WarnerMedia Drives AT&T Growth in Q2, as HBO and DirecTV Lose Subscribers

WarnerMedia was AT&T’s fastest-growing division in the second quarter of 2019. But the telco showed ongoing signs of trouble in its pay-TV business, with DirecTV and DirecTV Now again posting subscriber losses — and the HBO division dropping U.S. customers in the period.

Revenue for WarnerMedia was $8.35 billion, up 5.5% year over year primarily driven by the consolidation of Otter Media, higher Warner Bros. revenue and gains at Turner and HBO.

AT&T reported a 778,000 net loss in DirecTV satellite and U-verse TV customers, which it attributed to an increase in customers rolling off promo discounts and competition. It lost a net 168,000 DirecTV Now subs, which it said was due to price hikes and fewer promotions. AT&T’s Entertainment Group revenue (which includes its consumer wireline businesses) dropped 1% to $11.4 billion, as video revenue fell 1.7% in Q2. Operating income rose 2.6%.

“WarnerMedia delivered another strong quarter with both revenue and operating income growth,” AT&T CEO Randall Stephenson said in announcing results. “And our Entertainment Group profitability continued to stabilize, and even grow. Across the board, it was a solid quarter that puts us in position to have a really strong year.”

In the past year, AT&T has lost 2 million traditional pay-TV customers, shrinking 8.6% year over year — while its over-the-top offering, which was supposed to pick up the slack, has fallen by 469,000 over that time (a 26% year-over-year drop). As of June 30, AT&T reported 21.58 million DirecTV satellite/U-verse subs and 1.34 million DirecTV Now subs.

The telco’s subscription TV biz will face further pressure if the current contract standoff with CBS continues. CBS went dark for about 6.6 million DirecTV and U-verse TV subscribers on Saturday, July 20, after the companies failed to come to terms.

Amid woes on the pay-TV side, AT&T — still working to pay down debt it accumulated through the Time Warner acquisition — is pinning hopes on WarnerMedia to fuel even more growth next year, with the launch of HBO Max in spring 2020. The direct-to-consumer streaming service will include HBO programming, along with exclusive licensed content like “Friends” and “Pretty Little Liars,” Warner Bros. movies, and original movies and series.

For Q2, WarnerMedia operating income was up 10.3% with gains in all three business units.

Turner revenue was $3.4 billion, up 1.9% year over year due to a 3.9% increase in subscription revenues and 33.1% growth in content and other revenues, partially offset by a 4.4% decline in ad revenue.

HBO grew to $1.7 billion in revenue, up 2.9% year over year reflecting a 44.9% increase in content licensing and other revenue, partially offset by a decline of 0.9% in subscription revenues. HBO continues to be hurt by an ongoing standoff with Dish Network; the premium cabler’s channels have been dark on Dish since last November. The company said the drop in U.S. linear HBO subscribers was partially offset by higher digital and international growth. (HBO later clarified that the loss of subscribers was from Cinemax, not HBO proper.)

Warner Bros. reported Q2 revenue of $3.4 billion, up 2.5% year over year due to 13.4% growth in theatrical product revenues and 27.8% growth in games and other revenue, which offset a 14.3% decline in TV product revenues.

Warner Bros. theatrical revenue was up 13.4% primarily from home entertainment revenues. AT&T called out several Q2 releases that have performed well: “Shazam!” has grossed more than $360 million worldwide to date and “Pokémon Detective Pikachu” has taken in $430 million worldwide to date. Warner Bros. games and other revenue was up 27.8% largely from the launch of “Mortal Kombat 11.”

AT&T wireless service revenue grew 2.4%, to $14.0 billion with 355,000 phone net adds (including 283,000 prepaid phone accounts). The telco said wireless equipment sales dropped 2.6%, to $3.5 billion, blaming lower postpaid smartphone sales.

Overall, AT&T reported $44.96 billion in revenue for Q2 — slightly beating Wall Street expectations of $44.85 billion — and adjusted earnings per share of 89 cents, in-line with analyst consensus estimates.

AT&T had $157.9 billion in long-term debt as of June 30. The company said it reduced net debt by $6.8 billion in Q2 and by $18 billion in last 12 months. Net-debt-to-adjusted-EBITDA ratio was 3.0X at the time of it closed the Time Warner acquisition. AT&T said it is targeting a 2.5X ratio range by the end of 2019, after which it will “consider opportunistic share buybacks while continuing to pay down debt.”

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