Telefonica Brasil SA (VIV) 2013 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 2013 earnings conference call. Today, we have with us Mr. Paulo Cesar Teixeira of Telefonica Brasil, and Ms. Christiane Barretto, Financial Strategy and Investor Relations Director of Telefonica Brasil.

Today we have a simultaneous webcast and a slide presentation on the Internet that can be accessed at the site [www.telefonica.brazil.br/ir] (sic). 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 section. 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 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.

Now I would like to 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'd like to thank you all for attending this conference, for the second quarter 2013 results of Telefonica Brasil. These are the highlights of today's call.

Our turnaround plan in the Fixed business that I described to you last quarter is reflecting clearly in the numbers. We show improvement in positive net adds in all Fixed services, resulting an inflection point in total Fixed access evolution, with the (inaudible) growth for the first time since third quarter 2011.

On the mobile side, our focus on profitability and expansion in higher revenue segments is converting in strong postpaid adoption by capturing 58% of the net adds in second quarter 2013, and consistent growth in ARPU.

On the financial side, it is important to highlight the substantial improvement in fixed revenue trend, and the strong Mobile revenue growth, mainly driven by higher data adoption in the period. On the bottom line, our net income showed an increase of 13% on a quarterly basis.

Finally, it's important to mention the conclusion of our corporate restructuring, which will allow us to continue even faster this integration of our operations.

On slide 4, we show our access evolution in the quarter, which reflects our ongoing turnaround in the Fixed, and our value growth in Mobile. The chart on the left shows that we ended the quarter with 91.1 million total accesses, an increase of 0.3% over second quarter 2012, and first quarter 2013. In the Fixed business, we ended the quarter with 14.9 million accesses, and with an important increase of 0.5% in comparison with the first quarter 2013, reflecting the reversal of the downward trend we have seen in last quarters.

In Fixed Voice, we managed to decrease less than 2% year over year, a strong improvement when compared to previous quarters. In Broadband, we grew 3.2% year over year, due to the acceleration of net adds in fiber and ADSL, mainly concentrated in higher speeds.

In TV, excluding the obligatory disconnection of pay TV accesses, (inaudible) MMDS, we can already see an increase of 4.1% in second quarter 2013 versus first quarter 2013, reflecting a positive trend on the back of our better evolution seen in IPTV, and the selective deployment of DTH offer occurred in June 2013.

In the Mobile business, we had an increase of 0.6% year over year, resulting from a strong performance in postpaid that grew more than 20% year over year, partially offset by the recent change of prepaid disconnection policy that applies to customers with [50 days without payment]. Actually, if our policy had been the same as the one practiced by the second player, our Mobile customer base in June 2013 would have been higher by more than 10 million accesses.

On slide 5, we show our strategy for the turnaround in the state of Sao Paulo, where we implemented a segmented approach according to value and availability of infrastructure. In the regions with more income per capita, focusing on Sao Paulo City, we already compete with cable and FTTH infrastructure. We are accelerating the net adds in FTTH, bundling the recently launched IPTV platform in order to accelerate adoption and improve loyalty of premium clients. We are also increasing our FTTH coverage area, reaching by the end of the year 1.8 million homes passed.

In the countryside, we have accelerated the DTH and the cross-sell with Mobile, with (inaudible) loyalty in our Broadband and Fixed Voice customers. We leverage our increasingly integrated customer intelligence to increase ARPU and reduce churn.

To improve our numbers, [in June 6th], we launched our new offer in communication for our Vivo TV in the countryside, and we are increasing the communication of our fiber triple play in the capital.

Moving to slide 6, we show the strategy is being implemented successfully, and we are already seeing positive numbers in many fronts. In Broadband, our customers are becoming more loyal and churn reduced 50 basis points on a yearly comparison. We continued to expand our footprint and improve adoption in FTTH, reaching [1.4 homes passed] (sic -- see Company presentation) this quarter, and increasing 1.6 times our client base in one year.

During this month of July 2013, we are pleased to announced that we achieved 150,000 clients with FTTH. Our triple play sales are increasing with the support of our new IPTV platform, which doubled the accesses in just one quarter. We are improving the mix of speeds of our Broadband clients throughout the state. As a consequence, our Broadband access base, with more than 4 megabits per second of speed, is 2 times higher than a year ago.

To consolidate this growth, we continue to make specific cross-selling offers with the Mobile, and that, on our new DTH offer, to attract and retain our customers.

On slide 7, we show the results in Fixed business in this quarter, which prove we are in the right direction in delivering our plan. For the first time in more than 10 quarters, we present positive net additions in the Fixed business, with 118,000 net adds in the quarter, with some evolution in all Fixed services.

In Fixed Voice, Telefonica has reversed the (inaudible) trend of losses by winning 15,000 net new customers in second quarter 2013. In Broadband, net additions were 4.5 times higher than the first quarter 2013, and more importantly, around 80% of these adds were in speeds of more than 4 megabits per second.

Finally, in the TV business, we began to see positive evolution when regards the obligatory disconnection of customers in the MMDS technology.

Moving to slide 8, in the Mobile business, we continued to address the market with a focus on improving ARPU and profitability in all customer segments. For prepaid, our focus is on acquiring and retaining the active customers and disconnecting inactive ones. We have today the strictest disconnection policy in the market, resulting in a [healthy] customer base. We drive the charge mainly through the sales of data, SMS, and value added services. We keep this strategy to emigrate prepaid customers to control plan, to improve their loyalty and ARPU.

Our efforts for the postpaid concentrated on accelerating as much for the penetration with [60 days] made according to the bundle adopted by the customer. In this sense, 70% of our individual postpaid customers today have a smartphone. In 4G, we are already (inaudible) leaders, and should continue to expand our coverage to 70 cities until December 2013, to consolidate even further this position.

We have today the most attractive data services for premiums customers, combining the quality of our services, extensive coverage in 3G and 3G Plus, leadership in 4G, and innovative offers like (inaudible).

The focus is then to continue the up-sell and cross-sell service to improve ARPUs and loyalties of our postpaid, maximizing revenue generation for the Company.

On slide 9, we show how effectively our commercial approach is being implemented. Our postpaid net additions are more than 2 times higher than the same period of last year. Postpaid growth accelerate to 20.4% year over year, improving our mix.

27% of the customer base in June is postpaid, an annual increase of 4.4 percentage points. As a result, our market share of postpaid reached 37.8% in the quarter. When we exclude M2M, our market share grows to 40.2%, and in data cards, we achieved 48.1% of the market in the quarter.

On the 4G business, we already capture an important stake of the market, and achieved a remarkable market share of 46.8% in June 2013, plus 26 percentage points ahead of the second operator, reinforcing our definitive coverage, quality, and improved brand perception within premium customers.

As shown on the bottom right, our strict disconnection policy in prepaid did not impact the evolution of our growth in cash for recharge, which are 9.2% higher than in second quarter 2012, even with an annual reduction of 5.2% in the accesses.

Slide 10 shows the continuous improvement of customer mix and its positive impacts. ARPU reached BRL22.8 in the quarter, an annual growth of 4.1%, even with MTR (inaudible). The results were mainly driven by an increase of data ARPU which soared 23.4% in the period. When excluding the MTR impact in the quarter, ARPU would have increased 6% year over year.

Now excluding revenues is net of the (inaudible), we can see that our outgoing ARPU is accelerating annual variation mainly as a result of the successful strategy in data. As you can see in the top right, the (inaudible) costs, SAC, decreased 1.8% in the year over year comparison, driven with a higher share of smartphone (inaudible) additions.

SAC featured BRL48.7 in the second quarter 2013, and our payback on customers achieved 2.13 months in the period, decreasing 5.7% year over year, which shows the consistency of our commercial strategy.

Moving to slide 11, in the corporate segment, the success of our convergent approach is also here evident. In the Fixed Voice, we had a growth in access of 5% year over year, while increasing 1.5 times the number of corporate accesses of Fixed UltraBroadband. In addition, we more than doubled the number of corporate mobile devices, and reached significant growth in the interim, by more than duplicating our customer base in the last year.

At the same time, we are phasing the rate for our growth in innovative services with the launch of the Vivo Cloud Plus. We have a complete portfolio of services that can be contracted with a single supplier. In order to ensure high (inaudible) to our customers, Vivo Cloud is supported from a state of the art data center infrastructure, with complex network management. In addition, our relationship model of specialized pre- and post-sales complements the quality and efficiency of our solution, meeting our customer needs.

On slide 12, we show that improvement of our position in the Fixed business in the state of Sao Paulo is crucial to our future generation. Fixed Broadband and TV are services with great potential for long-term growth. More than that Sao Paulo's response to a great part of our revenue generation, our need to defend our revenue base in the state is clear. The convergence of services, this is not an opportunity for (inaudible).

This is why I have been personally concentrating efforts to define a (inaudible), a strong strategy to improve our (inaudible). The operational numbers evolution leave no doubt we are in the right direction, but it's important to bear in mind that this is not a short-term process. As once seen in these quarters, we are committing resources to give better services for our clients, with focus on quality, and to increase sales. We are preparing our structure for customer care, including channels and call center, and we're launching new offers with broad communication.

It's only fair that as we acquire and retain valuable clients, valuable cost of the acquisition also starts to kick in. It is a short-term effort with a much higher value generation of higher ARPU customers loyal to our Company. Then, revenues and EBITDA will start to grow on the same direction.

Slide 13 shows the financial performance in the second quarter 2013 versus second quarter 2012 and first quarter 2013. Our resilient growth in revenues, even (inaudible) impact and the (inaudible) are the highlights, our total revenues maintaining annual growth of 3%. Excluding regulatory impacts, it would have reached 4.2% annually.

The 7.1% year over year growth in Mobile and 4.1% year over year decrease in the Fixed, the best evolution in Fixed revenues in the last four quarters.

Our recurrent costs (inaudible) to increase in the quarter and the year, mainly explained by higher commercial costs have succeeded these growth efforts in the second quarter 2015, something that Cristiane will detail in the second part of our presentation. As a consequence, recurrent EBITDA decreased 8.6% annually, reaching BRL2.5 billion in the second quarter 2013, an EBITDA margin of 29.4% in the period, less 3.7 percentage points versus second quarter 2012.

On the bottom line, we total BRL914 million in the quarter, an increase of 13% quarter over quarter. (inaudible) explained by the (inaudible) of fiscal benefits resulting from the consolidation of our subsidiaries.

Now, Cristiane will give you the details of the financial part.

Thanks, Paulo, and good morning, ladies and gentlemen. On slide 15, which is the Wireline revenues evolution. As you can see on the left side, Wireline revenues recorded annual reduction of 5.2%, and is part of the reduction (inaudible) during the previous quarters. By excluding the impact of MTR cut, a reduction of 12.1% in the Wireline revenue would be registered in the period. Voice accessing network uses increased by 0.3% in relation to the first quarter 2013.

Our (inaudible) reflects all initiatives to increase the loyalty of our Fixed (inaudible) customers. That includes (inaudible) of (inaudible) revenues recorded an increase of (inaudible) in the quarter, mainly due to a better mix of speed (inaudible) initiatives (inaudible) adoption. Apart from that, the (inaudible) business performance was affected by disconnection of (inaudible), partially being compensated by the accelerated adoption of IPTV, and the return of (inaudible) sales in the period. As a result, data and pay TV revenues already account for 45% of Wireline revenues.

On slide 16, we see that Mobile net service revenues has consistent annual growth of 7.1% in the second quarter of 2013, when excluding the impacts of the additional 2013 MTR cuts.

Access and usage grew 2.8%, driven by the growth in postpaid customer base, and the continued increase in prepaid recharges. Data and value added service revenues grew 24.7% year over year, due to higher sales of 3G and 3G Plus data plans tied to smartphones, and the increased sales of data packages to prepaid customers.

The reduction of [17.2%] in networking (inaudible) connected to the MTR cuts of 11.8%, made [in April 6th]. Now, excluding this impact, the annual reduction would be 7.4%.

On slide 17, we show the data and value added service performance. In the quarter, data and VAS revenues accounted for 32% of the net mobile service revenue, rising 5.1 percentage points in the year over year comparison. Messaging revenues increased by 4.8% annually, due to (inaudible) and the inclusion of net (inaudible) in postpaid plans.

Mobile Internet revenues continued to grow, having soared 35.7% in the annual comparison, plus 20 percentage points in comparison with the previous year. The performance in this quarter was driven by the high adoption of modem, data plans and packages, especially in 3G Plus offers, besides our continued market share increase in postpaid and data customers. Other data and VAS revenues increased by 33.4% on our annual comparison, mainly driven by education services and Vivo (inaudible).

On slide 18, we show the operating cost evolution when we [reach] first quarter 2013 and second quarter 2012. Disregarding the non-recurring costs, second quarter 2013 expenses would have increased 8.8% in comparison with second quarter 2012, and focused 90% versus the previous quarter.

Adjusted network costs in second quarter 2013, annual increase of 3.7% in the period, mainly due to the collective agreement granted in January 2013. In the quarter to quarter basis, adjusted network expense recorded decrease of 6.3% in the period, reflecting part of the benefits of our restructuring the first quarter.

Adjusted service revenue costs in the second quarter 2013 increased 2.4% year over year, impacted mainly by the higher volume of sites (inaudible) and higher (inaudible) maintenance of the network with focus on quality, partially offset by the reduction of MTR. Subsidies declined 9.3% year over year, due to our original commercial quality with focus (inaudible).

Adjusted selling expenses increased annually 18.6% in the second quarter of 2013. This year over year evolution is explained by the collective DTH (inaudible) in efforts to improve costs and evolution in all Fixed business. In addition, selling expenses were offset by the (inaudible) mix in (inaudible), which have a higher commission (inaudible).

As a consequence of these efforts, our adjusted EBITDA was affected by additional expenses of BRL238 million, reducing 2.6 percentage points the EBITDA margin of the quarter, compared to the first quarter 2013.

In general and administrative expenses, an annual reduction of 10.9% is shown as a result of lower maintenance and (inaudible) costs, something already expected because of our integration process.

On page 19, we analyze the evolution of the EBIT which is mainly related to the already explained EBITDA evolution. On the other hand, net income, on the left, showed an increase of 13% on a quarterly basis, benefited by the (inaudible) tax credits resulting from the consolidation of subsidiaries.

On the top right, free cash flow reached a minus BRL64 million in the second quarter 2013, affected by the payment of the second installment of 4G license acquisition in the amount of BRL945 million. When you exclude this effect, cash flow would have reached BRL881 million, with an (inaudible) of 20.9%.

In the second quarter 2013, we reached a net debt of BRL0.5 billion, as a result of our strong cash generation.

Now, Paulo will present the final conclusions. Thank you very much.

Thank you, Cristiane. Our results for second quarter 2013 confirm we are heading to the growth. Our turnaround in the Fixed business becomes a reality, with (inaudible) evolution (inaudible) efforts.

The strong postpaid (inaudible) adoption driving ARPU growth, improving substantially Fixed revenue trend. Sustained strong growth in Mobile revenue, and extending profit generation in base [per billions]. And we are taking actions to improve results further (inaudible), delivering the turnaround of the Fixed business and guaranteeing sustainable value generation, with repeating selective commercial strategies in Mobile, growing in higher revenue segments, and disconnecting inactive prepaid customers, improving corporate structure, enabling process and offer diversification.

Finally, quality is and will continue to be the driving force behind our strategy, with growth, with profitability as our main objective.

Thank you, and now we are ready to answer your questions.

Thank you. The floor is now open for questions. (Operator instructions) Thank you. Our first question today comes from Andrew Campbell with Credit Suisse. Please go ahead.

Yes, good morning. Thank you for taking my question. I would like to ask about some of the increases in expenses that you mentioned during the quarter. I understand that many of them were related to the commercial efforts that you're making on the fixed line side, and how they're translating into some immediate improvements. But I wanted to ask if there were also perhaps some seasonal or non-recurring components there. I know in second quarter, with Mother's Day, Valentine's Day, etc., that sometimes we see higher costs in the second quarter, and if perhaps some of these costs were a bit unusual, in the sense that maybe they're just related to launching, the relaunch of the DTH, so that we should expect to see some, perhaps, decline over the next couple of quarters. Thank you.

Hi, Andrew. Thank you for the question. Actually, we had some costs, some sales costs in second quarter, like we said on the presentation, regarding the (inaudible) costs (inaudible) more penetration of smartphones in mobile. And indeed, Fixed turnaround, we had some costs that -- they're not one-off, but actually, we had them more strong in second quarter, (inaudible) costs. And these should be improving in the third and fourth quarter.

We're also having other costs that are continuing more than -- a little bit more than what we had in the first quarter. (inaudible) some deferred (inaudible). We anticipated some very strong costs in terms of labor costs, and we continue to (inaudible). And the (inaudible) ahead of what we had last year.

So one-off, we didn't have specifically, but we had, in these kind of launch of turnaround of the fixed (inaudible) that were more strong in the second quarter. We think we could (inaudible) third and fourth quarter.

Regarding DTH, Paulo is going to answer the question -- DTH?

(inaudible) started to (inaudible). Basically we are focused on the countryside of Sao Paulo state, and people that you have fixed line or fixed broadband. Basically, we are protecting base with our offer that we have, and basically we start this campaign in the next quarters and think we have good opportunity to have more clients with triple pay offer and to protect even those.

Okay, sorry. The campaign actually started in July, or in June?

In June. June.

June? Okay, June, great. Thank you very much.

Thank you.

Our next question comes from Andre Baggio with JPMorgan.

Good morning. I have a (inaudible) question on -- with regards to the impact of (inaudible) in EBITDA, because it is quite -- very well (inaudible). But the (inaudible) something with regards to what happened to EBITDA and with regards to MTR cuts?

Hi. Thank you for the question. The impact, basically the impact in the quarter on the EBITDA was BRL40 million. Net revenues, (inaudible). So BRL40 million in the quarter, of the additional (inaudible) that we had this year.

We had, in terms of revenue, (inaudible) BRL92 million. In terms of costs, in terms of (inaudible), the (inaudible) mobile, (inaudible), less costs, BRL85 million, and the net impact, BRL40 million.

Okay. And the second, also (inaudible) and the (inaudible) question, do you think that the results were expected? Let's say, you -- you had a big increase in the selling expenses. Do you think that the results are comparable with the additions you get from the (inaudible) in terms of for fixed line and broadband and pay TV? Or do you think that's something that's -- we're still going to see the results in the coming quarters of the efforts that you made this quarter, versus higher expenses?

Okay. Like I said in the presentation, we had some additional costs in the second quarter regarding the Fixed turnaround business. But we also had some impacts in the Mobile in terms of (inaudible). We grew 45% the total (inaudible) with data (inaudible) package, which (inaudible) handsets. We had much higher costs.

So some of these efforts, we also are presenting the Mobile, and the smartphone (inaudible) important, because in that, we can penetrate more in data plans and have more ARPU for the future.

So we think that the effort (inaudible) out in this quarter (inaudible) also to improve some of the Mobile is more (inaudible) smartphones. We have to (inaudible) for the future, and we want to keep (inaudible) telling to you that is growing profitably (inaudible). Of course, we're going to analyze probably back the results of the additions in this quarter, and adjust it as necessary, our efforts in commercial area.

Okay. Thanks a lot.

Welcome.

Our next question comes from Fabio Levy with BTG Pactual.

Morning, Paulo and Cristiane. I have two questions. One is regarding your voice revenue. I know that you have an impact on MTR this quarter, additional cuts from MTR. But what is the main reason to drive your usage revenue to decelerate significantly your revenue in this quarter? Especially because you opened this line with MTR, and also, so that usage was somehow very, very weak in year over year comparison, compared to the last quarter.

And the second question is on your dividend payment for this year. And so we have seen that you increased your CapEx to BRL6.2 billion, now including the license that you are going, to increasing the CapEx. And also, we are seeing some EBITDA pressure due to this result of the (inaudible). So just wondering if you are thinking anything different in terms of your mindset to regular payments of 95% of your results. That's pretty much it. Thanks.

Okay, Fabio, thank you for the question -- actually, the questions. I want to make sure that we cover everything (technical difficulty).

Regarding voice, I think you were talking about (inaudible), just to clarify, Fabio, in the first question?

Mobile.

Mobile, okay.

Mobile.

Mobile is more penetration and more mature market in terms of what growth in voice. And the opportunities that we have to grow more in data has been important in the past. So if you -- if we have an opportunity to grow with our offers to try to improve the Fixed -- the Mobile voice revenue, but in market, it's already a lot of -- very mature, in terms of voice. (inaudible) between voice and data, but (inaudible) more hard to grow in terms of voice in the Mobile.

In terms of CapEx, just to make sure that we got your question, (inaudible) license that we had before, it (inaudible) in terms of (inaudible) operation. We do not think we're going to have any constraints in keeping up (inaudible) CapEx strategies that we launched in the guidance, the BRL5.7 billion. It's not going to be a constraint for us, and we have a very strong cash generation to couple with both of these objectives, we have more impact in our operation.

Now, just now to make sure that the last question, there was no impact on the dividend -- not guided, because (inaudible) revenue has been guided, but (inaudible) impact in our capability to (inaudible) additional CapEx (inaudible) concern.

I don't know if I got --

Yes, just to clarify, in terms of revenue growth, first, we are seeing that your prepaid recharge, somehow it didn't show any impact from declaration, the prepaid. And we had a very good postpaid net additions in the quarter. So just wondering, where were the main impacts on voice, that explains the deceleration on usage, since there is no impact, significant impact on MTR in this line. So usage was somehow very weak year over year.

And for the case of the CapEx, I was wondering, we had considered that this BRL5.7 billion for the year, it doesn't include the BRL500 million that you are planning to add to your CapEx during the year. Is that correct?

Yes, it's correct. It does not include -- our guidance, it does not include -- never includes any (inaudible) in the operations and license. You are right. The total CapEx now is BRL6.2 billion -- BRL5.7 billion, the normal guidance that we gave in the first -- beginning of the year, plus this BRL500 million of license of (inaudible).

Regarding the voice, yes, (inaudible) answer your question before, actually. We really think that -- we really feel our recharge growing 9% (inaudible) connections that has been made in the last quarters in the postpaid, with the penetration in (inaudible) market share. But the natural transitions between voice to data, (inaudible) rate. We had (inaudible) today more (inaudible) data plans, packages, so we tried to integrate (inaudible) data even more. It's the reason that your process is going to (inaudible) our revenues to data revenue.

Okay, so (inaudible) that there is a kind of migration from the prepaid customer, (inaudible) explaining that on voice and putting more -- expanding on data. Is that correct?

Yes, it's correct.

Okay. Thank you, guys.

Our next question comes from Michel Morin with Morgan Stanley.

Thank you. Can you just tell me, just to complement on the earlier question on the Mobile service revenue growth rate, I think the reason why we're focusing on this is, there was a notable deceleration, and the MTR cut this year is actually lower than the MTR cut that we saw last year. So, I don't know, you -- I don't think you disclosed the MOUs this quarter, so I don't know if you could share that with us. But anything that you can help us with, to understand what is driving this, do you think it's mainly the economy that maybe has produced a more generalized slowdown in the sector, or is there anything else that we may be missing?

If we (inaudible) the MTR cut, the additional MTR cut that we had in this quarter, I think growth would be [30%] in Mobile in the quarter. It's a very healthy growth. So it's important to keep in mind that the real growth is 7%, counting the MTR cuts.

To answer the second question, I just want to retrieve what I said before, in the question that I answered to Fabio. It's (inaudible) migration from voice to data. So I think it's important to keep in mind the overall growth of the total revenues are in the Wireline business. Wireless business, sorry.

Okay. And MOUs, are you no longer disclosing that?

We're not disclosing MOUs, because now it's very important to show this data growth, how it's not measured by MOU, so that's why (inaudible) two quarters ago, I think, we did not disclose anymore.

Okay. And then on the fixed line, in terms of the net additions, I mean, that's a nice change in (technical difficulty). It's (technical difficulty), do you see any change in -- I mean, is this a direct result of the increased efforts of AT&T and (technical difficulty) in terms of their ability to bundle, or was there something else, perhaps on the corporate side, it looks like you did a little bit better, so is that more economy related? Where is this improvement really coming from?

Michael, when I (inaudible), we, in the last quarter, announced a new restructure internally in our organization, to put more focus on the Fixed business. Basically we implemented many actions in main segments that we made, to have in Sao Paulo state, basically in the -- (inaudible) to have copper, and (inaudible) have fiber and cable. Basically, this is what we are progressing, and we are very (inaudible), very good growth, because we are growing out, basically in (inaudible) doing very well. We are maintaining our strategies to improve the speed of our [base]. And in TV, we start in our campaign, and we think we are possible to have better numbers in TV segment for the next quarters.

So (inaudible), these actions. Cristiane said in the previous comment that we are looking for the economics about the (inaudible) of our (inaudible), basically what is this matter with focus on profitability, with focus on -- basically you have (inaudible) if you are capturing the (inaudible), we can -- it's possible in this moment. Okay?

Great. Thank you very much.

Thank you. Our next question comes from Mauricio Fernandes with Merrill Lynch Brazil.

Thank you. Good morning, everyone. A similar (inaudible), Paulo. If you -- I know there's some more guidance, but there is a new level of EBITDA margin, or margins in general, which are related to turning the Fixed line business around, which makes a lot of sense, from the long-term perspective. Again, speaking to the question I think on everyone's mind is, what kind of trajectory do you see in the profitability, be it EBITDA margin or margin in general, over the next -- not necessarily the next one or two quarters, but going into 2014. And the question is whether we should go back to a more normalized EBITDA margin already in 2014. And by normalized, I mean the level of 34%, 35%. That's question one.

And two, still related with that, clearly, with a nice -- as Michel was saying, it's a nice pickup in additions in fixed line business across the products, it's -- when would you expect -- when should we expect to see the actions weighting into higher revenues, or revenues that don't fall as much in the fixed line business? What kind of timeframe you have in mind for that? Thank you.

Hi, Mauricio. Thank you for the question. (inaudible) the first part of the level of EBITDA margin. As you know, we do not provide guidance for EBITDA margin for 2013 and 2014 on. What I can say is that we've been making out better efforts try to improve the -- both businesses, the Fixed and the Mobile. And some of the (inaudible) short-term. That's why we had (inaudible) slide in our presentation showing that (inaudible) right now (inaudible) medium and long-term. It's not possible to make a turnaround without any additional commercial costs. And as you know, the impact is not in the first months.

So it would be natural to expect improvement in the near future, but we cannot give any guidance about (inaudible) margins.

We're going to break (inaudible) decrease in the revenues in the Fixed about 5%, much better than what we did in the first quarter. (inaudible) that we had in second quarter basically would be 4%, which is an amazing (inaudible) compared with what we did in the last quarters. So I think we had (inaudible) in the Fixed, and we have to wait a little bit more to what (inaudible) and to balance the level of efforts you're going to make in commercial areas to -- for the future.

Okay. Thank you, Cris.

Welcome.

Our next question comes from Susana Salaru with Banco Itau.

Hi, guys, good morning. I had two questions here. First, could you guys comment on the penetration of (inaudible) fiber, or if you've got fiber and cable network? You had 1.5 million homes passed, and if we're not mistaken, the penetration is something around 5%. How do you expect that to evolve going forward, with the - like the strategies that you guys implemented? So that would be the first question.

And the second question is related to the effective tax rate, if you could provide us a number after the consolidation of the tax code, how should we work with that?

And another question, related to the tax rate, is regarding the deferred taxes of the quarter. I wonder if that is a one-off event? I just want to be sure that it is correct. That's it, guys. Thank you.

Thank you, Susana, for the question. About the fiber penetration, basically we are -- increase our homes passed. We finished the year with [1 million] homes passed, now we have 1.4 million. Basically, we have -- we are now (inaudible) that we have (inaudible) the 150,000 clients in fiber. If you compare basically (inaudible), if we're not (inaudible), if the numbers (inaudible) homes passed, our penetration is more than 10%. But basically, we (inaudible) that.

(inaudible) this penetration, in addition in the (inaudible), no? And we are now reporting this business. I think it's worked very well. We have now an opportunity to go -- to sell not only the broadband (inaudible), but (inaudible), the TV solution. And we think (inaudible) penetration at the moment. Basically, (inaudible) our focus (inaudible) of the year, (inaudible), and maintain our effort to increase our base in fiber, and (inaudible).

Thank you, Susana. Thank you for the question. Regarding the tax effective rate, we had BRL320 million in the quarter. It's one-off, you are right. It's the revenue result of an activation of the [trade] tax credit, so (inaudible) that we incorporate (inaudible) profit that we do now. (technical difficulty) this credit, because if we are separate companies that had no expectation of future profitability, and now all the companies together with the new (inaudible) that we had in terms of (inaudible) income from data, this (inaudible) because we have other companies that say (inaudible). So it's one-off, you are right.

Regarding the effective tax rate, the cash effective tax rate in this semester was 29%. The (inaudible) cash flow, it's lower numbers than the past. The effective tax rate was 34%. I don't know if your question is about cash basis, or (inaudible) more important than income tax in the (inaudible).

Well, going forward, I mean, just (inaudible) going forward, maybe it should be lower than this 29%, because you have the full impact of the tax code unification, not just a partial impact. That's what -- that was --

In terms of cash, or tax (inaudible) [for like]?

So it should be lower than this [20%], just to clarify, correct?

Lower than 29%, yes, for the cash.

Okay, that's it. Thank you.

Welcome.

Our next question comes from Richard Dineen, HSBC.

Thanks very much for taking the question. I guess, thinking about the turnaround of your Fixed line business, I was wondering if you could give us an update on the status of local unbundling. In terms of the timing, I think that was originally supposed to be an April/May type of event.

Maybe what your current understanding of the (inaudible) approach to cutting (inaudible) prices, I think the methodology and the actual price is going to be important to estimate the demand for that type of service.

I guess my angle is, unbundle locally has been a real long-term, fixed line growth headwind for operators in markets like Europe, with major loss in market share, general (inaudible) price pressure.

So is it something we should be factoring in to estimates to Telefonica Brasil over the medium, long-term, or is it a bit of a non-event? So any color on that would be fantastic. Thanks.

Thank you, Richard, for the question. We don't have the (inaudible) price for unbundling in the market. But basically, we understand that the market in Brazil, it's not competition, and we are not expecting big numbers in (inaudible) area.

Okay. Maybe just -- so maybe just one. Is it still your understanding that the fiber investment -- you know, fiber investments will be exempted from those rules?

In terms of fiber, we have [line meters] (inaudible). (inaudible).

Okay, understood. I guess we'll sort of watch this space and see what the regulator comes up with. But thanks for those comments.

Thank you.

Our next question comes from Soomit Datta with New Street Research.

Hi, yes, a couple of questions, please. First of all, when can you -- in the context of the Fixed investments, one thing you haven't talked about too much is VDSL, but I understand there is a VDSL, and sort of plan afoot. And do you mind sort of commenting if that is the case, and what your plans are? And regarding VDSL, what your targets are? I gather that's something which would been happening outside of Sao Paulo City, but any color on that would be very helpful, please.

And then secondly, looking at the LTE dongle, I guess, coming through from ANATEL, look quite promising for Vivo. Can you give any color on handset availability? So when could we start to see handsets coming through in Brazil in reasonable numbers, such that that could actually help drive smartphone trends, as well as the dongle trends? Thanks very much.

Thank you for the question. About the VDSL, basically, we are distribution, we have the solution for the corporate segment. When it's appropriate for the short (inaudible), and -- but we are focusing -- it's more focused on the fiber solution and ADSL. Basically we are now ahead of two -- it's possible to measure the high quality of ADSL and improve the speed and working of this, and we are implemented the possibility to increase the speed in ADSL, and more focus (inaudible).

In terms of LTE, basically, we have now more than 10 models, and dongles and box, that customers that we have in our broadband. Our focus in this moment is to get a good quality of the network that we have, and (technical difficulty) in Brazil. Our objective at the end of this year is more than 17 cities, where basically, we have a big offer, we have a good possibility to mix with all the possibilities like to have a smartphone, to have a dongle, or to have modem platform (inaudible). And our focus is to have good solutions for this kind of client.

Basically, (inaudible) changing from 3G to 4G. Okay?

Okay. I just wanted to clarify, on VDSL, it's very -- it's not really a residential solution. Is that right? It's more of a corporate solution.

Yes. For a more corporate solution.

Okay, thank you.

This concludes the question and answer section. At this time, I would like to turn the floor back over to Mr. Teixeira for any closing remarks.

Thank you all for attending our conference (inaudible). The highlight of this quarter is the consistent delivery in the Fixed turnaround plan, as highlighted to you last quarter. (inaudible) this quarter (inaudible) accelerate our commercial efforts which resulted in a good trend resulted in Wire and Fixed businesses, but also created short -- some short-term pressure from launchings.

In this (inaudible) quarter, we also completed another important step, a formal integration process, reorganization of our corporate (inaudible), creating more (inaudible) environment for coverage and (inaudible). We are optimists about the future. As you know, we have changes ahead, but I here affirm that our focus will continue to be on growing with the quality and profitability, creating value for our shareholders.

Thank you (inaudible) again, and I hope to see you again next quarter or anytime soon. Thank you.

Thank you. This concludes today's Telefonica Brasil 2Q 2013 results conference call. You may now disconnect your lines at this time. Thank you.