Data Revenues Rose 36.5% Year-over-year
Rio de Janeiro, Brazil - October 26, 1999 - Embratel
Participações S.A. (Embratel Participações or the "Company")
(NYSE: EMT; BOVESPA: EBTP3, EBTP4; BVRJ: EBTP ON, EBTP PN), the company
that holds 98.8% of Empresa Brasileira de Telecomunicações S.A.
("Embratel"), today announced highlights of results for the
quarter ending September 30, 1999. (All financial figures are in Reais
and based on consolidated financial statements in Brazilian GAAP -
"Legislação Societária").
Embratel Participações' net revenues of R$ 1,280 million rose
16.4 percent versus the third quarter of 1998 with strong growth in
data revenues. Net income was R$ 209 million (R$ 0.63 per 1000 shares)
compared to a R$ 237 million loss (R$ 0.71 per 1000 shares) in the
third quarter of 1998.
Domestic long distance revenues of R$ 1,051 million rose 10.4
percent compared to the third quarter of 1998 and increased 4 percent
compared to the second quarter of 1999. Domestic voice revenues were
impacted by the introduction of the new numbering plan and the start of
a partial competitive environment. The application of the escape code
reduced Embratel's advantage of a single national access code
capable of carrying all long distance national and international calls
and the perpetuation of several "closed numbering areas"
("Área de Numeração Fechada - ANUF"), enabled the coexistence
of both the old and new numbering systems. Both the escape code and the
ANUFs are in a phase-out period due to be largely terminated by
November 30, 1999. Contributing to the domestic long distance
performance were revenues from fixed-to-cellular calls which Embratel
began to receive from July 3rd onwards.
International voice service revenues of R$ 233 million remained flat
compared to the third quarter of 1998 and rose 3.2 percent compared to
the previous quarter. The quarter-over-quarter increase reflects the
result that reduced settlement rates had in reversing the trend in
routing traffic by foreign carriers.
Data revenues posted a 36.5 percent growth reaching R$ 312 million.
Data growth remained strong in all data segments including dedicated
lines and switched data products. Internet revenues rose almost 90
percent year-over-year.
EBITDA amounted to R$ 415 million representing a margin of 32.5
percent. Compared to the previous quarter, EBITDA rose R$ 101 million.
Two factors accounted for the bulk of this increase. Embratel's
efforts to reduce interconnection costs, by increasing the numbers of
points-of-presence and connecting clients directly to the network have
succeeded in reducing the cost of interconnection and contributed to a
2.4 percentage point growth in margin in the quarter.
Secondly, Embratel chose to pay the COFINS tax in full taking
advantage of the Federal Government's "Medida Provisória"
(MP 1858-6) on June 29, 1999. This "measure" permitted the
settlement of amounts under legal dispute without the incidence of
interest and penalties until February 1999. Embratel paid R$ 290
million in a single installment on July 30, 1999. As a result it
recovered the corresponding interest it had been providing for the
period between 1997 and 1999. An amount of R$ 62 million was recorded
under other operating revenue/expense and contributed to approximately
a 4.9 percentage point improvement in margins. Excluding this recovery,
EBITDA margin would have been 27.6 percent.
In the third quarter of 1998 Embratel made provisions for the change
in the pension fund (R$ 341 million), post retirement medical plan (R$
56 million), and the voluntary dismissal program (R$ 57million). As a
result, there was an EBITDA loss of R$ 201 million . Excluding these
provisions, EBITDA margin would have been 22.9 percent.
Operating income (EBIT) rose R$ 95 million from the previous quarter
to R$ 228 million corresponding to an operating margin of 17.8 percent.
Excluding the above mentioned provisions, operating margin was 13.0
percent, 7.3 percent and 10.8 percent in the third quarters of 1999 and
1998, and in the second quarter of 1999, respectively.
Net income for the quarter was R$ 209 million representing an
increase of R$ 132 million over the previous quarter. Contributing to
this increase was a reduction in social contribution tax (see technical
-Social Contribution - note below).
Embratel Participações ended the quarter with a cash position of R$
195 million. Total debt outstanding as of September 30,1999 was R$
1,194 million of which R$ 922 million is long term. The average
interest rate on the debt was approximately 9.8 percent per annum. On
September 30, 1999, Embratel's debt/equity ratio was 0.21.
On October 1, 1999, Embratel obtained approximately R$ 150 million
of Reais based short term debt. Embratel is in the process of obtaining
additional borrowing both in domestic and foreign currency. The total
amount borrowed is expected to increase by another US$ 200 million
after the completion of transactions. The purpose of these loans is to
strengthen the working capital position in view of capital expenditures
planned for this year.
Income Tax on Inbound Revenues: In late March 1999 the Company
received from the Federal Revenue Agency a tax assessment in the amount
of approximately R$ 287 million (including interest and penalties) for
failing to pay the related income tax on net foreign source operating
income for the years 1996 and 1997.
In late April 1999, the Company filed its legal defense against the
tax assessment with the administrative level of the courts. Hearings on
the matter are pending scheduling. In June 1999, the Company was
further assessed for non payment of income tax on net foreign source
income for 1998 amounting to approximately R$ 64 million (including
fines and interest). The Company will continue to pay income tax on net
foreign source income currently until the tax controversy is resolved.
The Company also will defend this assessment and is still maintaining
discussions with the appropriate authorities.
Withholding Tax on Remittances to Foreign Administrations: The
Company does not withhold for Brazilian income tax from amounts paid to
foreign administration companies. The Company believes that this
practice is in accordance with Brazilian law and regulation. If the
Brazilian tax authorities were to successfully challenge this practice,
the Company's total liability would have been approximately R$ 750
million as of December 31, 1998. The Company submitted two legal
inquiries on this matter to the tax authority. On August 26, 1999 it
received a response. In its response, the tax authority stated that
income tax retention on remittances related to telecommunications
services for the payment of foreign administrations are exempt from
October 19, 1998 onwards when the President promulgated the
International Telecommunication Union Constitution and Convention. In
addition, it stated that the tax is not applicable in remittances to
countries with whom Brazil has bilateral tax treaties. Brazil has
treaties with 23 countries including most of the EEC, major Asian
countries and Canada. This reduces the total above-mentioned potential
liability to less than R$ 400 million. The Company is still vigorously
contending this issue and believes it will ultimately prevail.
Management Changes: On September 9, the Company announced that Dilio
Sérgio Penedo will be named President. In addition, Jorge L. Rodriguez
will be named President of Embratel, the operating company. The
appointments will be made official next month. Both will report to
Daniel E. Crawford who will continue as President of the Board of
Directors of the two companies. The changes in Management of the two
companies are occurring one year after completion of the privatization
of telecommunications in Brazil, and they represent the transition of
the company from public sector to private. The new organization places
the company in position to take advantage of new opportunities in
Brazil, concentrating its attentions on growth and success in the
competitive environment.
The changes will allow Dilio Sergio Penedo to focus attention on the
regulatory and government areas and new business opportunities. At the
same time, Jorge Rodriguez' experience will bring a strong focus on
the core long distance business.
Satellite division: Embratel has formed a division exclusively
focused on the satellite business, with the purpose of expanding
activities throughout Latin America. This reorganization allows
Embratel to more effectively address the growth in the satellite market
which has been fueled by new service providers requirements to reach
areas where fiber does not exist and their desire for instant
infrastructure. The management team has developed an aggressive
business strategy addressing broadband applications and has applied for
Ku and Ka band license with Anatel. It has also formed subsidiaries in
Argentina and Chile to provide satellite services in those markets.
Additionally, the Unit has applied for landing rights in Colombia,
Venezuela, Peru and the USA.
Internet: In September, Embratel launched an Internet service
campaign and will be introducing a new line of business services for
small businesses and for ISPs - Business Dial. Three services are
offered under this family: Virtual Dial (outsourcing remote dial
access, taking advantage of Embratel's more than 60 points of
presence in the country), Office Dial (IP dial-up for remote access to
the company's data network) and Internet Simples (dial-up).
Embratel's internet services include: direct internet access to
Embratel's network, IP intranets, and hosting services.
Urban rings: Embratel currently has 354 km of urban rings in
operation in São Paulo, Rio de Janeiro and Porto Alegre. Embratel's
long distance fiber ring linking São Paulo, Rio de Janeiro and Belo
Horizonte is also operational. There are more than 290 direct
connections to urban rings, and more than 5,400 using radio.
Technical Note - Social Contribution: Embratel benefited from a
positive Social Contribution Tax of R$ 110 million. This amount arises,
in part, from an increase in the social contribution tax rate from 8 to
12 percent applicable to deferred credits previously booked at 8
percent. These credits became deductible in September after the tax
rate had increased (R$34million). Also Embratel recovered social
contribution tax from 1996 and 1997 (Instrução Normativa IRS 038/96).
This credit was used to offset the Social Contribution of R$ 84 million
provided during the period in which the company was disputing the
COFINS and PIS taxes. For further information refer to notes 9, 12 and
16 of our Quarterly Financial Statements.
Embratel provides long distance and international telecommunications
services, in addition to 40 other communication services. Embratel has
the largest long distance telecommunications network in Latin America
and owns the only national and international Brazilian
telecommunications network directly connected to thousands of
companies. It is the main provider of high-speed data transmission and
Internet in Brazil, with the largest network of broadband optical fiber
cables, covering over 18,000 kilometers.
Note: Except for the historical information contained herein, this
news release may be deemed to include forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended,
that involve risk and uncertainty, including financial, regulatory
environment and trend projections. Although the company believes that
its expectations are based on reasonable assumptions, it can give no
assurance that its expectations will be achieved. The important factors
that could cause actual results to differ materially from those in the
forward-looking statements herein include, without limitation, the
company's degree of financial leverage, risks associated with debt
service requirements and interest rate fluctuations, risks associated
with any possible acquisitions and the integration thereof, risks of
international business, including currency risk, dependence on
availability of interconnection facilities, regulation risks,
contingent liabilities, and the impact of competitive services and
pricing, as well as other risks referred in the company's filings
with the CVM and SEC. The company does not undertake any obligation to
release publicly any revisions to its forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
