As AT&T enters a new era, back where it began as a company singularly focused on connectivity, it’s confronting acute challenges that could hamper its ability to grow and remain competitive on 5G.

Its problems are both unique and common — inflation, massive debt, and a slow start in deploying more advanced 5G network infrastructure. Ironically, debt might be the least of AT&T’s problems going forward. 

Upon finalizing a shedding of its WarnerMedia business earlier this month, AT&T has realized $50 billion in asset sales since the beginning of 2021, CEO John Stankey said on the company’s first-quarter of 2022 earnings call. AT&T also reduced its net debt by about $40 billion as part of the deal that combined WarnerMedia with Discovery. 

“Our transaction marks a critical step in the repositioning of our business. We’re now able to focus intensely on what we believe will be multiyear secular tailwinds in connectivity,” he said, according to a Seeking Alpha transcript. “We now have the right asset base and financial structure to devote our energy to becoming America's best broadband provider.”

Best isn’t the same as being the biggest, of course. AT&T remains the No. 3 player in the domestic wireless market, as T-Mobile US and Verizon have deployed significantly larger 5G networks than AT&T thus far. 

Deployment activities in the important C-band won’t commence until the middle of this year, but the company remains committed to its plan to reach 200 million people with its mid-band 5G network by the end of 2023, Stankey said. 

“There are things that we can deploy today to get ourselves ready, make sure that we're in the right position. And we can start spending on and be in a position to scale that, turn up pretty rapidly as we hit midyear,” he added. 

Those investments began showing up during Q1 when AT&T’s capex jumped almost 18% year over year to $4.75 billion. 

AT&T expects data traversing its networks to increase fivefold through 2027, and it intends to generate additional revenue from those increases, according to Stankey. It also remains on track to cut costs by $4 billion by the end of this year, he added.

Those savings will initially flow into AT&T’s network infrastructure investments, but it expects to start banking some of those savings later this year, Stankey said.

Stankey also declined to share any plans to increase pricing, despite growing expectations among analysts and investors.

“The problem with an industry that can’t raise prices is the flashing red light in today’s Q1 earnings report,” analysts at MoffettNathanson wrote in a research note. Costs are rising and prices are not, the analysts noted. “Without pricing power, the path forward for AT&T looks very challenging indeed.”

Meanwhile, AT&T continues to make cost reduction a key part of its turnaround strategy. “But it should be remembered that this is a company that has been in cost-cutting mode for decades. And they are now cutting costs at a time when inflation would have them rising,” the analysts wrote.

“As with the economy more broadly, the debate is now about inflation. Input costs will rise, most importantly for labor. Can they pass those cost increases through to customers? At least for now, they are not.”

Stankey addressed this issue head on. “I’m not happy about the fact that wages are rising as fast as they are. We’re having to deal with it. It is going to drive a bit of an uptick in what I would call per-individual wages,” he said. 

“The good news is we’re doing a lot of investment in other forms of mechanization and automation in our business. And some of that investment is helping us keep a lid on some of the wage related inflation costs,” Stankey added.

However, AT&T employees have been paying the price for the company’s efforts to virtualize core infrastructure and automate more functions and tasks.

“Broadly across the board in the economy right now, we are seeing inflationary pressures and the consumer is seeing that every place they go. It's my belief, if we do not see some moderation in this fairly quickly that, I think every business in the United States is going to be dealing with the cost of inputs. And I don't see the wireless industry being immune from that, nor any other industry being immune from that,” Stankey said.

AT&T reported $5.2 billion in net income during Q1, a 35% year-over-year decrease. Total revenue slid 13.3% from the year-ago period to $38.1 billion. 

Heavy promotions and stronger-than-expected net customer additions bolstered AT&T’s financial performance during the quarter, but analysts don’t expect those factors to last much longer.

MoffettNathanson concludes: “What’s left is a company that, as was the case way back in 2013 before they embarked on their foray into media, is struggling to grow.”