Telesp Misses Earnings Expectations

Feb.16.10 | About: Telecomunicaes de (TSP)

Brazilian fixed-line carrier Telecomunicacoes de Sao Paulo SA (NYSE:TSP), commonly known as Telesp, reported fourth-quarter 2009 earnings per ADS of 62 cents falling short of the Zacks Consensus Estimates of 64 cents.

Net income dipped 24.7% year-over-year to R$544.8 million (US$314 million), largely due to a decline in local voice revenue and higher loss from financial operations. For full year 2009, net income was R$2.17 billion (US$1.1 billion) or R$4.29 per share (US$2.18 per ADS), a penny shy of the Zacks Consensus Estimate of $2.19 per ADS.

The Brazilian subsidiary of Spanish telecom giant Telefonica (NYSE:TEF) reported net operating revenue of R$4 billion (US$2.3 billion), down 3.2% year-over-year, due to declines in legacy voice telephony business as a result of lower access lines. For full year 2009, revenue declined 1.1% to R$15.8 billion (US$8 billion).

Local voice revenue decreased 10.7% year-over-year to R$585.9 million (US$338 million) while domestic and international long-distance revenues declined 1.5% and 17.4%, respectively. Data transmission (broadband Internet) revenue declined 2.7% in the quarter and while Pay-TV sales increased 12.7%. Internet revenue was impacted by the slower uptake of the “Speedy” broadband service which was suspended by the Brazilian regulator Anatel (from June 22, 2009 to August 27, 2009) due to poor service quality.

Consolidated EBITDA for the quarter declined 18.2% year-over-year to R$1.4 billion (US$805 million) with EBITDA margin equating to roughly 35%, down from 41% reported in the year-ago quarter. This decline is attributable to fixed-line revenue erosion and higher operating expenses.

Total operating cost increased 7.3% year-over-year to R$2.6 billion (US$1.5 billion) as the company spent more to improve service quality. Loss from financial operations (stemming from financial investments) increased to R$51.2 million (US$29.5 million) from R$43.5 million (US$25 million) reported a year-ago.

Telesp registered 58,000 net additions for its broadband service, bringing the total subscriber base to roughly 2.64 million (up 3.2% year-over-year). Subscriber growth was hindered by the suspension of Speedy Internet service.

Pay TV subscriber base increased 3% year-over-year to 486,614 customers, while it declined sequentially as a result of suspension of Speedy which represents part of the dual and triple-play (“Duo Telefonica” and “Trio Telefonica”) bundled service. Total fixed access lines in service reached 11.25 million, down 3.5% year-over-year.

Telesp exited 2009 with cash and cash equivalents of R$2.3 billion (US$1.3 billion) and net debt of R$3.5 billion (US$1.8 billion). The company generated R$4.4 billion (US$2.2 billion) of cash from operating activities during the year and spent R$2.2 billion (US$1.1 billion) in capital expenditure.

Telesp has been investing in new businesses, especially broadband Internet, given the limited opportunity in its highly matured local and long-distance phone operations. The company is bundling broadband and video with its legacy wireline voice service in an effort to contain customer churn.

However, Telesp remains significantly challenged by a declining subscriber base for its legacy voice telephony operation as it is facing stiff competition from alternative services including wireless, VoIP (Internet phone) and cable services. The company’s exposure to an increasingly competitive environment is expected to limit operating results, at least in the near term.