AT&T, in its Wall Street swan song as an entertainment entity, reported solid subscriber pickup for HBO Max and HBO for the first quarter of 2022. The now-divested WarnerMedia unit was again a drag on profitability because of continued investments in HBO Max and the launch of CNN+ — reflecting a key reason AT&T spun it off.
WarnerMedia is now part of Warner Bros. Discovery, after AT&T divested the media division and officially merged it with Discovery earlier this month. But for the first three months of the year, WarnerMedia was still part of AT&T.
Worldwide, HBO Max and HBO added 3.0 million subscribers sequentially (and 12.8 million subscribers year over year) to end Q1 with 76.8 million total. That included 48.6 million domestic HBO Max and HBO subscribers, up 1.8 million from the prior quarter. The 3 million quarterly net gain for HBO Max/HBO matched that in the year-earlier period.
The growth for HBO Max/HBO stands in contrast to Netflix’s Q1 results reported earlier this week — whose subscriber growth slammed into a wall, missing expectations with a surprise loss of 200,000 subs.
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WarnerMedia revenue for the first quarter was $8.7 billion, up 2.5% versus the year-ago quarter, driven by higher subscription revenues (up 4.4% to $4 billion, primarily thanks to HBO Max) and higher content and other revenues. Ad revenue was $1.7 billion, down 3% year over year due to a decline in linear TV audiences and “tough comparisons” to the prior-year political environment, partially offset by higher sports.
WarnerMedia’s operating income was $1.3 billion, down 32.7% year over year, which AT&T said was a result of “continued investments in HBO Max” as well as in the launch of CNN+ — the news cabler’s new subscription-streaming service — as well as incremental ad-revenue sharing costs.
The HBO Max/HBO monthly domestic subscriber average revenue per unit (ARPU) was $11.24 in Q1, up from $11.15 in the prior quarter but down from $11.72 in Q1 2021.
For AT&T, shedding WarnerMedia — ending its ill-fated run in the entertainment biz — has reverted the company into a pureplay communications provider. Rather than needing to invest billions in streaming content, the telco going forward is plowing its capital into 5G and fiber deployments. In announcing the Q1 results, AT&T chief John Stankey touted the company’s biggest first-quarter postpaid phone net adds in more than a decade.
“AT&T has entered a new era,” Stankey said in prepared remarks.
For Q1, the telco posted 691,000 postpaid phone net adds (versus 595,000 in the year-earlier period) with wireless revenue up 5.5% to $20.1 billion. Operating income in the segment was $5.9 billion, down 3.2% year over year. Operating expenses were $14.2 billion, up 9.5% year over year due to higher equipment costs, 3G network shutdown costs, higher bad debt, higher HBO Max bundling costs and other expenses.
AT&T’s total revenue for the first quarter was $38.1 billion, down 13.3% year-over-year, reflecting the impact of divested businesses, mainly its DirecTV and U.S. video unit (which it spun off in the third quarter of 2021). The revenue number was slightly under analyst expectations.
Excluding WarnerMedia, Xandr, DirecTV and other divested businesses, standalone AT&T revenue was $29.7 billion, up 2.5% from $29.0 billion in the year-earlier quarter. AT&T’s net income was $4.8 billion (65 cents per diluted common share) down from $7.5 billion in the year-ago quarter. Adjusted for special charges, EPS was 77 cents — topping Wall Street consensus estimates of 71 cents — versus an adjusted earnings per diluted common share of 85 cents in the year-ago quarter.
The company’s net debt increased $12.8 billion sequentially in the period, to $169 billion, yielding a net debt-to-adjusted-EBITDA ratio of 3.42X at the end of the first quarter. AT&T previously said it expects to use free cash flow (post dividends) to reduce that ratio to the 2.5X range by the end of 2023.
AT&T completed the WarnerMedia/Discovery spinoff and merger on April 8, 2022. As such, the WarnerMedia business “will meet the criteria for discontinued operations for our second-quarter 2022 reporting,” the telco said in an SEC filing.