AT&T Q2: Time Warner Divisions Shine but Telco’s Video Revenue Drops

AT&T, in its first earnings report with Time Warner under its wing, stumbled with weakness in its Entertainment Group that includes DirecTV during the second quarter of 2018 — hurt by cord-cutting and consumers’ move to internet video.

The telco’s WarnerMedia division, encompassing HBO, Turner and Warner Bros., had Q2 revenues of $7.8 billion, up from $7.3 billion a year earlier. Of the $7.8 billion, $1.1 billion is included in AT&T’s consolidated results, representing the 16 days that the telco owned the ex-Time Warner properties in the quarter.

Overall, AT&T reported $38.99 billion in revenue and net income of $5.1 billion, or 81 cents per share, reflecting the favorable impact from U.S. corporate tax reform and new revenue accounting rules. The topline number missed Wall Street’s forecasts of $39.39 billion, while the telco’s adjusted EPS of 91 cents beat analyst expectations of 85 cents.

Randall Stephenson, AT&T chairman and CEO, praised the WarnerMedia group in his prepared remarks. “Time Warner joins us coming off an impressive second-quarter. Turner turned in solid subscription and advertising revenue growth, Warner Bros. is in high gear with a record number of series in production, and HBO delivered strong subscriber revenue growth.”

He added, “Our goal is to reshape the way media and entertainment work for consumers, and you will see us continue to do exactly that.”

Warner Bros. revenues of $3.3 billion were up 11%, Turner revenue of $3.2 billion was up 4% (and subscription revenue rose 6%), and HBO revenue of $1.7 billion increased 13% for the second quarter.

However, AT&T’s Entertainment Group segment, which includes the DirecTV U.S. video operations, fell 8% in Q2, to $11.7 billion — down by $1 billion from the year-earlier period. (On an adjusted basis, excluding an accounting change for regulatory fees, the group’s revenue was $11.86 billion, or down 6.4%.)

The telco said the decline reflects “continued pressure in video revenues from declines in linear video subscribers,” in addition to lower legacy wireline-service revenues, partially offset by advertising revenues increases. Operating income for the group fell 13%, to $1.45 billion (or down 25% on an adjusted basis).

AT&T’s video entertainment revenue specifically fell 9%, to $8.33 billion in Q2 (or $8.44 billion on adjusted basis). DirecTV’s core satellite TV service dropped a net 286,000 subscribers in the period — the biggest loss in DirecTV’s history — to 19.98 million at the end of Q2. The company’s internet-delivered DirecTV Now service added a net 342,000 subscribers, to stand at 1.81 million at the end of June.

On the wireless front, AT&T’s consumer mobility group service revenue was $14.9 billion (down 1.5%, or flat on a historically comparable basis). Overall, AT&T reported 3.1 million U.S. wireless net adds, including 46,000 postpaid phone net adds versus a net loss of 89,000 in the year-prior quarter.

AT&T closed the $85.4 billion deal for Time Warner two days after the June 12 U.S. District Court ruling in favor of the merger. After waiting for a month, the DOJ appealed the decision and is seeking an expedited schedule for the appeal with oral arguments coming after the final filings on Oct. 18.

AT&T has committed to keep Turner operating separately pending an appeal, but only until Feb. 28, 2019. Turner is the focus of the government’s case, arguing that the deal is anticompetitive because the telco would be in a position to hike carriage rates for rival TV distributors.

At the start of 2018, AT&T adopted new accounting standards to record Universal Service Fund (USF) and other regulatory fees on a net basis (e.g., like sales taxes). That’s reduced reported revenue; for example, AT&T said on a historically comparable basis, Q2 revenue would be $39.91 billion.