Telefonica Brasil SA (VIV) 2006 Q2 法說會逐字稿

Good morning ladies and gentlemen. At this time we would like to welcome everyone to Vivo Participacoes second quarter 2006 earnings release conference call. Today with us we have Mr. Roberto Lima, CEO of Vivo Participacoes and Mr. 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 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 the results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Roberto Lima, CEO of Vivo Participacoes. Mr. Lima you may begin your conference.

Okay thank you. Good morning ladies and gentlemen. So I have here Mr. Ernesto Gardelliano and I will explain this presentation to you. So in fact by slide number 2 I would like say that Vivo faces nowadays many challenges and among them I would pinpoint to promote revenue growth and to stabilize market share. This half, we think is the most important for us and this subject has been in our priority list since last year and they originated from related points of attention that deserve our committed force and energy. Some results are already [obtained] in the real time and the completion of these projects will deliver a set of sustainable solutions.

I will start by saying that the national coverage is one of our major objectives and we are glad to say that on June 14 Anatel approved the incorporation of the frequencies of 1.9 megahertz -- gigahertz pardon, to the mobile system in Brazil, and we should bid for these frequencies and we expect to do that before the year end by November this year. So this will enable our customers to have authenticated our CDMA and GSM network [inaudible] with the quarter we have all over the country that puts Vivo among the first in terms of quality of network and service in Brazil.

Another aspect that is for us one of our main priorities, fraud and cloning. And we are also glad to say that the number of cases of cloning reduced from the beginning of this year by 85%. So it derives from all the measures we took in terms of authentication of the network and [console] system developed internally to the company.

The third point that we think it's very important to the restructure of Vivo is to unify the platform. As you know Vivo is composed by 14 different operators with six different system platforms ranging up to -- in seven different data centers. So by the end of June we already had 78% of our customers processed in just one system base and we expect before the end of the year, 90% of these customers will be in the same base and we're going to reduce the number of data centers from seven to two.

The [fourth] point is the corporate restructuring of the company. Vivo as I said was composed by five different holdings and 14 operators. The first phase of this restructuring was completed by January this year and the [inaudible] had some of the results of this incorporation by reducing the gross debt and the net debt and also the financial costs.

The second phase has started in the beginning of this year and Anatel should approve the incorporation of all the 14 operators in just one company before the end of this year and we expect Anatel approval for today or for next week. So this will allow Vivo to improve their operational systems, not having to work with 14 different companies and to produce a lot of synergies in terms of management, in terms of fiscal and other synergies.

During all this time that we have been reconstructing Vivo, we have a different major differential -- a negative differential compared to our competitors which is the price of the handset. We know that GSM technology has a much bigger scale that CDMA has; it allows our competitors to have differential of prices in terms of handsets that rise from $30 to $29. So a decision that we should take, and was taken yesterday and approved by our Board is to build an overlay GSM network in our authorization area in Brazil and we expect to increase this network by entering [inaudible] once Anatel had approved and we bought the frequencies of 1.9. This is a very important decision and we think that we did that in the good moment in very good conditions considering that our suppliers made a good effort to reduce the price and to reduce the investment for Vivo.

The last point is that the importance of the corporate segment for Vivo which we have been providing a service with the CDMA video technology. We are the leader in this market and in this quarter we maintained 40% of the share of that in Brazil in the regions where we have three operators and 37% when you have 44 operators in the market. We keep on putting a lot of effort in the corporate segment and to make the CDMA technology with the video proves value and allow Vivo to price -- to sell value added service at the higher ARPU.

So the market continues to be highly competitive and in the second quarter we were affected by two main events. One is very negative, the fact that we had some problems in [prisons] in Brazil that made other operators to block the service in [inaudible] region for 20 days. The other one which was positive but implied [inaudible] addition in revenues was the World Soccer Championship. During the days when Brazil played the traffic reduced but anyway it was a very important moment for the commercial activity.

We maintain our swaps on high and mid value clients which are increasingly targeted by our competitors and as always have taken [every] initiatives in the past quarter. We are glad to say that more -- as I said, 78% of our customers are already in the same systems which allows us to manage our commercial activity from at least just one data warehouse, which allows us to make more telemarketing and direct marketing trying to block our competitors' initiative.

From the other side the migration of the postpaid clients to this new billing system provoked them in the last six months, some delays in billing with a consequent delay in the [inaudible]. And this provoked some difficulties for some clients to pay the accumulated charge. In this case we have to face some difficulties to recover what justifies an exceptional provision for net debt in this quarter.

What you see is that we have to record 161 million real additional in PDD. If we had not done that the EBIT would be at 467 million with 18% EBITDA margin. We estimate that the bad debt level will stay stable at 40% similar to the industry until the end of 2006.

In terms of financial management I wish to say that a reduction in the financial quarter was recorded. In function of doing past competition, revenues are subject to pressure from [campaign basis] of three minutes, also contributed the adjustment in billing systems, reduction in roaming, promotions basis on points and decline in inbound traffic.

Moving to the next slide, I wish to highlight that one of our competitive advantages is the quality that is recognized by Anatel. Part of our [force] to maintain the high level of quality, is dedicated to call cloning and fraud and in this sense 100% of our network is already authenticated which is very important to reduce the volume on fraud. And we saw that we are able to reduce by 85% the number of cloning calls compared to the beginning of this year.

As I said, 78% of the clients are in the same billing system, 57% of the customers are the same prepaid platform and 72% of the customers are in a single front office system. In the short run, these products will be completed as planned and be ready by the end of this year.

We confirm that our target is to retain national coverage, I've already said about that; the approval by Anatel the new frequencies will allow us to do that. And we are now preparing the deployment overall of GSM networking, different from our competitors, we're going to be 850 megahertz frequency. That we think will allow us to have less BTS than they have and to have a more added quality compared to our customers.

This is a good opportunity to increase our competitive advantage in terms of choice offered to the clients, the price of handsets and also national and international roaming [inaudible]. The recent reduction in network costs and difference in price of the handsets have made this project become more attractive. In parallel, this creates the possibility to evolve into 3G, enable CDMA with -- at least it will reduce the impact in CapEx.

Going to slide number 5, talking about our client base. As I said the fact that we implemented since last year new systems like a billing system, prepaid platform. We did that to impact some customers and by the end of this process considering that we have almost just one data warehouse, we observed that the number of inactive customers and we decided to clean out the portfolio and the base of customers by 1.8 million customers, reducing the base to 28.5 million customers that we consider as the good part of our customer base.

We should consider that the effects of this write off we will reduce some costs including some taxes that we pay on the number of customers we have. As we will see later this measure affected the churn, the ARPU and the MOU index and where the revenues were already affected in the past, they will not be subject to further effects.

Moving to the next slide, in terms of distribution and coverage Vivo has 1,300 points of sales in Brazil and we should consider it in terms of own stores. We have almost three times more than our second competitor which allows us to have very aggressive offers to the customers that come to our stores and this is very important for the high and middle segment.

For this high quality distribution network and coverage, we'll play a crucial role in the commercial launch of GSM ad service based on the GSM network covered later that we're talking about which on the other hand, we will also [win] business for our distributors.

In the quarter we reduced a total of 2,500 new ads and a share of ads of 34%. It means that the size of the problems we are facing to restructure the company Vivo maintains its sales capacity intact so we are able to sell more than 2.5 new ads in one quarter. And we should add to that 1.4 million handset replacements which means that we have more than 4 -- almost 4 million operation actions during three months -- the last three months.

In the next slide we see some of the actions we have in terms of marketing that are not only to sell new handsets, but also to promote prices and campaigns to stimulate the recharge of the prepaid handset, and give some bonus traffic, trying to increase the paid track for our customers. The Mother's Day campaign was particularly successful in terms of acquisition of new clients, highlighting the States where it put our focus, I mean some Sao Paulo, Rio de Janeiro and [inaudible].

In June we had a St. Valentine's Day campaign which recorded better results than the ones recorded in the last year. In terms of prepaid we sold 11% more than we sold last year. During the World Soccer [inaudible] period Vivo launched the campaign for new customers, that for the first time lies as standard to the existing customers as well as a loyalty program.

In slide 8 we can see the actions we take for loyalty and retention, and we look on segments that offered better levels of our ARPU and remain longer in the company by 305,000 customers in the second quarter 2006. Throughout the exchange of handsets which is 34% more than 2005, when we managed to buy 227,000 customers.

Net revenue -- now I will move to Ernesto Gardelliano and ask him to keep on presenting you the next slide.

Good morning ladies and gentlemen, I will start referring to the different performance indicators of Vivo, so let's start by slide number 9.

I'd like to let you know that the second quarter revenue stream generated by the outgoing traffic increased in relation to the second quarter of 2005, both in postpaid and prepaid. And in addition to that we have developed and deployed a number of campaigns aimed at improving the recharge of prepaid customers that resulted in increasing both ARPUs and revenues that we recorded in this second quarter.

Related data revenue stream and value added services show a consistent growth, both in relation to the same period last year and also to the past quarter of this year 2006. There were other items that suffered effects and of certain conditions that just -- a reduction in roaming revenues due to some actions that we adopted basically to prevent fraud as well as some actions taken by our competitors in order to the block the use of our TDMA networks by the [inaudible].

We have put in place loyalty campaigns based on a program of points and free minutes. We kept on with the actions of Right Planning in order to better satisfy the customer needs and to align with the competitive scenario. It is important to mention that our savings scheme had an 82% taxes rate based upon the actions that we managed both proactively and reactively with our customers.

Also the revenue stream was impacted by the early detection of potentially problematic calls and [inaudible] disconnection basically for [inaudible] system. Fixed mobile traffic substituted for mobile to mobile, including a set of volume [inaudible], and adjustments in the billing system during the migration to the unified platforms that we put in place in [inaudible] and [inaudible].

Let's move to slide number 10. We here basically refer to the data revenue evolution. We've been proactively launching campaigns in order to encourage the use of Internet through the cellular phone and also by means of access cards to enable high speed data connections to the Internet through different [laptops]. This was a campaign mainly targeted at the cost segment and we've been more than doubling the number of [inaudible] in the past quarter. We have been working hard in order to promote, to advertise on a sale basis the transmission services reaching more than 400 services that can be downloaded as a tune, as images [inaudible] location services. This service grew by more than 14% in relation to the second quarter of 2005.

Let's move to ARPU indicators, to slide number 11. Here we can see that the output is almost stable. There was however a decline in the blended ARPU which is due to the items that affected the revenues already mentioned by Roberto. There was a significant impact of the disconnection of the different cell sites surrounding [inaudible] as well as an effect that was traded on the day that the Brazilian team was playing in the World Soccer championship. That provoked a reduction in the volumes of [scores] especially on those days.

However the activity levels for commercial activity remains stable and basically what we see here is that the erosion in the incoming [inaudible] from fixed-to-mobile kept its base. We have some news that we will talk afterwards now that the [inaudible] scenario was taken out from the [inaudible] landscape.

If we move to slide number 12 we see here the impact of the different retention actions and loyalty campaigns that I mentioned to you before, especially because you will see when we talk about minutes of use, that the minutes of use are going for the postpaid customer, did not change significantly. But basically we've been adjusting, doing a fine-tune of the different service plans in order to keep these customers with us. However the incoming traffic and incoming revenue suffered the same stream as you would see in the different segments of our customer base.

Prepaid in slide number 13, we can see that we were successful in implementing the different campaigns that have in mind to fix the minutes of use of our prepaid customers for outgoing calls. We have launched a number of campaigns that called for bonuses whenever a charge was on top of X amount of real. On top of that we tried to put in place a campaign that calls for free minutes, you pay free minutes, you can talk 45 [inaudible] and they proved to be very successful. And basically they were targeted at the high value prepaid customers.

Here we see the slide number 14, I'm talking specifically about minutes of use. There you will see that the blended MOU remained almost the same just with a small drop in incoming minutes. But when we split the amount between postpaid and prepaid we can see that for postpaid customers, the outgoing traffic remained the same as in the second quarter of 2005. So basically there was an erosion in the service plan that we put in place basically targeting those customers we wanted to keep. And in terms of prepaid MOU, the number of minutes remained the same after the first quarter but basically the introduction of data related services, basically the SMS, resulted in higher ARPUs that do not reflect in terms of minutes of use.

When we move to slide number 17 and we talk about customer acquisitions costs, they were down by 25% as compared with the second quarter of 2005; just an increase of more than 2% as compared with the first quarter.

We must have in mind that the second quarter is a quarter of high activity here in Brazil as Roberto mentioned. The biggest campaign is the Christmas campaign, the second biggest campaign is Mother's Day. And basically we have reasons that made this cost to go down and only one that compensated that effect. The main reasons taking these costs down were the reduction in the prices of CPEs as well as a change in the exchange ratio between the real and the dollar and realignment of commissions that we deploy with the distribution network.

However the mixed of CPEs that were sold during the second quarter of 2006 were of a higher quality and basically, more than 75% I would say were between medium and high [CSOs] as compared with, I would say 50% when compared on the second quarter of 2005. Basically the entry levels were put down but still more expensive than the competition allowed their customers to get.

Moving to slide number 18, I'm talking about operating costs. We've been working hard in order to achieve the synergies that the scale of this business brings to the business. However there were a number of them, basically taxes related to customers, that we paid on an annual basis and on a monthly basis based upon net ads [inaudible].

In terms of headcount there was a slight increase basically derived from the fact that we renegotiated some salaries by the end of 2005.

And in terms of selling expenses we have included in the charge a dotted line in order to reflect what the increase, or the exceptional increase in uncollectability that was recorded during this quarter.

In terms of cost of handsets I referred to that in the previous page. And G&A, I mentioned that the only exception in terms of increase was the fact of the taxes that relate to maintaining a customer base.

On page number 19 we refer to uncollectability during the second quarter of 2006. The Brazilian economy as a whole has seen an increase in bad debt and Vivo has felt this effect, however we must consider that the main cause of the incremental uncollectability is the migration of clients to new system platforms that caused delays in billing that follow implementation of such platforms. For over four months we've been sending to a number of customers our invoices with a period of 20 days. This caused an impact to a great number of customers that were unable to pay and right now, although there are actions taking place in order to facilitate the statement of [inaudible] to those customers, conservatively we decided to record the potential loss that those incorrect billings or untimely billings had in our customer base.

On the other hand we must keep in mind that cloning and fraud are not simple events. Cloning as Roberto mentioned was reduced by 85%, there is still a number of areas that we need to focus and follow. We are not only intercepting our customers when moving from one area to another but unfortunately there are a number of customers that cannot roam when getting outside of the authorized Vivo area these days.

On page number 20, when we talk about EBITDA and EBITDA margins we have included there what the EBITDA would have been without recording extraordinary items; it would have been 18%, still 2% less when compared with the second quarter of 2005. Basically the increase in commercial activity has an effect and retention efforts were the main cause for part of the drop in revenues.

And as far as the cost side is concerned, two big issues impacted the EBITDA generation. Number one is the uncollectability we recorded. Number two I'm glad to say that we are in the final stages of negotiating agreements with long distance operators. In the second quarter of 2005 we had no impact as far as these negotiations were concerned. In 2003 the system [inaudible] was implemented in Brazil with some deficiencies as far as billing on behalf of -- was to be implemented and the collection of those calls were to be paid to those operators. We have now reached this agreement with the most important long distance carriers here in Brazil. So we can say that in the following quarters we will see these amounts that were recorded in [inaudible] to drop significantly.

Talking about debt, in page number 21, we have been able, once we were able to set [inaudible] and to start with the first stage of the restructuring to repay debt with the excess cash that we had in the different holding companies. These days we have a R$4.3 billion of net debt. This has an impact -- a positive impact in the net results -- in the net financial results that we recorded in the period. However, being the first stage we had to pay, and you can see that in slide number 22, we had to pay almost R$15 million in terms of CPMF which is a tax paid on financial transactions. But that was a one-time once that we have redone all of the restructuring, and now we have all the instruments to carry on for leveraging the company's indebtness.

In page number 23 we talk about the investments, the capital expenditures that we have recorded throughout the quarter, R$375 million [sic - see Presentation]. Basically taking into account the deployment of additional coverage and capacity needed for the customer needs in TDMA, the deployment of the different unique platforms for IT and others. The number was higher than the first quarter, but basically lower than the ones we adjusted in the second quarter of 2005.

What we have said is the number of the GSM/Edge network that we'll start deploying today, the total amount of that investment is R$1,080 million. That investment covers not only network, but IT and we estimate that that amount will be invested throughout 2006 and 2007. What we can anticipate to the financial community is that the CapEx guidelines that were included in the restructuring that we announced at the beginning of this year will be kept and no additional investments are going to be needed.

Now I'd like to pass on the word to Mr. Roberto again in order to talk about quality and to close the presentation [inaudible] the data with events that we have announced today.

Thank you, Ernesto. So we are very glad to see the efforts to improve calls. They pay off and into the second quarter 2006 Vivo is the number one in terms of compliance with the Anatel indicator for quality. We can see as well that this is a good record for Vivo. Once we came from 15% of non-compliance in the first quarter 2005 to 3.8 non-compliance in March 2006 and 3.3 in June 2006. We think that we still have room for improvement, but be informed that during this period in which we are implementing new platforms, sometimes the system suffers with the side effects from this implementation. We believe that from now to the end of the year we should improve even further by reducing flaws, improving quality in billing and customer care and also by completing the insertion of customers into the system. An improving quarter reflecting cost reduction and client care and restructure.

We're now concerned with the social responsibility. It's true that we reduced our budget this year considering the level of results we have, but we still have some important actions that are based on the Vivo voluntary space where we have more than 600 volunteers of the company working mainly on the recording of the spoken books and the impression of Braille books for the eye disabled people.

So moving to the next page, I think that we should say something about the GSM overlay. So the project is the construction of a GSM/Edge network capable of upgrade to W-CDMA the UMTS ready for 3G. And this network will be added to our CDMA network by replacing [inaudible] about a migration for our customers to GSM. But using GSM as a tool to win back or to conquer new customers in the market based on the fact that the differential on handset price is very huge. We've talked a lot about [inaudible], about corporate structure, about systems platforms, data centers, call centers, and I think that the last handicap that we should face was the differential in terms of handset price. So with the approval that the Board gave to Vivo yesterday we will be able, by building this network, to compete in the market with the same tools that our competitors have, but using the 850 frequency we think that we have an advantage in terms of quality of [inaudible] and quality of the communication.

The CapEx to overlay with the GSM will be approximately R$1,080 million; we are talking about real. In this CapEx we include 70 million for systems, for GI, and the rest is for the core of the new network and for the radio frequencies.

Anticipating some questions, I should say that we are talking about 7,000 BTS and we think that this will facilitate the digital roaming around the world and not only in Brazil. One of our handicaps is the international roaming that we give to our customers and we think that going to GSM we will solve this problem.

We're going to gain scale, we're going to prepare the network to evolve to the UMTS with a very reduced incremental cost of CapEx. And so we think this was a good moment to launch this project as the last one that we have to launch, to reinforce the structure of Vivo and to prepare Vivo for the competition we have in this market.

And the advantages we have are handset price, short-term payback considering the level of investment we are doing and considering that the differential in price of handsets varies from $30 to $39 and considering that we sell or replace like 10 million new handsets per year, it's easy to calculate why this payback will be so short. For doing that, we count on the experience of our team in previous implementations of the CDMA and [inaudible] moving from the TDMA. And also with the experience of our main shareholders, Telefonica Moviles and Portugal Telecom, in other markets, especially in Latin America.

So with this we will have a higher offer of handsets and service to the market. We are well known by the quality of the service -- of the value added service we are able to offer to the market with the CDMA video. And we think that we're going to do the same with the GSM network but in a market that has a lot of contrast to Brazil where price for the low end of the market is very important. While also international roaming is very important for the high end of the market, we will have an important offer in other segments of the Brazilian market.

So the final remark that I should say -- that I should mention was foreign cloning. We made a sustainable effort to detect and to control and the authentication of all the networks used nowadays paid off. We implemented some prevention systems that are working very well, this is what allowed us to reduce by 85% the number of clones since the beginning of the year.

In terms of systems, the unified IT in just one platform, 75% of the job is done; they are already integrated. Now we are reducing the number of data centers from 72. Thus today the center will be linked to have a disaster control and compliance with Sarbanes-Oxley. And then we expect to have increased reliability and control.

The corporate [inaudible] and the first phase was done and finished at the end of January this year, it paid off by reducing financial costs. And we expect for today or next week the approval from Anatel for us to merge our 14 operators in just one without the operation of fiscal and management synergies that we could produce within this project.

Finally the call rates will be solved with the 1.9 frequency that we will want to have for us not to pay the yields of third party network but even if we still don't have this frequency we will come with the GSM, with a network -- additional network with the agreements that we have already signed with the other operators in Brazil in GSM. Nowadays we are using the work phone for doing that but going to GSM we think that we will have a much bigger offer considering that 76% of the handsets we are [studying] now three band or [quasi] band, meaning that they can work both in 850 and 1.8 gigahertz.

So this is I think what we have to present you, and before I finish I would like to thank all the teams that work in this GSM project; our internal team, the support we have from Portugal Telecom and Telefonica people team. And also to thank the providers that [inaudible] especially the two that already chose to implement the first part of the network; it means in our authorization area nowadays.

And so thank you for the attention and now we are ready 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, please go ahead.

Thank you. I have a couple of questions, firstly starting with the disconnection of your customer base. You made this big disconnection. Did you only find out that you needed to disconnect these customers after you changed the system? Or you knew before and you just changed the criteria to change customers in your system?

And a second question is the following. Usually when the company making a big clean-up in the customer base the ARPU tends to increase. And at this time your ARPUs declined, so how should I see that? Thank you.

Okay, Vera this is Ernesto speaking. As far as the clean-up as you say was a write-off, as you refer, no. We've been working through the quarter in order to stabilize the last migration which was [inaudible]. This unique platform as Roberto mentioned before, the 78% of the postpaid customers, were achieved only this quarter. We didn't know it before and once we knew it we decided to go ahead and clean them up during this month. As you are aware in May we haven't reported that issue, we did not have that issue and because of what we have found out, we have not reported [inaudible] until today. That's number one.

Number two, you're right that [inaudible] but the fact is that the number of customers that were disconnected; a number of postpaid and a number in prepaid. And the fact is that when you take into account revenues divided by customers, the ARPUs are the ones that we have reported.

Okay, so to follow up on your comments. So in the press release it's saying that you already migrate 78% of your customers to the new platform. So you still need to migrate 22%. So we may see more disconnections in the future, is that correct?

Vera, this is Robert de Lima. You know that in the first migration indeed we took between five to six months to stabilize the system in the second migration indeed which was Rio de Janeiro. This took us between two to three months, let's say 70 days to stabilize the systems. And we expect that the next migration that will be over the center of Brazil and TCO, we expect that the learning curve we had, the implementation [inaudible] have to stabilize the system in just one month.

And on top of that it is important to mention this. The data warehouse that provides us with traffic information, not only outgoing but incoming, has already been implemented for 100% of our customers. So we do not expect that to happen with the 22% of the postpaid customer base that we need to migrate.

Okay. And in terms of the ARPU, so given that your ARPUs also declined, so the disconnection of customers that you -- the customers that you had to disconnect they had very high ARPUs. Is that correct?

No I don't think so because these customers were not active since let's say three or four months, so they were not producing any revenue. So maybe we lost some important customers in the end of the year and during the implementation of the systems because when you have a problem with the billing systems or a prepaid re-charge system, sometimes the customer decides to abandon the company. So this is what could provoke the reduction in the ARPU but not the disconnection.

I'm not sure if it's very clear to me, because if you disconnect customers that are -- like you have customers, you disconnect customers that are inactive, I think your ARPU should have gone up not down.

Of course, this is true but it's not the fact that we have wrote off these customers that the ARPU should increase. These customers were not producing the revenue so the reality that we lost these customers in the past, it means in the last three or four months they were not producing revenues any more.

Okay. And the last question is on your CapEx for the GSM. You mentioned in the press release that you have 1.08 billion CapEx for the GSM. This is for the entire upgrade or the first phase only?

No this is for the actual coverage area we have with the exception of [inaudible] and north east. We are talking about 7,000 BTS to cover the same area we have nowadays. Some would say that it's surprisingly low; it's true. We knew that the market was expecting something above $1 billion and we are talking of something above $490 million now. And I think this derives from the good work our team has done in terms of projects, but also we fought off negotiation with the [conquerors] of our shareholders. This is a lot of synergy on that and we have to consider that some of the suppliers helped us a lot to reduce the cost. You know that the Chinese providers are in Brazil and they are working a lot in terms of prices, so we are very happy with the result of the negotiations.

The second phase, which is [inaudible] that depends on the [inaudible] on the frequencies. The basis for this will be -- we're establishing this first phase of the negotiations in terms of price, but it makes not part of this agreement we are signing now.

And how long do you expect to maintain two methods? The CDMA and the GSM?

You know that we are not talking about replacing the CDMA by the GSM network. We know that we'll have customers in CDMA for a long time. We still have like 5 million customers in TDMA, we've proved that the network can resist. And the one concern, the CDMA network, we think that with the 3G service that we provide through certain segments of the market nowadays, we will maintain this network for a long time period.

Okay. And the total CapEx for '06 and '07 assuming the GSM overlay; the maintenance on your CDMA network plus the coverage that you are going to do in [inaudible] in the north east for the roaming purpose. How much do you expect in CapEx for these two years?

Well, it was just a precision and not [inaudible]. When we have the frequency of 1.9 we will have not just roaming, but a local operation. But with the decision taken on GSM we try to accommodate all the investment -- the need of investments in the same level of investment that we haven't forecasted before. So there is no incremental payback. Considering that even though we are going to maintain our CDMA network, part of the capacity we need for the future will be offered by GSM. So we are not forecasting an increase in CapEx in 2007 or 2008. In the three year period from 2006 to 2008, the CapEx level will be the same that is forecasted when we made the projection for the corporate restructuring.

Thank you. Our next question is coming from [Ricardo Silva] with [Ital]. Please go ahead.

Hi, hello. First Roberto, if you could just remind me how much of this CapEx that is estimated in this restructuring for '06, '07 and '08? This is the first question.

The second one, if you can provide us any guidance of CapEx for -- to cover [Amena Generale] and the rest of the country, I mean that you don't cover right now and you will, once you have 1.9 megahertz frequency.

And the third one relates to the fact that you, for a while, as you stated before, you will keep operating actually three networks; the TDMA that you currently do; CDMA and GSM1. Don't you think that it can increase significantly your operating costs? And wouldn't that be a reason for you to stimulate the migration from CDMA and TDMA customers to the new GSM network? Thanks.

So what we say, I think I will catch up on the numbers for the projections for the restructuring -- the corporate restructuring, but we have -- the R$1.8 billion that we are talking for this first phase of GSM will be spent in 2006/2007. So 2007 the investment will reduce despite the fact that our key [high] investments are reducing, we are quite finishing the implementation of the new platforms, and also we think we don't have to push for tomorrow morning the CDMA network. So we will maintain the same level of investment.

The second question is the second phase for Amena Generale. We expect to have the same price in the non-consolidated core and the rate of -- part of the investment. And we have signed an agreement with the other operators to share the infrastructure in this region. So we cannot advance the numbers of this investment because we are still negotiating with some suppliers for the second phase and we're going to separate what comes from core and the radio and that comes from infrastructure. So as soon as we have the project finished we will communicate to the market.

That was if we keep [inaudible] --

We know that the fact that we have three networks maybe puts some pressure on our costs, but it's true that the first one to be abandoned is the analog network; that should be done before the end of this year. The second one will be TDMA and then when transferred to CDMA and GSM we will keep on maintaining the two networks for a period of time. And since we are sharing the infrastructure for GSM and CDMA we must ensure the maintenance can allow that. We think that we have very good conditions.

One thing that we could add to this information is the fact that, for the new GSM network we signed the agreement -- reviewed that all the new release will not concern capacity and quality will be included in this agreement. So we have no new investments for release of quality and capacity in the network we are deploying now.

For four years.

Yes, just one follow up concerning the changes that were recently released by Anatel, two of them. If you could quantify the impact of the calculation of the [inaudible] in your EBITDA in order to increase revenues and cost. I'd just like to know if you have done a study to estimate the overall net impact in EBITDA?

And the second item that was included in it is the introduction of the off peak discounts in the mobile interconnection rates. If you have estimated how much that would negatively affect your EBITDA?

Okay, to answer your question, yes we did, but we are not announcing what that would be because I would put it in this way. Here the balance of traffic between Vivo and all the different other operators remains the same as it is today. Vivo is in a winning position; the EBITDA impact is positive. What we don't need to forget is that those balances have been migrating from month to month causing an impact -- a negative impact in terms of incoming traffic -- incoming paid traffic, because of the partial bill and keep. So basically if this doesn't change it will have a positive impact. What we cannot assure so far is what the other operators are going to do because basically today with the exclusion of bill and keep traffic between mobiles is still cheaper than fixed to mobile. That's number one.

The question number two was the timing difference? It was that?

Yes, the discount in the off peak traffic that you have to give to the --

Well, that has an impact -- a negative impact because basically we should be providing the same discount as the fixed carriers are providing to their customers. And that in our estimate are going to be compensated by the positive effect of bill and keep.

At the same time that the timing issue could imply some reduction in price, it allows us to make some offers to some promotions to our customers and try to increase traffic in this period. So if you want to take us by the good side that it allows us to be much more close to our customers offering new promotions on [inaudible] with synergy with Telefonica in Sao Paulo.

Okay, good. Thank you very much.

You're welcome.

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

Good morning, a couple of questions. Can you be a little bit more specific on your CapEx, Roberto? You mentioned that the CapEx for the next [inaudible] should be the same with or without GSM. What is your CapEx precisely so that we know what kind of numbers we're talking about before GSM? So that's question number one.

Question number two, just to make sure on the disconnects you had on this quarter, did those disconnects happen in the fourth -- at the beginning of the quarter or towards the end of the quarter just to make sure that we understand why our [inaudible] is in with the disconnects.

And number three if you can clarify how many radio based stations you have on CDMA today? Thank you.

First question on CapEx. Last year 2005, we had R$2.3 billion in CapEx. 2006 we will -- less than 2.3 and 2007 is less than 2006. So we are reducing CapEx year-over-year on the plan we have for deploying the GSM and CDMA network. And especially with the reduction investment in the technology of information.

I will let Ernesto talk about the period of disconnecting the customers. And then about the BTS zone CDMA we have little more than 7,000 BTS with CDMA nowadays.

Yes, going back, I think I mentioned this at the very beginning. The disconnections were done at the end of the quarter. We are reporting those disconnections today to Anatel. At the same time we [plugged] the press release onto the net, at the same time we were providing with [inaudible] about the approval that the Board made yesterday. And at the same time we were providing with Anatel about those disconnections.

And just on the radio base stations, the 7,000 CDMA radio base stations. What about TDMA? So in total, how many radio base stations without of course GSM does Vivo have today?

I don't get your question Mauricio

What -- you said you have today 7,000 radio base stations with CDMA. How many with TDMA? So in total, how many radio base stations does Vivo have today?

No let's say we share -- that's the network we have and in many of those stations we have CDMA, we have still analog and we have TDMA. I cannot tell you exactly how many of them are shared but that's the network that we are operating this day.

Okay. Thank you.

You're welcome.

Thank you. Our next question is coming from Walter Piecyk with Pali Capital. Please go ahead.

Thanks. I just want to confirm that the 1.9 spectrum will only relate to Amena Generale. You do not expect over time will have to acquire more spectrum as you might with GSM, the W-CDMA?

The 1.9 concerns first for Amena Generale but Anatel we were offered frequency all over the country so we are interested in buying other frequencies they can offer as extension brands. And we don't think we will need, in the next four years concerning the growth rate respect for the market, we will not need more frequency; we can balance between what we have now. But we expect that before that, Anatel will beat the 1.9 to 2.1 frequencies for the W-CDMA which is already decided. It was a ready approval in incorporation of this frequency that the mobile service in Brazil, so I think at the moment that Anatel realize that operators are ready to launch in the 3G, they will put this new frequency there in no time.

Are there other frequencies, other than 1.9 that are available for you to get awarded from Anatel before the auctions that will occur in 2007?

Yes. Before the 1.9, 2.1, Anatel will sell 1.8 frequencies and this is something that we could study if we feel that we need. For the moment our decision is to be on 1.9 and the 850 frequency.

I also want to go back to your some of your prior comments about the capacity you said for four years. When you're talking about having those guarantees for four years, are you referring to software upgrades to [vocoders] or are you referring to additional base stations or radios that go under base stations that this price includes any capacity upgrades, meaning additional radios to go under base stations for the next four years?

No the answer is clear. We're talking about software and new release but not capacity. We think what we are buying now is the systems network for the next four years. So perhaps at the same time, we have in the agreements the provisions for new release with no cost. We're talking about software.

And finally I just want to return to Vera's question, I think your response said -- your response was that many of your disconnected customers were people that had paid earlier in the year and then had maybe not paid in the past three or four months and that was part of the explanation for the ARPU decline.

Yes, we know that we had some problems with customers during the period when we were implementing systems and maybe these customers moved to the competitors. And the rule we have is that after three months with no communication receiving or making calls, we have to disconnect. So once we --

So this was not a situation where there was perhaps a customer that was not paying you for a year, that you just happened to find in the system and decided to disconnect. These are basically customers that have recently decided not to pay that you're just going to disconnect?

No the fact that we were implementing systems, sometimes we had some postponing in the billing system for one or two months and then we invoiced the customer two months after we should have invoiced it. And then three months after having invoiced it, we realize they didn't paid. At this moment we had to -- we had connected this customer before but we have to write this customer off because we are sure that they will not pay.

You also talked, when you were talking about ARPU, you made some references to some areas of Brazil that you made unavailable and how that affected the service revenue. Was I understanding that correctly?

Yes, that is correct. Our prepaid customers for some areas cannot roam outside of the Vivo area. Basically because we do not have a solution that provides us for online billing.

Online billing concerns to the prepaid and this is the measure for us to reduce the cloning which we saw the results we have. We're sure that by reducing cloning we had some side effects like some customers [day to day] will not be happy with the fact that they are not able to roam with the prepaid handset in regions like [inaudible].

So finally just on the disconnect, is there -- do you anticipate a -- now that you've gone through these processes and got rid of these customers, that as the churn rate for third quarter and the fourth quarter and into 2007 should return to below 2%? Or is the organic churn rate still going to remain above the 2% range?

I can anticipate that we do not foresee any surprises because as I mentioned before we do have a unified data warehouse system that provides information about all of our customer base. To make a forecast about the churn rate for the future, I don't think it's correct on our part to be providing for that guidance.

Okay, thank you.

Thank you. Our next question is coming from Stephen Graham with UBS. Please go ahead.

Hi Ernesto and Roberto, a quick question. You mentioned in the text of your release also during the opening statement that one reason for the falling prescription usage revenue, that is the falling service revenue this quarter, were actions undertaken by some operators for blocking the use of our CDMA network by their customers. What is that all about?

Let me explain. We do have roaming agreements with our competitors and basically using not GSM, not CDMA but TDMA. But what we did in order for us to fight against cloning and fight against what we had to suffer in the fourth quarter of last year basically by paying roaming charges to visited networks, was to block our customers and to prevent some of our customers to go and roam. And for the postpaid customers we did the same but allowing them, with an interception on our part.

When we're talking about competitors I'm talking about our competitors' ability to let their customers roam in our CDMA network that we have those revenues in the past but they prevented their customers to do the same with us. So basically that revenue stream disappeared all over Brazil.

They did that just to retaliate?

No, it's because they were protecting their -- this was a kind of fraud protection for them, so we know that TDMA networks are more vulnerable to fraud and they decided to -- the same we did with our prepaid customers, not allowing them to roam outside our areas. Some of our competitors did the same. It's not a retaliation, I think it was the fraud protection.

It was the fraud protection. And basically they said, do you want to roam? Come and trade in your TDMA phone for a GSM. That was what happened throughout the year and specifically in the second quarter.

Okay. Thanks a lot.

You're welcome.

Thank you. Our next question is coming from [Pilar Bertuzzi] with Sanford Bernstein. Please go ahead.

Yes, good afternoon gentlemen. A couple of questions if I may. The first one is on the cost of service rendered on page 7. Can you quantify the amount of core billing provisions that you took in the quarter? And can you tell us whether these are one-time in nature or if you expect them to reoccur? Could you also kindly explain what falls under core billing?

The other question I have is could you tell us what level of bad debt provisioning as a percentage of gross revenue we should expect for the full year?

And finally, this is a question on the EBITDA growth for the 2006 year. Telefonica and PT have said in the past that they expect EBITDA growth at Vivo of around 10%. Can you comment on this please? That is all, thanks.

Okay, question number one. The impact in this quarter was about R$50 million as compared with 55 in the first quarter and only 3 or nothing in the second quarter of 2005. And that was basically stemming from negotiations of long distance carriers, and that was the impact.

Your question number two was related to the provision for bad debt for the whole year. I can anticipate that based upon the actions that we're taking, the new credit scores that were put throughout the distribution networks and our own shops, we can expect uncollectability for the following two quarters, third and fourth quarters, to be in the range between 4 and 5%.

And number three, we do not comment on what PT and Telefonica say.

Can you give us any guidance as to the EBITDA growth for 2006 at all please?

Unfortunately no.

Thank you.

Operator. Thank you. Our next question is coming from Henry Cobbe with Thames River Capital. Please go ahead.

Hi there, thanks very much for the call. I've just got three questions. The first on the CapEx, I've got the offer document in front of me from Goldman Sachs with the valuation report, and the consolidated CapEx that they forecast at the time, I think it was about 1.8 billion for '06 and 1.4 billion for '07. Can you confirm that that's the CapEx forecast that you're referring to?

The second question is just on the long distance carrier rates. Can you just quantify in terms of central service revenues how that will affect your leased line or interconnection costs?

The third question just on total traffic. Could you tell us how much is on net?

Okay, let me -- I don't know if I can answer all of your questions, I don't have them by heart. Number one, you mentioned CapEx. CapEx basically we are finishing the signing of the contract. What we can say is that overall 2006 and 2007 is going to be less than $2 billion in each of those years -- each year.

Question number two, you mentioned about core billing as a percentage of revenues, was that the question?

No, the -- you said that you've negotiated lower long distance carrying rates.

No, it's not rates. What we negotiated is [bill]. Back in 2003 there was a change in the system prevailing in Brazil and basically all of the mobile and fixed line operators had to be on behalf of long distance carriers. That was done in less than a month and all of the different software systems had to be ready to cope with that new situation in Brazil. Because of the shortage in time there were some errors in the different -- I would say in the marketplace. And basically what has been negotiated and has been ended so far was the fact that not all of the CDRs were able to be billed or invoiced to the customers. And there was a long fight with NFL last year, it started I think in July 2005. It went through September and by November Anatel said that they were not going to take a position on that issue.

And basically what the regulations said that the billing carrier should pay the long distance carrier exactly for the amount that the carriers received. Because of the import of [price] the amounts that were paid or passed onto the long distance carriers were different from the expectations that these carriers had, so we needed to get into negotiations based upon who was to blame, I will put it in those words.

And now we have reached those agreements specifically with the fine-tuning of the systems and now that everybody is fully aware that at least Vivo is billing 100% of those CDRs. And whenever there is uncollectability, basically that was the key issue that was put into place. That has nothing to do with rates for long distance, it has nothing to do with that.

So there's no margin --

I think with that, part of this negotiation was already [treated] by Anatel and by the end of the last year Anatel said that this should be sorted among the operators with no involvement of Anatel.

And the third question? Excuse me, but I don't remember.

That's no problem. Just of your total traffic, how much is on net?

No, that's something I don't have in my [inaudible] this time.

Okay. And, sorry, just one little follow-up question. I think you gave some figures for your estimated handset demand for GSM. I think you said 10 million replacement per annum and was it 4 million for new subscribers?

No, what we said was that nowadays between sales and trade-ins we are trading something like 10 million CPs per year. And that was a number that we took into account in order for us to make estimates of payback.

I see. And is the vendor who you're going to appoint for the GSL upgrade, are they going to provide you with handsets as part of vendor financing?

Yes, our [vendor] will supply handsets as well. Now we start looking and they negotiate now the handsets and the suppliers will furnish the network. We'll also be in this bid.

And so is that included in your CapEx?

No. If it is included in the CapEx --

No, it's not included in the CapEx. The CapEx is [inaudible].

Okay. Thank you very much indeed.

You're welcome.

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

Okay, good morning. My first question is regarding the number of GSM subscribers. You may have mentioned it, I probably didn't get it. But how many GSM subscribers do you expect to have on your networks say by the end of this year, by the end of next year?

So, by the end of this year the network will not be ready, so we expect to build this until the end of the year. But we wouldn't like to say something about our commercial strategy and what concerns GSM and CDMA. So we expect to win back and to gain new customers with the GSM network more than migrate CDMA to GSM.

So you can't even give us rough numbers as to what percentage of your total network will be GSM in terms of subscribers in the next year or so?

No I don't think we can mention that.

Okay and the second thing is that if you look at the bad debt, the bad debt that you mentioned related to this change in the systems was 161.5. Is it fair to assume that most of this bad debt was related to the 495 -- 0.5 million postpaid subscribers that you disconnected?

The postpaid part of that yes.

And so that means roughly five -- so subscriber, you disconnected these subscribers after five months non-payment?

No, three months non-payment.

Three months, what Roberto mentioned --

What I said about five months is that where we were implementing systems it took at least two months for us to stabilize the system and to re-start invoicing customers. So the [instruction] was invoices two months after and then the customer had three months to pay. But as the same time we accumulated two or three invoices, it became -- the accumulation of all this really became too much for the customers and this is one of the reasons why we had some difficulty to recover.

Is it fair to say that part of the provisions you are taking because of delay in payment, some of these payments you will be able to recover in the future?

As part of the provisions we already did that for the past and tried not only to recover the money but also to win back the customer with some promotions, giving some discounts to the amount of the deal. We had some telemarketing actions. We are now trying to recover part of this amount but we cannot forecast how much it is.

Okay. Lastly with bad debt kind of out of your way, with IT systems pretty much in place, you think there may not be a whole lot more in these provisions. Should we expect a pretty significant improvement in your margins in the second half of this year or 2007?

I wouldn't refer it about margins, I believe there was another question about that and we will not refer to margins. What I can tell you is that based upon the actions that we have put in place and the scoring that we are making to prospective customers these days, that the uncollectability -- the bad debt rate for the next two quarters should be between 4 and 5.

Okay. Is there anything that you see on the horizon, the near term or medium term? Any other provisions or other charges that you may have to take that can keep your margins down?

No because basically, as I mentioned during my presentation, there were three issues that affected the earnings in this quarter. Number one were the revenues; Roberto made a good explanation of the different factors affecting this specific quarter. Then I mentioned the bad debt provision. And on top of that I mentioned the issue at the end of the core billing fight that we were having with long distance carriers.

From now on we only should have issues related to the operation on a monthly basis.

Okay thank you very much.

You're welcome.

Thank you. Our next question is coming from [Theodore Mura] with JP Morgan, please go ahead.

Actually it's Andre Baggio from JP Morgan. I just want to know what would have been the additional revenues that you would bill in the second quarter if there was no bill and keep? Meaning ignoring -- I know there will be some changes in the net traffic patterns and I am aware of that but ignoring that fact, how much would have been the additional service revenues that you would be able to bill in the second quarter if there was a --

I'm sorry Andre but I don't have that in mind and it wouldn't be good on our side to be forwarding that kind of information. That is when I started learning about [inaudible] that was the impossible task because bill and keep was still there during the second quarter.

Okay that's fine. Thank you.

You're welcome.

Thank you. Our next question is coming from Patrick Grenham with Citigroup, please go ahead.

Could you just confirm that you mentioned a migration cost on the handsets during the presentation of somewhere between $30 and $40 per handset? You threw a comment in there of 10 million users per year would migrate. That suggests $300 million a year of extra handset costs for you as a result of the GSM migration.

The second question on the network is that you say that you want to turn off the analog network first, but I understood that you have to provide roaming to your TDMA and CDMA and that you do that through the analog network. And that means that you're probably not going to turn off the analog network until 2008.

My other question is, if your accounting is on the timing of the disconnections, you say you disconnected the users at the end of June and that these are people who didn't pay their bills for three months. And that means they probably stopped paying the bills five months' ago because of the two month cycle in the bill. Is that over yet? It looks like we have another quarter of very big disconnections the postpaid business.

And the other question on that is if I look at the revenues that you mentioned on the PDD, it looks as if the people you're disconnecting are higher than average ARPU customers, they're almost [R$110] ARPU customers. How long is that going to go on?

Concerning the first question we are not -- the 30 to 39 models are not in the migration cost. What we talked about was the difference between a CDMA handset and a GSM handset. A CDMA handset considering the scale of production is $30 to $38 more expensive than the GSM handset.

I see, okay.

The second point analog. When we say that we're going to disconnect our analog network this is true, but the analog network we use nowadays for [inaudible] is other operators' network. So if we had a network in this region it is hoped that they would not be analog but we are using other parts analog networks in these regions and they cannot disconnect while we are using these networks. They have to replace with something else.

Is that 2008 yes?

We expect that by 2008 we should disconnect but let's consider that we have now 100,000 customers just in analog. And if we have to disconnect and if the other operators have to disconnect their analog networks by this time we are sure that we will have a solution on GSM or with the world phone.

Right because -- I suppose my point is the analog network is used more than just to provide service to your analog customers. It's to provide roaming between your TDMA network and your CDMA network.

No analog has nothing to do with TDMA and CDMA. Analog is amps, pure amps.

So how do you roam between TDMA and CDMA?

TDMA and CDMA. TDMA was the already network that was in place here in Brazil.

How do you roam between the two? If I'm in a TDMA network can I roam on digital?

You can roam on digital within Vivo. If you go to [inaudible] or [inaudible] where we don't have operations you roam with TDMA of our competitors.

And if somebody roams into your network with a TDMA handset, you're offering fully digital service everywhere in Sao Paulo?

With TDMA we offer TDMA.

Okay. In Sao Paulo?

The problem is, as I mentioned before, our competitors are blocking their customers to roam with CDMA because of the fraud issues that appeared in Brazil during 2005.

Right. So you offer digital roaming to TDMA customers in Sao Paulo?

TDMA customers in Sao Paulo, no.

Okay so what do they use to roam?

Our competitors or our customers?

Anybody who's roaming on your network. I thought roaming is compulsory in Brazil?

Yes but if we want all of our customers to roam in our network you have to use a CDMA handset which is not the case.

So you do not provide roaming to Telemig or to any of the TDMA operators in Sao Paulo?

In TDMA in the south of the country and in --

No in Sao Paulo. Who -- you have no roaming agreement in Sao Paulo with Telemig and Vivo? Is that true?

But Telemig believe they are doing roaming [inaudible].

So they -- you do not provide any roaming with them?

No.

No.

In Sao Paulo, nothing?

No.

No.

And no other TDMA provider can roam on a Vivo network?

In Sao Paulo TDMA? No.

Nothing? Okay.

Okay?

Okay. The other question, then, about the ARPU of the customers you are disconnecting?

No, basically you mentioned something about the five months and the three months and I got lost to be honest.

Well, you said that -- okay, well you said that you sent the bill for instance in December; they failed to pay the bill; they're three months behind on paying the bill. And then you disconnect. You disconnected 0.5 million at the end of June which means that they stopped generating revenues for you probably in December, or the end of January.

But that's not exactly --

And so we are talking about disconnection, we should talk about the write-offs. So we disconnect the customer the first time 15 days after he doesn't pay the bill, so we do what we call a half disconnection; he is not able to issue new calls or to receive new calls. 30 days after we disconnect for him to make new calls. And what we say about 90 days is that they were -- we launched -- the amount of the bill in the provision for bad debits? And the disconnection of the customer was done before the day we launched the amount in bad debts.

What we did now is we cleaned off the portfolio recognizing that all the customers that we sell -- that we were not able to recover and also the prepaid customer that had not made any calls in the last three months. This is the normal procedure for Vivo.

But something that probably Patrick is missing is that, as Roberto mentioned before, we had delays in billing and there was a time here that we had to bill our customers every 20 days because we were not able, because of the local regulations, we cannot accumulate two bills or two charges -- two different months in one single bill. We must bill and the timeframe within is only 20 days. So the cumulative amounts in a number of customers caused us to go ahead with this clean-up. And as Roberto mentioned, as well, we have teams here in place in order to bring back those customers if possible by allowing a certain payment facility going forward. However, we wanted to recognize the potential debt by accounting for the R$161 million that we are disclosing today. Okay?

Thank you, sir. Our next question is coming from Carlos Sequeira with UBS, please go ahead.

Hi, I have three questions. One is what will your new GSM network have different from the other GSM players that will make it cheaper to migrate to UMTS in the future?

The second question is can you tell us what is the net impact for Vivo of the new mobile interconnection rules?

And the third one is how much more will it cost Vivo to operate CDMA and GSM networks at the same time in the future? Thank you.

The first question was about what our GSM network has in difference that makes it less expensive to migrate to [inaudible] CDMA. It's the fact that it's a newer network so we are buying it now. It's the last version of GSM that is in the market so these networks are more modern and what we know is that the migration for 3G is much cheaper than it used to be in the past.

The second question about the impact on [inaudible] I think Ernesto already said that we are not ready to comment on that.

And the third one I don't remember is --

Yes, sure. How much more will it cost Vivo to operate the CDMA and the GSM networks at the same time?

So we are -- now we are established all these figures but as we said we are sharing all the infrastructure we have with CDMA to put the GSM network overlay, so in terms of maintenance of the network we'll have no costs. In terms of systems we have a CapEx of R$70 million now and the system platform will work for both platforms with no difference, so we have no different systems for operating the two networks in [that concern]. The customer relationship, the process for invoicing and all that, so it is not important the level of CapEx that we're going to have to operate these two systems. I think that in the next quarter we could exactly state the number.

Okay. And just a follow up on the net impact on the new mobile interconnection rules. Can you say if it's positive, neutral or negative to Vivo? I don't need numbers, just an idea of how you see the new rules.

As I mentioned, if everything keeps as it is today it is completely positive for Vivo. What we don't believe is that the different balances of traffic are going to remain the same and that whenever somebody has something that will prevent them from doing a good business, they will migrate that traffic among the different operators. So it's kind of difficult to forecast for the future.

The timing issue there for long distance is definitely is going to impact negatively but if we assume what we have today in and out, it compensates and gives a positive effect to Vivo today.

Okay. Great, thank you.

You're welcome.

Thank you. Due to time constraints this concludes the Q&A session. I would now like to turn the floor back over to Mr. Roberto Lima for any further closing remarks.

Okay, first of all I thank you for the attention. I would like to renew my thanks to all the team that work in the GSM project and to thank the suppliers who [inaudible], to thank the suppliers who make the final offer and allowed us to have the very, very good conditions to make this investment. And I think you already know who are the winners and I think [inaudible] and Ericsson did a very good job in trying to reduce as much as they could the prices. And providing us with good guarantees for the quality of the network we will have.

We were sure that this is what we should have -- that is what we should do for Vivo now and parallel to that we will keep on working on orders and infrastructure projects that we have; going against fraud; implementing the systems; making a more simple legal charge for Vivo and getting from that all the synergies we can.

And finally, counting on all the support we had from our shareholders and their team. So we are very optimistic for the future and we hope that the worst is back in the past. Thank you very much.

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