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

Good morning. My name is Eric Luebchow, senior analyst covering telecom services here at Wells Fargo. Thanks for joining us for our fifth Annual TMT Summit. Very pleased this morning to have a keynote address from Jeff McElfresh, CEO of AT&T Communications. Jeff, thanks for your time today.

Eric, it's my pleasure to join you.

Great. So just to kick it off, Jeff, at a high level, AT&T obviously looks materially different today than it did at this time last year. You've really refocused the company back to focus on communications, right into your area of responsibility. So given all the moving parts, maybe you can kind of share your 30,000-foot perspective of the business and your vision for the next 1 year, 3 years, 5 years?

Yes. Sure, Eric. Hey, before I begin, I need to call to the audience's attention our safe harbor statement, which I think was posted there just a second ago. And that statement says some of our comments may be forward-looking subject to risks and uncertainties. Results may differ materially, and you can find further information on our website or in our SEC filings. So getting that housekeeping out of the way, Eric, yes, this is a different AT&T than what we've experienced in the past decade. And I got to give a lot of credit to our CEO, John Stankey, who has been with the company for a very long time, but has only been our CEO since July of last year. And since he took the helm, we've been very purposeful in our strategy and very consistent in that strategy, and it's produced some of the best results that we've experienced in the communications company sector in well over a decade. I mean we've added nearly 4 million postpaid voice net adds to our wireless business. And we posted some record level EBITDA performances in that wireless franchise, which is our largest of all of the business units, nearly 3.6% growth year-over-year. And the total tonnage of EBITDA in the third quarter of '21 was a high-water mark for us. We've added over 1.4 million fiber net adds in our conviction to reinvest in what we believe to be a very future-forward technology in fiber that's got superior advantages to any other kind of broadband connectivity offering. And we've actually grown our HBO Max subscribers by nearly 14 million since he took office and posted a total global number of around 70 million. So all in all, the objectives of us to grow our customer relationships, I mean we're firing on all cylinders here at AT&T. The second element of the strategy, though, isn't just about subscriber growth. It's also about restructuring the business and being efficient in everything that we do. And it includes things that we've announced, our transformation program, Eric, where we're retooling the structure of the company, kind of getting the organization rightsized for the new focused portfolio going forward. We've -- probably about halfway through the $6 billion cost takeout synergy target that we disclosed when we began this. And as I mentioned before, a lot of our transformation efforts that we've been working through are not just taking cost out to drop to the bottom line, as evidenced in our mobility EBITDA growth performance last quarter, but it's also helping us fuel the subscriber growth in an efficient and effective manner. So we're really pleased with that. It's given us a little headroom for us to invest in things like fiber and help us reposition our enterprise business segment, which has been under some stress, into a future-focused product mix. And then lastly and really important, I mean, John and the management team have done really good work in getting the capital structure of the company positioned for strength for us in the communications company going forward. And that's we've either closed or announced $55 billion in asset transactions. In the last 12 months, this business has delivered over $26 billion of free cash flow. And we've got the capital structure now in place that will support the investments that we need to make in the communications company in our wireless network with the deployment of C-band as you're well aware of, and our 5G expansion, as well as our fiber investments as we announced our goal to drive more than 30 million passings by 2025 as we restart the second major investment wave on our fiber portfolio. So when I look at this, I've been in the company now 26 years. Tomorrow is my 26-year anniversary. I got to be honest, I've never seen us execute this consistently and this efficiently and effectively in the marketplace in my 26 years. And I couldn't be more pleased with the work that John and his leadership has provided, but also my team that is doing it day-in and day-out in the marketplace with our frontline employees, who are just doing really a fabulous job.

Thanks for that, Jeff. It's a great overview. So maybe we'll dive into some of the specific business segments, and we'll start with mobility. As you mentioned, obviously, you've done a much better job in terms of volume growth, particularly in 2021. You've had postpaid phone and prepaid net adds up year-over-year, upgrade rates inflecting higher, and churn staying very low. So what do you attribute the recent success of AT&T's volume growth in the segment to? And as investors, how should we think about the sustainability of it as we look out? I think there have been some question marks on how sustainable this broad-based industry growth is that's coming significantly faster than the rate of population growth.

Yes, and so let me tackle that in 2 parts. First, our success, Eric, this is really important to me, and we've covered this a few times publicly, and I made note of this in our third quarter earnings as well. Our success at AT&T, we've been on the same consistent strategy since John took office in July of last year. And over the last 5 quarters, we haven't changed our game plan one bit regardless of what the competition does. And as you mentioned, there were a lot of questions at the very beginning of our campaign in the third quarter of last year about how can this upgrade offer and this device promotional offer make any sense? Since then, consistently quarter-to-quarter, we've posted improving growth up to our peak here in the third quarter of last year. Not only did we have strong EBITDA growth, 3.6%, proving that the economics of our playbook works well, but also, we led the industry in service revenue growth. I mean you got to remember that AT&T is in the third place position in wireless. We kind of wake up here. The industry has consolidated down to 3 major players, and we're in third place. And so our goal here is to grow, but grow efficiently. And we've done that intelligently, not just from a device promotional offer. So 3 key elements, 3 key things that have given us confidence in the durability and our performance. The first is a great network. Second is a simple and a consistent offer to the marketplace. And the third -- kind of the third element of this is our relentless focus on the customer experience. And what that translates to, Eric, is at the moment of truth in the marketplace itself as we serve opportunities, they see AT&T doing a much better job serving their needs. Our customers are responding with higher satisfaction levels. In fact, you mentioned that our churn performance at a 0.72 in the third quarter, that led the industry, and that was a pretty good low-water mark. for us. That is compounded or reinforced with our Net Promoter Scores that we track weekly as we make our way through this transformation as a leading indicator to what we expect churn to look like in coming quarters and months. And so we know that the level of service that we're providing customers is much better than we have historically in the past, and it's proven to help us win share in the marketplace. Our network's never been stronger. In fact, this year, we'll post probably the largest capital investment that we have in recent memory in our wireless business as we're densifying the network with our small cell deployment on top of our expansion of fiber throughout the metroplexes, the deployment of our 5G network and C-band and new cell sites, new coverage sites in support of, not only the mass market, but our FirstNet program as well. And so our network's never been stronger, and customers are satisfied with the performance that we provide there. Our price/value equation is right. And the satisfaction levels that the customers are telling us they are receiving from us give us confidence, as we've proven over the last 5 quarters, that this playbook works. Having said that, I have seen the competition make dozens of moves. In fact, I've lost count of how many tactical moves our competitors have made. And we, on our side, like we're hard at work inside the business, transforming our distribution, our service models, our way of delivering products to customers during this pandemic. And we're putting our energy there, keeping our offer consistent. It's just proven to work and given us, surprisingly, the strongest growth in the third quarter of any player in the market. I do -- your second point of your question is kind of around this inflated level of postpaid growth that we see here in 2021, and I think this has been a question that's been asked frequently. And there's no doubt that the stimulus programs have put some extra cash in household budgets. And so we're not expecting that level of activity to continue into 2022 and beyond. In fact, in a 3-player market with the integration between Sprint and T-Mobile, we suspect the activity level for postpaid in 2022 is probably going to subside. We're not forecasting it to be as strong as it is this year. But we are expecting to take more than our fair share, more than our market share in terms of that growth opportunity in the wireless business over the next 2 to 3 years. And so our outlook, I want to make it clear that our outlook, our guidance doesn't count on the industry being outsized in terms of postpaid growth. Why do I have confidence that our playbook is going to work, Eric? It's because as I dig in and I look at the segments that we serve, we're doing great in a handful of segments, but there are other areas of opportunity that give me confidence. There are pockets of growth for us to continue to pursue. We talked a little bit about how our fiber expansion plan has enabled us to rekindle our consumer wireline business and get it back to a subscriber growth and near EBITDA growth profile with our broadband business. But on top of that, we're able to pull through a lot of competitive steals on wireless. And so it's helping us fuel our mass-market wireless program. When you look at our small business and mid-markets in the enterprise space, we are underrepresented today in the marketplace relative to our peer groups, be it cable or other wireless players. In this year alone, we've seen really nice movement. I've witnessed really nice share gains, both wireless and fiber in the small business space, and we still have open running room in the mid-markets. And so as our fiber continues to expand and our refocus of our enterprise business shifting down to the mid-market segment. there's pockets of growth there for wireless that we haven't tapped into yet. And I'm confident that's going to provide accretive growth for AT&T regardless of what the overall industry growth profile looks like. And then lastly, and this cannot be overlooked, our FirstNet program is a major contributor to our success in wireless. Not only has it helped us efficiently expand our network, but we just surpassed to take a leadership position as the leading provider for law enforcement agencies across the nation. And I got to be honest, I mean we're not even finished yet. We're just beginning with the momentum in the marketplace serving public safety with our FirstNet program. So all in all, regardless of what happens in the overall aggregate industry size, as a third-place player who's got the highest ARPU in the industry, who is underrepresented in mid-markets and who's got a really strong expansion plan for that segment, I got a lot of confidence that we'll continue to get the growth we need in order to achieve operating leverage in our wireless franchise going forward.

Great. That's helpful, Jeff, and a lot to dive into there. So one thing you talked about was on the competitive environment, obviously, a 3-player market. We have DISH building in some new markets, and we have the cable companies who have been taking some share as well. So maybe could you talk about what you're seeing in Q4 quarter-to-date in terms of the competitive environment? We have a new Apple device on the market. We have several new promotions from some of your peers. Are you seeing a larger switcher pool this year versus last year? And how is AT&T seeing the fourth quarter shape up now that we've gotten past Black Friday, although we still have the holidays in December? What are you seeing quarter-to-date?

Well, I still have a high degree of confidence, confident in our guide for the fourth quarter and for the full year for the communications company. So there is nothing organic in our results that we see that give me any pause whatsoever. I have seen, as you alluded to, a heightened level of competitiveness from our 2 major wireless players. And in fact, I kind of laugh at times, giggle a little bit when I read print that says AT&T is the most aggressive. And then I just look at what's available in the market, where our competitors have basically copied our device promotion. They once said this is untenable, this is not economical. And now you see them basically running the general same playbook as us, but they've actually added to that with switcher cash on top of a device promotion. And so in terms of being the most competitive in the marketplace, I mean our offers are very reasonable and responsible. They're not overly aggressive. And coming through what I see going on right now doesn't give me any reason to change our strategy or adjust our outlook or our posture in the market whatsoever.

That's fair. And One topic you brought up, Jeff, in an earlier comment was around ARPU. Pascal said at a recent conference, we should see that stabilize next year. Maybe you could help us think through the moving parts between the impact from some of the device promotions you've had in the market versus some of the step-ups you've had from customers taking higher tiers of unlimited, and how we should think about the financial flow-through from that over the next 12 months.

Yes, that's a good question. In fact, if I look at history and I look at the last 5 quarters that we've been on the same consistent play, to be honest with you, looking at a $54 postpaid phone ARPU in the third quarter that was down only 0.6% and is the highest in the industry, if you would have told me that 5 months ago, "That's the outlook. Would you take it?" All day long and twice on Sunday, because given the amount of international roaming revenue that was once in our ARPUs that hasn't fully recovered yet, gives me a high degree of confidence after all the scale, all the volume that we have put through the program life-to-date since we started it. We are at scale. and so I don't anticipate any additional dilution on ARPU. Actually see upside on ARPU as roaming revenues will, certainly, at some point, be a little bit more fully recovered to the pre-pandemic levels. And that might take an extra quarter or 2, but we do expect that to recover at some point in the future. And the volume of our promotion offer, we're kind of lapping that going into next year. So I don't see kind of any downward pressure on ARPU. I would call that to be stable. in 2022 and going forward. Organically, if I look at the volume that we see in the business today, Eric, really only about 1 in 5 opportunities that join AT&T take advantage of the richest promotional offer. Only about -- 1 in 4, I should say, on the promotional offer. And only about 20% of our postpaid base is actually subscribed to the richest unlimited plan. It happens to be the most popular plan and is growing quickly, but we've got a lot of room to run in that up-sell funnel as we further penetrate our fiber footprint with wireless cross-sell, and we continue to take share in the marketplace in the mass market. So outlook for ARPU, for me, looks pretty stable. And I'm really pleased in our ability as the #3 player in the market to take material share growth and get this business back to growth and basically manage our ARPU essentially flat year-on-year.

Okay. Great. That's helpful. I wanted to switch to kind of the network build. And obviously, this is something that I know you spend a lot of time on. One of the news items that has been making the rounds recently is around the pace and trajectory of the C-band deployments you invested heavily earlier this year. Obviously, there have been some FAA concerns around interference with C-band deployments. You pushed back your deployments for 1 month; and then more recently, some proposed power limitations that you and Verizon were putting in place for 6 months. Maybe you could just give us an update on your perspective on C-band deployments. Do you still think you can hit the targets that you've laid out? And do the power restrictions have any impact on performance or propagation or anything else that we should think about in the near term? That would be great. That would be helpful.

Yes, you bet. So first of all, you said it correctly. Verizon and us, we voluntarily offered some concessions, temporary concessions to help address some of the concerns that the FAA has, yet again, brought back to the fold. I mean, I remind you that this was basically discussed and litigated back many years ago when the FCC was looking to bring the C-band deployment to market. And we basically offered a little bit of window, a time horizon for the FAA to bring forward what their concerns look like with respect to interference regardless of the fact that we've got a massive guard band between our C-band deployment and what we will radiate versus what the airline radar altimeters used in some vintage equipment that they're most concerned about. And so I've got a lot of confidence that we'll work through this. Why? Because this isn't the first time that we've had to coexist and make some modifications to our power levels or antenna tilts. And I think it's been somewhat overblown in terms of the impact. If I look at the investment thesis for C-band and I look at a broad-top coverage map, really, it's a very single-digit percentage, if not less, of the number of cell sites and POPs covered that we've got to make these modifications to, which are really in and around airports or helipads or final approach slopes where aircraft are landing. And so it's not a major impact on the radiated signal strength nationwide on the C-band spectrum. Third, I would tell you that it's not about our C-band deployment being held up. I mean, we're still doing the silver works, hanging antennas or prepositioning the radios. And so that program continues. It's about turning up the C-band signal in and around those airports that is the concession that we've offered to the FAA. And our public statements that we made the 24th of November, I think, pretty much spelled out for any investor what our intent and our plans are. So all in the grand scheme of things, I mean, I wouldn't be overly concerned about this as an investor. I'm not. As a leader of our communications company, we'll work through it. It is frustrating that you got to repeat this after years of conversation. And we at AT&T, we do the right thing. We are a company that's got a 140-year brand where it's important to us that we participate with our government officials to make sure everybody is safe and everybody's concerns are addressed. And I'm confident that we'll work through it.

Okay. Thanks for that update, Jeff. So obviously, I wanted to touch on the fiber build as well. That's something that you've really accelerated here in the last year.

Yes.

Could you refresh us on where we are today? I know you mentioned there were some modest supply chain constraints that limited the build cadence this year. But maybe you can talk about what you're seeing from a build cadence right now and into next year, what the study run rate could get to as you build some momentum in that business.

Well, first of all, our 30 million objective for 2025 is -- I've got no concerns about hitting the pace that we need to on a monthly or a quarterly basis, bringing on new locations of new fiber into inventory for our sales teams. I will tell you that as we reembarked upon a fiber investment, Eric, we set forth to establish very durable and large purchase agreements for fiber and chipsets associated with this multiyear build. And so from a supply chain perspective, I feel pretty good that we've got enough weight in the industry and enough partnership with our vendors and suppliers to work through any month or 60-day delay or sluggishness in the supply chain. And our initial builds for this next tranche of fiber were always going to be tail-end-loaded for new inventory here in 2021. Because really, in earnest, we got started in the engineering and the planning late last year. And building fiber is not something you just turn on overnight. It takes permitting, silver works, trenching. It's a rather large infrastructure investment program. And so we knew that our back half of 2021 was going to be a heavy build turnup. And our goal was to exit this year at a rate and pace to give us high confidence that we could achieve a steady level expansion over the next several years to achieve the 30 million. And I'll tell you that the latest numbers that came out of our network organization, for the inventory that they've turned up in the month of October, gives me a high degree of confidence that we are hitting game speed, as I call it, and putting this new inventory in the ground.

Okay. That's great to hear. And I guess in addition to that, obviously, building the fiber is one goal to hit. Another is the go-to-market engine in terms of selling into that fiber.

Yes.

So maybe you could talk about things you've done recently to kind of execute on the opportunities to sell into that footprint. And maybe you can talk about what you think reasonable penetration rates could be over time. And then perhaps parse out where those penetrations are -- penetration rates are on perhaps slightly more mature markets that you've built several years ago, versus kind of the new fiber inventory that you're bringing into markets today.

Yes. And so I think this is a really important question, Eric. It's an insightful question because fiber, as you expand your fiber footprint aggressively as we're doing, we're going to load in a ton of inventory into the denominator. And so I don't expect our aggregate penetration rates to reflect the true growth that we're achieving in either the old footprint or the new footprint. It's going to look like, "You guys aren't really making much headway on that." I think what's really important is penetration rates are one metric. The second metric, maybe one that's more directly correlated with EBITDA production and profit and a growing business, is net adds. It's actually adding subscribers in a quarterly cadence that's a steady, healthy run rate. And so what I'm focused on more than I am penetration levels, I'm focused on demonstrating to you, the investor, that we can accelerate and step up our net add performance quarter-to-quarter with our fiber business. But specifically, when you look at fiber in general, generally by years 4 or 5 of an aged fiber footprint, achieving the 40%, 50% penetration rates has historically been deemed as a very successful fiber build. And what I'm excited about, and I alluded to this on our third quarter earnings call, not only have our fiber or dedicated fiber team -- so we've got a division, one small add point here. We actually have a unit inside of our consumer business that is dedicated to the consumer wireline business. It's led by a veteran leader. It's well equipped. And they are tactically executing at a local market level better than I've ever seen us execute, with field resources that roll into neighborhoods of older fiber to go drive up penetration and getting after brand-new fiber that we light up. And within the first 30, 60, 90 days, we measure what our pen rates look like on that early 30-, 60-, 90-day window. And in the third quarter, I disclosed that we have doubled our 30-, 60-, 90-day pen rate over our historical best ever. So we are adding in our fiber inventory, in the net adds that we produced in the third quarter and we will produce this year is a combination of selling some of the final strands of fiber in our vintage fiber footprint, but it's also bringing in new subscribers on the new footprint that we've built. And you're going to see that shift move more into the new inventory as we've completely penetrated the existing fiber. And as more inventory comes online quarter after quarter, you're going to see that number accelerate. I do expect that we will build more fiber in '22. We will penetrate, we will pass more locations in '22 than we've been able to do in '21. I'm confident of that, given the pace and the run rate that we're on right now.

Okay. That's very helpful color. So thanks for that, Jeff. We just have about a minute or so left, so obviously, there's a lot more we could go through if we had more time. But maybe this might be more of a question for Pascal. But from where you're sitting, how do you think -- how do you view the businesses that you manage in relation to the overall guidance that AT&T has provided for 2021 and some of the longer-term guide that you provided, pro forma, the Warner Media spin?

Yes, I get it. Eric, the best way I can describe it is this business has never had as strong of momentum as we have today. As we exit '21, we enter into '22 stronger than we entered into '21. And you know as well as I do that the business that were in here is all about momentum. It's about achieving operating leverage. And so when you look at our wireless business, our largest franchise, I mean our team is executing better than it's ever had. We've got this thing top-line growing. We've got subscribers growing in a healthy way with the best NPS and the lowest churn we've ever experienced. And our bottom line is growing and it's the largest EBITDA contributor to the overall portfolio. So I feel really good about our wireless business. Our business wireline is in a transition period right now. And I'm excited about our fiber expansion, as you'll see us in '22 light up more locations that address small business and the mid-market segment. That's going to give our business wireline an opportunity to grow for the long term as we shift out of our legacy products. And so 2022 is a real pivotal year for us in our business wireline. Our consumer wireline business, we've touched on that a lot. We've got that to a point of subscriber stability overall, and we expect to grow that next year and expand our EBITDA. And as we enter our back half of our transformation program, Eric, not only are we able to self-fund and fuel our customer relationship growth, but I'm excited to drop a lot of these savings to the bottom line through margin expansion over the coming years, with this operating leverage that this business can generate, given the health of it and the momentum that it has. And so as I look out at our ability to hit our guidance over the next 2 to 3 years, I'm pretty confident that it's modest in what we can accomplish.

That's a really helpful summary, Jeff. So it sounds like you'll be very busy. It was really nice to see you virtually. Hopefully, we can do this in person in the future. But thanks again for your time today.

Eric, it's my pleasure. Thank you.