AT&T earnings: ‘We feel really good about our overall performance,’ CFO says

AT&T CFO Pascal Desroches joins Yahoo Finance Live to discuss company earnings, free cash flow falling short of expectations, the state of the consumer, and competition in the telecom space.

Video transcript

- AT&T shares are slipping today after the telecom giant reported slowing growth in postpaid phone subscribers for the first quarter, although the number did beat estimates. It also saw free cash flow fall short of expectations. AT&T CFO Pascal Desroches Roche joins us now alongside Yahoo Finance's executive editor, Brian Sozzi. Pascal, it is good to see you, as always.

So as we said, you're seeing that slowing growth--

- Good morning.

- Good morning. You're seeing that slowing growth in postpaid phone subscribers. It did beat estimates. But talk to me about that business in particular and give us a temperature check, if you will, on it right now.

PASCAL DESROCHES: I couldn't be more proud of our team. This is the 11th straight quarter where we delivered over 400,000 net adds. And the thing to keep in mind is overall, the industry continues to grow coming off of two really strong years of growth. And not only are we growing subscribers, the thing to keep in mind is that you're also seeing the quality of those subscribers come through where we have among the highest RPU in the industry as well as the lowest churn. All that is resulting in wireless service revenue growth of over 5% for the quarter, and the business grew profits 8%. So we feel really good about the overall performance of that business.

BRIAN SOZZI: Pascal, Brian here. Good to see you again. So the free cash--

PASCAL DESROCHES: Good seeing you, Brian.

BRIAN SOZZI: Good to see you, yes. The free cash flow missed estimates, but you came out here and reaffirmed your outlook for free cash flow. How do you see things evolving over the next three quarters to hit that point?

PASCAL DESROCHES: Here is the thing, Brian. Free cash flow came in right in line with our expectations. I said at the beginning of the year that I expected free cash flow to progressively get better as we've made our way through the year, specifically because our capital spend was going to be front-end loaded.

Our spending on devices was going to be front-end loaded as well as the annual incentive comp cycle. All those things make Q1 a low watermark for free cash flow. It will progressively get better from here. And it's really mechanics of the magnitude of those three disbursements. They normalize out during the balance of the year.

- Hey, Pascal. Brad here. One thing that we're trying to get a better read on over the course of this earnings season as well is the health of the consumer. We've had bank CEOs come out and say that the consumer is healthy, but one of the data points that you're kind enough to continue to give us updates on is what the delinquencies look like from your customers. Can you give us an update on that metric? What are you seeing among subscribers right now in their payment frequency and cadence?

PASCAL DESROCHES: Sure thing. Here's what I would say. We have actually seen delinquency patterns that all pretty much continue to trend consistent with what we saw the second half of last year. So there is no discernible change there. The only change we're seeing modestly is a moderation of our growth. But when you take a step back, the industry is still growing. It's just a moderation of the pace of growth.

- Take it back to free cash flow for just a second here, because as you SAID it was what you expected, but clearly, it wasn't what the Street was expecting. So is it just a matter of maybe you need to do a little bit of a better job communicating that trajectory, or how would you explain that disconnect?

PASCAL DESROCHES: Yeah, here is, really clearly, what happened. Our free cash flow guidance-- we give annual guidance. We said it was going to be back-end loaded. Street estimates are $1.5 billion. We came in at $1 billion. $400,000 of the difference is really in the level of capital spend. And so you're talking about $100 million on a company our size. It's not something I worry about. We're trying to manage this business for the long term and not quarter to quarter.

BRIAN SOZZI: Pascal, I talked a little earlier on today with American Express CEO Stephen Squeri, and he told me that he's seeing stress among lower-income consumers. Do you see that in your business?

PASCAL DESROCHES: As we made our way out of the pandemic, we've progressively been seeing that the lower-income cohorts are more challenged but still relatively resilient. And the thing to keep in mind as it relates to our business in particular-- the critical nature of our goods and services are such that it will be something that consumers would be very reluctant to do without. So we're probably not as exposed as other sectors to some of the demands of the consumer.

BRIAN SOZZI: Since we last spoke to you, Pascal, one of your competitors-- I won't say their name-- we'll be friendly here-- spent a lot of money on a prepaid business in Mint. Were you involved in that deal? And that sure seemed like a lot of money to me. Did it seem like a lot of money for you for that asset?

PASCAL DESROCHES: Look, I'm not going to comment on what our peers have decided to invest in. What I will tell you is I'm incredibly proud of our prepaid business, both AT&T Prepaid and Cricket Prepaid. Our churn is remarkably low for a business that is prepaid. We have really attractive economics. And it's a very valuable business. We're happy with it, and we see no need to add to that.

- At the same time, it speaks to the attractiveness of that asset and that customer base in general, whichever prepaid brand that you're talking about. And it also speaks to, to get back to the low-income idea, to the affordability issue. We have continued to see pricing pressure among some of you and your competitors. Where do we stand on that? Is that what we can expect for the foreseeable future?

PASCAL DESROCHES: I don't think I follow. Can you repeat your question? I don't think I--

- Just in terms of promotioning on postpaid phones, are we expecting to see that similar cadence to what we have been seeing?

PASCAL DESROCHES: The industry has been competitive for some time, but I take a step back when you look at it. This was the best first quarter ever for our mobility business. We are growing our RPU, and we are among the very top in terms of RPU for the industry. So any given quarter, there will be competitors in the market with special offers. But big picture, when you look at how we are managing this business for the long term, how we're evolving it, I couldn't be more proud with the results we're seeing in that we're growing RPU, we're growing subscribers, we're growing revenues, and we're growing profits.

- And so what does that mean for the marketing spend that you've continued to pull forward-- or at least put forward, rather, to try and attract new subscribers as well? You're talking about transformation progress and supporting margin growth, and that pulls us back to the conversation of where you're cutting out spend in other places or restructuring costs. Does that include continuing to churn marketing spend? Or if not that, where else across the organization are you looking at cutting costs?

PASCAL DESROCHES: Here's what I would say on our marketing spend. We are competitive but very disciplined. We've been very disciplined. We've had the same offers to both our existing subscribers and new subscribers. And that approach has worked incredibly well for us. And we're seeing the results of that in terms of lower churn in our customer base. And ultimately, that drives savings and cost. When you don't have to go out and replace subscribers because you are keeping your subscribers longer, I think that is the savings that is coming through. We are being competitive, but we're being very disciplined at the same time.

BRIAN SOZZI: Pascal, to the extent you could, March was a scary time for markets, consumers, to see people lined up outside of banks their money. I've never seen that before. Can you take us inside the c-suite with you and your CEO, John Stankey? When you see those things happening, from a leadership perspective, what were your thoughts in mid-March while you watched this unfolding? And how do you think about leading differently, if anything, in the months ahead?

PASCAL DESROCHES: Yeah, look, it is a reminder that the last decade, we have been living on abnormally low interest rates and probably broader credit availability than has been historical norms. And when that happens, invariably, you see the repercussions in things like Silicon Valley Bank. For us, fortunately, we're in a position where we've taken significant actions over the last several years to delevel our balance sheet.

And 95% of our debt is fixed with rates, on average, 4%. And so we were very fortunate. We're in a very fortunate position that we didn't-- while we were paying close attention and making sure that we had ample liquidity, we were confident that we would be able to navigate no matter what the environment bought.

- Pascal, where would you say that we are on the network enhancement and expansion front? Is it too soon for me to be asking about 6G? 5G was all the rage. It seems like that's a thing of the past now. That's so 2019.

PASCAL DESROCHES: Look, I think 5G is still in the very early innings. I think there will be a whole host of services that are rolled out the next several years using 5G technology. So there are clearly people in our organization looking at 6G and what that will bring. But right now, I'm focused on optimizing the true value of 5G.

- All right. That's going to be--

- Get this guys a 5G phone there, Pascal. Got to get him a 6G phone.

- That is a rip your face off speed, Pascal, if I hit 6G within the next couple of years here. AT&T CFO Pascal Desroches as well as Yahoo Finance's executive editor, Brian Sozzi, here. Thanks so much.

PASCAL DESROCHES: Thank you very much, guys. Great seeing you again.