Portugal Telecom Posts Q2

LISBON -- In 2Q10, operating revenues amounted to Euro 1,909 million, up by 17.1% y.o.y, EBITDA reached Euro 664million, up by 11.4% y.o.y and net income increased by 82.5% y.o.y to Euro 164 million. In 1H10,consolidated operating revenues amounted to Euro 3,682 million, up by 13.8% y.o.y, while EBITDA reachedEuro 1,297 million, up by 8.2% y.o.y. Consolidated EBITDA margin stood at 35.2%. Income from operationsreached Euro 488 million. In 1H10, the contribution of fully and proportionally consolidated internationalassets to operating revenues and EBITDA stood at 57.2%, up by 7.4pp y.o.y, and at 48.8%, up by 7.6ppy.o.y, respectively. Net income amounted to Euro 264 million and basic earnings per share reached Euro0.30. In 1H10, Capex decreased by 4.5% to Euro 484 million, equivalent to 13.1% of revenues and wasprimarily directed to the investment in the rollout of new technologies and services, namely the fibre networkand TV service in Portugal and the investments in 3G and 3.5G in Portugal and Brazil. Despite the continuedinvestments in new technologies and services, EBITDA minus Capex increased by 17.5% y.o.y to Euro 813million. Operating cash-flow stood at Euro 466 million, while free cash-flow reached Euro 118 million mainlydue to an increase in income taxes paid, primarily at Vivo, following the improvement in its earnings andappreciation of the Brazilian Real. As at 30 June 2010, net debt amounted to Euro 6,093 million, while aftertaxunfunded post retirement benefit obligations totalled Euro 1,193 million.

Income Statement

In 1H10, consolidated operating revenues increased by 13.8% y.o.y to Euro 3,682 million, as a result ofrevenue growth in wireline and international operations, namely Vivo, Timor Telecom and Dedic, PT’s contactcentre and outsourcing business in Brazil.

In 1H10, revenues from domestic operations decreased by 2.3% y.o.y. The revenue performance of domesticoperations was negatively impacted by lower equipment sales (Euro 7 million), lower MTRs (Euro 4 million),and lower customer revenues at TMN, which more than offset the increase of wireline revenues,notwithstanding the negative impact of the change in the recognition of contract penalties (Euro 8 million).

In 1H10, wireline operating revenues increased by 0.6% y.o.y, from Euro 965 million to Euro 971 million.Adjusting for the change in revenue recognition of contract penalties referred to above, wireline revenueswould have increased by 1.4% y.o.y, underpinned by retail revenues and data and corporate and despitelower wholesale revenues. Retail revenues were broadly flat at Euro 484 million in 1H10. Adjusting for thechange in the recognition of contract penalties, wireline retail revenues would have grown by 0.9% y.o.y, onthe back of the continued strong performance of the Meo triple-play offer (voice, data and pay-TV), whichcontinues to mitigate significantly fixed line net disconnections, which stood at 36 thousand in 1H10 comparedto 65 thousand in 1H09 and 110 thousand in 1H08. Moreover, net disconnections of traffic generating linesstood at only 13 thousand in 1H10, compared to 44 thousand in 1H09, an improvement of almost 70% y.o.y.

In the wireline, retail net additions reached 156 thousand in 1H10, up by 13.9% y.o.y, driven by the success ofPT’s Meo triple-play offer, which is contributing to gain in broadband market share and record losses in termsof fixed line net disconnections. ADSL retail customers increased by 19.5% y.o.y in 1H10, reaching 933thousand customers. Broadband retail net additions reached 71 thousand in 1H10, in line with the improvingtrend posted during 2009. PT’s Meo offer continues to see strong demand in the market having reached anestimated market share of 27% and surpassed the 700 thousand customer threshold. Pay-TV net additionsreached 122 thousand in 1H10 and total pay-TV customers stood at 702 thousand, equivalent to 75.3%penetration of the ADSL retail customer base, up by 18.6pp y.o.y. Retail RGU per access increased by 11.3%y.o.y in 1H10 to 1.60.

In 1H10, TMN’s operating revenues decreased by Euro 48 million (-6.5% y.o.y) to Euro 689 million, mainlydue to: (1) lower customer revenues (Euro 19 million), against a backdrop of adverse economic conditionsand increased penetration of on-net flat-fee prepaid tariff plans in prepaid customers; (2) lower equipmentsales (Euro 17 million), and (3) lower interconnection revenues (Euro 8 million), partially as a result of thenegative impact of lower MTRs (Euro 3 million). Non-SMS data revenues continued to be an important sourceof growth, on the back of increasing penetration of smartphones and wireless data cards. Non-SMS datarevenues increased by 9.1% y.o.y in 1H10, now representing 60.6% of total data revenues. Data revenuesreached 24.2% of service revenues, up by 1.5pp y.o.y.In 1H10, Vivo’s operating revenues increased by 30.7% y.o.y in Euros and 6.6% y.o.y in Reais, improving therevenue trend seen in 2009 and in 1Q10, on the back of continued customer growth (19.6% increase y.o.y inthe customer base) and data revenue growth.

Other revenues, including intra-group eliminations, increased by 51.9% y.o.y in 1H10 to Euro 137 million. Thisperformance was mainly due to: (1) the increase of 32.1% y.o.y at Timor Telecom; (2) the improved trends atDedic, and (3) the consolidation of GPTI, an IT / IS company acquired by Dedic, as from 1 March 2010. Theseeffects more than offset the revenue contraction at CVT in Cape Verde, which was primarily due to weakeconomic conditions and adverse regulation.

Portugal Telecom SGPS SA (NYSE: PT)