AT&T's Q3 Revenue And Earnings Gains Overshadowed By Blockbuster Time Warner Deal

Telecom service provider AT&T reported stable but flat third-quarter 2016 earnings Monday, a signal that the carrier may need to differentiate its connectivity portfolio in the evolving and ever-competitive telecom market.

The Dallas-based carrier released its Q3 earnings three days earlier than expected following news it had struck a deal to buy entertainment and media giant Time Warner, Inc. in a cash and stock deal worth $85.4 billion, valuing Time Warner at $107.50 a share.

Competing telecom providers Verizon and Comcast are pushing to break into the content creation space, evidenced by Comcast's ownership of NBCUniversal and Verizon's ownership of AOL and its recent deal to acquire Yahoo. With the Time Warner deal on the table, AT&T is also looking to better position itself in this arena.

[Related: AT&T To Buy Time Warner In An $85.4 Billion Blockbuster Media Deal]

AT&T will leverage Time Warner assets to create a "totally differentiated video service" that will allow the carrier to reach customers through traditional television, mobile communications, and through over-the-top (OTT) streaming services, said AT&T Chairman and CEO Randall Stephenson, in a statement.

’We’ll have the world’s best premium content with the networks to deliver it to every screen," Stephenson said. "With great content, you can build truly differentiated video services, whether it’s traditional TV, OTT or mobile. Our TV, mobile and broadband distribution and direct customer relationships provide unique insights from which we can offer addressable advertising and better tailor content."

In its business services segment, AT&T reported mixed results. Q3 (ended Sept. 30) 2016 revenues were $17.8 billion, up a slight 0.4 percent when compared to the year-ago quarter. The carrier attributed this modest growth to gains in mobility and strategic business services offsetting declines in legacy services.

While total business wireline revenues declined by 3.7 percent in the quarter to $7.8 billion, business wireless revenues were up 4 percent year over year to $9.9 billion, driven by wireless service revenue growth and higher equipment revenues, AT&T said.

The carrier added that revenues from strategic business services, including next-generation business solutions such as VPN, Ethernet, cloud, hosting, IP conferencing, VoIP and security services, grew by $242 million or about 9 percent in Q3 2016 compared to Q3 2015. Revenues from legacy voice and data services dropped by about 12 percent to $4 billion.

Wireless revenues have been growing thanks to AT&T's partner program, Partner Exchange, with partner-led revenues in Q3 up more than 300 percent year-over-year, according to Sue Galvanek, vice president of marketing, pricing and product solutions for AT&T Partner Exchange.

"As revenues shift to wireless and strategic services, we are seeing continued traction within Partner Exchange." she said. "The opportunity within the channel is real and we’re driving new strategic wireline and wireless revenue growth for AT&T."

AT&T reported that total net income for the third quarter increased to $3.33 billion or 54 cents a share, compared to $2.99 billion or 50 cents per share in Q3 2015. Consolidated total revenue for the quarter was $40.89 billion, up 4.6 percent from $39.09 billion in the third quarter last year. The carrier attributed this growth to the July 24, 2015 acquisition of DIRECTV.

While AT&T met Wall Street's earnings-per-share estimates for the quarter, revenues were just under estimates of $41.1 billion.

The Time Warner deal is still subject to regulatory approvals by the Justice Department and approval by Time Warner Inc. shareholders. AT&T said during the earnings call that it expects the deal to be approved, despite analyst questions around potential regulatory scrutiny of the blockbuster deal. The companies expect to complete the acquisition by the end of 2017.

Time Warner shares dropped more than 2 percent to just over $87.00 Monday morning, well below AT&T’s offer of $107.50 a share on the deal. Shares of AT&T fell 1.5 percent to $36.93 Monday morning. According to a report from the Wall Street Journal, the market is estimating that the deal has a 40 percent chance of being approved.