AT&T Q2 Commentary: Fleeing Media Biz Already Looks Like the Right Move

&T Q2 Commentary: Fleeing Media Biz
Cheyne Gateley/Variety Intelligence Platform

AT&T’s future is looking bright, and the fundamentals of its core businesses continued their strength in Q2, as the company looks to ditch the streaming wars for the 5G race. Investors heard the message loud and clear Thursday morning: AT&T is one step closer to stripping away the distractions and focusing on the basics to drive long-term shareholder value.

The telecom giant is so confident in the road ahead it boosted its 2021 guidance after reporting overall revenue in Q2 was up 8% and earnings per share jumped 7%. AT&T now expects consolidated revenue growth between 2% and 3%, up from previous estimates of about 1%.

AT&T’s mobility business, which accounts for 43% of consolidated revenues and is a core profit driver for the company, had another monster quarter. In Q2, AT&T added 789,000 postpaid phone subscribers, well above Wall Street’s estimates for 278,000 additions over the quarter.

For context, AT&T lost 151,000 postpaid phone subscribers in the year-ago period and added just 74,000 in Q2 2019. On Wednesday, rival Verizon reported a gain of just 275,000 postpaid phone subscribers in the second quarter.

On top of that, churn is also at record lows, with postpaid phone churn at just 0.69% in Q2. The aggressive recent wireless promotions are certainly paying off, which could mean the promotions, while costly for the company, will likely stick around a while.  

It’s mind-blowing just how much the media landscape has changed over the past several years. At one point, telecom giants such as AT&T and Verizon thought they could establish a real presence in media, and then cord-cutting accelerated and streaming took off. In order to survive in the media space, companies had to pay to play. Media businesses like Netflix and Disney were pouring billions of dollars into their streaming services, a luxury highly indebted telecom companies like AT&T just didn’t have.

This forced telecom companies to decide what the future would look like if they wanted to create long-term value for their loyal shareholders. And the answer was clear: Take an L now before it’s too late.

Verizon announced in early May that it would be selling off its media business to private equity firm Apollo for $5 billion. Then just two weeks later, AT&T revealed its media business, WarnerMedia, would be merging with Discovery in a $43 billion deal.

AT&T’s diversification strategy-gone-wrong had some consequences and dragged down its stock in recent years. Over the past five years, shares of AT&T fell 35%, while Verizon was down less than 1% and T-Mobile surged 218%. But if there is any faith in AT&T’s back-to-basics business plan, some could argue this is the ultimate buying opportunity.

AT&T’s move to sell off its struggling media assets was a signal that it would be putting all its cash and energy into becoming a pure-play telecom company focusing solely on investing in the future of wireless: 5G.

And so far it is probably the right move. Net debt in Q2 fell by about $1 billion from $169 billion in Q1. And debt is expected to continue to shrink once the WarnerMedia-Discovery deal closes, according to management’s commentary on the earnings conference call Thursday — exactly what investors want to hear from a company with one of the largest debt loads in the space.

AT&T’s Q2 results were solid and illustrated the ongoing momentum of its core businesses. However, while the newly refocused business likely gives investors some renewed confidence in the company going forward, a key question remains: Is AT&T's strength in wireless sustainable, or is the all-in strategy too little too late?