Telefonica Brasil SA (VIV) 2014 Q2 法說會逐字稿

Good morning ladies and gentlemen. At this time we would like to welcome everyone to the Telefonica Brasil's second quarter 2014 earnings conference call. Today with us we have Mr. Paulo Cesar Teixeira, CEO of Telefonica Brasil, and Mr. Alberto Horcajo, CFO and Investor Relations Director of Telefonica Brasil. Today we have a simultaneous webcast with slide presentation on the Internet. It 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 session. At that time further instructions will be given. (Operator Instructions)

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the 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 would turn the conference over to Mr. Paulo Cesar Teixeira, CEO of Telefonica Brasil. Mr. Teixeira, you may now begin your conference.

Good morning ladies and gentlemen. I would like to thank you all for attending this conference of the second quarter of 2014 results of Telefonica Brasil.

On slide 2 we see the main highlights of today's call. In the mobile business our growth in higher value customers remain solid. Our contract base expanded 27% year over year with strong data adoption in all segments. As a consequence, data ARPU soared 15% annually. In addition to that, the strong performance in fixed voice outside of Sao Paulo State, pay TV and fiber resulted an excellent level of fixed net adds in the period.

Revenue trends in the quarter are also consistent. Net service revenues attribute solid annual growth of 1.9% in the quarter and 5.1% when excluding regulatory effects, a strong annual evolution in the period. Even with higher commercial activity we continue to show a strict discipline on cost evolution with controlled annual operation of 1.3% in the quarter.

Our constant efforts to achieve greater cost efficiencies and improved business performance focused on revenue generation led us to an annual growth in recurrent EBITDA of 2%, reversing the trend presented in the first quarters.

On slide 4 we show our accesses evolution in the quarter. Chart on the left registers almost 95 million total accesses at the end of the second quarter 2014, an accelerated annual increase of 4.1%.

Mobile accesses has grown 4.1% compared to last year, driven by contract which increased almost 27% in the same comparison. Prepaid accesses decreased 4% due to our strict disconnection policy based on profitability analysis. We affirm that our focus has to be in value, not in the number of accesses. If you're following the second player's policy we would have 17.5 million additional accesses.

Fixed accesses recorded 15.5 million at the end of the second quarter 2014 with increased annual growth of 4.1% and a strong evolution in all services. Fixed voice grew 3.4% annually, driven by the acceleration of sales of our fixed wireless solution nationwide. Broadband increased 2.4% year over year, thanks to an aggressive fiber to the home marketing strategy in the state of Sao Paulo. And in TV, we saw annual growth of 30.4%, almost two times higher than the previous quarter driven by IPTV and DTH sales.

Moving to slide 5, we describe how we are strengthening the pillar of our super mobile strategy, the quality delivered and perceived by our customer. We continued to invest in a differentiated mobile network, following in the steps of our success case in 3G, we're leading in 4G coverage. Nowadays we offer our 4G services for almost 35% of the population while in 3G the coverage goes up to 90%. To improve capacity, to achieve better quality in voice and data services, we substantially increased our sites and carriers in more than 20% during this year for each of them.

In terms of spectrum we differentiated ourselves by having the largest national spectrum in lower frequencies and the largest available slot in 4G spectrum. The staff of our network and customer care is structured, is reflected in ANATEL's indicators and in the value of our brand. We have the best level of mobile IDA and the lowest level of complaints among our national competitors according to ANATEL. We are also reckoned as the leader in quality perception in both prepaid and contract segments according to the research recently published by ANATEL, perceived quality research. Our strong brand is best recognized by its success in brand perception being the most valuable and recalled of the telecom markets according to the last ranking of Brand Finance and Top of Mind of Folha de Sao Paulo respectively.

On slide 6 we show how our super mobile strategy continues to produce solid contract growth in data adoption, leading to accelerated ARPU growth in this quarter. In second quarter 2014, we lead the market, achieving around 43% market share in contact, excluding M2M and almost 40% of the 4G market. The consistency of this trend is also reflected in the continuous reduction of contract churn. The annual decrease of 0.5 percentage point reaching 1.5% in the quarter. In addition, the penetration of smartphones, including web phones featured 81% for individual contract customers and 56% for prepaid at the end of the quarter. An annual increase of 10 and 18 percentage points respectively, thus enlarging the potential for data adoption.

Penetration of data plans attribute 74% for individual contracts and 34% for prepaid in the quarter, a positive evolution of 15 and 21 percentage points respectively. As a result mobile data users represented 33 million accesses in the second quarter, a growth of 55% year over year. Combined with that, the data traffic climbed 86% in the same period. The growth in higher revenue customers and data adoption in all segments continues to support ARPU increase. This indicator reached BRL23.4 in the quarter, growing 2.3% year over year mainly due to the evolution of data ARPU which soar 50% annually.

On slide 7 we present our fixed access evolution that reflects the sound execution of our strategy. Commercial activity was impacted in this quarter due to the reduced number of working days during the World Cup period. Even so we achieved a positive evolution of net additions of 155,000, an important growth when compared with the same period of last year. In fixed voice we presented an outstanding annual evolution with 98,000 net additions during second quarter 2014 mainly explained by the growth of fixed wireless sales nationwide.

As we focus on being a fiber company, we are improving the quality and ARPU of our net adds. In this sense, almost 6% of broadband adds in the quarter were done with speeds above 15 megabits per second versus 33% in the second quarter 2013. Higher sales in IPTV and DTH fuelled our sustainable growth in TV. We achieved 45,000 net additions during the quarter, more than three times higher that the second quarter 2013.

Slide 8 shows our commitment and focus on transforming Vivo into a fiber company and enhancing our position as a video player. We continue to first expand our FTTH footprint in the [Delta region] of Sao Paulo. We account for 2.9 million homes passed, the 1.8 million commercially addressable. Connected homes are accelerating as we doubled the level of broadband and IPTV net additions in the second quarter 2014 versus second quarter 2013 by reaching 37,000 new customers in broadband and 14,000 in IPTV. As a result, FTTH customers total 273,000 for broadband and 61,000 for IPTV by June.

Our net additions in satellite TV reached 40,000 in second quarter 2014, four times higher than last year. Our sales focus is on creating loyalty among existing fixed customers in areas which are not covered by (inaudible). This strategy allowed us to increase our triple play penetration more than 24% year over year, lowering our pay TV churn to half of the level recorded last year.

Moving to slide 9 we present once again our solid evolution in the corporate segment in many different fronts. In M2M we increased our market share to 32% in the second quarter, more than 8 percentage points higher than a year ago, as a result of our investments in fiber outside the state of Sao Paulo, allowing us to better address opportunities with large corporations. We grew our customer base by 55% annually.

In the 4G front, our complete portfolio and coverage leveraged us to achieve more than 400,000 customers only one year after its launch. In addition, we doubled our customer base of fixed wireless services, mainly supported by the expansion of our sales channels.

Slide 10 shows the financial performance in the second quarter 2014 versus second quarter 2013. In the year-over-year analysis, sales revenue grew 1.9% with a stronger mobile performance. Mobile sales revenue are accelerating and increased 6% year over year, the highest annual growth in the last three quarters. Fixed revenues negatively affected by regulatory effects in lower number of business days due to World Cup decreased 5.4% year over year.

By having a strict policy towards cost, we managed to achieve annual cost evolution of just 1.3% year over year. The results are even more impressive in an environment of higher inflationary pressures and commercial activity. As a result, recurrent EBITDA annual evolution reversed the trend of the last quarters with a 2% growth in the period.

On net results we totaled almost BRL2 billion in the quarter, an increase of 118% year over year, mainly explained by tax effects in the amount of BRL1.2 billion as Alberto will tell you in the following slides.

Now, Alberto will bring us some insights regarding financial performance.

Thanks, Paulo, and good morning ladies and gentlemen. On slide 12 we show the strong evolution of mobile service revenues. During this quarter annual growth achieved 6%, almost doubling the growth of 3.3% of last quarter. When excluding MTR cuts, the variation is even more impressive, reaching 9.3%. Data revenue has been the main driver for this evolution and grew by 19.5% on a year-over-year analysis to considerably higher internet and value added service revenues, as I will detail in the next slide.

In the context of lower economic growth, I would like to highlight the increase of 4.5% year over year recorded in access and usage revenues as a result of an improved pricing of voice services that started earlier this year and the sustained expansion in contract customers, you have been seeing each month none of those numbers.

The reduction of 29% in network usage revenues for the quarter reflects the 25% MTR cut effective in late February. Without this effect, we perceive an annual reduction of just 6.4% due to lower incoming traffic as a consequence of increasing Vivo community in the contract.

In slide 13 we present the details on the evolution of data and value added services. In the second quarter our share of data services is now equivalent to some mature markets, accounting for 36% of the mobile net service in the quarter is a 4 percentage points rise annually.

The main driver, Internet revenues, sustains an impressive growth, climbing 29% in the year due to the level of contract customers' additions and the strong adoption of 3G and 4G services. Messaging revenue's evolution reflects the maturity of the service we've been talking about for the last few quarters and have an annual decrease of 11% in the quarter while we successfully promote the adoption of integrated offers of SMS, voice and data to improve ARPUs.

VAS revenues soared 42% in a year-over-year basis, mainly driven by our education and online security services besides the sales of ring-back tones. As we show on the right side of the slide, data and VAS already represent almost 80% of data revenues and should continue to be the drivers for the sequential improvement in revenues seen in the last few quarters.

On slide 14, we show the recent evolution of wireline revenues. Even in the face of a lower number of business days during the World Cup and regulatory events namely [VC-CAS]in February and the reduction of basic plan fees in June as a consequence of last year's merger, fixed net revenues showed a controlled decrease of 5.4% year over year. When excluding the regulatory impact, the variation is down to reduction of just 2.4% which reflects a better annual evolution when compared to the second quarter of 2013.

Voice revenues were down 11% and continued to suffer from service maturity and mobile substitution, although it's starting to be compensated by the recent fixed wireless revenue stream. Data transmission revenues increased by 0.5% year over year with a direct influence of a more competitive environment partially compensated by the acceleration of higher ARPU FTTH net additions. Other revenues grew by 3.7% year over year due to the accelerated adoption of IPTV and DTH pay TV services.

On slide 15, we present the main levers of our yearly margin evolution for the second quarter of 2014. EBITDA margin slightly improved 0.1 percentage points to 29.5% as a result of efficiency initiatives and then increasing the rational commercial strategy in the cost front added to the revenue acceleration already described.

Services rendered expenses decreased 0.9% year over year due to the MTR cut made in the period. When excluding such effect, services rendered increased 5.5% explained by variable cost of content attached to sales of TV and mobile applications.

Even with the continuity of a strong access evolution subsidies and selling costs evolved 4.1% year over year impacting the EBITDA margin just 0.3 percentage points due to a more rational commercial strategy.

General and administrative and personnel costs have a 7.4% increase which impacted in 0.2 percentage points the EBITDA. Due to the collective bargain agreed to in the period added to lowered tax expenses in the second quarter of 2013 resulting from tax recoveries in the period especially from (inaudible). Excluding this effect, annual evolution of G&A and personnel costs is well below inflation. Our austerity on costs resulted in a reduced annual growth of 1.3% in recurring terms.

Now, moving to slide to 16, on the top left side we show that CapEx reached BRL1.6 billion in the second quarter of 2014, representing close to 18.7% of sales, 4 percentage points higher than the previous year. This evolution is in line with the plan of expansion of fiber-to-the-home in the state of Sau Paulo, investments in 3G capacity and 4G carriage to guarantee a superior quality in the services we provide and to strengthen our leadership positions.

The net financial expense increased BRL39 million on a yearly basis, mainly explained by higher level of net debt and interest rates in the period which stood at BRL2.6 billion although representing just 0.24 times over the last 12 months' EBITDA.

On the top right of the slide, the operating cash flow improved by 19% when comparing to the second quarter of 2013, thanks to much better EBITDA evolution and solid working capital management.

In this quarter, Telefonica Vivo recorded an outstanding net income of BRL2 billion, 2.2 times higher than a year ago, explained by a positive effect of BRL1.2 billion due to the revision of the tax bases for certain intangibles arising from past business combinations, and after the passing of lot number 12,973 which came into force last May.

Now, Paolo will conclude with the final statement before we open for questions. Thank you very much.

Thank you, Alberto. Once again Telefonica Brasil has proven its operational and financial capacity to overcome adversity. Our focused, aggressive and customer-oriented strategy brought us back to the (inaudible). On the operational side our evolution remains solid with outstanding mobile contract and data growth and acceleration in fiber TV and fixed wireless accesses that proves that we are in the right track.

More than ever we are committed to the right investment level to guarantee the sustainability of our competitive advantage where we are -- 4G, FTTH, mobile data growth, corporate solutions and digital services. Tough challenge continues to exist, we still face a challenging regulatory environment, a lower economic growth, and increasing inflationary pressures combined with quality demands. We are on top of all those issues and confident that we are more prepared than any of our competitors to face them.

Now, we are ready to take your questions. Thank you.

(Operator Instructions) Andrew Campbell, Credit Suisse.

I just wanted to revisit a little bit the non-recurring item that you mentioned that affected the tax line and I understand that with the new law that you probably have more legal certainty on what you can actually amortize and deduct et cetera. But I wanted to understand if there is actually an economic impact, in other words is there a cash benefit and a change in the way that you've been amortizing for tax purposes or is this basically a continuation of previous policy but simply a change for book purposes? Thank you.

Good morning, Andy, how are you? This is Alberto answering your question. Well, this is the consequence of the change in the law which was published last May which lea us to review the total value of the goodwill which we had booked in October 2011, at the that there was an incorporation of the mobile businesses within the fixed business. At the time we had kept aside a total volume of the goodwill to be amortized a fraction attributable to intangibles associated with the brand and the customer base, the value of the customer portfolio. And that was roughly BRL1.2 billion.

Now, with new law in place we decided after obtaining several independent opinions that we have the grounds for the amortization of such value which we had kept aside the base to be amortized. And we could only do it by taking this into the P&L because we had a time -- there was a period for which we could actually book in the balance sheet but that had expired. So this does have an economic impact, obviously. We're showing this as a profit because this is the only choice we have inline with our accounting standards, and it will have a cash impact as well, though this is a deferred impact. We chose to amortize this goodwill in the period of nine years. The law allows us to do it -- to do this in a minimum of 60 months and the Company in fact then decided to do this.

In nine years we will be actually extending the period of the amortization by another two years, and this will start in May 2020. So that means that for the period funding in May 2021, May 2022, there will be an additional charge of roughly BRL600 million and then there will be an impact obviously on our tax base as regards corporate tax.

Does that answer your question?

Yes, that's really helpful. Thank you, Alberto, appreciate it.

You are welcome, Andrew.

Valder Nogueira, Santander.

The question is pretty simple, the intake of the fiber in terms of pay TV net adds has proven to be extremely way better than in cable and DSL. In that sense you have mentioned for the presentation the investment that you have made in the city of Sao Paulo and the results of it. My question is related, okay, what is the strategy for the state of Sao Paulo, for the city of Sao Paulo it's pretty clear but for the state of Sao Paulo what's the objective, what's the goal and how would that change the way that you allocate CapEx around? That's the question.

Thank you Valder for the question. It's Paulo talking. Basically in terms of Sao Paulo state we have now 28 cities in Sao Paulo state covered by fiber. Basically the main city of Sao Paulo state. And we are putting these areas the TV distribution that we have in IPTV solution. And in our vision it's a good way to promote the growth in fiber in the cities that are possible to capture the most valuable clients that we have in the fix business. But in our vision this helps to increase the coverage in the next few years. But the number that we are showing now are so impacted if you compare with the last year, and our proposal is to promote on our plan to accelerate this solution because we have now around 50% of the total people that we are capturing in the market from our competitors. It's a very good solution, better than our competitors, as we are increasing our participation in this market.

We have satellite TVs in the areas that we don't have fiber to cope with our solution that we have in "ASL." Okay for you?

Okay, okay, thank you, Paulo. And still on that question, how do you show for CapEx around? How do you allocate the CapEx around because initially you had a stronger focus on copper and cable and now you are shifting more focus on fiber, does that change your level of CapEx?

Well, they're just to split $party. Basically we don't (inaudible) the CapEx for each service, no, but in the case of the fiber we are I think this year we put more than 1 million [HDs] in six months. We are growing so fast in terms of this strategy. But we don't (inaudible) the numbers of our CapEx in fiber, okay?

Okay, good. And my second question on, you have a pretty strong increase in penetration of data package, we are seeing postpaid client to 74%. Where do you believe we can reach a saturation there? I know this is a good question to answer but what do you believe to be a good decent level of saturation?

In my vision I think we (inaudible) room to increase a lot of this because we had just 58% of the total base with smartphone, just 36% with data plan, data plan which are month basis not day, not week plan. And, well, I think probably this group of the clients will increase a lot in the next few years. Basically in our vision it's possible for 200% nowadays by selling in our own store only smartphones, for example.

And I think the market of smartphone in Brazil this year increased a lot, and it's a very good opportunity for us. If you see the numbers that are shown in terms of Internet plans, we are showing that have increased a lot these days and our focus is on this. Okay, basically I think it's -- it should increase a lot. And the operations when achieving 100%, if you have than 100% in voice, probably in few years it's possible to achieve this in (inaudible).

Thanks, Paulo, make lot of sense. Thank you.

Michel Morin, Morgan Stanley.

Good morning everyone, thank you. So on prepaid you have disconnected aggressively some subscribers over the past couple of years, and I just wanted to see if you can share with us how you are thinking about this business going forward, given that we now have the glide path for MTRs. And specifically today there is still more than 200 million prepaid subscribers. Do you have a ballpark estimate of how many of these will eventually need to be disconnected because they will no longer be profitable as MTRs decline to low single-digits, reais, centavos of a reais over the next few years. Is this something that we would expect to see as continued disconnections of prepaid subs for the industry?

Thank you, Michel for the question. Basically, our policy for the prepaid is 30 days without traffic, incoming and outcoming and after this our profitability arises. So according to the rules that you have from ANATEL. But we are jumping this people from prepaid to postpaid in the big numbers, 400,000 a month. All the prepaid that you have in our bases, that is possible to have in postpaid in this core bases, in the equipments (inaudible) to go to the postpaid and basically the prepaid were push a lot for data. Our focus now is to have more prepaid with data.

I think it's all -- it's is so clean in the market and we maintain this. Our strategy we have now is data plan sensitive, when you launch it in last January our offer (inaudible) is a plan data sensitive and recently two of our competitors make a copy of this and launched the same plan, (inaudible). and I think it's a, for us it's a good way to maintain our base, so clean up, so profitability and we achieved this conditions to invite people to the postpaid or invite them, okay?

Right, so basically based -- you said, 400,000 per month is the migration to postpaid, is there still lots of scope for that to continue?

Yes.

Okay.

-- Michel --

Yes.

-- this is Alberto Horcajo here, I want to just add to what Paulo just said. If you look at our numbers for customer base, mobile customer base, the last 12 months, you see that we have grown our base, our contract base by 4.5 million customers. Our prepaid went down 2.4 million customers. So the net is clearly, we are capturing over two-thirds of the contract base net additions in the market. How fast can we move these customers onto contract as Paulo pointed out, and how fast can they actually adopt data plans. If you look, our data customers, we have 23 million customers with data plans, and that's more than our contract base, which is 19.9 million customers, which means we are being relatively successful in actually emancipating customers from the prepaid base onto contract and then buying into data plans.

Now, what will happen at the margin. I believe as Paulo pointed out, we will continue to be disciplined in the management of our customer base. And if the customer is not producing that revenue which is a minimum to be required according to a rule then we will disconnect the customer, but we have a strong belief that this market is fast moving onto higher value data plans and so we believe this is the right strategy going forward.

Makes sense, thank you. And if I can just add, throw in another quick one on pay TV. The month of June data came out yesterday and looks like you had a very strong month of June, much stronger than the first two months of the quarter. So if you can just comment a little bit on that was it World Cup related or is there really a -- been a pickup of momentum during the quarter? Thank you.

Michel, about the World Cup is correct, we had a campaign, we promote the 8G at the time, and we have a good answer about the campaign, it's a very good month for us and we could (inaudible).

Okay. Thank you very much.

And Michel, just to add this [plaster], when we added in (inaudible) the historical of IPTV customers each one only month. So around 60,000 customers in IPTV throughout the year, okay. And they are all in this month. So (inaudible) has available all the historical data as well if you want to take the [bait] there.

Thank you very much.

Fabio Levy, BTG Pactual.

So first regarding your mobile service revenue. In the second quarter you registered a growth of 6% year over year, and part of this is related to your repricing on your plans. So I was just wondering if you could give more details on this repricing and how much you can attribute to 6% year-over-year related to that repricing? That's my first question, thank you.

In terms of repricing, we increased our plans (inaudible) plans for 86% in February, and we increased our prepaid data plans in 20% in May and increase our postpaid plan in end of last year. But when you compare our plans on what we have, (inaudible) lot in terms of 4G plans. The 4G plans we had more data, but we have more compromise in terms of value, about BRL15 to BRL20 more when you compare with the 3G plans, basically (inaudible).

And you are monetizing more data in prepaid. We launched recently (inaudible) 50 megabits per second during seven days if it's possible to buy directly in our platform. If you are using 200 megabits per second, for example, and achieve this goal you can buy (inaudible) all data that's possible, and we are, if this makes sense, when you compare our growth in terms of revenue.

Okay. Should we make any back of envelope calculation, so can we attribute 3%, 2% of year over year growth additionally because of all these effects on the pricing plans, do you have any sense of how much it could impact your service revenue growth?

(inaudible). We are growing around 4.5% year over year in voice revenues, a great part of (inaudible) the price increases were made and the add-ons were then purchased?

Okay, thank you, Alberto. And second question on regarding to your additional net income of BRL1.2 billion related to this fiscal benefit that you are passing through the P&Ls. Should we expect an additional BRL1.2 billion in additional dividend related to that or since you pay almost all your net income, so I just wonder if we probably are going to see the same effects in dividend payments?

Hi there, this is Alberto Horcajo, we have, as you just pointed out, a practice of distributing 95% of our net income. Too early to tell what we will do. It's obvious that we have a strength in our (inaudible) position now, and we also have a very flexible financial position.

But I believe this is something that shareholders -- Board of Directors in the first place and then shareholders would have to decide at the right time.

Okay, thank you very much.

Susana Salaru, Itau.

I have one question on the cost side. We would like to know what are the main drivers for margin expansion going forward. Basically if you could elaborate a little bit about selling expenses how do you think about it, the more that you add postpaid subscribers the higher the commissions cost, so I was just wondering what kind of, what would be the alliance between cost that would compensate this increase in commission expense, that would be our first question.

And the second question, just to clarify on the CapEx, you guys are reiterating the CapEx guidance for this year despite (inaudible) of CapEx this quarter or not, or we could see a higher CapEx for the year? That's it. Thank you.

On the -- this is Alberto Horcajo. On selling expenses, you have seen the acceleration in net gains, that explains a part of it. Obviously as we are in a very competitive environment we also need to create the right incentives for customers to buy to higher value plans with us. It's an acceptable increase in the selling expense which we believe will bring our future revenues going forward. We also believe that we have the most expensive and best position dealer network here in Brazil, so we are very pleased with the performance.

And as you also noticed, the second quarter 2014, we have reduced with a slowdown the impact of selling expenses. And so as we fine-tune such expense in this current market we also believe that we have the right balance both of incentives and quality and breadth of our dealer network.

Okay. Thank you.

Hi Susana, about the CapEx, it's Paulo talking, basically the second quarter is seasonally better than the first quarter of the year, and we are recovering our debt to grow more in terms of CapEx in this year, but we maintain our guidance, 18% to 19% of the total net revenues in the year.

Okay. Thank you, Alberto. Thank you, Paulo.

Paul Marsch, Berenberg Bank.

I have two questions, firstly just on the customer consolidation of the mobile market in Brazil. I want to ask you if the dream of mobile market consolidation in Brazil is now effectively dead given developments with one of your peers recently or do you think the prospects for consolidation are still possible, are there alternative approaches that could keep that dream of mobile market consolidation alive in the neartime?

And then the second question relates to the spectrum auction. There has been some talk, I think, in the local press in recent days of certain operators lobbying the government to delay the spectrum auction. What is your position on that issue and do you think there is any realistic prospect that the spectrum auction might be delayed just to give some breathing space to our operators who may not be able to participate in the near term?

And maybe when you answer that question, I don't know if you are aware yet, but I haven't seen any clarification of the issue. If one operator does not participate, can we presume that the fourth block of spectrum can actually be acquired by the other three players participating in the auction? Thank you.

Three or four questions, but I think the two very important questions we prefer to don't make any comments about this. Basically in terms of consolidation I think it's a very important point but we prefer to not make any comments. (inaudible) auction, I think we need to see all the official rules. No, we don't have the official rules yet. I prefer to have these to make comment.

Do you have a sense of -- do you have a sense of what measures might be made available, that should be pretty imminent.

The next week probably, I think so.

Okay. Thank you.

Thank you.

Maria Tereza Azevedo, UBS.

My question would be on bad debt behavior. As you upgrade more prepaid subs to contract plans and as we face a more challenging macro backdrop how do you expect delinquency rates to behave going forward?

Thanks for the question, Maria. We have right now a delinquency ratio which is in line with what we have seen in the last few quarters, it stands at about 1.7% of revenue. We have made a charge for this quarter roughly BRL120 million for uncollectibles. Our view is that the industry is probably different from what we have seen in the larger economy. However, we also believe that Telefonica Vivo has a slightly better-than-average quality of customer base. So we have a strong credit policy and tools to guide us through the management of our customer base. And though it would be reasonable to expect the slight deterioration in line with the increase in interest rates and in line with the latest figures we have seen in -- both in employment and in other growth indicators we believe that we are rightly equipped to manage such situations and we are not anticipating or at least we are not seeing yet a meaningful deterioration in delinquency ratios.

Okay. Thank you. And my follow-up question would be on what is your subsidies strategy going forward and how important you think it is going to be to subsidize the smartphones for the emerging prepaid subscribers that will enter your contract base?

Maria, this is Paulo. Basically (inaudible) that we -- that are buying our postpaid with data plan in 4G. Our focus now is to promote our 4G and we are just deciding this kind of project. The other projects (inaudible).

Okay, perfect, thank you.

Marcelo Santos, JPMorgan Chase & Co.

My question is about the reduction in voice message revenues in fixed telephony, you mentioned that there was a 5.5 percentage point impact due to the (inaudible) tariff reduction part. How much of this impact was attributed to David Pears because I think this will allow us to project better the following quarters? That's it.

Thank you, Marcelo, for the question. The commercial activity was so impacted in the World Cup. But in terms of the fixed business we had a punctual commercial slowdown in the corporate taxes and also in the installation of new customers. In terms of (inaudible) of 30% in average happened in late February, had a full impact in the full quarter. And the third division that we have in the fixed basic plan, the 29.5% according to the (inaudible) dropped our revenue in BRL10 million in the month, by month now. And the true effect (inaudible) if you exclude this, our fixed revenue just climber 2.4%. Okay.

Okay. Thank you.

Carlos Legarreta, GBM.

Just very briefly I would like to know your thoughts on the competition environment, particularly in the pay TV market now that AT&T is aiming to acquire directly. And how could this affect the DTH market in Brazil? Thanks.

We don't see any variation in terms of the prices we had now in this market. I think in the World Cup there is a, World Cup competition, about HD. Basically all the players in the market promote HD solution, we are on that, and we achieved good numbers. I think we are in the similar of our competitors but I think it's possible to maintain this to outgrow the a price war in terms of the future. I think so, but I don't have now more information (inaudible) the same prices that you have in the market.

Okay. Thank you. And as a very brief follow-up. Regarding the CapEx items that you're reiterating have 18% to 19% of sales, this doesn't include the auction payments for the 700 megahertz, right?

All including.

That's great. Thank you.

Walter Piecyk, BTIG.

Two questions, one on ARPU. If you, I understand that ARPU is -- postpaid ARPU is getting helped by data growth in smartphones, but obviously you are -- in [Michelle's] question earlier you were talking about the reduction of prepaid customers. So if, let's say, an existing customer in Brazil was using multiple phones, multiple prepaids, are you seeing any pickup in voice usage as the prepaid base has come down for you and for other operators and maybe that's going to help to grow your ARPU.

In terms of more, if you compare our evolution, we are growing, the voice is growing, develop more. But all drops that we have now in postpaid and including prepaid (inaudible) with SMS and voice, and our focus is on data. And basically of this our growing data is so fast, but we can compare the number that we have in the last quarters about the (inaudible). Okay.

Okay. And then the second question is just back to the auction, I know you said the rules haven't come out but I guess more broadly if you have an opportunity to get more than 20 megahertz of spectrum, however that happens as far as the auction, is there -- do you have interest in being able to purchase more than just one of the blocks which is only 20 megahertz of spectrum?

I can't comment about this.

Okay. Thank you.

Thank you.

This concludes the question-and-answer session. 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 all interest. I think this quarter is showing once again how strong our competitive advantages are. We accelerated revenue despite (inaudible) in maintaining a more controlled evolution on cost, recovering a good trend in the (inaudible) EBITDA. Moreover, our (inaudible) show our commitment to sustain high quality (inaudible) in our services. I confirm that our focus will continue to be on growing mutual stabilities. Thanks again, I hope to see you again next quarter or any time soon. Thank you very much.

Thank you. This concludes today's Telefonica Brasil's 2014 results conference call. You may disconnect your lines at this time.