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NET Servicos de Comunicacao S.A. declared better-than-expected financial results for the second quarter of 2011. Quarterly net income was $78.2 million or 21 cents per share compared with net income of $35.4 million or 9 cents per share in the year-ago quarter. Net revenue (excluding connection cancellations and sales taxes), in the reported quarter, was approximately $1,020 million, up 24.4% year over year. The increase was mainly attributable to higher subscription revenue as the subscriber base enlarges.

Gross profit in the second-quarter 2011 was 37.7% compared with 38.4% in the year-ago quarter. Quarterly operating expenses were $255.2 million, up 17.5% over the prior-year quarter. As a percentage of revenue, operating costs decreased from 26.5% in the second quarter of 2010 to 25% in the second quarter of 2011. Quarterly operating margin was 12.7% compared with 11.9% in the prior-year quarter. Quarterly EBITDA was $291.4 million, an improvement of 24.2% year over year. EBITDA margin, in the second quarter of 2011, at 28.6% remained the same year over year.

During the first half of 2011, NET Servicos generated $462.5 million of cash from operations, up 22.3% year over year. Free cash flow (operating cash less capital expenditures) in the first half of 2011 was $80.4 million, up 1.3% year over year.

At the end of the second quarter of 2011, NET Servicos had approximately $383.2 million of cash and cash equivalents, down 25.5% from the end of 2010. Total debt, at the end of the reported quarter, was around $1,878.4 million, down 14.4% from the end of 2010. Debt-to-capitalization ratio at the end of the second-quarter 2011 was 0.30 compared with 0.35 at the end of fiscal 2010.

Recommendation

We maintain our long-term Neutral recommendation for NET Servicos. The company is facing stiff competition from Brasil Telecom S.A. , Tele Norte Leste Participacoes S.A. , and Telefonos de Mexico . Currently, NET Servicos holds a short-term Zacks #3 Rank (Hold) on the stock.

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