Telefonica Brasil SA (VIV) 2005 Q4 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, fourth quarter 2005 earnings release conference call. Today with us we have Mr. Roberto de Lima, CEO of Telesp Celular Participacoes, and Mr. Ernesto Gardelliano, 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/ri. 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. [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. Roberto de Lima, CEO of Telesp Celular Participacoes. Mr. Lima, you may begin your conference.

Thank you. Thank you all for attending our conference call and I would like to start by some highlights of the fourth quarter and 2005 results of Vivo, and especially in TCP, Telesp Celular Participacoes.

So in what concerns our performance, Telesp Celular Participacoes is the leader in cellular telephony in Brazil. We have nowadays more than 45% market share in number of users. It’s counting 20m customers at the end of 2005. And this year we count more than 5,700 of points of sale, exclusive or not, which gives us a big difference comparing to the competition.

In terms of CapEx, we still invest a lot of money in network in what concerns the coverage in Brazil and increase of capacity, but also to replace the old TDMA network by the CDMA. We are still investing in the consolidation of information systems. We are talking here about billing, pre-paid platform. The system -- the SAP system is already deployed in 2005.

In terms of new systems, this year we launched with one of our partners a special handset called Globalmoto that has dual mode and dual frequency that is able to talk in 170 countries, based in roaming agreements we have with all these operators.

We also launched the launch of the Smart Mail 3G. We are talking about EV-DO technology, and the Zap 3G, the instrument that gives the desktops and also the laptops access to Internet in third generation.

In terms of finance, TCP recorded a margin of 27.3% of EBITDA over the net revenues, which is considered the best of the market if you consider that the second and third competitors we have, they are in 18% and negative in what concerns the [inaudible].

So Vivo has the objective of keep on growing its customer base and its revenues in a positive way. But at the same time, recording margins that can be -- can allow Vivo to finance its investments and to produce enough cash to improve its structure of capital in the future.

This year we saw a reduction in the net financial expenses. We redefined the accrual of debt toward long term. And we generated a positive cash flow of BRL480m -- BRL481m. The gearing of Vivo is close to 1.

In terms of corporate governance, we adopted a conduct for -- ethics for all the workers in Vivo. And as you know, we started and finished a restructuration of the corporate chart that was quite finished yesterday -- on February 22 with the Assembly of Vivo.

So in terms of development, in the state of Sao Paulo we covered 100% of the municipalities with a digital coverage, 1xRTT. And we have more than 921 municipalities in 1xRTT and EV-DO in the main capitals of Brazil.

Turning the page, our customer base evolved 14.6% year-over-year and 14 -- and 4.3% quarter-over-quarter. And we should say that in the post-paid system our customer base grew 9.5% year-over-year, and the pre-paid 15.5%.

In terms of some regions, Sao Paulo grew 13.5%, and we saw in Parana, where we are -- we are not the first one in the market, we grew 12.8%.

In terms of post-paid net adds, you can see that from 2004 to 2005 the net adds evolution rose by 95%, almost 100%. And in the quarter we made the same number we made in the fourth quarter of 2005 -- 2004.

Net service revenues, a growth of 4.3% quarter-over-quarter and 3.2% year-over-year. This comes from the increase on the customer base and an important increase in the data service. And this was partially compensated by the fact that the incoming traffic reduced. So this is why you see a number of 3.2%.

In terms of handsets, Vivo has the best role of handsets we've ever had. So we have 67 handset models in all the segments of the market. In 2005 and 2004 we launched an important service like the ZAP 3G [using] EV-DO on the data communications for Internet, the download banking, games multiplayer, the smart mail, all these services addressed to the corporate market.

In terms of marketing actions, our marketing was very promotional this year, trying to increase the level of activation of our customer base, increasing the revenues, and keep our customers with a higher degree of loyalty.

I will tell you about the Globalmoto. In terms of innovation, it’s the first handset that is available to talk in 170 countries, the same number and the same handset. And by the end of the first half of 2006, we should have two other models with two other partners. Different brands for the same kind of handset, with the same possibilities we have with this one called Globalmoto.

Distribution and coverage. As I told you, Vivo has more than 5,500 channels of distribution and we already covered 100% of Sao Paulo in digital. We have more than 92% of the south region, Parana and Santa Catarina, in terms of population coverage. And we are still investing to get 100% in that region.

We have more than 200 points of sale owned by Vivo, and more than 5,500 points of sale with partners in the retail and [other] specialists.

The data revenue evolution was 45% from 2004 to 2005, and the last quarter of 2004 to -- 2004 to 2005 was 43%. And the percentage of data revenue over service revenues grew from 4.3% to 6.5%.

And what is important to say is that data service is not only SMS. You’ll see that from 2004 to 2005 our percentage of SMS decreased from 76% to 58%, because the Zap system, this means the Internet access and also the Internet access with mobile, grew from 8 to 19%, and from 16 to 23%. It means that we have a better mix of data service in 2005.

So now we turn to Ernesto Gardelliano, who will resume the presentation. Please, Ernesto?

Okay. Good morning, ladies and gentlemen. I'd like to start covering ARPUs, if we go to page number 12. We experienced a reduction fourth quarter '04/fourth quarter '05, about 10%, mainly addressed by incoming calls.

On the other hand, if we move on to following page and talking about post-paid ARPUs, it was completely the opposite. We had an increase of 8.5%. That's still incoming -- incoming calls are the main driver of the mix and the drop. And a 2.6% increase when we compare fourth quarter '05 with the third quarter in the same year.

Talking about minutes of use, same thing. We have a 15% decrease year-over-year. Talking specifically about the fourth quarter, that decrease is mainly based upon the mix of new customers coming in. So we have targeted all of our efforts during the third and fourth quarter to keep on working on high-end customers -- high ARPU customers. That will be reflected in the following pages.

When we talk about post-paid minutes of use, we grew from 220 to 230 minutes. Still the decrease in incoming is evident.

But when we go to the following page, page number 16, you will see a drop in the acquisition costs. Acquisition costs take into account not only acquisition but also retention. There's a mix there. We were able to get better prices for handsets, as well as a revaluation from the real in dollar terms. And this was a mixture, not only of a slowdown in the amount of gross adds but also an increase in the number of trade-ins we've been doing in order to focus on the strategy I mention below.

When we talk about operating costs in terms of cost of services rendered, the increase is mainly due to the higher customer base on top of an accounting change in order to normalize the accounting practices of TCO with that prevailing of TCP. So basically, we normalized that effect of the Fistel, which is a tax we pay based on the customer base we have at the beginning of the year, plus all of the additions on a quarterly basis.

In terms of headcount, it’s basically the same amount, only affected by the governmental increases that we allow per employee.

In terms of handsets, there is a significant reduction. As I mentioned below, not only because of the amount of gross adds but also in terms of the cost of those [CPEs].

When we talk about selling expenses, we have to separate a provision that we have recorded in the fourth quarter related to uncollectibility. That uncollectibility stems from the fact that we still don't have coverage in two areas of Brazil. Our customers are allowed to roam in those areas, basically roaming in analog networks that were not authenticated. But we experienced our customers not recognizing a number of calls, and that amount had to be paid.

And instead of completing those calls to our customers, once we started getting the sense that a fraud was there, we preventively recorded the provision for bad debt, a bad debt that is not derived from revenues because it is basically a balance sheet account, receivable with payables, because those revenues belong to the [inaudible] operators with which we have a roaming agreement. And we have taken measures that I believe we will cover afterwards.

In terms of G&A, the jump there is due to the fact that back in 2004 we'd been developing some projects -- IT-oriented projects that, because of some issues we had at that time, the payments and the effectiveness of the payments were weighed. Once we achieved completion of some of those projects in 2005, we made an agreement in order to pay a [inaudible] rate on top of the normal expense that we had for the year. So that is the main reason for the jump.

If we move on to page 18, we can see that EBITDA numbers and EBITDA margins for the quarter and for the year came in at about BRL2b for the year, BRL418m for the quarter. But if we take out the impact of the provision I referred to before, margins would have gone up to 29.5% on a yearly basis and 30.5% [sic - see presentation slides].

Going on to CapEx, investments for the year kept on moving towards migrating TDMA networks into CDMA, basically in the areas of center, west, and north of Brazil, as well as in Parana and Santa Catalina, on top of capacity that we had to fulfill, based upon the [earlier] traffic that we were experiencing from the higher customer base.

On top of networks, we've been early working in implementing a unique set of billing, customer care and pre-paid platforms throughout Brazil. We understand that we will be finishing with the completion of such projects throughout this year, 2006. We were able to comply with 100% in all of the bigger companies with a financial system in the SAP. But as far as billing is concerned, we have completed those projects only in Sao Paulo and Parana and Santa Catalina, but we are still moving ahead in the center, west, and north of the country.

On top of IT, on top of network, we have other investments. Basically -- we basically cover corporate devices and data [inaudible] stemming from our Vivo Zap service that derives from high-speed data using our 1xRTT network throughout Brazil.

Talking about gross debt, net debt, and gearing. We can say that we had a small increase when we talk fourth quarter '05 versus third quarter '05. That difference stems basically from the fact that we had billing problems in center, west and north, where we were not able to issue invoices to our customers. We have been working throughout January and February in order to normalize that effect, taking into account that we cannot -- we are not able to send invoices within a period of less than 20 days, each of the invoices. So basically that increase in the accounts receivable is normalized and we have, in order to fulfill capital needs, to go to the market and get an extra BRL170m in debt.

In terms of leverage, we are well positioned. 1.31 by the end of 2004, 1.12 by the end of 2005. This is going to be one of the major targets now that we have Vivo Participacoes, and that has [been born] 2 days ago.

On top of that, it is important to say that we have achieved a trade-off between short term and long term throughout the year 2005, where we had almost a 60/40 ratio short/long by the year 2004, migrating to 30/70 by the end of 2005.

The whole debt is about -- 62% is foreign currency denominated. We have a policy where we hedge 100% of such debts. And we've been monitoring the efficiencies of getting lower interest rates, albeit the interest rates prevailing in Brazil.

But when we go to page number 21, we can see the reductions in the financial expense that compare with the third quarter. The jump -- the small jump there is derived of the fact that we pay a tax based on COFINS in December, based upon the payment of interest on capital that we declared at the beginning of December, when we announced the restructuring of all of the Vivo companies.

When we go to the bottom line, the impact is basically deriving from the fact of the uncollectibility that we recorded, as I mentioned below. And we will now be moving toward working out through all the different Vivo companies, in order to basically get a better sense of what the net loss, net income line is going to be.

Trying to close the presentation and talking about our social responsibility, I will ask Roberto to take again the conversation, so that we can go afterwards to the Q&A section.

Okay. So we are very conscious that the service we provide to our customers has an important impact on society in Brazil. It's a way for this conclusion. But besides that, we know that Brazil is a very contrasted country, and Vivo has an institute that develops some other activities in terms of ecology and socially responsible activities.

And in this page, we just listed some of the recognitions that Vivo received in 2005 from important institutes in Brazil.

So, the Good Corporate Citizenship that related to educational projects that we made in partnership with the Ayrton Senna Institute. The Environment Case Prize, for the Waste Management Project, the project dedicated to the use -- for the after use of the batteries of the cellular phones. The Abrafort Prize for Corporate Responsibility for the program of volunteering in Vivo. The APCA Prize to ESPN's Sports Caravan. And finally, the Darcy Ribeiro Education Prize that was gave for our project Escola Solidaria.

So Vivo is very recognized in the Brazilian environment as one of the companies that most contributes to social activities.

So now I think that we can go to the final remarks. So Vivo, in the second half of 2005, important investments in the expansion and overlay projects. When Ernesto mentioned this, the investment we made in networks is not only to replace TDMA to CDMA but is to increase our coverage in the Brazil geography, and also increase our capacity.

And in the beginning of this year, considering the problems we had when we used the other operators' networks, we made some agreements with them to invest some money to authenticate these networks in order to reduce the possibility of fraud. So this was done during January and February, and we finish the task of authentications in those networks in this week of February.

In terms of systems unification, we told you about the billing system, pre-paid platform on our orders that we expect to finish by the end of 2006. The completion of SAP projects is already deployed in all Vivo facilities and points of sale. As I told, billing, pre-paid, front office will be finished before the year end.

And in 2005 we invested a lot of time in reducing the number of claims in our call center, trying to improve the quality of service. And we see that in November and December we had less -- 20% less calls than we had in 2004.

So -- and corporate restructuring that we developed in the end of 2005, that took place this week with the creation of VIVO Participacoes, was an important achievement for the year 2005.

So now we can go to the questions.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS]. Our first question is coming from Vera Rossi with Morgan Stanley.

Thank you. Good morning. I have a question about your network fraud. You took some measures now in the beginning of the year in your networks. And do you think this is enough to lower the level of provisions that we have today, or do you still think you need to have -- to roam on digital to resolve this problem for good?

And what level of revision do you expect to see going forward? It is on the mid-single digits, as we had until last quarter, or is on the teens that we had in the fourth quarter '05? Thank you.

Vera, thanks for your questions. Just the position. The authentication of the network, our own network, was meeting the test. We didn't have problems with our own networks, CDMA or TDMA.

Where we have problems are on the regions that we are not present and we have to use other parties' network -- or I’m talking about our competitors’ networks. So, and we couldn't authenticate the data network. This year we get to an agreement by the end of 2005, we signed this agreement on January 10, and we implemented the authentication of those networks from January 10 to February 24. So just the position is very important, because our network was already authenticated. What we did this year is to invest in other operators’ networks.

And I think that this will allow us to work in analog, and roam in analog, but much more safe than in the past. But it is not the final solution. We are expecting that Anatel should put on sale their 1.9 frequency before the end of the first half of 2006. And in this case, we could have additional cooperating in the states where we are not present, and in this case we will be, let's say, 100% safe.

Okay. So, but with the measures you took so far, where should I expect to see your provisions during 2006? In the low -- in the mid-single digits, like 5, 6% as we had in the third quarter, or in the teens? This quarter Vivo had 13% of service revenues in provisions. Where do you think we should see it for this year, before you get this additional spectrum?

I think that it's too early to rate what would be the level of provisions because we’ve just launched this authentication yesterday. So, and I expect to have very good results on that. So this is a feature that we didn't have in the past that will improve our control over the network we use. But I think it's too early to say, but I think it is a very important measure.

Okay. And just one question -- another question on ARPUs. We saw a very good improvement in your ARPUs, especially in contract ARPUs, in most of your subsidiaries. Should I expect to see -- this was something just related to the fourth quarter, airtime campaign or more business based, or during '06 should I expect to see the same levels of the fourth quarter '05 or even higher, given all the retention efforts that you have been implementing?

Vera, let me explain about that. Let’s say I cannot anticipate what the number is going to be. I can, yes, tell you, as we did in the past, that we have specific focuses throughout the Vivo companies that addresses that fact. I would like us to keep on seeing that what we have implemented in the second part of 2005 that proved, based upon the numbers that we’ve been recording, to be persistent because we have a plan in place that we need to achieve. But to anticipate a number, I think it should not be responsible on our side to commit on that area. Is that okay?

Yes. Just one follow-up. So, the increase in ARPUs is not related to an airtime promotion; it's related to your retention efforts that you have been implementing?

Yes. And as a matter of fact, if you looked at the promotions we've been doing, we tried to be very simple for the Christmas campaign. We just had only one promotion. That was the BRL40 to speak to any other fixed or cellular phone, if only you keep on recharging your phone by whatever amount.

And the promotion that we started at -- I think it was in September of last year, that was related to the soccer world championship. That is basically a pageant here in Brazil, and that we will keep on promoting until the very -- I think it starts in June this year.

And when these promotions go away, you don't -- you do not foresee a decline in ARPUs because the increase in ARPUs has been coming from a real increase in usage?

It’s a real increase. But, Vera, I wouldn't say that promotions will go away. Promotions, when we look at the different drops, they turn out to be very positive in terms of compromising the customer. So we try to be very simple, not to overwhelm our customers with too many things that they don't know exactly what to choose. But promotions are still going to be there, and if they keep on proving that they are useful, that they keep on adding value, it's going to be a marketing strategy that we will address.

Okay. Thank you.

Thank you. Our next question is coming from Andrew Campbell with Credit Suisse.

Yes. Good morning. I was wondering if the provision that you took was for revenues that had been recognized in the past only, or was it also to anticipate any revenues you might have in the future which you wouldn't be able to collect?

Andrew, I -- let’s say the same question was raised this morning in our [inaudible] conference. And I tried to figure out when I spoke about the provision.

The provision is not provisioning revenues. The way it works here in Brazil is the revenues for -- when our customers do roaming in other areas, those revenues belong to the [business] operators. So basically, it's a balance sheet account that I have to pay them. We have -- that's mandatory. It doesn’t matter whether our customers recognize the cause or not, we have to pay. So we create an accounts payable account, and at the same time, we create an accounts receivable account because we are billing basically on behalf of a third party.

So it's not that we are -- that revenues -- the revenue stream that we have reported is challenged, but is basically the write-off of a balance sheet account.

I see. And in terms of the timing, the provision that you took, is it only backwards-looking or does it also anticipate for the future any provision that you may need to have taken in 2006?

No. Basically what we have recorded there is a hiccup that we have seen coming from the end of September, October, November, and went down in December, when you look at the pattern or the behavior that that usage had.

I see. And maybe you could just help us to understand how the authentication process works. What exactly does the other operator do? In that case, how much -- that investment is being paid by you, is that correct, or how exactly does authentication work?

Yes. In fact, the investment was made by Vivo. We invested in other operators’ networks and the authentication process is a kind of operating that is created any time the handset is put on work.

The first time we put the handset on work, it creates some new numbers that cannot be copied by anyone. So it's a very complicated and technical subject that -- and we don't like to talk too much how it works because --

Basically, the phone works based upon a pair of numbers, the MSN, the ESN. That algorithm keeps on changing while the phone is working on that specific network. That is a simple way of telling you.

I see. And that investment was done really in 2006 or was there already some investment in 2005?

It’s 2006. 2006 when we made the investment with our own reserves and part of our network partners’ reserves.

I see. And is it a material amount of CapEx?

No. No, it's not material; it’s more systems than structural.

Okay. Super. Thank you.

You’re welcome.

Thank you. Our next question is coming from Mauricio Fernandes with Merrill Lynch.

Thank you. Good morning. Just wanted to know, you mentioned the network is 100% digital now in Sao Paulo. I just wanted to get a sense for the rest of the Vivo operations. What exactly is -- how far are you from becoming 100% digital?

Okay. When I said about that some -- the city of Sao Paulo is 100% digital, it's 100% digital in 1xRTT. It means we have a high speed of communications in Sao Paulo. And we just have nowadays 100,000 handsets that works in analog and we have 5,000 handsets that work in TDMA. This is what concerns the number of handsets.

In terms of digital coverage, in all the regions where we are present, we still have some lags in the center of Brazil, but we are already 9% -- 90% digital in that region. So for 2006 we should cover all Brazil with digital technology.

Okay. Just one more question on the provision for bad debt. You mentioned in the press release that a quarterly increase in the provision was due to the regular -- your regular collection policy with clients and the other portion will be driven with the implication or the agreement with the other operators, particularly in Minas Gerais in the northeast. Can you give us a breakdown of how much of the increase in bad debt was related to one side of the problem and the other side of the problem?

In terms of uncollectibility, the normal uncollectibility, it's coherent to what we sense in the past. So basically, I don't have the exact number here in front of me. We can talk to you afterwards. But basically you can -- if you are trying to set up a model, keep on working on the uncollectability rates that we have exchanged in the past.

So the bulk of the increase was really the agreement with the other operators?

It's not the agreement. I believe nothing -- it's not related. The agreement in terms of -- we have roaming agreements with our partners -- with our partners -- with our competitors, as a matter of fact, in those areas where we don't have coverage and in one area that we do have coverage but we have only CDMA coverage; that's Parana and Santa Catarina. So we need TDMA -- we need a TDMA roaming agreement there too.

What we have written off -- we have stated a provision there is based upon the accounts receivable I explained to you before. That stems from the fact that we need to pay them based upon the usage stemming from a Vivo phone in their networks.

That has nothing to do with the agreement of authentication. Once we experienced that, once we understood the reason what was going on, we set up -- or we reached an agreement that was signed on January 10, in order to make the proper investment in their networks to get authentication so that we could get a proper control of what was going on in their networks, and to set up the structural reductions not only from a trading of IT systems but also on the phones that were working there. Is that understood?

Yes. That's clearer now. And just one final question, if you could give us how much you expect to spend in CapEx in 2006 for both TCP and Vivo as a whole?

No. I think that is something we --

Is it -- just is it similar or not to 2005?

We are -- Mauricio, we are -- today we published that we started with recent rights because of the restructuring. We cannot anticipate because we would put in danger all of the transaction that is going on that was approved at the shareholders’ meeting two days ago. So I beg your pardon, but we cannot anticipate on that.

Understood. Thank you very much.

Thank you. Our next question is coming from Rizwan Ali with Bear Stearns.

Good morning. My question was again regarding the provisions. It appears that there is a lot of fluctuation in the provisions and the bad debt provisions you take on a quarterly basis. And were you not anticipating -- in the previous quarters, did you not make these provisions and that's why you had to make a big one in the fourth quarter? Or there is some other issue, because Telemig, for instance, also has cloning problems and actually, as a percentage of subscribers, they have a larger cloning problem than you have. Yet, they don't seem to take similar provisions and their margins tend to be higher. So I'm just wondering whether there’s a different accounting being used by TCP or the Vivo Group?

Okay. I won’t make any comparison between Vivo and Telemig or whoever, let’s say just to be fair with you. What I found out, or what we have found out, based upon the accounting records is that on a quarterly basis we do have a number of calls that are not recognized by our customers. And those calls are being analyzed on a one-by-one basis in order to determine whether such calls were indeed made by any other third party, or if those calls were -- have a certain pattern using the same number of cell sites and same code in numbers that we can argue with the customer.

So in essence, I believe we do have something in the past, but it was very minimal. The hiccup that we have experienced in the fourth quarter is basically derived from an extraordinary activity that, as somebody called in this morning, is that cloning fraud. Let's say a part of that is cloning fraud, but let's not forget that in Brazil we have a bill-and-keep system that allows for Voice over IP to get free access to networks on top of the fact that fraud, as we are calling, is not illicit, or at least there is not a regulation that punished that type of activity.

Yes. Well, in the [May] quarter is it -- what was so extraordinary that happened in the fourth quarter that you had to take this massive provision? Would you say you were under-provisioning for the same problem in the previous quarters?

No. We suffered an attack of frauders during the third -- last -- the end of the third quarter and then the beginning of the fourth quarter of 2005.

Okay.

It was a very concentrated attack, like other competitors suffered in the -- January of 2006.

Okay. Now, my second question is that in the third quarter you had a massive increase in retention expenses. Can you tell us how does -- in terms of retention costs, how does the fourth quarter compare to the third quarter? Did you have similar costs in the fourth quarter as well?

That number, let's say that you can figure out based upon the acquisition costs. The acquisition costs went down. The mix of the acquisition costs is what's really driving that. In terms of handsets, when we talk about retention, we are subsidizing a higher amount because basically, when we are targeting the segments of customers that we try to keep, that we will fight at whatever price makes sense on a payback basis. This has to be higher.

What we have done is to lower the amount of gross adds, still keeping a good part that will enable us to have the customer base growing. Have in mind that the churn rate that we have experienced is a very good one. However, the customer base we have is big enough. So whatever percentage, [with 21%] on day one, you wake up the first day of every single month and you need to start rowing in order to offset the amount of churn.

But going back to the issue of retention, indeed it's going to be the focus; it has been the focus. It's having a great percentage that has impacted that acquisition cost as a whole. And let’s not forget that for trading programs, based upon the model that is prevailing in Brazil these days, it's not possible for us to get out of the market in terms of CP prices because we would be opening -- we would be making it very, very easy for our competitors to attract one of our customers just for the trading of their phones. So have that in mind.

Okay. Is it fair to say that your retention costs have decreased in the fourth quarter and should continue to decrease going forward?

No. Retention costs? No, I wouldn't say that. It will be similar.

Okay. Thank you.

Thank you. Our next question is coming from Gustavo Oliveira with Citigroup.

Good morning. I have a question regarding the selling expenses, more specifically regarding your third quarter service expenses. We saw a big jump in the quarter. Are you having problems to -- are you having to increase the commissions that you are paying for your third quarter distribution network and what is the level of attrition that you are having in that network?

No. In terms of commissions, we have not increased them. We did make some agreements with some dealers that they can be used as -- not only as a distribution channel for new gross adds, but also to fulfill a specific segment that was not covered by our own customer care representatives, in order to keep on working on retention. So there is an extra piece that -- it does not mean by any way that we are increasing on a per-unit basis, but we have in a way increased the base they are allowed to get their commissions.

So again, most are related to retention.

Okay. Is that something related to -- more towards the post-paid pays and -- but more specifically on the areas in which you compete against Brazil Telecom or is it more in Sao Paulo?

No. It is basically addressed to the post-paid. But let's not forget that there are a number of pre-paid customers that like to be in pre-paid, with sometimes ARPUs higher that the average of post-paids. So we must keep them happy.

Okay. I have another question on the interconnection rates and the negotiations for the VUM. I know that last year the negotiations started in early February, but they were only able -- you were only able to finalize in June.

In July.

In July, yes. And Anatel had to intervene on that as well. What are the developments for 2006? Are you beginning to negotiate already? Is it --?

You know the negotiations was already made. What we are expecting is the approvement by Anatel. We expect that before Carnival, but it seems that it will take some more days.

Okay. So it's already finalized, that's what --?

Among the operators, yes. With Anatel we should have the approvement -- the approval.

Okay. Thank you.

Thank you.

Thank you. Our next question is coming from Andre Rocha with Unibanco.

Good morning. I have one question related to subscriber acquisition costs. Do you consider these items should continue decreasing in 2006? And how much of the decrease is due to the appreciation of Brazilian currency and how much is due to the gains of scale? Thank you.

Okay. In terms of the appreciation of the real, as you mentioned, we have our own plans and let’s say I cannot anticipate what our targets in terms of foreign exchange are. I can do -- tell you -- I can confirm that we have reached important agreements with CPE vendors in terms of price reductions in dollar terms.

Because of the volumes that Vivo as a whole buys on a monthly basis, we were able to reach agreements not only in terms of general agreements that, as a matter of fact, we count with the support of the whole networks of the controlling shareholders that allow us to get but also [inaudible].

Yes. The partnership with specific vendors that have been pushing our, on a per-unit, cost down significantly. That is one of the main issues that is driving acquisition costs down.

In terms of the appreciation of the real or not, that is something that I cannot anticipate.

Okay. Thank you.

Thank you. Our next question is coming from Carlos Sequeria with UBS.

Hi. Were you anticipating a resolution for the digital running problems in the northeast other than waiting for Anatel’s auction of the 1.9 gigahertz license there?

The 1.9 and also the recoveries of the 850 megahertz that could happen this year. It's for us a solution to have a local operation because Anatel should sell that retail license. But in what concerns the [inaudible] problems, we think that the measures we took are already very good for that. But beyond the 1.9 and some other aspects on that, we could have that they, Anatel, recovers the 850 frequencies from the other operators that go into GSM. I think this will be the final solution.

I see. Thanks. And also, can you update us on the related initiatives to eliminate the cloning problem of Vivo customers that some Vivo customers have been experiencing the last years?

No. I think that the matters are the same. So we had to authenticate the network, what we did in our own network in the past and what we -- we get to an agreement with the operators -- other operators in the beginning of this years. And with this authentication we think that we are in a better position now.

Okay. So just -- so it's fair to say that a client traveling between Rio and Sao Paulo only, you will not have the cloning problem any more?

We know that a customer that lives in Sao Paulo, he goes to one of these two areas, [inaudible] Minas Gerais, he was subject to the cloning. Now, it depend -- it does not depend where he comes from. I think that in these areas now he will work with analog but the network will be authenticated. So the probabilities of having cloning is much less than they used to be.

Okay. Thank you.

Thank you. Our next question is coming from Marcio Correia with Banco Pactual.

Hi. Thanks. You had BRL286m related to this problem. And you also said that it was concentrated in September to December, with declining trends. And now also you said that you have some agreements with operators, starting in January 10. So could you tell us how is it now, in January and February? Have you already seen a significant reduction in this -- in the [inaudible] related to this problem?

January we saw an important reduction because it took other measures before authenticating the network. The network was authenticated. We finished that yesterday and we will start to work on the authentication networks this week, so it's too early to say what the results are. But the other measures we took already produced some results, so January was quite a good month in terms of -- in terms of crimes and fraud.

What we should say is this amount you mentioned is something that we had to pay to our competitors, so it's in their revenues. For us it’s an expense. So we expect to reduce this amount since January this year. They will still have some revenues but normal revenues. They're roaming revenues, not extraordinary revenues that they used to have in the last quarter of 2005.

Okay. And regarding your structural borrowing [inaudible] regarding this issue, how -- what kind of CapEx should we work with in terms of additional frequency and etc?

If we get the 1.9 frequencies, we should invest to have a minimum coverage in Minais Gerais and northeast to make roaming, to give the roaming possibilities to our customers. But the amount is included in our budget for 2006. The moment Anatel gives us the license to start working, we will redeploy our investments to give this -- to give it a priority.

Okay. And just a final question. Regarding the competitive environment, we've seen a very substantial decrease in total subsidy. I mean net handset subsidy. If you look at the second quarter, where the competition picked up, the total subsidy was BRL311m, and in the fourth quarter it was only BRL171m. Should we consider this a very structural change? Your decrease in subsidy to the pre-paid segment is being higher than your increase in retention costs for the post-paid segment. Can we see this as a structural change or not?

I would expect it is a structural change in the market, but I don't think it is. So I think that some of our competitors still have a lot of inventories that they will have to flow in the first quarter of 2006, before the Mother's Day. So we made some improvement in the last quarter of 2006 -- 2005, but I think that we will see some movements in the marketing before the Mother's Day.

Let me add something else. Let's say we cannot control a BRL1 offer that are there in the market. So it's something that we will be monitoring very closely, decide upon what the business strategy is going to be.

Okay. Just a follow-on on this. Like, for example, your adjusted margin was 28% in the fourth quarter but the first quarter last year, which is generally a good quarter for margin, was 40 or 40-something. Like, for example, now in January and February, are you seeing margins bouncing back to the high 30s, 40%, or are you still in the low 30s? What are you seeing now?

Marcio, as I mentioned before, we announced the restructuring -- the restructuring was approved two days ago. Anticipating any kind of results would jeopardize the transaction that is currently on the [inaudible]. Okay?

Of course. Thank you very much.

Thank you. Our next question is coming from -- our last question is coming from Carlos Vasquez with Banco Pactual.

Good morning, gentlemen. My question is regarding the write-off of the BRL245m write-off. As you said, it's much more a write-off than a provision. My question is you said that this problem -- this one problem is reducing since September into December. And what I wanted to know is, this BRL245m relates only to these four months or when you decided to write off this total amount you analyzed a higher period than that. I just want to have an idea of how many quarters were included in this provision?

And my second question is can you give us -- can you tell us the level of the migration from TDMA to CDMA today?

Regarding your first question, I mentioned that we have seen an unusual pattern starting by the end of September. So we are not counting on previous quarters. So basically we [inaudible] -- when analyzing the usage and when started getting answers from our customers of recognizing such calls, you'll see growth October/November.

Regarding your -- the next question was?

CDMA.

CDMA. Let's say if -- it's coming based upon the plan that we are executing. That type of information is confidential that if fed up into the market will give good insight to our competitors, in other words to attack. So I would prefer not to answer that.

Just to see if I've got the right understanding, you said that the BRL245m provision, it corresponds to the last four months of the year. So it's something, in average, something around BRL6m per month. Is that right?

I will say that.

Okay. So, and my final question regarding the strategy for the Company next year. Can you assume that Vivo should -- as you have been saying the last meeting with investors that you're going to focus on your own base and try to increase its returns against your current base, can we assume that Vivo should grow lower than the market and then increase its return ratios?

I would say that the focus that we said, we confirmed, we executed and we keep on doing, is a fact that is not new to the market. Whether we're going to grow less or more than the market, again, is something that the market is going to be driven by specific offers. We will be monitoring. We will keep on having our leadership throughout Brazil. But it is early to say whether we are going to grow less or more.

We have a plan. We need to execute the plan. And that plan can suffer deviations based upon the behavior of the competition. So we are not -- we are not in an island. We are not isolated to say exactly how many customers we're going to grow. We do have a plan, but this is a multiplayer market, so you'll be seeing the evolution throughout the quarters.

Okay. So, but you're more focused on your current client base instead of growing it?

Yes.

Okay. Thank you.

Thank you. I'll now turn the call over to you for any further or closing remarks.

Well, I would like to thank you all for attending this conference call and we are very positive in the measures we are taking to restructure the Company. And I think that the market has been very responsive to our actions. The level of loyalty of our customers is increasing, the level of satisfaction as well. And we expect that by the end of the year we would have completed all the new systems deployment, and we could have a faster time to market and also have a lower cost base for us to grow our margins.

Okay. Ernesto?

Just thank you all and we'll keep on working on it to provide full results. That is actually our mission here.

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