Vivo Matches Ests, Profit Swells - Analyst Blog

Vivo Participacoes (VIV), the largest wireless operator in Brazil , reported second-quarter earnings per ADS of 33 cents, in line with the Zacks Consensus Estimate. However, net income surged 29.9% year over year to R$236 million ($132 million) on the back of higher revenues and healthy subscriber accretion.

Revenues & EBITDA

Vivo, a joint venture between Spanish telecom giant Telefonica (TEF) and Portugal Telecom (PT), posted net revenues of R$4.40 billion ($2.47 billion), up 9.9% year over year, driven by sustained growth in data and value-added services (VAS) revenues partially offset by decline in handset sales.

Net service revenues in the quarter increased 10.7% year over year to R$4.1 billion ($2.3 billion) driven by a nearly 71.8% year over year growth in data and VAS revenues as a result of the increase in mobile customer base and growth in data service usage. Mobile Internet revenues shot up 121.4% year over year, representing 53% of data and VAS revenues. Higher incentives led to higher growth in Mobile Internet revenues.

Access and usage revenues (43% of net service revenues) spiked 2.6% year over year to R$1.8 billion ($1 million), primarily driven by an increase in the customer base, higher post-paid customer mix, higher prepaid services and increased voice service consumption.

Network usage revenues (38% of net service revenue) upped 1.9% year over year to R$1.5 billion ($840 million). Moreover, Handset revenues dipped 1.9% to R$271.8 million ($152.4 million).

Consolidated EBITDA increased 10.6% year over year to R$1.34 billion ($751 million), owing to higher data service revenue and efficient subsidy control.

Subscriber, ARPU & Churn

The company gained 2 million subscribers in the second quarter, up a whopping 72.2% year over year to reach the total subscriber base of 55.98 million (up 19.6% year-over-year). Vivo maintained its leadership in terms of net addition with a roughly 33.7% market share, beating its biggest rival America Movil’s (AMX) Claro.

Vivo continues to dominate the Brazilian wireless market as the carrier exited the quarter with an overall market share of 30.2% and a 34.7% share in the post-paid segment. The company’s GSM/WCDMA operation registered approximately 50 million subscribers.

Average revenue per user (ARPU) dropped 7.4% year-over-year to R$25 ($14) on account of price reductions. Outgoing ARPU fell 3.1% year over year, while incoming ARPU declined 13.8% as a result of higher mobile penetration in Brazil. Churn (customer switch) improved slightly to 2.6% compared with 2.7% in the year-ago quarter.

Cash, Debt & CAPEX

Vivo exited the quarter with cash and cash equivalents of R$1,192.9 million ($668.7 million). The company’s restructuring efforts are helping it gain synergies and reduce net debt, which fell 28.5% year over year to R$3,355.3 million ($1.9 billion). Vivo generated R$1,236.4 million ($693.1 million) of cash from operating activities and spent R$489.2 million ($274.2 million) in capital expenditure (CAPEX).

A significant portion of CAPEX was directed at the expansion network capacity and technology, and coverage to support the growing demand for voice and data services.

Dividend

The company’s board declared a dividend of R$2.05 ($1.14) per share totaling R$818.9 million ($456 million), which was approved at the general shareholders’ Meeting on April 16, 2010. The company will pay the dividend in two equal installments. The first installment was paid on April 19, 2010, and the balance will be paid on Oct 25, 2010.

Our Analysis

Vivo continues to lead the domestic market in terms of new subscriber additions. The company is benefiting from favorable trends in the Brazilian wireless market, its new operations in the northeastern region and expanded coverage for its 3G WCDMA network, the largest in Brazil. However, we are concerned about the declining ARPU due to price competition and pressure on margins. Moreover, Vivo is susceptible to increased domestic competition which may create further pricing pressure and affect subscriber retention.

We are currently maintaining our Neutral recommendation supported by our Zacks #3 (Hold) Rank.