Tele Norte Deep in Debt

Its net debt increased 12.7% sequentially and about 278% year over year to R$21,638 million (US$10,353 million). This was due to higher capex expenses, including a third-generation service license for its 3G mobile set up in São Paulo and the takeover of Brasil Telecom Participações (BRP - Analyst Report). During the quarter, the company acquired a 55% stake in Brasil Telecom for R$12.4 billion.

At the end of second quarter, net debt represented 2.2 times Tele Norte’s consolidated EBITDA in the last 12 months. We understand that rising debt will increase financial expenses in the short term and will have an impact on the company’s future earnings.

The company reported a quarterly net loss of R$146 million (US$69.9 million) compared with a net income of R$288.5 in the year-ago period. Its loss per share came in at 18 cents, while the Zacks Consensus Estimate was pegged at a profit of 24 cents.

Consolidated gross revenue amounted to R$ 11.2 billion, up 3% from the second quarter of 2008, mainly due to the performance of the wireless segment, which grew by 13% to R$2.4 billion. The expansion of the average user base and the introduction of 3G service also helped sales in the wireless cell phone segment during the period.

At the end of the quarter, Tele Norte's revenue generated units amounted to roughly 60 million, which was composed of 34 million mobile customers, 22 million fixed lines in service and about 12.1 million fixed broadband users. This represents an overall growth of almost 18% in last twelve months. Of the nearly 9 million customers added in the last twelve months, 8.65 million are new mobile users and 552,000 are new fixed broadband access, representing increases of 34% and 16%, respectively, compared to June 2008.

We believe that the company will be able to post encouraging results in the medium-term following the integration of Brasil Telecom. However, 2009 will be a challenging year for the Brazilian telecom industry as a whole. A fiercely competitive environment and the recent global financial crisis are hurdles in the way of rapid growth in the wireless industry.