Telefonica Brasil SA (VIV) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to the Telefonica Brasil Third Quarter 2013 Earnings Conference Call. Today with us we have Mr. Paulo Cesar Teixeira, CEO of Telefonica Brasil and Ms. Cristiane Barretto, Financial Strategy and Investor Relations Director of Telefonica Brasil. (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 also affect the Company's future results and could cause results to differ materially from those expressed in such forward-looking statements.

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

Good morning, ladies and gentlemen. I would like to thank you all for attending this conference for the third quarter 2013 results of Telefonica Brasil. On slide 2, we see the main highlights of today's call. We continue to see solid improvement in the fixed assets this quarter with a high level of net adds driven by solid performance in our fixed services, but especially in voice and TV.

We first reflect the success of our (inaudible) solution, and then later, the increase of sales of our revamped DTH offer started in June this year. In addition, broadband net adds were benefited by our evolution in the FTTH accesses which grew 61% year-over-year reaching 171,000 clients in September 2013.

On our mobile business, our focus on higher revenue segments is converted into very strong levels of postpaid and data adoption leading the high acceleration of ARPU growth. The consistency of these improvements and the competency efforts taking place, mainly our increasingly (inaudible) on customers are reflected in higher revenue per access. The end result is in acceleration of total service revenues, which grows this quarter more than two times the annual growth presented in the first quarter of 2013.

Moving to slide 4, we show our access evolution in the quarter which reflects our ongoing turnaround in the fixed and strong increase in the mobile postpaid segment. The chart to the left shows that we ended the quarter with 91.7 million total accesses, an increase of 0.6% over second quarter 2013. In the fixed business we ended the quarter with 15.1 million accesses and with an important sequential increase of 1.1%.

In fixed voice, we decreased less than 1% year-over-year, a strong improvement when compared to previous quarters. In Broadband, we grew 3.4% year-over-year due to the acceleration of net adds mainly concentrated in the fiber-to-the-home technology. In TV, we see our quarter growth of 9.4% in third quarter 2013 reflecting the positive trends in IPTV, DTH sales.

In the mobile business, we saw annual stabilization in total number of accesses, which gives strong improvement in the mix of postpaid customers. Postpaid total growth of 23.3%, more than 20% resulting in second quarter 2013. On the other hand, our strict disconnection policy which applies to the customers with 30 days without traffic is driving a 7.4% reduction in the total number of accesses.

In the month of September, always respecting the rules established by Anatel of maintaining customers for at least 60 days after expiration of the recharge, we present an additional disconnection of 859,000 inactive access basis from our ongoing profitability analysis of the basis. Actually, if our policy had been the same of the (inaudible) second place, our mobile customer base in September 2013 could have been higher by more than 30 million accesses.

Moving to slide 5, we show that the segmented strategy that we define for Sao Paulo is being implemented successfully with positive trends once again in this quarter. In regions with more income per capita, in the city of Sao Paulo, we continue to expand our FTTH footprint with aim to reach 1.8 million homes passed until yearend. Even more important than that is an acceleration in customer adoption in future broadband and IPTV. DTH net adds in the third quarter 2013 are more than two times the level presented in the first quarter of 2013, and the IPTV we increased five times our level of net adds of the first quarter.

We have a headcount with 171,000 fiber customers in September 2013. In the country side of Sao Paulo State, access evolution TV reflects the successful launch of our DTH offer in June. During the third quarter 2013, net additions in satellite TV achieving 45,000, five times higher than the level of the previous quarter. We continue to make specific cross-selling offers with the mobile and DTH to attract and especially to retain our best customers. Broadband churn continued to reduce showing the effectiveness of our approach.

In slide 6, we can see the evolution of our fixed mobile integration reflected in our offers. Since last year, we have been increasing the productivity of our own store selling fixed services in our mobile stores with success. Optimizing the use of our infrastructure, we launched fixed service using mobile infrastructure nationally.

Our FWT and Vivo Box are plug-and-play offers with price advantage when compared to the additional fixed services. This is an increasingly unified intelligence on customer's end. As a first step to start serving our customer needs, the Company has launched cross discounts in fixed and mobile, voice and data services to existing customers.

Following the same rationale, we are proud to announce our new quadruple-play offer, MultiVivo Total, to have now a complete portfolio of offers for each type of customers with voice, broadband, TV and mobile services, which is an initial soft launch in surrounding area of Sao Paulo City for now. Even so we see potential for expansion in the near future.

The objective of this to attend our customer needs increasing share of warranty from our existing customer in different platforms, and consequently increase revenue per customer. The offer simplifies the life of our customers, provide unified experience in sales, installation, customer care and billing, improving loyalty in our most available basis.

Going to slide 7, the results in this quarter confirmed the trends we saw in the second quarter 2013. We continue to show positive results across all fixed services as seen this quarter. Once again, we present positive net additions in the fixed business with 157,000 net adds in the quarter accelerating additional (inaudible) in more than 30%.

In fixed voice we increased net additions in 4.5 times sequentially. (Inaudible) 60,000 leading customers in third quarter 2013, expansion of (inaudible) sale initially helps to explain this evolution.

Broadband net additions reached 46,000 in the quarter and more importantly over 90% of these adds were in speeds of more than 4 megabits per second, especially concentrated in FTTH technology, which more than doubled the level of net adds in comparison with the first quarter 2013.

Finally, in the TV business we began to see strong evolution on the back of higher sales in IPTV and especially DTH. The latter encouraged by the relaunch in June 2013, reaching 51 net additions in the period.

Moving to slide 8, in Mobile, we continued to improve growth in net additions resulting in strong leadership in higher revenue segments. Our postpaid net additions in the quarter reached a record level. More than two times higher than the first quarter, improving our mix of postpaid customers to almost 29% of the total mobile accesses. Our share of net adds in postpaid keeps increasing and reached 64.5% in the third quarter 2013. As a result, we increased our leadership.

Vivo's market share of postpaid excluding M2M reached 41% in the third quarter 2013, 1.1 percentage points higher than in September 2012. In data, the numbers are also impressive. Our market share in dongles raised to 49.6% in the third quarter 2013, increasing 1.5 percentage points year-over-year.

Moving to slide 9, we show our performance in data services. We are driving smartphone penetration in our customer base both in postpaid and prepaid, by reaching 75% and 42% in the third quarter 2013 of penetration respectively. In these numbers, web and smartphones are included.

As we increase (inaudible) potential base for data, while improving adoption to data plans and package in an accelerated pace, our mobile data usage reached 24.1 million growing 12% sequentially. At the same time, data traffic as increased 22% quarterly as a result of customer immigration to larger data bundles.

We promote continuously the upselling of our larger data bundles by immigrating our best customers to new technologies in 3G Plus and 4G where they can experience better speed and access to new services. Our 3GPlus accesses grew 2.2 times since the beginning of the year, and in 4G multiplied it by four, our base in the last 3 months improving data [monetization].

Slide 10 shows the positive impacts generated by our selective commercial strategy on the mobile business. ARPU reached BRL23.6 in the quarter, an annual growth of 6.6% even with MTR reduction. The results were mainly driven by an increase of data ARPU, which soared 24% in the period. When excluding the MTR impact in the quarter, blended ARPU could have increased 8.6% year-over-year.

Our successful strategy in data can also be noticed in the positive annual evolution of outgoing ARPU, which has been accelerating for the last four quarters and grew 11.8% year-over-year in the third quarter 2013. Even with a strong growth in high value customers, there have been controlled acquisition costs. As you can see on the top right, SAC featured BRL48.9 in the third quarter 2013 decreasing 4.6% year-over-year. In addition, to state the quality of our customer base, mobile net debt over gross revenues reduced again this quarter.

Moving to slide 11. In the corporate segment, we present once again solid evolution. In the core services, fixed voice accesses had an annual growth of 40%, while it increased 1.5 times in number of corporate accesses of fixed ultra broadband with our portfolio simplification. In addition, the gross adds of fixed wireless services out of Sao Paulo State tripled in 1 year, mainly because of the attractive combination of simplicity and price-quality relation, as well the strengthened sales channels distributed throughout the country.

In the M2M front, we doubled the number of corporate mobile device compared to last year, with the objective to obtaining large cooperation nationally with the best quality and address opportunities in the segment out of Sao Paulo. We highlighted the expansion of fibre optic network in seven cities out of our (inaudible) this year, and should continue to expand in the future.

On slide 12, we describe our position in the innovative services. We continue to outperform innovation with sales offer in various selected sectors such as the health, education and financial, aiming to capture value by combining our expertise in telecom and IT with capabilities of our partners. In this sense, we are offering to our clients a mobile payment solution, ZUUM, through a partnership between MasterCard Worldwide and Telefonica to capture the potential growth in financial service market. And we already have more than 250,000 accounts in use.

Considering the high level of unbanked population, ZUUM enabled realization of payments and transfers from our prepaid accounts through an handset, even without internet access using USSD network combined with chosen password to guarantee the security of the security of the services, provide more independence in spending control to these customers.

Slide 13 shows the financial performance in the third quarter 2013 versus third quarter 2012, and the 9 months 2013 versus 9 months 2012. We highlight that out access evolution is driving stronger sales revenue while costs for growth continue to weigh on margins in the short term. Our total revenues third quarter -- an annual growth of 3% in accumulated basis and 2% in the quarter.

Service revenues have accelerated and reached 1.5% annual growth in the quarter, higher than the growth presented in the two previous quarters. Excluding regulatory impacts, third quarter 2013 versus third quarter 2012 would have reached an overall increase of 9.1% year-over-year growth in the Mobile and 6.6% year-over-year decrease in the fixed.

Our recurrent costs in the quarter (inaudible) increased mainly explained by a higher commercial costs, (inaudible) growth efforts in the third quarter 2013, mainly related to the increased post-paid customer base and higher base of option. Fixed evolution and effort to improve quality is something that (inaudible) in the second part of our presentation.

As a consequence, recurrent EBITDA decreased annually 17.1% in the quarter and 80% in the accumulated basis, which is BRL2.4 billion in the third quarter 2013 and BRL7.7 billion in the 9 months 2013 with an EBITDA margin of 12.1% in the period. On the bottom line, we totalled BRL760 million in the quarter, a decrease of 19% year-over-year largely explained by EBITDA evolution in the period partially compensated by the positive impact in taxes as a result of interest on [XP] declared in the third quarter 2013.

In slide 14, even with some pressure on our results in the short term, I am confident we are heading to the right direction. We are improving our competitive position today to improve value generation on the long term. We are best positioned to capture the markets growth in four important fronts.

Number one, ultra broadband through our robust and strategic fibre to the home footprint. Number two, PayTV, extended by our differentiated IPTV solution and our relaunched DTH offer. Number three, mobiles, since we have the best 3G and 4G coverage, our absolute leadership in post-paid and data customers. Number four, innovative services being fostered by strategic partnerships and a global division to address maximum opportunities.

In this sense, we expect to keep leading value generation in the long term with the launch of new services sustaining our competitive advantage. Benchmark in customer care, best infrastructure and coverage, excellence in IT and best brand perception as attested by Folha Top of Mind award in October 2013, when Vivo was the first brand in telecom sector for the sixth consecutive year, increased 5 percentage points different ahead of the second place.

We are also developing, as it was guided, to be leaders in convergence solutions to our clients and our turnaround in Sao Paulo is critical for this evolution. Now Cristiane will give you the details on the financial part.

Thanks, Paulo, and good morning, ladies and gentlemen. On slide 16, which is the accelerated annual and quarterly growth of mobile net service revenue, on the left side we see a better evolution of mobile net service revenue which grew 4.3% this quarter compared to 0.8% in second quarter 2013. Accessing users revenues recorded in the annual increase of 5.4% in the third quarter 2013, a growth acceleration in comparison with the plus 2.8% achieved in the second quarter of 2013, mainly driven by the growth in post-paid customer base and a continued increase in prepaid recharges.

Data and value added service revenues grew 24.6% year-on-year due to higher sales of 3G, 3G Plus and 4G data plans, tied to smartphones and dongles in the post-paid segments besides increased sales of data package to prepaid customers. A reduction of 16% in network users is connected to MTR cut of 11.8% dating April 6th. By excluding this impact, the annual reduction would be 5.1% explained by the community effect.

On slide 17, we showed a data and value added service performance. In the quarter, data and VAS revenues accounted for a 32.4% of net wireless service revenue, rising 4.6 percentage points in the year-over-year comparison. The main highlight is the mobile internet revenue, which continued to grow significantly having soared 35.5% in the annual comparison, 19 percentage points more than one year ago.

The performance in this quarter was driven once again by the increased requisition of post-paid customers, strong adoptions through larger data bundles, and sales of prepaid packages. Messaging revenues increased 5% annually due to sales also linked to the packages in the post-paid plans, higher penetration of SMS in the (inaudible), and the inclusion of alternate SMS in post-paid plans. VAS revenues increased by 32.5% on annual comparison, mainly driven by education, security, and financial services besides Vivo [Fonshamada].

On slide 18, we see the wireline revenue evolution. As you can see on the left side, wireline revenues record an annual reduction of 7.7%, mainly explained by reduction in the fixed voice and other service revenues, besides the [VC] reductions since April 2013. By excluding these regulatory impact, a reduction of 6.6% in the wireline net revenue would be less during the period.

Data transmission and PayTV revenues recorded a quarterly increase of 0.3% compared to minus 1% last quarter, mainly explained by a better mix of speed and some initiatives to expand fiber adoption in the state of Sao Paulo. Apart from that, the performance of PayTV dividends was positively impacted by the accelerated adoption of IPTV and improvement of DTH sales in the period. As a result, data and PayTV revenues already account for 36% of landline revenues and an annual increase of 3 percentage points.

On the right, we show evolution of fixed revenue on a cumulative basis. In the year-to-date annual drop of fixed revenue decreases mainly due to efforts of what we are doing to turnaround the business of Sao Paulo. Still, we may experience volatility quarterly mainly in the corporate segment like it happened during the last quarters due to corporate traffic demand during social projects in the third quarter of 2013 and [fixed] related to large corporate contracts.

On slide 19, we show the current EBITDA evolution between 9 months 2012 and 9 months 2013. Recurrent to EBITDA margin in the period reduced 3.5 percentage points, a short term effect driven by growth in cost related to selling expenses to enhance future growth. The positive evolution of net operating service revenues in the 9 months of 2013 explained by the stronger mobile data growth and the continued effort to improve the fixed business accounted for 1.4 percentage points of the recurrent EBITDA margin, even considering the regulatory impacts in the period.

Disregarding non-recurring event, personnel plus G&A cost in 9 months of 2013, annual increase of 3.2%, which is below inflation in the period due to synergies and cost control. In this sense, personnel plus G&A cost impacted a recurrent EBITDA margin in only minus 0.4 percentage points. Subsidies plus selling expenses increased BRL623 million year-over-year, impacting the recurrent EBITDA margin in minus 3.2 percentage points, mainly by selling of course, towers with fixed business and increased postpaid customer base. This added a higher data adoption in the period.

Adjusted service rendered expenses annual increase BRL159 million in the period. This evolution is explained by the increase of network maintenance and expansion, focus on quality of mobile services as a consequence of the strong growth of mobile data traffic. In addition, this evolution connects via fiber expansion out of Sao Paulo. As a consequence, recurrent EBITDA margin was impacted minus 0.8 percentage points in the period.

On slide 20, we show the net profit evolution on a cumulative basis, which is favored by the subsidiary consolidation, the reduction of 16.6% in annual variation was impacted by non-recurring positive effect in 2012, mainly sales of towers and revision of provision, excluding nonrecurrent effects, this variation (inaudible). This improvement is mainly associated to the interest on capital declared in the third quarter of 2013 and the tax rate arising out of consolidation of the subsidiaries, partially offsetting the growth in costs related to certain expenses we just explained in the previous slide, and the higher depreciation due to acceleration of MMDS depreciation.

Moving to slide 21; on the top-left Capex achieved 13.2% of net operating revenues in the 9 months of 2013, when we exclude investment of 1.9 gigahertz spectrum upgrade in the amount of BRL451 million recorded in the third quarter of 2013. This positive evolution in the period is mainly explained by the expansion of fiber to the home in 3G and 4G coverage besides the focus on quality of our services. The financial results registered decrease of 21% on an yearly basis mainly explained by the evolution of financial revenues associated with financial investments in the period.

On the top-right, operating cash flow reached BRL6.813 billion in the 9 months of 2013, an increase of 2.5% year-over-year in the period. In addition, in the third quarter of 2013, we have reached a net cash level of BRL0.3 million as a result of our strong and sustainable cash generation. Now Paulo will present the final conclusion. Thank you very much.

Thank you, Cristiane. In summary, the main message that we'd like to leave with you for the quarter are, on the operational side we continue to execute successfully our strategy with segmented approaches in Sao Paulo intensified by an increasingly integrated offer resulting once again in positive access evolution across all fixed services. On the mobile side, we accelerated net adds in postpaid, resulting in a strong leadership and higher revenue segments and an increased adoption of data plans, especially in 3G Plus and 4G, sustained by a higher smartphone penetration.

On the financial side, it is important to highlight that our fixed revenue continue to present positive trends in the year, while mobile sales revenue accelerates annual growth even excluding the MTR impact, driven by the strong evolution of data and VAS revenues.

Finally, our EBITDA margin was affected in the short term by costs associated to higher commercial activity to capture future growth. We are leaving a moment where there is greater potential to build the base for all future generation. We cannot lose this window of opportunity. We have strong competitive advantage, the highest EBITDA margin in the sector, and an extremely solid financial position, and therefore investment capacity, and we are using this to enhance future penetration. It is important to mention that our main objective is to grow with profitability with a strong quality focus. Quality is and will continue to be the driving force behind our strategy. Thank you. Now we are open for the questions.

Thank you. The floor is now open for questions. (Operator Instructions). Andre Baggio, JP Morgan.

I would like to ask you about first the fixed line strategy of growing outside Sao Paulo. Can you talk a little bit more in detail on this?

Thank you, Andre, for the question. Basically we are promoting our (inaudible) solution, basically our 3G network and it's going very well, having more than 58% of the total population outside of Sao Paulo is covered by the solution, because we have the (inaudible) rules, the ability to sell fixed lines in this area. And we're pushing these solutions and (inaudible) that's basically a mobile with broadband selling together fixed voice. The net debt (inaudible) it's more than 6,000 a month, and I hope it's going very well.

The other end we have a solution (inaudible) promoting in corporate segment that's basically to achieve some corporate ties, with our fiber solution that we had in our (inaudible) in mobile, and to extend this to obtain some clients outside of Sao Paulo. Have seven series now in corporate solution. It's going around, it's going very well too.

Okay. And the second question I have is related to the cost sides and EBITDA margins structure. EBITDA margin had gone downward sequentially each quarter this year. Again you changing the strategy that would stabilize this margins or it's something that you are continuously wanting to invest in order to get more postpaid users and more fixed line and PayTV, so that you have better trends in the future?

(Inaudible) we think we have a great opportunity now in Brazil to capture more revenues from our internal base, but basically to capture more subscriber in the high end segment, and we will focus on this. Basically our focus is to promote all the capacity that you have in mobile to push harder in fiber, IPTV solution and TV solutions and so on. I think Cristiane can complement the answer.

Yes, regarding the margin, Andre, we have to work outside. We are investing very strongly in growth and having more clients in postpaid that have much more mix of smartphones which has higher costs, and also continues to make profitable turnaround in Sao Paulo business together with the mobile.

So we are in our strategy to building the future and to keep these clients with us in the near future and in the long term also with more focus and having all the products together with the clients and then increase their loyalty.

So our strategy continues to be same. We had some push in costs and commercial cost in this quarter, and all the Brazilian companies are feeling pressure about margins, not only Telefonica Brasil, and we want to keep our strategy in near future and get benefits and paybacks for these clients in the near future.

Okay, thanks a lot.

Daniel Federle, Credit Suisse.

My first question is about the EBITDA margin also. What is the most likely scenario for a pickup in EBITDA margins. Is it dependent on a pickup in fixed line revenues or you should expect a reduction in selling expenses in the coming quarters?

And my second question is about the fixed line product, how you see the Telefonica offers compared to the main competitors in Sao Paulo. We see net from America model, very aggressive on the commercial side and you have [GVT] entering the Sao Paulo market as well. So do you think the current platform with DSL is competitive against those competitors, or you should expect for a greater footprint of fiber-to-the-home to see a revamp in the fixed line business?

Regarding EBITDA margin, in terms of costs, we want to continue to focus on growth, of course, with profitability. We had an impact of BRL60 million in this quarter. We got in some renegotiation of contracts in networks and this is not going to be recurring for the next quarter. So you could normalize that for the future. Other than that we watch out to get benefit from the increasing revenues for the postpaid and also for these six new clients that we are getting right now outside Sao Paulo and in Sao Paulo.

So the pickup of EBITDA margin comes from both parts, increase in the revenues and also trying to reduce costs very strongly. Other than the standing costs, we are making a very strong transformation program in Brazil, regarding reducing any other costs that you can show in their G&A that represent in this quarter in reducing and making some efforts in terms of personnel, also to reduce headcount for the near future and get benefits.

So not only this sudden expenses are costs that we're going to continue to have a good performance but we are also working in your -- lot of other costs trying to reduce the level of cost for the future [in terms] of the business.

Daniel, basically in terms of fixed business in Sao Paulo, we have had two main areas and our focus is basically to have different tactical approach in these areas. And the areas that we have copper, basically in countryside of Sao Paulo state we're accelerating DTH sales, very good broadband speed (inaudible) 90% of the all net adds in this quarter with speeds more than 4 megabytes per second, and we have integrated offers in fixed mobile.

On the other hand, we have fiber and cable area in Sao Paulo city based again in the more than 60 cities in the neighborhood of Sao Paulo that you have the focus to win back and loyalty of current base.

The expansion (inaudible) we are doing this year has a lot of times the size of business (inaudible) in Sao Paulo city, and we have in this, our focus in premium clients, and you have integrated offer now that we launched (inaudible) of Sao Paulo in a soft launch, that we will be (inaudible) in the near future for all areas that we have in fiber, fiber and cable.

Thank you.

Susana Salaru, Itau.

We have a question here. First on data growth going forward. We have been seeing that the data growth has been the main driver to support mobile revenue growth. What kind of leverage should we continue to see going forward. That would be the first question. And just another detail on that. We have been seeing that SMS has been decelerating a lot.

We have a 5% growth this quarter and in the first quarter it was something around 15% growth year-over-year. So not only data, but if you could elaborate a little bit more about SMS growth going forward would be helpful. And the second question is a little bit on competition, if you guys notice any difference in the dynamics of -- (technical difficulty).

That was a lot. In this case our focus is to have the capacity to maintain our growing, to maintain the quality that have, (inaudible) quality we have in this market. (Inaudible) companies who are growing bundled solution. This is very good sign. And we are promoting more sales now in our new brand launch to get this quality solution for 4G. Basically our all plans that we have now are integrated voice and SMS and VAS and we are pushing harder for this.

Our vision is possible to having the Christmas campaign in Brazil, it's a good opportunity to capture more market, according to our region, because the smartphone penetration in Brazil is not so high, and we have now a lot of good offers based on the retail strategy to promote the sales of this kind of device. Basically, dealers are focused on this. The numbers are showing a good performance you have and a good performance in our strategy.

Hi, Susana. Regarding SMS and MMS, we already projected in the last quarter growth of 4.8%, so we increased a little bit now 5%. We've been showing the last year a very strong growth in internet 3G, and in different culture in the world, the cannibalization in the SMS is much more faster than what we presented here because we had a lot of initiative in trying to keep the level of SMS and MMS high. Of course, now with a lot of years from the start of the launch of 3G and 4G also now, we are feeling some pressure on SMS because we have a lot of other package that includes benefits you in internet. So it's natural. We were waiting for that and I think that's not predicted by us and we're still keeping a growth of 5%, the same that we presented last quarter. So it's not a surprise for us, no more.

About GVT, the next question, GVT started its commercial operations in Sao Paulo by the end of July in this year, basically in seven, eight areas of Sao Paulo City, capital city, and basically had no (inaudible) impression in price because we had fiber on good position in cable and basically mainly (inaudible) fiber, the HD channels (inaudible) and additional decoders. When you compare our offers, these revenues there, GVT offers, I think we have some point that we have in the (inaudible) GVT. Basically these don't have any number (inaudible) more concerned now about the GVT in Sao Paulo area. Okay.

Okay, guys, thank you.

Michel Morin, Morgan Stanley.

Two questions if I may. The first is when we look at your EBITDA, it's down about 8% year-to-date on a recurring basis but your operating cash flow was up 2.5%. So I was wondering if you can give us the -- what you view as the key reasons why we have this divergence in trend between the EBITDA and the operating cash flow. And then secondly, your outgoing ARPU which you flagged on slide 10, I was wondering is this mostly just because of mix shift towards postpaid or could you give us a little bit of breakdown of what the trend would be just for your postpaid customers please. Thank you.

Thank you, Michel. We've got the EBITDA. We reconciled, we tried to re-conciliate the loss, the drop that we had in EBITDA in the operating cash flow. It's because we had some impacts in our EBITDA that didn't have cash associated so far. So that's a normal timing and in fact that is going to reconcile any more in the near future, (inaudible).

Sorry, can you elaborate on what kind of items those are, is it like provisions for contingency, there are things like that or?

Yes, the provision for contingency is almost the same level that we presented last year in the third quarter and also in the second quarter, but still it's -- the total amount of contingency we don't have cash involved, but explained also part of these.

And I mentioned the question before, I don't know if you heard, that we had some negotiations and some discussion and some contracts of network that we had to make up an additional provision of BRL60 million that also had no cash involved so far, just for the payments for the future and all the number of things not being very different from this.

And that BRL60 million, is that the EILD or is it something else?

No, the BRL60 million is from a lot of contracts that we had network regarding some rentals that we were negotiating and had some negative impact in this quarter because of some adjustments that we had to make in these contracts.

Okay.

So we're not going be a normal level for the future, but it's actually very strong in this quarter.

Okay, great. And on the outgoing ARPU?

Michel, well, our outgoing ARPU basically the trend is very good now, and basically we had a lot of postpaid that we -- part of this came from prepaid, and we have two targeted areas to (inaudible) hybrid band, we called it (inaudible) with data that was launched in the beginning of this year, that's going very well, and few postpaid. The postpaid basically deposited large things from control plan. It's going very well, the number that you show in data, the participation in ARPU's relation, it's very high, and basically (inaudible). I think it's a very (inaudible) I need to improve more this possibility.

Okay, and you mentioned in the press release also that you've reduced the handset subsidies. Is this something that had a meaningful benefit in terms of margin this quarter and is that something that we should anticipate might be more noticeable in the fourth quarter? How should we think about this going forward?

Yes, Michel, we reduced the subsidy on control plan. So today we only give subsidy to postpaid if it's attached with a data plan. So this benefit of this is probably going to continue in the first quarter next year. This strategy is only to give subsidy to postpaid with data plans to accelerate the adoption of the data plans and increase ARPU also.

So it's not a very huge number, but it had a reduction in this quarter and was offset partially by the higher mix of smartphone which had higher subsidy. So that's why we did not feel any benefit on that because this reduction was compensated with (inaudible) that has a huge mix compared to last quarter and compared to last year, but yes, this strategy continues forward.

Great, thank you very much.

Soomit Datta, New Street Research.

Few questions if possible please. First of all, on the cost side, your interconnect cost, I noticed, were quite elevated this quarter. Obviously, you've had the MTR cuts, so versus this quarter last year I would have expected those to fall. Can you help us understand why that is, it suggests you might have got more off-net minutes? So I don't know whether you've changed any of your tariff plans to encourage off-net calling, so any clarity on that would be great.

And then secondly, could you provide an update as to the level of TV subscribers or DTH subscribers, roughly you need to achieve break-even on that product, that would be very helpful? Thanks

Thank you for the question. Regarding interconnection, the increase that we had in this group was not related to interconnection costs, actually it was the same item that I spend in the previous quarter. The BRL60 million that we had to renegotiate some contract is out there within this group of expanse. So there is nothing to do with the (inaudible) even the changing mix of the traffic, and this is not going to be reported for the next quarters.

Okay, I understand.

Okay.

In terms of our DTH solution basically you have margin for 100,000 subscribers nowadays and, we are increasing a lot this. Basically you have a gain associated to the cost that you pay for the content. But it's very possible to join this, the IPTV solution that you have basically all quarter or push a lot for both options, basically our focus in DTH in Sao Paulo countryside. And I think it's in the beginning of this strategy because we launched the service in June of this year, and I can't foresee now the break-even of this.

Okay, thank you.

Welcome.

Carlos Sequeira, BTG Pactual.

Yes, my question is on broadband net adds which decelerated sequentially while at the same time PayTV net adds and fixed line net adds accelerated in the same period and I was wondering what is behind that if -- you are now because you're selling fixed line service outside Sao Paulo if you're selling base services alone? And also the DTH picture, if that are being sold alone and that's why we're seeing the difference. I mean, my point here is can you comment on why we're seeing the different trends between broadband net adds and PayTV and fixed line net adds in the quarter? Thanks

Hi, Sequeira, thank you for the question. Basically you have a more comparative environment in the fixed side basically when you have areas with low (inaudible) in data in fixed broadband. In this case, it's very difficult to maintain our position because we are competing with the player that have more possibilities to offer a high quality or better mix of speed.

But (inaudible) position to offer now is basically in fiber cable. We are operating in the same terms basically in terms of fiber compared to the net adds cash position in this case. Our offer that we have is a bundle, primarily is a bundle, but it's possible to have in some cases two or three or four (inaudible) solution that we achieve our goals through to have more days with more than one product from Telefonica Brasil. Okay?

Thank you.

Lucio Aldworth, Citi.

Just wanted to understand how much of your cost of sales today is related to renting total capacity. And if you cannot give that precise number, would you at least be able to give us some sort of a ballpark as to how much renting capacity could explain the 18% increase in third-party expenses in the third -- from third quarter of 2012?

And my second question relates at the structure of these sale lease back contract? In general terms, I know you don't disclose the economics, but how are they readjusted so they are just inflation or being sensitive to interest rates or subscriber usage? Just wanted to get a sense of how they are formatted? Thanks

Thank you for the question. You're right, we do not disclose the economics of this project. But the project -- all the towers that we sold, the negotiations that we made with the companies is below market price and (inaudible) is positive of course, other than that we wouldn't have done the operation. The impact that we had is due to less than 1 percentage points in EBITDA and it's not that relevant that it could make any disclosure, there's no disclosure.

Okay, and are you then selling towers now?

No, no. Yes, we are done. Sorry, we are done. We've sold the only tower that we can (inaudible) that we will not sell anymore. So the towers we are done.

Okay, great. One last question if I may. Is the cost of the 3G network, for renting capacity on a tower for a 3G network the same as for a 4G, or is there a difference for between 3G and 4G network?

Same cost.

Okay, thanks so much.

Andrew Coelho, Scotiabank.

You are mentioning here in the report that you are planning to reduce the number of employees by 600 in the fourth quarter of the year. So let me ask you, how many employees do you have today, what impact in cost should we expect for the fourth quarter of the year as a result of these layoffs and what kind of savings should we expect for next year as a result of the restructuring process?

Thank you for the question. The layoffs that -- the 600 people that you said that we [delayed], the impact cost that it's going to have in the fourth quarter is BRL73 million, and the benefits that we are going to have in the next year is not all of these layoffs, but have to consolidate with the other layoffs that we did this year in March and last year. So we think that the result is very positive for the Company, and the benefits much higher than what we had before. So it's more than a BRL150 million of benefits per year of this three layoffs combined, roughly.

Okay. So there will be additional expenses for BRL73 million if I heard correctly, and you are expecting sales in approximately BRL150, not only because of the layoffs, but also as a result of the restructuring process, is that correct?

Yes, together with the other layoffs that we had, we had in March a 1,000 people that we are already laid-off, we also had last year. So the combined of these three layoffs are going to benefit at roughly BRL150 million per year.

Okay. And how many employees do you have today?

Right now 15,000.

15,000, okay, thank you very much.

Maria Azevedo, UBS.

Could you please discuss a little further the status of the 4G network sharing agreement that you have with AMX, and should we also expect any network sharing in the 700 megahertz as well? Thanks.

Thank you, Maria, for your question. Basically we are working together with our partner in this case, AMX in Brazil to have -- to the opportunity in our network in the next year. Basically this year, we had a hard time to have the construction of the network, and we have focused more on our planning for the next year.

Basically it's to have more sales sites in order to have more data demand that's recovering with 4G solution. And we promoted to use more fiber in case of 4G because of the high capacity that we saw in this technology. For the 700%, don't talk about this because it was under discussion with regulator about the total profit of this. But basically in terms of the (inaudible) we have now, it's a very good solution for us, for both companies to promote this together to use all (inaudible) have now in Brazil to grow together, and solve question in this case.

Okay, thank you very much.

Ivon Leal, BBVA.

Just maybe a couple of questions on your fixed line business outside Sao Paulo. Out of the 150,000 net adds that you had in broadband since the beginning of the year, could you tell us roughly what part is coming from Sao Paulo State and what part is coming from outside of Sao Paulo. And eventually what is the number of broadband subscribers now outside of Sao Paulo?

And the second one is would I be right to say that due to the lack of critical mass yet, the broadband subscribers outside of Sao Paulo are still negative contributors to EBITDA level or just hardly break-even?

Just to clarify. Outside of Sao Paulo, the only solution that we have based our fixed business is our solution to go [FTT] solution, (inaudible) solution. The other solution that we have is VivoBox. It's a combination between Vivo fixed or FTT (inaudible), together a solution to capture the opportunity in terms of broadband. But this is a mobile broadband. It's fixed elements that's possible to put in your house or a small office.

But the rules, according to the regulator, is the same rules that we have in mobile. We don't have for the [traditional] segment fixed solution, the fixed broadband outside Sao Paulo. We have in the corporate segment the fixed broadband in the corporate segment based on fiber that we have in our wet call in the series that we have (inaudible) possibility that constituted the solution to achieve some client in the corporate segment according to the demand that we have in this area.

Okay. Actually what you are reporting as broadband subscribers then, all of them are the pure fixed line in Sao Paulo. Am I right?

Yes.

Yes, okay.

[Derrick Francis], Raymond James.

I have a question. You mentioned significant data traffic growth of 22% quarter-to-quarter. I was wondering if you can share with us what kind of average usage you are seeing on a 3G or 4G smartphone and the dongle just so we can see how much consumption there is happening? Can you hear me okay?

Yes. No, basically we can't talk about this is that we have -- all the offers that we have in the market today, we have the appropriate price for each technology, we have price for 3G, for 3G, of course, a different price, and 4G, different price. And with this, we control the managing, these three possibility that we have in our network. Nowadays, we are looking for more the -- to have more people in 4G because 4G is our new network; we have an OpEx base to we have more people in this solution.

But we are not pushing a lot in terms of subsidy. Basically, the same [solutions] that apply now in the market according to what payback, according to all the rules that you have (inaudible) to focus on profitability. The consumption that you have now is increasing, normally the same with other markets, no difference between -- when you compare basically the increase in (inaudible) we have more people in prepaid use data (inaudible). More than 8 million people are using prepaid data, and we have sold all the possibility that you're supposed to have in this area. We're launching simply a prepaid (inaudible) that's possible to have now, but our focus in the packets that we have for months, no, and it's sold. We don't have any doubts about this.

And then you touched on fiber briefly there. How many of your cell sites have you already been able to deploy fiber backhauls? It seems like a very important part to make 4G service work right?

I don't suppose I know this number. Okay.

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 our conference and for your interest. The highlight of this quarter is a delivery on the operational side. We accumulated slightly higher net additions in the postpaid (inaudible) by a Brazilian company. On the fixed side, numbers continue to improve. With our integration efforts taking place we expect to keep improving revenue per customer. At the same time we continue to strengthen our capabilities to continue to differentiate with special focus on quality.

In the short term we are seeing some margin reduction, but this is the short-term effect for building a better future. And I have (inaudible) that I'm optimistic about our long term (inaudible).

Thanks again. I hope to see you again next quarter or any time soon. Thank you.

Thank you. This concludes today's Telefonica Brasil Third Quarter 2013 Results Conference Call. You may disconnect your lines at this time.