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

Okay. Hello, everyone, again. So I'm really pleased to introduce Pascal Desroches, who is the CFO of AT&T. Pascal, thanks very much for joining us today.

It's a pleasure to be here. Thank you for having me.

Why don't we maybe start off with an intro. Do you want to start off with any opening remarks here?

Yes. Well, first, I have to provide the standard disclaimer or else my colleagues from IR won't ever forgive me. Some of the statements we're about to make are forward-looking and are subject to risks and uncertainties. So please refer to our website for more details. And with that, let me just try to set the stage. John Stankey hasn't been CEO, not even quite 2 years at this stage. And when you think about how we have remade the company over the past year and 3 quarters, it's -- really, John deserves an enormous credit. You start with -- we understood we had 3 businesses that had really great potential. Software-based entertainment, HBO Max, fiber and 5G. We felt that the secular trends that were behind these businesses were really great and we needed to press up and invest significantly. And at the same time, we understood, given our dividend, the size of our dividend as well as our size of our debt load, that we couldn't lean in to the extent we wanted to. So we took the steps that we needed to, over the last 2 years, in simplifying the company, separating it, putting WarnerMedia in the right capital structure for the long term, and you have just heard from Gunnar about that. Then we are right now focused on being the greatest connectivity company in the U.S. We think the trends -- the secular dynamics for fiber and 5G are behind us. And with the financial flexibility we have created, we were able to invest significantly and lean into those trends over the next several years. All that is underpinned by a transformation program where we are rightsizing our cost base.

Great. So let's talk about -- you talked about WarnerMedia a little bit. Let's talk about Remainco. Can you talk about the strategy for the company, post WarnerMedia, how these changes are positioning AT&T for longer-term success and how the restructuring changes AT&T's stock as an investment.

Yes. Look, simply put, when you look at our company going forward, we are one that has a dividend right now that is north of 6% implied based on where the stub is trading -- the Remainco is trading. And you couple that with our expected earnings growth over the next several years, I think we are incredibly attractively priced and the prospects are very bright. Let's talk about our businesses. First, wireless. We -- you heard us on Friday. For several years, we had been underinvesting in our business. We hadn't been investing in keeping our customers. That changed in 2020. And we really stepped up our investment to a point where we are matching our competitors and the results have been very clear. We have, during that time, led the industry its shares. We are growing both top line and bottom line for our largest business, and we expect that to continue. Fiber, or our Consumer Wireline business, for years had been -- we had seen declines in legacy copper products surpassing growth in fiber from a top line perspective. And that we had changed starting in 2021. We are now growing revenues for that business, and we expect profits to grow, especially as we expand our fiber footprint over the next several years. So we expect growth in both top line and bottom line. Our Business Wireline, we have a great enterprise business, but we all know that's a business that is in the period of transition. And that transition we expect will be fueled by continued growth in our fiber-based connectivity products. And in the near term, we expect declines mid-single digits in 2022 and low single digits in 2023. And we expect to exit 2023 with stabilized profits going to 2024. And we are remaking our corporate infrastructure to reflect smaller new AT&T. And as I said on Friday, we expect $1 billion of cost savings to come from leaning out our corporate infrastructure. So we feel really good about the different piece parts and how we're positioning for the future.

You mentioned the dividend. After the WarnerMedia transaction, what would you say to investors regarding the risk of a dividend cut in the coming years, prospects for dividend growth and the logic for continued risk premium versus peers in your dividend yield?

Look, I can speak to sustainability and the logic in terms of why we are priced the way we are. I'll leave it to people in the room to make their own determination. But here's what I would say. When you look at the moves that we have made, I think the dividend not only is safe but gives us plenty of financial flexibility where we have set it. If you look at our guidance for this year, $16 billion. And we know that doesn't reflect a full year of interest savings post WarnerMedia deleveraging. If you factor all that in, you're at nearly $18 billion. $18 billion when you have a dividend -- a common dividend of $8 billion. Plus we have, call it, $1.5 billion to $2 billion of other obligations, preferreds, et cetera. So all told, $10 billion on an $18 billion free cash flow without assuming any growth and also without factoring in the fact that we are now at the peak levels of investment for -- because of our 5G deployment as well as our investments in transformation. So we feel really good about where we are and the opportunities ahead of us to maintain this dividend and also invest significantly in our businesses. And once we get to 2.5x, we will look at other ways to deliver value to shareholders.

And let's talk about the EPS and free cash flow outlook. Within your company, you've got some areas that are growing, such as fiber, broadband and mobile. You got some declining, Business Wireline, legacy consumer voice and DSL. When you look at all the pieces together, how would you characterize the earnings and free cash flow growth outlook for AT&T over the next 3 years?

Look, we laid it out on Friday, I think the growth vectors for our business over the next several years are going to be our mobility business, our largest business, and that's already growing both top line and bottom line, as I said. Consumer wireline is the business that is going to scale this year as we -- last year, we added 2.6 million new fiber homes -- fiber locations. This year, we're expecting 3.5 million to 4 million. And with that, we're going to have an acceleration of net adds and top line and profit trends. The profits are going to improve. So those are going to be the 2 growth vectors underpinned by transformation savings, including shutting down legacy copper network, modernizing our infrastructure used to support customers; using AI, machine learning to really help better service customers through the retail channel; as well as improve our fiber deployment and how we service customers going forward. So all those things, coupled with rightsizing our corporate infrastructure, are all things that will drive the EPS growth that we have laid out and our free cash flow guidance.

And one of the questions I think a lot of people have asked about is just the rationale of the spin. You recently announced that the WarnerMedia transaction would be structured as a spin without an exchange offer. It caught some market participants off guard. Can you just talk about why the decision was made to do a spin versus a split and what the key factors were behind that decision?

Here's the context to keep in mind. We are going to -- right now, Discovery has 700 million shares outstanding. WarnerMedia, upon the separation, there are going to be 1.7 billion new shares that come to market. So in order to really do a split, one, you're going to have to create enough demand for that 1.7 billion. For -- in a shareholder base -- for AT&T shareholder base, that is retail, dividend-focused retail investors and income-focused funds, funds with income mandates. So at a time where we are trying, you have those 2 shareholders would likely not participate in this. And that represents nearly between 60% and 70% of our shareholding base. So you'd be trying to get the demand in the remaining 30%. There's never been a split of this size that has been done. And our view is this, in order to get the demand, we would have to really discount the Warner Bros. Discovery stock at a time where those shares don't fully reflect the value that we see long term for the combined company.

Makes sense, yes. Let's talk about the guidance, and you touched on it a minute ago a little bit, but you recently gave guidance of 3% wireless service revenue growth in '22. But you've been tracking ahead of this space, growing 4.5% to 5% over the last 3 quarters. Why would the growth be closer to 3% rather than higher, particularly with DISH recently revealing that a significant migration in the Boost subs are going to go to the AT&T network in the first quarter? Should we just think about that guidance as conservative? Can you just help us think about that?

Look, here are a couple of things to keep in mind. One, I think you heard John Stankey say this recently, which we are a company that we want to make sure we are being conservative in how we guide investors. So that is a deliberate change in mindset. The other thing to keep in mind, too, is with our 3G shutdown peak investments this quarter, we expect to see some 3G subscribers churning off that, and so that's going to impact us some. But overall, let's be clear, we feel really good about where our wireless business is right now. While we're not planning for the same environment that we've seen the last 1.5 years, the market is really healthy. And I feel really good about how we're pacing 2.5 months into the first quarter. So yes, it's all healthy, nothing to be concerned about, and it's just really a combination of being conservative as well as looking at some of the tailwinds that we -- the headwinds that we see from the 3G shutdown.

Right. Maybe just a question on ARPU. You talk -- can you talk about the trajectory for postpaid ARPU growth this year and longer term and just help us to understand the moving pieces that are impacting ARPU growth.

Yes. As you know, when we -- we added many new subscribers. Under the accounting rules, we're required to put up an asset to reflect the subsidies that we've given to customers. So that's been amortizing against our ARPU. But taking a step back, Bryan, here's what to keep in mind. One, we have the highest ARPU in the industry. Two, we expect wireless ARPU to stabilize as we get through the balance -- the second half of 2022. Three, we turned a business that wasn't growing top line and bottom line and that has happened. So when you take all those factors, a lot's been said or written about our ARPU, but it remains at the very top of the industry. So we feel really good about the formula that we have for continuing to gain share and, at the same time, be very disciplined in the way we're approaching it.

You've stepped up promotion, obviously, over the last several quarters. Can you talk about the trade-off between offering these more generous retention promotions and achieving stronger sub growth? Just help us understand the economics around that decision.

So, look, it's really, in our mind, we are -- we've invested in our customers. These are the best customers and people we know. And so when you have people that you know, you know their credit history, it is really good business to go in and actually invest in that subscriber base. We've seen increased lifetime values as a result of doing that. And as we said, as we get through the second half of 2022, the ARPU, we expect ARPU to stabilize. So overall, by investing in our base, we've had the lowest churn in our history plus higher NPS, higher lifetime values. So all things that are very, very good as we try to reposition the business.

What's your market outlook? When you look at last year's strength in industry volumes, what do you attribute to that strength? And what are you seeing so far in 2022? And how are you thinking about industry growth for this year?

Look, we've said this, but I'm going to -- at the risk of repeating myself, I'll do so again. We are expecting -- we're not planning for the same markets that we've seen in the last 1.5 years. There are some factors, and some of it, we know for a fact, but others -- other parts of it, we're just not quite sure. So here are some of the dynamics we think that were at play. First, there was clearly older people and younger people participating in getting devices. In the case of younger people, earlier than they otherwise would, and for older folks participating for the first time because of the pandemic. That, we think, is clearly temporary. But you look at things like business formation, business formation continues to be very strong. And that's another factor that has helped grow the pool of subscribers for the industry. And look, who knows how much of that will continue? But we don't think it's going to stop right away. And right now, as I said, 2.5 months in, the market remains really healthy. So look, we're not planning for it, but the market dynamics remain very healthy now.

Okay. And let's talk about competition. You provided a lot of detail as to why you think you can gain share through this disciplined go-to-market strategy. But others have said the same, for example, targeting areas where they've underpenetrated such as enterprise. How do you think about your ability to succeed vis-a-vis your competition? If others get more aggressive on using pricing as a tool to go after share, how would you respond? And are you focused more on subscriber growth, the right subscriber growth or profit growth? And how should we think about the balance of those factors when you consider your go-to-market strategy?

Simply put, we are interested in profitable growth. It's -- and our approach is working. The subscribers we're adding, we feel really good about the quality and the lifetime values associated with those. And for years, AT&T has not done the job it needed to do in really paying attention to our customers. That has changed. And let me try to give a little bit more texture around some of the things that are impacting us that I think that are contributing to our success that I think often go unnoticed. Two years ago, a whole new leadership team took over operating business led by Jeff McElfresh and his team. Here is what we did. We decentralized our go-to-market approach such that people that are dealing with the customers are able to make decisions quickly in response to the conditions in the marketplace. That helped us enormously. We also started to do a better job of surgically looking at underpenetrated portions of our customer base and going after those with tailored offers. All those things, coupled with our investments in devices to make sure we're keeping our best customers, have all contributed. And look, it's not that our competition hasn't responded. They have. They are providing oftentimes promotions that are richer than ours, but it's not changing our success. Our success is not by accident. We are being very deliberate in how we're going about executing this. And we feel really good about the sustainability. And it's discipline.

Let's talk about spectrum for a second. How do you feel about your spectrum position today with the additional 3.45 frequencies from Auction 110? And can you just remind us of the timing around your plans to deploy your C-band frequencies as well as the 3.45?

Sure thing. One of the things we did was when we looked at what was happening with the C-band dynamics in Auction 107, we understood that there was going to be another opportunity to acquire very attractive mid-band spectrum, and we opportunistically waited deliberately. And that gave us a much better set of economics for our overall spectrum, 120 megahertz that we acquired. 80 megahertz of that is going to be available for deployment starting the second half of this year. That includes the Department of Defense and the first tranche of the C-band. And we expect to cover 200 POPs by the end of 2023. And look, the second tranche of C-band is going to be available at the end of 2023 and we will pursue deployment of that. And the thing to keep in mind is, by deploying both C-band and DoD spectrum at the same time, it allows us to do -- to climb -- do a tower climb one time. And that saves us an enormous amount. And so we feel really good about our strategy, how we've positioned it, and we will have 80 megahertz available in the marketplace sooner than many of our competitors will have their full spectrum deployment, so.

Yes. That's a good segue into CapEx. You talked about $8 billion in CapEx for a typical wireless network interface change. So is this the right context that we should use in considering your mid-band deployment costs over the next 3 years?

Yes. As I said last week, we are at peak CapEx right now between transformation, C-band deployment and success-based fiber deployment. And over the course of the next 2 years, we expect between C-band and transformation, those investments to taper. And so overall, we think we'll get to a run rate in 2024 of about $20 billion. And at that point, we have significant financial flexibility given our -- we would have had delevered fairly significantly by then. And we'll continue to look at opportunities at that time to deliver value to our shareholders in other ways, including buybacks.

Okay. On the fiber side, you've laid out plans to double the fiber-to-the-home footprint $30 million by the end of '25. Can you talk about the pacing of the build-outs this year and your confidence in reaching your target, just given some of the supply chain and labor shortages that are affecting a lot of industries, including your own?

Yes. Look, we're not immune to supply chain issues, but let's be -- we have first priority on supplies. We are in great position on access to labor relative to others. And what we're seeing is, while there were issues in the summer of last year, those issues have been largely resolved and we exited 2021 with good momentum and that continues in 2022. So we feel really good about our ability to deliver 3.5 million to 4 million new locations this year.

Okay. Great. And just on strategy, what's the path to adding more than 300,000 fiber-to-the-home net adds per quarter? Is there anything you need to change or improve with respect to your go-to-market strategy? Or is it just a matter of selling into an expanding pool of newly built fiber locations?

It really is just that. I think the #1 question we get is when will fiber be available in my neighborhood? And once it's available, it's a product that sells itself given the quality is unmatched. We have a pricing advantage relative to the incumbents. So best product at a very attractive price with some adjacencies to our mobility business checks a lot of boxes. So really, the gating factor is how can we go faster?

Right. Yes. Talk about the economics a bit on fiber. Can you help us understand at a high level the business case for expanding fiber deployment areas where -- in areas where several years ago the economics just didn't support that expansion? And as you move further along with the build-out, is there any consideration being given to expanding the build outside of your traditional wireline footprint or utilizing government subsidies to fund additional build-outs? And maybe within that, if you could talk about some of the factors, such as move rates and household formation and port ratios and consumer differentiation between fiber and cable that are impacting net add trends today or in recent quarters?

When we look at fiber, it is the best technology available for the foreseeable future. Why wouldn't a customer want to get the best technology? I mean, it's just -- so you start from that standpoint. And we -- our returns on fiber are very attractive. The payback periods are shortening as a result of the adjacencies we're seeing across both our business and wireless footprint. And so really, all arrows point up. So it's hard to say that there is anything other than going faster that we're concerned about as it relates to the business prospects for fiber.

And then somewhat related, fixed wireless. The other 2 scaled U.S. MNOs are moving ahead aggressively with fixed wireless products while you've taken a different approach concentrating on fiber. Why does AT&T have a different strategy than the others? What is it that they see that you don't or you see that they don't, maybe, from your perspective?

Yes. Look, fixed wireless is a tool that we have available to us. And it's one that, in certain instances, it is the right solution, whether you think about some of the less densely populated areas and whether you think about a pop-up retail store or construction site. Those are all fine use cases for fixed wireless. But in densely populated areas, like long term, first, it's not as good of a product. Two, it costs us more long term to maintain it. So why not just simply go and do it right the first time, provide for those areas where the returns will pencil out? Build fiber and bet on the long term that the trends are in your favor. I mean when -- our internal surveys and research would suggest that we're going to get a significant increase in demand for connectivity over the next several years. I mean, it's going to -- the trends are unmistakable. And with that, fiber is really the only answer wherever you have it possible.

All right. Going back to the question around what you're seeing in net adds, I mean have you seen a real shift in consumer recognition of fiber versus whether it's cable or even some of the VDSL products that are out there? I mean do consumers recognize the difference in care and make decisions based on it?

I use this as a first-time example. I was -- I met somebody on Saturday evening, and he's like, what do you do? And I tell him I work for AT&T. And he's like I just got AT&T Fiber. It is amazing. And it's like he goes I get 2 gigs. Of course, it's just -- my life has changed, just the amount, how quickly things I can transact. And he runs a small business. So it's like it's just -- it's been a life altering. Like happy to hear that.

So well, on small business, you've recently been highlighting a renewed focus by AT&T on the small business market. What's the opportunity that you see there? And what do you need to do tactically to capture that opportunity?

It's really having the product available. For years, we've been at a disadvantage to cable. And literally, we haven't challenged cable for the small business because we didn't have fiber available readily. And once fiber is available and we focus and prioritize it, there's no doubt in our minds, we're going to be able to succeed because -- not only because of the quality of the product, but the price point as well.

And in enterprise, can you just talk about the outlook for 5G enterprise specifically, its potential to become a new leg of growth for the industry? And what kind of engagement you're now having with prospective 5G clients?

Yes. Look, I would characterize 5G right now as being in the relatively early innings. Our customers are really excited about the power of 5G. And the place we start from is we have a relationship with 90% of the Fortune 1000. And so having that, coupled with the increasing use cases for 5G, whether you think about autonomous vehicles, whether you think about connected vehicles, telemedicine, they are all going to increase the use cases for 5G and fiber. And so once we having the relationships plus having the product set to deliver, we think will accrue very attractive returns long term. In the near term, as we said, the business will be going through a period of transition. And we expect there, we're going to be down the next 2 years and stable as we exit 2023.

Okay. And on the cost side and EBITDA outlook, you provided a lot of color on your expectations for transformation costs to fall to the bottom line. How should we expect to see them show up? Any additional cost transformation opportunities that you foresee after this initiative is wrapped up?

Yes. Look, we -- up to now, we've generated over $3 billion of savings that we've used largely to reinvest in our customers and to fund the transformation effort itself. As we move forward, we expect $1 billion of incremental savings in 2022 and $1.5 billion in 2023. Those will show up in a variety of places, whether you think corporate infrastructure, moving applications to the cloud and rationalizing some of the supporting infrastructure that was on-premises, creating automated sales channels, all things that will drive not only near-term profits but sustainable improvements in the business and will really service the foundation as the business moves forward for the next several years.

Okay. And we have a couple of minutes, if anyone in the audience has a question. Let's just get a mic over there, Lee, if you have a second. Someone on the way.

I'll speak loudly. Can you hear me?

I can.

All right. Go ahead.

I need a favor. I'm an AT&T customer, my wife is a Verizon customer. So everybody has a plan [indiscernible], number one. And number two, you mentioned you had underinvested back in 2020. There's good property on the market. Ligado has about 35 megahertz of 5G spectrum. Do you see yourself as a potential buyer of that property? Or do you have enough spectrum to be competitive?

All right. Look, first, in terms of 5G network, I will tell you we -- everyone has a really good 5G network, and they're going to continue to get better, whether it's T-Mo, Verizon or us. I think all of us have a good 5G capabilities, and they will continue to get better with the spectrum that's been acquired recently and that has not yet been deployed. In terms of whether or not we are interested in more spectrum, look, whenever something comes to the market, we're going to evaluate it because we think this is a core asset that we will need in order to deliver the quality of services that we want, we aspire to deliver.

You say spectrum is growing in value or...

I think it is. I think if you -- if I look at our spectrum portfolio, we probably -- not that we would ever do this, it's more valuable today than when we acquired it.

Anyone else? All right. We're just about out of time anyway. So why don't we wrap up there, Pascal. Thanks very much for joining us today. I really appreciate it.

Thank you, Bryan. Thank you, everybody.