Telefonica Brasil SA (VIV) 2010 Q3 法說會逐字稿

Good morning ladies and gentlemen. At this time we would like to welcome everyone to Vivo Participacoes' third-quarter 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 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 Vivo Participacoes S.A., we would like to thank you all for attending this conference for disclosure of the third-quarter 2010 results.

The operating and financial results of Vivo in this quarter reflect once again our sound strategy and its successful implementation. Vivo's effectiveness has continued to strengthen its customer base, especially the postpaid customer base which recorded an annual growth of 30% in the quarter.

Considering the increase in the prepaid segment, the total customer base recorded a growth of 18%. The increase in voice service consumption and the strong adoption of data and value-added service plans resulted in a 0.8% growth in ARPU for the second consecutive quarter. The increase in the customer base and in the ARPU produced once again in this quarter a two-digit growth in the service revenue, exceeding the 10% recorded in the year-to-year comparison.

Due to the rationality in acquisition of customers and the increased efficiency of the distribution channels, the SAC has continued to decrease and dropped 21% in the year-to-year comparison. Such factors added to an efficient cost management allocation, allowed Vivo to keep the EBITDA growing at the same rate as revenues in comparison to the same quarter of last year.

The net profit should also be highlighted. It recorded BRL602 million in this quarter, the second highest quarterly profit ever recorded by Vivo.

Slide four shows some of Vivo's competitive advantage, the basis for our growth. The Vivo Internet Brazil projects which provides for acceleration in the 3G coverage is underway. We progressed from one new 3G municipality activated per day to two new municipalities, recording 39% growth in the number of municipalities covered by 3G technology in a year-to-year comparison. Thus in the third quarter, we have already covered 779 municipalities and more than 65% of the population in such technology.

Complete voice and data offers and the largest network of owned store are part of our competitive advantage. As a result of that, we recorded a base of almost 58 million customers in this quarter with an annual growth of 18%, ensuring the continuance of our market leadership with a market share of 30.1%.

In the postpaid segment, Vivo increased its leadership to 35.3% of market share. Out of the total net additions, 41.5% were postpaid access, thus conferring to Vivo a significant growth of 30% in the postpaid customer base over last year as already mentioned. The customer base growth above the market average and the continuous performance of cross and upselling actions toward customers lead to an increased consumption of service, which is the base for the growth in our results.

As it can be seen from slide five, Vivo recorded a significant traffic increase of 53% in the year-to-year comparison. The branded MOU recorded 115 minutes in the quarter and achieved an annual growth of 29%. When compared to the previous quarter, the total traffic recorded an increase of 4.6% and the blended MOU recorded a growth of 0.9% even though in a period of few celebration days.

Worth of mention is the increase in the outgoing traffic and the outgoing MOU, which recorded growth of 75% and 47% in the year respectively. The annual growth of the outgoing traffic is a result of increased activity of the customer base in originating calls which started in 2009 with the Vivo Voce plans for the postpaid and the Recarregue e Ganhe promotion which aim at increasing the habit of speaking in the prepaid segment. To this effect, the percentage of the prepaid customer base that makes monthly recharge has been constantly growing, and in September it recorded an increase of 490 basis points when compared with September 2009.

Slide six shows that the increased activity in the customer base translated in increased consumptions of voice service and mainly data service produced a positive variation in the ARPU of 0.8% for two consecutive quarters, stimulated by the outgoing revenue for user, which grew 1.9% in the last quarter.

In the year-to-year comparison, the ARPU recorded a drop of 7.4%, which was mainly due to the dilution of multiple SIM cards and to the reduction of the incoming ARPU, which dropped 15.5% because of the community effect caused by an increased offer of bonus for on-net calls.

Also important to be noted is the reduction in the annual drop of the outgoing ARPU for the fourth consecutive quarter, which recorded an annual reduction of only 1.9% despite the existence of a quite larger number of customers with SIM cards in the customer base.

In slide seven we can see that the customer base in Vivo's 3G plans has continued to grow at high rates. In the year-to-year comparison, the growth was 112%. The data and value-added service ARPU recorded a positive annual increase of 36%.

Vivo's differential is that it offers 3G data plans tailored to the needs of each customer with access to the Internet via smartphones or modem. The sales of SMS promotional packages, among other services offered at Vivo service store, have helped stimulating the ARPU growth. Vivo has launched innovative services such as financial service which allow payments and bank transactions to be carried out via mobile and which are likely to be the drivers of the data ARPU in the future.

In slide eight we can see that Vivo's effectiveness and the continuous efforts towards rationalization and adequacy of acquisition expense to each customer's user profile have produced results. There was a reduction in the customer acquisition cost of 12.7% in relation to the previous quarter and 20.5% in the year-to-year comparison. Worth of mention is the annual reduction in unitized subsidies by more than 50% due to the higher volume of sales of SIM cards without handsets, and also the relatively small increase of 5.6% in unitary commission in spite of a much higher number of postpaid customers in the gross additions recorded in this quarter. As a final result, we can see a reduction in customers' estimated payback in all quarters along this year, recorded its lowest level in the third quarter.

It was the good operating performance shown in the preceding slides that allowed us to generate consistent financial results with highlight to the revenue and EBITDA growth.

In slide nine we see that the net service revenue recorded a growth of 10.1% in comparison to the third quarter of 2009. The EBITDA recorded BRL1,500 million with annual growth of 10.1% and EBITDA margin of 33.4% in the quarter. The net income increased by 80.9% over last year, recording the amount of BRL602 million as we will detail in the following slides. Cash generation recorded significant growth; the cash flow generation after investment activities grew 300% in the period and recorded BRL979 million.

By investing in a constant product and service-innovation process, Vivo has strengthened its base for keeping the leadership position and continue to achieve sustainable growth at the long term. In financial services segment, Vivo has made efforts towards not only stimulating the use of such service to the cell phone, but also to promote access to payments and bank transactions to our customer base that in many case has no bank account.

Through partnerships with some of the main market players, Vivo has launched well-subsidized initiatives. The successful sales of the co-branded Itaucard credit card, which currently reached 400,000 cards is a proof of that. We also bet on the launching of new services in other markets such as education, in which with the pioneering language course services via SMS we are already one of the largest language schools in Brazil and also on the sales of other applications to our service store.

We believe that the power of mobile connection opens infinite possibilities for people to live in a more funny, human, intelligent and safe manner. In order to make all this potential become a reality to our customers, we have the commitment to invest in a quality connection throughout Brazil, which explains how we're forced towards universalizing 3G coverage, which today reaches more than 65% of Brazilian population. It has the aggressive goal of reaching 85% by the end of 2011.

Now, I would like to offer the floor to Cristiane Barretto, Vivo's CFO, to continue with our presentation.

Thank you very much, Roberto Lima. Good morning ladies and gentlemen.

In slide 12, we can see that the net service revenue in the third-quarter 2010 recorded a growth of 10.1% in the year-to-year comparison and 4.3% in the quarter-to-quarter comparison, keeping a positive evolution of the second quarter in a row. Although the main driver of revenue has continued to be use of data and value-added services, which recorded a 61.4% in the year-to-year comparison, the annual growth in outgoing voice revenue is also worthy of mention.

Due to the increase in the customer base, improvements in the customer mix and increased activity in the prepaid customer base as shown in the higher volume of recharges increased consumption of services. The voice revenue recorded an annual growth of 5.9%, a strong increase in relation to the 2.6% growth in the comparison between the second quarter 2010 and to the second quarter 2009.

In slide 13, we see the evolution of the data and VAS revenue which recorded a growth of 61.4% in relation to the same period of last year, accounted for 19.6% of the net service revenue. The increase in the data and VAS revenue in the quarter was 5.1%.

As shown above, the mobile Internet revenue grew 92% over last year, stimulated by the increase in sales of data plans linked to modems and smartphones and by the expansion of the distribution network into new municipalities. The mobile Internet revenues has already recorded 54% of the total data revenue, thus showing the return obtained with investments made in 3G technology since 2008.

We also emphasize the growth in the SMS and MMS service revenue, which grew 47% over last year, especially due to successful sales of SMS promotional packages and new products based on such technology.

In slide 14, we comment on operating cost. The total operating cost excluding depreciation/amortization expenses recorded BRL3,070 million in this quarter, an increase of 10.5% over the third quarter of 2009. The growth is due to the increase in commercial activity and the customer base recorded during the period. When compared to the previous quarter, they remained almost stable with slight increase of 0.4%. The cost of service rendered recorded a growth of 15% over the third quarter 2009 due to the increased expenses with interconnection, leasing of sites and infrastructure related to our increasing revenues and customer base.

The cost of goods sold recorded a reduction of 4.5% in relation to the same period of last year. The increased participation of SIM-only sales and the restricted policy of subsidy that links the expense to each customer user profile explains the drop. It recorded a growth of 9.5% over the second quarter of 2010, due to an increase in sales of terminals intended to promote customer loyalty.

Selling expenses recorded a growth of 5.7% over last year, due to the increase in expenses with commissions and sales support because of the growth of access in the postpaid and data segments and advertising expenses, offset by the reduction in expenses arising out of consolidation of employees of owned stores. When compared to the second quarter 2010, it recorded a reduction of 6.1% due to the lower volume of sales.

General and administrative expenses grew 15% over last year due to the increase in third-party service, especially collecting expenses due to a larger postpaid customer base and volume of recharges, besides the cost with consultants, audits and legal services. In relation to the previous quarter, there was a growth of 6% due to the increase in expense with third-party services.

Personnel expenses increased by 5.7% in the quarter, and by 36.8% in the year due to the incorporation in September 2009 of employees of our owned stores. This increase was offset by reduction of third-party services cost with improvements in several operating indicators such as lower turnover and higher satisfaction of employees and customers. Fistel, Fust and Funtel expenses recorded a reduction of 1.8% in the quarter, and an increase of 10.5% in the year-to-year comparison related to the volume of net additions, and of the customer base and revenue in relation to the compared period.

In slide 15, we can see the components of the EBITDA evolution which recorded BRL1,537 million, an increase of 10.1% over last year due to the continuous growth in service revenue, increase in voice and data revenues [allied] to the continuous cost management during the period.

In slide 16, we see that the continuous improvement in the process and the financial discipline presented by the Company has allowed a consistent cost control, culminating in the growth of EBITDA margin which recorded 33.4%, growing 2.9 percentage points in comparison to the previous quarter. When compared to the third quarter of 2009, the EBITDA margin did not record any change. But it's important to remind that the same period of last year was impacted by non-recurring effects, mainly of SMS recovery.

In slide 17, we present the EBIT and the financial result. The operating profit EBIT recorded an increase of 62% over last year, and of 95% over the second quarter of 2010, explained mainly by the increase in the EBITDA combined with reduction of depreciation/amortization due to the end of depreciation of CDMA equipment.

As for the net financial expense it recorded reduction of BRL34 million in relation to the third quarter of 2009, due mainly to the lower indebtedness and net cost. When compared to the previous quarter, the net financial expenses lowered by BRL38 million due to the increase in the interest revenues because of a higher average amount of cash invested.

In slide 18, we can see the evolution of the net profit which recorded an increase of 81% in the year-to-year comparison. Such growth resulted from the increase in the EBITDA in addition to the reduction in depreciation cost allied to a better financial result explained in preceding slide.

The cash flow after investment activities totaled BRL979 million in the period, almost 300% higher than in the third quarter 2009 due to an increased operating cash.

Slide 19 shows the indebtedness result. In the comparison with the third quarter of 2009, we can see a reduction of 43% in the net debt as a result of cash generation, payment of debt related to the 3G license in the third-quarter 2009 and lower debt service cost.

Worth of mention is the closing of a new credit line with BNDES, referring to the PSI Investment Support Program in the amount of BRL319 million, of which approximately BRL100 million has been already drawn.

In slide 20, we can see that the investments made in the second quarter 2010 recorded 14.7% of the net revenue, showing a growth in relation to the previous quarter. The major investments were allocated in this quarter mainly to the increase in the third-generation network coverage, and also the increase of the capacity and the quality in the second- and third-generation network.

Vivo has continued to invest to increase IT capacity, both of hardware and software, with the purpose of supporting the growth of our customer base and for the lending of handsets for adding and retaining corporate customers.

Now I offer the floor to Roberto Lima for his final comments. Thank you very much.

Thank you, Cristiane. Quarter after quarter, we have used the same expression for summarizing Vivo's performance, sustainable growth. Once again, this is the description that best applies to our results in the third quarter 2010.

From a financial point of view, we have continued increasing our revenue which grew 4.7% over the last quarter, when our selling activities benefited from events such as the World Cup and Mother's Day.

The EBITDA grew more than 10%, and the net profit increased by more than 80% in relation to the third quarter 2009. The adaption of the prepaid offers to the particular needs of each region combined with the efficiency of the selling channels allowed us to record market share gains for nine consecutive months. In face of the actions developed by the competition, in the last quarter, we placed special focus on attracting new customer in the postpaid segment which adds more revenue to the Company.

In this quarter, we managed to maintain our leadership even though with a slight reduction in the blended market share and strengthened our number-one position in postpaid customer attraction. No less than 41.5% of the net additions came from postpaid access, a record. The fact is that we have added unconsolidated competitive advantages that strength Vivo's effectiveness in relation to the competition.

This has permitted us to reduce acquisition costs by 20% over last year, and to manage total costs chasing efficiency without disregarding service quality. In parallel, the same attributes ensured high satisfaction of our customer base and ARPU increased for two consecutive quarters. Such effectiveness has resulted from our well-defined strategy with established solid pillars in essential fronts -- network quality, billing, recharge customer assistance in stores and other channels, and constant launching of the innovative products and services.

In summary, we have striven to spread Vivo's leadership in everything that matters to the customers. Thus we are leaders in coverage and have the largest and best second- and third-generation network in Brazil.

We are leaders in service quality and customer assistance as showed by Anatel indicators. We have the largest network of own-stores, and each customers are assisted by Vivo employees acting in line with our values and excellence practice.

We offer our customers an extended and flexible portfolio of plans tailored to meet their defined profiles, not to mention our (inaudible) data and voice promotions.

It's such set of differentials that attracts and retains our consumers. For them to be a Vivo customer means to have the best operator, the best service, the best cost-benefit relations. It also means to have a brand that is tuned to its time, committed to connecting them, each time more with a world of possibilities and opportunities offered by the network society.

It means to have a component that looks towards the future, to the long term, establishing the present time, the basis for continuing to grow on a perennial and sustainable manner. Our third-generation coverage, for example, has recorded a fast expansion thanks to the Vivo Internet Brazil program, incorporating new municipalities every day. In 2011, the program will comprise 2,832 municipalities which account for 85% of the Brazilian population.

As for services, we have continued the innovative -- (technical difficulty).

Good morning, and congratulations on very strong results. A couple of questions, if I may. First, Roberto, I think that on the conference call of the first quarter results, you had mentioned that the recharge activity was a little bit of a leading indicator for service revenue growth, and you had flagged that you would expect to be in the double digits in the second quarter, and indeed you were. So I was wondering if you can give us an update on what you see with recharge activity. I saw something on your slide five, but I wasn't sure. If you could maybe elaborate a little more on that.

And then the second point would be the margin expansion. If we normalize for the one-time items last year, the margin expansion was very impressive. It looks like a lot of that is coming from a reduction in cost of goods sold, and I know that a year ago is when the most of the industry started focusing on SIM only. So I am wondering -- we haven't seen that much G&A leverage. So I'm wondering how -- to what extent can we think of the margin expansion as sustainable as we anniversary the strategy of going for SIM only. Thank you.

Okay. Good morning, Michel. So the -- what concerns the first question, the recharging side of the business, I remember that I said in the first quarter that maybe recharge is the first indicator that shows us how is our customer base reacting to our proposals. So a customer can choose an operator not only in the moment he buys a handset, but the really true moment is when he buys a recharge. So he can change his SIM card any moment. So we knew that, we learned that since we started selling SIM cards only.

And while we say that, we've prepared our offers exactly to capture the customer the moment he decides to recharge. And I think that we -- our strategy has been successful. Since then, we are growing recharging double digit in this year, in all the three trimesters. This is what we saw in third trimester as well.

And what we showed in the slide number five, that's the number of users that frequently recharge their handsets. It means that the customers that recharge at least once in a month. So the part of our customers, they don't recharge every month. They just receive calls. This is why they are in the base, but this number of customers is growing every month because more and more people are adopting our proposals. So this is what I had to say about recharge.

I will ask Cristiane to answer your remarks concerns the cost and the margin.

Yes, hi Michel, how are you? About margins, just to remind you that last year we had an extraordinary impact regarding the VAT tax in the third quarter, and another one regarding the loyalty program, which both together presented an improvement of BRL78 million in our revenues and also in EBITDA. So if you take up -- take out these extraordinary impacts of 2009, the margin would be 32% not 33%. So we really improved 1 percentage point from year to year. So that explains your question about margins.

When you're talking about G&A leverage, just to let you know that in the group of G&A that's demonstrated in the presentation, it's also included some tax that repay -- not taxes, contributions are repaid through prepaid recharges and also postpaid. And that's why there was a main impact that caused variations during the year over year.

Sorry, Cristiane. So just to expand on that last point a little bit, what was the size of the impact in this quarter?

So the impact of the -- the extraordinary impact of VAT was last year in the third quarter of 2009.

Okay. Yes.

That is BRL8 million.

I thought you meant -- okay, but in the G&A line item was there something else there as well this year?

Yes, I know in G&A it's nothing extraordinary. I just was mentioning that in the group of G&A it's also included some charges that repay to collect accounts from postpaid that has direct relation with our postpaid client bases.

Okay.

Not only purely G&A, extraordinary cost.

Right. Okay. All right, that's fine. Thank you very much.

You're welcome.

Thank you. The next question comes from James Ratzer from New Street Research.

Yes. Good morning. I had one question really regarding your data business, please. You're obviously putting up some phenomenally strong numbers on your Internet business. And I was wondering if it's just possible to get a bit more breakdown of the driver both in the BRL457 million of revenue and how much of that comes from smartphones, what rate is that growing at, how much comes from data cards, what rate is that growing at.

I mean, you're also able to talk a bit about your data card business. How many data cards, for example, do you have and do you think you're taking any business from the fixed line operators as a result? Thank you.

Yes, thank you for your question. We do not disclose these (inaudible) for Vivo, so we don't disclose the data card sales and widescreen and small screen, sorry.

But you (multiple speakers) --

But what we could say is that we have double-digit growth in other what we call service -- value-added service and Internet. So Internet is booming because of the level of coverage we have all over Brazil and the sales of modems and smartphones.

But also the SMS has a double-digit, and other value service, the new value-added service that we are selling. So I think that this is what -- the way we found to increase revenues in the outgoing traffic.

Are you able, please, to talk at all kind of qualitatively about the relative importance of smartphones versus data cards in your business, please?

I think that it's half and half. So they are -- they use the network in a different way. The smartphones, they use more frequently than the modems, but that when the modems is up, they use much more traffic than the smartphone, so different use.

When one of our customer has a smartphone, it allows us to sell and to upsell value-added service with -- whatnot happens when we sell a modem. So they are two different businesses with two different uses of our network, but both of them are very profitable now.

Okay. Thank you.

You're welcome.

Thank you. The next question comes from Rizwan Ali from Deutsche Bank.

Yes, Good morning. I'm just wondering, of course you've seen a very impressive increase in your 3G services, and I was told last year around this time that you're using 20% to 30% of your 3G capacity. I'm sure it's gone up quite a bit now. So I'm wondering like how much more capacity do you have and then what happens after that? Are you pushing the government to sell 4G licenses?

Yes. You know that our 3G network is quite new, we launched in October 2008. So we still have room to grow in 3G. We are investing a lot in the access network, but also in the transmission network. What we have been doing within the transitions is try to share the investment with some other companies even if they are competitors of Vivo.

So we are building new transmission lines together to reduce CapEx and OpEx in the future. So -- and I think that this strategy pays out, so we are increasing the number of municipalities. Every day we are launching two new municipalities 3G in Brazil. We expect to be at a number of 2,832 municipalities by the end of 2011, and so this is I think what you can tell.

Okay. And also regards to -- do you expect 4G licenses to be sold off anytime soon?

Yes, you know that there is something on the press today that all the sector is complaining against the decision of Anatel just to sell the new 3G license for one new entrant in the market. As concerns the 4G, what we know is that this could be -- the beat could happen in 2011. So it's true that sooner is better in this case, considering that Brazil will face Soccer World Cup in 2014, Olympic Games in 2011. So we would like to see the 4G technology and the frequency allowed to the market before 2012, even though if, we consider that it could represent a little more investment.

But since we are working in our networks every day, it is better to implement two or three technologies at the same time as we are doing in the northeast region of Brazil. The same time we launched 2G we launched 3G as well. So maybe we could have some projects that could pay off as well.

Thank you.

Okay. Thank you. (Operator Instructions) And the next question comes from [Evin Liyal] from [EVVA].

Yes. Good morning, gentlemen. Just couple of questions. I don't know if you could tell me what do you think is the main reason on your very strong share of net adds that you record in especially in this third quarter, but also I think the last ones.

And the second one maybe having your opinion on what exactly is the situation now on the decision making on the MTRs. I think there is a initial proposal of 10% decrease for next year and 2012. I don't know if you could give us maybe the timetable in order to get a decision, and the second thing the opinion on what will be the final decrease of that.

I will take the first question that concerns the net adds. You see that in the first half of the year we sold a lot of prepaid. And this is why -- this is shown by the fact that we view our market share in the last nine months before the third quarter of this year.

In the third quarter, since the competition reacted to our strategy in the prepaid, we decided to put folks on the postpaid segment. And in the postpaid we are selling not only the traditional handsets, but also smartphones and modems. And modems normally we sell in a postpaid grant -- agreement. So this is what is the reason why we succeeded. You can see that more than 40% of our total net ads in this quarter comes from the postpaid segment, which means we are getting customers with a higher value than the prepaid.

I don't know if Cristiane could add something on that. But -- and not concerning the second question and --

So basically -- basically just to come back on this. Basically you feel that you can -- so you're providing the consumer with better data services than your competitors?

Yes. I think we have a very good mix of products and service. We are not only focusing new adds, but also in maintaining the base we have. So one of the reasons we are -- we grew marketing the last month was because we have a rate of churn that is lower than our competition. And I think this is the main reason why we see not only base -- a customer base that progress, but also the revenue that follow the customer base.

So -- and we are able to cross sell and upsell on this base, selling new services like Internet access, value-added service for the same customers that are used to have the good service of Vivo.

Okay.

Okay. So the second question I think was about the MTRs.

Yes, the MTRs, yes.

Yes, I will let Cristiane answer it.

Well, can you repeat the question. This was regarding what we expect or the impact (inaudible).

Termination, the ratio behind it.

No, what you expect? And the second thing, and when do you expect the decision to be taken?

This is a million-dollar question. And so, yes, you know that --

You want to take it?

Yes, please go ahead, Cristiane.

No, no, go ahead, Rob.

You know that the local regulator, they are trying to decide something about the MTR for 2011. This is why we are focusing on products that generate outgoing traffic. This is why we are stimulating our prepaid base to communicate on-net and to take advantage of all that, to depend less and less on the MTR. So this is our strategy. And it doesn't depend on what's going to happen and when it's going to happen.

Okay, any opinion on that. I think those initial proposal of 10% cut for the first two years, any view on that?

Yes. I wouldn't like to comment, you know this --

Okay. Thank you very much.

You're welcome.

Thank you.

Thank you. And the next question comes from Liam Hynes from Occam Asset Management.

Hi, how is it going? I've two questions please. The first is on the depreciation charge. So you've recorded a low depreciation charge of BRL550 million and this, as you said, was due to CDMA equipment depreciation charge being finished. Looking forward, can we see a similar depreciation charge or will this be a [1,000] in the third quarter?

And the second question is on the CapEx spend. And in 2010 are we going to see a jump in CapEx spend in fourth quarter? And can you give me some guidance on 2011-2012 CapEx spend, if that's possible? Thank you.

Okay, thank you for the question. Regarding depreciation, yes, we finalized in June the depreciation of CDMA. This was about BRL300 million every quarter. We do not have that expense now, but we cannot guarantee that we can continue the same level in the future. We had some delays in the CapEx of 2010. And that's why the depreciation was not higher than what we presented right now.

So probably in the first quarter, considering that we had now in third quarter higher CapEx announced in second quarter, we expect to have more depreciation in the first quarter than we had in the third quarter. It's not exactly the reduction that we had in CDMA, we cannot compare. We cannot assure that's going to be exactly the same reduction that we had for no depreciation anymore in CDMA.

And the second question, we had the guidance for 2010 for CapEx to BRL2,490 million. We had almost -- we had [a billion six three hundred] into September. We intend to put in our plans to expand 3G capacity and continue to invest what we proposed in the beginning of the year. And for 2011 we don't have -- we cannot give any guidance right now. We're probably going to announce the guidance for 2011 in the results when we publish the results of 2010, or in the first quarter of 2011.

Okay, great. So basically the CDMA depreciation charge for the past so many quarters was approximately BRL300 million and that's officially off the books now.

Yes, yes, that's right.

Okay, thanks very much. Thanks --

Welcome.

Thank you. Next question comes from [Pavio Laveen] from [BTG].

Hi, hello, everyone. I have a quick question here. One, it's related to your churn rate. You register a quite significant increase quarter-over-quarter, registering the highest level churn until now. And I understand that if that it's definitely related to your strong commercial activity recently with strong gross adds. But my question is if it's a new level of churn going forward, if you expect to increase a bit? And what kind of customers are increasing your churn? It's mostly prepaid or some postpaid and data card?

And the second question is, it's related to your infrastructure in Sao Paulo, regarding only transmission. Today you fully use Telesp infrastructure or do you have a pretty good infrastructure there? That's all from my side.

Okay. So and that concerns with churn. So it comes from the prepaid segment. It's the fact that last year or more than an year ago we started selling SIM cards -- and the SIM cards have a higher volatility than the adds that we used to do in the past when we sold just handsets with the SIM cards. So it changed the way of measuring the churn.

But what we are disconnecting now are customers that were not producing revenue since three months ago. So it doesn't impact in our level of revenues. So it's just recognition of a new dynamic in the market since Vivo was the last one to start selling just SIM cards.

When you look to the postpaid, you'll see that we made more than 40% of our net adds in the postpaid segment. It comes not only from the new adds, but also from the fact that we have a churn that's below 22% in the postpaid.

So what concerns the network in Sao Paulo, we already share a lot of transmission lines with Telesp here in the state of Sao Paulo, as we are sharing with all other competitors and telecommunications company all over Brazil. Not only in network already existing but also developing new projects and new implementations with this -- those companies.

Okay. Thank you.

You're again welcome.

Thank you. And we have a follow-up question from Michel Morin from Barclays Capital.

Thank you for taking up the follow-up. Cristiane, I just wanted to verify with you in the other expense line. What -- can you remind us what goes into that line item? Because if there was nothing unusual this quarter, but it was higher-than-usual numbers. So I'm wondering if you could explain that a little bit.

And perhaps tied to that, when you disconnect some of the prepaid subscribers that are not active, sometimes do they have a balance remaining on their cards sometimes and does that create revenue if you're disconnecting them with remaining balance? Thank you.

When you disconnect them, they're supposed to have 90 days or 80 days without any traffic, not entry and outgoing traffic.

And no balance (multiple speakers).

And no balance (multiple speakers).

No balance, okay. And what goes into that line item? I think it was BRL46 million in the quarter.

We have to pay the fees to Anatel. This is why we have to be very rigorous not considering users that do not produce revenues for Vivo. So we are interested in disconnecting as soon as we perceive that this customer will not reactive his SIM card.

Okay, Michel, I think you want to know the nature of what is -- the groups -- in the group of other revenues, isn't it right? Michel?

Sorry. It's the -- I think it's a negative in the expense line, the last item.

Yes, but your question is what, the nature of the groups that are inside the big group, is that it?

Yes.

Okay. We have in this group, a lot of revenues and expenses, and the net balance is between these two. The main groups of revenues is the charges that we got from sharing our infrastructure and transmission like Roberto just said. And then we had some taxes in that group also. We have [contingencies] net, provisions for contingencies, net of what we paid in the period. These are the main groups of these two revenues and expenses, Michel.

Okay. Yes. Now, just at the last two quarters that number has been a little bit higher perhaps than it had been. So I'm just wondering what -- how we should think about that going forward. It's not that big, but it's noticeable anyway.

And if I can ask a separate question on your data revenues which has been very strong. How should we think about this? Is it mostly really your postpaid subscriber base who are really moving the needle here, or are you starting to have a real tangible contribution from your prepaid subscribers?

And I'd be interested to hear a little bit from you, Roberto, as to how you think about the opportunity for data services to your prepaid segment. Thank you.

Okay, so we think there is a lot of opportunity in the 3G. This is why we are investing a lot in deploying our access network all over Brazil.

As I mentioned before, we expect to reach 2,832 municipalities by the end of 2011. And the results we got until now shows that there is a demand for this kind of services. The handsets are improving a lot. And also with the appearance in the market of the new tablets, we will have new opportunities to offer services and internet connections.

So we are very positive on this side. And what is important as well, that I already mentioned, is that this is outgoing traffic; it is a kind of revenue that do not depend on the interconnection rates and on the regulation rates.

So it means that since we have a huge advance compared to the competition in coverage, in 3G coverage, we think that we are well positioned to face the competition and to keep on increasing our revenues that grew this year 60% compared to last year in data and value-added service.

And is it really still focused on the postpaid? Is it mostly coming from postpaid today or it (multiple speaker)?

Yes, it's mostly based in the postpaid, but we already launched the first product for the prepaid segment. And we think that we could have as well a hybrid product that is pre -- postpaid and prepaid for the excess of utilization a customer can have. So he has a franchise, he can use until a certain level of megabytes or something like that, and after that he can recharge his line to use more and more.

So this is what we are trying to launch, and we expect that we will have some revenue coming from the prepaid segment as well.

Great. Thank you very much.

You're welcome.

Thank you. (Operator Instructions) Okay, we have a follow-up question from James Ratzer from New Street Research.

Yes, thank you. Thank you very much. Just one question regarding your voice business. And if I try to calculate your outbound price per minute, just looking at your outbound ARPU to outbound MOU, adjusting for data, it looks like your average price per minute has actually now increased for two consecutive quarters. I mean, do you think this is now the start of a trend, that we are through the worst in terms of the price promotions in Brazil, or do you think prices could start to head back down from here? Thank you.

Thank you, James. But it is difficult to consider the trend if we consider that the competition is very strong in the Brazilian market. You know that we are increasing our voice ARPU because we are increasing the level of activity of our customers in the base. We have more and more prepaid customers recharging every month. We have more and more prepaid customers that move to the postpaid segment. And on the postpaid segment, we have plans that motivate the customers make more and more voice calls even if they are long-distance calls.

So -- but it depends on the level of competition, if you have to review our price or not. But if everything is equal, maybe we'll have more and more activity in our base. It could mean that the output could grow. But I cannot affirm because of the fact that we are in a very, very competitive market. We don't know what will happen in this Christmas season in the end of this year. So we have to be very, very reactive to the market as well, not to lose our most important assets, which is our customer portfolio.

Okay. Thank you very much.

You're welcome.

Thank you. (Operator Instructions)

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

Okay. Thank you very much for your assistance to our third-quarter 2010 results conference call. We are very happy with the results we could produce in the third quarter, and we expect to continue providing not only good results, but also good service to our customers and good opportunities to our employees.

Now, we are starting a new year in the life of Vivo, considering that we have Telefonica as the main shareholders, as the controllers -- the only controller of the company. So we think that this will open several opportunities for Vivo to be in contact with all the other countries that exerts the same activity all over Latin America and in Europe and other countries. So this brings us much more opportunities to benchmark and to learn and to exchange experiences, and we expect that this could revert to an increased level of service to our customers, which could mean more revenues and more results for Vivo.

Once again, thank you very much, and I hope to see you in the next conference call for the results of the fourth quarter, if not before that in any occasion we have. Thank you.

Thank you. This concludes today's Vivo 3Q '10 results conference call. You may disconnect your phone lines at this time.