Poor 2Q Results For Brazil Phone Cos Confirm Tough Times

SAO PAULO -(Dow Jones)- Uninspiring second quarter results for Brazilian telecom companies confirms the tough time many are currently experiencing.

The continued erosion of Brazil's fixed-line customer base caused revenues to drop for two of the three main operators - the first time this has happened since the telephone system was privatized in 1998 - and wireless operators are finding it difficult to increase margins in the cutthroat business environment.

"It was a disappointing set of results overall," said Luciana Leocadio, telecom analyst at BES Securities in Rio de Janeiro.

The telecom firms' results were littered with provisions and also hurt by one-off events.

Three holidays fell on weekdays during April, while June saw a number of foreshortened working days due to the soccer World Cup, when Brazilians are traditionally allowed to leave work early to watch matches. When they aren't in their offices, they aren't making so many calls, which especially hurts fixed-line operators.

The fixed-line firms saw revenues bolstered by broadband and wireless services, but this compensation was not as large as had been expected, said BES Securities' Leocadio.

Brazil's largest telecom firm, Tele Norte Leste Participacoes, or Telemar, saw net operating revenues fall to 4.06 billion Brazilian reals ($1.90 billion), down from BRL4.12 billion a year ago. The company registered net profit of BRL282.2 million, up from BRL203.8 million last year but below market expectations that centered on an estimate of BRL329 million.

Brasil Telecom Participacoes registered gross revenue of BRL3.62 billion in the last quarter, down 0.6% from BRL3.64 billion in the year before period. However, Brazil's third-largest phone company registered a rise in second-quarter net profit based on growth in its more lucrative mobile and data services.

The only fixed-line company to register growing revenues was Telecomunicacoes de Sao Paulo, or Telesp. Revenues rose 2% to BRL3.61 billion.

Meanwhile, wireless firms continued to suffer from the intense competition. They have stopped offering subsidies on prepaid phones, which are aimed principally at lower income brackets, but the financial results showed that attempts to keep clients through special offers on higher-end subscription plans was taking its toll.

"Mobile phone companies seem to have a fundamental problem raising margins," said Alex Pardellas, telecom analyst at ABN Amro in Sao Paulo.

Brazil's largest mobile-telephone company, Vivo Participacoes, posted a second-quarter net loss of BRL493.1 million, sharply wider than its net loss of BRL252.7 million last year, which it said was due to rising costs and exceptional provisions.

The company canceled 1.8 million subscriptions as it tidied up its customer base - and Vera Rossi, telecom analyst at Morgan Stanley said there may be more cuts to come.

"(Vivo) is also facing further customer disconnections due to the intense competitive environment in Brazil," Rossi said in a research note, adding that the competition shifted its focus to the mid to high-end segment late last year, where Vivo has the highest market share as an incumbent operator.

Tim Participacoes continued to perform slightly better than its competitors. The firm reported a net loss of BRL249 million for the second quarter, compared with a loss of BRL333.3 million in the same period a year ago. The loss was slightly greater than forecast by analysts, mainly due to high tax provisions.

Shares in local telecommunications firms continued to be offered at large discounts compared with other Brazilian firms.

While the indifferent results obviously turn off investors, corporate governance as well as regulatory and technology risks are still the key factors that keep telecom stocks under pressure, said ABN Amro's Pardellas.

With quarterly results continuing to disappoint, and competition remaining very tough, a major reorganization of the industry's ownership structure is expected at some point, although who will take over who and when remains unclear.

-By Alastair Stewart, Dow Jones Newswires; 5511-3145-1479; alastair.stewart@dowjones.com

(END) Dow Jones Newswires"

Posted to the site on 16th August 2006