Telefonica Brasil SA (VIV) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Vivo audio conference call to discuss the first quarter 2004 financial results. My name is Andrea and I will be the coordinator of the conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. This call is being recorded. I would like to turn this conference over to Mr. Francisco Padinha. Please go ahead, sir.

Good morning & afternoon, ladies and gentleman. Thank you for joining here for TCP's first quarter 2004 earnings release conference call. This conference call is being simultaneously broadcast over the internet, and you may accept a copy of this presentation from our new website, http://www.vivo.com.br/ir/ Here with me today is Arcadio Martinez, TCP's appointed CFO and our Investor Relations officer, Ronald Hiken(ph).

It's getting harder to facilitate comparisons, so by financial and p impressional(ph) indicators are presented on an aggregate basis. Also relating to TCO 100% during first quarter 2003 unless stated otherwise. Data operations(ph) is available in earnings release.

I will begin on slide three with some of the operational highlights during the first quarter. First, we highlight TCP's leading market growth - total active customers reach 14.3m for an early(ph) subscriber increase of 36% and 8% quarter-over-quarter with a support base growing 7% year-over-year. Net adds totaled 997,000 and represented a robert(ph) market share of 54%. The company was also successful in its customer retention strategy, with multiple(ph) churn rates falling to 1.4%, down from an adjusted 1.8% a year early, and especially important considering the rising competitive pressures.

Sublines were also (inaudible). Service revenues rising 22% year-over-year, or 32% when excluding the SMP impact. That is in line with average subscriber growth. Consequently, normalized ARPU was real(ph) 38, flat year-over-year, despite the accelerated customer growth and pre-paid (inaudible). Total growth in data revenues remains an important phenomena for the TCP company. This segment (inaudible) 4.7% of total services, almost double the rate of 2.4% in the first quarter 2003.

In the first quarter 2004, (inaudible), briage(ph), 699 million, (inaudible), 22 to 23%, and the margin over total net sales of 40.7%. Excluding one-time positive impact from changes in accounting strategy in first quarter 2003, (inaudible) growth would have been 40% year-over-year. Net loss in the quarter was also reduced by 80% to real 36 million, (inaudible) company's profitable(ph) momentum(ph).

On flood(ph) 4, (inaudible) performance, in terms of share of net adds, which (inaudible) 0.54 cents in the first quarter, 2004, an encouraging improvement from a year earlier, and compared to a positive (inaudible) competitive pressures vis-à-vis (inaudible)

Looking to the performance of the (inaudible), region of Brazil had another strong share of net assets of over 66% in the first quarter, and that's from leverage 6% in the first quarter, 2003. Vivo Mobile Telecom's market share remains strong, at 48%, but lower quarter-on-quarter impacted by the consolidation of a new competitor, in market share of net adds stable at 54%.

Finally, we are at the total number of (inaudible), which increased six-fold versus first quarter 2003, especially due to the 1900, 19,000 (inaudible). Excluding these effects, total net debt jumped to 272% year-over-year, an increase (inaudible) leverage, reflecting the Telesp(ph) premium-brand strength, financial muscle, and risk volatility(ph), when compared to in terms per capita.

On slide five, we show that during the year, the difference between the absolute client base of TCP operators and its main competitors had a very positive evolution, and even accelerated from previous quarters. The A-brand of operators, (inaudible) and ERO, the East-West region, have increased the gap with the second operator by 47% in San Paulo, 32% in the first quarter, 2003, and 36% in area seven(ph), 27% in fourth quarter 2003. The gap in San Paulo was increased by nearly 1.4 million subscribers who 4.7 million, 1 million and 4.3 million, respectively, in fourth quarter, 2003. The D-band operators, Mobile Telecom and then BT, meanwhile have reduced their gap against the market leader by 41% and 59% respectively, 37% and 34% respectively in fourth quarter, 2003. Showing in all cases, TCP's strong performance against the competition.

The next slide, slide six, shows the relative subdivision(ph) of market share at TCP during first quarter, 2004. The company's consolidated market share, including its two D-band operators, falling .3 percentage points to 57.3% according to the simply(ph) (inaudible) field. This, we note, is especially important when you consider our strict disconnection policies, vis-à-vis our competitors.

By region, it's important to analyze the positive evolution at Mobile Telecom. The company gained 4.5 percentage points of market share during the year, and continues to increase its market share number versus fourth quarter 2003 despite the consolidation of a third operator in the quarter.

At BT, market share increased by .57 basis points, and that area seven market share was titled (inaudible) 66.9%, the highest rate of all band telecoms(ph) in Brazil.

On slide seven, we infer that part of this success is in (inaudible) market share figures is important of consolidation of the Vivo brand that was launched a year ago. As can be seen in the (inaudible) above the Vivo brand's national reach, 50% top-of-mind in February, expanding its already large margin share over the second ranking. On a regional basis, the market lost some power and Brazilia showed even greater disparity. In (inaudible), where Vivo Mobile Telecom operators, our rankings was just 3% lower than the leader, the smallest difference since the Vivo brand launch. It is important to mention that this excellent performance has been achieved with Vivo having only the second highest advertising expenditure among our telecom competitors.

On slide eight, we show another important metric that helps to explain our significant brand recognition status which our leading quality of service records. NFL(ph) statistics show that we will have the lowest rates of multi-complaints from customers among national telephone operators, a result made possible by the extension of our network coverage and the performance and quality of our customer service compared with our competitor.

Moving on slide nine, we show TCP client-based growth of 36% year-over-year and 8% quarter-on-quarter, with quarterly rates above the Brazilian average of growth which illustrates the company's above-average growth prospects. It's important to note that our prospect client base increases by more than 7% year-over-year and remains stable quarter-on-quarter.

On slide ten, we analyze the company's important customer retention success, despite the rising competitive pressures and the company's well-known printed disconnection status in the country. As shown on the graph, reported monthly churn rates was reduced to 1.4% from an adjusted 1.8% in the same period last year. This success has been achieved through important initiatives, including programs of (inaudible) rates, promotions incentivating pre-paid recharges, pre-paid migration with retaining the same telephone number, etc. Going forward, we should expect churn to increase slightly, as the first quarter rates are seasonally low.

On slide 11, we analyze the company's robert(ph) top-line performance. During the quarter, net service revenues reached real 1.7 billion. That's 23% year-over-year, finally reflecting the customer base expansion and rising data revenues. On the negative side, revenues were partially impacted by the higher mix of pre-paid customers from promotional campaigns with free minutes and SMP impacts in the quarter when compared to first quarter 2003. Excluding the SMP impact, net service revenues would have risen 72% year-over-year in line with average client growth in the period, and I think the company's solid policy records(ph).

The decline in service revenues from fourth quarter 2003 is a result of the seasonally period - stronger promotional period, policies, and the effect resulted to the migration of PRO's business and interconnection platform, causing an estimated negative impact of almost (inaudible) on TCP's ARPU. It's important also to point out for our friends in the North Hemisphere that we are in the South Hemisphere. So in the first quarter, this year, you should take into account the effect of summer holidays of the Brazilian people and Carnival. By these comments, I'd like to point out also that Incept(ph) sales revenues increases by 71% year-over-year, lifted by the higher rough(ph) edition in the quarter.

Moving to slide 12, you can see a more detailed breakdown of data sales evolution. Data revenues had growth of 141% in the first quarter 2004, already representing 4.7% of net service sales, nearly doubled the rate a year early. It's not only due to the increased inter-penetration of the (inaudible) handset, but also to the positive trend of average usage(ph) per customer, as revenue increased, was clearly higher than the increase in enabled clients. SMS-enabled clients rose 79% versus end user increase of 118%. SMS revenues represented 74% of total data revenues at TCP, reporting an increase of 180% year-over-year.

On slide 13, we show that the average number of SMS messages(ph) sent their amount on first quarter 2004 reaching which was approximately 80 million, a growth of 150% from the average of the same period last year. On the right-hand graph, we explain the increasing importance of the other services, of data revenues, including downloads and MMS. The average number of downloads, MMS sent amount(ph) in first quarter 2004 reaching approximately 130,000, a quarterly growth of 76% from the average of first quarter 2003.

On the slide 14, we show vaguely(ph) some of our recent media campaigns and marketing positions. Here you see how we have we changed our external media to incorporate new selling lines, (inaudible) in first place, also starting to work on brand attributes.

On slide 15, we analyze some of our recent SMS campaign, focused on both acquisitions and usage incentivation

On slide 16, we see some of our (inaudible) usage of volume-based(ph) image and content to promote downloads, video clips, etc. The second step of features is the new re-launch of the Vivo concept with the entry of the new Motorola handset, equipped with camera.

Finally, on slide 17, we show here some of our strategic promotional marketing actions, including (inaudible) summer, first quarter 2004 summer event, and it will be open-air, which we're almost certain of to boost brand awareness and top-of-mind, thus providing prompt media returns.

On slide 18, the small year-over-year dilution of blended annual reflects greater representation of pre-paid customers in the company's total customer base. The pre-paid client base grew 46% year-over-year and now represents 81% of the total, from 76% in the first quarter 2003. This is partially compensated by the partial sense (inaudible) as well as the 25% year-over-year increase in growing pre-paid annual, which reflects the success of pre-paid recharging (inaudible). It's important to point out that these actual results were obtained in an environment of high growth and changing mix of pre-paid and post-paid base.

Moving to slide 19, reported blend of ARPU declined 7% year-over-year to real 36. Impacted by the SMP effects, actual rate is growth and rate representation of pre-paid customers in the company's profile(ph) customer base. Pre-paid client growth of 46% year-on-year now representing of total, 81% of total from 76% in the first quarter 2003, as well as the strong promotional minutes bought in the quarter versus the year-ago period. Excluding the SAP effects, blended ARPU would have been real 38, year-over-year, despite the 32% average customer base increase, 95% being pre-paid.

This encouraging trend is primarily driven by the 10% pre-paid ARPU increases year-over-year is an important indication to the quality of the pre-paid growth in subscribers.

The 14% reduction in blended ARPU in the first quarter versus fourth quarter 2003 is mainly explained by seasonal effect, continued aggregate premium promotions, and the number recording in fact in migration of building an interconnection platform at (inaudible), which is excavated(ph) to where it causes in decline in ARPU of real 2 and the decline of ARPU, of real 1, (inaudible). Excluding this impact, ARPU declined would have been 10%, in line with seasonal trends.

On the next slide, slide 20, here (inaudible) are some of the operational efficiency metrics which have allowed for important margin expansion despite significantly higher number of blocked(ph) activations year-over-year. In the first and second graph, we show TCP at 37% year-over-year productivity improvement and the decrease in G&A expenses to less than 5% of net sales, achievements obtained from the continuing operational integration and exploitation of synergies (inaudible). On the third graph, it illustrates the 20% year-over-year decrease in (inaudible) to real 120; this despite the fine competitive environment, robert(ph) market share, and escalating subscriber growth. This reduction is essentially explained by a more favorable exchange rate and increasing scale advantage since the creation of Vivo.

On slide 22, we discuss TCP and BTA evolution in the first quarter 2004. Reported by BTA in the period reaches(ph) real 699 million, up 23% year-over-year for a margin of 40.7%, excluding the positive extraordinary impact due to the changes in accounting practices in the (inaudible) first quarter 2003. And BTA would have increased 40% year-over-year. Note that the change to the SMP regime has a positive impact of 1.8%. in the first quarter, 2004, and ETA margin, compared to the same period last year.

On a regional breakdown, BT, ERO, and GTE reported a BTA margin of exactly 43.4%, 42.0%, and 22.0%. And I'll pass it on towards Arcadio Martinez, Vivo's new appointed CFO, who is going to give another view of Vivo financial results during the first quarter.

Thank you, Francisco. It was great being present with you for the first time in this conference call, for a presentation of the first quarter financial results of TCP Consolidated. On slide 22, we show that TCP Incorporated financial results improved by 6 reales in the first quarter. (inaudible) financial revenues of 155 million, future (inaudible) reduction in the CTI(ph) rate, the interest rates in the country, which went from a quarterly rate of 5.67% in the first quarter of 2003 to 3.76% in the first quarter 2004, partially compensated by the gain in the Vivo operation, and more than compensated by the (inaudible) financial expenses due to the reduction of interest rates, save on our loans and on our debt and the customer generation.

In slide 23, we highlight the company's profitability momentum. Net loss was reduced by 80% quarter-on-quarter to 35 million real, mainly reflecting higher EBITDA and lower financial expenses in the quarter (inaudible). According to slide 24, we highlighted TCP's total capital investments, reaching a seasonally low 106 million real, or based on 1% of net sales due during the first quarter of 2004.

In the rest of the year, total investments should reflect the company's favorable growth prospects, continued expansions of CDMA one(inaudible), now reaching 41% of the population. In Sau Paulo, Rauloa Telecomia(ph) (inaudible) and CDMA network target in the TRO(ph) region, where call rates are really rich(ph), 42% of the population at the end of the first quarter 2004.

Besides customer growth, total 2004 capex were also being factored with (inaudible) such as meals(ph), unified account billing, CRN assistance, unification of pre-paid platforms, across all the companies in the TCP family of companies. On the next slide, slide 25, we show operating cash flow for TCP. It shows a significant improvement this quarter, generating 594 million reals, up 29.4% over last year's first quarter. During the first quarter, total operating cash flow was positively impacted by higher EBITDA, as already mentioned, capex is almost unchanged from the first quarter of 2003. Free cash flow was negatively impacted here in the quarter by the yearly payment of sales tax, taking place customarily at the end of March.

Finally, from the financial side, on slide 26, we summarize the evolution of gross and net debt since the end of 2003. Total gross debt at the end of the first quarter declined by 1.1% compared to the end of last year, for a total of 6.2 billion real. In spite of a 1.2% increase of net debt compared to December 31st of last year, hurt by the yearly payment of the fiscal tax due at the end of March, as mentioned. Net debt to EBITDA ratio shows the increase of 1.2% compared to the first quarter of 2003, and down to 1.62 times EBITDA. Now, I can give back to Francisco for his closing remarks.

Thank you, Arcando. Let me finalize by giving a quick summary of these results. First, we pointed to TCP's strong subscriber growth and (inaudible). Second, we remain focused on excellence, on excelling in keeping our best customers through many initiatives mentioned in this presentation. Excellent results have been achieved in these territories. Third, additional margin expansion through continued efficient and productivity gains must also be hammered in everybody's mind, especially in these competitive markets. Fourth, stimulating consumption must surely be another focus and how our success story in the data business must be emphasized. Finally, we note the recent positive momentum which should significantly impact bottom-line. I would now like to pass the call to the operator to receive your questions, and would like to say thank you very much for your attention. We are now ready to receive your question.

Thank you, ladies and gentlemen. We will now begin the question and answer session. If you have a question, please press the star key followed by the one key on your touchtone phone now. If at any time you'd like to remove yourself from the question queue, please press the star key followed by the two key. Our first question comes from Jason Hafner of Standard Life.

Hi there. Can you elaborate on the ARPU issue please? On your press release, you say that the rate of ARPU decline at Telesp Cellular reflects mainly lower use of service during the holiday season, yet at some of the other subsidiaries like Global Telecom and Telecenter(ph) West, there seems to be a range of issues of affecting the ARPU and most of the concerns today over the results are focused on the ARPU. If you can give us a steer on where ARPU will go, will it recover in the second quarter, so give us an outlook for the short-term for the ARPU? And then secondly, if you could talk to a little bit about, medium-term, where you expect blended ARPU to go, keeping in mind all the different sensitivities on it?

As far as we're concerned on the position of the ARPU, I think it's important to stress again that, when you compare the last quarter of 2004 with the first quarter 2003 - sorry, the last quarter of 2003 with the first quarter of 2004, it's important to have in the mind the following: first, we have, as the numbers increase, of net adds in the first quarter of 2003. Second, the first quarter 2004 is a quarter characterized by a lot of (inaudible), because people are taking advantage of the promotions in the advertisement(ph). It's a quarter that has a lot of summer in Brazil, it's the summer in Brazil, it's the summer holidays in Brazil and has the Carnival and etc., so this is a clear seasonal trend as we explained and when you compare orange with orange, taking into account the non-recurring impact and the SMP effect, we are seeing the ARPU quite stable, the blended ARPU.

So what is it important to take in mind here? With this tremendous acceleration of growth in Brazil, if you are not able to increase the consumption of the pre-paid, as we have based on pre-paid, make sure it will be possible to keep the trend, and this I think it's important for you to have keep in mind depth, people have been able to sustain this trend. We have tremendous success in our recharge strategy, we are very intensive on recharge, recharge is the name of the guy for the prepaid, and we have been also able to increase good consumption on the cost base. So with this evolution, I believe that in the medium-term, I mean, the next quarter, that will be possible to keep the trend.

We don't know exactly because it depends on the volatility of the markets, but as we have been tremendous successful in the recharge strategy, I just see some slight decrease on ARPU. I don't, I would like to say that, in my view, the ARPU have conditions, according to performance of the company, to be quite stable, but that once again depends on the acceleration of the market. I think it's important once again to point out that we are probably in the most accelerated part of the growth curve in Brazil, in logistics(ph), that's already part of the logistics. According to our review, and in the same sentence, we are doing everything to the calling of the customer, etc. I don't forecast enmities(ph) on the ARPU side.

When you look at farther, and when I say that, we're talking about 2005, can you give us an indication, do you expect ARPUs to remain, blended ARPUs to remain flat to nominal for several years, or surely we'll see an increase at some point? Can you expand on that, as your wages(ph) on the economy comes back?

It's impossible to, I don't have a crystal ball. For several years, to keep the blended ARPU flat, it's difficult. You should take into account that, in fact, Brazil is growing mainly on the lower end, on the (inaudible) lower end, CDs, OK? This has the trend for dilution in the ARPU, but what is important, once again, is to have a correct strategy to keep the recharging planning on line, on track, so that's why we are confident that it would be possible to manage our customer base on pre-paid, OK, we have efficiency, with efficient profitability in place, so as we've been successful in this area, and we think that we have the right strategy on the field, I believe it will be possible to control this trend, because the name of the game in the long term, when we increase the customer base with a lower economic capacity, people are starting to dilute a little, the ARPU, but what is important to look for at efficient (inaudible) of the company, the capacity they may have or not to keep the margins, etc. etc.

OK, thank you.

Our next question comes from Vera Rossi of Morgan Stanley. Please go ahead.

Hi. I have follow-up question on ARPUs. I want to know about the maturity cycle of your subscriber base, especially the pre-paid subscriber base. How long it takes between, you add a new pre-paid subscriber and the subscriber starts to generate revenues for the company? Because my understanding is that you are giving a lot of free airtime when you add a new customer. Thank you.

Free airtime means in all markets, of course, some operators should do in order to increase the habit of users. It's an investment that we are doing in order to create usage in the lower realm of the customer base. So we are, in fact, using this (inaudible) offer, but we have very accurate strategy. If you remember, on (inaudible), we have one amount(ph), it was January, OK, now we have the Mother's Day, we are promoting balance, which is valid, calling everyday. So the balance should view this as (inaudible) in order to stream the usage and to try to consolidate the usage at the second(ph) level, and promote the increase of the usage in the short-to-medium-term.

It's an investment. So the trend for the ARPU, as I said, is a trend that depends on the quality of the base. And for the time being, what you are seeing as we are following careful. Every month, we are measuring the quality of our customers compared with the customers that we have been obtaining in the past, so what we call (inaudible) of ARPU, we are looking for every block of customers that we are adding, we are joining to our customer base, and looking for this efficiency. So for the time being, the customers are not causing any dilution on the profitability of the company or the efficiency of the company. They are good customers if you compare with the customers that have been joining in the past, but that will depend.

I think that in the medium-term, what you should take into mind, keep in mind is, the question is, is the new customers, they are creating dilution of the profitability of the company or not, if they are diluting the margins or not. For the time being, they are not dilutions. And in the future, what you should look in the limits is looking for MPB(ph), they are zero MPB, positive MPB, or negative MPB in the future. So what I can guarantee to you, in fact, in our company, we are careful looking for the characteristics of every block of customer that we join to our customer base, every month. And for the time being, no rev-flex(ph).

And just one follow-up, the block of customers you add in December, that was a significant block of customers. Are they already generating ARPUs for the company, revenues, or are they still using the free minutes they got when they bought the handset?

No, they just use the promotion was for one month, and after that, they should recharge. So our strategy is, OK, they're calling now on Mother's Day, we get the promotion from ten days, sorry, ten, reage(ph), OK. After the period of two months, customers should be of course targets in terms of recharge strategies. So if you look for the past story of the company, what you are seeing is that since, during 2003, we have been able to keep the usage of our pre-paid base. So for the time being, as I said, I don't see any rev-flex(ph) on the quality of customers that we are joined to our customer base, but anyway, it is something that should be observed and measured every month, and we are doing that.

And I have one question on your network capacity. I see that you are adding a lot of subscribers and giving these campaigns to recharge and also free time, and at the same time, the capex on Telesp in the last two to three years has been low, less than 10% of revenues. So I just want to know what is happening with your network capacity, and if you need to increase your capex based on all this strong subscriber growth and also increasing usage, and this promotions to increase usage of subscribers? What is your capex for this year, and what do you expect to see in the next years?

Well, the free time, the volume of free time that we are offering now, they are (inaudible) of the capacity of the network, because we are not willing, of course, to increase the capacity of the network just to support the bond(ph). We need to have a gap, it's a safe gap, between the normal usage of the network and the traffic, and the saturation level. For the time being, we have, I would say, balance gap between the capacity and the classic(ph) that we have in the network. It's quite clear that we should do every month, in terms of investment in the network, but I'd like to point out that one of the advantages of TMA is that the tremendous efficiency we have using the technology.

As you know, in Europe, where the network is completely congested, one of the reasons because the European operators are so keen to move to one-GS(ph) just because one-GS is better than live-band CDMA, OK. So we have no sequences(ph). In Sau Paulo, we are just using roughly 60% of the sequences we have the right to use. And we have now no constraints on the network capacity, and we should divide the network capacity into two main blocks. One is coverage and capacity and the other is switching. So we are carefully increasing the capacity of switching and the capacity of (inaudible), which is much better than GSM, because we are using CDMA in order to keep and to follow the trend of our database. I would say, of course, we are now seeing a tremendous increase in the customer base, so Brazil is growing.

If it keeps the pace of the trend, it could grow at least at the level, comparable with the level of 2003, so if the trend is constant, it's because we need to expand a little on the ramp and also on switching. But then it is something we are now studying and making the final service(ph), taking into account the evolution of the first quarter 2004, the remainder of the year, our target, and we'll discuss with our shareholders after that the various scenarios. But I do not anticipate anything important in this area. Anyway, of course, if the customer base increases, we need to adapt the capacity of the network, but once again, I would like to point out that the use of CDMA technology is something that works on all types. It is very positive on all types.

And what is capex number for the year for Telesp, TRO, and also Global Telecom for Sau Paulo? TRO and also Global? The number you had today.

As I said, as I said, we keep the figures that we disclosed last year, or (inaudible). But we are under revision of these figures, and after that we'll contact the market if there are some things material.

And the number before the revision? The number that your shareholders gave last year?

The number, the number of the revision, and I think that the guidance that was done by Powershare(ph) over the last years was roughly 11-12% of the revenues of the company. So we are now revising this and this, as I said, there are somethings material, we will address the market.

And when you say revenues, is that total revenues or service revenues? Or service revenues? 11 or 12%?

Total revenues. It's total revenues.

Total revenues, 11 of 12 total revenues. OK. Thank you.

Plus the guidance that was done (inaudible).

But this is under revision. It's possible it's going to increase? OK.

Hopefully(ph) they don't find(ph) anything material, but it depends on the trend, the growing, the growth in Brazil.

OK. Thank you.

Our next question comes from (inaudible). Please go ahead:

Yes, good morning. My question, going back to ARPU and seasonality, last year in the first quarter, because you had those accounting changes, essentially, and you had no subscriber growth, your ARPU was flat sequentially, which would suggest that there's not a strong seasonal factor from the fourth to the first quarter of the year. Would you, I mean, would there be any reason for that seasonal factor to be stronger in 2004 than it was in 2003?

Could you repeat the question, please?

Yes, I mean, if you look at your first quarter 2003 reported numbers, you had basically no growth and subscribers last year because you had to clean up in your subscriber base. And your ARPU was flat from the fourth quarter to the first quarter, if you make the adjustment for the changes that you made on the pre-paid side. So you did detail that in your press release last year. This would suggest that the seasonal factor last year was not strong. Would there be a reason for it to have been stronger in 2004?

No, what you are seeing now, if you look for the first quarter 2003, the blended ARPU was roughly 38 real, OK. If you take into account the changes on SMP and also the PRO problems we had with the billing, you should look for 38, the evolution of 38 to 38...

Last year, I mean actually, in your press release, you state that last year, you had made changes to the way you were recognizing revenues for pre-paid, that your ARPU, your reported ARPU was 38.3%, but on a comparable basis with the prior quarter, it was actually $43 versus $44 in the fourth quarter. So it was little change from the fourth quarter 2002 to the first quarter 2003. That's why in a flat subscriber base environment, that's why the seasonal factor certainly didn't look very strong last year.

Yes, but the situation in first quarter 2003 was completely different from the first quarter 2003. If you remember, in the fourth quarter 2003, roughly 40% of net additions wasn't there, OK, so there's was a tremendous acceleration of the customer base and the growth of the Brazil was in fact based in the first quarter 2003, 2003, if that. So when you compare the performance of first quarter 2002 with first quarter 2003 and try to extrapolate to the first quarter 2004 with first quarter 2003, the situation's quite different because of the accelerations of the growth of the base was completely different. Let me explain the following(ph). Comparing orange with orange, OK, 38 real in the first quarter 2003 compared to 38.5 real in first quarter 2004. So this is the accurate figures we have.

It's just, what was particularly weaker was the contract, post-paid ARPU, and there, it was really a factor of, and that shouldn't have changed too much because there's little growth on the contract side, yet you saw 8% drop sequentially in the ARPU in Sao Paulo, and that's caused by, again, lower NYUs. Could you comment on that, what's happening on the post-paid side?

Yes, what you are seeing is a decrease of 7%, as I explained before, on the pre-paid, OK. But we see(ph) the growth of 46%, you know, the figures are completely different, which are, a different status of evolution of the customer base, so we are in fact an accelerated area of the growing product in Brazil. So, for instance, if you look for the post-paid, they have an increasing (inaudible) 5% on an increase on the customer base of 7%. So you should take into account first the difference cited of the Brazil market in terms of growth, OK. A growing rate. Secondly, the change of mix between post-paid and pre-paid. And third, (inaudible) are to keep these figures, the success of our strategy on recharging the pre-paid. So otherwise, of course, we'll be losing the ARPU and now thinking about the ARPU on pre-paid. So we have to been able to keep these smaller plants(ph), just because, in fact, the customers are not there, the customers are not contributing to any dilution, but anyway, we are impacted slightly then, a loss for the reserve strategy.

So you could just, I'm sorry, clarify what last year, you had one-time, a one-off item that depressed revenues in the first quarter, which was linked to the change in revenue recognition pre-paid. Can you give us the amount?

Yes, you need to take into account, sometimes it's difficult for those in the North Hemisphere, sometimes people forget that in the South Hemisphere, February, March, January, mainly January, is August in Europe. OK, because everyone is on holiday, generally. February is Carnival which has tremendous impact by cultural reasons in Brazil, OK. So the first quarter, if you look for the facts and decide, take into account the accelerated area of trend in Brazil, the first quarter is completely different from the others and don't follow the trends in the North Hemisphere. Don't follow the trends in Europe or the United States, just because people contemplate the Summer holidays in January and the Carnival holidays in February, or now it's March.

So you would think the post-paid ARPU could rebound in the second quarter?

I think that in the second quarter, we will see some stabilization of this trend because this is certainly and slowly we can increase, but that will depend once again on the acceleration of the customer base in Brazil. Anyways, for the time being as I said before, I don't see any rev-flex on the quality of customers that we have joined to our customer base. are joining heads, customers with (inaudible) dilution are the main indicators of the business, OK, but you should take care of it(ph).

You mentioned subscribers still being positive NPV, the new subscribers you're adding. What is the break-even ARPU level for positive NPV in your estimation, or break-even NPV?

We don't disclose that figure, but anyway, what I can guarantee to you it's that customers that we are now trying to joining this holiday, they are customers with the same value from the ones who have been joining in August or in July last year. Customers who are not diluting the main indicators of the business, and you have room to decide - even if they dilute, they are not in the picture.

They, if they are considered for any dilution, it doesn't mean that they are NPV negative, OK. So we need to balance it, which is a very typical gain(ph), but what I can guarantee, I'd like to say it once again, is that in our company we are following careful the behavior and characteristics of every month, every block of customers that we have, every month. And we are more than (inaudible), some of our friends handle it, etc., we will explain how we are dealing with these delicate issues, because it is very delicate. You need to follow careful and month-by-month because, otherwise, we can make some mistakes.

OK, thanks very much.

Your next question comes from Patrick Grenham of Citigroup Smith Barney.

Good morning. Just following up, I'm sorry to add more questions to the ARPU. But if you just look at the traffic per on the MOUs, it looks as if this is the first quarter in forever where we've seen to have had an absolute reduction in the total amount of traffic carried and every subsidiary except for the Sao Paulo, Global Telecom, pretty much everywhere what we're seeing is that, on the contract side and the pre-paid, the MOUs are falling by more than the additional, the percentage increase in the subscriber base. That seems to me to be much more than just a seasonal effect. The second issue is could you actually go through the details of what the system changes were in TRO, and that doesn't cause a material drop in the ARPU? Thank you.

I'll make some comments on annual on three and four, and talk a little on TRO. Well, if you look for our, on slide 18, what it is showing is the following: the pre-paid annual decreases year-over-year roughly 7%, but the pre-paid plans based growth 46%, so there are always some dilution in there. OK, and once again, you should take into account that we are comparing with the first quarter 2004 where the consumption and the working days are completely different.

But you agree that the absolute amount of traffic carried on your network fell in the first quarter compared to the fourth?

Because we have a lot of holidays(ph). People use it in December and now used it in January, so the total amount depends. The total amount means you are looking for the figures that include fixed-to-mobile, mobile-to-fixed, the total traffic or just on that?

I'm talking the total traffic carried. So it would include everything: fixed-mobile, mobile-mobile, mobile-fixed.

OK. This is total traffic. What's happens is that it is increasing tremendously, and in fact, on net traffic, it is decreasing the fixed-to-mobile. The first trend, when we increase, the mobile base, in fact, to decrease the fixed-to-mobile and to increase on net(ph). So you need to adjust, of course, there are some actions from the fixed operators.

But that doesn't look like it happened to your results because your network usage fees went up.

Sorry?

Patrick Grenham Your network usage fees went up, didn't they?

Yes, but you need to compare between post and pre-paid. On post-paid, we increased 5% with an increase of 7% of client growth, on an annual side.

Year-over-year?

Year-over-year.

But I'm not talking about year-over-year. I'd like to know first quarter over fourth. I've never seen in the history of your results where I've seen an absolute reduction in total amount of traffic carried, and this is the first quarter I've seen that.

By the reasons I explained before. The fourth quarter 2003 is the quarter that has a much more working base in Brazil than the first quarter 2004, OK. And once again, you should take into account the quality that we use to measure(ph) that. That's the explanation.

But you register the MOUs and the revenues as the credits are being used, don't you? Because you changed your accounting policy last year on that, didn't you?

Yes, but the credits expired and the limits of the bonds(ph). So the figures you have here, 100 off the blended annual, is characterized as a seasonal trend. It's always the same. If you look for the historical trends in the past, and I could show you with more detail after this conference call if you're interested, I'll be available, I would explain in full detail what happens normally in the first quarter. The first quarter has in Brazil much less working days, and less than fourth quarter 2003. It's normal.

It would be very helpful if you could show us that seasonality in the last three years for each subsidiary you're in, if that's possible, in terms of traffic evolution, because it looks very dramatic this year.

OK, but then contact me directly, because I have ways to explain the situation in detail, of the evolution of annual and ARPU, taking into account the characteristics of the second OC(ph) in Brazil. Thank you.

OK. OK. And the system changes into your overage(ph) that caused the ARPU reduction?

This is Arcadio Martinez, CFO, trying to explain the question. What happened at TRO is that we're moving from, basically the connections of sampling(ph) platforms into new ones. However, the changes and out of the revelation of the balances of customer accounts and pre-paid accounts and (inaudible) accounts. With a professional's(ph) assistance, we came up with some no-recording effects that caused this negative impact from the ARPU on the TRO level in the first quarter of 2004. Some of these charges are recorded in the market evaluations, the next quarter basically, in the month of April, we will be able to recognize some high revenues at TRO that will compensate for factories'(ph) loss. But some other portion, as adjusted for market evaluation, of customer balances and carrier balances.

So how much of the reduction of the two real drop is actually one-off and how much of it is recurring?

Basically, I can say one-third is one-off loss and two-thirds are expecting, we are looking forward for a recovery.

And your handset prices dropped in the quarter? Is that going to continue as well?

Could you repeat the question?

It seems as if the average handset price that you're selling at dropped quite a bit in the quarter. Is that going to continue?

That's competitive trends. We have indeed seen a drop, you are talking about the cut in prices...Cost of what's sold?

On the revenue side?

Yes, they have been impacted both by customer needs, the customer allegiance that's mostly paid, and more low-end turning off, and also, because of the practice of churn off. In the first quarter compared to the last quarter of last year, particularly in the months of October and November. Prices were higher than those we're practicing today, we and the rest of the competitors.

And do you think that will continue?

I'm sorry. We have some to discuss(ph) on these issues. Another thing is related to either when the people change the terminal or swap the terminal in our shop, because we have entrances into these swaps(ph), but we've changed because it's a retention (inaudible). We need also to take into account these increases, the increases are facts, OK. The trend, well, it's difficult to forecast because what we are seeing now is some activity on entry(ph) from Telecom Italia and from Telecom Americas. So for the time being, they are concentrated in post-paid, which is dangerous in our vision to decrease the match prices on post-paid because the people normally, they are not the capacity to pay enough to migrate(ph) enough for pre-paid. And that's the business case.

But anyway, I think that, I would say, according to trends that we are seeing, probably we'll face a little more activity on the entry, probably on pre-paid in the coming campaign, but we need to look for the behavior and for the attitude of our competitors. And on this issues of prices, namely (inaudible), we are followed, and the (inaudible) tariffs. For the time being, everybody has been said(ph) to take chances, have some good sense on tariffs. Sometime there are some crazy offers. But anyway, we need to follow. It's difficult to give you an answer because that will depend on mainly the strategy of our competitors.

OK. Great. Thank you.

Our next question comes from Ricardo Garcia of PBI.

Hello? Can you hear me?

Yes.

Hi, good afternoon, it's Ricardo actually from PBI. Sorry to come back to the ARPU issues. Apparently, and we said from (inaudible), this seems to be the year of growth in Brazil and there's some expectations out there of around 6 millanets(ph) for the year. My question is, given this expectation of very high growth in 2004, will you believe that ARPUs could be at the same level for a full-year in Q1, and also, would you see a bottom of 35, as a margin that's feasible in this context? Thank you.

Well, that's not easy, Ricardo, because as I said, for the time being, what you are seeing is the customers that are turning to our base have the same characteristics, the same values, that the customers that we have been having in the past, I mean, in the last year. But I would say that it would depend of the evolution, also, of the social-economic situation in Brazil. I believe that there are room to increase our customer base and keeping the same characteristics of the new customers, but I don't know. '05, we can get, and how long it lasts, because there are a lot of variables in this area. So, as I said, I would much like to anticipate any kind of guidance that could create, I would say, too much positive expectations, because we don't know what is the real revolution.

What I would like to stress is, in fact, we are not, we have been very faithful on tax(ph), very faithful on acquisition, very additive on retention, and the name of the game is not only a share of growth adds, it's also net adds, which means that our strategy on retention and civilization(ph), it's also very important for the real growth of our base, but I would say, to be frank and to be accurate, I think that, I would be possible to say to, the cost, the new customers could have the same characteristics, but I don't know what will happen till the end of the year. Suppose that our competitor might reserve to say, to make some assumptions on these areas, as the following: suppose our competitor will start with a very additive campaign on sub-deviation(ph) on post-paid, for instance.

Now they have some offers of 99 reals on post-paid. This is my vision, and it's a very difficult strategy to understand, because it incentivates people who have no economic power to join and sometimes it's not easy to check if the client has exactly there's a lot of inefficiencies in terms of identification and certification, etc. So suppose that our competitor increase their(ph) activity on acquisition, so I think the growth factor in Brazil could decrease a little in terms of the quality of the customer.

So it's, I would say, if the situation keeps the same characteristics that we have now, I don't see any reason or to not at least in the first half of this year, to behave or to capture customers with the same characteristics that we have been capturing. After that, we should look carefully at the market because Brazil has emergence of markets that are in fact growing at a fast pace, has these characteristics. You should take into account that we have already 49 million customers in Tel(ph) Brazil. I don't know if it's sustainable or not; it's a very (inaudible) game. I have no conditions to make assumptions to the end of the year. But I think that it would be possible in general.

Just on seasonality, you said the Q1 was suffering from a very strong Q4 when you compare quarter-on-quarter, but shouldn't there be more roaming revenues in, you know, the kind of revenues where people are on the move in the first quarter, given that that is the Summer period in Brazil, and there's a lot of people talking on the move, and spending a lot more money on the mobiles than on the fixed-line, and shouldn't these compensate part of the increase MOU in the last quarter of the previous year, and this case, the increased traffic in Q1 is basically paid because there's people that were enrolled and subscribers in the previous quarter, are now spending more because they're on the move and they're paying for it, because the promotions have ended, let's say, at the end of January, so that I understand a little bit better the seasonality effects here.

Well, the normal trend, to look at historical data, the normal trend is, in fact, to increase efficiencies and profitability to the end of the year, so we have now the effects of the frequent campaign, the effects of the new customers, you have the effects of the activation from (inaudible), OK, Sao Paulo(ph) time, so the normal trend, the historical trend, is to increase the performance to the end of the year, as we saw in last year. So it's the picture we have.

OK. Just a final question, sorry. You mentioned contribution and (inaudible) crazy moves by any of your competitors. Which one of those competitors are you feeling the most pressure from, Cloudor(ph), Teem(ph), which ones are making you life harder?

I would like to stress that, when I said crazy offers, it's some lease operations. For the time being, it's lease operations, OK, but what should be negative? Performance in a stable strategy. For the time being, we are not seeing this. The environment is more or less rational. I have some difficulties to quantify my competitors, just by (inaudible), and well, now, it's (inaudible) in some markets, namely in Sao Paulo and Brazilia and Rio Janeiro, and mainly on tariffs(ph).

On the minutes, now they are offering 1,000 minutes free. And they have a lot of offers. I understand they have the network, I mean, the GSM network, free. But in our vision, some think they should take, because it's normally difficult to manage in the medium-term, because the GSM, the GSM customer has a very low loyalty because they just need to change the chip card and they keep the same terminal. It's an advantage we have, our customers have some deficiencies(ph) to change, because they need to change terminal. They need to acquire a new terminal. On GSM, it's much more difficult, so in my vision, they should deploy some technalization strategies between them. OK, because otherwise, the GSM base could grow in Brazil, but on a (inaudible) because they're just talking about cheap cards, and not real customers. In short, it's my vision.

OK. Many thanks.

Our next question comes from Mauricio Fernandez from Merrill Lynch. Please go ahead:

Good morning. Just one question, not to insist too much on ARPU. When you say we should see a stabilization of trends going forward, if you look at the number of the ARPU reported this quarter, for instance, in (inaudible) or San Paulo, should they expect the ARPUs going forward to be 39 reals, roughly around the number, or get back, when you see stabilization, get back to the 44 reals in the fourth quarter of 2003? Thank you.

As I said before, if the trends, if the trends that you're now seeing, with these characteristics, I don't forecast (inaudible) ARPU, the customer increase too much. But for the time being, we think we can (inaudible), new customers, I would say that we have the conditions to keep our ARPU more or less flat.

And that means flat relative to what you reported in the first quarter, right?

The 38 would probably be next quarter.

OK. Thank you.

Our next question comes from Andreo Campbell(ph)of the CSFB. Please go ahead.

Yes, thank you. I just wanted to ask about the very high tax rate that you paid in the first quarter at TCP. It seems that you have some inefficiencies in the structure, particularly not being able to use the global tax credits, and it seems like moving ahead with some kind of restructuring of the group would definitely improve the tax efficiency. What kind of things are you doing, what kind of tax rate do you think we can see going forward, and what can you do in terms of structure that can improve this tax rate?

Andreo, let me answer your question. As you know, this is the type of situation that the company was trying to avoid by incorporating TCO. That was part of a one alternative way of improving the efficiency on the tax credit side, and also on the cash management side. The corporation of TCO didn't get through, the corporation (inaudible) as you know, we're challenging that in court, legally, and for the time being, that's the only clear way of action that we're taking.

We're following up on that court claim, we want the TCO petition revoked, both in order to be able to continue, again, if that proves to be a success, the corporation of shares of TCO. And most of all, just to indicate that provisions will take some time, we think we did everything within legal terms, and we want it to be fair to all minority shareholders of TCP and TCO. There's nothing new to propose on that, there are many alternatives for the improvements of the efficiency of our usage of past credit. We're evaluating carefully of those alternatives and our shareholders as well, at some point, they can make it or not, some just choose to move ahead some of the conversations. But at the time being, there's nothing going on.

OK, so for the time being, Arcando(ph), we just assume the effective tax rate's going to be very high going forward, is that right?

I'm afraid so.

OK, that's fine. Thank you very much.

There are no further questions. I would now like to invite Francisco Padinha to proceed with his closing statement. Please go ahead, sir.

Well, I would like to thank everybody for the interest and for your time to follow TCP. We understand that we have a very, very challenging project. Our evaluation of the first quarter is very positive because, as I said, before, you need to take into account the seasonality of this quarter, increasing competition; also, the growing face in Brazil of the customer base, which is, in fact, very strong. But anyway, we are available. Please do not hesitate to contact myself or speaking for my colleagues, Arcadio Martinez, or our Investor Relations officer, Ronald Hiken for any details in terms that could be useful for your evaluation or your correct evaluation of our performance. So thank you very much everybody, and I would like also to thank to the people that had been supporting our conference calls, and I would like to say hi in the second quarter, 2004, and I hope to have, once again, good surprises for everybody. Thank you.

That does conclude the Vivo audio conference for today. Thank you very much for your participation, and have a good day.