AT&T CEO says AI will CHANGE the future of connectivity

[00:00:01]Welcome back. AT&T reporting second quarter earnings in the last hour setting the stock up this morning. It's up 3 and 1/2% at 2302. The company posting a beat on earnings per share, but a slight miss on revenue reporting growth in advanced connectivity subscribers from fiber, fixed wireless, and postpaid phones. Join me now to break it all down is the CEO of AT&T and the chairman John Stankey. John, welcome. Good to see you this morning.

[00:00:25]>> Good morning, Maria. It's good to be with you.

[00:00:27]>> Well, let's talk about the quarter and what drove business. I know all of the investment that you have been putting into the company and into fiber and wireless over the last several years is playing out in this quarter once again.

[00:00:40]How would you characterize the quarter?

[00:00:43]>> Yeah, I think you just hit the nail on the head. We had indicated as we gave guidance for the next 3 years that because of those investments that you alluded to, we were going to start to see a step up and accelerated growth.

[00:00:55]And that's exactly what you saw this quarter. Really strong customer subscriber numbers. We added over a million strategic new customers on the core products that we want going forward in the future.

[00:01:07]Account formation, which means new customers into AT&T was at a 3-year high. So, that was really strong performance in that. And as a result of that, you saw accelerated EBITDA growth.

[00:01:19]You saw accelerated [clears throat] service revenue growth.

[00:01:23]Obviously, the confidence that we were able to move our guidance on EPS and EBITDA for the balance of the year to the higher end of our guide as a result of that. And look, while the growth has been really strong, look at the margins. This, you know, I can't go back that far, but this may have well been the best margins I know we've ever had since I've been in this job and may well have been some of our strongest margins ever. So, it was a really strong effort by the team, really well balanced, and really good performance in the market.

[00:01:53]>> Yeah, congratulations on those margins looking like some of the best you've ever seen. in terms of the second half of the year and into the new year.

[00:02:01]What's your expectation?

[00:02:03]>> Our expectation is we're going to keep going. We think this is the first step up. As you know, we made some key strategic decisions to acquire some new spectrum and some new footprint from a you know, former company in the organ in the space that we operate in with Lumen.

[00:02:20]And as a result of that plus our organic investments, we have a great opportunity to continue run. This is what we've been telling the street and telling our investors that that organic investment that you alluded to plus the new footprint puts us in a very unique position that even though we're in a little bit more mature industry in terms of customers that have the product and service, when you're taking share and you're building a better product, your growth can be strong and that's what we're demonstrating. So, we expect to carry that forward and we're also bolstered by the fact that this quarter for the first time in a long time, we saw growth in our business revenue news on our strategic services.

[00:02:57]And when we've got all the cylinders hitting, this is going to be a really really strong engine.

[00:03:03]>> Yeah, and certainly investors are reacting this morning after what has been a flat to down showing in the stock last 6 months, but you're returning 100% of free cash flow to shareholders and you've got a gain this morning, but we want to look longer term. John, we don't really like to look short term here, but I want to get your take on longer term broadband subscriber growth. We were just talking about SpaceX in the last segment with Cathie Wood and some investors believe that mobile is at risk from the rising threat of satellite. How is AT&T dealing with that?

[00:03:39]>> We want to look longer term, too, and that's exactly why we've been making the investments we've been making. We've been building the infrastructure that we think will match not only drive returns today, but match to the AI revolution moving forward. And one of the reasons we've gone so heavily into fiber is we believe those AI workloads are going to require a lot more symmetricality in networks, meaning the same amount of bandwidth upstream as downstream. And traditionally our broadband networks, especially in the consumer space, have been asymmetrical, more downstream bandwidth than upstream. And so we're investing in the best technology at the lowest marginal cost to carry those workloads. Sometimes we drop the fiber in somebody's house, but sometimes we put the fiber right up to the cell site where there's a very short wireless tail between the cell site and the customer before the traffic gets on the fiber.

[00:04:30]And that allows us to have these ultra-high-performing fiber networks that support wireless as well. And so we believe we're in a position from a technology perspective in the years of investment in that dense infrastructure that it's going to be very hard for a new entrant to come [clears throat] in and meet the service expectations of the AI generation. We invest a significant amount of money not just outside, but inside as well. If you go into a stadium or a hospital or a university or a large office building, you don't cover those from outside cellular towers. You have to build infrastructure in those buildings and it takes years and a lot of money to make that happen. And to deliver that kind of consistency of service requires dense fiber at the edge and a huge investment in wireless technology over many years to make that happen. So we're future-proofing our network. We feel really good about where we where we are, just like people buying chips today or buying memory or building data centers, the data communications network is going to be important fabric of the AI revolution moving forward. We feel like we'll fit right in and be very, very competitive.

[00:05:36]>> Yeah, that's that's a great analysis as SpaceX tries to tell us it's got multiple total addressable markets.

[00:05:42]AT&T's moving toward implementing AI, accelerating infrastructure for hyperconnectivity to reduce costly outages nationwide. Tell us about your commitment of up to $250 billion through 2030 on this AI build-out.

[00:05:57]>> Yeah, that's what we just alluded to.

[00:05:58]You know, we're we've been investing over the last 5 years at a rate that's much higher than everybody else in our space and our industry. And it's it's on this bet that this infrastructure is going to be irreplaceable moving forward and that we're going to see these more symmetrical workloads. And so our commitment is we're going to continue to do this, you know, through about 2030.

[00:06:20]And we believe at that point we get to a competitive footprint that's going to be very, very hard to catch or touch.

[00:06:27]And that's going to structurally distinguish this business and make us the the best provider in the market and make us incredibly competitive. And it takes some guts to do this to your point. We think about this from the long term. It means that sometimes you're going to get a few of these short-term dislocations like what you alluded to and what's happened with the stock price in the last couple of months. But my learnings in this industry over time is you have to be consistent and persistent and it takes multiple years to kind of get a flywheel going. But if you stick with it, once that flywheel gets going, it throws off a lot of cash and it's a very successful return. And that's the bet we're playing here right now.

[00:07:07]>> John, what are you expecting in the way of regulation? I mean, some analysts talk about the support strong regulatory support by the way for for space acts.

[00:07:17]We know that it's an important uh components for governments right now.

[00:07:22]But in terms of regulating your industry, do you see changes? What do you need to see in the way of regulation to actually continue to see that growth launch?

[00:07:32]>> Well, look, I would say by and large there's always going to be some things on the edges you quibble about, but by and large this administration and what's gone on the last couple of years has it right. And if you think back all the way to 1997 when the Telecom Act was in put in place, the whole goal of the Telecom Act, at least in our industry, was to start to move out of regulation, highly regulated markets. And it was about building intermodal competition and having new players and new entrants come and compete with each other.

[00:08:05]And I don't know that anybody thought it was going to take as long as it did, but we are here right now. You know, most Americans have choices from like four broadband providers today.

[00:08:15]>> Yeah.

[00:08:16]>> That was unheard of 15 years ago. So, now that we have this intermodal competition and we have all this investment that's poured in and you see bandwidth going up, prices going down, the next step is you really don't need regulation. Markets take care of these issues. And so, the FCC is actually looking at opportunities for them to come back and say, maybe there's some markets where we've traditionally regulated that we no longer need to do that or do it in a very different way.

[00:08:44]And I applaud that because that's exactly where we are. The markets are taking care of things in the vast majority of Americans' lives today.

[00:08:52]There's probably still some areas in rural areas where maybe you need to be a little bit more careful about those things, but we can move into a deregulatory posture, not a more active regulatory posture.

[00:09:01]>> Well, the fact that you did these investments in fiber and wireless and broadband so long ago set you up to best compete with this change where you're expecting SpaceX to directly enter mobile. And so, um I I I understand that vision that you had so long ago in terms of the investment. AT&T also partnering with Palo Alto Networks to release quantum resilient SASE fabric for enterprise customers, advancing quantum computing and accelerating connectivity for businesses. Tell us about that. Why is quantum fabric so powerful?

[00:09:36]>> Well, we're we're getting to that point where given how fast AI has moved, I think everybody's now looking at the next wave and saying, "Wow, you know, how quickly is quantum going to come upon us?" And as you know, from a security perspective, quantum adds a lot of new challenges into the workplace in terms of what it's capable to do and and practices that we've used historically that maybe no longer going to be effective in the quantum world. So, our work with Palo Alto is to take what they do really well with their software and their devices, marry it with some of the information that we have coming off of our network, so you can get better security with the two together, security that will actually withstand the abilities of quantum moving forward. And so, we're taking the first steps that what we know is going to be a long road of innovation that's going to be necessary to recast cybersecurity and enterprises for the future. Um we have a lot going on in that space right now because here and now the fight on how do you deal with the AI evolution that's occurring or revolution is probably more accurate. We've got a lot of cyber capabilities that need to improve just today. So, this is going to be a long road of innovation that's going to be necessary.

[00:10:46]>> Yeah, John, putting the competition with Starlink and and and and SpaceX aside, your wireline and wireless footprint is massive. Can you give us your sense of what the macro story feels like to you right now?

[00:11:00]>> The macro story is really good. I I read the same things that all of you read and I know that there are consumers that are feeling stressed and they articulate concerns about the economy, but their behavior is such that they they are still in the economy. Um certainly our products and services are so indispensable, we don't see a softness.

[00:11:19]Our one of our company objectives had been to be more complete in our portfolio so that we could participate more actively in driving share in the value segment, some of the more affordable price points. We stated that about 2 years ago and we are now starting to see traction on that. That's why that new account formation that I alluded to is as strong as it is because we're hitting price points in the market that maybe we haven't hit before. We've got the right kind of infrastructure to do that at an effective cost structure that we can make money doing that. Uh, but the customer is still willing to come in and buy. They're still paying us. We see a strong consumer and I don't expect to see that change anytime soon right now.

[00:12:02]>> All right. We will leave it there. John, great to have you this morning. Thanks so much.

[00:12:06]>> Ria, thanks for having me and >> All right. John Stankey is the chairman and CEO at AT&T. We'll be right back.