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

Hi, everybody. This is Tim Horan, the cloud and communications analyst here at Oppenheimer. My pleasure to host the AT&T CFO, Pascal. AT&T has basically attended every conference that I've run here at Oppenheimer for the last 22 years, and thank you so much. I really appreciate that. And they've attended many other conferences that I have also worked on. Pascal, good to see a fellow New Yorker doing so well. I know you're down in Texas now. But a great job, and you're doing a great job here at AT&T. It seems like frankly, a brand-new AT&T, the company is being dramatically transformed here.

And before we talk about in depth about what AT&T is doing, can you talk a little bit about your experience on the media side of the world and how that's kind of helped you look at AT&T and what A&T strategy should be from that experience?

Sure thing, Tim. Good morning, everybody. It's a pleasure to be here. Before I get started, Tim, I have to provide safe harbor disclaimer. Some of the statements we make here are forward-looking and are subject to risks and uncertainty and results can differ materially. Also, we are in the quiet period for spectrum Auction 110, so I'm not going to be able to talk about that. If you want additional information about our safe harbor and our forward-looking statements look on the investor website. So Tim, even before I jump into that question, I think it's -- there's been so much going on around our company, I think it's so important to try to put some of it into perspective. John Stankey has been the CEO now for just a little more than a year. Last July was 1-year anniversary, last month was his 1-year anniversary. During that time, he put in place a new management team. He identified 3 simple guiding principles on which to manage the business. One, wanted to grow subscriber relationships and Wireless, Fiber and HBO Max. And I'd say across the board, that has been accomplished, nearly 3 million wireless subscriber additions in the last year, 1 million fiber additions and 11 million HBO Max additions. Said he wanted to operate more effectively and efficiently. Our customer service and promotion NPS scores have improved significantly. We've taken $2 billion of costs out of the business. And we wanted to really be very disciplined and deliberate in our capital allocation. So what have we done. On the one hand, we said we wanted to significantly invest in our 3 areas of subscription revenue growth that we're trying to go after. And we've significantly invested, including spending $27 billion in the recent spectrum Auction 107. We also significantly invested in content and capital across all of our business. Then really importantly, we've put in place some of the actions we did with the Warner Media transaction, really sets us up to sustain those investments for the long term and to accelerate the growth that we are seeing in these initiatives. So in just a short period of time, we have strengthened the balance sheet significantly and really allowed ourselves to put in place a capital structure that could support future growth at a critical juncture in the evolution of this -- of both the Connectivity business and Software-based entertainment. So in terms of my background, I, whenever you're taking on a big role like the CFO of AT&T, you bring to it the collection of all your experiences. I mean, I've spent over 30 years in the workforce in Corporate America, including I was a partner at a big accounting consulting firm. I worked at the SEC for a couple of years. And I spent 20-plus years at Time Warner, now WarnerMedia, which own a variety of different media assets as well as once upon a time, an internet service provider as well as a cable company. And so during those times, I saw a lot of different things. And also, look, I served as the Chair of the Audit Committee of a public company board. So those collection experiences, I think, help me understand the myriad of challenges, including some of the strategic challenges that we face. And it's been really about 4 months now, and I'm having a good time.

Great stuff and good luck. So the company is making some obviously, radical changes you talked on the fundamentals which have improved dramatically. But you're obviously breaking up the company into basically 3 different companies at this point. What was the impetus for the breakup? And what do you hope to accomplish?

When we look back at, when John Stankey talking to me about taking this position, what he was keenly focused on was we were at the early innings of a significant evolution in connectivity, 5G and fiber. Remember, fiber in the pandemic would prove to be the best technology given the symmetrical speed. So understanding that would be a place where we really needed to invest along with 5G. And as importantly, HBO Max, we needed to invest significantly. And one of the things we realized, not with Stankey, even though we were succeeding in really in our launch of HBO Max, the market wasn't giving us the appropriate credit for it. And we felt that a more efficient capital structure would be to provide Warner Media with its own capital structure and stock so that investors who are interested in media would be able to invest directly into Warner Media. So it's a combination of we needed to make sure we had additional investment capacity as well as making sure that our capital structure was efficient and provided -- and unlock value for shareholders.

Great color. And I guess, while you touched on it, I do want to come back for a few other. Well, we're going through a little bit more detail on your fiber strategy and kind of what's going on there, which I completely totally agree with. But before we do that, can we just maybe step back on the quarter here. Can you just -- now that all your competitors and the industry has reported, just any thoughts on what we saw this quarter out of the industry and your results in particular?

I think what you saw is a very healthy consumer. We see it in wireless. The industry is definitely growing. It's growing faster than population growth. Fiber, I think recently, somebody told me, 2020 was the year of the SPAC. 2021 is the year fiber investment. And because fiber is proven that it will be the standard long term. And we saw significant growth at HBO Max, testament to our product and the quality of the product and the offerings. So look, the consumer is strong. Our businesses are operating very well. The Jason Kilar, WarnerMedia and Jeff McElfresh are doing an outstanding job in really continuing to execute and deliver value to our shareholders.

Great color. So it seems like to me on the call, you were pretty emphatic that you don't want to lose wireless market share anymore. And you seem to be actually gaining market share out there. Just what caused the change in mindset? It seems like you guys have been losing market share for the last decade almost. And is it in your power to grow market share at this point in wireless? And is that important to you?

Look, I think management matters. And you saw like in the wireless business, Jeff McElfresh took over late 2019 in managing the overall connectivity business. And there are several things Jeff did to really position what you're seeing now. One, he decentralized the wireless organization structure. And so on a go-to-market strategy, the local teams have the ability to react to specific market conditions and operate much more nimbly. Also, became focused on key customer segments that may be unserved. Think about our FirstNet offering where we created an offering tailored to first responders and provided them with priority access to our networks and good plans at appropriate value proposition. We also started to bundle HBO Max. And then finally, we provided our customers, our best customers, those we have long-term relationships with, with our best offer because we know long term, we're going to deliver a lot of value as a result of that. The lifetime value of those customers is really attractive and provides appropriate return. The other thing to keep in mind is our ARPU is at the top of the industry. So we felt that it would be perfectly fine to trade a few points of ARPU to maintain and grow our market share given that we are still much higher than others in the industry.

Yes, great job, great flow share here this last quarter. And do you think you sustain that? Is that the goal to just continue to grow the subscriber market share?

Absolutely. And again, it is really good execution and paying attention to our customers, identifying underserved segments of the population and really going after those in a deliberate way. And we think that is sustainable, and we can do so very profitably.

And on FirstNet, are you the only carrier that still offer priority like in emergency situations? I know you have -- is that just for the spectrum that you got for FirstNet? Or is it your whole network that first responders get priority? And does anyone else offer that?

Look, I think everyone will say they offer some version of that. We provide priority access to our -- in our whole network. Now that's boosted by the network -- the FirstNet network that we built, but we have -- we provide priority access across the board.

And FirstNet, obviously, we have disasters all the time. The Northwest and the United States is having quite a few disasters as we speak. Is the network performing as kind of expected? Does it hold up pretty well during these disasters?

It does indeed. It really does. And there are -- we've gotten really positive feedback from the FirstNet authority and we couldn't be more pleased with the performance.

Congratulations. And can you update us on where you are with your 5G build-outs at this point and maybe the C-band rollouts?

Look, we are in terms of the 5G build-out as of the end of the second quarter. We have coverage of around 200 million POPs. And so we feel really good about that. And that's all before we're rolling out. We start our c-band deployment later on this year with most of the deployment happening in '23 -- in '22 and '23.

And what will -- when do you think the C-band will be turned on at spectrum or start to be turned on?

It will start to be turned on in 2022 and then obviously beyond that.

So can you talk about what the 5G has meant for your average speeds and latency or any other color what it's meant to the network?

Well, look, I think the network has never operated better. The speed is great. Consumers are happy, and it will only continue to get better. Right now, while speed is a differentiating factor over time, I expect to see much more specific product use cases for 5G that will really help demonstrate the power that it brings to the market and delivers to consumers.

And do you have -- I'm sorry, I'm getting some questions from participants and anyone can ask on the Wall Street webcasting chat here. But just elaborating on 5G, do you have a strategy in enterprise on 5G to maybe build private networks for enterprises or new specific vertical applications for enterprises on 5G?

Absolutely. I think there will be some unique cases, very much like FirstNet. I think there are segments of the enterprise market that will benefit significantly from 5G. Think about autonomous vehicles, think about AR, VR, like the use cases for 5G are fairly -- can be really attractive and differentiated for those segments of the industry.

That's really good. And while we're on wireless right before we go to fiber, you've had a promote, well not a promotion, but you have handset subsidies now for existing as well as new subscribers. I know your position has a little bit lower market share than the industry slightly a little higher ARPU, a little higher churn. It seemed like you're in a position to kind of take advantage and improve on all those metrics or will take advantage of the higher ARPU by offering a little bit more to customers. Are you kind of happy with what you've seen so far from offering handset subsidies existing subscribers? And do you think you'll retain this over the long term?

Yes. Look, the offers that we have out there are competitive and they're very profitable for us. So for the foreseeable future, I don't see any changes in that. They are working, consumers recognize the value, and we're recognizing that by doing that, we are keeping customers we know a lot about. We have a long history with. We know how they will perform, how they pay. So we feel this is really good business.

Yes. Well, it seems to be in your results and congratulations again. So just moving over to kind of fiber. I guess similar to wireless, it feels like you want to gain share now in broadband. And fiber is going to be a critical component to that. Can you talk about what has changed? I think you're at close to 15 million homes, you're going to double that in the next 5 years or so. What has changed that caused you to really accelerate investments in fiber?

Look, John Stankey has always been a believer in fiber. I think when he took over he identified that as a priority area because he understood from a technology standpoint, there is no better technology for connectivity. And therefore, in a world where the demands for symmetrical speed are increasing significantly, this is the technology to bet heavily in. And so we have a great position, and we are leaning into adding to that position. So it's really a function of when you -- and I think others are now recognizing it as a result of what you've seen in the last year in the pandemic, the need to do what we're doing now, 2-way communication can only happen with symmetrical speed. So I think everyone has had an aha moment, like we need to deploy fiber. And so we've long believed that. John has long believed that, and this is just really leading into that opportunity.

And a question here from the audience. Can you talk about what the market share looks like when you deploy fiber? What type of incremental gains do you get? And what type of competitive response do you see from the cable company?

Here's the way we think about it. As we deploy fiber, our goal is to get at least 40% penetration on homes passed. And we think in certain markets, we'll have an opportunity to do better than that. And the other thing that is great about is when you lay fiber, you lay fiber to a community where there is both homes and businesses. So it also helps boost returns in your enterprise business. And so that's why it is so critical that we roll this out because the ability to grow both your enterprise and your consumer business is attractive. And we think these investments will provide us with mid-teen returns over time.

Those are extremely high returns. Can you give us any color how much it costs for home pass to build out and how much it costs to connect are those metrics been improving? Or are they increasing? Just any color around that would be great.

I can't get into specifics because I don't believe we have disclosed that. But as a general matter, as you see in other things, the more scale you have, the better your economics. I think we have -- when I think about AT&T, we are probably -- I know we're largest fiber purchaser in the country. And we have prices that are at the best and most competitive among the industry. So we feel really good about the ability to secure inventory, fiber inventory and at attractive price points and the ability to execute and the build-out at scale, something that many others don't have.

Clearly. And the government looks like they want to give $65 billion to promote broadband. Do you think that $30 million can go to a higher number if you get the right types of subsidies from the government?

We think it is a great business, a great public policy for the government to invest in the infrastructure of the company and to incentivize private companies to invest with them. That's -- private companies like us have a long history of being able to deliver connectivity very reliably in difficult situations, including a pandemic the likes of which most people have never seen in their lifetime. So we showed the resiliency of our network during the pandemic. We provided the opportunity for low -- we expanded the opportunities for low-income offer. So we think it's a win-win for the government to provide for subsidies and the more subsidies, the more homes we can build.

And it seems like it is going to be technology neutral. I know you guys are believers in that. So I know some of the homes will be fixed wireless or mobile wireless or other forms of technologies. Do you think fixed wireless now can be a part of your broadband strategy going forward?

Clearly, there is a place for fixed wireless in certain rural communities where it's hard to make the economics work through a fiber build-out, then it may make sense to use a fixed wireless solution. But in urban communities that have wireless, oftentimes the issue is affordability. And I think what we have to -- what the government needs to do is to work with the private sector to figure out reasonable programs to provide us to provide economic rates, the fiber to the home because that is the best experience consumers can have.

And it looks like there will be for I think I saw 4 million households, will be able to get a $30 million -- sorry, $30 a month upside potentially. I know the details aren't totally worked out yet. So obviously, that's a good step also. But consumers, there are some subsidies now for rural areas and for low-income consumers also. Is that important to you guys, your customers take advantage of those subsidies now? Or do you ever...

Yes. No, look, we offer a very attractive low-income offer, and there are consumers who take advantage of it.

Very good. And another question here from the audience. Can you talk about the attach rate when you sell fiber broadband, what percentage of your customers are also taking mobile? Like are you packaging that together to sell those together?

We are packaging it together. We haven't disclosed the percentage of customers taking it. What I can say is this once you bundle them together, the performance, the churn characteristics are very attractive and the NPS scores go up.