AT&T Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the AT&T 4Q20 earnings call. At this time, all participants are in a listen-only mode. If you should require assistance during the call, please press star then zero, and an operator will assist you offline. Following the presentation, the call will be open for questions. If you would like to ask a question, please press one and then zero, and you will be placed in the question queue. If you are in the question queue and would like to withdraw your question, you can do so by pressing 1 and then 0. And as a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Amir Rozwedowski, Senior Vice President, Finance and Investor Relations.

Please go ahead. Thank you, and good morning, everyone. Welcome to our fourth quarter call. I'm Amir Rozwedowski, Head of Investor Relations for AT&T. Joining me on the call today are John Stanky, our CEO, and John Stevens, our Chief Financial Officer. Before we begin, I need to call your attention to our safe harbor statement, which says that some of our comments today may be forward-looking.

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As such, they're subject to risks and uncertainties. Results may differ materially. And additional information is available on the Investor Relations website. And as always, our earnings materials are on our website. I also want to remind you that we continue to be in the quiet period for the FCC Spectrum Auction 107. So unfortunately, we can't answer your questions about that today. With that, I'll turn the call over to John Stanky. John?

Good morning, everyone. Happy New Year to all of you, and I hope this moment finds you all in good health. With that, let's go ahead and get started on slide three. There are a lot of words to describe 2020, most of which wouldn't be nice to say in public, but when I look at how we executed on our priorities in the midst of this pandemic, I keep coming back to one word, and that's resilience. We added 1.5 million postpaid phones during the year, our most net ads in a decade, and our highest value subscribers. We reduced churn, streamlined operations, and had the nation's fastest wireless network. For the second year in a row, we added more than 1 million fiber subscribers as customers moved to our higher speed services. And perhaps most remarkable during this pandemic, we launched HBO Max. And about seven months later, we had more than 41 million HBO Max and HBO domestic subscribers, two years ahead of the plan we shared with you in October of 2019. Our resilient portfolio of subscription businesses continued to generate strong cash flows, more than $27 billion, to support our ability to invest in our growth areas and sustain the dividend. In fact, We finished the year with our total dividend payout ratio at a very comfortable level. And on debt management, we made material progress in 2020 by reducing debt maturities over the next five years by about 50% and lowering our weighted average interest rate on debt to about 4%. We continue to transform the business to drive efficiencies. Our cost-cutting initiatives generated about $2 billion in savings in 2020 dollars we invested back into the business to drive subscriber growth and move our transformation initiatives forward. In mobility, we streamlined distribution, shifted some stores to third-party dealers, and closed others. Total calls into our call centers are down by 30 million as we saw a dramatic shift to online transactions by our customer base. We retired more than 30 products in our portfolio and consolidated operations to capitalize on reduced complexity. We took our first steps and reduced our real estate footprint by more than 9 million square feet, with more work underway in our longer-term operating model. We also realigned and streamlined our WarnerMedia operations to better deliver on HBO Max, and the future of how consumers want to view content. Those are a few of our 2020 highlights. Let's talk about our 2021 priorities on slide four. We have three priorities this year. Number one is straightforward. Grow our direct customer relationships. That begins with the vital connectivity services we provide and the strength of our network. we've had the overall fastest wireless network in the nation every quarter for the last two years, according to ucla and the fastest nationwide 5g network in the second half of 2020 after our nationwide 5g launch it shows the strength of our low band spectrum portfolio.

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Our FiberNet promoter scores continue to be materially better than cables and are helping drive strong subscriber trends and higher penetration rates. there is strong demand for the reliability and speeds our fiber product provides. Beyond our core connectivity services, we're focused on our goal to establish relationships with most U.S. households, and HBO Max is the key here. Through our software-based entertainment platforms, we can learn more about our customers and create long-lasting emotional connections with our award-winning storytelling capabilities. Our second priority is the same as last year, and that's continuing to transform our operations to be more effective and efficient. We're restructuring businesses, sunsetting legacy networks, reducing corporate staffing levels and overall benefit costs. As a result, we're positioned to enter the post pandemic world as a more agile and efficient company. Our third priority is about continuing to be deliberate and strategic with how we allocate capital. We plan to use free cash flow after dividends for the next couple of years to pay down debt. We remain focused on monetizing non-core assets and using those funds for debt reduction as well. We're committed to sustaining our dividend at current levels and will give top priority to debt reduction at this time. In summary, I'm pleased with the progress we've made the last two quarters. Despite COVID-19 challenges, we're seeing growth where we want to see growth, and we're successfully redirecting our investments to support those areas. We have more work to do, but I'm confident we're on the right path. Before I hand it over to John, I want to acknowledge that I'm sensitive to the reality that there's much going on in and around the business. I know inside AT&T we're working hard to reposition the company, so I can imagine you're working equally hard to keep up with us. To that end, I want to let you know we plan to host a virtual investor event in the second half of the quarter where our leadership team will provide more insight into our business plans and we'll have a lot of time for discussion and your questions. Look for more to come on that soon. With that, I'll turn it over to John to discuss some more detailed results from the quarter. John.

Thanks, John. Good morning, everyone. Let me start on slide six with a quick look at our fourth quarter subscriber metrics. Wireless subscriber growth was the best it's been in years. We had 1.2 million postpaid net ads, including 800,000 postpaid phones. Postpaid phone churn was the second lowest quarter on record. coming in at 0.76%. Our fiber momentum also continues. We added more than 270,000 fiber subscribers in the quarter. HBO Max subscriber growth continues to outpace original estimates. We added nearly 7 billion total subscribers for HBO Max and HBO in 2020 alone. The trend of premium video declines continues to improve. If you exclude the impact of Keep America Connected on third quarter net ads, our premium video net ads improved sequentially for the fifth quarter in a row. Let's now look at our consolidated and segment results, starting with our financial summary on slide seven. Adjusted EPS for the quarter was 75 cents. That included COVID impacts to revenues from lower television licensing and production, changes to the theatrical release slate, and lower international roaming. Combined, COVID had an estimated eighth sense of EPS impact to fourth quarter, which we did include in our adjusted results. We've made the decision to operate our broadband and legacy voice operations separate from our video business unit and have recast our entertainment group results accordingly. In conjunction with this change in operations, we reassessed the book values of our video assets, including Goodwill and other long-lived assets. As a result, we recorded a pre-tax, non-cash impairment of $15.5 billion. Additionally, we adjusted for an actuarial loss to our benefit plans and a write-off of production and other content inventory at WarnerMedia, stemming from the continued shutdown of theaters and film releases going on HBO Max. We'll provide more information in our SEC findings and on our website and in our annual report. Revenues were down from a year ago, with gains in mobility partially offsetting pressure from WarnerMedia and video, but revenues were up sequentially. Foreign exchange had a negative impact of about $200 million in revenue, primarily in our Latin America segment. Cash flows for the quarter and the year underscore our resilient customer base and liquidity. Cash from operations came in at $10.1 billion for the quarter and $43.1 billion for the year. Free cash flow was $7.7 billion for the quarter and $27.5 billion for 2020. For the full year, our total dividend payout ratio was just under 55%. Gross capital investment was about $20 billion in 2020, and we continue to invest heavily in our growth areas, even during a pandemic. In addition, we invested about $800 million in HBO Max in the fourth quarter and about $2.1 billion for the full year. Let's now look at our segment operating results, starting with our communication segment on slide eight. Our communication business showed revenue growth this quarter thanks to a strong performance in mobility. We told you we intended to give our best customers our best prices and offers, and you are seeing the benefits of that logic. Strong subscriber gains and people moving to unlimited plans help drive service revenue growth in the quarter, even with continuing pressure and international roaming. More than 60% of our postpaid phone base is on an unlimited plan. Churn has been impressive. The last two quarters have been our lowest postpaid phone churn quarters on record. And for the full year, a remarkable 16 basis point improvement in postpaid phone churn. Our successful retention approach does require some upfront investment, but the lower churn levels and improved subscriber counts make this the right economic trade. As I mentioned, we have split the entertainment group into two reporting units. broadband and video and a full reconciliation of the two units is in our support documents. But for comparative purposes, here are the trends in entertainment group, the way you have been used to seeing them. We had our best AT&T fiber fourth quarter net ads, even with more challenges associated with a pandemic and penetration continues to grow. It's now at 34% in our video unit, Premium video losses were improved year over year thanks to lower churn and our focus on high value customers. We continue to drive ARPU growth in both video and IP broadband. In fact, premium video ARPU was up more than 5%. Our business wireline team continues to effectively manage the transition of the business and deliver solid results amidst the pandemic. Solid cost management is the key to delivering solid EBITDA all year long.

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Let's move to WarnerMedia and Latin America results, which are on slide nine. WarnerMedia continues to be impacted by the pandemic. as we've seen across that entire industry. We did see solid gains in subscription revenues thanks to the rapid growth of HBO Max. We now have 41 million domestic HBO Max and HBO subscribers and about 61 million worldwide as we prepare for the international launch of HBO Max later this year. and we now have more than 10 million customers who combine one or more of our connectivity products with HBO Max or HBO. Advertising revenues also grew, driven by political advertising and CNN, which was number one in all of cable viewership, not just news in the fourth quarter. Because of the pandemic, we introduced a unique one-year plan in which Warner Brothers will continue to exhibit films theatrically worldwide while adding an exclusive one month access period on HBO Max simultaneous with the film's domestic release. Our goal is to make the best of a very challenging situation for all involved. That includes filmmakers in town, theater owners, and most importantly, the movie going public. Our Latin American operations continue to work to recover from the pandemic. We added more than 500,000 subscribers in Mexico and almost 50,000 subscribers in Brio, helped in part by our over-the-top offering in Brazil. Latin America revenues continue to be challenged by FX, slow economies, and COVID. Even with this, Mexico EBITDA improved year over year for the second quarter in a row, and Brio continues to generate positive EBITDA and cash flow on a constant currency basis. Now let's go to slide 11. for our 2021 guidance. Last year was a difficult year for us to forecast for obvious reasons. There remain uncertainties in 2021 with the rate and pace of recovery from the pandemic around the globe impacting media, travel, and employment. Against that backdrop, our current outlook for 2021 is as follows. We expect consolidated revenue growth of about 1% with wireless service revenue growth of 2% and a gradual improvement in WarnerMedia's top line. As noted previously, we plan to reinvest all our savings from our transformation efforts to support our customer count momentum in our growth businesses. Combined with ongoing declines in our premium video segment, this could lead to adjusted EBITDA declining slightly in 2021 versus this year. Adjusted EPS is expected to be stable with 2020. We expect gross capital investment in the $21 billion range and net capex of about $18 billion. The primary difference between the two is from vendor financing initiatives we have in place and anticipated first net reimbursements. Free cash flow has been resilient for us, even during the pandemic, and we expect that resiliency to continue in 2021. with a $26 billion range target for free cash flow. We'll also continue to focus on bringing down debt. As John mentioned, we expect to use free cash flow dollars after dividends to pay down debt. We continue to look for opportunities to monetize assets and apply those proceeds to paying down debt, including Crunchyroll, which we expect to close later this year. We do plan to provide an update on our leverage outlook and longer-term debt ratio target once the auction quiet period ends. As 2020 showed us, things can change quickly. However, we are encouraged by our ability to adapt to those changes while driving increased customer accounts, generating strong cash flows, investing in areas of strategic focus, all while maintaining a disciplined approach to our capital allocation and shareholder return strategies. As John mentioned, we plan to have a virtual analyst event later in the quarter to talk about this more. From here, that's our presentation. We're now ready for Q&A. Operator, we're ready to take the first question.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press 1 and 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, Please press 1 and 0 at this time. And one moment, please, for your first question. Your first question comes from the line of Simon Flannery from Morgan Stanley.

Please go ahead. Okay. Thank you very much. Good morning. So looking forward to the analyst day. Perhaps you could start with the macro environment. What are you assuming in terms of the backdrop? Are you really assuming things continue to be much as they are, or do you have a pickup? In the second half on things like roaming and advertising, any comments just about trends with what CIOs are seeing, et cetera, that underscores that? And then within the CapEx budget, are there any material changes within your priorities there? For example, your fiber build-out, I know that's a big priority. Is there an opportunity to ramp that up or additional spend on 5G rollout? Any color there would be great. Thank you.

So side of this, John, let me take that. On the macro side, the one thing we saw at the end of last year was a customer's willingness to pay. Our bad debts were really quite solid, quite positive trends, both on the consumer and the corporate side. So while we're not getting overly excited, it was a positive sense. What we have built into our plans are, if you will, more of the kind of current environment for the next six months with some Second half and really close to the fourth quarter pickup in pandemic relief activities. So we'll see more theater going probably in the fourth quarter than we did this year. We'll see some more travel. But in no way did we envision a hockey stick or any kind of dramatic increase. It's really much more of a general staying the course. There is some slight improvement, but stay in the course. Secondly, the one thing I'd add, though, is the cash collections have been strong and have been resilient. I feel really good about that, so it gives us some comfort. Secondly, with regard to the CapEx, I'd say it this way. As you look at kind of the gross capital being put in the ground, it's up a billion dollars. There will be some changes in what we spent last year. I continue to expect the a little bit lighter on the video satellite type side of the business because of the success of AT&T TV and our focus on churn reduction as opposed to gross ads. So there'll be some more money there. I think you'll see us, we've continued to spend money on wireless, but we're well into and well completed with the first net build. So we'll have some ability to manage there. The next piece, though, is we will see an increase in the fiber build. and the opportunity to add some more sales opportunities to that inventory. John, did I miss anything from your perspective?

Yeah, I'll be more precise than John. We'll be building somewhere around 2 million fiber residential locations in that neighborhood. That's kind of what we've got the team tasked to do to give you a sense of what that increase will be. And I think the only other thing I would comment on relative to the wireless spend overall, the shift that's occurring, you know, we put this amount of capacity out over the last several years in combination with a lot of the work we spoke to you about with the FirstNet upgrades, and there's a kind of a shift in mix going on within the wireless build, and we're now moving away from what I would call capacity that's on existing spectrum bands, and starting to see ourselves prep for, um, you know, possibly using other spectrum that may come into service at some point in time, et cetera. So we got a little bit of a dynamic going on in the shift that's in the overall wireless program.

Okay. Okay. Is CapEx second half loaded then?

Uh, we, we don't have anything that I would tell you is any different than what you've seen. You know, we're actually We started doing engineering. If you're worried about fiber, Simon, we started doing engineering on the fiber build this year. I told you we were getting ready to go, and it was my intent to get going, and the teams are already out turning things up. We had the conversation last quarter. I don't want to repeat myself, but we shared with you that this build is a little bit different than when we initially started because we have wire centers that are already fiber capable. The infrastructure is in place. we're going back in and picking up the next adjacent neighborhood or the next successive area. And as a result of that, the speed to get up and moving is not the lift that it was the first time we started ramping up on this. So we've got a little bit smoother dynamic around it than what you might think because of the increase in the fiber dynamic.

Thanks very much for the question. If we can get the next question.

Your next question comes from the line of John Hudlick from UBS. Please go ahead.

Thanks, guys. First, a related question. What's driving the 22% decline in the broadband segment? Are there additional costs associated with splitting it out from broadband? from video and sort of how do you expect that to progress through the year, especially with the increased fiber bill you expect as we go on? And then secondly, any update on the timing of the AVOD launch or anything you can tell us on new content or reliance on sports and news?

Thanks. John, let me take the first one. With regard to the broadband piece, Quite frankly, it's really the efforts we've had to increase our sales capabilities, add new customers, the amounts that we've built out in the prior years. It also has to do with the recognition that we are providing HBO Max for all of our gig customers, and so there's an intercompany charge there. It's within the umbrella of AT&T, and the economics are there, so we feel good about it, but that's also in there. I would tell you, as you all know, the The network infrastructure, customer service, like fiber, is a long-term game. And we've, you know, gone through the process many times, feel very good about the long-term returns and the efforts. But, yeah, we're going to be spending some money, as we did last year, to invest in that customer growth. You saw the 600,000 plus, 650,000 or so net ads last six months. And, you know, we feel very good about that. particularly when we look at the churn numbers, particularly when we look at the customer satisfaction, the NPS scores. So I completely support the fact, but yes, there is some investment there. With regard to the Avon, we are expecting to launch our international version of the HBO Max later this year as well as the Avon. I'm not ready to give any dates, John. I don't know if you want to say anything more.

We're still shooting for second quarter launch on AVOD, and I think I would point out equally as important as the Latin America launch of HBO Max that we've been working really hard on and will be an important driver for us on future growth and getting ourselves embedded into the international front on a unified platform and approach to things. So you should expect, you know, as we get into the second quarter, there's going to be a lot of activity and change going on here. One of the reasons we're kind of trying to pinpoint the exact date on it is, as you know, we've been working through pandemic-related production issues, and ramping that back up has been a pretty significant task. The team's done a remarkable job getting ourselves back into that business and working through the dynamics safely. It puts a little bit of overhead on things in terms of speed of production and what we're able to do. And there's a bit of rework that goes on with trying to work around the limitations of a pandemic-based environment. As a result of that, we're still fighting through getting the pipeline, dropping the content at the right rate and pace that we want it to. And the first quarter this year continues to be a bit of a stretch in that regard as we've cycled back into production. You know, our expectations are that we start to hit our stride as we get into the second quarter, and it's really important as we put these new iterations of the product out that we have ourselves in a good position in terms of the content inventory. And so as we're kind of going hand-to-mouth on these right now, John, we'll be a little bit more discreet on when we announce what's coming out in exactly what month simply because it's just that tough and that much of a battle. literally show by show to get this stuff done and get it into the funnel, and we're working hard to do that. And we hope we're past any of the unexpected dynamics like the California closures that went on over the last several weeks that put a couple twists and turns in the road, and we've got the worst behind us. But I'm a little chased right now with everything on the pandemic, so I don't want to overpromise anything. Thanks, guys.

Thanks, John. Your next question comes from the line of Phil Cusick from JP Morgan. Please go ahead.

Hey guys. Um, so much to ask. Thank you. So in wireless, John, you talked about growing customer relationships overall as a priority for the company. Should we assume that means the current level of promotion and upgrades that effort continues? And then second to follow up, um, For John Stevens, just really quick, you mentioned an updated leverage target that you would talk about on an analyst day. I know you can't really talk about where leverage goes around an auction, but do you anticipate changing the target from the current 2.5 turns? Thanks very much.

So, Phil, look, we're in a dynamic market. Things change all the time. We're going to look at our promotion strategies and adjust them accordingly. and determine what we need to do to continue to be in a position to maintain and grow share. And I think it's really important we continue to have a growing business. You know, the management team is focused on two things. We like the momentum. I think we'd like to be a little bit more efficient with the momentum. We've done some really good stuff and had some really good progress on self-funding a lot of what we've been doing in the market. But we're not self-funding all of it yet. And so our continued work on trying to manage the efficiency and effectiveness of this business so that we can be in a more aggressive posture in the market is something that this team is working on every quarter. And we've tried to be diligent and reasonable in our guidance to you and make sure that we have high confidence in what we share. But what I'm turning back to the management team is a task that I'd say is more aggressive than that. To the extent that this management team delivers, and they have been doing a remarkable job of doing that over the last several quarters, does that mean that that's going to give us more room to do more in the market and continue to maintain a posture that I think is totally appropriate, bringing in high-value customers, the right kind of customers we want, going down the swim lanes that we set up for ourselves that we think we have a unique place to be, which is winning in the public sector with our first net abilities, using our deep enterprise customer relationships to go deeper into their customer base with affinity programs, ensuring that we're getting the mass market with attractive offers like HBO Max and what's associated with that that has brought in a really attractive gross ad pool, and treating our embedded base well. That is the strategy, and we're going to continue to do that. I think you're seeing it. To be the industry leader in sharing this quarter, You know, I think we called it right. We said that we don't have customers that are upset about our network. They like it. We don't have customers that are upset about our service. They're satisfied with our service. We had customers who were interested in finding new devices. We shared with you that we had a little bit more agent population on device longevity than the rest of the industry. We've been targeted on how we do that. I think, you know, getting a new 30-year lease on life, a 30-month lease on life with these customers. I wish it was 30 years. You know, it's a very appropriate exchange for the franchise right now, given everything we have in front of us.

Phil, with regard to the update at the analyst conference, first and foremost, you know, what we've said and will continue to say is, Free cash flow and access to dividends is going to go to pay down debt. Proceeds from the sale assets is going to pay down debt. The reality of it is, you know, we would prefer to be able to give you more information about a leverage target. We can't do that at this time because of the status of this EBIT auction and our inability to comment on it. That's all we're trying to tell you is that we understand that we would normally give that to you, that it would be appropriate, but because of the FCC rules, we can't. So we will commit that we will update it when it's possible. That's the story. I think the one thing that I repeat, though, is $27.5 billion last year, $26 we're guiding for next year, $15 billion dividend, a lot of money to use to pay down debt. That's what the message we want to give you, and the proceeds from things like Crunchyroll can be used to pay down debt. So we feel good about what we've done over the last three years with regard to managing the debt, and we feel really good about our ability going forward. But the comment about leverage is just, you know, it's appropriate for us to give to you. We can't because of the rules around the C-band auction.

Okay, so that's a maybe this year leverage target, not a permanent changing the two-and-a-half leverage target.

If I say we'll give you all that at the analyst conference when we can talk about it, quite frankly, I just got to be really careful. We'll go from there and move forward. But our guidance on this, the real piece is, Cash flow in excess of dividends and proceeds from asset sales go to paid on debt. And if you look at our net debt at the end of the year, I think we've shown a – we've got a good record to prove that we're doing what we said we're going to do.