Brazilian Phone Company Says Hi To Wireless Growth

Rio de Janeiro-based Tele Norte Leste Participacoes' (NYSE: - ) operating company is Oi -- Portuguese for "hi." Through its fixed-line, cellular and broadband divisions, Oi has several ways to help its customers say hello.

Landline growth is sputtering in Brazil, but cell phones and high-speed Internet are gaining ground.

The firm has 37% of the country's landlines, provides service to 13% of its cellular customers and connects 20% of the broadband users. Its market share also grows as it tweaks its services and reaches into new regions.

Oi added a net 369,000 customers in the second quarter, bringing the total to 29.2 million.

Its wireline count dipped 0.7% from a year ago to just under 17 million.

But the firm is trying to stabilize the fixed-line business. It has added new pricing plans and reached out to more users with spotted credit histories. That helped it boost revenue per customer.

"Instead of having only one service, one product, to offer to the client, we have a basket of 12 alternative plans to offer to the client," Jose Luis Magalhaes Salazar, the firm's director of investor relations, told analysts in a conference call. "So we give more options to the client that wants to churn either voluntarily or involuntarily."

Meanwhile, Oi's cell phone subscribers jumped 13% to 13.6 million.

Its small broadband unit grew even faster. It is reaching 1.3 million customers, an almost 31% gain from a year ago.

Who Ya Gonna Call?

Brazil has a growing population of 190 million people. But only about 75% of households have a fixed phone line.

Still, landline growth has stalled. Government figures show fixed lines peaking in 2004, at about 40 million. It has slid slightly since, to fewer than 39 million in the first half of 2007.

Meanwhile, cell phone penetration reached 57% in the second quarter, and is growing.

The country had about 23 million cell users in 2000. It ended last year with 99.9 million.

The government said there were 106.7 million phones in use by the middle of this year. A report by Morgan Stanley predicts there could be almost 142 million cell phones in Brazil by 2010.

The firm says the cluster of Brazilian states in which it operates is likely to grow faster than the nation as a whole.

Between the first quarters of 2006 and 2007, the number of cell phones grew 16.2% in all of Brazil, and almost 19% in Oi's 16-state region.

In September, Oi won a government auction for the rights to sell mobile service in a 17th state -- Sao Paulo. The firm said the $44.6 million it spent for the license could give it a leg up with regulators when it later applies for rights to sell next-generation mobile services in its other 16 states.

The company formed in 1998 with the breakup of the national phone monopoly Telebras. Since it went private, Oi has tripled its revenue, and almost quadrupled its customer base.

As the market kept deregulating, Oi added new services. It started its mobile business in 2002 and broadband shortly after that. Now, it's trying to build customer loyalty by bundling services.

Merger Tango

The Brazilian telecom industry is consolidating.

There's talk that Oi could merge with another so-called Baby Bra, Brasil Telecom Participacoes (NYSE: - ), the country's third-largest landline company.

The Brazilian government has said it might relax the rules to allow that merger. It believes the deal would create a company better able to compete with Spanish, Mexican and other telecoms in Latin America.

A group of Brazilian investors, Telemar Participacoes, controls 52% of Tele Norte Leste, Oi's holding company. Earlier this month, it gave up on an attempted leveraged buyout of the firm and its subsidiary.

But analysts note that the complex structure -- with multiple classes of shares and various holding companies -- has pressured the stock.

Oi also faces more mundane challenges, including more competition from cellular providers and other technologies.

There's still heavy government regulation that restricts its flexibility.

There's also downside risk if the Brazilian economy falters, notes Deutsche Bank analyst Rizwan Ali. The firm has benefited from Brazilians' rising wealth. If that turns around, many might not have the spare reals to pay their cellular bills.

After uneven results last year, earnings rebounded in the first two quarters of this year.

Oi posted profits per American depositary receipt of $1.58 in 2006, a 29.5% gain from the year before.

But the quarterly results were uneven. So far this year, earnings have rebounded with 82% and 91% year-over-year gains in the first two quarters. Analysts surveyed by Thomson Financial are expecting $2.37 per ADR this year.

Company officials couldn't be reached for comment. The firm will report third-quarter results at the end of the month.