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Brazilian telecom carrier, Telefonica Brasil SA (VIV - Analyst Report) reported fourth-quarter 2013 net income of R$1,231.3 million ($409.3 million), down 16.5% year over year. Net income for the full year was R$3,715.9 million ($1,726 million), down 16.5% year over year.

Net operating revenue rose 1.7% year over year to R$9,056.7 million ($3,974.9 million) in the fourth quarter. In 2013, net operating revenue grew 2.4% year over year to R$34,721.9 million ($16,128 million).                    

Recurrent EBITDA dropped 12.6% year over year to R$2,778.3 million ($1,219.3 million) in the fourth quarter, while EBITDA margin of 31.2% was down 440 basis points (bps). Recurrent EBITDA for 2013 dropped 9.2% year over year to R$ 10,492.9 million ($4873.9 million). EBITDA margin plunged 370 bps year over year to 30.4% in 2013.

Operating expenses in the fourth quarter and full year increased 6.7% and 7.6% year over year to R$6,112.6 million ($2,682.8 million) and R$24,063.2 million ($11,177 million), respectively. 

Revenue Segments

Mobile Business total revenue climbed 4.5% year over year to R$6,086.3 million ($2,671.3 million) in the reported quarter, primarily driven by Data and VAS, Access and usage revenues and text revenues.

Average revenue per user (ARPU) grew 3.8% to R$24.8 ($10.88), driven by 17.5% rise in Data ARPU. Customer churn was flat year over year at 4.1% in the fourth quarter of 2013.

As of Dec 31, 2013, the total subscriber base was 77.245 million (up 1.5% year over year). Post-paid subscribers increased 26% year over year to 23.693 million, while prepaid customer count decreased 6.6% year over year to 53.552 million.

Fixed Line Business total revenue fell 3.7% year over year to R$2,970.4 million ($1,303.7 million). Pay-TV revenues dropped 6.2% and fixed voice and access revenues decreased 10% year over year.

At the end of the fourth quarter, total fixed access lines reached 15.312 million, reflecting a 2.2% year-over-year increase. Fixed Broadband customers were 3.922 million compared with 3.733 million a year ago. The Pay-TV subscriber base grew 6.8% year over year to 641,000 customers, while fixed voice subscribers totaled 10.750 million, up 1.0% year over year.

Liquidity

Telefonica Brasil – a subsidiary of Telefonica SA (TEF - Analyst Report) – exited the quarter with cash and cash equivalents of R$ 6,543.9 million ($3,039.6 million), down 8.3% year over year. Total debt was R$8,753.6 million ($4,066 million) and net debt-to-EBITDA ratio was 0.17 times.

Our Take

We remain apprehensive about Telefonica Brasil’s fixed line segment that is significantly challenged by persistent erosion in the voice telephony business. Moreover, 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.

Telefonica Brasil currently holds a Zacks Rank #4 (Sell). However other stocks to consider in this sector include Level 3 Communications, Inc. (LVLT - Snapshot Report), Nippon Telegraph and Telephone Corporation (NTT - Snapshot Report). Both currently carry a Zacks Rank #2 (Buy). 

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