Portugal Telecom Reports H1 688518

LISBON -- Following the acquisition of PT’s investment in Brasilcel by Telefónica on 27 September 2010, PT adjusted its financial statements for previous periods in order to recognise Vivo as a discontinued operation. This trading update, which is not a complete release of financial statements and therefore is unaudited, excludes the proportional consolidation of Oi and Contax. A complete and audited earnings release will be disclosed on 31 August 2011.

In 1H11, operating revenues excluding Oi and Contax amounted to Euro 1,744 million, down by 5.3% y.o.y, while EBITDA reached Euro 708 million, down by 5.3% y.o.y. EBITDA margin stood at 40.6%, flat y.o.y. Excluding Oi and Contax, capex decreased by 5.8% y.o.y to Euro 294 million, equivalent to 16.9% of revenues, and was primarily directed to the investment in the rollout of new technologies and services, namely the FTTH network and TV service and to investments in the swap of 2G equipment to LTE (4G) enabled equipment. In 1H11, EBITDA minus capex reached Euro 414 million (-4.9% y.o.y). Operating cash flow stood at Euro 410 million, up 164.7% y.o.y, on the back of improving revenues and EBITDA trends, downward pressure on capex following the completion of the network modernisation programme and tight management of working capital. Free cash flow, excluding the investment in Oi and Contax, reached Euro 486 million, up from Euro 31 million in 1H10. As at 30 June 2011, net debt excluding the proportional consolidation of Oi and Contax and adjusted for the receivable from Telefónica and for the tax effect related to the transfer of the regulated pension plans to the Portuguese state, amounted to Euro 4,269 million, including the Euro 1,139 million dividend payment. In 1H11, cost of net debt stood at 1.66%. Excluding the interest on certain cash deposits in Brazilian reais, related to the acquisition of Oi, cost of net debt stood at 3.51% in 1H11. The liquidity position, including cash, underwritten commercial paper, standby lines and the receivable from Telefónica in connection to its acquisition of PT’s investment in Vivo, stood at Euro 5,372 million, as at 30 June 2011.

Portuguese Businesses
Revenues from Portuguese businesses, which include wireline and TMN, decreased by 7.5% y.o.y in 2Q11. In the wireline segment, retail revenues increased by 0.9% y.o.y in 2Q11 underpinned by the performance of the residential segment (+6.3% y.o.y in 2Q11), which benefited from the solid and steady growth of Meo’s double-play and triple-play offers. Wireline revenues, adjusting for a contract with public administration related to the provision of broadband in schools (Euro 11 million) and for the decline in the directories business (Euro 5 million), declined by 1.1% y.o.y in the quarter impacted primarily by lower wholesale revenues (Euro 7 million), which reflected the Euro 2 million reduction in ULL and DSL wholesale revenues. Revenue performance at TMN was impacted by: (1) lower customer revenues (Euro 23 million), as a result of the economic conditions, including the 3pp y.o.y increase in VAT and increased popularity of tribal plans, namely those without a monthly fee and only with mandatory topup obligations; (2) lower interconnection revenues (Euro 11 million), mainly due to lower MTRs, and (3) lower equipment sales (Euro 2 million). TMN revenues in the quarter registered a marked improvement: -10.7% y.o.y in 2Q11, which compares to -12.4% in 1Q11. In 1H11, non-voice revenues in Portugal represented 46.0% of services revenues, having grown 4.0pp y.o.y. This positive evolution of PT’s revenue mix is making performance more resilient and predictable and was achieved on the back of increased penetration of data and video services accross all segments, following the significant investments in the fibre rollout and leading-edge technology.

In 2Q11, EBITDA from Portuguese businesses declined by 4.3% y.o.y to Euro 332 million. EBITDA margin increased by 1.5pp y.o.y to 45.0%. Operating costs excluding PRBs and D&A in Portugal declined by 9.9% y.o.y reflecting: (1) pay-TV reaching critical mass, which leads to lower programming costs per customer in the wireline segment; (2) fibre rollout, which has a superior quality of service leading to lower customer support and network maintenance costs; (3) the implementation of transformation initiatives, namely in customer care and field force, benefiting from fixed-mobile integration, and (4) additional measures undertaken in anticipation of weaker macro fundamentals, reflecting PT’s strong cost focus. In 2Q11, EBITDA in the wireline business increased by 1.1% y.o.y, the best performance in the last nineteen quarters, benefiting from the pay-TV customer base having reached critical mass and thus confirming the success of Meo as the key driver of the turnaround in the wireline business. This solid EBITDA performance in the wireline business was achieved against a backdrop of lower contribution to revenues and EBITDA derived from the directories business, which declined by Euro 5 million and by Euro 1 million, respectively. EBITDA at TMN declined by 10.7% y.o.y. EBITDA margin was flat y.o.y at 46.9%.

Portugal Telecom SGPS SA (NYSE: PT)