AT&T Inc. (T) Earnings Call Transcript & Summary

All right. Well, welcome, everybody. Thank you for joining us again at our 2021 Global Telecom, Media & Internet Conference. I'm David Barden. I head up U.S. telecommunication services and communications infrastructure research for Bank of America. Thank you for joining us. I'm really pleased to have with us today, Thaddeus Arroyo, who many of you may have not met yet. He is the CEO of the Consumer Division inside AT&T Communications. It's the largest business unit. He's had a long trajectory through the organization across a lot of different vectors. And I'd like to say thank you for joining us, Thaddeus.

Well, thanks, David, and thanks for having me here.

Before we begin, I think you have a safe harbor statement that you'd like to reference?

Yes, of course, always have to begin with this important piece of work here, and that's -- I need to call your attention to our safe harbor statement. It says that some of our comments today may be forward-looking, and as such, they're subject to risks and uncertainty. Results may differ materially, and additional information is available on our investor relations website. With that out of way, we can go right in.

Awesome. That's always the best part.

Definitely.

So Thaddeus, again, thanks for joining us. I think it might be helpful for some people to kind of get a sense as to kind of your background a little bit. I think one of the things that differentiates you from some of your predecessors is that you have kind of more of an IT background as opposed to a finance or operations background. And not that you don't have all the experience, but I'd like to -- I think it would be helpful people can hear how you have kind of got where you've gotten in AT&T.

Sure. And I've been fortunate to have experienced many different roles in my career and even spanning a couple of industries. A journey that's largely been formed on technology, product and innovation route foundation. And since returning to the communications business, as Id return to the communications industry in 2001 as the first CIO for Cingular Wireless, I had an opportunity to be part of successive waves of the evolution of wireless technology, from 2G, all the way to the 5G era that we're entering today, as well as at the same time, being part of the evolution of what was happening across our wireline set of capabilities, as we advanced our numerous copper-based broadband service offerings to introducing this next generation of fiber-based broadband services that are going to power our future. And throughout my career, I've had the opportunity to see this pace of technology accelerate and our business support systems even move out from behind the desk, behind the systems of our professionals who supported our customers to actually moving directly into the hands of our customers as we begin serving them digitally on their own terms. And over the course of this same time frame, I had a chance to see that what we do, what we do in connecting customers, both consumers and businesses to their world, has evolved materially as well because our wireless and wired connectivity has moved deeper and deeper into the center of customers' lives and work experiences. My perspective, having been built through this experience lens, has certainly shaped me in my approach to leading businesses. I transitioned from running technology and leading our technology development to leading businesses in 2015 when I became the CEO of AT&T in Mexico. And a couple of years later then, I assumed the role for AT&T business, all the way taking me until September of 2019 when I was appointed to lead our consumer group and which really includes our wireless operations as well as our consumer wireline business. And my path has certainly left me with a bias for this value of harnessing the power of technology to transform and disrupt, but ultimately, to center all of that around how we reach our customers, how we serve our customers, and in what ways can we advance those relationships.

So does this -- and what does it mean for an IT technology-centric person to run the consumer businesses? Is it your job to advance the next wave of digitalization, automation, self-provisioning and all these things? Is that the kind of mission that you've been given?

Yes. I think that's an element of the broader mission. But let's be clear, if I look at -- it's my responsibility, the responsibly of our organization, to grow relationships. Being responsible for all aspects of how we take our products to market, the products we develop. Increasingly, every element of what we do is reaching customers in new ways. And so that is an important element of it. But since running businesses here over the last 7 years, it really has been bringing that digital centricity into more and more what we do because at the end of the day, it's what customers are using to connect to the services. But it does all begin with the priorities that we set around building customer relationships about our core products. But more importantly, I think, if it wanted to mark any indication of a focus, it would be on how we use these capabilities. How we take human-centered experiences and power them with technology to really advance our relationships with customers, and to use that as an important strategic element of how we compete in the marketplace.

Okay. Great. So I want to ask one more question on that line of things before we get to kind of the core business, which is I was being kind of a geek and Googled you, and I found a Forbes article from 2017 where there was a quote from you that said that you kind of saw telecommunications companies becoming IT brokers as opposed to IT builders, which is I thought a strange statement from America's largest capital spender. Could you kind of explain, what does that mean for you running the largest kind of element of AT&T's business? Are you outsourcing more stuff, or planning to? Or what does that mean?

Yes. I think there's multiple dimensions on this, David. And I think first and foremost and most importantly, as what we do in connecting customers to their world, at the end of the day, it's a service that customers can consume. They don't have to worry about how to build that technology. And so if you go down to the roots, and I'll put a little more color on what this means for how we build those capabilities and the make versus buy equations. But most importantly, I can go back in my long tenure technology history to look at, in many respects in the past, how businesses would build a set of technology services. We even acquired dark fiber to interconnect those. The point is here that if you think about in this new modern world, including communication services, including compute services, is that you can simply consume those as a service. That's what we do. We offer that as a service. Now let's look at the ingredients of how we build that. And so you can imagine that we're always assessing the make versus buy equation on the key decisions around how we bring innovation to market. Think of that innovation as our products. Think of that innovation of how we serve customers. But we have to ensure that from a strategic fit perspective as well as aligning around our core competencies, that this balance works. And the point, specifically in that article, is about speed. It's about the speed when you just tap into that innovation and a set of capabilities that you can consume versus taking the time to build what already exists in the market. So if you're a business trying to build private networks, the real question out there is why not simply consume it as a service? And interestingly enough, not only does it exist, it allows you to bring that to market so much faster. And we bring that same thinking into what we do. And considerations always relate to cost, brand reputation, the supply chain sustainability, reliability, how we support our customers. These are all important decisions in that model. But when we make a decision, and we think the same thing is true for our customers, it's true for our customers, consumers and businesses alike. And a great example, even in the consumer space is look at home WiFi, right? We provide clearly great broadband fixed connectivity to your home, but we also extend that in a really great set of services to create a set of WiFi capabilities to deliver it to every device. Consumers have the choice to go and build that themselves or consume it as a service from a company who's building what we believe is the best product in the industry. Those are the type of decisions. And it's really even more amplified when you look at businesses. And so when a decision is made, you look at in terms of what we're building, we're bringing technology to the market. We now have a cloud-first bias as a good example, clearly, for our IT systems, but even elements of the network as we move forward. But we take an approach that says, we're going to partner with best-in-class providers. And the obvious area now is compute. And now, as we disaggregated the software elements of our network from compute, it means we'll even have compute elements that run in shared public cloud services. But as you look now at the business support side, it really means that we have now a Software-as-a-Service based model as we move forward on customer relationship management, business support systems, just to name a few. And the important element of this, what that allows us to do is to move our innovation at a new pace and to bring new capabilities to bear that frankly may redefine experiences. And then another important element is though that you have to continually reassess that. You ensure that the prior decisions that you made -- that we make actually remain sound in what's happening across the evolution of the technology marketplace. In my opinion, this is the new best practice.

Okay. So I want to pivot a little bit back to the business. But before we get into the nitty-gritty, there was a little announcement the other day about splitting up AT&T into 2 parts, a media part and a communications part. I think it's fair to say that AT&T senior management, for the last many years, has spent an awful lot of energy trying to convince us that it was important to have media and communications together. Now we've decided we don't want to do that anymore. How is the organization at large reacting to this internally? And how -- what does it mean for you, the guy who's running the consumer business, that you've been told you needed media to be successful?

Yes. Great. And I'll even speak about this relative to the context of the complete communications business, because we're really excited about the opportunity that this presents to unlock the value of WarnerMedia and invest though, at the same time, in this potential of 5G and fiber to drive communications company revenue and earnings growth. So you can imagine that the reaction within the communications team has been favorable. It's favorable because of the financial flexibility to address this growing demand for connectivity and to be among the best capitalized communications company puts us, we believe, in a really important position here to sustain some growth. Our operational focus and priority remains continuing to grow customer relationships. And we're going to do this by increasing fiber penetration on our existing fiber footprint, while we penetrate new builds as we build out that footprint. And while we use also these growing fiber households as an opportunity to expand wireless share in that footprint. And we also, in parallel, are going to continue to execute on our strategy across the entire wireless market to win in this battleground for convenience by simplifying our wireless offerings for our customers and redefining those experience. So we believe we're -- the flexibility that comes from this allows us to continue to focus on growing in the right way, driving efficiencies and effectiveness through our operations transformation and allowing us to expand service margins while we also grow customer volumes. So net-net of it, a lot of excitement around the potential to really kind of creating that marketplace in global streaming.

And so a follow-up question on that from an organizational standpoint. AT&T has been a leader in articulating a view that 5G might be an enterprise-first kind of monetization opportunity. The wireless business falls within the consumer business, and the business-to-business that you used to run is separate and distinct from that. Is that going to change? How do these 2 things work together given the different leadership?

Yes. Well, first, I think as it relates to it, they're tightly coupled today. We have a single communications company. And if you look at the strategy, the strategy around investing in wireless, investing in fiber, this hybrid strategy that I'm sure we'll have a chance to provide some more texture around, these aren't separate organizations that pursue the marketplace in an unconnected fashion. And I'll cover a few of those areas where, in fact, there are a lot of synergies in how we look at this together. Because business relationships tie to our potential in the consumer marketplace. The underlying technology for how we serve businesses is the same underlying technology for how we serve consumers. So they're tightly coupled. I think we're managing through different scenarios in both sides of those businesses. And when I talk about wireless and all the dimensions around wireless, understand I'm speaking for wireless momentum, wireless approach to the marketplace that encompasses both, everything that's happening on the business side as well as our reach in the consumer marketplace. There is an element and a dimension that we have to manage here as we look at our business wireline in particular, no different than how we look at consumer wireline. But the interconnectedness is important. We have to deal with the dynamics, as an example, in the business wireline business that's been in a secular decline, if you look at that aspect of how we serve enterprises, and along with the rest of the industry who's been a comparable decline. But what we'd like to highlight as we look at this journey, this journey of driving these strategic services as the growth, if you will, for pulling forward the transition from the past to the future, if I look at what we're doing in business wireline, we have successfully demonstrated how we can manage through these transition of legacy businesses time and time again in the past, frankly, over the course of the last 140 years, you can have many examples of that. And in that model, it's a little different strategy than the model that we'll potentially take in the consumer market, but it relies on transforming our cost as we manage through this transition. That begins with simplifying our portfolio, focusing on strategic products like business fiber, the collaboration and productivity tools that we put on top of that business fiber and how we wrap every element around that in security to increase the growth then of these strategic future-oriented services, while we also move away from high customization, heavy use of resources as well as even some areas that have lower-margin parts of that portfolio. But as we redefine the distribution to reach businesses, we're doing this in the sense that, particularly as you look at small business, that spans how we reach the mass market through consumer channels as well as how we move upmarket by redefining our distribution to more effectively reach the broader market. And interestingly enough, we bring the same design principles into both of those. We focus the growth of the future on our core fiber and wireless connectivity with a predisposition to digitally reaching our customers, increasing productivity, improving service through the technology platforms that power this. And we're well positioned for this transition, and it goes back to how we look at both of these businesses because we have a unique capability in a full range of wireline to wireline solutions for business customers. And as we think about this applicability then, again, the same core technology powers both across our broader wireless and consumer wireline businesses. Our investments in fiber and 5G, they position us to capture this increased demand for both mobile and fixed broadband usage. This is increasing for consumers; it's increasing for businesses. And we believe that the approach that we're taking -- and look, this is a different strategy than maybe a pure-play wireless or even a pure-play Internet company because ours is a hybrid one. It's an approach that we think allows us to differentiate AT&T by positioning to capture growth in this environment around this construct that demand is not ubiquitous. There's diversity in the customer segments that we serve. They require different capabilities in their fixed broadband. And the economics to serve them, command multiple technology solutions. The performance, the capacity, the cost advantages of having capabilities to provide owners' economics for fixed services, for wireless services, will allow us to serve high-capacity needs economically with fiber to a home or a business. And it also allows us to use our wireless network to serve true mobility needs as well as even some targeted fixed wireless broadband use cases that will stand up in areas where we're not going to build fiber. It's why we believe, though, that we're optimally positioned with scale, robust and fixed mobile networks to serve both of these. But as you can see, there's a high interconnection between how we serve businesses and how we serve wireless customers, and we obviously approach the marketplace and intersect that demand with very unique distribution.

So you mentioned, I think that the kind of internal sense is that business is a secular decliner, which means the opportunity would really be in consumer and mobile. This year's capital investment guidance is about $21 billion. You recently changed the outlook for capital expenditure to be closer to $24 billion, and that presumably entails less for DIRECTV and nothing for WarnerMedia down the road. This year's fiber build goal and consumer is about 3 million customer premises passed. So that's kind of in the run rate now. So if we kind of think about where the additional spending is going, it kind of feels like it's mostly going to wireless. I just wanted to make sure that's a true statement. And if so, beyond maybe just doing as much as you can on C-band element, where is all this capital going to go with the margin?

Sure. I'd love to unpack that. But before I do that, I think what's important here as we look at it, when I mentioned the secular decline, that is business fixed services. Let's be clear, as we look at the wireless element of business and what it's driving, that is a growth business for us, and it's an important part of that strategic future as we surround the relationship with how we can serve them across multiple sets of services. And so kind of moving on then to CapEx here, we are stepping up investment, but it's not just in 5G; it's 5G and fiber to drive growth. We expect capital expenditures of about $24 billion a year after the WarnerMedia discovery transaction closes. That's an incremental investment that's going to go to fiber to 5G capacity and 5G C-band deployment. Our spectrum position's never been stronger. So part of our incremental investment is going to be targeted at putting our C-band spectrum into service. We acquired 80 megahertz of C-band spectrum in the FCC spectrum Auction #107. We plan to begin deploying the first 40 megahertz of that spectrum, begin turning this up in select areas by the end of '21. And we expect to spend about $6 billion to $8 billion in CapEx, deploying C-band specific spectrum here with the vast majority of that shaping up between '22 and '24. And we now expect to cover 200 million POPs with mid-band spectrum by the end of 2023. And as 5G use cases evolve to leverage lower latency, they have higher speed requirements, our network's going to be there to deliver that experience. These 5G use cases are very early on in this cycle. They're being developed as we see the deployment of faster speeds, the proliferation of the devices that can take advantage of it. And these will enable applications and like next-generation cloud-based gaming, more automotive connectivity that support more immediate type services, potentially even autonomy, wireless broadband for targeted use cases. And I like to liken this, having gone through this cycle in the 4G world, where we evolved and created a set of capabilities, that we're faster than 3G. Application stores begin to emerge and then devices proliferated. When all that happens, the ecosystem, the innovation evolves, and then we see, like we did in the 4G era, the emergence of video streaming, navigation, contextual-based services that really enable now ridesharing as we know it today. The world in 5G will untap many of those as well. And we're also though going to continue to invest in expanding our nationwide 5G coverage with low band. Think of this as the sub-6 spectrum that gives you that macro layer of coverage. Currently, we're covering over 240 million POPs across more than 470 markets. That's going to continue to grow. And our investments -- and this is important. What we think we get out of this, our investments in wireless network capacity, coverage, speeds, capabilities through low and mid-band deployments, they're going to ensure that our wireless network strength continues. Our investments are paying off. Our network covers more than 99% of all Americans. Our wireless network -- AT&T has America's best and largest wireless network, and our network's never been stronger. According to America's largest drive test, one performed by GWS 1 score, AT&T was named the Best Network in 2020. These investments are intended to keep us in that competitive position. But it doesn't stop there because we have another great opportunity, the one we continue to talk around fiber. So as part of this capital, we're going to be investing in fiber expansion to meet the growing needs for bandwidth that require a much more robust fiber network regardless of the last mile serving technology. Fiber is the foundation that fuels our network. Expanding our fiber reach serves multiple services hanging off at each strand of fiber. It includes macro cell sites, small cell sites, wholesale services, enterprise, small business, and fiber that's extended directly into our customers' homes and into businesses. We plan to reach 30 million customer locations passed with fiber by the end of 2025. That's going to double our existing fiber footprint. And investing in fiber drives solid returns because it's a superior product. Where we have fiber we win, we're improving share in our fiber footprint, and the penetration rates are accelerating and growing, given our increased financial flexibility. We're comfortable in our ability to invest and achieve our leverage targets that we outlined of getting to 2.6% at close and below 2.5% by the end of 2023.

Well, let me ask a follow-up just real quick on that. Your boss' boss, John Stankey, has been kind of vocal about opposing the Biden infrastructure proposal as far as it goes towards encouraging municipalities to build to close the digital divide. You guys have made your own announcements about trying to address some of those issues. So is the Biden infrastructure plan bad news for AT&T?

Well, I think let's start with -- we're still in the very early innings of shaping what this is going to be, right? It will go through some changes. The administration has been open to discussion, and we're actively involved in that dialogue to determine what we think effective policy should be. We're engaged, and we continue to be working with the FCC on also shaping that discussion with our input. We have some opportunity areas, we believe, in rural domains that the bill can help. And the right policy, we think we -- with the right policy around that with investment, we think that we can participate in these growth areas. The good news is that the guidance that we've given you in the core of our business, we think we have a lot of opportunity for growth in broadband. This would be icing on the cake. And if we're able to make some headway here, I think that this is an opportunity we want to build on. Look, we've already launched the emergency broadband benefit program, applicability to our customer base when this came to be on May 13. And these are temporary offers of $50 per month up to $75 in tribal lands that help eligible households pay their Internet and mobile bills. And -- but we're going much broader than that because we're doing our part to help bridge this digital divide. Over the next 3 years, we're committing $2 billion, building on the commitment of nearly $1 billion that we had over the last 3 years to help the nation's underserved communities. Renewed commitment combines a combination of low-cost broadband, community investment, The immediate help I just mentioned that we're providing through the emergency broadband benefit program participation. And in the short to medium term, we're launching AT&T Connected Learning, which includes digital learning platform for WarnerMedia and AT&T connected learning centers that will establish an underserve neighborhoods. On a long-term basis, we're working on the network planning and build-out and working with Congress and the FCC to develop affordable, accessible and sustainable solutions. And with regard -- again, we're early on in this. But with regard to municipal network build-outs, we support subsidized services for commercial infrastructure builds. And I think the reference that you mentioned really aligns to its misguided to support directing money to networks that we believe can best be provided by commercial operators because it aligns with the capital-intensive technology businesses that require a constant refresh and constant management. So opportunity here, but again, it's the early innings.

Yes. I mean telecom is a scale business. So all right, I wanted to ask another question along that vector on the broadband side before we kind of shift gears to wireless. I guess the fiber program at AT&T really kind of kicked off with one of the DIRECTV merger concessions. You got up to about, I think, 14 million by the end of 2020. I think there was about 1 million homes passed in 2020 itself. And the results we're seeing from the fiber net additions and sales and such are healthy. But AT&T is about to triple the amount of homes passed from last year, this year and then roughly the same amount next year on an ongoing basis. So what kind of share gain, what kind of growth acceleration from where we saw 1Q set, should we expect from that business?

Yes. Well, first, I think it's important that what we're working towards here is a very level loaded plan. This isn't, particularly with infrastructure build, something that we push a button and we're ultimately at the end state. And as a result, we're really focused on efficiency in that build. But fiber is a great technology. It's a great business for us. Long term, we plan to reach 30 million customer locations passed by the end of 2025. As I mentioned, that's a doubling of our footprint. Investing in fiber yields a fantastic return. And I think it's important, there's some elements of why that's the case. Fiber is a superior product. It is a product today met for the moment in time that we're in and beyond. We get close to day the symmetrical speeds of 1 gig. Think of that as the same speed up, the same speed down. That makes it very durable. But more importantly, this foundation of what we've built is capable of scaling to multiple gigabits in the near future. You'll hear much more about that here as we proceed. And where we have fiber, we win. We're improving share in our fiber footprint with penetration rates only accelerating. And so the strong return on investment's moving up. Expect this investment to generate internal rates of return in the mid-teens. This work-from-home shift during the pandemic highlighted fiber's symmetrical differentiation. And we expect, in a post-pandemic hybrid workforce and a home-based learning model, that even as students go back to school, we'll move into new models of tutoring at home using these video capabilities that we're going to see continued demand. And demand where now, the uplink is growing faster than the downlink. This strengthens that potential for fiber-based services. So let's talk about what we're doing even this year. And you mentioned an important element of kind of this restoration of our build and the momentum. In 2021, our fiber footprint expansion is well underway in 19 metropolitan areas. We plan to build to 3 million customer locations this year. This is an increase of over 2 million customer locations over 2020 as part of our integrated fiber strategy. And for the product reasons I just mentioned, we have strong fiber penetration potential. But importantly, though, is that we have incremental penetration momentum that comes from what we believe is one of the best value propositions in this space. And it begins with 20x faster upload speeds than standard cable, 99% reliability, low latency, a really simplified approach to how we bring that to market with 3 simplified pricing tiers. We've launched the new WiFi gateway for superior WiFi experience. It happens to be the #1 pain point our customers have. No data caps, no annual contracts. And on all our best plans, we include HBO Max premium bundles. This leads to share growth. And historical performance for us and our fiber footprint demonstrates that we eventually achieve a leading market share position, seeing positive trends in terms of the penetration on our new build. And put this in context, 7 out of 10 of all of our new fiber additions represent new household relationships to AT&T. This drives outsized wireless share growth potential in our fiber footprint. So as customers consume more bandwidth, they're moving up to faster speeds, lifting ARPU. Coupled with subscriber growth and expanding footprint, this all yields solid revenue growth. And as fiber build-out accelerates and the strategy shifts from just moving our legacy copper customers, it becomes a growth story. To mid -- we're already expressing an outlook here this year of mid-single-digit IP broadband revenue growth for 2021. And so I think the story is solid, has great potential and even provides incremental upside on the wireless side.

All right. So that's a good transition to the wireless business. So I think that -- we talked a little bit about capital investment. I think one of the things that AT&T kind of shifted gears on towards the end of last year was the kind of operational cost investment in handsets to new and existing customers. We've all seen the TV ads. And it had a positive impact. Subscriber growth in the fourth quarter and first quarter was solid, very solid. And I think what surprised people most was that margins were actually pretty healthy as well despite the spend on the handsets. So the question I get a lot is, how did that happen? What is being cut, if we're spending so much on the handsets, to get these subscriber numbers? And is it sustainable?

Yes. This is our largest business. So it's probably worthy of going a little deeper on this one. And look, we're pleased with the mobility results over the past quarters. We've added over 3 million postpaid net adds over the last 3 quarters alone, of which, 2 million were very important postpaid phone additions. We know our position in the market. Look, we're the third largest U.S. wireless provider. And our goal is to continue to improve that position, to do it through growth and to do it the right way. But I'm happy to say we're just getting started. It starts with to the question you asked on the offer, I think it's much bigger than that because it starts with this relentless focus on our customers and taking care of the customers that want to be with us through very simple-to-understand constructs, to join AT&T, but more importantly, we're taking care of the customers that are with us today. And look, we like our formula. We feel good about our offers, our ability to grow subscribers and profitability. And it begins with focusing on the customer with a simple, consistent offer and plan construct, like we did with unlimited your way, which allows customers to tailor plans around their needs. But to do it without [indiscernible] . They truly can tailor our unlimited portfolio of plans around each of their family members without a need to have a matrix to understand which ones you can actually select. We're also giving our customers flexibility to move into the latest 5G devices with affordable installment plans that we're making easier on their wallets by exchanging value for trade-ins. On the device side of this, extending the installment period, and frankly, it's extending the installment period to better match the true device lifespan. And customer response has been favorable. We're seeing continued an industry-leading low churn by driving higher-quality retention. But importantly, we're also driving higher quality intake through the distribution transformation that we've driven. Another key segment, though, to kind of, again, let's connect the dot to what I mentioned about this interconnection of our enterprise and our consumer business. Another key segment is supporting our continued momentum around our affinity discount programs. Think of this as the offers that we give to employees of business and government customers. These affinity discount programs, they enhance our -- they do 2 things, it's interesting. They provide a great value proposition for consumers who get them, but they actually improve our value proposition for business and government entities because we're giving them a benefit they get to extend to their employees. For example, FirstNet has enabled us to increase share where we had proportionately lower share in the past and serving public safety users. And we already have today 16,500 agencies who signed up over 2.2 million connections on the FirstNet network. And we're seeing strong demand continue. This is evidenced in both the agency and connection growth. But importantly, we have also extended a first responder appreciation offer to essentially the family members of the first responders who are coming into FirstNet. So we want to bring their families along with this. And with FirstNet, we get the added benefit of adding substantial network capacity, coverage and quality improvements. This is paying off. This is why we enjoy the position today as America's largest wireless network in terms of coverage. We're focused on growing the right way. And to do that, we have to drive efficiencies and effectiveness through the transformation that we're leading. That allows us to grow both customer volumes while expanding profitability at the same time. And on the heels of launching nationwide 5G coverage last summer, we're also seeing really strong demand for 5G devices, and partly because we've extended our 5G services to all of our unlimited plans, and we've created a very effective go-to-market strategy behind that with an intent to grow share. The wireless market, though, remains competitive. We really like our position, our strategy. We have the ability to serve customers in all segments: postpaid, prepaid, reseller and connected devices. And in our best plans, we differentiate with HBO Max. We have content with HBO Max that our customers love. And when we put this with our premium plans, we see a lot of improvements in the retentiveness of the customers, their satisfaction with that. And then we went a step further because we've strengthened our overall value proposition, by also including simplified security with AT&T Active Armor, extending 24/7 proactive security extra device protection and more tools to block unwanted calls. And this is available for all of our wireless customers at varying tiers with an entry level that begins at no cost, all the way up to the premium services. We view the investment in our customers as good business with an attractive ROI. And as you saw in our first quarter results, where wireless EBITDA grew by 2.3%. And as you heard from John Stankey recently, we plan to realize incremental transformation cost savings about between $1.7 billion and $2 billion by 2023, which, in part, allows us to reinvest to support the growth of our business. And key to sustaining this growth and profitability is our continued transformation efforts, targeting savings for reinvestment in growth. And an important one of these, and I suddenly mentioned it, but it's streamlining of our distribution and optimizing our channel mix. We rationalized, in the course of the pandemic, our distribution to come out of the other end with a smaller physical distribution, but a higher quality. And what this allowed us to do was materially reduce cost structure around that, but improve the quality of our intake. We're seeing this now. This is an element of our lower churn as we're seeing on the involuntary side of churn improving. At the same time, we're rationalizing IT systems and network operations, continuing to shift our applications from higher-cost legacy data centers to shared cloud infrastructure, to our question that we discussed earlier. And of course, we have this evergreen focus on efficiency and speed that simplifies how we support our customers: business sales, call centers, field operations. All of that allowing us to do an important element of our strategy and improve that experience. But at the end of the day, we believe that taking care of our customers, both the ones with us and the ones not with us; and the reality is that we're in a highly competitive environment where our nationwide peers, they change their offerings numerous times over the same period, and we're happy with the durability that we're seeing with our consistency, our simplified plans, our upgrade offers and the yield that they're driving. If you look at this in terms of the productivity that we're getting from our promotional spend and net additions, our cost per net addition from a promotional perspective is significantly down year-over-year. So we like the formula. It's working. We're going to continue to run it.

So we don't have a ton of time left, but I do want to talk about 2 more things.

Yes.

One thing is the big question coming out of 1Q. In 2017, postpaid phone net adds in the United States were, round numbers, 3 million. In the first quarter of 2021, they're run rating probably closer to 6 million. And all the children look above average as a result of that. What's happening in the industry do you see from your seat?

Yes. Well, interestingly enough, there's probably a lot of themes in this, but I think an element of this is obviously strong consumer demand on the heels of unprecedented stimulus. And that tide is obviously lifting all boats. I think that the important element that we look at in here is us ensuring that we continue to gain an outsized share with whatever opportunity wherever the market goes. And I think that's an important element of how we're looking at this. Our market share is 27% over the course of each of these successive quarters, we've moved our net add flow share from 30% to 36%. And it's showing the -- essentially the strategy we put in place working. And so regardless of where the final level becomes in terms of demand, then we want to make sure that we're taking our fair share of that through the constructs that we're bringing to market. And I think as it relates to what we're seeing and the confidence, hopefully -- and with this strategy, we feel we're well positioned to do that. But this is how we're looking at things. We see healthy subscriber growth. I mentioned I covered the over 3 million postpaid net adds over the last 3 quarters, and more customer leads to an improved revenue pool because it's the outcome, obviously, of what we're seeing here. We're seeing healthy trade-ups at the same time towards higher and unlimited plans, where we still have more room to grow. Mix is always an important caveat between our entry-level and top-tier plans, but we're really comfortable with the trajectory here. And putting this all together, we see a solid runway for 2% service revenue growth in '21. Now importantly, should any one of these factors exceed our own internal expectations, we'll have to take that into consideration. But remember, we were at 0.6% in the first quarter, which already suggests that we see an acceleration of growth over the next few quarters and our participation in whatever industry growth there is. And so in our view, we're ready to address the competitive responses that we've seen in the marketplace. Frankly, we've anticipated them, meaning we feel we're going to remain competitive through this any structural shift that we see relative to the ebbs and flows of an industry. But lastly, there's a number of costs that we're anticipating that could impact our business in varying degrees. They include not limited, of course, but to our 3G network shutdown. Just to remind you, we're shutting down our 3G network in February of next year. So we want to maintain some flexibility until we have improved visibility to the very point of the question you asked.

And just to be clear, what would the growth rate be if roaming was normal, which it obviously is not?

Yes. So from a roaming perspective, we expect not a full, but some modest recovery in the second half. So you'll get a better feel for that. We haven't broken that out specifically. But clearly, there's been a big impact on the roaming element. But the combination of units, as I mentioned, the increase in that revenue pool, give us the confidence that we will see that service revenue growth here that we've at least provided the outlook on so far over the course of the rest of the year.

And I guess just to wrap it up, I think we touched on this a little bit at the beginning. But for 35 years, AT&T was everybody's steady Eddy income portfolio component, and that's going to change in a year. And I guess we've got 2 minutes for you to explain to investors why this is a good idea for them that we change our investment policy and dividends, pivot to higher CapEx and focus on growth?

Great. I got the message, be shorter on this, and I will. First, I think it's important that after close, the expected dividend pay to be in the 40% to 43%. But again, it goes back to this. The reference dividend change is after the close of the transaction. I think that's important to understand. And then as we map it now to this dividend payout range on what we anticipate to be of the remaining communications company, free cash flow of $20 billion, we're talking about free cash flow post separation yield on that of about $8 billion to $9 billion, if you apply 40% to 43%. But importantly, though, this is prudent positioning against the smaller size of the remaining business that we have, given the cash flow that's going with WarnerMedia, and then you have to remember the cash flow, what we announced before this, that's going to go with the U.S. video business separation, juxtaposed against our investment opportunities. After close, I think it's also important to note that this smaller company and the dividend, we will -- that I just articulated that we'll pay on that, remains an attractive dividend yield. It would represent the top 95th percentile of yield for dividend yield investors. And post-close, this is going to allow the company to better capitalize on the long-term demand for connectivity that we just spent time discussing that we believe provides attractive return opportunities in 5G and fiber. It moves to a payout ratio in the low 40s versus the high 50s pre-spin. It significantly increases financial flexibility with $43 billion of net debt relief that comes on the go down of the transaction, plus a payout ratio supporting investments in growth, debt reductions and then after we hit our target levels of debt, even share repurchases. And as we already talked about, we're investing more in 5G, more in fiber, taking advantage of strong ROI and returns that can exceed our cost of equity. And as always, this is a Board decision.

You did it perfect. Thank you, Thaddeus. A good way to wrap it up. I appreciate it. Thank you for joining us. Thank you, everyone, for being a part of the conference this year again, and I look forward to seeing you later in the day. Cheers.

All right. Thank you. Thank you, David. I appreciate it.