We are upgrading our recommendation on Vivo Participacoes (VIV), the largest wireless operator in Brazil, to Outperform from Neutral. Currently, the stock has the Zacks #2 (Buy) Rank.
Vivo has a strong brand name in Brazil and the growth trend for the wireless business in that country remains positive in our view with the expansion of 3G coverage. The company's differentiated services along with its investment in spectrum licenses will provide an upside to the company's revenue and earnings going forward.
We believe the company is benefiting from its new operations in northeastern Brazil and expanded coverage for its 3G WCDMA network, the largest in that country.The expansion of 3G network provides significant advantage over its peers andwill enhance additional wireless data revenue growth in future. Vivo invested heavily on spectrum acquisitions (including the 1.9 GHz frequency bands) to reinforce its 3G network.
Third quarter earnings largely outpaced the Zacks Consensus Estimate by 25 cents on account of strong revenue driven by an expansion in the 3G mobile customer base. Net income shot up 80.9% and revenue climbed 10.4% year over year. However, average revenue per user dropped 7.4% year over year due to dilution caused mainly by the presence of multiple SIM cards in the market.
Vivo, now fully controlled by Spanish telecom giant Telefonica (TEF), continues to lead the domestic market in terms of new subscriber additions. The company gained 1.7 million subscribers in the third 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.
Vivo's growth trends are expected to remain positive in the foreseeable future given the rapid economic recovery in Brazil. Differentiated services, a premium portfolio of handsets and service plans as well as its bellwether position are contributing to the company's growth.
Further, Vivo is leveraging healthy cash flow from its cost cutting measures (through corporate restructuring) to reduce its debt exposure and fund dividend payments. Net debt of R$2.41 billion ($1.38 billion) at the end of the third quarter represents nearly 43.2% year-over-year decline. We expect Vivo to continue generating healthy free cash flow and reduce capital spending need, thereby creating opportunities for sustained debt reduction.
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