AT&T Details $430M Virus Pandemic Earnings Hit for First Quarter, Loses 1.04M TV Subs

Randall Stephenson - Economic Club Lunch- Getty-H 2019
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WarnerMedia boss John Stankey says his studio is "rethinking our theatrical model and looking for ways to accelerate efforts that are consistent with the rapid changes in consumer behavior."

Telecom giant AT&T on Wednesday reported its first-quarter financials, the first set of results affected by a few weeks' worth of the coronavirus pandemic. 

It detailed a $433 million hit to quarterly earnings before interest, taxes, depreciation and amortization and a roughly $600 million revenue impact, but added: "The economic effects of the pandemic and resulting societal changes are currently not predictable."

"In the first quarter of 2020, we recognized approximately $430 million, or $0.05 per share, of incremental costs associated with bad debt reserves, voluntary corporate actions taken primarily to protect and compensate front-line employees and contractors, and WarnerMedia production shutdown costs," the company explained. "We expect more than half of these incremental charges will be short-term in nature."

AT&T disclosed that it lost 138,000 subscribers at its AT&T TV Now streaming service in the period, following a loss of 219,000 in the fourth quarter and a loss of 83,000 in the year-ago period. It also recorded a 897,000 loss of premium TV subscribers at DirecTV and U-Verse, compared with a loss of 945,000 in the fourth quarter and a year-ago loss of 544,000. Overall it lost 1.035 million TV subscribers.

UBS analyst John Hodulik had forecast AT&T TV Now losses of 278,000 subscribers and a premium TV sub drop of 709,000.

Wall Street analysts have been debating whether the virus crisis that has forced people to stay at home would make pay TV services more core for consumers looking for news and entertainment or accelerate cord cutting amid rising unemployment.

AT&T, led by chairman and CEO Randall Stephenson, said WarnerMedia's revenue and earnings fell. Hodulik had forecast a 4.5 percent revenue drop to $8.0 billion and a 17.2 percent earnings decline to $1.98 billion.

AT&T executives talked during an analyst call about possible job losses at WarnerMedia due to the impact of the COVID-19 crisis on its media businesses and consumer viewing habits. "We're sizing our operations to reflect the new economic activity level. And we're leaning into our cost and efficiency initiatives," Stephenson told investors, without being specific about business divisions.

WarnerMedia's Turner division has been hit as live TV sports ground to a halt during the pandemic and Warner Bros.' movie business has been disrupted. WarnerMedia CEO John Stankey said the media business was impacted on the theatrical and TV sides, with production studio and theater shutdowns and less advertising revenues following the postponement or cancellation of live sporting events.

"We also expect our pay TV business to be impacted by the economic headwinds. As you might expect, we're not backing off our cost and efficiency transformation initiatives that remain largely under our control. If anything, we see this as an opportunity to approach all of our businesses differently and better align our work with how COVID has reshaped customer behaviors and the economy," Stankey said during the call.

He reiterated AT&T anticipated $6 billion in cost savings across all of its divisions over the next three years "and improved market effectiveness." The telecom giant also talked about cinemas eventually reopening and changes to come with the traditional theatrical window.

"Don't expect there's going to be a snapback. That's going to be something we'll have to watch," Stankey said of theater attendance when cinema screens eventually reopen. The WarnerMedia boss added his studio is "rethinking our theatrical model and looking for ways to accelerate efforts that are consistent with the rapid changes in consumer behavior from the pandemic."

He pointed to WarnerMedia on Tuesday, announcing it will send its animated film Scoob!' straight to premium on-demand, instead of waiting for theaters to reopen, followed by an exclusive streaming play on HBO Max, as one example.

And content production will return to normal post-pandemic, Stankey predicted: "The studios are dark now. But as soon as we can resume production, we plan to get back to where we left off in March with a steady stream of new offerings in the fall and winter."

WarnerMedia operating earnings in the first quarter fell amid the virus impact and investment and foregone revenue tied to streaming service HBO Max, just like in the fourth quarter when foregone revenue had amounted to $1.2 billion. The company had previously said that WarnerMedia's "strategic decision" to keep such shows as Big Bang Theory for HBO Max instead of licensing them to other services would "pay off over the long term." 

Overall, WarnerMedia posted $7.4 billion in quarterly revenue, down 12.2 percent. Operating income fell 24.3 percent to $1.7 billion.

Turner revenue for the first quarter dropped 8.2 percent to $3.2 billion amid lower advertising revenue primarily from the cancellation of the NCAA March Madness basketball tournament. But operating income rose 10.9 percent to $1.4 billion. Said AT&T: "In addition to … incremental [virus pandemic] costs, our operations and comparability were impacted by the cancellation of the NCAA Division I Men’s Basketball Tournament, resulting in lower advertising revenues and associated expenses, closures of retail stores, contributing to a decline in wireless equipment sales, with a corresponding reduction in equipment expense and the imposition of travel restrictions, driving significantly lower wireless roaming services that do not have a directly correlated expense reduction. The net impact of these items on profitability was not significant."

HBO's revenue dropped 0.5 percent to $1.5 billion, while operating expenses increased 13.9 percent, leaving operating income down 25.4 percent at $423 million.

Warner Bros. posted a 7.9 percent revenue decline to $3.2 billion due to "unfavorable comparisons" with the prior-year period. Operating profit of $249 million was down 54.5 percent. Its releases in the period included Birds of Prey and The Way Back. The year-ago quarter had included The Lego Movie 2, Isn't It Romantic and carryover from Aquaman

AT&T had on March 20 said that it was canceling $4 billion in planned stock buybacks to maintain its financial flexibility amid the coronavirus pandemic, adding its financial impact on the firm could be "material." It said at the time that it was difficult to predict the exact fallout, echoing similar comments from many other companies.

On Wednesday, AT&T pulled its guidance for 2020 and a three-year period, which it had previously focused on.

Management reiterated the firm was confident in its balance sheet. On April 7, AT&T unveiled a deal for a $5.5 billion loan, boosting its liquidity amid the coronavirus crisis and said it would continue paying dividends. But it added that it expects to be "sizing our operations to economic activity," a sign of possible layoffs or reduced investment amid the crisis, although the company didn't provide any further details.

AT&T recently also named former Hulu CEO Jason Kilar the new CEO of WarnerMedia, replacing John Stankey, who was previously promoted to the role of president and COO at the parent company. Kilar, who will report to Stankey, will join the company May 1.   

One of his core priorities will be streaming service HBO Max, which is set to launch in late May. It will be made available to Spectrum customers through a deal that cable giant Charter Communications and WarnerMedia unveiled last week.