Analyst Commentary

• Portugal Telecom is forging ahead with the domestic rollout of its LTE, extending coverage to some 80% of the population and intending to increase this to more than 90% of continental Portugal by the end of 2012.

• In Brazil, its unit Oi is aggressively expanding its broadband coverage under the national broadband plan (PNBL), recently adding 150 new municipalities and taking its total coverage to 1,232 regions in the country.

Today we focus on four developments:

• Portugal Telecom has revealed its first-quarter revenues were EUR1.72 billion (USD2.19 billion), up from EUR871 million in the same quarter of last year, due to the effects of the consolidation of its Brazilian unit Oi. The group also revealed its domestic sales fell 5.2% year-on-year (y/y) to EUR680 million, while revenues from Brazil were EUR788 million, representing some 46% of Portugal Telecom’s total sales. The operator's earnings before interest, taxes, depreciation and amortisation (EBITDA) rose 60% y/y to EUR572 million due to the Oi consolidation, while operating costs more than doubled to EUR1.14 billion. Operationally, Portugal Telecom saw its total fixed-line retail accesses rise 6.6% y/y to 4.88 million, driven by a 11.9% y/y rise in broadband connections to 1.14 million, while mobile customers stayed virtually flat at 7.46 million. In Brazil, fixed-lines fell 7.8% y/y to 12.8 million, while broadband users rose 15.4% y/y to 4.6 million, as mobile subscribers were up 12.2% y/y to 44.1 million.

• In Poland, NFI Midas has reported its first quarter results with revenues tripling to 18.2 million zloty (USD5.3 million). Earnings before interest, tax, depreciation, and amortisation (EBITDA) decreased from a loss of PLN4.5 million in 2011 to a loss of PLN11 million in the first quarter of 2012. Operating losses increased to PLN26.2 million, from 1.5 million a year prior. The hike in revenues was due to the increase in wholesale customers of mobile operators Centernet, Mobyland, and Aero2. Deals with Cyfrowy Polsat, Polkomtel, and Sferia will continue to add to group revenues as the three operators look to increase their population coverage. As part of the network deployment NFI Midas has teamed up with Polkomtel, also control by Zygmunt Solorz-Zak, for a equipment tender worth PLN800-900 million (see Poland: 20 January 2012: Polkomtel and NFI Midas Prepare for USD270 Mil. Equipment Tender). Further cooperation between NFI Midas and Polkomtel is expected as Solorz-Zak looks to improve profitability through decreased costs.

• United Kingdom fixed-line player TalkTalk has revealed its first-quarter revenues fell 3% y/y to GBP421 million (USD671 million), as its total subscriber base fell 3.2% y/y to 4.07 million. The operator has also announced its revenues for the full financial year to end-March, which fell 4% y/y to GBP1.69 billion, while full-year EBITDA rose 18% y/y to GBP326 million, due to some fairly aggressive cost-cutting. TalkTalk has now raised its EBITDA margin target to 25% over the medium term, from the current 19.3%, as cost cutting and improved average revenue per user boosted its outlook. Meanwhile, the UK regulator has again called on the UK broadband operators to improve the information provided to customers about potential download speeds, singling out TalkTalk as one of the worst offenders (see United Kingdom: 16 May 2012: Analyst Commentary).

• Hungary’s three mobile operators have proposed modifications to the government’s planned tax on the telecoms sector. Magyar Telekom, Telenor, and Vodafone jointly issued a statement proposing the monthly cap on individuals be reduced from 700 forint (USD3) per month to HUF400, while corporations cap should be set at HUF1,400, rather than the government’s planned HUF2,500 (see Europe: 9 May 2012: Analyst Commentary). The operators also reiterated their stance that the tax is an unfair burden on the telecoms sector and will not raise the amount of money the government is looking for.

Our Take

Portugal Telecom's domestic revenues continue to fall, due to the deep recession and painful austerity measures being introduced in the country following the European Union/IMF bailout. However, the operator is forging ahead with the rollout of its LTE network in the country, extending coverage to some 80% of the population by the start of May, and now intends to bring the service to more than 90% of continental Portugal and the islands by the end of 2012 (see Portugal: 7 May 2012: Analyst Commentary). Portugal Telecom's mobile unit TMN won a licence to launch LTE services in the 800-MHz band in the digital dividend auction in December, along with rivals Optimus and Vodafone Portugal (see Portugal: 2 December 2011: All Three Portuguese Operators Gain 800-MHz Spectrum in Digital Dividend Auction). However, competition is growing in the Portuguese mobile market as ongoing economic uncertainty fuels an ongoing price war, causing active mobile devices to fall 0.5% y/y in the fourth quarter of 2011 (see Portugal: 22 February 2012: Portuguese Active Mobile Connections Fall 0.5% in Q4).

Portugal Telecom consolidated its 25% stake in Brazil's largest operator Oi from April 1 last year, bringing a huge boost in revenues, but also higher operating costs. Oi is aggressively expanding its broadband coverage under the national broadband plan (PNBL), recently adding 150 new municipalities in April, taking its total coverage to 1,232 regions in the country (see Brazil: 20 April 2012: Analyst Commentary). Meanwhile, Oi is looking to launch fibre-to-the-home (FTTH) broadband next year, where it will face competition from rival TIM Brasil, which plans to launch its own fibre broadband service in the third quarter of this year, marking the Telecom Italia-owned operator's entry into the residential broadband space (see Brazil: 1 May 2012: Analyst Commentary). Meanwhile, in the mobile sector, Oi and its rivals Vivo, Claro, and TIM have filed petitions against plans to tender licences in the 2.5-GHz and 450-MHz bands in June 2012, saying they would likely prefer that 450-MHz spectrum is excluded from the auction, uneasy with the regulator’s dual objective of offering LTE spectrum for urban deployment, whilst asking the operators to deploy 450 MHz to improve rural mobile broadband coverage (see Brazil: 15 May 2012: Analyst Commentary).