We upgrade our recommendation for NET Servicos de Comunicacao S.A. (NETC) to Outperform. Since 2005, the company has been posting impressive operating results, including continued growth in its subscriber base, increasing average revenue per user, strong growth in its broadband and voice service divisions, better cash flow generation, and continued growth in revenues. NET Servicos is pursuing a conservative cash management policy to ensure the implementation of its strategy of sustained growth. Management aims at sustaining the organic growth of the company irrespective of the capital market condition. We also remain optimistic about the acquisition of ESC 90 Telecomunicacoes by the company.
NET Servicos continues to grow in the broadband segment. NET Servicos provides the most advanced and reliable broadband service in Brazil (known as Vírtua megaflash) which gives the company another avenue for growth in the short term. Recently NET Servicos launched its fifth generation broadband service which allows ultra-high access speeds. The new Net Virtua 60 Mega is the fastest broadband available in Brazil for both download and upload.
We believe NET Servicos is in a great position to take advantage of the growth of the VoIP business. With the acquisition of BIG TV, NET Servicos’ competitive strength improved in the existing as well as new geographies where BIG TV has a strong presence. NET Servicos’ product portfolio includes various innovative products such as Net Digital HD Max, NetFone.com, and Net Virtua which are expected to drive subscriber-based growth, going forward. In the upcoming quarters, we expect operating margin to increase due to an expected fall in depreciation and amortization expenses as a percentage of revenue.
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