Cord-Cutting in Focus for "Nervous" Investors as Pay TV Giants Prep for Earnings Season

Josh Tulman

"Sub trends remain an overhang" for entertainment stocks, too, says one analyst, but there are expectations for a stronger back-half of 2017.

While pay TV giants have focused more and more on their broadband businesses, the spotlight is expected to again be on cord-cutting this earnings season.

The amount of pay TV subscriber losses in the first quarter had surprised, even shocked, Wall Street observers.

Traditional pay TV subscriber defections picked up speed in the first quarter with an estimated loss of 802,000 subscriptions, according to Kagan, a group within S&P Global Market Intelligence.

MoffettNathanson analyst Craig Moffett said that key pay TV companies he covers lost 809,000 in the first quarter, or 434,000 when including subscriber gains from streaming-only bundles. In the year-ago quarter, he had counted a drop of 141,000, or gain of 24,000 subscribers, respectively.

"Changing viewing habits point to mounting losses for traditional video services, and challengers are lining up to capitalize," explained Ian Olgeirson, research director, S&P Global Market Intelligence, in a recent report.

Morgan Stanley analyst Benjamin Swinburne wrote after first-quarter earnings season that traditional pay TV sub trends were “surprisingly weak.” That also means that there will be increasing focus on how new streaming-only pay TV services do.

“The real surprise of the quarter was the acceleration of cord-cutting in legacy [pay TV] subscribers, which was not offset by the estimated gain in virtual [pay TV providers],” MoffettNathanson analyst Michael Nathanson said in a recent report. “This dynamic punishes those networks and companies that are not being carried by virtual [providers] and strikes at the heart of a more bullish ‘cord-cutting will stabilize’ media thesis.”

All this has hurt investor sentiment as far as pay TV and entertainment stocks go. "Secular concerns around cord-cutting, seasonality and competition from telco/emerging players are on the rise," said Macquarie Capital analyst Amy Yong. "The pay TV industry lost about 1.6 million subs last year. Much to investor's angst, this accelerated in the first quarter."

For the second quarter, which is traditionally the weakest of the year as students and so-called "snowbirds," or people who spend the winter in Florida and other warmer states, move and drop their pay TV subscriptions, many expect things to look even worse.

Moffett expects a second-quarter pay TV subscriber drop of around 1 million, worse than the loss of
775,000 in the year-ago period, or 696,000 when including streaming subscribers.

Wells Fargo analyst Marci Ryvicker even forecasts a second-quarter decline of 1.28 million traditional pay TV subscribers for key companies she covers, or 858,000 when including subscribers to new streaming bundles. “We know investors are nervous about this print,” she wrote in a recent report, citing the weak first quarter “coupled with the fact that the second quarter is the seasonally weakest quarter of the year, we’ve had the debut of two more streaming bundles via Hulu and YouTube, and competition from the incumbents has picked up (AT&T is aggressively promoting DirecTV and DirecTV Now, and there is no Verizon strike).”

Yong sees a less pronounced drop of around 494,000 subs for second-quarter earnings season, which AT&T kicks off Tuesday, followed on Thursday by Comcast, Charter Communications and Verizon.

Yong forecasts Comcast will post a 16,000 video subscriber decline for the period, Charter Communications, which has been pruning its customer base after the acquisition of Time Warner Cable, to report a 125,000 drop, Dish to lose 229,000 subs and Verizon FiOS to add 18,000 subs. AT&T will lose 313,000 U-Verse subs and add 171,000 DirecTV subs, she expects. For the full year 2017, she forecasts a 1.06 million decline in pay TV subs.

In her recent report “The Dog Days of Summer,” Yong wrote: “As we head into second-quarter earnings, we caution that seasonality is a headwind and that competition picked up noticeably,” particularly from telecom companies.

Entertainment stocks are also caught up in the pay TV subscriber trends given many companies have big cable networks units, which account for a majority of companies' profit. "Sub trends remain an overhang," for entertainment stocks, Jefferies analyst John Janedis wrote in a preview report. "Investor sentiment remains negative for the group, and we believe it is unlikely that second-quarter results will change the narrative, though the potential exists that fundamentals may not be as bad as feared."
 
In any case, Wall Street observers predict improving trends in the back half of 2017. “We expect sub losses will slow in the second half [of the year] as AT&T simplifies its DirecTV Now plans and as Charter’s pruning efforts come to an end,” said Yong who forecasts a loss of 113,000 pay TV subscribers in the third quarter and a loss of only 7,000 in the fourth quarter.

New live-streaming video services, including DirecTV Now and recently launched offers from Hulu and YouTube, along with established offers from the likes of Sling TV, are likely to start having an impact, according to the analyst. “We believe these providers can cumulatively add at least 500,000-750,000 subs per year,” Yong said.

Swinburne says that entertainment stocks could also benefit from a stronger back-half in pay TV. “We continue to assign an ‘attractive’ industry view on media, where depressed valuations offer investors compelling risk/reward as the distribution revenues accelerate,” he wrote in a recent report.

comments powered by Disqus