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Edited Transcript of VIVT4.SA earnings conference call or presentation 4-Nov-19 2:00pm GMT

Q3 2019 Telefonica Brasil SA Earnings Call

Sao Paulo Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Telefonica Brasil SA earnings conference call or presentation Monday, November 4, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Mauad Gebara

Telefônica Brasil S.A. - CEO & Director

* David Melcon Sanchez-Friera

Telefônica Brasil S.A. - Chief Financial & IR Officer

* Luis Carlos Da Costa Plaster

Telefônica Brasil S.A. - IR Director

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Conference Call Participants

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* Daniel Federle

Crédit Suisse AG, Research Division - Research Analyst

* Diego M. Aragão

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Guilherme Haguiara

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Mathieu Robilliard

Barclays Bank PLC, Research Division - Research Analyst

* Rodrigo Villanueva

BofA Merrill Lynch, Research Division - VP

* Susana Salaru

Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology

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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 Telefónica Brasil Third Quarter of 2019 Earnings Conference Call.

Today with us representing the management of Telefónica Brasil, we have Mr. Christian Gebara, CEO of the company; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. Luis Plaster, IR Director. We also have a simultaneous webcast with the slide presentation on the Internet that can be accessed on the site, www.telefonica.com.br/ir. There will be a replay facility for this call on the website. (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 on the 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 Telefónica Brasil. Mr. Plaster, you may begin your conference.

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Luis Carlos Da Costa Plaster, Telefônica Brasil S.A. - IR Director [2]

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Good morning, everybody, and thank you for joining us in this conference call for Telefónica Brasil's 2019 Third Quarter Results. The call, as usual, will be divided as follows. To start, Christian Gebara, our CEO, will give you an overall view of our operating and financial performance for the third quarter of the year and then go over our commercial and CapEx evolution in more detail. Then, our CFO, Dave Melcon, will comment on our digitalization initiatives, efficiency and financial results. We will then move to Q&A.

I'll now pass it over to Christian.

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [3]

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Thank you, Plaster. Good morning, everyone, and thank you for taking part in our third quarter 2019 results call.

I'll start by commenting on the highlights on Slide 3. The growth of everything related to fiber continues to accelerate. And in the third quarter, our FTTH customer base grew 34% year-over-year while revenues grew 44.5%. More and more, fiber is proving to be a key catalyst in the transformation of our fixed business, and it will drive sustainable revenue growth in the future.

In mobile, our postpaid customer base grew 7.3% year-over-year, and our premium position and a superior customer experience allow us to raise prices again, taking postpaid revenue growth to 6.8% year-over-year. Total revenues were up 2.6%, the highest growth in 3 years, driven by mobile service revenue that grew 4.6% year-over-year.

In terms of costs, we continue to see room for the reduction of nonquality costs by leverage on digitalization and simplification initiatives. In the third quarter, recurring costs remain under control, increasing 0.6% year-over-year when excluding the cost of handsets. And our recurring EBITDA was 2.8% higher.

Finally, we continue to deliver outstanding cash generation and shareholder remuneration. Free cash flow expanded close to 15% year-over-year, reaching BRL 5.6 billion, and our dividend yield stands at 6.7% for the last 12 months.

Moving to Slide 4. We present the results of our mobile revenues in the third quarter that grew 6.6% year-over-year, including handset sales. If we exclude handsets, mobile service revenues increased 4.6%. The key driver of this growth was the evolution of postpaid revenues that grew 6.8%, benefited mainly by price increases and solid net adds, especially in hybrids.

In prepaid, we continue to improve the monetization of our customer base and are seeing encouraging results as demonstrated by the constant recovery since the beginning of the year. Our handset business is also outperforming. The sales of higher-value smartphones continue to increase, stimulating the adoption of 4G and have been able to reduce subsidies, improving the profitability of this business.

On Slide 5, we see that our overall leadership in mobile increased to 32.3% market share and (inaudible) only postpaid customers, 39.8%.

Our superior competitive position allow us to maintain our rational strategy and increase prices across all segments as shown in the graph on the top right.

The result is an ARPU increase of 6.4% and limited impact on churn. I would also like to point out that phase at which data consumption is advancing with gigabytes of use per customer growing 39% on a yearly basis.

Data usage is quickly migrating towards 4G where we see a year-over-year increase of 92% in traffic already representing 71% of all data consumers. This is relevant because it's confirmed that consumption continued to motivate their saying of -- their selling of our services in line with our more-for-more approach.

Moving to our fixed business on Slide 6. For the first time in the company's history, revenues for growing business, fixed business, surpassed legacy revenues. The main driver has been broadband, which was seen in the previous quarter, represents more than voice now. This change in revenue mix, combined with sustainable fiber growth, confirms that we are on the right track to stabilize fixed revenues and resume growth in the near future.

In the quarter, fixed revenues dropped 3.9% year-over-year, impacted by our recent decision to stop commercializing satellite television, which improves the company's profitability, and the consistent decline of fixed voice also affected results.

FTTH and IPTV revenues now represent almost 20% of overall fixed revenues, with FTTH reaching to BRL 531 million, growing 44% year-over-year, and IPTV, BRL 227 million, increasing 26% year-over-year.

On Slide 7, you can see that our fixed customer base continues to migrate towards our high-value fiber products as we accelerate our FTTH deployment. In the third quarter, FTTH taxes grew 34% and now represent 1/3 of our broadband customer base, a 10 percentage point increase versus a year ago.

As a result, broadband ARPU increased 12% year-over-year to BRL 66, continues the trend of double-digit increases from the previous quarters. Furthermore, we continue for a rational strategy and have just raised price for FTTH at the beginning of November.

On the right-hand side of the slide, you can see that our IPTV business is also performing very well. IPTV access increased 27% year-over-year and now represents almost half of our overall Pay TV customer base, contributed to an ARPU improvement of 4% year-over-year to BRL 106.

Now moving to Slide 8. In the first 9 months of the year, we deployed FTTH in 33 new cities, result of our accelerated deployment in comparison to previous years. In the third quarter of 2019, we took our FTTH network to 12 new cities, summing up to a total of 154 cities. Cities launched this year are showing better-than-expected results as uptake is higher than planned. We are not only expanding our footprint to cities that don't have our fixed services but also to cities where we already provide FTTC, therefore, overlaying such technology with FTTH to defend and upgrade our customer base.

In fact, FTTH ARPU is 27% higher than FTTC and 36% higher than xDSL. These movements are contributing to an increased proportion of FTTH homes passed over our total fiber footprint. We ended the third quarter with 10.2 million FTTH HPs, homes passed, representing 49% of our 20.7 million fiber homes passed.

Moving to Slide 9. You can see that apart from the expansion that we have been doing for all resources, which has already proved to be a success, we are implementing alternative models of FTTH deployment that will allow us to further enhance our footprint with lower CapEx impact.

One of the models being rolled out is a partnership with American Tower. This partnership targets the construction of more than 40 new cities in the state of Minas Gerais, with a potential of around 800,000 homes passed to be built over 3 years.

CapEx deployed in the rollout will be done by American Tower, which will also operate the homes passed infrastructure. Vivo will be responsible for an investment in customer premises and commercialized connectivity using the Vivo Fibra brand. In terms of profitability, this model is accretive and will lead to relevant operating cash flow generation.

The other model being implemented is based on franchising. Here, we are targeted to roll out FTTH in new cities and additional neighborhoods of cities where we already operate by selling franchises for third parties. The franchisee would closely build and operate the entire network, meaning, that Vivo does not deploy any CapEx in the expansion. The franchisee will be responsible for customer relationship and pay us a royalty fee based on gross revenues. In return, we'll provide the franchisee our know-how backbone (technical difficulty) call center, scaled suppliers among other advantages.

The Terra brand powered by Vivo Fibra will be used to commercialize the product. These movements are important as they enable us to reach our relevant number of additional new cities and neighborhoods with UBB service, creating a further source of revenue and protecting our high-value mobile customer base.

On Slide 10, you can see that our investments amounted to BRL 2.4 billion in the third quarter of 2019, totaling BRL 6.5 billion in the year, a growth of 6.7% in the period. Our CapEx execution is in line with the guidance provided for the year, which consider an accelerated expansion of our FTTH footprint.

Investments in fiber increased 25% year-over-year, amplifying our presence to 255 cities with FTTx. In addition, CapEx related to improving the quality and coverage of 4G and 4.5G continues to rise, growing 45% year-over-year.

To conclude, we continue to work closely with team to develop our network-sharing initiatives and are confident that the results will be very positive. The discussions so far are showing a relevant potential for OpEx and CapEx optimization across more than one technology, and we will share details with you as soon as possible.

I now pass it on to our CFO, David Melcon.

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David Melcon Sanchez-Friera, Telefônica Brasil S.A. - Chief Financial & IR Officer [4]

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Good morning, everyone, and thank you, Christian.

Moving to Slide 11. We continue to be very efficient in managing costs, leveraging on digitalization and simplification processes that benefit not only our results but also our customer experience.

In the third quarter of 2019, our operating expenses rose 2.5%, below inflation of 2.9% in the period, which led us to expand our EBITDA margin to 36.2%. Costs continued to be impacted by a strategy of accelerating asset sales. Excluding the cost of goods sold, which grew 22%, our expenses increased only 0.6% year-over-year. Personnel cost, which represents 30% of total OpEx, decreased 0.2% as a result of the organization and restructuring and automation of processes carried out in the last 12 months. Cost of service rendered, which account for 41% for the...

(technical difficulty)

Our total OpEx increased 6% year-over-year as a result of the phasing from higher network expansion costs. Commercial expenses, excluding bad debt, decreased 3.5% in the period as the ongoing digitalization of our customer relationship contributes to reduce costs with call centers, back office, billing and posting. In the third quarter of 2019, commercial expenses represent 24.6% of our total OpEx.

Moving to Slide 12. The digitalization and automation process continues to improve our customer experience and help us to capture cost efficiencies in both front and back offices. Our front office initiatives present a positive evolution, with e-billing penetration expanding to 65%, an increase of 24% year-over-year while 51% of payments are already done on e-care platforms.

Meu Vivo app increased its user base by 14%, and alongside with Aura, which is Vivo artificial intelligence, reduced the need to reach a human call center by 20% year-over-year.

We are also constantly developing solutions to improve technical support. Today, 40% of all technical support is digital, and 41% of queries related to our fixed service are sort (inaudible).

At the same time, we are starting to work on the automation of a number of back-office initiatives that can produce further cost savings and optimization. Among all initiatives, we are using robots to contact customers with overdue bills, to schedule and confirm technical repairs and to run failure test to prevent unproductive visits. These initiatives are allowing us to significantly reduce related back-office and nonquality costs.

Now moving to Slide 13. Accumulated net income for the first 9 months of 2019 reached BRL 3.9 billion, 2.6% higher than a year ago in a recurring basis. The evolution was driven by EBITDA expansion boosted by revenue growth and disciplined cost evolution, improved financial results related to lower debt and reduced taxes expenses backed up by an efficient financial management.

Turning to Slide 14. In the first 9 months of 2019, free cash flow grew 50% year-over-year, reaching BRL 5.6 billion even during a higher CapEx cycle as a result of lower interest and income taxes payments and improved working capital. Our expressive cash flow generation allow us to continue expanding our investment in top share technologies, such as fiber and 4.5G, leading us to capture high-quality growth while we remunerate our shareholders with one of the highest deal in the industry.

In this sense, in August, we already paid out the first part of a larger remuneration in the amount of BRL 3.2 billion. And in December, we will pay out the final tranche, BRL 3.8 billion, totaling BRL 7 billion of shareholder remuneration.

Thank you, and now we can move to the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mr. Rodrigo Villanueva, Merrill Lynch.

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Rodrigo Villanueva, BofA Merrill Lynch, Research Division - VP [2]

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My question is really related to wireless ARPU. It increased by 6% year-on-year during the third quarter. And as far as I understand, the price increases over the last 12 months have not applied yet to the entire subscriber base. So the question is when would you expect higher prices to apply to the whole base and which would you expect to be the impact on ARPU? That would be my first question.

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [3]

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This is Christian. Yes, you are right. We increased price. We increased price in all segments of the mobile and postpaid hybrid and prepaid. Yes, it was applied for the whole customer base, okay? There may be some prices that were related to acquisition in the prepaid. That's only when we acquire a new customer. They may be the Giga Chip, but all the rest was applied to the whole customer base. And the impact was already seeing in the last month of the quarter.

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Rodrigo Villanueva, BofA Merrill Lynch, Research Division - VP [4]

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Understood, Christian, very clear. And my second question is related to the recent JV with American Tower, the franchising scheme that you just announced. Is it possible for you to share with us the economics of these alternative schemes in terms of revenue and margin on a per home connected basis?

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [5]

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No. Rodrigo, this is a partnership, so we cannot share the details of the deal. What I can tell you is what I briefly explained. We talked about 2 new models. Now I think in the previous calls, we always mentioned that we were studying alternative models to deploy fiber. So we are giving here 2 concrete examples. I think you referred to the American Tower, one. This one is in Mina Gerais. We are talking of around 40 cities and the total of 800,000 homes passed in the period of 3 years. American Tower is responsible for building the homes passed. Vivo is responsible for connecting. There's a variable cost associated to the connection of each of the customers that we pay to American Tower, and that's I think what I can share with you at the moment, okay? So if you have any further questions, specific question, our team can share, but we cannot talk about economics. The good thing here is that we will be able to deploy fiber with more speed, leverage all the assets that American Tower acquired in Mina Gerais. Vivo is the leading company in this state with more than 50% market share postpaid. So again, it's a model that allows us to deploy more fiber with less impact in our CapEx and give us time to market, that's what we are looking for.

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Operator [6]

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Next question comes from Diego Aragão, Goldman Sachs.

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Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [7]

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Christian, I guess the question is for you. You have been very vocal about the new areas and new opportunities that in this digital context Vivo can explore to find new source of revenue. For instance, you recently launched a credit line for consumers in order to leverage your customers' profiling. You also launched these new business models to sell the FTTH into new regions. So I guess the first question is how fast do you think top line can grow and benefit from these new initiatives in the next, let's say, 3 years?

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [8]

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Thank you for the question, Diego. So yes, you're right. We are looking for new source of revenues. I think is -- our strategy is based on that. I think you mentioned 2 different models. Now one is partnering with other companies to deploy more infrastructure. So we gave very -- 2 concrete examples, the franchise and the American Tower that I just described to Rodrigo. The franchise is also partnership with many other third parties that are willing to deploy fiber network. As we see, there are many small companies in Brazil. So what we want to offer these companies is our expertise, our scale, our brand and to help them deploy this fiber in cities that we cannot reach, and that is a good idea for bringing digitalization to cities with Vivo's expertise. The second one and the first one that you mentioned is how can I partner with others to distribute digital services and that we have been doing in B2C and B2B. B2C, we gave some examples in entertaining in video, in music, in gaming, education, and we want to go further with the strategy. We don't give a specific name -- number for this, but I think that allow us not only to increase our revenues for our digital service but also to make our customers more loyal. And I think churn has been showing that, that we have a very controlled churn even when we increase price above competition, and that happened in all segments, postpaid, hybrid and prepaid. And in the B2B, we are seeing important deals also with big companies, large companies like Cisco, Microsoft, among others, bringing more results in B2B that we see a positive growth in revenues there. And again, giving our value proposition, a differentiation of value that's bringing more customers and keeping the ones that we have more loyal. So it's part of the strategy going forward. We see that partnerships in deploying infrastructure and partnership in distributing content.

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Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [9]

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Okay. And I guess my second question is regarding opportunities and cost efficiency. Maybe David can help me with this one. As your margins continue to improve driven by digitalization and you already have a very healthier, let's say, cash flow profile, which is growing, let's say, about 10% on an early basis? Would you consider to speed up investments in order to address the pent-up demand for data connectivity either like in the fixed business or the mobile business?

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David Melcon Sanchez-Friera, Telefônica Brasil S.A. - Chief Financial & IR Officer [10]

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This is David. Thank you for your question. Just to give you just an introduction about what's going on here toward the initiatives to continue to have economic savings in digitalization. In the first quarter, we were talking about a target of BRL 1.6 billion that we're expecting to capture between 2018, 2021, and we are fully on track. So the first quarter, we already captured around 36% of the total. Now we are closer to 40%. And now we are seeing that, as we explained about all the robots and all the digital initiatives, where we are going beyond what we were initially we're planning. The scope of digitalization now is we are enhancing this scope, but we are seeing that particular

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we'll talk about the network which is one of -- it's going to be one of our key investments for the next few years. That means that we're going to be (inaudible) saving not only our existing cost base, but this new strategy is going to allow us to capture some savings that will be cost avoidance, we could say. Because, I mean, Brazil is like a size of the continent, so deploying fiber using analytics is going to provide even more and more savings. So we are expecting to continue having the same discipline that we have shown so far, having on -- this year, reducing costs over a quarter-over-quarter, year-over-year, and this is the strategy that we are planning. So we could see -- continue seeing these trends in our financials.

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [11]

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Yes. Only to complement, Diego, on what David just mentioned, I think digitalization is key for us. I think we've been seeing the penetration of our e-care app growing year-over-year. Also we see the cognitive platform they are deploying here in Brazil for Vivo, with results not only in our digital channels, but also in the call center. And going forward, I think we're going to expand all these initiatives to bring more OpEx reduction. On the same time, I think toward the first question that you just also asked us, we're going to do more partnerships. So of course, the margins of some of the services will be different. Because in some of them, we'll bring revenue share where we're sharing with a partner at our results different from our legacy products where we had 100% of the benefit. So I think we should focus more in EBITDA growth instead of the margin evolution. We want to grow in EBITDA even if you need to look for products or services, also handset that has a different economics that could bring us more revenues and more growth in EBITDA and not only be focused on the margin.

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Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [12]

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And maybe just a follow-up question on this. I mean, if you would benefit a 100% of those digital initiatives, how far do you think margins can go? I mean, without passing any, let's say, benefit to price and to consumers, just capturing a 100% of the digital initiatives, how far do you think your EBITDA margins can go?

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [13]

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Yes. We don't give guidance in margins. As I said, our focus is growing revenues and growing OIBIDA, so I think with -- our strategy will be driven by that, those 2 targets, now growing revenues and growing the OIBIDA, but we cannot give you a guidance on the margin.

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Operator [14]

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Next question comes from Mathieu Robilliard, Barclays.

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Mathieu Robilliard, Barclays Bank PLC, Research Division - Research Analyst [15]

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I had 2 questions, please. First, in B2B, very strong growth in the fixed business in Q3. And I was wondering if those kind of growth rates are sustainable. I do understand that there's some big contracts signed from one quarter to another. But generally, do you expect that sector or rather that segment to continue to grow at least high single digit? And I don't know if you can answer to that, but back to the margin question. I mean, is there a big difference in margins when you generate revenues there compared to the core fixed? And then the second question was, you laid out quite a number of initiatives to stimulate growth in fixed with a number of partners. Is it realistic to assume that within 12, 24 months that the fixed business could stabilize, thanks to all these initiatives and also the different price increases you're putting through?

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [16]

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So Mathieu, this is Christian again. So I want to share with you as much as we can in B2B because we don't open up so much the numbers. But you're right, B2B revenues are recovering, and we are having like good results in the fixed. I think the fixed business in B2B is being driven by also by our fiber deployment. So I think we are doing fiber deployment and more focused in B2B that was done in the past. So when we enter a new city, we also focus on areas where we see B2B customers. So not only for the fiber, but also for advanced data, corporate data that we leverage on the fiber penetration that we have there. Apart from the fiber itself, as I also said, we have been very successful partnering with other IT players and selling services related to the fixed business, both services and hardware, that leverage our presence in these places, so we are selling a lot of cloud security services and hardware that also improving our results for B2B. So we are positive and optimistic, and also the recovery -- the economy is also helping these companies to decide about investments that were postponed in the past. What -- talking about the fixed business, I think, is your second question. We are -- again, we are here trying to get the balance of new services that are the fiber, corporate data, broadband in general, against voice and DTH. And so today, this is the good ones. Now that future ones are growing around 15%, and we expect it to continue to grow. And while we have this growth there, and we have a more controlled decline in what we call a legacy, we assume that next year, we're going to have a positive result for fixed business in general, B2C, B2B. We don't give a precise month, but we see the trend as positive. As we deploy more fiber, we leverage the corporate data, B2B services based on the fixed services, more IPTV and try to control decline in voice and also take into consideration our decision to stop selling DTH that has a negative impact on our numbers, and we'll continue with the decision.

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Operator [17]

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Next question comes from Mr. Daniel Federle, Crédit Suisse.

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Daniel Federle, Crédit Suisse AG, Research Division - Research Analyst [18]

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The first one is regarding the mobile business. The company has been very successful in passing through price increases. My question is if that should continue to be an important pillar for further revenues growth, and if the higher bad debt in the third quarter is, in any sense, a yellow flag for future churn. And the second question regarding potential financial services. Actually, we saw the company launching the Vivo Money a few months ago. And my question is what's the ambition of the company in this segment? And also if you could see eventually Vivo Pay or any payment solution in the future.

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [19]

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So Dan, this is Christian. I will let the last one-off bad debt to David. I will answer the other 2 questions, okay? In the mobile, I think we see still there's opportunity to migrate customers from prepaid to hybrid and hybrid to postpaid and also to penetrate more with 4G. And once you penetrate more with 4G, you have more data consumption. And then I also leverage more in our partnerships to offer something different with our customers a better proposition that is differentiated. We don't see price increase as the key strategy going forward since we have like an inflation that is much lower than it was before. So here now, we are looking for other ways to give our differentiation not only for the coverage and the quality of our Internet, mobile Internet, but also bringing something else. So again, I think it's going to be an inflation lower than we had before, so price will increase less than were increased in the past. So we're going to bring more innovative offers to the market to be capturing more customers and controlling our churn that, again, is very reduced.

Regarding money. No, it's one of the initiatives that we have in financial services and other digital services. It's not the key one or the main one. We are piloting something right now. We are planning to do something more concrete next year. What we want to do is to leverage on the footprint that we have as a company with the channel that reach many places that the other channels don't reach. We have a very strong brand that gives a lot of credibility to the customer who wants to borrow money. And then we have information of some customers that are our prepaid customers but are not -- doesn't have a bank account. So we want to leverage on that to be much more assertive and positive in providing credit to these customers. So again, it's a pilot. We see other opportunities in the fintech arena. We are not revealing now because it's part of our strategy going forward. But we see that we have a strength, that our footprint, brands, data that we should leverage not only for financial service but also for other digital services. I don't know if I answer these 2 questions, Daniel. I now pass to David for the bad debt.

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David Melcon Sanchez-Friera, Telefônica Brasil S.A. - Chief Financial & IR Officer [20]

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This is David. I will take the question about the bad debt. So first of all, it's important to look at commercial costs as a whole, which includes a provision for asset and which is dropping and reducing year-over-year. But even when we drill down into the bad debt number, which is at least primarily linked to the acceleration of postpaid services, mainly mobile postpaid with revenues and subscribers that we are going -- going up more than 7%. So we continue using analytics for latest calling process and taking a controlled financial risk. And we have a very high margin in those services, not subsidies for customer acquisition, and we grow back commercial commissions. We believe the greatest -- is accretive, and it allowed us to keep growing market share at the same time that we're increasing our profitability. So if you look to the ratio of bad debt with gross revenues, we see that full year, we have 2.5%. And in the third quarter, if you like, something, 2.7%. So there is no -- nothing to worry here, and we do not believe this is an indicator that could be an increase in churn. So nothing additional to remark.

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Operator [21]

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Next question comes from Fred Mendes, Bradesco.

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Guilherme Haguiara, Banco Bradesco BBI S.A., Research Division - Research Analyst [22]

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It's actually Guilherme Haguiara here. My first one is on wireless. We have seen you more active in price increases in recent months, and we appreciate the details you provided in this slide in the speech. And we were just wondering how are you seeing competitors react to your pricing strategy? And if we can expect more rationality not only for postpaid, but also for the prepaid segment going into 2020.

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [23]

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Guilherme, thanks for the question. As I said, no, we've been moving prices in all segments. Now as we showed in our presentation, we increased price in postpaid, increased price in hybrid. So postpaid was, in July, 80%; in the hybrid, 10% in September; and also in the prepaid interim offer that we had Giga Chip, that would be 25%. Yes, I expect competitors to be more rational. It's difficult to point out who's being more and who's not being so. I think you follow the market and you know the difference between the offers that we have among all of our players. And also important to highlight that sometimes price can be comparable, but some competitors are giving off-net and full access to social network that I think is a strong benefit, especially for prepaid. We should be more rational there, controlling the usage of social network and off-net calls. And again, we are being positive, that we need to be more rational and should increase prices in all segments. As you move the prepaid, you are able to move the hybrid and they will move the postpaid. If you don't move the prepaid, your ability to move the hybrid is limited. And for consequence, the ability to move the true postpaid is also limited, so we should move in all directions. If you consider the 9 99 weekly offer, we've been with this price point for a long time, and we see now competitors offer off-net calls and full access to social network with the same price point. So again, expecting ever to be more rational. We saw some movements from some of them but not from all of them.

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Guilherme Haguiara, Banco Bradesco BBI S.A., Research Division - Research Analyst [24]

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Okay. That's very clear. And my second question on the cost side. We have some pickup in the cost related to your network expansion efforts, and we understand it's linked to the acceleration of offering investments over the past quarters. And we were just wondering how much more can this line slightly pressure results going forward and if the other efficiency and your digitalization initiatives should continue to be able to offset this, not only in the fourth quarter, but also looking into next year.

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David Melcon Sanchez-Friera, Telefônica Brasil S.A. - Chief Financial & IR Officer [25]

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Guilherme, it's David. Just -- actually, good job on the evolution of the costs of [celebrated], which it mainly, as you say, is mainly impacted by the network expansion. So we -- as you know, we are accelerating deployment of both fiber, our mobile capacity, 4.5G. So this is increasing part of our costs but mainly, we have a seasonality on pacing quarter-over-quarter. But -- and so for example, this quarter, we are growing 6%. But if you look to the previous quarter, it was the second quarter, these costs were down 2.4%. Now -- so here, we are seeing economies from the scale for impact of Telefónica group and also for deploying the network using also, again, analytics and so on. So this is helping us to keep growing revenues. At the same time, we have been talking about margin. We are talking about also being more efficient. So this will be one of the levers to continue improving our OIBIDA over the next few quarters, now and in the future. So nothing additional to talk here, but this is one of our main costs and buckets that we have, and this is where we are driving also our efficiencies.

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Operator [26]

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Next question comes from Susana Salaru, Itaú.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology [27]

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The first question, if you could elaborate a bit more on the MOU with TIM, if you could give us an idea of how much CapEx or OpEx you expect to save from this partnership or this combination of infrastructure, that would be our first question. The second question will be related to handset sales. If you could give us a guidance or give us an idea of if the margins currently is already neutral in terms of EBITDA or if it's still slightly negative in terms of contribution to overall results of the company. That's it, guys.

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [28]

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This is Christian. So as I said that we've been working with TIM in the last 60 days in the MOU. We've been very positive, optimistic about the results. As you remember, the MOU has more than 1 area. One is the 2G and the other one is more a full technology in cities, is more in the 30,000 inhabitants. We evolved very well in one and is still working on the second, so that's why we decided to postpone another 60 days our MOU to be able to present a full result of this agreement. So at this moment, we cannot share more than what I shared. We've seen that it's promising. We progress well, and we still have some work to do, especially in the full technology sharing for smaller cities. Hopefully, the next call for the end of the year, we're going to be able to share more. Regarding handsets, again, we've been -- there are 2 types of sales. Now the sales for pure postpaid customers. Then in this sense, we are giving subsidies. So the margin, it's different to calculate because we are like keeping the customer loyal, and there is a revenue coming from the service. But also we are expanding our penetration in customers that we don't sell with subsidizing. This one, the margin is positive. So we don't give a specific number, adding up these 2 type of customers, but we are growing in the ones that we don't give subsidies, and we are reducing services in general. So the business itself, it is good and positive for us, but we don't give the details.

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David Melcon Sanchez-Friera, Telefônica Brasil S.A. - Chief Financial & IR Officer [29]

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And also, Susana, this is David Melcon. Just to complement here on the network and also the previous question from the year, MOU with TIM, which also allowed us to protect the cost of maintaining our network, particularly more efficient, and particularly in small cities and all technology, which is one of the key topics that we are covering here with the network sharing with TIM.

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Operator [30]

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(Operator Instructions) This concludes the question-and-answer section. At this time, I would like to turn the floor back to Mr. Christian Gebara for any closing remarks.

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [31]

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Okay. So thank you for -- everyone, for participating in the call. Hope to see you in all the events that we have scheduled over the next weeks. And if you have any additional questions, our team is here like ready to answer all of them. Otherwise, I see you soon or in the next call for the end of the year results. So thank you, everyone.

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Operator [32]

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Thank you. This concludes today's Telefónica Brasil Q3 '19 Results Conference Call. You may disconnect your lines at this time. Have a great day.