Friday, August 16, 2013

Oi Reports Disappointing Q2 2013

Oi (OIBR) just announced their Q2 results. And the news didn't improve. Revenues increased slightly QoQ but EBITDA decreased significantly to 1797 M reais from 2151 M reais a quarter ago — 1 USD is approximately 2.2 reais. This meant earnings came in at -124 M reais (-0.08 reais per share) versus 262 M reais a quarter ago. This is the first losing quarter since 2011.

Management said the 354 M reais drop in EBITDA was because of three main expenses. The followings shows all their operational expenses.

The first problematic expense is personnel. Management said the increase was due to an one-off wage benefit (100M) and a 6% inflation increase to wages. The second is marketing expenses. Oi is the official sponsor of the just completed Confederation Cup and spent 66M. The third one is bad debts (115M) which was due in part because of the downturn in Brazil's economy. So the management emphasized that the drop in net income can be explained by one-off special expenses and bad credit requirements. Bad debt is running at about 300M a quarter and should be half that. But if the sales department get picky with customers, how will that affect revenue?

To me, the crux of the problem is the margins, EBITDA margin is now 25.4% versus 30.5% a quarter ago. This is clearly unacceptable. But can the company change that, or is it that the company needs low margins to sustain the revenue? The jury is out. But from a revenue perspective the company seems to be doing ok. The newly appointed CEO Bava did emphasize costs as his first priority. The media is very positive about him, if he is that good, I think he should be able to fix the cost problem.

Debt and Dividends

The company's net debt level is now at 29.5 B reais. That is a 2 B increase over a quarter ago despite 1 B in asset disposals! The company paid 900 M reais in various fees that are not quarterly recurring. Capex was 1506 M reais. Bava said that capex will be lower next year, below 6 B reais. The company has 12 B reais of liquidity so I don't think it is an issue over the next year or two.

To help manage the debt problem, the company will now pay the legal minimum of about 500M reais a year in dividends. That works out to about $0.14 USD per share. The preferred stock last traded at $1.61 USD per share.

In addition, in the coming two quarters the company will realize more than 1 B reais cash for previously mentioned asset sales.

Final Thoughts

My original reason for buying Oi many years ago was to participate in the rise of the BRICs. Many developing countries are now hitting a speed bump. But emerging ecomonies will be the growth of the future. Brazil has a fast rising middle class that will very much need telecom services. Oi I feel is a company that just needs to get its act together. It has been under medicore mangement for too long.

Portugal Telecom, Bava's previous company and Oi's parent company, also reported poor earnings recently. In the coming weeks, I will, look into PT to see if Bava is really that good and what he did at PT. I may post my findings.
As another note, Fitch just downgraded Oi from BBB to BBB-. This is the last rating before junk.

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