AT&T Inc.'s (T) Management Presents at Citi's AppsEconomy Conference (Transcript)

AT&T Inc. (NYSE:T) Citi's AppsEconomy Conference January 5, 2022 10:00 AM ET

Company Participants

John Stankey - CEO

Conference Call Participants

Michael Rollins - Citigroup

Michael Rollins

Well, good morning, and welcome back to Citi's AppsEconomy Conference. For those of you I haven’t met, I’m Mike Rollins, and I cover communication services and infrastructure for Citi.

And before we get started, I’d just like to mention that we have disclosures available to the right of the video player as well as under the Citi disclosures and Safe Harbor tabs if you’re doing this via Velocity. Also for those of you joining us here today, if you’d like to ask questions, simply type them into the box on the screen and they’ll come directly to us and we’ll do our best to get them integrated into the discussion.

With that out of the way, we’d like to welcome AT&T back to our conference. Joining us today is CEO of AT&T, John Stankey. Pascal, who was supposed to be here, wasn’t able to make it today, but we’re thrilled to have John. John, it’s great to see you.

John Stankey

Mike, thanks for having me in, and it’s good to be with you. Sorry about the last minute change. You're going to have to live with the B team today.

Michael Rollins

Well, to get us started, it's been now some time that you've been operating under this updated strategy. I’m curious as you look at 2022, what your key strategic and operating priorities are for this coming year?

John Stankey

Sure. Before I go, Mike, just so I don't get anybody in our legal department nervous, you referenced the disclosures, and they are in front of you. I'll just mention everybody that, of course, our Safe Harbor statement applies here. We will be talking about some things forward-looking and there is risk and uncertainty. You can go to our website to get more detailed information. And I will also remind everybody that Auction 110 is, although we finished the assignment phase yesterday, we're still not in a position to talk about the outcomes yet until the information is published.

So to answer your question, look, I couldn't be more pleased with where the team finished up the year. And as we walked into '21, what I shared with everybody is that we wanted to focus on some very critical and select places in our customer growth. I think we did a really outstanding job of doing that. We pre-released some customers’ subscriber metrics for the fourth quarter earlier this morning. And it continues the trends that we saw progressively improving in each of the quarters throughout '21.

And I'm just delighted to get through one of the more significant and competitive quarters in wireless with 880,000 postpaid phone net adds, a total of about 1.3 million postpaid net adds. We did really well in broadband at 270,000. Typically, it's a little bit of a slower quarter given people in December don't like folks in your home doing work and changing things. But I think it shows the strength of where we are in the market in that regard. And the WarnerMedia folks just knocked the ball out of the park. And we said we'd be at the upper end of our 73 million guidance on HBO Max subscribers and we were closer to 74 million.

And that just shows what has been fabulous execution not only domestically in the United States, but as we've started to truly turn that into a global platform. As I think about what we've been able to do is you've seen over the last several quarters while we've been investing in the customer base and growing, we're starting to demonstrate that we can also generate higher EBITDA returns in the business. And I feel really comfortable about that margin. A lot of that is coming on the efficiency aspects of how we're running our business. We've been able to run it more effectively and efficiently.

We've been able to run our operations better because of improved customer satisfaction, that's extending into lower churn levels, that ultimately drives efficiency in, things that we're doing to make our business more effective and efficient moving forward, that are helping us keep that margin equation where it needs to be, so that we're getting good, healthy, profitable growth around that. I feel really good about the progress we've made against our $6 billion objective over a three-year period to drive costs out. We're halfway plus through that at this juncture. And I think there's really good momentum and discipline and operating capability moving into the business as a result of that.

And then finally, boy, if I go back and I think about how we've reordered the portfolio since the first of the year and the number of transactions that either we had announced and closed, like DIRECTV and what we did there with our partner in TPG to those that we've announced that are in process and on the verge of getting to completion, it would be really hard to not suggest that the team did a really remarkable job with everything that was in the air around that.

That's now positioned us to allocate capital against our focus business, which is to be a great connectivity company and ensure that the media assets move into a position where they're as strong as they are today, even in a better position and allowing them to grow and truly become a global media distribution asset. I think that's just a -- it's going to be a great unlock and a great opportunity for shareholders of this company as we move through this year.

Michael Rollins

Building off of that comment, John, as you're transforming the asset mix, and we see that from the external side of what you've announced, can you give us a little insight into what's actually happening internally within the company, and how the company is transforming itself with the management, the internal focus and how that can affect financial performance in the future?

John Stankey

Well, look, I think everybody is working really hard is the first thing I would tell you is what's happening internally. And as I said at the start, I couldn't be more pleased with the results that the team is bringing in. I think their commitment to what's been a really challenging year of transition is exemplified by the market performance that I just articulated. And to do what we're doing at a time when there are that many moving parts, I think just shows that there's a really capable and strong management team, both in media and in the communications business.

What I would tell you that I think people are excited about is everybody believes that this next step is going to allow us to spread their wings a little bit, do the things that they really want to do. I know the media company is excited about having a broader portfolio of content and start to play into genres and demographics that will strengthen the overall offer, as the direct-to-consumer platform evolves in time. And I think that's really, really important.

David has great opportunity to get further synergies out of the core businesses and dedicate those back to the new growth areas and work through his plan for how he gets his balance sheet in the right position to be strong and move forward on that. He's got great plans and he's articulated those, and I think they're going to do really well in that regard. And I know that he's working hard now with the WarnerMedia team on those kind of planning moves to be in a position to make that happen.

In the communications company side, we're going to walk out of this with a capital structure and a balance sheet that I think puts us in a great position relative to our peers in the industry. I've articulated where we're stepping up our investment, especially making sure that we have fiber capillaries that allow us to do really well in our wireless business and really well in our premium business networking entity. And then go back into places where we've been underpenetrated, like the consumer broadband market, and ultimately be share takers and grow our business as a result of that.

And I think if I were to characterize what's happening inside of the company is more often than not right now we're getting to yes on opportunities for people to do new things, improve products and chase those markets. And that certainly excites individuals when they have an opportunity to go and say, I'm going to do something new, something innovative and truly make something the best. And as we start to talk about our evolution of our product profile, both on multi-gig for fiber and what we're doing with 5G rollout and wireless, people can really get excited about that when they can chase those opportunities.

And look, we're going to be a more focused business. And as a result of that, we're working on those things to streamline ultimately the Remainco to ensure that it's sized and structured appropriately. And I'd like to see a business that moves a little quicker. It's a little more agile. It's a little bit more compressed in terms of how we have management structures and decision making, so people can respond to markets and do those things. And that work is underway as well. And I think it will be one of the stories of helping us execute even better as we get later into 2022 as the management team starts to operate in that kind of an environment.

Michael Rollins

Great. Well, as we dive into the wireless business first, I thought we'd bring in our first live survey question, and I'll read it for our audience and then you'll have a chance to select your responses. They're confidential. We're not tracking your responses and then I'll share the results. So the first question is what is the biggest threat to revenue and cash flow performance for AT&T mobility over the next three to five years?

And our choices are Verizon, T-Mobile and the competitive environment broadly; cable insurgency; dish insurgency; or other new entrants, whether it's Apple, Google or Amazon that are possible to enter into the category. So you'll see that question. We'll get the responses. And while we're waiting for that, it just seems like every few years, there's some kind of competitive pivot in the industry, whether it's unlimited or rate plan on bundling. Does AT&T see another pivotal moment coming in the way consumers are going to buy wireless and communication services?

John Stankey

I think I alluded to this in some of my other public discussions in the latter part of last year. And I don't know that I've got insights to everything that could happen. There’s certainly a tremendous amount of innovation going on in the industry right now. And I think there's probably some dynamics that maybe are a little different in the business market than the consumer market.

But one of the things that I shared at the end of last year that I believe is happening is I do believe we're seeing a reordering of industry structure in general where customers don't necessarily love the notion of having to make a decision to buy one form of connectivity from one company and another form of connectivity from another. And I think most customers when they get up in the morning just think about it in the context of I need to get on the Internet, I like to just get on the Internet, I'd like to be able to do the business I need to do.

And my gut is that customer desires are ultimately going to drive how product and industry performs. And I expect that we're going to see more consolidated offers going out to customers, where people are selling a bundle of connectivity. And it doesn't matter where you are or where you need to use it. And as we think about how product evolves and the capabilities and features of products, that that's going to be what kind of the next several years or ultimately going to start to seed into the industry as we think about things.

And I - when I start talking about why I believe AT&T is well positioned with that transition, we are a company that has more fiber infrastructure than anybody else who does networking in the United States. And we know more about building these integrated networks than anybody else, and we do more -- we have a more balanced portfolio at the low end of the market in the consumer space and at the top end of the market in business networking.

And if that's in fact where we think things are going, I think that positions us incredibly well to respond to that where we can handle infrastructure on owner’s economics, on product innovation, across the broad cross section of fixed or wireless and truly bring a unified connectivity approach to the customer, which is, in my view, I think how they want to play.

Then secondly, I think in the business segment, we're going to see this interesting dynamic of public and private networking start to evolve, where private networking used to be in the domains of exclusively unlicensed spectrum, and what I would call fixed LAN connectivity oftentimes and larger more complicated businesses. And I think we're going to now start to see a little bit of that dynamic where managed wireless networks are going to become relevant in parts of businesses and how that gets done, I think, will be maybe another dynamic that requires companies to work -- a company like ours to work with large enterprises on that approach.

And, again, I think we start from a unique place there, where we have the account management infrastructure, the consulting expertise and the capabilities to go into those businesses to support them through that evolution as they do a combination of what used to be fixed private networking that's now fixed and wireless private networking in combination with large scale public networks. And I think that's probably another dynamic we'll see play out over time.

Michael Rollins

We'll go to the results of our survey and then we'll come back further into the wireless business. So in terms of response, 64% thought the biggest risk was Verizon, T-Mobile and the competitive landscape broadly; 24% cable; 12% dish; and 0% for other possible new entrants. John, how does that strike you? And maybe this is an opportunity to double click on the postpaid phone performance for AT&T in the fourth quarter and what drove the strength of that performance?

John Stankey

It's been the same thing that's been driving it all along. And first, my reaction to kind of those results are I'm actually surprised that zero is at the bottom end of the spectrum there for other new entrants, because I frankly believe if 12% of the folks think that dish is maybe going to be the most disruptive aspect, my gut tells me that dish coming into the market may be something that's more paired with a combination of possibly another new entrant that wants to do something a little bit differently. But I think the notion that the top line answer is in fact amongst the traditional industry players is probably accurate.

And I think what we've demonstrated is we do just fine competing against that said, and our best days are yet to come. Our best days are yet to come as we're able to go out with more mid-band spectrum deployment on 5G, put our network in a position that I think we can compete every bit as good as what T-Mobile was graced in the combination of Sprint with a mid-band spectrum position that they've been able to get out a little bit earlier on.

I see our trends right now at the macro level in customer service and NPS on the ascent and now starting to get to a place where leading in the industry is within reach for us as we continue to do that. I see what's happening as we start to combine products with our customers and bring wireless together with the leading broadband product in the industry.

We see incredible LTVs on that base of customers, incredibly low churn and as a result of that much better profitability, satisfaction and customer sponsorship as a result of those changes. And given our footprint expansion, what's going on, that's going to give us a place to go run where we've been underpenetrated. For example, in the public sector, FirstNet is doing remarkably well. It will continue to do remarkably well moving forward.

When you look at how we're aligning our go-to-market resources in business, in areas where we have not penetrated as effectively, in the midmarket as an example, we know how to work at the top end of the market. We're strong at the low end of the market. We just need to refine our capabilities in the midmarket and make sure we've got the right kind of coverage and approach there and the right product mix. And I think we've got great opportunity to grow there as a result of that.

And then when I think about what we're able to do, just putting all this together with a refine brand message and a refine value proposition that we know is going to be coming in as we get through 2022, I feel really good about that momentum and our ability to respond to T-Mobile and Verizon in the way we've done this year and continue to be very, very effective.

Michael Rollins

So speaking of performance going forward, we're curious to see what the audience thinks of what postpaid phone adds could be for AT&T in 2022 after -- with the announcement today, I think it's 3.2 million that you added this past year. So we're going to introduce our next survey, which is --

John Stankey

That was 3.2 million less than a decade.

Michael Rollins

And what's interesting is people question what does that mean for AT&T going forward? And can AT&T keep going with the stronger phone net adds? I know it's been a priority that you laid out last year to improve volume. And so the question is, how many postpaid phone subscribers will AT&T add in 2022? So our choices are 1.5 million or less, 1.6 million to 2 million to 1 million to 2.5 million, 2.6 million to 3.0 million or more than 3 million, which it was in 2021.

And while we wait for the results for that, can you talk about as you're getting the stronger volumes -- the other question we're getting from investors is the cost of this, whether it's the subsidies to help reduce the churn or the promotions that you're pushing in the market? How do you look at the cost of these promotions and the profitability of the customers coming in?

John Stankey

We've kind of dealt with that question I think every quarter since the start of '21. And my answer is continuing to be the same. And we've tried to give you the data points to look at all the traditional measures that we've reported in wireless for many years. I'm not trying to invent any new ones here. And we've shared with you even some that are not as intuitive that you can't pull back from our disclosures. Our cost per customer acquisition is dropping, not increasing. Part of that is we have a healthier mix. And as a result of that, we're getting better leverage out of our scale.

Our LTVs on our customer, our lifetime embedded value are improving, not decreasing. There's combination of reasons behind that. Part of it is a reduction of churn. Part of it is as we bring customers in and they're staying with us, they're buying up on ARPUs because they're choosing to stay with us. They're retooling their plans to use services in a way that they want to use.

And as you start to throw that all into the mix master, you've seen in the results we're starting to drive more EBITDA performance in the business as a result of that with the customer base growing. And we believe that equation hangs together as we move forward, especially as we continue our work on our efficiency and cost reduction efforts. Many of the early dollars that we were able to glean out from that work, we chose to put back in the market to get us into a position where we were scaled on our gross inbound and our ultimate net intake.

So we've moved through the second phase of this plan. We've got the engine performing the way we want it to perform right now. Some of what we get now in those efficiencies and savings starts to drop into the bottom line in margin support as we move through this year and next year. And so we feel really comfortable about the overall equation that we're working through right now and where it's going to go. And I will tell you as we think about that, we're pretty conservative in our point of view on the industry.

I will tell you as we went into the '21 plan, we thought about what the gross add, net add dynamics would be in the business, they were a lot higher than what we expected in our plan. That's the nature of our planning. It tends to be more moderated and a little bit more conservative. I will tell you going through 2022, we have what I believe is a very reasonable and pragmatic view of what the industry is going to look like. We're not leaning on a repeat of the '21 dynamic in order for us to make our guidance and our plan that we'll talk with you about. I think we're going to be -- we're pretty good at assessing these things of what's going to occur.

And if we do kind of make a call, we usually make a call to the more conservative side, just because that's the right thing to do. And I think we'll continue to do that in '22. And I feel really comfortable that we're not expecting outsized shifts in the dynamics of the industry or outsized growth that's kind of repeating the '21 dynamic in order for us to ultimately deliver our commitments back to our shareholders.

Michael Rollins

So going to the results of our survey, 36% thought it would be 1.5 million or less; 11% at 1.6 million to 2 million. I apologize. We don't have this on the screen. Our audience can see it. But for you and I, I'll just read it. 39% is 2.1 million to 2.5 million, and then 7% for each of the buckets of 2.6 million to 3 million and over 3 million. So the highest response of 39% was 2.1 million to 2.5 million.

John, as you look at what you've done on gross add shares, you look at what you've built now in the marketing engine of this business, is there any reaction that you have to the survey? And are there any other considerations that investors should keep in mind about the competitive landscape and AT&T's position in that?

John Stankey

It's nice that everybody has an opinion. Look, I'm not going to provide any guidance right now, Mike. We'll provide guidance as we get into the end of January here and come out with a quarterly report and where we're going to go is what we traditionally do. And I doubt very much that I'm going in that guidance be giving you a net add target on postpaid or anything like that. We are razor focused right now in cash generation in the business and getting the operating leverage out of our base. I think that's the most important thing for us and for our shareholders right now. And I think you'll see us kind of give you some insight to that as we get into the earnings discussion.

Michael Rollins

Can you give us a preview of what 5G is going to look like for AT&T over the next 12 months? AT&T was in discussions with the FAA and with C-band over the last few weeks. So what should your customers and investors expect for the evolution of what 5G will look like from an experience perspective?

John Stankey

First of all, I'd step back, given it's been in the news and the media cycle and maybe try to put in perspective what's gone on the last couple of weeks. When you deploy an air interface like 5G, it's with you a very long time. And so a couple of weeks here and a couple of weeks there at the front end of this isn't in the context of the grand scheme of what's going to happen and how you build networks and how you support a customer base. In my opinion, it isn't going to be a big shift one way or the other. I think we need to keep that in perspective.

What I would tell you about our approach is no different than what I alluded to earlier. We want to make sure all of our network deployment, whether it be fiber or 5G is done in a way where we're taking advantage of our dense and rich fiber networks, that we're putting the bandwidth where customers need to do it and we're evolving a product in a way that we can have a relationship with a customer that says it doesn't matter where you go, we will handle your bandwidth needs. And we may choose to do that on 5G or we may choose to do that on fiber. At the end of the day, that should be something that's fairly transparent to the customer. It should be done in a way that makes sense for them and a product that makes sense for them. And I think we'll be in a good position to do that.

Our approach to 5G rollout, partly because we have such a broad and dense low band spectrum position, our networks performing incredibly well right now. You see the speed tests. And I would tell you that yes, there's nominal differences that are showing up at a couple meg here, a couple meg there. This provider wins in this market, a different one wins in another. But when you look at customer feedback, customers are telling you -- AT&T customers that they're incredibly satisfied with the service.

We see sentiment on the network improving. That's really important as a result of that. And that's all going on within the dynamic of what's occurring in the market right now and what other competitors are doing. When you see that momentum and that ascent on network performance and the consistency, that's really strong and that's partly because of one, the dense spectrum assets we already had walking into the mid-band deployment; and two, just the infrastructure of how cell sites in the network has been built.

Now as we go into this mid-band deployment, we're going to be a bit more deliberate in our approach here, because as you know we've got the dynamic of certain mid-band spectrum being available now, certain mid-band spectrum that won't be available until '23 and we have some other mid-band spectrum that may come available somewhere in the middle of those two things. And as a result of that, as you think about how you deploy, you want to make sure that you're using the right electronics and the right time to be on a tower once as opposed to multiple times.

And so as we move through the middle of this year, I think you'll see us hit our stride on how we get the right kind of pervasive coverage using a collection of mid-band spectrum assets to make sure that that occurs. And I think given the near term as we kind of get in to the middle of this year and we wait for further spectrum availability into '23, a spectrum that we've acquired and other auctions, we'll be in a really nice position to take the strength of where the network is today and evolve it and ultimately be in a position to do that in the middle of this year as we start to scale that.

Michael Rollins

Let me turn to our third live survey question, and I'm going to pull this up on the screen for our audience, and the question is what is the biggest risk to AT&T achieving its pro forma free cash flow target for 2023 of $20 billion plus? And the responses are none, confident AT&T will achieve this target, revenue growth will not meet the annual low single digit target, EBITDA growth will not meet the annual mid-single digit target. And then we also give a couple of other options; higher capital needs for CapEx in spectrum or higher cash taxes. So we pushed that survey out.

While we're waiting for those results, John, one of the differences so far in the 5G discussion for AT&T is on fixed wireless broadband. How are you looking at the opportunity, especially where you don't have an incumbent wireline footprint or in the areas where it may not make sense to build fiber, how are you looking today at the opportunity to use this mid-band spectrum that you have in the wireless network and offer a wireless home broadband solution?

John Stankey

I've been pretty clear in my point of view on this. And I think if you go back and look at some of the data we've laid out, and I look at experiences that we're having in the market today, I just believe there's a segment of the population. There are homes and there are businesses that given the intensity of their compute and data needs, given the innovation that's going to occur in the market of all the things that we see going on, I believe that having some fixed high bandwidth infrastructure is going to be essential to being an effective networking company moving forward.

I just give a simple example. If you go into a typical average U.S. household and you think about the amount of video consumption that's going on in a household today and you think about the customer trajectory of how much of that video consumption is moving from what used to be what I'll call broadcast or multicast combinations, where it's one stream sent out to a bunch of households or one stream watched by many people in the household to unicast where each individual in the household is watching something different at a particular time.

And I would tell you that if you believe, two things happen. One, that there's going to be more on-demand consumption of video moving forward. And two, the resolution of that video will improve over time. And it will improve at a rate that compression technologies won't necessarily keep you even in that consumption, so the jump to HD to 4K is an example. I would tell you that you start to look at those things and realize that wireless networks in some instances will have difficulty scaling in certain segments of the market as a result of that and there'll be more effective ways to serve those customers.

And when I start to look at what we're seeing as we start to do our market tests and our market pilots on multi-gig deployment on fiber and the market success we're having and the sentiment of the customers that are taking it, I think that's a really, really powerful combination. And I think those segments of the market are going to need to be addressed with more fixed solutions.

Now, are there single individuals living in an apartment someplace that may have a usage profile that is effectively served by fixed wireless in a metropolitan area? Sure. There are those other businesses that sit in a strip mall that are low data intensity that may have an opportunity to be served by fixed wireless, sure. Is fixed wireless going to be the best way to get a lot of bandwidth out to less densely populated rural areas? Yes, it probably will be. So is there a segment of the market where fixed wireless will apply and be effective? Sure, it will, and we’ll be in a position to have the right product to address those places.

But I don't want to just simply say, well, that is the single solution that's going to deal with what I would call the 70% of the business community, the 70% of the consumer population that are going to be pretty intensive users in some location, indeed, to have fixed infrastructure to support that over the long haul, given all the innovation that's going to come. So how do I think about it out of region? Again, having a broad portfolio of business and consumer and believing that ultimately having fiber infrastructure to make both networks run well is important.

I see an opportunity for us to be very targeted and very disciplined around what we do and what used to be I hate using the term but traditional out of region markets, where good fiber deployment that supplements the strength of your wireless network and at the same time can pick up businesses and consumer, that's probably a place where if this future that I talk about, which is a consolidated broadband product offering that occurs in the market, a customer that just wants a provider that solves their needs starts to occur, that those opportunities and companies that ultimately sustain themselves in the U.S. market for networking will need to address and ultimately effectively do. And that's how we're positioned to move forward right now.

Michael Rollins

And on the fiber side, you announced that you hit the 2.6 million homes incrementally passed in 2021. Are those now fully open for sale in 2022? And is there another bogey that we should be thinking about for the next year in terms of the expansion of your home fiber network?

John Stankey

The answer is yes on the 2.6 million. And as I think I shared on the last earnings call, we wanted to do 3 million this year. We got a little bit of a supply chain dynamic that worked in the latter part of the year on how we were getting some of the elements we needed for the -- the final piece of the distribution plan. It was largely how the preassembly dynamics of the fiber come in for us to be able to splice it in and ultimately serve the home. Feel pretty good about how the team and our vendor community has worked through that in the fourth quarter.

Obviously, we did 2.6, not 2.5. I think that's indicative of the fact that we've got a little bit better momentum than what we had expected. And now those homes are in fact available. And the next 400,000 that we didn't hit will come very quickly in the front end of this year in the 30, 45-day timeframe, because we are in fact starting to see that ramp in that supply component we needed. As we told you, we want 30 million fiber households by the end of '25. I'm very confident we'll get that done.

As I've told you on the last earnings call, I'd kind of like to get away from a discussion of how many new homes are added this quarter and be able to talk to you about just what are we seeing in the growth of customer acceleration? I'm really pleased with 270,000 fiber adds in the fourth quarter of this year, especially given we were a little bit late bringing on that new inventory. I think now that we can sell into that in '22, that's going to allow us to get that momentum to break through that 300,000 range on customers per quarter.

And as we continue to add in the footprint, what the investor base should look about is, is our new fiber adds, are they continuing to scale and grow irrespective of what we're doing with the footprint. And that's really what I hold the management team to and how we think about our commitments and our financial planning moving forward. So yes, I expect you're going to continue to see those to grow as we move through '22 as the footprint expands, and that will be the case all the way through '25 as we get to 30 million fiber homes through the end of '25.

And as I've also shared, we're continuing to do work to look at opportunities out of region, what we want to do to possibly find other attractive places to go and penetrate more effectively in the business community. And as we have confidence in those things and we're in a position to go and demonstrate that we can make that happen, we may be doing some revisions to our approach and our guidance on that moving forward.

Michael Rollins

Great. So three more topics to hit today, the Discovery transaction, HBO Max, and then we'll get to that free cash flow question that we surveyed our audience for. So first on the Discovery transaction, over the last few weeks you announced the private letter ruling, you announced European approvals. What's left? And can the timeframe to close this deal accelerate from the midyear target that you previously set?

John Stankey

We've said midyear. Could it accelerate and happen earlier, it’s entirely possible. It could also possibly slip. My view is right now the momentum is we're doing exactly what we expected to have occur is occurring. Really pleased about the private letter ruling. You saw we filed our S-4. You get some indications of what's going on there. I think that now clears the way for us to move into the Discovery shareholder vote, which of course needs to occur. You saw that the EU cleared this without any concerns.

I would say that if you think about the company's holdings in the EU versus elsewhere in the world, there shouldn't be anything that jumps out that says, gosh, there should be something hiding there that's going to be a problem. So we feel comfortable about the balance of the world approvals that we can work through those in the timeframe. As I mentioned in the fourth quarter and still remains to be the case, the process we've been going through with the U.S. regulators, in particular the DOJ, has been following kind of the script and the expectations when we set up the deal. And we gave you guidance.

I feel very comfortable with how that's going. I think those conversations have been constructive. And they've been responsive both ways. I see nothing going on, on that causes me any concern. So look, I think the good news is, as we envision the transaction, both the structure of it and the pacing of it, we're following the script exactly the way we set it up. That's great for the team, both Discovery and the WarnerMedia-AT&T team around executing on what they set out to do. They've done a very good job of that.

I have no reason to believe that's going to change as we move through first quarter of this year. And we're now getting to that point where those proof points will start showing up on a little more frequent basis, because we're in the latter part of the cycle as opposed to the front part of the cycle. And I would fully expect as those proof points show up, investors in the investment community will continue to gain confidence as to why this is a tremendously valuable transaction and something they're going to want to jump in on and get the value of the back end of it.

Michael Rollins

And on the HBO Max side, you described how you outperformed the high end of your guidance range. Was it AVOD, international, domestic? Where did you see the greatest outperformance and is there a brief update you might provide on engagement with the platform?

John Stankey

Sure. The outperformance I would say came from really good international launches. We are now a product that has moved from just not only a domestic strength of being in the mid 40 millions of domestic subscribers to one that is got momentum in Latin America, throughout the entire continent. Our early launches in Europe have been really strong and have demonstrated that there is a market for the strength of the library that HBO Max brings into that market as well as our new content is performing incredibly well in all markets, not just domestically in the U.S.

And so that stride for the launches internationally, the team did such a nice job on buttress against what's been strong continued performance domestically I think is why we probably a little bit higher than what we expected when we were giving the guidance to 73 million. Engagement on the platform is -- I think I told you early on back when we launched the product, my hope was to get people into something over an hour a day. And we have been so far beyond that and have done so much better. I just couldn't be more pleased.

And the great part about it is, Mike, we really haven't hit our full stride right now. We're still coming out of the COVID hiatus where disrupted production schedules and we've kind of had to tier some things in. And as you get into '22 when I think we get to what I would consider to be more the stride not only of the amount of production hours that come onto the platform, but some of the content that we had chartered at that time to broaden the demographic aperture of how the product appealed into the market. You've heard me talk about this.

The HBO content does incredibly well and has had just such great longevity into the cultural zeitgeist of consumers of this kind of service. But we also know that we can broaden the aperture a little bit with similar content that has that kind of quality, but maybe a little different orientation in terms of the demos that applies too and you're going to start seeing that start to roll into things in '22. And I think that's only going to make the product stronger frankly as a result of that.

The platform, the technology is getting better. More features are coming in. Like any software development that you have to globally scale, you're always making tradeoffs between time to market and the functionality of the platform. Once you get through another year of those cycles, the product gets better. It adds more features. It does things where people can engage with it more, they can find more content because search starts to improve.

And then you go through the dynamics that you look at and you think about all the work we're doing on branding, understanding the customer base now that we have scale, how we target to that. We're running our funnels more efficiently and more effectively.

And when you think about what that team has done, Jason's done a remarkable job leaning in to bringing that product over the course of this year from one that I think some people were wrongfully skeptical about, or asking is it going to make it to now when you kind of open up the end of your dynamics of various pundits and you look at the various magazines that are rating things, people are saying, who did the best in 2021, what streamer ascended in 2021?

HBO Max is at the top of those lists, and it's a real credit to the team. And I think '22 is going to be even a better year for that. And once David closes Discovery and can start to bring in the strength of what Discovery does so well into that portfolio, it's going to be unstoppable.

Michael Rollins

I think this brings us to a good final question ahead of the rapid fire, which is going back to the survey. So we surveyed what the risk is to your pro forma free cash flow target. 19% said confident AT&T will achieve the target, 15% thought the revenue growth is the risk, 41% thought the EBITDA growth of that mid-single digits is the risk, 22% thought higher capital needs for CapEx spectrum and only 4% thought taxes.

So if we look at the highest percentage at the 41, which is the EBITDA risk, maybe there's just a two-part question; your confidence in the revenue trajectory and you're confidence that you can deliver that outsized operating leverage to deliver a mid-single digit EBITDA growth pro forma relative to a low-single digit revenue growth.

John Stankey

Look, we gave guidance that we're confident, Mike, and I remain confident. The guidance we'll do our updates as we hit the latter part of this month when we come out for fourth quarter, and give you the results. That's traditionally when we do it. That's when I intend to do it, not today. And I feel really good about the momentum of the business right now. And as I've said, I think we still have a lot of opportunity in surface area to run our company more effectively.

I think we have an opportunity as a more focused business, we are going to execute better as a more focused business. I am absolutely convinced with this talented management team that we have, that knows the networking business as well as they do when they're given the latitude to come in every day and focus in that area with a capital allocation that we've set up and communicated out to our investor base that we intend to dedicate to this business moving forward, that we are going to see an even better company come out of this, I have no question about that.

Question-and-Answer Session

Q - Michael Rollins

That brings us to our rapid fire three questions in three minutes. First, why should investors buy your equity?

John Stankey

It's the most undervalued player in the telecom and media space right now. I can't imagine -- given the yield that's out there on the dividend and what you can get paid to wait as this transaction takes place, the upside that's going to occur when David executes the integration of those two businesses and takes the direct-to-consumer play at Warner Brothers Discovery to the next level and the value accretion that occurs as a result of that in the equity combined with what we just spent a lot of time talking about really sharp execution on the communication side of the business an opportunity to continue to grow EBITDA because we're going to run this place more efficiently.

On a base of subscribers, it's growing. I look at it and just say, there's just a fundamental structural value play here. And it may be gets back to your previous question of where you're looking at it. Obviously, the confidence of the investor base has to attach to the confidence of the management team. I've been talking about that for the better part of 18 months since coming into this job. I keep what we are going to say we're going to do reminding you we've done what we're going to do, and I expect that we'll continue that through 2022. And as that cycle continues to perpetuate itself, I think confidence goes up and ultimately I do believe that should be reflected in valuation.

Michael Rollins

Second question, is inflation and net opportunity net neutral or net risk for your business model and financial performance over the next few years?

John Stankey

I don't really like the question. I think the question is -- the answer to that question is nobody should like inflation at the levels we're seeing in the United States right now that that approach or policy that ultimately doesn't get that contained quickly is not going to be good for anybody, my company or any other company. And our focus right now as a country, our focus from a policy perspective, our focus on everything we should be doing is about getting that genie back in the bottle and dealing with it aggressively. It's not healthy for anything.

Michael Rollins

And our final question since it is the AppsEconomy Conference, what application can fundamentally change demand for connectivity and data consumption over the next few years?

John Stankey

There isn't one, and I'd go back and say, history repeats itself. It's like saying what application made LTE and 4G relevant in society. And I'm old, I'm gray. I've been around here a long time. I can remember sitting around in 2009, 2008 answering the same, well, geez, what's going to justify this investment in LTE? Isn't 3G good enough? And why do we need to invest this money? And it almost seems quaint right now that you'd go back and say, was it worthwhile to invest in LTE and in 4G to give people more speed and more effective and more resilient, more ubiquitous networks? And the answer was, of course. And I'd ask the question, are wireless networks as effective and as resilient as what you're accustomed to when you sit in your living room or when you're at your desk inside of an office building? The answer is not yet.

And so if there's innovation that occurred on the LAN in the workplace and if there's services and capabilities that occur in your home that you can't quite do everywhere you are, why wouldn't there be an opportunity to invest to take that somewhere else. And as we start to think about what I talked about earlier, public and private mixes into enterprise, when we get to low latency and what that opens up in terms of opportunity for medical diagnostics and remote health care and we think about the manufacturing dynamics and autonomous vehicles, we're going to see a whole another decade of innovation that's built on the back of these networks. And I'm really optimistic about that. And I have no question that we're going to someday be sitting around saying, we need more spectrum because 6G is here and if we don't have it, we're not going to be able to take the next wave of innovation for ubiquitous high broadband, high speed broadband networks, no matter where we are, live, work and play.

Michael Rollins

John, great to see you. Thank you for joining us today.

John Stankey

Yes, I appreciate you putting up with me as a pinch hitter. I know Pascal is a much better looking guy. But I did the best I could. So thanks, Mike. I hope you have a great '22.

Michael Rollins

Thank you. You too.