Telefonica Brasil SA (VIV) 2004 Q3 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 S.A. (TCP) Third Quarter 2004 Conference Call. Today we have simultaneous webcast with slide presentation on the internet. That should be accessed at the site www.vivo.com.br/ir. 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 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.

With that 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 of 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 affect expected 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 conference.

Good morning, ladies and gentlemen. Thank you for joining us for TCP's third quarter 2004 earnings release conference call. This conference call is being simultaneously transmitted over the internet and you may access a copy of this presentation from our website vivo.com.br.

Here with me today is Arcadio Martinez, Vivo's appointed CFO and our Investor Relations Officer [inaudible].

Starting the presentation on slide two, we show the operating highlights for the quarter. We maintained our solid leadership positions in a very competitive marketplace reaching a total of 16.4 million customers at the end of September 2004 and [inaudible] Vivo's achievement of 25 million systems. The EBITDA margin of 34.6% in spite of a intensified portfolio of innovative services positioning the Company in favorable position to exploit the market for beta products. We reduced our accumulated net losses by 45% for the first nine months 2004 compared to one year ago.

Moving to slide three, you can see that while Vivo already is a 35 million clients company, it has kept [inaudible] that is the potential for growth as the opportunity must be used given the financial [inaudible] relatively when compared to the numbers. It is interesting to note that client base increased to 5.6% year-over-year, 1.3% without quarter-over-quarter.

Slide 4, it's natural and well known that the leader is the most challenging person, when you have to play a fight for the second place in the market. The Company also increased it market share. To face competition special offers and promotion were implemented, being special time at whether to recalibrate the market or to proactively severely manage the prevalent conditions.

Please move to slide 5 that following the recent competition, Vivo has reinforced its commercial efforts in Brazil. The net add drop shows a 5.7 year-over-year growth, the growth in the second part of 2004 was due the strong campaign with [inaudible], two most important mass market campaigns in Brazil. During the third quarter 2004, the Company tried to reduce its profitability pressure increasing entry barriers but competitors did follow us impacting our market share.

On slide 6, you can see that the difference between the [inaudible] have noticed that its main competitor is showing a positive evolution. Please note that NBT, this gap is positively zero, a remarkable feat.

Now slide 7, accumulated service revenues year over year grew by 29.5% while from third quarter 2003 to quarter 2004 it reduced 7.1%. This increase reflects the average customer base expansion of 38.6% from rising revenues of 40%. The current revenue scenario also reflects the capacity of Vivo to successfully face negative effect of this competitor to our high value of customer base through aggressive and innovative loyalty programs rotation plans. Please be aware that in 2003 the results show that the client mix played a positive role in the quarter.

On slide 9, we present the break down of the evolution of blended ARPU year over year and positive report. Comparing the marking on the left side of the graph, the real negative ARPU variation is 4.6. The other effect on the [inaudible] plan basically, using the same methods which profitable for them. At the right of the slide, you can see the cumulative effect.

Turning to data revenues on slide 10. The growth in the number of SMS in average per customer has played an important role in the increase of data revenue [inaudible] the news services, the data revenues the growing segment of the data is MMS. That is corporate customer strength. We introduced new technology, ZAP to offer a significant competitive edge over the GSM. Brought another [inaudible] who has the 30 kilometer track. [inaudible] we are permitted to compete in the other [inaudible] what are you going to [inaudible] be able to complete in the broadband market where there is consolidated growth over GSM operators.

On slide 12, we see that productivity by means of continuous pricing improvement by the number of claims per employee. It was possible [inaudible] competition.

Slide 13, operating costs break up as administrative, personnel, cost of service were under control. On an accumulated basis they represent 34% of total cost in 2004 versus operating expenses in 2003. On the other hand, the link of the commercial activity grew from 57% to 63%. This is due to [inaudible] base competition as well as increasing quality of customer service.

On an accumulated basis, EBITDA grew by 20% reaching 1,977,000 for a margin of 36.7%. While our EBITDA margins from a bottom basis are extended by higher competitive pressure. Vivo has been able to manage the gap for at least 15 point higher on average.

On slide 15, we provide the break up is important trade attributes that show people from both the part of the bottom [inaudible] namely coverage, network quality, offering best promotions and discounts, best customer care and easiness to upgrade handsets. Vivo is a prime mobile brand. It means we can afford to be a rational and intelligent player in our timely asset to the move of the Company. People use a prime mobile brand based on these [inaudible] it means we can afford to be a rational and the intelligence player in our timely and the to the moves of the [inaudible].

On slide 16, the competitive environment by means of innovative service. Creativity [inaudible] supply Vivo and covering U.S., especially the high end. Prime users of the range of solutions in communication offered by them.

Slide 17 shows that EV-DO network provides improved service by offering connection until 2.4 megabytes per second. WAP 3G is the first service in the finally of service based on EV-DO, the SRVD in this service range. There is no competitor for the WAP 3G in the market because of its ability to offer speed of up to 10 times the traditional broadband.

Turning to slide 18, the GPS wire technology permits -- determines the position of the client with high position roughly 5. The service is launching system in the competitor and there is nothing by using GSM technology. We are launching three new services. [inaudible] that shows the map of the surrounding. These locators idea of exuberant with optional map and is near by restaurant and bar.

On slide 19, it shows another service. Vivo AGENDA, first operator in the world to launch [inaudible] and in handset the facilities to create some editing using the web. Vivo's mobile office. There is where the impact there is in terms of flexibility and compatibility.

Slide 20, we can see the ten new service were launched in one single day at Futurecom Fair in Brazil.

Now I will pass the floor to my colleague Arcadio Martinez, our CFO.

Thank you, Francisco. Good morning, good afternoon. I am going to make a quick summary of our performance in the first quarter related to P&L below as they did the line as well as some financial highlights.

As shown in slide 21, the more investment resource in higher CapEx given the [inaudible] and accumulate in the first months of 2003 is in line with [inaudible]. Physically efforts to deploy the CDMA has found its coverage, [inaudible] percentage is the over lay [inaudible] particularly in [inaudible] region to accommodate the introduction of new products and services. Together with the efforts we are making now [inaudible] where unifying accounts in dealings [inaudible] prepaid platforms are closed of the TCP operating company. The CapEx for the first six months of demand or the year of curse those depends [Inaudible] 16.5% for the revenue for the Company. Total CapEx for the year which is now force is being lying with these level as a percentage of revenue for this [inaudible] taking into account [inaudible] for the total of year 2004.

On the next slide, number 22 we [inaudible] situation regarding the TCP cost relative finance base. Gross debt at the end of September reached a total of 6.6 billion reais, which is 4.4% higher than at the end of 2004 due to increased operating and investment cash needs. The Company had already announced a capital increase of about 2.05 billion reais with the main objective of greater financial facility through the street. When completed this capital increase will bring at a base level ratios to provisions that are more aligned with all the cellular operators in Brazil and Latin America. The proceed from this capital increase have started to be obtained by the Company before the end of the first quarter of 2005. In the meantime, the companies have entered into our series of short-term loan agreements [inaudible] finding of that recently completed that offer for one set of deposit owned [inaudible] TCO, TRO which was oversubscribe from resulting -- resulted in a financial purchase price and a final purchase price, excuse me, of 902 million reais.

We also need to face order maturities towards the end of the year including [inaudible] in the amount of 160 million euros, which are maturing the end of November. All in all, we can say that we are very comfortable about the ability to cover all this financial needs. In fact, we have insured already most of these funds that we need through the end of the year and waiting for the proceeds of our intended capital increase.

Now we go to slide 23. We can see that the net financial result shows an improvement from the second quarter 2004 cost by the changes in taxes, particularly fees that [inaudible] impact financial income [inaudible] and shareholders equity but the rest of financial income is extended from this tax.

Finally, from this side moving on to slide 24. We show that put online commit a year which has shown improvement on the right hand side of 45% in various [inaudible] we have roll it by our losses also refer to net debt basically and lowering interest rates. However in the recent previous quarters to second quarter of 2004 [inaudible] due to the tax rebate or turning the second quarter 2004 cost by the payment of international shareholders equity paced by their operating company [inaudible] to the holding company TCP holding.

That's it from my side. I'll hand it back to Francisco Padinha for some closing remarks.

Thank you very much. Just looking for our final slide 25, of course we are bullish about the TCP in a period of a strong growth and intense competition we show a clear leadership in our coverage areas. The Company remained focus in keeping the best customers and stimulated consumption, this is down [inaudible] is going value for the compared as we have been able to manage our margins through some cost control across the board and taking the advantage of our superior scale effects. So now we and Arcadio will be happy to answer your questions and thank you very much for your attention and to attend to this conference call.

Thank you. The floor is now opens for questions. If you have a question please press "*","1" on your touchtone phone at this time, if at any point your question has been answered you may remove yourself from the key by pressing the "#" key. We do ask while we you are posing your questions to please pick your handset to provide optimum sound quality. Once again for any questions are "*","1" on your touchtone phone. Your first question is coming from Bur Rosy (phonetic) of Morgan Stanley.

Hello, good morning. My question is on the contract ARPU [income], could you give us an idea, what is going on that caused the drop of 10% in your ARPU's of contract users in São Paulo market, thanks.

São Paulo what you are seeing is mainly 3 effects. One stems from the corporate marketing, the corporate market sector where the companies are increasing the approach of wireless what we call in the market wireless PABX. So, what happened is that the companies became more and more keen about this approach so they are interconnecting the PABX directly, through wireless interfaces to our mobile network so it is a game that has been played in Europe and in the other countries and here the name of the game is to keep the customer with us and try to take advantage in the near future. okay or to loose the customer. So what happens is the fix up the mobile revenues are [transformed] in mobile to mobile after corporate discounts. So this is one off defect. The other stems from the strong effect of our competitors to our customer value base, so we have been able to keep the share low, we are answering directly, and then directly proactively or reacting to a specific offers and we have been launching offers very competitive in terms of Paris, very competitive in terms of Tran terminals [inaudible] so, this is also the effect of our reaction in terms of past plans, I mean the right planning in order to keep our value share in good numbers as you can see, from the figure. The last is relatively when sharp operation that we are correcting in our revenues, some artificial revenues coming from part of the subscription. If our traffic do not artificially enhance our ARPU but okay, correct the revenues once you detect some clouds of subscription both in gross adds and in revenues and do not increase our ability. So, in short, with this approach we have a very good value sharing in some power but we believe that with this transfers, we will be able to recover the annual and after that to recover the ARPU.

Okay, where do you expect to see your ARPU of contract users following the next quarters.

We believe that in the next quarter we will see not exactly the same fever but the same trend, okay because very strong pressure, namely on the corporate market as I said and also in the right planning. So, we believe that it's possible to keep this trend more or less flat in the fourth quarter.

Okay, and I have another question on, competition. Brasil Telecom started to offer services earlier this month, did you see any change already in the competitive environment in Parana and Santa Catarina and also in the Central West region of the country? Thank you.

Talk yet directly, I mean in operational terms but in fact we are seeing some exhibitions from mainly from the corporate market segments, from the development sector in order to have time to study the offers of Brasil Telecom which are completely commercial bundled. They are working in our vision, outside of the law, we are including -- explaining the situation to the Anatel but anyway for the time being we are not seeing material in fact in our operation but anyway we believe that it is possible to have of course some impact mainly if completely commercial band of the process could continue. We believe that Anatel will try to control that kind of approach as they have been stating, they are investigating the bundling approach of Brasil Telecom and we believe also that the capacity of Vivo to face Brasil Telecom will be similar with a capacity of Vivo to face [Coisa] in Northeast regions. So, it is another competitor, but we have also four competitors and [rejuvenated] for instance and one of them are related to either fixed operation and we have been able to control the situation

Okay. And do you expect to see pressure on margins of TRO and Global in the next quarters, given this pressure from Brasil Telecom?

Some pressure could happen but that will depend first of all on our competitors of course.

Okay. Thanks.

Thank you. Your next question is coming from Charles Chichester of Cazenove.

I was just wondering, just look at your market share net of overall which was around 27 cents in Q3, how much was this a conscious decision hold back prior to the fourth quarter and how much do you think that increased competition, this may be the sort of share we would like you to acquire going forward, I am just trying to get my idea of the control you had over this and what we should be expecting in the fourth quarter and then a little bit more specifically can you tell us a little more about what's happening with TD, your market share net has dropped to 10% and its in the area this quarter where in fact it has decreased, I am just wondering if there is specific reasons [inaudible] towards that market in particular? Thanks.

By now I think that we should take into account debt in that areas including some power region we have really newcomers. I mean, we have Telecom Italia very aggressive with GSM we have also Claro that is rewinding BCP operation, operating in GSM so the net add figure sometimes doesn’t reflect the reality, why, because we have a very strict A Band operators and a consolidated operator. We have very strict policies in terms of share and our [inaudible] okay and our competitors in this phase of the competition normally they don’t have this kind of approach. I mean, they have no [inaudible] in terms of so accurate I would say in terms of managing the customers and mainly of course the prepaid individual. So I think that we need to see that deletions, we need to rewind to have real idea about the net level [inaudible].

[inaudible] and what about [inaudible] and what about what is going on in that market.

Well we have a very strong competition and very irrational competition mainly coming from [T] and from Claro. We have always completely irrational on the cost base which is normally very dangerous because if you lower too much the, [inaudible] cost base or the identities for all those subscriptions who are [attaining] low profile customers that normally have one launch. They need [inaudible] to move to prepaid. So in real we are managing the situation okay, in order to mark these guys out. Anyway we are now in the situation which is now much more positive in our reach. The [inaudible] has been increasing and we will be able to keep a balanced situation in [inaudible]. It's a quite good market and we should take care about the -- of some initiatives that really can be strike out.

Okay, thank you very much.

Thank you, and you next question is coming from Andrew Campbell from Credit Suisse First Boston.

Just, I was hoping you could give us an update on the capital increase, our understanding was that the SEC was going to respond within 10 days and as the 10 days have past so, if you have heard anything from the SEC and maybe give us an idea of what the time line will be when we will find out what exactly the price will be?

Thank you Andrew. Yes, you are right the SEC has completed already -- has exhausted the 10 day period in order to come with the decision whether to revise the SEC document that we presented that were filed with them, so that period expires, they have signed out that they are not going to review the recommendation presented there so, we are free in the chance to continue with the rest of the internal moves that were needed in order to complete and launch the increase of capital is going to be copied in the following days. I can't give you a specific deadline but it's going to continue moving as you say [inaudible] in the next few days.

Okay. Thanks Arcadio.

Thank you your next question is coming from Ricardo Seara of BPI.

Yes, hi. Good morning, this is Ricardo Seara from BPI. I got some questions on market share and margins in some valid TCO in Global Telecom carriers. It's seems that the market shares have declined in this regions respectively by 1.8 points in some São Paulo, 0.5 in Global Telecom carriers, and 1.2 percentage points in TCOs areas and at the same time the margins are under pressure. My question is regarding the trade off between the fast growing of and the need to grow with the market today because it is relayed that the market is growing and to what extent will you be able and will you be willing to sacrifice your margins, so could you provide us any guidance on the lower shadow of margins below which you will not be making further proceeds not to move market share? And another question is that you have said some of the proceeds from capital increase would be definite to pay that inter company loans or the loans from Brasil Telecom was 160 million euros that would be expiring in November, is that right? Thank you.

Okay. It is just answer to your question of margins in the city I mean, Global Telecom, Sao Paulo, and TCO. We would like to stress that’s we are in the real battle hence what is our limit? The limit is do not destroying value to the operation, do not restrain value to the company and to all our shareholders in the medium and long-term. We are in fact facing tremendous competition in these markets, we have made a tremendous effort in order to keep our structural margins very high. The lower margins -- the lower margin that you are seeing is 100% related with subsidy. Its 100% related with effort to our doing in order to not lose dynamics of leadership and too not lose too much market share but keeping the value and keeping the profitability and [inaudible], we believe that is possible why, mainly first we have very eyes touched hold margins. We are -- second, we are in the real battle and we just decreased some 0.1 -- 0.3% in the margins from second quarter to third quarter. Okay, we are being able to manage 35% EBITDA margins in these very aggressive markets. If you look for the margins of our competitors for instance, okay probably has reported moving from 3% positive to 3.2% negative this first quarter, okay. Claro is moving from 0 to just 3% and we will wait Telecom Italia, they need to have the GSM operations

So we strongly believe that we will at least have a 30% of points, okay higher than the average in the sector. So the limits of our efforts are the limits of rationality, are the limits of the value of the company. In the fourth quarter I don’t know what happened is in fact through the pressure of the market, the pressure of the analyst for instance, the pressure of Vivo -- we have been responding to the aggressiveness of our competitors is paying results. Now you can see that [inaudible] is increasing why, because our competitors concluded that Vivo and these shareholders are not willing to loose market shares, okay and it doesn’t pay just to decrease [everybody] else so, they are increasing. Now [inaudible] I believe that in the fourth quarter we will face very aggressive competition on the Christmas campaign but probably much more rationale so, what's important to have in mind is in fact Brazil is in a high growth 42% year-over-year. We are just with 32% penetration, okay, Vivo is releasing with 35% EBITA margin; okay we have high circular margins. As soon as the market in Brazil approaches the separation may be it's [inaudible] we don't know exactly, the EBITA margins of Vivo will increase tremendous, so I believe that in fact we are in the right track and we are doing the right strategy.

And just a follow-up to pretty more straight forward, if lets us put it this way one percentage point market share loss in one quarter is this a matter of concern to your right now even at the level of margins or [inaudible] willing in the short run, I am not talking about structural margins, you are absolutely right, in the short run would you be willing to take your margins below the 30% level to avoid this 1% market share loss in one quarter?

1.5 % loss of market share in one quarter, is fact the figure that came from the number of the Anatel, the number that comes from our competitor. But I would like to stress again that they are not, okay, so accurate, so regal, in terms of the keeping prepaid systems in this database. They are growing, they are newcomers, they have starting operations, so the policy they have in terms of [inaudible] is completely different, from the policy we have in our database, so I think that it is important to wait for the evolution of the market, and the time to conclude that in fact, we are losing that kind of market share. I strongly believe, that for instance, but it's just my vision, it's not a guess but by feeling, that we are not loosing, so high market share. But anyway, 1.5 is not a dramatic thing, provided that I am taking into account, that we are keeping our margins in 35.

Okay, thank you very much and on the loan from PT?

Driving your question on U.S. order proceeds from capital increase, first of all it is a little bit early to anticipate but there's a timing difference there, alone from PT in the total of 416 million euros are maturing at the end of November. In all likelihood we are not going to be worried with the capital -- with the proceeds from the capital increase by then so we are looking at announcing those needs through short term, loans from [inaudible]. In fact we stopped operating all the facilities in place to accomade this need to repay the loan to the controlling shareholder. Once we get the proceeds in place from the capital increase, we will look at overall debt structure of the company of course and we'll take the right decisions at that time but…

You said that…

The maturity is what it was to the end of this year plus the need is resulting from the tender offer that will just run on TRO and is going to be covered by short term financing available in the Brazilian market, we have no problems accessing those sources of fund.

Sorry I didn’t get it -- you said 416 is maturing in November, is it

Yes.

Okay. Thank you.

Thank you. And your next question is coming from Stephen Graham of UBS.

Yes, thanks. Slide 8, show that the MOU's are rising on outgoing call and it is only the incoming that is the fixed-to-mobile calls that are falling and in fact plunging and causing the overall drop we never used. And that same conclusion comes from the other bit of data [inaudible] at the future.com [inaudible] is following fixed-to-mobile, I mean views are the cause of following argues. At the beginning of this call you mentioned that corporate bypass of fixed-to-mobile putting cause on to their mobile-to-mobile plans commercial rate is one cause of that. My question, what can you about it, and what can you do about the fact that fixed-to-mobile calls in general are now very high priced and there is no flexibility, no plans, and they looks less and less attractive where as to mobile-to-mobile calls, do you have any strategy for making them more attractive or somehow spending the fall in fixed-to-mobile?

Okay. In terms of rented MOU we should take into account that of course we are seeing a decrease coming mainly from the bonus policy that we have been running last year and in the beginning of this year. And we always should take into account also that we are moving in certain areas for instant TCP, sorry TCO from TDMA to CDMA and we are moving, managing the same spectrum, the same frequency. So that’s why we have been decreasing our bonus and that can impact in blended MOU. As far as it concerns the corporate market and the trend for the mobile PABX, I think that is not negative, I would say profile in the market. Why, because this is a normal trend that all the operators all the operators all over the world should manage. We have been able to manage that in Spain, we have experience, we have been able to manage that in Portugal, okay. So what is important for us is to keep the customer with us, okay and to manage the decrease -- the immediate decrease of revenues coming from the differences between to receive a mobile termination rather than moving to mobile to mobile corporate standards which normally are lower because we have got in that areas strong discomfort but we need to be confident that it will be possible to increase MOU because as the people is looking for the invoices and the cost they will see that we will have room increase consumption without I would say without increasing the total [invoice]. So it’s -- I would say a temporary effect. Everybody needs to manage this trend, okay? And that depends mainly on the capacity of the Company, as I said, to keep the customers and to create new products and services and incentives to the consumption. So, I think I am very confident about the recovery of this trend, what should be done [inaudible] is to lose the customer. That should be done.

Okay, so it sounds like you are basically saying volumes will rise from these corporate customers who are now getting cheaper calls. Now what about the residential customers, I mean it seem like their volumes of fixed to mobile calls are flat or declining also, and certainly that also had to do with a different pricing. Fixed to mobile calls being very expensive and no -- there is no packages, there is no weekend plans, no night plans here, none of those things that you attract customers with for outgoing calls. Is there any strategy at all for increasing residential fixed to mobile?

The increase in residential fixed to mobile, we have specific efforts. We have some offers that the customers, namely, in the prepaid sector -- segment, they can charge his prepaid card with incoming call. Okay. It's something that is very aggressive for the fixed operators and for the other operators and we are doing that. We are starting with this aggressive offers. We have just two months and we are deploying all over the operation because that depends also on specific characteristic of IT billing systems and as you know, we have still five different systems, so we need time for to deploy the product. But then, Ray, the decreasing of fixed to mobile in terms of minutes is a trend that we should also to mange [careful] because it's impossible to increase or to change this trend. What we need is to adapt the business model in order to keep our profitability even with these trends because mainly the new prepaid customers -- they have a little [not a match] but a little trend for to decrease the fixed to mobile, [not the match] for the time being we are seeing more or less the same incoming traffic, but of course that it hurts the attitudes of some fixed operations that are blocking his networks to the fixed to mobile. Well, that’s why they are discussing about the needs to decrease the mobile termination, but we don't believe that that plan we will succeed in Brazil because we have a very good relationship between fixed to mobile terminations 1 to 5 something. Okay, and it's not material for the customers that if there are -- for the customers that have decreasing his traffic from fixed to mobile it's not material, there are no elasticity if you decrease for instance 10% cost from fixed to mobile. So what period is to adopt every month and every quarter and every year the profile in terms of cost and the profile in terms of new products and service of the company for this trend. This is a trend that has been happened in all country, the decreasing of fixed to mobile traffic. But at the same time we have a tremendous opportunity which is to manage in, we say, a clever way the increasing in mobile to mobile. That’s why we are doing.

Thanks.

Thank you. And as a reminder, ladies and gentlemen, if any one has a question, please press "*" "1" on your touchtone phone at this time. Once again, that’s "*" "1" on your touchtone phone. Your next question is coming from Jash Norbert (phonetic) of ING.

Good morning everyone. Couple of questions, first, you noted there clearly that EBITDA margins only fell slightly from the second quarter. But they would have fallen further had it not been for this 37 million reais came from the turnaround and liabilities of suppliers. So I was hoping you could comment a little bit more about the nature of that game? And then my second question is cost of services rendered from -- fell pretty sharply, not only from the third quarter of last year but also from the second quarter. So I was also hoping you could just indicate how sustainable the new level of -- the third quarter level of cost of services is going forward?

Okay, of course, that results of the company was impacted by some adjustments in one way or other way. We try to gives you the best indications we are getting in order for you to understand what is the situation, but we can talk about some positives -- the EBITDA margins of the period. We can also talk about some negatives. Francisco already alluded that to some adjustments related to fraud, for instance, within the [inaudible]. What [throughput effects] on those we believe in accounting numbers and what we saw we believe that is a real indication of where we are in terms of margins. The second question I don’t -- related to the cost of service what they are referring – your second question, yeah..

I was referring to the cost of services rendered line and noting that those costs came down to a 187 million reais from just about two-ten in the second quarter. So I was hoping to get some more color on what was behind that decrease and how sustainable the new level was that obviously -- that decrease obviously helped of that some of the other issues that has been pressuring your margins.

Okay I understand. Thank you very much for repeating the question. Well, that is mainly related with the decrease if you look for the [inaudible] mainly related to decrease in the interconnection costs and also with costs of circuits. There are two reasons, interconnection costs, they are decreasing for the billing and prepaid pack, and the interconnection, I mean, decreasing because we saw uncertain hires [inaudible] of our network and investing not too much but it’s a very good business because the [uncertain hire] of Brazil we gave high costs from circuits. They are implementing some part with our network. So that’s why that cost decreases. It’s a trend that could not repeat exactly in the fourth quarter, but this trend will be normally slowly decreasing this cost.

Okay. Thank you.

Thank you. Your next question is coming from Brian Rusling of Cazenove.

Yeah, good afternoon gentlemen, just a couple of questions. First of all on the SAC number at TCP, the 193 reais per [presume] because of that. Does that conclude any element of retention costs and you talked about trying to keep your contract customer base and if that doesn’t then can you explain why there was such large rise? And second question is on that basis can you run us through a calculation of the net present value of a new prepaid customer, just to clarify in our mind whether it's still strongly positive? And final question just related to CapEx, you have indicated 16% CapEx to revenues for full year. Should we expect next year CapEx to remain quite strong given the level of growth in the market?

Thanks for the question, well, a far as concerning to the fact in [inaudible] that is related to the increasing competition, of course, namely TIM (phonetic) and also Claro they have decreased a tremendous margin after the campaigns of Father's Day. So it was a surprise -- it was a surprise all the Brazil, but and you will real -- that's why real seeing increasing in fact. In that figure, that also includes roughly 33 or 32% on retentions utilizations, that is related with changes of terminals that we are doing in our shops. Okay, so on average of the our total subsidy includes roughly 30% of cost utilization and retention that is related with this change of terminal. As far as it concerns [MPV] or prepaid, we have been very, very, I'd say, accurate and very -- we get a lot of care about it. We are looking for every month, we are through our databases. We are looking and measuring vertical -- the ARPU [inaudible]. And for the time being, what are seeing is even with these increase efforts, okay, even with these increase efforts in terms of subsidy, but taking into account that we have also some positive impact from decreeing price of terminals. The MPV are clear positive, otherwise it will be impossible to keep our margins in 30 [points] as you can see. Finally, on CapEx, but I agree that this is something that you should measure every month in order to have to be sure that we are not entering in the areas where the customers are not contributing for the follow-up with company or on the contrary, could destroy the [balance]. For the tie being, they are not even diluting the margins.

So, on CapEx, in fact, we increased our CapEx mainly due to two reason. The first, is related with our capacity to do not lose competitive advantage from TCL and [inaudible]. But on the [city] I was just talking about, the TCL region. There we are moving from TDMA to CDMA.. Them TIM and Claro [inaudible] have in fact accelerated, remember, the migration from TDMA to CDMA. So, for Vivo it's crucial to have exactly the same coverage. I mean where Vivo where Claro and TIM have GSM, we should have CDMA. Otherwise it will be very difficult to manage the image in the market and also it will a confusion in all a shop, in our commercial effort. So they increased these effort, they are moving from a phasing out approach to a swap out approach and we have been obliged to increase also our [inaudible]. The second reason is related, we have increased in general of the competition and to increase in general of course of the service offer all over the country coming from our competitor. We are still managing fixed 5 billing system, we are still managing roughly six different prepaid platforms. We are still managing a lot of back-office ITC spend, so we accelerate the consolidation of the seasons which are already running, but we accelerate in order to handle in 2005 with these structural, I would say, a structural project -- very close to the end. So for us it's important that the billing -- the new billing system, the new prepaid platform, the new staff or administrative support, the new back-office, the new CRM which is important should be running as just ones in first semester 2005, that's why we increased the CapEx.

Thank you. And as a final reminder to everyone, if you have a question, please press "*" "1" on your touchtone phone at this time. As a reminder, this the last announcement for question. If there are any questions press "*" "1" on your touchtone phone. Your next question is coming from Andrew Ragia (phonetic) of JP Morgan.

Hi. I want to know if you are talking about decline in fixed mobile traffic, why do we see the interconnection revenues going up on a sequential basis?

Fixed revenue in general, okay? Well, the fixed to mobile traffic, as I said before, the trend of course is pretty clear. They are decreasing on the prepaid segment. They are decreasing in the postpaid segment. In the postpaid segment, we can see some acceleration coming from the corporate segment of market through the wireline PABX solutions which is now very, very popular in Brazil in the segment okay? So we are managing this decrease. We are trying to take advantage of the moving from fixed to mobile traffic to mobile to mobile adapting our efforts and we believe that we will be able to manage this trend as the other operators in Europe and the even in the States, but mainly in Europe have been able to successfully manage this trend, but this is a trend of the market.

So, can I imagine that this increase is coming from automobile companies? Outside this the 45-55% band of the Bill and Keep?

The Bill and Keep, it's another story. You know, we believe that it will be possible to manage the Bill and Keep issue, today we have 45-55%. The real threat is that in 2005 we will have the true Bill and Keep. I believe there is nobody that we can change the guidance just for the guess. I believe that will be possible. Do not hampering this true Bill and Keep in 2005. During this year the trend will be the same. We are roughly having an impact on our gross revenues coming from the interconnection of roughly 6% in terms of Bill and Keep effects. So I think that’s -- that provided that we are keeping this 45-55% window, we must see any material impact, I mean had a negative material impact in our performance coming from the Bill and Keep provided that we keep this approach.

Okay, thank you.

Thank you, your next question is coming from Conrad Werner of Morgan Stanley.

It's actually [inaudible] is calling. Just very simple question about handset procurement cost. I remember a year or two ago being told that GSM handset at the low end were perhaps $10 or so cheaper for the same functionalities in the CDMA and perhaps you could update us on the relative pricing of GSM handsets first with CDMA handset in terms of the current typical handsets you are selling in Brazil?

Well the gap is still more or less the same. So as we decrease -- we forced the suppliers to decrease the price on lower end, also GSM is moving a little. But anyway we believe that it will be possible to continue to closing this gap, why, now Qualcomm has been launching it's CMOS chip which is really very cheap. They suffering pressures came in from China, they are also suffering pressures coming from India and we are now in touch Vivo and Reliance and also China Unicom. And we have been lobbying in the positive sense, of course, with Qualcomm in order to speed up the CMOS direct conversion chip which is very cheap compared to the other and at the same time trying to obtain additional discounts from Qualcomm . Now they are much more sensitive about this issue because now they understand that the battle of course is not just a battle on technology and the battle is still in the second generation in terms of the glowing of the market and they should increase these effort in order to help to close this gap and in fact we are slowly closing this gap.

Thank you very and just one follow-up question if I may and apology if this is in your presentation, could you just update me on the percentage of TDMA now in your base?

In this area, I have not -- it’s lot of figure. I have the figure of the Vivo but this is 30 million customers, so it's less than 50% is less that 50% in the TCP.

Thank you very much.

Okay. And this is decreasing because we are increasing our migration -- our effort for the migration.

Thank you.

Thank you. There appear to be no other questions at this time. I would now like to turn call back over to Mr. Padinha for his final remarks.

Well, first of all, I would like to thank you everybody to attend our conference call and for your attendance to follow so accurately the Vivo operation. We are strongly confident about the capacity of the Company to succeed in this very, very tough market. As you can see for our capacity to resist to decreasing of the margins. We are confident about also the economic characteristics of this market of Brazil in general. We are the confident that through the pressure of the market the analyst etcetera, the market could be much more rational in them of the entry barriers as we’re seeing now. So we are confident about our operation and about the capacity of this company to take advantage of one of this major advantage, which is the scale. So now we are more than 30 points percentage higher than the average of EBITDA margins in the sector. We are running lower margin compared with our dream targets, but it's still a strong margin 35 – strong margin and we believe that after these battles the company we will be in premium condition to increase dramatically its margin in the near future. So thank you very much for your attention and me and our Arcadio, we will be happy if you have supplementary or detailed questions, then please do not hesitate to come back to his or our Director of Investor Relations, [inaudible].

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