[Company Representative] (AT&T): I think you've got 17 holes to go. You got some work to do, buddy.
[Company Representative] (AT&T): Hey, Dad, did Grandpa see that?
[Company Representative] (AT&T): Oh, he saw it.
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[Company Representative] (AT&T): Quiet on the course.
[Company Representative] (AT&T): Were you aiming for the sand?
[Company Representative] (AT&T): It's not helping, Gramps.
[Company Representative] (AT&T): Great shot.
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[Company Representative] (AT&T): Thanks, Gramps.
[Company Representative] (AT&T): For what?
[Company Representative] (AT&T): For everything.
Brett Feldman: Hey, guys. All right, coaches, meet your students. Your parents, y'all.
[Company Representative] (AT&T): Need some more help in Texas, sir?
[Company Representative] (AT&T): There's a lot of buttons here. So probably, yeah.
[Company Representative] (AT&T): Get fast home internet from AT&T for unlimited connections.
Brett Feldman: I did it.
[Company Representative] (AT&T): How's it going, Angela?
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[Company Representative] (AT&T): Creed?
[Company Representative] (AT&T): Whose baby is that?
[Company Representative] (AT&T): It's okay. I asked.
[Company Representative] (AT&T): Who?
[Company Representative] (AT&T): The baby.
[Company Representative] (AT&T): Why is there a baby in here?
[Company Representative] (AT&T): We're setting up the internet.
[Company Representative] (AT&T): This is a liability.
[Company Representative] (AT&T): This is part of my job.
[Company Representative] (AT&T): No, it is not part of your job.
[Company Representative] (AT&T): Yes, it is part. Hi, Nora.
[Company Representative] (AT&T): How did he do?
[Company Representative] (AT&T): He was fantastic. He helped set up our internet.
[Company Representative] (AT&T): On this first one, I'll knock, you talk?
[Company Representative] (AT&T): Yeah.
[Company Representative] (AT&T): Hi.
[Company Representative] (AT&T): Hey.
[Company Representative] (AT&T): I'm your neighbor.
[Company Representative] (AT&T): We're having a watch party.
[Company Representative] (AT&T): Would you like to come?
[Company Representative] (AT&T): Sounds like fun.
[Company Representative] (AT&T): Yeah.
[Company Representative] (AT&T): Hey, Alex.
[Company Representative] (AT&T): What's up?
[Company Representative] (AT&T): Keep everyone connected with unlimited hyper-fast AT&T Fiber internet. Now available in your neighborhood.
[Company Representative] (AT&T): Last year, we helped small business owners fall asleep. This year, we're waking them up. Morning, people. Feels good to finally connect with y'all. Meet the world's first AI alarm clock, Craig AI, or as I like to call him, Craige.
[Company Representative] (AT&T): Craig, is this magic?
[Company Representative] (AT&T): It's not magic, just AT&T Business' fast, reliable internet.
[Company Representative] (AT&T): Craige.
[Company Representative] (AT&T): Don't worry about Santa.
[Company Representative] (AT&T): That was cool.
[Company Representative] (AT&T): You guys want to hear something cool? She's going to play music with her eyes. Want to see? Come.
Operator: Good morning, and welcome to AT&T's Q3 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 two. 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.
Brett Feldman: Thank you and good morning. Welcome to our Q3 call. I'm Brett Feldman, Treasurer and Head of Investor Relations for AT&T. Joining me on the call today are John Stankey, our Chairman and CEO, and Pascal Desroches, our CFO. We are also joined today by our Deputy CFO, Jennifer Biry. 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 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 will turn things over to John.
John Stankey: Thanks, Brett, and good morning, everyone. I appreciate you joining us today. We continued the momentum we established in the H1 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 postpaid phone, our best quarter in more than four years and our second consecutive quarter with more than 1 million net adds 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 Q3, we achieved 3.8% year-over-year growth in consolidated service revenue, our best performance in more than four years.
John Stankey: 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 are 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 Q3, 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 Q3, which is a faster pace of sequential growth than we achieved in the Q2.
John Stankey: This includes momentum in territories we acquired from Lumen, where converged penetration has 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 are reaching into this large under-penetrated opportunity with new plans and pricing strategies designed to bring more converged customers onto our network. As we expand our fiber reach, we are 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 are able to execute efficiently as a result of our local operating scale and owners' economics across 5G and fiber.
John Stankey: We are 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.
John Stankey: Our broad and deep fiber network also has us well-positioned to be a leader in AI-grade connectivity. Over 90% of mapped US data centers are within 10 miles of our fiber, and over 80% are within 1 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 are 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.
John Stankey: I have said this before, but it is worth repeating. The strength of our performance comes from the structural advantages we have 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 converged value proposition. By the end of this decade, we expect to operate the most advanced and technologically open communications network in the US, 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.
John Stankey: 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 US. 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 Gigapower 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.
John Stankey: Combined with our industry-leading capital investment and recent acquisitions of spectrum from EchoStar and fiber from Lumen, these agreements sharpen our US investment focus, strengthen our convergent 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.
John Stankey: 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.
John Stankey: 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.
Pascal Desroches: Thank you, John, and good morning, everyone. At a consolidated level, total revenues in the Q3 were 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 Q3 consolidated adjusted EBITDA margin since we refocused 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.
Pascal Desroches: During the Q4, 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 Q3 2025, driven primarily by growth in adjusted EBITDA and lower depreciation expense. Our Q3 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.
Pascal Desroches: For the full year, we now expect adjusted 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 held-for-sale accounting for AT&T Mexico. Capital investment was $5.6 billion in the Q3, up roughly $300 million year over year. Consistent with our outlook, free cash flow was approximately $5 billion, essentially stable compared to the Q3 2025. For the Q4, we expect free cash flow of approximately $6 billion compared to $4.2 billion in the Q4 of last year. This primarily reflects an outlook for higher cash from operations compared to last year, when our Q4 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 billion to $24 billion of capital investment.
Pascal Desroches: 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, adjusted EBITDA, adjusted 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.
Pascal Desroches: 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 billion to $23 billion range. Based on the attractive opportunity we see to grow fiber and convert 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 payments.
Pascal Desroches: 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 Q4 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 postpaid 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 remain focused on adding the right customers on the right plans with the right offers.
Pascal Desroches: This approach resulted in 379,000 postpaid phone net adds during a competitive Q3, with stable year-over-year postpaid phone churn of 0.92% and strong margin contributions. Advanced home internet service revenues grew more than 23% year-over-year in Q3, driven by the increase in our customer base. We achieved 696,000 advanced home internet net adds in Q3, including 416,000 AT&T Fiber net adds and 280,000 Internet Air net adds. This was a record quarter for combined net adds 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 Q4, we expect that our advanced home internet net adds will moderate as we typically see lower demand in this category during the holiday season. Fiber ARPU declined 4% year-over-year in Q3.
Pascal Desroches: 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 Q4 when we anticipate a similar year-over-year decline compared to our Q3 results. As we have 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 Q3 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%.
Pascal Desroches: 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 Q3 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% year-over-year, consistent with our expectation for continued 20% plus declines as we power down copper-based services and migrate customers to more advanced and reliable technologies. Legacy EBITDA declined about 27%, 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 Q4 results will be impacted by unfavorable vendor dispute settlements that will be primarily reported within the legacy segment.
Pascal Desroches: 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 Q3 with net debt to adjusted EBITDA of 3.13 times, up from 2.68 times in Q2, 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 adjusted EBITDA to return to a level consistent with our target in the 2.5 times range during 2029.
Pascal Desroches: This will be achieved through growth in adjusted EBITDA and debt repayment using excess cash flow and proceeds in 2027 from closing our fiber JV and the planned sale of our Mexico wireless business. We returned $4.8 billion to shareholders during Q3, including $2.8 billion of share repurchases. Through the end of Q3, 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 am grateful for your engagement.
Pascal Desroches: I am really proud of the work we have done here over the past 5 plus years, and as a shareholder, I am very pleased that Jennifer will be stepping into the CFO role after the new year. Brett, we are now ready for the Q&A.
Brett Feldman: Thank you, Pascal. Operator, we are ready to take the first question.
Operator: We will now begin the Q&A session. To ask a question, please press star then one. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause to assemble our roster. The first question today comes from John Hodulik with UBS. Please go ahead.
John Hodulik: Great. Good morning, guys. Before we begin, I just want to say congrats to Pascal on your retirement. It has 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 goals in terms of penetration rates? You had been talking about a 40% penetration rate, and now I think you have aspirations to get to 50. Just based on what you are seeing in the market and from competition and fixed wireless penetration, is 50% still the expectation, and could it go higher? Maybe what are you seeing in the Lumen markets? As a follow-up, John, to your commentary about the wireless signal radiating internally. Obviously, a lot of questions about the Starlink mobile strategy.
John Hodulik: Just 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? Thanks.
Pascal Desroches: Good morning, John. Our fiber goals would be to have 100% penetration, but it may take a little while to get there.
John Stankey: I think we have to step back and say we have limitations to this over time. When we think about how we invest in an area, we do our economics assuming we can get to a terminal penetration rate of 40%. We do not want to go invest any place where we do not think we can get adequate returns at that level. That is not what our internal objectives are. We believe we can exceed that level. What I have 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 with persistence and consistency, and frankly, it will lean a lot on us being very successful on more converged customers to get there.
John Stankey: Still fully believe that is achievable, and I would expect that as we go forward, you have heard me say that we have a lot of different plays that we can run. Obviously, in all markets, I would love to be able to get to that 50% penetration with a direct retail relationship. But I have also shared with you that in this company and in this industry, it is not beyond any expectation that you would not have some wholesale at some point in time. 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 are putting all that capacity to use over the long haul.
John Stankey: If we hit a place in particular markets, for example, where we think we have 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 would not rule that out over the long haul. So I think there is more innings to play in this game as we move forward. The Lumen markets, as you know and we shared when we acquired the asset, were under-penetrated comparatively to what AT&T markets might have been for their same build tenure. So what we have been doing, as you are aware, is trying to convert all those markets to AT&T-branded fiber. We are just about through that process. We have a couple left to go to finish that up.
John Stankey: 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 are seeing penetration march up. That penetration is marching up in a manner that is 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 done to put some conservatism in the business case. With what I am seeing right now, maybe that is a little too conservative. We will see as time marches on. As I shared in my remarks, the other advantage we are seeing is increasing in the convergence rate.
John Stankey: We are up 250 basis points since the March, end of February acquisition. That is part of the reason you are seeing the strong margin performance in the wireless business as well. I feel really good about where those are and where we are going to go over the long haul. In terms of what it takes to build a scaled converged 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 am maybe not the best person to reference on that. 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 is not something that gets done overnight.
John Stankey: I wouldn't over-rotate on what I would call one carrier of low-band spectrum. I mean, let's put this in perspective. In our scaled network, we run, depending on the metro, somewhere between 6 to 8 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 have shared with you that you can go into a metropolitan area like Chicago and look at the traffic on the network, and somewhere between 40% to 45% of the traffic on any given day is traffic that is originated from inside of a building. As a result of that, how you perform indoors, of course, is extremely important, and we shouldn't think about those as being nominal loads. They are significant loads, even with robust Wi-Fi networks that are out there.
John Stankey: I think it takes a lot of years and a huge level of 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. I think there is going to be continued advances. We are 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 have got the scale where the scale matters.
John Stankey: 98% of the traffic is where we have already built and where we already have capabilities, and customers have become accustomed to a level of service that is pretty high, and rightfully so. They pay us a lot for what they get from us, and they should expect it to work. That is my point of view on it. I feel really good about where we are at. I feel really good that we are 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.
Brett Feldman: All right. Thanks for the questions, John. Operator, we will go to the next one.
Operator: The next question comes from Michael Rollins with Citi. Please go ahead.
Michael Rollins: Thanks. I also want to extend my congratulations to Pascal on your upcoming retirement and a welcome to Jennifer. Two questions, if I could. First, if you drill down further on the broadband ARPU, can you share what you are seeing in terms of the performance of broadband ARPUs and revenue in your more established, mature fiber markets relative to the expansion markets? Do you see broadband returning to some degree of annual pricing power, whether it is through the speed tier mix, future upsells, or just simply changes in retail pricing over time? Secondly, John, you referred to some of the AI opportunities earlier for AT&T.
Michael Rollins: And just curious, what are the signals that you are 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 are looking to invest in connectivity with AT&T? Thanks.
John Stankey: Good morning, Michael. The way I think about broadband ARPU is what we want is a portfolio of customers that basically buy from us at all discrete price points. I think you have heard us talk about the fact that we have been somewhat under-penetrated in maybe more of the value segments. That is true both in our wireless business as well as our fixed business, and I see no reason that, especially when you are 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.
John Stankey: I think in our, 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 higher price points because we went in marketed largely as premium, and it was premium. We are now coming back and doing the cleanup on convergence to pick up additional households, and in some cases, we are going in 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. We think that getting that consolidated account in makes sense, and as a result of that, you get some deterioration in average ARPUs. I do not want to focus on that exclusively.
John Stankey: What we want to focus on is the fact that you are seeing great service revenue growth in our business. You are seeing great customer account growth. You are seeing a margin equation that is fantastic, in my view, based on the kind of growth we are going through. When I have that kind of equation showing up, that is how I want the team to move forward and how we should think about these things. In terms of your question on what happens in the future, I think what happens in the future is what has happened in the past. That is, you have those relationships and they are good, and customers like the product and they stay with you, and we have every reason to believe that a converged customer that is sitting on fiber is going to be a sticky and high lifetime value customer. We shared that with you.
John Stankey: They are going to naturally, based on their needs and capabilities that they desire, they will probably buy up over time. 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 fixed wireless, a better performing product, 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 caused them to say, "I need to tick up to a higher speed tier." And we will be able to do that without breaking a sweat because the network is there and can easily do that on a software adjustment, and we do not have to add incremental capacity in the infrastructure to do that.
John Stankey: I expect there is going to be good stability in that ARPU over time. In the enterprise segment
Pascal Desroches: Well, Mike, one other point. I would remind you as recent as last December, we had a pretty meaningful price increase that impacted much of our fiber base. As consistent with John's response, we have a history of being able to manage the base of pricing across both products.
John Stankey: In the enterprise segment on AI, what we are seeing right now is what I would call there is 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 where they are running traffic over both their fixed and mobile infrastructure. They are running traffic 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.
John Stankey: The discussions right now of the next application are how 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 is consistent with what the performance is, if it is an AI-based driven application or capability. Oftentimes, those have more stringent requirements on latency, round trip performance. If you are doing inference, you need quicker response times, and people want that performance and they are doing more of it, so they just need more sheer capacity. That is part of what is 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.
John Stankey: When you start thinking about what happens in the robotic space, what happens as more autonomy increases at the warehouse levels, those things are going to drive another layer of requirements and performance. When that happens, I believe there will 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. Once you have that foundational infrastructure in that, 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 are going to be in really good shape.
John Stankey: I just might add for clarity, the reference I made to some of the work that we are doing with the hyperscalers, where that fits into this picture is, as you know, we have invested heavily at the edge in endpoints, both in our wireless business and our fixed business. 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.
John Stankey: 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 is our metro and our endpoint networks that we have built and invested in so heavily can have that end-to-end visibility and end-to-end performance. 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 that we are at the right points of presence to be able to offer that back to customers.
Brett Feldman: All right. Thanks for the questions, Mike. Operator, go to the next one.
Operator: The next question comes from David Barden with New Street Research. Please go ahead.
David Barden: Hey, guys. Thank you so much. Pascal, it has been a pleasure, and welcome to Jennifer as well. I guess, John, I agree with you. I think that the idea that SpaceX and Elon are going to invest a tremendous amount of resources to take a business that is very well functioning and tear it down is probably the wrong way to think about the ambitions in mobile, which is to create new connectivity opportunities in AI and robotics and cars and all these things. I think that maybe the market is getting that wrong. I do think that there is this question about their ability to address the broadband industry.
David Barden: Maybe at the value end of the market where fixed wireless access has been so successful and how that presence might alter your thought process around fixed wireless access, its growth opportunity, its role in nurturing how you build and bridge to the fiber business. If you could elaborate a little bit on that would be great. Then, Pascal, just quickly, 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, as we reduce CapEx in fiber through efficiencies, we are 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.
John Stankey: So, Dave, good morning. I would tell you this, that 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 is 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 are building for AT&T Fiber and how we think about expansion and our partnerships is all driven on a foundation of how do we get enough footprint and enough converged services in a way that puts us in a shared leadership position for consolidated service revenues moving forward.
John Stankey: And over the long haul, whoever steps into my chair after me, that is, in my view, kind of the race you are running for, and those are going to be the most durable customers, whether they are consumers or businesses. Moving forward, we have, as we always have in this industry, there are transition times of technology. It is not to say that there was not money made off of digital subscriber lines and ADSL and other capabilities, but they are transient and they run their course if they are not the most sustainable technology. To your point, I think fixed wireless access, as I have 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 is used and are being used today that ultimately will be outstripped by investment in other and newer technologies.
John Stankey: As I have said, 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 is a motivation to invest in AT&T Fiber, it is going to be really hard for people to beat the consolidated value proposition of AT&T 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 peak and then a downward trajectory of fixed wireless as those technologies and the better technologies settle into places.
John Stankey: But that is not inconsistent with the set of expectations that we have been building in this company and that we have used to drive our guidance to you over the long haul, and it is not inconsistent with what I have articulated as this company's goal to be the service revenue leader in the industry as we exit this decade.
Pascal Desroches: 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. Generally, we pay for the devices within a relatively short term. 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. That is the working capital drain that I described in my script. Also impacting our cash is the disposition of our Mexico asset. As I mentioned in my comments, higher cash interest principally related to rates.
Brett Feldman: Thanks for the questions, Dave. Operator, can we go to the next one?
Operator: The next question comes from Sean Diffley with Morgan Stanley. Please go ahead.
Sean Diffley: 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. 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. Do you see this as a deflationary force in the industry and a catalyst for switching? Then talk about the risk and opportunity that you see for AT&T specifically. On CapEx, I think it came down by about $1 billion for 2027 and 2028. 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?
John Stankey: Good morning, Sean. So, look, I think there's a lot that still is unpacked on what is technology in general, agentic search, agents, et cetera, going to do to everybody's funnel management. 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.
John Stankey: I think we're probably in the early innings of that, but we're aware of it. We're adjusting to it. I think at the end of the day, what's really important is you have good products, and those good products have the right reputation and right value in the market, and then ultimately, you will be successful as you move forward. When you're operating in a position where you're putting technology out that's the 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 forward. 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. That's always been our point of view.
John Stankey: We also believe customers need to dictate their path forward on things. Customers 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.
John Stankey: As long as that responsible party is authorizing and allowed to go out 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 confirm. Those same principles and practices will be in place moving forward with agents. But the important thing is that the customer will control.
John Stankey: They'll say whether or not their account is authorized to be managed by an agent. Then if there is a large transaction that takes place, there'll 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. Over the long haul, 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.
John Stankey: 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. I think over the long haul, put good products out there, treat people well, it'll be fine for our business. We'll have accretion of new customers who find us who wouldn't have found us otherwise. We'll have some customers who choose to be a little bit more efficient now they buy from us. Pascal, do you want to touch on the cash flow issue?
Pascal Desroches: 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 $1 billion. $300 million to $400 million of that is going to be Mexico Wireless CapEx. The balance is from the efficiencies I described in my comments. Think about this. 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 build a little bit more efficiently and effectively. In terms of overall cash flow, the pieces to think about are the absence of Mexico probably costs you $400 million to $500 million annually.
Pascal Desroches: 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.
Brett Feldman: All right. Thanks for the question, Sean. Operator, we will go to the next one.
Operator: The next question comes from Craig Moffett with MoffettNathanson. Please go ahead.
Craig Moffett: Hi, thank you. You talked about the fiber-led strategy. Given the rise in interest rates, you have 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?
John Stankey: Good morning, Craig. Yeah, I think part of the reason why we are 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. The reality is that is very hard to do. In some cases, there has been maybe more concentrated builds with the business model on legacy services and other things that have not been aggressively managed to come up with an overall profitable equation. We see the same thing. I think I would answer it the same way I have answered it in the past. Tell me the price and I will give you the answer to the question.
John Stankey: I think you've seen up to this point in time, I've been willing to go and acquire footprint and do things when I feel like we're getting a price that's an appropriate price. We think if the infrastructure's 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 if it holds to my point of view of us getting scale in the right geography. I don't want to just buy a footprint for the sake of buying it.
John Stankey: 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 in our wireless business and all the things that we think kind of are the magic 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 that were like that were priced that way, showed up, sure, I'd look at them as options and possibilities for us. Right now, I would say in some cases, maybe there's expectations in that market that aren't consistent with what I just articulated.
Brett Feldman: All right. Thanks for the question, Craig. Operator, I think we have time for one more question.
Operator: The next question comes from Sam McHugh with BNP. Please go ahead.
Sam McHugh: Yeah, morning, guys, and congrats, Pascal, as well, and welcome, Jennifer. On the fiber ARPU, helpful color on Q4. The 2027 guidance, do you anticipate a similar decline in fiber ARPU as we're seeing at the moment? 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 cross-sell potential in wireless if you wholesale. Would you look for reciprocal fiber access from others as a precondition of wholesaling fiber? Thanks.
Pascal Desroches: Hey, Sam. 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. That would imply a slight 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.
John Stankey: Sam, on your question about wholesale, your question, and first, you're thinking about it the right way, which is wholesale doesn't mean you have to open it up to all comers. Wholesale could mean that you wholesale it to those that are more strategically positioned to help you in aggregate. An example of that would be, potentially there's a wholesaler who wants to, for example, have an exclusive MVNO 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. 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.
John Stankey: 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. I think what's important to understand is you don't have to make these decisions on a national basis. These can be very geographically driven. I think as 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.
John Stankey: Really, if you look at what we have recently done in reorganizing our business, I do not 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 are at a place where not all markets are created 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. I think you are going to make those kind of decisions on a location-by-location and circumstance-by-circumstance basis.
Brett Feldman: All right. Thank you for the question. Operator, that was our last one. You can go ahead and close out the call.
Operator: Thank you. The conference has concluded. Thank you for attending today's presentation. You may now disconnect.
[Company Representative] (AT&T): Somebody say door?
[Company Representative] (AT&T): Light them up, Bobby. My man.
[Company Representative] (AT&T): Man, I could really hit that ball. I miss it every day.
[Company Representative] (AT&T): Well, maybe we should get you back out there, huh?
Operator: Hey, Gramps, can you hear me? Can you see me?
[Company Representative] (AT&T): Is that you, Mike?
Operator: I need you to be my eyes today, okay?
[Company Representative] (AT&T): You got it. That's grip, more hip?
Operator: Yeah. Hey, what do you think I should do here?
[Company Representative] (AT&T): See if you can try it left hand low.
Operator: What you think about that?
[Company Representative] (AT&T): I think you've got 17 holes to go. You got some work to do, buddy.
Operator: Hey, did Grandpa see that?
[Company Representative] (AT&T): Oh, he saw it.
[Company Representative] (AT&T): Where did you learn to swing like that?
Operator: All my weaknesses come from you.
[Company Representative] (AT&T): Stop trying to kill it. Hit it now.
[Company Representative] (AT&T): Quiet on the course.
[Company Representative] (AT&T): Were you aiming for the sand?
Operator: It's not helping, Gramps.
[Company Representative] (AT&T): Great shot.
Operator: What was that?
[Company Representative] (AT&T): Great shot, Mike. You heard me.
Operator: Well, I know. I just wanted to hear you say it again.
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Operator: Thanks, Gramps.
[Company Representative] (AT&T): For what?
Operator: For everything.
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John Stankey: You need some more of them safety pins?
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[Company Representative] (AT&T): Why is there a baby in here?
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John Stankey: This is a liability.
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Operator: Yeah.
