AT&T has a lot to talk about and to answer for heading into 2019, and the company will try to address those topics this week during an analyst meeting on Thursday.
Some of the biggest questions for AT&T tie back to the company’s video strategy, both in its traditional and virtual pay TV businesses and its WarnerMedia division.
After record subscriber losses of 346,000 during the third quarter, AT&T’s DirecTV and U-verse businesses will be under a magnifying lens. AT&T management has said that its Entertainment Group will be able to stabilize adjusted EBITDA and margins in 2019, but analysts like Deutsche Bank’s Matthew Niknam remain skeptical after declines year to date.
Deutsche Bank is modeling for -2% year-over-year revenue growth, which is an improvement over -5% declines year to date. The company attributes the improvement to pricing tailwinds in both linear (roll off of two-year price locks) and OTT ($5 increase across tiers this past summer) and elimination of bundling discounts.
“But, given the ongoing transition from higher-margin linear to lower (or negative) margin OTT video, and content cost escalators (which outpace ARPU growth), we are modeling -5% yoy growth in segment Adj. EBITDA next year (vs. guidance for stabilization),” Niknam wrote in a research note.
Heading into the analyst event, Deutsche Bank said it will be looking for insights on AT&T’s video segmentation strategy and how it plans to turn around deteriorating profitability, as well as updates on its new thin-client video service/WatchTV.
Niknam also posed questions about WarnerMedia, primarily concerning the division’s plans for a direct-to-consumer streaming service and whether it will require increased investment in content to compete with Amazon, Disney and Netflix.
“We are somewhat skeptical as to how this service will differentiate itself in a growing pool of DTC streaming services, especially with the launch date a year away. With that said, we also do not material a significant spike in content investment,” Niknam wrote.
The company said WarnerMedia will likely leverage existing HBO, Turner and Warner Bros. content and that any new content investment for the service will be manageable. The strategy for WarnerMedia’s DTC service could come into better focus now that AT&T has appointed veteran AT&T and DirecTV executive Brad Bentley to service as executive vice president and general manager for direct-to-consumer development at WarnerMedia. The planned launch date for the new service has yet to be announced, but AT&T expects it will hit the market during the fourth quarter of 2019.
Macquarie Research analyst Amy Yong sees plenty of upside for WarnerMedia due to its news and sports cable network franchises and momentum at Warner and HBO.
“The asset is EPS accretive and on track to deliver US$1.0bn/$1.5bn in revenue/cost synergies by YE21. On Thurs, we expect management will present its strategy for driving additional growth/pipeline of content,” Yong wrote in a research note.