Earnings preview: AT&T, a modern media company in the making
AT&T Inc. is on its way to becoming a modern media company.
In a world where the wireless market is becoming increasingly saturated and where cord-cutting is the norm, the telecommunications giant is looking to leverage its position as a leading pay-TV distributor by combining its so-called pipes with its newly acquired WarnerMedia content to entice customers.
“AT&TT, -0.50% sees where the industry is headed,” said Frank Louthan, managing director of equity research at Raymond James. “And it’s furthering its strategy of being able to offer packages that include media across multiple streams.”
The company will announce its second-quarter earnings Tuesday after market close.
AT&T acquired WarnerMedia, formerly Time Warner, for $85.4 billion in June after U.S. District Court Judge Richard Leon approved the deal. The Justice Department has since appealed the court’s ruling in an effort to undo the purchase.
In a hint of what’s to come, the company also purchased ad-tech company AppNexus and, according to a recent Recode report, is looking at purchasing the rest of digital video company Otter Media, which AT&T now co-owns with The Chernin Group.
During a May interview at Code 2018, AT&T Chief Executive Randall Stephenson said the company was well-positioned to take advantage of its assets and hinted at its future.
“A lot of the media companies do not have that direct relationship with the customer,” he said. “So if you can bring 130 million mobile customers where you have a direct billing relationship, day-to-day customer relationship, bandwidth as well as content, media and entertainment content, put all that together, then you have vertically integrated the same way as some of these other guys have,” he added, referring to companies like NetflixNFLX, -0.25% AmazonAMZN, -0.73% and DisneyDIS, -0.57%
AT&T has been losing its traditional television subscribers to cheaper streaming services. The company reported losing 187,000 U.S. traditional TV customers in the first quarter, though the number was significantly lower than the 257,000 FactSet analysts had predicted. The company has also been losing share of wireless postpaid customers, those who pay a monthly bill for usage after the fact, much of it to the smaller and cheaper T-MobileTMUS, -1.18% AT&T lost 22,000 postpaid phone subscribers in the first quarter.
By combining its position as a pay-TV distributor and its trove of newly acquired WarnerMedia content, AT&T is looking to a future where it is a direct-to-consumer media company as well as a telecommunications company. Streaming is an important part of that strategy; the company added 312,000 customers to its DirecTV Now streaming service in the first quarter.
Analysts at Cowen & Co., led by Colby Synaesel, will be “looking for details on the new video offerings, ad-tech development, integration and content creation“ in AT&T’s earnings announcement and call.
Much of that will depend on the outcome of the Justice Department’s appeal of the June court decision allowing AT&T to buy WarnerMedia. Most analysts are confident the merger will stand, but see the ongoing suit as a drag on the company. Raymond James downgraded AT&T to market perform from outperform after the appeal was announced earlier in July, calling the court case a”negative catalyst for the stock.”
Here’s what to expect on Tuesday.
Earnings: Analysts polled by FactSet expect AT&T to report per-share earnings of 87 cents, a 38% increase from its EPS of 63 cents per share a year earlier. Estimize, which crowdsources estimates from buy-side and sell-side analysts, fund managers, academics and others, also expects EPS of 87 cents.
Revenue: FactSet analysts expect revenue of $38.7 billion in the second quarter. Estimize expects $39.4 billion.
Stock movement: AT&T stock has slumped 20% so far this year, much of the downturn due to disappointing first-quarter earnings results, a heavy debt load and the legal issues surrounding the WarnerMedia acquisition, analysts say. Of the 32 analysts in FactSet who cover AT&T, 11 rate the stock a buy or overweight, 18 rate the stock as hold and 3 rate the stock at underweight or sell. The average price target is $31.
What else to look for:
At its heart, AT&T is still a telecommunications company. Investors will be paying attention to the company’s postpaid phone subscribers and traditional video subscribers. They also will be paying especial attention to additions to streaming service DirecTV Now, which will help offset any losses in DirecTV’s satellite service.
One worry for investors is AT&T’s large debt load after the company’s acquisition of WarnerMedia. In June, both S&P Global and Moody’s Investors Service downgraded AT&T’s credit rating to two levels above speculative grade. Moody’s said the company’s post-merger debt of over $180 billion would make the company “beholden to the health of capital markets.”
There is also some concern about the effect AT&T’s debt may have on its dividend, which is a big draw for investors. AT&T has raised its annual dividend for 34 consecutive years, but some investors are worried about the viability of the company’s dividend yield. On Tuesday, analysts will be looking out for any comments from management about AT&T’s plans to pay off its debt.
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