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

Good morning, and good afternoon, everybody. Welcome to the final day of TMT Barcelona. Unfortunately, we're virtual this year, but it's our great pleasure to welcome John Stephens, the CFO of AT&T. Welcome, John.

Thank you, Simon.

Before we get started, please note that important disclosures are on the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And I think, John, you have some safe harbor as well.

I sure do, Simon. First of all, thanks for having me. Always appreciate being with you and I enjoy spending the time together. Some of the comments I'm going to be making are forward-looking that are subject to risk. I'd encourage everyone to look at our SEC filings and our website information. And lastly, as everyone knows, the process for the C-Band auction has begun. So we'll -- we're going to have to adhere to the quiet period rules with regard to that. That being said, Simon, let's get started.

Great. Well, maybe we'll start with some personal news. Congratulations on your retirement announcement. You're going to be leaving in March. Perhaps just talk us through why now? And a little bit about Pascal for those who don't know him.

Yes. Great. Thanks. I'd like to say, I'm excited about it. Simply, I've been in the job, it'll be 10 years when I retire from what it was announced. And so it's time, logical time for change. My wife and I and our family has grown, and we have some interest in doing some other, if you will, other things in the next chapter. So we're really excited about it. Needless to say, this is something my family is waiting for, for a while. With regard to Pascal, he's going to do great. You'll enjoy him. He's got a lot of experience. He's been with Time Warner and Turner, a long time, a very storied career with regard to -- prior to that. And a very, very sound business and technical expertise, but he's also going to have a great team. We've got a great finance team here at AT&T, and they'll do a great job working with them and support them. So feel really good about the situation. And excited for the momentum of the business, quite frankly. And as you saw in the third quarter, feel really good about that, and that also makes any kind of transition much easier.

Great. Well, I'm sure we'll have a chance to catch up before you leave, but good luck with the transition. Let's talk about the COVID situation. You talked about Q3 and certainly some encouraging signs in terms of subscriber momentum across the business, across the industry, frankly. But how has AT&T been navigating COVID? And how do you see this going forward?

Yes. So a couple of things: One, we've been focused on safety and security of our employees, our customers. We've been focused on continuing to provide great service to our customers. And when I say that, I'll tell you, if you think about the dramatic shifts in network traffic, from the urban cores to the suburban and rural areas and the seamless way, we've been able to do that. As many of us, Simon, work from home and traffic jams are not what they used to be, even in major cities. The empowerment of that, the enablement of that comes from the great networks of companies like ours. So we've been really proud of that. Certainly, the COVID has hit our -- from a product set, it has provided a reassurance of the quality of the resilient products of broadband, wireless connectivity, those aspects, and those have done really well. It's challenged the media business, the closing of theaters. The challenge with getting production completed and having to postpone or delay production. So we are seeing those challenges. We're getting through those. We've got a lot of production back up and running. It's -- we're doing it safely. We're doing it carefully, but we're seeing that come back. You've seen us open back up our stores. We're still careful. We didn't open as many stores as we had. We went through a transformation and a streamlining of that process. But we are getting through it. It has definitely had an impact on us. I firmly believe, and I'm encouraged by the vaccine that we are -- we'll soon be able to see the light at the end of the tunnel, that we will get through this. And then we'll see a return to -- I don't want to say normalcy, but a more normal environment. With that being said, we had a really good third quarter with Wireless. We -- between prepaid and postpaid voice, I think, we led the U.S. industry in net adds, 5 million total connections. Really great broadband numbers. We saw the announcement with Wonder Woman. So we're taking this challenging time and making the best of it for our HBO Max, for theater owners, and working with the talent. So we got a lot of really good things going on in a difficult environment. But we're becoming more optimistic -- careful but more optimistic as we understand the storage of the vaccines and other developments.

Great. Well, in addition to your announcement, there's been a lot of other changes at AT&T. Obviously, John Stankey has taken over as CEO. Now we hear Bill Kennard is going to be the Chairman of the company. So what would you say have been the biggest changes since John has taken over? What are the key priorities for the company over the next few years now?

Yes. I think, John has been very clear. We've been clear on our earnings. When you think about the priorities, certainly, it's going to be 5G, fiber, high-speed connectivity. It's going to be software-based entertainment. And then it's going to be a relentless focus on the customer. I think those, we're going to continue to do. I know we're going to have to do that efficiently. We're going to have to be relentlessly focused on transforming and eliminating costs. We're going to do that while keeping our balance sheet strong and our ability to invest strong and flexible. But really, those major priorities are what we are focused on and what the team is really looking at.

Great. And would you say -- and internally, would you notice a different organization versus, say, a year ago? Is there a different kind of set of goals in terms of how people are measured or short-term versus long term?

Yes. So we're taking a number of steps, if you will, to streamline operations, whether it's in consolidating some of the -- another step of consolidating the accounting functions or some of the organizations in the CFO chain? Or more importantly, things like putting all the content under one leadership perspective, under Jason with Casey Bloys and getting that focus. All of it is about transforming the business so we can make -- be more nimble, make faster decisions, respond to the demands of the marketplace or the needs of the marketplace quicker, and so we'll continue on with that. It also has the benefit of freeing up investment dollars to invest in the content, to invest in networks, to invest in fiber.

Great. Well, let's turn to the individual businesses, if we could, and let's start with wireless. I think there has been concern in some quarters about the level of promotions in the industry, and you've got some attractive retention offers as well as acquisition offers. So help put that in the context of your long-term plans and the -- what you're seeing in terms of an iPhone Supercycle or not here?

Yes. So a couple of things. When you go back to those priorities, I'll pick on one in the 5G wireless. And we've got that network built, and now we're doing an iPhone launch, a device launch at the same time. So if that's a priority, how do you respond to it? Well, if you're relentlessly focused on your customers and you want to think about what they want, we've gone out and talked to them. And one of the pain points, our customers have pointed at is, cashing-on on your best customer, but I can't get your best offer. I've been a customer a long time. So we went through the process of developing this offer. And we've got to remember, when you offer this to the best customers, these are customers you now are going to pay. It's not a bad debt. The bad debt risk is very minimal, if at all. You know this customer is not going to churn. He's been with you for a long time, and she's been with you for a long time, they're family. They often have multiple phones on that plan. So it could be, you're making a software for one, but you're getting some quality assurance out of 3. All those things and then you take into account the opportunity to buy up, to sell them up on more unlimited, the opportunity to get a quality phone is a trade and to offset some of the cost. And quite frankly, to adjust the offer as we already have since we put it out to meet the marketplace. So I view that not so much as a sign of competition in the marketplace. Marketplace is competitive, absolutely. I think it more as a sign of innovation of applying our principles of we're going to be relentlessly focused on 5G. We're going to want to get that opportunity to provide software-based entertainment, which you can do on the 5G networks and you can do with the new iPhones, and you can do putting a new device in the customer's hands and relentlessly focused on what the customer experiences and what they want. And those -- tying those 3 things together from our basic priorities kind of lay out why we give this offer. You saw the results in the third quarter. They were very good. Churn was very good. Net adds were -- the wireless business were very good. Postpaid, total postpaid, but particularly postpaid voice, so feel very good about that. And I have been really pleased to see that momentum continue, not giving any -- not giving out any numbers nor I can tell any specifics, but feel really good about how the progress is going. Feel good about how the offer to give our best customers that upgrade opportunity is working.

Right. And these -- you usually have a 30-month payment plans with these offers, right? So just to say, it's a long...

Yes, we used to have 24 months and as part of -- just -- it's a great point, Simon. Just like the opportunity to add HBO Max, the opportunity to get them either into an unlimited or upsell them in the unlimited plans, which is we've had a real positive experience on that. We're really pleased with that process. We're also able to take what is normally a 24-month commitment and take it up to 30. And it's worked -- it's been received very well, and we're very pleased.

Great. Well, you've hint -- you've touched on a little bit, but this opportunity to move customers up to the premium unlimited tiers, where you can get HBO Max. Talk us through what the opportunity is in your base? What you -- where you are now? What you see the potential to be? And just tying that into wireless service revenue growth, and presumably, you'll get a tailwind from the return of roaming revenues as travel resumes over the next few quarters?

Yes. So think about it, as we said, we still have some on traditional plans of -- that are on the non-unlimited plan, the mobile family share planning, the mobile share plans. And you move those up into unlimited. But then in the unlimited range, there's basically 3 different categories: The basic; the medium, which gets some additional content and additional modes; and then the Elite, which gets the free HBO Max. And we are seeing customers take and move much more towards that Elite and move up in the stack. If you think about the opportunity there, this is a $20 difference between those price points. So there is that opportunity. But quite frankly, there's as much of opportunities to lower churn and retain the existing customers and build value that way. So yes, there is this opportunity to go up. But quite frankly, we're very pleased about what happened with churn in the third quarter and the indications of that with -- you built this great network, customers really appreciate, you win a lot of awards, but customers really appreciate it. And you give them great offers and they're voting, so to speak, with their feet to stay. And that aspect of the business from both a customer carrier, customer service, customer quality, operational as well as the financial side. The best customer you can get is the one you already have, right? It's the most efficient one, and this is what we're focused on.

Great. And you've touched on 5G a couple of times, and you've built out that network. You had a lot of extra spectrum. You were able to deploy along with FirstNet. But as CFO, what does 5G mean to you? Where are the revenue opportunities? It's a lower cost per gig? What are the things that you get excited about as you look out?

So a couple of things: One, you get excited about putting all that spectrum that you invested into service. Secondly, you get you excited about that ability to have utilization of the assets at hand. Secondly, you really get excited about seeing the customer quality. So this award win depending upon GWS or other tests, the fastest network, the best coverage network, the fastest network for an iPhone. Those awards are all really important, but they're really important because it's how the customers see it. Secondly, the meaning of how the team did it and under Scott Mair's leadership, what they were able to achieve is, they've built that 5G network while also improving the LTE network. So every one of my existing customers got better service, got better quality, got better coverage. That's a huge, huge win for the finance and the customer satisfaction perspective. And I don't want to lose that on anybody. The customers that we serve are getting a better service today with or without a 5G device. We're seeing them buy a lot of 5G devices, but they're getting it the way they built it. That's really important. Then when you go to that and you have the sustainability ability to then say, "My gosh, you're going to use 5G, you use your phone for so many more things, I better get the elite upgrade, the elite unlimited plan. I better buy up into that. I better buy into the -- I'm going to take advantage of the HBO Max and those opportunities." Simon, I know you have some views and I've read some of your stuff with regard to 5G opportunities in some other countries. And specifically, I think with regard to -- on some opportunities in Korea and I understand those and I'm hoping that we will see those, but we see a lot of opportunities right now with our existing base by just taking them in through the unlimited and just getting lower churn. I am hopeful that we'll get further opportunities like that and certainly believe your promise. But I wouldn't say we have a lot of room to grow just based on the momentum we're seeing today. With regard to -- with regard to international roaming, we'll see how the vaccine works, and we'll see how that comes back. And so we're still measured on that, not that we don't want it to be there. We believe it, but I would just suggest to you, that's one that we're being really measured about, careful about and try to fill out -- the vaccine rules out? How consumer in the marketplace reacts? And what that does that just to the statistics of the disease, but rather the consumer confidence that goes along with a potential solution or vaccine.

Sure. Yes, I guess, we all hope that's going to recover soon. On 5G, on the network build, how is AT&T thinking about the millimeter wave? One of your competitors is pretty focused on -- that the role of millimeter wave. You've obviously built it out. But it seems like you're looking at kind of an approach across all other bands, but without a focus as much on millimeter wave. How does it fit into your plans?

Well, I think -- kind of the overall play is an integrated carrier. And remember, we have extensive footprint of wired assets that can coordinate. Those fiber assets can interact, integrate and a critical piece of a total integrated network experience. So what I would tell you is inclusive of that integrated network experience is millimeter wave, we've got in probably close to 40 cities. We were kind of operating it on whether it be the connected factory or the campus or sports venues, which aren't seeing as much activity these days. All of that capability, and we have it for traffic volume capabilities, but the reality of it is, is with COVID and with the shift to work from home, what we've seen is a dramatic shift in volumes into the suburban and into the rural areas, where our extensive, quite frankly, low-band spectrum holdings and our extensive towers and fiber footprint has really served us well and served our customers well. So we believe millimeter wave, as you know, we have a significant amount of millimeter wave holdings from the last auction as well as from our FiberTower acquisition. But with that, we believe it's only part of an integrated solution and feel really good about where we're at with regard to the process.

Great. Well, maybe we'll turn to WarnerMedia there. And you made some big waves in the entertainment industry with the Wonder Woman 1984 announcement on -- free on HBO Max on December 25 and also in theaters. So talk us through that -- have you got everybody onboard with that? And what the objective here is with this announcement?

Well, certainly, we're working with all the parties involved. Whether it'd be new talent, whether it be the theater owners, the distributors and so forth. So it is a compliment for Jason, commend his team on really working very hard, being collaborative and to think differently and to do something really first time in the industry as far as I know. So pretty amazing stuff. And hats off to them for doing that. With regard to it, it's, quite frankly, a really challenging time for theaters, and they really starve for great content Wonder Woman 84 could have been that kind of great content. So for them, it's going to be a great opportunity to have something really high quality. By the same token, to make it work for us, it certainly provides us a great opportunity to showcase HBO Max and to have a really lead invitation for people to come, not only use HBO Max to watch Wonder Woman 84, but then to realize the great depth and quality and, quite frankly, diverse content that's available there. And so it's a win-win in a difficult situation this COVID's presented, particularly for theater owners, but it's a win-win for all of us. So we feel really good about that as well as some of the recent developments with Amazon and negotiations there. We're really pleased with what's happened there. Once again, Jason and the team are really doing a great job of kind of dealing with issues as they come up in this environment and really getting the really great resolutions.

Right. Presumably, there'll be some good pull-forward on downloads and subscriptions and perhaps through your bundling with wireless as well. So -- one of the things, I think, since Jason has taken over, has been more of a focus on international for HBO Max. So perhaps just talk about what we should be looking for in '21? What are the key focus areas initially to gain that scale?

Yes. Let me mention this. So Warner Media properties: HBO, Turner, CNN, have had extensive international footprint for years. Warner Brother Studios, tremendous success internationally with their movies. So I think what Jason has done and said, let's get a relentless focus on being able to take HBO Max and launch internationally for the very good business reasons of the more customers you have, the bigger base you have to amortize the cost of content. So the more content you can feed into it. What he has put his focus on so far, the team's focus, at least, publicly is this launch here domestically in the United States. We'll expand that and continue that focus internationally and specifically, I think, the first focus will be Latin America next year. Now I will tell you, as you saw, I think, was around April, we bought in our partners from HBO Latin America and took full control of the distribution down there. So this process has been -- Jason has been focused on this, and we've been focused on this for -- certainly for a while. But you're right, he is focused on that, and he is really focused on making HBO Max, the premier international brand.

Great. And you also have an AVOD offering coming out next year as well, is that on track?