Morningstar | Telefonica Brasil Reported Mixed 2Q Results With Weak Revenue Growth but Solid Margins
Telefonica Brasil reported mixed second-quarter results with weak revenue growth but improved EBITDA margins. We expect to reduce our $13.50 per ADR fair value estimate by about $1 per share because of the weakening of the Brazilian real versus the U.S. dollar since our last update. With this adjustment we think the shares are fairly valued. While we continue to believe Telefonica Brasil is the best-positioned telephone company in Brazil, it still doesn't have an economic moat. The firm reported revenue growth of 1.2% year over year, which is below our full-year projection of 3.5%.The wireless division continues to perform well with revenue growth of 4.2%. It increased its market-leading postpaid subscriber base 10.8% to 38.4 million, which is now larger than its prepaid base. Its prepaid base declined 7.1% to 36.8 million. Despite the growth of postpaid subscribers at America Movil and TIM Brasil, Telefonica Brasil maintains 41.3% market share in postpaid and 31.9% for all wireless customers, still the highest market share in the country. The firm's wireless average revenue per user, or ARPU, also increased 0.5%. We expect Telefonica Brasil to remain the largest wireless operator in Brazil and to continue to increase its subscriber base and ARPU.
However, the fixed-line side continues to struggle to recover from Brazil's recession. Revenue in this division fell 3.7%. While broadband revenue increased 14.3%, this was insufficient to offset declines elsewhere. Broadband revenue benefited from the continued move to faster broadband speeds, with 66.1% of revenue being generated from ultra broadband customers. We expect this trend to continue throughout this year.
Telefonica Brasil has done an even better job than we anticipated at controlling costs, which pushed its adjusted EBITDA margin to 37.6%, nicely ahead of our 35.1% full-year projection. We believe there is room for further margin expansion.
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