Telefonica Brasil SA (VIV) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to VIVO PARTICIPACOES' third 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 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, 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. It 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 2008 earnings release presentation. This quarter, as in the second quarter 2008, our published results are consolidated with those of Telemig.

The third quarter of 2008 was marked by several important achievements. For the fifth consecutive year, VIVO was elected the most reliable brand in the mobile telephony segment by an IBOPE survey carried out in conjunction with Selecoes magazine. This award is a reference for the evaluation of brand, institution and professionals, and VIVO was elected by 35% of the consumers interviewed.

In addition, Brand Finance, the leading brand evaluation consultancy, elected VIVO one of the 10 most valuable brands in Brazil. This evaluation assesses (inaudible) price, adequacy and transparency, brand perception, social responsibility, and quality.

In September, VIVO launched its W-CDMA network, and became the first Brazilian operator to offer the HSUPA network. In October, it began operations in the states of Ceara and Pernambuco, covering Fortaleza, [Recife], and 18 other cities, strengthening its leadership of the Brazilian markets.

Thanks to this [constant chase] of excellence, VIVO was included in the list of the 150 best companies to work for in 2008; further proof of our determination to provide job satisfaction for our employees, and underlining our commitment to transparency, the creation of market confidence, and a strategy focused on always maintaining our reputation as a quality (inaudible).

It was in this climate that we launched our new marketing campaign, "VIVO never ceases to innovate, because our life also never stops," which brings us to the beginning of our third quarter results presentation.

VIVO's net service revenue recorded a year-on-year inorganic growth of 28%, accompanied by strict control over expenses, which moved up only by 14% in the period. As a result, EBITDA increased by 58% to BRL1.3 billion, with an EBITDA margin of 32.3%, up by 6.6 percentage points (sic - see Press Release).

EBIT climbed by even higher, 127%, reaching BRL551 million; the net profit recorded almost BRL130 million. As for organic growth, net service revenue rose by 15%, while expense only increased by 4.4%, once again, underlining the recent administrative expense controls, sustainable growth, and profitability that characterizes the recent quarters.

Consequently, EBITDA moved up by 40% and the EBITDA margin widened by 6 percentage points. EBIT recorded period growth of 83%. Our EBITDA per subscriber is by far the best in the category.

On slide 5, you can see that the customer base reached 42,277 million customers in September, ensuring our leadership of the sector with a 30% market share. Our share of net additions stood at 24.2%. Net additions of 1,842,000 customers in the third quarter underlines the success of our client acquisition efforts.

The period, whose main campaign centered around the Father's Day, was marked by customer acquisitions and loyalty building promotions. In comparison with the third quarter 2007, there was an inorganic addition of more than 10 million customers, equivalent to an year-on-year growth of 35%.

The GSM operations achieved more than 26.2 million accesses, representing more than 62% of the total customer base. In the third quarter, we initiated a rationalization drive to improve the profitability of recharge points, closing September with 456,000 points, and the biggest handset distribution network with more than 9,900 points of sale.

Network quality, attractiveness on the portfolio of plans, and handsets contributed to this growth, keeping the Company's leadership position.

On slide 6, you can see that the acquisition costs come to BRL76 in the third quarter 2008, 11.6% down on the previous quarter. This reduction was mainly due to the decline in expense per customer acquisition subsidies, thanks to the almost 50% reduction in subsidized sales. Increased sales of SIM cards and GSM handsets also contributed, given their lower costs.

The churn rate stood at 2.6%, identical to the previous quarter, thanks to our efforts on the client loyalty building and retention fronts, such as Reward Program, especially in regard to exchanging handsets.

Slide 7 shows the ARPU and MOU variations. Blended ARPU averaged BRL29.40 in the third quarter 2008, 2% up on the previous quarter, thanks to the 3% upturn in incoming ARPU.

In year-on-year terms, ARPU fell by 4%, despite the 20% period growth in the customer base, and the 80% increase in the average recharge value per customer. It's also worth noting that paid ARPU moved up 20% year-on-year, led by the postpaid segment; postpaid ARPU grew by 27%.

The launch of BlackBerry Pro and Curve in Minas Gerais gave further momentum to this revenue, reinforcing VIVO's strategy of being the best choice in this segment.

The Company continues to focus on the rational position and maintenance of high and medium-end customers, always seeking positive results from its commercial operations.

Blended MOU fell by 5% over the second quarter 2008, impacted by the usage incentive promotions for Mother's Day and Valentine's Day. Blended MOU increased 16% year-on-year, mainly pushed by outgoing MOU, which moved up by more than 30% fueled by the usage incentive campaign.

Now, I would like to give the floor to Ernesto Gardelliano, who will comment on our financial performance.

Good morning, ladies and gentlemen. I'll start on page 10, where you can see that net service revenues increased by 7.5% over the second quarter of 2008, and 15% on a year-on-year basis, mostly fueled by the upturn in data and value-added service revenues, which climbed by 41% over the third quarter of last year, and accounting for 10% of the total net service revenue.

VIVO Zap and downloads were mainly responsible for the data upturn, recording respective year-on-year growth of 66% and 85%. Franchise and usage revenue also contributed with an increase of 11.9% primarily from the growth of total outgoing revenue mainly driven by usage intensive campaign, which boosted customer satisfaction and convenience by offering a more attractive cost-benefit ratio.

As mentioned previously, Telemig contributed with a net service revenue of BRL400 million in the third quarter of 2008.

On slide 11, we comment on our operating costs. The cost of service rendered, excluding the Fistel fee recorded an year-on-year upturn, mainly due to the increase in the interconnection costs, as a result of our growing traffic growth. In comparison with the previous quarter, they fell by 1.9% due to the reversal of PDD resulting from the co-billing renegotiations.

The cost of goods sold fell slightly over the third quarter of 2007, mainly due to the increased [income-only states], despite the more intense commercial activity.

In quarter-over-quarter terms the cost of goods sold moved up 1.8%. Selling expenses climbed 7.1% on a year-on-year basis, due to the high third-party service and customer loyalty expenses, partially offset by the reduced provision for bad debt, which represented 1.2% of growth revenue in the third quarter.

In comparison with the second quarter 2008, selling expenses dropped by 10.4%. G&A expenses recorded an 11.4% year-on-year reduction, due to the termination of the management fee contract in early August. In relation to the second quarter 2008, they fell by 8.6%, mainly due to the reduction in consulting expenses and others related to technical administrative services.

Personnel expenses climbed by 4.7% over the third quarter 2007, due to the collective wage agreement, but reduced by 0.9% over the previous quarter. Fistel contributions also moved up year-on-year, due to the period increase in the customer base.

On slide 12, you can see that the third quarter EBITDA totaled BRL1.3165 billion, 60% up on the previous quarter, giving an EBITDA margin of 32.3%. In comparison with the third quarter '07, the consolidated EBITDA moved up by 40%.

These hefty increases were due to the big upturn in revenue, driven by the expansion of the customer base, as well as the reduction in costs, especially structural costs, which remained under strict control. A further positive contribution came from the maintenance of the cost of goods sold, due to the sale of GSM handsets, whose acquisition costs are lower.

On slide 13, we show our cash flow from operations, excluding investment activities. In the third quarter, we had a cash consumption of BRL110.2 million, 80% less than in the second quarter 2008, mainly due to the reduction in additions of intangible assets and investments and the positive impact of the quarter's net income.

If we exclude Telemig, the addition to investment planned include BRL651.1 million in [goodwill] from the Company's acquisition, VIVO would have recorded a positive cash flow of BRL540.9 million. Operating income totaled BRL550.9 million for the quarter, %282.8 up from the second quarter 2008, and 83% up on a yearly basis.

On slide 14, you can see that VIVO posted a third quarter net income of a BRL129.8 million, a massive improvement over the previous quarter's BRL59.5 million net loss.

As you can see on slide 15, VIVO's net financial expense increased by BRL99 million, primarily due to the adjustment of the third generation licenses to present value in the amount of BRL50.3 million.

The gross debt totaled BRL5.9 billion, which was partially offset by cash flow, financial investments and derivatives, assets and liabilities, [forwarding] a net debt of BRL4 billion at the end of the quarter.

The increase in the net debt was due to the acquisition of the third generation licenses, partially offset by strong period cash flow generation. Excluding the acquisition of Telemig, the net debt would have to come to BRL2 billion, 19% down from the second quarter 2008, and 51% less than in the same quarter of 2007.

On October the 14th, VIVO approved the contracting of credit line amounting to BRL389 million from Banco do Nordeste, for the implementation of the northeast network, and the expansion of the networks in Bahia, Sergipe, and Maranhao. We should also make it clear that all of VIVO's financial debt is protected by hedge operations, tying the final cost to reais.

On page 16, you could see the payment schedule that is going to be due in the fourth quarter of this year, and also a breakdown of what has been contracted in foreign currency and in local currency, again repeating that we have signed for financial instruments that [we raise] that all debt is tied to the reais.

On slide 17, we show our investments. We continue to focus on capacity expansion projects to support the 2008 growth. Most investments went towards expanding the coverage and capacity of the network, which now includes Minas Gerais, Ceara, and Pernambuco. These two states in the northeast absorbed more than BRL180 million, or around 20% of the total network investments.

Year-to-date investments in maintenance and expansion excluding licenses, totaled BRL1.5729 billion, equivalent to 14% of the total net revenue.

Now for the final remarks, I would ask our President Mr. Roberto Lima to take on the lead. Thank you very much.

We believe the third quarter numbers are the result of a very competent policy regarding service quality and good financial management, and at the same time, doing all the investments required to guarantee VIVO's future in these markets with high growth levels and with its enormous potential.

Telemig acquisition, the launching of the northeast operation, the coverage leadership in 3G, and the continued expansion in GSM operation, changes the strategic position and competitiveness of VIVO.

The quality of VIVO's team, and our capacity and our adaptability to face big challenges, are our main levers to maintain a good performance on results and growth for the future. We can now start with the Q-and-A section. Thank you all for your attention.

Thank you. (Operator Instructions) Our first question comes from Vera Rossi from Morgan Stanley. Please go ahead.

Thank you. My first question is about your EBITDA margin. If we assume competition continues to be focused on price per minute, and subscriber growth remains at the current pace, can we assume the margin now are going to be in the 30s range, so it could go to mid-30s next year? Thank you.

Vera, thanks for the question. We expect it to -- because that the level of investment will be very high for next year (technical difficulty) the commitment we have -- and our strategy is to generate as much cash as we can, and we hope that all the market will follow us because they also need to invest. So this is the way we think that the margins should behave next year.

I would -- Vera, I would add to that something that I've already mentioned in our previous conference in Portuguese, is the fact that when you choose to have a keen eye for what the competitive environment is going to be [advising] the whole industry. So we cannot stay that far from what the others are going to be doing, since we have to keep on doing our consistent job of ensuring a flexible organization in terms of making decisions, in terms of structural costs, so as to provide to the commercial organization. Both on the loyalty time and on the acquiring side, we have enough resources to be there on the margin, okay?

Okay. And my second question is about your handset costs for the fourth quarter, this upcoming Christmas season. Do you think the recent depreciation of the currency is going to have already an impact from this quarter, like fourth quarter, or just next year?

And we already have negotiated all the contracts for the fourth quarter so -- and we have good agreements with our partners, every one of them. And so for the fourth quarter, I don't see too much problem. Let's see how the local currency evolves for the next year. But for the moment I think that we've got some equilibrium.

Okay, thank you, and congratulations on your results.

Thank you very much, Vera.

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

Hi. I know it's still fairly early, but I wondered whether you'd noticed any competitive change from Oi coming into Sao Paulo. And secondly I wondered what the policy was with regard to dividend. Thanks.

So in our considers -- in our concerns Oi entering in Sao Paulo, I think it's an important move, as our entering in the northeast region where Oi is the leader is also very important. So -- and I think that there we were [struck] by the low end of the market, but they are [doing] -- selling SIM cards, and we have to respect it's a strong competitor.

But we know that we are able to defend our position in the higher value market that this is what we are doing. And numbers we have from the [portability] system confirms that we have the good strategies.

We are doing very good in -- my concerns, the corporate markets, and in the high-end it means that postpaid are contract customers. So we have to effect -- we issued some policies as part of the reality.

We have to keep on doing what we know to do it, is to serve our customers with the best as far as we can, because we don't want a customer that will stay with us for three months just because it was a SIM card at BRL5 and he has free traffic for three months. So we expect to have a long-time relationship with our customers. It's a different strategy.

And now concerning dividend, I will let Ernesto comment on that. But you know that we still have a lot of investments in the next year in terms of GSM expansions, and also in the commitments we have within ourselves.

And we once we sign the agreement for the 3G frequencies and some licenses, we are assuming that we have to increase the coverage for second generation and third generation [in this MOU], when we start all over Brazil.

So we will have to preserve the cash and liquidity is something that we will have to wait and see two or three months to see how it evolves. But we have to be very responsible in what concerns cash management for the near future.

Yes, and I will say that this is exactly a good time to be talking about that. We analyzed and decided at the shareholders' meeting for the results of the whole 2008 that is going to happen next year.

Okay, that's great. Thank you.

Right.

Our next question comes from Valder Nogueira from Itau. Please go ahead.

Good morning guys. We saw that you guys did a good job on the MOU side, especially the outgoing MOU. This reduces your dependency on the mobile termination rate. My question is, what's the status of the discussion on mobile termination rates?

The agreements that we signed with all the other operations, they have a two-years term.

Yes --

So --

-- for the time being I would say they would cover all of 2009.

Yes, for 2009, we don't have -- we already negotiated, so it's done. But we know that not only the operators, but the government will -- we will try to discuss the [services]. And we are ready to do that. So we know how the dynamic of this market is. And if we change one of the elements, the important elements like the [UN], we'll have to consider what has impact in all the others, so it means [exceeding] market growths, investments, and all that. And I know that not only the government, but all the other operators, they are very sensible to that.

Okay, thank you.

Thank you.

Our next question comes from [Julian Brezhon] from Citi. Please go ahead.

Hi, guys. It's actually James Rivett here from Citigroup. Two questions, if I can. The first one is, are you seeing any impact of the economic slowdown currently within your numbers? It doesn't look like it.

And the second one is, just in terms of the Christmas campaigns, should we expect anything different this year? Is there anything in the way that you're changing your strategy for the fourth quarter versus other years? Thanks very much.

Well, for the time being we don't see any reduction in traffic, as I said in the previous call this morning. I gave a date on October and October was one of -- was the best month in the VIVO history for the recharge, it means in the prepaid, with the exception of December, that is a special month.

So we don't see any reduction in the consumption for this moment. But we cannot assure that this will keep on for the next month. There seems to be -- we're not sure that we'll find the same situation for the next months, or for the first quarter 2008, but we are very positive on that.

We know that cellular phones and communication by mobile phones is an -- first-need service nowadays in Brazil. People will start -- people will stop drinking Coca-Cola, but they don't -- they don't stop to recharge their phones.

So we expect that even if there is a recession in Brazil, our market will be, let's say, more protected than all others. So -- but anyway we know that there's some kind of unemployment and other macroeconomic impacts on Brazil. We should be very conservative in what concerns the cash management, because we have to reduce the cash flow we are [dishing] out.

We see the high margins we are generating. It's just for us to have a good cash generation, because we know that we should keep on investing in coverage in GSM, in coverage in 3G, reinforcing our network capacity, covering new and small cities, that comes from the [commitments] we've signed with Anatel the moment we bought the third G -- the 3G generation -- the 3G licenses and frequencies.

So -- but I think this is what we have to say about that. So it's time to manage the treasury, try to generate as much cash as you can, not -- it doesn't mean that we will not pay a lot of attention to the markets, and maintain the leadership in number of users, but principally in revenue share.

Okay.

Mr. Brezhon -- or, Mr. Rivett, do you have any further questions?

Yes, it was a -- follow-up was about the Christmas campaigns. Is there anything -- is there a reason to expect anything different this quarter versus -- or the fourth quarter versus this time last year or the year before?

No, I think there's different moods from different operators, if we look through -- to Oi, they are entering now in Sao Paulo and they will put a lot of pressure on the Christmas campaign for this region of Brazil, so we will do for the northeast region. We see that the operators will try to have different campaigns for different regions.

In our case we will put a lot of action in taking some [volume] from our own customers' portfolio, considering that we are already [big] -- we have 43 million customers -- and nowadays we have much more products than they used to have in the past.

So -- and not only in 2G, but with 3G, we can sell the moldings to our own customers, we can sell smart phones, BlackBerrys, and higher value handsets for our own portfolio. We can offer several new services that we think fits their needs. We can segment our base -- this will be the focus we will be taking in Christmas time. It doesn't mean that our efforts to bring new customers will reduce. So we'll have 9,900 points of sales.

We have a machine that is able to sell more than 2 million, almost 3 million new customers in this period of time. So -- but we will try to do both at the same time, so as to attract new customers, but at the same time try to sell new service to the customers we already have.

Do you have any further questions, Mr. Rivett?

Thank you.

Our next question comes from Lars Konrad from Merrill Lynch, please go ahead.

This is actually Mauricio Fernandes. Good morning, everyone. I have three questions actually. First is on the ARPU patterns. I just wanted to understand what happened to -- I understand that the minutes of use went up, particularly on the outgoing side. I just wanted to understand what has driven the increase.

I would guess it is still the influence of the promotions that we saw in the second quarter -- that hit the numbers in the second quarter that seems to be paying off now. And so I would -- wanted to understand what can you expect going forward, is this new level of ARPU or not? That's the first question.

Second question is on CapEx for 2009. This MOU increase will probably mean more capacity in the network, which is partially compensated by the spectrum that you brought in at the end of last year. So I wanted to understand how advanced are you in the 3G network development, and whether this will -- the higher MOU will mean even higher CapEx?

And finally the third question is to do with the spectrum bought last year, whether the financing requirement has been obtained, or you're going to pay installments to the government? Just wanted to understand how the payment regarding the spectrum is to start with the (inaudible)? Thank you.

Okay, let's go step by step. In terms of MOUs, they have declined, based upon the different campaigns we have launched during the third quarter. Of course, during the second we launched a very aggressive campaign for Mother's Day that paid back in terms of the number of customers we got from the market.

If you look back, what we are trying to do in terms of ARPU and it's not only depending on MOUs, but on the mix that we try to offer to all of our customer base, is to keep an ARPU rather constant, no matter that the customer base is going up. As we have included -- we have disclosed for this third quarter the customer base grew by almost 20% when you look on year-to-year, and ARPUs has only fell 2 point something. So basically, that's the line that we have approached, and we are executing for some time now and that is something that we would like to keep for the future.

CapEx 2009, it's still early to comment on that. We are discussing budgets, and as we did in the past, we always disclose the amount of investments. Once the shareholders' meeting approves the investment plan, we offer as a proposal from the senior management. But I can tell you that as far as the CapEx for 2008 is concerned, there are no surprises, that is not going to be high in investments that the ones that we have disclosed to all of you.

And in terms of the financing of the 3G licenses, again we have to make a payment on December the 10th. As everybody knows, the market conditions have changed significantly, so we still have the alternative to apply for the financing of the regulator, in which case there's going to be a grace period of three years, and then a six-years payment that will grant us for additional financing.

So far, we have in our plans, the payments, going to the market and paying for the license since the amounts involved in terms of interest expense, it still makes sense for us to do that. But of course, we are having an eye kept on what's going on a daily basis, basically to understand what the market is offering.

So far we've been delivering our financing plans of capturing additional debt, since the investments for this year have grown, not only because of the normal cost of business, but because of the acquisition of the controlling stake and mandatory tender offers and voluntary tender offers of Telemig, but also for the (inaudible) which we have already paid 10% back in April.

So again, we can only tell you that we are still evaluating and we still have one month to decide, and based upon what is going to happen from now on, we'll decide whether to accept or not that offer.

And that's when -- if you decide to go for this financing provided by the government for the spectrum, can you whenever you want or whenever market conditions improve prepay the remaining amount?

I don't get the question, Mauricio. If we decide to accept the alternative, what do you mean?

If you decide to go for the alternative of getting the financing from the government, so paying the three grace [years] and then the six installments, if market conditions improve, and interest rates come down, can you prepay the debt, the spectrum whenever you want?

Yes.

Yes, but that's going to be a decision based upon a different scenario. So far, what we are looking is what's going on these days.

Okay, and just one more on the ARPU. As we said it was a mix between, as far as I understood, from the promotions in the second quarter plus a better mix of recharges and prepaid, postpaid pricing (technical difficulty)?

And data, Mauricio.

So would it be fair to assume that the promotions that we saw in the second quarter could come back?

Promotions are always there. There are different types of promotions depending upon what the market is offering. They say you are not on an island, you are not alone. So promotions are going to be every single time of the year.

Of course, you have seasonality based upon the business campaign, the Mother's Day campaign, the Valentine's Day, that apply for different promotions based upon what we understand are the needs of not only the new customers, new entrants getting into the system, but also to the existing customer base that you apply for retention purposes.

But I mean, the second quarter promotions that we saw, (inaudible) that depended between the -- among the carriers were somewhere between BRL0.05 and BRL0.07 per minute were specifically more aggressive than usual and that -- these are the ones I was referring to.

Yes, but the BRL0.05 or BRL0.07 per minute is how you advertise when you do the revenue per minute, it's not BRL0.07. So it's going to be a mixture of what we would like to provide and how we are going to be advertising the promotion in terms of the convenience for the customer.

So I cannot anticipate whether it's going to be at BRL0.01, BRL0.02, BRL0.05, BRL0.20, or whatever. Is there going to be a promotion? Of course, there's going to be a promotion. There's going to be promotion every single month of the year. And we will try to maximize our revenues, but also the perception in terms of how the customer perceives that the promotions makes good sense from a cost-benefit ratio.

Okay, thank you very much, Ernesto.

Okay.

Thank you, our next question comes from Andrew Campbell from Credit Suisse. Please go ahead.

Yes, good morning. I had two questions. First of all, if you could just discuss your refinancing strategy for the short term that you have on the balance sheet now. And my second question is about iPhone, and what kind of demand that you've seen. I know the prices have been quite high, but I was wondering how they're selling and what do you expect heading into the fourth quarter.

Okay, basically yesterday as we made it public once we got this approval, so yesterday regarding BRL550 million we have in place, and we also announced another indebtedness with Banco do Nordeste for BRL389 million, so there's a short-term financing in place going on with different institutions. You can make a quick calculation based upon the interest expense we have recorded and the gross debt, so that you can see that the results is our interest expense is lower than the CDI, and again we have been working on the plan, no matter that their financial conditions have changed.

Of course there's an impact in terms of interest expense based upon the increase in the (inaudible) rates. But so far what we have in mind is that based upon that charge that we have included the short-term for the fourth quarter, we have already worked on that.

Yesterday we got the additional money, but again we cannot assure that everything is going to be fine. What we need to know and we need to analyze is on a day-by-day basis what's going on with the market. And depending upon that -- I forgot to mention before, cash is one of the priorities, and we are working towards that in order to get additional cash reserves you've been looking from the result that we've been disclosing during the past quarters.

Given the fact that we have committed a number of investments that are not only wishful thinking, but commitments in terms of the regulator that calls for coverage into certain areas, that could appear as us being with a low population, but so far, in terms of traffic, have proved to be very successful.

The second question you mentioned about iPhone, iPhone we launched back on September the 26th. Roberto pointed out this morning also in the other call, that what we have -- the strategy that we have taken was to make it available for existing customers.

So it was an issue that was greatly appreciated by the customer-base, the high-up customers, and not only for the existing ones, but from some other customers that were asking to become VIVO customers given the possibilities that we were putting on the table.

Just to let you know in terms of the experiences we got with number portability, it looked that the customers or the highest piece of postpaid customers turned out to be VIVO customers, proving that the quality issue that we have launched two years ago is really proving to be cost effective.

Okay. Thanks, Ernesto.

Our next question comes from Richard Dineen from HSBC. Please go ahead.

Thank you. You're migrating customers very rapidly from CDMA to GSM, the nine months run-rate seems to suggest you're going to get over 90% of your subscriber base on to GSM, probably in the second half of next year. I think previous commentary from you had indicated the target shutdown of the CDMA network sometime in late 2010 or 2011. I'm just wondering if it's correct to assume that this target shutdown date might be brought forward a bit.

And secondly, perhaps just related to that, I'm just wondering how we might think about the cost savings that might be available from shutting down the CDMA platform. Is this a big saving opportunity? Maybe a few extra points of margin from consolidating network operating expenses, or does it just get lost in among the other margin drivers like subsidies and so forth? So anything on that would be great, thanks.

Okay. We are keeping on our belief that the network is still going to be there until the end of 2011. We are doing a [quick] trading program with existing customers. At the very beginning, it was a proactive trading program, but now it's a reactive, but we still have a big number of customers out there using CDMA.

Something that we have to keep an eye on is that whether these prices are still going to be out there. The useful life of phones tend to last, and to become longer and longer, so there are a number of CDMA phones out there that will prove to be very useful for a number of customers that they will be needing the CDMA network in order to get service from us.

On the other side, you mentioned about operating expenses. Our technology people have been doing a tremendous job in terms of reducing expenses and you can make a quick benchmark on how we are performing with two networks, and how the others are performing with [Project One] and you will see the difference.

That's key. That's part of the focus that we have pointed out in terms of the structural cost. Of course reducing the network will reduce part of those expenses, but at this time we can tell you that they are not going to provide for five additional percentage points on the EBITDA margin.

Ernesto, if you allow me, I would like to add that the CDMA networks are very profitable networks.

Yes.

Besides the normal customers -- typical customers that they have in CDMA, they love their phones because it works very well. They have several contacts within the corporate markets especially like, for sales automation, management of power stations that use [teller] phones to be operated.

So a very complex application that we have, these corporate customers, they are very satisfied with results, so we will still keep on rendering this service to this segment of the market, and this is why we think that before 2011, we will still milk this network. This can produce a lot of revenues, before we shut off the CDMA network.

Thanks. Could I just -- maybe one little follow-up. Just in terms of the net add mix at the moment, you're obviously talking about selling a high proportion of the GSM devices and that was behind the lower subsidies in the quarter.

I was just wondering, is there any way you can give us a sense -- maybe not -- you can -- maybe not percentages, but just a sensible, whether there is a further margin outlet possible from an increasing trend of selling ever more GSM devices in the mix? Is that something you can help us with?

That is true that GSM has handsets are cheaper than the CDMA, but through -- it's -- now that all the handsets are becoming more and more sophisticated, that we are selling more and more smart phones, phones that have access to Internet, 3G phones, so one thing compensates the other.

So handsets are cheaper but handsets are more expensive because they do more things. So -- and the point is with the same handsets, we can provide more and more services, more high valued-added service.

Yes, but just not to mix things up, we are not selling CDMA phones, okay. Is that understood?

Okay. Yes, thanks for that.

Our next question comes from Brian Rusling from Cazenove. Please go ahead.

Yes, a question in relation to your subscriber acquisition costs. In your release, you say that almost 50% of all additions were obtained without subsidies. Can you just explain that a little bit more?

Was that related to a very successful mobile number portability month or are people just willing to take subscriptions without any handset subsides? And if that's the case, I'm just a little bit confused why the handset revenues didn't seem to take a hit?

Let me explain, I'd say this is a mix. Number portability proved to be very successful not only in terms of the net number that was on -- in favor of VIVO, but also of the type of customers we were able to get in.

When we talk about customers with no subsidies, what we're meaning is that we just showed SIM cards, SIM cards only. In our case, we are operating in a frequency that are not -- there's a number of phones out there that can operate in our network. And we are taking advantage because of the offer, because of the service, because of the position that VIVO has in the market, that is attracting those customers which already have a phone, just to plug-in our SIMs.

I can understand SIM only, but then why is your revenue line so good on handset revenues?

Because on the handsets that we are selling, basically they are top-tier -- high-tier phones, devoted mainly to 3G that have an additional cost. And as Roberto mentioned before, we've been renegotiating prices of handsets given the fact that the foreign exchange went up, or the real suffered devaluation. And part of that has been translated to the customer base or to the customers that were willing to get those type of phones.

Mr. Rusling, do you have any further questions?

Well, I'd love to know what proportion of the 1.8 million net adds were SIM only.

We said 50%. Oh, the net adds.

The net adds?

No, net adds is a combination of -- all of the gross adds is basically 50%, let's -- at this point, the net -- I don't have that number yet. Yes.

I just have total -- or gross.

Mr. Rusling, does that answer your question or --?

That will do for the moment, thanks.

Okay. Our next question comes from Ricardo Seara from BPI. Please go ahead.

Hello. Yes, I would just like to know, you mentioned on the press release the end of the management fee. How much would it be in Q3, the management fee, or on a quarterly basis, how much would that be?

Well, we have posted in the third quarter given the fact that July was still full force and we have recorded until August that the fourth --

-- the amount was BRL14 million.

Okay, thank you.

Our next question comes from [Yeshwant Holkar] from Artha Capital. Please go ahead.

Yes, hi, good morning. Just two quick questions. One, again, on the subsidy-free gross adds. Should we expect that that level would continue to around 50% of the gross adds, or was that more a function of this number portability issue?

No, I would say that we can still see the numbers given the phones available in the market. Number portability is going to be increasing in terms of the different locations that will be added up to the whole system and we will have the whole of Brazil by the end of, I think it's March, with the incorporation of both Sao Paulo and [Rio de Janeiro].

So to clarify, that's not a strategic decision, targeting 50% of gross adds without subsidies? It's more a function of market dynamics?

It's the market dynamic.

Yes.

Okay. And then the other is, if you could just give me a little bit of color on the improvement in the post -- how do you call it, the post-due account, the provisions for bad debt?

Just - the improvement there was noted over the quarter on a yearly basis. If you could just go into a little bit of color there please?

We started with a number of actions. That's -- again, that's a dynamics function that we have to foresee, and enhance the different elements we have in place once we have a new customer knocking on our door or an existing prepaid customer willing to migrate to a postpaid service. We started it back in the second quarter of 2006.

I know the people there are doing an extremely exceptional job in order to do a filtering. As Roberto said before, a number of people can argue that we could be having more and more customers. We prefer to keep an eye on which type of customers we are letting in, again, in order to find out what the availability for additional services that we would be able to provide to that customer, and that is something that is not just an improvement in a quarter. It's an ongoing task that has been carried out by our trade debt collections people.

Okay, excellent, thank you. Congrats on the quarter.

Thank you.

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

Thank you. Hi, I just wanted to focus on page seven of the press release where you talk about the cost of services rendered. And in the explanation for cost of services, you referred to the reversal of network PDD due to co-billing renegotiation.

What exactly is that and how much was that for the quarter, because if I look at Q2 in 2008, that other expense line was about BRL21 million as an expense, and then it became a BRL12 million gain. So at the face it would look like maybe there was a BRL30 million impact.

But it seems like the comment in the paragraph where you say, well, if we normalize and take the PDD out, we would have just been equal with Q2. So you're -- it's almost like you're saying that it would have been a BRL10 million impact from PDD. So if you'd just explain what PDD is and just kind of size up on what the impact is, I assume that's one time in nature for the quarter? Thank you.

Okay, let me tell you, and what we refer to PDD or co-billing is the -- you know that we are not a long-distance carrier, and we bill on behalf of long-distance carriers every single day. That's part of how the system works here in Brazil.

On a monthly basis, we do reconcile all of our tickets with the long-distance carriers, and from time to time, we have a number of issues on rejections that basically the long-distance carriers say that they should be collecting more money than the one that we are sending on their behalf.

Part of that are settlements that take a number of months to agree upon, to demonstrate, given our conservative policy of accruing all of those accounts receivables that we understand can have a potential impact in terms of costs. And based upon the number of days, these settlements took more than a year to be resolved. It was resolved in our favor, and of course, the table recorded that reversal in the third quarter. The amount was BRL20 million.

BRL20 million? Okay. So you're -- so let's get back to then, let's -- even if we add the BRL20 million back and the increase sequentially in cost of services is relatively small, relative to the increase in the service revenue --?

Yes.

So your gross margin is improving sequentially, is that a function -- are you turning off any CDMA cell sites, is there -- because -- how much -- obviously, there's a fixed component to cost of services, but is there any other benefits that are -- that you're seeing now in cost of services that are helping that gross margin improve going forward?

No, and I didn't get exactly what you meant by CDMA, because as I mentioned before, CDMA network is still there, it's still operating, it's proved to be very successful. And we do not plan to turn it off until the end of 2011.

Okay, so -- and that's just you would never even -- say, you're in a rural part of Brazil and you're saying, well, we're getting no CDMA usage here, I understand you want to keep the network up until 2000-whatever, but you wouldn't even start to turn off some cell sites in areas where there's just no CDMA usage at all?

No, we haven't.

Okay, great, thank you.

We haven't, we haven't. Okay.

Mr. Piecyk, no more questions?

No, thank you.

Okay. (Operator Instructions) It appears we have no further questions. So for further -- for closing remarks, I'll return the floor back over to Mr. Roberto Lima.

So thank you all for attending our call, and we are very happy with the job we have been doing in the last, let's see, six quarters. And I just wanted to say that we have a good strategy and we have a good operation.

We count on our team for the difficult times that will come with this fiscal environment, but we know that we have within the Company, all the levers we should have to get -- to be successful in so interesting market like the Brazilian market is.

We are one of the best companies in the best sectors in the best conditions to succeed, and we expect to have a very good fourth quarter 2008 as well, and hope to see you in the next conference call. Thank you very much.

Thank you. This concludes today's VIVO's 3Q '08 results conference call. You may disconnect your lines at this time, and have a great day.