Telesp Profit Plunges, Revenue Ups

Brazilian fixed-line carrier Telecomunicacoes de Sao Paulo SA (TSP), better known as Telesp, reported first quarter 2011 net income of R$418.3 million ($250.8 million), down 13.7% year over year. Earnings per ADS came in at 49 cents in the reported quarter.

Telesp, the Brazilian subsidiary of Spanish telecom giant Telefonica (TEF - Analyst Report), reported gross operating revenue of R$5.389 billion ($3.23 billion), up 2.4% year over year. The increase was buoyed by higher data transmission revenue and partially offset by the erosion in fixed telephony business.

On an annual basis, local voice revenues dropped 4.3% in the reported quarter due to falling access lines and lower traffic while long-distance revenues increased 10.2% on higher traffic. Data transmission (broadband Internet) and Pay TV climbed a respective 11.5% and 1.3% year over year. On the other hand, Interconnection and Other revenues declined a respective 1.2% and 5.3% year over year.

Consolidated EBITDA dropped 6.8% year over year to R$1.189 billion ($713 million) with EBITDA margin decreasing 280 bps to 30%. A 6.1% year over year increase in operating expenses to R$2.777 billion ($1.66 billion) was responsible for this decline.

Subscriber Trend

Telesp registered 578,000 net additions for its broadband service (offered under the “Speedy”, “Ajato” and “Fiber” brands), bringing the total subscriber base to roughly 3.4 million (up 20.7% year over year). The Pay TV subscriber base grew 8.4% year over year to 509,000 customers. Total fixed access lines in service reached 11.18 million at the end of the first quarter, reflecting a 0.2% year-over-year decline.

Liquidity

Telesp exited the quarter with cash and cash equivalents of R$2.27 billion ($1.36 billion) compared with R$2.78 billion in the year-ago quarter. Total debt reduced substantially to R$2.4 billion ($1.44 billion) from R$3.56 billion in the year-ago quarter. Capital expenditure increased 4.4% year over year to R$373.2 million ($223.8 million).

Our Analysis

Although the company has been investing in new business opportunities such as video, broadband Internet andPay TV to boost long-term growth prospects, we believe Telesp remains significantly challenged by persistent erosion in its voice telephony business due to stiff competition.

Consequently, we are maintaining our long-term Neutral rating with a Zacks # 3 (Hold) Rank.

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