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Wall Street Breakfast

Net Serviços de Comunicação S.A. (NETC)
Q2 2007 Earnings Call
July 19, 2007, 11:00 AM ET


João Adalberto Elek, Jr. - CFO and IR Officer
Francisco Valim - CEO


Vera Rossi - Morgan Stanley
Andrew T. Campbell - Credit Suisse
Gustavo Oliveira - Citigroup
Peter Lyons - Oscar Gruss
Patrick Grenham - Citigroup
Miguel Garcia - Deutsche Bank



Good morning ladies and gentlemen. At this time, we would like to welcome everyone to the Net Serviços conference call to discuss its second quarter 2007 results. The audio for this conference is being broadcast simultaneously through the Internet at the website We inform that all participants will only be able to listen to the conference during the company's presentation. After the company's remarks are over, there will be a question-and-answer section. At that time further instructions will be given. [Operators 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 beliefs and assumptions of our management and on information currently available to the company. 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 future results of Net Serviços and could cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the floor over to João Elek, CFO and Investor Relations Officer. Mr. Elek, you may begin your conference.

João Adalberto Elek, Jr. - Chief Financial Officer and Investor Relations Officer

Good morning. On behalf of Net's management team and Francisco Valim, NET's CEO who is participating in this call, I would like to welcome you to this event. As we have always done, I will start commenting on the main highlights and then move in to question and answer session. Since June 11, when the shareholders' meetings approved the acquisition of Vivax by Net, 100% of the company's capital entered fiscal Q2 has been translated to work.

Consequently, at the end of the second quarter, Net's consolidated results include Vivax's results. The analysis of this quarter's operating goal confirms that net additions remain strong and in line with conference guidance. On pay TV subscriber base grew by around 22,000 new subscribers. And our broadband subscriber base extended by almost 136,000. Net Fone continues to enjoy excellent customer acceptance with 96,000 new subscribers added to the base in the quarter.

We believe that our range of sales channel combined with differentiation of high speed broadband product and our capacity to create value for our consumers with the bundling of different products to our Net combo packages, have enabled us to get to a substantial share of new broadband users and thus fuel their confidence over the long haul [ph].

As for their churn rate, as you all know the churn rate in Vivax operations have been slightly higher than that. Therefore the consolidated churn rate for both pay TV and broadband grew slightly in line the with the base consolidation. Their churn rate for pay TV and broadband stood at 13.9% and 16.3% respectively too close for the 15% still in guidance given by the company. We have been analyzing the reasons for this difference in churn rates, and certainly whether web based application of Net's process and combo products will give us churn rate to a level close to Net. We ended the second quarter with 2.3 million pay TV subscribers, 1.1 million broadband subscribers and 354,000 voice subscribers.

The company has good liquidity. At the end of the quarter our cash and cash equivalents totaled 559 million reais and after quarter 100% of all short-term liability. Our EBITDA margins to 2.4 billion reais with long-term liability accounted for 60% of this total.

Vivax has brought 220 million growth of that on to our consolidated balance sheet, but has not changed our leverage given that that it's capital structure was very similar to Net. The net debt EBITDA ratio has slightly declined to around 0.2. Shareholders' equity reached 2.6 billion reais after the acquisition of 100% of Vivax capital stock.

Gross revenue totaled 903 million reais in the second quarter, 29% higher than in the same period of the previous year as a result of increase in the subscriber base. Client ARPU that is the sum of gross revenue from monthly fee, pay per view and other services divided by the average number of pay TV subscribers. And exclusive voice and broadband clients rose from 170 reais to 126 reais, an increase of 8% as a result of company strategy of accelerated growth focused on the expansion of bundle offers.

Operating costs grew by 30% during the period. Yes as a percentage of Net's revenue, these costs remain usually stable at 47%. The more significant cost increase came from the call center due to restructuring a new model and due to the massive growth of the subscriber base.

General and administrative expenses including the one-off adjustment of Vivax accounting standardization stood at 98 million in the quarter, up 19% over the 82 million recorded in the second quarter of the previous year. Restructuring, higher personnel, consulting and legal expenses as a percentage of Net's revenue, general and administrative expenses declined from 15% to 14%.

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