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

Good afternoon. I'm Simon Flannery. It's my great pleasure to welcome you to the Morgan Stanley European TMT Conference, unfortunately, not live in Barcelona, but virtual this year. And it's my great pleasure as well to welcome Pascal Desroches from AT&T. Pascal, welcome to the conference.

Thank you, Simon. Good morning, everybody.

Great. Well, before we get started, please note that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com.\researchdisclosures. There's also the ability on the webcast to ask questions. We'll try to get to some of those questions at the end. So Pascal, thanks so much for joining us.

Pleasure to be here.

Great. There's a lot going on in the industry and with AT&T. Perhaps remind us -- you had an Analyst Day. You set out some long-term priorities earlier this year. Remind us as we think past the various transactions, I think you just closed another one recently with Vrio. What are the key focus areas for AT&T?

And Simon, maybe even before that, a couple of things. First, just reminding everybody of the safe harbor. Some of the information we'll discuss is subject to risks and uncertainties and refer to our website for more information. I think it's important to put this all into context, and I will address what our expectations are going forward. But I think it is important to start back when John Stankey was announced as CEO when he took on the new role. There were 3 strategic priorities identified. First, grow our customer base in our 3 areas of priorities: wireless, fiber and HBO Max. Since that time, what has happened is we have generated more than 4 million postpaid phone net adds. Fiber, we've added 1.4 million fiber net adds. And there is -- and sequentially, we've accelerated our additions. And then finally, HBO Max. We're really pleased with how that's going. We have grown nearly 14 million subscribers. We've added nearly 14 million subscribers since launch, and we are approaching 70 million subscribers globally. We also said we were going to -- John also said, we're going to manage the company much more effectively and efficiently. How we're seeing that materialize? We reported last quarter that we are -- we have secured half of the $6 billion of synergies associated with transformation, and we've reinvested that back into the business. And that has, in fact, helped drive some of the growth we're seeing. As we look forward, we expect more of that as we expect to make our way through to $6 billion by 2023, and more of that will start to fall through to the bottom line over the next several quarters and years. Then we also -- and then not to forget, Net Promoter Scores across our 3 areas, our priorities are up. So again, we are -- not only are we being more efficient, we're being more effective, and customer satisfaction is up. And finally, we committed to strengthening the balance sheet. And just this year, we have announced or closed $55 billion worth of asset monetization that will go towards deleveraging, including the WarnerMedia and DIRECTV transaction. The DIRECTV transaction closed in August. We expect WarnerMedia transaction to close in the first half of 2022. And in fact, we expect in the coming days to file our registration statement for -- in support of that transaction. And so a lot's going on. A lot's been done. As it relates to our guidance going forward, we said, as you look forward, we expect low single-digit growth for the remainder of the company, the connectivity business. So low single-digit revenue growth. Wireless, you saw last quarter, we are growing revenues, and we're growing EBITDA. We expect that to continue. We reached the inflection point in our consumer wireline business where we grew both revenues and EBITDA last quarter. And then Business Wireline, we're in the midst of a several year transition where we are rationalizing low-profit margin products and taking a lot of costs out of the business, so still generating high levels of absolute profit margins. But over time, the growth vector for these businesses is going to come from fiber connectivity to small and midsized businesses as well as new products and services to enterprises. That's what we think it looks like. But overall, when you put that all together, it translates into low single-digit revenues. EBITDA, we expect to be mid-single digits driven by revenues, continued cost transformation and just disciplined execution and cost management. And we feel really good that we're on our way there. We've made great progress this year.

Right. That's a great overview. And maybe we'll start with the wireless business. You talked about the very strong momentum. AT&T has led the industry in postpaid phone adds for several quarters at this point. I guess the questions that come up are, is this sustainable? Because a lot of this is market expansion. We've seen really strong industry expansion faster than pre-COVID unlike, say, broadband, the broadband industry, we haven't seen a deceleration at this point. And then is it economic? I think you've talked about the churn benefits that you've seen. But AT&T has been offering significant deals to new and existing customers. So how do you think about making sure that all these iPhones at attractive prices are going to earn their return?

Yes. A couple of points, Simon. First, on the growth in the overall market. The thing to keep in mind is the consumer is really healthy now. Credit scores are up. Savings levels are up. And I think the pandemic has made people realize the real value of connectivity. So in many households, I think the age where you have members of the family getting devices is probably aged down from where it was pre-pandemic. At some point, I would expect wireless industry to grow in line with overall population growth. But in the near term, we see no evidence of a market slowdown, and we feel really good about the momentum. In terms of the ads and sustainability, a lot has been said about that, but here are a couple of points to keep in mind. Last quarter, we grew both revenues and EBITDA, and we were able to do that because these are very economical [ deeds ]. In fact, our top plan, only 25% of consumers have -- are taking the richest plan that we have. So it's less than 25%, in fact. So it's not the promotions. It's several things that we have done extremely well. For example, we -- our go-to-market strategy has been decentralized. It's under Jeff McElfresh's leadership. We've also done a much better job of segmenting the market and identifying opportunities to serve underserved segments of the market. FirstNet is just one example of that. We've provided more value in the form of bundling content in HBO Max, and then the promotions have also helped. But our promotions are no richer than others, and we believe they are sustainable. In fact, as we move forward, we expect while ARPU has been down this year slightly, we expect ARPU to stabilize as we get through the latter part of 2022, I would say in the second half of 2022. And that's going to be driven by a couple of things. One, you have -- yes, you're going to have continued amortization, but it's going to be offset by some return of international roaming. We are still down materially in international roaming from pre-pandemic levels. Also, one of the things that is happening is more and more consumers are opting for our Unlimited Elite plan. It's our fastest-growing plan. And as a result, what you're seeing is it's growing at -- it's only 20% of our smartphone adds to date, but it's growing faster than any other offering. And as we go up the ARPU stack, that should also help offset the amortization that we're seeing. Overall, we're not interested in the race to the bottom. We feel really good about the value we are delivering to consumers, and we believe this is sustainable. And as we make our way through 2022, ARPU should stabilize. And once you get -- once you combine that with continued share in volumes because we intend to continue to take our fair share, we expect revenues to grow. Coupled with transformation we expect, we will see margin expansion.

Great. You talked about bundling with HBO Max, and we'll come on to WarnerMedia a little bit later. But how should we think about your go-to-market after the deal is completed? Have you negotiated what the terms will look like? Will it continue to look similar to what you see today? Or will there be a change in your go-to-market?

When you say -- can you clarify the question/is it whether or not we will be bundling HBO Max going forward?

Exactly.

I would expect that we would retake a commercial agreement to continue to bundle HBO Max. We think it's a good service for our customers, but we also think it's a good distribution for WarnerMedia, and one of the new Warner Bros. Discovery business.

Okay. And obviously, 5G and C-band is a big topic right now. Can you update us on how the build-out is going towards your, I think, 75 million covered POPs by the end of '22?

Look, as you know, Simon, there was -- we have -- as a result of the FAA recent agreement that we entered into, we paused some of the deployment. And hopefully, we're going to be able to resolve the issues with the FAA more broadly by early next year. Bottom line is this, the FCC concluded, as you know, that C-band and air safety can coexist, that we can safely deploy C-band without any compromising to air safety. And so we thought we -- that had been litigated and adjudicated. But now the FAA is raising some concerns. So we thought the best course is, let's allow a 30-day period to address any concerns that we have. But to date, we haven't seen any data to support the FAA's assertions. Our engineers feel really good. And if you look at outside the U.S., the same technology is being deployed without any impact to aviation. So I look at that and I say, okay, what is the issue? But hopefully, this all gets resolved as we make our way through the early part of next year, and we can begin to deploy this very valuable spectrum and really allow the U.S. to start catching up with the rest of the world.

Great. And one of the big topics on the quarterly earnings calls was fixed wireless. And you've certainly done some fixed wireless, particularly in rural areas, but I think you've been less focused on that in a 5G context. Can you remind us of your approach, is it really that fiber is the best way forward rather than a wire?

We really believe this. In certain cases, fixed wireless makes a lot of sense. But when you have an urban or suburban area that is well populated, it's more fiber is a better solution, and it's more economical. And that's why we think that, that is the better course to go to. But clearly, we're not dismissing fixed wireless and in certain instances, it may make sense. But fiber is the superior technology and more cost-effective.

Great. And one of the areas I think that's helped your phone adds in the wireless business has been FirstNet. So perhaps update us on your go-to-market there. You've been winning a number of important public safety agencies over the past year or 2, but how far through that market opportunity are we in terms of the FirstNet?

We feel really good about FirstNet progress that we've made. We've signed up more than 18,000 agencies. And as we move forward, we expect to continue to grow that, our share. Also, we have -- we've been really pleased with the number of subscribers have been able to get through our FirstNet relationship. So it's really going well, and we're very pleased. Now obviously, others are trying to replicate and -- but we feel great about our ability to compete.

Great. And then maybe turning to business wireline, if I could. I think you talked about the SMB opportunity. Can you expand a little bit on that? And how do you see your ability to take share there being driven.

Yes. If you look at the cable companies, they've done a really good job of taking share in small business in their footprint. We have not competed as effectively as we should for that business. And as we build out our footprint, we think there is incredible opportunity to be in the consideration set and to gain share. Our product is better. The price points are very attractive relative to cable, and we think we are well poised to gain share.

Okay. Great. And is, I think, something that John had said on a couple of recent calls, has been a focus on revisiting the brand. Perhaps you can just update us on that? And is that going to be important in how you kind of approach -- come back to some of these segments like SMB?

You see -- here is -- when John talks about the brand, it's not one particular product line. It is the entirety of AT&T. How do we show up? When you hear AT&T, what is -- what do consumers think? And we think we need to sharpen that focus. We need to make ourselves be loved like many other brands are in the eyes of consumers. Right now, we have a very recognizable brand. But in terms of the distinction that you'd want and what you want to be known for, I think we can sharpen that focus.

Okay. And when should we get updates on what you've concluded in terms of how to refresh the brand?

Stay tuned. I would expect as we get through the WarnerMedia transaction, we should be able to give you a full view of what the company looks -- the company going forward would look like.

Okay. That's great. And then on the large enterprise side, and you talked about this sort of multiyear transition. Is it a couple more years of a similar trajectory that we've been seeing recently? I know there's been a lot of puts and takes with COVID, but when you've turned business consumer wireline around, how many years do you think it will take to see the same pattern in business?

Here is what I would tell you, Simon, as you look at business we've -- late last year, we started a process of aggressively rationalizing some of our low profit margin products and really getting out of certain services that we were performing. We begin to lap that this year. So the comps will get a little bit easier as we make our way through the first part of next year. All told, I still would anticipate some modest declines in revenues, but not to be at the levels that we've been seeing. So that should moderate. And I think we said that in the third quarter. And look, overall, we think we can -- it's going to take us several quarters to get to the other side of this.

Okay. Understood. And then turning to Consumer Wireline, perhaps update us on the fiber build, both for this year, but also I think you've got plans to accelerate even further into the 5 million-plus households. And how are you thinking about that opportunity and the timing of that?

Here's what we've said publicly. We expect to get to 30 million incremental homes passed -- 30 million homes passed by 2025. So as we look out over the next several years, we expect a continued ramp up. This year, we're adding -- we expect to add 2.5 million homes passed. We expect that to accelerate in the coming next year and beyond. And look, once we reach a certain scale of rollout, it's much easier to get to the next level. But until we are able to deliver 3 million homes on a consistent basis then at that point, we will step up our efforts to go beyond that.

Right. And any updates on the supply chain?

I think John characterized it well in the Q3 earnings call. Look, we are -- we're in the best possible position to manage the supply chain. We have a priority access. We have pricing that is better than the competitors because of the scale we bring to the market. But at any given point, you may find portions of the supply chain that are disrupted and dislocated. We know how to manage it. They fundamentally don't change the trajectory of our overall business, but we feel really good about the ability to manage, but there will be some dislocation at points. But no material impact on our business going forward.

That's good to hear. And obviously, building out the fiber infrastructure is just one part of it. Getting the customers on, getting the penetration is important as well. And we've seen rising penetration from you in the last few quarters. Can you just talk about how that's going and what you see as the opportunity there to really take share within the fiber footprint?

I really appreciate the question because as we look at this, our view is if we have the product deployed, we're going to be able to penetrate it at very attractive rates. It's a better -- it's the best product in the market, and it's priced very competitively. So we -- really, it's how fast can we build out and begin penetration in new areas passed? And remember, as we're building out, that fiber can serve multiple needs. They can serve business. It can serve as support for our mobile networks, all things that I think we often don't think about but are a key part of how we're thinking about this. So we feel really good. Once we are -- once we've deployed the homes and they're available, we can penetrate.

Great. And the President just signed the infrastructure bill into law on Monday, there's $65 billion there for broadband. Is that something you're going to be able to leverage to help pay for your build or expand into areas that weren't economic before? I think there's a concern it might drive more overbuilding, more competitive activity. How do you think about that?

Yes. First, I want to applaud the Congress for doing this. I mean we're reminded that at some point, sometimes when the Republicans and Democrats work together, good things can happen. And this is an example of that. This bill will help bring this vital service to parts of the country that are underserved. Importantly, in order for this to be effective at the macro level, what has to happen is we can't have build in areas that already have fiber or adequate broadband. We have to target the underserved and unserved portion of the population. While $65 billion is a lot when you look at how much the major players across the country are spending annually, it's really -- the only way you're going to make effective use of that is by using it to serve underserved or unserved areas. With that said, look, we think we are well positioned to do it in terms of -- we know how to do this. We're doing -- we're the largest player in fiber deployment. So we know how to do this. We can do it at scale. We can do it more efficiently than others. So hopefully, we get our fair share of that.

Great. Well, let's turn to WarnerMedia, and it's been a -- exceptionally busy year for HBO Max, and you've had a number of new international market launches recently. So just perhaps update us on -- you started at the top of the call with this being one of the 3 pillars of the growth strategy. So how are things looking today?

We feel really good about the progress of HBO Max. Think about the competitive environment we launched and we had the highest -- one of the highest priced products. And during this time, we've performed very well. And in Q3, we launched in Latin America, and we're really pleased with the outcome there. And it's still -- we still see great momentum in the market. We started in Q4 in parts of Europe, Nordics, Spain and the Netherlands. So really, really good progress so far, Simon, and it gives me a lot of -- gives me -- makes me optimistic as I look out the next several years. Clearly, HBO Max will be part of the consideration set as we move forward.

Great. And how do you think about the benefit you got this year from day and date movies, which won't be there to the same extent next year? Is that a big part of the attraction? Or do you think this is -- it's something -- there's enough content coming through the pipeline here to keep people interested?

We've been in the business of keeping people engaged in great content from the time the company was formed. So we are -- this is something we know how to do. The movies, while they won't be available -- they'll be available soon thereafter on a continuous replenishment cycle. So I think you're going to see fans continue to be enthusiastic. Next year, Game of Thrones comes back. Think about how many people will tune in for that. And you look across the board, even remainder of this year, you have King Richard coming out and The Matrix. So it's -- we feel really good about the ability to keep the momentum going.

Great. And then on the more traditional side of the business, how do you see the advertising environment? We've had a very, very strong year. Is that something that's sustainable as well?

I think advertisers always want to be associated with high-quality content. It's important for their brands. And candidly, there's been a lot of demand for the types of advertising that opportunities alongside HBO Max AVOD product. The real issue is going to be in short term, what impact does the supply chain have on advertising demand? But long term, I see this we're just in the starting to scratch the surface of the possibilities for advertising for HBO Max.

Great. Well, maybe just turning to the transaction, if we could. You updated us on the proxy timing and as well, we've got -- you said first half of '22. So what sort of visibility do you have into the IRS and the various government agencies in terms of that time line? Have you had any sort of further clarity? Or is it the process still pretty much as it was at earnings?

The process continues to move along. And we are exactly where we would think we were going to be at this stage in the process. There have been no surprises, and we feel really good about our build to get this transaction closed in the first half of next year.

Great. And I know AT&T investors are very keen to understand how the transaction will be structured. Can you just go through the various options? And I think John had said maybe in the earlier part of next year, we might get more clarity on that.

Yes. Obviously, we can do 1 of 2 things or some combination thereof. We can have an exchange offering, whereby we provide shares of Warner Bros. Discovery in exchange for retiring AT&T shares. That's one option. Another option is simply provide a dividend to our shareholders for their pro rata interest in WarnerMedia. And -- or we can do a combination of both. We do an offering of exchange. And then if there are any shares of Warner Bros. Discovery left, we dividend those out. So those are -- there is a range of options available. A lot of this is going to come down to what the market dynamics are at the time, what's our view of the relative valuations of both companies. So more time will give us a better visibility in terms of what the cost forward will be.

Great. And in terms of the dividend strategy going forward, you said $8 billion to $9 billion. Is that something you'll clarify early before deal close and then the potential to grow that dividend? How should we think about that?

Yes. We will definitely. As part of when we're finalizing the deal, we will articulate our final dividend strategy. And as we said, it's going to be $40 billion to $43 billion -- 40% to 43% of a $20 billion free cash flow number. So it's -- but we will clarify that as we get closer to the transaction close.

Okay. Great. And you just talked about the $20 billion of free cash, and perhaps it leads us into a little bit into capital allocation and capital structure. This is going to -- this transaction will delever your balance sheet. How do you think about -- you've got heavy capital investment on building out the networks, but what are the priorities in terms of appropriate leverage at the dividend and growing in the -- investing in the business?

Yes. Look, I think our prior year always starts with investing fully in the businesses that we're in because we think the returns on that are superior to anything else we can do. Then we've committed we're going to continue to use free cash flows after dividends to delever until we get to 2.5x net debt to EBITDA. And once we get to that point, we will reevaluate what other options are available to us. How can -- what other means we can deliver value to shareholders. But until then, we will continue to focus on let's continue to delever and pay an attractive dividend. And with -- coupled with earnings growth, we think we're going to deliver very attractive returns for shareholders.

Okay. And what do you think the right level of leverage is for AT&T long term?

As I said, we haven't articulated that, but you can imply that our view is you need to be lower than 2.5x, 2.5x or lower.

Okay. Great. So you talked earlier about the cost achieved, the cost savings that you've achieved, the productivity. Could you give us just a little bit more color? I think one thing that COVID brought us was increased adoption of digital tools and digital transformation, the customer interacting with agents either via text or on the web portal. So how are you thinking about the opportunity to run AT&T differently in this sort of environment and transform that cost structure and probably drive customer satisfaction as well?

Yes, indeed, Simon. That is music to my ears. We are -- we've already started doing a lot of that. I think the pandemic, while it's with challenges, it showed us the possibilities associated with customer self-service, digital -- triaging customer issues using digital tools, using AI and machine learning to respond to customer queries. As a result, what we've seen is we've seen the number -- significant cost savings and field tech activities using digital to help us better manage how to triage issues, and when we go out, how to fix something without having to come back, making sure that we are appropriately coordinating with the customer, all things that seem little, but are important to really take cost out of our -- servicing the customer and acquiring customers. So it's -- we're in the very early innings of that, but it's happening, and we feel really good about the progress there. And that is clearly going to be part of the arsenal as we move forward.

Right. It seems like we've had a lot of input cost inflation in other sectors. Telecom hasn't talked about it as much. But how are you managing inflation in your OpEx base? And I'm guessing things like retail store employees, wages and things like that and obviously, energy costs, but what's the offset there?

Yes. I think there are a couple of things. Clearly, we're seeing some wage inflation like everyone else. We're not seeing as much supply inflation yet because many of our key goods and services are subject to long-term contract. But with that said, we fully expect over time, we're not going to be immune to that. And what you will see we're doing is we're continuing to find ways to through automation, technology to more efficiently and effectively serve the customer, and that's what's going to help offset some of that. And look, over time, as inflation persists, we would also always evaluate the opportunity to surgically increase prices.

Sure. Okay. We've got a couple of questions coming in. The first one here is on how do you see the opportunity? And I guess it's a little bit related to that last point on pricing is monetizing 5G. You talked earlier about moving people up to higher-end plans.

Yes.

You've got business opportunities with 5G, what's the most exciting?

Yes. Well, here is when you think about 5G, we're just starting to deploy it and creating use cases for it across the country. As you develop more and more use cases, we believe we have a real opportunity for differentiated pricing for advanced services. And so we're keenly aware of it. We're looking at developing products that help better improve the customer experience. So we think there is going to be the ability to differentially price certain services under 5G.

Right. And I guess one of the things we hear a lot about is things like Internet of Things, and you've had very good growth in your connected devices portfolio over time. And one of the questions is asking for more clarity around that. So how do we think about connected devices today and then the opportunity going forward with 5G with IoT?

I think it's fair to say, look, we have done a great job in increasing our distribution and presence in IoT. As we move forward with 5G, what's going to happen is we're going to have the ability to provide differentiated pricing similar to phones, and we're going to be able to provide differentiated pricing because of the additional functionality that 5G will allow for IoT products.

Great. And another question is coming in on wholesale -- wireless wholesale. You did a key deal with DISH last -- a couple of months ago here, giving you, I think, a minimum of $500 million a year. And help us understand the -- how that flows through over the next few years and then just your philosophy and how you work with wholesale customers to ensure that it's profitable revenue for you and for the customer?

Wholesale relationships in different forms have been part of the industry since its inception. So this is not new. In this regard, here's the calculus we went through. We said we have a great network, clearly could handle additional traffic. If DISH is willing to pay us a very attractive rate for that, it's a win for us. It allows -- it gives us more investment capacity to continue to improve our network. It also benefits them by getting use of a very good network and view this as a win-win. Some would surmise, well, why would you -- why would you enable a competitor? In the end, DISH would have done this with or without us. And so we feel like once we have a good product in the marketplace, we like our ability to compete, and DISH is just the latest example of various wholesale deals that we've seen over time. And in terms of how it's going to come into P&L, we said it's a minimum of $5 billion over 10 years, and we expect that to be more front-end loaded.

Great. So we've just got time for one more here. DIRECTV is off your balance sheet now, but it's -- I guess you still own 70% of it. So help us think about the opportunity to get value out of that either organically or through strategic optionality.

I think both are -- I think there clearly is a possibility for strategic options, but also the company is performing incredibly well under Bill Morrow's leadership. They're focused. They're driving efficiencies. And at the same time, they're moderating some of the losses that we've seen in the past. So we feel really good about how they're performing. And we think it gives us an option to do other things in the future.

Great. Well, Pascal, a great conversation. Thank you so much for joining us today. And everybody, thanks as well. Good luck with the rest of the conference.

Thank you, Simon. Take care, everyone, and have a happy Thanksgiving.