Verizon's new union terms after strike could hurt 2016 results, analysts say

Verizon (NYSE: VZ) and the around 36,000 CWA and IBEW workers were able to reach new terms and tentatively end the strike on May 30. But Jefferies analysts anticipate the new deal with union members could impact fiscal 2016 for the telecom giant.

"It is unclear what net impact the new terms will have on 2016 results, though we believe management has been setting the stage for potential downside to the prior outlook (EPS to plateau around $3.99)," Jefferies analysts wrote in a research note.

The deal, which is expected to be ratified by union members soon, will hurt Verizon's wireline business but Jefferies expects the impact to be confined to the second quarter. The firm is reducing Verizon's wireline revenue and EBITDA estimates by 1.1 percent and 6.3 percent, respectively, due to "lighter volumes driven by reduced demand and a focus on repair and maintenance during the strike." The impact to EBITDA will stem from opex Verizon took on in order to cover outsourcing and overtime during the strike along with the labor costs that had previously been capitalized. But Jefferies said there is a slight upside to the work stoppage.

"These impacts more than offset savings from unpaid wages and benefits during the strike," the analysts wrote.

Jefferies is also adjusting its forecast for FiOS TV and Internet to declines of 20,000 and 5,000 respectively, from 20,000 and 70,000 in its previous estimates.

Other analyst firms like Wells Fargo are taking a rosier long-term outlook and seeing future financial benefits for Verizon after the new union terms are ratified.

"While there likely will be some impact on Q2 financials related to the strike ... the savings that should result from this Strike outweigh the near term distractions, in our view," said Jennifer Fritzsche, senior analyst for Wells Fargo, in a research note. "We would expect more quantitative details related to these savings to come from the company when it reports Q2 2016 earnings (late July) if not sooner."

Verizon CFO Fran Shammo today confirmed the strike's expected negative impact on wireline net adds but declined to say how big the impact could be since the company is now in "catch-up mode."

"The actual net adds for wireline will be negative for the quarter" due to the employee strike, Shammo said today at the Bank Of America Merrill Lynch 2016 Telecom & Media Conference. "Now obviously our employees will be back to work, we're doing installs for the month of June, so I don't actually know the exact number that we'll end in the quarter because now we're in catch-up mode. Because we did have a pipeline build during the strike, it's a matter of how much we can get to that pipeline, but I would expect broadband [customer net additions] to be negative in the quarter."

Special report: Verizon's Boston FiOS rollout focuses on community, holistic use strategy

Related articles:
Verizon's striking wireline employees will return to work Wednesday
Verizon, CWA, IBEW reach tentative deal to end strike of wireline workers
Verizon's union strikers are threatening replacement workers, says labor board
Strike torpedoes Verizon's Q2 FiOS earnings estimates due to drop in installations
Verizon, CWA, IBEW unions invite federal mediator to contract negotiations

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