We have downgraded our recommendation for the Brazilian wireline service operator Telecomunicacoes de Sao Paulo (TSP), commonly known as Telesp, to Underperform based on the company’s lackluster operating results in the most recent quarter and lack of visibility for operational improvements in the near-term.
Telesp, the Brazilian subsidiary of Spanish telecom giant Telefonica (TEF), provides local voice, intra/inter-regional and international long-distance services and custom data transmission services. The company also offers broadband Internet (under the “Speedy” and “Ajato” brands) and Pay-TV services.
Earnings for the last quarter missed the Zacks Consensus Estimate due to lower local voice revenue and higher losses from financial operations (stemming from investments). Telesp’ margins remain significantly stretched due to fixed-line revenue erosion and higher operating expenses.
Moreover, revenue growth for the Pay-TV business in the quarter was more than offset by the declines in fixed voice telephony and broadband Internet. Telesp’s Internet business is affected by the slower uptake of its “Speedy” broadband service, which was suspended by the Brazilian regulator Anatel last year (until August 2009) due to poor service quality.
Telesp remains significantly challenged by the sustained erosion in its core wireline voice customer base due to intense competition, which continues to weigh on the top-line and margins. The carrier’s legacy fixed voice operation has stagnated and there is limited expectation of a revival in the near future.
Competition in the local phone market remains intense as Telesp is facing stiff challenges from alternative services including wireless, VoIP (Internet phone) and cable services. Impact of wireless substitution remains high as a growing number of customers are taking advantage of the discounted calling plans from the national wireless operators.
Moreover, French media conglomerate Vivendi’s (VIV) recent acquisition of a controlling stake in GVT Holding (the fourth-largest broadband and fixed voice service provider in Brazil) has increased competition in the Brazilian fixed-line market.
Telesp operates in a highly matured local and long-distance phone market and is exposed to a stringent regulatory environment, as the carrier is subject to changes in regulations (including tariff revisions). We expect the company’s exposure to an increasingly competitive environment as a hindrance to operating results, at least in the near term.
Read the full analyst report on “TSP”
Read the full analyst report on “TEF”
Read the full analyst report on “VIV”
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