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Edited Transcript of VIVT4.SA earnings conference call or presentation 22-Feb-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Telefonica Brasil SA Earnings Call

Sao Paulo Feb 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Telefonica Brasil SA earnings conference call or presentation Wednesday, February 22, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eduardo Navarro

Telefonica Brasil SA - CEO

* David Melcon

Telefonica Brasil SA - CFO

* Christian Gebara

Telefonica Brasil SA - CRO

* Luis Plaster

Telefonica Brasil SA - IR Director

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Conference Call Participants

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* Daniel Federle

Credit Suisse - Analyst

* Andre Baggio

JPMorgan - Analyst

* Susana Salaru

Banco Itau - Analyst

* Mauricio Fernandes

Bank of America Merrill Lynch - Analyst

* Fred Mendes

Bradesco - Analyst

* Richard Dineen

UBS - Analyst

* Mathieu Robilliard

Barclays - Analyst

* Julio Arciniegas

RBC - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefonica Brasil 2016 and Fourth Quarter of 2016 Earnings Conference Call.

Today with us representing the management of Telefonica Brasil, we have Mr. Eduardo Navarro, CEO; Mr. David Melcon, CFO and Investor Relations Officer; Mr. Christian Gebara, CRO and Mr. Luis Plaster, IR Director.

We also have a simultaneous webcast with slide presentation on the Internet that can be accessed at this site, www.telefonica.com.br/ir and Engagex platform. 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 will turn the conference over to Mr. Luis Plaster, Investor Relations Director of Telefonica Brasil. Mr. Plaster, you may begin your conference.

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Luis Plaster, Telefonica Brasil SA - IR Director [2]

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Thank you. Hello, everybody, thank you for joining us in this conference call for the fourth quarter and year 2016 results of Telefonica Brasil. Our call will be divided in three parts. In the first part, our CEO, Eduardo Navarro, will give you an overall view of our operating financial results for the quarter and for the year.

In the second part, Christian Gebara, our CRO will go over our commercial strategy and CapEx evolution, and our CFO David Melcon will discuss our financial results and synergies. Finally, Eduardo will close the presentation with our strategic vision and main perspectives for 2017. And then finally, we will move to Q&A.

Now I pass the word to Eduardo.

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Eduardo Navarro, Telefonica Brasil SA - CEO [3]

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Thank you, Plaster. Hello, everybody. Before presenting our results for the fourth quarter 2016, I would like to emphasize how excited I am about the prospects of Telefonica Brasil. As a result of the [superior[ execution of our [strategy] in previous quarters and years, I am convinced that the Company has built the assets, the brand, the financial strengths that the team required to consolidate its leadership in the Brazilian telecommunication industry, offering the best connectivity to people, business and in the future of things that's driving the digital transformation of the country.

I would like to reiterate my commitment to continue creating shareholder value through solid and consistent financial results, executing with discipline our data-centric strategy, focused on enabling our customers' digital lives with the best connectivity, the best services and the best customer experience.

Now regarding the fourth quarter and the full-year 2016 results, I'm very pleased to report another quarter of solid performance with strong results across the board. As you can see, slide four of our presentation, we would like to highlight four themes.

First, we continue to deliver superior and consistent revenue growth. We were the only Brazilian operator that was able to consistently grow revenues in a very solid year. Total service revenues grew 1.8% year-on-year in the fourth quarter and 1.7% in the full year. (inaudible) we estimate that the rest of the market reduced revenues by 2.5% in the year. For Telefonica Brasil, growth was mainly driven by the mobile business where services grew 3.9% in the quarter and 3% in the year. Growth in the mobile business was fueled by the consumer segment, which grew 4% in the year.

Second, we consolidated our leadership in key markets. On the mobile business for the first time in 10 years, we reached a total market share of [30%], [quite] maintained our solid lead in the postpaid segment. (inaudible) finished the year with a 42% market share. In the fixed business, we reached 4.1 connected homes with FTTH. Specifically, we grew our fiber consumer base by 25%, reaching more than 700,000 connected homes. We are now the largest FTTH operator in Latin America and we will continue to expand our fiber network as it is a future-proof fixed-asset technology with improving economics.

Third, we leverage synergies and efficiencies to improve our margins. Our EBITDA grew 7.4% on the year in fourth quarter and 7.3% in the full year. Actually, our EBITDA performed consistently during the year growing between 7% and 8% in each quarter. Key to these solid result were initiatives to cutting costs and to capital synergies. Despite inflation, we have reduced recurring operating costs by 1.9% in the full year.

And fourth, we substantially increased cash flow generation. Our operational cash flow, [measured as] EBITDA minus CapEx grew by a robust 28.2% in the year, reaching BRL5.7 billion.

In slide 5, you can see some details about our solid results.

Now I pass it to Christian Gebara who will give you more details about our commercial strategy and results. Christian, please?

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Christian Gebara, Telefonica Brasil SA - CRO [4]

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Thank you, Eduardo. Good morning, everyone. Before going through the slides, I'd like to highlight our key commercial initiatives and results for the fourth quarter. This was another very positive quarter for Vivo, reinforcing our leadership in key segments.

We continue with our more for more pricing strategy for mobile, increasing data allowances, benefits and prices for all hybrid and postpaid plans. We maintained focus on innovation for family plans with smart data allocation. We increased transparency in our fixed business products, removing all timeframe discounts in a more simple and direct offer. We continued our focus on ultra-broadband, more specifically on very high speeds through FTTH. And digital continues to be our priority as we reached $14 million from Meu Vivo, our (inaudible) app and significantly increased e-billing penetration.

Moving on to slide 5 of the presentation, you can get the perspective about how we were able to increase our non-voice revenues, which had a significant growth of 15.2% year-over-year and already represents 59.1% of our total revenues, 7 percentage points more than a year ago. On the right hand side of the slide, you can see that this increase came specifically from () service like mobile data and digital service with 23.7%, ultra-broadband with 17.5% and Pay-TV with 4.6%. This quarter, we had a 6.7% increase in fixed and 15.7% decrease in mobile voice revenues, mostly affected by regulation, economic effects and service immaturity. To minimize this effect, Vivo has been consistently developing commercial initiatives such as bundling and [make great use of] to flat fee on fixed voice plan.

Getting now in details of our main business. On slide 6, we present the evolution of our mobile revenues, which increased 3.9% year-over-year or 6.2% excluding regulatory effect, mostly driven by data and digital service that went up by 23.7%. This is a result of our effort on reducing our dependence on voice by launching new services, offering more attractive bundles and increasing data allowance on mobile plans. I would also like to highlight that Internet revenues had an impressive growth of 40.7% year-over-year.

On the right hand side of the slide, you can see the postpaid revenues grew 8%, representing already 72% of our total mobile service revenues. On prepaid, although revenues decreased 4% year-over-year, part of this decline is due to our successful strategy of migrating prepaid users to hybrid plans. In addition, there is a consistent trend of improvement as a result of our efforts on stimulating clients to top up. Finally, our strategy to encourage the use of digital channels had very positive results. In 2016, Meu Vivo app reached an average of 3 million unique users per month, while the app reached over 14 million downloads as already mentioned before.

The left hand side of slide 7 shows that our mobile customer base increased 1% with a clear focus on profitability. It's important to highlight that we were able to grow while the market declined 5% in 2016, which granted, as said before by Eduardo, 30.2% mobile market share. In postpaid, we increased 7% representing now 45% of our customer base, reflecting a good execution of our strategy to focus on premium segments sustaining our solid leadership.

On the right hand side of the slide, you can see that we increased net adds by 39% year-over-year. I would also like to highlight our performance and portability positive figures [every month] for 2016. Despite a challenging economic scenario and higher competitive pressure on the mobile segment, we were able to maintain a healthy and declining churn rate at 1.6% in postpaid, a direct consequence of our superior data-centric value proposition, best network, high quality channel experience and inspirational brands.

On prepaid, we continue to encourage data usage. As a result, prepaid plans with data included increased 44% in the last year. This higher penetration of bundled offers and increased days of additional data packages and value-added services drove our prepaid outgoing ARPU up by 15.3% in the last 12 months.

On slide 8 you can see the execution of our innovative commercial strategy is paying off, we have brought innovation in the use of data plans with Planos Vivo Familia family plans, enabling customers to distribute data allowance per dependent subscriber directly (inaudible) app.

On prepaid, Vivo Turbo, our weekly and monthly bundled offers encourage customers to top up regularly. In addition, we continue to stimulate customers to acquire additional packages to remain connected. As a consequence, ARPU went up reaching BRL28.6, 10.8% more than one year ago. We estimate that ARPU is 74% higher than other competitors' average. The breakdown of ARPU also shows that data already represent 62% compared to 52% of last year.

Moving now to slide 9, we present our performance on the fixed business. We have a clear focus on premium services, which grew at relevant rates, minimizing the impact of voice decline. This quarter we had a slight increase in service revenues of 1.2% year-over-year in the fourth quarter, but when excluded the regulatory effects, our top line would be 1.4% higher than one year ago. In ultra-broadband FTTx, we reported 17.5% revenue growth year-over-year, while our Pay-TV revenues grew 4.6%, 15.2% considering only IPTV.

Finally B2B, despite the macroeconomic challenges we have been facing the past months, we were able to increase revenues in key segments like data and IT with 3.1% year-over-year. We have implemented a B2B plan including fiber network expansion outside Sao Paulo, portfolio improvements, process and system simplifications and quality and customer experience enhancements. With all of this, we've expected economic recovery, we expect to improve our performance within the segment.

On slide 10, you can see that despite the decrease of 2% in our fixed customer base, we have improved our product mix, increasing the relevance of premium products. The right hand side of the slide show that our FTTC customer base grew 6% in the last 12 months while FTTH increased an impressive 25%. This growth was sustained by profitability since our broadband ARPU increased 7% or 9% if you consider only ultra-broadband.

On Pay-TV, we've followed a more selective approach for new customers in order to assure the best return on investment, especially in the standalone DTH. We managed to increase 48% our IPTV customer base, focusing customer totalization to drive loyalty. In the last 12 months, our total Pay-TV ARPU grew 9%.

Moving now to slide 11, we present our CapEx execution in fourth quarter and full-year of 2016, closing in BRL8 billion in total as planned, representing 18.8% of our total revenues and decreasing 1 percentage point year-over-year. The execution of this smart and effective allocation of CapEx in a better macroeconomic environment, especially the devaluation of the exchange rate helped us to keep our investments in line with guidance, while keeping execution as strictly as planned and maintaining our recognized excellent network experience.

During the entire year of 2016, the largest part of our CapEx was allocated to growth initiatives from the business units to support revenue increase with a strong acceleration in the last month. Allowance of 290 new cities with 4G coverage in the fourth quarter, reaching 566 cities in total, and increasing our population coverage by almost 10 percentage points, representing now 60%, while still leading population 3G coverage with 90%.

Continued expansion of our fiber network coverage, adding new ultra-broadband facilities with focus on existing cities and overall capacity increase and optimization of our optical and IP backbone. On the right hand side of the slide, there shows some examples of our continuous focus on (inaudible) using big data to drive investments to the cities [inside] of the high concentration of high value customers, both the mobile and fixed, being more selective on Pay-TV customer acquisition, thus increasing return on investment, focusing on 4G coverage and capacity expansion, prioritizing our customer experience, enhanced FTTH network design (inaudible) and processes and improving logistic and refurbishing processes allowing 30% saving on CPE.

For the future, our primary focus will be on the fast expansion of our high-speed data footprint. In 2017, we've to reach 90% of the urban population in 4G and deploy FTTH to 19 new cities nationwide. Despite aggressive plans in network expansion, we are confident that our efficiency efforts and stability of macroeconomic environment, movement in downward trend of CapEx over sales for the next years.

Now, I turn the call to David Melcon.

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David Melcon, Telefonica Brasil SA - CFO [5]

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Thank you, Christian and good morning, everyone. Moving on to slide 12, once again during this year, we have been able to reduce the current operating cost by almost 2%, despite inflation, we've reached 6.3% in 2016. This is the fourth consecutive quarter with cost reduction, demonstrating the successful execution of synergies and efficiency initiatives. Moreover, management has consistently executed our value driven strategy based on commercial rationality, simplification and enhanced use of digital channels that has benefited our commercial and customer (inaudible) cost. As a result, we reported a very consistent growth of 7.1% in our recurring EBITDA on a year-over-year basis and improved strongly our recurrent EBITDA margin to the highest level during the year, 33.8%, decreasing in almost 2 percentage points compared to the previous year.

On slide 13, I will elaborate in more detail on our cost evolution by content. Service rendered and G&A cost decreased BRL47 million year-over-year, benefited mainly by lower interconnection cost and synergies related to (inaudible) TV content contract more than compensating for higher cost related to network deployment. In addition, G&A expenses were negatively impacted by cost in (inaudible) to generate synergies under our [transformation] initiatives as well as penalties to enable us to terminate rental contracts as part of our real estate optimization.

Commercial expenses decreased BRL45 million year-over-year, influenced by the result of our [rational] commercial strategy, sales force optimization and synergies in advertising due to the brand unification done this year. In addition, customer cost also declined due to improved quality and higher allocation of (inaudible) such as our application Meu Vivo we launched in April also in 2016. Cost of goods sold reduced BRL139 million as a consequence of the selective approach in handset, focusing strictly on higher value customers.

During the fourth quarter of 2016, bad debt represents 3.2% of net operating revenue, keeping the same level as the third quarter this year. We continue to strengthen our credit controls while protecting our top line growth. The current personnel cost evolution, which excludes the provision for the organizational changes in the quarter grew 3.2%, which is still below the inflation in the period, despite the annual salary increase and the in-sourcing of fixed services and call center employees during the year, partially offset by the restructuring programs executed during the last two years.

Now moving to slide 14, net income for 2016 reached BRL4.1 billion, almost 23% higher than the amount of the same period in 2015, mainly driven by the increased EBITDA on tower sale in the period. Even when excluding the net positive impact of the one-time events, the net income will have grown 11% reflecting our solid financial performance and capture of synergies.

Now moving to slide 15, we closed the year with an impressive cash flow generation through improvement in our lines, thanks to a solid EBITDA evolution, the result of the smart CapEx allocation combined with a strong financial discipline. In 2016, free cash flow achieved BRL5 billion, 56% higher than previous year. As a result, we continue to sustain a very solid financial profile. As of December 2016, the net debt stood at BRL4 billion, down 11% year-over-year and representing just 0.3 times EBITDA. To improve further our debt profile, we have just successfully issued a BRL2 billion (inaudible) debenture program.

Turning to slide 16, once again we present an update on our synergy evolution, so the usual (inaudible) you've seen in the last quarter. I believe it's important to highlight the strong execution and internal commitment of the Company to maximize synergies captured in every front. The Company has already secured at the end of 2016 an NPV of BRL16 million, more than guaranteeing the best case NPV of synergies calculating during the (inaudible) and already securing 71% of the total NPV included in our best case scenario of BRL22 billion. The increase of guarantee NPV compared to the previous quarter was concentrated in OpEx, mainly related to the saving in TV content cost leveraging unusually [high] contracts with our suppliers.

In addition, we continue to move forward on CapEx synergies, mainly through network integration and on the revenue front, gradually increasing cross-selling activities besides the natural buildup of the customer base as the economy improves.

Moving now to slide 17, our self-execution of synergy milestones allowed us to generate solid results in 2016, contributing strongly to our cash flow generation. Incremental revenues and OpEx savings from synergy initiatives, mainly cross-selling to fixed B2C customers under our channelization of commercial expenses from channel integration contributed BRL948 million for the EBITDA in the year. Including CapEx needed for generation of synergy, especially IT integration (inaudible) cash flow generation reached almost BRL1 billion in the year.

In the cash flow generated from CapEx and OpEx avoidance reached BRL465 million, driven mainly by avoided investment in [backbone routes] using GVT infrastructure contributing to a total of BRL1.4 billion in 2016. When analyzing this number for quarter, we can observe that in the fourth quarter contribution to the cash flow has been higher than in previous quarter. The increased synergies together with our efficiency and optimization initiatives, we have been adopting [support our vision] of a positive trend in capital for the year.

Thank you. And now I pass it on to Eduardo to develop on our strategy vision and perspectives for 2017.

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Eduardo Navarro, Telefonica Brasil SA - CEO [6]

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Thank you, David. Before going to the Q&A, I would like to comment a bit on our strategy going forward and our expectations for this year.

On slide 18, you can see a visual representation of our strategy for the mid-term. We aspire to be the best alternative for data connectivity in Brazil for consumers and companies alike. To reach this vision, we will work to totalize our customers with a complete, profitable and quality offer, leveraging four pillars.

First, we will provide the best Internet in and out-of-home, in mobile 3G (inaudible) 4G now and 5G in the future and insisting that we have a growing fiber network, becoming the preferred hub for all digital services for our customers.

Second, we will digitalize the business in the front and the back end and we will increasingly use Big Data to improve decision making.

Third, we will (inaudible) efficiency, continue to capture synergies we see in our operations and simplifying process to reduce waste with a zero [wastage] approach.

And fourth, we will deliver the best customer experience in our [four] channels, be it our innovative and (inaudible) stores, our segmented customer care and field operations teams, or our increasingly friendly and powerful digital channels. (inaudible) for all of this, will continue to strengthen the Vivo brand. In order to ensure it remains the most available and aspirational brand in the telecom market in Brazil.

Specifically for 2017, you can see in the slide 19 that we expected to continue deliver double digit revenue growth in mobile data and digital services and in fixed ultra-broadband. Consistent improvement in EBITDA margins, solid investments around BRL8 billion per year in the next three years, focused in spreading coverage and capacity in our 4G network, as well as expanding our FTTH network.

And finally, payment of dividends and interest on capital of BRL4.1 billion, which is 24% higher than the last year. We are very confident our plans and strategy will allow us to continue to deliver superior shareholder value. Of course, our results will be impacted by the recovery of the Brazilian economy. We are optimistic of its future prospects, but do not have a (inaudible) visibility of the speed of recovery and how it may affect the telecom sector.

Now we can start the Q&A session.

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Questions and Answers

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Operator [1]

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Thank you. (Operator Instructions)

Daniel Federle, Credit Suisse.

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Daniel Federle, Credit Suisse - Analyst [2]

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Hello, good morning, everyone. My first question is, do you see a tougher competition in the high-end postpaid segment versus the low-end control plans and how to avoid losing revenues among the high-end clients?

And my second question regarding interconnections, revenues in the mobile segment, we saw that revenues -- MTR revenues came in slightly higher than expected in the fourth quarter. So I'd like to understand if the fourth quarter is the recurring level or the third quarter is more like the recurring level of MTR revenues going forward? Thank you.

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Christian Gebara, Telefonica Brasil SA - CRO [3]

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So hi Daniel, this is Christian. For the first question, we had a very good performance in general in postpaid for the last quarter and for the whole year. So as I showed before our net adds are very positive and our churn is very controlled and portability, we were positive among the key players along the year. So we are very comfortable with our proposition for high-value customers. As I also said, we launched new functionalities and like family plans, data sharing controlled by [MTR] and I think our position remains strong. So I do see that in postpaid, Vivo for the last year had a very strong performance.

I understand that in the hybrid plan as you mentioned, I think that is maybe also working in migrating their prepaid customer base to control to hybrid as we did, we have been doing for the last years. So maybe that is the impact for an improvement also in the net adds for them in postpaid.

In MTR, there is always the impact of the offer of our competitors that are giving much more minutes off-net, so that maybe impacting our results in this line.

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David Melcon, Telefonica Brasil SA - CFO [4]

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Hi Daniel, just to elaborate on the second one, I mean the higher revenue coming from the commercial (inaudible) has to do with incoming traffic from -- also from our all competitors.

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Operator [5]

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Andre Baggio, JPMorgan.

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Andre Baggio, JPMorgan - Analyst [6]

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Hi. Yes, I wanted to know a little bit more about your bundle projects. Let's say we're seeing not much additions in the Pay-TV and fixed line broadband; so I want to know how do you expect these markets to develop?

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Eduardo Navarro, Telefonica Brasil SA - CEO [7]

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All right, Andre, in the Pay-TV you're asking?

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Andre Baggio, JPMorgan - Analyst [8]

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Yes, Pay TV and also fixed line broadband.

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Eduardo Navarro, Telefonica Brasil SA - CEO [9]

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Fixed line broadband, okay. So broadband and Pay-TV, okay. So in Pay-TV, we are very focused in totalized customers with 3P offer, so we step back in the standalone DTH as we did in the past mainly in Sao Paulo area. So now we are very focused, where we have fiber in Sao Paulo to sell IPTV. So that's why you see incremental in revenues and also in customer base. And outside Sao Paulo, we are being more selective, we have DTH, always selling through bundled with broadband and more selective because of the economic situation of the country, not being so obsessed about volume, but in loyalty and reducing churn of broadband customers.

In the ultra-broadband or in broadband fixed as you also asked, we've also been driving our growth in premium customers or in FTTx customers. We've been expanding our network and we have plans to expand even more for 2017. And again, also being selective, okay, we preferred to use our CapEx to customers with better credit risk and better ARPU. In other words, selling more speed rather than being also focused in volume and with higher credit for the customer. So I think we've been doing well and again we've been expanding and growing our customer base in ultra-broadband.

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Andre Baggio, JPMorgan - Analyst [10]

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And if I may ask a second question, what gives you the confidence that you can stop the growth in CapEx, like you put up a CapEx plan of three-year, which is pretty much flattish versus what we saw in 2016. But in this industry, we have seen CapEx going up over time as in nominal terms, in real terms, as a percentage of revenue. So what make you confident you can make this decline continues?

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Eduardo Navarro, Telefonica Brasil SA - CEO [11]

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I think Andre maybe then, we can elaborate a little bit more. I think the exchange rate is benefiting us considerably, okay. If you consider what we talked one year ago when the exchange rate obviously run out and I think also we are getting scale, mainly in FTTH deployment and 4G and also the unit prices going down. So we are confident that we can accomplish with this. And again as also said about being more selective in the CapEx that we deploy for CPEs, we've been able to have savings there. And also as I said, DTH standalone no more, much more focusing in higher speeds and our higher returns and also as I mentioned briefly, we are doing a lot of refurbishing of our CPEs that's bringing us important savings of around 30% that we expect to fully spend in CPEs. We were able to save we've refurbished off the existent installed base.

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Christian Gebara, Telefonica Brasil SA - CRO [12]

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And Andre, in addition, just also to remind that the opportunity we have around the synergies in CapEx now that it's benefiting us leveraging the infrastructure from GVT under the cost for future deployment (inaudible) Brazil, particularly in Sao Paulo.

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Operator [13]

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Susana Salaru, Itau.

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Susana Salaru, Banco Itau - Analyst [14]

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Hi, good morning, everyone thank you for taking our questions. The first question is on the digitalization process. Could you elaborate a bit more on which revenues and cost line should benefit from it? And also if you could give us a ballpark of what kind of margin expansion digitalization process could generate in the coming years? That would be our first question.

The second question, we would like to discuss the synergies, we saw an interesting progress on the OpEx and CapEx saving, but revenues still seems a little bit behind of the (inaudible) other lines progress. So I just was wondering if you could elaborate what is happening on revenue synergies and what should we expect going forward? Thank you.

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Eduardo Navarro, Telefonica Brasil SA - CEO [15]

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We had a problem here with the connection, we could not listen to your first question.

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Susana Salaru, Banco Itau - Analyst [16]

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Okay, I'll repeat. It's regarding digitalization process. If you could elaborate a bit more on which revenues and cost line should benefit from it and also if you could give us a ballpark of what kind of margin expansion should we expect going forward arising from the digitalization process? Thank you.

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Eduardo Navarro, Telefonica Brasil SA - CEO [17]

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Okay. Susana, this is Eduardo, thank you very much for your question. I'll say regarding digitalization, we can see four levers, the first one is on the EKR. You know we spent a huge amount of money on call center, on sending our billing to our customers, just to give you some numbers, you send more than 30 million letters now with invoices to our customers every year, they have to take this bill, have to go to a lot in order to pay and there can be very high commissions. Then, if they had any problem, they had to call us, every call they do us is, I don't know, it's approximately BRL5 per call. Then if you are (inaudible) we are doing this to digitalize the care, there's a huge opportunity for cost savings and also for customer satisfaction and improvement.

In e-commerce, everything that you can move to e-commerce, there is often a high potential for saving -- on cost of savings for commissions, e-commerce is another very important leverage for improving our cost. Further one for me will be, this is more related to revenues. We know (inaudible) not to package digital services to our offered bundle, you can include (inaudible) you can include security, you can include education, there is a huge whole of services, it can improve our revenues. And we're seeing these now already in our numbers. And finding some [single space] across for all the companies is that using Big Data.

Now as you get the Company -- now as you become a Company much more usage to get to through information or decision making that includes for instance CapEx, we are going to install our sites and we are ready to increase -- there is huge opportunity to reduce churn, to reduce our -- to have a smart allocation of CapEx, so I think this is a general concept that we have to apply to our lives. We are all going to it -- more or less now in revenues or EBITDA or CapEx, but all of them they could impact the three lines of our P&L.

On the margin expansion, we are not going to provide guidance on numbers. What have seen in the last two years is that we have been improving between around -- between 1.5 points and 2 points every year and there is no reason that you cannot continue to improve the margin, what we're providing here is our commitment not to continue to improve the margin, but we are not going to commit a number, just the commitment that there is no reason for change, the speed, the pace that has been moving up to now.

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Christian Gebara, Telefonica Brasil SA - CRO [18]

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Regarding the -- Susana, regarding the second question about the synergies in revenues, so far we have captured 20% of the net present value. I mean we knew that it was going to be lower than capturing the OpEx and the CapEx initiative. We are in line with our plan. We are in line with our plan, we are expecting some improvement in the next few year, particularly with the cross-selling that we are expecting out of Sao Paulo, it involves B2C and B2B.

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David Melcon, Telefonica Brasil SA - CFO [19]

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Yes, well, all you have to compliment on that. We changed the brand in April of last year, still working on the consolidation of a unique brand in the country and also preparing to be more cross benefits across customer base of the fixed and the mobile. But as we've said, very aligned with our plan and very aligned with our strategy to give benefits for convergence customers rather than discounts.

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Operator [20]

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Mauricio Fernandes, Bank of America Merrill Lynch.

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Mauricio Fernandes, Bank of America Merrill Lynch - Analyst [21]

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Good morning, everybody. I think this is a question for either Eduardo or Christian. It's about the price increases that we've been seeing all companies including Vivo to pass through the ICMS or VAT rate increase that happened towards of the end of last year. Have you been able to recognize or see any potential impact into consumption, meaning whether customers have been disconnecting or using the phone less as a result of those price increases? Thank you.

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Christian Gebara, Telefonica Brasil SA - CRO [22]

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Hi Mauricio, Christian. More focusing on 2016, so as I said, we had very good results. Some of the price increase also occurred in the end of last year. And as showed, we kept our very relevant growth in net adds and also very controlled churn rates. So -- and also a part of the strategy of some of the price increases, they were bundled off some more benefits to the customer in the data allowance mainly. So far it's being having good results, very good results in line with our performance, best performance.

And also the launch of our family plans that's given a lot of benefit, especially for the pure postpaid, because adding dependents in our plan and controlling the data allowance and assigning how much data you want to each of the plan, then that is something unique that Vivo offers in the market are putting us in a good situation. So again, I think it's been good and also as you saw, competitors also were managed to increase price. So I think getting more rational in (inaudible) player.

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Mauricio Fernandes, Bank of America Merrill Lynch - Analyst [23]

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And still on a similar subject, things specifically has been a lot more active on hybrids, actually part of I think Daniel's question on this, have you been noticing any impact in terms of whether you've been losing customers or maybe customers with double SIM cards have been using more of TIM, in general have you seen an impact into Vivo from this more active campaign and new plans that TIM is offering more recently?

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Eduardo Navarro, Telefonica Brasil SA - CEO [24]

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Mauricio, I think we've been very successful, as you know, in migrating customers from prepaid to hybrid. And now we're successful story we told that hybrid strategy is very focused on your own customer base in migrating prepaid to postpaid, we continue doing that and we continue to having good results. Maybe as you mentioned, my competitor now is doing better on this as well. Migrating prepaid to hybrid in their own customer base, I do believe their hybrids is very focused on their own customer base rather than capturing customers from competitors.

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Operator [25]

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Fred Mendes, Bradesco.

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Fred Mendes, Bradesco - Analyst [26]

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Good morning, everyone and thanks for the call. I have two questions here as well. I mean, the first one again in the mobile revenue growth, we have sort of price increases, Mauricio mentioned in the last question, you also had an improvement in the mix of your clients and the average growth in our postpaid base was like 4.7%, it was 9.5% but the average was 4.7% and your mobile growth was 3.9%. So just -- we do understand there was an anticipation of revenue for the third Q, I was just wondering if there is anything else there and if you can give us the size of this anticipation of revenue, this will be great. That's my first question.

And then my second question, talking about the plan to increase the 4G coverage to around the 2016 to 2017, just wondering if you are already considering the usage of the expected 700 megahertz and/or the re-farming of the 1.8 gigahertz in order to make the 4G roll out cheaper and when do I expect to be able to use the 700 megahertz spectrum? Thank you.

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Eduardo Navarro, Telefonica Brasil SA - CEO [27]

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Fred, this is Eduardo, I am going to the second one and then Chris will answer the first one. Now regarding the 4G coverage, at the beginning, we have been much more focused on providing a very good coverage on the lighter cities, where we have 67% of our customers (inaudible) especially that's why in the first weeks of the year, we're having much more concentrated on those cities. Once those cities are covered, then we decided we should accelerate the coverage to other cities, and just to note, provide you some numbers already in presentation.

In the first three quarters, we have covered a little more than 40 cities, in the last quarter, we have covered more than almost 290. And we remain now in the first quarter this year at the same page that we were in the fourth quarter of last year. You know that we are -- strong last year related to our 4G coverage on number of cities, once we have already now covered the big cities.

And regarding your question about 700 megahertz, yes we are considering to use 700 megahertz (inaudible) especially in the north cities or some small cities that we will depend on the (inaudible) now that we are working to provide these, with special note to launching this in Brazil, now too in the coming months in Sao Paulo to defend on Sao Paulo capital always it's positive now in March, but you have to wait for the rest of the (inaudible) state and now it maybe is not going to happen before end of the year but, yes, we are considering as soon as we have the spectrum available because of the TV has been a turn off, because we do not turn off the TV, it's a case of some cities in north east we will start to use 700 megahertz and we can -- this is another source of efficiency, because we can do much more efficiently, the deployment in 700 megahertz, they are high frequencies.

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Christian Gebara, Telefonica Brasil SA - CRO [28]

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Can I -- what I jumped for the first one, Fred, this is still, do you have another question for the second on the CapEx, otherwise I'll answer the first.

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Fred Mendes, Bradesco - Analyst [29]

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No, no, please, please go ahead.

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Christian Gebara, Telefonica Brasil SA - CRO [30]

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Okay. On the first, I think maybe three effects, there is one that there is a regulatory factor. So when you compare customer base growth with revenue growth you need to consider that, that we were in fact in 2016. There is also -- there is one wholesale agreement that improved results in the third quarter and doesn't repeat in the fourth quarter. And finally the prepaid, although we're having a positive trend as we showed also in the presentation is too negative in the fourth quarter, minus 4%. So I think the three elements together may explain the difference that you see in the customer base growth and the revenue growth.

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Operator [31]

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Richard Dineen, UBS.

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Richard Dineen, UBS - Analyst [32]

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Thank you. Good morning everyone, thanks for taking my questions. First one is just a quick follow-up on Pay-TV. Do you expect any boost to Pay-TV customers from the analog TV switch-off, which is coming up in Sao Paulo at the end of March and we've seen quite a big effect from that in other markets like Mexico. Just wondering if Brazil is the same or different, what are your expectations there?

And then just secondly on CapEx, do you have an estimate of the potential CapEx savings from the move from concession to authorization, less obligation to invest in the copper network, public frame boxes, how material do you think that could be, would be just a few hundred million reals of savings, could it be BRL1 billion, was the rough magnitude of that if you can help us, that would be terrific? Many thanks indeed.

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Christian Gebara, Telefonica Brasil SA - CRO [33]

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Hi, Richard, this is Christian, I will answer the first and Eduardo, you answer the second. I think Digital TV is already very well penetrated in Brazil in the cities that we saw that move from analog to digital, above 90% of customers already have the digital device, so we don't see an important boost on Pay-TV related to this movement from analog to digital.

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Eduardo Navarro, Telefonica Brasil SA - CEO [34]

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Hi Richard, this is Eduardo, regarding your question about the change of the regulation, it's too early to talk about the impact, there is the law requires a few amount of detailed regulation that's not ready yet, but what I would anticipate is that we thought with the end of the obligation for the fixed line, we have not invested too much on fixed line anymore. Most of our CapEx now is dedicated to fiber to TV to mobile, then I would not expect a great impact on CapEx. What we could expect the bigger impact would be on OpEx because of many of the obligations are related to the concession fee that you pay now, not that you have not to pay in the future or some obligations that you have with maintenance, for instance with fiber points or things like (inaudible). Again it's too early to talk about impact but I would anticipate more impact on the OpEx margin, OpEx more than in the CapEx.

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Operator [35]

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Mathieu Robilliard, Barclays.

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Mathieu Robilliard, Barclays - Analyst [36]

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I have two questions, first in mobile, so mobile obviously doing very well, notably compared to your peers. I was wondering as we look into 2017, how we should think about that. I mean I can see some clear positives, I think between 2016 and 2017 macro is getting better, the weight of data is also higher, so the growth should have a bigger impact on the overall MSR. So all these points to potentially an acceleration in 2017 from 2016 in mobile service revenues, but I was wondering if you could point out to some negatives that we should be aware and that could cap the acceleration?

And then the second question on fixed. So mobile, as I said, is very strong, fixed I guess somewhat mixed in terms of the KPIs and really what I wanted to understand better is why is there an acceleration in the loss of fixed lines. I understand the fixed to mobile substitution impact, but why would that be accelerating now compared to few years ago and is it just that?

And also surprised to see that in the context of some of your competitors struggling a lot on fixed, I know you guys thought would have given you the opportunity to continue to grow your presence in general in fixed? So really two questions. Thanks.

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Christian Gebara, Telefonica Brasil SA - CRO [37]

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Hi, Mathieu, this is Christian. So on the mobile, as you pointed out, the perspective is positive, although we are very strong in the postpaid, we still have important amount of revenues coming from prepaid. So we see a positive trend in the last quarter being less negative than it was in the previous months. So if the economy starts to recover, mainly employment, there maybe they're going to be the last one to be recovered and impacted a lot in the consumption of prepaid customers with a positive outlook.

In the postpaid, again we are focused on the strategy that be successful for the last two years. We understand that we need to bring more innovation to the table because our competitors are also moving in the postpaid arena. But we are confident that with our superior customer experience, brand's aspirational channel excellence, and innovation that we are always brings to the table were being strong enough to be as competitive as we are in the past.

In the fixed as said before also, we are very focused on broadband, in ultra-broadband, there is a loss of voice, there is a (inaudible) replacement as we said, there is also the economy situation impacting fixed voice customers. So there is a way to save something, you rather save on voice than save on data and we have seen that also declining our fixed-line even in the small Company. So it is a trend that is happening and maybe decelerating because of the economic situation.

We do believe that with our ultra-broadband capability and infrastructure, we've be able to gain more customers and as we said when we compare to competitors that don't offer the same speed that we do, we are able to capture customers because the demand for more speed, upload and download, is increasing. And Vivo is very competitive in two arenas and mainly when you do high speeds upload and download over 100 Mbps, maybe we are almost alone in this market.

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Operator [38]

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Julio Arciniegas, RBC.

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Julio Arciniegas, RBC - Analyst [39]

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Yes, hello, thank you for taking my question. This is regarding competition. Do you consider that the market will continue being rational, having minor for example, America Movil posted some very strong postpaid net adds in the last quarter, basically it was driven by price reduction? That's my first question.

And the second question is regarding the ARPU. Basically in the presentation it says that the ARPU is 74% higher than competitors. Isn't this -- are we still -- do you think that this could be a risk or if it's in a sense, can you give me some color about it? Why it's not a risk? Thank you.

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Christian Gebara, Telefonica Brasil SA - CRO [40]

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Julio, this is Christian, we expect the market to be more rational. So as you mentioned, gaining more customers, talking about my competitors hopefully they're also going to gain more ARPU, so it's better that it would be all rational in price because volume alone isn't going to drive revenues. So that's our expectation, there is a move, and a positive movement in giving value to data, that is what customers are demanding and we need to put value on that.

On the ARPU, here is the blended ARPU. We have a stronger contribution of postpaid in our results, that also respond for some of the difference and also in the prepaid and the postpaid, I think Vivo also pioneered in bundling data, so when customers are consuming more data, so also helping us driving our ARPU up.

If you think of the prepaid, we launched a weekly offer bundling SMS, voice and data much before my competitors. So all these effects are also driving our ARPU. It's not -- you cannot take the ARPU difference for a price difference it's not the same, considering again the mix that we have in postpaid and prepaid and the penetration of data in our bundles both in prepaid and in postpaid.

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Operator [41]

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And ladies and gentlemen, this will conclude the question-and-answer session. At this time, I would like to turn the floor back to Mr. Luis Plaster for any closing remarks.

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Luis Plaster, Telefonica Brasil SA - IR Director [42]

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Okay. Thank you. I'll pass the word now to Eduardo Navarro to make his final remarks.

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Eduardo Navarro, Telefonica Brasil SA - CEO [43]

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I feel like not to (inaudible) my message to you, as you all know this is my first call as the new CEO, I am here now for three months. And I would like to thank you very much not only for this participation on this call today but on all the very constructive feedback that you give us on a day-to-day basis.

I already have the chance now to be with some of you and I have been very concentrated here. This is my initial period here, as most (inaudible) and that's already completed. And I hope that for those of you that I still have not the chance to meet with one to one, I have the chance to do it in the coming weeks. Again just thank you very much and to confirm my wish to be with each of you in the coming weeks. Thank you. And Plaster, please if you could give the final remarks?

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Luis Plaster, Telefonica Brasil SA - IR Director [44]

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Thank you. And any additional question you may have, the IR team, myself, (inaudible) we will all be available to address your questions. Thank you.

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Operator [45]

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Ladies and gentlemen, the conference has concluded. Thank you for attending Telefonica Brazil 2016 and 4Q 2016 results conference call. You may disconnect your lines at this time.