AT&T to "Lead the Evolution of Video" Services After DirecTV Acquisition, CEO Says

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AT&T CEO Randall Stephenson

The telecom giant highlights the opportunity to cross-sell services in 39 million households, reduce programming costs and how it will respond to changing pay TV usage habits.

Telecom giant AT&T on Wednesday updated its financial guidance and strategy following its recent acquisitions of satellite TV giant DirecTV and Mexican wireless companies Iusacell and Nextel Mexico.

"With our national retail presence, coast-to-coast TV and mobile coverage, and pervasive broadband footprint, we’re positioned like no other to lead the evolution of video and shape the future of the industry," said chairman and CEO Randall Stephenson. "We have the premier set of assets to redefine TV everywhere and deliver an entertainment experience that is truly unique."

He added: "We’re a different company than when we began the year and it shows in what we’ll be able to offer customers and in our financial outlook. We’ve diversified our capabilities, added significant scale in video and mobility and can now deliver integrated services that set us apart from the competition."

The comments come after big entertainment industry stocks fell last week amid fears of cord-cutting and a rise in popularity of "skinny" pay TV packages, as well as soft TV networks ratings and advertising revenue.

AT&T now is the largest pay TV provider in the U.S. and the world, providing service to more than 26 million subscribers in the U.S. and more than 19 million in Latin America. It also has 132 million wireless subscribers in the U.S. and Mexico and has nearly 16 million broadband subscribers.

AT&T said it continues to expect $2.5 billion or more in annual cost synergies from the DirecTV transaction by 2018. CFO John Stephens
highlighted the opportunity for programming cost savings, highlighting that AT&T's U-verse video service pays $17 per subscriber per month more in content costs than DirecTV, providing a "great opportunity" to negotiate with "the content guys."

Management said content companies could in return benefit from more data on who is watching and more targeted advertising opportunities.

Stephenson said cord cutting has been trending in line with management's assumptions and said the company expects "manageable" declines in overall pay TV subscribers in the foreseeable future. Meanwhile, cord shaving doesn't present a big issue for the company as the margins on a $50 DirecTV package and a $90 U-verse package are similar, he said. And the CEO said that AT&T expects to grow revenue per household over the foreseeable future.

Executives several times mentioned that millennials like to watch content on mobile devices.

The figure for the cost savings "does not include numerous revenue synergy opportunities, including cross-selling additional products to each customer base; enhanced retail distribution as AT&T begins to offer DirecTV in its 2,200 company-owned retail store locations; and enhanced advertising opportunities, such as local ad insertion," it said.

The cross-selling is a 39 million total household opportunity, with 15 million homes possibly adding wireless, 21 million adding video and
3 million adding high-speed Internet services, it said.

"Additionally, AT&T now has the ability to broadly offer TV service to its 57 million broadband customer locations," it said. "Previously, the company could offer U-verse TV and broadband to only about half of these customer locations."

Potential capital spending and working capital synergies include moving to a common video platform and transitioning to a common set-top box, AT&T said.

Given all that, the company updated its 2015 guidance, including double-digit consolidated revenue growth due to the DirecTV acquisition, and gave a three-year financial forecast.

From 2016 through 2018, the company expects annual revenue growth in line with GDP growth or better and adjusted earnings per share growth in the mid-single digit range.

AT&T released its updated expectations ahead of a conference with Wall Street analysts.

At the event, Stephenson again argued that integrated solutions will win out and content is key. He also said that the world was quickly moving to TV Everywhere, said "we intend to redefine TV Everywhere" and said AT&T's new model of offering integrated services was also attractive to the content industry.

The CEO said that the events of last week, when entertainment stocks fell on cord-cutting fears, "magnified" the importance of coming at services and offers in new ways. "We think we stand alone today," he said.

John Stankey, CEO of AT&T Entertainment and Internet Service, at the event also said that Comcast, Verizon, Netflix and others can't offer the across-the-board services AT&T can now provide. "We're poised to set the model for others to chase," he said.