Randall Stephenson's big headache

randallstephenson
Randall Stephenson is the chief executive of AT&T. (AT&T)

AT&T’s Randall Stephenson has a lot on his plate, to say the least. And a new report from Wall Street investment firm Wells Fargo outlines just how many balls Stephenson has in the air as he works to integrate the Time Warner business, pay down a massive amount of debt, deploy 5G, stamp out a winning position in the video business, and build out fiber to millions of new locations.

Indeed, the severity of the situation led the analysts at Wells Fargo to downgrade their rating on AT&T stock.

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“Our downgrade is driven by 3 factors,” the analysts wrote in a report this week, listing what they said are the top three major challenges facing AT&T’s Randall Stephenson:

  1. “continued pressure on entertainment margins and enterprise stability not yet seen.”
  2.  “many new balls to juggle (and invest in) with Time Warner assets.”
  3.  “achieving delevering targets might push other priorities down the list.”

AT&T, of course, competes in a wide variety of markets now that the company has officially acquired content gaint Time Warner alongside satellite TV company DirecTV. But what’s likely the company's most pressing concern is its massive debt load.

Specifically, AT&T’s total debt jumped from $123.5 billion at the end of 2016 to fully $190.2 billion at the end of June, a 54% increase in the span of a year and a half. “AT&T is now the world’s largest non-bank debt issuer,” the Wells Fargo analysts wrote. “Our estimate is that interest alone will cost AT&T upwards of $8.5 billion in 2018.”

AT&T, for its part, has promised to deleverage down to 2.5x by the end of 2019 and to 1.8x by the end of 2022.

“If achieved, these leverage levels would likely put T’s credit profile back more firmly in investment-grade standing,” the analysts wrote.

AT&T’s debt load is also driving concerns into other parts of its business. For example, the company has promised to increase HBO’s spending on content. But, as the Wells Fargo analysts note, even if AT&T increases its investment in creating new content for HBO, its programming budget would still be 33% less than Amazon's spending and $5 billion less than that of Netflix.

Moreover, the analysts note that AT&T faces a significant challenge in simply integrating Time Warner’s massive content business into its own corporate structure.

What might be even more concern for the company is its efforts to stamp out a position in the world's video business. After all, AT&T has been working to migrate its legacy video customers into its new over-the-top video products. The Wells Fargo analysts wrote that so far that effort has yielded uninspiring results.

“With the number of OTT offerings changing almost every day, we believe it is difficult to assess how T will fare in the ever changing competitive environment until we see the actual OTT plan it presents to the market,” the analysts wrote.

Further, as the Wells Fargo analysts noted, AT&T’s enterprise business suffered a surprising drop in the second quarter.

“While we note strategic services (typically the ‘good’ part of enterprise revenue) grew y/y, it was flat sequentially in Q1’18 and actually declined sequentially in Q2’18,” the analysts wrote. “This was especially surprising given we would have thought many of T’s enterprise customers would be feeling the boon of tax reform. This is a key focus as the fixed strategic growth is required to help offset the declines in legacy voice and data services.”

Given all of these different concerns, the Wells Fargo analysts noted that AT&T’s spending on its wired and wireless network could suffer as a result of all of the other demands on its pocketbook.

“Given the promises it has made to the bond community to delever, this in addition to dividend are first cash priorities,” the analysts wrote. “Our concern is these multiple capital demands for T are happening at a time when its competitors on the cable and telecom side remain somewhat double downed on their network investment. While we know that T is not underspending on its network the competition may be investing in a faster and more aggressive pace—especially in the fiber area.”

After all, AT&T has promised to deploy fiber to 5 million more premises by the middle of next year. And the company said that it has deployed FirstNet’s 700 Mhz spectrum to 2,500 sites so far, but that it hopes to increase that number to up to 15,000 sites by the end of this year.

It's clear that Randall Stephenson has a lot to do.

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