TNE Tele Norte Leste Participacoes S.A. Common Stock

NET Servicos de Comunicacao S.A. (NETC) declared mixed financial results for the third quarter of 2011. Quarterly net income was $14.5 million or 13 cents per share compared with net income of $42.5 million or 13 cents per share in the year-ago quarter. The decline in net income is primarily attributable to significant foreign exchange rate volatility.

Net revenue (excluding connection cancellations and sales taxes), in the reported quarter, was approximately $1,055.3 million, up 24% year over year. The increase was mainly attributable to higher subscription revenue supported by subscriber base growth and subscribers’ preference toward high-end products.

Gross profit in third-quarter 2011 was 37.8% compared with 37.2% in the year-ago quarter. Quarterly operating expenses were $265.4 million, up 14.7% over the prior-year quarter. As a percentage of revenue, operating costs decreased from 27.2% in the third quarter of 2010 to 25.2% in the third quarter of 2011.

Quarterly operating margin was 12.6% compared with 10% in the prior-year quarter. Quarterly EBITDA was around $299 million, an improvement of 32% year over year. EBITDA margin in the third quarter of 2011 was 28.3% compared with 26.7% in the prior-year quarter.

During the first nine months of 2011, NET Servicos generated $742.8 million of cash from operations, up 30.8% year over year. Free cash flow (operating cash less capital expenditures) in the first nine months of 2011 was $11.67 million compared with just $5.5 million in the year-ago period.

At the end of the third quarter of 2011, NET Servicos had approximately $427.2 million of cash and cash equivalents, a decrease of 15.5% from the end of 2010. Total debt, at the end of the reported quarter was around $1,300 million, down 3% from the end of 2010. Debt-to-capitalization ratio at the end of third-quarter 2011 was 0.33 compared with 0.35 at the end of fiscal 2010.

Recommendation

We maintain our long-term Neutral recommendation for NET Servicos. The company is facing stiff competition from Brasil Telecom S.A. (BTM), Tele Norte Leste Participacoes S.A. (TNE), and Telefonos de Mexico (TMX). Currently, NET Servicos has a short-term Zacks #3 Rank (Hold) on the stock.

 
BRASIL TELECOM (BTM): Free Stock Analysis Report
 
NET SVCS DE COM (NETC): Free Stock Analysis Report
 
TELMEX ADR-CL L (TMX): Free Stock Analysis Report
 
TELENORTE L ADR (TNE): Free Stock Analysis Report
 
Zacks Investment Research