Vivo Beats on Solid Data Revenue - Analyst Blog

Vivo Participacoes (VIV), the largest wireless operator in Brazil, reported third quarter earnings per ADS of 86 cents, surpassing the Zacks Consensus Estimate of 61 cents. Net income jumped 80.9% year over year to R$601.8 million ($345.3 million) on the back of higher revenues.

Consolidated EBITDA increased 10.1% year over year to R$1.54 billion ($883 million), driven by continued growth in service revenues, especially data revenue, as well as efficient subsidy and sales commission control.

Revenue

Vivo, now fully controlled by Spanish telecom giant Telefonica (TEF), posted net revenues of R$4.61 billion ($2.64 billion), up 10.4% year over year, driven by sustained growth in data and value-added services (VAS) revenues as well as higher handset sales.

Net service revenues in the quarter increased 10.1% year over year to R$4.3 billion ($2.47 billion), driven by nearly 61.4% year over year growth in data and VAS revenues (19.6% of net service revenue) on an expansion in the 3G mobile customer base. Mobile Internet revenues shot up 92.3% year over year, representing 54.2% of data and VAS revenues. Higher incentives through smartphones and modems led to the whopping growth in mobile Internet revenues.

Access and usage revenues (43.9% of net service revenue) spiked 5.9% year over year to R$1.9 billion ($1.09 billion), primarily driven by an increase in the number of customers, more prepaid services and higher voice service consumption.

Network usage revenues (35.7% of net service revenue) inched up 0.4% year over year to R$1.54 billion ($884 million). Handset revenues climbed 14.9% to R$300.5 million ($172.4 million).

Subscriber, ARPU & Churn

The company gained 1.7 million subscribers in the quarter to reach 57.71 million (up 18.2% year over year) customers in total. Vivo maintained its leadership in terms of net addition with roughly 27.4% market share, beating its biggest rival America Movil's (AMX) Claro. The company continues to dominate the Brazilian wireless market, exiting the quarter with 30.14% overall market share and a 35.3% share in the post-paid segment.

Average revenue per user (ARPU) dropped 7.4% year over year to R$25.2 ($14.5) due to dilution, caused mainly by the presence of multiple SIM cards in the market. Outgoing ARPU dipped 1.9% year over year, while incoming ARPU declined 15.5%. Churn (customer switch) improved to 2.9% from 2.5% in the year-ago quarter.

Cash, Debt & CAPEX

Vivo exited the quarter with cash and cash equivalents of R$1.8 billion ($1.0 billion). The company's restructuring efforts are helping it to gain synergies and reduce net debt, which fell 56.8% year over year to R$2.4 billion ($1.4 billion).

Vivo generated R$1.4 billion ($787.4 million) of cash from operating activities and spent R$675.2 million ($387.4 million) in capital expenditure (CAPEX). A significant portion of CAPEX was directed at the expansion of network capacity and technology as well as coverage to support the growing demand for voice and data services.

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, which is the largest in Brazil. However, we are concerned about 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 on Vivo, supported by the Zacks #3 (Hold) Rank.