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

Okay, everybody. Good morning, and welcome to the Third Annual UBS Future of 5G Mini Conference. I'm John Hodulik. And I'm joined with Batya Levi, I think, other members of the telecom, media and communications infrastructure team. And I'm very pleased to have you for today. We've got a series of 4 speakers in panels today exploring the developments in 5G in the United States. And we're very happy to announce that our first speaker is Igal Elbaz, Senior Vice President of Wireless and Access Technology at AT&T. Igal, thanks for being here again.

Good morning, John, thank you so much for having me. Such a pleasure.

Nice. So we've got about 45 minutes for Q&A. And as always, if anybody out there in the audience has any questions for Igal, please either e-mail myself or Batya or text us, and we will weave them into the conversation.

So Igal, maybe we should start off by sort of level-setting on where AT&T is on -- in terms of the -- its 5G build-out. If you could give us some color on maybe each band that the company is working on and sort of where you are in the process?

Sure. John, just before we get started, let me please, with your permission, I need to call everyone's attention to our safe harbor statement. It says that some of what I'm going to share today is forward-looking and such may be subject to risks and uncertainties, and the results may be materially different than what I'm saying. For additional information, please feel free to visit our Investor Relations website, and you can find additional information. So John, first of all, it's actually great to be here and being able to share with you all the forwards that we've made at AT&T. I think we've made real good progress. And we had a great momentum, both on our business side as well as our network build. As we shared, our intent is to be the premier -- the nation's premier broadband connectivity provider. And we want to do this by providing both fixed and wireless networks. Before I get to where we are right now in terms of bands and 5G data, I do want to take a minute and go back to last year, 2020, extremely challenging year with a global pandemic. And as we shared, we saw before, I want to reiterate that the AT&T network was resilient. It was able to keep up with a surging demand and the changes in the traffic patterns. But in addition to that, our build plan also showed resiliency. And I can tell you that when COVID started, we asked ourselves will that have an impact or an effect on our bid. But I can tell you that we have completed our bid as planned. We didn't miss a beat. In July of last year, we were a nationwide 5G. In addition to that, we continue to densify the 5G network, and we completed our plant build in terms of CRAN, millimeter wave, FirstNet and fiber. And that strong momentum is now carried into 2021. So today, AT&T is the largest network in North America. Our voice and wireless and data wireless network covers more than 99% of Americans. Based on GWS, AT&T is America's Wireless Best Network (sic) [ Best Wireless Network ] for 3 years in a row. And a lot of these now resonate extremely well with our customers. As you know, over the last couple of quarters, we are seeing great success in terms of postpaid net adds, low churn in levels that we haven't seen before. So clearly, our customers really like what we're doing. We have 3 simple unlimited offers that, to be honest, actually started before COVID. And we showed consistency with those plans throughout all of that time. And they're carrying our build today, and they include 5G. And in addition to this, we've extended our 5G to all of our loyal legacy unlimited customers. And in addition to this, 5G now available to our prepaid and repeat customer with the right plan and device. Now from a build perspective, Our 5G sub-6 network is already covering more than 240 million POPs in 470 markets. Our 5G+, our millimeter wave network, is now in part of 38 cities. And I do want to take a minute here to reiterate our philosophy when it comes to millimeter wave. You're typically going to see us deploying millimeter wave in dense areas, entertainment districts, venues, stadium, airports because we think it's millimeter wave that's the experience there. And we want to deploy this where we think it matters to customers, and we can actually be seeing experiences being developed. So think something like venues or a stadium, where you can reimagine the fan experience running on millimeter wave and 5G. The other part of where we're building millimeter wave is typically with enterprises. We have very interesting demand with 5G with our enterprise customers. And typically, that comes with millimeter wave as well with our MEC solutions, our local edge. And you're typically seeing this in industries like health care, manufacturing, military, as I said, airports and others. When it comes to FirstNet -- and again, whenever I talk about FirstNet, I always want to mention a couple of things: One, we are all privileged in AT&T to be able to serve our first responders and health care professionals, for sure, in a year, like last year with the global pandemic, fires, hurricanes, et cetera, as well as FirstNet was foundational to the way we build our efficient deal, putting the foundation to everything that we have in the network. So in terms of the momentum, in terms of adoption, there's already 16,500 agencies joining the FirstNet program with 2.2 million connections. Our build now covers more than 90% of our commitment to FirstNet, and that is well ahead of schedule. We're also allowing first responder now to access our 5G+ networking in the same part of 38 cities that I mentioned. And a new site build that comes with our FirstNet in terms of rural and remote and tribal areas continue to build on our way nicely into that build. And all of this, John, is build on top of our efficient, integrated fiber build that fuels all of this. So all in all, we feel really good about our build, about where we are and the way our customers are -- we are seeing -- actually, we're seeing really strong customer satisfaction with the plans and everything that we're offering. So all of this is coming together very nicely.

Can you talk a little bit about the C-band spectrum that the company acquired in the auction and maybe the timing of that build-out? And then maybe tie that back into your -- the rest of the sort of sub-6 build-out and talk about spectrum gap related to 5G?

Sure. So as you know, we have acquired 80 megahertz in Auction 107 of C-band, and that gets us into a place. We're very happy with our spectrum position. We are heads down in planning and engineering the deployment of the first tranche of the 40 megahertz towards the later part of the year, when it becomes available. And actually, we've adjusted the deal recently. So we're happy to report that, as you move forward in terms of the C-band bid, we're going to be around 70 million, 75 million POPs at the end of 2022 and 200 million POPs at the end of 2023. So aggressive deal but puts us in a really nice place at the end of 2023. In terms of our overall holding, so we have a strong position, both in the low band, mid-band even before C-band with AWS and PCS and other bands. And by the way, that is the grid that's going to help us to deploy our C-band spectrum. And obviously, last year -- or at the end of 2019, this is where we got all of our millimeter wave holding in terms of spectrum. So we are very satisfied with our holding. And again, we have a wide range all the way from low band, mid-band, different types of mid-bands all the way up to millimeter wave.

Got you. Have you guys said how much total in terms of spectrum gap? And so you got 70 million to 75 million POPs on that first 40 megahertz tranche in '22. But the -- what else on this -- in the sort of [ sub-5 ], how much total -- like let's say, by the end of '22, can you give us a number in terms of total megahertz dedicated to 5G by the end of next year?

We never share publicly how much of the remaining sub-6. The way to think about this is that, over time, more and more of our spectrum holding will be redeployed and transitioned into 5G. There's a technology out there called dynamic spectrum sharing that is allowing us to do this very efficiently. If you remember, John, in previous generation, the way to move on one generation to another would be to take one of your spectrum, take out the existing one and move it into the new generation. And what dynamic spectrum sharing -- by the way, AT&T was the first to deploy it here in the U.S., in North America, really allows you to run both 4G and 5G on the same band and, as a result of that, really allow you to be really efficient and intelligent in the way that we are transitioning our spectrum into 5G. So what it allows us to do is the more customers we're having with 5G devices that are getting on the 5G network, it allows us to -- through dynamic spectrum sharing, to allow to serve both LTE and 5G customers on the same spectrum. So I can't tell you at any given time where we're going to be. But this is how -- this is the way to think about this. A transition on our existing spectrum plus C-band, that's going to be an augment for 5G-only, where we think it matters for the experiences the millimeter wave. And the remaining will transition over time based on the growth of the customer and the 5G devices based on this dynamic spectrum sharing technology.

John, maybe asking that question in a different way. How important was it for you to get the first 40 megahertz of a block that's going to clear up sooner? Was that a necessary add-on to the DSS or other sub-6 gigahertz deployments that you've been making?

It was extremely important. We don't need DSS for C-band. But again, we've always said that this mid-band that became available with C-band is extremely important in order for us and, by the way, for the industry to scale 5G. It's that part of the mid-band. It's good, both for capacity, very friendly to 5G capabilities, both for capacity and coverage. And us having that and augment this to the already strong middle position that we have of spectrum really allows us to scale and provide more capabilities in terms of coverage and speed and capacity to our customers and starting to foster all of those use cases and immersive experiences that we're talking about that comes with 5G. So that 40 megahertz are extremely important. Again, as I said, we're heads down in making sure that we're engineering and planning this, so we can start deploying this at the end of the year.

Okay. Maybe can you also tie that to the new CapEx guidance, which you laid out? Gross CapEx about $21 billion this year, it's going to ramp to $24 billion over the next 3 years. What's that incremental spend coming from? Is it more this acceleration of the C-band deployment? Or is it more fiber deployment?

It's both. I think we've been very clear about the fact that, that acceleration will allow us to do 2 things. One is continue to build our wireless network. C-band is a big part of this. And if you remember, from our Investor Day to today, we've accelerated the deployment of C-band in terms of numbers at the end of 2023. And at the same time, we've accelerated or expanded our fiber guidance in terms of being able to say that we're going to get into 90 metro areas this year, covering 3 million customer locations. But we will continue that pace to the point that we're going to be able to cover 30 million customer location by the end of 2025. So taking those both, that's the primary area of where we're going to see the acceleration in the investment of that capital.

Beyond that investment period, which is quite elevated in terms of -- in capital intensity as a percent of sales, would you expect that to start to come down beyond that -- I guess beyond '24?

I think we need to get into a rhythm of the build and see where we are and see the success that comes with that. Remember, you're building in order for customers to come and consume them. So we're going to see how we're doing. We're going to see what kind of adoption we're seeing so far. Wherever we build fiber, for an example, we're seeing great success. So if that momentum will carry, we'll make our decision as we come close to that. Same thing with wireless system. Between now and 5 years, it's interesting to see how things are going to evolve, what's going to become available, what use case is going to be out there, what devices people will use, the amount of innovation and things that can change between now and 2025 in terms of the mobile economy. I don't think we can even imagine what would be there. So as we move forward, and we are seeing those things evolving and the ecosystem developing, we'll make our decision how we go beyond '24, '25.

Got you. Can we talk a little bit about the -- maybe more about the fiber side. We keep hearing about the sort of integrated fiber strategy. Can you give some color sort of on what that looks like?

Sure. Fiber is foundational. Foundational to our network, it's foundational to any network. Fiber is what fuels our mobility network. And now with this integrated fiber build along the same routes, we can now light new neighborhoods. We can connect small, medium businesses. We can connect securely enterprises. And this is why we were reiterating that our approach is this hybrid fixed and wireless network. We believe that is the right strategy, and that was the right approach. And if we take back -- and I think we shared this in our Investor Day. Maybe I'll take a couple of minutes to reshare that. If you look at the data consumption patterns in our network, you're seeing a couple of interesting trends. One, clearly, broadband data consumption is going up, both on wireless and on fixed network. However, there's a couple of subtrends that are interesting: One, you're seeing a transition from wireless into in-house into fixed. You're seeing the pace of growth on fixed network growing in a higher rate than based on wireless network. Some of you now on this meeting are connecting from your home. And you are expecting a reliable connectivity because this is a business meeting. And you want to make sure that everything does not jitter and the quality is high. The second and -- now, no doubt that COVID was an accelerator to that fact, with us working from home and starting from home. But I don't know that it's going to stop. I think a lot of enterprises is going to move into this hybrid work environment. So a lot of this will continue. The other trend that we're seeing is that the uplink growth in data is growing at a higher rate than the downlink pace. And that comes with us doing video conferencing and opening video, user-generated content and all kind of things. And there's other more devices that are connected at the home. So the consumption in the home is going in a high rate. And for that, we think this hybrid approach is the right one, as I mentioned, getting into 90 metro areas, 3 million customer location this year. And let me maybe share a little bit about why we think fiber and access technology is a good one. First of all, you're getting 1 gig speed. And that over time is multi-gig enabled. The second thing is symmetrical. I just mentioned uplink and downlink. The fact that you can have a 1-gig uplink, which is pretty much 20x what you can get from cable. It's pretty significant. If you are a gamer or certain applications at home, low latency on fiber is really important. The fact that you have a fiber architecture makes it extremely reliable. We now have a WiFi-6 band gateway that allows you to expand your coverage and speed inside of the home, which is typically the #1 pay point of customer. We are the smartphone manager of the app that allows you to manage your connection, your devices at home. And what we're seeing is extremely high customer satisfaction. This is probably -- our fiber product has probably the highest NPS across all of our portfolio. It's higher than any of our competitors. We're seeing 70% of our gross annual fiber are actually new customers to AT&T. So a lot of good success. And we have -- same as wireless, we have 3 simple speed tiers and offers without any data caps. And what we're seeing is our customers are going up in those speed tiers that can -- lifting our output. Now John, you asked about this integrated fiber build. Going back few years in AT&T, you would see planning and engineering of fiber network for wireless completely separated from engineering and client planning of fiber for enterprise base as well as different than residential model. And what we said to ourselves is that we need to bring this together. This is something we started a couple of years ago. There's a lot of efficiency that comes with bringing those routes and fiber build together. And it starts in different parts of this. It starts, first of all, with the understanding that we need to do this. Those 3 use cases coming off the same fiber, there's a lot of efficiency of bringing them together. Our planning systems are providing us the ability to plan the routes in an intelligent way. And that comes with a lot of converged architecture in terms of -- all the way from putting a 5G back up into a gateway, from the fact that you can run different services on the same fiber; from the fact that, John, we might be talking about edge later on. The fact that all of the architecture is getting more distributed and software-based and convergent with DX allows us to -- having a converged architecture to support the different use cases from the same target architecture. So that integrated fiber build and planning gives us a lot of efficiency. And if you bring them together, you're seeing the ARPU lift with the speed tiers. You're seeing the efficiency in the bid. You're seeing the transformation that we're doing. And we can absolutely see how we are expanding our fiber EBITDA and accelerating the breakeven on customer in about a year. And put this all together, if you fast-forward 4, 5 years, now you have a solid -- like when we're getting to 30 million customer locations, you can now see a solid platform for long-term growth coming out of that investment. So we feel really good about that fiber plan and where we are in the customer adoption. And a lot of this comes with this integrated build.

I want to ask one follow-up on that. And I know that this is a 5G day, but obviously, access falls under your responsibilities, Igal. Now that's a great commentary there about fiber breakeven customer in about a year. I mean have the costs to deploy fiber continue to come down? I mean Batya and I go back to the introduction of Fios 15 years ago, and the economics weren't that great. But now -- but there, we were talking at least $1,500 to pass a home with fiber. Have the costs come down aggressively enough, sort of sub-$1,000 to pass a home? And ONT has gotten cheap enough, so that -- could you talk a little bit about those costs? And I guess it's now an attractive business model as far as you guys are concerned?