Telefonica Bets Smartphones Hotter Than Brazil’s Economy

Telefonica SA, Latin America’s second-largest phone company, is counting on smartphone demand from Brazilian consumers to offset the effect of slower economic growth in its biggest market, said the region’s top executive.

“The market is only moderately dependent upon the economy,” Santiago Fernandez Valbuena, chief executive officer of Telefonica Latin America, said in an interview at Bloomberg’s Sao Paulo office. “Data migration is happening very fast in a very large way, and we think that’s the future.”

Competition is increasing in Brazil for the most profitable mobile users as consumers cut off landlines, forcing companies to invest in services like high-speed Internet to attract customers. In its home country of Spain, which has an unemployment rate of 27 percent, Telefonica is losing mobile subscribers and customer bills are decreasing, putting pressure on the Brazilian unit to supply growth.

Brazil this year became the biggest single market for Madrid-based Telefonica, the parent company of Sao Paulo-based Telefonica Brasil SA. Latin America represented 51 percent of Telefonica’s 14.1 billion euros ($18.8 billion) in revenue in the first quarter, according to data compiled by Bloomberg.

Only 16 percent of wireless users in Brazil have smartphones, Fernandez Valbuena said. The rate is 50 percent in Europe, showing Brazil still has ample room to grow, he said.

“It’s not a stagnant market like in Europe where you are going to go up and down with the ebb and the flow of macro,” he said. “Here, you still have a lot of penetration.”

Data Growth

Telefonica Brasil’s revenue from data and other non-voice services rose 19 percent in the first quarter of 2013 from a year earlier. Total sales climbed 2.9 percent in the first quarter in Brazil, compared with an 8.8 percent drop in its parent company’s revenue, according to data compiled by Bloomberg.

Telefonica Brasil had a 26 percent market share of mobile broadband accesses in April, compared to first-place America Movil SAB’s Claro brand with 40 percent, according to consulting firm Teleco. While Claro and Tim Participacoes SA offer lower prices, Telefonica provides better coverage, with a network that extends to more municipalities than all of its rivals combined, Fernandez Valbuena said.

“Telefonica is winning because of the quality and coverage of its network,” said Andre Baggio, a Porto Alegre, Brazil-based analyst at JPMorgan Chase & Co., in a telephone interview. “The company is ahead and others are trying to catch up.”

Brazil Performance

Telefonica is down less than 1 percent in Madrid trading this year, compared with a 7.1 percent increase for Telefonica Brasil in Sao Paulo and a 17 percent drop for the Ibovespa index. Telefonica Brasil is trading at 13 times estimated 2013 earnings, compared with nine times for the parent company, according to data compiled by Bloomberg.

Telefonica Brasil rose 1.5 percent to 52.50 reais at the close in Sao Paulo, while its parent company fell less than 1 percent to 10.11 euros in Madrid.

Brazil’s economy expanded 0.6 percent in the first quarter of 2013, below economist estimates of a 0.9 percent expansion. Household consumption has also slowed to 0.1 percent from 1.2 percent in the previous three-month period, the national statistics agency said. Economists expect Brazil’s gross domestic product to expand 2.5 percent this year, down from 3.2 percent in January, according to a central bank weekly survey published this week. In addition, inflation has quickened to 6.5 percent, matching the upper limit of the central bank’s target range.

Middle Class

“The weaker the economy gets, certainly it will hit the Brazilian middle class, the less money they will have to spend on everything, certainly including data,” said Christopher King, an analyst at Stifel Nicolaus & Co. in Baltimore, one of four who rate Telefonica Brasil’s American depositary receipts hold. Eight analysts say buy and none say sell.

Growth in data “is disassociated from the economy,” said Baggio, who rates Telefonica Brasil overweight. The Brazilian equity has 12 buy ratings, seven holds and one sell.

While he declined to provide a forecast for the second quarter of 2013, Fernandez Valbuena said the trend of customers shifting to data services and contract plans is similar to the first quarter. Contract customers rose 17 percent last quarter from a year earlier, and 81 percent of them bought smartphones.

About 20 percent of Brazilians have contract, or postpaid, plans for mobile-phone service, with the rest on prepaid accounts, according to the telecommunications regulatory agency, Anatel. Fernandez Valbuena said his goal is to shift more of those users to contracts, where they offer more-dependable, steady sales.

The economy is “not what we depend on, because we actually depend on something people want to do, have the means to do,” Fernandez Valbuena said.

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