AT&T Inc. (T) CEO John Stankey Hosts 2022 AT&T Analyst & Investor Day (Transcript)

AT&T Inc. (NYSE:T) 2022 AT&T Analyst & Investor Day March 11, 2022 10:00 AM ET

Company Participants

Amir Rozwadowski - Senior Vice President, Finance and Investor Relations

John Stankey - Chief Executive Officer

Jeff McElfresh - CEO, AT&T Communications

Jenifer Robertson - Executive Vice President & General Manager, Mobility

Rasesh Patel - Executive Vice President, Chief Product & Platform Officer

Pascal Desroches - Senior Executive Vice President & CFO

Conference Call Participants

John Hodulik - UBS

Simon Flannery - Morgan Stanley

Brett Feldman - Goldman Sachs

Mike Rollins - Citi

Craig Moffett - MoffettNathanson

Phil Cusick - JP Morgan

Walt Piecyk - LightShed

Frank Louthan - Raymond James

Doug Mitchelson - Credit Suisse

Dave Barden - Bank of America

Eric Luebchow - Wells Fargo

Brandon Nispel - KeyBanc Capital

James Ratcliffe - Evercore ISI

Amir Rozwadowski

Good morning, everyone, and thank you for joining us. Welcome to AT&T's 2022 Analyst and Investor Day. I'm Amir Rozwadowski, Head of Investor Relations. Before we begin, I need to call your attention to our safe harbor statement. It says that some of our comments today may be forward-looking.

As such, they're subject to risks and uncertainties described in AT&T's SEC filings. Results may differ materially. Additional information is available on the Investor Relations website. And as always, all of our materials are on our website.

With that, in a moment, you'll hear from our CEO, John Stankey, but first, let's watch a brief video.

[Audio/Video Presentation]

John Stankey

Thanks, Amir, and good morning, everyone. It's great to be with you today, albeit virtually once again. We had to make a call weeks ago on how to handle this day with you and elected to go this route for certainty. But around me here in Dallas, it's nice to see so many of my cookers back in the building and enjoying each other's presence.

But most of all, thanks for choosing to invest your time with us today. We appreciate your interest. Today, we're focused on looking forward. We're coming up soon on a big transition AT&T, a more focused company, a more focused management team, a commitment to being the best with our resources aligned to accomplishing that goal.

We have stated our intent to focus and simplify our company, improve our returns and become America's best broadband provider. Thus far, this management team has shown you improved operating effectiveness through an enhanced customer service and customer acquisition engine, more postpaid wireless subscriber growth than in the past decade, fiber growth of 1 million or more subscribers for the fourth straight year and the establishment of HBO Max is a scaled customer favorite and streaming.

Over the next couple of hours, we aim to enhance your understanding of why we're positioned to take advantage of what we believe to be a strong and unique market opportunity that plays into the DNA of our company.

For the last 18 months, we've been positioning for this reality. And today, we'd like to accomplish 4 things with you. First, we'll lay out how our network assets and strategy position us to serve important customer segments and set us up for growth.

Second, we'll highlight our path to differentiating the AT&T value proposition. Third, we'll outline our progress in reshaping our cost structure as a key element in driving improved cash flows in support of our growing customer segments.

Finally, we'll sum up how this execution and focused approach will drive improved returns and value creation for shareholders in the years ahead. I'm bullish and optimistic about the opportunity for a company with our assets, skills and customers.

I believe we're at the dawn of a new age of connectivity powered by the emerging business models requiring pervasive high-performance connectivity and establishing long overdue social policy intended to achieve universal access to the Internet.

Underpinning my confidence, we conservatively project a 5x data increase on our network over 5 years. A couple of examples. The evolution of social interaction, gaming and experiential alternate realities will consume huge amounts of real-time, low latency 2-way data.

Dramatically improving collaboration tools will enable more effective distributed work environments that will take traffic off of corporate lands and onto robust distributed WANs. Improved health care outcomes and lower cost to address an aging population will rely on access, telemetry and observation to address the challenge of rising cost curves and the list goes on. Some worry and ask, will we get paid for this new rule? History has shown us that sound policy will, in fact, provide returns and solutions.

Since the launch of the T1, demand has continued to increase, cost per bit has continued to decline, returns have remained competitive. And so we believe the utility and value of these applications will continue to support those who make the long-term investments to support this dramatic innovation.

Cost of goods sold for connectivity will be comparatively small, amortized over a landscape of high utility and essential applications with significant end user benefit. Candidly, I worry less about getting paid and more about getting there fast enough.

In the lab, software and hardware will mature rapidly and efficiently. As has been the case since the advent of compute, distributed networking will be running to keep pace. We exit the pandemic with a credible real-world testimony to the value of reliable and pervasive connectivity.

Policymakers in the United States got so much right, scaled mobile networks, which cover an incredible land mass acted as a backstop and lifeline for the country, highly capable and reliable fixed networks effortlessly accommodated record shifts and increases in the types and volume of traffic.

Even from this position of strength, the industry is still on the verge of a 2022 that will likely be a record year of investment to continue enhancing service to customers and enable new business models.

That said, it's now time for every American to experience the social, economic, health and educational benefits of universal access to the Internet. Policymakers got this right again, addressing the remaining gaps in some of the world's most capable and distributed broadband networks when passing the Infrastructure Act, leaning on public-private partnerships to get the job done.

AT&T will be there to support and participate looking to pay our capital with more than $43 billion of incremental public infrastructure deployment administered by the Department of Commerce and more than $14 billion of support through the FCC's Affordable Connectivity Program. We feel this will be good for the industry, good for AT&T and good for Americans. And we're working with policymakers to design these programs to make participation as easy as possible, consistent with congressional intent couple this major policy shift with the strong tailwinds of technology and innovation and we're set up for a strong demand cycle and increasing customer usage.

We think these fundamentals are important and frankly, define how networks should be designed and constructed. We offer that the next evolution of entertainment will drive a nearly 2x increase in bandwidth demands for improved resolution and clarity, coupled with demands for 2-way interactivity. Consumer entertainment behavior will continue to transition for mass experiences to personalized and individualized consumption.

A pattern that's barely crossed the halfway point in its evolution. Pervasive application of AI will require persistent connection and instantaneous access to data stores to enable insights and functionality.

Greening of transportation will reach to ubiquitous and reliable connectivity to achieve efficiency, autonomy and improved utilization. Said another way, if the economy is to shift from shopping malls, bank branches, movie theaters, stadiums, classrooms, office parks and medical plazas, it needs robust distributing networking to enable it.

AT&T intends to facilitate this transition with America's most pervasive and scaled broadband network. The AT&T story will be written in 2x. Today, we'll focus on the first act, and that has taken our current asset base in delivering competitive returns. We'll walk you through this discussion articulating how our wireless business is performing effectively and at scale.

We'll outline the effectiveness of our consumer fiber business and our progress achieving our desired scale. Finally, we'll explain our ongoing repositioning in the fixed line business markets. This will outline our approach to growing the franchise on sustainable owned and operated infrastructure and extending our leadership in the largest corporations in America to the mid and low end of the market.

When our first act is done, we'll be a more focused, agile and capable domestic network leader. We'll be a company with a smaller product portfolio built on the back of fiber in the core metropolitan and suburban areas, combined with a highly capable nationwide wireless network able to extend even greater capabilities in utility than ever before beyond our core.

Our legacy cost will be permanently altered and will be positioned for our next generation of growth. We're mindful that we operate in ever-changing and dynamic markets. While we like the durability of our asset-intensive products, we desire a better balance of revenues and profits that are generated from more flexible and asset-light approaches that software brings.

After retrenching from entertainment, we have more work to do to differentiate our connectivity. We're not talking about transformative M&A here. Instead, we're focused on developing software and capabilities that lay on top of our network and optimize our connectivity value proposition.

I'll acknowledge, we're hard at work on that front, but we're not ready to share any conclusions or projections with you today. It's vitally important we get act 1 right. Without successful execution on this act, our management team knows the second act doesn't really matter.

As we establish your confidence in what we outlined today, I do expect we'll be back with more. There are just too many exciting opportunities in unmet customer desires to be satisfied with 1 act play. Before you hear from our team, I'd like to offer a little more perspective on the macro environment we're operating in and its impact on some of the guidance and projections we'll provide.

I suppose there's been one constant since I took this role, and that's been navigating through some unprecedented events. And unfortunately, for all of us, we seem to find ourselves in another one of those moments on the geopolitical stage, all to go with the end of the easy money era, heightened risk at all levels of the economy, extended and persistent supply chain inconsistencies and shifting domestic tax and investment policies.

There is no doubt all these factors increase uncertainty for investors and hamper visibility for management, including those of us AT&T. However, we are comparatively well positioned to navigate this moment. Our products are essential to everyday life and critical as the foundation for the next stage of software innovation. Our asset base is heavily physical and tends to reflect its relative value as markets evolve.

Our customer relationships are strong, durable and linked to value enabling intelligent pricing adjustments. Our balance sheet and discretionary cash position will momentarily be meaningfully improved, and our obligation are largely fixed and long term in nature with no pressing needs to enter the debt markets in the near term.

Our supply contracts are preferred and scaled, allowing us to navigate unplanned disruptions. Finally, we're investing at record discretionary levels, offering latitude to adjust our approach if economic conditions warrant.

In short, we feel we're positioned to navigate this moment largely from a position of flexibility and opportunity. We also are positioned to sustain strong cash flows and a dividend yield near the top of the Fortune 500.

Our improved financial flexibility allows us to pursue durable and sustainable growth opportunities that offer future upside. I couldn't be more excited to launch this next chapter in AT&T's storied history, and I know the management team is equally excited to show you what they can do. So let's get to the material.

To lead us through the discussion on our 4 objectives today, you'll hear from Jeff McElfresh to summarize the rationale behind our network capital deployments; Jen Robertson, to share how the AT&T value proposition is winning in the consumer space; Rasesh Patel, on how we're repositioning in business markets to remain the leading and most trusted name in networking; and then Jeff will come back with an update on our cost transformation.

Finally, Pascal Desroches will take you through our path to sustainable growth before I summarize and we get to your questions. Thanks again for being with us today. And Jeff, why don't you take it away?

Jeff McElfresh

Thanks, John, and hello, everyone. Let's go deeper on our goal to become the best broadband provider in America. It's a bold objective and I'm confident in AT&T's expertise to deliver. Now to be recognized as the best in tomorrow's hyperconnected world, we believe the network must start with a solid foundation of fiber, a foundation that isn't just fiber in the core of the network but is also in a dense distribution network with pervasive pathways of fiber serving customers out at the edge.

We believe this fiber foundation is essential for a network to perform to consistently deliver a great experience with greater ubiquity, reliability and it must also have the capability to efficiently serve this increasing demand for high-quality bandwidth.

And it must do all of this while satisfying the unique needs across a diverse set of customers. And that's where our network investment strategy begins. It begins with the customer. Their demand guides our planning and our design and how we present our assets across every square mile of our network footprint to meet their demands.

So let's look at our 3 major customer categories to set the context for our network investment strategy. Consumers need more data than ever before. Their monthly consumption in their home is accelerating from 900 gigabytes, nearly a terabyte today to 4.6 terabytes by 2025.

To put this into perspective, today, we're consuming roughly 30x more data in our home than we are on the go with our smartphones. Homes are getting smarter and they're becoming more demanding environments where flawless, high-quality broadband is required.

Let's take a look at a few consumption trends we're seeing in the home. The average household today has 13 devices, and that's expected to triple by 2025. From smart TVs to smart appliances, these devices are consuming more and more data.

There is an immense expansion in streaming and gaming where higher resolution formats going from HD to 4K to 8K are becoming more of the standard, and that's only increasing. Why? As more occupants in every home shift their entertainment consumption away from broadcast formats to unicast streaming, the demand for concurrent high-quality bandwidth increases. Coupling that with the format shifts to 4K and 8K, the payload soars well over 2x.

There's another dynamic that's driving the need, and that's in the reverse direction, the upstream. The home has become our new permanent workspace. An incremental 35 million U.S. employees have the option to work remotely post pandemic and not just temporarily. This new trend line for symmetrical performance in broadband is where fiber excels.

Upload quality is a premium and in high demand for applications like video collaboration, file uploads and cloud sync. Being able to manage the performance of the home broadband network is becoming more important, requiring the ability to protect the bandwidth serving the work from home traffic from everything else.

With these dynamics in play, it's no wonder, broadband consumption in our homes is on the rise. And based on the trends we're seeing, they're not slowing down. Small and medium-sized businesses are also consuming more and more and expected to grow 3.5x in the next 3 years from 600 gigabytes to over 2 terabytes.

This category of customers is quite heterogeneous with the mix of needs, but the majority have something in common. They are all seeking higher-performing bandwidth across multiple locations from their place of business to their employees' homes and all the spaces in between. This is also the fastest-growing segment with over 4 million new businesses created since 2020. They're always on the go from sales to real estate, to field workers who need the flexibility to work from anywhere consistently with point-of-sale systems, document sharing and the ability to display inventory catalogs.

Small businesses and mid-market customers often seek expertise for their connectivity needs. So they depend on trusted providers like AT&T with a reputation of providing professional-grade services that are secure, dependable and resilient with always on failover. And turning to the enterprise market, where AT&T has long held a leadership position, consumption is not only growing, it's being accelerated by shifts in where the bandwidth is needed.

Enterprises are automating business processes, migrating applications off-premise to the cloud and accessing new technology services through platform integration. Some enterprises have shifted upwards of 80% of their entire processes from manual to digital in the past year. Furthermore, as enterprises are managing a multi-cloud environment, they require more low latency and secure bandwidth.

And the shift is further compounded by the evolution of the workforce to being more distributed and remote. To operate effectively and seamlessly, companies are becoming more reliant on high-quality bandwidth for their employees and their tools that they need to perform their tasks like video collaboration and unified communications.

And the CIOs of these customers need their new, more distributed network to perform reliably and securely. While each customer we serve has unique needs, they share a growing appetite for high-quality broadband. And we believe fiber is the best technology. It's multi-gig capable the day we install it, so it can handle the demands of today and in our hyper-connected future without significant capital investments.

It provides the fastest performance with expectations of up to 10 gigabits per second reliably with symmetrical upload and download speeds.

To us, fiber is foundational to our entire network. We seamlessly plan and operate one large fiber network with multiple purposes or endpoints. Thank homes, apartments, small and medium businesses, large multi-location enterprises as well as our wireless network. Wherever fiber goes wireless follows. And it's also the most efficient technology. That's why a dense fiber infrastructure is foundational to AT&T's growth as it allows us to manage traffic on the most cost-effective technology. Comparing the cost per byte carried for fiber and wireless while also considering the forecasted demand, we engineer our network to serve high-bandwidth traffic on fiber as it's the most economical use of our assets and provides the best industry-leading customer experience.

We're not attempting to serve terabytes of monthly consumption over wireless. Rather, we choose to preserve our wireless spectral assets to remain competitive for the high-value mobile applications. And as consumption trends continue to grow, technologies other than fiber will need more costly capital investment cycles to remain competitive, and deliver a consistent high-quality experience.

And with fiber being such a superior technology, let's talk about the number of residential and business customers not currently served by fiber. In fact, in urban and suburban areas, we estimate there are roughly 50 million households and nearly 10 million business locations that are prime for fiber and are not covered today. This provides a strong growth vector for AT&T. After all, why wouldn't everyone want the best? As we continue to scale our current fiber build, the more we complete the more economical it gets.

Capital investment per location is lowered with densification while our returns improve with penetration. And that's a positive thing considering we're at the dawn of a new connectivity error. Executing a large-scale fiber infrastructure program like we're doing AT&T is hard work upfront. But we're playing for the long term. We're making the upfront investment to best position AT&T for sustainable and durable growth with the best fiber network to capture the benefits of this growing demand.

Now I want to take you through the advancements we've made over the past year with our strong wireless assets. Last year, I declared my confidence in our ability to improve the performance and the perception of our wireless business. John touched on our industry-leading subscriber growth earlier. Customers are choosing AT&T's fast, reliable and secure 5G network at record pace. And that's because it's never been stronger. Over the last 12 months, our network delivered consistently, maintaining a 99.5% reliability.

We expanded the coverage of our network to industry-leading, now covering over 2.9 million square miles AT&T is America's largest wireless network. We have seen 8 consecutive quarters of improved overall network satisfaction significantly closing the gap to the industry leader by almost 1/3, all while remaining disciplined in our go-to-market approach, which Jennifer will touch on next.

Our design objective for our wireless network is simple. It's about coverage and consistency of a premium network to serve a high-quality and diverse customer base. Our wireless investment strategy starts with a strong coverage advantage in square miles made possible by our great low-band spectrum holdings. Low band provides the best and most consistent experience because of its propagation characteristics, both inside and outside. It's because of this low-band advantage, we could be deliberate in our mid-band spectrum strategy in 2 ways.

First, we could be opportunistic in acquiring 120 megahertz of mid-band by choosing to participate in both Auction 107 and 110. By doing so, we were able to accumulate 120 megahertz at an attractive cost per megahertz POP. Second, we can be efficient with our deployment ramp. As we deploy mid-band, we're installing 2 radios per tower that provides the necessary bandwidth and power to achieve the full performance of our entire 120 megahertz of mid-band spectrum without sacrificing coverage.

And because the 40 megahertz from Auction 110 becomes available this year ahead of C-band Phase 2, we're able to deploy a total of 80 megahertz of mid-band spectrum starting this year. During this phase, our network will remain competitive as we deploy this first tranche of spectrum and we'll be positioned for efficient deployment of the remaining mid-band holdings going forward.

We have what we need to remain very competitive and achieve our business plans. Customers want a consistent experience on connectivity, and it's a race to the home and to deploy 5G across the country. Our capital investment will be elevated over the next few years as we aggressively build a next-generation network with fiber and 5G.

We expect our capital intensity to reduce as we exit this period of investment. We have been through cycles like this before, and we are confident our expertise in building scaled networks will play to our advantage. Our deliberate plan enables us to optimize asset returns across multiple segments and benefit not only from owners' economics of the largest fiber network, but increased returns by multiple revenue streams.

We are on track to double our fiber footprint by 2025. Despite the supply chain and labor challenges that we faced last year, our momentum is trending slightly above our expectations, and this reinforces our confidence in delivering the significant infrastructure build. AT&T's fiber network will be a strong growth platform, covering more than 25 million consumer locations, 4 million small businesses and 1 million enterprise locations with industry-leading multi-gig performance. And this fiber network will fuel the backbone of a more capable 5G wireless network.

In parallel, we will deploy our mid-band spectrum to over 200 million POPs by the end of 2023. This complements our strong 5G footprint, which today covers more than 255 million POPs in more than 16,000 cities and towns. Our fast, reliable and secure 5G network will maintain its leadership with coverage and consistency.

We are choosing fiber to fuel our vision of being the best broadband provider in America. We're investing in a scaled fiber network with a deliberate wireless strategy. By owning and operating both, we have stronger flexibility to the leader that captures growth by providing high-quality broadband in more places for businesses and consumers.

To explore those opportunities, let me hand it off to Jenifer and Rasesh to take you through our customer strategies that we're executing to deliver the plan that we've laid out.

Jenifer Robertson

Thank you. And hello, everyone. I'm excited to tell you our story. So I'm going to jump right in. Jeff mentioned a key step of becoming the best broadband provider was our investment in improving market performance and perception.

To do this, we needed to rethink how we were approaching the market top to bottom and be willing to make the necessary investments to reignite the growth engine in our business. So how did we overhaul our business? We started by listening to our customers. And you know what they told us, their biggest pain point was that we didn't value existing customers as much as new ones. And that alone made them want to leave.

Customers cited not having access to new offers. Our long-tenured most loyal customers didn't feel valued or appreciated. Looking at our investment in 2019, I can see why? At that point in time, our competitors were outspending us significantly on acquisition and retention promotions, and our results showed it.

In 2019, we added 483,000 net adds in an industry that added about $6 million. That's only 8%. Our promotional spend was weighted almost entirely towards acquisition. We underperformed an upgrade rate and in post-pay voice churn at 0.95%, and we were a distant third place in Net Promoter Score. That wasn't good enough for us. So we changed it.

1.5 years ago, we raised our total investment to match industry levels, and we shifted that investment from acquisition to retention of our best and most loyal customers by responding with the launch of best deals for everyone. It was a necessary move and an important investment in growth.

From that point forward, we've delivered 6 quarters of net add growth and industry-leading share growth. In 2021, we grew our postpaid voice base by 3.2 million net adds. That's more than double year-over-year and our best results in a decade. It's also the most efficient net ad spend across the industry last year. Why focus on retention?

Look, aside from the fact that customers told us it mattered, we all know it costs less to retain a customer than acquire a new one. There are other benefits as well. First and foremost, engaging in an upgrade cycle gives us the opportunity to move customers to the right plan for them, often higher value plans. Second, we earn the right to sell value-added services like our next step plan and mobile insurance. Third, it gives our customers flexibility to move into the latest 5G devices and get the best experience on our network. And we do this with affordable installment plans. In exchange, we gain value for trade-in devices, and we better insulate our base for market variables like price changes and the timing of network updates.

With about 80% of our postpaid voice base on an installment plan, we've increased upgrade rates to comparable industry levels while delivering the lowest postpaid voice churn. I'm talking industry-leading churn of 0.76%. That's down 20% since 2019. For those of you looking at ARPU, let me offer a few points.

We continue to have the highest ARPU in the industry. It's slightly down from the investments we're making and migrations within the base, but we expect to stabilize in the latter part of the year. Factors driving ARPU stabilization and improvements include 15% of upgrades moved to a higher rate plan.

And almost half of all upgrades attach at least one of the value-added services I mentioned. We also expect the return of international roaming revenues. These benefits help offset the impact of our promotional spend. Part of this is also influenced by the quality of our gross adds. So I want to touch on those 2.

We didn't lose sight of new customers. We made several parallel moves, which improved the quality and the efficiency of our intake. We introduced simpler rate plans and maintained consistency of our offers. You don't see us changing offers on a weekly basis.

Today, over 75% of our base is on unlimited plans. Our fastest-growing unlimited plan also has the highest ARPU. And with only 27% of our base here, we have plenty of room to grow value as we move customers add. The result is an acquisition cost per gross add that's down 23% year-over-year and down 46% from 2019.

This growth investment is about discipline. It's important to remember that not all customers take a promotional offer. About 50% of our customers do with only half of those or 25% qualifying for our premium offer. Because of our consistency and simplicity, our offers are very effective. We don't need to stack these offers with rich switcher credits, and you don't see us putting smartphone BOGOs in the marketplace.

We've maintained focus on growing the right way with high quality intake and investments in our existing customers. And our customers, well, they've responded favorably with higher NPS scores. As a matter of fact, our highest NPS ever on record. I'd sum it up this way.

We're growing subscribers at a record clip with record low churn. We've improved return and we've increased the lifetime value of the base 14% fully accounting for promotion amortization.

We learned another valuable piece of information listening to our customers. Specifically, what matters most to them when they choose a wireless provider. The rhetoric in the marketplace, it's confusing. Here's what's not, simple, reliable, secure. As we like to say around here, it's not complicated. So we go to market with simple offers and experiences delivered on America's largest and most reliable wireless network. The launch of Unlimited Your Way, our customers can tailor plans around their data needs with no surprises.

And our best deals for every one offer, well, I already mentioned that offer gives customers flexibility to move into the latest 5G devices. We've strengthened our overall value proposition by including security with AT&T ActiveArmor, extending 24/7 proactive security, extra device protection and more tools to block those unwanted calls.

We've had simple, consistent offers and messaging since 2020, which enables efficient spend and best-in-class execution. Our brand and message recall is well above industry norms and ahead of competitors even though we spend less on advertising. Our frontline teams are executing better than ever before because of that consistency, spending more time serving our customers and less time training on new offers.

As a result, we're winning in the marketplace with flow share of 34%. That's a 4x improvement over 24 months. By the way, we're not just winning in postpaid. Included in our outlook are the strong results we get from our prepaid and wholesale businesses. Based on net adds in 2021, AT&T was the fastest-growing prepaid carrier in the U.S. for the fourth year in a row. The Cricket brand works hard for us with a value proposition of simplicity and a smile.

It delivers the best experience in the industry, demonstrated by recent J.D. Power wins in purchase experience and customer care. As a result, Cricket consistently delivers industry-leading prepaid churn. With a customer base that skews higher income and more diverse, strong ARPUs that have grown both of the last 2 years, our high-quality, high-value offers are working and will stick to that formula.

Said differently, we have the best prepaid base in the industry, and we're going to keep our focus on those customers. Wholesale is a segment where we've traditionally been underrepresented. But our strategic agreement with DISH positions us to grow this customer segment with revenues that ramp in the second half of this year.

Looking forward, we expect to build on our success in 2021 and target additional market opportunities where we historically underpenetrated. We'll stay disciplined in our approach and target customer segments that play to our strengths. Let me give you a few examples of where we see opportunity.

First up, mid-market business and public safety. In both areas, we believe we have more upside. Since we were selected to build FirstNet 5 years ago, it's grown to cover more first responders than any network in America. With 3 million connections across nearly 20,000 agencies, we're just getting started.

We've expanded the market and will continue to do so through incremental new connections like body cams, connected cruisers, school buses, biometrics and 2-way radio devices. FirstNet was a deliberate focus for us, one where we made a commitment to asymmetrical share gain, and we delivered. It's yielded strong growth and gave us a playbook we can continue to run for other customer segments.

In mid-markets, simply put, we're underpenetrated. Rasesh will talk to you in a minute about our distribution plans to reach this customer segment of about 6 million businesses.

Second, the Hispanic customer segment. It's expected to reach nearly 70 million people in the U.S. by 2025, with an annual growth rate of about 2% and a total addressable market value of almost $90 billion.

With our postpaid market share of 24% in this customer segment, we're under-indexing our overall share and we clearly have opportunity to grow. It's a prepaid segment we've had success in with 30% Hispanic market share, up 100 basis points year-over-year. So we know what it takes.

To win in this space, we'll use our network assets, introduce new products and go local with distribution. With network assets on both sides of the border, we're the only carrier to offer unlimited talk, text and data in both countries, 1 network, 2 countries.

From a product perspective, we have plans to introduce some interesting offers in the second quarter. And we're expanding third-party distribution to reach these customers in their communities. Third, we have an opportunity to cross-sell in our fiber footprint.

You heard earlier today where fiber goes wireless follows. We've proven we can grow wireless relationships where we have fiber. In fact, our wireless market share is 50% higher in our fiber footprint. And we're not just talking about discounting a bundle. Rather, we create a halo effect by providing premium reliable products.

If you assume about 3 postpaid phone users per household, it's clear there's significant yield here, especially when you consider we have 4 million fiber households where we still don't have wireless. With better share where we have fiber and as you heard, we're building more fiber every day. I feel good about delivering on this opportunity with targeted approaches. Like investing in our base, these customer segments will drive growth, utilizing our current and planned network assets.

Speaking of fiber, Jeff talked to you last year about our strong performance. And I'm happy to tell you that strong performance, it's gotten even better. We've put down a marker everywhere we have fiber, we intend to own the home it's connected to with the best connectivity and the best experience.

Our home Internet customers have told us what they value and above all, it's speed, security and simplicity, sound familiar? Let's start with speed. AT&T Fiber is the premier product in the market, and it's the fastest Internet among competitors. Our recently announced Hyper-Gig product offers 2 and 5 gig symmetrical speeds to more than 100 metro areas.

And what's next, faster speeds, more locations. For security, we provide AT&T ActiveArmor. It helps safeguard all the devices within the home from known threats, and it's effective, stopping an average of 15 threats per day. Today's consumers also say emphatically, they want simplicity. So simplicity, it is with straightforward pricing, no annual contracts, no price increases at 12 months, no data caps and no equipment fees.

It's really not surprising that AT&T Fiber's Net Promoter Score leads the industry by more than 3x and that's driving penetration. We ended 2021 with 37% penetration across our entire fiber footprint, including new build. And 2/3 of our net adds are new to AT&T Broadband. We're also focused on accelerating penetration of our new build. Let me give you a quick case study.

Take a few key markets like New Orleans, Miami and Louisville, where we've been building rapidly. The penetration rates on our more recent build in those markets are well north of 30% after only 12 months of fiber deployment. How are we doing that?

First, we've significantly enhanced our prebuild marketing and communications, giving us a head start on attracting potential customers. We also intensified our local efforts, putting teams directly in the neighborhoods so people can better understand the benefits that fiber can bring to their lives. These are just a few examples because across our broader build, our average 1-year penetration rates are roughly 2x what we've seen historically at almost 24% versus 12%. Sustaining this level of penetration accelerates payback in our already attractive business case.

I shared earlier that cross-selling into our fiber base is a key wireless growth tactic. We know our customers love the combination of fiber and wireless, and we love it too. Jeff already mentioned why we believe fiber is the best technology and that we plan to double our footprint.

Let me give you a little more context on why our fiber strategy is a key principle to our growth. First, our build. We're building in adjacent geographies with approximately 90% being overbuilt. And we've reasonably balanced our build across the year. The outcome is a more cost-efficient build.

Second, I mentioned that 2/3 of our net adds are new. But for those customers migrating, we see an approximate 10% to 15% lift in ARPU. As we build out these markets with a superior product, we expect customers will pay more for that value even as we remain competitively priced in the industry. We also expect data needs to grow.

With the launch of Hyper-Gig, we're ready to serve those customers as they continue to step up the speed and the price curves. This all leads to strong fiber returns in the mid- to high teens. And when we have wireless, it's even better.

Churn is reduced significantly with higher ARPUs and higher NPS. You can see why it makes sense to keep investing in fiber to grow and generate returns by winning the home. I hope you get a sense for how focused and excited we are to grow this business. We're focused on our wireless base, targeting key customer segments for new wireless relationships and future-proofing the home. That all gives me confidence in our ability to continue generating long-term value.

This growth is durable with increased value and synergies to us and our customers. Speaking of long-term value, let me hand it to Rasesh to walk you through our plans for the business segment.

Rasesh Patel

Thanks, Jen. As you've heard so far, fiber and mobility have been a common theme. I'm also going to pick up on this golden thread because for AT&T business, fiber and 5G are keys to unlocking the next tranche of growth.

Before I dive into the specifics, let's set the stage here. As you all know, our business wireline unit is in a period of transition consistent with industry-wide trends. In the near term, we expect both its top line and profits to be impacted by continued pressure from declining legacy product revenues.

But similar to what we have done with our consumer wide line business, we are leaning into this transition and see a path to profit stabilization as we exit 2023. The foundation of our transformation is expanding our fiber footprint, using our market-leading position in enterprise to drive fiber and 5G adoption and increasing penetration in the small business and mid-market segments.

We will focus on repeatable core connectivity and transport solutions where we have owners' economics. And AT&T business is well positioned for this transformation. We're a trusted brand with sales to over 90% of Fortune 1000 businesses and more than 200 government agencies.

We lead the industry in connecting businesses. 70% of our large customers by both wireline and wireless services. And we're also the leader in customer experience. We've received the J.D. Power award for enterprise and medium businesses across both wireline and wireless services. And as we transition to 5G, we're a leader in the IoT space, with over 95 million connected devices and greater than 50% share of the market.

With FirstNet, we are proud to be America's only purpose-built public safety network. While we've had a strong position with enterprise businesses, we are underpenetrated with the small business and mid-market segment. With the shift to cloud, we see a profitable growth opportunity to serve this segment across fiber, mobile and fixed wireless.

We're expanding our fiber footprint to reach more than 5 million business locations by 2025 or approximately 50% of the addressable market. Now let me give you a sense for why this is such a compelling opportunity. As Jeff mentioned earlier, SMB is a fast-growing market with a little over 4 million new businesses created in the U.S. last year.

We have a repeatable playbook we can use to capitalize on the market we have historically underpenetrated. Let me start by saying these are valuable customers. For fiber broadband, more than 80% of customers are new or switching to AT&T from a competitive service.

On average, they stay with us more than 60 months and their lifetime value of a fiber business customer is approximately $10,000. For these customers, the most important buying criteria are reliability, speed and simplicity. Their businesses increasingly depend on it.

And AT&T checks all 3 boxes. We're #1 in reliability across fiber and 5G. And our fiber offers the fastest Internet in the nation with our recently announced 5-gig symmetrical speed tiers. And we have simplified the experience with straightforward pricing, no annual contracts, no exploding offers, no data caps and no equipment fees.

And while fiber is the gold standard solution for retail based businesses, we have seen a tremendous opportunity to serve mobile or field-based businesses as well. These include construction sites, pop-up retail and COVID testing sites.

Our fixed wireless broadband has quickly grown to 130,000 subscribers. The speed to market, mobility and quality of the service has been well received by our customers. And as Jen mentioned, we're also investing to expand our distribution to reach more mid-market customers.

We're recruiting and deepening our relationships with established value-add resellers who really know and understand the mid-market segment. We are also expanding our direct sales coverage and enabling our nationwide AT&T retail stores and digital distribution to serve this segment.

We have a brand that plays well best-in-class technology and a value prop that is resonating in the market. As we expand the fiber footprint, we are positioned to take share. And we're also seeing success and momentum in business mobility.

In 2021, AT&T won 53% of postpaid phone flow share, the highest value business mobility service. This was driven by momentum in small business, and by the undisputed success of FirstNet. In fact, over the last 18 months, our small business wireless market share has improved from mid-30s to 40%.

As we expand fiber footprint and distribution for mid-market businesses, we see a similar opportunity to expand share, which is currently in the low 20s today. We are also the share leader in IoT connectivity and which is now a $1.3 billion business that is growing 18% year-over-year.

The next wave of digital transformation is being driven by cloud, AI and connected sensors. So we really like proposition here. We've taken a deliberate approach with FirstNet, establishing a dedicated organization who has a deep understanding, relationships and trust with public safety organizations.

For those of you who don't know, FirstNet is America's only nationwide purpose-built platform for public safety. It offers interagency communications with unprecedented priority and preemption service. Reaching more than 2.9 million square miles across the country with Band 14 and AT&T LTE bands, FirstNet covers more first responders than any commercial network in the country. FirstNet has rapidly grown into a $1.7 billion business, which posted 60% year-over-year growth in 2021.

In the past couple of years, the number of FirstNet connections has expanded to nearly 3 million among 20,000 agencies. AT&T is now the market leader in law enforcement community. We made a commitment to drive asymmetrical share gain. We've delivered strong growth, and we are positioned for continued performance, and we're making good on our mission to modernize public safety through the FirstNet platform.

For example, we're offering expanded solutions, including connected body cams, fleet, surveillance and interoperable push-to-talk communication with more than 7 million public safety radio users. In addition to the success with FirstNet, we have also become a trusted partner in the automotive industry.

We have greater than 80% share of all connected cars in the U.S. market. There is no question the automotive industry is going through a dramatic shift to electric and autonomous vehicles. In fact, the car is rapidly becoming a platform where electronics and connectivity are essential.

We see a 4-fold increase in connectivity consumption in these next-gen vehicle platforms. And that will further expand with autonomous vehicles in the future. We will offer next-generation network services, including MEC, Network Slicing and Edge.

We believe these capabilities are table stakes and are required to compete in the industry. And we are actively working with customers to develop their solutions. And we have recently signed long-term deals with GM, Ford, Nissan, Tesla, among others. We're helping these brands solve next-generation use cases that will make the car a more engaging, entertaining and safer experience.

We intend to replicate this approach of having a dedicated organization that deeply understands the customers' needs and tailor as a service proposition to differentiate our offerings to customers in the manufacturing and health care verticals.

For customers in Manufacturing segment, digital transformation is being driven by the combination of cloud, edge and private 5G capabilities. Let me take you through how we're helping Ford transform their iconic Dearborn, Michigan factory.

We're deploying private 5G in the factory coupled with edge compute powered by Microsoft Azure. This will enable Ford to better transform their manufacturing processes with capabilities such as machine vision to enable real-time quality checks during manufacturing through low latency communications, acoustic detection to capture in real time the sound of a seatbelt click to inform that the seatbelt is working properly, over-the-air firmware updates to the F-150 lightning as it's moving across the factory floor.

And in health care, COVID drove a 78-fold increase in telehealth adoption. We're working with health care providers to improve patient care and experience. We are piloting an industry-first deployment of MEC and 5G capabilities in partnership with the VA.

Among the health care-focused use cases being deployed are mobile to mobile connectivity between medical devices, improved medical procedures and training through the use of augmented reality. And we are enabling patients with serious illnesses to immersively travel to their favorite destination through virtual reality and take their mind off their illness. This deep understanding of the industry positions our sales teams to become trusted advisers to these customers and ultimately enables us to drive our core connectivity services.

As you can see, we are excited about the new capabilities enabled through these next-generation services. We're collaborating with our most valued partners to develop these solutions. First, let me discuss network edge. We have launched partnerships with Microsoft Azure and Google Cloud to deploy network ad zones throughout the country.

Combining the speed and low latency of 5G with cloud and edge compute capabilities opens up an entirely new world of opportunities for businesses to serve their customers in new ways. We have 2 monetization models.

The first is a revenue share model with the cloud service providers. The second monetization model is where we directly have the relationship, like the example of the Ford factory. The next area of opportunity is private 5G. We are deploying private cellular networks for businesses, universities and public sector organizations.

And although a lot of players are entering the space, the advantage AT&T brings is the ability to seamlessly integrate to our nationwide macro network and deploy our spectrum assets when necessary.

For example, devices leaving a medical facility into an ambulance can be seamlessly tracked beyond just the 4 walls of the hospital. And finally, a unique opportunity for woodwork. The nature of work has permanently shifted coming out of the pandemic. Most organizations face the need to provide safe and secure connectivity, not just in the 4 walls of their campus, but anywhere employees choose to work.

AT&T will launch a new solution later this year that will provide a secure lane to directly connect employees to their corporate network, extending the reliability, security and performance of a corporate campus to their homes.

We expect to offer this both on our network and over the top. As I mentioned before, these next-generation services are being enabled by some of our most valued partners. And I'd like you to hear from a few of them.

[Audio-Video Presentation]

We really appreciate these relationships and value the work we're doing together. So to recap, what we've discussed today, we are focused on building out our fiber footprint committed to increasing penetration in small business and mid-market segments and developing the next-generation services to help enterprises with their digital transformation.

Now let me show what that means for Business Wireline EBITDA. As a reminder, business mobility, FirstNet and IoT are reported in the total mobility segment. As we simplify our product portfolio, we expect declines from legacy products will be mostly offset by accelerated growth in fiber and fixed wireless services with business wireline EBITDA approaching stability as we exit 2023.

With this approach, we are reorienting AT&T business with a focus on fiber and 5G-based services where we have owners' economics and can generate durable value. I hope you get a sense for how focused and excited we are about this market opportunity.

Now I'll hand it back to Jeff for an overview of what makes everything at AT&T stronger and that's our transformation program.

Jeff McElfresh

Thanks, Rasesh. You have heard a lot from our leaders today and why we are excited about our vision for the future and the opportunities for growth. Our ability to fuel these areas of growth comes from cost and operating efficiencies we're delivering as part of our transformation program that we announced 2 years ago.

Our transformation objective is straightforward, to become a leaner, simpler and more customer-focused company that delivers sustainable long-term value. A year ago, we shared our goal of growing customer relationships across wireless and fiber broadband reinvesting much of the early savings we've earned from our transformation program.

And as you've heard here today, we've enjoyed some nice success in accomplishing that goal. That goal was just the beginning. Our transformation program is a multiyear journey, and I am pleased to report that we are making steady progress with more opportunity in front of us. We expect with continued focus and discipline, our program will drive further efficiencies to the bottom line to deliver growth in an accretive manner. Allow me to walk you through the current status of the program.

To help break it down further, there are 3 main areas: the first, sharpening our focus on the network; second, enabling our customer experience; and third, streamlining our back-office operations. I've mentioned simplicity and focus.

These are good ways to think about what we're doing to transform our legacy or copper network footprint and all the fixed and variable costs that go along with running and maintaining a very large copper network that's carried the load for decades. It's widely known that our highly profitable legacy revenues that are served by this network are declining.

Now controlling the timing and profitability curve while we migrate customers to our next-generation fiber and 5G services is essential to our transformation. It's a big reason why we launched the transformation program and why we've chosen to do this work internally as opposed to seek other options for this legacy component of our business.

Reducing the legacy fixed cost and associated trailing expenses and migrating these customers to fiber and 5G solutions maintains our margins, it enables simpler operations and creates a better experience for our customers and for our employees.

We plan to reduce our copper footprint 50% by 2025. In doing so, we are rationalizing a cost base of $6 billion. This program is in the early days of gaining scale, and we're getting to the point where the cost savings are materializing.

To date, we've turned down or decommissioned over 900,000 network elements programmed to date. We've reduced over 4 billion in annualized kilowatt hours program to date. And we've seen a 16% reduction in copper maintenance, trouble ticket repairs. These actions not only drive cost efficiencies, but they're opening up more opportunity that is meaningful for our future.

Our teams in these network areas are able to reinvest their time towards building out our next-generation fiber and 5G networks, the growth platform for the future. And AT&T is uniquely positioned to work with state and local jurisdictions to compete for and win government funds to upgrade our network.

Dependable companies that can deploy large-scale next-generation connectivity across the greatest geographic reach are the solution policymakers are looking for. This part of our transformation program is significant. We will end the journey with more fiber deployed and an even more capable wireless network.

To put it simply, today, 20% of our wireline footprint is served with fiber. By 2025, our goal is to improve this to more than 75% served by fiber and 5G, which represents the majority of our network surface area. That's a platform to fuel growth, and we won't stop there. We will continue to push our capable 5G network further to support the remaining wireline footprint.

Let's turn from our network to enabling our customer experience and streamlining our operating model. Our focus on the customer experience is unquestioned. We're seeing and hearing it from our customers and what they're telling us, but we have much more to accomplish.

Simplifying our product portfolio across our segments has been a key focus area. We plan to reduce the number of products and legacy rate plans by 50%, and we have already made strong strides.

This alone allows us to declutter the back-office business support systems and rationalize billing systems, where we are on track to transition off approximately 30 more by 2023. But more importantly, by decluttering, we freed up capacity to focus on simplifying our customer journey to drive a better experience across our retail distribution, customer service centers and online channel experiences.

For example, we're creating an enhanced digital experience that leverages AI and machine learning to drive better direct fulfillment performance and help our business units deliver more efficient growth. As we transition the customer journeys, it allows us to reorient our internal operating model and make material reductions in our infrastructure requirements. We are consolidating backend platforms, reducing energy costs and technical space occupancy enough to consolidate 20 of our data centers that are not being strategic or part of our network edge compute architecture. Equally, for the remaining platforms and the applications they host, we're well underway migrating to the cloud with our partners at Microsoft.

We have successfully migrated 1,500 applications to the cloud. This not only allows us to decommission servers once again, but the process of migration alone forces a harmonization of these applications, so that our product and platform teams can efficiently code enhancements, allowing for the launch of new product capabilities in record time, going forward.

And embracing a flexible work schedule post pandemic, we've been able to reduce real estate by nearly 15 million square feet. The improvements that we are making in our operating model as a smaller, more focused AT&T go beyond our operating teams. We're carrying these improvements forward to rebalance our staff support teams as well.

In each case which you see, once again is progress in the direction of simplicity, which is our ultimate goal. One network, one platform, lower costs, better scale dynamics and a better experience. These results are making life better for our employees and for our customers.

While I’ve shared a bit of context and specifics around our transformation program, we're confident in our commitment to deliver the $6 billion of run rate savings. Prior, we had mentioned savings and benefits and supply chain, each of the three areas I've covered today are also material in our pursuit of the $6 billion. And we're already more than halfway to our goal with line of sight on the areas that will produce the remaining value, which you should expect to see materialize on the bottom line this year.

Pascal will walk you through more detail in his section. We're making solid progress and will continue to drive significant sustainable savings for years to come with the incredible amount of work we've accomplished on the following, transitioning our network to the best-in-class technology and dispatch reduction, improving our customer experience with product simplification, billing system consolidation and omni-channel optimization and streamlining our internal infrastructure and support costs.

Employees at all levels have embraced the challenge. And from the frontline to the senior management team, transformation has become our way of doing business. As a result, we've never been more customer-driven, focused and inspired than we are today. I couldn't be prouder of the work the team has done and will continue to do to transform AT&T to being the best broadband provider in America.

I'll turn it over to Pascal for a deeper dive into our financials. Pascal over to you.

Pascal Desroches

Thank you, Jeff, and hello, everyone. You've now heard a lot of insights on how we plan to realize sustainable growth in our business focus areas, underpinned by our 5G and fiber investments.

Our vision and strategy are clear and our results will reflect this clarity. Building on our success we expect to continue to execute. We will focus on a disciplined go-to-market approach across both, mobile and fixed broadband, deliver best-in-class technologies and simultaneously reduce costs through identified and targeted cost transformation efforts.

Before I connect the dots and discuss our financial expectations for 2022 and 2023, let me review our framework for how we plan to deploy capital going forward.

We believe, we have the brands and assets to be the best broadband company in America, and we are leaning into this opportunity by continuing to invest in our business. As John shared, we are now at a dawn of a new era of connectivity, and we intend to lean into secular trends that will define both, our company and the industry for the foreseeable future. This is why we feel strongly that now is the right time to invest in that future, by expanding and enhancing our fiber and 5G networks.

We are also continuing to prioritize our investment in transformation to deliver operational excellence and sustainable improvements in our cost structure. The irrefutable principle is to sell now and reap later. We want to be clear. We believe our company can grow meaningfully and sustainably on a consolidated basis from both a revenue and EBITDA standpoint. We are committed to make the necessary investments and take the necessary steps to unlock that growth.

In 2022, our expected $24 billion in capital investments will be our highest level ever. It reflects in part, a shift in our orientation from paying a high dividend at the expense of making investments that deliver sustainable earnings growth. Our comfort in investing at these levels is grounded in our belief that investments in 5G and fiber can generate the best returns for our shareholders. 5G and fiber will serve as the digital backbone for this country's economy for at least the next decade. Now is the right time to put those investment dollars to work. We believe investing in 5G and fiber along with transformation will fuel earnings growth over the next several years.

In 2022, on a combined basis, we are spending around $6 billion in 5G deployment and transformation. As previously indicated, we expect to continue to spend at similar capital investment levels in 2023, which should be the peak year for our mid-band 5G spectrum deployment and investments in transformation. Starting in 2024, we expect our capital investments to begin tapering to around $20 billion range, as we surpass peak levels of our 5G investment and transformation.

Shifting to our fiber deployment, we are currently spending in the range of $3 billion to $4 billion per year to target our goal of 30 million-plus locations by 2025. Once we achieve our intended target, our fiber investment levels thereafter will depend on the attractiveness of the expected returns we see in the market. Another priority is to continue to reduce our leverage by using free cash flows after dividends to pay down our debt and thereby achieve the goal we set for net debt-to-EBITDA in the 2.5 times range by the end of 2023. As we get closer to this target, we expect our financial flexibility to increase our ability to pursue other ways to deliver incremental value for our shareholders. This includes the optionality to buy back shares or make success-based investments that generate very attractive returns.

In the meantime, investors will participate in our expected earnings growth and receive a high credit quality dividend. Our adjusted dividend ranks our stock among the very best yielding stocks in the U.S. Post transaction, our expected annual total dividends of around $8 billion reflect a payout ratio of about 40% against our 2023 free cash flow outlook in the $20 billion range.

Putting this all together, the key financial metrics we expect to measure our business moving forward includes revenue, adjusted EBITDA, adjusted EPS and free cash flow. These are clear, reliable, and leading indicators for our business.

These metrics are also the best indicators of our improving financial flexibility we will use to reduce debt and provide improved returns to shareholders. In order to provide better context, this morning, we published our pro forma consolidated financial statements. In addition, as we look to improve the financial transparency, we will be providing updated business unit level pro forma financial post the close of the WarnerMedia transaction.

I'd now like to share our updated 2022 financial outlook, which excludes WarnerMedia and Xandr for the full year. Let's first start with our 2022 guidance, which essentially confirms the guidance we provided to you in January.

For 2022, we expect total revenue growth in the low-single-digit range and wireless service revenue growth in the 3%-plus range. We expect broadband service revenue growth in the 6%-plus range. We are also refining our adjusted EBITDA expectations to $41 billion to $42 billion range for the year.

Keep in mind that between peak 3G shutdown costs and the absence of CAF II credits, our 2022 adjusted EBITDA growth is impacted by approximately $600 million. Much of this impact is expected to be felt in the first half of the year. In addition, as we've previously mentioned, we expect increased fiber rollout investment and ongoing rationalization of our business wireline products to have a more pronounced year-over-year impact in the first half of 2022. This should lead to an improved adjusted EBITDA cadence as we make our way through the course of the year.

Driving annual growth in adjusted EBITDA is growth in wireless and broadband service revenues and incremental transformation savings. We expect this growth to be partially offset by mid-single-digit declines in business wireline. In total, we expect incremental transformation savings of $1 billion in 2022 and $1.5 billion in 2023. We expect this transformation savings to be driven primarily by the optimization of our field dispatch and customer service, fourth, energy and real estate savings from our continued transition from our legacy copper network. And consolidation of backend platforms and rationalization of administrative G&A support cost from a smaller and more focused AT&T.

Specifically, we expect to reduce G&A support costs cumulatively by around $1 billion between 2022 and 2023. As Jeff mentioned, we've achieved over $3 billion in transformation savings to-date. Some of you may be wondering why that has not resulted in earnings growth in 2221. Here are a few things to keep in mind.

During COVID, our international roaming revenues largely disappeared and we are now just starting to see those recover. We expect the return of roaming to be a tailwind going forward. Our success in growing wireless and fiber footprint comes with some upfront cost recognition, including advertising and promotion. Going forward, the subscriber growth achieved will serve as a tailwind. Last year, we spent around $700 million in expenses in executing our transformation program. We expect those to taper off over the next two years.

Turning next to free cash flow. We've incorporated investor feedback to simplify and sharpen our definition of free cash flow. Going forward, it will be measured as our cash from operations, less capital investments, which includes vendor financing payments, plus cash distributions from DIRECTV. Using this revised definition, our expected free cash flow is $16 billion for 2022.

AT&T’s adjusted EPS is expected to be between $2.42 and $2.46 for the year. Keep in mind, expected growth in adjusted EBITDA and operating income is expected to be partially offset by a higher effective tax rate.

And lastly, as John indicated, our expectation is that the WarnerMedia transaction could close before the typical May dividend distribution date. The decision on our common dividend payout is always made by the Board at the time that each dividend is declared. However, as we've said previously, we expect payments post close of the transaction to be at the new expected annual common dividend amount of a $1.11 per share.

Shifting gears to 2023. We understand that there has been considerable discussion of the trajectory of our core connectivity operations, specifically, whether we can deliver sustainable earnings and free cash flow growth, post the close of the WarnerMedia deal.

So, let me provide you with several factors to consider when thinking about our financial expectations for 2023. We expect total revenue growth and wireless service revenue growth in the low-single-digit range. We expect broadband service revenue growth to accelerate from 2022 levels as we benefit from the expansion of our fiber footprint. Last year, we added 2.6 million new fiber locations. Based upon our current build rate, we expect our fiber inventory to increase by 3.5 million to 4 million locations over each of the next several years. Our adjusted EBITDA expectations are in the $43.5 billion to $44.5 billion range. Adjusted EPS for 2023 is expected to be between $2.50 and $2.60.

Now, let me provide you a bit more color on our free cash outlook. Our newly defined free cash guidance is $16 billion for 2022, which compares to about $19 billion in 2021 on a comparable basis. The primary year-over-year deltas include approximately $2 billion in higher expected cash taxes and about $4 billion in higher capital investments. We expect these factors to be partially on set by a $1 billion in organic adjusted EBITDA growth and a $1 billion in transformation savings.

In addition, we expect about $1 billion in lower cash interest and working capital savings. We expect $4 billion in cash distributions for DIRECTV in 2022. This is consistent with the combined 2021 cash generation from our investment and our seven-month full ownership of the video business.

Now, how do we get from the current 2022 expectations to our 2023 cash flow outlook? We started $16 billion for 2022. We expect $1 billion in lower cash distribution from DIRECTV, which brings us to $15 billion. We then add a benefit of approximately $2 billion. This reflects lower cash interest from debt paydown expected to take place after the WarnerMedia deal closes, as well as some working capital benefits. The balance will come from growth in adjusted EBITDA of approximately $3 billion per year for our core connectivity business, including transformation.

We believe adjusted EBITDA growth will be driven by four factors. First, mobility EBITDA. We expect growth in the low-single-digit range driven by subscriber growth. We expect a more normalized industry backdrop, surgical price increases, and a ramp of abyss MVNO subscribers to support our outlook.

Second, consumer wireline. As you've just heard, the plan from here is to pivot from a copper-based product to fiber, moving from a product that historically has been good enough to meet the basic connectivity needs to the very best technology available today. In making this pivot, we expect EBITDA growth in the mid-single-digit range, driven by mid to high-single-digit growth in broadband revenues and subscriber net-adds on our new fiber builds. This will be partially offset by declines in legacy copper voice and data products.

Third, business wireline EBITDA is expected to be down low-single-digits. Declines in legacy products are expected to be mostly offset by growth in higher margin connectivity service in small and medium businesses. We expect business wireline earnings to stabilize as we exit 2023.

And fourth, transformation savings. We expect to deliver incremental transformation benefit of approximately $1.5 billion in 2023.

Many of you have also asked for increased clarity on the bridge from adjusted EBITDA to free cash flow. This morning, we provided a historical reconciliation in the materials on our website.

Looking forward, this is how you should think about the walk for 2023. Start with the midpoint of our adjusted EBITDA guidance of $44 billion. Back out capital investments of $24 billion and reduce your cash interest assumption by approximately $2 billion. Next, input your expectation for cash taxes. Our expectations are broadly for steady levels from 2022, which we indicated would be up $2 billion over 2021. Then factor in a modest benefit from working capital. Remember that device subsidy amortization does impact revenues and adjusted EBITDA, but from a cash perspective, we've already incurred the subsidy. As our contract asset flattens in 2023, the cash conversion improves. Also, expect the remaining other non-cash items to be consistent with trend. Lastly, add back to your expected cash distributions from DIRECTV. We indicated cash from DIRECTV should be approximately $1 billion lower versus 2022 levels. That should get to our guidance of the $20 billion range.

As we issue this financial guidance for 2022 and 2023, we recognize that over the last few months, the degree of macroeconomic and geopolitical uncertainty has increased, including wage and supply inflation, rising interest rates, higher energy costs, and the potential implications of the Russian invasion of Ukraine. We are not immune to these macroeconomic risks and geopolitical disruptions. That being said, we have a resilient business that delivers mission-critical products and services.

In addition, we have multiple levers we can pull to help us navigate future potential challenges and continue to deliver strong results for our shareholders. These include having a meaningful portion of our energy cost locked in on stable long-term contracts; having a vast majority of our debt fixed and manageable near-term maturity towers, given the de levering that will take place post the WarnerMedia separation; our ability to increase prices in response to wage and supply inflation; and our ability to adjust the pace of capital spending if we face severe economic conditions.

In prior periods of economic pressure, our business has performed well, given its strong defensive characteristics and subscription-based revenues. While we have not seen an inflationary environment like this in a very long time, we are confident that our business will be resilient. The bigger picture here is that we have taken significant steps to improve the financial flexibility of our business. Whether it is the accelerated pay-down of our debt through asset disposition, the rightsizing of our dividends, the cost takeout initiatives we've put in place, or the reallocation of capital towards durable and sustainable growth vectors, we are in a much better place to navigate potential impact of any macro or geopolitical uncertainties.

Speaking about bigger picture, we realize there are some questions about whether we have the right amount of financial flexibility to meet all of our financial obligations. Perhaps this quick exercise can help frame our comfort with the current obligation levels.

Let's first start with our free cash flow expectations of $16 billion for 2022. Add back an expected nearly $2 billion from interest savings from the WarnerMedia separation and the absence of 3G shutdown costs. This gives you a better picture of our run rate cash flows of approximately $18 billion.

Hypothetically, let's assume our business runs at this current run rate over the next three years. In other words, let's not even adjust for any material benefits from growth, cost reduction or our expectations of a declining capital intensity beginning in 2024. In this scenario, starting in 2023, we would expect to generate $54 billion of free cash flows over the next three years. $30 billion of this cash would be distributed to shareholders via our common and preferred dividends as well as minority interest obligations. What would that leave us with, on a simple consistent run rate basis over the next three years, we would generate at least $24 billion in excess cash, even if we don't materially grow cash earnings. And if we grow the business, as expected and benefit from the tapering of our peak investment levels and benefit from our cost reduction plans, we would improve our excess cash position.

This is why I'm comfortable with our capital allocation plans. This excess cash generation provides us with tremendous flexibility and optionality to invest in the business to generate attractive returns. It also creates the financial flexibility for us to return value to shareholders in other ways, as we get closer to our leverage targets.

So, let me quickly summarize. What we’ve shared with you today provides you with our capital allocation approach and financial guidance for the Company moving forward. We’ve also shown you that we are a company intensely focused on disciplined growth, execution and delivering shareholder returns. Simply put, we say what we mean, and we mean what we say. We have a clear, practical and achievable path to deleveraging our business through a thoughtful and dedicated capital allocation process.

By early second quarter, we’ll have a business with an increased ability and interest to invest in the areas we consider most important for the future, fiber and 5G. And we expect those investments to deliver revenue and earnings growth. This growth will be supplemented by delivering efficiencies across our business through transformation. Given our cash generation expectations, we really like the ability and agility we'll have to invest in growth parts of our business or to unlock additional ways to return value to our shareholders.

Our transformation sets up AT&T post-peak complexity to emerge from 2022 as a simplified, more focused and purpose-driven company committed to growth and creating shareholder value.

That concludes the financial portion of our presentation. I'll now turn it over to John for closing comments before we begin the Q&A.

John Stankey

Thanks, Pascal. I want to quickly wrap up with a couple of comments, and then we'll be on to your questions.

I hope we've driven home today why and how we believe our network strategy and assets set us up to serve our important customer segments and create a clear path to sustainable growth.

We believe we're differentiated with our wireless and fiber combination; we're on track with reshaping our company's operations and cost structure; and our focused execution in the market will drive improved returns and value creation in the quarters and years ahead.

This management team and I are energized by the cycle we're creating with our repositioning. It allows us to invest in our key areas of growth and capture new opportunities with both, 5G and fiber. Our more focused company and management team is aligned to become America's best broadband provider.

And most importantly for you, I hope we've displayed the information and insights to earn your confidence in our ability to reach our financial projections, including the questions we know you have in particular areas like free cash flow, as we enter this next new chapter in our company's history.

We now welcome your questions and feedback with Jeff, Jen, Rasesh and Pascal rejoining me. Amir, let's get started with the questions.

Question-and-Answer Session

A - Amir Rozwadowski

Thanks very much, and let's kick off Q&A here. Our first question comes from Jonathan Hodulik of UBS. Jonathan?

John Hodulik

Great. Thanks, guys, and thank you for all the information you guys have provided today. I've got two questions. First, maybe for John or Jeff, the 30 million locations being passed with fiber, why is that the right number, especially given the impressive penetration numbers that Jen gave us this morning?

And then, second, it looks like -- I would say the $3 billion in EBITDA growth form '22 to '23 is the number that stands out the most. And it sounds like a fair amount of that is driven by cost savings. Could you walk us through a little bit of what's going on in terms of the copper decommissioning? Is that just areas where you guys are deploying fiber? Or are you actually sort of converting to wireless or just decommissioning copper in certain areas? And how confident are you that all these costs fall to the bottom line?

John Stankey

Jeff, why don't you go ahead and take that and start out with the build and then carry on to the cost structure issues that John just raised.

Jeff McElfresh

Yes. Hey John. Thanks for your question. So, our current plan over the next 3 to 4 years is about 3 million to 4 million new passings per year. And we're on that pace right now with the build in our capacity of our construction and engineering teams, as I and Jen alluded to earlier in our comments. And so, yes, we have a lot of success. We're seeing some success in our early penetration rates there.

And look, we're setting ourselves a doable plan. John has challenged us to run faster and quicker as hard as we can. And to the extent that we can step that up, we will, but we're not guiding to any number above that. In fact, in the guidance that we've offered today, we've tried to give you a little bit more color and texture into the kinds of locations that we're passing with our current build. Also and most importantly, currently, this year, right now, the teams are doing great work. And so, we're comfortable guiding to build for this year up to the $3.5 million to $4 million range.

Now, for sure, where we're building our copper -- where we're building our fiber footprint, as I mentioned in my comments earlier, we kind of engineer this every square mile of our entire fixed footprint.

And the areas where we're building our fiber, we are taking winning share. Our fiber product is the premium superior product in the market, and we're able to grow as a result of that, not only in our broadband business, but our wireless business.

And so, in those areas, we are reclaiming copper, removing copper and cost, but that's not the only area of our copper sunset and optimization strategies. We have many square miles outside of our fiber footprint that we have very little to no demand that's existing in this part of our footprint, and we've made the necessary filings and the cooperation work with the local authorities, and the FCC to begin to unwind and remove that copper infrastructure out of that footprint. And in those parts of the market, we're going in with catch products, transitioning customers that are in that part of the footprint, to a better product served by wireless in many instances.

As we make increasing speed and pace in our copper sunset activities across our entire footprint, those costs begin to mount up, and those savings start to reveal themselves on the bottom line of our multiyear plan.

Amir Rozwadowski

Thanks very much, John. Next question comes from Simon Flannery from Morgan Stanley. Simon?

Simon Flannery

My first one is on the CapEx. Pascal, you talked about $20 billion tapering down, but also there was a comment about increased potential for increasing success-based investments. So, I want to understand, is it kind of coming down $1 billion or $2 billion a year or could be a sharper drop than that as we think about our model?

And then, Jeff, one for you on the 5G. Can you update us on the tariff climbing, the equipment availability? You gave us at year-end '23. But what about an interim target? Obviously, your peers are talking about how fast they're rolling out their plans. So, when are you going to get to $100 million, $75 million, et cetera?

John Stankey

Pascal, why don't you go ahead and touch the capital issue first?

Pascal Desroches

Sure thing. Simon, thank you for the question. Here's the way I described it in my script. We started off at $24 billion this year. Over the next couple of years, because of the C-band deployment and the transformation CapEx, we will get to a normal run rate of around $20 billion in 2024.

My comments that I made about success-based progress, remember, by 2024, we have a lot of financial flexibility. And we're going to look for alternative ways to deploy that capital such that we're generating the best possible returns to our shareholders. We haven't committed to additional fiber deployment, but we’re really going to be guided by how do we deliver the best value for our shareholders long term.

John Stankey

Jeff?

Jeff McElfresh

Yes. And then, Simon, on your 5G mid-band spectrum deployment, we haven't wavered off of our interim target of $70 million by the end of this year. Equipment is coming in line in the back half of the year, kind of coincident with the availability of the DoD auction of 110 spectrum. And so, all of our tower touches at the back half of this year will be lifting the full 80 megahertz of spectrum deploying the two radios, one for both bands.

Simon Flannery

And everything going okay with the FAA?

Jeff McElfresh

Yes, everything is going fabulous with the FAA. I think we and the industry have done a nice job kind of working through that. And so, no urgent issues or anything that gives us caution.

Amir Rozwadowski

Thanks very much, Simon. Next question, we've got Brett Feldman from Goldman Sachs. Brett?

Brett Feldman

Two related [Technical Difficulty] in the business plan that you laid out for us in terms of proactively migrating your households from copper to fiber? Or would that be a potential incremental discretionary capital expenditure over time?

And then, second, when we look at the Consumer Wireline segment, your margins in the low-30s are arguably low for a connectivity centered business. I'm curious, how do you think about the margin potential of that business segment over time? And what would be the conditions that could ultimately get you to a much more scaled margin profile? Thank you.

John Stankey

Hey Brett, can I ask you maybe to repeat the first part of your first question a little bit? You cut off, and we weren't able to pick it up.

Brett Feldman

The general question is, what are you assuming your business plan for proactively moving copper households over to fiber as you deploy?

John Stankey

Okay. Jeff, why don't you go ahead and you can keep carrying on that.

Jeff McElfresh

Yes. And so Brett, thanks for the question. When we are deploying our fiber into a footprint, as Jen mentioned earlier, two-thirds of our net growth in that footprint area are new to AT&T broadband.

Suffice it to say that we sacrificed for loss business in this area for many years. And now, as we're bringing back in a superior technology that serves up multi-gig speeds, symmetrical bandwidth both up and down, we're seeing really strong adoption rates without the need for us to simulate anything unique or special or specific to motivate a household to migrate. That motivation is occurring on their own. I mean, customers are recognizing they need this capability that fiber brings.

As to your question about margin and EBITDA, look, we're -- way I would encourage you to think about our Consumer Wireline business is this. If you go back a year, for the first time in a long time, we had actually transitioned that segment to revenue growth. We've achieved that revenue growth on the backs of our strong fiber building performance that was just beginning last year. We were just starting this next tranche of fiber deployment. This year, that business, our Consumer Wireline business will make the transition to positive EBITDA growth.

And every dollar that we're investing today for that business and this fiber footprint is really durable and future-proof, meaning as we continue to grow, penetrate that fiber deeper, we've already got prebuilt-in multi-gigabit speed capabilities to meet the demands and expectations of these customers in these footprints without the need to deploy incremental capital to meet that demand.

So, as we think about the scale of our Consumer Wireline business, the more we scale it and as we're doing now, the more velocity we get, that EBITDA performance improves. And we expect to see expanding margins as a result of that at scale.

John Stankey

Brett, maybe let me fill in two thoughts that might help you as we look at how we do the churn down of some of the legacy services. It's not something we're necessarily going to provide you discrete guidance on. But, as we measure it internally, our goal is to equate a square mile of churn own to our cost structure. And that's kind of how we look at it. So, as we've been working through our transformation estimates with you, we now have enough experience to understand when we are able to take down a certain number of square miles, what we can ultimately pull down from a cost structure perspective. And the team has objectives in working through that over the course of the next several years in the way that Jeff described.

And so, that's how we kind of equate our transformation and our ultimate achievement of the cost structure, objectives to what we're doing in copper, either replacement churn down and then supplement of the wireless network.

If I were to characterize the margin dynamic that you're alluding to, I just encourage you to go back and think about every access architecture change we've had in the business. And if you look at the business case on deployment of fiber, it doesn't look any different.

When we did the access change to DSL initially the first couple of years, margin structures are pressured. We did the access architecture change to Ethernet. The first couple of years, we're always having these conversations, well, boy, that looks like it's pressuring overall transport margins. Well, what happens is you get to steady state and you get to the marginal customer addition, they go back into the traditional transport margins. And that's what's been accomplished over the last several years.

And I see nothing different as you start to look at the mature fiber business as you get into scale and mature crew, that we shouldn't expect those same kind of margin structures after we scale into the business.

Amir Rozwadowski

Thanks very much, Brett. Moving to our next question. We've got Mike Rollins from Citi. Mike?

Mike Rollins

Two if I could. The first is that the management team has previously acknowledged that the postpaid phone volumes may not grow up at the pace achieved during 2021. Curious what the team has seen in terms of industry growth, the size of the switcher pool, state of competition that can facilitate your ongoing growth in wireless postpaid volumes.

And then secondly, I was curious to return back to some of the discussion that was referenced earlier on government programs. I'm curious how much of that $40-billion-plus of the build and upgrade in terms of funding that's available that AT&T could pursue and potentially win. And maybe as in reference to ACP, how many of those subs are you serving today? And where does that go over time?

John Stankey

Jen, why don't you take the first part of that? And then, I can fill in what you don't ultimately cover there.

Jenifer Robertson

All right, happy to. Thanks for the question because I would tell you, I am excited and the team is very proud of the results we've delivered to date. What we are seeing is customer demand. And we talked about it all morning, as demand continuing to increase, the appreciation for the need for connectivity in our lives is certainly becoming more and more clear.

The guidance that Pascal offered today is built on our plan, and that assumes that the industry returns to a more normalized growth level this year. So, any strength above and beyond that that we see this year would be upside to the plan.

And so, I feel like we're being very balanced in our expectations for the year. Given the fact that we've solved the biggest pain point we know from customers and that is treating existing same as new. We feel good about our ability to compete consistently, simply and stay discipline and continue to share.

John Stankey

Mike, on where we go on the government program side of things and what we expect to see happening, it's still pretty early in the cycle. And as you know, each state ultimately determines its particular program and how they're going to go and allocate out the infrastructure build. And I think over the next several months as the FCC solidifies the maps, we'll start to see some of the bigger states probably be leaders in framing exactly how that gets done.

Now, having said that, we've gone out and we've kind of looked around where we expect based on the data we have and information we have, where the governments are likely to come forward and start trying to incent some kind of a cooperative build.

And, we've gone in and we've set our sights internally around what we think can be competitive for. We've set up a special organization that is focused on this. They are actually already out bidding on opportunities that have come under other federal government-sponsored programs or state programs. And we've had some success in the last couple of months around that where we've been able to pick up a couple of build areas. In fact, our win rate is looking a little bit better than what we would have expected it to be.

So, we've now got an organization and a mindset to be able to go in and compete and be successful in ultimately pulling down some of these funds. We actually think the approach, as I indicated in my opening comments, is a really smart public-private approach.

The combination of the subsidy that comes in, plus the additional monthly subsidy that comes in with ACP makes it a really good combination and we're highly interested in continuing to participate in it. So, we haven't given you anything in our guidance right now that assumes we're going to be successful on those programs. We've given you guidance and we've given you a direction that's consistent with the build as we characterize it and what we're doing in the markets today. It's entirely possible as we get through this, to Pascal's point on success-based capital that we might come back in and tell you, we've been successful and we're going to do some more. And it ultimately has an impact on some of our forward-looking guidance if that comes to pass.

Amir Rozwadowski

Thanks very much, Mike. Next question, we've got Craig Moffett from MoffettNathanson.

Craig Moffett

I wanted to drill down a little bit more on the fiber plans that you talked about. You talked about, I think, 75% of your footprint eventually being built with fiber. But, when you talked about 50% of all businesses, I think, being built with fiber, that would, to me, imply that you're going to start to do significant building of fiber outside of your footprint. I wonder whether you could just flesh that out a little bit as to what your plans are for a fiber construction beyond your traditional wireline footprint. And to the extent that you see a real value to the bundled offering, which I think you talked about the uplift that you get in the wireless market share, how do you think about going to market with a bundled offering in places where -- either outside your wireline footprint or where you don't have fiber?

John Stankey

Rasesh, why don't you tackle the business side of that first? And then, we'll come in behind that, if that's okay?

Rasesh Patel

You bet. Yes. Craig, great to see you. So, as we mentioned in the presentation, we are doubling our fiber footprint between now and 2025 for business locations. We will reach 5 million business locations. All of that is within our franchise footprint.

And as Jim shared, fiber is a superior product. Customers adopt it quickly, both the speed advantage on the symmetrical side, the multi-gig capability that we've launched. And for businesses, we have the added benefit of not only having fiber broadband, but being able to sell dedicated internet services that have sufficiently higher ARPU and lifetime values.

And so, we feel very good about this investment. Its returns are in the low- to mid-20s. And so, I think there's further room from there as we exit 2025, to continue to build out our footprint. And so, we feel good about that investment.

John Stankey

So, Craig, good to see you. The question on what we might do elsewhere is a good question. If you couldn't tell from the numbers that we shared with you earlier, we're incredibly bullish on our performance and how we've been successful in the market.

We've seen the fiber economics. Frankly, if I go back to the first business cases I was involved in probably in the 2010 time frame, to where we stand today, they've gotten progressively better for a variety of reasons. Some of it is the market demand and willingness to pay is higher. Some of it is getting up the learning curve on scale that's allowed us to change certain cost dynamics. You heard Jen talk about the fact that we've come up with approaches that allow us to penetrate much faster than we've historically penetrated which advances cash into the business case. And those things have all certainly given us a lot more confidence where we're asking ourselves the question, should we be restricted to what might be the traditional footprint?

We don't advertise this a lot right now, but we're actually edging out from our traditional footprint today in places where we have interesting communities that we can go and attach right to what used to be our franchise territory. We are not opposed to do that and -- opposed to doing that, and we are doing that in many instances.

And those are really natural and they're easy because there's no incremental fixed cost start-up dynamics associated with that. And we've seen really good success that we've moved into those areas to pick up those customers. And so, now, the next question becomes would you want to go a little further? Do you want to move away from something that's immediately in juxtaposition to your franchise territory? Certainly, some of the subsidy dollars that are coming in causes us to ask that question as well.

I think as we're looking at that, it's possible we may come back to you and tell you we have a business model and approach that allows us to sell two products, and we can find territories to deploy capital with the right kind of returns that look as effective as the returns is what we're getting and what I'll call our traditional franchise footprint.

But right now, I don't have anything to tell you in terms of guidance or homes or numbers specifically that would say, this is what you should factor into your modeling and/or how you carry things forward.

Amir Rozwadowski

Thanks very much, Craig. Moving to our next question, we've got Phil Cusick from JP Morgan. Phil?

Phil Cusick

Thanks, Amir. So two, if I can. First, fiber returns in the mid-teens is great. And John, I think you said they've gotten better over the years. Can you expand on the penetration assumption that goes into that? I know you aren't pushing fixed wireless access, but what drives your confidence that wireless from competitors won't take enough share to impact you?

And second, John, you spoke about layering software on top of the network over time. I know it's not the focus today, but are you talking about moving up the stack and creating more revenue on top of the pipes? And any preview you can give us. Thank you.

John Stankey

Sure. Phil, it's good to see you. Jen, why don't you go ahead and talk a little bit about the penetration dynamics and why we're winning with fiber and then and come back in and talk about the act 2.

Jenifer Robertson

All right, happy to. And so, let me talk a little bit. I mentioned earlier this morning that because of the build momentum that Jeff referenced and our ability to go in, level load the plan and very efficiently build, our sales and marketing teams have stood up behind that and figured out how to communicate and market to customers and drive penetration much, much faster.

So, we're seeing, as I mentioned, on average, one-year penetration rates that are 2x what we've historically seen that dramatically improves an already good business case. The sales teams are also coming out. As we talked about a superior product, when you have speeds that are symmetrical and that are faster than standard cable, you're meeting a customer need. And customers are responding, as Jeff already mentioned this morning, favorably.

I want to hit a little bit on your bundling. We absolutely see competition out there, and cable is out there making some aggressive bundling moves. We use that tool as well. It's an effective long-standing tool in the industry to bundle products together. But what customers are telling me every day is they want more than just a bundled discount. They want us to come in and offer a simple, a secure and a fast product, and we are delivering on that value proposition. And because we're delivering and because customers have higher demand, we're seeing opportunity to move them up in the stack. So, there's some revenue potential as well.

John Stankey

So, Phil, I just -- we're not opposed to fixed wireless, and I'm sure there's going to be segments of the market where it's going to be acceptable, and folks are going to find it to be adequate right now. I would just tell you, having played the catch-up gain for a significant part of my career on the broadband side of the equation, I tried to give you a little flavor in my opening comments around where we see demand for bandwidth going and the demand that's going to put on these networks. The reality is that the curve is moving away from the scalability of wireless. And I think, as a result of that I'm making a longer-term bet that a much higher percentage of the market is going to go for exactly what Jen described, which is the best product in the market.

And I think that's going to become more and more important, frankly, as applications become more demanding on the reliability and consistency of the bandwidth and nothing is going to top fiber in that regard.

On your second question about what I refer to as act 2, we are doing a lot of work today that is enabling us to open up aspects of the network for others to come in and start offering value-added services associated with it. In addition, there are things that we can do with our customer base to start giving them control. I think, Jeff alluded in his remarks about how much we're seeing if we go into our large enterprise customers and a CIO talks to us about, "I need the ability to manage the network from my employee who's working from home just like I did when they were sitting at their desk on the corporate land."

And some of the work that we're doing right now is on how do we begin instantiating software that can add these features back into the network that allow us to put value add on top of it and sell those managed services or capabilities back into the core connectivity that we put in place. That would be an example of that.

We're doing a lot of work. I think as you heard Judson talk about in the customer segment, on enabling software capabilities to the network and the hyperscaler cloud so that those capabilities can be attached to certain applications and services that people choose to use. We believe those features and capabilities over time add core value into the connectivity and can prefer other aspects of our connectivity. So, I'm not talking about moving up the stack to try to attack a sales force or to try to replace somebody who's in the application space. We're talking about moving up the stack to do things with our network that allows us to prefer our connectivity because it will work better with people who are running more sophisticated software on top of that stack, which allows us to stay at a premium position in the market and differentiate in ways that others cannot.

Amir Rozwadowski

Thanks very much, Phil. Next up, we've got Walt Piecyk from LightShed.

Walt Piecyk

Thanks. You guys are doing a 75% build, right? And so, in 2025, assuming you get like a 50% share, which is typical for fiber, what do you anticipate the response to be from a pricing standpoint? I mean, I guess, you could argue it's still a duopoly. But, do you think ARPUs for broadband can continue to rise several years from now, if you're offering fiber versus the cable? I mean, and what was yesterday, or two days -- or I guess, the last week, maybe -- no, it’s earlier this week at Morgan Stanley, I guess, they can respond quickly. Can they respond quickly? And how do you think ARPUs look? Because that obviously impacts your view on returns.

John Stankey

Jen, do you want to take the question?

Jenifer Robertson

Sure. So, as we mentioned, customers absolutely are looking for higher speeds. And we've announced our Hyper-Gig product, 2- and 5-gig speeds at a higher price point because there's a great value exchange there with customers. We expect that demand to continue to increase. And so, as customer demand does increase, we expect to be able to raise in exchange with that.

Let me tell you a little bit, we are already testing in lab speeds that are 10-gig. And so, as I mentioned, we see faster speeds, more locations coming. Where we're positioned today, we have room to move in ARPU and still stay very competitive. And so, I think we've got room to grow that.

Walt Piecyk

Could you also just comment on -- you should be able to hit your 2.5 leverage target next year. Is that when we should think that you would consider just begin this share repurchase program and you look at your mix of investment opportunities?

John Stankey

Walt, good to see you. The answer is that's what we said we want to evaluate at that point in time what we're going to do on a capital allocation front. I don't want to consider buyback prior to that. There's a lot of reasons why I think it's important that we hit that particular threshold. But at 2.5 times, it certainly should be on the table.

Now, when we arrive at that moment, we're going to be evaluating a lot of things. We're going to be evaluating where the equity sits and how it's trading. We're going to be looking at interest rates. As Pascal indicated, we may be looking at other organic investment in the business that has interesting returns and opportunities, and we'll come back out at that point and declare what we think our right approach is going forward.

We've kind of put that stake in the ground, just to let you know that until we get there, it's not something I've got on the table as to where we should be deploying our capital. But it certainly opens up at that point in time. If we look at the environment, what the balance sheet is going to look like, how much we're paying for debt, all those types of things that we see it could very well be a possibility at that juncture.

Amir Rozwadowski

Thanks very much, Walt. Next up, we've got Frank Louthan from Raymond James. Frank?

Frank Louthan

Great. So, two questions. Here’s the thesis around fiber and mobility as well. Considering there's like several other telcos, maybe some large fiber builds out there, would you guys consider an MVNO to have them have a wireless product that they could offer as well but also possibly help offset some of the wholesale losses you might have to track on with their owner? [Ph] That's the first question.

The second one is, what is sort of the bottom on large enterprise? That business has been in decline for 10 or 12 years. Do we think we can see a point where there's -- where we'll be an inflection in that business? Thank you.

John Stankey

Jeff, why don't you pick up the first part of Frank's question and then we'll have Rasesh maybe talk a little bit about where we are on the enterprise side.

Jeff McElfresh

Hey Frank, it's great to see you. And so, on -- the first question was…?

John Stankey

The first question was MVNO…

Jeff McElfresh

Yes, the MVNO. Sorry, MVNO had a footprint with other fiber overbuilders. Certainly, Frank, we'll look at any opportunity that's attractive for us, anywhere across our footprint where we're not directly competing with the underlying partner just as a principle of our -- the way the management team thinks about it from a strategic lens.

Now, right now, we stood up the MVNO and wholesale arrangement with our partners at DISH, and we expect to see that begin to grow here in the back half of this year and really become more material in 2023. Our capabilities to integrate with third parties, like fiber overbuilders out of franchise, we've got that capability inside the business.

And so, if that opportunity becomes attractive and there is an option for us, we would certainly take a look at it. In terms of the turnaround transition in our enterprise business, Rasesh, do you want to take that?

Rasesh Patel

Yes, you bet. So, happy to share more about that. So, really think about it in sort of three plays. The first is we're doubling our fiber footprint, and that allows us to actually grow our share of penetration with small business and mid-market enterprises.

As I mentioned in the presentation, as we approach 2025, that fiber revenue base becomes 44% of our EBITDA contribution. And so, that's a very material growth vector. We report business mobility under the total mobility segment. But just as Jen mentioned, when we went in wireless, we also see strong strength in business mobility, and we've seen some nice share gains on the SMB side for mobility.

The second part of this is really our enterprise business. And as we talked about, we have some unique opportunities to reposition that business from a vertical perspective. We're really winning in public sector with FirstNet. We talked about the automotive space, and we've got additional verticals that we are going to be centering around to really drive more customer-oriented value and solutions.

And the last part is we are actually repositioning the product portfolio. We've -- as Jeff mentioned, we've reduced our product offerings by about 40%. And some of what you see in both, top line and bottom line trends or actually discretionary decisions we're making to exit out of high labor intensity, low-margin services such as outsourcing.

So, when you sort of put these things together, what I can share with you is as we exit 2023, the growth from our fiber services will outpace the legacy headwinds. And fiber becomes more and more a component of the EBITDA mix of our enterprise segment. So, I feel very good about our ability to drive that as we exit 2023.

Amir Rozwadowski

Thanks very much, Frank. Next up, we've got Doug Mitchelson from Credit Suisse. Doug?

Doug Mitchelson

Thanks, Amir. And I'll add my appreciation for all the information today. Two questions, if I could. John, Jeff, within the financial framework you laid out, what are the Company's plans for premium services from customers like your current free HBO Max offer? And should we assume that investment is stable, growing or shrinking? I'm just curious if you have plans to or if you're interested in the strategy Verizon announced last week where they would give their customers choice as to which streaming or other services they would receive for free as part of being on the premium price tier here. So, that was all meant to be one question.

Pascal, I was just hoping you could clarify if your expectation for DIRECTV cash flow in 2023 is based on AT&T receiving 100% of the free cash flow, if you're still in the catch-up phase or if that's been completed, and that's down to a 70% free cash flow payout? I'm just trying to think about the sustainability of that level in 2024 and beyond. Thank you.

John Stankey

Jeff, do you want to maybe pick up on question about Doug's services aggregation? And then, Pascal, you can talk a little bit about the tranche payouts?

Jeff McElfresh

Yes. So, thanks for the question, Doug. So, we are seeing great success in our value proposition that we've been consistent with over the last six quarters, as Jen pointed out earlier in her commentary. In fact, if we've learned anything from our customers is this consistency and fairness that we've offered them that's really winning in the marketplace, both retaining and gaining share. Our HBO Max bundling on our elite tiers, which we have today on our high-end unlimited rate plan for mobility as well as our gig plans in fiber. We'll look to continue that play and similar plays into the future. And we suspect that as we get more targeted in the pockets of growth, the segments that Jen laid out earlier today that we're probably going to have to do a thing or two to spice up the total value proposition for each segment. So teams will evaluate.

But today, we're not announcing any change or any difference or a change of course in direction, I would say. Pascal?

Pascal Desroches

And Doug, the way you should think about this, 2022 and 2023, 100% of the cash flows are expected to come from us. Once you get beyond that, we go to our economic share, which should be -- which is 70-30. But we feel really good about our visibility into 2022 and 2023, which we've guided to.

Amir Rozwadowski

Thanks very much, Doug. And next up, we've got Dave Barden from Bank of America. Dave?

Dave Barden

Hey, guys. Thanks so much for doing this. And thanks for taking the questions. I guess, a lot of detail, Pascal, on the free tax flow bridge. This is something that we've been talking about since a year ago, and so it's great to have that detail. I just wanted to do a couple of housekeeping on that. I guess, first, there's no change in the pro forma free cash flow guide from when you were including half of a year of WarnerMedia to now. So, that implies that there was never any free cash flow from WarnerMedia baked into the business, so I wanted to confirm that.

Second, I think I heard you say that while this year, there's a $2 billion cash tax step-up, you should expect it to be roughly flat in the '23 guide. And then, as we -- and I apologize because no good deed goes unpunished. We think about '24, the moving parts there seem to be continued growth in the business and increment from maybe DISH wholesale, a $4 billion step down in CapEx. And if I'm worried about two things, I'm worried about the step down for DTV and maybe a step-up in cash taxes, I don't if you could talk a little bit about that. Thank you.

Pascal Desroches

Dave, great seeing you again. But, we're not going to provide you cash flows for 2024. So, regretfully, I'm not going to comment on that. So in terms of 2022, -- we had a really good line of sight when we set our guidance about what WarnerMedia would contribute for the period we held. We understood where we thought the transaction would close. And so, in that regard, we factored it into the guidance we gave in January. So, really, that's the comment on that. And then, you asked about cash taxes for next year?

Dave Barden

Yes.

Pascal Desroches

We expect those to be relatively flat to 2022.

Dave Barden

And when we talked in the fourth quarter about moving parts into 2023, I just wanted to make sure you heard me kind of tick off a bunch of moving parts for 2024, are we missing anything? Did I mischaracterize anything?

Pascal Desroches

Boy, you are good, Dave. I'm not going to comment on that.

Dave Barden

Okay. Thanks for that, guys. I appreciate it.

Amir Rozwadowski

Thanks very much, Dave. Next up, we've got Eric Luebchow from Wells Fargo. Eric?

Eric Luebchow

I wanted to dive into the fiber business. I know you've had a lot of questions about it. I know you don't give exact cost per pass numbers, but wondering if you could talk about at a high level how these cost have trended and kind of where you expect them to go. Obviously, we've seen higher equipment costs, higher labor costs from fiber trenching and installation. How are you working to contain some of those costs, and whether that will have any impact on kind of the return hurdles you've set out for mid- to high-teens?

John Stankey

Okay, Eric. Jeff, why don't you go ahead and give a little color?

Jeff McElfresh

Yes. So Eric, what Pascal commented about the capital that's in our plan for fiber in $4 billion to $5 billion range is currently what we're spending in a 4 million passings target for the year. And I would point you to those data points as a rough number.

In terms of inflationary pressures, cost of goods sold, look, it's one of the benefits. If you want to describe us as a fiber overbuilder, we are a very large fiber overbuilder. We've got scale and we've done it before. And that scale translates to things like supply chain agreements that are long in tenure and then have really good protections for both us and our suppliers. It's in a really strong and fruitful labor agreements with the distribution elements and the engineers that are constructing and the technicians that are installing these services all in these territories, which we know well. So, I feel like we've got a really good operating model. And our scale plays to our advantage here as we build the fiber footprint further this year, next year and the following year.

Of course, as we continue to penetrate and edge out the network, as John alluded to earlier, certainly, where we find opportunity to perfect our cost per passing, we do it. And we've seen improvements over the last two years in our cost to deploy fiber on a per passings unit. But, we're not expecting any material significant improvements in our current run rates for us to satisfy our multiyear plan. We've got a pretty level loaded, at pace and speed build right now. And so, we feel really good, we've got the right protections for any kind of inflationary pressures.

Amir Rozwadowski

Thanks very much. Next up, we've got Brandon Nispel from KeyBanc Capital.

Brandon Nispel

[Technical Difficulty].

John Stankey

Brandon, we're having trouble hearing you. I don't know if your volume is up on your mic or...

Amir Rozwadowski

Here we go.

John Stankey

Here we go. That might be a little better.

Brandon Nispel

Can you guys hear me?

John Stankey

There we go. All good.

Brandon Nispel

Pascal, the question is for you. I think you gave some of the components in your comments, but I was hoping you could just walk us through one more time, your expectations for Mobility, Consumer and Business segment EBITDA growth in both 2022 and into 2023?

Pascal Desroches

All right. Here are some of the dynamics to keep in mind as you think about 2022 and 2023. We expect mobility, we expect subscriber growth and a relatively stable ARPU as we make our way through the next couple of years.

Consumer Wireline, as you heard earlier, this is a business that we made the pivot last year in terms of revenue growth. We expect to make the pivot in terms of profit growth from here as the business scales and we build out -- we continue to build out our fiber footprint. So, we're expecting both, top line and bottom line growth for Consumer Wireline.

And with business, Rasesh said this, we are expecting to be down mid-single-digits this year and low-single-digits next year. And as we exit 2023, we expect the business to be stabilized into 2024.

The other piece to keep in mind is, we have our transformation efforts, which will take out cumulatively between '22 and '23, about $1 billion in corporate costs.

So, all those are the piece parts as you think about how we expect to get to our guidance for '22 and '23.

Amir Rozwadowski

Thanks very much, Brandon. And then, for our last question, we've got James Ratcliffe from Evercore ISI. James?

James Ratcliffe

Two, if I could. First of all, just to clarify, if you're taking the copper footprint, which is right now sort of 60 million home locations and taking down to by half to 30 million; fiber is going up by 15 million. And so it's like you're talking about shutting down the copper network and moving to wireless, in about 15 million locations over the next 4 years. How do we think about the pacing for that? And can you just give a context on where you are in terms of FCC and states approvals and socializing that concept with them.

And secondly, just to understand, the free cash flow of $16 billion for 2022, does that include the $4 billion in distributions from DIRECTV, or a portion of it? Because I'm trying to work through the free cash flow walk, Pascal, you shared with us from '21 to '22 million and the $19.2 billion of '21 included $2 billion from DIRECTV. But, I don't see the $2 billion step-up there in any of those columns to get to the $16 billion, so wanted to be sure. Thanks.

John Stankey

Jeff, do you want to take the front end of the question there? And then, Pascal can come in deal with the walk up on the DIRECTV distributions.

Jeff McElfresh

Yes. So, on the copper optimization strategy that we've laid out, I want to reiterate, we are following the demand from the customer. And so, we have first prioritized parts of our footprint where we've had no demand or zero demand and very small actual customers being served by the footprint.

And as we make our way through the filing process with the local jurisdictions in the states, we're finding some success working with them to enable us the potential to unwind and retire that copper footprint. We've got the majority of our states that are in our 21-state footprint that have signed off on the strategy or on this execution plan.

We're in the early days of actually performing the physical work. Last year, we started -- we're not disclosing the percentage of the square miles that we have optimized. We're not disclosing that data. But suffice it to say, this year in 2022, it's probably a 10x increase. And this program will reach a peak probably by the year 2024. That's how I would think about the total footprint in copper reduction or copper sun setting.

John Stankey

Some of that is contingent, James, on the catch product work that's necessary on the wireless network to pick up some additional customers that sit on very lightly penetrated products in copper that we can pull off. That work is, in some cases, just finishing or other products come in later this year. That allows us then to accelerate more of those areas that Jeff just alluded to as zero demand areas, by ultimately doing the replacement.

Pascal, do you want to hit the DIRECTV…?

Pascal Desroches

Sure thing. Here is, James, what to keep in mind. We owned the asset for seven months last year, 100%. And that is included in our cash from operations. And then, we got cash when we were an investor with TPG. So, the sum of those two is roughly the same as what the $4 billion that we are getting in 2022.

So, there is no increase in year-over-year contribution to DIRECTV -- from DIRECTV in our $16 billion guide.

Amir Rozwadowski

Thanks very much, James. And so, with that, we've concluded the Q&A portion of today's day. John?

John Stankey

Folks, we really appreciate your attention. I know it makes for a long morning and into your lunch hour for some of you, but we appreciate your interest in AT&T.

I believe what you have seen from us today is a very, very focused management team that is absolutely committed to ensuring we are the best broadband provider in the United States. I think what we're most excited about is we have great alignment, not only to our strategy to make that happen but we feel like we are on the dawn of the capital flexibility, and how our balance sheet is structured, how our capital structure is set up in total to allow us to execute in a way that I know the team is incredibly energized and focused on to make happen.

So, with that, I'm glad you were with us today. We hope you all have a great weekend. And we'll see you at the close of the quarter.