Telefonica Brasil SA (VIV) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time we would like to welcome everyone to the Telefonica Brasil fourth quarter and year of 2014 earnings conference call.

Today with us we have Mr. Paulo Cesar Teixeira, CEO of Telefonica Brasil, and Mr. Alberto Horcajo Aguirre, CFO and Investor Relations Director of Telefonica Brasil.

Today we have a simultaneous webcast with a slide presentation on the Internet that can be accessed at the site www.telefonica.com.br/ir. There will be a replay facility for this call on the website.

After the company's remarks are over, there will be a question and answer session. At that time, further instructions will be given. (Operator instructions.)

Before proceeding, let me mention that forward-looking statements are 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 call over to Mr. Paulo Cesar Teixeira, CEO of Telefonica Brasil. Mr. Teixeira, you may begin.

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

On slide three, we see the main highlights of today's call. During 2014, we have formed very solid operational trends, which can also be observed in the financial results for the year.

We sustained a very strong performance in high-end mobile segment. Our contract base expanded 20% year-over-year, and already represents 36% of our total mobile accesses. In addition to the differentiated customer mix, data adoption within our customers climbed fast, leading us to achieve annual acceleration and excellent mobile service revenue, which grew almost 80% in 2014, excluding regulatory effects.

On the fixed side, our focus on high-end customers is also evident. We accelerated the level of net additions in fiber to the home broadband, and pay TV services, growing year-over-year 84% and 22% respectively.

As a result, the recurrent fixed revenue, excluding regulatory effect in the year, reached a slight reduction of less than 1% year-over-year, a significant improvement over 2013.

Our permanent effort to achieve great cost efficiency resulted in a very controlled cost growth of 1.3% in 2014, much lower than inflation in the period despite our strong commercial activity.

Consequently, we achieved during the fourth quarter record EBITDA growth for the third consecutive quarter, accumulating in 2014 an overall increase in recurrent EBITDA.

Moving to slide five, we present our consistent accesses and overall evolution. The chart on the left registers more than 95 million total accesses at the end of 2014, an annual increase of 3.1%, which represented an acceleration in comparison with the previous year.

Following this trend, mobile accesses have grown 3.5% versus 2013, leading by the evolution of contract accesses, which increased almost 20% in the same period of comparison.

On the prepaid segment, our strategy is consistent. We focus on value rather than number of accesses. Therefore, prepaid accesses have decreased 3.7% in the year due to our strict disconnection policy and the intensive migration to contract plans. Actually, the fall in second play policy would have around 21 million additional prepaid accesses in our base.

Fixed accesses recorded 15.4 million at the end of 2014, with annual growth of 0.9%. This evolution is mainly explained by a reduction of 0.1% in fixed voice accesses, led by strong sales of fixed voice out of the state of Sao Paulo during the year, although we have recently revised our sales strategy for this service with a more rigid credit criteria in the fourth quarter 2014.

A slight increase in broadband accesses, mainly explained by our successful strategy of migrating our customer from ADSL to the FTTH technology and a growth of 22% in pay TV accesses, with increasing sales in IPTV and DTH technologies.

Slide six shows the consistent execution of our super mobile strategy. Our contract customer base reached 28 million accesses by the end of the year, representing 35% of our total mobile accesses, almost 20 percentage points higher than the average contract mix of our competitors.

At the same time, we made several efforts during the year to promote data adoption in large scale for contract and prepaid customers. Penetration of smartphones and Web phones in our base reached 66%, an annual increase of 19 percentage points.

Data sales penetration is increasing on the same pace, and currently represents 45% of our mobile base. Therefore, mobile data users already surpassed 20 million accesses in the quarter, a growth of 48% in the year-over-year comparison, while data traffic soared 64% in the same period.

The effectiveness of our data services is not based on prices, but supported by our differentiated coverage, customer experience, innovative services, and brand perception.

As a result, we sustained once again robust growth in data ARPU for the year, soaring 17% in the period, a figure up 18% since 2012. Our sound strategy reflects an ARPU which is almost 50% higher than the average of our competitors in the fourth quarter.

Moving to slide seven, we describe how our investment in 4G, with focused innovation on commercial approach, is leading to improved customer experience and loyalty. Vivo continues leading the market in 4G coverage and increasing the gap against its competitors, closing the year with 140 municipalities and more than 80 million people covered.

We also led in 4G accesses, reaching 39% of market share in December 2014. As a result of this strong adoption, 4G traffic already represents 27% of the total data traffic in the main capitals in Brazil in January 2015.

During fourth quarter 2014, Vivo revisited the portfolio and launched new offers aiming to improve customer experience and continued value generation. In this sense, we simplified the portfolio of contract plans, expanded 4G data plans to prepaid and contract plans, and limited data usage after the end of the bundle.

With operational and commercial approach focusing our subsidies in high 4G ARPU customers, currently 54% higher than 3G ARPU, we sustained a controlled level of payback of our customer base while we already received strong benefits of our 4G strategy.

Slide eight presents the evolution of our strategy of being a fiber company and enhanced video player. We ended the year with a significant expansion of our FTTH footprint, doubling the number of homes passed, which accounted for 4.1 million homes, meaning 2.6 million commercially addressable.

In addition, we accelerated our path to have growth in net additions of Vivo fiber by reaching 52,000 new customers in the fourth quarter, almost two times higher than one year ago. Our customer base in Vivo fiber reached 375,000, 84% higher than last year, and represents a penetration of 50% over addressable homes.

Moreover, our share of UBB net adds in the state of Sao Paulo was 61% in 2014, more than 40 percentage points ahead of the second player according to Anatel.

In pay TV, we sustained robust growth during the year, with a target strategy focused on increased monetization and loyalty. DTH customer base, for instance, experienced a relevant annual growth of 26%, while IPTV net adds increased 38% in the same period.

As a result, we see the number of customers with triple play solution climbing 22% annually, with corresponding benefits in ARPU and loyalty.

Moving to slide nine, we ended the year with strong and solid growth in terms of accesses and revenues in the most relevant and promising platform for the corporate segment. In 4G, our complete portfolio and coverage led us to increase our customer base fourfold annually by reaching 629,000 customers in December 2014.

On the fiber side, our level of net additions in fourth quarter 2014 is 50% higher than in 2013, supported by the expansion of homes passed in the period, unlocking opportunities with large corporations and SMEs.

In addition, our M2M accesses base is more than 50% higher than a year ago. We have sustained leadership in share of net adds throughout 2014. With focus on high growth platforms and also looking for new opportunities in IT, we can already report great achievement. In data packets and IT, for instance, we recorded an accumulated base increase of 26% and 13% respectively.

Slide 10 summarizes Vivo financial performance in the fourth quarter 2014 and for the full year. In fourth quarter 2014, recurrent mobile sales revenue increased almost 6% year-over-year in the quarter and fixed revenues decreased 5%, resulting in a service revenue increase of 1.6% for the year on a consolidated basis.

As a result of our continuous cost discipline, we achieved an overall recurrent cost reduction of 0.4% in the quarter, and a slight and controlled increase of 1.3% in the year. These evolutions are particularly impressive in an environment of high inflationary pressure and strong commercial activity.

In this sense, our recurrent EBITDA annual evolution in the quarter confirmed the positive trend presented in the last two quarters, with a 7% increase in the period.

On an accumulated basis, recurrent EBITDA increased 1.2% annually, improving the trend presented in the last two years. In addition, net income featured BRL5 billion in 2014, an increase of 33% year-over-year.

In terms of CapEx, we closed the year with BRL6.4 billion invested, excluding the 700 megahertz license, representing 18% of net revenues generated in the period, pretty much in line with what we are providing to you as a reference.

Our main focus remains oriented to promote a quality differential in our operations. These results are solid but, more important that that, show improving trends in all fronts.

Now Alberto will bring us more details regarding financial performance.

Thanks, Paulo, and good morning, ladies and gentlemen. On slide 12 we show the evolution of mobile service revenues on a recurrent basis, excluding in the fourth quarter of 2013 a tax credit recovery, mainly IECMS, in the amount of BRL165.3 million.

Annual growth reached 6% in the quarter, or 9% when excluding MTR cuts for the period. The increase accumulated in 2014 when excluding regulation impacts is of almost 8%, representing an acceleration when compared to the 7.2% annual growth obtained in 2013.

Data revenues, our main growth driver, enhanced their expansion to reach 22% year-over-year in the quarter and 21% in 2014 thanks to a robust and sustained rise in Internet and value-added service revenues throughout the year, as I will detail in the next slide.

Accesses and usage revenues increased 2% annually both in the quarter and in 2014, mainly due to our continued positive evolution in the contract customer base and the steady portfolio offer.

The annual reduction in network usage revenues for the quarter and year reflects the 25% MTR cut effective as of late February. Without this effect, we would have seen an annual reduction in the quarter of just 6% due to lower income in traffic as a consequence of the increasing Vivo community in contract.

Quarter after quarter, I have been reaffirming to you our primary focus on revenue quality, as reflected in ARPU evolution and share value. As a consequence, we are pleased to report that we believe we have closed the year having captured almost 80% of the market's incremental mobile service revenues.

Now moving to slide 13, we present the details of the evolution of data and value-added services, which already represented in the fourth quarter of 2014 39% of mobile service revenues.

As already described by Paulo, our position as a top quality player has been the pillar for a continued growth in contract and data users, supported by an increased smartphone penetration translating into a data revenue mix which is similar to the penetration of some more mature and higher income markets.

Internet revenues accelerated their annual growth, rising 32% in the quarter and in 2014, due to strong sales of 4G plans and prepaid packages. Value-added services revenues soared 37% against the same quarter of last year and 43% in 2014, both mainly driven by our online education, security and health services, and continued adoption of media products, mainly the Vivo music product.

Messaging revenues decreased annually around 10% in the quarter and 13% for the whole year, reflecting the maturity of this service as we have been witnessing in recent quarters. Still, these revenues are being more than compensated, especially by data usage, as we promote the adoption of integrated offers of SMS, voice, and Internet to improve data ARPUs.

As a result of the preference of our customers for Internet and digital services, SMS represents now just 18% of our data revenues versus 25% in the fourth quarter of 2013.

On slide 14, we show the recent evolution of fixed revenues. In 2014, net fixed revenues' evolution confirms our continued improvement, with a controlled decrease of just 3.9%. When excluding regulatory impacts, the reduction is of less than 1% in the year compared to a more than 5% decrease recorded in 2013.

Voice revenues were down 8% in the quarter and 9% in the year, and continue to suffer from service maturity and mobile substitution, although being partially compensated by the fixed wireless revenue stream. When excluding the mentioned regulatory impact, voice revenues in 2014 would have decreased 3% annually.

Data transmission revenues accumulated in the year remained stable and fell 3% in the fourth quarter 2014, with a direct influence of the competitive broadband environment.

While we strive to retain and attract best customers in corporate areas to bundling, in the areas where we deployed fiber our total focus is in the migration of customers to FTTH, which has a higher ARPU and lower churn, and in winning back customers from competition. As a matter of fact, more than 60% of our additions in the quarter came from the competition.

On the pay TV side, we recorded accelerated annual revenue growth of 22% both in the quarter and for the full year, mainly due to strong sales of IPTV and DTH services, as Paulo previously mentioned.

Other revenues grew by 1.6% for the full year as a consequence of the higher level of equipment sales attached to selected service contracts with our corporate customers.

Moving to slide 15, we present the main levers of our margin evolution for the year 2014. General and administrative and personnel costs rose 2.1% annually due to the wage agreement implemented as of January 2014, offset by the strong cost control especially related to rent expenses and restructuring programs put in place in recent years since the merger of the fixed and mobile business under a single entity.

In that context, a provision for BRL212 million has been created in the last quarter for continuous right-sizing of the operation.

Subsidies and selling costs increased 6.6% year-over-year, reflecting our continued focus on capturing higher value customers with vigorous access evolution in contract, mobile data, FTTH, and TV segments.

On the other hand, services rendered expenses decreased 1.3% year-over-year due to the MTR cuts made in February 2014. When excluding such effect, we notice an increase of 5% attributable to higher costs with leasing of sites to improve network coverage and quality besides higher ratable cost of TV and mobile content.

Our austerity on costs in different fronts, even in a highly inflationary environment as pointed out by Paulo before, resulted in a slight channel increase of 1.3% in total recurring costs during 2014. This evolution, combined with the revenue increase mentioned before, led to the annual increase of 1.2% in recurrent EBITDA in the year, a significant improvement when comparing to 2013.

Now moving on to slide 16, on the top left side we show that our CapEx reached almost BRL9 billion in 2014. When excluding the payment for the 700 megahertz license, our investment reached BRL6.4 billion, representing 18% of sales, a growth of 2.1 percentage points over 2013.

Our higher investment level aims at solidifying our quality leadership, as mentioned before by Paulo, and as we evolve fast with the plan of FTTH expansion in the state of Sao Paulo to invest in 3G capacity and 4G coverage backbone and backhaul to guarantee the best experience for our customers.

Flat EBITDA for the full year led to cash flow generation of BRL9.4 billion, a slight decrease of 2% over 2013's figure.

Gross debt decreased 11% as of the end of 2014, while net debt increased 29% over the last 12 months ending December 31st, on the back of BRL2.8 billion paid as dividends and BRL1.7 billion paid for the 700 megahertz license in the last days of 2014.

Still, net debt represents just 0.22 times the EBITDA in the period, preserving our financial profile.

In 2014, as already mentioned by Paulo, Vivo recorded a net income of close to BRL5 billion, 33% higher than a year ago, explained in part by sustained operating performance as well as by recurrent positive impacts in depreciation and other tax benefits during the year.

Now Paulo will give you a final message before we open for questions. Thank you.

In conclusion, 2014 was a year of operational and financial improvement. Our leadership in high-end customer segments and strong cost control led us to an improved EBITDA evolution.

Quality is our key focus. We invested BRL9.1 billion last year, mainly to improve our customers' experience with a differentiated network and services. We consolidate as the national leader in mobile broadband service with the largest network in 4G technology.

Today 27% of total data traffic in the five largest state capitals is in LTE. We also lead in fixed ultra broadband with the largest network of fiber to the home countrywide.

We are the brand of choice of those who acquire ultra high-speed broadband plans in Sao Paulo. Our customers are experiencing the benefits of these new technologies. And over time we are confident that we will continue improving our ARPU and reduce churn from 2015 and on.

Now we are ready to take your questions. I just would like to point out that due to our process for the acquisition of GVT, during this conference call we'll not be able to discuss any matter related to the GVT transaction nor any perspectives of the development of our business for the larger entity. Thank you.

Thank you. The floor is now open for questions. (Operator instructions.) Michel Morin, Morgan Stanley.

Yes, hi. Good afternoon, everyone. The first question is on your fixed line business. We noticed some negative lines in service or disconnections of fixed lines, a fairly large amount, around 200,000, which we haven't seen in a while. And also, your broadband net adds were down, were negative, and we haven't seen that very often. So, I was wondering if you can give us a little bit more color as to what is driving that. Thank you.

Thank you, Michel, for the question. Basically in terms of mobile -- in fixed broadband, we are focused on migration from ADSL to fiber. We have some areas and they have competition against cable companies with our infrastructure that we have in copper. In this case, it has an advantage to compete, and we are promoting some bundles and some offers to protect our base.

And in the other hand, we have a large part of the very special areas, the very areas that it's possible to promote more our offer in fiber, that were achieving our objectives to capture people from our competitors. Like Alberto said, around 60% from our competition went back with Vivo.

And it's our strategy. Basically it's on this? No, we have parts that we are possible to compete in terms of the -- we have advantages to compete. In the other parts of our footprint, it's more complicated to do this.

Okay, that's clear. Thank you. And then, I just wanted to clarify regarding your handset sales. There was a comment in the release about you being more prudent with subsidies. But, when I look at the numbers, I'm a little confused because your revenues are down but your expenses are up, so that seems to suggest that you had bigger subsidies. So, can you help me understand what's happening here?

Michel, this is Alberto Horcajo. When you look at the composition of our portfolio devices, you will notice that average unit prices are higher since we are now carrying mostly -- well, only smartphones, and the bulk of the subsidies goes to 4G customers.

So, yes, we did have a slight decrease in sales of devices, it's about 7%, and a slight increase in the cost of goods sold. And that's answered by the makeup of our portfolio devices.

Okay.

In our case, Michel, we have actually a lot of handsets on the market, no? Basically in the retail market, it's possible to capture all the devices from this kind of channel, no?

Sorry, Paulo, I didn't quite understand that last comment.

No? I was saying that we are not selling directly our own handsets, no? It's possible to capture from the market. From the retail, for example, that customer to buy a smartphone for many installments, like 12 installments. And it's possible to capture this type of client.

Okay, got it. Thank you very much.

Richard Dineen, UBS.

Oh, thanks, guys. Yes, just maybe a follow up on the fixed line on your Vivo Fibra numbers. You mentioned you're growing those fiber customers at 80%, but you're also growing coverage around about that rate too. We had another 400,000 addressable homes passed this quarter, so your penetration seems quite flat.

I guess I'm just wondering when you're going to slow or stop the build to drive the penetration number up. And which number should we be looking at? Are you going to be sort of stopping when you get to, I don't know, three million addressable homes? Basically, we are near the end of the fiber project?

And then secondly, if I may just quickly on text revenue, I think like everyone you're seeing a lot of pressure on that from instant messaging. And although it's obviously less significant as a standalone segment these days, I think you talk about rolling it into other offers, I'm just wondering what happens to that BRL400 million which you're still getting from I guess that sort of standalone text revenues. Is that at risk, or is there a plan to migrate that as we see ongoing pressure from instant messaging? Thanks very much, guys.

Hi, Richard. Basically in terms of fiber, we achieved 4.1 million homes passed and 2.6 million addressable homes. As you see, in Sao Paulo we have 36 cities covered by fiber.

But, basically we have very different situations in each city, no? We have rich areas with addressable homes for fiber close to poor areas, no? When you compare the penetration in terms of fiber with the other markets, mature markets, we have nowadays 50%, no?

Now we are growing a lot. It's more difficult to have more penetration than this, no? But, we understand in this year we are growing very fast because we put more coverage in more cities, and we increase a lot the number of people that we have in fiber.

On the question of messaging, as you see, it represents a lower share of our data revenues, more than compensated by Internet related revenues.

So, we think if we look at data ARPU and how it's rising by about 16% year-on-year, this is the right strategy, as most of our customers now carry smartphones that obviously run all the applications that they now prefer to communicate with other people.

So, that's the rationale for us, recognizing that this is obviously a mature service.

Okay. Thank you very much, Paulo. Alberto as well, thank you. Just maybe -- if I could just maybe press you for a number on the fiber rollout, I mean, if you're at 2.6 million addressable homes, and it doesn't look like you're slowing the homes passed and the addressable homes is sort of following through from that, is it reasonable for us to expect you to slow down this year in terms of your coverage, or is that something we should just not think about? Is it still full steam ahead, as it were?

I think we have space to grow. But, nowadays we are focused more in the connection, basically to have all the perspectives in this areas that we have covered. And we achieved now 61% of share in ultra broadband when you compare with our competitors in these areas.

And it's very possible for us to increase the penetration in the same area. I think if you compare in the mature markets with a geography like ours, it's possible to achieve 30%, three-zero, okay?

Right. Okay, that's very helpful. Thanks for the follow up, Paulo. Thank you.

Thank you.

Andre Baggio, J.P. Morgan.

Good afternoon. Did you mention what is the impact of the recent increase in the FX? So, we saw the dollar going from 2.20 to 2.8. Does this have any impact on your plans for the next years? Do you have a substantial part of the CapEx that's linked to the dollar?

Thanks for your question, Andre. Part of our CapEx, yes, is indexed to the dollar. But, we have also negotiated several rates at which we have a reasonable expectation of the final cost for us in reais.

The greatest impact actually is related to the purchase of devices, which is obviously a component of cost. And for those, we also have negotiated several bands of different rates.

Obviously, the real has depreciated significantly since last quarter, but we don't foresee a significant impact on the potential depreciation of the composition of our costs or our CapEx, really.

And then, I'd also like to say that the small portion of our debt which is denominated in other currencies is hedged, as are other commitments for the business.

Perfect. And a second question I have is can you talk a little bit about overall competitive environment, both in fixed line and mobile? What's recent changes and motion, or is it pretty much stable?

In terms of fixed, competition is quite stable.

In terms of mobile, we have some news in the market in the end of this year, basically from our competitor that launched postpaid plans with OTT free offer. So, basically that's a new offer that we have in the market, no? It's more competition in terms of postpaid basically.

But, you still expect to maintain a very high margin of the additions?

We maintain our position. We maintain our offer. We renew our portfolio in the end of this year. We are so comfortable with this position.

Thanks a lot.

Thank you.

Pierre Safa, Goldman Sachs.

Yes, hi. Thank you for taking my question. So, my first question is about your provisions for bad debt. So, it's up 0.5 percentage points year-over-year. Could you please discuss it a little bit, where you see that headed as the economics in the area becomes tougher and what you're doing about it, and where you see that for 2015?

Sure. This is Alberto Horcajo. Thanks for the question. For the whole year, it was about BRL900 million. That means that we have allowance for uncollectibles which represents roughly 1.8% of our net revenues.

We find a challenging environment which is taking us to work on both our credit policies, those in our collection arrangements. As you have noticed, we have significantly expanded our contract base in mobile. And part of our customers that are coming from prepaid onto our hybrid contract plans carry the risk of potential uncollectibles.

We are comfortable with that level. 2015 might perhaps represent a turning point. But, I like to state that we will not sacrifice the quality of our revenues for the sake of a pure expansion of those. So, we're confident that around that level of allowance for uncollectibles is where we should be working.

So, you think you'll stay -- so, should come around the same level, should remain flat going forward?

Yes. Around that level, both for the residential and for the corporate customers, yes.

Excellent. Thank you. And could you please just confirm quickly what your smartphones came at for the year? I couldn't find that. You said you added 15 million over 2014. Could you confirm what that number was at the end of the year?

It's roughly 66% of the mobile customer base. So, I think it's 84% for the contract base and some 49% for the prepaid. So, these are the numbers.

Perfect. Thank you.

Ivan Hernandez, Scotiabank.

Yes, thank you. This is actually Andres Coello. Regarding that BRL112 million provision for restructuring, do you have an estimate of the savings this provision can bring in the future? Should we expect personnel costs to remain flat this year or perhaps dropping a little against 2014? Thank you.

What I can say is that typically we've seen that we do recover the cost associated with these programs within the year. It's difficult for us to make any predictions on headcount and what type of future actions will be taken, but we find these adequate for this time.

Okay. Thank you. And regarding CapEx, you said that 18% of revenues was reasonable for the year, for 2015?

I think we said we are in that area, overall CapEx against revenues. That's what we said. And we think that's the environment in which we operate.

Okay. Thank you.

Andrew Campbell, Credit Suisse.

Yes, hi. Thanks for taking my questions. I wanted to ask a bit about the macro environment. I think you had a question on FX and also another one on bad debt expense. But, in terms of a weaker macro with the consumer being hit with some tax increases and tariff adjustments, this kind of thing beginning of the year, are you expecting to see some kind of ARPU weakness to come through as a result of that? That would be my first question. Thank you.

Thank you for the question, Andrew. Basically, I think we maintain our strategy in terms of -- the focus in postpaid in the high value segments in fixed and mobile. Basically, we maintain our offer that we have now.

We have some control in our acquisition in terms of scores that we have from the people came from the market. Basically, we maintain our position. I think it's possible to maintain with more focus in terms of the quality of the people that we are acquiring basically on this.

I see. And I don't know if -- from the first two months of the year if you're sensing a bit of slowdown in terms of recharges or usage or anything like that, or if it's maybe too early to reach that conclusion.

No, I think in the beginning of the year we have a good position because people are buying our services. No, we are -- like through the end of this year, no change.

Okay, thanks. And then, my other question was just on the hard caps that I believe have been applied to some of the data plans. First of all, just how extensive are those amongst the plans that you're offering? And do you feel that you're having a good reaction in terms of recharges and customer reaction and that kind of thing to the hard caps?

Like we show in our presentation, I think we are growing a lot in terms of people that are using smartphones in Brazil, no? I think the number that we show, it's very important to see that the people are using a lot, people that are buying smartphones and people are using data package.

If I may add to your question, Andrew, on what Paulo just said, those hard caps certainly are contributing to maintaining our revenue quality, okay? That is leading customers to recharges, and we're monetizing more from our customers who are on data plans on the prepaid base.

I see. Okay, thank you very much.

Bernardo Teixeira, BTG Pactual.

Hi. This is Carlos Sequeira, in fact. I have about three questions, please, if I may. The first one is on G&A expenses, which fell quarterly quarter-over-quarter. And it's not because of third party services, which in fact grew, but because of other G&A expenses. And I was wondering what exactly is behind the line? What exactly fell? That's the first one, please. Thank you.

You were re-baptized, I think, Carlos. This is Alberto Horcajo. Thank you for the question. On G&A, we have a number of programs in place. I think it was probably mentioned that we've even been renegotiating leases. Many things really open up for negotiation in this environment.

We've been doing selected third party arrangements for a number of support functions. We've been reducing many costs associated with support activity. So, it'd be difficult for me to point out any in particular, but I'll just give you an example.

We've been closing down distribution centers across Brazil, and that's also bringing in efficiency for us. And the program hasn't yet obviously reached its full potential. So, we will definitely work hard to continue to maintain G&A under control.

Okay. Thanks, Alberto. Another question that I have is CapEx to sales increased in -- even after excluding license payments, CapEx to sales increased in 2014 to something around 18% from 16% in 2013. And I was wondering if we could assume that this is a new level going forward.

I think we can explain about this, no? Basically it's not possible at the moment to disclaimer anything about the future, no? I think the next conference call we'll be able to discuss about this.

Ah, okay. Okay. I see, because it's -- yes, okay. Fine. So, okay, another question then. Sorry about that one.

I would like to go back to the fixed broadband net disconnections in the quarter. And what caught my attention is there were disconnections -- there seemed to be a disconnection between the growing pay TV base and the declining broadband base in the quarter. And I was wondering if you can help us understand why did it happen, and why broadband base is declining while the pay TV base is growing. And they should be -- I think should be together.

About competition that we have now in terms of TV and broadband, it's tough competition. That I said previously, basically in terms of they have different areas of Sao Paulo added to cover by fiber. It's a stronger position that we have in these areas. And we have a weak position in these areas that have competition with cover against cable, no?

In terms of pay TV, we have some competition too. I have a good offer that we have in IPTV solution to grow a lot. And we have more competition in DH solution basically on this.

Okay. Thanks, Paulo. Thank you.

Mauricio Fernandes, Merrill Lynch.

Thank you. Good evening. A quick question still on Carlos' point on G&A and more on the margin. In the past, fourth quarter would see margins fall because of promotions related around the Christmas holidays. Then more recently I would say that margins would be up in the fourth quarter given that promotions were not as substantial and volumes would help, so seasonally it would go up.

This quarter we saw margin expansion again, but without volumes going up significantly. It was basically flat or slightly up in the quarter, so it is really related to cost cutting. And with the macro environment as we seem to face going forward, it doesn't seem to leave room to be able to maintain the margin at around a level of almost 33% in recurrent EBITDA margin. So, I was wondering, Alberto or Paulo, if you could elaborate on how would it be possible to sustain that level in 2015? Thank you.

Thank you. This is Alberto Horcajo. I think we've been obviously struggling to recover, sustain, and then improve on the 30% OIBDA margin.

We're very pleased to report that for three consecutive quarters we've been increasing our recurrent OIBDA. And this is obviously the result of a number of initiatives that comprise different cost components, not a single one.

And I think you have already noticed throughout the conference call, there are plans for this size and shape of our operation. There are plans for the way we deal with our partners, be them commercial partners, technology partners, so on and so forth.

There are plans to review a lot of the contracts we have in place, because this is an economy that demands that and because we recognize that we have a weak top line.

And unless we work hard on the cost side, it's very difficult to maintain the level of income that this business demands for a sustained CapEx effort and for an ongoing remuneration to our shareholders. At the end of the day, this is an operation with BRL45 billion of equity in place, and we need to achieve a minimum return on that capital.

So, we do believe strongly that we're not there yet, that despite weakness in revenues, although we believe also that the quality of our revenues allows us to manage cost in a more efficient way, that we want to consolidate levels that you're seeing, and that I believe you should be looking at the recurring numbers rather than the reported numbers, because they really show the nature of our business, and hope that, as we have also been trying to explain throughout the call, we will continue to gain share in the markets where value is, both in mobile and in fixed. And that's what really sustains our margin efforts.

That's very clear. Thanks, Alberto. And one -- or a couple more. So, of the price increases that happened last year in wireless, have you noticed any impact to volumes in terms of minutes or data usage from customers yet?

No, no impact when you compare the minutes of use and the impact to our selling. We have a quite similar level, no impact.

Thank you, Paulo. And in terms of -- and last question, I promise. In terms of FISTEL, you've had a number of disconnections also in fixed and some in wireless. Could you disclose or share with us how much in FISTEL have you been able to save as a result of that?

Mauricio, in terms of FISTEL, basically we introduced our new policy about the clients, that we see basically the people that are using the services in the last three to 30 days. And the people do have a profile of use that it's possible to pay the FISTEL, no?

Basically we are very strict in this policy. We reduced the number that we have in base in December in a big amount of people, naturally. But, it's clear that it will be possible to make the accounting if you compare with the previous months, no? I don't have the number here, but I can say that it's a very special number because December is our Christmas campaign, no?

Fair enough. Thank you, Paulo.

Okay.

Jonathan Dann, Royal Bank of Canada.

Hi there. Two questions (inaudible -- technical difficulties).

Mr. Dann, is it possible your phone is muted? We'll move on to Carlos Legorreta, GBM.

Thank you. I understand you cannot disclose any particular figures, but is there any regulatory risk that we should be looking at for 2015, obviously outside of anything involving the GVT transaction? Thanks.

I can't explain about this point basically on this.

No, I mean, we know the drop in the termination rates in both fixed and mobile. Is there any other particular item that we should be looking at that is not necessarily company specific but rather industry-wide that you think we should be aware of? Thanks.

In terms of our events, basically we have a discussion about the new contract in the fixed business.

That's ongoing still, right?

Yes.

Okay. That's fair then. Thanks.

Thank you.

Jonathan Dann, Royal Bank of Canada.

The first question was on the fixed wireless subscribers in the quarter. Can you confirm whether or not you went any down?

And then, back to the FISTEL payments. Do you have many more customers that -- I mean, how much of the margin improvement do you think came from lower provisions for tax FISTEL in the quarter? And is that a sustainable increase going forward?

In terms of the FWT, it's a solution that we implemented in 2012. We increased a lot in the last year, just in 2014, the number that people came for these services in areas outside of Sao Paulo.

We see that we are facing now a new moment because the ability is increasing a lot, and we have decided to put -- discourage more severe in this case, no? Basically all this, we have reduced the number in the last quarter. Now, I think it will be possible to have the same offer that we have now, but more severe in terms of credit, no? Basically all this in this kind of servicing.

The other point that you asked about FISTEL, FISTEL is a regulated situation in terms of the possibility that we have to reduce that number of people that we are in our base. Basically you have this political in terms of you look for all the possibility to have a cleaned up base, a base of people that are using our services.

And the decision that we take in the end of this year is basically all these are people that are using that are profitable, that were in terms of Anatel rules okay, we maintain. If you don't have this possibility, you get that. Okay?

That makes sense. Thank you.

Maria Azevedo, UBS.

Hi everyone. Thanks for taking the question. On the CapEx, do you expect to increase the levels on the back of FX and high exposure to data? And still on the FX, do vendors absorb any of the FX risk? And are we correct to assume that around 50% of your CapEx is in US dollars? And what about your IPTV content? What percentage of that would be dollar exposed? Thank you.

Good question, Maria. These contracts, we actually price everything in reais. Obviously part of the negotiation, the currency of reference for the -- of the par might be the dollar. And of course that can impact the width of the investment that we may end up making.

But, as I said before, once we have any commitments made, we hedge all the positions. So, we're not anticipating any significant impact against our investment plans, and neither for cost components that are also referenced on the partner sides to any other currency. So, it's not a concern for us, Maria.

Okay. Thank you very much. And as a follow up question, back to your fiber net adds. What has been the main obstacle to faster growth? Is it due to the execution, the learning curve, or do you also see an important impact from the macro and from the cable competitors and their retention strategy?

Well, basically you have all the capacity to sell this, to have the installation. Basically we have improved in the possibility to achieve some buildings, areas that we have in vertical areas that we have in Sao Paulo cities. And we already implement this solution.

And it's possible to gain traction on this. Basically, we are putting all-out effort that we have in this in terms of capacity of people that work with us. And it's all the possibility to have it nowadays.

Okay, perfect. Thank you.

Michel Morin, Morgan Stanley.

Thanks for taking the follow up. I just wanted to ask about something on your slide seven where you compare the ARPU of your 4G subscribers versus your 3G subscribers. I thought that was a very interesting data point, but I was wondering if you could give us more of a like-for-like comparison, because I'm assuming that those people who've taken on 4G are your heaviest users who probably were already spending more than a typical customer. So, do you have any data that can show us what kind of uplift you're getting from an existing customer who moves from 3G to 4G?

Michel, basically the 3G, it's already a high user, no? We are looking for the people that are using a lot of 3G to invite these people to come to 4G, no? Basically the people that are in 4G now, it's a high user, no?

And when you compare the basis we have now, it's almost three million clients in 4G. And 27% in the main market that we have in terms of consumer dataset is people that use a lot. Basically the comparison that you have is in terms of the millions that you have in terms of ARPU that we have in 3G with people that use the high part of the pyramid in terms of 4G basically on this.

Right. Do you have any data that would show us kind of the data consumption of a 4G customer versus a 3G customer?

I don't have here now. But, basically people that came for 4G, it's a very high user.

Okay. All right. Thank you very much.

Thank you.

If I may add to what Paulo said, I'd like to highlight the fact that in a number of data plans, we happen to be the most competitive service provider in the market.

When you have the 500 megabits entry plan, for 4G we are the most competitive of all for active players. And in other very popular plans, the 4 gig and the 6 gigabits, we're also very competitive. And we have many of our customers -- 4G customers are really close to that, around BRL100 a month.

So, the fact is that we're very competitive. There is always the myth that Vivo is a premium price competitor. I believe we are a very competitive operator, and that, yes, we're moving customers from 3G to 4G pretty successfully with that, close to 50% uptake in ARPU.

Great. Thank you very much.

And ladies and gentlemen, that concludes today's question and answer session. At this time, I would like to turn the conference call back over to Mr. Teixeira for any closing remarks.

Thank you all for attending our conference. As I told you during the presentation, our focus is on quality, to improve the loyalty of our customers, and create even better and sustainable results for our shareholders. Thank you again, and I hope to see you again next quarter or anytime soon. Thank you.

Ladies and gentlemen, that does conclude today's Telefonica Brasil fourth quarter 2014 results conference call. You may now disconnect your telephone lines. Thank you.