AT&T Wednesday reports its first full calendar year financials after officially tucking up Time Warner. It’s been a tumultuous 12 months with a refashioned WarnerMedia the object of some admiration and some angst on Wall Street.
Analysts will be seeking clarity on spending by HBO Max, the new streaming service to launch this spring that’s been announcing rapid fire deals from costly rights to South Park and Friends, to a Gossip Girl reboot to spinoffs of Gremlins and Dune. It’s inked overall deals and set new shows with producers like J.J. Abrams and Greg Berlanti.
Beyond HBO Max headlines, one Wall Street firm urges a closer look at TBS and TNT, saying prospects for the general entertainment networks are bad and getting worse. That’s crucial because Turner Cable Networks provides more than half of WarnerMedia’s revenue.
“There is a very real risk that WarnerMedia’s cable network business could begin to unravel well before HBO Max hits its stride (even if 2020 results at WarnerMedia are technically ‘on plan’),” analysts at MoffattNathanson wrote in a report earlier this month.
Over the past year, AT&T has contended with gadfly investor Elliott Management, which acquired a big stake in the fall, steep losses at DirecTV and management churn at WarnerMedia, including the high-profile departures of HBO chief Richard Plepler and Turner president David Levy. In a drama-filled reorganization last spring, former NBCUniversal chairman Bob Greenblatt was named chairman of WarnerMedia Entertainment and Direct-to-Consumer.
Analysts with ‘buy’ ratings on the stock — about half of them — focus on wireless and the rollout of 5G, video and broadband. AT&T is in better shape than Verizon, they say. It has sold nonstrategic assets and cut debt — thanks in part to pressure from Elliott — and has a steady dividend.
Their view of WarnerMedia specifically runs from slight concern to waving red flag.
“The company needs to provide clarification around its recent statement regarding $500m of investment in HBO Max [in the fourth quarter] vs its analyst day’s estimate of $100m of incremental HBO Max domestic net investment,” said Philip Cusick of J.P. Morgan in a note to clients — referring to an update to shareholders on Jan. 8 by AT&T CFO John Stephens.
“It seems to us that there may be some definitional comparison issues between the two numbers, and we don’t know how AT&T could have spent $400m more than it expected,” Cusick said.
WarnerMedia unveiled HBO Max at an event in October. It will launch in May free to HBO Now subscribers and AT&T customers who get HBO. Otherwise the service will cost $14.99 a month. It will add an advertising-based tier in 2021.
In his update, Stephens noted that “investment in HBO Max in the fourth quarter, in the form of new content production, foregone licensing revenues and platform costs, pressured operating income about $500 million.”
(Stephens also anticipated a dip in Warner Bros.’ fourth-quarter theatrical revenues versus a stronger film slate in the year earlier quarter.)
AT&T “is quietly paying down debt and continues to pay one of the safest dividends in the market. We anticipate growing pressure on the pay-TV lines of business, but not enough to knock the train off course. Yet,” said Cestrian Capital research in a post on financial site Seeking Alpha.
“We’re relaxed short term, concerned long term,” the firm said.
The most alarming take came from MoffattNathanson. Its report was titled, “AT&T: How Bad Could It Get For WarnerMedia?”
“The center of gravity of WarnerMedia is not HBO, it’s the Turner cable networks,” the analysts said. They predicted that falling viewership, low levels of engagement and declining distribution numbers at TBS and TNT will pressure both ad revenue and affiliate fees and set the stage for a brutal round of affiliate renewals. (They said CNN is doing fine.)
The analysts said Turner last signed a major affiliate renewal in 2015.
“Assuming five-to-seven year contracts (an industry norm), Turner is likely facing a series of affiliate renewals over the next year or so that collectively represent more than 50% of the industry.”
The issue reflects the decline of general entertainment programming and the conundrum of trying to both jump-start streaming services and bolster legacy media that will be a key issue for the media industry and its earnings for years to come.
“It’s Clayton Christensen’s disruptive innovation. If you don’t cannibalize yourself, someone else will cannibalize you,” said one media analyst, referring to the well-known theory by the late Harvard professor of why some companies leapfrog other to succeed while others struggle.
AT&T is expected to report 87 cents in adjusted earnings per share Wednesday morning, up from 86 cents in the same quarter in 2018. Revenue is estimated to come in at $46.9 billion, versus $48 billion a year earlier.
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