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Brazilian telecom carrier, Telefonica Brasil SA (VIV - Analyst Report) reported third-quarter 2013 net income of R$760.2 million ($332.4 million), down 18.8% year over year.

Revenues rose 1.9% year over year to R$8,618.2 million ($3,767.9 million).                      

Consolidated EBITDA dropped 18.2% year over year to R$2,381.3 million ($1,248.3 million) in the third quarter, while EBITDA margin of 27.6% was down 680 basis points (bps). Operating expenses increased 12.4% year over year to R$6,236.9 million ($2,726.8 million).

Revenue Segments

Mobile Business total revenue climbed 7.5% year over year to R$ 5,739.2 million ($2,509.2.6 million) in the reported quarter, primarily driven by Data and VAS, Access and usage revenues and text revenues.

Average revenue per user (ARPU) grew 6.6% to R$23.6 ($10.3), driven by 24% rise in Data ARPU. Customer churn rose to 4.3% from 3.5% in the third quarter of 2012.

As of Sep 30, 2013, the total subscriber base was 76.614 million (up 0.2% year over year). Post-paid subscribers increased 23.3% year over year to 22.138 million, while prepaid decreased 7.4% year over year to 54.476 million customers. 

Fixed Line Business total revenue fell 7.7% year over year to R$2,879.0 million ($1,258.7 million). Pay-TV was the worst performer with a 14.3% decline in net revenue followed by an 11.5% reduction in fixed voice and access.

At the end of the third quarter, total fixed access lines reached 15.098 million, reflecting a 0.1% year-over-year increase. Fixed Broadband customers were 3.883 million compared with 3.754 million a year ago. The Pay-TV subscriber base shrunk 5% year over year to 588,000 customers, while fixed voice subscribers totaled 10.627 million, down 0.8% year over year. 

Liquidity

Telefonica Brasil – a subsidiary of Telefonica SA (TEF - Analyst Report) – exited the quarter with cash and cash equivalents of R$8,630.5 million ($3,773.3 million) compared with R$6,680.2 million ($3,296 million) in the year-ago quarter. Total debt was R$9213.3 million ($402.8 million) and net debt-to-EBITDA ratio was a negative 0.02 times.

Our Take

Telefonica Brasil, which operates with other Latin American telecom service providers such as America Movil S.A.B. de C.V. (AMX - Analyst Report) and Hawaiian Telcom Holdco Inc.(HCOM - Snapshot Report) currently holds a Zacks Rank #4 (Sell).

We remain apprehensive about Telefonica Brasil’s fixed line segment that is significantly challenged by persistent erosion in the voice telephony business. Additional factors such as cuts in tariff rates, loss of subscribers, adverse effects from regulatory changes and fierce competition will likely act as roadblocks in the company’s growth path.

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