Telefonica Brasil SA (VIV) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Vivo Participacoes' Third Quarter 2007 Earnings 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 in 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 call during the Company's presentation. After the Company's remarks are over, there will be a question-and-answer session. 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's 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 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 third quarter 2007 earnings release presentation. The third quarter was with no doubt one of major achievement for Vivo. In recent months, the Company has taken important steps towards obtaining one of its greatest goals, nationwide operation.

On August 2nd, we entered into an agreement to acquire the control of Telemig and Amazonia Celular. The transaction will give us direct entry into Minas Gerais, the [country Brazil's] most important state. We enforce our presence in the North and add at least 4.9 million customers to our customer base.

On September 25th, we acquired the 1.9 GHz frequency in northern regions where we not yet had Anatel authorization to operate, especially the Northeastern states of Pernambuco, Alagoas, Ceara, Piaui, Rio Grande do Norte and Paraiba. The addition of new spectrum will also allow us to reinforce the calls served in our existing areas. Further contribution towards enhanced service of course came from the awarded Vivo para o Cliente, Vivo for the customer program, whereby the Company's executive and managers exchange their routine activities for those of the front line. The idea is to ensure that management gains the first hand awareness of customers' issues and through internal discussions, he then tries opportunities and suggest improvement.

Beside this, the elimination of cloning and provision for bad debt problems, the successful conclusion of our corporate restructuring and implementation of the GSM network, leading Vivo to have the best served calls according to Anatel and one of the lowest churn in Brazilian market.

Now on slide number 3. Vivo has scaled out several markets surveys and analysis of its customer base in order to identify customer needs. Based on the results, which resulted its entire portfolio of plans in order to ensure greater flexibility inline with customer usage profile. We focus on publicizing the benefit of our new plans and persuading net clients to change over increasing the acquired perception [alliance].

Our efforts proved successful and around 63% of our customer base has already signed up for the new plans, which completed one-year on October 19th. The Brazilian Consumer Rights Association has just published an independent survey which confirmed that Vivo's plans are the most economical for different usage profiles in all the regions in which it operates, being the only ones that permit free customization with the advantage of free-add on, which is most important for the client.

As you can see on slide 5, we maintained our leadership position with the increase in our customer base, which closes the quarter at 31.3 million customers, 9% up over the third quarter 2006 and 3.6% up over the second quarter 2007. The period, whose most important day is the Father's Day, was market by aggressive acquisition and loyalty building promotion and the launch of pioneering service.

With 26.4% share of net additions in our operational area, we maintained our leadership both there and nationwide. It's important to note that the gradual rise in sales of GSM handset, whose additions and exchange already exceeded 6.7 million handsets.

Vivo's 2.2% blended churn in the third quarter and the improvement over the previous year was due to the implementation of quarter boosting initiatives that ensured Vivo made the most progress, these are the indicators.

Distribution channels, Vivo 2007, distribution channel certainly is aiming at improving efficiency with the focus on building client loyalty, increasing customer satisfaction and boosting profitability, with an emphasis on postpaid sales and value-added service.

The retail store also grew to the special in the period. Thanks to the differentiated bars and expansion through all the states where we operate. The retail store sales volume jumped by 400% and share of total sales increased by 3.2 percentage points.

The third quarter 2007, the year-on-year comparison underlines this trend, a 46% increase in the value-added service sales volume and a 24% upturn in productivity with new sales per point of sale. And in addition, customers had session with the sales provided by our store [in Kuwait].

Vivo is always attentive to clients' needs, as you can see on slide 6. After confirming through service that many customers preferred to call from their home at cheaper rates and rather than use their cell phones. We developed a super economical tariff package. Recently, we launched two new products which combine cellular, fixed-line and Internet access minutes with total mobility as well as packages of fixed-line minutes that can be used at any location in Vivo's area to make a local call.

In all these products, Vivo focus on total mobility, a prime advantage and one which customers have declared to be of extreme importance. Brazilian draw the distinct edge over its competitors by giving simplistic and mobility as much emphasis as economical tariff. In that, Vivo launched 12 new service for individuals. Vivo Flash which provides domestic wireless broadband access for as little as 39.9% reais per month and telephone residential, a handset resembling a fixed-line phone, but which use the wireless network and is associated with the series of differentiated plans per cost to conventional phones.

Telephone residential currently pay out commercially incorporates all the advantage and functionalities of modern telephony, such as caller ID, address book, SMS and hands free, that has appearance of conventional phone, enjoys fixed-line tariff. With this handset, customers can also share their mobile line plan minutes and minutes to fixed-line phones. So, even if the handset remains at home, minutes are totally mobile and useable wherever clients are.

Vivo Flash is residential broadband Internet access, service to the user in desktops. It has certain advantage over fixed-line broadband, such as, wide coverage, high data transmission speeds and portability. Customers can take the Internet with them to anywhere in Vivo's operating area. All they have to do is connect their mobile to the modem of another computer.

Vivo has also forward numerous of old partnerships with SonyBMG and Sonora, Terra's music site, as well as a search engine partnership with Yahoo.

We have also launched a dual-delivery, a service permitting music purchasing by cell phone, to be received in a computer. Finally, there was a Blackberry Curve handset launch with exclusive rights in Brazil.

On slide 7, you can see that our SAC reached R$115 in the third quarter due to increase in sales for slightly high and medium valued customers and lower handset barriers prices in the period.

Our GSM Overlay allowed us to offer more competitive price and acquire higher valued client. These led to a more market activated handset mix and an increase in our postpaid additions compared to the same period last year. Although SAC was 7.5% higher in the quarter, this was inline with the upturn in the revenue, prior to the additions in the highest value segments, with a consequent consumptions of more sophisticated handset and higher sales of value-added service.

Outgoing ARPU in the third quarter increased by 10.5% over the third quarter of 2006, as you can see on slide number 8. Part of this improvement was due to the sale of new service packets that made current clients increase their commitment. The Vivo's quarter plans has proven to be a great success playing a major role in increased competitiveness of Vivo service. Another positive factor was implementation of campaigns, featuring progressive bonuses according to the recharge value.

On service and recharge, question up the average recharge value per client by 15.4% in the period. The company continues to focus on the acquisition and maintenance of high and medium valued clients, maintaining rationality and pushing positive results in each campaign and sales initiative.

Inbound ARPU increases by 3.7% over the third quarter 2006, seasonally due to the traffic volume, including the long distance call. And 1.7% increase in the interconnection tariff reversing the recent one-time downward trend. It's also worth noting that the data tool increases by 33% from R$1.80 in the third quarter 2006 to R$2.40 in the third quarter 2007. Blended MOU remaining flat compared to the second quarter 2007 and the third quarter 2006. Please note that MOU plays an important role to improve revenue, but data revenues plus value-added service are important as more.

On slide number 9, we can see that zero maintaining, it's retention on customer loyalty force, focused on high and medium-running customers and the individual customers.

The reward program continued to be stronger in usage in the exchange of handset consolidating its position as the main relationship into our post-paid individual clients. As of June 2007, the reward program balance was included in the client deal, increase in transparency and bringing them in line with the new [statistical] position.

The GSM handset portfolio was consolidated and it's held responsible for both exchange. It also measures the reward program more attractive, expanding the volume of a spontaneous customer usage of clients and improve customer loyalty. We maintain the recharge bonus contains and intensify the sale of new products and services in order to encourage the use of model phones by our clients. As a result, we manage to retain 22% more customer than in the third quarter 2006.

In addition, the volume of cancellation intentions continued to fall, thanks to improved offers and customer care and more competitive price. In September 2007, we have retained the lowest rate since January 2006, Anatel complained it results extremely important to Vivo and a sharp decline in the volume of complains to the agency is clear reflection of our improved performance.

Now, I will give the floor to Ernesto Gardelliano, who will present you the financial performance of Vivo in the third quarter 2007.

Thank you Roberto, good morning to everyone. I'll start presentation on page 11, by covering net service revenue. There we can see that those revenues rose by 15.3% over the third quarter 2006 and by 7.5% over the second quarter 2007. A large share of this increase was due to continuous encouraging mobile phone usage and acute popularity of the Vivo's Korea plan, which were introduced in October 2006. This plant is frequently used in upgrade both active and receptive, since they offered customers more minutes and service but announced slightly higher than the prevailing one. This initiative in addition to encouraging usage also increased profitability and capital satisfaction due to our better cost benefit ratio. The consumption of these customers after migration within the plants increase by 6%, rate and value of the services revenue plan by 34% over the third quarter 2006 thanks to the continued growth of WAP mobile Internet. Game and content download, broadband Internet access services, such as, [Vivo Escolha] and Flash based modern Blackberry and Smart Mail. Also the launch of innovative products and services, and initiatives encouraging to use for private services like SMS, VIVO AVISA Voice Mail and Voice Portal. Network usage revenue was fueled by the 1.7% increase in interconnection rate, approved by Anatel.

When we move to slide 12, we show operating cost. G&A recorded a year-on-year increase due to technical assistance contracts. This issue together with pros and cons analysis scheme, have been formally raised, by management to the controlling shareholders.

Over the previous quarter, the G&A cost fell by 1.4% due to the reduction in third-party services, especially, data processing and plant maintenance and conservation. Selling expenses grew up 4.5% year-on-year post-paid increase in third-party services partially offset by the reduction and the provision for bad debt, which currently accounts for just 1.7% of gross revenue.

Selling expenses remained flat over the previous quarter. The cost of goods sold increased by 14.3% over the third quarter 2006, primarily due to the 29.5% growth in gross add. In comparison with the second quarter 2007 and despite this reduction in commercial activity GSM additions and trading increased by more than 6.7% impacted mainly by the CPA mix.

Human resources picked up by 0.3% year-on-year due to the collective Union agreement signed in November 2006, and partially offset by the lower headcounts.

The 8.3% decline over the previous quarter was due to the reduced task force and the decrease in severance payments. The cost of service rendered increased by 21.6%, over the third quarter 2006. Thanks to 27.8% growth in interconnection cost due to the end of the partial Bill&Keep system, the up-turn in expenses of third-party services and the rise in provisions for third-parties network usage.

In quarter-over-quarter terms the cost of services rendered prime by 3%, also reflecting the increase in interconnection charges, as well as, higher property rental expenses partially offset by lower expenses from third-party service, particularly, utilities and plant maintenance and conservation.

On slide 13, you can see that the 7.5% increase in revenue pushed up the quarterly EBITDA to R$833 million with a margin of 25.7%. EBITDA was 31% higher than the previous quarter and 16% up on a yearly basis.

Moving on to slide 14, we continue to focus on increasing the company's economic value and operating cash flow total R$527.5 million, almost 55% up on the R$340.7 million record in the same quarter last year.

Year-to-date operating cash flow totaled almost R$962 million, 116.3% higher than in the nine months of 2006. In this quarter, we also managed to move from a net loss of R$112.8 million in the second quarter of 2007 to a net income of R$4.4 million in the quarter. The year-to-date result recorded a decline of 85.3% in our net loss.

As you can see on slide 15, net debt, total less than R$3 billion, as of September 30, 2007 29% down year-on-year, these level of indebtedness alliance to the already approval on same structured operations with Bank [inaudible] and the European Investment Bank and our improved operating cash flow would allow us comfortably amortize future maturities and also pay the M&A activity and coverage commitment estimated for the coming years. We have already received 67% or R$164.8 million of the Bank [inaudible] and we expect to receive the remaining by the end of 2007.

Regarding the benefit, the loan which I already receive R$605 million out of the R$1.5 billion total. However, we will receive the remaining amount as soon as the necessary documentation is filed with the institution. The law from the European Investment Bank has already been approved and agreement signed last October 31.

On slide 16, you can see that we invested R$369 million in the third quarter 2007. As part of our consistent access to improve service quality and customer satisfaction, as well as to meet growing profit demand, we allocated most of the investment during the period to increase the GSM network quality and capacity. We also continue to modernize the layout of our sales channel. We are ranging point of sale and opened new stores, thereby ensuring high quality and convenient product current and future customers.

In addition, in order to comply with Anatel's demand, we are adapting our systems and networks for the implementation of number profitability.

We also invested in a new front office an operating system that will ensure faster and more efficient customer service that is going to be used by couple of store attendants, dealers, call centers and account managers throughout Brazil.

Finally, as a featured example of our ongoing determination to improve customer service speed and quality, we are implementing a processed unification project that will enhance the experience of being a Vivo customer field service.

Now, I will hand over Roberto, this presentation for the final remarks. Thanks.

Okay. Thank you, Ernesto. So, my final remarks, we should see that in the month with acquisition of Telemig and Amazonia, and the auction of 1.9 gigahertz spectrum, Vivo took several important steps towards increasing its competitive and instant service capacity. Given that as a part of our wireless plan, which includes the elimination of foreign [inaudible], the corporate restructure the consolidation of its systems, the expansion of its network coverage and implementation of GSM Edge overlaying in a record time.

Vivo maintains a highest standard of service quality, Hawaii corporations that are both commercial and responsible and capable of attracting and retaining high value customers, encouraging mobile phone users among its customers even more. For Vivo and its management team, client recognition is the most important element in confirming that the company's strategy is on the right track, accompanied by the requisite operation of quality standards. At the same time, its improved operating and financial results, and help balance sheet are proof of its ability to progressively satisfy its shareholders and investors.

I thank you all for your attention and now we are ready for your question. Thank you.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS]. Your first question is coming from Vera Rossi of Morgan Stanley. Please go ahead.

Thank you. I have two questions. One is about your ARPUs. What are the reasons for the increase in usages, especially with the outgoing traffic? And the second is your CapEx for the new regions and for the current regions, if you have an idea about this year and next year as well. Thank you.

Hey, Vera. This is Ernesto speaking. Going to question number one, you should have been following our performance quarter-over-quarter. Last year, let's say, on October the 19th, we launched a new set of plans trying to simplify the offers as well as to adapt what the customers were asking us based upon some enquiries that we made to the market. And especially last year, we started with the prepaid segment in order to expand the usage on net. That was also -- was awarded to the postpaid segment starting in March. It was a different and very complex prospect. But the main reason was that the package plan that we put in place that caused for a new attention. So, that was the main driver for outgoing traffic.

When you see overall minutes of use, you will see that there is practically no change. But the ARPU, yes, indeed goes up by R$1 in the quarter. What is important to mention here is that part of those packages that we've been selling since last year, I think it is kind of a committed amount, using or without using it. And on top of that the increase in value-added services that are not linked to any traffic, lets the ARPUs to grow up, not reflecting that into the revenue per minute amount.

On the second question, we can talk about the remaining of this year and as you can recall, we always -- our guidance was R$1.732 billion for the year, without considering any new investment, any new frequencies. Now, that we were able to buy a 1.9 GHz spectrum for total R$85 million. Our expectation is for 2007 that the total CapEx will not exceed R$1.950 billion. As far as 2008, it is early right now to be talking about that. And that amount, that's not conceded, in any case, the budget of Telemig and Amazonia.

Okay. Just a follow up on the first point on the ARPUs. In terms of improvement in usage, did you improve your ARPUs of contract and prepaid users as well with your campaign? Is that what you mentioned?

Yes, yes. And as a matter of fact, we got a quick answer on the prepaid base, since we started that by the end of last year. So, we saw the results almost immediately. And on top of that from the second quarter of this year, we started seeing that improvement in the postpaid base as well.

Okay. And in terms of, like, postpaid customers that now are under a contract, so they signed a commitment to stay with the Company --

Yes.

-- for a certain period? What is the percentage of your postpaid base that is under a contract now?

Well, that's a tricky question, Vera. Let's say, you've been asking this for the past three quarters, I believe. And starting this year, we would prefer to talk about customers in general, because internally, our segmentation price, not to identify postpaid and prepaid, by the different segments in terms of value per customer. Because I can tell you this, I was kind of surprised -- gladly surprised to see a bunch of prepaid customers that carry a higher ARPU than the average postpaid customer nowadays.

And then, if I can add something to -- last instances we made some test with postpaid customers who signed the contract to be loyal to our Company. And now, we did the same with another group of customers, not asking for these customers to sign a contract. Both have the same level of loyalty to the Company. So -- and the second group is much more satisfied with the fact that the contract do not oblige them to sign an agreement.

Okay. Thank you.

You are welcome.

Thank you. Your next question is coming from Walter Piecyk of Pali Capital. Please go ahead.

Thanks. Just on the ARPU. The prepaid ARPU, I know you have stopped reporting the difference between prepaid and postpaid, but the last time you reported was a year ago when it was 15.70. Is it substantially higher than that level right now as far as the prepaid ARPU is concerned?

Yeah. You can make a comparison by just assuming what was the average then and what it is right now. All of our efforts are targeted towards working on sustainable growth. And basically as I mentioned before to various questions, we saw a quicker answer on the prepaid segment rather than the postpaid. So, let's say, we started later on.

So, the postpaid is probably generally the same and then the prepaid is where you have seen into the more the near-term increase?

No, no. That's not correct.

Both grew.

They both grew.

Okay.

What I am telling is that, we started capturing the additional growth in prepaid as from the first quarter of this year and that started happening with a postpaid base in the second quarter. Remember that we launched the Overlay in GSM for prepaid by the end of 2006. For the postpaid base, we were only able to launch by mid March. So, basically there is a difference. And I am not saying that the difference is only on the prepaid. I am saying that they both devote positively. And again, we are segmenting our base in such a way that we try to deal with the customers based up on their values not because --

I understand. But there is -- there has been a substantial difference historically in the difference between the prepaid and the postpaid ARPU, obviously. So, --

Yes.

-- for above R$16 or may be R$17 on the prepaid, with the growth in data and some of these new service plans, can we view the prepaid market as something that could go north of R$20 in the future?

It will depend upon the penetration again, Walter. What I can tell you is, yes, the prepaid segments based upon the new technologies and the new offers, they started using more the data services. But on top of that, if you think about the Vivo's caller plans that we launched a year ago, they are basically modeled voice service, a package that had voice. And on top of voice, the customer could chose whether it was data roaming long distance or -- let's say, the main three [inaudible]. But what I can say today is, probably as you mentioned, in terms of differences, yes, the gap has narrowed between prepaid and postpaid. While in the past, it had a very, very significant deviation gap between postpaid and prepaid as we historically used to see.

Okay.

One thing that we could add is that, considering that we have fetched out more prepaid customers and postpaid customers, R$1 more in ARPU in prepaid give us much more money.

Absolutely.

And what you said about the future that we could reach R$20 in ARPU for the prepaid, maybe this is true. But considering that the commercial activity that we have now in the Brazilian market, the new customers we bring to base have not the same level of ARPU, so that we could diminish the impact of the growing ARPU for the prepaid on a [commission base]. So -- but anyway, I think that our strategy was right, starting by the prepaid, making R$1, R$2, R$3 more in our prepaid base. We should consider that in the prepaid base, we find several customers that we consider premium customers. This is why we segment. We are not looking to the customers if they are prepaid or postpaid. We look to their value and this is what's making us to see in both side of the business.

And additional information that we can add is that months over months, we are breaking our own records in cell phone recharges. When you add up all of the recharges in terms of Electronica, Internet and [inaudible] prepaid cards, the amount that is located into the liabilities of the Company and so the customers use that credit have been out passing our own records months over month.

Okay. And just one question on the CapEx also. When you first talked about overlaying GSM, I think a couple of analysts had wrongly pointed out a very high capital number for a new network build of over 2 billion. I think someone had 2.5 billion. I think you said it was going to be 400 million and people still didn't believe it. Can you just give us an update on what that GSM Overlay costs you? And, you know, was -- is there enough to pass, obviously, you are getting tremendous growth in subscribers on that GSM network? Is there enough capacity in that network even what you've spent to-date to handle more growth on that GSM network? Thank you.

Okay. The amount that we talked back on July the 20th, I think it was 2006, was R$1.80 billion and that amount is still valid. We have already captured 90% of that investments, but you are right, let's say, there's an additional growth when compared to the guidelines in terms of expected growth for 2006 and 2007 versus what is it going on these days, the current amount are showing an additional increase in terms of accesses that will be reflected in capacity. Now, having 1.9 frequency, not only in the Northeast, which is a new -- our new territory for us, but on the existing ones, there's going to be additional investments in order to cope with this additional traffic that we are seeing and that basically, is turning us into third generation on a monthly basis. But, thank you for the comment. The investment that we announced was R$1.080 billion and still for that phase, its still running. And we understand that we would be finishing the 100% of that investment during this fourth quarter is running.

Just to add something, I think what results say that with the R$1.080 billion that we --

Real, right. And I think some of the estimates tell us that were $2 billion after-tax.

Yes.

I am not sure where they come up for those CapEx numbers on some of these companies.

Yeah.

Well, actually the R$1,080 million that were able to make I believe one-to-one. It means to have in GSM where we used to have CDMA and what we are talking about now about the capacity, the increased capacity we need, because the market is growing faster. This investment, if we don't do that in GSM, we could do that in CDMA. So we should not count on the GSM part of investment. This is increase of capacity and we are obliged anyway to do this investment.

Okay. Great. Thank you very much.

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

Yes. Hi. My question is about 3G, and you mentioned the 1.9 spectrum that you purchased in terms of the 3G auctions that are coming up. And now that you have some more color on what the bidding terms look like, can you just tell us how attractive do you think the licenses are, your level of interest and in particular if you have any preliminary numbers in terms of what the CapEx could be associated with 3G?

From this view point, we are interested in 3G. We have a very large experience with the investments in EV-DO since 2005. We should capitalize on that. Now, we are studying the deep process on the sale and price to see what should be our strategies to have a large deployment of 3G all over Brazil or should we start by hotspots and which kind of customer should we attract with 3G. And now, it's a fine tuning of this strategy that we are in interested in 3G in Brazil.

Okay. Do you have any sense of just of the magnitude that CapEx could be? I mean I know you don't have a specific number at this stage, but maybe a range just to give us a rough idea.

At this point, Andrew, we do not have them, basically because we are still analyzing that. You mentioned the fact of the license price that is out there. So at this stage, since we do not have a conclusion on that, not to give or to release any numbers that could be misleading.

Okay. I understand. Thank you.

Welcome.

Thank you. Your next question is coming from Rizwan Ali of Deutsche Bank.

Hey, good morning. I have two questions. One is related to your market share of net adds. It dropped down quite a bit in the third quarter compared to the second quarter. I am wondering if it is the run rate you expect going forward. And second question is, the merger with Telemig or TIM, merger of Telemig with Vivo's operations, should we expect any cost related to this merger coming up in the fourth quarter or next year?

So you are not concerned about -- we are focused on measuring our market trends in those revenues. Brazilian market has been very hot in the last few months with some companies selling SIM cards as is this to our handsets, and sometimes offering a SIM card for 10 reais, give credit for 100 reais. And we don't think this is our real assets or real customers.

So we have been very careful in driving our commercial activities to the high-value customers, trying to be sure that they will stay with the company at a minimum period to return on our investment in the commercial operations. So losing some points of market share, considering that that we are not presenting neither [inaudible] is something that we have to accept.

But we know what is important for Vivo is keep on growing. We already have almost 32 million customers. We have to take care of this base of customers. No other company in Brazil has as many customers as we have. We have to make them use our service and provide more revenues to the company. So this is our priority.

Sometimes we would like to invest in the commercial side of the business just to have some more users or, let's say, number of users that we are not sure that they will provide us the level of revenues that we want. So we have to hold our breath and to be very cold on that and understand that our focus is on market sharing revenues.

And the second question was related to Telemig, but can you repeat that please?

Yeah, I am just wondering whether as you combine the operations of Telemig with Vivo's should we expect any costs related to that?

Yes, for sure. In any M&A activity, we do have costs, but you are talking about combining. And so far, we have not released to the market what the actions are going to be. So far, what we have assigned is to have a controlling stake in Telemig and Teleamazonia.

There is a surprise out there that has been publicly announced on August 2nd, once we sign the stock purchase agreement. But again, all of those costs were taken into account at the time of setting up the price as we have to bid. There is a vis-à-vis, the synergies and the inorganic growth that was going to be a [combined] Vivo.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question is coming from [Mike Schwab of Arthur Capital].

Hi. I have got two questions. First, I am really wondering if there any...

Can you get closer to the microphone please?

Can you hear me better now?

Now, yes,

Okay.

Thank you.

Yeah, two questions. The first one is, I am wondering if there any new commercial initiatives, whether it be the rollout of the wireless Internet or anything else, which will temporarily put a little bit of pressure on your margins. And I am not talking about seasonal issues, which were certain quarters a higher than others, but let's say temporarily from a structural point of view would put some pressure on the margins. That's the first question?

The second question I suppose is a little bit of a repeat of Rizwan's question, but obviously the combination with Telemig is very interesting. And I am wondering if you can just layout some of the thoughts there about I think there is tender for portion of the shares that are traded. If you could make comments about why you don't want to tender for the whole thing and therefore accelerate the combination and the synergy?

Concerning the first question, I think that the point is that Christmas this year is to be very hot. So Brazil was doing good. So economy was going well. People have some money in their pocket and mobile phones are still number one in the customers' preference for this Christmas. So we expect a very active Christmas campaign.

But, we don't think that could put some pressure on the margins. It should be the appearance after the 3G, but this for the 2008. There we know that handsets are more expensive than the 3G handsets. This is something that we have to work on to have something very balancing between investments we will have to make on network, investments we will have to make on commercial. This is why we have to find the good spots to launch 3G in Brazil. So I will let Ernesto answer about Telemig and preparations announced for the future.

Okay. What we have stated at the time we announced is that there is a mandatory tender offer by the time we assume control of those companies as well as a voluntary tender offer should be set up within at the [dual] time and in between. At this time, you have asked me whether we would be making an offer for 100% of the shares that is not on the horizon. What we will be doing is just exactly what we have told the market at the time of the agreement, progressing nature of the agreement.

Okay. So you have to run the company separately until a decision is made to -- the case is filed?

Yes, that's why answering to this one, I said that we have not released any future actions. We just mentioned that we brought a controlling stake in both companies.

Okay. Thanks.

Thank you. Your next question is coming from Christian Kern of Lehman Brothers. Please go ahead.

Hello. This is Christian Kern of Lehman Brothers. I was just interested if you're seeing your risk of a new national tie-up being formed over the next, let's say, 6 to 12 months and what your views on this would be? Thank you.

The answer is yes, Vivo.

Well, if I can blow that question a little bit further, I mean you have been around for a long time. But then there are, obviously, certain considerations in the market to form a new player in terms of emerging fixed and mobile. And I was just wondering if you have any views on the impact on your business going forward.

Well, we know that we will have one more competitor in Sao Paulo with [OE], but he will have another big and strong competitor, I mean as they arrive with Vivo plus Telemig [in the light of these change], but what we have to do is to enforce our positions to enforce our fundamentals in the company. And considering Brazil is a big market business, you'll have some market percent. We think that ARPU is very low for a country like Brazil. Minute per usage is very low. So there is still some room for our company to grow, and competition is normal.

So we will have -- if you think about some of our big competitor with [convergent] competitor in fixed lines, mobile lines, well, we are doing very interesting thing with Telefonica here in Sao Paulo, the most important market in Brazil, combining our progress and our offers to important customers in this state.

So, we have how to react. We have how to do good things for the customers, and we are the biggest company. We have 32 million customers. We should count on them to continue providing the revenues we need and to financing the growth of the company. But we have on the other side to offer them good products and good services, which I think is one should focus on and not to be focused on one of the competitor's strategy. We should be very strong in our relationship with our customers.

Can I just follow up in terms of, do you see any change from the TIM Brasil situation with regard to Telefonica?

No. Yesterday I read something in the newspaper that might have said that, I think that now it's time to fight more and more against Vivo. And so, we are ready for that.

Ethically?

Ethically. And this is good ethically.

Thank you.

Thank you. Your next question is coming from Fernando Ramos of JPM Securities. Please go ahead.

Thank you. Good morning. I was wondering if you could give us a little more color on your policy regarding handset subsidy. And secondly, I was wondering if you could tell us when you will start offering your services in the 1.9 frequency that you just acquired. Thank you.

Okay. From an accounting standpoint, let me explain, all of the -- 100% of the subsidies for all of the segments, except the corporate segment are charged to expense in the months we have the deactivation. Now on the corporate segments, everything is capitalized and is amortized over a period of 18 months. But all the rest is a 100% charge to expense in the month. Okay?

Okay.

And the second question was?

When -- I don't know if you've already said this, but when you will start offering your services in the 1.9 GHz frequency that you recently acquired?

After we buy the -- or we haven't yet signed the agreements with Anatel and the service will be the same. So, [850] and 1.9. They are complementary and the same handset will work in both frequencies. So, there is not any special service that will be launched within 1.9. And [we are pleased] with our network capacity and the entering in new regions where we weren't in the North of Sao Paulo and the South of Goias and the Northeast of Brazil.

Yes. But I was wondering when you will start offering your services in this new state?

Perhaps, as Roberto mentioned, we first need to sign the contract with the regulator. So far we have made a bid, and we won on October the 26th, no payments have been made so far since the contract has not been signed. So, once that -- on parallel, we are working in the selection of the vendors and setting up our plans. But so far, we have not signed the agreement. Okay?

Okay. Thank you.

And it will depend on Anatel. We haven't signed because Anatel haven't presented the agreement to [signings].

Okay. Thank you.

Thank you.

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

Hi. That's Henry Cobbe from Nevsky Capital, and I really wanted to follow up on your pricing. On looking at the price per minute, you have managed to increase the revenue per minute while keeping MOUs flat. So, can you describe the quality of subscribers that you are bringing on to the network? Are these in high-end business customers? How you managed to get the additional ARPU?

The additional ARPU comes from other services that counts on the customers' view, but are not MOU related, as all of the data revenues that we were able to capture since the beginning of this year. So basically, it's not an increase in the revenue per minute. The only increase in terms of pricing was the 1.7% adjustment that we got for incoming calls, incoming traffic. But in terms of revenue, we were not increasing them. This is basically a mathematical number that comes by dividing revenues by minutes, but remember that these -- basically they accounted for 8.4% of all of our revenues are data-driven that are not MOU related.

And what's the outlook for SAC next year in the light of [M&T and VT] don't, but do you expect SAC to remain around current levels or could it increase?

That -- first of all, let say, we prefer not to talk about the future in terms of cost is going to be. In terms of acquisition costs, you will have to have an eye on the market, what the market is doing. And based upon the aggressiveness, but not depending upon which segments you want to get into, the acquisition cost is going to be reflecting that behavior. But, so far to say what the acquisition cost is going to be for next year, I believe it's too premature.

Okay. And lastly, when do you expect to close the Telemig acquisition?

That's something that we are talking with the sellers to know the stock purchase agreements that states that there is going to be a closing. Once we get approval from Anatel for both companies, Telemig was easier since we did not have any duplicity in terms of licenses and we did not need the cap for spectrum. In the case of Amazonia, that's different because together Vivo and Amazonia are going to held more than 50% of the market share. We'll have two licenses overlapping and we are exceeding the spectrum cap. That is taking some additional analysis from Anatel and of course, we are working on both sides, but as soon as that happens, we are able to close the deal.

Okay. Thank you very much indeed.

You are welcome.

Thank you. Your next question is coming from Damien Maltarp of Cazenove.

Thanks very much. I've got two questions. You talked about the market heating up, is that more in the residential segment or are you seeing that in the business and corporate segment as well? And the second the question, just on the handset subsidy. Looking at the numbers, it has gone up fairly materially year-on-year. I heard what you were saying about it may be more conservative focus on high-end customers. But just, I would have thought that [this time agreed] that the fact that you are buying GSM handsets should have reduced cost of the handset purchase. I think currency is probably moved in your favor as well in terms of the cost of the other handsets. So, is this just a sign by the underlying SAC has actually gone up or lot more? And is it just sign of you being very aggressive in the market? Is that the right conclusion?

Let me go step by step. When you say that the market is heating, yes, indeed the numbers are telling us behaviors that we have not seen in the past. So, that's something that it is happening. But that heating related with your second question as far as acquisition costs are concerned, it's like we are now being a spectators of a new behavior of a new animal that is basically linked to SIM cards that we prefer to see what the behavior of those accesses is going to be in terms of revenue growth.

So, when you mentioned what GSM provided to us, you are right. It has provided a lot of room for us to grow, for us to be delivering the consistent results that we have been providing to the shareholders. And whether that is going to go up or not, it will be depend upon what type of services and features the customers are going to be asking. Because, as we said, as Roberto said, like here an hour ago, these days trying to get some black and white telephone, well, its almost back to the year rates, [inaudible].

So, in terms of pricing or in terms of costs, costs are going down. But on top on that, CP manufacturers are trying to add more value in order to keep a price that customers are looking forward to it. So, again, to tell all of you what the acquisition costs is going to be for next year, I think it's premature. What we've been doing is basically to focus on retention and capture a vast, of the different segments that we want to cope with, not I think that I am not meaning that we're loosing the leadership in terms of customer share, but again, our decision of course for next year is going to be one of the most important guidance that we could get and so far we are not providing any guidance for the future.

Thanks. Can I just follow-up on the first question. It's possibly more just on whether you are seeing increased competition in the corporate segment?

I know it certainly not, the competition -- corporate segment is always tough, everybody wants to get all of the corporate customers you have. But the explosion that we have seen in terms of SIM cards is basically related with the residential market.

Okay. That's fair, thanks.

[OPERATOR INSTRUCTIONS]. Your next question is coming from [Louie Generva] of HSBC, please go ahead.

Yes hi, it's [Louie Generva] from HSBC. I was wondering if running two networks at a same time, so GSM and CDMA, is having an impact on your OpEx? And specifically, if the increase in third-party services we are seeing in your accounts is attributed to dual network planning effect? Thank you.

You are right, let's say running two networks have a common side of OpEx and a separate one. The problem is running just one network it means from times of cost replacement and amount that makes no sense in terms of trading all of the CDMA customers that we do have, have in mind that there are more than 25 million. So, basically, yes the answer is, there is an increase in the network and engineering OpEx, derived from the fact that we have both networks, those networks as we mentioned at the time of announcing this are Overlay and on top of that, that is going to be increasing to say, try not to get this as a guidance but that is going to be once we setup to 1.9. Once we operate the 1.9 frequencies in the North East because basically there we have nothing. So...

But anyway you should mention that, point in time, I used to have analog network, CDMA network and CDMA network. So, we put up the analog network by the end of the first quarter 2008, we should have put down for the CDMA network, so we will do have CDMA and GSM. And let's consider that the GSM network was built as an Overlay of the CDMA, we share all the infrastructures, so we share all the maintenance and all that. So, it's true that we have some costs that are separate for GSM and CDMA. But the most part of them are common dual network. I think and when we -- when your last to the first quarter of 2008, that we put up the CDMA network we start saving some money.

Okay. And if I can just follow-up on that, if you could may be quantify the increase in the network and engineering OpEx you are experiencing?

At this time, I don't have that amount on my head.

Okay. And just a follow-up question then on the -- say, on others topic really, on the market share, net additions, how do you plan to improve it because you are basically -- in this quarter you are on 26.4% market share of net adds which is diluting your overall market share, which is still around 36.8%. So, what measures do you have in mind just to bring the market share of net adds more in line?

You know that your question gives us the opportunity to exchange some opinions we have about the growth we have seen in the market in the last few months. So, we have been very careful not practicing certain types of selling like attracting customers switch to SIM cards for R$10 with the credit of R$100. We are not sure that this is a new asset for our new customer, but this is our recharge card. So, market is growing much more than anyone could preview in the Brazilian market, even the analyst. And we know that part of that are not real users that are coming to the market. So, instead of spending a lot of money on that, we prefer to work on the reduction of the churn on that account on our firm-base knowing that we made big investment to have an inorganic growth that we should take advantage on 2008. And considering that with Telemig and I was wondering should reach almost 36 million customers. We should maintain the focus on reducing churn and activating these days of customers as much as we can. So, part of the growth we see in the Brazilian market, nowadays, we take that very carefully.

Okay. Thank you very much.

You are welcome.

Thank you. This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Roberto Lima for any closing remarks.

Again, thank you all for attending to this presentation and for the questions you made. We should say that all we will feel very happy with the results we could present this quarter and it's a good work this team has been doing in the last -- let's say four quarters and all that was included in the turnaround plan that we are receiving now. And we know that this third quarter will be one of the most important for the Vivo's teams.

We presented good financial results, a good commercial operation and we made some very important steps in order to have and to reinforce our strategic position in Brazil, covering all over Brazil and have operation commercials in this country that should be considered as one of the most important commercial market for mobile phones in the world.

So, we will maintain the leadership. Our brand is much more stronger than it used to be one or two years ago. Our customers are much more satisfied with this, which reflect on Anatel indicators, as well as, and the research we made, and all this could sign up our -- show, we can see that in the financial results we are showing now in order to subscribe the other public and you'll have to subscribe at shareholders and investors. Thank you very much for your attention, and we hope to see you soon. Thank you.

Thank you. This concludes today's Vivo's third quarter 2007 results conference call. You may disconnect your lines at this time.