Peso strength fuels Telmex Q2 results

Although powerhouse Mexican telecommunications company Teléfonos de México SA de CV (Telmex) reported this week a whopping 93.3 percent increase in net income for the second quarter, analysts Thursday were not impressed.

While Telmex consistently rings in a profit, income results from its second quarter, released late Tuesday, were more a reflection of the peso's appreciation against the dollar than the fact that the company is growing at breakneck speeds, analysts said.

Net income for the quarter ended June 30 leapt to 6.48 billion pesos (US$718.56 million, on June 30), from 3.35 billion pesos a year ago.

The net income figure "is not a true measure of the company's operating performance," said Deutsche Bank AG analyst Sean Ludwick, noting the effect of the peso's strength.

"While some people saw the results as stellar, we saw them as flat," Ludwick said.

In yet another surprise, earnings per share grew 111.5 percent over the same period last year, jumping to 0.48 pesos a share from 0.22 pesos. Meanwhile, revenue for the quarter tallied 27.26 billion pesos, a 7.1 percent increase over revenue in the second quarter of 2000.

UBS Warburg LLC analyst Josh Milberg said that the peso's appreciation "accounted for the earnings surprise" but that from an operating standpoint, the results were in line with his expectations.

While Telmex said that its trail blazing-results were in part spurred on by the addition of 305,537 fixed lines over the quarter, as well as a 76.5 percent increase in data transmission line equivalents over the same period last year, the company also credited the peso's power.

The peso was trading at 9.52 to the U.S. dollar on March 30, the last day of the first quarter, yet had strengthened to 9.018 against the dollar by the last day of the second quarter, June 30.

According to Deutsche Bank's Ludwick, a truer reflection of the company's performance can be seen in the decrease of the company's earnings before income taxes, depreciation and amortization (EBITDA) margin, a financial calculation used to gauge a company's cash flow.

Telmex's EBITDA margin decreased 2.3 percent in the second quarter over the same period last year. The decline was due to higher operational and labor costs, Ludwick said, noting that Telmex recently gave employees a 14 percent wage increase.

UBS's Milberg said that the company's absolute EBITDA also gives a clearer picture of how the company did. Telmex's EBITDA for the second quarter increased 2.5 percent over the year-ago period to 14.03 billion pesos.

Telmex said total number of calls increased 4.5 percent in the second quarter over last year. The company added that interconnection traffic - the number of calls Telmex competitors patched through the company's networks, and consequently paid a fee - increased 44.1 percent. While this indicates increased activity by Telmex rivals, it also spells higher profits for Telmex.

The company's local service operations, where it has a strong market dominance, also got a boost from interconnection traffic by competing cellular companies, which increased 30.1 percent in the quarter over the same period a year ago.

However, offsetting that growth was a decrease in the interconnection rate for long-distance and cellular operators from US$0.03 a minute to US$0.0125 cents a minute, the company said. Mexican telecom regulators put the interconnection-fee cut into effect at the beginning of the year, in response to complaints by Telmex rivals that the high fee they were paying to patch into Telmex's ubiquitous networks were prohibiting them from making a profit.

Although domestic long-distance minutes increased 18.6 percent in the quarter over the second quarter of last year, international long-distance minutes decreased 14.3 percent for the same period. The company said that this was due to the downturn in the U.S. economy - the destination and starting point of much of Telmex's long-distance traffic.

In terms of online connectivity, the telecom mammoth reported a 43.8 percent increase in Internet access accounts for the quarter. Telmex stakes claim to the country's number-one Web portal in terms of unique visitors, T1MSN.com, which it runs in partnership with Microsoft Corp. T1MSN bought Spanish-language portal Yupi.com in June, and said that it plans to increase its presence in the U.S. and Latin America via the new acquisition.

And while analysts eagerly await the company's third-quarter results to see if the peso orchestrates any more surprises, Telmex Chief Financial Officer Adolfo Cerezo gave fair warning in a conference call with analysts Tuesday night that the effects of the worldwide economic downturn could still take their toll, Ludwick saidNevertheless, given the slew of woeful earnings releases reported so far this year, even a downturn for Telmex may not look so bad in comparison.

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