you to. In the first quarter, as I mentioned in my prepared remarks, we're at the high watermark of our device payments. It's the only quarter that has our annual incentive compensation. Those two things, coupled with our elevated CapEx relative to our full-year guide, hurt Q1 to the tune of $3 billion to $4 billion, and we expect that to turn during the course of the year just mechanically. It really isn't much harder than that. Based upon our spend, what we expect to spend in those categories, those should turn mechanically. So, we feel really good about being able to deliver $16 billion or better.

Dave, regarding your comments on DISH, I don't necessarily want to agree with your characterization. I'm sure Charlie probably doesn't either. Firstly, I haven't really shared my views on the combination of DIRECTV and DISH, and I don't plan to do that today. It's not something we typically speculate on. Charlie has largely been the one commenting on that and he certainly has the right to do so. You might find him to be a better source, as he is likely more familiar with his business than I am. We continually reassess the structure of the industry and what the future may hold. The best way to predict future trends is to analyze past patterns, especially when valuable spectrum becomes available through any means, whether it involves a business combination like our partnership with LEAP or responsibly engaging in auctions. We always aim to ensure that our investments are sustainable. If there happens to be a spectrum reordering due to auctions or asset changes, we will understand it and will consider whether certain options are more effective than investing in our network for greater density. We will keep evaluating this and make decisions accordingly. While I won’t delve into specifics about our scenarios or potential actions, it’s clear that with such significant financial implications, we are consistently assessing these matters to determine the best strategies for the company.

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

Frank, would you clarify for me when you say government guidelines exactly what you're referring to in that question?

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

I wanted to ensure I answered your question clearly. We are in a very good position. We have completed what I would consider the initial set of milestones for the first seven years of the contract. We have addressed all responsibilities and obligations as anticipated, and there are no issues or concerns. Overall, I believe we have performed exceptionally well. While I don't want to speak for the FirstNet authority, I think both sides view this as a highly productive public-private partnership, and we are continuing to plan future initiatives to enhance it. Regarding the rest of the areas we serve, California is somewhat unique. We have freedom from our carrier obligations in nearly every other region. The methods for achieving this differ from one area to another, but we have the flexibility to take necessary actions. We've been actively working towards this, which is why we are currently in the filing stage in California to ensure we have products ready to support customers. I'm very satisfied with our progress. You are aware of our capabilities in providing data services on the wireless network with fixed wireless, which I mentioned earlier regarding our market position. We have also been implementing a scaled wireline replacement for basic phone service, offering the same features and meeting the regulatory standards associated with traditional copper-based services, which we now support off our wireless network. These are two examples of replacement products that are better aligned with our future-focused architecture—a scaled wireless network—than relying on outdated low-speed services like copper. We believe these products offer significant advantages to customers compared to what they currently have. Regulators are keen on us taking the right steps going forward. They prefer to eliminate power-hungry copper lines that contribute to greenhouse gas emissions and don’t want technology that's over a century old and prone to failure during rain. I feel we are well positioned to accomplish our goals.

John, AT&T played a significant role during the launch of smartphones, particularly the iPhone, though perhaps less so with tablets. There's a lot of excitement surrounding augmented reality as the next big device. I'm interested in your views on the role of wireless operators. Have you had any initial conversations about how those partnerships will function with the variety of device manufacturers available?

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

I also just have a follow-on question on the structure of the industry. I mean cable is obviously, in many cases, giving away free phones and reallocating revenue from the broadband business. They've had success, I think, in terms of subs, maybe not at higher ARPU, but how do you see AT&T positioned long term in terms of also taking advantage of a bundled approach of offering broadband and mobile in more markets than where you just have your fiber?

We use the term durable wall for a reason. I want to avoid wasting resources on something that will not look good in 18 to 24 months. My focus is on positioning the business's infrastructure for the next decade. I have consistently mentioned that there will be areas in our network with underutilized capacity and lacking fixed infrastructure. Some segments will best use that underutilized capacity in a durable way. I noted earlier that many businesses have usage profiles where fixed wireless combined with other wireless services is a strong offering and will remain so for a long time. Certain consumer segments will benefit from this, but I believe it's not the case for most. We will continue to leverage this where I am confident that the customer acquisition cost is justified and will sustain the relationship. For instance, our fiber in-service lines are surpassing our traditional copper service lines because it is an excellent product that customers want to retain. I understand the duration that people keep this product in service. When customers hold it for 4.5 to 5 years, I can scale the product effectively, leading to high profitability. We need to carefully consider every customer we bring on and be diligent in how we invest in customer relationships and network infrastructure. This will help build those durable relationships. I would also highlight our churn numbers for both product sets as evidence of our commitment. Being deliberate and disciplined in this approach will yield long-term benefits for our subscription base.

Thanks very much. I think that's all the time we have for questions. John, I'll turn it over to you for final remarks.

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