AT&T Inc. (NYSE:T) Credit Suisse 24th Annual Communications Conference Call June 14, 2022 8:45 AM ET
Company Participants
Pascal Desroches – Senior Executive Vice President and Chief Financial Officer
Conference Call Participants
Doug Mitchelson – Credit Suisse
Doug Mitchelson
Hi. Good morning. I’m Doug Mitchelson, Credit Suisse’s, media and cable, satellite, and wireless analyst, and along with my colleagues Meghan Durkin and [Grant Joslin] [ph], 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 two 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.
Pascal Desroches
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 saw 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.
Doug Mitchelson
Let’s exciting start. Well, 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?
Pascal Desroches
Yeah, 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 it’s only been a year, probably two years since John Stankey took over as CEO. We reenergized growth across each of the businesses we were in at that time.
For a long time, we were being out spent 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 – and we just launched HBO Max, and we invested significantly, at the same time, we recognize 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.
We’ve focused 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 of 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, you know, we’re taking a lot of cost out of the company right now. And over time, that’s going to resolve in operating leverage improving. And, you know, 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. [Multiple Speakers]
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, 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 going to – our best sense of inflation. We 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, you know, it’s – and it’s something we’re going to continue to keep an eye on. And, you know, we’re seeing inflation in labor, supplies, energy, transport.
So, we’re keeping an eye on it and it continues, at which, you know, 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, you know, inflation’s probably the area that I worry the most.
Doug Mitchelson
Alright, makes sense, and we’ll dig into to some of that more. I think on – before we get too far in the operations, just look at the asset base now that you’ve spun off or, you know, and you know, DIRECTV, Warner’s sold Xandr, is this the right asset based and asset mix now, or should we expect some more tweaks to the asset base?
Pascal Desroches
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. Yeah. That’s a possibility, but nothing of the magnitude that we’ve done in the last 12 months or so.
Doug Mitchelson
Makes sense. And I think, it’s interesting. You mentioned inflation, you touched the consumer and the economy in so many ways. And so, I’m just curious what have you seen recently? Obviously, the stock markets were, you know, reflecting elevated concerns. And so, outside inflation, anything else you’ve seen 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?
Pascal Desroches
Yeah. 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. You know, with that said, you know, we have seen the last six months. So, a tick-up in voluntary churn back to the levels they were pre-pandemic. And so, we’re – they are not worse than what we saw a couple 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’ve come back to pre-pandemic levels, but let’s make sure we’re clear. As I look at the inflationary expectation 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.
Doug Mitchelson
And then on the industry demand side last month, John Stankey said, there was no softening. With the [indiscernible] tax refunds, you know, help out the second quarter, so now we’re almost on the second quarter, mid-June and the report on 2Q demand with that dynamic in the [rearview mirror] [ph]?
Pascal Desroches
No. Look, it’s really, you know, 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 the last couple of years. And as we sit here today, that I can tell you, you know demand remains very good.
Doug Mitchelson
So, let’s talk about mobility a little bit then. You know, our largest business, industry growth has been remarkable as you suggested that’s helped you. You know, we’ve led the industry in postpaid net additions for the past year and obviously pretty good number with the tailwinds in the industry, higher mix of higher gross adds share and lower churn. So, help us understand how sustainable these trends are? And if you can carry that through to EBITDA, you know, 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 would be helpful.
Pascal Desroches
You know, 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 target. We are providing, you know, if you go back to, before John Stankey was CEO, we were under investing in our mobility customers. We were being out stepped 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 of – we don’t change them 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 [our customer] [ph] are all really helping our performance and we are taking share. And we are being helped by very healthy market and demand.
Why is that market as robust and elevated from historical levels? I think they’re – excuse me. My allergies, seasonal allergies are bothering me. 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 business, you know, new business formation has been really strong the last several – 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 comfortable numbers. And in terms of profitability for the mobility segment, you know, we feel really good with the profit characteristics of that business. As we move through, you know, the first half of this year, we said that we were going to be impacted by 3G shutdown costs.
We’ve shutdown the network in February and those customers that were not migrated, you know we’re going to lose the ad revenue. Last year, we benefited from [cap to subsidies] [ph] coming in FirstNet 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 very nice expansion of margins over the course of the back half of the year and improve profit trends.
Doug Mitchelson
Makes sense. And, you know, 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. You know, this quarter you got promotion where Galaxy could be traded in for $800 off the S22 Ultra and the iPhone [trade] [ph] offer is a bit less competitive. Overall, is the mobility segment taking a step forward or step back in competitiveness? How would you describe that and just the overall marketplace for mobility, do you think the competitive level is getting higher?
Pascal Desroches
I wouldn’t characterize it getting higher. Look, it’s been competitive for some time. It remains competitive. You know, each one that we, you know, it’s roughly shared a third, a third, a third, you know, you have three players controlling probably nearly 90% of the market. And in that environment, look, I think if we compete well, we can get more than [indiscernible] shares as you’ve been seeing us do over the course of the last, you know, 18 months or so.
Doug Mitchelson
How do you think about the threats from Cable and Dish getting into the business?
Pascal Desroches
Here is the way – you know for years we’ve been hearing about Dish and what they are doing. And look, they are a good partner that we are very happy with the relationship we have with them. But overall, it’s, you know this is a business you need scale, you need owner’s economics in order to compete. And right now, they don’t have that and well, 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, you know, a cable has been there the last couple of years. We haven’t – has it impacted our performance? No.
Doug Mitchelson
So, let’s move over to your move on HBO Max. So last week, you introduced new pricing for a wireless and fiber that excludes HBO Max or previously included it for free. So, is this another way to increase prices or cut costs or both and can you walk through, you know, the calculus of that decision?
Pascal Desroches
Yeah. 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. How can we deliver value to our customers. Many of them do value HBO Max, but some may not. And some may value a more hotspot, and some may value roaming, additional roaming. And that’s what we are doing right now.
It’s we’re trying to experiment and see, 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 shift – of our customer base.
Doug Mitchelson
Yeah, seems to be dynamic because in theory the benefits of having HBO Max were achieved since you had it out there so long and that subbase can stay in place, you know, for a while with your churn being low, you know, anyway. So, to some extent, those who want to have it, right?
Pascal Desroches
Yeah. They have it, and we’re not taking it away from this. So, yeah, it’s one that is – this is really another play where we’re experimenting, and we’ll see, we’ll see how this works. You know, we’ll have a much better sense in the next three months to six months how it’s working.
Doug Mitchelson
So, as promised, I wanted to talk about, you know, pricing a bit and the price value for your mobility service, and the price increase on metered and legacy plans implemented June 1st, 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 [there] [ph]?
Pascal Desroches
Look, whenever you go and you touch a portion of your customer base, you’re always concerned about churn. And, 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 clients] [ph], we ask, okay, how can we try to move them to our new plan?
You know, increasing their prices will likely result in an engagement with the customer. And there, we’ll try to steer them to [some of our] [ph] new plans to provide more value to them at – while at a higher price, and on balance we think that plate could work and result in customers moving to some of our newer clients.
Doug Mitchelson
How much is roaming recovered at this point? Are there any other pandemic dynamics of note for we think about mobility, particularly price?
Pascal Desroches
Yeah. Here’s the way I would characterize it. We haven’t given specific numbers publicly, but every month, it’s improving some. It really is, you know, we’re seeing gradual improvement, but there’s still meaningful opportunity to get back to pre-pandemic [clouds] [ph].
Doug Mitchelson
Okay. Interesting. Let’s move over to spectrum. So, you’ve talked about an intention to possibly revisit your, also pricing, your plans as the 3, or 4, 5 [gears] [ph] in C-band spectrum starts being lit up. You know, what form could that take, and, you know, how do you feel about your network at this point? And is the change in that network, sort of now or as you put the spectrum in place, change how you think about pricing?
Pascal Desroches
Yeah. 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, you know, of course, 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.
You know, and I think, as importantly, what will happen Doug is, 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 that we [get] [ph]. And so we feel really, really good about the future of the business and in terms of pricing, look, we we’re going to be very clear, if we need to raise prices in order to offset really high [indiscernible] 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 [long behold] [ph], our competitors match what we were doing. And we said that, look, overtime, our ARPUs would begin to stabilize as we got through the latter part of this year. And it wouldn’t surprise 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 class] [ph], we’re already starting to see an uptick in ARPU, and look, we feel really good about the state of the business, and we think the new capabilities that will be unleashed by our spectrum deployment is upside that hasn’t been factored into any of the guides we’ve given.
Doug Mitchelson
Yeah. And it’s like, you know, [indiscernible] next because the peers have talked a lot about 5G revenue opportunities. You know, fixed wireless to the consumer side and enterprise services like private networks and IoT and [Mac] [ph]. How much do you think these opportunities will be for AT&T?
Pascal Desroches
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.
Doug Mitchelson
Alright. We are [filling] [ph] 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 yeah, does that 30 million plus include any assumption for the, you know, for the refunded broadband issues including [indiscernible] or the wave of money that could get allocated next year and, you know, if or if not, how big could that that opportunity be? And let me throw a couple more in there just to do all things fiber, you know, Pascal. Are you seeing competitors racing to build fiber in your footprint before you can get there and if you do it, you still build in those locations? So, I’ll stop at five questions.
Pascal Desroches
Alright. Let me try to paint the big picture and you could – obviously, we can do follow-ups to the extent I don’t hit on all those questions. Big picture, you know, John Stankey has been a fiber bull for a very long time. Alright. And when you look at the pandemic, it really solidified what 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 five 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 hit, we are at roughly 17 million fiber locations passed. And as we move forward over the next starting this year, we’re expecting that 3.5 million to 4 million locations each and every year. And when we have fiber we win. We target or we’re prioritizing let’s go into areas where there is maybe one incumbent. Most of the time, it tends to be capable. 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, we – the return is in the payback period because of that accelerated penetration are much more attractive and payback periods are shorter.
So, I look at that and say, it’s – the game for us is 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, but through a combination of fiber and our wireless service.
And the perception of AT&T goes up and measurably once you have [five rates] [ph] the best technology, reliability 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. You’ve got 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, mid-sized businesses in the area and had a fiber deployed in a manner that it could serve small, medium size businesses. So, it’s all those things that make us really optimistic about the future of fiber.
Doug Mitchelson
So, where does this all shake out? When you think about, you know, penetrations longer, when obviously, you know, you’ve had some changes in, you know, pricing, you talked about the capabilities of products, you know, competition levels are changing, you know, folks are bundling with mobile including you. So, where did fiber penetration shake on then? Can we look at your older build cohorts today and use that as a sense? Is there another North Star that you would use?
Pascal Desroches
Yeah. Look, the way, you know, typically, when we’ve been in a location for, call it, four years, we would expect 40% plus penetration levels. And that’s why, you know, in a two-player market, there’s no reason why you shouldn’t get it with the best cost product.
Doug Mitchelson
[What happens with] [ph] the legacy footprint? We think about the legacy ADSL and DSL network overtime that isn’t going to be converted over to fiber, you know, what’s the opportunity there assuming you keep it, you know, maybe you’ll tell us you won’t. And I think even pushing price through there, how’s that been received?
Pascal Desroches
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, yeah, 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 player 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 plan 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, but I don’t think I addressed in my comments to your earlier question is, the funds, the federal funds. Right. We have not factored any of that into our guidance that we have out there. And so that is upside. I mean, by and large the way the process is working, we would expect probably funds to start getting allocated sometime late 2023, 2024, 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] [ph].
Doug Mitchelson
I’m glad you caught that one. So, on [business wire] [ph] I’m going to [narrow] [ph] all my questions down to kind of just one, you know what are you seeing from SMB and enterprise customers at this point?
Pascal Desroches
Here is the clear trend that we are seeing. Let’s talk for us with enterprise. Demand for complicated complex networking solutions [are in] [ph] secular decline, and we expect that to continue. Public sector, you know, we’ve seen a decline in public sector in Q1. We expected that to start coming back in Q2. It’s probably we haven’t seen it yet. So, we’ll keep 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 that is growing and it should continue to grow. So – and in terms of just overall business and – the overall business wireline, it’s probably going to take us a couple of years to stabilize that business. And, you know, as we guided to earlier, we expect to get to relatively stable business exiting 2023.
Doug Mitchelson
Alright. And let’s move on to the CFO stuff, free cash flow, CapEx, and the balance sheet in our last five minutes here Pascal. So, while 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’s being, sort of plus or minus a billion, but maybe, you know 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?
Pascal Desroches
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, you know, we’re going to cheat those numbers. And, you know, we’ve laid out clearly the path forward to doing that, and we feel really good about where we are with that right now.
Doug Mitchelson
Alright. The 2023 CapEx is expected to fall 20 billion, that’s what you’ve outlined. So, you know, we’re always getting questions on whether that, you know, 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, you know, coming out quickly? We think about, you know, pushing fiber deeper or building out more wireless, more aggressively or faster? Any thoughts as to, you know, what will go into ultimately whether that $20 billion ends up being the right number or not?
Pascal Desroches
Yeah. Here is thing to keep in mind. This year and next year, we’re at 24 billion. Between our transformation efforts and 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, you know, 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 you know, anticipate, you know our CapEx spend as you get through the next couple of years.
Doug Mitchelson
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, you know, have interest rates also, you know or other macro factors influenced your thinking about, you know, capital allocation and again throwing them all in their Pascal. When you think about the leverage target and other hurdles on the balance sheet, what’s your, sort of level of comfort and how much greater comfort you need before you pursue any shifts and change in capital allocation?
Pascal Desroches
Yeah. Look, I think we are on a really good glide path. With the transactions, you’ve done the course of this past 18 months, we don’t have to issue any debt for the foreseeable future. You [stop] [ph] 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, etcetera, those were probably 10 billion.
So, you have 10 billion of free cash flows after dividends, you know, to continue to pay down debt, which we intend to do until we get to 2.5x, and beyond that, but 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. So, we are in much better shape, and I couldn’t be prouder of the team for the work that’s been done over the [class of] [ph] 18 months to get us to this point.
Doug Mitchelson
Yeah. [Indiscernible] dynamic, if you start buying back stock and you maintain the dollar amount you spend on dividends and obviously dividend per share can go up perhaps beyond a normal level. Any closing comments in our last minute here Pascal?
Pascal Desroches
Look, other than we’re really proud of the position that we’re in, and the future for AT&T is really bright and it couldn’t be proud of our colleagues.
Doug Mitchelson
Thanks so much for spending some time with us today and join us again at our conference this year. Thanks, Pascal.
Pascal Desroches
Thank you. Take care.
Question-and-Answer Session
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