America Movil SAB de CV (AMX) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the America Movil Fourth Quarter 2011 Earnings Conference Call. (Operator instructions). As a reminder, today's conference is being recorded.

I would now like to turn the call over to your host today, Mr. Tomas Lajous. Please, begin.

Good morning. This is Tomas Lajous from UBS. Thank you, everybody, for being on the call. So, welcome to AMX's fourth quarter of 2011 conference call. We have today on the line Daniel Hajj, CEO of AMX; Carlos Garcia Moreno, CFO; Oscar Von Hauske, COO; and (Inaudible).

With this, I'll just turn the call right over to AMX, and then we can move on to the Q&A.

Thank you, Tomas. Thank you, everyone. Carlos, as always, is going to make a summary of the results.

Thank you, Tomas, for hosting the call. Good morning, everyone.

In spite of the increaser uncertainty worldwide in the last quarter 2011, with high financial volatility extending from the European crisis and still with the US economy, the tone of the Latin American markets continued to be strong throughout the end of the year. America Movil thus posted a 13% increase in gross wireless subscriber additions in that quarter relative to the prior year, hitting A record in Brazil at nearly 10 million and continuing strong in Mexico with 9.1 million.

America Movil finished the year with 300 million accesses, of which 242 million were wireless subscribers and 58 million were revenue-generating units on the fixed-line platform. We added 16.7 million subs in 2011, including 304,000 subs in the fourth quarter. The latter figure reflected connections effective in the period after the introduction of a change in the methodology used to account for subscribers statistics in Mexico, Colombia, and Ecuador. In particular, we are now excluding from the subscriber numbers those lines that have not had any air-time recharge during a certain period, the churn period. In the absence of the change in methodology, we would have posted lower churn rates in all three countries relative to the fourth quarter of 2010.

We continued making inroads in the postpaid segment across our operations, adding 1.6 million subs in the fourth quarter and 6.1 million in the full year. Our postpaid base increased 20.5% in 2011. Except for Panama, in all our operations, the postpaid base increased more rapidly than the prepaid one.

Our RGUs, revenue-generating units, was 12.3%, driven by a 15.6% increase broadband accesses and by a 33.1% jump in PayTV clients. The number of landlines increased 3.4%.

Our fourth quarter revenues totaled MXN182 billion. They were 12.3% higher than a year before, with wireless revenues, which account for two-thirds of the total, expanding 15.4%. These figures reflect, in part, the impact of the sharp depreciation in the quarter of the Mexican peso vis-a-vis the US dollar and other Latin American currencies. At constant exchange rate, and after adjusting for certain reclassifications corresponding to 2010, the quarter's revenues increased 8.6% from the year before at a time when a significant part of the world is facing recession.

EBITDA came in at MXN65.4 billion(Sic-see press release) and was up 3.9% from a year before, the best rate achieved in 2011, with strong increases in the Andean countries offsetting small declines in other countries. EBITDA was held back somewhat by subscriber acquisition costs that remained high in the wireless and PayTV space and by expenses associated with the integration of the fixed and mobile networks and, more generally, with our vast investment program.

Our operating profits increased 15.1% from the year before to MXN38.3 billion, partly as a result of a 9.7% reduction in depreciation charges, since, at the end of 2010, we had booked extraordinary charges as we began to integrate the fixed and mobile platforms after the acquisition of Telmex Internacional.

The depreciation of the peso in the quarter and the increase in net debt throughout the year as we purchased stock of Telmex and other entities brought about an increase in our comprehensive financing costs, which totaled MXN11.1 billion, a very important factor in the reduction of our net income to MXN16.3 billion. Whereas, in the last quarter of 2010, we had posted significant foreign exchange gains, in the fourth quarter of 2011, we registered even greater foreign exchange losses, and that explains, for the most part, the swing in net profit.

Our net debt rose from MXN207 billion at the close of 2010 to MXN321 billion last December to help us fund MXN70 billion in stock purchases and MXN54 billion in share buybacks. Our cash flow from operations more than covered our capital expenditures of MXN121 billion and dividends of MXN17 billion throughout 2011.

I want to thank you for listening, and I will pass it back to Tomas.

I guess we can now move on to the Q&A. And, Shawn, while you get the roster together, I'll ask some questions.

(Operator instructions).

Okay. So, while we get a roster together, I'll start with questions. The first question on my end would be on growth and margins. Daniel and Carlos, you've talked about in the past how you prefer growth to margin at this point. And, if you can, further clarify this continues to be the strategy. And what is the level of growth you are seeking, and how much margin -- and what the margin we should be looking for in the short term, given that level of growth.

Well, Tomas, as we have been saying, growth is very important still in Latin America. And there's a place where, even that we're slowing down a little bit, we are in better shape than the rest of the world. The rest of the world today is weak. So I think what we are going to do is we're going to take advantage still of this growth. So growth is very important. But that doesn't mean that we are not taking care about a margin.

Why margins are slowing down a little bit? Well, margins are slowing down because, first, we are growing a lot on postpaid. Postpaid has been growing around 30%. So, the growth on postpaid is more expensive than the growth on prepaid.

Then, the growth on prepaid -- we have been having very good growth this year. As some analysts are saying, this month of only -- we could have around 8 million new subscribers in the quarter if we don't have this new methodology on the churn. So we have been growing a lot.

The second [very important is] that we're investing a lot. And, when you invest, you have more costs, more expenses, more maintenance. And we think that the revenues of all these investments are coming. So we hope that, day by day, the investments that we do against the revenue that we're going to get are going to help us to recover the EBITDA.

And the third, also very important-- we are not only a wireless company. We have other lines of products. We have wireless, wireline, broadband, and TV. And, today, TV, we are growing very fast on TV, and TV has some things like the content. No? And I think, as we grow faster, we're going to get better deals with the content and better margins in those segments. Then we are going to have other lines of products, like the cloud computing, [OTD], and we're investing a lot on all of these new lines of products.

Great. And, I guess, my second question --

Sorry. Allow me to finish. But growth -- we are really focused on growth, and we're going to try to catch all those new subscribers -- capture all those new subscribers that they are coming in Latin America.

Okay. Thank you. The other question on my end, before moving on to the Q&A, is on overall year investment, both in terms of CapEx and in terms of investment items that you're expensing. Where is it going? We had a particularly high level in 2011. Where are we going in 2012 and 2015? What happens when Net is included into the equation?

And, related to that, maybe Oscar can help with how the full fiber IP project is going and when we should be able to get to sort of full IP or full MPLS.

I think, in Latin America, we have a very solid platform. I think we have a much better shape than anyone in Latin America. We have investing not last year -- last year, we have investments of around $9.7 billion. But we have been investing for the last ten years. And I think we're still going to invest for a couple of years because the demand on data is coming. We are growing a lot on data. And we want to have all the platforms in place for all this growth. We want to take the advantage of the growth that is coming.

Where we are growing? Oscar can tell us mainly where are the places where we are growing.

Well, as you know, as Daniel mentioned, we are an integrated telecommunication company. So we have the wireline business, and we are extending our reach in the wireless. We are building home passes in some of the countries, mainly in Brazil. We are building new home passes. And, as you know, data is growing pretty rapidly, not only in wireline, as well, in wireless.

Talking about wireless, we need to get closer the network. We need to get closer to fiber to our customers. So we had extended the wireless network in all the countries. Mainly in Brazil and Mexico, we are doing a lot, [record build-outs]; that is, to extend the reach of the wireless network to improve the data connectivity. I think we are in good shape in all the countries doing this extension. We will see that, by second quarter, we will have 50% of the ready extensions already connected with fiber. That will allow us to deliver a very good quality and increasing our [bundling that what is happening].

Another thing is that, as you mentioned, we have integrated the networks to just a single IP network, so we are going to handle all the traffic through this unified IP backbone that will include broadband, wireless, wireline, PayTV, and voice in a unified and seamless network. We are working on that. The major integration that we have to make is in Brazil. As you know, we have Claro network, Net network, and Embratel network. We have (inaudible) that we are monitoring constantly to improve that. And it will take, like, one year to have a fully integrated network in the case of Brazil.

And I think, Tomas, all these things that we are doing at the short time, we're going to have a little bit more of expenses. But I think, in the long term, it's going to help us a lot to have lots more revenue.

And better costs.

Better costs, better quality.

Thank you very much, gentlemen. I think that, with that, we can probably move on to the open Q&A. So, Shawn, if you want to start the questions.

Michel Morin, Morgan Stanley.

Carlos, maybe I should know the answer, but, just for the benefit of everyone else on the phone, could you explain to us the reasons why the country-by-country EBITDA has changed when you look at the last year numbers? Specifically, in some countries, there were very significant restatements to the EBITDA that you reported a year ago, 8% or 9% changes in Brazil and other countries. If you can walk us through the methodology for that, that would be very helpful.

And then, secondly, you've addressed on the margin front some of the issues that are impacting margin. And you've mentioned now the construction portion of the CapEx. And I was hoping that you might be able to give us a little bit more color about how significant that is, at least in rough terms, so that we can better analyze that impact. Thank you.

Well, we think a full set of statements specific to the Mexican BOLSA so that you can look at all the exact numbers there. You can see the full reconciliation there.

Net, net for the Group as a whole, it leads to an increase of 1.9% in EBITDA. That would have been higher last year than what was actually reported. And, net, net, it means that, at the level of the overall net income, it was essentially unchanged. So it didn't really have any impact that was significant. Technically, no impact at the level of net profit and a 1.9% increase in EBITDA.

I do not have here the breakdown by country, but I can tell you that the most important change had to do with Colombia because, in Colombia, we had been -- we had posted a net interconnection revenue as opposed to the gross interconnection revenue and the gross interconnection costs. We've actually had to adjust for that.

So it's basically something that had to do with the presentation of the figures, not really with the substantial (technical difficulties). But I would be happy to walk you through all the numbers country by country after the call so that you can put this (inaudible).

The second question was what exactly, Michel?

It was related to trying to quantify the impact on EBITDA from the construction costs that you expense.

I think, Michel, what we're doing is we're investing a lot. And, when you invest, you put a lot of infrastructure. This infrastructure that we are putting, let's say, cable, (inaudible) cable, network, fiber, home passes, fiber to the node, satellite -- all these have some cost, expenses, and maintenance. And, when you start to fulfill the capacity of all those things, then the revenues are going to grow, and you are going to still have the same maintenance and the same expenses that you have.

So, when you grow a network, your expenses grow, but, when you start to have the revenue and penetrate that network, you're going to have all the -- you're going to have the benefits of what we are doing. I think that's mainly the reason. No?

The other big reason is that we are really growing a lot on the postpaid subscribers. Postpaid subscribers means the smartphone's more expensive. You need to subsidize more. But the revenues are growing 30% in Latin America, and I think we're going to grow the same pace this year. No?

Is there also the effect that you had in the US at Verizon and AT&T, where you're also upgrading handsets for some of your existing postpaid subscribers, and the cost of those upgrades has gone up?

No. What we're doing is we have a lot of postpaid subscribers, and, when we finish their contracts, the postpaid -- this customer came and if they have -- they always -- almost all of them want a better handset. They want better services. They want more applications. So they came, they renew their contract for some time, 12 months, 18 months, 24 months, depending what they want. And they get a new handset. So that's mainly what people [is] doing. We only saw a few customers who want to renew their handset and they didn't finish their contract. I think the customers are waiting until the contract finish, and then they are changing. If they want to do it before, then they have to pay that up rate of the handset.

Right. Okay. Thank you. And, Carlos, just on a follow-up on the first question. It does look like the changes in Brazil was, like, 9% negative, Chile negative 10%, Peru negative 8%, Central America negative 8%; so, very big EBITDA downward revisions to last year's fourth quarter. And, yet, Mexico, I think, and Colombia are up slightly. So I struggle a little bit to see how, on a consolidated basis, it was up -- I think you said 1.9%, which is also what I saw. So I definitely would like to follow up after the call.

Yes. Happy to do that.

Thank you.

Ric Prentiss, Raymond James.

A couple of questions; first, on Mexico. When you cleaned up the subscriber base, was this just a one-time effect? Or do you expect further cleanups as it goes on? And what would the effect be on ARPU as we think through 2012 on the subscriber cleanup?

Well, I think, when you clean up the base -- well, it's not a cleanup. It's a change of methodology because what we believe -- if these subscribers are starting to consume again, we are going to reactivate it immediately. So we are not cutting the subscribers from the network. We are only changing the methodology of accounting the churn. So that's mainly what we are doing.

I don't know. I'm not so sure if we are going to do it again. We don't have plans right now to do it. But I don't know if there's -- if we can do it again. That means, thus, less subscribers, better revenue. It's better ARPU. So that's what is happening.

But at the end of the day, everything is accounting because these subscribers are consuming or are not consuming. So there's nothing [unless] changing a methodology. That doesn't change anything on your real revenue.

And then, on 2012, do you specific targets or budget goals you'd like to share with us as far as net adds or CapEx in 2012?

Well, the CapEx is going to be around $8.5 billion to $9 billion. It's what we are going to invest. We're going to -- we want to take advantage of 2012 and put in place capacity, put in place the best platforms, quality. And, to win customers, we're going to invest a lot of customer care to give the best service to all of our customers when investing in networks, in data. So that's mainly where we -- in IP, a lot. We have a big project for America Movil United to data centers, cloud computing. So all those areas is where we are going to invest in 2012. And I think we're going to spend around $8.5 billion to $9 billion on CapEx. It's what we -- it's our budget.

And as far as net adds in 2012?

Net adds in 2012? Well, I think, in mobile, maybe 14 million to 15 million subscribers. Maybe 14 million is more accurate to say.

Great. Thank you.

Vera Rossi, Barclays.

My question is about Brazil. In your press release, you mentioned that you have almost 10 million clients in PayTV. However, when we look at the Anatel information, the Net services and Embratel have, combined, approximately 7 million. So what is the type of access you consider PayTV in Brazil to get to the 10 million subscribers? Thank you.

As you know, in the case of Net, they account the analog and, as well, the digital. The difference is the digital PayTV that we have in Net. Initially, the release of Net, we take in account on RGUs the digital part of Net as well.

Okay. Thank you. And, in terms of the impact in margins of the PayTV content, what would be the breakeven point in terms of number of PayTV subscribers in which the content cost stops negatively impacting the EBITDA margin?

Well, I don't think there's a break point. I think that it's like economy of the scale in content. As you grow more, then your content goes down. So I don't think we have a point where content -- still we don't see a point where content is not coming down. The breakeven -- we are, I think -- in almost all of our operations, we are positive in the TV segment. We're winning money. We are Net. You can see Net. Net is having --

30%.

30% EBITDA. We have a positive EBITDA, but the EBITDA is lower than, let's say, the wireless. Okay? But I think that it's coming -- with all the growth and we have more subscribers, this EBITDA is going to come up. I don't know, Oscar, if you want --

What we are -- what we have in some of the countries is that the cost of the content will be reduced with the volume. So it will represent the cost of the content less than the revenue. So our target is to review the cost against the revenue side -- as you mentioned, in the CapEx in the content as well.

Another impact that we have-- some of the countries have faced is dollars. So, on the last quarter, we have an impact of the exchange rate that now is coming down. So it can have an impact on the content as well.

Okay. And do you still have the target to get to 20 million PayTV users in Latin America in the next two to -- in the next three to four years?

Yes, for sure.

We grow from [10 to 13.5], so we grow around 3.5 million TV subscribers. And, of course, we think we can get 20 million. I don't know if it's going to be in two years or if it's going to be in four years. But, of course, we're going to go to 20 million.

PayTV penetration in some of the countries is very low, so we feel there is room to get to that figure.

Okay. And my last question is in terms of uses of cash. Assuming that you already acquire most of the free float of AMX subsidiaries, what do you expect to do with your free cash flow in 2012?

(Inaudible) CapEx was -- hit a high point, I think, last year, both in absolute terms and, certainly, relative to revenues. You should expect CapEx itself to come down from this point and that, with whatever impact it has already on cash flow.

The target that we have had for a long time, as you well know, is that we'd like to manage the Company to maintain a net debt to EBITDA ratio of around one. We are a little bit in excess of that today. But I think, after the consolidation of Net and so on, we are going to be very similar -- very close to our target.

So, unless we engage in any more acquisitions -- there's really not much more to buy of Telmex stock. It's less than 5% outstanding. Not much more to buy of Telmex Internacional stock. It's probably about less than 2% outstanding. And there's only 6% of Net outstanding that could possibly be bought. So in terms of further purchases of stock of these companies, it's really very limited. So, unless we were to do any other acquisitions, we basically don't really have any other use for the cash than to distribute it back to shareholders; again, via share buybacks or dividends.

So I would highlight we are a company that is managing to sustain pretty good, pretty solid rate of growth or revenues. I think it's a company that is deploying very well its infrastructure that will provide us for a good base to continue to grow revenues. And I think that (inaudible) cash flow from CapEx is going to be diminished, and, therefore, we will have more funds available for all uses. If it is not for acquisitions, it will definitely be to return money to our shareholders.

Okay. Thank you very much.

Walt Piecyk, BTIG.

Thanks for that answer on cash flow. That was great.

I wanted to talk about the ARPU in Mexico and the dynamics there. Obviously, this year's ARPU was impacted by the termination rate cuts. But now, with this new policy on prepaid and, obviously, your success in postpaid, should we expect some moderation in the declines of ARPU?

(Technical difficulties)

I think Walter's question was on ARPU, given the changes in accounting and where we should expect ARPU development, particularly in Mexico.

Well, I think the ARPU -- I think we are going to maintain the ARPU in Mexico, growth a little bit, depending on the new methodology of the disconnections. But what's happening in Mexico is that prices are going down really fast.

But, in the other side, we are selling more smartphones, we're selling data, and we're selling applications. So that means that revenues are going [back up]. The prices come down, more services to our customers. That means more or less that we're going to maintain that.

And, in the other side also, we still are growing in the prepaid subscribers. The prepaid are in the rural areas. Prepaid are consuming very low ARPUs. So you need to -- And, also, the interconnection rates are down, like, 80% or 70% last year. So I hope that we can sustain the ARPU this year. I don't think there's going to be a big move in the ARPU. I think we can sustain what we have in ARPU in Mexico.

Okay. Thanks. And then, on Brazil, I assume that, since you made these kind of changes in policies in Mexico, Colombia -- I was surprised, I guess, I didn't see any type of reduction in Brazil, given you had to pay the FISTEL tax at the end of the year. Are you satisfied with where your customer base is as far as your policies and what you count as a customer after lack of payment for a certain amount of time?

What we have been doing in Brazil is we have been very conservative because of that -- exactly because of the payment of FISTEL that is very costly. So we have been really conservative in Brazil. So, in Brazil, we're following the policies of what the government is saying and, because then, over in Brazil, you have to pay the FISTEL. So that's what we are doing in Brazil. I don't think we need to do any change in Brazil.

Okay. And just a last question on LTE. Can you just kind of walk us through what your thought process is on LTE investment? I know Carlos talked about CapEx going down as a percent of revenues. Is it possible that there's an LTE investment in 2013 or 2014 that will reverse kind of the moderation in CapEx that's happening this year? Thanks.

No. I think it's very important to understand how LTE works. I think LTE is -- we have licenses in Mexico and in Puerto Rico, and I think they're coming, the auctions, in the rest of Latin America. But LTE -- if you want to put LTE, what you need to do is what Oscar just said. You need to put fiber to the node. You need to put IP. You need to put -- to make more strong all the backbone, the backhaul, everything. And then the LTE is coming more or less on the radio. Okay? So we are doing the investments today to put LTE in the rest of Latin America. So there are not going to be huge investments on LTE because we are doing the investments today. Let's say, in Mexico, we're going to launch maybe in the second quarter a couple of big cities with LTE. And, in Puerto Rico, also we can do something in the second or third quarter. So that's the calendar that we have.

So, Daniel, when do you think LTE will be available broadly in kind of all the major cities in Latin America? Is that an end of 2013 event or earlier?

Maybe yes. I think so. Maybe in 2013. It depends on the speed of the auctions in the countries. But we are ready. We already test the technology. We know how to do it. We are selecting our suppliers. So we are really advanced on that. And, as they are starting to launch -- sorry -- to auction that, we are going to start to put that technology. And it's going to be maybe 2013.

And, as I said, we have been doing a lot of the investments already to put LTE because LTE is only the radio, but you have to put all the backbone, the backhaul, and everything in. It's what we have been investing last year, and it's what we're going to invest this year.

Great. Thank you very much.

Richard Dineen, HSBC.

Maybe just a clarification, if possible, on the subscriber counting change in the methodology. You mentioned inactivity over a given period. I'm just wondering if you can share with us what that might be -- if it's sort of three months or six months -- just to get a sense of how strict that is.

And, secondly, maybe just a question on leverage and guidance for that. You're now at around sort of 1.3 times net debt/trailing 12-months EBITDA or thereabouts. Is that kind of where we should expect it to stay, or do you think, over the medium and longer term, you'd take that down to more like sort of 1 times, where you were before the Telmex minority buy-in?

Color on either of those -- well, on those questions would be great. Thanks.

The first question is what we do in Mexico. I think we reduce the methodology to half, more or less, and, in Colombia, a little bit more than half because we have a longer period. Okay? So that's what we do in this change on the methodology. And, as we say, we don't know if we're going to go further or not. But it's what we do until now.

The second question -- I don't get all the question. Can you repeat it, please? Ah, net debt to EBITDA again. Can you repeat that question?

Yes. Sure. Just that, obviously, now you've increased borrowing and increased net debt by -- I think it was 55% or so up. You know, are you planning to take that level of gearing down over the longer term, back down to sort of 1 times or so? What sort of period could we expect that, if indeed that's the case?

It will happen, I think, fairly quickly. I think, yes, we intend to aim for 1 by the end of the year. Again, on a consolidated basis, we will be including now (inaudible). And there are some issues that probably we might refer to, which have to do with the pace at which we have paid taxes. Last year was a bit faster than was normal on account of various things. But the fact is that, in terms of cash flow, part of the money that we ended up spending last year we are going to be recouping this year. So that should have an important effect in terms of helping with EBITDA to net debt.

So part of this is, basically, temporary, and it's something that we think is going to be corrected fairly quickly.

Okay. Thanks very much, guys.

[Fernando Ramos, GB Global].

If I'm correct, traditionally, postpaid ARPUs have been four or five times the ARPUs of prepaid subs. And my question is if in the postpaid subs you've added more recently, say, this last quarter, you're seeing the same levels of postpaid ARPUs or a bit lower and, if so, by how much. Thanks a lot.

Well, as you get more and more subscribers, the subscribers that you are getting are not the high-end subscribers, and you are getting subscribers that doesn't have the same income than the old subscriber. That means that they are not having the -- they are not consuming or they are not spending what the other ones are spending. But I think they are spending more because we are giving them not only voice; we're giving them also data, applications. And they are not as the old ones, but they are good, spending -- well, for us, good, spending subscribers.

Okay. Great. Thanks a lot.

Stanley Martinez, Legal & General Investment.

Just, first, a couple of quick questions on cash flow. To return to the cash tax point, Carlos, could you dimension exactly how much that cash tax delta would be in 2012 versus 2011?

And, also, on CapEx, does the $8.5 billion to $9 billion guidance there for 2012 contemplate a video license at Telmex? And, if not, how much of an additional factor might that be, either for PayTV customer premise equipment or to harden the network for video?

Well, in terms of the cash flow impact of taxes, we think it could be around $1 billion.

And, in terms of the CapEx, the new number, as Daniel mentioned, already includes the CapEx of Net. So you are seeing already a fairly big reduction in the CapEx of the old America Movil. So we are now moving to, roughly, $9 billion of CapEx, including, again, as I said, Net. But this number, as we've always mentioned -- CapEx is basically plant and equipment, and it doesn't include any acquisitions of spectrum or licenses or anything like that.

Okay. Thanks. And, if could just ask one other question specific to Claro in Brazil -- wondering whether the investment cycle that we talked about a few quarters ago in terms of customer care, call center, and distribution -- whether that's largely completed now in the first quarter of 2012. And, having made those investments, do you expect to now be able to improve your share of net additions from the 20% level that we've seen this quarter and last more towards where you've traditionally indexed? And, if not, maybe you could talk broadly about your ambition for revenue, market share, or operating income growth at Claro in Brazil.

I think what we have been saying all along this call and, indirectly, in the report is that there's been a clear strategy by America Movil of gaining more in the postpaid segment. And that's been the strategy that we're having in all the countries, including Brazil.

So it's not the big number that we are after necessarily. I think that we're after the good clients. The good clients are in postpaid. We are gaining market share in postpaid everywhere. Brazil, again, is not the exception.

And, the case of prepaid, precisely because of the question that was posed a little while ago regarding the FISTEL taxes and so on, I think we have been fairly cautious, as Daniel just mentioned, in terms of -- very conservative in terms of our growth in prepaid. We do not like to engage in SIM card games, and we've been very mindful of just going after good, prepaid clients. So I think that's why we're not doing any major revision in Brazil.

And we, again, continue to gain in postpaid. We have very good data capabilities and very good coverage, which is increasingly important for postpaid clients. And, on top of that, we have not gone into the happy numbers of the SIM cards, but, simply, we have been more conservatively going after prepaid clients.

Another thing that I want to add that Carlos is saying is Brazil is really competitive. And, still, we do a lot of things the past two years, and, still, we're going to do more things in terms of distribution, in terms of marketing, in terms of customer care centers, more stores. So we are investing a lot on that.

All the results are not coming in one month. I think I'm happy how we are evolving in Brazil. And we're still going to do that -- we're still going to be very cautious on the churn. Also, we are not going to maintain customers that they are not consuming. In Brazil, a lot of -- they have two SIMs then consume one or two months with you, and then they go with the other one and [then didn't] return with you.

So we're going to be under the policy of what the government wants in terms of the FISTEL. But we are going to be really conservative in postpaid and in prepaid in Brazil. But all the investments in distribution, in marketing, in customer care, in customer call centers, everything -- we are still going to invest a lot this year.

Is it fair to say, Daniel, that, as postpaid grows as a proportion of your net adds, that we should just expect to see more variability with respect to service margins, not just in Brazil but across the Group, in the quarters where you have high customer activity, like Q4 and Q2?

What you should see is more on the revenue side -- on the growth of revenues. Okay? And it's where we want to be really focused. No? We don't want customers that they are not consuming. We want customers that they are consuming. And we want customers that they consume -- if they consume not too much, we want them because they are consuming. But we want to be really focused on revenue -- on new revenues, on new lines of revenues. In all of that is where we want to be focused. So I think the measure for us is going to be on the revenue side, not under the number of subscribers. It's where I'm measuring the countries. No?

Maybe we should move on to the next question.

Thank you.

[James Raza, New Reach Research].

I'd add two questions, please, both, actually, relating to the old Telmex. In Telmex's result statement, it seems there's been a strong boost in data revenues. And it mentions that this is related to a security project. I was wondering if you could just talk a little bit more about that. Is that a one-off item? How much did that boost revenues by, please, and, also, EBITDA within Telmex?

And then, secondly, I was wondering if you could let us know what you're doing with your fixed and mobile tariffs within Telmex. Are you planning to fully pass on the interconnection rate cut to your customers in Mexico? Thank you.

I will ask (Inaudible) that is here with us from Telmex. He will be answering the first question.

Sure. Regarding your first question of the security, this is a project that has been going on for the last three years. And, during this quarter, there was an important delivery of the product and of the services. Therefore, the impact on the data revenues -- if you take apart this project from the data revenues, the increase would be 8.4% in the quarter -- on a yearly basis, of 7.6%. So that is kind of the impact that you might see. So, therefore, in the quarter, the impact was around 15% of the revenues of the data.

Then, regarding your second question of the fixed to mobile rate, we have been mentioning that we are passing through all the benefit of the reduction in the interconnection tariffs to the customers. Therefore, we are reducing the rate from MXN1.35 per minute to MXN0.71. What we would expect is to see an increase in the traffic due to this rate reduction.

Okay. Thank you very much.

Bill Alexander.

On your data transmission, could you give us an idea of the size of it and how fast it could grow in Mexico and Brazil over the next few years?

Sure. Well, let's talk about Mexico -- that we have the figures. If you take the broadband of Telmex plus the data that (inaudible) is handled, in the peak hour, we have like 800 gigs of speed in the network. What we've been seeing is that, every 12 months, the traffic gets duplicated in our network. That gives you a sense how is growing the traffic and the size of the volume that we are handling through our network. In the peak hour, I repeat it, like 800 gigs in the network.

I don't know if this answered your question.

I think, in terms of the potential, what we have said for some time now is that we believe that we are going to be able to duplicate fixed broadband penetration in the course of another three or four years and that, in the case of mobile broadband, where mobile broadband is today aimed at postpaid clients, basically, the practice of smartphones [has fallen] significantly over the last year or year and a half. And that is allowing us to migrate more rapidly postpaid clients to smartphones. That is something that we think will continue, will proceed.

And, probably within three years or so, we will have migrated all our postpaid clients to smartphones. We believe that, at some point, the practice of smartphones will come to be cheap enough, low enough, so that they are attractive to the mass market. And then, you know, we can have something as what we saw in the middle of the last decade, where the mass market will (inaudible) the growth of data revenues.

So I think the next two or three years we're going to see mostly adoption of smartphones on the part of our postpaid. We will be migrating, essentially, all of them at no increased cost because, essentially, we're relying on the price of the countries to continue to decline. And then we expect that they will be low enough for them to be attractive to the mass market. That's something that is probably three years out.

Secondly, the wireless HSPA+ is now traveling the speed of the transmission. So the problem is not so much now with the electronics and the radios, as Daniel was pointing out. It's basically we need to have all the fiber support, backbones, and backhaul, and so on to be able to transport all the data.

Again, getting back to your EBITDA margins in Mexico (technical difficulties) bottomed out?

We don't hear you.

Oh, excuse me. With reference to your EBITDA margins in Mexico, can one make the case that your EBITDA margins have basically bottomed out? Or is the negative trend going to continue for a while?

I don't think we have -- I think, still, the present -- second quarter, we have the difference, because, in the mobile side, we have high interconnection first and second quarter. And this quarter -- of last year. And, this year, we are going to have the reduction in, let's say, 75% or 80% reduction in the interconnection rates in the mobile. So, when you compare first and second quarter of last year to first and second quarter of this year, you're going to see that. But, without that, I think we can maintain the same EBITDA that we have been having.

And, if you look at Brazil (technical difficulties).

I think, in Brazil -- I don't hear you. But, if you talk a little bit about Brazil, I think, in Brazil, we're really doing the integration of the networks really fast the investment. So I think Brazil we should see the same or a better EBITDA this year. I hope and we're working to have better EBITDA numbers this year.

Andres Medina Mora, GBM.

I was wondering where you would expect to see your data revenues as a percentage of service revenues going forward, probably by the end of the year.

And you were also mentioning the integration in Brazil. Should we expect to see a higher level of integration in between the Mexican companies? Thank you.

Yes. We're integrating it in Brazil, and we're integrating in Mexico. Oscar can explain to you more or less what we're doing, let's say, on the networks in Mexico.

Yes. Well, in Mexico, as we mentioned before, the data traffic is growing very fast. So Telmex Mexico already have a huge coverage in its data network. So (inaudible) is using the data network of Telmex in order to don't duplicate investment. We are using the same fibers in the data traffic, so we believe that will bring quality to our services and improve the cost to deliver the services. And we are doing the same situation all over the countries, as we mentioned before, to unify the networks, to unify as we can the switching, and, in some cases, locations which are, in some cases, when it's possible to do it. So I think we are on the path to integrate the network to become just a single network and avoid all the duplication that would happen, barring the data network.

And the integration is not only on the networks. We are integrating -- having integrations on the distribution, in the customer care/support area. So we are -- IT. Data centers. We are doing the integration in a lot other areas. I think we are -- in some countries, we are more advanced than in the other ones. But I think we're going to reach a point where every -- all the countries and the companies are well integrated.

Just to give you an idea for the (inaudible) data and revenues, I think that, by the end of the year, we'll probably be around -- fairly close to one-third of the service revenues coming from data -- from mobile data on the wireless side. And it is already more or less there on the fixed-line side if we consider also broadband (inaudible) networks. And this should also continue to increase. So, probably, on the mobile side, more or less a third of service revenues. On the fixed-line side, probably between 35% and 40% of service revenues.

Okay. And, Shawn, maybe we can move on to the last question today.

Jim Breen, William Blair.

Just a couple of clarifying questions. On the CapEx side, $8.5 billion to $9 billion, can you talk about the proportion of that -- where you think you'd be spending it in Brazil and Mexico?

And then, also, as you talk about transitioning to data, can you, first, talk about what you think your smartphone penetration is right now amongst your postpaid customer base. And, then, where do you think the bottleneck is in terms of getting speeds for 3G and, eventually, LTE up and running?

On the CapEx, I don't have it here. And we don't disclose how much is going to be in Brazil and Mexico. But, all overall, it's going to be between $8.5 billion and $9 billion on CapEx, including Net and including Telmex. Okay? So everything included, it's going to be around $9 billion, let's say.

The penetration? I don't have it. We can give it to you. I don't have the penetration on the smartphones. But what I can tell you is that the smartphones are -- the prices are coming down really fast. And, as they are coming down, I think the customers are getting more and more and more smartphones, and we're getting more and more revenue on the data side.

I think we are also prepared to give more and more data on the prepaid side. I think a lot of our prepaid customers are starting to use. You could see that our prepaid customers are starting to use more and more data in their phone.

So it's what we are going to focus this year, to get more smartphones and sell more data to all of our customers around Latin America.

And then just one follow-up question with respect to the customer base cleanup. You know, generally speaking, you've been putting up strong net adds in Brazil, and, yet, the reported numbers as a country, the penetration obviously is getting at that 100% level. As you look across your base and you think about what the real penetration is, maybe in Brazil and Mexico, sort of what's your feeling there? Is penetration in the stated numbers overstated by 20% or 30%?

I don't know. In my numbers, no. I have a very clean base in Brazil. And we have been very conservative in Brazil and in Mexico. I can just tell you about what we have in America Movil. I don't know exactly what the other companies have there. But, if you talk about Brazil and Mexico, either Colombia or any place, I think we have been very conservative in our base. So I can tell you that our base is really generating revenues for us. All of our subscribers are generating revenue.

Great. Thank you very much.

Thank you, Tomas, and thank you, everyone, for being in the call.

Thank you, Daniel. Thank you, Carlos, Carlos, Oscar, Daniela. Thank you, everybody, for being on the call. And I think that concludes are call for today.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.