Telefonica Brasil SA (VIV) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefonica Brasil first quarter 2013 earnings conference call. Today with us, we have Mr. Paolo Cesar Teixeira, CEO of Telefonica Brasil, and Ms. Christiane Barretto, Financial Strategy and Investor Relations Director of Telefonica Brasil.

Today we have a simultaneous webcast with slide presentation on the Internet that can be accessed at the site www.telefonica.com.br/ir. There will be a replay facility for this call on the website. After the Company's remarks are over, there will be a question and answer section. At that time, further instructions will be given. (Operator instructions)

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the Company's management beliefs and assumptions, and on information currently available.

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 affect the Company's future results, and could cause results to differ materially from those expressed in such forward-looking statements.

For comparative purposes, the first quarter 2012 figures were prepared on a combined basis. Thus, the annual variations presented may differ from those reported in the financial statement filed with CVM through the form Quarterly Information ITR.

Now I will turn the conference over to Mr. Paulo Cesar Teixeira, CEO of Telefonica Brasil. Mr.Teixeira, you may now begin your conference.

Good morning, ladies and gentlemen. I'd like to thank you all for attending this conference, for the first quarter 2013 results of Telefonica Brasil. This quarter, we changed the way we present results. I will talk about the results of the quarter, and each segment, provide our vision for the next steps.

In the second section, Cristiane will give some details about the financials, and then I will come back to talk about conclusions.

These are the highlights of this call. In this quarter, our focus on Mobile remained on value generation, capturing the largest part of postpaid in data users on the market, which reflects in our ARPU, annual growth, and (inaudible) with SAC decrease.

In the Fixed business, trends are improving, in voice and broadband accesses, and we do reinforce our good expectations for the year, with significant actions to improve revenue per home, adoption and loyalty.

On the financial side, it's important to highlight the sustainable mobile revenue growth, the high estimate market during first quarter 2013. This is mainly due to Internet acceleration, which showed an annual growth of [32.5%] in the period. As a consequence, the consolidated recurrent EBITDA increased 2% year over year, excluding one-off effects.

In addition, our cash flow in the quarter [exhibited] a strong performance by reaching 2.5 times the amount of first quarter 2012.

I should like to point out, before we get into the numbers, that my goals for the Company have always been on growth, with sustainable flexibility, and our track record and current results reflect that.

On slide 4, we show our access evolution in the quarter, which reflects our selective growth in mobile and ongoing turnaround in the fixed. The chart on the left shows that we ended this quarter with 90.9 million total accesses, an increase of 0.9% over first quarter 2012.

In the mobile business, we had an annual increase of 1.6% year over year, resulting from the strong performance in postpaid and data in the period, as we will detail in the next slide. In the prepaid, we reduced our customer base by 2.9%, due to the continuous process of revising our disconnection policy in order to be more profitable.

In this quarter, we reduced our disconnection criteria even more, from 50 to 40 days. If our policy had been the same as the one (inaudible) by the second player, our mobile customer base in March of 2013 would have been around 8.9 million accesses higher, and this number is 1.1 million higher than the one I mentioned in the results presented for the last quarter.

In the fixed, we entered the quarter with a customer base of 14.9 million accesses, a reduction of 2.5% in comparison with first quarter 2012. Fixed voice accesses decreased 3% year over year, a lower level of disconnections when compared with previous quarters.

In broadband, we grew 1.8% in the period, even with the continuous (inaudible) of the competitive landscape.

In pay TV, the annual evolution is affected by the reduction in the numbers of (inaudible) customers, due to the (inaudible) of our 4G operators.

On slide 5, our focus on the goal that has been almost an obsession for me, to grow the higher revenue segments, such as postpaid, data, and M2M, using our competitive advantages, such as brand quality and coverage. I am happy that our postpaid customer base increased 17.4% year over year, and during this quarter, 22% of new postpaid customers chose Vivo. As a result, our market share reached 37.1% in the quarter, and 39.7% if you exclude M2M, an 18% lead over the second player.

Data cards, we reinforced our leadership despite increased competition in this segment, reaching a market share of 47.4% in the quarter. As shown on the bottom right, the evolution of prepaid accesses and recharges shows the efficiency of our strategy. We continue to grow the amount of cash for recharges, which is 9.5% higher than first quarter 2012, even with annual recognition of 3% in the accesses.

These strong results are very important because postpaid and data customers are the base for the future revenue growth and profitability in mobile.

On slide 6, it's important to note that we are the only player with annual growth in ARPU, which increased 3.4% year over year, even with MTR reduction, and achieved BRL23.1 in the first quarter 2013. The results are driven by an increase in our data ARPU, which grew almost 15% in the period. By excluding revenues with network usage, you can see that our outgoing ARPU shows an even better (inaudible), mainly as a result of the successful strategy in data.

As we can see on the top right, the (inaudible) division (inaudible) SAC decreased 26% in the year over year comparison, reaching BRL45.8 in the first quarter 2013. In contrast, the percentage of individual smartphones over postpaid net adds climbed, from 62% in the first quarter 2012, to 81% in the quarter.

Finally, our payback on customers reached 1.98 months in the period, decreasing 28.5% year over year, showing the consistency of our commercial strategy.

On page 7, which is that our competitive advantage remains solid. On the left side, our differentiated quality in mobile is once again evident. We maintain a strong leadership in the mobile IDA, and then this modest level of complaints, according to most recent Anatel data. It is producing higher satisfaction as attested by Anatel (inaudible) today, with around 83,000 mobile users in Brazil. In this (inaudible), Vivo was ranked number one among postpaid and prepaid users.

(inaudible), we continue leading with large margin in terms of 3G coverage, guaranteeing a penetrated experience in mobile broadband, the majority of the population, (inaudible) our headcount of our 3G Plus services.

As we detail in slide 8, we are reinforcing our position with valuable customers with an innovative offer and deployed 4G network. I am proud to announce the launch of our new offer, MultiVivo, which is the first multi-device offer in Latin America. This is a new process that allows the client to connect to the Internet on a smartphone, tablet or notebook with a single plan, and receive only one bill. It's a simpler and more effective plan, and I'm really confident that this new offer will enhance our share with more available customers, improving their loyalty and accelerating even further our data revenue stream in 3G, 3G Plus, and now with 4G.

We are deploying our 4G network according to the schedule established by Anatel, and had by the end of April the service available in the six cities of the Confederation's Cup and in Sao Paulo, anticipating Anatel coverage growth in the city. Furthermore, we should reach more than 60 cities by the end of the year.

In our continuous aim to actively monetize the investment in new technologies, we continue to charge affordable price for a limited data usage in 4G, and have been applying our investments to sharing and leverage our existing infrastructure.

On slide 9, we can see that in the fixed broadband and voice has shown annual improvement, and we have seen even better trends over the last couple of months. In the fixed broadband, we continue with the initiatives mentioned last quarter of upgrading current customers to higher speeds. As a result, the proportion of customers with data plans of more than 4 megabits per second increased 12 percentage points, when compared to the last year.

In fixed voice, we are also reducing the annual decrease in the accesses base, when compared to the last two quarters. But more importantly, we are starting to see signs of improvement, including implementation of our [central] plan to turn around the fixed business, as I mentioned last quarter, with a new structure and new segmented actions taking place, while seeing some early sign of improvement.

First, broadband net adds are accelerating in the last two months, mainly driven by fiber to the home adoption. And second, fixed voice (inaudible) reductions are also decreasing, especially in March and April.

On slide 10, we detail some of the actions included in our turnaround plan that should improve results. We segmented the market in Sao Paulo in different areas based on competitive landscape, in (inaudible) and our current acknowledged infrastructure. We defined specific actions for each area.

To address (inaudible) customers, we believe fiber to the home will guarantee a significant advantage for us. We have now 1.1 million homes passed, and should increase rapidly our coverage of homes passed in 2013, to reach 1.8 million HPs by the end of the year, with the focus in the city of Sao Paulo. While gaining still an advantage in our learning curve, we reduced costs to homes passed and homes connected, and improved economics of FTTH.

IPTV had a soft launch, and should start to accelerate in the next quarters. To improve loyalty for our current ADSL and voice customers in the state of Sao Paulo, we strengthened our DTH offer with competitive prices for our customers, (inaudible) offers. Our 4G launch and increased sales of fixed wireline phones and the Internet through VivoBox should offer improved results in this area.

As a matter of fact, as we evolve in our integrated customer intelligence, we plan to accelerate bundles of services, attending all specific customer needs, and consequently, improving loyalty and revenue per home.

On slide 11, we can see the evolution of the corporate businesses. Our increasingly convergent approach is producing high growth in the core services. In the fixed voice, we had a growth of 5.2% in accesses, reaching ARPU 50% higher than the average of the market. We almost doubled fixed ultra-broadband corporate accesses. In addition, we increased by 20% the number of corporate mobile devices, and by 5 percentage points the proportion of mobile customers with data plans.

We're also expanding in other fronts, and reached material growth in the interim by duplicating our customer base in less than one year, and had strong performance in the IT services. At the same time, that's paving the way for our growth in the segment with new offers, and building our own infrastructure to expand and increase competitiveness of our corporate data offer nationally.

In terms of innovations, we are focusing on selected sectors, where we see more potential to capture value by combining our strategies in telecom and IT with new capability. In commercial services, we have different mobile payment solutions to address the specific needs of each niche.

In the health sector, we are also developing a large portfolio of solutions, leveraging Telefonica's [resource] recently acquired, AxisMed. We are offering services for the large population of people with chronic disease in the country.

In education, we have our flagship service Kantoo, trained more than 50 million people, and also have exclusive partnerships for new services like cloud of books and Vivo Success.

All of these services pave the way for our long-term growth with profitability in promising sectors, leverage our competitive advantage in our core business, and growing partnerships to maximize the value.

In slide 13, we show that we keep evolving well in turning Vivo into an integrated company, with the objective of having a convergent approach to customers, and being more dynamic, flexible, and more efficient. I chose to show you our progress specifically in the areas of IT and customer care, because I think these are extremely structural pillars of our convergence. When we began our (inaudible) our integration, the first initiative was to renegotiate unified contracts between the mobile and fixed operations.

We changed processes, based on practice of each site, and today, we are much more efficient in costs in these two areas. The IT, we also lowered, to unify our infrastructure, and a great part of it is already integrated.

In terms of applications, we are also simplifying (inaudible) systems (inaudible) convergent solutions, by taking our [map] and (inaudible) important applications. In data centers, we are integrating and should reduce one data center this year, with a long-term goal of passing from the current eight to only three data centers.

When it comes to customer care, we are (inaudible) our stores and data channels are already selling fixed and mobile products, and contain convergent information, while billing and CRM are in the process of convergence.

The slide 14 shows the financial performance in the first quarter of 2013 versus first quarter 2012. Our total revenue growth in the year over year comparison featured BRL8.6 billion, an annual increase of 2.9%. The wireless service revenue kept a strong increase of 7% year over year, even with the MTR cut, and remains at the longest growth in the market.

It is also important to highlight our evolution on recurrent costs during the quarter, with operation below inflation of 2.4% year over year. As a consequence, on a recurrent basis, EBITDA has an annual increase of 2% in the quarter, reaching BRL2.8 billion. The recurrent EBITDA margin was [30.2%] (sic -- see Company presentation) in the first quarter 2013, once again, the largest in the market.

As a result, net income totaled BRL810 million in the quarter, a reduction of 15% largely (inaudible) by non-recurrent costs, and (inaudible) of (inaudible).

Now Cristiane will give the details on the financial part.

Thanks, Paulo, and good morning, ladies and gentlemen. On slide 16, we see that mobile net service revenue had consistent growth in the first quarter 2013. Comparing first quarter 2013 over first quarter 2012, we increased 7%, even considering the regulatory impact. Access and uses grew 7.1%, driven by the growth in (inaudible) customer base and a continued growth in prepaid recharges.

Data and value added service revenues grew 18.8% year over year, with the increasing sales of 3G and 3G Plus data plans tied to smartphones, and increased sales of data package to prepaid customers. The reduction in network users justified by the MTR cuts of 14% made in February last year.

On slide 17, we show the data and VAS performance. In the quarter, data and value added services revenue accounted for 30% of the net mobile service revenue, an annual growth of 2.9 percentage points. Mobile Internet revenues continued to grow, have increased by 22.5% in annual comparison. The performance in this quarter was driven by the adoption of data plans in packages, especially increased (inaudible) offers. In March, 74% of the Vivo postpaid additions had a data offer attached.

Messaging revenues increased by 14.5% annually, due to the sales of unlimited packages in the (inaudible) plan, higher SMS penetration on a prepaid basis, and the inclusion of net SMS in postpaid plans. Other data and value added services revenues increased by 16.4% on an annual comparison, driven by education services, Vivo Som Chamada, and voice portal, which recorded growth of 13.8%, 20.2%, and 32.9% respectively, in comparison to first quarter 2012.

On slide 18, we see the wireline revenues evolution. As you can see on the left side, wireline revenues recorded annual reduction of 8.9% Voice, accesses and network users decreased by 13%, in relation to first quarter 2012, almost the same trend presented in the last three quarters, with regulatory impact in (inaudible) mobile (inaudible).

Data transmission and pay TV revenues recorded an annual decrease of 3.3%, which were more compared to the environment, especially in broadband. The pay TV business performance was flat, with disconnection of (inaudible) customers, and reduction in (inaudible) sales in (inaudible), while the pay TV product was accelerating the adoption. Even so, data and pay TV revenues already account for almost 45% of wireline revenue.

On slide 19, we show the recurrent cost evolution, comparing first quarter 2013 to that of first quarter 2012. Disregarding the non-recurring costs, first quarter expenses would have increased 3.4% in comparison to the previous year, showing a strict control of costs. Personnel costs in the first quarter 2013 went back to the (inaudible) restructuring in the total of BRL19 million. Excluding the workforce adjustments impact in the compared quarter, personnel expenses would record a growth of 3.4%, which was below collective agreements granted in the period.

Services rendered costs in the first quarter 2013 dropped by 1.8% annually, impacted by lower payment for [presale] taxes and the MTR cut that occurred in this period. These reductions were partially offset by an increasing rate of 5 (inaudible) mobile coverage expansion.

Subsidies declined 15.3% year over year, with (inaudible) of commercial policies. We focus only on postpaid data addition.

Selling expenses increased 2.8% on an annual comparison. Excluding the non-recurrent impact in first quarter 2012 related to the brand, these expenses would record a growth of only 4.3%, despite of the greater mix of postpaid in data customers, which would have a higher commission per addition.

On slide 20, we have a clear picture of part of the benefits that have been captured as a consequence of the efficient integration process. In terms of personnel, the rates of the number of accesses per employee keeps growing, with the period of comparison showing the Company's continued (inaudible) reflected in our recent corporate restructuring.

In the customer care front, as shown on the bottom left, we have a sequential reduction, the OpEx with call centers for access on a monthly basis. This (inaudible) a reduction of 11% in 2012 with 2011 comparison, and 9% in the first quarter of 2013 versus 2012 comparison. These results are mainly due to the consolidation and [renegotiation] of contractions, as well as some improvement in the integration process.

Regarding our network, we have (inaudible) integration our infrastructure after (inaudible), and renegotiation of contracts. The result can be seen in the reduction of 5.4 percentage points in the proportion of network costs and CapEx over revenue.

Another important front is IT, which was a reduction of 0.62 percentage points in the efficiency index, with the comparison of 2012 versus 2011. It's a consequence of the renegotiation of contracts, reduction of the number of data centers, and infrastructure unification.

Finally, the evolution of our consolidated efficiency index shows relevant improvement in the two periods of comparison, exceeding 75.1% in the first quarter 2013, the best level among competitors.

On slide 21, we comment on our EBITDA. Our recurrent EBITDA, excluding one-off items, reached BRL2.8 billion in the quarter, an increase of 2% over first quarter 2012, which reinforces the result of our (inaudible) focus on value generation, and other initiatives we have in place in order to improve efficiency in the Company.

On the right side of the slide, we can see that the recurrent EBITDA margin reached 33.2%. When we exclude handset activity, which is solely oriented to increase that adoption, the recurrent EBITDA margin remained stable in the year, reaching 37% in the first quarter 2013.

On page 22, we now have the evolution of the EBIT. It reached BRL1.4 billion in the first quarter 2013, an 11.6% decrease compared with the first quarter 2012. This is mainly explained by the acceleration of the (inaudible), continuation of this technology. As a consequence, net income, on the left, showed a decrease of 15.3% on an annual comparison.

On the top right, free cash flow reached BRL1.4 billion on the first quarter 2013, 2.5 times the amount showed in the first quarter 2012. The net debt reached BRL0.7 billion, a decrease of 75.3% year over year, mainly to the operational cash flow generation in the period.

Now, Paulo will present the final conclusions. Thank you very much.

Thanks, Cristiane. Our results in first quarter 2013 confirm we are headed in the right direction. Leadership in all quality metrics and satisfaction. Expanding our share in higher revenue segments. Sustaining strong growth in mobile revenue. Improving fixed trends. Strong profitability. Continuity of strong cash flow generation.

And, we are taking actions to improve results further for the year, reinforcing our position with valuable customers with new offers and the evolution to 4G. Implementing tactical plan to turn around the fixed business. Consolidating synergies in all fronts. Expanding in digital services and innovation to enhance long-term revenue growth.

Finally, quality is and will continue to be the driving force behind our strategy, with growth, with profitability as our main objective.

Thank you, and now we are ready to answer your questions.

Thank you. The floor is now open for questions. (Operator instructions) Our first question is [Bruno Mendoza], Santander. Please go ahead.

Hi, guys. Good morning, and congratulations for the results. My question is about the impact of competition in the Company's margins. We saw in the first half of 2012 a series of non-recurring costs due to layoffs and brand unification. It's continuous to what we see today.

You have clearly outperformed the competition, mainly in the mobile front, during the last 12 months, which is great. But we didn't see any significant margin expansion in the second half of 2012 as a consequence of those costs in the first quarter of 2012.

So, at the same time, I have two questions. First, is it wrong to understand that you have (inaudible) this synergy on surprises, and at what expense do you believe the competition is putting pressure on prices and how Telefonica is exposed to that?

And my second question is, what should we expect for 2013? Hence, can we count that the non-recurring layoff costs seen in first quarter 2013 will translate into higher margins in the following quarters? Okay, thank you.

Thank you. Thank you, Bruno. On the -- our views about the non-recurring costs, and then Paulo can complete talking about the competition and pressure on the fixed by -- that we had in Sao Paulo, mainly.

Regarding the (inaudible) we had this year, like as mentioned, (inaudible) personnel costs, of course, we do every year, we have to offset this cost, with the reduction of having personnel in the next year to improve the margin (inaudible). We are not done with the synergies. I talked in the last quarter (inaudible) we guide we still have a lot of work to do in terms of synergies, not only synergies between fixed and mobile, but (inaudible) internally to (inaudible) in terms of infrastructure per -- in terms of network and IT, which is going to come up in the future with better margin expansion.

So indeed, when we took (inaudible) brand and personnel, we had some savings, yes, but not in the (inaudible) that's relevant, that could only (inaudible) expand our margins.

From the mobile side, you know that we haven't feel any strong -- go to our -- that go to our prices, so we hadn't felt a lot of pressures from the price. But we have (inaudible) and differences in terms of quality and brand.

In terms of flexibility, (inaudible), let me tell -- (inaudible) Paulo here, so he can comment on some pressures we have in terms of competition, (inaudible) some pressures in price.

Thank you, Bruno, for the question. Basically, we are facing a strong competition in fixed in Sao Paulo, basically broadband and TV. We are turning around this business. We have accelerated the gain that we have in March and April in -- basically, in broadband. And TV, I can comment, basically we have another strategy, because we are facing disconnection probably, and then that group that we have, but we're prepared to launch a differentiated second quarter -- second half of the year.

Basically, we are improving our pay TV, (inaudible) [IPTV], and that the competition is right, that basically we are adjusting the (inaudible) increase the (inaudible) base, increases the speed that you have in broadband and fixed lines, and to adapt some voice plans to (inaudible) of our needs of the customers, and to adjust price to maintain this plan. Basically it is this.

Okay. And for 2013, sorry, I didn't understand, but other than -- so the bulk of the margin expansion decrease should expect to come from -- mainly from G&A, right? Not exactly so, some personnel and brand unification [that you said].

That is not only G&A, but we also have a lot of work in place in terms of network and IT (inaudible) call centers. Paulo mentioned a graph, and I also mentioned a graph in the presentation showing the index that we have in terms of improvement in the network between year over year.

So the synergies are not only going to come from G&A, personnel and brand. We have a lot work in track, and Paulo mentioned some of them in the presentation. The cash, obviously, this is not only -- it's not (inaudible) exclusively. But, you know, remember that -- I would remind you guys that the synergies that we present in 2011 were operational synergies mainly, and were supposed to come from 2014 on. We really anticipated some layoffs starting in 2012 and 2013, but which covers the market in the presentation of the acquisition of Telefonica (inaudible) from Vivo, that the main opportunities in the operational side will come from 2014 on. So we are on track of our schedule.

Okay. Thank you.

Our next question is Andrew Campbell, Credit Suisse. Please go ahead.

Yes, good morning. Thanks for taking my question. I was hoping yo could just discuss a little bit more the dynamic regarding this decline in revenue growth. And if you think within the next couple quarters, we'll be seeing perhaps an improvement in that trend. And I also had, just because of the cut in fixed mobile rates that went into effect in the second quarter, the apparent upcoming launch of [GVT], as well as could be an increase in competition. And I'm not sure if there's also additional (inaudible) revenue on the pay TV side that you think will come out of the numbers.

So given all those factors, I'm just wondering if you believe that we should expect a similar trend, or what are the dynamics that you expect there? Thank you very much.

Thank you, Andrew, for the question. We are working hard in this business. We think we have a competition between fixed and mobile, because with mobile, tariffs have increased a lot in the last year. But we are -- have a very good focus on Sao Paulo. We are facing strong competition (inaudible). But basically, we are working very hard to improve the loyalty in our current base.

Basically, we are increasing our bundle offers, including mobile in these bundles, and we are (inaudible) the (inaudible) same situation like this (inaudible) that we have in other plans that were not in the (inaudible) market today.

Basically it is has reported to have in our operation, it's under -- very under control, and we are working hard in terms of TV, because we have (inaudible) this base that we need to disconnect. And based on -- you have to (inaudible) Sao Paulo, because we directly have the (inaudible) any option to solve this. But in Sao Paulo, we can solve it, basically, with (inaudible) subscriber to the DTH offer.

The other point is about the GVT. GVT has amounted to everything Sao Paulo capital, that we are -- I think we are so prepared, we have in Sao Paulo area, we are concentrate our efforts basically in fiber. We are increasing our fiber HPTV, basically have in this area, there's going to have 1.1 million HPs, and we are -- in the end of this year, we are achieved 1.8 million. And we are so prepared, so in these areas, to compete with our new venture.

Okay, thank you. Just to clarify, are there any more (inaudible) customers to disconnect in the second quarter, or have we seen basically the full impact in the first quarter?

We (inaudible) 21,000 in this quarter, the first quarter. And we have 53,000 to disconnect in the next quarters.

Okay, thank you.

Our next question is Michel Morin, Morgan Stanley. Please go ahead.

Good morning. So I just wanted to follow up. I think you mentioned, if you could clarify your change in the disconnection policy for inactive prepaid subs, if you can just clarify the number of days? I think you said 40. But I was wondering, has that change in policy actually impacted your customers' behavior? Are you seeing them recharge more to avoid getting disconnected, or is it still a little bit early, too early to tell?

And specifically, you presented the chart on page 6 that showed the outgoing ARPU. And I'm wondering if you can help us understand how much of that improvement is real improvement on an underlying, same subscriber basis, and how much of it just mathematical because you removed all these inactive subs from the base? Thank you.

Thank you, Michel, for the question. Actually, we -- our disconnection policy changed before (inaudible) charges. We haven't felt any loss in terms of (inaudible) the price. As you see in our press release, and on page 4, we had a graph that showed that even though we lost 2.9% of our prepaid base, we grew 9% recharges.

We need (inaudible) that we disconnect -- they were not using our network, they're not generating any revenue, so there's no impact in that.

Of course, disconnections impact (inaudible) in terms of ARPU, but also (inaudible) 7%, despite of disconnection. And the greatest (inaudible) not related to that, related to the (inaudible) data plans and (inaudible).

So we don't have a fixed number to tell you here, but most of the growth come up only from the mathematical part how they're changing disconnection, how they're changing the rules, but also from the big adoption of (inaudible) data plans in this quarter, and including postpaid adoptions (inaudible).

Okay, thanks, Cristiane. But actually, just to clarify, the first part of my question, I was referring to your existing customers. So not the people that you've disconnected, who clearly were inactive, but for your existing subscriber base. Now that -- I'm assuming by now they know, or many of them would know that, if they don't recharge within 40 days, they'll get disconnected. So are you seeing your existing prepaid subscribers recharge more often, or can concentrate their usage with Vivo as opposed to spreading it with other providers?

Yes, they are concentrating on using our network. The ARPU per client increasingly growing also. So that's a good and positive (inaudible) change.

Great. Thank you.

Welcome.

Our next question is Ivon Leal, BBVA. Please go ahead.

Yes, good morning, everybody. Thanks for taking a couple of questions. The first one, the strong competition you're mentioning on the fixed line side is driving you to reconsider your fiber plans, eventually speeding up the plan, and then thinking about the wider coverage in Sao Paulo.

And maybe the second thing, I was trying to isolate in your operating costs -- I was trying to get a sense of how much commercial costs have increased in this first quarter, and whether we should expect the increase of that trend to continue throughout the year, or we eventually should assume that maybe if you made an effort in commercial costs in this first quarter, which eventually would become the second half of the year, you know, maybe supporting better performance on the margin level.

Thank you, Ivon, for the question. For the first of all, when you talk about the strong competition, if we change our strategy, basically it's not. We have approval in the next -- for this budget, the improvement to coverage our FTTH. Basically, we have this plan. We are focused on Sao Paulo capital, that we have a 20% of GDP in Brazil. And we have a good base here, and we are -- consider that we may have to have more strong (inaudible) of this connection.

Basically, we have now new technology that (inaudible) connected to fiber, it will reduce the cost, and we are working hard to reduce the cost to (inaudible), new clients in this area. And basically, we are almost double our coverage in Sao Paulo capital. Okay?

And concerning the commercial costs, we had some -- the commission and the subsidy increase a little bit in terms of absolute, but in terms of [unitary cost reabsorption], in terms of commission, we have been having more the mix of postpaid and data plans, which have higher commission, so we increase a little bit the individual costs. But all of these clients that has a very good ARPU and a payback (inaudible) is very, very small.

In terms of (inaudible), policy of (inaudible) postpaid with data plans, which is also going to generate more revenue for the future.

In terms of communication, we've been using very, very strongly in the communication to disclose into launch both products on the fixed and mobile, price reviews, more integrated benefits from both companies. So (inaudible) looking to better [use] of the cost, with the two (inaudible) we are doing that so far, and we are going to keep doing that.

In (inaudible) costs, but for the clients that we generate more revenue in the future, so the costs are under control, and you know, we want to keep on that.

The higher commissions are account -- I mean, the commissions are accounted from the cost of goods side, line?

No. In the selling -- the selling costs of the goods, the selling costs.

Okay, thank you very much.

Welcome.

Our next question is Susana Salaru, Itau. Please go ahead.

Hi, good morning, everyone. Well, we have two questions here. First, on the subsidies. So just would like to know if you could elaborate here a bit more on the policy, (inaudible) that your are using. This should contribute to a -- assume that if you accelerate going forward, keeping your focus on the postpaid segment? That would be the first question.

And the second question would be on the CapEx, because end of first quarter, CapEx was much lower than we were expecting, (inaudible) to check with you guys, what is the plan for the next quarters, and it was so low in this first quarter. That's it, guys. Thank you.

Thank you, Susana. Basically, we are focusing in postpaid, we are focused in data. And we are (inaudible) only for postpaid (inaudible).

Basically, you have our new scenario in Brazil, because we've had very good (inaudible) in smartphones, and you have some (inaudible), together the [retails]. And I think we have the best position to capture in this market, because it has a good brand, a good network, a good quality, and we are very confident to increase our position in this segment.

Basically, we are very (inaudible) to make an offer, basically a payback (inaudible) depend of the region. And we continue to do this. Basically (inaudible) amount of money (inaudible), but basically achieving our goals in terms of (inaudible), to acquire most clients in postpaid and data.

Okay, Susana, thank you for the question about the CapEx. If you compare last year, actually we had some very strong projects ongoing, the 3G projects that -- capturing the first quarter 2012, a very strong CapEx in 3G. We have a lot of projects ongoing, but when you compare data for 2012 with the end of 2011, that's why we compare the both years, and the variances was very strong.

We have other projects ongoing, but now it's just seasonality, (inaudible) final track, and we give the guidance for the year.

All right. Thank you, guys.

Welcome.

Our next question, Mauricio Fernandes, Merrill Lynch. Please go ahead.

Thank you, good morning. A question on the income tax, the -- I know this can be very misleading, but the income tax reported in the income statement shows nearly 40% effective rate. I was wondering if there are any -- is there any chance for that number to come down, number one, and two, what are the -- just let me get an update on cost emerging Vivo with the (inaudible), so at the end of the day, the tax spread can be better utilized, and it's -- even thought it might not be clear on the income statement, cash taxes could come down relative to what they were in 2012, particularly with the potential use of statement of interest and quarter. Thank you.

Thank you for the question, Mauricio. Actually, the cash effective tax is 21%, (inaudible) income side, but we had some [physical] additions, permanent additions that sometime take up (inaudible). But the cash effective rate, it's really 21%.

Regarding the restructuring, we are on track in our operational changes (inaudible), a lot of work is going on. We are waiting for our (inaudible), with the (inaudible) last year, some (inaudible) more clear to us, and some (inaudible). So, yes, just waiting for the approval. We are on track internally. As long as Anatel approves, we can do the changes during this year.

Okay. Any timing on when we should expect this to be, in the first half of the year, second half of the year, or it's not feasible yet?

Well, it's not feasible to (inaudible), Anatel (inaudible) a date. It's not reasonable to guarantee the date. You know that the profits are (inaudible) last year in March, and it's taking more at the same time, the same period that (inaudible) took with this case. So, if they (inaudible), we're supposed to have (inaudible) in the first half of the year. That's not a guarantee. We have to wait for the approval.

Okay, thank you, Cristiane.

Welcome.

Our next question is [Walter Heilich, AIG]. Please go ahead.

Thanks. (inaudible). Just a question on the prepaid subs. I'm not sure you disclosed last quarter what the cleanup was, so if you can give us that number? But if we look at the cleanups in the this quarter, last quarter, and I guess last year, that's a lot of customers. What should we expect over the course of 2013? Pretty much down in disconnecting customers that are just not using the products. And also, what contribution to the voice ARPU did that have this quarter? Because if you look at the sequential decline in the voice ARPU, it just obviously wasn't as steep as it was historically from the MTR cuts. How much of that was positively impacted, do you think, by the cleanup of subs that you've been doing over the past couple of quarters? Thanks.

Thank you for the question. Regarding the prepaid, first I'd like to clarify, it's not a cleanup. We actually analyzed the behavior of the clients, (inaudible) and the clients usually had three more, two or three or four (inaudible) from different companies, so (inaudible) recharging the (inaudible) from different companies, from the offer they had, actually.

So we started to analyze from the beginning of last year, the behavior of these clients, so we tried to understood that some of the clients were not generating any results, any revenue for us. So that's why we started to disconnect on prepaid. So it's from 80 days, (inaudible) to 60, 50 and now 40. Continue to -- obeying the Anatel rules.

So it's not a cleanup. It's a disconnection of clients that were not using our recharging, generating any traffic, so it's not a (inaudible) anything.

Of course, (inaudible) with ARPU, we had some positive impact, in terms of (inaudible) ARPU. I cannot give you the specific amount here right now, but we can (inaudible) and it's probably from the 7% of growth, how much was the (inaudible) would be. But most of the (inaudible), as I said before, we did more, more strong adoption of the (inaudible) in the quarter.

So is the one, the last quarter we're going to see of that? Or is there -- next quarter, you're going to be on your quarterly report, (inaudible) went from 40 to 35 days, and 30, and then another 1 million subs that are -- again, when you said define, cleanup, call it whatever you want, it's a reduction of subs that just obviously aren't paying.

It's a reduction of subs that are not generating any revenue for us. But for us, much more important, market share of revenue than for subs. (multiple speakers) --

No, that's great, I think you're doing the right thing. I'm just trying to understand when it's going to end, and what the impact is for the ARPU, as far as trying to model the Company. I understand it's not negatively impacting the revenue.

It's an ongoing project that we are doing, an ongoing process which analyzes the behavior. If you notice, in the next quarter, the behavior of the clients that still have 40 days without (inaudible), it's not generating anything for us, we're going to continue to disconnect. But I would say that we are -- they are (inaudible), it's more profit right now than what we had last year (inaudible) the year, for example. But (inaudible) in the next quarter. But we are comfortable (multiple speakers) --

So is this something that can help to offset the impacts of MTR, meaning that -- is that voice ARPU less likely to fall sequentially as it typically does in that seasonal second quarter?

Yes.

Okay, perfect. And then my second question was, in the slides, you talked about 4G, and I think you referenced -- I think the -- what you said in the presentation was, anticipating covered goals in Sao Paulo city, and then you also made reference, just more than 60 cities with 4G by December 2013.

So can you guys talk a little bit more about coverage? Because I think I'm a little unclear, because some people are saying that the coverage is only going to be around the stadium, as far as the use of this [2.5]. Also, if you're doing this coverage, isn't also Claro going to benefit from whatever you're stating on the page 8 in your presentation, it's on whatever covered goals are reached? Thanks.

No, about the coverage, (inaudible) have an obligation that this 50% of the coverage in the city, of Confederation's Cup, basically the fixed (inaudible) costs. We agree, obviously, but we launch our network with more than 80% of coverage, and basically, we start with Sao Paulo because it's the main market that we have. And we decide (inaudible) Sao Paulo city, but it's a very good coverage. Not only the stadium, but basically, all the main areas that we have high traffic (inaudible).

So have you had to add cell sites to do that? Because there's been much criticism throughout the world about using 2.5 and needing additional cell sites. Have you been able to use your existing cell sites to achieve that coverage in Sao Paulo?

At the beginning, we can use the same breed that you have in 3G. But in the future, we need to add more cell sites.

Okay. And Claro? Doesn't Claro benefit from this? I thought you were sharing in the buildout for 4G.

(inaudible). We are working now to approve this in the competitive area. Basically, and we are working the contracts to finalize this agreement.

So once that agreement is finalized, Claro will benefit from this breakup (inaudible)?

Yes, yes. (multiple speakers)

Great.

(inaudible) sites.

Okay. I'm sure we'll be happy to hear that. Thank you.

Our next question is Soomit Datta, New Street Research. Please go ahead.

Oh, hi, yes, good morning. I have several questions, please. First of all, just to reference a number in the slide pack on SAC, (inaudible) acquisition costs. We've seen a steep decline, it's like [25.8] in Q1. Could you just help me understand the likely future directions that (inaudible), that that will sort of go back up to close to historic levels over time, or is that sort of stable, or potentially turning down (inaudible) directional indication, and the SAC would be very helpful please.

Then just another question on the mobile service revenue growth, which I think you said was around 7% this quarter. And excluding the regulatory effect, the growth is pretty similar. I'm just wondering why -- you know, what is managing to offset the (inaudible). I mean, is that something which you can continue going forward when the MTR cuts are (inaudible). Thank you very much.

Thank you for the question. About the SAC, we are decreasing the SAC, basically because we had a focus on (inaudible) this year. And we are working hard to achieve this, our goals, basically, because we have a very good and equalized brand, quality and the network. And basically, are promote our selling with (inaudible) differentiation, and we are reducing basically to make (inaudible) to achieve better results in their business.

Soomit, can you please repeat the second part of the question?

Yes, sure, just on mobile service revenue growth. It's around 7%, 7.0% year over year in Q1. You said, I think, excluding regulatory effects, the growth would be 7.2%. I.e., the numbers are pretty similar, so it doesn't -- if I'm understanding correctly, what the material impact on termination rate cuts, is what you're effectively saying. Is that right?

Yes, you're right. It's not (inaudible) very strongly, but it's very similar. Even if we go to (inaudible), it's very similar, and if you compare (inaudible) with the net income, we are trying to -- we are offsetting the loss realizing MTR. (inaudible) the growth.

And I'm just wondering, on the SAC, is it possible to get a sense, is there more downside to the (inaudible) [net 45.8] SAC number?

So, (inaudible) in Brazil. But we think we are working hard to (inaudible). But basically, we don't forget that we are focused only in achieved (inaudible) data, and in postpaid. This is (inaudible).

Okay, thank you.

Our next question is Dan Kwiatkowski, UBS. Please go ahead.

Hi, just a question on your DTH launch, which is going on in the second half of the year. Can you give us some guidelines, in terms of what you're expecting, in terms of net adds, and also, what we might expect in terms of costs, how might it impact your margins going forward? Thank you.

Just say that we don't give guidance for this, but we are working to promote DTH offer in Sao Paulo state, basically, in the second half of this year. We are now waiting for the equipment that we already buy, and we also prepared our workforce will do it, and our commercial area (inaudible). And we're ready to offer this in bundle with our current data, with voice and broadband.

Basically, it's our objective is to improve the loyalty in the voice and broadband base, in all classes to have in Sao Paulo state.

Well, I'm imagining this is a cost, rather than a revenue line.

I think it's (inaudible) to analyze, or this (inaudible) in terms of the (inaudible) business. If we have the voice and the (inaudible), we are at least (inaudible) to have the best performance and to analyze the (inaudible).

We are working to operate just the cost, basically, in the content. It's the other part of the [usage]. But it's one more situation that we are working out, because we have the possibility to increase our base, but we need to make some (inaudible) of our supplier of content.

To put it another way, is it going to have a significant impact on your -- more on the profitability of the business?

No. I think it's possible to increase the loyalty. But the numbers that we are looking for in the Sao Paulo state are -- the Sao Paulo state, the revenue -- the most -- we have the penetration so high, you compare it with Brazil. But we are taking some part of (inaudible), to protect our base, rather, in Sao Paulo state.

Okay. Thanks very much.

Our next question, Fabio Levy, BTG Pactual. Please go ahead.

Hi, good morning, Paulo and Cristiane. I have two questions. One is related to your improvement in broadband applications and (inaudible). I'm just wondering if it's related to more aggressive pricing, or it's just that the work you have been doing in the network upgrade.

And the second one is related to your data, if we are seeing a strong improvement, increase of 38% quarter over quarter, and also 12% year over year, if it's related to any specific commercial activity, or it's just something that we are seeing from the past, that we are improving some problems with the collection.

So I just wanted to get insight on bad debt, and (inaudible) improvement in broadband. That's all from my side. Thanks.

Okay, Fabio, thank you for the questions. In the broadband, we are growing, basically, supported by fiber. Now our focus is to increase more penetration, more (inaudible) in this (inaudible). We are working to (inaudible) and to promote more (inaudible). Basically, we are maintaining our price, and not reduce the price, but we are (inaudible) more (inaudible) to offering this, what is (inaudible), and basically, the (inaudible) of the number came from fiber.

Fabio, regarding the bad debt, actually, it's more important to look -- if you look at the debt (inaudible) that we had this quarter of 1.6%, last quarter we had 1.1% in the fourth quarter, but last year we had 1.4%, 1.5%. So the -- usually, the first quarter of the year is our best (inaudible) but the increase in collection, in terms of lot of work we are doing there, collecting agencies to recover more, and that in fact helps us (inaudible). If you look at (inaudible) it was 1.1% also, and the first quarter 2012 was 1.5%. So we are getting back to normal our rates now.

Of course, then we have a few [confessions] on (inaudible) segment, so there is a little bit of increase in the relative (inaudible) bad debt, regarding the (inaudible) that we had in Brazil. [It wasn't that strong, we're working very strong (inaudible) debt. But we don't see that as a big growth, if you look at the relative numbers comparing year over year.

So basically, in the second quarter, maybe we then should see a small deceleration of this line, and then also for the improvement throughout the year? Or should we continue to see just the same [trend] that we are seeing year over year growth decelerating, but still on very high levels?

Yes. Actually, I don't think that 1.5% is not that high level, Fabio. That's why (inaudible) talk about relative, not absolute growth of bad debt. But yes, we want where we see that we can improve it during the year, and (inaudible) 2013, like we had in the first quarter 2011 and 2012, some (inaudible) recovery, that will improve the number for the first quarter, and (inaudible) for the full year.

Okay, that's clear. Thanks, guys.

Welcome.

Our next question is Jonathan Dann, Barclays. Please go ahead.

Oh, hi, there. If I read the slides right, I -- so you're (inaudible) about (inaudible) and now smartphones. Could you just help those of us who are not in Latin America, what's the most popular smartphone tariff?

And then secondly, is the run rate of fiber homes passed for 2013, do you think that's a sort of typical run rate of homes passed now, for this sort of 2014, 2015? And I guess ultimately, is there an optimum number of homes passed in Sao Paulo state that you need to cover?

Jonathan, thank you for the question. About smartphones, we are -- we have now (inaudible) [300 to 200], basically. And -- but the differentiation that you have in Brazil nowadays is that basically the retail (inaudible) sales in 24 installments.

Now, it's very (inaudible) to date, and the people (inaudible), we can see basically what we have now on the smartphone, that we are still prepared to receive this client, and you have all the differentiation, because it has branded (inaudible) quite in a better (inaudible). And we are working together the retail.

We have (inaudible) to promote this, and we are earning this (inaudible) very well, because it's an opportunity (inaudible), it's very good.

About HP, it's basically -- we are prepared now how to (inaudible) the brand. Basically we think it's a different situation. We think we will (inaudible) more and more. I think it's very important to reduce the costs that you have to connect a new client, and it's (inaudible). We are changing now our network based on (inaudible), so (inaudible), it's possible to do a connect a new client (inaudible) than (inaudible), and we had a (inaudible) fiber plan for the next year, and they are focused on this. It's to achieve, now, their main clients, with a (inaudible) solution.

Are we ready for the next question?

Yes.

The next question is Andre Baggio, JPMorgan. Please go ahead.

(inaudible) Good morning (inaudible). What's the (inaudible -- microphone inaccessible) --

Please, we cannot hear you. Can you speak louder, please?

Can you hear now?

Yes.

When handset revenues went up every quarter, (inaudible) with the smartphone, what's behind this (inaudible)?

Yes. You are asking -- it's really (inaudible), started to hear better, but then it got low on the last. You are asking why we increased the revenues of handsets (inaudible)? Is that right?

Yes. Yes, [it's right].

Yes, actually, the number of handsets grew, but what grew more was the mix of smartphones among these sales. That's why it increased the amount, because (inaudible) normal (inaudible).

Okay. And the second question, what is the sale of (inaudible)?

We didn't have any sales of (inaudible) this quarter. Of course, we increased a little bit the (inaudible) we have with sales (inaudible). But not that relevant. I don't know if you're asking about this, on top of this here. Is that right?

Yes, no, but this is (inaudible). Thanks a lot.

Oh, the sales did not have any.

Okay, thank you.

This concludes the question and answer section. At this time, I would like to turn the floor back to Mr. Teixeira for any closing remarks.

Thank you all for attending this conference, and (inaudible). I think the quarter is showing us again how strong our competitive advantages are, and we continue to sustain high mobile revenue growth, despite the (inaudible) in Brazil. Our margin is recognized on the market, and our cash flow generation confirms our solid operational and financial management.

We are optimistic about the future, since this trend (inaudible) in fixed, and our integration process. I affirm that our (inaudible) continue to be (inaudible) with profitability, and raising the value to our shareholders.

Thanks again, and I hope to see you again next quarter, or any time soon. Thank you very much.

Thank you. This concludes today's Telefonica Brasil first quarter 2013 results conference call. You may disconnect your lines at this time.