Strike torpedoes Verizon's Q2 FiOS earnings estimates due to drop in installations

Verizon (NYSE: VZ) wireline revenue estimates for the upcoming second quarter have been lowered by Wells Fargo by $343 million, to $7.52 billion, as the telco reported that installation of new FiOS subscribers has plummeted during the wireline labor strike.

Jennifer Fritzsche, senior analyst for Wells Fargo, said in a research note that despite making progress in negotiations with a federal mediator, neither Verizon nor the unions have signaled an agreement is coming any time soon and that is causing near-term concerns.

"While a federal mediator has the two sides back at the bargaining table, a near-term resolution is still unclear," Fritzsche said. "Management recently indicated that install and order activity for FiOS has "significantly dropped" as employees have been primarily focused on repair and maintenance. Accordingly, we are cutting our Q2 and FY'16 wireline revenue estimates by $343MM and $826MM, respectively."

Additionally, Wells Fargo is lowering both FiOS internet and video net additions to fewer than 25,000 from 75,000 and 30,000 before the strike began.

The drop in installations is because Verizon's management team and replacement workers have been focused on conducting network maintenance and repair. However, the telco is now starting to conduct new installations, a trend that Shammo says will continue to ramp.

As a result, Verizon noted that capital labor costs for new installs were being directed toward repair/maintenance, which is an operating expense.

Fran Shammo, CFO and EVP of Verizon, told investors on Thursday during the MoffettNathanson Media & Communications Summit that despite the near-term issue he said they are beginning to take new orders.

"Our installs and new orders have significantly dropped," Shammo said. "Maybe over the last week and a half we just started to do some initial installs and new orders."

Similar to the 2011 strike, Shammo added that once it comes to an agreement with the unions that it will be able to quickly ramp back up FiOS installations.

"Coming out of the first quarter, we had built a lot of momentum," Shammo said. "In my history of this situation what normally happens is customers who were going to buy FiOS during this period of time take a step back and wait until things settle down.

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