AT&T Inc. (NYSE:T) Q3 2023 Earnings Call Transcript

AT&T Inc. (NYSE:T) Q3 2023 Earnings Call Transcript October 19, 2023

AT&T Inc. beats earnings expectations. Reported EPS is $0.64, expectations were $0.63.

Operator: Thank you for standing by. Welcome to AT&T’s Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Following the presentation, the call will be open for questions. [Operator Instructions] And as a reminder, this conference is being recorded. I would like to turn the conference call over to our host, Mr. Amir Rozwadowski, Senior Vice President of Finance and Investor Relations. Please go ahead.

Amir Rozwadowski: Thank you, and good morning everyone. Welcome to our third quarter call. I’m Amir Rozwadowski, Head of Investor Relations for AT&T. Joining me on the call today are John Stankey, our CEO, and Pascal Desroches, our CFO. Before we begin, I need to call your attention to our safe harbor Statement. It says that some of our comments today may be forward-looking. As such, they’re subject to risks and uncertainties described in AT&T’s SEC filings. Results may differ materially. Additional information, including our earnings materials, are available on the Investor Relations website. With that, I’ll turn the call over to John Stankey. John?

John Stankey: Thanks, Amir, and good morning everyone. I appreciate you joining us. At the start of this year, we articulated a plan in which our deliberate investment in 5G and fiber would help grow our customer base in a profitable manner. Strong results we share today represent the latest proof that our strategy is working and sets us up for continued sustainable and profitable growth. We’re meeting rising data demand with best-in-class 5G and fiber solutions. This is not only expanding our durable customers. 5G and fiber solutions. This is not only expanding our durable customer base, but also delivering attractive returns. The results we’re seeing only strengthen our conviction in continuing to invest to bring these next generation technologies to even more Americans.

We’re tracking in line to meet or beat our consolidated financial targets and we’re raising our full year adjusted EBITDA and free cash flow guidance today. Our goal has been to invest and grow the business in a manner that progressively differentiates the AT&T asset base in our industry, and we’re doing exactly that. In wireless, our consistent go-to-market approach continues to expand our base of high-value subscribers. Our results show that our best deal for everyone approach continues to resonate with customers. For example, in September, we saw the strongest iPhone pre-orders we’ve had in many years, despite competing promotions with higher subsidies allowing lower value device trade-ins. This is a testament to both the simplicity of our offers and the strength of our consistent and straightforward value proposition, as well as the quality of our network.

The tail of the tape is clear. Customers are staying with us longer and spending more with us. Just take a look at our consistent low churn, increasing ARPUs, and improving returns. Why? Because we’re providing more value to customers. For example, the vast majority of people taking our iPhone promotions are signing up for our highest value plans, even though it’s not a promo requirement. In fact, our highest value unlimited plan is our fastest growing plan. In addition, our network has never been better in terms of its size and quality as we continue to enhance the largest wireless network in North America and expand the nation’s most reliable 5G network. It’s no surprise that when you combine our high-value customer growth and rising revenues per user, we continue to grow profits in our wireless business as evidenced by our highest ever EBITDA on record.

Turning to fiber, the story remains the same. Where we build fiber, we win. We win by delivering the undisputed best broadband solution on the planet, improving our brand position, gaining broadband share, and by improving our mobile share. Our strategy is working. We just delivered nearly 300,000 high quality net adds this quarter against a muted backdrop of household move activity. In addition, the returns on our fiber investment continue to improve from our initial assumptions. We’re exceeding our expectations for penetration in new markets. Additionally, the accretive mix shift to higher value fiber plans has driven our fiber ARPU up nearly 9% year-over-year. Look no further than how fiber is fueling a surge in broadband revenue growth.

Consumer Wireline has transformed from a declining business to one that is delivering strong, consistent growth. We offer a superior product that has room to improve on all the levers that drive margin performance as we scale. No matter where we put fiber, we’re the preferred broadband provider. In August, we selectively launched AT&T Internet Air, our fixed wireless product. We view this service as yet another tool in our connectivity toolbox. While it will primarily act as a targeted catch product, we’ve been pleased with the positive early reception and have already added about 25,000 subscribers, pushing us back into positive territory for overall net broadband growth of 15,000 subscribers in the quarter. Meanwhile, we’re only in the very early stages of reaping the long-term benefits from the inevitable convergence of 5G and fiber.

Where we’ve deployed fiber, we’re seeing an uptick in Mobility growth. Additionally, AT&T customers with fiber and wireless service have our lowest churn and the highest lifetime values to match. As the one player scaling both wireless and fiber networks, we’re well positioned to be the provider of choice for the ubiquitous connectivity that consumers want. And importantly, we’re positioned to do this at the lowest unit economic costs, establishing a long runway for sustainable returns. To enhance our network capabilities, we’re powering experiences built for the high speed connected everywhere world we now live in. One example is our work with Cisco to deliver the next evolution in collaboration for those working on the go. By tapping into the fast speeds and low latency of 5G, we’ve seamlessly extended Webex Calling capabilities to mobile phones, simplifying connectivity for a mobile workforce.

We feel strongly that this is just the beginning of what’s possible. At the same time that we’re reinvigorating customer growth, we are also operating more efficiently across our business. This is a core component of the 120 basis point margin improvement we saw in adjusted EBITDA compared to the third quarter of 2022. You can also see the benefits of our $1.5 billion of incremental cash from operations over the first three quarters compared to the same period a year ago. We’re off to a strong start as we execute on our plan to generate $2 billion plus of incremental cost savings within the next three years and we’re confident in our ability to achieve this goal. We’re executing our legacy wireline transformation as we scale our 5G and fiber networks.

Over time, we expect this evolution to drive significant operating efficiencies as we sunset legacy infrastructure that no longer meets our customers’ needs. We’re also aligning our operating footprint and work environment to mirror our streamlining focus on 5G and fiber. These steps are important enablers to further improve our collaboration, eliminate organizational redundancies, and fully utilize the innovative technologies that improve how we work. And while we’re still in the very early stages of Generative AI, we’re already seeing tangible AI-driven improvements in productivity and cost savings. Measurable progress has been made with lowering customer support costs, unlocking software development efficiencies, and improving our network design effectiveness.

We expect these capabilities to play a key role in our continued efforts to achieve our future cost savings objectives. This takes us to the final priority, and that’s how we’re putting our improving operating leverage to work. In the third quarter, we reduced our net debt by more than $3 billion and are on track to achieve our 2.5 times net debt to adjusted EBITDA target by the first half of 2025. Less net debt allows us to continue investing in AT&T’s durable connectivity businesses and enhance our ability to deliver additional shareholder returns once we reach our long-term target. Our focus remains steady on allocating capital to create best-in-class experiences for customers, drive sustainable, profitable growth, and deliver long-term value for shareholders.

Over the last few years, our investment-led strategy has delivered tangible benefits to, and financial returns from, our growing and high-value customer pool in both Mobility and broadband. We’ve expanded our nationwide 5G network and are on track to reach 200 million people or more with mid-band 5G spectrum by the end of the year. We’re also on track to pass 30 million plus fiber locations by the end of 2025. We now have about 24 million fiber locations that we’re able to serve on our network with additional opportunities to provide service through our Gigapower joint venture with BlackRock or BEAD funding opportunities. Given the returns we’re seeing, we continue to believe leaning into attractive return profile of 5G in the fiber business make good strategic and economic sense.

At the same time, we remain committed to our dividend payout level and expect its credit quality to consistently improve. In fact, we’ve already generated more than enough cash to meet our annualized dividend even before the fourth quarter, which is generally our highest cash generation quarter. Demand for better and faster broadband connectivity is growing exponentially. With the largest wireless network in North America and as the nation’s largest fiber Internet provider, we’re providing best-in-class 5G and fiber services to meet that demand. It’s clear the fundamentals of our business have never been stronger, and they’ll only grow stronger as we continue to scale our networks, simplify our customers’ connected lives, and deepen our engagement with them.

With that, I’ll turn it over to Pascal. Pascal?

Pascal Desroches: Thank you, John, and good morning, everyone. As John discussed, we’re driving great returns on our 5G and fiber investments, as you can see on Slide 5. The favorable trend in our wireless and broadband businesses continue. We’re growing subscribers, ARPUs and margins in both wireless and broadband and we’re taking out costs. Our strategy is working and gives us confidence to raise guidance today. I will discuss this in more detail later on. Now, let’s move to our third quarter financial summary on Slide 6. Consolidated revenues were up 1% in the third quarter, largely driven by growth in wireless service and fiber revenues. These increases were partially offset by an expected decline in Business Wireline. Adjusted EBITDA was up 4.6% for the quarter with growth in Mobility, Consumer Wireline in Mexico.

This was partially offset by an expected decrease in Business Wireline. In fact, due to our increased revenue growth and overachievement in cost savings, we now expect to grow adjusted EBITDA by better than 4% versus our prior guides of 3% plus. Adjusted EPS was $0.64 compared to $0.68 in the year-ago quarter. This includes about $0.08 of non-cash aggregated EPS headwinds from lower pension credits, lower capitalized interest, higher effective tax rate, and lower DIRECTV equity income, all of which we expected. Cash from operating activities was $10.3 billion in the quarter and $26.9 billion year-to-date. This is an increase of $1.5 billion year-to-date, primarily driven by higher receipts due to revenue growth and lower disbursements, including personnel costs and device payments.

This growth comes at the same time as we saw a lower year-over-year net impact of receivable sales of about $1 billion year-to-date and higher cash taxes of about $350 million year-to-date. This shows the underlying strength of the organic cash flow occurring in our business. Capital investment was $5.6 billion in the quarter and this reflects continued historically high levels of investments in 5G and fiber. We expect to move past elevated capital investment levels as we exit the year. We feel really good about free cash flow of $5.2 billion in the quarter. Through the first three quarters, our free cash flow was $10.4 billion, up $2.4 billion versus the same period a year ago. We’re also now tracking to about $16.5 billion free cash flow for the full year.

Now let’s turn to our Mobility results on the next slide. Looking at our Mobility results, postpaid phone net adds were 468,000. Total revenues and operating income in our largest business unit are at all-time highs. Revenues were up 2% and service revenues were up 3.7%. These gains were driven by subscriber growth and higher postpaid phone ARPU. Year-to-date wireless service revenues have grown 4.6% and we continue to feel really good about the performance of our wireless business. Mobility EBITDA was up 7.6% in the quarter. Mobility postpaid phone ARPU was $55.99, up $0.32 year-over-year. The primary drivers of ARPU growth are higher ARPUs on legacy plans, a continued mix shift to higher value rate plans with higher margins, and continued improvement in consumer international roaming trends.

Postpaid phone churn remains low at 0.79% for the quarter. This continued low wireless churn shows our value proposition is resonating with customers. In prepaid, we had 26,000 phone net additions with total churn of 2.78% with Cricket churn substantially lower. Let’s move to the next slide and our wireline results. Our fiber investment is driving Consumer Wireline growth and strong returns. We added 296,000 fiber customers in the quarter. The consistency of fiber’s appeal continues to shine as we’ve now added more than 200,000 fiber net ads for 15 straight quarters. We’ve also seen measurable improvement in fiber churn year-over-year despite recent pricing actions. This highlights the superior product and experience that customers consistently receive with fiber.

Strong fiber revenue growth of about 27% drove total broadband revenues up nearly 10% year-over-year. Fiber ARPU was $68.21, up about 9%. Customers are increasingly choosing faster speed tiers, which is also supporting ARPU growth. Consumer Wireline EBITDA grew 9.4% on the strength of fiber revenue growth. Given the better-than-expected broadband revenues we’ve achieved so far this year, we now expect to deliver 7% plus broadband revenue growth for the year. Additionally, our AT&T Internet Air product is off to a solid start. As we expand our service to select new markets, we’re confident it will serve as a strong catch product as we continue to sunset our legacy copper services. Turning to Business Wireline, EBITDA was down $268 million year-over-year.

Overall, Business Wireline remains in transition as we move from offering legacy products to next-generation connectivity products. If you take a step back, the overall picture of our business franchise looks somewhat different when you include the increasing strategic importance of business wireless to these very same accounts. Wireless service revenue is up 7% benefiting from continued growth in postpaid wireless subscribers and connected devices. As the transition to electric vehicles continues, we expect a tailwind from our consistent success in connected cars since EVs consume more data bandwidth. Connectivity solutions are also growing in the high single digits due to momentum with fiber as we make it available for more small to medium-sized businesses.

And total business solutions year-to-date EBITDA is down slightly year-over-year as growth in wireless is largely offsetting declines in wireline. At the end of the day, we see the same underlying trends we’ve seen year-to-date with Business Wireline EBITDA, and we now expect low double-digit declines for the full year. Now before I close, I’d like to quickly provide an update on the progress we’re making on improving the flexibility of our balance sheet. As a result of our strong cash generation, we’re on track to achieve our net debt reduction target for the year. In addition to debt reduction and liability management we discussed last quarter, we have also incrementally reduced our short-term direct supplier and vendor financing obligations in the third quarter, and we expect to continue to do so in the fourth quarter.

As a reminder, the paydown of these obligations is a headwind to free cash flows. We are reducing these liabilities in a high interest rate environment, which will help contain our cash interest costs. Therefore, I’m really pleased that we’re doing this while still exceeding our initial free cash flow targets for the year. In addition, lowering our financing obligations should enable a more radical quarterly cadence of our free cash flow in 2024. As we think about our debt maturity towers for the next two years, we feel we are in a solid position and expect to address near-term maturities as they come due with cash on hand. We had more than $9 billion of cash equivalents and interest-bearing deposits on hand at the end of the quarter. In this high-rate environment, we find ourselves in the enviable position of being able to earn more on this cash than the cost of our long-term debt.

It is also important to remember that more than 95% of our long-term debt is fixed at an average rate of 4.2% and a weighted average maturity of 16 years. The financial structure I’ve outlined improves our financial flexibility and ensures we remain in an advantageous position with respect to our cost of capital. Our expectations for growing free cash flow and reducing our debt as it comes do only further improve that position. To close, I’d just like to emphasize that I could not be happier with what our team has achieved this year. We are very pleased with our operating results as our business fundamentals are largely exceeding our expectations. As John mentioned, we articulated the plan in which we expected to grow customers in a profitable manner, and we’re on track to deliver just that.

That concludes my remarks this morning. Let me hand it over to Amir to open it up for Q&A. Amir?

Amir Rozwadowski: Thank you very much, Pascal. Operator, we’ll take the first question.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Brett Feldman of Goldman Sachs. Please go ahead.

Brett Feldman: Thanks for taking the question. Two, if you don’t mind. The first one is, I was hoping we could get your early insights on what drives the uptake of Internet Air, the demo where it’s resonating. And I’m also curious how you are deciding which of your in-region markets where it makes sense to launch that product and maybe whether you’re starting to reconsider whether there’s opportunities to identify the same condition out of region. And then just a question for Pascal, I’m curious why you did not increase your adjusted EPS guidance for the year in conjunction with your EBITDA guidance? Thank you.

John Stankey: Good morning, Brett. Nothing’s changed on our approach to Internet Air. I think I’d start with the second part of your question, and I’m going to articulate exactly how we see the product being used within our business moving forward. So we don’t necessarily distinguish that there’s application of the product out of region just as there is in region, although they’re a little bit different. I’ve said before, I have no issues selling Internet Air into the business segment. It’s a really attractive thing for us to do. It’s a really helpful product on a number of different fronts that meets a particular need. I’ve shared with you that given what businesses pay for broadband and the other incremental services you can layer on top of them that allows them to have a higher take or a higher ARPU and their usage characteristics that makes the profitability of serving the product in that segment different than it is in, say, a consumer household with four people that’s streaming video all day long.

And so we will continue to find opportunities to do that. We have some markets out of region where we’re under-penetrated. We have a lot of [network-valued] (ph) capacity that we can use. And we’ll selectively look at opportunities to do that, where it makes sense to do that. I wouldn’t tell you that’s the dominant driver in region and where we’ve been putting a lot of time and energy. We start with our customers first. We have a lot of longstanding loyal customers that have been with us. They’ve been buying bundled services from us, and we can give them a better service on Internet Air than we could possibly on the existing infrastructure that’s in place, that is generally going to be infrastructure that we’re going to be replacing in fairly short order with fiber.

And so as a holding strategy, we may apply the product in that case to hold that customer with a better service experience because they’re a high value customer. It allows us to move into our process of shutting down infrastructure in places where we need to ultimately pull out costs and shutter network and infrastructure, and it becomes a tool in allowing us to do that. And so that’s how we intend to use it, and we’ll use it, as I said, on a very careful, surgical and targeted basis, but it really hasn’t changed our point of view on the product in aggregate. And Pascal can touch on the EPS issue, which I think is a pretty simple explanation.

Pascal Desroches: Hey, Brett. Here’s what I would say first and foremost, don’t read too much into this. We couldn’t be happier with the performance of the overall company. And remember, when we gave EPS guidance, we gave a pretty broad [indiscernible] range. I think it’s fair to say we are tracking towards the upper end of that range. But there’s more variability in things like capitalized interest, non-cash pensions. So it’s really just a question on our part, but all in all, we feel really good about the overall performance of the business.

Brett Feldman: Great. Thanks for that, color.

Operator: Our next question will come from the line of Simon Flannery of Morgan Stanley. Please go ahead.

Simon Flannery: Great, thank you very much. Good morning. I wonder if we could dig into the fiber and the broadband growth, that 9% ARPU growth is very impressive. Can you disaggregate that a little bit more and help us understand what’s the kind of the take-up of these higher-end tiers and how much further can this growth continue? And then perhaps talk a little bit about DIRECTV and how you see that evolving over time and how you are thinking about your various strategic options around that?

John Stankey: Hi, Simon. I don’t know if I’ll be able to give you the exact number you want, but what I will tell you is the ARPU growth is being driven largely by migration into higher speed plans where customers are moving up in the continuum. Plus we’ve been managing the base of some of our embedded stuff at the low end with some pricing adjustments that we’ve made that’s helped. So the spread from bottom to top of the customer base is a little tighter spread than it used to be in aggregate. But by and large, we’ve got customers that are choosing to migrate up on speed, and I would tell you, there’s a long way for that to run, because as you know, as we’re deploying today, at a minimum on the new build, we’re putting in 5 gig networks.

And so, we’ve got a lot of customers that have a lot of room to go from maybe their migration into a 1 gig product and ultimately moving up to a 2.5 or a 5 gig product as their needs adjust and when they decide they want to do that. So I would also tell you, when you look at where we’re selling on average price per bid, relative to others in the industry, we tend to sell at a bit of a discount, which we’re okay with right now. I’ve outlined before why we think that’s a pretty decent strategy at this juncture and allows us to get the faster penetration the way we want to do it. And I think it’s also going to help us as we move into some bundling strategies moving forward that it gives us a lot of opportunity and flexibility as to how we think about putting those products together without taking any margin erosion in the approach.

So I feel really good that we’ve got a lot of headroom. I think I would also point out that on the expense side of the equation, we are still scaling. You see it happening each quarter, we’re getting better, but in a lot of these metropolitan areas that we’re building, we’re not quite at optimal scale yet. That’s where our build is focused as we move forward, which is to fill in and make sure that we get footprints and numbers of homes passed and workforce sizing that is kind of in an optimal structure. And when we do that, we take cost per down as a result of that. We take cost per down in our acquisition costs. We take cost per down in our ongoing maintenance costs. So you should also understand that from a margin accretion perspective, it’s not just about driving the ARPU up, it’s about us also getting more efficient and effective on the cost line of how we operate that business.

On DTV, we’re running the business incredibly well. It’s generating the cash that our partnership was designed to generate. The team is very focused on what they’re doing. The plan for the first two years that we’ve been in is basically not only tracked to what we expected, but is outperforming what we expected. I think the focus in that mature business has been really good. We’re very satisfied with the trajectory of how it’s operating. We’re extremely satisfied with how the management team is executing the plan that we set up. They’re very focused on what their mission is over the next couple of years. My point of view is we continue to run the play we set up, something else came along that made sense, fine, would examine it, but right now, our management team is focused on operating the business.

Simon Flannery: Great, and any update on the BEAD process?

John Stankey: Other than the wheels of government turn slowly, not really. It’s in the process and we’ve been working actively. I would say there’s a couple states that are a little bit further ahead than the other states in the country. If you want to call them bellwether, they’re bellwether from the sense of that is they’re getting ready to file and submit their applications. It’s exposing a couple of the areas where clarification needs to occur in the process about how the regs are to be applied, how the bids are to be evaluated. That process of getting that clarification between the industry, broadly the state and the Federal government is underway and I think that’s where the action is right now. That clarification will hopefully allow the states that are maybe second, third, fourth in the queue to be a little bit more precise in their applications, and I suspect that once some of these issues are resolved, there’ll be a little less back and forth and a little bit more of the [rote] (ph), respond to the application and move forward.