Verizon’s Q2 Earnings Could Trend Lower On Labor Strike, Wireline Headwinds

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Verizon (NYSE:VZ), the largest U.S. wireless carrier, is slated to publish its Q2 earnings on July 26. We expect the carrier’s earnings to trend lower on a sequential as well as a year-over-year basis, on account of a six week long labor strike in the firm’s North-Eastern wireline business which disrupted operations. Below we take a look at some of the key factors to watch in the company’s Tuesday earnings release.

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Wireline: Impact Of Strike In The Northeast and Mid-Atlantic

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About 39k employees from Verizon’s Northeastern and Mid-Atlantic wireline operations, who were members of two labor unions – Communications Workers of America and the International Brotherhood of Electrical Workers – went on strike for more than six weeks during Q2 on account of certain issues including healthcare benefits and Verizon’s move to consolidate some call centers. As these workers were involved in network maintenance, troubleshooting and customer service, the strike resulted in meaningful service disruption and delays.

Verizon’s wireline operations have already been facing headwinds amid a decline in traditional voice (subscribers down -7.4% y-o-y in Q1)  and broadband connections (-0.3% y-o-y) and also due to a relatively weak uptake for the FiOS services that the carrier was banking on to offset some of the declines. FiOS broadband net adds declined by about 26% last quarter, and the firm could actually witness FiOS net customer losses during the quarter on account of the strike. Overall, Verizon expects the strike to impact Q2 EPS by $0.05-$0.07.

Wireless: Feature Phone Attrition And Margins In Focus 

Verizon has been letting go of its feature phone customers amid a focus on more lucrative smartphone users, a trend that will likely continue into Q2. During Q1, the carrier lost 292k feature phone subscribers, while its smartphone adds stood at 284k, translating into net postpaid phone losses. While this could put some pressure on wireless revenues, it should help Verizon’s wireless margins as well as ARPUs. As of Q1, Verizon’s smartphone base accounted for about 84.7% of its overall subscriber base, up from 83.7% in the previous quarter.

Verizon’s wireless service revenues could continue to face pressure, amid an increasing shift to equipment installment plans (68% take-rate in April).  Verizon expects service revenues to return to growth in 2017, as a bulk of its subscriber base shifts to EIP plans. That said, the plans could positively impact wireless margins for the quarter on account of lower subsidy costs.

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