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Verizon CEO Sees ‘Meaningful’ Yahoo Cost Synergies as Q2 Results Hurt by Wireline Strike

Verizon CEO Lowell McAdam called out the acquisition of Yahoo’s Internet businesses as providing a base for “significant” future growth in mobile media revenue, and said he expects “meaningful” cost synergies from the acquisition.

The telco announced the proposed acquisition of Yahoo, $4.83 billion in cash plus the assumption of an estimated $1.1 billion in employee stock grants, a day before posting a 5.3% decline in revenue for the second quarter of 2016. A seven-week strike by wireline workers in the period weighing on earnings, while it also added fewer retail wireless postpaid customers than expected.

Verizon’s total revenue for Q2 was $30.53 billion, below Wall Street forecasts of $30.94 billion. Excluding second-quarter 2015 revenues from divested local landline businesses and second-quarter 2016 revenues from AOL (which was not part of Verizon a year ago), total operating revenues on a comparable basis would have declined 3.5%.

Net income was $831 million in second-quarter 2016, a decline of 81% versus $4.35 billion a year ago. Adjusted earnings per share of 94 cents, excluding one-time charges, beat analyst expectations of EPS of 92 cents. Verizon said its earnings were negatively impacted by about 7 cents per share by the strike by union workers.

With Verizon’s core wireline and wireless businesses declining, the company is looking ramp up its content business — with a specific eye on expanding into the mobile advertising market dominated by Google and Facebook. On Monday, the telco announced plans to acquire Yahoo’s operating business, which McAdam said will “put us in a great position as a top global mobile media company and give us a significant source of revenue growth for the future.” The deal comes after Verizon bought AOL for $4.4 billion last year, and launched the Go90 mobile-centric video service last fall.

Now that the auction for Yahoo is over, “we can go in and talk to management and see a much greater depth of information,” McAdam said on a call Tuesday with investors. “We’ll validate our plans and make our decisions.”

Verizon expects to close the Yahoo deal by the end of 2016 or in the first quarter of 2017, McAdam said. He declined to outline expected cost savings from merging AOL and Yahoo, but said: “They’re meaningful, let’s just put it that way.” For example, McAdam said Verizon sees opportunities in reaching new content-licensing deals, including for sports programming from the NFL and NBA, to tap into the combined reach of AOL and Yahoo. He also suggested content from AOL sites like Huffington Post, Engadget, TechCrunch could be integrated into Yahoo’s tech, news and finance sites.

Verizon said AOL delivered strong revenue growth in second-quarter 2016, with $713 million in the period. “By acquiring Yahoo, we are scaling up to be a major competitor in mobile media,” McAdam said. He said Yahoo’s Internet business is complementary to AOL, “giving us market-leading content brands and a valuable portfolio of online properties and mobile applications that attract over 1 billion monthly active consumer views.”

Meanwhile, Verizon posted net declines of 41,000 FiOS TV and 13,000 FiOS Internet subscribers, with the company citing the strike as affecting the results. Total revenues for FiOS services grew 3.7%, to $2.8 billion; blaming the strike, Verizon said the wireline segment reported an operating loss of $463 million in second-quarter 2016 (versus an operating loss of $199 million a year earlier).

Verizon said it made significant progress in working through a backlog of FiOS installations in June, after the strike ended in late May, and has since returned to its normal run rate of FiOS connection growth. CFO Fran Shammo also noted that Verizon suspended FiOS advertising during the work stoppage. In addition, Verizon said its Custom TV “skinny bundle” remains popular, representing nearly 40% of FiOS video sales in the quarter.

On the wireless side, Verizon added a net 615,000 retail postpaid subscribers; analysts had expected net add of 784,000 on average according to FactSet StreetAccount. As of the end of June, Verizon had 113.2 million retail connections, up 3.3% year-over-year, including 107.8 million postpaid connections.

Verizon’s total wireless revenue fell 4%, to $21.7 billion in the period, as customers continued to choose unsubsidized device payment plans. Service revenue plus device payment plan billings increased 2.3%, to $19.1 billion.

The company said growth in 4G device adoption continues to drive increased data and video usage. About 93% of Verizon’s total data traffic is on the LTE network, with the amount of data traversing LTE up 44% from a year earlier.

Verizon’s Q2 net income included a non-cash after-tax loss of $2.2 billion, or 54 cents per share, generated by pension and other “post-employment retirement benefits,” which the company said were primarily associated with the new labor contracts, the sale of local landline businesses to Frontier and settlement accounting. In addition, the company took a charge of $1.1 billion, or 27 cents per share, in connection with early debt redemption, and recorded an after-tax gain of $139 million, or 3 cents per share, on the Frontier transaction.

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