Telefonica Brasil SA (VIV) 2009 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 2009 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 begin your conference.

Good morning, ladies and gentlemen. On behalf of Vivo Participacoes SA, we would like to thank you all for attending our meeting for presentation of the first quarter 2009 results. In this quarter, as in the fourth quarter of 2008, our publishable growth are consolidated with those of Telemig.

Vivo's performance in the first quarter 2009 strains its commitment to the Company's capacity to sustain its profitability during a different and intensive competitive economic scenario. In this quarter, in continuance with the nationwide operation process, our coverage started to be provided in other two northeast states, Paraiba, Alagoas and Rio Grande do Norte. In a more consistent but leading to operate in Piaui, we completed our coverage in the whole northeast territory, which will fill in the commitment we undertook with our community.

Additionally, Vivo offers the largest and best covered generation coverage in Brazil. More than 400 municipalities are covered and each source efficiency and the best network coverage. This is the way we continue to work towards offering to our more than our 45 million customers a connection like no other. As regards the quarter results, pursuant to the corporate law, our net service revenue recorded a growth of 21.4% in relation to the same period of last year and net expenses increased by 18.8% despite the increase of 32% in the customer days during the period.

We evidenced the synergies in the acquisition of Telemig. Accordingly, the EBITDA grew 25.2% and resulted in an increase of 1 percentage point in EBITDA margin, as compared to the first quarter of 2008. The EBIT when it's done, increased by 34.5%. In the same comparison, the net profit calculated in accordance with the corporate law included that 26.5%, which shows the good performance of the Company in managing its financial liabilities, which were higher in 2008, with investments required for the acquisition of Telemig, the purchase of frequencies, the 3G launching and the beginning of operations in the northeast region.

On slide number four, on a combined base, we see that the net service revenue grew by 9.6% in relation to the first quarter 2008, coming to BRL3.7 billion, against a 7.6% increase in expenses, excluding the extraordinary effects of the recovery of ICMS tax occurred in Telemig in the first quarter 2008, recording BRL2.8 billion.

The EBITDA on its turn is 13% generates additional margin of 1.1 percentage points. On [Valtrias], we can say that the acquisition of the BRL1.9 billion has meant in the auction carried out by Anatel at the end of 2007, it became possible for the Company to operate in markets the northeast region, thus the US continued to stimulate and enhance the local economy with investments and quality service to our customers and business partners. Upon starting to operate in Piaui state in April 2009, we will complete its cover in the whole domestic territory, fulfilling the commitment undertaking to its community of more than 45 million customers.

On slide eight, we show the growth in the customer base, which recorded 45.6 million customers in March 2009, with net additions of almost 700,000 customers. We are able to keep the market leadership with the market share of 29.7%. However, as much more important than the market share is the revenue share of users estimated at 32%, which evidences the quality of our customer portfolio.

The GSM and WCDMA operation accounts for more than 73.1% of the customer base and already records for more than 33 million access. Since the beginning of the number portability in Brazil in September 2008, Vivo has held a positive balance of migrations with 60% of the customers brought being postpaid customers. This rate is a clear indication of our service quality positioning as a competitive edge. Currently, our distribution network has more than 11,000 points of sale of contracts and more than 541,000 points of recharge in the main locations throughout the Brazilian territory.

Slide nine shows the subscription acquisition cost, which was BRL97 in the quarter. The subscription acquisition cost recorded an increase of 10% when compared to the first quarter of 2008 and of 31% when compared to the first quarter of 2008, which includes while mainly explained by the exchange devaluation and the appropriation of the fixed cost of advertising to a lower number f additions. Vivo has 31% of the market's postpaid segment and in the last quarter recorded a share of net additions from the postpaid segment of approximately 57%, confirming its better market position and its focus on high-end customers.

Churn recorded a reduction for the fifth quarter in a row with 2.4% in the quarter, even considering the effectiveness of the number portability in the whole domestic territory. This indicator reflects customer satisfaction while a Vivo customer mainly in relation to factors such as the proceeds of the sales channels, best signal quality, attractive offers and best portfolio of handsets in the industry. The customer loyalty and retention force implemented by meaning of this core program, especially for the expense of handsets, also contributed to this reduction.

On slide 10, we explain the variations in the ARPU. The branded ARPU of BRL27 in the quarter reduced by 8.5% when compared to the first quarter 2008 as a re-growth of the growth of the customer base, which recorded 19% in the period. The continued search for price reduction, activation and retention of the customer days in reaction to the current economic scenario. When compared to the fourth quarter 2008, the ARPU reduced 7.2%, due to the same reasons mentioned above.

The growth strategy of the Company, by means of a qualified segmentation of prospects and also the current customers has provided Vivo with a sustainable growth over the long term and now income clashes resulting in value sharing of the customer base in view of that crisis and significantly reducing producing products through account rates which helped by 14% in the year. It is important to point out the growth in the data ARPU, which increased 13.8% in relation to the previous quarter.

As shown on slide 11, the branded MOU in the first quarter 2009 reduced 0.3% when compared to the same period of 2008 and 9.4% when compared to the fourth quarter 2008. The voice traffic on its part increased 18.6% in the comparison with the same quarter 2008 as a result of the increase in the customer base and a reduction of 6.1% when compared to the previous quarter due to the seasonality of the period.

Now, I would like to offer the floor to Ernesto Gardelliano, our CFO, who will continue with our presentation.

Good morning, ladies and gentlemen. Thank you for being here with us. On slide 13, we can see that net service revenues in the first quarter of 2009 grew by 9.6% over the first quarter of 2008. In comparison with the previous quarter, we recorded a drop of 3% due to the seasonality factors. Revenues from data and value-added services grew 29% in the year, reaching 12.1% of net service revenues, with an increase of 2 percentage points to the share of this revenue in comparison with the previous year.

In the quarter, the increase in data and value-added service revenues was 17%. The increase of 10.4% in access and usage revenues also contributed such increase. As shown on this slide, SMS plus MMS grew by 31% and WAP plus Internet 3G plus e-mailing grew 44.7% in the year-over-year comparison.

The growth in smartphone sales and increased access to mobile broadband stimulated the consumption of services such as Vivo Internet 3G, e-mail access services for BlackBerry, iPhone and smart-mail. In March, we recorded more than 80 million users in the WAP services and the use of SMS interactivity during the first quarter of 2009 grew by 24% over the same period the last year. In comparison to the last quarter of 2008, the growth was 17%.

On slide 14, we comment on the operating expenses. The figures evidence cost control, especially in relation to a new economic scenario, which demanded higher attention from the Company. Cost of services rendered, excluding Fistel fees, recorded a decrease of 2.1% in relation to the fourth quarter of 2008, due to a reduction of interconnection costs.

When compared to the first quarter in 2008, those services recorded an increase of 8.9% due to increase in lift lines and with rent, condominium fees and others related to a higher number of sales sites derived from the increase in the covered areas. The cost of goods sold recorded a reduction of 15% in relation to the fourth quarter in 2008, as a result mainly of the reduction in sales and handsets in the period. In the year-over-year comparison, there was an increase of 15% as a result of the exchange variation in the acquisition price of handsets.

The selling expenses recorded a reduction of 9% in relation to the fourth quarter in 2008 due to the decrease in the commercial activity. In comparison with the first quarter of 2008, there was an increase of 4% in cost due to the increase in expenses with third-party services. The provision for doubtful accounts recorded an annual reduction of 14% and represented 1.4% of the gross revenues.

General and administrative expenses recorded a reduction of 14% in the year and an increase in the quarter due to non-recurring amounts of third-party expenses recorded in the last quarter of 2008. Headcount expenses recorded an increase of 2.3% in the quarter and 6.6% over the same quarter of the previous year, practically due to the annual wages increase agreed upon with the unions. The expenses with Fistel, Fust and Funtel recorded an increase of 12.8% in the quarter and 25.8% in comparison with the first quarter in 2008. The Fistel fee in an annual comparison recorded an increase of approximately BRL44 million and negative impact of 1.1 percentage points in the EBITDA margin. Brazilian taxation of the telecom industry is one of the highest in the world.

On slide 15, we can see that the EBITDA in the first quarter of 2009 was BRL1.2 billion, an increase of 13% over the same quarter of last year. The EBITDA margin of the quarter came to 29.9%, a growth of 1 percentage point when compared to the margin of first quarter of 2008, excluding extraordinary effects of the recoverability of ICMS tax on Telemig. The maintenance of the prepaid recharges and the control over the provision for doubtful accounts in a new macroeconomic scenario managed to have a positive impact on the results, generating an increase of 9.6% in total service revenues.

On slide 16 presents cash flow of the operations derived from investment and financing activities. In the first quarter of 2009, Vivo had cash consumption in the amount of slightly over BRL1 billion, with investments made during the period, payments of loans, dividends and taxes around capital. The operating profit recorded BRL399 million in the quarter, a reduction of 31% in relation to the previous quarter, while when compared to the same period of the previous year, and excluding extraordinary effects of the ICMS tax recovery incentive the EBIT recorded a growth of 16%.

On slide 17, we can see that the net profit calculated pursuant to corporate law was BRL123.5 million. When compared to the same period of the previous year, we recorded a growth of 26.5%, and in relation to the previous quarter the net profit recorded a reduction of 42.7% due to the combined effects that I mentioned before.

As shown on slide 18, Vivo's financial expense increased by BRL109.8 million in the year, which was explained by the increase in the net debt and higher effective interest rate in the period. When compared to the previous quarter, there was a reduction of BRL133.7 million. That variation is mainly explained by the extraordinary effects incurred in the fourth quarter of 2008, such as recognition of the extraordinary provision of the 3G and recognition of the fees and co-fees expense on the allocation of the interest and on capital approved in the fourth quarter in 2008. Also contributing to such variations is a reduction in expenses due to a lower effective interest rate during the period.

The gross debt recorded BRL7.7 billion, of which 23.7% is nominated in foreign currency and by time and 9.9% hedged. The debt recorded in the first quarter of 2009 was offset by cash and financial investment amounting to approximately BRL1.8 billion and by derivative assets and liabilities that turned out to be BRL300 million on a receivable basis, resulting in a net debt of BRL5.5795 billion. The increase in the net debt is directly related to the acquisition of key assets, such as Telemig, the purchase of frequencies, the beginning of -- the start of operations in the northeast regions and the payment of the Fistel fee.

Despite the increase in the net debt, the debt profile improved. In the first quarter in 2008, [55.4%] of the debt was long term, while during this first quarter 2009, the long-term debt represented 61.2%. This change in the debt composition has been achieved due to higher funding from structured transactions, new developing banks and to the use of the credit facility granted for the 3G license, which was made available in the option carried out by Anatel.

On slide 19, we comment about Vivo's investments, which continue to be concentrated in projects for enlarging the capacity and coverage of the GSM and wide CDMA networks and for compliance with the coverage clause set forth by Anatel. With the investment made, Vivo's mobile network now covers 3,119 municipalities with digital technology. Vivo's investments in the quarter recorded BRL541.3 million, representing 13.5% of net revenues.

Now, I would like to ask Roberto Lima to share his final comments with all of us.

Thank you, Ernesto. Amongst all the aspects of the current economic scenario, the various aspects leads to one positive factor. It coordinates the organization to a higher proof, facing evidence there is strong outlook point. The results we recorded in the first quarter 2009 leave no doubt that the [extending] time down initiative we undertook in the recent years will leave an organization quite well prepared to face new scenarios as the one we are currently in.

The growth of our revenue from those previous levels and the EBITDA margin of 29.9% has given even more relevance, if we recall that these results follow a year of outstanding performance for Vivo. In values, we have shown a consistently sustainable performance because of our strength and its consistent in the foundational reach our companies' days are sound. We have just completed the launch of our operations in the northeast states, achieving so much during the year nationwide coverage. Additionally, by the end of this quarter, our Company became the largest 3G network in Brazil.

We have continued to invest in enlarging and improving the coverage of our network and our service for offering a connection like no other, with plans and service that add value, provide our customers with even more comprehensive profitability and use Vivo for connecting themselves and exploiting the opportunities provided out of a networked society.

According to the results of the latest issue of the customer existing performance index ranking, published this week by Anatel, Vivo was acknowledged as the best mobile telecom operator in terms of quality and customer assistance. Also worthy of mention are the following highlights. Companies that provided the best assistance to its customers with the lowest complaint rates in the Anatel ranking since February 2008, and the best signal quality pursuant to Anatel indicators and teleco analysis, with an average of more than 99% of compliance with indicators in 2008 and the average of the first two months of 2009.

No matter how intense the economic crisis may be, they finally end, having our well-sheltered organization is of key importance for overcoming the challenges posed in this period when progressing, even though in an adverse context. It's essential to look to the future with optimistic eyes. A few companies, like Vivo, are allowed to have, once it's supported on sound basis for achieving a sustainable growth and determined to perform its whole enduring such future.

Thank you all for your attention and now, we are ready for your questions.

Thank you. The floor is now open for questions. (Operator Instructions)

Our first question is from the line of Vera Rossi from Morgan Stanley.

Thank you. I have two questions. My first question is about your accounts receivable. Are you seeing any increase in the provision of accounts receivables or the number of days, if the number of days is increasing? And the second is what was the participation of SIM cards only and secondhand phones in your growth additions during the first quarter. Thank you.

Okay, Vera, in terms of when we look at our accounts receivable, we split them between the accounts receivable of our end customers and the accounts receivable from our distribution network. In terms of the end customers, we are now seeing an increase in the days outstanding. On the contrary, we are reaching our own goals month after month.

Yes, during the quarter we had two incidences at two distributors that went through chapter 11, so we had to make provisions for the outstanding amounts that were not that significant. And in other situations we had to refinance some of a number of dealers that were going through financial problems, especially due to the fact that credit availability during the last quarter of 2008 was cast today.

But as far as the accounts receivable are concerned, we are pretty comfortable and again, we will keep on focusing on assisting seeing what we've been doing during the last quarters. In relation to your question number two, SIM card only was -- or accounted for almost 50% of our gross adds.

Okay, thank you.

Our next question comes from the line of James Rivett from Citigroup.

Good morning. I've got two questions if I can. The first one is about competition. We're nearly at Mother's Day. How do you think that commercial activity is shaping up so far this year versus the same period last year? So, my second question relates to the ARPU trend for the rest of 2009. Given everything that you said, is this sort of the level for ARPU where we should expect it to remain for the rest of the year, or can we see some market growth? Thanks very much.

James, is it possible that you can -- I don't know, with the approach, the microphone was really bad to hearing to you. The first question was something about the competition --

Yes, sorry, it was about the Mother's Day promotion. How is the promotional activity shaping up compared to this time last year?

Versus last year?

Yes.

So, we think that we should look to each one of the competitors we have. Some of them are very aggressive. Others are trying to protect their financial accounts, but anyway, we have a good proposal. In this time we have -- dependent on the region, we can offer 10 times the number of minutes the customer buys for our customers and for our prospects, and we think that is enough for us to resist to the competition, considering that the customers are not looking just to the price, but also to the quality of the service, and even more importantly in the postpaid segment.

In some areas of Brazil, we are giving much more than 10 times. We are giving 20 times the minutes of the recharge or even the signature of the customers. So, we see that Mother's Day could be very competitive, like the other years, but I think that we are well prepared.

Second question was about --

Yes, my second question was about the ARPU trends for the rest of this year? Do we expect them to continue at sort of the level that you reported in the first quarter?

We don't give guidance about ARPUs. What I could tell is that we are trying to reduce prices for the voice and even for the data, but we consider that the ARPUs that we have that is higher than our competitors, it's a good level of ARPUs, although we think that we should still reduce some price by giving promotions, but on the other side the fact that we are selling much more data connection and value-added service, it should compensate the decrease on voices and traditional products, like SMS and others.

Very clear. Can I just follow-up on the first question about Mother's Day. You gave a great answer about what's going on in terms of the minute promotion, but what about sort of handset subsidies and that sort of side of the equation?

At this time, we wouldn't like to advance what we are going to do, but the handsets, it's true that there will be a huge competition, but not only handsets, but you know that the market in Brazil is selling a lot of new chips because of the minute promotions, so people give as a gift not only the handset any more, because they are trying in this period, then, because of the economic scenario. People are trying to give more time for their own handsets, and sometimes the minutes promotion is the kind of gift that they could offer to others, even for their mothers.

Very clear. Thank you.

Okay, thank you.

Our next question is from the line of Andrew Campbell from Credit Suisse.

Yes, last year, you had quite a lot of margin volatility around the second quarter, dropping from 29% to 23%, and then back up to 33% in the third quarter. Do you think it's likely that we'll see the same degree of margin volatility that we saw last year, because it will set again this year?

Andrew, this is Ernesto speaking. Again, on a looking-forward statement, you know it's our policy that we do not provide for guidance. In terms of volatility, we have seasonality among the different quarters. That's a reality, so again, you have to think about what the yearly financial statements are going to look like. And, again, whenever there's a possibility to get any new one-time shot income, we will do it when we are going towards it. Again, to provide for enough space to keep on having Vivo at a competitive pass through throughout these competitive scenarios.

The fourth quarter was an extraordinary quarter. When we made a presentation, we talked to all of you that we have basically two issues. Number one, the commercial activity, specifically for the Christmas campaign, was not as big as we thought that it was going to be, and the second important issue was that there were one-time shots that we recorded in the past quarter that made as a recovery of expenses that enabled us to reach to that margin.

Now, we have different variables moving forward. You have an issue related with the structural expenses related to the industry, namely the taxes affecting our business on the second -- as the second caption, you have the dollar-related issues and on the fee you have all of the different environment expenses that we keep under control that are never in the story. We need to keep on providing more and more efficiencies, again, in order to create that space, the necessary space in order to keep on growing.

And also, remember that when compared with the last year, we have a new region. We have six new states for now with a new network, with new cell sites. Among those new six states, we have mandatory commitments from Anatel in order to cover populations with less than 30,000 customers, so, again, it's the machinery that you have to fix all things up in order to create the necessary schemes to keep on growing at a profitable space, and that's the consistent story that we've been providing to all of you.

Okay, and is it possible to give us an idea of what the margin would have looked like in the first quarter if not for the EBITDA losses coming from the northeast region?

Unfortunately not. We are not providing for that guidance.

Okay, understood. Thank you.

The next question is from Rizwan Ali from Deutsche Bank.

Good morning, I'm just wondering if your -- you know, your bad debt provision appeared to be really low, especially compared to your competitors as well as other accounts that we see elsewhere in the region. I'm just wondering --

Excuse me, Rizwan, can you get nearer to the microphone, please?

My question is about your bad debt provisions. Your bad debt provisions appear to be much lower than some of your competitors, as well as what we see elsewhere in the region. I'm just wondering do you think your credit checks or your provisioning methodology is a bit different from some of your competitors?

Let's put it this way. We have credit checks and we have a whole process that involves normally our people from payment and collections, our people from marketing and operations. To be honest, I do not know what the accounting principles from our competitors look like. I can tell you that we record to expense wherever accounts on top of 90 days are unpaid. And what we have been doing is to set dynamics within the Company in order to get better and better results, in a way as a recognition during the presentation.

We tried to avoid it, or to be selective. We want to cover all different segments. We have an offer for every single segment, but we try to get the best of every single segment available. We cannot just think in terms of postpaid. Brazil is a huge country and there's still penetration out there to be covered and, again, the way we've been doing is by working together as a team and looking what the prospects in terms of new adds look like in order to monitor not only the interest, but a period of time when we monitor usage and payment patterns.

I should add that if you remember bad credit used to be a big issue for Vivo two years ago, so this is an area where we invested a lot, not only in new systems, but bringing especially from the market good people, and I think that we were able to deploy all this process all over the Company, not only for the new subscribers, but also for the actual portfolio we already have, trying to look at the customer behavior and try to prevent them to be in difficulties sometimes, adapting the plans, adapting the prices and giving them more adapted products for them to keep on using our service campaign. And this is what comes from our good performance in terms of the credit.

Okay, one last question about Telemig. When do you expect the cap of the ADR program and also when should we expect you to completely consolidate or close the capital of the Company?

Rizwan, unfortunately, we are not able to provide such estimates, given the fact according to a new censor from the local SEC, which is number 35, and that's we made it public that has two special committees that are analyzing the different tax, different projections, there's not a time for the to come up in the recommendations, but according to this new law, this new tax, they will have to do that, that transition to the Board. But there's not a timetable that they should commit to.

Okay, thank you very much.

You're welcome.

Okay, your next question comes from the line of Peter Lyons from Oscar Gruss.

Hi, guys. I had a question on the seasonality in the first quarter. I wanted to understand how much of that is the seasonality that we typically associate with the first quarter in Brazil and how much of it is related to this economic slowdown being felt by your subscribers? I just wanted to note that access and usage were down 7.5% versus the fourth quarter '08, while between the first quarter '08 and the fourth quarter '07 it was down 1.6%. So, it seems there was an amplification, I guess, of the decrease, and just if you could comment on that.

So, personally, I couldn't call this a crisis. I think that all the message we got from the press about all the news about international economy, I think that people are more cautious in terms of consumption. They are more conscious and there's not more confidence and people try to reduce their expense by 5% or something like that, so, but not only reducing their expenses but try to compensate and to trade off voice traffic for SMS and try to be more efficient in the money they spend in telecommunications.

At the same time, we have in Brazil some new effects, like cars, and some domestic utilities have some tax exemptions or reductions in Brazil, like refrigerators, TV sets and others, in order to stimulate investment. So people, sometimes they preferred to keep their own handsets for three or four months more and buy a new refrigerator. This is something that could affect our sector, but anyway, it's something that we think is not so important, looking to the performance we can observe in the Vivo case.

Just a quick follow-up, on the access and usage, specifically, would you say it declined 7.5%, mainly as a result of less recharges, or are postpaid subscribers switching to lower-cost packages?

Again, Peter, can you rephrase the question? You're talking about the 7.5% of what?

7.5% decrease in access and usage revenues between the fourth quarter '08 and the first quarter '09. I wanted to understand, is that coming from prepaid recharging less or postpaid downgrading monthly service? Because if monthly service is a fixed price they pay every month, it shouldn't vary between the fourth quarter to the first quarter.

So, in terms of access (inaudible - technical difficulty) the income tax is postpaid and prepaid and also, it's on top (inaudible - technical difficulty) and also fourth quarter. [Did that answer your question]?

Sorry, sorry. I couldn't hear that.

We covered that -- regards to the question, Peter. The question was regarding the incoming traffic, is that --?

No, no, no, it's regarding access and usage, subscription and usage under the service revenues. Is it 7.5% quarter-over-quarter. I'm wondering if that decline is related mostly to the prepaid, less prepaid recharges? Or is it related to postpaid subscribers downgrading to lower monthly packages?

No. You know that we are making a bidding to reduce our price to accommodate not only our own customers, but the new ones, because of the economic scenario and we accept a certain level of price reduction. But in trying to compensate that by the selling of new products like data and 3G access and some other value-added services. This one should compensate the other, but, anyway, as the consumption of voice is much bigger and the offers we do now for the prospects we also offer to our won customers. It's normal that we have some ARPU reductions.

But what we should consider, is that we have been able to increment the number of our users that [normal] users every month. So, it means that even with a lower ARPU and a lower MOU, we can produce much more traffic and much more revenues. So, if we are trying to create a different elasticity, so by reducing price trying to increment the number of users that are active in our days.

Okay, thank you, guys.

Our next question is from the line of Henry Cobbe from Nevsky.

Hi there. Thanks very much for the call. I've got two questions. Firstly, just on the depreciation, amortization charge, can you give us what the estimate is for the full year, given your BRL2.6 billion CapEx estimates? And secondly, perhaps just give us the number of handsets that were sold in the first quarter?

Well, the answer to question number one, the increase is mainly related to the new estimates that we did on our CDMA network, and when you compare with the first quarter of last year we have an increase of BRL100 million. First quarter last year was BRL50 million. This quarter was BRL150 million, so basically that's the main reason for the jump. And, number two, in terms of handsets was we can tell you, and going back to Peter's question, the mix that we faced during this first quarter was -- almost reached 50% of SIM card only, so 50% of that were CPE related.

Okay, and just for depreciation, how soon -- or how quickly will the CDMA network be off your books? When will it be fully depreciated, assuming a BRL150 million per quarter run rate?

We estimated the useful life and now we understand that the remaining value will be zero by the end of 2010.

Okay, so should we expect depreciation to drop back down again between the first quarter '11?

Yes, of course.

Okay, thank you very much.

You're welcome.

Your next question is from the line of Robert -- I'm sorry, Walter Pieckyk from Pali Capital.

Yes, hi, this is [Jerry Valone] for Walt. Sorry if I missed this in your earlier comments. Can you please comment on the use of free cash flow going forward, given your low debt leverage? Are you more comfortable with the capital markets, since I know this is a concern, in using your cash for higher dividends of share repurchase?

Yes, my boss is saying I answer this question to you I must tell him, so what looking forward basis we are not providing those type of information.

Walter, are you there?

Hello?

Are you there?

Yes.

I was joking here with my boss. I was saying that on a forward-looking basis, we are not providing for that information because it would easily be understood at a number. So, we are recording the first quarter numbers. We can talk about some trends or some things that we are looking so far, but telling exactly what the free cash flow is going to be for the rest of the year is something that we do not provide. The thing that has been made public is the investment level, that was BRL2.6 billion.

Anyway, Walter, one thing that we should have in mind, that in 2008 our investment went to BRL6 billion, BRL6.1 billion because of the Telemig acquisition, the launch of the northeast, the payment for the new frequencies we got, and in 2009 we don't have all these exceptional investments to do, so we should be around BRL2.6 billion, so I think this is important information we can give you because this issue (inaudible) information. Okay.

Our next question is from the line of Will Milner from Arete Research.

Hi, just a quick question on your trends in usage and the difference between inbound and outbound usage. I mean, obviously, outbound usage is increasing year-over-year at a good old [click], but I wonder if you can just talk about the dynamics about what kind of inbound usage, which looks like it's falling 15% year-over-year this quarter and that's an accelerating trend. I just wondered if you could talk about what's contributing to that?

Yes, no problem at all. If you take into account that the number of accesses that Anatel has disclosed is on top of 152 million accesses for Brazil, let's say there's a bigger substitution fixed to mobile than to mobile to mobile, and within that mobile to mobile you have the different communities and mainly all of the different promotions that have been out there, both for on-net discounts.

So, there's a mix in the way people talk among them. In our case, we do not count two times -- we don't count twice minutes that are -- how do you say? That are just internally. If one Vivo customer calls another Vivo customer, we just call that one minute. If a Vivo customer calls an outside customer, well, that accounts to one minute here and one minute in the other side. That's normal. If you see what the trends are out at least throughout Latin America, more and more the importance of these communities are getting a different strength and in essence that's a way that outgoing traffic is improving in a way to be less dependent upon interconnection revenues. Okay.

Thanks. Just to clarify, then, if there is an on-net call, that doesn't contribute to the inbound usage. If there's a Vivo customer calling a Vivo customer, you only call that customer outbound.

Excuse me, can you say that again?

Yes, I just wanted to clarify that on-net calls aren't contributing to on-net usage. Is that what you're saying?

I don't understand exactly your question. Outgoing calls?

Yes, just as you said, if it's an on-net call, is that not contributing toward your inbound usage?

No, it contributes a lot. If it's an outgoing call within our network, you get the revenues and you don't have the expense.

Okay. And just one other point, are you actively looking to reduce interconnect rates before sort of Anatel investigation in 2010?

No.

Okay, thank you.

You're welcome.

(Operator Instructions).

Our next question is from the line of Henry Cobbe from Nevsky.

Hi, there, just following on from that. Would you disclose what percentage of traffic is on net and, secondly, specifically your affected interest rates and there was no move up, despite the increase in Selic. So could you just run through the main drivers for your interest rate variables? Thank you.

We don't disclose the breakdown between on-net traffic and outgoing traffic. And the second question was regarding interest rates. Is that --

Yes, perhaps a breakdown of debt by interest rate? How much specific based, how much is TTLP, how much is international, push to talk --

Our debt in Brazil is fully protected and fully swapped to interest rates perceived. And it's only interest rates in Brazil that accounts for our cost of debt.

And what's the spread versus Selic.

Sorry.

What's your average spread versus Selic?

It's a little bit more than the 100% of Selic and it's in line with the recent trend that we have some money from development banks that is below Selic and some new loans like the Denver that are a little bit higher than Selic, on average, a little bit higher than Selic rate, or 100% of Selic rate.

I would say that we have experienced a change during the last half of 2008. We are able to restructure our banks with these development banks, namely the Development Bank of Brazil, the Bank of the Northeast, the European Investment Bank, back in 2007, and that enabled us to reach a rate that is below the Selic rate here in Brazil.

On the other hand, after we made the investment in 2008, namely, the new networks, the northeast, Telemig and the licenses, we have to incur an additional indebtedness that had a spread that last year we had to pay -- let's say that's -- I don't know if it's confidential information because that's on a two-party side, but it was in terms of spread higher than 100% but on the other side you have the Selic rate going down.

But you said that 40% of gross debt is --

No, no, I didn't say that. I'm telling you that we have different negotiations with different institutions that go for more than 100%, depending upon the time that 100% -- I can tell you, the debentures, because that's public information, we paid 120% of spread on the Selic, but now Selic is down since the beginning of the year. So, in essence, we are talking about a lower effective tax rate.

Okay, it's just very noticeable that the first quarter and the average interest expense versus the gross debt was slightly low given where the rates were the first quarter, on average.

Sorry, could you make it again?

I'm just saying that the average effective cost of debt was very low, given where Selic rates were in the first quarter.

Yes, not only Selic, but we were able to repay some loans. We got others at different conditions. I would say that the last quarter of 2008 was signaled by a level of uncertainty that caused us for higher rates. Now, during this first quarter, we were able to see something on the longer term, the financial institutions were willing to get strong names into their accounts receivable, so we were able to negotiate better terms.

In the first quarter, remember, also that we decided for liquidity purposes not to pay for the licenses with Anatel, so given the fact that there was an alternative of not paying any type of interest if we paid by December 10th, we had to record the whole impact extending from April through December. So, that's something that you get in [operation easy].

And very lastly, just looking at revenue growth, and your revenue and service revenues are going up 8% or 9% year-on-year versus the first quarter combined with last year, that compared to about flat for one of your competitors and about 13% for another of your competitors. So, on average, do you see yourselves as gaining revenue market share, or do you see yourselves as kind of maintaining revenue market share. And, if so, who is winning at the moment?

I can tell you the same data point, the estimates of this first quarter regard additional basis points in terms of revenue share, so in terms of market share probably we are down, and that's something that we see on a monthly basis. In terms of revenue share, we are up. I would like you to make the calculations and not me talking about my competitors, if you don't mind.

Okay, fine. Thank you very much.

(Operator Instructions)

Our next question is from the line of Mitchell Collett from Cazenove.

Hi, there. It's Mitch Collett from Cazenove here. Two questions, please. The level of net debt to service revenues, it's low and has improved year-on-year. It seems to have sort of picked up since Q4. Is there a seasonal effect there or are you finding that people are -- that you need to write great versions for net debt because of the economic circumstances? And then, secondly, looking at the proportion of your SAC that is due to commissions, that's increased. Is that a function of a great proportion of your customers being prepaid -- postpaid customers, sorry, rather than prepaid? Or is there a change in the commission structure going on there? Thanks.

Okay, let me start by the second question, which is the one I remember. Yes, it is mainly because of the mix of customers that we have added to our customer base. There's a different equation depending on the NPV, the region off our customers will contribute to Vivo, and depending upon that we pay to our distribution network. The first question is the one that I really didn't catch. You talked about indebtedness, about the fourth quarter, the first quarter, but I didn't get your question.

I'm sorry, it's to do with bad debt, provision for bad debt.

Oh, provision for bad debt, and which was the question?

Year-on-year, that proportion has decreased from 2.7% to 2.1%, but versus Q4 '08 it's increased from 1.5%. I wondered if there is a seasonal effect to provision for bad debt, or whether that increased quarter-on-quarter as a function of the deteriorating economic condition.

No, I wouldn't say deteriorating economic conditions. As I mentioned during the fourth quarter presentation, usually, during the fourth quarter people get more liquidity because here in Brazil you get a 13-month payment and we set up specific campaigns, as we did in the last years, in order to get not only the payments for that quarter but in order to recover past-due accounts. So you usually have a decrease based upon those campaigns that are targeted to get the additional cash that is out there in the market.

We haven't seen, and that's something that I think Vera asked during the first question, that we haven't seen a deterioration in the accounts receivable from our customers. On the contrary, we've been able to keep on surpassing our internal goals. What we have seen during the first quarter was a number of problems with some distributors that were facing some financial problems. In two situations, we had to provision because two of them went through chapter 11. In other cases, we have to renegotiate that debt in order to keep them alive.

But in terms of accounts receivable from the customer base, basically, not seeing a deterioration. We are saying and we kept on pointing out that it's a different moment, it's a different economic moment, but we haven't faced a jump in uncollectability as it appeared to be when you compared quarter-over-quarter. There is seasonality. There is seasonality based upon the two biggest campaigns that are going to be in customers out there that will not pay, and depending upon that seasonality we have a higher amount, namely the two biggest campaigns are the Christmas campaign and Mother's Day. But when you look on a yearly basis we are improving consistently year-over-year.

Okay, so 3% roughly is a sort of a fair guess for the rest of the year, with Q4 perhaps being a touch lower because of seasonality?

Yes, not seasonality but those campaigns that I mentioned to you before.

Okay, thanks.

You're welcome.

Our next question is from the line of Henry Cobbe from Nevsky.

Thanks for a last question. Just lastly on SAC, you were on the plate earlier this morning of saying that you expect that SAC could come down or be mitigated by the stronger real relative to the second half of 2008. What kind of SAC, ARPU ratio are you looking at as a sustainable level of acquisition cost.

Sorry, but we wouldn't like to advance this kind of guidance with very important indicators, so we apologize, but we cannot answer that.

Okay, but if I ask it differently, what proportion of SAC is actually US dollar linked?

Oh, the subscriber acquisition costs, if this is the kind of information that we wouldn't like to disclose to the market, because it's very strategic. But we can say that all the SAC experienced costs that even though they are producing in Brazil, the most part of the components comes from abroad, so there is a lot of impact. It seems like 90% of the handset costs are dollar denominated.

I would say in another word, that say on a looking-forward statements, we are sorry but we do not provide for that type of information. But you can refer to page nine, where you can see what the percentage of subsidies is upon the customer acquisition cost, and what they have there, what has been during the first quarter 2008, fourth quarter '08 and this first quarter of 2009. Again, but that's a mix. It doesn't mean -- that's a mixture, because that's the subsidy. It's the difference between price and cost and that's going to be based upon the type of customers that we add to the base.

What I could add is that when you look to the comparison between the first quarter 2009 and 2008, is that in 2009 the price of the handset is higher, so this subsidy is -- we have to reduce the number of units to compensate, and on the other side, the advertising expenses that is our fixed expense, they are diluted by a low level, or a low number of new adds.

Thank you very much indeed.

You're welcome.

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

Okay, so thank you all for attending our first quarter 2009 conference call results. We apologize but sometimes we weren't able to understand your questions. We had a bad connection today. It's not Vivo's quality connection, but we will try to improve for the next conference call. We think that Vivo did great in the first quarter, considering all the economic scenario, where we had some doubts on the economic side of the country.

But we are very positive, because our results are based upon solid fundamentals of our Company. We have been considered by Anatel over the last two years the Company that respects more all the quality indicators and it's very interesting to see that after the portability implementation in Brazil, Vivo were able to be very positive on the balance in the portability and we should add that 60% of the new customers that come from other operators they are postpaid customers that gives much more value to the quality than to the price.

So things like they are, competitors are still very aggressive. We think that Brazil is the country where we can see more opportunity in the telecommunications market. 3G is a reality, but in the very beginning, so we look forward and very optimistic and we expect to do good results for the future. Thank you very much.

Thank you. This concludes today's Vivo first quarter 2009 results conference call. You may disconnect your lines at this time.