Content and Network Investments Ramp Up for AT&T

AT&T’s (T) third quarter earnings displayed several of the same themes as the last few quarters: solid momentum in the wireless business, continued growth at HBO Max, and steady gains in consumer broadband, set amid financial complexity as management deconstructs the firm’s former strategy. Our $36 fair value estimate is unchanged, and we believe the shares are attractive.

Wireless customer additions were impressively strong. AT&T added 928,000 net postpaid phone customers, by far its strongest quarter of the past decade, leaving its base nearly 5% bigger than a year ago. Prepaid net customer growth (351,000) was also the strongest since 2018. AT&T has paid for this growth with lower pricing overall. Average revenue per postpaid phone customer declined 0.6% year over year as the amortization of phone discounts hits this metric (an artifact of contract accounting). Still, wireless service revenue increased 4.6%, positioning the firm to easily hit its 3.0% growth target for the full year. Though EBITDA grew 3.6%, the wireless segment EBITDA margin dipped to 41.7% from 43.1% a year ago, reflecting management’s effort to reinvest gains from its cost savings program into customer acquisition and an increase in the phone upgrade rate (related to the iPhone launch).

HBO Max added 1.9 million net new customers, a sharp slowdown versus past three quarters. The Warner lost 1.8 million net Max customers in the U.S. during the quarter, resulting from the removal of the service from Amazon Channels. The decision to assert control over the Max customer relationship makes long-term sense in our view, particularly with a distributor like Amazon that is also a competitor. With the launch of Max in Latin America, the service added 3.7 million customers outside the U.S., an 18% increase in the international customer base during the quarter. With several European launches coming, Warner should easily hit its target of 70 million-73 million global Max customers by the end of the year.