Telefonica Brasil SA (VIV) 2010 Q4 法說會逐字稿

Good afternoon ladies and gentlemen. At this time we would like to welcome everyone to the Vivo Participacoes' fourth-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 result -- 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 afternoon, ladies and gentlemen. On behalf of Vivo Participacoes SA we would like to thank you for attending this conference for disclosure of the 2010 fourth quarter and year results.

The operating financial results of Vivo for the fourth quarter and for the full year reflect once again a year of major achievements. The adoption of a balanced commercial strategy along the year and Vivo's competitive advantage in relation to its competitors allowed us to increase our leadership in the postpaid customer segment, recording a market share of 35.2%. Our total market share remained almost unchanged even in face of the increased competition.

The growth in the ARPU for three consecutive quarters evidences the strong performance of the net additions in value-added service and data plans as well as the increasing consumption of voice service, resulting in a 2.8% growth in such indicator in the fourth quarter. Thus, as a consequence of the higher adoption of voice and data service and the growth in the customer base, we achieved an increase of service revenue in this quarter which is unprecedented in the year.

More rationale selling actions focused on customers with higher revenue generation combined to the increasing efficiency in the distribution channels allowed us to record in this quarter the lowest historical value for customer acquisition cost at the same time as the voice service recorded increased profitability. All these attributes added to an efficient cost management and allocation, resulted in a higher EBITDA margin and record profitability for Vivo. The net profit totaled BRL864 million in the quarter, closing the year 2010 with BRL1,894 million, an annual increase of 116%.

In slide 4, we see the results of the Vivo commercial strategy along the year. In the first half of the year, Vivo sought to increase its market share and activate its customer base which was leveraged by the launching of the Recarregue e Ganhe Recharge and Win promotion and the new Vivo Voce plans which with the competitive price allied to the quality of the service produced the best cost-benefit ratio on the market.

During the second semester and due to the competitor's reaction in the prepaid segment Vivo strengthened its efforts on the acquisition and retention of postpaid customers using its increasing competitive advantage in 3G coverage, and its owned stores network for enhancing sales of data service. Thus, we managed to achieve the benchmark of 60.3 million customers in December with an annual growth of around 17% while we remained as market leader with a market share of 29.7%. In the postpaid segment, Vivo increased its leadership and recorded 35.2% market share in 2010.

Out of the total and net additions in the Brazilian market in 2010, 51.9% were postpaid effects of new customers in Vivo which resulted in a significant growth of 29.1% in our postpaid customer base over the previous year. As a consequence of the increased customer activity and the growth in the customer base, slide 5 shows a traffic increase of 17.1% in the year-to-year comparison and of 6.7% in the quarter-to-quarter comparison. The outgoing traffic recorded an important annual increase of 20% while incoming traffic grew 6.9%.

The blended MOU remained almost stable in relation to the fourth quarter 2009, a positive factor if you consider the increased rationality of the current offer in comparison with the previous year and a growth in the customer base with more customers using multiple SIM cards. In comparison with the previous quarter, the blended MOU recorded a growth of 2.6%, also due to seasonality. The increased number of active lines is also reflected on the percentage of the prepaid customer base that makes monthly recharge which has been constantly growing, and in 2010 recorded in average an increase of 5.4 percentage points over 2009.

Slide 6 shows that the increased consumption of voice service and mainly of data service besides the seasonality of the period produced in this quarter a positive variation in the ARPU for the third consecutive quarter, recorded 2.8% increase with emphasis to the 3.8% increase in the outgoing ARPU. In the year-to-year comparison, the ARPU recorded a drop of 4.4%, which was mainly due to the dilution of the multiple SIM cards and to the reduction in the incoming ARPU which recorded a drop of 15.3% as a result of the cumulative effect caused by an increase offer of bonus minutes for on-net calls.

Worth of mention is of the reversal in the trend of annual decrease in the outgoing ARPU which recorded an annual growth of 3.1% due to the increasing consumption of service that exceeded the mentioned dilution.

Slide 7 shows the evolution of Vivo's market share in the segment of modems and machine-to-machine access attached to data plans. We recorded 40.1% of market share of data terminals in December, managing to obtain on average 72% of new data customers. This performance evidences the acknowledgment of Vivo as the best option in the Internet service for such segment as well as confirms our strong leadership when it refers to the actual adoption to plans and data services.

The data and value-added service ARPU recorded a positive annual growth of 26% as a consequence of the increased adoption to Internet plans and due to the sales of SMS promotional packages. With a contingent innovation process, Vivo offers through its Vivo service store an each time wider portfolio of options to its customers which has also helped to stimulate the growth of the data ARPU. To this effect, the Vivo service store already offers around 500,000 videos, ringtones, songs and other contents, generates approximately 1 million downloads per month.

Slide 8 show that the subscriber acquisition cost recorded its lowest historic value, decreasing by 9.7% both in the year-to-year and in the quarter-to-quarter comparisons. The subsidies per line were reduced by 33.9% over the previous quarter and by 40.9% over the last year due to the increasing proportion of additions with naked SIM cards and to the adoption of a rational policy that links the subsidy granted to the value expected from the customers.

In addition, the brand achievements contributes to a reduction in expense with customer attraction once we are the best options among the mobile telephone operators in Brazil. We must also emphasize the reduction in commissions per line by 15% over last year and by 13.4% over last quarter, which is the result of a continuous work seeking efficiency in the channels which has reduced the average commission per addition even in face of a larger proportion of postpaid and data customers in additions.

The increasing profitability of voice service due to a rational policy of bonus in the prepaid offer is also worth of mention. We think in this context the growth in the outgoing voice service revenue has increased while interconnection costs were reduced.

The operating strategy implemented in the course of the year and shown in the previous slides allied to a good financial and asset management, generated consistent financial results in the quarter with emphasis to the EBITDA margin level of 34.5% and to the quarterly profit more than four times higher than the profit recorded in the fourth quarter 2009.

Slide 9 shows that the net service revenue recorded a growth of 20.5% (sic - see Presentation) in the fourth quarter when compared to the same period of the previous year, while EBITDA recorded BRL1.7 billion with an increase of 20.9% over the last year.

The operating cash generation after the investment activities recorded again a significant growth. The operating cash flow after the investment activities grew 48% in the period. The fourth quarter result has helped us built a year of high growth in revenue, EBITDA, profit and operating cash generation.

Slide 10 shows that the net service revenue totaled BRL16.9 billion in 2010, a growth of 9.9% over 2009. The EBITDA recorded BRL5.8 billion with growth of 11.6% and margin of 32.2%. The net profit recorded an unprecedented benchmark of BRL1.9 billion and growth of 116% in the period. Cash generation represented by the cash flow after the investment activities was 63.7% higher, having recorded BRL2.9 billion.

Thus, having view our aim to increase total shareholder return, Vivo's Board of Directors approved the distribution of BRL2.3 billion in dividends.

Since it's creation in 2003, the Company has been investing to be the best mobile operator in the Brazilian market and to achieve positive results in the last three years. Thus, the Company proposed to distribute all the 2010 net profit and part of its expansion reserves, resulting in a payout of 127% over 2010 net profit, less legal reserves.

Vivo has worked in the different fronts to strengthen its competitive advantage with the objective of keeping its leadership and sustainable long-term growth. We believe that constant innovation in service and application is the main way to transform people's lives by connecting themselves. We offer a large range of valuable products and service which make life of our customers more human, safe, intelligent and funny.

From a financial point of view, they are sustainable revenue-generation tools with high return once they are free from interconnection costs and because they do not cause traffic increase nor require additional investments in networks. Thus our Vivo service store seek to offer an increasing portfolio of contents and applications with results already showing that we are in the right course.

The sales of the Vivo service store already record around 1 million monthly downloads, and in past December there were already around 1 million subscribers of service related to English language course through the mobile phone.

However, we know that this is only the beginning and that there is too a large growth potential. Thus, with the purpose of attracting as many developers as possible and offering our customers the best and major novelties in this segment Vivo actively participates in one of the most important events sponsored by Telefonica Group in the industry, the Campus Party.

We have also [bet] on the launching of new services in other markets such as the financial service market in order to foster the use of the mentioned service through the mobile phone and promote access to payments and bank transactions to our customer base which in many case hold no bank accounts.

By means of partnerships with some of the most important companies in the market, Vivo has launched successful initiatives. The sales of the credit card co-branded with Itaucard which has presently recorded more than 500,000 cards is an evidence of that.

In order to make all this potential a reality for our customers, we are committed to invest in a quality connection throughout Brazil. For this reason, we are making our best efforts towards universalization of the 3G coverage which today reach more than 70% of the Brazilian population and has the aggressive goal of achieving 85% by the end of 2011. Now, I'd like to offer the floor to Cristiane Barretto, Vivo's CFO, to continue with our presentation.

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

Slide 13 show that the net service revenue in the fourth-quarter 2010 recorded a growth of 12.5% over last year and of 6% over the last quarter, with the growing trend recorded along the year remaining stable. In the year to date, the net service revenue recorded BRL17 billion and achieved a growth of 9.9%. The acceleration of growth in the outgoing voice revenue recorded along the year is worth of mention. Attributes such as increased customer base, the best mix in the market and incentives to increase activity in the prepaid customer base were decisive for increasing voice service consumption and also for reducing dependence on interconnection revenues.

The data and value-added services revenue accounted for 20.7% of the net service revenue in this quarter and has continued to be the main driver of revenue increase, recording a growth of 48% in the year-to-year comparison.

Slide 14 shows in detail the evolution of data and value-added service revenue which recorded increases of 12% and 48% over the last quarter and the last year respectively as a result of the Company's focus on the promotion and sale of differentiated services. The constant investments made in 3G network for increasing coverage and improving quality have been showing the expected result. The number of customers having the data plan recorded an annual growth of 87%.

The Mobile Internet revenue continuing to show a strong performance have been increased by 65.4% over last year due to the increase in sales of data plans related to modems and smartphones. The Mobile Internet revenue recorded an increase of 10.3% in the quarter and accounted for 53.2% of the value-added service and data revenue. The successful campaigns and promotions for stimulating sales of SMS packages contributed to leverage the SMS and MMS revenue and are also fulfilling the objective of promoting a change of behavior in its customers who even after the end of the promotions continued to use the service more frequently.

Slide 15 and 16 show our comments on operating expenses which as from this quarter are grouped in such a manner as to better reflect our business strategy. The first cost slide lists those costs more directly related to the commercial activity and to the service revenue. We can see that the growth in these lines of cost were quite lower or there were even [annual] reduction given the high growth of revenue and of the customer base.

Direct cost of service rendering recorded BRL952 million in the quarter, an increase of just 2% over the same period of last year. This happened partially due to an increase in provision of doubtful accounts in consequence of the increase in the service revenue offset by the reduction in interconnection expenses due to a more restrictive policy for granting bonus to mobile fixed calls. These items remained stable in the quarter.

Regulatory cost recorded an increase of 6% over last year and of 8% in the quarter-to-quarter comparison which was mainly due to the increase in expenses with Fistel, Fust and Funtel directly related to growth in net additions and to the customer base and revenue for the year. Acquisition and retention cost recorded a reduction of 14% in the annual and quarterly comparison which was mainly due to the restrictive policy in granting subsidies linking the expense to the usual profile of each customer and to the higher proportion of gross additions of customers with naked SIM cards.

Commercial activities cost recorded an increase of 15% in comparison to the fourth quarter of 2009 which was mainly due to the increase in cost directly related to the commercial activity and to the customer base such as mailing, call center expenses due to the high number of customers and advertising. When compared to the previous quarter, there was an increase of 9% due to seasonality.

Factory costs, including network and IT expenses, recorded an increase of 18% in comparison to the fourth quarter of 2009, due to an increase in expenses with slight transfers in energy as a result of coverage expansion, especially 3G coverage. In comparison to the previous quarter, the cost remained stable.

Personnel cost increased by 48% in the year and by 44% in the quarter due to the impact of the collective agreement with base in November 2010 in estimated non-recurring expense relating to corporate restructuring in the amount of BRL66 million.

General and administrative expenses grew 9% in the year due to increase in certified services expense because of the contractual adjustments to inflation. In relation to the previous quarter, the 13% increase is explained mainly by the increased institutional expenses due to seasonality. The legal expenses grew 13% in the year and 7% in the quarter as a result mainly of the increased expenses with taxes.

Slide 17 shows the results of the continuous improvement of process aligned to the constant financial discipline enforced by the Company. The significant revenue growth and the strict cost control resulted in an increase of the EBITDA by 20.9% in the year, recorded BRL1.7 billion with EBITDA margin of 34.5%, an increase of 3.1 percentage points. When compared to the previous quarter, the EBITDA recorded an increase of 9.1% with EBITDA margins higher by 1.1 percentage points. In the year to date, the margin was 32.2% and the EBITDA recorded BRL5.8 billion with an increase of 11.6%.

Slide 18 shows the EBIT and the financial result. The operating profit EBIT recorded an increase of 109% in relation to the last year, and of 19% in relation to the third quarter of 2010 due mainly to the increase in the EBITDA combined reduction in depreciation amortization due to the end of depreciation of CDMA equipment.

In relation to the net financial expense, we can see that there was a reduction of BRL32 million in relation to the fourth-quarter 2009 due mainly to the lower indebtedness level in debt service cost. In comparison to the previous quarter, the net financial expense has increased by BRL47 million mainly because of the expense with PIS/COFINS on financial revenues in relation to the allocation of interest on capital.

Slide 19 shows that the net profit recorded BRL864 million in the quarter, and increased by 325% in relation to the fourth-quarter 2009. The net profit amounted to significant BRL1.9 billion in the year, a historic record for the Company, with growth of 116% over 2009. Such increase is mainly due to the increase in the EBITDA allied to lower depreciation expenses and better financial result in the year. The cash flow as to investment activities totaled BRL1 billion in the quarter as a result of increased operating cash generation even though with increased investments made in the period.

Slide 20 shows indebtedness result. In the comparison over the fourth quarter of 2009 and third quarter of 2010 there was a reduction of 54.4% and 27.7% respectively in net indebtedness as a result of the strong cash generation as well as the lower debt cost with lower interest rate.

Slide 21 shows that the investment made in the fourth-quarter 2010 accounted for 20.5% of the net revenue, recording an increase in relation to the investments made in the previous quarter. Accordingly, the year-to-date CapEx recorded BRL2.49 billion, in line with the year's guidance. Investments had continued to be focused on increasing the natural capacity and quality, and increasing the third generation network coverage with the purpose of continuing to provide high levels of satisfaction to our customers as a result of excellence in service rendering.

We had also continued to invest in information technology and services with the purpose of supporting the future growth of our customer base. In addition, we are investing in the construction of the first phase of the new data center in Tambore with 20,000 square meters constructed in a land of 70,000 square meters, totaling BRL73.3 million invested in 2010. With such projects, we have in perspective a growth horizon for the next 10 years.

The new data center will be sufficiently large to allow us to support all the new applications, contents among others, as well as to ensure quality and availability of our assistance assuring excellence in customer assistance in terms of billing, call center and stores among other points.

Now, I offer the floor again to Roberto Lima for his final comments. Thanks to all of you.

Thank you, Cristiane Barretto. The largest mobile telecommunications operator and the eighth largest company in revenues in Brazil, Vivo is a young company with seven years of existence with a colloquium of achievements that is suitable to veteran companies and a promising future that can be dreamt of only by organizations which are able to promote convergence of interest and virtue. That is which make our business a way to flourish people, the society and the country. It is with the principle that year after year we have managed to go through a course of sound and sustainable evolution with quite positive results once again in 2010 generating value to millions of Brazilians and thus generating value to Vivo itself and to its stakeholders.

The year was lot of great important achievements that help us strengthen the basis to follow on with our growth path. In the auction made by Anatel in December last year, we managed to eliminate the gap we had in terms of spectrum in relation to our competitors. In some place, we had nearly 60% less spectrum than the other operators and we still secured a high level of quality thanks to the efficiency of our network.

The incremental spectrum acquisition gives Vivo more flexibility to grow in the long term in voice and especially in data, maintaining a top quality level with the essential element for our strategic positioning. A huge mosaic of dimension has turned Vivo into what it is today. And the element that puts this work together may be summarized in one solid expression, trust relations. Customers, shareholders and investors, employees, partners, community, government, press, competitors each of the mentioned parties sees Vivo and is related there to from different viewpoints according to their respective goals, demands, needs and interests. From Vivo's perspective, they are separated parts forming a wide ecosystem, separated parts which need to be cultivated with dedication in order for the whole to flourish and develop itself.

They are interconnected and interdependent elements which are mutually energized. And such energy emerges from the trustworthy relations. It is based on this network of trust relation with all the stakeholders that the Company strength and Vivo's brand emerge, a brand that is going to become even more comprehensive.

Telefonica, which in 2010 purchased Portugal Telecom's stake in the Company, decided not only to keep Vivo brand in Brazil but also to extend it to the fixed telephone services in Brazil. By connecting more than 60 million of Brazilian citizens, Vivo consolidated itself as an organization that's more than a mobile telecommunication operator. The Company is also an important economic, social and cultural transformation agent. A Company full of vitality because energize the environment in which it's inserted and energize itself with it. That creates value to people, to the society and to the country instead of follow the old school that teach that companies should capture value. That builds a new environment that ends feeding its business that leverage the development, creating context to develop itself.

In few words, what Vivo does is to promote the convergence of virtue and interest feeding a spiral in which all grow. With the changes in the shareholder structure ends an era of corporate success story and begins another area full of new opportunities and other dreams to come true.

Brazil leaves a special moment of growth and new horizons of opportunity to develop itself and we have an important place in the construction of this future because we promote the essential [food] to move the progress in contemporary world, connectivity, as part of an ecosystem that companies influence and are influenced by it. Some of them come only to do business. Others, like Vivo, come to create development.

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

(Operator Instructions) James Rivett, Citi.

I've got two questions, if I can. The first, Roberto you talked about competition rising in Brazil during the second half of the year. I just wonder whether you could give us an update on, a, what was happening, and, b, if you've seen any changes in that environment since the start of this year.

My second question is on the dividend payment, which is clearly a huge yield. Is this the absolute number that if you were to remain a stand-alone company you think the payout ratio should be going forward? Thanks very much.

Okay, thank you for your question. So first, about competition in the year of 2010, we should -- as you did, we should subtract the first and the second half. So Vivo until the end of the first half 2010 have been gaining market for 10 or 11 months in a row. So -- and we are doing very well in the prepaid and postpaid segment.

In the second half of 2010, we realized that some other competitors, that they were doing their tough turnaround. They came to the market with very aggressive proposals, with a huge investment in publicity. And we decided to focus on the most viable customers. I mean, focus on the postpaid segment of the market even for voice and for data traffic.

So -- and this strategy paid off even though we lost some small part of the market in terms of numbers of users. But in terms of revenues we are sure that we gained a lot of share of revenue. So we decided not to enter in a war price when they came to the prepaid market. So we decided to focus on the more valuable segment. And this is what we did in the -- for the second half.

In what concerns the dividends, I will let Cristiane comment on this.

Okay. Hi James.

As you know, we don't give any guidance for dividends. We cannot assure that we are going to maintain the same level for the next year. We have to look at our internal needs, then the needs of investments in Vivo. So we paid this year 127% of profit, including usage of some reserves. But we cannot assure that's sustainable for the future and if you're going to do that for the future, because we have to consider other aspects along the year.

That's fair. I had to try.

Just following up, Roberto, on your comment about the competition. Is it still the same, are we still in the same position today that we were in at the end of last year or has it got easier or tougher?

No, we are in the same position. We are focused on the postpaid segment, and also we are doing well in the prepaid. So I think that we are in the same position we were in the -- in 31st December.

Perfect. Thank you.

Tomas Lajous, UBS.

I guess the two questions are related to, first of all, dividend. If you can just tell us what the ex-date on the dividend is likely to be.

And the second one is on CapEx. In terms of the CapEx that you're planning for 2011 that you've commented on, are you taking into account the future of Vivo plus Telesp when you're making your CapEx plans, or are those numbers that would still change once the combination comes through?

Okay. The Ex data has to be as per the general meeting which is supposed to take place until 30 days from now.

Okay. And what's related to the CapEx, we announced BRL3.4 billion for 2011, and in this number there is BRL800 million that are related to the frequency bought on the beat that Anatel did in December 15 last year. So BRL3.4 billion less BRL800 million, we are talking about a BRL2.6 billion operation investment that is mainly focused on network, IT and commercial facilities.

But is -- but, I mean, was that number planned and the plans you're making for CapEx are they taking into account a future integration with Telesp or are they -- were the plan just made for a standalone Vivo?

This is for the standalone Vivo. So, in fact, that we are trying to negotiate a part of the network investment for 2011 together with Telesp for us to have some advantage in terms of price, but this is the investment for Vivo in 2011.

Okay. Thank you very much.

You're welcome.

[Lee Hynes], Occam Asset Management.

Congratulations on a great quarter. I've a couple of questions. One is on your effective tax rate. It came in quite low on the fourth quarter. I think it was sort of 18%, and for 2010 it came in at about 30% overall. Can you give any guidance on your tax rate going forward for the next couple of years?

And second is, I just want to revisit a question asked, did you say that BRL800 million was already spent out of the BRL3.4 billion, or BRL3.4 billion would be spent in CapEx in 2011? Thanks.

I will start by answering the second question. So BRL800 million, in fact it's BRL780 million that we expect to pay for the frequencies we bought in December 15 last year. As you remember that Vivo bought 1.8 gigahertz frequency all over Brazil, and we will have to pay this by the end of 2011. So this is included in our CapEx for BRL780 million. And the difference from the BRL780 million to the BRL3.4 billion is the normal CapEx of the Company, that it was BRL2,490 million in 2010 and is going to be BRL2.6 billion in -- almost BRL2.7 billion in 2011.

Regarding the tax, the effective tax rate, we had a positive impact in the quarter related to income tax over tax on capital with the credit in income tax. And we also -- we don't have any more some deductible expenses like we had in the past. So for the future we do not give any guidance but I think that we are coming much closer to the 34% effective rate which is normal rate on Brazil for income tax and social contribution.

Right, okay. So it will be somewhere in between 2009's rate of 40% and 2010's rate of 30% basically. So you're hoping for 34%.

Yes, yes, right.

Okay. Thank you.

Welcome.

Rizwan Ali, Deutsche Bank.

My question was about the whole process of acquiring Vivo by Telesp. So you've appointed a three-member committee. Can you take us through exactly what are the other -- what are steps we should expect between now and when the transaction happens? And also whether the evaluation that will be done by independent bankers that you've hired will include cost synergies you can expect with the transaction?

So I don't think we are able to comment on this. So the special committees are created. Me and Cristiane, we were not part of this committee. So I don't think we are -- we're not comfortable on commenting on this.

Okay, thanks.

(Operator Instructions) Ivon Leal, BVA.

Couple of questions. The first one, you look to be really focusing on the postpaid segment. So I don't know if you could help me to understand what is the profitability of a postpaid client versus prepaid client, maybe sharing with us what is the ARPU of postpaid versus prepaid, the SAC of acquiring a postpaid client, and maybe also the churn of each specific clients.

And the second one, coming back maybe to the competitive landscape for 2011, I don't know if there is -- competition is basically coming from one or two specific competitors or we are in a stage where basically all mobile operators are driving down prices, and eventually what you think about Nextel reinforcing its position in 2011, that is maybe worse, is going to worse the situation going forward?

So the first question about the profitability of the two different segments, postpaid and prepaid, and what we could say is that on the postpaid we have much higher ARPUs than in the prepaid which was leveraged by the data service that we are selling now. But on the other side, on the prepaid, we don't have the -- we have a much lower cost of sales. Sometimes we just sell a chip or a SIM card and we don't subsidize the handsets. The points of sales are much larger for the prepaid. It's much easier to buy a prepaid and to activate the phone by phone. So it's a different contact that we have.

So costs are -- in the call center a larger part of the calls received comes from the postpaid segment, so costs are higher for the postpaid. So one side you have a much lower ARPU for the prepaid, but you have much less costs. On the other side, on the postpaids, from selling to the attention to the customer, to the customer care, it's more expensive to maintain a postpaid customer.

But one compensate the other. We have, as you know, 80% of our customers comes from the prepaid segment. And they do -- they correspond to, let's say, for the 45% or 46% of the total revenues. So -- but they are very profitable.

So it's unclear which segment is more profitable nowadays.

Okay, but this is the kind of the information that we don't disclose. I mean, both of them, they are profitable.

Okay, thank you.

But on the postpaid segment, since we are selling now data traffic and also value-added services, we are in the most part of the time selling to the customers that we already have. So it's easier to contact with those guys, we don't have a massive list to do much -- advertise, I mean.

So is -- one customer that buys three or four access, he becomes much more profitable than one that just have one voice line with us --

The churn I guess is much lower on the postpaid segment, isn't it?

The churn is much -- yes, it's much lower, yes.

Fair enough.

Okay.

What about the competitive landscape?

Yes, you know that we are having -- we already have a very competitive market in Brazil. In the 2011, we will see Nextel starting the investment in the, what we call the [SMP] service, the mobile phone service. They will be an important competitor I think in the corporate market.

In the Vivo market, it will take some time, and they will not be present all over Brazil. So we, Vivo, and the other big operators are present in the 27 states of the federation. And Nextel will take some time to be present in the small cities, I mean all around Brazil. So they have build their network, they have to invest a lot of money, and they have to be known all over Brazil.

In terms of product, they are very successful on their radio product. It doesn't mean that we cannot compete with them because we can have the same product to sell to the corporate market and to the others. So it's still a small component that will be very aggressive, we have to take care. But on the same market we have two companies like Oi that have been less aggressive in the last, let's say, 18 months. And we think that with the contribution for Portugal Telecom and the money they are receiving now maybe they will come more aggressive to the market in the second half of 2011.

Okay, thank you very much.

You're welcome.

[Nick Hopp] of [Spot Trading].

Concerning the dividend, how would you -- do you have a classification for what kind of dividend this is? Would you consider it a special or an ordinary dividend or is this pursuant to Vivo's policy?

This is [no more] dividend, it's considered 100% of the income of the period excluding the legal reserve, which is 5%, which is regulatory in Brazil. And we also included some -- we utilized some reserve expenses, capital reserve of expansion together with the income of the period. So total it's 127%, considered as net income.

Payout, yes.

And also reserve, capital reserve.

Okay, thank you.

Welcome.

Michel Morin, Barclays.

Roberto, on the handset subsidy and SAC question, you had very good performance this year. And I guess the question is, is this as good as it's going to get? We've seen increased intensity from Claro on the postpaid segment in the fourth quarter. And as you alluded to, there is intensifying pressure in the prepaid segment as well. So I'm just wondering if industry-wide and in the case of Vivo can we have a repeat of this performance on subscriber acquisition costs?

And then, secondly, some quick housekeeping items. There was a personnel restructuring cost in the fourth quarter. I'm just wondering whether or not we should expect anything similar in the first six months of this year as you integrate with Telesp.

And then depreciation was lower in the fourth quarter than in the third. And Cristiane, I was just wondering whether or not this is also the low point and we should be growing from here given the CapEx numbers you've talked about. Thank you.

Okay, Michel, thanks for your question. About the subsidies, I think that we will maintain our policies just to subsidizing the customers that we were not able to capture if they don't come with no subsidy. We have to understand that in the Brazilian market now the -- all the handsets are unblocked, so we can capture customers from the competition without having to subsidize handset for him.

And in the prepaid we do not subsidize. We just ask the real price for the handset. And all of our customers they have to buy one if they are in the low segment because we are in a different frequency for our customers. Once we have the 1.8 gigahertz frequency that all of our competitors have, it will be easier for us to capture new prepaid customers in the low end because they will -- they can come with their own handset. So as we see forward we think that we are able to maintain the policies that we are having in commercial terms --

Great. And on the other items?

Yes. The second one is about -- why the personnel relate to the -- yes. The expense you saw in the fourth quarter 2010 is a provision for special expense that we could have during 2011 considering that the synergy that we could create with Telesp. So we decided to create a special plan to compensate and to have a good treatment with the employees of Vivo in the case we have to licensing some of them.

Okay, great. And so in other words we shouldn't expect anything new in 2011, you've already provisioned for it.

This provision is not a real expense in 2010.

Okay, and then the depreciation, Cristiane, is this, should we be going up sequentially from here?

Yes. Actually, we had in last year, you must recall some delays in investments in the first and second quarter, even the third quarter. That's why we had so low depreciation in the third and fourth quarter. So we had like BRL300 million less regarding the depreciation of CDMA, and this amount was not increased, considering that we -- the normal CapEx of the year were a little bit delayed.

So I wouldn't say that's normal pace, that amount of the third and fourth quarter, and the fourth quarter specifically. But we do not give any guidance. So maybe if you can take the CapEx that we just disclosed as a guidance and make your calculation, consider the matrix dates of the expansion and the coverage you can try to get some numbers of the depreciation.

Okay, that's fine, thank you. And if I could also just clarify an answer to an earlier question regarding the dividend. I think what everyone is every -- wants to confirm is that the plan is to pay this dividend to Vivo shareholders, in other words, before the merger. Is that the fair assumption?

No, no, no. It depends actually on what's defined in the general meeting. What I said is that the general meeting supposed to take place into 30 days from now, and the general meeting is going to decide the date of the payment of the dividend.

Okay, so there is still uncertainty. Okay.

Yes, yes. I believe we can pay until December 31st.

2011.

2011, yes.

2011.

Thank you.

(Operator Instructions) James Ratzer, New Street Research.

Two questions please. The first one was just regarding your outlook for overall EBITDA margin expansion. You've obviously done a very good result in the fourth quarter, we've seen margins expand.

Yes.

I mean, it sounds like you're going to be getting more scale on data next year, but in the same time you suggest there is maybe a bit more competition coming from Nextel. I mean, do you think your EBITDA margin can continue to expand going into 2011?

And a second more technical question I have is just trying to reconcile your net debt versus your CapEx spending. You say you've spend CapEx in the year of BRL2.5 billion. Then the cash flow statement, it's only showing addition to PP&E of BRL1.57 billion. Does that mean we are going to see a much higher cash-out on CapEx in 2011? Is that a bit of a catch-up for paying for suppliers that you haven't booked in 2010? Thank you.

Okay, I'm going to take the last one first. Not necessarily. We're going to have a higher payment in 2011 because it's normal that some investments are also made in 2011 and in the years the payment is in the next year. So we probably going to pay also economic investments of 2011 in 2012, okay. So it's not directly a relation between the economic and the financial CapEx.

About margins, you know that we don't give any -- provide for any guidance for EBITDA margins for the future. The only thing we can say is that we continue with our strategy that Roberto talked about, about the competition and the [food] between postpaid and segmentation between the products in Vivo. And we also continue to do the work we've been doing with (inaudible) work in the process to get them more efficiently. And the results of that is better margins, but we don't give any guidance for the future.

And last time on the line, I was wondering if I can ask your latest thoughts on the potential termination rate cut. It seems as it's being delayed. I mean, you are able to give any idea on potential timing of when that might be implemented? Thank you.

You know that we expect that for the first two quarter of 2011. We haven't had until now. We don't know from the regulator side if they will decide. We don't think that this will happen in March, maybe April or May. What we are doing now is increasing our data revenues and value-added service revenues that do not depend on interconnection rates to -- and so we are kind of hedging our results by increasing all our revenues to compensate the event of decrease we could have in the interconnection revenues. But for the moment we don't know exactly when this will happen.

Okay, thank you.

You're welcome.

(Operator Instructions) At this time there are no further questions. 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 to our fourth-quarter 2010 result session. And as you must realize, we are very happy with the results we could produce in the year of 2010, and even more that those results come from a solid company that has a very good strategy. But more than that, it has a very good implementation on its industrial side all over the country and also in the commercial side of the business. We create a very, very strong brand that nowadays reduce our selling cost. That is very attractive.

Looking forward, we think that with Telefonica now we can collaborate a lot here in Brazil with Telesp and to create a stronger company by making the two companies working together. And together with Telefonica all over the world we think that we will have access to all the innovations and to all the product service and synergies and cost that we could have for the fact that now we now belong to a very well strong group, one of the most stronger groups all over the world. So a new future that is open for Vivo. We have done very well until now. And I think that we can do -- we could do better for the future.

So, once again, thank you all, and we hope to see you in the next quarter when we hope to present good results as well.

Thank you. This concludes today's Vivo's 4Q '10 result conference call. You may disconnect your lines at this time.