Okay. All right, we're live here. Thanks, everyone, for joining us for our second session of the day. I'm really pleased to introduce Pascal Desroches, who's the Chief Financial Officer of AT&T. Pascal, welcome.
Thank you for having me. It's a pleasure to be back two years in a row.
Maybe just talk first about a high-level topic. I mean, I think both yourself and John Stankey started in your new roles as CEO and CFO in the second half of 2020. Can you just talk about the transformation that AT&T has undergone under John's and your tenure over the past 2.5 years? You know, how the company has evolved and progressed since then.
Yeah. Look, you know, at the outset, let me just say, I couldn't be more proud of the organization for rallying around John's vision, to reposition the company. Remember, when John took over, in the middle of 2020, we were in the early days of a pandemic. We had one of the, probably the highest debt loads in corporate America. We had businesses that needed to be re-energized in terms of growth. We had a cost base that wasn't competitive and a number of different businesses that probably didn't quite have the adjacencies and created a degree of complexity that wasn't helpful.
We also understood that we were at a point where we were about to embark on a significant investment cycle, whether it was spectrum, whether it was launching HBO Max globally, all problems that needed to be solved. During that time period, we re-energized growth by investing more in the business, including $37 billion in spectrum that we purchased. We rolled out fiber to homes in our footprint at a faster pace than anybody, we were already the largest fiber provider. We had significantly simplified the company. DirecTV was separated, it's an asset now that it continues to be optimized by a great management team. Also look, WarnerMedia was put in its own capital structure.
We've delevered in the process, resized the dividend, and you now have a company that has a clear path to continuing to deleverage. At the same time, last year, we grew customers, revenue, earnings. This year we've guided that we're gonna continue to do just that, and also grow free cash flow in addition to paying a really healthy dividend. When you think about AT&T, it's a company that year in and year out, you should hold us accountable for continuing to grow both top line and bottom line in cash and continue over the next couple of years to delever, because I still think on balance, our leverage is a touch high relative to where we want to be aspirationally. All in all, I couldn't be more proud.
As I look ahead, I mean, one of the things that I think is an enormous opportunity for us is to continue to take costs out and improve the operational excellence, operational execution of the organization. One of the things that we know we've been operating the last, you know, decade with a cost base that's probably at a bit of a disadvantage relative to some of our peers and makes it much harder for us to invest at the competitive levels that we need to. That is part of the next iteration of the next evolution of the company over the next several years.
I guess maybe if you could talk about the major priorities for you and the management team, you know, this year. You know, what are the major things that you're focused on?
You know, as I said, simply put, we're gonna look to grow the business, revenues, earnings, take share, grow free cash flows, and continue to delever. As part of that, as I said, you know, it's really important that we take our cost base, which is still burdened by a significant legacy copper footprint, and rationalize it over the next several years. We expect to rationalize our copper footprint by 50% between now and 2025, and with that comes significant fixed cost reductions that should come through and drive margin expansion.
Sure. Maybe if I could just follow up on that for a second. The 50% reduction, how much of that is within the existing fiber footprint versus, you know, where you might have to build or find maybe a wireless solution to?
Look, it's all within our existing footprint.
Okay.
We're gonna reduce it by 50%, and that's gonna come with, you know, the way to think about this is we are supporting, on the one hand, growth in our through our fiber rollout, but also have an existing copper infrastructure that's on different billing systems, that has a different fixed cost profile that we have to rationalize over the next several years. We're gonna do that, and it's one that we've committed to a 50% reduction by 2025.
I guess, maybe just to complete the topic of, you know, cost takeouts. I know it's, you know, it's been a recurring theme for you, as you mentioned. You know, we hear a lot about cost initiatives from companies, and candidly, you know, sometimes we don't really see them show up in the numbers. Is this something that we're gonna be able to tangibly see? You know, can you know, help us understand, you know, beyond the copper retirement, you know, where you expect to get them from, any other areas?
Yeah, sure thing. Look, I recognize it may be difficult to fully appreciate what we have done. Through the end of last year, we've taken out $5 billion of costs. The thing to keep in mind is you have different asset bases in each of the different years. Some have been disc ops, some have been continuing op. You couple that with a significant inflationary environment and peak investment levels. I understand how it may be difficult to see through. When I take a step back and what I'm able to see is we've managed on an organic basis, when you look through it all, have cost, a cost base that is relatively flat despite significant inflationary headwinds and significant ramp-up in investments.
Remember, we were being outspent in 2018 2 to 1 by our peers in terms of the level of dollars that we were putting out in investing on promotions for our customers. We caught up, all that has been funded as part of our overall cost takeout, and we're able to keep costs relatively flat as we move forward with as those investments have plateaued. Just like you saw in the back half of last year, once we started to lap those investments and they were no longer growing, you started to see margin expansion, you started to see acceleration of earnings growth. That's really what we're holding ourselves accountable to, and we fully expect that to happen.
Okay. maybe we could talk about the mobility business for a bit. revenue growth in wireless has been pretty healthy balance of volume and ARPU over the past couple of years. How do you see that balance going forward in the context of the 23 guidance of 4%+ wireless services revenue growth?
Yeah. Look, I would expect, pretty much more of the same as you saw last year. We are at a point where, we expect our ARPU to grow. Remember, part of what had been suppressing it is the initial ramp-up of promotional investments that gets amortized against your top line, service revenue. We have now, that investment has plateaued. As a result, we started to lap that, and that's coming, that's driven the lapping of that flow growth, along with migrations to higher price plans and a return to, international roaming. The migration to higher price plan, we expect that to continue. We've been seeing it the last several years. That's expected to continue.
We're not quite all the way back on international roaming. You only need to see the travel demands to understand that that has a secular tailwind. That coupled with, we're gonna continue to look for opportunities to, are there ways for us to drive additional value through our pricing, through different pricing mechanisms, if appropriate. It's one that I think we have plenty of tools. You add that on top of our transformation efforts, we feel really good about the future of the wireless business. Even though the industry's growth had normalized in the back part of last year, we still took more than our fair share.
Maybe that's a good segue to wireless volumes. Any insights you could share on how industry volumes are holding up so far this year? Could you talk about your expectations for industry volume in 23? You know, how should we think about your net add performance this year in that context?
You know, let's go back to 2022, just level set. What we saw in 2022 was, the first half, a continuation of the activity, the elevated subscriber activity that you saw in 2021. As we made our way through the back half of last year, I'd say, we definitely saw a moderation in industry demand, but we still performed really well. Sitting here today, I'd tell you the environment remains very healthy. Not at the elevated pace that we saw in the early days of the pandemic, but still really healthy.
Yeah. How about on the promotional environment? What are you seeing in terms of promotional intensity in the market today across the industry?
You know, look, this is an industry that has always been competitive. I don't expect it to be any less competitive, but, you know, in a three-player market, I think we have no intentions of degrading the economics of our business. I would say, well, yeah, it's competitive and there are promotions, but nothing out of the norm. It's a continuation of the environment we've seen.
Yeah, no increase in promotional intensity since last quarter?
No, I wouldn't say. There, there is. Yep.
Okay. I think you touched on it a little bit, but maybe just to go maybe a little bit deeper if you can. Can you talk about the moving pieces of Postpaid Phone ARPU growth this year? You know, when you think about mix, shift to premium, promotional impacts, international roaming, et cetera.
It is all those, it is all those things. I think a big piece of it is the continued migration to higher price plans. I think roaming will continue to be there, and it will continue to grow. you know, on top of that, you know, this year we're still benefiting from the price increases that we put in place in the middle of last year. That's gonna provide a tailwind, a full year tailwind versus half a year last year.
Right.
All those things together give us every confidence that our ARPU should grow.
Maybe if I could just follow up too on just the volume topic a bit. You know, one of the things I think that, you know, has been talked about is, the shift toward companies, you know, issuing devices, you know, moving away from Bring Your Own Device. Any sense for just, you know, broad strokes, how early we are in, you know, in that trend? Is that a multiyear secular trend that you think will continue to drive growth?
I think so. Look, here is when you think about increasingly, employers having to worry about security, information security, there is. They wanna be able to control the devices that they provide to employees. As a result, I think increasingly there will be employees who wanna have, in addition to their work device, a personal device, so that they can have a degree of control. 'Cause we know that once a device is provided by the employer, it's the employer's device, and there are all sorts of restrictions that are imposed. I do think this is a secular tailwind that I would expect to continue.
No TikTok, right, on those devices.
That's right.
Let's talk about margins in wireless. Wireless service margin I think ticked down slightly over the past couple of years, even though EBITDA growth has still been solid. You know, what are you expecting directionally for service margins in 2023, and what are the dynamics underlying that margin trend?
Yeah. Look, we haven't provided specific guidance on margin, but here are the things that you have to keep in mind. One, one of the things that had been contracting margins had been the investments that we made in catching up on promotions.
Right.
We are now at a point where that is more steady state. Two, we expect ARPU and service revenues to grow on a cost base that is reasonably fixed, and you can do the math to see how what that implies in terms of overall margin trends. We feel really good about the margin trajectory and all of that is also gonna be helped by our transformation efforts. Remember, we continue to find ways to rationalize our cost base. Think things like customer self-service. You know, you call up, you have a problem, and through automated technology, you're able to resolve it or direct the call to the right place in order for it to be solved quickly. That's really helped reduce the amount of call volumes.
All those things together, and also a digital channel where a lot of our upgrade activity continues to come through, all those things, will also help in driving margin expansion.
Let's talk about 5G and the network. What are you seeing in the emerging 5G enterprise segment of the market? Have Edge Compute and Private Networks been slower to materialize than you expected? What are your expectations for when 5G enterprise could start to become material to revenue growth?
Yeah. Look, it's, let me start by saying that this is happening exactly at the pace we thought it would. It, you know, we never expected those advanced networking services to be meaningful in the next two to three years. We don't, and our plans are not based on that. We do, however, based on the product development work that we're doing with a number of different enterprises, we are confident that it will develop, but it's just gonna be over an extended timeframe. That is consistent with what we've thought all along. We feel really good about the services that are gonna be unleashed by that.
Think about, some of the wearable devices and then the importance of very low latency, remote medical procedures, all things that are gonna be enabled by the advanced networking solutions. We are in the early days of that evolution.
Maybe shift to fiber and consumer business for a bit. Your fiber to the home build-out now passes 24 million residential and business locations, that's relative to the target of at least 30 million by the end of 2025. How successful have you been in penetrating newly passed homes and businesses? How do the ARPU and churn profiles compare to non-fiber to home internet access subscriber base you have? It feels like you pulled back on the cadence of your fiber build. Just wanted to ask you know, what has really changed there, and, you know, what are your thoughts on the build trend going forward?
Yeah. Look, if I don't answer all your questions,
I'll remind you. Sorry.
Remind.
A lot in there.
All right. First, overall, we had always guided to 30 million plus homes by 2025. That remains our guidance. If you were to do the rough math, that would imply 2-2.5 new homes passed over the next 3 years.
Mm-hmm.
In terms of the characteristics, I think it's fair to say that it's probably costing us more than we thought when we started. Yeah, the costs have gone up, but we're also penetrating much faster than we thought and, you know, nearly 2x the level of penetration in the first year that we have seen historically. We're really, we're really pleased with how we are driving penetration on the build. Also, the ARPU is at a higher rate than we had assumed. On balance, the returns are actually a little bit better than we thought. You know, you take a step back. Look, this is a product that is durable, that the maintenance associated with it is much more attractive than our copper footprint.
All are really positive tailwinds, but it just takes a while but it's something that we are more excited today than we've ever been about the opportunity. All of that doesn't include the money that we expect to secure from the government as part of the overall broadband infrastructure bill. It didn't include the $one and a half million we've already announced in our Gigapower partnership with BlackRock. In success, I would expect that to also be something we expand upon if it proves out as we expect.
Yeah. I think you hit all the points there. Good job. Let's talk about consumer wireline revenue growth. Your consumer wireline business is now seeing consistent revenue growth, and even stronger EBITDA growth. Do you think that revenue growth and margin expansion can continue on the back of the build-out that we were just talking about?
You know, absolutely. If you, we're at a point, and we reached this last year, where the absolute quantum of fiber revenue exceeds the copper-based revenue, and it's growing much faster. Mathematically, we should continue to see revenue growth. Also, importantly, and I said this, but I think it's worth underscoring, a big attraction to fiber is not only its effectiveness, but the maintenance characteristics are very attractive. There are much fewer dispatches for repair versus copper. It's one that Fiber tends to be less impacted by weather events. All those things make it not only attractive but very profitable long term.
Just, I guess, maybe on the fiber side, can you shed any light on how much of your gross adds are typically existing AT&T internet access subscribers that are upgrading from a legacy service versus customers that are coming, you know, say, directly from competitors that are new to AT&T?
Yeah, I think, you know, here's what we have said publicly. You know, think about it as roughly half are new to AT&T. They're in our footprint, but the other half are upgrades of existing customers. Look, I view both of those are really attractive because the nature of the legacy services are they're gonna be a future churn event if you don't catch them. I'd say it's about 50/50. Customers that are coming in new also give us an opportunity, if they are not wireless subscribers, to get them to be wireless subscribers because how attractive that service is. The NPS scores for fiber are really attractive.
Generally, what you will find is, we have a pretty meaningful uptick in our wireless penetration when we have fiber. All those things make us excited about the opportunity.
Yeah. Maybe talk about just bundling for a second. Fixed broadband is obviously a great business on its own, but I'm curious to know how much of your strategy is motivated by wireless/wireline convergence. It would be great just to hear your overall perspective on how you think that market evolves from here.
You know, if you look across broadband and wireless in general, everybody's trying to create some version of a bundle.
Yeah.
We are the only company that is able to do so organically using our own network. Also look, fiber, I think, is something that when you look at the NPS scores, when you look at where it is priced relative to cable, you know, we have an opportunity. It's a better product at a lower price point. We have an opportunity to grow that price, and all that is before the ability to add additional customer lifetime value through deeper penetration of our wireless footprint. All things really, really good and, you know, fortunately, we're in the very early innings of this. Yeah.
You mentioned the Gigapower JV with BlackRock. How do you expect, I guess, you know, first off, the BEAD government subsidy program and the, and the JV with BlackRock to contribute to your fiber strategy? Are they likely to be material to the premises count over the next five years?
You know, just to make sure it's a level set in terms of why we did the BEAD, why we did the JV. We are committed to continuing to build over the next several years in our footprint, 30 million-plus homes. Plus, this is an opportunity when timing is of the essence to accelerate that build by partnering with someone for parts, for footprint that is outside of our traditional footprint. At a very light capital investment. You're able to do that, expand your TAM at a time where a lot of government subsidy is gonna come to the market.
You're in effect, whether it's through the Gigapower JV or through on our own, we're gonna be able to capitalize on that money coming into the marketplace over the next several years at an accelerated pace versus if we had just done it ourselves. We are committed to continuing to delever our balance sheet over the next several years. This is a capital light way to accelerate that build. I mean, if you think about it, this JV is gonna be leveraged, and we and BlackRock are each gonna put in half of the equity.
All right.
Look, yeah, really excited about it. We're gonna be able to bundle our wireless relationships through the sales of the service.
Gigapower allows you to play offense in gaining fiber outside of your traditional leg footprint and, you know, BEAD can help you to fund the build out of the less dense areas within footprint. That's kind of the way to think about it.
Yeah, that's right. That's right. BEAD could potentially expand the TAM of the Gigapower build as well.
Let's touch on fixed wireless. I understand you're in the process of reinventing your fixed wireless access product. What do you hope to achieve with the new version? How does fixed wireless fit into your strategy? Is it just about geography or, you know, is it also about demographics and affordability challenges, you know, of FTTH for middle and lower income subs?
Yeah. It's one. I think unlike some of our wireless peers, our view is this. Look, fixed wireless, in certain cases, it's kinda nice. It's a nice catch product where we have a copper customer that we're gonna get to in the next 12-24 months. Long term, it's not a solution we wanna put a lot of resources behind. Why? It's because it's not a great product and the customer ultimately is gonna reject it. I mean, at its core, that is our belief. When you look at the amount of bandwidth that is consumed in the home, over time, the customer's experience is gonna degrade, and we don't think it's a product that we wanna spend a lot of resources on.
Two, when you start to factor in, okay, what is the service being offered at in the marketplace? What is the customer acquisition cost? What is truly the expected lifetime of that customer? You start to pencil out some rough math. It's really hard to say that this is a product that's gonna be, that's gonna grow like gangbusters and provide really attractive returns. We are, you know, candidly, we'd much rather take our resources, focus on deploying more fiber. Also, look, I think our spectrum long term, we think provides us with a great opportunity to continue to experiment and ultimately roll out a new class of service. Let's not get distracted by chasing empty calories in the near term.
Maybe to shift to the macro environment, what are you seeing across your businesses as far as impacts, you know, right now from the macroeconomic environment? Are you seeing any impacts as they relate to volumes, you know, pricing, bad debt, collections, inflationary pressures, you know, just anything? Very open-ended question, but.
Yeah, look, it's one, obviously, given the breadth of our consumer relationship, I get asked all the time. Here's the way I would say, like the consumer remains very resilient. Is demand as high as it was in the first half of 2022? No. It's basically at the same volumes that we've seen historically. In terms of credit losses, since, you know, the spring of last year, we said that we saw an uptick in bad debt, but it really got us back to pre-pandemic levels, maybe a little slightly worse. That has not degraded at all over the course of the back half of 2024. Sorry, 2022. Collections.
We saw a normalization of the collection cycle last year. That has basically remained at around the same level that where we saw the uptick and the normalization last year. Although I'd say demand is solid, bad debt and collections are basically at pre-pandemic levels. Customer continues to hang in there.
Yeah. Wow. Maybe just talk about the balance sheet and free cash flow a bit. You know, regarding the 2023 free cash flow guidance, I think a few factors below the EBITDA line caused you to lower free cash flow guide in 2022 by $2 billion to $14 billion. Why did the 2023 guidance decline by $4 billion to $16 billion? You know, what are the factors that reduced the previous 2023 expectations for the amount of free cash flow growth you'd have? Really reduced it by 50% from $4 billion to $2 billion. I think on the 4Q 2022 earnings call, you mentioned that there is some level of seasonality associated with cash flow.
Can you just help us understand that seasonality, and is that a function of being more dedicated, being a more dedicated connectivity provider?
Yeah. Overall headlines on free cash flow for 2023. Relative to 2022, we expect to grow $2 billion or better. The piece parts are: we expect EBITDA growth, we expect lower interest costs. A big part of our expense for 2023 that we anticipate is amortization of the prior year promotions that we gave. The cash was spent, so that's an amortization. That's gonna create $2 billion of non-cash benefits. Those are the three big pieces. Going the other way, we would anticipate DirecTV to be about $1 billion. In terms of relative to the original guides that we gave, I think the big pieces are this. One, Business Wireline has performed worse than we anticipated.
Yeah.
There's no hiding behind that. I also think that inflation has been more than we thought, you know, and we've quoted like $1 billion plus beyond our original expectation. Also, the normalization of the collection cycle. We said last year that that cost us about $1 billion. You kind of put all those pieces together, should give you a sense for why we're off relative to the original guide.
Okay. On the seasonality piece of it.
Yeah. In terms of seasonality, here's the thing to think about in the first quarter. One, you have the biggest absolute level of device spend because you pay in Q1 for September through December device sales. Every year, that's gonna be a factor that you are spending your most on device in Q1. Two, that's when we pay our annual incentive comp. You know, last year was a record CapEx build, and there is an amount, like, a payable at the end of the year related to that build that hits in Q1. Also, look, we don't talk a lot about this, but, you know, our headcount sequentially in the quarter is down 7,000. I mean, there, 7,000 employees and, you know, that comes with a certain amount of severance.
all those things are gonna hit Q1 and depress it relative to what you would normally expect. Look, I'd be remiss, we have an extra payroll relative to 2022, you know, just where the way the calendar fall.
Yeah.
All those things are, will make Q1 the lowest quarter of the year, but we feel really good about our full year guidance.
Okay. Maybe, before we wrap up, just to talk about capital investment. You've guided the flat CapEx this year, followed by a significant decrease in 2024. Is there any risk to that decline next year not materializing as expected? Is the difference all related to the completion of the C-band deployment or the other factors involved?
I think you know we expect we will moderate CapEx beyond 2023. You know we are at record capital intensity over time, we would expect our capital intensity to be in the mid-teens. Last year, we were about 20%, not acceptable long term. I think we're gonna be largely complete with the C-band deployment. There's still gonna be some, but it'll be largely done. Also, we've been investing significantly in transformation. Some of the transformation work we've been doing to automate some of our systems, implement AI, all things that are producing returns. We've been at peak investment levels the last 2 years, including this year, you should see that moderate as you make your way beyond 2023.
All right, great. Well, thanks so much for joining us today, Pascal.
Well, thank you, everybody.