Thank you for joining us. Welcome to AT&T's Third Quarter 2022 Earnings Call. I would now like to hand the call over to our host, Amir Rozwadowski, Senior Vice President of Finance and Investor Relations. Please proceed.

Thank you, and good morning, everyone. Welcome to our third quarter call. I'm Amir Rozwadowski, Head of Investor Relations for AT&T. Joining me on the call today are John Stankey, our CEO; and Pascal Desroches, our CFO. Before we begin, I need to call your attention to our safe harbor statement. It says that some of our comments today may be forward-looking. As such, they're subject to risks and uncertainties described in AT&T's SEC filings. Results may differ materially. And as always, additional information and earnings materials are available on the Investor Relations website. With that, I'll turn the call over to John Stankey. John?

Thanks, Amir. Good morning, everyone. This morning, we shared our third quarter results, which, yet again, demonstrate our strong execution in delivering critical connectivity services to our customers. Earlier this month, we saw just how vital these services truly are. In the devastating aftermath of Hurricane Ian, the ability to connect with others proved to be invaluable to so many people. And our teams were, yet again, some of the very first to arrive on the scene, working tirelessly for our customers. The effort they made, along with first responders, supported by FirstNet, to keep our network running in some of the hardest hit areas was nothing short of heroic. I'm really grateful for their sacrifices, and all of AT&T is proud of their efforts. I'd also like to say thank you to our teams for their solid execution in deploying our mid-band 5G spectrum and building out best-in-class fiber-based access solutions. As you can see from our results, we continue to deliver strong customer growth on the back of our focused 5G and fiber strategy. The demand for fast and reliable 5G and fiber is at an all-time high, and our disciplined and consistent go-to-market strategy continues to resonate. In addition, as we begin to lap investments we need to optimize our networks, improve our distribution and transform our business, we're now seeing the benefits of our growth fall to the bottom line, as we suggested they would and as evidenced by accelerating adjusted EBITDA growth. Let me dive in a bit. In Mobility, we posted another strong quarter of growth by adding 708,000 postpaid phone net adds. As I stated in prior quarters, our consistent results are being driven by an improved value proposition, better network experience and our ability to meet our customers where their needs are. We're creating efficiencies through our distribution, and acquisition costs are improving. This is helping us drive further gains in operating leverage. This past quarter, our teams delivered across 3 key performance measurements: strong postpaid phone net adds, accelerating ARPU growth and higher Mobility EBITDA. In fact, the third quarter marked our highest wireless service revenue growth year-over-year in more than a decade, and we now expect to achieve wireless service revenue growth at the upper end of the 4.5% to 5% range. This is about 200 basis points higher than where we expected to land at the start of the year, thanks to continued net add strength and ARPU growth. Now let's jump to fiber, where we continue to invest in building out a premium network and deliver on our stated expectations for steady customer growth. The success of our strategy is evidenced by the fact that we just posted our 11th straight quarter with more than 200,000 fiber net adds, with 338,000 net adds this past quarter. We're finding success in serving more customers in new and existing markets with what is the best wired Internet offering available. We're increasing share in our fiber footprint and converting more IP broadband Internet subscribers to fiber subscribers. This is driving favorable ARPU trends and profitable growth within our overall Consumer Wireline business. Ultimately, our fiber strategy is a long-term play, centered around a best-in-class network technology with a multi-decade lifespan. When others finally decide they need to upgrade their infrastructure, we will already be providing our customers with great service and sustainable technology. Simply put, where we have fiber, we win. And the numbers show we expect to keep winning. So let's step back for a minute and take a look at what we've done so far this year across 3 quarters. We've achieved what we expect will be an industry best with more than 2.2 million postpaid phone net adds. Additionally, our teams are deploying our mid-band 5G spectrum quickly and efficiently, and the spectrum assets we're rolling out are performing even better than our high expectations. As a result, we've achieved our already increased year-end target of 100 million mid-band 5G POPs and now expect to reach more than 130 million people by the end of the year, nearly double our expectations when we entered the year. This progress is benefiting our customers as well. In fact, since the start of the year, our already consistent download speeds have increased materially as a result of our mid-band deployment. We're also approaching 1 million AT&T Fiber net adds for the year, and we've added nearly 2.3 million fiber locations through 3 quarters to bring our total customer locations to 18.5 million. This keeps us on track to achieve our target of 30 million-plus locations by the end of 2025. In summary, I'm very happy with the strong, high-quality and durable customer adds, network enhancements and improving financial returns we're seeing across our twin growth engines of 5G and fiber. Moving to our next priority. It's more important than ever that we be effective and efficient across our operations. We continue to have strong visibility on achieving more than $4 billion of our $6 billion transformation cost savings run rate target by the end of this year. As I said earlier, we're beginning to see savings start to contribute to the bottom line. We're transforming our business as the world continues to face what feels like a period of uncertainty. Many of the economic trends that we spoke about at the start of the year and the assumptions that we've been operating under are now coming to fruition. This is one reason why we focus so intently on reorienting our business, whether it was asset dispositions, investing in cost transformation or our proactive decision to address rising inflation through a measured pricing strategy. As a result, our balance sheet has improved, our network performance continues to get better, and we're now seeing some benefits to our profit trends. This is a direct result of acting when we did and how we did it. Our third quarter results demonstrate that our business can deliver even against the challenging backdrop. The current environment is not easy to predict, but our flexibility affords us the ability to meet or surpass all of our financial commitments while investing in the best technology available. Now turning to our capital allocation strategy. The long-term economic justification for our investments in 5G and fiber remains fundamentally sound, and we're continuing to invest through this cycle to support future growth. These investments will prove to be the foundation of AT&T over the next few decades. We feel confident our approach will prove to be increasingly beneficial with each passing year as data demand and traffic continues to grow dramatically. Our strength and focus on core connectivity is helping us meet customers' needs, and we're growing mobility and fiber subscribers in a disciplined and profitable manner quarter after quarter. This makes me very comfortable with our ability to continue improving the cash yields of our business going forward. Our free cash flow for the quarter was in line with our expectations despite higher third quarter capital investment spend, and we're on track to deliver on our previously stated $24 billion capital investment plan for the year. At the same time, we hope this healthy free cash flow for the quarter gives you confidence in our ability to achieve our target for free cash flow in the $14 billion range for the year, a level that is more than ample to support our $8 billion dividend commitment. Before I turn this over to Pascal, allow me to finish with this. Our results demonstrate that the strategy we put forward more than 2 years ago is the right strategy for not only the future of our business, but for the future of the communications industry. We're focused on creating sustainable and scalable businesses that drive a free cash flow flywheel for many years. We continue to hold ourselves accountable for earnings growth against our historic levels of investment, which you'll see through improved cash conversion moving forward. We're confident that the investments and choices we're making will benefit our customers and shareholders now and in the future, while also setting the stage for our next act as America's best broadband provider. Let me now turn it over to Pascal to discuss the details of the quarter. Pascal?

Thank you, John, and good morning, everyone. Let's start by taking a look at our subscriber results for our market focus areas on Slide 5. Our consistent Mobility strategy remains successful as we delivered 708,000 postpaid phone net adds in the quarter. Since we began our transformation 9 quarters ago, we've delivered nearly 7 million postpaid phone net adds, along with improved ARPU. Looking at AT&T Fiber. We totaled 338,000 net adds in the quarter. This marks our second best quarter ever. Our plan in Consumer Wireline remains centered on pivoting from a copper-based product to fiber, and we're doing just that. Over the past 9 quarters, we've gone from 4.3 million AT&T Fiber subscribers to now approaching a subscriber base of 7 million. So we're really pleased with the momentum we have with customers in the marketplace across mobility and fiber. Now let's move to our third quarter consolidated financial summary on Slide 6. First, as a reminder, with the closing of the Warner Media transaction in April, historical financial results have been recast to present Warner Media and certain other divested businesses, including Vrio, Xandr and Playdemic as discontinued operations. Additionally, there continues to be some year-over-year comparative challenges as the prior year results also included DIRECTV for 1 month and other 2021 dispositions for a partial quarter. Therefore, where applicable, I will highlight our financial results on a comparative like-for-like basis. Comparative revenues for the quarter were $30 billion, up 3.1% or more than $900 million versus a year ago. This is largely driven by wireless revenue growth and, to a lesser extent, higher Mexico and Consumer Wireline revenues. This was partly offset by a decline in Business Wireline. Comparative adjusted EBITDA was up nearly 5% year-over-year as growth in Mobility, Consumer Wireline in Mexico were partly offset by a decline in Business Wireline. We expect the year-over-year EBITDA trend lines to improve for the balance of the year as we continue to grow our wireless and fiber customer bases and lap 3G network shutdown costs and stepped-up investments in technology that began in the second half of 2021. Adjusted EPS from continuing operations for the quarter was $0.68. On a comparative stand-alone AT&T basis, adjusted EPS was $0.62 in the year ago quarter. The quarter also includes a recurring favorable impact of about $140 million to adjusted EPS from retirement/medical benefit plan change. For the full year, we now expect adjusted EPS from continuing operations to be $2.50 or higher. Cash from operating activities for our continuing operations came in at $10.1 billion for the quarter, up 9% year-over-year. Capital investments of $6.8 billion was up $1.3 billion year-over-year, and we continue to expect capital investments in the $24 billion range for the year. Free cash flow was $3.8 billion. DIRECTV cash distributions were about $1 billion in the quarter. Overall, we remain on track to achieve or surpass all of our previously shared financial targets for the year. Now let's take a deeper look at our Communications segment operating results, starting with Mobility on Slide 7. Our Mobility business continues its strong subscriber momentum and positive profitability trends. Revenues were up 6%, with service revenues growing 5.6%, driven by subscriber growth. Mobility postpaid phone ARPU was $55.67, up $0.86 sequentially and 2.4% year-over-year. This continues to come in ahead of our expectations. This is largely a result of benefits from our targeted pricing actions, improved roaming trends and more customers trading up to higher-priced unlimited plans. With regard to EBITDA, we delivered our highest Mobility EBITDA ever. Year-over-year, Mobility EBITDA increased 5.5%, driven by wireless revenue growth. We remain confident that Mobility EBITDA growth will continue to accelerate through the balance of the year due to revenue growth and the lapping of 3G network shutdown investments that began in the second half of 2021. So we're really happy with our Mobility performance, and our consistent strategy is yielding great results. Now let's turn to our operating results for Consumer and Business Wireline on Slide 8. Our fiber growth remains strong, and we continue to win share where we have fiber. Our total Consumer Wireline revenues are up again this quarter even with continued declines from nonfiber broadband services. Broadband revenues grew 6.1% due to fiber revenue growth and higher broadband ARPU, driven by customer mix shift to fiber. Our fiber ARPU was $62.62, and we expect that to continue to improve as more customers roll off legacy promotional pricing and on to simplified pricing constructs. Looking forward, remember that seasonality in the fourth quarter typically results in lower industry net adds. We expect EBITDA growth to remain strong on a year-over-year basis for the balance of 2022. This will be driven by growth in broadband revenues and the lapping of technology investments that began in the second half of 2021. Looking at Business Wireline. We continue to restructure and rationalize our portfolio with a focus on core connectivity where we have owners' economics. In this regard, we continue to grow our connectivity services revenue as both 5G and fiber offerings continue to perform well. Our enterprise mobility momentum remains strong, with Business Wireless service revenue growth of 7.9% and a sequential increase in our FirstNet wireless base of 334,000. Additionally, we had about $100 million in revenue from intellectual property transaction in the quarter. This is about $80 million more than the prior year. For context, this is an action we've taken in the past when favorable opportunities arise. Now I'd like to quickly touch on our capital allocation strategy. Overall, our priorities remain unchanged, and we're largely past the heavy lift of reorienting our company's focus on our core connectivity strengths. As a result, we've established a more sustainable financial structure that better positions us for the current environment. We also have enough flexibility to invest in our business while meeting our financial obligations. In the third quarter, the $3.8 billion in free cash flow we delivered was largely in line with our expectations. And given the expected timing of our capital investments, we feel good about our line of sight to achieving our free cash flow target in the $14 billion range for the year. We are very comfortable with our cash levels after paying our dividend commitment, and this should only increase in the future years as we expect cash conversion to improve from here. Our results today have only further solidified our confidence that we will exit 2022 stronger than we entered the year. In fact, we continue to expect EBITDA growth and higher free cash flows in 2023. We also plan to continue to use excess cash after dividends to reduce debt with a goal of reaching a net debt to adjusted EBITDA range of 2.5x. And as we typically do, we'll provide 2023 guidance when we share our fourth quarter results. Amir, that's our presentation. We're now ready for Q&A.

Thank you, Pascal. Operator, we're ready to take the first question.

Our first question today comes from Phil Cusick with JPMorgan.

I guess, first, Pascal, the free cash flow bridge to $14 billion, just to reiterate, help us think about that as we go into the fourth quarter. You need at least $6 billion, and you said CapEx, it sounds like it's coming down. That's a good part of it. And then as we think about next year, for what you can give us, how should we think about things like taxes, pension as well as the industry overall? And I know you don't want to update it, but given how much the world has changed, is that $20 billion free cash flow guide even relevant anymore?

I appreciate the question. Let's start with the $14 billion for this year. We delivered $3.8 billion this quarter while spending $6.8 billion in capital. For next quarter, we are maintaining our full-year guidance of $24 billion, which suggests around $4.5 billion for the next quarter. If you do the math, that brings us right where we need to be for the full year. Generally speaking, our performance in the fourth quarter tends to be stronger than the first half of the year. Overall, we have a clear outlook. Regarding next year, as you mentioned the macro environment, that is why we are not providing updated guidance right now, and we will stick to our previous communication that we will update you at year-end when we report our fourth quarter results. However, as mentioned in my prepared remarks, we expect EBITDA and cash to grow next year. For instance, this past quarter, we saw nearly a 10% increase in cash from continuing operations, reflecting strong organic growth from the business, which aligns with our expectations coming into the year. What factors will drive improved earnings and cash next year? First, our mobility business is performing significantly better than expected, with a larger subscriber base and better ARPU trends. Second, fiber is also performing well, and the shift to fiber brings higher profit margins and ARPU. Additionally, we anticipate growth in Consumer Wireline next year. While we expect some moderation in overall Business Wireline trends due to cost-saving efforts, transformation savings are starting to positively impact our bottom line as our investments peak and taper off. We also expect lower interest rates to assist in our debt reduction. However, this will be partially offset by higher cash taxes, which are consistent with our previous guidance, along with slightly reduced DTV distributions. Overall, we feel very positive about the trajectory of the business. Considering our annual dividend commitment of $8 billion and our growing free cash flow, the model is functioning exactly as we expected.

Our next question comes from the line of Brett Feldman with Goldman Sachs.

Really, just sort of two here on fiber. The first is, it's great to see that the fiber net adds continue to gain momentum. You now have a larger fiber broadband subscriber base than nonfiber, but you haven't quite turned the corner sustainably yet on net positive broadband growth. And so I was hoping you can comment on how you see the path unfolding there. And do you just need a bigger fiber footprint to get there? And then the follow-up on that question is, there was a report yesterday you're considering a potential fiber JV. I'm sure you're somewhat limited on what you can say. So the higher level question would be, your existing fiber build is being completely funded out of your cash flow from operations. So if you were looking to do something incremental, including with a partner, what kind of boxes would you have to check? Is this about speed or breadth or potentially something else?

Brett, I appreciate the question. Certainly, a bigger fiber footprint allows us to improve our relative net add performance in broadband. I think the short answer to your question is, for the next several quarters, we'll be in this dance around, what I would call, at least on the subscriber counts, something close to near 0. But you ought to understand, as Pascal just indicated to you, our yields on fiber customers are, of course, much better than our copper customers. Combination of ARPU, churn characteristics and, frankly, the operating performance profile, which, I know you've observed that there's still room for our margin expansion in the Consumer Wireline business and that we should be looking at that relative to others in the industry. And I think that's an accurate observation over time as we continue to scale the business, that we'll continue to improve profitability in it. But we still have several quarters of working through the dynamic of getting the legacy dynamics out of the business and focusing on the new infrastructure and the growth, and that's a journey we're committed to. And I think you're seeing that it's got strong economic promise as we move through that and continue to increase the size of the fiber base. I don't know that I could add a whole lot to you on your question about what we might think about in terms of doing other fiber builds that are out of our operating territory. First of all, I'm not going to acknowledge your comment specifically on some of the speculation that's shown up in the media. But I think I have shared most recently when I was in Arizona, and we were doing the work in Mesa, that we're evaluating it under many of the same sort of criteria and circumstances that we look at within our existing operating footprint. Number one, can we go in and be the first fiber provider in that area? Two, do we believe it's a market where the brand is going to perform, and we'll get the rate and pace of penetration that we need to make an economic return on it? Three, can we build because of the dynamics around a particular municipality or area cost effectively and quickly with a relatively low overhead around that and get, what I would call, an operating scale in that geography that warrants the fixed cost infrastructure start-up? And then finally, do we think that there's some interplay in terms of having the asset and improving value in our wireless business as we operate in the area as well, and it marries into our distribution? So to the extent that we found opportunities like that, that had as competitive returns is building in our region, I think the management team would have to evaluate those types of things and think about how it moves forward on them. And I would tell you, as I've indicated as well, that there will be some federal subsidy monies coming in, in places, and we should use that same set of criteria in that same model as we think about are there opportunities for us to pair our capital with possibly a public capital to open up opportunities that we might not have pursued otherwise.

Our next to the line of Simon Flannery with Morgan Stanley.

John, you opened your comments mentioning the world faced a period of uncertainty. You've been looking at that for a little while. It would be great if you could, and Pascal, update us on what you're seeing real time, both on the business side in terms of cutting back IT budgets, et cetera, and how that may evolve over the next few quarters as they deal with some of the stresses from inflation demand? And then on the consumer side, obviously, you've called out the DSO issue last quarter. Good to hear the free cash flow reiterated this quarter. So perhaps you could update us on payment trends on bad debts and how we should think about churn here as your sort of pricing increases sort of mature going forward?

Sure. I’ll begin, and then Pascal can add anything I might miss. On the business front, I believe the main trend is somewhat separate from the economy. We are experiencing a significant shift toward cloud technologies and software-defined networking (SDN). This transformation is one reason we are repositioning our business segment. It's crucial for us to be cautious about how we manage our owned and operated infrastructure to support business workloads effectively. This shift plays into an efficiency narrative for many established large businesses, though it may involve some difficult adjustments. Eventually, we'll navigate through it, and the core connectivity business related to our owned infrastructure will see improvements. The private networks we previously deployed, which were heavily managed and architected, are transitioning to SDN-based technologies that require less management but offer greater bandwidth. We aim to enhance our bandwidth-intensive infrastructure, selling connections on our owned infrastructure. Enterprises will benefit from greater efficiency with SDN because these less managed networks are generally more cost-effective. Therefore, I don’t believe that budget constraints will significantly derail this transition. If anything, such constraints might only slightly slow the process, which could be somewhat advantageous for us since current margin structures are better than those on new infrastructures. If companies see this as a means to run their operations more efficiently, I think the trends we’ve seen over the years will continue. On the small business front, it’s clear that small business formation could decline during an economic downturn, which might affect our segment if the economy experiences slower growth. However, we are underrepresented in the small business area and are working to improve that, showing progress along the way. My current base of subscribers in areas relating to advanced networking isn’t as strong as I would prefer. Thus, I don’t think we will be heavily affected. There might be some softness in the wireless segment if the economy struggles further, potentially moderating wireless growth. Nevertheless, we have been performing well in that area, primarily due to FirstNet, and I don’t anticipate any significant changes even during a downturn. Regarding other economic factors and their impact on our business, we haven’t seen any changes in Days Sales Outstanding compared to last quarter, and we are back to pre-pandemic levels, as we indicated previously. There hasn’t been any decline, and our guidance for the year still holds true. We are observing bad debt levels return to pre-pandemic standards, but we need to monitor this if the economy deteriorates, as it tends to correlate with economic conditions. However, I don’t see any signs suggesting we are deviating from our usual patterns. Our credit management practices haven’t changed, and we have a strong customer base that helps us navigate these fluctuations. As I mentioned earlier, churn has increased slightly, but it is within our expectations given the recent pricing changes. We successfully implemented the pricing adjustments, and most of our customers are engaging with us to modify their plans to higher-value options, resulting in higher average revenue per user and creating stickier customer relationships. Overall, we see this as a positive long-term outcome. The churn we’ve experienced aligns with our forecasts, and it has not adversely affected the overall benefits of the pricing changes, as reflected in our recent performance metrics.

And our next question comes from the line of John Hodulik with UBS.

You have made significant progress in wireless regarding subscribers, average revenue per user, and now even margins. Can you provide some insights on how confident you are that these three metrics will continue to improve? Additionally, with the expansion of broadband fiber and the potential joint venture, has your perspective on fixed wireless changed at all? Both Verizon and T-Mobile seem to be successfully selling that product. What are your thoughts as we move into 2023?

So John, I believe our visibility is quite strong. We operate a subscription-based business, and as you're aware, those customer relationships tend to be very durable. We are fully equipped to track how we're acquiring customers today and at what profit margin. We understand our customer base and their performance. We have reasonable methods to analyze changes related to factors like roaming, and we can foresee the impacts and how they'll play out. My earlier discussion with Simon highlighted some of the main profitability drivers in the subscription business, particularly regarding churn and our perspective on those dynamics. When I reflect on our capability to grasp the reasons behind our operational momentum, we indicated at the start of the year that the latter half would be a key period, and you are witnessing that now. As we are currently in the fourth quarter, we are well aware of our current numbers, and I feel confident that we will continue to achieve the leverage dynamics we previously mentioned. Therefore, I am optimistic about our outlook on the subscription base. We have developed a strong subscription base and attracted quality customers, which are beginning to enhance our profitability, while also maintaining clarity on our cost structure and the efforts we've made in that area. As I mentioned from the beginning of the year, we anticipated some of this improvement would contribute to our bottom line as we stabilized our promotional strategy in the market, which I believe you've observed, and we continue to maintain our market momentum with that approach. I am quite positive about it. I don't think anything has changed with fixed wireless. As I have repeatedly stated, it has a specific role in our portfolio. However, that role isn’t to deploy it on a broad scale across every region where we operate. If I had the choice, I would prefer to gain 1 million new fiber customers annually rather than 1 million new fixed wireless customers each quarter. The long-term value of those fiber customers is significantly better for our shareholders. Consequently, our focus remains on expanding our fiber footprint and acquiring high-value, sustainable customer relationships that align with our network infrastructure and consumer needs both now and in the future. Fixed wireless will serve a limited purpose in a few regions and specific applications. It will not be implemented across our entire national customer base. Therefore, investing shareholder funds now just to boost top-line growth, which I don’t believe will be sustainable over the next several years, is not the best use of my management team's time or our limited capital. The most effective use of resources will be to establish durable infrastructure, continue attracting high-value wireless customers, and enhance our wireless network to support future applications necessary to realize the potential of 5G, especially as the dynamics around autonomous vehicles, medical monitoring, and private 5G in enterprise environments develop. We want our wireless network ready to efficiently handle those workloads, as we anticipate that those revenues will return with the same margin characteristics we've historically experienced in the wireless sector. Consequently, I feel comfortable with our balance on this matter. We will utilize fixed wireless appropriately moving into next year, but it will not be on a broad scale. Pascal, did I overlook anything from your viewpoint?

No.

And our next question comes from the line of David Barden with Bank of America.

I guess a couple, if I could. I guess the first question, Pascal, could you talk a little bit about how the interest rate environment is affecting the income statement? I guess, specifically, with respect to probably 2 items: one is the fixed versus floating; and the other would be how the net impact on the pensions is being affected in terms of discount rate for the PBO and then, obviously, the impact on returns to the portfolio. I guess the second piece I would ask would be on the wireless business. Obviously, the DISH wholesale arrangement was expected to be kind of a big contributor or a tailwind as we go into the year. Could you just talk about how, if at all, that's affected this year's performance to date and how we might expect that to evolve?

In terms of the interest rate environment, we have made significant changes to our maturity structure over the past few years, taking advantage of historically low interest rates following the pandemic. Currently, our debt is yielding an average of around 4%, with 95% of it being fixed. Looking ahead at our maturities, our free cash flows after dividends should be sufficient to manage those obligations. If rates increase slightly, we can roll over debt on a short-term basis. Our approach to capital management allows us to continue reducing our debt over the coming years without needing to raise new debt in the market. Regarding pensions, for the next decade, we likely will not need to fund the pension plan. However, with the discount rates fluctuating, we have seen some significant gains that we've normalized in our earnings. Next year, we expect higher pension expenses due to the adjustment in discount rates. It's important to note that these are noncash impacts, and our primary focus is that there is no immediate need to fund the pension plan. As for the DISH MVNO, it is not significantly contributing this year, but we expect it to increase over the next several years, and we are optimistic about the overall arrangement.

And our next question comes from the line of Michael Rollins with Citi.

Just to dig in a little bit more to wireless. In the presentation, it was flagged that the business wireless service revenue grew 8% year-over-year, and I think the total was around 6%. So curious if you can unpack a bit more of the differences in trends that you're seeing between the business side of wireless and the consumer side of wireless? And then as you're talking about the next stages of 5G and the opportunities, I was reading in the press release that you're flagging the success of IoT and connected device volumes. I'm curious if you can unpack that a little bit more in terms of, I think the automotive industry was one place you referenced in the release on success. Where are you seeing success in those verticals? And are you seeing any kind of inflection in the near to medium term where this B2B IoT opportunity could become more for AT&T and the industry?

Sure, Mike. Let me address your first question. I believe I understand what you're asking. If I miss anything, please feel free to ask me again. First of all, no two businesses are the same. When evaluating the relative profitability of a business subscriber, it largely depends on the segment being considered. Generally, our highest average revenue per user dynamics tend to come from the consumer market, particularly with family plan structures. Our growth in the business sector is also highly profitable, but it’s shaped by certain factors like what we achieve with FirstNet. As expected, customers who purchase in larger quantities tend to receive better rates, which affects the average revenue per user in the business segment compared to the consumer segment, where such high-volume purchases aren’t as common. Nonetheless, looking at our overall average revenue per user trends, we see improvements and growth. This indicates that although we’re experiencing differences in average revenues across segments, we are still managing to enhance our overall average revenue. This positions us well. Moreover, our margin structure remains stable this quarter, contributing positively to cash yields. Regarding IoT, our primary profit source in that sector continues to be vehicles, which remains unchanged. I don’t expect significant changes in the near term during our guidance and planning cycle. However, we have a strong opportunity for growth in automotive, given our solid market position. With the increasing communication demands of each vehicle, there’s substantial growth potential in that area, which we will continue to focus on. I also believe that as we move beyond our current planning and guidance cycle, there are additional IoT opportunities in manufacturing and medical devices to explore. However, I don’t anticipate these will significantly alter our business-to-business revenues or patterns in a major way for 2023. Hopefully, that answers your questions, Mike. If you’d like to clarify the first one, feel free to ask.

It's very helpful. And I was just thinking, just even on the top line service revenue side, with the business service revenue growth faster than the overall and then implicitly consumer, is that something that you would expect to continue where this business is just going to be a bigger contributor to the wireless business going forward?

I do expect this to be the case because, as we mentioned, there are several dynamics at play in our distribution strategies that have fueled this growth. It's important to note that our market stance and offerings are not solely based on promotional strategies. We've successfully shifted our distribution approach, resulting in improved performance in these segments. These sales do not primarily come from customers walking into stores for device upgrades, which is why our overall profitability dynamics are changing. We've provided visibility into how these shifts are happening. We're successfully gaining market share in the public sector, particularly with initiatives like FirstNet, and we've leveraged affinity dynamics within the households of first responders. Additionally, our distribution strategy is becoming more effective in the mid-market for business compared to our historical performance. Consequently, we are likely to experience faster growth in the business segment, and I believe the results demonstrate our success relative to industry trends.

And our next question comes from the line of Kannan Venkateshwar with Barclays.

A couple, if I could. I mean, first, on the fiber side, we've seen penetration growth slow a little bit. Obviously, the absolute number keeps growing and accelerating every quarter sequentially. But then when we look at it in terms of penetration rate, I think it slowed a little bit versus what you were able to achieve last period. So it would be good to understand what the puts and takes there are and how we should expect that to evolve as we go forward. And then, I mean, I guess, an associated question is the nonfiber decline rate is also accelerating. And so how much of the growth that we are seeing in fiber is on account of transfers from maybe the nonfiber side to the fiber side? And lastly, just Pascal, on the $20 billion free cash flow guide for next year, could you give us a sense of what kind of math or variables are being assumed for that guidance in terms of potential recessions or the growth environment in general?

Kannan, I'll start with the first part of your question, and then I'll let Pascal provide further insights. First, you can expect that throughout the cycle of a build, the initial 30% of penetration is achieved relatively quickly, while the next 20% takes a bit longer. So, as we progress and reach that 30% penetration rate, it's natural for the growth curve to start slowing down, which we have anticipated. The most significant change in penetration is how fast we are reaching the 20% level compared to historical figures. As we previously mentioned, we have effectively doubled our pace for reaching penetration at the beginning of that curve. Additionally, a typical cash flow analysis of fiber investment shows that three key factors drive the return dynamics, one being the rate of penetration. Initially, we had expected a more gradual increase to reach that first 30% of subscribers, but we have successfully reduced the time it takes to hit the 20% mark, significantly impacting cash flows in our favor. This change also influences the overall returns, even if we maintain the same terminal penetration assumption. We have seen success in this area and communicated that clearly, but we have not assumed that reaching the 30% level will speed up growth on the back end. Therefore, as we approach that 30% mark, you will notice a slowdown in penetration, which is typical and does not imply any negative connotation; it simply takes longer to stabilize and establish market norms regarding how shares are distributed among various competitors. I hope that clarifies things for you. While we don’t publicly disclose transfer rates, based on the public data we've shared, you can infer that a significant portion of the fiber growth must come from competitors for us to achieve our results. We monitor this closely, and it's beneficial for us since moving customers from legacy systems to fiber establishes them as long-term clients who are unlikely to switch. Importantly, we wouldn't report the strong numbers we shared this quarter without gaining market share, which almost exclusively comes from existing cable providers.

Kannan, regarding free cash flow, we are not updating our guidance for 2023. However, as we are over three-quarters of the way through the year and considering our perspective on the macroeconomic conditions and associated risks, we anticipate that this business will experience growth in both earnings and free cash flow next year for the reasons I mentioned earlier. While we are not immune to broader macroeconomic factors, these businesses tend to be more resilient even during economic downturns. Overall, we will provide an update next year.

And our next question comes from the line of Frank Louthan with Raymond James.

With your success with wireless, I just wanted to be clear how you're thinking about the promotional activity going forward. Any need to back off some of that promotional activity? You're clearly seeing good strong margin improvement without that. And then I had a follow-up question on the fiber JV. I can appreciate you not wanting to comment on the story, but conceptually, would you be open to some outside investment to possibly reach some of those areas of your territory that aren't necessarily economical with your own capital going forward?

Frank, thanks for asking the quarterly question on what's sustainable. It was sustainable for another quarter, and that's been 2.5 years now. And I'll let you know next quarter if it's 2 years, 2.75 years. So I feel really comfortable with where we are. I think you're seeing the strategy play out. I look at where the market sits today, and I'll reiterate what I said earlier in the call. We're not the one out there with $1,000 for new iPhones right now. We are at a different place than I believe both of our primary competitors. And I also characterized for you, you need to understand a lot of our growth is not coming from what we have as offers that we're communicating in the market. Mike's question is a really important question, looking at the consumer business mix. And when we think about how we're spending our promotional dollars, I characterized for you in the Goldman conference that there's a lot of other aspects of promotion, how advertising gets done, how heavy you have to be to communicate your message. If you're doing a more promotional stance, what you have to do in your channels to incent people to sell and change things, the formula and the mix we have is a very competitive formula and mix right now across consumer and business, across our mix of promotional strategies or distribution partners. And one should not just simply say, because the lead offer that's being communicated in mass advertising is x, ask whether or not that's sustainable. The question is, are our customer acquisition costs sustainable? You're seeing the profitability improvement. You're seeing the ARPU improvement, and I think that's a pretty sustainable equation. I'm not going to comment on the fiber JV structure. I will make an observation, Frank. It's my duty to always keep my mind open to new ideas. It's my responsibility in running the business that if there's an opportunity for us to do something that's in our wheelhouse, that's in the strength of the capabilities that we have as a company, and it's core and foundational to our brand to try to ensure that we seize those opportunities and move forward on them. We certainly have a past practice. The wireless business was built with partners. I think you should understand and look back, and we've done that effectively in the past. And things that we've done, and we've done it in a responsible way for shareholders, and it's been a means for us to think differently about how footprint expansion can be done. We've certainly used that kind of an approach before. We understand how the approach works. I think about it in aspects to all kinds of elements of our business, and I've got to keep an open mind to those things moving forward.

And that question comes from the line of Walter Piecyk with LightShed.

John, when I look at postpaid, which is probably the prior focus on revenue for the company, you've increased revenue, or it's accelerated for the past 8 quarters. So I guess, when I look at the first part of that, you kind of referenced that in the last question, we were talking about how everyone was talking about the handset promotions. You saw very good subscriber growth, and that's sustained. And now when we look at the past year, it's been in part on price increases to some of the legacy plans. So now you've got to this, whatever, where you're 6% growth in postpaid. If you just sustain that going forward, that will probably beat consensus. You probably don't need to sustain it, but when you look at '23, is it going to be a component of more price increases? Or do you think subscribers are going to help you for growth in? And my second question, which is related, is part of the ARPU increase for others was bundling in Netflix or, for your case, HBO Max, that you cut, and I think in June 1 for new customers. Maybe that's been helping your profitability, I don't know, but is there an opportunity to repack some of these streaming services into your offers in order to get ARPU even higher?

I appreciate the question. It's important to consider the disclosures we've provided for the quarter. There are often one-time factors that affect the numbers in a particular quarter. Your overall assessment is correct: we are improving revenue growth yields and the resulting EBITDA. While I won't claim that a 6% revenue growth will directly lead to 6% yields, we have seen those yields improve each quarter. We’re confident this trend will continue, which aligns with the guidance we provided for the rest of the year. We have good visibility for this improvement, influenced by effective cost management. In 2023, I can’t predict the environment, and I won’t announce any changes today. We will inform you when it’s time to make market updates. Considering the inflationary environment, it’s essential to manage both revenue and costs effectively, and we will approach this responsibly. The specifics of our strategy will depend on the circumstances we face, but the team is actively planning and preparing guidance for the year to ensure we have the right options available. Regarding content, we haven’t gained any advantage compared to the industry. Many customers still have content bundled with their services, which we see as a key competitive factor. As mentioned last quarter, we expect to find ways to integrate content offerings into our portfolio. Our relationship with Warner Bros., Discovery, and HBO Max remains significant and effective, but there are also other opportunities worth exploring. As we move into 2023, expect to see adjustments in our strategies involving content and ancillary services within our wireless bundle. We aim to manage our promotional activities prudently, maintaining flexibility without relying solely on a captive content engine like AT&T.

Thanks very much for the question, Walt. And thank you, everyone, for your participation and interest in AT&T. With that, we'll conclude the call and look forward to connecting again post our fourth quarter results.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference Special Services. You may now disconnect.