VIV Telefonica Brasil SA

Brazilian telecom carrier Telefonica Brasil SA (VIV) reported fiscal 2011 net income of R$5.07 billion ($3.04 billion), up 18.2% year over year. Earnings per ADS came in at $2.71, which outpaced the Zacks Consensus Estimate of $2.46.

Revenue grew 5.4% year over year to R$33.2 billion ($19.9 billion) and surpassed the Zacks Consensus Estimate of $19.3 billion. The outperformance was primarily driven by growth in mobile revenue.

Consolidated EBITDA rose 6.4% year over year to R$12 billion ($7.2 billion) with EBITDA margin increasing 30 bps to 36.3%. Operating expenses grew 4.8% to R$21.1 billion ($12.7 billion) from the prior year.

Revenue Segments

Mobile revenue climbed 10.5% year over year to R$19.6 billion ($11.7 billion), driven primarily by data and VAS, and network usage revenues. Telefonica Brasil added 4.52 million customers to reach 71.6 million (up 18.7% year over year) subscribers at the end of 2011. Post-paid and prepaid subscribers grew 27.6% and 16.3% year over year to 16.1 million and 47.7 million, respectively.

Average revenue per user (ARPU) fell 2.9% to R$24 ($14.4) in 2011 as lower voice ARPU outstripped the strong growth in data ARPU. Churn deteriorated 20 bps year over year to 2.8%.

Fixed revenue inched down 1.2% to R$13.6 billion ($8.1 billion) from the prior year. Fixed voice and access revenue saw the largest decline of 9% followed by interconnection revenue (down 6.6%). These declines were partly offset by the solid growth in Pay TV (up 57.3%), data transmission (up 10.8%) and other services revenues (up 10.6%).

Pay TV saw the largest growth of 43.7% year over year followed by fixed broadband (up 9.5%) revenues. Fixed voice nevertheless fell 2.8% year over year.

Total fixed access lines reached 15.31 million at the end of 2011, reflecting a 1.4% year-over-year increase. Telefonica Brasil registered 80,000 net additions for its fixed broadband service, bringing the total subscriber base to roughly 3.63 million (up 9.5% year over year). The Pay TV subscriber base shot up 43.7% year over year to 699,000 customers. Fixed voice lost 1,09,000 customers, touching 10.98 million at the end of 2011.

Liquidity

Telefonica Brasil, a subsidiary of Telefonica SA (TEF), exited the year with cash and cash equivalents of R$2.9 billion ($1.77 billion) compared with R$3.7 billion last year. Net debt increased substantially to R$3.16 billion ($1.9 billion) in 2011 from R$2.1 billion in 2010. Net debt-to-EBITDA ratio stood at 0.26 times compared with 0.19 times in 2010.

Capital expenditure increased 16.4% year over year to R$5.74 billion ($3.4 billion) in 2011.

Our Take

Telefonica Brasil has attractive long-term opportunities in both fixed-line and mobile businesses. Despite stiff competition from its rivals such as America Movil S.A.B. de C.V. (AMX) and Telecom Italia S.P.A. (TI), we believe the fixed-line business will benefit from the expansion of video, broadband Internet andPay TV services.

Furthermore, the demand for 3G in the mobile market is growing by the day, thereby minimizing the adverse affects from regulatory changes and drops in tariff rates.

We are currently maintaining our long-term Neutral recommendation on the stock. However, for the short term (1-3 months), Telefonica Brasil holds a Sell rating with a Zacks # 4 Rank.

 
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