AT&T Details $830M Pandemic Earnings Hit for Second Quarter, Loses 886,000 Premium TV Subs

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New AT&T CEO John Stankey

The pandemic contributed to lower WarnerMedia results, while investment in HBO Max accounted for a $400 million hit to earnings. HBO and HBO Max ended June with 36.3 million U.S. subscribers.

Telecom giant AT&T on Thursday reported its second-quarter financials, the first set of results fully affected by the novel coronavirus pandemic. 

It detailed a roughly $830 million hit to quarterly earnings before interest, taxes, depreciation and amortization and a roughly $2.8 billion revenue impact after in the first quarter having mentioned a $433 million earnings and a $600 million revenue hit.

Its investment in streaming service HBO Max accounted for a roughly $400 million hit to quarterly earnings, the company said.

AT&T touted the "successful launch of HBO Max with strong engagement," but didn't immediately detail figures beyond disclosing that combined HBO and HBO Max U.S. subscribers grew 5 percent from the 34.6 million as of the end of 2019 to reach 36.3 million at the end of June. 

HBO Max is "on track" to hit the subscriber and revenue targets outlined by management, AT&T CEO John Stankey said on the earnings conference call. The company's goal is to reach 50 million-55 million HBO Max customers in the U.S. by 2025. Stankey also said there were signs that the streaming service can, as hoped, boost broadband user momentum and wireless average revenue per user.

AT&T also disclosed that it lost 68,000 subscribers at its AT&T TV Now streaming service in the second quarter, following a 138,000 loss in the first quarter. It also recorded an 886,000 loss of premium TV subscribers, which includes DirecTV, compared with a loss of 897,000 in the first quarter. 

AT&T also reported WarnerMedia's revenue and earnings for the second quarter, highlighting a $1.5 billion revenue impact, but also some lower expenses, including for sports content. 

Second-quarter revenue of $6.8 billion was down 22.9 percent from the year-ago period, with the segment operating contribution of $1.9 billion down 18.4 percent. WarnerMedia's operating income fell 16.6 percent to $1.9 billion. Turner led the revenue decline with a 12.4 percent drop, while HBO recorded a 5.2 percent and Warner Bros. a 3.9 percent drop.

The entertainment unit's operating earnings in the first quarter had dropped 24.3 percent amid the virus impact and investment and foregone revenue tied to streaming service HBO Max, while its first-quarter revenue had fallen 12.2 percent. 

Stankey on the call said the company was operating under the assumption that the virus impact would be around "for some time" and "significant access" and other needs "will be the business norm well into next year.”

He also said that AT&T now defines its purpose as being "to create connections," offering “stories and experiences that matter" and “compelling entertainment.” 

He said the company would also look to become "more agile and efficient," a possible sign of cost and job cuts. The company will end up looking "different" when a multi-year transformation process is completed, he said. 

Stankey also said debt reduction remains in focus along with a "disciplined" review of non-core assets. He also highlighted that the firm remained committed to their  

Core subscription businesses have been "resilient" amid the pandemic. 

Warner Bros' second-quarter revenue fell amid "the absence of theatrical releases and lower games and other revenues, partially offset by higher television revenues, including internal sales to HBO Max that are eliminated upon consolidation." Warner Bros. operating expenses fell 11 percent "primarily due to the production hiatus and lower marketing expenses partially offset by higher film and production costs primarily associated with HBO Max sales.

HBO's revenue decline was "driven by lower subscription revenues due to domestic linear subscriber declines, partially offset by growth in digital and international." Content and other revenue decreased as a result of lower content licensing. HBO operating expenses jumped nearly 33 percent due to increased programming expenses related HBO Max.

At Turner, "lower advertising revenues primarily from the postponement of the NBA season," drove the revenue drop. Subscription revenue was also down "due to lower regional sports network revenues and unfavorable foreign exchange rates." Turner operating expenses dropped 37 percent "driven by the timing of sports costs associated primarily with the delayed NBA season."

AT&T in its earnings report reiterated the "continued lack of visibility related to COVID-19 and economic impact," saying it would continue to provide limited financial guidance. 

"Our solid execution and focus in a challenging environment delivered significant progress in the quarter, most notably the successful launch of HBO Max, resilient free cash flow and a strengthened balance sheet," said Stankey. "Our resilient cash from operations continues to support investments in growth areas, dividend payments and debt retirement. We are aggressively working opportunities to sharpen our focus, transform our operations and continue investing in growth areas, with the customer at the center of everything we do."