Telefonica Brasil SA (VIV) 2006 Q4 法說會逐字稿

Good morning ladies and gentlemen. At this time we would like to welcome everyone to the Vivo Participacoes fourth quarter 2006 earnings release conference call. Today with us we have Mr. Roberto Lima, CEO of Vivo Participacoes and Mr. Ernesto Gardelliano, CFO of Vivo Participacoes. Today we have a simultaneous web cast with a slide presentation on the Internet that could be accessed at the site, www.vivo.com.br/ir. There will be a replay facility for this call on the website.

We inform you that all participants will be able to listen to the call 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 will turn the conference over to Mr. Roberto Lima, CEO of Vivo Participacoes. Mr. Lima you may begin your conference.

Good morning ladies and gentlemen. On behalf of Vivo Participacoes S. A. we would like to thank you all for attending our fourth quarter 2006 earnings release meeting.

On the page three we see that Vivo's fourth quarter 2006 figures reflect the results of management's priority projects and the quarterly highlights included. Corporate restructuring was concluded on October 31, 2006, with a consequent activation of tax credits in the net amount of BRL740m.

EBITDA margin reached 29.2% in the fourth quarter with 19.8% increase in EBITDA against the third quarter. Outgoing traffic was 12.8% up to the third quarter and 28.1% up from the fourth quarter 2005.

The volume of prepaid recharge increased by 15.9% when compared to the third quarter 2006 and 16.1% when compared to the fourth quarter 2005. The net service revenue was 7.3% above the third quarter 2006.

The ARPU increased by 6.6% when compared to the third quarter 2006, in response to the consumption promotion which was particularly strong in the second semester of 2006. We are maintaining a 14.8% reduction in the subscriber acquisition costs in relation to the fourth quarter 2005 as a result of improved conversion operation efficiency, the great number of activation in our own stores and the appreciation of the Real against the Dollar.

Provision for bad debt accounted only for 1.8% of gross revenue, the lowest rate in the last two years. Thanks to this performance we posted a quarterly net income of BRL886m.

Operating cash flow because of the change in working capital increased by 68% in relation to 2005, reaching BRL1,228m. Finally, with such good indicators, the net debt fell by 14.3% over the previous quarter.

On the page four you can see some main accomplishments in 2006. And you could say that throughout 2006 Vivo transformed itself working intensively on various projects in strengthening its fundamentals and laying the foundations for a recurring profitable and sustained market growth.

The new corporate organization enabled benefits such as efficiency, administrative streamlining and resource management, leading to a reduction in the net debt and the generation of net income through the operating fiscal and financial gains, among others.

Concerning fraud and cloning, we reduced the losses to negligible levels tending towards zero.

Regarding systems, more than 95% of customers are already integrated into the unified systems, resulting more active billing and collection processes and more rapid development of products and services, ensures prompter arrival in the market.

On the service front, the focus went on the First Call Resolution program. There the recalling was by reduced by 8 percentage points in the year. In this context we also exceeded Anatel's target with 99% of calls to the call center completed. Thanks to communication operation actions, the customer voice is being heard throughout the organization.

Finally, the volume of complaints decreased by 31% between January and December 2006 and reply times improved as a result.

Regarding the handsets and cost differential, thanks to the investment in GSM EDGE, Vivo is now even better prepared to meet customers' every need, particularly as we are enjoying the benefits resulting from the low cost handsets enabled by this technology. We are also offering easier domestic and international roaming. In these new technologies we have strengthened our handset portfolio adding 27 new and even more attractive models. No less important was the launch of Vivo Escolha and Vivo Escolha [Frare] pricing plans which combine simplicity, savings and freedom to select service, among other advantages.

In December we pre-launched GSM EDGE technology for prepaid customers and the project is strictly within its material financial schedule. It is worth remembering that the project will absorb total investment of BRL1.8b, corresponding to the implementation of 7,000 [inaudible] stations and the adjustment of our operation systems in a record time.

Now on page five we see that we focus on customer loyalty by encouraging use through the bonus packages, the launch of the innovative price plans and synergy with Telefonica among others. These initiatives were exemplified through campaigns such as Vivo Escolha, which means Vivo Choice. The objective was to improve price perception and strengthen market leadership.

In October we launched Vivo Escolha, a pioneering plan combining simplicity, freedom to select service and other advantages for customers, who can opt for a combination of those features most suited to their use profile.

Parcera Vivo e Telefonica, Vivo and Telefonica partnership, the objective was to cement Vivo's postpaid client loyalty, attract new customers and strengthen synergies between the two companies. We launched the Vivo and Telefonica promotion by means of which Vivo Post and Speedy. It means wideband customers can talk free on charge on weekends from Vivo to a fixed line and a fixed line into Vivo.

Mude to Vivo, a third initiative, switch to Vivo. The objective was to attract higher value postpaid customers from competitors. We launched the Mude para Vivo campaign developed through the direct market in Vivo stores. These promotions are designed to provide greater benefit to customers with a higher monthly expenditure commitment.

The last campaign, BRL1,000 por Recarga, up to BRL1,000 for recharge. The objective is customer acquisition, loyalty and profitability, favoring the creation of consumption habits in prepaid card customers by encouraging monthly recharges. Bonuses vary according to each customer profile, being progressive and in line with the recharge value and can reach as high as BRL1,000.

Turning to slide number six, we can see that Vivo continues to substantially expand its coverage increasing the number of municipalities covered, extending the 1xRTT coverage to 100% of new municipalities, expanding the new GSM EDGE scaleable to W-CDMA network in a record time and having national and international roaming in third party network.

Own stores had 30% share of total sales in the fourth quarter 2006. And sales by the online store increased by 200% over 2005.

Our relationship channels were subject to improvement, improving the standardization of 53% of our own stores and 450 third parties. 66 new recharging partnerships were implemented, which are generating significant gains for the Company. They include partnerships with Visa, MasterCard and Souza Cruz, which in Brazil is the British American Tobacco Company, which added 30,000 recharge points of sale.

On page seven, we start talking about the operating performance and we can see that on December 31, Vivo had 29m customers and was the leader in the operational area with a market share of 38.2%. Even though the Company does not have a nationwide presence, it's also the national leader with a market share of 29.1%.

We maintained our focus on profitability, controlling entry barriers in a rational way, segmenting promotion and marketing efforts with products and services specific to each client profile. As a result, churn levels were kept under control.

Finally, the increase in the customer base was influenced by the strengthened handset portfolio. We have 27 new models and a [substantial] improvement in service quality. The recent announcement of Vivo Escolha, Vivo choice plans also helped to improve the Company's competitive positioning.

On slide number nine, we can say that in the fourth quarter 2006 Vivo continued its efforts to cement customer loyalty and maintain its focus on high and medium value clients. The rewards program was improved and remained the main tool in high value customer loyalty campaigns. There were also additional features. Points are awarded for length of time as a customer and the partnership program broadened. As a result, there was a significantly lower churn rate in the value segment with higher loyalty and retention quality.

The considerable increase in recharge of 15.9 and 16.1% in relation to the third quarter of 2006 and fourth quarter 2005 respectively exemplified the results of improving card mix and substantial recharge volume.

On slide number 10 we can see that the SAC fell 14.8% over the fourth quarter 2005 due to lower expenditures related to acquisition synergies, the higher number of activation in own stores, which accounted for nearly 30% of the total sales and the rationalization of the advertising expense as well as the exchange variation. The 9.5% increase on the SAC over the third quarter 2006 was due to the typical seasonal upturn in commercial activities and increase in expense related to sales support, partially offset by lower acquisition costs.

It's worth mentioning that we managed the entry level price in both the post and prepaid segments, concentrating our most aggressive force on the top of the range. As a result, high end handset activation increased by 8 percentage points in the fourth quarter compared to the fourth quarter 2005. And acquisition costs fell by 22.4% over 2005, despite the fourth quarter 2006 increase, mainly due to the planned subsidy expenses as a consequence of the exchange variation. More adventurous agreements with suppliers and synergies with the controlling shareholders also helped.

Turning to slide number 11, blended ARPU of BRL30.6 increased by 6.6% and 5.5% over the third quarter and the fourth quarter 2005 respectively, even if you take into account the effect of the voice and the data price adjustments implemented during 2006. The positive variation was the result of campaigns and promotions to encourage traffic and consumption.

Adjustment for the end of partial Bill and Keep blended ARPU in the fourth quarter 2006 was increased by 4.6% over the previous quarter. The increasing traffic triggered by promotions and usage incentives led to an increase in outgoing ARPU in the fourth quarter 2006 versus the third quarter of the same year, both in the postpaid and the prepaid segments and in blended MOU which moved up by 5.1% over the third quarter 2006.

Total traffic grew by 6.4% over the third quarter 2006, highlighting the 4 -- the 5.4% increase in the postpaid segment alone. Considering outgoing traffic only, the upturn came to 12.8% in the fourth quarter 2006 compared to the third quarter. Even taking into the account maintenance of the client base, we had an increase in traffic, thanks to our efforts to acquire and retain higher value clients. The December launch of Vivo Escolha, Vivo Choice exemplifies actions combining sales and freedom to select service.

On slide number 13 the net service revenues grew by 7.3% over the third quarter 2006, higher than the increase in the customer base. Even after adjusting the fourth quarter 2006 to the third quarter 2006, results for the end of partial Bill and Keep service revenues would still have moved up by 5.9% between periods.

When comparing to the fourth quarter 2005, there was a reduction of 8% in subscription and usage revenues reflecting the necessary adjustment to user's needs and customer profiles. On the other hand, the 6.9% increase in subscription and usage revenue over the third quarter 2006 was mainly due to the increase in total outgoing revenue in view of consumption incentives and the launch of the Vivo Escolha plan and the seasonal effects.

As already mentioned, the 15.9% increase in recharge volume over the third quarter 2006 also contributed to the revenue growth.

On slide number 14 we see that data services were incremented by the new voice portals, the film content, complete music track downloads, location service and a variety of games. As a result, data revenue increased by 3.9% [3.1% - sic see slides] over the third quarter 2006. SMS accounted for 49 of this revenue, even taking into account the new price alignment of 40% in Sao Paulo made in June. And the share of higher value added service in the data revenue moved up 5 percentage points over the third quarter 2006 and 10 percentage points over the fourth quarter 2005.

The adoption of Vivo ZAP data cards in the fourth quarter 2006 doubled in relation to the same period in 2005. WAP revenue moved up 27.3% year on year, with a potential growth in view of the increase in data enabled handsets. The upturn was fuelled by the development of specific products, higher utilization of the service and improved communication and information for users. We are advancing the adoption of specific third generation data service evidencing the learning curve of the Company and its customers in the utilization of such service.

So now I would like to turn the floor to Mr. Ernesto Gardelliano, our CFO, for him to talk to you about the operating expenses and give you some more important financial information.

Good morning ladies and gentlemen. Thank you for being with us this morning. I will cover all of the financial related aspects of this presentation and afterwards I will hand over again to Mr. Lima.

Okay, let's turn to page 15. We'll talk about operating expenses and we say that in order to generate greater efficiency, Vivo maintained strict control over the management expenses. Even in the case of variable costs such as those from handsets, supply and change management was able to achieve more advantageous conditions. As far as cost of services is concerned, it is important to mention the set up of full bill system back in July, which had an impact on both revenues and costs. Overall, the effect on EBITDA was positive reaching BRL13m in the fourth quarter of 2006.

Human resources expenses increased mainly due to collective union agreements, performance bonuses and termination payments.

Provision for bad debts fell to one of its lowest levels in recent years, as you can see in the next slide.

Let's turn to page 16. One of our priorities during 2006 was to reduce provisions for bad debt and to improve managing credit risk. In a short period of time we were able to control fraud and cloning problems, achieving best practice patterns. Provision for bad debt totaled BRL73m in fourth quarter of 2006, accounting for 1.8% of total gross revenues, the lowest level and value in two years. 50.6% down on the previous quarter and 72% less than in the fourth quarter of 2006.

The actions taken to contribute to the improvement of this indicator were mainly reduction in fraud and cloning losses, new credit score model, specific campaigns to recover accounts receivables past due 180 days and a major effort on the collections front. The balance sheet was also benefited from these actions with a reduction of accounts receivable by BRL813m in the year.

If we move over to page number 17, we can talk about EBITDA. The fourth quarter EBITDA totaled almost BRL858m, resulting in a margin of 29.2, the highest in 2006 and 3.9 percentage points above the previous quarter. As already announced in the previous quarter conference call BRL136m was recorded due to the reversal of PIS and COFINS accruals. Of this amount, BRL126m positively impacted EBITDA and the difference was recorded under the financial results. The combined effects of the end of the Bill and Keep rules, less the reversal of the PIS and COFINS accruals would have led to EBITDA margins to 27.9%.

EBITDA performance was mainly due to the revenue growth and strict cost controls especially related to the provisions of bad debt. The decline in the cost of goods sold also helped. Operating cash flow was positive by BRL1.228b in the year, 68% above the one in 2005 and mainly due to customer accounts receivable management.

If we move over to page 18 we'll talk about net income. And the net income for the quarter was mainly impacted by three major issues. Number one, the second corporate restructuring phase that allowed Vivo to record fiscal tax credits that had a positive impact on quarterly and annual earnings. Number two, BRL136m that were recognized from the reversal of PIS and COFINS accrual. And number three, the write off of fixed assets totaling BRL278m in the fourth quarter of 2006.

Let's move forward to page 19, where we'll talk about financial results and gross and net debt. The net debt fell by 14.3% over the third quarter of 2006, as a result of higher cash flow, working capital management and the restructuring of financial debt which was possible due to the corporate restructuring. As a result, the above mentioned impact plus the reduction of the interest rates during the period, the net financial results improved by 27% in the quarter.

GSM EDGE projects was one of the major investment goals during the second semester of 2006, and even so the CapEx over net revenues ratio was lower than the previous year by 1%. Projects implemented in 2006 were the GSM EDGE overlay, the quality and coverage increase of CDMA 1xRTT network and EVDO, expansion of transmission routes as well as new lines to rationalize costs, IT integration, mainly billing, collection and [service], development of new products and services, opening and remodeling of own and third party stores, handsets for the corporate segment and network and IT improvement and [inaudible] stability.

We go to the third chapter of this presentation. Let's move to the page 22 and talk about the corporate restructuring that took place during the quarter. And basically we can say that it brought benefits to the organization in terms of efficiency, administrative streamlining and network and financial resources.

In order to achieve this goal, the various operating companies held an Extraordinary Shareholders Meeting on October 31, 2006 which approved their merger into Global Telecom, which afterwards of course the name was changed to Vivo S. A. and those were consequently extinguished. This concludes the second phase of the corporate restructuring which began with the merger of the five holding companies into a single one, namely Vivo Participacoes S. A.

Net fiscal credits amounting to BRL740m were recorded in this quarter. And out of this total, BRL1.1b was credited stemming from the loss carry forwards of the former Global Telecom and BRL360m written off belonging to those companies that were incorporated.

Okay. I'll hand over to Mr. Lima for the conclusion of this presentation starting from page number 23.

Thank you Ernesto. So on page 23 we talk about the human talent and as you know Brazil is a highly competitive market and the need to maintain our leadership requires from us constant effort and investments in the ongoing development of our staff. Seeking to build the skill needed to make the Company even more competitive, in 2006 we trained 2,161 employees in technical and leadership programs.

On page 24 we see the Instituto Vivo activities, which handles the Company's social investment. We directed in 2006 its focus in supporting educational initiatives for youngsters. The Vivo Voluntario, a volunteer program, instituted several social initiatives to benefit communities where the Company operates, such as Christmas and Children's Day campaigns. In 2006, volunteers worked on editing and typing material for the Braille format and recording audio books. Approximately 510 hours were recorded in Vivo Voluntario's facility in Rio de Janeiro and more than 39,000 pages were printed in Braille in Sao Paulo unit.

Also in 2006, Instituto Vivo gave courses in material review and reading as well as audio description, a technique that allows volunteers to describe a theater play to the visually impaired. Audio description at the Vivo Theater, the only place in Brazil that has the necessary equipment for this activity, began in October 2006 and after two months the Company volunteers had already audio described one play to more than 120 visually impaired people.

On page 25, the Instituto Vivo activities in what concerns the culture and the environment. In the social environment responsibility area in 2006 Vivo began collecting handsets and accessories from stores for use and recycle under the slogan, "Your useless mobile phone can help connect the world to a better future", the first mobile phone operator to implement such a project.

Besides benefiting the environment, the campaign also brings social benefits since all the phones raised from reusable cell phones will be donated to the institutions supported by Instituto Vivo.

Vivo also undertook other environmental initiatives and campaigns, including promoting the selective collection of material for recycling and the correct disposal of hazardous wastes such as batteries, fluorescent lamps, hospital waste and electro and electronic equipment.

And so, as final remarks, we should say that in 2006 we laid more solid foundations to ensure that Vivo maintains its leadership of the Brazilian market. And our challenge remains in 2007. We will drive our efforts towards spreading throughout the Company the awareness of our own strengths and weaknesses, to focus on customer satisfaction as a way to improve loyalty and profitability and all that maintaining the strong financial management we did in 2006. Thank you all for the attention and now we wait for your questions.

Thank you. [OPERATOR INSTRUCTIONS]. Your first question comes from Vera Rossi of Morgan Stanley.

Thank you. I have two questions. The first question is on your net additions. What is the level of net additions you expect for 2007?

And in terms of CapEx what is your forecast for 2007? Thank you.

Good morning Vera. So we won't disclose any figure about 2007 and even about CapEx or net additions. But the only thing we could say is that CapEx, for the authorization that we have today, should be lower than the CapEx we did in 2006.

Okay. But in terms of just going back to the net additions, in '06 you had for the year a negative level because of the disconnections you had to make in the second quarter. For '07 where do you see your market share going? If you don't have the number of absolute net additions, but what are your plans in terms of market share versus your competition?

Vera, when taking the market share in the number of users we should consider that in the GSM world it is easy for you to buy a handset today and receive two or three new chips with different operators and all these chips are counted, are recorded in the Anatel as new users. So we prefer to consider our attention to the market share in revenues, not only numbers of users. So this is what we are looking for.

And do you expect to maintain your market share of revenues that you have today during 2007?

Yes, we expect to.

At least to maintain, or you expect to increase?

I think it is difficult for us to disclose all the strategies we have. But on the running rate, by the end of the year, we should see something different than we are seeing now.

Okay. Thank you.

Thank you. Your next question is coming from Andrew Campbell of Credit Suisse.

Yes, hi. Just going back to CapEx for a moment. Of the BRL1.1b in CapEx you had in the fourth quarter, approximately how much of that was from your GSM CapEx?

65% Andrew.

55% and --

Excuse me. 65%, but it's the same number. The total amount that we disclosed to the market that the GSM network, plus all of the integrated systems would cost to us, was BRL1.080b. Out of that amount, 65% was already recorded by the end of December 2006.

Okay. And of that original guidance, the BRL1.08, do you feel that's still realistic or do you think it may need to be a bit higher than that?

I don't mean realistic. It's the number.

Okay. Understood. And I saw you had a pretty significant increase in your account payables in the quarter. I guess that's probably the equipment that you're purchasing, partly the GSM equipment. And in terms of when those payables will go back and you'll have to convert that and pay in cash, I mean should that already happen perhaps in the first quarter or is that a longer term process?

It depends upon the different contracts. You are right. The increase in accounts payable was due to the GSM as you can imagine we disclosed -- we launched to market that we're going to invest back in July, July 21. We were able to sign the contracts during August of last year. And it's been quite a challenge to go throughout Brazil, so more than, almost 7,000 cell sites. So basically the increase is because of that. According to the different contracts, we have payments due 60, 90 and 180 days.

Okay, super. Thank you very much.

You're welcome.

Thank you. Your next question is coming from Walter Piecyk of Pali Research.

Thank you. And thanks for the further clarification on the CapEx. I am not sure what else you guys have to say before people believe that GSM CapEx number. Can you just respond to a couple of questions on the operating line and then one on strategic? For G&A it was up 30% sequentially. Were there any one time items there?

Yes. If you compare fourth quarter versus fourth quarter, we reduced that amount by 11.5%. When you compare that to the third quarter, we basically had the fees and different expenses that were needed in order to set up the GSM network as far as rents and expenses. And also, all the consulting fees that we had as a one time because of the corporate restructuring we made back in October 2006.

So in aggregate what do you think those numbers were in the fourth quarter as far as the G&A expense?

G&A I would say that were around BRL30m.

BRL30m?

Yes.

Excellent. The other question is, excuse me, as far as the strategic future for the Company, I guess there has been additional press reports about the interest of Telefonica in Portugal Telecom's stake. I'm just curious, if, assuming that Telefonica has an interest in the overall Company or other, another investor has an interest in the overall Company, can you give investors any type of comfort with regard to the allocation between the ordinary and the preferred shares, as far as what management would accept, in a purchase of the Company, as far as the value between again between the ordinary and the preferred shares? Thanks.

We apologize but I think that we shouldn't comment on that.

But is it so the management can't comment that they would defend the value of the preferred shareholder?

No we should defend the value of the preferred shareholder. This is what we are doing with the results and we are trying to get for the Company. I think this is what we should do. So questions related to our shareholders, our controlling shareholders, I think that they should work on that. So we are doing our best to have a healthy Company, to have good performance in the market and on the financial side.

Okay. And then just one last question. On the bad debt, I know in your prepared comments you talked about a couple of things that you've done but I missed them. Can you just again return and talk about the specific items that were taken to get the bad debt to such a low level? Thank you.

Okay. First of all it was you know that in the past the bad debts were impacted by the fraud and cloning. This is something that has disappeared in the Company due to the projects we drove in 2006. So we don't have this impact. It doesn't mean that we will abandon the effort to control fraud and cloning. You never know when it can happen again. So we maintain all these structures to control this side of the business.

So and the other side we have been very strict in implementing the new credit policy on the Company, new procedures, new systems. We are using new partners to evaluate the credit score for appliance for the Company. So I think this is one of the areas where we made a good progress in 2006. And what concerned the 1.8% over the net revenues, we think that this is a number that is very low --

Yes.

Very low. And for the future, if you want to be a little more aggressive in the postpaid, we should accept a higher number.

Okay. Great. And then, I'm sorry, just one final question. Your EBITDA is obviously the revenue is finally accelerating now, the margins are kicking in. You mentioned that your CapEx is going to decline. So it appears that you're going to be looking at some very significant free cash flow in the upcoming years. Can you just review with us how you look at a dividend policy? How often is that reviewed? When should we expect that to increase? And is share repurchase a consideration when you're looking at that significant free cash flow? Thank you.

You know that even though I think we are doing good at this time, Brazilian market is still a very competitive market. It is very volatile. So it is difficult for us to forecast what is going to happen in the margins in this sector in Brazil. So, but we expect to be the number one in terms of EBITDA margin. And we start producing positive results or positive net income, once the sector as a whole permits that. So the level of commercial expense we have nowadays with subsidies and all that, all other investment in advertising that the market asks for us to do, so it prevents us to maintain higher levels of margin than we are doing today.

I understand that. But your leverage right now, your net debt to your EBITDA is very low. Your EBITDA is obviously growing. So this is going to be a very big free cash flow story for 2007 and 2008, I guess. Investors have --

I have something in mind that apparently was not pointed out or not taken. You mentioned about CapEx levels and we said that 2007 is going to be less than 2006 as it was less than 2005. Those CapEx take into account the investment that we need in the area that Vivo covers today, okay.

Okay. Thank you very much.

Welcome.

Thank you. Your next question is coming from Patrick Grenham of Citigroup.

Good morning. This is actually Gustavo Oliveira. I have a question going back to accounts payable. You also mentioned in your press release that you have some standby credit facilities of BRL1.1b. Could you please comment on the likelihood of using that credit?

That credit facility it is a tool that we have in order to provide us for liquidity. We have a policy to provide with a certain amount of cash. And it is not related to the accounts payable. But it is basically to have a line in terms of what might happen based upon the plans we have. So it has nothing to do with the increase in the accounts payable by the end of 2006. But it is basically a measure in order to provide for liquidity taking 12 months in a row.

Okay. But do you think you're going to need it in the short term?

No.

Okay. My second question is regarding the GSM rollout. Could you please give us an update on how that's going on and when do you actually intend to launch a full GSM services?

We already launched the GSM service for the prepaid customers. We are selling new GSM handsets all over the country. We launched that in December last year, starting by Sao Paulo and Rio de Janeiro. Now we are covering all the country in the most important municipalities and in the capital of the states. And next step is to launch the postpaid. That should be ready before the end of the first quarter.

And what's the percentage on your net additions? What are the percentage of GSM customers that you have? I assume that in 2006 in the last quarters probably very minimal if anything. But going into the first quarter of '06 and going forward, what's the percentage of subscribers that you think will come from the GSM?

You were right when you say that it was minimum in the last quarter but we wouldn't like much to disclose this information now. So, for us not to give this information to the competition is very important.

Okay, thank you.

Thank you.

Thank you. Your next question is coming from Mauricio Fernandes of Merrill Lynch.

Thank you. Good morning. Just a question on income tax. You had a big income tax reversal in the quarter that I believe has to do with merging all the subsidiaries. Do you, for doing the reversal right now, do you expect to generate - I don't know if you can answer that - but do you expect to generate pre-tax income already in 2007 so that you are able to use that tax credit? Or if that's not necessarily true, you might only start generating pre-tax income from 2008 or '09 onwards? Thank you.

Okay, Mauricio it's not a reversal as a matter of fact. It's the recording of the loss carried forward that the company that incorporated all of the other operators had and had not recognized in its balance sheet. And so it's not a reversal. It's really the creation of the deferred assets.

And as a matter of fact, once we have only just one operator, as of November 1st, all those companies that were profitable and paying income taxes will stop doing it as from that day. So basically, the incorporation allowed us to compensate those losses carry forward and to save money in terms of tax.

And so is -- understood. So will -- do you expect it to -- even though you did it right now, do you expect it to start using that credit already in 2007 or not?

That's difficult to say. We stopped paying. That's another way of answering your question. Using it, it will depend upon the drivers of the market and although we have a plan and we are executing that plan, we'll need to be very alert to what the competition is going to do.

You know that acquisition costs plays a role in the income statement of each of the different telecommunications companies. So I wouldn't like to submit a number saying yes, we will use it because in that case we're going to be driving yourself to say that we will be net income positive. And again, although we have a plan, we need to be having a close look at what the competition is doing.

Okay, understood. Thank you.

Thank you. Your next question is coming from Carlos Sequeira of UBS.

Hi, good morning. How much of the reduction in bad debt provisions came from the extraordinary efforts made in the quarter? Or maybe another way to look at it is what is a normal level of provisions for bad debt as a percent of revenues that we should expect for the coming quarters?

Okay. Well 1.8 is a very low level. It is not a running rate. That was a question that has been asked many, many times. The extraordinary issues that we were able to cash in was about BRL50m during the quarter. That was due to the fact that we launched campaigns with different credit agencies in order to get back our money. Not represented that we were able to get back those customers, but by showing a number of actions, placing names into the credit bureaus agencies we were able to get that back.

If you look at the other operators, uncollectability stands around 4%. So at 1.8%, although it's a challenge and we'll do our best to keep that in mind, I don't think it's going to be a number that you should use in your models.

Okay, 4% of gross revenue you said as a normal level, maybe?

Yes, that's the market level.

Okay. And just another question on another subject. Should we expect higher marketing expenses related to the launch of the GSM services to prospect clients in the next quarter?

No, we are not advertising the launch of GSM. We were advertising services going to rent to our customers all technology GSM or CDMA. We don't want to make something specific for GSM. So what we'll offer to the customer is the best choice among the two technologies, but in terms of service not in terms of technology.

Okay, thank you.

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

Hi, thanks very much. I've just got a quick question following up on that really, on CDMA and GSM. Do you have any plans, at this stage, for any migration over from CDMA? Do you have any thoughts of what you might do in order to migrate customers over? Maybe that's for later on?

Can you get closer to the microphone? We are not able to listen to you.

Can you hear me now?

Yes.

I was just wondering on your GSM Mobile whether you have any plans at this stage for customer migration and what your thoughts are in terms of migrating customers over from CDMA are at this stage?

In the GSM we are looking for new customers, not for customers you already have to migrate from CDMA to GSM. So we are selling on the stores and the dealers and on the retail.

And in the future, the launch of the postpaid, we're going to look for the roamers, international and domestic roamers. So the fact that now we have a digital coverage all over the country. So, but this is what I think I can say and the program is exactly on what we projected.

Okay, thanks.

Thank you. Your next question is coming from Eduardo [Cabel] of Frost Sullivan.

Good morning. My question is related to GSM Moville. I don't know if you could give us some guidelines for us to put in our models here. I basically wanted to understand what is the percentage of ARPU increase that you are expecting within GSM Moville.

And I know you just commented that you are expecting to get more customers from the GSM side and are not planning to migrate any CDMA customers. But could you give us some guidelines on what the percentage of the ARPU increase that you are expecting? Thank you.

No, I don't think that we can provide that information. You know that in some countries of Latin America the implementation of GSM improved the ARPU, but we should keep this information non-disclosed.

Okay, thank you.

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

Hello? Yes, it's Ricardo Seara from BPI. I would just like to know if you are providing any targets for -- you mentioned market share in terms of revenues, if you are providing any level of market share expected for 2007 revenues? Or else if you are willing to provide some targets in terms of revenue growth and EBITA margins for '07 as well? Thank you.

Now what we have is our balanced score card, internal balance score card but we won't disclose this information. But we are looking to grow our revenues.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. We do have one question coming from Fernando Ramos of GBM Securities.

Good morning everyone. I just wanted to know when will the GSM overlay be fully paid for?

You're talking about the network?

Yes.

By the end of the first quarter.

Okay, thank you.

You're welcome.

Thank you. We have one follow up coming from Ricardo Seara of BPI.

Sorry, regarding margins, at least can you say if the 27% adjusted margin you booked on this quarter, EBITA margin I mean, is sustainable for the year 2007?

The 27% is restated margin considering the restatement of Bill and Keep. And also the PIS and COFINS. So you know that when we consider the full Bill and Keep, the margins increase even though we generate a profit in the interconnection sites.

So the result is positive, but in terms of margins, reduce the margin. So this is why we restated the EBITA margin in this case. But we cannot advance any numbers in terms of margins.

Thank you.

[OPERATOR INSTRUCTIONS]. There appear to be no further questions. I would now like to turn the call back to management for any closing comments.

Once again, we thank you all for attending our conference call and we are very confident on the capacity of this Company to turn around and to start producing better results than in the last two quarters -- the first two quarters of 2006.

I think the last two quarters were very good for Vivo. We put in place all the projects we had for the Company. Now we are putting our efforts in having the national coverage. We are dealing with Anatel to have the frequencies we need to start going in other regions than the regions we are nowadays.

We think that the team we have in Vivo is very important in all the areas and you see the good job that was done in the network side, on the marketing side on the financial side. So I think that we have a very solid Company and solidly base to start growing again in the next future.

Thank you very much.

Thank you. This does conclude today's Vivo Participacoes S.A. fourth quarter 2006 earnings release conference call. You may now disconnect your lines and have a wonderful day.