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

Well, Peter, before they asked me to take on this role for the company, I was the head of the technology and the network organization. And I think I took that in 2018. And so the person that was running that before was clearly in a mode of driving consistent, sustained investment levels in our network. And so I would tell you that our wireless capital spend back in 2018 was at a higher level than 2017. And our goal isn't to ramp up to an incredibly high-water mark for capital investment. Because for those that have been in this industry for a long time know, this is a momentum business. It's a momentum business with customers. It's a momentum business with investment. And getting the factory built in a sustainable way, whether we're talking about 5G wireless investments or fiber investments, requires what we call at AT&T somewhat of a level-loaded plan. And that means that we are constantly investing quarter-to-quarter. We're not investing in 1 year and then shutting down towards the end of the year and then restarting in the beginning of the next year. And I know that sounds overly simplistic. But I can tell you if you are vigilant with that kind of investment approach, you get economies of scale and speed of execution that is unavailable to you if you're flexing on, flexing off these investments. And so as such, back in 2018, the team and I saw the opportunity to step up investment in a consistent way. Here, this year, we're investing more in our wireless network here in '21 than we did in '20. In '20, we invested more in our wireless network than we did in '19. And where we're spending that -- those dollars is not only in new site builds to maintain our leadership and coverage across this nation but also in densification in the deployment of our 5G network, which today covers more than 240 million POPs. And to those that think we might be behind, I'd just say, "Hey, take a look at fourth quarter and the first quarter performance for 5G customer additions and our subscribers seem to be just okay with the performance of our 5G wireless network." So I don't feel like we're behind at all. What this calls to though is another point. And that is all networks, wireless networks require a ton of fiber. And in the past, pre-2019, 2020, we might have been investing our fiber network to fuel our wireless network in a specific design only for the wireless franchise, while at the same time, the teams supporting our enterprise segment feeding fiber into medium and large businesses had their network. And our consumer team had their fiber networks penetrating these new subdivisions or filling in existing pockets of opportunity in our market areas. And what we've done beginning in 2019 was to take a different approach to the engineering and the design of the fiber network, so we can stretch a dollar of capital invested in this fiber franchise to support not just wireless but also the residential and the enterprise, all market segments for fiber. And by doing that, we actually drive improvement in deployment, improvement in yield, improvement in penetration. And that helps fuel heavier investments in fiber and more capacity in our 5G networks as we move forward. So we're really, really pleased with the spectrum position that we've got. I am pleased with the pace at which our network teams are executing the fiber deployment as well as the 5G network. And it is definitely a strength for us and an advantage in the marketplace. And Peter, as you called out, our strength in balance sheet that we get coming out of the Discovery-WarnerMedia transaction really gets us excited in the communications company because we get to accelerate our investments in these networks. Time is money. And there's an opportunity for us to grow and continue this growth. And this pandemic has taught to us that no one technology is going to be the ultimate winner. It's going to have to serve this demand for bandwidth, either via fiber connections or wireless connections or a combination of both. And we see that as a real opportunity. And that's why we called up our guidance on our C-band deployment in our wireless network from what was 175 million POPs covered by the end of '22, we're now going to target 200 million POPs by the end of '23. And I have, of course, challenged the engineering team to beat that number. And so with that as well, we're able to invest and double the size of our fiber footprint from, call it, the 15 million today to 30 million passings by 2025. So I can tell you the excitement that we've got inside of AT&T and the engineers, the designers, the construction team, the distribution team, the sales agents, the call center agents. I mean, the level of excitement right now is as high as the performance we posted in the first quarter. And we're going to look to keep that up.

Your comments on the unification of the fiber strategy are particularly additive for me. And I can imagine that your ability to deploy small cells in the future, when the cost of those small cells are amortized across multiple business units, will be even stronger. This summer, we expect the DoD 110 auction. And it comes just 6 months after the monumental expense of C-band. And I wonder if you all plan to participate in DoD 110. And assuming you can't make detailed comments on that, I'd be curious if you could discuss the relative feel of that spectrum to that which just transacted.

Yes. Well, you know the answer to that question. And I think most of your audience does as well. We don't speculate on that. But we always take a look at spectrum. As it pertains to the caliber of the spectrum and the importance of C-band, I think most players in the market and most individuals that follow the sector appreciate the strength that the mid-band spectrum provides to not only have decent compromise between coverage and distance that, that signal can cover juxtapositioned against the bandwidth that you can offer for really high speeds. And so the C-band spectrum and the upcoming 110 auction basically sit side-by-side. And so that 110 auction spectrum from the Department of Defense shares a lot of the similar characteristics. And so I would imagine, as an engineer, you view that as attractive as the DoD or the C-band spectrum that was auctioned at the end of last year, beginning of this year. Having said that, Auction 110 means there's been 110 auctions. And I expect that there will be more than 110 auctions in the future. What's more important is the work that's being done now to prepare the wireless network itself to receive the first tranche of spectrum that we secured in the C-band auction, roughly 40 megahertz, which we expect to light up towards the end of December when that spectrum becomes available. And teams are hard at work. The supply chain is hard at work, ensuring that we get the infrastructure equipment loaded and deployed on our cell towers in the market areas that we are prioritizing to begin with and get after the 200 million POPs covered by 2023.

Okay, great. Further on network capacity, we heard recently senior management from AT&T speak more positively about fixed wireless access for residential customers. And I wonder if -- why that change in focus? And should we think of that as a meaningful revenue opportunity for the Communications business over the next several years?

Yes. I think as with all opportunity, we look at the capacity that we offer in our network. And I would tell you, at AT&T, we don't think about just our wireless network. I mean, we shared in our Analyst Day the power of this hybrid network. And we know, we watch the traffic on the networks, Peter. And I can tell you, without question, the pace at which traffic is growing on high-quality fixed network connections that are served with WiFi on the tail end are exceeding the growth rate that we see in the wireless network. And that stands to reason when you and I and everybody else that's participating here on the conference has probably experienced jittery upload, demand sharing and bandwidth management in your home. Hopefully, your new house there has got access to great fiber service, so you and your family have a really nice experience. But as we've been working from home, we've been trying to compete with maybe our young ones learning from home or gaming, which is probably the more likely activity that many of our teenager-age children have been doing during the pandemic when they're not learning, when they're not in school. And that contention that we see, that bandwidth demand that we see in these home fronts across the nation, that's amount of bandwidth that doesn't foot the math to serve exclusively with wireless. I mean, if it did, we'd serve it with wireless because we offer wireless. We are a scaled wireless operator. But rather, we know where that heads. And that's why we are leaning into the deployment of fiber and getting fiber all the way to the home and getting it penetrated and selling those services to consumers because we know, without question, where we have fiber, we win, period. We win on all accounts. We win with great customer adoption. It's the highest, most satisfying product that AT&T has in its arsenal of products. Our customers give us the highest NPS scores. It's the highest engagement levels that we have with our customers as they not only engage in our tools, like our smart WiFi manager that we offer in the house, but also how much they enjoy the HBO Max application, getting their best content delivered over this ultrafast fiber network. And the beauty about the fiber infrastructure itself, Peter, that I think is important as an engineer, it's got a low maintenance aspect to it, number one; two, it's multi-gig-enabled. And so we get the opportunity to now begin to offer different speed tiers and different use categories across that fiber network to provide for some price discrimination to help us grow our ARPU as we grow our penetration of that fiber. And then third, and something we very rarely talk about and it's hard to connect the dots on, is the 90 metro markets where we're building this fiber is in areas where we're filling in the footprint of our existing fiber franchise. You can either edge out of your current territory. You can fill in particular pockets, where it makes economical sense to deploy the fiber. And doing that enables my team to shut down the aged copper network. And as we do that, I mean, as of today, we're probably about 2,000 square miles of our copper network that's been decommissioned as part of this new market focus, and that takes cost out that helps grow margin, helps us deliver our $20 billion in free cash flow guidance, helps us reinvest in things like fiber. And in pockets of the metro area where we won't build fiber, we will serve with wireless. We will give customers that option. And so at AT&T, we think about using the best technology that we have at our fingertips to serve the demand. And where it does not make sense for us to invest in fiber, we will serve that demand with wireless. What percentage of the growth profile does that represent? Time will tell. But we're not betting our future revenue or our profitability on a fixed wireless solution to serve broadband. We just don't think that is a durable solution to really meet the bandwidth demands that can only be met with the high-quality symmetrical fiber investment that we're making.

That answer and that strategy make a lot of sense to me. I want to try to put some scope around the fiber strategy beyond the passings targets that the company has already discussed. I wonder if you could help us think about the mix or the balance of greenfield fiber build versus overbuild. I think you have a 35 million home VDSL or U-verse footprint, which should provide enormous opportunity to meet your goal of passing 10 million homes with fiber. But I also understand there will be some greenfield. And so if you could just help us think about that with all its implications.

Yes. And so I don't think we've publicly disclosed how that makeup looks market-by-market, but I'd say well over half of our fiber investment is laying across brownfield or overbuild areas that we've not served effectively and have lost market share or are losing market share as a result of a noncompetitive product as opposed to greenfield. We've always been expanding the greenfield market annually in the capital plan. As we gain more success, we will -- with the right kind of penetration and ARPU mixes, we will free up incremental capital dollars to maybe expand a little bit further into more true greenfield areas where we're not today. And so I think that's something that the market is going to have to watch to see how we execute the strategy. I would tell you also that as we finished up our last very large fiber deployment to pass 14.5 million homes as part of the DTV transaction, I look at our deployment speed and I look at our penetration rates and what kind of customer relationships we drive in that footprint, and then I use that as, "Well, that's our internal benchmark. Can we beat that number with the new build?" And we began engineering the new build back in 2020, even though we just started getting after it now here in '21. And so for the year, we're pacing out to have a capacity with a level-loaded network plan, exiting the year at a 3 million passings capability. And we'll amp that up with some success in the market to achieve the 30 million by 2025 and we may get to a 4 million passing number. But that's going to depend on the team's ability to drive penetration levels in that fiber that we are deploying. And so what we're seeing so far this year, we are at or better than what I expected this team to deliver. We're pacing ahead of what we've done historically, which gives me confidence the teams are really focused in driving growth on the brand-new fiber that we've laid. Now you might ask, "Okay, well, there's not a lot of incremental revenue there." And I'd say, "No, no, no, hang on a second. Let's think about how this integrated fiber plan works." And I gave you this visual of the wireless network and the enterprise network and the consumer network with my hand gestures here. I'd tell you an area that we are underrepresented relative to our market share is in smaller mid-market segment of the enterprise segment as well as small business. And if you look at the opportunity for us to go grow revenues that aren't in our P&L today, it is taking what today we pass about 1 million, 1.5 million business locations with fiber. Our integrated fiber plan is going to more than 2.5x amplify that number. And I'm looking and I've challenged this team to go get us our rightful share of fiber services and outperform that of our cable competitors over the next 2 to 3 years. And that requires us to build. In the footprint area, we may offer copper today, but we don't enjoy our fair share of that market segment. So there is plenty of opportunity for us to go grow both revenues and EBITDA inside of the footprint area that we occupy today. And with some success, we'll keep that mission afoot, and we'll expand it. But we've got to prove that. We've got to prove that to the investors. And the team is up for the challenge to go do that.

It sounds like it could be fun to watch. You just created a bridge to the most popular question on the interactive question site. And it's what are your thoughts on the competitive environment following Comcast's new multiline unlimited offer?

Expected, expected that this marketplace in wireless is always going to be competitive. It has been competitive. In fact, if you were to maybe do some channel checking, and there are some entities that do that and publish this work, you'll notice that wireless marketplace has been competitive. And it's been accelerating in its competitiveness all during 2020 and really took on a heightened sense of competition, I think, when the iPhone entered the 5G system last fourth quarter. And so what we've seen occur from all the players in the marketplace is changes of promotions and offers and opportunities to the tune of 40, 50 changes in the promotional activity in the industry while we, at AT&T, have remained pretty vigilant and steadfast on a simplified offer, where everyone, no matter new or existing customers, get access to the best deals that we have to offer. And I'm a leader that kind of likes simple and focused. Now if you're a cable company and you're serving into the mid-markets and the business segment, I'd say yes, you probably need to serve that industry, that segment with more than just fixed connections. And in fact, Peter, what -- probably the item I was most pleased with during the pandemic was the vital nature that our enterprise business segment served and the importance of it and the durability of that business to reorient what we offer to our enterprise customers and our mid-market customers as they had to shift their own workforce and their own customer base as a result of pandemic. And I enjoy very much having access to a scaled fiber network and a scaled wireless network to go drive that growth to compete. And so the move from the cable company competitors, it's not a surprise to us. We're watching it very much. We think that's a play that they're going to run to defend their strength in that mid-market segment. And I've already alluded that we are underrepresented as a company in that segment, a very strong upmarket in the Fortune 2000 ranks in the large enterprise. And we enjoy leadership there, and we will protect that leadership. But the focus and our sharpened market awareness is around the mid-market and small business segment. And so we're looking to go drive growth there and expect the competition to be fierce. We wouldn't expect otherwise.

Makes good sense. Let's go to the wireline business and enterprise. Private networks have been a big topic in 5G, that maybe they are the incremental use case about which at least financial market participants and I think a lot of people in the telecom industry have the most confidence. So could you talk about your view of the private network product, which, of course, is delivered as a wireless product, but the customer is an enterprise customer? And so to what extent should we think of private networks as incremental to the business in aggregate? Or to what extent might they cannibalize enterprise wireline relationships?

Yes. I think it's an insightful question. Because what we've learned -- if you would have asked this question before the pandemic, I suspect most of us in this industry would have had an answer A. And post pandemic, what is it that enterprise customers are looking for? The LAN, the local area network, is no longer. A campus environment is no longer the epicenter of all activity for commerce. In fact, the WAN, the wide area network, is now the LAN. And more and more of our customers in the enterprise segment, beyond the factories and the hospitals and specific areas where network slices with our edge compute product and offers that we've gone to market with, the likes of some of the hyperscalers or our own innovation with our 5G network teams, beyond those particular use cases, what's on the mind of our enterprise customers is really how do they maintain their competitiveness in serving their customers and driving their business when half, if not more of their workforce is having to do it from their new home office, like you are, Peter, and spread across consumer-grade products and services having to fuel an enterprise-grade engagement and no longer does a CIO have total control over that environment. And so if you are a company like AT&T that's got a scaled wireless and a scaled fiber network, then you actually have owners' economics and an opportunity to do some product innovation that is not available to you unless you have access to both networks. And that's kind of the product simplification and the focus of our enterprise organization is around that future-leaning, what is it that these enterprise customers need? Now we are actively engaged, we're not as vocal as some of our competitors are. But we are as engaged in driving 5G and multi-access edge compute capabilities for our large enterprise customers. We're deep in trials across the ecosystem of our Fortune 1000. We think that will drive incremental revenues for sure. But we don't think that by itself is going to get our business wireline segment back to growth. And that's something I am personally energized about sitting and driving this organization to get that part of our franchise back to top line revenue growth. Getting it there is not going to come from just 5G network edge compute, network slicing. It's going to come, just like the consumer business, in a myriad of strategies that all have to come together in order for us to achieve that top line growth in the guidance period that we shared as a result of the Discovery-WarnerMedia announcement. And what is it going to take? It's going to take us improving our share position in the small business, low end of the mid-market segment. It's going to take continued penetration of fiber, where businesses need access to multi-gigabit speeds. It's going to require us to have a nationwide, high-capacity, high-performing 5G network for those clients that are looking for a wireless-only solution to serve their campus or more importantly a wide area network with fiber or 5G integrated that gives the CIOs of our customers confidence with AT&T, you not only get fast, you get reliable and you get secure connectivity, so I can conduct a business remotely no matter where my employees are located, and they feel like they are connected and engaged. I honestly think that is a bigger opportunity in the future of our enterprise segment and one that the team and I spend just about every day discussing how we can accelerate our pace in that regard.

Terrific. And I'll wrap up with a philosophical question. Historically, many have considered AT&T's Communications business to be an incumbent that was highly focused on profitability and which had observed weaker-than-average market share trends. I wonder if you, as you look forward, would encourage us to think about AT&T's Communications business as one that is focused more on market share, and perhaps with a qualifier, profitable market share. But should we think about AT&T as a company committed to defending and growing its share? Or should we still think of the company as managing for some fundamental financial parameters, first and foremost?

Yes. I appreciate that question, Peter. I'm here to grow the business. And I'm here to grow it profitably, and I've got a team of professionals who wake up every morning who don't like being #3 in the wireless business, don't like losing share to cable in certain areas where we ought to be better. And so we are not looking quarter-to-quarter just to make a number. I'm not going to scare you, right? We hit our commitments. We are a team that is working to build confidence and -- from our investors and our owners. And we hope to do that by steadfast improvement, delivering the performance and the results quarter-to-quarter-to-quarter. We've historically been complicated. It's hard to understand AT&T's future. Well, maybe I can clear it up here. We intend to be the nation's premier broadband connectivity provider, period. What does that look like? We can't lose market share. We can't continue to chase growth that's not profitable in certain market segments. And so this renewed focus that we brought to the Communications business starting back in 2019 is to do what we're really good at doing and to stay steadfast at it, heads down. And I think we're proving that, the fourth quarter and the first quarter. Publicly, I think people are starting to pay attention. So in the future, thinking into 2024, 2025, this should be a company that our owners say, "Good job, you not only protected your share, you reoriented the products, your networks, where you've retired legacy, you've retired a lot of that low-margin, high-revenue outsourcing businesses that you might have had in your enterprise segment. You've retooled your product sets to a small finite number of products and services that your customers love. It's a pleasure doing business with AT&T and I get great service. And as a result of that, I'm going to reward you with my money and my loyalty. And I'm counting on you to be there when it matters most." And that's really AT&T. We've got a spirit of service, and we intend to continue to serve our customers but do so while we grow. We are not on defense. We are not on our heels. We are back on our toes. And that posture of stepping forward and driving growth and accretive, profitable growth was in advance of what we announced on the 17th of May about the future of the company and the combination of Discovery and WarnerMedia. And so for me, the company is supporting the Communications segment with everything that I or my team could ask of them, strengthened balance sheet, investing more capital behind this team in the areas of 5G and fiber. We're earning the right to go invest and grow this business. And I'll tell you what, Peter, it's been a long time since we have felt that way at AT&T. And I'm just lucky to be a part of the ride on that, and look forward to proving to everyone that we're serious about what we say. And we're going to deliver on our commitments. And you'll be the judge, and you'll reward us or not accordingly. So here we go.

I had high hopes for this conversation, and we've met them. Thank you very much. And I think that is a perfect note to end on. We're pretty close to time. So again, thank you for joining us. I want to thank all of Bernstein's clients for being with us at the SDC today, and look forward to talking with you again soon.

Great. Thank you for having me, Peter.