There may have been a low bar headed into AT&T’s Q1 earnings Thursday morning, but the telecom giant blew past Wall Street expectations with flair.
Despite the intensifying competition, AT&T proved to its investors that its heavy investments into 5G and its streaming service, HBO Max, were certainly paying off. Shares of AT&T rose as much as 5% Thursday even as the broader markets were lower.
To be frank, there wasn’t much to dislike from AT&T’s Q1. Revenues were up across the different segments, and HBO Max, which both Wall Street and Main Street have been watching fiercely, added a solid 2.7 million U.S. subscribers during the quarter. As of the end of Q1, HBO and HBO Max had 44.2 million domestic subscribers. It’s worth noting that HBO Max “activations” were not reported this time around.
A healthy number of people subscribed to HBO and HBO Max in the first three months of 2021 and were willing to pay more for the premium service. Domestic HBO and HBO Max ARPU was $11.72 per month, which compares to about $4.03 per month for rival Disney+ and $14.25 per month for Netflix.
Many were skeptical at the time, but WarnerMedia’s decision to release its entire 2021 movie slate simultaneously on HBO Max and in theaters seems to be working so far. Management lauded the successes of “Godzilla vs. Kong” and said that it drove new customers to HBO Max, and they stuck around for the other great content.
Subscription revenue jumped 12.6% from last year to $3.8 billion during the first quarter, and as a result, overall revenue at WarnerMedia rose nearly 10% to $8.5 billion.
Looking ahead, there are only more reasons to be bullish on HBO Max. The planned AVOD service is still on track to launch in June and expansion into 60 international markets is scheduled to happen by year-end.
Though management wouldn’t provide pricing details on the upcoming AVOD service, CEO John Stankey was adamant that the service would be able to tap into a much larger customer base that typically wouldn’t be able to access a premium subscription service like HBO Max. If pricing is no longer a concern for most, then the subscriber growth can only continue to ratchet higher.
Not only will growing subscriber figures be a huge win for WarnerMedia, but the advertising from the upcoming AVOD service will help the company drive sales further. During Q1, ad revenue at WarnerMedia rose 18.5% thanks to the return of sports, and the momentum will likely continue as the world moves toward post-pandemic recovery.
However, the growth in streaming comes as cord-cutting continued its precipitous decline. Though the trend has been ongoing and was largely expected, AT&T lost another 620,000 pay-TV subscribers during the first quarter.
On the flipside, AT&T’s core profit driver is its wireless business and accounted for 41% of overall revenue. It added an impressive 595,000 net wireless phone subscribers in Q1, and has been cutthroat in the space even as competition ramped up. Rival Verizon reported Wednesday that it lost 178,000 postpaid phone subscribers during the quarter.
Looking at AT&T’s balance sheet, debt is still a concern. Net debt rose to $169 billion, levels last seen about two years ago. However, investors seem to understand that the heavy investments are temporary and necessary to remain competitive in both wireless and streaming — for now. The telecom giant said that it plans to shell out $22 billion on capital investment in 2021. Management reassured investors that it is committed to paying down its debt through asset sales and continued revenue growth, but investors will have to see proof with its free cash flow sustained at least at current levels going forward.
Investors didn’t expect much from AT&T during Q1, but the company showed that it was in fact competitive, not only with its wireless business but also its growing streaming business.
AT&T shares have been lagging its peers for a while, but if it is able to keep up positive momentum, its shares will likely follow suit.