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Verizon swings and misses; eyes turn to telecom titans next up to bat

A busy week for earnings in the communications industry began on Jan. 24 with Verizon Communications Inc. reporting its fourth-quarter and full-year results from 2016. And things did not begin on a strong note.

Verizon reported results that were below expectations, recording fourth-quarter 2016 net income attributable to the company of $4.50 billion, or $1.10 per share. Adjusted to exclude net gains related to mark-to-market pension adjustments and other one-time items, the company's fourth-quarter 2016 EPS totaled 86 cents.

By comparison, the S&P Capital IQ consensus EPS estimate for the just-ended quarter was 89 cents on a normalized basis and 90 cents on a GAAP basis.

Also troubling to analysts was the company's 2017 guidance, which called for consolidated revenues on an organic basis and consolidated adjusted EPS to be fairly consistent with 2016.

In an emailed statement, Moody's Vice President and Senior Credit Officer Mark Stodden described Verizon's fourth-quarter 2016 results and guidance as "disappointing," noting the company's performance may fuel speculation Verizon will need to pursue "large-scale M&A for growth."

"However, we think Verizon will remain conservative and focus on expanding its network leadership, possibly through mutually beneficial partnerships," Stodden said.

BTIG LLC analyst Walter Piecyk, meanwhile, said in Jan. 24 blog post that he believes the results raise a very important question for the company: Is its network advantage over?

"We believe the root cause of our estimate revisions is an erosion in Verizon's wireless network advantage, potentially marking the end of a 20-year run," he said. In other words, Piecyk believes wireless customers may no longer be willing to pay a premium for Verizon service.

Piecyk said that he expects the company to report post-paid phone losses of 544,000 in 2017.

"Verizon's CFO admitted that there was a higher level of migrations to lower priced rate plans, that we suspect is driven by the retention department's responses to Sprint [Corp.] and T-Mobile [US Inc.] promotions and an elimination of overage revenue," the BTIG analyst noted.

Verizon ended 2016 with 114.2 million retail connections, an increase of 2.1 million from the end of 2015. By comparison, T-Mobile said earlier this month it ended 2016 with 71.5 million total customers, up by nearly 8.2 million from year-end 2015.

Shares in Verizon slid more than 4% on Jan. 24, closing at $50.12.

Following Verizon, AT&T Inc. is set to report earnings after market close on Jan. 25, and Comcast will follow on the morning of Jan. 26.

For AT&T, the S&P Capital IQ consensus EPS estimate for fourth quarter 2016 is 66 cents on a normalized basis and 55 cents on a GAAP basis. For full year 2016, the S&P Capital IQ consensus EPS estimate is $2.84 on a normalized basis and $2.30 on a GAAP basis.

Analysts and investors will undoubtedly be curious whether AT&T is similarly hurting from the competitive pressures affecting Verizon.

While the company's financial results will be of interest, however, investors may be most eager to get an update on the company's pending $106.83 billion purchase of Time Warner Inc. President Donald Trump has said he opposes the deal, saying it would concentrate too much power in the hands of too few.

But AT&T CEO Randall Stephenson previously described politicians' early negative remarks on the deal as "uninformed comments." And Stephenson subsequently met with Trump on Jan. 12. Though an AT&T spokesman said at the time the "proposed merger with Time Warner was not a topic of discussion," Stephenson nevertheless may have gotten a better sense of Trump's views.

As for Comcast Corp., the cable company has similarly been the target of negative comments from Trump. The former host of NBC's "The Apprentice" said in October 2016 that his administration would look at breaking up the combination of Comcast and NBCUniversal Media LLC. "Deals like this destroy democracy," Trump said.

Comcast may be asked about the president's remarks. More likely, though, are potential questions about the possible repeal of the FCC's Open Internet order and the related privacy order -- two pieces of regulation aimed at broadband service providers. The Open Internet order reclassified broadband service providers as common carriers under Title II of the Communications Act, making providers subject to potential rate regulation and giving the FCC more authority. While the commission promised to forebear from rate regulation, many broadband providers see common carrier status as a huge uncertainty looming over their business model.

The S&P Capital IQ consensus EPS estimate for Comcast's fourth quarter 2016 is 87 cents on both a normalized and GAAP basis. For full year 2016, the S&P Capital IQ consensus EPS estimate is $3.46 on a normalized basis and $3.49 on a GAAP basis.