Telefonica Brasil SA (VIV) 2015 Q1 法說會逐字稿

Good morning Ladies and gentlemen. At this time, we would like to welcome everyone to the Telefonica Brasil first quarter of 2015 earnings conference call.

Today with us we have Mr. Alberto Horcajo, interim CEO, current CFO and Investor Relations Director of Telefonica Brasil and Mr. Amos Genish, currently CEO of GVT already indicated by the Company's controlling shareholder to act as CEO of the Company after the conclusion of the GVT acquisition.

Today we have a simultaneous webcast with 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 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. Alberto Horcajo. Mr. Horcajo, you may begin your conference.

Ladies and gentlemen, I would like to thank you all for attending this conference for the first quarter of 2015 results of Telefonica Brasil.

Before my remarks on the release of results for this period, let me pay tribute to those that made our performance over that time possible. More specifically, I would like to take the opportunity to acknowledge the enormous contribution of Paulo Cesar Teixeira, our most recent CEO to position Vivo as a premium mobile franchise in Brazil.

I also wish to express my conviction that under the leadership of Amos Genish we will continue to thrive and to turn us into the most admired Company in our industry in Brazil and beyond.

Now moving on. On slide 3, we highlight the sustained positive evolution of our main operational and financial drivers in a challenging business environment. We continue to record a very strong performance in high-end segments, a distinctive trait of our Company.

On the mobile side, we continue to sustain significant growth in postpaid accesses, which already represent 35% of our mobile base. At the same time, as a result of our differentiated quality and offers, data adoption is accelerating, especially in 4G. LTE data traffic currently represents almost 30% of our total data traffic in the five largest metropolitan areas. With a stronger growth in data revenues, we achieved the highest increase of outgoing mobile service revenues in three years, an impressive 14%.

On the fixed side, the level of fiber broadband and Pay TV net adds grew significantly in the year, 74% and 77% respectively, producing resilient revenue evolution. Business to consumer fixed broadband revenues increased by 3.4% in the first quarter of 2015. As a consequence, net revenues in the first quarter of 2015 recorded highest growth in about three years, 4.3%, despite a higher level of allowances for uncollectables and then we achieved EBITDA growth for the fourth consecutive quarter.

Now moving to slide 5 where we present the evolution of our accesses. On the left of the slide, we breakdown the evolution of fixed and mobile accesses which totaled more than 97 million by the end of first-quarter 2015, an annual increase of 3.5%. Mobile accesses have grown 4.3% versus the first-quarter 2014 driven by the evolution of contract accesses which increased more than 15% in the same period of the comparison, rebalancing and allowing for the better monetization of that part of our mobile base.

Thus, on the prepaid segment our strategy is also consistent with focus on value rather than number of accesses. Prepaid accesses resumed growth increasing by 1.1% in the first quarter of 2015, also due to lower number of migrations to contract plans as we enhance and maintain a solitary disconnection policy based on access value.

Fixed accesses reached 15.3 million in the first-quarter 2015, stable in the yearly evolution mainly explained by, first, a reduction of 2% in fixed voice accesses led by some commercial changes in our fixed wireless solution resulting in a new credit (inaudible) last-quarter 2014. Secondly, stable and resilient evolution in broadband accesses with an important positive evolution with a fiber technology. And third, consisting growth of 23% in Pay TV accesses with increasing sales in both IPTV and DTH technologies.

In slide 6, we describe briefly our ongoing mobile strategy and its recent impact on ARPU. We reached 29 million contract accesses in the first quarter of 2015, representing roughly 35% of our total mobile accesses with a market share of 42% in this segment. This outstanding performance is also sustained by our leading carriage in 4G reaching more than 40% of the Brazilian population.

Data adoption is climbing fast. Mobile data users reached 41 million accesses in the quarter, an annual growth of 35% while smartphone penetration within our base soared to 69%, probably 20% higher than the industry average. Moreover, 4G data traffic currently represents almost one-third of total data traffic. As a result, we generated robust growth in ARPU in the quarter, 4.3% growth year over year with data representing around 42% of total revenue per user.

The numbers are more impressive in relative terms. Our ARPU for the first-quarter 2015 is more than 50% higher than the average for the industry and we are the only one reporting rise in ARPU. We thus reinstate our commitment to value and healthy competition in mobile.

On slide 7, we show some changes in our portfolio that contributed to reinforce our strategy to improve monetization and customer experience. On the prepaid segment, we recently launched a new portfolio of data plans, all of them with the 4G technology incentivizing the sporadic usage of data resources.

In addition, we are stimulating more intense usage with value-added services (inaudible) for control and pure postpaid customers. The new portfolio for controlled customers allows for the use of larger data plans with the benefits of our 4G service. We have seen a strong migration of clients to very competitive data bundles of 2 gigabytes and higher, enhancing customers' ARPU.

Recharges are also increasing by double-digits driving overall data plan penetration to grow 11 percentage points year over year reaching 45% of our base in the first quarter of 2015. At the same time with the limitation of data usage after the end of the franchise, we were able to reduce inefficient network usage and this is already reflecting in regulatory quality indicators. Our access disconnection rate improved on average by around 30% after this measure was implemented.

In slide 8, we present the evolution of our strategy, being the ultra broadband Company and a competitive video player. On the left side of the slide, we show the evolution of our Vivo fiber net adds, almost twice higher than a year ago. This trend is reflected in our share of ultra broadband net additions in the state of Sao Paolo, almost 60% of the total according to the latest numbers released by ANATEL.

As a result of our focus on the monetization and loyalty of customers, our broadband ARPU increased by 4% annually. To support this strategy, we significantly expanded our fiber footprint in the year by almost doubling the number of homes passed in commercially addressable homes accounting for 4.2 million and 2.7 million respectively.

With a targeted strategy focused on expanding our customer base, we show in the right side the robust growth of our Pay TV accesses both in DTH and IPTV technologies, the latter more than doubling its customer base with penetration that is close to 20% of the fiber ultra broadband base. Also, the number of customers with triple play solutions rose 24% annually with corresponding benefits in revenue per user and loyalty.

Now in slide 9, we recorded in the first-quarter 2015 a strong annual growth in revenues and accesses in the most relevant services for the corporate segment. In 4G, our competitive portfolio of devices, outstanding carriage led us to increase our customer base almost three times by reaching 780,000 customers in March 2015.

In high-speed broadband, our level of net additions in the first-quarter 2015 in the corporate segment is 40% higher than a year ago, supported by the expansion of addresses passed and customers migrating from the XDSL solutions.

In addition, our machine-to-machine access base is 1.4 times higher than a year ago with sustained leadership in share of net adds throughout the year, that is 1.1 million new accesses in the period. With this focus on high-growth platform and also looking for new opportunities in IT and value-added services, we can already report great progress in the corporate segment. In data and IT for example, we recorded an annual increase of 33% and 44% respectively.

Slide 11 summarizes Vivo's key financial figures in the first quarter of 2015. In the first quarter of 2015, higher growth in mobile service revenues and resilient fixed revenue evolutions led overall net revenues to record the highest growth in three years of 4.3% annually. Despite further provisioning for uncollectables, we achieved EBITDA growth for the fourth consecutive quarter, although way below our target in normalized conditions.

In addition, net income reached almost BRL580 million in the quarter, a decrease of 12% year over year mainly explained by higher financial expenses in the period associated to various hedges. In terms of CapEx, we closed the quarter with BRL1.3 billion invested, representing roughly 40% of net revenue generated in the period, an increase of close to 27% when compared to the first-quarter 2014. The results are solid and show their determination to create a stronger platform to capture further growth opportunities as I will detail in the next slides.

On slide 12 we present our evolution of mobile service revenues and the potential for capturing the incremental revenues generated by the Brazilian telecom market. Annual revenue growth accelerated and reached 8.4% in the quarter and almost 12% when excluding MTR accounts for the period. Data revenues, our main growth driver, enhanced their expansion to reach 32% year over year in the first quarter thanks to a strong and sustained rise in Internet and value-added service revenues, as I will detail in the next slide.

Accesses and usage revenues grew softly by around 1% annually in the quarter mainly due to our continued positive evolution in the contract customer base and the higher level of recharges in the period showing resiliency in the face of restrained consumer incomes.

The 28% annual reduction in network usage revenues for the quarter reflects the 33% MTR cut effective as of late February. Without this effect, we would have seen an annual reduction of just 2% due to lower income in traffic as a consequence of the expanding Vivo community.

For the last two years, I have been reaffirming our primary focus on revenue quality generation. As a consequence, we are pleased to report that we ended the quarter having captured well over 90% of the market's incremental mobile service revenues in the last 12 months, although our share of mobile accesses have remained unchanged over the same period.

Moving to slide 13, we present the evolution of data and value-added service revenues, already representing 42% of mobile service revenues in the first quarter of 2015. Internet revenues doubled the rate of annual growth increasing 46% in the quarter due to strong sales of 4G plans and higher sales of prepaid bundles. Value-added services revenues soared 28% against the same quarter of last year, mainly driven by our online entertainment, education, security, self health and help services. P2P messaging revenues decreased 3% in the quarter versus 11% in the last quarter of 2014. This lower annual reduction is mainly explained by the stronger reduction of bundles combining voice, SIMS and data.

Moving now to slide 14. The evolution of net fixed revenues confirms our continued improvement with a reduced decrease of 4% versus 5% in the previous quarter. When excluding regulatory impacts, we achieved a soft annual reduction of just 0.4% in this first quarter of 2015. Voice revenues were down 10% in the quarter and continued to suffer from service maturity and mobile substitution. When excluding the mentioned regulatory impact, voice revenues in the first quarter of 2015 would have decreased by 2% annually. Pay TV revenues in the first quarter of 2015 continue to record accelerated annual revenue growth of above 20%.

On the data side, for the first time in this quarter we are disclosing data revenues separating consumer and corporate segments. B2C data recorded in the quarter an annual increase of 3%, reflecting our strong focus on increasing ARPU despite the intense competition and soft economic growth. We strive to retain and attract best customers in covered areas through a smart bundling and in the areas where we deployed fiber our total focus is on the migration, improving accesses monetization.

Corporate data and IT revenues grew by 2% in the first quarter when compared to the first quarter of 2014, mainly due to renewal of major contracts with price adjustments and IT services sales under challenging conditions.

In slide 15, we present our EBITDA evolution for the first quarter. Our tight grip on costs combined with the revenue increase mentioned before led us to achieve EBITDA growth for the fourth consecutive quarter, an EBITDA margin of close to 29% in the period.

General and administrative and personnel costs rose 2% annually, reflecting the wage agreement implemented as of January 2015 offset by lower GAD expenses. Subsidies and selling cost increased 9% year over year, mainly impacted by an increase in the allowance for bad debt amounting to BRL117 million in the quarter. Excluding this effect, commercial expenses would have grown by just 2% year over year.

We are now in the process of rebalancing our mobile customer base, also reviewing credit policy and collection procedures, creating the conditions for improved cash conversion of sales later in the year.

In addition, services rendered expenses increased by only 3% year over year due to the MTR cut made in February. When excluding such effect, we notice an increase of 9.5% attributable to higher cost with leasing of sites to improve network coverage and quality, besides higher variable cost of TV and mobile content in the partnerships for value-added service.

Now moving onto slide 16. On the top left side of the slide, we show that our CapEx reached BRL1.27 billion in the first quarter of 2015, growth of roughly 27% over the first quarter of the previous year to support our quality leadership, as we invest in [better] broadband access and transmission, 3G capacity and 4G coverage to guarantee the best experience in the market.

Gross debt by the 31st of March had decreased 18% year on year due to debt amortization. Net debt also recorded a reduction in annual terms of 29% representing now 0.25 times the EBITDA of the last 12 months. Even with the BRL2.8 billion paid as dividends and interest on earned capital during 2014, net debt reduced almost 30% in part as a result of the mark to market of the transactions with derivatives created for the acquisition of GVT as of March 31.

Flat EBITDA year over year led to cash flow generation of roughly BRL1 billion, a slight decrease over the first quarter of 2014's figures.

Now moving on to page 17. In conclusion, over the first quarter of 2015 Telefonica Brasil performed well in different fronts; first, sustaining a leading position in premium segments, both in mobile and ultra broadband in Sao Paulo; second, maintaining a value driven approach to pricing and improving network quality and customer experience; third, achieving record revenue growth driven by mobile data and Pay TV; fourth, reaching recurrent EBITDA annual growth for the fourth consecutive quarter; and finally, sustaining a clearly differentiated net profitability and solid capital structure.

And now with the successful conclusion of the GVT transaction, we expect to reinforce this trend of growth by creating the leading integrated Telco in Brazil, also supported by synergies that will be generated from day one.

Now Amos will talk briefly about progress in the integration of GVT, pro forma first-quarter 2015 results for the combined Company and the way forward. Thank you.

Good morning everyone, this is Amos. I just would like to refer to page 19 where we are showing the combined results pro forma Vivo GVT for Q1. Before that, I would just mention quickly the result of GVT for Q1, growth of 10.1% on revenues and 11.3% growth of EBITDA for the quarter year over year, and on the growth of Rugs we had the growth of 11% in voice -- fixed voice, 15% in broadband, and 28% of TV, clearly very strong performance on Rug's growth and still double-digit -- low double-digit on revenues and EBITDA growth.

So when you look on the combined results of Vivo and GVT, you can see that growth of access is 4.3% with positive effect of GVT on the fixed voice and the broadband. Broadband grew for the combined business 6% for the quarter, 25% for TV. That also improved the profile of growth for Vivo for 5.2% on the top line and EBITDA growth with 2.1% and also improvement of the EBITDA margin for the quarter due to GVT contribution.

We are in the process of finalizing the integration plan. Closing is expected for the 28th of this month and I think it's -- we are really starting, good starting point to leverage the synergies that we highlighted during the last few months with respect to the combination of Vivo GVT.

And with that, I will open it I believe to a Q&A session. Thank you.

(Operator Instructions) Andrew Campbell, Credit Suisse.

I was hoping we could go back to the mobile service revenues and the ARPU trend, which was obviously very favorable in the quarter. As you mentioned, you are seeing a dynamic that's different from what your competitors are seeing. So I was wondering if you could give a little more color on why you guys are being more successful and in particular were there some changes in the commercial approach or the pricing of certain plans or something in particular that led to this stronger growth in the first quarter? Thank you.

I think it's a question of combining a number of approaches that Vivo has been pursuing in the last few quarters. First, there are no freebies. When compared to some of our competitors, we are not giving anything away. We price our services in respect of the quantity of the service we provide, in terms of the coverage that we have. The breadth of our services is also based on value that is added on over the top service offerings which we have and I think that distinguishes us from some of our competitors.

Secondly, we are disciplined in re-pricing our bundles. And third, we are I think quite successful in up-selling to customers. We recognize that there is a huge unsatisfied demand for mobile data and those customers of Vivo that already carry a smartphone, as I said in the call before, a significant part of our customer base have more and more a need to have higher gigabyte bundles. And thus I think it is a combination of these three factors plus the fact that we probably have a customer base which contains some of the early adopters of mobile telephony here in Brazil, it's important to remember that Vivo is the consequence of the combination of the first and most successful mobile franchises here in Brazil that lead us to have this differentiated ARPU with our competitors.

And clearly we are also backing it up with investments, refer to our 4G share before, and that's built on the premise of higher coverage and first mover advantage in some key markets like the market here in Sao Paulo. The combination of all these factors probably lead to that and also looking at what other companies are doing in other markets we believe that certainly we haven't yet reached the limit for us to continue to monetize successfully on the existing customer base and to migrate customers to higher value contracts in the right circumstances. I hope this answers your question.

Yes Alberto, that's very clear. Just going back to the 4G portion and also the up-selling that you mentioned in the very high percentage of traffic now that you have in a number of the markets that's actually on LTE, when you're getting customers to migrate to 4G are you typically seeing some kind of an up-sell then associated with that? Is that a common dynamic?

Well, absolutely. On average, ARPU rises by about 50% when we move a customer from 3G plans to 4G and then once they're in 4G they move from the 2 gigabytes to the 4 gigabytes bundles. That's about it. And it's pretty fair and it's pretty competitive; when you look at the prices of our bundles and compare them with the competition in most segments, we're quite competitive. So yes, there is a gain in the monetization of the customer.

Great. Thank you Alberto.

Welcome.

Vera Rossi, Goldman Sachs.

My question is also on the wireless. What type of customer is bringing up the blended ARPUs? Because I see the postpaid is up 1%, the prepaid 2% and the M2M is down 8%. So your blended went up 4%, so is this a result of a better customer mix or more -- not better but with more postpaid?

Thanks for the question. But I think that if you look at the most recent quarter, you'll see that the rate of migration from prepaid to controlling and contract is somehow slowed down in the light of market circumstances and we've also made a reference to the [pay] that this increase in the allowance for uncollectables is made in our accounts. And I think we're pretty conservative in the way we're provisioning this. But anyway, that's what we need to do and we're working to turn that around.

But if you look at the three previous quarters, you'll see that the rate at which we've been migrating customers from prepaid to controlling has been extremely fast. So that's obviously meant that our customer base is now rebalanced towards higher value. A smartphone penetration is also risen over the last 12 months significantly. So the combination of the devices customers carry and our ability to create new bundles together with what I referred to before in terms of up-selling to customers leads to what you're seeing now.

Okay. And I have one question on your fiber-to-the-home product. The ratio fiber-to-the-home subscribers divided by the addressable market home space is approximately 60% today, has been relatively stable in the last year. So do you think this ratio has room to increase and if so to what level? Thank you.

Sure. Thanks for the question. Of course, we do believe that this penetration rate is set to rise for the year 2015 as we will focus more on connection than on passing homes. We mentioned it in the call earlier we now have 2.7 million homes passed here in the city of Sao Paulo. We'll need to add the homes passed by GVT that gives us a tremendous platform to build our Vivo fiber offering. And thus yes, we believe strongly that you will see rise in the penetration rates for with the broadband here in Sao Paulo.

And do you have an idea or like a goal for the next two years where we should see this ratio going or this -- the subscriber base increasing?

Well, if you look at the industry average, we could more than double that rate. If you look at the penetration in the GVT base, we can certainly more than double that rate as well. And so we're very encouraged by all the knowledge that we now we have within the Telefonica Brasil Group with the GVT team leading that effort. As I said before, (inaudible) CapEx towards connection and less passing of homes as we already have this significant base.

Okay, thank you.

You're welcome

Susana Salaru, Itau.

We have two questions. The first one is regarding the change in the subscriber -- mobile subscriber mix. We've seen that's growing much more and/or is accelerating the growth in the prepaid and decelerating the growth in the postpaid. So our first question would be if that should be the case going forward and if so we should -- I mean we estimate will have a positive impact on the commercial commissions going forward.

And the same time if you could also talk a little bit about the churn rate. We see a good improvement in churn rate from previous quarter. So we should continue to see these levels of improvement given the fact that you have more stability in the subscriber base growth on the mobile segment. That would be our first question.

We are seeing (inaudible) notes on the base and on revenues for mobile services. On the base, it is likely that in this current market conditions we will continue to see slower rate of migration from prepaid to contract. That's reasonable when you can see the speed at which we have been migrating in the previous quarters and we're now probably migrating customers and margins.

Although we have a pretty segmented approach to these opportunities which looks at different geographies within Brazil, looks at different markets also based on our own market position.

So it's very likely that you won't see -- you look at the most recent quarter, we took roughly 30% of the net contract gains and that's a significant reduction when compared to previous quarters. But we're still comfortable with that because what's most important and that's the second part of my answer, is how is our revenue progressing. As long as we continue to see good monetization at the customer level, we continue to grow this proportionate share of incremental revenues and an incremental share also of revenues in the different segments we are happy with the performance of the business.

We believe strongly that when you look at the cost of serving that particular base clearly there are a lot of expenses that are related to the customer independently of the relative value of the customer. So our approach is obviously having a very competitive commercial offering for those customers that already are buying data plans from us and making sure that we continue to re-price in a disciplined manner going forward.

I hope that answers your question.

Yes, great. And our second question would be on the cost side. On the bad debt that we had a little bit of increase in the quarter and you mentioned that you are rebalancing the subscriber base and you take the necessary steps to revert this trend. Just -- if you could just elaborate a bit more what would be the necessary actions to mitigate this problem and if you -- if we should expect a reversion of this trend already in the next quarter?

Certainly, thank you for your question. Susana, we hope that the charge for uncollectables should decrease over time. And why should that be? Well, first because as I mentioned just a moment ago, from the commercial front we are focusing more on sources of revenues which don't carry new exposure to credit risks with customers that were just accesses for us rather than customers before migrating to contract with us.

We're looking at -- not only looking but working both in the credit [to scoring] fronts, on collections procedures. I must admit that we now have a more strenuous approach to some of these processes. In 2014, we believed that it made economic sense for us to push hard on expanding the contract base with the aim of further monetizing it down the road. We now believe that in the context of macro conditions in Brazil, we need to take a new look at this situation. And it will probably be showing as early as this second-quarter 2015 that we're rebalancing that.

The charge in the first quarter was about BRL325 million. It was probably BRL120 million higher than we have anticipated and in fact it was quite frustrating for all of us because we wanted this quarter to really show growth (inaudible) higher than the growth of revenues which we believe is impressive. But I guess we have to wait for at least another quarter. Hope that answers your question.

Yes, thank you Alberto.

You're welcome.

Michel Morin, Morgan Stanley.

I was hoping to ask a question on GVT. The company had been for sale on and off for the last three years or so and I'm wondering if, how that might have affected investment decisions and growth that the company ended up delivering.

My understanding was that Vivendi was trying to get to free cash flow positive, perhaps sooner than otherwise would have happened. So, when we look at the low double-digit revenue and EBITDA growth that we've been seeing in recent quarters, is that kind of how we should be thinking about this business going forward or is there an argument to be made that you can go back to faster growth rates that you had in the past?

And I would add in conjunction with that, Amos, if you can also give us a little bit of color in terms of how you see the opportunity, the long-term growth opportunity for that business? I remember a few years ago we would say this company could still probably quadruple in size.

I don't know how you would think about it today when you look at penetration and market shares in different places around the country. Thank you.

With respect to the first one, no doubt, that yes, we've been the company on the block. Vivendi as the shareholder have a very short-term view on investment and so that's reduced substantially CapEx as percentage of revenues for about 57% a few years ago to 31% in 2014 and much lower than that in Q1 2015.

That's affected growth -- activity, the growth -- the company and a lot of that relating to CapEx investment, especially in the expansion of the networks in current cities and new cities that substantially been reduced in the last two years and so that we're seeing a lower growth, again, lower double-digit and the 20s up and higher 20s in the past.

I still believe that the potential of growth is substantial for the company in expanding in new cities where there's no any service of visible broadband, and expanding in areas where we already have but still without any coverage of GVT.

We, for example, the broadband of 25 mega and up doubled in number of accesses year over year. That's impressive growth. It's showing that there is a substantial pent up demand for ultra broadband services, maybe not 12 megabyte or 15 megabyte but 25 megabyte, 35 megabyte and 50 megabyte, where GVT is an absolute leader in this market.

We also can do much more in Pay TV, Pay TV penetration although is high in GVT base, about 27%. We are limiting the growth of GVT base of Pay TV due to a CapEx limitation (inaudible) again. There is potential to grow faster than that. That will require more CapEx investment, something we'll -- clearly we'll evaluate in the combined Company to mitigate CapEx and growth and that's in ongoing discussions currently.

Hopefully that answers your questions with respect to potential of growth going forward for the company. Again, I will not give specific guidelines. I will just say that the potential is higher than what we have today. We've identified those opportunities but we need to mitigate all CapEx investments in Vivo with respect to growth opportunities and this will be one of them.

Amos, maybe just on the second question, if I can follow up. In the past, you've shared some market share data by region, so in some of the states or cities where you've had the longest presence, your market share, I think the number I saw a few years ago was north of 30% or even 35%. So I don't know if you can update us a little bit, maybe to get us a sense exactly of kind of how -- what kind of potential there is as you've expanded more recently in the north.

We are doing extremely well, GVT, in the northeast of Brazil. That's a region that still has substantial pent up demand for broadband and Pay TV services and that region will continue to expand faster in the future. The backbone of Vivo reaching cities and areas we couldn't reach as GVT on a standalone before the acquisition. Post merger of 28th of May, broadband and fiber, substantial number of cities in that region that would enable us to grow faster.

Again, I think southeast, in general, of Brazil and south is well penetrated and very competitive while in the northeast and north, which is another potential we did not reach yet, has more opportunities in growth for both companies.

Great, thank you very much.

Thank you, Michel.

Richard Dineen, UBS.

Maybe following up on Vera's question on fiber and your comments on customer penetration. If we look at the ratio of addressable homes to homes passed, that's remained quite constant, which suggests that you're still finding new areas to expand into.

I just wanted to get a sense of the maturity of the fiber build out. At what point will you slow down and ultimately stop the expansion of your fiber network? And secondly, wondering if you might help us understand the incremental CapEx that fiber represents. Is it, I don't know, 2% to 3% of sales, something like that, I don't know? Anything on that would be really helpful to understand your CapEx, going forward. Thanks. Thanks very much.

Thanks for the question, Richard. As I said before, in 2015 we expect to see acceleration of connections rather than a continuation, a significant continuation of the expansion in the base of homes passed. I won't elaborate much on that but it's certainly a reprioritization of our aims and investment choices for the fiber business here in the state of Sao Paulo.

I won't also break up on the incremental investment associated with the connections of the customers. What I can say is that as the operation brings momentum and size, we already have close to 0.5 million Vivo fiber customers here in the state of Sao Paolo. We also reach lower unit investment per new customer. That's what I can say.

I will add to that that in the state of Sao Paulo, we have Vivo, 4.3 million home passed, the definition of what the market calls home passed. And about 2.6 million of building connected, so actually buildings or addresses that we have and access connected to them and about 430,000 customers.

Clearly the main focus in the coming quarters would be in increasing penetration where we have over the connection to buildings and instead of additional coverage of fiber. We have also to remember that the Vivo with GVT combined will have a different view about CapEx allocation and will look for [best of times] on investments on a nation-wide basis and not looking on Sao Paolo on a standalone. Hopefully that's helping to give some more color on your question.

Yes, thank you very much because that's very helpful. I just wondered if your 4.2 million homes, do we look at the sort of homes passed to get a sense of when that project starts to slow down the expansion? Is there a kind of a target that we should have in mind like, I don't know, 5 million or 5.5 million, 6 million homes? Is that the kind of number we should be looking for? Or is it more just about the evolution of the penetration, the customer penetration?

In the mid term long run, we have much more ambitious goals with respect to improving our fiber broadband network in the state of Sao Paolo. There are more than 11 million homes that we'd like to address in the long run. We are not covering all of them with the right platform to deliver high ultra speed broadband and clearly within time we'll want to do more than what we have now.

But clearly, again, the focus for the next few quarters will be focusing on higher penetration and within time to improve the network in other areas of Sao Paolo to enable a higher speed of broadband to customers that really have no other option besides Vivo or in areas where the competition is very low and clearly, we have a high potential of doing an up-sell from low speed to high speed.

So clearly, there's a plan on that and within time we'll give more light on where we are on the progress. But, we believe that at this stage, we had enough coverage and we need to focus on the penetration.

Okay, that's very clear. Thank you Amos, Alberto, thanks very much. Appreciate it.

[Matthew Rodelar], Barclays.

Coming back to this topic of fiber-to-the-home rollout, if I understand correctly what you guys said that you basically want to focus on improving the pick-up rate in Sao Paolo but outside of Sao Paolo through the GVT vehicle you want to increase actually the reach. If I understand that correctly, can you give us a sense of what's the potential market for GVT in terms of homes passed? I mean can you double that coverage or any sort of indication would be helpful?

Second question on mobile, probably a bit naive but I cannot experience the quality of your network being in the UK but recently the regulator ANATEL put up a number of indicators comparing your network with others and surprisingly given your reputation of quality and then obviously the numbers you are pulling out are a proof of it, you are not ranking that well. So how can I understand that disconnect between the rankings of ANATEL and what the customers seems to be experiencing?

And finally a last question, if I could have two numbers. The first one, what is the number of fixed wireless customers at the end of Q1 and what was the CapEx for GVT in Q1? Thank you very much.

Yes, I will respond to the first one and Alberto will take the second and third. With respect to the potential of home passed for GVT, we identified additional 60 attractive cities that, again due to Vivo backbone, we can have GVT reach and there would be met out in the next few months in order to see when and where we can reach them, high potential and gain we will again balance CapEx and gross potential in the next few months and build a plan that will address those three things.

But no doubt again, GVT can deploy faster CapEx, reach new areas and gain more momentum on board than in TV penetration in the next few years, that we don't have any doubt about the potential of the market. It's just how much we would like to invest and that's something again we'll have to mitigate with respect to other factors we have to direct internally. And with this, I will let Alberto talk about the two questions.

Sure. The issue of quality in the mobile services, obviously we believe that we have the largest customer base of higher value subscribers for a reason. First, we have the largest coverage both in 3G and in 4G. If you look at the number of populations that we cover in 3G and no one is any more paying attention to that, we have as many as practically the three of our competitors, key competitors together. That's a fact.

In 4G, we cover more than 150 cities. Nobody comes close to that number yet. And in terms of the population cover, if I am not wrong we are close to 40%. Second place is about 37%. We have been investing significantly in capacity and we believe that also shows in the quality of the services and the fact that customers are ready to buy higher value plans from us.

I won't say that we challenge the way the regulator is pursuing the analysis of quality but I believe strongly that when you look at outliers you can come to the wrong conclusions. And that's what's happening in number of markets and that's something that some of our competitors have been using to create the impression that they have a faster service, that they have a better coverage.

Again, I want to say market is fixed and of course we take it very seriously when the numbers for quality indicators are released both in terms of the reliability of our network in terms of calls dropped, in terms of other technical indicators. And more importantly also on the question of the way that customers are taking care of which is a separate indicator.

And I can also take the opportunity to say that one of the key priorities that the new leadership under Amos is defined is to have a significant overhaul of our quality performance, both the way we deliver and it's shown in the indicators and the way our customers perceive us. And I believe that there was another separate question.

I will address the CapEx of GVT just before we go to the fixed wireless. Vivendi, our holding, decided not to disclose the CapEx of GVT and I am not free to disclose the number, we couldn't or didn't want to disclose. So I really apologize. I will have to follow Vivendi rules with respect to disclosure and not to be on what they already gave. Apologize for that, it's not our call. Fixed wireless, I think --

Fixed wireless, we've been growing the base significantly. In the last few quarters, it grew up to 800 subscribers. The bulk of them or nearly 90% of them are outside the state of Sao Paulo. Continues to be an attractive product but we also recognize that we're selling at the margins in the periphery and that's brought some reconsideration of the way for the product going forward.

And on top of that, obviously now with the combination with GVT that creates new space for other service offerings outside the state of Sao Paolo for voice and data of course. So expect us to remain still competitive in the fixed wireless space but not to make a significant effort to expand our base.

Carlos Legorreta, GBM.

Just two very brief ones. The first one regarding the cost of handsets, in your press release you motioned that one particular or one part of the increase is related to FX. Well, I understand that your competitors have some sort of, I don't know if it's hedging, the correct word, they work with certain intervals for the FX. I don't know if this is the case for you as well. My assumption would be that it is, but I don't know if you can comment on this further more. Thank you.

Sure. We definitely do. We have our contracts with our key vendors that replicate the evolution of exchange rate and part of the depreciation of the real is taken up by the vendor considering the volumes that we buy from them. It's important for you to be aware that we have a higher average cost of a device that we have a larger penetration of the smartphones. We sell more -- I won't give any names, but we sell more devices of the highest trend than anybody else here in Brazil. And we believe that we get the right return from those devices.

We also have a fairly conservative subsidy policy. It all shows in the cost of goods sold for us and in that particular case the increase that is more related to the makeup of our portfolio than to the evolution of the exchange rate which obviously does have an impact, but as I said before, we have a practice of also aiming for exchange rate ranges in the pricing of the devices with our vendors.

Okay, that's very helpful. Thank you. And the second question would be, I understand it's maybe too soon to ask but are you planning to pursue an explicit four play strategy with the integration of the businesses going forward? Thank you.

That's Amos' call.

So yes, we will. Clearly, the market is moving too quickly and we will have the possibility to pursue the corporate strategy after the combination as we'll have the national presence both on fixed and mobile and as we will be one of the only two players that can provide the quad play. Moving to quad play will finally differentiate between the long-term winners and the others. And we believe that if you package it smartly without destroying value, quad play can be an substantial enhancement to our positioning and revenues growth. Thank you.

Thank you. I'll look forward to more comments on that.

Jonathan Dann, Royal Bank of Canada.

I had two questions. One was in the prepaid, the prepaid growth. Did you specifically market prepaid or was that a result of the price increases at the other carriers? And then in terms of the increased content spend, is that scalable across the entire Vivo Sao Paolo and GVT platform? And then a sneaky third question, have you ever sort of attempted to assess how many SIM cards you have per Vivo household, so how significantly second, third SIM card opportunity inside a house is?

Well, thanks for the questions, Jonathan. On the question of the prepaid, you need to take into account this first-quarter 2015 already reflects the solitary effect of the disconnection policy associated with the depletion of customers' balances on their data plans. So rather than (inaudible), now customers are being asked to do top ups and that reflects in part on the revenue, the good performance of the revenues for prepaid segment.

As I also mentioned earlier in the call, the basis is grown marginally by slightly over 1%. So prepaid we have a contribution to ARPU obviously for prepaid as a consequence of what I just mentioned and in general obviously new plans and the re-pricing is an ongoing exercise show higher values for different bundles. It's on the prepaid.

There was a question I believe on multiple SIMs, but I think it is a question that we'll need to ask households. But what we believe is the follows. And as also mentioned in the call before that as MTR cards have their impact on the industry as a whole and no one is actually reducing off net pricing, what we believe is that the perception. And in fact the strength of our brand and the quality of our service offering is making us have a higher and larger community of Vivo users.

So those customers of ours that used to carry three, up to four SIMs with them and depending on who they were calling they will be switching SIMs are not going through that hassle and sticking with us. That's our perception and we believe that as we continue to perform very well that we should see a positive impacts on that as well.

And there was another question, Jonathan, that I -- sorry, I don't recall exactly. What was the middle question?

It was in the tax dimensions and increase in TV content. I was just sort of trying to get my head around what exactly both is it -- are you sort of pre-purchasing for ahead of -- what exactly happened?

I think it's important to take into account that the Vivo base, which is roughly 800,000 subscribers, has been growing significantly, it was mentioned earlier in the call, by roughly 26% over the last year. So obviously we had a higher expense for content. And we haven't yet reached the threshold where we can significantly impact unit content costs in the combination with GVT that puts us in a much different position and is one of our expectation something that we have been disclosing to the market in the context of the recent follow-on that the economics of our Pay TV business are expected to change.

But in the context of what we have been discussing in this call and the recent performance of the business, it's the contribution from a higher number of customers.

Thank you very much.

Thank you.

Luis Azevedo, Bradesco.

I have two questions. The first is if you could give more color in the bad debt provision. Was it concentrating any product like the fixed wireless telephony or it was balanced all across the portfolio?

And the second is regarding synergies. Do you plan to release any update on synergies and if you do when? Thank you.

Sure Luis, thanks for the question. On the bad debt provision, well I think it's capturing several segments and several products as well. Typically those are products which we are unable to bundle and fixed wireless, Pay TV or DTH and then some segments I must admit that the small and medium size enterprises also have shown deteriorated behavior in credit terms for us as well.

We have also had, as I mentioned before, different impacts from different parts of the country. I won't go into too much detail, but it's an overall deterioration of the quality of credit on the customer base, which we believe by the way reflects the state of the overall economy. I also mentioned before that we are already taking measures to address the situation and some of them are on the commercial front, some of them are more on the financial side of the business, the operation, both on credit and collections.

And on synergies, I will pass it on to Amos.

With the synergies, as we've mentioned during the road show, post closing every quarter we'll report to the market about the status of synergies and the progress been made. And the first report will come on the next quarterly results, so we will have to have some patience but that will be a constant reporting each quarter. At this moment, we don't have anything new to report on synergies.

Amos, but do you plan -- so probably you are going to revise the number or not just monitoring what has already have been released before?

We will get there when we will have additional view of synergies. Yes, we might revise them, but again at this moment we are still analyzing synergies and the two companies finally had a chance to walk together in analyzing what has been already disclosed. We are building up more the operation plan how to reach the synergies than actually just calculating the synergies, is actually focusing on implementation and delivery of what's been -- really been promised at this stage.

If we knew any news on the total synergies, you might or might not inform the market. Clearly if it's anything below the number, we will mention will be clearly we said it. If it's above, we might keep it internally as again we have to be certain about what we are telling to the markets. Clearly the focus is not the end PV at all, it is delivering a substantial synergies for the next three years where I think will be more important for the markets and for us to see initial impact on growth, EBITDA and EBITDA margin.

Great. Thank you guys.

Thank you.

[Valder].

On the mobile data, you guys had another strong showing and by the way thanks for disclosing the data and the break down of the ARPU and the -- between data and voice that's very helpful. On the mobile data, how much does this performance you guys believe comes from superior consumption of your clients and how much does it come from the pricing strategy that you have?

In other -- putting in a different way, how much do you believe your charge of a premium on average to your competitors on the mobile data package, if you do charge?

Thanks for your question, Valder. I think it's a combination of both factors. In certain plans, we are more competitive than our competitors and this is for a reason. Those plans that we are trying to promote typically moving customers from the entry level of 500 megabits to 2 gigabits plans and then onto 4G and 6G so on. So there is a reason for that. Clearly, our customers are using them up and the balances are particularly we are seeing that on the prepaid segment as I said before, running out faster. It's a combination of both factors.

And then let's admit it, we have a customer profile which is different from that of some of our competitors, not just on the [breaking] perception of having more contract customers than anybody else or having that 40% of the contract base, it's a fact that if you look at our market position in different parts of the country we have in general a higher average income per user than our competitors and that's obviously an opportunity for take up of higher value plans with us as well.

Okay. And on the voice part of the ARPU, how you are seeing that behaving because again most of your competitors they had very, very weak showings in the recent results, especially on mobile voice which was largely offset or cannibalized, I believe that's the best word, on the voice part of the ARPU, how is your behaving?

Well, it's -- that part is dropping in value, relative terms is about 60% of the ARPU and its certainly worth less and less and that is a fact.

And again, this is a situation where you need to make up for the erosion you've -- in revenues from voice with data. And but it's a no brainer, that's what you've seen in all market, that's what we are also seeing here in Brazil. And to the extent that we also create new value-added services which have -- as someone was saying in the context of the just announced purchase of American Online by Verizon, have the customer glued to their screen in the smartphone, that's what we all want to do because that's what's bringing additional revenues to us. And that's the way we want to perceive these opportunities.

Voice we want to continue to be disciplined. We don't want to do any silly things about the pricing of that part of our service offering. But let's face it, it's a declining component of our revenues, yes.

Okay. My second question still on mobile, there were more recent reports in Brazil regarding MVNOs in Brazil. There is -- you have already one up and running MVNO and there's a potential of new MVNOs. How are you guys seeing the MVNO market and how much of that could be a threat to the quality of your network or you're extremely comfortable by engaging through that market?

Well, what we're seeing is that some plans that were mentioned in the past haven't taken up. As they say here in Brazil, (spoken in Portuguese), it's a fact. We are supporting a number of initiatives where we believe that in that Brazil might not be the same as in other markets where you have a significant share of the mobile customer base in the hands of MVNOs. We'll see, but it's a fact that we want to make a smart decisions in terms of sharing our resources with other companies. I think we did a very good business with and continue to do with Nextel.

We are not cannibalizing our revenue base and at the same time we are monetizing our infrastructure. We'll see. We need to be opportunistic in this context, Valder.

Thanks Alberto, thanks Amos, thanks team.

I take the opportunity, Valder, since you're on the line, I just saw that you published something on our declaring interest on capital and dividends the Board of Telefonica Brasil approved yesterday. Such payment of interest of capital, [BRL550 million to BRL270 million] of dividend and I just want to take the opportunity to say what we've been saying to you all over the road show, we will continue to have a very disciplined approach to the financing of the business. We take you very seriously, it's your money that we are managing here in the business and we will continue to distribute income that we generate in the business, which we hope will continue to rise.

That's a 1.1% yield on the table.

This concludes our question-and-answer session. At this time, I would like to turn the floor back to management for any closing remarks.

I'd like to thank everyone for their participation today in the session. Clearly, we are enthusiastic from the results of Q1, especially on the growth of the top line. It's really a good beginning for the new Vivo phase. I believe that the positioning and market share and growth are more hard to achieve than EBITDA, EBITDA margin. I'm aware that some of you might not totally pleased with the performance in the EBITDA. However, it's easier fixed than the top line.

So overall, we're pleased that both companies have a higher growth than market average and combined again it's a good starting point. And in the future, no doubt with the implementation of synergies and more focus on some items that have been negative this quarter would be able, I believe, in the future to improve profitability as well.

Thank you all and would see you and talk with you in the next quarterly results.

Thank you. This concludes today's Telefonica Brasil 1Q 2015 results conference call. You may disconnect your lines at this time.