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Portugal Telecom (NYSE:PT)

Q1 2012 Earnings Call

May 17, 2012 9:00 AM ET

Executives

Zeinal Bava – CEO

Luís Pacheco de Melo – CFO

Analysts

Georgios Ierodiaconou – Citi

Tim Boddy – Goldman Sachs

Paul Marsch – Berenberg

Daniel Morris – JP Morgan

Nuno Matias – Espirito Santo Investment Bank

Frederic Boulan – Nomura

Operator

Greetings and welcome to the Portugal Telecom 2012 First Quarter Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Zeinal Bava, CEO for Portugal Telecom. Thank you. Mr. Bava, you may begin.

Zeinal Bava

Okay, thank you. Good afternoon, ladies and gentlemen. Thank you very much for being on this call. I’m here with my CFO, Luís Pacheco de Melo, our IR Director, Nuno Vieira, and the rest of our finance team as well.

In the first quarter of 2012, consolidated operating revenues of Portugal Telecom amounted to €1,716 million while EBITDA reached €572 million. Our consolidated EBITDA margin stood at 33.3% underpinned by the solid margin of the Portuguese telecoms businesses, which stood at 45.2%. Our net income reached €56 million and basic earnings per share stood at €0.07.

In the first quarter of 2012, our CapEx amounted to €259 million. That’s equivalent to 15.1% of our revenues. In the first quarter, our EBITDA minus CapEx amounted to about €313 million while EBITDA minus CapEx of the Portuguese businesses amounted to €193 million.

In the first quarter 2012, our operating cash flow stood at €113 million. Free cash flow was negative €158 million and it was impacted by a number of events, which our CFO will take you through in a lot more details.

With regard to our debt, our cost of gross debt was 4.6%. That compares to 4.2% in the first quarter 2011. The liquidity position excluding the consolidation of Oi and Contax in Brazil and including cash, underwritten commercial paper lines and facilities was €3.4 billion as at 31st March 2012.

In the first quarter, we continued to see strong RGU momentum across various regions. Let me perhaps start with Portugal. We ha6 an incredible quarter in terms of retail fixed broadband, retail fixed pay-TV as well. As you no doubt will have seen, we had 69,000 net adds in our pay-TV service in the first quarter. This is the best quarter out of the last nine quarters of Portugal Telecom.

In the case of broadband as well, we added 35,000 subscribers. And again we continue to gain market share, not just in terms of subscriber numbers, but also in terms of revenues. We continue to push RGU penetration in the installed customer base and this is, of course, being reflected in increasing ARPU as well in the Residential segment.

In TMN, our mobile operator in Portugal, we continue to lead the market. And I think worth highlighting are two – I would say two points. First is that postpaid customers grew 6.3%, in line with our strategy to promote smartphone penetration and unlimited packages. And it is also worth mentioning that the – our unlimited plan, e nunca mais acaba, actually ended up the quarter with more than 800,000 subscribers.

In the case of Oi, which now has 70.8 million RGUs, we saw very stable RGUs quarter-on-quarter on Residential. Very strong growth in mobile customers. Enterprises also posted a pretty good performance and this is, of course, being underpinned by innovative offers that I will discuss a bit later in my call.

With regard to other international businesses, we also saw very strong subscriber growth underpinned by increasing market penetration of telecom services in pretty much all of the markets in Africa and also, the businesses we have in Asia.

With regard to financial performance, we will go into that in a lot more detail, but I just would like to mention that we posted, I would say, pretty resilient top line performance. Revenues were down 2.7% if you exclude Brazil, so leaving to one side the impact of consolidation of Brazil, revenues were only down 2.7%, against a backdrop which, as you know, is very challenging.

We posted very strong margin performance in Portugal and this has to do with the fact that we remain very focused in being disciplined when it comes to cost and also cash flow management. We also saw improving margins in Oi, despite the investments that the company is now making in its own turnaround.

With regard to other regions, we continue to see very profitable growth. International businesses now represent 50% of Portugal Telecom’s revenues. Basically, Portugal Telecom is today a diversified company, not just in terms of the scope of services that we offer in each market, but also in terms of our geographical presence.

Regarding CapEx, there’s, of course, seasonality but whereas in Portugal, we are now in the final stages of the completion of our modernization program, we will invest in Oi to ensure that Oi can deliver on the numbers that Oi’s management presented recently on their Investor Day.

Let me now, focus on Portugal. Revenues were down 5.2%, but if you exclude the regulatory impact, revenues would have been down 4.2%. As I mentioned, our CapEx program was countercyclical to what’s going on in the sector. In fact recently, a number of peer group companies have announced significant investments in fiber, whereas, for example, our fiber program is coming to an end in terms of investment. But we have made already important choices with regard to technology and I think the good news is that a lot of those investments are now beginning to come through, if you like, the top line and underpin the transformation of our business model.

And as such, I’m very pleased to say that in this quarter, 50% of revenues of Portugal Telecom are now non-voice. If you look at the Residential segment, 62.5% of our revenues are non-voice. If you look at our Enterprise segment, 47.2% of our revenues are non-voice. And with regard to mobile, revenues that are non-voice are now 33%, but it is also worth mentioning that in the Portuguese market, SMSs today, and increasingly, are being part of a bundled, if you like, unlimited tariff plans and thus, the contribution of SMS revenues to our data revenues is much lower than in other markets in Europe.

Turning now over to the Residential segment, great quarter across the board. Best quarter of the last two years. Double-play, triple-play doing extremely well. Retail RGUs per unit customer actually grew 9.2%, basically confirms what we said before that Portugal Telecom’s penetration – Portugal Telecom’s strategy now is much more focused in up-selling its services, as opposed to continuing to invest massive amounts in gaining market share.

With regard to PSTN lines, net adds, we saw line loss of 5,000 which is immaterial and of course, it has to do with the fact that we have now switched off, as you know, the analog TV service and as such, there has been some changes in the market position of each operator. But we have not responded to a number of irrational tariff plans that some of our competitors have put in the market. As such, we continue to see the minus 5,000 as a very, very good performance. Unique residential customers up 0.4%, but retail RGUs – so retail RGUs per unique customer were up 9.2%.

Our Residential revenues grew by 4.6% underpinned by strong non-voice revenues and flat fees. Residential ARPU was up 11% as a result of RGUs growing, but also, I would like to mention to you particularly, the fact that the weight of flat-fee revenues today in the case of Portugal Telecom accounts for about 86.6% of our total revenues.

In my view, this is what actually leads us to believe that our business in Portugal today is a lot more resilient than it used to be three years, five years down the line. And we believe that as we continue to drive the transformation for our business via our model forward, we will continue to see substantial increases in the weight of flat-fee revenues and as such, provide you with a lot more predictability in terms of our future performance, especially in the Residential segment.

Turning now to the Personal segment. Data contribution is growing and it’s growing supported by pick-up in smartphone penetration, utilization of apps by our customers and of course, flat fee, sort of flat-fee tariff penetration. These tariff plans bundle voice, minutes and data. With regard to smartphone sales, we continue to drive a market share which is at a premium to our natural market share.

Customers, we account for 47% of smartphone sales in the Portuguese market. We are also beginning to see the benefits of that. As I think we have shared with you in the past, the ARPU of smartphone users tends to be somewhere between 15% and 20% higher than your normal customer that does not have a smartphone.

Unlimited customers increasing in terms of numbers; e-customers, which is our bundled voice and data plan, has already surpassed 800,000, to be more exact, 885,000. Personal revenues, so personal segment revenues were impacted by an environment which is challenging, but they seem to be stabilizing.

TMN, in the last three to six months, has continued to launch significant number of campaigns to stimulate consumption, but, of course, austerity measures are having an impact and are leading particularly to some erratic behavior on the part of customers.

We continue to see, particularly in the recent launch of the 4G, some irrational behavior on the part of our competitors. But as we have said to you before, we are not prepared to lose share. We will continue to defend our market share of customers and we will continue to work to increase our market share of revenues by underpinning, if you like, our strategy with increased smartphone penetration and by developing a number of apps ourselves and leveraging, if you like, the know-how that we have within Portugal Telecom, particularly in the area of Internet and portals.

We prefer to compete on innovation, but we will remain competitive on prices. We want to have always the best value offer in the Portuguese market when it comes to mobile.

With regard to the enterprise segment, innovative product services, products and services coupled with increased commercial activity is leading to market share gains, particularly in the SME segment.

As you will have seen in the presentation that we put out this morning, SMEs commercial contracts were up 36%. Corporate Virtual Private Serves also saw a substantial increase and therefore, the good news is that we are translating the investment that we have made in future-proof technologies in providing our customers, enterprise customers with novel services. And that is leading us not only to gain market share of customers, but also particularly increase our share of wallet of those customers when it comes to telecoms and IT.

Nonetheless, in this very challenging environment, corporates remain very price sensitive. Some projects are being delayed. And of course, insolvencies are also picking up. Nonetheless, our strategy to differentiate based on IT, in my view, will deliver the kind of results that we would like to have in the future. And as and when we have tailwind, no doubt Portugal Telecom will translate that in superior performance, both in terms of revenues and also EBITDA.

With regard to the Portuguese Enterprise segment, we also included a slide so you could get a sense for what’s going on with insolvencies in Portugal. Insolvencies have picked up. Our revenues were down 9.8%. Part of that has to do with the challenging environment that we’re seeing in the SME segment. And of course, part has to do with the lumpiness of a number of large corporate projects which will be executed and implemented in the next three to six months and will no doubt lead to us to have a better performance in the Enterprise segment.

Turning now over to Brazil. We see favorable market dynamics in the Brazilian telecoms market as a result of increased consumption levels, but also, if you like, in light of the substantial potential that we see in increasing the penetration not just of mobile, particularly data, but also, if you like, broadband and pay-TV.

Brazil ensures scale for Portugal Telecom. It’s an optionality for us to grow in the future and it’s a unique opportunity for us to leverage our know-how, expertise and innovation in the strategic partnership that we have with Oi.

Oi’s unique profile and platforms are true competitive advantages to address not only the demands of customers that are growing, but also convergence strength. Oi has 70 million RGUs, a business mix similar to that of Portugal Telecom and is facing challenges that we have tackled – we’ve tackled within the past. And the good news is that the relationship that we continue to enjoy, not only with the shareholders, with the core shareholders of Oi and also in particular with the management that we support, lead us to believe that we will be able to bring to bear our expertise particularly to reduce the time to market of new services in the case of Oi.

Oi is moving from technology to a customer-centric organization, having completed the simplification of the corporate structure and announced the dividend policy, as we have promised to you in the past. We believe that now, with this new structure, Oi will be more focused on execution and the new organization structure, if you like, represents a clear focus on the customer, is a step in the right direction and a clear signaling that Oi would like to serve better its customers in the future by providing innovative services, by having the best offers in the market and by leveraging its unique footprint and of course, the partnership when it comes to R&D with Portugal Telecom.

The first quarter results of Oi have been announced. The management has done a conference call. The result showed improving RGU trends. The result showed improving revenue trends quarter-on-quarter, albeit it’s worth emphasizing that whilst the roadmap of the turnaround has been presented to the market, we still have a lot of execution ahead of us. But the early signs are clearly encouraging.

If you like the roadmap that was presented to investors in two days of presentations in Rio and in New York, if you like all the hot buttons that Portugal Telecom feels very comfortable with and in my view, show the kind of transformation that Oi would like to achieve. And it is something that we recognized and we understand, because we’ve done very similar things also in the Portuguese market.

In the first quarter, Oi also posted better margin performance. And most importantly, in the recent conference call, the management reaffirmed its confidence and reiterated the guidance and dividend policy announced at the Investor Day, to deliver better and more innovation, more services such as pay-TV, triple-play, Smart Cloud, 3G and 4G, as we have done in Portugal, will require more CapEx.

As Oi’s management showed you in the Investor Day, the CapEx will pick up in the next few quarters, but we expect this higher CapEx to translate into more RGUs and more market share both in terms of revenues and customers, especially in a market which is showing incredible signs of future growth. We continue to collaborate actively with Oi’s management to improve time-to-market and we are confident about their ability to deliver on the targets that have been announced.

With regard to Africa and rest of the world, we continue to see a solid profitable growth, solid customer growth across all our assets, solid revenue growth as a result of customer growth and of course, sound EBITDA growth and strong profitability. I also would like to mention that all our companies in all of these – in Africa and rest of the world are cash flow positive and are self-funded.

Before I hand you over to Luís, just two more points I would like to emphasize. Number one, we will maintain strong cost discipline to underpin margin and cash flow in our company. OpEx was down 3.6% as commercial costs were higher due to, if you like, the recent shutdown of the analog digital service. OpEx was down 3.6%. If you ignore the costs associated with the shutdown of the analog TV signal, our costs would have been down almost 5%. We will remain focused on this.

The second point I would like to highlight to you as well before I hand you over to Luís is regarding CapEx. We are reaching the end of our modernization program in Portugal. We are obviously keen to leverage – we are keen to leverage the investments we have made to build market share of revenues and clients as well. But we will adjust, if we have to, our CapEx to defend cash flow in the future.

We are comfortable with our normalized free cash flow as presented in the presentation that we put out in our site. But we will continue to be very focused in ensuring that this company continues to have a solid balance sheet position so that we can continue to honor all our obligations in the future.

Worth mentioning is the fact that the quality of Portugal Telecom’s CapEx in Portugal is of superior quality to our peer group companies. 60% of our CapEx is customer CapEx and is related to technology projects that will drive us in the future, to take advantage of the digital opportunities. In the case of Oi, of course, CapEx will pick up, but that represents a significant investment in the turnaround of the company in a market which has substantial future growth.

Let me now hand you over to Luís. Thank you.

Luís Pacheco de Melo

Thank you, Zeinal. Good afternoon, ladies and gentlemen. After Zeinal’s comprehensive presentation on our operations, let me focus on the main financial highlights for the quarter. Please bear in mind that as we have started consolidating Oi and Contax in the second quarter of last year, the quarter-on-quarter variations are not meaningful.

With regards to revenue, total revenues were up 97% in the first quarter due to Oi, of course. But within that and with regards to Portugal, revenues were down by 5.2% in the first quarter and if you exclude the impact of the regulations, they would have been down by 4.2%.

Within Portugal, the Residential continues to post very strong growth, a 4.6% increase in revenues as a result of a very solid RGU and ARPU growth. Residential ARPU now stands at €31.5 and non-voice revenues, as Zeinal mentioned, already represent 62.5% of total revenues for the segment.

Personal revenues decreased by 9.8% in the quarter, with customer revenues down by 8.1% as a result – mainly as a result of the 7.1% decline in ARPU, both in voice and wireless broadband. Interconnect revenues did not help as well, because they were down by 24.3% in the quarter.

Total revenues on the Enterprise segment declined by 9.8%, as Zeinal mentioned, and this is basically as a result of the cost-cutting initiatives like corporate, public administration constraints, budget constraints and all that despite the market share gains that Zeinal also mentioned.

Wholesale and other revenues in Portugal declined by a mere 1.7% and they were basically due to the 22% decline in Directories revenues, also lower sales of large projects and UOL revenues have impacted negatively the revenues for the segment.

Oi’s revenues were approximately consolidated in our income statement, totaled €788 million in the first quarter. Revenues as presented by Oi on a pro forma basis totaled BRL6.8 billion in the first quarter of 2012 and a 1.9% decline, with Residential revenues declining 11.5%, Personal revenues up by 12.8% and Enterprise almost flat. On the proportional basis, our other international assets posted a very strong 21.1% increase in revenues and basically due to the very strong subscriber growth and data revenue growth.

With regards to EBITDA, consolidated EBITDA increased by 60% on the back of the consolidation of Oi. If we exclude the Oi, EBITDA would have decreased by 6.7%. In Portugal, the decline would have been 7% – was 7% to €307.7 million as a result of the 5.2% decline in operating revenues and despite the 3.6% decline in OpEx for the quarter. EBITDA margins stood at an healthy 45%.

Wages and salaries continued to decline at 4%, as a result of the cost-cutting initiatives, higher efficiency levels and also the restructuring implemented in the fourth quarter of 2010. Commercial costs were up by 10.3% and this is basically due to the very strong commercial activity in the quarter. If you adjust for the commercial costs, EBITDA would have decreased by 4.1% in Portugal.

Of course, with the significant scale that we have now obtained on the Pay-TV and also on the fiber penetration, we are starting to see the benefits of that in everything that has to do with maintenance cost, customer support cost and so on that continue to decline at very favorable rates.

Going forward, and as we always say, we will remain cost-disciplined and we will continue to implement additional structural cost initiatives. EBITDA at Oi on a pro forma basis was up by 1.4% as a result of the 3.2% decline in operating expenses and despite the increase in personal costs and commercial costs that Oi incurred in order to reinforce all its commercial activity.

On the proportional basis, the other international assets posted a very strong 18.4% increased in EBITDA, below EBITDA D&A increased by 76%. It’s basically due to Oi. If you exclude that, D&A was down. The Oi – sorry, the D&A also includes €9 million of amortization of intangible assets or the amortization of the goodwill, actually. Excluding the proportional consolidation of Oi, D&A was down by 3.3%.

PRB is basically in line with last year. The small increase is due to the consolidation of Oi. So after that and in addition to that, the other two factors that impacted our net income that decreased to €56.5 million in the quarter were basically the €51 million interest of paying in bank deposits in the first quarter of 2011. I will remind you that we only invested in Oi in the beginning of March of last year, so in the first two months, we still benefited from the high deposits that we had at that time.

And also with the lower contribution from equity affiliates, because in the first quarter of last year, we also booked a gain of €38 million in the disposal of UOL.

Total CapEx in the quarter increased 112% to €259 million in Portugal or if you exclude Oi, CapEx would have increased by 13.2%. CapEx in the Portuguese business increased by 13.3% and it’s basically due to the very strong customer-related CapEx due to the very strong sales that we had. And in addition, we are deploying the LTE network and we are also finalizing our fiber deployment.

In Brazil, CapEx in reais increased to BRL1.1 billion or 31.6% as a result of high investment and improvement in coverage and in capacity of both 2G and 3G and also of the fixed broadband network.

With regard to cash flow, operating cash flow totaled €113 million as a result of the €242 million investments in working capital. Excluding Brazil, operating cash flow stood at €77 million and reflecting as well a €126 million investment in working capital. The main changes from last year’s free cash flow to this year’s free cash flow were related to the UOL fell of €156 million last year.

The €200 million increase in working capital investments and as you might recall, the first quarter of last year, we had positive or a negative working capital investment because with the cash that we had received from the sale of FISTEL, we in the fourth quarter of 2010 anticipated substantial amounts of payment to suppliers. And therefore, the first quarter of last year is not a recurrent quarter in terms of working capital investment.

Also, the numbers in this year were affected by the €111 million increase in interest payments as a result of what I’ve just said that last year, we had two months of substantial cash in hand deposited in banks and a gain of €51 million also in Brazil, which this year, we did not have those benefits.

We also had a €93 million decrease in dividends received from our international operations. So, basically, first quarter is normally a low cash flow quarter with 50% of our interest cost actually spent on this – on the first quarter and also normally is a high working capital investment and a non-dividend receivable quarter and therefore, normally, first quarter is a low cash flow-generating quarter.

With regards to our balance sheet, net debt amounted to €6.85 million, including Oi, which basically stands at three times EBITDA. The increase of €461 million from the end of last year is basically due to the interim dividend that we paid of €185 million, also, the first installment of the LTE license that we paid as well and the consolidated negative cash flow, free cash flow of €158 million that we posted in the first quarter.

Excluding Brazil, net debt stood at €4.4 billion. Following the reimbursement of the €1.3 billion bond that we paid back in March, the total cash available and the undrawn facilities stand now at €3.4 billion. With regards to our cost of financing, cost of net debt stood at basically at the same level as last year, 3.6% and the average maturities now stand at 5.3 years.

With regards to pensions, after-tax unfunded pension liabilities and salaries paid – payable to pre-retired and suspended employees stood basically at the same level as last year of €675 million. With regards to dividends, PT will pay its remaining €0.435 of the 2011 dividend on the coming 25th of May.

As we said on our last call with regards to future shareholder remuneration strategy, it will be discussed in due course at our board. Whilst we continue to believe that our cash flow underpins flexibility to pay the dividends in line with the guidance we provided, we look with frustration at our low share price and resulting high yield offered by our shares. So, once the board has reviewed the matter, we will report back to you immediately.

Let me now hand you over to Zeinal for his final remarks.

Zeinal Bava

Thank you, Luís. So, to conclude, we’re facing a challenging economic environment in Portugal. We are focused on execution, not just in Portugal, but also in Brazil. The challenges are different. In Portugal, we are poised to grow as our modernization program and transformation of our business model has been completed.

In Brazil, Oi’s management needs to invest in a turnaround to deliver on targets. The benefits of investments that are being made both in Portugal and in Brazil are beginning to come through. The first quarter results of Oi were encouraging, showed encouraging signs.

In Portugal, non-voice revenues account for 50% of our revenues. Residential is growing. Personal segment is stabilizing. Corporate – our Corporate segment has some lumpiness, but of course the environment remained challenging as insolvencies are picking up. As such, cost discipline, financial discipline, cash flow discipline will remain a key focus, albeit that we are confident that we can continue to grow RGUs and enhance our competitive position in the future.

We also would like to make sure that everybody understands that we will always want to have the best value offers in our market. This is a competitive market as well, both here and in Brazil and we need to ensure that we have enough discipline at the cost level so we can continue to underpin, if you like, the RGU growth, considering the options for growth that exist.

CapEx is being invested as long as it delivers returns and in Portugal, the modernization already coming to an end. We are leading on innovation and we will continue to differentiate our offers in the market on the back of that innovation. With regard to dividends in the future, as was mentioned by Luís, it will be addressed by the board in due course and we will revert to the market as and when we have the final decision by the board.

Thank you very much. And of course, my team and I are now available to answer questions you may have.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from the line of Georgios Ierodiaconou with Citi. Please state your question.

Georgios Ierodiaconou – Citi

Hi. I have two questions, please. One of them on dividend. The first one on – as you just stated, would have to be around dividend. If I believe – if I remember correctly in the full year results, you mentioned the fact that you are waiting for Oi to announce its dividend, for the new board to be elected. Given that these two events have taken place, why are we seeing a delay in making the decision for your own shareholder return policy? And what would be a reasonable time to expect an announcement on that?

And my second question is on associate dividend. And I know there’s seasonality on when you tend to receive the dividends from your toman associates, but can you update us to whether you expect it in Q2 or maybe later in the year? Thank you.

Zeinal Bava

Okay, thank you very much for your question. I’ll answer the first one and Luís perhaps can complement. The new board was elected on the 27th of April. So we need to, I would say, I think we will need a bit of time to review some of these issues with the new board. Albeit, it’s pretty much the same, but it’s a new mandate.

So I wouldn’t like to speak on behalf of the board in that regard, other than to confirm what I’ve just said, that the board will consider what is it that Portugal Telecom should do in terms of the future. Luís, I think was – expressed, I think, the frustration that he has, that I have, that the board has, with the way our shares are trading and with the implicit yield associated. So we will look at these signs as well when we discuss these matters in our board.

When is it that the board will convene to discuss this matter? I don’t have any specific information that I can share with you, because this is a matter for the board and it will depend very much on when the board decides to actually schedule this discussion. With regard to the associate dividends, Luis?

Luís Pacheco de Melo

Okay, thank you. Some of the dividends we will receive in the second quarter, some later in the year, depends on the associate. The biggest one, as you might recall, the dividend was declared and is awaiting the approval by the Central Bank of Angola to be paid. So, as usual, we expect to receive it. A specific date, I cannot compromise at this moment.

Georgios Ierodiaconou – Citi

Thank you.

Operator

Our next question is coming from the line of Tim Boddy with Goldman Sachs. Please state your question.

Tim Boddy – Goldman Sachs

Yes, thanks for the question. I wanted to ask a couple of things. Just on Portugal, if you could give us any update on trends since the quarter ended, has there been any change? And are you still comfortable with consensus forecasts, which I think are around 1.2 billion in EBITDA for Portugal this year? Secondly, in terms of Oi, the company has given quite remarkably optimistic guidance, which is unusual. As a shareholder of Oi, what are the risks that you’re concerned about in terms of the ability to achieve that growth?

And then lastly, you’re making aggressive and unusually large investments in data centers in your Smart Cloud platform. Can you talk us through the returns you think you can achieve on that investment, which I think is the sixth largest data center in the world, from your presentation in Q4? Thanks very much.

Zeinal Bava

Okay. Thank you very much. With regard to trends in the Portuguese market; with regard to triple-play, we continue to see, I would say, good momentum behind Meo.

As you know, we differentiate our service on the back of innovation, HD channels, better quality of sound, image; a lot of interactivity. And as such – and we have fiber-to-the-home which is very different, as you know, to DOCSIS 3.0. So in that regard, I think the Portuguese consumer is beginning to understand that there are significant differences and advantages in joining Meo and in basically adhering to a triple play. That’s why I showed you that in the slide in our presentation that our RGUs were up 9%. It is this upselling of services which is underpinning our, if you like, ARPU growth, which was very healthy in the first quarter.

So April and so far May, the trends would seem to point in the same direction. And therefore, we remain quite happy with the rate at which we are growing in the case of Meo. And whilst we are quite happy already also with the fact that we have gone above 1.1 million customers, we think that leadership is on sight, and it will be achieved not by competing on price and by having irrational commercial behavior in the market. It will be achieved on the back of what I think is sustainable long term, which is providing a unique customer experience and a differentiated customer experience.

With regard to mobile, very erratic behavior. I would say limited elasticity. And therefore, with regard to mobile, we are, of course, all over, if you like, promotions in order to ensure that one customer perceive, if you like, price leadership from TMN. We’re also doing more and more segmentation in order to address the needs of different customer segments and live up to their expectation. Invest in flat fees. Continue to drive mobile Internet.

That’s why I was actually making sure in my presentation that you guys understand that whilst our data revenues or revenue or data accounts for about 33% of our revenues, the weighting of SMS in our market is much lower than in other markets, simply because the bundles of packages has led to, if you like, the price of SMS is coming down substantially in the last few quarters.

In the case of Corporate, I would say SMEs, insolvencies still keeping up the kind of rates that we have seen in the past. But on the corporate side, I would say that exactly because we have been making investments in new technologies and we are moving away simply from being a simple telecoms provider to an ICT player, I think that is beginning to underpin, if you like, our performance. And in my view, long term, it will allow us not only to gain share of subs, but also share of revenues.

So, in a nutshell, are we comfortable with the consensus? Yes, we are. Yes, we are and we will continue to maintain a high level of cost discipline. I disagree with some of the remarks that analysts have made about the potential of cost savings within our company being limited this year because of everything we’ve done in the past. We will continue to drive costs down and we will continue to surprise the market in that regard.

With regard to Oi, we are not just shareholders. We are strategic shareholders of Oi. We are also, if you like, the technological partner of Oi. So, with regard to what Oi presented in the Investor Day, we – all the hot buttons with regard to what is it that that company should be doing to take advantage of opportunities in the Brazilian telecoms market, we relate to the, if you like, the investment in triple-play, double-play.

If you like, getting into the business of also selling some handsets, beefing up coverage of 3G, positioning for 4G, starting to offer, if you like, Smart Cloud and IPT-type offers in the corporate segment, all these things, if you like, are things that Portugal Telecom has done successfully in the last few years. And in fact, by being, if you want, a technological partner of Oi, we will also assist Oi in, if you like, improving the time to market of some of these services in Brazil.

Now how those – how that strategy gets translated into financial performance, the management has provided guidance. We will continue to support the management with whom we enjoy an extremely good working relationship. Myself and the CEO of Oi get together frequently and we discuss telecom matters. So we will continue to support the Oi management team and all our, if you like, colleagues in Oi to ensure that they can deliver on the numbers that they have shared with you in the Investor Day they did in Rio and in New York.

With regard to data centers, it is a structural – it is, if you like, a long term investment. If you like, what’s driving that investment in my view are two things. First is the need for us to reduce significantly the power consumption. Right now, if you look at data centers on average, the power usage efficiency is something like 2.4, 2.5. Some of these new data centers are driving power usage efficiencies to as low as 1.2. So in an environment where you need more storage capacity and more processing capacity, that will be a key cost driver in the future.

The second thing is virtualization, cloud office allow our customers to reduce costs by 20% to 25%. In an environment where the economy is very challenging, cost is an imperative, not just to us as Portugal Telecom, but to all of our customers. And we believe that technology is a means to an end. We think we can use technology to enhance the company’s efficiencies.

And as such, we are pushing Smart Cloud aggressively. We are working with Microsoft, the Office 365. We have technological partnerships also with the likes of Cisco, a number of Chinese vendors as well and therefore, we believe that we are poised to grow in the ICT market in Portugal and therefore, we will grow not on the back of competing on price, but on the back of offering novel and innovative solutions to our customers. That bottom line will improve their convenience, because they’ll have just one supplier to deal with, but I would say mainly because we will be able to reduce their cost by 20% to 25%.

The initial state of that investment will only involve us building 3,000 square meters and of course, we will grow based on demand and of course, that demand will not be exclusively for Portuguese customers. It will also be for international customers that we will look to find ourselves, but we will also find through the technological partnerships we have established and we will continue to establish over the next three to six months. Thank you.

Operator

Our next question is coming from the line of Paul Marsch with Berenberg. Please state your question.

Paul Marsch – Berenberg

Hi, thank you very much. I have three questions, actually. The first is on shareholder remuneration. I just wanted to understand in more detail what’s behind your comments on the dividend.

I know this is the second time that you’ve made similar comments now. Is your concern all about the lack of your share price reflecting what you see as being a sustainable commitment to payout? In which case, does it make sense to maybe take a significant proportion of your payout and buy back your stock instead of paying it all out as dividends? Or, is there an element of your thinking that sees a need for a more cautious or conservative stance on shareholder remuneration, given the uncertain backdrop? That’s my first question.

The second question is on customer revenue trends in the Personal segment, where I think we’ve seen another slight worsening of the trend there. I’m just wondering if you would be expecting the pace of that decline to stabilize through the rest of the year. Is there any reason to expect that? And then finally if there’s anything you can say on signs – early signs of customer take-up from your new 4G service offerings? Thanks.

Operator

Our next...

Zeinal Bava

Okay. Thank you very much. With regard to shareholder remuneration, we believe that we need to address the issue at the board level. I would very much like to answer the question. I think it’s very valid and, I think, a very good question. But I think at this stage, I prefer to have a discussion at our board level.

Of course, we look at the dividend yield of our stock. Of course, that is a mathematical calculation. But we also have to look at the environment and I think it’s best that we discuss these things with the board. But as we said, we are confident about the financial flexibility that we have in our balance sheet. We are fully funded until the end of 2013.

And as such, I would say, that whilst the financial flexibility is there, the board obviously needs to consider this, because it’s a new board and we have a new three-year term. And as such, that is something that needs to be on the agenda.

Having said that, the fact that Oi has announced its own dividend policy which will underpin our cash flow in the future was also very good news. That was something that the market had as a concern, because Oi wasn’t able to come back and we didn’t want Oi to actually come back with a dividend policy until the corporate simplification – corporate restructuring was completed.

That is out of the way now. I think the fact that today we have one listed entity will facilitate, if you like, the turnaround effort that needs to happen in that company. But I think with regard to our shareholder remuneration and notwithstanding the fact that Oi will contribute with over €130 million as dividends to our cash flow, we think that we need to address this at the board level and I prefer not to elaborate more, and come back to you as and when the board has that discussion.

With regard to Personal, you’re right. Revenues were down 7.7, they’re down 8.1. So there’s a very slight deterioration. But I will refer to the previous question. I mean, we are seeing some erratic behavior on the part of the customer, very difficult to actually pinpoint as to the cause and effect. Clearly, the fact that the GDP growth prospects seem to be or are being revised, and when they are revised, some of – if you like, particularly the prepaid customers tend to react in advance of. This is one of the reasons why TMN is pushing postpaid customers. If you look at our first quarter results, postpaid customers were up about 6.3%.

And therefore, I think what we need to continue to do is take advantage of the fact that we are a very flexible organization and ensure that we are out there quickly putting out new tariff plans, if you like, new promotions to ensure that if there is cash available, that cash is actually being spent with Portugal Telecom.

With regard to 4G, it’s very early days to actually give you anything that is meaningful or that would help you extrapolate, particularly because one of our competitors here decided to do a promotional campaign, which we think was completely bogus and unnecessary, whereby they gave 50% discount to the early adopters of 4G. So therefore, whatever I might say will be influenced by the fact that there has been this aggressive promotion in the market.

But I would say also, perhaps I would say the following, which might be helpful to you, is that we have already 80% coverage of the Portuguese population. So today, Portugal Telecom has the best 4G offer, if you like, in terms of coverage, quality of service in the Portuguese market. We are using already the 800 megahertz frequency and therefore, that has allowed us to actually reach that kind of penetration in terms of pops.

By the end of the year, we expect that 90% of the Portuguese population will be covered with 4G. And of course, in the case of Portugal Telecom, because we have fiber, fiber-to-the-home and in the backbone, more than 90% of our base stations are now served with fiber. So we’re pretty much all IP now end to end.

So not only we have coverage, but we also have, if you like, distribution at very high speeds between where the inflow is picked up and the cloud. So from that standpoint, what you will continue to see, especially in those operators that have fiber-to-the-home on one hand and 4G on the other, is acceleration of convergence offers. And this is something that we continue to believe is something where there is huge amounts of potential in the future.

Having said that, we need to educate the customer that there are advantages in you dealing with just one supplier for all of your needs, whether you’re talking about voice, video and data in the house or outside the house.

So, I think 4G will be, in my view at least, an enabler for more aggressive convergence offers in the future, especially for those operators that have symmetrical, if you like, technologies both in fixed and in mobile. With regard to just dongle sales, I think at this stage, it’s completely irrelevant and skewed in one direction because of heavy promotions, which will, I think, have terminated at the end of April. Thank you.

Operator

Thank you. Our next question is coming from the line of Daniel Morris with JP Morgan. Please state your question.

Daniel Morris – JP Morgan

Thanks very much for taking the questions. I’ve got two, please. First of all, I just wondered in the Other and Eliminations line, where you did about €250 million of revenues this quarter. There have obviously been quite a few consolidation changes there and I just wanted to check if that’s now the right base to model on for the future quarters in this year?

And then second of all, I just wanted to ask a follow-up on your comments around the balance sheet. Should we take it that whatever the decision on the dividend, you’re comfortable with the current leverage and therefore would consider either doing other things with the cash or might you prudently de-lever, should you cover dividend? I’m just trying to understand that. Thanks very much.

Luís Pacheco de Melo

With regards to the first question, it’s Luís. Yes, you’re right. Basically from now on, voice is probably the right model or the right way to model going forward.

Zeinal Bava

With regards to your second part or the second part of your question, of course, as was so rightly put, we need to take into account the fact that we are going through, if you like, from a capital market standpoint, a period of significant volatility.

And therefore, when I was referring earlier that we will maintain cost discipline and that we will maintain financial discipline and we will maintain huge amounts of focus on the cash flow generation in our company, has to do with the fact that we believe that in this environment, we need to have financial flexibility and use that financial flexibility as a competitive and comparative advantages in the market. For us, having a good balance and a good, if you like, refinancing schedule, is not just a matter of finance. It’s also a matter of market. Those companies that are funded will be able to compete in the market and will be able to continue to invest in innovation.

And as such, we, at Portugal Telecom, need to continue to strike that balance, as we have done in the past. And therefore, financial flexibility is also one of the utmost, if you like, concerns that we will continue to have in the company. We are comfortable with the fact that we are fully funded until the end of 2013.

Worth mentioning, also the fact that we have a diversified group of banks that have extended credit facilities to Portugal Telecom. Almost all of those banks are international banks and therefore, from that standpoint, our CFO and our finance team has done an impeccable job in ensuring that until the end of 2013, we have the financial flexibility that we think we need in order to cater for the needs not just of our business, but also to live up to the commitments we’ve made to the market. Thank you.

Daniel Morris – JP Morgan

Thanks very much.

Operator

Our next question is coming from Nuno Matias with Espirito Santo Investment Bank. Thank you.

Nuno Matias – Espirito Santo Investment Bank

Thank you. Just a couple of questions on your cash flow performance. Firstly on the variation of working capital in Q1, quite high value. Understand that this is more or less seasonal. But do you expect this value to revert fully this year?

And secondly, and if I understood correctly, your interest payments were biased towards Q1. So what – expect, Luís, that going forward for the remaining of the year, we should expect lower interest costs at least in terms of the – of your payments for 2012? Thank you.

Luís Pacheco de Melo

Okay. Thank you, Nuno. Let me see. As I mentioned, the normal first quarter cash flow is a quarter where you see significant working capital investments. Why? Because normally, you pay the supplier for the investments that you do towards the end of the year. And normally, if you revert back some years at Portugal Telecom, that has been the case, except last year, when, as I mentioned, since we had received a substantial amount from this acquisition of FISTEL by Telefonica, we decided to anticipate significant amounts of payments to suppliers to the fourth quarter of 2010. And therefore, we had a, I would say, negative working capital investment in the first quarter of last year.

Normally, what we see is that we tend to recover most, if not all, of these investments throughout the year, throughout the remaining parts of the year. With regards to interest, what I said is, as our debt structure, most of the yearly interest are focused on the first quarter. What I’ve said is that the first quarter normally, there is approximately 50% of all the interest that I paid for the full year.

So going forward, although in the P&L, it’s not like that. But from a cash perspective, for the remaining three quarters of the year, we will have lower interest cash payments in the second, third and fourth quarter.

Nuno Matias – Espirito Santo Investment Bank

Okay, that’s great. Thank you.

Operator

Our next question comes from the line of Frederic Boulan with Nomura. Please state your question.

Frederic Boulan – Nomura

Hi, good afternoon. A question on spectrum in Brazil. Can you share with us your views on this and any discussion you have with Oi? And can you provide some guidance and views on value of spectrum over there or that’s a decision they take on their own? And also, can you comment on the couple of headlines we saw on Tuesday about Oi that may look to increase their stake in Portugal Telecom? Thank you very much.

Zeinal Bava

With regard to the second part of your question, as was stated in Oi’s conference call, the acquisition of 10% of PTU was part of the agreement that was signed when we did our strategic partnership. And as was stated in the Oi’s conference call, the agreement has to be fulfilled. So I have nothing more to add other than what Oi has already said in that call.

With regards to the spectrum in Brazil, of course, this is part of the discussion that we have in various committees and the discussions that we have within Oi. For obvious reasons, as you can imagine, I wouldn’t like to discuss that, also because it’s a competitive process. Thank you.

Operator

As this brings us to the end of our Q&A session, I will turn the floor back to management for closing remarks.

Zeinal Bava

Okay, thank you very much for being on this call. My management team and I, of course, are always available to answer any questions you may have offline, particularly our IR director, Nuno Vieira. So, if there are any questions that were not answered or – please feel free to send us an email and we’ll get back to you.

And as we will be starting a road show shortly, and particularly spending some time in London, we hope to see you there in London and perhaps in some other cities where we will certainly also do a road show over the next three to four weeks. Thank you very much and I look forward to seeing you. Bye-bye.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.

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