AT&T beat revenue expectations for the third quarter of 2018 while falling short on profit, with the telco touting the addition of WarnerMedia as contributed top-line and income growth.
For Q3, WarnerMedia — as Time Warner was rechristened — posted revenue of $8.2 billion, up 6.5% year over year. WarnerMedia delivered operating profit of $2.57 billion (up 9% year over year), with an operating income margin of 31.3%.
Sales were up across the board at WarnerMedia. Turner boosted revenue 3.9% to $3.0 billion on subscription, content and other revenue growth, while domestic ad revenue for the quarter dropped 4% and international advertising was down in the low double-digits, according to CFO John Stephens. HBO was up 2.4% to $1.6 billion, with subscription revenue climbing 7%. And Warner Bros. revenue was up 7.5%, to $3.7 billion, on increased TV licensing revenues.
AT&T’s wireless service revenue of $14.0 billion was up 2.3% year-over-year on a comparable basis, with the company netting 3.4 million overall wireless net connections (versus 3.0 million in Q3 2017) driven by prepaid accounts and connected devices. AT&T had 69,000 postpaid phone net adds, down from 246,000 in the year-ago quarter.
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“I’m pleased with the progress we made on a number of fronts in the third quarter,” Randall Stephenson, AT&T chairman and CEO, said in prepared remarks. He noted that the telco’s acquisition of WarnerMedia “was immediately accretive in its first full quarter,” contributing 5 cents to earnings per share.
However, AT&T’s pay-TV business continued to slide. The company reported a 346,000 net loss in traditional DirecTV satellite and AT&T Uverse video customers while gaining 49,000 customers for the DirecTV Now internet-TV service. DirecTV Now currently has 1.86 million customers.
The company said it is focusing on “improving profitability” of its pay-TV products and will begin beta-testing “a new streaming-video device.” John Donovan, CEO of AT&T Communications, said trials of the new device will be launched in the first half of 2019. An AT&T rep was unable to provide more info on what that refers to, but it appears to be the wireless internet set-top box based on Google’s Android TV platform that has been in development for over a year.
AT&T’s Entertainment Group, which includes DirecTV and wireline broadband and phone businesses, posted revenue of $11.6 billion, down 7% versus the year-earlier quarter. The company attributed the drop to cord-cutting and ongoing declines in legacy wireline services; an accounting change in revenue recognition; and revenue from the Mayweather-McGregor pay-per-view event in Q3 2017. The segment’s operating income of $1.1 billion was down 14.1%; video-entertainment revenue declined 8.5%, to $8.28 billion.
Donovan, discussing DirecTV Now on the earnings call, said the company is “evaluating our channel lineups” to “align content costs with the price,” suggesting that the telco plans to roll out skinnier OTT bundles.
In July, DirecTV Now raised the price of its bundles by $5 per month. Donovan told analysts on the call the 49,000 net adds for the OTT service were better than he expected for Q3. “We actually expected a far worse outcome than we had,” Donovan said.
Overall, AT&T reported $45.74 billion in revenue and adjusted earnings per share of 90 cents. (Excluding Time Warner, the company’s revenue was flat with the year-ago period.) Wall Street had expected AT&T to report revenue of $45.65 billion and adjusted EPS of 94 cents.
The company’s stock fell more than 3.5% in pre-market trading on the earnings miss.
Stephenson said AT&T — which amassed a large amount of debt to buy Time Warner — is on track to get its debt-to-adjusted-earnings ratio to the range of 2.5X by the end of 2019. He added that the telco is “making pricing moves on video” that will lay the “foundation for stabilizing our Entertainment Group profitability in 2019.” On the earnings call with analysts, Stephenson called out AT&T’s free cash flow of $6.5 billion for Q3, up 16.6%, as an example of the company’s operating momentum.
As of Sept. 30, AT&T had a whopping $168.5 billion in long-term debt on its balance sheet, up from about $126 billion at the end of 2017. The company it expects to have retired or refinanced about $28 billion in debt by the end of 2018.
AT&T closed the acquisition of Time Warner on June 15. The Department of Justice’s appeal of an antitrust ruling clearing the way for the deal is still pending.
The telco’s newly renamed Xandr advertising-services and analytics unit delivered operating revenue of $445 million, up 33.6%. The increase included the acquisition of programmatic ad-tech company AppNexus; excluding AppNexus revenue, sales were up 22%. Xandr’s operating profit contribution was $333 million, up 13.3% versus Q3 2017.
Some of the revenue reported for Xandr is double-reported by AT&T’s Communications segment. The company provided a consolidated picture of advertising across divisions, totaling $1.5 billion for the third quarter: WarnerMedia generated $983 million, Communications was at $478 million and Xandr tallied $445 million, minus $401 million in eliminations for double-reported revenue.
