UPDATE: Brazil's Vivo Sees Market Share Up, Margins Off In 1Q

Brazil's leading cellular operator, Vivo Participacoes SA (VIV, VIVO4.BR) saw its market share increase but its margins slip in the first quarter as it lowered prices and conducted aggressive promotions.

The joint venture between Spain's Telefonica SA (TEF, TEF.MC) and Portugal Telecom SGPS SA (PT, PTC.LB) earlier Monday reported a first-quarter net profit of 191.9 million Brazilian reals ($110 million), up from BRL133 million in the first quarter of 2009.

Earnings came in below market expectations. A survey of six analysts, compiled by the local Estado newswire, came up with an average forecast of BRL243.7 million.

Vivo accounted for 43% of all net cellphone acquisitions in the first quarter. Moreover, it increased its share of the postpaid market to 19.5% by the end of March, after obtaining 71.5% of the net additions.

"We believe the main driver was the superior quality of services (customer service and network) combined with its data offerings," said Vera Rossi, telecom analyst at Morgan Stanley in a report.

However, the aggressive price policy means that average revenue per user fell 9.2% compared with the year before.

"This new level reflects increased penetration in lower income groups and intense commercial disputes in strategic markets, such as Sao Paulo," said Sao Paulo-based Link Investimentos in a report.

Vivo's first-quarter net revenue rose 4.8% to BRL4.23 billion from BRL4.04 billion in the year-earlier period, helped by a 52% jump in data and value-added service revenue.

The company's earnings before interest, taxes, depreciation and amortization, or Ebitda, was BRL1.27 billion, up from BRL1.22 billion in the first quarter of 2009.

The Ebitda margin, a measure of profitability over net revenue, was 30.1% in the quarter, down slightly from 30.4% in the year-earlier period.

According to Vivo Chief Executive Roberto Lima, the company believes it can maintain margins at this level in the future.

Good cost controls allowed Vivo to maintain the margin above 30%, despite the intense commercial push, said Morgan Stanley's Rossi.

Overall, investors classified the results as neutral. Vivo shares were 0.3% lower at BRL46.08 in afternoon trade on the Brazilian Stock Exchange, or Bovespa, while the benchmark Ibovespa index was 0.5% lower.

-By Alastair Stewart, Dow Jones Newswires; 5511-3544-7072; [e-mail]