AT&T reported that it continues to lose large numbers of subscribers from its DirecTV services, and mobile subscriber growth disappointed investors, sending the stock down as much as 3% in trading Wednesday after the company reported fourth-quarter 2019 earnings.
As we wrote here last week, the poor performance of AT&T's DirecTV business, for which it paid $50 billion in 2015, continues to be a worry. But more so, the company's debt load, which totals more than $160 billion from the acquisitions of DirecTV and the $80 billion purchase of Time Warner last year, is becoming a growing concern.
AT&T CEO Randall Stephenson acknowledged this during Wednesday's earnings call and said the company will focus on reducing debt, rather than chasing growth. Stephenson has said multiple times over the past year that AT&T will use free cash flow to pay off debt. But the problem is, if the business deteriorates, the debt will become a larger problem, which has been the issue nagging investors and the stock.
“Our top priority for 2018 and 2019 is reducing our debt and I couldn’t be more pleased with how we closed the year," said Stephenson in a press release.
DirecTV and mobile blues
Despite the fact that Stephenson is pleased, the DirecTV business is a mess, with subscribers continuing to flee.
Interestingly, AT&T downplayed the trend in DirecTV, choosing not to even mention lost subscribers in the corporate press release. Analysts, however, were quick to pick up on the fine print, noticing that the company reported a loss of 403,000 satellite TV subscribers during the quarter.
Even more worrisome, AT&T lost 267,000 subscribers of its cheaper, over-the-top streaming service, DirecTV Now, which had been aggressively promoted in 2018 and was supposed to help stem the losses in the traditional satellite business.
AT&T explained the losses in DirecTV Now by saying it has cut back on promotion. But if customers leave that easily, it must mean there is a problem with the basic value proposition of the offering.
It should be apparent now that the satellite business is in full-blown crisis, with AT&T executives relatively clueless about how to stem the bleeding. As I opined last week, price hikes in the face of rising cord-cutting competition is probably not the best way to go about it.
In addition to the bad news for DirecTV, AT&T is not keeping up with competitors Verizon and T-Mobile in the wireless wars. The service provider reported 134,000 phone subscribers on a monthly bill, less than analysts’ estimates of 208,000, according to research firm FactSet. AT&T has 153 million phone subscribers. In comparison, Verizon added 650,000 net subscribers in the fourth quarter.
Overall, revenue for AT&T's Mobility segment decreased 2% year over year to $18.8 billion in the fourth quarter.
Stephenson is trying to reassure investors on the debt issue, as its balance sheet has bloated to more than $160 billion in short- and long-term debt over the past four years. With interest rates creeping up, that's a concern to investors.
On a bright note, AT&T still generates a significant amount of profit and cash, giving it wiggle room to manage the debt situation. The company reported diluted EPS of $0.66 compared to $3.08 in the year-ago quarter (2017 was impacted by tax reform). Net income was $4.9 billion compared to $19.0 billion in the year-ago quarter (2017 impacted by tax reform). Cash from operations totaled $12.1 billion, up 27%.
Another cause for optimism is that Time Warner appears to be generating profit to pay for its purchase. The company bought the business for new content to distribute over its networks, including HBO, Warner Bros., Turner and CNN. But that deal created the huge debt load. AT&T has rebadged its massive $80 billion Time Warner play as the WarnerMedia segment, which includes Turner and premium TV channel HBO. That business reported revenue of $9.23 billion during the quarter, beating analyst estimates of $9.05 billion.
This significant leverage and complexity clearly has investors worried. AT&T shares have fallen 14% over the past year, including dividends, compared with a 6% loss for the S&P 500. The next few quarters will be key for the company, as it has to prove it can keep up cash flows in order to start delivering on its promise to reduce debt.
R. Scott Raynovich is the founder and chief analyst of Futuriom. For two decades, he has been covering a wide range of technology as an editor, analyst and publisher. Most recently, he was VP of research at SDxCentral.com, which acquired his previous technology website, Rayno Report, in 2015. Prior to that, he was the editor in chief of Light Reading, where he worked for nine years. Raynovich has also served as investment editor at Red Herring, where he started the New York bureau and helped build the original Redherring.com website. He has won several industry awards, including an Editor & Publisher award for Best Business Blog, and his analysis has been featured by prominent media outlets including NPR, CNBC, The Wall Street Journal and the San Jose Mercury News. He can be reached at [email protected]; follow him @rayno.
Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.