Telefonica Brasil Earnings, Revenues Rise on Mobile Strength

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Brazilian telecom carrier Telefonica Brasil SA (VIV) reported second-quarter 2014 net income of R$1,992.6 million ($893.7 million), up an enormous 118% year over year. Net operating revenue rose 1.5% year over year to R$8,616.6 million ($3,864.5 million).

Recurrent EBITDA improved 2% year over year to R$2,545.5 million ($1,141.7 million) in the second quarter, while EBITDA margin of 29.5% was up a mere 10 basis points (bps).

Recurrent operating expenses in the second quarter increased 1.3% year over year to R$6,071.1 million ($2,722.9 million).

Revenues Segment-wise

Mobile Business’ total revenue climbed 5.1% year over year to R$5,824.1 million ($2,612.1 million) in the reported quarter, primarily driven by Data, Internet, VAS and other services.

Average revenue per user (:ARPU) grew 2.3% to R$23.4 ($10.50), driven by 15.4% rise in Data ARPU. Customer churn stood at 3.5% in the quarter, down 30 bps.

As of Jun 30, 2014, the total subscriber base was 79.4 million (up 4.1% year over year). Post-paid subscribers increased 26.5% year over year to 26.2 million, while the prepaid customer count decreased 4.2% year over year to 53.2 million. The company ended the second quarter with 2.0 million 4G customers.

Fixed Line Business’ total revenue fell 5.4% year over year to R$2,792.4 million ($1,252.4 million). Pay-TV revenues jumped 27.0% while fixed voice and access revenues dropped 10.8% year over year.

At the end of the second quarter, total fixed access lines reached 15.5 million, reflecting a 4.1% year-over-year increase. Fixed Broadband customers were 3.9 million compared with 3.8 million a year ago. The Pay-TV subscriber base grew 30.4% year over year to 688,000 customers, while fixed voice subscribers totaled 10.9 million, up 3.4% year over year.

Liquidity

Telefonica Brasil – a subsidiary of Telefonica SA (TEF) – exited the quarter with cash and cash equivalents of R$ 5,486.7 million ($2,494.8 million) as compared to R$6,543.9 ($3,039.6 million) at the end of 2013. Total debt was R$ 8,336.2 million ($3,790.5 million) versus R$8,753.6 million ($4,066 million) at the end of 2013. Net debt-to-EBITDA ratio was 0.24 times.

Total capital expenditure during the quarter was R$1,615.3 million ($724.5 million), up 29.0% year over year.

Our Take

We believe Telefonica Brasil’s bundled offering coupled with quality service is strengthening its competitive position, thus allowing it to expand its market share. However, the poor performance of the company’s fixed voice and access business remains a concern. Further, weak economic growth, competitive pressure, increased wireless penetration, a weak Brazilian real and regulatory pressure continue to weigh on the stock.

Telefonica Brasil currently holds a Zacks Rank #4 (Sell). Better-placed stocks worth considering in this sector include Shenandoah Telecommunications Co. (SHEN) and Chunghwa Telecom Co., Ltd. (CHT). Shenandoah carries a Zacks Rank #1 (Strong Buy), while Chunghwa holds a Zacks Rank #2 (Buy).

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