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AT&T fell short of profit expectations when it disclosed its third quarter earnings Wednesday, its first financial report that includes a full three months of Time Warner ownership.
The telecommunications giant earned an adjusted 90 cents per share on revenue up 15.3 percent to $45.7 billion, which included $8.2 billion in new revenue, compared with 2017, from the Time Warner acquisition. Analysts expected AT&T to report 94 cents in per-share earnings on revenue of $45.65 billion.
AT&T completed its $85 billion acquisition of Time Warner on June 14, and then changed the entertainment division’s name to WarnerMedia, with its HBO, Turner and Warner Bros. divisions set to compete against Netflix amid cord-cutting and a turn by consumers to streaming services.
The second-quarter report three months ago included just 16 days worth of WarnerMedia’s financials. Shares in AT&T fell by $1.88, or nearly 6 percent, to $31.14 on the New York Stock Exchange in morning trading as investors digested the quarterly earnings miss.
“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 a statement. “WarnerMedia was immediately accretive in its first full quarter, contributing 5 cents to EPS, and our free cash flow grew by double digits.”
During an analyst call, Stephenson focused on the financial and strategic benefits of WarnerMedia. “All three divisions are growing,” he said, citing the quarterly performance of HBO, Turner and Warner Bros. after the telecom giant acquired in Time Warner a media conglomerate.
For the third quarter, WarnerMedia posted revenue of $8.2 billion, up 6.5 percent from a year-earlier $7.7 billion on higher subscription revenues and increased licensing revenue from Warner Bros. AT&T indicated Turner revenue was up 3.9 percent to $3 billion, while HBO was up 2.4 percent to $1.6 billion.
Warner Bros. saw its revenue rise 7.5 percent to $3.7 billion, on higher TV licensing revenue and a “solid theatrical slate” from titles like Crazy Rich Asians, The Meg and The Nun. Theatrical revenues were flat as fiscal 2017 included titles like Dunkirk, It and Wonder Woman.
For WarnerMedia, third quarter operating expenses were up 5.4 percent to $5.6 billion, due to increased TV production costs at Warner Bros. and consolidating Otter Media. Operating income for the division was up 9.1 percent to $2.6 billion on “strong gains” from Turner and HBO.
AT&T’s Entertainment Group, which houses DirecTV, posted revenue of $11.58 billion in the third quarter, against $12.4 billion in 2017.
DirecTV Now added 49,000 subscribers to get to 1.9 million total subscribers. The traditional satellite service lost 346,000 customers, with the DirecTV Now streaming product making gains as the Entertainment Group starts beta testing a new streaming video service.
The Entertainment Group ended the third quarter with 25.2 million video subscribers.
AT&T execs during the analyst call talked up the bottom line boost to come from owning the revenue streams of entertainment and media businesses, and offering them to traditional mobile subscribers.
“We’re doing dramatically better than the industry where we have a fibre footprint,” John Donovan, CEO of AT&T Communications, insisted. AT&T execs also argued that, heading into 2019, the telecom giant has the free cash flow and merger synergies required to reduce a massive debt load facing the combined entity after the acquisition of WarnerMedia’s TV networks and film business.
That deleveraging comes as AT&T still faces demands on its cash for investing in 5G on the mobility side and producing more TV shows and movies to compete against Netflix and other streaming giants.
AT&T CFO John Stephens said asset sales were likely as the phone giant looked to reduce its debt load. “I’m not going into any major transactions…but we’re looking at everything,” Stephens said.
Oct. 24, 9:30 a.m.: Updated with comments from senior AT&T executives made during an analyst call.
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