The Company's strategic planning also considers the development of sustainability initiatives, the enhancement of corporate governance practices, and the complementarity of operations. The synergy captured between the three business segments - Telecom, Business Process Outsourcing and IT and Complementary Business – is crucial to enable Algar Telecom to consistently enhance competitiveness, in addition to surprising the clients with efficient and innovative solutions, alongside a friendly, close and pleasant relationship, based on both the way of being and conducting business of Algar.

Algar Telecom's bold and confident approach, which has paved the way to become the most effective company in the telecommunication services segment. This achievement is also backed up by the Company's distinguished management model, which bolsters the attainment of goals, engaged by the whole team of associates, coupled with the culture of innovation that fosters the development of solutions that yield creation of value to all stakeholders.

Network Company Management Model

Algar Telecom believes that achievements result from each associate's effort and ability to innovate. This belief led to the challenge of introducing participative business management at all levels. Since 1990, the Company has adopted the Algar Group's management model, called Network Company.

This model has clear processes announced widely and involving all associates, regardless of their positions. It also has tools to foster commitment and autonomy with responsibility, thus allowing each professional to follow and play an active role in the decisions that guide the Company.

In practice, each business segment of Algar Telecom is considered a Results Center and has its own budget and goals. The Board of Executive Officers manages all of them strategically by aligning them with the goals set jointly with the Board of Directors. However, after budgets are approved, each Results Center has full autonomy to execute its planning, which results in greater promptness in the decision-making processes.

Applied for over two decades, this management model has proven efficient in motivating associates, since it fosters a culture in which all are ready to make suggestions, listen to criticisms and, above all, learn. This participative process strengthens associates' sense of belonging and commitment, and makes them proud of the results achieved by the teamwork.

The efficiency of Algar Telecom's management model has enabled the Company to capitalize its businesses, within a market environment characterized by fierce competition, by enjoying a track record of consistently solid operating cash flow generation, coupled with low financial leverage. In this sense, in early 2013, the ratings agencies Standard & Poor's and Fitch upgraded the Company's rating to AA- Brazilian Scale.

Innovation

The history of Algar Telecom shows evidences that, since its foundation, innovation has been a fundamental tool to back up the Company's differentiation strategy, within a service rendering industry disputed by major worldwide players. Among a series of pioneering initiatives, of special reference was the installation of Brazil's first optical communication system in Uberlândia in 1984. Years later, in 1992, Algar Telecom launched the mobile telephony service to the inland region of Minas Gerais State, even before it was available in several Brazilian state capitals. Six years later, in 1998, it was the first company in Brazil to offer pre-paid phone services, currently predominant in Brazil's mobile phone system.

With a view to strengthening this pillar that an integral part of the Company's culture and processes, Algar Telecom has launched a specific program that relies on its own budget, with the participation of the Innovation Committee. This group made up of professionals from different areas is responsible for assessing and coordinating the introduction of projects that may lead to improvements, savings or new revenues, and disseminate the culture that encourages associates' commitment to generating ideas. This committee is connected with the Algar Group's Innovation Advisory Committee, in charge of disseminating the innovation policy throughout the Algar companies.

The motivation that encourages the presentation of innovative ideas is supported by the "Process Management Program" (PGP) and the "Idea Management Program" (PGI) methodologies, geared towards improvement projects for all business segments. Moreover, technical and financial support is granted by the Algar business incubator for the execution of prototypes that are likely to generate new business, Once approved, associates' ideas are developed, and contributors are rewarded financially. The projects delivered to the Algar business incubator are incorporated into the Company's portfolio, and sometimes they may also give rise to a new company, of which Algar becomes a partner.

The best initiatives presented during the course of 2011 were displayed at the Algar Innovation Exhibition, hosted by Algar Holding, outside the city of Uberlândia, at Algar Tecnologia's headquarters, in Campinas, on July 4, 2012. The event was attended by over 1,500 associates, clients, suppliers and other guests.

In 2012, Algar Telecom developed 10 innovative projects, which produced R$ 13 million in revenue. Since 2007, the accrued revenues deriving from this program amount to over R$ 43 million.

Apart from the generation of revenues, Algar Telecom's innovation culture is reflected in the appreciation that the Company enjoys in the market. In 2012, its expertise in coordinating marathons with the participation of students conferred the Company the privilege of hosting, in Uberlândia, the Minas Programming Marathon, which was engaged by 150 students from 21 universities located in the state of Minas Gerais.

The acknowledgement of the value attributed to Algar Telecom's innovation culture is also expressed in terms of awards. Algar Telecom ranked Brazil's 10th most innovative company (1st among telecom companies) in the Best Innovator category, published by the Época Negócios magazine in 2012, which also nominated the twenty companies that achieved the highest results based on innovation. The Company also won the first place in the Technology, Media and Telecommunications category, and received the prize The 100 Most Innovative Companies in the Use of IT, sponsored by IT Mídia and InformationWeek Brasil. The first place was attained due to the Sales Portal case, which was designed by means of an innovative architecture, enabling the Company to attain further improvement in delivering services to its clients.

Growth Strategies

Algar Telecom's growth strategy is focused on geographical niches that enjoy corporate and retail market opportunities. In 2012, the delivery of voice and data services for medium-sized and large companies has kept the uptrend, by achieving an 18% growth in revenues, which reiterates the fact that the corporate segment stands out as the main driving force that shall boost the Company's growth for the upcoming years.

Even though the Company is allowed to extend the offer of these services throughout Brazil, Algar Telecom's strategy has been concentrating on providing top-quality speedy data services through a modern IP network in the best areas around its backbone from a commercial perspective. The Company's circular long-distance fiber optic network of 12,000 km in length managed to cover 70 cities in the Southeast, Mid-West and South regions of the country, including major metropolitan areas such as São Paulo, Campinas, Ribeirão Preto, Goiânia, Brasília, Belo Horizonte, Juiz de Fora, Rio de Janeiro and Curitiba.

The amount of investments earmarked for the expansion of the Company's participation in the B2B market also involve brand strengthening and further enhancement of the Company's commercial area relationship efforts. During the period, Algar Telecom, in partnership with HSM Management, promoted five events focusing on sharing of management and quality content with its clients. Moreover, it also invested in marketing campaigns broadcast by channels oriented to the target public.

From a commercial perspective, the creation of the Prime Corporate Club was rather fruitful. This program was intended to bring together different business areas, with the purpose of promoting a better understanding of their clients, assess needs and propose the best solutions. Initially, the portfolio was composed of eighteen accounts, which are served by the Key Account Manager (KAM) consultants, sales professionals who have received special training developed by UniAlgar. In 2012, the activities performed by the Prime Corporate Club Clube Corporativo Prime strongly contributed to increase revenues from this client group.

The regional offices, representing a significant competitive edge aligned with the Algar Telecom's way of serving, have also played a major role in conducting the strategy of bringing the Company closer to its clients, thus strengthening the brand in the market. In this sense, the highlight in 2012 was the inauguration of the Algar Group's headquarters in the city of São Paulo. For 2013, further inaugurations are planned to take place.

In the retail segment, main strategic focus for the coming years is the expansion of Band H, the last frequency band available for 3G telecom services in Brazil. IN 2012, Algar Telecom completed the full payment for the concession acquired at an auction held by ANATEL in December 2010, for the total amount of R$ 30.6 million. Furthermore, the Company consolidated its presence in the first group of 31 cities (Area Codes 34, 35 and 37), by offering packages that combine services of fixed and mobile 3G telephony, broadband internet and pay-TV.

Just as in the corporate market, the quality of customer service and close relationship, features that regional offices mostly benefit from, is one of the key stepping stones towards growth in the retail segment of the new cities encompassed by the expansion project, as well as in the 87 municipalities located in the Company's concession area. With a view to placing a competitive proposal on the market, the Company also invests in technology and innovation. The search for process improvement, which enables the enhancement of quality and cost reduction, is crucial to remain competitive within such a market disputed by major players.

Other major highlights that marked the year 2012 have come to signal a positive outlook for growth in the retail segment for the next years. One of them, of regulatory nature, was the "General Competition Goals Plan" (PGMC), introduced by ANATEL, which requires the largest companies of the industry to share their infrastructure with the smaller ones. This compulsory sale, which benefits the mobile telephony segment for a niche-oriented company such as Algar Telecom, will add part of the traffic network capacity, as well as a further availability of space for the accommodation of cables through ducts, trenches and towers of the companies classified as "Significant Market Power".

As for the pay-TV segment, the positive expectations derive from the launch of the HD 44-channel package, which extends the Company's service package offer to over 170 channels. The results for the next years are also expected to be positively impacted by the investments in the amount of R$ 40.5 million carried out during the 2012-2013 period, in the improvement of physical network to support the Ultra Broadband internet access – a higher speed service target to A and B classes, as well as to micro and small enterprises.

The segment of Business Process Outsourcing and IT, targeted to large companies, enjoys growth rates that exceed the rates of the country's GDP. Recent data published by IDC and Gartner have pointed to the maintenance of this trend. This segment has registered growth rates that exceeds the sector's average over the last years, due to the increase in business with existing clients, coupled with the geographical expansion, both in commercial and operational terms.

Relationship is a key factor to promote growth, and for this reason the Company seeks to maintain a close communication with its clients, with a view to jointly develop customized solutions that confers more efficiency and efficacy to all processes. The Company's current growth strategy aims at concentrating efforts geared towards the strengthening its brand image, resulting from its participation in events and the sector-related publications, press relations, use of new social media tools, and reinforcement of relationship with its clients' base.

Internal service quality programs were developed to support growth. A good example is Top Performance, designed to increase productivity and improve service quality at the contact center. The results of this program reshaped Algar Tecnologia's management, and the program was replicated for the other products and all support divisions.