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

All right. Good morning, I'm Doug Mitchelson, Credit Suisse's media and cable satellite and wireless analyst. And along with my colleagues, [ Nathan Durkin ] and Grant Joslin, I would like to welcome you to the 24th Annual Credit Suisse Communications Conference and our first keynote. I hope everyone has a very productive next 2 days, so let's get started. So this will be a 40-minute fireside chat with Pascal Desroches, Chief Financial Officer of AT&T. And my questions are likely to run the full time, but feel free to email me questions, if by chance we do have some remaining time, Pascal, thanks so much for coming again this year.

Thank you very much for having me, Doug. Good morning, everyone. Before we jump into the questions, Doug, I think I have to make sure that I dispense of the safe harbor. So the first slide you sought up had our safe harbor warning. So the information we're going to discuss is forward-looking and is subject to risks and uncertainties. So with that, Doug, let's get going.

That's exciting start.

Look, Pascal, it's been over -- just over a year since you took on this role, about exactly a year since you presented at our last conference. A lot of changes have been made in strategy and the management team, the asset base. It's been a remarkable makeover. So what's going right? What has been a bigger challenge than perhaps you hoped? And is the company set on the right path at this point?

Doug, I think you said it well. This has been a remarkable year, and I couldn't be more proud of my colleagues. When you think about all we've accomplished over the course of probably -- it's not only been a year, probably 2 years. Since John Stankey took over as CEO, we've reenergized growth across each of the businesses we were in at the time. For a long time, we were being outspent in our Wireless business. We weren't deploying fiber at the levels we thought we should, given the return profile. And at the time, we owned WarnerMedia, and we had -- we've just launched HBO Max. And we invested significantly. At the same time, we recognized we needed to fix the balance sheet. And the moves that we've made over the last year have really set us on the right path, which we focus the business. We're focused on broadband connectivity as you -- so both wireless and fixed. And we are executing well. We're taking share of mobility. We're deploying -- we're already the leader of fiber. We're deploying fiber faster than anyone right now. And look, you look up, our balance sheet is in as good a shape as it's been in some time. We have lots of flexibility. And as we move forward, I only expect our flexibility to improve. We're taking a lot of cost out of the company right now. And over time, that's going to result in operating leverage improving. And as we move through the next 18 months, I expect us to delever down to around 2.5x. And at that time, we're going to look for other ways to deliver capital to our shareholders. So a lot has gone right. And I couldn't be more proud of my colleagues for all the work that's been done across the company.

All right. That's [ tough ].

Inflation. Inflation is probably the issue not only us, obviously, across the board. Inflation is running at a faster clip than we anticipated. If you go back to last year's planning cycle, when those -- that typically wraps up in late October. We held it open for a considerable period of time through December to really take a final look at what was in our best sense of in place. We've built in a fairly healthy level of inflationary expectations into our budget. With that said, it's running harder than we thought. And you saw one of the things that we did recently was to raise prices in response to that as we -- and it's something we're going to continue to keep an eye on. And we're seeing it. We're seeing inflation in labor, supplies, energy, transport. So we're keeping an eye on it. And if it continues, which candidly, as I sit here today, I expect it to continue for the foreseeable future, we're going to have to look at pricing again as a potential leverage to help offset that. So inflation is probably the area that I worry the most about.

All right. That makes sense, and we'll dig into some of that more. I think before we get too far in the operations, just looking at the asset base, now that you spun off for DIRECTV, Warner's, [ Xandr ], is this the right asset base and asset mix now? Or should we expect some more tweaks to the asset base?

By and large, so heavy lifting on reconstructing the asset base is behind us. Is it possible that we're going to do tuck-in acquisitions in areas where we think we need discrete skill sets we don't have internally? Yes, but they should be very, very small. Additionally, are we going to continue to look at our overall asset base and see are there opportunities to continue to prune and take capital that is deployed in some businesses and some small businesses and redeploy it to other places? Yes, that's a possibility, but nothing of the magnitude that we've done in the last 12 months or so.

Makes sense. And I think it's interesting, you mentioned inflation. You touched on the consumer and the economy in so many ways. And so I'm just curious, what have you seen recently? Obviously, the stock market is well, reflecting elevating concerns. And so outside inflation, anything else you're seeing on the consumer side? And are there other ways AT&T responds beyond price? And we'll probably get into that pricing discussion at some point here.

Yes. Look, we do touch the consumer in a variety of different ways. And I would tell you, the consumer, up to now, has been pretty resilient, and demand for our services is very healthy. With that said, we have seen, the last 6 months or so, a tick up in involuntary churn back to the levels they were at pre-pandemic. And so they are not worse than what we saw a couple of years ago. But it is notable, we were at very low levels during the pandemic, in part because of the stimulus money that was -- that consumers had. And now we come back to pre-pandemic levels, but let's not -- let's make sure we're clear. As I look at the inflationary expectations over the next several quarters, it's hard for me to envision that, that's not going to impact the consumers negatively, and that we and others will see some pressure. But so far, so good.

And then on the industry demand side, last month, John Stankey said there was no softening with the [indiscernible] the tax refunds help out the second quarter. So now we're almost on the second quarter, mid-June, any report on 2Q dynamic -- demand with that dynamic in the rearview mirror?

Now look, it's really -- as far as we can tell right now, demand is very healthy. So demand is really good considering everything. And as we said, coming into this year, we didn't expect the same level of demand that we've seen in the last couple of years. And as we sit here today, I can tell you, demand remains very good.

So let's talk about mobility a little bit then. Your largest business, industry growth has been remarkable, as you suggested, that's helped you. You've led the industry in postpaid net additions for the past year and obviously, a pretty good number with the tailwinds in the industry higher -- mix of higher gross agg share and lower churn. So help us understand how sustainable these trends are. And if you can carry that through to EBITDA, if you would, is churn just structurally lower for mobility at this point with the changes in the industry? And everyone now offering their base free handset upgrades and handset feature upgrades, any comments on that would be helpful.

Big picture, we are doing, as a company, a lot of things very well. We are targeting segments of the population that are underserved. Example, FirstNet, the Hispanic market. We are being very surgical targeted. We are providing -- if you go back to -- before John Stankey was CEO, we were underinvesting in the our mobility customers. We were being outspent 2:1. We have stepped up our investment to match the competitors, and that has helped enormously. We are -- our offers are simple, straightforward, and we don't change them on a very -- well, we don't change all that often. And that helps the team sell better the products and services that we have. So the consistency of our offerings, the investments that we're making to our customers are all really helping our performance, and we are taking share. And we are being helped by a very healthy market and demand. Why is that market as robust and elevated from historical levels? I think there are several things that I think you have to keep in mind. During the pandemic, there was stimulus money that came, and that helped expand the pool. Two, if you look at our penetration among younger cohorts and older cohorts, that's improved across the board. So you're seeing kids getting phones at an earlier age. You have older people getting phones that never had them. You're seeing, all of a sudden, a separation of your work life from your home life, so people getting multiple devices. And new business formation has been really strong the last several -- the last couple of years during the pandemic. So all those things have resulted in elevated demand, coupled with our great execution, I think is what you are seeing come through in numbers. And in terms of profitability for the mobility segment, we feel really good with the profit characteristics of that business. As we move through the first half of this year, we said that we were going to be impacted by 3G shutdown cost. We shut down the network in February. And those customers that were not migrated, we're going to lose the agg revenue. Last year, we benefited from CAF II subsidies coming in, first, net subsidies, all those things. As we make our way through the second half of the year, we begin to lapse our 3G shutdown costs and the comps get easier, and we should see a very nice expansion of margins over the course of the back half of the year and improved profit trends.

Makes sense. And all of us are pretty focused on the wireless competitive environment. You've had a pretty consistent presence in the market, sort of 18 months. This quarter, you got a promotion where Galaxy can be traded in for $800 off the S22 Ultra, and the iPhone trading offer is a bit less competitive. Overall, is the Mobility segment taking a step forward or a step back in competitiveness? How would you describe that in just the overall marketplace for mobility? You think the competitive level is getting higher?

I wouldn't characterize it getting higher. Look, it's been competitive for some time. It remains competitive. It's one that we -- it's roughly shared, 1/3, 1/3, 1/3. You have 3 players control probably nearly 90% of the market. And in that environment, look, I think if we compete well, we can get more than our fair share, as you've been seeing us do over the course of the last 18 months or so.

How do you think about the threats from Cable and DISH getting into the business?

Here is the way, if for years, we've been hearing about DISH and what they are doing. And look, they are a good partner. We are very happy with the relationship we have with them. But overall, it's -- this is a business you need scale, you need owners' economics in order to compete. And right now, they don't have that. And will they get it? Perhaps, but I'm convinced, if we run our play, Doug, we should be fine. In terms of Cable, they are riding on the networks of the incumbents. And again, it's really hard to be a principal in this business, unless you own the network. You control the entirety of the customer experience. And we feel really good about where we are. And if we execute our play, we'll be fine. We'll be fine. And I just don't -- Cable has been there the last couple of years. We haven't -- it hasn't impacted our performance, no.

So let's move over to your move on HBO Max. So last week, you introduced new pricing for wireless and fiber that excludes HBO Max where previously, it included for free. So is this another way to increase prices or cut costs or both? And can you walk through the calculus of that decision?

Yes. Look, first and foremost, HBO Max is a great service, and we are -- we believe, they will be an incredibly successful company. The thing I would say is this. From time to time, we experiment. What -- how can we deliver value to our customers? Many of them do value HBO Max, but some may not. And some may value more hotspot minutes. Some may value roaming -- additional roaming. And that's what we are doing right now, is we are trying to experiment and see, hey, is there another play where we can really better penetrate some portion of the market through using different tools in the toolkit to drive penetration? And we'll see. So it's really not anything against HBO Max. It's us trying to drive deeper penetration to different courses of our customer base.

Yes. This is [ dynamic ] because in theory, the benefits of having HBO Max were achieved since you got it out there so long, and that sub base can stay in place for a while with your churn being low anyway. So to some extent, those who want to have it, right?

Yes. Yes, they have it, and we're not taking it away from them. So yes, it's one that -- this is really another play where we're experimenting, and we'll see how this works. We'll have a much better sense in the next 3 to 6 months, how it's working.

So as promised, I wanted to talk about pricing a bit and the price value for your mobility service. And the price increase on metered and legacy plans implemented June 1. You talked about the price increase due to inflation, but if there's any other rationales in there. And do you expect any churn from that?

Look, whenever you go and you touch a portion of your customer base, you're always concerned about churn. But you do it -- you try to approach it in a way that you think, net-net as a company, you end up ahead, that while there will be churn, you're going to probably -- the price increase will more than offset that. It's too early to tell if that is, in fact, what's going to happen. But in this instance, what we did is we looked at the customer base that we haven't engaged in for some time and customers that are on some of our older plans. We asked, okay, how can we try to move them to our new plan? Increasing the prices will likely result in an engagement with the customer. And there, we'll try to steer them to simple newer plans to provide more value to them at -- while at a higher pricing. And on balance, we think that play could work and result in customers moving to some of our newer plans.

I'm curious how much is roaming recovered at this point? Are there any other pandemic dynamics of note for when we think about mobility, particularly price?

Yes. Here's the way I would characterize it. We haven't given specific numbers publicly, but every month, it's improving some. It really -- it's -- we're seeing gradual improvement, but there's still meaningful opportunity to get back to pre-pandemic levels.

Okay. Interesting. Let's move over to spectrum. So you've talked about an intention to possibly revisit your -- well, also pricing, your plans as the 3.45 gigahertz in C-band spectrum starts being lit up. What form could that take? And how do you feel about your network at this point? And is the change in that network sort of now whereas you put the spectrum in place, change how you think about pricing?

Yes. Look, Here's the thing I would tell you about our network. Our network is reliable, consistent and it's better than it's ever been and getting better every day. We, the course of the last 18 months, acquired nearly $40 billion of mid-band spectrum. And that has not been deployed. We expect to deploy that over the next 18 to 24 months. And as we deploy, the network will only get better. And I think as importantly, what will happen, Doug, is there will be -- it will unleash the potential for new products and services that have different profit characteristics than some of our existing wireless offerings, but none of that has been considered or built into the guide set we give. And so we feel really, really good about the future of the business. And in terms of pricing, look, we're going to be very clear. If we need to raise prices in order to offset really high in place, we're going to look at that as -- and we're going to try to be smart about it. We're going to try to do it in a way that delivers more value to the customer. And look, the thing I would tell you I'm really proud of is that when we initially started to do the promotions, everyone said, it's not sustainable. And lo and behold, our competitors matched what we were doing. And we said that, look, over time, our ARPUs would begin to stabilize as we got through the latter part of this year. And it wouldn't surprise you to hear that, look, I wouldn't expect -- I would expect to see a little bit of uptick sequentially. So we feel really good as roaming recovers, as consumers migrate to higher-end plans, we're already starting to see an uptick in ARPU. And look, we feel really good about the state of the business, and we fit the new capabilities that will be unleased by our spectrum deployment, it's upside that hasn't been factored into any of the guidance we've given.

Yes. And it's kind of where I was going next because the peers have talked a lot about 5G revenue opportunities, fixed wireless on the consumer side and enterprise services like private networks and IoT and Mac. How material do you think these opportunities will be for AT&T?

Look, we're excited about those opportunities. But candidly, it's hard to say in the near term how material they're going to be, because they are just -- we are in the very early innings of what will likely be a several year expansion of products and capabilities. But the thing -- here's how I think about why I'm excited about AT&T's unique position in this. When you look at the relationships we have with IoT providers, top in the industry, connected cars, very strong position. So I think those relationships will be critical in unleashing the next iteration of products and services. You couple that with our much stronger mid-band spectrum position, we feel really good about the future of this business.

Yes. We filled in a lot of mobile questions. So let's move on to fiber. Obviously, a foundational investment for the company. Would you put the 30 million-plus locations by 2025 target in context against your overall footprint and opportunity? And does that 30 million plus include any assumption for the federally funded broadband initiatives including [indiscernible] or the wave of [indiscernible] that could get allocated next year? And if or if not, how big could that opportunity be? And let me throw a couple more in there just to do all things fiber, Pascal. Are you seeing competitors racing to build fiber in your footprint before you can get there? And if you do it, will you still build in those locations? So I'll stop at five questions.

Let me try to paint the big picture, and obviously, we can do follow-ups to the extent I don't hit on all those questions. Big picture. John Stankey has been a fiber goal for a very long time. All right. And when you look at the pandemic, it really solidified what's the importance of fiber. Our engagement on this virtual fireside chat without really good connectivity would not be possible. Fiber is the best connectivity solution with symmetrical speed. So our belief is when you fast forward 5 years from now, consumers will say, this is the solution I need, and I'm not going to accept anything less, especially in an environment where reliability is very important because consumers are using it to not only for their personal needs, but also for business. So that's the North Star. Overall, we are at roughly 17 million fiber locations passed. And as we move forward over the next -- starting this year, we're expecting to have 3.5 million to 4 million locations each and every year. And when we have fiber, what -- we win. We target or we're prioritizing, let's go into areas where there is maybe 1 incumbent. Most of the time, it tends to be Cable. And as we go into those areas, we take share. We bring a better product at more attractive price points. And historically, first year after deployment, we penetrated around 12%. Now we're penetrating north of 20%, nearly 25%. And so it's the returns in the payback period because of that accelerated penetration are much more attractive and the payback periods are shorter. So I look at that and say it's a gain for us, it's about trying to get to fiber locations where we think we have the opportunity to penetrate. The other benefit that we bring is that with a wireless offering, we're able to drive the incremental value to our customers through a combination of fiber and our wireless service. And the perception of AT&T goes up immeasurably once you have fiber. It's the best technology. Our liability is there. And you -- the ability to have a consumer that is satisfied to help drive deeper penetration of your borrowers ,product is really significant. Also the other thing, too, is as we are rolling out fiber, we're doing it with a goal of trying to make sure that we are looking at small businesses, midsized businesses in the area and had fiber deployed in a manner that it could serve small, medium-sized businesses. So it's all those things that make us really optimistic about the future of fiber.

When -- so where does this all shake out? When you think about penetrations longer, and obviously, you've had some changes in pricing. You talked about reliabilities of the product. Competition levels are changing. Folks are bundling with mobile, including you. So where do fiber penetration shake on that? Can we look at your older build cohorts today and use that as a sense? Is there another North Star that you would use?

Yes. Look, the way -- typically, when we've been in a location for, call it, 4 years, we would expect 40%-plus penetration levels. And that's why in a 2-player market, there's no reason why you shouldn't get it with the best cost product.

So, this is the legacy footprint. When we think about the legacy ADSL and DSL network over time, that isn't going to be converted over to fiber. What's the opportunity there assuming you keep it? Maybe you'll tell us you won't, and even pushing price through there, how has that been received?

Yes. Look, the play that we are trying to run there is, one, maximize the cash that's coming out of that business. At the same time, I would expect us to have a new product offering, fixed wireless product offering in certain cases if once we conclude that the economics could make sense. But by and large, it's a play of trying to maximize the cash out of our legacy footprint. And in instances where we think we can put together a competitive fixed wireless offering that doesn't impact the quality of our mobile services in that area, maybe that's the other play that you should look for us to do over time. But importantly, it cannot undermine the quality of our mobile network. Another point that you asked me about that I don't think I addressed in my comments to your earlier question is the funds, the federal funds. We have not factored any of that into the guidance that we have out there. And so that is upside. By and large, the way the process is working, we would expect probably funds to start getting allocated sometime late '23, '24. And at the time, we like our ability to compete. We have organizations where we -- our external affairs organization has relationships across the country. And we have a really good opportunity to compete once we get to -- once those funds are being allocated. And that would be upside to the plan.

I'm glad you caught that one. So on business where I'm going to narrow my questions down to kind of just one. What are you seeing from SMB and enterprise customers at this point?

Yes. Here is the clear trend that we are seeing. Let's stop first with Enterprise. Demand for complicated complex networking solutions are in secular decline, and we expect that to continue. In public sector, we've seen a decline in public sector in Q1. We expected that stock coming back in Q2. It's probably -- we haven't seen it yet. So we're keeping an eye on that. In terms of small-, medium-sized market, we're continuing to penetrate with our connectivity solutions there, but it's one that -- it's a small base that we're working off of. And over time, that is growing and it should continue to grow. And in terms of just overall business, that overall business wireline, it's probably going to take us a couple of years to stabilize that business. And as we guided to earlier, we expect to get to a relatively stable business exiting 2023.

All right. And let's move on to the CFO stuff, free cash flow, CapEx and the balance sheet in our last 5 minutes here, Pascal. So why don't we start with free cash flow? Guidance is for $16 billion range this year and $20 billion range next year. I always enjoy the range, which I guess, I think, it to be sort of plus or minus $1 billion, but maybe you can clarify if I'm thinking about it wrong. What will take to achieve those free cash flow target, $16 billion and $20 billion?

I think simply put, look, we have to execute well. We have to grow earnings, and we have to execute on our transformation efforts. If we do that, we're going to achieve those numbers. And we've laid out clearly the path forward to doing that, and we feel really good about where we are with that right now.

All right. The -- and for '23, 2023, CapEx is expected to fall $20 billion. That's what you've outlined. So we're always getting questions on whether that CapEx drop for each of the telcos will materialize fully. What do you see as the opportunities that might be too good to pass up that could disrupt that lower capital intensity coming out quickly? Will you think about pushing fiber deeper or building out wireless more aggressively or faster? Any thoughts as to what will go into ultimately where that $20 billion ends up being the right number or not?

Yes. Here is a the thing to keep in mind. This year and next year, we're at $24 billion. Between our transformation efforts and the deployment of our mid-band spectrum, that's $5 billion to $6 billion annually. The clear thing is, that is a temporary. Those items will dissipate as we get into 2024. And so you start with that. Then what could increase from there? I think if we're succeeding in fiber significantly, it may be an attractive opportunity to continue to push harder than the guidance that we gave. But for now, there shouldn't be any reason why we shouldn't, dissipate in our CapEx spend as you get through the next couple of years.

So then what are the other priorities for free cash flow? You sort of hinted at it at the start of the conversation, but after CapEx, after the dividend, have interest rates also or other macro factors influenced your thinking about capital allocation? And to get throw them all in their Pascal, we think about leverage target and other hurdles on the balance sheet. What's your sort of level of comfort and how much greater comfort do you need before you pursue any shifts in change in capital allocation?

Yes. Look, I think we are on a really good guide path. With the transactions we've done the course of this past 18 months, we don't have to issue any debt for the foreseeable future. You start with that. We are, next year, expecting to generate $20 billion of free cash flow. When you look at our dividend obligations and our minority interest, et cetera, those are probably $10 billion. So you have $10 billion of free cash flows after dividends to continue to pay down debt, which we intend to do until we get to 2.5x. And beyond that, look, once we get to 2.5x, there are a variety of things we can do. If there are unique opportunities we can press up on, because fiber -- in the area of fiber, because it's going so well, maybe we do that. Maybe we do share repurchases. We're going to always look at the dividend to make sure we have a very competitive yield. The key thing to think about, Doug, is all that is flexibility that we have -- we now have that we didn't have for a very long time. We are in much better shape, and I couldn't be prouder of the team for the work that's been done over the last 18 months to get us to this point.

Yes, interesting dynamic. If you start buying back stock and you maintain the dollar amount you spend on dividends, then obviously, dividend per share can go up perhaps beyond a normal level. Any closing comments in our last minute here, Pascal?

Look, other than we're really proud of the position that we're in and the future for AT&T is really bright, and I couldn't be prouder of all our colleagues.

Thanks so much for spending some time with us today.

Thank you.

And joining us again at our conference this year. Thanks, Pascal.

Thank you. Take care.