WarnerMedia Faces Wall Street "Pressure" Ahead of HBO Max Launch

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As AT&T plans "heavy" investment for its new streaming effort, revenue forecasts dim as its pay TV businesses "bleed market share."

In 2016, when AT&T revealed its intention to pay $85 billion for Time Warner, it said the deal would "enhance its revenue and earnings growth profile." Shortly after the merger closed in June 2018, AT&T CEO Randall Stephenson predicted TV subscribers would expand "over the next couple of years."

But Jan. 29, he disclosed that between DirecTV and U-verse, the telecom had 19.5 million video customers, 15 percent fewer than a year earlier, while AT&T net income slid 25 percent to $13.9 billion in 2019 on operating revenue that dipped 2 percent to $45.1 billion. Revenue and operating income also declined at WarnerMedia.

UBS analyst John Hodulik downgraded AT&T shares Jan. 30 to neutral while cutting his price target, suggesting the firm faces "secular pressure within its entertainment and WarnerMedia units." Bernstein analyst Peter Supino says he's "extremely concerned about the environment for WarnerMedia's legacy TV businesses, especially the large affiliate revenue streams of Turner and CNN."

AT&T said it shed 20,420 employees year-over-year, but the layoffs apparently haven't saved much money yet amid spending on HBO Max, the streamer it plans to launch in May. CFO John Stephens said pressure from heavy HBO Max investment not only dented its fourth-quarter financials but will keep doing so for the first half of 2020.

Along with HBO Max costs, WarnerMedia is forgoing some licensing revenue. Craig Moffett of MoffettNathanson notes, "A year ago, WarnerMedia was growing." But if losses mount at HBO Max, the company will "wither," the analyst warns, thus his rating on AT&T shares are a "sell."

AT&T counters that it met or exceeded all of its 2019 commitments, including record free cash flow for the year. "Our three-year financial outlook and capital allocation plan position us well for the future," Stephenson said Jan. 29.

On the brighter side, some observers have confidence that an Oct. 28 agreement with activist investor Elliott Management, which owns $3.4 billion in shares and equivalents, could be beneficial. The deal calls for a full review of the portfolio, presumably with the intention that AT&T would sell assets (some are suggesting jettisoning DirecTV, which lost 403,000 subs in the last quarter) along with "no more major acquisitions."

In a bullish note, David Barden at Bank of America says AT&T "is running the media business just fine" because, had it not been for investments in HBO Max, revenue in the segment might have grown 10 percent in the fourth quarter instead of sinking 3 percent; Supino points out that AT&T stock is cheap and adds, "Management's alignment with activist shareholders portends better earnings-per-share results by whatever means necessary, but we expect AT&T's key businesses to continue to bleed market share."

This story first appeared in the Feb. 5 issue of The Hollywood Reporter magazine. Click here to subscribe.