Telefonica Brasil Impresses in 4Q

Brazilian telecom carrier Telefonica Brasil SA ( VIV - Analyst Report ) reported fourth-quarter 2012 net income of R$1,474.3 million ($715.2 million), up by a marginal 0.8% year over year.

Revenue rose 3.6% year over year to R$8,910.3 million ($4,322.4 million), surpassing the Zacks Consensus Estimate of $4,125.0 million.

For 2012, net income was R$4,452.2 million or $2,159.8 million (down 12.2% from the prior year), on revenues of R$33,931.4 million or $16,460.1 million (up 2.3% year over year).

Consolidated EBITDA jumped 16.5% year over year to R$3,854.0 million ($1,869.6 million) in the fourth quarter, with EBITDA margin standing at 43.3% was up 480 basis points (bps). Operating expenses dropped 4.5% year over year to R$5,056.3 million ($2,452.8 million).

Revenue Segments

Mobile Business revenue climbed 10.7% year over year to R$5,823.2 million ($2,824.8 million) in the reported quarter, primarily driven by data and value added service (VAS), and access and usage revenues.

Average revenue per user (ARPU) fell 2.8% to R$23.9 ($10.8), hurt by a drop in interconnection rates. Customer churn upped to 4.1% from 3.0% recorded in the fourth quarter 2011.

As of Dec 31, 2012, total subscriber base was 76.14 million (up 6.4% year over year). Post-paid and prepaid subscribers grew 16.7% and 3.4% year over year to 18.80 million and 57.33 million, respectively.

Fixed Line Business revenue plunged 7.6% year over year to R$3,087.2 million ($1,497.6 million). Pay TV performed the worst with revenue decline of 18.4%, followed by a 12.7% reduction in fixed voice and access. On the other hand, interconnection revenue registered an increase of 16.1%.

At the end of 2012, total fixed access lines reached 14.98 million, reflecting a 2.2% year-over-year decrease. Fixed Broadband customers stood at 3.73 million compared with 3.63 million a year ago. The Pay TV subscriber base dropped 14.2% year over year to 600,000 customers, while subscriber base at fixed voice segment was 10.65 million, down 3.1% year over year.

Liquidity

Telefonica Brasil – a subsidiary of Telefonica SA ( TEF - Analyst Report ) – exited 2012 with cash and cash equivalents of R$7,196.1 million ($3,490.8 million) compared with R$2,940.3 million ($1,426.3 million) in the year-ago quarter. Net debt decreased to R$439.9 million ($213.4 million) from R$3,165.4 million ($1,535.5 million) in 2011. Net debt-to-EBITDA ratio improved to 0.03 times from 0.26 times in last year.

During 2012, the company incurred capital expenditure of R$6,117.1 million ($2,967.4 million) as against R$5,741.2 million ($2,785.1 million) in 2011.

Our Take

Telefonica Brasil currently holds a Zacks Rank #3 (Hold). We believe that Telefonica Brasil displays long-term opportunities for both fixed-line and mobile businesses, leading to better revenue in the coming quarters. Broadening the subscriber base along with investments in improving the network activity will also aid in the company’s profitability.

Other Stocks

Other foreign companies that are expected to perform well in the coming days are France T ( FTE - Analyst Report ) and Hawaiian Telcom Holdco Inc. ( HCOM - Snapshot Report ) . Both the stocks hold Zacks Rank #2 (Buy).