Telefonica Brasil SA (VIV) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to the Vivo Participacoes Second 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.

There will be a replay facility for this call on the website. After the Company's remarks are over, there will be a question-and-answer section. At that time, further instructions will be given. (OPERATOR INSTRUCTIONS).

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Vivo's management and on information currently available to the Company.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Vivo, and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I will turn the conference over to Mr. Roberto Lima, CEO of Vivo Participacoes. Mr. Lima, you may begin your conference.

Good morning, ladies and gentlemen. On behalf of Vivo Participacoes S A, we would like to thank you all for attending our second quarter 2008 earnings release presentation.

The information disclosure for this quarter has been consolidated with Telemig's results and has been reclassified as applicable. The information for the first quarter 2008 and the second quarter of 2007 was prepared on a combined base for comparison purposes.

The second quarter of 2008 was definitely an outstanding quarter. Vivo celebrated its five years of existence with an enviable [curricula]. On that same date, it launched its brand in Minas Gerais, adding more than 3.9 million customers to Vivo's customer base. The Mother's Day and the Valentine's Day campaigns were key to enable Vivo to reach more than 14 million customers to be the leading company in net adds with 2,125,000 new customers, and to recover its leadership position in Minas Gerais.

Along the quarter, the Company was able to keep its growth rates on a profitable basis by controlling manageable costs and carrying out aggressive contents designated to stimulate use. In this quarter, Vivo recorded a 14% increase in service revenue and kept strict control over the expenses, which presented an increase by 12% over the second quarter 2007.

Therefore, the EBITDA grew 16% with 23.2% EBITDA margin, up 6 percentage points. Thus the EBITDA recorded [at] 36% growth in the period. Excluding Minas Gerais, we would have recorded a 15% increase in our service revenue and a 10% increase in our costs over the second quarter of 2007.

The EBITDA would have grown 26% when compared to the same period of the previous year's, with a 23.4% margin, 2.4 percentage points up. Thus, the EBITDA would have grown 338%, totally BRL140 million in the quarter.

Slide 5 shows that the Company customer base reached 40,435,000 customers in June, thus ensuring the leadership position with a 30.4% market share. The net additions of 2,125,000 customers in the second quarter of the year discloses the Company's success in customer acquisition, mainly in the postpaid segment, which represented 36.6% of the net additions. This necessary and successful strategy is reflected by leading share of revenues.

Excluding Minas Gerais, Vivo recorded 36,173,000 customers in this quarter, with a 5.4% growth in relation to the previous quarter. The GSM operation achieved more than 22.6 million access, representing more than 55% of the total customer base, a growth of 54% over the first quarter 2008. Vivo accounted for more than 486,000 recharge points in June 2008, which represents 32% growth in the year. And the largest handsets distribution network with more than 9,700 points of sale, keeping the Company's leadership position.

Slide 6 shows that the acquisition costs of BRL86 in the second quarter 2008 represents a reduction of 17.2% over the second quarter 2007, and of 2.3% in comparison with the first quarter 2008. This reduction was achieved in spite of the advertising expenses related to the Mother's Day and the Valentine's Day campaigns in which Vivo leaded the market share of net additions.

(inaudible) acquisition costs would present an even more significant [reduction]if we disregard the brand name exchange and the remodeling expense for the points of sales in Minas Gerais. Expense [focused] on customer loyalty totaled BRL128 million, an 80% increase in the quarter, and [32.4%] increase in comparison with the same period of the previous year.

Our customer loyalty actions such as the reward program for usage, for exchange of handsets, and also for [achieving] the customer base contributed to the (inaudible) which reached [churning] stability, which reached 2.6% in the quarter.

Slide 7 explains the ARPU and MOU variations. The ARPU of BRL28.8 in the quarter represented a 3.7% reduction over the second quarter 2007, even with the addition of more than 6.5 million customers within the period. Excluding Minas Gerais, the ARPU would have been BRL28.9. It's important to evidence that the growth of 30.4% in data ARPU starting from BRL2.03 to BRL3 in relation to the same period in the previous year.

The blended MOU in the second quarter 2008 recorded a 23.7% increase over the second quarter 2007, out of which 51.2% increase in the outgoing MOU is then a result of usage incentive campaigns, which allowed us to test the elasticity for preference analysis of a community that exceeded the 40 million customers by the end of June. When compared to the first quarter 2008 the blended MOU grew 22.1% in the quarter, also as a result of the usage incentive campaigns.

Excluding Minas Gerais, the Vivo brand -- Vivo's branded MOU would have been 93 minutes, a 20.8% growth and 24% over the second quarter 2007, and the first quarter 2008 respectively. The outgoing MOU would have meant an increase of 47.3% over the same period in the previous year.

Now, I'd like to give the floor to Ernesto Gardelliano, our CFO, who will present you the financial data.

Good morning, ladies and gentlemen. We will cover the financial performance of the Company, so let's start on slide 10, where you can see that net service revenue grew by 14.4% over the second quarter of 2007, and 1.3% over the first quarter of this year, which is a result of the evolution of all components, particularly data and value-added services.

The increase of 10.8% in the franchising and usage revenue also contributed, mainly due to the growth in the total outgoing revenue, usage incentives, and promotions. Excluding Minas Gerais, we would have had an increase in net service revenue of 15.4% in relation to the same quarter of last year.

Data and value-added services revenue represents 10.4% of the net service revenue in the second quarter of 2008, an absolute increase of 52.7% over the second quarter of 2007. In comparison between the second quarter and first quarter of this year, the increase was 2.6%. Again, excluding Minas Gerais, the data revenue would have meant 10.5% of [network] service revenues, a growth of 2.6 percentage points.

This growth is due mainly to the continued increase in the SMS usage, Vivo ZAP, Flash and BlackBerry and Smartmail and the diversification in the WAP portfolio, Contents and Games.

We experienced a significant increase in the Other item, mainly due to the access charges related to promotional campaigns carried out during the period. By the end of June, Vivo accounted for more than 500,000 wide-band users. We are by far the leading wireless broadband carrier with more than 1.1 million monthly games, tunes, and images downloads and more than 300,000 monthly songs for downloads, which makes us the largest virtual music store in Latin America.

On slide 11, we bring our comments on the operating costs. The 23.7% increase in the cost of services rendered in the second quarter of 2008 over the same period of 2007, excluding the expenses (inaudible) is due to the 26% increase in the interconnection costs related to the growth in the total outgoing traffic, in addition to expenses with rental, insurance, and condominium fees.

The cost of goods sold recorded an increase of 5.1% in the second quarter of this year over the same period last year, partially due to the higher number of gross activations we've recorded, a 41% increase. In the second quarter of 2008, selling expenses recorded a 19% increase in relation to the same period of the previous year, arising out of higher volumes in third parties' services expenses such as advertising and publicity, donation, commissions, outsourced labor and client care, and supporting increasing customer loyalty retention costs partially offset by a reduction in the provision for bad debt.

The G&A expenses remained stable in relation to the second quarter of 2007 and recorded a 6.6% reduction when compared to first quarter of 2008 due to the decrease in third party service expenses namely consulting, technical services, technical-administrative services, rental, insurances, and condominium fees.

We keep on searching for new ways of doing and reshaping our operational processes to achieve savings in scale. Labor costs remained stable when compared to the first quarter of 2008 and the second quarter of 2007 even considering the annual wages increase agreed upon with unions.

Excluding the operating cost for Minas Gerais, we would have recorded a total of BRL2.6 million, an increase of only 10% in relation to the same period in the previous year. If we considered only the structural costs, those over which we have an effective control regardless of the commercial activity, we would like to record as a reduction of 4.7% in relation to the second quarter of 2007. This ongoing strategy places Vivo in better competitive conditions.

On slide number 12, we can see that the EBITDA in the second quarter of 2008 was BRL879.3 million, an increase of 16% in relation to the second quarter of 2007 and resulting in an EBITDA margin of 23.2%.

When compared to the first quarter of 2008, the consolidated EBITDA had a reduction of 5.4 percentage points. However, it is necessary to isolate the extraordinary effect of the [ISMS] tax recovery in Telemig in the first quarter of 2008 in the amount of BRL240 million.

Therefore, the EBITDA would have recorded an amount of BRL1 billion and 64.8 million with a reduction of 2.9 percentage points in the quarter as a result of increased commercial activity during the period and of the advertising and marketing expenses due to the launching of the Vivo operations in Minas Gerais.

Excluding Minas Gerais, Vivo's EBITDA would have been BRL799.6 million, a growth of 26% over the second quarter 2007 and the EBITDA margin would have been 23.4%.

On slide 13, we present cash flow of the operation excluding investment activities. In the second quarter of 2008, Vivo had cash consumptions in the amount of BRL588.9 million, an increase of a little more than double in relation to the pervious quarter due to the reason of licenses to intangible plant, property, and equipment.

The operating profit or EBIT was BRL143.9 million in the quarter, an increase of 36.4% in relation to the same period of the pervious year. In relation to the first quarter of 2008, the EBIT recorded a reduction of 58.2% excluding the extraordinary effect of the [ESMS] tax recovery in Telemig during the period.

On slide 14, we can see that Vivo posted a net loss of BRL59.5 million in the quarter. This result was mainly due to the increase in the interest rate and to the additional indebtness required for the acquisition of Telemig and in addition to the depreciation expenses.

Excluding Minas Gerias, we would have recorded a net loss of BRL69.7 million in the period. Please have in mind that when looking at the slide and specifically about the (inaudible) income. The combined net income in the first quarter BRL256.2 million, we must have in mind the extraordinary effect of the ESMS agreement entered into by Telemig, which impacts that result during the first quarter of this year.

As shown on slide 15, on June the 30th, 2008, Vivo's gross debt totaled BRL5.8 billion, out of which 31.4% were denominated in foreign currency. Such indebtedness was offset by cash and financial investments as well as the relative assets and liabilities resulting in a net debt of BRL3.6 billion.

The increase in Vivo's net debt in the second quarter of 2008, when compared to the first quarter of this year and the second quarter of last year, is mainly due to the acquisition of the control stake of Telemig and to the payment of 10% of 3G licenses, which were offset by strong operating cash generation by the company during the same period.

Excluding the Telemig's acquisition, the net debt would have decreased by 14.3% in the quarter and 25.3% in the year. Vivo's net financial expenses in the second quarter of this year increased by BRL46.2 million over the first year or the first quarter of this year. Such variation is explained mainly by the extraordinary effect of the assessment of (inaudible) taxes on the allocation of interest on the old capital.

Increase of financial charges and indebtedness arising out of the payments for the control share of Telemig's voluntary public offering and from 10% of the 3G licenses as I mentioned before, in addition to the increase in the actual interest rate during the period.

When compared to the second quarter of 2007, there was a reduction of BRL15.9 million in the financial expenses due to the lower effective interest rate in the period in addition to the end of the assessment of (inaudible) tax in 2008. On April the 3rd, Vivo took over the control stake of Telemig by setting a BRL1.2 billion payment. On April the 8th, we started the voluntary public offering for the acquisition of [up to] one-third of the outstanding preferred shares of Telemig, which finished on May the 15th. (inaudible) holding a 42.76% interest stake in the capital stock of Telemig Participações.

On July the 15th, Vivo announced the public offering of shares by disposal of share (inaudible) for acquisition of the outstanding common shares, the price of which will be updated since (inaudible) from the closing date until the date of the financial settlement of the auctions to be held on August the 15th at CBA (inaudible).

On July 16th, we (inaudible) on Vivo's investments, which had concentrated on (inaudible) products to support the 2008 growth. We have continued to address most of our investments towards enhancing the GSM network capacity including the municipalities at Minas Gerais, which I'm sure would support to the commercial activity in the quarter while allowing us to keep our leadership in compliance with (inaudible) quality goes.

Additionally, investments were made to increase the (inaudible) of the physical churns, improve systemic service, and promotional campaigns. Investment increased due to licenses of BRL1.2 billion are also accounted for in this quarter, contributing to a CapEx increase to BRL1.6 billion during the quarter. Including such effect and considering the adjustments to present value, as per the cbm instructions (inaudible) 169 the CapEx number would have represented 11.5% of net revenue totaling BRL435.7 million. In cash terms, we have only paid 10% of the total 3G licenses' value. Also for comparison purposes and excluding investment made by Telemig the CapEx number would have been BRL685.7 million (inaudible). Just for the -- the final remarks, I would like to pass over to Roberto Lima so that he can end this presentation. Thank you very much.

Thank you Ernesto. Now, we would like to add that we concluded the rebranding and the team integration of Telemig in April this year, Telemig is a company with almost 4 million customers and 2.5 thousand employees. At the same time, it's important to mention the brand (inaudible) is based on quality service (inaudible) and the largest handset distribution network which allowed us to (inaudible) this share of net additions in this quarter. Meanwhile, the company was able to keep its operating expense under control thus focusing on the commercial activity to face the current demand. We led the proposition by achieving the lowest number of complaints in accordance with ANATEL quality index while achieving 100% of ANATEL's quality targets.

Additionally, it's important to point out to the prizes awarded to Vivo, such as, IR Magazine Brazil Awards 2008 of the largest evolution in investors relations. The great place to work institutes prize for being among the 50 best IT and telecom companies to work with in 2008. And the XM Magazine highlight position in the annual list of best and largest companies in Brazil, which evidence our commitment to (inaudible) of our employees and a strategic focus on quality.

Thank you all for your attention. And now, we are ready to take your questions.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS). Please hold while we poll for questions. And so our first question comes from Vera Rossi from Morgan Stanley, please go ahead with your question.

Thank you, I have a question about CapEx. Are you still investing in your CDMA network if it is still necessary? And if so, what could be the percentage? And if not, when did you stop investing in your CDMA network?

And what will be the guidance for this year, if you have a guidance, assuming the total CapEx and the breakdown between -- we know how much is license. So what is the CapEx just for the -- your [network]? Thank you.

Okay. Answering your first question. No, there are no more investments on the CDMA network. We stopped investing last year. So far what we are investing is in adding capacity for the growth in the GSM and the new licenses, the new 3G network and the northeast.

What we have told to the market early this year was that the total investment was going to be -- and now I'm talking combined -- Vivo and Telemig was almost BRL6 billion.

(inaudible) for the licenses. We have assumed the BRL1.2 billion that we have paid out for the control stake of Telemig plus the (inaudible) tender also in mandatory (inaudible) that we learned by August that appears to be around BRL2.6 billion. The difference is basically network and IT and product and services. So that's the amount.

So the amount is BRL6 billion minus BRL1.2 billion?

It's -- I forgot, it's BRL6.2 billion.

BRL6.2 billion?

BRL6.1 billion is my total. So subtracted that BRL1.2 billion for the licenses, subtract BRL2.6 billion for Telemig, and the rest is the normal cost of business in terms of (inaudible) and others.

Okay. And when did you stop investing in your CDMA network specifically last year's second quarter, when you launched the GSM or --

Yes, it was first quarter of last year.

First quarter of last year. So all the cumulative CapEx since last year has been in GSM?

Yes.

And before -- because you had launched in the second quarter of last year, GSM.

No, we launched -- remember that we launched prepaid by the end of 2006, and postpaid we launched in March 2007. So we ended with our stocks of CDMA phones in the second quarter of 2007, but as CapEx are related, we stopped investing back in the first quarter of 2007.

Yes. But during 2007, (inaudible) made some investments in the EVDO network. We opened that (inaudible) demand of some customers, we have some corporate clients -- but (inaudible) that just increased the EVDO capacity (inaudible) for broadband.

Okay. And I have another question in terms of your handset mix. What do you expect to happen with your handset mix after you launch the 3G? Do you expect to see an increase in the acquisition costs because of the handset mix?

What works in 3G and the cards. It means that the device we have to connect the laptops the desktops. So this is what the market is looking for. In terms of our handset, we are already selling 3G handsets like all those smartphones we sell or the BlackBerrys, they are all 3Gs. So I think this -- we already have the distribution, we will have in the future.

So -- but have you launched 3G in your GSM network?

Not yet. We are still working with the EVDO. We are testing our 3G with HSDPA network which looks very well, but we are increasing a lot our transmission capacity before launching the service. But we are already selling EDGE devices that are combined with 3G transmission.

Okay. And when you'll launch 3G in your GSM network?

We are launching in small segment (inaudible) the campaign, I apologize, but we won't say when we are going to launch (inaudible) But we already have a 3G operation (inaudible) Telemig (inaudible) all the testing (inaudible) having some issues that other companies but we may have 3G EDGE, we should launch the EVDO in 2005. We have a large base reaching more than 600,000 customers in 3G EVDO. As we've told this morning that we have more than six million unique users for Internet access every month. So I think we are very well positioned, and we don't need to make a big campaign such as this this is already something that is already accepted by the market.

So but I'm not so interested in knowing the campaign now, but in terms of your handset mix, so what you said is that whenever you have your 3G under the GSM, you won't -- you believe your mix in terms of handsets, in terms of the -- especially the subsidy is now going to increase. Is that correct, because you already have that cost in your cost structure?

Maybe you could include it, but I don't think it is a big increase, because we are already selling all the best sellers like N95 from Nokia, the Blackberry from RIM other Samsung 3G smartphones. (inaudible) And so I think that the segments of the market that are able to buy a 3G handset, they are already doing that.

Maybe we could see some increase, but I think that the big increase will be on the connection devices that we put on their laptop or on their desktop.

(inaudible) we have a mix of 3G in GSM mix of CPUs those are already out there. Customers are paying for that. There could be a marginal increase as soon as there is going to be more availability of different variety of 3G phones that are not there yet. But so far that increase derived as coming from those phones are the already in the acquisition phase that we are facing today.

Okay. Thank you.

Welcome.

Our next question comes from Peter Lyons from Oscar Gruss. Please go ahead with your question.

Hi guys. I had a question on the advertising and publicity related expenses for the push in Minas Gerais, recognizing that this is the launch of a -- the Vivo branded operations in Minas Gerais.

Is it possible you can break up what portion of the selling expenses we saw in Minas Gerais under Telemig related to this initial push, and what we can see, I guess, going forward?

You are talking about the number that we could consider as one time or for the (inaudible) conversion is about [BRL16] million. And this webcast was to announce that there is the new brand in Minas Gerais, and now it's good to convert all the (inaudible) all the materials -- to change it, basically -- to change the face (inaudible) of all our stores in Minas Gerais.

Okay. And another question. This outgoing minutes of use increase that we saw, it was mentioned in the press release that this is resulting from a promotion -- an On Net promotion, I guess, related to Mother's Day and to Valentines Day.

If you could describe for us exactly what is this promotion, is it six months, is it introductory? What can we see in terms of minutes of use going forward? I'm just trying to understand why with On Net traffic increase, you would see also increases in interconnection, and how that relates.

But we campaigned for that (inaudible). We had a number of campaigns out there as you mentioned for Mother's Day and Valentine's Day. There were a number of campaigns that were bundled all together, and yes, all those campaigns are launched for a period of six months.

But for a customer to be taking advantage of such campaigns, first of all the customer must make a down payment, an extra charge that we had reported in other revenues, as I mentioned before. And on top of that, that customer must at least have to recharge -- basically for the prepaid -- for the prepaid customer, they have to recharge a value which in this case was BRL60 every 30 days. Unless that customer keeps on doing that, that customer loses the promotion.

So in terms of (inaudible) that was mostly directed not to get usage up, but to get a higher number of customers within the prepaid segment to recharge on that different frequency as we have seen before. We were able to see out of the total customer prepaid base a 2% more (inaudible) based to recharge that did not recharge in the past with that frequency.

And so far we are not foreseeing that that peak in the use are going to be likely to happen in the third quarter. We mentioned this before. And again, something that is still on is the Mother's Day and Valentine's Day campaign that we learned that in October, I think it is the date. But so far, the number of customers that are keeping them achieving the minimum target is diminishing months after month.

Okay, so we'll see a relative decline in the outgoing minutes of use as people come off this promotion?

Yes, but in terms of whether it's their minutes is going to be up.

Okay, that makes sense. Thank you.

Our next question comes from Walter Piecyk from Pali Capital. Please go ahead with your question.

Thanks. Just to verify. You said you have 600,000 of the internet cards that have been sold to date?

Excuse me, can you repeat that?

Did you -- I just want to -- I think you said this, I just want to verify. You have 600,000 cards for internet access, wireless internet access?

500.

You know, it's between 500 and 600 thousand internet cards that are EVDO cards.

Oh, EVDO.

CDMA, EVDO.

Fine. And so what's your expectation on a quarterly basis? I know you're starting to sell cards in some of these high end electronic stores. How many hundreds of thousands do you think you should sell at each quarter going forward?

I'm sorry, but I don't think we are able to --

Can you give us -- I mean, is it possible that cards could be half of the -- 50% or 30% of the net additions of the company?

No, no.

No, I don't think so.

No. Given the volumes that we are facing these days, (inaudible) that's not correct.

Okay. And then also bad debt, it's obviously very low. Any reason why this should spread one way or another in future quarters?

Again, I just hope that it is very low. Yes, we are leading that index (inaudible). We are looking through that index with other Latin American countries. We still have a job to do. Our strategy is, again, is not to be fixed in a direction of numbers, but to better a dynamic process that would keep on working where the sales team, the customer care team, assessed in a way to -- how is it possible to increase revenues where that will have an uncollectibility (inaudible), but which is the way that we can proactively increase revenues in a way that, on a percentage basis, it's going to be beneficial to the Company? So we're not looking in terms of absolute terms. We're looking at on a percentage point.

So even if the percentage is pretty impressive, less than 3%.

Yes. Yes, and we keep on working about -- again, it's a combined effort between the different teams, how we react, how we changed those policies at the time that a new customer is coming to us, at the time a prepaid customer is migrating to a postpaid line in such a way that we can be highly productive in concurring their issue and not (inaudible).

And that is also part of the profile, the customer based profile that we have, by setting up some standards and some conditions to (inaudible) our customer to apply for our services. So it's not just a way of dealing with uncollectibility, but it talks (inaudible) about the customer base that we have so far.

Okay, and then just one last question. I believe that around the time when you purchased the 3G spectrum, there was some discussion about an integration of a built-out of the 3G networks with other operators, for example, TIM Participacoes. Have you talked to them at all about building 3G networks together or any of those type of integration with them?

No, it's a lot of (inaudible) that companies could share the frequencies in the networks in small municipalities. Less than 30,000 inhabitants. But at this point in time, we don't have any projects we -- any other related --

Only -- the only thing that we are doing as we did in the past is to share our (inaudible) sites.

Okay, great. Thank you very much.

You are welcome.

And, so our next question comes from Rizwan Ali from Deutsche Bank. Please go ahead with your question.

Hey, good morning. My question was related to the campaign, the Mother's Day and the Valentine's Day campaign, that you had in the second quarter. Do you have any -- was your campaign in Sao Paulo a whole lot more aggressive than in other parts of the country? And that's the first question. And second question is, are you negotiating with Oi in Sao Paulo to share in the structure?

First question, no, it was a national campaign. It was communicated by the net, all the -- the campaign, about that time all over the world.

Including Minas Gerais.

Including Telemig in Minas Gerais. And the second question was about -- we are sharing stuff with Oi in the northeast and also here in central but just some (inaudible).

And one last thing is, I mean, Father's Day normally is less aggressive in terms of campaigning. Do you see any difference this time around? Do you expect --

Well, last year Father's Day was very aggressive we sold a lot of new --

SIM cards?

SIM cards last year, and but this year we think that we see no difference. It should be a little less than we saw in the Mother's Day.

Yes, if we prioritize, our Christmas campaign is the number one. Mother's Day is the second one. And then you have Valentine's Day, Father's Day with different seasonality that is going to impact our opinion.

And one last one. You said there is an extraordinary effect in the interest expenses because of the fee and tax. Can you quantify that?

That's -- no, that's -- this year, according to the procedure and regulation, there was a CPMS tax that applied to all of our debit within the current account, the checking accounts, but this year it's not (inaudible) in place.

So starting January the 1st, all of the industry, we think I believe there are (inaudible) So that's -- it's not (inaudible) but it's an expense that is no longer there. Is that what you mean?

I guess, yes. I mean, you mentioned there was extraordinary taxes in the expense line. So the expense veered. Thank you.

Well, apparently this one, in -- by the end of the January this year, Telemig signed an agreement with the government of Minas Gerais to put an end to an (inaudible) that they were carrying out in such a way that they would not keep on arguing about a specific line of (inaudible) value added validity status, but on a state-by-state basis, it's not a national task. And Telemig got back (inaudible) [BRL50] million based upon that.

Of course, that amount has various fees attached. So the accounting record that was posted in the first quarter was, on a net basis, BRL240 million. That was completely extraordinary. It was reported that (inaudible) revenues was completely out of the normal course of business. You have to take into account -- and I mentioned that --and the net income -- I think I mentioned the EBITDA relied on the net income.

If you could (inaudible) the combined net income of [BRL256] million that we should have disclosed in the first quarter, should have Telemig being considered, took into account BRL240 million of an extraordinary tax expense.

Okay, thank you.

In reality, it's not a tax expense. It's a recovery of a tax expense. And we got cash it is not just an accounting record. They have got the cash.

Okay.

(OPERATOR INSTRUCTIONS). And so our next question comes from Henry Cobbe from Nevsky. Please go ahead.

Hi there, and thanks very much for the call. I just wanted to check on two things. First of all, there has been a dramatic improvement in your SAC. It's come down a lot. And I guess that has partially due to the move to GSM. And -- but, well, how much more can you reduce SAC price over the next 12 months? And in elated question what was your outlook for margins, EBITDA margins for the full year?

To be very candid, (inaudible) what comes from the GSM operations, but also from the stuffs that we are selling. A part of the new (inaudible) we have comes from the SIM cards sold out. (inaudible) one of these, but, yes, we are selling (inaudible) SIM cards.

And exchange rates?

The exchange rate, that are in Brazil is very appreciative so it reduced costs of all the components in the handset value (inaudible). So I think this has produced and we think the fact there's another point that's important is the fact that we are selling a big chunk of -- being part of the postpaid new ads in some of our own stores where we don't have to pay commissions and other rival costs to the -- that we have to do in the retail or the department stores.

Okay. So and how does that impact margins for the full year, do you think?

Talking about margins.

So -- yes, we wouldn't like to talk about the future in (inaudible).

Okay. I know we're going -- just going back to the past. And in the second quarter, it's very clear that the outbound usage volumes are dramatically increasing as a prices come down. Is this part of a strategy to reduce the dependence on inbound revenues?

Yes, the first objective we have is to activate (inaudible). You know that nowadays we have 140 million customers, the (inaudible) who have these customers that (inaudible) so that they have to use our service.

So reducing price to make these networks fairly more active and for them to tap our services and to increase the knowledge of these customers and also reducing the cost of planning for the future.

And in that concerns the interconnection costs we know that the reduction in the outgoing prices is a way for us to reduce the dependence, but it is too soon to say that this will reach this objective.

Okay. Thank you very much indeed.

Welcome.

Thank you. (OPERATOR INSTRUCTIONS). And sirs, we have a follow-up question from Mr. Peter Lyons. Please go ahead.

Hi guys. I was just wondering with regards to Sao Paolo, about what percentage of the new handsets sold were 850 megahertz only and what do you expect going forward in terms of the mix of phones for 850 megahertz.

First of all, it is not only 850 megahertz. There are dual band phones which is 350 and then (inaudible). Those are the two freqencies that Vivo is operating today.

Yes.

And then we have the tri band and quadri band phones taken as a 1.8 and the 2.1 as well. Today we have a different array and again, the price in -- the CPA price together with certain plans is set up based up on a big expectation that we have in (inaudible) that we understand should be the base in order to have the customer base that we are willing and that we are currently holding together with the profitability that we understand it is necessary for this business.

But again let's say telling you that moving from now on just to (inaudible) phones in the high frequencies. That it is not something that is going to happen in the short term. Remember that we have 55% of our capital (inaudible) GSM. We still have CDMA. CDMA is operating in 850, and again all of the main tier phones are dual bands.

So, just to be clear, TIM and Collateral, they operate in 1,800 or 1,900 or both in Sao Paolo?

No, they operate in 1.8.

1.8?

1,800.

1,800.

Yes.

So the dual band phones then do not operate in the same frequency as the competitors, but the tri band phones do.

Yes, yes.

The tri band phone we have, 860, 1.9 and 1.8.

1.8.

And about what percentage of the new phones sold in the quarter were tri band and what percentage were dual band?

That's going to be an excellent opportunity for them to know what we have sold, I am sorry --

Today. Okay, all right. That's fine. With regards to the SAC, I'm not really clear on how SAC declined when we saw such an increase in selling expenses. Is it just because the sheer number of net adds diluted the subscriber acquisition costs?

Yes.

Yes.

Yes.

Yes.

Definitely.

The number of new adds and considering that part of these adds comes from the selling of SIM cards.

Okay. All right.

Having known that on a yearly basis and that is something related to the ARPUs as well, when we look at ARPUs falling 3.7% on a yearly basis, I remind that during the same period, we added more than 6.5 million customers. So that impressive.

Okay. Thank you guys.

Welcome.

Our next question comes from Mitchell Collett from Cazenove. Please go ahead with your question.

Hi. I just want to be clear on the minutes of usage. The number that you -- inbound that you have in your numbers, does that include all net calls? And if it does, it seems to have declined. So, this increase in MOU overall largely because of cost of fixed lines, or is it cost to competitors?

The answer is no. Inbound minutes are only recorded from fixed-line companies, our competitors and international calls. All net calls are only recorded at that (inaudible) and it is only recorded as one piece, although it demands two pieces of voice radio and we record it as just one piece.

Okay. I understand. And then so this increase from 41 minute outbound in Q207 to 62 minutes of Q208, could you give us a feel for how much of that increase is on net?

On net, I don't have that by heart, no.

Okay. No, you couldn't sort of just have it broadly?

Yes, I don't have that by heart.

Okay. Great. Thanks.

Okay.

Our next question comes from Michael Schwabe from Arthe Capital. Please go ahead.

Yes, just a question on penetration. What do you think the real penetration is and how many customers have two SIM cards? And as the penetration gets higher and higher, what should we read of this --?

I was waiting for that so that question by (inaudible) when asked of that because it is a very interesting question, yes.

My answer is that we could say something about 20% double counting --

Yes, correct, but the penetration is not exactly a penetration of customers. Lately we started talking about the concept of accesses and how we will make a comparison of how we make like a ruling of how many accesses belong to one customer. But it is not something that we can truly report to the market. It is something that we have some feelings.

But if you remember, what we've been saying in the past and many, many times three years ago, two years ago when many, many people asked us about why we were loosing market share, and we kept on saying that market share is very important -- index is a very important metric. Bu as a means of grading an addition target which we have in all of our performance (inaudible) and whatever which is revenue share.

Unfortunately so far we have not seen our Company's (inaudible). By the end of all of the disclosures we'll be able to calculate again. But have in mind that by the end of the first quarter, we were having something more than 30% of market share, but in terms of revenue share, we will come to 33%. So that's a good arithmetic to be following so as to have a glimpse of how much of the penetration is linked to a figure only or a number, but a number that costs a lot in Brazil based upon the system fees that we have to pay based upon every activation that we disclose and how much translates into profitability.

Okay. And second question is are you seeing much inflation in any of, let's call it -- obviously not the taxes and the interconnection stuff which has to do with other things, but with the third party services or some of these selling expenses, is there much inflation in any of these, any pressures?

What we have seen inflation is basically in our -- all of our (inaudible) that by contact we have to object. And third party is expensive as I mentioned. There is (inaudible) as we have also seen and faced an increase in all of our salaries based upon the agreements with the unions. But what we are trying to do as we pointed out in our presentation is that all of the structuring costs -- we must keep on working. That's another story of how we set up processes that we have a positive impact in the customers. Those expenses will go down and make room -- enough room for us to keep on investing on the commercial side. So we have seen in some areas, not in all of them.

How much did the union wages go up by?

Last year it was 23 (spoken in foreign language). It was 45%.

Okay. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Please hold while we poll for questions. Please continue to hold while we wait for questions. And sirs, our next question comes from [Jose Lyon] from [Vonetta Assets]. Please go ahead.

Hi. I have one follow-up question regarding the penetration and market share. When you mentioned your markets held 43% on revenues, that is including the interconnection fee?

I said seriously no not seriously I am talking about the (inaudible) when you compare some other (inaudible) revenues interest rate and then you make up this and the interconnection of course the next part of the revenue stream and we are talking about service revenues that were not considered (inaudible).

Okay, the other point is we are having penetration (inaudible) Anatel (inaudible) such that our company is not very (inaudible) not only the postpaid clients also the prepaid so just there is no way to, I think there should be a way to talk right there how much is there where penetration and how many phones they were placed in the industry.

To tell you I think your question we I believe we (inaudible).

I think, I apologize, last year such that all the company's registered a decline not only for prepaid customers but also for postpaid customers also for prepaid so is there a list of the clients that should be a way to calculate how many, the real penetration and how many (inaudible) the number.

I am not sure we understood what you said about Anatel but not users. My impression can have more than a one actor, we see that (inaudible) has 107% (inaudible) said that that [15%] it means that their (inaudible) the one I said. And Anatel says 133 million customers in fact list 133 million access and Anatel does not make any difference whether it is a postpaid or prepaid and by the time you add our new access you take (inaudible) and that you read it is to state that that access so you pay an initial effective rise (inaudible).

Okay, perfect. Thanks.

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

Okay, thank you all for attending to our second quarter (inaudible) presentation we have (inaudible) reducing our various (inaudible) in the future and the confidence you see is such that the specific issues we had in the past that cannot be (inaudible) different technologies all that belongs to past, we have the best team in the market, we have the best rent, so we think we are able to maintain our leadership and trying to increase our share in the revenues (inaudible) so the company is (inaudible) we are the projects you mentioned and we give you our presentation (inaudible) for us knowing that we are recognized by the market, we are recognized by our customers and also by our employees. So we are very positive on the future and once again thank you all for attending this presentation, thank you.

Thank you this concludes today's Vivo's 2Q08 results conference call. You may disconnect your lines at this time.