Verizon Warns Financial Hit Possible as Strike Continues

The ongoing strike against Verizon could affect Verizon’s bottom line, Chief Financial Officer Fran Shammo said Thursday on an analysts call as the carrier released Q1 results. Shammo said Verizon may have to update full-year guidance, depending on how the labor negotiations go in coming weeks. Nearly 40,000 Communications Workers of America and International Brotherhood of Electrical Workers members went on strike last week (see 1604130031).

“At this point, it’s too early to tell the impacts,” Shammo said of the strike. “We’ve deployed thousands of management employees to take on the work. We, obviously, always during this period of time fall a little behind on the install work. We still see good momentum coming in from a sales perspective so there’s a little bit of a backlog there.” The strike will have an effect on Q2 numbers only if it drags on for a long period, he said.

Verizon is off to a strong start in 2016 and is “well positioned to compete in a competitive environment,” Shammo said. But “given the status of our labor contract negotiations there will be pressure on earnings in the second quarter due to the timing of cost reductions,” the carrier said in a statement. Verizon isn’t providing revenue guidance at this time, Shammo said. Verizon is providing only EBITDA margin percent guidance and earnings per share guidance, which are “relatively comparable to 2015.”

“Verizon continues to expect full-year 2016 adjusted earnings to be at a level comparable to the company’s strong full-year 2015 adjusted earnings,” the statement said.

Analysts told us the risk for Verizon rises the longer the strike continues. “The longer it goes for, the harder it will be to keep all the replacement workers in their temporary roles rather than their usual jobs, and the more they're likely to struggle to keep up with the workload and perform to the same standards as those they're replacing,” said Jan Dawson, analyst at Jackdaw Research. “It can be done for a couple of weeks, but over the long term it's impossible to run a company equally well when you're missing 40,000 employees.”

“Verizon is currently following its tried-and-true strike procedure of seconding non-union managers and wireless employees to perform wireline union tasks,” said Roger Entner, analyst at Recon Analytics. “The immediate impact of the strike is therefore small, but if the strike continues the negative impact increases as the at-work labor force is increasingly stretched thin.”

The earnings report shows “starkly how the company’s misguided priorities and scattershot approach to business are hurting customers and the company’s standing on Wall Street,” said an emailed statement from Brooklyn-based Verizon field technician and striker Anthony Finocchio. “Despite making $39 billion profits over the last three years and $4.43 billion in the first quarter of 2016 alone, the company is refusing to settle a fair contract and continues its efforts to offshore jobs to the Philippines, Mexico and other locations.”

The carrier reported net profit of $4.4 billion in the quarter, up from $4.3 billion a year ago. Revenue was $32.2 billion, a 0.6 percent increase from Q1 2015, a news release said. Postpaid mobile phone connections had a loss of 8,000, as a result of a decline in 3G and basic phones, but Verizon added 507,000 tablets in the quarter, a news release said. Retail postpaid churn was 0.96 percent, an improvement of 7 basis points over the same period last year.

Shammo was asked during the analysts call about special access reform, in light of Verizon’s proposal with Incompas for revamping special access services (see 1604070069). “We reached a deal with a lot of the CLECs in order to resolve a longstanding and contentious regulatory issue,” he said. “Our top priority though is to ensure that our business services are on a level playing field with all the other competitors, including cable companies.” Shammo said Verizon would work with other companies and the FCC on a framework “that applies to all competitors equally and relies on sound public policy to determine where and when regulation is appropriate.”

Verizon is positioning itself for the launch of 5G, Shammo said. “During the quarter, we announced our intention to acquire XO Communications, which will provide us the opportunity to deepen and expand our fiber assets nationwide, as well as to lease millimeter wave spectrum for 5G testing purposes with the option to buy,” he said. “There is a strong interest and commitment from members of the 5G Forum to prepare for fixed wireless commercial pilots using the technology next year.”

The telco is looking at closing the remaining holes in its East Coast Fios network, Shammo said. The company recently said it would partner with Boston to replace its copper network with fiber (see 1604120057). “We’ll take one city at a time,” Shammo said. “We still don’t have Alexandria [Virginia] built out or Baltimore. … At this time, we’re concentrating on Boston.”