AT&T’s Latest Results Help Explain Need For Time Warner Deal

October 23, 2016, 7:50 PM UTC
An AT&T store is seen on 5th Avenue in New York on October 23, 2016. AT&T unveiled a mega-deal for Time Warner that would transform the telecom giant into a media-entertainment powerhouse positioned for a sector facing major technology changes. The stock-and-cash deal is valued at $108.7 billion including debt, and gives a value of $84.5 billion to Time Warner -- a major name in the sector that includes the Warner Bros. studios in Hollywood and an array of TV assets such as HBO and CNN. / AFP / KENA BETANCUR (Photo credit should read KENA BETANCUR/AFP/Getty Images)
Kena Betancur — AFP/Getty Images

Overshadowed amidst AT&T’s Saturday announcement of its deal to buy Time Warner, the carrier also reported third quarter results for its current businesses.

AT&T’s wireless business has been suffering for some time. Once an engine of growth, total revenue in the mobility business declined 1% to $18.2 billion. Still, with the boost from last year’s DirecTV acquisition, overall revenue at AT&T increased almost 5% to $40.9 billion. Wall Street had expected $41.2 billion.

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The big headline from Saturday night’s AT&T announcement, however, was the deal to buy Time Warner, the home of popular cable channels like HBO, CNN and TNT along with the Warner Brothers TV and movie studio. AT&T agreed to pay $85 billion for Time Warner (TWX) and assume $22 billion in net debt, putting the total cost of the deal at over $107 billion. The acquisition dramatically diversifies AT&T’s business but comes at a high cost and also faces a significant regulatory review.

Looking at third quarter results for AT&T (T) within its wireless unit, the carrier yet again lost one of the most valuable types of customers. AT&T lost a net 268,000 regular, monthly phone subscribers, also known as postpaid phone customers. The losses came as rival Sprint and T-Mobile ramped up the competitive pressure, rolling out new, cheaper unlimited data plans. AT&T offers only a more expensive unlimited plan that is only sold to DirecTV customers and didn’t match its rivals new plans.

The pressure was also evident in Verizon’s (VZ) results last week, as the largest wireless carrier reported a net loss of 36,000 postpaid phone customers. And Sprint (S), benefitting from its new unlimited offering, said it added 347,000 postpaid phone customers in the third quarter. T-Mobile (TMUS) is scheduled to report its third quarter results on Monday.

The arrival of Apple’s (AAPL) new iPhone 7 late in the quarter doesn’t appear to have helped AT&T’s phone sales much, either. Smartphone sales were down 7% from the same period a year earlier, BTIG Research analyst Walter Piecyk noted.

On the video side, the results were somewhat better. AT&T added 323,000 customers for DirecTV while losing 326,000 from its wired U-Verse cable TV service that it has de-emphasized in some markets. The net loss of only 3,000 video customers was the best result since before the DirecTV acquisition. And the average bill per video customer rose 3% to $118.09 per month.

One rationale for the Time Warner (TWX) deal is that it will add new revenue streams as the wireless market tails off. Another reason for the deal is to make AT&T’s video service – whether delivered via satellite, cable or Internet streaming – more attractive. As the third quarter results indicate, both segments could use the help.

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