T — Q3 2026 Financial Report Analysis

A $2.6 billion Mexico write-down sank reported profit; the business underneath had its best quarter in years

AT&T's revenue for the three months ended September 30, 2026 rose 5.3% to $32,322 million, well ahead of Q2's 2.3%. Service revenue (the recurring monthly bills, as opposed to one-off phone sales) grew 3.8% to $26,301 million, which the company calls its best consolidated service revenue growth in more than four years. The growth came from wireless service, fiber home internet (including the Lumen fiber customers AT&T bought in February) and higher handset sales.

Reported profit went the other way. Diluted EPS from continuing operations fell from $1.29 to $0.13, and net income attributable to AT&T fell 90.4% to $891 million. Both years are distorted by large one-off items: this quarter carries a $2.6 billion non-cash impairment (a write-down of an asset's book value to what the company now expects to get for it) on the Mexico wireless business AT&T agreed on October 13 to sell to Grupo Televisa and Fintech Holdings, plus employee separation charges; the year-ago quarter carried a $5,479 million pre-tax gain on selling the DIRECTV stake. Strip both out and adjusted EPS (AT&T's non-GAAP figure, which removes items it considers one-off) rose to $0.65 from $0.54.

This report is written from the earnings release and its two supplementary exhibits (filed with an 8-K on October 21, 2026). The full 10-Q, with management's discussion and the detailed notes, is not filed yet, so a few explanations below are limited to what the release says.

Three terms used throughout. EBITDA is earnings before interest, tax, depreciation and amortization: roughly the cash profit from running the network before paying for its construction and its debt. Postpaid customers pay monthly after using the service, usually on contract; they pay more and leave less often than prepaid customers, so carriers treat postpaid phone lines as the most valuable subscriber. Churn is the share of subscribers who cancel in an average month; 0.92% means AT&T loses fewer than one in a hundred postpaid phone customers a month.

AT&T's release does not report ARPU (average revenue per user, the monthly bill per subscriber) for the U.S. business, so this report can't say how much of wireless service growth came from price versus more lines.

Where the growth came from

AT&T reports three segments since Q1 2026: Advanced Connectivity (5G wireless, fiber and fixed wireless in the U.S.), Legacy (the copper network it is retiring) and Latin America (Mexico).

Inside Advanced Connectivity, service revenue rose 6.1% to $23,902 million:

• Wireless service +5.0%, up from +3.3% in Q2. The release credits "growth in retail wireless subscribers in underpenetrated categories and converged accounts, and pricing actions that were partially offset by promotional discounts on wireless subscriber additions."
• Home internet +23.4% includes the acquired Lumen mass-markets fiber business, which closed in Q1, so part of this growth is bought; the release doesn't split out how much.
• Business transitional and other −14.6%, on "lower demand for virtual private network and wholesale services" — older corporate networking products being replaced.

Subscribers tell the same story. AT&T added 769,000 internet customers, a company record: 442,000 fiber and 327,000 fixed wireless (home internet delivered over the cellular network, such as AT&T Internet Air). It now reaches more than 39 million homes and businesses with fiber and says it remains on track for over 40 million by the end of 2026. Postpaid phone net adds were 379,000 (versus 405,000 a year ago and 432,000 in Q2), with churn flat year over year at 0.92% but up from 0.86% in Q2. Prepaid phone subscribers kept shrinking (−21,000). The share of AT&T home-internet households that also take AT&T wireless (the "converged" bundle the strategy is built on) rose to 42.8% from 42.5% in Q2.

Mexico grew revenue 13.2%, which the release attributes "primarily" to "favorable foreign exchange rates and postpaid wireless subscriber growth" — a weaker dollar makes peso revenue look bigger in dollars. Costs rose 11.4% for the same currency reason. It made $45 million of operating profit on $1,240 million of revenue and lost 102,000 subscribers in total (482,000 postpaid gained, 512,000 prepaid lost). From 2027 the outlook excludes it.

What the headline numbers hide

The profit drop is almost entirely one-offs, in both years. Corporate & Other's operating loss widened from $999 million to $4,076 million because of a $3,372 million "asset impairments and abandonments and restructuring" line, which includes the $2.6 billion Mexico write-down and employee separation charges. AT&T's EPS bridge: $0.13 reported, plus $0.41 for the Mexico impairment, $0.09 for employee separation and $0.02 for benefit, transaction and legal items, gives $0.65. A year ago, $1.29 reported less the $0.79 DIRECTV gain plus $0.04 of other items gave $0.54. The prior-year quarter also carried $487 million of "transaction, legal and other costs" versus $44 million now.

The impairment came with almost no tax relief. Income tax was $1,390 million on $2,696 million of pre-tax profit, an effective tax rate (the share of pre-tax profit paid as tax) of about 52%, against about 9% a year ago when the DIRECTV gain inflated pre-tax income. AT&T's reconciliation shows a tax impact of only $34 million on $3,502 million of pre-tax adjustments, meaning the write-down was essentially not tax-deductible. That is why reported EPS fell further than operating income.

Lower depreciation is doing a lot of the operating-income work. Adjusted operating income rose 16.1% to $7,607 million, but adjusted EBITDA, which ignores depreciation, rose only 5.4%, and its margin barely moved (38.7% vs 38.6%). The same pattern shows in Advanced Connectivity: operating income rose $1,211 million while EBITDA rose $837 million, with depreciation and amortization down $374 million and EBITDA margin flat at 41.8%. The release attributes the drop to "fully depreciated legacy assets." Depreciation is the non-cash cost of spreading a network's construction cost over its life; when old equipment reaches the end of that life, the charge stops, but nothing about the business got more efficient. The cash-profit measure (EBITDA +5.4%) is the better read of underlying growth than adjusted operating income (+16.1%). Business customers are the clearest case: the business unit moved from a $215 million operating loss to a $288 million profit, while its depreciation fell $278 million and its operating costs fell only 0.5%.

Buybacks supplied a meaningful slice of EPS growth. Diluted share count fell 4.5% to 6,844 million after $2.8 billion of repurchases in the quarter ($7,472 million year to date). Adjusted earnings attributable to common stock (our calculation from AT&T's reconciliation: $855 million reported plus $3,536 million of adjustments) rose about 13% to $4,391 million; unrounded adjusted EPS rose about 18%. So roughly 5 of those 18 points came from fewer shares rather than higher earnings. Interest expense pulled the other way, rising 16.4% to $1,979 million on higher debt.

Cash conversion is fine, but year-to-date free cash flow is behind last year. Q3 operating cash flow of $10.5 billion was eight times income from continuing operations — normal for a telecom, where depreciation is a large non-cash charge, and inflated this quarter by the non-cash impairment. Free cash flow (operating cash flow minus capital spending and vendor-financing payments) was $5.0 billion versus $4.9 billion. For the nine months, our calculation from the cash-flow statement is $12,129 million ($28,915M operating cash flow − $15,638M capex − $1,148M vendor financing), against $14,080 million a year earlier; the 2025 figure included DIRECTV cash flows that no longer exist. Hitting the $18 billion+ full-year target needs roughly $5.9 billion in Q4.

Working capital: nothing alarming in the release, one item to check in the 10-Q. Accounts receivable fell 9.6% since December to $7,992 million. Inventories rose 19.5% to $2,893 million while equipment revenue grew 12.1% year over year. The release doesn't explain the build, and part of the balance sheet moved into "assets held for sale" with the Mexico deal, so balance comparisons with December aren't clean; the 10-Q should show whether this is seasonal stocking.

Guidance went up, and capital spending went down. Against Q2's reiterated outlook:

The new EPS figure sits above the top of the old range. Year-to-date adjusted EPS is $1.86 (+16.3%), so "$2.40 range" implies a Q4 near $0.54, below this quarter's $0.65; the release doesn't say why, though the debt raised for the EchoStar purchase (long-term debt up $23 billion since December) now carries interest every quarter. Year-to-date adjusted EBITDA growth is 4.3%, consistent with the "upper portion" language.

Did last time's read hold up?

Our Q2 report said to watch "whether Legacy cost reductions start matching Legacy revenue declines." In Q2 they didn't: Legacy revenue fell $570 million year over year while its costs fell only about $134 million, and operating income dropped 45.5%. In Q3 they mostly did: revenue fell $494 million and costs fell $313 million (−23.5%, against revenue −24.5%), so operating income fell 26.7% and the segment margin held at 32.8% versus 33.7%. The release says the prior-year quarter's costs were helped by favorable vendor settlements, which makes this year's cost decline more impressive, not less. Q2 also noted Advanced Connectivity EBITDA growth of 8.0% running ahead of the 6%+ guide; Q3's 7.3% is still ahead.

Outlook and our read

Management's outlook, on a continuing-operations basis: Advanced Connectivity service revenue growth of 5%+ in 2026 and mid-single digits annually after; Legacy service revenue down 20%+ in 2026 and "immaterial by the end of 2029"; Advanced Connectivity EBITDA up 6%+ in 2026; Legacy EBITDA expected to turn negative after 2027 until the copper network's direct costs are largely gone; adjusted EPS growth at a double-digit compound rate through 2028; and the $1.11 annual dividend maintained.

Our read: the operating side is getting better, not just holding up — service revenue growth accelerated from Q2, fiber net adds hit a record without acquisitions, and Legacy finally shed cost almost as fast as revenue. The pressure is in the balance sheet. Leverage rose to 3.13x with the EchoStar purchase, interest expense is up 16%, year-to-date free cash flow is $2 billion behind last year, and the company is still committed to about $10 billion of buybacks this year. The cut to 2027–2028 capital investment is what makes the unchanged free-cash-flow targets easier to reach; whether the network keeps hitting its fiber build targets on less spending is the thing to check over the next few quarters. Two smaller items for Q4: whether postpaid phone churn, up to 0.92% from 0.86% in Q2, stays there through the holiday promotion season, and whether the Mexico and Forged Fiber 37 sales close as agreed (the 2027–2028 outlook already excludes Mexico).

Takeaway: AT&T's 90% drop in reported profit is a $2.6 billion Mexico write-down that was barely tax-deductible, measured against a year-ago quarter flattered by a $5.5 billion DIRECTV gain. The underlying quarter was strong — service revenue +3.8%, the best in over four years, and a record 769,000 internet net adds — but the cleanest profit measure, adjusted EBITDA, grew 5.4%, not the 16% that adjusted operating income shows thanks to lower depreciation. With leverage up to 3.13x after EchoStar, the raised EPS guide matters less than whether lower capital spending can coexist with the fiber build.