AT&T Inc.

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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 open for questions. If you would like to ask a question, please press 1 and then 0, and you will 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 1 and then 0. And as a reminder, this conference is being recorded. I would like to turn the conference call over to our host, Amir Rozwedowski, Senior Vice President, Finance and Investor Relations. Please go ahead.

Amir Rozbudowski Thank you and good morning, everyone. Welcome to our fourth quarter call. I'm Amir Rozbudowski, Head of Investor Relations for AT&T. Joining me on the call today are John Stanky, our CEO, and Pascal de Roche, 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. 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 have been announced, but we're still in the quiet period, so we're limited in what we can say. With that, I'll turn the call over to John Stanky. 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'm 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, and HBO Max. In Mobility, strong network performance and a consistent go-to-market strategy helped us lead the industry with about 3.2 million post-paid phone net ads. That's more customers than 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 to 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 reaches a base of 73.8 million subscribers globally. WarnerMedia is well-positioned as a dynamic global business. In addition to growing customer relationships, we also continue 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 improve mobility NPS and industry-leading fiber NPS. We also continue to rationalize our low-margin business wireline services as we reinvest savings into 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 U.S. video assets and Brio to our pending WarnerMedia transaction. Together, these and other asset monetizations will generate more than $50 billion, and AT&T shareholders will own 71% of one of the world's foremost media companies in the new Warner Brothers discovery at close. we also continue to generate meaningful levels of free cash flow nearly 27 billion dollars in 2021 a 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 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 WarnerMedia deal is progressing and now expect the transaction to close in the second quarter. Going forward, we aim to be America's best broadband provider, powered by 5G and 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 and taking share in under-penetrated segments of the consumer and business marketplace. While we're still in the 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, and 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 2 gig and 5 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, and we look to further our international momentum and deliver more world-class content for viewers. 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's position 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'll continue to responsibly remove costs from the business. We have a clear line of sight to achieving more than two-thirds 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 sustain low churn levels. As we expand our fiber reach, we'll be orienting our business portfolio to leverage this opportunity and stabilize our business wireline unit by growing connectivity with small to mid-sized 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 WarnerMedia transaction to achieve a 2.5 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 the 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're 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 look forward to giving you more detail at our virtual analyst event which we expect to host in March. And 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 continue 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've built in 2021 to carry over to 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 from both periods, consolidated revenues were up more than 4 percent for the quarter and about 6 percent for the year, thanks to growth in our market-focused areas. Adjusted EBITDA was down 8 percent for the quarter on a comparable basis. Growth in mobility was more than offset by a decline at WarnerMedia from increased HBO Max investments. the new DIRECTV advertising sharing arrangements, and lower contributions from basic networks. Our consolidated operating income results continue to be impacted by certain retained costs from DIRECTV that are in the process of being rationalized. Apart from WarnerMedia's 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 direct TV and tangible 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 guides for the year. For the quarter, cash from operations was 1%. $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 in 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 communication business on slide 8. For the second consecutive quarter, our communication 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. also continues to deliver impressive results with phone churn 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 comes without a material return to international roaming and with 3G 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 FirstNet operations and the completion of support funding for the CAF2 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 wirelines 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 the capabilities to support those businesses through that evolution as converged wireline and wireless solutions become the norm. At the same time, we're energized by the opportunities that our fiber expansion creates in the small to mid-sized business segment, and we plan to be more active there going forward. Turning to consumer wireline. our fiber customer growth and fiber network expansion continues. And we continue to win share wherever we have fiber. We added 271,000 fiber customers, even in a 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 in fiber, 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 WarnerMedia's results, which are on slide nine. WarnerMedia revenues were up 15.4 percent, led by strong content licensing and D2C growth. D2C 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 TV licensing and theatrical releases. Advertising revenues were down about 13%, primarily due to lower audiences with tough comparison to the political environment in 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 some incredible content in the fourth quarter, including the premiere 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 A Batman, Winning Time, The Rise of the Laker 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 is a full year view of our consolidated revenue outlook, excluding direct TV and Brio from both periods. Our outlook does include a full year of expected results for WarnerMedia and Zander. We also included our full year expectation for WarnerMedia's 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 remain code 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 one-time 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 in EBITDA are expected to grow on improving fiber subscriber trends. However, we expect fun and loaded investments to impact first quarter year-over-year EBITDA trends as we ramp up promotional efforts around our new multi-gig offering. 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 WarnerMedia's 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 direct TV 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 them to be revenues in the $37 to $39 billion range, EBITDA in the $6 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 our presentation. We're now ready for the Q&A.

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

Thank you. And as a reminder, if you wish to ask a question at this time, please press 1 then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1 then 0 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 build out this year, what's the fiber build out this year? Any color there would be great.

Hi, Simon. How are you doing? So first of all, on where we are, when we set 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 a high degree of confidence that we could work through the regulatory process. And I'm really pleased the team has done exactly that. And if you kind of looked at the prototype of the timeframe and 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. You know, we've gotten through our filing process with the SEC. You know, you kind of look at where we are in other international regulatory domains and what our exchange has been with domestic regulators, and all that is going right to pattern as we expected, and we don't see anything that, you raising our confidence level that we can tighten that timeframe of when we believe we'll have everything kind of line up and be ready to go sometime during the second quarter. So I'm really pleased about that. I think everybody feels pretty good about where things stand. There's 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 the 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 we're 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 has to make a final decision. Looking at it, handicapping it in 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're almost ready to call a question on that. Our desire and our posture on that is 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're 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 want to do around that. They've, as you would expect, put a lot of diligence into this over the last several months. They've carefully considered a lot of different options. There are pros and cons to going either with a spin or a split. Certainly it's attractive and the reason we kept this option open is at some point I'd like to get the share count circulating on AT&T down and this was an opportunity for us to evaluate whether something like that could occur. In order to do that, it's a bit of an unprecedented transaction in size. There's 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 sometimes 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 is our watchword around this transaction, which was We want the shareholders to get value out of this. This is all about driving shareholder value. And given the size of a split, you know, we know that there would have to be some leakage to kind of get that structure properly. So, you know, as we kind of step back, we want to do something that's clean. We want to do something that's deliberate. The board hasn't decided right now. There's pros and cons of both. But I think we'll be probably giving you some sense of what we want to do around that in fairly short order. And we want it 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 settle to the right place. And, you know, 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 would take a little bit of time, both the regulatory process and then the reordering and combination of the new assets. And so being mindful of keeping true to the best way to get value back to the shareholder and being patient as the markets wear out over time. I think that's kind of where my head's at at this juncture right now. And we'll finish the final touches on this and ultimately let you know 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 and where it stands right now that no matter where we are in that $8 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's a good play either way around that. On the CapEx side, Simon, we... We aren't going to break out specifically what we're doing and in specific categories of the spend. What we've tried to give you a sense of is, first of all, we've given you the guidance for the year. We've 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-year. 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's public and in the public domain that we've won 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, you know, 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're going to deploy around that. And, you know, I think typically when we've looked at an air interface change. It's been an $8 billion-ish round number to kind of get through that transition over a number of years. And I expect that that'll probably be the case as we work through the next three-year deployment of this air interface change.

And on the fiber side?

Look, we've given you the direction of where we're heading. They're going to be at 30 million homes by the end of 2025. You saw us pick up the pace in the fourth quarter. We wound up 2.6 million past 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. And 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 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 count start to ramp as that footprint gets larger. And 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 million plus ads now with a product that's going to be even better. It's going to clearly demonstrate the superior capabilities of the infrastructure we're putting out there, plus the footprint expansion, I feel really good about the momentum you're going to be seeing in our subscriber counts as we move through 22. Great.

Thanks for the call.

Operator, can we move to the next question?

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

Yeah, thanks for taking the question. Your simplified mobile offers have obviously had a lot of traction in the market. 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 attracted to that had a lot of opportunity to avail themselves. And so 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, and what is your tactic for 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'm concerned about. I actually view it as something that we're really pleased about. It's basic, fundamental, easy for the customer to understand that we see no evidence whatsoever that we're losing traction in the value proposition that we have. And in fact, I would point to what we did this week on our broadband offer in 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's sustainable. It drives up customer satisfaction. It allows us to be consistent in our messaging that we carry out to the market. It ensures that every one of our employees knows the line and doesn't have to relearn something every 30 days, 60 days, 90 days. And 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 a focused, simplified business moving forward, part of what we're attempting to do is move our entire product portfolio into a position that we can represent it in a similar fashion. And so this week's move in 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 that 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's 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 to the consumer some of those characteristics we just talked about 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 WarnerMedia 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 in a little bit more pointed fashion that we want to carry forward. I think that it's 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 around that so that what we tell the customer is, 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 definition looks like and where we're going.

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

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

Great. Thanks, guys. First, Pascal, thanks for all the color on the guidance and, you know, per segment. But can you let us know what the guidance for 22 assumes for RemainCo EBITDA growth? And then drilling down a little bit further, um, obviously you guys cut the losses on the, uh, on the business side and it sounds like you expected, you know, 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 did you foresee the possibility of that segment returning to EBITDA growth by the end of the year? And then, um, and then maybe for John, um, just maybe following up on those, 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 brand, you know, selling a package of fixed and mobile services? Thanks.

So let me do the front end of this, John, and then I'll have Pascal just kind of walk you through the EBITDA dynamics. So let me step back. We're going to spend a lot of time on this in March when we're 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 you should understand we've been executing on over the course of the last year and the process we're in. 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 calling has 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 or a fixed network. And we've made really good progress in our distribution in 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, are we doing the right things to pick up the business segments where we can grow in the small and midsize 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 the 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 and complex networking for those that need it. And those that need it are typically broad distributed companies, not ones that operate two data centers based on how SD-WAN is developed, et cetera. But it's those that have a lot of branch offices or many stores to support or restaurants to support. That distributed networking is kind of our strength in what we do and where we'll 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're making that pivot to ultimately get back to the kind of growth that we need. I don't expect an aggregate that we're going to see EBITDA 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. And 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. I can't disclose a couple of the larger customers. we've signed with yet at this point, but you're 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, us starting to do a better job of using 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 gain 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 caring about how we deliver. Pascal, do you want to give the EBITDA guide?

Sure thing, Luke. As you know, John, we did not give specific EBITDA guides, but I think you can get pretty close with some of the information that we've given. Here are some of the dynamics to think about in each of our major businesses for RemainCo. 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. We, transformation continues and we expect some operating leverage from that. So we feel really good about the trajectory 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 this, we feel really good about the build we had in 2021. As that business scales, the operating leverage is really good. You couple that with transformation, the consumer wireline segment is also expected to grow. As you 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 on corporate and other. You can get a pretty fair sense that Overall, the business is going to be, on an EBITDA basis, flattest up modestly. Got it. Okay. Thanks, Mr. Conley.

Operator, we can 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 we could dive a little further into the wireless business, and specifically if you could 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 contributions that you would expect from a DISH wholesale deal that you previously announced. And then just separately on a higher level in terms of the asset mix, John, you mentioned that you were largely done with asset dispositions. And just curious if there's any further questions exploration of optimizing the wireline footprint or thinking about the future opportunities for your DTV business and where that may better fit strategically over time.

Mike, let me start. Here's the way for you to think about it. First and foremost, 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. That's one. In terms of our pool, and I think we've said this previously, the way we think about this is, as we make our way through the year, we have every expectation that we should see continuing recovery in international roaming. And also, what we're also seeing is our Elite Unlimited plan is our highest priced ARPU plan, and it's 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 of some of the promotional expenses, but all in all, we feel really good about the trajectory of mobility.

So, Michael, good morning. On your second question, so we set up the DirecTV structure deliberately, and when I say we're through the asset disposition, I think the distinction I would draw there is The management team 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 DirecTV 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 is, 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 it, 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 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 relooking 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've 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 products, 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, that have been the mainstay of this company for a period of time, and doing in a very, very smart and tactical way the shutdown and sunset of those. And as we sunset them, 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 costs 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 saddled with distracting operating models that don't allow us to be a focused broadband fiber provider offering the best products available on the market. Thanks.

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

our next question comes from the line of david barden with bank of america please go ahead hey guys thanks so much for uh taking the questions i guess my first one uh for you john you know we saw about two and a half times more fiber homes passed in 2020 but you know over the course of the year fiber net ads didn't really accelerate and so as we look at you know even more acceleration in fiber you know when should we start to see the acceleration in fiber net ad and and what's the typical lag time from a passing to a selling opportunity. And Pascal, you know, I guess I was a little surprised to see the $4 billion gross capital investment 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 that it raises the question as we look into 2023 and people have been, you know, as you know, trying to bridge from this year's 26 to 30, the 2023 20 billion guidance, given the higher CapEx and the loss of the $3 billion WarnerMedia cash contribution, how much vendor financing 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 color from Pascal on the EBITDA dynamic and cash flow. The answer to your question is, from the time we say go to about the time we're actually in the market selling, is currently running about a year. And that's literally when we say go that we're going to start engineering and go into a particular area. I'd like that at maturity, and the challenge I've got to the team is 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 spottiness 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 were back in 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 again. And as we shared with you, what we have improved fairly dramatically over the last several years is our rate to penetration once it becomes available for sale. And we're walking up that penetration dynamic faster. And so what my goal had been, and what I'd still like to work the management team to, is from time of engineering to time of availability, nine months, and then achieving what we're actually doing right now on the penetration rates. And so 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 rate to penetration, teams made a lot of progress on that. That's a huge economic driver of return given the pace and 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's kind of been working against this right now and making that happen, and maybe that clears sometime this year. We'll have to see.

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 rates of free cash flow. WarnerMedia is contributing, call it, around $3 billion. And we expect 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 vendor financing. But we have found that more and more of our vendors are willing to provide us very attractive terms and we're taking advantage of those. With all that said... The guides we've 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 and RemainCo. 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 Pascal, if I could just quick follow up on that. So 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 precash 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 precash flow number will fall, replaced by vendor financing, and that $20 billion precash flow guide is actually going to be higher?

As I said, Dave, you will hear from us. Today we are giving guides on 2022. You'll hear from us on 2023 at Analyst Day in March.

All right. Thanks, Scott. 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 J.P. Morgan. Please go ahead.

Thanks, guys. You know, it's funny. I know you're not going to own this forever, but 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, but should we think of this HBO ARPU run rate as a good level going forward, or is there still expected to be volatility there? And how do you think about the 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 a sort of negative EBITDA all year, or do you think by the back half we've got enough growth to get that back to positive? Thanks very much.

Sure, Phil. 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 ARPUs 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 going to be a large part of the growth moving forward, given the new markets we're opening up and the natural penetration that occurs, given the product is sized differently and starts from a different place you're going to see that have an impact. Generally speaking, those ARPUs 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 U.S. 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. Effective January 1st, the products are identical now. And as a result of that, I expect there'll be some customers that choose to go the ad-supported route that may have gone the subscription route before. However, What will happen is it's not that one is less accretive than the other. The subscription line will possibly dilute a bit, but the advertising line will increase. So when you look at the customer overall, they're no less profitable. It 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 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 than 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, you know, the nice part about that is we said this was going to happen, and it happened. We said the market was going to come to us on pricing. And lo and behold, you know, we are no longer the high-priced offer in the market. And, you know, 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, you know, starting with mid-40 million-ish customers allowed us to be very different given the ARPUs that we had around them. And then finally, you know, 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 the right decision in a post-COVID 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'm 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'll 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, then 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 that really are Amazon's direct-to-consumer customers. They are not the media company's direct-to-consumer customers. Pascal, did you want to add anything on the EBITDA side?

No. Look, we've provided you with guidance for WarnerMedia, the contributions for the full year. And keep in mind, we are launching... in a number of European territories, as well as we plan to launch CNN Plus this year. 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.

And that last question comes from the line of Kanan Venkateshwar with Barclays. Please go ahead.

Thank you. So, Pascal, maybe one on free cash flow and another on the standard. But broadly on the free cash flow side, if you think about the $20 billion kind of a number for this year, could you help us understand the breakdown? I mean, There's been some pushback, obviously, as you're aware, that the 20 billion number may not be a real number until you're on the back of the telecom business. So if you could help us understand how much of the contribution comes from, say, DirecTV, the Zander bit, as well as potential cash flow reversal, because you might now get paid for HBO distribution instead of absorbing the working capital impact. So if you could just help us understand that, that would be useful. And then the other source of confusion, I think, has been the impact of Zander and the relationship across the three assets, across DirecTV, AT&T, as well as OneMedia. So if you could just understand the puts and takes, I mean, what went away with the Microsoft transaction, how much of cash flow comes in to AT&T, and what moves out to DirecTV, that would be useful to contextualize the cash flow number. Thanks.

Okay. So, Kanan, appreciate the question. So here is... For 2020, let me try to break down free cash flow for you. Said, overall, we are guiding to $23 billion. The contribution from WarnerMedia 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 part 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 deployment of spectrum as well as our continuing accelerated rollout of fiber. So we're going to have higher CapEx. But we do expect as we make our way through the year that our cash interest costs should decline because of the delevering that is happening at the company. And, of course, we are growing our, as I said, were flapped up modestly on EBITDA for the overall remain code. Those are the big piece parts. The way to think about Zander separately, Zander has the way to think about historically two pieces. You have the AppNexus 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 and included within WarnerMedia's results. Upon separation, there was a new agreement struck whereby WarnerMedia would continue to sell DirecTV advertising inventory through until close, and in exchange for that, WarnerMedia would receive an ad share. And So the vast majority of the economics of the DirecTV advertising inventory is going back to DirecTV. Only a commission is staying with WarnerMedia. So those are the key spots for Zander and the free cash flow dynamics.

Got it. And could I just ask one follow-up on HBO? On the Amazon deal, that probably caused some volatility in the quarter, but revenues were sequentially down. even though subscribers were up and the ARPU 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 from here on?

Yeah, Kunal, yes. We expected that we were going to be decelerating as a result of Amazon. It is a one-time decline as we move forward and continue to grow subscribers, we would expect that growth from here.

Thank you.

Thanks very much, Kanaan. Turn it over to John for some final comments.

So thank you very much for joining us today, and I just couldn't be more pleased with how 2021 turned out. As I started in my opening comments, we outlined for you what we intended to do through the course of the year, and I think we checked the boxes across the board on every commitment that we made to you. I'm really proud of the team. I'm proud of Jason. 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 and restructuring this business to get the kind of operational focus that, you know, 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 and allow both management teams to focus on moving things forward in the way they can with a clean operating environment. I think the best days are ahead here as a result of that. Thanks very much. Hope you all have a good year. We'll see you 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.