TNE Tele Norte Leste Participacoes S.A. Common Stock

NET Servicos de Comunicacao S.A. (NETC) declared better-than-expected financial results for the second quarter of 2011. Quarterly net income was $78.2 million or 21 cents per share compared with net income of $35.4 million or 9 cents per share in the year-ago quarter. Net revenue (excluding connection cancellations and sales taxes), in the reported quarter, was approximately $1,020 million, up 24.4% year over year. The increase was mainly attributable to higher subscription revenue as the subscriber base enlarges.

Gross profit in the second-quarter 2011 was 37.7% compared with 38.4% in the year-ago quarter. Quarterly operating expenses were $255.2 million, up 17.5% over the prior-year quarter. As a percentage of revenue, operating costs decreased from 26.5% in the second quarter of 2010 to 25% in the second quarter of 2011. Quarterly operating margin was 12.7% compared with 11.9% in the prior-year quarter. Quarterly EBITDA was $291.4 million, an improvement of 24.2% year over year. EBITDA margin, in the second quarter of 2011, at 28.6% remained the same year over year.

During the first half of 2011, NET Servicos generated $462.5 million of cash from operations, up 22.3% year over year. Free cash flow (operating cash less capital expenditures) in the first half of 2011 was $80.4 million, up 1.3% year over year.

At the end of the second quarter of 2011, NET Servicos had approximately $383.2 million of cash and cash equivalents, down 25.5% from the end of 2010. Total debt, at the end of the reported quarter, was around $1,878.4 million, down 14.4% from the end of 2010. Debt-to-capitalization ratio at the end of the second-quarter 2011 was 0.30 compared with 0.35 at the end of fiscal 2010.

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 #3 Rank (Hold) on the stock.

 
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