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AT&T misses on revenue, loses more DirecTV Now customers

Media properties like Aquaman and Game of Thrones are bright spots for the company, while the wireless and pay TV businesses face hefty competition.

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It's not easy to be a media conglomerate and telecom powerhouse. That's the reality for AT&T.

On Wednesday, the company disappointed Wall Street analysts by missing revenue expectations in spite of gains in new wireless subscribers and a strong media and entertainment business. It also announced continued subscriber losses for its DirecTV Now streaming service.

The main takeaway is that AT&T is facing intense competition in both its wireless and video services, where the key to success is attracting and keeping customers, while also making sure you're not giving away too much of your profits to do so.

One potential bright spot is its WarnerGroup entertainment properties, acquired last June from Time Warner Media. This business includes movie studios and cable channels like HBO, which offers hit shows like Game of Thrones. But making money from these entertainment properties is proving a challenge. Revenue for WarnerMedia in the first quarter was slightly below what investors had expected.

The company's chairman and CEO Randall Stephenson says he sees big upsides in the entertainment business. He's also encouraged by the company's wireless business, which is seeing improvements thanks to deployment of new spectrum from its nationwide FirstNet network. FirstNet is being built in a partnership with the first responder community, and Stephenson said access to this spectrum has allowed the company to expand its and significantly improve performance. 

"I take more satisfaction in this area than anywhere else," he said on the conference call with investors on Wednesday. He added that after investing tens of billions of dollars building out its wireless infrastructure, the FirstNet spectrum is "having the impact we thought it would have and changing the value proposition" in terms of the "quality and speed" of the so-called "5G Evolution" service.

"Our customers are seeing the faster speeds," he said. "And it is truly a step change difference." 

The results

For the first quarter, the No. 2 wireless carrier in the nation reported a surprise gain of new wireless customers, who pay their bills monthly. In total, it added 80,000 new postpaid phone subscribers in the first quarter. This was the first three-month period in five years that the company added these valuable customers to its roster.

But those gains may have come at a price, as the company used price cut promotions to attract new subscribers. AT&T missed Wall Street revenue expectations. Total revenue was up to $44.83 billion from $38.04 billion, but it fell short of the $45.11 billion that analysts had expected, according to Yahoo Finance.

There were some other trouble spots in the company's earnings report, as its video service DirecTV Now lost 83,000 subscribers in the quarter, which follows a loss of 267,000 subscribers in the fourth quarter of 2018.

DirecTV Now finished 2018 with 1.6 million subscribers and at the end of March it had 1.5 million. AT&T also said it lost 544,000 traditional pay TV subscribers in the first quarter from its DirecTV satellite business and its AT&T U-verse services. It now has 22.4 million TV subscribers.

But because the company jacked up prices on its subscription services, it was able to increase revenue per subscriber across all of its TV products with so-called ARPU (average revenue per user) up more than $10 on the DirecTV Now streaming product as compared with the same quarter a year ago.

Stephenson said he expects the pay TV subscriber losses to continue into next quarter, but added they should stabilize by the end of the year. He said the $10 price hike to $50 per month for its DirecTV Now service puts the product in a "sustainable place." Stephenson noted that price is a major factor for streaming services.

"Make no mistake about it," he said on the call, "this segment of the market is very price-sensitive."

He said he also expects continued subscriber losses throughout 2019 in the company's DirecTV satellite TV product as two-year price guarantees start to expire. 

AT&T saw some growth in WarnerMedia Group, with revenues of $8.4 billion, which was up a little more than 3% compared with the same quarter last year as the company continued to see revenue gains from its big holiday blockbuster, Aquaman. But analysts said they had expected revenues to be a bit higher. 

Still,  AT&T executives said they are encouraged by HBO's Game of Thrones premiere, which broke records for viewership, and another superhero blockbuster, Shazam!, has already grossed more than $300 million worldwide. More than 17 million people viewed the first episode of Game of Thrones and more than 27 million have viewed it since it aired on the cable channel. 

As for AT&T's prospects for leveraging this content in the future, Stephenson said he's encouraged by the positive response that Disney has gotten as it's rolled out its own Disney Plus streaming service. AT&T plans to launch a similar video-on-demand service in the second quarter of 2019 that will highlight the company's deep WarnerMedia catalog of movies and TV shows. 

"The Disney announcement has brought us even more optimism of what we plan to bring to market," he said. 

The company also saw strong growth in its broadband internet business, adding about 45,000 new subscriber, a 10% jump in revenue compared with a year earlier.

All in all, Stephenson said in a press release that he feels confident about the company's prospects for the year. After touting some key achievements in the quarter he said, "All this speaks volumes about our focus on our strategic priorities and our ability to grow our mobility, WarnerMedia and emerging Xandr [advanced advertising and analytics] businesses. Our teams are executing well and have turned in a good performance to start the year."

The company's stock was trading down 3.72% to $30.91 in midday trading.  

Originally published April 24 at 5:39 a.m. PT.
Update, 8:21 a.m. PT: Adds comments from CEO Randall Stephenson as well as other information from the company's earnings call. 

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