AT&T’s WarnerMedia posted solid profitability gains for the fourth quarter of 2018, but the company missed its top-line target — with a drag coming from record losses at DirecTV and lower-than-expected postpaid wireless subscriber adds.
For Q4, AT&T overall reported revenue of $48.0 billion and adjusted earnings per share of 86 cents. Wall Street analysts on average expected sales of $48.5 billion and EPS of 86 cents. AT&T shares dropped as much as 3.1% in premarket trading Wednesday. The company pointed to a 10.9% decline in wireless equipment revenue for the quarter on a comparable basis, due to lower postpaid smartphone sales, which represented a $530 million drop.
WarnerMedia total revenue was $9.2 billion, up 5.9% year over year, thanks to a box-office bump at Warner Bros., which boosted sales 10.4% to $4.5 billion. In particular, AT&T cited Warner Bros.’s Q4 theatrical revenue up 29.3% from the strong performance of releases in the quarter — including “Aquaman,” which has earned more than $1 billion at the box office, “Fantastic Beasts: The Crimes of Grindelwald” and “A Star Is Born” — along with 3.9% growth in TV licensing revenue.
Fourth-quarter sales at Turner of $3.2 billion and HBO of $1.7 billion were down slightly year over year, with HBO revenue hurt by its carriage dispute with Dish Network and Turner ad sales down 6.3% because of ratings declines, according to AT&T.
But all three WarnerMedia divisions improved operating income in Q4 versus the year earlier with cost-cutting measures: Warner Bros.’ operating margin increased from 12.7% to 18.1%; HBO’s climbed from 28.8% to 37.2%; and Turner’s rose from 33.1% to 40.2%. Overall, WarnerMedia operating income was up 33.2% for the fourth quarter. For full-year 2018, WarnerMedia contributed 18 cents of adjusted EPS to AT&T’s total adjusted earnings per share of $3.52.
Analysts questioned whether the cost reductions at Turner and HBO were short-term gains that won’t help in the long run. “[L]onger term, we are worried about Turner’s ability to drive non-sports and non-news audience growth given their portfolio of networks,” MoffettNathanson analyst Michael Nathanson wrote in a note to clients. For HBO, “we worry about the sustainability of this trend in light of HBO’s strategic plans to increase programming investment.”
AT&T’s Entertainment Group revenue was down 4.8%, to $12.0 billion, amid record subscriber losses for both DirecTV and the DirecTV Now internet-streaming service. Video entertainment revenue dropped 5.7%, to $8.67 billion, for the quarter.
During Q4, DirecTV Now shed 267,000 net subscribers — after the company ended virtually all promotional pricing packages, some as low as $10 per month, by the end of 2018 — while DirecTV satellite subscribers declined sequentially by 403,000. The telco said the drop in video subscribers was due to its “focus on profitability and reduced promotions.” At the end of 2018, AT&T tallied about 24.5 million video connections (including 1.6 million DirecTV Now subscribers), a 3% decline from 25.2 million a year earlier.
AT&T had about 500,000 DirecTV Now subs on promo prices, and “they are all gone or they stepped up” to a full-price plan, CFO John Stephens said on the earnings call. He said DirecTV Now’s average revenue per subscriber increased $10 in Q4 with the change.
Debt continued to be a major story for the telco. At the end of 2018, AT&T’s long-term debt stood at $166.25 billion, much of it accumulated through the Time Warner acquisition (which closed in June 2018) as well as the $49 billion deal for DirecTV. That makes it one of the most highly leveraged companies in the media and entertainment space.
AT&T said it’s aiming to reduce its debt-to-EBITDA ratio from 2.8:1 to around 2.5:1 by the end of 2019 and to “continue deleveraging” through 2022.
“Our top priority for 2018 and 2019 is reducing our debt and I couldn’t be more pleased with how we closed the year,” Randall Stephenson, AT&T chairman and CEO, said in announcing earnings. With record free cash flow in 2018 of $22.4 billion, “this momentum will carry us into 2019 allowing us to continue reducing our debt while investing in the business and continuing our strong record for paying dividends.”
AT&T posted $1.19 billion in operating costs related to “Time Warner and other merger costs,” expenses that Stephens said will be going away in 2019.
AT&T reported a net gain of 134,000 postpaid wireless phone customers in Q4 — well below analysts projections of 208,000 for the period. Total wireless revenue for the fourth quarter of 2018 was $18.8 billion, down 2.1% as the result of AT&T’s change in accounting for Universal Service Fund fees. The AT&T Mobility group’s operating income margin improved to 29.1% versus 22.3% in the year-ago quarter.
Meanwhile, WarnerMedia plans a major dive into direct-to-consumer streaming, targeting a Q4 2019 launch. The yet-to-be-named service, debuting initially in the U.S., will offer three different plans that bundle content from Warner Bros., HBO and Turner along with third-party programming.
Asked about competing with Netflix and others, Stephenson said AT&T has high expectations for the WarnerMedia streaming service. “We don’t think there will be a proliferation of [subscription streaming services] that will succeed over time,” he said on the call with analysts. “The ones with deep libraries of IP are the ones that will succeed over time.” The CEO added that the direct-to-consumer service will include “ad-supported elements as well,” supported by AT&T’s Xandr advertising division.
On the wireless front, AT&T — like rivals Verizon and T-Mobile — is investing heavily to build out next-gen 5G service this year but the telco says 5G will not be “a significant revenue stream in 2019.”
AT&T provided updated guidance for 2019, projecting free cash flow in the $26 billion range and low single-digit adjusted earnings-per-share growth. The company expects gross capital investment of around $23 billion for the year.