AT&T CFO Pascal Desroches joins Yahoo Finance Live to discuss earnings, cash-flow guidance, recessionary risks, inflation, phone subscribers, and the outlook for growth.

Video Transcript

- AT&T is out with an earnings beat for the second quarter, showing momentum in consumer additions across its growing 5G wireless and fiber networks. But the telecom is lowering its full year free cash flow guidance, taking a hit from higher capital investments and timing of customer collections. Joining us now to break this all down is AT&T's CFO Pascal Desroches.

Pascal, good to see you here this morning. The stock is under a good deal of pressure here, down close to 10% right now. And it looks to be concerns about free cash flow guidance and how consumers are paying their bills. Take us through what you're seeing from the typical AT&T consumer right now.

PASCAL DESROCHES: Good morning, Brian. Good morning, everyone. Maybe where to start, just taking a step back, the fundamentals of the business remain really strong. We are growing customers at a rate we haven't seen in some time. We raised the service revenue guidance for our mobility business, which is by far the largest business of AT&T. And our fiber business is also performing well. So all in all, really strong demand for our products and services.

Our adjustments to our free cash flow guide-- it really reflects two items. One, because we're growing faster, we're investing more to support that growth. So that is one piece of it, and you're seeing that in the form of higher payments for devices as we are growing more customers than we anticipated.

Two, we're seeing-- and this is a recent phenomenon-- we're seeing about a two day delay in collections for customer receivables. Our history would show that even in recessionary periods, customers pay their bills, albeit maybe a little slower than they do in normal, less stress, times. But they do pay, especially when you consider the mission critical nature of goods and services. But those are the two factors that led to our adjustment of the free cash flow guide.

With that said, I think the bigger picture here is customer demands for our goods and services remains really strong.

- Pascal, when you sit around the table and talk to your team about some of these trends in the past six weeks with the consumer, I mean, is this the first signs of a recessionary impact on your business?

PASCAL DESROCHES: Again, I think it would be-- I don't want to set off alarm bells, because I think it's too early to say whether or not we are being impacted by a recession. Clearly, even in recessionary periods-- and I think John Stankey mentioned this on the call today-- our customers still paid us. Because of the critical nature of our services, we're still going to get paid. It's really slower than we've seen historically, but this recent trend is a more recent phenomenon. And think it's too early to call whether this is just an aberration that will turn itself or whether it is indeed a sign that the consumer is being strained.

We haven't assumed that this comes back in the near term. So that's really the reason-- that's one of the reasons for the adjustment in our guide.

- Pascal, it's Julie here. Just to get a little more granular on this if we could. I'm curious what the default rate or the non-payment rate does look like in a full fledged recession. And what it's like now versus that scenario, what would characterize that scenario?

PASCAL DESROCHES: Here is the way I would characterize it. Overall, we are seeing delinquency trends and bad debt levels slightly worse than pre-pandemic levels. Not nearly what we have seen in prior recessions. And even in prior recessions, the level of write-offs is relatively low in comparison to many businesses.

- Pascal, I wonder what are some of the kind of preemptive measures that the company would work through or at least evaluate if signs of a recession started to show up more in the data? Would that mean closing unprofitable stores? Would that mean pausing some of the network infrastructure investments, even, that you've been accelerating over these past couple of years?

PASCAL DESROCHES: Here is the bigger context to keep in mind. We undertook a significant number of dispositions the last year, and we reduced our dividend. We did-- we took those very important and hard steps in order to really position us for investing in the long-term-- for the long-term growth in this business. And that's exactly what we're doing. The investment cycle in this business is long term. And to try to-- in order not to be beholden to short-term changes, we wanted to buy ourselves much more flexibility in our model. And so, what this allows us to do is, even if we are in a period of economic stress, we can continue to invest in the long-term, still cover our dividend obligations, and deliver an attractive return to shareholders. That's what we're set up for.

With that said, in terms of how we're readying ourselves in the event of a recession, this company has been under a restructuring the last several years. We have-- and during that time, we have reduced our workforce. We are shutting down products and services that are no longer viewed as strategic. And we are reinvesting in other places, in other parts of our business that are growing. So we have been restructuring the business for the last two years. We are on track to delivering $4 billion of a $6 billion run rate savings by the time we exit this year. We have a $6 billion transformation program. We're on track to deliver $4 billion of those savings by the end of this year. So we feel really good that we have positioned the company to be ready for a time just like this.

- Do you envision a continued reduction in the workforce, then, with some of the work that you've already been doing?

PASCAL DESROCHES: Look, we've said this at our investor day, that there will be areas like some of our support services that we're going to continue to rationalize. There will be-- we are shutting down portions of our legacy footprint that will come with dispositions of assets, reduction in some of the infrastructure. So that has been and will continue going.

- Pascal, lastly, I believe you're still looking for a overall, this year, $1 billion worth of inflation. Of course, it continues to be a very challenging environment out there for all companies due to inflation. Do you envision having to try to push through more price increases to offset that?

PASCAL DESROCHES: Look, as you know, Brian, we took the very painful step of having to increase prices to a portion of our customers. But I thought the way we went about it was very smart. We targeted those customers that we thought-- we had new plans, and they were still on old plans. Those new plans could work better for them, provide them with more value, albeit for a slightly higher price. And look, it's too early to call it, to say we have succeeded in doing that. But it is-- early signs are really good that that strategy and that approach has worked. And look, in terms of-- as we look forward, John Stankey has said this, that given the inflation we're seeing in inputs, the responsible thing is to not take options off the table, whether it's continued cost reduction measures and potentially looking back at pricing as we move forward.

- Pascal Desroches, the AT&T CFO. Thank you so much for spending some time with us this morning. And we know it's a busy one for you.

PASCAL DESROCHES: Thanks very much for having me.

- Thanks. Take care.

PASCAL DESROCHES: All right. You take care.