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Edited Transcript of NOS.EP earnings conference call or presentation 28-Apr-17 11:00am GMT

Thomson Reuters StreetEvents

Q1 2017 Nos SGPS SA Earnings Call

Lisbon May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Nos SGPS SA earnings conference call or presentation Friday, April 28, 2017 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* José Pedro Faria Pereira da Costa

NOS, S.G.P.S., S.A. - CFO, VP and Executive Director

* Maria João Hewitt Carrapato Moura Landau

NOS, S.G.P.S., S.A. - Head of the IR Department

* Miguel Nuno Santos Almeida

NOS, S.G.P.S., S.A. - CEO and Executive Director

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Conference Call Participants

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* Fernando Cordero Barreira

Grupo Santander, Research Division - Equity Analyst

* Henrik Herbst

Crédit Suisse AG, Research Division - Research Analyst

* Jonathan Dann

RBC Capital Markets, LLC, Research Division - Analyst

* Laura May Ashforth

Morgan Stanley, Research Division - Equity Analyst

* Nicholas Prys-Owen

Jefferies LLC, Research Division - Equity Analyst

* Nicolas Didio

Berenberg, Research Division - Analyst

* Paul Marsch

Berenberg, Research Division - Senior Analyst

* Pedro Pinto Oliveira

Banco Português de Investimento, S.A., Research Division - Analyst

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Presentation

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Maria João Hewitt Carrapato Moura Landau, NOS, S.G.P.S., S.A. - Head of the IR Department [1]

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(technical difficulty)

José da Costa, the CFO will go through a brief summary of the results. The presentation is already up on the website. You can access that. And we have the whole ExCom team in the room to take your questions after the presentation.

I'll hand it to over Miguel.

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Miguel Nuno Santos Almeida, NOS, S.G.P.S., S.A. - CEO and Executive Director [2]

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Okay. Thank you, Maria, and good morning, everyone. We would will start directly with Page 3 with the operational review. And in fact, we started 2017 in what would seem quite a positive way with another strong operational quarter with solid growth in all services, and particularly in Pay TV with 8,000 net adds. We were again the company with which grew more in all of our services, mainly fixed broadband with 25,000 net adds number; fixed voice with around 13,000 net adds; and finally, mobile with 31,000 net adds number. Year-on-year growth in terms of total RGUs was around 6.5% in the quarter.

Turning to the next slide and taking advantage of some recent statistics published by ANACOM. We have released some relevant analysis, we think, comparing our base of RGU growth with the overall market. Our pace of RGU growth has clearly exceeding the market as a whole and across all services. If we take RGUs combined, we have around 7.2% against 2.2% for the market as a whole with mobile services being the clearly outperformer for us with NOS growing 8.1% against 1.7% for the market. This, of course, has translated into significant growth in overall share of RGUs, which have grown from 28.6% at the end of 2015 to around 30.5% at the end of 2016 and is now pretty much in line with our market share of revenues, which, as you know, is around 30%.

On the next slide, we compare ourselves against the remaining operators in the Portuguese market in terms of net adds across core relevant services. And we can say that with the exception of Pay TV where NOS is a clear market leader and mostly extending the gap versus the second player. And therefore, we are growing at a slightly slower pace than the overall market growth. In all other services, NOS net adds has been exceeding the net adds of all other operators together. This is the case for fixed broadband, where NOS positive net adds exceed the aggregate net adds of all other operators and also in fixed voice and mobile, where NOS is post -- has been posting positive net adds against the negative net adds number for the aggregate of the remaining players.

On Slide 6 and in terms of convergence, we continue growing at a very significant pace, having reached almost 700,000 convergent unique customers reaching 47% penetration of the fixed voice, plus 4 percentage points in the last 4 quarters. This translates to almost 3.5 million RGUs sold under convergent bundles. Again, we achieve to increase the average number of RGUs per convergent household, which are 5.02 RGUs per customer.

On Slide 7 and turning to Pay TV. The recent new FTTH areas continued to support our continued growth of net Pay TV base. We were able to deliver again a solid 8,000 net adds number. The FTTH network expansion program was relatively reasonable this quarter with just 8,000 new homes passed in the quarter, having reached a total accumulated number since we started this expansion program of 520,000 homes passed. Average penetration is now around 23%, 1 percentage point up from previous quarter. We continue to see potential for this penetration to increase, mainly in the more recently deployed areas. Growth of the fixed access Pay TV base is helping to mitigate some pressure we are starting to feel in our DTH Pay TV base, although there is also some internal transfer of our own DTH customers to our fixed access customers as well.

On Slide 8 and a quick note on our total coverage, the recent FTTH expansion program has enabled NOS to lead the market in terms of NGN coverage with our 3.8 million. households. This is, in turn, supporting our high market share of high-speed residential customers, which, according to also recent ANACOM data, has reached 50% at the end of 2016.

Slide 9 in the broadband and fixed voice areas, we continued to post a very healthy growth. We have in this last quarter again around 25,000 net adds of fixed broadband customers and 13,000 net adds in terms of fixed voice, therefore continuing to support NOS as the fastest growing player in these areas with penetration over the Pay TV base of 76% and 86%, respectively.

On Slide 10, we continue to hold a high proportion of fixed access customers under the loyalty contracts. And percentage reached now has stabilized at around 74%. Churn continues to be at low historical levels with some negative impact in the quarter comparing to the last quarter of '16 coming from the price adjustment we did at the end of 2016.

On the mobile front on Slide 11. Mobile remains our fastest growing area with again a positive quarter with mobile net adds of around 50,000 in the quarter. Convergents continues to be the main driver of mobile growth. As you can see in the right side of the slide, there is a strong correlation between postpaid mobile net adds and convergents net adds with NOS having a solid 68,000 mobile postpaid net adds number in the last quarter. Prepaid net adds were negative in the quarter due to seasonality with some additional churn in prepaid when compared to last year due to the price increase as well.

On Slide 12, smartphone penetration as over total handsets continues to increase steadily. It's now 71% of the smartphone base. More than half of it is now 4G-enabled. And average usage of mobile data is now over 1.6 gigabits for smartphone users. In the case of 4G customers, this is already exceeding 2 gigabits. This, of course, represents a steady and strong pickup in terms of usage. And this represents an important driver for additional investments in the mobile network as planned and as communicated to the market recently.

On the B2B front, on Slide 13, we continue to grow consistently in this quarter. We have had 13,000 business RGU net adds, pretty much in line with last quarter. We have gained new accounts in strategic growth areas such as smart cities, ICT integrated service management, cloud and data center management with IT services being also a key growth lever at plus 20% year-on-year. Priority in the last quarter segment is now to build our share of recurrent revenues in existing accounts, and these are at plus 10% year-on-year.

On Slide 14, on the cinema exhibition front and following up on a very positive performance last year, we have again a robust quarter despite, in this case, being affected by the -- what we call the Easter effect with Easter taking place fully in the first quarter last year, whereas this year it has fallen fully in April. We have posted a GBO revenue decline of 3.3% and attendance decline of 4.3%, again affected by the tough comp we saw last year. These results are very much in line with the overall market, both in terms of attendance and GBO revenues, leading to stable market shares of around 60%.

One quick note with the preliminary results with what we already know from the Easter period in April and also with the help of some relevant franchise launches, we should be able to close April it appears with numbers above last year's numbers when we will recover the gap that we have in March.

On Slide 15. The Audiovisuals division performance also have a strong performance in the quarter with market share in cinema distribution well over 60% in the quarter, having distributed 7 out of the top 10 most popular movies and also benefiting from the solid performance of the cinema exhibition business, which together with positive trends on the premium movie channels has translated into revenue growth in the first quarter of 10.6%.

Now moving on to the financial results and to Slide 16. In this quarter, we continued to post solid revenue growth of close to 3%, 2.9% at the group level, taking advantage of the strong contribution of the core Telco unit as well as the Audiovisuals unit.

On the core Telco revenues front on Slide 17. Overall revenues on Telco -- on the Telco business, they were up this quarter by 2.9%, growing well above the overall market. Through our positive and solid revenue performance, we had positive contribution from all customer segments, compensating the MTR declines that continued to impact negatively Reg evolution, although as you know, they are positive at [EBITDA] level. If we were to exclude MTR declines, customer Telco revenues would have grown almost 1 percentage point at the 2.9.%, so around 3.8% in the quarter.

Turning to each one of the segments and starting with consumer on Slide 18. We have again a very positive performance from the consumer segment with 3.8% year-over-year growth or almost close to 5% in customer revenues on this consumer segment if we are to exclude MTR's impact. Within the consumer segment, the residential subsegment posted solid growth year-on-year with personal mobile being flat in the quarter. This is in line already with the previous quarter trends and which is a substantial improvement from what we had before.

Turning to the B2B segment on Slide 19. The business and wholesale segment also had a positive performance in the quarter with revenues coming up year-on-year by 1.1% or 1.5% if we are to exclude MTR impacts. To this performance again, we have a negative contribution from the wholesale segment. This is in line with the last couple of quarters. Although in this quarter, this negative performance was less negative, with just minus 1.5% year-on-year, with growing in revenues offsetting the continued decline of low-margin mass calling services. On the positive side, the corporate segment, the larger corporate segment posted growth of 2.1% year-on-year, continuing to benefit from increasing revenues of our existing customers. And also, the mass business segment continues to perform in quite a steady way, growing 3.3% in the quarter, also taking advantage of price adjustments made at the end of last year.

On Slide 20 and in terms of OpEx evolution in this quarter. Again, strong operational growth in the Telco division continues to drive the cost rates, which grew 2.1%, still below the 2.9% growth we had in revenues with most of the significant impact as it was the case in the previous 2 quarters coming from direct costs, coming from the impact of the new football contracts. Direct costs increase of almost EUR 5 million in the quarter. Almost -- out of this EUR 5 million, almost EUR 9 million came primarily from the new football contracts, namely the new sport distribution model, and then you're going to see (inaudible) sport contracts. The remaining direct costs have reduced and due to the decreasing MTRs and through more efficiencies in terms of capacity costs. Also other operating costs came up by 9.8% in the quarter due mostly to an increase in regulatory taxes and noncash provisions. Commercial costs came down significantly around 22% driven mostly by a decrease in cost of goods sold as a result of lower equipment sales as well as a result of lower commercial activity and marketing expense. About 70% of these commercial costs are now activity-driven. This is the case with handset sales and with sales commissions. Therefore, we should expect some relief in the coming quarters in these areas. On marketing spend, we should recover during the rest of the year. On wage and salaries, we have a decrease of 6.9% with around 1% decrease of recurrent salaries on the back of some headcount decrease, the rest being explained primarily by nonrecurrent impacts, which are related more to the way we account for variable compensation.

On Page 21, if we are to exclude the direct costs out of the cost base given this is mostly explained by the strong increase in programming costs and mainly on football content, we can see that the rest of the cost base, excluding direct costs, pretty much flat in the quarter versus last year. Strong cost discipline as well as the expected operational leverage.

On Slide 22 and following up on this cost discipline and operational leverage and despite the increase in direct costs, we managed to post EBITDA growth of 4.2% at the group level with 50 basis points of margin improvement. The Telco division performance explains fully this strong performance.

On Slide 23. Net income evolution during the first quarter was well supported by the positive performance activity level, having increased year-on-year to EUR 31.4 million in the quarter, up by 29% year-on-year. Below the EBITDA level, we have in this quarter a very strong and positive contribution from the share of JV results consolidated through equity method, which represented a positive EUR 5.3 million in the quarter compared to a negative EUR 6.4 million during first quarter of last year. This positive evolution, we have a strong positive contribution from ZAP, which was able to post positive net income this quarter, benefiting from a more stable local currency evolution but also from some substantial margin improvement on the back of price increases in local currency and also on some key content renegotiation efforts. Still we continue to have cash repatriation issues, which still remains a challenge therefore, we continue not having any visibility on receiving dividends from ZAP. Also, we have a positive contribution from Sport TV as expect -- as a result of the implementation of the new distribution model with Pay TV operators. And D&A has increased to EUR 103 million in the quarter on the back of some significant impairment charges following the network modernization process in place which will turn obsolete some of the equipment. Other expenses increased modestly to EUR 3.4 million in the quarter, again with some curtailment costs and some noncash write-off of deferred expenses related to judicial collections as we have in the last quarter, although in this quarter, in a less material way. Net funding costs has reduced around 4% in the quarter as a result of the lower cost of debt. Still, net financial expenses were up to EUR 6.6 million in the quarter due to a higher-than-normal positive effect we had last year related to interest collected on customer receivables. The income taxes number remains relatively flat despite the increase in earnings before tax, benefiting from tax incentives in this quarter.

Turning to Slide 24. Total CapEx in the quarter was around EUR 87 million, 8% down versus last year, driven mostly by a reduction in Telco CapEx of the same magnitude.

On Slide 25, we can look why Telco CapEx has come down. It came down due to a decrease in customer-related CapEx due to an overall lower level of commercial activity that's planned for 2017 and also by a lower level of technical Telco CapEx, which was only 10% of Telco revenues in this quarter, due to lower levels of network expansion. Anyway, we should expect this technical CapEx to recover during the remainder of the year to the levels of 12% to 13% we mentioned as long-term guidance for the company.

Slide 26. We have a strong progress in free cash flow generated in the quarter on the back of also a strong EBITDA-minus CapEx progress, which increased 32%, up to EUR 56.5 million also benefiting from the unwinding of the negative Sport TV working capital impact, which covered mostly the significant payments to suppliers we have in this quarter on the back of the high CapEx over the last quarter of '16 and the still challenging African receivables impact. Free cash flow after interest and taxes came up significantly to EUR 58 million, also due to the nonrecurrent cash inflow related to the sale of the FTTH network to Vodafone. This represented EUR 24 million in the quarter. As you recall, this is still a (inaudible) dating back to the merger approval in 2013.

Finally, on Slide 27 and looking at our capital structure. Net financial debt has decreased in the quarter to around EUR 1,050 million as a result of free cash flow generated in the quarter. This net financial debt number represents 1.9x the EBITDA level, slightly below the stated target of 2x. Still, since we will be paying dividends of around EUR 100 million this quarter, we should releverage to the referred target. Average cost of debt remained at similar low levels of previous couple of quarters, around 2.1% in this quarter. We will have some EUR 150 million refinancing needs towards July and September this year, therefore we are expecting some further slight reduction in average cost of debt towards the second half of this year. Also average maturities at this stage, 3 years. It also should be extended with the EUR 150 million refinancing planned for this year. And finally, in terms of liquidity, we continued to benefit from a strong liquidity position with cash and equivalents and unused credit facilities of around EUR 270 million.

And with this, we finish our presentations. And we are, at this stage, ready to take the questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Paul Marsch from Berenberg.

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Paul Marsch, Berenberg, Research Division - Senior Analyst [2]

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I have 2 questions on cost and then 1 question on CapEx. So you mentioned that sports rights costs were EUR 9 million higher in the quarter, but you clearly had some offsetting factors in direct costs. As well I think you mentioned termination rate costs reducing. So can we expect that kind of relationship to continue through Q2, Q3, Q4, where you've got a similar kind of uptick in sports costs compared to the prior year but a similar kind of offset from other factors compared to the prior year? Then on commercial costs, I just wondered if you could repeat. I missed what you said about the outlook for commercial costs. Obviously, you had lower handset sales, lower marketing expenses. So should we expect commercial activity to pick up again through the rest of the year, and particularly in the second half as we saw a surge in the second half last year? And then finally, just on CapEx. I wonder if you could confirm yet whether -- or whether the -- the thinking about doing another 200,000 households on the footprint, where's that thinking got to? Is there any conclusion on that yet?

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP and Executive Director [3]

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Okay. Thank you, Paul. I'll take the first couple of questions, and then Miguel will answer the CapEx question. So on direct costs, the additional football-related costs that we mentioned during this quarter, we are expecting still because we still have a tough comp in the second quarter. We didn't have football until the third quarter of last year, so we should expect still a significant number in the second quarter. And then on Q3 and Q4, we will still be comparing -- we will start comparing against quarters in which we already have the new revised contracts. So there is still some increase but clearly of much smaller magnitude than the one that we presented in this -- first couple of quarters. Related to the other components which we account and the direct costs basically, they have to do, overall, with a level of activity. In the case of cost of goods sold, it's related to handset sales which we report separately, so again expecting some slowdown in terms of commercial activity. We should expect some compensation in the other lines out of the lower level of commercial activities and some positive compensation out of the increase in terms of programming costs and particularly of football-related costs. Related to commercial costs, I'll try to repeat what I said. I mentioned that around 70% of what we account as commercial costs are basically activity-driven or sales-driven, so we should expect also some relief in this number. Whereas the remaining 30%, which is marketing spend, is of a more, we would say, flat nature in terms of guidance for this year. So we are not -- so the reduction we have in this quarter, we should recover in the remaining quarters.

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Miguel Nuno Santos Almeida, NOS, S.G.P.S., S.A. - CEO and Executive Director [4]

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On the FTTH expansion, we already decided to expand a few thousand households that we will be deploying probably in the last -- sorry, in the next couple of quarters. But the big number that you mentioned is still under analysis.

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Operator [5]

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Your next question comes from the line of Nicholas Prys-Owen from Jefferies.

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Nicholas Prys-Owen, Jefferies LLC, Research Division - Equity Analyst [6]

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First, I just wanted to follow up on the marketing expansion point. I was wondering if you could give some more color on why you pulled back on marketing in the quarter, if you could believe we can link any of this to the lower subscriber momentum we witnessed in the quarter. Secondly, looking at data from ANACOM in Q4, it appeared in the last few quarters your triple play product has started to become responsible for an increasing share of your net adds. I was wondering to what extent this trend repeated in Q1. And if so, what you think has been driving this trend. And just finally, during your presentation you mentioned that you're seeing degree of internal transfer from the DTH base to fixed. I was just wondering if you can elaborate on how much of the DTH decline was driven by the internal transfers in the quarter and whether this is stepped up compared to previous quarters.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP and Executive Director [7]

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Can you just repeat the second part of the question, which we didn't get, for me?

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Nicholas Prys-Owen, Jefferies LLC, Research Division - Equity Analyst [8]

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It was just on -- the second question was just on ANACOM data in Q4. It looks like they've -- it looks like they -- it looks like you've had more triple play within your net adds number. And I was just wondering if that had been repeated again in Q1. And if so, what you think has been driving this trend.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP and Executive Director [9]

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I'll start addressing the first question on marketing spend because nothing to do with the level of commercial activity relating to the spend on marketing, and what we have communicated at each time in terms of positioning the products to our customers. We have slightly lower activity than last year. But again, as we said, we should recover to the same number we had last year to the remaining quarters. So on this one, I think it was clear what we said in terms of guidance. On the previous question, again on the other components of commercial costs, we expect some reduction on the remaining 70% of commercial. Costs are more activity-driven. We should expect some further reduction. In terms of the impact of lower DTH, our own cannibalization of the DTH customer base, it's not a very significant number. So in this last quarter maybe it's explained about 50% of the decline we have due to DTH base which is reported in our own data. We are talking about maybe a couple of thousand customers migrating from DTH to fixed. So it's not a big thing, but still, it's an area which we believe at this stage is a little bit more under pressure with the development of fiber networks across the country.

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Nicholas Prys-Owen, Jefferies LLC, Research Division - Equity Analyst [10]

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Your answer on the triple play question?

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Maria João Hewitt Carrapato Moura Landau, NOS, S.G.P.S., S.A. - Head of the IR Department [11]

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Sorry. Can -- Nick, can you just clarify the question because I don't think we got what you were asking?

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Nicholas Prys-Owen, Jefferies LLC, Research Division - Equity Analyst [12]

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Yes, sure. So basically, if you look at the data from ANACOM in Q4, it appears that basically the last few quarters your triple play product has become responsible for an increasing share of your Pay TV net adds. I was just basically wondering if that repeated again in Q1. And if so, why you think triple play is being more resilient in terms of net adds in the last few quarters.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP and Executive Director [13]

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So why we sell Pay TV given that we could not sell Pay TV as a stand-alone product anymore...

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Miguel Nuno Santos Almeida, NOS, S.G.P.S., S.A. - CEO and Executive Director [14]

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(inaudible)

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP and Executive Director [15]

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I'd say a very high proportion of the Pay TV net adds are triple play net adds that's a standard offer. That's what -- actually what we sell, so it -- there wasn't any particular pickup in the last quarter because it's been like this for a long period. So we'll have to review this maybe offline with you to understand the correct -- what's the point, but there is usually a very strong proportion, not to say 100% but very high number of Pay TV variance, which is sold through triple play.

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Operator [16]

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Your next question comes from the line of Henrik Herbst from Crédit Suisse.

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Henrik Herbst, Crédit Suisse AG, Research Division - Research Analyst [17]

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Yes. Just one follow-up on the questions regarding your OpEx. Just wondering if your activity base costs are going up, I mean, does that mean we should expect higher net adds as well? Or is there anything else going on? And then if you can maybe give us a little bit of an update as well in terms of the synergies from the Zon Optimus merger? Are all those now realized? Or do you think you can still sort of get your office space down a little bit?

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Maria João Hewitt Carrapato Moura Landau, NOS, S.G.P.S., S.A. - Head of the IR Department [18]

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So, Henrik, I think -- again can you repeat the first question? There must be some problem on the communication. Could you repeat that for us?

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Henrik Herbst, Crédit Suisse AG, Research Division - Research Analyst [19]

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Sorry. The first question, No, I was just wondering if you're -- I've thought you said, at least, that your activity base, OpEx, just your commercial spend is going up. Does that mean that your net adds should improve a little bit as well?

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Miguel Nuno Santos Almeida, NOS, S.G.P.S., S.A. - CEO and Executive Director [20]

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No. I think we know there has been some confusion in the communication, but I said exactly the opposite that activity base costs, if we understand the question, referred to commercial costs. These should come down given the lower level of commercial activity, so probably you got it wrong. What we said earlier, cost is not correlated with net adds. But all other commercial costs, they are more closely correlated with activity, so they should come down with activity also coming down. So...

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Nicholas Prys-Owen, Jefferies LLC, Research Division - Equity Analyst [21]

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So one way or the other...

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP and Executive Director [22]

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And the direct costs we have interconnection MTRs, so MTRs also we have the regulatory effect, the cost is coming down, so this is also helping to drive down. We also have some capacity costs, which also have been coming down with some improvements. And then on commercial costs, cost of goods sold and commissions, they are also activity-driven. And so they should also come down following the reduction in terms of our commercial activity. In terms of synergies, we think that we've already being almost 4 years down the road since the merger was done. There is not much more to capture in terms of savings from the integration. This has nothing to mention about spacial efficiency improvements and additional cost reductions. So we are always focused on getting the operation as efficient as we can. As we have been sharing, we have a program in order to tackle these efficiency improvements which -- and also through innovation. So we will continue impacting some further cost reductions but not specifically related to the integration of the cable and mobile.

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Operator [23]

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Your next question comes from the line of Laura Ashforth from Morgan Stanley.

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Laura May Ashforth, Morgan Stanley, Research Division - Equity Analyst [24]

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I just wanted to ask again how would you say that price increases have been received by your customers this year? Did they seem better or worse than in previous years? And then also on that topic, your consumer ARPU, per customer grew 2.3% this quarter. It showed only a small improvement versus Q4 despite your price increases. Could you explain why that is? And also if possible, speak a bit more about the ARPU growth and how it breaks down between RGU up-sell and price increases.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP and Executive Director [25]

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On the price increase, obviously there was an impact absorbed, some washing and from churn. As you could see from the churn numbers of the quarter, it is not that material. So all in all, we would say that price increase is not that different from the impact we have in the past with price increase.

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Miguel Nuno Santos Almeida, NOS, S.G.P.S., S.A. - CEO and Executive Director [26]

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So regarding the ARPU increase on a year-on-year basis, I'll try to define the numbers to make sure that we compare relevant numbers to each other. So the number that we posted is 2.3%, and that's basically for the complete revenue of the consumer segment divided by the number of fixed customers. As Jose Pedro mentioned, we have -- we're continuing to have an MTR impact on complete revenue -- on total revenue, although it's not -- it doesn't impact customer revenue. So on a customer revenue level, we are 2.5% year-on-year. And then an additional effect, premium revenue has been stable to slightly negative in the first quarter. So it's not an issue, a contained issue on itself. But given that there was no decrease effect on that part of the revenue, the comparable revenue was up to 3% on a year-on-year basis. And if you take out traffic revenue and the DoD revenues, this comparable value's up to 3.9%. So when we just look at monthly fees, so the contracted revenue from customers with us, that was a component that was mainly affected by the price increases, were up to 3.9% year-on-year. I don't know if that was clear.

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Laura May Ashforth, Morgan Stanley, Research Division - Equity Analyst [27]

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No, that was very clear.

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Operator [28]

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Your next question comes from the line of Pedro Oliveira from BPI.

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Pedro Pinto Oliveira, Banco Português de Investimento, S.A., Research Division - Analyst [29]

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First, ANACOM has opened a regulatory program (inaudible). Can you please comment what is in question here then what could be the development here if there are any (inaudible). And my second question is related to some comments on (inaudible) changing strength and which would most likely lead to strong commercial effects from their side. And I was wondering if still have some implication on your commercial cost business.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP and Executive Director [30]

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Thank you. As you probably know this, there was a -- not deliberation but deliberation for consultation, which we obviously have since contested, it's -- the view that ANACOM expresses, we don't share that view and -- as you saw and you can understand. And we tried to demonstrate to ANACOM that the view was more adequate. And -- but at this stage, we don't have any final decision from ANACOM. So it's still early to say what the impact could be or what the measures should be. It's -- we have to wait and see. With concerns of our competitor and the events, we don't have any information. And usually, we don't like to comment on with this, let alone the competitors. So I will prefer not to comment on that one.

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Operator [31]

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Your next question comes from the line of Fernando Cordero from Banco Santander.

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Fernando Cordero Barreira, Grupo Santander, Research Division - Equity Analyst [32]

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The first one is related with the fixed subscriber performance, and I would like to know in order to understand what's going to be the future performance in the coming quarters and also next year. And what is the breakdown of general adds between new areas and your former cable areas? If I'm not wrong, given that penetration has improved by 1 percentage point in new areas in the quarter it seems that you have added 5,000 new customers, so 30,000 net adds in your former cable areas. And is that improving these former quarters? Have you seen a trend (inaudible) you're having already also and higher market share? And the second question is related with the added costs and I understand we should expect, given the upgrade -- not the upgrade, sorry, the renewal of your WiFi solution to your customers I understand we should expect higher traffic to be balanced by your WiFi sports (inaudible), trying to offload traffic from your former network. And I just would like to understand if there is going to have any kind of impact in added costs going forward.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP and Executive Director [33]

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I'll start with the second question, Fernando. On direct costs, I think we've already touched this point a couple times in the call. We are not expecting any significant impact from what you just referred. (inaudible) and any impact will come from programming costs, in this case from football-related content which is significant but is not different from what we said in previous calls. So it's something that will be more pronounced in the first half and then still some increase but less material in the second half of this year. And then remaining components within direct costs, ones that have to do with traffic, they are also driven by MTR requirements and capacity efficiency improvements should continue (inaudible) conversation of the increase in programming costs.

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Miguel Nuno Santos Almeida, NOS, S.G.P.S., S.A. - CEO and Executive Director [34]

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So regarding the slate of net adds in the quarter between new adds and the traditional areas, so as we've mentioned in the past, we have stabilized and even grown slightly our former areas. Whilst most of the growth as historically stated, have come from new areas. But there is no decline on the traditional cable areas.

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Fernando Cordero Barreira, Grupo Santander, Research Division - Equity Analyst [35]

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Right. Just as a follow-up on the WiFi story. We understand this effort you have made on the -- your solution on declines. (inaudible) also on the potential delay of CapEx on expanding your mobile network as you are now potentially uploading more traffic from your customers through WiFi.

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Miguel Nuno Santos Almeida, NOS, S.G.P.S., S.A. - CEO and Executive Director [36]

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We have been doing that for some time already. It's not something that will really delay our mobile investments. As we have been mentioning, we are going to upgrade our network to a single-run network. And that is something we will do over the next 18 to 24 months. And it's regardless of the WiFi upload which exists, but it already exists. We don't have any major disruption on that front.

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Operator [37]

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Your next question comes from the line of Jonathan Dann from RBC.

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Jonathan Dann, RBC Capital Markets, LLC, Research Division - Analyst [38]

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Historically, you've given some color on what percentage of your base are on a discount versus the headline tariff. If you could just help us understand I guess the average customer yield if it might improve with less discounting going forward?

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Maria João Hewitt Carrapato Moura Landau, NOS, S.G.P.S., S.A. - Head of the IR Department [39]

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Jonathan, I'm not quite sure what you're referring to (inaudible)

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Jonathan Dann, RBC Capital Markets, LLC, Research Division - Analyst [40]

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Sorry. So I think about 2 years ago, you gave a data point that 70% of the customers had some form of retention discount.

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Miguel Nuno Santos Almeida, NOS, S.G.P.S., S.A. - CEO and Executive Director [41]

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Well, I'm not sure that we are giving that exact number, that description because I'm not sure that the people in this room really know the answer, and I'm not in the position to give you that number. If you're talking about the percentage of clients with loyalty contracts, at this stage I think a number is it's 74% of our customer base is under a loyalty contract. That doesn't translate to discounts. Maybe sometimes, most of the times probably not. We don't really have that number.

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Jonathan Dann, RBC Capital Markets, LLC, Research Division - Analyst [42]

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Okay. Can I ask a follow-on? Roaming in the summer. A lot of the Northern wireless operators are sort of worried that there will be a revenue transfer, and I guess I've noticed that you guys are in the South. And I guess if it's going to be North and South (inaudible) someone has to collect a lot of volume. I mean, are you expecting -- have you signed sort of discounted roaming arrangements or...

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Miguel Nuno Santos Almeida, NOS, S.G.P.S., S.A. - CEO and Executive Director [43]

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We expect the volume, the traffic from roaming to increase. It has been the case in the last 2 months with the new regulation. Probably it will pick up. But in terms of an absolute number in terms of units that is not a number that is very significant. Yes we expect, not only the volume but probably also the revenues since -- even though (inaudible) are lower, the volume probably will offset that, but the net effect shouldn't be that material.

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Operator [44]

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Your next question comes from the line of Nicolas Didio from Berenberg.

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Nicolas Didio, Berenberg, Research Division - Analyst [45]

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Just one question. The (inaudible) undone after the (inaudible) results. You mentioned that the variable compensation could be changed, I mean the incentive could be changed with the AGM with some proportion of the management incentive related to total shareholder deferment. So can you come back on that, please? If there has been any change to the incentive to the management.

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Miguel Nuno Santos Almeida, NOS, S.G.P.S., S.A. - CEO and Executive Director [46]

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Yes. Well, it's not something that is undo the resolution or the decision of the AGM. It's the board that decides. We -- yes, we expect our KPIs to be changed but not the way you've mentioned. We are adjusting and fine-tuning our KPIs but that could be areas probably not within the set of KPIs. I don't think I ever mentioned that, that will be a possibility.

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Operator [47]

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We have no further questions on the phone line. Please continue.

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Maria João Hewitt Carrapato Moura Landau, NOS, S.G.P.S., S.A. - Head of the IR Department [48]

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So thanks very much for being here. And as usual, we're available to take your questions afterwards and look forward to speaking with you soon. Bye.

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Operator [49]

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That does conclude our conference for today. Thank you for participating. You may now disconnect.