Good morning, everyone. It's Tim Horan, the Cloud and Communications analyst here at Oppenheimer. My pleasure to be hosting the AT&T CFO in a very, very exciting time in AT&T's history, and Pascal and I going to have just a plain fireside chat. But Pascal, I'm not sure if you have to hit any of the Safe Harbor Statements before we do so.
Yes, Tim. Good morning, and good morning, everybody. It's a pleasure to be with you. For all those out there, happy holidays. Before we get started, I'd like to reference you to our Safe Harbor Statement, which is up on the slide here. The statements that going to make are forward-looking and are subject to risk and uncertainties, and therefore, may change in the future, and we have no obligation to update them. Refer to the Investor Relations website for more information.
Great, and going toget into this in a lot more detail, but I did want to congratulate Pascal on massively improving AT&T's free cash flow generation, and we're really on the cusp of some very serious deleveraging. All very, very positive occurrences. Before we get into that in a lot more detail, what going todo with all that great free cash flow, you had a big announcement last week on Open RAN, or we saw it as a very big announcement. Maybe it's a little bit more long-term focused, but like, can you talk about the high-level benefits and, you know, why you went with Ericsson on the Open RAN announcement strategy?
Yeah, sure, Tim. You know, here is, when we take a step back, as an industry, we've tried to drive an Open RAN architecture for some time. We thought this was a great moment in time. And, you know, the last several years, the equipment manufacturers have enjoyed significant business as a result of the mid-band deployment, and things are about to slow down right now for them. And this was a great time to use the position that we were in to try to really accelerate the Open RAN architecture that we've been talking about for so many years.
And what this will do is, while we are going with Ericsson, they have committed to open up the architecture, and over time we would expect that to drive efficiencies by, first and foremost, standardizing some of the basic equipment and architecture in our industry. And also, over time, through an open architecture, allow others to come in and drive further innovation, further efficiencies in the space. And, you know, I would expect that this move, over time, in the near term, probably not a big impact to our capital investment profile, but over time will generate more efficiencies and candidly drive further innovation.
What I would tell you is this, when I look at AT&T overall, the last couple of years, 2022 and 2023, have been years that we expect to be at peak capital investment. Next year, as John Stankey alluded to last week, we expect to have a step-down in capital. We expect overall capital investment to be in the $21 billion-$22 billion range, inclusive of our commitment to Ericsson. So overall, feel really good about the deal. We think it really not only benefits us, but benefits the entire industry, and will drive long-term innovation and efficiencies.
Well, I think to your point, having a much more open supply chain, historically, if you look at technology, you've seen, like, innovation come out of left field, right? An incredible acceleration of innovation as long as, you know, people can kind of use standardized equipment and come up with their own software. It's really, really hard, I'm sure, to think about what that means over the next two years, but you guys have obviously thought about it, what it means over the next kind of, you know, decade. Any more color you can kind of share in terms of the innovation that we can expect or, you know, a lower capital intensity as a result of this, or how the whole supply chain might evolve?
Yeah, you know, what we've said long term is that we expect to operate at mid-teens capital intensity. I don't know that this announcement changes that at all. We just right now think that this creates enormous optionality for the overall industry, and hopefully it creates much more innovation in an area that, you know, candidly, I don't think we have innovated fast enough.
For sure, and I am sure it will, but these things are always organic and a little hard to predict exactly right now. So just stepping back into the wireless front, obviously the largest business you have, can you talk about how the competitive environment this holiday season, how it compares to last year or the last few years?
As you would expect, I mean, during the holiday quarter, you know, each of the major carriers are competing for the new gross adds that are typically elevated during that season a nd I would characterize this season no different than what we saw last year. I think, we are continuing to run our play. We're trying to be financially disciplined, and it all starts for us by making sure we are taking care of our customer. We are providing our customers with great value proposition. The same offers that we would provide a new customer, we provide to our existing customers, so that has resulted in record low churn.
You add on top of that the fact that we are competing effectively for the gross adds that are in the market, but doing so in a disciplined way. You know, we would expect, relative to Q3, to see an uptick due to holiday sales, and overall, that should put you in about 500,000 net subscribers for the fourth quarter, and we feel really good about how we're executing. Our network is great. We continue to move customers up the ARPU stack and couldn't be more pleased with how the team is executing.
Yeah, that's great color, and thanks for that 500,000 number. And, do you think, have your promotion dollars shifted, or are they higher or lower than they were, you know, a year ago to hit that target number?
Well, Tim, you've noticed we have been really consistent across the board. I'm not going to comment specifically on our promotion dollars, but you look at our promotions relative to those in the marketplace, I think it's fair to say we've been much more disciplined, and we are opportunistically looking to take the gross adds that are there without being overly promotional, and at the same time, making sure we are taking care of our great customer base.
And do you think competition should be relatively stable for the remainder of the year? I know the cable guys talked about getting a little bit more aggressive. Verizon, you know, saying they're doing a little bit, you know, better. Are you seeing any of that out there, and do you expect anyone maybe is falling behind a little bit, they might have to get more promotional?
Look, it's hard for me to surmise what others will do. What I can tell you what we will do, is we will continue to be really disciplined and take the ads that are there without being overly promotional, because we're trying to really drive the best long-term economic return for our shareholders.
Are you changing your go-to-market approach at all, or are there under-penetrated segments that you know, you feel like you can do a little bit better with? And I know, you know, the first responder has been an area you've been doing, you know, great with, but how's that going? Any other new segments you're targeting?
Look, I'm not going to talk specifically about new segments that we're targeting, but one of the things that has been the key to our success has been our ability to identify segments of the market that are under-penetrated. You provided the first responders as a key example. We have really gained share in that marketplace. We have a great product, and I couldn't be more pleased with it. But in addition to that, there are parts of the country where we are under-penetrated markets, such as the Hispanic market, Asian markets, and we are surgical in going in identifying those, putting together offerings that will help drive further penetration.
Also, look, even within the first responder market, we've expanded it from its initial inception to include, you know, healthcare professionals. So, all things that are key innovations that our team are driving in order to really help expand the services we're providing to areas that have been traditionally under-penetrated.
So, can you remind us, what are you growing wireless EBITDA at this point, and do you think that's sustainable? What's the strategy to keep what's been, you know, pretty good growth going?
Well, here's what I would tell you is this . Our strategy has been, let's move our existing customers up the ARPU stack. So, take share of the gross adds that are there, create new products and services. I'll give you an example, o ur insurance product. O ver the last several years, we have grown the pool of customers that have taken insurance, and that's helped drive additional revenues. We've also had our first, our Next Up product. Again, driving more customer value in, and also ensuring that we are going to be able to re-sign those customers when their existing deal is completed.
So all those things have been great value drivers, and our team is really good at innovating, and you know, just as we've done so in the past, I would expect our team to continue to find ways to extract value and at the same time, deliver additional value to our shareholders.
Yeah, that's great color. The ARPUs have been growing nicely, and I know you're a little unique in the market, too, in your ability to converge wireless and wireline, both from a, frankly, from a network perspective, but also from a go-to-market, you know, perspective. I mean, is that helping ARPUs, you know, at this point and helping churn, and you know, how differentiated do you think you are there?
Well, I think we are extremely differentiated in that regard. We are the largest fiber provider in the country, and we're, we're adding to that footprint faster than anybody else and at the same time, we have a scaled wireless business, so we're the only ones who are able to offer both products using our own network and w here-- w hat I would tell you is this, where we have our fiber product, we see an uptick in wireless penetration and the ability to bring both products to market, to customers, and they benefit from the, candidly, the best product, the best broadband product in the market. The perception of our wireless business goes up as a result of bringing both.
So you start from there, and, you know, I think it's really important you take a step back. Two years back in 2020, overall, we had $2.8 billion of fiber revenues. This year, I would expect us to be around $6 billion. So, in a short amount of time, we have more than doubled the revenues, and I couldn't be more excited, and I think we are, we have every confidence going tocontinue to expand our footprint. At the same time, going tobe able to drive ARPU lift, and, as we retire our copper footprint, we should continue to see expansion of margins. And over time, there is no reason for us not to have the same margin profile that you see in our, from our broadband peers.
So overall, look, I couldn't be more pleased, and the converged offering is really—we're just starting to hit our stride, so there's plenty of opportunity to further penetrate with our converged offers.
And i mportantly, one of the things I would tell you, Tim, is when you look at the returns that we are getting in from deploying fiber, we are penetrating faster than we had initially anticipated in our business case. Our ARPU's are higher than we had anticipated, and as a result of that, look, John Stankey said this last week, "We expect to see to have 10-15 million incremental opportunities within our footprint," and that's in addition to our Gigapower JV, where we just closed on that early in 2023.
So, but we expect to really be able to use that as the vehicle to drive further expansion outside of our footprint. All- in- all, we feel really good about this fiber, and we think it's still early days and lots of opportunity to continue to drive additional subscribers, revenues, and profits.
The fiber, obviously, it's been a, you know, a home run. The 10-15 million, are, is that referencing 10-15 million incremental fiber homes passed over the long term?
Yes, over the long term. That's correct. And, you know, but remember, what we have said is, our goal is to get to 2.5x by the middle of 2025, and that hasn't changed. going tocontinue to make sure that in addition to rolling out fiber, we are de-levering at the same time, and we have every confidence we can do that. Now, and beyond 2025, you know, we think there is 10-15 million attractive returns, homes or locations with attractive returns. So, for, So yeah-
I would agree with you. And luckily, I mean, a lot of markets outside the United States where fiber is really ramping up, you know, build-outs also. You know, I think you're a little bit lucky in that the cable guys are not upgrading fiber. You know, they think their legacy plant's okay, which I don't agree with. But you know, fiber is obviously far, far, far superior, and you figured out how to, I think, deploy it fairly cost effectively at this point and to sell it very, very cost effectively. You know, now your copper base is so small, those declines aren't really impacting you all that much anymore. So it feels like you're really at the point and that inflection point on broadband, that should really help.
But, how important would some of the federal subsidies be to that 10-15 million build-out? Do you think, you know, half of that going tocome from subsidies or a third? Not, you know, not to put words in your mouth.
Look, it's hard to say. We're not for that 10-15 million, we're not counting on any subsidies at all. This is no subsidies. Look, if we're able to identify attractive opportunities that have subsidies, that would be great. Yeah, I think it is too early to tell. A lot of going todepend upon the methodologies the individual states employ in driving in allocating the funds, to the extent that they are looking for reliable providers that are able to do this in a way to really solve the problem. I think we will get more than our fair share of the dollars, but we haven't included any of that as part of this overall 10-15 million we've identified.
Got it. So it could be an incremental $5 million on top of that. Got it. That, that's, that's great. My estimate's, not yours, obviously. And then, you know, on the-
Yeah.
Yeah. Sorry.
One other thing I would say in terms of just, even, we continue to see really good uptake in fiber net adds. So, this quarter, I would tell you, other than what you would typically see as normal seasonal downtick because of, you know, consumers don't want somebody installing fiber in their homes, I would expect us to continue to perform in line with what we've been doing. So adjusting for that, you should expect around 250,000 fiber subscribers for the quarter, the fourth quarter.
Well, that's great color. And, how about on the fixed wireless side? You know, I know your thinking has changed there a little bit. You know, how many adds should we be thinking about per quarter, you know, going forward over the next few years? And it seems like it's a product that, you know, if you get enough subscribers in one area, you can backfill in with fiber if need be, and kind of make it a win-win.
Y eah, Here is- I don't know that I would characterize that our thinking has changed vis-a-vis fixed wireless. It's been fairly consistent. We don't believe it's a product that we should be, that we will be deploying at scale across all our footprint. With that said, there are instances where it makes a lot of sense. Let's take an area where the economics are just not there for deploying fiber because it's sparsely populated. Fixed wireless may be a fine solution in that instance. There are businesses like, you know, construction sites or strip malls that don't have high bandwidth needs, where fixed wireless may be a fine solution. Also, in places where we plan to deploy fiber but are not there yet, it serves as a great catch product, allowing us to decommission some of our legacy footprint.
In those instances, it makes all the sense in the world. But what we've said is that our priority remains, let's really lean into 5G, and the new services that will come off of 5G, on the enterprise side, and importantly, fiber. W e think that's where we get the best returns, that's where we are able to add to our scale position, and long term, the economics are just really good.
Fair point, and didn't mean to mischaracterize it, but do you think you can add, you know, a couple of hundred fixed wireless subscribers a year going forward? You know, your peers are adding 1.5 million, 2 million, as part of the strategy.
Look, I think it's early days for us in fixed wireless. We're going to give guidance, but, again, you know, our goal is to use it in the ways I just described, so really as a supplement. It's another tool in our toolkit but going to use it for very targeted purposes.
Got it. Very helpful. And maybe just on the, on the business wireline side, can you, can you talk about what the growth of that business should be longer term and, you know, what's the major kind of themes going on there?
Yeah. Here's how we think about business wireline. It's a really important segment for us. If you look at the wireless relationships that are generated from our business relationships, really attractive. It's been a big part of our success in wireless over the last several years. Also, core connectivity. Fiber connectivity is an area that has been growing nicely, that should continue to grow nicely as we pass new locations. And importantly, in that regard, we have to do a better job of getting our fair share of small to medium-sized businesses. I think they are a really attractive set of middle-market customers that need the capabilities that an AT&T brings. And, candidly, we probably have opportunities to do better in that regard by bringing not only connectivity, but great security, and networking capabilities.
So, those will be the growth vectors long term. In the meantime, we have an enormous base of legacy products that are in secular decline. going to continue to support those products for our key customers, but over time, the growth vectors will be wireless, fiber, and fixed wireless for areas that are going to afford those businesses that don't consume enormous bandwidth. And those going to be the growth vectors. We're going to- and we're going to continue to drive our cost, rationalize products wherever we can.
Do we have a sense when the business wireline, you know, growth can resume and margins stabilize, like, when you look at the legacy versus the new growth areas?
You see, we haven't provided updated guidance on that, and so what I would tell you is this: despite the fact that we have been in decline, we have been growing the overall company, and we are confident going to be able to continue to grow the overall company, manage this transition, and still serve our very valuable customer base.
Got it. So even if the trends in the business wireline continue a few years, it's becoming a smaller and smaller percentage, and the overall company should still grow at a good clip.
That's right.
Yeah. Great, great, great color. And, like, how important is the wireline to the wireless? I know we talked about it in consumer, but, you know, how about on the business side, like, that converged offering, how, how important is the go-to-market there?
Well, look, virtually all of our enterprise customers, we have wireless relationships with them. It's a big piece of our overall wireless growth, and I would expect that to continue. Because, look, we have done great work in supporting these customers over the years. We have great relationships, and they trust us, and it's been key to our performance to bring holistic connectivity solutions to them, so I would expect that to continue.
Great. So maybe just switching over to the free cash flow side, can you think about how we should be thinking about free cash flow in 2024, if we're spending $21 billion-$22 billion on CapEx? You know, can it grow versus 2023? You know, what's driving the growth in 2024? And, you know, I hate to put you on the spot, I mean, but, I mean, you know, longer term, do you still have the ability to grow free cash flow? Because, you know, frankly, where your dividend yield is, the market seems to be concerned, that, you know, maybe you can't grow free cash flow longer term.
Look, here's what I would tell you. We are building a durable franchise here, it's that we expect to grow each and every year. That's why we're investing the level of capital we're investing. That's why we are the only ones who are in a position to offer a fiber-based broadband solution with our network and a wireless base. So, as I think about 2024 and beyond, what you should expect is us to grow earnings, continued growth in mobility. Tim, think about, going to compete for the gross adds that are in the market. We're going to do-- we continue to do the great job that we've been doing to retain our customers. And, we're going to be innovative and opportunistic to, to drive incremental value through our base, through the various tools that we've been using.
So over time, all- in- all, that should continue to show you that we have the ability-- we have been growing, and we expect to continue to grow our wireless business. Similarly, consumer wireline, this was a business that was in secular decline a few years ago. We have righted the ship. We are, we've more than doubled our fiber revenues, and going to continue to lean into our core competency there and continue to grow fiber revenues, continue to manage costs as we transition from our legacy base. And we should, we expect to continue to grow that business. Coupled with overall cost outs across our administrative footprint, you should expect that to drive EBITDA growth and overall earnings growth.
Importantly, as you think about next year, we're going to-- the recent deal we did with Ericsson, going to shorten the lives of our Nokia equipment as we replace it with Ericsson, so going to result in some incremental depreciation for next year, non-cash depreciation. And so, all-in-all, from a free cash flow perspective, we would expect to grow free cash flows next year. It's earnings growth, lower capital partially offset by higher taxes and lower DIRECTV distribution. Importantly, you know, one of the things that we've done this year that I'm incredibly proud of, we have really upped our organic cash conversion. It's allowed us to grow free cash flows very nicely, plus also allowed us to pay down some of our short-term financing obligations.
I would expect us to continue to run that play as we move forward, because, you know, we are building a durable franchise that drives free cash flow with very good margin profiles overall. So that's the play we've been running. We expect that to continue, and I couldn't be more proud of the team.
And on maybe just on the expense front before we get into capital allocation. I know you said you have the ability to drive down, you know, expenses further. You know, is that material? Can you give us some areas of low-hanging fruit, and are you using artificial intelligence to enable that?
Sure, sure thing, Tim. If you look at the last few years, what we've managed to do, we've managed to keep expenses relatively flat while increasing our investment in things like promotions and investing in our network. So, the areas we have targeted in the past include, we've made much more use of artificial intelligence to optimize our call centers, so our call volumes are down. We've optimized our field dispatch. We had our force counts are down significantly. Our consulting and contractor expenses are down significantly. I would expect us to use those very same plays as we look forward and-- b ecause all this is before generative AI, and we see real promise in generative AI for our call centers, for our field dispatch, also for our software development.
The ability to use that to really help increase the productivity of our software engineers, you know, coupled with, we still have an opportunity to drive efficiencies in our administrative cost base. So, all-in-all, continued opportunities, all while investing in the business and, continuing to drive margin expansion.
That's great color and very optimistic. So, then we have you basically, your target is you'll be at 2.5 x debt to EBITDA within 18 months here, first half of 2025. You know, at that point, your debt is frankly fairly cheap, what you have on the books. How do you think about basically capital allocation? Will you invest maybe a little bit more in, you know, CapEx and R&D? Do you do share buybacks? Do you start to grow the dividend again? How are you thinking about it?
Here is the way I think about it. First and foremost, our priority is let's get to 2.5 x. Once there, I think it's safe to say that we understand the importance of continuing to find new ways to deliver value to our shareholders, whether that be a buyback, some sort of adjustment to our dividend, or. And also, look, if we have really attractive opportunities to invest in our network through additional fiber homes, we'll look, we'll absolutely consider those. But it's really about creating that optionality and being in a position to offer shareholders other value for the great patience that they've had as we've gone through this transition.
So your debt, you're almost improving it, like, 0.3 per year from, like, 3.1 down to 2.5 in a two-year period. I mean, should we expect—I think your goal is 2-2.5. I mean, should we expect maybe instead of a 0.3 improvement in a multiple year, like, 0.1, will you continue to slowly de-leverage, maybe just change the pace a little bit?
Well, look, the guides that we've given, Tim, is that going to get to 2.5 x the first half of 2025. Beyond that, I think what we do in terms of where we manage the company will, a lot of it will depend upon what's the interest rate environment. If interest rates are at current levels, I see no-- I'm pretty comfortable operating at this level of at that leverage target. But if it's considerably higher, you know what? I think we may want to use the excess capacity to pay down debt. So, it's we have a bunch of tools in our arsenal, and importantly, going to have optionality, something we haven't had for some time.
Great point. Well, at trading at a 14% free cash flow yield on your equity value, it would seem like the highest and best use would be to buy back stock. Unless, of course, you can get, you know, 20% on the fiber builds, which you probably are, so I know it's a balancing act, and it'd be nice to do a little bit of everything.
Indeed.
I do have some questions from investors here. One is: "Do you plan on decommissioning legacy copper, and can that be a material expense savings?"
Over time, I would expect—Yes, we are decommissioning copper as we've gone along this transition. I would expect that to continue to be a high priority for us and be part of the cost savings we see over time. I think a lot of it depends upon, you know, we would love to be able to accelerate that transition, but there are obviously regulatory concerns that we'd we have to manage because there are regulatory restrictions. And over time, I would expect us to continue to do what we've been doing and generate meaningful cost savings. And once we're at the other end of it, the margin profile of our wireline business should be no different than our broadband peers.
And are regulators more open? Let's say you have an area with very few customers of pulling out the copper and replacing with a wireless, if need be, or, a nd are regulators still concerned about even having, like, Class 5 switches anymore? Do they really care if it's a completely, you know, cloud-based or, you know, internet-based backbone?
Look, I think it depends. I mean, it's not only do we have federal regulations, we have state regulations that we have to navigate, so it's all those things. But, Tim, the one thing I know is this: we know how to manage through the regulatory framework as well as anybody else, but that is the one thing we cannot control a nd John Stankey alluded to this last week, our investment plans are dependent upon having a real sensible regulatory construct. That's what's resulted in the U.S. having the sort of infrastructure that we have, and if regulations become untenable and therefore impact returns, we will, you know, going to have to figure out, okay, are there better ways we can drive value to our shareholders?
Well, and I guess, and that—so are you seeing any relief somewhat with replacing copper with wireless? Have you seen some examples of that and, you know, replacing maybe legacy switching?
Look, there have been places where we've managed to have some success, but it's still early days. I think it's too early to call the ball on that, Tim. But there are areas that we have seen some success, and we're able to do it because the alternative, the supply of alternative providers is pretty robust. But I think it's too early to call the ball on that.
Maybe can you give us a little bit more color how things are progressing with BEAD and other government subsidies? Is it-- I'm sure you're negotiating at a state-by-state level, but any color on how that's going, and will it really benefit AT&T?
Here is what I would tell you. The allocations to the states have happened, and if you look at the states where we have our legacy footprint, Texas, California, Florida, Georgia, those are states with big allocations. Now, the states now have to determine how they going to allocate those funds, and I think that's where the devil's in the details. And I think it's too early to say how each state will go about it and how the different municipalities within the state will go about it. So that's where the battle going to be going forward. If they are looking for a reliable provider who probably can do the broadband build in the most economical way, and that is willing to bring also its own resources to bear.
We should win more than our fair share because we are as well positioned as anybody, but I think each, it remains to be seen how each state will go about that process.
Well, I'm sure you guys will win, and I'm glad I'm not working through that process personally, but good luck. A question here: "Can you explain relative to one of your larger competitors, you've been, you know, having better market share gains. Can you just give a little bit more color why that's the case?" The question here is, "Do you think it's your retention offers? Is it, you know, your network? Is it the consistency, anymore, and can that continue?"
You know, for the last three years we've been asked, "Can this continue?" Here is what I would say: I think it's all the things you mentioned. It is, one, our network has gotten, we've made significant investments in our network over the last, you know, five, six years, and the network has never been better, and it continues to get better. Two, I think we are doing a much better job of segmenting the population in the U.S. and identifying those instances where we have been under-penetrated, those segments, and we do a great job of identifying ways to penetrate those segments. Three, our best deals for everyone, where we have a consistent offer, not only for new customers, but for existing customers. That helps us keep our customers, and importantly, it helps the sales teams execute more consistently.
By having the same offer, not changing it every quarter, it helps the execution of the sales team. You layer on top of that our innovation by identifying new value pools within our existing base, things like creating insurance products, identifying ways to offer the customer the ability to get their next phone on us. All those have created great value, great value for our company, and our team is just really good and deep expertise, and I would expect that to continue.
Pascal, we're out of time. I want to thank you so much for presenting and for all those details on the quarter. Very helpful for all of us in our modeling, and thank Amir for... I know Amir had a busy night last night. Thank Amir for sharing you with me. Thanks so much.
All right. Well, thank you. Happy holidays, everybody. Thank you very much.
Happy holidays. Bye-bye.