Telefonica Brasil SA (VIV) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefonica Brasil second quarter of 2012 earnings conference call. Today with us we have Mr. Paolo Cesar Teixeira, CEO of Telefonica Brasil, and Ms. Cristiane Barretto, Controller, Director of Telefonica 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. (Operator instructions.)

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the Company's management's 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 half of 2011 figures were prepared on a combined basis. Thus, the annual variations presented may differ from those reported in the financial statement filed with CVM through the form Quarterly Information ITR.

Now I will turn the conference over to Mr. Paulo Cesar Teixeira, CEO of Telefonica Brasil. Mr. Teixeira, you may begin your conference.

Good morning, ladies and gentlemen. I would like to thank you all for attending this conference for the second quarter 2012 results of Telefonica Brasil. Please, go to page 4. These are the highlights of today's call.

In this quarter, we (inaudible) about the significant quality improvement in our fixed services. We have the highest fixed attendance index, IDA, by Anatel in the market. We believe this is the direct result of our [political] focus and of the launch of the Vivo brand for [all] our services.

Our strong mobile network quality enforced our leadership in the postpaid segment, where we continued to increase our market share leadership. Further, despite of the impact of the MTR dilution and increased competition, we are able to keep an accelerated annual growth of mobile revenues.

Our margin for the quarter reached 37.5% in a period of strong commercial activities, rebranding and integration. Lastly, I will share with you the rationale behind our five strategic pillars, which focus on delivery of maximum quality and satisfaction to our customers.

On page 5, I will differentiate in growing quality in fixed service (inaudible). As I announced to you in the third quarter of 2011, we have been focusing on improving quality in fixed services and the results are now becoming clear. Our fixed attendance index reached its best ratio on April 2012 when we became the leader in quality among fixed operators in Brazil.

On the bottom left chart, you can see that we reduced the level of complaints, Anatel, by 26% year-over-year. Additionally, just one month we after rebranding to Vivo, we surpassed competitors on the customer satisfaction index measured by independent surveys. We are working hard to continue enforcing the policy of quality perception our customer has of the Vivo mobile operations, always seeking to take our customer's experience to the next level.

Moving to page 6, we have our growth in accesses. The chart on the left shows that in this quarter we had a 14.5% annual increase in accesses and in the period we've covered 90 million accesses. The fixed segment customer base remained with 50 million accesses. The mobile segment grew 18.2% compared to the second quarter '11 and reached 75.7 million accesses.

Meanwhile a more restrictive profitability analysis led us to disconnect 1.6 million prepaid customers during the quarter. The chart on the right details our net additions, which were 25% higher than second quarter '11, not considering the already mentioned prepaid connections.

This more restrictive policy reiterates our focus on revenue share profitability in real value generation. This is a rational movement that should be followed by the industry in -- at the reflection of real market share and improving profitability for the sector.

On page 7, we have the mobile commercial performance. In the quarter, we improved our customer mix with an annual growth of 21% in the post paid customer base reaching a market share of 36.6%. We also managed to increase especially the number of prepaid net additions, resulting in a super branded market share of 29.6%.

In the data card and machine-to-machine segment we had a [simplification] from voice to data made by two competitors impacting the comparison basis. With the highest number of data cards announced by Anatel, our market share is 49.2%, the undisputed leader in the market.

I underscore the importance and value of our growth in postpaid in data in light of the tougher competitive landscape in the quarter, coupled with our [rational] and strict commercial policy, mainly regarding subsidies. As evidenced, the subscriber acquisition cost, SAC, decreased by 4% annually reaching BRL49.6 in this quarter.

On page 8 we show the efficiency of our mobile campaign. Our prepaid campaign, Vivo Sempre, is proving to be very effective in driving recharge activities in our prepaid customers. As you can see on the top right, annual growth in the recharge has been higher than the growth in accesses for the last two quarters.

As a result of the higher adoption of prepaid and control plan customers, the ARPU diluted by 7%, also driven by MTR cuts beginning of February 24th. By excluding this effect, ARPU would have diminished 4.6% showing a limited erosion compared to market average. Again, this quarter demonstrates the better quality of our customer base.

On page 9 we can see the evolution of the fixed business. In fixed broadband we grew total accesses by 7.1% year-over-year and increased voice in the corporate segment. As a result, the ratio of broadband over voice accesses keeps increasing steadily reaching [35.1%] in the quarter versus 31% in the second quarter of 2011.

In addition, an important proportion of the increase in fixed broadband access was originated by Vivo Fibra, our Fiber To The Home solution, which maintained an accelerated level of net additions during the quarter and reached around 90,000 access in June 2012, four times more compared to the last year.

It is also worth mentioning the performance in the corporate business leveraged by our increasing conversions [structure]. We had annual growth rates of 36% in the fixed voice, 20% in fixed broadband and even a stronger growth of 71% in mobile accesses in the corporate segment.

Page 10 highlights our financial results. We managed to build a solid set of financial results even in the face of three large margin resistors in the quarter. Number one, MTR and fixed [receipt] cuts in the period. Number two, progresses in the integration process. Number three, intensification of the competitive landscape.

Our service revenue growth in the year-over-year comparison reached 1%, [as low though] compared to the second quarter '11 mainly due to MTR and [receipt] cuts as of February 2012, which resisted the annual growth around 200 basis points.

It is also worth mentioning the higher fixed revenue base in second quarter '11 due to the incorporation of TVA and seasonality in corporate IT services, as Cristiane will detail later.

EBITDA registered an increase of 1% reaching BRL3.1 billion with a margin of 37.5% affected by non-recurrent events. Net income totaled BRL1.1 billion, a decrease of 5.6% year-over-year mainly due to the higher taxes and financial expense in the period.

Now, Cristiane will give you some details on the financials. I will come back to talk about the highlights of our strategy.

Thanks, Paolo, and good morning, ladies and gentlemen. On page 12, we see that mobile net service revenue maintained an accelerated growth in the second Q of 2012, growing 11% year-over-year. If we exclude the impact of the MTR revenue growth would be 13.8% year-over-year.

The larger customer base and our promotions had a simulated increase of outgoing voice and data, which grew 15% and 21% year-over-year respectively. The reduction in network usage is explained by the mentioned MTR cuts by around 14%.

Data and value added service recorded annual growth of 21% as can be seen on page 13. Thus, data and VAS already represent 27% from mobile net service revenues, compared to 25% in second Q of 2011. The performance in this quarter was mainly driven by messaging revenue, which recorded a growth of 29% in the second Q of 2012. Internet revenues increased by 15% over second Q, 2011.

This growth is driven by adoption of 3G plans in data card packages as sales of data packages attached to smartphones have increased 173% year-over-year. In addition, the number of prepaid accesses in data packages increased four times year-over-year.

On page 14, we have the evolution of wireline revenues. As seen on the left side, wireline revenues reduced by 11.7% annually and 2.9% quarterly. Excluding the regulatory impact of the reduction of fixed-to-mobile tariffs, annual decrease would have been 10.4%.

Looking at the graph on the right side, we see that the variations in results were mainly driven by non-recurring items. Voice revenue reached an annual decrease of 16.3%, partly explained by the reduction of fixed-to-mobile tariffs as of February 24th.

Data transmission and pay TV revenues recorded an annual decrease of 1.8% due to a more competitive environment. A growing number of corporate and broadband customers contributed positively to partially offset the reduction of the TV business. TV also decreased because of the lower commercial activity anticipating the launch of the new TV platform in the second half of 2012.

Other revenue decreased by 13.5% when compared to the same quarter of 2011 due to the seasonality recorded in the second Q, 2011, especially on IT corporate services.

On page 15, we comment on operating cost comparing 2Q of 2012 versus 2Q of 2011. Total operating cost totaled BRL5.1 billion in second Q of 2012, including a net effect of BRL361.6 million related to one-off reduce in expenses. Excluding these effects, the recurring costs would have increased 4% compared to the previous year, showing a strict control of cost even in the context of our integration process.

Recurring costs were quite stable with the exception of G&A expenses, which grew year-over-year due to integration costs. The net positive non-recurring effect totaled BRL361.6 million as follows.

One, of the cost of service rendered, positively impacted by BRL244 million due to reverse of provision. Two, commercial costs, negatively affected by BRL64 million due to the launch of the Vivo brand for all services in this quarter. Three, other expenses revenues, positively impacted by a BRL191.6 million due to the sale of non-strategic assets in the quarter.

On page 16, we see on the left side that EBITDA margin reached 37.5%, 40 basis points above last year. In the second quarter, the EBITDA was impacted by one-off. Considering the adjusted EBITDA margin, on the right side, we see that the recurrent margin in the quarter reached 33.1%.

On page 17, we analyze the evolution of the operating profit. It reached BRL1.7 billion in the second Q of 2012, a 0.5% increase over the same quarter of last year. On the top right, we show the financial results. Net financial expenses increased by BRL33 million in the annual comparison, mainly due to the lower volume of cash reserves and lower return on it, a result of the decrease in the interest rates. As a consequence of the stable EBIT and higher financial expenses, the net income reached BRL1.1 billion in the quarter, a decrease of 5.5% over second quarter of 2011.

Moving to page 18, on the left we observe that the consolidated CapEx amounted to BRL1.1 billion in the second quarter of 2012, a CapEx to sale ratio of 13.9%. When comparing to the second quarter of 2011, excluding licenses, it increased 10.2% due to expansion of capacity and quality of the network as well as investments in key IT projects like the data center. The gross debt, on the top slide, decreased by 4% annually and reached BRL5.5 billion in the second quarter of 2012 due to amortization of debt in the period.

The net debt, on the bottom right, reached BRL3.2 billion, a decrease of 1.2% year-over-year. When compared to the previous quarter, it increased by 19% due to the dividend payment in May.

Now, Paulo will take us through the strategic highlights.

Thank you to all of you.

Thank you, Cristiane.

This quarter, I would also like to share with you our review on key trends affecting the Brazilian market and how those support the key elements of our long-term strategy. Please move to page 20.

First, we see the Brazilian customers are becoming increasingly demanding, requiring that we deliver customized care and customer-centric offers and servicing models that go beyond the standard and truly address their needs.

Second, there is intensification in price competition with some very aggressive pricing moves and promotions for our competitors, most especially on the prepaid segment. We believe that while our price remains competitive, our focus on quality and loyalty continue to be our driving force to attract and retain customers.

Third, there is an acceleration of data and value added services growth in Brazil. So the best position to lead and capture the growth, we had made important investments in future-proof solutions, having acquired the best 4G spectrum in June and continue to expand our Fiber.

Fourth, a fixed voice acceleration at a maturating stage, working on creating innovative business models to diversify our revenue streams, ranging from Vivo for financial services and [e-health]. Lastly, there is pressure in key cost drivers that compel us to continually and positively transform our production model towards quality and efficiency.

Moving to page 21, given the trends and implications and having absolute clarity that quality and customer satisfaction are and will remain our focus, we have built five pillars to guide our strategy.

Number one, to provide a unique and integrated Vivo experience to each customer. Number two, to strengthen our convergence infrastructure focusing on quality. Number three, to continue fostering profitable growth. Number four, to drive innovation and capture new opportunities. And number five, to transform our operational model. In the following pages, I will go deeper into each of these pillars.

Moving to page 22, our first strategic pillar is to provide a unique and integrated Vivo experience to each of our customers. This implies treating our customers with efficient care, providing a constant brand experience on all our interaction of -- and touch points and valuing and rewarding their loyalty. We have made great strides to live up to the strategic pillar and we are proud to share with you the recent launch of the Vivo Valoriza; our new loyalty program.

This program rewards our customers for all products and services they have with us and has already been recognized as a differentiating asset to our customers, improving their satisfaction by 10 percent points on our latest survey. Building on the theme of seeing the customer as one, we are proud to be the first operator in Latin America with an unified customer view, followed by an evolution of our customer intelligence and the convergence of our platform.

Furthermore, since April our super stores, online channels, and IVRS have been integrated offering our customers a consistent Vivo brand experience at all touch points. We are confident that these initiatives will foster loyalty, satisfaction and as a result an increase in our share of volume.

On page 23, we have our second strategic pillar -- to strengthen our convergence infrastructure focusing on quality. On the base, we have IT excellence capabilities that enhance convergence, flexibility and efficiency. In the last quarter, we have [important] developments in capabilities with several initiatives, most notably the online company, unified business intelligence, convergence billing and front-office systems, and our new state of the art data center capable of supporting business growth for the next 10 years.

Building our IT excellence to have a strong network to support data growth. Not only we have built a strong national backbone and a solid backhaul, we are also the only operator in Brazil with an all mobile spectrum frequency.

At the top, we have superior technology, the true backbone of our lasting quality proposition. We are the absolute leader in 3G and HSPA plus national coverage. In June, we acquired the best 4G spectrum in Brazil and we are confident the evolution to 4G will further strengthen our leadership position. Moreover, Fiber To The Home coupled with IPTV and OTT will provide our customers with unmatched quality and take the entertainment experience to the next level.

On page 24, we have our third pillar; to continue fostering flexible growth. In our strategic view we believe there are three avenues for profitable growth, namely, keeping momentum in mobile growth, protect our value in fixed services and consolidate leadership in corporate. We will briefly discuss each of these in the next pages.

Mobile is a key growth engine behind Vivo and page 25 highlights some of our latest offers and services development. We aim to continue to increase differentiation for postpaid by enhancing our offers. We offered to the postpaid market a differentiated experience through smart Vivo, the combination of high quality smartphones with the best coverage, quality, speed and access to the largest community in Brazil.

In addition to Vivo Smartphone Ilimitado and the best in market quality mobile internet, we launched the new international roaming offers. As our postpaid customers become global trotters we have step changed the affordability of our international roaming offers with data download package starting at BRL24.9 per day and voice at BRL1.5 per minute to any country.

In the first month, customers almost tripled their data traffic while roaming abroad demonstrates commercial effectiveness in delivering against an emerging market need. To complement our portfolio for the prepaid market we are launching affordable SMS to all operators at BRL0.05. This new offer couples differentiated quality with affordability.

Furthermore, tomorrow, we will launch a new prepaid offer with internet access at BRL9.9 per month, which translates into the most competitive price, in addition to providing greater usage flexibility.

Moving to page 26; fixed service are a fundamental value generator in our business and our goal is to continue to protect its value with a persistent focus on quality and customer satisfaction. In this, we are the leader in fixed satisfaction as measured by Anatel.

For our fixed customers new offers and promotions play an important role in cross-selling and furthering customers' convergence, with Promocao Facoritos, our fixed mobile preferred numbers promotion, and triple play offers being our focal point this quarter

In fiber, our focus and dedication to drive growth and loyalty in FTTH has generated positive results, most notably successful [upscale] of ADSL customers to FTTH -- two-thirds of fiber net ads in second quarter '12 comes from ADSL customers -- 50% lower churn in fiber than market internet average, enhancing ARPU through bundling with a two time [listing] from single or to triple play cross-selling, reduction of 16% cost per add.

On page 27, we had our -- profitable growth avenue, to consolidate our leadership in corporate. This quarter we focus on new products and innovation and launching several new offers for the corporate segments such as software as a service, our app store. We signed partnerships with the key market players such as Office 365 to give our customers access the best internet solutions to their apps, business needs.

Vivo Cloud Plus hosting, we enhanced competitiveness for large corporate clients by upgrading Vivo Cloud capabilities, while also growing the penetration in this quality services on the SME segment. As a result we've had great success, driving growth and loyalty in the corporate segment with 65% share of Push-to-Talk new ads in Q2, a 24% growth in data package customers year-over-year, a three times year-over-year growth in M2M new ads, and a 3.5 times year-over-year growth in Ultra Broadband new ads.

Page 28, we move onto our fourth strategic pillar; to drive innovation and capture new opportunities. As a market leader, we have a unique ability to expand our partnerships and build new ones. Our new business revenues have experienced tremendous growth in the last two years and we expect this positive momentum to continue into the future.

Furthermore, it is proven that VAS customers are more loyal making new business an important lever to combat churn. Here are a few of the latest innovations that we and our customers are really excited about.

Machine-to-machine solutions for the corporate customers like tracking, telemetry and security; co-branded cards, prepaid cards, M-Wallet and a pilot with NFC technology and sales of insurance products.

Kantoo, our language teaching application that fuses videos, images, text and audios, and already accounts for than 3 million subscribers. We have an app that provides guidance on preventive health, well-being and connects customers with nurses, on duty 24 hours per day, 7 days a week.

Finally, on page 29, as our fifth strategic pillar to transform our operational model. In our relentless drive for efficiency and quality, we recognize that the fast pace nature of our sector inherently pushes us to rethink our operational model. This quarter we would like to draw attention to four elements of our operational model that has been central to our transformation.

First, we are optimizing our customers management by promoting self care, especially through the use of SMS, IVR and the web. We are also boosting own store productivity to strengthen the brand and lower acquisition costs.

Second, we continue to drive network efficiency. Power sharing as well as backbone and backhaul sharing partnerships remain key business practice in our model. Furthermore, we are continuously analyzing the potential for other network sharing models, such as 4G and RAN sharing.

Likewise, enhancing our IT infrastructure remains a cornerstone of our operational model. We have made progress in the virtualization/private cloud, the unified data center and unified billing infrastructure.

Lastly, our cultural transformation has created a culture of excellence. This culture is embedded in all aspects of our strategic pillars and can be instilled into three key characteristics; customer and quality-centric, innovation driven, and agile. These operational improvements deliver on the announced synergies and will take our efficiency to the next level.

Moving to the page 30, we have a brief update of our integration progress. In summary, our integration is a reality as pointed out by the successful launch of our Vivo Valoriza loyalty program, driving brand unification actions, the convergence of our network and our customer satisfaction achievement.

Moreover, the implementation of our key priorities is well underway. Most importantly, unification of our billing systems, the integration of CRM, a new and competitive IPTV offer, the expansion of FWT outside Sao Paulo and the 4G acquisition.

Summing up, quality is and will continue to be the driving force behind our strategy, with leadership in mobile and fiber as our objective.

Thank you. Now, we would like to open for questions.

(Operator Instructions).

Andrew Campbell, Credit Suisse.

My question is on the mobile data segment, and in particular, you mentioned the 21% revenue growth in data plus value added service. But it seems that you may be seeing a bit of a slowdown in that segment. And the other thing is that actually the SMS components, you pointed out, is actually growing faster than the internet component, which is a bit surprising. So I was wondering if you are seeing some change in the market dynamic, if this is competition, possible saturation in the product or what is causing this bit of a slowdown on the revenue side? Thank you.

Thank you, Campbell. I -- we think we are growing in this market; we have now new data from Anatel. We have more than almost 50% of market share in data cards. When you compare with the data cards, the M2M, [the R2] is almost 10 times more growth. I think we are growing in a fast pace in a correct way, and we are very confident that we can increase more now when we launched the new offer for prepaid.

In prepaid segment, we have announced now an offer that will pay BRL9.9 per month and we have two megabytes for use during the month. So it's very affordable offer, and I think we are very confident that we will enhance our capacity to grow in this area.

Okay. And the timing for the launch of the new prepaid offer?

Okay, we -- in voice we are in terms of the total evolution of our Vivo Sempre campaign, we offer now BRL0.05 per SMS for all clients in Brazil, off-net clients as well. And we are changing so many parts of the rules of our offer that should compensate this. It's a high profitable offer that we are making now in this offer -- promote more SMS services for our base. When do you launch -- we launch tomorrow this offer, okay.

Okay. Thank you very much.

Valder Nogueira, Santander.

Two quick questions. First, are we done with the integration process between Telesp and Vivo? That's the first question. And the second question is, at the launching of the new products, being fixed or mobile or with the integration of the billing systems, the CRMs going forward, you are going to be able to better bundle. Do you believe that these tends to at least -- move part of the drop that we are seeing on the prices of broadband, and what has been the main parts to the prices of broadband?

Regarding the first question, we are done with the huge part of integration cost, which was the reduction we made in the release in the first quarter and also the change in the brand. Of course, we do have some work to do in terms of trying to change our systems and capabilities to get improvements from our billing systems, for example, and try to get more benefit in the convergence side. But the huge cost is a one-time huge cost -- I think we are done -- were naming the brand and the personnel cost.

Thanks.

Welcome.

Concerning the fixed broadband we are facing a strong competition in this area, but we are promoting our FTTH services. We are now with more than -- almost 90,000 clients through the fiber, and we are promoting our cross-selling and bundling all the services that we have in mobile and fixed lines in this area.

We are facing, it's true, a very tough competition now, but we are very confident that it's possible with high quality that we are having now to maintain our base. And the launch of the IPTV platform that will be prepared for September of this year and commercially in October will be the next step in this area, okay.

Excellent. Thank you, Paulo.

Michael Morin, Morgan Stanley.

I just wanted to drill a little bit further into the fixed line trends. Specifically, you flagged on one of your slides, I think number 14, that there was a negative impact related to TVA and also to others, and I just wanted to see if you could explain what those two items are? My understanding was that TVA was being consolidated as of a year ago, so I am not sure how that would impact the year-on-year comparison?

About -- in these graphs we have here in page 14, we have some impact. The first one regarding fixed into voice -- fixed voice, 1.2 percentage points regarding the MTR cuts that impact our [GC], and then we lost some revenue on that side if you compared to last year.

The other, we had some one-offs -- one revenue less here in data. We -- that one-off specifically was more seasonal than anything -- (technical difficulty) -- consolidated the whole semester in TV business in the second quarter results last year. So if you take out BRL31 million that was regarding between January-March, the impact would explain 2.2 percentage points.

And the last one, the 2.1 percentage points about corporate, just seasonal projects that we had in large corporate segments in fixed aside that are seasonal and that have very different periods in the year that you get some big projects, so the revenues can go up and down -- depends on the closing of different projects in the big corporations.

Okay. Now, that's very helpful. And then you also had, Cristiane, provision reversal. Can you give us some color as to what that was?

Yes. We had (inaudible) with a company of roads in Brazil. It's a public company, and they started to charge a price. Years ago, we had some of this starting to begin that was a legal application, so we are provisioning since August. But we are also discussing that and making a judicial deposit.

There was decision in the superior tribunal in this quarter and our lawyers entirely changed the (inaudible) the discussion to possible in (inaudible), so we reversed the provision that we made in the past in the discussion with roads.

Okay. Great. And then if I can just wrap up on the fixed line. You have emphasized quality as part of your action plan. Can you share with us some of the concerns that Anatel has raised in recent days. I think that obviously the other competitors have been impacted in the mobile area, but there was some press statements about the quality of your fixed line networks. So if you could share with us what some of Anatel's concerns are, and I think that they have given you a five-month time frame to comply with certain metrics. If you can elaborate on that that will be helpful? Thank you.

I think you mean -- you talk about the fixed problem that we are facing. But this is more serious in the interior of Sao Paulo, the countryside side of Sao Paulo. In reality we're (inaudible) areas we have the present problem. We have a plan to solve and fix these problems in short period of time. We are so confident that we achieved the goal that Anatel has an obligation, but we don't have, impact in this case -- so much CapEx because -- more number of serious -- it's more serious in the countryside of Sao Paulo, okay.

Sure. Okay. Thank you.

Andre Baggio, JP Morgan.

I have a question related to this Anatel prohibition of sales. Do you think that it could possibly impact the performance of Vivo going forward? Now that's at least -- sorry, one competitor per state is banned from selling phones for the time being. And second, do you think that Vivo could increase its presence to make sure that it continues to have a better quality then the others in the light of Anatel?

We think we are prepared to maintain our focus on quality and we don't make comments about the [problems] our competitors are facing now.

But we think we have the best position in the market. We are very focusing in maintaining this quality and maintaining the strategy that we have, and we think it's natural that we have some advantage at the moment in this situation. But we prefer to maintain our focus and maintain our team working hard and to maintain our CapEx that we are planning for this year. No news above this. And we are also committed to make our plan go ahead.

I am sorry. You have a CapEx plan of roughly BRL24 billion in four years, correct?

Yes.

Perfect.

Vera Rossi, Barclays.

When do you expect to see a slowdown in the disconnections of the voice, the fixed line voice, and what needs to happen before -- what will be the lead indications before we see this disconnect --- a slowdown in disconnection?

We think we are facing a situation that we are occurring (inaudible) in the fixed income operators, but we are so prepared to bundle more, to selling --- to make more cross-selling with the mobile products. And especially now, we have launched the IPTV solution.

I think we are --- our focus that we have in fiber and FTTH and the IP solution that we propose to launch in next semester, we think that that will be the best situation that we are facing this situation --- this problem.

And when you say next semester, you are referring to the second half of 2012?

Yes, yes. We are preparing September for the tests and October for the launch, commercial launch.

And then, when you will make this commercial launch, do we expect to see also your Pay TV business resuming growth?

Yes, in the segment that our focus -- this -- yes, we are focusing in areas that we have the best clients in fixed services in class A and B, and the solution that we have is a very good solution. We think it's a differentiated solution that we have to compare with our competitors, and we think it will be helping us to maintain our leadership in this area.

Do you also have expected launch of like DTH product for mid to low income users?

We are studying this and we are working with Telefonica Digital for the new strategic about this point.

Okay. And my last question is about your rebranding. So why did you rebrand the product quarter ahead of having your products ready for launch. So you rebrand in April but your triple play will be only ready around September. What is the rationale behind this strategy?

The rationale is to have the benefits our own brands for all services and we -- the result of this that we have now some researches that we are very good position, recognized by people Vivo is a very good brand. And we are so confident that we -- possible to have the same level of quality in all services we have in fixed, in TV, like we have in mobile.

Okay. Thank you.

Okay.

Rizwan Ali, Deutsche Bank.

My question is related to handsets prices. Have you seen, because of the depreciation of the real, is there any impact on handset prices in Brazil? And second question is regarding reduction in MTRs. In the second quarter have you seen any price elasticity or positive price elasticity that encourages to increase ARPUs in the second half of the year?

About the handset price, we think we have very good negotiations from the Group and we are selling in a very competitive price, and no subsidies in prepaid, only in postpaid, in a short payback and according our postpaid plans. And we are naturally adjusting then the price of our selling, according the market. We are leader in the market and we are maintaining our focus into having high profitability in this market. The second point was?

The elasticity of ARPU?

About elasticity, actually, there is normal trend. We are still trying to see any different impact about MTR cut -- is to very soon should prove some big elasticity or small elasticity. So it's -- for now, no big trends expect from now on.

Thank you.

Welcome.

(Operator Instructions).

Susana Salaru, Banco Itau.

Hi, guys. Good morning. (Inaudible question - microphone inaccessible)

We cannot hear you. Hello?

Okay, thank you. So I just wondered if you guys could elaborate on the broadband services quality regulation which will be effective in October, which establishes a minimum and average target speed for broadband services. I mean, if you guys are prepared for that and if you guys are negotiating some kind of waiver with Anatel regarding this kind of regulation?

And then, the second question on the accounting side, a little bit on the taxes, why it was so much higher than the previous one? That's it. Thank you.

About the question to the quality of -- to have in broadband, we think we are so prepared for the -- this time to have a new minimum --- minimum targets to achieve. And we are so confident that it's possible to achieve, and when we have the better quality in the market, I think we are so prepared for this.

About the taxes, which will have two different components. Telefonica -- the operation of the Company resulting out of Telefonica Brasil, and then the results were there and they are profitable. And then we had to pay tax, and the results are better than last quarter.

Okay. Thank you.

Welcome.

Roger Oey, Banco Espirito Santo.

My question is regarding the level of expenses. Now you say that integration is mostly done. Can we expect then personnel expenses to remain in this level going forward? And what about G&A, it has went up by 15% quarter-on-quarter. I wonder what's the normal level of G&A?

About the integration cost, as I said before, we are done with the biggest part of the cost. We are still working very strongly in efficiency project and synergies between fixed and mobile. The biggest change we are -- all is expected to be done as from 2013 on as we -- Telefonica disclosed in the business plan last year in the acquisition of Vivo. So we still have to work a lot of better (inaudible) systems in billing, customer care and other processes that could have more benefits than we have right now.

So the normal -- the normal G&A tends to have an improvement in the next quarter. Not only in the next quarter, but remaining -- from 2013. And about G&A, we had some specific renegotiations of contract with some readjustments. A little bit higher than what we expected. That's why we had a 15% increase in the quarter. Nothing very relevant.

So just to make clear, so the normal level would be between the first quarter and second quarter for the G&A for this year -- for the rest of the year?

Yes. Actually, some contracts that we renegotiate we had some adjustments in the second quarter. We are going to prepare to it for next quarters, but we had one-time, very small in this quarter in G&A also because of this contract. At normal level, it should be a little bit lower.

All right. And the other thing is, during the weekend Minister of Communications, Paulo Bernardo mentioned he was working on a proposal to share infrastructure in the mobile segment. Do you know any details of this? Is this new? How do you see this?

Roger, we already shared all the possibility that you have to share, sites and (inaudible) and we are discussing to rent sharing. We are open to share everything.

All right. So you think that the new proposal would not affect you at all?

No, no, we had already discussed this point with our other operators.

Okay. Last question is regarding asset sales? Do you still have more assets to sell during the year? Can we expect more to come?

We are always looking for opportunities, with a potential sale of non-core business assets, non-strategic. That's why we did right now and we did in the last quarter. We do not disclose any other opportunities. If we find out some other new opportunity, we would be disclosing in the next quarters.

Okay. Thank you.

Welcome.

Will Milner, Arete Research.

I mean, firstly, I just want to come back to the fixed line business. Certainly, the voice and access revenue trend and the data revenue trend deteriorated quite a lot looking at the year-over-year numbers. You mentioned increased competition. I just wonder if you can give us a bit more color around that and whether we should be expecting those trends to remain broadly similar throughout the rest of the year?

And then I have a second question just on the EBITDA performance. On slide 15, you mentioned the three non-recurring events, and I think if we adjust for those you find that the EBITDA has fallen around 10% year-over-year. And I just want to understand, are there any other integration costs other than the three that you have mentioned that would lead you to -- lead us to see the EBITDA falling at that rate or is that just a function of the revenue line and the increased competition?

In terms of the fixed revenues we can say that we are facing a tougher competitive landscape. But we have the mobile voice per minute prices continuing to decrease in the market and drive a substitution for fixed voice for mobile voice.

The higher basis for comparison that we had in second quarter '11 due to seasonality that we had especially in corporate services and TVA revenue that we had, and we had a regulatory effect of Anatel and the is [reduction that we had of receipts], in the mobile (inaudible) fixed and voice [business]. The total scenario that we have is it's a so tougher competitive landscape, it's true, but we also had to put together all products that we had to protect our base in this stage.

About cost -- thank you for the question. As I said, we had a huge cost of cost integration (inaudible) you have a lot of opportunities and synergies, as I said before, starting mainly as from 2013. So the huge integration cost we already had it. From the future, we are working very strongly in efficiency. And now with the processes of the two companies integrated, so we want to come up with a more efficient structure of cost in the future to balance and keep the pace of the growing of the revenues.

So that's our ambition here. It's very medium and long-term job, very strongly, well detailed. But it has a lot of other opportunities to have a much more efficient Company together, the fixed and mobile.

Okay, that's -- so just to clarify, you are saying that beyond the three non-recurring events on slide 15, there are significant integration cost that you are experiencing before you see cost savings from 2013. Is that the message?

Yes, actually, in the three items that we disclosed in slide 15, only one was regarding integration cost, the fixed formula for the brand. The other two had nothing to do with integration. It has to do with normal business that we are doing in mobile or fixed line. And the reversal of provision has nothing to do also with integration cost.

So we had more than BRL100 million in the first quarter regarding to personnel that we disclosed in March. And now we had the BRL64 million rebranding. The other two are non-recurrent, but they are not -- nothing to do with integration cost.

Okay. And then just a final question. Could you just clarify what the dividend policy is for Telefonica Brasil?

We do not have a dividend -- a formal dividend policy in Telefonica Brasil.

So does -- it's paid as and when or --

We have been paying 100% payout or a little bit less considering that we have to deliver 5% to legal reserve, but it's not a policy. But we have been doing that in the last few years.

Okay. Thank you.

Welcome.

Ivon Leal, BBVA.

A couple of ones. Should we expect any material OpEx and CapEx implications from your IPTV solution for the second half of the year, and eventually, these new solutions will just run on fiber network or you will be able to deliver that also on your old copper network?

And maybe the second one on the mobile channel, which has increased from 2.8 to 3.8. Is there any specific issue behind that, any specific campaign from competitors or the 2.8 is something that we should expect to be sustainable for the coming quarters?

In terms of the IPTV solution using our budget for this year, it's -- we are expecting to have this product in September for test. And we are putting this in our fiber that we have in our cable from TVA and we have 1.7 [HPs] in this area. We are maintaining our budget for this. It's also prepared for launch in October.

About the second question, we had some disconnections, as you saw, in May and June, in Telefonica Brasil. We want to make our prepaid base much more profitable, and I think it should be a trend for the whole -- in this sector to reflect real customer to reduce the number of double and triple SIM cards that we have in Brazil.

So there is a minimum days of 6 days declared by Anatel, we are following the rule. We do not disclose though the specific rule we have here, but we have a very conservative rule in terms of prepaid rule to benefit from keeping the best and the profitable clients in our base and improve indicators in the -- that we have from each client.

Okay. Thank you.

Welcome.

Andres Coello, Scotiabank.

Regarding Telefonica's plans to lease assets in Latin America, can you give us some color as to how these may affect Vivo?

And second question, we have heard some noise regarding Vivendi's intention to sell DVD. Are you interested in this asset? Thank you.

The two questions that-- I'm sorry, I cannot answer the two questions. They have to be directly addressed to Telefonica Madrid, because that issue -- they are taken care directly from there. We are not involved in any kind of discussions about it.

Okay. Thank you.

Welcome.

Alex Garcia, Citibank.

Very quickly, out of this 1.5 million homes passed that you have -- that you plan to offer IPTV, what will be the percentage or an idea where -- or this houses already have a similar service. That will be my first question.

And the second question would be still on the homes passed. I mean, in the state of Sao Paulo how do you plan to defend the rest of your homes passed that are still on copper. Thank you.

We have now penetration like 12%. We think it's possible to increase this penetration. We are constructing now more [agencies], more connection in the buildings. And we are implementing a plan to complete our coverage in Sao Paulo, most important and most value areas and to have a good base now in more than 200,000 clients. And we think we -- the solution of TV will be the best solution to promote this service -- not on broadband, but with broadband with TV.

Okay. How do you plan to defend those ADSL with small speeds that you have across the state? I believe that this 1.7 million homes passed are concentrated in Sao Paulo City and you have mentioned before that there are other cities of Sao Paulo that you guys are initiating the fiber project. But my question would be, how do you plan to defend the rest of our base or ADSL that doesn't have the -- that the technology doesn't allow you to deliver, let's say, higher speeds of broadband?

Well, see, Alex, we have fiber in 15 cities of Sao Paulo, not only Sao Paulo capital, and we have VDSL solution in some of the parts of the state. And we are working in many areas to put (inaudible), more channels -- more services to increase the speed that we have in these areas.

There are so many solutions. But our focus in fiber that we say. At the beginning we have this focus in the most important areas in Sao Paulo like A and B areas that we have the most important clients in these area.

Okay. Thank you.

Soomit Datta, New Street Research.

I think I need to go back to the question on mobile data right at the start of the Q&A, and I didn't quite follow the answer. And when I was looking at the mobile Internet revenues of Vivo and I didn't see anything wrong about -- and the Brazilian market is about smartphone growth -- accelerate to -- yet there's been no reason in the pronounced slowdown in the mobile internet revenues to around 16% year-over-year and sequentially there is not very much growth at all. So I didn't quite understand what exactly is driving that slowdown when one would perhaps think it would be accelerating at this stage? Thank you.

Actually, we are growing 16%. It is a very important growth considering the number of clients that we had [this year]. We have a much higher, much larger base, customer base, than all the competitors. So it's normal that when we have a larger base and a larger number of revenue, the growth is going to be lower within the years. So I think that's just an impact of the size of our base.

Nothing that specific (inaudible) doing a lot in penetration of data package in the smartphone plan that are sold in our stores and also make some kind of marketing tool to sell different products and data. So it's a trend -- very important year, but we have to consider that we have a very, very large base.

Just a follow-on, on kind of straight line new trends that suggest growth is going to go up in 9 months or 12 months time, and should we think of this as a growth segment going forward?

I will not talk about any guidance for the future. I just wanted to clarify that we still have a lot of opportunities for growth. We still have a number of clients with smartphone without data plans, without internet plans, so we are making very push, work in here to try to penetrate much more in smartphone plans and data cards. But we don't give any guidance for the future.

Okay. Thanks.

You are welcome.

This will conclude our question-and-answer session. At this time, I would like to turn the floor back to Mr. Teixeira for any closing remarks. Sir?

Thank you all for attending this conference. I'm confident -- we have a solid strategy to improve the business leverage and our superior quality and convergence capabilities. I hope to see you again during our third quarter, 2012, results release. Thank you again. Thank you.

All right. Thank you, sir, and everyone for your time. This concludes today's Telefonica Brazil second quarter 2012 results conference call. At his time, you may disconnect your lines. Thank you and have a great day.