AT&T Inc (T) — Q3 2024 Earnings Call Transcript

Thank you, and good morning. Welcome to our third quarter call. I'm Brett Feldman, Head of Investor Relations for AT&T. Joining me on the call today are John Stankey, our CEO; and Pascal Desroches, our CFO. Before we begin, I need to call your attention to our safe harbor statement. It 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 the call over to John Stankey. John?

Thank you, Brett. I appreciate everyone joining this morning. I hope you're all doing well today. The third quarter showed again that our team continues to produce solid results as we efficiently grow high-value wireless and broadband subscribers. Since Pascal will go through the quarter in detail, I'll share more on how our investment-led strategy is helping us deliver on our full year consolidated financial guidance, creating runway for future growth, and then I'll provide a few updates on some recent developments. Our strategy remains the same to lead the industry in converged connectivity through 5G and fiber. In Mobility, the value of the coverage and reliability of the service we provide and our best deals for every one approach that puts our customers first are producing solid, sustainable results. We're growing 5G subscribers in a durable way and delivered 403,000 postpaid phone net adds in the third quarter. We also grew efficiently with lower year-over-year postpaid phone churn and upgrade rates. Three quarters of the way through the year, our Mobility business has grown EBITDA by more than 6%, which is at the high end of the guidance we provided for the full year. This puts us in a solid position heading into the fourth quarter where we expect seasonally higher phone purchasing activity, upgrades, and promotional cycles. Overall, we feel great about our continued momentum in Mobility. We're adding customers, increasing profitability, and expect to deliver the best postpaid phone churn in the industry for the 13th time in 15 quarters. Now let's switch gears to Consumer Wireline where we generated positive total broadband subscriber net adds for the fifth consecutive quarter despite impacts from a one-month work stoppage in the Southeast and from Hurricane Helene. It's important to take a moment and recognize our frontline teams who continue to show up in a heroic fashion while confronting multiple devastating hurricanes. We were pleased to welcome our committed employees in the Southeast back to work on September 16th, with newly ratified agreements, a five-year contract in the Southeast and a similar four-year agreement in the West. We appropriately recognize our employees for the exceptional service and performance they provide our customers on a daily basis with annual wage increases averaging 3.6%. Our employees will maintain their position as some of the best-paid professionals in the industry while we cooperatively work with our labor partners to reposition the company around 5G and fiber as the only all-union wireless and broadband provider in the U.S. We serve millions of individuals and businesses in the Southeast region of the country, and our frontline employees on the ground have responded quickly and worked tirelessly to keep our communities, customers, and first responders connected when it matters most. For context, our FirstNet organization provides a meaningfully differentiated product to public safety during events like these. Our organization dedicated to supporting our growing public safety base on FirstNet responded to more than 200 requests during the Hurricane Helene recovery. This was one of our largest emergency response efforts ever. These efforts are nothing short of remarkable. It's exactly why more than 29,000 public safety agencies and organizations, including the New York City Police Department, the Fire Department of New York City, and the North Carolina Department of Public Safety choose FirstNet, the only dedicated communications platform for public safety. We applaud the FCC's recent decision to make available 50 megahertz of spectrum to the FirstNet authority to facilitate nationwide deployment of 5G services for first responders, and we look forward to working together on plans that take these capabilities to the next level. Moving back to broadband. Despite a 30-day work stoppage in the Southeast portion of our footprint, we've now had more than 200,000 AT&T Fiber net adds for 19 consecutive quarters, which shows the strong underlying customer demand for fiber. In the quarter, Consumer Wireline delivered more than 8% EBITDA growth, driven by nearly 17% growth in fiber revenues. These consistent results make it clear that our fiber investment is generating attractive returns with improved operating leverage as we transition from legacy networks. Overall, the underlying momentum with 5G and fiber positions us to close the year strong. While our 5G and fiber businesses are performing well on their own, it's increasingly clear that customers prefer to purchase mobility and broadband together as a converged service. Only AT&T can offer this at scale with benefits from owners' economics. This is driving a reinforcing cycle where the success of our fiber business drives growth in mobility and vice versa. As we shared last quarter, about four out of every ten AT&T fiber households also choose AT&T as their wireless provider. Additionally, our share of postpaid phone subscribers within the AT&T fiber footprint is about 500 basis points higher than our national average. This highlights the true benefit of owning and operating both 5G and fiber networks at scale, which is the ability to drive higher share in both mobility and broadband through converged service penetration. Over time, we expect this should drive higher returns on our invested capital in both our mobility and broadband businesses than either could achieve as a standalone operation. While our convergence strategy began with a focus on our own fiber footprint, we're also pursuing attractive opportunities to expand AT&T Fiber outside of it. We're already America's largest fiber provider with the fastest and most reliable speeds. The superiority of AT&T fiber elevates the overall AT&T brand. We want more customers to experience the best wired Internet experience available today. That's why we've announced plans to bring AT&T Fiber high-speed Internet to even more people in new geographies through Gigapower, our joint venture with BlackRock, as well as through recent agreements with commercial open access fiber providers. These fiber-driven growth initiatives present attractive capital-efficient ways for us to provide both AT&T fiber and 5G wireless services to more customers. In addition to being the largest capital investor in the U.S. connectivity infrastructure since 2019, we continue to reduce our net debt and increase operating leverage due to a combination of higher EBITDA and strong free cash flow generation. Our financial flexibility continues to improve, and we remain on pace to meet our target of net debt to adjusted EBITDA in the 2.5 times range in the first half of next year. In the quarter, we also announced that we reached an agreement to sell our remaining 70% stake in DIRECTV to TPG in a non-contingent transaction, subject only to customary closing conditions, and separate from the regulatory process associated with the DIRECTV DISH transaction. This sale and transaction structure allows us to continue our focus on being a leader in 5G and fiber connectivity throughout America while further strengthening the balance sheet. It also presents new optionality as we consider opportunities to leverage our significant distribution to aggregate products and services that simplify and improve our customers' lives. We will close the transaction following necessary regulatory approvals and optimal financing and tax considerations. We're confident that the company's transformation over the past four years has positioned us well for continued organic growth while also increasing our financial flexibility and capacity to support sustained investment and enhance shareholder returns. We're excited to share the details of what this all means for the future of AT&T when we speak with you again at our upcoming Analyst and Investor Day on December 3rd, so mark your calendars for an exciting visit to Big D. With that, I'll turn it over to Pascal to cover the quarter in greater detail. Pascal?

Thank you, John, and good morning, everyone. Let's start by reviewing our third quarter financial summary on Slide 8. Third-quarter consolidated results were in line with our expectations. Revenues were down slightly as a decline in Business Wireline service revenues and low margin mobility equipment revenues were mostly offset by growth in higher-margin wireless service revenues and fiber revenues. Year-over-year consolidated revenue trends were also impacted by more than $100 million of foreign exchange headwinds and an approximately $100 million impact from transferring our cybersecurity business into a joint venture earlier this year. Adjusted EBITDA was up 3.4% for the quarter as growth in Mobility, Consumer Wireline, and Mexico, which collectively drove more than 80% of our total revenues in the quarter, were partially offset by a continued decline in Business Wireline. Year-to-date, adjusted EBITDA grew 3.4%, and we continue to expect adjusted EBITDA growth in the 3% range for the full year. We expect to achieve this growth even with about $115 million of estimated financial impact related to the effects of Hurricane Helene and Milton and the work stoppage. Consumer Wireline and Business Wireline are expected to bear most of this impact. Adjusted EPS was $0.60 compared to $0.64 in the year-ago quarter. Consistent with prior quarters this year, the third quarter included about $0.09 of aggregate EPS headwinds from the four items we discussed earlier in the year. Adjusted EPS excludes a $0.61 impact related to a $4.4 billion non-cash goodwill impairment charge for our Business Wireline unit driven by an industry-wide secular decline of legacy services. For the full year, our expectations remain for adjusted EPS in the range of $2.15 to $2.25. Year-to-date, free cash flow is $12.8 billion. This is up $2.4 billion compared to the same time last year and consistent with our goal of driving higher free cash flow that is more ratable on a quarterly basis. In the third quarter, we generated free cash flow of $5.1 billion, which included the previously disclosed one-time payment of $480 million related to our wireless network transformation and the continued paydown of vendor financing obligations. Capital investment for the quarter was $5.5 billion, down about $150 million compared to the prior year, primarily due to lower vendor financing payments. Capital expenditures were $5.3 billion, up approximately $650 million compared to the prior year. We expect higher capital investment in the fourth quarter as we ramp our wireless network modernization. We also expect to sustain strong cash conversion in the fourth quarter and anticipate using our improved liquidity to continue reducing our short-term financing, including further paydown of vendor financing in the fourth quarter. These additional vendor financing payments put us on page for a full year capital investment at the high end of our guidance range of $21 billion to $22 billion. Our free cash flow is tracking to the midpoint of our guidance range of $17 billion to $18 billion. Now let's look at our mobility operating results on Slide 9. For the quarter, we delivered 403,000 postpaid phone net adds down from 468,000 a year ago. This is consistent with our wireless market normalization expectation. We also posted another quarter of year-over-year churn improvement with postpaid phone churn of 0.8% versus 0.79% in the third quarter of 2023. Mobility service revenue grew 4% driven by strong execution in our balanced go-to-market strategy. In the quarter, we also aligned the timing of certain administrative fees and recorded approximately $90 million of one-time revenues that benefited service revenue. Postpaid phone ARPU was $57.7, up 1.9% year-over-year largely driven by higher ARPU on legacy plans. As expected, service revenue growth was partially offset by lower equipment revenues with a postpaid upgrade rate of 3.5%, which was down from 3.9% last year. In prepaid, our Cricket brand continues to display remarkable consistency with positive phone net adds for 40 consecutive quarters or a decade straight. For the year, we continue to expect Mobility service revenue growth in the 3% range. Mobility EBITDA of $9.5 billion grew 6.7% or by about $600 million year-over-year. On a year-to-date basis, Mobility EBITDA grew 6.3%, reflecting nearly 100% of service revenue growth flowing through to EBITDA. The strong performance puts us on pace to achieve our target of mobility EBITDA growth in the higher end of the mid-single digit range for the full year. Our Mobility outlook also continues to anticipate higher fourth quarter promotional activity levels consistent with seasonal trends.

Now let's move to Consumer Wireline results on Slide 10. The sustainable strength of fiber is driving Consumer Wireline growth and yielding strong returns. In the quarter, we added 28,000 total broadband subscribers, which includes 226,000 AT&T fiber net adds. Our fiber subscriber gains also reflect an estimated 50,000 fewer net adds from the work stoppage and storms in the Southeast. It is clear that where we do have AT&T Fiber, we win. We now passed more than 28 million consumer and business locations with fiber and remain on track to pass 30 million plus fiber locations by the end of 2025. As we've stated before, the better-than-expected returns we're seeing on our fiber investment potentially expand our opportunity to go beyond our initial build target by roughly 10 million to 15 million additional locations. We look forward to providing you with a more detailed update on our plans for expanding the reach of AT&T Fiber during our Analyst and Investor Day on December 3. Outside of fiber, we remain encouraged by the early performance of AT&T Internet Air and our success proactively migrating legacy copper-based Internet customers to this service. We now have nearly 500,000 total AT&T Internet Air consumer subscribers, including 135,000 added during the quarter. Third-quarter broadband revenues grew 6.4% due to strong fiber revenue growth of nearly 17%. For the full year, we continue to expect broadband revenue growth of 7% plus. Fiber ARPU of $70.36 was up 3.2% year-over-year with intake ARPU approximately $75. We continue to see solid uptake in higher speed fiber tiers and healthy underlying pricing trends. The third quarter also was the first full quarter in which ARPU was impacted by the rollout of Autopay changes. We view Autopay as a long-term benefit for customers as well as operationally for our broadband business. Consumer Wireline EBITDA grew 8.6%, as growth in broadband revenues and ongoing cost transformation continued to improve profitability. Through the third quarter, Consumer Wireline EBITDA grew 10%, and we continue to expect growth in the mid to high-single-digit range for the full year, including impacts from the recent work stoppage and storms. Now let's cover Business Wireline on Slide 11. Business Wireline EBITDA was down 20% due to continued industry-wide secular declines in legacy voice services. The reported decline in EBITDA also reflects a tough comparison versus the third quarter of last year, which benefited from approximately $100 million of IP sales that did not recur in 3Q this year. Overall, Business Wireline is performing slightly below the outlook we provided in the first quarter due to lower revenue expectations, including a shift of IP sales into 2025, as well as the impact of the Southeast work stoppage and impacts of Hurricanes Helene and Milton. We now expect Business Wireline EBITDA declines in the high-teens range for the full year versus our prior outlook for a mid-teen decline. While near-term declines in legacy voice revenues are likely to weigh on Business Wireline EBITDA trends for the remainder of the year, our 5G and wireless products continue to present attractive growth opportunities in business solutions. This includes sustained growth at FirstNet, which now has approximately 6.4 million total connections. Similarly, we're excited about the potential of emerging growth products like AT&T Internet Air for business. Now let's move to Slide 12 for an update on our capital allocation strategy. Our approach to capital allocation remains consistent and deliberate. We're successfully balancing efficient growth with long-term investment as we deliver converged network services to more customers, pay down debt and return value to shareholders. We also remain focused on deleveraging, we reduced net debt by about $1.1 billion in the quarter despite a $1.3 billion foreign exchange headwind related to foreign debt. Also recall we fully hedge our foreign denominated debt. So we have an offsetting foreign exchange gain recorded in other non-current liabilities on our balance sheet related to the hedges. Year-over-year, we've reduced net debt by approximately $2.9 billion and have lower vendor and supplier financing by $2.4 billion. At the end of September, net debt to adjusted EBITDA was at 2.8 times, and we're making steady progress on achieving our target in the 2.5 times range in the first half of 2025. Looking forward, our debt maturities are very manageable and we're in a great position with more than 95% of our long-term debt fixed with a weighted average rate of 4.2%. In addition to paying down debt, we reduced direct supplier and vendor financing obligations by about $1.7 billion versus the second quarter. The third quarter net impact from securitization facilities was a $400 million source of cash. So the net of these items was a $1.3 billion use of cash. In the fourth quarter, we expect a sequential increase in direct supplier financing balances due to typical seasonality. However, we expect to continue reducing our aggregate net balance of direct supply and vendor financing on a year-over-year basis for the remainder of the year, which should lower our interest expense and continue to improve the quality and ratability of our cash flows over time. DIRECTV distributions in the quarter were about $600 million on a pretax basis. Based on the terms of our agreement to divest our 70% stake in DIRECTV, we expect $1.1 billion of pre-tax cash payments in the fourth quarter. Cash taxes were about $600 million in the third quarter, and we expect to pay about $1.6 billion in cash taxes in the fourth quarter. To close, I'm very pleased with our team's performance so far this year. And as John noted, we're on pace to deliver on all of our full year 2024 consolidated financial guidance.

Brett, that's our presentation. We're now ready for the Q&A.

Good morning. Thank you very much. John, you mentioned in the fourth quarter, we expect seasonally higher phone purchasing activity, upgrades, and promo cycles. Can you just put some context around that? You've continued to see low upgrade activity. There are concerns about a bigger iPhone cycle. What are you expecting in the fourth quarter and longer term as Apple introduces AI, etc.? And then just one on the Business Wireline. Any kind of light at the end of the tunnel there? How much more of the sort of pressures do you think we get before the rate of change starts to stabilize and improve? Thanks.

Hi, Simon. Good morning. I don't know that I can give you an answer that's more satisfying than last quarter on projecting what Apple phone sales might be. You've seen the numbers; they're down slightly over last year's levels on an introduction. We're still waiting, obviously, for the software release and whether or not that software release drives interest in the consumer base to accelerate that remains to be seen. I don't know. I've given you my point of view that says I think some of these things are going to be a little bit more graceful ramp-up in consumer interest as opposed to a big bang. Software oftentimes tends to be that. If you went back and thought about any software innovation that occurs on a handset over the past decades or so, you tend to see that dynamic occur. They become material and meaningful over time. But oftentimes, certain features didn't exactly go to this massive ramp when they're first released because software is an iterative technology that sometimes has to be iterated on to improve it and make it meaningful and address the particular need. So I don't know that I would expect when the software release comes out that all of a sudden we see this massive uptick, but the consumer ultimately decides. I think I mentioned last quarter when we were on the call, expected that fourth quarter might be an active combination of holiday season device capabilities. And so we've tried to make sure that we're in a position to address that, no matter how it occurs, and I feel like based on what you've seen in the industry over the course of the last couple of weeks, things have been realistic and pragmatic about how folks have approached the market. I don't expect things to be dramatically different as we move through the fourth quarter. Relative to Business Wireline, there are a lot of green shoots. As you know, we're trying to reposition the business to a connectivity-based business. When I look at what we're doing in our connectivity-based product and service portfolio as we reposition the focus of the organization, we move from spending most of our time in the Fortune 1000 to a broader exposure to the business market. I do see those volumes starting to take off and I see our distribution starting to ramp. They're just not doing it at the rate and pace of some of the decline in the legacy revenue base, and some of those products are fairly mature products that have very attractive margin constructs around it, and there's a little bit of a shift going on. It's not a whole lot different than what we were kind of going through on the consumer side a few years back. We will catch it exactly on the date that we will catch it. We'll spend some time on that in December, giving you a little bit of an outlook of how we see that playing through. We've been doing a nice job as a business, finding other places to grow to offset that as we move through it. One thing I do not wonder about is whether we should be putting our time and effort into repositioning the business. I feel very comfortable that this is a place that AT&T should be, this is an important market to us; all of our data, all of our research, everything we're doing suggests that we can create long-term value, just like we're doing in Consumer, as a converged provider, and we will be successful in that transition. I don't want to lose the fact that because we report Business Wireline separately, it doesn't really reflect how we're doing in the business market overall. When you add in what we're experiencing in the wireless space and the solid growth that we're putting up on the board, a lot of that's coming from the business. It's just a technology shift in some cases, a business that has traditionally purchased wireline services is now migrating certain products and services to wireless. I'm confident we're going to make that pivot, and we're going to be in a good place after we get everything lined up on that.

Great. Thanks, John.

We'll take our next question, please.

Great. Thanks and good morning, guys. I don't want to jump in too much on the December event, but can we talk a little bit about the out-of-region opportunity with fiber? I guess, first, how did you guys or what was the criteria for selecting the partners that you have? And are there more partners likely to be added? Second, how big could that opportunity be? I guess, including Gigapower. And third, are you guys seeing the churn benefits, I guess, you sort of laid out the customers that have bundled service, but are you guys seeing churn benefits in the wireless business for customers that have that take both services? Thanks.

Hi John, I'm glad to discuss these topics. We will provide more details during your visit in December. The partner dynamic is an essential consideration for us. I mentioned this at the Communacopia conference, where we aimed to create a strong portfolio of capabilities to make us an appealing partner. We are not just selling products; we are developing a Gigapower offer and, in some regions, operating an open-access network. We've carefully considered how to structure our product offerings and collaborate with partners. We approach partners with a business model that mirrors our own Gigapower execution, including the same product offers and distribution strengths. We also offer support with OSS and BSS back offices to enhance their operations. We're also eager to share our in-home technologies and see how our product capabilities evolve. Achieving world-class products requires substantial scale. When we approach a partner, our aim is not merely to sell fixed wireless access but to foster a long-term mutually beneficial relationship. There is certainly more potential to explore. It's crucial to understand that partnerships and open access arrangements will eventually change the demographics of how certain brands and capabilities serve the population. This shift will play a significant role in the total addressable market for companies like AT&T. I believe this opportunity will expand, and what you're witnessing now is only the beginning. This isn't a trend that will resolve in two or three years; it's about how the industry will evolve over the next decade. My focus is on positioning AT&T favorably as this industry undergoes a significant transformation compared to the last decade. Regarding performance, I shared insights at Communacopia about our partnership sales. Our metrics for customer acquisition, ARPU, and penetration rates are consistent with our established regions. When we formed these partnerships, we did not anticipate this. We adjusted our business cases, expecting slower penetration due to our brand's limited presence in those markets and anticipated needing to adjust ARPU to gain traction, but that hasn't proven necessary. The early results resemble our established regions, which is encouraging. However, we still lack a two-year perspective in that business, so I can't definitively predict our wireless market share or churn dynamics. But given that initial results align with our established markets, I see no reason to expect a significant divergence, provided we maintain the same product quality and execution that we are achieving in our more established regions.

Yeah. That makes sense. Thanks for the color.

We will take the next question please.

Hi. Good morning. Thank you. A question on consumer broadband and one on capital allocation. In Consumer broadband, your Internet Air net add growth stabilized despite your announcement that you've launched about 204 partial regions last quarter. I wonder if you could comment on the relationship between that open-for-sale change and the growth path of Internet Air, just bigger picture? And then on capital allocation, on the M&A front, I wonder if you have a point of view on HFC assets on cable assets, where they could possibly be complementary to your fiber strategy depending on the region and the assets you have in place? Thanks.

Hi, Peter. I'm very comfortable with where we're at on Internet Air. I don't think you should be, as I've said many times, expect that AT&T is going to look like some of our competitors in the industry on volume and where we're going. We're using it very strategically. I'll sell to any business customer that is well-suited to the product, that's an attractive market to us. It's attractive because of what we can bring in growth in other products and services, including handsets in the account, we can justify the usage characteristics around it. You should expect as we continue to scale some of our distribution in the mid-business market that you'll see those numbers grow as a result of that. Then we use it very strategically in consumer. We're using it as a footprint hold capability as we know we've got some copper customers, we can improve service levels, waiting for fiber. In some cases, we're using it to migrate people off of copper so that we can ultimately turn down costly service areas and not have to support the legacy infrastructure that's in place. It's really kind of a follow dynamic, and we can get the right returns on it. That rate and pace are never going to rival what you're seeing with anybody else, and you should just assume that's the case. I would tell you, relative to our internal projections of the product, we're very much in line with what our expectations would have been. And I don't think you're going to see what I would call a demonstrative shift in the quarters moving forward. There was a time in my career where I believed that HFC at that time would be the right capital allocation decision. I think cable has demonstrated that it has been a pretty resilient and capable infrastructure that they've managed to get very attractive returns on. But every decision has its time in place. I believe we're on this steady march that eventually fiber is moving to a customer. We've been on that march since the early 1980s when fiber introduced itself, and it's just been on a slow march to getting closer to the customer. I think we're now starting to get into the final innings of that game. In what I would consider to be a more mature technology cycle, jumping into something like HFC ultimately ends with fiber showing up at the customer's home doesn't seem like a well-timed decision right now. More importantly, I look at our business model and our organic opportunities in front of us, and I look at how we're executing around this, and I look at the future returns. I'm more interested in allocating capital to use the business model we have that I think is incredibly powerful and has a fantastic runway, a durable annuity stream for investors.

Thanks, John.

Thanks, Peter. We will take the next question, please.

Good morning, everyone. Thank you for the questions. John, it's great to see you. I wanted to ask a question that could be viewed as the opposite of the Gigapower inquiry. As you consider the expansion of fiber in your area and the decisions regarding future developments, is the fiber infrastructure you’re building exclusively for AT&T's use? Is the market share you manage to capture all that you intend to acquire? Or is there a possibility that AT&T aims to function as an open access provider, allowing participation in parts of the market that it doesn't directly serve, similar to your historical approach regarding the wireless business and cable relationships? Additionally, Pascal, I noted that you reiterated the guidance, but I think I missed the comment indicating that earnings growth would be positive in 2025. I understand that there are many variables at play, but could you walk us through the reasoning behind that? Thank you.

Hi, Dave. That must be when you’re getting old if you remember when I had Air, but you look good for being old days. The structure of this industry is going to evolve differently over the next decade. The way I think about it is there's going to be far more differentiation that comes over time on what a converged offering looks like. That differentiation will be both on product and service. I don’t want to use the term walled garden, but if you think about owned and operated assets, our motivation would be to get the best customers that we can sell the most product to and provide the most vertical revenue capability on new products and services where our brand is the owned and operated servicing brand to that customer. I think that's the play we want to focus on for the next year or two, and I think we'll be very successful in that regard. We'll find very attractive customers interested in a very simple value proposition of working with one company, and we'll make sure that we get the most share that we can in that way, shape, or form that will likely be the most profitable loyal and best customers we have. But I've been in this industry long enough to know that it is a high-fixed cost industry, and there's been an element of wholesale that has played in over time in virtually every piece of infrastructure built. Will there come a time where you step back and say there's another point or two of growth or capacity that can be allocated in a way that's different? It could be done on a wholesale structure, and it may be accretive to overall returns of the business. I think it's entirely possible it could arrive. I think it's really important to think about the industry structure in that regard. I won't rule it out. I believe over time there may be an accretive economic construct around it. I don't know that time is right now, but it's something we should be paying attention to when you have plenty of capacity in the ground that you can continue to sell in different ways. Pascal?

Sure. Thanks. Hey, Dave. I wouldn't read too much into it except that, we announced our DIRECTV transaction, and we're not quite sure when in 2025, that's going to close. Depending upon when it closes, we may not grow EPS on a reported basis, but rest assured, on an organic basis, we continue to expect our EBITDA and operating income to grow next year. I feel really good about the overall performance, so it's mostly about DIRECTV and the timing of the close.

All right. Thank you, both.

We will take the next question, please.

Thanks and good morning. Curious if you could provide an update on the wireless competitive landscape broadly across the consumer and business verticals. If you can unpack in a little bit more detail what's driving the growth in postpaid phone ARPU on a year-over-year basis, and how you view the sustainability of postpaid phone ARPU growth over the next couple of years?

Hi, Michael. Look, I think the industry is great. I'm very comfortable with where things sit. It's competitive. We're having to work really hard, but I don't look at it and say I can't figure it out. I think I can understand the moves competitors are making and what's going on. I think I understand what we have in terms of our long-term ability to compete against it effectively. I don’t mean to sound like a broken record; there's some growth in the industry I'm not as interested in participating in. I feel good about kind of the balance of our growth to the quality of our growth. I think over the long haul that's the best way to ensure that we're returning for our shareholders, and I feel good about where we stand in that regard. I don't expect that's going to change dramatically. I see consumers using more of our product every month. I see it working its way into their lives in more important fashions. I think that bodes well over the long haul for what's occurring. Business, as I mentioned earlier, is a place that I think we could do better as our distribution gets fine-tuned a bit. There's a lot of activity going on in the business market. I believe we're doing well, but we're not as good as we can be. I think there are still some segments in the business market that we can be more present and more effective, especially given what we're able to do on a combined basis, the introduction of Internet Air in addition to selling voice products as well as our fiber footprint. I don't know that that's any different in how the market is performing; it's just an opportunity of where I think we can get better as we move through the year. In terms of ARPU, it's always a combination of things. I would actually say as I move into next year, I wouldn't dismiss, if I'm able to get a little bit more effective in the value segment of the market that came at a plateauing of ARPU because I was getting a little bit better growth in that segment because of the mix that was occurring, that wouldn't bother me. But I would say on the embedded base of customers we have, our ARPU growth is because we're able to get customers to say they want to buy up and get more from us and buy other products and services that add value to that relationship. We'll continue to do that. We still have room to grow on that. We've certainly been diligent about where we think there's value mismatches in our base where we can possibly realign some pricing into the market; that's helped us this year and helped us last year. I would expect it might help us a little next year. I feel like we can continue to do the right things in managing the returns and yields of our customers. But I'd actually like to see us maybe do a little better down at the low end of the market overall, and that would naturally come at a little bit of a play on ARPU from a company that has leading ARPU in the industry.

We'll go ahead and take our next question.

Good morning. Thanks for taking my question. If we consider the pace of your fiber net additions and broadband heading into next year, if you're passing the same or more locations with better penetration, is there any reason to believe why those fiber net additions shouldn't accelerate next year? And then relative to CapEx, I believe we heard from one of your competitors yesterday that CapEx is moving higher in 2025, mainly due to accelerated fiber investment. This is an area where you've been the most vocal in your industry in terms of fiber expansion. Is it expected that you would see the same trend in your CapEx next year?

Hi, Jim. I guess I would say our rate and pace of build has been more level loaded over the last several years, and as we introduce new footprint, it's been very ratable in how we brought it in. There’s still seasonality in our net add dynamics that are more market-based around buying cycles of the consumer. I wouldn’t expect it to dramatically change as you move into next year. I don’t see anything where there's a footprint that's going to come in that will dramatically change that dynamic because we've been at a steady pace of new footprint and the way we've brought it in. So I don't think you should see any dramatic change in the rate and pace of what we're able to do and how we're doing it. I can't speak to my competitors. I can tell you I'm well aware we've been investing at the top of the industry over the last four years, and that's been necessary for us to reposition the company to where we are today and see the opportunities in front of us, and I feel very comfortable that that investment has driven the right kind of growth. We've been on that trajectory. We've already been doing the things that I think I'm seeing other people start to consider investing capital into. It’s not like I have to start investing in fiber. I’ve been doing it for over four years now, and we’ve had great success at it. We have a great footprint and we’re the leading provider of fiber in the market. I think a lot of that’s in our run rate, and as we’re getting better and better and driving costs down, there’s things we can do to moderate our capital intensity as we get some of these things behind us over time, and we’ll talk about that as we move into our Investor Day and how we see that playing out over the next couple of years.

We will take our next question please.

Housekeeping question. I think last quarter, you pointed out that the postpaid phone ARPU should probably be seen more in the fourth quarter than the third quarter related to the price increase that kind of went into effect mid-third quarter. Is that still the right way to think about it? And relatedly, of the $90 million one-time benefit, is that within postpaid phone ARPU or is that perhaps captured somewhere else within service revenue? And then maybe, I guess, broader kind of question. John, you talked about the 4.9 gigahertz award to FirstNet for AT&T. Obviously, I think at Communacopia, you talked about the supply of spectrum likely influencing pricing across the industry over the next several years. An election is upcoming in a few weeks here; probably not going to materially change the availability of spectrum for a few years. So thinking about AT&T's appetite, given your peer kind of did some transaction in the secondary market just last week? Thank you.

Hey, Sebastiano. How are you? Regarding our announced pricing actions, they will affect the fourth quarter, but this is included in the updated guidance we provided. We feel very optimistic about the overall direction of the business. The $90 million adjustment from simplifying our administrative fees is affecting postpaid ARPU.

So my comment on where we are. I think about spectrum and the portfolio spectrum of the 4.9, not much differently than any other spectrum that needs to be developed; it takes time. If the FirstNet authority decides they want to deploy that in a way similar to how they've deployed spectrum previously. It will take time to have infrastructure put in place and to figure out where they wish to do that and how they want to deploy it. I don't think this is anything where you've got the same dynamic that you might have in the secondary spectrum market right now where you can acquire something, flip a switch and get capacity into your network to continue to grow on things. For that reason, of course, I'd be interested in the secondary market; it's something I pay attention to. If I can go pick up attractive spectrum that is harmonized with our existing holdings, that we can go get additional capacity without putting more capital into the network to do things, that's a good move for our shareholders. It's a good move for our customers and a good way to sustain growth. Where there are opportunistic opportunities to do that, I always pay attention. I’ll never not examine and understand whether or not there's an opportunity to do that. As we work with the FirstNet authority, there are win-wins in a lot of these things. Just like with how we introduced their initial holdings spectrum and allowed them to get some of the product and service capability that is truly differentiated using our embedded portfolio spectrum and services that are in place, we see the same opportunity presenting itself with 4.9. We can continue to provide advanced 5G services as we harmonize that spectrum and put it out in the network, allowing the next generation of unique and differentiated public safety services for FirstNet to be developed that we can both benefit from if they choose to do that as the band manager for that spectrum.

Operator, we have time for one more question, please.

Thank you. Maybe a couple on '25. I know it's a little early for you guys to start talking about it. But maybe if we could just understand the levers. Operating leverage this year has been very high, especially on the mobility side because of upgrade rate and also churn being low. If you could just talk through some of the levers next year, maybe on the cost front or maybe the price versus value dynamic? That would be helpful. The same question on cash flow, just in terms of leverage; obviously, taxes will be a headwind. The financing in theory should be an easier comp and DIRECTV we'd expect would depend on when the deal closes; that would be another variable. If you could just help us think through the operating leverage side and the cash flow, that would be helpful.

Sure thing. I'll start and John will probably chime in. Here's the way I think about it: we've been investing because we expect to continue to grow our business over time. You should expect a continuation of our EBITDA growth over time. In terms of the Mobility business, we're really pleased with our performance and believe that it's one we can sustain. Similarly, we feel really good about our Consumer broadband business, and we continue to believe there's an opportunity to drive more operating levers there as we continue to scale fiber. What you should see is over time profit margins that are much closer to some of our scale broadband competitors. We still have an opportunity across the board to continue to work on cost, whether associated with serving customers through the use of AI, machine learning, there are plenty of opportunities there as well as rationalizing our real estate footprint. The other benefit to think about for 2025 is the last 2023 and 2024 we spent paying down vendor financing balances fairly significantly. As we exit this year, I would expect us to be at a level that we will manage the company at over time. While those investments have depressed free cash flow over the last two years, we'll be in a position where they are not going to depress free cash flow. On the other hand, we would expect higher cash taxes and the absence of DIRECTV to help offset some of those tailwinds. By and large, we are investing because we believe this is a business we can grow both top line and bottom line.

All right. That is the end of the call. Thank you so much, everyone, for joining us this morning.