Okay, welcome everyone. Welcome back again. I'm excited to introduce our next guest on the stage here, Pascal Desroches, the Chief Financial Officer of AT&T. Pascal, welcome.
Hey, it's a pleasure to be here. Hello, everybody. Maybe before I forget, I'm supposed to remind everyone of the safe harbor statement that's up on the slide here and available on our website.
All right.
There you go.
Maybe to start off, it seems, Pascal, that sentiment among some investors, it seems like it's that AT&T hasn't really progressed from where the company was back in early 2020 when the balance sheet was stretched, the dividend wasn't sustainable, the wireless business wasn't growing, and the company had a lot of exposure to the media and pay-TV distribution industries. Maybe you could take the opportunity to walk through, you know, really how much AT&T has evolved over the past four years since John Stankey and yourself stepped into your respective CEO and CFO roles.
Yeah, look, I appreciate the question, Bryan. When I take a step back, you know, we were a company that had all sorts of different parts: media, connectivity, an advertising business. We have slimmed that down to now where we are a core connectivity provider. Our goal and our aspiration is to be the best connectivity provider in the US, led by having great capabilities in both 5G and fiber. Over the course of the last three years, not only have we simplified the company, we've re-energized growth. Let's take first our mobility business. During the last three years, we added nearly 8 million—I think the exact number is 7.8 million postpaid phone net adds. We've also grown wireless service revenues by over $7 billion annually. I mean, that and so that gives you a sense, so, of the success we've had there.
I feel really good about how we're executing. Our network gets better every day. We're really pleased with how the mobility business is progressing. Consumer wireline, it's what we were in, a business that was principally DSL, declining revenues, declining earnings. We've made the pivot. We are growing revenues. Fiber revenues are growing faster than declines in legacy products. We've more than doubled our fiber revenues in the last three years. We are growing the business nicely. And as we make our way through the transition, that's gonna create opportunities for margin expansion. Within that business unit, we still have a considerable amount of legacy copper infrastructure that it will just take us time to get through.
But as we get through that, we are really pleased with what we're seeing already in terms of fiber and the maintenance profile and the durability, less truck rolls for repairs, lower power demand—all things that really set us up well as we make our way through the transition. In business wireline, we're still in the midst of a transition in cannibalization. I think we need to do better there. It's one I think we had an opportunity to do better. As you think about business wireline, the growth vectors there will be fixed wireless, principally focused at small and medium-sized businesses. I think we have an opportunity to do much better than we have there. Also, with increasing our fiber locations, that creates a natural entryway to expanding the TAM on small to medium-sized businesses. And our mobility business relationships continue to perform very well.
The last two years, on average, we've grown mobility on the business side 7%, the service revenues. So you take a step back. Those are items that ultimately the growth in those will ultimately outpace the declines in legacy. But we're just earlier in that evolution. And in the meantime, what we will do is we'll, in addition to leading in on those products that we expect to grow, we're gonna continue to drive efficiencies across our business. So look, although I take a step back three years into the job, we are on the cusp of we've already started to grow the business, and we're on the cusp of getting to our leverage target next 12-15 months. And that sets us up really well to start to evaluate other options for shareholders once we get there.
Yeah. Yeah. We're gonna hit on a number of those areas as we go through. But maybe to start with, mobility at the industry level, what's your view on the health of the wireless industry today and its ability to sustain growth over the next several years?
Overall, look, I think, and we said this in our release that went out this morning. We're really pleased with how the business is performing. You know, clearly, you know, we don't have the same volume of gross adds that were in the marketplace in 2021 and 2022.
Mm-hmm.
But it's we're still growing the overall industry. We compete for the gross adds that do come to market, coupled with making sure that we are driving churn as low as possible by giving our customers what they want and continuing to invest in network to make sure that we're never at a competitive disadvantage on the network side. Those things, you know, overall in our execution, really happy with how we are performing so far this year.
How do you see subscriber growth and ARPU trends for AT&T specifically playing out this year?
Look, here's what we said. We expect modest ARPU growth. That's a function of the fact that, you know, you had pricing actions that went into effect last year for part of the year. You know, you have subscriber intake and movement up the ARPU stack. And, you know, there are certain other pricing actions that we've announced recently. So all those things together should provide us with a modest ARPU lift. I would expect us to compete very effectively for the gross adds that are in the marketplace and continued with a maniacal focus on churn.
Yeah. Yeah. I mean, bringing up churn, how has AT&T managed to bring postpaid phone down postpaid phone churn down to the lowest level in the industry? You know, what's your confidence in being able to sustain it going forward?
It really you know, one of the things that I'll give Jeff McElfresh, our COO, and John Stankey, our CEO, a lot of credit. They realized we were not being competitive in our retention offers or our go-to-market offers, with we weren't at parity with our peers. So therefore, okay, we need a massive step up in investment. I mean, they were outspending us 2-to-1. We've caught up, and we're at parity. And as a result of being at parity and giving our customers what they want, plus making steady improvements in our network as we're deploying the additional C-band spectrum and 3.45 spectrum we acquired, all those things are continuing to improve our network. And so the consumers have no reason to leave us.
If we're giving them the best, the same deals as we're getting to new customers, we're keeping, so we're keeping churn low, and we're able to compete for gross adds. What's our, and what's really exciting is that as you look out, as we add more fiber homes, the ability to provide a converged offering where we have attractive economics on both sides, we're not renting the network the way some of our peers are. And, I think that's a distinct advantage that we have that over time will allow us to, one, drive churn down even more. We have found that where we have both products, the churn profile is better than each individual product.
So the ability to lean into that unique opportunity will give us every confidence that we can maintain churn at really low levels and actually attack a set of opportunities that we didn't have even if you just look a couple of years ago.
Right. You made reference to the cable operators there in your comment. How?
You say cable operators.
You say it. How have their market share gains in mobile affected AT&T? I mean, has it negatively impacted your postpaid phone net adds, or is it showing up in prepaid, or do you feel it's not having an impact? Just curious in your thoughts there.
Here's what I would say. You know, typically, if you look at the parts of the market they are succeeding. It's typical 1-2 lines, a lot of prepaid to postpaid migration.
Mm-hmm.
Most of our accounts come with more than two lines, and so we are playing in a different part of the value chain. You add onto that, I think our results for the last three years speak for itself.
Yeah.
I, you know, our wireless service revenue growth over the course of the last three years I'd put up against anyone. I think that speaks for itself. Our porting ratios to cable have not changed measurably over the course of the last three years.
Wanted to ask you about content bundling. AT&T is the only big three MNO that doesn't really feature content bundling in its premium mobile plans today. Wasn't always that way.
Mm-hmm.
I was just curious, you know, why is that, and, you know, why is your product strategy different in this respect?
I think it really goes down to like, we like to experiment with what is it that the consumer really wants from us.
Mm-hmm.
You know, we're, you know, we have a portion of our base that does get content, and they're happy. But we also recognize that some wanted more hotspot minutes, so we gave them that. Or some may want international roaming. There are different things for different customers, and it's really meeting the customer where they're at. And I think our strategy is proving to be very successful.
Yeah. Okay. And FirstNet, AT&T and FirstNet just recently announced a 10-year network investment plan. Can you explain this development and, you know, what it means for the company?
Look, we take the responsibility to service our first responders very seriously. In each one, we are incredibly proud of how we've partnered with FirstNet. You see the results. Quarterly, we announce the connections, FirstNet connections, and we're incredibly pleased with that. We're honored that they chose to continue that partnership with us for the next decade. What it means is, look, we're gonna continue to, you know, we're gonna roll them out onto 5G, make sure that first responders continue to have first priority. Importantly, all of that, we think we can do within the overall capital envelope of the company. So you take a step back. It's the ability you have an opportunity to serve the very most important frontline responders in the U.S. That's an honor. We're able to make the business around it, you know, attractive for us.
So all checks many boxes.
Yeah. Okay. Let's shift to consumer wireline. You've laid out a plan to reach 25 million fiber homes by the end of next year.
30.
Sorry. 30. Yes.
Locations. Yes.
I was thinking by the end of 2025, and but I've also talked about the intention of expanding further post-2025, so how successful has the fiber build-out been, and, you know, how are you measuring that success?
Yeah. A great question. Here's, you take a step back. We really started to lean into fiber 3 years ago. Like I said at my opening comments, we've more than doubled our fiber revenues. We expect to get to 30 million locations next in 2025. We've announced that we have an opportunity for an incremental 10-15 in our own footprint beyond that. All that is aside from the amounts that we have invested in Gigapower, where we are the anchor tenant. Our 50/50 JV, we are the anchor tenant. And that is in phase one. That's expected to be 1.5 million subscribers or locations past.
Yeah.
And in success, if we're penetrating that and getting returns, there's no reason why we would stop at 1.5 million. So all of a sudden, you start to see the opportunity set, you know, 30 million next year, 30 million locations next year, an incremental 10-15 we're going at thereafter, and whatever's done in Gigapower. And we haven't really, we don't understand yet what the opportunity's gonna be in BEAD. So all that makes us feel really good because relative to when we originally greenlit the business cases, we are penetrating fiber faster. Our ARPUs are higher.
Mm-hmm.
Our churn is lower. So there are lots of really good things happening. And I take a step back, and I say, the only limiting factor is the CFO saying, "We've gotta do this, and at the same time, deliver.
Right.
But we couldn't be more pleased. The ability to then take that expanded TAM in fiber locations, pair it with our wireless product, and drive churn lower, really prospects are really good for us as we look out the next few years.
Yeah. How about ARPU? I mean, fiber broadband ARPU has been growing over the past few years, but, you know, still a discount to other fiber-to-the-premises providers. So how should we think about the pace of fiber broadband ARPU growth going forward?
You know, what's been driving the growth importantly is customers choosing to buy into higher-priced plans to give them more consumption. When you look at the consumption patterns over the last several years, and we think there's no reason why they shouldn't continue, fiber will be having ample broadband at the right speeds symmetrical. Fiber's the only solution that could provide that. And so I think we have a natural ability, look, through customer self-selection to move up the ARPU stack coupled with, you know, given the value that we are conveying, there's no reason to believe we're not gonna be able to take price, especially when we're at a discount to cable on a like-for-like plan.
Yeah. What about, you know, from a competitive standpoint, you know, do you think you can sustain broadband subgrowth and ARPU growth as the cable operators continue to, you know, sell discounted wireless bundled mobile with broadband, and also as T-Mobile and AT&T continue to push forward with fixed wireless?
Why should you know, I would tell you, just look at what we've done. We've done this at a time where cable has gained significant share.
Yeah.
We've continued to grow. So, I think if we just stick to our play, give our customers what they want, compete for the new adds that are in the marketplace, and as it relates to broadband, look, it's a better product at a cheaper price. So I think there are enormous opportunities there.
Okay. And then I wanted to ask you about AT&T's fixed wireless product. So the company relaunched it in August of last year. How should we think about the trajectory of fixed wireless subgrowth? And, you know, I know that you're using the product in a, you know, a different way than your two largest competitors. You know, maybe if you contrast, for the audience, you know, how you're using it in your business, relative to them.
Sure. Sure thing. Fixed wireless, you know, probably right as I was taking on the role, number one question I was getting was, "Why can't you do more fixed wireless? Why don't you lean into it the way your peers are?" At the time, what we said is, "It's a product that we would consider using as a catch product in sparsely populated areas. And there may be some interesting use cases in small or medium-sized business." We introduced a consumer product last year, and the way we are using it is catch product, sparsely populated areas. We're gonna introduce a business product, a new iteration of a business product that is also gonna be. I would expect to be small to medium-sized businesses that don't have the significant bandwidth consumption.
Why, why do we put a caveat unlike others? It's we understand that the cost to serve bandwidth on a mobile network is much more expensive than a fixed network. And if you are a high-consumption user, you are getting a pr you're selling a product at a discount to fix, and it's gonna cost you more to serve that product. And we just never thought the economics were attractive long-term to use it as a solution for consumers on a broad-scale basis. And our views on that haven't changed. Yeah, while it may feel good today to those that are really leaning in, over time, the cost to continue to add capacity to the network would make many of them rethink the offering.
Okay. I wanted to ask you about profitability in consumer wireline. Margins were 31% last year, which is at the low end of scaled operators in the industry. So, you know, how should we think about margins, you know, going forward and, you know, the opportunity to expand them? And, you know, how do you ultimately bring margins up to, you know, say, more industry levels or, you know, kinda top-of-the-industry levels?
Yeah. Here's the important thing to keep in mind. We have in that business unit, we are carrying a massive copper infrastructure that's been in place that's still producing cash for us but also comes with a big fixed cost. And, you know, we're going through a product lifecycle. At some point, you're gonna get to critical mass that you're gonna be able to decommission and take out some of this cost. And what will be left is a world-class fiber network with very attractive maintenance profile, very attractive energy consumption. And so there is no reason why you shouldn't have margins with the same characteristics, if not better, than our broadband peers.
You've talked a little bit about convergence already. You know, maybe if you could just talk a little more about, you know, your stance on convergence of wireless and, and wireline broadband services and, you know, just, you know, your kinda strategy going forward to really, you know, take convergence to the next level, if you will.
Okay. Here you know, you take a step back. You have the wireless companies providing broadband on their wireless network. As I just described, long-term, the economics around that are not sensitive. You have the cable companies providing wireless using somebody else's network. Long-term, the economics of that are not very attractive, and you are beholden to the MVNO, your wireless partner, to give you a good deal. We are uniquely in a position to provide both on our network. We plan to increase the TAM from where we are today. You know, we ended last year with 8.3 million fiber subscribers, you know, penetration of about 39%. There's no reason why penetration shouldn't go up, you know, such that we have 50% of the market in any given market because we're choosing to go to markets where there is one in one fiber incumbent and not two.
And we think in that regard, we're gonna be able to get our fair share. And you layer on top of that the ability to add a wireless product whereas we don't have it. The churn profile goes down radically. The cost to serve is, and the ongoing customer acquisition cost is lower. So I, look, we are in a unique position that no one else has. And the opportunities are in front of us. We don't have to go out and acquire, do any acquisitions in order to build upon the advantage we already have.
Okay. Let's shift to business wireline for a moment. This segment has seen EBITDA decline pretty significantly over the past few years. How should we think about the trajectory of business wireline going forward? You expect EBITDA to stabilize, you know, exiting this year or at some point longer term?
Yeah. Look, it's, it's been declining the last few years, and we've managed to grow the overall business. And I think that's one that we are committed to continuing to do that. And I'm at it every way I can. With that said, I think we have opportunities to do better. Here's where it comes down to how do we just take the fiber that we are laying and really lean into small and medium-sized businesses in those communities. There's no reason why we can't do more of that. Our TAM will expand, and we will bring a better product than cable at a much more attractive price point and, with very little incremental cost to extend to the local businesses. Two, I think we have an opportunity to really lean in on AT&T Internet Air for Business.
That is that has to be part of the growth vector. We're seeing growth in IoT relationships. It's been growing nicely, and I would expect that to continue. And our mobility relationships in business are very attractive. That's where you will get growth. But we are still, we're in the middle innings of legacy declines. It's massive revenue legacy voice and data and VPN, massive revenue base that will continue to decline, but we think we can manage that and still grow the overall company.
Okay. Middle innings. Okay. Is it, does stabilization in EBITDA largely come from just waiting for legacy to get small enough, or can you get there just with the growth in the, you know, the strategic services like fiber and fixed wireless?
I think you're gonna need both. You're gonna have to grow, you know, grow your connectivity revenues. You know, those are high-margin revenues that, as they grow, they fall to the bottom line. And over time, we're gonna have to, we're gonna have to live through a legacy decay curve. And I think there are plenty of costs to take out as those legacy revenues decline. And, look, that's, that is the pivot we are on, and, we've been on for the last few years, and we've managed to just still grow the company. We have line of sight to continue to deliver even with that dynamic in place.
Yeah. You touched on costs a little bit already, but I wanted to ask you about your, you know, your cost transformation goals. You've outlined an additional $2 billion+ of planned cost savings in addition to the $6 billion run rate that's already been achieved. You know, where are these, these cost savings coming from? Is it, you know, is it copper? You know, where, where, w?
Yeah. It's important. Look, we understood we needed to invest significantly.
Mm-hmm.
We understood that we had legacy businesses that were gonna decline. So we leaned into our transformation program with those being our understanding we have a challenge ahead of us, and we have to become more efficient. And so where did it come from? It came from things like shutting down retail stores, getting much more efficient with customer service, getting much more efficient in field dispatch through both of those through the use of artificial intelligence, all before generative AI, which will give us incremental opportunities. We also shut down a lot of our real estate. You know, we and our administrative staff all contributed to the $6 billion+. And I would tell you, as I look ahead, the opportunities remain in real estate, remains in optimizing customer service, field dispatch.
Look, when you think about your own purchasing relationships, most of them happen digitally now. I would, I would, I would guess. We still have a lot of opportunity to drive more digital sales. So all in all, look, it's we still have plenty of opportunity. We said $2 billion+ by the middle of 2026. All that is part of how we're gonna continue to manage the overall decline in business wireline and still grow the overall company.
How do you, how do you balance the cost-cutting with making sure that you're making all the necessary investments to drive sustained growth?
Yeah. Look, if you look at how much we've invested, and we're investing more than anybody else. And I would expect because we are pursuing a dual strategy that we, in terms of capex, will probably continue to do so. We understand the importance of doing that, and it will build a sustained advantage long-term. That's something we don't wanna give up, and we won't give up. And fortunately, we're at a point where we can invest meaningfully and delever and cut costs 'cause there's a lot of legacy costs that will come out as the business, as the legacy revenues fall away.
Yeah.
I mean, you know, I mean, this I don't mean to bore you guys, but look, you have multiple billing systems to serve legacy products. You have all sorts of legacy infrastructure in our central offices that are needed, and you're not able to shut it down because you're servicing a legacy footprint. Over time, those will go away. And that gives us enormous confidence that we should be able to drive margin expansion long-term.
Okay. Let's shift to network and CapEx for a moment. The midpoint of your CapEx guidance is about $2 billion below last year's actual CapEx. What's driving this step down, and how do you see CapEx trending beyond 2024?
One thing to just keep in mind, we guide to capital investment. Capital investment is in-year capital expenditures plus payment for capital incurred in the previous years. Last year, a big part of our capital investment was to pay down bills that had happened in 2022. As we look out this year, a larger portion of our capital budget will be towards projects in-year. So we are actually doing more things in 2024 than we did in 2023 as it relates to new revenue-generating revenue-supporting initiatives. And this is why we've been saying it's really important for us to manage down our vendor payables in addition to our on-balance sheet debt because that gives us an opportunity.
If you clear enough of that out, more of your spend is gonna be on projects that will produce revenues even though you're spending on an absolute level less.
Yeah. And you mentioned that, you know, once you reach the fiber goal at the end of 2025, the 30 million locations, you know, you plan to continue to build. I mean, is there any way you can help us to think about, you know, what the pace of that build-out might look like? You know, is there any reason to think it would change from what you're doing currently?
Here is the important thing. You get to middle of next year, we would have hit our leverage target, right? And assuming we remain at 2.5 turns and given, you know, where interest rates are today, we're probably comfortable holding within the 2.5 turns umbrella. So the capacity that gets freed up by just remaining at 2.5 turns gives us an opportunity to continue to invest, perhaps even more than currently, in order to build and also look for other ways to deliver value to shareholders, whether that be buybacks, incremental dividends, in addition to investment in fiber. So all those things would be on the table, and the board will have options in terms of deciding what it wants to do in terms of overall capital allocation.
We've been working really hard towards this, and it's really nice that, hey, we have line of sight. It's really pretty exciting time.
One of the opportunities, I guess, for capital allocation is the BEAD program. So as those programs slowly take shape, how do you expect, you know, AT&T to be involved and participate in the program?
Yeah, it's, you know, I think time will tell. Here's what we've said. One, we think it's incredibly important to help bridge the digital divide. No questions asked. It's something. It's a core part of our overall mission. You know, with that said, in order to put shareholder money to work, it also has to provide us with a sensible return. So we know how much it costs us to build homes in our footprint, and we feel really good that, with what's ahead of us, that we have really attractive opportunities. The BEAD funding will be incremental to that. And the real question comes down to, with the subsidy, what does, you know, net of the subsidy, how does the price per location pass compare to our own operating?
To the extent it puts us at a significant disadvantage, like, you know, we, you know, we'd have, I thought that would not be attractive to us. So it's really important that that is this sensible way and realistic expectations on the level of subsidy needed in order to really help build out. And until the rules get set.
Mm-hmm.
It's hard to quantify what that opportunity is.
Okay.
But importantly, we are betting our cost to build is lower than anybody else's, and we are really good at it. And so I would submit that we are in the best shape.
Yeah.
To take advantage of it, but it has to be sensible.
Okay. Then, maybe we'll wrap up with free cash flow and capital allocation, which I know you touched on a bit already. But maybe if you could just talk about your confidence in meeting the free cash flow guidance this year of $17 billion-$18 billion. And also, you know, how should we think about the impact of bonus depreciation if it is reinstated by Congress?
Well, first, just to level set, this year, we got it to $17 billion-$18 billion. That's coming off of a year where we delivered $16.8 billion. We're gonna grow our earnings this year, and we got it that we're gonna grow EBITDA up 3%. Our capital midpoint is $2 billion less. So 3% growth, $2 billion less. I'll feel pretty good about that. Oh, if you add to that an increase in taxes expected, that's how you get to $17 billion-$18 billion, largely. You know, I take a step back and ask, "Okay, what could go wrong?" Look, the economy's always a big question, but so far, the consumer is healthy. The economy's hanging in there. But besides that, I feel really good about the trajectory.
Yeah. Great. And then, you know, I you've probably already touched on it, to the extent you're going to, but I'll throw it out there anyway. You know, just capital allocation priorities, you know, once you do get to the 2.5 times, in the first half of 2025, should we think about that as, you know, probably buybacks, or, you know, how would you?
Look, first and foremost, it is a gonna be a board decision. Here's what I would tell you. We understand that investors have been patient with us and, in going through this, transformation of the company. With that comes a responsibility to make sure we are looking to reward shareholders, whether it be through earnings growth or other mechanisms. I'm sure all those things will be on the table, whether it's buybacks, whether it's dividend increases, all things that we will put for the board's consideration.
All right. Great. Thanks, Pascal. Great discussion. Thanks for joining us, everyone.
Thank you, everybody.