Zacks_Analysts' Blog : NET Servicos Posts Mixed Results - Analyst Blog

NET Servicos de Comunicacao S.A. (NETC) declared mixed financial results for the fourth quarter of 2010. Quarterly net income was $78.3 million or 23 cents per share compared with net income of $81.2 million or 25 cents per share in the year-ago quarter. Fourth-quarter 2010 EPS of 23 cents was well above the Zacks Consensus Estimate of 19 cents.

Fourth-quarter gross revenue was $1,114.2 million, an improvement of 16.7% year over year. The increase was mainly attributable to higher subscription revenue as the subscriber base enlarges. Net revenue (excluding connection cancellations and sales taxes), in the reported quarter, was $856.4 million, up 17.8% year over year. However, this was significantly lower than the Zacks Consensus Estimate of $950 million.

NET Servicos generated significant subscriber growth in the reported quarter. At the end of fiscal 2010, Pay TV subscriber base was 4,212,000, up 14% year over year. Net additions during the quarter were 147,000 clients. Broadband subscriber base totaled 3,524,000, up 22% year over year. Net additions during the quarter were 195,000 clients.  Fixed Telephone Line in Service was 3,153,000, up 23% year over year. Net additions during the quarter were 172,000 clients.

Quarterly operating expenses were $405.8 million, up 12.6% over the prior-year quarter. However, as a percentage of revenue, operating costs fell from 49.6% in the fourth quarter of 2009 to 47.4% in the fourth quarter of 2010. Selling, General  & Administrative expenses were $184 million, up 17.4  year over year.

Quarterly EBITDA was $262.8 million, an improvement of 28.3% year over year. EBITDA margin in the fourth quarter of 2010 was 30.7% compared with 28.2% in the year-ago quarter. Total capital expenditure in fiscal 2010 was $706.8 million, up 13% over fiscal 2009.

At the end of fiscal 2010, NET Servicos had $483.9 million of cash and cash equivalents. At the end of fiscal 2010, net debt of NET Servicos was $799 million compared with $697 million at the end of fiscal 2009. However, net debt-to-EBITDA ratio was 0.87 at the end of 2010 compared with 0.95 at the end of 2009.

Recommendation

We maintain our long-term Neutral recommendation for NET Servicos. The company is generating commendable Pay-TV subscriber growth despite facing stiff competition from Brasil Telecom S.A. (BTM), Tele Norte Leste Participacoes S.A. (TNE), and Telefonos de Mexico (TMX). Therefore, currently NET Servicos holds a short-term Zacks #2 Rank (Buy) on the stock.