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

[indiscernible] I think I found [indiscernible] safe harbor. It's the perfect way to start this conference. So many of the business panel we're going to hear about the next few days are really [indiscernible]. We'll get into that. But I think [indiscernible] the safe harbor [indiscernible].

Sure thing. If you go into our website, the safe harbor statements on our website [indiscernible] are forward-looking [indiscernible].

Perfect. Well, as I said, Pascal is the Senior EVP and Chief Financial Officer of AT&T, where he's been in since 2021. He has really spearheaded a significant cost transformation effort to strengthen the balance sheet and really [indiscernible] investment of both 5G and fiber. And really this approach by AT&T, I believe, [indiscernible] infrastructure in that both on the wire and wireless side of the business. So let's get started and jump right into it.

You all have done an amazing job deleveraging in the past few years. You've already achieved your stated goal of 2.5x in the first quarter, and you've indicated a buyback would be part of the second quarter. Do you have to have an intent to kind of balance the capital allocation priorities now that you've achieved the [ leverage permit ]?

It's true [indiscernible]. We're just so incredibly proud of [indiscernible]. When I look out the next 7 to 8 [indiscernible], there are certain things that I know would be true. One, [indiscernible]. Two, fiber is the very best [indiscernible]. Today, we are at [indiscernible]. And next 5 years, we expect to add [indiscernible]. Over the next few years, [indiscernible] each and every year. And in addition to that, [indiscernible]. So we will invest in the future as well as delivering attractive returns to our shareholders [indiscernible] is about [ $200 million ] [indiscernible] [ $8 billion ] a year in maintenance plus [ $10 billion ] [indiscernible]. Super incredibly proud of the position we're in. [indiscernible].

[indiscernible] see all the great work that you have in the last 5 years under your watch. I want to really hone into an exciting transaction that was announced by [indiscernible], that being the AT&T and Lumen transaction. With this transaction, you -- kind of referring to my notes here, you get 4 million additional passings, 1 million additional fiber subs. And as you alluded to, you're going to get to 60 million homes passed with fiber by the end of 2030. And these are not insignificant markets, in fact, Portland, Los Angeles, Minneapolis, Seattle, the list goes on. Can you [ tell ] if this deal from your seat was really a defensive move or an offensive move? You're already the largest fiber-to-the-home player, talk about a little bit of a land grab, but curious as to your thoughts there because things are changing quickly around you.

Yes. To me, this is an opportunity to -- we saw an opportunity with the Lumen consumer assets to lean into our strategy and to add to it. We've made no secret we like fiber. We manage it very well. And here, we're a set of assets in 11 states that we don't do business in currently that we don't have broadband infrastructure. So this gave us a foothold in those states. Currently, we're going to get 4 million-plus fiber passings at closing. And importantly, it's going to come with a build engine that allows us to expand in those states. Currently, the penetration for -- of that fiber footprint that was acquired is about 25%. We see no reason why, with our distribution network and additional investments, we can't get it to 40%. Also in the markets that we're operating in that Lumen operates in, we're under-penetrated in wireless. And so the ability to take up our wireless penetration, where we have fiber in our own footprint, we see about 500 basis points of incremental wireless share. And we are well under our average penetration in the Lumen market. So we think it's -- we have an enormous wireless opportunity on top of being able to more fully penetrate the existing build. And we expect to significantly increase the passings in that footprint over the next several years. So all in all, we think it's a great transaction for us, and we're incredibly excited.

And for -- with that also, so if I'm hearing you correctly, not only greater penetration, higher ARPU, lower churn, obviously, that math is an attractive one for any CFO, I would think.

Absolutely.

That's what you're seeing. The wireline penetration, you mentioned this, if I'm right, the math of your penetration in your fiber markets, legacy AT&T is about 40%. And Lumen is -- do I have that right? You said...

25%.

25%. So it does offer a tremendous opportunity. How do you expect to approach this for the wireless subs? I mean what is the targeted push?

Yes, even -- before even commenting on our 40% penetration, we're at, on average, 40% across our footprint. But remember, much of our build has happened over the last 4 years. So by definition, we are not yet at full scale in those markets. So we are incredibly excited about our ability to continue to add to up the penetration in our own market. In terms of the wireless opportunity, when -- simply put, when we have an opportunity in the Lumen markets to be able to take a great fiber product and bundle it with our wireless, our belief is that we will be able to get higher than our fair share. We will add distribution. We will -- incremental distribution beyond what we already have in the market, not only for fiber, but for wireless as well. And we think those 2 things will allow us to really up the amount of penetration that we have in the Lumen markets.

Definitely. And that -- I mean you've seen evidence of that really where -- for both you and Verizon, where you have both the wired and wireless people come.

Absolutely. Fiber product is just a superior product. It works really well. And in many of the markets we go into, the consumers didn't really have a choice, a viable competitor. And having a viable competitor with a better product and oftentimes at a slightly lower price point, it's a win-win.

Yes. Part of the transaction announcement, and I know there's limits to what you can say here, but you did announce that a potential partner will be coming, a private capital partner here. And while I understand you can't comment on where those discussions are, who it involves, but I just wanted to get your thoughts as to why you would prefer an equity partner versus keeping it on balance sheet with this Lumen transaction. Just some thoughts there.

Sure thing. We're currently spending $22 billion a year in capital. And we've guided that, that is our expectations through 2027. That's at the top of the industry. An important part of the Lumen acquisition is that we're going to expand upon their existing footprint. And we would have to up our capital, which would obviously impact free cash flows. In our view, this allows us to still get access to an expanded footprint while, at the same time, continuing to deliver attractive returns that we've committed to our shareholders and still manage within the capital envelope we guided to investors. So we think this is a great way to allow us to continue to tick off all our priorities and, at the same time, get access to a really attractive footprint with great demographics that candidly we -- where we think we can, with our distribution, really penetrate and deliver attractive returns for our owners.

And on the private capital side, you clearly have experience with that with GigaPower where you partnered with BlackRock. Can you talk a little bit about maybe some lessons learned there and why, if it did contribute, that this is an approach you would want to take with Lumen?

Sure thing. With GigaPower, here's what I would say, we're really happy with our partnership with BlackRock. It's very collaborative, and we're incredibly pleased with that. Also, one of the things we wanted to prove to ourselves with GigaPower was the ability to go outside of our traditional footprint and have the AT&T brand perform. And while it's still relatively early days, we have seen that the performance of AT&T Fiber coming from GigaPower is performing comparably to that of the fiber built in our own network. So our brand hunts in those markets. So again, another proof point. And when I look at it all in, the amount of the returns that I get through the JV, through a JV structure, because the amount of leverage you could put on it, which is higher than what we would have at AT&T, the overall returns are very comparable. So to me, it's a great way to strike the right balance, expand the pool of fiber customers that we're going after and, at the same time, use some of our existing excess capital to return to shareholders.

And we were talking in the breakout room, there is kind of a land grab right now. I mean, to your point, to be able to take on that leverage and do it, really put the pedal to the metal, does that -- would you agree with that view? Because it's -- time seems of the essence. If -- some reports would indicate that between you and Verizon, pro forma for your 2 outstanding deals control 75% of the fiber market. I mean, to be able to kind of get there and build it first, would you agree with that thought?

Yes. We've said this publicly, when we look out by the end of the decade, we expect that all the economic -- virtually all the economically viable fiber locations, somebody will stake a claim to it. A lot of it will come through our own organic build. Some of it will come through GigaPower JV. And hopefully, some of it comes through this Lumen transaction once it gets approved by the regulators. So all of that, we think it's really important that we act with purpose and really stay focused and use our capital to stake a claim to those parts of the country that we think are economically attractive because this opportunity will not exist a decade from now. And it's -- we think we're really good at it. And our build gets more efficient. The supply contracts we have puts us at an advantage vis-à-vis others. And our goal is to -- we've mapped out where we want to go, and let's go at it. Let's go get it.

That's great. So sticking with the financial side of this deal, you were very clear, and I think The Street very much appreciated this, that you continue to expect to operate within your leverage ratio of 2.5 net leverage following Lumen. Following this deal and assuming a partner does come along because it does sound like those conversations are going well, if I'm reading the tea leaves here.

We really haven't engaged in earnest with a -- to try getting a partner. But my knowledge of the marketplace and the amount of capital that is available for this, for infrastructure, there is no doubt in my mind that we're going to be able to find a partner and we'll be able to strike a good deal for AT&T shareholders.

Great. And then how, if that comes to fruition, how would that impact the $10 billion in incremental financial flexibility you've spoken about in the past?

Sure thing. Here, just to level set, the Lumen transaction was -- the overall price was about $5.75 billion. We are executing the transaction on our own. So upon close, of the $10 billion of financial flexibility that we had outlined at our Investor Day for the next 3 years, the $5.75 billion comes out of that. Importantly, when we find a partner and we determine the appropriate capital structure for the JV, that will serve to -- as a capital recoupment for AT&T. So some of it is going to come from levering up the JV. Some of it is going to come from the equity provided by our partner. And so all in all, I would expect that there remains a meaningful portion of the $10 billion even after this transaction and the second step. And look, this is a business as we grow more each year, our capacity will increase. So one of the reasons why we waited so long before starting to buy back shares and some even argue that, look, 2.5x for a business our size with this type of infrastructure, maybe a little low, but we wanted to be in this point because it gives us ample flexibility to go out and do a transaction like Lumen while not disturbing the capital returns we've promised to shareholders. And that's where we wanted to be. This -- to the point you made earlier, Jennifer, this is a time where you don't know where opportunities will come from, and you want to be in a position to take advantage of that.

And it seems like your balance sheet is well positioned to do that.

It is. We are incredibly proud of the work that's been done.

So shifting to the other side of your business, we've talked a lot about what I'd call the wired side, shifting to wireless. Everyone talks about spectrum as being the lifeblood of the wireless network. John Stankey and others at AT&T have been very vocal about the need for more spectrum coming from this government. And it's clearly, I would say, a priority for the Trump administration. He's talked publicly about freeing up 600 megahertz of spectrum. But I guess my question is, that's not easy. I mean there's the Department of Defense, et cetera, et cetera. And in the absence of new spectrum coming from the government, you seem to be doing a lot in the 3.45 acquisition side, a few deals have been announced, namely around UScellular. If you look where you need more spectrum, is it really in the mid-band area? Or how do you think about the spectrum puzzle?

I take a step back, when I took the role almost 5 years ago now, we were concerned about the spectrum position. But since then, we've spent a lot investing in spectrum. And as we're deploying the spectrum that we acquired, that spectrum propagates much more efficiently than we even thought. And so our network, there is no immediate need for spectrum. But we run this business not for the next 5 years, we run it for decades to come. So whenever a spectrum becomes available, it is something that we would always look at. And in many -- in most cases, when spectrum becomes available, you get a return in a couple of ways. One, the coverage and capacity that you add to your network, it will displace a good bit of that, so reducing your capital intensity. Two, fixed wireless is a product that many consumers see as really a good product for them. And additional spectrum allows you to increase then the amount of fixed wireless subscribers you have on your service. So all in all, it's simply an ROI, and we would look at it if the government makes more spectrum available. And we think it's a good thing long term for the industry to have more spectrum. But there is no pressing need that I feel like we have to go out and acquire spectrum in the next 12, 24, even 36 months.

Got it. Okay. Sticking with wireless, bigger picture, as we've talked about, you have the largest fiber footprint in the U.S. and your 5G network covers, I think, more square miles than any of your peers. How are you kind of leaning into the converged services? I mean, can you explain how the AT&T Guarantee really helps drive that convergence strategy?

Sure thing. The AT&T Guarantee is this: we want, when somebody does business with AT&T, for them to know, one, if they have a technical issue because of something that we did, we're going to make it right by proactively giving them a credit. Two, if somebody calls in for technical assistance, we're going to either answer within 5 minutes or agree to give you a call back. And if we don't do that, we will give you a benefit. Three, we're going to give you the best deals that we have, whether you are an existing customer or a new customer, and it doesn't have to be with the highest price plan. And we believe having both a wireless and a fiber network where you control the experience, we are in a position to honor those guarantees and to be -- really to increase the affinity for our services. And you can't give a guarantee if you don't control both networks. And we spent a lot of time doing a lot of work, making sure we're in a position to deliver that guarantee. And the early reaction has been positive. As I look ahead, I mean fiber is such a great product. If somebody has a great experience with fiber, why wouldn't they try our wireless product?

Yes. It kind of sells itself if there's...

And our research has shown that the vast majority of people don't want -- they want connectivity. They want fixed, they want mobile connectivity, and they'd rather deal with one company as opposed to 2. So if you have great products, great service through the AT&T Guarantee, why would somebody want to deal with multiple carriers? And again, these are long-term bets we are making, and we feel that the reaction we are getting is really positive.

It is a competitive market, sticking with wireless here. And I'm curious as to your thoughts, I mean, about the current state of this competition. Cable has been somewhat of a loss leader in pricing. It feels like that is ramping up, especially as you see some of these cable brothers join forces. What gives you the confidence you can, on the wireless side, achieve the guidance when there is kind of some cowboy behavior around you?

The wireless industry has been competitive for a very long time. Cable has gained share for the last several years vis-à-vis wireless. I look at our performance during that time frame and I think here's what I look at: every company defines a subscriber slightly differently. If I give you a line for free, is that a sub? If I migrate from one tier service to another, is that a subscriber? We don't count either of those as subscribers. What I look at is when I look at how much wireless service revenue is growing in the industry, the last several years, we have garnered the most share of service revenue growth when you strip out fixed wireless and you look at it pure. That's how we know we are doing well. And our services are resonating and customers are paying for our services. When it's all said and done, if it's not translating to service revenue, it's really -- it can be viewed as empty calories. That's how we look at it, and that's why we've been really disciplined in how we approach the market and how we count subscribers because ultimately, it's about service revenue. And so yes, the wireless industry is competitive, no doubt about it. But we know how to compete. We think through the advantage of convergence, it gives us another leg up. We have a great network. And we're confident that with a great network, great products, we can compete effectively just as we have been in the last several years.

And on the wired side, too, I mentioned cable companies joining arms, that obviously being Charter and Cox. Do you see any -- cable has kind of been quiet on the wired side. I mean they've had a lot of share before telecom, including AT&T, really leaned into the fiber deep architecture. Do you see, with the cable competition, that competitive side changing? And are you underwriting that risk?

Here is -- cable for years, in many cases, has operated as a monopoly. There hasn't really been competition. There hasn't been choice. So competition makes you better. I'm really confident when we bring our fiber product to a market, we're going to effectively compete with cable. It's a better product at a lower price point. And there is no doubt in my mind we can compete, and we're going to continue to get more and more opportunities to do so.

And if math is right, that would suggest that's been happening since the second quarter of '22, I believe, when cable -- I mean, when telecom carriers have really leaned into fiber.

Yes. The other thing, too, is, look, because there has been no competition, when you start to get attacked not only with fiber, but on the lower end fixed wireless, it's game on. So I think that what is happening now is for the first time, the cable companies have to compete against others that are providing alternative products.

Yes. So I want to just -- before we open it up to questions, 2 kind of macro questions. Well, luckily, you're not expected to have the direct impact of tariffs. It has created uncertainty just in general. And you do have a unique front-row seat into economic spending patterns of the consumer. Are you seeing any kind of "Danger, Will Robinson!" type of concerns? Many in the audience might not even know what that means.

Oh, I do. I do.

But I wonder, I mean, are you seeing any -- because you guys will be the first to see it. I mean I remember being an analyst and other CEOs and CFOs at AT&T calling out weakness well before everyone else saw it.

Yes. First, on the tariffs, here's what we have said: look, fortunately, we are a domestic-based company. And yes, we do have some exposure. Much of the network equipment comes from different parts of Asia. So there will be some impact there. Also, the phones that we resell, there will be some impact now. The phones, they are Apple, Samsung, others, and they set the price they determine. We provide a subsidy. I wouldn't imagine that the subsidy is going to change meaningfully as a result of the tariffs. In terms of the hardware, it will be an impact, but something that we think we can manage. When I think about our capital spend, the vast majority of our capital spend is labor. While we spend on equipment, the vast majority of it is labor. So the exposure, we've described as we can manage through it. And especially, we reiterated our guidance this year. We feel like whatever the ultimate outcome, we can manage through it. In terms of the impact to consumers, say, the consumer remains healthy.

Not seen.

Credit and collections, very solid. Demand is solid. In fact, we talked about on our earnings call, we are seeing -- we saw higher activity levels late Q1 into Q2. We think in part, there is some consumers trying to get ahead of the tariffs. So it may be a pull forward from second half. But so far, there hasn't been meaningful impact. Now one of the things I look at is over the years, our services have become more and more essential. And I'm not sure we'd be the first to see it right now. Given how critical the services are, I think there are a lot of things consumers would cut back on before they...

It's ironic because you think in past weaknesses, it always the talking point was cable will be the last bill you don't pay. But really, it is your wireless network now or your connection. And I guess the final question I have is what I'd call the longer-term crystal ball question. I'm curious like as you look at the end of the decade, what you see as your network looking like, your operating leverage looking like and, I guess, your overall growth profile?

You take a step back, at the end of the decade, we'll be largely done with our fiber build. That's a meaningful portion of our capital budget. We'll be largely out of copper. Copper is -- think landlines, legacy DSL, we still have a lot of that, that we are decommissioning and getting out of our network. It comes with a $6 billion cost base. We'll be largely out of that. We're going to have a scaled fiber network. Our wireless modernization will be done. So I look at a company that will have the largest fiber network in the country, the largest, most modern wireless network in the country and will not have the headwinds of legacy declines that we are going through today. And you all are really smart, you understand what the profile of that could look like. And so I think it is an incredibly exciting time for AT&T and its shareholders.

Right. Well, terrific. Thank you, Pascal. We're going to turn it over to questions. I know we have mics, so if anyone has questions. And I will say you must speak at a lot of conferences, but I don't know that any circles you in the AT&T blue as we have today. Any questions? No? I see one in the back here. Let's just get you a mic. Okay, perfect.

My name is [ Anand ]. I have a question regarding your strategy is more focused on fiber. How do you view alternate connectivity strategies like Starlink, who are based on satellite? And how does the fiber play in alongside or in response to that alternate connectivity strategy?

Sure thing. When I think about fixed broadband today and our wireless network, rough math, you probably get -- you cover 90% plus of the U.S. population. And so the TAM -- those products are incredibly efficient. They work better and more efficient than satellite. The physics of it all makes that very clear. So the question really becomes who serves that -- the remainder of the U.S. population because we still have a lot of people, far too many that aren't served. And we think satellite is a fine solution in that regard. And our view is we would love for there to be a vibrant satellite market that where we can buy services and allow customers to ride on our network and satellite no different than international roaming. So somebody goes to a national park and we don't have coverage, they get access to satellite coverage, and we pay the satellite provider. And in an ideal world, there will be multiple providers such that we can -- the price -- the ultimate price to consumers is really attractive.

Okay. Any more questions? Pascal, like I said in the beginning, this is like the perfect way to start this conference because I think as we hear about these other models emerging, they're emerging on the networks you and your peers are creating. So thank you so much for being here and opening this conference.

Thank you very much.