Telefonica Brasil SA (VIV) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to the Vivo Participações First Quarter 2007 Earnings Release Conference call. Today with us we have Mr. Robert Lima, CEO of Vivo Participações and Mr. Ernesto Gardelliano, CFO of Vivo Participações. Today we have simultaneous webcast with slide presentation on the Internet that can be accessed at the site www.vivo.com.br/ir.

There will be a replay facility for this call on the website.

(OPERATOR INSTRUCTIONS)

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 depends on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Vivo and could cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. Robert Lima, CEO of Vivo Participações. Mr. Lima, you may begin your conference.

Going morning, ladies and gentlemen. On behalf of Vivo Participações S.A., we thank you for attending this meeting for the announcement of our first quarter 2007 results. Please go to slide number three. And we can say that the first quarter 2007 results already reflect efforts made by the company in restructuring and reinforcing its competitiveness and operational and financial management skills.

The quarter highlights are EBITDA 5.6% increase over the first quarter 2006. Outgoing traffic 22% up from the first quarter 2006 and the results of consumption incentive campaign. Prepaid recharge, the financial volume of recharge increased 20.5% over the first quarter 2006 as a result of incentive campaigns and great number of sales points. Distribution channels, we increased the number of our own stores in comparison with the first quarter 2006. Vivo now has 203 owned stores, almost three times higher than the first competitor in our operational area.

Data revenue and value added services, 28% over the first quarter 2006. This is a historical record for a first quarter and is the result of the adoption of service with higher added value. MOU, 10.3% increase over the first quarter last year. The ARPU 18.1%, up from the first quarter 2006.

The net results losses reduced by almost nine times when compared to the first quarter reaching minus R$19 million. Operating cash flow plus changes in working capital, positive in R$296 million. Net debt 26% reduction with regard to the first quarter 2006. After the debt restructuring part of the short-term debt was turned into a long-term debt. Today the short-term debt represent 32% of the total debt compared to 40% in 2006. All the short-term debt is covered by the company's (inaudible - technical difficulty) and operating cash inflow.

GSM EDGE, on December 2006 GSM was offered to the prepaid segment and at the beginning of March for the post-paid one. At the end of the first quarter 2007 we had almost 360,000 of GSM customers representing 16% of total additions in the period and 33% of margin total additions. Our GSM network provides national digital coverage.

Unified systems, 100% of the customers have already been integrated into a common platform. The synergies provided with simplified process such as billing and collection, besides it may lead the company for the faster development and launching of products and service.

On the next page we see some examples of marketing campaigns and we should say that Vivo launched a recognitioning campaign on March 11th showing everything that has already been made to all our customers' experience our best in class mobile phone service.

The next page we should say that in addition to the repositioning campaign and among the main commercial activities in the quarter we could point out Vivo and Telefonica partnership that allows the postpaid customers using speech to place free calls from their Vivo cell phones to any fixed phones and from their fixed phones to any Vivo cell phone during every weekend through 2007.

R$1,000 and 2,500 minutes promotion. Following Vivo's strategy to stimulate the use of cell phones and reduce interconnection cost Vivo has just launched promotions offering progressive bonus to both new and existing customers which are entitled to on net promotions basis upon purchase or [CPEs] trading. Migration of pre to postservice plans are also enabled to this benefit. The amount of money to place these on-net calls will vary depending on the service plans adopted or the amount of credit recharges on the prepaid phones.

On slide number six, the new GSM EDGE network is capable to WCDMA, provides our customers with national digital coverage. Vivo covers 2,295 municipalities against 1,782 of the second competitor in our operational area. Vivo maintains its national retail share leadership with 40% of this channel total sales, 19% above the second place.

In this quarter 40% of the sales to individuals were made through the company's own stores, the postpaid service segment accounting for 77% of this channel total additions, a 46% increase over the first quarter 2006. The sales in our own stores increased by 18% in the year as a result of the channel expansion.

We now have more than 338,000 points of recharge. For this proposal, we have entered into partnership agreements with company's such as [Tosa Cruz], Visanet and more recently with Santander and Bradesco Banks through their following correspondent bank service, Santander Bank Presto and Bradesco Expresso.

Moving to page 8, the company's focus continues on the acquisition and maintenance of value customers prepaid and postpaid keeping rationality and search of positive results in each campaign and business action.

Features that add up to Vivo's performance are namely Vivo's caller service plans which were adopted by 32% of post-paid individual customers, a wider range of handsets particularly of the GSM technology, continual improvement of the service provided and a greater number of sales points. Vivo is the market leader in its operational area with 37.6% market share.

Moving to slide number nine, loyalty and retention. In the first quarter 2007 Vivo continued its customer loyalty and retention efforts focusing on high and the medium value customers prepaid and postpaid. The rewards program for replacing handsets remains the main tool for the postpaid retention. Other recharge and traffic incentive actions were taken with the granting of on-net bonuses. The company also had the right client campaign, active telemarketing targeted at customers with the consumption profile inadequate to their contracted plans. Improving the client's satisfaction. As a result of these actions and considering the competitive pressure churn remains under control.

Recharge, Vivo has been investing in the expansion of virtual credits or electronic recharge resellers which so far accounts for 40% of the total recharge. The recharge operation showed sustainable revenue growth together with a cost reduction as a result of greater share of electronic channels, banks, distributors and virtual sale retailers.

Vivo has more than 338,000 recharge points. In the first quarter 2007 Vivo launched recharging incentive campaigns such as the bonus up to R$1,000 every month paid by Vivo.

The 20% overall improvement year over year in acquisition costs was due to lower subsidies, reduction of advertising and exchange rate variation. Cost of equipment sold within this item accounting for an 18.7% reduction, 30% reduction quarter over quarter mainly derived from lower subsidies and change in the payer distribution mix.

Page 11, the MOU, MOU was 10.3% higher than in the first quarter 2006. The increased on-netoutgoing traffic contributed for such growth due to the introduction of new plans, promotions and segmented campaigns. With regard to the fourth quarter 2006, the 8.5% reductions is the result of the seasonality between periods where the first quarter is historically lower due to the vacation and less number of working days.

ARPU the company's focus continues on the acquisition and maintenance of value customers prepaid and postpaid balancing pay backs in each campaign and business action. The maintenance offers 30 ARPU even with the typical seasonality in the period shows Vivo's customer base equality.

Now I could ask Ernesto Gardelliano to talk about the financial performance. Thank you for your attention.

Thank you, Roberto, good morning everyone. Let's move over to page number 13. During the first quarter Vivo experienced net service revenue growth of 15.4% year over year. As we see the outgoing usage and data revenues were up 7% when compared with the first quarter 2006 and when compared with the last quarter the 2.5% decrease was due to seasonality between periods basically because of a lower amount of workable days and holidays. As already mentioned, the 20.5% increase in the financial volume of recharges between first quarter '07 versus first quarter '06 correlated to the revenue growth.

This recharge operation shows a sustainable revenue growth with a cost reduction justified by better mix in the less costly channels and a decrease in the average commissioning costs. Let's move over to page 14 where we will talk about net data revenue.

Data revenues and value added services in the first quarter 2007 reached a historical record for the period, 28% higher than the first quarter 2006 and almost 50% of these revenues were not SMS related. There were several actions taken to reach this rate including downloads. Today we are one of the largest digital music stores in Brazil with more 120,000 full titles sold monthly. We also have a campaign coming from synergies with Telefonica namely (the Big Brother) Brazil Voice Portal Number 7, which was created with an attractive and varied range of content for the user and also a Reverse Dutch Auction Voice Portal in partnership with the SBT (TV)network.

Brazilian users of mobile telephony are always looking for technological advancements to facilitate their day to day life, Vivo has taken the message and met this demand by innovating and placing in the market a new range of tracing applications that ensure greater security and comfort for the customers such as Vivo Locate Family service. This service ensures speed and precision from 10 to 30 meters in open areas and from 50 to 300 meters indoors. It is already available to customers in more than 300 cities throughout Brazil.

As a result Vivo's data revenue and value add services accounted for 8.2 of the total net service revenue during the first quarter of 2007. I'm showing page number 15 the breakdown of operating expenses is as follows, cost of services rendered. You have a 65.1% increase year over year due to the change in the partial Bill & Keep rule applying to interconnection. In this regard should we apply the former regulation, the mentioned evolution would have resulted in a 1.6% reduction year over year and a 0.9% reduction also when compared to fourth quarter 2006.

As far as our human resources are concerned, we recorded an 11.6% increase year over year due to agreements signed with the different unions related to salary and benefit adjustment as well as restructuring and severance expenses. When comparing quarter over quarter we recorded a 6% reduction mainly due to the reduction, the cost reduction campaigns that we launched during the last four months of 2006 with related impact in this amount for the former year.

As far as cost of goods sold, 18.7% and a 15.6% reduction year over year respectively without impacting operational performance, this focusing on sustainable growth and improving OCPs mix. A scattering position with suppliers, GS influence as well as the local currency operation contributing to reducing these expenses.

Bad debt amounted to R$107.4 million representing 2.7% over gross revenues, a 33.3% reduction year over year. Last year we recorded R$161 million which represented 4.5% of gross revenues. This outcome is derived from all of the different actions taken as from the second semester 2006 on both new and existing customers.

Selling expenses represented 12.9% and 8.4% reduction year over year and quarter over quarter respectively. When we talk about G&A we have a 21.2% year over year increase mainly due to net (inaudible - highly accented language) services and 2.2 reduction quarter over quarter is basically coming from the seasonality between periods.

When we move over to page number 16 EBITDA during the first quarter was R$757 million, 5.6% higher year over year resulting in a 26.6% of EBITDA margin. Should we apply the end of the partial [B&K] grew also to the prevailing year EBITDA would have been R$745.8 million with a 29% EBITDA margin, 1.9 percentage points year over year. In the charge we show with different colors the actual EBITDA margin as well as EBITDA margin that would have resulted without applying the end of the Bill and Keep rule.

Operating cash flow, namely EBITDA less CapEx plus change in working capital, generated R$297 million in the quarter while during the same period in 2006 Vivo used resources in the amount of R$114 million.

Page number 17 accounts for the net loss -- the message that we would like to tell you is mainly that we have had nine times improvement year over year. That extraordinary non-recurring items in the fourth quarter amounted to R$876 million and this improvement in the net loss is mainly due to the better financial results that we will cover in the following page.

Vivo reduced its net financial expenses $67.5 million in comparison with the first quarter 2006. Such reduction results from a drop in the net indebtedness and a restructuring of the financial liabilities. When compared quarter over quarter, the higher operating cash flow and the effective interest rate reduction in both periods were the main factors that led to a decrease in the first quarter financial expenses.

We were able to change the profile between short and longterm by improving year over year from 40% of Vivo total debt to 32% and 35% in the last quarter. We are currently working on structural operations with development organizations and we have already put in place a shortterm liquidity policy with better cash from management and standby facilities.

In page 19 we talk about capital expenditures. During the quarter they accounted mainly for the GSM EDGE overlay. As a result the investment made during the quarter reached a total amount of R$235.4 million representing only 8.3% of net revenue.

I would like to pass over to Roberto Lima for the final remarks. Thank you very much.

Thank you Ernesto. I'm glad to conclude that Vivo management was able to deliver and to present to all of you these consistent achievements during the last three quarters. Vivo results didn't come from nowhere. They reflect a strong commitment of the team in restructuring the company. They also reflect the investment we have made in IT network, but they do certify that the investment Vivo has been making in people is crucial to achieve our aggressive goals. It's clear especially when talking about the sales force and the in-place in direct contact with our customers.

I'm positive that we've found out the correct positioning to exchange the customers to a higher level of quality and services. I'm aware of the depths we still have to cover to achieve the level of excellence we desire for them. It's our belief that linking our responsible financial and operational management will enable us to reach our main objective, reinforce our competitiveness and recover the customers we have lost in the past.

I would like to thank you all for your attention and now we are ready for your questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Andrew Campbell of Credit Suisse.

Yes hi. Just looking ahead now to the second quarter you mentioned the campaign that you started on March 11th and we've also seen some of the promotions that you've been doing for Mother's Day in terms of handsets that you're offering for R$10 and this kind of thing. And I'm just wondering how we should think about the margins in comparison to the first quarter. Is the first quarter a sustainable level of margin or should we expect that this is perhaps high relative to what's going to happen in the second quarter?

Andrew, in terms of margins we think about the second quarter, take into account the seasonality because basically we have Mother's Day, that's the second most important campaign after Christmas. So probably the margins are going to go down since everybody has been noticing that we are more aggressive. And just to say something else, part of the 23,000 negative net adds that we had in the quarter just in the month of March, we had more than 130,000 positive net adds. In April it was over 100,000 and we are going for much more. So probably that's going to have an impact. But again you have third quarter that is going to be of a different level of activity that is happening in the sales throughout the years.

Okay. Just to make sure I got the right number for April was it 103 or 130, 130,000?

134, for March 134,000 just in March.

In March, okay sure. And I think just related to margins you mentioned there was some -- it looked like there was some severance that came in in the first quarter. Was that a material amount in terms of the reduction we could see in the second quarter?

Non-material, I wouldn't say it's business as usual but they derive from the fact that after restructuring all the different companies after integrating all of the different or 100% of the customer base in just one common platform, we are trying to make this organization as flexible as possible having in mind that our (inaudible - highly accented language) has declined.

Okay, thank you.

You're welcome.

Thank you, our next question is coming from Vera Rossi of Morgan Stanley.

Thank you, I have a couple of questions, my first question is about your gross additions. Of your gross additions this year, what is the breakdown between GSM and CDMA? And the second question is about your ARPUs. You have representing a significant improvement in ARPUs because of the campaigns to increase usage both in voice and data. Do you think this improvement that you are seeing is sustainable going forward? Thank you.

Vera, in terms of gross additions throughout third quarter the number of GSM it was 16% but just in March that amount went up to 33% and it's growing. In April it was higher than that number. In terms of ARPUs as you mentioned let's say we launched and based upon the different fronts that the company started working or decided to face well the results we got in APRUs are mainly derived from the incentives that we put in place basically during the second semester of 2006. Take into account that recharges for prepaid grew more than 20% year over year. Take into account that on those recharges we have launched a specific card that on top of the normal usage you will get for R$1 an additional package just for data.

As you've seen the data revenues went up significantly. That's part of the strategy and all of those incentives that we put in place that we still have so you can go to the different stores and get a new phone today. But basically having in mind that those incentives will try to get usage from our customers in a way that all of them are on net, thus avoiding inter-connection costs. But they're basically stemming from the incentives in terms of what else can be done in terms of data as I mentioned during the presentation almost 50% of the data revenues are nonSMS. SMS played a big role during this quarter. We lowered prices in Sao Paulo that had an immediate reaction, an immediate elasticity that proved to be very, very beneficial. And we keep on seeing that path. That is something that is always on our table, and will depend obviously upon the working days and the different periods throughout the year. But it's not a one time issue that made us possible to disclose these numbers today.

Okay so you believe this improvement is likely to be sustainable going forward, is that correct?

Yes at least let's say I cannot disclose April numbers but I'm telling you that ARPUs for April again did not go down by 50% or 30% or whatever. It was not just an issue for the quarter. Let's say all of the campaigns are targeted at first of all the different segments and based upon them to trying to get the best in terms of the different networks within Vivo so that the perception in terms of price benefits us. Let's say that's homework to do. Let's say we were seeing -- still we have some issues to overcome in terms of pricing but that has played a significant role in keeping those ARPUs at the level that we have disclosed today.

Okay and my last question is about your subscriber mix I couldn't find in the press release the breakdown between postpaid and prepaid and I realize you had disconnections this quarter. Could you tell us what was the breakdown at the end of the quarter between prepaid and postpaid users?

You haven't found that because that data has not been disclosed. And that data has not been disclosed also in the fourth quarter. Because of the competitive environment we decided not to put that in place because we have seen and based upon different reviews during the past that that was part of the campaign where our competition targeted us. So basically we're disclosing as a whole, and no we are not disclosing what it is prepaid and what it is postpaid.

Okay thank you.

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

Good morning just two questions. First of all as a follow up to Vera's on the postpaid/prepaid mix although you're not disclosing the breakdown on that 16% of gross additions that was GSM in March and 33% you're seeing in April could you give us an idea of how many of those additions, of what proportion of those additions are postpaid?

Patrick, 16% was for the quarter and 33% just to March.

Okay I see, okay. The proportion --?

And what the question was exactly because I --?

Do you have an idea of how many of them -- a rough idea of what proportion of those GSM additions would be post-paid.

Well, we can say that the major part is prepaid because we just launched the postpaid operation March the 8th, so the second week of March. So the contribution of GSM postpaid in March is very low but we should say that March we made 134,000 net addition -- a net addition of 134,000 and we could say that the proportion is better than the 20% 80% between postpaid and prepaid.

Okay and the other thing is on your acquisition costs, you've seen a drop in your acquisitions costs. Now that you're back into pushing GSM on postpaid GSM, will you see those subscriber acquisition costs increase in second quarter and third quarter?

No GSM handsets have a lower subsidy. We just have one system platform to erect all the new sales we do so I think that we are selling much more in our own stores, 40% of the individual new additions we have are made on our own stores where we have a lower cost because they take commissions for that. So there's a serial of elements that contribute to the reduction of the SAC.

Okay the reason I'm asking the question because the acquisition costs on postpaid is much higher than prepaid and if you're now improving your share of postpaid additions, it suggests that your acquisition costs are going to go up.

But again what Roberto is saying, Patrick, in terms of customer acquisition costs obviously the same expenses are going to grow as a total amount and that is part of the answer that I mentioned before in terms of margins let's say. Whenever you have a higher commercial activity, it's going to be impacting your P&L.

Okay and the last question on your CapEx what's your CapEx gains for all of this year and all of the next, and what proportion of that is going to be in GSM?

GSM we disclosed last year that the total investment was R$[1.08] billion, R$[1.08] billion . That has not been already launched, has been 100% committed. Now let's say we can say that in terms of coverage we are one to one with CDMA. What is still pending from that is capacity. As soon as we keep on adding GSM customers and looking into the traffic patterns we'll keep on growing in terms of capacity throughout the year.

Out of the total commitment for this year, for this year, I believe that I would say 50% of the total committed amount for CapEx or planned amount for CapEx is from GSM.

Okay so you're talking CapEx for this year then?

It's 1.8.

1.8 and I know it's very early but 2008 we should look at the same type of CapEx but it will shift towards capacity expansion and GSM and away from CDMA?

Let's say I think it's premature to talk about 2008 already.

Okay, okay thank you.

Thank you. Our next question is coming from Henry Cobbe of Nevsky.

Hi there thanks very much for the call. Just a couple of questions, first on the revenue side, you mentioned that the adjusted APRU, adjusted for Bill & Keep was up 3% year on year. And given the subscriber base, the average subscriber base declined 3% year on year. Does that imply that the adjusted revenues of Bill & Keep were actually flat year on year and the margin improvement of 1 percentage point or margin EBITDA versus 1 percentage year on year came simply from the marketing cost reduction, can you confirm that?

Okay let me tell you. In terms of total revenues, total service revenues if you compare year over year without Bill & Keep the increase would have been only 0.44%. But take into account that outgoing traffic plus data if we take into account incoming service revenues they were up 7% year over year, outgoing, without taking into account incoming.

So that's one question, the second the 1.9 is not only because of selling expenses but take into account uncollectability and G&A as a whole.

And could you give us some guidance on the tax rate for the year, you've got taxes coming out?

Guidance I think we are not in a position to disclose guidance throughout the year. Thank you.

Okay. And coming back to SAC you mentioned that the second quarter promotional activities will pick up and granted the GSM handsets are lower cost and we saw that come down in your cost of goods sold. But would it fair to assume that SAC would increase quarter on quarter due to the promotional Mother's Day impact?

No what we said is that the total amount of selling expenses is going to grow, but in terms of acquisition costs the unit we will keep that under control because it not only depends upon subsidy but which distribution channels we are using to get those new customers into our base. And take into account that we have more than 303, as a matter of fact, own stores, through those own stores we get almost 40% of our net adds -- no, of our gross adds, excuse me, and those channels have no commission. Let's say they are part of the Vivo structure and they are fixed costs and those we are lowering in terms of pay unit although the total amount is going to grow.

Okay thank you very much indeed.

You're welcome.

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

Piecyk, thank you very much. Just two quick follow up questions then I have a question. First when you were talking about the subs obviously it was 134,000 in March because the regulator reports that. But did you also reference there was over 100,000 in April as well?

I said that it went up 100,000 in April, yes.

Went up 100,000 awesome. The second question is on CapEx you just stated 1.8 billion but in the 20F there was a reference of 1.732 billion.

You're right, I round it up.

That's a nice round, okay. And then lastly on slide 15 you went through all those operating expenses which was nice, but you left off what you call other operating revenue and expenses. Now this is a line item that historically has actually been revenue. And in this quarter, it was a large expense. I know last quarter there was a one time gain but is there -- the press release you had some words in there about provisions and things like that. Can you give us a little bit more detail about what exactly that charge was?

Well the detail I believe it's explained in the press release in that line although during the last quarter we have more R$80 million in terms of revenues because of the reverse of the provision for fees to COFINS, this quarter we have recorded on that line, Provisions for Contingencies based upon the change that happened last year here in Brazil due to a regulation of the CMV that caused for a different way of recording a contingent liabilities. Because of the different --.

But that's a noncash item then?

It's a noncash.

Okay and that should just be a one time impact as far as the quarter is concerned?

As far as the quarter yes but again processes will keep on coming in and out.

Right.

So during the second quarter and this is something that I let's say, I wish, we are working with our lawyers in order to resolve those outstanding issues as far as civil and labor, whatever kind of processes Vivo is facing in order to get things done, to get them resolved. At that time, of course, is going to be a cash item but I do believe that we will be able to reverse part of those contingencies, liabilities.

So that contingent, because there's a lot of different items in that line item. Just the contingency itself you were saying was about R$80 million?

Yes it's about R$70 million.

R$70 million, and you also reference a reduction in the revenue from fines what does that mean?

That we have an issue with fines in terms of retention tools that you have to your customers that you bill them. In the past, most of them you bill, you try to keep those customers but in the end they became uncollectabilities, so we set up new policies in order to place what's really the customer is willing to get from Vivo and that is part of the change.

You're basically offsetting -- you're giving up some of those fines in order to try and retain that customer?

Yes.

Great, thank you very much.

Thank you. Our next question is coming from Brian Rusling of Cazenove.

Yes hi I have two questions really for clarification one on the SAC and one on CapEx-related GSM. On the SAC, I'm trying to imagine the number of 100 that you reported for the first quarter is a blended average over the whole quarter.

Yes.

And you only upped your marketing campaign in March, I was wondering how that varied as the first quarter progressed? And a second element of that is why is there such a difference between yours and TIM de Brasil's SAC? Is this to do with your 40% of connections through your own stores where there's no commission?

No, I believe the difference with TIM is based upon they changed their accounting policies and they decided to defer part of the subsidy in the past and well, once you defer you have to recognize as a loss sooner or later. As far as what the marketing campaign or the advertising campaign, I do not have in mind an amount of how much of the expense that we launched or we started on March 11th is going to be affecting let's say what part of that in terms of the total expense is going to affect second quarter customer acquisition cost.

Okay the second question in relation to CapEx, you just said that 50% of the 2007 CapEx of 1.8 is going to be GSM so R$900 million?

Yes.

And the total GSM spend is just over R$1 billion. Looking at my notes from the Q4 question and answer session so said that you'd already spent 65% of the GSM CapEx in 2006? Well that doesn't add up then. How much did you spend in Q4 of 2006?

Let me tell you -- let me tell you when we said the 1 billion and 80 it was the network, to build up the network in order to be in a position to offer GSM to our customers as an overlay to CDMA. The projections called for additional capacity based upon what we are looking these days. That capacity has not been already implemented. That capacity that we have so far as we disclosed in the press release at the end of March we have 359,000 customers, I believe, so that's based upon the projections we have in order to keep on growing within GSM. But the commitment is already there. The R$1.80 billion is based upon building a network that will provide for an overlay for customers by the end of 2007 and 2008.

So a 65% spent in '06 is probably right, so R$650 million spent in Q4?

That's right.

Did you then pay Ericsson in Q1 for that?

We paid part of that.

So it hasn't all been paid yet?

Yes, it's not only Ericsson. Let's not forget Huawei.

Okay and the R$900 million to be spent in '07 is part of the 1 billion but also additional capacity?

Additional capacity and again we have to have in mind whether the additional frequencies are going to be launched by the government or not. So we have to have a B plan for that.

Okay thank you.

(OPERATOR INSTRUCTIONS). Our next question is coming from [Fernando Ramos] of GBM Securities.

Hi I would like to know if an existing customer of yours decided to change from a CDMA to a GSM handset, would you have to pay the [fiscal] tax to Anatel or any given tax?

If that customer trade just the phone in and keeps on the same phone number, there's no additional -- there's no additional tax, the monthly tax. But of course you are going to pay for the picture at the end of the year as for every other customer no matter whether this is CDMA, GSM or TDMA.

Okay, thank you.

No additional cost.

Thank you, our next question is a follow up coming from Brian Rusling of Cazenove.

Just to follow up in terms of are there any restrictions stopping you doing network sharing with TIM de Brasil on 2G and potentially on 3G? And if you were able to do that have you thought about what's the coverage or how that would be implemented?

Are you talking specifically about site sharing or what?

Well it could be site sharing. It could be some of the radio network sharing. It depends what you're allowed to do in reality.

Site sharing is a common practice not only with TIM but with TIM, Claro, Brasil Telecom, Oi, with all of the different operators as well as they do with us and there's no restriction in terms of regulation that we are or we are not able to do that. So I don't know if that was specifically the question?

And also for the roaming in the air our view is not present like Minas Gerais and Nordeste. We have a roaming agreement with TIM so our customers use they and work on those regions.

And the part of the radio network?

Total network, Minas Gerais and Nordeste we totally use the TIM network for our customer when they travel.

For roaming.

Yes but I'm talking about the radio access network things like the Node-Bs and things like that.

In a place where we do not have a network, of course, but only just for roaming issues. The customer, our customer goes to Minas Gerais and plays and receives any calls using the TIM network, the 100% of the TIM network. Is that the question, because I don't --?

No, I'm thinking more explicitly about sharing Node-Bs. There's some technology that certainly we've heard about in Europe from people like Nokia and Ericsson where they can have two different frequencies using the same Node-B and therefore you would share the radio infrastructure on the cell site and therefore you could reduce your CapEx quite dramatically on the build out.

And you're mentioning let's say here in Sao Paulo that we share the network here in Sao Paulo where we both operate?

We share some sites.

But sites but not -- it's site sharing, and you having agreements wherever you do not have a network in a specific place.

Okay so you don't see easy shortterm synergies that can be done from commercial relationships between TIM Brasil and Vivo?

We are two separate companies.

Okay.

Thank you. (OPERATOR INSTRUCTIONS). Our next question is a follow up coming from Walter Piecyk of Pali Research.

Thanks I may have missed this but can you provide any kind of -- what your outlook is on how the progress is going to go on getting that license in Minas Gerais? I know there was a mention about it in the press release but do you have a sense of what the timing of when you might get that license awarded to you?

You know Anatel has accomplished all the steps to put on sale the frequency of 1.9 Gigahertz all over the country and we expect that for the next month we will have some news. It should go to the board of Anatel during the month of May and maybe the deed will take place before the first half end.

Before the first half and do you expect that there's going to be a price tag associated with that spectrum?

If there will be --?

Do you have to pay for the spectrum?

That's for sure. What is not sure for the moment is the kind of data they will present to us, maybe there will be a low price with some commitments from the company to invest in network. Maybe it could be a full price, this is not decided by Anatel. They will vote that in one of the next board meetings.

Okay. I also have a question and I think you guys were involved when Claro had launched in Minas Gerais and I think you were -- maybe I'm wrong, but I think you maybe you were one of the petitioners that had them shut down in that market because of some of the ownership that they had in multiple operators there. So I'm just curious about what your viewpoint is that Anatel has if someone controls two companies that owns spectrum in the same market is there a spectrum cap or are they going just automatically require a divestment of one of spectrum licenses forcing that company to move those customers to one or the other network?

Let's go by item because your question is too long.

Okay.

Number one we were not part of those companies rejecting Vivo to get into the Minas Gerais market so just to mention -- Claro, okay.

The second part or that is --

You started making which went too long.

Okay, let me try and cut it down then. If an operator owns two licenses in a given market is it your belief that Anatel is going to force that operator to sell one of those licenses or like other countries in the world is it possible that Anatel increases the spectrum cap and allows you to own two licenses in the same market?

The law is very clear today any company cannot have two licenses in the same region, and the spectrum cap is of 50 MHz so if you want to count by position in other words to get to have more than that you will be asked by Anatel to give it back, to return.

Right and can't you just give -- let's say you own 60 MHz can you just give back 10, sell off the 10?

Yes.

Okay great. Thanks.

Thank you. (OPERATOR INSTRUCTIONS). Our next question comes from Carlos Sequeira of UBS.

Yes hi my question is would you have any problems in roaming in Minas Gerais in the northeast given that your GSM network uses 850 MHz frequency band and your other GSM operators use 1.8 GHz frequencies or are you selling only triple band handsets at this point, triple band GSM handsets at this point, cause a potential problems here?

No, any kind of problem in that more than 75% of the handsets that are sold in the Brazilian market nowadays are at least three band or four band so no issue on that. It works perfectly.

Like in Europe.

Okay.

Like in Europe when an American handset goes to Europe it's the same.

So you're basically selling three band or four band handsets now?

Yes but on the prepaid people who don't travel, we have some handsets at low, very low priced handsets that are dual mode or dual band with 860 and 1.9 but this less than 10% of the handsets we are selling nowadays.

Okay thanks.

But remember all the Latin America and all the Latin America is under the 860 frequency.

All of the Americas.

All of the Americas so it's easy for us to run on the frequency we are and considering that the most part of the travel that goes abroad, Brazil goes to those regions, we think that they are very well placed and adding to that the fact that 850 or however high quality in terms of communication.

Yes sure. Okay thank you.

There appear to be no further questions at this time. I would now like to turn the floor back to Mr. Roberto Lima for any closing remarks.

Well thank you all for attending this meeting and for the questions you made and I think we are very sure, we are very confident on Vivo's future. We think that we found the right position for the company. We are working a lot on quality because we think this is the only way for us to recover or to win back the customers we lost in the past.

We have now two networks with very high quality that differentiates Vivo in terms of quality of sign up, quality of service, quality of coverage. And based on that, we think that we could be as aggressive as the market is in terms of selling and getting new additions. So March and April show that Vivo is a very recognized brand in offering a good service. We have all the conditions to win back and to recover part of the market share we lost in the past. So we are very confident on that.

Once again thank you all for your attention and we hope to hear from you during this quarter and to present the second quarter results in July.

Thank you. This does conclude today's Vivo Participações First Quarter 2007 earnings release conference call. You may disconnect your lines at this time and have a wonderful day.