TEO Net Surges But Misses Ests

Telecom Argentina (TEO - Analyst Report) reported third-quarter earnings per ADS of 40 cents, falling short of the Zacks Consensus Estimate of 52 cents. However, reported net income from continuing operations grew 39% year over year to P$303 million (US$79 million), boosted by healthy growth from broadband and mobile segments.
 
Consolidated revenues increased 13% year over year to P$3.1 billion (US$803 million) as the company’s cellular business grew 13% while broadband business (Arnet) posted healthier annualized growth of 54%. Broadband Internet revenue growth was fueled by significant expansion of broadband service, commercial promotions, innovation of service portfolio and improved network coverage.
 
The company’s cellular telephony business achieved respectable growth in the quarter with revenue of P$2.1 billion (US$550 million) accounting for approximately 68% of the consolidated sales. Revenues from data transmission grew 25% year over year to P$70 million (US$18 million). Fixed-line voice service revenues increased 3.1% year over year to P$701 million (US$184 million).
 
Total wireless subscribers in Argentina reached 14 million, up 17% year over year. Approximately 69% of the overall subscriber base was prepaid and 31% was postpaid. Cellular subscribers at Nucleo (mobile subsidiary in Paraguay) reached roughly 1.8 million, down 1.9% year over year, with prepaid and postpaid customers representing 89% and 11%, respectively. The company ended the quarter with 15.8 million total mobile customers, up 15% year over year.
 
Aggregate fixed lines in service increased by 1% year over year to 4.3 million with broadband Internet customers (of 1.2 million) representing roughly 28% of the total.
 
Telecom Argentina continues to be benefited by the growing domestic wireless market (largest in Latin America in terms of mobile penetration) coupled with increased penetration of value-added services. The company launched the ‘SMS Messenger’ service during the quarter in collaboration with Microsoft (MSFT - Analyst Report) which enables access to Windows Live Messenger from mobile handsets.
 
In broadband Internet, “Arnet Recargable” (the first pure prepaid ADSL product) and the first converged fixed and mobile broadband Internet service “On-the-Go” (combining ADSL and 3G services) continue to boost revenue per user.
 
Telecom Argentina has collaborated with leading satellite TV operator Direct TV (DTV - Analyst Report) for its triple-play offerings which bundles voice telephony, Internet and pay-TV services.  In the first phase of commercial deployment, the company is offering this service (called “SuperPack”) in the Salta province, northwest Argentina. The deal eliminated the need for a broadcasting license as the telecom carriers in Argentina are currently barred from entering the pay-TV market under the existing regulatory framework.
 
While Telecom Argentina’s prospects in wireless and broadband appear promising, we remain concerned about the inflationary impacts on the company’s cost structure and bottom-line. The inflation level in Argentina is expected to be around 20% in 2009. Moreover, profitability of the company’s fixed telephony segment continues to be affected by frozen tariffs.

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