Phil Cusick : Turning to fiber. Gigapower was a great announcement, but a little smaller than we had expected. John, how do you think about the 1.5 million versus the potential of that venture or for others in that model? And your own on-balance sheet fiber construction of — I think you said $2 million to $2.5 million annually. It seems like a slower pace than we had been discussing. Is there anything changing there? And then finally, just to John’s question, one quick clarification on the free cash flow. Pascal, is that working capital going to contribute $2 billion to free cash flow in ’23? Or is it just offsetting what had been a $2 billion drag, I think, in ’22?
John Stankey : Phil. So first of all, as I mentioned in my comments, I view the fiber portfolio as that, a portfolio. It’s a portfolio of options for us to look at where the return characteristics are most optimal on how we deploy capital around that. And I’m trying to be pretty overt in my commentary to all of you that we understand that we need to be very disciplined in demonstrating to all of you that each of those portfolio decisions and how we put capital against that is, in fact, driving acceptable returns. I’m very mindful of the fact that the Gigapower announcement is a model that the investor base is unfamiliar with. This is something different and something new. And I want to be very sensitive to the fact, just like we did when we were deploying in-region fiber and stepping up our investments.
I’ve tried to be transparent with all of you around what our progress has been on the key drivers of the economic return of that investment. We’ve been sharing pretty aggressively things with you like ARPUs and penetration rates and a variety of other things that give you the confidence that in fact, that that’s a sustainable, smart long-term investment. This new Gigapower model is a bit different. And I think it would be normal for any of you to look at it and say, gee, it’s going to return at the same level. And so to demonstrate to you that I’m serious about ensuring that every incremental investment decision we make in this look, 1.5 million homes, you may say, well, that’s not a lot. It’s over $1 billion of investment to be able to go do this.
We set up this first tranche to be able to come back to you over the course of 18 months and give you information that raises your confidence and in fact, we are driving the returns on this in the way that we anticipate them to be attractive and the management team that has been put in place and how the partnership is set up is intended to do exactly that. We will be in the market very, very soon right after the announcement. I intend to have 12 months of penetration information that I can bring back to you. And you can bet that when we’re successful doing this and we demonstrate to you that we have the numbers to back it up that it won’t necessarily still be 1.5 million. I would also tell you, I want to be thoughtful about, as I’ve made the comment what is it that we should own and operate 100% to ourselves and what we want to do within the partnership, just like we might have done when we were building wireless infrastructure a couple of decades ago.
And if we hit the ball out of the park and things are great, we may choose to do some of this in-house and on our own and not necessarily subjected to a partnership. On the other hand, if we need more scale and we need to move faster, we have a vehicle now that’s set up that we can move very quickly to increase the amount of funding and the amount of capacity that’s in that entity to take advantage of that. And so we’re going to have data that we can come back to you with, and we’ll, I think, do the right thing and try to make sure that you’re moving along with us every step of the way. And I just see this as another tool that gives me a lot of flexibility and a lot of options. Relative to the in-region fiber side of things, as I said, I’m looking for a portfolio of returns.
And what I tried to stress in my opening remarks is, I’m giving you a characterization right now of what we think are high-return options within the 30 million passings that we committed to and what that looks like, and I’ve tried to clarify because I know some of you have been trying to do the math on it. But we have these other options now. I want to balance out what I think the return characteristics will be through the Gigapower initiative and we are going to now see some volume and capacity coming in out of region — or excuse me, out of the 30 million build that will be subject to BEAD funding. And some of that subsidy may have a very different return characteristics than some of the stuff we’re doing organically in region right now. And I want to have options open to understand that and look at that aspect of the portfolio as well.
And I think we’ll get clarity on that is on the end of the third quarter of this year that we start to see where we’re successful in bidding for that money, how much it is, what kind of a build line do we put on the business in terms of having to add capacity to get the bill accomplished and how does it fit into the kind of operating territories that we think set us up for a geography and a footprint that’s intelligent for us to operate moving forward. So that’s kind of how I think about it in aggregate, and I’ll let Pascal pick up your question on the free cash flow clarification.
Pascal Desroches : Hey, Phil, the simple way I think about the majority of the $2 billion is this. We have deferred acquisition cost that’s on the books where the cash went out in prior years. That amortization — it’s going to continue to be amortized against EBITDA in 2023. That is noncash expenses burdening. So when you — just the sheer mechanics of adding that back to our free — to our EBITDA will elevate the cash EBITDA that the business produces.
Phil Cusick : John, if I can follow up on one. Start to be a split. Do you look at Gigapower and BEAD spending as alternative places to spend your capital and effectively now slowing the organic pace to get to that 30 million?
John Stankey : I’ve given you the pace of how we get to the 30 million. And so I don’t see that changing. I think we’re committed to what I just articulated to you. So if you’re asking am I going to see — am I going to come back and give you an incremental revision of that 30 million to substitute? No.
Pascal Desroches : But to be clear, Phil, this — the BEAD money and the Gigapower are incremental to the 30 million.
John Stankey : Yes, if that’s your question, 100%.
Operator: Our next question comes from the line of Simon Flannery with Morgan Stanley.
