AT&T Inc at Bank of America Media, Communications and Entertainment Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: David Barden - BofA Securities, Inc. - Analyst : Awesome. Thank you so much. So there's a little bit of news out this morning that might be distracting some of our audience. And I'd like to get your hot take on the announcement that Verizon is going to buy Frontier for an 8.4 times EBITDA multiple before synergies expected to close in 18 months. Conference call is ongoing. What is your kind of thought on what's happened here?

Question: David Barden - BofA Securities, Inc. - Analyst :

Question: David Barden - BofA Securities, Inc. - Analyst : You're good. Okay.

Question: David Barden - BofA Securities, Inc. - Analyst : So I want to kind of just dig in a little bit more on this whole topic, which kind of goes to this idea of convergence a little bit, which is, I think, for a long time the wireless industry said, okay, cables, merging broadband and wireless over the Verizon MVNO and they're having a little success with onesie-twosie customers, but there's a limit. We can be successful in wireless without a broadband solution. But yet, here we are, all the wireless companies seem to be adding broadband to it. So it might not be a need to have, but it's obviously a nice to have, right? So can you talk a little bit about the difference in opportunity when you have a wireless only part of the market as opposed to where you have fiber and wireless together. What's the difference between those two?

Question: David Barden - BofA Securities, Inc. - Analyst : I think you want to put some numbers around that. Verizon said 50% reduction in wireless churn and 40% reduction in fiber churn. Can you do better?

Question: David Barden - BofA Securities, Inc. - Analyst : I was hoping today, it was that day.

Question: David Barden - BofA Securities, Inc. - Analyst : So that leads me to my question about, if this is true that maybe they don't need to be together, but when they are together, they're stronger together, wireless and fiber or broadband. And what we're watching happen is, Verizon now is kind of going to have maybe 28 million homes passed within a couple of years, you're going to have 30 million-plus. T-Mobile has got something going on. We'll probably learn more about their strategy at their Analyst Day and I think the 18th coming up. So does this mean that we're balkanizing the US wireless market, where you're going to have this weirdly larger share where you have fiber, but a weirdly smaller share where Verizon is fiber. And is this now a land grab. And if it is, why are you not then grabbing land faster, even if it's a little bit more expensive than it could be to be in your region.

Question: David Barden - BofA Securities, Inc. - Analyst : So if I hear you, it's not binary. It's not you have fiber, you win; you don't have fiber, you lose. It's a multivariant combination of go-to-market, retail, care, fiber might be a home field advantage, but it's not a guarantee and it's not a guarantee that you lose if you don't have fiber, but it's not a guarantee you win, you got to do a lot of things right, right? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 05, 2024 / 12:00PM, T.N - AT&T Inc at Bank of America Media, Communications and Entertainment Conference

Question: David Barden - BofA Securities, Inc. - Analyst : I'm going to ask a weird question, which is, what are people going to do in your territory when you have fiber to win?

Question: David Barden - BofA Securities, Inc. - Analyst : So I want to get -- I'll go back to the business in one second. I just have to ask this question, which is the other thing in the news, which is the -- I think it's 15,000 workers have gone on strike, and I think the question people have is, it's probably not going to be hugely disruptive, but should we be tempering expectations for like net adds or either in the wireline business or the wireless business? What should we expect in that regard?

Question: David Barden - BofA Securities, Inc. - Analyst : Round numbers, in a given quarter, what percentage does the Southeast represent of net adds?

Question: David Barden - BofA Securities, Inc. - Analyst : Pascal, man. Okay. So all right, let's get back to the industry equation. So yesterday, we had Sampath, CEO of Verizon Wireless Consumer, and he told us about the formula for growth that they foresee, 40% straight up price increases. 40% kind of value ups, whatever the word for that is when people kind of take a bigger price plan for whatever reason, and then 20% volume growth. Is there -- what is the formula at AT&T for growth that we should project into the future?

Question: David Barden - BofA Securities, Inc. - Analyst : So if the bulk of your revenue growth is volume driven, I think that one concern would be that the expectation rightly or wrongly is that industry volume at this mature state of the industry has to slow down. So do you agree with that? And if you do agree with that, and recognizing that Verizon has an intention of kind of taking more share and cable is desperately trying to grow mobile, is the pool of opportunity shrinking for AT&T? Do you have to lean more on the pricing lever as you look ahead.

Question: David Barden - BofA Securities, Inc. - Analyst : So I think a lot of people run that playbook going after -- we've heard this, the first responders, enterprise, 65 and older, affinity group, armed forces, where do you over-index and how do you defend against those incursions? You knew, I was going to ask that.

Question: David Barden - BofA Securities, Inc. - Analyst : Your competitors already know. You can just say it.

Question: David Barden - BofA Securities, Inc. - Analyst : Okay. So one of the things that has kind of, I don't know, bubbled up and bifurcated the market a little bit is there's this universe of Apple bulls that are convinced that the iPhone is the best thing since slice bread because that has AI in it, and that all the carriers are going to get their knives out and use this as a switching opportunity, and you guys are going to murder each other. And then there's all the carriers, which are like, no, that's not going to happen. And my theory is that, you look backwards, you look at the 5G cycle, right? In 5G, there is a real benefit to the carriers to push 5G phones into the marketplace. Even though they really didn't do much that was new for the consumer for the carrier, they did a lot. And now we've got this phone that's going to do next to nothing for the carrier. And the question is, is it going to do something for the consumer that makes them want to do something on their side? How do you respond to that? And how does AT&T prepare for what's going to happen next week when the new iPhone comes.

Question: David Barden - BofA Securities, Inc. - Analyst : Big losses. I would talk about too.

Question: David Barden - BofA Securities, Inc. - Analyst : So what percentage of your base has an iPhone?

Question: David Barden - BofA Securities, Inc. - Analyst : I'm pretty sure you have. Just remind me. So I think that the theory though is -- so there's been a couple of stories, right? One story would be that this could be a minimum an elevated switching event, it's always a switching event, but it's an elevated switching event. And if it's not an elevated switching event this year, more likely than it's an elevated switching event a year from now. So one theory is that, Verizon might use this as a way to get the net add growth that they haven't been able to get for the last 1.5 years or so. And where they would go get that is where most of the switches are, which is probably the company that had the iPhone, the longest, which is AT&T. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 05, 2024 / 12:00PM, T.N - AT&T Inc at Bank of America Media, Communications and Entertainment Conference And so AT&T is going to be back into a corner to defend itself and that there will be an escalation of promotions and kind of just net losses across the industry as a function of this. Are you concerned about that?

Question: David Barden - BofA Securities, Inc. - Analyst : Okay. So I want to ask the other question, which is that there's a -- every dollar that you discount an iPhone is a deadweight loss to you and a windfall to Apple. And if you multiply those discounts, times the tens of millions of customers that upgrade per year, and then you take that across the industry and it gets you to even multiples of tens of millions of customers a year. And then you discount that back into the future, it's hundreds of billions of dollars of value that's being transferred out of wireless into Apple. Why -- how do we fix it? When do we stop doing this? Because the US is not necessarily normal. Like you go to Canada, north of the border, they don't discount phones, people pay for their phone. They want a phone. It doesn't have to be done. And it maybe doesn't go from something to nothing, but it could go from something to a little less than something is directionally signal to everybody, hey -- not going to free forever.

Question: David Barden - BofA Securities, Inc. - Analyst : All right. So I'm going to do something which I'm very happy to be able to do, we just talk about free cash flow in the second half of our conversation.

Question: David Barden - BofA Securities, Inc. - Analyst : So I think in the press release that you put out ahead of our conversation, you kind of stated something about you're happy with where the cash flow is going. Maybe just revisit for us what the cash flow picture is for 2024. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 05, 2024 / 12:00PM, T.N - AT&T Inc at Bank of America Media, Communications and Entertainment Conference

Question: David Barden - BofA Securities, Inc. - Analyst : With a 40-60 split versus the second half.

Question: David Barden - BofA Securities, Inc. - Analyst : Which you're on track.

Question: David Barden - BofA Securities, Inc. - Analyst : So one of the things that has been a burden for the AT&T stock starting to get past that now was, in 2022, there was working capital stuff, there was phone stuff, and you had to lower your free cash flow guidance. And then in 2023, the first quarter cash flow was super low relative to the guidance. You ultimately beat your guidance in 2023, but there's a lot of question marks and doubt and that I remember coming down to visit, and John Stankey, he was like, look, we're going to fix this. We're going to smooth out our free cash flow for the market. How have you done that? And have you -- are you done or is there more to do?

Question: David Barden - BofA Securities, Inc. - Analyst : So in the kind of olden days, the kind of the pre-C-band, pre-pandemic days, I would say AT&T probably run a business-as-usual CapEx rate of probably around $19 billion. This was before we had a term called capital investment, which was CapEx plus the vendor financing and other stuff. So does that $21 million, $22 million, is that the new run rate? Given fiber, given other things? Or can that $21 million and $22 million come down to $20 million, $21 million or $19 million to $20 million, like or should it come down?

Question: David Barden - BofA Securities, Inc. - Analyst : Yeah, absolutely.

Question: David Barden - BofA Securities, Inc. - Analyst : So one of the things that I think is interesting about the kind of the AT&T conversation is that the business seems to be the least complicated part of it now, which is kind of great. You got the wireless business, volumes seem to be pretty good. Industry discipline seems to be pretty good. Pricing is moving in the right direction, if you choose to use it. Customers are moving up the value chain. The iPhone doesn't seem like it's going to be disruptive. If it creates disruption, I think the mutually assured destruction that exists between three players in a three-player market, we'll keep things contained. What about cost structure? What opportunities do we have on that?

Question: David Barden - BofA Securities, Inc. - Analyst : That was 29 minutes and 30 seconds for the first mention of AI just for the record.

Question: David Barden - BofA Securities, Inc. - Analyst : So probably the only kind of variable that seems, I don't know, I would say troublesome is enterprise. So I got two questions on that. But the first one is what is the game plan for enterprise?

Question: David Barden - BofA Securities, Inc. - Analyst : So you're the largest business services, wireline connectivity provider in the US. The next largest player recently announced a $5 billion series of transactions to build AI network connectivity for the hyperscaler community is suggesting that this is a new opportunity, untapped, and they won it because of their network capabilities, why did AT&T lose that deal?

Question: David Barden - BofA Securities, Inc. - Analyst : You didn't win it. There's only two kinds. Winners or losers.

Question: David Barden - BofA Securities, Inc. - Analyst : Okay. So I guess I wanted to go back to one of the -- to the cash flow side. So we've got an understanding, we're working on enterprise. We got the cost structure. We talked about wireless revenue, fiber revenue is good. Cost structure is improving. CapEx is kind of where it is, maybe -- I think maybe could go down a little bit. So there's kind of -- two more parts that people are trying to figure out. One is the working capital part. Are we at a point now where the working capital is kind of run rate. Obviously, this Apple iPhone situation is something that creates a little anxiety. But other than that, we're kind of good on working capital flattish.

Question: David Barden - BofA Securities, Inc. - Analyst : It's a high-class problem, I guess, is what you're saying.

Question: David Barden - BofA Securities, Inc. - Analyst : And then taxes, right? John Stephens was the Obi-Wan Kenobi of taxes, and I think people think like you're always underpaying taxes. And we always have to assume taxes are going to keep going up for you guys. What do you think is a good base case for people to assume about taxes and AT&T?

Question: David Barden - BofA Securities, Inc. - Analyst : After next year. So 2026 is when they expire.

Question: David Barden - BofA Securities, Inc. - Analyst : So that's kind of where maybe we kind of wind it up a little bit, which is, okay, we're going to get to target leverage ratios in the first half of next year. And it was interesting because Verizon was also getting to the target leverage ratio in the first half of next year. And we were asking, what are you going to do when you get there? And now we know, which is buy a company, right? So for AT&T, given historically the sensitivities around free cash flow, you've got some choices to make. One would be grow the dividend or buyback stock or both. When you think about that choice, which of the two is better?

Question: David Barden - BofA Securities, Inc. - Analyst : As you exit the year. Before the exit of the year or after the exit of the year?

Question: David Barden - BofA Securities, Inc. - Analyst : So -- because here's my thought, right, is because in 2026, if we've got this potential, I mean, again, everything just -- everything could change in another month. But as we sit here today, 2026, we're going to lose all the tax deductions from CapEx. I mean cash taxes could go up meaningfully, which means that a stock buyback announcement would give you more flexibility, you would appear larger to the market, and that might be a better path given the unknowns. A dividend increase, though, would put you back on that historical path. It's a smaller number. It kind of increases the aperture of investors that look at dividend growth. Which of those two look better? (laughter) Okay. So then the other option is investment and M&A. It kind of feels to me like what you've been saying is that there's just a huge opportunity internally. You've been run rating it 2 million to 3 million homes passed in fiber that seems to be the big opportunity you've talked most about. Can that materially improve? Is it even possible to go from 2 million to 3 million to 3 million to 4 million. I mean I've seen how hard it is to do this work in person. It's -- I can't. I mean -- it's hard. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 05, 2024 / 12:00PM, T.N - AT&T Inc at Bank of America Media, Communications and Entertainment Conference

Question: David Barden - BofA Securities, Inc. - Analyst : That's a perfect place to leave it, Pascal. Thank you so much for coming. I really appreciate the time.