Brazil's Vivo sees 2008 margins under pressure

SAO PAULO (Reuters) - Vivo VIVO4.SA(VIV.N), Brazil's largest wireless phone company, expects mobile calling prices to fall in 2008 as competition intensifies for low-income consumers, Chief Executive Officer Roberto Lima said in an interview on Monday.

The company, jointly controlled by Portugal Telecom (PTC.LS) and Spain's Telefonica (TEF.MC), also sees faster-than-expected market growth and a surge in investments pressuring profit margins this year.

"Probably what the market wants now is lower calling prices," Lima said at the Reuters Latin America Investment Summit in Sao Paulo. "All our research shows that there is a need to cut prices for calling traffic to grow."

The company's earnings before interest, taxes, depreciation and amortization, a measure of cash flow known as EBITDA, grew in 2007 for the first time in at least three years, after it cut costs and paid down debt.

EBITDA as a percentage of sales, a commonly used measure of profitability known as EBITDA margin, rose to 25.1 percent from 23.7 percent in 2006. The company said last month it wanted its margins to grow in 2008, but intense competition in the fast-growing market for low-income users may make that difficult.

"Our focus will be to maintain our margins, but it's true that the market has shown stronger than expected sales and selling expenses are normally the ones that most affect the industry's margins, mainly because of the subsidy cost (for mobile phones)," Lima said.

Brazil's mobile phone market has boomed recently as faster economic activity fuels an increase in wages and employment. A surge in credit has also made it easier for people to finance the purchase of phones in interest-free installments.

Most of that growth comes from low-income households in Brazil, where only 33 percent have mobile phones, compared with 90 percent in high-income families, according to research firm Teleco.

Besides cutting the price for phone calls, Vivo may also offer bonus minutes for prepaid clients to lure more people into making calls, instead of just receiving them. The company expects overall calling traffic to rise in 2008 and has announced plans to invest 6.06 billion reais ($3.47 billion) this year, three times more than in 2007.

"Once we can increase our network capacity with strong investments, as we are doing, we will be able to ... have cheaper prices for lower-income consumers," Lima said.

Lima said Portugal Telecom and Telefonica have "a much stronger understanding" about their stakes in Vivo since both of them reiterated the desire to remain a stakeholder in the Brazilian company.

Telefonica offered Portugal Telecom 3 billion euros for its Vivo stake last year but the offer was turned down. Portugal Telecom and Telefonica control 63 percent of Vivo through a 50-50 joint venture.

($1 = 1.746 Brazilian reais)

(For summit blog: summitnotebook.reuters.com/)

(Additional reporting by Tais Fuoco, Renata de Freitas and Elisabete Tavares, editing by Phil Berlowitz)