UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
|
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
OR
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the fiscal year ended December 31,
2008
|
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
OR
o
|
SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
|
For
the transition period from ________________ to
________________
|
|
Commission
file
number: ________________
|
TELECOMUNICAÇÕES
DE SÃO PAULO S.A. – TELESP
(Exact
name of Registrant as specified in its charter)
Telecommunications
of São Paulo – Telesp
(Translation
of Registrant’s name into English)
Federative
Republic of Brazil
(Jurisdiction
of incorporation or organization)
Rua
Martiniano de Carvalho, 851
01321-001
São Paulo, SP, Brasil
(Address
of principal executive offices)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
|
Name
of each exchange on which registered
|
Preferred
Shares, without par value
|
New
York Stock Exchange*
|
American
Depositary Shares (as evidenced by American Depositary Receipts), each
representing 1 share of Preferred Stock
|
New
York Stock Exchange
|
*
|
Not
for trading purposes, but only in connection with the registration on the
New York Stock Exchange of American Depositary Shares representing those
Preferred Shares.
|
Securities registered or to be
registered pursuant to Section 12(g) of the
Act: None
Securities for which there is a
reporting obligation pursuant to Section 15(d) of the
Act: None
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.
The
number of outstanding shares as of December 31, 2008 was:
|
|
Number
of Shares Outstanding
|
Shares
of Common Stock
|
|
168,609,291
|
Shares
of Preferred Stock
|
|
337,232,189
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
o Yes
x No
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
o Yes x No
Note –
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those sections.
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filer x Accelerated
Filer o Non-accelerated
Filer o
Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
U.S.
GAAP o
|
International
Financial Reporting Standards as issued by the International Accounting
Standards Board o
|
Other
x
|
The
financial statements included in this filing were prepared in accordance with
the accounting practices adopted in Brazil, as prescribed by Brazilian Corporate
Law (Brazilian GAAP).
Indicate
by check mark which financial statement item the registrant has elected to
follow.
o Item
17 x Item
18
If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
o Yes
x No
TABLE
OF CONTENTS
Page
ITEM 1. IDENTITY OF DIRECTORS,
SENIOR MANAGEMENT AND ADVISERS
|
5
|
ITEM 2. OFFER STATISTICS AND
EXPECTED TIMETABLE
|
5
|
ITEM 3. KEY
INFORMATION
|
5
|
ITEM 4. INFORMATION ON THE
COMPANY
|
14
|
ITEM 4A. UNRESOLVED STAFF
COMMENTS
|
42
|
ITEM 5. OPERATING AND FINANCIAL
REVIEW AND PROSPECTS
|
42
|
ITEM 6. DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES
|
64
|
ITEM 7. MAJOR SHAREHOLDERS AND
RELATED PARTY TRANSACTIONS
|
75
|
ITEM 8. FINANCIAL
INFORMATION
|
76
|
ITEM 9. THE OFFER AND
LISTING
|
85
|
ITEM 10. ADDITIONAL
INFORMATION
|
90
|
ITEM 11. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
102
|
ITEM 12. DESCRIPTION OF SECURITIES
OTHER THAN EQUITY SECURITIES
|
102
|
ITEM 13. DEFAULTS, DIVIDEND
ARREARAGES AND DELINQUENCIES
|
103
|
ITEM 14. MATERIAL MODIFICATIONS TO
THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|
103
|
ITEM 15. CONTROLS AND
PROCEDURES
|
103
|
ITEM 16.
[RESERVED]
|
104
|
ITEM 16A. AUDIT COMMITTEE
FINANCIAL EXPERT
|
104
|
ITEM 16B. CODE OF
ETHICS
|
104
|
ITEM 16C. PRINCIPAL ACCOUNTANT
FEES AND SERVICES
|
104
|
ITEM 16D. EXEMPTIONS FROM THE
LISTING STANDARDS FOR AUDIT COMMITTEES
|
105
|
ITEM 16E. PURCHASES OF EQUITY
SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|
106
|
ITEM 16F. CHANGE IN REGISTRANT’S
CERTIFYING ACCOUNTANT
|
106
|
ITEM 16G. CORPORATE
GOVERNANCE
|
106
|
ITEM 17. FINANCIAL
STATEMENTS
|
108
|
ITEM 18. FINANCIAL
STATEMENTS
|
108
|
ITEM 19.
EXHIBITS
|
108
|
GLOSSARY OF TELECOMMUNICATIONS
TERMS
|
110
|
SIGNATURES
|
112
|
INTRODUCTION
References
in this annual report to “Telesp,” “we,” “our,” “us” and “the company” are to
Telecomunicações de São Paulo S.A. – TELESP and its consolidated subsidiaries
(unless the context otherwise requires). In addition, all references in this
annual report to:
·
|
“ADSs”
are to our American Depositary Shares, each representing one share of our
non-voting preferred shares;
|
·
|
“ANATEL”
are to Agência
Nacional de Telecomunicações – ANATEL, the National
Telecommunications Agency of
Brazil;
|
·
|
“BM&FBOVESPA”
are to the Bolsa
de Valores, Mercadorias e
Futuros;
|
·
|
“Brazilian
Central Bank” or “Central Bank” are to the Banco Central do Brasil, the Central
Bank of Brazil;
|
·
|
“Brazilian
Corporate Law” are to the Lei das Sociedades por Ações, Law No. 6,404 of
December 1976, as amended;
|
·
|
“Brazilian
government” are to the federal government of the Federative Republic of
Brazil;
|
·
|
“CADE”
are to Conselho
Administrativo de Defesa Econômica, the Brazilian competition
authority;
|
·
|
“Ceterp”
are to Centrais
Telefônicas de Ribeirão
Preto;
|
·
|
“CDI”
are to Certificado de
Depósito Interbancário, the Certificate for Interbank
Deposits;
|
·
|
“CMN”
are to the Conselho Monetário Nacional, the Monetary
Council of Brazil;
|
·
|
“Commission”
or “SEC” are to the U.S. Securities and Exchange
Commission;
|
·
|
“Corporate
Law Method” is the accounting practice to be followed in the preparation
of our financial statements for regulatory and statutory purposes
prescribed by the Brazilian Corporate Law and accounting standards issued
by the CVM;
|
·
|
“CTBC
Telecom” are to Companhia de Telecomunicações
do Brasil Central;
|
·
|
“CTBC
Borda” are to Companhia
Brasileira Borda do Campo –
CTBC;
|
·
|
“CVM”
are to the Comissão de Valores Mobiliários, the
Securities Commission of Brazil;
|
·
|
“General
Telecommunications Law” are to Lei Geral de Telecomunicações, as
amended, which regulates the telecommunications industry in
Brazil;
|
·
|
“IPCA”
are to Índice de Preços
ao Consumidor, the consumer price
index;
|
·
|
·“IST”
are to Índice Setorial
de Telecomunicações, the inflation index of the telecom
sector;
|
·
|
“JPY”
are to Japanese Yen;
|
·
|
“Number
Portability” are to “Portabilidade
Numerica,” the service mandated by ANATEL that provides customers
with the option of keeping the same telephone number when switching
telephone service providers;
|
·
|
“PTAX
rate” are to the weighted average daily buy and sell exchange rates
between the real
and U.S. dollar that is calculated by the Central
Bank;
|
·
|
“real,” “reais” or “R$” are to
Brazilian reais,
the official currency of Brazil;
|
·
|
“Speedy”
are to broadband services provided by Telesp through asymmetric digital
subscriber lines, or ADSL;
|
·
|
“TJLP”
are to Taxa de Juros de
Longo Prazo, or long term interest rate;
and
|
·
|
“US$,”
“dollars” or “U.S. dollars” are to United States
dollars.
|
Unless
otherwise specified, data relating to the Brazilian telecommunications industry
included in this annual report were obtained from ANATEL.
The
“Glossary of Telecommunications Terms” that begins on page 110 provides the
definition of certain technical terms used in this annual report.
FORWARD-LOOKING
STATEMENTS
The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. Certain statements included in this annual report,
principally in “Item 3.D—Risk Factors,” “Item 4—Information on the Company” and
“Item 5—Operating and Financial Review and Prospects,” contain information that
is forward looking, including, but not limited to:
·
|
statements
concerning our operations and
prospects;
|
·
|
the
size of the Brazilian telecommunications
market;
|
·
|
estimated
demand forecasts;
|
·
|
our
ability to secure and maintain telecommunications infrastructure licenses,
rights-of-way and other regulatory
approvals;
|
·
|
our
strategic initiatives and plans for business
growth;
|
·
|
our
funding needs and financing
sources;
|
·
|
network
completion and product development
schedules;
|
·
|
expected
characteristics of competing networks, products and services;
and
|
·
|
other
statements of management’s expectations, beliefs, future plans and
strategies, anticipated developments and other matters that are not
historical facts.
|
Forward-looking
statements may also be identified by words such as “believe,” “expect,”
“anticipate,” “project,” “intend,” “should,” “seek,” “estimate,” “future” or
similar expressions. Forward-looking information involves risks and
uncertainties that could significantly affect expected results. The risks and
uncertainties include, but are not limited to:
·
|
the
short history of our operations as an independent, private-sector entity
and the ongoing introduction of greater competition to the Brazilian
telecommunications sector;
|
·
|
the
cost and availability of financing;
|
·
|
uncertainties
relating to political and economic conditions in Brazil as well as those
of other emerging markets;
|
·
|
inflation
and exchange rate risks;
|
·
|
the
Brazilian government’s telecommunications
policy;
|
·
|
the
Brazilian government’s tax policy;
|
·
|
the
Brazilian government’s political instability;
and
|
·
|
the
adverse determination of disputes under
litigation.
|
We
undertake no obligation to update publicly or revise any forward-looking
statements because of new information, future events or otherwise. In light of
these risks and uncertainties, the forward-looking information, events and
circumstances discussed in this annual report might not occur. Our actual
results and performance could differ substantially from those anticipated in our
forward-looking statements.
PRESENTATION
OF FINANCIAL INFORMATION
Our
consolidated financial statements as of December 31, 2008 and 2007 and for the
years ended December 31, 2008, 2007 and 2006 have been prepared in accordance
with the accounting practices adopted in Brazil, as prescribed by Brazilian
Corporate Law, or the Brazilian GAAP, which differs in certain significant
respects from generally accepted accounting principles in the United States, or
U.S. GAAP. Notes 36 and 37 to our financial statements appearing elsewhere in
this annual report describe the principal differences between the Brazilian GAAP
and U.S. GAAP as they relate to us, and provide a reconciliation to U.S. GAAP of
net income and shareholders’ equity. These consolidated financial statements
have been audited by Ernst & Young Auditores Independentes S.S. (“E&Y”
or “Ernst & Young”).
As a
result of a change in Brazilian corporate law with respect to financial
reporting (Law 11,638), certain changes in accounting criteria became effective
for fiscal year 2008. A CVM rule allows companies to adopt these
changes for fiscal year 2008 only, without making changes to comparative 2007
financial information, with disclosure in the notes to the financial statements
explaining such accounting treatment. Based on this CVM rule, we have
elected not to restate our 2007 financial statements. Any changes that would
have resulted to our financial statements as of and for the year ended December
31, 2007 as a result of applying the new accounting criteria would not be
material, and the application of these changes to our financial statements as of
and for the year ended 2008 does not have a material effect on the comparability
of our 2008 financial statements with our 2007 financial statements. However,
some amounts for 2006 and 2007 presented throughout this Form 20-F have been
reclassified to conform with the presentation of the 2008 amounts prepared in
accordance with the new accounting criteria. Please see Note 3 to our 2008
financial statements for a qualitative and quantitative analysis of the changes
resulting from this new accounting criteria.
We have
made rounding adjustments to reach some of the figures included in this annual
report. Accordingly, numerical figures shown as totals in some tables may not be
an arithmetic aggregation of the figures that preceded them.
PART
I
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
applicable.
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not
applicable.
ITEM
3. KEY INFORMATION
A.
Selected Financial Data
Our
consolidated financial statements included in this annual report on Form 20-F
and the selected financial data presented for the periods described below have
been prepared in accordance with the Corporate Law Method, which is the same
basis of accounting used in our annual financial statements published in Brazil,
audited by Ernst & Young Auditores Independentes for the fiscal years ended
December 31, 2008, 2007, 2006 and 2005, and Deloitte Touche Tohmatsu Auditores
Independentes for the fiscal year ended December 31, 2004. Although we adopted
law 11,638 effective as of January 1, 2008 (see "Presentation of Financial
Information"), certain previously reported amounts for 2006 and 2007 presented
below have been reclassified to conform with the presentation of the 2008
amounts prepared in accordance with the new accounting criteria. See
Notes 3 and 4 to the consolidated financial statements.
In
October 2005, the CVM introduced Deliberation 488, which had the principal
effect of changing the classification on our balance sheet of provisions to
assets from liabilities from 2006 onward. Thus, our financial information as
represented on our balance sheet as of December 31, 2005 included in this annual
report has been reclassified to make it comparable to the corresponding
financial information on our balance sheet as of December 31, 2006, 2007 and
2008.
The
following tables present a summary of our selected financial data at the dates
and for each of the periods indicated. You should read the following information
together with our audited consolidated financial statements and the notes
thereto included elsewhere in this annual report and with “Item 5—Operating and
Financial Review and Prospects.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of reais, except for share
and per share data)
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazilian
Corporate Law
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating revenue
|
|
|
15,979 |
|
|
|
14,727 |
|
|
|
14,643 |
|
|
|
14,395 |
|
|
|
13,309 |
|
Cost
of goods and services
|
|
|
(8,726 |
) |
|
|
(8,029 |
) |
|
|
(7,781 |
) |
|
|
(7,717 |
) |
|
|
(7,496 |
) |
Gross
profit
|
|
|
7,253 |
|
|
|
6,698 |
|
|
|
6,862 |
|
|
|
6,678 |
|
|
|
5,813 |
|
Operating
expenses, net
|
|
|
(3,523 |
) |
|
|
(3,051 |
) |
|
|
(2,607 |
) |
|
|
(2,805 |
) |
|
|
(2,504 |
) |
Operating
income before financial expense, net
|
|
|
3,730 |
|
|
|
3,647 |
|
|
|
4,255 |
|
|
|
3,873 |
|
|
|
3,309 |
|
Financial
expense, net
|
|
|
(228 |
) |
|
|
(307 |
) |
|
|
(331 |
) |
|
|
(460 |
) |
|
|
(404 |
) |
Income
before tax and social contribution
|
|
|
3,502 |
|
|
|
3,340 |
|
|
|
3,924 |
|
|
|
3,413 |
|
|
|
2,905 |
|
Income
tax and social contribution
|
|
|
(1,082 |
) |
|
|
(977 |
) |
|
|
(1,108 |
) |
|
|
(871 |
) |
|
|
(724 |
) |
Net
Income
|
|
|
2,420 |
|
|
|
2,363 |
|
|
|
2,816 |
|
|
|
2,542 |
|
|
|
2,181 |
|
Earnings
per share in reais
|
|
|
4.78 |
|
|
|
4.67 |
|
|
|
5.57 |
|
|
|
5.17 |
|
|
|
0.0044 |
|
Cash
Dividends per share in reais, net of
withholding tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
4.54 |
|
|
|
5.25 |
|
|
|
5.58 |
|
|
|
6.89 |
|
|
|
5.63 |
|
Preferred
Shares
|
|
|
4.99 |
|
|
|
5.77 |
|
|
|
6.14 |
|
|
|
7.58 |
|
|
|
6.20 |
|
U.S. GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating revenue
|
|
|
22,017 |
|
|
|
20,472 |
|
|
|
20,293 |
|
|
|
19,870 |
|
|
|
18,330 |
|
Operating
income
|
|
|
3,803 |
|
|
|
3,635 |
|
|
|
4,305 |
|
|
|
4,026 |
|
|
|
3,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of reais, except for share
and per share data)
|
|
Net
income
|
|
|
2,500 |
|
|
|
2,370 |
|
|
|
2,930 |
|
|
|
2,638 |
|
|
|
2,184 |
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share—Common shares—basic
|
|
|
4.63 |
|
|
|
4.39 |
|
|
|
5.48 |
|
|
|
5.02 |
|
|
|
4.05 |
|
Weighted
average number of common shares outstanding—basic
|
|
|
168,609,291 |
|
|
|
168,609,292 |
|
|
|
167,242,724 |
|
|
|
164,734,052 |
|
|
|
165,320,207 |
|
Weighted
average number of common shares
outstanding—diluted
|
|
|
168,638,238 |
|
|
|
168,609,292 |
|
|
|
167,242,724 |
|
|
|
164,734,052 |
|
|
|
165,320,207 |
|
Earnings
per share—Preferred shares—basic
|
|
|
5.10 |
|
|
|
4.83 |
|
|
|
6.02 |
|
|
|
5.52 |
|
|
|
4.61 |
|
Weighted
average number of preferred shares outstanding—basic
|
|
|
337,232,189 |
|
|
|
337,232,189 |
|
|
|
334,342,809 |
|
|
|
328,130,540 |
|
|
|
328,272,073 |
|
Weighted
average number of preferred shares outstanding—diluted
|
|
|
337,276,489 |
|
|
|
337,232,189 |
|
|
|
334,342,809 |
|
|
|
328,130,540 |
|
|
|
328,272,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of reais, except per share
data)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazilian
Corporate Law
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
9,869 |
|
|
|
10,260 |
|
|
|
11,651 |
|
|
|
12,358 |
|
|
|
13,369 |
|
Total
assets
|
|
|
19,992 |
|
|
|
18,950 |
|
|
|
18,146 |
|
|
|
17,760 |
|
|
|
18,752 |
|
Loans
and financing—current portion
|
|
|
519 |
|
|
|
806 |
|
|
|
1,829 |
|
|
|
247 |
|
|
|
530 |
|
Loans
and financing—non-current portion
|
|
|
3,217 |
|
|
|
2,503 |
|
|
|
510 |
|
|
|
2,151 |
|
|
|
2,226 |
|
Shareholders’
equity
|
|
|
10,046 |
|
|
|
9,905 |
|
|
|
10,610 |
|
|
|
10,204 |
|
|
|
11,399 |
|
Capital
stock
|
|
|
6,575 |
|
|
|
6,575 |
|
|
|
6,575 |
|
|
|
5,978 |
|
|
|
5,978 |
|
Number
of shares outstanding (in thousands)
(1)
|
|
|
505,841 |
|
|
|
505,841 |
|
|
|
505,841 |
|
|
|
492,030 |
|
|
|
493,592,279 |
|
U.S. GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
9,909 |
|
|
|
11,280 |
|
|
|
12,018 |
|
|
|
12,726 |
|
|
|
13,700 |
|
Total
assets
|
|
|
20,878 |
|
|
|
20,203 |
|
|
|
18,825 |
|
|
|
18,140 |
|
|
|
19,159 |
|
Loans
and financing—current portion
|
|
|
519 |
|
|
|
808 |
|
|
|
1,828 |
|
|
|
256 |
|
|
|
478 |
|
Loans
and financing—non-current portion
|
|
|
3,221 |
|
|
|
2,503 |
|
|
|
510 |
|
|
|
2,151 |
|
|
|
2,231 |
|
Shareholders’
equity
|
|
|
10,624 |
|
|
|
10,478 |
|
|
|
10,823 |
|
|
|
10,265 |
|
|
|
11,422 |
|
(1)
|
On
May 11, 2005, the shareholders approved a reverse stock split in the
proportion of 1,000 (one thousand) shares to 1 (one) share of the same
class. Had the reverse stock split occurred on December 31, 2004, shares
outstanding would be 493,592 and earnings per share under Brazilian
Corporate Law would have been R$4.40 as of December 31,
2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of reais
except when indicated)
|
|
Cash
Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazilian
Corporate Law
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by operations
|
|
|
5,130 |
|
|
|
4,778 |
|
|
|
5,007 |
|
|
|
5,538 |
|
|
|
5,606 |
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(2,075 |
) |
|
|
(2,318 |
) |
|
|
(1,885 |
) |
|
|
(1,667 |
) |
|
|
(1,415 |
) |
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
used in financing activities
|
|
|
(2,247 |
) |
|
|
(1,740 |
) |
|
|
(3,372 |
) |
|
|
(3,647 |
) |
|
|
(4,167 |
) |
Increase
(decrease) in cash and cash equivalents
|
|
|
808 |
|
|
|
720 |
|
|
|
(250 |
) |
|
|
224 |
|
|
|
24 |
|
Cash
and cash equivalents at beginning of year
|
|
|
933 |
|
|
|
213 |
|
|
|
463 |
|
|
|
239 |
|
|
|
215 |
|
Cash
and cash equivalents at end of year
|
|
|
1,741 |
|
|
|
933 |
|
|
|
213 |
|
|
|
463 |
|
|
|
239 |
|
Exchange Rates
The
Brazilian Central Bank allows the real/dollar exchange rate to
float freely. The real/dollar exchange rate has
been established mainly by the Brazilian interbank market and has fluctuated
considerably. The Brazilian
Central
Bank has intervened occasionally to control unstable movements in the exchange
rate. However, the exchange market may continue to be volatile, and the real may depreciate or
appreciate substantially in relation to the U.S. dollar in the future. It is not
possible to predict whether the Brazilian Central Bank or the Brazilian
government will continue to let the real float freely or will
intervene in the exchange rate market.
The
Brazilian government has been introducing significant changes aimed at
simplifying the Brazilian foreign exchange market. Prior to March 4, 2005, there
were two principal legal foreign exchange markets in Brazil:
·
|
the
commercial rate exchange market;
and
|
·
|
the
floating rate exchange market.
|
On August
4, 2006, the Brazilian National Monetary Council, through Resolution No. 3,389,
relaxed the exchange coverage for exports, allowing Brazilian exporters to keep
up to 30% of their income generated from exports of goods and/or services
outside of Brazil. The remaining 70% of such income continued to be subject to
compulsory repatriation to Brazil.
On
September 27, 2006, Resolution No. 3,412 absolved existing restrictions on
investments in foreign financial and derivative markets by individuals and legal
entities. On October 27, 2006, Resolution No. 3,417 increased the liquidation
period permitted for exchange transactions from 360 to 750 days.
Since
March 17, 2008, Brazilian exporters are allowed to keep 100% of income from
exports outside of Brazil. In addition, the foreign exchange mechanism was
simplified to provide for the simultaneous purchase and sale of foreign currency
through the same financial institution and using the same exchange
rate.
The
following tables set forth the exchange rate (rounded to the nearest tenth of a
cent), expressed in reais per U.S. dollar
(R$/US$) for the periods indicated, as reported by the Central
Bank.
|
|
Exchange
Rate of R$ per US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2.654 |
|
|
|
3.205 |
|
|
|
2.917 |
|
|
|
2.654 |
|
2005
|
|
|
2.163 |
|
|
|
2.762 |
|
|
|
2.413 |
|
|
|
2.341 |
|
2006
|
|
|
2.059 |
|
|
|
2.371 |
|
|
|
2.168 |
|
|
|
2.138 |
|
2007
|
|
|
1.732 |
|
|
|
2.156 |
|
|
|
1.929 |
|
|
|
1.771 |
|
2008
|
|
|
1.559 |
|
|
|
2.500 |
|
|
|
1.833 |
|
|
|
2.337 |
|
Source:
Central
Bank of Brazil, PTAX.
(1)
|
Represents
the average of the exchange rates (PTAX) on the last day of each month
during the relevant period.
|
|
|
Exchange
Rate of R$ per US$
|
|
|
|
|
|
|
|
|
Month
Ended
|
|
|
|
|
|
|
October
31, 2008
|
|
|
1.921 |
|
|
|
2.392 |
|
November
30, 2008
|
|
|
2.121 |
|
|
|
2.428 |
|
December
31, 2008
|
|
|
2.337 |
|
|
|
2.500 |
|
January
31, 2009
|
|
|
2.189 |
|
|
|
2.380 |
|
February
28, 2009
|
|
|
2.244 |
|
|
|
2.392 |
|
March
31, 2009
|
|
|
2.237 |
|
|
|
2.422 |
|
April
2009 (through April 9)
|
|
|
2.176 |
|
|
|
2.289 |
|
Source:
Central
Bank of Brazil, PTAX.
B.
Capitalization and Indebtedness
Not
applicable.
C.
Reasons for the Offer and Use of Proceeds
Not
applicable.
D.
Risk Factors
This section is intended to be a summary of more detailed discussions contained elsewhere in this annual report. The risks described below are not the only ones we face. Additional risks that we do not presently consider material, or of which we are not currently aware, may also affect us. Our business, results of operations or financial condition could be impacted if any of these risks materializes and, as a result, the market price of our preferred shares and our
ADSs could be affected.
Risks
Relating to Brazil
The
Brazilian government has exercised, and continues to exercise, significant
influence over the Brazilian economy. This influence, as well as Brazilian
political and economic conditions, could adversely affect us and the trading
price of our preferred shares and ADSs.
In the
past, the Brazilian government has intervened in the Brazilian economy and
occasionally made drastic changes in policy and regulations. The Brazilian
government’s actions to control inflation and affect other policies have often
involved wage and price controls, currency devaluations, capital controls, and
limits on imports, among other things. Our business, financial condition,
results of operations and the market price of our preferred shares and ADSs may
be adversely affected by changes in government policies, as well as general
economic factors, including:
·
|
exchange
control policies;
|
·
|
internal
economic growth;
|
·
|
liquidity
of domestic capital and lending
markets;
|
·
|
tax
policies (including reforms currently under discussion in the Brazilian
Congress); and
|
·
|
other
political, diplomatic, social and economic developments in or affecting
Brazil.
|
Uncertainty
over the possibility of the Brazilian government implementing changes in policy
or regulation affecting these or other factors in the future may contribute to
economic uncertainty in Brazil and heightened volatility in the Brazilian
securities markets and securities issued abroad by Brazilian companies. In
addition, possible political crises may affect the confidence of investors and
the public in general, which may result in economic deceleration and affect the
trading prices of shares issued by companies listed on the stock exchange, such
as us.
Our
business may be vulnerable to the current disruptions and volatility in the
global financial markets.
The
global financial system has experienced difficult credit and liquidity
conditions and disruptions leading to greater volatility. Since the fall of
2008, global financial markets deteriorated sharply and a number of major
foreign financial institutions, including some of the largest global commercial
banks, investment banks, mortgage lenders,
mortgage
guarantors and insurance companies, were experiencing significant difficulties
including runs on their deposits and inadequate liquidity.
In an
attempt to increase liquidity in the financial markets and prevent the failure
of the financial system, various governments have intervened on an
unprecedented scale, but there is no assurance that these measures will
successfully alleviate the current financial crisis.
Despite
the extent of the above-mentioned intervention, global investor confidence
remains low and credit remains relatively lacking. Continued or worsening
disruption and volatility in the global financial markets could have a material
adverse effect on our ability to access capital and liquidity on acceptable
financial terms, and consequently on our operations. Furthermore, an economic
downturn could negatively affect the financial stability of our customers, which
could result in a general reduction in business activity and a consequent loss
of income for us.
Political
instability may have an adverse impact on the Brazilian economy and on our
business.
Political
crises in Brazil in the past have affected the trust of investors and the public
in general, as well as the development of the economy. Political crises may have
an adverse impact on the Brazilian economy, our business, financial condition
and results of operations and the market price of our preferred shares and
ADSs.
Inflation
and government efforts to curb inflation may contribute to economic uncertainty
in Brazil, adversely affecting our business and results of
operations.
Brazil
has historically experienced high rates of inflation. Inflation and certain of
the government’s measures taken in the attempt to curb inflation have had
significant negative effects on the Brazilian economy. The Consumer Prices Index
(Índice de Preços ao
Consumidor), or the IPCA, published by the Instituto Brasileiro de Geografia e
Estatística, rose 5.9% in 2008, reaching the target fixed by the National
Monetary Council. The inflation rate was 4.5% in 2007, 3.1% in 2006, 5.7% in
2005 and 7.6% in 2004.
Since
2006, telephone fees for fixed-line services have been indexed to the Indice de Serviços de
Telecomunicações (Telecommunications Service Index or IST), which is a
basket of national indexes that reflect our industry’s operating costs. As a
result, this index serves to reduce the apparent incongruity between our
industry’s revenues and costs, and thus reduce the apparent adverse effects of
inflation upon our operations. In contrast, Brazilian monetary policy has been
using the IPCA as an inflation targeting system. The inflation target for 2009
is 4.5% and if inflation increases beyond this target, basic interest rates may
rise, causing direct effects on the cost of debt and indirect effects on the
demand for telecommunication goods and services.
Our
results of operations have been negatively affected by a decrease in our
customer growth and could also be affected if our rate of customer turnover
increases.
Our rate
of acquisition of new customers can be negatively affected by market
penetration. For example, our fixed-line customer base decreased 1.2% from
December 31, 2006 to December 31, 2007 and decreased another 2.5% from December
31, 2007 to December 31, 2008. The decrease was mostly due to an increase in
competition in the fixed telephony industry from cable and fixed-wireless
operators, and an increase in substitution of fixed lines with mobiles. This
decrease in customer acquisition has negatively affected our results of
operations and could continue to do so in the future. In addition, if our rate
of customer turnover were to increase significantly, our results of operations
and or competitive position could be adversely affected. Several factors could
influence our rate of acquisition of new customers and our rate of customer
turnover, including competitive pressures from mobile telecommunication service
providers and other fixed-line telecommunications providers, and economic
conditions in Brazil.
Fluctuations
in the real/U.S. dollar exchange rate may adversely affect our ability to pay
U.S. dollar-denominated or U.S. dollar–linked obligations and could lower the
market value of our preferred shares and ADSs.
The
Brazilian currency has experienced devaluations in the past. The real was devalued against the
U.S. dollar by 18.7% in 2001 and 52.3% in 2002. Over the next few years, in
contrast, the real
began appreciating against the U.S. dollar, increasing 18.2%, 8.1%, 11.8%, 8.7%
and 17.2%, respectively, in 2003, 2004, 2005, 2006 and 2007. However,
the real depreciated
against the U.S. dollar by 31.9% in 2008. It should be noted that the
IST, the current index applicable to telecommunication fees for fixed-line
services, does not adequately reflect the true effect of exchange rate
fluctuations as compared to the previously applicable index, the IGP-DI. Thus,
since 2006, telecommunication revenues, when converted to U.S. dollars, do not
adequately reflect the true effect of exchange rate fluctuations, so that our
results of operations could be adversely affected. See “— Selected Financial
Data — Exchange Rates” for more information on exchange rates.
As of
December 31, 2008, 13.7% of our R$3.74 billion total indebtedness was
denominated in foreign currencies, primarily in Japanese yen, Euro and U.S.
dollars. As of December 31, 2008, we had currency hedges in
place to cover virtually all of our foreign currency-denominated bank debt. Part
of the costs relating to our network infrastructure is payable or linked to
payment by us in U.S. dollars. However, other than income derived from hedging
transactions and international long distance interconnection, all of our
revenues are generated in reais. To the extent that the
value of the real
decreases relative to the U.S. dollar, our debt becomes more expensive to
service and it becomes more costly for us to acquire technology and goods
necessary to operate our business that have their prices linked to exchange rate
fluctuations. The additional costs from our debt, however, are offset by
revenues from corresponding hedging transactions and the exposure of our capital
expenditures is constantly monitored so that it does not reach a material
amount. Nevertheless, currency fluctuations are expected to continue to affect
our financial income and expenses.
Political,
economic and social developments, and the perception of risk in other countries,
especially emerging market countries, may adversely affect the Brazilian
economy, our business, and the market price of Brazilian securities, including
our preferred shares and ADSs.
The
market for securities issued by Brazilian companies may be influenced, in
varying degrees, by economic and international market conditions, especially by
those in Latin American and other emerging markets. The reaction of investors to
developments in other countries may have an adverse impact on the market value
of securities of Brazilian companies. Crises in other emerging countries or the
economic policies of other countries, in particular those of the United States,
may reduce investor demand for securities of Brazilian companies, including our
preferred shares. Any of the foregoing developments may adversely affect the
market value of our preferred shares and hinder our ability to access the
capital markets and finance our operations in the future on acceptable terms and
costs, or at all.
Exchange
controls and restrictions on remittances abroad may adversely affect holders of
our preferred shares and ADSs.
Brazilian
law allows that, whenever there is a significant imbalance in Brazil’s balance
of payments or a significant possibility that such imbalance will exist, the
Brazilian government may impose temporary restrictions on capital outflows. Such
restrictions could hinder or prevent the holders of our preferred shares or the
depositary for the ADSs from remitting dividends abroad. The Brazilian
government imposed restrictions on capital outflows for a six-month period at
the end of 1989. If similar restrictions are introduced in the future, they
would likely have an adverse effect on the market price of our preferred shares
and ADSs.
Increases
in interest rates may have a material adverse effect on our
business.
The
Central Bank’s Monetary Policy Committee (Comitê de Política Monetária do Banco
Central – COPOM), establishes the basic interest rate target for the Brazilian
financial system by reference to the level of economic growth of the Brazilian
economy, the level of inflation and other economic indicators. As of December
31, 2004,
2005,
2006, 2007 and 2008, the basic interest rate was 17.8%, 18.0%, 13.3%, 11.3% and
13.8%, respectively, and as of March 31, 2009, was 11.25%. Increases in interest
rates may have a material adverse effect on us.
Risks
Relating to the Brazilian Telecommunications Industry and Us
Extensive
government regulation of the telecommunications industry and our concession may
limit our flexibility in responding to market conditions, competition and
changes in our cost structure or impact our fees.
Our
business is subject to extensive government regulation. ANATEL, which is the
primary telecommunications industry regulator in Brazil, is responsible for,
among other things:
·
|
industry
policies and regulations;
|
·
|
telecommunications
resource allocation;
|
·
|
interconnection
and settlement arrangements; and
|
·
|
supervision
of universal service obligations.
|
For
futher information concerning specific regulations or resolutions issued by
ANATEL, refer to section “Item 5.A −Operating and Financial Review and
Prospects−Operating Results−Regulatory and Competitive Factors.”
Our
concession may be terminated by the Brazilian government under certain
circumstances.
We
operate our business under a concession granted by the Brazilian government.
According to the terms of the concession, we are obligated to meet certain
universal service requirements and to maintain minimum quality and service
standards. For example, ANATEL requires that we satisfy certain conditions with
respect to, among other things, expansion of our network to provide public
pay-phone service for all areas with populations in excess of 100, expansion of
our network to provide private individual telephone service for all areas with
populations in excess of 300, and, with respect to quality of service, targets
for the number of call completions. Our ability to satisfy these terms and
conditions, as well as others, may be affected by factors beyond our control.
Our failure to comply with the requirements of our concession may result in the
imposition of fines up to R$50.0 million or other government actions, including
the termination of our concession. Any partial or total revocation of our
concession would have a material adverse effect on our financial condition and
results of operations. Moreover, the concession agreements establish that all
assets owned by the Company and which are indispensable to the provision of the
services described in such agreements are considered reversible assets and are
deemed to be part of the concession assets. The assets will be automatically
returned to ANATEL upon expiration of the concession agreements, according to
the regulation in force at that time. On December 31, 2008, the net book value
of reversible assets is estimated at R$6.9 billion, which is comprised of
switching and transmission equipment and public use terminals, external network
equipment, energy equipment and system and operation support
equipment.
The
expiration date of the original concession agreements was December 31, 2005, but
it has since been renewed as of December 22, 2005 for an additional 20-year
term. A Public Notice (consulta pública) was published
on March
31, 2009 with the proposed revisions to the concession contracts. ANATEL will
accept comments until June 1, 2009, and then it is expected that it will revise
the concession contracts in 2010.
We
face substantial competition from other fixed-line providers that may reduce our
market share.
We have
experienced, and expect to continue to experience, market adjustments in which
providers take actions in order to compete for clients, especially corporate and
premium residential clients. Such actions result in pressure on
market prices and shifts in market share.
At the
end of 2008, ANATEL approved a change to the General Plan of Grants or Plano Geral de Outorgas,
allowing fixed-line providers to hold concession licenses within the same
business group in more than one region. This change allowed for the
merger between Oi and Brasil Telecom, operators in Regions I and II,
respectively, thus redefining the competitive landscape in Brazil.
Number
Portability was also introduced in 2008, which we expect will result in
significant changes in the competitive dynamic of the Brazilian
telecommunications market. Number Portability allows clients within a
limited geographic locale to relocate or change their telephone operator without
the need to change their telephone number (for either a fixed or mobile line).
Number Portability was introduced for certain of our clients in September of
2008 and as of December 31, 2008, approximately 18% of our clients had Number
Portability rights. Number Portability rights for all of our clients became
effective in March 2009. Though it is difficult to estimate the impact of Number
Portability on the Brazilian telecommunications market, we expect, as an
operator with significant market share, that we will initially lose more clients
(and hence, market share) than we gain as a result of this change.
Any loss
of market share as a result of competition from fixed-line providers could have
an adverse effect on our business, financial condition and results of
operations.
We
face increasing competition from cellular service providers.
Rapid
growth of the cellular telecommunications industry and intense competition among
cellular service providers have resulted in lower prices for cellular services.
Cellular services are increasingly becoming an alternative to fixed-line
services, primarily for residential customers. We expect this to negatively
impact the use of fixed telecommunications services and, therefore, mobile
services are still the main competitive product to our services. Certain
fixed-line services operating on mobile platforms are already common in the
market, wherein a user will have two numbers, a mobile number and a fixed
number, the latter functioning only in the user’s area of residence or “home
zone.” Additionally, with Oi and AEIOU now operating in the state of
São Paulo beginning in the second half of 2008, competition in the mobile
telecommunications market has intensified, putting further pressure on the
fixed-line telecommunications market. Any loss of market share as a result of
competition from cellular service providers could have an adverse effect on our
business, financial condition and results of operations.
The
industry in which we conduct our business is subject to rapid technological
changes that could have a material adverse effect on our ability to provide
competitive services.
The
telecommunications industry is subject to rapid and significant technological
changes. Our future success depends on our ability to anticipate and adapt in a
timely manner to technological changes. We expect that new products and
technologies will emerge and that existing products and technologies will be
further developed.
The
advent of new products and technologies could have a variety of consequences.
New products and technologies may reduce the price of our services by providing
lower-cost alternatives, or they may also be superior to, and render obsolete,
the products and services we offer and the technologies we use, thus requiring
investment in new technology.
As an
example of the alternative technology, in December 2007, ANATEL auctioned
frequencies for 3G services (third generation cellular telephone services) at
premiums of almost 80% over minimum bid prices, for which all current operators
as well as other new entrants into the market submitted bids. The 3G networks
allow mobile broadband access at speeds and prices competitive with currently
offered fixed broadband services, which
could
have an adverse effect on Speedy’s growth and our results. Currently,
all current mobile operators in the State of São Paulo (except AEIOU) provide 3G
services at prices competitive with those of the fixed technology players in the
market.
We seek
to invest in new technology to remain competitive in a rapidly changing
market. If we do not make sufficient investments in new technology or
if our networks and technologies otherwise become outdated or obsolete, we may
not be able to compete effectively against new, alternative technologies, which
could have an adverse affect on our business, financial condition and results of
operations.
Risks
Relating to the Preferred Shares and the ADSs
Holders
of our ADSs may face difficulties in serving process on or enforcing judgments
against us and other persons.
We are
organized under the laws of Brazil, and most of our directors and executive
officers and our independent public accountants reside or are based in Brazil.
Substantially all of our assets and those of these other persons are located in
Brazil. As a result, it may not be possible for holders of the ADSs to effect
service of process upon us or these other persons within the United States or
other jurisdictions outside Brazil or to enforce against us or these other
persons judgments obtained in the United States or other jurisdictions outside
Brazil. Because judgments of U.S. courts for civil liabilities based upon the
U.S. federal securities laws may only be enforced in Brazil if certain
conditions are met, holders may face greater difficulties in protecting their
interests due to actions by us, our directors or executive officers than would
shareholders of a U.S. corporation.
Holders
of Our Preferred Shares and ADSs generally do not have voting
rights.
In
accordance with Brazilian Corporate Law and our bylaws, holders of our preferred
shares, and therefore of our ADSs, are not entitled to vote at meetings of our
shareholders, except in limited circumstances set forth in “Item 10.B—Additional
Information—Memorandum and Articles of Association.”
You
might be unable to exercise preemptive rights with respect to the preferred
shares unless there is a current registration statement in effect which covers
those rights or unless an exemption from registration applies.
You will
not be able to exercise the preemptive rights relating to the preferred shares
underlying your ADSs unless a registration statement under the U.S. Securities
Act of 1933, as amended, or the Securities Act, is effective with respect to
those rights, or an exemption from the registration requirements of the
Securities Act is available. We are not obligated to file a registration
statement. Unless we file a registration statement or an exemption from
registration applies, you may receive only the net proceeds from the sale of
your preemptive rights by the depositary, or if the preemptive rights cannot be
sold, they will lapse and you will not receive any value for them. For more
information on the exercise of your rights, see “Item 10.B—Additional
Information—Memorandum and Articles of Association—Preemptive Rights.”
An exchange of
ADSs for preferred shares risks the loss of certain foreign currency remittance
and Brazilian tax advantages.
The ADSs
benefit from the certificate of foreign capital registration, which permits The
Bank of New York, as depositary, to convert dividends and other distributions
with respect to preferred shares into foreign currency, and to remit the
proceeds abroad. Holders of ADSs who exchange their ADSs for preferred shares
will then be entitled to rely on the depositary’s certificate of foreign capital
registration for five business days from the date of exchange. Thereafter, they
will not be able to remit non-Brazilian currency abroad unless they obtain their
own certificate of foreign capital registration, or unless they qualify under
Resolution 2,689 of the Central Bank of Brazil, dated January 26, 2000 and
issued by BACEN, which entitles certain investors to buy and sell shares on
Brazilian stock exchanges without obtaining separate certificates of
registration.
If
holders of ADSs do not qualify under Resolution 2,689, they will generally be
subject to less favorable tax treatment on distributions with respect to our
preferred shares. There can be no assurance that the depositary’s certificate of
registration or any certificate of foreign capital registration obtained by
holders of ADSs will not be
affected
by future legislative or regulatory changes, or that additional Brazilian law
restrictions applicable to their investment in the ADSs may not be imposed in
the future.
Holders
of our preferred shares will be subject to, and holders of our ADSs could be
subject to, Brazilian income tax on capital gains from sales of preferred shares
or ADSs.
Brazilian
Law No. 10,833 provides that gains on the disposition of assets located in
Brazil by non-residents of Brazil, whether to other non-residents or to
Brazilian residents, will be subject to Brazilian taxation. The common shares
and preferred shares are expected to be treated as assets located in Brazil for
purposes of the law, and gains on the disposition of common shares and preferred
shares, even by non-residents of Brazil, are expected to be subject to Brazilian
taxation. In addition, the ADSs may be treated as assets located in Brazil for
purposes of the law, and therefore gains on the disposition of ADSs by
non-residents of Brazil may also be subject to Brazilian taxation. Although the
holders of ADSs outside Brazil may have grounds to assert that Law No. 10,833
does not apply to sales or other dispositions of ADSs, it is not possible to
predict whether that understanding will ultimately prevail in the courts of
Brazil, given the general and unclear scope of Law No. 10,833 and the absence of
judicial court rulings in respect thereto. See “Item 10. E—Additional
Information—Taxation—Brazilian Tax Considerations.”
Certain
Factors Relating to Our Controlling Shareholder
Our
controlling shareholder has strong influence over our business.
Telefónica
Internacional S.A., or Telefónica Internacional, our principal shareholder,
currently owns directly and indirectly approximately 85.57% of our voting shares
and 87.95% of our total capital. See “Item 7.A—Major Shareholders and Related
Part Transactions—Major Shareholders” and “Item 7.B—Major Shareholders and
Related Part Transactions —Related Party Transactions.” As a result of its share
ownership, Telefónica Internacional has the power to control us and our
subsidiaries, including the power to elect our directors and officers and to
determine the outcome of any action requiring shareholder approval, including
transactions with related parties, corporate reorganizations and the timing and
payment of our dividends. Given this degree of control over our company,
circumstances could arise under which the interests of Telefónica Internacional
could be deemed to be in conflict with the interests of our other
shareholders.
ITEM
4. INFORMATION ON THE COMPANY
A.
History and Development of the Company
General
Following
the restructuring and privatization of Telebrás, discussed below, we were
incorporated on May 22, 1998, as a corporation (sociedade anônima) organized
under the laws of the Federative Republic of Brazil. We are registered with the
CVM, as a publicly held company and our stock is traded on BM&FBOVESPA. We
are also registered with the SEC in the United States and our ADSs are traded on
the New York Stock Exchange, or the NYSE. Our headquarters are located at Rua
Martiniano de Carvalho, 851, 01321-001, São Paulo, SP, Brasil. Our telephone
number is 55-11-3549-7922.
As of
December 31, 2008, we had 168,609,291 outstanding common shares, with no par
value per share, and 337,232,189 preferred shares, with no par value per share.
Our shareholders’ equity was in the amount of R$10 billion as
presented under the Brazilian Corporate Law Method.
We
provide fixed-line telecommunications services in the State of São Paulo under
concession agreements granted in 1998 by the Brazilian government in connection
with the restructuring and privatization of the Telebrás System, as described
below. The concession, which was renewed in December 2005, authorizes us to
provide fixed-line telecommunications services in a specific region, which
includes all of the State of São Paulo except for a small area (Sector 33),
where a previously existing fixed-line service provider, CTBC Telecom, which was
not part of the Telebrás System, continues to operate
independently.
In
addition to the services we provide under the concession agreements of 1998, we
also provide international and interregional long-distance services, as
permitted under Act No. 23,395 of March 1, 2002, under which ANATEL also
acknowledged our having accomplished the network expansion and universal service
targets as of September 30, 2001.
We also
provide multimedia communication services (“serviços de comunicação multimídia”
or “SCM”) such as audio, data, voice and other sounds, images, texts and
other information. ANATEL granted the SCM license with Act No. 33,791 of
February 14, 2003. Telesp possesses one license, for Sectors 31 (our predecessor
company’s area prior to the reorganization), 32 (the area corresponding to
Ceterp prior to our acquisition) and 34 (CTBC Borda’s area prior to the
reorganization).
In March
14, 2007 ANATEL conceded to A.Telecom S.A., one of our wholly-owned
subsidiaries, the license to offer Pay TV services through DTH (“Direct to the
Home” - a special type of service that uses satellites for the direct
distribution of television and audio signals for subscribers). We began offering
Pay TV services on August 12, 2007.
On
October 31, 2007, the board of ANATEL approved, from a regulatory perspective,
the association between Grupo Abril and the Company, which involved, among other
transactions, the acquisition of all of the operations of Multichannel
Multipoint Distribution Service (MMDS), a special license that allows us to
offer Pay TV and broadband services through our subsidiary Telefonica Sistemas
de Televisão S.A. The transaction continues to be analyzed by ANATEL, solely
with respect to antitrust matters, and will be finally reviewed by
CADE.
On
February 16, 2009, ANATEL extended the authorization until 2024 for the use of
the spectrum frequencies associated to the MMDS in the cities of São Paulo,
Curitiba, Rio de Janeiro and Porto Alegre.
In 2008,
the Company pioneered the launch of internet access through fiber optic cables
(“Fiber to the Home” - FTTH) for non-commercial customers in Jardins, a
neighborhood in São Paulo. Aside from the offer of an internet connection with
high-speed capacities of 8 Mbps and 30 Mbps, various bundles were also offered,
including Wi-Fi, Digital TV, 2,000 minutes of local and intra-state calls,
anti-virus protection, call identification, technical assistance and specific
call center assistance.
As of
December 31, 2008, our telephone network included 11.7 million fixed lines in
service, 2.5 million broadband clients and 0.5 million Pay TV clients. Of the
access lines in service, approximately 73% were residential, 22% were
commercial, 2% were public telephone lines and 3% were for our own use and
testing.
Historical
Background
The
Restructuring and Privatization
After the
incorporation of Telecomunicações Brasileiras S.A. - Telebrás in 1972, Telebrás
and its operating subsidiaries, collectively, the “Telebrás System” acquired
almost all of the telephone companies in Brazil and monopolized the provision of
public telecommunications services in virtually all areas of the
country.
In May
1998, just prior to its privatization under the General Telecommunications Law,
the Telebrás System was restructured to form, in addition to Telebrás, twelve
new holding companies. Virtually all assets and liabilities of Telebrás were
transferred to the new holding companies, or the “new holding
companies.”
In July
1998, the federal government privatized the Telebrás System, selling
substantially all its shares in the new holding companies, including TelespPar
and its shares in TSP and CTBC Borda, to private sector buyers. As a result of a
subsequent reorganization of SP Telecomunicações on January 10, 1999, one of its
subsidiaries, SPT Participações S.A., or SPT, became the controlling shareholder
of TelespPar.
The
Reorganization of TelespPar
On
November 30, 1999, the shareholders of TelespPar approved a reorganization
involving a series of mergers, whereby Telespar became the telecommunications
services company operating under our current name, Telecomunicações de São Paulo
S.A. - Telesp.
Ceterp’s
Acquisition
On
December 20, 1999, we began the acquisition, through a public auction from the
municipal government of the City of Ribeirão Preto, in the State of São Paulo,
51.0% of the voting shares and 36.0% of the total share capital of Centrais Telefônicas de Ribeirão
Preto S.A., or Ceterp. Ceterp provided fixed-line and cellular services
in the State of São Paulo, outside the Telebrás System, and had been one of our
minor competitors.
On
December 27, 2000, Ceterp was merged with and into us.
The
Spin-off of Certain Data Transmission Operations
On August
3, 2000, the wholly-owned subsidiary Telefônica Empresas S.A. was created with
the corporate goal of providing Switched Package Network services. On November
24, 2000, the Company completed a capital increase for Telefônica Empresas S.A.
in local currency through the valuation of assets related to the Switched
Package Network services, including valuation of a transfer of the authorization
to provide that service. On January 30, 2001, the independent Brazilian
corporation Telefônica Data Brasil Holding S.A. (TDBH) was created through a
shareholder-approved spin-off of the data transmission operations performed by
Telefónica Empresas S.A. This spin-off was part of Telefónica’s global business
reorganization to allow managerial and operational consolidation of business
lines through separate, but affiliated, global business units and to enhance the
strategic and competitive position of the group. At that time and based on the
opinion of external consultants, the management of the company understood that
it would be in the best interest of the company to segregate the assets and
operating activities related to the rendering of the Switched Packaged Network
services, transferring all the shares of Telefónica Empresas S.A. to the then
newly-created TDBH. After five years, management of the company and TDBH
determined that the segregation of Telefónica Empresas S.A. reached the expected
objectives, which were: (i) consolidation of the Multimedia Communications
Service (SCM) in the corporate segment, both in terms of technical specialty as
well as client portfolio; and (ii) execution of specific investments that
allowed a significant growth of Telefónica Empresas S.A.. Nevertheless, the
management of the company and TDBH determined that the considerable increase in
competition within this market, dominated by companies directly tied to large
national and foreign groups, together with the transactional costs involved,
provided an opportunity to merge its operations and increase technological
expertise and the development of new products. Accordingly, the merger of the
companies’ operations was effective July 2006. See “—The SCM
Restructuring.”
Attainment
of ANATEL Targets
Telesp’s
business, services and tariffs have been regulated by ANATEL since June 16,
1997, in accordance with various decrees, decisions, plans and regulatory
measures. We became the first operator to achieve ANATEL’s service targets. As a
result, ANATEL granted us a license to offer domestic and international
long-distance services to our customers. On September 30, 2001, in anticipation
of a December 31, 2003 deadline, we achieved the service offering targets set by
ANATEL in respect of network expansion and service universalization. This was
acknowledged by ANATEL through Act 23,395 of March 1, 2002. Pursuant to our
fulfillment of the targets, on April 29, 2002, ANATEL granted us a concession
allowing us to offer international and interregional long-distance services
outside our concession region of São Paulo to the whole country, thereby
enabling us to have a presence throughout Brazil. Accordingly, on May 7, 2002,
we began providing international long-distance services and on July 29, 2002, we
began providing interregional long-distance service. See “—Regulation of the
Brazilian Telecommunications Industry—Obligations of Telecommunications
Companies—Network Expansion & Quality of Service” for information relating
to ANATEL’s network expansion and universal service targets.
The Board
of Directors of ANATEL, at ANATEL’s meeting held on January 29, 2003, granted
Telesp the authorization to use the SCM nationwide. The Company may now offer
voice and data services through various points of presence composed of networks
and telecommunication circuits.
On July
6, 2003, mobile telephony operators started to implement a long-distance carrier
selection (CSP) that enables the client to determine the long-distance carrier
for each domestic long-distance call (VP2 and VP3) or international call, in
accordance with the SMP (Mobile Personal Service) rules. As a result, the
Company, having acknowledged the revenues from these long distance services,
started to pay the mobile telephony operators for the use of their
networks.
On
September 4, 2004, the rules dictated by Resolution No. 373, dated as of June
03, 2004, were implemented to carry out the reconfiguration of the local areas
for the Switched Fixed Telephony Service (STFC). As a consequence, all calls
previously billed at domestic long distance rates (DC level – Áreas Conurbadas) are now
billed at lower rates as local calls. In São Paulo, this modification involved
53 municipalities, of which 39 are in Grande São Paulo.
Acquisition
and Reorganization of Atrium
On
December 30, 2004, we acquired indirect control of Atrium Telecomunicações Ltda.
from Launceston Partners CV. Atrium provides various types of telecommunications
services in Brazil, including internet and intranet services, telecommunications
management services and the sale and rental of telecommunications systems and
related equipment. The acquisition was carried out through the purchase of the
total share capital of Santo Genovese Participações Ltda., which held 99.99% of
the representative share capital of Atrium.
On
November 21, 2005, we approved the corporate reorganization of our wholly-owned
companies A. Telecom S.A. (formerly Assist Telefónica S.A.), Santo Genovese
Participações Ltda., or Santo Genovese and Atrium Telecomunicações Ltda., or
Atrium, which was implemented and became effective on March 1,
2006.
The
SCM Restructuring
On March
9, 2006, our Board of Directors and the Boards of Directors of TDBH and
Telefónica Empresas S.A., a wholly-owned subsidiary of TDBH (“T-Empresas” and
together with us and TDBH, the “Companies”), approved the restructuring of the
Companies’ serviços de
comunicação multimidia (“SCM”), or multimedia communications services,
and data transmission activities (the “SCM Restructuring”).
The terms
and conditions of the SCM Restructuring are set forth in an agreement executed
by the Companies on March 9, 2006. The SCM Restructuring consisted of (i) the
merger of TDBH into our company (the “Merger”); and (ii) the spin-off of all
T-Empresas’ assets and activities except its SCM assets and activities outside
Sectors 31, 32 and 34 of Region III of Annex II of the General Concession Plan
(the “Spin-off”) and assets and activities related to the data
center.
Following
the approval of this restructuring: (i) TDBH was dissolved; (ii) its
shareholders received shares of our common or preferred stock, or ADSs, as
appropriate; (iii) we succeeded TDBH in all of its rights and obligations; and
(iv) T-Empresas became our wholly-owned subsidiary. The transfer to Telesp of
the spun-off components of T-Empresas did not result in any increase or decrease
in the net equity of Telesp, nor in the number of shares that comprise its
capital stock.
With
respect to TDBH’s Merger into us, certain minority shareholders tried to suspend
our General Shareholders Meeting by contesting the appraisal of the share
exchange ratio provided by NM Rothschild & Sons (Brasil) Ltda. by obtaining
an injunction from the 14th civil chamber of the central forum of the district
court of São Paulo. The injunction was lifted on July 28, 2006, and the merger
became legally effective. The main action (Ação Ordinária No.
583.00.2006.156920-5) has not yet been resolved in the lower court.
On
January 31, 2008, at the 22nd General
Shareholders Meeting of Telefónica Empresas S.A., the only shareholder of which
is Telesp, it was resolved to change the corporate name of Telefónica Empresas
S.A. to Telefónica Data S.A.
Association
Agreement DTH Interactive
Since
August 10, 2006, the Company, its subsidiary A.Telecom S.A. and DTH Interactive
Ltda (DTHI), which provides satellite TV, have maintained an association
agreement whereby these companies could offer integrated telecommunications
services to consumers, including voice, ADSL, and subscription TV, with each
company assuming obligations and earnings related its own expertise. This
partnership permitted the introduction of the triple play of telephony,
broadband and subscription TV into the Brazilian market.
Agreement
of Convergence, Purchase and Sale of Operations, Assets, Stock and Other
Obligations with the Abril Group
On
October 29, 2006, the Company entered into an agreement with Abril Comunicações
S.A., TVA Sistema de Televisão S.A., Comercial Cabo TV São Paulo Ltda., TVA Sul
Paraná Ltda., and TVA Radioenlaces Ltda. (the “Abril Group”), whereby we
combined our telecommunications and broadband services with the broadband and
cable services of Tevecap S.A., or TVA, the second largest Brazilian pay TV
provider with operations in the states of Paraná, Rio Grande do Sul, São Paulo
and Rio de Janeiro. Through this transaction, we broadened our services to meet
our users’ increasing demand, combining the Abril Group’s expertise in content
and media production and placement with the expertise of the Telefónica Group in
the telecommunications segment.
On
October 31, 2007, the board of ANATEL concluded the regulatory review of the
association between Grupo Abril and the Company, approving the transaction,
which involves (i) the acquisition of all of the operations of MMDS
(Multichannel Multipoint Distribution Service) and broadband, and (ii) the
acquisition of a significant stake, within the limit of the foreseen effective
laws and regulations, in the cable television dealers controlled by Grupo Abril
within and outside of the State of São Paulo. This decision was published in the
Official Gazette of the Federal Executive on November 19, 2007. The transaction
continues to be analyzed by Anatel, solely with respect to antitrust matters,
and will be finally reviewed by CADE (Conselho Administrativo de Defesa
Econômica), the Competition Authority.
The
Telesp stockholders, in the extraordinary general meeting held on November 23,
2007, ratified the entering into of the Agreement, its amendments and annexes,
and approved the implementation of the deal and the signature of all documents
necessary for its complete formalization.
As a
result of this transaction, Navytree Participações S.A (“Navytree”) became a
wholly-owned subsidiary of Telesp, and our provision of broadband services
became centralized.
On June
10, 2008, at the General Shareholders Meeting of Navytree, the corporate name of
Navytree was changed to Telefônica Televisão Participações S.A
(“TTP”).
Recent
Developments
Corporate
Reorganization involving DABR and TTP
On
October 21, 2008, the Company’s Board of Directors and the shareholders of
Telefônica Televisão Participações S.A. (“TTP”) and Telefônica Data Brasil
Participações Ltda. (“DABR”) approved a corporate reorganization that consisted
of the merger of TTP and DABR into us.
On
November 11, 2008, the merger of TTP and DABR was approved by our Extraordinary
Shareholders Meeting.
The
reorganization allowed the Company to increase synergies, reduce managerial
risk, simplify the corporate administrative structure and reduce costs, while
also providing tax benefits expected to reduce the Company’s income tax and
other taxes assessed on revenue and income, thereby improving the Company’s cash
flows. The reorganization and the goodwill amortization were structured as to
avoid any assumption of indebtedness by Telesp and to minimize any negative
impact on the future results of the Company.
As a
result of this restructuring: (i) TTP was dissolved; (ii) its shares were
cancelled and Telesp’s participation in TTP was exchanged for the respective net
assets, without any increase in capital stock or issuance of new shares for
Telesp; (iii) Telesp assumed all rights and obligations of TTP, (iv)
administrative costs were reduced, the goodwill in connection with the
acquisition of TTP was transferred to Telesp, which can be amortized will result
in a tax benefit of R$288 million, based on future yield, and (v) since TTP was
a wholly-owned subsidiary of Telesp, the transfer to Telesp of the net equity of
TTP did not result in any increase or decrease in the net equity of Telesp nor
in the number of shares that comprise its capital stock.
Moreover,
following the approval of this restructuring: (i) DABR was dissolved; (ii)
Telesp succeeded DABR in all of its rights and obligations; (iii) Telesp’s
capital stock held by DABR was directly attributed to the controlling
shareholder of DABR, SP Telecomunicações Participações Ltda., in exchange for
the interests it then held in DABR, and the shares retained the same rights as
the shares issued by Telesp; (iv) an increase in Telesp’s capital resulted,
without the issuance of new shares; (v) DABR’s net worth – comprising an amount
equivalent to DABR’s investment in Telesp and an amount corresponding to
goodwill resulting from the shares received by Telesp – was transferred to
Telesp, and the amortization of the goodwill resulted in a fiscal benefit to
Telesp, which was accounted for in Telesp’s Goodwill Special Reserve account in
net equity, which shall be capitalized to the Company’s controlling shareholder,
SP Telecomunicações Participações Ltda., at which time the minority shareholders
will be assured the right of first refusal to subscribe said capital increase
and any amounts paid by them shall be delivered to the controlling shareholder;
and (vi) the capitalization of the portion of the Goodwill Special Reserve in
share capital, in the amount corresponding to the fiscal benefit, will be
realized at the end of each fiscal year to the extent that this benefit
represents an effective decrease in the taxes paid by Telesp.
Corporate
Structure and Ownership
Our
general corporate and shareholder structure is as follows:
Capital
Expenditures
We are
permitted to determine our own capital expenditure budget, subject to compliance
with certain obligations to expand service under the concession. With this in
mind, we were focused in voice services in order to comply with ANATEL’s targets
and to provide quality service for clients. Also, in order to achieve a
consolidated position in the broadband and Pay TV market, during 2008 the focus
of our capital expenditure has been, and continues to be, expanding, modernizing
and upgrading our ADSL network, increasing the base of Pay TV and lauching a new
FTTx network (Fiber-To-The-Home).
The
following table sets forth our capital expenditures for each year in the
three-year period ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of reais)
|
|
Switching
equipment
|
|
|
61.1 |
|
|
|
54.7 |
|
|
|
31.3 |
|
Transmission
equipment
|
|
|
226.6 |
|
|
|
264.5 |
|
|
|
122.9 |
|
Infrastructure
|
|
|
56.0 |
|
|
|
45.6 |
|
|
|
60.8 |
|
External
network
|
|
|
433.4 |
|
|
|
356.0 |
|
|
|
382.1 |
|
Data
transmission
|
|
|
559.8 |
|
|
|
444.7 |
|
|
|
307.2 |
|
Line support
equipment
|
|
|
471.8 |
|
|
|
380.2 |
|
|
|
297.7 |
|
Administration
(general)
|
|
|
459.2 |
|
|
|
368.5 |
|
|
|
329.3 |
|
Long-distance
|
|
|
- |
|
|
|
- |
|
|
|
35.2 |
|
Other
|
|
|
74.6 |
|
|
|
78.3 |
|
|
|
154.9 |
|
Total capital
expenditures
|
|
|
2,342.5 |
|
|
|
1,992.5 |
|
|
|
1,721.4 |
|
In
addition to the consolidation of our broadband market position, the primary
focus of our capital expenditure program has been, and continues to be, the
expansion, modernization and digitalization of the network in order to comply
with ANATEL’s targets and to provide quality service for our clients. See
“—Business Overview—Regulation of the Brazilian Telecommunications
Industry—Obligations of Telecommunications Companies.”
We
anticipate that our capital expenditures for 2009 will be approximately R$2.4
billion. We expect to fund these expenditures with funds internally generated
from our operations and through debt.
B.
Business Overview
Our
Region
The State
of São Paulo covers an area of 248,809 square kilometers, representing
approximately 2.9% of Brazil’s territory. The population of the State of São
Paulo is approximately 40.6 million, representing 21.6% of Brazil’s total
population. Based on the most recent data available, the gross domestic product,
or GDP, of the State of São Paulo in 2007 was an estimated R$855.02 billion, or
approximately US$439 billion, representing approximately 33% of Brazil’s GDP for
the year. The State of São Paulo’s annual per capita income during 2007 was an
estimated R$20,522, or approximately US$11,537.
The
concessions granted by the Brazilian government in 1998 and renewed in 2006
allow us to provide fixed-line telecommunications services to a region that
includes most—approximately 95%—of the State of São Paulo. The portion of the
State of São Paulo that is excluded from our concession region represents
approximately 1.5% of total lines in service and 2.2% of the population in the
state. This concession is operated by CTBC Telecom.
Our
concession region is Region III, which is comprised of 622 municipalities,
including the City of São Paulo, with an aggregate population of approximately
40.6 million. Of the municipalities in Region III, 70 have populations in excess
of 100,000. The City of São Paulo has a population of approximately 11 million.
According to the plan established by the federal government, whereby the
government granted licenses to four providers of fixed-line telecommunications
services, the State of São Paulo was divided into four sectors, including
Sectors 31 (our predecessor company’s area prior to the reorganization), 32 (the
area corresponding to Ceterp prior to our acquisition), 33 (corresponding to the
portion of the State of São Paulo that we do not service) and 34 (CTBC Borda do
Campo area prior to the reorganization). Through transactions that took place in
November 1999 and December 2000, CTBC Borda do Campo and Ceterp merged into our
company, which now holds Sectors 31, 32 and 34. Sector 33 is held by CTBC
Telecom. According to the Presidential Decree regarding the new General Plan of
Grants, published in the Diário Oficial da União on
November 21, 2008, we were given a period of 18 months for the unification of
the three sectors for which we act as a concessionaire (sectors 31, 32 and
34).
On May 7,
2002, we began offering international and interregional long distance service
and on July 29, 2002, we started offering international long distance service.
The conditions for the provision of interregional and international
long-distance services outside the concession area contemplate that providers
already operating services under a selection code (a two-digit code to be input
by the caller as a prefix to the number dialed) shall keep
such code
under the new licenses authorizing operation outside the applicable concession
area. Accordingly, we continue using the provider selection code “15” that
permits our callers to originate calls using our services even though they are
outside our concession area. All interregional and international cellular calls,
whether in our concession area or that of another provider, dialed using
Personal Mobile Service—SMP, through which mobile services users choose the
provider for interregional and international long-distance calls, and which
requires dialing our code “15” in order to use our services. See
“—Services—Network Services.”
Services
Overview
Our
services consist of:
·
|
local
services, including activation, monthly subscription, measured service and
public telephones;
|
·
|
intraregional,
interregional and international long-distance
services;
|
·
|
data
services, including broadband and other data link
services;
|
·
|
Pay
TV services through DTH (direct to home) satellite technology and land
based wireless technology MMDS (multichannel multipoint distribution
service);
|
·
|
network
services, including interconnection and the leasing of facilities, as well
as other services.
|
In March
2002, ANATEL certified our compliance with the 2003 universal service targets
and authorized us in April 2002 to start providing local and intraregional
services in certain regions in which we were not operational and interregional
and international long-distance services throughout Brazil. See “—Competition”
and “—Regulation of the Brazilian Telecommunications Industry—Obligations of
Telecommunications Companies—Public Regime-Service Restrictions.”
We
provide interconnection services to cellular service providers and other fixed
telecommunications companies through the use of our network. In April 1999, we
also began to sell handsets and other telephone equipment through A. Telecom
S.A. (formerly Assist Telefónica S.A.), our wholly-owned subsidiary. Until
January 2001, we provided data transmission services, but spun off our data
transmission operations into TDBH. See “—History and Development of the
Company—The SCM Restructuring.”
The
monthly and usage fees for our services (local and long-distance) were initially
determined in our concession agreements. From March 2007 until July 31, 2007,
the billing system was converted to a minute basis and the former measurement
based on pulses was discontinued for all customers. Our concession agreements
also set forth criteria for annual fee adjustments. We derive a substantial
portion of our revenues from services subject to this price adjustment. The
method of price adjustment is essentially a price cap. ANATEL annually applies a
price index correction that reflects the inflation index of the period and a
productivity factor to our local and long-distance fees. Since 2006, the
inflation index has been replaced by the IST, which reflects variations in
telecommunications companies’ costs and expenses. ANATEL has complied with the
fee range set by the concession agreements.
The
following table sets forth our operating revenue for the years indicated. Our
fees for each category of service are discussed below under “—Rates and Taxes.”
For a discussion of trends and events affecting our operating revenue, see “Item
5—Operating and Financial Review and Prospects.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of reais)
|
|
Local
service
|
|
|
8,609 |
|
|
|
9,125 |
|
|
|
9,636 |
|
Intraregional
service
|
|
|
2,644 |
|
|
|
2,006 |
|
|
|
2,090 |
|
Interregional
long-distance service
|
|
|
1,165 |
|
|
|
1,215 |
|
|
|
927 |
|
International
long-distance service
|
|
|
140 |
|
|
|
134 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of reais)
|
|
Data
transmission
|
|
|
3,760 |
|
|
|
2,996 |
|
|
|
2,020 |
|
Interconnection
services
|
|
|
4,372 |
|
|
|
4,064 |
|
|
|
4,245 |
|
Network
usage services
|
|
|
466 |
|
|
|
405 |
|
|
|
535 |
|
Network
Access
|
|
|
384 |
|
|
|
319 |
|
|
|
399 |
|
TV
service
|
|
|
379 |
|
|
|
54 |
|
|
|
- |
|
Other
|
|
|
1,102 |
|
|
|
866 |
|
|
|
792 |
|
Total
|
|
|
23,021 |
|
|
|
21,184 |
|
|
|
20,797 |
|
Taxes
and discounts
|
|
|
(7,042 |
) |
|
|
(6,456 |
) |
|
|
(6,154 |
) |
Net
operating revenue.
|
|
|
15,979 |
|
|
|
14,728 |
|
|
|
14,643 |
|
Local
Service
Local
service includes activation, monthly subscription, measured service and public
telephones. Measured service includes all calls that originate and terminate
within the same local area or municipality of our concession region, which we
refer to as “local calls.” Excluding the portion of our region that was serviced
by Ceterp before our acquisition in December 1999, we were the only supplier of
local fixed-line and intraregional long-distance telecommunications services in
our region until July 1999. At that time, licenses were auctioned to permit a
competitor to provide local fixed-line and intraregional long-distance
telecommunications services in our region, including the area formerly served by
Ceterp. Vésper São Paulo S.A. received authorization and began operations in
December 1999. Embratel, Br Telecom and Telemar also provide local services in
our concession region.
See
“—Competition.”
Telesp
became the first telephone service concessionaire in Brazil to offer local
services outside its concession region (the State of São Paulo). In May 2003, we
achieved the network expansion and universal service targets established by
ANATEL, and began providing local services to six other states in Brazil,
including Sergipe, Espírito Santo, Rio Grande do Sul, Paraná, Santa Catarina and
certain areas in Rio de Janeiro. In May 2004, we began providing local telephone
services in seven other states in Brazil, including those in the capitals of
Pará, Roraima, Amapá, Rondônia, Maranhão, Tocantins and Acre. In May 2005, we
also began to provide local telephone services in the capitals of the following
states: Ceará, Amazonas, Pernambuco, Rio de Janeiro, Bahia, Mato Grosso do Sul
and Mato Grosso. Since May 2006, we have also been providing local telephone
services in Brasília (Distrito Federal) and Goiânia, the capital of the State of
Goiás. We did not have any activations in 2007.
Intraregional
Long-Distance Service
Intraregional
long-distance service consists of all calls that originate in one local area or
municipality and terminate in another local area or municipality of our
concession region. We were the sole provider of intraregional long-distance
service in our region until July 3, 1999, when the federal government also
authorized Embratel and Intelig to provide intraregional long-distance services.
Embratel, Br Telecom and Telemar also provide local services in our concession
region. See “—Competition.”
Interregional
and International Long-Distance Service
On March
1, 2002, ANATEL acknowledged that we had satisfied its network expansion and
universal service targets two years prior to the scheduled date. As a result, on
April 25, 2002, ANATEL published an order that allowed us to be the first
fixed-line telephone company to provide the full range of Fixed Telephone
Commuted Service (STFC) and granted us a concession to develop interregional
long-distance services in Region III and an authorization to develop services in
the local, intraregional, interregional and international markets throughout
Brazil.
We began
operating international long-distance service in May 2002 and interregional
long-distance services in July 2002. Interregional long-distance service
consists of state-to-state calls within Brazil. International long-distance
service consists of calls between a point in Brazil and a point outside
Brazil.
Network
Services
Brazil is
divided into Regions I (Oi (Telemar), CTBC Telecom and Embratel), II (Oi (Brasil
Telecom), CTBC Telecom, Embratel, Sercomtel and GVT), III (Telefónica, CTBC
Telecom and Embratel) and IV (Embratel and Intelig) with Oi (Telemar), Oi
(Brasil Telecom), CTBC Telecom, Sercomtel, Telefónica and Embratel being the
incumbents. In 2005, we expanded our long-distance network in the main Brazilian
cities of Regions I and II, to new regions, such as the concession areas of CTBC
Telecom in Uberlândia and Sercomtel in Londrina. We have also updated our
interconnection agreements that have allowed us to begin local operations in
seven capital cities of Brazil—Porto Alegre, Curitiba, Brasília, Rio de Janeiro,
Vitória, Belo Horizonte and Salvador—by means of supplying such markets with the
necessary infrastructure based on new generation platforms. In 2008,
we commenced operations in the cities of Florianópolis, Fortaleza e
Recife.
In 2005,
we optimized new business opportunities in the State of São Paulo through
offering services to other telecommunications companies. The result was a
significant increase in the number of providers that use our wholesale
services.
One of
the most important developments in network services concluded in 2005 was the
adjustment of the network topology in the State of São Paulo by regulatory
requirements, which consisted of the integration of 92 municipalities in the
state, allowing customers to make local calls that had previously been
categorized as long-distance calls.
Competition
for long-distance service has increased and at the time there were a total of 21
active CSPs (Carrier Selection Code) in the State of São Paulo. A new prepaid
attendant service for intercity call forwarding has been implemented, as well as
a national satellite service for large scale clients’ support needs, and 20
local and long-distance carrier service agreements have been
renegotiated.
In 2007,
Telefónica developed network solutions and invested significant funds to adapt
its network to ANATEL’s Number Portability requirements. The implementation of
Number Portability in the state of São Paulo was effectively initiated in
September 2008 and fully implemented in March 2009.
Other
Services
Currently,
we also provide a variety of other telecommunications services that extend
beyond basic telephone service, including interactive banking services,
electronic mail and other similar services.
Interconnection
In 2004,
ANATEL published proposed amendments to the interconnection rules in general
and, specifically, to the interconnection charging rules. In July 2005, ANATEL
published new rules regarding interconnection systems that substantially changed
the interconnection model. These changes include: (i) an obligation to offer the
public all types of interconnection services, in addition to the interconnection
between fixed-line service providers and mobile service providers; (ii) an offer
of interconnections for Internet Service Providers (ISPs); (iii) the
establishment of criteria for the treatment of fraudulent calls; and (iv) the
reduction of time in which new interconnection solicitations are answered. These
reforms have facilitated market entry for new operators.
We have
entered into new interconnection agreements in accordance with the new
interconnection rules upon entrance into the market of seven new fixed and
specialized mobile service providers. New contracts have been implemented as of
March 2006, which allow us to develop additional interconnection relationships
and to offer our interconnection customers new telecommunications services in
the State of São Paulo.
In 2006,
our interconnection contracts were renegotiated to comply with ANATEL’s
regulations and our strategy for reducing interconnection costs.
The
interconnection public offer (OPI) had been amended following negotiations with
providers and changes in the services rendered and regulatory requirements. We
have adopted procedures to reduce the time necessary to answer customers’
interconnection requests, as well as to monitor and comply with quality levels
set by ANATEL for interconnection services with a current availability level of
99.8%.
We have
also completed implementation of the interconnection with mobile service
providers in the most intensive traffic areas, assuring the proper billing for
such calls and reducing interconnection costs.
In 2007,
ANATEL published the new version of the Regulation of Fixed Network Compensation
Rates, which primarily modified the rules for interconnection rates and
calculation methods. A 20% increase was applied to tariffs of non incumbents in
their regions. The difference between the Normal Schedule and the Off Peak
Schedule was also implemented. The tariffs in respect of the Off Peak Schedule
were reduced by 30%.
With the
publication of the regulations concerning ANATEL’s Number Portability
requirements between Fixed and Mobile carriers, Telesp, in conjunction with
other operators, implemented a systematic solution including several
interoperative processes, which allows
for the correct forwarding of calls.
In July
2007, a new Mobile Network Interconnection Fee (VUM) Agreement was signed among
the fixed, mobile and long-distance companies. According to the regulation,
starting in 2002 and revised in 2006, the VUM price is subject to free
negotiation between parties and once an agreement is reached it should be
homologated by ANATEL to take effect. According to this Agreement,
the parties agreed that the basis for the VCs rate adjustment will be the
inflation index of the telecom sector (IST) and the productivity factor
(FatorX), and that only 68.5% of this adjustment be passed onto the VUM. This
agreement is beneficial to Telesp as it slightly increases the margins on fixed
to mobile calls. The first agreement was effective in 2005 and extended until
2008.
In 2007,
ten new Interconnection contracts and nine new Traffic Transport agreements were
signed with both Fixed and Mobile operators.
In 2008,
four new Interconnection contracts and eleven local and long-distance Traffic
Transport agreements were signed with both fixed and mobile
operators.
ANATEL
allowed Telefónica to charge a long-distance interconnection fee in a specific
scenario of mobile to fixed calls.
I-Telefónica
I-Telefónica
is a free Internet access service provider launched in September 2002 by our
subsidiary A. Telecom S.A. (formerly Assist Telefónica). The product is
available in 645 cities in the State of São Paulo and over 2,000 cities in all
of Brazil. The service delivers high quality, stable Internet access that is
structured to ensure that our clients do not encounter a busy signal when
connecting to the Internet. I-Telefónica permits us to increase the range of our
services and better supply our customers by offering an entry-level option to
the Internet market. I-Telefónica also represents a strategic tool to protect us
against the possible traffic imbalance that may be generated by Internet access
service providers that do not use our network. Traffic imbalance (sumidouro) occurs when a
certain telecommunications operator has a higher volume of incoming than
outgoing traffic (with another operator). When the incoming/outgoing traffic
relationship falls outside the 45%-55% range, the operator with higher outgoing
traffic must pay to the other the interconnection fees corresponding to the
traffic that exceeds the range. Telecommunications operators that house internet
service providers tend to have more incoming than outgoing traffic, and thus
receive interconnection revenues from other operators. I-Telefónica helps us
keep our dial-up traffic on our own network, and thus reduce unfavorable traffic
imbalance, thereby lowering our interconnection expenses.
IP
Network Asset Acquisition
On
December 10, 2002, after receiving approval from ANATEL, our Board of Directors
approved a proposal to acquire certain assets from Telefónica Data S.A.
(formerly T-Empresas), one of the companies of the Telefónica group, including
the following services: (i) an Internet service that allows our customers to
access our network through remote dial-up connection and (ii) services that
allow customers of Internet Service Providers, or ISPs, to
have
access to broadband Internet. The purpose of this asset acquisition was to
capitalize on synergies that would assist in developing our network and provide
a quick response to market competitors.
Authorization
to Provide Multimedia Services
On
January 29, 2003, ANATEL granted our SCM license nationwide, allowing A. Telecom
S.A. (formerly Assist Telefónica), our wholly-owned subsidiary, to provide voice
and data services through points-of-presence (POPs), which are comprised of
private telecommunications networks and circuits. In addition to A. Telecom
S.A., ANATEL granted SCM licenses to T-Data (formerly T-Empresas) and
Emergia.
Authorizations
for pay TV via satellite
On March
14, 2007 ANATEL granted A.Telecom S.A. authorization to provide services of paid
TV via satellite (Direct to Home – DTH). DTH is one of the special types of
subscription TV services that utilize satellites for the direct distribution of
television and audio signals for subscribers. The launching of the commercial
transaction occurred on August 12, 2007.
Authorization
for Multichannel Multipoint Distribution Service (MMDS)
On
October 31, 2007, the board of ANATEL concluded its regulatory review of the
association between Grupo Abril and the Company, approving the transaction from
a regulatory perspective, which involved, among other transactions, the
acquisition of all of the operations of Multichannel Multipoint Distribution
Service (MMDS).
This
decision was published in the Official Gazette of the Federal Executive on
November 19, 2007. The transaction continues to be analyzed by ANATEL, solely
with respect to antitrust matters, and will be ultimately also reviewed by CADE
(Conselho Administrativo de
Defesa Econômica), the Competition Authority.
On
February 16, 2009, ANATEL extended the authorization until 2024 for the use of
the spectrum frequencies associated to the Multichannel Multipoint Distribution
Service (MMDS) in São Paulo, Curitiba, Rio de Janeiro and Porto
Alegre.
The
STFC Concession Agreement
As
mentioned above, we are a concessionaire of STFC to render local and domestic
long-distance call services originated in Region III, which comprises the state
of São Paulo, in Sectors 31, 32 and 34, established in the General Concession
Plan (PGO).
The
current concession agreement, dated December 22, 2005, was renewed on January 1,
2006, and will be valid until December 31, 2025. However, the agreement can be
reviewed by ANATEL on December 31, 2010, 2015 and 2020. Based on such review,
ANATEL may establish new requirements and targets for universal and high quality
telecommunication services, according to the conditions present at the time of
review.
The
concession agreement establishes that all assets owned by the Company and which
are indispensable to the provision of the services described in such agreement
are considered reversible assets and are deemed to be part of the concession
assets. These assets will be automatically returned to ANATEL upon expiration of
the concession agreement.
Every two
years, during the agreement’s new 20-year period, publicly held companies will
have to pay a renewal fee which will correspond to 2% of its prior-year SFTC
revenue, net of taxes and social contributions. The first payment of this
biennial fee occured on April 30, 2007, based on the 2006 STFC net revenues. The
next payment is scheduled for April 30, 2009 based on the 2008 net revenues. See
Note 21 to our Consolidated Financial Statements.
On April
8, 2008, Telesp signed an additive term to the concession contracts to
substitute the obligation to install telecommunications service posts with an
obligation to roll out broadband network infrastructure throughout the
municipalities serviced by such concessionaires.
Corporate
Customer Services
We offer
our corporate clients comprehensive telecommunications solutions and IT support
designed to address specific needs and requirements of companies operating in a
number of different market segments such as manufacturing, services, financial
institutions and government.
Our
clients are assisted by our highly qualified professionals who offer specialized
telecommunication and IT support tailored to meet the specific needs of each
company by delivering corporate Internet access, voice and data solutions, and
by consistently striving for greater service efficiency to preserve our
competitiveness in our market.
Rates
and Taxes
Rates
Overview
We
generate revenues from (i) activation and monthly subscription charges; (ii)
usage charges, which include measured service charges; and (iii) network usage
charges and other additional services.
Rates for
telecommunications services are subject to comprehensive regulation by ANATEL.
See “—Regulation of the Brazilian Telecommunications Industry.” Since the
relative stabilization of the Brazilian economy in mid-1994, two major changes
in rates for local and long-distance services have occurred: in 1996 to
compensate for accumulated effects of inflation and in 1997 to eliminate the
cross-subsidy between local and long-distance services.
Concession
agreements, which were valid from 1998 until December 31, 2005, and subsequently
renewed for an additional 20 years until 2025 (all of our relevant concession
agreements were renewed), establish a price cap for annual rate adjustments,
generally effected in June of each year.
As of
January 2006, with the renewal of our concession agreements until December 31,
2025, new readjustment rules for fees became effective. The current contract may
be reviewed and modified by ANATEL on December 31, 2010, 2015 and 2020 to set
forth new terms that account for conditions existing at the time of that future
review.
According
to the new contract we readjust charges based on a service basket of fees, as
follows:
·
|
local
services, where rates are established pursuant to a service basket of fees
that includes rates for the measured traffic and subscription fees. In the
case of a price adjustment, each one of the items within the local fee
basket has a different weight and, as long as the total local fee price
adjustment does not exceed the rate of increase in the Telecommunication
General Price Index, or IST, minus a productivity factor as established in
the concession agreements, each individual fee within the basket can
exceed the IST variation by up to
5%;
|
·
|
installation
of residential and commercial lines and public telephone services, with
adjustments limited to the rate of increase in the IST minus a
productivity factor as established in the concession agreements;
and
|
·
|
domestic
long-distance services, with rate adjustments divided into intraregional
and interregional long-distance services, which are calculated based on
the weighted average of the traffic, and taking into account time and
distance. For these categories, each fee may individually exceed the rate
of increase in the IST by up to 5%; however, the total adjustments in the
basket of fees cannot exceed the rate of increase in the IST minus a
productivity factor as established in the concession agreements. See
“—Regulation of the Brazilian Telecommunications
Industry.”
|
Our rates
for international services are not subject to regulation and are not required to
follow the price cap for annual rate adjustment described above for other
services. Therefore, we are free to negotiate our fees for international calls
based on the international telecommunications market, where our main competitor
is Embratel.
Local
Rates
As of
March 2007, the billing system for local calls was converted to a per-minute
system and the previous pulse system was discontinued. The conversion of pulses
to minutes occurred gradually, between the months of March and July of 2007. As
of August 1, 2007, all of the customers of the Company had their local calls
billed in minutes.
Our
revenue from local service consists principally of activation charges, monthly
subscription charges, measured traffic charges and public telephone charges.
Users of measured traffic, both residential and non-residential, paid for local
calls depending on usage, which until July was measured in pulses and from then
on has been measured in minutes. The first minute is accounted for at the moment
a call is connected to its destination.
Under
current ANATEL regulations, customers who pay the basic plan monthly fee receive
an allowance of 200 minutes per month.
Our local
concession contracts set forth two mandatory plans for local fixed service, and
allow for the concession company to design other alternative pricing plans
of its own. Customers will have a choice between the two mandatory
plans, any other alternative plan or a combination of basic and alternative
plans. The main differences between the two mandatory plans are as
follows:
|
1)
|
Local
Basic Plan: for clients that make mostly short duration calls (up to three
minutes), during regular hours; and
|
|
2)
|
Mandatory
Alternative Plan (PASOO): for clients that make mostly longer duration
calls (above three minutes), during regular hours and/or that use the line
for dial-up service to the
Internet.
|
The
following table outlines the basic billing requirements and rates for the local
Basic Plan and the Mandatory Alternative Plan:
CHARACTERISTICS
OF PLAN
|
BASIC
PLAN
|
MANDATORY
ALTERNATIVE PLAN
|
Monthly
Basic Assignment
|
|
|
Allowance
(minutes included in the Residential Assignment)
|
200
minutes
|
400
minutes
|
Commercial
Assignment
|
|
|
Allowance
(minutes included in the Commercial Assignment)
|
150
minutes
|
360
minutes
|
Local
Call Charges
|
|
|
Regular
Hours
|
|
|
Completing
the call (minutes deducted from the allotment)
|
-
|
4
minutes
|
Completing
the call after the terms of the allotment
|
|
|
Sector
31
|
-
|
R$0.15446
|
Sector
34
|
-
|
R$0.15046
|
Sector
32
|
-
|
R$0.16208
|
Local
Minutes - charges in excess use of the allotment
|
|
|
Sector
31
|
R$0.10060
|
R$0.03859
|
Sector
34
|
R$0.10060
|
R$0.03760
|
Sector
32
|
R$0.10060
|
R$0.04050
|
Minimum
time billing
|
30
seconds
|
-
|
Reduced
Hours
|
|
|
Charge
per answered call (minutes deducted from allotment)
|
2
minutes
|
4
minutes
|
Charge
per answered call after the allotted duration
|
|
|
Sector
31
|
R$0.20120
|
R$0.15446
|
Sector
34
|
R$0.20120
|
R$0.15046
|
Sector
32
|
R$0.20120
|
R$0.16208
|
The fees
for Local Basic Plan Service were approved by Act No. 4,289 of July 21, 2008, of
ANATEL. The Alternative Plan under Mandatory Service Provisions (Oferta Obrigatória) (PASOO)
was approved by Resolution No. 450, on December 7, 2006, being that the
readjustment of the tariffs follows the same rule established for the local
basic plan.
Besides
the Basic Service Plans, Telesp may offer alternative plans with any pricing
design it chooses. However, ANATEL must be notified of these alternative plans
prior to publishing and implementing of any such plan.
On July
21, 2008, ANATEL’s Act No. 4,289 approved new local tariffs for our areas of
concession, to take effect as of July 24, 2008. The average readjustment in the
local service basket was 3.01%. The tariffs were applied to customers as
demonstrated below:
·
|
Residential
customers were charged a monthly subscription fee for the provision of
service of R$39.97;
|
·
|
Commercial
clients and non-residential customers (PBX) were charged a monthly
subscription fee for the provision of service of R$68.56 in Sector 31,
R$66.74 in Sector 34 and R$63.68 in Sector
32;
|
·
|
Local
minute tariffs were charged R$0.10060 per minute to Sectors 31, 32 and 34;
and
|
·
|
Activation
fees were charged R$112.44 in Sector 31, R$92.54 in Sector 34 and R$60.05
in Sector 32.
|
Intraregional
and Interregional Long-Distance Rates
Intraregional
long-distance service consists of all calls that originate in one local area or
municipality of our concession region and terminate in another local area or
municipality of our concession region. All other calls are denominated
interregional long-distance calls. Rates for intraregional and interregional
long-distance calls are computed on the basis of the time of day, day of the
week, duration and distance of the call, and also may vary depending on whether
special services, including operator assistance, are used.
On March
1, 2002, ANATEL acknowledged that we had reached its network expansion and
universal service targets two years prior to the scheduled date. As a result, on
April 25, 2002, ANATEL published an order that allowed us to be the first
concessionaire to provide the full range of STFC services and expanded our
license to develop services in the local, intraregional, interregional and
international markets throughout Brazil.
On April
29, 2002, certain provisions of ANATEL’s order were partially suspended as a
result of certain legal proceedings brought by Embratel. The proceedings
prevented us, as a concessionaire, from commencing our interregional services
that originated in our concession region, Region III, and terminated in other
concession areas, namely Region I (Telemar’s concession region) and Region II
(Brazil Telecom’s concession region). However, our authorization to provide
local and interregional services in Regions I and II, Sector 33 of Region III,
and international services in all three regions was not affected. On June 28,
2002, ANATEL dismissed the proceedings and allowed us to begin offering
interregional services originating in our concession region.
On July
29, 2002, after we received the concession from ANATEL to provide interregional
long-distance services in Region III and authorization to provide interregional
long-distance services throughout Brazil, we launched several new options of
interregional calling plans relating to consumer “Code 15,” which is the
selection code dialed by customers who may choose a long-distance provider with
each call and may result in different prices based upon frequency of use and
customer calling patterns.
International
Long-Distance Rates
On May 7,
2002, we began operating international long-distance services. International
long-distance calls are computed on the basis of the time of day, day of the
week, duration and destination of the call, and also may vary depending on
whether special services are used or not, including operator
assistance.
We have
developed alternative rate plans for our residential and corporate
customers.
Network
Usage Charges
We earn
revenues from any fixed-line or mobile service provider that either originates
or terminates a call within our network. We also pay interconnection fees to
other service providers when we use their network to place or receive a call.
Under the General Telecommunications Law, all fixed-line telecommunications
service providers must provide interconnection upon the request of any other
fixed-line or mobile telecommunications service provider. The interconnection
agreements are freely negotiated among the service providers, subject to a price
cap and in compliance with the regulations established by ANATEL, which includes
not only the interconnection basic principles covering commercial, technical and
legal aspects, but also the traffic capacity and interconnection infrastructure
that must be made available to requesting parties. If a service provider offers
to any party an interconnection fee below the price cap, it must offer the same
fee to any other requesting party on a non-discriminatory basis. If the parties
cannot reach an agreement on the terms of interconnection, including the
interconnection fee, ANATEL can establish the terms of the interconnection. See
“—Regulation of the Brazilian Telecommunications Industry—Obligations of
Telecommunications Companies.”
In
accordance with ANATEL regulations, we must charge interconnection fees to the
other telephone service providers based on the following fees:
·
|
Fee
for the use of our local network—We charge long-distance service providers
a network usage charge for every minute used in connection with a call
that either originates or terminates within our local network. We
|
charge
local service providers a fee for traffic that exceeds 55% of the total local
traffic between the two service providers.
·
|
Fee
for the use of our long-distance network—We charge the service providers a
network usage charge on a per-minute basis only when the interconnection
access to our long-distance network is in
use.
|
·
|
Fee
for the lease of certain transmission facilities used by another service
provider in order to place a call.
|
Beginning
in 2006, with the 20-year renewal of the concession contracts, the rules in
respect of local network fees, or TU-RL, were changed. Beginning on January 1,
2008, local network fees were supposed to be calculated based on a long-term
cost model (LRIC—Long Run Incremental Costs).
Through
Resolution No. 464, published on April 27, 2007, ANATEL postponed the adoption
of the LRIC model to April 30, 2009. Nevertheless, ANATEL is still working on
the necessary studies to implement this cost model, as this model is part of its
General Plan for Updating the Telecommunications Regulations in Brazil,
published on November 12, 2008.
On
February 8, 2007, ANATEL published Resolution No. 458, that approved the
regulation of payment for interconnection for STFC. Through this regulation,
ANATEL established, as the transition rule until the LRIC model becomes
effective, that the value TU-RL stays limited to 40% of the local minute
value.
In the
same way, Resolution No. 458 established that the transition rule for the
inter-city network tariff TU-RIU will remain in effect until the LRIC model
becomes effective, and further determined that the value of TU-RIU is limited to
30% of the long distance minute value of Class 4, which is the class of calls of
the longest distance established by ANATEL.
Cellular
telecommunications services in Brazil, unlike those in the United States, are
offered on a “calling party pays” basis, under which the subscriber pays only
for calls that he or she originates. Additionally, a subscriber pays roaming
charges on calls originated and terminated outside his or her home registration
area. Calls received by a subscriber are paid for by the party that places the
call in accordance with a rate based on per-minute charges. For example, a
fixed-line service customer pays a rate based on per-minute charges for calls
made to a cellular service subscriber. The lowest base rate per minute, or
“VC1,” applies to calls made by a subscriber in a registration area to persons
in the same registration area. Calls to persons outside the registration area,
but within our concession region, are charged at a higher rate, “VC2.” Calls to
persons outside our concession region are billed at the highest rate, “VC3.”
When a fixed-line service customer calls a mobile subscriber, we charge the
fixed-line service customer per-minute charges based on VC1, VC2 or VC3 rates.
In turn, we pay the cellular service provider the cellular network usage
charge.
Our
revenue from network services also includes payments by other telecommunications
service providers for the use of part of our network arranged on a contractual
basis. Other telecommunications service providers, including providers of
trunking and paging services, may use our network to connect a central switching
office to our network. Some cellular service providers use our network to
connect cellular central switching offices to the cellular radio-based stations.
We also lease transmission lines, certain infrastructure and other equipment to
other providers of telecommunications services.
Data
Transmission Rates
We
receive revenues from charges for data transmission, which include “Speedy,” the
rental of dedicated analog and digital lines for privately leased circuits to
corporations and others that were provided by TDBH. See “—The Spin-off of
Certain Data Transmission Operations” and “—History and Development of the
Company—The SCM Restructuring.”
Taxes
The cost
of telecommunications services to each customer includes a variety of taxes. The
principal tax is a state value-added tax, the Imposto sobre Circulação de
Mercadorias e Serviços, or “ICMS,” which the Brazilian
states
impose at varying rates on revenues from the provision of telecommunications
services. The rate in the State of São Paulo is 25% for domestic
telecommunications services.
Other
taxes on gross operating revenues include two federal taxes, the Contribuição para o Programa de
Integração Social or “PIS,” and Contribuição para o Financiamento da
Seguridade Social or “COFINS,” imposed on gross operating revenues at a
combined rate of 3.65% for telecommunications services and 9.25% for other
services. PIS is a tax designed to share business profits with employees through
a mandatory national savings program, and is financed by monthly deposits
collected as a percentage of gross operating revenues. COFINS is a tax designed
to finance special social programs created and administered by the Brazilian
government. On February 2, 2004, the combined rate of PIS and COFINS imposed on
gross operating revenues generated by services other than telecommunications
services increased from 3.65% to 9.25% (on a non-cumulative basis). However,
revenues related to, among other things, equity, dividends and fixed asset
sales, are not subject to PIS and COFINS, except for revenues relating to
hedging transactions and interest on shareholders’ equity (juros sobre o capital
próprio).
In
addition, the following contributions are imposed on certain telecommunications
services revenues:
·
|
Contribution for the Fund for
Universal Access to Telecommunications Services—”FUST”. FUST was
established in 2000 to provide resources to cover the cost exclusively
attributed to fulfilling obligations (including free access to
telecommunications services by governmental institutions) of universal
access to telecommunications services that cannot be recovered with
efficient service exploration or that is not the responsibility of the
concessionaire. Contributions to FUST by all telecommunications services
companies began in January 2001, at the rate of 1%, and it may not be
passed on to customers.
|
·
|
Contribution for the Fund of
Telecommunications Technological Development—”FUNTTEL.” FUNTTEL was
established in 2000, in order to stimulate technological innovation,
enhance human resources development, create employment opportunities and
promote access by small and medium-sized companies to capital resources,
so as to increase the competitiveness of the Brazilian telecommunications
industry. Contributions to FUNTTEL by all telecommunications services
companies began in March 2001, at the rate of 0.5% net operating
telecommunications services revenue (except interconnection revenues), and
it may not be passed on to
customers.
|
We must
also pay a contribution to the Fund for Telecommunications Regulation—“FISTEL.” FISTEL is a fund
supported by a tax applicable to telecommunications operators (the “FISTEL Tax”)
and was established in 1966 to provide financial resources to the Brazilian
government for the regulation and inspection of the telecommunications sector.
The FISTEL Tax consists of two types of fees: (i) an installation inspection fee
assessed on telecommunications central offices upon the issuance of their
authorization certificates and (ii) an annual operations inspection fee that is
based on the number of authorized central offices in operation at the end of the
previous calendar year. The amount of the installation inspection fee is a fixed
charge, depending upon the kind of equipment installed in the authorized
telecommunications station. The operations inspection fee equals 50% of the
total amount of the installation inspection fee that would have been paid with
respect to existing equipment.
Billing
and Collection
We send
each customer a monthly bill covering all of the services provided during the
prior period. Telephone service providers are required under Brazilian law to
offer their customers the choice of at least six different payment dates within
the monthly billing cycle. In our case, customers are divided into twelve
different groups, and each group receives a bill according to a specific billing
date within the monthly billing cycle.
We have a
billing and collection system with respect to fixed-line-to-fixed-line and
fixed-line-to-mobile for local, long-distance, subscription and receivables
services. Payments of the bills are effected under agreements with various banks
and other collection agencies (including lottery-playing facilities, drugstores
and supermarkets) either by debiting the customer’s checking account, by direct
payment to a bank or through the Internet.
In
accordance with the Brazilian telecommunications regulations, we use a billing
method called “co-billing.” This method allows billing from other phone service
providers to be included within our own invoice. Our customers can receive and
subsequently pay all of their bills (including the fees for the use of services
of another
telephone
service provider) by using one invoice. To allow for this method of billing, we
provide billing and collection services to other telephone service companies and
have developed a special system for such bills. We have co-billing agreements
(“co-billing in”) with Intelig, Embratel, Telemar/TNL, GVT, CTBC Telecom, IP
Corp, Brasil Telecom and Convergia, each of which provides fixed-line services,
and with TIM, which provides mobile services. Similarly, we use the same method
of co-billing to bill charges for our services on the invoices of other
telephone service providers. We have co-billing agreements of this nature
(“co-billing out”) with Telemar, CTBC Telecom, Brasil Telecom, Sercomtel, GVT
and Embratel, each of which provides fixed-line services, and with Oi, Tim,
Sercomtel Celular, CTBC Celular, Brasil Telecom Celular, VIVO and Claro, each of
which provides mobile services.
ANATEL
regulations allow us to prevent a customer from making outgoing calls after a
receivable has been outstanding for 30 days—a partial block—or prevent a
customer from making outgoing or receiving incoming calls—a total block—after 60
days, and to disconnect a customer upon failure to pay after 90 days. During
2008 the monthly average of partial blocks was 834,246 telephone lines and the
monthly average of total blocks was 186,934 telephone lines. On December 31,
2008, 13.7% of all receivables had been outstanding between 30 and 90 days, and
39.3% of all receivables had been outstanding for more than 90 days. For a
discussion of provisions for past due accounts, see “Item 5—Operating and
Financial Review and Prospects.”
We
continue working on improving the system to control the revenue chain. This
control is important for continual improvements in our billing and collections
processes, as well as for the assurance of the non occurrence of losses in the
implementation of new systems and in roll-outs. The actions are followed closely
by our Revenue Assurance Team, which measures every risk of loss of revenue
detected along the billing and collection chain. These risks are managed to
minimize revenue losses.
Network
and Facilities
Our
network consists of an access layer, that connects our clients to our central
switching voice and data hubs, and a network transport layer for managing client
concentration, which also connects our clients to our central
hubs. These central hubs are interconnected locally or remotely
through transmission equipment, which forms a layer of network services that
interconnect with other operators. Local transmission is provided through
fiber-optic and metallic trunk lines. Intraregional long-distance
transmission is provided by fiber-optic cable or by a microwave
network. Our network strategy is to develop a broadband integrated
network that is compatible with several types of telecommunications services and
multimedia applications.
As a
telecommunications services provider, we do not manufacture equipment for the
construction of our networks and facilities. We buy the
equipment from qualified suppliers and through this equipment we mount our
networks and facilities through which we supply our services. The following
table sets forth selected information about our network in aggregate, at the
dates and for the years indicated:
|
|
At
and for Year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installed
access lines (millions)
|
|
|
14.7 |
|
|
|
14.6 |
|
|
|
14.4 |
|
|
|
14.3 |
|
|
|
14.2 |
|
Access
lines in service (millions) (1)
|
|
|
11.7 |
|
|
|
12.0 |
|
|
|
12.1 |
|
|
|
12.3 |
|
|
|
12.5 |
|
Average
access lines in service (millions)
|
|
|
11.8 |
|
|
|
12.0 |
|
|
|
12.3 |
|
|
|
12.4 |
|
|
|
12.3 |
|
Access
lines in service per 100 inhabitants
|
|
|
28.7 |
|
|
|
29.1 |
|
|
|
29.9 |
|
|
|
30.9 |
|
|
|
31.7 |
|
Percentage
of installed access lines connected to digital switches
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
98.7 |
|
Employees
per 1,000 access lines installed
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Number
of public telephones (thousands)
|
|
|
250.3 |
|
|
|
250.3 |
|
|
|
250.3 |
|
|
|
331.5 |
|
|
|
331.2 |
|
Registered
local call pulses (billions)
|
|
|
25.9 |
|
|
|
27.3 |
|
|
|
28.3 |
|
|
|
31.8 |
|
|
|
33.5 |
|
Domestic
long-distance call billed minutes (billions)
|
|
|
11.8 |
|
|
|
11.9 |
|
|
|
13.0 |
|
|
|
14.1 |
|
|
|
15.9 |
|
International
call billed minutes (millions)
|
|
|
84.7 |
|
|
|
88.1 |
|
|
|
94.7 |
|
|
|
104.9 |
|
|
|
96.0 |
|
Broadband
services (ADSL) (millions)
|
|
|
2.5 |
|
|
|
2.0 |
|
|
|
1.6 |
|
|
|
1.2 |
|
|
|
- |
|
(1)
|
Data
includes public telephone lines.
|
Technology
In order
to offer a greater quantity of integrated services, we have incorporated a
series of new technologies in our voice and data networks, the most prominent
being IP/MPLS Multiservices networks. In the telephonic segment we have created
a network of the latest generation that allows for transportation of multiple
media over IP Protocol that supports a diversified portfolio of products and
services for clients.
Other top
technologies in the segments of access (fiber-optic cables running to the
client’s home, Wi-Fi), transmittal (Metroethernet) and service platforms
(flexible billing plans, prepaid) are being implemented which will allow Telesp
to offer, in the short term, voice, video and data services in an integrated
form, encompassing all the segments of the market. This convergent network will
allow for increased offerings for our clients and a reduction in operational
costs centralizing information into fewer elements.
In the
corporate segment, we offer an IP/MPLS Network that supports the VPN-IP services
to access the Internet and a Frame Relay network for service based on this
technology. We have a portfolio of clients in diverse areas such as government,
finance and retail.
In the
residential segment, since 1999, we have been heavily investing in offering
broadband access through an asymmetric digital subscriber line, or ADSL,
technology under the brand “Speedy.” This technology provides high-speed
Internet access through regular telephone lines. In 2007, we initiated the
implementation of the FTTx network (available through fiber-optic cables running
to the subscriber’s home), with speeds of up to 30 Mbps. In December 2008, we
surpassed the mark of 2,489 million broadband-connected in service. To reach
this number of clients, we constantly search for market differentials such as
new integrated services, speed upgrades and servicing of new localities, among
others.
We are
implementing an IPTV Platform, aiming in 2009 to offer services through the FTTx
network technology. This platform consists of pay TV with video broadcast
offered through the use of the IP protocol, whereby the current pay TV channels
are accessible. The offering of such technologically advanced services is only
made possible due to our partnership with TVA, a recognized provider of pay TV
services. Additional services, such as pay-per-view and “video on demand”
(“VOD”), are available. Furthermore Telefónica’s network contains space for the
recording of programs or local recordings in the Set Top Box (“STB”), and in the
future, third-party content providers will be able to offer games and
connectivity services.
We also
offer digital television service via satellite (DTH) to the users/subscribers in
the State of São Paulo (and in the future, all of Brazil) that receive
broadcast/PPV content through a Ku band antenna and Set Top Box (with Smart
Card). As of December 31, 2008, we surpassed the mark of 289,000
users/subscribers in service.
Our
development plan contemplates the use of the most advanced technology available,
focusing on integration with the Internet and an increase in the number of
multimedia transmission services, with emphasis beyond ADSL investments in FTTx
(GPON), NGN, DWDM and re-transmittal technologies of TV over IP protocol (IPTV)
and satellite (DTH).
Currently,
100% of our network is digital.
Competition
We
currently face strong competition in the corporate and premium residential
segments in respect of several types of services. In the corporate segment, we
face strong competition in both voice services (local and long-distance) and
data transmission, resulting in customer migration and the need for greater
discounts to maximize client retention.
Our main
competitors in the corporate segment are Oi (formerly Telemar), Intelig,
Teléfonos de México, S.A. de C.V. (“Telmex”) through Embratel and GVT a “mirror”
operator (operators with certain restrictions set forth by ANATEL during the
privatization process) in Region II. Our competitors employ varying strategies
in an effort to gain market share. For example, Embratel has sought to expand
its presence by consolidating a large portfolio of companies, making direct
sales and improving customer service. New market entrants Oi and GVT have
focused
their
emphasis on larger corporate clients. Our market strategy in this sector is
based on offering bundled products (voice, broadband and hardware) and on
improving our customer service.
In the
high-income residential service segment, we compete in fixed voice and
long-distance services with Telmex (Embratel) and in broadband and pay TV
services with the pay TV provider NET Serviços de Comunicação S.A. For the local
voice and high-income segments, we also face increasing competition from
cellular telecommunications services, which have lower rates for certain types
of calls such as in-network mobile-to-mobile calls. Such competition increases
our advertising and marketing costs. In 2008, we continued to observe the
appearance of small VoIP operators, focused on low and middle income corporate
clients, whose impact has not been significant at this point, but which can be
more significant in the future. We are taking several steps to defend ourselves
from increasing competition. In this customer segment we are focused on
improving our voice, broadband and pay TV offerings by developing our products
toward specifically defined market segments to remain competitive with new
products offered by our competitors.
The
region in which we have been granted a mobile telephone authorization is divided
in two sub-areas, with five mobile service operators, two of which began
operating in São Paulo in the second half of 2008. In March, 2007,
ANATEL granted Unicel a license to offer mobile telephone services in São
Paulo. Beginning in August 2008, Unicel began offering mobile
telephone services in the city of São Paulo and in 63 of the municipalities of
the state of São Paulo under the brand AEIOU. In September 2007, Oi
obtained a SMP authorization from ANATEL through a public bidding
process. In November 2008, Oi began offering mobile telephone
services in the state of São Paulo. We expect that the entry of AEIOU
and Oi in the mobile telecommunications market in São Paulo will increase
downward pressure on the prices for mobile telephone services in the state,
contributing to further migration of users from fixed-line to mobile telephone
service.
With this
new scenario in the competitive dynamic in 2008, the five mobile service
operators in the state of São Paulo include:
·
|
Vivo
(formerly Telesp Celular), which was the incumbent mobile telephone
provider in the State of São Paulo and is now controlled by a joint
venture between Portugal Telecom and Telefónica, our controlling
shareholder;
|
·
|
Claro,
a unified brand name used since the end of 2003 by several cellular
operating companies controlled by America Móvil, S.A. de C.V., the leading
cellular service provider in Mexico (which was spun off from Telmex in
September 2000). America Móvil is controlled by Carso Telecom Group S.A.
de C.V., a closely-held holding company incorporated in Mexico that is
controlled by Carlos Slim Helú and family. Carso Telecom Group also
indirectly controls Embratel through its subsidiary Telmex;
and
|
·
|
TIM,
controlled by Telecom Italia, which began operations in October
2002.
|
·
|
Oi
(formerly Telemar), which was the incumbent fixed-line telephone operator
in Region I under the General Plan of Grants and which entered the São
Paulo mobile telecommunications market following the acquisition of a 3G
license in September 2007; and
|
·
|
AEIOU
(formerly Unicel), which obtained a mobile telephone services license in
March 2007 to operate in the city of São Paulo and 63 other municipalities
in the region and began operating in August 2008, focusing primarily on
providing services to a younger demographic, offering lower rates,
pre-paid service and distinguishing itself by the absence of physical
stores (all sales are made through the
Internet).
|
In 2008,
we saw a slight decline in the number of fixed-line customers, in part as a
result of increased competition. In an effort to maintain the attractiveness of
fixed-line telecommunications service, we have created product offerings
customized to different customer segments. For example, in the low-income, local
fixed telecommunications segment, we face less direct competition due to the low
profitability of this market. However, we do face more significant
competition from prepaid cellular telecommunications providers in this
segment. Such services are relatively profitable because of the high
fees generated through the interconnection of fixed and cellular networks. To
address indirect competition from prepaid cellular telecommunications providers
in the low-income
customer
segment, we offer low-cost, pre-paid fixed-line service, which we believe helps
prevent migration of these customers from fixed-line service to mobile
service.
We have
also sought to protect our voice services offerings by increasing our offerings
of “Minute Packages” and by including bundling offers with Speedy and pay TV. We
have enhanced the attractiveness of our voice services by including voice
service plans allowing for unlimited fixed-line to fixed-line calling in bundled
Duo and Trio packages (packages with a combination of voice, Internet and pay TV
services).
In
addition to traditional telephone services, we continue to develop our product
offerings by expanding our offerings in related market sectors, particularly
those with greater potential for future growth, such as broadband Internet
services, pay TV, and information technology services.
With
respect to our broadband Internet offerings, in spite of increased competition
in the broadband Internet market, Speedy has maintained its position as a market
leader, with more than 2.5 million customers as of December 31,
2008. In addition to the voice and data bundling services previously
mentioned, we have been actively pursuing additional market strategies to
maintain this position, including the launch of high speed broadband services
(up to 30 Mbps) in addition to expanding our offering of 2 Mbps services to the
majority of our customer base.
We
believe we made substantial advances in the pay TV market in 2008 by expanding
our range of available programming, leading to increased subscription, with over
650 thousand clients as of December 31, 2008.
At the
end of 2008, there were approximately 38 million mobile phones in the State of
São Paulo (out of approximately 150 million in Brazil). Operators such as the
subsidiaries of America Móvil operating under the brand name Claro and Embratel,
controlled by Carso Telecom Group, launched combination offerings in 2006
involving fixed-line and mobile services. Other integrated groups, such as Oi
(formerly Telemar) and Brasil Telecom and its cellular company “BrT GSM,” have
also launched offers incorporating the use of fixed telephones and mobile
phones, though such offerings have not yet been launched in the São Paulo market
despite the pressure of Oi in the mobile market. We are also offering
combinations of services for our customers with “Vivo,” one of the mobile
companies affiliated with the Telefônica group.
In 2008,
we strengthened our position in the market as a provider of complete information
technology infrastructure solutions customized to individual clients from which
we receive monthly rental payments. As part of this new product
offering, we provide “work stations” to our large business clients and
“information stations” for small and medium business clients, packaging
hardware, voice, data, internet, and network servicing solutions in one
convenient bundle.
Finally,
we believe our relationships with our customers are the foundation upon which
our business is built, and in 2008 we made important advancements in improving
our customer relations. First, we restructured our traditional sales
and customer service channels so our retail stores can serve as an effective
channel for customer relations, offering improved service and higher quality as
well as a direct source for all of our product offerings. In
addition, we restructured our call centers and adapted our internal customer
relations procedures with the goal of offering a higher level of customer
service at all points of communication with our customers.
Sales,
Marketing and Customer Services
Sales
We employ
the following different approaches to deliver our solutions to corporate
customers:
·
|
Person-to-person
sales: our business management team offers customized sales services to
preserve customer loyalty, customized consulting telecommunication and IT
services and technical and commercial
support;
|
·
|
Telesales:
sales through telemarketing call centers employing highly trained sales
associates;
|
·
|
Indirect
channels: outsourced sales—by certified companies in the
telecommunications and data processing segments—to provide an adequately
sized network for our products and
services;
|
·
|
Internet:
“Portal Telefônica,” with on-line information on our products and services
specifically targeted toward our corporate
clients;
|
·
|
Door-to-Door:
in order to approach more Telefónica Negócios corporate clients, in March
2006, we launched door-to-door sales of services by consultants in the
State of São Paulo.
|
Marketing
We
continuously monitor market trends in an effort to develop new products and
services that may address future needs and tendencies of our
customers.
We have
developed packaged products, bundling voice and data services, digital
telephone, minutes packages, information systems and improved connectivity in
response to a growing demand from our clients. We believe that the trend toward
bundled offers will continue to grow, and developing such offers will be
important to maintain our competitiveness in the market.
We employ
a different approach to marketing whereby we use a mix of human and
technological resources (a specialized team and business intelligence tools,
respectively), in addition to specific studies that allow us to target each
market segment according to the relevant customer’s specific needs.
We
believe that the brand strength of Telefónica (the brand under which we offer
our services) and its customer service, marketing and communication efforts will
produce new business opportunities and attain and preserve customer
loyalty.
Customer
Services
Our
principles of corporate operations state that we must always offer our clients
innovative and trustworthy products and services of high quality and at
reasonable prices. We continually improve the quality of our products and
services through the modernization of our telecommunications platform and its
management systems, as well as its operational support management systems, and
an organizational structure with as few levels as possible, bringing the company
closer to the customers. The following table sets forth information on service
quality for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repair
requests of traditional telephones (% requests for repairs of traditional
lines/lines in service)
|
|
|
1.3 |
|
|
|
1.4 |
|
|
|
1.4 |
|
Repair
requests of public telephones (% requests for repairs of public
lines/lines in service)
|
|
|
5.0 |
|
|
|
6.2 |
|
|
|
6.2 |
|
Call
completion local rate during the peak night period (% local calls
attempted and completed/total local calls attempted)
|
|
|
75.0 |
|
|
|
75.3 |
|
|
|
78.6 |
|
Call
completion national long-distance rate during the peak night period (%
long-distance calls attempted and completed/total long distance calls
attempted)
|
|
|
71.1 |
|
|
|
71.1 |
|
|
|
71.6 |
|
Billing
complaints (complaints per 1,000 bills)
|
|
|
1.8 |
|
|
|
2.6 |
|
|
|
2.6 |
|
Under
Brazilian telecommunications regulations, our concession and authorization
contracts for providing services (fixed commuted, communication and multimedia
telephone and pay TV) contain required targets that must be reached with respect
to the quality of services that apply to access times for special service codes,
response times for requested information for access codes, national and
international call completions, repair requests, fulfillment of repair requests,
fulfillment of address change requests and the quality of billing
documents.
On
December 1, 2008, a new law (the “Lei do SAC”) regulating
customer service requirements in the telecommunications industry came into
effect. Pursuant to meeting the requirements of this new law, we have
invested and continue to invest to develop new procedures in addition to hiring
and training additional personnel.
In order
to improve the quality of our services, we have undertaken several measures to
guarantee customer satisfaction, including:
·
|
Broadening
the scope of customer satisfaction surveys conducted each month for each
customer segment among residential, small business and corporate (large
companies). In addition to customer satisfaction, the surveys evaluates
customer loyalty and our corporate
image;
|
·
|
Analyses
of satisfaction surveys: identification of the critical factors for
customers and main points for
improvement;
|
·
|
Analysis
of the correlation of the results of the satisfaction surveys with the
operational indicators of the
company;
|
·
|
Implementing
new customer research to evaluate client satisfaction, specifically with
respect to the level of customer care received, the sales process, product
installation and billing. This research helps identify our
customers’ key concerns with respect to our
operations;
|
·
|
Identification
and monitoring of action items: monitoring of action items and projects
resulting from the satisfaction surveys and from additional internal data
that facilitate identifying the main problems, so that the action items
and projects can be effective;
|
·
|
Maintaining
an increased emphasis on programs and projects focused on customer
satisfaction, oriented toward and prioritized on customer satisfaction
survey results together with internal evaluation and evaluation by outside
consultants to help focus on action items of primary importance to
customers;
|
·
|
Implementation
of processes aimed at reducing billing errors and technical problems for
fixed-line and broadband service;
|
·
|
Maintenance
and review of quality controls and objectives designed from the customer’s
perspective, which establish internal service levels among business areas
and support areas (network and system
facilities);
|
·
|
Increased
emphasis by the Executive Committee on product and service quality and on
customer satisfaction with weekly meetings attended by our senior
officers;
|
·
|
Establishing
a committee for approving new products and services based on analysis of
product and services
functionalities;
|
·
|
Full
use of the “Six Sigma” methodology for improving internal processes,
intended to increase customer and employee satisfaction levels and
revenues, and to decrease our
costs;
|
·
|
Internal
audits of processes based on regulatory requirements stemming from our
concession and authorization contracts, mainly focused on the processes
that reflect directly on the quality of services and customer
satisfaction;
|
·
|
Maintain
the highest level of NBR ISO 9001:2000 certificates attainable in Brazil,
with the following objectives:
|
·
|
Management
and execution of marketing, installations, operations, billing, customer
service and technical support processes for our voice services in respect
of the public telephone segment and for our voice, data and Speedy
services in respect of the residential, small business and large corporate
segments; and
|
·
|
Management
and execution of network projects to provide the products and services
discussed above.
|
·
|
Certification
every four months, by an independent auditor authorized by the National
Institute of Metrology, Standardization and Industrial Quality (INMETRO),
of our billing process for fixed commuted telephony (STFC) services,
including registering calls, setting tariffs and
billing;
|
·
|
Annual
certification and maintenance, by an independent auditor authorized by the
National Institute of Metrology, Standardization and Industrial Quality
(INMETRO), of our processes for collecting, calculating, consolidating and
sending to ANATEL quality indicators for fixed commuted telephony (STFC)
services; and
|
·
|
Internal
evaluation of environmental effects of our activities and the products and
services that we develop, with the objective of reducing and preventing
negative impacts and promoting the creation of telecommunications services
that contribute to our society’s sustainable development. See “—Regulation
of the Brazilian Telecommunications Industry—Obligations of
Telecommunications Companies.”
|
Seasonality
Our
business and results of operations are not materially affected by seasonal
fluctuations in the consumption of our services.
Regulation
of the Brazilian Telecommunications Industry
General
Our
business, including the services we provide and the rates we charge, is
materially affected by comprehensive regulation under the General
Telecommunications Law and various administrative rules thereunder. Our
companies that operate under a concession are authorized to provide specified
services and have certain obligations, according to the Plano Geral de Metas de
Universalização, or General Plan on Universal Service Targets and the
Plano Geral de Metas de
Qualidade, or General Plan on Quality Targets.
ANATEL is
the regulatory agency established by the General Telecommunications Law and the
Regulamento da Agência
Nacional de Telecomunicações, known as the ANATEL Decree issued in
October 1997. ANATEL is administratively and financially independent of the
Brazilian government. Any proposed regulation by ANATEL is subject to a period
of public comment, including public hearings, and its decisions may be
challenged in the Brazilian courts.
Concessions
and Authorizations
Concessions
are licenses to provide telecommunications services that are granted under the
public sector, while authorizations are licenses to provide telecommunications
services granted under the private sector.
Companies
that provide services under the public sector, known as the concessionary
companies, are subject to certain obligations as to quality of service,
continuity of service, universality of service, network expansion and
modernization.
Companies
that provide services under the private sector, known as the authorized
companies, are generally not subject to the same requirements regarding
continuity or universality of service; however, they are subject to certain
network expansion and quality of service obligations set forth in their
authorizations.
Companies
that operate under the public sector include us, Embratel, Telemar, Brasil
Telecom, CTBC Telecom and Sercomtel. The primary public sector companies provide
fixed-line telecommunications services in Brazil that include local,
intraregional, interregional and international long-distance services. All other
telecommunications service providers, including the other companies authorized
to provide fixed-line services in our concession region, operate under the
private sector.
Public
sector companies, including us, can also offer certain telecommunications
services in the private sector, of which the most significant are data
transmission services.
Fixed-line Services—Public sector.
Our current concession agreements for the local, intraregional and
interregional long-distance services, were extended on December 22, 2005, for an
additional period of 20 years.
The
current concession agreements contain a provision allowing for ANATEL to review
the concession terms in 2010, 2015 and 2020. This provision permits ANATEL to
update the renewed concession agreements with respect to network expansion,
modernization and quality of service targets in response to changes in
technology, competition in the marketplace and domestic and international
economic conditions. A Public Notice (consulta pública) was
published on March 31, 2009 with the proposed revisions to the concession
contracts. ANATEL will accept comments until June 1, 2009. These proposed
changes might be put into effect in January 2011.
Under the
renewed concession agreements and during the 20-year renewal period, we will be
required to pay a biennial fee equal to 2% of our annual net revenue from the
provision of fixed-line public telecommunications services in our concession
area for the prior year (excluding taxes and social contributions). See
“—Obligations of Telecommunications Companies—Public sector-Service
Restrictions.” Each of the foregoing regulatory terms and conditions affecting
(or potentially affecting) the current concession agreements, as well as current
obligations under the existing concession agreements, may impact our business
plan and results of operations.
Fixed-line Services—Private sector.
The Brazilian telecommunications regulations provide for the introduction
of competition in telecommunications services by requiring ANATEL to authorize
private sector companies to provide local and intraregional long-distance
service in each of the three fixed-line regions and to provide intraregional,
interregional and international long-distance services throughout Brazil. ANATEL
has already granted authorizations to private sector operators to operate in
Region III, our concession region. ANATEL also granted other private sector
companies authorizations to operate in other fixed-line regions and
authorizations to provide intraregional, interregional and international
long-distance services throughout Brazil in competition with Embratel. Several
companies have already applied for the authorization, and ANATEL may authorize
additional private sector companies to provide intraregional, interregional and
international long-distance services. See “—Competition.”
Since
2002 we provide local and interregional services in Regions I and II and Sector
33 of Region III, and international long distance services in Regions I, II and
III.
Obligations
of Telecommunications Companies
We and
other telecommunications service providers are subject to obligations concerning
quality of service, network expansion and modernization. The six public sector
companies are also subject to a set of special restrictions regarding the
services they may offer, which are listed in the Plano Geral de Outorgas, or
General Plan of Grants, and special obligations regarding network expansion and
modernization contained in the General Plan on Universal Service
Targets.
In 2008,
the presidential decree published with the General Plan of Grants increased the
flexibility of telecommunications provider groups as STFC concessionaires by
allowing such providers to provide services in up to two General Plan of Grants
regions. Prior to this decree, telecommunications provider groups
holding STFC concessions could offer STFC services in only one
region.
Public
sector companies are also subject to certain restrictions on alliances, joint
ventures, mergers and acquisitions, including:
·
|
a
prohibition on holding more than 20% of the voting shares in any other
public sector company, unless previously approved by ANATEL, according to
the General Telecommunications Law;
|
·
|
a
prohibition on public sector companies that provide different services
restricting the provision of more than one service at a time;
and
|
·
|
various
restrictions on the offering of cable television by concessionary
companies.
|
Network
Expansion & Quality of Service
We are
subject to the General Plan for Universal Service Targets (Plano Geral de Metas para a
Universalização) and the General Plan for Quality Targets (Plano Geral de Metas de
Qualidade), each of which respectively requires that we undertake certain
network expansion activities with respect to our fixed-line services and meet
specified quality of service targets. The timing for network expansion and
benchmarks for quality of service are revised by ANATEL from time to time. No
subsidies or other supplemental financings are anticipated to finance our
network expansion obligations.
The
decree altering the General Plan for Universal Service Targets rescinded in 2008
the obligation of telecommunications concessionaires to install
telecommunications service centers (providing calling and data access to walk-in
customers) and substituted such obligation with an obligation to roll out
broadband network infrastructure throughout the municipalities serviced by such
concessionaires. According to this decree, all municipalities in
Brazil are expected to have the necessary infrastructure for broadband
networking by 2010. This obligation will require us to roll out
network infrastructure to 257 of the 622 municipalities in our concession
region, representing approximately 3% of the population in our concession region
(though this regulation will require us to expand our network throughout
substantially all of our concession region).
Moreover,
as part of the General Plan for Universal Service Targets, we have, as have
other telecommunications concessionaires, committed to provide free internet
access to public schools during the term of our concession grant (until
2025). This will require us to connect approximately 9,200 schools in
our concession region, 80% of which must be connected by December 31, 2009, with
full connectivity by the end of 2010.
If a
public sector company does not fulfill its obligations under the General Plan
for Universal Services and the General Plan for Quality Targets, there are
various monetary penalties that may be imposed by ANATEL. A company may lose its
license if ANATEL considers it incapable of providing basic services under the
two General Plans.
Interconnection
In
compliance with resolution 458 of February 2007, new rules for interconnection
fees were introduced. The interconnection fee for off-peak hours was reduced by
30% and it was indicated that the use of the LRIC cost-based model for
determining interconnection fee values will be accepted after 2009.
C.
Organizational Structure
On
December 31, 2008, our voting shares were controlled by two major shareholders:
SP Telecomunicações Participações Ltda. with 50.71% and Telefônica Internacional
S/A with 34.87%. Telefônica Internacional is the controlling shareholder of SP
Telecomunicações and, consequently, holds directly and indirectly 85.57% of our
common shares and 89.13% of our preferred shares. Telefónica Internacional is a
wholly-owned subsidiary of Telefônica, S.A. of Spain.
Subsidiaries
A.
Telecom S.A. (formerly Assist Telefônica) is our wholly-owned
subsidiary. A. Telecom was incorporated in Brazil on October 29,
1999, and it is engaged primarily in providing telecommunications and data
services and internal telephone network maintenance for customers. The principal
services are as follows: (i) digital condominium which is a value-added service
for commercial buildings, integrated solution for equipments and services for
voice transmission, data and images on commercial buildings under a Building
Local Exchange Carrier (“BLEC”) model; (ii) installation, maintenance, exchange
and extension of new points of internal telephony wire in companies and
dwellings under a basic plan of maintenance (BPM) and (iii) provision of free
ISP service under the brand name “I-Telefônica.” In addition, on December 30,
2004, we entered into a transaction to acquire indirect control of Atrium
Telecomunicações Ltda. The transaction was approved by our shareholders on
January 19, 2005. The acquisition was carried out through the purchase of the
total share capital of Santo Genovese Participações Ltda., which held 99.99% of
the representative share capital of Atrium. On March 1, 2006 then-subsidiary
Santo Genovese Participações Ltda., having merged into its subsidiary Atrium
Telecomunicações Ltda., was acquired by
A.
Telecom S.A. and ceased to exist. A. Telecom remained a wholly-owned
subsidiary of Telesp, and began carrying out the activities formerly performed
by Atrium. See “— Business Overview—Services.”
From the
second half of 2006, A. Telecom began providing pay TV services, fully focusing
on the development of this new product line. In February 2008, A. Telecom became
an owned subsidiary of Telefônica Televisão Participações S.A. (TTP), which
currently covers all investments in the pay TV business. In November 2008, TTP
was merged into Telesp and A.Telecom became a wholly owned subsidiary of Telesp.
See “—Corporate Reorganization involving DABR and TTP.”
Telefônica
Data S.A.’s business purpose is to render telecommunications services such as
the development, implementation and installation of projects related to
integrated business solutions and telecommunications consulting, as well as
activities related to the rendering of technical assistance and equipment and
telecommunications network maintenance services. Telefônica Empresas, currently
(“Telefônica Data”), became a wholly-owned subsidiary of the Company after the
corporate reorganization that was carried out in July 2006. See “—History and
Development of the Company —The SCM Restructuring.” In July 2008, Telefônica
Data became a wholly owned subsidiary of TTP. In November 2008, TTP was merged
into Telesp and Telefônica Data became a wholly owned subsidiary of Telesp. See
“—Corporate Reorganization involving DABR and TTP.”
Telefônica
Sistema de Televisão S.A. (“TST”) is a company that provides pay television
services through the Multipoint Multichannel Distribution Services (“MMDS”)
modality.
Associated
Companies
Since
June 30, 2000, we have consolidated, under the Corporate Law Method, the
operations of Aliança Atlântica Holding B.V., an investment company incorporated
under the laws of the Netherlands. As of December 31, 2008, we held a 50% share
ownership and Telefónica S.A. held the remaining 50%.
Furthermore,
since December 31, 2003, we have also consolidated, under the Corporate Law
Method, our investment under proportional consolidation in Companhia AIX de
Participações, or AIX. At December 31, 2008, we held a 50% share ownership in
AIX and Telemar Participações S.A. held the remaining 50%. AIX was formed in
2001 to explore, directly and indirectly, activities related to the execution,
conclusion and commercial exploitation of underground cables to fiber-optic. See
Note 1 to the consolidated financial statements included in this Annual Report
starting at page F-1. We also consolidate, as required under the Corporate Law
Method, Companhia ACT de Participações, in which we hold a 50%
interest.
D.
Property, Plants and Equipment
Our main
physical properties for providing the Company’s services involve the segments of
switching (public switching telephone network-PSTN), transmission (optic and
wireless systems), data communication (multiplex devices, IP network),
infrastructure (Energy systems and air conditioned) and external Network
(fiber-optic and metallic cables), which are distributed in many buildings in
the State of São Paulo. Some of these buildings are also used in administrative
and commercial areas.
Our
properties are located throughout the State of São Paulo. At December 31, 2008,
we used 2,089 properties in our operations, 1,442 of which we own, and we have
entered into standard leasing agreements to rent the remaining properties. We
own a building in the City of São Paulo where the majority of our management
activities are conducted.
As of
December 31, 2008, property related to construction in progress represented 6.2%
of the net book value of our total fixed assets, automatic switching equipment
represented 22.9%, transmission and other equipment represented 33.7%,
underground and marine cables, poles and towers represented 2.2%, subscriber and
public booth equipment represented 4.7%, electronic data process equipment
represented 1.1%, buildings and underground equipment represented 26.1%, land
represented 2.3%, and other assets represented 0.8% of total fixed assets. As of
December 31, 2008, the net book value of our property, plant and equipment was
R$9.9 billion.
Pursuant
to Brazilian legal procedures, liens have been attached to several properties
pending the outcome of various legal proceedings to which we are a party. See
“Item 8.A—Financial Information—Consolidated Statements and Other Financial
Information—Legal Proceedings.”
ITEM
4A. UNRESOLVED STAFF COMMENTS
None.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A.
Operating Results
The
following discussion should be read in conjunction with our consolidated
financial statements and accompanying notes and other information appearing
elsewhere in this annual report and in conjunction with the financial
information included under “Item 3.A—Key Information—Selected Financial Data.”
Except as otherwise indicated, all financial information in this annual report
has been prepared in accordance with the Brazilian Corporate Law and presented
in reais. For certain
purposes, such as providing reports to our Brazilian shareholders, filing
financial statements with the CVM, and determining dividend payments and other
distributions and tax liabilities in Brazil, we have prepared and will continue
to be required to prepare financial statements in accordance with the Brazilian
Corporate Law.
Overview
Our
results of operations are principally affected by the following key
factors.
Brazilian
Political and Economic Environment
The
Brazilian economy has experienced moderate growth this decade. According to the
IBGE (Instituto Brasileiro de
Geografia e Estatística) which uses the new methodology of national
accounts, Brazil’s GDP expanded 5.7% in 2004, 3.2% in 2005, 4.0% in 2006, 5.7%
in 2007, and 5.1% in 2008.
Consumer
prices, as measured by the Consumer Price Index, or the IPCA, published by the
IBGE, registered a variation of 5.9% in 2008. Accordingly, growth in
consumer prices was above the inflation target established by the Central Bank,
of 4.5%, but below the maximum target threshhold of up to 6.6%. In 2006 and
2007, the variation had been of 3.1% and 4.5%, respectively. Inflation, as
measured by the General Price Index, or the IGP-DI, calculated by the Fundação Getúlio Vargas,
which includes wholesale, retail and home-building prices, increased 9.1% in
2008, compared to 7.9% in 2007 and 3.8% in 2006.
As a
result of the deceleration of increasing inflation, the Central Bank raised
interest rates beginning in the second quarter of 2008, and as a result, the
Selic rate increased during the course of 2008 from 11.25% to
13.75%.
Brazil
finished 2008 with a trade balance surplus of US$24.8 billion, compared to US$40
billion in 2007. Exports went up by 23.2% to US$197.9 billion, while imports
increased by 43.5% to US$173.1 billion. Financial inflows into the country
increased significantly, with foreign direct investments of US$45.1 billion,
compared to US$34.6 billion in 2007. The good performance of external accounts
allowed international reserves to increase by US$26.5 billion to the record
level of US$206.8 billion.
Public
finance performed in accordance with the initial target of 4.1% of GDP for
primary surplus. Net public debt, as a proportion of GDP, decreased in 2008 to
around 36.0% from 42.0% in 2007. In contrast to prior years the
depreciation of the national currency in 2008 did not generate greater public
debt. This was due, in part, to a higher level of international reserves
accumulated by the country that was greater than the public debt, and Brazil’s
becoming an international creditor, rather than a debtor. As a
result, Brazil’s sovereign debt received investment grade rating from each of
Standard & Poor’s and Fitch in March and April, respectively, in
2008.
Despite
the favorable ratings, the lack of liquidity in international credit markets and
a higher level of risk aversion in the investment community led to an increase
in country risk in 2008. The JP Morgan Emerging Markets
Bond
Index Plus (EMBI + Brazil), which tracks total returns for traded external debt
instruments in the emerging markets, increased during the second half of 2008
reaching a 479 basis points in December, the highest level since September of
2004.
As a
result, the real
depreciated against the U.S. dollar by 31.9% in 2008. During 2007, however, the
Brazilian real
continued its appreciation path, observed since 2004, as a consequence of
a fall in country risk. The exchange rate was R$1.77 to US$1.00 as of December
31, 2007 compared to R$2.14 to US$1.00 as of December 31, 2006 and R$2.34 to
US$1.00 as of December 31, 2005. The appreciation of the real in this context is also
related to the devaluation of the U.S. dollar against other
currencies.
Our
business is directly affected by trends in the global economy and the Brazilian
economy. If the Brazilian economy enters a period of continued recession, then
demand for telecommunications services is likely to decline. Similarly,
depreciation of the Brazilian real against the U.S. dollar
could reduce the purchasing power of Brazilian consumers and negatively affect
the ability of our customers to pay for our telecommunications
services.
Impact
of Inflation on Our Results of Operations
Prior to
2006, the fees we charged our customers were periodically adjusted by ANATEL
based on the inflation rates measured by the General Price Index
(IGP-DI).
Starting
in 2006, telephone fees were indexed to the IST, which is a basket of national
indexes that reflect the telecommunications sector’s operating costs. Such
indexing will thus reduce inconsistencies between revenues and costs in our
industry and therefore reduce the adverse effects of inflation on our business.
The IST registered a variation of 6.6% in 2008.
The table
below shows the Brazilian general price inflation (according to the IGP-DI and
the IPCA) for the years ended December 31, 2004 through 2008:
|
|
Inflation
Rate (%) as Measured by IGP-DI (1)
|
|
|
Inflation
Rate (%) as Measured by IPCA (2)
|
|
December
31, 2008
|
|
|
9.1 |
|
|
|
5.9 |
|
December
31, 2007
|
|
|
7.9 |
|
|
|
4.5 |
|
December
31, 2006
|
|
|
3.8 |
|
|
|
3.1 |
|
December
31, 2005
|
|
|
1.2 |
|
|
|
5.7 |
|
December
31, 2004
|
|
|
12.1 |
|
|
|
7.6 |
|
(1)
Source:
IGP-DI, as published by the Fundação Getúlio
Vargas.
(2)
Source:
IPCA, as published by the Instituto Brasileiro de Geografia e
Estatística.
Regulatory
and Competitive Factors
Our
business, including the services we provide and the rates we charge, is subject
to comprehensive regulation under the General Telecommunications Law. As a
result, our business, results of operations and financial conditions could be
impacted by the actions of the Brazilian authorities, including:
·
|
delays
in the granting, or the failure to grant, approvals for rate
adjustment;
|
·
|
the
granting of licenses to new competitors in our region;
and
|
·
|
the
introduction of new or stricter requirements for our operating
concession.
|
A series
of new regulations became effective in 2008. The most important among these
regulations were:
·
|
Resolution
507, which approved the Rule for the Methodology for the calculation of
the definitive productivity ratio (X Factor), applied to the Tariff
Adjustments for STFC. X Factor is a mechanism that is intended
to share the savings of productivity gains by service providers with their
customers.
|
·
|
Resolution
516, which approved the General Plan on Updating Telecommunications
Regulations in Brazil. This resolution sets forth an agenda
with 37 action items to update the regulatory framework of the
telecommunications sector. These action items have been broken
down as follows: short term (up to two years), medium term (up to five
years) and long term (up to ten years). In any event, ANATEL
may make periodic revisions to this general
plan.
|
·
|
Decree
6,654, which revoked Decree 2,534 of April 2, 1998 and approved the
General Plan of Grants for Telecommunications Services. The
General Plan of Grants sets forth the regions and sectors in which
telecommunications concessionaires may operate and other regulations
applicable to concessionaires.
|
We expect
the following issues to become effective as new regulations or to be subject of
one or more Public Notices in 2009, with an exact timeline yet to be determined
by ANATEL.
·
|
Proposals
for new conditions and goals for quality and universal access to be
included in the revision of concession contracts of STFC operators
scheduled for 2010;
|
·
|
Proposals
for the assignment of the 2.5 GHz
bandwidth;
|
·
|
Announcement
for bidding of licenses on the 3.5 GHz
bandwidth;
|
·
|
Development
of a General Competition Plan that would regulate standards for service
providers with significant market power;
and
|
·
|
Publication
of the Rule with the criteria for calculating the weighted-average cost of
capital (WACC), which was put into Public Notice in 2007 (Consulta Pública
799).
|
Number
portability came into effect in Brazil in September 2008. Number
portability allows clients within a limited geographic locale to relocate or
change their telephone operator without the need to change their telephone
number (for either a fixed or mobile line). We have been gradually
implementing Number Portability for our clients beginning in September
2008. As of December 31, 2008, approximately 18% of our clients had
Number Portability rights. Number Portability rights for all of our
clients became effective in March 2009.
In
addition to regulatory considerations, our business is affected by competition
from other telecommunications providers. We began to face competition in our
region in July 1999, and we anticipate that competition will contribute to
declining prices for fixed-line telecommunications services and increasing
pressure on operating margins. Our future growth and results of operations will
depend significantly on a variety of factors, including:
·
|
Brazil’s
economic growth and its impact on the greater demand for
services;
|
·
|
the
costs and availability of financing;
and
|
·
|
the
exchange rate between the real and other
currencies.
|
Result
from ANATEL’s Authorization to Provide Interregional and International
Long-Distance Services
As we
achieved our universal service targets before ANATEL’s deadline, we were
authorized by ANATEL to launch long-distance services outside our concession
region. We started our international long-distance services on May 7, 2002 and
our domestic long-distance services on July 29, 2002. In 2008, our revenues from
domestic and international long-distance services amounted to R$3.9 billion as
compared to R$3.3 billion in 2007. By the end of 2008, we had estimated market
shares of approximately 62% in international service and approximately 68% in
interregional long-distance services.
Foreign
Exchange and Interest Rate Exposure
We face
significant foreign exchange risk due to our foreign currency-denominated
indebtedness and our capital expenditures, particularly equipment. A real devaluation may increase
the cost of certain of our capital expenditures.
Our
revenues are earned almost entirely in reais, and we have no
material foreign currency-denominated assets other than derivative instruments
and corporate stakes in foreign companies.
On
December 31, 2008, 13.7% of our R$3.74 billion of indebtedness was denominated
in foreign currencies (Japanese yen, euros and U.S. dollars). See Note 15 to the
Consolidated Financial Statements. Devaluation of the real causes exchange losses
on foreign currency-denominated indebtedness and exchange gain on foreign
currency-denominated assets and corporate stakes in foreign
companies.
We use
derivative instruments to limit our exposure to exchange rate risk. Since
September 1999, we have hedged virtually all of our foreign currency-denominated
bank debt; using swaps. However, we remain exposed to market risk resulting from
changes in local interest rates (principally the Certificate for Interbank
Deposits (Certificado de
Depósito Interbancário), or CDI; CDI is an index based upon the average
rate per cost of loans negotiated among the banks within Brazil).
Substantially,
all of our debt is exposed to interest rate risk. On December 31, 2008, R$2.10
billion of our indebtedness was subject to fixed rates, and the balance was
subject to floating rates (CDI and LIBOR). However, virtually all of our foreign
currency debt is swapped under hedging arrangements for variable-rate real-denominated obligations
based on CDI. As of December 31, 2008, we had swap transactions—CDI against
fixed rates which totaled R$1.52 billion to partially hedge against internal
interest rate fluctuations. We invest our cash and cash equivalents mainly in
short-term instruments that earn interest based on CDI. See Note 34 to the
Consolidated Financial Statements and “Item 11—Quantitative and Qualitative
Disclosures about Market Risk.”
Since we
have foreign currency derivatives with notional amounts substantially equivalent
to our borrowings denominated in foreign currency, we do not have material
exchange rate exposure with respect to these contracts. However, we could still
continue to have exchange rate exposure with respect to our planned capital
expenditures, approximately 31% of which are made in foreign currencies (mostly
U.S. dollars). This is up from 12% in 2007 due in part to the acquisition of
newer equipment and technology not available from domestic suppliers. We
systematically monitor the amounts and time of exposure to exchange rate
fluctuations and may contract for hedging positions, when appropriate, at our
discretion.
Discussion
of Critical Accounting Estimates and Policies
The
preparation of financial statements in accordance with Brazilian Corporate Law
included in this annual report involves certain assumptions and estimates, which
are based upon historical experience and various other factors that we deemed
reasonable and relevant. Although we review these estimates and assumptions in
the ordinary course of business, the presentation of our financial condition and
results of operation often requires our management to make judgments regarding
the effects on our financial condition and results of operations of matters that
are inherently uncertain. Actual results may differ from those estimated under
different variables, assumptions or conditions. Note 3 of our Consolidated
Financial Statements includes methods used in the preparation of those
statements and Note 4 includes a summary of the significant accounting policies.
In order to provide an understanding of how we form the foregoing judgments and
estimates, we have summarized certain critical accounting policies
below.
Estimated
Useful Lives of Property, Plant and Equipment and Intangible Assets
We
estimate the useful lives of property, plant and equipment in order to determine
the amount of depreciation and amortization expense to be recorded during any
reporting period. The useful lives are estimated at the time the assets are
acquired and are based on historical experience with similar assets, as well as
taking into account technological changes and public telecommunications service
regulations. If technological changes were to occur more rapidly than
anticipated, the useful lives assigned to these assets may need to be shortened,
resulting in the recognition of increased depreciation and amortization expenses
in future periods. Alternatively, these types of technological changes could
result in the recognition of an impairment loss to reflect the write-down in
value of the assets. We review these types of assets for impairment losses
annually, or when events or circumstances indicate that the carrying amount may
not be recoverable over the remaining lives of the assets. In assessing
impairment
losses,
we employ the cash flow method, which takes into account management’s estimates
of future operations. See Note 12(a) to the Consolidated Financial
Statements.
As of
December 31, 2008, we had R$11.7 billion recorded as property, plant and
equipment and intangible assets under the Brazilian Corporate Law, accounting
for approximately 58.6% of our total assets.
Revenue
Recognition and Accounts Receivable
Under the
Brazilian Corporate Law and U.S. GAAP, revenues from interconnection fees are
calculated based on the duration of each call and, as determined by Brazilian
law, recognized at the time the interconnection services are rendered. Under the
Brazilian Corporate Law and U.S. GAAP, revenues from public telephones are
recognized at the time the prepaid phone card is used. For the year ended
December 31, 2008, we had R$444.9 million recorded as revenues from public
telephone services under Brazilian Corporate Law. See Note 23 to our
Consolidated Financial Statements. Deferred revenues are determined based on
estimates of outstanding credits of prepaid phone cards that were sold but have
not been used as of the date of each balance sheet. Under the Brazilian
Corporate Law, revenues from activation or installation services are recognized
upon the activation or installation of services to the customer. Under U.S.
GAAP, revenues from activation and installation services are deferred and
amortized over the estimated expected service period of the customer of 4.79
years.
In light
of increasing competition in the telecommunications industry, we are
increasingly offering bundled products and services to our customers. This
practice does not allow for the exercise of judgements and estimates in
collecting the value of bundled products with respect to the various components
of the bundled products in order to recognize revenue under US
GAAP.
We
consider revenue recognition a critical accounting policy because of
uncertainties caused by different factors such as the complex information
technology required, the high volume of transactions, problems related to fraud
and piracy, accounting regulations, management’s determination of our ability to
collect fees and uncertainties relating to our right to receive certain revenues
(mainly revenues for use of our network). Significant changes in these factors
could cause us to fail to recognize revenues or to recognize revenues that we
may not be able to realize in the future, despite our internal controls and
procedures. We have not identified any significant need to change our
recognition policy for U.S. GAAP or the Brazilian Corporate Law.
Allowance
for Doubtful Accounts
In
preparing our financial statements, we must estimate our ability to collect
payment for our accounts receivable. We constantly monitor our past due accounts
receivable. If we become aware of a specific customer’s inability to meet its
financial obligations, we record a specific allowance against amounts due in
order to reduce the net recognized receivable to the amount we reasonably
believe will be collected. We also reassess whether we should recognize future
revenue from such customers when collection is assured. For all other accounts
receivable, we recognize allowances for doubtful accounts based on our past
write-off experience (i.e., average percentage of
receivables historically written off, economic conditions and the length of time
the receivables are past due). Our reserves have generally been adequate to
cover our actual credit losses. However, because we cannot predict with
certainty the future financial stability of our customers, we cannot guarantee
that our reserves will continue to be adequate. Actual credit losses may be
greater than the allowance we have established, which could have a significant
negative impact on our selling expenses. We recognized provisions for doubtful
accounts of R$539 million, R$653 million and R$413 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
Provision
for Contingencies
We are
subject to legal and administrative proceedings related to tax, labor and civil
matters. We are required to assess the likelihood of any adverse decision or
outcome of these matters, as well as the range of probable losses. A
determination of the amount of reserves required, if any, for these
contingencies is made after careful analysis of each individual matter and in
consultation with our internal and external legal counsel. We record provisions
for contingencies only when we believe that it is probable that we will incur
loss in connection with the matter in dispute and we are able to reasonably
estimate the expected loss. We have recorded no provisions for a number of
significant tax disputes with the Brazilian tax authorities because we do not
believe we are likely to incur losses in
connection
therewith. Our required reserves for contingencies may change in the future
based on new developments or changes in our approach to these proceedings (e.g., change in our
settlement strategy). Such changes could result in a negative impact on future
results and cash flows.
Future
Liability for Our Post-retirement Benefits (Pension Fund and Medical Health
Care)
We
provide various pension and medical benefits for our employees. We must make
assumptions in connection with the provision of such benefits as to interest
rates, investment returns, inflation, mortality rate and future employment rate
levels in order to quantify our post-retirement liabilities. The accuracy of
these assumptions will determine whether or not we have sufficient reserves for
accrued pension and medical health care costs.
Deferred
Taxes
By
recognizing our net deferred tax assets, we imply that we will generate
sufficient future taxable income in certain tax jurisdictions, based on
estimates and assumptions to realize the benefits of such assets, and will
continue operating under the current and future applicable provisional measures.
If these estimates and related assumptions change in the future, we may be
required to record additional provisions to be offset against our deferred tax
assets, and thus recognize an additional income tax expense in our financial
statements. Management evaluates the reasonableness of the deferred tax assets
and assesses the need for additional valuation allowances at the end of the
year. As of December 31, 2008, we did not believe an additional provision to
offset our net deferred tax assets was required beyond those recognized in the
financial statements.
Financial
Instruments and Other Financing Activities
In order
to manage foreign exchange transactions, we may, from time to time, invest in
derivative financial instruments. Under the Corporate Law Method, as of January
1, 2009, foreign currency swap agreements are recorded at fair value. For the
year ended December 31, 2008, we recognized net gains of R$153.4 million (net
losses of R$153.0 million in 2007) on our derivative transactions, an asset of
R$95.8 million and liabilities of R$37.3 million as of December 31, 2008
(liabilities of R$357.2 million as of December 31, 2007) in order to recognize
existing temporary gains or losses. The gains or losses on hedge transactions
were calculated based on the fair value of the derivatve financial
instruments.
We apply
SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” under
U.S. GAAP. The accounting required under SFAS 133 is broader than the Corporate
Law Method, especially with respect to the overall treatment and definition of a
derivative, when to record derivatives, classification of derivatives, and when
to designate a derivative as a hedge. All derivatives, whether or not related to
a hedging transaction, must be recorded on the balance sheet at fair value. If
the derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and the hedged item are recognized in earnings. If the
derivative is designated as a cash flow hedge, changes in the fair value of the
derivative are recorded in other comprehensive income, or OCI, a component of
U.S. GAAP shareholders’ equity, and are recognized in the income statement when
the hedged item results in earnings or losses. Portions of changes in the fair
value related to ineffective cash flow hedges are recognized in earnings of the
period.
On
December 31, 2008, we had US$10.9 million, JPY 15.0 billion and EUR 24.8 million
of notional value swap contracts designated as fair value hedges of a portion of
our foreign currency-denominated bank debt. Under U.S. GAAP, we recognized a
gain of R$3.5 million for the period ending December 31, 2008 for such
transactions (R$18.0 million for the period ended December 31,
2007).
In
applying generally accepted accounting principles in connection with these
derivative instruments, management took into consideration interest rates,
discount rates, foreign exchange rates, future cash flow, and the effectiveness
of hedges. These judgments directly affect the value of derivative instruments
recorded on the balance sheet, and the amount of gains and losses included in
the calculation of operating income. Should actual interest rates, discount
rates, foreign exchange rates, future cash flow and ultimate hedge effectiveness
differ from our estimates, the amounts recorded within the period of realization
will have to be revised.
Sources
of Revenue
Our
revenues are derived primarily from the following:
·
|
local
service charges, which include monthly subscription charges, measured
service charges, activation fees, and charges for use of public telephones
(including prepaid cards); for calls to both fixed and mobile numbers,
either within or outside our
network;
|
·
|
intraregional
long-distance service charges, which include service charges for calls
that originate and terminate within our concession
region;
|
·
|
interregional
and international long-distance service
charges;
|
·
|
charges
for data transmission, which include Speedy and management and data
transmission to corporate segment since the merger of Telefónica Empresas
in July 2006;
|
·
|
network
usage charges, which include fees paid by our customers for fixed-mobile
calls;
|
·
|
interconnection
fees paid by other telecommunications service providers on a per-call
basis for their calls that terminate in our
network;
|
·
|
network
access fees paid by other telecommunications service providers on a
contractual basis for the use of parts of our network;
and
|
·
|
charges
for other services, which include miscellaneous revenues from other
services (call waiting, call forwarding, voice and fax mailboxes, speed
dialing, and caller ID).
|
Our gross
operating revenues include value-added and other indirect taxes and discounts to
customers in accordance with Brazilian GAAP. The composition of operating
revenues by category of service is presented in our Consolidated Financial
Statements and discussed below. We have not calculated net operating revenues
for each category of revenue.
Results
of Operations
The
following table sets forth certain components of our net income for each of the
years in the three-year period ended December 31, 2008, as well as the
percentage change of each component.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
- 2007 |
|
|
|
2007
- 2006 |
|
|
|
(in
millions of reais, except
percentages)
|
|
Net
operating revenue
|
|
|
15,979 |
|
|
|
14,727 |
|
|
|
14,643 |
|
|
|
8.5 |
|
|
|
0.6 |
|
Cost
of goods and services
|
|
|
(8,726 |
) |
|
|
(8,029 |
) |
|
|
(7,780 |
) |
|
|
8.7 |
|
|
|
3.2 |
|
Gross
profit
|
|
|
7,253 |
|
|
|
6,698 |
|
|
|
6,863 |
|
|
|
8.3 |
|
|
|
(2.4 |
) |
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expense
|
|
|
(2,601 |
) |
|
|
(2,462 |
) |
|
|
(1,924 |
) |
|
|
5.6 |
|
|
|
28.0 |
|
General
and administrative expense
|
|
|
(755 |
) |
|
|
(839 |
) |
|
|
(983 |
) |
|
|
(10.0 |
) |
|
|
14.6 |
|
Other
net operating income (expense)
|
|
|
(167 |
) |
|
|
250 |
|
|
|
299 |
|
|
|
(167.1 |
) |
|
|
(16.7 |
) |
Operating
expenses, net
|
|
|
(3,523 |
) |
|
|
(3,051 |
) |
|
|
(2,608 |
) |
|
|
15.4 |
|
|
|
17.0 |
|
Operating
income before financial expense, net
|
|
|
3,730 |
|
|
|
3,647 |
|
|
|
4,255 |
|
|
|
2.3 |
|
|
|
(14.3 |
) |
Financial
expense, net
|
|
|
(228 |
) |
|
|
(307 |
) |
|
|
(331 |
) |
|
|
(25.7 |
) |
|
|
(7.3 |
) |
Income
before taxes and social contribution
|
|
|
3,502 |
|
|
|
3,340 |
|
|
|
3,924 |
|
|
|
4.9 |
|
|
|
(14.9 |
) |
Income
tax and social contribution
|
|
|
(1,082 |
) |
|
|
(977 |
) |
|
|
(1,108 |
) |
|
|
10.7 |
|
|
|
(11.8 |
) |
Net
income
|
|
|
2,420 |
|
|
|
2,363 |
|
|
|
2,816 |
|
|
|
(2.4 |
) |
|
|
(16.1 |
) |
Results
of Operations for the Year Ended December 31, 2008 Compared to the Year Ended
December 31, 2007
Net
Operating Revenue
Net
operating revenue increased by 8.5% reaching R$15.9 billion in 2008 from R$14.7
billion in 2007. The increase in net operating revenue is primarily a
result of increased revenues from cable TV services and data transmission
services (Speedy), and from increased revenues in our national long distance
services and interconnection services, both of which were motivated by the
increase in the number of mobile customers resulting from a higher number of
mobile operators. This increase in net operating revenue is also attributed to
increases in revenues from such sources as Posto Informático (PDTI),
digital network services, and a tariff readjustment that took effect as of July
2008 that increased service charges to our customers by a weighted average of
3.01%. These increases were partially offset by a reduction of revenues from
local services, from activation fees and from public telephone services, the
latter due to an increase in competition from mobile telephony
companies.
The
following table sets forth certain components of our operating revenues for 2008
and 2007, as well as the percentage change of each component.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
- 2007 |
|
|
|
(in
millions of reais, except
percentages)
|
|
Gross
operating revenue:
|
|
|
|
|
|
|
|
|
|
|
Local
services:
|
|
|
|
|
|
|
|
|
|
|
Monthly
subscription charges
|
|
|
5,487 |
|
|
|
5,646 |
|
|
|
(2.8 |
) |
Activation
fees
|
|
|
114 |
|
|
|
120 |
|
|
|
(5.0 |
) |
Measured
service charges
|
|
|
2,563 |
|
|
|
2,808 |
|
|
|
(8.7 |
) |
Public
telephones
|
|
|
445 |
|
|
|
551 |
|
|
|
(19.2 |
) |
Total
|
|
|
8,609 |
|
|
|
9,125 |
|
|
|
(5.7 |
) |
Long-distance
services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intraregional
|
|
|
2,644 |
|
|
|
2,006 |
|
|
|
19.8 |
|
Interregional
and international
|
|
|
1,305 |
|
|
|
1,349 |
|