Telefonica Brasil SA (VIV) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen. At this time we would like to welcome everyone to the Telesp Celular Participacoes, TCP, fourth quarter 2003 conference call. Today, we have a simultaneous webcast with slide presentation on the Internet that could be accessed at the site www.vivo-sp.com.br. There will be a replay facility for this call on the website.

We inform you that all participants will be able to listen to the conference call 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. Should any participant need assistance during this conference, please press '*0' for an operator.

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 TCP 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 future results of TCP, and could cause results to differ materially from those expressed in such forward looking statements.

Now I will turn the conference over to Mr. Francisco Padinha, CEO of Telesp Celular Participacoes. Mr. Padinha you may begin your tele conference.

Good morning ladies and gentlemen. Thank you for joining us for TCP's Q4 2003 earnings release conference call.

This conference call is being simultaneously transmitted over the Internet. You may access a copy of this presentation from our website www.vivo-sp.com.br, Investor Relations section. Here with me today is Fernando Abella Garcia, CFO, and our Investor Relations Officer, Ronald Aitken. In order to facilitate comparisons, all financial and key operational indicators are presented on an aggregate basis, consolidating TCO 100%, unless stated otherwise. Data per operator is available in the earnings release.

On slide three I will begin by updating you on some of the quarterly business environment highlights. Once again we evidenced during the quarter an improvement in the macroeconomic scenario in Brazil. Domestic interest rates, CDI, was cut by 4.5 percentage points in December. The dollar real exchange rate was relatively stable at R$2.9 to the dollar. Brazil's counter risk continued to fall sharply, reaching 463 basis points at the year end 2003. Inflation closed the year at one digit point.

Secondly, following the trend seen in the third quarter, 2003, Brazil's mobile market experienced stellar growth rates during the fourth quarter. This resulted in a record in terms of Brazil net adds. Brazil ended the year with over 46m cellular subscribers, 24% year-over-year. This represented net adds of 5.5m for a penetration rate of 26%. We believe the higher than expected growth is a result of lower handset prices. This intensified competition with frenzy of marketing expenditures seen in the market, as well as the aforementioned improvements in the economic scenario.

Thirdly, we highlight the entry of a new competitor in the states of Parana and Santa Catarina, mobile telecoms operating region in the quarter. This new entrant, GSM based in structure, commenced its operations with very limited coverage in December 2003. Another highlight is the launch of Brazil's second largest operator nationwide brand, which especially impacted in Sao Paulo city.

Lastly on slide four, we discuss the consolidation of the Vivo brand nationally. With just over nine months from launch, it has consolidated its premium brand, [inaudible], maintaining a large advantage over the second ranking. On an original basis, the market of Sao Paulo city and Brazilia showed even greater disparities in [colitiva] where we are a D Band operator. Our ranking was just nine percentage points lower than the leader, the smallest difference since the Vivo launch.

On slide five we list some of the operational highlights in the fourth quarter. Firstly, we highlight TCP's leading market growth with a record of net adds of 1.6m, up to 142% year-on-year with the solid sales share of net adds of 53%. Total active customers reached 15.3 million for an early subscriber increase of 29% and at 14% quarter-over-quarter with the postpaid base lowering 7% year-on-year, and an important 2.5% quarter-on-quarter.

Fourth quarter results were impacted by higher commercial activity, intensifying competition and some non-recurring items. Nevertheless, SAC in the fourth quarter reduced to R$95m, down 34% year-over-year. Finally, we note the continued increase of load in data services. Data already represents 3% of our total service revenues. Later we will discuss this important evolution in more detail.

On slide six you can see the improvement in market share of net adds since the launch of the Vivo brand in April 2003. It reached 53% in the fourth quarter, a significant improvement from the average of 39% in the first semester. Looking at early comparisons, it is important to mention that the competitive environment changed significantly in 2003 versus 2002.

Looking at the performance of the different operators, we note that TCO, Area 7 Central West region of Brazil, showed another strong sales share of net adds of over 60% in the fourth quarter. This was up from an average of 50% in nine months, 2003. GP margin of our market share remains strong at 56% in the quarter. Finally, we highlight the total number of net additions in the quarter, which increased 142% versus first quarter 2002. An increase above the Brazilian average, reflecting the company's brand strength, financial muscle range and market leader strategy.

On slide seven we have shown that during the year, the difference between the absolute client base of the operators [indiscernible] and its main competitor, has had a very positive evolution. The A Band operators, who are in TCO, the mid west region, have increased the gap with a second operator by 32% in Sao Paulo and 27% in Area 7. The gap in Sao Paulo was increased by nearly 1m subscribers to 4.3m. The B Band operators, GT and NBT, meanwhile have reduced their gap against the market leaders by 30% and 34% respectively. Showing in all cases TCP's strong performance against the competition.

Slide eight shows the stabilization of TCP's market share during the fourth quarter, 2003. The company's consolidated market share, including its two B Band operations, is up two percentage points to 58%. This we note is especially important when we consider the strict disconnection policy vis-a-vis our competitors. By region, it is important to highlight the positive evolution at GT. The company gained four percentage points of the market share during the year, and 2.5 percentage points in the fourth quarter. This was despite the entry of a third operator in the quarter.

Moving on to slide nine, we show TCP's client base growth of 29% year-over-year, and 14% quarter-over-quarter. This is a rate above the average for Band A operators. It is important to note that the postpaid client base increased more than 6.5% year-over-year, and 2.5% quarter-over-quarter, driven by the corporate client segment.

On slide 10, you can see that fourth quarter net revenues increased 8.6% quarter-over-quarter, and 22.2% year-over-year. Not that hilly comparisons are impacted by CSP, Bill & Keep, and changes in accounting policy effects. Excluding these impacts, we estimate telesales growth over 25%. Quarter-over-quarter, when we exclude the impact of Bill & Keep, fourth quarter net sales increased over 12%.

Fourth quarter net service revenues increased 18.7% year-over-year. Quarter-over-quarter growth of 3.2% was especially explained by the 8.8% increase in average subscribers in the period. This was more than compensated by the negative impact of Bill & Keep, [indiscernible]. As well as the seasonal one quarter lag between the concentration of net additions during the last weeks of Christmas and when these customers start to effectively generate revenues for the company.

Handset revenues increased more than 36% in the quarter, and 32% year-over-year. This reflected the strong commercial activities during the period.

On slide eleven you can see a more detailed breakdown of data sales evolution. Greater revenue growth of 138% in 2003 is not only due to the increase in the penetration of the enabling handsets, but also to the positive trend of average usage per customers. Revenue increase was higher than the increase in the enabled clients, SMS enabled client growth of 72% versus unique users increase of 161%.

Also in 2003, SMS continued to represent the bulk of data sales, 72%. It is important to note that other services, such as Blue, Zap and MMS, for example, are starting to show a significant potential of revenue expansion in this segment.

On slide 12 you can see one of the main service launches in 2003, Vivo ao Vivo. A multimedia super platform that enables Vivo clients to use icons without access, to facilitate the use of different Vivo services. Moving to slide 13, you can see some of the futuristic advertising of Vivo ao Vivo campaigns which was very well received by the public.

On slide 14 we show the range of download services offered. These include downloading games; different entertainment applications such as ring tones, [inaudible] and similar; communication applications such as chat and productivity, including translator, dictionary and traffic road guide, etcetera. In December alone the number of downloads reached a record of 129,000 over all Vivo companies: TCP, Telesp Cellular, Global Telecom and TCO. They accounted for more than 70% of these volumes.

Moving to slide 15, you can see an example of our MMS advertising campaign which has the incentive of pushing our clients to send pictures, photos and other multimedia services from the handset. There are currently three digital camera phones available in the market, with another two expected in the next quarter.

Next to slide 16. We show how Vivo has been the leader in terms of wireless data revenues performance in Brazil. The product penetration and revenue generation of many of our services are also further ahead than some companies in the United States and Europe. Consider the lag between the launch of our services and the launch of these countries.

On slide 17, the positive evolution in TCP minutes of use this quarter reflects a sustainable increase of postpaid MOU and the stable prepaid MOU. This is covered by a 20% increase in outgoing prepaid MOU, which reflects the success of our prepaid recharging campaign. Revenues in MOU decreased as a result of greater representation of prepaid customers and the companies took our customer base. As well as the fact that an important part of new customers will have it at the end of the period, namely December.

Moving to slide 18. Excluding Bill & Keep and CSP effects, and the changes in the accounting policy of TCP in the first quarter 2003, the 2003 landed ARPU would have remained stable year-over-year. This is especially important when considering the 24% average customer increase, 94% being prepaid. The 5% reduction in blended ARPU in the fourth quarter versus the third quarter, 2003, is mainly explained by the important increase in total prepaid clients in the quarter. There were more than 1.6m new adds or 17% quarter-on-quarter increase, as well as the fact that an important part of new customers were added at the end of the period, roughly 40% in December, with little revenue generation impact.

Excluding Bill & Keep effects, this reduction would have been smaller, 3.5%. This would have been in line with last year's seasonal quarterly reduction. We note that the impact of Bill & Keep was more significant at the last [seminar], given that one of its main competitors started to operate under the DSM [indiscernible] just in October.

On slide 19 we show the evolution of total 2003 costs, which increased 16% year-over-year. Finally reflecting higher selling and handset expenses, more than 48% year-over-year. This was related to the commercial activity with an increase of 55% in net adds. This was partially compensated by the decrease of the non-commercial costs less 19% year-over-year.

Total costs in the quarter increased 23%, seasonally impacted by the increase in commercial costs, more than 34%. Non-commercial expenses increased just 7% and were impacted by several non-recurring items. Firstly, expenses with contingency provision increased the net BRR57.8m in the quarter. The most relevant contingency was the provision related to the [indiscernible] on financial, other non-operating revenues, in the amount of BRR77.6m.

On the opposite side, bad debt expenses were reduced by BRR16.6m in the quarter. This was due to the cancellation of accounts receivable partially provisioned.

Moving to slide 20, we show how subsidies of consolidated and subscriber acquisitions costs decreased by 34% year-over-year, reaching BRR95m [worth 32] in the fourth quarter 2003. This is despite the stellar subscription growth, strong share of net adds, and more intense competition and environment. This reduction is especially explained by a more favorable exchange rate, increasing scale advantage and the larger concentration of prepaid sales in the quarter. Accumulated SAC 2003 fell 6% year-over-year. bSAC did not decrease further due to a higher commission of advertising [indiscernible] had in 2003.

On slide 21 we discuss EBITDA margin evolution in the period. 2003 EBITDA increased 16.4% year-over-year for a margin of 38%. In the fourth quarter EBITDA increased 6% year-over-year but fell 12% quarter-on-quarter. The intense commercial activity gross adds of 2.3m higher than the extraordinary personal costs, and the net impact of non-recurring items of BRR45m, are the principle reasons for margin contraction in the period.

Not considering the non-recurring items, many related to [indiscernible] discussed earlier, EBITDA would have reached R$670m. This represents a 35.7% margin, down from 38% a year earlier. On original basis, TCP's fourth quarter EBITDA margin was impacted by TCO margin of 31%, down from 42% in the third quarter 2003. However, it was in line with the fourth quarter 2002 margin of 30.9%.

Analyzing TCP's margin, excluding TCO's results and the non-recurring expenses, we reached a quarterly margin of 37.6% and an accumulated margin in 2003 of 38.8%, in line with the results of 2002, 39.6%. This is despite TCP's, excluding TCO, net adds in the fourth quarter 2003 being more than two times the net adds of the fourth quarter 2002. The early decrease in 2003 was 50%. I will now hand over to my colleague, Fernanda Abella, for the financial outlook of the company.

Good afternoon ladies and gentlemen. On slide 22 we show the financial profitability. We saw a reduction of R$173m, mainly related to some extraordinary one-off effects. First we have expenses on net interest from capital, [indiscernible] capital, in the amount of R$940m. R$940m being the result of R$132m minus R$38m going to TCP. Financial costs, as I say, this too is a provision of fiscal [things] as explained on slide 19, of R$20m.

We have also reclassification of interest related with R$16.6m reversal of the bad debt provision in the amount of R$22m. That was reduced from the financial revenues. [indiscernible] certain provision in the [indiscernible] was another one-off effect. Besides that, there are some costs related with the TCO operation. Namely, [indiscernible] and the incorporation process. There were negative results compared with the third quarter in [indiscernible] evaluation, and another effect related to the payment of [CPMF] of higher expenses and higher repayment of debt. Excluding non-recurring items, the items [indiscernible] have been stable if compared with the third quarter 2003.

Going to Slide 23, the company has reduced significantly its net loss year-on-year of R$490m. Mainly reflecting higher EBITDA and lower financial costs. In the fourth quarter 2003, the loss reduced by 70% compared with fourth quarter 2002. There was only a negative evolution if we compare third quarter 2004 with the third quarter 2003, reflecting lower EBITDA and higher financial costs in the quarter.

Slide 24. TCP total investment, as a percentage of net sales, fell to 11.4% versus 11.8% higher earlier. This positive performance comes despite explosive cover growth; continued expansion of 2.5G coverage, now reaching 49% of the population Sao Paulo estate and 100% of Sao Paulo city; and CDMA over [indiscernible] [projects]. Thus demonstrating significant scale of efficiency of the company.

As you will see on the left hand graph, total CAPEX per total net adds in the period decreased 25%, year-on-year to R$252m,$87m, for an accumulated CAPEX per client of around $250. This is down 50% year-on-year. The company remains committed to reaching [indiscernible] levels on level of quality of service. CDMA is [indiscernible] efficient. [indiscernible] organization means that there is no need for further speculative acquisition to meet the potential subscriber. In 2004 we expect CAPEX to remain with a stable guidance of 10-12% of total revenues.

Slide 25. Operating cash flow for TCOP saw a significant improvement this year, generating BRR1.75m, up 16.5%, year-over-year. In the fourth quarter, total operating cash flow was impacted by lower EBITDA and higher CAPEX, generating BRR159m. It is important to highlight the significant decrease in the working capital of approximately R$400m, related to the increase of our accounts payable.

As I have already mentioned, higher CAPEX, the conclusion of the TCO OPA loan on slide 26. In terms of our net equity [pay], as well as [indiscernible] obligation, the generated cash resulting in 11% increase in the net debt to BRR4.119bn, approximately $1.4bn.

Net debt to EBITDA remained stable at 1.6% level, similar to 1.6% at the year end 2003. The increase in short-term debt, which accounted for 64% of the company's total debt in the fourth quarter 2003, up from 47% in 2002. This is the result of inter-company loans amounting to BRR416m, due in November 2004.

On slide 27, we show the evolution of the prices of TCPPN, TCOPN, [indiscernible} index, and telecommunication in Brazil. So, both TCPPN and TCOPN have given there [indiscernible]. Now I hand back to Francisco Padinha.

Just to finish our presentation, I would like to finish by briefly highlighting some of our achievements in 2003. First, you note our successful acquisition and full operational integration of TCO. Our continued leadership in the market growth in Brazil. The solid premium brand awareness of the Vivo name and the continued, positive evolution of the data business.

This came as a result of our important investment in state of the art technology through our CDMA and 1XRTT platforms, as well as our multimedia for the platform, Vivo ao Vivo. Thank you very much for your attention. I would now be glad to answer your questions. Thank you very much.

Thank you. Our first question comes from Rodrigo Ortigao of Banco Pactual.

My question is regarding prepaid traffic. I was wondering how are you seeing the evolution of prepaid outgoing revenue going forward? Do you feel that the promotions that you have put on are having effect on prepaid outgoing traffic? Also, if you could tell us what is your current ratio of the outgoing incoming traffic in the prepaid segment? Thank you.

Thank you for the question. Well the outgoing prepaid traffic is still increasing. So, as we look for our trends, namely in the fourth quarter, they are mainly driven by the bonus of our campaign at Christmas. However, we are looking at the behavior of these customers, the outgoing traffic as the [habit] of use mainly on that, it is increasing.

So we believe that this trend could be sustainable, mainly if we retain our success on the recharge campaign.

Yes and how about the ratio you have currently on outgoing and incoming traffic for your prepaid segment? Could you tell us that?

Sorry, we are not disclosing those kind of figures.

Okay. Lastly, could you provide us with an EBITDA margin guidance for this year for TCPNO?

We are also not supplying guidance for the coming year about TCPNO.

Okay.

Thank you.

Thank you. Our next question comes from Mauricio Fernandes of Merrill Lynch.

Hi, morning everyone. A couple of questions. First of all, Francisco, to what would you attribute the high margin in the Sao Paulo market, 42%, in spite of the similar subscriber growth that you saw in mobile telecomm and TCO market? That is the first question. In addition to that, although you are not providing guidance, do you believe that the margins on Paulo launch are going to be higher or lower than that 42% for 2004?

The second question is on subscriber growth. I know you have been mentioning a 30% growth in 2004, which in percentage terms is similar to 2003. However, in terms of the new additions it is a much higher number. How have you come to that number? What is behind that? Do you see early signs in January, February, of strong subscriber growth already? Or you have conducted a survey and you believe that you are getting to 30% wireless growth or subscriber growth in 2004? Thank you.

So in Sao Paulo, what you are seeing is in fact the synergies working. The cost of terminals as we increase our sales is under control. We are negotiating in certain favorable conditions with our suppliers. This is very important. The recharge campaigns have been a success. So these three factors, and also including the synergies I mentioned, in the first place, are indicators of our results and our margin in Sao Paulo.

Well the trends in 2004 for development in terms of overall markets. Well we believe that if the optimistic mood in Brazil can be maintained. The market is very hot and all players are actively investing. Then maybe we can see the same growth that we found in 2003. I mean in the order of about 30%.

Just one question on the recharge campaign. Can you provide details on why you think it is successful? What has been the driver for that success in the recharge campaign, please?

I cannot give, of course, dependable figures on the recharge campaign. However, it is one of our main bats on the prepaid revenues. You follow our market and our advertising, so you know we are launching another recharge campaign. This is the main part of our strategy, to increase revenues or to increase consumption line in the prepaid.

What I can say to you is, in fact, the recharge campaign is the main tool we are using to increase the revenues and the consumption of prepaid.

Okay, just one final question. On CAPEX, can you provide a CAPEX figure for [indiscernible] on [holiday] basis or for TRO a breakdown for 2004?

We maintain the guidance of 10-12% at a level of TCP at present feature of revenue.

There are no constraints. I would like to stress there are no constraints within these figures to manage the increase in traffic. The increase in the customer base has impact. We have very good prices on CDMA infrastructure. The CDMA has a tremendous advantage over the TCPA technology. The same applies for GSM because it is very, very efficient and uses [inaudible].

So the 10-12% is for TCPA only, excluding TRO, therefore [overlay] or that is on a consolidated basis, Fernando?

Everything included.

Okay.

Thank you. Our next question comes from Andrew Campbell of Credit Suisse First Boston.

Yes, hi. Good afternoon. I just wanted to go back to around the time when you cancelled the TRO exchange offer. I remember that you mentioned that you were going to pursue some legal quest to prove that your offer was in compliance of the law. I was wondering if there was anything that is actually happening in the courts? If you are still pursuing any kind of recourse there? If there is any update on that front?

We are trying to reverse the [CVN] opinion in the courts but nothing has happened. We are not providing any details and we are working on that. We are continuing with the same idea to reverse this opinion. So we will know very soon.

If you are able to reverse the initial opinion, is the idea then to come back with the offer that you had? Or is the idea simply to clarify in the court that your offer was in compliance with the law?

We will see. We will analyze the market conditions and the economic evaluation. We will have to analyze at the time when we get the reversion.

Okay, thanks Fernando.

Thank you. Our next question comes from Laura Mello of Santander Bank.

Hi, good morning. I wanted to have a feeling on how many subscribers on TRO you have already migrated to the CDMA network? If you could specify? Also, you mentioned that 23.6% of your users on TRO would be targeting data products. Are those the users that are already migrating or those are the targets for promotion for migrating? Could you specify?

Excuse me, could you repeat the question?

My question is how many users you have already migrated from TDMA to CDMA on TRO region?

Excuse me, next question. We are not providing this data of migration. The next question please.

The other question was regarding the 23.6% of TRO subscriber base that you mentioned on the report that would be willing to consume data products. Are they the ones that you will be targeting with promotions for the migration to the CDMA network?

I am sorry, could you repeat the last part of your question, please?

You mention on the press release that there are 23.6% of your users that may be willing to use data products, SMS and enhanced services. I was wondering if those are the clients that you are targeting through promotion to migrate to the CDMA network?

Well, first of all, the point is some of the figures are not disclosed. Anyway, with regard to our strategy on the migration of CDMA, I would like to give you our response to this issue. It is being dealt with in a phased way. So, we are measuring the reaction of the market and looking for the position of our competitors who are higher. We are deploying the network as competition is increasing, the digital coverage in GSM, and also managing the traffic from our networks in TDMA to the new network in CDMA.

As you probably know, we are managing the same frequencies so we need to take care of the capacity of both networks we are managing centrally. What happens in CDMA and SMS. In fact, SMS is the stronger of the data revenues. It is has a strong depth of subscriber. So, we are increasing and we are incentivizing the increase of the enabled base in terms of SMS.

Well it is still a success in terms of data but the trend is to decrease a little overall. To decrease slightly in WAP and to increase the SMS. That is the trend that we are seeing in all the operations that we have in Brazil.

Okay, thank you very much.

Thank you. Our next question comes from Brian Rustling of Cazanove.

Two questions please. The first one, in one of your slides you refer to you implementing the operational integration of TCO. Can you just go through what you have achieved so far, the actual measures? What is left to be done? How much are you restricted by not being able to do the financial offering to the full extent you would have liked?

The second question is in relation to your short-term debt. Obviously, spiked up, partly to do with the shareholder loan. Looking at the next year, it seems that you are going to have to go through quite a lot of refinancing. Is it just an issue of rolling over the shareholder loan? How does that rank against any payments to Portugal Telecom during 2004?

As far as the integration of TCO is concerned, I would like to stress that, of course, we are respecting and we are looking for a legal environment. Of course, we need some full integration. Anyway, full integration, as we mentioned in our presentation, it is mainly related with operational integration. This year TCO is acting over the Vivo brand. It is integrated in our organization because we have vertical comments of the different lines of the operation.

For instance, IT, technology and operations, [DRE], human resources, communication, financial, etcetera. So, TCO is now functionally a region of Vivo. It is mainly a channel, it is mainly a business area. So when we mention full integration, it means that TCO and the other operations are restructuring on the basis of one brand, one company, and one team.

So the synergies that we have been able to capture from these organizations come mainly in operational terms. Of course, Fernando could elaborate a little on that. There are some limitations that are mainly financial, related to the financial activity. However, in commercial and operational terms, the fact that we are managing, and I would like to stress that in Vivo we are managing five open holdings companies, our margin rating any constraint in operational terms, as you can see from our results.

Related with intercompany law of €460m with PT. The idea of Vivo is to repay this loan in November 2004 when it is due. So we are going to have internal resources from the operation. We will also need some third party loans and we are already analyzing the different possibilities. A decision will be taken at the end of the third quarter, depending on the market conditions.

Thank you. Our next question comes from Charles Chichester of Cazenove.

Hi, just a couple of questions, if that is all right. I noticed in the Parana/Santa Catarina operation the mix in customers is increasing very rapidly in favor of prepaid. However, I also note that your market share has also increased there. Do you think this is indicative of the market there or have you possibly taken a lot of low-end customers from the other operators over the quarter?

My second question. I do not know if you are able to but whether you could tell us all whether you would be active in any auctioning of the recently renounced Band D licenses in Areas 4 and 10. Thank you.

Well, as far as concerns the prepaid issue, this is related to the growing operator bases. I would like to stress that from the second symmetry in Brazil, the main growth in all operators has been from the prepaid. It has been driven by the [indiscernible] and the [indiscernible], the other campaigns, culminating with the recent campaign.

The main driver in the prepaid also works in Parana/Santa Catarina. There we started with a D Band operation with a very, very strong base of postpaid. It was the strategy of the former owners of Global Telecom. So, it is normal that we are now moving to a more widely base of prepaid customers. However, as you can see, the fundamentals of the company are not changing too much, as the company follows the trend in all the operations in Brazil.

Okay, but the base of prepaid in Global Telecom of that area, Area 5, is significantly higher than all of our other areas. It is definitely the highest, is it not?

Yes, because the campaign, as I said before, has mainly been driven by the prepaid. So, as we are an attacker in Parana/Santa Catarina, you need to be aggressive. Prepaid is the basis for full growth. As the A Band operator, it is many phases in [indiscernible]. It is the natural trend.

Okay, thank you.

Thank you. Our next question is a follow-up from Rodrigo Ortigao of Banco Pactual.

A question on potential acquisitions. What are your alternatives to enter Area 4 now that [Telemedia SA] has now announced the use of GSM technology for their upgrade? Do you feel it is essential to be able to offer your brand in the region? Or is it simply a question of offering digital roaming? Thank you.

Our strategy is to deploy the digital service over the units rise and the sixth place in the market. I mean the Area 10 and Area 4 are mainly bases in roaming services on digital technology. For the time being the A and B Band operators are obliged to support our roaming and analogue on 850mhz. So, as this frequency is becoming much more free because the A and B Band operators that are located on those areas are migrating to GSM, 1800mhz.

So we are beginning our demand, our questions to Anatel to consider this issue. So we are looking for the possibility to deploy the operations bases on the digital roaming. On the first phase asking for the A and B Band operators to move from analogue technology to CDMA technology, supporting our roaming, in commercial and other commercial conditions. This is in order to not change much the current fundamentals of the business in those areas.

However, we believe that will be possible very, very soon. I do not know if it will be possible this year but we are fighting on that. In order to support our continuity of digital services in [indiscernible] on the basis of 850mhz. With the same conditions that they are now supply analogue roaming.

The alternatives are not only based on acquisitions. The acquisitions, as we know, probably are not managed by the operational team of Vivo. They are managed the co-operative areas of our shareholders. Also measured by the boards of the Brazilian [sales]. However, we are not very concerned about debt because we have been saying to the market and to our shareholders that minutes rise and [indiscernible] are important. However they are not crucial for our operational performance.

For the time being, as you can see, our figures are very strong and we are not seeing any handicap in our operation for the reasons that we are now covering minutes rise, not least with digital services. Of course, in the near future the situation could change, and probably will change. However, our strategy in opportune terms is to create conditions on the basis of a regulatory environment.

To have this continuity of services on the first phase basis on roaming digital service. There are no reasons to have this service supplied by, say, A and B Band operators.

Thank you.

Thank you. As a reminder, if you do have a question, you may press one followed by four on your touchtone phone at this time. We do have a follow-up comes from Mauricio Fernandes of Merrill Lynch.

Thanks for taking the call. I have a follow-up question to my previous question on EBITDA margin, Francisco. First of all, why do you think that the markets at TCO and Global Telecom have not been able to achieve 40% EBITDA margin or so? Given that they can also benefit from the synergies and the recharged [NPs]. Do you believe that they will be able to, for instance in this year, match with the [Matcha tel XP] cellulars, given the margin in San Paolo?

That will depend on the level of subsidies and tariffs, the behavior of our competitors, and the relative results from those areas. As we have negative business, the terminal business, our business will, of course, decrease. Margins will increase EBITDA but we will decrease margins.

In Parana/Santa Catarina, the competition is very fierce. We have [Team] vying to defend its position. Now we have [Klau] and in Paulo we will have Brazil Telecom. The same applies in the area of TCO where we have Team, we have Klau, Telecom Americas and in additional Brazil Telecom. So we have four.

In Sao Paulo the conditions are much more stable because we have three competitors in this area. The economic conditions of Sao Paulo are also much more compatible. It will be possible to manage the [indiscernible] in this area. That is why we are probably a little conservative about the margins in TCO and the margins in mobile telecom.

Okay, good. Thank you.

Thank you. At this time I would like to turn the floor back over to management for any closing remarks.

Okay. Just to say thank you to everybody for joining us and for your interest in Vivo. I would like to say that we have been very, very committed to our targets. We have been establishing very active plans, very ambitious plans. Therefore, I think that our performance in 2003 will replicate in 2004 because, as you know, we have a very good and very active team.

Regarding the team, I would like to announce that following five years in Brazil, Fernando Abella is now returning to Madrid. He will assume a new management role in Telefonica Moviles, with responsibility for the control and business development of Latin America operations. It is not good news for us as a team because Fernando has been very, very fair and very loyal and a good profession. He is a very good colleague.

It is not easy for us to announce this but we are also very happy because Fernando will be joining the team of Telefonica Moviles at the corporate level. We will now have a guy there who knows everything in this business. He knows the team well, knows the business well. Certainly, Fernando will continue a much more fluid relationship within our operation and the corporate area of Telefonica Moviles. I would like to wish Fernando all the best, both professionally and personally.

I would also like to announce on behalf of my shareholders that Fernando will be replaced by [Arcando Martinez]. He has been with us and the Board for six or seven months. He is currently the General Director of control and finance, etcetera. He is a good professional in Telefonica Moviles. He is also a member of our team. It is a smooth transition between Fernando and Arcando.

We are very confident about this change. However, I would like to wish Fernando on behalf of myself and all of my colleagues, all the best and also all the best to Arcando.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day