Q4 2023 Earnings Summary
- AT&T is experiencing sustainable growth in wireless postpaid phone subscribers, with expectations to continue this trend in 2024. The company has been disciplined in promotions, maintained low churn levels, and grown ARPU, driving operating leverage and EBITDA growth.
- The company's fiber investment strategy is yielding strong results, with a goal to pass 30 million fiber locations by the end of 2025. AT&T remains committed to this target and sees opportunities for further growth, potentially expanding to an additional 10 to 15 million locations.
- AT&T is on track to achieve its net debt to adjusted EBITDA ratio target of 2.5x by the first half of 2025, improving financial flexibility for capital allocation decisions such as debt reduction, share buybacks, or further investment in growth opportunities, enhancing shareholder value.
- Significant decline in Business Wireline EBITDA: AT&T's Business Wireline segment reported a 19% decline in EBITDA in Q4 due to weaker-than-expected wholesale revenues and non-repeating one-time items. Efforts to improve this segment are progressing "a little slower than I might like," according to CEO John Stankey ,.
- Continued decline in DIRECTV cash distributions: Cash distributions from DIRECTV in 2023 were $3.7 billion, down about $750 million compared to the prior year. AT&T expects these distributions to decline at a similar rate in 2024 and thereafter, which may negatively impact free cash flow.
- High capital expenditures may pressure free cash flow: AT&T's capital intensity remains high compared to peers. While the company expects to reduce capital intensity to mid-teens percentage of revenue in the long term, achieving this is contingent upon continued strong performance, indicating potential risk if expectations are not met.
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Capital Allocation and Deleveraging
Q: How will you allocate capital as you approach target leverage?
A: John Stankey emphasized that AT&T's first priority is to invest in the business to ensure sustainable growth, followed by protecting the dividend and achieving their target net debt-to-EBITDA ratio of 2.5x in the first half of 2025. Once they reach that point, they will consider options like stock buybacks, further deleveraging, or investing in additional fiber homes, depending on market conditions, stock price, and interest rates. He highlighted the company's improved balance sheet and the significant optionality they will have in capital allocation decisions.
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Free Cash Flow Guidance and Capex
Q: What factors influence your free cash flow guidance and capex plans?
A: Pascal Desroches stated that they have good visibility on their capital spend for 2024, which will be heavily weighted towards project spend within the $21 to $22 billion range provided. They also have a good line of sight on cash taxes and expect EBITDA growth. He doesn't anticipate material headwinds from working capital and is confident in delivering on the free cash flow guidance. John Stankey added that they are committed to meeting their 30 million fiber passings by 2025 while balancing capital allocation decisions to ensure they meet their commitments.
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Capital Intensity and Free Cash Flow Growth
Q: Can you discuss your long-term capital intensity and free cash flow growth?
A: John Stankey believes that AT&T should not sustain the current elevated levels of investment indefinitely and expects to operate at mid-teens capital intensity as a percentage of revenue in a steady state. They are investing in durable infrastructure like fiber, which has long-term benefits. He mentioned that technologies like Open RAN will help manage capital intensity moving forward. Pascal Desroches added that the investments are working, and they are committed to finding ways to deliver value to shareholders.
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Wireless Pricing Strategy
Q: Is there room to increase wireless prices further?
A: John Stankey stated that AT&T has been deliberate about driving price changes where they add value to customers. They've invested significantly in their networks, and customers are getting more utility, which allows for some pricing movement. They expect modest ARPU accretion in their guidance, achieved through moving customers to higher-priced plans with more features and some price adjustments.
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Sustainability of Postpaid Growth
Q: Can you sustain postpaid phone growth amid competition?
A: John Stankey expressed confidence in the sustainability of their performance, noting that the market is healthy. Despite a slight decline in gross adds in Q4, AT&T managed to outgrow peers by being disciplined on promotions and strategic in channel operations. They achieved an incredibly low churn rate while growing ARPU and driving operating leverage and EBITDA growth. He expects the strategies and tactics used over the past three years to continue delivering results.
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Economic Outlook and Business Wireline
Q: What's your outlook on the economy and Business Wireline performance?
A: John Stankey noted that the economy has been resilient and expects it to remain so in 2024, with no significant concerns from consumers or business formations. On Business Wireline, he acknowledged challenges due to nearly $100 million of non-recurring items and weaker wholesale revenues. However, they are shifting focus to the mid-market, opening new distribution channels, and seeing progress in fiber-driven revenues. He is optimistic about combined wireless and wireline EBITDA growth in the business segment.
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AT&T Internet Air Expansion
Q: How do you plan to scale AT&T Internet Air?
A: John Stankey explained that while AT&T will not push fixed wireless as aggressively as competitors, they see it serving certain market segments, particularly small businesses with specific usage profiles. They plan to leverage AT&T Internet Air to transition away from legacy copper assets and meet obligations where they haven't built fiber. He emphasized that it will be a tool to achieve aggregate broadband growth but not a primary focus.
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ACP Exposure and BEAD Participation
Q: How will ACP uncertainty and BEAD impact your business?
A: John Stankey expressed that regardless of the fate of the Affordable Connectivity Program (ACP), AT&T will manage effectively. They've provided guidance knowing the outcome could go either way and have plans to respond accordingly. On BEAD participation, he mentioned that they will be targeted in their approach, focusing on states with favorable policies that encourage private investment. Texas was highlighted as a state with sound policies where they may have good opportunities.