AT&T's WarnerMedia Division Faces Wall Street Skeptics After Earnings

Ann/Getty Images
Outside WarnerMedia's HBO Max investor day presentation at Warner Bros. studios on Oct. 29, 2019

Analysts see investment in mobility possibly suffering as the telco giant shores up its media businesses and gets set to launch HBO Max.

AT&T remains a wireless phone powerhouse, but COVID-19 has upended WarnerMedia and its premium film and TV businesses, judging by its first-quarter earnings unveiled Wednesday.

And that expensive bet on show business worries Bernstein analysts Peter Supino and James MacNeill, who criticize AT&T for spending heavily to acquire DirecTV and Time Warner assets only to see WarnerMedia walloped by the coronavirus pandemic.

"Having failed badly at repackaging DirecTV, AT&T now seeks to repackage WarnerMedia amidst media industry disarray that would be hard to exaggerate," the Bernstein duo wrote Thursday in a note. The analysts see investment in mobility possibly suffering as AT&T shores up its media businesses and gets set to launch HBO Max to take on Netflix and other tech groups.

"The Warner Media and entertainment segments continue to lose market share on almost every front. With the COVID-19 recession pressuring investment decisions and a mostly new senior management team, we forecast this vicious cycle to continue," added Supino and MacNeill.

AT&T on Wednesday revealed deep losses for WarnerMedia as its base of TV subscribers fell sharply. The company 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.

Craig Moffett, an analyst with research firm MoffettNathanson, said AT&T moving from its low-cost virtual MVPD, or skinny bundle proposition introduced with DirecTV Now, has not paid off, given continuing subscriber losses. "There was a time when pay TV was viewed as a stable and defensive business. But with sports now off the air, and with lower-cost alternatives now plentiful, one simply can’t make that case anymore," Moffett wrote Wednesday in a note.

"This marks the sixth straight quarter of subscriber losses. Their vMVPD business has shrunk by two-thirds over the past year and a half," he added.

Wall Street watchers noted AT&T execs on Wednesday's analyst call said nine times that they will still pay shareholders a dividend, even though no one questioned if they might pull it amid their media woes. But "where we struggle is AT&T has brought into its model a cyclical exposure (media) at an (very) unfortunate time. We expect HBO Max to see positive trends — but question if this will offset the other media headwinds it likely will continue to face," Wells Fargo analyst Jennifer Fritzsche wrote Thursday in her own investor note.

Vanishing live sports and TV advertising during the pandemic also had Cowan analyst Colby Synesael predicting a bleak outlook for Turner — including Turner Sports, TNT and TBS — beyond a first-quarter hit by the cancellation of NCAA March Madness, and with continuing steep revenue declines on the horizon.

"Looking forward, we are now forecasting a -40 percent year-on-year decline in Turner ad revenue in 2Q, with gradual improvement from there, with our 2021 forecast roughly -14 percent below 2019 levels," Synesael wrote Thursday in a note.