Telefonica Brasil SA (VIV) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to the Vivo Participacoes First Quarter 2008 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 can be accessed at the site www.vivo.com.br/ir.

(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 other information currently available to the Company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Vivo and could cause results to differ materially from those expressed in such forward-looking statements. Now I'll 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 first quarter 2008 earnings release presentation. In order to allow a little more time for the Q&A section, we have reduced the time of presentation after some requests from analysts and investors.

The first quarter 2008 was undoubtedly marked by important achievements. On April 13, 2008, Vivo completed five years of its existence. The Company's history is full of achievements and accomplishments. In these five years Vivo maintained the marketing leadership. Vivo is viewed most valuable cell phone operator brand. Its service plans are considered by the market by the more cost-effective plans.

The Consumidor Moderno magazine awarded Vivo the [quarter excellence] prize on the mobile category in this month of March. Regarding the quarterly results, the Company's revenue increased by 16.9% in the year, always keeping a strict control over its costs, which increased by 13.2% in the period. As a result, the EBITDA increased by 27%, leading a 16.1% growth in EBIT in relation to the same quarter in the previous year.

For the third quarter in a row, Vivo achieved a net positive result. In the first quarter 2008, it recording R$89.6 million thus reversing a negative result of the first quarter 2007, representing a 216% growth in relation to the fourth quarter 2007. In addition on April 3rd, Vivo undertook the share control and management of Telemig Cellular and it will start the second quarter of the year with more than 38 million access.

Slide five shows that the Company's customer base reached 34.3 million customers in March, thus ensuring a leadership position with 27.3% market share. The net additions of 839,000 customers in the year's first quarter shows the rational customer acquisition policy and reflects our focus on profitability to the detriment of low value customers' addition.

The Company's GSM operation reached more than 14.6 million accessed which represents more than 22% of the customer base a 30.4% growth over the fourth quarter 2007. Vivo had more than 412,000 recharge points in March 2008, a 22% growth in the year, and the largest network for distribution of handsets with more than 8.8 thousand points of sale keeping the Company's leadership position in its whole operational area.

Slide six shows that the SAC, the subscription acquisition cost of [R$95] in the first quarter 2008 decreased by 5% in relation to the first quarter 2007, and by 7.8% in relation to the fourth quarter 2007, as a result of lower expense in customer acquisition, [similarly], and a greater participation of handsets and SIM cards in the GSM technology, which have a lower cost.

The results are a reduction in advertising and commission expense due to the periodic seasonality and since no relevant campaign was launched. Slide seven explains the MOU and ARPU variations. The ARPU of R$29.8 in the quarter was practically stable in relation to the first quarter 2007 despite the growth in the customer base.

As it can be seen, the outgoing ARPU increased by 2.5% which is an evidence of better customer mix. The reduction recorded in relation to the fourth quarter 2007 reflects particularly the seasonality in the period as there was the existence of less working days in the period.

Considering that the growth of the customer base was slightly greater than that of the next service revenue, the ARPU remained at the current level particularly because of the outgoing traffic. It's important to point out that the data ARPU increased by 26% for R$2.3 in the first quarter 2007 to R$2.9 in this quarter. The blended MOU remained stable in the first quarter 2008 in relation to the first quarter of 2007.

However, the outgoing MOU increased by 7.7%, a growth that resulted from user's incentive campaigns particularly for the prepaid segment. In comparison with the fourth quarter 2007 results there was a 6.3% reduction because of the period's seasonality. Now I would like to give the floor to Ernesto who will continue in this presentation.

Thank you, Roberto. I'm going to cover the financial performance of Vivo during the first quarter of 2008. In Page ten we're going to cover net service revenues and these show a 15.8% increase on the first quarter 2007, which is a result of the evolution of all components particularly data and value-added services.

The revenue increase also benefited from a 14.7% increase in access and usage revenue component particularly because of the growth in the total outgoing revenue, which we started from the increase in the total ARPU [end] traffic. This increase was mainly due to the usage incentive and promotional campaign and has a 6.5% increase in the average cash amount of recharges per customer. In comparison with the fourth quarter 2007 there was a 1.6% increase despite the bigger seasonality.

Data and value-added services revenues represent 10.4% of the service revenue, an absolute increase of 47.7% over the first of 2007. When comparing the first quarter of 2008 with the last quarter of 2007 the increase was 10.4%.

The main reason for this growth was the increase in Internet access, sales with NAND Flash, Blackberry and (inaudible) besides the increased usage of SMS. The (inaudible) end launch was the application providing access to Windows Live and Messenger, Hotmail and Spaces and the offer of handset with access to digital TV also contributed to this result.

On Page 11 I will bring our comments on the operational cost. The 17.3% increase in the cost of services rendered in first quarter 2008 when compared with the same period of 2007 is the result of a 23.2% increase in the interconnection cost caused by an increase in the total outgoing traffic, higher third parties service expenses, particularly for the planned maintenance despite an increase in the Fistel fee.

In comparison with that fourth quarter 2007 the 6.4% increase was due mainly to the increase in third party service costs such as those related to planned maintenance and public services. Besides the Fistel fee, rent, insurance, and condominiums partially offset by a reduction in the lease lines and interconnection costs.

The cost of goods sold shows a 42.9% increase in the first quarter 2008 in relation to the first quarter 2007 figures, which is partially due to the large number of gross activations representing a 65.9% growth. When compared to the last quarter of 2007 it shows a reduction of 17.9% due to greater business activities during the Christmas season in the period.

This variation is directly proportional to that of the revenue of gross subs. In the first quarter 2008 the commercial expenses showed a 12.6% increase over the first quarter of 2007 reflecting increasing third party selling expenses such as advertising, publicity, donation, commissions, outsourced labor, besides increased customer loyalty costs partially offset by a provision for bad debt reduction.

In comparison with the last quarter of 2007 figures the commercial expenses showed the 10% reduction particularly because of a decrease in third party service expense, especially those related to sales support, which were partially affected by an increase in the provision for bad debt and customer loyalty.

The G&A expenses show the 7.2 increase in the first quarter of 2008 in relation to the same period of 2007 particularly because an increase in third party service expenses especially those (inaudible).

In comparison with the fourth quarter of 2007 there was a 5.6% reduction which resulted from a decrease in the expenses incurred with third party services particularly outsourced labor, which were partially affected by an increase in the data processing and technical assistance expenses.

When compared with the same period in the previous year the labor cost decreased by 8% mostly because of the personnel right-sizing after the Company's restructuring. In a comparison with the previous quarter we found out that there is a 12% decrease related to seasonal compensation expenses for targeting achievement. We consider only the structural costs, those over which we have an effective control regardless of the commercial activity we find a reduction of more than 16% in relation to the first quarter of 2007 against a growth rate of approximately 23% in those related to the commercial activities.

This permanent and control space is [bigger and better] competitive conditions. On Page 12 we show that EBITDA in the first quarter of 2008 was R$961.2 million, a 27% increase over the first quarter 2007 figures, those resulting in an EBITDA margin of 28.8%. When compared with the fourth quarter of 2007 the EBITDA shows a 5.8% increase with an EBITDA margin of 1.9 percentage points higher.

The results shown for the first quarter of 2008, the highest in the last five quarters, reflects a revenue growth achieved with an increased customer base and a fixed cost control. The customer sold also played an important role in this evolution because of the sale of GSM handsets, which have a lower purchase cost.

On Page 13 we show cash flow and EBIT and in order to provide a better disclosure of the account that have impact in the Company's cash generation we altered the cash flow presentation criteria. Before we used EBITDA minus CapEx plus working capital and now we have adopted indexed cash flow methodology as recommended by CDM disclosure policies.

Therefore the cash flow shows a reduction of R$8 million in the first quarter of 2008 from cash consumption for payment of the (inaudible) in March in the amount of R$463.8 million. Likewise the operating profit for EBIT showed an evolution of 60.1% and 69.5% when compared with the first and fourth quarter 2007 respectively, achieving R$297.7 million in the quarter.

On Page 14 we showed that the net result of R$89.6 million in the quarter reversing a negative result in the first quarter of 2007 and a 216.6% increase in relation to the last quarter of the last year.

On Page 15 we show a financial result of debt and net debt stating that on March 31, 2008 Vivo's loans and financing capabilities reached R$4.8034 billion, 45% being denominated in foreign currency. Such indebtedness was offset by cash balances that were really were on financial investment amounting to R$2.236 billion and by derivative assets and liabilities of R$340.3 million to finally restating a net debt of R$2,907.7 million. In addition the Company entered into swap operations to provide partial protection against fluctuations in the domestic interest rates.

The transactions covered reached a total of R$109.5 million. The total spend net debt reaction in the first quarter of 2008 versus the same period 2007 comparison we started from the Company's operating cash generated in the period. Equalizing the comparison base once the operations install fee, the annual fee applicable to customer base and cell phone bay stations in cellular at the end of the previous year and that amounted of R$419.7 million was paid in April because during the last year the due date had fallen the last Saturday, and if we take out all of these effects, the net debt would have had a reduction of 21.9%.

In a comparison with the fourth quarter 2007 figures we found out that the net indebtedness increased particularly because of the [cash] down payment of $463.8 million made on the last day of March. Viva Participacoes' net financial expenses in the first quarter of 2008 versus the fourth quarter 2007 comparison decreased by R$40.9 million. This variation is explained particularly by the extraordinary effect of the [fees income] impact assessment that were R$22.8 million in the fourth quarter 2007 or the allocation of interest on the overall capital.

The end of the CPMS tax assessment now R$16.2 million in the fourth quarter 2007 besides a reduction in the interest rates, the effective interest rates in the period, which was 2.53% in the first quarter 2008 versus 2.58% in the fourth quarter 2007. When comparing with the first quarter 2007 figures there was also a reduction of R$48.2 million. This lower net financial expense was caused particularly by a reduction in the net indebtedness as a result of the Company's operating cash generation as well as by lower effective interest tax rates in the period which was [2.53%] as mentioned before versus 3.03% in the first quarter in 2007. Besides the [end] of keeping a tax assessment in 2008 that took R$14.3 million in the first quarter of last year.

Page 16 shows our investment that we're concentrating on the completion of projects starting in 2007 and on projects to support the 2008 growth. In the constant search for providing satisfaction and high quality in the services provided Vivo saved no effort and concentrated most of its investment in the GSM network capacity expansion. As a result support has been provided to meet the commercial aggressiveness of the voice and data traffic making it possible for the Company to keep its leadership and yet achieve sales quality goals.

At the same time investments were also made to comply with the new S&P rules and the non-reportability requirement established in the standards issued by the regulatory authority during the last year.

As a result the Company invested R$256.6 million in the first quarter of 2008 which represents 7.7% of its net revenue. Next I will ask Roberto to make the final remarks. Thank you so much.

Thank you, Ernesto. As final remarks I should say that the continuous good results achieved led us to our best performance in the last five quarters confirming our strategy to be the best quality option for the mobile services in Brazil. This strategy is anchored on three basic pillars, the network, the billion recharge systems and the customer service quality.

This made it possible to improve our relationship with customers and make Vivo the Company with the lowest number of complaints filed with Anatel. In addition we were awarded a quality prize for the service provided increasing our employee satisfaction and the confidence of our shareholders and investors. All these has placed Vivo in a unique position to face the continuous growth of the market and the implementation of the number portability that will increase even more the competition in the mobile sector.

The indicator report on the here-to-date are literal demonstration trust established on a daily base by all the agents of a social network of which Vivo is a member. We would like to thank all the public for their contributions given to help us build what we are today, a quality sign up company. Thank you all for your attention and now I think we are ready for your questions.

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question is coming from Vera Rossi of Morgan Stanley.

Thank you. I have a question about SIM card. Are you selling SIM cards only without associated with the handset?

Yes, Vera, since now in the Brazilian market you see some handset vendors furnishing directly to the dealers and so the great variation, how do you call it, the repays so if they sell only handsets, open handsets we have to sell SIM cards to have new customers with this new handset that are sold.

And do you believe this strategy that not only Vivo but everyone is doing in Brazil is going to pay off because of especially the Fistel fees that the companies are required to pay when they add a customer and also on an annual basis?

Nothing, now the case, I think you were right when you put the question because you know that for each customer we pay like R$39 every year. And we have to be very selective in the customers we want to have with us. This is why sometimes we sell less than our competitors but we know that we sell for the best customers in the market.

And what is the percentage of your net additions today that are buying -- that are SIM cards only?

It's about 30% of total sales.

Of total net additions or gross additions?

Total gross additions.

Gross addition, okay. Thank you.

Our next question is coming from Andrew Campbell of Credit Suisse.

Yes, hi I was wondering if you could give a little more color on the MOUs in the quarter, in particular the lack of growth on the year-on-year basis? And do you think that maybe you need to be more aggressive in terms of bringing pricing down or changing packages or anything in order to perhaps drive up the usage levels higher?

Andrew, this is Ernesto speaking. If you look at the picture we disclosed you will see that the outgoing minutes as a matter of fact are growing. So we have been putting, we have been setting a number of incentives for our customers for the new customer and existing customer base in such a way that those minutes are growing.

Of course there are always opportunities to enhance that usage, but in essence what we are seeing is a result of the actions that we have planned in the past.

Sorry, but I think that we should add to that, the data revenue they're growing 47.7%.

On a yearly basis.

Yes and the use of data is not included in the MOU.

Yes.

Okay I guess the only point that brings up then because the outgoing is going well and so is the data if the incoming is not growing, I mean does that suggest that maybe the VOM should be lower?

Not exactly. Is a matter of how companies are setting up their promotions. You follow because of your market and basically all of the mobile operators started in the past with on-net adjust on-net. After awhile they freed those promotions by selling not only on-net but off-net to wireline. So basically it's not just a factor of [Bewime]. Bewime is a component of the price. It's not a factor between the customer of our operators. It's just how promotions are set.

Okay, thank you.

You're welcome.

Thank you. Our next question is coming from [Oscar Gross]

Hi, Guys. Good quarter. I have two questions, actually. First is regarding the talk to the iPhone for Mother's Day promotion, if you have any additional information on that? And secondly, I would like to know -- I would like to get your reaction on the increased competition with the entrance of Oi into San Paulo and what you see as any particular competitive advantages you might have, technology-wise, particularly with regards to Oi. And that's -- those are my two questions. Thank you .

So in the first --

The iPhone.

Unfortunately, I believe we don't have iPhone for this Mother's Day, but that's for the second half. And concerning the entrance of Oi in the State of San Paulo, we know that we already established a plan four months ago to reinforce our position in terms of customer satisfaction and it pays off, we think that we have nowadays a customer base that is very linked to VIVO brand and this is the way that we're going to provide this slide.

So -- and in terms of technology, I don't see any Oi advantage when compared to VIVO. So what happens is at the same time that they are entering San Paulo, we are entering in Minas Gerais, which is the second most important space in Brazil for mobile sector and at the same time, we are covering some regions in the State of San Paulo like [Franca] and even [the sul] like the [lot of them], where we are not present and in the second quarter, we should be present in northeast of Brazil, the 60 states between [Barila] and [Mariel].

So we are reinforcing our position in terms of competition to maintain our market share in Brazil, since we are maintaining -- quite maintaining the first quarter market share we had. Although I think nowadays we are much more able to sustain this position than we were before.

Specifically, I wanted to know about this -- the fact that I guess VIVO operates 800 in the State of San Paulo and then you have most of the competition operating at, I believe, 1,800 or 1,900. So then with unlocked phones, that would imply that there is -- there is an inability for the movement between the two types of -- or the two frequency handsets?

Yes. But at the same time that maybe we have to focus on the high-end segment of the market because those, they have [quad] band phones, where this question of frequency doesn't show up.

Yes.

And at the same time, in the low end, our portfolio is protected because they cannot sell SIM cards to our customers. So this is the way we want to play it. So we want to attack on the high end and on the low end, I think, we just have our position.

Okay. Great. Thank you very much.

You're welcome.

Thank you. Our next question is coming from Stanley Martinez of Legal and General.

Thanks. Good morning. Good results. A question for Ernesto on the operating costs. If I look at what I'll call the non-handset related selling costs, they were decreased more on a per subscriber basis than what I'd estimated. I'm wondering whether you might have delayed certain advertising ahead of your relaunch in the Minas and generally how you see those type of costs progressing on a per subscriber basis for the balance of '08. Either because of your acquisition over there or Oi's launch in San Paulo.

Okay. Let me go step by step. There is not any kind of assets deferral in this case. The advertising that we have posted into the accounting records are the expenses that we have incurred during the quarter. As you mentioned, our entrance in Minas started on April 3rd, so you will see those amounts within the Telemig financial statements in the second quarter. It is not within the financial statements of VIVO.

And basically we are not delaying any kind of campaign just because of our financial performance. We are doing what we think necessary for our campaigns to be on the market, to pursue segmented campaigns through other means and not just incur only in television. So basically, I feel very comfortable with the amounts that we have there. So you shouldn't have any surprises. We have capitalized expenses in our balance sheet.

Great. So should we expect a similar kind of trajectory of selling expense on a per sub basis the balance of '08 or how do you think the launch will play out as far as the impact on margins for the balance of the year?

In Telemig, we will file -- let's say we migrated, we changed our brand name on April, 15th. That has already been done in every point of sale. The introduction of VIVO as it was known already because our open campaigns are known nationwide, so that was basically a one-time expense because all of the other expenses in terms of advertising, we are doing nationwide and shouldn't have a specific impact going forward.

As far as selling expenses are concerned, let's say we are doing that on track. We are not waiting for any surprises. And we are following the track in terms of the purchasing cost of the CPs. And again, we will follow and we will have a close look as we have been doing in the past, to the market and what the market is demanding from us and from the competition. So again, we do not foresee any kind of hiccup in that line.

Well that should bode well for your gross adds as well. Thanks, gentlemen.

You're welcome.

Thank you. Our next question is coming from [Simone Trazazello] of Itau Securities.

Hi. I'm Simone. I'm from Itau Securities and I have some questions. How are discussions with CVM about the tender offer documents? If I'm not wrong, preliminary filing was in April 11th and do you believe that until [May] you have a final agreement with CVM?

As far as the tender offer is concerned, let's say, the facts that we have posted are the information that is publicly known. We are waiting for the auction to take place on May the 12th, if I'm not wrong, and the payment should take place on May the 15th, for the preferential rights.

Sorry, when should the tender offer take place?

For the preferred shares.

Okay.

For the ONs, we do not know.

Okay. But the tender offer for the PN shares, you may have an agreement by May 12th and then you publish the final public offer notice on the following day, on the same day, how it's going to be?

That is going to take place, as far as the rules are concerned, let's say we will follow what the rules are demanding from us, as we have done in the past. And again, we say, so far what we have announced to the market is the only thing that we have so far to tell to the market. And the results of what we have achieved in those days are going to be informed after May the 16th, basically.

Okay. Okay. So you cannot just give me a small detail and just color about it because --

The details that we can share with you are the ones that we have already filed as [advance].

Sorry, I didn't hear.

That's all the information that we can share with you are information that is already published and reported to the market.

Okay. But you cannot give me the color about when are you intending to do the -- when you believe that it is actually going to happen, this tender offer?

The tender offer is on the [the airway] now. For the PNs, it's May 12th.

Okay. Okay. Okay. Thank you. Bye.

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

Hi, guys. Yes, I have a couple of questions. One is could you please give us more color on how your sales of mobile broadband cards are doing? And I'm trying to understand if there was any impact from cards launched of 3G services in the country? That's the first question.

We launched 3G back in 2005. Let's see. If you recall our numbers, the sale of broadband cards are doing extremely well. If you have following our trend, today we can, with more than 10% of our service revenues coming from data. They grew more than R$100 or R$100 million in a year, more than 47%. So basically there's an announcement of something that is not new to us. So that is doing extremely well. I don't know if you want add something else.

No, I think that is okay. [Ernesto] is talking about the launch of EVDO in the beginning of 2005. We are still selling PCMA cards that are selling very well. We have a very good network, the quality of the service as well. We will invest in 3G, since the frequencies for the CDMA, we signed the agreement with [Anatel] yesterday and now we build our network and we'll launch 3G as soon as we see that the new networks, based on the HSDPA, will have the same level of quality that we reached in the EVDO technology.

Yes. Okay. Thanks. I was trying to get a sense of how many cards you sold in the first quarter this year compared to previous quarters. Maybe fourth quarter of '07 or first quarter '07. I mean, just to have a sense of how many more broadband cards you're selling now compared to maybe fourth quarter, first quarter last year?

I don't have exactly that amount in mind, if you would excuse us, we can get that amount later and share it with you. As a matter of fact, I don't have it on my hands.

Or mine.

Okay. Okay. Fine.

It's more. 20,000.

Between 15,000 to 20,000 per month.

Yes. Yes. There are some peaks. But that was probably the quarter. Yes.

And important that it works.

Yes. Yes, providing revenues.

Okay. And my second question is you mentioned in the call that you won't have iPhones for Mother's Day, but you also said that you'd have it in the second half of this year. Do you have an agreement?

I answered the question about the iPhone and Mother's Day and I said that unfortunately, we don't have the iPhone, but we're working to have it as soon as we can. Of course it depends on -- you cannot realize the kind of negotiation that is behind this.

So you don't have any agreements on it yet?

No.

With Apple?

No.

Okay. And how likely is that you have -- are you -- how likely is it that you get then iPhones in Brazil?

What is it?

No, we cannot --

I -- I don't think you can say anything about that now.

Okay.

We are under non-disclosure agreements (inaudible).

Okay. No, that's fine, that's fine. Thank you.

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

Good morning. I have two questions. One is, is there any way to divide your -- I'm trying to figure out if your data memory is coming more from your CDMA operations or you GSM? And whether it's a [lump] to get the mobile data as well data you collect from, say, laptops? And second question is is there any --

Rizwan, let's go step-by-step because your first question is (inaudible), so as not to forget. Could we do that?

Sure.

Do you want to answer or I answer?

No, go ahead.

Okay. In terms of data, we disclosed in the presentation that 50% comes from SMS and data as you call it, VIVO Flash, the BlackBerries and basically the broadband plat -- the broadband cards are growing quarter-after-quarter. All of the broadband cards, as Roberto stated before, come from EVDO.

What we launched back in 2005 was EVDO and we are still enjoying being the first within Brazil, being the first in making arrangements with network vendors at that time and today getting the results of that technology. That in our perception, we had some other questions today, vis-a-vis what the competition is facing. There's a learning curve that we had in the past and today we can provide this level of quality or quality level customers are demanding and are enjoying. So basically there's not a division. And as you know, the licenses for 1.9 and 2.1 were only freed yesterday, so all of the data for broadband comes from CDMA, from EVDO. Okay?

Okay.

The second?

When we saw EVDO, we have the one 1X network as well, so we can't compare it. We have HSDPA and EDGE. We have EVDO in 1X. So let's remember that the most important state in Brazil, we have 100% coverage in 1X. And in some hot spots we have EVDO, it works very well.

And as -- the growth of the data revenues year-to-year was -- year-on-year was 47.7%. It's what - [I think] that we are on the right track.

Thank you. My second question was in the past, many years, you've seen a level of competition and therefore margins contracting in the second quarter quite a bit. Is there any evidence so far that Mother's Day this time around would be less comparative or more comparative?

I think we have a good campaign, but we cannot presume the results. Even if we think it's a good campaign, I think we are not able to say anything.

Yes. But we can say it's going good. We are achieving good returns.

It's going well.

Yes.

But I think the customer perception about VIVO is very positive at this time.

Are you hearing about -- are your competitors being more aggressive or less aggressive than last year?

I would say --

I would say everybody's being very aggressive. You know that they are working on more volumes. At this time, we are working on price reductions. So last year we were in bonus, they were in price reduction. So anyway, I think that when the customer decides, he takes into consideration the price, but nowadays he takes into consideration the quality of the service in terms of network (inaudible) and customer care. So this is our strategy.

Okay. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

Our next question is coming from [Peter Lions]of [Oscar Bruce].

Hi, guys. Just a quick follow-up question. Actually, two more questions. But very quick. Third-party expenses, I know that you had some technical assistance expenses related to Portugal Telecom and Telefonica. My understanding was that these would begin to go away, that these contracts are set to expire beginning, I believe, in August. I was wondering if you could give us a little bit more color on that? And also what do you have in terms of guidance for CapEx subscriber growth? Et cetera, et cetera. Thank you.

Well the first question, as we mentioned, I think it was back in the last quarter, yes, you're right, the management fees are going to be out at the beginning of August. And that is exactly what we have to say.

So far, what we are doing is accounting for the agreements that are in place and they have an impact for the quarter, it was something like R$43 million. Is that correct?

Yes.

R$43 million.

Okay. Great.

And CapEx, let's see, we announced by the time we had our shareholders' meeting that CapEx for the year will be above R$6 billion, but R$6 billion will cover the controlling state for Telemig, the tender offers, up to one-third of the preferential shares plus the tag-along for the UNs, plus the licenses of 3G that amount of R$1.2. So basically if you take those amounts out, what is we have is a R$2.5 billion for all of the CapEx, and not just relating to network, but network IT and others that will take into account network capacity and again, coverage for Brazil.

So just to recap, you said R$6 billion total, including Telemig, including the three licenses, but R$2.5 is stand alone?

R$2.5 for VIVO. Yes. It's excluding the shares of Telemig and excluding the licenses. Yes.

And just real quickly, the shares, can you just give us a quick recap of what exactly you're getting from Telemig in terms of the preferred shares and such?

I don't understand your question. What do you mean? What we -- ?

Well what of the R$6 billion, can you give us a quick breakdown on what is -- what goes for Telemig and what goes for the licenses? Obviously we know R$2.5 billion is for --

R$1.2, roughly R$1.2 - R$20 I think it was.

Yes.

And for Telemig, it's about R$2.7.

R$2.7. Okay. Great. Thank you.

Thank you. Our next question is coming from Walter Piecyk of Pali Capital.

Thanks. I just wanted to follow-up on the CDMA, the 3G. The -- are those cards, do they show up in your subscriber base? Like does that count as a subscriber card?

Yes. Yes. Every card is a new customer. Or a new access. Let's call it access.

So is -- and basically what you said, if I'm correct, is there's no reason to deploy HSDPA while you've got this good DO network. Correct?

No. We are not saying that.

No.

Okay. I'm sorry. Go on.

What I said is that we will launch HSDPA network as soon as it -- we realize that the network has the same level of quality that we have in EVDO. This will happen soon.

Okay. And then you also mentioned that the DO is in hot spots relative to the 1X coverage. If you were to look at your overall coverage, what percent of the POPs do you think DO is actually in?

EVDO today covers for about -- yes, 27%.

27%.

27%?

Yes.

Municipalities. But it's about 35 million POPs.

35 million POPs. That's a lot of hot -- okay. So when I look at the CDMA customer base, since you've launched GSM, it's declined by about 2 million customers per quarter. A little bit more on the first quarter.

Yes.

So basically at that pace, within two years, you should have taken those customers off of the CDMA network. Obviously you probably accelerated towards the end. Is the plan for the CDMA network to take those voice customers down and then use it just as data? Or basically to ultimately shut it down in two or three years time and realize the -- some of the efficiencies in network expense?

Our estimate considers that we still have three more years of CDMA. We are not aggressively incentivating our customers to migrate. So basically all of our gross adds are coming from GSM and there's a natural trading of our existing customers asking for a new phone. That's why today we have -- or at the end of March we have 42% of our customers based in GSM. That is not a result of just acquiring new customers. It is a fact of loyalty plans that we have with existing base.

Network, of course, we say that they take time for us to turn it off, as you mentioned before, but it is not something that we are foreseeing for the very short term. We will take three years or more.

Just as a matter of fact, and as information to you, by the end of March, we still have less than 1 million customers in CDMA. Today that number is about 600 -- between 600 and 700,000 customers. So again, the [set] at CDMA is going to be ended by the end of this year. But again, we are not pushing our customers to do that.

And when -- it looks like at CDMA, for example, when those customers move off towards the end of the year, then you can at least turn those cell sites -- I mean, at some point does the CMDA network just get shut off altogether and there's some benefit to network expense?

It gets (inaudible), yes.

Yes. Yes.

Okay. And then on ARPU, I know there's been some concerns out there about the level of subscriber growth and that maybe there's multi-SIM cards, but it looks like your ARPU has actually held up, so if you look at the -- I know you don't disclose post-paid and pre-paid. You did pack in 2000 --

We did it. We did it. Many, many of you have asked us for that, so if you look at the representation, we did it.

Oh, okay. I'll look back on that. So when you look on that --

Okay. But customer was a question.

No, no, the customers -- if I looked at the ARPU, year-over-year, it was a similar level. Is there any -- is post-paid going down and pre-paid -- I mean, what is the -- what's happening in the post-paid and pre-paid ARPUs?

Basically, all of them are increasing. And again, look at the blended amount in terms of outgoing.

Okay.

And to disclose again, between that, we really believe it is very strategice and we do not want our competitors to come, although there's a war among the competitors to look for the high end. But again, we need to keep on attracting and pampering those customers to stay with us. And they are paying off.

Okay. And then my last question is just on churn. The churn rate of 2.6% was no change to the prior year. But when you look back, 2006, 2005, 2004, there wasn't -- it didn't seem like Q1 was typically a high churn seasonal quarter. So is this a change in your business that you're going to see a higher churn in Q1 and it'll go off towards the end of the year? Or was there anything that we should look at as far as Q1 compared to Q4, as far as a higher level of churn in Q1 that might not be -- or that might be continuing in future quarters?

Basically what -- we are not seeing that it changed, of course, during the first quarter if you compare that. Not between quarters when we compare with the first of last year. But we do not believe that's out of control. And again the thing of -- we are looking closely with the competition is reporting and we do believe that we are doing a good job on retention. So I do not believe and I could tell you that we do not foresee surprises in that area.

And if a CDMA customer goes over to GSM, that doesn't count as a churn customer, right? You just -- that -- there's no change as far as the subscriber base on gross adds?

What do you mean, adds?

CDMA customer you retain them with a GSM phone.

No, no, no. That doesn't count as churn.

That's not in churn. Okay. Great. Thank you very much.

You're welcome.

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

Once again, thank you all for attending to our conference call this morning and thank you all for the questions. And 2008 will present to VIVO some interesting challenges, like the 3G HSDPA implementation and we think that these trends we have in EVDO will help us to a good job in HSDPA.

The second important challenge is the portability and the strategy we are trying to practice since 2005 of being the best company in terms of customer satisfaction. I think this puts VIVO in a unique position to face the portability. We feel that the customers want to come back to VIVO or the new ones wants to adopt VIVO at their operation.

And the fact that this year we are almost covering all the states of Brazil, the fact that we are present in Minas Gerais as the second most important market for mobile, the fact that we are entering in Franca, [Carlotas] and then in the next future in the northeastern Brazil, I think that now we have the same conditions to compete that some of our competitors have in the past. So we believe VIVO is strong, we have a good team, we have a high level of customer satisfaction and at the same time, we have the highest level of employee satisfaction in the country.

So this is what we count on to keep on producing the good results we think we produced this quarter and we have produced in the last five quarters. So this is I think what we have to say and once again, thank you all.

That's good.

Thank you. This does conclude today's VIVO First Quarter 2008 Results Conference Call. You may disconnect your lines at this time.