Telefonica Brasil SA (VIV) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Vivo Participacoes First Quarter 2010 Earnings Conference Call. Today with us we have Mr. Roberto Lima, CEO of Vivo Participacoes and Ms. 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. (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'll turn the conference over to Mr. Roberto Lima, CEO of Vivo Participacoes. Mr. Lima, you may begin your conference, sir.

Good morning, ladies and gentlemen. On behalf Vivo Participacoes, we would like to thank you all for attending this conference for disclosure of the first quarter 2010 results. Vivo's performance during the first quarter reflects the balance between an excellent commercial performance and generation of financial results. The net service revenue recorded a 5.8% growth when compared to the first quarter 2009. The EBITDA in the first quarter reached BRL1.27 billion with an EBITDA margin on total revenues of 30.1%, a slight reduction when compared to the same quarter of the previous year.

Excluding the effects of the CPCs adoption, the EBITDA would be at BRL1.208 billion, an annual rate of 6.6%, and an EBITDA margin of 30.6%, 17 basis points higher than in the same period of 2009. The net profit in the quarter amounted to BRL192 million, 44% higher than in the same period of the last year. The cash generation before investment activities was about BRL393 million.

Slide four shows the customer base growth will reach 53.9 million access in March 2010, an annual rate of 18.2%. Worth of mention is the 19.5% increase in the postpaid customer base due to the strong contribution of internet access sales and to the large acceptance initiative to the community concept provided by the new Vivo Voce plans launched in November 2009.

Around 2.2 million access were added to Vivo community in the quarter bring this number of net additions, the largest mobile telecom company achieved in the first quarter since Anatel started to disclose this number. We would like to highlight that 33% of these net additions were in the postpaid segments. For the second consecutive quarter, Vivo [met] the share of net additions with 42.8%, resulting in an increase of our market share we reached at 30.1%, 38 basis points higher than in the previous quarter.

In the postpaid segment, we increased our leadership with a significant 71.5% share of net additions in the period, resulting in a 33.5% market share of access, 250 basis points higher than in March 2009. The growth of the distribution network is another key point. Vivo has more than 11,000 points of sales of handsets with 331 owned stores and more than 500 2,000 recharge points distributed around the most important locations in Brazil, thus allowing accessibility to our products and services.

The growth in customer base recorded in the period was possible to the sound structure and quality of Vivo network, which supported and stimulated this commercial growth through the increase of leadership in 3G coverage and the continuous improvement indicators that reflects the connection quality. Slide 5 shows that Vivo, once again in this quarter, has as its priority goal to deliver the best service to its customers, has continued to consistently reach quarter levels above its competitors. As far as it refers to the goals set by Anatel to be matched by the SMP, the personal mobile service operators, Vivo has continued to reach levels close to 100%.

In relation to coverage with the 3G technology, Vivo reached the benchmark of 594 municipalities covered, being ahead of its competitors and increasing its advantage in relation to them, so as to consolidate its leadership position in this segment. The quality and activeness of our offers portfolio may also be measured by the performance recorded in the quarter. Our vivo Voce postpaid plans launched in November 2009. We are fairly accepted on the market and already include around 28% of the postpaid individual customer base. The plan has showed to be a strong instrument for attracting and retaining the high-end customers, not only due to its excellent cost beneficiary ratio, but also to the customization possibility in accordance with customers' needs.

Our offer to the prepaid segment, [Hakaegi Igeni], launched in September 2009 with the purpose of activating the customer base and increasing the volume of recharge has fulfilled its goals. The mechanics of the campaign was remodeled in November. As a result of the promotion, we can observe a growth of 9.1 percentage points in the number of customers that are recharging and a growth of 10.4% in the financial volume of the recharge when comparing to the first quarter of 2010 with the same period of the previous year.

Slide seven shows that in March, we recorded approximately 12.4 million unit users in our customer base, that used the internet service through handsets, smartphones, or data cards, representing an increase of about 40% over the previous year. The good performance in sales of data service made possible due to the strong hedge and 3G coverage, allowed Vivo to become an operator with the higher market share of broadband plans, estimated in 41% in March 2010, increasing its advantage over the competitors in the last months. From now on, with the purpose of promoting higher transparency, the Company started to consider in the subscriber acquisition cost, SAC, the expenses with corporate lending and [fiscal] tax besides the company's already considered.

In slide eight, so the SAC of BRL69 in the quarter. When compared to the first quarter 2009, the SAC recorded a reduction of 32%, evidenced in the rationale in attracting customer and the dilution effects caused by the high volume of additions with the SIM only used in handsets available in the market. In comparison to the previous quarter, there was an 11% growth in SAC, due to the higher participation of data and postpaid customers in net additions whose handsets have a higher subsidized component.

The churn in the quarter recorded 2.5% and remained stable, both in relation to the previous quarter and to the same period of 2009, and reflects of our successful customer loyalty and retention policies and many of our customer satisfaction. This is a positive indicator, especially if you consider the sales of SIM only whose churn is higher.

Slide nine explains the variations in the ARPU. The blended ARPU in the quarter of BLR24.80 recorded a decrease of 8.5% when compared to the previous quarter, reflecting the 6.9% and 10.8% reduction in the outgoing and incoming ARPU respectively. These reductions are due to the seasonality and the lower number of business days. We also need to consider the efforts to promote community concept and the increase in the mobile penetration, which results in an increase substitution of fixed to mobile to mobile to mobile traffic.

When compared to the first quarter of the previous year, the ARPU recorded a reduction of 9.2% which is lower decrease when compared to the 10.3% reduction observed in the fourth quarter 2009 in comparison to the fourth quarter 2008. It's also due to the effort to make prices adequate to the market, which is the reason for the good commercial performance and positive evaluation the service revenue recorded in the last quarters.

As shown in slide ten, the blended MOU in the first quarter of 2010 recorded a reduction of 2.5% in relation to the previous quarter and an increase of 50.6% in relation to the first quarter 2009. The outgoing MOU on [its done] had a reduction of 1.1% in the quarter-over-quarter comparison, related to seasonality of the period and the lower number of working days. In the year-over-year comparison, there was an increase of 85.7%. Also, as a result of the strong increase in the customer base, the total voice traffic recorded a growth of 76.6% in the year-over-year comparison and of 3.7% in the quarter-over-quarter comparison.

The outgoing traffic on its done increased by 119% and 5.3% respectively in relation to the first quarter of 2009 and to the previous quarter. The growth of the MOU in relation to the last year, especially in the outgoing segment, is a result of the continued incentive to a higher volume of traffic beginning in the previous quarter with the launching of the recharge and gain campaign. Now I would like to offer the floor to Cristiane Barretto, Vivo's CFO, to continue with our presentation.

Good morning, ladies and gentlemen. Starting this quarter, because of the adoption of all the new accounting practices announced in the Brazil CPCs, the information disclosed converts to an IFRS methodology. In the first quarter, the consolidated impact caused by the CPCs adopted was a reduction of approximately BRL10 million in EBITDA.

Slide 12 shows a net service revenue evolution. Adaptation of prices to the market led to a strong growth in the customer base and generated an increase of 5.8% in revenues when comparing the first quarter of 2010 with the first quarter of 2009, which is higher than the 3.4% obtained in the first quarter of 2009 when compared to the fourth quarter of 2008.

This happened on one hand as a result of the increase in sales of data and value-added services, especially internet and messaging, growth in the customer base, and usage incentive actions. And, on the other hand, due to the already mentioned before of prices adjustments for increase in the activities of the current customers and attraction of new customers. When compared to the previous quarter, the service revenue recorded a reduction of 3.2%, due to seasonality in the period and less number of business days.

Slide 13 shows in detail the evolution of the data and VAS revenue, which recorded once again in the first quarter a substantial growth of 51.8% in relation to the same period of previous year, now representing 17.5% of net service revenue, an increase of 529 basis points in this revenue in comparison to the previous year. The data and VAS revenue increased 7.3% quarter-over-quarter.

As shown in this slide, the mobile internet revenue grew expressive a 120% in the comparison to the previous year, due to an increase in sales of data plans related to modem and smartphones and to the 3G network expansion. The 3G data plans customer based increased by approximately 150% in the comparison to March 2009. Due to its high growth, Vivo's internet revenue now accounts for 53% of the data and VAS revenue with short messaging and MMS account for 41% of revenue.

It's important to emphasize that 16.2% growth over the previous year in the short messaging and MMS revenue. The success in the sales of short messaging promotional package, especially through the talk (inaudible) promotion and the growth of interactivity services shows the growth in these services.

In January of 2010, Vivo became the first operator in Brazil to launch an open platform which allows any developer to create applications and sell them to our more than 53 million customers. The revenue generated by the creation of applications will be shared with the developers. And even high growth is expected in the messaging revenue, resulting from the launching of new applications based on short messaging developed in this platform.

Slide 14 shows our comments on operating cost. The figures shows that our cost-efficient policy has proven to be consistent. Total operating costs, excluding the precision, reached BRL2.9 billion and BRL59.5 in this first quarter, an increase of 5.2% in comparison with the first quarter of 2009. This growth is due to higher commercial activity in the period. When compared to the previous quarter, operating costs present a reduction of 1.8% as a consequence of seasonality, optimal results allocation, and a continuous improvement in process.

The cost of service rendered, excluding the [fiscal] fee, recorded an increase of 3% in relation to the previous quarter, due to increase in expense resize in infrastructure range and of 19.1% in relation to the first quarter of 2009, due to the increased interconnection costs. Although there was a reduction in the interconnection costs in the quarter-to-quarter variation, the annual growth reflects the increase in the mobile-to-mobile traffic (inaudible) in the period.

The cost of goods sold recorded a reduction of 11.4% in relation to the previous quarter and of 29.2% in relation to the previous year, due mainly to reduced sales of handsets because of the higher participation of SIM only in the additions. The selling expense has recorded an increase of 4.3% in comparison to the fourth quarter of 2009 and of 10.8% in relation to the previous year, due to increased expenses with commissions and sales support as a result of the increase in net additions, whose mix has more participation of postpaid and data customers.

Such increase was partially offset by the reduction in third party services arising out of internalization of employees of owned stores and of expenses and provision for (inaudible) accounts. The general and administrative expenses recorded a reduction of 3.8% in relation to the previous quarter and a 4.6% in relation to the previous year. The personnel expenses recorded increases of 3% in the quarter, of 15.8% in the year, due to an incorporation as from September 2009 of professional supervise assistance in our owned stores.

Such facts resulted in a reduction in costs as with third party services, as previously explained. The fiscal [forced and fontel] expenses recorded a slight reduction of 0.3% in the quarter, an increase of 30.3% in the year, due to the growth in development of net additions and in the customer base in revenues in relation to the same period of previous year.

Slide 15 shows that EBITDA in the quarter was approximately BRL1.274 billion, an increase of 3.8% in relation to the same quarter of previous year. In the quarter-to-quarter comparison, there was a drop of 9.1%. The EBITDA margin in the quarter recorded 30.1%, a slightly reduction of 30 basis points when compared to the margin of the first quarter 2009, due to increased commercial activity. In the comparison with the previous quarter, the margin was reduced by 160 basis points, due mainly to positive nonrecurring [in effect] occurring in the first quarter of 2009.

Excluding the effects of the CPCs adoption, the EBITDA would be of BRL1.28 billion, representing an annual growth of 6.6%. The EBITDA margins would be of 30.6%, an increase of 70 basis points in relation to the first quarter of 2009. Having maintained the differentiated profitability, even though in periods of increased commercial activity, is a reflection of the consistent results in rationalizing customer attraction and retention in the strategy of making the customer base every time more profitable as from the sale of value-added services and the continued search of an optimal location of resources and efficiency of processes.

Slide 16 shows the cash flow from operations after the investment activities. In the first quarter of 2010, we recorded net uses of cash of BRL58.2 million. The available cash after these usage was used for payment of debt and the corresponding hedge which became due in the quarter. In the comparison over the previous quarter, a reduction was recorded in cash generated, which was a result of the increase in the operating payment, especially the TSCs, which [in repaid] to the Anatel, despite a similar cash consumption relating to CapEx. In addition, the interest in other debt during the period were settled.

The increase in operating disbursement related to the customer base growth, partially compensated by the lower investment activity, resulted in a cash flow reduction of BRL68.9 million, when compared to the first quarter of 2009. The operating profit EBIT recorded BRL402.4 million the quarter, a reduction of 29.5% when compared to the previous quarter, due mainly to the reduction in the EBITDA of 9.1% and to the increase of depreciation and amortization expenses. When compared to the same period of last year, the EBIT was 6.8% lower due to the increase of 9.6% in depreciation and amortization expenses.

Slide 17 shows a net profit. Vivo recorded a net profit of a BRL191.9 million in the quarter, a growth of 44.3% when compared to the first quarter of 2009. In relation to the previous quarter, the profit was reduced by 11.6%, due to the lower EBITDA in the quarter, partially compensated by the better financial result in the period, which will be shown in the next slide.

As shown in slide 18, Vivo's net financial expenses in the first quarter of 2010 were reduced by 59.1% in relation to the previous quarter. Such reduction is mainly explained by the additional expense rising out of the assessment of PIS COFINS tax [revised] on the allocation interest over owned capital in the period. This was partly offset by income from core deposits and contingency expenses in addition to a lower effective interest rate in the period. The growth debt in the end of the quarter was BLR4.8 billion, a drop of 37.7% when compared to the previous year.

The main driver of this reduction was a prepayment of 3G license, finalized in the first quarter of 2009. In comparison with the previous quarter, there was a reduction of 6.3%. The available cash and the financial advancement offset the indebtedness in the quarter, resulting in the net debt of BRL3.9 million, a reduction of 29.9% in relation to the same period of previous year. The net debt to EBITDA ratio recorded in the quarter was 0.75%.

In the first quarter, the Company settled the third issue of debentures in the amount of BRL210 million, plus interest of BRL22.8 million and started to repricing of the second issue, the second series of debentures in the amount of BRL800 million. Our strategy of continued financing cost reduction, combined with the decrease of our debt levels in the effects to lower costs (inaudible) led to the offer of repricing conditions that resulted in a dividend from some of the debenture holders. In April 9, 2010, the amount held by the dividends was BRL459.9 million. This amount was reallocated to short term according to CPC 24.

Slide 19 shows our comments on Vivo investments, which were mainly allocated to the expansion and the coverage of our third generation network, an increase of the capacity and quality in the second and third generation networks with special attention to Northeast region and to the compliance with the coverage growth set forth by Anatel. Further, we used (inaudible) increase in the system capacity, both in hardware and software with the purpose of supporting the growth of our customer base.

To this effect, we emphasize the investment carried out for the construction of a new data center. Part of our investment was also used in development and modernization of our network of owned stores and in the [lease] of handsets for attracting and retaining corporate customers. With the investments thus made, Vivo [cellular] telephone network started covering 3,502 municipalities, with digital technology offering approximately 600 I-O with 3G that was (inaudible). Vivo's investments in the quarter were BRL328.7 million, equivalent to 7.8% of net revenue. Now I offer the floor to Roberto Lima for his final comments. Thank you.

Thank you Cristiane. When we look to our financial and operating indicators, we see that Vivo has shown a remarkable balance between growth and value generation. In this last quarter, Vivo has maintained differentiated profitability levels while increasing its revenue and market share.

We recorded almost 54 million customers and a market share in excess of 30% in the end of the period, having led the market with more than 2.2 million new access in the quarter. Our postpaid customer base played a key role for the achievement of such performance. Having grown more than 19% out of the new access in the postpaid segment, 71.5% came to Vivo in this quarter.

Our current commercial growth is a result of our current tax with (inaudible) on the market, created from the right choice we made in the past, such as focusing on satisfaction on large of our customer base and constant quality improvement in everything we do. It's also a consequence of a changing perception that Vivo is a company with the expensive price directed only for a few customers.

An efficient cost-control policy and continuous improvement in operating process, allowed the creation of a pricing promotion policy that promoted a better perception of value for the money on the market. The high adoption fee and satisfaction with the Vivo Voce, our data plans and prepaid promotion are a proof of that.

Vivo increased its market share for the seventh month in a row. We have conciliated such growth with an annual increase in the sales revenue, close to 6%, quite above the growth recorded in the previous quarter. And the reflects of our better operation financial performance, the consolidated net profit for the period recorded an increase of more than 44% in relation to the first quarter of last year.

In March 2010, Standard & Poor's raised our long-term corporate rating to a AAA BRAAA, from BRAA. Our current focus has remained the same. We are the operator which received the lowest number of complaints to Anatel and recorded the best performance in satisfaction research as a position we have consecutively kept for more than two years.

Today, we enjoy a privileged position on the market. This does not mean that we are satisfied, we still have a lot to accomplish. Our dream is to build every time more bridge between company and the several different target [publics] and at the same time among people, contributing to integration through connectivity, since we understand that being connected is essential for achieving a better life quality, both to companies and to people.

In order for our dream to become true, our goal is to work hard without ever giving up our obsession of establishing high quality relations with all our stakeholders. Thank you a lot for your attention and now we are ready for your questions.

Thank you, sir. The floor is now opened for questions. (Operator Instructions). In case you are following the conference call via webcast, please click on the question to the host to send your question. Questions will be taken in the order in which they are received. (Operator Instructions). The first question we have comes from Vera Rossi with Morgan Stanley. Please go ahead.

Thank you. My question is about your EBITDA margins. Do you think you will be able to maintain your EBITDA margins in the 30% range or what would cause the margins to decline above this level? Thank you.

Vera, we believe that we are able to maintain a margin, in the period to 30%. So I think this is the answer, so this is what we are trying to do to maintain the margin above 30% and, at the same time, maintaining the commercial growth that we showed this quarter.

And the main reason for the margins to stay around these levels is the reduction in subsidies on the prepaid customer base on an industry-wide basis, not only Vivo, correct?

Yes. This is very important. The SIM card only commercial operation is very important to reduce price. Since there is an offer in the market selling open handsets, we are able to see -- to sell just the chip and to gain new customers.

And you don't see any of your competitors today subsidizing prepaid. Is that a fair assessment?

No, I don't think -- even more after Anatel decided to prevent the companies to charge a small amount of money to unblock the handsets, I don't see any company subsidizing prepaid handsets.

Okay. Thank you.

You're welcome.

The next question we have comes from Michel Morin with Barclays Capital.

Hi. Thank you. Good morning, everyone. Roberto, I was wondering if you can comment a little bit about the outlook for growth in the mobile industry in Brazil and specifically if we look at your service revenue growth, it has improved to about 6% this quarter and we saw collateral report a little bit less than 4%. And these are not very high growth numbers when you consider how well the economy has been going in Brazil and when you consider that in a market like the US, service revenue is growing 10. So I was wondering -- could you -- what would you think is the outlook for mobile service revenue growth going forward and what would be a driver of acceleration there? Thank you.

Okay. So it's true that we have to consider that in 2009 telecommunication sector had to compete with other sectors like the --

The home appliances.

The home appliance and automobile sectors. So there was an effort to reduce prices and to give more traffic for free in 2009. So this is what made the ARPU to go down. And now we -- I am very positive for the months to come and we see that the level of recharge of our prepaid base is going up in two digits. So I'm very positive that we can recover part of the revenues that we should be producing with 18% customer base growth.

And when you look at your competitive position specifically, your competitors have become more vertically or more integrated. And obviously, [Clavo] is in the process of integrating with Embratel. Do you see a need for you to have also a fixed line offering?

Not a fixed line offering. I think that we should focus on having a strong transmission backbone and backhaul. So this is what we are looking for. And in terms of fixed line, we try to do as much as we can -- synergies with the Telespy in Sao Paulo and let's see what we could do for the future, even together with Telespy or having our own operation fixed. But it's not a priority for now for us.

Okay.

So I think that we are focused on 3G. Value-added services and internet revenues are going up. So this is what we are trying to put on focus now.

Great. And then obviously you've had great results in postpaid. I was wondering, when you look at those results, can you tell us if that's coming from an improvement in portability perhaps or are you seeing your -- perhaps are you converting your prepaid subs into postpaid? What would be the source of that strength, aside from your branding and network quality?

All the answers are true, so we are migrating prepaid customers to postpaid. So a huge amount every month. Secondly, we are trying to sell more access to the customers that are already existing in the base.

Yes.

Selling 3G modems or smartphones, upgrading those customers. And that concerns the portability. And even though the numbers are very low, so it accounts for 3% or 4% of the total of new sales on the month. It's a kind of thermometer for us, so it shows that Vivo is gaining market share. We could consider this as just an indicator of how good is our performance in postpaid.

Great. Thank you so much.

Thank you.

The next question we have comes from Andre Baggio with JPMorgan.

Hi. Good morning, everyone. I'd like to know, in terms of growth outlook, Vivo is doing a very good job in terms of getting a lot of postpaid subscribers. But still we see growth just slightly above inflation. Is this what the company can expect or do we think that could accelerate?

What could accelerate the --

The revenue growth.

The service revenue growth.

Yes, you know that as I explained it the previous question. In 2009 we made an effort to adequate price -- price to the market so -- and this had two effects. First, the good commercial performance we showed in the first quarter and also the level of activation of our own basis. So increased by 900 basis points the number of customers in prepaid that recharged every month. So -- and this makes us feel that for the next month we should see something very positive in terms of revenues, since our recharge, that anticipates the consumption, is growing into this level.

Okay. And just a second question. Is there any news on the -- related to interconnection or is just Anatel still has plans of doing their long-term incremental costs and nothing really is happening.

We know that this is a subject that is always on the press. It's something that Anatel discussed a lot. But we have to consider in Brazil there were several difficulties for them to change the interconnection system that we have nowadays. You know that part of the prepaid base do not recharge their handsets. They are the only handset that receives calls.

Today we don't have the [VUM] compensation, which will be difficult for us to maintain those guys in the customer base. So from the social and political point of view, I don't think that Anatel could do that without changing or giving the mobile companies another way to compensate these revenues that we could lose because it could mean 30 million or 40 million customers that could disappear from the market.

Okay. Thanks a lot.

The next question we have comes from Andrew Campbell with Credit Suisse.

Yes. Good morning. I had a question about a couple items below the operating line. In particular, you saw a large increase in depreciation. I was wondering if we should still expect a decrease in depreciation later this year with the end of the CDMA depreciation. And my second question is just on the tax rate, which seems to be quite high in the quarter. I was wondering if the Telemig merger into Vivo will help to improve the tax efficiency and if we should expect a lower tax rate going forward.

Okay. Thank you for the question. About value depreciation, we're going to finalize into June depreciation of CDMA. It's around BRL300 million we still have as a net book value as of March 31. So as of June you're going to have this effect already over. Regarding the tax rate, we've been showing 44% in the last quarters as effective [rate] to have some permanent additions that increase a little bit the effect of tax rate. So the thing with Telemig that we are -- the finalization of the operation with Telemig does not have a direct impact on this tax rate. This tax rate is a result directly of permanent additions that we have. It's recurring. If you look at the last quarters in 2008, we always had tax effective rates higher than 34%.

Okay. Thank you.

You're welcome.

The next question we have come from James Rivett with Citi.

Good morning, guys. I've got two questions if I can. The first you saw a much bigger increase in interconnection costs year-on-year rather than revenue growth. And I'm just trying to see whether this is a change in strategy, whether you've now moved away from the focus on on-net promotions or whether this is a seasonal thing and we should expect this trend to reverse as we go into the second half of the year. My second question is on spectrum auctions. Where are we with those? When do we expect them to happen and what do you guys expect to be able to participate in? Thanks very much.

So on our interconnection costs, it's not directly related to the interconnection revenue. So those things should be analyzed separately. But in the case of Vivo, what happened is that on the second half of 2009, we launched a campaign for the prepaid segment with an incentive in -- as a bonus for guys to call on-net and also to fixed lines. So this increased our interconnection costs. In the second phase of this campaign, you reduced the level of bonus traffic for fixed lines. And in the third phase of this campaign, reducing even more. So what we see for the future is that interconnection costs should go down and revenues should go up at the same time.

And just to check, you mean the interconnection costs for in absolute terms or as a percentage of revenues?

In absolute terms.

Okay. Great.

Yes.

And the spectrum auction?

And in terms of the spectrum, we are working for Anatel to establish the schedule for the new auctions and we will see. We discussed with Anatel about the possibility of participating in the H-band 3G that Anatel wants to sell to a new entrant and we think that they should make this band available to the existing players in the market. It's a difficult discussion, but we are very interested in everything that concerns to spectrum.

And when do you expect for that to happen now, the H-book auction?

We don't know. So Anatel [generalizes] that it could happen on the second quarter, but it don't look so -- we don't know.

Perfect. Thank you.

Yes.

The next question comes from Walter Piecyk with BTIG.

Great. Thank you. On slide seven of your presentation, you have that slide that shows lines that access the internet. Just a couple questions on that. It was down sequentially. Could you give us a sense of what the mix is on data cards versus smartphones versus WAP phones? I know it includes all three. And would any of those individual items within lines that access internet better or worse than the others or explain why it declined from Q4 to Q1.

So, Walter, normally we don't disclose the breakdown of the data revenues between smartphones and data and modems. What we see is that the internet became the number one contributor to the value-added services in data revenues. And the second one is still the SMS that is growing [to this base], but lost the first place in the last quarter. So I think this is what we can tell you. But you see by the numbers of access that we are selling every month that smartphones and internet access are both contributing a lot for our growth in the postpaid segment.

And about the question of reduction in the quarter-over-quarter, it's just seasonality of the period.

Seasonality? So it wasn't a matter of just losing more CDMA cards and that offset the gains in WCDMA?

No, no, no.

No, no. no.

Just so -- just one other question then. If you go to slide 13, I mean, it's the same issue. I mean, you're internet, Vivo internet is up 120% year-over-year. Is that growth driven more by data cards or phones or is it a combination of both? They are beginning from 360 --

It's a combination of smartphones and data cards.

Okay. Thank you.

You're welcome.

The next question we have comes from Rizwan Ali of Deutsche Bank.

Good morning. My question is regarding the changes in accounting you had. You said that the net impact, negative impact on EBITDA after the changes in accounting was about BRL10 million. Can you break it down for revenues and cost?

Okay. We had, in the first quarter, BRL75 million of more revenue, of services. And total revenue 34% -- BLR35 million. And the cost side we had a difference of BRL40 million. So the difference between these two amounts are approximately BRL10 million.

I'm sorry. You said BRL75 million from revenues.

Yes. Yes. We had total revenue -- total revenue, BRL35 million.

BRL35 million. Okay.

BRL35 million in to total revenue. In cost and cost of goods sold, BRL40 million.

Increase?

Increase. And then we had a group of other costs that are the difference, other non-operating costs and operating.

Okay. And now that you've -- so it is appears, looking at your pricing, you said you'd be removing some of the bonuses that you were giving subscribers last year. That started last year in the second half. Does that mean that the average pricing is going to be higher going forward? And then a related question is should we then expect lower MOUs for the rest of the year?

No, we expect to reduce the MOU because we are reducing the level of bonds that we have in our campaigns and this should happen in the month of May and principally in June. And the level of price, I don't see it going down. So I think that without the promotions we did into second half 2009, we reached the level in the market that is enough to motivate people to come to Vivo. This is what we see in our commercial performance. So from -- in point in time, we don't see the need for any movement in terms of price to go down.

And so what's your observation in terms of price elasticity? I mean, mobile to mobile price elasticity or fixed mobile price elasticity, has that surprised you, upside, downside?

You know that we grew 18% in number of users year-over-year and we grew almost 6% in revenue. So we expect to grow more in revenues in the months to come. And the level of growth in the customer base should maintain at the same level we are observing now. So this is what I can tell.

We are not surprised because when we decide to reduce price or to adequate the price to the market, we knew that we could lose part of the revenues because what we offer to the new entrants nowadays we offer to our own customer base as well. So we expected that, but this is a way for us to protect our base and, at the same time, to conquer customers from the competition.

Okay. Thank you.

The next question we have comes from Henry Cobbe with Nevsky.

Hi there. Thanks very much for the call. Would you be able to split out in the first quarter how much the depreciation expense was from the CDMA accelerated appreciation?

About BRL300 million.

Okay. So BRL300 million was in the second quarter -- first quarter and BRL300 million to go in the second quarter.

Yes.

Yes, okay.

And secondly, just on the traffic volumes. Now a large percentage of your traffic is outbound. What percentage of that is on net?

We don't disclose this information -- traffic on net. Yes, sorry, but we normally don't disclosure this information.

Okay. And lastly, just on the accounting changes, you're saying there's a net negative impact for the first quarter 2010, but am I right in thinking for the notes that for the fourth quarter and the first quarter of '09, there was actually a positive impact on the net basis to EBITDA?

Just a second.

Yes, we disclose the (inaudible) on exhibit in the press release that shows exactly the impact in the fourth quarter of 2009. You had -- if you're talking about revenues, you had -- just a second, please, here -- BRL97 million in total net revenues. And then you have the cost side more -- less -- almost the same -- BRL5 million. So these are the main lines. If you go to page 16, 17 of our press release, we disclose detailed information about first quarter of 2009 and fourth quarter 2009. So you can make the comparison if you are were to take out these facts.

Yes, and it show a net positive impact from the adjustment, is that right?

Yes. Yes.

Yes. On a EBITDA level.

Yes.

And also in the notes you made a comment on the subsequent events regarding the exercise of the per option of BRL460 million of debentures. Is that going to be a problem for you to refinance?

No. No problem. No problem at all. We already refinance. Yes.

It's already done. Okay. Okay. That's great. And very lastly, the growth in data is obviously very encouraging, but if we back out the kind of voice revenue trends, it looks like they're kind of stable to slightly declining. Is that something you think will come back depending on what promotional activity you're focusing on or do you think this has kind of peaked out in terms of voice?

No we expect that this will come back since we are in the third phase of our prepaid campaign we launched in September 2009. In this third phase, we reduce the level of bonds and see the recharge is showing a number of growth in two digits. So we expect that for the next months we should capture part of the revenues that will come from the level of the recharge that we have now.

Okay. And just to come back to James Rivett's question on the interconnect costs -- and they grew to 23% year on year for the second quarter running. Are you saying now that this has peaked in absolute terms because of the expected change in activity?

Yes, as we could consider the peaks, is as I told you the level of bonuses that we have in the prepaid campaign was reduced and mainly in what concerns the bonds for fixed line traffic. So we slight reduce it for 10% of the total of the bond that people can use to call fixed line. So we should see a reduction in the interconnection graphs in the months to come.

Okay. And very lastly, is the increase in outbound MOUs, the stimulus that you're creating for outbound traffic, is that part of a strategy to reduce your exposure to any cuts in termination rates in the near future?

Yes, it has this effect as well. The first one is to protect the basis, try to maintain the customers' [revenue] and to conquer new customers that could come from the competition. But it's true that more and more we are reducing our dependence on the interconnection revenues. So the other -- the strategy is to grow as fast as we can the data and value-added services revenues.

Okay. And perhaps, just finally, to help on this interconnect issue, of the interconnect cost, how much is from calls to fixed lines and how much is from calls service to mobiles?

Sorry, but we don't break down this and we don't disclosure the difference, but as I told you, part of that comes from the calling fixed line traffic and this is what we are reducing now.

Okay. That's great. Thank you very much indeed.

You are welcome. Thank you.

Okay. Bye-bye.

The next question we have is a follow-up from Michel Morin of Barclays Capital.

Hi. Good morning. Thanks for the follow-up. I just wanted to check to make sure that below the operating line there was no impact from the change in accounting standards. Is that correct?

Yes. We had, on the EBITDA level, a negative impact of BRL10 million.

Yes, but below that, nothing. So no impact in depreciation.

No, no. No, no, no, no. no. Not at all.

Okay. And then I wanted to come back to the earlier question on slide ten in terms of the on-net traffic. I know that you won't disclose the percentage, but can you give us a sense of how much it's grown year-on-year? And the reason why I'm asking is because I assume that you count on-net traffic only once in your minutes of use. So presumably, if on-net is growing very rapidly, your traffic, if you were to count those minutes twice, the growth would be much more significant. So maybe -- so I just wanted to get a sense of it would be materially different in terms of the -- either the MOUs or the voice traffic total growth.

The MOU would be higher, of course. We had some studies made last year. We -- the MOU of Brazil, for example, was 78. The MOUs account for two different tracks. It would be until 120. We don't have new numbers for 2010, but of course, it would be higher. And the other question, can you repeat, please?

Well, it was all part of the same question. But just to make sure I understood, you said the 120. That would have been for the first quarter of '09 or for --

No, no. I said that we had some studies last year, in 2009. When you consider the MOU of Brazil, it was 78 until third quarter, I guess, and the 78 would be 120.

Okay.

So if you want to make the same proportion of this year, it's approximation of what would be the MOU.

Okay. Great. And then can you give us a sense of how significant data is as a percentage of your total traffic? I think in many of the European countries, data is already 75% to 90% of traffic. I would assume it's a much lower number, but can you give us a sense of where you're at right now?

No. No. Sorry, but one of our strategies to maintain our network, as strong as it is nowadays, but we wouldn't like to provide the level of traffic, coming from data and from voice. So we don't disclose this information.

Okay. That's fine. Thank you very much.

You're welcome. Thank you.

(Operator Instructions).

I just want to make a follow-up answer on the question about any impacts below operating. The only impact that we had was we started to capitalize revenue -- interest on CapEx, so that was the only difference we had from this adoption of fixed fees. It was about BRL4 million in the quarter.

(Operator Instructions). And it appears that we have no further questions at this time. This concludes the question and answer session. At this time, I would like to turn the floor back to Mr. Roberto Lima for any closing remarks.

Okay. Thank you all for attending our first quarter 2010 conference call results. We are very, very happy with the results we are publishing this quarter, mainly because of the exceptional commercial performance that the Company was able to present. And we think that this is exactly the customer-based growth that will allow us to produce more revenues in the future.

We think that we are counting with the good customers in the market and we are expanding the number of services that we are ready to provide them. So value-added services and internet are contributing to 17.5% of our total revenue. This is what is important for us. It reduces the level of [debtedness] that we have on the interconnection revenues.

It depends on us to keep on taking advantage of the huge base that we have and to provide more and more services and traffic to those customers. In terms of quality, we have been for the almost three years in a row, the best company in the market and this is what shows the Anatel indicators and also the public research that are published in the market. So this is what makes Vivo have a constant result presentation quarter after quarter.

So we expect the quarter -- second quarter 2010 we will do the same. We will keep on growing and presenting a margin above 30%. This is what we are looking for without losing the strongness of our company and what concerns the brand and the commercial activity. So thank you very much and hope to see you soon. Bye-bye.

Thank you, sir. And thank you to management. And thank you all for participating. This concludes today's Vivo First Quarter 2010 Results Conference Call. You may disconnect your lines at this time.