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

All right. Thanks for joining us. Welcome to the 51st Annual JPMorgan TMC Conference. I'm Phil Cusick. I follow the communications and media space here at JPMorgan. I want to welcome John Stankey, Chairman and CEO of AT&T.

It's good to be here.

John, you finished selling assets about a year ago...

Before you get in, can everybody get their drink order in for the cocktail hour?

Yes, the cart is going to come around.

I probably ought to do the safe harbor statement, too. As you know, we have a website that you can go to look at all of our Investor Relations material. And some of the things I say today are forward-looking in nature and may not ultimately be the reality that sets in, so please understand that as you move forward here today. Thank you.

There you go. Did you hear I had to read that for [ Disney ]...

Did you?

Yes, 90 seconds of it. I did it in my best Mickey voice.

That's what I've got the legal department down to. We're changing a lot at AT&T.

Yes. All right, good. So a year ago, changing a lot. You spun off WarnerMedia. And talk about what's happened in the business in the last year in terms of efficiency and a more sort of streamlined organization.

So it is -- it's actually a year, I guess, last month so it's not been that long. But I'd say what's happened at the macro level is the business is a more focused business. One of the ways I described it, the people ask me is I think there's more days where we come into work and we're calling the plays rather than the plays being called for us, which is a good thing. We have -- when you think about all the things we set out to do, which is start the process of delevering, we made good progress on that last year, have more work to do as we drive to 2.5x in 2025 and still committed that our excess cash moves toward that. Our market momentum, both in the consumer fixed space and in wireless, has been strong. We've been much more efficient in how we've attacked the market. You've seen our margin expansion occur in both those spaces as we've gotten more efficient. Our customer service levels have been improving across the board, which has helped us achieve best-in-class churn in both our postpaid wireless space and our consumer broadband space. For the first time in our history, we surpassed both T-Mobile and Verizon in ACSI customer satisfaction scores. Our own polling that we do and research shows that we're making progress in a lot of key areas of how customers view the business. Very, very strong progress in the reliability of our broadband product and the consistency of use on the wireless network, not maybe the fastest but the consistency of use scores, which we know is one of the major determiners of customer's choice on wireless networks has improved dramatically. So that's helped. And frankly, when you start to look at what we've been doing on the cost side, some of the basic blocking and tackling where we started to close some of the gaps between ourselves and other industry players, but also we've done a lot of work around how we start to migrate out of our embedded legacy infrastructure in the business and put a lot of plans in place. We've built some specialized products and enabled that to happen. We've been aggressively working the regulatory stance on those things. And we are now poised and in a position where we can start working through that and executing that. And that will be kind of the next chapter in our ultimate cost takeout in this business. So I would say, by and large, over the course of the year, we kind of set out what we intended to do, which is be a great communications company, take the asset base, get better returns off of it and start maturing our operations and our expertise on it. And we're not done with that journey, but we're in a far better place.

You started with cost cutting, and I want to go back to that because you're in the middle of a pretty substantial cost-cutting program. Where are you in that? And where are you in terms of starting -- that starting to come through in margins rather than being reinvested?

Well, it's -- I think you're actually starting to see it come through in margins. You've been seeing some margin accretion work into parts of the business right now. And I would tell you, when you look at kind of where we are, we set out an initial target of $6 billion. We just passed the $5 billion of the $6 billion. We'll finish the balance of that over the course of this year. I don't expect we're stopping, to my point. I think our next chapter is to move into some of the legacy infrastructure on the copper base and what we're going to do to start sunsetting and retiring a lot of those legacy products and services that we have. I fully expect that, that's going to be something that will be a multiyear effort. When I look at kind of where we are relative to our gaps against some of our most storied competitors, we're probably about halfway in the journey of getting to parity of what we expect. So we've got about another half to go, that when I look at the initiatives we have on the plate and the things that we're doing, feel comfortable that we can get that done. And look, I think you're going to start seeing that accretion come in the form of improved cash flows, as we said, $16 billion this year. Some of that is coming on the backs of our improved cost management. And as we move into the subsequent years, we're going to be doing the same thing.

Okay. There was some very precise net add numbers thrown around in the industry recently that I don't know how anybody can be that precise on where we're headed. But as you look at the industry and the customers that you can go after in the last year, has that customer base slowed in terms of growth? And what do you think is driving that?

Yes. I think I'm probably sinking with you on what some comments were maybe a week or 2 ago by some in the industry. And I think the characterization of the industry, I would generally agree with. I don't know that I agree with each of the precise allocations of the buckets within it. I would say in aggregate, the industry slowed a bit. And I think we've been saying since last year that it was going to slow a bit. And I expect that, that was kind of the foundation on which we built our plan on. Everybody kind of looks at it a little bit differently. We don't count prepaid to postpaid conversions as a gross add in the industry. Others do. There are free line giveaways, which get counted as net adds. But if they're not accreting into revenue, is that the same as one that's a new customer that's paying full tilt for a monthly service fee? So there's a little bit of de-rating that goes on. I think the point is that we're going to see an industry that no matter how you count it is suppressed probably in every category from last year a bit. And I think that's just an artifact in the post-COVID environment of, in some cases, businesses rationalizing the infrastructure they need to support their business as they moved out of COVID. Sometimes, there were multiple devices. Sometimes, there were data pucks. Sometimes there was backup systems for temporary offices being put in place. Some of that's being worked out. And as a result of that, you see a little bit of thinning. I think you had, as you would normally in the early parts of the new entrant coming in, cable can look at the credit profile of certain customers differently than the embedded wireless players can look at them. They have a relationship. They sell broadband to a customer, somebody that we may have viewed -- looked at as being credit-unworthy, they may have a relationship with and say they are worthy because we have -- we know what they do, and we can treat them to a different type of product or service. You work through kind of the front end on those things. The easy stuff comes on and then it suppresses a bit. And I think we're going to see that as we move through the balance of this year, probably also gated by a little bit of a more tepid economic environment is my guess.

I was surprised that one of your peers sat right here a couple of hours ago and told us that his net adds would be better year-over-year in the second quarter. A pleasant surprise. Do you want to give us where you're coming in?

Who was here earlier?

Mike Sievert.

Okay. I could have guessed.

I wasn't going to say it.

Yes, just checking, I want to make sure. Probably doesn't surprise me. I would think a couple of things. One is they just did a major price increase and rejiggered their plans and threw a bunch of promotional constructs and try to trigger some of that. I think you've also seen, at least I've seen, some stuff floating around the industry of internal documents that they're also targeting that with maybe some additional free lines on certain accounts to incent some movement on that. And so with that, I would expect that there's probably a little bit of pent-up demand in the front end of that new construct that you're going to see some customers move in. And then it will, as it typically does, if it doesn't gain traction and the data that I've seen, at least in porting ratios and what we see in the market suggests there was a bit of a spike in the first couple of weeks, and we're now kind of moving back to stasis and normalization. So I think that will probably contribute a bit. Secondly, I know, and it's been in the public domain, there was a large government account that changed hands, it left AT&T and it went to a particular company. It's probably 75,000-ish postpaid subscribers that are part of that government account. It was business that was a breakeven business for us. I [ whacked ] it because I didn't want it at the prices that were required to take it. And I felt like kind of preserving profitability was an appropriate thing. I'm sure that's going to move through the numbers in the second quarter. That will help, and that's a big chunk. And sometimes you see those lumpy dynamics roll through. So it didn't surprise me that maybe they have a more flattish quarter to last year. But I think, overall, I still stand by my notion that I think the industry, in general, is going to be down. And I think we are seeing numbers that are very similar to what I saw in the first quarter. We're ratably -- we're generally holding our share, notwithstanding a couple of those comments I just made that I think are probably going to be one-off dynamics.

How do you think about tuning the business? That's very helpful. Tuning the business in a slower environment. You let that one go, maybe you fight for this one. Sort of judging that, you want to grow, you want to maintain your share but also very sort of rationally.

I wouldn't -- the context of your question, I wouldn't have made a different decision on that a year ago or 2 years ago. It would have been the same decision whether the environment was fast growth or slow growth. We do business that is accretive to the company, and that's kind of how we're tuned all the time. Now I can't tell you that we're perfect in a large business and somehow somewhere or somebody doesn't get something through that didn't have the right eyes on it. And maybe if John Stankey had looked at it, he might have said no and somebody else said yes. But by and large, the constructs that we try to run the business by and what we do is to ensure that we're bringing in business that's accretive. And because of the breadth of our relationships, for example, with many large business accounts that we have, we have to look at that broadly. And sometimes in a particular contract change or a particular construct that we're selling, we may be balancing that out against the entire book of business with the account and thinking about what holds and what allows us to stay in a prime position. But those kind of decisions have always been the way that we've looked at things and made sure that, in aggregate, we're delivering acceptable returns back. Now to get to the point of your question, what do we do in a slower growth business? Well, look, I think it's really important that you have low churn in a slower growth market. And it's good to be sitting here at the lowest postpaid churn, voice churn in the industry right now. It's good to be sitting here with the lowest broadband churn in the industry. The best way to manage costs and manage profitability and slower growth is to not have to retrade customers. And we start that in a very strong position in that regard and propensity to switch numbers that we look at within our customer base are incredibly robust right now in terms of our ability to hang on to the base and manage through things. So that's one. Two, you have to be very careful about which channels are bringing in the right profitable growth. We've been talking for multiple quarters about we're not really just kind of running one play. We've been working our distribution very carefully across a variety of different channels. Some of those channels are more profitable than others. Some of them are better at bringing in new gross, new to AT&T than others. And so we are tuning that to ensure that we're prioritizing those channels and maybe backing off some of the channels that were neutral to slightly positive with the expectation that in this environment that they may move to being less than positive. And so that's probably the second biggest move we do. Third, we're, of course, playing through where we have an opportunity to start gaining up on multiple products in a household, wireless but no broadband, broadband but no wireless. Those are easy accretive wins early on. We've done some good work in that regard over the last couple of years, but we still have more to do where we can be a bit more refined right now, and we're doubling down in those areas.

You mentioned broadband wireless, wireless broadband. I said earlier today that I've been doing this a long time, and I've never seen where there wasn't a lot of fear about competition. And yet today, the focus of fear is on cable and this convergence and just a general deflation in both industries as wireless goes into broadband and broadband goes into wireless. Is that a concern of yours or is that just overblown by investors?

I'm always mindful of competition. I think there's -- you don't ever want to take your eye off the ball, but I'd step back before I'd look at any specific issue. And I'd say, look at what's just happened in the wireless space over the last 2 months in the restructuring of rate plans across our 2 largest competitors. You want to get that?

I'm just going to leave it.

So our 2 largest competitors just made some pretty significant changes, and I think in most instances, are trying to price in more value by taking rates up and sometimes restructuring how the fringes come with it. But they're effectively, I think, suggesting that because of their large investments in their business, they should be able to get more from a customer. Boy, if you're worried about competitive intensity, typically, you wouldn't see the [ core ] going this way, right? And so I'm just -- I'm a simpleton but I don't do market structure for a living, but I think most of the books used to say that, that was an indication of a healthy structure in the market. So I kind of look at that and I say, "All right, well, cable is down pricing to a segment of the base at aggressive pricing." The segment that they seem to be able to attach are the 1- and 2-line customers. It's much harder on an MVNO construct at 3 and 4 lines when you get into cost of devices, you get into the breakage dynamics that occur at the lower price point, on the average lower price points that we sell at on a 4- or 5-, 6-line...

Yes, just to clarify, I've heard this and people ask me what this means. And I think what it means is you sell a single customer at $70, $80, $90 and you sell family lines at $40 to $50.

Yes. And I always love the good comparison that comes out is everybody says, "Oh, rates are so much lower in Europe." Well, what they're comparing is the 1-line price in the United States to the 1-line price in Europe. What is the comparison is the family plan price in the United States, which over 65% of our customers are on greater than 2-line family plans. And you compare those numbers and they start to look comparative, right? And it's exactly right. And that's how most of the market in the U.S. is sold. So I would tell you that while there's some near-term numbers, I don't know that, that scales necessarily to the broad base, given the constructs of affinity plans. I would also say that when you kind of look at what we've got going on is I'm not surprised that the aggressive stance right now, if you have the most vulnerable broadband product in the market, which if you do customer research, least satisfied fixed broadband customers, the large players in the market, tend to be -- assuming our fiber product, tend to be spectrum Charter customers. I think going and pairing them with another product is a good defensive move to keep them on your broadband product. And I'm not surprised that they're being competitive and aggressive with that. But at some point in time, being on a variable cost product where the usage element is increasing 40% a year, and we're likely to start seeing some new applications start to pop up in the end of this year where customers start buying devices that are mobile usage-intensive, that require high bandwidth capabilities to use them and avail themselves of them, there are going to be incremental add-ons to existing accounts, that play just feels like it's going to get stressed to be a low-price leader when you don't -- you're not the low-priced infrastructure provider.

So you've hinted about this, I think it was on the earnings call, the things that could come at the end of the year. So I think of what to come at the end of the year is the 5G networks will be much more complete than they are today, yours and your peers. And there's some AR/VR devices that are big headlines coming from some big manufacturers. Is that what you're referring to?