Q4 2021 AT&T Inc Earnings Call

January 26, 2022

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[music] Your conference will begin momentarily please continue to hold.

Ladies and gentlemen, thank you for standing by. Welcome to AT&T's fourth-quarter 2021 earnings call.

At this time all participants are in listen-only mode. If you should require assistance during the call, please press star and then zero and an operator will assist you offline.

Following the presentation, the call will be opened for questions.

If you would like to ask a question, please press, one and then zero and you'll be placed into the question queue.

If you are in the question queue and would like to withdraw your question, you can do so by pressing one and then zero.

And as a reminder, this conference is being recorded I would like to turn the conference call over to our host Amir Rozwadowski Senior Vice President Finance and Investor Relations.

Please go ahead.

Thank you and good morning, everyone. Welcome to our fourth quarter call. I'm Amir Rozwadowski, head of Investor Relations for AT&T.

Joining me 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 are subject to risks and uncertainties described in AT&T's SEC filings. Results may differ materially. Additional information is available on the Investor Relations website.

And as always our earnings materials are on our website. In addition, the SEC spectrum auction 110 results had been announced but we're still in a quiet period. So we're limited in what we can say. With that, I will turn the call over to John Stankey. John.

Thanks, Amir and good morning, everyone. I hope you're all doing well and a belated happy new year to all of you.

A year and a half ago, we began simplifying our business strategy to reposition AT&T for growth.

As you can imagine this was a significant undertaking requiring us to not only focus our operational efforts toward growing customers.

But also doing so in a manner that set us up for an improved profit trajectory in the coming years.

Simultaneously, we took on the task of structuring our communications video and media businesses in a manner that ensured their future success with the right capital structures access to capital. And most importantly, the ability to drive better returns in a manner consistent with their respective market opportunities.

I am pleased with the results our teams delivered last quarter last year and for the last six quarters. While this repositioning was underway.

We finished last year with strong momentum and growing customer relationships, achieving outstanding yearly subscriber growth across mobility fiber in HBO Max.

And mobility strong network performance and a consistent go to market strategy helped us lead the industry with about 3.2 million postpaid phone net adds that's more customers that we added in the prior 10 years combined.

We achieved this growth the right way with full-year mobility EBITDA up about $1 billion.

In fiber, we ended the year with a great build velocity passing more than 2.6 million additional customer locations.

We added more than 1 million fiber subscribers for the fourth consecutive year and full-year broadband revenues were up 6.5% as we returned our consumer wireline business the revenue growth.

We also surpassed our high-end guidance for global HBO Max and HBO subscribers, adding 13.1 million subscribers in 2021 more than any year in HBO's history.

HBO Max and HBO now reach a base of 73.8 million subscribers globally.

Warner Media is well positioned as a dynamic global business.

In addition to growing customer relationships.

We also continued to make great progress in repositioning our operations to be more effective and efficient.

We achieved more than half of our $6 billion cost savings run rate target, which we've reinvested into operations supporting our growth.

This includes simplifying and enhancing our customer experience, which has resulted in higher customer self-service lower customer churn.

And greatly improved mobility NPS.

And industry leading fiber NPS.

We also continue to rationalize our low margin business wireline services as we reinvest savings in the segments that support improving returns.

And you're familiar with the significant steps we've taken to reposition the company's assets for future success.

From our US video assets in Brio to our pending Warner Media transaction.

Together, these and other asset monetization will generate more than $50 billion and AT&T shareholders will own 71% one of the world's foremost media companies and the new Warner Brothers discovery at close.

We also continue to generate meaningful levels of free cash flow of nearly $27 billion in 2021 number we feel good about when looking at our business after the Warner media transaction.

So to summarize, we did what we said we were going to do last year.

I'm really proud of what our teams accomplished and we're very pleased with the momentum we have.

Turning the page to this year, we will be consistent in focusing on these same three operational and business priorities.

Now that our asset disposition initiatives are largely complete, I expect we'll take our execution to the next level. To that end, we're encouraged with how the process for the Warner Media deal is progressing and now expect the transaction to close in the second quarter.

Moving forward, we aimed to be America's best broadband provider powered by 5G in fiber and defined by greater ubiquity reliability capacity and speed.

We're confident we can achieve that because in wireless.

Our focus will be continuing our subscriber momentum while increasing the pace of our 5G deployment.

We're confident in our ability to compete with 5G and our disciplined approach to selectively targeting taking share in underpenetrated segments of the consumer and business marketplace.

While we're still in a quiet period, I can share that we're very pleased with the results of spectrum auction 110.

We received 40 megahertz of quality mid-band spectrum that we can begin to put into service this year, we plan to efficiently deploy it with our C band spectrum using just one tower climb.

We're on track to cover 200 million Pops using mid-band spectrum by the end of 2023, and our network is only going to get better as we effectively deploy our new spectrum holdings.

In wired broadband, we have the fastest-growing fiber network and expect to capitalize on the expansion of our fiber footprint and accelerate subscriber growth.

The best-in-class experience, we provide is getting even better with our multi-gig rollout, which brings the fastest internet to AT&T fiber customers with symmetrical two gig and five gig speed tiers. This will truly differentiate how our customers experience the internet.

Coming off an outstanding year with HBO Max, we plan to hand off the business with a strong exit velocity.

We look to further our international momentum and deliver more world class content reviewers.

When the deal closes, the investments made in both content and HBO Max growth coupled with strong execution by the team will ensure Warner brothers discovery is positioned as a leading global media company with the depth of content and the capabilities required to lead in the next era of media.

As we expand our customer base, we will continue to responsibly remove costs from the business.

We have a clear line of sight to achieving more than 2/3 of our $6 billion cost savings run-rate target by the end of this year.

And importantly, we expect to see these savings start to fall to our bottom line beginning in the back half of the year.

Our increased ability to reinvest in our business will fuel growth and allow us to deliver an even better customer experience.

As we further improve NPS and sustained low churn levels.

As we expand our fiber reach, we will be orienting our business portfolio to leverage this opportunity and stabilize our business wireline unit by growing connectivity with small to midsize businesses.

We also plan to use our strong fiber and wireless asset base broad distribution and converged product offers to strengthen our overall market position.

We're now at the dawn of a new age of connectivity where customers want more consolidated and integrated offers and we're well-positioned to meet that demand.

Our 5G network is already the best and most reliable and it will be enhanced by our accelerated fiber expansion and 5G spectrum deployment, a great reputation for advanced and reliable networking.

And our expertise to bring it all together for the customer.

We remain laser-focused on reducing debt and will strengthen our balance sheet by using proceeds from the Warner Media transaction to achieve a two and a half times net debt to adjusted EBITDA by the end of 2023.

We also expect to remain a top dividend-paying company after deal close with a dividend payout in the $8 billion to $9 billion range, where anywhere in that range should rank us among the best dividend yields in corporate America.

We're now in the middle innings of our transformation and the momentum we have is real and sustainable.

We are well-positioned post-deal close to have a capital structure and balance sheet that puts us in an attractive position relative to our peers.

In addition, we believe it provides us with the financial flexibility to invest significantly in our business and the flexibility to pursue additional shareholder value creation initiatives over time.

We believe it provides us with the financial flexibility to invest significantly in our business and the flexibility to pursue additional shareholder value creation initiatives over time.

We look forward to giving you more detail at our virtual analyst event, which we expect to host in March.

Now I'll turn it over to Pascal. Pascal.

Thank you, John and good morning, everyone. Thanks for joining us. Slide six should look familiar as our pre-release earlier this month already indicated, we continued to deliver growth in postpaid phones fiber and HBO Max. John just highlighted our full-year results. We're really pleased with them and expect the momentum we built in 2021

to carry over into 2022. Let's now take a look at our financial summary on slide seven starting with revenues.

On a comparable basis, excluding DirecTV and [Brio] for both periods consolidated revenues were up more than 4% for the quarter and about 6% for the year. Thanks to growth in our market focus areas. Adjusted EBITDA was down 8% for the quarter on a comparable basis. Growth in mobility was more than offset by a decline at Warner Media.

From increased HBO Max investment.

The new DIRECTV advertising sharing arrangements and lower contribution from basic networks. Our consolidated operating income results continue to be impacted by certain retained cost from DIRECTV that are in the process of being rationalized.

Apart from one immediate contributions, our communications segment EBITDA was up approximately 2% for the quarter.

Adjusted EPS for the quarter was 78 cents.

In addition to merger amortization, adjustments for the quarter were made to exclude our proportionate share of DIRECTV intangible amortization and a gain in our benefit plan.

For the year, EPS was up nearly 7% with strong organic growth in mobility.

Lower interest lower benefit costs and higher investment gains.

We exceeded our free cash flow guidance for the year.

For the quarter cash from operations was $11.3 billion. Spending increase year over year with Capex of $3.8 billion and gross capital investments totaling $4.9 billion.

Free cash flow for the quarter was $8.7 billion even with.

A year over year increase of $1.4 billion in Capex.

For the full-year free cash flow was $26.8 billion. Despite an increase in CAPEX of about $900 million and more than $4 billion and higher cash content costs.

Our total dividend payout ratio was about 56%. This included cash distributions from Directv of $1.9 billion.

Let's now look at our segment operating results, starting with our communications business on slide eight.

For the second consecutive quarter, our communications segment grew both revenues and EBITDA.

A big part of that growth was driven by our increasing strength in mobility, which turned in another solid quarter.

Service revenues were up 4.6% for the quarter and 3.7% for the year driven by postpaid and prepaid subscriber gains.

Postpaid phone churn continues to run at low levels and in fact, hit a record low for the full year, our strong subscriber momentum continues with industry, leading postpaid phone growth.

Prepaid also continues to deliver impressive results with phone churn of less than 3% and revenues up mid-single digits cricket momentum continues with strong ads and phone churn substantially lower than 3%.

Mobility EBITDA was up more than $300 million driven by growth in service revenues and transformation savings. This growth comps without a material return to international roaming and with [inaudible] shutdown costs of about $130 million during the quarter.

We remain on track to successfully shut down our 3G network next month and expect 3G shutdown impacts to peak in the first quarter of 2022 at about $250 million.

In addition, we expect another $100 million of expense in the first quarter associated with investment in our first net operations and the completion of support funding towards the Caf II program.

Business wireline EBITDA margins continue to be stable as we rationalize our portfolio of low margin products.

In fact, margins were up 50 basis points year over year, thanks to our transformation process.

This rationalization process will continue in 2022 and as we lap the beginning of this process, we should see improving revenue trends in business wireline in the latter part of 2022.

We believe we're really well-positioned in the enterprise space. And there is an interesting dynamic as public and private networking start to evolve. We have the account management infrastructure, the consulting expertise and capabilities to support those businesses through that evolution as converged wireline and wireless solutions become to norm.

One.

At the same time, we are energized by the opportunities that our fiber expansion creates in the small to midsize business segment, and we plan to be more active there going forward.

Turning to consumer wireline.

Our fiber customer growth in fiber network expansion continues and we continue to win share wherever we have fiber. We added 271000 fiber customers even in the traditionally slow fourth quarter and our fiber network continues to get even better with our new multi-gig speeds for AT&T fiber.

Driven by our strength with fibre, total consumer wireline revenues were up for the third consecutive quarter.

We had sequential EBITDA growth in the fourth quarter. Segment EBITDA did decline year over year due to a one-time pandemic related benefit in last year's fourth quarter and higher network costs, including storms in the quarter.

Let's move to Warner Media's results, which are on slide nine.

Warner Media revenues were up 15.4% led by strong content licensing and DTC growth.

[DTC] subscription revenues grew 11.5%, reflecting continued success of HBO Max partially offset by lower wholesale revenues related to the termination of our arrangement with Amazon at the end of the third quarter.

Content and other revenues were up 45%, reflecting higher television licensing and theatrical releases.

Advertising revenues were down about 13%, primarily due to lower audiences with tough comparison to the political environment and last year's fourth quarter.

Costs were up year over year due to a significant increase in programming and marketing, including the international launch cost for HBO Max.

Incremental HBO Max investments for the quarter was approximately 500 million. The fourth quarter also included the impact of about $380 million in Directv advertising revenue sharing costs.

We also launched an incredible content in the fourth quarter, including the premier of the hit series and just like that and the third season of succession.

With the production team operating close to full throttle, we expect peak content investment in 2022, with an even stronger release schedule, including.

That Batman.

Winning time to rise the Lakers dynasty.

And the highly anticipated Game of Thrones prequel, House of the Dragon.

Now, let's look at our 2022 guidance on slide 11.

What we're showing you today as a full-year view of our consolidated revenue outlook, excluding DIRECTV and free up from both periods.

Our outlook does include a full year of expected results for Warner Media and Sandra.

We also included our full-year expectation for Warner Media standalone contribution to help you model post-close.

We now expect the WarnerMedia discovery transaction to close in the second quarter.

Given this, we plan to update guidance for [inaudible] at our upcoming virtual analyst event in March.

Until then, let me walk you through our expectations for the year.

First, we expect consolidated revenue growth in the low single-digit range with wireless service revenue growth of about 3% plus for the full year.

Mobility EBITDA is expected to grow low single digits plus over the course of the year.

As we continue to take disciplined share of subscribers with attractive long term value.

As noted earlier several onetime related impacts such as peaking 3G network shutdown costs are expected to impact year over year EBITDA trends in the first quarter.

Consumer wireline revenues and EBITDA are expected to grow on improving fiber subscriber trends. However, we expect front end loaded investments to impact first quarter year over year EBITDA trends as we wrap up promotional efforts around our new multi-gig offerings.

As noted earlier.

We expect year over year comparison pressures to ease in our business wireline segment through the course of the year. However, we expect product rationalization to peak in the first quarter, resulting in more pronounced margin pressures in the first part of the year before recovering in the back half of the year.

Consolidated adjusted EPS is expected to be in the $3.10 to $3.15 range.

This guidance reflects one immediate declining contributions due to anticipated investment initiatives.

A 200 basis points increase in our effective tax rate and no anticipated investment gains. We also expect adjusted equity income contributions from DIRECTV to be about $3 billion for the year.

Look for more details on our earnings outlook during our upcoming virtual analyst event.

Gross capital investment is expected to be in the $24 billion range and capital expenditures in the $20 billion range.

Free cash flow is expected to be in the $23 billion range.

That includes expected Directv cash distribution of approximately $4 billion.

And $2 billion in higher expected cash taxes in 2022, reflecting the expiration of immediate expensing of R&D and lower limitations on interest expense deductions starting this year.

We expect WarnerMedia's full-year contributions when including [inaudible].

Revenues in the 37 to $39 billion range.

EBITDA in the $6 billion to $7 billion range.

And free cash flow contribution of approximately $3 billion as we expect 2022 to be the peak investment year for HBO Max.

Amir, that's all presentation, we're now ready for the Q&A.

Thank you, Pascal. Operator, we're ready to take the first question.

Thank you.

As a reminder, if you wish to ask a question at this time, please press one then zero on your telephone keypad. You may withdraw.

your question at any time by repeating the one that zero command.

And our first question today comes from the line of Simon Flannery with Morgan Stanley. Please go ahead.

Great. Thank you very much, good morning, John, good to hear the updated timing on the deal close. Can you perhaps update us on your conversations with the regulators and what gives you the confidence to move that up? And when do you expect to give us the clarity on how the deal will be structured? What the dividend policy will be is that going to be in the March meeting?

And then if you could just give us color on what we should be expecting with the CAPEX this year? What's the 5G buildout this year? What's the fiber buildout this year? Any color there would be great.

Hi, Simon. How're you doing?

So first of all.

Where we are, when we said the transaction up and announced it.

I think I indicated it was really important for us to put a transaction out there that we felt like.

We had high degree of confidence so we can work through the regulatory process.

And I really pleased, the team has done exactly that and if you kind of wanted the

Prototype of the timeframe on when we expected various approvals and processes to work through we have tracked right to the likely case analysis on that.

As you are aware, we've had several milestones over the last couple of weeks, including clearance in the EU, we've gotten through our filing process with the SEC.

You kind of look at where we are in other international regulatory domains and what our exchange has been with domestic regulators and all of that is going right to pattern as we expected.

And we don't see anything that causes us concern and consequently

Raising our confidence level that we can tighten that timeframe of when we believe we will have everything kind of lined up and be ready to go some time.

during the second quarter. So I'm really pleased about that. I think everybody feels pretty good about where things stand. There is still work to be done.

Always is. There's a lot of moving parts, but based on how these things go.

I feel about as good as I can feel at this point in time, and we're now moving into the mode of the cycle, where we're making what I'll call the final preparations as opposed to anticipating what we have to work through.

In terms of clarity on structure, I would tell you were pretty close to giving you some guidance on that.

I would certainly expect by the time we get together with you in March.

That you would have some.

Understanding of where we're going. At least that's what I would expect. Ultimately the board has to make a call on that and it has to make a final decision.

Looking at it, handicapping it and my sense of where they are in that cycle and what we know about how the markets have performed over the last couple of months I think we're at a point right now where we are.

We're almost ready to call a question on that. Our desire and our posture on that as we'd like to let you know as soon as we conclude so once the board makes a final decision we will carry it forward. And I think we are tight enough to the close window right now that we could probably do that as soon as the board is comfortable with the decision.

And what we wanted to do around that.

Dave, as you would expect, put a lot of diligence into this over the last several months, Dave carefully considered a lot of different options.

There are pros and cons to going either with a spin or split. Certainly it's attractive and where the reason we kept this option open is

At some point, I would like to get the share count circulating on AT&T down.

And this was an opportunity for us to evaluate whether it's something like that could occur.

In order to do that.

It's a bit of an unprecedented transaction size. There has never been a split-off of anything close to this number of shares with this kind of a base.

We also have a very large retail base.

And we have to be mindful of the fact that that retail base is sometimes it doesn't go as deep on the puts and takes and ins and outs of things as the institutional base does. And we need to make sure it's transparent and clean for everybody involved in this and as I step back and look at it.

We need to be very thoughtful about what we started with as our watchword around this transaction, which was we want the shareholders to get value out of this is all about driving shareholder value and given the size of the split.

We know that they would have to be some leakage to kind of get that structured properly.

So as we kind of step back, we wanted to do something that's clean. We wanted to do something that's deliberate the board Hasnt decided right now. There's pros and cons of both.

But I think it will be probably giving you some sense of what we want to do around that in fairly short order. And we wanted to be transparent and clean here's what I would tell you is kind of where I start this. Markets are pretty good.

I think it will be probably giving you some sense of what we want to do around that in fairly short order and we wanted to be transparent and clean here's what I would tell you is kind of where I start this markets are pretty good.

They'll eventually settled to the right place.

And as I said when we announced the transaction in May, this isn't going to be something that's going to ultimately manifest and unlock the value overnight. We knew that this restructuring will take a little bit of time, both through the regulatory process and then the reordering in combination of the new assets, so being mindful of keeping true to the.

The best way to get value back to the shareholder being patient as the markets were out over time. I think that's kind of where my head's at this juncture right now. And we will finish the final touches on this and ultimately what fairly quickly. At the same time we do that, we'll let you know about the dividend policy and where we're going on that we've already told you.

It's going to be between $8 and $9 billion.

And I think we know enough about the market, where it stands right now that no matter, where we are in that $8 billion to $9 billion range. Even at the low end of that range, we're still going to be paying out at the top of corporate America from a yield perspective. So it makes for a very attractive value in the stock right now, there's a lot of optionality and upside, especially.

When I think about how the media asset is performing and what's going on in the growth.

Of the direct to consumer business and what we have for value accretion that can occur as we start to move up the kind of multiples that are warranted in that business. So I think that there is a good play either way around that. On the Capex side, Simon.

We aren't going to break out specifically what we're doing in specific categories of the spin.

What we tried to give you a sense of is first of all we've given you the guidance for the year.

We told you in terms of how we're staging this. Our spend starts to get more aggressive in the wireless transition into the C band in the auction 110 spectrum when we hit mid-tier.

And the reason behind that is we are in a unique position to be able to deploy both 40 megahertz of our a block from the C band and our 40 megahertz from the auction 110. I want to be careful about how far I go but it is public and in the public domain that 1.40 megahertz.

Nationwide in that auction.

Those radios become available.

In the early part of the summer, late spring. And so to do that together at one time with one tower climb that allows us to start really going well.

What I would call good guns on this and scaling that up. And we'll be at 200 million Pops for mid-band deployment, which will be an 80 megahertz mid-band deployment by the end of next year. And so that's how you can think about the scaling and how we are we're going to deploy around that.

I think typically when we've looked into the air interface change it's been.

It's been $8 billion round number to kind of get through that transition over a number of years.

And I expect that that will probably be the case as we worked through the next three-year deployment in this area in a phase change.

Great, and on the fiber side?

Yeah.

Look, we've given you the direction of where we're heading. We're going to be at 30 million homes by the end of '25. You saw us pick up the pace in the fourth quarter, we wound up 2.6 million pass locations.

We feel like we're through the supply related issues. The organization is executing in the field operationally at a very good clip-on that. So I feel very very comfortable that we're going to hit that 30 million direction that we've given you by the end of '25 as I told you last quarter I'd like to get off of the.

The number of homes passed in any 90 day period discussion. And I think what you should be looking at is are we selling more end users. And you are going to see us start to sell more end-users each quarter as we move forward and you're going to see our subscriber counts start to ramp as that footprint gets larger.

I couldn't be more excited given our announcement this week on two gig and five gig offerings, we are going to be out in the market with a superior product. We've had great momentum, finishing another year of a $1 billion-plus ads now with a product that's going to be even better it's going to clearly demonstrate the superior capability.

So the infrastructure, we're putting out there plus the footprint expansion I feel really good about the momentum you're going to be seen in our subscriber accounts as we move through '22.

Great. Thanks for the color.

Yeah.

Operator, can we move to next question?

Our next question comes from the line of Brett Feldman with Goldman Sachs. Please go ahead.

Yes, thanks for taking the question.

Your simplified mobile offers has obviously had a lot of traction in the market now and at the same time, they've been out there for about a year and a half and so it seemed like consumers who are uniquely attractive data at a lot of opportunity to avail themselves. The question would be how are you thinking about evolving your mobile go to market strategy.

Or your value proposition or maybe another way of asking that would be what do you think the AT&T brand means

To the mobile consumer? What do you think it should mean?

What is your tactic or driving that perception shift? Thank you.

It's a good question, Brad. As we move through this year I think you'll see us.

Very definitively rotate into a position. First of all, I would tell you the strength of the offers that we've been on for a period of time is in fact that we've been on these offers for a period of time.

And I don't view that as being something I am concerned about. I actually view it as something that we're really pleased about.

It's basic fundamental easy for the customer to understand and we see no evidence whatsoever.

That we're losing traction and the value proposition that we have. And in fact, I would point to what we did this week on a broadband offer and trying to go in with an everyday simple pricing construct and the reason we're doing that is based on what we learn from our wireless business, which is.

Something that's very straightforward for the consumer to understand over time.

Allows us to gain the right kind of momentum in the market that is sustainable. It drives up customer satisfaction. It allows us to be consistent in our messaging that we carry out to the market. And ensures that every one of our employees knows the line and doesn't have to relearn something every 30 days 60 days 90 days.

So we're very comfortable with the messaging we have right now. We're very comfortable that it still has room to run. And when we talk about our focus simplified business moving forward part of what we're attempting to do is move our entire product portfolio into a position that we can represented in a similar fashion and so this week's move.

And our fixed broadband products is really important when you think about lining that up and carrying that message forward. When I think about how we communicate more effectively around the brand.

I think you've heard me allude to this in some previous conversations.

There's a lot of things that I think the AT&T brand is very strong and does very very well in the market reliability reputation of consistency.

There is a perception within.

The business community about advanced networking and the strength that we have around that trusted in those regards. But I also believe we can do some things to start to manifest for the consumer and some of those characteristics. We just talked about it in a more real way, which is a more straightforward simplified credible reliable expert.

And I don't want to take away anybody's thunder, but I think you should expect after we close the Warner Media discovery transaction.

That you will see us maybe start to refine a little bit of the messaging around the brand moving forward in the market. That will carry forward the kind of characteristics and a little bit more pointed fashion that we want to carry forward. I think that is.

Underneath your question. And we've been doing a lot of work around this I've alluded to it in previous remarks. This isn't an advertising campaign. This is about structurally what we do behind the business to operate in a way that we think is going to be relevant with the consumer and get the operations lined up.

So that what we tell the customers in fact represented in our product offers our service support how they experience AT&T moving forward, we've been working really hard on that over the last year, we still have a little bit of work to do to finish that up. But I think by the time you get into the mid part of the year you will see what that.

What that definition looks like and where we're going.

Thank you.

Thanks very much. Operator, if we can move to the next question.

And our next question comes from the line of John Hodulik with UBS. Please go ahead.

Alright, thanks, guys.

First, Scott. Thanks for the color on the.

Guidance per segment, but can you give us, can you let us know.

What the guidance for '22 assumes for remain co EBITDA growth and then drilling down a little bit further.

Obviously, you guys cut the losses on the business side. And it sounds like you expect that sort of further improvement, maybe in the second half of next year. Could you walk us through sort of what's going on in that business segment to sort of rationalize it? And do you foresee the possibility of that segment returning to EBITDA growth by the end of the year? And then and then maybe for John.

Maybe following up on those comments.

When do you expect to have these converged offers in the market? And is that what you're talking about in terms of refining the message around the brands? Selling of packages of fixed and mobile services.

So let me do the front end to this John and then I'll have Scott just kind of walk you through the EBIT of dynamics. So let me step back. We just spent a lot of time on this in March when we work together with you to give you some color on the business market and where we're going but here's what I would tell you should understand we've been executing on over the course of the last.

Year and the process for [him].

One, we've backed away from sales of revenues that are low margin.

Low strategic value products, and we've kind of been calling that out of the business profile and some of that coin is been manifested in the results that you've seen over the course of the last year.

And where I want the organization to move to is a much more crisp and intense focus on what I call owned and operated infrastructure. I want the foundation of what we're doing in the business segment to really start from we're always putting the customer on facilities and infrastructure that we own and operate whether it be a wireless network.

Our fixed network and we've made really good progress in our distributions and emphasizing wireless distribution into those segments and we're now coming in behind that with some of our fixed capabilities as well. And that partly is making sure we have the right fiber products available.

As well as getting the footprint engineered correctly, so as we're out there deploying or we're doing the right things to pick up the business segments, where we can grow in the small and mid-size segment. And we've been sharpening our engineering in order for us to do that and so at the macro level, that's kind of a reorientation that's going.

On and it doesn't mean we're backing away from the top end of the market. We want to still be that consulting expert for large enterprises in complex networking for those that need it.

And those that needed are typically broad distributed companies, not ones that operate two data centers based on how SD Wan has developed et cetera. But it's those that have a lot of branch offices or many stores to support our restaurants to support that distributed networking is kind of our strength in what we do and where we will focus.

But we can be a lot stronger in the mid and low end of the market and tuning our distribution, where we have that strength. So that we can be in with both wireless and fixed solutions is really the reorientation that we're working in that segment of the market and where we need to where we're making that pivot. So ultimately get back to the kind of.

Growth we need. I don't expect in aggregate that we're going to see EBIT growth in the business segment this year. I do expect we're going to see that turn next year and we're going to talk a little bit about that in March when we get together, but that's kind of what I would say is the macro point of view of what's occurring in the converged offers.

In some cases are actually happening today, especially in the mid and upper part of the market as we bundle both wireless and fixed together on the same paper.

And I think you're going to now start to see things that are occurring in private networking that extend into the business space, we already are starting with.

I can't disclose a couple of the larger customers we've signed with yet at this point. But you are starting to see that combined fixed wireless converged networking that I think is going to be relevant in the upper part of the business space. And then I believe you will see as we get into the latter part of the year are starting to do a better job of using.

Our both our fixed wireless capability to pick up segments of the business community early to accelerate revenues. And then back in behind it with fixed facilities as we gained scale over time, but that should be something that really becomes more transparent to the customer where they're buying bandwidth from us and they're not carrying about.

How we delivered. Pascal, do you want to give the EBITDA guide? Sure thing. Look, as you know John, we did not give specific EBITDA guidance, but I think you can get pretty close.

With some of the information that we've given.

Here are some of the dynamics in each of our major businesses for remain co.

Mobility, while we expect some comparison issues early in the year, we feel really good about the organic trends in that business we expect.

Continued growth in wireless service revenues.

Our transformation continues and we expect some operating leverage from that so we feel really good about the trajectory of that.

The mobility business is on. I think you can get a pretty good sense for where that should land given our wireless service revenue growth given our fourth-quarter performance, we feel really good.

Consumer wireline.

The word here is scale as we feel really good about the build we had in 2021. As that business scales. The operating leverage is really good. You coupled that with transformation.

Transformation.

If the consumer wireline segment is also expected to grow. As you've just heard from John business wireline, we expect losses to moderate as we make our way through the year, but we don't expect that segment to grow you layer on top of that an expectation of continued transformation savings are in corporate and other.

You can get a pretty fair sense that.

Overall, the business is going to be on an EBITDA basis flattish to up modestly.

On an EBITDA basis flattish to up modestly.

Got it, okay. Thanks, Pascal.

Operator, if we move to the next question.

And our next question comes from the line of Michael Rollins with Citi. Please go ahead.

Thanks, and good morning. I'm curious if you could dive a little further into the wireless speakers and specifically if you can

Unpack the wireless service revenue growth guidance of 3% plus with respect to how you're thinking about volume.

The opportunities to improve ARPU and any contribution that you would expect from a dish wholesale deal that you've previously announced. And then just separately on a higher level in terms of the asset mix. John, you mentioned that you are largely done with asset dispositions and just curious if there is any further.

Exploration of optimizing the wireline footprint, we're thinking about the future opportunities for your DTV business.

And whether that may better fit strategically over time.

Yeah.

Mike.

Mike, let me start. Here is the way. If you think about it.

If you think about it.

First of all, most of the market remains really healthy. Now for planning purposes as you would expect.

We aren't planning that the industry will continue to grow the way it has the last year and a half but overall the market remains healthy and in that environment, we're going to be disciplined and we believe we will continue to take share in a very disciplined way.

But for planning purposes, we have assumed that the overall industry normalizes to where it's been historically.

In terms of ARPU, I think we've said this previously the way we think about this.

As we make our way through the year, we have every expectation that we should see continuing recovery in international roaming.

What we're also seeing is our elite unlimited plan is our highest priced art climate is our fastest growing. And as a result of that we expect to continue moving up the ARPU stack, that's going to be partially offset by the amortization.

Also.

What we're also seeing is.

Our elite unlimited plan is our highest priced art climate is our fastest growing and as a result of that we expect to continue moving up the <unk> stack, that's going to be partially offset by the amortization.

Of some of the promotional expenses, but all in all, we feel really good about trajectory of mobility.

So Michael, good morning. On your second question.

So we set up the Directv structure deliberately.

And when I say we are through the asset disposition, I think the distinction I would draw there is the.

The management team that of AT&T remain co is not going to be distracted with having to work through additional work on restructuring the asset base of the company in the near term. And that doesn't mean that the independent DIRECTTV company and the management team that is operating that over there might not.

Choose to do something in their business. I don't know of anything. I'm not announcing anything, but what I'm trying to distinguish us if that entity decided that there was value to be created to restructure their business in some way shape or form. It is a distinctive group of individuals that would be involved in doing that and executing.

And it would not cause the AT&T management team.

To have to spend cycles and energy working through those kinds of issues and so I think that's the distinction I'm trying to draw not to suggest that.

The Directv asset per se is frozen in time or not. In terms of your question on.

The wireline footprint.

We spent a lot of time. Far back as 2012, and constantly revisiting and re looking how we wanted to work through.

<unk> 2012, and constantly revisiting and re looking how we wanted to work through.

The transition of our business.

And I'm not a big believer right now that us going out and taking.

The less utilized parts of our wireline footprint and sending them out to somebody at a steep discount and continuing to have to do things like operationally provide services to that entity for many many years to come on.

Infrastructure.

IT systems et cetera that have to be maintained is the right thing for a healthy and sustainable business. My point of view is that as a management team that runs networks and what we do around here our job should be to rationalize those assets in an effective way and do it in.

The best interest of our shareholders.

And you heard me talk about that. When I talk about transformation and shutting down products.

And thinking about how we become a company that offers products on fiber.

What's going on behind the scenes on that is actually backing away and moving deliberately through a process of taking products that served us incredibly well.

It had been the mainstay of this company for a period of time and doing it in a very very smart and tactical way the shutdown and sunset of those and as we sunset.

Take the high cost operating model that supports them away. And so when we talk about transformation and we talk about getting savings from shutting down applications and IT infrastructure and product sunset.

That's really synonymous with us.

Actually walking away from square miles and infrastructure and cost and all the things that have seen their better day. And so we intend to ultimately capture that value and return it to the shareholder. Not do it in a front end loaded transaction. That's highly discounted.

That leaves us settled with distracting operating models that don't allow us to be a focused broadband fiber provider operating the best products available in the market.

Thanks.

Thanks, very much, Michael. Operator, if we can move to the next question.

And our next question comes from the line of David Barden with Bank of America. Please go ahead.

Hey, guys. Thanks so much for taking the questions. I guess.

My first one for you, John.

For you John.

We saw about two five times more fiber homes passed in 2020, but over the course of the year fiber net adds didn't really accelerate and so as we look at even more acceleration in fiber.

When should we start to see the acceleration in fiber net adds? And what's the typical lag time from a passing to a selling opportunity?

And Pascal.

I guess I was a little surprised to see the $4 billion growth capital investments premium over Capex, because I think over most of the year, we've been talking about maybe weaning ourselves off of that number and I think it raises the question as we look into 2023 and people then you know as you know trying to.

Bridge from this year's 26 to 2023 $20 billion guidance, given the higher CAPEX and the loss of the $3 billion Warner Media cash contribution how much vendor financing is going to.

Is baked into that 20 that maybe we hadn't been thinking about? Thank you.

So I'll take the front end, Dave and then you can get the.

Get the.

Color from Pascal in the EBITDA dynamic.

And cash flow.

The answer to your question is.

From the time we say go to about the time we are actually in the market selling is currently running about a year.

And.

And that's literally when we say go that we're going to start engineering and go into a particular area.

I like that at maturity and the challenge I've got to the team as I'd like that to be nine months.

What's worked against us to do better than a year, right now has been a little bit of spot in this in the supply chain that we've shared with you it's really what drove some of the.

Challenges to get to the 3 million objective last year that we ultimately ended up at 2.6.

And as a result of that, we are backend loaded in the turn-up of the 2.6. That inventory came available for sale very late in the year.

And now it's out in the market and available.

And as we shared with you.

What we have improved fairly dramatically over the last several years is our rates of penetration once it becomes available for sale.

We are walking up that penetration dynamic faster.

And so my goal has been and what I'd still like to work the management team to us from time of engineering at the time of availability in nine months.

And then achieving what we're actually doing right now on the penetration rates.

You are going to see that acceleration start to happen. Because we have put that inventory in the market. A lot of it came on late last year and you should expect that as we start working through the quarter here and into second-quarter, third quarter, that we start crawling up that dynamic of putting three handles.

Routinely.

On our net add numbers for broadband and that's where I want to see us get.

And we should be able to get there as we move through this year.

So that's kind of the color on it. But what we've been characterizing for you on our rates of penetration teams made a lot of progress on that.

That's a huge economic driver return given the pace of the rate we're doing right now.

But I wouldn't mind if at steady state, we got three more months off the build cycle. Supply chain has kind of been working against us right now in making that happen and maybe that clear sometime this year, we will have to see.

Got it.

Dave, on your free cash flow question.

You'll hear more from us at Investor day, but here's what.

Just to reiterate some of the piece parts.

For 2022, we are guiding to $23 billion of the $23 billion range free cash flow. Warner Media is contributing call it around $3 billion.

And we expect vendor financing.

Vendor financing.

To continue to be around $4 billion for this year. You are correct in your recollection that. Look, we were going to look really hard to make sure that as we are doing these vendor financing transactions that we are getting the best possible terms and to the extent, we felt we can get better financing sources, otherwise, we would do that instead of taking the

Better financing, but we have found that more and more of our vendors are willing to provide us with very attractive terms.

We're taking advantage of those. With all that said, the guidance we have.

Given here.

Anticipates $20 billion of Capex, $24 billion of overall.

Gross capital investment. Other piece parts are, keep in mind as we close the WarnerMedia transaction, we should see a meaningful savings in interest expense.

In cash interest.

And then as we make our way through the year and next year, we're going to hold ourselves accountable to continuing to grow EBITDA remain co. So those are all the piece parts to think about as you think about

our $20 billion guidance for this year. And you'll hear more from us at analyst day.

And if I could just a quick follow up on that.

If what you're saying is that in March of 2021, when you were contemplating.

Not using as much vendor financing and you set the $20 billion free cash flow guide for 2023.

Are you saying that now that vendor financing is too attractive not to take?

That whatever CAPEX number was in that $20 billion of free cash flow number will fall, replace by vendor financing and that $20 billion free cash flow guide is actually going to be higher.

Got it.

You will hear from us. Today, we are giving guidance on 2022, you'll hear from us on 2023.

Today, we are giving guidance on 2022, you'll hear from us on 2023.

At analyst day in March.

Alright. Thanks, Scott. Thank you.

Thank you very much, David. Operator, if we can move to the next question.

And our next question comes from the line of Phil Cusick with JPMorgan. Please go ahead.

Thanks, guys.

It's funny. I know you're not going to own this forever, but.

I know youre not going to own this forever, but the.

A lot of moving pieces in the Warner side. Can you talk through what's going on in HBO and how we should think about this going forward?

Obviously, a lot of issues with Amazon, so volatility through the quarter.

Should we think of this HBO ARPU run rate is a good level going forward or is there still expected to be volatility there?

And how do you think about the potential growth rate domestically for HBO from here now that the AD driven product is launched?

You also said peak content investment in 2022. Should we expect this to be sort of negative EBITDA all year? Ordo you think by the back half we've got enough growth to them to

to get that back deposit? Thanks very much.

Sure. Let me give you maybe some color on the front end and then we can go through.

So first of all.

As you know, there's a lot of moving parts on the ARPU side of things. One moving part is

International ARPUs are different than domestic ARPUs.

And if you think about.

The growth internationally, where that's that's going to be a large part of the growth moving forward.

Given the new markets we're opening up in the natural penetration that occurs. Given the product size differently and starts from a different place.

You're going to see that have an impact, generally speaking those ARPU internationally are a bit lower than the domestic ARPUs. Second point.

We've had launched as I said earlier in my comments.

The AD supported product.

And I expect the AD supported product as a percentage of mix domestically in the US to increase.

This year. Part of that will be because the products had a little bit of a different characteristic where the subscription product had access to first-run movies.

The AD supported product did not.

Set to January 1st, the products are identical now and as a result of that, I expect there'll be some customers.

to choose to go the AD supported route that may have gone to subscription route before. However, what will happen is it's not the one is less accretive than the other. The subscription line.

Will possibly dilutive, but the advertising line will increase.

So when you look at the customer overall, they're no less profitable.

They're just books to two different places on the P&L.

And our goal and in fact, what we are seeing today, we are indifferent as to what the customer chooses.

Frankly, maybe in some cases, it's a bit.

It's a bit more accretive if they go the AD supported route. So I think you just need to look at your geography of how that plays out more than anything else relative to the domestic side.

Look we expect domestic growth to be more suppressed and international growth as we move forward.

We're in a great position.

We are sitting at a large domestic base with a very high ARPU.

And the nice part about that is .

And we said this was going to happen and it happened. We said the market was going to come to us on pricing.

And low and behold, we are no longer the high priced offer in the market.

And the nice part about that is we think it will allow us to have domestic growth as we move forward, but the base is in a really really good place as a result of that. We don't have the struggles that maybe some other products that came in at very low prices are going to have to kind of try to move up that ARPU continuum.

It's about being very diligent in adding customers at a moderated pace and I think if you go back to our analyst day.

In 2019, whenever we did that. And we gave you our domestic point of view of what that growth is going to look like it was a very measured and moderated point of view because starting with mid $40 million-ish customers.

Allowed us to be very different given the ARPUs we had around them.

And then finally, we made that hard decision on Amazon to your point, we felt it was the right decision. I feel it was the right decision. I think it will even be more of the right decision in a post-discovery environment as the offer only gets stronger. That's in the market and the content that's available at the end of the day.

You want full control of your customers and I am confident with the strength of the offer that will be in the market. Those customers are all going to come back into the offer it may take a couple of quarters for that to happen.

But they will eventually be.

A product out there that they're going to look at and say they want to be part of.

And better to have them there where you have direct access control of them can market to them, know what they're doing than to have it be in some black box where you absolutely have no idea what somebody else is doing with aggregating your content. And your exposure to the customer and I would point that out again.

That is what our customer base is there are a lot of entities out there growing quote-unquote direct to consumer customers that are behind the screen of the Amazon marketplace really are amazon's direct to consumer customers. They are not the media companies direct to consumer customers.

Pascal, did you want to add anything on the EBITDA side?

Now look, we provide you with guidance for WarnerMedia, what the contributions for the full year and keep in mind.

We're launching in a number of European territories, as well as we planned to launch CNN plus this year.

<unk>.

In a number of European territories, as well as we planned to launch CNN plus the CSO.

So we are going to be in the investment cycle. But overall, we feel really good about the underlying trends of our direct to consumer business and the balance of the business is performing exactly as you would anticipate.

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

Yeah.

And that last question comes from the line of [inaudible] with Barclays. Please go ahead.

Thank you.

So maybe one on free cash flow and another on [Xandr], but.

And I bet on Thunder, but.

Currently on the free cash flow side.

If you think about.

Of the 20 billion kind of number for this year.

Okay.

And the breakdown I mean.

<unk> been kind of pushed back obviously, you guys get a bad debt.

<unk> billion number.

You may not be a real number.

On the back of the telecom business. So if you could help us understand how much of the contribution come from Directv.

Does the under banked as women.

Potential cash motor vertical because you might now get speed put HBO distribution set up absorbing the working capital impact. So if you could just help us understand that would be useful.

And then the other sorts of confusion I think has been the impact of vendor and the relationship across the three assets across Directv.

AT&T is with them.

<unk> media. So if you could just understand the puts and takes I mean, what went away with the Microsoft transaction, how much of the cash flow comes in to AT&T and what moves out anything that could be used for looking picture right the cash flow number.

Okay.

I appreciate the question. So here is.

For 2020, let me try to break down free cash flow for you.

Overall, we are guiding to $23 billion.

The contribution from Warner Media is about $3 billion.

The remainder of the company, including the contributions from Directv are making up the balance of this.

And those both will continue post separation.

The piece parts to think about this year relative to the past, we're going to have higher capex and as John explained earlier that capex is related to our.

Wyman as spectrum as well as our continuing at accelerated rollout of fiber. So that we're going to have higher capex, but we do expect as we make our way through the year that our cash interest cost should decline because of the delevering that is happening at the company and of course, we are growing.

As I said, where we are.

Flat to up modestly on EBITDA overall remain co. Those are those are the big piece part the way to think about sand or separately zehnder has the way to think about historically two pieces you have the app Nexus business, which is.

In the midst of being sold to Microsoft We have an agreement in place for that and then you have the Directv advertising inventory the Directv advertising inventory.

Prior to the separation was managed.

Included within one immediate results.

Upon separation.

There was a new agreement struck.

Whereby Warner media would continue to sell.

Directv advertising inventory through the bat through until close.

<unk>.

In exchange for that Warner media would not receive would receive an add share.

And so the vast majority of the economics.

Directv advertising inventory is going back to Directv only a commission is staying with Warner media.

So that's those are the piece parts per standard and the free cash flow dynamics.

Got it.

And could I just ask one follow up on each deal.

On the Amazon deal that probably close them when it ended in the quarter, but.

Revenues were sequentially down.

Even though subscribers.

The IPO was also quite weak sequentially, but when you think about the sequential impact sequential revenue trends from here on.

Is that decline a one time kind of a decline how should we think about the cadence.

Yes.

We expected that we were going to.

Take a we were going to be decelerating as result of Amazon. It is a onetime.

<unk> decline as we move forward and continue to grow subscribers, we would expect that.

Growth from here.

Got it. Thank you. Thanks, thanks, very much can on turn it over to John for some final comments. So thank you very much for joining us today and I just couldnt be more pleased with how 2021 turned out as I started in.

My opening comments.

Outline for you what we intended to do through the course of the year and I think we checked the box across the board on every commitment that we made to you I'm really proud of the team I'm proud adjacent I'm proud of Jeff I think they've done a remarkable job given that we've got a number of moving parts going on in restructuring this business to get.

The kind of operational focus that we asked them to do and I think.

Four quarters of results here demonstrate that and I'm really pleased that we're on the doorstep excuse me of being able to complete the transactions that we have in front of us that allow both management teams to focus on on moving things forward in the way they can with a clean operating environment I think the <unk>.

First days are ahead here as a result of that thanks very much hope you all have a good year, we will see in 90 days.

And that does conclude your conference for today. Thank you for your participation and for using AT&T Conferencing service you may now disconnect.

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