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AT&T suffers financial hit due to coronavirus expenses

Its wireless business was a bright spot, but its entertainment side took a heavy hit from the COVID-19 pandemic.

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AT&T's booming wireless business wasn't enough to shield the telecom giant turned media conglomerate from bad news in the first quarter due to the coronavirus. The company said the impact of the pandemic added costs and caused advertising revenue for its media business to dry up during the quarter, resulting in lower revenue than expected. 

The company said it earned $4.61 billion, or 63 cents a share, in the first quarter, which is down from $4.86 billion, or 56 cents, during the same quarter a year ago. Revenue dropped 4.8% to $42.78 billion.

AT&T is the first telecom giant to report earnings in the age of COVID-19. While the wireless and broadband industries are relatively good businesses to be in during this pandemic, Hollywood and the entertainment business have suffered as movie productions have been shut down and live events like sports have been canceled, resulting in less advertising revenue. AT&T is different from its telecom rivals, since over the past few years it's expanded its business to include movie studios and theme parks as well as video distribution properties through its acquisition of Time Warner. 

On Wednesday, AT&T reported that its earnings fell $430 million, or 5 cents a share, due to the coronavirus. It saw a $600 million decline in revenue because of lower equipment sales and hits to advertising sales, due largely to the postponement of sporting events such as the March Madness college basketball tournament. It also lost revenue as its WarnerMedia business shut down production of movies and shows.

The company also said its costs rose during the quarter. Specifically, it saw incremental costs in the quarter associated with bad debt reserves as it anticipated customers being unable to pay their bills. In addition, AT&T said, it incurred costs as it took "voluntary corporate actions"  to protect and compensate front-line employees and contractors.

Still, the company's traditional telecom services did well during the quarter. AT&T added 163,000 new monthly phone subscribers. Analysts had been expecting the company to add about 90,000 new subscribers. These additions came as the company was forced to shut down roughly 40% of its retail store operations. 

The company continued to lose TV subscribers, including subscribers of its DirecTV satellite service, reporting a loss of 897,000 customers. Sales in its WarnerMedia group, which includes cable channels like CNN, TBS and HBO, dropped 12% to $7.4 billion due to losses in advertising revenue.

Reading the tea leaves

With AT&T's diverse business portfolio, the company's earnings are being closely watched as a barometer of what may come next. 

Craig Moffett, an equities analyst from MoffettNathanson, said in a note to investors Wednesday that AT&T's first-quarter results are "but a foretaste" or a sampling of what to expect "when we see a full quarter of coronavirus impacts," not just for AT&T, "but for the broader economy."

AT&T CEO Randall Stephenson acknowledged this and talked about the effects he sees from the fallout from the coronavirus. The biggest issue he sees is the overwhelming number of layoffs as small businesses are crushed by the abrupt stoppage of economic activity. 

Stephenson acknowledged that the uncertainty and job loss will have an effect on all aspects of the company's business, from its media efforts to its wireless and broadband initiatives, as customers are faced with tough choices as to how and where to spend their money.

John Stankey, CEO of the Time Warner brand, said he expects the media business will continue to be strained as people throughout the country and the world continue to social distance, which likely means no going to movies or theme parks. Advertising revenue is expected to continue to be soft, too, especially with no live sports events happening and as industries, like the travel and automobile sectors, cut marketing budgets. 

But Stephenson said that in spite of these weak spots, AT&T is in a good position to weather the storm. He said the company will continue to invest in its network, including its 5G infrastructure, and new services, like its HBO Max video streaming service slated to launch next month.

"The message I want to get to you is ... we feel really good about the financial capabilities to continue to invest," he told analysts and investors on the earnings call. "The real unknown, quite frankly, might be when we come out of this, what will be the new things we want to invest in."

Stephenson noted that one bright spot for the company has been AT&T's wireless, broadband and backbone internet networks holding up well to handle the onslaught of network traffic as students access classes online and workers telecommute from their homes as they shelter in place. He added that even though so much economic activity has ground to a halt, broadband networks in the US, such as AT&T's network, have helped keep what activity is left still working.

"It's really impressive to see how much activity is still actually going on by virtue of the connectivity that's been facilitated into the home" he said. "It's something, obviously, none of us have experienced before. But I will tell you we as a company, and I would even say we as an industry, are taking a lot of satisfaction in terms of how these networks are standing up to the shift in volumes and increase in volumes."

He added that investments that broadband and wireless companies have made over the years to ensure their networks have excess capacity is paying off. He urged lawmakers in Washington, DC, to take note.

"This is no accident. The public policy positioning in the United States has been different than it has in most of the rest of the world," he said. "As a result, the incentive to invest in building capacity and to have cushions of capacity for times like this are playing out. I hope as we come out of this, our public policy folks take a hard look at this and recognize that this is important."

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