Vivo Participacoes (VIV), the largest wireless operator in Brazil, reported robust net income of R$710.2 million (approximately $425.8 million), up 270.1% from R$191.9 million (approximately $106.6 million) in the year-ago quarter driven by strong operational activities and lower depreciation expenses. The company reported earnings per ADS of $1.06 in the reported quarter.
Consolidated EBITDA climbed 29.6% year over year to R$1,651.3 million (approximately $990.1 million). The improvement can be credited to continued growth in service revenues, especially data, and increased revenues from post-paid market share gains.
Revenue
Vivo, controlled by Spanish telecom giant Telefonica (TEF), posted net revenue of R$4,812.3 million (approximately $2,885.5 million) in the reported quarter, up 13.7% year over year. The improvement was attributable primarily to sustained growth in data and value-added services (VAS) and mobile Internet revenues.
Net service revenues climbed 14.7% year over year to R$4,508.3 million (approximately $2,703.2 million) driven by voice and data services revenue, a wider subscriber base, increased uptake of Internet plans and growth in the use of SMS. Data and VAS revenues (21.8% of net service revenue) leaped 43% year over year on the back of an expanded 3G mobile customer base and growth in revenues arising from SMS usage.
Mobile Internet revenues shot up 45.3% year over year, representing 54.2% of data and VAS revenues. Higher incentives through smartphones and modems led to the impressive growth in mobile Internet revenues.
Access and usage revenues (41.2% of net service revenue) increased 9% year over year to R$1,856.3 million (approximately $1,113 million), buoyed by increased subscribers, more prepaid services as well as higher voice service.
Network usage revenues (36.1% of net service revenue) grew 8.2% year over year to R$1,628 million (approximately $976 million).
Other services (0.9% of net service revenue) increased 20.8% year over year to R$41.3 million (approximately $24.8 million).
Net handset revenues inched up 0.1% year over year to R$304 million (approximately $182 million) in the reported quarter.
Subscriber, ARPU & Churn
Vivo gained 1.8 million subscribers in the first quarter, bringing its total customer base to 62.1 million (up 15% year over year). Vivo maintained its leadership in terms of net addition with roughly 23.4% market share.
The company continues to dominate the Brazilian wireless market, exiting the quarter with 29.5% overall market share and beating its biggest rival, America Movil’s (AMX) Claro. At the end of the first quarter, Vivo holds a 41.7% share in the data market as well as 35.5% share in the post-paid segment.
Average revenue per user (ARPU) dipped 0.8% year over year to R$24.6 (approximately $14.8) due to dilution caused mainly by multiple SIM cards. Incoming ARPU deteriorated 6.1% while Outgoing ARPU increased 2.7% year over year. Churn (customer switch) dropped to 2.7% from 2.5% in the year-ago quarter.
Cash, Debt & CAPEX
Vivo exited the first quarter with cash and cash equivalents of R$2.0 billion compared with R$805.9 million at the end of year-ago quarter. The company’s restructuring efforts are helping it to gain synergies and reduce net debt, which plunged 60% year over year to R$1.6 billion.
Vivo generated R$826 million of cash from operating activities in the first quarter compared with R$393 million in the year-ago quarter, representing a growth of approximately 111%. The company spent R$339.7 million in capital expenditure (capex), up 3.3% year over year. A significant portion of capex was directed toward the expansion of network capacity and information technology.
Our Analysis
Vivo has a strong brand name in Brazil and the growth trend for wireless business in that country remains positive in our view with the expansion of 3G coverage in the wireless market. We believe the company is making efforts to reduce debt and thereby improving its balance sheet.
In addition, differentiated services along with the investment in spectrum licenses will provide an upside to the company’s revenue and earnings going forward. However, declining ARPU, competitive threats and Brazilian regulation may limit the upside potential to the stock.
Hence, we are currently maintaining our long-term Neutral recommendation on Vivo supported by the Zacks #3 Rank (Hold).
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