AT&T Q4: WarnerMedia Takes $1.2 Billion Hit on HBO Max Investment, Telco Loses 1.2 Million TV Subscribers

Courtesy of WarnerMedia

AT&T’s top line was stung by its investment in HBO Max in the fourth quarter of 2019 to the tune of $1.2 billion in “foregone licensing revenues.” The telco also continued to see rapid deterioration in its pay-TV business, losing a total of nearly 1.2 million subscribers in Q4.

WarnerMedia — comprising Turner, HBO and Warner Bros. — saw Q4 revenue drop 3.3% to $8.9 billion, while operating income fell 9.5% to $2.4 billion. That decline included an estimated $1.2 billion in foregone licensing revenue during the quarter for content earmarked to stream exclusively on HBO Max, set to launch in May 2020. Shows coming to HBO Max include the full run of “Friends,” which left Netflix at the end of 2019.

In Q4, AT&T’s DirecTV and other premium TV video subscribers had a net loss of 945,000 customers, while the AT&T TV Now service (formerly DirecTV Now) dropped a net 219,000 customers. As of the end of 2019, AT&T reported 20.4 million video connections (including 926,000 AT&T TV Now subscribers) — down 17% from 24.5 million at Dec. 31, 2018.

Overall, AT&T posted revenue of $46.82 billion (down 2.4%) and adjusted earnings per share of 89 cents (up 3.5%). That missed Wall Street consensus expectations of $46.96 billion in revenue and beat EPS forecasts of 88 cents.

“We delivered what we promised in 2019 and we begin this year with strong momentum in wireless, with HBO Max set to launch in May and our share retirement plan well underway,” said Randall Stephenson, AT&T chairman and CEO, in announcing the results.

Within WarnerMedia, Turner had $3.26 billion in Q4 revenue (up 1.6%) on higher subscription revenue while ad sales dropped 2%. HBO grew revenue 1.9% to $1.7 billion, attributed to higher digital subscribers; the premium programmer’s operating income dropped 27.5% in the period on higher programming, distribution and marketing costs.

Warner Bros. revenue dropped 8% year-over-year to $4.12 billion, as the HBO Max investment depressed TV licensing revenue and the studio had lower theatrical revenue compared with a “more favorable mix of box office releases” in Q4 2018.

Revenue in AT&T’s Entertainment Group, which includes its pay-TV business, fell 6.1% to $11.2 billion, driven by cord-cutting and declines in legacy telecom services partially offset by higher broadband revenue. The Entertainment group’s operating expenses of $10.5 billion were down 5.8% largely because of lower content costs from fewer subscribers offset by higher costs associated with DirecTV’s NFL Sunday Ticket.

AT&T’s Mobility wireless group held steady in Q4. Revenue edged up 0.8% to $18.7 billion, as the company reported a net gain of 3.6 million wireless subscribers to stand at 165.9 million connections at year-end (including more than 1 million connections to AT&T’s FirstNet network for first responders).

In announcing the year-end 2019 earnings, AT&T boasted that it reduced net debt by $20.3 billion during the year, hitting its target of maintaining a net-debt-to-adjusted-earnings ratio of 2.5. The company reported $151.7 billion in long-term debt as of Dec. 31, 2019, much of it amassed as part of acquiring Time Warner.

AT&T reiterated 2020 financial guidance. It’s forecasting revenue to increase 1%-2%, with adjusted EPS of $3.60 to $3.70 including the HBO Max investment (vs. $3.57 for full-year 2019). As execs have previously said, the company expects to sell $5 billion-$10 billion in additional assets this year — and has forsworn any major acquisitions in the next three years under an agreement with investor Elliott Management.