Welcome to AT&T's Second Quarter 2024 Earnings Call. This conference is being recorded. I will now hand the call over to your host, Brett Feldman, Senior Vice President of Finance and Investor Relations. Please proceed.

Thank you, and good morning, everyone. Welcome to our second quarter call. I'm Brett Feldman, 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 states that some of our comments today may be forward-looking, as such they are subject to risks and uncertainties described in AT&T's SEC filings; results may differ materially. Additional information, as well as our earnings materials, are available on the Investor Relations website. With that, I'll turn the call over to John Stankey. John?

Thank you, Brett. I appreciate you joining the call. Hard to believe we are already halfway through the year, but we are, and our team delivered solid second-quarter results as we continue to grow the right way by efficiently adding high-value wireless and broadband subscribers. Our strong start to the year is built on the foundation of what our team has accomplished over the past four years. As a result of this hard work, we're now repositioned around our connectivity strengths. This puts us on a clear path to becoming the leading provider of converged 5G and fiber services. Since Pascal will go through the quarter in detail, I'd like to spend some time highlighting how our team's execution of our investment-led strategy is driving consistent results. In Mobility, we delivered 419,000 postpaid phone net adds in the second quarter and 768,000 during the first half of the year. This put us modestly ahead of last year's pace despite ongoing wireless market normalization. And we're not just growing customers. Our Mobility EBITDA grew by more than 5% in the second quarter, driven by more than 3% growth in service revenue and 100 basis points of service margin expansion. We're delivering consistent results by keeping the customer at the center of everything we do. It's a winning play that we continue to run. The efficient first-half growth we achieved in our Mobility business positions us well for the back half of the year when we expect higher activity levels driven by the availability of new devices and features, seasonal purchasing activity, and promotional cycles. In Consumer Wireline, we added broadband subscribers for the fourth consecutive quarter, driven by consistent growth in AT&T Fiber and early success with AT&T Internet Air. Once again, this story is about growing both customers and profitability as our Consumer Wireline business delivered more than 7% EBITDA growth during the second quarter. This was driven by approximately 18% growth in fiber revenues and improved operating leverage as we transition from legacy networks to advanced broadband infrastructure. While some portions of our business are still being pressured as customers transition off legacy voice and data services, our significant investment in 5G and fiber and consistent execution is driving durable growth across the large majority of our business. I expect this performance to continue, putting us on track to deliver on our full-year financial guidance. The durable trends in 5G and fiber are being driven by more than the solid individual execution within each business. We believe the success of our fiber business is driving growth in mobility and vice-versa as consumers increasingly prefer to purchase mobility and broadband together as a converged service. For example, today, nearly four out of every 10 AT&T Fiber households also choose AT&T as their wireless provider. As a result, our share of postpaid phone subscribers within the AT&T Fiber footprint is about 500 basis points higher than our national average. In our fiber business, we continue to achieve key penetration milestones faster than we anticipated and considerably faster than the fiber providers that do not operate wireless networks based on publicly available data. A key reason for the strong performance is our ability to sell fiber to our mobile customers. Additionally, we're able to reach new broadband customers through our substantial mobile distribution channels. The key point here is that our proven ability to drive higher share in both mobility and broadband through converged service penetration is the true benefit of owning and operating both 5G and fiber networks at scale. Over time, we expect this to drive greater returns on invested capital in both our mobility and broadband businesses than either would be expected to achieve as standalone operations. While our convergence strategy began with a focus on our owned fiber footprint, we also see attractive opportunities to expand the availability of AT&T Fiber and our converged offers outside of it. This includes the continued scaling of our Gigapower joint venture and through capital-light arrangements with other providers of commercial open-access fiber networks. We expect the continued expansion of AT&T Fiber, both in-footprint and outside of it will enable us to drive significant growth with converged customers. Ultimately, our convergence strategy closely aligns with our primary focus over the last four years, growing in a durable, sustainable, and efficient way. We still have a lot to accomplish as we execute this strategy, but I am encouraged by our momentum and see a long runway of growth with 5G and fiber together. More importantly, I like the distance between us and our competitive set with respect to our positioning to organically address more customers more profitably. Our commitment to our investment-led strategy has played a pivotal role in our success and made AT&T the largest capital investor in the U.S. connectivity infrastructure since 2019. In addition to our ongoing network investment, we continue to reduce our net debt and leverage due to a combination of higher EBITDA and growing free cash flow. We expect these trends to continue and remain on pace to meet our target of net-debt-to-adjusted EBITDA in the 2.5 times range in the first half of next year. This should provide us with greater financial flexibility to support sustained investment in growth, as well as enhanced shareholder returns. We're excited about what all this means for the future of AT&T. And given that our direction remains constant and our performance consistent, I'm going to avoid belaboring what we've been discussing for a number of quarters now. I turn it over to Pascal.

Thank you, John, and good morning, everyone. Let's start by reviewing our second quarter financial summary on Slide 7. Second quarter results were in line with our expectations with revenues down slightly as a decline in Business Wireline service revenue and low-margin mobility equipment revenues offset growth in higher-margin wireless service revenues and fiber revenues. Adjusted EBITDA was up 2.6% for the quarter as growth in Mobility, Consumer Wireline in Mexico, which collectively drove more than 80% of our total revenue in the quarter were partially offset by continued declines in Business Wireline. In the first half, adjusted EBITDA grew 3.4%, and we continue to expect adjusted EBITDA growth in the 3% range for the full year. Adjusted EPS was $0.57 compared to $0.63 in the year-ago quarter. Consistent with 1Q, the quarter includes about $0.09 of aggregated EPS headwinds from the four items we discussed earlier this year. For the full year, our expectations remain for adjusted EPS in the range of $2.15 to $2.25. We generated second quarter free cash flow of $4.6 billion, up nearly $400 million year-over-year. This is the result of sustained growth in adjusted EBITDA, improved conversion of EBITDA into free cash flow, and lower capital investment. Capital investment for the quarter was $4.9 billion, down $1 billion compared to the prior year, primarily as a result of lower payments for vendor financing. Capital expenditures were $4.4 billion, up approximately $100 million compared to the prior year. We remain on track for capital investments in the $21 billion to $22 billion range for the year with higher spending in the back half of the year as we ramp our wireless network modernization. The quarter also included a lower net impact from securitization of $1.5 billion relative to last year's second quarter. Now, let's look at our Mobility operating results on Slide 8. For the quarter, we delivered 419,000 postpaid phone net adds, up from 326,000 a year ago. This improvement was driven by a 9 basis point decline in churn to 0.70%. We grew Mobility service revenues by 3.4% driven by strong execution and our balanced go-to-market strategy. Postpaid phone ARPU was $56.42, up 1.4% year-over-year, largely driven by higher ARPU on legacy plan. As expected, service revenue growth was partially offset by lower equipment revenues with a postpaid upgrade rate of 2.9%, which was down slightly from 3.1% last year. For the year, we continue to expect modest postpaid phone ARPU growth and Mobility service revenue growth in the 3% range. Mobility EBITDA of $9.2 billion grew 5.3%, or by more than $450 million year-over-year as we converted over 85% of our service revenue growth into EBITDA. During the first half of 2024, Mobility EBITDA grew 6.1%, and we continue to expect Mobility EBITDA growth in the higher end of the mid-single-digit range for the full year. As John noted during his remarks, our Mobility outlook anticipates higher activity levels in the back half, consistent with seasonal trends. In particular, we anticipate higher marketing spend in the third quarter compared to last year. We also expect to see greater benefits from our announced pricing actions in 4Q versus 3Q. Based on our strong subscriber and EBITDA growth through the first half of the year, we believe our Mobility business is well-positioned to capitalize on a more dynamic wireless market in the back half while achieving our financial targets. Now, let's move to Consumer Wireline on Slide 9. Our growth in Consumer Wireline was once again led by fiber subscriber growth, which has consistently yielded strong returns. Overall, we added 52,000 total broadband subscribers in the quarter. This is the fourth consecutive quarter of positive broadband net gains and we expect this trend to continue. Where we have fiber, we win, and we added 239,000 AT&T Fiber subscribers in the quarter. Our 2Q AT&T Fiber net adds are consistent with the three primary drivers of quarterly net-add variability that we've previously shared. These are the pace at which we put new fiber locations into service, which is the largest variable in any given quarter as new inventory we're able to serve can fluctuate. Second, overall broadband market dynamics which have remained fairly stable. And finally, typical seasonality. We expect these to remain the primary drivers of quarterly trends in AT&T Fiber net-adds in the back half of the year. And as a reminder, the third quarter typically has favorable seasonality relative to the second quarter. We now pass nearly 28 million consumer and business locations with fiber and remain on track to pass 30 million-plus fiber locations by the end of 2025. As we've stated before, the better-than-expected returns we're seeing on our fiber investments potentially expands the opportunity to go beyond our initial build targets by roughly 10 million to 15 million additional locations. This assumes similar build parameters and a regulatory environment that remains attractive to building infrastructure. We are also encouraged by early performance of AT&T Internet Air and our success in proactively migrating customers with legacy copper-based Internet connections onto this fixed wireless service. We now have AT&T Internet Air in parts of 137 markets with nearly 350,000 total consumer subscribers, including 139,000 added during the quarter. Second quarter broadband revenues grew 7% due to strong fiber revenue growth of approximately 18%. For the full year, we continue to expect broadband revenue growth of 7% plus. Fiber ARPU of $69 was up $2.30 year-over-year with intake ARPU remaining above $70. Consumer Wireline EBITDA grew 7.1% as growth in broadband revenues and ongoing cost transformation continue to improve profitability. We still expect Consumer Wireline EBITDA to grow in the mid-to-high single-digit range this year. Now, let's cover Business Wireline on Slide 10. Business Wireline EBITDA was down 13.9% due to continued industry-wide secular declines in legacy voice services consistent with the trends we discussed last quarter. The reported decline in EBITDA slightly improved in 2Q versus the first quarter. This primarily represents benefits from favorable timing of anticipated items and early traction on cost-saving initiatives. Looking into the back half of the year, I want to remind you that we benefited from approximately $100 million of IP sales in the third quarter of last year that are not expected to recur next quarter. So the year-on-year trend in Business Wireline EBITDA is likely to see some pressure in 3Q before improving in 4Q as comparisons ease. Also, I'd like to note that 2Q results included less than one month of revenues from our cybersecurity business prior to deconsolidating its operations into a joint venture. On average, this low-margin business contributed about $100 million in quarterly revenues. The key point is that Business Wireline is performing in line with the outlook we provided last quarter. So for the full year, we still expect Business Wireline EBITDA decline in the mid-teens range. While near-term declines in legacy voice revenues are likely to weigh on Business Wireline EBITDA trends for the remainder of the year, our 5G and fiber expansion continue to present attractive growth opportunities in business solutions. This includes sustained growth in FirstNet, which now has more than 6 million total connections. Similarly, we're excited about the potential we have with emerging growth products like AT&T Internet Air for business, which we launched nationwide, and Dynamic Defense. Now, let's move to Slide 11 for an update on our capital allocation strategy. Our approach to capital allocation remains consistent and deliberate. We're successfully balancing efficient growth with long-term investments in delivering converged network services to more customers, paying down debt, and returning value to shareholders. We remain focused on deleveraging and have reduced our net debt by about $2 billion year-to-date. At the end of June, net debt to adjusted EBITDA was below 2.9 times and we're making steady progress on achieving our target in the 2.5 times range in the first half of 2025. We continue to address near-term maturities with cash-on-hand and this quarter, we repaid $2.2 billion of long-term debt maturities. Looking forward, our debt maturities are very manageable and we are in a great position with more than 95% of our long-term debt fixed with a weighted average rate of 4.2%. In addition to paying down debt, we reduced direct supplier and vendor financing obligations by about $700 million versus the first quarter. Additionally, the second quarter net impact from securitization facilities was a $700 million use of cash. These efforts highlight the improving quality of free cash flow we're delivering. We expect to continue reducing our aggregate net balance of direct supplier and vendor financing on a year-over-year basis, which should lower our interest expense and continue to improve cash flow ratability over time.

DIRECTV distributions in the quarter were about $740 million, and we continue to expect DIRECTV cash distributions to decline at a similar rate to 2023, or by about 20% annually. We generated $4.6 billion of free cash flow in the quarter and $7.7 billion in the first half of the year. Free cash flow is up $2.5 billion compared to the first half of last year, which is consistent with our goal of driving more ratable free cash flow. Looking into the second half of the year, we expect cash taxes to be a billion dollars higher compared to the second half of last year. We also expect to incur a one-time payment of $480 million in the third quarter related to our wireless network transformation. Overall, we're on pace to deliver on our full-year free cash flow guidance in the $17 billion to $18 billion range. To close, I'm very pleased with our team's performance in the first half of the year and we're on pace to deliver on all of our full-year financial guidance. Brett, that's our presentation. We're now ready for the Q&A. Thank you, Pascal. Operator, we're ready to take the first question.

Our first question will come from the line of John Hodulik of UBS. Please go ahead.

Great. Thanks, guys. A couple if I could. First, John, you talked about higher activity levels in the second half in wireless, and obviously, there's a lot of concern about upgrade rates with the new iPhone. I mean, are the comments that you made just a function of sort of typical seasonality, are you expecting sort of a new upgrade sort of initiative? And what does that mean? If so, what does that mean for the levels of churn we've been seeing in profitability and sort of overall competition in the space? That's number one. And then number two, you had some comments about Gigapower and the potential open-access relationships. As it relates to Gigapower, any color you can give us on how that relationship or partnership is doing in terms of rollout and customer uptake? And then is there room for more of these relationships with other third-party open access providers? Are you talking to anyone else and how big could that opportunity be? Thanks.

Good morning, John. How are you? So on your first question, first, I'd start out by saying whatever happens going forward, we've been focused on ensuring that we try to set up the business to respond to what the customer wants to do with their accounts and keep that a focus of what we think our strategy ought to be and how we go-to-market. And I think it's important to understand that whatever happens going forward is going to be a factor how customers decide to do things. And I think we'll be positioned as a company to deal with that either way. There is seasonality. First of all, as you know, when we get into a new device cycle coming out from typically one of the handset providers, there's a little bit of a suppression effect that occurs a month or two before they go to market, and then there is an increase in acceleration that occurs. And as you heard both Pascal and I talk about, we've expected that that cycle is going to continue, and I think we're in a good position with our guidance to be able to adjust to whichever way it goes. I've looked at some of the notes that have been written recently about sizing and looking at this particular dynamic. And I think that they're directionally consistent when you start thinking about the reality that we have accounts that have discrete handsets that mature in their cycles at different times. You typically don't have an entire account, at least in how we built our customer base, that gets to a upgrade cycle all at the same time. So we're able to kind of look at history and understand a little bit about it. And if the customer decides that there are meaningful features in the new devices, we're going to respond to it. We're going to deal with it. But I feel like we're in pretty good shape to make that happen one way or another. Now whether or not there is something more compelling in this cycle, frankly, none of us know exactly what's going to come in. We do have some reference points. There have been other AI devices that have come into the handset ecosystem over the last couple of months. I haven't seen anything in them that suggests to me it's going to cause customers to immediately say this is world-changing for them, but it doesn't mean that somebody doesn't unlock the key at some point. Typically these feature enhancements take one or two cycles to get them right and ultimately bring them forward, but time will tell remains to be seen. I would also say that there's a lot of ways you can experience AI without having to necessarily change out hardware per se. I mean, we're already seeing that in ways that AI is implemented into search and browsers and things like that. So how customers get comfortable with it and start to adopt it, we'll watch and I think we'll go through the cycle. And if there's a little bit of spike at the front-end and then it slows down a little bit later, we've been through those cycles before and we'll do fine. Pascal, I don't know if you want to add anything to that.

You know, John, I would just add one thing. When you look at our performance for the overall Company as well as Mobility, we are running ahead halfway through the year of the full-year guidance that we gave. And so whatever the environment is, I feel like we are incredibly well-positioned for it.

On your question about the status of Gigapower, I'm going to hold off on answering for now. I believe I mentioned when we started that I owe the investment community transparency regarding our performance. I set a benchmark indicating we would need 18 months to evaluate the investment cycle of launching the product, entering markets, and assessing our results. We will reach that point around Communacopia, and I expect to spend some time during that session providing the insights you're seeking. I look forward to that conversation. I believe there’s significant potential for us to grow profitably through fiber and convergence in various models. As I previously stated, we understand how to effectively sell both products together. I've noticed throughout the industry that potential partners recognize our unique capabilities and effectiveness compared to others in different regions of the United States. I feel we are acknowledged for our competence in this area, and I am eager to capitalize on that. We've made strategic choices, such as not broadly selling fixed wireless across our entire footprint, which distinguishes our competitive positioning with partners. Additionally, in developing Gigapower, we've created a back office with a wholesale relationship that collaborates with AT&T, allowing us to offer this infrastructure to others. If someone is interested in using that infrastructure to jointly market our products, especially where our wireless can support their fixed assets, we view this as a beneficial dynamic for achieving scale. I see more opportunities for growth in this space as we continue to advance in convergence, which will help us gain an edge over competitors.

Thanks, gentlemen.

All right. Operator, we'll take the next question, please.

Our next question comes from Simon Flannery of Morgan Stanley. Please go ahead.

Thank you. Good morning. And I think we managed to get this far without mentioning ACP. I wonder if you could just give us an update on what you've seen so far; what do you expect in the third quarter? And then coming back to the comment about in-region fiber, you've talked a few times about the 10 to 15. I think you're almost at 28 million locations, pretty near that 30 million. So help us understand where you are on that evaluation process and what should we expect in terms of you giving us a new kind of map for the next three years, or whatever, and how that flows through to CapEx, et cetera. Thanks.

Good morning, Simon. On ACP, I think we indicated to you probably last quarter, maybe even the quarter before. Start of the year.

Yes, that we would be effective at working through this. We didn't see it as being material or significant. And I characterize that we saw no reason we continue to be able to deliver on our commitments back to you. And that is, in fact, happening and will happen. We are most of the way through the ACP effect. Has there been an effect? Sure, a little bit. It's not the sole reason we're a little bit down on fixed broadband this quarter. There are other reasons moves are continuing to be a bit suppressed is one of them. Seasonally, second quarter tends to be down a bit. But we had a little bit of an impact because of some adjustments that were made going through that. But the vast majority of our customers, most importantly, we know who these customers are, right, because we know that they're getting the discount are through a transition process, and we feel fine about it. I'm pretty proud and pleased with how our prepaid business performed this quarter. It had some impacts from ACP associated with it. But I think if you look at where we were with churn and where we were with gross adds and net adds in that space, I think we came through it and demonstrated that we had good-quality customers who still need to use the service one way or the other, and we've accommodated them. So we still got a couple of people hanging out there on some what I will call transitional promotions. I expect that there'll be a little bit of shrink in some of those transitional promotions. They're all following our expectations as we calculated what we thought the impacts were going to be. They're all consistent with the guidance that we have been giving you. So I wish we hadn't had to go through this with our customer base. We did, but I think we've handled it well and we're largely through the impacts at this juncture and moving on to do other good growth. In terms of where we are, we've been very clear that we'll give you kind of an update on our capital allocation strategy as we approach this 2.5 times adjusted net debt to EBITDA ratio in the first half of next year. I would expect that as we go through our normal cycle toward the end of the year here as we start to give guidance for next year, you'll get what you need in terms of moving forward. And I don't think there's going to be any shocks in this. Our priorities remain the same. We want to make sure we can continue to grow the business. That's first and foremost. I want to leave a business to whoever sits in my chair later that has a good strong sustainable franchise that can be healthy and that the next generation of individuals that work at this Company feel confident and proud about where the Company is going to go. And we'll invest in a way that we make sure that we have that capability and that kind of a franchise built. Then of course, we want to continue to maintain our commitments to our bondholders and our dividend, and those are what I would say the top three. But as you know, we'll have some optionality to go beyond that as we get into next year. And I think we'll be very deliberate about that. The Board is being very deliberate about it right now. We're spending multiple cycles on it. We're spending a lot of time looking at scenarios. I think we'll continue to invest in growth in this business at some level in some way, but I also believe we have optionality to change our formula around how we return to shareholders. And I think you'll see us employ the right approach to that.

We're ready for the next question.

Our next question will come from the line of Jim Schneider of Goldman Sachs. Please go ahead.

Good morning. Thanks for taking my question. Two, if I may. First on the fiber side, relative to the long-term fiber passings target of 40 million to 45 million, which we talked about, can you help us understand whether you're seeing stronger returns and actually accelerating the pace of build-outs from here? And how roughly would you expect that pace of additions or passings to add to the trend in 2025? And then secondly, in terms of Internet Air, you mentioned that it's now available for business nationally. Does that imply that the run-rate of net-adds could accelerate materially in the coming quarters? And how much headroom do you see in your overall network capacity relative to adding business fixed wireless subscribers? Thank you.

Good morning, Jim. As Simon mentioned earlier, our fiber target is to reach 30 million passings by next year, and we are on track to achieve that. I anticipate that with our current performance in fiber, specifically for our in-region organically developed fiber, our returns on the overall investment portfolio have exceeded our expectations since we began this process in the 2014-2015 timeframe. This quarter, we are providing additional insights as we identify strengths in our markets where we can co-market our wireless and fixed offerings, creating a strong combination for us. I would describe our return characteristics as still in the early stages, with significant progress made but room for growth ahead. As we refine our strategy and integrate product and service innovations, we expect to enhance our returns. Regarding Simon's question about our continued investment in growth beyond 30 million passings, I believe that the pace of that investment will align with the target we set. We will provide more details as we approach the end of the year to ensure the Board is fully aligned with our vision. As I mentioned to John, we have various strategies for implementing a converged offer, which will allow us to leverage our strong financial returns and available capital to build partnerships or pursue organic development. We plan to capitalize on all three approaches to generate significant returns. Concerning our Internet Air run rate, we expect continued growth and improvement in our rates. However, I want to clarify that this is not a change in strategy. We are executing the strategy we've established, which differs from others as we are selective in our Internet Air offerings, introducing it where it makes sense to transition from legacy to new technology and utilizing underused capacity for long-term stability. We will offer Internet Air wherever the right business customers are interested, taking into account that the business product differs in usage and ARPU characteristics, and allows for bundling with multiple products. I am confident in our nationwide business offer as we select the right customers and utilize our capabilities for either primary or backup services, allowing us to profitably integrate those offerings into our portfolio. Therefore, we will continue to grow in the business market, fine-tuning our distribution in this area and expecting improvements in our business segment numbers in the upcoming quarters.

Thank you.

Are you ready for the next question, operator?

Our next question comes from the line of David Barden of Bank of America. Please go ahead.

Hi, guys. Thanks so much for taking the questions. John, I wanted to maybe go back to something you just said, which was that there's a race to convergence in the market. And I think that not everyone agrees that that's a true statement, that maybe it's more of a race for AT&T to exploit the opportunity it has in its footprint to converge as much as possible. You mentioned that you've got a 500 basis point market-share advantage in the areas where you've deployed fiber. Could you kind of share more data that would support your argument that there should be a race to convergence that AT&T is in a unique position to take advantage of these economics beyond simply market share? And then if I could, the second question would be there's been a series of events over the course of the year, network outages, data breaches, disclosures about previous data breaches. Is there anything that we need to know about how that's impacting either your go-to-market or the possibility of future financials? Thank you.

Hi, good morning, Dave. As we move forward, you'll receive more insights over time. Today’s information provides a lot of valuable context, but I won't go through everything we consider. However, you should take away a couple of key points. Firstly, our combined customers are happier, exhibiting lower churn and longer lifetime values. Why emphasize convergence? It’s a profitable strategy that helps retain customers. I believe it is the right approach, and we will continue to pursue it because we are well-positioned to succeed. This is what makes our Company exciting. We have a strong opportunity for organic growth and investment that allows us to control our future. Part of this involves a share-take dynamic, meaning we don’t have to be entirely reliant on overall market growth or increases in fixed broadband connections; we aim to utilize others’ connections effectively. Maybe that’s why this is more significant to me than to others more entrenched in the industry, as they may have a different perspective on it. This process will unfold over several years, not just within a single quarter or two. It requires a restructuring of assets, and if executed correctly, will be very effective. Customer preferences also drive this process. Customers prefer to limit the number of relationships they have with service providers for essential services. They value a few dependable partnerships that are functioning well. The company that can figure this out will offer great value and enable customers to access connectivity globally, whether through direct relationships or third-party aggregation. I believe the company that excels at this will ultimately perform best in our industry and achieve greater scale. This is the reasoning behind our direction, as well as our focus on product development and pricing plans for the next decade. The management team understands that this will be a continuous race, not just a short-term sprint. Regarding your second question, I share your disappointment in having to address these issues. My colleagues and I feel the same way about instances where we have not met customer expectations. Nonetheless, we have taken the right steps to respond. We prioritize reliability, privacy, and data security. We are operating in a dynamic environment, making necessary changes within our company that bring many challenges, while also facing a challenging threat landscape that may become more complex due to geopolitical factors. Other reputable companies like ours are learning and adapting to new threats. Unfortunately, given our large customer base, our missteps receive more scrutiny compared to others. However, everyone is facing similar challenges. I am proud of how we have responded, taking proactive measures to learn and communicate effectively with our customers about the circumstances. Despite the issues, we have stood behind our product. From all available data, it seems we are maintaining our customers' trust as best as possible. I do not take this lightly, as it is extremely important to me. It's a situation I want to avoid in the future, but we have managed the situation as well as we could. As I’ve stated, we are confident in our financial guidance moving forward, and we stand by our public statements that indicate these issues are not material to our business performance. We remain committed to improving daily and hope to avoid similar conversations going forward.

Thanks, John.

Are we ready for the next question?

Our next question comes from the line of Sebastiano Petti of JPMorgan. Please go ahead.

Hi. Thanks for taking my question. Pascal, I wanted to follow up on the $480 million one-time event that you expect in the second half of the year from the wireless transformation. Could you provide some details about that and confirm if this was taken into account in the guidance at the beginning of the year? Additionally, for John, could you share your thoughts on how you and your team are approaching spending and enhancing the wireless network, considering the current challenges with the FCC regarding spectrum authority and the limited pipeline for spectrum? Thank you.

Hi, Sebastiano. Regarding the payment we plan to make, we mentioned late last year that we were entering a new agreement and as part of that, we would be phasing out one of our vendors. We anticipated some form of termination payment related to that. Whether this was included in our guidance, I'm not going to discuss, but we are very confident that we will be able to make that payment and still fulfill our full-year commitments.

Hi, Sebastiano. So to answer your question, first of all, I think it's important to frame that it starts with a point-of-view that we view capacity as being a fixed resource that has to be managed very, very carefully, and so made some comments earlier about our point-of-view around fixed wireless and how we deploy that spectrum and where we deploy that capacity. I mean, it ties into a point-of-view of how we invest in the network moving forward and how do we monetize that scarce resources effectively as we can. And that's part of our planning, and look, the good news is we put a lot of capacity out there over the course of the last couple of years and we have a little bit more to go. But we're using that wisely. We're being very deliberate around how we deploy it. We want to make sure we give ourselves the longest runway to return as we can. And I think our strategies are directly proportional to that. And I don't think you should disconnect our investment in fiber from the fact that we've got spectrum planning issues to do and I'll get to maybe that part in just a minute. All right. We think that a good way to pick up high-density traffic in places is to do it over fiber, not to do it over wireless. And so that's a difference and maybe my point-of-view on to Dave's question, convergence, and how the market develops over time and trying to be deliberate in how we do capital allocation. Now in the near term, I expect we're going to be using every trick in the book as we historically do to ensure that we can deal with the 30% growth. One trick in the book is you continue to advocate for policy change. And I've been pretty vocal. I mean, you go and look in some of the comments I've made, I've gone out of my way to walk into some public forums to say that I do not think spectrum policy in this country is on the right path right now. And that change could come possibly with a change of posture from the existing administration, which may get tweaked and adjusted by a new leader or by an administration change. And that's important because I think there are things we can do from a policy side to improve the availability of spectrum, which is the most effective way to increase capacity in a network, and we'll continue to advocate and push for those changes as we move forward. Second, there are some options in the secondary market. Some of them that will be available through normal course and frankly, some others that could be made available if there were some policy and spectrum adjustments made to how particular spectrum assets that have been put into the speculator market that they're out there could potentially be used and put to use. And I think a good policy for this country right now would be that for everything that we have licensed that we'd want it to actually be invested in and turned into service. And it seems to me that, that would be a good thing, especially when this country is behind other countries like China and other regions of the world in getting licensed spectrum into service. So I would suggest that if we look at that, there is some near-term opportunity to use existing licensed spectrum that's out there by just tweaking some rules and doing some things differently to get investment in it and actually get capacity in. Third, we talked about what we're doing around O-RAN. And I think if you go back to my comments, I shared with you that one of the reasons we think that it's so critical that we open these interfaces up and we take this step is to play in the next generation of wireless deployment. It's in more distributed radiation points rather than macro sites, and to get the benefits of openness in the cost curves, in the flexibility. I've seen those interfaces open and getting a multi-vendor environment and then using our dense fiber assets that we're deploying is a match made in heaven to be able to deal with that growth in a more cost-effective way. And so that's a deliberate aspect of our strategy as to why we're doing O-RAN the way we're doing, why we're thinking about O-RAN is busting open the smaller cell structure to get more innovation, more providers, and how to then layer that on top of the fact that we're putting denser fiber reaches into our network that allows for us to take advantage of that. That allows for a more efficient growth of capacity as we move forward. So I would tell you that I think we've got a lot of tools in place to be able to do this, but it starts with market discipline around how you sell the product and service. And I feel like we're in a pretty good shape around our mix of fixed and mobile assets and how we're thinking about that evolution of convergence.

I think we're ready for our next question, operator.

Our next question comes from the line of Michael Rollins of Citi. Please go ahead.

Thanks and good morning. Two topics, if I could. First, on Mobility, just curious if you could further unpack where the strength in the postpaid phone net adds came from during the quarter, and if you're seeing any changes in the competitive landscape with some of the adjustments to the promotional strategies from some of the cable and M&O competitors? And second, on the cost structure, curious if you could share your progress on the multi-year cost-cutting targets, and how you're looking at the durability for EBITDA growth on a consolidated basis to potentially outpace the consolidated service revenue performance. Thanks.

Hi, Michael. The situation hasn't changed much. We're engaging customers and channels where we believe we can truly make an impact and do so profitably. If you look at the broader numbers, you'll see we're growing a bit faster in the business side of wireless than in consumer. Our stronger growth in the business sector is partly due to our success in government and public safety sectors, which is boosting our overall performance. By nurturing our relationships in the large enterprise sector, we're able to accelerate our growth. In the consumer sector, our channels for acquiring customers have been strong and are continuing to improve. We've shown that we can work effectively with these channels each quarter, making strategic adjustments that enhance their success. This growth is not coming from a single source but rather from various areas, which is encouraging. I'm pleased to note that we're not solely relying on aggressive low-price offers to attract customers. Looking at our converged services growth, it's clear that we're incrementally improving our marketing strategies across various offerings, whether it’s wireless with no broadband or broadband without wireless. All these factors contributed to our improved performance, which we aim to maintain as long as it's profitable. Regarding our costs, we are seeing an increase in our margins, which is outpacing service revenue growth thanks to our effective cost management. I believe we still have ample opportunities to enhance business efficiency. As we transition into a 5G and fiber provider, we're addressing the infrastructure and overhead that has accumulated over time. The technology that served us well in the past will not be our foundation for the future. We’re steadily working on reducing those costs each year. Progress continues on the regulatory side, although it's a challenge state by state, we're moving forward and gaining flexibility in changing our cost structures. The management team has done an excellent job of restructuring our labor to align with these goals, and I feel confident about our progress. We're positioning the Company for future growth and creating sustainable career opportunities, which is encouraging. Although there’s still much to do, we're making strides. Our technology is working in our favor. As I mentioned, our investments in fiber are yielding benefits in operating costs. I can’t emphasize enough how advantageous it is to be involved in our network operations at this point. We’re seeing improvements in failure rates, reliability, and on-time service, which has led to a more efficient operating environment than ever before. Additionally, technology on the software side is helping us streamline labor-intensive processes, allowing us to serve customers better and improve their overall experience with AT&T. We're making significant progress and will continue in this direction. I believe we can keep lowering costs in this business, enhance consumer margins, maintain competitive margins in the wireless sector, and drive growth.

All right, operator, we have time for one more question.

Our last question will come from the line of Bryan Kraft of Deutsche Bank. Please go ahead.

Thanks. Good morning. I have a question just on the industry. Investors are growing concerned over the potential for a volume slowdown in the wireless industry, and also that perhaps the industry has taken as much pricing power as it can for a while, leaving minimal room for further pricing actions. I just want to ask, what are you seeing in the market as it relates to these issues? Do you share any of these concerns on either volumes or pricing power? Thank you.

Yes, I don't want to repeat myself too much, but I will. We've been discussing how we've observed a moderation in market volumes for some time. This year, while we're slightly ahead of the same period last year, I still anticipate that we will see overall volumes in the industry moderate a bit, which is part of our guidance and expectations moving forward. What sets our situation apart is that we have part of our business focused on the industry's growth, which is happening as people are using more of our product and willing to pay more for improved performance and features. We also have an opportunity to gain market share, allowing us to generate our own growth by attracting customers from competitors, which has been an effective strategy for us. If we can refine our approach in the middle segment of the business market, which we're diligently working on, I believe that could present an excellent opportunity for us to enhance our performance. I also think that the quality of growth will be scrutinized more closely in the future. I'm confident in what we've achieved in that area. The quality of growth we're seeing this quarter directly correlates to the customers joining our payroll and driving EBITDA growth. They are all paying and contributing positively, and I am satisfied with that kind of growth moving forward. I remain confident about our situation; this is not a shift in our strategy. We will keep seeking quality customers with a competitive offering, which will sustain our business. It's not just about raising prices for the sake of it; we've been able to showcase more value to customers, providing them with additional benefits and enhancements to their accounts. We still have the opportunity to differentiate our product and service, and when we deliver that value, we can expect to see improvements in ARPUs in the future. With that, Brett, I want to thank everyone for their time this morning. I appreciate it. As I mentioned in my opening remarks, it feels like we're going through a familiar cycle, and that's positive. We've been quite consistent in our approach. I don't have a lot of new updates on our execution besides the fact that we are continuing with the same strategies we utilized last quarter. I don't want to overemphasize it, but one of the management team's main goals has been to establish a routine that allows us to address the same challenges consistently over time and make incremental improvements. I believe you're witnessing that progress in the Company right now, and this focus is beneficial for us moving forward. I also think we have more opportunities to enhance our performance in this area.

So thank you for your time and thank you for your interest in AT&T, and I hope everybody enjoys the balance of their summer.

Ladies and gentlemen, that does conclude our conference call for today. On behalf of today's panel, we'd like to thank you for your participation in today's teleconference call, and have a wonderful day. You may now disconnect.