Telefonica Brasil SA (VIV) 2007 Q2 法說會逐字稿

Good morning ladies and gentlemen. At this time, I would like to welcome everyone to the Vivo Participacoes Second Quarter 2007 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 webcast with 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 conference during today's presentation.

(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 and uncertainties and assumptions because they relate to future events and therefore depend on circumstances -- of 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, who will begin the presentation. Mr. Lima, you may begin your conference.

Good morning, ladies and gentlemen. On behalf of Vivo Participacoes, we would like to thank you all for attending the Second Quarter 2007 Earnings Release Meeting.

Vivo continued with its repositioning campaign in the second quarter, focusing on available quality, services plans and promotions, in order to become the best most telephony option. Highlights for the period included an extremely successful Mother's Day and Valentine's Day campaigns, adding 1.2 million customers to the base, effective control of the churn rate, a 21% year-over-year increase in service revenue, a 70% year-over-year reduction in provisions for bad debt to 2.3% of gross revenue. The operational cash flow plus the change in working capital increased by three times, a 77% year-over-year reduction in the net loss an a 22% year-over-year decline in the net debt.

The second quarter 2007 EBITDA moved up 107% year-over-year, mainly due to higher service revenue, reduction in provision for bad debt, commissions and advertising expense among others. Despite heavy commercial activities, selling expenses, including provisions for bad debt, fell 27% year-over-year and cost of services rendered remained flat over the second quarter 2006. This quarter, the network indicators recorded excellent results. Recent approval of the 1.9 gigahertz enhancement and the interconnection price adjustment made in this month of July.

For the first time ever, Vivo recorded a gain in market share in May 2007, as shown in slide number four, closing the market with a market share of 37.3% in its operational area. This performance was the result of our successful Mother's Day and Valentine's Day campaigns and the progress in increasing GSM handset sales and trade-ins, which have already reached the 3.3 million mark.

Net additions in the second quarter 2007 totaled 1.2 million customers, a 34.7% net gain share in our operational area, maintaining our market leadership both in our operational area and throughout Brazil. 84% of total activations in the second quarter were in GSM technologies. This solid and consistent growth reflects Vivo's position as best service choice given that there was a 63% growth in the high-end post-paid additions compared to the previous quarter.

The Vivo Escolha plans were responsible for increasing the competitiveness of our services and now account for more than 50% of our post-paid individual customer base. The company implemented a sales initiative during the quarter to acquire new customers and strengthen customer loyalty. The results can be seen in the increase in additions and the reduction in churn rates.

In slide five, the subscription acquisition costs fell 16% year-over-year, an increase of just 7% over the previous quarter. The annual reduction was due to the reduction in [unit time] subsidy following the launch of GSM and the drop in handset price in dollar terms and in the exchange rate variation. The main difference between CDMA and GSM subsidies comes from the handset acquisition costs, which is lower for GSM and consequently allowed us to be aggressive in our pricing.

The quarter-over-quarter upturn was mainly due to the lower entry barriers for the Mother's Day and Valentine's Day campaigns. In the post-paid segment, the entry barrier fell R$70 in the first quarter to R$49 in the second, while the pre-paid one decreased from R$93 to R$73 in the same period. This decline took place in various Vivo regions, but in Sao Paolo, post-paid handsets were being sold for R$10, bundled with higher new service plans. On the other hand, there was a reduction in expense from commissions due to the higher number of sales in the company's own stores.

In slide number six, we can see that the branded ARPU increased 24.1% year-over-year and remained flat over the previous quarter. The annual upturn was mainly due to the campaign to encourage use and the launch of Vivo Escolha. In fact, if we look at the post-paid customers who migrated to Vivo Escolha, we can see that ARPU increased at the high-end value segment. This is exceptionally positive, as it indicates that we were capable of holding on to our best customers who are willing to have a higher monthly commitment.

Just as an example, additions to the Vivo Escolha 90-minutes plan represented 20% of the total in March and 37% in May, while additions to the economic plans fell from 15% to 7% in the same period. By eliminating the effects of termination of the partial Bill&Keep system, the blended ARPU in the second quarter would record 7.5% increase in relation to the second quarter of 2006.

The blended MOU moved up 14.9% year-over-year and 2.7% quarter-over-quarter, thanks to the campaigns to encourage pre-paid use and the adoption of new service plans and segmented campaigns. Incoming traffic it would have a tendency to decline in most markets, has remained steady in recent quarters in Vivo's case.

Now I'd like to leave the floor to Ernesto Gardelliano, our CFO, to comment on the financial performance.

Thank you Roberto, good morning to everyone. As shown in slide eight, net service revenues increased by 1.5% in the quarter and 21% in the year. Even when adjusted for the partial Bill&Keep effect, net service revenues still moved up 4.9% year-over-year. Network usage revenues, excluding Bill&Keep effect was impacted by the increase in our customer base and by the tendency to substituted fixed to mobile, for mobile-to-mobile traffic.

Subscriptions and usage revenue was positively impacted by 29% higher recharge volume in the year thanks to the successful pre-paid segmented campaigns, which helped us strengthen customer loyalty and increase both recharge frequency and average volumes. Another important factor in the profitability of our customer base and the consequent upturn in revenue was the launch of the Vivo Escolha service plans. We consider the monthly commitment of post-paid customers who migrated to one of the Vivo Escolha plans increased by 20%. The upgrade acceptance ratio also moved up by 7% as a result of the new plan.

Data revenue grew by 15% over the second quarter of 2006 fueled by initiatives to encourage the use of existing services, such as SMS, VIVO AVISA, voice mail and voice portal, the continuing increase in our web services, including content and game downloads as well as the existing VIVO ZAP, which is a wireless Internet access that offers a launch of such premier services as complete song downloading.. All in all however, we believe that the quarter's most significant initiative was the removal of the download and browsing traffic charge, ensuring that consumers have a much clearer picture of prices. Vivo is the first company to introduce such procedures, underlining its commitment to and respect for consumers as well as its belief in the future of this service.

Moving on to slide number nine, we present the operating costs. The cost of services rendered increased by 21.4% year-over-year due to the higher interconnection costs, triggered by the end of the partial Bill&Keep scenario and the upturn in third-party service costs. This increase was partially offset by the reduction in expenses from the Fistel contribution and other contributions as well as the lower roaming losses. In the quarter-over-quarter trends, the cost of services rendered moved up 5.9% for the same reasons mentioned before. Adjusted for the end of the Bill&Keep scenario, the second quarter '07 figure was literally in line with the second quarter 2006.

Personnel costs rose by 6.2% in the year, due to the collective union agreement signed in November 2006 and the increase in severance payments arising out of our reduction in the labor count. The 5% reduction over the previous quarter was due to lower compensation payments and a leaner workforce.

The cost of goods sold [ran] 56% over the first quarter 2007, due to the 47.3% increase in gross additions as a result of the Mother's and Valentine's Day promotions among others. Provision for bad debt stood at 2.3% of gross revenue, thanks to strict controls of the new customers acquired during the end of the year campaign and overdue portfolio.

Eliminating the second quarter incremental amount of R$161.5 million, the provision for bad debt would still present a reduction of 42.9%. Selling expenses fell 5.6% year-over-year due to the reduction in expenses from third-party services, particularly commission a and utilities.. The 22.5% growth over the previous quarter reflected the repositioning actions with pushed up expenses related to advertising, commissions, third-party expenses and customer care.

General and administrative expenses grew 11% year-over-year due to increasing third-party service costs, primarily from technical assistance related to technology transfers, legal matters and other expenses, partially offset by the gains in efficiency triggered by the conclusion of the unification of the systemic platforms and the reduction in other expenses for material, rent, insurance and condominium fees. G&A expenses moved up 10.8% over the previous quarter, pushed by the upcoming technical assistance and other expenses, partially diminished by the lower expenses from rent, insurance, condominium fees, plant maintenance and conservation services.

Let's move over to slide number 10, there we see that the second quarter's EBITDA totaled R$634.2 million, 107% up from the second quarter 2006, accompanied by an EBITDA margin of 21%. In quarter-over-quarter terms, EBITDA fell by 16.2%. This performance was due to the commercial activity of the period, which resulted in a substantial increase in the customer base. Adjusted for the end of the partial Bill&Keep scenario, second quarter '07 EBITDA would have come to R$626.3 million, with a margin of 23.5%.

The second quarter figure reflected revenue growth from the increase in the customer base and improvements in the use of voice and data and on the other hand, strict control over costs, even considering the volume, acquisitions and a resumption in sustainable growth. Another positive factor was the maintenance of cost of goods sold thanks to the sale of GSM handsets with lower costs.

Operating cash flow, meaning EBITDA less CapEx, plus the change in working capital, registered R$137.6 million in the quarter, a lower amount than R$217.5 million recorded in the second quarter 2006. It is worth remembering however, that the second quarter '07 figure was impacted by the payment of the Fistel contribution in the amount of R$420 million. This contribution is payable every year in March, but in 2007 it was paid out on the first business day of April, impacting the annual comparison. Year-to-date operating cash flow plus the change in working capital totaled R$434.3 million, three times up when compared to the same period last year. The company recorded a net loss of R$112.8 million in the quarter, a 77% improvement over the R$493.1 million loss posted in the second quarter of 2006.

Moving on to slide number 11, we see that Vivo's net financial expense results remain practically stable over the first quarter of 2007, moving up by a mere R$5.7 million due to the expenses related to the taxable financial transactions, which impacted over R$420 million Fistel payment at the beginning of the second quarter.

In year-over-year terms, the net financial expense fell by R$89.2 million due to the reduced net debt, higher operating cash flow and the restructuring of the financial liabilities as well as the (inaudible) reduction in interest rates in the period, 3.58% in the second quarter versus 2.89% in the second quarter of 2007.

On June the 30th, 2007 the total debt from loans and financing amounted to R$3.7057 billion, 49% of which were foreign currency denominated. The company makes use of swap operations to protect 100% of its financial debt against exchange volatility, so that the final cost of debt plus swap is back to the Real.

The company also maintains swap reparations to partially recover changes in domestic interest rates, which amounted to R$2.274 billion. The debt was offset by cash and cash equivalents of R$955.2 million and derivative assets liabilities that were on a payable base of R$585.8 million, resulting altogether in a net debt of R$3.3363 billion.

The gross debt fell by 21% or R$980.7 million over the second quarter 2006, thanks to the financial flexibility and rationalization generated by the corporate restructuring, which allowed for the prepayment of debt contracted through the use of cash from companies with greater liquidity.

Even though the company paid a R$420 million Fistel contribution in 2007, the net debt remains practically unchanged over the previous quarter due to the operating cash flow. Another important point to mention is that in the meeting held on July the 11th, the Board of Directors of Vivo Participacoes decided for the second renegotiation of debentures of the 1st Issue of the Company for the following year.

On slide number 12, we present the main investments of the quarter. The set up of the GSM EDGE overlay continued, having absorbed 76% of the total CapEx defined for the initial project. Investments in the second quarter '07 came to R$337.3 million, equivalent to 11% of net revenue, allocated to network and system quality maintenance, expansion of coverage and handsets for the [corporate] segment among others.

Year-to-date CapEx totaled R$572.7 million. In addition to the investments we have just mentioned, we can also cite the following. Coverage expansion, increasing the data network infrastructure, expansion of virtual recharge partners, the Sao Paolo subway mobile network, as well as a new billing format.

In order to talk about final remarks, I would like to pass on over to our President, Mr. Lima again. Thank you.

Thank you, Ernesto. And part of the good results Ernesto presented comes from important actions that we are doing in Vivo like the loyalty and retention programs and we can say that Vivo continued with the fixed customer loyalty and retention efforts in the second quarter 2007, focusing on high and medium-value individual customers as we can see in slide 14.

The rewards program was a major factor in encouraging handset exchange, becoming the main customer relationship tool for individuals in the post-paid segment, resulting in a 0.3 percentage point decline in the quarterly churn rate. As of June 2007, customers' rewards program balances will clearly show on their bills, exemplifying increased transparency and alignment with tower positioning. The success rate of the rewards program rose 64% year-over-year and 70% over the previous quarter.

The GSM handset portfolio has matured and is already responsible for more than 90% of post-paid handset replacements. This in turn resulted in a more attractive rewards program, increased the number of spontaneous customer usage of points and improved customer loyalty. We also altered the recharge mix, adding lower amounts, generating increase in the frequency of recharging and greater loyalty among pre-paid customers. As a result, recharge volume climbed 18% year-over-year and 8% quarter-over-quarter, with respective increase in recharge revenue of 23% and 3%.

We have worked hard on a wide range of initiatives that converge towards a single objective, transforming Vivo into a company perceived by the customers as a signal of quality, as shown on slide 15. We have simplified the post-paid plans, revised pre-paid pricing in five systems and launched the GSM service. Thanks to the (inaudible), we have national digital coverage and international roaming in more than 200 countries as well as reducing handset acquisition costs and consequently the associated subsidies.

We now have more than 3.3 million GSM customers. Our current handset portfolio comprises 75 models, 40 of which GSM enabled and 35 CDMA enabled. We are also the best choice in terms of service, leading the modern Internet access segment with more than 200,000 broadband customers. But the market is not standing still and competition remains fierce. As the market leader, therefore we seeing to retain and attract high volume customers through a policy of excellence and quality, driving revenue even higher. As a result, we have maintained our customer loyalty and retention effort, based mainly on the rewards program, which has allowed us to keep churn rates under control.

The company's new position in Vivo signal of quality and the campaign's based on strong commitment to customers has generated important achievements for the brand. Vivo is the fifth most recalled commercial and is also ranked the ninth in the list of favorite commercials. And for the first time in our history, we reverted the market share loss using our selling strength throughout -- through our exclusive distributions channel. Since its creation, Vivo has invested more than R$5 billion in network and we continue to work every day on ensuring the best call quality.

Another innovation was the launch of our new bill format, which was developed following extensive surveys with customers and attendants from the call center complaints area. Our objective is to ensure that our customer relations are always based on transparency and respect and we have been remarkably successful, no less than 95% of [its] internal customers' comments of the new format have been highly favorable.

Yet another initiative was the launch of the customer service model for high-volume customers, both corporate and individual, called the Call Stars, which aims at resolving all issues on the first call.

Now we would like to make the final comments. In May, Vivo recorded the highest share of additions in Brazil mobile telephony market. A sure sign that we are on the right track and that the best way of achieving success in the fiercely competitive scenario is to do everything possible to improve customers succession through a commitment to the highest standards of transparency and respect for the consumer.

A differentiated consumer service strategy and a broad portfolio for modern communication solutions has been Vivo's most important [triumphs] in ensuring customer preference. We aim to be regarded as the more reliable and preferred company than our competitors. In few words, a company that outperforms the market in terms of quality.

This superiority requires intelligent and disciplined internal process, capable of providing superior service and customer assistance. Initiatives such as GSM projects, unification of systems and platforms and the reduction in provision for bad debt and fraud levels together with the repositioning strategy and the achievement of national and international digital coverage are beginning to generate positive results.

In May, for the first time in our history, we captured market share and become the outright market leader, recording our fourth best day in terms of sales and our best day -- our best ever day in terms of handset exchange numbers.

Thanks to its customer focused strategy, Vivo also achieved its best ever results in Anatel's May survey, involving the company's 14 operations and more than 190 network service indicators. This performance proved that whatever the technology, Vivo is doing good to be the sign of quality.

As we finish, we would like once again to thank you all and we [expect] for your questions.

(OPERATOR INSTRUCTIONS) Our first question is coming from Walter Piecyk from Pali Capital.

Hi, thank you. Three questions. Based on the recharging on the pre-paid cards, do you have a good idea as far as the direction of ARPU on a sequential basis for the third quarter? Because it seems like given those expenses, you'd have some good idea as far as ARPU is concerned?

The second question is, I guess there was some commentary from your first call about some management fee related to the performance of the stock. I don't know if you could provide some incremental commentary on that.

And then the last question is on Minas Gerais. So are we to assume that based on your comments made in the press release that there won't be any license award, but that you would expect to basically have to bid on the spectrum in the upcoming auction? Thanks.

Okay. Answering to your first question about ARPU, figuring out ARPUs for the future, it's not exactly the same. You know that we usually do not give guidance for the future. We just refer what the performance of the company has been.

As far as recharge, our concern, really they are performing extremely well, increasing over 20% year-over-year. And that has been taken into account, considered in the ARPUs of the fourth quarter, the first one and this second one, let's say, if you compare, it was 30, let's say on the overall base, R$30 in the fourth, R$30 in the first and 29.9 in the second quarter. We are very confident about the performance of the pre-paid customer base. We have launched, in the past, a number of incenting campaigns, using on net bonuses and they have paid quite well. They have paid back quite well and we will keep on reinforcing the strategy for the future in order to maintain the ARPUs that we have been getting from the past.

The second question regarding management fees, they belong -- or they derive from a contract that has been there since 1998. They have been always within the Vivo results. They are mainly referring to the results of the company. So [LAIR] is basically the biggest component and if you look back at our history, the good news is that depending upon that performance of the company, and not that much of the stock, it's obviously just one component, you get higher or lower results as they have been.

The third question as far as the licenses, we have been waiting for this for a long time, more than two years. The good news is that Anatel approved them, only last Wednesday I think it was, and we are not waiting for the official ad in the official newspaper, so as to compete for the auction process. And those licenses, they will enable us to get more spectrum on a nationwide basis. Because we did receive many questions as far as only Minas Gerais all in all this. We are talking about a nationwide license.

Great. Thank you. And just two follow-up questions, please. On the management fee, it does not appear that your expenses on G&A are going up, so you're obviously dropping out other expenses so it's not impacting the overall business. But is that management fee a recurring number or is this more of a one-time event based on those performances? Is that, I guess it's --?

I wouldn't say well it is regarding one time. The contract has been there for -- since 1998 and they depend upon the performance of the company. So you have to look whether the last line, the bottom line, goes up, they will go up. So it's not a tendency -- it's not a fixed contract. That's a good one. It's not a fixed contract.

Right. And it doesn't seem like G&A expense is abnormal, so I'm not sure what all the concern is about. But my follow-up question -- .

Yes, you are exactly right.

Yes, exactly. So my final question is on NOLs. Can you just remind us what your NOL position is currently?

To be honest, we really don't have it by heart.

How about a ball park number?

The operating losses. What we have? I'll give you that answer. I don't have it by heart here, okay?

Okay. By the end of the call then, perhaps?

Yes, perhaps within -- I'll ask my people to get that.

Excellent. Thank you very much.

You're welcome.

Thank you. Our next question is coming from Patrick Grenham from Citi.

Good morning. Just to go back to this management fee thing. It says that you're trying to [yes] that the management fees are based. I know there's a whole series of management fees, but it says that they're based on a percentage of revenues and then adjusted for monetary correction. There's nothing here that says that it's related to the share price performance.

You're saying the management fee has not changed at all since 1998? There's been no change in the contracts at all?

No change at all. No change at all and you say revenues. Revenues have grown up for more than 20%, if you take it into account and one of the big components, as we've been disclosing to all of you in the past quarter, has been the change in the Bill&Keep system. So that's one issue. But the formula has not changed at all since the very beginning.

So how much of this management fee has do with the share price performance? Because it was a huge jump year-over-year.

Excuse me, can you repeat the question?

How much of it is to do with share price performance? Because the concern is partly that it's something that the market didn't know, but it's also because there's been a very big increase year-over-year in the amount that's paid.

Okay. Let me tell you this. More than 50% of that is related to the last line of the P&L. It has not to do with the performance of the stock.

Right. So it's up to 50% could be due to the performance of the stock.

No, no. I'm telling you, we said revenues, we said stock and we said LAIR LAIR accounts for more than 50% of that.

Right.

And that's it. (inaudible), excuse me, I said it in Portuguese. EBIT.

I see. So it's actually related to EBITDA?

Yes. Revenues and EBIT. And you've seen that the performance has been completely different last year from this one.

Right. I see.

It looks as if, if I do look at your 20-F, you're passing up hundreds of millions of Reals every year to these -- to various controlling entities.

Hundreds of millions? No. To be honest, no. Let's say interaccounts-- this second quarter, we recorded R$42 million and the second quarter last year was only R$8 million. R$8.7 million (inaudible).

And how much in total was paid up last year?

I don't have it by heart, but I think -- only R$95 million.

So this year, it looks as if it's tracking to be R$160 million?

Yes. Probably. But that has been, let's say, look at the performance of the company.

Oh, I see. I see. Okay. A second quick question on your CapEx. The CapEx again this quarter has been extremely low.

In line with the second quarter of last year.

Right. But given that you're doing the GSM overlay and you're adding a lot of GSM subscribers, how much -- how are we going to see the GSM CapEx develop over the next 6 to 12 months?

Okay. Have in mind that a year ago we announced that the total investment for the additional stage was R$1.08 billion. We have achieved, by the end of the second quarter, 76% of that investment. So far, we are think that we will finish with that investment by the end of the third quarter and again having in mind what the plans are, the CapEx amount is still there and again the number of subscribers, as you've seen in the -- by the end of the first quarter, GSM was only 370,000 customers. By the end of the second quarter, we have more than 3.3 million customers. Based upon the usage pattern and so, the second stage will take into account that pattern in order to grow their revenue line.

And are you disclosing what percentage of the traffic on your network has been carried on GSM?

We are not disclosing that.

I imagine it's still pretty tiny though?

It's being -- I would say it's surprisingly well.

Okay. All right. Great. Thank you.

You're welcome, Patrick.

Thank you. (OPERATOR INSTRUCTIONS) Our next question is coming from [Marcello Santos] from JP Morgan.

Hi, in fact it's Andre Baggio. I just want to know, two questions. One is related to -- Hello?

(inaudible)

No, I thought it was Marcello.

Yes, I work with him here also in JP Morgan.

I want to know how is the -- actually, related to the Fistel, the Fistel actually went down. I wanted to -- I don't know if I understood well, but could you explain why the Fistel went down in the quarter where you had more additions?

Fistel it's -- you pay Fistel in two different ways. One based upon the net additions every month and two based upon the photograph of the customer base by the end of the year. So by the end of March, you have to pay that amount that is based -- you have two -- the two different ways have two different prices. R$13 per customer and 26% per net add. So basically that's a recurring payment that we made by the end of the first quarter. This time it came -- it was a Sunday. I think it was at the end of March, we paid it on the first day of April. But it's not related to the growth in the quarter. That payment is related to the customer base you had by the end of the fiscal year, so the previous fiscal year.

Yes, but that's on a cash basis. On a --.

Yes, on a cash basis. On an accounting basis, we accrue on a monthly basis.

Yes, so shouldn't on an accounting basis increase in the second quarter based on your strong net additions?

Yes, and that has been taken into account based upon -- excuse me, based upon the net additions and what we have as a customer base. And we do have customers that we have paid, but that has been taken into account on a monthly, monthly basis. That is a strict accounting policy that we have.

Okay. That's fine. And then the second question, can you disclose what was this management fee the first quarter of this year?

Yes. I think it was R$33 million.

Okay. All right. Thank you.

You're welcome.

Thank you. Our next question is coming from [Pedro Devon] from BBM Bank.

Hello, good morning. I would like that as the biggest component in the management fee is the LAIR I'd like to know that as the LAIR becomespositive and grows, it's -- if this management fee is going up significantly. Thank you.

Again, I didn't understand the question.

If I understood correctly, the LAIR is the biggest component on the management fee calculation. I'd like to know that if the LAIR is going to become positive and is going to become bigger over the next years, is management fees going grow significantly?

Yes. Related to the performance of the company, the EBIT goes up, the volume of the company as a whole goes up and that fee is going to go up. It's a very -- it's a share of risk, I would say. In the past, the company was performing in a way and now it's performing in a different way. We understand that this is going to be performing even better and that is going move accordingly.

Okay. Any guidance on the -- on this value of this management fee for the next few years?

I wouldn't say the guidance for the management fee. Let's say we do not provide guidance for the future in terms of the company in terms of margins. So that is going to be linked to it, okay?

Okay. Thank you.

You're welcome.

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

Yes, hi. Could you just clarify for me whether or not you're capitalizing any of your handset costs or not?

Just for the corporate business, yes? And that is in the CapEx. We disclosed that the CapEx for the quarter took into account mainly the [couch] issue of GSM, but just CPs for the corporate segment.

Okay. Because I didn't know that actually -- I thought that you were expensing all of your handsets --

That's a common practice in Brazil, all of the companies do that.

I see. Because I know that TIM switched a few quarters ago, capitalizing some of their post-paid handsets, but -- so for the corporate segment, just to understand, you capitalize the entire handset? Or is this just a subsidy or how --?

Yes, the entire handset. Yes, you're right.

Okay. And out of the post-pay base?

For the individual base? No. They are expensed 100%.

Okay. And if I could just -- one other clarification, you mentioned on the front page of the press release that you had an adjustment or are expecting an adjustment to the VOM, to the mobile termination. And it wasn't clear to me from the Anatel statement, I knew that they were increasing the VC1 or the fixed mobile rate, but it wasn't clear to me if there was also an adjustment in VOM. So it's the same increase?

Let me tell you, it's not the same increase. It depends upon region from region. And that has not affected the second quarter results. We just include that in the press release because it's a good news that we have that it's going to impact the third quarter onwards, okay?

Okay. And when will we officially, I guess, when will there be something published on that or --?

It depends on Anatel, when Anatel will publish the new percentage for VOM and VC1. But what I could say is that the adjustment in VOM will be in about 68.5% of the readjustment in the VC1.

Okay. Great. Thank you.

You're welcome.

Before the next question, I wanted to get back to Walter Piecyk, what he asked about NOLs. We have R$1.1 billion..(inaudible)

Thank you. Our next question is coming from Christian Kern from Lehman Brothers.

Hello, it's Christian Kern from Lehman Brothers. Can I just ask you about your vision of the mobile market in Brazil kind of let's say 1 to 3 years down the road? There seems to be quite a bit of change of shareholder structures going on around telco assets in Brazil. Is there anything you can share with us?

I think that we know everything that you know. In the newspapers today, we saw that we talk about a merge between Brazil Telecom and Telemar. This could create one -- third large group in Brazil as Claro and Vivo are already. So -- but I don't think that this will change the dynamics of the mobile market. So it depends -- the mobile market still needs a lot of investment in Brazil, considering that for the next year, maybe we'll have the 3G licenses and frequencies. And we still have 45% of the cities in Brazil that are not covered by the mobile sector and we know that to reach these people we will have to continue to keep on subsidizing the handsets.

So even though we could have bigger groups, it could mean bigger -- a larger capacity of financing and competing, but anyway, the market is still the same. So it's the countries where we see a lot of contrast in social and economic terms, we have very rich people that can provide us very high ARPUs, but at the same time we have to reach the low revenue people with subsidies that are in small cities that are far from the big centers. So I don't think it changes the structure of the market in Brazil.

One -- another point that could change is some reduction in the taxes that the sector has submitted nowadays. So you know that Brazil is one of the more taxed telecommunications sectors in the world.

That's very interesting. Can I just follow-up with regards to your view on the importance of any convergence product in the Brazilian market?

Yes, I think that we're going to see more and more mobile sector trying to replace some products and services that the fixed line companies used to sell. Like the broadband, we showed you this in the presentation today that we are ready to have more than 200,000 broadband devices and this is growing very fast now. We are signing like 15,000 each month and in terms of communication for the households, we see that we and other competitors are trying to create new products, not to replace the fixed line, but to give an alternative for the ones who doesn't have a fixed line at home. So -- and this is something that I think we'll see more and more in the Brazilian market.

Thank you very much.

You're welcome.

Thank you. Our next question is coming from [Antonio Jinquera] from UBS.

Hi. In fact it's Carlos Sequeira, UBS. Sorry, I'll have to go back to the management fee issue, if I may. You said more than 50% of the management fee is related to operating income. Right? I guess that's what I got at least. And but Vivo reported R$32 million in operating income in the quarter and paid R$42 million in management fees. So I just can't get -- can you help me get to the R$42 million management fee from the R$32 million operating income? That's what I'm trying to do and I can't.

I'm not sure I understood the question. Let me try to give you some --.

Yes, the point is if it's based on operating income and operating income was R$32 million, how come the management fee was R$42 million? That's what I'm trying to understand.

Again, what we said was that more than 50% of the impact is based upon the EBIT. If you take into account the R$8.7 million of the second quarter of '06 and the R$42 million in the second quarter of '07, R$35 million of the difference comes from the EBIT. On top of that, you have revenues and a piece from the stock price.

What we are trying to explain is that to reach -- to -- in the calculation of the management fee, we have three indicators. One is EBIT, the other one is develop the shares in the stock market and the third one is net revenues. So -- but these three factors, they are weighted. So -- and the one who has the most -- the big chunk of the contribution to the management fee is the EBIT. It means the LAIR as we call here in Brazil. And what produced the big difference between the first quarter 2006 to the first quarter 2007? From the difference that was R$42 million less R$80 million last year, it means R$34 million.

On the R$34 million, R$30 million comes from the difference in the EBIT. It's a kind of hedge. So we could have an agreement with the shareholders based on a fixed fee or a flat fee per annum or things like that. But in this case the company has a kind of hedge. So if we have good results, we pay more to the shareholders. If we have bad results, they will get less money than they should have.

Okay. And on the stock price, if the stock price goes up, then you pay more. But if it goes down, what happens?

We pay less.

We pay less.

But they return the money?

The weight of this sector is less important than the EBIT.

Okay. I see. Okay. Well, thank you.

I think this was included in the numbers of Vivo since the beginning, since 1998. So this is something that must be priced. So what we are disclosing now is the way how we calculate this number. So and I think that the good news is that this is the kind of hedge. So if the results are better, we pay more. In the opposite side, it is the same.

We don't pay.

Yes, I know. I understand that. And the only point that puzzles me is that it was a big loss in the second quarter last year, R$300 million in operating income -- operating loss. So the improvement is massive, I agree, but you see only R$22 million, so it's -- what bothers me, how come the fee payment is higher than the income you were reporting? That's what puzzles me. But I will try it again. Maybe we can talk about that later, off the line, and see if I can get the math. Because the goal here is to forecast that in the future. That's what we're trying to do. Thank you.

Okay. You're welcome.

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

Hi there. It's Henry Cobbe from Nevsky Capital. Thanks so much for the call. Just two questions. First, what percentage of your gross adds are now GSM customers? And looking at the GSM budget that you quoted, the R$1 billion, that would give roughly kind of 500 million -- sorry, 5 million line capacity. So just interested when you think the next -- how much of your subscriber base you want to migrate to GSM and what the budget for that would be?

Let me -- I didn't get a clear view of your second question. Let me ask you the -- let me respond to the first one. In average, it was 84% of the gross adds during the quarter.

No, let me correct you. 84% was the gross adds, plus the replacement of handsets. In our [Fidat] programs, we used the exchanged handsets and in this case, new additions plus the handset exchange, we had 84%.

In the new additions, the GSM accounted for 67% in the quarter.

And it's going up. In the first quarter, remember, it was 16% and March was 33%. In the quarter it was 65%. And the June numbers reached 80% mix.

I didn't get your second question, because --.

(inaudible)

The second question, just what you're saying, you spent R$1 billion on GSM infrastructure and there's a sort of back of the envelope at $100 a sub that gives you roughly 5 million subscriber capacity. And I'm just interested to know what the CapEx budget is for next year for the group and for GSM? And how much of your subscriber base you aim to migrate to GSM over the next 12 to 18 months?

Okay. We -- in fact, we don't want to disclose the number for the future, but anyway, you are right. Our investment in the new network, the GSM network, was R$1 billion plus R$80 million for the systems adjustment and this is the budget that we have for 2006 and 2007 in concerns the GSM network.

For the next year, we have to consider if you were -- if we are entering Minas Gerais on that or not. If we are going to invest in the 3G with the new frequency phone lines and so in this moment, we cannot advance any number on the network investment.

And on a group CapEx number. Do you have -- what was the guidance for this year and next year for group-wide CapEx?

For this year, we disclosed R$1.732 billion. And that took into account the difference, the balance of the GSM network initial phase that we announced last year. CapEx for next year, we have not disclosed because again as Roberto said, we are still reviewing our plans and taking into account that with the auction of the 1.1 licenses, would have extra spectrum and we will have the possibility to get into the Minas Gerais in all these regions. Where today we do not have a commercial operation, we do have coverage through roaming agreements, but we do not have a commercial operation.

And 3G, which is another opportunity that the regulator is putting on the table, so we need to understand better the rules.

Okay. But looking at the -- on the gross adds numbers that you said, 6%, 7% on GSM, it seems that you are going for an aggressive conversion from CDMA to GSM?

Conversion? Not only conversion. It's growth. Take into account that if you compare second quarter of last year with second quarter of this year, we are talking about 2 million customers.

So it means that we are not stimulating our customers to move from CDMA to GSM. But certain segments of our days, like the customers that travel a lot, so they are interested in moving to GSM in the case of they go to Europe or even if they go in Brazil to Minas Gerais or in the Northeast. But we are not motivating people to migrate. So we have a very good CDMA network. They -- it's still today, we know that the customers are looking for having CDMA handsets because of the quality of the network, so we will keep -- we will maintain this as the market needs. So we will not speed up the migration from CDMA to GSM.

Okay. Thank you very much.

You're welcome.

Thank you. (OPERATOR INSTRUCTIONS) Our next question is coming from [Carolina Brandau] from Mellon.

Hi. I'd just like to make two quick questions on the management fee. If I'm not mistaken, the fixed line companies, they don't charge the management fee anymore?

Can you approach the microphone that we cannot hear you.

Oh, I'm sorry. I'd just like to -- because I was wondering if there's actually a termination date for this management fee? Because I think the fixed line companies don't charge them anymore. And if there's any regulation related to it.

The actual agreement they have nowadays goes until 2008.

To 2008. And is this regulated or it's just between the company and their controlling group

This is a normal agreement that --

Between parties.

Between parties. It's a contract that is disclosed like any other agreement.

Okay. So it's not regulated at all?

No, no.

Okay. Thank you.

Thank you. We do have a follow-up question from Walter Piecyk from Pali Capital.

Thanks. I guess I feel compelled to make a statement in addition to my follow-up question on the NOLs. I mean, I look at your G&A and it's down 150 basis points year-over-year. So the expense is you're leveraging the margin at G&A. So I just would encourage management, I know you've made a big effort in the past six months to increase your disclosure. And it's definitely much better than it was a year ago. And I wouldn't -- I would just encourage you that even though you've had this type of response for offering additional disclosure, even when your margins are expanding on that specific line, I wouldn't discourage you from continuing that disclosure policy. So I appreciate that.

And then the follow-up question is on the NOLs. The $1.1 billion number that you provided is that a present value number or is that the gross amount of NOLs that are available? Thanks.

No, it's just the fiscal credit, Walter.

Great. Thank you.

Okay. And thank you for your --

Thank you for your comment.

Thank you. We also have a follow-up question from Patrick Grenham from Citi.

Just a couple of clarifications. First of all, on the CapEx. Am I right to assume you have not completed the R$1 billion of CapEx for the GSM network? How much of that has been spent?

We said 76% of the initial stage.

Okay. So --?

You know that after the implementation of the BTS, there is some compute for us to test and to validate the implementation, then we start paying the supplier. So we are exactly in this period right now. But more than 96% of the -- now we are covering 96% of the CDMA coverage with GSM.

Right. And the R$1 billion is 76% spent?

Yes.

Yes.

Okay. Perfect.

And we plan to end by the end of the third quarter, excuse me.

Okay. And the second question is, I don't see anywhere the management that these management fees are disclosed or the terms of the disclosure. The trend that you have only says it's related to revenues. Is there anywhere where the terms of this agreement are disclosed or have ever been disclosed?

Yes, in 1999, in the 20-F.

Okay. And the full formula has been disclosed there?

Yes, I think so. At that time it was not Vivo. It was the different companies that now -- that then became Vivo.

Okay. But it is disclosed there?

Yes.

Yes, but in the Tele Leste Celular, Tele Oeste Celular, Tele -- (inaudible)

But at that time, there were two different -- there were different sets of companies, so what you're saying is, are you paying into Brasil Tel or are you still paying directly to the Telefonica, et cetera?

Brasil Tel. Brasil Tel.

They're all going into Brasil Tel?

Yes.

Yes.

Okay. All right. Thank you.

You're welcome.

You're welcome.

Thank you. (OPERATOR INSTRUCTIONS) There appear to be no further questions at this time. I would now like to turn the floor back over to Mr. Roberto for any closing or comments.

Okay. Thank you very much for your attention and thank you very much for the questions and also for the comments and we -- the point that was present about the transferring that we are trying to show the results and everything, this is the point taken and we're going to be more and more careful then. Thank you very much.

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