Brazil Telecom Firm Oi Sees Higher Profit, But Challenges Remain
05/15/2012| 06:04pm US/Eastern
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--Brazilian telecom group Oi sees profits triple, but declining wireline revenues still weigh
--Chief executive says challenge is to grow customers, sell more products
--Chief financial officer says in interview that turnaround has begun
By Matthew Cowley
Of
Brazilian telecommunications group Oi S.A. (OIBR4.BR) saw its profit more than triple in the first quarter, while executives said the firm's business plan is starting to gain some traction.
The company posted a net profit of 346 million Brazilian reais ($174 million) in the first quarter, up from BRL93 million in the year-earlier period.
However, as the company completed a major reorganization halfway through the quarter, pro forma results showed that net revenue was BRL6.8 billion, down 2.2% from a year ago, while earnings before interest, taxes, depreciation and amortization, or Ebitda, were BRL2 billion, up 1.4%.
Oi continues to struggle with a declining fixed-line business, which is falling off at a faster pace than the mobile business is growing. The number of customers is up, but revenues aren't rising as fast, although the firm insists that there are clear signs of a turnaround.
"We have to sell more services to more people and that's how you will start to grow revenues. That's the challenge," Francisco Valim, Oi's chief executive, told reporters. The executive said that adding to the problems, prices for telephone services in Brazil are falling, in real terms, while taxes account for about 50% of the firm's revenue.
Alex Zornig, the firm's chief financial officer, told Dow Jones Newswires in an interview that the company has managed to reduce the turnover in its fixed-line business in the quarter, and Oi was the fastest growing in terms of postpaid mobile telephone customers in Brazil.
Some observers remain skeptical. Analysts at Credit Suisse said the "high exposure to fixed-line revenues may entirely offset mobile growth in 2012." Meeting the company's goals for this year will require strong growth over the next nine months, "which we see as very challenging," Credit Suisse said.
Zornig reaffirmed Oi's commitment to its guidance for the year, saying the firm is on track to meet its Ebitda target of BRL8.8 billion, despite the challenges, and amid the backdrop of a sluggish economy.
While prepaid mobile telephony is most directly affected by the economic cycle, services such as pay television and high-speed Internet access aren't, because there is such pent-up demand, Zornig said. Oi should be protected for the next two or three years, he added.
The company is starting to see the benefits of the major corporate reorganization, which saw several Oi group companies folded into one. Expenses fell compared with the fourth quarter, and the company will save money by not having to file securities reports for the companies that have ceased to exist, Zornig said.
Credit Suisse, meanwhile, said Oi's dividend yield should remain "increasingly attractive" against a backdrop of ongoing cuts in the central bank's overnight rate, the Selic. Oi said it paid BRL2 billion in dividends in early May, and will pay a further BRL1 billion in August.
The investment bank said Oi's shares continue to trade at a discount to rivals Telefonica Brasil SA (VIV, VIVT4.BR) and TIM Participacoes SA (TIMP3.BR) because of the higher debt levels and challenges associated with delivering its business plan.
Oi ended the quarter with BRL17 billion net debt, up 21% from a year ago. Zornig said the debt was up in the first quarter because of an annual tax payment and to pay for investments. Foreign currency debt accounted for 35% of total debt, but just 0.7% had some exposure to currency swings because of hedging operations, as well as a cash position maintained in foreign currency.
Oi's debt is manageable, Zornig said, and it is relatively long term and at a relatively low cost by Brazilian standards. The company does have some non-core assets that could be sold, and if that were to happen then the proceeds would be used to pay down debt.
The firm invested BRL1 billion in the first quarter, up from BRL829 million a year ago. The company plans to invest BRL6 billion this year in total, Zornig said.
-By Matthew Cowley, Dow Jones Newswires; +55 11 3544 7071; matthew.cowley@dowjones.com
--Rogerio Jelmayer contributed to this article.
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