At&T Inc. (T) Q3 2026 Earnings Call Transcript

Good morning, and welcome to AT&T's third quarter 2026 earnings call. At this time, all participants are in a listen-only mode. Should you need assistance during the call, please press star, then zero, and an operator will assist you offline. Following the presentation, the call will be open for questions. If you would like to ask a question, please press star, then one, and you will be placed in the question queue. If you are in the question queue and would like to withdraw your question, you can do so by pressing star then 2. And as a reminder, this conference is being recorded. I would now like to turn the conference call over to our host, Brett Feldman, Treasurer and Head of Investor Relations. Please go ahead.

Thank you and good morning. Welcome to our third quarter call. I'm Brett Feldman, Treasurer and Head of Investor Relations for AT&T. Joining me on the call today are John Stanky, our chairman and CEO, and Pascal DeRoche, our CFO. We're also joined today by our deputy CFO, Jennifer Byrie. 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. Additional information, as well as our earnings materials, are available on the Investor Relations website. With that, I'll turn things over to John.

Thanks, Brett. Good morning, everyone. I appreciate you joining us today. We continued the momentum we established in the first half of the year, delivering another strong quarter that reflects durable growth from our investment-led strategy. During the quarter, we added over 1 million advanced connectivity subscribers from fiber, fixed wireless, and post-paid phone. Our best quarter in more than four years, and our second consecutive quarter with more than 1 million net ads across these services. These are high-quality customer relationships, and we continue to see growth in accounts that select AT&T for both their wireless and Internet connectivity. Our improved gains in subscribers and converged accounts are driving strong financial results. In the third quarter, we achieved 3.8% year-over-year growth and consolidated service revenue, our best performance in more than four years. It was also our second consecutive quarter with adjusted EBITDA growth above 5% and adjusted EPS growth above 20%. Our strong operating and financial performance reflects balanced growth across our portfolio of 5G and fiber services in both the consumer and business sectors. We're achieving these results through consistent execution against our core priorities, which are growing converged customer relationships, operating with greater efficiency, and investing for durable growth and attractive returns. At the end of the third quarter, nearly 43% of our advanced home Internet customers also had a postpaid wireless account with AT&T. We added approximately 350,000 customer relationships to our base of converged accounts in the third quarter, which is a faster pace of sequential growth than we achieved in the second quarter. This includes momentum in territories we acquired from Lumen, where converged penetration is increased by 250 basis points since we closed the transaction in early February. Our fiber reach has never been greater, our spectrum position has never been stronger, and we're reaching into this large, underpenetrated opportunity with new plans and pricing strategies designed to bring more converged customers onto our network. As we expand our fiber reach, we're using tiered introductory pricing to build penetration and anchor the home early across a wide range of customer cohorts that we can grow our business with over time by attaching wireless and other high-value services and features. With fiber, this is a differentiated and effective go-to-market strategy that we're able to execute efficiently as a result of our local operating scale and owner's economics across 5G and fiber. We're also removing friction for consumers by constructing plans built around simplicity, transparent value, and convergence, by investing in digital experiences that allow customers to do business with us the way they want to and by offering peace of mind through America's best guarantee. By continuing to put our service and customer experience at the forefront of our customer value proposition and shunning uneconomical device offers, we are well positioned to drive durable, converged relationships. We saw improved traction with business accounts in the quarter and achieved our second consecutive quarter of year-over-year growth in business advanced connectivity service revenues. Our performance reflects improved sales execution across direct, indirect, and digital channels, greater penetration of fiber and fixed wireless, and better positioning with business customers that need reliable, secure, and high-capacity converged connectivity across multiple locations. Our broad and deep fiber network also has us well positioned to be a leader in AI-grade connectivity. Over 90% of mapped U.S. data centers are within 10 miles of our fiber, and over 80% are within one mile. This is one of the reasons why the nation's leading hyperscalers are working with AT&T to support their rapidly growing high-capacity connectivity needs. This includes AWS, who is using AT&T to connect their locations with high-capacity fiber. We're also working with Microsoft to support its high-capacity needs as AI growth drives demand. These moves are simply foundational to drive sustainable value by layering high-margin services and network intelligence on top of that fiber to connect growing AI workloads across the entire ecosystem, including business endpoints, metro aggregation, and managed multi-vendor cloud ingress and egress. I've said this before, but it's worth repeating. The strength of our performance comes from the structural advantages we've established after years of consistent and targeted investment. In the dense urban and suburban areas where we deploy both fiber and 5G infrastructure at scale, we believe that our competitors cannot and will not match our operating proficiency, network performance, or exceptional converge value proposition. By the end of this decade, we expect to operate the most advanced and technologically open communications network in the U.S., built on a foundation of dense interconnected metro fiber and a nationwide wireless network that I should mention already functions at scale indoors and out. This asset base puts us in a leading position to serve converged consumer and business customers today and well into the future as AI becomes a key driver of their connectivity needs and requires ever-improving high-performance networking. Over the past few weeks, we've announced several agreements that further advance our goal of being the leading provider of advanced connectivity in the U.S. This includes the launch of our joint venture to help close coverage gaps by making satellite-enabled connectivity easier to deliver where traditional service is limited. We announced an agreement with global infrastructure partners, a part of BlackRock, and CPP Investments to form a JV that includes giga power and the fiber assets we acquired from Lumen in order to accelerate fiber deployment outside of our traditional operating territories. We also reached a multi-year agreement with Corning to supply the fiber we need to support our goal of reaching 60 million-plus fiber locations by the end of this decade. We signed an agreement to sell our wireless business in Mexico. Combined with our industry-leading capital investment and recent acquisitions of Spectrum from Echostar and Fiber from Lumen, these agreements sharpen our U.S. investment focus, strengthen our convergence strategy, and position AT&T to have the leading share in advanced connectivity service revenue by the end of the decade. On the cost and simplicity side, we continue to make significant progress in our work to exit less efficient copper-based legacy services. We're putting our customers at the center of this transition, and we're working with them to upgrade to newer, more reliable services like Phone Advanced, fiber, and Internet Air. Our progress here is picking up momentum, and we now have more than 100 wire centers with no customers supported by Legacy Services. This is an industry first at scale, and we're on track to reach our target of discontinuing copper-based services in 50% of our wire centers outside of California by the end of 2027, and substantially all of them by the end of 2029. We still have a lot of work to do here, but we've put ourselves on a path to remove significant cost and complexity as we remove outdated technologies from service. As we accelerate this work, we believe we have a meaningful medium-term opportunity to monetize the copper embedded in our legacy network. As I close, I think many of you are aware that this will be Pascal's final quarterly report. I know he'll tell you that his tenure has been a relaxing walk in the park and that nearly six years has raced by, but it's fair to say much has been expected of him over this period. It's also fair to say he delivered on those expectations. I could not have asked for a better partner and leader to support the transformation of AT&T's business model. His story is an inspiring story of solid values, quiet determination, respect and care for others, and a daily focus to solve problems on behalf of shareholders and the company. I know I speak for the broader team at AT&T when I say we'll miss his daily presence, but we'll be forever grateful for his leadership and outsized contributions. Now for the final time, Pascal, over to you.

Thank you, John, and good morning, everyone. At a consolidated level, total revenues in the third quarter was up 5.3% year over year, with service revenues growing 3.8%. Adjusted EBITDA grew 5.4% year over year, and we achieved an adjusted EBITDA margin of 38.7%. This is our highest third quarter consolidated adjusted EBITDA margin since we refocus our business on advanced connectivity at the beginning of this decade. And we achieved this record despite 12% growth in equipment revenue, which is dilutive to margins. This highlights the continued improvement in our underlying operating leverage as we grow our base of converged customers and achieve efficiencies from our transformation initiatives. For the full year, we continue to expect consolidated service revenues to grow in the low single-digit range and now expect consolidated adjusted EBITDA to grow in the upper portion of the 3% to 4% range. During the fourth quarter, we expect our adjusted EBITDA growth will be impacted by higher marketing and other customer acquisition costs compared to last year, driven by an extended device launch cycle and our expanded fiber go-to-market opportunity, as well as unfavorable vendor dispute settlements of approximately $100 million that will primarily impact our legacy segment. Adjusted EPS of $0.65 was up 20% from $0.54 in the third quarter of 2025, driven primarily by growth in adjusted EBITDA and lower depreciation expense. Our third quarter results reflects two notable adjustments, including a $2.6 billion non-cash impairment charge related to our agreement to sell AT&T Mexico and a roughly $800 million employee separation charge that will impact cash primarily in 2027. For the full year, we now expect a just EPS in the $2.40 range compared to our prior outlook of $2.25 to $2.35, primarily because of lower depreciation expense related to health for sale accounting for AT&T Mexico. Capital investment was $5.6 billion in the third quarter, up roughly $300 million year over year. Consistent with our outlook, free cash flow was approximately $5 billion, essentially stable compared to the third quarter of 2025. For the fourth quarter, we expect free cash flow of approximately $6 billion compared to $4.2 billion in the fourth quarter of last year. This primarily reflects an outlook for higher cash from operations compared to last year when our fourth quarter results were impacted by discrete items, including a large contribution to our pension and legal settlements. For the full year, we continue to expect $18 billion plus of free cash flow with $23 to $24 billion of capital investment. We now expect cash taxes in the $750 million range for the year compared to our prior outlook of $1 billion to $1.5 billion as we continue to benefit from the provisions in last year's One Big Beautiful Bill Act. Compared to our initial outlook, this is offset by higher cash interest payments, which primarily reflects higher gross debt and interest rates, as well as increased investments in working capital driven primarily by higher upfront spending on devices and other customer acquisition costs as we drive higher levels of customer additions across our advanced connectivity services. In our earnings release, we reiterated our long-term outlook for consolidated growth in service revenues, adjust EBITDA, adjust EPS, as well as our outlook for free cash flow through 2028. As a reminder, our long-term outlook is presented on a continuing operations basis and excludes our Mexico wireless business beginning in 2027. As we continue to extend our industry-leading scale in fiber, we are becoming more effective in how we plan, build, install, and calibrate the pace of our network deployment. We believe this positions us to reach 60 million-plus locations with fiber by the end of the decade with annual capital investment that is roughly $1 billion lower than we previously planned. For 2027 and 2028, this represents annual capital investment in the 22 to 23 billion dollar range based on the attractive opportunity we see to grow fiber and converge customers. As we expand our fiber reach, we expect to reallocate this capital into the business, primarily through working capital in support of customer acquisition investments, as well as higher interest payment. We will provide more color on the drivers that support our outlook for $19 billion plus of free cash flow in 2027 as part of our fourth quarter earnings report early next year. Our consolidated growth continues to be driven by momentum within our advanced connectivity segment. Advanced connectivity service revenues grew 6.1% year over year, with EBITDA increasing 7.3%. Wireless service revenues grew 5% year-over-year, driven primarily by growth in our subscriber base and a 4% growth in post-paid phone ARPU. This reflects greater execution of our wireless pricing strategy, including the impact of our new and refreshed rate plans, as well as our consistent approach to managing back-book pricing across the base. We remained focused on adding the right customers on the right plans with the right offers. This approach resulted in 379,000 postpaid phone net ads during a competitive third quarter with stable year-over-year postpaid phone churn of 0.92% and strong margin contribution. Advanced home internet service revenues grew more than 23% year-over-year in the third quarter, driven by the increase in our customer base. We achieved 696,000 advanced home internet net ads in the third quarter, including 416,000 AT&T Fiber net ads and 280,000 internet air net ads. This was a record quarter for combined net ads across these services, driven by the significant increase in our fiber reach, our deeper mid-band spectrum position, positive seasonal dynamics, and strong uptake of our introductory pricing. During the fourth quarter, we expect that our advanced home internet ads will moderate as we typically see lower demand in this category during the holiday season. Fiber ARPU declined 4% year over year in the third quarter. This reflects a range of factors, including traction with our introductory pricing, our growing base of converged accounts that earn discounts and growth in lower ARPU fiber customers on the quantum brand in territories we acquired from Lumen. In the near term, we expect fiber ARPU will continue to be impacted by these dynamics, including during the fourth quarter when we anticipate a similar year-over-year decline compared to our third quarter results. But as we've discussed before, our goal is to optimize growth in total advanced connectivity service revenue and EBITDA, not specific operating metrics. And we believe that our third quarter results highlight how we are improving overall margins while driving balanced and profitable growth across our portfolio. This includes another quarter of improved momentum in business advanced connectivity service revenues, which grew 2.5% year over year, with fiber and advanced connectivity service revenues growing nearly 9%. We achieved solid growth across wireless, fiber, and fixed wireless, which is now consistently offsetting structural pressures on transitional services such as VPN and wholesale. We exited the third quarter with great operating momentum, and we continue to expect full-year advanced connectivity service revenue growth of 5% plus and EBITDA growth of 6% plus. In our legacy segment, service revenues declined approximately 25 percent year over year, consistent with our expectation for continued 20 percent plus declines as we power down copper based services and migrate customers to more advanced and reliable technologies. Legacy EBITDA declined about 27 percent, and we continue to make progress taking costs out of the business as we ramp the retirement of legacy wire centers. As I noted earlier, our fourth quarter results will be impacted by unfavorable vendor dispute settlements that will be primarily reported within the legacy segment. Copper retirement remains an integral part of our overall cost transformation, and we remain on pace to achieve our target of $4 billion in annual consolidated cost savings by the end of 2028. We ended the third quarter with net debt just EBITDA of 3.13 times, up from 2.68 times in the second quarter, which reflects our $23 billion purchase of Spectrum licenses from Echostar at the end of July. The transaction materially deepened our low and mid-band Spectrum holdings and puts us in a great position to execute our strategy. We continue to expect net debt to adjust EBITDA to return to a level consistent with our target in the two and a half times range during 2029. This will be achieved through growth in adjusted EBITDA and debt repayment using excess cash flow and proceeds in 2027 from closing our FiberJV and the planned sale of our Mexico wireless business. We returned $4.8 billion to shareholders during the third quarter, including $2.8 billion of share repurchases. Through the end of the third quarter, we repurchased over $7 billion of stock this year, and we continue to target approximately $10 billion of share repurchases in 2026. Before I move on to the Q&A, I want to take a moment to thank everyone on the call. Over the years, your thoughtful questions and candid perspective have sharpened my thinking and made every conversation more valuable. I'm grateful for your engagement. I'm really proud of the work we have done here over the past five-plus years, and as a shareholder, I'm very pleased that Jennifer will be stepping into the CFO role after the new year. Brett, we're now ready for the Q&A.

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

We will now begin the Q&A session. To ask a question, please press star then 1. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause to assemble our roster. The first question today comes from John Hudlick with UBS. Please go ahead.

Great. Good morning, guys. And before we begin, I just want to say congrats to Pescal on your retirement. It's been great working with you. And welcome to Jennifer. Maybe for John, if we could start first with the fiber strategy. Could you talk a little bit about your sort of goals in terms of penetration rates? You have been talking about a 40% penetration rate. And now I think you have aspirations to get to 50. Just based on what you're seeing in the market and from competition and fixed wireless penetration is 50% still sort of the expectation and could it go higher? And maybe what are you seeing in the lumen market? And then as a follow-up, John, to your commentary about the signal, the wireless signal radiating internally, obviously a lot of questions about the Starlink mobile strategy. Just can you, Any high-level thoughts on the use of a Leo Constellation to provide mobile service and maybe what it would take to build out a terrestrial footprint to complement that service and match what you get from AT&T from a mobile standpoint?

So our fiber, actually, my fiber goals would be to have 100% penetration, but it may take a little while to get there. I don't think we have to step back and say that we have limitations to this over time. We clearly, you know, when we think about how we do our economics, assuming we can get to a terminal penetration rate at any place where we don't think we can get adequate returns at that level, that's not what our internal objectives are. We believe we can exceed that level. what I've shared with you before is we have a pretty straightforward process that gets us from zero to 40 in terms of tactics and timing the 40 to 50 range is a little bit different takes a little bit more time takes a variety of different tactics and it comes you know with to get there and so still fully believe that's achievable and I would expect that as we go forward you've heard me say that we have a lot of different plays that we can run markets. I'd love to be able to get to that 50% penetration with a direct retail relationship. But I've also shared with you that in this company and in this industry, beyond any expectation that you wouldn't have some wholesale at some point in time. And we got a lot of capacity on that network. We could literally handle 100% of the customers in an area if they all came to us. So I want to make sure that we're putting all that capacity to use. And if we hit a place in particular markets, for example, where we think we've reached our ability to penetrate under our brand, as this matures over time, is it possible that we might open up the network and have others sell on top of it to drive penetration and returns up? I wouldn't rule that out over the long haul. So I think there's more innings to play in this game as well. The Lumen markets, as you know, and we shared when we acquired the asset, underpenetrated comparatively to what AT&T markets might have been for their same build tenure. And so what we've been doing, as you're aware, AT&T branded fiber, we're just about through that process. We have a couple left to go to finish that up. As we convert those markets to the AT&T branded fiber, as we put the business processes in place that we have honed in our other operating regions and apply them to those markets, we're seeing penetration march up. That penetration is marching up in a manner that's consistent with the business case that we outlined and our goals. I think we shared with you when we did the transaction that we expected the terminal penetration levels of our out-of-region markets to be somewhat lower than the terminal penetration levels of our embedded traditional markets. That, again, was the conservatism in the business. What I'm seeing right now, maybe that is a little too conservative. We'll see as time marches on. And as I shared in my remarks, the other advantage we're seeing is increasing in the convergence rate. We're up 250 basis points since, you know, the March, end of February acquisition. Part of the reason you're seeing, you know, the strong margin performance as well. So I feel really good about where those are and where we're going to go. In terms of what it takes to build a convergent network, which is what I believe everybody is marching into here and what some of the new entrants are talking about needing to do. It takes a lot. I'm maybe not the best person to reference on that. I might, you know, next time you bump into Charlie, you should talk to him and ask him what it took and how many years and complications that come up in doing those types of things. It's not something that gets done overnight. I wouldn't over-rotate on between six to eight carriers of low-band spectrum. In addition, that spectrum is not just housed on macro antenna sites. It exists on every indoor building system and high-rises and hospitals and stadiums. I've shared with you that you can go into a metropolitan area like the traffic on the network and somewhere between 40 to 45 percent of the traffic on any given day. is traffic that's originated from inside of a building and as a result of that how you perform really important and we shouldn't think about those as being nominal loads there there are significant loads even with robust wi-fi networks that are out there so i think it takes a lot of years and a huge level investment to get to the kind of performance levels that customers have become accustomed to in scaled networks that are running on the infrastructure that most of the incumbent providers have today. So, you know, I think there's going to be continued advances. We're certainly excited about the continued advances in LEO technology and how it might help us at the edges of our network and preventing folks from walking off the network, how it might help us in places where we have less density and maybe we can lower our cost structure rather than putting less used macro sites in place, serving those differently. But we've got the scale where the scale matters. You know, 98% of the traffic is where we've already built and where we already have capabilities and customers have become accustomed to a level of service that is pretty high, rightfully so. They pay us a lot for what they get from us, and they should expect it to work. So that's my point of view on it. I feel really good about where we're at. I feel really good that we're going to have the best converged set of assets out there, both with fiber and our robust wireless network to meet those expectations moving forward, especially in the upstream.

All right, thanks for the questions, John. Operator, we'll go to the next one.

The next question comes from Michael Rollins with Citi. Please go ahead.

And I also want to extend my congratulations to Pascal and your upcoming retirement and a welcome to Jennifer. two questions, if I could. So, you know, first, if you fill down further on the broadband ARPU, and can you share what you're seeing in terms of the performance of broadband ARPUs in revenue in your more established, mature fiber markets relative to the expansion markets? And do you see broadband returning to some degree of annual pricing power, whether it's through the speed tier mix, feature upsells, or just simply changes in retail pricing over time. And then secondly, John, you referred to some of the AI opportunities earlier for AT&T. And just curious, what are the signals that you're currently seeing in the network from enterprises, hyperscalers, and consumers in terms of early uptake of data traffic and consumption and how customers may be engaging with you differently in terms of how they're looking to invest in connectivity with AT&T.

So, Ann, I think you've heard us. You've been somewhat underpenetrated in maybe more of the value segments. That's true, as well as our fixed business. And I see no reason that, especially when you're building a network that has the kind of capacity that a fiber network has that we shouldn't think about. We want to play in every segment. We just want to play in those segments at the right price point. And I think in what I would call our more mature markets, if you went in and looked at them, what you would see is a very nice distribution of folks that are at – because we went in, marketed largely as premium, and it was premium, and we're now coming back and doing the cleanup on convergence to pick up additional households, and in some cases with different price points and a different performing product. We want to make sure that the price point is matched to the performance of the particular product. Think rate and speed. And we think that getting that consolidated account in makes sense. And as a result of that, you get some deterioration in average ARPUs. And focus on that exclusively, what we want, revenue growth in our business. You're seeing great customer account growth. You're seeing a margin equation that is fantastic, in my view. based on the kind of growth we're going through. And when I have that kind of equation showing up, that's how I want the team to move forward and how we should think about these things. And in terms of your question on what happens in the future, I think what happens in the future is what's happened in the past. That is, you have those relationships and they're good, and customers like the product and they stay with you, and we have every reason to believe that a Converge customer that's sitting on fiber is going to be a sticky and high lifetime value customer. We shared that with you. They're going to naturally, based on their needs and capabilities that they desire, they'll probably buy up over time. And so just because we bring somebody in at a more value-oriented price point early on and we can offer at a price point that matches, fix wireless. I think the future is bright because at some point that household is going to take advantage of the things that you just referenced, like more capabilities around AI or they have more children or whatever it might be that cause them to say, I need to tick up to a higher speed tier. And we'll be able to do that without breaking a sweat because the network's there and can easily do that on a software adjustment. And we don't have to add incremental capacity in the infrastructure to do that. So I expect there's going to be good stability in that ARPU over time. In the enterprise segment.

Well, Mike, one other point I'd remind you. As recent as last December, we had a pretty meaningful price increase that impacted much of our fiber base. So it's consistent with John's response.

We have a history of being able to manage the base of pricing across across both products in the enterprise segment on AI what we're seeing right now is what I would call there's just increased workloads that are going on mostly into the cloud that people need capacity for to deal with what the discussions are moving to is a reality that most people are in a hybrid environment over both their fixed and mobile infrastructure across multiple cloud layers. And what they need to be able to do is to ensure that certain applications that have higher requirements for performance are consistently managed across both those networks and across multiple cloud fabrics. And so the discussions right now of the next application are how do we basically tag and mark performance level packets to ensure that particular applications that run in both environments can maintain a high level of service that's consistent with what the performance is if it's an AI-based driven application or capability. Oftentimes those have more stringent requirements on latency, round-trip performance. If you're doing inference, you need quicker response times, and people want that performance, and they're doing more of it, so they just need more more sheer capacity, and that's part of what's driving the lift. What I expect, based on other conversations that are going on, is we, in fact, will start to see more applications pop up that are even more demanding. When you start thinking about what happens in the robotics space, what happens as more autonomy increases at the warehouse levels, those things are going to drive another layer of requirements and performance. And when that happens, I believe there'll be probably another investment level that will be required. It will be managed networks that will be necessary given the performance requirements that are essential to allowing that to happen. And once you have that foundational infrastructure in, it's that, you know, what I would call fiber-fed infrastructure that has the ability to track packets across both fixed and mobile and deliver a high-quality service, I think you're going to be in really good shape. I just might add for clarity, the reference I made to some of the work that we're doing with the hyperscalers, where that fits into this picture is, as you know, we've invested heavily at the edge in endpoints. We have a fantastic metro-to-metro infrastructure, as you might imagine, based on the nature of our network and how we operate. What we want to make sure is that our backbone, in and out of those metros that hit those cloud fabrics, we have absolute visibility on how we do that ingress and egress. And so by involving ourselves with the hyperscalers that are driving most of the workloads in that space, that makes sure that we have the right expressways or on-ramps in and out of their clouds so that as our metro and our endpoint networks that we've built and invested in so have end-to-end visibility and end-to-end performance. And we want to do enough work in the long haul and in the data center to data center space and partner in the right ways where we ensure we have that right infrastructure in place and we're at the right points of presence to be able to offer that back to customers.

All right. Thanks for the questions, Mike. Operator, we'll go to the next one.

The next question comes from David Barden with New Street Research. Please go ahead.

Hey, guys. Thank you so much. And Pascal, it's been a pleasure. And welcome to Jennifer as well. So, I guess, John, I agree with you. I think that, you know, the idea that, you know, SpaceX and Elon are going to invest a tremendous amount of resources to take a business that's very well functioning and tear it down is probably the wrong way to think about the ambitions in mobile, which is to kind of create new connectivity opportunities in AI and robotics and cars and all these things. And so I think that maybe the market's getting that wrong. But I do think that there is this question about their ability to address the broadband industry, maybe at the value end of the market, where fixed loss access has been so successful, and how that presence might alter your thought process around fixed loss access, its growth opportunity, its role in nurturing how you build and bridge to the fiber business. If you could kind of elaborate a little bit on that. That'd be great. And then, Pascal, just quickly, you know, we threw the word working capital around quite a bit in the prepared remarks. It feels like the intention has been to reduce subsidies on handsets as a method of growing the wireless business. But, you know, as we reduce capex in fiber through efficiencies, we're reinvesting it in a combination of working capital interest expense. Could you elaborate a little bit on how this working capital investment is allocated to building the business? Thank you.

So, Dave, good morning. I would tell you this, the most durable customer combination in our industry is a fiber-fed broadband customer with a great wireless service on top of it, bar none. It's going to be the most sustainable, longest lifetime value. In my view, when I talk about service revenue share leadership in the industry, the math and the calculation on the footprint that we're building for fiber and how we think about expansion in our partnerships is all driven on a foundation of how do we get enough footprint and enough converged services in a way that that puts us in a share leadership position for consolidated service revenues moving forward. And over the long haul, You know, whoever steps into my chair after me, that's, in my view, kind of the race you're running for, and those are going to be the most durable customers, whether they're consumers or businesses, moving forward. We have, as we always have in this industry, there's transition times of technology. You know, it's not to say that there wasn't money made off of digital subscriber lines and ADSL and other capabilities, But they are transient and they run their course if they're not the most sustainable technology. And to your point, I think fixed wireless access, as I've said, will have certain customer bases and applications that are going to make it a sustainable technology, but there are going to be other ways that it's used and are being used today that ultimately will be outstripped by investment in other and newer technologies. As I've said, I think there's some – I think Leo constellations are fantastic for delivering bandwidth to rural areas, and they may well be the most efficient and effective way to get bandwidth into less densely populated areas moving forward. Where there's a motivation to invest in fiber, it's going to be really hard for people to beat the consolidated value proposition of fiber and wireless, especially as the technology matures and the service capabilities around it mature to allow less friction for a customer, offer more effectiveness with it, and make those products work even better together. So I think over time your point is correct that there is going to probably be some kind of a, you know, peak and then a downward trajectory of fixed wireless as those technologies and the better technologies settle into places, but that's not inconsistent with the set of expectations that we've been building in this company and that we've used to drive our guidance to you over the long haul, and it's not inconsistent with what I've articulated as this company's goal to be the service revenue leader in the industry as we exit this decade.

And, Dave, you are correct in saying that the level of promotions remains the same, and the customer ultimately is going to bear the cost of higher device prices. With that said, there is a timing element. So, generally, we pay for the devices within a relatively short term. So, think about phones, tablets, gateways. We pay upfront and we collect over time, typically the life of the customer. Therefore, we are investing upfront and recovering it over time. So that is the working capital drain that I described in my script. Also impacting cash is the disposition of our Mexico asset. And as I mentioned in my comments, higher cash interest principally related to rates.

Thanks for the questions, Dave. Operator, we go to the next one.

The next question comes from Sean Diffley with Morgan Stanley. Please go ahead.

Great. Thanks very much, team, and congrats to Pascal on an awesome career. Two, if I may, the first on Agentic and the second on CapEx and free cash flow outlook. So, John, just an overarching question on how you're thinking about the potential rise of AI agents like Muse impacting the connectivity sector or not. You know, do you see this as a deflationary force in the industry and a catalyst for switching? And then talk about the risk and opportunity that you see for AT&T specifically. And then on CapEx, I think it came down by about a billion for 27 and 28. You kept the free cash flow guide the same. I think you talked about improved efficiency on some of the fiber builds. I think the Mexico sale might be in there. But anything else we should be thinking about on the CapEx and free cash flow swings?

Good morning, Sean. So, look, I think there's a lot that still is unpacked on, you know, what is technology in general, agentic search, agents, et cetera, going to do to everybody's fund. And I don't pretend to know exactly how that's going to play out. I will tell you we're spending a lot of effort and time on it. And there's many things we've been doing over the last several months and quarters to fine-tune our strategies on how we make sure we stay relevant. I would tell you, as different as it's going to be, what I'm encouraged by is we seem to be doing just fine and making the adjustments we need to make, because there's been quite a bit of change already in how consumers are searching and looking for information and what they're doing around it. And I think we're probably in the early innings of that, but we're resting to it. I think at the end of the day, what's really important is those good products have the right reputation and right value in the market, and then ultimately you will be successful as you move forward. And when you're operating in a position where your lowest marginal cost technology that performs better, I think that puts us in a really good position to make sure we stay in that conversation moving. Specifically to your question about Muse and some of the other chatter that's going on right now, what I would tell you is philosophically, we believe the customer gets to make choices on what they do with their service. have been pretty clear with us over the past number of years about account security, account management, account control. Before agents ever showed up, there's all kinds of scenarios that go on today in real life that cause people to have to be really specific on who the decision making authority is on their account. We run family plans that have many, many people on them. We have people whose life circumstances change where there's a responsible party and there's maybe a separation or a marital discord that changes things. The notion of an account having an owner and a responsible party is not a new issue. As long as that responsible party is and make a transaction and can confirm that in the way that we would normally confirm those things, such as validating their identity and ensuring they're authorizing it, they should be able to do to their account whatever they want. If it's their agent that decides something needs to change, and they've authorized an agent to do transactions on their account, and we can authorize that transaction in the same way we would normally confirm, such as when there's a SIM swap or a major change on an account today, we use things like two-factor authentication to ensure that it's valid and confirmed. Those same principles and practices will be in place moving forward with agents. But the important thing is that the customer will control. They'll say whether or not their account is authorized to be managed by an agent. And then if there is a large transaction that takes place, there will need to be a validation and authentication of that to ensure that we're not doing something that encourages fraud or is inconsistent with what the account owner would want to do. My point of view, just like today, is we want to make sure the customers feel like they're getting value for what they're buying. We want to make sure they're right-sized to what they need in their products and services. We do that as a normal course of business when people come into our stores and talk about what their needs are or when they're working with us online in our algorithmic approach. I think agents are probably going to be another way for people to do that and be able to get insight as to what works for them. And I think over the long haul, put good products out there, treat people well, it'll be fine for our business. And, you know, we'll have a creation of new customers who find us who wouldn't have found us other ways. And we'll have some customers who choose to be a little bit more efficient now they buy from us.

Sure thing. On CapEx, here's the way to think about it. Sean, excuse me. Overall, CapEx, we said, is going to be down about a billion dollars. Three to four hundred million dollars of that is going to be Mexico wireless CapEx. The balance is from the efficiencies I described in my comments. Think about this. We have – we've been doing this for a very long time, and with that comes the advantage of scale and improved ability to get it done faster and cheaper. We have long-term contracts with partners we've been doing business with for a very long time. All those things are allowing us to do – to build a little bit more efficiently and effectively. In terms of overall cash flow, you know, the pieces to think about are the absence of Mexico probably costs you $400 million to $500 million annually. And beyond that, with higher device costs up front that we're paying for and collecting over time, there will be a working capital investment that we have to make. Those are the piece parts along with the interest costs.

All right. Thanks for the question, John. Operator, we'll go to the next one.

The next question comes from Craig Moffitt with Moffitt Nathanson. Please go ahead.

All right. You talked about the fiber-led strategy. Given the rise in interest rates, you've seen some of the smaller independent fiber builders starting to struggle, Brightspeed issuing a going concern warning and that sort of thing. Is there an opportunity for you to pick up attractively priced assets in a consolidation cycle, given the rise in rates and what that does to some of the smaller independents?

Good morning, Craig. Yeah, there are some, I think part of the reason why we're comfortable where we are in our investment levels is one of the trends that you cited, which is mistakenly some people went into this space thinking that they could build little pockets of fiber in places and never get to scale in a metropolitan area and be successful. And the reality is that's very hard to do. And in some cases, there's been maybe more concentrated builds with the business model on legacy services and other things hasn't been aggressively managed to come up with an overall profitable equation. And so we see the same thing. I think I'd answer it the same. I'll give you the answer to the question. And I think you've seen, you know, up to this point in time, I've been willing to go and acquire a footprint and do things when I feel like we're getting. And we think if the infrastructure has been built in a way that's consistent with our standards and our practices, that we can operate it effectively over the long haul and the price is right. Sure, I'd be interested in picking up more footprint point of view of us getting scale in the right geography. I don't want to say combine it. I need to make sure it bridges to other parts of our network where we can have the kind of efficiencies and scale and advertising and the growth and the economics around that. Lumen clearly fit that bill across the footprint that we picked up, in my point of view. If other opportunities were like that, that were priced that way, showed up, sure, I'd look at them as options. Right now, I would say, in some cases, maybe there's expectations in that market that aren't consistent with what I just articulated.

Thanks for the question, Craig. Operator, I think we have time for one more question.

The next question comes from Sam McHugh with BNP. Please go ahead.

Good morning, guys, and congrats, Pascal, as well. And welcome, Jennifer. On the fiber ARPUs, helpful color on the fourth quarter, but 27 guidance, do you anticipate a similar decline in fiber ARPUs as we're seeing at the moment? And then secondly, on the wholesale fiber point, John, I think you raised this maybe a year or so ago first. Obviously, you lose a bit of kind of wholesale, I'm sorry, cross-sell potential in wireless if you wholesale.

Would you look for reciprocal fiber access from others as a precondition of wholesaling The way to think about Q4 is, as I said, I expect Q4 to be down year over year around the same rate as we saw in Q3. You know, that would imply a sequential moderation. Overall, the guidance that we've given, if you recall, over the three-year period is to have most of the growth. The vast majority of our growth is going to be driven by customer additions and not pricing. And that continues to be our expectation. So overall, we continue to expect relatively stable ARPU over this period.

Sam, on your question about wholesale, your question infers you're thinking about it the right way. Wholesale could mean that you wholesale it to those that are more strategically positioned to help you in aggregate. And an example of that would be potentially there's a wholesaler exclusive MD&O relationship with you, or maybe there's a paired footprint somewhere else outside of existing fiber footprint that we have that we gain access to that we wouldn't have otherwise. And also to your point, and as I indicated in my comments, you do this after you think you've run all the plays that are your highest value plays at retail. So, you know, our goal is to do everything we can to pick up every high value customer we can to serve at retail. And we're having great success doing that, as you're seeing, with the results that we've been sharing with you. And we'll continue to run that play until we hit a place where we think we've topped out. And I think what's important to understand is, you know, you don't have to make these decisions very geographically driven. and I think is over time what we know and I think what the cable industry would show you is a lot of these decisions and a lot of your approaches to market are local and they have to be. If you look at what we've recently done in reorganizing our business, I don't know how many of you picked up on it. We did a structural change in our consumer space in our go-to-market structure. The whole reason we did it is a realization that we're at a place where not all markets are created of equal. There are differences in infrastructure. There are differences in tactics that need to be used in particular geographies of the country, depending on what your asset base and the tactics you want to move forward. And we needed to organize our business, our management teams, our incentives in a way that drove that. And I think you're going to make those kind of decisions on a location by location and circumstance.

All right. Thank you for the question, Operator. That was our last one. You can go ahead and close out the call.

Thank you. The conference has concluded. Thank you for attending today's presentation. You may now disconnect.