Vivo: Beginning the Flip
>> Brazil's Vivo Approves $492 Million GSM Overlay Plan
Alastair Stewart
Dow Jones Newswires (Sao Paulo)
tinyurl.com
The board of directors of Vivo Participacoes SA (VIV), Brazil's largest mobile telephone operator, Friday approved an overlay of a GSM network on top of its existing CDMA platform, receiving a mixed response from investors.
While Vivo and investors agree the overlay will help shore up leaking market share, analysts are worried about the cost of implementation.
Vivo, which is jointly owned by Portugal Telecom (PT) and Spain's Telefonica (TEF), said the GSM platform will cost BRL1.08 billion ($492 million).
"The cost of implementing is surprisingly low as we will be able to use a lot of our existing network," said Roberto Lima, Vivo's chief executive, during a conference call. He said the cost will have no impact on Vivo's capital expenditure budgets for the next two years.
Analysts said the final cost of the network - to be supplied by Sweden's Ericsson (ERICY) - will probably he higher.
Analysts are skeptical, however. Considering that Telefonica estimated the GSM overlay would cost over $2 billion, it seems fanciful that the true cost is only a quarter of that, said Guilherme Marins, an analyst at the local Ativa brokerage.
"The investment figure probably just covers laying down the initial network in major cities. There must be more," said Alex Pardellas, a telecom analyst at ABN Amro brokerage in Sao Paulo.
Vivo's main motivation in choosing to overlay its existing system was to be able to sell GSM handsets, which are cheaper than the rival CDMA technology handsets.
"In the ultra-competitive Brazilian cellphone market, we were losing out because of higher handset prices," Lima told analysts.
Vivo is the only local mobile operator that uses the rival CDMA technology. The firm has seen its client base stagnate in a growing market over the last years, ending the second quarter with 28.5 million customers, up slightly from 28.4 million a year ago, while the market grew 25% in the same period.
"This is our bid to evolve and grow," said Lima.
The introduction of GSM will also allow the company to develop third-generation data services, which at a later date can be integrated with its W-CDMA data services.
As well as investment costs, analysts are also wary about the impact on Vivo's bottom line.
"In the medium to long term, we think operating expenses are likely to increase, given the migration to GSM. Vivo will maintain several networks operating simultaneously, GSM, CDMA, TDMA and analog, which will pressure its operating costs," said Vera Rossi of Morgan Stanley in a research note.
In addition, handset subsidies are likely to increase with the migration of customers to GSM from CDMA or TDMA, Rossi added.
"The company had little option, as the company's results get worse and worse ... But Vivo keeps on coming up with unfavorable cost and expense surprises in its earnings reports," said ABN Amro's Pardellas.
Vivo said the GSM network would be ready in 2007 but did not say how quickly it expects its GSM client base to grow.
"We sell 10 million handsets per year, but we will continue to sell CDMA services concurrently," said Lima.
He said the aim was to conquer new clients with its GSM phones, rather than migrate existing customers.
Also Friday, Vivo reported a net loss of BRL493.1 million for the second quarter, sharply higher than the net loss of BRL252.7 million in the second quarter of 2005. The results were far worse than analyst expectations, which sat between BRL114 million and BRL185 million. Vivo shares fell in line with the market Friday, despite the terrible second quarter results. Vivo ended 1.2% lower at BRL5.06 on the Sao Paulo stock exchange, while the broad Ibovespa index was 1% down.
"There was a general feeling that the GSM system was the only way to go. The market reaction was a mild positive," said one Sao Paulo-based trader. <<
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