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

Okay. Good morning, everybody. Welcome to day 2 of Morgan Stanley's TMT Conference. I'm Ben Swinburne, Morgan Stanley's telecom and media analyst. Quick disclosure, for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, reach out to your Morgan Stanley sales representative. And we're kicking off day 2 with Jeffery McElfresh. He is the COO of AT&T, overseeing the company's global network, technology and operations since 2022, but has a long, long career at AT&T, which we're going to talk through all of the important things at AT&T over the next 30 minutes. Jeff, thanks for being here.

Ben, thank you for having me. And if I could call everyone's attention to our safe harbor statement and remind everyone that we are in the quiet period for FCC Spectrum Auction 113 as it's in effect.

Great. Well, with that done, so you guys provided an update to your multiyear guidance on your January earnings call, laying out expectations for healthy and improving organic growth over the next few years. And I'm sure you wouldn't be surprised to hear that competition is a big focus in the investment community in the telecom space in the U.S. So stepping back, what gives you and the team confidence you can deliver on those growth targets in an environment that at least people would describe as being mature on the wireless side and heavily competitive in both wireless and broadband?

Yes. Thanks for the question, Ben. We -- at AT&T, we have a differentiated strategy. I mean it is a disciplined investment-led strategy to drive convergence. And we have been incredibly consistent with this for quite some time. This is not just something that's new for us. In fact, when I look at the number of customers that we now serve in a converged environment, the quantum of customers is significant. And what we learn from what they tell us is there's only one Internet, why pay for it twice. And for us at AT&T, when we see that kind of response and adoption to the products, it's rewarded in things like where we offer convergence, that's backed by fiber. AT&T is #1 in brand love, #1 in NPS. Churn profiles of these customers are the lowest among all customers. The propensity for them to buy multiple products and help grow up the revenue stack continues to increase. And this playbook that we've been executing in a heightened competitive environment for the last many years gives us a lot of confidence that continuing to focus and execute on that is winning play. And I'd say we've got all the building blocks. Like there's nothing that we need. We've now closed on the Lumen transaction. That adds 4 million passings. We're at 36 million fiber passings as of today. And we'll exit the year with 40 million. I mean there's nobody else in this sector that is expanding their growth funnel the way AT&T is by executing a proven strategy.

That's a great start. You mentioned convergence. And I think the market seems to oscillate between being bullish on convergence and then worrying it's sort of devolving into discounting and maybe even a price war. So how does AT&T approach convergence in the market in a way that drives growth but also preserves customer lifetime value and returns?

Yes. I mean the continued performance of churn profiles with these customers and the number of products that they purchase continue to maintain the most attractive LTVs in our business, and that continues. Now at AT&T, when we think about investing, as we are, at the highest levels of anybody in this industry, what do we hold ourselves responsible to? One, we got to drive penetration into that investment. Two, we've got to sell multiple products to get even stronger returns. And so our strategy to serve the best, highest-performing quality product in a converged manner drives these LTVs that we're seeing and keeps these customers incredibly loyal and sticky. We're not competing on promos. We're not competing on just pricing actions. We're competing on performance and value. And the more we do, the better the brand performs in these markets. And I think that's an important note. That discipline that we hold ourselves to is something that has generated very attractive returns. I mean, during this competitive environment, as we continue to drive convergence, we've delivered in fourth quarter, very strong wireless growth, strong fiber growth, strong EBITDA, expanding margins. And we're able to do all of that while maintaining our commitment to our capital returns program with share buybacks and attractive dividends. And so this is a working formula. And what I'd like to impart on the audience is, I mean, we're still in expansion mode. We are still growing. And as we expand this fiber network and we run this convergence play, we gain even more and more scale. Ultimately, AT&T will have the absolute best, largest fiber network that is a superior technology, that can serve traffic at the lowest marginal cost of any other technology in the industry. And we complement that with a modernized open 5G network that is now fully fueled with a very impressive mid-band spectrum portfolio. So owning and operating both of those networks gives those at AT&T the ability to serve customers where they want to be served, offering the right performance and the right value.

You mentioned the wireless network. So let me ask you about your outlook for that business, mobility. So you guided to 2% to 3% wireless service revenue growth through 2028, primarily volume driven, I believe, the way you framed it. So where are the opportunities in the U.S. wireless industry for you to do a better job with market share and go after?

It's probably two frames to think of. The first is we continue to see opportunity in market -- segments of the market where AT&T is historically underpenetrated. That might be more of the price-sensitive or value-conscious market, single-line accounts as well as maybe 55+. We still are seeing success in growing our small business franchise with wireless. These are the more classical straight-up wireless-to-wireless plays that we continue to execute on and is bringing new accounts into the AT&T fold. But importantly, on the convergence footprint, when we closed this transaction with Lumen in record time, we ingested 4 million passings network that is 25% penetrated against AT&T's 40% penetrated larger fiber network. So you can imagine, as I said earlier, okay, well, Jeff, you and the team are focused on penetrating, driving that fiber up from 25% to 40% in that footprint. And our ability to drive convergence, which is to attach mobile to that account. Inside of that footprint, the Lumen territory represents areas of market share where AT&T is lower than our national average. And one in five of those Lumen accounts have wireless services from AT&T. So as we execute the same strategy we've been executing, we drive incremental wireless growth in a differentiated manner that's durable to the competitive pressures that you see in these footprints. That ability for us to go grow is, as I just explained, now, but we're not stopping at where we sit with this fiber footprint. I mean we'll add another 4 million incremental to exit the year with 40 million passings by the end of this year. And so this convergence play is fueling incremental mobility growth, which is why our guidance incorporates continuing to execute our convergence strategy.

There's been a lot of focus, as we've mentioned earlier, on the competitive environment, Jeff. And I think over the last 6, 9 months, the cable operators have incrementally gotten more aggressive, I would say, from a pricing and packaging point of view and really leaned into wireless and broadband bundles. What impacts, if any, are you seeing from this on AT&T's ability to compete and grow, particularly in wireless?

We've been seeing cable being competitive for quite some time now. But I'd say like we're not cable. We're not like cable. I mean our playbook is, as we are expanding our fiber, which is the absolute best, highest-performing product in the sector in this industry, as we're expanding that into territories where cable has enjoyed some incumbency, it's clear. It's clear that customers are going to pay and switch service for a company that will give them better performance at better value. And as we own and operate both the fiber network and that wireless network, that gives us the ability to serve the household in a way -- in a competitive way that is unmatched by cable. So over the last, call it, 3 to 4 quarters, as you've seen, as you cited, some heightened competitive intensity, I would just guide the audience to and look at our results over the last 4 quarters. And can you see signals that, that cable strategy is actually giving us pressure. And I would say no, we're actually being quite successful.

Yes. You touched on it earlier, the network and the modernization of the network that's going on. I think AT&T -- somewhat unique strategy and network position. Talk a little bit about where things stand right now on that modernization process and what it does for the company as it wraps up?

Yes. I'm super excited about this because I've been at the company for a long time. Next week, we get to celebrate 150 years of connecting people from the very first phone call next week, and that's why I'm wearing this nice pullover. And I shared last night with some guests that I've never been more excited as an engineer in the industry for what we got going on at AT&T right now. This modernization that we're doing across our network assets is by all means, kind of quiet and behind the scenes. We haven't spoken a lot about that. But we're making incredible progress on our wireless network. We're about halfway through the switch, the rip-and-replace of some radios. And we've got another 18 months before we're kind of complete with that program. What I'm excited about is that's been almost flawless in terms of implementing this tech upgrade across all these towers without disturbing customer service. And if you're a company like ours that backs your product with the industry's only guarantee, like we've raised the bar on ourselves to make sure that we don't impact service when we're making these investments in modernizing the wireless network. So the progress, what we're seeing when we have touched these cell sites and really refreshed the technology that's on the towers, we're seeing gains in customer experience, gains in throughput, gains in retainability, gains in performance and lower cost structures because we've gone to more standard models across these towers so that our operating teams find efficiency in maintaining that RF environment. And that's just going to continue to improve as we make our way through that transformation.

So this sounds like it's both an efficiency and a customer-facing.

It is. And then that's kind of like on the surface. The second tactic and the second objective of this modernization effort is to open it up. And opening up introduces new players to come in from the hardware perspective to innovate on small cells, femtocells and some even high-performing radio assets. And we've seen some really good success in the lab and some early market trials of providers of equipment that are new to the category, interfacing with our network in this open standard. That's one benefit for capital efficiency in the future. And I'll remind you as we get through this modernization, like right now, we're at peak levels. When we complete the wireless modernization, that capital intensity falls kind of similar to when we're done building out our 60 million-plus passings, our capital intensity falls. But when we get to that point of the wireless modernization, we now have a platform that we can open API interface to maybe, let's say, a wireline network or a hyperscaler. And at AT&T, our convergence strategy isn't just a go-to-market strategy. It's actually what is guiding our investments in our networks as we modernize. So think convergence of these network assets well -- deep into the edge of the network, closest to customers. This is why we have confidence we will emerge with the absolute best, lowest marginal cost network to serve an ever-increasing demand of traffic as AI workloads and all of these new capabilities are starting to surface and emerge.

Got it. Why don't we -- let's shift gears to broadband, and I want to -- you mentioned it earlier, but let's talk about Lumen. You closed the Lumen Mass Markets acquisition last month, adding over 4 million homes to the footprint. What's next in terms of leveraging the newly expanding fiber footprint and kind of folding it into your overall convergence strategy?

Yes. You probably recall John's commentary in our fourth quarter earnings. I mean we closed this transaction in record time. And at AT&T, we've done a lot of horizontal mergers, acquisitions and integrations. And as the teams are preparing for a close, generally, we have more time to get a few of the final pieces assembled, but the close occurred in record time. And so as John alluded to, for the first cycle or 2, we're still completing that integration work. And that integration work isn't, let's say, technically complex. It's about things like you convey employees, you welcome new employees from Lumen into the AT&T world. And then you've got to allocate resources out into the markets where you're finding increased demand for your fiber product. And the technicians that you need to locate, that takes a minute or 2 to hire, to train and to get them positioned. We've also got a build engine that conveyed with the Lumen transaction. And we are going to capitalize that build engine and scale it along with our Gigapower franchise to generate 1 million passings a year run rate. And so we're working on the building blocks for that organization to increase their rate and pace of new footprint build. Because remember, the acquisition of Lumen wasn't a synergy-based case. This was a growth-based case. And so we'll take the time to get the assets positioned right. And I'll be excited for when we start to report results as the year progresses so our investors can actually see the success we expect.

So with Lumen, I think you're at 36 million fiber passings, you plan to reach over 60 million by 2030. You mentioned you're building more than anybody else in the country, but you've actually got to ramp up the run rate to get to those numbers.

Yes, we do.

What really needs to happen? Like how do you derisk a pretty key expectation of the market to get up to sort of a 5 million type build run rate. I mean this is -- it's a pretty significant ramp.

It is, but you have to remember that this build isn't happening all on top of one another. And so as -- I mean, we, at AT&T, we have built at a 4 million run rate level in the past. So as we scale up to that 4 million number, you have to ensure that you've got good cost control over your supply chain and your labor markets, which we've demonstrated we do, and we continue to do. Two, you've got to ensure that your implementation out into the markets is effective. And so that is the permitting, that's the prepositioning of all the materials and the contractors and the employees to get the work done. So we've successfully scaled from 2 million to 2.5 million to 3 million to 3.5 million. We've got the runway on that from an organic perspective. On the Lumen side and the Gigapower side, the amount of footprint that they have to pursue to go grow is known. It's identified and it's in the permitting process. And then the scale of the AT&T purchasing power with fiber providers and with equipment providers helps to derisk those build engines from scaling.

And how do you think about cost containment, cost per passing in a world of inflation and supply chain complexity and the world you're operating in?

Yes, a lot of people buying a lot of fiber lately, right? Well, a couple of things. First, over the last couple of years in an inflationary environment, our cost per passing has been inflated no more than 2%. So we have been very successful in managing costs. But as I said -- as I shared with the investors at our Analyst and Investor Day in Dallas, there's three costs we pay attention to. We pay attention to what it costs us to actually build the network to pass a location. We pay attention to how much it costs for us to connect the customer to that network and then the cost to maintain. And so when we're looking at investing this amount of capital into a fiber network, we're going to go drive penetration because it's the only way you get revenue on it. And the cost associated with turning that investment into revenue is a large component of the total cost. It's just not the cost to build. So as we find efficiencies in our cost to build, which we have as we've scaled, we are finding even more efficiencies in our cost to connect. And cash is cash. So it gives us the ability to redirect any improvements or efficiencies in our cost to connect in other areas like growth, maybe building one more passing. And the scale advantages of this network and this build engine and this team is impressive. And that's what gets me excited because when we wrap up this transformation and this fiber expansion, then you're kind of sitting there looking at having a highly penetrated, best-performing future-proof fiber network where you've got happy customers that buy more from you than just broadband. They are loyal, they have low churn, the highest NPS scores, you can kind of get this image of this becomes a cash flow generating platform that AT&T is going to enjoy when we make our way to the end of the decade.

You guys laid out growth projections for broadband. There has been certainly a little bit of a moderation in fiber ARPU growth, and I think the market has been focused on that in your results and your outlook. What's your perspective on the opportunity or risk around AT&T's fiber ARPUs? And is it still an opportunity for AT&T in terms of driving growth long term?

Yes. I mean it's -- there's no change of perspective in terms of what kind of revenue yields we can get on the fiber network. But I think this is an important point. We're growing, like we're expanding. And when you're running a very large-scale network like ours, you get into a yield management strategy where once you achieve a certain pin rate on an investment, you have secured the payback. You've hit your IRR like success. And what we're seeing at AT&T is we are continuing to beat our own internal expectations in terms of penetrating that fiber when it's built, converging it with mobility, securing the home with a quality of installation that's durable. So any resident that ever occupies that location in the future is eligible for self-install and the cost profile of that is very attractive. And so our strategy is to maximize the number of connections on our fiber network, to do so in a manner that penetrates in segments that aren't just SFUs. There are many different kinds of customer cohorts. And fortunately, because of our execution and the cost structure of this technology, we're able to compete across many of those cohorts in a way to gain share and continue to drive attractive returns and profits in that part of our business.

Last broadband question, then we'll move on. But how does fixed wireless fit into all this fiber focus?

Same as it always has at AT&T. It's a very tactical product for us. We don't sell fixed wireless where we offer fiber. We use it for preceding, preselling where fiber is coming. We use fixed wireless effectively and drive convergence in markets where we never intend to have a fiber asset. And you can think about as over the last year or so, as we lifted up that 3.45 spectrum, it opened up more sectors of fallow capacity we could sell into in areas where we have low wireless share like we did in the Lumen footprint. You can imagine AT&T was offering fixed wireless in those markets. Now that we have fiber, we won't prioritize fixed wireless. We'll prioritize, obviously, fiber. Fiber remains our #1 play where we have it. Fixed wireless is a tool in the toolkit to drive conversions, to drive growth in markets where we don't have fiber.

Let's move to the business market. What do you think is the most exciting opportunity in B2B? And since this conference is all about AI and hyperscalers, maybe you can talk about how AT&T sits in that ecosystem.

It's -- we're well positioned, Ben. We've got a storied -- we've got a great book of business with enterprise, as you know. And we've been around a while doing this. I've never seen the kind of conversations like I'm seeing today with enterprise customers. They are trying to figure out where their workloads go. And in the past, maybe it was a hub-and-spoke model. I've got my data center. I got to get to another hyperscaler data center. Maybe I have to interconnect through a MeetMe point. Now they're realizing that with AI coming on strong within their enterprises that these workloads are really going multiple places. They need a high-availability, high-assurance, high-performing network that is not single threaded, but multi-threaded in order for them to secure their future. And when you couple that need against the largest fiber network and the strongest 5G position in the industry, AT&T has got real opportunity to drive not only fiber and 5G, but some value-added services to help our enterprise clients actually attach to this AI-enabled network of the future. And I think that's emerging and developing. I think there's no pinned out winning strategy yet because many people are still investing in these data centers in the metro areas, but more and more of the conversation is leading in that direction. And why I like it is, well, AI needs high-performing bandwidth. And that's kind of the business that we're in.

Yes. There's a lot of focus also on satellite connectivity. I mean I know you've spent a lot of time thinking about and looking at -- you have a deal that you've recently announced with Amazon with their -- what used to be Kuiper now Leo product. You're also an investor and I think an early partner in AST. So talk a little bit about AT&T's position on direct-to-cell or direct-to-device and sort of how you think it fits in either as an opportunity or even as a potential new competitor down the road?

At AT&T, we view our #1 role is to connect people and to do so in a very seamless manner. And so it's our job to remove the complexity. You just want to be connected to the Internet. So we still view satellite as an important but complementary service. The Amazon Leo deal was for a different mission or different use case than direct-to-device, which I think bodes to our strategy where we're not wedded to one particular technology or provider. Our job is to ensure that we can provide seamless connectivity to the Internet at the lowest marginal cost with the best performance. And if we do that in this industry that is being shuffled and reshaped right now, we believe that's the winning strategy. So you'll see consistency from AT&T in bringing in partners like an AST or an Amazon or others where it helps us deliver on that vision of being the company that makes connecting seamless.

Do you see satellite as a potential competitor to terrestrial long term?

No. We've been pretty consistent on that. It will have its place where it is uniquely positioned to perform miracles actually and fantastic things. But the amount of traffic growth that we see in the terrestrial networks right now is not slowing down. And it's not just download traffic. It's these AI applications and robotics and autonomous vehicles, the uplink needs that they are bringing forward are massive. And you really need dense, very robust terrestrial networks on the ground to carry that traffic.

Got it. Okay. Let's shift gears a little bit more on the expense and EBITDA side of the equation. You're aiming to decommission I think the majority of your copper network by the end of 2029, not a small project.

Not a small project.

Give us an update on sort of where you are now, what milestones you've achieved? And also, what are the big pain points in front of you when you think about certain geographies and all the regulatory bodies you guys interact with?

We've had really good success here, and it's been a long mission. Susan did a nice job at our Investor and Analyst Day in Dallas, kind of laying out what the milestones are, and we're right on those milestones. One thing that's important to note is we've announced a new reporting convention that we're going to begin reporting here in the first quarter, separating out our Advanced Connectivity and our Legacy business. This is an important move for AT&T. We're giving clear transparency to all of you, our investors, as well as we're creating some accountability for our teams that have to go mine out these legacy services, you're able to now see what kind of revenues and expenses are associated with that copper network. That's an important point for us. We've got about 85% of the wire centers today, we're not selling in anymore. We have permission to discontinue sale. We've got about 30% of them where we can go to full discontinuance, which means we can actually shut down these wire centers. We've got over 5,000 of these scattered across all the states. And right now, we are in execution mode. We are migrating customers off of those services. We are transitioning them to our products to get them off of the copper. And then we go in and we cleave out equipment and hardware, shut down power and basically lower the operating expense of that wire center. And it is a wire center by wire center task. There's no rip the Band-Aid and one day, it's all gone. It is going to atrophy like this as we manage that. Then the bigger challenge is many of the systems that support legacy, they're not a system just for that wire center or that state. So success across the footprint is required for us to decommission some of these larger legacy IT platforms that support that work. That will come towards the tail end of our unwinding strategy with copper. So you'll be able to now track and see our progress on unwinding that copper legacy business. While at the same time, you'll see these very attractive growth rates in our Advanced Connectivity segment, where it's where all of our capital is going, and we're excited about that structure.

And the expectation you've laid out for the market is 3% to 4% EBITDA growth this year, ramping to 5% plus by '28. When you think about the expense piece of that acceleration, what else are you focused on beyond what we just talked about to get there?

Well, we -- I mean, we are -- this is an investment-led transformation. It's not just sheer cost cutting. The other activities that we have in flight in the company beyond copper sunset are: we touched on wireless modernization. So standardizing on our architecture out in the field gives us synergy opportunity in the workforce and the tool sets that we use to maintain that. That lowers our carrying cost and cash operating expenses. Second, in our wireline modernization strategy, as it begins to get implemented market by market, when we're done with that market, that market is in the future state and the support cost that are required to maintain that go away. So it's not a cliff event for us in terms of driving operating leverage. We have guided to a $4 billion cost target out to 2028 right now. Well, that continues as we continue to execute each of these transformation strategies.

Got it. Well, that's a good place maybe to -- for my last question, which is beyond 2028. I know you guys are thinking long term about the network and the business. So if you think about AT&T 2030, and you think about all the capital you're investing into the business more than really anybody else in the sector between now and then, what does AT&T look like as these investments and transformations wrap up and you reach the other side?

It's going to be a beautiful day. I remember when we first started talking about the end of the decade, I'm like, well, that's a long way away. I mean that's just 4 years from now. That looks right around the corner. One, an industry-leading, most modern, most open and most cost-efficient wireless network that is ready for the future state of technology nationwide, plus dense metropolitan fiber in all the markets where we find attractive returns with success in driving and leading in convergence in this industry with customers on those networks with attractive churn profiles -- churn performance and return profiles. And everywhere else across this great nation, no more copper, we're only serving with wireless. And the efficiencies that we generate when we come out of that transformation, I think, are self-evident in terms of the P&L and the expenses. We're going to be in a position where we've got -- we've proven consistently and are in a leadership position with a converged strategy as this industry resets around us. We don't need to buy anything incremental. We just need to execute, and it's in front of us to go execute. And when we get there, the cash flows that this company will generate will be industry-leading.

Great. Perfectly landed at 0. Thank you, Jeff. This was awesome. Appreciate it.

Yes, touchdown.

Thanks, everybody.