Telefonica Brasil SA (VIV) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Vivo Participacoes third quarter 2009 earnings conference call. Today with us we have Mr. Roberto Lima, CEO, of Vivo Participacoes and, Mr. Cristiane Barretto, 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. Should any participant need assistance during this conference, please press star zero for an operator.

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 can 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 meeting for presentation of the third quarter 2009 results.

[Superior] performance in the third quarter 2009 reflects our strong strategy and a commitment to seek differentiated profitability even during periods of intense competition. Such commitment is demonstrated by the following results in the quarter. The EBITDA reached BRL1,400m, with EBITDA margin of 34.4%, up 1.9 percentage points over the same period of last year, resulting for a 4% growth in the net service revenue and 2.6% reduction in expenses in the period.

The EBIT recorded BRL607m in the quarter, a growth of 8.9% over the same period of last year. The net income on its turn recorded an increase of 154% in the quarter, reaching BRL340m. In the year to date the net profit recorded BRL636m, which represents 72.7% growth. Cash generation after the investment activities in the quarter reached BRL620m, coming to a total in the year to date of BRL1,700m.

In slide four we can perceive that Vivo, in its commitment to deliver the best service to its customers, has continued to consistently reach higher quality levels than its competitors. As far as it concerns to the goals set by Anatel to be met by operators of the personal mobile services, Vivo has reached almost 100%, and during the third quarter increased its advantage in relation to the Company in the second rank to 3.6 percentage points.

In relation to customer assistance, Vivo recorded the maximum grade in the assistance performance index for the third consecutive month. Created by Anatel in the beginning of the year, this grade has been used to monitor the quality of services provided by telecommunication operators in Brazil. In September 2009 we turned 2,500 outsourcing employees into our own employees. This workforce provide assistances in 161 of our own stores in the States of Sao Paulo, Parana, Santa Catarina and Rio Grande do Sul. This action, which aims at improving the service provided in our stores, is part of our wider strategic operation which places its main focus on customers and their full satisfaction as its major goal.

Slide six shows the growth in the customer base, which recorded approximately 48.9m customers in September 2009, with net additions of more than 2m lines to Vivo's community in the quarter. Within a high competition scenario, we not only kept our market leadership with 29.4% market share, but also increased our leadership in the market share of Postpaid customers to 31.4%, with strong contribution from Internet Access sales.

The GSM and WCDMA operations reached 80.7% of our total customer base, recording more than 39m Accesses. Since the beginning of the number portability in Brazil, which occurred in September of last year, Vivo has recorded a positive balance in migrations. The quality of the distribution networks is another key point, and it's worthy of mention.

Vivo has more than 11,000 points of sale and more than 490,000 points of recharge situated in the main locations of Brazil, thus, allowing greater accessibility to our products and services. Our continued efforts towards customer loyalty and retention, implemented to its core program mainly for exchange of handsets, also contributed to Vivo's commercial performance.

Slide seven shows the subscriber acquisition costs, which recorded BRL77 in the quarter. When compared to the third quarter 2008 the subscription acquisition costs recorded a slight increase of 1.3%, and in comparison to the previous quarter the reduction was 7.2%, reflecting that our rationality was maintained in the acquisition of new customers.

The churn recorded a drop of 0.2 percentage points in relation to the previous quarter, reaching 2.5% in the quarter. Even considering the effects of the sales of SIM cards only, gross churn is higher. In the year-to-year comparison this rate decreased by 0.1 percentage point.

Slide eight shows the average revenue per user variations. The blended ARPU of BRL26.40 increased 0.4% in comparison with the previous quarter. When compared to the third quarter of last year the ARPU recorded a reduction of 10.2%. The high growth in the customer base of 15.5% in the quarter, a scenario of constant search for price reduction, the multiple SIM card phenomenon and the residual effects of the economic scenario in the first semesters are the main drivers to this reduction.

As shown in slide nine, the blended MOU in the third quarter 2009 recorded an 11.3% increase in relation to the previous quarter, due mainly to the 15.1% growth in the outgoing MOU. In comparison with the third quarter 2008 the MOU remained stable, even that the campaign of BRL0.05 per minute carried out in second quarter 2008 produced an increase of use also in the third quarter 2008. The total Voice traffic on its turn recorded 16.1% increase, both in the annual comparison and in the quarterly comparison, which was due mainly to the increase in the customer base in the outgoing traffic. The latter grew 21.9% in the quarter and 25.6% in the year as a result of the campaigns to stimulate on-net traffic.

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

Good morning, ladies and gentlemen. In slide 11 you can perceive that the net service revenue in the third quarter of 2009 recorded 4% growth over the same period of last year. This happened as a result of the increase in the sales of Data and value-added services, the growth in the customer base and the action to stimulate the usage. Price adjustment efforts seeking to increase current customer loyalty and to attract new customers was also responsible for the result. In the quarter-to-quarter comparison a 4.4% growth was recorded, being explained by the same reasons mentioned above.

Slide 12 shows in detail the evolution of the Data and the value-added services revenue which grew 40% in the year, recording 13.5% of the net service revenue, an increase of 3.5 percentage points in its shares of revenue in relation to the previous year. The increase of Data and value-added services revenue in the quarter was 11.7%. Due to its high growth, Vivo's Internet services revenue has reached for the first time the same share as SMS and MMS, corresponding both of them to approximately 46% of the Data and value-added services revenue. As shown in this slide, the Internet services revenue grew 76% in the year-to-year comparison, while the short message and MMS revenue grew by 31%.

The growth in the sales of modems and smartphones in the larger access to mobile wideband have stimulated the consumption of value-added services as well as the use of mobile emailing. In September we recorded around 9.1m unique users in our customer base who used the Internet services via cellular phone or Data cards, representing an increase of 41% over the last year.

In slide 13 we comment on operating costs. The figures show the consistence of our cost efficient policy. The cost of services rendered, excluding the Fistel fee, recorded a 2.8% increase over the last quarter. In relation to the third quarter of 2008 it recorded an increase of 9.3%, reflecting the increase in rental, insurance, condominium and leased line expenses.

The cost of goods sold recorded a slight increase of 0.9% in relation to the previous quarter. In the year-to-year comparison it recorded a reduction of 26%, due mainly to the reduction in sales of handsets in the quarter. Selling expenses recorded a reduction of 5% over the second quarter, due mainly to a reduction in the provision for doubtful accounts and a decrease in expenses with customer retentions and donations. In relation to the third quarter of 2008 there was an increase of 4.9%, due to the increase in expenses with third-party services, especially sales commissions and support.

General and administrative expenses recorded an increase of 10.6% in comparison to the previous quarter, reflecting the increase in expenses with third-party services such as audit, legal, data processing and technical services, in addition to plant maintenance. In the year-over-year comparison there was a reduction of 5.9% due to the reduction of expenses with third-party services, especially technical assistance.

Human resources costs decreased by 4.1% in the quarter and increased by 5.6% over the same quarter of last year. Fistel, Fust, and Funtel expenses recorded a 1.3% increase in the quarter and 20.1% in the year. Still, in the line of total costs, comparing with the third quarter of 2008 and second quarter of 2009, there was an increase in revenues coming from recovered expenses, especially taxes. In the third quarter of 2009 there was a net increase of BRL46.3m related mainly to the non-recurring recovering taxes between other effects.

Slide 14 shows that the EBITDA recorded BRL1,400m in the quarter, representing 17.2% increase over the previous quarter. In the year-to-year comparison there was an increase of 6%. The EBITDA margin in the quarter recorded 34.4%, a growth of four percentage points when compared to the margin in the second quarter of 2009, and 1.9 percentage points in the year-to-year comparison. Such performance level reflects the results of the rational customer attraction retention policies, the constant search for cost efficiency and a strategy of creating more stable and profitable customer base.

Slide 15 shows the cash flow from operations after investment activities. In the third quarter of 2009 we recorded cash generation of BRL620.3m which, added to the cash available, which was used for payment of debts and their corresponding hedge, such as in the case of the prepayment of 88.8% of the 3G licenses. In the quarter-to-quarter comparison a reduction of BRL444.8m was recorded in cash generated by operating activities, explained by an increase in disbursements to suppliers, an increase in the handset inventory due to the change in the portfolio profile, due to a campaign directed to the high-premium segment and an increase in accounts receivable due to the sales increase.

In the year-to-year comparison the cash flow after investment activities recorded an increase of BRL836.5m, explained mainly by the disbursement in the third quarter of 2008 of the voluntary tender offer referring to the acquisition of Telemig Participacoes S.A. The cash flow from operations after investment activities recorded BRL1.7b in the year to date. The operating profit EBIT recorded BRL607.2m in the quarter, a growth of 61.5% when compared to the previous quarter, and of 8.9% when compared to the same period of the previous year.

Slide 16 shows the net profit. Vivo recorded a net income of BRL340m in the quarter, an increase of 97.2% when comparing to the previous quarter. In relation to the third quarter of 2008 the growth was 153.9%, reflecting the operating results presented before, allied to the reduction of depreciation and to the financial results that will be shown in the next slide. In the year to date the net income recorded BRL635.9m.

As shown in slide 17, Vivo's net financial expenses in the third quarter of 2009 reduced by BRL19.6m in relation to the second quarter, due to the reduction in the net debt allied to a lower effective interest rate in the period. Net debt was reduced by 10.3%, from BRL4.7b in the second quarter of 2009 to BRL4.2b in the third quarter, which represents a leverage of net debt over EBITDA of 0.81.

On the gross debt side, the Company recorded BRL5.2b at the end of September 2009, a drop of 20.6% over the previous quarter. The main reason for the reduction was the prepayment of the 3G license in the amount of BRL1.1b, equivalent to 88.8% of the total financing amount. Such payment contributed to reduce, even more, the Company's debt cost. After closing the quarter we paid out the remaining amount.

The Company's debt profile remained almost the same; 68.2% in long term and 31.8% in short term. Although it does not affect the balance sheet presented in this quarter, we would like to highlight Vivo's fourth issue of debentures carried out on October 15 in the amount of BRL810m, which, due to the large demand recorded in the book bidding process, had the amount initially estimated increased in BRL210m and the rates initially offered reduced. Three series were issued with remunerations of 180% of CDI, 112% of CDI, an inflation rate plus 7% per year respectively.

In slide 18 we comment on Vivo's investments which continued to be intended for ensuring increase in the coverage of the second and third-generation networks, increase of capacity in regions where demand exists, especially the north east region, and achievement of goals set for us by Anatel, and additionally invested to increase system capacity both in hardware and software, and the development of own stores. With the investment, made Vivo's network now covers 3,421 municipalities with digital technology. Vivo's investments in the quarter recorded BRL548.7m, 13.4% of the net revenue. In the year to date the CapEx totaled BRL1,696.8m, representing 14.1% of net revenue.

Now I offer the floor once again to Roberto Lima for his final comments.

Thank you, Cristiane. In business, just like in sports, winning is more valuable when it results from strong competition. And maybe this is a good approach for assessing Vivo's performance on the Brazilian Mobile communication market. In a scenario of intense competition Vivo has steadily pushed its development goal, recording consistent and sustainable results, as it becomes evident from its positive performance in this quarter. From financial indicators to those relating to [quotes] on market share, Vivo has recorded quarter after quarter results that attest to the sound basis of our Organization and the consistency of our strategy adapted.

With due attention to the competition scenario, we have adopted different price policies. However, this is only one of the elements which have allowed us to lead the share of net additions or to retain a loyal customer base with low churn levels. We also believe that as the economic scenario improves Vivo will be in a privileged position and will be able to harvest from the increasing loyalty of its customers. Vivo differentiated attributes is called quality, quality of service for people to be able to connect themselves each time more, from where and whenever they wish, once they count with the largest and the best coverage in Brazil, including 3G technology.

Quality in customer care evidenced by the leadership position that Vivo achieved in Anatel's assistance performance index, having recorded the maximum grade for three consecutive months. Quality in the relationship with its customer base which has been Vivo's priority in all the offers, promotions and new launches. Quality in the organizational environment which makes Vivo, for the second consecutive year, one of the 150 best companies to work for in Brazil in the survey conducted by [VoiceCFCR] and [XM] magazine.

All the above-mentioned qualities enabled Vivo to ensure its competitive position and its health and sustainable growth, despite the contest of strong competition which, after all, adds an additional value to the victories achievement.

I would like to thank you all for your attention, and now we think we are ready for your questions.

Thank you. The floor is now open for questions. (Operator Instructions). Our first question for today will come from Andrew Campbell from Credit Suisse. Please go ahead.

Yes, good morning. My question is about the balance sheet. You've seen a pretty significant reduction in both gross debt and net debt over the past couple of quarters, given how strong your cash flows have been. And my question is will the priorities for the short term still be to continue to reduce net debt? Or are you at a level where you believe this leverage is more or less appropriate? How do you expect to handle that going forward?

We don't have any estimates to reduce net debt or to increase. We are --- our leverage is 0.8, as you said. We are comfortable with that but it's acceptable to go higher than that. And we have plans with our suppliers, with our investments and with our shareholders, and we expect to maintain on the level that we've seen is comfortable for us. But we cannot talk about what we're going to do in the future.

Okay. And then, the dividend from last year, does that have to be paid by the end of this year? Is there a deadline for that?

Yes, the dividend declared last year we are going to pay on December 2.

Okay, that's great. Thank you.

Our next question comes from James Rivett from Citigroup. Please go ahead.

Yes, good morning all. I've got two questions, if I can. The first is your EBITDA margins this quarter were fantastic. But I'm just trying to get a sense for the underlying number. You talked about the BRL46m in non-recurring tax benefits that you saw through the operating costs. The improvement in bad debt that you've seen, though, how much of that is non-recurring, if any?

My second question is you've seen a great increase in the number of minutes coming from outgoing calls versus incoming. But I was wondering whether you could give us the split of profitability currently between calls coming from Fixed Line as a percentage of your total profits, and how that's trended over the last 18 months or so.

Okay, I'm taking your two first questions. Regarding the provision for debts are lower, so we had some recoveries this quarter, and I would say the running rate normal would be between 1.2% to 1.5% from total gross revenues for the future, which is normal.

And the other, we said in the press release that BRL46m was the difference between the amounts raised during the second quarter and the third quarter. Actually, we had two effects -- non-recurring effects in this quarter. The first one is regarding the recovery of taxes, similar to what we had in the second quarter. We disclosed BRL47m of tax recovered in the second quarter and we have almost the same amount in this quarter now.

And the second one is we had estimates for our loyalty program and, of course, given the level of withdrawals of handsets and the value of the points that can vary. Because in the portfolio of handsets that we offer in the loyalty program we always evaluate the best level of the provision, and we had -- we make a reversal in this quarter of BRL38m to better reflect the obligation that we have with the clients with the loyalty programs. For these two effects were one-time, non-recurring, although the tax issue we've been talking about it from the first quarter, it's not one thing that we can count always in the future.

Roberto's going to take the third question about MOU?

Yes, it's about the outgoing traffic, I think.

Yes.

Yes. I think the question was is it profitable to the outgoing traffic. Yes, it's very profitable. Even more when you consider that part of the outgoing traffic is growing because of the 3G services that we are implementing now, access to Internet and new [SCAs]. And this is part of our strategy to depend less and less on the Interconnection revenues, where not all the factors we can control. You know that [VUM] is something that has been always in discussions, always something that we want to depend on less and less in the future.

And what will happen for the future? I think this was the second part of your third question. Unfortunately, we cannot anticipate what the trends are.

Yes, sorry, just following up then. My question was actually how much of your profit comes from VUM currently in the third quarter, and how has that changed over the last 12/18 months?

I think at this point we do not disclose it, because there are several elements that come from the -- on the Interconnection or the VUM. So we are not able to provide this number now.

Okay, thank you.

Our next question comes from Michel Morin from Barclays Capital. Please go ahead.

Yes, good morning. I was hoping you could talk a little bit about the competitive environment right now. It seems like things are, perhaps, heating up a little bit. We heard last week from one of your competitors that they are launching an unlimited voice plan for on-net traffic. And even in your own results we see your Minutes of Use up 11% but your ARPU flat sequentially. So, clearly, there's some pressure on pricing for Voice. And I was wondering if you could discuss how you see that evolving currently in the market. Thank you.

Okay. So we agree there is a very high competition on prices now, not only on the handset price, what used to be the main driver for the growth in the past. [Sister] companies now are very big. They want to grow but they, first of all, in the case of Vivo we want to maintain our base and we want to maintain our customers' portfolio. This is why we have to adapt, we have to right size, we have to right plan our prices in order to defend from the competition attacks to our own base.

So you see in the numbers that we will reduce the prices, we increase the MOU and this makes that the ARPU this year is 10% below 2008. But this is part of our strategy to defend our own portfolio. And I think this is the mark how it is nowadays, and we will keep on adapting our strategies depending on the movement that our competitors do.

And are you -- on the Voice side are you using your 3G network for Voice or exclusively for Data?

We use the 3G network for Voice as well. We try to pass part of the Voice traffic through the 3G network.

Great, thank you very much.

You're welcome.

Our next question comes from Peter Lyons from Oscar Gruss.

Hi, guys. Congratulations on the quarter. My question is with regards to your working capital. I noticed that there was some decrease in accounts payable days, increase in accounts receivable days and it seems like inventory turnover also -- inventory turnover days increased. If you could just address that on a quarter-over-quarter basis and then also versus the third quarter '08. Thank you.

Okay. The increase in accounts receivable and inventory is a normal effect considering the seasonality of the year. We had a different mix in our inventory with more expensive handsets, so contributed a little bit to increase the balance of the inventory. It's normal to operations in the third quarter and preparing for the fourth quarter that much more hot in terms of consumption of inventories. And so it's not un-normal. And accounts receivable is considering that the gross sales are higher, it's natural that the accounts receivable is also get higher.

Okay, and a question about the upcoming Christmas season. What are you guys seeing from the market in terms of the competitors in terms of their approach to the Christmas season? Are we looking at subsidies for handsets, are we looking at just more minutes included, more on-net minutes? What in general are you seeing in the market in these next few months?

It's difficult to talk about that, because this could be considered as anticipating our strategy. I think that the market is very hot nowadays, not only in terms of handset sales, but also for the Voice price and some services like SMS, and I think that this will keep on being very challenging and I think that our competitors will try to grow and some of them to recover part of the market share they lose in the past, and we have to respect their strategies.

But we, Vivo, we are always looking, not only for the market share in terms of the number of users, but also in terms of revenues and the profitability of the customers we have. So I don't think I could anticipate any more elements to the Brazilian scenario in Christmas, but I think the market will keep on being very competitive.

Okay, thank you.

(Operator Instructions). Our next question comes from Mr. Rizwan Ali from Deutsche Bank.

Good morning. My question was related to the revaluation of the handsets. I wanted to know this BRL36m reversible that you did in the third quarter, which line item in the P&L did it hit? Was it the cost of handsets, this reduced cost of handsets?

And my second question is related to your strategy about SIM cards. So it looks like you really pushed in the third quarter SIM card-only sales. So will this be the norm going forward?

Rizwan, can you repeat for us the first question, please?

You mentioned the two extraordinary gains you had in the quarter. One was recovery of taxes, BRL46m, another was revaluation of the handsets, BRL36m.

No, no, no. It's not -- I'm going to clarify. The first one was the taxes, like you said, was not BRL46m. BRL46m is the difference between the group of Other revenues from the second quarter to the third quarter. We had two effects. One is the taxes that I mentioned before, it was similar to what we had in the second quarter. And the second one was reversal of our loyalty program provision, considering the level of withdraw that's being done right, considering the portfolio and mix of handsets that we offer to the clients. These are the two extraordinary facts in the quarter and the total of these two is approximately BRL80m.

Sorry, you said the two combined are BRL80m?

Yes, two combined, yes.

So I just want to know, this reversal of the loyalty program, it hits the P&L, right? And would it hit the P&L through the cost of handsets?

No, it hits the P&L through that line of Other, Other Revenues.

Okay. And then, regarding your strategy going forward, are you really pushing SIM cards only now?

I think that in the Prepaid market this is what works nowadays, because customers are used to have more than one SIM card in their pockets. So we have to tie to the market. So since the competition launched this idea to sell naked SIM cards, we are doing the same. And sometimes we sell a second SIM card to the same customer. Sometimes it's a new customer that want to share their expenses with other operators. And this is how the market is working nowadays and part of our Prepaid sales are done in the SIM cards only.

Thank you.

Our next question comes from Henry Cobbe from Nevsky Capital. Please go ahead.

Hi, there. Perhaps you could give us an update on the CapEx budget for this year and next year?

Okay, not concerned this year, we forecasted BRL2.6b for 2009. At the end of the third quarter we realized BRL1.7b. So we still have a program to do before the year end. And we are on time. We are doing what we have to do. Part of this investment is to increase the coverage and the capacity of our network and, as you know, the traffic grows in the -- by the month of December. So in our plans we have some of the projects finishing by this time. And we think that we will do what we have forecasted in the beginning of the year.

Much relates to 2010, once we have our budget approved by the Board we will, as always, present the CapEx expenses for 2010 in the first quarter 2010.

Okay. Also you mentioned in the conversation the growth in on-net traffic. Would you be able to give us a split of what proportion of traffic is currently on-net?

No. No, we don't disclose this information. But it's true that this is one of the main elements we have in our strategy, is to increase the on-net traffic. Because having almost 50m customers we have to take the advantage of that, and to produce the maximum communication among them, and not to have to pay the VUM when they use the other -- when they use the third-party network. So this is our strategy. This is why we are increasing the on-net traffic.

Okay. It's just very hard to interpret anything if there's just a growth rate and we don't know what the base is. We don't know. It's very hard to tell whether that's material or immaterial.

Okay. I think in a one-to-one conversation we could give better information.

I'd rather it was disseminated to everyone simultaneously.

I understand that it's very complicated, because more and more you have other revenues that comes from Data service, from Internet Access that is always mixed with the Voice revenues. So we will try to make it a little clearer for you.

And on the depreciation side, is this the new run rate now? It seems like the accelerated depreciation on the CDMA. Are you depreciating that? Or what kind of rate are you depreciating that per quarter?

Okay, the CDMA is going to be over by June 2010. In this quarter the total deprecation of CDMA was BRL229m, and by the end of December we will probably have about BRL500m terminating in June 2010.

So it's about BRL250m a quarter?

Yes, this quarter was BRL230m, but the average BRL250m.

Okay. Okay. And if I deduct the BRL230m from the total, that should give me the GSM depreciation. Is that right?

GSM and 3G.

The existing assets.

The existing assets, yes.

Okay.

Mr. Cobbe, do you have further questions? Okay.

No, that's great, thank you.

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

Thank you very much. Just a question on the headcount. It looks like that's gone up quite substantially quarter on quarter by 28%, to 10,500. I'm just wondering what those additions were, in which sort of areas you took on people and also if you might reconcile that to the personnel costs, which look like they're down.

The growth in the number of own employees comes from the decision we made to insource all the representatives that we have in our own stores in the States of Sao Paulo, Parana, Santa Catarina and Rio Grande do Sul. These guys are the ones that are in the front end of Vivo and we have to manage these people as we have all the other staff people.

So it was very strange for us not having the possibility of discuss directly with these people that are in direct relationship between the customers about our goals, about our results, about our strategy, the communication process, the services processes. So we think that we'll be much more efficient in having a direct relationship with these people. So this is why we hired 2,500 people. We still have for the other regions in Brazil, considering that what we did is for Sao Paulo and the south region. And we think that by the end of the first quarter 2010 we should do for the rest of Brazil, which should count to more 2,500 people as well.

And in terms of costs it comes to the same, because when we outsource we not only have to pay the taxes but also the margin that the outsourcer gets from the service. And sometimes it comes in reduction of the salary that is paid to the representatives. So we prefer to increase their salaries and to having the same process, much more motivation, much more integration in our commercial process.

Okay. So it's basically just been moved from the third-party services, I guess. Is that where it's -- that was previously held, these guys were being paid? That's where your outsourcing expenses come in, right?

Pardon. I'm not sure I understood your question, sorry.

Sorry. I'm just wondering, from -- so you're basically saying that the personnel costs are going down because basically you're not paying the margin to the outsourcing people? But it's basically just been moved around in your operating expenses stack?

Okay, how do we record that in our accounting system?

Yes.

That's the question? So I would like the question. No. I don't think that, no, no. The reason -- no, I don't think I'm able to --

No. We had some reduction in charges of our being paid together as the labor salaries and that was the main reason of reduction in the quarter.

Because the decision was made during the third quarter, but it was implemented in September. So we have the first month of these 2,500 people as own employees. So we are not seeing the effects for [2009].

Okay, so it was late in the quarter? Okay.

Yes.

Yes. Actually, we have some aggregate charges to the salaries. We charged some taxes and certain salary indications and other charges and we had a reduction in these charges considering their movement in the third quarter. That was the main explanation of the reduction. It is nothing to do so far with the headcount.

Right. Okay, that helps.

Okay. And what I said about the costs for these people in the stores, we said that we pay taxes and we pay a margin to the outsourcing company. So we decided not to outsource and pay a little more to the representatives with the higher salaries, or a higher verbal compensation. We expect to have much more motivation and efficiency, what is proven in the first month of implementation.

Okay, understood. That's very helpful, thank you.

You're welcome.

(Operator Instructions). Our next question comes from Miguel Garcia from Deutsche Bank.

Thank you. I wanted to see if you could explain a little bit what could we expect from the possible acquisition of GBT by Telesp in terms of costs of network leasing, and also in terms of the possibility of you bundling services with GBT in the corporate segment?

I think that this should be the same that we have been doing with Telesp. We share some transmissions line, we share some other equipment, but in terms of product we were able in the past to launch some bundled products like Mobile Internet and Fixed Internet, Mobile lines and Fixed lines also in the corporate and in the individual market.

And I think that if they buy GBT we could increase this possibility in other States in Brazil, considering that Telesp is now present only in Sao Paulo State. But this is very theoretical. We have to see, first of all, how will they move on that. But it's true that it will increase the possibility for Vivo to be -- to launch some -- the same products that we launched together here and to share other investments that they have and we have as well.

Good. And also related to this, in terms of the cost of the network leasing, we have heard from some of your competitors that, as Data transmission is increasing, it's becoming a more important part of the cost. What's exactly the -- or approximately the percentage of your costs that go to network leasing?

Network leasing, in fact -- yes, we don't disclose that. But are you talking about transmission lines?

Yes, exactly.

Transmission lines we disclose.

I think we've disclosed the transmission lines. It's -- no, no. So the leased lines you have in page -- in our press release in page 15. You have the leased lines in the cost of services rendered. You have BRL75.9m in the third quarter and BRL76.5m in the second quarter.

Okay, thank you.

Okay.

Our next question comes as a follow up from Michel Morin from Barclays Capital. Please go ahead.

Yes, thank you. I just wanted to see if you had any views on the significant slowdown that we saw during the month of September in the Postpaid market. For the broader Brazilian market it looks like only 3% or so of net additions were Postpaid. So I was wondering if there was something that had changed in the market dynamic there.

And then, secondly, in the north east where you've been expanding, presumably that part of the business is not profitable today. I was wondering if you could quantify whether or not this has a noticeable impact on your overall profitability and, as we think ahead to next year, how that might show some improvement. Thank you.

I'm not sure that I understood all the questions. But as concerning the first part of your questions related to the Postpaid performance on the Brazilian market during the third quarter or in September, I think that that must be some disconnections with some other companies since we increased our market share in Postpaid in this quarter. But I think that not only because we sell the amount that we wanted to sell, but also because some other companies disconnected some lines. This is why I think we have only 3% of net adds in the quarter.

The second part, if you can repeat, please?

Yes, the second part has to do with the north east where you're essentially more of a startup, I guess. Is that part of the business having a negative impact on your margins today?

No. We have the EBITDA margin that we forecasted for the year, even though we have a flatness and a little less costs and expenses. The strategy is online, so we're now attacking the Postpaid market, and especially the Data, the Internet Access market. And I think that we are doing a good job over there.

So it's new market for us. We have been increasing our network coverage at the same time that we are launching the services. We now have the leadership in 3G coverage in the region with 255 municipalities. And also in what concerns 2G we are not at the same level of competitors in numbers of municipalities, but we are covering the most part of the population. So we are now in a position that we can compete in the same base against them.

Great. And, if I may, just have one last one here. There's a lot of new handsets that are being rolled out in many markets around the world, Android based handsets I think, from Motorola in particular. Should we expect to see some of these handsets make their way and be launched in the Brazilian market in time for the Christmas season?

Yes, I think that we are up to date with what they are doing in other countries. We are launching Androids, more with Motorola, with Samsung and other suppliers. And I think that we have the last models that they have now. So I don't see any delay on the international launch and Brazilian launching. We already launched the iPhone 3GS, which is doing well. And, as you can see in communication, we are betting on the Smartphones market. We are trying to upgrade our own customer Postpaid base for them to have the Smartphones and signing a Data plan with us in order to increase ARPU.

Perfect, thank you very much.

You're welcome.

Okay.

Our next question is a follow up from Henry Cobbe from Nevsky Capital.

Hi there, just following up on the depreciation issue. The depreciation for the third quarter was BRL797m. You're saying that the CDMA part was BRL229m. That implies that the GSM part was just BRL568n. And if it's going to be running at BRL250m a quarter through to second quarter '10, is it fair to assume that the GSM depreciation will be running at BRL570m on average for the same period?

We have to consider the new investments also and the calculation of future investments, to calculate the new level of depreciation. So it's not only what we have now we've just seen for depreciation CDMA. You also have to consider the new investment in CapEx that can make an average if you want to put in your model for the next year.

And the CDMA looks a little bit higher than previously expected. Previously it was running at around BRL150m per quarter. So why the acceleration?

I'm sorry, can you repeat, please? Why do we accelerate?

The CDMA depreciation was running at BRL150m a quarter from fourth quarter '08. So why the step up to BRL250m?

Actually, we started to accelerate it. In this year we accelerated six months more. Until last year we are accelerating until December 2010. Then we changed it this year. But the forecast of number of clients that we're going to have in our base is by 2010. And migration of CDMA to GSM is faster than what we expect in the beginning so that's why we accelerate more. And we had in the first quarter BRL165m of accelerated depreciation, with total of BRL300m, and now we have BRL230m. I'm not sure if I got what your question --

Yes, almost. And then you're saying BRL500m cumulative for fourth quarter and then BRL780m?

No. BRL500m for the fourth quarter, no, no. We had in the third -- I said the run rate fourth quarter is BRL250m total depreciation of CDMA; normal depreciation and also the accelerated part. So we -- by December 2009 we're going to have a net value -- a net book value of BRL500m that's going to be completely terminated by June 2010.

Okay.

But the run rate is BRL250m.

Okay. I see. So the net book value as at the end -- if you have BRL250m in fourth quarter the net book value would be BRL500m. And then it'll go down to zero by the end of June?

Yes, exactly.

Okay. And the GSM, we can assume it's running at BRL570m, and then obviously any new investments?

Yes. And now to 3G, yes.

Yes, yes. Okay. Well, that's particularly helpful. Thank you very much.

You're welcome.

(Operator Instructions). Please hold while we poll for questions. This concludes the question and answer session. At this time, I would like to turn the floor back over to Mr. Roberto Lima for any closing remarks.

Okay, thank you all for participating in this conference call. I could say that Vivo's team is very happy with the results we've presented today. Even more because they are based in some solid fundamentals and a solid strategy of this Company. We have the best customer portfolio in Brazil. We have the best team and the brand is very well recognized. So we are in the right market, in the right sector, in the right country. So we have all the possibilities for the future.

So we are very confident that we could keep on doing the same we have been doing the last quarters, presenting good results and taking all the opportunities to grow in Brazil, not only the traditional services, like VoIP, but also what is very motivating for us is to enter into the world of the 3G and all the services that we can provide with the new handsets, very sophisticated, that we are now seeing in the market. So thank you very much and hope to hear from you in the next conference call. Thank you.

Thank you. This concludes today's Vivo's 3Q '09 results conference call. You may disconnect your lines at this time, and have a great day.