Second-quarter profit for Brazil’s four biggest mobile- phone carriers was below analyst estimates, including Slim’s America Movil (AMXL) SAB and leader Telefonica Brasil SA. (VIVT4) Oi SA (OIBR4) plunged Aug. 1 in Sao Paulo by the most in three months after it posted an 83 percent drop in earnings, and Tim Participacoes SA (TIMP3) also fell.
Companies are trying to gain market share among Brazil’s growing middle class by offering discounts of as much as 24 percent, allowing subscribers to cut their monthly bills even as mobile-phone use increases. Tim, Oi, America Movil’s Claro unit and Telefonica’s Vivo brand reported declines in per-customer spending of as much as 15 percent last quarter. Brazilian regulators also have penalized companies for customer complaints by banning some sales and ordering carriers to cut fees.
“What you have is a Brazilian economy that appears to have stopped on a dime,” Christopher King, an analyst at Stifel Nicolaus & Co. who recommends holding America Movil and Telefonica Brasil and buying Tim, said in a phone interview from Baltimore. “You’ve got a combination of carriers that feel desperate to grow revenue by growing subscribers, and you’ve got consumers that are spending less than they were.”
Telefonica Brasil, Brazil’s largest phone company by revenue, fell 1.3 percent to 48.72 reais at the close in Sao Paulo. The shares have declined 6.1 percent this year. Oi slid 0.8 percent to 9.25 reais today, and Tim slid 3.7 percent to 8.70 reais. Oi is down 15 percent this year, and Tim has fallen 5.8 percent. The Bovespa has gained 1.7 percent in the period.
$74 Billion Empire
America Movil’s customers in Brazil more than doubled in the past five years to 60 million wireless subscribers, making it the company’s fastest-growing market after the Caribbean. The increase was three times the pace of growth in Mexico. The company accounts for 58 percent of 72-year-old Slim’s $74 billion empire, according to the Bloomberg Billionaires Index.
Telefonica Brasil, the local unit of Madrid-based Telefonica SA (TEF), said July 25 that net income declined 5.6 percent from a year earlier to 1.09 billion reais ($538 million). Tim, the second-biggest carrier in Brazil, reported a 0.9 percent drop to 347 million reais, while No. 3 carrier America Movil said on July 26 that its Brazilian earnings before interest, taxes, depreciation and amortization, or Ebitda, fell 6.2 percent to 1.81 billion reais. Oi’s net income plunged 83 percent to 62.2 million reais.
When consumer spending falls sharply, carriers have to be more aggressive on price, said an America Movil official who asked not to be named under company policy. The government’s rate cuts have also hurt sales, the official said.
A Telefonica Brasil official who asked not to be named under company policy declined to comment.
Telecommunications regulator Anatel in Brasilia has increased oversight of the wireless industry this year as it seeks to catch up with other nations’ moves to cut prices and boost competition in the industry. On July 23, Anatel banned Tim, Claro and Oi from signing up new wireless voice and data customers in some regions because of network failures and customer complaints about poor coverage. It lifted the ban on Aug. 3 after companies agreed to spend a combined 20 billion reais on network upgrades through 2014.
In February, the regulator ordered companies to reduce fees they charge each other to connect calls by 14 percent. The mobile interconnection fee may decline by almost 80 percent by 2018, Anatel Commissioner Emilia Ribeiro said in a March 7 interview.
“Regulation has been heating up,” said Richard Dineen, an analyst at HSBC Holdings Plc in New York. “We’re not going to revert back to a period of super light-touch regulation.”
Companies are offering price discounts to lure customers as growth slows, Oi Chief Financial Officer Alex Zornig said in a telephone interview. While the slowdown will make it harder for companies to replicate the gains seen in recent years, Oi still has strong growth potential because it only controls about a quarter of the market, he said.
“The price war has reached the bottom of the barrel,” he said. “It should transition to a managed, rational environment.”
Brazil’s economy expanded 0.8 percent in the first quarter from a year earlier, the slowest rate since 2009. Economists are expecting gross domestic product to grow 1.85 percent this year, according to a central bank survey released yesterday.
Rising demand for data services such as Internet access and online video may help wireless carriers usher in more stable prices in the next few years than they have been able to maintain for voice, HSBC’s Dineen said.
Tim hasn’t seen evidence of a price war since no carrier is selling services below cost, said Rogerio Tostes, the company’s investor relations director. Data services such as Internet access will fuel additional growth, he said.
“The market still has growth ahead,” Tostes said. “What we saw in the last few years, with growth of 30 percent a year, will probably slow a little, but the prepaid segment and the lower middle classes still provide lots of opportunity to grow.”