Will Lower WarnerMedia Margins Hurt AT&T's (T) Q4 Earnings?

AT&T Inc. (NYSE:T) is scheduled to report fourth-quarter 2019 results before the opening bell on Jan 29. For the fourth quarter, the company is likely to have recorded lower revenues due to adverse foreign currency translation and additional investments for new content production in HBO Max.

Factors at Play

The WarnerMedia segment represents the various business units of the erstwhile Time Warner namely, Turner, Home Box Office and Warner Bros. It also includes AT&T’s Regional Sports Networks in the Turner division and Otter Media.

With premium content from HBO, Turner and Warner Bros., along with enriching advertising services and data analysis, AT&T’s WarnerMedia segment has been offering steady revenues since its acquisition. This trend is likely to have continued in the fourth quarter. The company is continually improving the relevancy of advertising by pooling a unique set of assets — valuable consumer data and insights, advanced advertising capabilities and engaged passionate fanbases — which is likely to have translated in higher ad revenues in the quarter. WarnerMedia is also expected to have monetized branded content on Turner network by extending ad campaign across Xandr’s addressable TV advertising footprint, spanning 15 million households.

However, continued investments in HBO Max in the fourth quarter for its upcoming launch, in the form of new content production, foregone licensing revenues and platform costs, are likely to have led to soft margins.

Key Q4 Developments

During the quarter, AT&T confirmed that it will launch HBO Max in May 2020 with about 10,000 hours of premium content, leveraging an extensive collection of exclusive original programs and the most sought-after shows from WarnerMedia’s vast portfolio of beloved brands and libraries. AT&T also revealed that it aims to create a company-wide ‘membership-model’ that taps into its 170 million direct-to-consumer relationships, 5,500 retail stores and 3.2 billion annual customer touchpoints to achieve scale and reach to outsmart competition.

In the fourth quarter, the company also unveiled Cartoon Network’s first official hotel developed in collaboration with Palace Entertainment, for an immersive family lodging experience. This 165-room nine-acre property located in Lancaster, PA, brings iconic characters to life and offers branded theme across guest rooms, resort amenities, dining locations and on-site activities.

Overall Expectations

The Zacks Consensus Estimate for operating income from WarnerMedia is pegged at $2,370 million, indicating a decline from $2,529 million reported in the previous quarter. The consensus estimate for EBITDA from the segment stands at $2,569 million, down from $2,679 million recorded in the previous quarter.

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The Zacks Consensus Estimate for total revenues for the company is pegged at $46,907 million, indicating a decline of 2.3% from $47,993 million reported in the prior-year quarter due to adverse foreign currency translation from Latin American operations. The consensus mark for earnings is currently pegged at 87 cents per share, up from 86 cents reported in the year-earlier quarter. (Read More: Earnings ESP Filter .