AT&T Inc. (NYSE:T) Q4 2023 Earnings Call Transcript

AT&T Inc. (NYSE:T) Q4 2023 Earnings Call Transcript January 24, 2024

AT&T Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Amir Rozwadowski: Thank you and good morning, everyone. Welcome to our fourth quarter call. I’m Amir Rozwadowski, Head of Investor Relations for A&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 as well as 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. I appreciate you all joining us today and my best wishes for a productive and healthy year ahead to all of you. We finished 2023 with a strong fourth quarter as we made substantial progress on our strategy of being America’s best high performance network provider. We showed again in the fourth quarter and throughout 2023 that we’re delivering consistent, positive operating and financial results, including sustained margin expansion and annual free cash flow growth. To do this, we work to grow the right way, invest at historic levels in best-in-class 5G and fiber assets, and deliver the best network to more customers in more places, all while simplifying our operations to drive efficiency while enhancing the customer experience.

As a result, we’re now positioned to provide our growing customer base with the best communications technologies to meet their ever growing need for connectivity supporting sustainable growth. We are deliberately allocating capital to expand and enhance our networks and improve financial flexibility to drive incremental shareholder returns. Since Pascal will cover the fourth quarter results in detail later on, I’d like to highlight some of our full year accomplishments and long-term business trends. Let’s start with wireless. For the full year, we delivered more than 1.7 million postpaid phone net additions with strong service revenue growth and continued historically low postpaid phone churn, all while maintaining healthy ARPUs. Taking a step back, it’s clear how far our investment-led strategy has taken us from where we stood only three years ago.

Since the start of 2021, we’ve substantially improved our mobility position and brand perception. We went from losing wireless share to growing our share of subscribers. As a result, we increased our postpaid phone base by more than 10% to more than 71.2 million subscribers. This represents our best three year stretch of postpaid phone net add growth in more than a decade. During the same three year time span, we’ve added to our share of industry wireless service revenue growth, increased our annual wireless service revenues by more than $7.5 billion, and grew mobility EBITDA by about $4 billion. This level of sustained success requires contributions from across the company, including our network team that continues to enhance and expand our 5G and fiber networks.

Our mid-band 5G network is now available to more than 210 million people, offering faster speeds and an enhanced experience. We’re also bringing more fiber to Americans than anyone else. This excites me because where we build fiber, we win. Over the past three years, we went from passing about 18 million consumer and business locations to now passing more than 26 million locations. As we continue to expand our reach, we’re growing our fiber base. With 1.1 million AT&T fiber net adds in 2023, we’ve generated more than 1 million AT&T fiber net adds annually for six straight years. Over the past three years, we’ve grown AT&T fiber subscribers by 3.4 million or by nearly 70% to more than 8.3 million. This success reflects new customer wins and lower churn, trends that we see as sustainable.

The financial benefits we continue to realize through our fiber focus are significant. Compared to 2020, we’ve more than doubled our fiber revenues to over $6.2 billion in 2023, and our broadband ARPU climbed more than 20% as customers continue to seek higher value plans with faster speeds. In addition to delivering high margin revenue growth, fiber is more energy efficient, requires less maintenance, and customers keep the service longer. Therefore, as we scale our fiber footprint, we expect to continue to drive margin expansion. This flywheel of faster subscriber growth, higher revenues, and expanding margins gives us confidence in our ability to repeat similar levels of fiber fuel growth in the future. In summary, our mobility and consumer wireline businesses are growing in a sustainable fashion.

We’re now a highly competitive wireless brand and the leading fiber brand. We’ve increased customer satisfaction, improved networks and are the best positioned to drive long-term returns as the convergence trend develops. Now let’s shift to our second goal of improving efficiencies. Last July, we announced we achieved our $6 billion plus run rate cost savings target well ahead of schedule. We then set a new target for an incremental $2 billion plus in run rate cost savings by mid-2026. We’re making strong early progress on this target. Importantly, we’re seeing the benefits from these cost reduction efforts increasingly fall to the bottom line. This is translating into improved operating leverage, as evidenced by the adjusted EBITDA margin expansion we delivered in 2023.

Going forward, we expect margin expansion to continue. I’m proud of the progress the team has made in streamlining our business. We now have further confidence in our ability to deliver on our promised goals. Turning to our last key priority. The benefits from our capital allocation strategy are meaningful and evident in our results. We were again a top investor in America’s connectivity through our 5G and fiber networks in 2023. Even with our elevated levels of investment, we delivered better than expected full year free cash flow of $16.8 billion, which is above our previously raised guidance. Furthermore, we achieved this significantly higher free cash flow while simultaneously reducing our short-term obligations. We reduced our vendor financing obligations by $3.3 billion in 2023, all while making more than $2 billion of non-recurring spectrum clearing payments.

With a year end net debt to adjusted EBITDA ratio now below 3 times, and the improved flexibility in 2024 to dedicate more cash to debt reduction, we are confident in our path to achieve the 2.5 times range in the first half of 2025. So overall, I’m proud of what our teams accomplished in 2023. Our strong fourth quarter to end the year accomplished all of our stated 2023 objectives. We replicated our success in 2022 again in 2023, exactly like we said we would. Moving to 2024, it should be no surprise that our plan is to do it again. Again, here’s how we’ll build off our momentum in the year ahead. In mobility, we expect to continue our success with adding quality customers on the strength of our go-to-market approach and elevated customer value proposition.

We also intend to improve our performance by targeting underpenetrated segments like value oriented customers and small to medium sized businesses as well as better penetrating our expanding fiber customer base. As we do this, we’ll take the same disciplined approach by remaining steadfast on profitable growth. Where we build fiber, customers love the value and service we offer, and accordingly, we become the favorite to win. We’ll continue to extend our lead as the company that reaches more homes and businesses with fiber. We remain on track to pass our 30 million plus consumer and business fiber location target by the end of 2025. As I mentioned last month, the better than expected returns we are seeing on our fiber investments potentially expands the opportunity to go beyond our initial target by roughly 10 million to 15 million additional locations.

This also assumes similar build parameters and a regulatory environment that remains attractive to building infrastructure. And in areas where we don’t yet have fiber, AT&T Internet Air allows us to better serve customers in select markets with fixed wireless Internet access. We also expect 2024 to be the prove-it year for our Gigapower initiative, and we plan to explore other unique opportunities to extend the AT&T brand on a converged basis beyond our traditional footprint. The good news is that no one is better suited to answer the call for converged connectivity than AT&T. We already have North America’s largest wireless network and the nation’s largest and fastest growing fiber network. There is simply no debate that 5G and fiber are hands down the best connectivity technologies available and we are the only provider that benefits from owners’ economics at scale on both technologies.

Why is this so important? Traffic on our network has continued to increase in excess of 30% each year over the past three years. Our position with the most pervasive U.S. fiber footprint, the largest wireless network, puts us in the unique position to grow at an advantaged marginal cost structure. At AT&T, we’re making the right moves to deliver high performance converged networking at a scale and breadth second to none in the United States. We’re doing this by continuing our investment in scaled, flexible, and an increasingly open networks that address customers’ needs to get on the Internet no matter where or how they are situated. Our existing strength and presence in literally every market segment from the largest multinational corporations to the most basic consumer allows us to effectively scale and commercialize the right solution with the right technology at the right price.

Accordingly, we’re well positioned to grow high performance networking that seamlessly combines fiber, mobile and fixed wireless, and satellite technology in the most secure and effective package desired by our customers. This is all part of orienting the company to put the customer first and prioritize simplicity in everything we do to further our growth and become more efficient in 2024. This includes enhancing our digital and self-service channels that are increasingly being supported by AI. This work will help shape the effortless and personalized customer experiences required for a truly converged future. AI-driven efficiencies are also another significant leg of our cost savings efforts as we make progress on achieving our announced incremental $2 billion plus run rate savings target by mid-2026.

In summary, we have the right formula to continue the improved operating momentum established over the last three years. I’m pleased with our momentum exiting 2023 and remain optimistic about where AT&T is positioned in the broader industry as we enter a year that I suspect will shape the direction of our industry in the decade to come. With that, I’ll turn it over to Pascal. Pascal?

Pascal Desroches: Thank you, John, and good morning, everyone. As John shared, we’ve maintained our momentum across both 5G and fiber. Let’s start by reviewing our fourth quarter financial summary on Slide 7. Revenues were up 2.2% for the quarter and 1.4% for the full year, largely driven by wireless service revenue, broadband revenues and Mexico. This was partly offset by a decline in business wireline. Adjusted EBITDA was up 3.2% for the quarter and 4.7% for the full year, as growth in mobility, consumer wireline, and Mexico were partly offset by a decline in business wireline. In the fourth quarter, adjusted EPS was $0.54, down 11.5% for the quarter due to a $0.10 impact from higher non-cash pension costs, lower capitalized interest, lower equity income from DIRECTV, and a higher effective tax rate.

For the full year, adjusted EPS from continuing operations was $2.41, in line with our previously stated expectations of the low 2.40s range. Free cash flow for the quarter was $6.4 billion, including about $900 million in DIRECTV distributions. For the full year, we came in above our already recently raised guidance with $16.8 billion in free cash flow. This is an improvement of $2.6 billion year-over-year, or up 19%. We achieved this free cash flow growth even with about $1 billion of higher cash taxes and about $750 million of lower cash distributions from DIRECTV. Additionally, and as previously mentioned, we reduced vendor financing obligations by $3.3 billion last year. Cash from operating activities came in at $11.4 billion for the quarter, up $1 billion year-over-year.

For the quarter, capital expenditures were $4.6 billion with capital investments of $5.6 billion. Full year capital investment was $23.6 billion, as we continued to invest in 5G and fiber at historic levels. We also continue to strengthen our balance sheet. Last year, we lowered net debt by about $3.3 billion, which was also burdened by $1.7 billion increase year-over-year for changes in FX rates related to foreign debt. We additionally completed an $8 billion pension liability transfer through the purchase of insurance annuities last spring, and we’ve done all this despite overcoming meaningful declines in the legacy wireline part of our business. Now let’s look at our mobility segment operating results on Slide 8. Our mobility business continues to deliver strong results, growing both revenues and EBITDA for the sixth consecutive year.

We are pleased with our 526,000 postpaid phone net adds for the quarter, particularly given some of the rich promotion by our peers. This success demonstrates that the general health of the wireless industry and the consistency of our go-to-market strategy, which continues to resonate with high value customers. Revenues were up more than 4% for the quarter and 2.7% for the year. Service revenues also continue to improve, thanks to steady and profitable subscriber growth. In the quarter, service revenues rose about 4%, while they were up 4.4% for the full year. Mobility EBITDA for the quarter was up about $450 million or 5.6%, driven by growth in service revenues. For the full year, mobility EBITDA grew 7.4% and we continue to see margin expansion year-over-year.

Mobility postpaid phone ARPU was $56.23, up 1.4% year-over-year. ARPU growth continues to be largely driven by our targeted pricing actions and from customers trading up to higher priced unlimited plans. Postpaid phone churn of 0.84% for the quarter remained historically low. Our continued low churn levels clearly demonstrate customers prefer the value proposition they are getting from AT&T. In prepaid, our phone churn was less than 3% with Cricket phone churn substantially lower. We remain encouraged by the overall health of the wireless industry and are confident that our mobility business will deliver again as we expect to continue to grow in customers, service revenues, and EBITDA to healthy clip in 2024. Now let’s move to consumer and business wireline results, which are on Slide 9.

Let’s start with consumer wireline. As John mentioned, the financial and operational performance of our fiber business is exceeding our initial expectation. Wherever we have fiber, we continue to win. In the fourth quarter, we added 273,000 fiber customers even in a seasonally slow fourth quarter and lower year-over-year household moves. This accentuates the resiliency of fiber and the superior experience it provides customers. Broadband revenues grew more than 8% year-over-year due to fiber revenue growth. Fiber ARPU was $68.50, up $0.29 sequentially, with intake ARPU now at more than $70. Consumer wireline EBITDA grew more than 10% for the quarter and more than 8% for the full year due to growth in fiber revenues and the more efficient cost profile of fiber.

And while fiber remains our focus and lead product, we’ve also been encouraged by the initial introduction of AT&T Internet Air, our targeted fixed wireless access service. We had 93,000 AT&T Internet Air subscribers at the end of the year and now offer this service in parts of 35 locations. Turning to business wireline. EBITDA was down about 19% in the quarter. This was impacted by about $100 million of items, primarily discrete intellectual property transaction revenues we had in the fourth quarter of 2022 that did not repeat in the fourth quarter of 2023. As I will discuss in a moment, we expect trends in business wireline EBITDA to improve on a full year basis in 2024. In the fourth quarter, our business solutions wireless service revenues grew nearly 6%.

This is an area where we continue to grow faster than our nearest peer. FirstNet also continues to be a growth factor for us with wireless connections growing by about 260,000 sequentially. Now let’s move to Slide 10 for our 2024 financial guidance. Here are our expectations for the year. First, we expect to again grow mobility subscribers against a healthy, but normalized industry growth. We also anticipate continued benefits from a larger subscriber base and modest growth in postpaid phone ARPUs. This should result in wireless service revenue growth in the 3% range for the full year. For broadband, we expect revenue increases of 7% plus for the full year. This growth reflects continued fiber subscriber growth and higher ARPUs from the mix shift to fiber.

Overall, we expect to continue to grow consolidated revenues next year. As we think about the EBITDA trends in 2024, we expect to grow mobility EBITDA in the mid-single digit as our disciplined approach helps us to grow valuable subscribers. In business wireline, we expect EBITDA to be down about 10% plus or minus. We expect legacy business wireline declines to be partially offset by incremental cost savings and increased fiber and fixed wireless revenues. Additionally, our guidance reflects the impact of the expected deconsolidation of our cybersecurity services business. In consumer wireline, we expect to grow EBITDA in the mid-single digit range, thanks to continued growth in fiber revenues, and to a lesser degree, growth in fixed wireless subscribers.

This will be partly offset by an expected continued decline in legacy copper revenues. Finally, similar to last year, we expect to benefit from ongoing corporate cost reductions again this year. These factors combined deliver consolidated adjusted EBITDA growth in the 3% range for the full year. Moving to EPS. Here’s what to think about when you do your calculations. Our full year guidance reflects non-cash headwinds of about $0.24, which include the following; $0.17 higher depreciation; approximately half is from accelerated depreciation on Nokia assets impacted by our Open RAN transformation, and we expect this impact to continue through 2026. The other half is incremental depreciation from our elevated 5G and fiber builds; headwinds of approximately $0.07 associated with higher non-cash pension and postretirement benefit costs, largely driven by declines in prior service credit amortization.

As a reminder, prior service credit are the result of amendments made in prior years to our postretirement benefit plan that reduced benefits. Under GAAP, the impact of these amendments is recorded as a credit and equity and amortized into income over the expected service period of plan participants. In 2023, prior service credit amortization was $2.6 billion, which is a positive contribution to other income. In 2024, we expect prior service credit amortization to be $2 billion or a decline of about $600 million. Next year, we expect a more moderate decline in prior service credit amortization, continuing to decrease in the subsequent years as prior year plan changes become fully amortized. We have provided the projected future annual amortization by year in the footnotes of our supplemental financial trends document on our Investor Relations website.

Importantly, we have continued to lower our pension obligation, including our transfer of certain pension assets and liabilities to Athene last year and we don’t expect any material required contributions to our pension plans for the balance of this decade. In addition to these non-cash items, the guidance also includes $0.08 of other headwinds. These include $0.05 impact from lower spectrum related interest capitalization as we near completion of our initial C-band spectrum deployment in 2024. We don’t expect capitalized interest to be a significant headwind beyond 2024, and $0.03 impact from lower adjusted equity income from DIRECTV, which we expect to be about $2.6 billion versus $2.9 billion in 2023. Lastly, we expect an effective tax rate in 2024 consistent with the 2023 rate.

Given these assumptions, adjusted EPS for 2024 is expected to be in the $2.15 to $2.25 range. Normalizing for these four items, our 2024 guides would imply adjusted EPS growth consistent with our expected growth in adjusted EBITDA. We expect to be in a position to begin to grow adjusted EPS again in 2025. Turning to free cash flow. Here’s what to consider for 2024. First, we expect adjusted EBITDA growth in the 3% range. We also expect cash taxes to be up about $1.5 billion based on current tax law. As we look out to 2025, we would anticipate cash taxes to increase around $1 billion over 2024. Cash distributions from DIRECTV in 2023 were $3.7 billion, down about $750 million compared to the prior year. Looking forward, we expect DIRECTV cash distributions to decline at a similar rate in 2024 and thereafter.

I’d also like to point out that DIRECTV’s debt levels have not changed materially since the end of 2021 and its debt is non-recourse to AT&T. Another impact to free cash flow is lower capital investment. We expect 2024 capital investment levels in the $21 billion to $22 billion range. It’s also important to note that the mix shift of our capital investment continues to move in a favorable direction as vendor financing obligations decline and project capital spend increases. Accordingly, we plan to continue to pay down short-term vendor and direct supplier financings this year as we shape an even more sustainable and ratable quarterly free cash flow cadence. Remember, our capital investments consist of payments from prior year capital spend plus current year spend.

This year, there will be less payments of prior year obligations than we saw in 2023 due to significant reductions in vendor financing. However, in the year, we do expect higher spend on capital projects. When you combine all these factors, we expect to deliver free cash flow in the $17 billion to $18 billion range this year. This is greater than 2 times our current annual common dividend and more than enough to cover other commitments. As we discussed in recent quarters, we continue to make progress on improving the ratability of our free cash flow. Last year, our free cash flow was about 70% back-end loaded to the second half. We expect that to be closer to 60% this year. Accordingly, we expect first quarter free cash flows of at least $2.5 billion.

Overall, the combination of increased free cash flow and fewer one-time items will enable us to continue our deleveraging progress in 2024 and remain on track to achieve our target range of 2.5 times net debt to adjusted EBITDA in the first half of 2025. Amir, that’s our presentation. We’re now ready for the Q&A.

Amir Rozwadowski: Thank you, Pascal. Operator, we’re ready to take the first question.

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Q&A Session

Operator: Our first question will come from the line of John Hodulik of UBS. Please go ahead.

John Hodulik: Great. Thanks. Good morning, guys. First, thanks for other detail on the free cash flow. Pascal. But can we focused on the sustainability of the postpaid phone growth in ’24 . You added 1.7 million subs that gross adds were down a bit in the fourth quarter. I guess, first, could you talk about the momentum you’re seeing here, here in the first quarter and how competition shaping up? And then John, you talked about these under-penetrated markets these three segments value, SME and conversion. Any color you can give us in terms of how big of an opportunity, those underpenetrated segments are in our, how you expect to adjust that year and ’24? Thanks.

John Stankey: Hi. Good morning, John. Happy New Year. So look, the — first of all, on the aggregate market, as we’ve been indicating, we thought there was going to be a little bit of a slowdown from previous year’s activity level. We saw that happen in ’23. I think we’re at a more normalized level right now. We’re kind of expecting that is going to continue into next year. It’ll be probably right around the same place. We’re not going to see it dramatically different. And our expectations are we’re going to continue to attack the market the same way we’ve been attacking it, and we’ve been really consistent about that over the last three years. And I don’t think you should expect to see that there is going to be any less sustainability of our performance than what you’ve seen over the previous couple of years in the strategies and the tactics we use.

I think the market is a healthy market right now. I would say, if you would look at the fourth quarter and look at what we delivered on postpaid phone net adds, your point on gross is an accurate statement, and I think it reflects the fact that we’re trying to be incredibly disciplined around profitable growth. We managed to outgrow one of our peers that has already reported. We did that, I think, being very disciplined on our promotional levels and being very strategic in the channels that we operate in. As I’ve indicated on previous calls, we delivered an incredible churn level, which helped us do that. It’s always easier to keep your customers than to churn them out. We’ve managed to keep that churn level while we’ve been growing ARPU. We’re driving operating leverage and EBITDA growth in a really strong fashion.

I think the equation is incredibly sustainable with what we’re doing right now. We’re going to tweak it, and that’s what I was alluding to and some of the things that we know there’s some areas where we could probably do a little bit better. I suspect, looking at some of the numbers yesterday from what Verizon reported, there’s some areas that they probably looked at and said that they can do a little bit better in, and we all have regional players that we play against and things that we do, like the cable companies, that, as we kind of understand the playbook and look at it, we can adjust how we approach that. They’re kind of a new player in the market. My guess is, after everybody comes out and reports, we’re going to see that the three large incumbent wireless carriers have had very effective quarters.

We all understand how to run our business. I think we’re all being pretty disciplined around how we go about it. I think we’re all conscious of the fact that we’ve invested at record levels and need to make sure that we’re driving returns on those record levels of investments. And to me, that kind of lines up for a very sustainable outlook as we move into next year.

John Hodulik: Got it. Thanks, John.

Operator: And Simon Flannery of Morgan Stanley. Please go ahead.

Simon Flannery: Great. Thank you very much. Good morning. Wanted to come back to the balance sheet. We’re now looking at sort of this time next year or near the — where you hit your 2.5 times first half of ’25, so it’s getting closer. How are you weighing at this point the opportunities to either buy back stock or to attack that 10 million to 15 million additional fiber homes or delever further? It would be great to get your thoughts on that. And then if you can give us anything on your ACP exposure and how that might play out and your latest thoughts on BEAD, that would be great.

John Stankey: Sure. Morning, Simon.

Simon Flannery: Good morning.

John Stankey: So I would say first of all, and we’ve been really clear on this and it doesn’t change, first and foremost, we want to invest at the right level in our business to make sure that we can grow it in a way that we think drives sustainable returns to our shareholders. Secondly, the dividend is something that we have to protect and make sure that we’re offering a fair return on, and then getting the balance sheet where we want to get the balance sheet is absolutely critical. When we arrive at that point, it’s the time to make the decision, and the decision has to be made relative to where stock is trading, where interest rates are in the environment, what opportunities we have in front of us as a business to continue to grow things based on how policies evolve in this country, and where we think there is opportunity for us to grow and get fair returns.