AT&T (T) isn’t making it easy on investors, shuffling businesses between segments to layer additional complexity on top of the Warner acquisition. Looking through the firm’s third-quarter numbers, though, we didn’t see anything to change our long-term view. The wireless business continues to slowly improve, while the entertainment segment looks troubled and WarnerMedia posted solid results. We aren’t big believers in the promised synergies between AT&T’s various businesses, but we still believe the firm overall possess advantages worthy of a narrow moat. We don’t expect to materially change our $37 fair value estimate.
AT&T added 69,000 net new postpaid phone customers during the quarter, a solid improvement versus a loss of 145,000 a year ago. Customer defections and gross additions both increased, which we suspect resulted from the entry of the cable companies into the market and customer retention struggles at Sprint. In addition, pricing changes across the industry have likely prompted more customers to look at changing carriers. On the flip side, AT&T has seen a nice lift in average revenue per customer. AT&T is also executing well on the prepaid side of the business, adding 588,000 net new phone customers in the segment. Wireless services revenue grew 1.9% excluding accounting changes, marking the fourth consecutive quarter of improvement.
The entertainment segment remains a sore spot. The business lost 346,000 net traditional television customers, while DirecTV Now, its Internet-based television offering, added only 49,000 net new customers, down sharply versus the past several quarters. Management indicated that price increases and reduced promotions around Now have stalled growth while making the offering profitable. We agree with the move to rationalize pricing, but we also believe AT&T is fighting against the tide here as the television business fundamentally changes in a way that makes content aggregation far less valuable than in the past.
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Michael Hodel, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.