Portugal Telecom SA ADR Earnings Call Nuggets: Business Prospects and Brazil Outlook

Portugal Telecom SA ADR (NYSE:PT) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Business Prospects

Georgios Ierodiaconou – Citi: If I could start with one of your initial remarks around the fact that now you are now fully funded until the end of ’17 and therefore you will be (looking out) in the medium to long term prospects of the business. What’s to stop you now from looking at an extension of the fiber coverage in Portugal? Is there any operational reason why it makes sense to wait or given the funding position that you are in now would it make sense to (front load) the investment and get the maximum benefit over the next four, five years? My second question is around SME and the impact of M4O in the ARPU of the SME customer that you have. Have you seen any migration into these parties and does that cannibalize the ARPU or if not kindly explain how far you tried to manage the migration? If I could also ask a quick question on Brazil, you mentioned the need to improve the (indiscernible) in order to be more active on mobile data. Is it similar for pay-TV and would we have to wait a few quarters before we see some improvement in the pay-TV growth and the broadband growth in the fixed division?

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Zeinal Bava – CEO: As you know, we have 1.6 million homes adds, and against this current economic backdrop, of course, we look at cash flow generation and therefore we are going to stick to the guidance that we have given off our CapEx of $500 million or less. We are quite happy with the 1.6 million fiber plan that we have. Having said that, we are monitoring very closely how the Competition Authority will look at with this next generation network footprint that ZON has in the context of the review that they’re doing of the Portuguese market. It is worth emphasizing that they cover about 2.6 million homes, with DOCSIS 3.0, whilst it’s not the same thing as fiber-to-the-home, it does allow them to provide customers with significantly higher feed. So, I think we will continue to keep a watchful eye on how the regulator will decide in connection with that footprint which they have, which in some cases is almost monopolistic, because it’s the only fast speed broadband service that’s available, before we take any views regarding this. We are quite happy with the penetration that we are reaching in terms of fiber. You certainly will have seen in the presentation that we put out, how little we have to spend in terms of maintenance repairs or customer care because of the heavy rains with those customers that have fiber. So, I mean, fiber business case stands also against any scrutiny when it comes to OpEx and I have – put it this way, we will go in that direction. But before that we need predictability and in particular, we need to see how the competitive authority will look at the existing transaction that they are reviewing in that particular regard. With regard to the SMEs, clearly, M4O is mainly for – I don’t see medium-sized enterprises buying M4O and certainly, what I see is SOHO customers and very small enterprise customers buying M4O. We only – obviously when it comes to SMEs or SOHOs, let put it to you this way, it’s much more a pull effort as opposed to a push effort. I think we’ve only stopped addressing that segment of the market about six, seven weeks ago, about two months ago, put it to you this way. So, I think it’s early days for me to tell you what impact it may or may not have when it stabilizes in terms of ARPU, but the ARPU enhancement number that we have made available to you is for the mix of the M4O customers that we have and that as we can imagine, includes residential customers, SOHOs as well as small enterprises. So, I would say that 10% is pretty good even if you take into account the mix that I mentioned. And again it’s worth emphasizing that the average savings that some of these customers are getting is about 18.5% which in my view is a lot more robust as an argument for them to stay with us two years than just the signing of the contract in itself. With regard to the comment on Brazil, just to say that we’re in the business of selling but also invoicing and generating cash flow on the back of the sales that we make. So, whilst we are very eager to capture more market share in Brazil when it comes to mobile, when it comes to postpaid in mobile, convergence, broadband, TV, we need to make sure that the back office processes are in place, so that we can sell those services with the level of comfort that allows us to believe that we’re not taking any unnecessary risks on our books. So, sometimes one needs to go slower to go faster and this is why we are putting a bit more scrutiny in that. The Oi CEO, James Meaney is dedicating part of his time exactly to make sure that we are comfortable with all the channels that we have and so on and so forth. So what you are likely to see us in Brazil is also to take a very similar approach. We need to invest where it makes sense and need to invest in line with the ability of this Company to generate cash flow so that we can honor all of our obligations. Thank you.

Brazil Outlook

Paul Marsh – Berenberg: I have a couple of questions, although I’m reluctant to detract from some of the encouraging trends in the domestic market I really feel that the dynamics around the Oi share price and the concerns over the Oi dividend are also important here. I just wonder, what you’re thinking about that situation, as the Oi stock price continues to weaken, so reflecting I believe concerns about the sustainability of the Oi dividend. Then secondly, if I look at the Oi balance sheet I see R$35 billion of gross book value of buildings, real estate, infrastructure, and other assets on the consolidated balance sheet I am talking about. You have talked or Oi has talked about potential for non-core disposals. I just wondered, if you are able to give us what proportion of that gross book value or even net book value might be potentially disposable on non-core?

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Zeinal Bava – CEO: With regard to the Oi share price obviously we look at it in fact differently because we are long term investors and we are strategic shareholders of Oi and of course we believe that Brazil continues to as a market offer significant growth potential for the future. Not to forget that there are 200 million POPS, 55 million households and a penetration of even the most basic services like broadband, pay-TV is well below what its full potential is in that market. Oi has an incredible position in that market because they are 50% of the territory we are either operating alone or have just one competitor. So I think the key challenge is to make sure that the capital is allocated where it makes business sense and where it generates the highest returns for the Company. So we continue to see Brazil as a market which provides Portugal Telecom with scale, provides Portugal Telecom with optionality and provides Portugal Telecom with a unique opportunity to bring to bear if you like the expertise that we have so that we can align that with Oi’s potential in that – growth potential in that market to actually to do something unique and something that creates value for all shareholders in the future. With regard to dividends and the balance sheet structure and so on, I think our CFO in Oi has provided the market with a number of answers in that regard, either in this conference call or in road show meetings that he’s done recently. If I recall what he said, the dividend decision is a decision of the Board, and obviously, when it comes to Oi; Oi, is actually diligently doing an exercise to sell non-core assets. Now, of course selling non-core assets and the timing of that sale is very much dependent on third parties, so, it is very difficult for him or for anyone to actually commit to a particular date, but as a philosophy, let me share with you. We are all in favor of and I think this reflects the position of controlling shareholders of Oi. We are all in favor of offloading non-core assets so that we can put the, if you like, capital to work, where it makes business sense and where it generates higher returns for us. So, you will see and you will have seen that we are in the process of selling a number of real estate properties we have. We are in the process of doing a number of other trades and so, bear with us, we are committed. We have a team that’s fully committed to making sure that these deals happen sooner, rather than later. This team is, if you like, a joint team of Oi and some of the best individuals that we have in all of our (indiscernible) and Portugal Telecom. So, we remain very confident that we will be able disclose of some of these non-core assets and use that to reduce our debt. In fact, even with regard to Portugal, I can tell you that we are waiting for the final decision, if you like authorizations on the CTM sale that we did and we will use the CTM cash also to reduce our debt level. So, I think both here in Portugal and in Brazil, we would like to pursue a more prudent approach to the management of our balance sheet. This is one of the reasons why we have been extending maturities and this is the reason why we recently did that bond issue that has actually made us in Portugal for example a lot – has put us in a lot more comfortable position in terms of funding position. With regards to specific numbers I will liaise with the Oi finance team and we will see whether we can – in one of the next meetings, roadshows we can provide you with something a lot more specific than we have done in the past. So leave that with me and we will come back to you.

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