AT&T, Inc. (NYSE:T) UBS 2022 Global TMT Conference December 6, 2022 8:20 AM ET
Company Participants
Jeff McElfresh – Chief Operating Officer
Conference Call Participants
John Hodulik – UBS
John Hodulik
All right. Everyone could take the seat. We’ll get going with our next session. Good morning. I’m John Hodulik. I am the telecom and media analyst here at UBS. And I’m here with Jeff McElfresh, the COO of AT&T. Jeff, thanks for joining us this morning.
Jeff McElfresh
John, it’s great to join you here from New York.
Question-and-Answer Session
Q – John Hodulik
So we’ve got about 40 minutes for Q&A. And I’ve got a list of questions here to run through, but I also have the iPad, so if you scan the box in front of you, it will open up an app and you’ll be able to ask some questions, and I’ll filter them into the conversation to make sure we have a comprehensive list here.
So Jeff, a lot to run through. But first, I thought we’d start with sort of the macroeconomic environment and then drill down a little deeper into each of the segments. But you guys are a big company. There’s been a lot of change in the industry or in the economy. Just can you talk sort of high level how you guys are sort of navigating the macroeconomic headwinds that we’re seeing and then potentially segue into the impact of the inflation that we’re seeing and how the company is handling that?
Jeff McElfresh
Yes, a small question. Before I get started, many of my comments might be forward-looking. And so, we’ve got the safe harbor statement here on the screen. And if you want all the specifics about it, please visit our IR website. And now that I’ve got that obligatory comment out of the way. So the economy, I think it’s proven to be fairly hard to predict. I mean while you’ve got high inflation and certainly maybe some stress in the economy, you’re seeing high demand for products and services like which we offer and our industry offers in broadband connectivity via wireless or fiber. And so it’s an interesting dichotomy, John, when you’re in a business like we’re in as you mentioned, it’s large scale.
We are seeing really good execution inside of AT&T, I would tell you, that I’m confident our teams have made the necessary operating changes to our cost structure and the way we manage through our growth or our service elements with our customers such that we can kind of overcome some unexpected inflationary pressure and input cost or wages or things of that nature.
I think you saw some of that probably come through in our third quarter results. And we feel pretty good about our ability to manage through what has proven to be kind of hard to predict. How do we do that? Well, we pay attention to, obviously, the intake and the customer growth that we’re seeing in our wireless and our fiber product sets. And the health of that growth remains very strong, high-quality customer base, high-quality credit scores. And we’ve continued to grow in that manner, posting some decent growth metrics.
And so we’re confident we’ve got a really stable, high-quality customer base, and it’s going to be pretty resilient. Our team did a nice job earlier in the year, working through a few pricing actions in some of our legacy rate plans. We did see at the beginning of the year some increase in DSO and payment terms. But not anything that alarmed us beyond what we saw pre-pandemic. And so we monitor that. We look at it on a weekly basis, in fact, to make sure that we don’t see any early warning signs.
John Hodulik
Got it. So no change in what you guys had said in terms of the slow pay that you might have been — I think you guys said that a couple of quarters ago?
Jeff McElfresh
Yes. I mean nothing actually — I mean, if we would go back in time, back to the 2018, 2017 timeframe, the metrics the industry is printing isn’t anything that would be out of line for that time period in the business. And so it’s something we monitor, but it’s not really impacting what we do in our growth or our go-to-market strategy right now.
John Hodulik
What about — you talked about the demand side, but what about the cost side from an inflation standpoint. I think you guys have called out some inflationary pressure you were seeing. I mean has that changed meaningfully recently? Or are there any signs that, that might be starting to slow?
Jeff McElfresh
No, I don’t know about starting to slow. I think any large-scale company like ours who is positioned with large-scale procurement agreements and a long-standing relationship with many of our partners like our labor union partners, we have an ability to weather a lot of the near-term turbulence with a very long-term lens.
And so John, I think it’s important over the last several quarters, certainly since John took over as COO, and I became the CEO of AT&T Communications Company, we went to work hard core on getting the cost structure improved in the business. And that gave us a little extra oxygen in the tank to weather some inflationary pressure that we might see or competitive pressure from offers in the marketplace. And so I think there’s now, you’re starting to see some of that operating leverage kind of kick-in in the back half of that multiyear program. And so we’re thankful we’ve been after this cost optimization and improvement plan for many years now, and it’s proven to be helpful to navigate this.
John Hodulik
Just as a follow-up to that. The — so I think your $4 billion through a $6 billion cost cutting program and maybe there’s more to go beyond that. I frankly don’t remember a time where Batya and I have been covering AT&T, you weren’t cutting costs. So I’m assuming that that’s going to continue. And I thought the most interesting thing you just said was that it’s starting to fall to the bottom line.
Jeff McElfresh
Correct.
John Hodulik
So the $2 billion that we’re going to see and maybe some more beyond that, does that all fall to the bottom line? I mean are we at a point where we can look across the segments and see like improving margin trajectory at least in the medium term?
Jeff McElfresh
Well, I think when we launched that program, we had stated we’re going to reinvest in the early part of the program, reinvest in technology platforms, reinvest in our distribution structure, reinvest in our market momentum, kick start back again, a healthy build with fiber. And all of that early investment, of course, did not fall to the bottom line because it was going into a more long-term oriented investment strategy.
And now what you’re seeing as we’re gaining attractive customers with very attractive ARPU and low churn on our product set, you’re now starting to see the fruits of that labor manifest itself in operating leverage. And so I think I would be remiss if I didn’t call out, it’s not about taking costs out. It’s about reinvesting what you’ve optimized for growth engines in the future. And that’s what you’re starting to see now, I think, come out loud and clear in the results.
John Hodulik
Great. So let’s drill down now into each of the segments, first of all, wireless, which really drives the bus here at AT&T. And you talked about reinvesting some of the things in the business. You guys have had a lot of success with your device promotions, which I think you’ve been — in time I guess I think you guys have been doing now for two years.
Jeff McElfresh
Time flies.
John Hodulik
It really does. And so first of all, I think you can talk about it from two ways. First of all, the sustainability of this program, A, what’s driving the success; and B, is this sort of how we should expect the AT&T to operate looking into the future?
Jeff McElfresh
Yes. I mean, I think we’ve been asked about the sustainability, the smarter choice before. And I’m not sure how many quarters are required before that question kind of gets answered, all kidding aside, though. When we started that program, that wasn’t something that we looked at and said, “Oh, that would be the right thing to do.” We actually looked at deep research with our customer base and we asked them basically what it is that they’re looking for us to do. And it was loud and clear that the AT&T subscriber base told us, you need to be investing in me as aggressively as you’re investing in earning others, business and loyalty to the company. And that kind of gave birth to the program, and we’ve lapped that now. And because we’ve lapped it, I’ve got confidence that the value proposition that we’re offering, our wireless subscriber base is strong. We’re at record level churn. Our volume and our activity in the business continues to be strong and not that we’re looking to be the leader in growth in any one quarter. We’re kind of right down the fairway. Growing the return profile of our wireless business over the long haul requires a growing healthy customer base. And we’ve proven even through dynamics of the economy, adjusting through competitive — competitor actions that it’s been pretty durable and been pretty consistent. And so for us, we kind of like the steady as she goes.
We think the industry is healthy. We think that the products that we offer in this industry is in high demand and in great need. And I can point to the growth that we’ve experienced at AT&T. It’s not been solely because we’ve got a device promotion. I mean we’ve got several other actions, not the least of which is our FirstNet program in serving first responders that continues to perform incredibly well, especially in this wireless space.
So I think our program is sustainable. I think we proved in the third quarter that our wireless business can achieve some operating leverage, and you would expect that we will continue being focused on that in the coming quarters and years.
John Hodulik
Speaking to the coming quarter, can you give us a sort of — in sort of round terms, how Black Friday went for you, maybe what your promotions were through what is a pretty meaningful selling period in the wireless market?
Jeff McElfresh
Yes. The wireless industry, clearly, the fourth quarter is the season and the holiday shopping season tends to be the one where you throw down most of your competitive offers. And we took a tactic this year. I think if those — that price checked and channel checked what was going on in the market, we were not the most aggressive and haven’t been the most aggressive in the market for quite some time.
I think I ought to give investors some confidence that the reason AT&T’s growth performance isn’t simply from a rate card promotion or a heavy device offer. There’s something else that’s occurring and why AT&T is able to attract high-quality growth, add volume and generate the performance in the business. And so for Black Friday, we were not the most aggressive. Others were quite more aggressive. And we’re right where we need to be for where we guided the company to be in 2022. So we feel good about that.
John Hodulik
Back to competition, you said it’s a relatively stable market. I mean what are you seeing from the cable companies? And how do you expect that to evolve? And as we look right now, I mean, especially the cable companies effectively have a bring-your-own-device model or 4G. As they move to 5G, do you think — and the usage increases, does that change, in your view, the competitive landscape and potentially the profitability of that business for them and their competitiveness?
Jeff McElfresh
Yes. I mean, obviously, they would be the experts at answering those questions. I would tell you this, like if you look at the competitive share gains and losses in the industry over the last three to four years, I’ve not seen a material shift in volume making its way to cable and a cable bundle. It’s been a nice healthy dose for them. And because it’s small subscriber share, right, share of nets tend to punch above the volume weight.
Having said that, I think that the usage characteristics we, as an industry, are experiencing with the adoption of 5G, it’s definitely up and on the rise. And I think as more consumers utilize those capabilities, not in their home, but broadly where they live, work and play on the go, sure it’s nice to have owner’s economics in a scaled wireless business that makes that a profitable venture. So does that change the margin profile of somebody renting a network? Probably it could.
You called on another point, though, and that is, largely the cable companies have leverage to bring-your-own-device model. And there’s a reason for that. The devices are expensive. The cost to manage a large-scale attractive customer base in the wireless industry requires reinvesting in that customer base. We’ve proven that at AT&T in the last eight quarters. That reinvestment takes a capital allocation decision. And is that the best use of capital? You’ll have to ask them where they see their best use of capital. For us at AT&T, we believe we have now lapped our investment in this, and we have the ability now to self-fund that part of our program, and that enables us to allocate our capital to things for longer-term value creation which is around our fiber network expansion that’s proven out to be a winning play for us.
John Hodulik
Makes sense. So the industry is seeing sort of outsized growth in the postpaid phone market right now and some attribute some of that to cable, which may be sort of pulling from prepaid to a certain extent with a bring-your-own device. What do you think is really driving it? And do you — I think you guys have said and John has said this on the calls in the past that we expect over time to go back to normal. It didn’t in ’22. I mean I don’t want to — I’m not going to hold you to it, but do you think that it happens in ’23?
Jeff McElfresh
I don’t know. I mean — well, one thing is pretty important that I think investors should know. And that is, our business plan, our forward guide, our investment strategy doesn’t require the industry to grow at this elevated base. Now it has. And we’ve performed pretty good in that environment. So we’ve been opportunistic, but it’s not a prerequisite for us at AT&T to deliver the returns that we’re committing to deliver to our investors.
Having said that, it’s possible maybe that you’ve got some prepaid to postpaid migration. It’s possible that not all subscribers are created equal. I mean, I oftentimes ask the question, what do you define as a subscriber? How do you know a sub is a sub? What kind of free line promotional activity is occurring? What kind of temporary lines are occurring in an industry number in aggregate? So I think it’s probably healthy and conservative to plan on a return back to the 6 million ballpark range and punching above that as the industry has been doing over the last couple of years when the growth is there and available, and if it’s good quality growth, and I think you should reward companies that achieve it. And when that subsides a bit, then I’d be looking for a company that maybe has other products and services that are in high demand like fiber and can provide an attractive return over the long haul.
John Hodulik
Right. Maybe shifting to sort of wireless — the business segment of wireless. I mean that has often been pointed to as one of the drivers of the outsized growth we’re seeing, just strength in the business market. I think in a previous conversation, you had mentioned some of your FirstNet initiatives were also driving an expansion of the market. Could you expand a little bit on that? Maybe just what your strategy is in the business market and talk about the competitive market on that side of things?
Jeff McElfresh
Yes. It’s interesting. Actually, I appreciate you bringing that up. The way we report our business and wireless mobility in total, Consumer Wireline, which is our landline fiber and copper business and then Business Wireline, I don’t think it does justice to the position AT&T has in the business space. I mean we lead the marketplace. We’re at large in this regard. But we have plenty of areas of improvement in growth.
For the last three years, we’ve really been investing, John, in getting our operating cadence, our execution out in the local markets for our subscribers in the Enterprise segment up when it comes to wireless. FirstNet is a clear part of that. I mean the growth of FirstNet, the number of agencies that we continue to add weekly, this isn’t something that’s done. It’s been a long-term 25-year investment strategy in a public-private partnership between the FirstNet Authority and AT&T, and that play is continuing to perform. And the growth that we see in that segment is attractive growth. And in some cases, it’s actually expanding the market. We’re taking using 5G or mobility solutions that replace other services that are not in our sector on what these public safety agencies need, providing bandwidth and cruisers for state police, things like this. So it’s definitely a TAM expansion. It’s not the largest. It doesn’t move the industry in aggregate, but accretive growth for AT&T like this is nice to have.
I’d say then, secondly, while we are the wireline share leader in enterprise, we are not the wireless share leader in enterprise. And where this is really seen is in the mid-market segment, mid-market down to small business. And this is harder to get after. It’s a ground game, I like to say. It’s local in nature. It’s where — you’ve got a subscriber base that’s not large and complex, and they tend to be a little bit more akin to a prosumer or a consumer-type product offer and we are just underway right now of really improving our performance in that regard. So there’s still growth that’s available in our Enterprise segment.
And there’s been a lot of change at AT&T, clearly, at the capital structure level at the top that John has led, down in the operating unit, which is where I spend my days and nights. I can tell you there’s a real change that’s been underway over the last several years about how to leverage every component of our operating team to improve our returns in each specific geographic market. It’s not a national game. It’s a local game. And I’m proud of the team and their diligence and staying disciplined in doing that.
John Hodulik
Got you. Sticking with wireless, a couple more on that segment. The — one of the sort of big occurrences here in ’22 was the price increase that you guys pushed through. Could you talk about the sort of results of that, the yield which you expected? And you saw a little bit of increased churn. Was that within the realm of what you expected? And then B, is there room to do that given what we’re seeing in the competitive environment, additional price increases as we look out into ’23?
Jeff McElfresh
I would tell you, I was delighted at the performance of our team. We didn’t really push through a pricing change. We navigated customers through a couple of adjustments that we made and what we learned in that process was we did it right. And it may take a little bit longer. But John, you’ll note, we were probably the first to come out about this plan before others.
And what the team did, keeping the customer at the center as the primary focus of really the boss of the company, the people that pay the bills, we were able to navigate through a lot of change in that regard such that, yes, the financial performance of that tactic was solid, the churn impact from that was better than expected. Do I think that there’s an opportunity for us to adjust and tune our product offers and pricing in the future so that we have some ARPU accretion and still have that possibility in the future? I absolutely do.
I do not believe that, that’s the only lever, the most important lever. It’s one of many. And getting the right returns and operating leverage is a combination of growth. Having the momentum that you need in a healthy business, coupled with cost efficiencies and other areas of the business where I can see still opportunity for us to drive deeper than the $6 billion plan. And coupled with pricing tactics that are needed, maybe to move a legacy rate plan customer up to something a bit more current to participate in the 5G space, and have access to some of the best features and capabilities we can offer. So it’s a very balanced play, and I’m confident we’ve still got room.
John Hodulik
Got it. Finishing up on wireless. One of the at least strategic differences between AT&T and your sort of facilities-based competitors T-Mobile and Verizon is the approach to fixed wireless. Both of those companies are — see it as a nice growth opportunity. They’re pushing it, I would say, relatively aggressively. And for a while, we’ve thought that there’s a couple of reasons why AT&T hasn’t. One is, you had a large wireline footprint. Two, you guys are pushing fiber aggressively. And three, you guys are a bit slower to deploy the mid-band spectrum, which is going to carry a lot of the load. Now that you’re getting the C-band out there, it doesn’t seem like your strategy is changing that much. I think we had expected that maybe you guys would come up with a sort of maybe a DSL saver strategy or something. But you give us a sense for why you aren’t being more aggressive or why you don’t have — with the C-band out there and then all the capacity in the network?
Jeff McElfresh
Yes, I think it’s a good question because it seems like, well, that’s just so obvious. Why aren’t you doing that? And look, we’re not opposed to the use of fixed wireless as a point solution for a particular use case, let’s say, for example, like in our Business segment, we actually do a lot of it. We don’t talk about it. It’s not the lead product that we offer, but it’s a solution we use to connect up a business or a bank branch, where we have a little bit off network footprint to cover. And that’s proven not to be very successful. Customers love it. They love the ease of installation. I think, as it’s kind of intuitive, but the bandwidth itself isn’t overwhelming such that it damages the performance of high-performing wireless asset where you’ve got high ARPU, low churn, high-value postpaid subscribers paying you for that level of service. .
At AT&T, I mean, we’ve been very disciplined and very clear on this. Our lead offer and our priority is 5G and fiber, and that’s where our capital goes. Where we have an opportunity to maybe loosen up the controls a bit on capacity utilization and tune a fixed wireless product maybe in areas of a copper catch as you point out, we may do that opportunistically, but you won’t see AT&T do that in a large scale. And the reason isn’t may be intuitive beyond the fact that the usage characteristics of what consumers want in a fixed broadband solution is measured in the hundreds of gigs. And at some point in time, the technology itself of wireless cannot serve that demand and generate a positive return.
And I say that, John, you and I have known each other for a while. I’ve operated large-scale fixed wireless networks throughout Latin America. I’ve seen it. And so maybe temporarily, it might be a nice growth vector, but long-term returns, AT&T is placing our bet in fiber. We’ll be opportunistic with fixed wireless, but it won’t be a lead offer.
John Hodulik
So you’re going to hate this question, but when is it? I mean, what you’re saying is eventually becomes obsolete. When do you believe — I mean, right now, some of the data we’ve looked at is the average household use is about 500 gig. We’re crossing the sort of 500 gig sort of threshold. We are on a way to a terabyte. When do you think that you start to really see — I mean, obviously, there’s some segmentation in the residential market, we have some decent data on that. But when do you think it becomes a problem? Is it — it doesn’t seem like it’s in the next 12 months. Is it in the next five years or 10 years? Or can you give us — can you put some boundaries on that?
Jeff McElfresh
Well, our investment horizon, as hopefully you can tell here is we’re looking at a five, 10-year horizon. That’s why we continue to double down on fiber. When you get usage characteristics like that, the cost per gig to serve on a wireless architecture is, plug that into your model and ask what ARPU are you charging? And what kind of return are you getting? That math is almost as simple as that. How long can fixed wireless be a viable alternative? Depends on scale, depends on where. But it’s not the investment thesis that we’re driving toward at AT&T.
John Hodulik
So let’s pivot now to the consumer or the wireline side Consumer and Business. First of all, on the fiber side, I think there’s been some worries or some thought that you guys might be actually slowing the fiber build, can you talk about where you are? You’ve scaled up a lot in terms of your construction. Give your outlook on sort of what you think the future holds for AT&T’s fiber construction?
Jeff McElfresh
Well, we have remained vigilant and consistent in our guidance. We will build and achieve 30 million homes passed with fiber by 2025. We are on that plan today. We remain on that plan. As you pointed out, when we restarted the fiber investment, we had to build a lot of infrastructure. This is probably one of the largest infrastructure programs in the country. And I mean, as we sit here today, there are more or less about 10,000 neighborhoods where women and men are digging dirt, laying the fiber and installing service today across this nation. So it’s a very large-scale operation. We went hard at that to get that scaled up to where we can have a consistent level-loaded investment, steady as she goes over a year after year after year, so we can keep our fiber business expanding and moving.
And so we remain committed to the $30 million. So nothing’s changed on that. We’ve not guided to how much we do a quarter or how much we’re going to do in a year. But I think from a modeling perspective, you should take my words as you can see we’re at $18.5 million at the end of the third quarter, $30 million is the objective in ’25, and then I’ll let you model out the pace that, that requires.
John Hodulik
Got you. I know there’s probably not a ton to say on this topic, but there’s been speculation, some press reports about potentially building fiber outside of the region, have a test market in Mesa, Arizona, I believe.
Jeff McElfresh
That’s right.
John Hodulik
Can you just talk about the — maybe in sort of general terms about the benefits of building out a region, maybe the returns you would expect and maybe whether or not or how much it maybe helps your wireless business in those areas?
Jeff McElfresh
That’s interesting, right? If you really think about AT&T, you might describe us in two different realms. Realm one is a nationwide wireless company that has a point of presence everywhere. We’ve got distribution everywhere. Then you could think about the different realm of AT&T being a fixed wireline based local exchange carrier telco from our history and that somewhat captures us in specific geographies of where we invest in the hard copper or fiber investments, right?
And so you sit back and you say, well, there’s some attractive markets that we aren’t the legacy wireline incumbent. We’ve got a really good wireless position. So we’ve got market presence. Our brand is known, and we’ve got scale as the largest builder of fiber in this country with procurement agreements, supply chain, labor, know-how, go-to-market with the best product, I think it’s the best product AT&T offers period.
Our fiber architecture is, as an engineer, I enjoy saying this. I mean it is the best that we can build multi-gig, like connecting the Internet straight to your gateway, nothing in between. I mean fiber goes from the core backbone router all the way to the back end of the router there is nothing in between. And so as I think about John, building your home with fiber, of course, you’re the customer today. But the investments that we make in that location are for anybody and everybody that use that location in the future. And so having a technology like our fiber and our design architecture and investing that in attractive markets like we publicly announced in Mesa, give us courage and an opportunity to grow beyond our borders, and you pointed out, possibly even help us return our ROIC or our return on invested capital in a market like Phoenix, which is an attractive demo where our wireless network is the only thing we have to offer.
And so as you think about modeling AT&T in the future, I think it’s a combination of scaled fiber deployment that’s durable, that’s future-proof that doesn’t require incremental spectrum or a tech upgrade over the long haul, couple that with strong — getting stronger wireless business is a good combination to win in the market.
John Hodulik
Makes sense. I would imagine you guys won’t build where there is a sort of strong cable company and a competitive fiber. So how many markets are there left like that, that are attractive in terms of traffic demographics and density and everything you need to — because obviously, fiber was sort of moving along, then it sort of stopped, now it’s moving along again. But is — I guess where I’m trying to get is how big could that opportunity be?
Jeff McElfresh
I’ll say large enough for us to pursue it. We’re not guiding on what that aspiration looks like because, John, we’re being very transparent in what we’re doing, and we’re being very consistent in our approach in the market. We’re not moving our strategy quickly one quarter to the next, like we want to be predictable, and we want to prove to you and ourselves that we can actually achieve the returns we believe are possible by expanding our fiber out of footprint.
And if we prove that, if we’re satisfied with those results and you’re satisfied with those results, there’s plenty of opportunity. I would say there are a lot of fiber overbuilders, lots. This is a scale game. This is hard work. This isn’t easy to do. Others have tried. Large companies have tried. They’ve left some assets stranded in markets A, B and C. I mean it’s — you got to have the physical infrastructure like a company like AT&T has to bear the brunt of what a large fiber investment really requires. And that’s what we’re doing. That’s what AT&T is doing.
And John, I like this position because we’re local, we’re in the markets, and we’ve got — the government’s going to be leaning in with some [B] funding down at the state level to help augment some of this fiber investment. And that, I think, changes the return profile where the risk capital isn’t just ours, is somewhat subsidized. And so if you got the workforce, you’ve got the fiber, you’ve got the know-how and you’ve got the funding, maybe there’s an opportunity to expand at a faster rate than what you assumed you would do going it alone. We got to prove that, and we’re here to do that.
John Hodulik
Got it. Maybe a couple of quick questions on the consumer fundamentals. First, broadband, you talked about penetration in areas where you have fiber, and that’s going nicely. Your net adds are moving up, and the revenues are growing nicely, too, I think because of the ARPU differential. Subs haven’t really moved that much. You’re still losing on the…
Jeff McElfresh
In aggregate.
John Hodulik
Yes, in aggregate. So can you talk — I mean, when is that dynamic? And maybe it’s really just from a visual standpoint, but when does that change? And I guess, are you converting a lot of those customers to fiber? And then — or are you — and at the same time, seeing increased competition, say, from both the cable guys who are obviously struggling to grow and the fixed wireless guys who have emerged?
Jeff McElfresh
Yes, there’s nothing outsized on the competitive dynamics that it’s creating the pressure. That we see I would tell you, it exists though. I mean there’s definitely cable companies being more aggressive, fixed wireless players being more aggressive. But it’s not moving the dynamic of our subscriber volume as much as you might realize or you might assume.
At the same time, you’ve got economic pressure. Most of the areas where we see churn is in our really low-speed DSL to your earlier question about could you offer a catch product with wireless to serve that home as if the economics make sense. And if it’s a durable solution, we may pursue that. But at the same time, at the beginning of John’s tenure, we announced this wireline transformation strategy and a copper sunset strategy where we looked at zero demand and low demand footprint areas of low-speed copper and we declared whether or not we were going to work ourselves out of that and serve that only with wireless or if that territory is future guided for fiber.
So what you’re seeing now play out on our volumes is some decisions we’ve made to not stimulate growth in certain areas where two years ago, we might have taken a DSL inward in a territory. But now as part of our program, we’re starting to attrit that volume. So you don’t have that gross add to offset a disconnect. And so I don’t see in the metrics of the business. I don’t see huge moves in the competitive dynamics that are driving that.
When do we overcome that? When we continue to expand fiber and we continue to drive our pin rates higher, and I’m pleased to report everything that we are seeing today in our fiber investments and the take rate from our subscribers is — our pin rates are exceeding our expectation. We’re beating ourselves, our bests that we did a year ago, five years ago. And so the demand is high, value prop is right, price is right, execution is right, rinse and repeat, keep going steady.
John Hodulik
You got time for two more questions. We squeeze them in. First, I’m going to combine business and consumer here. On the margin side, you guys have made some nice improvement on the margins really on the business side and consumer side. On the consumer side, they’re still low in the 30s, but we’re into the cable competitors are sort of in the 40s. I mean, you have — I guess, for both sets, you have line of sight that we can see, given everything you talked about in terms of the cost transformation and it’s falling more to the bottom line that you’ll see improved margins in both segments, say, over the near to medium term?
Jeff McElfresh
Yes, I think, yes. I mean we’re not guiding what that’s going to look like. But I think it’s important to note, and you called it earlier, maybe in the past, long, long time ago, five, six, seven years, maybe the cost reduction that you might remember as part of AT&T, that’s not what this margin expansion or operating leverage is about now. It’s a combination of growth, that’s high quality and future proof, a combination of cleaning up the corporate structure because now we’re a more simplified company and then getting more local in our execution has uncovered plenty of areas of cost improvement and synergy between our various divisions like enterprise and consumer. And so I’m confident as the COO, I’ve got line of sight myself on my plans how to continue to drive really good operating leverage improvement. And that helps give us oxygen to continue to grow accrete share and expand the revenue and the subscriber base in a healthy way and provide a good return for our owners.
John Hodulik
Great. And then my last question, and sort of the most important given that the call volumes and the — what we are talking about with AT&T every day. Are you still confident in reaching the $14 billion in free cash flow for the year? And then can you talk about what are the major drivers of free cash flow as we look out to ’23?
Jeff McElfresh
Yes. And so we’ve — we’re not guiding ’23. We’ll give you an update on that in — obviously, in January. But just a couple of things. One, we have reiterated our guide on capital for this year at $24 billion. I think through the third quarter, year-to-date, we were at $19.5 billion. So if you compute the math, that gives you a little over $2 billion, $3 billion to $4 billion lower capital spend in the fourth quarter, add that to what we generated in cash flow in the third quarter. When you sum that up yes, I’m confident we’ll hit $14 billion.
Second is, if you think about AT&T in the future, think about we’ve got a larger subscriber base that is showing ARPU accretion and checks to position against a cost structure that’s improving through our transformation program and our accretive share gains gives me confidence that our operating leverage and our conversion to cash flow is part of the plan. And I think it’s going to continue as a very healthy company that will self-fund itself and the investments needed to be a really attractive return. And I don’t think it’s a whole lot of hockey stick in, I think it’s pretty much a straight model, and you’ll see what we see.
John Hodulik
Great. Well, Jeff, thanks for being here today.
Jeff McElfresh
John. Appreciate it.
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