Brazilian fixed-line carrier Telecomunicacoes de Sao Paulo SA (TSP), better known as Telesp, reported third quarter earnings per ADS of 73 cents, which was well ahead of the Zacks Consensus Estimate of 67 cents. Net income climbed 7.2% year over year to R$647.4 million ($371.4 million). Improved earnings were driven by higher revenues on account of increased commercial activity.
Telesp, the Brazilian subsidiary of Spanish telecom giant Telefonica (TEF), reported gross operating revenue of R$5.38 billion ($3.08 billion), up 0.3% year over year. The increase is attributable to higher broadband and data transmission revenue partially offset by the erosion in legacy telephony business.
Local voice revenues dipped 5.2% year over year to R$2.52 billion ($1.45 billion), due to higher monthly fee. Domestic and international long-distance revenues increased 4.5% and 6.1%, respectively, driven by higher traffic. Data transmission (broadband Internet) and Interconnection revenues climbed a respective 12.3% and 8% year over year. Pay TV and Other revenues dropped a respective 4.1% and 9% year over year.
Consolidated EBITDA in the quarter declined 10% year over year to R$1.30 billion ($746 million) with EBITDA margin decreasing 420 bps to 32.6%. This decline can be credited to higher operating expenses.
Total operating expenses grew 8.3% year over year to R$2.68 billion ($1.54 billion), mainly attributable to expenses incurred through contract renegotiations with suppliers and increased interconnection expense.
Subscriber Trend
Telesp registered 165,000 net additions for its broadband service (offered under the “Speedy” and “Ajato” brands), bringing the total subscriber base to roughly 3.14 million (up 21.7% year over year). The Pay TV subscriber base declined 8.4% year over year to 466,000 customers. Total fixed access lines in service reached 11.30 million, down 0.4% year over year.
Liquidity
Telesp exited the quarter with cash and cash equivalents of R$1.63 billion ($935 million) compared with R$1.55 billion in the year-ago quarter. Total debt reduced substantially to R$1.93 billion ($1.11 billion) in the reportable quarter from R$3.39 billion in the year-ago quarter. Capital expenditure was R$547 million ($313.8 million) compared with R$500 million in the comparable quarter last year.
Our Analysis
Though the company has been investing in new business opportunities such as video, broadband Internet andPay TVto boost long-term growth prospects, we believe Telesp remains significantly challenged by the falling subscriber base of its legacy voice telephony operation. Thus, we are currently recommending a long-term Neutral rating on the stock.
Telesp is exposed to competition from alternative services including wireless telephony, VoIP (Internet phone) and cable services (voice, video and broadband). Telesp operates in a highly matured local and long-distance phone market and is exposed to a stringent regulatory environment (including tariff revisions).
We believe the company’s operating results will be challenged by cutthroat competition, at least in the near term. Consequently, we are recommending a Sell rating with the Zacks # 4 Rank for the short term (1-3 months).
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