operating income before net financial expenses, taxes, excluding depreciation, amortization and interests

operating income before taxes and interests

Tele Celular Sul closed the second quarter 2004 with 2,417,793 lines, 34% more than in the same period of 2003, of which 1,831,560 were prepaid and 586,233 postpaid customers. The postpaid base grew by 11% when compared to the prior year period. Net additions totaled 225,721 customers, 284% above the 2Q03. These net additions were exclusively GSM lines.


Tele Celular Sul’s region of operations has enjoyed growth in mobile telephone services above the Brazilian average. By quarter end, the estimated total penetration was 30%, over the 20% reported in the 2Q03. The 2Q04 market share was estimated at 51.4%, and the gross adds market share was 46.6%, reaching 50.3% in June, confirming the Company’s leadership in the area.

In less than one year, Tele Celular Sul has matched the coverage of GSM to the existing TDMA coverage, six months earlier than had been forecasted at the launch of the new technology last August. Currently, the 256 cities covered by TDMA also have GSM coverage and the services are therefore extended to 82% of the area’s population. By quarter end, our network was comprised of 786 Base Transceiver Stations.

One outstanding feature of the GSM network is that it already has GPRS and EDGE technologies, providing high-speed cell phone data transmission, resulting in virtual broadband for GSM handsets. For the launching of EDGE, the Company is offering a handset at R$ 1,499.00 for postpaid and R$ 1,748.00 for prepaid. Shortly the selection of handsets with this feature will be increased.


The national integration of the GSM network, which is already in place, increases our competitiveness, providing a wide variety of tools that enable us to meet the changing needs of our customers. Undoubtedly, GSM is a competitive advantage for the Company and its customers, as both benefit from the technology.

The total gross operating revenue amounted to R$ 462.3 million, 38.5% above the 2Q03. That increment is mainly attributable to the 34% expansion in the customer base, the 86% increase in the handsets revenues and the 166% growth in value-added services revenues (VAS).


The average revenue per user (ARPU) in the quarter was R$ 38.20, as compared to the R$ 39.4 registered in the 2Q03. This decrease is derived mainly from the strong customer base growth, the increase in the proportion of prepaid lines and the effects of Bill & Keep. When compared to R$ 41.4 in the preceding quarter, the decline is additionally related to the seasonal characteristics of the first quarter, a recurring fact over the years.

On July 6, 2003, the Company launched the Código de Seleção de Prestadora (CSP), the Carrier Selection Code, enabling users to choose their long-distance carrier. The choice of the carrier for calls made from a cell phone is part of the requirements of the new system in which the Company has been operating since December 2002, the Personal Communications Service (PCS).


As a result of the new fee structure introduced under PCS, the Long-Distance Services revenue replaces VC2 (calls made by a subscriber in a registration area to another registration area but within the Company’s Region) and VC3 (calls made by a subscriber in a registration area to another registration area, outside the Company’s Region) revenues.

The cost of services for the period – without depreciation and amortization – reached the amount of R$ 47.2 million. The 5.5% decrease when compared to the same period of the previous year stems from the decline in interconnection charges and network maintenance costs.

(1) Before depreciation and amortization.

The cost of handset sales in the quarter amounted to R$ 107.5 million, higher than the R$ 56.1 million in the 2Q03 because of the greater sales volume. In the quarter, 390.9 thousand handsets were sold, a 128.2% increase over the 171.3 thousand handsets sold in the 2Q03. Of the total handsets sold in the period, 84.2% have GSM technology.

(1) Before bad debt expenses;

(2) Before depreciation and amortization.

Selling expenses – before depreciation, amortization and bad debt – were R$ 69.8 million, 70.9% higher than in the 2Q03. This was the result of gross additions in the period – of 371,523 versus 177,816 in the 2Q03, a 108.9% increase. The growth in gross additions for the period increased mainly because of selling expenses related to commissions, and the FISTEL tax assessed over each new handset activation.

The subscriber acquisition cost (SAC) for the period was R$ 121.98, an increase from the R$ 94.98 reported in the 2Q03. In the quarter, the Company focused its selling efforts on increasing the customer base, considering the Mother’s Day celebrations which are typically seasonal sales boosters. Marketing campaigns included the offer of subsidies and installments in handset sales, in addition to free usage minutes for calls between Company subscribers. Additionally, handset prices were impacted by the exchange rate variation, the average of which surpassed that of the 2Q03.

General and administrative expenses (G&A) - without depreciation and amortization - totaled R$ 22.6 million, versus R$ 17.4 million in the 2Q03. The increase for the quarter stemmed mainly from extraordinary expenses related to the corporate restructuring.

Bad debt expenses were R$ 6.1 million, representing 1.3% of the total gross revenue, compared to 1.9% in the 2Q03. In addition, R$ 8.5 million was included as a provision for amounts receivable from others operators.

In the 2Q04, the EBITDA – earnings before income tax, depreciation and amortization – reached R$ 85.4 million, versus R$ 87.7 million in the 2Q03. The EBITDA margin was 32.2% over the net services revenue, affected mainly by the increase in the costs of handsets and selling expenses resulting from the increase of customer gross additions and the efforts to expand the GSM network in the period.

Depreciation and Amortization expenses, including the amortization of the privatization premium, amounted to R$ 62.3 million, an amount 6.5% above the 2Q03, because of the investments made in the network expansion and technological enhancement during the period.

The EBIT – earnings before interest and income tax – totaled R$ 23.1 million, in comparison with R$ 29.3 million in the 2Q03.

The consolidated net income was R$ 18.0 million and the profit per lot of 1,000 shares was R$ 0.05 versus R$ 0.06 in the 2Q03.

By quarter end, the Company had R$ 330.9 million in cash, and the gross indebtedness was R$ 62.3 million.

The net financial revenue for the quarter was R$ 5.6 million, mostly derived from the reduced indebtedness and the interest on cash investments.

Investments in the 2Q04 were R$ 70.1 million, totaling R$ 113.1 million in the first half of the year, basically directed to the GSM implementation. Year to date, the free cash flow resulting from the operation was R$ 11.8 million, of which R$ 5.2 was registered in the 2Q04.

Corporate Restructuring

On May 31, 2004, the Boards of Directors of Tele Nordeste Celular Participações S.A. (TND) and Tele Celular Sul Participações S.A. (TSU) authorized the execution of the Protocol and Justification of Merger, under which TND will be merged into TSU.

As a consequence of the merger, and after fulfillment of all of the operational and legal conditions, (i) TND will cease to exist and its shareholders will receive shares of TSU stock, and (ii) TIM Nordeste Telecomunicações S.A., currently held by TND, will be held by TSU, together with the current TSU subsidiary, TIM Sul S.A. The merger is basically designed to reduce the administrative costs involved in maintaining two separate company structures, as well as concentrate the liquidity of the shares of TND and TSU stock.