Verizon Reports Mixed Q2 Earnings Impacted By Strike, Business Services On The Decline

Following a nearly two-month employee strike - and one day after announcing a major deal to acquire Yahoo's core internet business - telecom heavyweight Verizon Communications reported mixed second-quarter financial results Tuesday.

For the quarter ended June 30, the Basking Ridge, N.J.-based carrier reported revenue of $30.53 billion, down more than 5 percent from $32.22 billion in the same period one year earlier. It also missed Thomson Reuters' forecast of $30.94 billion in revenue.

Net income for the quarter was $831 million, down a whopping 80.9 percent from net income of $4.35 billion in last year's second quarter. Earnings per share was 17 cents, down nearly 84 percent from $1.04 per share from one year earlier. Adjusted (non-GAAP) EPS was 94 centers per share, however, exceeding Wall Street's expectations of 92 cents per share. As previously predicted by Verizon's chief financial officer Fran Shammo, the labor strike, which included nearly 40,000 employees, cost Verizon seven cents per share.

[Related: Partners Expect Potential Fallout From Verizon's $4.83B Yahoo Acquisition]

Verizon's business segment revenue continued its downward trend. Global Enterprise revenue in the wireline segment was down 3.3 percent in the second quarter compared to the year-ago period. Global Wholesale revenue also dropped 4.1 percent when compared to the second financial quarter of 2015. Total operating revenue for the carrier's wireline segment declined 2.4 percent in the quarter, which Verizon attributed to technology transitions and pricing pressures.

Small business wireline revenue also declined 1.2 percent during the second quarter.

Verizon is facing stiff competition in the wireless space from such carriers such as T-Mobile, as well as on the wireline side, according to one Verizon partner who asked not to be named.

"The problem is their voice and connectivity business can't grow much faster or become more profitable without usage caps for wireless or landline [services]," the partner said. "Verizon is desperate not to be just a 'dumb pipe,' but that's what they've sold themselves as for years."

"We believe we have an opportunity to further penetrate the markets we serve," Shammo said of the disappointing business services revenues. "In terms of improving the overall margin, we made improvements in cost structure by optimizing our workforce and expect benefits from the new labor contracts to be realized during the remainder of 2016."

The carrier noted that it prioritized maintenance and repair activities during the seven-week long labor dispute, but the company has been working through a backlog of Fios installations -- an issue that Verizon's channel partners grappled with during the strike.

"We expect capital spending levels to increase during the second half of the year as we return to normal operations [after] the work stoppage," Shammo said.

The carrier is anticipating cash savings of $500 million over the term of its recently negotiated labor contracts.

Verizon on Monday announced it would acquire Yahoo for $4.83 billion in a transaction expected to close during the first quarter of 2017. Verizon CEO Lowell McAdam attempted to focus the Q2 earnings call on its recent "strategic milestones," including the Yahoo acquisition, the closing of the sale of its wireline assets to Frontier Communications earlier this year, and the revamping of its wireless pricing plans.

McAdam said the Yahoo acquisition will make Verizon "an even stronger competitor in digital media." While McAdam acknowledged that the digital video marketplace is currently dominated by Facebook and Google, he said content creators are hungry for alternatives. During the question and answer portion of the call with financial analysts, McAdam acknowledged that the industry was questioning whether Verizon intends on competing with Facebook and Google.

"We plan on being a significant player here," he said. "The market is going to grow dramatically, [and] we are a small player today relative to [Facebook and Google]. All we need to do is take our fair share of the growth of the market and this will be a success for us."

Verizon's wireless division was a bright spot in the carrier's Q2 2016 financials. The carrier reported 615,000 retail post-paid net additions during Q2 2016. Verizon also reported a 3.3 percent increase in retail connections, with 113.2 million new connections, when compared to Q2 2015. Verizon also saw a 3.7 percent uptick in revenue for its Fios fiber-optic based services year-over-year, at $2.8 billion in the second quarter.

"We [delivered] solid results in a challenging environment," McAdam said of its overall second-quarter financial results.

The carrier also touted its growth in new Internet of Things (IoT) revenue streams, which climbed 25 percent to $205 million in Q2 2016 compared to results in Q2 2015. McAdam also said that Verizon is nearing the end of its data center evaluation process and plans on announcing whether it will sell or hold onto its data center assets during the next financial quarter.