Pascal Desroches, CFO at AT&T, laid out the company’s financial strategy very clearly at yesterday’s Citi 2023 Communications, Media & Entertainment Conference. He said the playbook “is very boring but very important: drive earnings growth, pay an attractive dividend and strengthen our balance sheet.”
Cost management and reducing debt are part of the mix. The company is currently in the midst of a $6 billion cost cutting program, that it began in early 2020.
Desroches said, “We have to make sure AT&T has a competitive cost structure. And in my mind that is a journey not a destination. We’re not going to stop at $6 billion. There are plenty of opportunities.”
He said AT&T has “an enormous legacy footprint that is declining,” referring to its DSL connections for both homes and businesses. “As that declines, there is lots of infrastructure and costs that are related to it that have to come out. And this is going to be part of the continued journey.” He said that cost-cutting will include overall lower headcount across the company.
AT&T also plans to continue implementing AI and machine learning in its customer service and field-tech operations to help reduce costs. It also constantly evaluates its retail footprint for the optimal mix of authorized retailers versus AT&T-owned stores.
He noted that for the last 2 ½ years the telecom industry grew at a rate that caught everyone by surprise. Although he didn’t mention Covid-19, that was basically the reason that telecom boomed — because people became much more reliant on their internet connections to work and learn from home.
“As we got into the second half of 2022, I would say we’ve seen more of a normalization of growth,” said Desroches, adding that moving forward, growth will be at a more modest pace. “We would expect at some point that the phone net adds would normalize to overall population growth.”
AT&T is taking a measured approach to promotions. Desroches said, “If you look at our actions relative to that of our peers, we were much less promotional around Black Friday. And that's the way we want to run this company as we move forward.… in a disciplined way.”
Last summer AT&T raised prices on some of its lower-tier postpaid plans, with the anticipation that it could move many of these customers to higher-tier plans. And that strategy has paid off for the company.
“Our fastest growing plans are our higher-tier plans, said Desroches. “The uptake to the higher-tier plans was a little bit better than we anticipated. We guided that we were going to start to see a stabilization of ARPU in the second half, and we saw ARPU actually grow.”
According to the analysts at Cowen, AT&T’s phone average revenue per user (ARPU) was $55.67 at the end of the third quarter 2022, an increase of 2.4% year over year, the strongest since 2019.
Fiber joint venture
Over the holidays, AT&T announced that it had created a joint venture with the private equity firm BlackRock Alternatives to create a national wholesale fiber network called Gigapower.
At the Citi conference, Desroches was asked why AT&T wanted to partner and use outside capital to fund fiber.
He said, “We’re not only using outside capital. We want to make sure that we’re continuing to de-lever our balance sheet.” He noted that before John Stankey became AT&T CEO a few years ago, AT&T was “really constrained” by debt, stemming from various acquisitions. “We have taken giant steps forward in de-levering and that remains a priority.”
But he said, in regard to fiber deployments, “timing is of the essence,” and “the outside use of capital is a great way to start to experiment to see how can you garner additional returns by partnering with somebody.”
He said AT&T was really fortunate to have de-levered much of its debt, especially since interest rates have risen. “Now, with 95% of our debt fixed, we have a clear path to continue to de-lever and build fiber faster than anyone else. And I think it’s important we do both.”
The company will continue to look for opportunities with fiber, whether it’s through the government stimulus monies or whether it’s through partnerships, but it will not be at the expense of the balance sheet.