$T Q3 2023 Earnings Call Transcript Summary

T

Oct 20, 2023

AT&T's third quarter earnings call has begun, with the operator reminding participants that the call is being recorded. The call will be open for questions after the presentation. Senior Vice President of Finance and Investor Relations, Amir Rozwadowski, introduces CEO John Stankey and CFO Pascal Desroches. Stankey discusses the company's plan for growth through investment in 5G and fiber, which has resulted in strong results and a growing customer base. This strategy has proven successful and AT&T will continue to invest in these technologies to reach more customers.

AT&T is on track to meet or exceed their financial targets and they are raising their guidance for adjusted EBITDA and free cash flow. Their consistent approach to the wireless market has resulted in a growing base of high-value subscribers and strong iPhone pre-orders. This is due to the simplicity and strength of their value proposition and the quality of their network. Customers are staying longer and spending more with AT&T, leading to low churn, increasing ARPUs, and improving returns. Their highest value unlimited plan is their fastest growing plan and their network has never been better. In the fiber market, AT&T's strategy of building fiber has been successful in improving their brand position, gaining broadband share, and improving their mobile share.

AT&T's strategy is proving successful as they have added 300,000 high quality customers despite a slow housing market. Their investment in fiber has exceeded expectations and is driving revenue growth. They have also launched a fixed wireless product and are seeing positive results. The convergence of 5G and fiber is expected to bring even more benefits, with customers who have both services having the lowest churn and highest lifetime value. AT&T is well positioned to be the top provider of connectivity at low costs and is constantly improving their network capabilities to meet the demands of a highly connected world.

The company has been working with Cisco to utilize 5G technology for improved collaboration on mobile devices. They have also been focused on increasing efficiency and cost savings, with plans to generate $2 billion in savings over the next three years. They are transforming their wireline services and streamlining their operating footprint to align with their focus on 5G and fiber. The implementation of Generative AI has already shown improvements in productivity and cost savings, particularly in customer support and software development. The company expects these advancements to contribute to their future cost savings goals.

In the third quarter, AT&T reduced its net debt by $3 billion and is on track to achieve its target of 2.5 times net debt to adjusted EBITDA by the first half of 2025. This allows them to invest in their durable connectivity businesses and deliver shareholder returns. They have expanded their 5G network and plan to reach 200 million people with mid-band spectrum by the end of the year. They also plan to pass 30 million fiber locations by 2025. AT&T remains committed to their dividend payout level and expects its credit quality to improve. They have already generated enough cash to meet their annualized dividend. They are focused on meeting the growing demand for better broadband connectivity and believe investing in 5G and fiber makes strategic and economic sense.

In the third quarter, the company saw a 1% increase in revenues, driven by growth in wireless service and fiber revenues. Adjusted EBITDA increased by 4.6%, with growth in Mobility and Consumer Wireline in Mexico. The company also expects to grow adjusted EBITDA by more than 4%, compared to their previous guidance of 3% plus. Adjusted EPS was $0.64, which includes expected non-cash headwinds. Cash from operating activities increased by $1.5 billion year-to-date, primarily due to higher receipts and lower disbursements.

The company's organic cash flow is showing strength despite a lower impact of receivable sales and higher cash taxes. Capital investment remains high due to investments in 5G and fiber, but is expected to decrease by the end of the year. The company's Mobility business unit saw an increase in postpaid phone net adds, total revenues, and operating income. Revenues and service revenues were driven by subscriber growth and higher postpaid phone ARPU. Mobility EBITDA also increased in the quarter. Postpaid phone ARPU grew due to higher ARPUs on legacy plans and a shift to higher value rate plans. Postpaid phone churn remained low, indicating a strong value proposition for customers. In the wireline business, the company's fiber investment is driving growth and strong returns in the Consumer Wireline segment.

In the quarter, the company added 296,000 fiber customers and has consistently added over 200,000 fiber net ads for 15 consecutive quarters. Despite recent pricing actions, fiber churn has improved, highlighting the superior product and experience. Strong fiber revenue growth of 27% drove total broadband revenues up 10%. Consumers are choosing faster speed tiers, supporting ARPU growth. AT&T Internet Air product is performing well and will serve as a catch product as legacy copper services are phased out. Business Wireline EBITDA was down due to transition to next-generation products, but wireless service revenue is up 7% and connectivity solutions are growing in the high single digits. The transition to electric vehicles is expected to bring a tailwind from connected cars and there is momentum with fiber for small to medium-sized businesses.

The company's year-to-date EBITDA has slightly decreased due to growth in wireless offsetting declines in wireline. They are on track to achieve their net debt reduction target for the year and have also reduced their short-term financing obligations. This may result in a more radical quarterly cadence of free cash flow in 2024. The company is in a solid position to address near-term debt maturities with their cash on hand. They have a significant amount of cash on hand and are able to earn more on it than the cost of their long-term debt. The majority of their long-term debt is fixed at a favorable rate and maturity.

The financial structure outlined by the company improves their financial flexibility and puts them in a favorable position with their cost of capital. They expect to see growth in free cash flow and a decrease in debt, which will further strengthen their position. The company is pleased with their operating results and is on track to meet their goals for growing customers in a profitable manner. The team is also seeing success with their Internet Air product, which is being used both in-region and potentially out of region. The company did not increase their adjusted EPS guidance for the year, but their EBITDA guidance remains unchanged.

The company is open to selling Internet Air to businesses, as it is a profitable product that meets their needs. However, their main focus is on serving their existing customers and using Internet Air as a holding strategy to retain high value customers while they transition to fiber infrastructure. They will only use Internet Air on a selective and targeted basis.

Pascal Desroches explains that the EPS issue should not be overanalyzed and the company is performing well overall. Simon Flannery asks about the growth of fiber and broadband, and the 9% ARPU growth is largely due to customers upgrading to higher speed plans and adjustments made to pricing for lower-end plans. John Stankey also mentions that the spread between bottom and top of the customer base is tighter.

The company is seeing customers migrate to faster internet speeds, with many still having room to upgrade to 2.5 or 5 gig products. The company is selling at a discount compared to others in the industry, but this is part of their strategy to increase penetration. They also have room for bundling strategies without sacrificing margins. The company is still scaling and expects to lower costs as they reach optimal scale in their metropolitan areas. This will contribute to margin accretion, not just increasing ARPU.

The author discusses the success of DTV and praises the management team for their focus and execution. They are satisfied with the business's performance and have no plans to deviate from their current strategy. The BEAD process is still ongoing and there have been some delays due to clarification needed on regulations and bid evaluations. Once these issues are resolved, the process should move forward more smoothly.

John Hodulik asks two questions during the conference call. The first question is about the flat churn rate in the wireless market and if this is a sign of continued strength in the fourth quarter. The second question is about the factors that will drive free cash flow in 2024 compared to 2023. John Stankey responds by giving some context on the competitive market in the wireless industry and mentions one specific account that had an impact on churn last quarter. He also jokingly mentions that Pascal will give a non-answer on guidance for free cash flow next year.

The speaker is pleased with the company's performance in the third quarter and believes they are back in a strong position in the market. They are focused on growing their share of revenues rather than just the number of customers. The churn numbers are also stable, and the company is growing ARPUs and bringing in profitable customers. They are optimistic about the fourth quarter and believe their product is relevant regardless of the economic environment.

The speaker expects a strong fourth quarter in the gift-giving industry and believes that the company will continue to see growth in earnings and cash flow in 2024. They mention the growth of their mobility and broadband businesses, cost-cutting efforts, and a decline in DIRECTV contributions. They also anticipate paying more taxes next year. On the topic of CapEx, the speaker notes that it has been decreasing throughout the year.

The speaker is responding to a question about the company's CapEx and suggests that it will be similar to last year's. They are working towards a more consistent approach to their business and may see changes in seasonality. The speaker also discusses their tactics for taking market share from cable companies.

The success of selling a product in a market relies on a team effort and creating awareness through tactics like digging up front yards. As markets reach a 40% penetration level, the tactics used must change to continue driving value and targeting customers effectively. The team is skilled at transitioning to different playbooks as markets mature, resulting in successful scaling of the business.

John Stankey, responding to a question about the 18-month penetration rate, declines to provide specific numbers. He then moves on to a question from Michael Rollins about the slowing wireless device upgrade rate and its potential impact on financials. Stankey mentions that the upgrade rate is influenced by economic conditions and that it may slow if the economy becomes more stressed. He also notes that there is less differentiation between device generations, making it less necessary for customers to upgrade frequently. He ends by saying that he does not expect a dramatic change in the upgrade rate.

The speaker discusses two reasons for the longer life cycle of devices: people are taking better care of them and they are more likely to opt for a replacement within their insurance agreement rather than buying a new device. This trend may continue as devices become more expensive. The company has achieved $6 billion in cost cutting over three years and plans to cut an additional $2 billion over the next three years, with an accrual set up for next year. This accrual can be used as a reference for understanding how costs will be managed in the future.

The speaker discusses their plans for the next 12 months and mentions their investments in information technology infrastructure. They are starting to see the benefits of these investments and are streamlining their business for new products. They are confident in achieving their goal of $2 billion over the next three years. In terms of the new iPhone launch, they are seeing positive upgrade rates and are expecting a boost in margins in the fourth quarter. Regarding the BEAD program, it is likely to ramp up in 2025 and it is unclear if it will be a substitute or supplement for their current fiber builds that are considered competitive overbuilds.

John Stankey, CEO of AT&T, stated that the pre-order rate for the new cycle was the best they have seen in a long time. The upgrade rate was also higher than previous quarters, but still within expected levels. He noted that the company's guidance for service revenue growth, operating margins, and EBITDA performance remains unchanged. Regarding BEAD, Stankey said it will depend on the specific build location and the company's contribution. He stated that any potential changes will not affect their current plans for 2024 and 2025.

During a conference call, John Stankey, CEO of AT&T, was asked about the role of pricing in the company's growth. He acknowledged that pricing has been a key lever for growth in the past, but with the increasing presence of cable companies in the market, the pricing strategy may need to be reevaluated. He also commented on the record levels of investment in the industry and the need for a return on those investments. In response to a question about the new FCC net neutrality NPRM, Stankey joked that the question was trying to "fire him up."

The speaker believes that the industry is adjusting its value equation to reflect the increased speed, reliability, and capability of services. This may include offering more free perks or adjusting pricing for heavy users. The speaker sees this as a rational and effective approach, citing factors like customer satisfaction and low churn rates. They also believe that being a low-cost leader in a variable cost structure is not a sustainable strategy in the long term.

The company focuses on profitable growth and finding customers who understand the value they bring. The United States has a strong and scalable broadband infrastructure, as shown during the pandemic. There has been record investment in wireless and fiber infrastructure, and the Bipartisan Infrastructure Act will also bring in private capital to address underserved and unconnected areas.

The broadband industry offers more options and there is no evidence of discrimination in the ISP segment. The industry does not support blocking, paid prioritization, or throttling, unlike some platform apps. Customers are not complaining about this issue. The speaker questions the use of taxpayer money and resources to address a non-existent problem. They believe that regulators should focus on bipartisan issues such as competitive spectrum policy, reauthorization of spectrum authority, and fixing the broken universal service process. The speaker will participate in the FCC process and provide data to demonstrate the market's operation. They hope for a reasonable outcome and have not given up hope for rational policy.

The speaker explains that if the government takes a heavy-handed approach and applies old regulations to the internet, the company will do everything necessary to ensure that the law and record accurately reflect their actions. They then answer a question about the decline in business, stating that the most significant impact is due to a shift in technology, particularly in the fixed wireline business. This includes the managed complex networking shift towards SDN, which may result in a decrease in technology spending from customers. They also address the impact of international roaming on wireless ARPU, stating that it has been affected by the pandemic but may start to recover in the future.

The company has made the decision to exit certain low-margin product sets that are inconsistent with their focus on core transport in a shifting market. This has led to a decrease in the resale of other services. While there is still demand for business services, the overall revenue growth is driven by the wireless business segment. The company is optimistic about the potential growth in wireless technology for businesses, similar to the growth seen in managed networks in the past.

In paragraph 30 of the earnings conference call, AT&T's CEO John Stankey thanks the participants for joining and expresses his satisfaction with the company's performance in the third quarter. He credits the success to the right formula, consistency, and focus on select products and lines of business. He also promises to close the year strong and sustain the momentum. The call ends with the operator thanking everyone and disconnecting the call.

This summary was generated with AI and may contain some inaccuracies.