Q2 2022 AT&T Inc Earnings Call
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Speaker 3: Ladies and gentlemen, thank you for standing by. Welcome to AT&T's second quarter, 2022 earnings call. At this time, all participants are in a listen only mode. If you should require assistance during the call, please press star, then zero, and an operator will assist you offline. Following the presentation, the call will be open for questions. If you would like to ask a question, please press one, and then zero, and you will be placed in the question Q.
Speaker 3: If you are in the question queue and would like to withdraw your question, you can do so by pressing one and then zero. As a reminder, this conference is being recorded. I would like to turn the conference call over to our host, Amir Razodowski, Senior Vice President to finance and investor relations. Please go ahead. Thank you and good morning everyone. Welcome to our second quarter call. I'm Amir Razodowski, head of investor relations for AT&T. Joining me on the call today are John Stanky or CEO .
Speaker 4: and Pascal Duroche, our CFO . Before we begin, I need to call your attention to our Safe Harbor Statement. It says that some of our comments today may be forward-looking. As such, they're subject to risks and uncertainties described in AT&T's SEC filings. Results may differ materially.
Speaker 4: I also want to remind you that we are in the quiet period for the FCC Spectrum Auction 108, so unfortunately we can't answer questions about that today.
Speaker 4: And as always, additional information and earnings materials are available on the Investor Relations website. With that, I'll turn the call over to John Stanky. John , thanks, Amir, and good morning, everyone. Thank you for joining us today.
Speaker 4: Last quarter, I shared that AT&T had entered a new era with the right asset-based capabilities and financial structure to become America's best broadband provider.
Speaker 4: I'm happy to share this morning that we're continuing our progress, improving our infrastructure, and expanding our customer base across our twin engines of growth, 5G and fiber.
Speaker 4: We saw historic levels of second quarter net additions thanks to our disciplined and consistent go-to-market strategy solid execution building fiber and deploying our mid band 5G spectrum assets. We saw historic levels of second quarter net additions and our mid band 5G spectrum assets. We saw historic levels of second quarter net additions and our mid band 5G spectrum assets. We saw historic levels of second quarter net additions and our mid band 5G spectrum assets. we saw historic levels of second quarter net additions and our mid band 5G spectrum assets. and our mid band 5G spectrum assets. and our mid band 5G spectrum assets. you
Speaker 4: In mobility, we brought in the most second quarter postpaid phone ads in more than a decade just like last quarter building on our momentum from 2021.
Speaker 4: It's noteworthy that we sustain this momentum in a highly competitive environment. It's noteworthy that we sustain this momentum in a highly competitive environment. It's noteworthy that we sustain this momentum
Speaker 4: Industry growth in the first half of 2022 has been stronger than the expectations I shared with you late last year.
Speaker 4: In our view, this strong performance reinforces that our success is not solely promotion-led, but instead reflective of our improved value proposition in the market.
Speaker 4: even though better than anticipated customer growth metrics resulted in some higher than expected success based investment.
Speaker 4: ARPU and profitability in 2Q improved.
Speaker 4: And we expect that trend line to accelerate in the second half of the year.
Speaker 4: As Pascal will discuss shortly, we're in fact increasing our service revenue growth guidance
Speaker 5: for 2022.
Speaker 5: In Fiverr, we continue to invest in building out a premium network.
Speaker 5: Drive a great build velocity and deliver on our stated expectations.
Speaker 5: for accelerated customer growth through improved penetration rates.
Speaker 5: We're finding success in serving more customers in new and existing markets with what we believe is the best wired internet offering available.
Speaker 5: This is evidence by more than 300,000 second quarter AT&T Fibernet ads.
Speaker 5: marking our 10th straight quarter with more than 200,000 fiber net ads.
Speaker 5: The strength and value of the AT&T fiber experience is enabling us to increase share in our fiber footprint and convert more IP broadband internet subscribers to fiber subscribers. The AT&T fiber subscribers. the AT&T fiber subscribers.
Speaker 5: Ultimately, our fiber strategy is a sustainable and long-term technology play. The
Speaker 5: that will support key macro trends.
Speaker 5: We expect to see a continuation of favorable R-POO trends.
Speaker 5: as we expand the availability of what we believe is the best in class network with a multi decade lifespan.
Speaker 5: So I'm very pleased with the strong customer growth we're seeing.
Speaker 5: Our success only reinforces the improved value proposition providing. Our success only reinforces the improved value proposition providing.
Speaker 5: We expect our investment in top-tier technology to translate into strong resiliency for our services for years to come.
Speaker 5: Over the last eight quarters.
Speaker 5: We've achieved an industry best 6 million post-paid phone net ads.
Speaker 5: Well, adding nearly 2.3 million AT&T fiber customers.
Speaker 5: increasing our fiber subscriber base by more than 50%.
Speaker 5: I'm also very proud with the progress or teams of Maiden rapidly expanding our 5G and fiber footprints.
Speaker 5: I'm pleased to say that we've achieved our target with covering 70 million midband pops.
Speaker 5: Two quarters ahead of our year end target and are now on track to approach 100 million midband pops by the end of this year. 100 million midband pops by the end of this year.
Speaker 5: and our expanded consumer wireline fiber footprint now gives us the ability to serve 18 million customer locations
Speaker 5: This is an increase of nearly 2 million from the start of the year.
Speaker 5: Our teams are running hard to deliver these world class services to our customers.
Speaker 5: We expect our commitment to investing in our core connectivity networks to serve as the foundation for AT&T's growth for decades to come.
Speaker 5: Moving to our second major priority, it's more important than ever we be effective and efficient across our operations.
Speaker 5: The dispositions we executed over the last two years provide us with operating flexibility to adjust as needed and what is proving to be an increasingly pressured economic backdrop.
Speaker 5: without requiring us to materially compromise on our investment priorities in financial obligations. on our investment priorities in financial obligations.
Speaker 5: We have strong visibility on achieving more than $4 billion of our $6 billion transformation cost savings run rate target by the end of this year.
Speaker 5: as we shared before.
Speaker 5: We've initially reinvested these savings to fuel growth in our core connectivity businesses.
Speaker 5: However, as we enter the back half of this year, we expect these savings to start to contribute to the bottom line. The next day, we will be able to build a new system. We will be able to build a new system. We will be able to build a new system.
Speaker 5: As you're likely aware, we're taking proactive measures.
Speaker 5: such as selective price and adjustments.
Speaker 5: to address as much of the very real inflationary pressures.
Speaker 5: that are clearly impacting all parts of our economy.
Speaker 5: The pricing strategy we implemented is being executed in a proactive and methodical way that enables some of our longest standing customers the opportunity to take advantage of our most robust offers.
Speaker 5: while also ensuring that we're responding to the real-time cost pressures in our business. So
Speaker 5: I believe with navigated this difficult reality effectively and thus far are seen results that are consistent with our expectations, although not sufficient to cover all inflationary impacts.
Speaker 5: Last quarter, I shared that we're seeing inflationary pressures.
Speaker 5: And we estimate those to be more than $1 billion above the elevated cost expectations embedded into our outlook.
Speaker 5: We're clearly operating in different times and the macroeconomic backdrop is evolving in a dynamic manner.
Speaker 5: Still, we're confident in our ability to emerge in this chapter.
Speaker 5: stronger company.
Speaker 5: Thanks to our position as one of the world's largest scale telecom operators.
Speaker 5: our improved underlying financial flexibility.
Speaker 5: the cost reduction initiatives we have in place.
Speaker 5: the essential nature of the services we provide.
Speaker 5: and our pricing actions that help partially offset these impacts.
Speaker 5: With that said...
Speaker 5: The current environment is not easy to predict.
Speaker 5: We're seeing more pressure on business wireline than expected.
Speaker 5: And on the consumer side of our business.
Speaker 5: We're seeing an increase in bad debt to slightly higher than pre-pandemic levels.
Speaker 5: as well as extended cash collection cycles.
Speaker 5: However, it's important to note.
Speaker 5: that historical patterns in previous economic cycles suggest customers have managed their accounts.
Speaker 5: similar to what we're experiencing today.
Speaker 6: In fact,
Speaker 5: We feel even better about the resiliency of our services, given the elevated importance of connectivity in everyone's lives.
Speaker 5: We view this cycle no differently.
Speaker 5: and still expect customers will pay their bills.
Speaker 5: I'll be it a little less timely.
Speaker 5: Furthermore, as I mentioned before,
Speaker 5: We feel better about our underlying financial flexibility that we have in quite a while.
Speaker 5: This is why we're confident we can maintain our focus for growth over the long term.
Speaker 5: by investing in the future of connectivity through 5G and fiber.
Speaker 5: It's our belief that near-term cyclical economic uncertainty does not warrant a retrenchment in the deployment of long-lived assets.
Speaker 5: The long-term economic justification for these investments remain sound and timing of the market development. The long-term economic justification for these investments remain sound and timing of the market development. The long-term economic justification for these investments remain sound and timing of the market development. The long-term economic justification for these investments
Speaker 5: supports our intent to invest through this cycle.
Speaker 5: Importantly,
Speaker 5: We maintained our focus on paying down debt with the 40 billion dollars in proceeds from the completion of the WarnerMedia discovery transaction in April helping us to significantly reduce our net debt in the quarter.
Speaker 5: I'd also like to touch on free cash flow directly.
Speaker 5: Well, free cash did come in lower than we expected this quarter.
Speaker 5: There were several notable factors to draw this.
Speaker 5: The first is the timing of higher success-based investments on the back of our robust customer growth. On the back of our robust customer growth.
Speaker 5: Additionally,
Speaker 5: We front-end loaded our capital investment plans in order to kickstart our growth initiatives.
Speaker 5: We expect these plans to seasonally moderate to the course of the year as we achieve our $24 billion capital investment plan. We expect our $24 billion capital investment plan.
Speaker 5: And I'm pleased we've been able to effectively manage our supply chain front end load some of our work this year. And front end load some of our work this year.
Speaker 5: In addition to these investment driven impacts,
Speaker 5: We're seeing some longer collection cycles and inflationary costs that we've not been successful in fully offsetting.
Speaker 5: These cash flow impacts...
Speaker 5: along with expectations for a more tempered economic climate in the latter half of the year have led us to adjust our cash flow expectations for the full year even with our expected material improvements over the next two quarters.
Speaker 5: The key takeaway is that we understand the emerging economic pressures on our business.
Speaker 5: and feel confident in our ability to manage through them while at the same time investing for the long-term benefit of our customers and shareholders.
Speaker 5: While we're not immune to the pressures impacting the broader economy, the repositioning of our business to focus on core connectivity solutions.
Speaker 5: The underlying financial flexibility achieved through a significant reduction of our debt.
Speaker 5: and the ability to invest in access technologies built for the long term allows us to opportunistically maneuver through this economic climate.
Speaker 5: Finally, I want to take a moment to discuss our business with the airline unit and our focused efforts to reposition the asset. The airline unit and our focused efforts to reposition the asset.
Speaker 5: There is a sizable base of business revenue coming from Legacy Voice and Data Services.
Speaker 5: This business has increasingly faced in secular pressures as customers replaced traditional voice services with mobile and other collaboration solutions. This business has increasingly faced in secular pressures as customers replaced traditional voice services with mobile and other collaboration solutions.
Speaker 5: On the data front, VPN and legacy transport services are being impacted by technology transitions to software-based solutions.
Speaker 5: Today approximately half of our segment revenue comes from these types of services. In audio visit to tabsabee.com
Speaker 5: Last quarter, we shared that we're experiencing additional government sector pressure related to the reallocation of spending priorities. We're experiencing additional government pressure and the reallocation of spending priorities.
Speaker 5: This pressure tied to the timing and restructuring of government spending continued into Q.
Speaker 5: While we're hopeful that some spending will return.
Speaker 5: and the enterprise infrastructure solutions, contract volumes and share gains will offset pricing reductions over time. We consider it prudent to reset expectations. We consider it prudent to reset expectations.
Speaker 5: It's worth noting that approximately 20% of the year-over-year business wireline revenue declines in the second quarter were due to government spending impacts.
Speaker 5: Lastly, we saw inflation and wholesale network access charges. We incur to provide services to customers outside of our footprint due to contractual resets.
Speaker 5: This cost pressure resulted in more than 20% of the segments year-over-year EBITA decline.
Speaker 5: This pressure will be managed through opportunities to operate more efficiently, to the movement of traffic to alternate providers.
Speaker 5: Symmetrical wholesale pricing adjustments and natural product migration trends. Symmetrical wholesale pricing adjustments
Speaker 5: Looking ahead, these developments only strengthen our result in executing our transformation.
Speaker 5: including actions to accelerate cost takeouts.
Speaker 5: and simplify our product portfolio.
Speaker 5: We expect these actions to mitigate the year-over-year pressure in this segment's profitability over time.
Speaker 5: But we now expect business wireline, even to declines in the low double digits this year, and our expectation for stabilization extends to the back half of 2024. Where is your Jay walked into 25 of 12 minutes at 00. Bring your back to 12 hour. Wait for the back half 2024. 22 12. more.
Speaker 5: However, we remain confident in our efforts to reposition the segment.
Speaker 5: The deployment of fiber is leading to an acceleration of growth each quarter in our connectivity solutions, which delivered close to 15% growth this quarter.
Speaker 5: Our fiber expansion also provides us with the ability to gain market share in SMB, which is an under penetrated segment for us.
Speaker 5: Moreover, we continue to utilize our business relationships to expand opportunities and mobility.
Speaker 5: Since last year, we've taken more than one full point of share in the business mobility space.
Speaker 5: Our focus on fiber and 5G continues to gain traction that we expect to use our strong enterprise growing SMB relationships.
Speaker 5: to take advantage of opportunities as they expand.
Speaker 5: We know this transformation won't happen overnight.
Speaker 5: but similar to our turnarounds in mobility and consumer wireline.
Speaker 5: We're confident we have the right strategy in place and in our ability to execute it successfully.
Speaker 5: I'll now turn it over to Pascal to discuss the details for the quarter. Pascal?
Speaker 4: Let's start by taking a look at our subscriber results for our market focus areas on slide five. Thank you, John . And good morning, everyone. Let's start by taking a look at our subscriber results for our market focus areas on slide
Speaker 4: As John mentioned, our consistent and disciplined go-to-market strategy continues to resonate with customers.
Speaker 4: In the quarter, we had a remarkable 813,000 post-faith phone net ads, our best second quarter in more than a decade. Looking at fiber, we had 316,000 net ads as we delivered upon our expectations to accelerate our subscriber growth.
Speaker 4: Our fiber-deploying plans remain on track and we expect to continue our solid-mode method with customers.<|en|><|transcribe|> metham with customers.
Speaker 4: Now let's move to our second quarter, Consolidate Finances from Year 5-6.
Speaker 4: First, it's important to note with the closing of the Warner Media transaction in April , his starkest financial results have been recast, present, Warner Media and certain other divested businesses including Rio, Nevada, Nevada, Crime Illiatricls, beds, and DECO<|ur|><|translate|> Capital Road Pilot Toast, Standin Thank you.
Speaker 4: While continuing operations provide a clear view of our remaining operations, keep in mind that that continues to be some year-over-year comparative challenges as the prior year results also include direct TV and certain other dispositions.
Speaker 4: Therefore, where applicable, I will highlight our financial results on a comparative like-to-like basis in addition to continuing from operations.
Speaker 4: Comparative revenues for the quarter were 29.6 billion, about 2.2% or more than 600 million year over year.
Speaker 4: This was largely driven by wireless revenue growth and to a lesser extent higher Mexico and consumer wireline revenues partially offset by declines in business wireline.
Speaker 4: Comparative adjusted EBITDA was up 1.7% year over year as growth in wireless, Mexico and lower corporate costs were partially offset by business wireline decline.
Speaker 4: We continue to expect the year-over-year EBITDA trend line to progressively improve through the year as we begin to lap, read you shutdown costs, and step up investments in technology.
Speaker 4: that began in the second half of 2021. Adjusted EPS from continuing operations to the quarter was 65 cents. Fear quality
Speaker 4: On a comparative stand-alone AT&T basis, Adjustment DPS was 64 cents in a year ago quarter. Adjustments for the quarter were made to exclude a gain in our benefit plans, non-cash restructuring and payment charges, and our proportion is shared directly via tantrawimerization.
Speaker 4: Cash rem operations for our continuing operations came in at $7.7 billion to the quarter.
Speaker 4: Capital investments of 6.7 billion was up 1.7 billion year over year.
Speaker 4: Free cash flow is $1.4 billion. Direct TV cash distributions were $800 million in the quarter.
Speaker 4: cash flow for the quarter was affected by several key factors.
Speaker 7: write
Speaker 4: As expected, we had higher front end loaded capital investments as we ramped our fiber and 5G mid-dance spectrum deployment.
Speaker 4: As John already noted, we expect lower capital investment levels in the back half of the year, in line with our expectations of $24 billion.
Speaker 4: The second is the timing of consumer collections, as it's taking about two more days than last year to collect customer receivables.
Speaker 4: The impact of this is almost one billion dollars for the quarter.
Speaker 4: The last item is some incremental success-based investments, including device payments tied to accelerate subscriber growth.
Speaker 4: Now, let's take a deeper look at our communication segment operating results, starting with mobility on slide seven. Let's take a deep breath in and out.
Speaker 6: Our mobility business continues its record level momentum.
Speaker 6: Revenues were up 5.2% with service revenues growing 4.6% driven by subscriber growth.
Speaker 6: Mobility post-paid phone off-pour was $54.81 up 81 cents sequentially or 1.1% year over year. This is a head of our prior expectations for stabilizing in the second half of the year. This improvement is larger result more customers trading up to higher price unlimited plans and improved roaming trends.
Speaker 6: Our two pricing actions were a modest benefit as well, but given the timing of the increases, we would expect our pricing access to be a larger factor in the back half of the year.
Speaker 6: Given our expectations for our crew, we not expect service revenue growth of 4.5 to 5% per year. That is up to our previously stated expectations of 3% plus.
Speaker 6: MobilityEbidot increased 2.5% year over year, despite an approximately $100 million impact from lower cap to government credits and higher first net costs. We also had around $130 million of higher bad debt expense during the quarter. While bad debt is now slightly higher than pre-pandemic levels, it is being all set by better than expected customer revenue growth.
Speaker 6: We may confident that mobility adjusted the EBITDA growth accelerates in the second half of the year due to revenue growth and the lasting of 3G shutdown investments that begin in the second half of 2021.
Speaker 6: Again, our customer growth performance was better than we expected, especially when you consider we became less active in promotional activities compared to others in our industry.
Speaker 6: So it's clear to us that the strategic change we made to simplify our go-to-market strategy two years ago continue to yield great results and that our value proposition is resonating in the marketplace.
Speaker 6: Now, let's turn it to our operating results for consumer and distance while I'm on spot 8.
Speaker 6: Our fiber growth was solid as we continue to wind share where we have fiber.
Speaker 6: Our total consumer wild line revenues are up again this quarter, even with the clients from Copper Base Broadband Services.
Speaker 6: Broadband revenues grew 5.6% due to fiber revenue growth and higher broadband off was driven by a customer mix shift to fiber and recent broadband pricing action.
Speaker 6: Our fiber arctu was $61.65 up 5.3% Euro over year with gross addition intake auto into $65 to $70.00.
Speaker 6: We expect overall fiber offering to continue to improve as more customers roll off promotional pricing and onto simplified pricing constructs.
Speaker 6: We accelerated our fiber footprint build and now have the ability to serve 18 million customer locations with great AT&T fiber experience that consistently with these high net promoter scores. That consistently with these high net promoter scores.
Speaker 6: As you heard at analyst day, our plans center on pivoting from a copper-based product to fiber, and we're doing just that. We continue to expect EBITDA growth to accelerate through the remainder of 2022 driven by continued growth in broadband revenues and the lapping of technology investments that began in the second half of 2021.
Speaker 6: Looking at business wireline, as John stated, revenues and earnings came in lower than we expected. There are two main factors that are driving the shortfall to our expectation.
Speaker 6: The first is lower revenue than an artist paid from the government sector.
Speaker 6: The second is inflationary pressure on wholesale network access costs. On a combined basis, these two factors accounted for about 100 million in EBITDA pressure year over year.
Speaker 6: While the business wildlife transition and portfolio rationalization creates incremental pressure on near-term revenues, it underscores the importance of transitioning to our own and operated connectivity services, as well as growing 5G and fiber integrated solutions.
Speaker 6: In fact, our connectivity services revenue growth continues to accelerate as we are up nearly 15% year over year.
Speaker 6: Both areas, business 5G and fiber, continue to perform well with business wireless service revenue growth of 7.4% and a sequential increase in our first net wireless base of more than $300,000. For more information, visit www.fema.gov
Speaker 6: Before we shift to questions, I want to provide you an update on how we are thinking about the rest of the year given to dynamic macro environment we're operating in.
Speaker 6: As I mentioned previously, we like the momentum in our mobility business, both on a service revenue and EBITDA basis. While we maintain expectations that 2022 industry post-pay phone demand levels are unlikely to replicate 2021, the strength we experienced in the first half of the year, coupled with better off-route trends, give us confidence in our raised service revenue outlook and expectations for an improved EBITDA trajectory.
Speaker 6: On consumer wire line, we are largely trending on-plan-given mixed-sift to higher R-pool fiber plans, which is driving both revenue and adjust EBITDA growth.
Speaker 6: on business wire line.
Speaker 6: You know the near term challenges we are facing, which reduces our expectations.
Speaker 6: We now expect business to decline in the low double digit EBITDA range for the year.
Speaker 6: Putting this all together, we remain comfortable in our ability to deliver revenue, adjusted E to the NEPS within our prior guidance ranges for the year. Moving to free cash flow, given the combination of elevated success-based investment, the potential for further extension of parents by our customers, inflation, and the more challenging environment facing our business waterline unit, we consider it prudent to take a more conservative outlook to free cash flow for the year.
Speaker 6: Given these factors, we anticipate pressure of about $2 billion to our free cash low guidance from our ploy at $16 billion for the year.
Speaker 6: Now, before the questions on how we get to the implied $10 billion of free cash flow in the second half of the year, when we generated $4 billion in the first half of the year.
Speaker 6: Let me provide you with some specific items to consider.
Speaker 6: Our outlook reflects the following expectations.
Speaker 6: $3 billion plus lower device payment versus the first half of the year due to timing.
Speaker 6: nearly 2 billion lower capital infestment versus the first half of the year as we reach our $24 billion expectations for the full year.
Speaker 6: The balance of the improvement relative to the first half of the year is due to wireless customer growth, including our recent pricing increases and lower cash interest expense.
Speaker 6: We expect these benefits to be partially offset by reduced distributions from DirecTV and our expectations for incremental tax payments in the second half of the year.
Speaker 6: However, we do expect full year tax payments to be lower than we previously anticipated. Additionally, we expect typical free cash flow seasonality with the fourth quarter higher than the third quarter.
Speaker 6: Although we're not providing an updated 2023 outlook, we expect improved cast conversion of EBITDA in 2023.
Speaker 6: Here's how.
Speaker 6: Better mobility cash flow as we get a full year benefit from a larger subscriber base at higher APU levels.
Speaker 6: We expect MVNO volumes to ramp and become more material through the course of the year.
Speaker 6: International roaming trends should improve as well. We expect broadband revenue growth from the mixed-shift to higher-priced fiber to continue.
Speaker 6: On the cost structure, we expect a full year benefit from our cost transformation efforts implemented in 2022 in conjunction with reaching our $6 billion plus target by the end of 2023.
Speaker 6: Additionally, the cost taxes we plan to execute in business water line in the second half of the year
Speaker 6: should produce more than 300 million of savings in 2023 relative to 2022.
Speaker 6: also recall that we have no 3D shutdown costs in 2023.
Speaker 6: In addition,
Speaker 6: We expect lower cash interest expense as we get a full year benefit from the debt pay down action taken in 2022.
Speaker 6: All these factors should more than offset the expected lower distribution from direct TV and an expected year over year increase in cash taxes.
Speaker 6: In summary, there is no doubt we're operating in a dynamic NACO environment, but we feel confident in both the resilient nature of our business and the underlying financial flexibility we gain from recent disposition. We're about to build a regain from recent disposition.
Speaker 6: A mere, that's our presentation. We're now ready for the Q&A.
Speaker 4: Thank you Pascal. Operator, we're ready to take the first question.
Speaker 3: Thank you, ladies and gentlemen. If you wish to ask a question, please press 1-0 on your telephone keypad.
Speaker 3: You might withdraw your question at any time by repeating the one zero command.
Speaker 3: Our first question will come from the line of John Hudlick with UBS. Please go ahead.
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Speaker 4: Hey John , sorry you're breaking up right now. Why don't we go to the next question and reconnect you.
Speaker 9: Okay.
Speaker 3: Thank you. Our next question will come from Simon Flannery with Morgan Stanley . Please go ahead.
Speaker 10: Great, thank you very much. Good morning. Just coming back to the 2023 free cash flow. Can you help us a little bit with the CAPEX? That's still expected to be about 24 billion before dropping off the following year, especially given that you've said you've pulled forward some of the 5G spend. I guess any updated thoughts on what you want to do in terms of fiber, you're going to continue at this 3.5, 4 million homes or locations a year and you're going to stop at 30 million.
Speaker 6: in mind is one of the things that we did when we did all the dispositions, we wanted, we, our plan was to invest significantly this year and next year.
Speaker 6: both the $24 billion level. And as you see so far, the momentum in our business remains really strong. Those investments are providing a track of returns and everything we see suggests that these were really good decisions. So yes, we are expecting $24 billion next year. We continue to expect to deploy fiber at the pace we've previously guide. And as it relates to direct TP.
Speaker 6: As you see so far, the momentum in our business remains really strong. Those investments are providing attractive returns and everything we see suggests that these were really good decisions. So yes, we are expecting $24 billion next year. We continue to expect to deploy fiber at the pace we've previously got. And as it relates to direct TP, uh. And as it relates to direct TP, uh.
Speaker 6: Nothing has changed at all. We expected around 4 billion this year. As you can see from the first couple quarters, that's more front-end loaded. And next year we expect 3 billion. So nothing has changed in that regard. And we feel really good about how the business is performing.
Speaker 10: Great, and just a quick follow-up on the price increases, what's your early read of what customers are doing? Are they paying the extra $6 or $12? Are they migrating to unlimited plans? Is that accretive or not? Any surprises on churn?
Speaker 5: Everything is tracking as we kind of expected when we laid it out the time. And as Sherwood, yeah, I think when we indicated we were gonna do it, you know, what we have is past models from executing these types of things that allow us to go and try to evaluate how customers are going to react and behave when the changes occur. And in this particular case, we had a great opportunity to ensure that what we were going through a price increase on a segment of plans, we were able to also provide the option or a customer to think about.
Speaker 5: need to migrate into better plans and trade up and take not only some of that value that we're giving but as you're seeing we're starting to drive the improvements in our poos that we told you would occur and certainly this is a component of that happening but I would tell you it is tracking as we expected it will be a creative as we expected and I think you know everything we've given you for end of your forecast is consistent with what is occurring right now in the market in the early days of the change.
Speaker 5: better plans and trade up and take not only some of that value that we're giving but as you're seeing we're starting to drive the improvements in our approves that we told you would occur and and certainly this is a component of that happening but I would tell you it is tracking as we expected it will be accretive as we expected and I think you know everything we've given you friend of your forecast is consistent with what is occurring right now in the market in the early days the change. Thanks John .
Speaker 3: Thanks very much, Dr. Milla. Operator, we can get the next question. Thank you. Our next question will come from Brett Feldman with Goldman Sachs. Please go ahead.
Speaker 11: Yeah, thanks. And I guess sort of a two-part question related to the timing issue that you highlighted with collections. So the first one is, what gives you confidence it really is a timing issue and not really a non-payment issue? You alluded to some prior experience in different economic cycles. So I was hoping you could maybe just elaborate on that. And then I'm curious to what extent this might be shaping the way you think about going to market, particularly in your wireless business. As you move into the back half of the year, you've obviously done very well.
Speaker 11: with a certain offer or suite of promotions. Does it make sense to maintain the same promotional stance in a more difficult environment, particularly where there may be some timing issues? It certainly seems like your financial guidance anticipates lower volumes in the back half, but if that's a misunderstanding, any color there would be helpful. Thank you.
Speaker 5: Brett, first of all, I'd say that our most recent experience in looking at kind of a challenge cycle is probably...
Speaker 5: Coming out of the 2008 recession and the dynamic around it, as I indicated in my earlier remarks,
Speaker 5: You know, we've evaluated that, we look at that, and that was a pretty stressed time, if you recall, and I don't know that I can exactly predict what's going to occur over the next year or so.
Speaker 5: My guess is it probably won't be quite as shocking as that cycle is what's occurred and in a worst case scenario. And we go back and we look at patterns and behaviors that have occurred in those cycles and evaluated them. And the other great thing we know that today is we have far better data that we've ever had that's more dynamic and how we do algorithmic scoring and things like that that allow us to be even more effective and managing customer risks. So.
Speaker 5: I think we feel pretty comfortable that we've got, you know, a reasonable record of data that allows us to do some projection on that as we start to see these things move. And as I said, this typically is not an issue of people not paying, it's an issue of when they pay. And I don't believe there's anything in our credit scoring and how we looked at our customer base coming in that would cause those trends to be dramatically different than a previous period. You know, in terms of how we go to market.
Speaker 5: We, I think we had a fantastic quarter and I don't know that I want to go to market any differently than the quarter that we put on the board.
Speaker 5: In fact, looking at many of your commentaries, you've been articulating that others have been much more aggressive in the market and probably leaning in to promotional activity in a heavier way. I would characterize our approach as being much more tempered and consistent with the past, and we have not really responded to that increased promotional activity that we're seeing from others in the market right now. We've been continuing to play our game, we put up a
Speaker 5: You know, a record quarter or a second quarter for ourselves in a 10 year period. And as I've told you before, we like each of these incremental subscribers for bringing in. We think the economics of them are very strong. I'll be if there is investment at the front end to bring them onto the network. But I'm not gonna shy away from that kind of growth. I don't know what the overall market's going to do for the next several quarters. I expect it will be, as I said in my comments.
Speaker 5: A bit more tepid is maybe economic stress comes in, but I've been saying that we expected it to be a little bit slower for a better part of nine months now that hasn't materialized yet.
Speaker 6: You know, we'll take the growth if it comes in. Uh, I expect it's going to slow a little bit and I'm going to continue to play our game as long as it's working and it's working right now. And Brett, one other point on, uh, as it relates to the overall, uh, credit quality of our customer base, while we did end up taking bad debt overall, if there's nothing at all concerning, you know, it's up slightly for pre pandemic level. So what?
Speaker 6: Our call out here was really just a question. Question investors given the broader macro trend that are happening. So we're not in any way of on-bidest. So we're not in any way of on-bidest.
Speaker 12: Thank you.
Speaker 1: Operator, we can move to the next question.
Speaker 3: Thank you. Our next question will come from the line of fill.
Speaker 3: Q6 with JP Morgan, please go ahead. Thanks very much, Gus. Couple of follow-ups and one new one. Can you, John , talk anything about recent customer trends? June and July , you just said a minute ago, you expect things to slow down, but it doesn't sound like you've seen a lower customer trend so far. It's a little surprising, given the elevated DSOs. And it sounds like... And it sounds like...
Speaker 3: You guys don't have a lot of confidence in that 2023 free cash flow number. What is there just less visibility so you don't want to cut that now? Or are you still reasonably confident in the $20 billion and you think you can get there? We can use a little more. And then finally, can you just get into the recent launch of plans that don't include HBO? What's the potential cost savings from that shift of customers away and what's been the reaction? Thank you.
Speaker 5: Hi Phil, so let me touch on these first and then Pascal can come in and back Phil to the extent he wishes to do so. So customer trends, first of all I don't want to go down a path on stuff we haven't disclosed, but the first part of July as you'd expect tends to be a little bit more suppressed because it's a high holiday and vacation period and that's what I would call seasonal and cyclical and we certainly saw a little bit of that occurring, but I'm not seeing anything in the market right now that suggests that.
Speaker 5: and have to fill the car and you get the electric bill come in and you see the kind of stepups that people are seeing. I think there's an adjustment period that goes on. The flip side is you've got another segment of the population that banked a lot of money during the pandemic. They weren't traveling, they weren't dining out. They were feeling a little bit more flush and they're making different decisions. And as you know, our post paid base is probably skewed a little bit more to the...
Speaker 5: higher socioeconomic dynamics and probably a bit more insulated. But there is a portion of the base that clearly is starting to adjust to this dynamic, that there's higher calls in their cash in any given quarter. They're having to adjust betting patterns and behaviors and prioritization of how they order bills. I think we're seeing that there's a little bit of that starting to occur. As Pascal said, it's not alarming in the way it's happening, but it is moving out.
Speaker 5: collection cycles a bit as we typically see when this type of stress starts to show up. And that's what the working capital issue is around it. So I would tell you I don't see anything in here that would be a pattern for this occurring. I think you've got two different parts of the economy though that are working in different ways.
Speaker 5: and how they develop over the course of the next several quarters is a little bit of a visibility issue to be candid with you. And I don't know, you know, if you'd asked me six months ago, would we see 9% inflation annualized?
Speaker 5: I don't think I would have picked it as being that strong, but here we are. Now the question is, how fast do we eradicate it and what rate? If you have a good pick on that or good insights, then I can probably be a little bit more precise on what I think 23 brings. I think what's important to understand is Pascal articulated his comments is the fundamentals of the business are really strong. We feel really good about some of the
Speaker 5: The mechanical things that will improve cash flow yields into 23, that's not going to change. But what happens in the overall economic pattern is a bit uncertain. And without seeing how the Fed reacts, how fast we see the curve has started to a bait on the inflation side, trying to make that pick right now, just feels like it's a bit of an overreaching. So I think we're reserving the right to get a little bit more visibility on 23 to declare.
Speaker 5: But I think the strong improvement dynamics are what I would call mechanical and the performance of the business is supporting the fact that we're going to see that improved conversion on cash flows who moved through the year. The strong improvement dynamics are what I would call mechanical and the performance of the business is supporting the fact that we're going to see that improved conversion
Speaker 5: And then finally on your question about the plans, we still have a lot of... We still have a lot of...
Speaker 5: Streaming services in our base that we're using, we're trying a couple different things.
Speaker 5: Part of this has been segment driven to look at opportunities for us to address areas that we think there is potential for stronger growth. And we shifted the mix of our plan and what we gave away, so to speak, and some of the benefits, especially as we were executing the price changes that we talked about previously. And we felt that this quarter and where we stood that working on things like more generous hotspot.
Speaker 5: capabilities and better roaming moving into the summer might be a better play in the market. And I would tell you kind of like what we saw you know in our results despite a lot of the changes by others in the industry in terms of what their value proposition as the customers and it it feels like it was a good pivot and rotation at this moment for what we needed to do with the kind of changes we were making broadly in our plants.
Speaker 5: That doesn't mean that that's the strategy forever. And it doesn't mean it's the strategy for the rest of the year. As we move through the summer months and we get through the peak travel periods and we look at what other options we have, we could choose to do something different in what we decide to do from a promotional perspective and what we choose to bring in as part of the bundles moving forward. I don't think anything should be viewed as static. And I think entertainment is part of a wireless bundle to reevaluate the spaces that we choose and play with.
Speaker 5: is probably something that's going to be around with us in this industry for a good period of time, because I think customers, certain customers, resonate with it. And HBO Max is a great product. We like the fact that we're kind of viewed as being the place to come to get it. And when it's right for us to put that up in the front line to do that, we'll continue to do that.
Speaker 12: Thanks, Sean.
Speaker 4: Thanks very much, Bill. Operator, if we can move to the next question.
Speaker 3: Thank you. Our next question comes from the line of Michael Rollins with city. Please go ahead.
Speaker 11: Thanks and good morning. So follow up in a question. When you're discussing some of the impacts that your customers are experiencing this inflationary environment, can you talk about how AT&T is using the ACP program, the size of it, and the opportunity to use that, which may be different than some past cycles. Customers had to deal with, you know, potentially tough from macro climate. And again, secondly,
Speaker 5: in the middle of that occurring, but the process of choosing not to drive new sales at the front end has been a relatively straightforward set of decisions. And I feel like we're executing reasonably well around that piece of it. We have dropped the number of products we have in the market pretty demonstrably over the last year and a half and we'll continue down that path. And I think it's that reduction in complexity that will allow us to then scale up what's essential to have a viable franchise moving forward in a robust.
Speaker 5: and growing franchise moving forward, which is one centered on moving product that is on our own and operated infrastructure. And what's right about our segment here that I wanna stress, if we report a little bit differently, than some of our peers, we do not report a consolidated business entity of both wireless and wireline services. You should understand a lot of our strength in the wireless business is coming from our success in our enterprise business. It's coming from increases in the public sector and our success of...
Speaker 5: of what we've done with FirstNet. It's coming from our success in penetrating deeper into our enterprise accounts with wireless services. We're really pleased with the share gains that we've seen in enterprise moving forward. Where we believe we have the opportunities in the mid market and the low end of the market, and they tracked a part about that as it's a two-for. It's not only giving more transport on the fiber infrastructure we're deploying, but we are under penetrated in the wireless space as we move into those accounts.
Speaker 5: So when we deploy Fiber and we have an opportunity to talk to mid-market customers about putting more of their transport on AT&T, we also oftentimes get the opportunity to talk to them about moving their wireless account as well. And that's an attractive opportunity for us. It requires us to tune our distribution differently. That's a slower process. And we've been making progress around it. You heard Pascal talk about?
Speaker 5: The growth that we're seeing in our fiber products, we're seeing some progress in the wireless space in the mid market, but we're not up to where we need to be yet. We will get there. We play very well in that space. Our brand plays very well in that space. We know how to sell product in that space, but it's getting the engine, kind of hitting all our light cylinders. It's gonna take us a couple more quarters and what we expected, but I'm optimistic we can get there. It's the right asset base. It's the right brand.
Speaker 11: We know how to approach these customers and we will make that happen. All right, great. Thank you very much. Thanks very much, Frank. And operator, we have time for one last question. Thank you. That question will come from the line of Tim Horan with Appenheimer. Please go ahead. Thanks, guys. Two questions. Could you just elaborate a little bit more on the waterline side of the business market?
Speaker 13: What are you replacing your legacy virtual private line networks with the same thing with voice? Are you I guess are you retaining these customers? Do you have a product for them? Is it just a you know a lower R poo issue? And then secondly on the catbacks we're hearing catbacks equipment costs labor costs are up 10 15% I know you know you dig your guidance out of quite a while ago for next year I guess how are you offsetting those those price increases that we're hearing about out there? You're keeping your catbacks flat thanks.
Speaker 5: Hi Tim. So what the move, as I just articulated, is we want people unknown and operated infrastructure. And so it is, as people migrate away from VPN, and we have a more dense fiber bases, we're selling more fundamental underlying transport, frankly, at higher speeds, and therefore higher connection values in that segment of the market, and that's where our future is.
Speaker 5: We work with layering that on a SDN capability that aggregates that, and that is the replacement product for VPN. We do very well in the market on that, although there is typically in a network replacement at the top end of the market some trade down in total value when that occurs. That's why this move into the mid-market is so important to us where we are typically under-penetrated.
Speaker 5: Because offsetting that trade down in the enterprise, top end of the enterprise space, where we are a share leader on VPN and have these complex networks, as we have some of that trade down and the migration on the technology side, market replacement in the mid-market is what offsets that and allows us to move the sector back to growth over time as we make that happen. And again, it's why this investment in fiber and our core business is so critical and important.
Speaker 5: and repositioning our distribution to make that happen. The world for us moving forward is a data VPN replacement world. And that's where we're gonna make our bread and butter. Our play and voice is to penetrate more deeply into wireless in these spaces. Generally speaking, when you look at what's happened on collaboration services, it's moved to other providers that are doing that kind of work. We want the underlying data infrastructure and those collaboration services to run on.
Speaker 5: And we want to sell more scale wireless solutions on top of our transport services into these customers to extend our relationship with them. And I think as I said, just a moment of Frank's question, we're doing that fairly effectively. And that's what the future is and how we move forward on it. On the cost side, we're certainly seeing some pressures, as we move through, we've articulated that. We're able to navigate it better than a lot as we've shared with you previously. We have a lot of long-term.
Speaker 5: contracts in place. I think those help us a lot. I won't tell you the entirely insulated. We want our suppliers to be healthy. We pay attention to that. We have grew good, long-standing partnerships with our suppliers, and I will be candid. We have sat down with them. In some cases, I've even though not had to pay people more, I've elected to pay people more because I think that makes for a healthier, went-went relationship on things moving forward. And we are having...
Speaker 5: a lot more rapidly than we thought we would. That has a big impact on the overall return characteristics of this investment that can overcome maybe some of those per living unit cost increases. We really like the ARPU trends we're seeing. We really like the churn trends we're seeing. All those things still make this a really smart and important investment for our business. And I think it's a balancing act as we move through it. And as we've said before, when you get the asset in the ground and ultimately work through multiple quarters of inflation, building it today is better than building it a year from today.
Speaker 5: And if it's a long-lived asset and it's an important product, ultimately we'll probably see some accretion move into our booze over time. So I feel like we can manage through this reasonably well, given our scale, given our long-term relationships with folks, and the importance and durability of the product over time. Thank you.
Speaker 5: a long-lived asset and it's an important product, ultimately we'll probably see some accretion move into our foods over time. So I feel like we can manage through this reasonably well, given our scale, given our long-term relationships of folks and the importance and durability of the product over time. Thank you. Thank you very much, Tim.
Speaker 5: So folks, I really appreciate you taking the time to be with us this morning. And I know you got from maybe hopefully last time a little extra work to do this quarter as we work through the disaggregation of discontinued operations and the like and results. And I'm excited about finishing this in this quarter and now moving forward in a more consistent fashion. We made some hard moves that brought us to this moment that all acknowledged.
Speaker 5: But those hard moves were to, number one, give us the ability and the flexibility to invest heavily in this business, and to make sure that we could respond to what goes on in the environment economically, whether economic stress, rising interest rates, et cetera. And I would say I'm really pleased we're in this position for having made those decisions. And it's allowed us to do exactly what we intended to do, which is to think about how do we create a durable AT&T with a consistent machine.
Speaker 5: that can deliver the right kind of subscription services for broadband moving forward. And I think we are doing that. We're building world-class infrastructure. Where we're doing that, you're seeing the momentum in the market that we're able to achieve. I view these customer relationships as durable customer relationships that are highly accretive and attractive. And I will tell you that as I work with the team, 90 days in this business with the way we operate and the infrastructure we build is sometimes a bit like trying to land a plane on the top of a pin.
Speaker 5: And so when I think about the reality of what we're doing here, we want to look at it over the course of the year and as the business has the right kind of momentum, and I've got people doing their work, we continue to invest, we make sure we put the right things out there, and a 90-day cycle is not the end of the world in any way, shape, or form. Hopefully, we've given you the confidence that we understand what's going to occur in the balance of this year and that we're investing in a way that's going to...
Speaker 3: return for shareholders in a fashion that I think will all be proud of moving forward. So thank you very much. I hope you all enjoy the rest of your summer and we'll talk with you in 90 days. Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.