Telefonica Chile's New Growth Trend

Telefonica Chile (NYSE: CTC) disconnected an old line and wired up a new trend yesterday when it reported a 2% rise in revenue -- the first quarterly revenue increase in five years. Majority owned by Spain's Telefonica (NYSE: TEF), the Chilean telecom operator grew revenue to $282 million for the quarter, as the company offset losses in traditional telephone services by signing up more users for broadband and pay TV services.

Unfortunately, this milestone achievement came at a big cost. Expenses were up 7.3% overall -- 16% when you factor out depreciation. The increased costs came largely from employment expenses and operating costs related to the push to sell digital television and broadband services. This led to a 7% drop in EBITDA margin, down to 42.7%. This drop cut heavily into net income, which came in at $7.2 million, 41.5% lower than the $12.3 million seen the year before.

Telefonica Chile has been quite successful at migrating customers in its flexible plans and bundled offerings. These plans include combinations of voice, broadband, and digital television services. Just as AT&T (NYSE: T) and Verizon (NYSE: VZ) have had to expand their services to compete with these "triple-play" offerings from cable companies such as Comcast (Nasdaq: CMCSA) and Time Warner Cable (NYSE: TWC), Telefonica Chile is working quickly to stem the flow of subscribers away to competitors. On this front, the company is doing well, as flexible plans now represent more than 21% of total revenue for the company and broadband accounts for 16%.

The cost impact of this diversification left investors unimpressed, though, as shares of Telefonica Chile are down more than 5% since Monday's close. While the turnaround that resulted in revenue growth is impressive and an important milestone, profitable growth is what matters most. For the time being, this still appears elusive for Telefonica Chile.

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Fool contributor Dave Mock hasn't grown much in five years, either, but he doubts that trend will reverse. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy speaks the universal language of love.