Transcript Financial Result of the 4th Quarter 2002 Conference Call Net Serviços de Comunicação S.A.

Transcription

1 Transcript Financial Result of the 4th Quarter 2002 Conference Call Net Serviços de Comunicação S.A. Operator: Good morning ladies and gentlemen. At this time, I would like to welcome everyone to the Net Serviços de Comunicação conference call to discuss the earning results for the fourth quarter of The audio for this conference is being broadcasted simultaneously through the Internet in the website We inform that all participants will only be able to listen to the conference during the company s presentation. After the company s remarks are over there will be a question and answer period. At that time, further instructions will be given. Should any participant need assistance during the conference, please press *0 for an operator. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of Forward-looking statements are based on the beliefs and assumptions of our management, and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operator factors could also affect the future results of Net Serviços and could cause results to differ materially from those expressed in such forward-looking statements. Operator: Now I'll turn the conference over to Mr. Leonardo Pereira, Investor Relations and Chief Financial Officer. Mr. Pereira, you may begin your conference. Leonardo: Thank you. Good morning everyone, on behalf of Net and my colleagues, I would like to thank you for your participation and, before going to the Q&A, I just would like to make some remarks about a couple of things. The first thing that I would like to talk about is the operating income, which, in the quarter, was a 21.5 million-dollar loss. The reason why I would like to talk about this number is because since the first quarter of this year we were managing to report an operating income and in the last quarter we are showing a loss. The main reason behind this loss is that we recognize a non-recurring provision of close to 19 million dollars in the 4th quarter because with the centralization of our legal department in São Paulo, we implemented a centralized litigation control system, which caused us to review the amounts that were provisioned. I think that the provision in itself may apparently be best recognized but it shows that we have been very proactive and constantly reviewing our risk management system, so we believe that this is a nonrecurring event and this basically explains why this number is negative. The other reason why this number is negative is because, as you know, under the SFAS 142 once a year we have to perform an impairment test where we have to measure the value of our good will against the market value, and we have to perform the third now and, as a consequence, we recognize a non-cash charge that reduces the carrying value of the good will associated with the Vicom acquisition of close to 3 million dollars. So those are the two reasons, why, differently from the previous quarters, we showed an operating loss. Going to the net loss itself, there were two reasons why it was impacted, it was an

2 operating loss, and then another provision that we made under the line other financial expense that is related to a provision on tax, on a financial transaction that, although we have very strong external opinions that support that this is not due, there has been a decision at the end of 2002 that might cause some controversy in the future so we decided to recognize the provision. So those are the two remarks that I would like to talk about in the financial statement. Going back to the operations, I would like to make two remarks. One in the subscribers and revenue lines, and the second one in the cost structure. In the subscribers base, as we have been anticipating, there was no growth, and this is not a surprise. We don't like that, but the measures that we have been taking are only slowly showing up and becoming visible. We have worked hard on creating retention islands and reversion islands to our subscribers to manage churn, and we have also started to improve the quality of our call centers, but those are measures that, as we discussed last quarter, take some time. We are starting to see some results as you can see the churn is coming down, but there is still some way to go. If you follow the Company, you have probably noticed that we have started advertising again and this is a major change because, during 2002, we basically didn't use any advertising and we're being very reactive on the sale side. So, now that our operations are more balanced, and are totally under control, we felt comfortable going back to the advertising market. Of course, not growing the Company, not growing the subscribers base, you have an effect on the revenue line, and this is what is clear in the fourth quarter because it's a quarter when we don't have much pay-per-view activity. So that's why the revenue came down and even in Reais it was practically stable. So that's another reason that indicates that it's important that the Company fixes its capital structure and can resume not necessarily an aggressive growth, but a growth that is realistic and solid considering the situation of the Brazilian market, but also considering the competitive advantage that we have, which is a little cheap in the main areas of Brazil, and also having a very good product that we can offer our subscribers. The second thing that I would like to talk about in the operations is the cost base. If you exclude the programming costs, it's very clear that all lines are under control and the Company continues reviewing its expenses on an on-going basis and this is not very clear in US cash, but in Reais we suffered a loss in the fourth quarter because of the devaluation. The good news is that we have managed to achieve with a very high percentage of providers now a long-term agreement that we have been charged in local currency. Those are not temporary agreements, those are agreements that we'll be charged in Reais, and where the IGPM, which is the index linked to inflation, is going to be ruling the increases that come from providers from now on. And the last thing that I would like to talk about is our re-equation efforts, as we announced last year, we had to make a difficult decision which was to preserve the operation because we understand that the most valuable asset that we have are the subscribers, our clients, and the cash flow capacity that we have, and that we can't increase in the middle to long term. So, we are in a position now where we are talking to our creditors; because of the change of the CEO, in January, we had a delay of a few weeks, but last March 17 we made a presentation to our creditors of our long-term business plan, with very clear assumptions of cash flow capacity going forward and, together with that, we made a proposal to normalize the relationship with our creditors. Right now our creditors are performing a due diligence in the Company, that started last Monday, so probably in the next few weeks they'll come back to us and

3 we'll have a new round of negotiations. So we believe that we are in the right path, we are getting support from the creditors, both sides agree that this Company has a problem of capital structure but has very clear fundamentals on the operational side. So, those were my remarks, now I would like to open to Q&A. Thank you. Operator: Thank you. The phones are opened for questions. If you do have a question or comment at this time, you may press the number 1, followed by 4 on your touch-tone phone. Once again, that is 1 followed by 4 on your touch-tone phone to poll the question. Please hold while we take our first question. Our first question is coming from Kitty Chang, of UBS Warburg. Please poll your comment or your question at this time. Kitty: Good morning, thank you for holding the conference call. I have a question on the Company's growth margin. As I understand Net has been pretty successful in... Leonardo: I'm sorry Kitty, I cannot hear you. Can you speak a little bit louder, please? Kitty: Sure. My name is Kitty Chang and thanks for holding the conference call. I have a question on the Company's margin, in particular the Company's growth margin. As I understand Net has made a pretty successful initiative over the past few months to pacify, or not pacify, to negotiate the programming fees in local currencies. One of the major reasons of doing that is to insulate internally volatile exchange rates, but as I look at the fourth quarter result I see that direct operating expense as a percentage of the revenue has actually gone up slightly, you know, it's gone up like 60% to 62% so, I'm wondering, is it because programming fees were not 100% converted into local currencies or, what is the reason behind the increase despite the conversion of the programming fees into local currency? Leonardo: OK, Kitty, this is a good point. Unfortunately the new programming conditions in local currency only became effective on January the 1st. Kitty: OK. Leonardo: OK? And so, in the last quarter, we still had an average exchange rate, which was 18% over the third quarter, and still we were being charged in dollar- linked instruments, but this new system came into place on January 1st. Kitty: So what would you expect the direct operating expense, going forward, as a percentage of the revenue, is it going to be in local currency? Leonardo: OK, let me tell you one thing. We believe the programming costs will be adjusted now in IGPM, OK? Unfortunately, the IGPM in the last 6 months of 2002 and still, maybe, in the beginning of 2003, it's going to be very high, so we'll probably face a situation that although we have converted, we have eliminated a mismatch of currency, we'll still have some mismatches, in the short-term at least, because we will not be able to pass on to the subscribers 100% of the IGPM, OK? But, having said that, I believe that it

4 was a very important move to convert the programming costs to Reais because, in the long run, this mismatch is easier to control and is much more predictable. So now we are dealing with only one variable, the inflation, and not with the two variables which were inflation and the exchange rate. So I think it was a very healthy measure, but I think we have to be careful when we make the 2003 projections because of this IGPM factor that will be very high in the twelve months before we have the first adjustment. Kitty: Right, thank you. Two more follow-up questions. One is on ARPU. You mentioned that the pay-tv ARPU in the press release, you mentioned the pay-tv ARPU, declined year-on-year, I mean quarter-on-quarter, mainly due to depreciation. If you reported them on the local currency basis, should we expect it will be like that, compared quarter-onquarter? Would you be able to tell us the. ARPU in local currency terms? The second question will be if you can give us some rough idea as to the EBITDA 2003 as to the capital expenditure? Leonardo: OK, the ARPU on local currency basis has been growing slightly quarter-onquarter. Kitty: On-going, right? Leonardo: Yes, what we need to maybe look at is on an annual basis where ARPU last year local currency increased close to 8% because we have to consider that there are quotas where we have seasonal effects such as pay-per-view. The fourth quarter the ARPU had a slight increase, the pay-tv ARPU, despite the fact that it is a very poor season in terms of pay-per-view. Then your second point was about, sorry? Kitty: EBITDA and capex forecast. Leonardo: In terms of EBITDA we are not giving data at this stage because we are discussing the business plan with the creditors, OK? In terms of capex we gave some indication last year that the capex should not be higher than 100 million Reais a year over the next two years, so we have not changed the statement since we have updated last year. Kitty: Thank you very much. Operator: Thank you. Just as a reminder, if you do have a question or comment at this time, please press the numbers 1 followed by 4 on your touch-tone phone. Once again that is 1 followed by four on your touch-tone phone. Thank you, our next question is coming from Rodrigo Macedo, of Performance Investimentos. Please poll your question or comment at this time. Rodrigo: How do you expect to have a growth from your subscriber s base for the next quarters? That's my question, thank you. Leonardo: OK, as we had discussed last year, we are not anticipating growth until the second quarter of this year. Why? Because we have taken some measures in terms of

5 improving the call centers, we have taken some measures in terms of creating retention islands and reversion islands, to ensure that the clients don't leave the base unless there is a real reason for that, we have started advertising again, but we also knew that those measures would take time. The only thing I would like to say is that we have to be very careful when we talk about growth. I think the first thing that the Company has to do is to stop having the base contracting. Then you can stabilize the base first and then start talking about those. As you know, in this business churn is a very important number that has to be managed so, what the Company needs to do is at least sell at the same level of its churn. Rodrigo: OK, thank you. Operator: Thank you. Just as a reminder, if you do have a question or a comment at this time, please press 1, followed by 4 on your touch-tone phone. At this time I would like to turn the call back to the presenters. There are no further questions at this time. Leonardo: Thank you very much, I just would like to remind you that myself, Márcio Minoru, or Lu Yuan Fang are always available to answer any additional questions and especially in the next few days, if anyone has any additional questions on the fourth quarter. Thank you very much. Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful afternoon.