The first quarter of the year was relatively disappointing for AT&T (T, Financial). The company missed market estimates, with its revenue falling by 3.6% to $38 billion versus the same quarter of the previous year. Even though earnings per share increased by 15% on an adjusted basis to 85 cents, this was slightly behind market estimates of $0.87.
There was mixed performance in its wireless networks segment. Although it recorded 3.2 million total wireless net adds, this was largely driven by connected devices. It saw a strong year-over year improvement in postpaid phone net adds, while there was continued prepaid growth through 192,000 phone net adds. The DirecTV Now streaming service, meanwhile, delivered 312,000 net adds to reach almost 1.5 million subscribers.
Changing business
Following the release of its first quarter results, AT&T’s stock price has declined by over 10%. This brings its decline over the last year to 12%, while during the same time period the S&P 500 has gained around 13%.
Looking ahead, major changes are expected for the company that could have a positive impact on its financial performance. One potential catalyst is the acquisition of Time Warner, with it set to provide an opportunity for the company to build an automated advertising platform for premium video and TV. This could be a means for AT&T to leverage its vast amount of customer data, such as TV viewing habits, using Time Warner’s ad inventory.
This could allow it to compete with digital advertising services such as those offered by Google and Facebook. They have become popular with advertisers due to the vast amounts of data they hold on their customers, alongside the large amount of ad inventory that they offer. As a result, a large portion of the growth in U.S. advertising spend that is taking place at the moment is centered on digital.
AT&T may have an opportunity to slow down the shift from television to digital, with its targeted ad platform having the potential to deliver a higher cost per thousand impressions than national ads. Alongside this, the recent acquisition of AppNexus for up to $2 billion enables the company to integrate its network into DirecTV, being a major global digital ad exchange. Growth in this area could boost the company’s long-term financial performance.
Growth potential
The deal to purchase Time Warner may also provide AT&T with a growth catalyst through HBO. It was able to grow operating income by 12% in 2017. With 142 million subscribers worldwide, it continues to have a wider audience than Netflix or Amazon Prime. Offering HBO as a discounted add-on to potential customers could work for AT&T in terms of winning new business in its broadband, cable and wireless bundles. In a highly competitive marketplace, this could have a positive impact on net adds.
Furthermore, HBO has the potential to transition towards an offering that is increasingly in line with consumer tastes. It will seek to boost daily engagement among subscribers as it is set to compete more directly with streaming services such as Netflix. Its HBO Now streaming service was launched in 2015 and has the potential to deliver strong growth in what remains a popular space among consumers.
Risks
The acquisition of Time Warner could prove to be a catalyst for AT&T due to the aforementioned impact of HBO and the potential for growth in advertising revenue. However, it is seeking to compete with established players in both markets, which could prove to be challenging.
Facebook and Google have dominant positions in the advertising marketplace, while Netflix and Amazon Prime continue to generate growing subscriber numbers. As a result, it could be argued that AT&T is taking on too many competitors as it seeks to reshape its business. This could lead to uncertainty in the short run.
Yet its advertising ambitions seem to be a good fit for the two companies. Time Warner has the ad inventory, while AT&T has the user data. On their own, they may not be particularly appealing. But when combined, they could add significant value which leads to higher demand from advertisers, as well as higher rates.
Further, the performance of HBO has been relatively resilient in what is a competitive marketplace. It is more profitable than Netflix, with its operating profit being $516 million in the first quarter versus $447 million for its peer. And with the potential to become a bigger player in streaming services, it could prove to be a good fit for AT&T.
Verdict
AT&T’s performance was disappointing in the first quarter. Its stock price has also delivered losses for investors in recent months. But it seems to have the potential to deliver a successful turnaround. The acquisition of Time Warner may pose a risk in terms of the competition the company faces.
HBO is a strong performer and has the potential to deliver improving financial figures if it can adapt to changing consumer tastes. Similarly, the potential for growth in the television advertising space using customer data could open up a new growth area for the business.
As a result, the stock may be unpopular at the moment, but it could prove to be a worthwhile contrarian investment opportunity for the long term.
