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

Good morning, and welcome to day 2 of the JPMorgan Technology Media and Communications Conference. I'm Fred Turpin, global head of media and communications for JPMorgan. It is my pleasure to introduce to you this morning John Stankey, who will become the CEO of AT&T on July 1. We're very excited to have AT&T with us today to kick off the second day of our conference as our keynote, and there's probably no other company in the world today that is at the intersection of all the key trends in my business from the media and communications perspective. John will be interviewed this morning by our star research analyst, Phil Cusick. And I'll turn it over to you, gentlemen. The screen is now yours.

Thanks, Fred. John, thanks for being with us virtually today, and congratulations on your pending promotion. I think it would be really helpful given the broad swath of the economy that AT&T touches.

Let's start off with COVID-19. It's been a few weeks since you reported. Can you give us an update for the business in the last few weeks? How is the company responding to the current health and economic situation to help employees and customers?

Sure, Phil. Before I do that, I probably should give a friendly reminder to our digital audience here that some of the comments I made -- going to make today are forward-looking, and they're subject to risks and uncertainties and our results could differ materially. And if you need more information, you can go to our website and see a lot more information on our SEC filings. Phil, what I would tell you is I think it was less than a month ago we spoke to you after the first quarter earnings, and I don't think we've seen anything in the environment that changes the perspective that we shared at that moment in time. There's still an incredible amount of uncertainty. We're all trying to understand the way out of the current set of circumstances. I think the only reassuring thing I could say is in that period of time we haven't seen anything through the month of May that would cause us to say the assumptions that we had been making around our cash generation capabilities and how the business is going to operate are any different. We're actually seeing that play out very much the way we expected, thus far. But the big question that sits in front of all of us is what this climb out of this hole looks like and what kind of dynamics occur in the second half of this year. If I were to pull the business through the part, the wireless business at its core remains very strong, although, as we shared on the earnings call, I think the activity environment is a bit suppressed and will probably continue to be a bit suppressed over a period of time, probably because of distribution has been impaired and starting to come back and still is not at full strength. Nonetheless, the activity levels that we're seeing in the business are strong. Clearly, roaming dynamics have put some pressure on revenues, the fact that we're extending customers that aren't in the best position to pay their bills is going to put a little pressure on things, but the core of it is still looking really good. The entertainment business, if you look at pay TV, it's doing what we said we expected it would do. Certainly, there's softness in the small business segment as bars and restaurants, of course, are possibly closing, not reopening. We've seen activity on gross ads dropped because folks, frankly, don't want people in their house doing work. But the folks that have the product are engaging with it more than they were prior to the crisis, and that continues at this moment. Business continues to triple along the low end of the market, again, just getting more impact than [indiscernible] to the market. But we have a steady franchise there that's built with a lot of global networks, and I expect that the EBITDA characteristics of that are going to remain largely intact. And then we fight through some of the battles on the media side of the house. It really have changed. We're sitting there looking at the studio and asking ourselves when does production get back and when the theaters get back. Until both of those things happen, it's tough to have a prediction of what's going to happen in the studio business, although it's not a large contributor to our annual cash flows. And then we're seeing the networks hold in there. We're not as over-indexed on sports as others. We are seeing some pressure on advertising, as we indicated on the earnings call, probably a 20% decline in aggregate that we expected and we forecasted into the cash flow characteristics we gave. And then we're ready to go at the end of the year -- or the end of the month on HBO Max, which I'm really excited about. We expect the customer demand to be as high as what we expected when we shared it with you on our Analyst Day on what was going to occur. Our investment levels, probably a little bit tempered for this year because a lot of that was production-oriented. And frankly, we're looking at a situation where we can't drive as much production as we might like. I expect that will probably snow pile a little bit into '21 as a result of that. But nonetheless, our customer acquisition push is going to be as aggressive as it was prior to the epidemic.

Okay. Let's dig in first on the impact you've seen on large enterprise and SMB. What have you seen as different states gradually encourage reopening?

Well, on the SMB side, I think it's a little early to tell whether there's going to be a bounce back. In many instances, I think some of the hardest hit areas, you still have owners that are making decisions not to reopen. I think Dallas is probably one of the areas, for example, that's a little bit earlier in the forefront of things, if you look in Texas, in general. And we have a lot of restaurant owners that are saying, with the kind of conditions that are put in place, better for them to continue to run a take-out business and open up when they want to get back to normal, so to speak. There's the same dynamic going on in retail, where, because of some of the restrictions, it's a selective reopening on the retail side. I think we're going to be in a fairly slow climb back out at the low end of the market. Look, we've got some enterprises that are spending, especially as they reconfigure their business to deal with a more distributed workforce, and we're right in the thick of that. But that's offset by a couple of industries that are just in a significant recovery mode. And travel and tourism is going to be a tough place for a period of time. We're seeing a little bit of activity coming back in some hoteliers and some segments of the industry, but it's going to be a bit of a push for a period of time. And I don't expect this is going to be a quick bounce back or snapback. We're expecting this is going to be a fairly slow climb out of this, this year.

Okay, okay. Let's follow up . You were certainly talking about HBO Max launching on May 27. What are your current expectations for the service? And talk about how that fits into the overall AT&T ecosystem?

So look, I think it's an unfortunate time, but for launching a product like this, I think it helps. It helps from the perspective of people looking for things to do inside their homes right now. And even by the end of this month, with some of the relaxation that's occurring, I think people are still a little bit more centered inside of their home than what they might be otherwise. And I suspect as a result of that, experimentation, test and trial are likely at a higher level than what we normally expect in a more distracted society. I think that's going to be great for the product because there's such really strong library that comes out of this. I think there's enough new content that folks are going to be interested in that to go and experience it and test and pilot. I think they're going to see a great product that's there. And we're going to be attaching to the products and services that we offer that I believe will put some compelling offers in the market that folks are going to look at and say, "Why not?" So I actually believe timing is good in that regard. Certainly don't want the current circumstances to extend too long because we've got to back to production in order to keep the inventory fresh, and that's going to be an important element as we navigate through the summer. As you've heard, and we publicly disclosed, we're going to be available on a broad cross-section of distributors, which I think will help the momentum of the product coming out the door. We've been pretty clear on where that's going, and I'm pleased to say we're going to be in virtually all app stores or maybe one exception. It looks like we may not be in the Amazon Fire app store when all of this is said and done. But I feel really good about the distribution dynamic, the availability of the product. Those who are HBO subscribers, who can immediately move into Max, there's going to be a really strong push day 1. I think it's going to generate a lot of word of mouth socially. It's going to generate a lot of activity. And then what we're doing for promotions of attaching the AT&T products, I think, will be another boost that's going to be really beneficial. Quite frankly, what we want to do is we want customers to start thinking about their connectivity, having benefits beyond just connecting it, but there's emotional benefits of content capabilities that they can go into and attach themselves because we want to know more about those customers, so that we can grow our advertising business over time and begin to take a subscription-based service and extend it into advertising-based capabilities and offer even a broader cross section of content over time. So HBO Max is at the front end of getting entertainment distribution platform. And I think it's really important to understand. We've -- if you think about time, we used to distribute entertainment over broadcast networks. And then we started to see proprietary cable networks being built in proprietary distribution systems that allowed for the dawn of the cable network in the 500-channel era. And so satellite systems were built, cable networks were built, proprietary telecom systems were built, and those became the aggregation and distribution point for a period of time. And we're now on another transition moment, and it will be these new platforms, like what we're building with Max. It will be the aggregation point and distribution of entertainment moving forward. And we think it's important to have one of those as we move into the next 5 to 10 years of our business.

So talk about Max, and we have AT&T TV in there as more intelligent distribution platforms. And what does that mean for the future of the legacy linear satellite platform?

So what Max and AT&T TV have in common is they're both software-based. They're both independent of any proprietary hardware. They allow a customer to get access to content over any device and any hardware platform. They're low friction. They can be deployed literally by a flick of a computer switch somewhere in a back office, and that's an important aspect. And I think what you're going to start to see is the customer base of Max grows, and it becomes what I would call the more scaled distribution element within AT&T, certainly something that surpasses 25%, 28% of households, like our pay TV offering. That becomes really the lead basis of entertainment, how we get into most U.S. households. As pay TV continues to restructure, maybe moves from the 500-channel land down to the 300 down to the 200 and becomes a more consolidated offering of live, sports, unscripted content news, it's very massive. But I think, over time, we're going to see these 2 bundled together and packaged together, and you want a platform that can distribute both. And so AT&T being software-driven, HBO Max being software-driven, user interfacing capabilities, bundling and pricing start to move together, I think we're in a very natural place to see that begin to recur. And our TV business and our SVOD business start to become one, as we get out over the next couple of years. And that's the transition that occurs. In the meantime, our marketing emphasis is on software-driven TV to have that in place in most households that we service, so that we can make that transition even smoother and easier for the customer.

So you're taking us down a path where you rely less and less on -- it sounds like traditional distributors of TV and go more toward direct to the customer. What does that mean for the content you put into TBS and TNT? Does that valuable sports content eventually move to more of an on-demand SVOD-type structure?

I think the element that's probably the most survivable element of the live linear construct is going to be sports content. And I think that those networks and the particular purveyors of those services are going to continue to be relevant, doing that for a period of time, as well news, as well unscripted content. I think if you look at it, a pure general entertainment construct, or a channel or a network that is strictly general entertainment-oriented are going to be the ones that are probably more challenged and what we consider live, linear, the pay TV bundle, and that's why when I talk about it skinning down in time that I expect that's going to occur. I think what you're going to need, if you think about any sports league or really anybody who creates valuable content, they want as broader distribution as they can possibly get. And I think the reality is that if you're a leagues, and you've got games that you want people to see, you're going to want to work with distributors that are able to ensure that your content gets out in front of most U.S. households. And as customers start to do what customers choose to do, which none of us can fight that battle, if you're a distributor that can offer access to most U.S. households through a variety of different platforms, I think you're in a unique position, and I think you're relevant in that case. And certainly, we want to try to position the consolidated AT&T and Warner Media to ensure that we're able to do that, whether it be through an SVOD platform, like HBO Max, or through a pay TV offering or ultimately a consolidated bundle of those that has some value to the customer and some benefits of how that occurs. I think it's important that you have that transition and be able to do that gracefully to deal with the dynamics of how the customer behavior is going to shift over the next couple of years. Frankly, I think we are uniquely positioned in that regard to work with the leagues, to work with the purveyors of that content and have the right kind of distribution platforms that make sense.

And obviously, you've been working toward this for a while with HBO Max, but does the pandemic accelerate the transition that would have happened anyway? You recently talked about maybe an acceleration in cord cutting later in the year. Are you sort of preparing for that and starting to transition that content faster than you would have otherwise?

Yes. I don't think we know yet, but if I were to just kind of step back and think about what I expect will happen, I expect we're going to be in a period of time where there's going to be some economic hardship that starts to move through parts of the country. And I think as a result of that, any discretionary spend in the household is going to come under some review in that yard. And so will there be some people on the margin in the pay TV world that decide this is the time for them to make the decision to get their entertainment in some other fashion? Yes, I expect that, that's probably going to rear its head the latter part of this year. I've already shared, we know, for example, that there are small businesses that have disconnected entertainment-based service. They may value those things, but they may never come back. They may be one of those companies who operate on a shoestring, and this hardship that occurs is just so significant they never reopened their business, and that's going to put pressure on us. So I think, in some regard, on the margins, we're going to see some pressure on the dynamic of people shifting away from general entertainment off of the pay TV offering and getting it in other forms of distribution. It's why Max is coming out at the end of this year. And this month is so critical. It's a place where people pivot to, and I think we'll be in a unique position. And what happens in the balance of that, how people come out of this at the back end, it's anybody's guess. And it's whether or not this consumer behavior dynamic stick, but we'll be in a great position to respond to it either way.

And you spoke a few minutes ago about getting distributors up and running with Max, and it sounds like you expect a lot of deals to be announced over the next couple of weeks. How should we think about that becoming a win-win, both for you and the distributor of legacy HBO products?

Look, today, if you think about what happens, so first of all, we're -- we allow distributors to the extent that they want to incorporate this into their user interface in their environment, allow people to navigate into Max the best -- something that we've offered. And I think they find it attractive that allows a customer to come to one place to aggregate their content and then not have to leave that HDMI input on their TV if they want to navigate through it off of the set-top box. And there's a wholesale construct around it that's attractive to them, just like there was with HBO, where they, on a monthly basis, can participate in the value, the customer choosing to use a service. And we think that's a friendly way to do business, and it's a way that they can ensure that their offerings still have value and engagement with the customers. So that, I think, is first and foremost. Secondly, the product itself will still have a very similar financial characteristics to a distributor as HBO is a better product. It's a product that uses twice as much content in the same price. That's got to be a great selling proposition as you're starting to work with the customer and convincing them if they want to bundle and bring something together. So I mean, that's a pretty straightforward value proposition for somebody to communicate to the customer, to give them more and not have to pay more. I think in this environment where we've got economic stress that's occurring, if you're a pay TV distributor, to be able to put that into your message and give customers that kind of dynamic, to be able to look at more content at home while they're captive, that's got to be a good thing for you.

Our family is certainly ready for more content. What about sharing the advertising data with distributors? Are you able and willing to sort of, again, go back to that win-win structure? Does it make sense to wrap that together as well?

So I think our approach, Phil, from the start of time, has been that we don't view ourselves as a captive walled garden approach, where we're going to be the only place that's going to win. We view part of our business as being distribution platforms that allow others to be able to come in and monetize on the fact that we build infrastructure and invest in customer base to be able to distribute things. And so when we've started Xandr and we went through the dynamics of advertising, a key element of what we were doing there was always about taking information and data and taking products out to the market that help others monetize their advertising inventory more effectively. So the information and the insights we get, not only from our entertainment business, what we get from our Internet business, what we know from our customers in general and how they interact around the wireless products and services, all within the constraints of our privacy and disclosure guidelines become insights that we share back out in our Xandr platforms. And so if somebody chooses to come in and do business with AT&T and distribute over our platforms, they will have access to that same set of insights that we're using to power our owned and operated inventory for their inventory that they wish to bring into the platform and distribute. And we absolutely believe that's going to be a stronger value proposition over time. We think people who own and operate advertising inventory and people who have content are going to want a place to come and monetize it where the splits aren't egregious, where most of the rent isn't going to the platform owner, that goes to the person who creates the intellectual property and actually has the audience or generates the audience. And we believe our products and services are going to do that. And so as we move out over time and we move from just SVOD to an advertising-supported video-on-demand, the whole value proposition around that is a platform that aggregate other content into an attractive fashion, have attractive splits. And when more content comes in under both subscription and ad supportive, that will only generate more audience. It will be good for all purveyors of content, rising tide and lift all boats, and it will be a more powerful business model over time.

Okay. With Brian Lesser departing, you -- I think you wrapped Xandr into the Time Warner advertising ecosystem. Can you give us an update on that structure? And what has the success been there so far? This combination of the advertising and data knowledge was a big pitch for the Time Warner deal from the first place. Has that been successful as you would have liked? Or has it taken a little bit longer?

I think everything always takes a little bit longer than you'd like whatever you -- when you set -- you try to think about transformational plans. Look, AT&T is a business, generally speaking, across the board, we are transitioning many of our businesses as is the rest of corporate America and there's a lot of different dynamics going on. And certainly, the pandemic itself has put many of us into the situation where we're even having to go double time on those issues. The purpose of how we restructured Xandr within Warner Media is very straightforward and it's very consistent with what I just characterized, which is we want to make sure that there's high affinity for how we build audiences in media and how we ultimately sell advertising. So 2 things to think about here. One is our next rendition of our distribution platform after Max comes out with an SVOD offering, a subscription offering, is to now add in that AVOD supported capability. And in order to do that, you don't want to build a tech stack that's distinct and unique on that platform from a tech stack that's distinct and unique for what you're building in your advertising business. To get the level of technical integration and collaboration, I'm a big believer, over the years, as I've done various M&A, that you've got to be in a situation where the fastest and best execution comes from one leader making a decision on that. Jason Kilar has come in. Jason is very, very talented. I think most would have a hard time arguing that he's been through a couple of cycles on these things. He understands how to build platforms that are supported by both subscription and advertising. He's been through these battles. He's had great success. Jason is now the leader, if you think about it, of both our advertising tech stack and our entertainment tech stack, has great software expertise, has great skills to do that, and he is a great product guide. And that leader is now willing to make those decisions. And I think to your point, he's going to quicken our execution and allow us to make sure that we can make this next product iteration in an effective fashion. So that's kind of point number one. Point number two is we sell to customers the same customers. And customers today, even more so now with the pandemic, are looking to pull every lever they can on how they invest their advertising dollar. And as we see these shifts occurring away from simply the reach of linear TV and wanting to augment the reach of linear TV with more targeted products, possibly addressable, possibly through digital-owned and operated, it only made sense for us to have one account team and one approach to the customer to be able to offer the full portfolio of what AT&T has under its umbrella for owned and operated capabilities, while still continuing to develop our platforms that allow others to bring inventory in from the marketplace. And so our owned and operated inventory is now being represented by one unified account team, with one message and, again, one leader communicating what that value proposition is. And I think, intuitively, most of the people on this call would understand that, and I can tell you definitively, prior to making the decision, I spent a lot of time out with the customers who buy it from us, asking them the question, "What would you expect to see us do differently in this space?" And I was getting the answer back is, "No, you really need to show up here with kind of one face and do it in unified fashion." And so I'm a big believer of listening to the customer, and that's another driver as to why we made that change.

Okay. Let's transition a little bit to mobility. AT&T has a goal of nationwide 5G coverage by midyear. How is that build going? And is the company facing any supply chain issues in terms of network equipment?

It's going well. Look, we've got -- we're starting from a very unique and strong position. The -- and you're seeing it starting to show up on virtually every national test that's out there. Our embedded network is performing as well or better than any other network out there right now. The speed differentials that are occurring, not only for our larger population of our customer base, but the uniqueness that we're offering in our FirstNet space is really unparalleled and feel like we're playing our game well and coming from a position of strength, and that's only going to get better. If you think about it, since the end of '17, we've added over 70% capacity into our network, and that is starting to show its dividends and performance. And our broad spectrum holdings, all the way from what we have in millimeter wave down to low-band and mid-band spectrum and having the flexibility of allocating traffic amongst those, is allowing a very, very effective transition to 5G. And so we're seeing the strength of that core LTE network get better as we're deploying all the technologies that LTE-Advanced allows. And at the same time, now starting to layer 5G, and to your point, we'll be in a situation where, in the summer, we'll have that nationwide coverage of 5G. I think you know our customer base really well. It far over indexes on Apple products. They're not as consumed right now on 5G as an offering because there is no 5G Apple product, and there won't be probably until later this year. I would expect at some point in time after, we'll make an announcement on something. I believe our network will line up well to when those product offerings possibly could occur and come in the market. And we are going to be in a great position through the combination of the network being ready for nationwide 5G across a variety of spectrum bands to having the right handset portfolio that starts to emerge at that time; and three, giving our customers a reason to do something with buying into better plans and faster speed, which will be great HBO Max promotions associated with that, that will be in our better offerings, our higher-end unlimited offerings that I think is just a natural dynamic that will help us, as we move through the latter part of this year. So I feel great about how things are lining up. And if you look in the rearview mirror and you look at how the first quarter went, you saw the customer statistics, you saw the growth in service revenues that were occurring prior to the pandemic happening, you saw what was happening in margin expansion that was effectively occurring, we were playing our game, and we're seeing the results. And we're going to continue to play our games.

Okay. It seems like the near-term business case for 5G is around pulling customers into higher spending packages as you said and HBO Max helps with that. What's the medium- and long-term business case for 5G? How can this really drive the business?

Look, I think we're going to see some unique use cases start to pop up in the enterprise. And you're seeing some of this being written now around, especially in the dynamics that are occurring in this environment as workforces get more distributed. And what 5G enables, where it's broadly deployed, not just in, what I would call, foreign metropolitan dynamics, is it allows that enterprise to think about a highly managed wide area network with incredible levels of security that supports the kind of environments that we're in today. And so I think it plays very well into the enterprise thinking about more extended managed network and having the ability to go and deal with the workforce that's out there as well as new business models that we've talked about. You think about managing a distributed environment, like a manufacturing, or you think about zones, like medical communities and medical establishments, and what can occur, I think those use cases in the midterm will be the ones that we see start to pop up. That really demonstrate the architectural strength of 5G and what it can do, probably more so than what we see out in the distributed consumer space other than faster networks that are able to handle more traffic are a good thing for consumers, and 5G will certainly be a step that helps in that dynamic.

Okay. And you've withdrawn your guidance, but how should we think about the long-term cost cutting opportunity for AT&T at this point? And does the 5G network transition sort of drive into that?

The transition that our business is going through, Phil, and that we've characterized for you necessarily changed because of the moment we find ourselves in right now. I think the opportunity for us to shift this business over the next couple of years is significant. I'm often asking, what is the difference in the transition between with Randall leaving and me coming in, and the answer is really isn't a difference in direction, it's just a moment in time. We've been a business that a tremendous set of assets -- we've done a several -- Randall has done a great job of bringing together a lot of tools in the toolbox. And at this moment in time, even before the pandemic, it was about making those tools work well effectively and repositioning the business and refocusing on the best of what we have. And that is what we would be doing, whether this transition was occurring or not. It just tends to fall to me now to carry that forward. And part of that repositioning is getting focused on where there's growth in this business. And where there is growth is it's in broadband connectivity that's driven by fiber or wireless, and that's going to be a key emphasis and element of that. And it's about software-based entertainment distribution, and that will be a key element of it. And now it's time to make sure that the broader AT&T that isn't circled around those areas, rationalizes and reengineers. And in looking at it in that fashion, getting those entities to grow, complex, distributed networks and businesses that are built on fiber, in complex networking distribution, what we can do in businesses, in small businesses to serve broadband connectivity that are -- that's fiber-based, what we can do to continue to propel higher bandwidth solutions in wireless, that is the focus of the business and now start to extract out all the dynamics around it that don't support it. And I think the opportunity is significant, meaningful. Now add on a pandemic, where, to your point earlier, you're seeing pretty dramatic changes in consumer behavior, and you can choose to get into the slipstream behind that. I am hopeful, and I would expect that customers that have had a threefold increase on their online shopping experience over the last couple of months to acquire a wireless services might understand that, that's a good way to do business moving forward, and it's a clean and solid experience. And as a result of that, all the work we were doing for in-home distribution and what we can do to allow that to be a customized, but more frictionless experience, a lower-touch experience will start to take off, and that might allow us to reengineer our distribution dynamics as a result of that. Getting in behind some of the things that this pandemic is accelerating and some of the consumer behavior dynamics that are occurring, I think, is really key. I mentioned earlier what's happening with software-based entertainment. The nice part about our AT&T TV offering and what we're doing on Max is that they are low-touch distribution alternatives. They're about getting the customer into the product without even, in theory, having to be in their house to do that. That's a good place to be, and we should be able to ride that and continue to manage some of our cost and distribution arrange near this business.

Just one follow-up there, and then we're out of time. But you mentioned rationalizing and reengineering some of the things that don't drive the growth side of the business. Do you think you're -- with a new -- you're coming in as CEO. Does that make you think harder about spinning off or combining some of those businesses to drive efficiencies that don't necessarily lead to the growth aspects of the business?

I think the business -- not just because I'm coming in, I think the business has been taking a hard look at any place that we can extend the balance sheet further and do things differently. And I can tell you, I'm laser-focused on it right now. I believe there's a tremendous business case for AT&T to continue to take the great success we've had with fiber, thus far, and push it further and faster. I think it helps our wireless business from a density perspective and a performance perspective. I think it helps our enterprise business in getting more endpoints, as we can walk up to customers and talk to them about being fiber fed, and I know it helps our consumer business. And so any asset that I look at and say it can further that objective and allow us to deploy capital against that and then drive return into that space, for me, is a win right now in our company. And I think that's the case even before this transition. And so yes, I'm going to look for every opportunity we can to ensure that we're putting the next marginal dollar or the next discretionary dollar against supporting that, while we're continuing to work on our abilities on the entertainment side of the business to generate audience and have a relationship with most households, so that we still know about that customer and understand how to market and sell and have a relationship with them associated with that connectivity. And that is the focus and the point on this business right now.

That's a great way to end up. John, thanks very much for your time today. Thanks, everyone, for joining us.

Phil, I appreciate having the opportunity to talk with you about us. I hope you're well and safe.

Thank you. See you soon, John.