Verizon dinged by strike, aims high with Yahoo

Verizon on Tuesday reported earnings hit by a prolonged workers' strike. But executives kept the focus on the future — namely a deal to buy Yahoo they hope will make it a much larger media distributor.

With both events in his rearview mirror, Verizon CEO Lowell McAdam offered a vision of the telecommunications giant's future as a growing media distributor.

"We are extremely excited about the assets that Yahoo has in the area of sports, finance, email and news, and you match those up with AOL (which Verizon acquired last year), and we’ve just made an exponential leap in capabilities here," McAdam said during a conference call with financial analysts and reporters Tuesday.

Verizon plans to pay $4.8 billion for Yahoo's core Internet business, which includes properties such as Yahoo Sports, Yahoo Finance, Yahoo Mail and Tumblr, in a transaction expected to close by the end of the year or in the first quarter of 2017. The nation's largest wireless carrier acquired AOL in May 2015 for $4.4 billion. AOL programming such as content from The Huffington Post is among  those delivered on Verizon's free, ad-supported go90 mobile service launched in October 2015.

Verizon is winner in Yahoo sale with $4.8B bid

With Yahoo on board, Verizon hopes to challenge Google and Facebook's dominance in digital advertising and a growing digital video marketplace, which has an estimated addressable market of $180 billion by 2020, McAdam said.

"Today that marketplace is dominated by two brands," he said. "Content creators and advertisers are hungry for alternatives as the market expands for both in-home and mobile consumption. Verizon intends to be a significant player in this space. By acquiring Yahoo’s operating business we are scaling up to be a major competitor in mobile media."

McAdam offered a glimpse of some programming possibilities for Verizon "not only over the traditional channels of FiOS, either Custom TV or the full bundle, but over AOL and Yahoo and finally over go90. We view this as a waterfall of content moving down through our different properties."

Sports. McAdam said he had talked to NFL Commissioner Roger Goodell and NBA Commissioner Adam Silver in recent weeks about the possibilities of increased sports content "not only in season but out of season." Verizon could also do deals with sports channels for more live games on its mobile and online networks.

Business. Yahoo Finance is "probably (Yahoo's) strongest asset today," McAdam said. He foresees partnerships to drive a greater reach of business coverage. 

News and email. A combination of Yahoo News and email with current AOL content from TechCrunch, Engadget and The Huffington Post could "drive a lot of visits to the sites," he said.

"Big advertisers have come to us saying that they have more ads to place than they have good places to put them," McAdam said. "We will be one of the few that can deliver advertising and content across the home, across the mobile device and across the Internet, and we think that puts us in a very strong position."

Chief Financial Officer Fran Shammo added, "Yahoo brings viewers. Viewers bring advertising. Advertising brings top-line growth." That growth, in turn, "will drive profitability," he said.

Verizon-Yahoo execs break down the deal

During the second quarter of 2016, a seven-week work stoppage in Verizon's wireline business — from mid-April through much of May — hurt earnings by about 7 cents per share, the company said. Adjusted earnings per share of 94 cents per share for its fiscal second quarter beat the 93 cents per share predicted by analysts polled by S&P Global Capital Intelligence.

Verizon's net income fell to $702 million from $4.2 billion in the April-June period the year before. Revenue of $30.5 billion missed Wall Street expectations of $30.96 billion.

Non-operational expenses included a non-cash, after-tax loss of $2.2 billion made up in part by a re-measurement of pension and retirement benefits triggered by the strike, the company said.

Shares (VZ) were down 1.9% Tuesday to $54.81.

Verizon added 615,000 new wireless customers, bringing its total subscriber base to 113.2 million, up 3.3% over a year ago. The strike resulted in Verizon FiOS subscriber losses of 13,000 Net connections and 41,000 video connections in the quarter, the company said.

However, FiOS revenue grew 3.7% to $2.8 billion. Overall, Verizon reported 14 million FiOS customers, a 3.1% increase over a year ago.

That FiOS growth encouraged S&P Global Intelligence Analyst Angelo Zino as did Verizon's "efforts towards becoming a mobile media company, which should support new revenue streams." He raised his 12-month target price by $5 to $56 in a note to investors Tuesday.

But Craig Moffett, senior analyst at MoffettNathanson, was more cautious, noting total wireless revenue was down 4% from a year ago, wireline revenue fell 2.4% and the company lost 41,000 FiOS video subscribers and 13,000 FiOS Internet subscribers, although the decline was attributed to the strike.

With growth stalling, "Verizon is turning to an entirely new source of revenue for the wireless industry: advertisers,” Moffett said in a note to investors. “It will take years to find out if the strategy pans out.”

Follow Mike Snider on Twitter: @MikeSnider