AT&T Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2022

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to AT and T's Second Quarter 2022 Earnings Call. At this time, all participants are in a listen only mode. And an operator will assist you offline. Following the presentation, the call will be open for questions.

Operator

Please press 1 and then 0 and you will be placed in 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. As a reminder, this conference is being recorded. I would like to turn the conference call over to our host, Amir Rzwedalski, Senior Vice President of Finance and Investor Relations. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to our Q2 call. I'm Amir Roswadowski, Head of Investor Relations for AT and T. Joining me on the call today are John Stankey, our CEO and Pascal Desroches, our CFO. Before we begin, I need to call your attention to Safe Harbor statement.

Speaker 1

It says that some of our comments today may be forward looking. As such, they are subject to risks and uncertainties described in AT and T's SEC filings. Results may differ materially. I also want to remind you that we are in the quiet period for the FCC Spectrum So unfortunately, we can't answer questions about that today. And as always, additional information and earnings materials are available on the Investor Relations website.

Speaker 1

With that, I'll turn the call over to John Stankey. John? Thanks, Amir,

Speaker 2

and good morning, everyone. Thank you for joining us Last quarter, I shared that AT and T had entered a new era with the right asset base capabilities And financial structure to become America's best broadband provider. I'm happy to share this morning that we're continuing our progress, Improving our infrastructure and expanding our customer base across our twin engines of growth, 5 gs and fiber. We saw historic levels of 2nd quarter net additions, thanks to our disciplined and consistent go to market strategy, Solid execution building fiber and deploying our mid band 5 gs spectrum assets. In mobility, We brought in the most 2nd quarter postpaid phone net adds in more than a decade, just like last quarter, building on our momentum from 2021.

Speaker 2

It's noteworthy that we've sustained this momentum in a highly competitive environment. Industry growth in the first half of twenty twenty two has been stronger than the expectations I shared with you late last year. In our view, this strong performance reinforces that our success is not solely promotion led, but instead reflective of our improved value proposition Our Q2 and profitability in 2Q improved and we expect that trend line to accelerate in the second half of the year. As Pascal will discuss shortly, we're in fact increasing our service revenue growth guidance For 2022, in fiber, we continue to invest in building out a premium network, Drive a great build velocity and deliver on our stated expectations for accelerated customer growth through improved penetration rates. We're finding success in serving more customers in new and existing markets with what we believe is the best wired Internet offering available.

Speaker 2

This is evidenced by our more than 300,000 second quarter AT and T Fiber Net Adds, marking our 10th straight quarter with more than 200,000 fiber net adds. The strength and value of the AT and T fiber experience Is enabling us to increase share in our fiber footprint and convert more IP broadband Internet subscribers to fiber subscribers. Ultimately, our fiber strategy is a sustainable and long term technology play It will support key macro trends. We expect to see a continuation of favorable ARPU trends As we expand the availability of what we believe is a best in class network with a multi decade lifespan. So I'm very pleased with the strong customer growth we're seeing.

Speaker 2

Our success only reinforces The improved value proposition we're providing, we expect our investment in top tier technology to translate into strong resiliency for our services for years to come. Over the last eight quarters, we've achieved an industry best 6,000,000 postpaid phone net adds, while adding nearly 2,300,000 AT and T Fiber customers, Increasing our fiber subscriber base by more than 50%. I'm also very proud with the progress our Teams have made in rapidly expanding our 5 gs and fiber footprints. I'm pleased to say We've achieved our target of covering 70,000,000 mid band POPs 2 quarters ahead of our year end target and are now on track to approach 100,000,000 mid band POPs by the end of this year. And Our expanded consumer wireline fiber footprint now gives us the ability to serve 18,000,000 customer locations.

Speaker 2

This is an increase of nearly $2,000,000 from the start of the year. Our teams are running hard To deliver these world class services to our customers, we expect our commitment to investing in our core connectivity networks To serve as the foundation for AT and T's growth for decades to come. Moving to our 2nd major priority, It's more important than ever we'd be effective and efficient across our operations. The dispositions we executed over the last 2 years provide us with operating flexibility to adjust as needed in what is proving to be an increasingly pressured economic backdrop Without requiring us to materially compromise on our investment priorities and financial obligations, We have strong visibility on achieving more than $4,000,000,000 of our $6,000,000,000 transformation cost savings run rate target by the end of this year. As we shared before, we've initially reinvested these savings to fuel growth in our core connectivity businesses.

Speaker 2

However, as we enter the back half of this year, we expect these savings to start to contribute to the bottom line. As you're likely aware, we're taking proactive measures such as selective pricing adjustments To address as much of the very real inflationary pressures that are clearly impacting all parts of our economy. The pricing strategy we implemented is being executed in a proactive and methodical way that enables some of our longest standing customers Responding to the real time cost pressures in our business. I believe we've navigated this difficult reality effectively and thus far Are seeing results that are consistent with our expectations, although not sufficient to cover all inflationary impacts. Last quarter, I shared that we're seeing inflationary pressures and we estimate those to be more than $1,000,000,000 Above the elevated cost expectations embedded into our outlook.

Speaker 2

We're clearly operating in different times And the macroeconomic backdrop is evolving in a dynamic manner. Still, We're confident in our ability to emerge from this chapter a stronger company, thanks to our position as one of the world's largest Scaled telecom operators, our improved underlying financial flexibility, the cost reduction initiatives we have in place, The essential nature of the services we provide and our pricing actions that help partially offset these impacts. With that said, the current environment is not easy to predict. We're seeing more pressure on business wireline than expected. And on the consumer side of our business, we're seeing an increase in bad debt to slightly higher than pre pandemic levels As well as extended cash collection cycles.

Speaker 2

However, it's important to note The historical patterns in previous economic cycles suggest customers have managed their accounts Similar to what we're experiencing today. In fact, we feel even better about the resiliency of our services Given the elevated importance of connectivity in everyone's lives, we view this cycle no differently And still expect customers will pay their bills, albeit a little less timely. Furthermore, as I mentioned before, We feel better about our underlying financial flexibility that we have in quite a while. This is why we're confident we can maintain our focus for growth over the long term by investing in the future of connectivity through 5 gs and fiber. It's our belief that near term cyclical economic uncertainty does not warrant a retrench And the deployment of long lived assets.

Speaker 2

The long term economic justification for these investments remain sound And timing of the market development supports our intent to invest through this cycle. Importantly, We maintained our focus on paying down debt with the $40,000,000,000 in proceeds from the completion of the WarnerMedia Discovery transaction in April, Helping us to significantly reduce our net debt in the quarter. I'd also like to touch on free cash flow directly. While free cash did come in lower than we expected this quarter, there were several notable factors that drove this. The first is the timing of higher success based investments on the back of our robust customer growth.

Speaker 2

Additionally, we front end loaded our capital investment plans in order to kick start our growth initiatives. We expect these plans to seasonally moderate through the course of the year as we achieve our $24,000,000,000 capital investment plan. And I'm pleased we've been able to effectively manage our supply chain and front end load some of our work this year. In addition to these investment driven impacts, we're seeing some longer collection cycles and inflationary costs We've not been successful in fully offsetting. These cash flow impacts Along with expectations for a more tempered economic climate in the latter half of the year have led us to adjust our cash flow expectations For the full year, even with our expected material improvements over the next two quarters.

Speaker 2

The key takeaway is that we understand the emerging economic pressures on our business and feel confident in our ability to manage through them, While at the same time investing for the long term benefit of our customers and shareholders. While we're not immune to the pressures impacting the broader The ability to invest in access technologies built for the long term Allows us to opportunistically maneuver through this economic climate. Finally, I want to take a moment to discuss our business wireline unit and our focused efforts There is a sizable base of business revenue coming from legacy voice and data services. This business is increasingly facing secular pressures as customers replace traditional voice services with mobile and other collaboration solutions. On the data front, VPN and legacy transport services are impacted by technology transitions to software based solutions.

Speaker 2

Today approximately half of our segment revenue comes from these types Services. Last quarter, we shared that we're experiencing additional government sector pressure related to the reallocation of spending priorities. This pressure tied to the timing of restructuring of government spending Continued in 2Q. While we're hopeful that some spending will return and the Enterprise Infrastructure Solutions Contract volumes and share gains will offset pricing reductions over time, we consider it prudent to reset expectations. It's worth noting that approximately 20% of the year over year business wireline revenue declines In the Q2, we're due to government spending impacts.

Speaker 2

Lastly, we saw inflation in the wholesale network access charges We incur to provide services to customers outside of our footprint due to contractual resets. This cost pressure resulted in more than 20% of the segment's year over year EBITDA decline. This pressure will be managed through opportunities to operate more efficiently, movement of traffic to alternate providers, Symmetrical wholesale pricing adjustments and natural product migration trends. Looking ahead, these developments only strengthen our resolve in executing our transformation, including actions to accelerate cost takeouts And simplify our product portfolio. We expect these actions to mitigate the year over year pressure in this segment's profitability over time, but we now expect business wireline EBITDA declines in the low double digits this year And our expectation for stabilization extends to the back half of twenty twenty four.

Speaker 2

However, we remain confident in our efforts to reposition the segment. The deployment of fiber is leading to an acceleration of growth each quarter In our connectivity solutions, which delivered close to 15% growth this quarter. Our fiber expansion also provides us with the ability to gain market share in SMB, which is an underpenetrated segment for us. Moreover, we continue to utilize our business relationships to expand opportunities in mobility. Since last year, we've taken more than one full point of share in the business mobility space.

Speaker 2

Our focus on fiber and 5 gs continues to gain traction and we expect to use our strong enterprise And growing SMB relationships to take advantage of opportunities as they expand. We know this transformation won't happen overnight, but similar to our turnarounds in Mobility and Consumer Wireline, We're confident we have the right strategy in place and in our ability to execute it successfully. I'll now turn it over to Pascal to discuss the details for the quarter. Pascal?

Speaker 3

Thank you, John, and good morning, everyone. Let's start by taking a look at our subscriber results for our market focus areas on Slide 5. As John mentioned, our consistent and Disciplined go to market strategy continues to resonate with customers. In the quarter, we had a remarkable 813,000 postpaid phone net adds, Our best second quarter in more than a decade. Looking at fiber, we had 316,000 net adds as we delivered Our fiber deployment plans remain on track and we expect to continue our solid momentum with customers.

Speaker 3

Now let's move to our Q2 consolidated financial summary on Slide 6. First, it's important to note With the closing of the WarnerMedia transaction in April, historical financial results have been recast to present WarnerMedia and certain other divested businesses, including Brio, Sander and Playdemic has discontinued operations. While continuing operations provide a clearer view of our remaining operations, keep in mind that there continues to be some Year over year comparative challenges as the prior year results also include DIRECTV and certain other dispositions. Therefore, where applicable, I will highlight our financial results on a comparative like for like basis in addition to continuing from operations. Comparative revenues for the quarter were $29,600,000,000 up 2.2% or more than $600,000,000 year over year.

Speaker 3

This was largely driven by wireless revenue growth and to a lesser extent higher Mexico and consumer wireline revenues partially offset by declines in business wireline. Comparative adjusted EBITDA was up 1.7% year over year as growth in wireless, Mexico and lower corporate costs We're partially offset by business wireline declines. We continue to expect the year over year EBITDA trend line to progressively improve Through the year as we begin to lap 3 gs shutdown costs and step up investments in technology that began in the second half of twenty twenty one. Adjusted EPS from continuing operations for the quarter was $0.65 On a comparative standalone AT and T basis, Adjusted EPS was $0.64 in the year ago quarter. Adjustments for the quarter were made to exclude a gain in our benefit plans, Non cash restructuring and impairment charges and our proportionate share of DIRECTV intangible amortization.

Speaker 3

Cash from operations for Operations came in at $7,700,000,000 for the quarter. Capital investments of $6,700,000,000 was up $1,700,000,000 year over year. Free cash flow was $1,400,000,000 DIRECTV cash distributions were $800,000,000 in the quarter. Cash flow for the quarter was affected by several key factors. 1st, as expected, we had higher front end loaded Capital investments as we ramp our fiber and 5 gs mid band spectrum deployment.

Speaker 3

As John already noted, we expect lower capital investment levels in the back Half of the year in line with our expectations of $24,000,000,000 The second is the timing of consumer collections As it's taking about 2 more days than last year to collect customer receivables, the impact of this is almost $1,000,000,000 for the quarter. The last item is some incremental success based investments, including device payments tied to accelerate subscriber growth. Now let's take a deeper look at our Communications segment operating results, starting with Mobility on Slide 7. Our mobility business continues its record level momentum. Revenues were up 5.2% with service revenues growing 4 point Up $0.81 sequentially or 1.1% year over year.

Speaker 3

This is ahead of our prior expectations for stabilizing in the second half of the year. This improvement is largely a result of more customers trading up to higher price unlimited plans and improved roaming trends. Our June pricing actions were a modest benefit as well, but given the timing of the increases, we would expect our pricing actions to be a larger factor in the back half of the year. Given our expectations for ARPU, we now expect service revenue growth of 4.5% to 5% for the year. That is up from our previously stated expectations of 3% plus.

Speaker 3

Mobility EBITDA increased 2.5% year over year Despite an approximately $100,000,000 impact from lower CAF II government credits and higher FirstNet costs, We also had around $130,000,000 of higher bad debt expense during the quarter. While bad debt is now slightly higher than pre pandemic levels, It is being offset by better than expected customer revenue growth. We remain confident that mobility adjusted EBITDA growth accelerates in Second half of the year due to revenue growth and the lapping of 3 gs shutdown investments that began in the second half of twenty twenty one. Again, our customer growth performance was better than we expected, especially when you consider we became less active in promotional activities Compared to others in our industry, so it's clear to us that the strategic change we made to simplify our go to market strategy 2 years ago continue to yield Great results and that our value proposition is resonating in the marketplace. Now let's turn to our operating results for Consumer and Business Wireline on Slide 8.

Speaker 3

Our fiber growth was solid as we continue to win share where we have fiber. Our total consumer wireline revenues are up again this quarter, even with the clients from copper based broadband services. Broadband revenues grew 5.6% due to fiber revenue growth and higher broadband ARPU driven by a customer mix shift to fiber and recent Broadband pricing actions. Our fiber ARPU was $61.65 up 5.3% Year over year with gross addition intake ARPU in the $65 to $70 range. We expect overall We accelerated our fiber footprint build and now have the ability to serve 18,000,000 customer locations with great AT and T fiber experience that Consistently received high net promoter scores.

Speaker 3

As you heard at Analyst Day, our plans center on pivoting from a copper based Product to fiber and we're doing just that. We continue to expect EBITDA growth to accelerate through the remainder of 22, driven by continued growth in broadband revenues and the lapping of technology investments that began in the second half of twenty twenty one. Looking at business wireline, as John stated, revenues and earnings came in lower than we expected. There are 2 main factors that are driving the shortfall to our expectation. The first is lower revenue than anticipated from the government sector.

Speaker 3

The second is inflationary pressure on wholesale network access costs. On a combined basis, these two factors accounted for about $100,000,000 in EBITDA pressure year over year. While the business wireline transition and portfolio rationalization creates incremental pressure on near term revenues, it underscores the importance of transitioning to our own and operated connectivity services as well as growing 5 gs and fiber integrated solutions. In fact, Our connectivity services revenue growth continues to accelerate as we are up nearly 15% year over year. Both areas, business 5 gs and fiber continue to perform well with business wireless service revenue growth of 7.4 Before we shift to questions, I want to provide you an update on how we are thinking about the rest of the year given the dynamic macro environment we're operating in.

Speaker 3

As I mentioned previously, we like the momentum in our mobility business, both on a service revenue and EBITDA basis. While we maintain expectations that 2022 industry postpaid phone demand levels are unlikely to replicate 2021, The strength we experienced in the first half of the year coupled with better ARPU trends give us confidence in our raised service revenue outlook and expectations For an improved EBITDA trajectory. On consumer wireline, we are largely trending on plan given mix shift to Higher ARPU Fiber Plans, which is driving both revenue and adjusted EBITDA growth. On Business Wireline, You know the near term challenges we are facing, which reduces our expectations. We now expect business declined in the low double digit EBITDA range for the year.

Speaker 3

Putting this all together, we remain comfortable in our ability to deliver revenue, Adjusted EBITDA and EPS within our prior guidance ranges for the year. Moving to free cash flow, Given the combination of elevated success based investment, the potential for further extension of payments by our customers, Inflation and the more challenging environment facing our business wireline unit, we consider it prudent to take a more conservative outlook to free cash flow for the year. Given these factors, we anticipate pressure of about $2,000,000,000 to our free cash flow guidance from our prior $16,000,000,000 range for the year. Now before the questions on how we get to the implied $10,000,000,000 of free cash flow in the Half of the year, when we generated $4,000,000,000 in the first half of the year, let me provide you with some specific items to consider. Our outlook reflects the following expectations.

Speaker 3

Dollars 3,000,000,000 plus lower device payment versus the first half of the year due to timing. Nearly $2,000,000,000 lower capital investment versus the first half of the year as we reach our $24,000,000,000 expectations for the full year. The balance of the improvement relative to the first half of the year is due to wireless customer growth, including our recent pricing increases and Lower cash interest expense. We expect these benefits to be partially offset by reduced distributions from DIRECTV and our expectations for incremental tax payments in the second half of the year. However, we do expect Full year tax payments to be lower than we previously anticipated.

Speaker 3

Additionally, we expect typical free Cash flow seasonality with the 4th quarter higher than the 3rd quarter. Although we're not providing An updated 2023 outlook, we expect improved cash conversion of EBITDA in 2023. Here's how. Better mobility cash flow as we get a full year benefit from a larger subscriber base at higher ARPU levels. We expect MVNO volumes to ramp and become more material through the course of the year.

Speaker 3

International roaming trends should improve as well. We expect broadband revenue growth from the mix shift to higher price fiber to continue. On the cost structure, we expect a full year benefit From our cost transformation efforts implemented in 2022 in conjunction with reaching our $6,000,000,000 plus target by the end of 2023. Additionally, the cost actions we plan to execute in Business Wireline in the second half of the year should produce more than $300,000,000 of Savings in 2023 relative to 2022. Also recall that we have no 3 gs shutdown costs in 2023.

Speaker 3

In addition, we expect lower cash interest expense as we get a full year benefit from the debt pay down actions Taken in 2022, all these factors should more than offset the expected lower distribution from DIRECTV and an expected year over year increase In summary, there is no doubt we're operating in a dynamic macro environment, But we feel confident in both the resilient nature of our business and the underlying financial flexibility we gained from recent dispositions. Amir, that's our presentation. We're now ready for the Q and A.

Speaker 2

Thank you, Pascal. Operator, we're ready

Speaker 1

to take the first question.

Operator

Thank You may withdraw your question at any time by repeating the one zero command. Our first question will come from the line of John Hodulik with UBS. Please go ahead.

Speaker 4

Thanks, guys.

Speaker 1

Hey, John. You're breaking up.

Speaker 4

Okay. Can you hear me now? Yes. Okay. Yes, 2 parts.

Speaker 4

First, on the I guess for Pascal, I guess your

Speaker 1

Hey, John, sorry, you're breaking up right now. Why don't we go to the next question and reconnect you?

Speaker 5

Okay.

Operator

Thank you. Our next question will come from Simon Flannery with Morgan Stanley. Please go ahead.

Speaker 6

Great. Thank you very much. Good morning. Just coming back to the 2023 free cash flow, Can you help us a little bit with the CapEx? Is that still expected to be about $24,000,000,000 before dropping off the following year, Especially given that you've said you've pulled forward some of the 5 gs spend.

Speaker 6

And I guess any updated thoughts on What you want to do in terms of fiber, you're going to continue at this 3,500,000 homes or locations a year and you're going to stop $30,000,000 what's the latest thought there? And then, you've referenced DIRECTV a couple of times. I just want to make clear, has anything Change at DIRECTV or is this just the quarterly kind of, cadence of the payments? Or are you still expecting the same distributions that you put out in your guidance for 2022 and 2023 as overall? Thank you.

Speaker 3

Sure. Thanks, Simon. Look, the thing is, I think you have to keep in mind is one of the things that we When we did all the dispositions, we wanted our plan was to invest significantly this year and next year, Both the $24,000,000,000 level. And as you see so far, the momentum in our business remains really strong. Those investments are providing attractive And everything we see suggests that these were really good decisions.

Speaker 3

So yes, we are expecting 24,000,000,000 Next year, we continue to expect to deploy fiber at the pace we've previously guide. And as it relates to DIRECTV, Nothing has changed at all. We expected around $4,000,000,000 this year. As you can See from the 1st couple of quarters that's more front end loaded. And as we and next year, we expect $3,000,000,000 So nothing has changed in that regard and we feel really good about how the business is performing.

Speaker 3

Great.

Speaker 6

And just a quick follow-up on the price increases. What's your early read of what customers are doing? Are they paying the extra $6 or $12 are they migrating to unlimited plans? Is that accretive or not? And any surprises on churn?

Speaker 7

Everything is tracking as we kind of expected when we laid it out, Simon. As I shared with you, I think when we indicated we were going to do it, What we have is past models from executing these types of things that allow us to go and try to evaluate how customers are going to React and behave when the changes occur. And in this particular case, we had a great opportunity to ensure that While we are going through a price increase on a segment of plans, we were able to also provide the option for a customer to think about moving to other plans And ultimately get more value and I think in many cases very attractive characteristics associated with that and we're seeing customers do both. In some cases they're Choosing to pay the increase of their existing plan and not move. But as you would expect, there's a degree of inertia in any subscription base.

Speaker 7

Sometimes it takes a little bit of time And we're also seeing some uses and opportunity to migrate into better plans and trade up And take not only some of that value that we're giving, but as you're seeing, we're starting to drive the improvements in ARPUs that we told you would occur. And certainly this is a component of that happening. But I would tell you, it is tracking as we expected. It will be accretive as we expected. And I think everything we've given you for end of year forecast is consistent with what is occurring right now in the market in the early days of the change.

Speaker 7

Great. Thanks, Joe.

Speaker 1

Thanks very much, Simon. Operator, we can get the next question.

Operator

Thank you. Our next question will come from Brett Feldman with Goldman Sachs. Please go ahead.

Speaker 8

Yes, thanks. I guess sort of a 2 part question related to the timing issue that you highlighted with collections. So the first one is, what gives you confidence? It really is a timing issue and not really a non payment issue. You alluded to some prior experience in different economic cycles.

Speaker 8

I was hoping you can maybe just elaborate on that. And then I'm curious, to what extent this might be shaping the way you think about going to market, particularly in your wireless business. As you move into the back half of the year, you've obviously done very well, with a certain offer or suite of promotions. Does it make sense to maintain the same promotional stance in a more difficult environment, particularly where there may be some timing issues? It certainly seems like your financial

Speaker 7

Brett, first of all, I'd say that our most recent experience And looking at kind of a challenge cycle is probably coming out of the 2,008 recession and the dynamic around it. And as I indicated In my earlier remarks, we've evaluated that, we look at that and that was a pretty stressed time, if you recall. And I don't know that I can exactly predict what's going to occur over the next year or so, but my guess is it probably won't be quite as shocking Is that cycle is what's occurred in a worst case scenario? And we go back and we look at patterns and behaviors that have occurred In those cycles and evaluated them and the other great thing we know that today is we have far better data than we've ever had that's It's more dynamic in how we do algorithmic scoring and things like that that allow us to be even more effective in managing customer risks. So I think we feel pretty comfortable that we've got a reasonable record of data that allows us to do some projection on that as we start See these things move and as I said, this typically is not an issue of people not paying, it's an issue of when they pay And I don't believe there's anything in our credit scoring and how we've looked at our customer base coming in that would cause those trends to be dramatically different than a previous period.

Speaker 7

In terms of how we go to market, we I think we had a fantastic quarter. And I don't know that I want to go to market any differently than the quarter that we put on the board. In fact, looking at many of your commentaries, you've been Articulating that others have been much more aggressive in the market and probably leaning in to promotional activity in a heavier way. And I would say, I would characterize our approach as being much more tempered and consistent with the past and we have not really responded To that increased promotional activity that we're seeing from others in the market right now, we've kind of been continuing to play our game and we put up A record quarter or second quarter for ourselves in a 10 year period. And as I've told you before, we like each of these incremental We think the economics of them are very strong, albeit there is investment at the front end to bring them onto the network.

Speaker 7

But I'm not going to shy away from that kind of growth. I don't know what the overall market is going to do for the next several quarters. I It will be, as I said in my comments, a bit more tepid as maybe economic stress comes in. But I've been saying We expected it to be a little bit slower for the better part of 9 months now and it hasn't materialized yet. We'll take the growth if it comes in.

Speaker 7

I expect it's going to slow a little bit and I'm going to continue to play our game as long as it's working and it's working right now.

Speaker 3

And Brett, one other point on as it relates to the overall credit quality of our customer base. While we did see an uptick in bad debt, Overall, if there's nothing at all concerning, it's up slightly for pre pandemic levels. So Our call out here was really just a question investors given the broader macro trends that are happening. So we're not in any way alarmed by this.

Speaker 8

Thank you.

Speaker 1

Operator, if we can move to the next question.

Operator

Thank you. Our next question will come from the line of Phil Cusick with JPMorgan, please go ahead.

Speaker 9

Thanks very much guys. A couple of follow ups and one new one. Can you, John, talk anything about recent customer trends? June July, you just said a minute ago you expect things to slow down, but it doesn't sound like You've seen slower customer trends so far. It's a little surprising given the elevated DSOs.

Speaker 9

And it sounds like You guys don't have a lot of confidence in that 2023 free cash flow number. What is there just less visibility, so you don't want Cut that now or are you still reasonably confident in the $20,000,000,000 you think you can get there? We could use a little more. And then finally, Can you just get into the recent launch of plans that don't include HBO? What's the potential cost savings from that shift of customers away and what's been the reaction?

Speaker 9

Thank you.

Speaker 7

Hi, Phil. So let me touch on these first and then Pascal can come in and backfill to the extent he wishes to do so. So customer trends, first of all, I don't want to go down a path on stuff we haven't disclosed. But The 1st part of July, as you'd expect, tends to be a little bit more suppressed because it's a high holiday and vacation period. And That's what I would call seasonal and cyclical, and we certainly saw a little bit of that occurring.

Speaker 7

But I've not seen anything in the market right now that suggests we're Seeing a move away from what the first half of the year represented. And I think kind of moving into the second part of your question, I hate to describe it this way, but I think we got a little bit of a tale of 2 cities going on here. And when you see 9% inflation, It tends to hit those in the low end of the market really, really hard. And it's difficult when you walk up to the gas pump and Have to fill the car and you get the electric bill come in and you see the kind of step ups that people are seeing. And I think there's an adjustment period that goes on.

Speaker 7

The flip side is you've got another segment of the population that banked a lot of money During the pandemic, they weren't traveling, they weren't dining out, they were feeling a little bit more flush and they're making different decisions. And as you know, Our postpaid base is probably skewed a little bit more to the higher socioeconomic dynamics and Probably a bit more insulated, but there is a portion of the base that clearly is starting to adjust to this dynamic that there's higher calls on their cash And they're having to adjust spending patterns and behaviors and prioritization of how they order bills. And I think we're seeing that there's a little bit of that starting to Herb, as Pascal said, it's not alarming in the way it's happening, but it is moving out collection cycles a bit as we typically see when this type of stress starts Show up. And that's what the working capital issue is around it. So I would tell you, I don't see anything in here that Would be a pattern for this occurring.

Speaker 7

I think you've got 2 different parts of the economy though that are working in different ways. And how they develop over the course of the next several quarters is a little bit of a visibility issue to be candid with you. And I don't If you'd asked me 6 months ago, we'd be seeing 9% inflation annualized. I don't think I would have picked it as being that strong, but here we are. And now the question is how fast do we eradicate it and what rate?

Speaker 7

And if you have a good pick on that or good insights, then I I think what's important to understand is Pascal articulated in his comments is the fundamentals of the business are really strong. We feel really good about some of The mechanical things that will improve cash flow yields into 'twenty three, that's not going to change. But what happens in the overall economic pattern is a bit uncertain. And without seeing how the Fed reacts, how fast we see the curve starting to abate on the inflation side, Trying to make that pick right now just feels like it's a bit of an overreach. And so I think we're reserving the right To get a little bit more visibility on 'twenty three to declare, but I think the strong improvement dynamics Our, what I would call mechanical and the performance of the business is supporting the fact that we're going to see That improved conversion on cash flow as we move through the year.

Speaker 7

And then finally on your question about the plans, look, we still have a lot of Streaming services in our base that we're using, we're trying a couple of different things. Part of this has been segment driven to look at We've got a couple of questions. We've got a couple of questions. We've got a couple of questions. We've got a couple of questions.

Speaker 7

We've got a couple of questions. We've got a couple of questions. So to speak, and some of the benefits, especially as we were executing the price changes that we talked about previously. And we felt that this quarter and where we stood that working on things like more generous hotspot Capabilities and better roaming moving into the summer might be a better play in the market. And I would tell you, we kind of like what we saw In our results, despite a lot of the changes by others in the industry in terms of what their value proposition is to customers and It feels like it was a good pivot and rotation at this moment for what we needed to do with the kind of changes we were making broadly in our plans.

Speaker 7

That doesn't mean that that's the strategy forever, and it doesn't mean it's the strategy for the rest of the year. As we move through the summer months and we get through the peak travel periods and we look at what other options we have, we could choose to do something different And what we decide to do from a promotional perspective and what we choose to bring in as part of the bundles moving forward, I don't think anything should be viewed as static. And I think entertainment as part of a wireless bundle is probably something that's going to be around with us in this industry For a good period of time, because I think customers, certain customers resonate with it. And HBO Max is a great product. We like the fact that we're kind of viewed as being the place to come to get it.

Speaker 7

And when it's right for us to put that up in the front line to do that, we'll continue to do that.

Speaker 9

Thanks, John.

Speaker 1

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

Operator

Thank you. Our next question comes from the line of Michael Rollins with Citi. Please go ahead.

Speaker 5

Thanks and good morning. So a follow-up and a question. When you're discussing some of the impacts that your customers are Experiencing this inflationary environment, can you talk about how AT and T is using the ACP program, the size of it And the opportunity to use that, which may be different than some past cycles, customers had

Speaker 7

to deal

Speaker 5

with potentially tougher macro climate. And then secondly, just in terms of the Structure money that's out there. Can you give us an update on your expectations for the size of the opportunity that AT and T could pursue? Thanks.

Speaker 7

Sure, Michael. First of all, I think the most Significant change in the ACP program is the fact that we have put out a new product accessed by AT and T. It's very easy for you to look at that product. All you need to do is search on the Internet accessed by AT and T and you'll be taken directly To the page that talks about what this is and it's of course tied to ACP dollars and That program I think is a great program. I think it's good for the consumer.

Speaker 7

As you know, it offers 100 by 20 dollars $30 fixed connection. And we also have options that are available in the wireless space around it as well. And we've been able to, in most of our channels, activate eligibility requirements for ACP. And We're working on ensuring that that's done. The government still continues to move around a little bit on some of the qualification criteria and those types of We have to adjust our operations, but I would say by and large in most of our mainline channels, we have the ability to Qualify customers and to move them into products and services as a result of it.

Speaker 7

And I think this is a it's a healthy program to get those that maybe are a Or income challenge to get them into not only new products, but better products. And so, I think that's a good thing. I think we still have an issue from a policy perspective in this country on how we sustain this for the long haul. And universal service reform is going to need to be a key element of that as we get out several years from now and the original ACP funding It starts to have to be renewed and we have to look at it differently. But right now, I'd say the program is healthy.

Speaker 7

I think we're in as good a position as anybody in the market As to what we're doing and it's needs based, but we make it very easy for those needs based customers to self identify and qualify at Point of sale and then take advantage of it and move into a product or service. And we think that'll be actually over the long haul something that makes for More continuity in our relationships with customers as it insulates them a little bit from economic cycles and some of the things that are going on like higher inflation. On the infrastructure side, look, I'm optimistic. We haven't given any guidance on what we think that number will be. And I tell you frankly timing wise this is a little bit out in the future right now.

Speaker 7

As you know the maps are not going to be issued From the FCC until a little bit later this year. And until that happens, the money really can't start to flow at the state level. So we got to get the maps in place. We've got the procedural process being defined as to how the states will come back to the federal government in Seeking the distribution of these funds, they will have to go through their the state will have to go through their processes to do that. I expect that that will start to occur into next year.

Speaker 7

Awards will probably start to materialize maybe in some meaningful levels In the middle part, latter part of next year, then you have to go and build and ultimately bring these things online. So you're not looking at These things creating what I would call material impact on the 2022, 2023 plans right now as it moves through the cycle. How much? We'll get a better idea once the rules are set and each state is going to have authorship Over their strategies and approaches, I've shared before that we're actively working with states trying to shape them in ways that we think Are meaningful for our business and are good policy for each of the states. I would point out There is no company that's building 2,000,000 connected locations of fiber in 6 months like we are.

Speaker 7

We are scaling In a way that nobody else is, we are deploying wireless infrastructure at a torrid pace. I think that makes us a good partner. I think at the end of the day states that care about somebody who's reputable, that can execute, That has a mature supply chain and a scaled engine to go after should make us very competitive for this money. And we intend to through a combination of what doing with ACP and our operational prowess and our scale that we're demonstrating and the fact that we've got a product in the market that customers love, It's got the highest NPS out there. I think we should be a very qualified partner to work with government on that and I'm optimistic that we can avail ourselves with some of that money.

Speaker 1

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

Operator

Thank you. That question will come from David Barden with Bank of America. Please go ahead.

Speaker 10

Hey guys, thanks so much for taking the questions. I guess I wanted to talk about the second half free cash flow guidance, if you will, for $10,000,000,000 and the jumping off point for 2020 3. I think Pascal, you said the biggest moving part is going to be $3,000,000,000 less spent on equipment, in the second half, which is Which would not be normal, I think, just because it's a higher upgrade period, you've got the iPhone refresh. I was wondering if you could kind of explain why that's going to be such a big tailwind. I think The second question would be $2,000,000,000 less in CapEx in the second half.

Speaker 10

We've been expecting AT and T to kind of come With the C band development and the auction 110 spectrum and kind of one big push, and so why is it The CapEx is coming down even as that begins. And if I could one last one is obviously the cash flow seems very sensitive to this 1 or 2 days lengthening billing cycle. Are we convinced that the billing cycle has lengthened? Or should we be concerned that it's Lynx and Inc, as we look into the back part of the year? Thanks.

Speaker 3

Okay. Let me try hitting all those and obviously John, you can chime in. First, look, the thing to keep in mind is The second we pay devices, for example, probably a quarter to a quarter and a half After the sale has happened. So for Q2 as an example, we're paying for the last part of Q4 and Q1. So in Q for the back half of the year, it's going to be largely activity from the back half of Q2 And Q3.

Speaker 3

So the holiday sales and the upgrade season, we're going to pay for that in the first half of twenty twenty three. And so mechanically, we have really good visibility in terms of the payments that we are likely going to make in the back half of the year. But overall, given the strong growth we had in the first half of the year, our overall device payments for the year are Higher than we anticipated, which candidly, this is a very good situation because we think this is attractive growth And we feel really good about it. As it relates to CapEx, our Fiber build was front end loaded for the year. Remember last year we had some supply chain disruption and it took us a while to ramp.

Speaker 3

We got Good exit velocity and exiting 2021 and that continued and in the first half of the year We delivered 2,000,000 locations passed. We feel really good about that. In terms of our C band deployment and the pace of that, nothing has changed. We said We were guiding to $24,000,000,000 of capital that remains the case. So we're not spending any more capital than we thought the year.

Speaker 3

And remind me, the last part of your question? Sales outstanding movement. Oh, day sales outstanding movement. So In terms of DSOs, here is what we know. This is a trend that is relatively nascent.

Speaker 3

It is Probably 6 weeks or so that we start to see an uptick in day sales outstanding. Is it a trend? Is it going to get worse? We don't know, but here's what we do know. We do know that, as Sean alluded to, in prior recessions, Customers may have paid late, but they paid us.

Speaker 3

So there's nothing to suggest given the mission critical nature of our services that customers won't pay us because They're going to want to maintain connectivity. So in that regard, we think it is a timing issue. And I think in this macro environment, I'm not going to call whether it's going to get much worse than where we are today, but We're taking a prudent view and not assuming it's going to get better given all the uncertainty.

Speaker 7

Dave, the only other thing I would add to what Pascal said is as We obviously hit our $70,000,000 POP coverage commitment that we made to you that was part of the capital plan for this year, 6 months early and as we told you we'll be around that $100,000,000 neighborhood as we get to the end of this year. I think it's Probably intuitive to you, but just to remind you, the first 100,000,000 POPs in wireless coverage are very different than the next 100,000,000 POPs Just in terms of kind of capital intensity and what has to be done to make them happen and the number of physical sites you have to touch. So If you want to think about this, it would not be right to kind of straight line level of activity and investment As you make your journey to covering most of the United States and that will probably help you understand maybe some of the rate and pace of things as we move through the year.

Speaker 10

Great. Thank you both.

Speaker 1

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

Operator

Thank you. That question will come from the line of Frank Lowden with Raymond James. Please go ahead.

Speaker 11

Great. Thank you. Can you comment a little bit on your dividend policy going Forward, is it a priority to grow the dividend by various amounts? That would be great. And then on part of the business Sai, I think you commented earlier this year about exiting some lines of business that were really low to no margin.

Speaker 11

How is that going? And To what extent is that impacting the declines that we're seeing in the business line? Thanks.

Speaker 7

Hi, Frank. Look, we've been pretty clear on the dividend policy as to what we're doing and the Board ultimately makes this call and this decision. And As I've said before, we set this at what we think is an incredibly attractive return in the market right now. And I think we are still standing there Relative to the yields on the stock, as I said, the Board will evaluate dividends along with other choices in front of us To return to shareholders, as we've indicated, our priority right now is to get the balance sheet Where we want it, which is a full rush and push to get into 2.5 times and then we can evaluate what other options are at that point in time. And those other options will range from whether or not we want to do something on dividend policy or something we want to invest More back into the business or whether we want to push on some buybacks and those decisions will be weighted time When we have those options in front of us and evaluate the market as to where it stands, our intent is to ensure that we're returning Good and competitive dividend out to our shareholders, which we have today, and we'll continue to be mindful of that as we go forward and we see the stock price Justin, what occurs in the value of the business?

Speaker 7

On the ABS side, look, I think as you've heard, The repositioning of the asset is it's a multi quarter set of processes and approach Our backing away from lower margin products is relatively straightforward. I say relatively because we can make the decision to do it at the front end. Obviously, in this customer base, we have contracts that sometimes extend for Multiple years in a period of time where we then have to kind of go through a wind down and wrap up cycle once we stop Selling something. And we're in the middle of that occurring, but the process of choosing not to drive new sales at the front end It's been a relatively straightforward set of decisions and I feel like we're executing reasonably well around that piece of it. We have dropped the number of products we have in the market pretty demonstrably over the last year and a half, and we'll continue down that path.

Speaker 7

And I think it's that reduction in complexity that will allow us to then scale up what's essential to have A viable franchise moving forward and a robust and growing franchise moving forward, which is one centered on moving product That is on our owned and operated infrastructure. And what's right about our segment here that I want to stress that we report a little bit differently And some of our peers, we do not report a consolidated business entity of both wireless and wireline services. You should Understand a lot of our strength in the wireless business is coming from our success in our enterprise business. It's coming from Increases in the public sector and our success of what we've done with FirstNet, it's coming from our success And penetrating deeper into our enterprise accounts with wireless services. We're really pleased With the share gains that we've seen in enterprise moving forward, where we believe we have the opportunity is in the mid market and the low end of the market.

Speaker 7

And the attractive part about that is it's a 2fer. It's not only getting more transport on the fiber infrastructure we're deploying, But we are underpenetrated in the wireless space as we move into those accounts. So when we deploy fiber We have an opportunity to talk to mid market customers about putting more of their transport on AT and T. We also oftentimes get the opportunity to Talk to them about moving their wireless account as well, and that's an attractive opportunity for us. It requires us to tune our distribution differently.

Speaker 7

That's a slower process. And we've been making progress around it. You heard Pascal talk about The growth that we're seeing in our fiber products, we're seeing some progress in the wireless space in the mid market, but we're not up to where we need to be yet. We will get there. We play very well in that space.

Speaker 7

Our brand plays very well in that space. We know how to sell product in that space, but it's Getting the engine kind of hitting on all 8 cylinders, it's going to take us a couple more quarters than what we expected, but I'm optimistic we can get there. It's the right asset base. It's the right brand. We know how to approach these customers and we will make that happen.

Speaker 11

All right, great. Thank you very much.

Speaker 1

Thanks very much, Frank. And operator, we have time for one last question.

Operator

Thank you. That question will come from the line of Tim Horan with Oppenheimer. Please go ahead.

Speaker 12

Thanks guys. Two questions.

Speaker 10

Could you just elaborate a little bit

Speaker 12

more on the wireline side of the business market? What are you replacing your legacy virtual private line networks with The same thing with voice. Are you I guess, are you retaining these customers? Do you have a product for them? Is it just a lower ARPU issue?

Speaker 12

And then secondly, On the CapEx, we're hearing CapEx equipment costs, labor costs are up 10%, 15%. I know you dig your guidance out of quite a while ago for next year. I guess, how are you offsetting those

Speaker 7

So Look, the move, as I just articulated, is we want people on owned and operated infrastructure. And so it is As people migrate away from VPN and we have a more dense fiber base as we're selling more fundamental underlying transport, Frankly, at higher speeds and therefore higher connection values in that segment of the market and that's where our future is. We work with layering that on a SDN capability that aggregates that, And that is the replacement product for VPN. We do very well in the market on that, although there is typically in a network replacement At the top end of the market, some trade down in total value when that occurs. That's why this move into the mid market is so important to us Where we are typically underpenetrated because offsetting that trade down in the enterprise top end of the enterprise space Where we are a share leader on VPN and have these complex networks.

Speaker 7

As we have some of that trade down in the migration on the technology side, Market replacement in the mid market is what offsets that and allows us to move the sector back to growth over time as we make that happen. And again, it's why this investment in fiber and our core business is so critical and important in repositioning our distribution to make that happen. The world for us moving forward is a data VPN replacement world. And that's where we're going to make our bread and butter. Our play in voice is to penetrate more deeply into wireless in these spaces.

Speaker 7

Generally speaking, when you look at what's happened on collaboration services, it's moved to other providers that are doing that kind of work. We want the underlying data infrastructure for those collaboration services to run on, and we want to sell more scaled wireless solutions on top of our transport Services into these customers to extend our relationship with them. And I think as I said just a moment to Frank's question, we're doing that fairly effectively and That's what the future is and how we move forward on it. On the cost side, we're certainly seeing some pressures As we move through, we've articulated that. We're able to navigate it better than a lot.

Speaker 7

As we've shared with you Previously, we have a lot of long term contracts in place. I think those help us a lot. I won't tell you they entirely insulate us. We want our suppliers to be healthy. We pay attention to that.

Speaker 7

We have good longstanding partnerships with our suppliers, and I will be candid. We have sat down with them. In some cases, I've even though not had to pay people more, I've elected to pay people more because I think that makes for a healthier Win win relationship on things moving forward and we are having to take some costs into our build and what we're doing. However, These are long lived assets and some increase in our build costs, for example, on putting fiber out there It is not the end of the world for us. We've shared with you a lot of data on the effectiveness of our build.

Speaker 7

We've shared with you that when we did the original business case on these things, we're penetrating a lot more rapidly than we thought we would. That has a big impact on the overall return characteristics of this investment that can overcome maybe some of those per living unit cost increases. We really like the ARPU trends we're seeing. We really like the churn trends we're seeing. All those things still make this a really smart An important investment for our business, and I think it's a balancing act as we move through it.

Speaker 7

And as we've said before, When you get the asset in the ground and ultimately work through multiple quarters of inflation, building it today is better than building it a year from today. And if it's a long lived asset and it's an important product, ultimately, we'll probably see some accretion move into ARPUs over time. So I feel like we can manage through this reasonably well given our scale, given our long term relationships with folks and the importance And durability of the product over time.

Speaker 12

Thank you.

Speaker 1

Thanks very much, Tim.

Speaker 7

So folks, I really appreciate you taking the time to be with us this morning. And I know you got for maybe hopefully the last time A little extra work to do this quarter as we work through the disaggregation of discontinued operations and the like and results. And I'm excited about finishing this in this quarter and now moving forward in a more consistent fashion. We made some hard moves that brought us to this moment that I'll acknowledge, but those hard moves were to To what goes on in the environment economically, whether economic stress, rising interest rates, etcetera. And I would say I'm really Pleased we're in this position for having made those decisions.

Speaker 7

And it's allowed us to do exactly what we intended to do, which is to think about How do we create a durable AT and T with a consistent machine that can deliver the right kind of subscription services for broadband moving forward, And I think we are doing that. We're building world class infrastructure. Where we're doing that, you're seeing the momentum in the market that we're able to achieve. I view these customer relationships as durable customer relationships that are highly accretive and attractive. And I will tell you that as I work with the 90 days in this business with the way we operate and the infrastructure we build is sometimes a bit like Trying to land a plane on the top of a pin.

Speaker 7

And so when I think about the reality of what we're doing here, We want to look at it over the course of the year and as the business has the right kind of momentum and I've got people doing their work, we continue to invest. We make sure we put the right things out there, and a 90 day cycle is not the end of the world in any way, shape, or form. Hopefully, we've given you the confidence that We understand what's going to occur in the balance of this year and that we're investing in a way that's going to return for shareholders In a fashion that I think we'll all be proud of moving forward. So thank you very much. Hope you all enjoy the rest of your summer and we'll talk with you in 90 days.

Operator

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using AT and T conferencing service. You may now disconnect.

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Earnings Conference Call
AT&T Q2 2022
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