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

Good morning, everybody. Tim Horan, the cloud and communications analyst here at Oppenheimer. My pleasure to be hosting AT&T here. And Jason Porter is going to present for AT&T as we kind of delve into what they're doing from a 5G and cloud perspective, but also from -- uniquely from their FirstNet perspective. I'm going to let -- Jason is in charge of FirstNet and amongst a few other things. But I'm going to let Jason talk about his background a little bit more, his direct responsibility, before we go into some fireside chat. Fire away, Jason.

Yes. Thanks for having us, Tim. Thanks for letting me join you here. First of all, so I am President, Public Sector and FirstNet. So as you referenced, I've got our FirstNet responsibility, a nationwide public safety network that has been very busy as of the last weekend. And honestly, the last couple of years, it's been extraordinary times for FirstNet. And then public sector, I have all of our federal accounts: DoD, Department of Treasury, FEMA, those kinds of things as well as our state, local and education. So a pretty broad portfolio, and it's an honor to serve the folks that serve us every day.

Well, that's an awful lot, and it's all very related. And it's all, I'm sure, seeing just dramatic transformation across the board, I guess, plus all 4 plus of those segments.

You kind of -- can you talk a little bit, maybe first off, about FirstNet? Where are you in the development of the network and in marketing of the product? How is it performing? And how unique is it out there?

Yes. Tim, thanks for the question. Let me first start off with my safe harbor statement. I want to make sure I check the box for my lawyers. But basically, I need to call your attention to the safe harbor statement, which says that some of our comments today may be forward-looking. As such, they're subject to risks and uncertainties. Results may differ materially. Additional information is available on the Investor Relations website. And also, it's important to note the quiet period for FCC Spectrum Auction 110 is in effect, so I won't be able to discuss that today. Tim, as I dive into FirstNet, it just strikes me this weekend's activities. I just want to say on behalf of AT&T and FirstNet that our thoughts and prayers go out to the lives impacted over the weekend with the tornadoes across the Midwest and Southeast all the way up to the Northeast, in fact. And honestly, you've seen the pictures. Being on the ground, the pictures don't even begin to touch how impactful those tornadoes were and the devastation. And so coming alongside that community and helping them. And also thoughts and prayers go out to the first responders, who now are going to be for weeks, months trying to put this community back together and trying to help with search and rescue missions that are going on right now. It's an honor to serve them. And thankfully, our network held up well, and our response was -- went very well. We've received a lot of good comments and thankfulness from the first responders. But the hardest thing in my job is serving those who serve us when they need it the most. And so to be around that kind of devastation is a really big challenge and just wanted to make sure I said thank you to them. Now to get to your question, honestly, FirstNet, as you know, has been one of the real shining stars of AT&T. It's really taking off. We now have over 18,500 agencies on FirstNet. And we've also got over 2.8 million connections on FirstNet as reported at the end of third quarter. And so we also reported at the end of the third quarter that we are 95% complete with our nationwide build. And honestly, the -- we announce every quarter the connections that are on FirstNet, so you can see the growth in subscribers. In just 4 years, we've been able to really grow this business significantly, and it's really done a few things for us. Number one, it's changed the culture in how we build and how we operate our network, raised it to a higher-level standard. Instead of just being a carrier, we are now mission critical. We need to be there, as I was talking about during the tornadoes. But around the country, there is always a disaster somewhere, and we've got to be able to respond. And so we have raised the bar for our network on resiliency, on coverage. And that has shown through to our consumer network, has taken advantage of that as well. Because as we've grown that, obviously, that reliability and resiliency is something that our consumers appreciate, too. And so you can see the subscriber growth, not only in FirstNet, but in our broader consumer business as well. And FirstNet, obviously, has been growing rapidly. We're now the market share leader in law enforcement, and we continue to grow and try to support our first responders the best way we know how. The really interesting thing is it's unlocked different use cases that we didn't even anticipate coming into FirstNet. Obviously, we've got connections for first responders. But the new connections that are out there, we've seen the prevalence of things like body cams, things like drones and other use cases that maybe didn't exist before FirstNet was here, but now we're seeing a growth in this public safety community that's allowed us to capture new market as well. So really exciting.

And so you touched on a point that I, obviously, just will stand first for a little bit. I want to get a lot more into the 5G strategy. But as you harden the network for FirstNet, I'm assuming -- it sounds like you're hardening the rest of the network and making sure that the uptime of the rest of the network is greatly improving. Is that the case?

Yes, sir. That's absolutely right. We -- when we secure and harden the network for FirstNet, the advantage is that hardening that tower, hardening those -- the transport, all of those things helps the broader network as well. So it's really improved the reliability and survivability of our network overall. Obviously, with FirstNet, you also have the dedicated Band 14 spectrum that is for first responders. And so in times of congestion, times when there's an emergency and you see a bunch of first responders and communities run to an event, now first responders have the additional benefit of priority and preemption on that Band 14 spectrum that is public safety's. And so they have that added level. But from the physical hardening of the network, that obviously has advantages to the entire user base.

I know we've had some incredible disasters year after year after year. The hurricanes down here in Louisiana and the Southeast were pretty bad this summer. And obviously, these tornadoes are horrific. Has the network -- I know you said the network kind of performed. Can you give a little bit more detail? I mean were the first responders able to access and use the wireless network while the rest of the world was basically shut down around them?

Yes, Tim. So some great examples of that across -- obviously, the last couple of years, we've had record wildfire seasons out West. We've had record hurricane seasons, all of that with the backdrop of a pandemic, where we've had to support pop-up field hospitals and vaccination sites and quarantine centers. So the pressures on public safety have been dynamic, and we've tried to be there with them. And I think you can see their -- the recognition of the value of FirstNet is the fact that our subscriber volumes have grown so significantly. You can see the success of it. And you can see things like -- probably the perfect example of what you talked about or your question is, January 6, and the activities that happened around the capitol. On January 6, you had several agencies responding to the riots at the capitol on January 6, but you also had a large population that was there. And shortly after that, there was a PC Magazine article that was written talking about and describing actually priority and preemption and how it helped. Because most of the civilian population was thinking that their -- the law enforcement was suppressing their communications when in reality, they were just hitting capacity on all the commercial carriers. All of those commercial carriers were hitting capacity loads, while public safety was able to still communicate freely because of that Band 14 clearance and that dedicated spectrum for public safety. It allowed them to operate and communicate and execute their jobs flawlessly without any kind of hampered communication. So a great example of priority and preemption that you talked about. But for everything else you talked about, we have a fleet of deployables. We call them satellites on cell towers on light trucks. We have cell towers on drones or wings. We even have a dirigible that is a blimp that we have flown most recently at Hurricane Ida in Louisiana, but we also had -- flew it over Cameron, Louisiana after Hurricane Laura. So we've learned after Hurricane Michael, after that broad devastation that happened in the Panhandle of Florida, we knew that cell towers on light trucks cover a certain range. And so they're good for certain use cases. Drones are good for other use cases. But a drone can't stay up for very long before it needs to come down and get powered up again. Where we went to work and decided that after a major event like a Hurricane Michael, we need a tool in our toolbox that could go up and cover thousands of square feet as well as stay up for a long time. So this drone we have, we call it FirstNet One, can actually go up and stay for 2 weeks, come down, power up in a couple of hours and get back up there and provide coverage. And to your point before, it's providing that coverage to first responders, but it's also providing that coverage for the general population to use when there's no capacity issues. So it's really helping the whole community. Tim, I can't hear you. I'm sorry.

Yes. It's my -- And so this last weekend, it did also help the general population. And it sounds like your strategy, do you think it's relatively unique? Are the other carriers doing something similar?

So first question, yes, it helps the general population. As we said, look, in a series of tornadoes or hurricanes, you're going to have transport issues, you're going to have power issues. And so hardening that network, it helps. We had 20 deployments for our -- we call it our response operations group, where we deployed those cell towers on light trucks and other use cases to go out and help the community. And those things help first responders, but they also help the general community. That hardening helps the whole community. So it is tremendous. And to your point, nobody else has priority and preemption. They don't have dedicated spectrum like we do, 20 megahertz of spectrum. And that's unique with FirstNet because we did, as a part of the FirstNet contract, get that 20 megahertz of spectrum from the government. We call it Band 14, and no other carrier has that. And so -- and also, no other carrier is monitored by the government. Like the FirstNet Authority audits us. I personally have to testify in front of Congress. So we have just a higher bar, a higher standard that if we're not there for public safety, there are implications and ramifications for that. So for us, it is significantly important to raise the bar, which we've done and helps our broader base of customers.

So just switching gears a little bit. What does 5G mean for AT&T? And what's the overall strategy at a high level? And where are you in deploying 5G?

Yes, absolutely. So 5G for us is, honestly, it's kind of like I talked about, different tools in the tool bag. You need different tools in the tool bag to successfully deploy 5G. You need sub-6 for that very broad coverage, and you need millimeter wave to unlock the benefits of extremely high speeds. All of it gives you low latency, the ability to separate the control plane and the user plane so that now your -- you can have edge compute capabilities that can unlock new use cases across various industries. And so we're very happy to say that we're -- our build is on track. Our 5G currently covers 255 million people and over 500 geographically diverse markets. And we've got our 5G+ or our millimeter wave, is deployed in over 40 markets -- in parts of 40 markets right now. And so our strategy with 5G is, quite honestly, maybe best told through a -- through some examples. I've seen tremendous use in my segment in higher education. Higher education is really jumping on 5G quickly. And if you look at something like a campus, a higher education campus, a college or a university, they really need a hybrid model. It can't just be wireless or fixed. It's got to be the combination of both. And then within wireless and 5G, you need that sub-6 and millimeter wave to cover the whole range of use cases. So an example, some recent deployments we've done in college campuses, you need that -- sub-6 deployment will actually cover broadly the entire campus and make sure that students are always connected, faculty always connected. A number of use cases and reasons for that, but you want to always provide that strong connectivity layer and broad connectivity layer. But when you look inside the campus, you go to something like the engineering building, you're going to want to put a fixed asset there with the throughput and the latency capabilities that are possible. And we're seeing so much growth in uplink speeds and capacity that you want to put a fixed asset there, a wireline capability, into the building. But even within that building, we're seeing robotics labs, as an example, that they're starting to put millimeter wave in the robotics lab. And they're putting what we call a Multi-access Edge Compute node, or a MEC node, that is that user plane put on the edge in the -- on the same floor with the robotics lab. So now you've got low-latency capabilities, extremely fast speeds that allow the students and the faculty to operate robots in very low-latency use cases and to experiment with that and develop new applications that will help us all in the communities in years to come.

That's great color. And can you talk about maybe how much spectrum you've deployed for 5G? Are you using the CBRS shared spectrum? And then maybe you can touch on -- I get a lot of questions on where you are with the C-band deployment. And I guess as you're building up C-band, are you using different 5G technology than your legacy, but just -- I know there's a lot of questions in one question.

Yes, exactly. So yes, we are using CBRS in certain locations. So we are using that. We're using our full suite of spectrum. So we're deploying everything -- all of our spectrum capabilities. Again, we're using low-band, mid-band and the high-band millimeter wave spectrum. And for your C-band question, obviously, we are deploying C-band. We're on track to deploy that to cover 70 million to 75 million POPs by the end of 2022, 200 million POPs by the end of 2023. And so we're very excited about that C-band deployment. We are using similar technology to what we've used in 5G in the past. We've been early adopters and moving to new deployment methods like software-defined networking in our core. We're eager to deploy Open RAN capabilities on the edge. But for now, we're using more of our traditional methods to deploy the C-band.

And the FAA, I guess, had some concerns about interference a little bit, and I know you guys have come to an agreement with them. And can you talk about what that agreement is, specifically?

Yes, absolutely. So I'm uniquely in a position where the FAA and I are close partners. They're a customer of mine. We've worked for decades together successfully and have a great relationship with the FAA. In this case, there's no credible evidence for any legitimate interference concerns. And we've been trying to work with the FAA to bring to light everything that the industry has done to prepare. If you think about it, the FCC did a tremendous amount of work before even going to auction with C-band to make sure that, that spectrum was safe and no harm would be done to things like the altimeters that the FAA is concerned about. We've done a bunch of testing ourselves, real-world use cases. We -- that's part of the reason why we agreed to hold our deployment until January 5. We kind of paused our deployment until January 5 so that we could make sure we worked with the FAA and continued to foster that really strong relationship we've had with the FAA. And then if you look globally, C-band is not a new spectrum across the globe. It's being used in many places. In fact, in Japan, there's one of the largest C-band deployments with tens of thousands of 5G base stations that have C-band deployed, and they have a much narrower guard band than the FCC established for us with C-band. So you could argue that ours is even safer than most of the global -- certainly Japan's deployment. And Japan hasn't had any interference with altimeters. Everything's been safe there. So for us, we are extremely encouraged by the work the industry has done and by the work globally. And we're happy to work with the FAA through -- as we try to get them comfortable with all of that evidence and understanding that evidence. In addition, we have voluntarily agreed -- the industry's voluntarily agreed to precautionary protections to further help the FAA feel comfortable in this situation. So things like we can downward-tilt antennas around helipads and airports. We can reduce the height of those antennas. We can reduce power levels in certain situations. All of that, we can do around airports and helipads to make the FAA feel even more comfortable for a period of time until -- once they gain the confidence that we have in this spectrum, both globally and as an industry, then we can move back to kind of standard deployments around those facilities.

And how long do you think that might take?

Yes. It's tough to put a time frame in, but what we've committed to is to hold our deployment until January 5, and then we're going to put these in for a few months after that. And we'll see how the negotiations and the relationship and the experience, primarily the experience with the FAA and their comfort level goes.

So this is a fairly big, open-ended question. But how are you using the cloud and the edge cloud to reengineer your network? And I know this is related to Open RAN and network virtualization and edge compute but -- and I know you're partnered with Azure. Maybe you can just go into a little bit more detail how cloud is transforming the architecture of the networks.

Yes. Fantastic. So we started a journey moving towards cloud and use of cloud in our network in 2014. So we were a very early adopter here, honestly, leading the way. And at that time, network workloads were not possible. We needed to build our own cloud to support network workloads from the throughput, security. All -- several factors caused us to go on our own and build a network cloud. We actually named it AT&T's Network Cloud. And so that became our core and still remains the core of what we do. And that is a white box technology leveraging cloud, software and capabilities to manage these tremendously large volumes that a network cloud has to manage. You referenced our relationship with Microsoft, and that's where our relationship really begins. We, this year, as you referenced, announced that we're going to continue to use our Network Cloud, all of the hardware and keep it on-prem. But we decided to work with Microsoft and give them our team that built the software around that Network Cloud and have them start to build the scale so that we can get to economies of scale and capabilities by serving many providers, network providers around the globe with the same capabilities that we had built and take that to sort of a scale of a cloud scale, if you will. So we're still planning to use that. That's our current architecture. We're using our cloud -- our Network Cloud today, operated with software from Microsoft -- or now Microsoft's operating that software. So that's sort of the core of what we're doing. Well, let me -- before I finish that, 5G brings, as you know, a very powerful innovation, and that is that -- I mentioned it before, control plane, user plane separation. So that core can sit in some of our centralized locations around the country. But what now 5G allows us to do is provide an edge cloud that can sit either on a customer's prem like the Multi-access Edge Compute that I mentioned earlier, MEC, or network edge cloud. So you can put that still in our close proximity. You could think about it as our local switching office. And what that allows us to do is serve different use cases. You could think about a Multi-access Edge Compute. I mentioned robotics in a university, but other great use cases are manufacturing and health care. We're putting them on manufacturing floors, and all of the robots and conveyor belts are operated through that Multi-access Edge Compute, or MEC, that sits on the floor with the factory so that it can operate in real time with 5G on the edge, maybe even a mix of 5G and fixed on the edge, and then all being operated by a local cloud there. Or there's other use cases using the network edge compute. In my space, for example, of public safety, there's a lot of excellent work going on with -- I mentioned drones earlier, drones being flown. And previously, they were having to bring in basically a small data center and find a place to plug it in to operate these drones. Now with network edge compute, they don't have to bring in hardware. They can use the network edge cloud and -- that sits in our closest switching office and be able to have that low latency to still fly the drone and get the advantage of being able to rapidly deploy, making it much more efficient for them. So that's all sort of the core, if you think about it. And then if you think about -- you mentioned our Open RAN. Again, this is one in 2018, we started to build a consortium. Five global operators, including AT&T, worked together to really start Open RAN. And so we're big believers in Open RAN and the benefits of faster innovation and broader range of services that can come through Open RAN. And so we're eager to and look forward to adopting and implementing Open RAN as the technology becomes more available and more reliable.

Great color. The edge compute, Microsoft's got an intelligent edge strategy themselves. And it seems like it would be a great partnership because they're going to build in factories and universities around the world, right, and definitely in the United States. I guess, can you talk a little bit more about that relationship with that edge compute infrastructure? Are -- will you guys build it in some cases and they put their equipment in there? Or are they building it and you're putting your equipment in there? Just a little bit more color how that gets built out.

Yes. So our strategy is to use cloud providers on that edge compute node. We're going to put them close to -- as close to the customer as we can get them in our network edge compute. And so those offerings will be a combination of the cloud provider and our network coming together to provide that really low latency and unlock new use cases, as I referenced before. So yes, Microsoft is a great example. But honestly, we expect that there's going to be multiple cloud environments there on the edge over time.

But are you generally building the small little mini data center inside the factory floor? Or is it Microsoft doing it? Or you're indifferent either way?

Yes. So obviously, we have to do -- we've done work within our -- I called it local switching offices earlier. We put them in several switching offices of different varieties. Some of them mobility switching offices, some of them typically considered wireline switching offices. But in all of them, we're essentially upgrading them and updating them to be mini data centers and environments that these cloud providers can come and put their equipment. Now each one comes with a different model of how they want to deploy it and how we want to work together with it. So I wouldn't say one size fits all there, but we have upgraded and are in the process of upgrading our data centers and switching offices to be able to handle different varieties of use cases of how those clouds will be deployed.

And if the factory is within like 5 miles or 10 miles, can they operate out of the switching office? Or do you need physical infrastructure on the factory floor?

Again, it's all use case-driven. If you're -- you can certainly operate from the network edge cloud. You're just talking milliseconds of latency change as you go on the floor versus in the edge, but significantly advanced. You could think of half the latency that was in maybe an LTE deployment or even better in some use cases of what we've seen. But the use case drives where you want to put your workload. And so a lot of what we're doing in, for example, in my team, working with government entities, with higher ed, figuring out where they want to put different workloads and how to maximize their use case.

And it would seem like -- it seems like the use cases, the wireline and wireless converge in a lot of ways and -- well, especially if you're using your switching offices. And clearly, you need to run fiber right out to the very edge. And in some locations, you might want to use millimeter; some locations, sub-6. But are you starting to really integrate the wireline and wireless networks together?

Yes. tremendous question. Yes. So our strategy is -- our network is going to be hybrid fixed and wireless. And as you mentioned, as we build out millimeter wave, every tower is going to have fiber. Every -- even just base 5G towers have fiber. And so as we've grown our 5G footprint, we grow our fixed footprint, our fiber footprint. And we continue to see that different use cases call for different things. I mentioned it before, on a university, you would want to put fiber to where the students are living. And part of the reason why you want to do that is they're all consuming massive bandwidth as they're streaming to their 4K TVs. But one of the most interesting things we've seen is a tremendous growth in uplink, right? They're gaming, they're -- now with 5G, you can do AR/VR capabilities, and you can do them either on the edge or on the prem. And you can do them with very low latency. So it really brings to life that AR/VR capability. But with that comes so much more uplink capacity need. And so we're seeing a tremendous growth in uplink capacity as compared to downlink. It used to be downlink to uplink was more like a 10:1 ratio. Now downlink to uplink is more like a 5:1 ratio. And so we believe that our hybrid deployment style with fixed and wireless is absolutely critical and sets us up for tremendous success of all these use cases. Because you won't be able to execute these use cases just on either-or. It's really going to take that hybrid capability to serve the variety of things that are being demanded by our customers.

We're almost out of time, but you're serving some of the most sophisticated users in the world of technology and the DoD and Federal and FirstNet and on and on. Could you talk -- I know you touched on body cameras, which is a great example, and drones. Can you maybe talk about what they're asking for you? Like what are the new applications? I'm assuming things like high-def cameras everywhere to do facial recognition and probably tons and tons of other things they're looking at. But can you talk about maybe, yes, some of the other new use cases you think that 5G will enable?

Yes. I mean there's so many examples. We're one of the leaders in winning what they call the DoD tranches for 5G. We've won more of those 5G tranches, test environments with DoD than any carrier. And so what we've seen -- I mean, it's really the forefront of technology. They're doing all kinds of things: operating runways, they are looking at robotics to go and disarm bombs. They -- we already mentioned public safety use cases like flying drones in areas. We're looking at robotics to go into -- one of the universities actually brought this to us, using a robot to go in and explore a building that's on fire or a fire environment, that we can keep the firefighter safe as we try to identify exactly where the person is. As you mentioned, there's also a bunch of AR/VR capability with flying drones and things that they're looking at there and body cams and facial recognition, license plate recognition, license plate readers, infusing that into city infrastructure. So what you're talking about is really massive IoT deployments that, again, going back to that uplink volume that we see coming in the future, it's all these 5G use cases of uplink here. We're seeing tremendous amount of uplink coming from these IoT, massive IoT deployments that we need to continue to deploy a hybrid infrastructure or else the wireless network will be challenged with the new uplink speeds.

Well, Jason, we are out of time. I want to keep everybody on time. I really, really appreciate your valuable time and great work. I'm sure you were working around the clock all weekend, and I really appreciate you taking time out to talk with us.

Yes. Thank you. Thanks for having me. I appreciate it.

Thanks, everybody. Have a great rest of the day. Thanks, Jason.