AT&T (T) earnings call highlights: Critical investments such as 5G, broadband and HBO Max will continue despite adversity

AT&T Inc. (NYSE: T) reported adjusted earnings of $0.84 per share for the first quarter of 2020. Excluding the $0.05 per share impact from the COVID-19 crisis, EPS was $0.89. The company did not adjust for these COVID-19 costs as it expects over half of these costs to have only short-term impacts.

COVID-19 impact and outlook

The pandemic impacted the overall earnings results by $0.05 per share. Due to the uncertainty surrounding the crisis and the economic recovery, AT&T withdrew its guidance for the time being.

“The COVID pandemic had a 5 cents per share impact on our first quarter. Without it, the quarter was about what we expected — strong wireless numbers that covered the HBO Max investment, and produced stable EBITDA and EBITDA margins.” – Randall Stephenson, AT&T Chairman and CEO.

Looking at the impact on businesses, in mobility, the company saw a reduction in roaming revenues and late fees. These factors had an impact of approx. $50 million on first quarter results, with almost all of it in the latter half of March. Roaming revenues are expected to increase as people start to travel again. Equipment revenues fell around 25% year-over-year in March.

AT&T expects bad debt expense to increase across the various businesses due to the coronavirus outbreak and has recorded an incremental reserve of $250 million in anticipation of this.

In the Entertainment Group, the company expects to see increases in premium TV subscriber, cord-cutting as well as a drop in revenues from hotels, bars and restaurants. In the WarnerMedia division, content production has been put on hold and theatrical releases have been postponed. The company has also seen a drop in advertising revenues and sports rights costs.

However, the company saw a pickup in demand for fiber and broadband during the quarter and it is seeing similar trends in demand for VPN bandwidth and security. This is due to an uptick in the value of streaming entertainment in the current environment.

In the wake of the crisis, AT&T adjusted its capital allocation plans and suspended its share retirements. Due to these actions, the company will be able to continue its investments in critical growth areas such as 5G, broadband and HBO Max.

Despite delays pertaining to workforce and permissions, the 5G deployment is ongoing and the company expects nationwide coverage by this summer. AT&T is also being opportunistic about its fiber build beyond its current reach of 14 million household locations.

The company also stated that it remains committed to its dividend and despite the current economic crisis, it expects the payout ratio in 2020 to be in the 60s, and is targeting the low end of that range. AT&T will also pay down its debt and maintain its credit metrics.

HBO Max

HBO Max is of high priority to the company and the service is set to launch on May 27. The company is witnessing high demand for a streaming model that appeals to all demographics. AT&T has distribution agreements that cover around half of the HBO embedded wholesale base and over two-thirds of the retail base.

Amid the ongoing crisis, premium streaming entertainment has gained in popularity and the company expects to see strong demand for HBO Max upon its launch. HBO’s popular TV and film content is expected to be an advantage in this regard. The company plans to roll out new offerings in the fall and winter once the halted production resumes.

Warner Bros film production on hold

During the first quarter, revenues in WarnerMedia fell over 12% year-over-year to $7.4 billion, mainly due to lower revenues in Turner advertising and declines at Warner Bros. A drop in theatrical revenues led to a decline of around 8% in Warner Bros. revenues which totaled $3.2 billion. This was partly offset by higher revenues from television.

The COVID-19 crisis impacted the theatrical and TV business due to the shutdown of production studios and theaters. The cancellation and postponement of sporting events led to a decline in advertising revenues. The company also expects its pay TV business to be impacted by economic headwinds. Overall, the crisis had an impact of around $400 million on revenues in this segment. Shares of AT&T were in green territory during afternoon hours on Thursday. The stock has dropped 23% since the beginning of the year.