AT&T (T +0.38%) CEO John Stankey outlined three key areas of focus for the telecom giant at a recent investors conference:
- Continue to build out the fiber network.
- Produce more differentiated content for HBO Max.
- Improve its capital allocation discipline.
Prioritizing those three areas may give AT&T investors more confidence in the future of the company.
Image source: Getty Images.
Building a broader fiber backbone
Fiber-optic cable is an important piece of AT&T's 5G network, but it also supports its home entertainment business.
"When you have a great 5G network, you're deploying a lot of fiber," Stankey said at the Goldman Sachs Communacopia conference. "That fiber that we deploy not only powers our wireless business, but it helps our consumer business in fixed broadband, it helps our enterprise customers and how we deal with them as well."
Fiber allows AT&T to provide much faster speeds for home broadband service versus cable. And as AT&T shifts to delivering home video over the internet through AT&T TV and HBO Max, offering faster speeds and more bandwidth will be an important part of establishing deeper customer relationships. That's a recurring theme in Stankey's priorities.
Taking HBO Max to the max
HBO Max is becoming the centerpiece of AT&T's entertainment business. There are two key sides to the HBO Max business: content and technology.
The content side will receive a lot of focus early. Consumers sign up for streaming services based on the content on the platform. Stankey wants to build on HBO's longtime success with original series and expand the budget. Last year, the company announced plans to make a $2 billion incremental investment in 2020 to support HBO Max, including doubling HBO's content budget.
Eventually, AT&T wants to unify the back-end software for HBO Max and AT&T TV, its software-based linear TV service. It also plans to launch an ad-supported version of HBO Max next year. Software will be integral to those efforts.
The value Stankey sees in HBO Max is the ability to establish a customer relationship in more homes than through traditional pay TV. It's another way to get its foot in the door. From there it can deepen the customer relationship and use data from those relationships to support its advertising business, as well as in-house marketing efforts.
A more balanced balance sheet
AT&T racked up quite a bit of debt after purchasing DIRECTV and Time Warner over the last few years. As of the end of the second quarter, it still had about $152 billion in net debt on its balance sheet.
It's now under pressure to divest nonessential assets, and that's exactly what Stankey intends to do. AT&T's investing in the fiber network and its streaming business. Stankey said the question he poses to management is: "If it doesn't contribute into those areas, how do we either strip it out, shut it down, or deemphasize it?"
Stankey is prioritizing AT&T's dividend, which currently yields around 7.1%. AT&T has raised its dividend for 36 straight years, and Stankey intends to make it 37 in December.
Proceeds from divesting noncore assets will go toward reducing debt. It's reportedly looking to sell its digital advertising business Xandr and may be considering the sale of DIRECTV. Neither asset is expected to fetch the same price AT&T paid.
The company's net debt-to-EBITDA ratio currently stands at 2.63. Reducing that level will give it more breathing room in its cash flow and provide greater confidence in the sustainability of its dividend.
AT&T is facing a challenging environment in both the wireless industry and the home entertainment industry. It'll have to stay disciplined while capitalizing on its best opportunities in order to produce strong returns for investors after lagging the market through the first three quarters of the year.
