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NET Servicos de Comunicacao S.A. declared mixed financial results for the third quarter of 2011. Quarterly net income was $14.5 million or 13 cents per share compared with net income of $42.5 million or 13 cents per share in the year-ago quarter. The decline in net income is primarily attributable to significant foreign exchange rate volatility.

Net revenue (excluding connection cancellations and sales taxes), in the reported quarter, was approximately $1,055.3 million, up 24% year over year. The increase was mainly attributable to higher subscription revenue supported by subscriber base growth and subscribers’ preference toward high-end products.

Gross profit in third-quarter 2011 was 37.8% compared with 37.2% in the year-ago quarter. Quarterly operating expenses were $265.4 million, up 14.7% over the prior-year quarter. As a percentage of revenue, operating costs decreased from 27.2% in the third quarter of 2010 to 25.2% in the third quarter of 2011.

Quarterly operating margin was 12.6% compared with 10% in the prior-year quarter. Quarterly EBITDA was around $299 million, an improvement of 32% year over year. EBITDA margin in the third quarter of 2011 was 28.3% compared with 26.7% in the prior-year quarter.

During the first nine months of 2011, NET Servicos generated $742.8 million of cash from operations, up 30.8% year over year. Free cash flow (operating cash less capital expenditures) in the first nine months of 2011 was $11.67 million compared with just $5.5 million in the year-ago period.

At the end of the third quarter of 2011, NET Servicos had approximately $427.2 million of cash and cash equivalents, a decrease of 15.5% from the end of 2010. Total debt, at the end of the reported quarter was around $1,300 million, down 3% from the end of 2010. Debt-to-capitalization ratio at the end of third-quarter 2011 was 0.33 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 has a short-term Zacks #3 Rank (Hold) on the stock.

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