AT&T on Wednesday upped its financial guidance for the next three years on the back of its newly-completed DirecTV buy and earlier acquisitions in Mexico.
Executives from the U.S. telco spoke at length on a call with analysts about the company’s growth prospects, particularly with regard to converged services in the U.S., and insisted that it stands to realise significant cost synergies as a result of the merger with DirecTV, by obtaining cheaper content rights, amongst other things.
The company expects to generate double-digit revenue growth this year, and puts full-year adjusted earnings per share at $2.62-$2.68; in January it forecast EPS growth in the low single digit range.
"We are increasing our free cash flow guidance for the year," to the $13 billion range or better from $12 billion, said AT&T’s chief financial officer John Stephens. The firm sees an improving free cash flow trend in the 2016-2018 period with a dividend payout in the 70%s.
As is usually the case with AT&T, the projections are on the conservative side. "We can meet or beat these increased expectations," said Stephens.
The caution on the numbers comes because "we’re somewhat creating a new category here," said AT&T chief executive Randall Stephenson, referring to the fact that with its acquisitions AT&T has created an integrated operator at scale, combining its mobile footprint and broadband base with DirecTV’s strength in TV and content. "We intend to redefine TV everywhere," Stephenson said.
Earlier this month AT&T unveiled All in One, a converged T V and mobile price plan that went on sale on Monday.
"We’re pleased with the reception so far," said John Stankey, CEO of entertainment and Internet services at AT&T. He said take-up is exceeding AT&T’s expectations, but did not provide further details.
The growth opportunity is not just about extending TV to the mobile device though. Despite the fact that pay TV and mobile are both mature markets, there is scope to expand both customer bases, Stankey said.
AT&T provides fixed broadband to 57 million U.S. customer locations, but prior to the DirecTV acquisition it was only able to reach half that number with pay TV through its U-verse service, he explained. Now it can offer TV services to all those households.
The cross-selling opportunity for the two companies comes in at around 39 million households. There are 15 million existing DirecTV customers that do not have an AT&T mobile service, 21 million AT&T customers that do not currently have either a DirecTV or U-verse video subscription, and 3 million without a high-speed Internet service.
"Our plan is to take full advantage of this very early in the process," said Stankey.
Indeed, on Monday AT&T offered DirecTV customers various credits worth up to $500 in return for switching to AT&T’s mobile service from a rival provider.
Stankey also highlighted the $2.5 billion in cost synergies on an annual run rate that AT&T expects to generate from the deal by 2018, noting that the firm remains optimistic it can meet or exceed that target.
Reducing the number of home visits and eliminating duplication in support functions will help it make cost savings, and the telco also outlined a plan to eliminate complexity from its operations. It will focus solely on the DirecTV architecture within the home and plans to roll out a single IP video distribution platform.
In addition, it believes its new scale in TV can help it reduce content acquisition costs.
"We have some room to negotiate," on the cost of content, Stephens said. "Our 6 million U-verse customers’ content costs us about $17 per month more than our DirecTV customers."
However, he insists there is an upside for content owners. "It’s not just about a zero sum game with content providers," he said, noting that AT&T can provide them with information about who is watching what, and help them with targeted advertising.
Nonetheless, it’s probably not good news for rival video providers, some of which opposed the AT&T/DirecTV tie-up on the grounds that the merged company would have too much sway with content owners.
Looking south of the border, AT&T indicated that it is also looking at opportunities around the provision of TV services in Latin America. "We believe we will have options," said Stankey.
DirecTV has operations in Latin America – including via a stake in Sky Mexico – and AT&T acquired mobile operators Iusacell and Nextel in January and April respectively.
"Our Mexican wireless operations can compete and gain market share," said Stephens. "We expect to turn profitable [in Mexico] in 2017," and double revenues by 2018, he said.
And the telco has clearly not ruled out further further expansion in Latin America.
"We’ll continue to evaluate our long-term opportunities in the region," said Stankey.
