Costs associated with DirecTV Now hurt the firm's profitability, but we maintain our narrow moat rating.
Alex Zhao, CFA
08:00 AM | Email Article
's fourth-quarter results were not impressive, with total revenue barely flat year over year. Adjusted EBITDA margin was down about 2 percentage points, even after accounting for nonrecurring charges in both quarters. Profitability suffered primarily from rising content and startup costs associated with DirecTV Now.
Alex Zhao, CFA, is an equity analyst for Morningstar.
We believe competitive pressure in the wireless market will persist into 2017, and so will AT&T’s sluggish growth in wireless phone subscribers in a prolonged price war. Nevertheless, we still believe AT&T holds a scale-based cost advantage over the two smaller carriers, T-Mobile
, and we maintain our narrow economic moat rating.
Management offered little color on its outlook except for a business-as-usual environment in 2017, with top-line growth in the low single digits and adjusted earnings per share growing in the midsingle digits. We maintain our $35 fair value estimate. With the shares trading at a premium, we recommend investors look elsewhere.
Wireless revenue was down about 1% for the fourth quarter and for 2016 overall. AT&T’s postpaid phone customer base continued to shrink, albeit at a slower pace than last year, but customer churn was on par with last year. Average revenue per customer declined at a pace typical of recent trends, partly because of the continued transition toward unsubsidized plans. AT&T’s consumer broadband business grew about 2% in the quarter. The firm added few Internet subscribers in the quarter and lost about 27,000 video subscribers in aggregate, as the subscriber additions booked by DirecTV Now failed to offset the continued defections of U-verse customers. Consistent with our thesis, product cannibalizations, expired discounts, and maneuvering of competitors together should limit the revenue growth and cross-selling effects from DirecTV Now. The consumer broadband margin also suffered from content costs and product launches.
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