AT&T's DirecTV Now Loses 267,000 Subscribers in Fourth Quarter

Randall Stephenson - November 20, 2017  -Getty -H 2018
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The telecom giant reports its latest financials and subscriber figures along with results at the former Time Warner businesses.

Telecom giant AT&T, led by chairman and CEO Randall Stephenson, on Wednesday reported improved fourth-quarter financials for its WarnerMedia unit, led by Warner Bros., and said it lost 267,000 subscribers at its DirecTV Now streaming service in the period.

DirecTV Now dropped 267,000 subscribers in the fourth quarter, ending 2018 with 1.6 million, down from 1.86 million as of Sept. 30. The company also lost 403,000 traditional DirecTV satellite TV subscribers, but added 12,000 at IPTV service U-Verse. "During the fourth quarter of 2018, including the impact of losses of 267,000 from DirecTV Now, total video subscribers decreased 658,000," the company said. "DirecTV Now net adds included approximately 65,000 on free or substantially free trials."

Meanwhile, at WarnerMedia, led by CEO John Stankey, the fourth-quarter earnings contribution reached $2.7 billion as operating income jumped 33 percent to $2.6 billion amid gains across all units. Revenue rose 5.9 percent to $9.2 billion, led by $4.5 billion from Warner Bros. (up 10.4 percent), $3.2 billion at Turner (down slightly) and $1.7 billion from HBO (down slightly).

Warner Bros. in the quarter recorded 29.3 percent growth in theatrical product revenue and 3.9 percent growth in television product revenue, with operating income up 57 percent, driven by the higher revenue that was "partially offset by higher expenses."

During a morning analyst call, AT&T execs, led by Stephenson, were pressed on how quickly they will pay down their debt load. "Our top priority in 2019 is driving down the debt from our Time Warner acquisition," Stephenson told investors. Wednesday's earnings report was AT&T's second that included a full three-month period of Time Warner, which the company had acquired last year for $85.4 billion.

AT&T execs pointed to free cash flow of $26 billion expected in 2019 as they insisted debt reduction, which is to include non-core asset sales, was "on plan." Stephenson pointed to strong revenue and profit margin trends at Warner Media.

Strong Warner Bros. box office from Aquaman and A Star Is Born helped lift the studio's operating income. HBO saw revenue fall slightly due to a carriage dispute with Dish Networks, and Turner, while seeing subscription revenues grow, also had ratings declines offset by higher pricing.

AT&T is eyeing merger synergies as it grows Warner Media and gets set to launch its direct-to-consumer offerings in late 2019. "We've identified billions of dollars in monetizable assets. Our Hulu investment is another opportunity," CFO John Stephens told analysts.

AT&T during an earlier analyst call in November 2018 first talked about possibly selling off its 10 percent stake in Hulu to shrink its debt load. On the pay TV front, AT&T said recent subscriber losses at its DirecTV Now streaming service followed around 500,000 customers with entry-level packages losing their promotion pricing.

"We have a customer base left on the streaming that's growing, and is a highly engaged.... We like where we are in how we're positioning the streaming product," Stephenson told analysts. And on the TV advertising front, the phone giant is ramping up Xandr, its new analytics business, in time for the 2020 U.S. presidential election.

HBO's fourth-quarter operating income jumped 29 percent to $622 million as a 12 percent drop in expenses, thanks to lower programming and distribution costs, outweighed a 0.4 percent revenue hit. Subscription revenue fell 3 percent amid a carriage dispute with Dish Network, which began in November. But content and other revenue increased due to higher international licensing revenue.  

Turner's operating income for the latest quarter rose $1.3 billion on lower expenses, led by lower programming and market costs thanks to the timing of original series. Turner recorded a decline of 6 percent in advertising revenue, due to lower ratings in the U.S. and unfavorable foreign-exchange rates abroad, partially offset by an increase of 3.7 percent in subscription revenue.  

WarnerMedia is planning to launch, in the fourth quarter, its own streaming service, overseen by AT&T veteran Brad Bentley as general manager and executive vp for direct-to-consumer development at WarnerMedia. 

Otter Media, the AT&T-owned digital media business, recently laid off around 10 percent of its employees amid a  reorganization of its portfolio of digital brands, including Fullscreen, Rooster Teeth and Ellation. Among the changes is a plan to bring the gaming-centric Machinima brand under the Otter umbrella. The company is also consolidating direct-to-consumer businesses Rooster Teeth, Crunchyroll and VRV under the Ellation banner.