Results for the second quarter of 2008 for Oi\'s Tele Norte Leste

Good morning and welcome to Oi's second quarter 2008 EarningsResults Conference Call. At this time, all participants are in alisten-only mode. Later we will conduct a question-and-answersession and instructions will be given at that time. Today'sconference is being recorded. If you have any objections, you maydisconnect at this time.
Thank you, operator. We would like to thank you for participatingin today's conference call to discuss results for the secondquarter of 2008 for Oi's Tele Norte Leste. There is a slidepresentation of our company's today's conference call, which wehave put on the website. If you do not have a copy or cannot accessit, please give me a call at 646-284-9409 in New York and I willsend it to you.
I would like to remind everyone that any forward-looking commentsmade during today's call are subject to macroeconomic conditions,market risks and other factors, and as a result future performancecould differ materially from current expectations.
It is now my pleasure to turn the call over to José Luís Salazar,the company's CFO, who is joining us from Rio, along with severalmembers of the Oi management team. Mr. Salazar, you may begin.
This conference call will also feature [Mark Schroeder] ourController; Tarso Rebello, the Treasurer; [Alan Evia], Strategy andRegulatory Director and [Alberto Giani], along with InvestorRelations team.
Before we continue, I want to highlight that the informationrelated to the second quarter will include for the first time theresults of a new subsidiary, which is Tele Norte CelularParticipações, TNCP, and as a consequence Amazônia Celular,whose shareholding control acquisition by TMAR was concluded onApril 3.
Now I would like to move on to the analysis of the results.
On Slide 1, we have the group's Revenue Generating Units, in excessof 36 1 million users, rising almost 9% in the quarter and 22% inthe 12-month period, which reflect both the acquisition of TNCP andorganic key growth.
Even excluding the TNCP numbers, 1,474 thousand customers, we hadthe record expansion this quarter, 4.4% up in the quarter and 18.2%year-on-year. If we consider organic growth only, days excludingTNCP, the total net additions in the second of 1,457 thousand were13.6% above those seen in the first quarter and almost four timesthe net additions in the second quarter of 2007.
On Slide 2, we see that at the end of the June, Oi's customer basewas composed of 13.9 million lines in wireless service or fixed,20.3 million OI mobile customers and 1,804 thousand broadbandusers, which includes 1,751 thousand Oi Velox and 53,000 broadbandusers via cable through Oi TV.
In wireless, wireline services the 1.1% drop in the quarterreflects fiercer competition, triggered by more frequent use ofmobile phones due to promotions offering reductive rates on callsredeemed at company's all networks or to fixed networks done byvirtually every wireless operator in Region I.
Oi Mobile continues to rise at a strong pace, it grew by almost 3million users in the quarter of whom 1,493 thousand accounts fororganic expansion and 1,474 thousand came from the consolidation ofTNCP. Even excluding this new subsidiary, net wireless additionsare more than five times the additions in the same period of lastyear of 276,000.
Oi Velox, approximately 113,000 new broadband users were added tothe base this quarter exceeding by 34.5% the additions recorded inthe second quarter of 2007. In the service, we maintained ourpolicy of expanding license stations and coverage. At the end ofthe first semester, Oi Velox was present in 328 cities. Thisquarter we also started to report the 53,000 broadband customers ofOi TV, which accesses broadband through cable.
Slide 3 shows that the wireless market in Brazil continues to growat a fast pace and Region I still accounts for the biggest part ofthis expansion. While the total mobile subscribers in the countryincreased approximately 25%, Region I lines expanded almost 29%adding 66.1 million users and making up for almost 50% of the totalwireless customer base in the country.
Net additions in Region I during the last 12 months amounted to14.7 million customers and represents 65.4% of all new users. Atthe end of June, the penetration in our region stood at 63.6%compared to country's average of 69.5%. The steep growth seen inboth Region I and in Brazil as a whole indicates that purchases ofnaked SIM cards have become a trend in Brazilian market. It isworth noting that this market trend was leveraged by a change inthe company's strategy for mobile prepaid services and reinforcedby Anatel resolution, which in fact represents more freedom tocustomers and the choice of their own mobile operators.
On Slide 4, which details the wireless user base at Oi, we can seethat 17.1 million customers are of 20.3 million in the prepaidsegment or 84% and 3.2 million are postpaid equivalent to 16% ofthe total. We kept its share of net additions at 5% in Region Iabove markets fair share, thus not only confirming but alsoexpanding our market leadership to 30.7% in June 2008 from 30.1% inMarch. These numbers also include the customer base added with theacquisition of TNCP. Approximately 87% of net additions relates tothe prepaid segment and reflects of new additions related to the OiLigadores promotion.
The postpaid segment accounted for 13% of net additions, 205,000users added via TNCP and (inaudible) via organic growth, of whichalmost 70% through the bundle Oi Conta Total. At the end of June,Oi Conta Total customers already totaled 783,000, making up for24.3% of the total of the postpaid base.
Moving ahead to the financial analysis, the Slide 5 shows thecompany's consolidated growth revenue, which totaled R$6,752million exceeding by 8.7% that of the second quarter of 2007. Ofthe R$542 million in gross in year-on-year, R$129 million amountedto TNCP. Excluding this new subsidiary, revenues would have risen6.3% compared to the second quarter of 2007. This evolution comesmainly from the good performance in the wireless given thatwireline revenues were stable for another quarter totaling R$5,176million. The wireless segment, which had R$1,576 million in grossrevenue, rose 53.3% and even excluding the effects from theacquisition of TNCP that growth would have been 38.5%. I want tohighlight that mobile service revenue already account for 23.3% ofthe company's total revenues in the second quarter.
On Slide #6, I had detailed the wireline segment revenues comparedto the second quarter of 2007 where we can see that stable revenuesare a result of losses in local services and in public telephones,which were offset by growth in data network usage and longdistance. The main contributors are #1) data transmission servicewhose revenues exceed those in the second quarter of 2007 by 18.9%mainly due to Oi Velox reflecting the important growth in the basesince mid last year. #2) Revenue from network usage were 17.8%higher and the result of the effects of the mobile companies offerswhich gives minutes based bonus on calls to customers who are ontheir own network as well as the fixed lines. 3) Higher revenuesfrom long distance outgoing calls excluding fixed mobile whichexceeded by 15.4% those in the second quarter of 2007. And 4)growth in fixed to mobile revenues by 0.6% leveraged by longdistance traffic VC2 and VC3 and a higher mobile customer base.
On the negative side, we have local wireless service fell 8.1%year-on-year mainly due to a reduction in local traffic revenuesand to public telephone revenues which dropped 47% that of thesecond quarter of 2007. Both revenues were hurt because of theimpact of fixed mobile substitution markedly by the same mobilepromotions we mentioned previously, which are based on reducedtariffs for on net and mobile to fixed cost.
On Slide 7 next, we detailed the revenue from wireless services,which totaled R$1,576 million, 52% or R$548 million above therevenues in the second quarter of 2007. This increase is explainedin the following way. R$149 million due to the consolidation ofTNCP revenues, the new subsidiary, R$363 million comes from higherlocal service revenues excluding network usage, R$49 millionrelated to higher network usage and reduction in handset revenuesby R$12 million. The big average customer base positivelyinfluenced service network usage and value added service revenues.In other words, a higher number of postpaid customers especiallythose with convergent plans had a positive influence insubscription revenue and a higher number of prepaid customerboosted outgoing calls network usage as well as value added servicerevenues mainly SMS.
Smaller handset revenues resulted from the company's strategy ofreducing the sale for handset in the prepaid segment aimed at thelower customer and acquisition cost, as has been discussed in theprevious conference call.
Moving ahead to Slide 8, we can see that the operating cost in thequarter totaled R$367 million, rising 21.9% year-on-year,equivalent to R$605 million. Of this amount, R$333 million arenon-recurring expenses related to the acquisition process of BrazilTelecome and R$58 million related to the consolidation of TNCP. Ifthe non-recurring items were excluded, operating cost would havegrown to R$171 million or 9.8%.
Here the items that changed the most year-on-year are: third-partyservices reflecting higher spending on (inaudible) payments,commissions, data processing cost and spending on consultancies,including R$18 million that are non-recurring related to the BrazilTelecom deal; rent and insurance mainly due to TNCP; provision fornet debt as a result of a more flexible credit cycles in salesfixed lines is starting in the second quarter of 2007.
However, when compared to the previous quarter, we see that thisitem is stable on operating cost mainly due to the non-recurringimpact of R$360 million linked to expenses distinguish legaldisputes involving Brazil Telecom to make it feasible theacquisition of this company.