Telesp Profits on Vivo Merger

Brazilian telecom carrier Telecomunicacoes de Sao Paulo SA (VIV - Analyst Report), better known as Telesp, reported second quarter net income of R$1.1 billion ($0.69 million), up 30% year over year. Earnings per ADS came in at $1.02 in the reported quarter.

Telesp merged its fixed-line operations with the mobile service provider Vivo Participacoes in early June. Hence, the second quarter reflects the combined result.

Telesp, the Brazilian subsidiary of Spanish telecom giant Telefonica (TEF - Analyst Report), reported total revenue of R$8.23 billion ($5.16 billion), up 6.7% year over year. Both mobile and fixed-line revenues drove the increase.

Consolidated EBITDA rose 9.1% year over year to R$3.06 billion ($1.92 billion) with EBITDA margin increasing 80 bps to 37.2%. Operating expenses grew 5.4% to R$5.2 billion ($3.2 billion) from the year-ago quarter.

Revenue Segments

Mobile revenue climbed 13.9% year over to R$5 billion ($3.1 billion), driven primarily by data revenues and network usage revenues. Telesp added 2 million customers to reach 64 million (up 14.4% year over year) subscribers at the end of the reported quarter. Post-paid and prepaid subscribers grew 25.4% and 11.6% year over year to 14.2 million and 49.8 million, respectively.

Average revenue per user (ARPU) inched up 0.4% from the year-ago quarter to R$25.1 ($15.7), owing to subscriber growth as well as high data and voice services. Churn deteriorated slightly to 2.8% in the reported quarter from 2.6% in the year-ago quarter.

Fixed revenue increased 8.1% to R$4.2 billion ($2.6 billion) from the year-ago quarter. Pay TV saw the largest growth of 88% year over year. Other services (up 28.7%), data transmission (up 15%), Interconnection (up 2.9%) and fixed voice (up 1.7%) revenues also aided revenue growth.

Total fixed access lines reached 15.28 million at the end of the second quarter, reflecting a 3.9% year-over-year increase. Telesp registered 93,000 net additions for its fixed broadband service (offered under the “Speedy”, “Ajato” and “Fiber” brands), bringing the total subscriber base to roughly 3.5 million (up 16.8% year over year).

The Pay TV subscriber base grew 45.5% year over year to 682,000 customers. Fixed voice lost 46,000 customers, touching 11.1 million at the end of the second quarter.

Liquidity

Telesp exited the quarter with cash and cash equivalents of R$2.66 billion ($1.67 billion) compared with R$2.36 billion in the year-ago quarter. Total debt reduced substantially to R$5.7 billion ($3.57 billion) from R$6.6 billion in the year-ago quarter.

Capital expenditure increased 94.6% year over year to R$1.8 billion ($1.13 billion).

Our Analysis

Telesp as a stand-alone entity was struggling to perform so far as it was significantly challenged by persistent erosion in its voice telephony business due to stiff competition.

We believe the Vivo integration would bring back the company’s profitability through its strong mobile service business. The combined company will now offer bundled (fixed-line and wireless) services that will improve its competitive position and expand its opportunities beyond the current expectations. The combined company expects R$8.2 ($5.3 billion) synergies from the merger that will start reaping results from the fourth quarter.

We are currently maintaining our long-term Neutral rating on Telesp. The stock retains a Zacks #3 Rank (Hold) for the short term (1-3 months).

Read the full analyst report on VIV

Read the full analyst report on TEF