Bloomberg News

Telmex Net Rises to 7 Billion Pesos on Brazil Sales

July 26, 2006

Telefonos de Mexico SA, Latin America's biggest fixed-line carrier, said consolidated net income rose to 7 billion pesos ($617 million) led by growing sales in Brazil of internet service to businesses.

Profit rose from 6.5 billion pesos reported a year ago. Earnings per Mexican share rose to 33 centavos from 28 centavos a share last year before adjusting for inflation.

Sales rose to 42.4 billion pesos from 40.2 billion pesos as reported a year ago. In Mexico, sales declined 0.9 to 30.6 billion pesos from a year ago after adjusting for inflation, Telmex said. Sales in Brazil rose 7.4 percent to 2 billion reais ($909 million).

``In Mexico, Telmex's growth is slowing because of competition, mostly from cellular telephones,'' said HSBC Holdings Plc analyst Raul Ochoa, who has covered the company for 14 years, before the earnings release.

Telmex, which the government sold in 1990 to a group of investors led by billionaire Carlos Slim, is focusing on internet services in Mexico and acquisitions abroad as it faces slowing demand for new phone lines and eroding prices for calls.

Earnings before interest, taxes, depreciation and amortization -- a measure of cash flow known as Ebitda -- was 18.3 billion pesos, up from 17 billion pesos a year ago before adjusting for inflation.

Brazil

Sales of internet services in Mexico rose more than 12 percent, helping compensate for dwindling fixed-line telephony revenue. In the second quarter, local and long-distance services accounted for 67 percent of Telmex's Mexico revenue compared with 82 percent five years ago.

In Brazil, revenue from local services rose 33 percent and business Internet climbed 23 percent from a year ago, helping overall revenue rise more than 7 percent. Ebitda rose more than 23 percent to 513 million reais, giving the Brazilian unit an Ebitda margen, with is Ebitda divided by sales, of 25 percent from 23 percent a year ago, Telmex said.

Growth in Brazil puts pressure on Telmex's consolidated margins to fall because the company is more profitable in its home market. Telmex in Mexico had Ebitda margins of 50 percent, or double Brazil's margins.

Acquisitions

Telmex's decision to grow through acquisitions outside Mexico hasn't convinced investors, such as Rodolfo Navarrete of Vector Casa de Bolsa SA, that its stock will outperform the benchmark Bolsa index. Navarrete, chief of Vector research, said he hasn't included Telmex in their investment model for more than two years and prefers America Movil SA, the wireless telephone company controlled by Slim.

``Telmex will give a return, but in our opinion, a moderate return,'' Navarrete said. ``We're seeing most of the growth for subscribers and new technology in wireless.''

Telmex's shares in Mexico this year fell 0.4 percent to 13.1 pesos compared with a 12 percent rise in the Bolsa index and a 20 percent gain in America Movil's shares. The stock rose 16 centavos today, or 1.2 percent.

Telmex began diversifying outside of Mexico about two years ago with acquisitions in Brazil, Chile, Argentina, Colombia and Peru, including the 2004 purchase of Embratel Participacoes SA (EBTP3), Brazil's largest long-distance telephone company.

Competition

In the second quarter, Telmex generated 28 percent of its revenue outside Mexico. Chief Executive Officer Jaime Chico Pardo said last month the company will continue to make acquisitions in Latin America to make up for weakening Mexico sales. Telmex in April said it was teaming up with America Movil to pay $676.6 million for a 28.5 percent stake in Venezuela's largest telephone company.

Telmex may soon face more competition in its home market from cable companies, which are waiting for government regulations to be published that allow them to offer telephone services on their existing networks. Mexico's antitrust agency has recommended delaying Telmex's entrance in the cable television market to compensate for its size. Telmex controls about 95 percent of Mexico's local telephone market and about two-thirds of the long-distance calling.

Telmex Complaints

Telmex complained that allowing cable companies to offer telephone service while barring it from the cable television market is unfair. Eduardo Perez Motta, president of the Federal Competition Commission, said cable companies may offer telephone services as much as 40 percent less than Telmex.

Telmex's eventual entrance in cable television would provide the company with another source of revenue to make up for the decline in fixed-line telephone service in Mexico, Ochoa said.

``Telmex is very big and could offer lower costs,'' Ochoa said. ``It would eat up market share from the rest.''

To contact the reporter on this story: Thomas Black in Mexico City at tblack@bloomberg.net

To contact the editor responsible for this story: Laura Zelenko at lzelenko@bloomberg.net


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