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Net Serviços de Comunicação S.A. (NASDAQ:NETC)

Q2 2007 Earnings Call

July 19, 2007, 11:00 AM ET

Executives

João Adalberto Elek, Jr. - CFO and IR Officer

Francisco Valim - CEO

Analysts

Vera Rossi - Morgan Stanley

Andrew T. Campbell - Credit Suisse

Gustavo Oliveira - Citigroup

Peter Lyons - Oscar Gruss

Patrick Grenham - Citigroup

Miguel Garcia - Deutsche Bank

Presentation

Operator

Good morning ladies and gentlemen. At this time, we would like to welcome everyone to the Net Serviços conference call to discuss its second quarter 2007 results. The audio for this conference is being broadcast simultaneously through the Internet at the website www.rinetservicos.com.br/. We inform that all participants will only be able to listen to the conference during the company's presentation. After the company's remarks are over, there will be a question-and-answer section. At that time further instructions will be given. [Operators Instructions].

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of our management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Net Serviços and could cause results to differ materially from those expressed in such forward-looking statements.

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

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

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

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

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

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

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

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

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

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

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

Revenue expense grew by 21% year-on-year totaling 65 million reais in the quarter. In line with the growth strategy, cellular expenses including advertising campaign and sales commissions should remain at current level as a percentage of Net's revenue.

As a result of EBITDA, excluding adjustments, reached 196 million reais, up 24% on the second quarter of last year. This confirms the growth is still based on the trends that the investments focused on our condition of new clients reached a negative level of return for shareholders. EBITDA margin stood at 28% at the high end level of our guidance which ranges from 26% to 28%. However as we equalize our offering and implement Net's growth strategy at Vivax, we expect margins to gradually converge within the indicated level. As we mentioned in the previous quarter, the company revised its estimate for a useful life of some of its assets in light of frequent technological innovation accomplishments.

Depreciation expenses surged by a 117%. And as a result of this revision EBIT rose from 19 million reais in the second quarter of 2006 to 63 million in 2Q '07. As for the financial results, the company posted a financial expense of $51 million versus on expense of 98 million reais in 2Q '06. The results reflect the adjustments we made at Vivax.

The company's CapEx totaled 182 million in the second quarter of this year. Of this total, 64 million reais was related to the expansion of digital services and the bidirecting projects. The remaining amount relates to growth of our subscriber base, total CapEx [ph] is mainly variable.

Of the 200 million related to the digital services expansion and bidirecting projects 92 million was already invested by the end of the second quarter. The company share created a 32 reais under Bovespa, 83% up on the second quarter of 2006. Our average liquidity trading volume under Bovespa remained strong totaling 43 million reais in the second quarter of this year.

On the NASDAQ, average daily trading volume for the ADR increased significantly last quarter from $1.4 million in the second quarter of 2006 to $5.2 million in this quarter, continuing [ph] steady increase in our liquidity in foreign markets.

We continue to look forward with sustainable growth of the company and confirm not only that our business is feasible in the long term but also that our growth strategy has created a solid business through the offering of attractive bundle packages.

We have an adequate capital structure and our investments are mostly focused on clients' growth making them essentially available on negligible returns. We take this opportunity to thank you for your support, and we hope to count on you yet again in the coming quarters, we'll be in the challenging phase of strong growth. Thank you very much. And now let's move on to the questions and answers.

Question And Answer

Operator

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question is coming from Vera Rossi with Morgan Stanley.

Vera Rossi - Morgan Stanley

Thank you. My question is about your EBITDA and adjusted EBITDA for the new company. I realize you have a 55 million reais in non-recurring expenses. And my question is the following: for the next quarter, the margin of the new company Net plus Vivax, it is going to be on the high 20s, that's what we are... we should expect? So this is my first question.

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

Well somewhere down the line we believe that the two companies will have a very good decent performance. We have been much seamless in what we have in that. In the very beginning, it is reasonable to expect a slightly higher margin even that we are not yet ready to implement our growth strategy before we have all systems settle down and ready to go. So I hope it helps in your projection.

Vera Rossi - Morgan Stanley

I am sorry, it didn't. And I just want to understand one thing, this 55 million in that you have is adjusted in Net margin, it is not going to happen next quarter so the next quarter...

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

That'sa one-time adjustment.

Vera Rossi - Morgan Stanley

I am sorry.

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

You are right. This is a one-time adjustment, this will not be...

Vera Rossi - Morgan Stanley

One time adjustment. So all the items included in this 55 million are just the one-time adjustments and, or going away next quarter.

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

That's correct.

Vera Rossi - Morgan Stanley

So the level of margins that I should expect for the next quarter is, it is around the high 20s, not the 20%, correct?

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

Irrationally, this is correct.

Vera Rossi - Morgan Stanley

I am sorry.

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

Irrationally this is correct.

Vera Rossi - Morgan Stanley

I see. And then in the medium to long term we're aware that there would be like... there are two things; first that these companies are growing fast. So there are some spending costs that are pressuring margins down in the short term. But also we have the gains that we're going to have with the merger of the two companies. Where do you think we are going to see the margins of this new company in three years time? Should we see these margins above like or at the mid 30 level?

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

In the medium term the company will continue to implement fast growth strategy. So we will remain in the range of 26% to 28% EBITDA margin. However if we stop selling... you may know that we spent about 9% of our net revenue in selling expenses. So if you do not sell any more, we have a mix of 9% margin.

Vera Rossi - Morgan Stanley

Yes, but this scenario is not realistic?

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

That's correct.

Vera Rossi - Morgan Stanley

So probably from now that you are going to start selling, so assuming its lower level of growth, where this 9% would go... would go to half of that or one third of that?

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

Well.

Vera Rossi - Morgan Stanley

And also the gains that you are going have in programming, so that I don't think it's only selling expenses, there are other programming and administrative costs that could go down with the merger of these two companies?

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

Well this is correct, you are right. We potentially have much more synergies, opportunities across the border. But in terms of our margin, our strategy is to continue to grow for a few years. If you go for our capital structure, you may see that the amortization of all that begins only in 2010, so we will not have any cash pressure that can obstacle our strategy. So we continue that for the next several quarters. We will continue to grow at that speed as we are growing today and after that we will see what's going to happen to the margin.

Operator

Thank you. Our next question is coming from Andrew Campbell with Credit Suisse.

Andrew T. Campbell - Credit Suisse

Yes, hi. I was wondering if you have an idea of your 9 million homes passed, approximately how many of those have overlapped with TV areas network? And I am not referring to MMDS, but to the actual cable network itself. And I was just wondering what your opinion is about the approvals from ANATEL yesterday, and if you think it's likely to change very much the competitive dynamic in the market.

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

Regarding the overlap, TV area Net services have mostly all of our... their infrastructure is overlapped by our infrastructure. Our infrastructure is by and large greater than theirs, but we have a pretty much a 100% over... they have a 100% overlap with us. We have obviously even in São Paulo, a lot more network than they do covering a much wider areas, but there isn't complete overlap.

As far as strategy is concerned, we are not changing our strategy in the new age. And so we are already competing with Telefónica for several years now and with TVI for even more years than we are with Telefónica. So we don't see a reason for us to change our strategy because of that... because we haven't actually changed anything. We have been operating together since November of last year, and we... that was no reason for us to change the way we go about doing business.

Andrew T. Campbell - Credit Suisse

Okay, great. And if I could just ask a follow-up, then. I know that you are about halfway through this kind of one-off CapEx that you have for this year for bidirectional network and for a digitalization. Are you guys looking to... do you have an idea for 2008? Should we expect that you will have a new target for bidirectional homes and that there should be another component of CapEx given that you are just at above 5.5 million right now of the total 9 million homes passed?

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

You are right. We are at 5.5 million homes passed but we are going to reach 6.3 million by the end of this year. And we are not posting any extra investments for that reason next year. So this investment was in 2007 and will not be repeated.

Andrew T. Campbell - Credit Suisse

Okay, thank you João.

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

Welcome.

Operator

Thank you. Our next question is coming from Gustavo Oliveira with Citigroup.

Gustavo Oliveira - Citigroup

Hi, how are you? I have a question in the programming and potential benefits that you could have. I understand that Vivax programming leg have benefits for not having essentially the same programming or the same content that you have in the Net, that's working also because of the Real appreciation. So what... when you move the programming to different programming or different content that you carry for Net, what is expected impact that we should see on the programming costs?

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

Well, we... by standardizing the programming line-up for both companies, it really is that, if you see programming costs as a percentage of Net revenue that could to be, to equalize to what Net has for merging with Vivax. That's the directional impact. And likely but surely we will have a certain discount as long as we are going to increase the digital subscribers.

Gustavo Oliveira - Citigroup

Okay. So...

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

And all these customers will have the benefit of more complete Wimax and our expectation that it will bump up the revenue.

Gustavo Oliveira - Citigroup

Okay. I understand that, that's clear. Also in the triple play product, we have seen an acceleration in this quarter in the number of digital fonts sold. What is the percentage of your customers that are actually in the triple play and do you expect that to continue to occur it in the next two quarters?

Francisco Valim - Chief Executive Officer

Gustavo, this is Francisco Valim here. The bulk of our customers are... the bulk of our voice customers are triple play customers. Not all of them, some of them are customers of voice service only, a very small number of those. Then some, there are subscribers to both broadband and voice and don't have pay TV but the vast majority of our voice customers are triple play customers. And for strategic reasons we don't detail that number.

Gustavo Oliveira - Citigroup

Okay. At those lines, is still the second line in the household or you're seeing customers disconnecting their fixed line and staying with your line.

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

It varies. We have both cases.

Gustavo Oliveira - Citigroup

Okay. Okay. And my last question is on the cost side. On the G&A expenses you had an increase of 35% which is above the increase you had in the top line but I understand there are some... there might be some more non-recurring items because of the Vivax acquisition. Is that correct? And would... are you actually having some operating leveraging in G&A?

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

That's correct. We have certain one-off items in our G&A expenses this quarter. And certainly we will implement fee interest but reason that we're just beginning the integration of the company, we are not yet in a position to anticipate what will be the dimension of certain synergies. We are integrating the system and self proposing, we'll identify work and we will rationalize their shares or have discounting contacts and so on.

Gustavo Oliveira - Citigroup

Okay, thank you.

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

Welcome.

Operator

Thank you. Our next question is coming from Peter Lyons with Oscar Gruss.

Peter Lyons - Oscar Gruss

Hi, good afternoon. My question is regarding specifically an issue in the programming and royalty section. I have two questions actually. The first one is regarding the programming and royalties and you mentioned that Vivax had lower unitary costs which were dollar denominated and that is, as you switched them over to a Net current agreement, you will get scaled but wouldn't there also be an offsetting increase as we move from the lower cost dollar, the programming cost for Vivax and and move them to Net real denominated costs?

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

Well, that's correct but you know that over time we are enumerating let's say, a currency mismatch element. So in the long term you never know when volatility can come back, and even that our revenues are, also in reais, we will have our costs also in reais denominated.

[Multiple Speakers]

Peter Lyons - Oscar Gruss

Sorry go ahead.

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

If I would get real is appreciating, this would be let's say, a cost reduction avoidance opportunities, cut to drive, we believe that, it's more stable and more predictable. In the long time we could have everything in local currency.

Peter Lyons - Oscar Gruss

Any idea you can give us about what subscriber levels will start being discounts from the content providers?

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

No. we do not disclose that level of information.

Peter Lyons - Oscar Gruss

Okay. My final question is about amortization. Can we expect the similar levels of amortization through the end of the year, in general terms, the impact of the Vivax acquisition in terms of amortization of goodwill? Just what can we expect moving forward in that?

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

You can expect that the Company's going to do all that's possible to optimize the cash tax planning. So we will have amortization and all of the strategic effort in order to optimize our GAAP resources.

Peter Lyons - Oscar Gruss

So we shouldn't be looking at EPS so much as more of the cash flow, is what you are saying?

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

That's correct.

Peter Lyons - Oscar Gruss

Okay, thank you.

Operator

Thank you. [Operator Instructions]. Our next quarter is coming from Patrick Grenham with Citi.

Patrick Grenham - Citigroup

Good morning. Can I just follow up on the cost side and the possible synergies that you can get from Vivax? I know earlier you mentioned your probably didn't want to quantify them, but I imagine that the rate of growth you have right now, you need to invest pretty heavily in your back-office systems, and the helpdesk, the calling centers that sort of thing. And so that's probably a pressure to increase costs, but on the other hand you probably can reduce the headcount out of Vivax quite a lot. Could you go through what you are thinking in that and do you have more investments to make in your back-office systems, number one? And second, do you... what percentage of employees do you think you could reduce out of Vivax?

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

Patrick, Vivax has 34 operations, has presently 34 different cities which... with the exception of one are all complementary to match Net's network. So we will have to keep the people, most of them helping us to run the business. We do not have people leading new field. Over that with restricted areas, we may have certain synergies. Certainly we will not overlap administrative areas but we are continuing to phase out integrating, we think it's certain, by the end of the year we will be in a position to get a clear picture of what's going to be done. But not only in terms of people but we can think about, if we implement all contracts to Vivax, then we may have better unit cost for installation for future strategies. So that's where we believe we will have synergies. And the largest one is amortization of goodwill. We are booking 1.6 billion of reais in this transaction and this is below the line, however, of the margin effect to earnings.

Patrick Grenham - Citigroup

All right. So that's... the immediate benefit is the tax benefit you'd get.

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

Correct but the synergies will come through.

Patrick Grenham - Citigroup

Okay. Okay. And you will be in position rather in third quarter to start quantifying the synergies...?

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

I cannot say that.

Patrick Grenham - Citigroup

Okay.

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

But there is one more by offering a larger array of products moving through the sales in Vivax regional growth.

Patrick Grenham - Citigroup

All right, okay. Thank you.

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

You're welcome.

Operator

Thank you. Our next question is coming from Miguel Garcia with Deutsche Bank.

Miguel Garcia - Deutsche Bank

Thank you. My question is regarding the growth in video subscribers. There was only 43.5 thousand net adds which is lower to what you were showing the previous quarters by yourself. Was there an extraordinary churn of subscribers? And the other question is related to your strategy and the phone strategy on the Vivax network. Are you planning to be as aggressive as you had been with Net services network or you require further upgrade in order to start offering services massively on the Vivax network?

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

Hi Miguel, it has been a long time. Well the growth of pay TV services we believe we are doing our best. We know this will and deliver a high quality service at this point in time. So that's what we believe we can do and we will maintain approximately the same level as we had last year in terms of absolute amount of new adds. So we don't see any deterioration of our sales force. We have the same sales team out there, and we have the same sales commission incentive for the program is out there and we don't see any change. So we are not anticipating any false grounds or any problem on that front. And Vivax network is absolutely brand new even more updated than the network of Net, it's is more recent, and we don't have to make investments here. It's literally ready to deploy the broadest stuff that Net is carrying.

Miguel Garcia - Deutsche Bank

Thanks a lot.

Operator

Thank you. [Operator Instructions]. Our next question is coming from Veri Sellers [ph] with Ventura.

Unidentified Analyst

Hi. I have a couple of questions mainly regarding the Vivax synergies. Vivax had energy for the clients a bit lower than Net. How do you see that evolution going forward and then how is growth concentrated on often more the triple play services to Vivax clients? And that's first question.

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

Well, you are right. As soon as we have this committed with, we're going to start offers to sell combos and packages and bundles that Net offers already. And at that time we are going to improve the ideals in mapping in Vivax net flow. This will take place gradually. Hopefully faster than we expected but it will take... this gradually will occur. We believe that somewhere between late third quarter and somewhere in the fourth quarter, we will have to see some good results and then we will stop selling this with triple play at this cost.

Unidentified Analyst

Yes but, Vivax already had also in I believe in broadband comps, a little less penetration than Net. And it grew under a smaller pay... it has been growing at a smaller pace in the last three years I believe. How did you see that in the second quarter and how do you see that going forward especially broadband?

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

Well idea is to accelerate the speed of our sales of broadband. Actually the speed what Net offers will be deployed in that spacing. We delivered it high demand on a pumped up demand for higher speed broadband services.

Unidentified Analyst

Okay. And regarding most of your growth I believe it has been a more focused on the lower class B homes. I mean as a whole and as well as Net not as well as Vivax. Do you study any class C product? I mean lower cost product for lower income households going forward and do you have any plan of adding further CapEx on offering broadband to pay TV areas? Well that kind of close customer could be a target.

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

Well as for it not at this moment. Our strategy is to continue focusing on the platforms A and B. And that's where we are bidirecting our network. So out of our 8.8 million HDs, 6.3 are As and Bs. and that's where we are deploying the bidirection and wholesome target.

Unidentified Analyst

And finally, regarding Vivax do you intend it to keep a brand or is there plans for the brand migration in the future?

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

Well idea is to have to standardize our brand and run the business when there is a map on dial-up.

Unidentified Analyst

Okay.

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

Welcome.

Operator

Thank you. Our next question is coming from Michael Schwab [ph] with iTech Capital.

Unidentified Analyst

Hi, kind of a more detailed thought question, your other operating expenses grew 91% this quarter. You are talking about call centre re-sizing and to more things down there as well as larger linked consumptions. So what I want, it sounds like what you do in the call center is let's a one-time revamping of size and maybe quality. If you could expand on that and tell us whether that's true and the growth of that expense item is going to be much more moderate going forward or maybe it goes on fourth quarter or so, give us some color on that. And then on the linked consumption maybe I am just maybe not so familiar with of what that is but give me a sense of really what that is and what that's related to? So how should we think about the growth of that and to the extent that you can tell us what the relative of size is of each of those two items would be helpful?

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

Well in the call center we've changed the model the way we attend customers. So instead of having people answering calls for any different... of all reasons of all sorts of questions now we have four different sizes, each one with a different expertise. So they can engage some of the this model and affect on growth perspective and training the people for that with them. So they're going to stuck off. We are digitalizing the network and bidirecting the network this is causing a lot of intervention... we feel, causing a lot extra calls. So we are adding as many as attendees in our call centers, in all this look that we start the safety discussion. And as long as it does this target is done and gets... are more familiarized with these type of model of call center. We believe that, at that time, this cost may essentially decrease. While we are not on busy pacing on a recruiter basis, just like a change of our model.

Unidentified Analyst

So going forward, this should grow more in line with revenues or in line with net additions or what is that...

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

Well we don't have experience with these models, should be closer to net additions but with certainly some level of synergies. So this won't be one by one, not totally that could net add. It means that actual additions flat, the bandwidth for access to Ethernet, so our customers, they not only are satisfied with the high speed but they use it really, our heavy user as well, large files to download and upload. They watch movies. So that's what the consumption of bandwidth and to the extent that we have more and more customers buying this high speed broadband, this cost will follow. So this is a variable cost. The more revenues we add in broadband while we are selling the high speed broadband we will have more lean costs.

Unidentified Analyst

We should look at broadband revenue as a very rough proxy of your cost of linked consumption?

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

Well, I don't think this is... that's the rule because our negotiation with our suppliers also tends to improve. So I don't have a rule for that but I think that if you attach one to the order, you may decrease whole matters in stock [ph].

Unidentified Analyst

Okay. Can you give us some sense of... we have this big jump this quarter of 91%. Any sense of what this item of this, group of items could be doing for the rest of the year?

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

Wellwhen we talk about this large number you have to take into consideration that is adjusted for Vivax, they are one-time adjustments. They are one-time adjustments that we'll not see moving forward. This is a just one-time adjustment.

Unidentified Analyst

Okay.

Operator

Our next question is a follow-up from Peter Lyons with Oscar Gruss.

Peter Lyons - Oscar Gruss

Hi, just a quick question on the income tax rate. Is there a general rate that we might follow through the end of the year in terms of the income tax 30%, 25%, 35%? Is there any consistency there? And now this is something that we can our hands around, if you could provide something, I would appreciate it. Thank you.

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

Well the statutory income tax rate for the quarter is about, really 34%. Net has the load of statuary rate. We have been running at 10% and I think that we're going to do the best we can to have the minimum cash we have that I think you should focus on EBITDA and asset adds. We are doing everything that's possible to maximize our results. And we hopefully will never get even closer to 34%. The Company has 1.4 billion reais of tax loss going forward and another 1.5 billion reais of goodwill from this Vivax acquisition transaction. So we have plenty of room to make our tax planning.

Peter Lyons - Oscar Gruss

Great. Thank you.

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

Welcome.

Operator

Thank you. [Operators instructions]. At this time, there appears to be no further questions. Now I would like to turn the floor back to Mr. Alex for this final consideration.

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

Well, I think that's our results. Once again that's our strategy of fast growth, accelerated growth with sustainable margin, and they are the results for our shareholders, have been successful and we will continue implementing the same strategy for the subsequent quarters. I want to thank you very much for the support you have continually extending to our company and wish that we will continue to be successful in the forthcoming quarter of the rest of this year. Thank you very much.

Operator

Thank you. This concludes today's Net Serviços second quarter 2007 results conference call. You may now disconnect your lines at this time and have a wonderful day.

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Source: Net Servicos de Comunicacao Q2 2007 Earnings Call Transcript
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