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Can AT&T (T) Rebound From a Terrible Performance in 2018?
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Despite some ‘out-of-the-box’ thinking that helped AT&T Inc. (T - Free Report) evolve from a telecom firm to a leading player in the U.S. communications sector with significant media assets, 2018 proved to be its nemesis. Over the past year, it recorded an average loss of 21.9% while the industry fell 5.5%.
As the industry remains at the cusp of 5G boom, investors seem wary about the company’s prospects. Let us delve a little deeper into the issue to gauge the underlying trends and try to fathom what the stock has in store for 2019.
What Ails AT&T?
This stock’s poor performance in 2018 could majorly be attributed to a steady decline in linear TV subscribers and legacy services, hurting its profitability and creating an element of doubt among investors. High-speed Internet revenues are also contracting due to legacy DSL decline, simplified pricing and bundle discount. Moreover, TV content-cost pressure, high programming costs and new video platform expenses are fast eroding margins.
Continued cord-cutting is another perennial challenge as consumers increasingly cancel pay TV packages for cheaper streaming options from Netflix, Inc. (NFLX - Free Report) , Amazon.com, Inc. (AMZN - Free Report) , Hulu and other services. The company continued to witness significant decline in DIRECTV subscribers over the past few quarters. As AT&T tries to woo customers with healthy discounts, freebies and cash credits, margin pressure tends to escalate.
Moreover, AT&T had a huge debt burden of $183.4 billion as of Sep 30, 2018, primarily due to the acquisition of Time Warner assets in mid-June. This could pose a sterner test for the company as it aims to achieve a debt-to-EBITDA range of 2.5x by year-end 2019. Although the company expects to reduce debt by utilizing its cash flow and proceeds from the sale of non-core assets, the debt-laden balance sheet is likely to weigh significantly on its coffers.
The company’s wireline division is also struggling with persistent losses in access lines as a result of competitive pressure from voice-over-Internet protocol service providers and aggressive triple-play (voice, data, video) offerings by the cable companies. These are weighing on the company’s revenues and margins. Moreover, AT&T’s quest for faster growth will increase subscriber acquisition cost in both consumer and SMB (small and medium businesses) units and put pressure on wireline margins.
In addition, a depreciating Mexican Peso and strengthening U.S. dollar has put its revenues from the Latin American market under strain leading to significant year-over-year decline. Although AT&T generates about 4% of its revenues from Latin America, a highly volatile macroeconomic environment in Mexico and adverse foreign currency translation could hinder its prospects in the region despite an increase in the subscriber base.
Other End of the Spectrum:
Synergies From Time Warner Acquisition
AT&T completed the acquisition of Time Warner in June 2018 to form a new business division — WarnerMedia. The company realized that vertical merger was the perfect way to move forward as neither a core communications firm could rely exclusively on content, nor a media firm could solely depend on wholesale distribution models to sustain in a dynamic environment.
With assets like HBO, CNN and TNT, AT&T's acquisition of Time Warner has created new kinds of online videos and opened up avenues for targeted advertisements to counter Verizon Communications Inc.’s (VZ - Free Report) Yahoo and AOL businesses. Given the scale of both AT&T and Time Warner, the merger has reshaped industry dynamics, creating a media behemoth.
AT&T expects to achieve synergies to the tune of $2.5 billion by 2021 from the WarnerMedia assets. These include $1.5 billion from cost synergies related to efficiencies in marketing and procurement and corporate overhead, and $1 billion revenue synergies from additional sales, lower subscriber churn and higher advertising opportunities.
Ramping Up FirstNet Program, 5G Focus
With the bulk of revenues coming from the Mobility business, AT&T aims to ramp up the FirstNet deployment while focusing on 5G technology to retain its leading position in this market. As part of the 25-year contract, FirstNet will provide AT&T with a swath of 20 MHz of spectrum in the 700 MHz frequency band for the entire duration. The company will also be given success-based payments of $6.5 billion over the next five years to design and build the network. It is expected to spend around $40 billion over the life of the contract to build, deploy, operate and maintain the network. AT&T has projected that this contract will create more than 10,000 jobs over the next two years, offering a significant boost to its profile.
As part of its 5G deployment in a dozen cities in 2018, AT&T aims to launch mobile 5G service in certain areas of five cities — Houston, Jacksonville, Louisville, New Orleans and San Antonio. These add to its previously announced seven cities of Atlanta, Charlotte, Dallas, Indianapolis, Oklahoma City, Raleigh and Waco. AT&T is further planning to bring mobile 5G service in parts of Las Vegas, Los Angeles, Nashville, Orlando, San Diego, San Francisco and San Jose in early 2019 to take the tally to 19 cities and will expand thereafter. Notably, AT&T’s 5G deployment will entail utilization of millimeter wave spectrum to deploy 5G in pockets of dense. In parts of urban, suburban and rural areas, the company aims to deploy 5G on its mid and low-band spectrum holdings.
New Revenue-Generating Avenues
In order to generate incremental revenues, AT&T plans to introduce subscription video on demand (SVOD) service in WarnerMedia in 2019 along with an advertising-supported video on demand service in the near future. With a three-tier service, including an entry-level movie-focused package, a premium service with original programming and blockbuster movies, and a bundled service package with content from the first two along with an extensive library of licensed content, SVOD is likely to complement WarnerMedia. This, in turn, is expected to expand its customer base and open up other avenues to monetize content by leveraging data and analytics to create focused advertising messages.
AT&T also expects to record solid growth in its advertising unit Xandr, which has an advanced cross-platform technology, enabling marketers to trade premium inventory in a transparent and automated environment. This new-of-its-kind advertising company has imbibed four key advantages from its parent firm — data, premium content, advanced advertising technology and distribution network to more than 170 million direct-to-consumer entities across wireless, video and broadband. Leveraging these key drivers, Xandr is anticipated to deliver strong revenue growth in its existing media sales operations in 2019 and beyond.
Our Take
With a focused roadmap, AT&T appears poised to turn the tables in 2019, which is likely to be a decisive year for it. Although a healthy dividend yield of 6.7% remains an enticing proposition for the investors, the company needs to pull up its socks on several counts and stem the losses to harbor any thoughts of a volte-face. If the company can significantly reduce its debt burden, plug the subscriber churn, generate solid cash flow and improve top line, it can expect a turnaround in its fortunes. Whether this Zacks Rank #3 (Hold) stock can indeed deliver on its set targets and perform to its full potential in 2019, remains to be seen. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?
Image: Bigstock
Can AT&T (T) Rebound From a Terrible Performance in 2018?
Despite some ‘out-of-the-box’ thinking that helped AT&T Inc. (T - Free Report) evolve from a telecom firm to a leading player in the U.S. communications sector with significant media assets, 2018 proved to be its nemesis. Over the past year, it recorded an average loss of 21.9% while the industry fell 5.5%.
As the industry remains at the cusp of 5G boom, investors seem wary about the company’s prospects. Let us delve a little deeper into the issue to gauge the underlying trends and try to fathom what the stock has in store for 2019.
What Ails AT&T?
This stock’s poor performance in 2018 could majorly be attributed to a steady decline in linear TV subscribers and legacy services, hurting its profitability and creating an element of doubt among investors. High-speed Internet revenues are also contracting due to legacy DSL decline, simplified pricing and bundle discount. Moreover, TV content-cost pressure, high programming costs and new video platform expenses are fast eroding margins.
Continued cord-cutting is another perennial challenge as consumers increasingly cancel pay TV packages for cheaper streaming options from Netflix, Inc. (NFLX - Free Report) , Amazon.com, Inc. (AMZN - Free Report) , Hulu and other services. The company continued to witness significant decline in DIRECTV subscribers over the past few quarters. As AT&T tries to woo customers with healthy discounts, freebies and cash credits, margin pressure tends to escalate.
Moreover, AT&T had a huge debt burden of $183.4 billion as of Sep 30, 2018, primarily due to the acquisition of Time Warner assets in mid-June. This could pose a sterner test for the company as it aims to achieve a debt-to-EBITDA range of 2.5x by year-end 2019. Although the company expects to reduce debt by utilizing its cash flow and proceeds from the sale of non-core assets, the debt-laden balance sheet is likely to weigh significantly on its coffers.
The company’s wireline division is also struggling with persistent losses in access lines as a result of competitive pressure from voice-over-Internet protocol service providers and aggressive triple-play (voice, data, video) offerings by the cable companies. These are weighing on the company’s revenues and margins. Moreover, AT&T’s quest for faster growth will increase subscriber acquisition cost in both consumer and SMB (small and medium businesses) units and put pressure on wireline margins.
In addition, a depreciating Mexican Peso and strengthening U.S. dollar has put its revenues from the Latin American market under strain leading to significant year-over-year decline. Although AT&T generates about 4% of its revenues from Latin America, a highly volatile macroeconomic environment in Mexico and adverse foreign currency translation could hinder its prospects in the region despite an increase in the subscriber base.
Other End of the Spectrum:
Synergies From Time Warner Acquisition
AT&T completed the acquisition of Time Warner in June 2018 to form a new business division — WarnerMedia. The company realized that vertical merger was the perfect way to move forward as neither a core communications firm could rely exclusively on content, nor a media firm could solely depend on wholesale distribution models to sustain in a dynamic environment.
With assets like HBO, CNN and TNT, AT&T's acquisition of Time Warner has created new kinds of online videos and opened up avenues for targeted advertisements to counter Verizon Communications Inc.’s (VZ - Free Report) Yahoo and AOL businesses. Given the scale of both AT&T and Time Warner, the merger has reshaped industry dynamics, creating a media behemoth.
AT&T expects to achieve synergies to the tune of $2.5 billion by 2021 from the WarnerMedia assets. These include $1.5 billion from cost synergies related to efficiencies in marketing and procurement and corporate overhead, and $1 billion revenue synergies from additional sales, lower subscriber churn and higher advertising opportunities.
Ramping Up FirstNet Program, 5G Focus
With the bulk of revenues coming from the Mobility business, AT&T aims to ramp up the FirstNet deployment while focusing on 5G technology to retain its leading position in this market. As part of the 25-year contract, FirstNet will provide AT&T with a swath of 20 MHz of spectrum in the 700 MHz frequency band for the entire duration. The company will also be given success-based payments of $6.5 billion over the next five years to design and build the network. It is expected to spend around $40 billion over the life of the contract to build, deploy, operate and maintain the network. AT&T has projected that this contract will create more than 10,000 jobs over the next two years, offering a significant boost to its profile.
As part of its 5G deployment in a dozen cities in 2018, AT&T aims to launch mobile 5G service in certain areas of five cities — Houston, Jacksonville, Louisville, New Orleans and San Antonio. These add to its previously announced seven cities of Atlanta, Charlotte, Dallas, Indianapolis, Oklahoma City, Raleigh and Waco. AT&T is further planning to bring mobile 5G service in parts of Las Vegas, Los Angeles, Nashville, Orlando, San Diego, San Francisco and San Jose in early 2019 to take the tally to 19 cities and will expand thereafter. Notably, AT&T’s 5G deployment will entail utilization of millimeter wave spectrum to deploy 5G in pockets of dense. In parts of urban, suburban and rural areas, the company aims to deploy 5G on its mid and low-band spectrum holdings.
New Revenue-Generating Avenues
In order to generate incremental revenues, AT&T plans to introduce subscription video on demand (SVOD) service in WarnerMedia in 2019 along with an advertising-supported video on demand service in the near future. With a three-tier service, including an entry-level movie-focused package, a premium service with original programming and blockbuster movies, and a bundled service package with content from the first two along with an extensive library of licensed content, SVOD is likely to complement WarnerMedia. This, in turn, is expected to expand its customer base and open up other avenues to monetize content by leveraging data and analytics to create focused advertising messages.
AT&T also expects to record solid growth in its advertising unit Xandr, which has an advanced cross-platform technology, enabling marketers to trade premium inventory in a transparent and automated environment. This new-of-its-kind advertising company has imbibed four key advantages from its parent firm — data, premium content, advanced advertising technology and distribution network to more than 170 million direct-to-consumer entities across wireless, video and broadband. Leveraging these key drivers, Xandr is anticipated to deliver strong revenue growth in its existing media sales operations in 2019 and beyond.
Our Take
With a focused roadmap, AT&T appears poised to turn the tables in 2019, which is likely to be a decisive year for it. Although a healthy dividend yield of 6.7% remains an enticing proposition for the investors, the company needs to pull up its socks on several counts and stem the losses to harbor any thoughts of a volte-face. If the company can significantly reduce its debt burden, plug the subscriber churn, generate solid cash flow and improve top line, it can expect a turnaround in its fortunes. Whether this Zacks Rank #3 (Hold) stock can indeed deliver on its set targets and perform to its full potential in 2019, remains to be seen. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?
These 10 are painstakingly handpicked from over 4,000 companies covered by the Zacks Rank. They are our primary picks poised to outperform in the year ahead. Be among the first to see the new Zacks Top 10 Stocks >>