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Telefonica Brasil Underperforms

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Brazilian telecom carrier Telefonica Brasil SA (VIV - Free Report) reported first quarter 2012 net income of R$956.6 million ($541.2 million), down 15.2% year over year. Earnings per ADS came in at 48 cents, which missed the Zacks Consensus Estimate of 54 cents.

Revenue grew 3.7% year over year to R$8.31 billion ($4.7 billion). The outperformance was primarily driven by growth in mobile revenue.

Consolidated EBITDA inched up 0.3% year over year to R$2.85 billion ($1.61 billion) with EBITDA margin decreasing 120 basis points (bps) to 34.2%. Operating expenses grew 5.6% to R$5.47 billion ($3.09 billion) from the year-ago quarter.

Revenue Segments

Mobile revenue climbed 9.3% year over year to R$5.11 billion ($2.89 billion), driven primarily by data and VAS, and access and usage revenues. Telefonica Brasil added 3.23 million customers to reach 74.78 million (up 20.5% year over year) subscribers at the end of the first quarter. Post-paid and prepaid subscribers grew 24.8% and 19.3% year over year to 16.62 million and 58.16 million, respectively.

Average revenue per user (ARPU) fell 5.9% to R$22.4 ($12.7) as lower voice ARPU outstripped the strong growth in data ARPU. Churn deteriorated 20 bps year over year to 2.5%.

Fixed revenue fell 4.1% to R$3.21 billion ($1.81 billion) year over year. Fixed voice and access revenue, which saw the largest decline of 14.6%, offset solid growth in interconnection (up 1.6%), Pay TV (up 45.4%), data transmission (up 10.5%) and other services revenues (up 17.7%).

Total fixed access lines reached 15.25 million at the end of the reported quarter, reflecting a 1.3% year-over-year increase. Telefonica Brasil registered 54,000 net additions for its fixed broadband service, bringing the total subscriber base to roughly 3.68 million (up 9.1% year over year). The Pay TV subscriber base shot up 34.2% year over year to 683,000 customers. Fixed voice lost 292,000 customers from the year-ago quarter, touching 10.88 million at the end of the first quarter.


Telefonica Brasil, a subsidiary of Telefonica SA (TEF - Free Report) , exited the first quarter with cash and cash equivalents of R$3.18 billion compared with R$4.25 billion in the year-ago quarter. Net debt decreased to R$2.66 billion from R$3.16 billion in 2011. Net debt-to-EBITDA ratio improved to 0.22 times compared with 0.26 times in 2011.

Capital expenditure increased 63.4% year over year to R$1.16 billion ($0.66 billion) in the reported quarter.

Our Take

Telefonica Brasil has attractive long-term opportunities in mobile business thanks to continued expansion of the subscriber base. We believe the fixed-line business, which is currently lagging, will also benefit from the expansion of video, broadband Internet and Pay TV services. However, we remain skeptical about its ability to regain profitability this year.

Further,the synergies derived from the mobile business would be partly offset by intense inflationary pressure, stiff competition from its rivals such as America Movil S.A.B. de C.V. (AMX - Free Report) and Telecom Italia S.P.A. (TI - Free Report) and excessive government intervention.

We are currently maintaining our long-term Neutral recommendation on the stock. For the short term (1-3 months), Telefonica Brasil holds a Zacks # 3 (Hold) Rank.

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