Telefonica Brasil SA (VIV) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to the Telefonica Brasil fourth quarter and year of 2013 earnings conference call.

Today with us we have Mr. Paulo Cesar Teixeira, CEO of Telefonica Brasil, and Mr. Alberto Horcajo Aguirre, CFO 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 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 fourth quarter and year 2013 results of Telefonica Brasil.

On slide two, we see the main highlights of today's call. In the mobile business, our postpaid market share grew to 40% in December thanks to an outstanding 6% increase in net additions.

We also experienced a strong data adoption, accelerating our data ARPU growth. In addition, we continued to see solid improvement in fixed assets this quarter, with strong performance in all segment services.

Total sales revenue growth in the fourth quarter is almost two times higher than the same increase achieved in the first quarter. This consistent performance is a consequence of strong mobile and fixed data revenues, which grew in the fourth quarter 19% year-over-year.

Increased revenues combined with reduced costs resulted in improved EBITDA margin in the fourth quarter when compared with previous ones, with a positive impact on the Company's profitability.

On slide four we show our access evolution in the quarter. The chart on the left registers 92.6 million total accesses at the end of fourth quarter 2013, an increase of 1.6% over fourth quarter 2012 and 0.9% over third quarter 2013.

Mobile accesses have grown 1.5% along this year, strongly driven by postpaid, which increased 26% year-over-year in the quarter.

Prepaid accesses, due to our restricted connection policy based on profitability analysis, was reduced by 6.6%. This policy has proven to be the correct one and we will continue to implement it. Actually, we will have more than 15.2 million accesses due to the same policy as the second player.

We ended the quarter with 15.3 million fixed accesses, representing annual growth of 2.2%. In fixed voice, we increased 1% year-over-year, a strong improvement when compared to previous quarters, mainly driven by sales of our fixed wireline solution nationwide.

In broadband, we grew 5.1% year-over-year, thanks to an aggressive fiber to the home marketing strategy.

In TV, we saw annual growth of 6.8% in the quarter, driven by IPTV and DTH sales.

Moving to slide five, in mobile we accelerated postpaid net adds with value increase and reduced churn and bad debt along the year. Postpaid net additions in the quarter climbed more than 80% compared to fourth quarter 2012 and reached 1.55 million, a new record for us, resulting in a mix of 31% of the total mobile accesses.

For the postpaid, we have a new portfolio for our hybrid plan. Data package and more affordable price mix allowed better monetization and data penetration. In this sense, Vivo market share of postpaid, excluding M2M, grew to 41.6% in December 2013, 2 percentage points higher than a year ago.

Even with the large and recurring acquisition of new postpaid customers, the quality of our customer base is attested by a reducing level of postpaid churn and bad debt. Both present strong reductions in our annual comparison.

Moving to slide six, we show that mobile data adoption is driving ARPU growth, while payback on customers is reducing. The market penetration, including Web phones and smartphones, reached 75% for pre and postpaid customers, and 45% for prepaid at the end of the last year.

As a result, our mobile data users reached 27.6 million, growing 76% year-over-year. When we include eventual users, mobile data use accounts for 27.7 million in the fourth quarter 2013, almost half of our total mobile base.

Customer migration to 3G and 4G plans is accelerating. Actually, more than 80% of gross additions in the fourth quarter 2013 were attached to a data plan or package. We are happy to announce that we achieved in February more than 1 million customers with our 4G services, just 10 months after its launch.

On the top right, ARPU reached BRL24.8 in the quarter, with annual growth of 3.8% driven by data ARPU, which soared 17.5% in the period. Our growth in higher credit customers and ARPU increase has driven more value when we analyze our payback on customers, which we have managed to reduce during the fourth quarter of 2013 due to our rational commercial approach.

Moving to slide seven, we show that the segmented approach for fixed services in Sao Paulo is being executed successfully, with positive plans also again in this quarter.

In regions with more income per capita, we continued to accelerate FTTH net additions, which were in the fourth quarter 2013 2.6 times higher than in first quarter 2013.

In the same comparison, IPTV net additions climbed around 7 times. As a result, we already count on 204,000 fiber customers in December 2013.

We are also expanding fast our footprint, and now count on 1.9 million homes passed in Sao Paulo by the end of 2013, surpassing the goal for the year.

In the countryside of Sao Paulo state, our satellite TV is being offered selectively to our current customers and is growing fast. Our bundling efforts, mobile cross selling, and migration of customers to higher speeds is paying off. And broadband churning was reduced also again in this quarter.

On slide eight, the results of this quarter confirm the trend we saw in the last two previous quarters. Once again, we present positive net additions in the fixed business with 215,000 net adds in the quarter, increasing 37% quarter-over-quarter.

Fixed voice represents 123,000 net adds in the quarter, doubling the level of third quarter 2013, mainly due to the success of our HDTV national offer.

Broadband net additions reached 39,000 in the quarter. And more importantly, around 90% of these adds were at speeds of more than 4 megabits per second, especially concentrated in the FTTH technology.

Finally, in the TV business, we continue to see strong evolution on the back of higher sales in IPTV and DTH, and achieved 53,000 net additions in the quarter.

Moving to slide nine and the corporate segment, we present also again solid evolution. In core services, fixed voice accesses had annual growth of 3%, while we increased 1.5 times the number of corporate accesses of fixed ultra broadband.

Gross adds in fixed wireless services out of Sao Paolo increased more than four times in one year, mainly because of stronger sales channels distributed throughout the country.

It's also important to highlight the penetration of data packages within our base, which increased annually 6 percentage points in the fourth quarter 2013, recording an historical record of gross adds.

In addition, we've more than doubled the number of accesses in housing and hosting services and almost doubled the number of M2M accesses when compared to last year, showing our commercial success on these products.

The right hand shows the financial performance in the fourth quarter 2013 versus third quarter 2013 and in the year of 2013 versus 2012. In the quarter-over-quarter analysis, total revenues accelerated its path of growth, reaching 5.1% versus third quarter 2013.

With solid improvement in fixed revenue generation and sustainable value growth, ever more rationality in commercial costs, and control in G&A and personnel expense, recurrent EBITDA increased 16.7% and margins grew 360 basis points sequentially to reach 31.2% in the quarter.

In the annual comparison, revenues grew 2.4% with continued growth in mobile services, which evolved at 6.1% year-over-year.

Recurrent EBITDA in the year decreased 9.2% year-over-year, reaching BRL10.5 billion in 2013 with a margin of 30.4%, reflecting higher commercial costs associated with growth efforts during 2013.

On the bottom line, we total BRL1.2 billion in the quarter and BRL3.7 billion in 2013, a decrease of 16.5% year-over-year, largely explained by the EBITDA evolution in the period.

Now Alberto will detail the financial performance, and I'll return at the end of the presentation to detail our strategic pillars.

Thanks, Paulo, and good morning, ladies and gentlemen. On slide 12, you see the recent trend in mobile net service revenues for the last quarter and for the whole year of 2013.

On the left side of the slide, we show that mobile net sales revenue displayed the same quarter on quarter growth of 5.3% as at the end of 2013, or 7.1%, by excluding the MTR effect.

This performance was mainly driven by the acceleration in data and value-added service revenues, while access and usage revenues showed signs of maturity.

In this fourth quarter of 2013, mobile revenues were favored by a non-recurrent impact from tax credit recovery, mainly ICMS in the amount of BRL165.8 million. Still, on an accumulated basis, we see mobile service revenues increasing 6.1%, or 7.6% when excluding the impact of MTR.

Access and usage revenues recorded an annual increase of 3.6% in 2013, mainly driven by the growth in the postpaid customer base and despite the severe reduction in the prepaid customer base.

The reduction of 14.6% in network usage associated revenues for the year 2013 reflects the already mentioned MTR cut of 11.8% enforced last April.

Data and value-added services' revenues grew in 2013 21.8% on a year-over-year analysis due to considerably higher Internet revenues, as I will detail in the next slide.

In a challenging consumer environment, our focus on revenue share is quite evident and supported by the numbers. For us, it is about value, not volume, as we continue to enhance and provide the best customer experience in the market.

We are pleased to report that we captured 66% of the market's incremental mobile service revenues in 2013.

On slide 13, we show the recent performance of data and value-added services. In the fourth quarter, data and value-added services' revenues accounted for 32.4% of the net wireless service revenue, rising 4 percentage points year-over-year.

The main driver is Internet revenues which, on an annual comparison, soared 35.1% in the fourth quarter 2013 and 32.4% in the whole year of 2013 due to faster addition of postpaid customers, a strong adoption of higher value data bundles such as 3G Plus and 4G, and a breakthrough in sales of prepaid packages.

Messaging revenues decreased 11.3% in the fourth quarter of 2013 versus the fourth quarter of 2012 as a result of the coming of age of the service, while on the flipside we achieved an increased adoption of plans and promotions that integrate voice, data, and SMS, manifestly preferred by our customers. In the year, revenues for SMS still grew by 2.7%.

Value-added service revenues increased annually 33.2% on a quarter-to-quarter basis and 29.2% for the whole year, mainly driven by new education and personal security services beside our highly successful Vivo Som de Chamada ring-back tone product.

As we show on the lower right side of the slide, accelerating Internet revenues are more than compensating for the slowdown in messaging, underpinning a promising annual growth in data and value-added services' revenues in 2013.

On slide 14, we show the evolution of wireline revenues. As you can see on the left side of the slide, wireline revenues in the fourth quarter of 2013 increased 3.2%, while they dropped 3.7% for the whole year.

In an early sign of potential reversal for the unrelenting reduction in fixed revenues, excluding the regulatory impact, the decrease for the year 2013 would have been 2.6%.

Data transmission revenues recorded a yearly increase of 5.2% as of the fourth quarter 2013, mainly explained by better quality net additions concentrated in FTTH. Other revenues grew 3% on a year-over-year basis due to the accelerated adoption of IPTV and DTH services and higher sales of corporate services, nonetheless impacted by the MMDS disconnection completed in the second quarter 2013.

As a result of our initiatives to better monetize the fixed business already described by Paulo, we perceive a likely better, despite subdued -- prospect for the evolution of wireline net revenues which improved 1.4 percentage points versus 2012.

On slide 15, we show the recurrent EBITDA evolution between 2012 and 2013. The recurrent EBITDA margin shrank 3.7% percentage points year-over-year, mainly attributable to planned outsize commercial efforts to improve fixed business offerings and to accelerate the conquest of higher value mobile customers.

Subsidies plus selling expenses increased thus 14.4% year-over-year, impacting the recurrent EBITDA margin in 3.6 percentage points. We have increased the calibrated commissions supporting our successful drive for a larger postpaid revenue base and costs associated to customer care and channel development.

Adjusted services rendered expenses increased 3.2 percentage points year-over-year due to increased network maintenance, focus on breadth and quality of service, expansion of fixed services out of Sao Paulo, and content acquisition.

It is worth noting that we have a disciplined approach to business productivity and other costs, resulting in a controlled growth of just 1.6% annually, thus below inflation for the period.

On slide 16, we show the net profit evolution on an accumulated basis, which is favored by the corporate merger effected last July 1st, 2013. The reduction of 16.5% year-over-year is greatly explained by non-recurrent income in 2012, mainly sales of towers and the reversion of provisions.

Please be aware that the tax credits associated to the interest on non-capital declared during the second half of 2013 and the tax credit arising for goodwill amortization arising from the streamlining of the Telefonica Brasil group structure nearly offset the reduction in recurrent EBITDA and the higher depreciation charges due to the discontinuation of MMDS.

Moving now to slide 17, on the top left side we show that CapEx reached slightly over BRL6 billion in 2013. When we exclude payment for licenses, our investment represents an industry standard 16.1% of sales, growing 1.3 percentage points over 2012.

This upwards evolution is aimed at the selective expansion of fiber to the home in the state of Sao Paolo, investments in 3G capacity and 4G coverage, and in the extension of our nationwide backbone, which exceeded 30,000 kilometers by the end of 2013.

The net financing expense decreased 26% on a yearly basis, mainly explained by lower fees and coverage in 2013 as a result of the higher level of interest on non-capital paid by the then subsidiaries in 2012.

On the top right of the slide, operating cash flow reached BRL9.6 billion in 2013, falling 4.8% year-over-year due to higher non-recurrent inflows associated with tower sales in 2012. Excluding such effect, operating cash flow would have increased 3.2% in 2013.

As a result of the solid cash generation and despite net dividend and interest on non-capital paid of over BRL4.8 billion, as of the end of the year our net debt stood at BRL1.8 billion, representing just 0.17 times the last 12 months' EBITDA.

Now Paulo will present our strategic overview. Thank you very much.

Thank you, Alberto. In slide 19, we present some main achievements in 2013 which transcend our main competitive advantage.

Number one, benchmarking customer care. During 2013, we expanded and enhanced our flagship stores, invested in customer intelligence in order to segment even more our customer care, and continued to lead the mobile and fixed section.

Number two, best infrastructure and coverage. We closed the year with the largest coverage in 3G and 4G, consolidating our position as the best provider of mobile data in Brazil and extended thus our FTTH footprint in Sao Paulo.

Number three, excellence in IT. During the year, we evolved in our convergent CRM and simplified our billing structure. In addition, we consolidated even more our infrastructure in fewer data centers to capture synergies.

Number four, best brand perception. As we evolved on this front, we reinforced our main values through our brand Vivo, which was elected as the most valuable, recalled, and reliable brand in the telecom market once again in 2013.

In slide 20, we detail our strategic vision for the Company. Number one, super mobile -- we lead the mobile Internet in Brazil with differentiated network quality and customer experience.

Number two, fiber company -- transform ourselves into a fiber company delivering best in class fixed services with efficiency.

Number three, convergent telecom service provider for corporate customers -- consolidate as the leader in integrated, innovative, and customized solutions for corporate and SMEs.

To achieve this in a sustainable and profitable way, we have a strong digital bet with the aim to be a digital telco with relevant and innovative services in selected areas. We also have a focus on efficiency and transformation in everything we do, mainly in the customer experience including channels, customer care, and infrastructure, promoting higher satisfaction and efficiency.

In slide 21, we detail our mission and vision for the mobile business. We aim to leverage our position as the leading provider in mobile Internet services in Brazil, sustaining our differentiation through quality and superior customer experience.

We believe that revenue increases will come from both, one, growth in high value customers, and two, increase of smartphone and data plan penetration in our prepaid base. We will address these opportunities, selling innovative offers with the right price mix customized to each segment.

Moreover, by investing in new technologies with the best infrastructure, we create a virtual cycle where we attract the best customers and can cope with data increases in a more efficient way.

At the same time, we create alternatives to monetize even more our network with agreements like the ones we recently signed with Nextel and Virgin. Both are still pending ANATEL's approval, and create additional revenues and synergies for us.

We also have a strong focus on increased efficiency in our channels, leveraging our additional channels like our new line store, group original channels, and self care.

Regarding innovation, our objective is to go beyond connectivity, transforming Vivo into a digital player providing relevant digital services and content in the most promising areas, such as e-health, education, financial services, and entertainment.

On slide 22, we present our strategy for the fixed business. We have focused on transforming ourselves into a fiber company. We are intending to double the number of homes passed in FTTH in Sao Paulo state during 2014, enhancing the customer experience and offering the highest broadband speeds on the market.

We are also simplifying our portfolio and expanding our IPTV offer to broaden the advantage of our offer against competition.

On the efficiency side, we are optimizing our investment model, focusing our resources in differentiated infrastructure, discarding obsolete technologies and reducing installation and maintenance CapEx with all IP portfolios of solutions.

We also leverage our mobile infrastructure to offer fixed services out of Sao Paolo.

Supported by our digital strategy for all customer segments, we will grow selectively in DTH and develop in new IPTV features and applications.

Moving to slide 23, we develop our vision for our corporate and SMEs business, where our goal is to consolidate as the leader in integrated, innovative, and customized solutions. Our focus will evolve to be offering convergent solutions to our customers and increase data penetration.

To address opportunities with large corporations nationwide, we will continue to expand our fiber footprint selectively in the main cities of Brazil. We are developing a complete portfolio of IT services from low end Web presence to high end customized projects, consolidating our position as the main provider of ICT services in Brazil.

One good example is to rely on our broad infrastructure, like our state of the art data center, to offer cloud computing services. Convergence in the channel and sales process will increasingly reduce our commercial costs.

Lastly, we will focus on growth in new areas in B2B like security, M2M, telemetry, and financial services supporting by Telefonica's digital units.

In conclusion, we have improved our operational results in all fronts in 2013, and we will increase our focus on profitability to deliver better financial results during 2014.

Our industry is substantially changed worldwide. Consolidation is already happening. Data demand is booming. Services are maturing, and new technology cycles are becoming more and more CapEx intensive.

MTR cuts, new spectrum auctions, high competitiveness, and regulatory issues are among the challenges we have this year. Besides chasing efficiency in everything we do, we intend to optimize our investment model, focusing on technologies that will differentiate us in the market.

Fiber and 4G, the right services price mix, and solid partnerships will improve our returns on capital and increase our value generation. We are proud to have captured two-thirds of the market growth in mobile revenues in 2013, and continue to lead in satisfaction and quality indicators from ANATEL, showing that we are executing well our strategy, having quality as one of our key drivers.

I am confident we are ahead of our competitors, and on the right path to deliver strong results for our shareholders.

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

Thank you. The floor is now open for questions. (Operator instructions.) Susana Salaru, Itau.

Good morning, guys. We have two questions here. The first one is related to the G&A cost control. Could you please elaborate what were the initiatives taken during the year that promoted such a reduction, and if there is more room for a decline in this line?

And the second question we have is on the revenue side. It's related to the SME revenues' performance. We saw a drop in the quarter of 11% year-over-year. Just was wondering if you guys have a feeling of how much that was caused by adoption of OTT and if you are taking any kind of measures to try to reverse that. Thank you.

Good morning, Susana. This is Alberto Horcajo. On your first question on the evolution of G&A expenses, I'd like to say that over the year 2013 we've been conducting a thorough review of many of the key components of our fixed expenses' base.

And as you've seen, we have right-sized our operation with a reduction of close to 9% of our headcount. In addition, we've been looking at different contracts we have with service partners. And beyond that, we've been reviewing a number of processes which we believe will create opportunities for further reduction in unit costs.

Nonetheless, I must say that, as you all know, we operate in a relatively high inflation environment, and some of the contracts have a duration that will not allow us to act on those on a short term basis.

We remain confident that we will be able to boost our productivity and enhance all G&A cost lines over the next few months, yes. Does that answer your question?

Yes, sure. Thank you.

Susana, it's Paulo speaking. Basically in terms of SMS, the effect that you have in the fourth quarter is basically that we increase a lot our numbers of smartphones, and basically it's a mature market for the services. And we are seeing now the possibilities of our data plan with these people, no?

Basically, we are seeing that people are at a future vision in Brazil market in smartphones. And basically, the new offer that we launched recently in January, we have a bundle now. This integrated voice, SMS, and data, no? And I think we posted this with the natural separations we have in Brazil now.

The maturity of the market on SMS is natural. I think it's a real separation that we face for this year. But, basically we increase in terms of the year-over-year, 2.7% in revenues. But, like I say, further in this year we'll cope this with data.

So, just to clarify, so going forward, we should expect a continued decline in this revenue line? Is that it?

That's really -- basically we bundle now of our offer. We have a bundled voice plus SMS and data, no? And people are using more on these plans and more data to have OTT or other solutions, okay?

Michel Morin, Morgan Stanley.

Yes, thank you. Good morning. Two questions, the first is on your mobile service revenue. Obviously, you did very well on a full year basis, capturing two-thirds of the growth. But, it does look like in the fourth quarter there was an notable deceleration. If you exclude the ICMS tax credit, it looks like service revenues were up only 2%.

So, I'm wondering if there was anything unusual in the year ago period that perhaps I'm forgetting. And if not, then it looks like you came -- you were doing 7% growth in the third quarter, so that's a pretty significant deceleration. What is behind this beyond what you've addressed already with SMS?

And then secondly, your slide shows your operating cash flow on a -- excluding the tower sales being up 3%, and that compares to your EBITDA down 9%. So, I'm wondering if you can explain to us what is driving this disconnect between these two trends? Thank you.

Michel, for the question, Paulo. Basically in terms of mobile revenues, we had a tougher comparison base with the fourth quarter of last year in 2012, that we have a strong base for comparison. But, basically this year in the last quarter of 2013 we had a different economic scenario, no?

If you remember, in Brazil the Christmas campaign was not so good for retail, for all the commercial area. We had a reduction about expectations, no? And basically, we retracted our mobile revenues.

But, it's very important to see that we have captured two-thirds of the total market in this year, no? And we think we have the whole opportunity to continue with this path in the next year. It's basically what we can say about this.

On the operating cash flow front, I think that it's important to know that generation of cash flow in the operation has been expanded in terms of collections.

We've improved our collection terms. And at the same time, we benefitted from a more balanced management of our payables. On top of that, we have a certain carryover from our investment in payments for the year.

And finally, I think it's worth noting, and as was mentioned in the presentation, that we benefit from the tax credits from the incorporation of the businesses in the year 2013, which basically yields a savings of close to BRL1 million.

So, that -- if you put it all together, you will have seen that cash generation was a priority for us in 2013, while we saw that deterioration on the economic results for the business. And that's where we have looked, if you do that harmonization. Does that answer your question?

Yes, perfectly. And Paulo, if I may, just to clarify your answer, so the year ago number was a difficult comparison simply because you had a great quarter last year. But, there wasn't anything one-time in nature, right?

Yes.

Mauricio Fernandes, Merrill Lynch.

Good morning, Paulo and Alberto. So, two questions. One, have you set CapEx plans for 2014 already? That's question one. Thank you.

Can you repeat?

Can you repeat the question, please, because I don't think we could hear you well.

Sorry about that. So, have you already determined what the CapEx is going to be for 2014?

For 2014, we have an intention to accelerate our CapEx deployment, focusing on fiber in the capital region. So, you can expect us to increase our CapEx and to stay within a reasonable range of close to 18% to 19% of revenues for the year, yes.

Okay. And second to Michel's question on the service revenue growth, what we have is a difficult comparison. But, the question is what to -- what's reasonable to expect in 2014. And I know there's been this whole -- but the outlook for 2014 points to a bigger monetization rate decline. It still points to a sluggish economy, and on then for -- and on top of that the Facebook thing. The market there for Vivo looks like it's up. It doesn't seem that SMS is going to have an improvement, in fact, that these services could continue to weigh on revenues.

So, the 2% as a comparison once you strip out ICMS relative to a tough quarter in fourth quarter 2012, that doesn't seem to imply that in 2013 -- as Alberto said, it would imply higher revenue growth going into the year and perhaps even 2014. Just wanted to get your thoughts around that.

Mauricio, basically we understand that it's not a good base for the comparison for the quarter, no? Basically, as I said to Michel, the comparison is 2012 had the best quarter in the year basically. And in this year, in 2013, not the same scenario which we have in Brazil, no?

But, we are -- in the next year, in 2014, basically we have in this year on the 8th of February the cut that we have in MTR. It's a very -- 28%, 25%?

Yes.

The MTR cuts. It's difficult to make now a comparison about this. But, basically we intend to continue to promote our strategy to capture higher values and basically pushing data.

Richard Dineen, HSBC.

Oh, thanks for taking the question, and good morning, everyone. Your fixed wireless product seems to be doing very well, and you had a major increase in your customer net additions in the fourth quarter. I'm just wondering what we might expect for that kind of customer growth in 2014 for the fixed wireless product. Can you keep adding sort of 150,000 per quarter, or should it be -- was this just a very strong quarter?

And secondly, related to that, just wondering what the kind of revenue implication from the fixed wireless product is. I mean, I can see it's kind of free money for you outside of Sao Paulo. But, is there any cannibalization of fixed line ARPU within Sao Paulo? Just how we might think about that would be very helpful. Thank you.

Thanks for the question, Richard. Basically, well, I think that it's possible to increase more our participation in this market. We have 274 cities in Brazil that it's possible to sell FWP solution.

We are offering more opportunities. At the moment, we are negotiating with ANATEL. Basically, we intend to promote more this product. It's our product that we are selling basically with a SIM card, which is just using our normal phone and a mobile phone, for example, with the perk of fixed business.

And basically in terms of comparison, we don't have the same offer that we had out of Sao Paulo. In Sao Paulo, it's an offer -- it's a single offer that we have in our fixed sales normally. It's the landline that we have in Sao Paulo.

We localized sales because of this, because we sold it quite -- so different. But, out of Sao Paulo, we are using another strategy, basically promoted by the SIM card selling that it is possible to use in any service phone that we have in the house, okay?

Yes, that's very helpful. If there's anything in terms of your expectations for customer additions, what kind of -- what might be achievable in 2014? If it's possible to share that with us, that would be really helpful.

Yes. Nowadays, we are capturing more than 50,000 a month. And we think it's possible to double this number in the next months.

Valder Nogueira, Santander.

Good morning, gentlemen. The current read that we have and I believe most of the market has regarding the upcoming 4G auction is anything but good. There are a lot of questions on the table to be answered. The government seems to be extremely aggressive on its potential revenue incoming from these auctions. There are more question marks than answers. What is your view regarding this extremely important overhang on the sector?

Thank you, Valder, for the question. I think basically it's too early to have an idea about this auction. Basically, it's a very complex auction. We have many, many points to fix.

Basically, we have to see how much they sell to fill up the discrepancy band and to -- all the cooperative state of this to clean up. Basically, I think we prefer to have all the information to fix our strategy about this.

Daniel Federle, Credit Suisse.

Hi. Good morning. My first question is related to connection costs. They are declining a lot in the fourth quarter compared to the last quarter. I would like to understand if this is sustainable or not, if it's related to lower traffic of SMS, just to have more color on that, because it increased a lot in the last quarter and decreased a lot now.

And the second question is related to the fiber to the home. I would like to have more sense on how is the contribution from fiber to the home products in the total fixed line revenues. Thank you.

This is Alberto Horcajo. And in general, we see a slower trend in the connection cost, which you know on balance hurts our EBITDA. But, obviously if the MTR cuts take effect, that has an impact on the cost for our outbound traffic.

And as you know, there is a calendar for further MTR cuts. So, that's where you can anticipate and bring into our own numbers. That's what I can say on the connection costs.

Just to clarify, I am comparing with the last quarter. So, the end charge, I believe, is practically the same, right?

Yes.

Daniel, it's Paulo. About the fiber to the home, basically we don't want to open this information, but we have now 204,000 subscribers, an increase in this last quarter of 32,000.

We think in this year we have a good opportunity to grow in very important areas of Sao Paulo. We have tried to grow further with this project. Basically, now we are covering the areas that we have cable, because we understand that we have a lot of people in Class A and B that we need to address with this solution.

Basically, lots for fiber, but that is our ultimate band solution. But, for IPTV solution, we are promoting together the fiber, no? Basically, we are in special work today. The purpose for this year is to go further in this project.

Basically, we have an agreement for possibility to pick up this project because we approved a budget for this, no? We are focusing this year's LT in this part of fiber of Sao Paulo.

Do you believe that the most marginal growth in revenues in the fixed line business will come from the fiber to the home product or not?

No, it's not the big amount now, because we have more participation from fiber to total revenue from the fixed business, no? But, I think we are starting a new moment of the Company, because we -- our intention is to speed up this project, to create more -- a record moment for the Company and capture more revenue from -- based on the fiber, no?

Daniel, this is Alberto Horcajo again. I just want to add to what I said before about the cost of interconnection. And in the last quarter, we had a BRL45 million challenge of our payables to other operators. And so, that makes part of the balance for the reduction quarter-over-quarter.

Ric Prentiss, Raymond James.

Thanks. Good morning. A busy earnings day, so I apologize if this has already been asked. Had a question in regards to your roaming agreement with Nextel in Brazil and Mexico. What are the thoughts there are far as how much revenue that could be bringing in versus enabling a competitor? And then second, on your thoughts about radio access network sharing and how that might play out in Brazil.

Okay, Ric, a very good question. But, we -- this agreement is under approval from ANATEL. Basically, in our vision, it's a very good agreement because we can promote more traffic and capture more revenue in our base in our network. But, we don't open this information. Sorry, but it is not possible, okay?

Yes. And then, radio access network sharing?

Well, we have not -- this is under approval at ANATEL nowadays. We are now -- Nextel is promoting this like roaming, but this is a (technical difficulty), the next step. But, now it's under analyzing in ANATEL, so I can't open this information now until this decision, okay? We are waiting for the decision from ANATEL.

Jonathan Dann, Barclays.

Oh, hi there. Just a question on the fixed wireless product and the (technical difficulty). Is there any ambition to expand or sort of I guess link the growth rates of fixed wireless (technical difficulty) positively about recent price increases, if you could just remind us which ones they've been?

Could you repeat? There were some cuts in your speech.

I'm sorry. For the satellite pay TV net outs and the fixed wireless net outs, I was just wondering if there's the opportunity to expand pay TV more broadly.

No, in terms of pay TV, our focus is Sao Paulo state. This is really our focus, in the main area of Sao Paulo state, in the Sao Paulo capital and the main cities the areas that we have fiber with IPTV solution. And the countryside of Sao Paulo state, in our base we are promoting FTTH, but just in Sao Paulo state.

In terms of satellite TV, I said we still cover all Brazil, no? We have 274 cities now in 23 states. And for the end of this year, our goal is to hit 460 cities, covering 53% of Brazilian homes. Okay?

Perfect. And have there been recent price increases on them?

At the moment, no. If I understand, if we are promoting increases in price, no.

Carlos Legorreta, GBM.

Yes, good morning. Thank you for taking my question. Do you have an estimate of the impact from the recently announced fixed to mobile reference termination rates? Can you comment on this based on your fixed to mobile traffic patterns, please?

This is Alberto Horcajo. In the presentation, the rate is about a 25% decrease in the fixed to mobile termination rates for the year 2014. This will take effect in the month of March.

And so, we obviously anticipate a hit on the revenue line as well as a hit on the EBITDA. And I guess you can make the numbers. It's going to be about BRL1 billion at the revenue lines and close to BRL180 million on the EBITDA line, yes. That's our expectation. Does that answer your question?

Yes, it does. Thank you very much. Furthermore, can you comment on your competition views for 2014 that's beyond your strategy for the fixed segment, please?

We have some competition. Basically, I think we are facing this with our strategy to have a premium price, to have the quality of our base. That's what promotes our strategy is basically on the quality, based on the quality.

And we think we are doing very well. Basically, we see that this is, at the moment, not so hard. But, all the competitors are maintaining the price strategy. We are the opposite of this, basically operating with a focus on quality and a differentiating offer for all segments. We have a focus on the value segment, on data, and also about broadband basically, and TV.

(Operator instructions.) Walter Piecyk, BTIG.

Thanks. A couple question, first on the comments about an NI with ANATEL. What exactly is ANATEL reviewing about that transaction? If they're just asking for roaming, that would seem something that ANATEL would want to approve. What would be the issue that they're actually reviewing?

The expectation that we have for the approval from ANATEL is basically on the max fixed base, to have the approval. Basically, we understand there is no concern about this.

Nextel started the operation. We have now our coverage. Basically, in the figures that we already had a competition basis and in our roaming agreement that we have with Nextel. But, the next step is to have industrial evaluation based in this agreement. But, I think in the next 60 days we'll have the approval.

Okay. That still doesn't make any sense to me, though. What exactly are they reviewing? What is the industrial evaluation that they're doing? I've never heard of that type of thing, that a regulator would actually review a roaming agreement. This is not a network agreement, right? They're just -- this is just a simple roaming agreement.

It's a roaming agreement. But, it can use our network to promote services, not like roaming.

It's not like roaming.

Now it's working like a roaming, but the next step, no. It's like normal use in the network that we have available, that you pay for it to use our network. But, not like a roaming.

It's not like roaming, but it's still -- how is it different than roaming? I mean, are they somehow utilizing your network and hanging their antennas on your tower? Are they going to do an (multiple speakers) agreement?

I prefer not to open this now, because it's under analysis in ANATEL. I think it's better to --.

Is there something additional, in addition to the roaming agreement, that ANATEL is looking at right now?

Yes, I think we prefer to --.

Okay, I understand. Thank you.

Get the approval from ANATEL to talk about this, okay?

Okay. That's fine. On the CapEx question that Michel had put out there, you gave a percentage of revenue. Is that service revenue or total revenue that you had? I think it was 18% to 19%.

Yes, that's for total revenue.

So, that's about BRL1 billion increase in your CapEx this year?

No, it's less than that. It's about BRL600 million above this year's level.

Got it. And then, just the last question on your smartphone penetration, you guys always provide the smartphone and Web phone. But, I would think that the smartphone ARPU is higher than the Web phone. So, can you give us some sense of -- again, in the presentation, you gave it postpaid and prepaid, but I think the mix is half your base is smartphone and Web. If you just excluded those Web phones, what percent of the base is using a smartphone?

We don't exclude the Web phone because it's possible to have data on this phone. And we promote data in all phones, in Web phones and smartphones. We don't exclude this.

All right. Let me alter the question then. This'll be the last one. Is there a significant difference in the ARPU of a Web phone and a smartphone?

Oh, yes, because that's (multiple speakers).

Well, that would be then be great to know what that smartphone number is, because obviously that's a lower number.

Okay, but we don't open this.

I understand. Thank you very much.

Michel Morin, Morgan Stanley.

Yes, I just wanted to see if you can give us a little bit granularity as to what you've been doing on the cost cutting front. It does look like you made good progress on G&A, and we know about the personnel question. But, elsewhere when you reference austerity measures, how much of that is kind of temporary cost cutting, belt tightening, and how much of it is really permanent, that you've actually taken costs out of the business forever, if you can give us some examples of things that have been done? Thank you.

Well, like I said before -- this is Alberto Horcajo again -- that we review the standing agreements with our partners. And you know we at Telefonica take advantage of our size and scale to improve commercial terms.

We acknowledged we have a position to, say, negotiate better content, to negotiate better other services provided by third parties. We review contracts and change the length of the contracts to improve the terms.

I mentioned the right-sizing of the operation because when you reduce a cost, there is also a resulting reduction in expense because you have a lower base of people that can spend money.

Beyond that, I also mentioned that we are reviewing processes. We have some innovative initiatives in place which I believe -- we all believe in the management committee of the Company that will take cost out of our cost base, make us more efficient, and bring the break-even point lower.

As you know, this is a tough market. We're all fighting for the same customers. We are very proud to say we are the only operator that has rising ARPUs. But still, though we have that advantage for quality revenues, we continue to bring down the unit cost. And it's such a wide variety of initiatives that it would take us very long to go over those, but every -- really every item.

And also, I'd like to add the boost we're giving to investment we believe at some point will also allow us to trade CapEx for expenses. So, that's another intention we have, because we have such a quality advantage in the mobile business, and we are building an advantage in the fixed business at the same time.

We believe that we will be able to take a whole range of expenses out of our accounts. So, that's our view, and that's what we're working on.

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. As I told you in my message during the presentation, I think we have a bright future ahead, while ambitious. And we will work hard in 2014 to increase our plan with success.

Thank you again, and I hope to see you again next quarter or anytime soon. Thank you.

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