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Should Investors Worry About Verizon Communications Inc's Strike Issues?

By Leo Sun - May 20, 2016 at 11:12AM

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Here are the key things Verizon investors should know about its ongoing strike.

Verizon (VZ -0.37%) has recently been dealing with a strike involving two unions, the Communications Workers of America (CWA) and the International Brotherhood of Electrical Workers (IBEW), which represent around 40,000 wireline workers in the Northeastern United States.

Image source: Pixabay.

The strike started on April 13 after Verizon and the unions failed to reach an agreement regarding a new contract to replace the old one, which expired last August. After ten months of negotiations, the two sides still haven't agreed on various issues, including healthcare, pension plans, and job security.

One major concern was Verizon's plan to move about 5,000 jobs to other countries, outsource labor to lower-wage contractors, and transfer existing workers to other states. The unions also claim that Verizon intentionally delayed its rollout of its FiOS bundled Internet, telephone, and TV service, and reduced the size of the wireline staff that would install the service in new markets.

What's Verizon's position?

Verizon denied those claims, stating that it had already surpassed its initial goal of installing FiOS in 18 million homes, and that healthcare issues should be reconsidered as medical costs for workers and retirees have risen over the past few years. For its part, Verizon has offered employees a 7.5% wage increase over the term of the contract, job protection for eligible employees, and "excellent" retirement benefits.

Verizon has prepared itself for a prolonged battle against the unions. The company trained "thousands" of non-union employees to ensure that wireline service and repairs were not disrupted, as well as business partners to handle certain network and customer service functions.

During last quarter's conference call (as transcribed by Thomson Reuters), Verizon CFO Fran Shammo stated that the company "had planned" for the strike, and that if it could "come back in mid-year" if the negotiations fell through. Shammo stated that it was "too early" to gauge the financial impact of the strike, but expressed confidence that second quarter earnings wouldn't be affected and that Verizon could still hit its EPS target of $3.99 for the full year -- which would represent flat growth from 2015 (but 3% growth after excluding the impact of assets held for sale).

Downsizing the wireline business

Verizon's clash with the unions is related to its ongoing efforts to downsize its slow-growth wireline business in favor of its high-growth wireless business and the expansion of its digital video and advertising ecosystem.

Last December, Verizon sold a large portion of its landline phone, Internet, and TV services to Frontier Communications (FTR) for $10.6 billion. Verizon has reportedly been trying to sell its data centers for $2.5 billion, and it shuttered two of its two public cloud services in April.

Last quarter, Verizon's wireline revenues fell 1.9% annually to $9.3 billion. However, the unit's operating margin rose 200 basis points thanks to a 4% decline in operating expenses, which boosted operating income 45% to $589 million.

Prematurely signing an unbalanced contract with the unions could reverse that bottom line growth, which explains Verizon's willingness to fight a prolonged battle. Verizon has survived big strikes before. Back in Aug. 2011, 45,000 of its wireline workers went on strike, but  the strike ended two weeks later after Verizon showed a willingness to "bargain seriously." The new contract was inked the following year.

How AT&T handled the unions

AT&T (T 0.05%) also recently renegotiated new contracts with the CWA to replace the ones which expired in April, but those negotiations have gone more smoothly. Last year, AT&T and the CWA negotiated new contracts for 17,000 wireline employees in the Midwest and 24,000 employees in the Southeast. It also started negotiations for 16,000 employees in the East and West regions in March, then finalized a deal with 9,400 employees in the Southwest region in April.

However, the negotiations with AT&T didn't cover controversial issues like outsourcing jobs, relocating employees, or replacing employees with contractors. Instead, the AT&T negotiations mainly centered around wages, benefits, pensions, and workplace rules.

Should investors worry about Verizon?

Verizon seems to have more trouble with unions than AT&T, but the company has weathered similar storms before with minimal damage. Shammo stated during the conference call that there wouldn't be a financial impact "unless (the strike) drags on for a much longer period of time."

Since Verizon recently returned to the negotiating table, there's a chance that the strike won't "drag on" for that much longer. Therefore, longtime Verizon investors shouldn't consider the wireline strike to be a huge headwind for the company. Instead, they should focus more on Verizon's wireless growth and the expansion of its digital ecosystem.

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