AT&T Brass Talk Debt Reduction Plans, DirecTV Content Costs and ‘Friends’ Deal

AT&T chairman-CEO Randall Stephenson assured investors on Wednesday that AT&T remains “laser-focused” on its promise to pare down its sky-high debt load.

“Our top priority for 2019 is driving down debt,” Stephenson told Wall Street analysts during the company’s fourth quarter earnings call.

Last year, AT&T debt stood at $180 billion after it completed its $85.4 billion acquisition of Time Warner. By the end of December, the number had dropped to $171 billion and AT&T said it was targeting a reduction to $150 billion by the end of this year.

AT&T chief financial officer John Stephens talked up the company’s record level of free cash flow generated for full-year 2018 ($22.4 billion) as a sign that it can deliver on its de-leveraging promises. WarnerMedia was a big driver of the quarter, thanks to double-digit operating income growth at Warner Bros., HBO and Turner.

DirecTV was once again a drag on AT&T earnings as it saw more subscriber churn, particularly on the low-cost side. The pressure on the pay-TV eco system in general is forcing the satcaster to take a hard line in setting new carriage agreements with programmers. Viacom and CBS Corp. are among the majors with broad DirecTV carriage pacts that expire this year.

Stephenson noted that it is simply impossible to sustain a business facing subscriber declines in the face of programming costs climbing 7%-8% a year.

“We’ve had very good success so far getting to a rationalization of those content costs,” Stephenson said. “We think this is an equation we can balance…We’ve got to get the content costs in line with what the customer is willing to pay.”

Stephenson was once again asked about Warner Bros. decision to license the streaming rights to the “Friends” catalog to Netflix for an estimated $100 million even as WarnerMedia plans to mine its vast library to launch a global streaming platform later this year. Stephenson emphasized that the deal with Netflix is non-exclusive, meaning that Ross, Rachel and the rest of the “Friends” gang will also be carried by WarnerMedia’s service.

In the near term, decisions about how much of WarnerMedia’s content should be licensed to outside distributors, amid the changing consumer landscape and the company’s streaming plans, will be made on a case by case basis. In the case of “Friends,” AT&T had little choice but to take the windfall offered by Netflix.

“Each of these decisions will be evaluated in terms of how critical it is to have it on our platform exclusively versus the economics of licensing it to others,” he said. The high demand for a 25-year-old classic such as “Friends” only validates AT&T’s pursuit of Time Warner.

“Having a 90-year inventory of incredible IP is a really important thing. If you look out on the landscape of what is being consumed (on other streaming services), you’d be surprised how much of that is Warner Bros. intellectual property,” Stephenson said.

AT&T’s overall fourth quarter earnings were viewed by analysts as a mixed bag. But the company’s repeated articulation of its debt-reduction strategy is a good sign that the post-merger focus is in the right place. Stephens said the company is continuing to pursue asset sales — including the 10% stake in Hulu that it inherited from Time Warner — to help tame the mountain of red ink.

“AT&T’s weak Q4 subscriber trends, especially for DirecTV and the Turner Networks’ viewer ratings, and debt levels remain primary medium-term credit concerns, but strong focus in 2019 on debt and leverage reduction provides some near-term comfort,” said Neil Begley, senior VP at Moody’s Investors Service.

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