Content Investment Dents AT&T’s 2022 Outlook; FVE $35

AT&T T posted mixed fourth-quarter results and 2022 expectations. The wireless business continues to perform well, attracting customers at a solid clip. While we have questions about the firm’s promotional strategy, management still expects to deliver at least 3% wireless service revenue growth in 2022, in line with Verizon’s forecast. HBO Max regained momentum in the U.S., but revenue per customer was weak and management expects far lower Warner margins in 2022 than we had expected. Overall, the firm expects to generate $23 billion of free cash flow this year, down from $27 billion in 2021, reflecting heavy investments in networks and content, which we believe are necessary to protect and build on its narrow economic moat. We are lowering our fair value estimate to $35 from $36 but still believe the shares are substantially undervalued.

AT&T led the U.S. wireless industry in net new subscribers for the third consecutive quarter, adding 844,000 net postpaid phone customers. Heavy promotional credits, which are amortized against revenue, hurt revenue per customer, but strong postpaid and prepaid customer additions over the past year still lifted quarterly wireless service revenue 4.6% year over year. The wireless segment EBITDA margin was roughly flat at 35% versus a year ago, as management makes good on its effort to maintain profitability as it adds market share.

HBO Max added 1.6 million net new U.S. customers during the quarter, surpassing Netflix’s performance (1.2 million) and nearly reversing the Amazon Channels losses from the prior quarter. However, average revenue per customer dropped to $11.15 per month, down 3% year over year and 6% sequentially. Management indicated the ad-supported version of Max generates comparable revenue as the standard plan, making the decline especially surprising. Warner’s direct-to-consumer revenue (primarily Max) declined 6% sequentially, pulling the segment’s EBITDA margin into negative territory for the first time.

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