AT&T Q4 Preview: DirecTV Now In Focus

AT&T (NYSE:T), the second largest U.S. wireless carrier and biggest pay TV operator, is expected to publish its Q4 2016 results on January 25. Below we outline some of the key factors to watch when the carrier reports earnings.

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We have a $44 price estimate for AT&T, which is about 10% ahead of the current market price.

Postpaid Phone Attrition May Continue

AT&T lost a total of 811k paid phone subscribers over the first three quarters of 2016, amid the defection of feature phone customers to smaller rivals such as T-Mobile and Sprint. The carrier has lost postpaid phone subscribers for eight straight quarters now, and it remains unlikely that much changed over Q4, given that it still had about 6 million feature phone subscribers as of September. Moreover, there is a possibility that the company’s current deal-making activity (the Time Warner deal was proposed in October) and the associated regulatory clearances could be distracting it from its core wireless operations, giving its rivals room to gain market share. That said, the carrier’s prepaid operations should continue to grow, driven primarily by its value-priced Cricket brand.

Impact of DirecTV Now In Focus

Losses in the U.S. pay TV market accelerated during the first nine months of 2016, with the industry losing about 910k subscribers according to Leichtman Research. However, AT&T fared better than the broader market, with losses standing 13k subscribers over the first nine months, driven by its marketing muscle and increased cross-selling to wireless customers. The most important trend to watch will be the performance of the company’s first over-the-top (OTT) streaming TV service, DirecTV Now. The service, which launched in late November at an introductory price of about $35 per month for 100+ channels, is targeted squarely at cord cutters and so called “cord-nevers.” This market could be as large as 20 million households per AT&T. While the service was off to a relatively rocky start with customers facing outages and other technical glitches, AT&T recently noted that it had added about 200k net video additions during Q4, “entirely driven” by paying DirecTV Now subscribers. This implies that the DirecTV Now figures are actually higher, as the company has been losing linear TV subscribers. There is also possibility that linear TV losses could accelerate, amid cannibalization from DirecTV Now, and this will also be a key factor to watch.

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