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AOL Lifts Verizon Top Line in Q1, As Telco Circles Yahoo

CFO Fran Shammo declines to discuss telco's reported bid for Yahoo

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Courtesy of Verizon

AOL boosted Verizon Communications’ revenue for the first quarter of 2016, pulling in $669 million in the period — AOL’s highest Q1 revenue in five years.

And Verizon could accelerate the growth of the digital-media biz anchored by AOL with the acquisition of Yahoo, if the telco is successful in its widely reported bid for Yahoo. Verizon CFO Fran Shammo declined to discuss the Yahoo sales process on the telco’s earnings call Thursday.

The growth of AOL “goes to our strategy to reach (a consumer segment) that quite frankly Verizon is under-penetrated in,” Shammo said, meaning Gen Z audiences.

AOL’s Q1 sales lifted Verizon total operating revenue for Q1 to $32.2 billion, up 0.6% year over year (short of Wall Street’s $32.5 billion forecast). Excluding AOL, which was not part of Verizon a year ago, total operating revenue declined 1.5%. AOL, which Verizon acquired in June 2015 for $4.4 billion, reported sales of $625 million in Q1 2015 as a standalone company.

Verizon is viewed by Wall Street as the leading strategic suitor for Yahoo, whose core search and advertising businesses have been steadily eroding and now faces investor pressure to find a buyer.

Yahoo CEO Marissa Mayer earlier this week said the company’s board and management team are making the sales process a “top priority.” She didn’t disclose which parties Yahoo has met with but said it has held talks with “some of the most well-known and respected names in the industry” over the last two months.

Regardless of whether Verizon ends up owning Yahoo, the company has been aggressively expanding its digital-media foothold over the past year. Following its AOL acquisition, Verizon last fall launched Go90, a free, ad-supported mobile video service stocked with an array of original programming and licensed TV and digital content.

Last month, Verizon and Hearst formed a joint venture to produce original digital content with two channels targeted at millennials, and the JV partners on Monday announced an agreement to acquire male-focused media outfit Complex Media.

And in early April, Verizon paid $159 million for a 24.5% stake in AwesomenessTV, the Gen Z-focused studio that is majority owned by DreamWorks Animation with Hearst holding the remaining 24.5% equity. In addition, Verizon entered into a multiyear content pact with AwesomenessTV to launch a premium programming service on Go90 and other platforms.

Meanwhile, Verizon is grappling with a strike by about 36,000 East Coast workers represented by two unions, who walked off the job April 13 after failing to reach a new contract addressing health care costs.

“Given the status of labor contract negotiations, there will be pressure on second-quarter earnings due to the timing of cost reductions,” Verizon said in its earning announcement. Currently, Verizon expects no financial impact from the strike “unless this drags on for a much longer period of time,” Shammo said on the call. The company says Verizon Wireless operations have had “very minimal impact” from the strike.

In the first quarter, Verizon added a net 36,000 FiOS TV subs (versus 90,000 a year earlier) and 98,000 FiOS Internet customers (down from 133,000). Shammo said the FiOS Custom TV “skinny” bundle remain popular, representing 38% of FiOS video sales in the period. Total FiOS revenue grew 5% in the quarter to $3.5 billion, amounting to 81% of consumer wireline revenue. In the first quarter, Verizon announcing plans to acquire Carl Icahn-owned XO Communications’ fiber-optic network business for $1.8 billion and an agreement to deploy a new fiber network in Boston.

Wireless segment total revenue fell 1.5% to $22 billion in the first quarter, which Verizon blamed on more customers choosing unsubsidized device payment plans.

The company reported consolidated earnings per share of $1.06, in line with Wall Street forecasts, versus EPS of $1.02 in Q1 2015.