Well, good afternoon. For those of you online, welcome back to Citi's 2023 Communications, Media & Entertainment Conference. For those of you I haven't met, I'm Mike Rollins. I cover communication services and infrastructure at Citi. Before we get started, I'd like to mention that we do have disclosures available at the registration desk as well as on the Citi Velocity page from which you're streaming the audio. We'll also work to incorporate your questions during today's discussion. If you're here with us live, we'll have a microphone and try to get to some questions at the end of our time. If you're streaming this connection, there should be a question box on the page, and you could type questions into that. We're also continuing our tradition of live survey questions. For those of you in our audience, you've got the QR codes out here and on the tables. For those online, the live survey will pop up on your screen, and we look forward to getting your responses. With all those details now out of the way, I'd like to welcome Pascal Desroches, Senior Executive Vice President, Chief Financial Officer of AT&T. Pascal, thank you so much for being here today. Mike, thank you for having me, and Happy New Year, everybody. Yes, and Happy New Year. I think you might also have something that you wanted to share with our audience. Yes. legal would not let me speak without reminding everybody of the safe harbor rules. Some of the statements that I will make are forward-looking and subject to risk and uncertainties. Refer to our website for more information. Well, great. Well, it's been a busy few years for AT&T, as we start this new year, maybe you could share with us how you're looking at the strategic and operating priorities for AT&T and if there's any notable changes from what the focus was last year at this time. Yeah, sure thing. I mean, as you said, it's been a busy couple of years since John Stankey took over as CEO. During that time, I would characterize, you know, our strategy has been fairly consistent. We're focused on growing customers, making sure we're doing so in an effective and efficient way, and being very rigorous with our capital allocation approach. The changes that you will see going forward are really more around the first part of John's tenure was focused on, let's get the asset portfolio right. Let's focus the company on wireless and fiber. That's gonna be the future of AT&T. Let's strengthen the balance sheet, de-lever, and get ourselves to a point where we can continue to invest in our businesses because we think the secular dynamics around wireless and fiber are very strong. I would say as you go into 2023, I would expect us to continue to invest, to generate customer growth in a very disciplined way. You should expect us to continue to drive improvements in our operating leverage through disciplined cost management and continue to de-lever our balance sheet using all free cash flows after dividends to pay down debt. You know, so the playbook is, in a way, is very boring, but it's very important. Let's continue to drive earnings growth, pay an attractive dividend, and strengthen our balance sheet. Well, wanna dig into all of that. Before we do, I'm gonna queue up our first live survey question. We're gonna ask our audience, what do you expect for wireless industry postpaid phone net adds for 2023? The choices are, over 2 million-4 million, 4 million-6 million, 6 million-8 million, 8 million-10 million, and over 10 million. We'll let this brew for a few minutes. Maybe we'll just start talking about the postpaid market. In 3Q, if I recall correctly, industry phone net adds showed some decline on a year-over-year basis. You know, at an industry level, did you continue to see that in 4Q? You know, can you talk about the promotional environment and how you would describe AT&T's level of aggressiveness? Sure thing. Maybe let's just start. I think for the last, call it two and a half years, the industry has been growing at a rate that caught everyone by surprise. It was growing much faster. As we got into the second half of 2022, I would say we've seen a more of a normalization of growth. I would say that environment remains. It's very healthy. I would expect, you know, the industry to continue to grow net adds, but probably at a more modest pace than what you've seen over the last two years, but that's no surprise. I think what you should look for is an environment where there's competition, but it's gonna be done so in a very disciplined way. You should expect us to grow service revenues. As we updated our guidance last quarter, should expect us to grow ARPU. Really it's a healthy business. Yeah, there was, there were the normal Black Friday promotions, but I'd say if you look at our actions relative to that of our peers, we were much less promotional around Black Friday than some of our peers. You know, that's the way we want to run this company as we move forward. We're gonna. It's gonna be important for us to grow, but we're gonna do so in a disciplined way. Within that growth, do you still expect to drive significant postpaid phone volumes as part of that, too? You mentioned the ARPU earlier, but, you know, should investors continue to expect the volume growth as well? Here's the way I would characterize it. AT&T will no longer be the share donor in the industry. We're gonna grow, you know, commensurate with industry growth or better. I mean, it's. We feel really good about our ability to compete, and we have a, we provide great products and services and feel really good about it. You mentioned you were being less promotional, so what's changed for AT&T that's improved the effectiveness of your go-to-market? You know, here's the thing I think that often gets lost, is AT&T has a massive distribution footprint, whether you think about our enterprise relationships, that's a big source of our wireless net adds. FirstNet, you know, we've generated over the last several years 4 million or so net add FirstNet subscribers, all subscribers that are not dependent upon the day-to-day promotions. These are relationships that we have. These are distribution channels that are very effective for us. It's that coupled with, I've mentioned this previously, we've, you know, go back two years ago, there was a management change that was done at the wireless business where we, the new management team came in and provided a lot more decentralization of the sales team, going to, you know, relying much more on the VPGM in each of the regions to drive more accountability across the country to generate new subscribers. All those things, coupled with our distribution channels, have all helped really get us to the point where we are. One other question that we've been getting over the last month, if there was some inventory constraints on high-end smartphones or any smartphones in the fourth quarter, and is that creating any spillover effect for AT&T from the fourth quarter into the first quarter? Here's the way I would characterize. There was clearly some dislocation, yeah, that probably did impact some volumes. I would say over the course of the quarter, things, the inventories got, situation got better. There was clearly points in the quarter where there was some dislocation, the supply was constrained of some of our of the higher-end devices. Just to close this off on just the environment on wireless postpaid, did you see any impact from Dish or incremental competition from cable? You know, The environment has been and remains competitive, I would say it's really, any changes really are a reflection of the fact that the market may not be as hot as it was in the latter part of 2021 and early 2022, It's still very healthy and, demand remains solid. Are you ready for our first survey results? Okay, let's hear it. All right. The survey. 33% expects industry growth postpaid phones for 2023 to be over 2 million-4 million. 27%, 4 million-6 million. 30%, 6 million-8 million. 3%, 8 million-10 million. 7%, over 10 million. A distribution. You know, I think going back, there were some management comments from AT&T about base case annual industry growth of 6 million phone net adds a year. Any thoughts on, you know, what investors should expect? You know, is that the expectation for 2023 should be 6 million? Is that your expectation or how should investors think about that? I think we've been pretty public about the fact that we would expect at some point to normalize, that the phone net adds would normalize to overall population growth. We've been expecting that, and we've been pleasantly surprised it hasn't been. I'm not in the business of forecasting exactly where it's gonna land. Look, so far, based on everything we've seen, the market remains healthy. In terms of ARPU opportunities, can you frame where AT&T is in terms of the penetration of higher value plans and how the mix of sales may inform where that can go over time? You here, I'm gonna be careful not to share anything that we haven't disclosed publicly. Here's what I would say. One, our fastest growing plans are our higher tier plans. I think consumers are finding more value, and we remain really pleased with it. Two, last year, we put in pricing actions to try to move customers to our higher tier plan. In fact, the uptake to the higher tier plans was a little bit better than we anticipated. Clearly, subscribers are finding more value. Overall, we guided that we were gonna start to see a stabilization of ARPU in the second half, and we saw ARPU actually grow, and we would expect that to continue. All the things that you would expect for a healthy business, we're seeing that. AT&T touches so many parts of the economy, the consumer businesses the business segments. Are you seeing any change in behavior from your customers in terms of demand, payment behavior, the types of plans and consumption that they're subscribing to? Here is the way I would characterize it, Mike. You know, you go back to the late 2020, 2021, we were in an unusual period where savings rates were really high and customers were paying faster than they've ever had. Delinquencies were really low. During 2022, we've gradually seen a normalization of that behavior back to pre-pandemic norms. I've said publicly that our, you know, levels of bad debt are probably slightly worse than they were pre-pandemic, but nothing that I would say that is alarming. It is really more of a normalization of what had been an unusually buoyant economic environment. Obviously, with rising interest rates and the Fed's hawkish posture, you know, we're being very attentive to see whether we see any signs. So far, other than the normalization that I previously commented on, so far so good. And just one quick follow-up on this. You know, you mentioned it was a little worse than pre-pandemic levels. When things were starting to revert back to pre-pandemic levels back in the summer, it the extension of the DSO contributed to the reduction in free cash flow in 2022, at least for the guidance for 2022. Yeah. Should investors, you know, consider that things getting maybe a little worse than pre-pandemic levels, is that a risk to AT&T's free cash flow or a headwind that people should be mindful of? We saw a day and a half extension of collection cycles. That has not gotten worse at all. It has remained the same. Really, there's nothing different from what I had characterized in our Q2 earnings forecast. You know, Q2 earnings conference call, excuse me. I'm gonna throw out the second survey question, and then we'll talk about a couple of other topics before we get to it. This is a little bit more of a complicated question, but I think it's gonna be a helpful question, which is, how should AT&T prioritize fiber investments in the future beyond what's been currently announced? Accelerate investment in the heritage footprint to get to more locations more quickly, divest local operations in markets where fiber deployments are just not prioritized, employ outside capital to accelerate fiber deployments within its current footprint, or expand the use of outside capital for out-of-region deployments, including for the BEAD program. We'll come back to this, and I realize there were some announcements late December, so we'll get into that in a moment. Before we do, just wanted to stay on the macro for one more moment. What are you seeing from inflation and how that could impact 2023 performance? Well, clearly, inflation has been a headwind, not only for us, but for other companies. That's why we took the pricing actions that we did. We've been on a transformation journey for several years, and that has also helped between the pricing actions and the transformation we are seeing. We were able to offset the over $1 billion of inflation headwinds that we faced, and those were increments to already pretty conservative inflation assumptions we had built into our forecast. Inflation did definitely impact us, but it's all been factored into the guidance we've previously given. I feel really good about how the business is performing despite significant headwinds from inflation. In terms of just responses to inflation, to the current cost structure, can you just give us an update on, you know, whether there's incremental opportunities to cut cost beyond the $6 billion program that you're on the journey of, and maybe how that program is evolving in terms of the conversion of cost cuts to the actual EBITDA and free cash flow of the company? Sure thing. We had said since late 2021 that we were reinvesting much of our transformation savings back into the business, and that would begin to drop more and more of the savings to the bottom line beginning in the second half of 2022. You saw that in Q3, I would expect that to continue for the balance of 2022. You know, we're going to give guidance next year. Look, we have to make sure AT&T has a competitive cost structure. In my mind, that is a journey, not a destination. We're not going to stop at $6 billion. There are plenty of opportunities, especially we have an enormous legacy footprint that is declining. As that declines, there is lots of infrastructure and costs that are related to it that have to come out of the company, and that is going to be part of the continued journey from here on in. Also, we're going to continue to use AI, machine learning, digital self-service to help improve customer service, to drive efficiencies in customer service and field tech deployment. I would expect us to continue to look at our retail footprint. Are there, are we at the optimal mix of authorized retailers versus cell phone stores? There are opportunities to generate efficiencies through third-party distributors, in our both our enterprise and our fiber business. All things that we can do better, and I view those as opportunities that we're going to harvest over the next several years. Maybe, you know, you talked about the legacy footprint. Moving over to the fiber builds, you know, can you share where you ended up on locations passed for 2022 and, you know, how you're thinking about the opportunities to keep the program going, you know, forward and building more locations? Here is, you know, through the end of Q3, we were at 18.5 million consumer locations passed and, about 3.5 million or so of business locations passed. We would expect that to grow each and every quarter. We're not providing quarterly or even annual guidance. What we have said, and we remain steadfast on, is that we expect to get to 30 million locations + by the by 2025. Importantly, with the JV we announced, you know, just before Christmas, we expect that number to be incremental to that 30 million+ locations passed. All in all, we feel really good about the pace of our build, our ability to build out. We're doing it at rates that no one has ever done in the industry, we're able to do it in a cost-efficient way because of our scale. I feel really good about where we are. Through the JV, we have a unique opportunity in a capital-light way to experiment outside of our traditional footprint to see if there are opportunities between the scale that we bring, levered capital, and bringing our wireless bundling relationships to bear, whether the economics could make sense and whether we can potentially expand outside of our footprint. We're really excited by the opportunity and the partnership with BlackRock. Look, I think this is an exciting time for the industry. At a time where timing is of the essence, I think this is a great way to help us accelerate some of our plans. It's a good segue into the survey results. Realize this is a little bit of a complicated question on how AT&T should prioritize its fiber investments. Interesting results. 22%, want you to accelerate investment inside the heritage footprint. Another 22%, would like you to divest the local operations in markets that you're not investing or prioritizing for fiber. Another 22%, wants you to employ the outside capital to help the current footprint. And 1/3 of our audience, wants to use outside capital for out-of-region deployments, including the BEAD program. Maybe the first question from this is, you know, given AT&T's balance sheet position and financials, why use outside capital to fund fiber? Look, clearly we're not only using outside capital, we are deploying a lot of our own capital. At the same time, we have a major wireless network. We need to make sure we are continuing to invest as the volume and capacity of that grows. We've said this, we want to make sure that we're continuing to delever our balance sheet. I think we, you know, we were really constrained as a result of the various acquisitions that we did. We've taken giant steps forward in, you know, delevering, and that has to continue. That it remains a priority and is one that we are committed to. When timing's of the essence and you also want to make sure you're delevering, the outside use of capital in our minds was a great way to start to experiment to see how can you garner additional returns by partnering with somebody. We're going to continue to prioritize delevering in addition to investments in our footprint. The guides we've given you is through 2025. It doesn't mean we're going to stop at, in 2025. You know, when you think about investing inside your footprint and then the incremental opportunities for things like convergence that you can get with the wireless business, how do you think about the returns of going faster inside your footprint, where you have some plan already, relative to going outside the footprint into, you know, wireline markets that you haven't traditionally been in? How do the returns look between those two? You mentioned you're going, you know, really fast right now in the build. Is there an opportunity to take the inside, you know, faster, further than the current plans? It's, it's important that we go quickly, but it can't be at the expense of continuing to delever. That's really from where John and I sit, it's really important that we do both. We don't want to get the balance sheet to a point where it's back where it was 18 months ago. Importantly, with the benefit of hindsight in the higher interest rate environment, we are really fortunate we've gotten to this point in the journey. Right now, with 95% of our debt fixed, we have a clear path to continue to delever. Build fiber faster than anyone else is doing it. I think it's important that we do both, but we will look for opportunities, whether it be through the government stimulus money, whether it's through partnerships, to see if we can go faster, but it cannot be, and it will not be at the expense of strengthening the balance sheet. How do the returns compare inside the footprint versus the outside? Is inside the footprint just naturally a better return given you're already there? I think we will share that information with you over time. Look, it is clearly, there are things that are in footprint that are very attractive returns we have kept for ourselves. That's a no-brainer. This is an opportunity to potentially expand our bets, use both third-party equity and debt to create an attractive return for us well in excess of our cost of capital so. How are subscribers pacing in terms of the penetration goals that you're aspiring to hit for these fiber builds? You know, relative to prior builds, the build over the last couple of years is penetrating at 2x the level of historical build in the first year. It's really, we have been surprised just how favorably fiber has been received. The long pole in the tent is getting fiber to the home. Once it's there, it's a product that sells itself. I think back, I think forward five years, what do you think consumers are gonna demand? Fiber is gonna be the only solution that is acceptable to consumers. Given the long lead time, the government stimulus money that's hitting the market, the infrastructure money that's hitting the market, our actions here, what I believe will prove to be very timely and produce meaningful returns for our shareholders. What are you seeing in the business segment right now? You've been trying to turn performance there. How's that progressing? Yeah. Business segment is one where it's a work in process, is the way I would characterize it. You are in the midst of a secular downturn for many of the historical legacy communication products. That decline continues. This year, we were hit more significantly than we expected by higher access costs, where we are using third-party carriers for some of our enterprise traffic and also some of the public sector business that we have done historically because of the timing of the budget cycle didn't come through in the timing we expected. Those two things caused an acceleration on top of what has been a secular decline in business. Fast-forward, I would expect this business, the growth factor to be fiber deployment in small, medium-sized businesses, and over time, I think three years or so, you should see more and more advanced services coming out of 5G capabilities, whether it is through the relationships we have with connected cars. We have more connected cars than any other provider in the country. We have over 100 million IoT relationships. Over time, I would expect as new services are unleashed, those relationships will prove vital in driving incremental sources of growth. Growth factors, advanced services and fiber in small, medium-sized businesses, also continued aggressive cost management in the portfolio. We're gonna tease out our next survey question. While we do that, if you're interested in the microphone to ask a question here in the audience, just raise your hand and we'll get one over to you. The third and final survey question that we're gonna ask is, and we'll come back to this in a few minutes, how much free cash flow will AT&T generate in 2023? Less than or equal to $13 billion, $13 billion-$15 billion, $15 billion-$17 billion, $17 billion-$19 billion, or over $19 billion. We're gonna come back to this in a moment. While these results kind of come in, how is AT&T viewing the opportunities to market converged home and mobile broadband bundles? Do you see these bundles creating more lifetime value than what you've traditionally used, you know, the family plans and home broadband and video packages? Look, it's an opportunity we think is extraordinary. When we have a fiber, the customer is really, really pleased with the product. If you're able to bundle wireless with it at an attractive economic terms, the churn profile is really attractive of that customer. The lifetime values are really attractive. We've seen a meaningful uptick in wireless penetration where you have fiber. It goes back to what I said earlier, the long pole in the tent is getting fiber out to as many locations as possible. As you've been deploying mid-band spectrum, any different feelings on the opportunity to market fixed wireless as part of a converged solution? Yeah. You know, I feel like a little bit of a broken record. You know, we've been on record from the get-go that fixed wireless is not gonna be a priority of ours. We're going to prioritize our investments in fiber, our investments in wireless, but we're not going to prioritize fixed wireless. Where it could make sense for us, areas like some of the rural areas where we don't expect fiber to ever be deployed, and we don't believe it would interfere with our wireless services, could make sense as a catch product in an area where we're trying to get fiber to. Outside of those two circumstances, don't really think it's going to be a priority for us, because once you start to factor in the tax on your network along with the customer acquisition cost and the price point at which the product's being offered, you look up and you say, the returns on that product are just not that attractive. As part of the expanding fiber footprint, you have a JV that we talked briefly about. Is there anything else about the joint venture that investors should be thinking about for AT&T, as well as how the infrastructure money and BEAD program plays into expanding the fiber footprint? I think it goes back to what we said. We really like fiber. We think when you look at the landscape and the consumption trends in the U.S., fiber is going to be the only technology that is acceptable. Given the amount of investment dollars going after it, our goal was, let's see if there are ways we can go faster without sacrificing our deleveraging goals. That's really what this is an attempt to look at, is to prove that, hey, we can do this, and with our wireless product, with the scale contracts we bring to market, we're going to be able to do this even outside of our traditional footprint in a way that delivers attractive returns. You know, when we prove it, you know, look, there's no reason why we should stop at 1.5 million we'll get to the free cash flow survey. By the way, did you want to respond to it? Yes, two weeks from now. Ahead of that, let me share these results, and we'll talk a little bit about free cash flow. 17% less than or equal to $13 billion. 30%, $13 billion-$15 billion. 30%, $15 billion-$17 billion. 7%, $17 billion-$19 billion, and 17% was over $19 billion. The guidance for 2022 is $14 billion. Can you help investors think about some of the pluses and minuses as they try to work through what the free cash flow level is going to be in 2023? First and foremost, we're going to grow earnings. We're going to grow earnings as a result of a bigger and more profitable wireless business, continued growth in our consumer wireline business, you know, based on the continued really strong fiber growth. You should expect us to continue to take out meaningful amount of costs, including overall lower headcount across the company. All those things coupled with lower interest should result in growth in earnings and free cash flow. In 2023. In 2023. Are there any unusuals, you know, taxes? you know, I know you're deleveraging, but is there anything that, you know, people should be mindful of that are just sort of, don't forget this element, whether it's a headwind or tailwind to free cash flow? A couple of things that I probably didn't mention, but I have in the past. One, you know, taxes, we would expect taxes to be up year-over-year, so that's a headwind. We would expect less, slightly less distributions from DTV than we are getting this year. You mentioned the focus- The other factor is we had pretty meaningful 3G and FirstNet cost this year that won't be present next year. That's also another tailwind. Those are the main factors that you should think about as you think about 2023. You mentioned a few times the focus on deleveraging the balance sheet. Can you remind us what the net debt leverage target is that AT&T wants to achieve and when you expect to arrive at that target? Our goal is 2.5x net debt to EBITDA, where we will use all free cash flows after dividend, to reach that goal between now and the next, and when we provide the updated guidance in terms of when we think we will get there. We haven't provided updated guidance on that, so stay tuned. You should expect that from us in a couple of weeks. In terms of free cash flow, can you remind us where you are in the capital cycle for the mid-band investments and what the opportunity is to bring down CapEx over the next few years? Here's the way I would characterize it. One, we came into this year, we expected to be to have 70 million pops covered by the end of 2022 and around 200 million by the end of 2023. We are well ahead of that the pace. The last guidance we gave is we expected to end 2022 at almost 2x the initial guidance of 70 million homes. 2022 and 2023 are peak investment cycles for us because of C-band deployment as well as investments in transformation. Those should begin to moderate as we get to 2024 and beyond. Importantly, we plan those peak investment cycles at a time where we knew we would have meaningful distributions from DIRECTV to help subsidize those. It's 22 and 23 peak investment cycles that should moderate over time to the more normalized around $20 billion of capital spend. We have a question from our audience. The joint venture that you announced during the holidays, will that focus on just builds, or could that also include acquisitions of fiber in the future? You know, obviously, as a policy, we would never, you know, comment on acquisitions. It is a vehicle whose priority right now is to build, to build out in regions that we think are economically really attractive, that we may have potentially be under-penetrated in wireless. Could it provide us with an uplift in wireless, also provide us with attractive returns and to reach a group of customers that we otherwise may not have reached and generate a meaningful return. That's all I will say about the JV. Just, you know, lastly, you know, as you think about the addressable market for revenue, across the products that you offer, how are you thinking about the expansion of that opportunity over time? Do you expect B2B, IoT, 5G applications to contribute substantially? Are there other areas that investors should be thinking about in terms of just growth prospects for the addressable market that may be underappreciated? Here's the way I think about it. I think we are a company that is great at providing, at building connectivity networks. There are a whole class of connectivity services that I think we can unleash through the power of 5G and through the continued evolution of fiber. I wouldn't expect us to run far afield of that. There is within that, if you think about the number of scale players that have the ability, that have owners economics that could deliver those services, there aren't that many of them. I think if you look at it in that context, there's plenty of opportunity when you look at the consumption trends, you look at who can provide those services. There is plenty of opportunity in the road ahead without running far afield of our core capabilities. Pascal, thank you so much for joining us today. Thank you, Mike. Again, Happy New Year's to all. All the best for 2023. Thank you.