Telefonica Brasil SA (VIV) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to the Telesp, which we call Telefonica de Brasil, second-quarter 2011 earnings conference call.

Today, with us we have Mr. Luis Miguel Gilperez, CEO of Telefonica de Brasil, and Ms. Cristiane Barretto, Controller, Director of Telefonica de Brasil.

Today we have a simultaneous webcast with slide presentation on the Internet that can be accessed at the site www.telefonica.com.br/investidores.

There will be a replay facility for this call on the website. After the Company's remarks are over, there will be a question-and-answer session. At that time, further instructions will be given. (Operator Instructions).

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities and Litigation Reform Act of 1996.

Forward-looking statements are based on the Company's management beliefs and assumptions and on information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the Company's future results and could cause results to differ materially from those expressed in such forward-looking statements.

For comparative purposes, the first quarter of 2011, second quarter of 2010, year-to-date 2011 and 2010 figures were prepared on a combined basis. Thus, the quarter and annual variations presented may differ from those reported in the financial statements filed with CVM through the form Quarterly Information - ITR.

Now, I will turn the conference over to Mr. Luis Miguel Gilperez, CEO of Telefonica de Brasil. Mr. Gilperez, you may begin your conference.

Good morning, ladies and gentlemen and thank you for attending this conference for the second quarter results.

On slide 4, we have the Company's consolidated operating and financial results for the second quarter. (Inaudible) once again, our sound strategy and successful implementation.

The Company's competitive advantage in relation to its competitors are always as to increase our leadership in the postpaid segment regarding a market share of 36.1%.

This strong commercial performance and higher adoption of services resulted in the growth of revenues mainly in the mobile segment, its turnaround that achieved 15.1% increases in the year-on-year comparison, with (inaudible) balance between growth and profitability.

The Company recorded an EBITDA margin of 37.2% in the quarter with net profit of BRL1.1 billion.

Slide 5 shows that once again the continuous qualities focus and the increase in competitive advantage are contributing to increase our customer base that reached 12.2% increase in the year-to-year comparison and reach 79 million accesses in the quarter.

The complete set of voice and data offers the quality of our services and the popularity of our own store are some on the main reason to behind the good performance in the mobile segment. We reached 64 million accesses that permit to have a growth 14.4% when compared to the second quarter in 2010.

Moving net addition accounted for approximately 2 million accesses of which 46.3% in the postpaid segment ensuring our market leadership in the segment.

On the fixed side, our customer base reached more than 15 million accesses with growth of 3.9% in the annual comparison.

It's important to point out, the fixed voice net addition performance that recorded 61% less this connection than in the first quarter 2011 and fixed broadband evolution with net addition 64% higher than the previous quarter.

Moving to the slide 6, we can see the mobile commercial performance in detail. In the quarter, we expanded our customer needs with an annual growth of 25.4% in the postpaid customer base reaching our postpaid market share of 36.1 in the period.

This leadership is even higher in the data market where we have 42.5 of the more on our machine-to-machine market with an annual increase of 7 percentage points.

The quality of our customer base is contributing to the positive ARPU evolution which recorded an annual increase of 0.4%, reverting an historical dilution trend.

The another trend of our Company as the best option in data services can be proven by the annual increase in the data ARPU, driven by the increases in consumption of data services throughout modern and smartphones.

The data ARPU recorded BRL5.9 with growth of 20.4% over the second quarter 2010 and BRL9.3 in the quarter previous.

In slide 7, we can highlight the recovery of fixed telephony assesses. In the quarter as a consequence of the lower level of this connections in voice and higher addiction in broadband.

In the second quarter Pay TV accesses reached a significant increase of 34% mainly driven by the consolidation of TVA, Pay TV business in the second quarter. Excluding this impact the organic growth could be of 5% in the quarter.

And therefore to increase the profitability and loyalty of our customer, we have been getting good results in the sale of duos and trios to our customer base. In this way, we can serve that already 31% of our voice customer already have broadband.

This evolution reflects the customer confidence on the Company's commitment to quality, also highlighted in the (inaudible) related services.

It was the good operating performance show it in the returning slide. Combined with the enhanced results coming from integration of fixed and mobile operation that allowed us to generate consistent financial result with highlight to the EBITDA margin and profitability growth.

In the slide 8, we see that the combined net operating revenue record a growth of 6.7% in comparison with the second quarter of 2010.

Considering us as a standalone wireless and wireline business, net service revenue presented an annual growth of 15.1% and 8.1% in terms of wireless and wireline business.

The combined EBITDA recorded more than BRL3 billion with annual growth of 9.1%. The combined EBITDA margin in the quarter was 37.2%, an increase of 0.8 percentage points. Excluding the sale of Portugal Telecom stock in the second quarter of last year and the consolidating of TVA results in this quarter, the increase in EBITDA margin would be up 1.9% points.

The net income increased by 30% over last year, recording the amount of more than BRL1.1 billion.

Now, I offer the floor to Cristiane Barretto, our Controller, Director to continue to with our percentage.

Thank you very much. Good morning, ladies and gentlemen. On slide 10, we can see the mobile net service revenues. In the second quarter of 2011, grew by 15.1% year on year and 5.4% in the quarterly comparison keeping accelerated double-digit growth in the last four quarters.

The main growth driver of revenue remains the use of data and value-added services, which grew by 39.2% year on year reaching 23.5% of net service revenues mainly driven by Internet revenues that increased 37% in the year-over-year comparison, as well as annual SMS growth of 29% and in other revenues also.

Because of the increased customer base and improvement in the mix, voice revenues grew 4.7% annually. Also highlighted the growth of long distance traffic as a result of our better promotions with the use of this traffic, thus contributing to the evolution of network usage revenues interconnection which grew 14.2% annually.

In slide 11, we can understand the evolution of the wireline and also standalone revenues which grew 8.1% annually versus 1.9% of growth in the first quarter, demonstrating a strong acceleration in the growth of revenues.

Excluding the consolidation of TVA's results in the second quarter, which represented an increase of BRL77 million, the growth would have been of 6.2% still much bigger than the growth recorded in the first-quarter 2011.

Fixed voice register an annual increase of 1.7% explained by the growth of long distance revenues as a consequence of the national long distance traffic originated on the mobile side.

Data transmission revenue recorded annual growth of 15% as a consequence of the actions made to promote sales and because of the Company's commitment to quality, both reflected in a higher quantity of access.

It's important to highlight that the corporate segment also register a revenue increase.

All this performance is reflected in the mix of service provided, presenting an increase of data transmission in Pay TV that already represent 26% of revenues with a consequent lower dependence on the fixed and voice business.

On slide 12, we comment on operating cost. The total operating cost amounted to BRL5.2 billion in the second-quarter 2011, BRL5.4 higher than second-quarter 2010. The increase is primarily due to increase of commercial activity and customer base.

Personnel cost increases 13.6% on an annually basis, this evolution stems from the consolidation of TVA's employees from June 2011 and increased due to collective bargaining.

Excluding the effect of TVA consolidation, this cost shows a net increase of 7.9%. The cost of service rendered increased by 2.7% compared to second-quarter 2010 due to higher interconnection expenses and taxes. Expense (inaudible) showed an increase of 9.5% year over year due to the higher net additions in the customer base for the periods compared.

Cost of handsets decreased by 0.9% over the same period of last year. The largest share of sales is (inaudible) SIM cards in our restricted policy and subsidy granting just by default.

Selling expenses rose by 5.6% over the previous year supported by increased expenses with customer care due to a higher consumer base. When compared with first quarter of 2011, it was increased 8.4% due to higher spending on our process services specially advertising.

The G&A expenses remained practically stable in our annual comparison. Other revenues reduced in comparison with the second quarter of last year due to the positive impact of the sale of Portugal Telecom shares in the second quarter of 2010.

On slide 13, we can see the evolution of the EBITDA that reached BRL3.1 billion, up 9.1% over the previous year as a result of continued growth in revenues from voice and data coupled with efficiency cost management.

Continuous improvement of processes and finance discipline has provided consistent cost control resulting in the growth of 0.8 percentage points in EBITDA margins reaching 37.2%. However, by excluding the event related to sale of shares of Portugal Telecom in the second-quarter 2010 and the elimination of TVA revenue in EBITDA in the second-quarter 2011, the EBITDA margin grew 1.9 percentage point.

On slide 14, we present the EBIT, financial result and net result. Operating profit EBIT rose by 15% in second-quarter 2011 over the previous year, mainly because of the increase in EBITDA associated with the growth in depreciation and amortization of 2.1% on a year-over-year basis, mainly due to increase in amortization of deferred assets.

As for financial results, it shows an improvement of BRL109 million in the annual comparison due to a lower net debt. Reflecting the improved operating performance, financial results and consistent administration, net income reached BRL1.1 billion, 30% higher than the second quarter of 2010.

In the slide 15, we can see the CapEx in the first semester of 2011 which amounted to BRL2.6 billion, an increase of 56.5% year over year. This evolution is mainly explained by the spectrum acquired by (inaudible) in the auction held in December 2010 in the amount of BRL811.8 million. By excluding this event, the CapEx would raise an increase of 7% with a stable CapEx per sales rate.

This evolution showed the Company's commitment to deliver the best service in the market concentrating its investments in the network expansion and quality, besides commercial cost to support the growth of our customer base.

In slide 16, we comment on debt evolution. Gross debt reduced by 13.5% annual due to debt amortization in the period.

In terms of net debt, the comparison with the second quarter of 2010, the reduction of 19% is due to the high cash generation in the period. In the quarterly comparison the increase is a result of the higher amount of cash available in first quarter directed for the payment of dividends in the period.

Thank you very much for this time, and now I offer the floor to the Luis Miguel Gilperez for his final comments.

Thank you, Cristiane. Now let's go to our project in Brazil. On the slide 18, we comment what is the potential.

I believe there is a huge potential for growth in Brazil. Really Brazil is not up -- is not a country, it's a continent. It's really a continent with a lot of opportunities and Telefonica is fully committed to be one of the driver of this success history.

Brazil is pacing for a great economic moment, especially for lower income class and increasing consumption (inaudible) throw the entire country. According to the public information of press matter, 30 million people migrated to the middle class in the last (inaudible) transforming, they are all now pyramid into a diamond of opportunities.

Telefonica will be increasing more part of the lips of this people. No matter it offering voice, data or TV services through a mobile or fixed device. We can do even more to increase the availability of our services to a broader number of the Brazilian citizens.

We strongly believe they are and will continue to be expanding more in telecom services. We have also be in the same regions in the north and northeast of Brazil growing at tremendous rate. Telecom services are pillars for the development of these regions and we will be the main technological partner of Brazil in this process.

On slide 19, taking a closer look into the Brazilian market on making the bridge to the telecom sector with a safe opportunities, to increase use in term -- mobile use, inter or to -- mobile Internet use, in terms of fixed broadband services, in term of fixed voice services.

With this we can increase use in Sao Paulo, but certainly the market outside Sao Paulo has more room to deploy our offers.

Voice service is still can grow and we still have underpenetrated segment that are being approached with cheaper and more powerful handset and with more accessible voice plans. In this matter elasticity could drive traffic growth in Brazil to international standard.

The largest and challenging opportunities on data, 72 of the homes in Brazil are not user of fixed Internet services and only 12% of the population has 3G phones that can deliver a good Internet experience.

We can offer again the gap in broadband penetration between Sao Paulo and outside Sao Paulo. In that sense, we feel that we have an unique position in order to capture these opportunities.

On the slide 20, we see that our Company is in a unique position. In terms of our infrastructure, we combine valuable assets in our operation. Our 3G coverage reached more than 1,400 municipalities in June, number which is far away from the base of our competitor in Brazil.

The capillarity and quality of our 3G network produced a unique and a strong selling proposition building up and in better competitive as its creating the condition to be up full services provider on a national basis.

With the last acquisition of spectrum in 1,800 megahertz built on to be the leader in national spectral capacity, more than the new spectrum will allow us to compete in the (inaudible) market.

In reference with the spectrum, we have not only the leadership in Telesp quantity. We have also the best quality because we have a part of our spectrum based on 800 megahertz that permit to provide indoor services with better quality than the provision with other frequencies.

In direct transmission we count on an expensive national backbone and build popularity or backhaul in Sao Paulo where we have more than 28,000 kilometers of transmission network.

With this asset, we have flexibility to grow in voice and especially in data, maintaining a good quality level which is essential element of our strategic position.

By connecting almost 80 million Brazilian people, Telefonica has the largest community in the Brazilian telecom sector. This added the most valuable telecom brand and the largest -- the largest distribution channel on the market drove us to consolidate ourselves as the national leader in integrated telecom services.

Moving to slide 21, we are optimist about our projects and confident that we can capture synergies through the integration of our operations in Brazil. After that in our execution plan we were able to increase the operational synergies target by 16%.

What we believe it was our gap in terms of operational synergies before is not the floor.

We expect to generate from EUR2.7 billion to EUR3.1 billion as net person value of operational synergies, mostly driven by higher expectation on revenues generation as we evolved in our initiative and had better visibility on the potential value generation we could have.

In that sense, we are working very intensely in order to capture with a lot of project, all the synergies.

On slide 22, you can see that these synergies are being capture today in many initiative that are already taking place.

We have a lot of -- but we want only to explain four initiatives. That one is an integrated approach to the corporate and SME segment, leveraging on our leadership in the standalone operation to increase sales of integrated solution.

Better long, this can offer for the mobile footprint support by our long distant call. The synergy in vendor management, especially in network and IT counter. Reducing cost unifying our infrastructure network and IT using the existing backbone to reduce leasing of circuit and unifying IT infrastructure throughout the construction of a new integrated data center to one existing availability.

All in all, that also essential to want the quality in providing services to our customer, but we are working in differ prospect of synergies. Not only working in order to have synergies between fixed and mobile operation. We also work in order to capture value that's come from Telefonica Group.

On slide 23 we present the new services that we had launched. We had been leveraging on the access to Telefonica Group innovation capabilities and with that we have been able to accelerate the launch of innovative services, generating a strong adoption in a short time.

Our new service dual ring back tone put to (inaudible) has already 2 million users, and the translation from the voicemail to short messaging, call it better Recado has 1.7 minimum package sold.

We have also bet on the launching of new services in the market suits us, the financial services and security market in order to foster innovation and create new and sustainable revenue stream for the Company.

From our financial point of view, that services are sustainable revenue generation tools with average once they are free from interconnection calls and because they have limited capacity utilization are able to enhance the return on our investment. But not only we're working in order to create project. We want to create culture, we want to create the DNA of our company.

On slide 24, beside the mentioned initiative, we are preparing the organization culture to continue capturing all the growth and opportunities that Brazil offers. We frame it five strategies, guidelines, which are somehow a reflection of our DNA.

First of all, connected, we want our Brazil connected with full coverage, timing our services and offers available to almost that fully to population.

Innovative, then focuses on innovation beyond the traditional businesses, i.e., reducing time to market of new releases and have the national average benchmark.

Committed to all of our respected callers. Having responsible attitudes and remarkable values. And finally, unique, unique once in the single team, one branch, one network is only possible to be unique in terms of one culture.

Moving into a slide 25, to prepare the organization for the challenge employed, we changed the way we work before as a standalone businesses.

We are moving to integrate this Company to our client ambition based to all market segment. We created a clear focus on our national basically augmenting the business between individuals and corporate show us to have a clear approach to the market we plan to integrate a structure maximizing synergies and obtain the best practices.

We are also fostering innovation and development of new product and services and those are market segments, we plan a specific unit to ensure our innovation focus. We call them verticals. With that, at this time, we have the right structure to succeed.

Now, in order to summarize on slide 26, Telefonica Brazil through the assets Vivo and Telesp, positions itself uniquely in the telecommunication market in Brazil. The growth and demonstrated in the results of this quarter reflect the consistency of our operation, which added to the rapid expansion of the Brazilian economy makes us aspire to even greater results for joint operations.

We want to achieve this through and unique identity and structure. We aim to become a reference of the telecommunication market providing integral and integrated services, positioning ourselves as market leaders in size, innovation and quality.

Thank you very much for your attention. Now we are ready to take your questions.

Thank you. (Operator Instructions) Mauricio Fernandes, Merrill Lynch.

Good morning. Thanks for the question. I have two questions, one is on the wireless business. I noticed that handset revenues has fallen sequentially and I was wondering why is that the case given that the subscriber growth was relatively similar in fact higher than the first quarter.

And the second question is on depreciation, I understand from your press release that the increase in the depreciation, plus amortization was an increase in amortization of the deferred asset. Just want to know what is this deferred asset? Is it a goodwill amortization and whether we should expect the new level of depreciation to be this BRL1.3 billion per quarter? Thank you.

Okay. Good morning, Mauricio thank you for your questions. Regarding revenues from handset, I will answer and in relation with depreciation, Christiana will answer the question about the depreciation.

Regarding the handsets -- generally with Vivo inter office it's kind along we had a very good negotiation with the band, but as far for Telefonica, for us it is possible to increase the level of negotiation. In that sense, we are reducing really the price of the handset with global negotiation that we had with whole, only one company with Telefonica.

In addition to that, the entire of the market, not only all the activation that come from a market come with handset. Part of -- a very important part of the activation comes with our handset, only with a SIM card. In terms of the prepaid services, more or less -- more, probably more than 70% of prepaid activation comes with our handset, only with SIM card. In that sense, for Vivo, it have very good (inaudible) because as you can understand we don't have -- spent some suggestion, the expenditure is much better that in the case that we are selling -- that we are selling handset.

We are confident with the evolution from the handset price. Of course that for the future probably we will need to sell, or not we will need, we are very focused in order to capture the more important client of the market, the postpaid client. So in that case, our focus is more -- is more and more smartphones and handsets with a very high price.

In that sense, for the future we will have a balance between the activation that we'll have with our handsets that we will continue because Brazilian is very up in that sense.

But in addition -- in those -- in those handset, we will increase the target of our customer base with the kind of the handset that we will sell. But this is our solo this quarter a balance between, the cost of the handset that we have regulatory action, in terms of the negotiation and the need that we have terms of SIM card only, like a (inaudible) activation that is very typical here in Brazilian market.

Now, Christiana will answer the question about and the depreciation.

Thank you.

Hi Mauricio. In the position of (inaudible) in the corporation of shares, we generated an increase of intangible assets of BRL28 million. From this intangible, there are three parts that are allocated which have the license, develop the license, the brand and the clients, the number of clients. This total number of what we're allocated generated BRL17 billion which we started to amortize in April. So we have in the operation of depreciation the two quarters, approximately BRL300 million of deferred amortization of these two amounts.

Thank you, Christiane. So that has implications on the effective tax rate. So, does that mean this the effective tax rate that we should assume is similar, going forward is similar to the one that we saw in the second quarter?

Yes. In the quarter, actually impacting effective rate, but after we finalized the process, maybe we're going to get some benefits on that. So, we're going to amortize it. For example, the amortization of the license for 27 years from now on. So we're just starting in April, but then when we make the phases that we're right now in the project participation, all this amortize can be deductible for fiscal purpose, so we're going to change the tax rate in the future also.

And this is embedded into the synergy estimates that you have updated now right?

Yes, right.

Thank you very much.

Welcome.

Andrew Campbell, Credit Suisse.

Yes, good morning. My question is about the inter-company eliminations. And if you could help us understand basically what is included in that line? And also it increased at a pace well above the growth overall in revenues, I was wondering if that reflects some of the coordinated initiatives between the fixed and wireless side. And if it make sense about elimination would continue to grow at a faster pace than the individual segment revenues going forward.

Andrew, it's clear is clear. Regarding elimination of course that the level of elimination is very high, but it's very high because we have a very good relation between the variant that we have in terms of the fixed services and mobile services. As you can understand, we can create a cluster, very important cluster between our customer base that is the biggest customer base in terms of cellular service, and the fixed services.

In that sense, the expectation for the future is continue with a very good, a very high level of elimination. Not only in terms of -- not only of course in terms of tariffs between the fixed and the mobile -- and the mobile customer because for us it's possible to create also a proposal in order to launch tariff with long distance promotion with long distance service. Because for us, now it's possible with a combination between both companies fixed and mobile, but the expectation for the future is continuing with this level of elimination even for us is possible to increase because our -- a very important part of our tragedy is to combine both -- in terms promotion, in terms of tariff, in terms of balance between and mobile and fixed services.

Okay. Thank you.

Next.

Mitchell Merin, Morgan Stanley.

Hi, good morning. Thanks for taking the question. First, I just wanted to touch a little bit on synergies, maybe I missed it in your prepared remarks, but I was wondering how much of the synergies have already been realized at this point? Have you -- is there anyway to quantify that or give us an idea of how quickly you're progressing on that front?

And then, more specifically to the quarter, was there anything in this quarter in terms of merger expenses that we would expect that over the course of the next year, would eventually disappear or diminish significantly.

And then, second question on data, and which has been a very strong growth driver for you. I was wondering if you can give us a little bit more granularity in terms of where that growth is coming from, is it religious penetration smartphones, is it changing consumer behavior, is it in postpaid or prepaid business versus consumer, any granularity you can give us on that would be greatly appreciated. Thank you.

Thank you, Mitchell. First, I will -- in terms of synergies as I commented during my presentation, we are working very intensive in order to capture the synergies. We have a lot of growth, a lot of project in order to work, in order to get very fast all the synergies.

We have the project from the side of the customer or the corporate customer. We have a project in -- from the cost savings. We have project in different way, but at the end of the day probably we are even defining a very good opportunity in terms of the -- from the revenue side, in that sense we are expecting in order to launch still wireless Telefonica part that we expect to launch very quick.

Regarding the number, the number of each synergies, the number of synergies that we expect for the future are higher that we have today, because now we are starting with new a company with a combination, with a company with integration that like I commented in my presentation, but of the future we're fully confident with expectation in terms of opportunities.

Regarding the growth is a combination between -- the growth come from different ways. First of all, we need to continuing capturing really the market. Brazil really is not a country, it's a continent with a lot of opportunity. The penetration is very, very high, but we continually find opportunities in order to increase the number of client that we have here in Brazil.

The level of activation that we had it's mostly is higher than 2 million. Just imagine that the potential that we had with this tool, but not only in terms of new subscriber, new activation. We are very, very interested in order to upgrade our customer base. With the new plans, with new services, with new promotions.

I do know probably in the voice of the country of Telefonica, but we are very intensive with immigration from prepaid to postpaid.

In Brazil, we are starting one year ago, but the number of immigration that we had today in term of (inaudible) rate are higher than 300,000 client per month. In that sense, probably the immigration is -- the sales staff of our incremental customer base for postpaid side.

So, in order to summarize, the growth come from all the possibility that we had because in tariffs, new services, we are very, very confident and (inaudible) important, like Cristiane commented with some as services, mobile -- multimedia mobile services are growing also

So, I don't have a certain answer about that, but we are working in all ways in order to increase continuingly, probably the growth come from 8% balance between the acquisition and loyalty and upgrading of the customer base. We are very active in all -- in all the place, in all the topics in order to increase the IP of our clients.

And that -- now that's very, very helpful. And just to follow-up on that, specific to those customers on prepaid plans or on prepaid who are not converting over to postpaid, are you seeing some data demand and spending from your prepaid base. And then just on the first question on synergies, was there anything non-recurring in terms of expenses related to the merger integration in the quarter, I don't if you can touch on that.

: Regarding the expenses we don't -- we have really that information. So I feel that for the future probably we can find it more -- we will have more information about all the synergies that we are finding continuously.

But we don't have non-recurring expenses in the quarter regarding synergies to your question.

Okay. Thank you.

(Operator Instructions) Alex Garcia, Citigroup.

Just a follow-up question on the previous one, if I may. Telefonica mentioned in the beginning about EUR65 million in terms of integration costs starting in 2011, and if I'm not wrong another EUR85 million on 2012. Should we see that happening -- should we see this 65 -- well, first, do you guys confirm those numbers? Or those numbers have changed? And if we should see those values kind of impacting the second half of this year for Telefonica Brazil? That will be my first question.

And my second question is a bit away from results, but has to do more with regulatory issues. I was just wondering if you guys could comment in terms threats and opportunities for Telefonica Brazil coming from this new proposal from Anatel of a competition target, et cetera. How do you guys feel that this could effect Telefonica's operation in Sao Paulo and what kind of opportunity would you guys see outside Sao Paulo, where let's say Vivo is not considered -- would not be considered a dominant player. Thank you, thank you for taking those questions.

Okay. Regarding the first question about synergies, Cristiane will answer the question. But regarding the question about regulatory aspect, let me explain what's happening in term with general plan of universalization that cash really Anatel. Of course that Anatel will increase slowly the challenge. Of course that Anatel will increase really the competition.

But in our case we are confident with our position because as I commented we have really the best network. We feel that for us our position, our capabilities in terms of competition are much, much better than the rest of the operators in Brazil.

In that sense, in terms of Sao Paulo. For us of course that with the fixed services it's possible to cover a lot of services, a lot of situation, but in addition to that we have the best cellular network that permit to complement really the offer in that sense.

So we need to increase the penetration of services, fixed services in Brazil for us. We had two tools, first one that come from fixed side and another one that's come from cellular side. But we look really outside of Sao Paulo, for us it's very, a very important opportunity because we don't have all services. We only provide cellular services and for us it's possible to provide the rest of the services. How? With our network, with our cellular network that will permit with Anatel to provide this kind of services.

This is our strategy. We are confident with our capabilities in order to be able to compete with the voice of the competitor, but of course and in order to -- as you know, probably, the new proposal from competition direct, Anatel is working in order to create this document in order to create this proposal. We are waiting the final result of public hearing, but in general we are fully confident because for us it's possible to compete independent of the competitor, independent of the rules because again over that the most important is to have the assets. We have the network, we have the brand, we have the culture, we have the people involve it, this is the more important in order to gain the matter. Now Cristiane will answer really regarding the first question about -- about this.

Okay, and I'm not sure what number you're talking about BRL65 million actually. The number disclosed in last year by Telefonica was BRL144 million in integration cost, now this will be BRL97 million. What we are doing right now is trying to get the best information, the best integration process between the two companies. I did find the best direction, of course, of these two companies and maybe some delays in the process generation and reduction, but you have to keep in mention that in slide 21, we show also our other initiatives that are getting better like revenues and benefits of CapEx. So it's taking consideration the net number of all the information that we hear, the benefits some higher then only the reducing of integration cost.

Okay. Thank you, very clear.

Okay. Welcome.

Fabio Levy, BTG Pactual.

I have two questions, if I may. One is related to your fiscal synergy again. I saw that you revised your operating synergies in 16% higher. But I was wondering if you have an expectation that you could revise your fiscal synergies of 2.2 to 3.3 in the next couple of quarters, if you expect upward revision on that.

And the second one is regarding your other service revenue of debt, we saw a very important increase quarter over quarter. And I was wondering to know what is the main fact that caused the strong improvement quarter-over-quarter? And that's all from my questions. Thank you.

Regarding synergies, Cristiane will answer to you, Fabio. But regarding the growth that we have in terms of revenues, we are confident with the growth and it is to continue with this pace in terms of growth, because I commented the growth come from a balance. It's not the balance focuses in only to catch the clients, we are maintaining our customer base, we are focusing in the best customer, we are focusing in the customer value. So, in that sense, I feel that for the future, we are able to maintain our strategy and I feel that, of course that the competition will be very high, but of course, then we have the best source in order to attack the competition. And so, in that sense, I'm fully confident in order to maintain this, this trends in terms of the growth for the future. Cristiane will answer the -- regarding synergy.

Yes. Just, it's only related to your other service revenue increase, which comes from your fixed business, it grew 40% quarter over quarter and I was just want to know what's the main driver for that?

The main driver for fee services are really broadband services and TV services. We are very focused in order to increase -- in order to increase -- the revenues that's come from data is from broadband services and from TV services. And regarding the voice services, our focus is to maintain the level that we have. Of course that probably will be necessary to combine fixed and mobile operators in order to have duos, trios and bundles in terms of values in order to avoid declining profits in terms revenues for fixed services. But we are able to maintain the level of voice services, the growth, the broadband service and TV services here in Brazil and with the growth that come from mobile space, not formally based in a balance with new services, with a strategy that's come from Telefonica side, from the Telefonica Group. We are fully confident that probably we will be possible to maintain the trends that we have today. Christiane will continue with the question about synergies.

Okay, regarding fiscal synergies, we're still working on (inaudible) restructure and therefore it wouldn't be fair to make any further comments on that, but we keep the target that it's close to the market.

So you mean, there is not -- this is not the final analysis of what you could extract from synergies, it could be higher, but you don't have a disclosure right now? Is that correct?

Yes, we keep it -- we keep the ranges between 2.2 to 3.6 as a range that it's closer and we are working on that target.

Okay. Thank you very much.

But between -- the fiscal '10 and the final structure and the amortization of assets in Brazil compliance with fiscal resolution. So, we cannot define the final structure yet, so we are not disclosing any more details than we've disclosed in the table.

Okay, thank you very much.

Welcome.

Richard Dineen, HSBC.

Two questions if I may. I want to follow-up to an earlier question on the general plans for competition. It looks like the main part of this plan is to introduce local loop unbundling, the regulator opening up your network to rivals at regulated prices. And this has been a really negative development in other regions like Europe. So, I'm just wondering if it is possible for you to share anything on your initial observations of the public consultation, anything on timing, the placing methodology. And critically whether how investments in fiber would be treated. Would they be subject to unbundling, first question.

The second one really just a short question about Pay TV, you talked about the commercial repositioning of that service in the quarter. Just if you could give us some more details on what you've done and when you did it because if you strip out TBA, it doest look like the growth in Pay TV was particularly huge. Just wondering what you're expecting in terms of that repositioning going forward on your growth rates? Thanks very much indeed.

Okay. Thank you. Regarding -- Richard, regarding the public consultants, we preferred to the final rules. But let me, I point really early with my opinion about that. We are in a very good situation in terms of partners. We have really a very good network. Of course that we continually need to upgrade the network, not only from the fixed side, also from the cellular side.

We can create the combination in order to provide services. Of course, that's some of that is important to provide with the knowledge that doesn't permit or to provide a very good throughput, a very good performance. But in my personal opinion we are really in the best position in order to be able to provide all the services to the client

Of course that we did it with all this kind of -- all profits, it's possible to increase the competition. And we can have for actually, in order to create our business. But we have access not only from the network side, we have access from -- we have access from the brand side. We have access from the quality side. Really we are in the best position in terms of brand. We are in the best position in terms of quality. We're in the best position in term of culture.

So, I'm fully confident that for us it will be possible to maintain our position in terms of the market independent of the rules that come them from the different consultant, public consultants.

Regarding the Pay TV, we have different technologies. We are using satellite technology, we are using IP TV technology and finally we are yet to launch very first probably during September, a new technology or call it Web TV based on the DSL services.

Our strategy -- we have a great technology inside San Paulo. But broadly, the market outside Sao Paulo is higher than the market that we have in Sao Paulo. So in that case, our strategy is not only to target the Sao Paulo market, we want to attack to a stand our settled services to rise of the country, in that case, to out of Sao Paulo. In that sense, as you can understand with satellite services you especially want to expand to have a global coverage in that sense, satellite services will be the first technology in order to extend the services out of Sao Paulo, but for us it's possible to have a very good offer, a very good quality with Web TV service that use bandwidth of DSL services. For us it would be a possibility in order offer this kind of services not only inside Sao Paulo, out of Sao Paulo.

This is our strategy to extent our position instead of TV with great technology, of course that IP TV will be focuses in that -- in the best client in the project that will have a very good connection with fiber with (inaudible) and the rest we will call it the technology based upon satellite and DSL services that probably that they're more challenging service that we expect to launch in the coming months.

Thank you very much for this. If I may just quickly follow-up on your response to the unbundling question, I guess if I just ask in another way, hypothetically, if unbundling work to include fiber, if you're basically forced to open up your fiber network under the new rules, would that affect your inclination, your desire to invest in fiber in Sao Paulo?

Okay. Regarding the -- regarding investment in Sao Paulo our strategy is to deliver to the client that they need, really. It probably is the same standards of the competitors. In that sense, it's not the problem of technology, it's not the problem of access, it's a problem of -- they need to handle megahertz per second probably would be possible only to provide with fiber solution, but the question is why they need fiber, they need to handle megahertz per second.

Of course that we need to answer the needs of the client with the technology that we are have in all cases. In that sense, we are working in order to deploy -- in order to deploy fiber. In order to cover the main areas or the areas that they're going to move clients with this kind of needs.

Today we had more than 500,000 [homepass] and the expectation is to continue with the developments and to get a very good -- more than EUR1 million on homepass.

In terms of the unbundled, it depends on the regulation, but at the end of the day the same of the rights of operator. For us, we want to attack the market with all the grips that we have, in that sense and we have services, fixed services, mobile services, broadband services, mobile broadband services. For us, it's important to be able to have bundled with all -- with all the services because at the end of the day we want to maintain the client, we want to maintain, we want to increase the royalty for the clients, we want to expand all the services to the customer base. Honestly, we don't know what will happen with the consultant, but we are the same of the rights of the handsets. We are confident with our situation in terms of position that we have here in the Brazilian market.

Well, thanks very much indeed for a very detailed response. Appreciate it.

Thanks Richard. Next.

Rizwan Ali, Deutsche Bank.

I had two questions, one is with the combination of Telesp and Vivo. Can you tell us roughly how much exposure you now have to mobile termination revenues? And second is what is the latest you've heard from Anatel or the regulators in Brazil with regards to the potential decreases in termination rates and whether those rate decreases would be passed on to the end users?

Okay. Okay, Rizwan, regarding MTRs, we don't know, we are waiting really in order to know from Anatel -- from Anatel side their final decision, but the same as I commented regarding the bandwidth that we can create between the mobile -- the mobile network and the fixed network. We are saying that for us it's possible to create, to create bundles in order to increase the loyalty that we have between the clients that we have in terms of fixed services and mobile services.

In addition to that probably it will be possible to increase or to capture the elasticity that's come from the price decrease. But honestly, we have the biggest customer base in terms of mobile. We have the biggest customer base in Sao Paulo area. So in that sense, for us, I don't know if we have a problem with the MTS, with -- or an opportunity in order to capture more and more market. But at the end of the day we are waking -- we are waiting the decision from Anabel -- from Anabel side.

This is really the situation that we have, we are confident but at the end of the day we don't know what will be the level of one that we have for the coming years.

Okay. When do you expect decision to be taken? It's been delayed quite a bit.

I don't -- Rizwan, I don't have really the exact date. We know that Anabel is working very intensively in order to produce to the MT formation, but we don't have a specific date in order to have the information. And as you know probably we are waiting the decision from 2007 so in that sense probably it would be difficult to define a specific date.

Well, also you are mentioning your -- how you want to bundle services in Sao Paulo, given bundling opportunities are more limited outside of Sao Paulo, I mean, what is your strategy outside Sao Paulo? Do you plan to investment structure to provide new services and bundling?

Out of Sao Paulo, our strategy is to -- is very simple. If you look out of Sao Paulo, we have leadership in terms of mobile area. So in that sense, for us probably is very simple to increase our penetration -- our penetration services with more services. The question is how many fixed lines we have out of Sao Paulo. The answer is very simple, still, how many people live out of Sao Paulo, very close to 150 -- some 50 million people, so in that sense I feel that we're going to have to very, very big opportunity in order to capture the duo side to Sao Paulo's market.

How? I feel that we continued the quality that we have in terms of our mobile network. For us it will be possible to attack this market and to increase our penetration in terms of fixed services and TV services out of Sao Paulo. This is our strategy, very simple to launch the same services that we have in fact on Sao Paulo, but based on cellular network. Of course that probably will be necessary to bell some part of fixed network, but the main access will be probably cellular access.

Thank you very much.

(Operator Instructions) Ivon Leal, BBVA.

A couple of questions, the first one is during the second quarter broadband net adds has picked up a bit, but we are still far away off the numbers you come in 2010. So I was wondering if the market itself is slowing down or just you're losing share on that net adds versus other operators in Sao Paulo.

So, may be you could tell us what is your market share, accumulated market share, and how your share of net adds performing first half 2011 versus 2010.

And the second one in terms of your Pay TV strategy, I was wondering if given that you're just targeting 1 million homes in your five-year deployment, I was just wondering if you're -- you're just say me that having 1 million subscribes on Pay TV or you think you're going to deliver that through satellite or you would be able to deliver IPTV to your corporate network?

Okay. Regarding the first question, Ivon. We have a very strong competition in Sao Paulo with net, and of course that we had the best position in terms of markets or in terms of broadband services. I don't know the exact figures in terms of bundled services, but our market share is around 70% in terms of the -- or the total region. Because the focus of net in Sao Paulo and probably the focus activity for the future is really not to attack all the area, all the [radian], is more focused in order to attack a strategic area which was higher -- activity. Regarding, the second question was really regarding Pay TV?

Yes.

The strategy about Pay TV was really based in three technologies, first one is IPTV that we need to have fiber or are able to -- are very good [coupon] because at the end of the day, we will need more on spend megabit per second in order to provide this kind of services. Second one is satellite, and finally we want to launch new services based upon the [XL] services which are very good quality, but probably not on the same quality that we had with IPTV services.

Regarding the numbers we have in term of -- in addition to that as you know, we have a specific network basis in cable, called TVA, that we had with -- the numbers are more, it's 200,000 that we had that's come from TVA, more it's accounted that instead of satellite on to IPTV. We had -- we have -- sorry we have five (inaudible) satellite, 200 in terms of TVA, more or less a little bit less and in terms of IPTV, we have more or less a 20,000. We are starting with this kind of services so in that -- in that trend the competition is grow a lot for the future.

Regarding, DSL's Web TV based on DSL services that competition is to launch very first. We have now -- now more or less September like based on date in order to launch the services. And we are very, very confident with this kind of services because for us maybe a very good option in order to increase the market, the penetration for this kind of services. Not only based on Sao Paulo, as far as -- for us, it's possible to launch this kind of services out of Sao Paulo.

Okay. So, basically you feel that in Sao Paulo you will be able to deliver that to your corporate network?

Yes, with corporate network it's possible to do a lot of things, not only based with the DSL or even with other technology. We -- our plan is to use a lot of corporate network and to continue with specific deployment of the fiber -- in the fiber network. As I commented we have now, right now, 500,000 homepasses in terms of fiber.

But, of course we will continue in order to expand all the possibilities that come from coupon because at the end of the day, we had the best network coupon here in Sao Paulo.

Thank you very much.

Thank you.

Marcelo Santos, JP Morgan.

In fact this is Andre Baggio. Are you hearing?

Perfect, I hear you Baggio.

Yes.

Perfect. Okay. All right, I have a question related to the CapEx. I see that you expect a significant reduction in the CapEx because of the synergies, and -- but however, I saw from the comments that there would BRL30 billion in CapEx in the next five years from a commit of Telefonica here in Brazil. Is this already accounted, do you still see -- do you think it's what your expecting that in this Company in the coming years? And how does investment would come from the -- in fixed line outside Sao Paulo?

Okay, Andre, Cristiane will comment about the figures, but let me explain a little bit about the goals of our CapEx. Mainly our CapEx is focusing on in order to growth, the goal is to growth, growth, growth. We are working now in different project in order to deploy new networks, 1,800 megahertz that will come very quick in order to provide the best quality to the mobile clients and not only quality because for us it is possible to increase our number of customer base with 1,800 megahertz, but only in 1,800 megahertz, we have investment. In addition to that we have allotted investment from the fixed side because we are improving our backbone, our backhaul.

We had the best backhaul here in Sao Paulo. We need a very good backbone in order to be able to provide the data services in order to extend our quality. So, all the CapEx is directly -- or is focuses on network side. Our focus is to growth, our revenue -- our revenues that come from the different services and at the end of the day here in Brazil CapEx is necessary in order capture the growth, regarding the figures probably Cristiane can comment with more details about the figures because Cristiane knows much better than me.

Hi Andre. Actually this $3 billion are disclosed for the next five years, include all the companies of Telefonica and Brazil not only Telesp and we don't have details on that actually for Telefonica.

Regarding the guidance of this year, we keep the guidance of 2.5 billion Telesp 3.5 billion -- we've included (inaudible) in the spectrum auction that we have in December.

Okay. Thank you.

You're welcome.

That concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Gilperez for any closing remarks.

Okay. Thank you, thank you, thank you, [Regales], thank you for attendance -- for attending this conference call. For me it's the first conference call here in Brazil.

But let me summarize my passionate point of view about the situation of Telefonica Brazil. First of all, regarding the results, in my personal opinion, we have fantastic result. We had a very good results. But, not only the results are important and I'm fully confident with the potential that we have here in Brazil.

Brazil is probably the country of opportunities. That project that we have regarding the integration of the Company is -- focuses in order to capture the potential, of course that we will go out in order to reduce cost, in order to capture all the synergies that come from the different project that we have, but the potential in terms of growth, in terms of revenues, we are able to capture this potential, because for us is possible to have the best access.

But not only the accesses in terms of the network. In all the topics when we are working very intensive. For example, tomorrow, we will launch a new campaign about prepaid, it's a campaign based in -- the goal for this campaign is to increase our profitability of course, but not only over profitability because for us also it's important -- very important to continue with that level of activation that we have.

So when we launch a campaign with two goals to increase our profitability, but in addition to that to continue with the level of activation that we have. That's the only a sample, that we are doing continuously. We're attacking the market, we are continuously have different approach in order to attack the promotion, a tariff, a product to the needs of the Brazilian.

In that sense, I'm confident because we have not only project, we have the country, we have the continent, we have the project in order to capture that this potential, but in addition to that we had the culture, we had the people, we had the people involved in two companies that are deliver for has really the spirit to win really the battle of the Brazilian market.

Our aspiration at the end of the day is to win really a reference, not to be the major, not to be the biggest, really to be our preference in the telecommunication sector.

This is my personal point of view. Thank you very much for attending the conference call. (Spoken in foreign language).

Thank you. This concludes today's Telefonica de Brazil second-quarter 2011 results conference call. You may disconnect your lines at this time.