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AT&T Misses Q1 Targets, as DirecTV Now Streaming Service Hits 1.46 Million Subscribers

AT&T added 312,000 DirecTV Now net new customers in the first three months of 2018 to reach 1.46 million subscribers, offsetting losses on the traditional pay-TV front.

With the growth of DirecTV Now, AT&T’s total U.S. TV base is around where it was a year ago: 25.36 million, vs. 25.37 million in the first quarter of 2017.

But the shift to the over-the-top packaging and delivery of TV — priced lower than old-school bundles — is actually shrinking AT&T’s video business. Revenue in the company’s video entertainment segment in the most recent quarter fell 7.3%, to $8.6 billion (or down 6.2% when adjusted for an accounting change). Operating income for AT&T’s Entertainment Group fell 16%, to $1.33 billion — and that’s down 29% if you back out the accounting change.

Overall, the telco fell short of analyst projections, reporting revenue of $38.0 billion, down 3.4% year over year, and adjusted earnings per share of 85 cents. Wall Street analysts expected AT&T to report revenue of $39.3 billion and adjusted EPS of 87 cents.

AT&T attributed a portion of the revenue decline to its adoption of new U.S. accounting standards dealing with revenue recognition and costs. With that, the company said it’s now recording Universal Service Fund (USF) fees and other regulatory fees on a net basis, which decreased both operating revenue and expenses approximately $900 million in Q1 2018. Excluding those changes, consolidated revenue on a comparable basis declined 1.1% — to $38.9 billion, still short of analyst expectations — while net income rose 21%.

“Our investment in customer growth and our integrated service offerings helped drive solid first-quarter subscriber gains across our wireless, video and broadband businesses,” AT&T chairman and CEO Randall Stephenson said in announcing the results.

Meanwhile, AT&T and Time Warner are now in the sixth week of the antitrust trial in a case brought by the Department of Justice, which is alleging that the $85 billion deal would raise prices for consumers and give the combined company too much market power.

Final arguments in the trial are set for Monday, April 30. “Based on the court’s decision, we remain ready to close,” CFO John Stephens said on AT&T’s earnings call. (Stephenson didn’t participate in the call.)

Stephenson, during his April 19 testimony at the DOJ trial, announced AT&T Watch — a new skinny bundle without sports networks, slated to launch in the next few weeks. AT&T Watch will be free for AT&T Unlimited wireless customers, and available for $15 per month to others. The telco did not provide any additional details on that.

AT&T also again promised that it will soon launch a next-generation DirecTV Now platform, which will offer a cloud-based DVR and a third video stream, up from two with the current service.

Total revenue in AT&T’s Entertainment Group — which includes DirecTV, broadband and wireline phone — dropped 8.1%, to $11.6 billion (down 6.4% on a comparable basis), a decline the company chalked up to traditional TV subscriber losses.

DirecTV’s U.S. satellite based dropped 188,000 subscribers, to stand at 20.27 million as of the end of the quarter. AT&T U-verse TV remained virtually unchanged at 3.63 million subs (the company reported a net gain of 1,000).

In the wireless segment, total revenue was $17.4 billion, up 1.5% year over year (or 3.2% on adjusted basis), which AT&T attributed to an increase in equipment revenue. Wireless service revenue dropped 7.4%, to $13.4 billion (down 1.7% excluding the accounting change impact). AT&T reported 3.2 million North American wireless net adds, including 2.6 million in the U.S. It added 49,000 postpaid net adds — versus a net loss of 194,000 in the year-earlier period. Total AT&T Mobility subscribers increased 7.5% year over year, to 143.8 million.

Last week AT&T pulled its planned IPO for Vrio, the holding company that comprises its DirecTV businesses in South America and the Caribbean, citing “current market conditions.”

For Q1 2018, DirecTV Latin America revenue was $1.35 billion, up 1% year over year, with operating income of $148 million and continued positive free cash flow.

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