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

Great. Good afternoon, everybody. Welcome to the AT&T fireside chat at the Goldman Sachs Communacopia and Technology Conference. My name is Mike Ng, and I cover AT&T and telecom here at Goldman. And I have the wonderful privilege of introducing John Stankey, who is the Chairman and CEO of AT&T. First and foremost, thank you so much for being here, John. It's an absolute pleasure.

Well, thanks for having us in, Mike. And maybe before we jump in and get started, if I can point you to our safe harbor statement and remind you that some of the things we're going to talk about today are forward-looking. They may or may not come to pass. And if you would like more detailed disclosures, there's some really wonderful reading on the AT&T Investor Relations website.

Great. To start things off, let's talk about big picture, overall strategy. The company is making -- has been making investments in the asset base, the build engine, the fiber assets, wireless infrastructure, all in an effort to drive sustainable long-term growth. That growth is underpinned by long-term financial guidance, a double-digit EPS CAGR through 2028, including mid- to high single-digit growth in Advanced Connectivity EBITDA. To start, maybe you can just share with us your strategic priorities and how that translates into the long-term financial outcomes?

Sure. The strategic priorities really haven't changed. For about 5 years, we've been pretty deliberately investing, top of the industry. And we've been doing that largely to drive the growth you alluded to. And our point of view had been that if we put the right assets in play in our industry, that we could grow at a better rate, and we could ultimately have a better profitability equation. And I think you started to see the evidence of that last quarter, where that inflection point started to hit. So goal here is to make sure that we are a scale provider in fiber and we lead in deployment of fiber infrastructure over time, strengthen our already strong wireless business and carry it forward. And in fact, you're seeing that happen and the growth is coming. One, the products together are a superior offering in the market. We're able to take share in places where we weren't able to take share before, plus engage and take the benefit of natural growth in the market that's occurring. This is largely coming on the backs of putting two products together from a convergence perspective. That brings us with higher household revenues. It gives us better margin performance as a consolidated account, lowers churn, keeps acquisition costs in check. And that equation is now starting to drive into that guidance that you talked about, which is margins have been stable to improving. You're seeing the service revenue growth. You're seeing the double-digit EPS growth. You've seen our EBITDA improvement. We're meeting our expectations on gaining share in service revenues in the industry. And we think that formula is good, and we think it's got some legs because as you know, we're not done building footprint until the latter part of this decade when we kind of wrap that up. And it takes us 3 to 4 years to penetrate that footprint, and we'll be able to ride that chain all the way up to that time.

Great. And it certainly feels like the market has come to acknowledge that convergence is a very effective strategy, and it's working. And AT&T really has a fiber-led convergence strategy with plans to reach more than 30 million fiber locations by 2030. Most of your peers talk about convergence through the lens of bundling and customer retention, but AT&T seems to be approaching it a little bit differently, right, with a heavy emphasis on fiber ownership, network integration and scale. So with that said, like why are you leaning so heavily into a fiber-led convergence strategy? What advantages does owning and scaling both the fiber and wireless networks create that some of your peers may have a harder time replicating?

Yes. I think we're in the early innings of convergence and kind of what my expectation will be over the coming years and how we're going to see things play out. I mentioned the near-term benefits just a few moments ago, which is you put an account together on both products and services and you see churn improvement, you see lifetime value accretion that goes on with that customer, you see brand loyalty improve. All those things can happen by just putting 2 really good products together that ultimately give the customer some value. And I think that's the first couple of innings of the conversions play. But one of the important parts of it, you're putting really good products together. Fiber and fiber broadband is a superior product. And that is what drives a lot of the surprise and delight that ultimately gives a customer the better brand point of view, makes the entire bundle stickier and allows you to, over that lifetime value, grow some accretion and benefit. However, the later innings of conversion are going to start to be more product- and feature-led. I'll give you an example. I expect we'll see satellite services bundled in at some point in time in the very near future. And in order to do that, it's not the easiest task to actually manage the layers of a network between satellite, wireless, fixed broadband, Wi-Fi. And to do that right, I think that's where you start to do things to say, look, I can give you a very seamless experience from a service perspective as well as an easy experience from an account relationship billing perspective. And when you start to do those things and you're giving somebody always-on connectivity, always working, very consistent, that moves beyond it's just as people refer to at a discount. It's not just a discount, it's a product that works better for the customer. And when we look at things like OneConnect that we put out there, which is to take away the anxiety from a customer to say whatever device you want to connect, you got that iPad that's sitting in a drawer that maybe you haven't had on the network, you want your vehicle to have the ability to stream entertainment in the back, all that's available to you on OneConnect in a very straightforward, simple approach, those are the things that start to add value in. And I think you'll see more and more of that in the, let's call it, the middle innings and the later innings of convergence as we move forward. They are going to move well beyond just an affordable price of putting the products and services together.

Great. We've talked about why you've committed to a fiber-led conversion strategy and some of the advantages of owning both fiber and wireless networks. At the same time, you've made a lot of changes in your go-to-market approach, right, through initiatives such as the refreshed Unlimited plans, Build-A-Plan, some of the legacy plan retirements and some targeted pricing actions. How do those initiatives support the convergence opportunity that we just discussed? And what are you looking to achieve with all those things that are out there?

Yes. I'd go back to the comment I made earlier, where our goal is to lead in service revenues. And when we think about -- especially where we ultimately put fiber infrastructure down, we really don't want to just think about serving the premium end of the market, where we've done very well at AT&T. When you look at our wireless space and you kind of see what happened during the early years of penetration of fiber, premium high-value accounts have been kind of our mainstay and bread and butter. Part of what we've been doing to tweak the plans is our goal really is to lead in service revenue growth across the industry. Then we've got to be applicable to all segments, and we have to be pretty effective in doing that. And so when we offer Build-A-Plan, Build-A-Plan came out and kind of went into place in the value segment that we weren't doing particularly well on. And it's a way for us to get into wireless penetration in an underpenetrated segment. And then our intent is, okay, what can we add on to that? Certainly, in a fiber footprint, we want to put an affordable broadband solution. Maybe it's not our best-performing gigabit service, but a more value-based product that when you -- once you put that infrastructure out there and your fixed costs are in place, you'll take that value-oriented customer on top of it, and that's accretive to you. And the same thing if you're thinking about using fallow capacity in your wireless network to add a fixed wireless account on to something. So we're playing a lot more effectively right now in all segments of the market as opposed to just the top end of the market. Last quarter would be a good example of that. We had probably our best new account growth in the company in probably the better part of over 3 years. And it's largely built on the fact that we've been able to now start to move into parts of the market where maybe we didn't have the right offers too. And we're pretty comfortable with how the products perform, in particular, how fiber performs. Customers love the product. They see the difference in how it performs. That gives you the opportunity then over time as that relationship grows more and more mature to begin moving somebody up the value continuum, the ARPU continuum to get more products and services into the portfolio of what they might buy from you, and we feel really good about our ability to do that.

Right. So we've talked about some of the product innovation that AT&T is pursuing. Maybe we can spend a minute just talking about competition. Last year, I felt like the entire conversation was about wireless competition increasing to some of the highest levels that we've seen in years. Today, the conversation seems to be shifting more towards broadband as fiber expansion continues to occur. FWA is growing. Cable operators are all pursuing the same customers. And we've also seen some downward pressure on ARPUs, especially on the broadband side. Against this backdrop, how are you thinking about balancing customer value and returns across your portfolio with -- transitioning away from device subsidies as the underlying costs of some of those devices increase?

I think -- first of all, the device subsidy issue maybe sits out on its own some regards. And what the industry has to do, and certainly, my view at AT&T is, for all kinds of reasons, we tended to bundle all the hard work we did in building infrastructure and services together with the device, and maybe in some respects, hit the value of what the underlying infrastructure is doing. And our job right now is to make sure we do a better job of helping people to understand what the true cost is of the underlying service, and then allow them to make informed choices on that. When we can put two products together that work better together, I feel really comfortable in that equation. So if devices continue to get more expensive and the life cycle of that device extends, then you have opportunities during that life cycle to think about how you bring that customer onto your infrastructure separate from the device and ultimately build a relationship with them. So I think you're going to see more of that occurring in those -- that latter inning and segment of the game that I talked about earlier on convergence is a critical part in making that happen. So want to get connectivity priced appropriately so somebody sees what the true cost of connectivity is, then have the freedom to move with the device when they have it. And we're seeing that happen more and more in the industry right now. I don't think it's the majority of the industry at the moment, but it's getting more prevalent each and every quarter, each and every year. And we want to make sure we catch that. But in general, look, the way we think about it is what I said earlier. I really want to think about the value of the household, not the value of any discrete product or service. And does it mean that maybe in the near term, I might use on 1 account to discount the broadband a little bit in order to get value out of a new wireless entrant or flip it in some cases and discount some wireless to get a new entrant in broadband. I'll do whatever I need to do so long as the household is an accretive household, valuable and ultimately stays with us for a period of time. And I think we're getting better at doing that every single quarter. We're still not at the top of our game. I think we can get even better. But by and large, our investment in growth in this industry and our investment in customer growth has been places where we think we can converge a customer and get that longer-term accretive relationship. If you adjust out the short version of our Lumen assets, we haven't had much time to manage at this point, we're at the 45% convergence rate. That's 5 points in 2 years. That's big. And if we can keep that continuing and moving forward and growing, I like that economic equation. And I'll do that all year long. And I think we have to understand that depending on where you are in the life cycle of an asset base, fiber that we built 4 years ago that's 40% or 45% penetrated may require a different strategy to get from 45% to 55% or 45% to 50%, than that which we're building today. And so when you start to see that mix come into our base, people shouldn't be shocked about that because when you look at that and say that makes perfect sense, maybe you want to do something to lead and penetrate and get some momentum and some growth that you will then over time, grow yourself into on a better margin profile. And I'm perfectly okay with that if we do it smartly and well.

Right. Can be very surgical about how you approach these.

Yes. And it's a different set of plays depending on the market and the asset base you have. So what we do in New York is going to be different than what we do in Dallas.

Great. Very clear. One of the other elements of competition that we haven't talked about was the growing role of satellite connectivity. And that's being discussed as a potential competitor on both the broadband and the wireless side. So I would love for you to just comment on satellite's role within AT&T's long-term strategy.

Yes. Mike, there's a lot of different ways to think about it. The one that everybody seems to want to talk about them in the media right now is its role in mobile, but there's certainly roles for satellite beyond just mobile. But relative to the 1 that seems to be the center of attention right now is if 98% of use cases are solved by the capable infrastructure that I mentioned earlier that's out there and working today, much of which that infrastructure is built over the course of decades. We started putting robust infrastructure and high-rise buildings and stadiums 20 years ago. And that's been a consistent drumbeat and march over that period of time. And it gets it to the kind of capabilities that when somebody goes to a World Cup game and all of their social media posting that they want to do goes off flawlessly so that they can demonstrate that they're out influencing the world in the middle of the game. That doesn't just happen overnight. And so the notion that you can simply serve mobility from outside is just not how the networks are architected today. And the notion that somehow, really small cells are going to somehow fix that problem, randomly deployed, that's not going to fix that problem. So we've been building this infrastructure to meet these customer expectations, and customers' expectations continue to rise every year as it gets better and better. And I think, as I said earlier, if we can put 2 products together, we can make them work in a way that takes anxiety out of a customer's experience. They work well, and I'm pretty confident that once you get a bit on fiber, nothing's ever going to beat it. And that includes the short hop from a device to a cellular antenna, that's a lot shorter than a hop from a device to something that's 300 miles above us. The faster you can get that into a fiber infrastructure and the more actively you manage it across both fixed and wireless, the better that customer experience is going to be. And I think we're in an excellent position to win in that regard. I don't diminish any competitor we're up against. I think there's going to be places where satellite is going to come in and innovate. There are use cases where it will be very well suited. But I think the bulk of use cases today, we address today on the infrastructure. And our job is to go find that 2% that we can address and make sure that we can bring satellite in to make sure that those are addressed. And that's why we put the JV in place with T-Mobile and Verizon. Our belief is we're all in the same position. We're addressing 98% of the use cases. And what we want to do is make sure that we can get the last 2% in a way that's customer-friendly. And that means all the interfaces for how satellite constellations interact with embedded infrastructure on the ground to do it in a way that it's cost effective. And by buying in bulk from more than 1 constellation, we can drive pricing down for the customer in doing that. By incorporating into existing product sets, maybe our more preferred customers are able to get that included in a plan. So they have incentive to buy up as a result of that. Those are all good things for the customer. It makes it very easy. It's solving the last 2%, not trying to come up with a new way to solve the 98%. That frankly isn't going to be very effective in competing against decades of infrastructure that's been put in place that works incredibly well today and is amazingly scaled.

That's very clear. Moving to business, if I could, Business, Advanced Connectivity service revenue turned positive last quarter. What's driven the business momentum? And how does business fit into your overall growth strategy?