AT&T Inc. (T) Management Presents at Bank of America Media, Communications & Entertainment Conference 2022 (Transcript)

AT&T Inc. (NYSE:T) Bank of America Media, Communications & Entertainment Conference 2022 September 7, 2022 11:00 AM ET

Company Participants

David Barden – Bank of America

Conference Call Participants

Pascal Desroches – Senior Executive Vice President and Chief Financial Officer

David Barden

…comments you’ll hear from me today are forward-looking and are subject to risk and uncertainties. Refer to the IR website for more information.

Before we jump in, Dave, let me just talk a little bit about the state — give a high-level overview of the state of our business, which is candidly quite good right now in terms of when you look at where AT&T was couple, probably two, three years ago, really high dividend load.

We had businesses that needed to invest to compete, and we de-levered the company. We’ve invested in our businesses. We’ve become more focused and for the first time in a long time, this company has grown both top line and bottom line and we have a clear path to continuing to de-lever.

We have an attractive dividend and I take a step back from all of that, and it was — it still strikes me as a surprise that there’s still all this consternation about the state of our business, but relative to where we were couple — just a couple of years ago, we are in a better position, and I’ve never been more pleased.

Pascal Desroches

Great. Thank you for those comments, Pascal. And if any of you have a meeting with Pascal later today, I saw him nodding at what Jessica was talking about on the AVOD business. Remember, Pascal was the CFO of WarnerMedia business.

David Barden

I’m happy to hear HBO has the best — the highest CPM. I’m not surprised.

Question-and-Answer Session

Q – David Barden

So Pascal, before we talk about kind of how well the business is positioned to move forward, I want to kind of go backwards a little bit to the second quarter and kind of talk about three things that you guys brought up that I think kind of emerged as somewhat of a surprise over the course of the first six months of the year.

It’s been a challenging, volatile environment for all management teams. But I think the first thing that got brought up was and a lengthening of customer receivables, DSOs, I think, from like 31 days to 33 days or something like that.

But because of the way your receivables are structured with such a large amount of handsets, it was a large enough number that you called it out. And I think that people would love to kind of get a sense as to whether you feel as comfortable, more comfortable or less comfortable about kind of the state of consumer receivables at this point in the third quarter.

Pascal Desroches

Just like even just stepping back, the way I would characterize where we are, where we were at the end of the second quarter, where we are today is we have returned to pre-pandemic norms. During the pandemic, there was a phenomenon because of all the government stimulus, there was a lot of money out there, and consumer was paid quickly.

The last thing that the consumer wanted to get paid off was their connectivity — the last thing they want to be cut off was the connectivity. So they were paying faster. So the anomaly looks like it was during that two-year period as the stimulus money is drying up, what we’re seeing now is a return to norms that were common in pre-pandemic.

With that said, look, remember, we were one of the first to report in the quarter. We thought it was careful to just call it. It hasn’t gotten any worse. And for purposes of our guidance, we haven’t assumed it was going to get any better or worse and so that’s really all it is.

We are not having any collection issues. Customers are paying us. It’s just that they’re paying us a little slower. That was one element of it. The other element that we said is we’re growing faster than we anticipated. We said coming into the year, we didn’t expect the market demand to be as high as we saw in 2021.

In the first 6 months, we grew postpaid phone net adds over last year’s really robust first half. So again, it’s a good problem to have. And so I take a step back from all that, it’s — I was surprised at the commentary that came out of — after we reported Q2 earnings.

David Barden

Well, so I do want to talk about — so the net — you talked about the receivables issue being about $1 billion, maybe the handset issue being a contributor to maybe another $1 billion. There was another piece of it, which is the business side. I want to get to that.

But I want to talk about the working capital issue because by definition, working capital is going to be one-time event. And unless you think that, that onetime event is going to recur again in another year, it won’t have the same effect on free cash flow in a year from now as it has this year, correct?

Pascal Desroches

Here’s the thing, Dave, like the macro environment is so uncertain. Like what we did want to do or didn’t do is to update our guidance for 2023 because fact is if — we are operating in a very challenging macro environment.

Fortunately, now things — the consumer appears to be really healthy, and demand is really good. So there isn’t an issue, but tell me where we think inflation is going to be next year. Tell me where you think the broader economy is going to be. That’s — and so to try to predict where — what the collection cycle is going to be in that environment is challenging.

David Barden

So to be crystal clear, you’re not changing ’23 free cash flow guidance.

Pascal Desroches

We’re not providing an update.

David Barden

Is there a plan to provide an update?

Pascal Desroches

Yes. We will provide an update to our 2023 guidance when we report our fourth quarter earnings, the same pattern that we typically do.

David Barden

Okay, great.

Pascal Desroches

But look, the thing that I don’t want to get lost in any of this is the consumer remains really healthy, and we feel really good about where the operating momentum of our business.

David Barden

So let’s shift gears then to the operating momentum of the business. So the subscriber growth has been pretty strong. You’ve actually been the biggest share gainer in mobile in the marketplace. I think at a very high level, probably one of the biggest concerns about the industry right now is that the postpaid phone net add growth has been so strong that it can only go down.

And as it goes down, it’s going to create internecine pressure between the big 3 competitors to kind of get more and more aggressive with one another. I think at the end of the second quarter, you guys said you really hadn’t seen any of that kind of retracement in the overall industry growth rate. What’s kind of your outlook right now?

Pascal Desroches

Here’s what we’re seeing. The market demand remains really healthy. We’re continuing to see good demand for subscriber — for new subscribers coming into the service and also, look, our churn levels are at really low levels.

You look at all that together, we have a mobility business now that we expect service revenues to grow 4.5% to 5%. And we expect profitability to accelerate in the back half of the year. So all indications are green and that we are performing really well.

David Barden

One of the kind of contributors to the low churn has been you guys as having kind of jumped early into the idea of kind of best promotions for new and existing customers. And that comes with a cost. And part of that cost finds its way into the revenue line as a contra revenue amortization of the promotion.

But it seems like you’ve kind of lapped that. Have you — now that you’re kind of seeing an acceleration in top line growth, it hasn’t — it stopped becoming a negative, and the upselling of the customers is now the primary driver of ARPU. Is that a fair statement that we should expect that, that’s going to come back to bite you?

Pascal Desroches

Yes. Look, we said since some time last year that we expected to start to grow ARPU in the back half of this year. It started in the second quarter, and we expect that to continue.

There are several factors. I think there is — as consumers are either upgrading or new customers are coming in, which you have an upward migration to higher tier plans. You have the return of international roaming. Travel was very healthy this summer, and you saw — we saw the benefits to international roaming.

We put in targeted price increases, but that hasn’t shown up in the second quarter. So that’s going to contribute to part of the acceleration we expect in the back part of the year.

David Barden

So let me ask about that. So I think that when the price changes occurred, they were on legacy plans, $6 to $12 for individual to family plans. And the idea, I think, was to potentially migrate those customers up to more current plans, higher value plans. So can you talk about what’s the experience thus far in terms of the uplift contribution versus the negative — the impact potentially from churn having gone up a little bit?

Pascal Desroches

Yes. Look, we — things are playing out exactly as we anticipated. We anticipated that it would result in a slight uptick in churn. It did for those plans. But with that said, it actually is working out a little bit better, and this is going to — this is an accretive play for us. But it’s all said and done, it’s — we — this was the right move. Many customers took the opportunity to upgrade to higher tier plans as a result of that.

David Barden

So it is interesting. So we actually saw T-Mobile increased some fees on some older plans, then we saw you guys increased fees on older plans. And we saw Verizon raised prices on fees. But then after kind of second quarter, what we saw was a new plan get introduced by Verizon. I think that they thought that they were maybe not as on market for bring your own devices, in particular, and they launched a new plan. And I think people were wondering, maybe even concerned about what that might mean to the market dynamics. Can you talk a little bit about what it’s done, if anything?

Pascal Desroches

Look, I’m not going to comment on what Verizon is doing, what reasons behind it. What I can tell you is, for us, we’re continuing to see really solid, really good customer demand for our products. So…

David Barden

All right.

Pascal Desroches

You make of that what you want. We are running our play. We’ve been doing that consistently quarter after quarter for the last 2 years. And that’s why we are — we have led the industry in postpaid phone net adds. And so until that no longer works, we’re going to keep running our play.

David Barden

And so I wanted to get to that point. So one of the plays or maybe the play, again, going back, is this idea that everybody gets a phone promotion, whether you’re a new or existing customer, whatever that promotion might look like. And you guys started early, it had an effect.

You went kind of from last to first in terms of market share acquisition. But it’s come with this kind of this promotional cost, and it’s almost the wealth transfer from the wireless industry to the equipment industry.

And by being successful, you forced T-Mobile and Verizon, I think, to follow suit. And so now the entire industry is shoveling money over to the equipment industry. And the whole point of going to equipment installment plans in the first place was to stop doing that exact thing, was to stop sending money to the equipment industry, but now here we are again. How do we — do we want to get — should we be doing this? If we don’t want to be doing this, how do we get out of it?

Pascal Desroches

Here’s the way I would respond to that question. If you take a step back where we were 2018, 2019, we were losing share. Our business was — our wireless business wasn’t growing. And in order for us to — a big part of that was we weren’t investing at the same levels that we — that our competitors were. We just weren’t, and we needed to catch up and that’s what you saw.

But the tactics we employed were different than them. We didn’t put all of our promotional dollars towards new customers. We sensed that that let’s focus on retaining our customers that we know a lot about. We know how many accounts they bring. We know their credit history. Let’s make sure we retain them, and the cost of retaining them is less than trying to go out and acquire new customers.

So our play has worked. We’re not being out — we’re no longer being outspent, but we’re not outspending. That’s not what is happening here. And so I think it’s really important to take a step back and say, right now, the business wasn’t growing. It is growing both top line and bottom line. ARPU is growing, and we expect growth to accelerate as we make our way through the back part of this year. So I think we’ve made the case that this is working, and we deserve the benefit of the doubt.

David Barden

So I think you have made the case that it is working. It is working. And I think that you’ve gone out of your way in the past to say that it’s not working simply because we’re being promotional handsets, because customer service has improved, network quality has improved, Net Promoter Scores have improved. So you were earlier this year highlighting, flagging the likely necessity of raising prices to offset inflation.

Would you want to — do you feel like now you’re in a position where the investments you’ve made in the business and the recognition that your customers have given you, you could start to dial back the cost and expense of those handsets and that, that would be an incremental contributor to profitability?

Pascal Desroches

What I will say is this, we’re going to be competitive. For years, AT&T was not competitive, and we’re going to be competitive, and we’re capitalists. At the end of the day, if there are opportunities to grow subscribers in a more efficient way, we’re going to sixteen those. But at the same time, we’re no longer going to be the share donor to the industry.

David Barden

I’m going to admit that I’m a little ignorant on this topic that I guess there’s a new iPhone coming out.

Pascal Desroches

That’s what I hear. This afternoon.

David Barden

This afternoon. How do you think iPhone season 2022 is going to go?

Pascal Desroches

Look, Apple consistently delivers a great product that consumers love. And what’s hard to predict always is what environment are they going to be selling into. But I would never bet against Apple here. It’s a great product.

David Barden

You flagged the inflationary pressures. So I think what happened was you kind of raised the revenue growth outlook, but kind of kept the EBITDA growth outlook with the expectation, I think, that whatever revenue top line benefits would be eaten away by the inflationary pressures in the back half of the year. Can you talk a little bit about we have seen gas prices come down from where they were when we report second quarter. That might be one area of relief. Is there any kind of changes in the kind of sense of inflationary pressures inside the business right now?

Pascal Desroches

Look, inflation is still elevated. Do I think it’s — I believe it’s moderated some. You see it in different portions of our supply chain, whether it’s energy. The competition for labor isn’t as fierce as it was, call it, 6 months, 6, 9 months ago. So I’d say it’s moderated some, but prices are still high. Prices are still high.

But in addition to the price adjustment that we did, we also are taking a lot of cost out of that business across the board, whether it’s Mobility, Consumer Wireline, the G&A functions. So there are other tools to fight inflation beyond just simply increasing prices.

David Barden

So is it possible we could see maybe upside relative to the current EBITDA guide if we’ve got all this positive upside in the…

Pascal Desroches

You’ll be the first to know when I…

David Barden

I appreciate it. Appreciate it. I was hoping you could tell me today. So okay, the — just kind of closing out a little bit on the wireless side. So handset availability is good. You’re kind of comfortable that you’ve got the supply coming from Apple to meet demand that’s going to come in the fourth quarter?

Pascal Desroches

Things — the supply chain issues that we flagged last year have largely been solved.

David Barden

All right. And then one other thing on the cost side. Unlike some of your rivals, your wireless business is unionized, and the union agreements tend to have COLA adjustments in them. Can you talk a little bit about the 2022, 2023 cost inflation in the wage base and how that might evolve and what we should be expecting if it’s — I’m assuming it’s backward looking, and so the 2023 inflation could be a lot higher than 2022. How do we think about that?

Pascal Desroches

Here is the way I would say these — we have several agreements. And they are renegotiated periodically and will reflect the environment that we’re operating in. With all that said, like I said, that was pretty much built into the updated guidance we provided.

David Barden

All right. So shifting gears a little bit, and we’re going to sandwich this conversation by talking about the good stuff in wireless, talking about the good stuff in consumer. But in the middle, we’re going to talk a little bit about the business services side.

So can you — you guys kind of made a change in your commentary around the outlook for the business services business, enterprise services business with the expectation that we’d be seeing kind of high single-digit negative EBITDA performance. And there were a number of reasons…

Pascal Desroches

Low double digits we said.

David Barden

Low double digit, I guess, for the back half of the year. So could you talk a little bit about how that’s evolving right now? Has anything changed? And you called out wholesale as one big contributor to that. And I’m interested to know who’s the beneficiary if you’re losing on the wholesale side.

Pascal Desroches

Yes. Look, first, there are 3 factors that are at play here. One, Business Wireline is in secular decline. It has been for some time, and we expected this business to decline profitability mid-single digits coming into the year.

Relative to those expectations, you had — we do a great bit of business with the government. And the business with the government didn’t come in at the cadence that we thought, and we’re not sure whether it’s going to come back. For purposes of updating our guidance, we assume they wouldn’t. And that was factor 2.

And factor 3 is wholesale access costs. What do I mean by that? When we sell connectivity solutions outside of our footprint, we need to buy access from third parties. And those third parties are, you can guess who, we would do business with all of them. And prices have gone up. In turn, we also sell wholesale and have opportunities to also raise our prices.

Now the fact that this business is in secular decline, by definition, that headwind is going to continue to become less and less over time. You couple that with a fairly aggressive cost program that is going on in that business led by a new leadership, we feel like this is — this business is really important strategically because much of our wireless distribution comes out of our enterprise relationships.

And you look at that, we have relationships with virtually over 90% of the Fortune 1000. And it’s a core competency that we have, and it’s one that has served us well. But it is very much in transition, and we’re — what we have to do is to grow our small, mid-business connectivity solutions. For years, we allowed cable to take share with no competition. We have to get better there. And over time, you’re going to have a business that probably has lower revenues but a higher profit margin characteristics because those are owned operating services.

David Barden

So how — let me ask this one more question on this because I think that we’ve talked about 5G. We didn’t really talk about it because we don’t really with AT&T talk about it all that much. The — how much of that potential revenue that exists in the future of the 5G enterprise and all that stuff, how much does that factor into how hard you throw your elbows to keep that business on price?

Pascal Desroches

We think it is — there will be a very attractive market for 5G-enabled IoT solutions. There is — it will come. It is born today. It will come and the relationships that we have among the Fortune 1000 is critical to — is critical in serving — in helping exploit that opportunity.

And again, our wireless relationships. The big part of the growth in wireless is also the ability to surgically attack our enterprise base and partner with different organizations to really drive increased subscriber adoption.

David Barden

And you do have the 40% market share in that business.

Pascal Desroches

Yes.

David Barden

All right. So let’s shift gears to the consumer broadband business, the fiber business. So there was a goal to get to 3 million fiber passings in 2021. We got about 2.5. You guys cited some supply chain issues there. The goal I think, was to get to 3 million to 4 million passings this year. Where are we now in kind of building out the fiber business?

Pascal Desroches

Through the end of the second quarter, we are at 18 million homes. And we really — we saw a really nice pickup in the rate of build out starting in the latter part of last year as the supply chain issues abated into the first part of this year.

And look, all told, we have fiber, we win. Like where we have fiber, we take share. We added 316,000 net adds — fiber adds in the last quarter. And look, we are increasing our penetration. We’re driving higher ARPU. And when it’s all said and done, the real gating factor is how quickly can we go.

David Barden

So a couple of questions on the volume side before we get to price side. The — despite the fact that you had, I think it was a record number of fiber net adds in the second quarter, you still had basically net 0 broadband performance.

So it’s not totally clear whether you’re simply converting copper or you’re actually taking share from cable at least from our seat. When, if ever, are we going to see net add growth in broadband from AT&T as a function of this aggressive fiber movement?

Pascal Desroches

Yes, I don’t think we have given specific guidance, but I would tell you, as we build out more homes that we will reach that inflection point. We are at the inflection point where fiber revenues, the growth in fiber revenues is surpassing the decline in legacy product.

We will reach that same inflection point in broadband subs. We haven’t gotten specific to when. But as we build out more locations, that will happen.

David Barden

So in 2020, we built out one million, and we were run rating probably 800,000, 900,000 postpaid — sorry, broadband net adds. In 2022, we’re kind of building — in 2021, we did 2.5 million, 2022, we’re going to three million, four million. So what — when you think about that kind of cadence where we’re going from one million to 2.5 million to three million to four million to four million home passings per year, what should we as investors expect to hold you accountable for in terms of those kinds of penetration that it had?

Pascal Desroches

I think over — we go to a market expecting to get north of 40% penetration. That’s…

David Barden

Over a 3-year period, a 4-year period?

Pascal Desroches

I don’t think we’ve given specific guidance on that. But it’s within a few years post penetration. Right now, as we are entering new markets or building out new locations, we are penetrating it twice the rate that we have historically.

I think for years, fiber was a nice to have. Now it is a necessity, given the increased number of people working remotely, online learning, the need for really reliable symmetrical speed has never been higher.

David Barden

So let me just ask the question that, I mean, everyone — we all know fiber is a great product, it’s future proof. It’s low cost. It’s low maintenance. It delivers super-fast speed. But when you say people need it, do they really need it? I mean, because they don’t really need it, right?

Pascal Desroches

Perhaps some would argue today, they may not need it with connectivity increasing at what we estimate will be a fivefold increase between 2021 and 2025, fiber will be the solution of choice. And given the long lead times, the long payback periods, if you decide you want to do fiber four to five years from now, it’s too late. And this is why we think we are building a strategy for long-term sustainable earnings with the best possible technology.

David Barden

So I want to ask — talk a little bit more about that, the strategic side of that. But before I do, so just — so while we’re at this moment in time, where fiber is doing well, but we’re kind of losing DSL at kind of the same pace, and we’re expecting these greater passings and these better sales that lead to ultimate net add growth. While we’re in this period where we’re kind of a net 0, there is an ARPU lift. What is the lift from a legacy DSL to a new fiber customer if I’m looking at that business?

Pascal Desroches

Call it 20%?

David Barden

Good. That’s what I have in my model. Ok, good. That’s the right answer. So the — so just being a couple of different strategy questions. So maybe fiber is the right long-term answer, maybe it isn’t necessarily the need that people have this instant.

You’re in the middle or at the beginning of kind of deploying your C-band and auction 110 spectrum. And you’re going to have a lot of empty wireless capacity. And I think the question comes up, why not be a little bit more open to fixed wireless access given some of the successes we’ve seen from your peers in that business, recognizing you can be committed to fiber and also exploiting some of the capacity opportunities you have in your mobile business. What is the — what’s the latest thinking on fixed wireless access as it relates to AT&T?

Pascal Desroches

Yes. And I think I’ve been fairly clear in this. We think in certain instances, it makes sense. If you’re in a rural area where it does make — where the economics don’t pan out for fiber, fixed wireless will be an interesting solution. If you — for places where we’re not going to get to fiber for another 2 or 3 years, it may make sense. That’s a good catch product. We keep the customer and ultimately transition them to fiber.

And it’s really — I think it’s fair to say we have a product that needs to be updated, and you’ll see — you’ll hear from us soon on that. But all in all, it is — we think in places, it makes sense. But long term, we don’t believe it will be good enough. And that’s why we think it is really important to start to place our bets now with fiber because by the time fiber becomes the only acceptable solution, it will be too late to start to build out because of the long lead times.

David Barden

And you have this goal of getting to 30 million homes passed by 2025, but there’s a lot more than 30 million homes in your footprint who represent an opportunity who probably want an upgraded experience that you could offer through fixed wireless access. So I’m still — I don’t understand why you haven’t just said we’re going to — we’re committing ourselves to both.

And we’re going to serve half our footprint with the best technology we can offer through mobile and the other half, we’re going to do with fiber. But you seem to not want to say that.

Pascal Desroches

Because long term, the tax on our systems on the mobility network for fixed wireless we think makes it a very expensive solution that is suboptimal.

David Barden

All right.

Pascal Desroches

And so it’s not a good customer experience over time as more and more demand hits the network, and it’s more expensive for us. So that’s why our focus is on fiber, and that’s where our priority is. But there will be places where fixed wireless may make sense as a catch product or in out of — in places where it’s not densely populated.

David Barden

And so I want to ask another kind of related question, which is you guys have talked about, and I think that this is a true statement. The fiber can be maximized economically as a scale business.

You guys will have the largest scale. And there are a lot of other smaller scale projects in the works. There’s businesses that are beginning to think about fiber overbuilding. There’s businesses that are in the midst of fiber overbuilding. There are some that have completed fiber overbuilding.

And I guess, strategically, how do you think about acquisition? How do you think about partnership and trying to leverage your scale for a mutual benefit with other fiber deployers in the market?

Pascal Desroches

Here is the way I would characterize it. I mean, we — as I said earlier, we’re capitalists. If there are opportunities for us to, whether it’s with a partner, whether it is through a small acquisition to do something that is accretive, that delivers shareholder return, we would do that.

But I don’t want anybody to walk away thinking we’re going to do any sort of big acquisition or any transaction to acquire a big company because I think given our ability to build within our footprint and the really attractive returns still left to be harvested within our footprint, why — let’s focus on that first. Let’s prioritize that. And then we’ll look at other opportunities where it makes sense.

David Barden

I think we’re going to talk about this later today with Andy Lipman around the regulatory environment. But the Biden infrastructure bill obviously passed, and money is beginning to flow. Could you talk about how, if at all, in the next year or 2 or 3 that’s going to impact your strategy on broadband deployment? Or is it just it’s still so nascent that it’s really just not going to happen?

Pascal Desroches

Look, we expect there will be meaningful opportunities to get broadband subsidies and to bring connectivity to places it’s not in today. Now when do I expect that to start to show up, I think, in earnest, we’re going to start to see real meaningful progress probably the latter part of 2023 is when you really start to see some momentum there.

None of that has been factored into our guidance. So if there are opportunities to build more through government subsidies, we have, in fact, added to our guidance.

David Barden

Cool. And as we kind of wrap it up in the last couple of minutes, I think maybe the best place to just kind of get people where they need to be comfortable level, can you talk about kind of balance sheet, deleveraging and commitment to the dividend ?

Pascal Desroches

Look, first on the latter part. Recently, people have to begin to ask is the dividend safe? Last year, this company — the same set of businesses generated $19 billion. We’re taking that down largely because of investments we’re making this year to really drive future returns. Our annual dividend is $8 billion. It is absolutely safe as I have said to many investors along the way, that’s it. We’re not going to — the dividend is absolutely safe.

Now in terms of your other question was free cash flow for 2023. Here are the factors to keep in mind. I think there is we expect to continue to grow this business.

You’re going to see growth in Mobility driven by a higher customer base than we anticipated coming into this year, higher ARPU. You’re going to see a ramp-up of MVNO revenues from our agreement with DISH. You’re going to see transformation savings. You’re going to see lower interest, all factors that will serve to improve the cash conversion of ’23 relative to — versus 2022.

And the big unknown, honestly, is just the macro environment we’re going to be operating under, what’s going to be the level of inflation, how healthy is the consumer going to be. And that’s why we did not update 2023 guidance at this point.

End of Q&A

David Barden

Great. All right. I think we’ll leave it there. I think that’s a good place to end. Thank you so much, Pascal…

Pascal Desroches

Thank you, Dave.

David Barden

For being part of the 2022 conference.

Pascal Desroches

All right. Thank you. Thank you, everybody. Great seeing you.

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