I'm speaking back down to the Safe Harbor, but it's the perfect way to start this conference. So many of the business models we're going to hear about in the next few days are really right on the network of which you are the largest. We'll get into that. But I didn't know if you wanted to do the Safe Harbor, and then we'll go right into.
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Okay. As Mahal said, Pascal is Senior EVP and Chief Financial Officer of AT&T, where he's been since 2021. He's really spearheaded a significant not only cost transformation efforts, but strengthened the balance sheet and really overseen the—we're going to get into a historic investment of both 5G and fiber. This approach by AT&T, I believe it's made you the—I put one of, but if I correct this, the top infrastructure investor both on the wired and wired side of the [audio distortion] . Let's get started and jump right into it. You all have done an amazing job of deleveraging the past few years. You've already achieved your stated goal of [geuss] 2.5 times in the first quarter, and you've indicated buybacks will be part of the second quarter.
Can you talk to how you intend to kind of balance the capital allocation priorities now that you've achieved the leverage target?
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[audio distortion] That being the AT&T and Lumen transaction. With this transaction, you—I'm going to refer to my notes here—you get 4 million additional caskets, a million additional fiber subs. And as you alluded to, you're going to get to 60 million homes passed with fiber by the end of [geuss] 2030. These are not insignificant markets, say, in the back. Los Angeles, Minneapolis, Seattle, the list goes on. Can you? And is this deal from your seat really a defensive move or an offensive one?
You're already the largest fiber home player.
About a little bit of a land grab, but curious as to your thoughts there, because things are changing quickly around you.
Yeah. To me, this is an opportunity to—we saw an opportunity with the Lumen consumer assets to lean into our strategy and to add to it. We've made no secret we like fiber. We manage it very well. Here were a set of assets in 11 states that we don't do business in currently, that we don't have broadband infrastructure. This gave us a foothold in those states. Currently, we're going to get 4 million plus fiber passings at closing. Importantly, it's going to come with a build engine that allows us to expand in those states. Currently, the penetration of that fiber footprint that was acquired is about 25%. We see no reason why with our distribution network and additional investments, we can't get it to 40%. Also, in the markets that we're operating in, that Lumen operates in, we're underpenetrated in wireless.
The ability to take up our wireless penetration where we have fiber in our own footprint, we see about 500 basis points of incremental wireless share. We are well under our average penetration in the Lumen market. We think we have an enormous wireless opportunity on top of being able to more fully penetrate the existing build. We expect to significantly increase the passings in that footprint over the next several years. All in all, we think it's a great transaction for us, and we're incredibly excited.
If I'm hearing you correctly, not only greater penetration, higher RPU, lower churn, obviously that math is an attractive one for any CFO, I would think.
Absolutely.
That's what you're seeing. The wireline penetration, you mentioned this. If I'm right, the math of your penetration in your fiber markets, legacy AT&T, is about 40%. And Lumen is—do I have that right? You said 26%.
25.
25%. It does offer a tremendous opportunity. How do you expect to approach this for the wireless subs? I mean, what is the targeted push?
Yeah. Even commenting on our 40% penetration, we're at, on average, 40% across our footprint. Remember, much of our build has happened over the last four years. By definition, we are not yet at full scale in those markets. We are incredibly excited about our ability to continue to add to up the penetration in our own market. In terms of the wireless opportunity, simply put, when we have an opportunity in the Lumen markets to be able to take a great fiber product and bundle it with our wireless, our belief is that we will be able to get higher than our fair share. We will add distribution. We will incremental distribution beyond what we already have in the market, not only for fiber, but for wireless as well.
We think those two things will allow us to really up the amount of penetration that we had in the Lumen markets.
Definitely. I mean, you've seen evidence of that really where it—well, for both you and Verizon, where you have both the wired and wireless, people come.
Absolutely. Fiber product is just a superior product. It works really well. In many of the markets we go into, the consumers did not really have a choice, a viable competitor. Having a viable competitor with a better product, and oftentimes at a slightly lower price point, it is a win-win.
Yep. Yep. Part of the transaction announcement, and I know there's limits to what you can say here, but you did announce that a potential partner will be coming, a private capital partner here. While I understand you can't comment on where those discussions are, who it involves, I just wanted to get your thoughts as to why you would prefer an equity partner versus keeping it on balance sheet with this Lumen transaction. Just some thoughts there.
Sure thing. We're currently spending $22 billion a year in capital. We've guided that that is our expectations through 2027. That's at the top of the industry. An important part of the Lumen acquisition is that we're going to expand upon their existing footprint. We would have to up our capital, which would obviously impact free cash flows. In our view, this allows us to still get access to an expanded footprint while at the same time continuing to deliver attractive returns that we've committed to our shareholders and still manage within the capital envelope we guided to investors.
We think this is a great way to allow us to continue to tick off all our priorities and at the same time get access to a really attractive footprint with great demographics that, candidly, we think we can, with our distribution, really penetrate and deliver attractive returns for our owners.
On the private capital side, you clearly have experience with that with Gigapower, where you partnered with BlackRock. Can you talk a little bit about maybe some lessons learned there and why, if it did contribute, that this is an approach you would want to take with Lumen?
Sure thing. With Gigapower, here's what I would say. We're really happy with our partnership with BlackRock. It's very collaborative, and we're incredibly pleased with that. Also, one of the things we wanted to prove to ourselves with Gigapower was the ability to go outside of our traditional footprint and have the AT&T brand perform. While it's still relatively early days, we have seen that the performance of AT&T Fiber coming from Gigapower is performing comparably to that of the fiber built in our own network. Our brand hunts in those markets. Again, another proof point. When I look at it all in, the amount of the returns that I get through the JV, through a JV structure, because the amount of leverage you could put on it, which is higher than what we would have at AT&T, the overall returns are very comparable.
To me, it's a great way to strike the right balance, expand the pool of fiber customers that we're going after, and at the same time, use some of our existing excess capital to return to shareholders.
We were talking in the breakout room, there is kind of a land grab right now. I mean, to your point, to be able to take on that leverage and do it, really put the pedal to the metal. Would you agree with that view? Because time seems of the essence. Some reports would indicate that between you and Verizon, pro forma for your two outstanding deals, controls 75% of the fiber market. I mean, to be able to kind of get there and build it first, would you agree with that thought?
Yeah. We've said this publicly. When we look out by the end of the decade, we expect that virtually all the economically viable fiber locations, somebody will take a claim to it. A lot of it will come through our own organic build. Some of it will come through Gigapower JV. Hopefully, some of it comes through this Lumen transactions once it gets approved by the regulators. All of that, we think it's really important that we act with purpose and really stay focused and use our capital to stake a claim to those parts of the country that we think are economically attractive because this opportunity will not exist a decade from now. We think we're really good at it. Our build gets more efficient. The supply contracts we have put us at an advantage vis-à-vis others.
Our goal is to—we've mapped out where we want to go. Let's go at it. Let's go get it.
That's great. Sticking with the financial side of this deal, you were very clear, and I think the street very much appreciated this, that you continue to expect to operate within your leverage ratio of 2.5 net leverage following Lumen. Following this deal and assuming a partner does come along, because it does sound like those conversations are going well if I'm reading the tea leaves here.
We really haven't engaged in earnest to try getting a partner. My knowledge of the marketplace and the amount of capital that is available for infrastructure, there is no doubt in my mind that we're going to be able to find a partner and we'll be able to strike a good deal for AT&T shareholders.
That's great. And then if that comes to fruition, how would that impact the $10 billion in incremental financial flexibility you've spoken about in the past?
Sure thing. Here, just to level set, the Lumen transaction was—the overall price was about $5.75 billion. We are executing the transaction on our own. Upon close of the $10 billion of financial flexibility that we had outlined at our investor day for the next three years, the $5.75 billion comes out of that.
Understood.
Importantly, when we find a partner and we determine the appropriate capital structure for the JV, that will serve as a capital recoupment for AT&T. Some of it is going to come from levering up the JV. Some of it is going to come from the equity provided by our partner. All in all, I would expect that there remains a meaningful portion of the $10 billion even after this transaction and the second step. Look, this is a business as we grow more each year, our capacity will increase. One of the reasons why we waited so long before starting to buy back shares, and some even argue that, look, two and a half times for a business our size with this type of infrastructure may be a little low.
We wanted to be in this point because it gives us ample flexibility to go out and do a transaction like Lumen while not disturbing the capital returns we've promised to shareholders. That's where we wanted to be. To the point you made earlier, Jenifer, this is a time where you don't know where opportunities will come from, and you want to be in a position to take advantage of that.
It seems like your balance sheet is well positioned to do that.
It is. We are incredibly proud of the work that's been done.
Shifting to the other side of your business, we've talked a lot about what I call the wired side, shifting to wireless. Everyone talks about Spectrum as being the lifeblood of the wireless network. John Stankey and others at AT&T have been very vocal about the need for more Spectrum coming from this government. It's clearly, I would say, a priority for the Trump administration. He's talked publicly about freeing up 600 MHz of Spectrum. I guess my question is, that's not easy. I mean, there's the Department of Defense, etc., etc. In the absence of new Spectrum coming from the government, you seem to be doing a lot in the three, four, five acquisition side. A few deals have been announced, namely around USc ellular.
If you look where you need more Spectrum, is it really in the mid-band area, or how do you think about the Spectrum puzzle?
I take a step back. When I took the role almost five years ago now, we were concerned about the Spectrum position. Since then, we've spent a lot investing in Spectrum. As we're deploying the Spectrum that we acquired, that Spectrum propagates much more efficiently than we even thought. Our network, there is no immediate need for Spectrum. We run this business not for the next five years. We run it for decades to come. Whenever Spectrum becomes available, it is something that we would always look at. In most cases, when Spectrum becomes available, you get a return in a couple of ways. One, the coverage and capacity that you add to your network, it will displace a good bit of that, so reducing your capital intensity.
Two, fixed wireless is a product that many consumers see as really a good product for them. Additional Spectrum allows you to increase the amount of fixed wireless subscribers you have on your service. All in all, it's simply an ROI. We would look at it if the government makes more Spectrum available. We think it's a good thing long term for the industry to have more Spectrum. There is no pressing need that I feel like we have to go out and acquire Spectrum in the next 12months, 24months to 36 months.
Got it. Okay. Sticking with wireless, bigger picture, as we've talked about, you've had the largest fiber footprint in the U.S. And your 5G network covers, I think, more square miles than any of your peers. How are you kind of leaning into the converged services? I mean, can you explain how the AT&T Guarantee really helps drive that convergence strategy?
Sure thing. The AT&T Guarantee is this. We want, when somebody does business with AT&T, for them to know if they have a technical issue because of something that we did, we're going to make it right by proactively giving them a credit. Two, if somebody calls in for technical assistance, we're going to either answer within five minutes or agree to give you a call back. If we do not do that, we will give you a benefit. Three, we're going to give you the best deals that we have, whether you are an existing customer or a new customer. It does not have to be with the highest price plan. We believe having both a wireless and a fiber network where you control the experience, we are in a position to honor those guarantees and to really increase the affinity for our services.
You can't give a guarantee if you don't control both networks. We spent a lot of time doing a lot of work making sure we're in a position to deliver that guarantee. The early reaction has been positive. As I look ahead, I mean, fiber is such a great product. If somebody has a great experience with fiber, why wouldn't they try our wireless product?
It kind of sells itself.
Our research has shown that the vast majority of people, they want connectivity. They want fixed. They want mobile connectivity. They'd rather deal with one company as opposed to two. If you have great products, great service through the AT&T Guarantee, why would somebody want to deal with multiple carriers? These are long-term bets we are making. We feel that the reaction we are getting is really positive.
It is a competitive market, sticking with wireless here. I'm curious as to your thoughts, I mean, about the current state of this competition. Cable has been somewhat of a loss leader in pricing. It feels like that is ramping up, especially as you see some of these cable brothers join forces. What gives you the confidence you can, on the wireless side, achieve the guidance when there is kind of some cowboy behavior around you?
The wireless industry has been competitive for a very long time. Cable has gained share for the last several years vis-à-vis wireless. I look at our performance during that time frame. I think here's what I look at. Every company defines a subscriber slightly differently. If I give you a line for free, is that a sub? If I migrate from one tier service to another, is that a subscriber? We do not count either of those as subscribers. What I look at is, when I look at how much wireless service revenue is growing in the industry. The last several years, we have garnered the most share of service revenue growth when you strip out fixed wireless and you look at it pure. That is how we know we are doing well. Our services are resonating, and customers are paying for our services.
When it's all said and done, if it's not translating to service revenue, it can be viewed as empty calories. That's how we look at it. That's why we've been really disciplined in how we approach the market and how we count subscribers, because ultimately, it's about service revenue. Yeah, the wireless industry is competitive, no doubt about it. We know how to compete. We think through the advantage of convergence, it gives us another leg up. We have a great network. We're confident that with a great network, great products, we can compete effectively, just as we have been the last several years.
On the wired side, too, I mentioned cable companies joining arms, obviously being Charter and Cox. Do you see any cable kind of been quiet on the wired side? I mean, they've had a lot of share before telecom, including AT&T, really leaned into the fiber deep architecture. Do you see with the cable competition that competitive side changing? And are you underwriting that risk?
Cable for years, in many cases, has operated as a monopoly. There hasn't really been competition. There hasn't been choice. Competition makes you better. I'm really confident when we bring our fiber product to our market, we're going to effectively compete with cable. It's a better product at a lower price point. There is no doubt in my mind we can compete. We're going to continue to get more and more opportunities to do so.
If math's right, that would suggest that's been happening since the second quarter of 2022, I believe, when cable, I mean, when telecom carriers have really leaned into fiber.
Yeah. The other thing, too, is because there has been no competition, when you start to get attacked not only with fiber, but on the lower end, fixed wireless, it's game on. I think what is happening now is for the first time, the cable companies have to compete against others that are providing alternative products.
Yeah. I want to just, before we open it up to questions, ask two kind of macro questions. Luckily, you're not expected to have the direct impact of tariffs. It has created uncertainty just in general. You do have a unique front row seat into economic spending patterns of the consumer. Are you seeing any kind of danger, Will Robinson type of concerns? Many in the audience might not even know what that means.
Oh, I do.
I wonder, I mean, are you seeing any because you guys will be the first to see it. I mean, I remember being an analyst and other CEOs and CFOs at AT&T calling out weakness well before everyone else saw it.
Yeah. First, on the tariffs, here's what we have said. Look, fortunately, we are a domestic-based company. Yeah, we do have some exposure. Much of the network equipment comes from different parts of Asia. There will be some impact there. Also, the phones that we resell, there will be some impact now. The phones, they are Apple, Samsung, others. They set the price, they determine. We provide a subsidy. I wouldn't imagine that subsidy is going to change meaningfully as a result of the tariffs. In terms of the hardware, it will be an impact, but something that we think we can manage. When I think about our capital spend, the vast majority of our capital spend is labor. While we spend on equipment, the vast majority of it is labor. The exposure we've described as we can manage through it.
We reiterate our guidance this year. We feel like whatever the ultimate outcome, we can manage through it. In terms of the impact to consumers, the consumer remains healthy.
Not seen.
Credit and collections, very solid. Demand is solid. In fact, we talked about on our earning call, we are seeing we saw higher activity levels late Q1 into Q2. We think in part there is some consumers trying to get ahead of the tariffs. It may be a pull forward from second half. So far, there hasn't been meaningful impact. Now, one of the things I look at is over the years, our services have become more and more essential. I'm not sure we'd be the first to see it right now, given how critical the services are. I think there are a lot of things consumers would cut back on before they.
It's ironic because you think in past weaknesses, it always the talking point was cable will be the last bill you don't pay. Really, it is your wireless network now or your connection.
Yeah.
I guess the final question I have is what I call the longer-term crystal ball question. I'm curious, as you look at the end of the decade, what you see as your network looking like, your operating leverage looking like, and I guess your overall growth profile.
Yeah. You take a step back. The end of the decade will be largely done with our fiber build. That's a meaningful portion of our capital budget. We'll be largely out of copper. Copper is, I think, landlines, legacy DSL. We still have a lot of that that we are decommissioning and getting out of our network. It comes with a $6 billion core space. We'll be largely out of that. We're going to have a scaled fiber network. Our wireless modernization will be done. I look at a company that will have the largest fiber network in the country, the largest, most modern wireless network in the country, and will not have the headwinds of legacy declines that we are going through today. You all are really smart. You understand what the profile of that could look like.
I think it is an incredibly exciting time for AT&T and its shareholders.
Right. Terrific. Thank you, Pascal. We're going to turn it over to questions. I know we have mics. If anyone has questions, I will say you must speak at a lot of conferences, but I do not know that any circles you in the AT&T blue as we have today. Any questions?
Wow.
No? Oh, I see one in the back here. Let's just get you a mic. Okay, perfect.
My name is Onan.
My name is Onan. I have a question regarding your strategy is more focused on fiber. How do you view alternate connectivity strategies like Starlink, who are based on satellite? And how does the fiber play alongside or in response to that alternate connectivity strategy?
Sure thing. When I think about fixed broadband today and our wireless network, rough math, you cover 90% + of the U.S. population. Those products are incredibly efficient. They work better and more efficiently than satellite. The physics of it all makes that very clear. The question really becomes, who serves the remainder of the U.S. population? Because we still have a lot of people, far too many, that are not served. We think satellite is a fine solution in that regard. Our view is we would love for there to be a vibrant satellite market where we can buy services and allow customers to ride on our network and satellite, no different than international roaming. Somebody goes to a national park and we do not have coverage. They get access to satellite coverage, and we pay the satellite provider.
In an ideal world, there will be multiple providers such that the ultimate price to consumers is really attractive.
Great. Any more questions? Pascal, like I said in the beginning, this is like the perfect way to start this conference because I think as we hear about these other models emerging, they're emerging on the networks you and your peers are creating. So thank you so much for being here and opening this conference.
Thank you very much.