Cutting the Cord: AT&T’s Push Beyond Landlines and Legacy Tech with CFO Pascal Desroches

Ann Berry (00:00):
Data relentless demands for it isn't going anywhere. With the average consumer now owning more than three devices and US data center power demand projected to grow at a 15% annual rate until 2030, the infrastructure to deliver all this has been under investor spotlight for several years and nowhere more so than in the telephony sector. Within that $190 billion market cap giant at and t has been doubling down on the data story post diversified acquisition spree from 2018, at and t is now entering its fifth year of transformation into a streamlined pure play communications leader. Starting in July, 2021, the company's video entities were separated into DirecTV and in 2022 it spun out Warn Media into a merger with discovery leaving behind what is now its core business lines. That includes mobile left knee, which uses radio signals from cell towers to provide wireless internet and phone service so users can stay connected while moving around. 

(00:53)
This includes first responders, firefighters, paramedics, and police who use at t's FirstNet services, a dedicated network built on the company's 4G and 5G infrastructure. Second fiber services which use fiber optic cables to transmit data with light offering faster internet speeds and more reliable connections, but requiring an immobile wired connection. This is replacing cable at t has already added 11 million fiber locations to its network between 2020 and 2024 doubling its number of fiber subscribers and from now until 2027, at t plans to invest 22 billion per year in fiber infrastructure to reach over 50 million locations, estimating that by the end of the decade about 80% of homes will have a fiber offering. The shift certainly showed through in at t's recent earnings reporting. The addition in 2024 of 1 million fiber subscribers for the seventh consecutive year with a 7.8% year over year revenue increase in consumer broadband. 

(01:47)
The fiber network also reached just under 29 million locations. Mobility service revenues increased 3.5% annually reaching over 65 billion for the year with solid performance and postpaid phone subscribers and continued convergence. That's customers buying both mobile and fiber services. Something that we are going to dig into, but enterprise services are still at an inflection point. The business wire line segments saw a revenue decline of 10% year over year with pressure on its legacy voice and data services and a Q4 dropping profitability. We unpack all this and more with at t's chief financial officer, Pascal de Roche in studio with us at after earnings. Let's get right to it. One of the places I'd love to start, Pascal is talking about how there was a time not too long ago when there was a lot of price competition, 

Ann Berry (02:33):
Particularly to get consumers onto their cell phone networks. Has that tapered out? What are you seeing in terms of pricing pressure there? 

Pascal Desroches (02:39):
It's always been competitive, the industry and it remains competitive, but what we offer is a good of service that is incredibly valuable. Consumers not only are asking for it, they are asking for more of IT plans that provide them with more connectivity, whether it's on the broadband side with a faster speeds or it could be on wireless with plans with more features and minutes. And so yes, it's competitive and yes, we have to provide promotions to get consumers onto our services, but the returns on those investments are incredibly attractive and as I said, not many companies are in a position to provide that. 

Ann Berry (03:23):
About 40% of your five are subscribers are also mobility subscribers, I believe Pascal, and that is this convergence phenomenon. Where do you think that 40% gets to over 

Pascal Desroches (03:34):
Time? Here's what we've said publicly. It is our goal to get to 50% 

(03:40)
As you get towards the end of the decade. So by 2029, the next five years we expect to get to 50%, importantly 50% of a much larger base. Today we are at nearly 29 million passings. By the end of the decade we'll be at 50 million plus and we expect to get to 50%. It doesn't mean we'll stop there. I think there are opportunities go well beyond. Our research has shown over 70% of consumers want to buy from the same provider. They just want their connectivity to work, whether it is at home, whether it is in the car, on a plane, they want it to work and they'd much rather deal with one provider that provides them that seamless connectivity and we are as well positioned as any to do that. 

Ann Berry (04:29):
So within that context, in that desire to have a one-stop shop, how do we explain the sort of proliferation of these sort of ankle biters? We've seen Mint is an example, right? Got a ton of coverage mainly because it had a very famous investor, but how did the mints of the world sort of pop up in the world that you've just described? 

Pascal Desroches (04:47):
Here is the way to think about it. When you get to a point where in any industry where you're close to a hundred percent penetration, the providers of those services tend to find alternative means of distribution. So you may have somebody like a mint that says, I'm okay with getting a small portion of the profit margins and for the big providers that it is all incremental margins. They are basically providing network access wholesale and somebody else is reselling that at a very small margins. So yeah, there is, you always have that when you get to near a hundred percent penetration in an industry and that happens across business, it's another way to monetize the significant investments we've made in our networks. 

Ann Berry (05:40):
One area that's been important for at and t has been spectrum acquisitions. Can you just break down for us what that is and why? There's some chatter at the moment that it might get harder to continue acquiring spectrum 

Pascal Desroches (05:52):
In order to connect consumers via your mobile services, your mobile phone. There is a series of towers and radio access networks across the world 

(06:05)
And importantly there is spectrum position that allow working in conjunction with that, those towers and small cell sites that really facilitate that seamless connection from device to device spectrum allows in a very, is the most efficient way to fulfill demand for network services. It is a scarce resource. The government had a big auction back in 2021. Since then it hasn't auctioned any new spectrum. We and others have been vocal about the need to add more spectrum to the pipeline to really allow a cost effective expansion of delivering mobility services. Ultimately, the consumer will benefit from the telcos having access to that spectrum. It will allow delivery of the service in a much more efficient way and the benefit ultimately accrues to the consumer. 

Ann Berry (07:10):
And why has the government not been selling as much spectrum? 

Pascal Desroches (07:13):
I think Spectrum is very valuable not only for the telecommunications but the Department of Defense. It is critical in a lot of the work that they're doing to defend the country and so I think there's been a little bit push pull within the different government agencies, but we're hopeful with the new administration that will be an area that we have access to new spectrum inventory. 

Ann Berry (07:37):
And what about other technologies that are trying to play where spectrum issues don't exist? Let's talk about satellite communications for example. Talk to us about what you are seeing with folks like starlink coming into that space. What does that mean for your business? 

Pascal Desroches (07:51):
Yeah, if I zoom out a little bit in order to set up communications, you can do it in a variety of different ways, whether it is through the network of mobility sites I described earlier. It could be by having a fixed broadband connection to your home that enables your wifi. Sometimes it could be through other means like satellite and satellite is works in places that are sparsely populated where the cost of deploying a wireless network or broadband becomes really expensive and satellite is a fine alternative. In those instances, it doesn't provide the same quality of service that you would get in a fixed or mobile, but it is fine for those who don't have other means to connect. And so starlink is a fine way to tackle portions of the population that are very sparsely populated, but there will be other satellite companies. There's a company we've invested in a ST that's a public company that's also launching satellites and there will be others. And our view is that competition and others bringing satellites to market will allow us to serve across the globe those parts that are really cost prohibitive to serve with the best technologies. 

Ann Berry (09:26):
So let's use that as a segue to talk about where you've been investing very heavily and that's in fiber. 22 billion a year of CapEx is a number that you've thrown out there to be invested annually through the end of 2027. That's a big number. Where's it going? 

Pascal Desroches (09:40):
It is indeed. It is. You take a step back, as I said, to be in these businesses you have to have the very best technology. So a lot of it is going to support our wireless. We are modernizing our wireless network. We are creating a much more open and modern architecture that will drive the cost of delivering each bit of wireless connectivity. It will drive down that cost. Similarly, fiber, we are only at 29 million homes. Our aspirations is to pass 50 million plus and it's going towards that. It is incredibly expensive infrastructure to put in, but once you have it, it is an annuity stream that will serve the company and its shareholders for years to come and it will provide absolutely critical services for consumers. 

Ann Berry (10:41):
We've talked a lot about consumers, let's talk about businesses as well. Also going through their own evolution. Business was a week apart. It was a weaker division for you. Talk to us through the numbers there and whether we can expect there to be a different trajectory for the business profitability than we've seen. 

Pascal Desroches (10:57):
Sure thing. Here are the dynamics that are happening in business. When it's all said and done, we are in the business of connecting not only consumers but businesses as well. We have more relationships with the Fortune 1000 than anybody else. So why is business in decline? Those relationships historically have been things like desk phones, fax lines, legacy, broadband. That's not as fast as the current broadband that we're deploying today. We went through the same transition where we on the consumer side but on the business side we are a little bit earlier in that evolution. Why think about covid from 2020 to probably 2022? No one was in the office or thinking about, okay, how do I continue to modernize my telecommunication infrastructure instead? That was delayed and it wasn't until 2023 that started happening in earnest and so what we're seeing is a decline in legacy services, which because we had been such a leader in that space, but at the same time an increasing in the services that we are growing like wireless, like fixed wireless, like fiber connections to businesses and those we expect to continue to grow and have really great tailwinds, but right now the tonnage of legacy revenues that that are rationalizing is overwhelming that, but it's only a matter of time before we get to the other side. Importantly, during this period of transition, we can still grow the overall company's earnings and return meaningful amounts to shareholders and grow our EPS double digits. So 

Ann Berry (12:46):
We'll come back to that and we'll talk about return of capital to your shareholders as well. But just to sort of hone in for a second, to zoom in on this business inflection point, there's still going to be some time with the burden of the legacy business running off, you are earlier in the cycle than in consumer for the more sophisticated technology adoption to happen. When do we get to the other side of it? When are you net growing faster on the business side than you're seeing the runoff? 

Pascal Desroches (13:11):
Here's what we have said publicly. We expect by the time we exit 2027, we should be approaching stabilization of that business because you will have between the wireless relationships that business brings, coupled with the fiber and fixed wireless relationships that business brings will offset the declines in legacy by that point and will reach a plateau. 

Ann Berry (13:38):
You've got a big cost cutting target, 3.5 billion of run rate cost savings is the target out there by the end of 2027. Break that down for us a bit. Pascal, how much of that is coming from retiring some of the legacy systems that were copper based and decommissioning that? How much is it coming from productivity from new technologies like ai? 

Pascal Desroches (13:59):
It's a great question. So here's what we've said publicly. We expect to have 3 billion plus of declines over the next three of cost savings over the next three years. Where is that going to come from? Big part of what you said is we have a big legacy copper base of customers and underlying infrastructure 

(14:23)
Over the next five years, we expect to largely get out of the copper business. So think of landlines, fax lines. We are largely going to be out of that business and the underlying infrastructure will be rationalized that will be part of the cost savings, but also new technology, new platforms enabled by ai not only generative ai but the AI that's been around for years will continue to get better. Customer service you call in having a virtual chat box assist our customer service reps has increased productivity significantly, has allowed us to answer customer inquiries the first time, put 'em in the right location to be solved. So despite the fact that our customers have grown significantly, we've seen a decline, a meaningful decline in call volumes. We would expect that to continue over time. We are also starting to see meaningful efficiencies in coding through the use of AI tools to help our software engineer that is making them significantly more productive. Also think about how much information about you that we have over time. The ability to drive more of our sales through the digital channels by recommending the right plan, the right devices for you and your family. Those are, we are in the very early innings, so the efficiencies that can be gared will be enormous. 

Ann Berry (16:01):
Just for the record, I feel I am compelled to tell you I still have a landline. I'm very attached to my landline. When the zombies come, I'm going to be the last person with it. 

Pascal Desroches (16:10):
You are in good company. There are quite a few people and historically the government has made it very difficult for us to get out of the landline business. 

Ann Berry (16:19):
Is that right? In what way? Regulating that. The necessary infrastructure there to support it for some period of time. 

Pascal Desroches (16:24):
Yes. You cannot stop offering landlines unless the government says you not only do you have to service the existing landline, but you have to continue to offer it as a service until the government tells you you don't need to. So it it's been a regulatory burden. What we're encouraged by is that the current administration is pledged to work with us to really help speed up the modernization of US telecom infrastructure. 

Ann Berry (16:53):
Bassett had no idea about the landlines. Let's stay on the topic of political impact on your business for a moment. You've referenced the current administration with respect to spectrum auctions, with respect now to the landline. There's one piece, and I want to invoke Goldman Sachs on this. I went back and read a number of research reports about at t and there's this one assessment that this analysis that Goldman Sachs made, which was to look at the impact of potential immigration policy on telephony companies, and I'm just going to read it just to give you the flavor. Goldman Sachs says, we believe potential changes to immigration levels is a meaningful risk for the wireless industry that we think is little discussed and underappreciated by investors. Given an estimated 11 million unauthorized residents in the United States, many of whom are likely to have mobile phone service, we fielded investor questions around the potential impact of immigration outflows on the wireless industry and that Goldman goes on to do a bunch of sensitivity analysis. Pascal, which for the case of at t suggests if that there were a million immigrants no longer able to stay in the country, that would translate into a pretty meaningful reduction in the number of your subscribers. What do you say to that? 

Pascal Desroches (18:03):
Here is what we say that think you go back to 2024, probably since the spring of 2024, the Biden administration started to really clamp down on immigration and there have been less people crossing the border and so we've been living with this for some time. You look at our customer base as a general matter, we are probably underpenetrated relative to our peers in the value base. What do I mean by value? Lower price plan, prepaid plans. So our peers are much more exposed to us. We still see that we have an opportunity to grow our share of the value base even with any headwinds that immigration could provide. 

Ann Berry (18:53):
Yeah, and I look, in fairness to that point, Pascal, actually the same report shows if there were, for example, a 10 million reduction in the immigrant base here in the us the report does point to about a two and a quarter percent drop in annualized service revenue growth for you, but significantly more, for example, to T-Mobile to your point. So that does come up in the discussion, but thank you for addressing the point. These aren't easy conversations to have. 

Pascal Desroches (19:16):
They're not. But look, we manage a really big business. We have every confidence that we can manage through what the future brings. 

Ann Berry (19:24):
Let's switch gears a bit and let's go back to a point that you raised, which was talking about return of capital to shareholder. 

Pascal Desroches (19:29):
Sure thing. 

Ann Berry (19:30):
With the free cashflow that at t has been enjoying, you've achieved a net debt milestone, getting that ebitda, that leverage ratio down to about two point a half percent. It feels like you're on track to 

Pascal Desroches (19:40):
Get out. We are on track to do that. 

Ann Berry (19:42):
Talk to us then about buybacks and dividends. 

Pascal Desroches (19:45):
You've 

Ann Berry (19:46):
Described a business model that really, you haven't used the word utility, but it is in fact a utility in many ways and you've referenced an annuity being generated as a result of that. How does that translate into your dividend and buyback strategy? 

Pascal Desroches (19:59):
Sure thing. Look, there are a number of ways we return. We make return source shareholders. Growing the business is probably the predominant way 

(20:08)
And we've been investing significantly to do that. We also pay a meaningful dividend. We're right now between four and 5%, four or 5% yield on our stock comes from dividend plus. We've announced that we will begin to buy back shares. We have shares that are still outstanding from the acquisitions done with the Time Warner acquisition, the DirecTV, we believe those assets have been spun off and separated, yet we still have those shares outstanding. So we think we have an opportunity to meaningfully lower the share count or give all the remaining shareholders a bigger piece of the pie. And we have pledged to return value in all three ways. We're going to grow the business, we're going to pay a healthy dividend and we're going to buy back a portion of the shares giving everyone left a bigger piece of the company and in the process, I think our shareholders will be rewarded handsomely. 

Ann Berry (21:16):
On that note, let's switch gears and talk about some rapid fire topics. What is the one question that investors should be asking you that they're not typically asking to better understand your share profile? 

Pascal Desroches (21:28):
Well, look to me, a great question always is what are you worried about? 

Ann Berry (21:32):
What are you worried about? Oh, come on, we get a bonus question. What is the single most important thing that you're worried about that's going, 

Pascal Desroches (21:40):
We have to grow this business and it is finding ways to effectively grow the business in what is a mature industry. And we have shown that we are able to do it by a combination of increasing the number of customers that we serve, as well as the customers buying services that are more valuable to them and to us. 

Ann Berry (22:10):
Second question for you, and I think this is fascinating. You all need to go and read Pascal's bio. Fantastic interview with Forbes Magazine. Recently you joined the Dallas Fed Board in 2024. What's the single most surprising thing you've learned in that experience? 

Pascal Desroches (22:27):
We run a national business. I always thought of business as being national. Inherently when you look across this economy, there are vast majority of industries, vast majority of geographic sectors. Not everyone is behaving the same way and really seeing the differences in sectors. One sector may be doing extremely well, another is in decline. So really being able to parse through that and see what does it mean to the overall economic picture because we often get a summarized view, but it's a lot more complicated, a lot more textured. 

Ann Berry (23:08):
So the diversity of the economy, 

Pascal Desroches (23:10):
Enormous diversity. 

Ann Berry (23:12):
Last question for you, which company that is not at and t do you most admire? 

Pascal Desroches (23:19):
I would say Apple. 

Ann Berry (23:20):
Why? 

Pascal Desroches (23:23):
Their customers love them. They love their devices, they love their services, and it is incredibly hard to get an Apple customer to change. That's what I aspire the at t brand to be. And they've also done it while reinventing themselves over the years. So I think that is incredibly powerful and something to be admired. 

Ann Berry (23:46):
Great answer and great conversation. 

Pascal Desroches (23:47):
Likewise. Thank you 

Ann Berry (23:48):
Pascal. Pascal De Roche, chief financial officer of at t. Thank you. Please come back. Lots more exciting 

Pascal Desroches (23:54):
Indeed. I look forward to it. Take care. 

Ann Berry (23:56):
I'm Anne Barry. Thank you for tuning into After earnings, the show that brings you up close and personal with the executives behind the world's most interesting publicly traded companies. If you learn something today, don't forget to like, subscribe, and share with your friends. Our upcoming episodes will feature CEOs and CFOs from Lucid Adobe and more.