UPDATE 1-Brazil's Oi posts smaller profit as financial expenses rise

Thu May 15, 2014 9:40am EDT

(Adds info from conference call, analyst quote, share reaction)

SAO PAULO May 15 (Reuters) - Grupo Oi SA, Brazil's biggest fixed-line phone company, reported a 13 percent drop in first-quarter profit on Thursday as higher financial expenses weighed on its bottom line.

Oi earned 227.5 million reais ($103.6 million) in the quarter, compared with 262.3 million reais a year earlier, according to a securities filing.

Financial expenses rose 57.1 percent on an annual basis to 1.2 billion reais due to higher debt levels, an increase in interest rates, and the depreciation of Brazil's currency, the real, against the dollar.

Earnings before interest, taxes, depreciation and amortization, rose 37.5 percent to 2.95 billion reais, boosted by the sale of cellular towers, which raised 1.3 billion reais.

The company plans to sell another 1,500 to 2,000 cell towers in the "medium-term," Chief Executive Officer Zeinal Bava said on a conference call with analysts on Thursday.

Shares of Grupo Oi sank 5 percent to 1.88 reais in early Sao Paulo trading and are down over 47 percent this year.

"While we believe Oi's management can improve operations, cash flows should turn positive only in 2016," Citi analyst Lucio Aldworth wrote in a client note.

Net revenue fell 2.3 percent from a year earlier to 6.88 billion reais.

Oi spent the first quarter preparing for a nearly $4 billion share sale as part of its planned merger with Portugal Telecom SGPS SA.

Many banks' equity research desks declined to give first-quarter earnings estimates for Oi, citing rules barring such forecasts while engaged in an investment banking transaction with the company. ($1 = 2.20 Brazilian reais) (Reporting by Roberta Vilas Boas; Writing by Asher Levine; Editing by Sofina Mirza-Reid and Nick Zieminski)

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