Verizon drops 13K FiOS internet subs in Q2 due to strike impact

Verizon (NYSE: VZ) saw its FiOS revenue grow in the second quarter, but the work stoppage due to a two-month wireline workforce strike took its toll, resulting in the loss of 13,000 internet subscribers during the quarter.

FiOS wireline subscribers in Q2 (Source: Verizon investor presentation)

Speaking to investors during the second quarter, Fran Shammo, CFO of Verizon, said that the telco is nearly through the installation backlog caused by the strike. "FiOS subscriber growth was impacted by the work stoppage in the second quarter," Shammo said. "We expect to return to a normal run rate in the third quarter."

During the quarter, the telco lost 13,000 FiOS internet connections and 41,000 FiOS video connections, ending the period with a total of 4.9 million and 4.5 million FiOS subscribers. From a total broadband subscriber perspective, Verizon lost 83,000 customers.  

News of the FiOS subscriber decline should not be of any great surprise. Shammo told investors in May that its management team and replacement workers during the labor strike had to switch their focus to network maintenance and repair. 

Despite the losses, Verizon's FiOS revenue grew 3.7 percent, to $2.8 billion, compared to second-quarter 2015. Verizon said it made "significant progress in working through a backlog of FiOS installations" in June and has returned to its normal run rate of FiOS connection growth.

"FiOS revenue was strong even with work stoppage and a high prior year comparable year pay-per-view fight event," Shammo said. "The growth in FiOS is driven by a higher customer base and the demand for higher internet speeds."

Top, total Q2 revenue; bottom, wireline revenue for Q2. (Source: Verizon investor presentation)

Nearly 11 percent of the telco's FiOS internet base has opted for speeds of 100 Mbps or higher. Customer demand remains strong for Custom TV, which represented nearly 40 percent of FiOS video sales in second-quarter 2016.

Still, the wireline strike negatively impacted wireline operating income. The segment reported an operating loss of $463 million and an operating margin of negative 5.9 percent, while generating $1.1 billion in segment EBITDA (non-GAAP), a year-over-year decrease of 26.5 percent.

Consumer wireline revenue declined 3.2 percent to $3.05 billion and Mass Markets, which includes small business, declined 1.2 percent to $3.51 billion.

Verizon made changes in its cost structure and expects benefits from the new labor contracts with the Communications Workers of America (CWA) and International Brotherhood of Electrical Workers (IBEW) union members to be realized during the remainder of 2016 and subsequent years of the new contract.

Revenue pain continued in the Global Enterprise and Global Wholesale segments.

Global Enterprise revenues were $2.9 billion, down 2.4 percent from $3 billion in the same period a year ago, "due to technology transition and pricing pressures," Shammo said. Likewise, Global Wholesale service revenues were $1.26 billion, a decline from $1.31 billion in the second quarter of 2015.

Shammo added that "trends in our enterprise and global wholesale businesses remain consistent with prior periods."

Overall wireline revenues were $7.82 billion, down 2.4 percent year-over-year from $8.01 billion. Verizon posted earnings per share of 17 cents.

From an overall financial perspective, Verizon's total operating revenues in second-quarter 2016 were $30.5 billion, down 5.3 percent year-over-year from the second quarter of 2015.

Shares of Verizon were listed at around $55.87, down 23 cents or 0.41 percent in Tuesday morning trading on the New York Stock Exchange.

For more:
- see the earnings release
- listen to the webcast (reg. req.)

Special report: Tracking wireline telecom earnings in Q2 2016

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