Summary
Earlier this past week, NETC reported solid Q1 2009 results, which while expected by some, were met despite the worsening of macro conditions in Brazil. In fact, from all Carlos Slim companies reporting this past week (i.e. AMX, TMX, NETC), NETC arguably had the strongest performance. Issues going forward: Deteriorating macro environment and mitigating an unfavorable decision by the local regulator.
Analysis
Brazil's largest cable operator reported strong results (Q1 profit more than doubled), with good performance from its 3 units (broadband/Internet, fixed line/voice and pay-TV). The company has continued to hit its stated growth objectives despite a deteriorating economy in Brazil. 2008 highlights included the introduction of Net Fone.com (triple-play offering), Net Digital HD Max (High Definition service), and Net Virtua 5G (5th generation broadband service via DOCSIS 3.0).
Although NETC has thrived in challenging macro conditions, the question is whether that could continue into the future. A rise in unemployment can lead to softer pay-TV numbers (which is a more discretionary service). In addition, the Brazilian telecom regulator (Anatel) has recently ruled against extra pay-TV connection charges, which even if tempered with higher installation charges and/or subscription fees, will still have a negative impact.
Anatel's ruling was a negative for cablecos since most pundits were expecting a favorable outcome (i.e. that the regulator would allow pay-TV companies to charge their subscribers for extra connections). The cable companies will appeal the ruling, as there are revenues at stake (in NETC's case ~ 5% of total revenues). However, the company will likely make up a part of these revenues, should the appeal fail, since it could charge for installation or introduce a slight increase in the subscription price.
