By Drew FitzGerald
AT&T Inc.'s big media bets dragged down results in the latest quarter, as closed movie theaters and pay-television customer losses offset the growth at its core wireless and broadband businesses.
The telecom and media giant said Thursday that 8.6 million customers had activated HBO Max, its Netflix-like streaming video service, by the end of September, up from 4.1 million shortly after its May launch. The total still trails rivals Disney+ and Hulu, but AT&T executives said HBO's user base was growing faster than expected.
"The reason we're doing HBO Max is because we want to be where the customers want to be," AT&T Chief Executive John Stankey said Thursday during a call with analysts. "It's a tough environment, but we're managing well."
The wireless business, which remains the heart of AT&T's profit engine, added 645,000 postpaid phone subscribers. That is more than double the phone connections gain reported by Verizon Communications Inc. during the same period.
AT&T's pay-TV division continued trending in the other direction, shedding 627,000 video customers. That result was still an improvement over the roughly one million video customers lost in each of the previous two quarters. The unit, which includes DirecTV, has suffered the lion's share of cord-cutting in recent years, prompting the company to explore a sale of the satellite business.
Overall, AT&T's quarterly revenue dropped 5% to $42.3 billion. The company attributed a roughly $2.5 billion revenue loss to Covid-19, as theater closures shrank box-office receipts from Warner Bros. movies and wireless roaming fees dried up.
AT&T and media rivals Walt Disney Co. and Comcast Corp. have started cutting thousands of jobs to offset business lost to the coronavirus pandemic. The virus has sapped the advertising market and delayed the release of major movies.
That market pressure prompted WarnerMedia to start a broad corporate shake-up to trim overhead costs and turn the movie-and-film producer into a more unified company. Executives seek to cut the division's expenses by as much as 20%, according to people familiar with the plans.
AT&T's overall quarterly profit fell to about $2.8 billion, or 39 cents a share, compared with about $3.7 billion, or 50 cents, a year earlier. The result included about 21 cents of per-share costs tied to the pandemic.
Stable wireless revenue allowed the company to tweak its full-year cash flow projection despite the pandemic-related costs. The company said it expects free cash flow to reach $26 billion or higher, with its dividend payout ratio in the high 50% range. That rate would support the nearly $15 billion in annual dividend payments expected earlier this year, before the coronavirus pandemic forced the company to withdraw its earlier forecasts.
AT&T finance chief John Stephens called the latest cash projection "a healthy and comfortable position."
"We feel good about the dividend and the ability to provide the board the flexibility to continue to pay and manage that dividend," Mr. Stephens said in an interview.
The latest quarter included 151,000 paying wireless subscribers retained under Keep Americans Connected, a program launched as a federal coronavirus forbearance initiative. The company also reported a net gain of 158,000 broadband subscribers, a figure that included 104,000 accounts on a Keep Americans Connected plan.
The Dallas company's communication business outside the U.S. also bounced back. The Mexican wireless business gained 441,000 wireless customers, while the Vrio satellite-TV unit added 229,000 accounts across Latin America after two quarterly declines.
AT&T is counting on HBO Max to offset its declining entertainment assets with new income from a growing direct-to-consumer model. HBO's cable-TV and online distribution channels have complicated that pivot. In the September quarter, the overall number of customers watching HBO in any form rose to 38 million in the U.S. and 57 million world-wide, exceeding the company's target for the year.
Some HBO viewers remain unaware that their subscriptions entitle them to the new content-heavy app, while others are unable to upgrade because of business disputes that have kept the service off Amazon.com Inc. and Roku Inc. devices.
Mr. Stankey said earlier this week at The Wall Street Journal's Tech Live conference that the market power of tech giants like Amazon warranted more scrutiny. The telecom company reached deals earlier this year with cable partners including Comcast and Charter Communications Inc. to make the app available to existing HBO subscribers.
The company said it remains on track to launch an ad-supported HBO Max version next year. WarnerMedia also plans to expand HBO Max into Latin America and western Europe in the months ahead.
AT&T shares rose rose 5.8% to $28.28 Thursday after news of growth in the wireless unit, the company's largest in terms of revenue and profit. The stock is off about 28% so far this year.
The improving wireless customer base "made me forget about DirecTV for the moment," said Jim Boothe, chief investment officer for Los Angeles-based Brentview Investment Management LLC. "A lot of investors were concerned. This report gave me some encouragement that the dividends were sustainable."
Write to Drew FitzGerald at email@example.com
(END) Dow Jones Newswires