UPDATE: Telefonica Brasil 4Q Net Profit Down 1.3% On Year

Telefonica Brasil SA (VIVT3.BR, VIV) Thursday reported its fourth-quarter net profit fell slightly from a year ago due to higher operating costs.

Telefonica continued to see its mobile business, which operates as Vivo, gain ground, while the traditional fixed-line business continues to decline. In mid-2011, Spain's Telefonica SA (TEF) merged its fixed-line business with Vivo, integrating them into a single company.

Telefonica saw fourth-quarter profits decline 1.3% to 1.46 billion Brazilian reais ($848 million). Operating costs totaled BRL5.3 billion in the period, up from BRL5.1 billion previously; revenues rose to BRL8.6 billion during the quarter, from BRL8.23 billion.

The results largely reflected the ongoing trend at Telefonica, with strong growth in mobile services offsetting a decline in fixed-line revenues. Still, the company's results came in slightly better than analysts had expected, largely due to a one-off BRL380 million from the sale of cell towers.

The latest results "provided more evidence that Vivo is solidifying its market leadership in mobile broadband and postpaid segments," Credit Suisse said in a research note. "The company should reap the benefits of a strong commercial focus and most extensive coverage in 3G. This strategy puts Vivo in the best position to take advantage of the 4G upgrade cycle that should take place after spectrum auctions in Brazil in 2Q12."

Vivo is the local largest mobile phone company, with 72 million customers at a 29.5% market share. The fixed-line segment gained just 1.4% to 15.3 million clients, as a decline in fixed-line voice customers was offset by growth of high-speed Internet customers.

Telefonica on Thursday said it would pay out an extra BRL2 billion in dividends, for a total of BRL4.2 billion payments from last year's profits. That implies a "high payout ratio" equivalent to 83% of reported net income, and a high dividend yield of 8%, Credit Suisse said. "This payout is likely to stay the same or increase this year," and becomes more attractive as the Brazilian Central Bank pushes ahead with interest rate cuts, the investment bank said.

"In our opinion, in-line fourth-quarter figures reinforce the defensive aspects we have attributed to Telefonica's investment case, notably by means of its solid financial position and strong cash flow," said Flow Corretora in a note. Flow's analysts said they expect more one-off costs this year from the integration of fixed and mobile businesses, but over the long term it remains positive on the shares, with an overweight rating.

Telefonica's shares traded in Sao Paulo were up 3.2% at BRL50.22; the Ibovespa stocks index was up 1.2%.

-By Rogerio Jelmayer and Matthew Cowley, Dow Jones Newswires; 55-11-3544-7071; rogerio.jelmayer@dowjones.com

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