AT&T disclosed in an 8-K filing Wednesday that it expects to shed 390,000 “traditional” video subs (DirecTV satellite and U-verse), offset by about 300,000 gains from DirecTV Now, the company’s OTT-delivered (and lower-margin) pay TV service.
AT&T, which will come out of Q3 with a loss of 90,000 total video subs, offered a lengthy list of reasons, noting that the reduction in its video base was “driven by heightened competition in traditional pay TV markets and over-the-top services, hurricanes and our stricter credit standards.”
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Those results, MoffettNathanson analyst Craig Moffett said in a research note, indicate that AT&T, like its cable peers, “is suffering from the ravages of cord-cutting,” as DirecTV Now additions weren’t enough to completely overcome traditional video subscriber losses.
“The issue is in the acceleration in cord-cutting, and the prevalence of OTT, not each other,” Moffett noted, adding that it’s “reasonable” to expect a weak Q3 across the pay TV industry.
Likewise, he held that “it is becoming increasingly clear that the wheels are falling off of satellite TV,” anticipating a tough Q3 from Dish Network’s satellite TV business as well.
Lastly, he said this backdrop on the stress being applied to pay TV “makes an AT&T acquisition of Dish Network all but unthinkable.”
Despite those video losses and devastation cause by recent hurricanes as well as earthquakes in Mexico, AT&T also reiterated full-year 2017 guidance of mid-single digital adjusted earnings growth, capex in the $22 billion range, and free cash flow at the low end of its $18 billion range. However, damage to its network and other property and the cost to restore services and waived charges are expected to result in a drop of Q3 consolidated revenues of nearly $90 million, with pre-tax earnings of about $210 million (2 cents per diluted share).
“We expect further reductions in the fourth quarter as we continue to assess damage to our network and fully restore service,” AT&T said.
AT&T also announced that, effective July 1, it is reporting prepaid IoT connections (mostly for car connectivity) as a separate class in its subscriber categories. That change will result in 97,000 additional prepaid net adds in Q3.