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AT&T’s video subscriber losses slowed for the third quarter.
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AT&T Inc. reported strong wireless subscriber growth and shed fewer DirecTV subscribers than expected, putting the stock on track to snap a 10-day losing streak Thursday.
Shares of AT&T T, +5.03% were up 4.9% in midday trading, after the company also delivered better-than-expected revenue. If the gains hold through the close, this would mark AT&T’s best earnings-day stock performance in three years.
“With how the stock had been trading going into earnings, investors were really fearing the worst,” Edward Jones analyst David Heger told MarketWatch. “The stock reaction today seems to reflect some relief that perhaps things are better than what was feared.” The good news in his view is that the wireless business, AT&T’s most important component, is humming along, while its business wireline operations are also holding up.
The telecommunications giant recorded 645,000 postpaid phone net additions for the third quarter, including paying accounts as part of the Keep Americans Connected Pledge, an industry program meant to allow people to keep their wireless service despite the difficulties brought on by the pandemic. Bernstein analyst Peter Supino wrote that the phone net additions came in far better than expectations for just 43,000 new subscribers.
The company’s postpaid phone churn was 0.69%, an improvement from the 0.84% it reported a quarter earlier and the 0.95% it reported a year earlier.
AT&T saw overall postpaid net additions, which include mobility devices more broadly, rise to 1.08 million, whereas Supino said Wall Street expectations were for a loss of 147,000.
Whether these trends are sustainable remains to be seen as the wireless industry ramps up promotions around the launch of Apple Inc.’s AAPL, -1.38% iPhone 12, but AT&T was particularly aggressive with its offers, which apply to existing subscribers as well as new ones. The company’s goal seems to be customer retention, Heger said.
See also: Verizon benefits again from low customer switching, but a new era is about to begin
Chief Executive John Stankey defended the promotions on AT&T’s earnings call as a key part of the company’s corporate strategy. “We have an incredibly valuable customer base,” he said, which is the “most important asset for us to focus on.”
Stankey argued that when customers choose to leave AT&T, it’s “not because of customer service or it’s not because they don’t like the network” but often because of an “enticement” to go to another carrier.
The promotions around the iPhone 12 seek to address that dynamic, in his view, because they are “going to ensure that our very best customers…are treated just like a new customer coming into our business and that they can avail themselves of that opportunity and recommit to us for a very, very long period of time.”
MoffettNathanson analyst Craig Moffett wasn’t convinced, asking: “Why would the company with the weakest balance sheet in the industry, with a dividend obligation that is teetering on the edge of unsustainability, take such a costly and rash promotional stance?”
He called the latest churn numbers “exceptional” and wrote in a note to clients that the “only possible answer” on AT&T’s promotional rationale is that the company “saw a wave of churn coming that they believed would be even more costly than the promotion they launched to stop it.” He has a sell rating and $24 target price on the stock.
As more people start buying 5G smartphones, the carriers will be trying to win customers through arguments about network quality. AT&T probably stacks up fine in terms of the initial 5G that wireless companies are rolling out, according to Edward Jones’s Heger, but the company “could be challenged to some degree” in the intermediate term when mid-band spectrum becomes more important.
T-Mobile US Inc. TMUS, -0.90% is sitting pretty with mid-band spectrum after its Sprint acquisition, while Verizon Communications Inc. VZ, +1.19% is in a better financial position than AT&T to amass spectrum at auction. In the long term, when millimeter-wave 5G becomes a bigger focus, Heger said that AT&T “should be OK again.”
While AT&T was able to post big wireless subscriber gains, it continued to bleed subscribers in its video businesses, though the losses slowed. AT&T reported 590,000 premium video net losses across DirecTV and U-Verse, along with 37,000 streaming net losses. The 627,000 combined losses were better than the 845,000 consensus view, Supino wrote.
At this point with DirecTV, investors seem to just want AT&T to minimize subscriber losses, Heger said, and the company did show improvement there. He argued that DirecTV gets a lot of attention but is a relatively minor part of the AT&T story, with the stock price likely not ascribing much value to this business.
AT&T continued to show weakness in its WarnerMedia business as the COVID-19 crisis pressures the film and TV landscapes. WarnerMedia revenue dropped to $7.5 billion from $8.4 billion a year earlier. Earnings before interest, taxes, depreciation, and amortization (Ebitda) for WarnerMedia declined to $1.9 billion from $3.0 billion.
Heger, who has a buy rating on AT&T’s stock, saw some signs of progress, at least in terms of the Turner part of this business, now that sports are coming back and advertising revenue is starting to recover. Still, he anticipates the overall business will remain challenged for some time given that movie-theater closures are hurting Warner Bros.
Bernstein’s Supino remains less upbeat about the broader picture for AT&T. “With Mobility stable while the media businesses hemorrhage, this print offers little to stem concerns that a weakening competitive position and pandemic-related dislocations increasingly strain the company’s financial position,” he wrote. “We believe the share price fairly reflects the highly uncertain outlook, and we are watching Mobility as the competitive environment evolves.”
Supino rates the stock at market perform with a $32 price target.
AT&T shares have declined 7.1% over the past three months as the S&P 500 SPX, -0.13% has risen 4.8%.
