Telefonica Brasil SA (VIV) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Telesp Celular Participacoes, TCP, First Quarter 2005 Earnings Release Conference Call. Today, we have with us Mr. Francisco Padinha, CEO of Telesp Celular Participacoes and Mr. Arcadio Martinez, CFO of Telesp Celular Participacoes. Today we have a simultaneous webcast with slide presentation on the Internet that could be accessed at the site, www.vivo.com.br/ir. There will be a replay facility for this call on the website. [OPERATOR INSTRUCTIONS].

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of TCP management, and on information currently available to the Company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions because they relate to future events, and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of TCP and could cause results to differ materially from those expressed in such forward-looking statements.

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

Okay. Good morning ladies and gentlemen. I'm Francisco Padinha, Telesp Celular Participacoes' CEO. And wish to thank you for joining us for the TCP's first quarter 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, www.vivo.com.br/ir. Mr. Arcadio Martinez, CFO, is here with me, as well as our Investor Relations Officer, Charles Allen.

Looking to the first slide, the leadership of the market was maintained without destroying value. This can be seen by the EBITDA and the EBITDA margins in spite of the aggressive market conditions in Brazil. It is worthwhile to pinpoint that the bottom line has improved in almost 60% in relation to the fourth quarter 2004. The focus on the post-paid segment as well as on royalty and retention has given positive results, as can be seen by the evolution of its client base.

TCP managed to reach the 17.9 with client base while all the Vivo companies reached 27 million plus mark. The existing overall client base was for through the loyalty program, as can be seen by the low churn rate which decreases from fourth quarter 2004 to first quarter 2005. A pension was also given to the data related services compared by the relative absolute growth rate shown by the revenues registered by this segment of our business. SAC was reduced just 8.5% during first quarter 2005 in relation to fourth quarter of 2004 because the focus was mainly directed to the post-paid segment as well as royalty and retention practices.

Our portfolio of innovative services keeps growing through demonstration of the CDMA superior technological features. One clue of this is the CDMA2000 1x video pioneered 3G service in Latin America.

On slide number 3, we depict one of our key features in terms of advantage over the competition. Network coverage and capillarity both in Sao Paulo and in Mid West. This advantage is confirmed by the 66.4 thousand points of sales to pre-paid recharge points, which is by far largest than each of our competitor. Some can be seen in terms of point of sales in Sao Paulo that reached 36.2 thousand. Once again, in slide 4, the champion attributes of the Vivo brand were assessed by the independent IPESPE survey, have shown in slide number 4. Is the real advantage to be recognized as the prime brand in the cellular market, once it help to capture the market segment that generate value and reassure our capacity to materialize our clients for the future, keeping the focus on revenue and margin while maintaining the leadership in the market.

Much before its two years of existence were celebrated, Vivo was awarded with Top of the Mind and some other prizes, which is translated in advantage related to being a premium brand, the most remembered brand in the segment. In the slide 5, we show some examples of sympathetic summer campaigns. After the effort developed for the Christmas period, focus on plans and tariffs based on fair cost benefit relationship for the clients, and thus well sustained consumption levels. It is worth mention that before the first quarter period begin, again the entry level barrier of the Company was raised with the intention to employ a truly non-destructive approach to face the tough conditions of the market.

On the slide 6, we see some examples of the market campaigns. We're focused on the innovative and leading services offered through the advanced features of CDMA technology. Most of those services are real hit, contributing to the increase of the revenues from data transmission services. Please note that the corporate segment, due to its importance to our business, receives special treatment and attention in terms of marketing, client retention effort, and support system.

Slide number 7, shows that in relation to the first quarter 2004, the Company registered an increase of 25.6% in its client base in spite of the strong competition. Please take note that the post-paid client base has shown an evolution of 5.8 year-over-year remembering that this is a segment that is highly descriptive by the markets. It is confirmed that during the quarter, our the dedicated efforts to the high-end has managed to retain and conquer new clients in the segment. As far as it concerns loyalty and retention efforts, the first quarter 2005 investment was 75% higher than in first quarter 2004. In order to balance our profitability, we decreased the acquisition efforts on pre-paid of roughly 30%.

We'd like to highlight in slide number 8, the net addition in post-paid compared to first quarter 2004, reaching almost 173% due to commercial activities directed to capture and retain high-value customers. This is important because we have a large market share on post-paid customers in our area. It is also interesting to notice that during the first quarter 2005 the competition resisted the prices, mainly in the mid and high ranges of the market, thus increasing the competitive pressure over Vivo.

We'd like to remind that in our case every new client corresponds indeed to a new onset, and that the Company employs strict accounting practices to compute the number of clients in our base, thus assuring transparency and reliability to the reported numbers.

Finally, it is impressing to notice that the monthly share rates are really the lowest in the market. It's showing a healthy evolution, a clear demonstration that therefore developed for promotion the clients' loyalty during the first quarter 2005 has paid off. A good example of this program is the one based in points offering discounts to encourage and separate the post-paid clients.

In slide number 9, one can see that the company has maintained, it's in fact not destroying value as it faces the tough competitive environment. A certain degree of market share was lost. However, we believe as we have seen in 2004, that our loss of revenue market share was comparatively much lower. I'd like to remember that in 2004, according the number published by our competitor, we decreased five points market share, but only three points in market share of revenues, and we increased a eight to nine points market share of EBITDA.

Finally, it is interesting to notice that the competitive pressure is not evenly distributed among the several regions served by TCP operator. This requires different approaches to each one of them, because while one market is more attractive, others have the seen the introduction of a new competitor in recent times.

Slide number 10 shows that the net service revenues grew by 2.1% in relation to first quarter 2004. This is mainly due to the increase recipient in the outgoing traffic in spite of the right planning. However, this effect was especially counterbalanced by the reduction of incoming traffic, the phenomenon caused by the fixed-to-mobile traffic being substituted by the mobile-to-mobile with correspondent reductions in the revenues from interconnection. The VUM remaining stable throughout the first quarter of 2005. And also, the effect of the push out Bill & Keep. In the comparison, we have first quarter 2004 the impact of seasonality and the tough competitive condition. One should keep track of the evolution shown by the data related services that grew 75% in the relation for the same period last year. Please take note that according to the accounting criteria implied to recognize revenues if really that any amount that doesn't directly pertain to read such as subscription, subscription fraud before it is returning.

Revenues from data services, as shown in slide 11, has shown a sustainable growth in the past quarter. It represents 5.7% of the mass service revenue. It is yet impressing to notice that the data-related revenues had reached 12% of the total outgoing revenue over the data enabling base. The availability of a large of range of options of data enabling handset and new services has played an important role in the promotion of data-related traffic. Services such as VIVO Agenda, VIVO Encontra, and Vivo Downloads are good examples to mention. The average number of SMS message amount in the first quarter was 80 million. Finally, I would like to pinpoint that revenue from data, as I recall that we now don't include proceeds from voice or non-data related services.

Slide number 12 offers more detailing information about demand for data-related services and one can see that the corporate clients has access to a wide range of solutions, many of them based on data transmission. The year-over-year 197% growth that is registered in the Vivo Zap shows the potential that these segment is capable to offer. By means of a wide range of a service, the corporate market segment Vivo Empresas division provides a mobile office through the service Vivo ordered service procurements, Vivo Empresas delivering, first to talk, EV-DO, when the Vivo Zap3G is available and more. In slide number 13, we can see that when comparing MOU to both first quarter 2004 and fourth quarter 2004, that the inbound traffic presented a bigger reduction in relation to the outgoing traffic. This was due to the migration from fixed-to-mobile towards mobile-to-mobile. The effect of the mix were also felt but in a smaller scale. Please note that in the first quarter 2005, blended MOU compared with the first quarter 2004 shows a reduction of 6% due to the seasonality, reduction of the bonuses based on and as explained before, a reduction of the inbound traffic.

Also shown in the slide the first quarter 2005 post-paid MOU remained particularly stable in comparison to first quarter 2004, once the drop of the inbound MOU of this segment was totally compensated by outgoing MOU. There are two blended evolution between first quarter 2005 and first quarter 2004 shown in slide 14. It mainly due to the effects of the mix, lower inbound traffic posted by the fixed-to-mobile migration towards mobile-to-mobile and VU-M kit. In the outgoing traffic the ARPU reduction was posted by penetration in lower income classes and right planning focus on postpaid. Comparing the first quarter 2005 with the first quarter 2004, what you see is the effect of seasonality as well as less working days. Finally it is important to notice that postpaid ARPU showed a much smaller reduction in loyalty churn than the prepaid, minus 7% versus minus 21% as you see in the following slide.

In order to correctly interpret the evolution of the blended ARPU we have disclosed it in slide number 15 and 16 what happened in the postpaid and in the prepaid ARPU. Please note that the postpaid ARPU in first quarter 2003 was 150.4 Reais. This in comparison with the fifth quarter 2004, the fall in ARPU was 22.4%. If compared to the 4.4% fall from quarter 2004 to first quarter 2005, we can see that there is a tremendous reduction in the strength moving to a more stable evolution.

Now, to complete the argument, on the slide 16 present evolution on the pre paid ARPU. The first point to call our attention is that it shows larger drop in the pre paid than in the post paid. It is specially a consequence of our efforts to bind high value clients in through loyalty programs. Please take note that once again the trend of a smaller drop is verified in the first quarter 2005 versus fourth quarter 2004, which recorded 11.9% when we verified that drop between the first quarter 2003 to first quarter 2004 was 13.6%, which represents a progress in the trend. The real loss of ARPU in the pre paid were 0.75 Reais in relation to the first quarter 2004 and 0.64 reais in relation to first quarter 2004. The factors were promotion to new clients and retention, migration to post-paid and difference in the number of working days. These three last slides confirms that our strategy in the first quarter, reserving value through controlling churn, to control the churn amount claims has been positive for the value of the company.

Turning to slide number 17, we see a decline in the SAC. In the first quarter 2005, views the end of the Christmas campaign, due to seasonality, and to the prices of the cheapest handset that were kept at high levels during most of period, which reduced the level of subsidy with positive effect on March. Nevertheless, the reductions was just 8.5% in relation to the first to fourth quarter 2004, because in parallel to the effort to retain IM client focus was directed to capture post-paid clients. In the sense, post-paid growth have shown a smaller reduction than the one we required on the prepaid. In the same slide, we can see that the effort to promote productivity effectively and can be seen by rising the number of clients per employee. Synergies between the operating companies continue to be used at higher levels of operating offices. The rationale differences that can eventually be nothing were caused by the different approaches of the competition in certain places.

In slide 18, general and administrative expenses of the first quarter of 2005 were lower than the first quarter 2004. This was due to the success in the program implemented to reduce the structural cost and by the high level of synergy obtained by the operating companies. The selling expenses presented a healthy reduction in relation to the fourth quarter 2004 due to the reduction in the number of as well as the reduction in cost related to such parties, commission and marketing expenses. But we must not forget that the strategy in first quarter 2005 recognizes high and mid range client loyalty. It is not necessary to comment that the cost of goods sold was reduced in relation to the first quarter of 2004 and fourth quarter of 2004 due to the lower number of commercialize of handsets. The cost represented by wage and salaries was impacted by the avg. wage increases of 6% and additional increases of 5% to match labor markets permitted and then increase, a smaller increase in the . Cost of branded services presented an increase when compared to the same quarter last year, and this was mainly caused by the fee, due to increase in the number of clients and through the changes in the accounting methods previously employed by TCO, which lowered the basis for comparison. The reduction in total operational cost resisted in relation to the first -- fourth quarter 2004 is a testimony that the company is fully committed to keep in check the cost that are under its direct control.

As already stated, the first quarter 2005 offers conditions to seek better margin. In spite of the strong competition and the seasonality factor resisted in the period, we can see in slide number 19, that the EBITDA grew by 10.2% in relation to the last quarter of 2004 and reached 40.1% in the same period. As we have clarified in previous occasions, please be aware that according to our strict accounting rules, the cost of the installments related to the gross adds are booked as operating expenses, thus directly impacting the EBITDA.

Now, I turn to Mr. Arcadio Martinez, our CFO.

Thank you, Francisco. Good morning, good afternoon to all of you. I am going to slide number 20, which shows that equipment and storage continued at a high pace through the first quarter of 2005. As a continuation of the rapid strength shown over the fourth quarter 2004, which resulted in a relatively high proportion of Capex to sales in the first quarter 2005 at 24.4% of sales. For the coming quarters, we expect that ratio to decrease down to a level for full-year 2005, similar to the one in 2004 for the full year, with Capex below 20% of total sales. The company maintains its intention to keep our leading position and consequently the investment plan for 2005 will be directed to increased capacity and coverage to handle and to meet increased traffic to our ability and coverage to the service, information systems filling, etcetera, as well as completing the transition of an overlay network at TRO from TDMA into CDMA.

Moving to slide 21, which shows that the total debt and net debt of debt to net of cash and cash equivalents increased over the first quarter 2005, mostly as a result of two seasonal and non-recurring effect. First of all, the payment of the fiscal fee already alluded by Francisco, which takes place at the end of the first quarter of every year, and had a total of 240 million reais paid by the end of the first quarter of 2005 over the cash position of the company. And secondly, the payments to suppliers, as we said that with a seasonal campaign for the Christmas campaign, for postage of terminal together with a high Capex overly referred to for the fourth quarter of 2004.

Moving on to the next slide, number 22. We are summarizing there the characteristics of our recently announced issuance of debentures for an amount of up to 1 billion reais, and we expect to close in May. The issuance is part of an earlier registered debentures program of up to 2 billion reais, and is intended to perform part of our short-term debt into long-term . Proceeds from this issue will be used in part to repay the 1 billion commercial -- issued in November 2004 in connection with the financing needs at the end of last year.

On the next slide, slide number 23, we show there is prospects for our announced reverse split of shares that is taking place in Brazil. We expect to close this transaction in the next few weeks, with the purpose of filing for the transparency and efficiency of our filing procedures in Brazil, as well as to decrease the administrative cost related to keeping nominal prices -- excuse me, lower nominal prices for our shares. In that regards, we are comparing 2,500 shares of TCP, both ordinary and preferential to one share, and 3,000 shares of TCO, both as well ordinary and preferred shares into one share as well for TCO. There is no change to the ADR trading since we're accommodating what is the ratio of raising from the preferential shares in Brazil to the ADRs in industry.

The net financial expenses of the Company is registered at 122 million reduction in relation to fourth quarter of 2004, as pictured on slide 24. Mainly due to the related to the interest on shareholders' equity raised at the end of 2004. There was a non-recurring item obviously. Second, there are more of losses with current deductions incurred in the first quarter 2005 compared to the fourth quarter of 2004. Lastly, the reduction in debt, a sequential raise of the capital increase took place at the end of December last year.

The bottom line, at the end of the first quarter of 2005, that's seen on slide 25, shows an improvement of more than 58% in relation to the fourth quarter of 2004. As a result of improvement in operational performance as measured by the EBITDA margins, was much higher in the first quarter of 2005. As well, we showed lower financial expenses as already referred. And also, losses of the fourth quarter 2004 were impacted by a non-recurring charge of over 50 million for Anatel's analog network related assets LIFO.

And now I turn the floor again to Francisco Padinha for his final comments.

Thanks Arcadio. On slide 26, we would like to emphasize that to make sure that our responsibility is understood . In our review, which is being carried on through a clear and transparent relationship with a community around us, clients, suppliers, shareholders, government, and many others. So, we will institute, of course many project to the benefit of hundreds of thousands and one of the best examples of internal commitment to this responsibility, actions is the Vivo program, devised to improve the employed in the community care, it has had an enormous success through the voluntarily dedicated hours and energy to the various courses. Finally in the slide 27, we are confident about the potential offered by the Brazilian market. Our plan, our focus in the long-term, and we are fully aware that each one of the period presents different and sometimes new condition. As market leader, in the first quarter 2005 we managed to establish a reference on subsidy, taking care for commencement of the market leadership without destroying value to the Company. There were conditions to promote admitted growth and then improvement of the margin. This was important to prepare the Company to support the current tremendous effort on the Mother's and St. Valentine's Day campaign in order to increase customer base, hence were important to present our value-based market share. So, thank you very much for your attention and now me and Arcadio and Charles Allen will be glad to hear your questions.

[OPERATOR INSTRUCTIONS] Vera Rossi - Morgan Stanley

I have two questions, the first one is about your acquisition costs and then ARPU. Where do you expect to see your acquisition costs in the second quarter compared to the first quarter, given the reduction in handset prices we saw in the markets in Brazil in the beginning of April? How much do you expect your subscriber acquisition costs to increase in the second quarter compared to the first quarter? And my second question is on ARPU. We saw a big drop in ARPUs in the first quarter, especially because of the seasonality of the quarter, but how much you expect ARPUs to improve in the second quarter compared to the first quarter if we exclude the seasonal factor? Thank you.

Thank you Vera for the questions. Acquisition cost the second quarter that will depend on the continuous effort and the continuous strategy of our competitors on Mother's and St. Valentine's Day. What we are seeing now in the market is some, shall we say, irrational of it. Some operators are offering 29 - for 29 reais in 10 installments prepaid products. Others with 89, 78, 12. As we had explained during the first part of our presentation, our strategy in the first quarter was in fact to focus on value to focus on loyalty and retention and to focus on the post-paid in order to prepare for the Mother's Day, because the Mother's Day is a very, very strong campaign traditional in Brazil as you know and has a tremendous, normally has a tremendous impact in the churn both in prepaid and in post-paid. So, that's why we are now resisting our prices. We are increasing our subsidy, of course, it should be higher than the first quarter and should be much higher, because we are not willing, of course, to lose value market share. I'd like to emphasize that during this campaign, the base of the customers of Vivo are normally a target, a potential target. So, it is important for Vivo, not just for growing by growing, but for protecting our base. As a consequence, we will grow much more than in the first quarter, of course, but with lower margin, clear lower margin. As it concerns the ARPU, as you can see on slide 15, and I think that is important to point out that the postpaid, which is the most important area of our revenues, is under control. Why can I say this? Because the decrease from the quarter -- fourth quarter 2003 to first quarter 2004 was, if you remember, roughly minus 22.4%. So, the decrease that you are now seeing is just 4.4% for the first quarter 2005 from quarter 2004. As a trend during this year, I believe that the ARPU will continue to decrease slightly mainly because we need to keep -- continue to reduce our plan, because our customer base is targeted. We have to remember the fact from a lot of operators, so the right planning, the new offers, the efforts on the loyalty and the retention in our content, and of course we will create conditions for a slight decrease in the ARPU. At the same time, we should take into account that the business segment of the market is also very bullish about the pricing, and our competitors are against our base. But anyway, I think that that's very important, what is important to retain is that this decrease is under control and we don't -- do not anticipate a -- shall we say a much more accentuated decrease. That will decrease slightly, but we believe that we will be able to manage this decrease in order to protect the value of the company.

Okay. I have a follow-up question on my first question about subscriber acquisition costs. First, what is the market share that you expect to get in Sao Paulo in terms of net additions during the second quarter? In the first quarter, this number was 4%. So, how will you expect to see your market share of net additions in the state of Sao Paulo in the second quarter? And then, the second point is on subscriber acquisition costs. When I compare your subscriber acquisition costs of the second quarter of 2005 with a year ago the second quarter of 2004 where we had a very competitive market in Brazil as well, do you expect to have the acquisition cost this quarter going up or down compared to a year ago? Because it's always hard to compare with fresh quarter, because first quarter doesn't have any standing campaigns like Mother's Day.

I would like to elaborate a little on the net additions market share. You know, Vera, that it is impossible to compete with operators that are apparently, I would like to be not misunderstood, apparently retaining or controlling its share. If you look for the figures of the Anatel and if you see this through to make the calculations, the reverse calculations, one of the most aggressive competitors of Vivo in the state of Sao Paulo have reported and directly because it is easy to make the calculations, okay, churn in Sao Paulo -- in the state of Sao Paulo of just 0.5% in January, 0.6% in February, 0.7% in March. We have roughly 9.6 million customers in the state of Sao Paulo. We have very good share, 41.5. So, we need to have at least 150 gross adds in order to grow zero. Okay? So, if our competitors are consoling between churn, it is very difficult to manage this image in the short term. So, what we are anticipating is in fact up in March. For instance, we decreased 1.6 points market share in TCP during the first quarter. But, in March, we only decreased 0.4, okay, according the Anatel figures. So, we believe that now and with our efforts to compete have to have not, you say, praising to please you, but have to have for second quarter profitability. In the second quarter, we will increase, of course, our net adds market share. But, pay attention, net adds market share is something very exoteric sometimes. We need to look for figures, we need to look for churn of each operator, because otherwise we are fighting against gross, and we are only spending money in race just for gross adds, gross adds, gross adds. That's the issue. On acquisition costs, as I said before, we will increase the acquisition cost during the second quarter. The final figure it's not stable in our mind. We have a target. I am not disclosing the target. And, it's not stable, why? Because we are not aware what will happen in St. Valentine's Day. We are not aware if this trend of some, or we say, guerilla tactics, of 49 reais for example, or 79 or 89 should decrease in the coming weeks. So, it is very difficult to give you a picture. What I can assure you, it's Vivo, we'll fight for a massive market share, profitable market share, but we are not willing to follow this crazy option.

Okay, thank you.

Thank you, Vera.

Andrew Campbell of Credit Suisse First Boston.

Yes, I just wanted to confirm your Capex for this year. I think your guidance was to do a similar amount of Capex this year as you did in 2004, is that still the case, or do you think you might have to spend more than that?

No, that is not still the case, Andrea. That's what we shoot for. More or less same proportion of sales I am attributing in 2004.

Okay, understood. And, I mean given that level of Capex, it seems that your cash flow, especially up with the TCP level, if we strip out the TRO cash and the TRO EBITDA, did you actually have a fairly high leverage up at the TCP level, especially with this increase in debt in the first quarter? Are you comfortable with that level of leverage that you have? Do you think that it might be necessary to put more equity into the Company or how do you feel about the current level of leverage?

Again, the increasing debt over the first quarter, it is the result of some seasonal impact that are not recurring, so the trend is going through reverse as to more normal.

For the rest of the year, from the standpoint of liquidity, there is no need for additional capital. We can live with what we have with us. The future generation of capital . With access to the market that . The rest of it is after the consolidation of our portfolio of shareholders, basically whether to decide to go for more or not. So far, there is nothing decided in these events.

Okay, thanks Arcadio.

Andrea Baggio, JP Morgan

I have a question regarding the outlook for EBITDA. In the previous conference call, you have been saying that the outlook for the '05 would be like pre-stable margins relative to '04, and then the outlook for '06 would be much better than that. Do you still maintain that or do you see that competition is becoming more aggressive, more irrational and is this -- in this sense, is the competition doesn't change then than the margins could go downs relative to your previous expectations?

Thank you for the question, Andrea. The question is there are two impacts on the DCA. The most important impact is subsidy and the choice between, of course, some market share and subsidy and on the other hand, is the traffic. And the inbound traffic, it's very important for cellular operators in Brazil. As you know, roughly 48% of our revenue came from interconnection fixed-to-mobile. On the other hand, what we have seen? We have seen three things. One is the increase in subsidy and different from market share, market share, and market share, okay. The other churn is the interconnection fee that has some trend to decrease in the coming year. We are now discussing some figures. With Anatel we've some modernized public, okay. 4.5%, 5%, 4%, we don't know exactly. We've lost three months, we see it. And these have a tremendous impact on 48% of our revenue. On the other hand, on that traffic, I believe that the operators, the cellular operators in Brazil needs urgently to come with a policy to repel us inspiring on that words. The revenues we have coming from incoming profits, I mean interconnect. So, as you have seen the interconnection traffic decreasing mainly due to two important effect. One is the increase of universal cellular operators in Brazil, it's a normal phenomenon of substitution fixed to the mobile or fixed-to-mobile for mobile-to-mobile. But beyond that, that is most important in my view in short term, it's the trend that has happened also in Europe for the small, medium, and large corporates or companies that have to interconnect directly the PAVX with the cellular operators. It's a difficult game because you need to choose to have 40% of something or 100% of due. When we interconnect corporate customers, I mean, the PABX through the cellular network by or through a wireless interface. We are charging revenue of a fixed-to-mobile interconnection fee for a mobile-to-mobile at a corporate discount fare. So, the evolution of EBITDA will depend on this trend, will depend on the evolution now of the increase of the VU-M and also the subsidy effort. What we think that could happen is in fact after this crazy campaign on Mother's day, we did crazy efforts, everybody will try to understand what will happen to this EBITDA. And, I believe I guess that probably every operator will try to decrease the effort on subsidy. But, this has a tricky question because everyone can decrease the efforts on pre-paid subsidy, but normally on the day after they increase their efforts on subsidy on the medium-to-high tier terminal. So, the subsidy is something that is you are taking care of your valid customer base. You need to manage. So, that's why we have been -- our shareholders have been saying and giving the guidance for end of the year low EBITDA margins on the mid 30s, low but more or less our target. And we're not -- we're just through confirming the guidance for forward schedule. But, there are a lot of factors in the field.

Second question I have is regarding to Capex, you are running with a Capex nearly 20% of revenues. This year, the outlook in longer-term could be much lower than that. In the future, I know you were talking about 3G license, you possibly could be using one of this 3G licenses as a mean I guess, but in this circumstance, I guess possibly the Capex would also increase. Do you have a longer-term outlook for the Capex?

Let me explain about the current efforts on Capex. We should take into account that, yes, mainly two or three factors that impact on the current Capex effort. One is the migration from CDMA-to-CDMA, and the issue and in the areas of PCO, we're building up very fast our CDMA network with 1X CDMA network. That impacts on the Capex, but it is not a threat at all, Capex, it's a consolidated effect. On the other hand, we're revamping all the information systems. Billing, pre-paid platform, SAP and . So, these impacts on the Capex in 2005 and in some part in 2006. If you look for our distribution of Capex, and if you look only for the Capex that is related with increase of the business, I mean increase of the base, increase of the service, we will see very, very, very comfortable figure. The problem or the challenge of the problem is to manage the migration from CDMA-to-CDMA and the information systems revamping. As far as it is concerns, the 3G license, we don't take exactly the third. What we have heard from some ALCATEL executives are responsible, is that in fact they've been sanctioned to launch this auction in a BP contest. That will be not mandatory for 3G. That will be from new services or new needs, okay. Probably we have some, I will say, some great periods to transform after the acquisition of the licenses and the frequencies or to implement. The projects help if the scenario responds to this picture. We are very keen because we need this 1.9 frequencies or to deploy at least a roaming infrastructure in . That's all I can say about 3G license because we have already 3G sets through EV-DO, our spot EV-DO we have already in Sao Paulo, in Rio de Janeiro, Brazil, etc., as soon as we have available of frequencies from 850, because we are changing technology there. We have already 3G services. We will manage this interim periods with a tremendous advantage over the other operators. We are already in the commercial pilot and this is not the rocket stand. If you look for a horizon, you look on Japan, you can have also a very very positive impact of a controlled deploy of EV-DO. That doesn't mean that in the future we will keep the EV-DO evolution, I mean, CDMA etc. That is something that is still an open question.

Okay, thanks a lot.

Gustavo Olivera of Citigroup Smith Barney.

Good morning. I have a question regarding your post-paid customers, especially in Sao Paulo and also your overall postpaid strategy on all the market. Although, in all the markets you are growing your postpaid by only 6% year-over-year, whereas the market in Brazil is growing on a rate of 24 percent, year-over-year. In Sao Paulo specifically it seems that the pressure you're having in your postpaid markets is much higher than the other markets. And even without the retention report you are commenting, your monthly showing was only basically flat, but you're level of net additions where very low. I would like to understand a little bit better of what is going on in your postpaid base and also -- and related to that I would like to know because you had recently launched your Push to Talk services and are you being able to compete directly with Nextel, and are you steeling some of their customers?

Well, our postpaid is based in Sao Paulo as you can see from the comments, the documentations we have. We believe it is now in the healthy conditions because we have to view our base roughly, 8% year-over-year. 1% from -- if you compare first quarter 2005, we are the first with the less for 2004. In Sao Paulo is by far the most competitive market in the postpaid, a lot of attack of our competitors, some will classify it as irrational because the EFO, the handset with cameras, free of charge, they commit with immediately to get the invoice by two. Well, it is a tremendous challenge, that is why, we invest a lot in reshaping our -- and rightsizing our plans and increasing our loyalty programs. So, I believe that this is in the EV-DO segment of market. Because the other parts in the postpaid probably is related with business segments of market. In the business segments of market, we have, and we believe we have a tremendous advantage because we have very good solutions based on BETA. We've bundled these efforts. We voiced and we've succeeded into retain and to increase our customer base on business segments of the market. So, just to confirm that Sao Paulo is by far the most challenging market we have in the value of customer, which is normal. Well, as far as it is concerned to Nextel approach, in fact, we are now deploying our Vivo Direct. It is a PCP over IP service, it is pure Voice-over-IP. There are no, I would say, carrier selection. It is a very competitive product. The quality of voice is very good. We are just slow at times, let's -- a little long time of establishing the call, but it makes no difference currently and we have a very, very aggressive plan for deploying this service on the business segment in May or at least by the end of the May. So, we believe that when we have our advantage on data. We are already deploying DPM services both in 1X and now we will start on EV-DO on that front as we have these advantages. As we have also the advantage of the -- you can say the Nextel-like approach or Nextel-like service, which is the Vivo Direct. We will have much more tools in our hands to keep the value customers from business segments of market in our area. So, we are very, very optimistic about our capacity to control the churn on the fast pace in Sao Paulo.

So, with that do you think that this is more a 3Q05 effect rather than the second quarter probably?

Sorry, will you repeat your question?

Do you think that then the effect of the Vivo Direct would be felt on the third quarter results rather than in the second quarter results?

Our -- it's not impact directly on the results. The Vivo Direct is mainly a loyalty product, because you know that we -- it is difficult to see an increase in revenues on the day after. What you will see is an increase on loyalty, because the solution will tie the customers with us. You know, because once you move to the solution, unless our customer has already a Nextel and we have moving from Nextel to Vivo. But, on overall on the day after, I mean the coming months, this is mainly a loyalty product for the business segment of markets.

Excellent. Regarding the just on my last question, do you have any -- do you have -- you've reached any agreement with any of the operators yet? And if not what do you think that Anatel -- will Anatel help you to reach those agreements and what are your expectations?

You meant on the interconnection fees?

That is correct, yes.

Well, we are -- we have been certain ways leading this relationship that is in fixed and mobile and try to be competitive and try to be sometimes flexible without losing too much value on our budget. And I now -- and I am optimistic that the Anatel, in the coming days, we will be able to found solutions that will be not exactly -- that will probably will be not exactly good for both fixed and mobile, but medium for both parties. Okay?

Charles Chichester, Cazenove Group.

Hi there. It's Charles Chichester. I'm just wondering if you could explain a little more what you'll see in the Amazonia state in the surrounding areas, . Is there any area where your market share has not gone down during the quarter? And I'm just wondering whether this is the result of a conscious decision on your behalf to target this area for some reason or whether you've just seen very little competition from TIM, Oi, and Amazonia Celular. And we don't have a split for ARPU in SACs for areas 7and 18 individually. We've got it for TCO as a whole. Are you able to tell us what these two KPIs are in area rate so that we can have an idea of the value of this operation? And also in that region do you see the low penetration in the Amazonia's region as an opportunity or do you expect to remain on the penetrative relative to the overall market in the long term? Thanks.

Sorry, just to recall your question, the first is the evolution the market share in Sao Paulo, is it right?

No. Not Sao Paulo, in Area 8 in the north.

In the north. The second one is the?

The second part, I was just wondering whether you are able to give a split because Area 8 is the area that's done well while your market share has not gone down during the quarter, and you don't give us a split for ARPU on SACs for Area 8 on a tone, we just got it for TCOs and for areas 7 and 8 together. So, we can't really see what's happening to the ARPU in SAC in Area 8. I am wondering if you can give us an idea of what's going on in just Area 8?

The market share in the north we're decreasing ARPU, but we should take into account that the north we have a very good operation and I remember SACs coming from TIM and coming from Oi. We are once again in the north trying to control value of the company and to notify just from market share to market share because it is not a wealthy region of the Brazil. But anyway we believe that regarding the balanced equation in the north. As far as 8, it will be possible to decrease the aggressively on the players mainly Oi and Tim in that area. On SAC, we decreased the SAC as you saw 8.5 percent, it's not to match from the first quarter 2004 to first quarter 2005, which as I said before. This is mainly due to the fact that we have contemplated or changed our effort from acquisition to retention and to loyalty profit. The trend that will depend and mainly of course of the efforts of our competitors. In the second quarter we will see the SAC increase of course and we will increase 1000 figure, but once again we will try to keep our margins in a defensible figure, we will disclose. The other question is to revise -- it just sorry.

Yes, no you have sort of covered it thanks.

Steven Iverson,

Hi, good afternoon. I was wondering here on actually on PRO results. There was some increase in the cost of service due to some accounting changes. Could you give me any color on, what could be the pro forma number for the first quarter of last year or what exactly happened on this number please?

It's an effect that took place at PRO over the year 2004. We aligned the accounting practices of PRO with the Vivo group. And the main impact was on the special PRO used to record a special tax at a much faster pace than the rest of Vivo, we deferred parts of a charges for the special tax according to Brazilian accounting rules and that's why we had a lowering of the impact of the tax on the PRO accounts all over the year 2004. Now, they are getting back to regular levels, let's say, and that's why you see an increase in that type of essence on the PRO level.

How about expense on the first quarter of last year?

I don't have the number with me right away. But, it explains, I can certainly the difference more to the difference in that category is explainable by the difference in the accounting treatment of . So, you can make a guess as out of the level, the difference between the first quarter this year and first quarter last year.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS)

So, thank you very much for everyone of our audience. Thank you very much for your interest in TCP, in particular in Vivo in general. I would like to emphasize once again that we're managing this business in the very competitive market, very turbulent market, but we will keep our strategy to balance our growth with the profitable result of the company without losing the leadership we made and the leadership capacity of the company to keep and to increase the value for the shareholder. Thank you, very much for your attention.

(OPERATOR INSTRUCTION)