Telecom giant Verizon posted mixed results for its second quarter, one day after announcing it will buy Yahoo for $4.8 billion.
Verizon's earnings show a firm buoyed by its 2015 purchase of AOL, the division that will essentially become Yahoo's parent company. That helped balance out the effect of the company's massive worker strike in April, but not completely. Verizon reported overall revenue of $30.5 billion, a decline of 5.3 percent from the same time last year. That missed analyst expectations of $30.9 billion.
Still, the firm beat expectations on profit by 2 cents per share, reporting earnings of 94 cents per share. Shares ended down about two percent in regular trading to $54.81 per share.
Verizon did not break out the numbers for AOL's revenue in detail but said that the division "delivered strong revenue growth," If Verizon included revenue from AOL and sale of some of its landline businesses — which were not part of the company a year ago -- revenue would have only been down 3.5 percent.
The company also said that its Fios fiber-optic services were up 3.7 percent compared with the same period last year. Verizon also announced that it's going to open its own fixed 5G network in 2017.
In a statement, Verizon chief executive Lowell McAdam said that the Yahoo purchase will help the company as it tries to move away from its traditional telecom business and to become more of an advertising and media firm, as well.
“Yahoo is a complementary business 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," McAdam said. "We expect this acquisition to 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.”
Perhaps the most significant part of the Yahoo deal for Verizon is how it recasts who Verizon's rivals are. In an interview with CNBC, AOL chief executive Tim Armstrong named Silicon Valley giants Google and Facebook as his key rivals -- not AT&T or Comcast. But, he said, Verizon will have to find its own path to success.
"Trying to do what Google and Facebook do is not a good strategy," Armstrong said in the interview. "We have to have a differentiated performance."
To that end, experts say that Yahoo under AOL could look much the same as it does now. Verizon is clearly interested in the scale that Yahoo's businesses can provide, said Rita McGrath, a professor at the Columbia Business School, and so has no real incentive to pare down its newly acquired firm.
"I would be surprised if it would further slice and dice; it wants more breadth than that," she said. For example, Yahoo's media properties with notable journalists such as Katie Couric complement the Huffington Post and other AOL media sites.
While Yahoo may seem to many like a relic of the Web of the late 1990s, McGrath said, it retains plenty of loyal members for different aspects of the company — its sports coverage, financial news or e-mail, for example. Yahoo, she said, has never been able to leverage that audience and turn it into strong revenue.
Armstrong has done a good job of keeping AOL relevant, McGrath said, by marrying content and advertising goals in a way Yahoo has not.
Armstrong is respected as a formidable force at AOL, though it's also earned him a reputation as a divisive executive. He famously fired a high-ranking executive during a conference call with 1,000 employees in 2013. And he was excoriated in the press a year later, after explaining that he’d slashed AOL’s 401(k) benefits in part because the company had paid millions to help a couple of employees' “distressed babies.”He later apologized and reversed his decision about benefits.
Yet part of the reason Armstrong and his management team have been successful is that they have been "unsentimental," said Kevin Werbach, a professor at the Wharton School of the University of Pennsylvania. Armstrong, he said, has avoided the goal of trying to restore a tech giant to its former glory -- a narrative that chief executive Marissa Mayer often fell into at Yahoo -- and that has helped keep Armstrong focused as he tries to forge a new path for Verizon.
On the earnings call, Verizon's McAdam also said the company would compete with the likes of Facebook and Google on digital advertising. But, he cautioned, doing so will take time.
McAdam said much has been made over whether Verizon will "challenge Facebook and Google" in the future. "We're a small player today relative to them," he said. "All we need to do is take more than our fair share of growth in the market."
In other words, Yahoo and AOL don't need to show explosive growth to be successful -- just solid and dependable gains.
Wharton's Werbach agreed. "So much of the mindset of Silicon Valley is about growth and disruption," he said. "We forget that there are a lot of good companies that are not on that trajectory."
An earlier version of this post misstated the effect AOL's business had on Verizon's revenue. This version has been corrected.