AT&T reported Q1 FY 2021 earnings results that beat analyst expectations. Revenue surpassed forecasts, up 7.6% from the year-ago quarter to $44.0 billion, reflecting partial recovery from the prior-year effects of the initial Covid-19 outbreak.
Higher revenues from WarnerMedia, Mobility (1.), Mexico, and Consumer Wireline more than offset declines in domestic video and Business Wireline and the sale of AT&T’s activities in Puerto Rico and the U.S. Virgin Islands.
Note 1. Mobility (aka Wireless) is AT&T’s largest and most important business, accounting for 43% of consolidated revenues, and fully 67% of pro-forma revenues post divestitures. Business and Consumer broadband wireline are also important segments for the telco, which is greatly expanding its fiber optic footprint. AT&T expects 1 million Consumer Fiber net adds for the full year 2021.
The telco added 789,000 net new postpaid wireless phone subscribers in the second quarter, a major turnaround from the 151,000 subscribers it shed in the year-ago quarter.
After showing such a strong recovery in second-quarter results at its wireless and media businesses, AT&T raised its full-year outlook. The company now expects 2-3% comparable sales growth this year, compared to an earlier forecast for 1 percent. This excludes the impact of the pending spin-off of DirecTV, which should be completed in the coming weeks.
However, everything was not all wine and roses for AT&T. Operating profit dropped to $3.3 billion from $3.5 billion a year ago, due to a bigger writedown on Vrio and higher programming costs from the return of sports.
Net adjusted profit increased to $1.5 billion from $1.2 billion, helped by financial gains, and adjusted EPS totaled 89 cents, up 7.2% year-on-year. Analysts had projected AT&T earnings of 79 cents a share on revenue of $42.64 billion. A year earlier, AT&T earned 83 cents a share on revenue of $41.1 billion.
Operating cash flow fell by around $1.1 billion from a year ago to $10.9 billion, with capex at $4.0 billion and content spend of $5.3 billion. Free cash flow totaled $7.0 billion. With net debt down by around $0.9 billion compared to March, AT&T finished the period with leverage of 3.15x adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
For the full year 2021, AT&T now expects adjusted EPS (Earnings Per Share) to grow in the low- to mid-single digits with capex at around $17 billion.
During its earnings call, AT&T CFO Pascal Desroches said the operator reached a “major inflection point in our consumer wireline business,” with broadband revenue growth now surpassing legacy declines.
“The story with Fiber remains much the same. We continue to see solid subscriber growth with most of those customers new to AT&T. And broadband revenues grew more than 8%. HBO Max continues to exceed our expectations. Having surpassed the lower end of our global subscriber target 6 months ahead of plan, we are now raising our expectations to 70 million to 73 million global subscribers by the end of the year. We also launched our domestic ad-supported version of HBO Max as well as our international offering in 39 Latin American territories at the end of the quarter. That sets us up for additional customer growth as our addressable market expand.”
“We expect profitability trends to improve,” he continued. “We saw they improved from Q1 to Q2 and we expect that to continue as we make our way through the back part of the year.”
“Our Fiber growth continues to be solid. We added 246,000 Fiber customers in the quarter. Broadband ARPU grew by 6.1% year-over-year. Our aggregate fiber penetration rate is now more than 36%, up from about 31% a year ago. And nearly 80% of net adds are new AT&T broadband customers. We’ve reached a major inflection point in our Consumer Wireline business. Broadband revenue growth now surpasses legacy declines.”
AT&T CEO John Stankey noted its consumer fiber subscriber base increased by more than 1 million customers since the same quarter a year ago. The operator ended the quarter with 5.43 million fiber customers, up from 4.32 million in Q2 2020.
Jeff McElfresh, CEO of AT&T’s Communications division, reiterated on the call it expects to reach 3 million new locations with fiber in 2021 and tipped this new build to spur accelerated net additions in Q3 and Q4.
“The first two quarters of this year have essentially been built selling into our aged fiber footprint from a prior build,” he said. “We are currently deploying some of the early stages of our next 3 million build that we disclosed for this year…the bulk of that inventory is going to come online towards the back half of the year. So my expectations are that our net add performance takes a step up as that inventory comes online.”
“We expect Dish to be successful in the market,” explained Jeff McElfresh, the CEO of AT&T Communications, which houses the company’s 5G and fiber operations. “And so the competitive dynamics aren’t changed here. Rather, we get to participate in their success at this point.”
“We’re going to enjoy some anchor tenant benefits from that,” he said of the company’s new deal with Microsoft. “We’re not disclosing any specific financial details, but one thing that we are not doing … We’re not outsourcing our core network functions. We are relying upon Microsoft to develop a scaled compute and storage capability at the edge while we retain control of our network stack and the kinds of services that we’re going to offer to the market.” McElfresh explained that the transaction will allow AT&T to focus on its services rather than the nitty gritty details of maintaining its network operations.
“It just continues to prove to be sustainable,” McElfresh said of AT&T’s free phone promotion, which has not dragged down AT&T’s earnings or profits. “We’ve remained consistent in our offer construct… This model is sustainable.”
Analyst colleague Craig Moffett of MoffettNathanson wrote:
When AT&T first embarked on their disastrous detour into the Media business, the wireless industry was in the throes of a brutal price war. It was hard to read the company’s moves as anything other than an intentional diversification away from wireless.
As it happened, the wireless industry started getting better right around the time that AT&T moved to buy Time Warner. That was no coincidence. AT&T’s need to focus on debt reduction at the time was the principal reason the industry pulled back from the brink.
Three years later, the wireless industry is still doing well. Industry subscriber growth across post-paid and pre-paid combined has soared to an improbable 5x population growth, and the very strong unit growth reported by AT&T and Verizon over the past two days suggests that it’s not slowing down for now.
Yes, AT&T’s solid growth comes with the asterisk of extreme promotions that are still suppressing EBITDA – AT&T’s EBITDA growth is lagging well behind Verizon’s, despite much faster unit growth. But, all in all, their results in Q2 were inarguably very strong.
But in jettisoning their Media and other non-core assets now, AT&T risks pivoting back to wireless at a time when this is as good as it gets. Competitive intensity in the wireless industry appears poised to be getting stronger (for all mobile carriers).
Just as AT&T, in retrospect, diversified away from Wireless at the bottom, are they diving back in at the top?
“It’s always difficult to parse the market reaction to such a tangle of businesses (we are looking forward to AT&T being a telecom company again),” wrote the financial analysts at New Street Research in a note to investors. “Taken together, the business that will constitute the future AT&T beat on revenue and subs (phone adds spectacular),” added the New Street analysts.
“AT&T added 789,000 postpaid phone subs in the quarter, well ahead of our 325,000 forecast, with the beat roughly evenly split between better gross adds and lower churn (0.69% vs our 0.80%), indicating that the company’s retention efforts continued to be effective in the quarter,” wrote the financial analysts with Evercore in a note to investors.
The ten-year agreement, which CNBC said was worth at least $5 billion, will serve as a back-up while the company rolls out its own mobile network. Dish has relied to date mainly on the T-Mobile network, as part of the deal signed last year to acquire Boost Mobile and other assets from T-Mobile following its merger with Sprint.
AT&T will also provide transport and roaming services, to support Dish’s 5G network roll-out. Dish said it is committed to becoming the fourth facilities-based carrier in the U.S. and is aiming to bring its cloud-native, OpenRAN-based 5G network to 70% of the population by 2023.
“With an MVNO deal past 2027, Dish can focus on denser markets and leave rural to AT&T,” said MoffettNathanson principal analyst Craig Moffett. “Dish desperately needs an MVNO to fall back on past 2027, because the economics of building to rural are awful, and a network that doesn’t have rural isn’t tenable.”
Tammy Parker, Senior Analyst at GlobalData, a leading data and analytics company, offered her opinion:
This deal is highly beneficial to AT&T as the company not only gains at least $5bn in revenue streams over the term of this ten-year agreement from new MVNO subscribers, it will also have access to DISH’s spectrum holdings to support DISH customers on the AT&T network. The NSA is not exclusive for either party, so both can go out and find new dance partners; however, given the depth and breadth of this agreement, that would appear both unlikely and unnecessary.
Both companies are poised to ride the US wireless industry’s ongoing growth wave. This is increasingly driven by the rollout of 5G, which enables faster network speeds, lower latency and new use cases, including Internet of Things services, that will result in many users having multiple wireless subscriptions. According to GlobalData’s latest forecasts, the number of unique mobile users in the US will increase by 5% over the next five years. Furthermore, total mobile subscriptions in the US will expand by more than 30% during that time and there will be nearly 692.6 million US mobile subscriptions by year-end 2026.
A fascinating part of this new arrangement is that it provides a glimpse into AT&T’s concerns regarding the possibility that DISH could sell out to another entity, perhaps even Amazon or Google. Rumors have abounded, even before DISH agreed to build its 5G network on Amazon Web Services’ (AWS) cloud platform, about possible negotiations between Amazon and DISH regarding the former’s potential use of DISH’s forthcoming 5G network to offer new services. Though there is nothing new to report there, this NSA stipulates that AT&T will be allowed to terminate the NSA in the event of a qualifying change of control of DISH. This could include a rival wireless provider, US cable company or ‘certain large technology companies’ taking over 50% more of the voting power or economic value of DISH. AT&T would still have to support DISH’s MVNO customers for up to two years after such a termination. “T-Mobile, and its Sprint network, is currently the primary MVNO partner for Boost and Republic. Ting operates on every nationwide network except AT&T. However, although DISH’s involvement saved T-Mobile’s acquisition of Sprint, the relationship between DISH and T-Mobile appears to have been fraught from the start. T-Mobile’s plans to shutter its 3G network by January 2022, leaving many of DISH’s customers without network service, has created an especially contentious standoff between the two companies, which likely helped pave the way for DISH’s new agreement with AT&T.”
Dish has 8.89 million retail wireless subscribers as of its last quarterly earnings report, while AT&T has more than 186 million mobile subscribers.
CNBC said that the pact is a potential precursor to a DirecTV-Dish merger since it brings AT&T and Dish closer together. Jonathan Chaplin, an analyst at New Street Research, said in a note to clients that one of the biggest obstacles to a merger has been the notion that “AT&T hates Dish.” Some of those bad feelings stem from the botched 2007 merger, when AT&T felt Ergen had reached a handshake deal and negotiated in bad faith, according to people familiar with the deal who asked not to be named because the discussions were private.
But the telecommunications world has dramatically shifted from 2007. AT&T is no longer run by Randall Stephenson, who stepped down as CEO last year. The wireless giant is reorganizing itself around 5G and fiber networks. AT&T could use the $5 billion Dish will give it over the next 10 years to pay down debt from its two enormous acquisitions of WarnerMedia and DirecTV.
While AT&T’s MVNO pact allows Dish to be a stronger competitor to AT&T, “getting access to Dish’s spectrum could help improve AT&T’s competitive position,” noted Chaplin, and facilitating a merger between DirecTV and Dish will help both companies.
Bringing together two competing satellite-TV providers — especially as both companies lose pay-TV customers each quarter as the world shifts to digital streaming television — would unlock billions in synergies, as satellites can be retired, duplicative jobs eliminated and competitive costs eradicated.
Still, regulators would need to feel comfortable that a Dish-DirecTV would be beneficial for consumers. While that remains uncertain, “it is a hurdle, not a barrier,” wrote Chaplin.
AT&T reports reaching at least 250 million people with low-band 5G, beating its milestone for its 5G network by six months. The carrier is also extending its 5G millimeter-wave infrastructure to 20 venues and areas in 38 cities. AT&T aims to deploy mmWave in 40 instances of each category this year, and has formed partnerships with companies such as Boingo Wireless to further 5G efforts in airports and other large indoor locations.
AT&T says it hopes its newly acquired 5G C-band spectrum (AT&T acquired 80 MHz of it during the most recent FCC auction) will cover 70 to 75 million Americans by the end of 2022, with the goal of increasing that number to 200 million by the end of 2023. Currently, AT&T says its standard 5G (aka sub-6GHz 5G) network covers more than 250 million people in the U.S., while its faster 5G+ network (aka mmWave 5G) is available in parts of 38 cities along with 20 stadiums and venues across the country. AT&T’s new mid-band spectrum will be faster than its low-band 5G, but slower than its lightning fast (but hard to find) 5G+.
AT&T says it’s completing the first successful C-band field test call. The carrier hopes to quickly deploy C-band spectrum when the first 40 MHz is made available to them later this year.
“Sports fans love watching the game, as well as the experiences surrounding it. AT&T 5G+ is advancing the fan experience by enabling enhancements that help make the games and their favorite players come alive. And when it comes to entertainment, our 5G network will allow viewers to be immersed like never before. Just like the thrill of a last second victory, bringing to life experiences that matter to our customers is an incredible feeling – that’s the power of advanced networks enabling advanced fandom.”
– Mo Katibeh, SVP, AT&T Network Infrastructure and Build
“It’s crucial for us to align with partners who share similar core values. We couldn’t be more in-sync as we are with AT&T. We can’t wait to give HEAT Nation a premiere fan experience through AT&T’s network and technology.”
– Eric Woolworth, President of Business Operations, The HEAT Group
AT&T says it’s giving its customers the full 5G experience now “through our continued network build, dynamic partnerships, drive to innovate and combination of spectrum. We’re providing the coverage, reliability, security and speeds that our customers deserve along with the ability to deliver the experiences and enable the innovation that’s important to them. AT&T’s 5G network is already giving our customers the full experience. And we’re just getting started.”
The true 5G experience can only be realized via 5G services, features and functions which are ONLY available with a 5G SA core network. AT&T, along with almost every other 5G network operator, has deployed 5G NSA which utilizes 4G LTE for everything other than the RAN (3GPP’s 5G NR). In particular, every 5G NSA deployment uses the 4G Evolved Packet Core (EPC) which can only deliver 4G services, features and functions.
Just one week after outsourcing their 5G SA/Core network software and IP to Microsoft (Azure public cloud), AT&T and Google Cloud announced new initiatives across AT&T’s 5G and Google Cloud’s edge computing portfolio, including AT&T’s on-premises Multi-access Edge Compute (MEC) solution, as well as AT&T Network Edge capabilities through LTE, 5G, and wireline.
For over a year, AT&T and Google Cloud have been developing edge solutions for the enterprise. Now, the two companies are taking the next step to deliver transformative capabilities that help businesses drive real value and build industry-changing experiences in retail, healthcare, manufacturing, entertainment and more — with the ability to use Google Maps, Android, Pixel, augmented reality (AR) and virtual reality (VR), and other solutions across Google for more immersive customer experiences. For example:
- Enabling video analytics services to help businesses across industries with theft prevention, crowd control, and queue prediction and management.
- In retail: Streamlining and automating inventory management, connecting brick-and-mortar, and ecommerce and backend systems for near real-time visibility into operations.
- In healthcare: Scaling access to services like telehealth-based therapy, using AR and VR for remote care either from patients’ homes or at an onsite facility.
- In manufacturing: Accelerating operations with remote support and quality control checks at plant locations, and optimizing bandwidth usage by streaming video on the edge rather than on-device.
- In entertainment: Enhancing in-venue experiences for concerts and sporting events, with solutions ranging from immersive AR and VR experiences, smart parking and ticketless entry, to contactless food and souvenir payment.
The companies are also working together to evaluate how network APIs could optimize applications, using near real-time network information at the Google Cloud edge. If successful, this would allow them to optimize the user experience at the edge and drive meaningful outcomes for businesses.
AT&T Multi-access Edge Compute (MEC) with Google Cloud combines AT&T’s existing 5G and fully managed MEC offering with core Google Cloud capabilities, including Kubernetes, artificial intelligence (AI), machine learning (ML), data analytics, and a robust edge ISV ecosystem. With the solution, enterprises can build and run modern applications close to their end users, with the flexibility to manage data on-prem, in a customer’s data center, or in any cloud. All this can help customers to increase control over data, improve security, lower latency and provide higher bandwidth.
AT&T Network Edge (ANE) with Google Cloud will enable enterprises to deploy applications at Google edge points of presence (POPs), which will be connected to AT&T’s 5G and fiber networks. In this low-latency compute and storage environment, businesses can deliver faster, more seamless enterprise and customer experiences. AT&T and Google Cloud are focusing on a multi-year strategy to bring the solution to 15+ zones across major cities, starting with Chicago this year. We expect to roll out the solution next in Atlanta, Dallas, Miami, and San Francisco.
“By combining the power of AT&T 5G and Google Cloud technologies, we are helping enterprises create new customer experiences and business services that were previously impossible,” said George Nazi, Vice President, Global Telecom, Media and Entertainment Solutions, Google Cloud. “Together with AT&T, we are committed to enabling our customers to build and deliver next-generation applications, whether on-premise or on AT&T’s leading mobile network.”
“With premises-based 5G and network edge computing, we give our customers even greater control of where their data goes and how they use it – at higher speeds and with lower latency. These capabilities allow businesses to deliver unique experiences to their customers, today and into the future,” said Rasesh Patel, Chief Product and Platform Officer, AT&T Business. “We’re bringing forth a new era where the latest technological advancements, including 5G and edge computing, make it possible to transform, innovate and prepare for whatever the future holds.”
“5G, cloud services and edge compute each have a tremendous amount of promise as standalone technologies,” says Jason Leigh, research manager for 5G and Mobile Services Research at IDC. “But coupling these three as complimentary, enabling technologies both accelerates and extends the promise of digital transformation in many more business settings.”
You can learn more about AT&T’s work in on-premises edge computing here, and network-based edge computing here. To learn more about Google Cloud’s work driving transformation and 5G adoption, visit here.
AT&Ts collaboration with Google extends beyond business and reaches the hands of the consumer. Together, the two companies are combining the power of AT&Ts 5G and fiber networks with Google cloud gaming platform.
Comment: It’s quite interesting that AT&T has outsourced its 5G SA core network to Microsoft Azure, but is using Google Cloud for edge computing for its 5G and fiber optics networks. AT&T claims a cohesive cloud strategy, but the network operator’s various alliances with cloud providers are confusing, according to Kathryn Weldon, research director at GlobalData. AT&T previously announced 5G edge partnerships with IBM, Microsoft, Accenture, Hewlett Packard Enterprise, and Deloitte.
The different goals AT&T hopes to achieve with each cloud or edge vendor and how they will jointly provide specific aspects of edge computing for each remains unclear, Weldon said.
“There have been so many announcements regarding operators’ relationships with hyper-scalers for 5G edge that it would be helpful to get really specific about use cases. The immersive experience examples are a bit generic. It’s time for actual customer use cases to be cited, even if they are only in trial,” she wrote in a report. Google Cloud and AT&T said joint customers will gain near real-time access to features packed into Google’s cloud and some of its most popular services.
“While the new initiatives leverage more Google capabilities, the announcement begs the question as to what things the partners have been working on for the last year. It isn’t clear why the listed Google elements could not have been brought in before,” Weldon added.
AT&T will run its 5G SA Core network on Microsoft’s Azure public cloud computing platform. Microsoft AZURE, which is the second largest cloud computing provider by revenue behind rival Amazon Web Services, has been building out specific cloud computing offering to attract carriers. AT&T is Microsoft’s first major deal in the 5G SA Core network space.
The two giant companies said that Microsoft will purchase software and intellectual property developed by AT&T to help build out its offerings for carriers. The companies did not disclose the terms of the deals, but said that Microsoft will make job offers to several hundred AT&T Network Cloud engineers.
Microsoft will use AT&T’s software and IP to grow its telecom flagship offering, Azure for Operators. Microsoft is acquiring AT&T’s carrier-grade Network Cloud platform technology, which AT&T’s 5G core network (when completed) will run on.
The companies disclosed a few key details about their new deal, but did not provide any firm numbers or any financial arrangements/guidance:
- Microsoft will “assume responsibility for both software development and deployment of AT&T’s Network Cloud immediately,” according to the companies, and will transition AT&T’s existing network cloud operations into Azure over the next three years. Eventually, all of AT&T’s mobile network traffic will run over Microsoft’s Azure.
- The effort will start with AT&T’s 5G core, but will eventually include virtually all of the company’s network operations, including its 4G core.
- Microsoft will be the company to certify all of AT&T’s software-powered network operations for inclusion in the AT&T network. That will include software from other vendors. AT&T has not yet named its 5G core network vendors.
- Microsoft will acquire AT&T’s Network Cloud technology – including its AT&T engineering and lifecycle management software – and its cloud-network operations team. The companies did not disclose exactly how many AT&T employees that transaction might cover, but an AT&T official suggested it will be in the “low hundreds.” Microsoft will then incorporate AT&T’s intellectual property into its Azure for Operators offering, which is for sale to other 5G network operators.
- Microsoft and AT&T did not provide the logistics of their deal, including exactly how many Azure computing locations might be necessary to power AT&T’s network. It’s an important issue considering AT&T’s cellular network spans an estimated 70,000 cell towers across the country, and the operation of the radios on top of those towers might eventually be handled by programs running inside of Microsoft’s cloud. A top Microsoft executive involved in the deal told Light Reading that Microsoft’s Azure software will be installed into some of AT&T’s existing computing locations. Several of those compute server locations are staffed by AT&T technicians.
- AT&T said the company plans to continue to run its network workloads inside of its own data centers and facilities. However, AT&T added that the deal today is focused on AT&T’s 5G core network and that the companies might explore additional elements of the network such as Open Radio Access Network (O-RAN) technology over the course of the agreement.
Sidebar: 5G SA Core networks to run on cloud service provider platforms:
- In late April, Dish Network made a similar deal to have Amazon run its 5G core network on AWS.
- In late May, Telefónica said it had validated AWS Outposts as option for 5G SA core deployment in Brazil.
- Earlier this week, TIM said it was building its 5G SA Core network on “Google’s cloud solutions” (whatever that means?)
Do you think the cloud service providers will essentially take over the implementation, operations, and maintenance of 5G SA Core networks, especially since they will likely all be “cloud native.” Please post a comment in the box below this article to express your opinion and why. Thanks!
“This deal is not exclusive, so I fully expect Azure will try to assert itself as the telecom cloud provider for many carriers around the world,” said Roger Entner of Recon Analytics LLC.
“It’s the first time a Tier One operator has trusted their existing consumer subscriber base to hyper-scaler technology,” Microsoft’s Shawn Hakl, VP of the company’s 5G strategy, told Light Reading. Before joining Microsoft in 2020, Hakl was a longtime Verizon executive.
The deal follows a $2 billion agreement in 2019 in which AT&T said it would start using Microsoft’s cloud for software development and other tasks. At that time, AT&T said it would continue to run its core networking functions in its own private data centers.
Andre Fuetsch, AT&T’s chief technology officer, said that shifting to a public cloud vendor will let AT&T take advantage of a larger ecosystem of software developers who are working on technologies such as wringing more use out of pricey 5G spectrum or creating new features for users. “That’s what we at AT&T want to do, and we think working with Microsoft gives us that advantage,” Fuetsch told Reuters in an interview.
“AT&T has one of the world’s most powerful global backbone networks serving hundreds of millions of subscribers. Our Network Cloud team has proved that running a network in the cloud drives speed, security, cost improvements and innovation. Microsoft’s decision to acquire these assets is a testament to AT&T’s leadership in network virtualization, culture of innovation, and realization of a telco-grade cloud stack,” said Andre Fuetsch, executive vice president and chief technology officer, AT&T. “The next step is making this capability accessible to operators around the world and ensuring it has the resources behind it to continue to evolve and improve. And do it securely. Microsoft’s cloud expertise and global reach make them the perfect fit for this next phase.”
Microsoft intends to use the newly acquired technology – plus the experience gained helping AT&T run the network – to build out a product it calls Azure for Operators, which it will use to pursue 5G core network business from telecommunications companies in the 60 regions of the world where it operates.
AT&T added 235,000 fiber connections in the first quarter, ending the period with nearly 5.2 million total fiber customers. AT&T says they have a total of around 15 million fiber and non-fiber customers, so fiber access is approximately 1/3 of total customers now.
The company recently announced it plans to build fiber to 3 million new customer locations this year and 4 million next year. AT&T plans to double the number of locations where it offers fiber Internet, from approximately 15 million to about 30 million, by 2025. To do that, AT&T is planning to increase its annual capital expenses from $21 billion to around $24 billion.
AT&T’s new focus on connectivity over content is a direct result of its spinning off Warner Media to Discovery, as we chronicled in this IEEE Techblog post. Thaddeus Arroyo, head of AT&T’s consumer business, made that crystal clear at a recent BoA investor event:
“We expect capital expenditures of about $24 billion a year after the Warner Media discovery transaction closes. That’s an incremental investment that’s going to go to fiber to 5G capacity and 5G C-band deployment.
We have another great opportunity, the one we continue to talk around fiber. So as part of this capital, we’re going to be investing in fiber expansion to meet the growing needs for bandwidth that require a much more robust fiber network regardless of the last mile serving technology. Fiber is the foundation that fuels our network. Expanding our fiber reach serves multiple services hanging off at each strand of fiber. It includes macro cell sites, small cell sites, wholesale services, enterprise, small business, and fiber that’s extended directly into our customers’ homes and into businesses.
We plan to reach 30 million customer locations passed with fiber by the end of 2025. That’s going to double our existing fiber footprint. And investing in fiber drives solid returns because it’s a superior product. Where we have fiber we win, we’re improving share in our fiber footprint, and the penetration rates are accelerating and growing, given our increased financial flexibility. We’re comfortable in our ability to invest and achieve our leverage targets that we outlined of getting to 2.6% at close and below 2.5% by the end of 2023.”
Mo Katibeh, the AT&T executive responsible for fiber and 5G build-outs, added on via a recent post on LinkedIn: “We are building MORE Fiber to MORE homes and businesses. And we’re talking A LOT of fiber – MILLIONS of new locations every year, planning to cover 30 MILLION customer locations by the end of 2025! And you know what comes with all that investment in America? JOBS. Our AT&T Network Build team is GROWING..”
Previously, Katibeh wrote on LinkedIn : “Contributing to a large portion of the $105B Capital spend between 2016 and 2020 – our team is building out AT&T #Fiber to MILLIONS of new customer locations in 2021, as well as augmenting America’s best mobility network with more capacity, more speed – and more #5G (you know I love 5G!).”
So with all that said, will AT&T’s fiber build-out keep pace with cable companies/MSOs DOCSIS networks?
Tom Rutledge, Charter’s CEO, made a brief comment about plant upgrades on the earnings call (note – Dave Watson made similar comments on the Comcast earnings call):
“We’re continuously increasing the capacity in our core and hubs and augmenting our network to improve speed and performance at a pace dictated by customers in the marketplace. We have a cost-effective approach to using DOCSIS 3.1, which we’ve already deployed, to expand our network capacity 1.2 gigahertz, which gives us the ability to offer multi-gigabit speeds in the downstream and at least 1 gigabit per second in the upstream.”
According to Leichtman Research Group, the top cable companies had 68 million broadband subscribers, and top wireline telecom companies had 33.2 million subscribers at the end of 2019.
“Based on the currently available information, cable stole wired broadband market share in Verizon and AT&T markets as well. Oy vey!” said Jim Patterson of Patterson Advisory Group in his May 2, 2021 newsletter. “Think about Comcast and AT&T as having roughly the same number of homes passed (AT&T probably closer to 57 million homes versus the nearly 60 million shown for Comcast),” he added. Patterson noted that top cable companies Comcast, Charter and Altice managed to capture 86% of broadband customer growth in the U.S. in the first quarter of this year.
“(AT&T) fiber connections simply aren’t growing fast enough to keep up,” wrote colleague Craig Moffett of MoffettNathanson in a recent note to clients. Here’s more:
To be sure, there are questions about the extent to which these deployments will overlap cable (or will instead be focused on unserved rural communities), and the extent to which labor and supply chain contraints might limit acheivability of announced targets. Still, taken together, these deployments suggest that, after a precipitous decline in new fiber construction in 2020, planned fiber deployments do, indeed, rise over the next two years; we expect that both 2021 and 2022 will represent new all-time peaks in total number of fiber homes passed. Typically, the competitive impact from overbuilds is felt with some lag, suggesting the impact on cable operators will peak in 2024/2025.
At the same time, we expect that federal stimulus to accelerate broadband market growth in 2021 and 2022, perhaps significantly, with new household formation, in particular, driving upside to 2021 and 2022 forecasts.
Longer term, however, Cable operators will have to contend with more fiber overbuilds, as TelCos increasingly see both more favorable economics for fiber deployment and increasingly acknowledge that their copper plant faces imminent obsolescence without it. The forecasts for fiber deployment in this note suggest that 2021 will be a record for fiber construction – assuming labor and materials capacity can accommodate the TelCos’ own forecasts – and 2022 will step up higher still. After that, deployments are expected to abate, at least to a degree.
“Cable can upgrade its plant quickly and at low cost to offer at least 4.6Gbit/s down and 1.5Gbit/s up, well beyond current fiber offerings. They can do this before the move to DOCSIS 4.0, which is still years off,” wrote the financial analysts at New Street Research in a recent note to investors. The result, according to the New Street analysts, is that fiber providers like AT&T won’t necessarily be able to dominate the fiber market with a 1 Gbit/s FTTH/FTTP connection and take market share from cable incumbents.
“Cable will face new fiber competition in more of its markets over the next few years; however, there is little to no prospect of fiber delivering a service in those markets that cable can’t easily match or beat,” New Street concluded.
“Looking back and being a little critical, we probably allowed the cable companies to execute and to take share in that market in a significant way,” AT&T CFO Pascal Desroches said at a recent Credit Suisse investor event.
AT&T executives have said that the company’s fiber investment ultimately will generate internal returns of around 15%. Desroches said that return on investment will be due to a variety of factors. Fiber “supports not only consumer needs, it supports needs for our enterprise businesses as well as needs for potentially our reseller business. So being able to look across and integrate the planning for fiber deployment such that it not only serves consumer needs, but it serves these other market adjacencies as well is something that we haven’t been very good at historically, That’s why we’re really bullish and we believe we’re going to be able to execute really well here,” AT&T’s CFO concluded.
With great fanfare, AT&T thundered its way into the media business three years ago with grand visions of streaming video to millions of its customers’ cellphones, etc. Now the telecom and media giant implicitly admits its mistake: AT&T has agreed to spin off its Warner Media group and merge it with a rival content provider, Discovery Inc., the companies announced today.
[We hinted that this might happen in a recent article titled, “Verizon Explores Sale of Media Assets; Wake up Call for AT&T?” We also chronicled AT&T’s spin off of their TV business in the article titled: Analysis: AT&T spins off Pay TV business…. Finally, we voiced our objection to the June 2018 AT&T-Time Warner deal in Analysis & Huge Implications of AT&T – Time Warner Merger.]
The transaction will combine HBO, Warner Bros. studios, CNN and several other cable networks with a host of reality-based cable channels from Discovery, including Oprah Winfrey’s OWN, HGTV, The Food Network and Animal Planet.
The new company will join together two of the largest media businesses in the country. AT&T’s Warner Media group includes the sports-heavy cable networks TNT and TBS. In addition to Discovery’s strong lineup of reality-based cable channels, the company has a large international sports business.
The new company will be bigger than Netflix or NBC Universal. Together, WarnerMedia and Discovery generated more than $41 billion in sales last year, with an operating profit topping $10 billion. Such a sum would have put the new company ahead of Netflix and NBCUniversal and behind the Walt Disney Company as the second-largest media company in the United States.
Under the terms of the agreement, which is structured as an all-stock, Reverse Morris Trust transaction, AT&T would receive $43 billion (subject to adjustment) in a combination of cash, debt securities, and WarnerMedia’s retention of certain debt, and AT&T’s shareholders would receive stock representing 71% of the new company; Discovery shareholders would own 29% of the new company. The Boards of Directors of both AT&T and Discovery have approved the transaction.
As part of the deal, AT&T will be able to shed some of its debt and get some cash and bonds that altogether would amount to $43 billion. AT&T shareholders will own 71 percent of the new business, with Discovery investors owning the rest.
The new company will be run by David Zaslav, 60, a media veteran and the longtime chief executive of Discovery, casting into doubt the future (yet again) of the top ranks of WarnerMedia. Jason Kilar, 50, who was hired to run AT&T’s media group only last year, could lose his job.
“Jason is a fantastic talent,” Mr. Zaslav said on a call with reporters following the announcement. He also praised other executives within WarnerMedia, including Toby Emmerich, the head of the film division, Casey Bloys, who runs HBO, and Jeff Zucker, the leader of CNN. Mr. Zucker and Mr. Zaslav are also longtime golfing buddies.
Mr. Zaslav said he would be looking for ways to “get the best people to stay,” but he didn’t elaborate on his plan for the new company’s management team.
John Stankey, the head of AT&T, who appeared alongside Mr. Zaslav in the news conference via Zoom, said “Jason remains the C.E.O. of WarnerMedia.” He added: “David’s got decisions he’s got to make across a broad cross section of how he wants to organize the business and who will be in what roles moving forward during this transition period.”
The companies said they expected the deal, which must be approved by Discovery shareholders and regulators, to be finalized in the middle of next year. The companies anticipate they will cut annual costs by $3 billion as a result of the transaction. AT&T will also cut its dividend (more below).
The deal highlights the need for even large media companies to get bigger. Traditional entertainment firms are struggling to maintain their grip on viewers as the likes of Facebook, YouTube and TikTok
continue to draw big audiences. Consolidation appears to be the quickest way to buy more eyeballs — the deal could set off another round of media mergers. ViacomCBS, the smallest of the major entertainment conglomerates, is often seen as a possible target.
To compete with Netflix and Disney, both AT&T and Discovery have invested heavily in streaming. AT&T has spent billions building HBO Max, which now has about 20 million customers. Discovery has 15 million global streaming subscribers, most of them for its Discovery+ app.
The new company expects to generate $52 billion in sales and $14 billion in pretax profit by 2023. Streaming will be a big driver of that growth and is estimated to bring in $15 billion in revenue.
Our analyst colleague Craig Moffett wrote in a note to clients:
This deal makes strategic sense for each side. Discovery’s linear networks are helped by the inclusion of CNN for news and by the inclusion of TV rights to the NBA, NFL, MLB and NCAA Basketball for sports. By our math, the new company will instantly become the largest home of linear impressions, sourcing 28% of the 2020 U.S. viewing time and 24% of U.S. national advertising. Better still, it will be under-monetized, as it will generate only 20% of national affiliate fees. While we rightly worry about the long-term health of TBS and TNT, we would assume that Discovery will move key Turner sports and news content to Discovery+, to make it a broader and more attractive offering which will help
their ability to grow those more valuable impressions. Internationally, Discovery’s linear and SVOD offerings will be strengthened by the inclusion of CNN and Cartoon Network into their offerings. Simply put, Discovery+ becomes a more relevant service for a wider group of people in the world.
For WarnerMedia, they benefit from having a more natural destination for Turner’s product in a DTC world. We have noted time and time again that TNT and TBS were poorly positioned, and appeared to have no clear path forward to a DTC world. We have similarly lamented that HBO Max, while immensely attractive to U.S. audiences, were not nearly so well positioned outside the U.S. Discovery’s international footprint and focus creates both an accelerator and greater scope for HBO Max’s international rollout.
The new company will now be able to have unified conversations with the same set of global distribution partners – Roku, Amazon, Apple, wireless operators, broadband services – with greater strength and urgency. We assume that both brands Discovery+ and HBO Max will maintain separate identities but will be offered in a bundle a la Disney. In short order, the new company will be able to join the upper tier of global SVOD/AVOD players: Netflix, Disney and Amazon.
For AT&T, while the timing was surprising, the action was not. The market was never going apply a Disney-like multiple (say, by using on 2024 revenue multiple for HBO Max) that would give AT&T full sum-of-the-parts credit for the potential value of HBO Max. Moreover, AT&T’s balance sheet allowed neither the aggressive investment required for HBO Max nor the 5G wireless push (nor, for that matter, for the consumer fiber business). Ultimately, they had no choice. The die was cast even before the ink was dry on their initial acquisition.
Not at all unexpected, AT&T said its 52-cent-a-share dividend would be cut if its merger of Warner Media and Discovery is approved. AT&T’s dividend’s health had been in question given a debt load that was exacerbated by the company’s 2018 acquisition of the WarnerMedia assets, which include TNT, CNN, HBO, and the Warner Bros. movie studio. As of March 31st, long-term debt totaled about $160.7 billion, up from $153.8 billion at the end of 2020.
In an interview with CNBC Monday morning, AT&T CEO John Stankey said “there’s been some overhang on our equity that’s been driven by the balance sheet dynamic,” notably debt. The deal will allow AT&T to “accelerate our deleveraging of the business,” he added
Just two weeks after Verizon won a 5G Private Network contract in the UK, AT&T now says that Private 5G Networks are coming soon to your office or campus. AT&T’s Rita Marty wrote in a blog post that many companies want “5G in a private space.”
“We’ve done exactly that at AT&T Stadium in Dallas. Fans will get experiences like live stats projected over the field on their smartphone camera.”
“Some organizations want a truly private, standalone 5G system. They envision full control of a “local area network” similar to corporate Wi-Fi, but with the performance, reliability and security of cellular. Nellis Air Force Base in Nevada is testing one flavor: a 5G-powered command-and-control center on a trailer. It will form the hub of a moveable, private cellular network for local personnel in a conflict area.
Ms. Marty alluded to network slicing and edge computing in her blog post. Those are two ultra hyped technologies that have yet to be deployed at scale by any 5G network operator.
“Other organizations are enhancing their 5G coverage with the ability to control specific local traffic themselves. They can peel off (via network slicing) certain data flows for “edge computing.” This means alarms in a factory, for instance, could be processed right on the premises – and thus much more quickly. MxD, a manufacturing innovation center in Chicago, is showing how fractions of seconds can help solve quality, safety and inventory issues.
Network slicing allows 5G network operators to create different sub-networks (which can be private) networks with different properties. Each sub-network slices the resources from the physical network to create its own independent, no-compromised network for its preferred applications. It requires a 5G standalone core network, the implementation of which has not been standardized and AT&T has yet to deploy.
Most of AT&T’s activities in mobile edge computing and private 5G networks are in trials and testing. AT&T is working to bring enhanced capabilities to their edge computing solutions by testing AT&T Network Edge (ANE) with cloud providers. AT&T says ANE’s potential benefits include:
- Lower latency: Deliver low-latency connectivity to high performance compute
- Network routing optimization: Network integration with cloud providers
- Extended cloud ecosystem: AT&T intends to develop an extended ANE ecosystem, allowing customers to use cloud services like they do today.
Image Credit: AT&T
Private networks also need careful thought and consultation, Ms. Marty stated. “Considerations include design, spectrum, and who’s going to actually run it. Even a standalone network, and even 5G, must be set up properly to achieve the highest security against cyberattacks,” she added.
5G Security Conundrum:
As leader of AT&T’s 5G security team, Ms. Marty has her work cut out for her. Especially considering choosing which of the 3GPP 5G SA security specs to support. Many of them are not complete and targeted for 3GPP Release 17. Also, European network operators have taken different approaches to 5G security and this will likely be a global phenomenon.
The real work on 5G security is being done by 3GPP with technical specification (TS) 33.501 Security architecture and procedures for 5G system being the foundation 5G security document. That 3GPP spec was first published in Release 16, but the latest version dated 16 December 2020 is targeted at Release 17. You can see all versions of that spec here.
3GPP’s 5G security architecture is designed to integrate 4G equivalent security. In addition, the reassessment of other security threats such as attacks on radio interfaces, signaling plane, user plane, masquerading, privacy, replay, bidding down, man-in-the-middle and inter-operator security issues have also been taken in to account for 5G and will lead to further security enhancements.
Another important 3GPP Security spec is TS 33.51 Security Assurance Specification (SCAS) for the next generation Node B (gNodeB) network product class, which is part of Release 16. The latest version is dated Sept 25, 2020.
Here’s a chart on 3GPP and GSMA specs on 5G Security, courtesy of Heavy Reading:
Scott Poretsky, Ericsson’s Head of Security, wrote in an email:
“The reason for the inconsistent implementation of the 5G security requirements is the language in the 3GPP specs that make it mandatory for vendor support of the security features and optional for the operator to decide to use the feature. The requirements are defined in this manner because some countries did not want these security features implemented by their national telecoms due to these security features also providing privacy. The U.S. was not one of those countries.”
AT&T is opening a lab in Plano, Texas, to research 5G use cases with help from Nokia and Ericsson. AT&T says the 5G Innovation Studio will provide a venue for developing next-generation products, such as holographic communications and drone services, and cutting down on their time to market.
The studio is outfitted with AT&T 5G connectivity, using its millimeter wave and sub-6 GHz spectrum. It also boasts standalone 5G core network (5G SA) and edge capabilities, along with network KPIs to enable creation, testing and validation of new 5G experiences.
AT&T VP of 5G Product and Innovation Jay Cary disclosed the Lab in this video. The goal of the Lab is to help bring products to market faster, providing a space where customers can explore and try out tech using advanced network capabilities. Along with current and potential customers, and Ericsson and Nokia, industry players like Microsoft will be involved, as well as smaller companies according to Raj Savoor, VP of Network Analytics and Automation at AT&T (formerly with AT&T Labs in Pleasanton, CA).
“Startups are a big part of the innovation ecosystem, and in fact, one of the first use cases was in collaboration with the drone infrastructure startup, EVA,” Savoor wrote in an email.
“We deployed a test environment representative of our Microsoft Azure Edge Zone with AT&T, which provided a low-latency path between the drone and the compute environment. This allowed much more responsive control over the drone’s flight path and is just one example of what’s possible when you combine 5G with edge computing,” Raj added.
“To really bring to life the unforeseen possibilities of 5G, we’ve partnered with Ericsson and Nokia who are helping us build out the technology and really the environment we need to be able to deliver those end-to-end consumer experiences that are really going to wow you and me when we see them on our phones,” Cary said.
Separately, AT&T’s 5G+ [1.] will be available for customers to experience during Houston Rockets games and other events at the Houston Toyota Center.
First responders in Houston will also gain access to 5G+ on FirstNet®, America’s public safety network. They will maintain voice communication through always-on priority and preemption on 4G-LTE and the intuitive FirstNet network will determine the best route for data traffic, whether that’s 5G+ or 4G-LTE spectrum.
Note 1. AT&T’s 5G+ is the version of its 5G that uses millimeter wave (mmWave) spectrum. A 5G capable device that supports mmWave frequencies is needed to get access. [Note that the mmWave frequencies for IMT/5G have not yet been standardized in ITU-R M.1036 Recommendation.]
AT&T stipulates that it may temporarily slow data speeds if the network is busy. The move falls in line with AT&T’s strategy of treating existing customers similarly to new ones.
AT&T 5G+ is available in parts of 38 cities and more than 20 venues across the U.S. Learn more about AT&T’s 5G network at att.com/5gforyou and check out AT&T’s 5G coverage in the Houston area and across the Gulf coast of Texas here.
Here are the highlights of AT&T Investor Day Announcements:
3 million new fiber locations:
AT&T plans to deploy fiber-to-the-premises (FTTP) to another 3 million-plus residential and business locations across more than 90 metro areas in 2021, and is already sizing up plans to push that to an additional 4 million locations in 2022, Jeff McElfresh, CEO of AT&T Communications, said today during the company’s investor day event.
“The margin economics are attractive. These areas are adjacent to our current footprint, driving cost efficiencies in our build as well as our marketing and distribution efforts.”
McElfresh expects its fiber subscriber volumes increase in the second half of the year after the initial buildouts, but noted that he likes what AT&T is seeing in the early part of 2021. The company noted that about 70% of its gross broadband adds in fiber buildout areas are new AT&T customers.
“And if we keep up with that pace, our vision would be to have over half of our portfolio, or 50% of our network, covered by that fiber asset. As our integrated fiber plan improves the yield performance on that fiber it will further give us conviction on continuing that investment in the coming years.”
AT&T is also looking to broaden its reach of fiber amid rising data demand and network usage that has occurred during the pandemic, and isn’t expected to stop any time soon. That’s shown in the graph’s below:
AT&T’s 5G Strategy:
AT&T’s 5G network now covers 230M Americans in 14,000 cities and towns and AT&T 5G+ is now available in parts of 38 cities in the U.S.
Note: AT&T may temporarily slow data speeds if the network is busy.
“Connectivity is at the heart of everything we do – 140 years and counting. From our fiber network backbone to the layers of wireless spectrum technology, we provide 5G network coverage that delivers the speeds, security and lower latency connections that customers and businesses need,” said Jeff McElfresh, CEO – AT&T Communications. “Over the past five years, AT&T has invested more capital in the U.S. than any other public company.”
Here is what the company said about its 5G Strategy:
AT&T has planned a balanced approach to 5G. Our strategy of deploying 5G in both sub-6 (5G) and mmWave (5G+) spectrum bands provides a great mix of speeds, latency and coverage for consumers and businesses. We rolled out nationwide 5G that now covers 230 million people, and offer 5G+ providing ultra-fast speeds to high-density areas where faster speeds can have huge impacts for our customers. So far, AT&T has deployed 5G+ nodes in parts of 38 cities across the U.S.
AT&T 5G is opening up some impressive opportunities for businesses and consumers and mid-band and mobile edge computing will help us go even further. There is an emerging multi-sided business model across 5G, edge computing and a variety of use cases from healthcare to gaming.
Our mobile edge computing plus 5G network will help satisfy the need for ultra-responsive networks and open up new possibilities for consumers and businesses. With our investments, we will take advantage of new technologies like spatial computing to enable applications across industries from manufacturing automation to watching immersive sports.
C-band spectrum deployment to begin in 2021:
- AT&T acquired 80 MHz of C-band spectrum in the FCC’s Spectrum Auction 107. The company plans to begin deploying the first 40 MHz of this spectrum by the end of 2021.
- AT&T expects to spend $6-8 billion in capex deploying C-band spectrum, with the vast majority of the spend occurring from 2022 to 2024. Expected C-band deployment costs are already included in the company’s 2021 capex guidance and in its leverage ratio target for 2024.
- AT&T expects to deliver 5G services over its new C-band spectrum licenses to 70 to 75 million people in 2022 and 100 million people in “early” 2023.
- Funding C-band spectrum: AT&T’s investment in C-band spectrum via Auction 107 totals $27.4 billion, including expected payments of $23 billion in 2021.
- To meet this commitment and other near-term priorities, in 2021 the company expects to have access to cash totaling at least $30 billion, including cash on hand at the end of 2020 of $9.7 billion, commercial paper issued in January 2021 of $6.1 billion and financing via a term loan credit agreement of $14.7 billion.
Jeff McElfresh, CEO of AT&T Communications, explained the operator’s focus on both 5G and fiber: “Our value proposition is to serve customers how they want to be served with enough bandwidth and capacity and speed, and we’ll let the technology service architecture meet that demand or that need.”
“When you get up into the midband segment of spectrum, while it offers us really wide bandwidth for speed and capacity, its coverage characteristics don’t penetrate [buildings and other locations] as effectively as the lowband does,” he said. “And so as we design our network and our offers in the market, you will see us densify our wireless network on the top of our investments in fiber.”
–>Yet McElfresh didn’t really address how AT&T Communications would overcome those challenges.
Financial Targets and Guidance:
- End-of-year 2021 debt ratio target of 3.0x. The company expects to end 2021 with a net debt-to-adjusted EBITDA ratio of about 3.0x,3 reflecting an anticipated increase in net debt of about $6 billion to fund the C-band spectrum purchase.
- 2024 debt ratio of 2.5x or lower. During 2024, AT&T expects to reach a net debt-to-adjusted EBITDA ratio of 2.5x or lower.3 To achieve this target, the company expects to use all cash flows after total dividends to pay down debt and will continue to look for opportunities to monetize non-strategic assets. The company also does not plan to repurchase shares during this period.
- 2021 guidance unchanged. AT&T’s 2021 financial guidance, announced in January 2021, is unchanged on a comparative basis. For the full year, the company continues to expect:
- Consolidated revenue growth in the 1% range
- Adjusted EPS to be stable with 20204,5
- Gross capital investment6 in the $21 billion range, with capital expenditures in the $18 billion range
- 2021 free cash flow7 in the $26 billion range, with a full-year total dividend payout ratio in the high 50’s% range