Telefonica Brasil SA (VIV) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to the Vivo Participacoes first quarter 2006 earnings release conference call. Today with us we have Mr. Roberto Lima, CEO of Vivo Participacoes, and Ernesto Gardelliano, CFO.

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 Vivo 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 Vivo, 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 Lima, CEO of Vivo Participacoes. Mr. Lima, you may begin your conference.

Thank you. Good afternoon you all. So, I would like to start with some highlights of the first quarter 2006, and mention that in this quarter, we had the all-time record for the number of indicators proposed by the regulator Anatel, as the quality indicators for restructuring in Brazil. Vivo achieved 95.6% of all the indicators. This is our all-time record and is the best of the market. The second point is that we are in progress with network and handsets authentication. We have already done the authentication in all the networks in Brazil, including those ones from our partners, in this case partners, but our competitors network is already authenticated. We work on the reduction for the tax credits and pay the prices, so we saw a significant reduction in the level of cloning and other kind of frauds in our company. We have already 33.7% of the market share considering all Brazil and 42.5% in the areas where are authorized to work. We have more than 30 million customers. This is the number we achieved in this first quarter of 2006. We have more than 8000 points of sales, being 330 of them our own facilities, and the other partners like dealers and retail stores.

In terms of CapEx, we focused on the system development. We are migrating all our portfolios to new platforms in our concern, the billing system, the prepaid, and also the front office. It will take until the end of this year for us to consolidate all the old legacy platforms we have in all the 14 operations Vivo is composed by. And by the end of this year, we should have migrated all the portfolios, all the customers to the one only system platform. Because it is growing very fast, we already have all the things where we are in a digital coverage. The customer care to corporate segment, we created a special call center to answer all the customers' -- the corporate segment customers' needs. More than 80% of our -- the cities we cover have the 1xRTT technology, which means high speed in data communication. The percentage of the population that we serve in our basic 1xRTT is more than 86%. At the end of the first quarter, we recorded an EBITDA of 717 million in this first quarter, with a positive operating cash flow of BRL435.8 million. We've finished the first step of our restructuring of the -- all the components of the Vivo Group, which was done very successfully. And, in this week, we are launching the second phase that has the objective of consolidate all the operators we have in Brazil into just one company, in this case it being Global Telecom.

Turning the page, the customer base evolution, we grew almost 12% in number of customers, with an important growth in the postpaid of 8.5%. And in this postpaid, we can see that the growth we were tiny in the corporate market, where we grew 13.1%. In terms of distribution, we have more than 8,000 points of sale in Brazil, 325 are our own stores, as I said, and the rest is composed of retails and 30 partners/dealers and others. We cover with our network 86% of the population with 1xRTT. We have more than almost 1800 cities with the same technology.

We have focused our force on the selling of the new service that's based on 1xRTT and also EV-DO, focusing on the corporate customers what means that we are developing systems of sales force automation, data transfer, and services like high-speed Internet access, and also selling all this service to PDAs and PC Cards for notebooks. In terms of the handsets, we should say that for every ten handsets sold in the first quarter, seven of them were in the mid-high segment, what improves our strategic [posting] on the high-value customers. 75% of the handsets sold are in the medium-high end of the market. In terms of marketing actions, the competition in Brazil was not only in the price of the handset, but also in the price of service nowadays. So, we have to better compensate that. So, we are trying to sell [third-party] service to some to promote with bonus traffic and things like for that for the prepaid and postpaid customers.

In the loyalty and retention, we are looking for the prepaid -- high-value prepaid customers as to the segment where we should see the more attention and try to attract these customers with discounts for every time he changes his handset. For the postpaid, we have the program of points, the mileage programs, the points that can be used in the case of an exchange of the handset. Overlay CDMA, we are trying to reduce and to bring to zero the number of CDMA handsets, which you have some 4.5 million handsets in CDMA as we should replace for CDMA handsets based on the points program we have. The launching of the Globalmoto, we call the world phone, that launched in the third quarter of 2005 is a success, which gives all the customers the possibility of roaming in 107 countries and , we already have access to the GSM network of , it means that our customers with the world phone can have 100% digital coverage in Brazil. In terms of retention, we have now segmented offers based on the data that we can collect and work on to create a list of models for segmented customers and make now and below the line special offers to each one of the segments. Migration fee to post-paid, this is the way for us not only to increase the loyalty of the customers without increasing the revenues. And we are trying to upgrade the plans, giving not only the voice but also proposing to customers to sell data transfer and orders certain high-value service.

Now, I would like to pass to Ernesto Gardelliano, who will say about the net revenues and other financial indicators.

Good afternoon to everyone. I would like to start talking about net revenues, how they developed throughout the year. Although net revenues grew by only 0.6% on a year-on-year basis, service revenues went down by 1.3. Basically, we were dealing with service plan relocations, what we call right planning. The competitive scenario during the first quarter as it was not planned since we saw during the last quarter of 2005 some kind of actually -- some kind of balance between the different operators, the competition grew strong and attacked not only the entry barriers in terms of cheap prices, but also in terms of service price. So, we've been working proactively in order to reallocate segmented customers into the different service plans that indeed try to keep those customers within the customer base. We've been proactively launching campaigns to incentivize the Internet usage, and we've been working hard in order to promote and to advertise and to sell data transmission services that grew on a year-on-year basis on our 21, 22%. Basically, those data services relate with Internet access costs, PDAs and SMS. If we look how they related to service revenues in each of the quarters, we have 5.8 in the first quarter of 2005, 6.3 in fourth quarter '05, and 7.1 in the first quarter of this year 2006, a growth of over 22%. When we allocate those services, we see that whether -- in the first quarter of 2005, we have 21% stemming from SMS services. Those SMS services accounted for only 59% right now, growing the potential that data transmission has in terms of speed for those Internet access and WAP services.

When we look at ARPUs, we see a decline of almost 12% year-on-year, but basically or significantly affected by incoming traffic or incoming revenues derived from traffic. Only 3% was the reduction in outgoing traffic, blended outgoing traffic, while incoming revenues accounted for a 22% decline. When we look at the different segments, we see that the postpaid ARPU grew by 2% on an outgoing basis, but went down on a 14% decline in incoming revenues, and the basis for the overall decline, the blended decline, stems from the prepaid -- platform for the prepaid customer base, but basically have no exit barriers and is heavily depending upon the different campaigns that come for discounts.

When we look at usage, the usage has a similar past in terms of the blended usage went down in outgoing, 17%, basically derived from prepaid, and incoming on an 18% basis. If we make the breakdown of usage and again, focusing on value as we mentioned to all of you something like two quarters ago, we see that outgoing traffic for postpaid grew by 4.3% on a year-on-year basis, while incoming traffic has slowed down by 5.5.

In terms of acquisition and retention costs, we had a decline that goes beyond 11% reduction. That reduction stems not only from the fact of a better foreign exchange in terms of the relationship between the real and the dollar, but compensated by the mix of CPs that we had during this first quarter of 2006 as compared with the first quarter of 2005. In essence, a year ago, we had an offer that covered all of the different tiers. During this first quarter, we basically focus on medium and high tier phones.

Also another thing that counterbalanced the effect of foreign exchange was that again aligned with focusing on high usage customers, high value customers, we set up a new commission scheme in favor of the different dealers trying to align the compensation related with the retention cost in order to keep the different bases that were applied by the company so that they could be bounded up with post-paid contracts on a twelve year basis going forward.

When we talk about operating cost, the costs grow with a competitive activity. If we look at the different breakdowns in terms of cost of services rendered, they grew 15% on a year-on-year, and [it's taken] only 2% basically derived from the different agreements based upon Brazilian law. But, the bulk of the increase is targeted towards retention, acquisition, commission scheme and also uncollectability. In terms of uncollectability, G&A, they are basically aligned with inflation and compensated by efficiency jobs that we are trying to carry out throughout the much of the different Vivo companies. I'll remind that we announced the second phase of the restructuring that will prove to integrate the different operating companies, now that we have 14 operating companies throughout Brazil, but we will cover the restructuring afterwards. In terms of uncollectability, the good news is that we have put in place a number of actions that we made available to you once we announced the first quarter results and basically to fight fraud and cloning. A number of those measures have proved to be correct and the number when we looked quarter-over-quarter, it went down by 38%. Although, when we looked on a year-over-year basis, it went up by 82%.

What we have to say here is basically we kept on working on the authentication of the analog and TDMA networks. We completed them all. We have been intercepting customers during roaming and visiting networks in order to validate and authenticate whether it was a valid customer or not. In front of the commercial activity, we have set up new credit scoring tools that enable us to have a glimpse of how much of a spending a new customer can afford based upon the different service plans that we have in place to offer to prospective customers and also to migrated customers. We have been doing -- we have been putting into account a usage control in terms of setting up limits that will enable for a customer to make payments in between their billing cycles. And although the trend looks good, we are not still past to say that we have finished the job and we have much more to do in terms of controlling this kind of migrating plague, migrating virus, that's this -- fraud issues throughout the [sim], because clone we understand is under control, we still need to focus all of the senior management throughout Vivo at that point as the main target to comply with in the year and us from senior management going down in the pyramid, everybody should have this into their agendas. This is one of the priorities and we are working hard in order to bring this percentage, that was 4.4 of the gross revenues during this quarter, to bring it down. It is not a percentage acceptable and we are working towards gaining extra space on that stage.

When we talk about EBITDA and EBITDA margin and looking back a year ago, we lost 10% or 10 points of EBITDA margin basically derived from the higher competitive environment that we spoke about before. When we look at the different lines affecting the decrease in EBITDA generation, we look that basically retention, acquisition, taxes related to maintain the customer base, and uncollectibility were the main factors that work towards not getting the same level of EBITDA generation as we have a year ago.

When we look to gross debt, net debt and leverage, gross debt was reduced by 3%, although net debt went up by 7%. This hiccup of 300 million basically derives from the fact that, by March 31, we had to pay part of those costs that I mentioned before, which is the Fistel tax. We had to pay almost 405 million reais, which is a tax that we paid based upon the photographs of the customer base we had by year-end. In terms of leverage, we are confident that the numbers are within our parameters, within our targets, 0.48, 0.53. We can talk about this later when we talk about restructuring that this is one of the issues where we are going to get synergies by capturing not only the spreads stemming from the first cash we had in some of our companies and the debts in ours, but also the fact that management throughout the company will be available, while in the past given the fact that we had different holding companies with different minority shareholders we had [expenses] and sometimes we lost part of those synergies.

In terms of net financial results, we have a reduction in the expenses not only derived from the fact of lower interest rates, but also based upon the excess cash that we have been producing throughout the year 2005. When we look at capital expenditures, we see a decrease when we compare year-over-year. We've been doing an extra effort throughout the third and fourth quarter of 2005. Those efforts have been really paying off. Today, quality and coverage are the main attributes that Vivo can offer in terms of one of the best coverage and the best quality in the areas where we have authorization to operate.

And in terms of IT, we keep on with the migration and the integration of the different platforms. We have recently completed the migration of Rio de Janeiro and Espirito Santo in terms of post-paid billing and front office. We still need to roll out the plan that we have in execution in order to obtain the migration of center, west, north and so as to be in a position by the end of this year to be operating with just one platform for post-paid, just one platform for prepaid, and just one platform for data warehouse and front office.

In terms of net loss, net loss, net income -- the net income, I believe I did not mention that when we are comparing numbers, we are comparing the numbers of Vivo Participacoes for the first quarter with a combined entity that did not exist in the past, it's the combined numbers of what Vivo would have liked to be in the past and basically, the net income that we had at the beginning would have stemmed from the fact that the minority shareholders of TCO have not existed, since now TCO is a wholly-owned subsidiary of Vivo Participacoes. And the difference, the gaps that we have, stems basically from the reduction in the EBITDA generation that we mentioned before.

In terms of the restructuring, we announced a restructuring of the five different companies operating within Brazil and four of them quoting their ADRs in New York. And we were able to propose and that proposal was accepted and now, we have reality to have only one instrument holding in both markets. Two days ago, the Board of Directors of Vivo Participacoes approved and authorized senior management to go ahead with the restructuring of the different operating companies that we have throughout the different regions where Vivo operates. Of course, we need the approval of the regulatory agency here in Brazil. We started working that, and we are planning to have all those authorizations by the end of this year. In order to achieve the different synergies that come not only from the operations, but also from financing and tax activities. As we have so far, we have the different operators that are 14, and we are planning to incorporate those that in essence will bring better control, would bring better management that -- better accounting for the different transactions and we are committed to achieve that by the end of this year.

In order to talk about quality achievements and targets, I would like to ask Roberto to keep on making this presentation, working the final remarks, before we go on to the Q&A section. Thank you.

In the second quarter last year, we launched some programs for Vivo based on some fundamentals that we should improve. One of them was the quality of service, the second was the single platform that we should implement, the third one was to have international coverage, and then the fourth one to simplify the chart of the organization what we have been doing. We are very glad to see that Vivo's improved quality has paid off and in the first quarter of 2006, Vivo was the number one in terms of compliance with Anatel, the regulatory indicators for quality, and we can see as well that the all-time record for Vivo -- we came from 15% of non-compliance in the first quarter of 2005 to 3.8% non-compliance in March 2006. So, we think that we still have some room to improve. Although the tier where we are implementing new platforms and new stations, sometimes the customer suffers some of the effects of this implementation, but we believe that from now to the end of the year, we should improve by reducing the fraud, the cloning, and also by implementing the new platforms.

Just a word about the Vivo social responsibility. In the first quarter, we had some new actions. I think that the most important of them was the inauguration of the Museum for the Portuguese language, with some important partners like . So and some other initiatives. And just a word for finish -- the final remarks, we still have some focus on the value customers. It means that we should focus not only on the post-paid, but also in the high value prepaid customers. The corporate restructuring is working -- progressing and I think that we already achieved some good results in this case. The coverage used to be a problem for us last year, now I think it's a very important differential for Vivo. And in the system platforms we have now already 60% of the customers that are already in new platforms, and we hope that we will finish that by the end of this year.

I think that's all we have to tell you today, and we are glad to hear from you -- from your questions, and we will be glad to answer them. Thank you.

[OPERATOR INSTRUCTIONS]. [Daniel Garvia], Morgan Stanley.

You mentioned the breakdown of the decreasing ARPUs in your presentation. I want to know where do you think we will see ARPUs in the coming quarters? And if I may, I had a couple of more questions. The other one is related to provision for bad debt. The security measures, if I am not mistaken, were implemented in February and they have gone -- they have shown good results so far. The second quarter is going to be the first full quarter with the measures in place. Where do you think the provisions, as a percentage of service revenue will be? And my last question, if I may ask it, is related to market share of net adds. You market share of net add has been in the single digit in the last two months. Are you happy with this level or do you think you should be at a higher level of, say, in the mid-teens or so?

Okay, I'll cover the different questions if you would remind me, if I don't recall. When we talk about ARPUs, ARPUs again we -- remember what we have been saying throughout this presentation that ARPU is not only a function that depends upon what the customer intends to do, but also in which competitive scenario where we are playing. We will keep on doing whatever is necessary for those segmented customers that we have identified that we do not want to lose. Although we are trying to launch to the market offers that try not to cannibalize revenues in order to provide for more services, whether we have to do extra efforts in order for those customers to be with us, we will be doing. So, it is kind of difficult to predict ARPUs when the battle lately has moved from barriers of entry to prices of services, so that's number one. Number two, you talked about uncollectibility, indeed, we mentioned the measures that we've been working on as far as fraud, as far as cloning were concerned. We completed them and they have been paying off so far. However, as this industry is really very fast, faster than the mobile operators I would say, they are migrating from day to day. So, we need still to be doing fine-tuning of the different tools in terms of subscription frauds that is in place, because of -- you can have people with bad credit scores, but also Brazil has a number of inhabitants that have no credit scores at all. And we have detected what we called -- first, let me talk about , it's a number of customers that say, they ask for services, they have no track record at all. They can apply for [six weeks] or wide service plan, but did not pay not even for the first bill, and they are not subscribed so far, they are -- there is a new wave of what we call premeditated uncollectability, a number of customers that already know that they are not going to pay for you not even the first bill. And given the fact that there are loss key of that prohibits the operators to allocate post-paid customers in their most recent debt lines for billing. So, you have to ask for the customer when he or she would like their bill to be due, that's creating some problem as well. The third one was something about net adds, right?

Market share of net adds, yes.

No, to be honest, we view to being within the single digits. We are not happy and we have been trying not to play the same game of offering phones at BRL1. However, that has been affecting our ability to incorporate new customers, and again, we are operating in a market of five players, three in some regions, five in others, and the expectations of the different operators are not aligned. So, basically, there are specific campaigns throughout the year. The following one is going to be Mother's Day, and the next one is going to be the Valentine's Day, that will have an impact. We cannot say whether we will still be in the single-digits or double-digits, but I can tell you that we will not be in the BRL1 game, in the BRL1 offer. We've tried to migrate that since last year and obviously it's paid some price, and as we said, the battle is now not only for the new customers, but also for the existing customers. The problem of that is proving, that's having an effect probably is that the prepaid customer has not exit barriers at all. So, that is really affecting the margins of all of the different operators.

Thank you very much.

[Walter Pasic], [Calley Research].

Can you quantify kind of the retention spending efforts that you talked about in your comments, how much that is a quarter? And specifically with the TDMA migration customers as well, what that is, and how that's impacting your EBITDA on a quarterly basis as you are trying to get the TDMA customers to CDMA? Also, on the price of the phone, are you able to pickup the benefit of Telefonica's pricing? In other words, America Movil claims that it can buy 50 million phones in every market benefits from the 50 million phone purchase. Can you get the same benefit from Telefonica?

I'll start with migration from TDMA to CDMA. We should say that this is including normal exchange -- handsets exchange program. What we do is to really give a priority to the customers that has -- if you have a TDMA handset. It means that there's a concentrated effort on that, but it falls in the same effort of handset expense we have. So, there is no different impact on the EBITDA. It makes part of the effort of retention and handsets exchange. The second question was --

Will we benefit from the economies of scale that Telefonica is still buying TDMA phones and phones as a whole?

In the case of mobile, Telefonica, no.

Are you -- do you benefit from Telefonica's purchasing power in the market?

Telefonica is a GSM company. We work together in what concerns the procuring department, we work together not only with Telefonica, but also with --

Why does the technology matter, if you are going to buy phone from Motorola who sells both CDMA and GSM? Why would it matter that they are primarily GSM?

The orders they can give to one customer could include Vivo if you were on GSM. The fact is that we leverage on the relationship they have with their suppliers. But, considering that we cannot order the amount that we have to order for Vivo, including their [amount]. So, there's different technology but we use all the purchase power of Telefonica. And more than that, we are trying to create some synergy programs here in Brazil with Telefonica to launch some bundled products for families and for homes and also in what concerns the long distance. So, I think that more and more, we have some opportunities to explore with one of our partners, that is Telefonica.

Can I just ask one other follow-up question? In the cost of services line, there is at the bottom kind of there's others, which in the first quarter of last year, was about 2.2 million. This year, it's 55 and it was 73 in the fourth quarter. Can you identify what exactly that expense is?

This is related with co-billing issues that we need to address with different operators. As you recall, the set up of long-distance operators was changed, I believe, three years ago. That has created some problems related with the ability of the mobile operators to bill on behalf of. So, that's part of the requisite of different systems, the maintenance of the different systems that we have been working on in order to work with the different operators that today operate in Brazil.

So, once that issue is resolved, that expense should go right back down to 2 million?

To be honest with you, I cannot address whether it's going to be 2 million.

My point is, it is not going to be 55 million.

Again, it's not going to be 55 million. I cannot say whether it's going to be 2 million. I don't know whether you know that those rules in Brazil are still not clear in terms of fraud -- long-distance fraud belongs to whom.

[OPERATOR INSTRUCTIONS]. Mauricio Fernandes, Merrill Lynch-Brazil.

First a question on EBITDA growth. There is a clear component of seasonality on your ARPU decline this quarter. But, if you look at past years, the same happened, though ARPU never recovered back, which could have to do with the growth that used to be higher than what it seems will be this year. On the other hand, in the second quarter, you can have probably lower margins because of this -- again the seasonal effect of now promotions. So, I am wondering if whether we can expect any EBITDA growth from what you've reported in the first quarter in the next few quarters? And also -- so that's kind of the question on the EBITDA growth, if you can address that first, that will be great. Thank you.

Mauricio, let me address that. Given what we are seeing, if you quoted me a quarter ago or by the end of last year, I would have one opinion. Now, see, what happened during the first quarter that's usually as you mention, there's a seasonality factor and usually the campaigns slow down when compared with Christmas -- with Christmas campaign. That did not happen during the first quarter. So, it would be not easy to give our guidance on what the EBITDA is going to look like. If the competitors will still be working hard on acquisitions, on getting customers from our customer base, not only for giving up phones or trading even phones, but also affecting the service, the price of services that we are offering.

Next question just if I may. On the restructuring of the -- and the merger of the subsidiaries, it's important in order to get a good feel for the value of that, what that represents to the stock into the Company, if you can give us an idea about the size of the tax spreads? And in looking at the statements of all the companies, it looks like the number of areas from that could be between 2.5 to 3 billion reais in total not a present value. But, can you give us any sort of idea of size for all the tax credits?

Unfortunately, no, Mauricio.

Final one on CapEx, it sounds like 2 billion reais for the year?

Again, CapEx, I would say that we are confident based upon the results that we achieved throughout the third and fourth quarter in terms of capacity, in terms of coverage; we keep on working on that. But again, we need to be very, very careful. If we are working on revenues, and revenues are being hit by the competitive scenario, but the marketplace is reacting in a way that at least was not expected that go to the topline growth. We will be very careful in order to see that capacity is being invested just in time. But, I would say that 2 billion could sound a bit high for this year.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. Gustavo Oliveira, Citigroup.

I have a question regarding the incoming revenues and their [evaluated] in the quarter. Could you please walk us through exactly what is happening in the incoming revenues and why it's been affected so much in your business?

Incoming. Let me explain.

On the use of network I mean.

Yes, incoming. You are talking about CPP, right?

Exactly.

How does it work? Today, throughout Brazil, we have more mobile phones than fixed. They more than doubled the number of fixed. And when looking at the industry as a whole in the different markets, you feel that each of the operators are being paid because of the uses, because what are usually called access charges. In Brazil, it doesn't work like that. There is a partial Bill & Keep structure that you will only get paid if the balance between in and out from -- on a one-on-one basis goes beyond 55% in balance or below 45. There the point is that billable minutes that you see are that they are the main source of revenues in our case. Given the higher customer base that we have as compared with our competitors is being affected by replacing fixed-to-mobile to mobile-to-mobile that has a direct impact of at least not paying 55% of those traffic. And beyond that, there are specific companies that we have identified. And so far, we were not able to do much about them with a regulator that a number of mobile operators linked to fixed line operators are migrating or bypassing the fixed line incoming call that we should have by bypassing through our mobile. So, we are basically losing the income from that traffic, not the traffic itself, but given the fact that CPP accounts for a significant amount of our service revenues, well, you see that difference. And that -- the reduction is even higher than expected.

A follow-up on the bypassing problem.

So, it would help whether Anatel can review that structure because -- the Bill & Keep structure because it's really not encouraging services to go up, service revenues.

On a related -- on the same [issue] related to the [VON] tariff, I know that Anatel now is collecting the cost structures for all the companies and it's likely that next year you are going to have VON mix adjusted based on this cost and of each company. What is your view on that and how do you expect the interconnect revenues to decline over time?

We have been working on that issue. As a matter of fact, it has been postponed. We should have filed those allocation of costs 120 days after the filing of the yearly results. That has been postponed by Anatel with no foreseeable future. So far, we have been working as we have done in the past by trying to set up agreements between the different operators. The next step should be achieved by July because that would be a year after we got our last increase.

But, July is -- it's Fistel this year for the free negotiations, but next year, it's going to be the costs. So, for the free negotiations for this year, I assume that Anatel is going to intervene, isn't it, and then for next year, they are going to come in with the new cost?

I don't have a view on that.

Mauricio Fernandes, Merrill Lynch Brazil.

Thanks for taking the follow-up question. Can you tell us what you think will be the impact of -- to you as a CDMA operator from the fact that the GSM operators, particularly now Oi. Others will do the same probably of selling SIM cards separately. I mean, just make SIM cards. You obviously cannot compete in that market with CDMA and therefore, you cannot tap that market. I am not saying that you should, but it's probably a market that you don't want to or you cannot achieve, but how do you think it will affect your current low segment, the segment that is already part of your subscriber base, you think you are exposed to that of losing those customers, how do you see that going? Thank you.

Mauricio, if you related to the sale of chips, basically what Oi will be doing is trying to capture a GSM customer, not a CDMA, that will not operate let's say with a CDMA phone, is that what you are relating to?

Yes, what I am trying to say is clearly you cannot -- yes, it's actually as cheap as the SIM card, but what I am trying to --

Yes, if they are selling SIM cards, they should be selling SIM cards to existing GSM customers, not to CDMA.

The question is whether you think your current subscriber base, your low -- the low end of your subscriber base is affected by that, of this potential offerings of just saying, 'Hey, I have a GSM phone that I can shift in cards all the time compared to the CDMA phone that I can't do anything'?

I think this is a question of -- first of all, I think [you'll still] increase the churn among the companies that are in GSM among them. So, and then what concerns our defense is the fact that there is a for the guys to go out because there you'll buy a new handset to go to a GSM technology. So, this is one point in favor of Vivo. But, what bothers us is the fact that they are reducing the handset prices at a level that we should be able to compete. But, not only the shift strategy, but I think more than that is the level of price for the handsets.

[OPERATOR INSTRUCTIONS]. Patrick Grenham, Citigroup.

Just a follow-up on the calling party pays on the low end, could you explain -- do you have an idea as to why your MOUs on the prepaid are so much lower than the other operators in the system? Is it because you have a -- is there something very different about the two, and why are you [assaulting] so much faster than everybody else, are you particularly vulnerable to the bypass issue on the incoming traffic?

I think yes, compared to other competitors, the ones who have a fixed operation as well, they can attack us with bypass more than we can. This is one of the points that we are discussing with Telefonica, how could we react on that. But, it's true that -- I wouldn't like to name some of them, but they are practicing this strategy and I think this creates new issue in the market.

Could you explain how the bypass works, is it an operator which has a long distance code that can bypass or is it -- how is that working?

It's not only long distance, but fixed line phones. A fixed line calling a cellular phone, the fixed line operator should pay. Calling party pays prices to the mobile operator. That fixed line, whether it is local or long distance, is bypassed through a mobile operator. That mobile operator, if belongs to the same group, is basically -- the money is kept in the same pocket, but that mobile operator does not pay to us.

That really just sounds like it's just is doing this?

It wouldn't be fair from our side to name who are doing --

I'd imagine it's either a company -- a cellular company, which is integrated with the fixed or it is the cellular company, which has a long distance code.

Not all are long distance code, because they can to do in local calls as well, but they have to have a fixed and a mobile operator in the same umbrella.

Right, I see. How do you fix it going forward, do you just have the Bill & Keep system abolished?

We should say that we are lobbying for that. So, we are asking Anatel to extinguish the Bill & Keep system, because this is what produced this kind of practice in the market, and I think this is a --

Do you think you've got -- what sort of chances do you think you have?

If this becomes a practice in the market and Anatel do not react on that, does not react on that, we should do the same working with Telefonica. So, if it's accepted by Anatel, we are going to go for the same practice.

And just a question, so why do you think you are particularly vulnerable? I mean, we are seeing your MOUs in prepaid in some cases at half the level of others.

Particularly vulnerable to what, to their bypass?

Not to the bypass, just your overall MOUs are extremely low now. I mean, they are a little more than half of some of the other cellular operators in prepaid.

It is true that in the last year, maybe we didn't stimulate the traffic by giving the bonus and some things like that. Things that are in our agenda for this second quarter of 2006 and maybe should -- we will have some opportunity to increase the MOU by giving more bonus. We know that mobiles who give more, paid traffic you get.

So, this is very much -- it is something you can deal with?

Yes, I can we can deal with this. We invest a lot in our land coverage network last year and then we were looking -- in our case, nowadays we have a network that can support a higher level of bonus traffic.

Okay. Great, thank you.

[OPERATOR INSTRUCTIONS]. Now, I would like to turn the floor back over to management.

So, I'd like to thank you for attending this conference call. We -- just as a final remark, we should say that we are working on the fundamentals of the Company trying to distinguish the frauds and cloning effects that we have in our operation nowadays. We are working very hard on systems and expect by the end of this year to have a new platform implemented. We expect that Anatel will work faster on the sale of the 1.9 gigahertz frequency for us to have a licensing . And also, we are doing what we can do in terms of reorganization of -- the [start] of the company, and in terms of quality process as well. And I think that we know these fundamentals, we are doing very well and trying to resist the practices in the market that we consider that are not the best practices in terms of price, but we have to respect our competitors' strategies, and trying to defend as much as we can our portfolio, our customer base. So, trying to defend as well our profit and loss, and at least generating the free flow -- the free cash flow to finance our investment need. So, we are very confident on the Vivo's future and expect that by the end of this year, we will have only one company, only one operation all over Brazil more stronger than we have today, or stronger than we have today. Thank you.

Thank you. This concludes today's Vivo conference call. You may now disconnect your lines at this time and have a wonderful day.

Thank you.