TNE Tele Norte Leste Participacoes S.A. Common Stock

NET Servicos de Comunicacao S.A. (NETC) declared better-than-expected financial results for the first quarter of 2011. Quarterly net income was $63.9 million or 19 cents per share compared with net income of $27.5 million or 8 cents per share in the year-ago quarter.

First-quarter 2011 EPS of 19 cents was significantly above the Zacks Consensus Estimate of 9 cents.

First-quarter gross revenue was $1,171.8 million, an improvement of 17.6% year over year. The increase was mainly attributable to higher subscription revenue as the subscriber base enlarges.

Net revenue (excluding connection cancellations and sales taxes), in the reported quarter, was $938.3 million, up 24.1% year over year. However, this was well above the Zacks Consensus Estimate of $887 million.

At the end of fiscal 2010, Pay TV subscriber base was 4,212,000, up 14% year over year. Net additions during the quarter were 147,000 clients. Broadband subscriber base totaled 3,524,000, up 22% year over year. Net additions during the quarter were 195,000 clients. Fixed Telephone Line in Service was 3,153,000, up 23% year over year.

Quarterly operating expenses were $461.1 million, up 27.8% over the prior-year quarter. As a percentage of revenue, operating costs increased from 47.7% in the first quarter of 2010 to 49.1% in the first quarter of 2011. Selling, General  & Administrative expenses were $200 million, up 21.2% year over year.

Quarterly EBITDA was $271 million, an improvement of 22.3% year over year. EBITDA margin in the first quarter of 2011 was 28.9% compared with 29.3% in the year-ago quarter.

Quarterly depreciation and amortization expenses were $149.7 million, up 15.5% year over year. At the end of the first quarter of 2011, net debt of NET Servicos was $806.7 million compared with $726 million at the end of the prior-year quarter.

Recommendation

We maintain our long-term Neutral recommendation for NET Servicos. The company is facing stiff competition from Brasil Telecom S.A. (BTM), Tele Norte Leste Participacoes S.A. (TNE), and Telefonos de Mexico (TMX). Currently, NET Servicos holds a short-term Zacks #4 Rank (Sell) on the stock.

 
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