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

Okay. Hello. My name is Colby Synesael, and I'm the communications infrastructure and telecom services analyst here at Cowen. Welcome to day 1 of Cowen's TMT Conference. For this session, we have AT&T. And from AT&T, we have Jason Porter, who is the President of the Public Sector and FirstNet. We have 30 minutes for this presentation. I have a set of questions that I prepared. [Operator Instructions] And I'll try to get to them as well. With that, Jason, thanks so much for being here. I know you have a safe harbor you'd like to read out before we begin.

Yes. Thanks for having me, Colby. I appreciate it. And thanks to everybody out there. Yes, I got to begin with our safe harbor. I need to call attention to that safe harbor statement, which says that some of our comments today may be forward-looking. As such, they're subject to risks and uncertainties. Results may differ materially. And additional information is available on the Investor Relations website. So thanks, Colby. I'm looking forward to it.

So Jason, can you explain your responsibilities as, again, President of Public Sector and FirstNet and where you're spending most of your time, for those who might not be as familiar?

Yes. Absolutely. So you said it earlier. I'm President of Public Sector and FirstNet, which basically means I'm responsible for all of our government business, from DoD and civilian, all the way to state and local governments. And so where I'm spending time right now is really about focusing on modernizations. My team's mission this year is modernizing -- helping our customers modernize. And so for us, that means -- first responders are trying to modernize to a broadband technology so that they have more situational awareness and more capabilities as they run to fires and events. And DoD and VA hospitals are trying to modernize towards a 5G platform, where they can get the advantage of low latency and faster speeds. And then states and local school districts are all trying to modernize their learning environments with 5G and broadband and solving the homework gap. So lots of modernization across our space.

Okay. And I guess just talking about the network to begin. In March, AT&T said that FirstNet is greater than 90% complete. And I guess the first question is, how are you measuring that? Is that based on cell sites deployed versus the end goal? Or is it a different way in which you're defining greater than 90%?

Yes. So it's greater than 90% as defined by the contract. And so the contract has geographical areas that they set out that they wanted us to cover. And we're happy to say that we're almost a year ahead in our build plan. And so we passed that 90% milestone.

And in terms of that geographical way in which it's being laid out, is that based on city? So if you have a cell site in a city that Fox gets checked? Or is it square feet or square miles of coverage to which FirstNet's network has to kind of -- the signal has to reach?

Yes. It's square miles. So we're 202.71 million square miles covered across the country right now, and we added 100,000 of those square miles in 2020. So our pace is just very rapid as we get to these last few square miles as we get into the more than 90% range.

So I can't do the math. If I took 2.71 million divided by 0.9, that would get me to what the total mileage square miles. Is that we're trying to get to? Is that the right math?

Yes. That's roughly right, yes. We've got that approximate value left, yes.

Okay. And I guess, how many of your approximately 70,000 macro sites have Band 14? And separately, what's the general mix between macro and small cell deployment on the FirstNet network?

Yes. So we don't disclose the number of sites that have Band 14 or the macro-small cell mix. It's really for us about getting the coverage that our public safety customers want. In our space with FirstNet, we're really guided by public safety. They tell us where they want it covered to make sure that public safety has it at the areas they need it the most. So whether that's a traffic area -- a high-traffic area that might be known for accidents or a wildfire area, they really define where those square miles are, and that's where we need to populate. And a lot of those, as you can imagine, are not in downtown areas. A lot of the areas that we're building are remote rural areas, tribal lands, national parks, areas like that, that also needed coverage. So it's been a great opportunity for us to grow our broadband footprint with Band 14.

Okay. And then how long will it take to get to 100%? And what work is remaining other than cell site deployment? Or is it simply just cell site deployment?

Yes. So cell site deployment is the major milestone. And we've got until March of 2023 to be at 100%. As I mentioned, I'm -- we're building ahead of schedule right now, but we are down to the challenging sites that might be really hard to get access to. There are other things in our commitments to the FirstNet Authority that we're measured by. And so those aren't necessarily payment milestones, but they are success milestones, number of applications, number of devices. So we're at 265 devices in our device ecosystem, 165 applications in our application ecosystem. So we have a number of gates that we need to pass to be able to successfully fulfill the contract with the FirstNet Authority.

Okay. And then the 2023 deadline, March 2023, even though you're a year ahead, would you assume that you'll finish a year ahead? Or do you think you're going to need all of that remaining time to get to 100% just given, to your point, you're now on your kind of your punch list of difficult sites?

Yes. Our target is to be done by that March 2023 -- we may finish a little early -- but we're on track to finish a little early. But as you mentioned, it's -- we're down to some really hard sites to build in rural areas. So we're going to probably take up and -- close to the whole time.

Okay. And then when will Band 14 -- and maybe you could just give the audience an overview of what Band 14 is, just in case anyone doesn't know. But when will that migrate to 5G? I presume everything that's been done with that thus far has been for 4G.

Yes. So Band 14, if I start there, Band 14 is 20 megahertz of spectrum that was allocated to the FirstNet Authority for public safety, building a nationwide broadband network for public safety. It was part of the 9/11 Commission, wanted to really build a nationwide interoperable public safety network for first responders. And so what they did was they gave 20 megahertz of spectrum to the FirstNet Authority, and that Band 14 is just the nomenclature for that 20 megahertz of spectrum. And essentially, we've been hanging radios focused on emanating that Band 14 spectrum for the last 3 years or so and have really passed that 90% threshold there. So when it comes to 5G, our strategy with 5G -- first of all, we did receive a task order from the FirstNet Authority last year to go ahead and build a 5G core. And so we've delivered that 5G core. We launched that earlier this year. And so what that does is gives the best of both worlds to first responders. They essentially have all of the reliability and stability of Band 14, which is on LTE still. But basically, what that does -- the reliability and stability comes from true, always-on priority and preemption. And what I mean by that is when there starts to be congestion in the network, you can see that we clear Band 14 and prepare it for only-use for first responders. A great example of that is the capital riots that happened in January. When that happened -- actually, PC Magazine wrote an article about what happened. Essentially, all the commercial networks hit congestion, and they started to slow down and struggle through that congestion. But for FirstNet users, those first responders that were there on the scene, of which we had several agencies, they're responding to the capital riot. And their devices worked effortlessly. They had no struggles from congestion or anything. And that's because we had cleared that Band 14 so that they could use that spectrum completely and freely. So the 5G strategy that we're executing right now is maintain that priority and preemption in Band 14 on LTE. But with the new 5G core and the combination of millimeter wave from AT&T spectrum, we now give first responders the ability to take advantage of that low-latency and high-speed 5G access when they go into one of those millimeter wave areas in those 38 cities that we've turned up 5G millimeter wave for AT&T. So they really have the stability of Band 14 while you get the speed and low latency of millimeter wave as well.

So it sounds like -- I have to put words in your mouth, and then you can take them back on and [ rearrange them ] correctly. But it sounds like you're going to stay on the sub-6 gigahertz 4G network, at least for some period of time, and you're not disclosing what that period is. But what you are going to do is augment to also support 5G millimeter wave, and that's going to be the first 5G spectrum to which you're going to be making available for FirstNet. And I guess, to the extent I did get that correctly, any time lines on any of this?

Yes. You did get it correct. Essentially, we are listening to the FirstNet Authority and to our Public Safety Advisory Council and our customers to determine the time line and time frame of moving Band 14 to 5G. So far, our customer base is very focused on making sure that it's reliable, dependable and that their service, they can count on it, which is why they want the stability of Band 14 on LTE. I think as more and more use cases come out and a level of maturity is secured with 5G millimeter wave, then we would potentially move Band 14, but no timing disclosed yet.

Okay. And just moving on and talking more specifically about the agencies that are using FirstNet and the subscribers. During your March Analyst Day, the company noted 15,000 agencies and 2 million connections as part of FirstNet. Are you able to provide an update to those numbers, perhaps as of the end of the first quarter?

Yes, I am. So FirstNet is a tremendous growth story for us, and it's a good success story. So I'm able to tell you that now as of the end of first quarter, we're at 2.2 million connections and just over 16,000 agencies. So we've continued to grow. And honestly, we hit a new record for growth every quarter. And so it's been just a tremendous story to watch the first responders gain confidence and trust in FirstNet and start to adopt it at a faster and faster rate.

Great. Well, that certainly would suggest then that part of the strength that we've seen from AT&T the last few quarters has been partly attributable to FirstNet. So congratulations there. But digging a little bit further into that, how many of those 2.2 million connections are phones? And any sense how many you're adding on a -- of the maybe 200,000 delta, for example, it sounds like, between the end of the year and then the first quarter, how many of those might have been phones?

Yes. So we don't disclose, but I'll say a majority of them are phones. And so we really have seen a massive growth in phones. And what we see is not just one device for every first responder at this point. There's tremendous affinity within an agency. For example, those 16,000 agencies that we have, we see that a member of the agency will also buy their IRU or their personal device as a FirstNet device. They might also have a body cam or a multitude of other devices that they might also leverage, but the majority are phones.

Do you think that over time, it actually becomes more nonphone? I'm just speculating here. But as IoT becomes a bigger opportunity, not just for FirstNet but really the world at large, tied to 5G and what 5G will enable, do you think it remains phones are the majority? Or do you think as connections grow, it's actually more nonphones where that growth is going to come from?