VIV Telefonica Brasil SA

• 2,028 thousand new accesses in the quarter (41.3% in the postpaid segment);
  
• Market Share of Net additions recorded 33.7% (61.6% in the postpaid segment);
• Vivo’s customer base totaled 55,977 thousand accesses , (19.6% annual growth, with 25.5% in the postpaid segment);
• M arket share of 30.24% (34.67% in the postpaid segment);

• Annual increase of 10.7% in the Net Service Revenue totaling R$ 4,129.8 million, with highlight for the increase in the outgoing ARPU;
• Annual growth of 71.8% in data and VAS Revenue which already accounts for 19.4% of the net service revenue (Internet revenue grew 121.4%);
  

• EBITDA Margin of 30 .5% in the quarter (+0.4 p.p. vs 1Q10; +0.2 p.p. vs 2Q09);
• EBITDA increased by 10.6% over 2Q09, recording R$ 1,342.7 million in the quarter;
• Net profit of R$ 236.0 million in 2Q10, with growth of 29 . 9 % over 2Q09 ;

• Expansion of 3G coverage  from 600 municipalities to more than 2, 800 (85% of the population) until 2011 ;
• Cash flow in the year-to-date 2010 recorded R$ 1,629.2 million;
• Net debt in 2Q10 in the amount of R$ 3,355.3 million (28.5% lower than in 2Q09).

• Vivo recorded an increase of 19.6% in the total number of accesses in comparison to 2Q09 and closed the quarter with 55,977 thousand accesses, out of which approximately 50 million were GSM/WCDMA technology.
• The total net additions of 2,028 thousand accesses in the period represents an increase of 72.2% in the year-to-year comparison, with a market share of net additions of 33.7%. Out of the net additions, 41.3% were postpaid accesses.
• The year-to-date leadership in net additions reflects Vivo’s high attractiveness. Factors such as the strength of Vivo brand, the largest network of owned stores in Brazil, the unquestionable leadership in coverage and quality of the 3G network and a portfolio of data and voice plans and promotions which reflect the best cost-benefit ratio in the market were decisive for the successful commercial activity in the period.

• Thus, Vivo reinforces its leadership with a market share of 30.24%: increase of almost 1 percentage point over June 2009.
• The postpaid customer base recorded an increase of 25.5% in the year-to-year comparison, with a market share of net additions of 61.6%. This growth arises out of the sales of the Vivo Você plan, which allows customized use of data and voice, and of the increasing sales of access to 3G internet through smartphones and modems. The market share of postpaid accesses of Vivo recorded 34.67%.

• SAC of R$ 71 in 2Q10 is 2.9% higher than in 1Q10. Such increase reflects the growth in the mix of postpaid and data customers in the additions, whose subsidies and commissions are higher. When compared to 2Q09, the SAC recorded a reduction of 15.5%, mainly due to the additions only with SIM Cards, that is, without acquisition of handsets. It must be reminded that since 1Q10 expenses with corporate lease and the Fistel fee started being included in the SAC calculation.

• The focus on the satisfaction of the customer base and the continuous efforts for ensuring loyalty and retention of its customer base through the rewarding program, mainly to handsets acquisition, contributed to the reduction of 0.1 percentage point of the churn in the quarter in relation to last year. Churn of 2.6% in the quarter shows that this indicator is under control reaffirming our position as the best option among the mobile operators.

• The ARPU of R$25.0 in the quarter records an increase of 0.8% in relation to 1Q10 as a result of increased activity in the customer base, with increased consumption of voice and data services. The growth in the recharge volume and the increasing adoption of 3G data and messaging services is an evidence of that.  When compared to 2Q09, the ARPU recorded a reduction  of 7.4% arising out of the dilution effect caused mainly by availability of multiple SIM Cards on the market. Such reduction confirms the decrease in the ARPU drop trend recorded in 1Q10, as shown.

• The Outgoing ARPU in 2Q10 recorded a reduction of 3.1% in relation to 2Q09 and an increase of 4.7% in relation to 1Q10, due to increased consumption, recharge and data usage. The Incoming ARPU, on its turn, decreased by 13.8% in the comparison with the same period of last year, mainly due to the increasing substitution of fixed by mobile traffic as a result of the penetration of the mobile telephone service in Brazil.
  
  

• Worthy of mention is the data ARPU growth, which increased by 44.1% in relation to 2Q09, mainly due to increased use of ‘Vivo Internet’, higher penetration of SMS services and use of SMS in massive promotions broadcasted on TV.

• The Blended MOU of 114 minutesin 2Q10 increased by 42.5% in relation to 2Q09 and decreased by 1.7% in relation to 1Q10. The increase posted in the Outgoing MOU was 69.8%. The growth in relation to the same period of last year is a result of the actions for stimulating usage, especially the “Recarregue e Ganhe” campaign and the “Vivo Você” plans, implemented in the 4Q09, which aim at increasing usage habits. The reduction recorded in the quarter is mainly due to changes in the pre-paid segment campaigns in November 2009 and April 2010, making them more rational in terms of bonus granting, with increased profitability in the results.

Campaigns to promote usage generated significant results: 104% increase in the outgoing traffic.

• The total traffic recorded a 70.1% growth in 2Q10, in the comparison with 2Q09 and 1.9% in relation to 1Q10, with emphasis to the 104.5% and 2.3% increase, respectively, in the outgoing traffic, which is a result of the dissemination of the community concept and of the increased customer base.

Total net revenue recorded a growth of 9.9% over 2Q09. Such variation was due to the growth in all the lines of service revenue due to increase in the customer base, higher activity in terms of consumption and, especially, increased use of Data and VAS services. Thus, the service revenues in the quarter grew 10.7% in relation to the same period of last year, accelerating the annual growth of 5.8% obtained in 1Q10 and widely offsetting the reduction in handsets revenue.

Access and usage revenue grew 2.6% in relation to 2Q09 and 6.0% in relation to 1Q10 due to the high increase in the customer base in the last quarters, improvement in the postpaid customer mix and increased activity in the pre-paid segment, shown by the increase in recharges volume and, consequently, increase in voice services consumption.

It is interesting to note that due to the changes made in the end of 2009 and, again, in the second quarter, turning voice campaigns more rational, the gross profitability of such voice services, represented by voice revenue excluding interconnection costs, recorded an increase in the quarter.

Annual growth of 72% in data revenues and of 121% in revenues from mobile internet services.

Optimum allocation of funds and improvement of processes contributed to increased profitability.

Depreciation and amortization expenses recorded an increase of 3.6% in 2Q10 over 2Q09, due to the investments effected in the period. When compared to 1Q10, depreciation and amortization expenses decreased by 3.6%.    

Decrease of 17.1%
in net financial expenses in comparison with 2Q09.

Net Profit of R$ 236.0 million in 2Q10 .

The consolidated Net Profit of R$ 236.0 million in 2Q10 represents an increase of 29.9% in relation to 2Q09 and of 23.0% over 1Q10, reflecting the better operational performance. A growth of 36% was recorded in the year-to-date figure. Vivo has continued to place its focus on profitability, as can be observed in the positive results presented in the last quarters.

Vivo effected the payment on April 19, 2010 of the 50% referring to the dividends declared based on the 2009 year-end balance sheet to the holders of common and preferred shares, the total amount of which is made up of interest on the own capital of R$ 104,135,762.30, with 15% withholding income tax, resulting in net interests of R$ 88,515,397.96 and included as dividends, as set forth in article 9 of Law no. 9249/95. This interest on the own capital added to the dividends in the amount of R$ 730,364,262.13, resulted in a dividend per share of R$ 2.049299159273 and in the total net amount of R$ 818,879,660.08. The net amount paid on such date was R$ 409,439,830.04.
The payment of the balance of 50% is scheduled to occur on October 25, 2010.

Distribution of 100.8% of the net profit of 2009, excluding legal reserve.

Release of
R$ 99.7 MM referring to the BNDES’ PSI Program.

The Company closed 2Q10 with a debt of R$ 4,588.4 million (R$ 4,803.2 million in 1Q10), of which 23.5% is denominated in foreign currency (UMBND, US$ and YEN). Out of the total loans, 99.9% are covered by hedge transactions. The debt in 2Q10 was offset by cash funds and financial investments (R$ 1,209.3 million) and by derivative assets and liabilities (R$ 23.8 million receivable), resulting in a net debt of R$ 3,355.3 million (R$ 4,692.6 million at June 30, 2009).

In relation to 2Q10 the decrease in the net debt, in the amount of R$ 1,337.3 million, is due to cash generation, allied to lower debt service cost. In 2Q10, Vivo completed the 2nd issue/2nd series debentures renegotiation process, in the amount of R$ 800.0 million. The total amount renegotiated was R$ 340.2 million. The difference of R$ 459.8 million was redeemed by the Company in the period. Still in 2Q10, there was the release of part of the indirect credit facility from the BNDES, in the amount of R$ 99.7 million, referring to the investment support program (PSI). This new credit facility shall be used for financing the acquisition of new machines and equipment manufactured in Brazil, as accredited by the BNDES (under the FINAME program), in addition to short-term foreign fund raising in the amount of US$ 150.0 million.

The gross debt in 2Q10 recorded a drop of 4.5% when compared to 1Q10. In the same comparison, Vivo’s net debt decreased by R$ 582.3 million, as a result of the consistent operating cash generation in the period, partially reduced by a higher payment of JCSP/Dividends in April (2Q10).

Vivo Internet Brazil, expansion of 3G coverage to more than 2,800 municipalities until 2011.

CAPEX represents 11.1% of the net revenue in 2Q10. The expenditures in this quarter were mainly intended to: increase coverage of the networks for supporting voice and data demand, expansion of the capacity in regions where demand exists, and in technology for supporting such growth. In 2Q10, CAPEX totaled R$ 489.2 million, lower than the amount recorded in the same period of last year due to different seasonality of the projects in the periods. In the 2010 year-to-date, the total invested was R$ 817.9 million.

Operating cash generation of R$ 1,236.4 million in 2Q10.

Merger of Telemig Celular S/A.

At May 10, Portugal Telecom SGPS S.A. (PT) communicated that it received a non-solicited offer from Telefónica S.A. (Telefonica) for the acquisition of 50% of its interest in Brasilcel for the amount of €5.7 billion. Valid until June 6, such offer was rejected by the Board of Directors of PT.

On June 01, PT informed to have received a new firm and unconditional proposal from Telefonica, increasing the offer value to €6.5 billion, with two alternatives, being one for the total immediate sale and the other a three-year deferred sale. Said offer was valid until June 30 and could be extended, in case the Board of Directors decided to submit it to the General Shareholders’ Meeting for examination. The Board of Directors of PT, considering that the offer did not reflect the strategic value to Telefonica, decided to call a General Shareholders’ Meeting for PT shareholders to decide on the offer.

On June 29, PT communicated to have received a revised offer from Telefonica, then increasing the value to €7.15 billion, valid until July 02, with all other conditions of the offer remaining unchanged. Such offer was examined by the General Shareholders’ Meeting held on June 30. At that meeting, out of the 62.9% shareholders attending the meeting who were entitled to vote, 73.9% voted for accepting the offer.

Even though the majority of the shareholders accepted the offer, this acceptance was rejected by the Portuguese Government through their “A” shares (Golden Share).

Following the General Shareholders’ Meeting held on June 30, 2010 Telefonica communicated Portugal Telecom that the offer was extended until July 16, 2010.

On July 08, 2010 the court of Justice of the European Union declared illegal the right of rejection, through the Golden Share, given to the Portuguese Government in the statutes of Portugal Telecom.

At July 17, Telefonica informed that, since the offer was not accepted within the valid date, it expired at 11:59 p.m. of July 16, 2010.

CAPEX – Capital Expenditure.
Working capital = Operational Current assets – Operational Current liabilities.
Net debt = Gross debt – cash – financial investments – securities – asset from derivative transactions + liability from derivative transactions.
Net Debt / EBITDA – Index which evaluates the Company’s ability to pay its debt with the generation of operating cash within a one-year period.
EBIT – Earnings before interest and taxes.
EBITDA – Earnings result before interest. taxes. depreciation and amortization.
Indebtedness = Net Debt / (Net Debt + NE) – Index which measures the Company’s financial leverage.
Operating Cash Flow = EBITDA – CAPEX.
IST = Telecommunications Services Index.
EBITDA Margin = EBITDA / Net Operating Revenue.
Allowance for doubtful accounts  = A concept in accounting that measures the provision made for accounts receivable overdue for more than 90 days, includes part of clients under negotiation.
SE – Shareholders’ Equity.
Subsidy = (net revenue from goods – cost of goods sold + discounts given by suppliers) / gross additions.

Technology and Services

1xRTT – (1x Radio Transmission Technology) – It is the CDMA 2000 1x technology which, pursuant to the ITU (International Telecommunication Union). and in accordance with the IMT-2000 rules is considered 3G (third generation) Technology.
CDMA – (C ode Division Multiple Access ) – Wireless interface technology for cellular networks based on spectral spreading of the radio signal and channel division by code domain.
CDMA 2000 1xEV-DO – 3rd Generation access technology with data transmission speed of up to 2.4 Megabits per second.
CSP – Carrier Selection Code.
SMP – Personal Mobile Services.
SMS – Short Message Service – Short text message service for cellular handsets. allowing customers to send and receive alphanumerical messages.
WAP – Wireless Application Protocol is an open and standardized protocol started in 1997 which allows access to Internet servers through specific equipment. a WAP Gateway at the carrier. and WAP browsers in customers’ handsets. WAP supports a specific language (WML) and specific applications (WML script ).
ZAP – A service which allows quick wireless access to the Internet through a computer, notebook or palmtop.
GSM – (Global System for Mobile) – an open digital cellular technology used for transmitting mobile voice and data services. It is a circuit witched system that divides each channel into time-slots.

Operating indicators:

Gross additions – Total of customers acquired in the period.
Net additions = Gross Additions – number of customers disconnected.
ARPU (Average Revenue per User) – net revenue from services per month / monthly average of customers in the period.
Postpaid ARPU – ARPU of postpaid service users.
Prepaid ARPU – ARPU of prepaid service users.
Blended ARPU – ARPU of the total customer base (post paid + prepaid).
Entry Barrier – Value of the least expensive phone offered.
Customers – Number of wireless lines in service.
Churn rate = percentage of the disconnections from customer base during the period or the number of customers disconnected in the period / ((customers at the beginning of the period + customers at the end of the period) / 2).
Market share = Company’s total number of customers / number of customers in its operating area.
Market share of net additions : participation of estimated net additions in the operating area.
MOU (minutes of use) – monthly average. in minutes. of traffic per customer = (Total number of outbound minutes + incoming minutes) / monthly average of customers in the period.
Postpaid MOU – MOU of postpaid service users.
Prepaid MOU – MOU of prepaid service users.
Market penetration = Company’s total number of customers + estimated number of customers of competitors) / each 100 inhabitants in the Company’s operating area.
Productivity = number of customers / permanent employees.
Right planning programs – Customer profile adequacy plans
SAC – cost of acquisition per customer = (70% marketing expenses + costs of the distribution network + handset subsidies + free lease to corporate customers (PJ) + Fistel) / gross additions.
VC – amount owed by the User, per time unit, for the communication.
VC1 – amount owed by the User, per time unit, for a call made to a STFC Access Code in the internal geographic area of the Registration Area of the call originated.
VC2 – amount owed by the User, per time unit, for a domestic long distance call to a location outside the registration area where the user is located but inside his/her primary area code.
VC3 – amount owed by the User, per time unit, for a domestic long distance call to a location outside the registration area where the user is located and outside his/her primary area code.
VU -M – amount payable to a SMP Operator, per time unit, for the use of its network (interconnection fee).
Partial Bill & Keep – system of collection for use of local network between SMP operators which occurs only when traffic between them exceeds 55%, which impacts revenue and interconnection cost. Application of Partial Bill &Keep ceased as from July 2006.