Telefonica Brasil SA (VIV) 2016 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 2016 earnings conference call. Today with us representing the management of Telefonica Brasil; we have Mr. Amos Genish, CEO; Mr. David Melcon, CFO, Investor Relations Officer; Mr. Christian Gebara, Chief Revenue Officer; Mr. Rodrigo Dienstmann, Chief Resources Officer; and Mr. Luis Da Costa, IR Director.

We also 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 section. At that time, further instructions will be given. (Operator Instructions).

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the Company's management beliefs and assumptions and on information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the Company's future results and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I will turn the conference over to Mr. Luis Da Costa, Investor Relations Director of Telefonica Brasil. Mr. Costa, you may begin your conference.

Thank you. Hello everybody, thank you for joining us in this conference call for the first quarter of 2016 results release of Telefonica Brasil.

Our call will be divided in three parts; in the first part our CEO, Amos Genish will give you an overall view of our operating and financial results for the quarter. In the second part, Amos will pass it on to Christian Gebara, our Chief Revenue Officer to go over our commercial strategy, to our CFO David Melcon who will discuss in detail our financial results, and to Rodrigo Dienstmann our Chief Resources Officer who will explain our CapEx evolution. And finally, we will move to Q&A.

And now I'll pass over to Amos.

Thank you, Plaster and good morning to everyone. I am very pleased to present our results for the first quarter of 2016.

The results continue to demonstrate our focus on profitability and our capacity to continue delivering revenue goals, improving EBITDA margins and free cash flow even in the face of slower economic activity and termination rate reduction.

Service revenue grew 1% year-over-year, driven not only by solid evolution of the fixed business, which grew 2% but also by continued growth of the mobile service revenue which grew 0.4%. Excluding reduction in termination rate our service revenue had a robust growth of 3.8%; growth of 5.1% and 2.9% in our fixed and mobile business, respectively.

Our fixed business; with respect to our fixed business I would like to emphasize that we were able to grow our FTTx and PayTV revenues by more than 20% year-over-year. In addition, even though we had been implementing a more selective commercial approach, we report double-digit increase in FTTx accesses and premium PayTV subscribers.

We continue to see pent-up demand in the fixed consumer segment, where revenues grew by 7.4%. This was driven not only by the former GVT, whose revenues grew by 12%, but also by the former Vivo, where revenues growth was a solid 4%, higher than any quarter in 2015.

On the mobile business, I would like to emphasize that our consistent data centric strategy allowed us to grow mobile data revenues by 22% reaching 52% mobile service revenues in the quarter.

We maintain a solid leadership position in the postpaid segment with leading share of net adds and stable churn. Our postpaid consumer revenues grew by 11% year-over-year. We are also pleased with the results of our cost containments and synergy capture efforts. We reduced by 2% our adjusted operating costs, which excluded impacts from the sales of [towers] in the quarter. If we exclude the impact from the reduction of termination rate, those costs grew only by 0.5%, significantly overcoming the inflation pressure in the period.

As a result of both of our value driven and data centric approach to the business, and of our strong focus in efficiency and synergies capture, we continued to accelerate EBITDA, which excluding the sales of [towers] grew by 7%.

Our EBITDA margin increased 1.9 percentage points when compared to third quarter 2015 and reached 31.4%. Our service EBITDA margin reached 34.5%. Our CapEx reached BRL1.5 billion in the quarter, which represents 14% of revenues, it is below our guidance for the year partly due to seasonality but also due to optimized CapEx allocation through smart use of Big Data and other optimization programs. We continue to deploy our networks to sustain and improve our leadership in key segments to meet our revenues and quality goals.

In all, our operation cash flow EBITDA minus CapEx grew by a robust 37% when excluding tower sales, a strong acceleration compared to the same quarter.

I would like also to highlight the fact that the sale of towers to Telxius is in line with our strategy to focus on core assets and enhance our cash flow generation. It generated BRL760 million, which will further improve our capital allocation.

For the rest of 2016 we plan to; one, continue delivering on our value driven strategy. Two, continue certifying the integration initiative, extracting value from them and reaching additional milestones. Three, continue increasing the efficiency of our operations and optimizing our CapEx allocation.

With this I will pass to Christian Gebara.

Thanks, Amos. Good morning, everyone. I would like to move to slide 4 of the presentation.

As presented in our Investor Day last month, our commercial strategy is based on six fundamental pillars. First, mobile data centric approach based on best network experience and coverage capacity. Second, most competitive 3P bundle anticipated a market in 4P and 5P. Third, unique all in one B2B solution provider. Four, superior experience through the enhancement of our traditional and digital channels. Fifth, broad and deep usage of Big Data to enhance customer experience and optimize business results. And six, one of the most valued and inspirational brands in the market.

This last pillar was reinforced earlier this month when we launched our new positioning campaign Vivo Turbo, adopting Vivo as our single commercial brand in Brazil representing our strong position on 5P; 4G, ultra broadband, voice, HD TV and digital services.

On slide 5, we can get the perspective about how we are able to grow our top line in spite of the reduction in termination rate. Our non-voice service had a significant increase in revenues of 15.5% year-over-year especially in key products like mobile data with 22.8%, PayTV with 21.1% and FTTx with 22.3%. Non-voice services already represented in the first quarter of 2016 52% of our total revenues. The robust growth in non-voice service allow us to compensate for a decrease of 11.2% in mobile and fixed voice revenues.

Getting now into details of our main business. On slide 6, we present the evolution of our mobile business revenues, which grew 0.5% year-over-year or 2.9% excluding the reduction of the mobile termination rate. Data and value added service revenues continued to be our growth engine with a strong 22.8% growth year-over-year now representing 51.5% of our services revenues.

The last slide of this slide 7 shows that in postpaid we maintain our solid leadership capturing 41% of all net adds in the first two months of 2016. In the last 12 months we captured 56% of all postpaid net adds reaching 42.4% national market share according to latest ANATEL figure. These represent an increase of 0.8 percentage points over our position one year ago.

You can also see that in spite of the challenged economic scenario and the higher competitive pressure in the mobile segment we were able to maintain a healthy and stable 0.8% voluntary churn rate in postpaid. We have been able to capture better performance and synergy from GVT and now more than 10% of our new postpaid sales are coming from fixed broadband customers.

On the prepaid segment Vivo Turbo continues to prove to be a very successful offer. Our active customer base that benefits from this weekly offer grew by 45% year-over-year. Higher penetration of weekly plans, more sales of additional data packages, higher penetration of value added services associated with the base cleanup of non-productive customers we implemented last quarter drove our prepaid outgoing ARPU up by 12.3% in the last 12 months.

On the right lower part of the chart you can see that our superior customer experience continues to be recognized. According to ANATEL's 2015 Satisfaction and Perceived Quality survey, released last month, Vivo is the leader among all major players with 7.02 points in postpaid satisfaction, first place in 23 of all 27 Brazilian states and 6.8 points in prepaid that is 0.23 points ahead of the closest competitor.

On the slide 8 we can see how our 4G offer continues to give relevance. 4G traffic has grown 88% year-over-year, while our customer base grew 57%. Today 26% of our customer -- of our smartphone customer base in all segments is already 4G, [and really] this segment give a solitary 36.3% market share; more than 8 percentage points ahead of the second player. Last February, the Open Signal Report elected Vivo as the fastest [quad] 4G network in Brazil.

In addition, we have continued to drive up our ARPU, which reached BRL26.9 in the quarter, 10.9% more than one year ago. In the B2C segment, ARPU solidly grew 13.8% of which data grew by an impressive 42.5% representing already 54% of the total ARPU compared to 43% in first quarter of 2015.

In the machine-to-machine business we've reached last February a solid leadership position with 37.8% of market share according to ANATEL figures. In all, our solid data driven mobile strategy has allow us to maintain a lead in customer preference especially in postpaid segment, where we had a positive net portability ratio in every single month of the quarter as it was in 2015.

Moving now to see our performance on the fixed business on slide 9. We can see that this business had a solid 2% year-over-year revenue growth or 5.1%, if you exclude the reduction in termination rates. In B2C segment, growth was even more impressive with revenues 7.4% higher than in the first quarter of 2015.

As Amos mentioned, it's important to highlight that in the fixed B2C we report positive revenue growth figures in both. The former Vivo footprint with 4% and in the former GVT footprint with 12% year-over-year. Our focus in key high-end products continues to drive revenue growth. In also broadband FTTx, we report 22.3% revenue growth year-over-year and in the premium PayTV our IPTV and interactive DTH offers growth reached 33.6%.

We have also made an important effort to retain revenues from traditional business such as outgoing voice with a 0.1% increase year-over-year in revenues and xDSL with a slight 0.6% revenue reduction.

On slide 10, you can see how our fixed business results continue to be driven by solid volume growth in key services and by continued ARPU growth. Our FTTx customer base has grown 13% in the last 12 months. In the first two months of 2016 we were able to capture 52% of all net adds in very high speeds equal or above 34 megabit per second maintaining our leadership position with 55% of market share.

Growth was even more impressive in FTTH where our customer base grew 49% year-over-year and we were also able to increase FTTx ARPU by 9% year-over-year, mainly through better pricing for new customers, 35% higher ARPU on new sales, and to improved sales mix. On Premium PayTV we followed the similar approach, a relevant 18% growth on the customer base associated with 26% higher ARPU on sales.

I would like to add that regarding synergies, by the time we launched our new position campaign Vivo Tudo, all our 716 Vivo stores in the GVT footprint already had our complete mobile and fixed products portfolio.

I'll now pass to our CFO, David Melcon, who will give you more detailed financial perspective on our first quarter results.

Thank you, Christian and good morning everyone. Moving onto slide 11, we are glad to present a continuous improvement in our cost evolution quarter-by-quarter. This positive trend is driven by all the efficiency initiatives we have executed in all fronts. The simplification of our offers, the enhanced use of digital channels and most importantly the synergies capture with the integration of GVT allowed us to reduce our operating cost by 2% in the quarter when compared to the previous year.

Even when excluding the connection cost, the expenses were almost flat with 0.5% variation year-over-year. This is an even more impressive evolution when considering an inflation above 9% in the same period. As a result, our EBITDA margin increased 1.9 percentage points annually reaching 31.4% in Q1, 2016. That along with the positive evolution of service revenue in the quarter allowed the achievement of our 7% increase of EBITDA excluding tower sale. This is a strong acceleration compared to recent quarters as stated by Amos.

On the slide 12, let me elaborate more on our cost evolution by content. Services rendered and G&A cost partly grew due to lower inter-connection costs and regulatory factors. This reduction partially compensates higher costs resulting from growth in premium accesses mainly mobile and TV content cost, as well as our effort in network expansion with a large number of fleet size and energy price hikes.

Selling expenses decreased more than BRL100 million due to our rationale commercial strategy. We have been optimizing our sales channels with a more selective approach and reducing customer care cost through a combination of enhanced use [selfie] care, offer simplification and improved quality. Saving in cost of goods sold is a consequence of the more selective commercial approach in handset; focusing especially on higher value customers.

Bad debt remained during the first quarter of 2016 in a lower level than Q1, 2015 at 3.3% of net operating revenues due to the structural actions in credit collections as started last year. We have implemented stronger controls by protecting our top line growth. Personnel costs grew less than the collective agreement of 7% for a period with the effects of our restructuring programs compensating the internalization of third party employees in selected areas of field operations that in addition end up generating savings in non-quality costs in our commercial expenses.

Now moving to slide 13, net income in this quarter rose BRL1.2 billion, almost three times the amount of the same period in 2015. And double, when excluding the net impact of the tower sale. With positive variation in all lines except depreciation and amortization due to the higher level of investments in recent years.

On financial expenses, the year-over-year comparison saw the exchange rate variation associated with GVT non-hedged debt during Q1, 2015.

Now I will pass to Rodrigo to explain the execution of our CapEx strategy.

Thank you David, and good morning everyone. So moving on to the slide number 14. In the first quarter of 2016 our level of CapEx for net revenues reached 14.3%. Our investments of BRL1.5 billion were mainly focused on quality and capacity with the objective of sustaining our differentiation and also enabling growth.

In this sense, 75% of our CapEx for this quarter was allocated to commercial projects in the different business units to drive revenue growth mainly focused on 4G coverage and 3G capacity. For the rest of 2016, we will continue increasing our CapEx effectiveness by using Big Data and analytics to smartly allocate investments to the technologies, geographies and customer segments that add the most value to our business.

This year, over 70% of investments will be allocated to the different business units to enable better customer experience and growth. These are mainly focused on 4G coverage 3G capacity, backbone and backhaul expansion, new FTTx footprint and [CPs] for new home connected.

With that I'll give the word back to David.

Thank you, Rodrigo. Slide 15 shows our free cash flow evolution, a stronger EBITDA group negotiation, which (inaudible) as well as content evolution and CapEx payments allowed us to generate more than BRL150 million in free cash flow during the quarter.

The cash generated in the quarter helped to sustain our solid capital structure with a net debt representing 0.35 times EBITDA giving the Company flexibility and optionality to navigate different economic scenarios.

Turning to slide 17, now I would like to share with you our evolution on the synergy fronts and some perspectives for the rest of the year. In the past few weeks, in April, we reached key milestones in our integration process. Which enable us to continue to deliver on our synergies for the year.

On April 14, we successfully unified our brand nationwide with a new (inaudible) ad campaign. Unification was very comprehensive including the standardization of the customer look and feel in all points of contact.

We also became one single legal entity unifying ERP systems and unlocking tax synergies. We started transformation of the fixed business using GVTs, IT and operational systems for fixed customers in Sao Paulo and launching an integrated national triple play portfolio. We also move along in our path towards conventions with our 4G pilot that will turn into a commercial quad play offer during the year. This milestones will bring additional volume and convergence to our customers, simplify and improve customer service and strengthen our position as key player in high value segments, improve profitability of the fixed business and allow for further capture of synergies.

Moving on to slide 19, our solid execution of the synergies milestones allowed us to generate strong results in the quarter in line with our expectations. Incremental revenues and OpEx savings from synergy initiatives mainly cross selling to fixed B2C customers and rationalization of commercial expenses from channel integration contributed in BRL208 million for the EBITDA of the quarter.

Including CapEx needs for the integration of synergies, especially IT integration, our data cash flow generation reached BRL179 million in the quarter. Indirect cash flow generation from CapEx and OpEx avoidance reached BRL142 million, driven mainly by avoided investments in backbone groups using GVT's infrastructure.

Now we can move to Q&A.

The floor is now open for questions. (Operator Instructions) Maria Tereza Azevedo, UBS.

Thanks for taking the question. My question is on mobile data growth, should we expect the similar mobile data growth deceleration for the next quarters? And was that slightly slower growth than previous quarter mostly due to the macro headwinds or pricing and lower price per mega? And if you can also talk a little bit about mobile traffic growth and what trend should we expect there?

Thank you, Maria. This is Amos, I will start and then give the floor to Christian. I think we will continue strong momentum in data mobile traffic and revenues, clearly as we saw in Q1, the revenues from data is decelerating, I don't think it is something we should draw a conclusion from there for the rest of the year, we will have to continuously -- the performance within time. We continue to see a strong demand for data, data mobile and I believe that the next quarters we will continue with similar plans, but it is too early to have an exact estimation of what does it mean for next quarter. But still the major driver of business going forward in the mobile business. With this I will lead to Christian to add more information on difference between 3G, 4G traffic and how we see data growth [decision].

Yes, complementing we see the growth as Amos said today, in the case of consolidated EBITDA, you see 54% of ARPU is already on data, so we see the robust growth. With the first quarter of 2015 when we started the blockage in the prepaid, so we had a positive impact in the growth of this quarter but we still continue to grow in the next quarter. In the traffic, as you asked the 4G as you showed in the slide has a very, very strong growth, more than 80% and the penetration of the smartphones and data plans and now our customer base is increasing considerably. So we see all the trends positive in the data and representing even more in our revenues for the future.

Perfect, thank you very much. And if I may just make a follow-up question, on the PayTV content synergies do you have any advance on the negotiation with the content providers and specifically global and does Sky Brazil still look as an attractive target for you? Thank you.

Yes, we are negotiating like with all the content providers and we are closing all of them and they are in line with the synergy plan that we had.

Just to reiterate, we strongly believe that we will be able in the next few months to finalize all negotiations to be in line at least in line with the initial projections we have when we integrate the two companies.

Perfect. Thank you very much.

Susana Salaru, Itau

We have two questions here, the first is related to CapEx. The CapEx this quarter came below the guidance for the year and the reasons are the seasonality but also some smart allocation because of the usage of big data. So our question is, is there room for a downward revision for the CapEx for the year based on the fact that is the more efficient allocation for CapEx within the data available? That will be our first question.

The second question is related to commercial expansions, very good cost control on that line, and it was mentioned that it was because of our rational commercial approach. So if you could just elaborate a little bit more on that because it is a frequent question to get, how Telefonica keeps growing in the high end part of the segment and still maintain commercial expenses under control.

So regarding your question about CapEx, yes the results of the first quarter that were 14.3% is just mainly seasonality, and we are keeping our guidance for year at 8.7% if you remember, it is 8.7% without the licenses. There is a ceiling for the CapEx if you will. Yes, there is room for improvement; we are constantly looking for improving all those lines and this is our daily job here, we are using the tools that you mentioned, Big Data and value capture, we are going after value, customers and quality maintenance.

So I would say that yes we expect to be able to reduce, come down with the CapEx this year compared to the ceiling that we have (inaudible).

Regarding your question Susana for commercial expenses, first there are some synergies being captured now of working together the two companies. Secondly, as I said before no we have a very strong commercial strategy that's value driven. So we've been like directing the right selling approach to our customers both in mobile, fixed, B2C and B2B. So focus on the 4G, focusing high value in 3P, focus on TV of high quality PayTV interactive so that is like giving us a much more precise approach to customers and a better approach also in our commercial expenses.

Perfect, thank you for the answers.

Daniel Federie, Credit Suisse.

Thank you taking my question. My first question is related to the discussions about the broadband data caps, the fixed line broadband data cap. How this is important for Vivo's strategy going forward, if this is something that is included in the synergy numbers? That is the first question.

And the second question is related to the handset subsidies, we see that the margin in the handset operations came much better than in the fourth quarter, I'd like to see if there is a room for lower services for better margins in this operation going forward.

This is Amos, I will take the first question about the broadband cap. Clearly, there is nothing in our business model that has any effect of the broadband cap. And as we have presented and discussed -- there is no any correlation to the caps themselves. I think the Vivo presenting potential, I would call it packaging of -- data packaging of -- for broadband fix from 2017 on is not the first move in the market. We are the third operator in the market that's joining to the trend.

Clearly it's a worldwide trend, we saw everywhere in the world, in the US AT&T, Verizon, Comcast, Rogers in Canada, British Telecom and others are already having some caps on broadband fix which seems logical vis-a-vis the substantial increase in data traffic in broadband, mainly video streaming.

There is now a public debate about this in Brazil as you are aware and we are really seeing it as a positive discussions between all stakeholders with respect to the what is the right model, with respect to the growth traffic and how you enable different users to benefit from different pricing and different packaging and not just as a high average price to everyone.

At the same time, clearly you want to maintain the quality of the networks and of the users with more sensitivity to usage of data traffic, also in fixed not just in mobile. I think at ANATEL the regulator taking the lead on that process, and supposed to regulate that. In the next few months, we will have to wait patiently to ANATEL view, I think it will be probably a very balanced view with respect to making sure that the users will have the information tools to measure their data usage and all packages will be available from unlimited to specific packaging, and I am really optimistic that the discussion will lead to positive effect in the future to everyone else in the game from operators to users.

At the same time, I think this debate is both in the sense its finally both an essential services, and it also is related to society to discuss the barriers of broadband expansion in Brazil. If it's the taxes, the high taxes on broadband, which is up 43%, and other barriers that the government may be can take a lead and enable better expansion of broadband in areas where ultra broadband does not exist.

So I think overall the initial discussion is very positive and I think the outcome will be also positive, but clearly depends on the overall result of the discussion going on today, with the regulator. Thank you Daniel, with respect to subsidies, Christian will take this question.

So our subsidies policy, like follow the same approach as before, it's data driven. So we are focusing only on pure postpaid customers, and of course it gets better as much as the plan is more expensive and provides more benefits to the customer.

So, we keep the same policy; very precise in the type of customers that one should reach with the subsidies, and I think recently as I said, in previous calls, we are adding other features to help customers to their smartphone acquisition.

I will highlight our buyback service, Vivo [Hanava], that is helping us in bringing more customers, like changing the used smartphone to a new one, helping also in the financing of the price because it helps with paying something back to the customer of -- to use the smartphone.

Richard Dineen, UBS.

Thanks for taking the question, good morning every one. Yes, maybe just a quick follow up to the question on broadband caps and specifically with regard to the fact that ANATEL is now reviewing, I guess, what could become intervention on what is a non-concession asset. I am just wondering if that were to happen and there were to be, more kind of a control of how you price, especially things like fiber based broadband. Would that at all affect your appetite for further investment in fiber, so that's just the first question.

Secondly, maybe for David, just on the fixed interconnection rate cuts, these were some pretty big cuts this year, causing quite a headwind in fixed line. I'm just wondering if you can give us your take on the intention of the regulator here. Is ANATEL's idea to completely eliminate fixed termination and maybe move to bill and keep. Should we expect this to be an annual revenue headwind in fixed or do you see it as more of a one off adjustments? Any thoughts on those two questions would be fantastic.

Going back to the broadband caps I would say that clearly the regulation of today allowing companies to have caps on broadband; and fixed broadband, not to mention this practice already exist by other operators today.

I think the public debate is clearly strong and ANATEL decided to take the lead on that and make sure the customer rights are not been violating when companies are presenting broadband caps. And I think this was the right decision, because the regulation on that is particularly clear and I think ANATEL, doing the right things, by making sure, for example, a clear information about usage is available to user which we don't have today, (inaudible) on the fixed business. So clearly that is something basic.

Second, to make sure that unlimited packages will continue. We got to define whether it should continue, and I think that also was not clear. Another thing that -- and low end users, especially in the low bit megas, in some areas, clearly we don't have the FTTx those customers with one, two, three, four megas, should they have a limit on their consumption. So there are several questions that need to be answered. And I think it's fair that ANATEL is taking the lead on that making sure that all those would be answered and customers will have the full transparency on that. I think we should fully cooperate on that as any other operator, and I think the ANATEL [direction] will make that sensible.

Clearly as much that the operator would need to live with that, in our case in 2015, traffic in broadband fix grew 80%. If you continue with that trend, you will imagine that profitability can be damaged or the other compensation will be to increase the average price to all users in order to compensate on that and make the possibility still attractive.

So, instead of just trading medium price to everyone, I think everyone is realizing it's better to have a different pricing range and option to customers. I think government is fully committed to continue to extend broadband in Brazil. They understand the lack of infrastructure. I don't believe they will put a barrier for profitability (inaudible) to operator, because that will be exactly on the other directions of their intention.

With respect to fixed plan interconnection rate, I will jump into that quickly and then David will continue. As you know, ANATEL already defined many years ago the reductions in mobile termination rate, which is going on and there is a schedule (inaudible) 2018. In the same flow, fixed business, CRLO, the interconnection rate, locally and long distance is also been regulated and there is a schedule of their decline being published by ANATEL, and it started for our business model. As it is a clear reduction and going to much lower rate.

David can give you more information on the numbers of that. Please, David.

Thank you for the question. And so, as Amos already mentioned, the termination rates have already been published by ANATEL, so we are expecting a reduction until 2019, with an average cut per year of 40%. But you need to consider that the impact that we will have in the first year will be higher than in the following year, because the base will be the same, so when we cut by 40% every year, so this will be decreasing year on year.

Okay, thank you very much Amos and David for those comments, very helpful indeed.

Mauricio Fernandes, Merrill Lynch, Brazil.

Amos with the slight reduction in the rate of growth in the fixed line business, it has been obviously very consistent relative to the decline of a few quarters ago, but it was growing around 3% to 4% and now it's 2%. Is this economic related? Have you seen any change in the competitive landscape or dynamics to see that eventually in the second quarter it could decline further to maybe close to zero. Just wanted to get a sense about what could drive this going forward.

I think it's still (inaudible) in discussion (inaudible). We had the best performance in revenues in the bit stream business, to mention 12% growth in the former GVT is one of the highest we had since 2014 and 4%, and in the form though of the Vivo, the Sao Paulo area of Vivo. Again the highest we have for a long time.

So clearly the B2C fixed business is growing very solid way, led by substantial demand and trend demand of both, and to some degree PayTV. So clearly, again we are selective on PayTV but clearly those two segments are continue to grow very robustly.

What affected the overall fixed business was the B2B performance. Fixed B2B performance was the one that weighted on the other results of the fixed; as I mentioned B2C has a very strong performance. And B2B is the segment that is affected substantially by the economy. We all know that the first thing that is to be affected by [bad] economy is B2B.

We have many companies that are using number of phone lines and number of employees and so on and number of stores. And all of that are clearly -- we see this as -- the weight mostly on the B2B. And this was the main reason of the decrease in growth in B2B in fixed pay revenues year-over-year excluding the (inaudible). I hope that answers the question Mauricio?

It does. Just one follow up Amos on -- given the sector is probably not growing and if anything falling. The B2C wins must be coming from someone else; that way maybe PayTV Sky. Is there any way of knowing exactly where this is coming from high--end, mid-end, low-end customers.

It's mostly high-end customer. We're totally focused on high-end customers. You can see our ARPU continue to grow despite competitive pressure and economic pressure. And this is our focus. But I cannot tell you exactly at this point where it's coming from, clearly not on the call. So but it's high value users.

Andre Baggio, JP Morgan.

I have two questions specifically on the data demand. So the first one on the fixed line. We have seen one of your large competitors with very tough financial difficulties. So do you think that that could create opportunities for you to enhance the growth of specifically of the former GVT products in this region?

Andre, I think in general I would say we are benefitting from good product portfolio and a very good positioning of our FTTx networks and very strong PayTV also we have. And so we are in -- in a very competitive position everywhere in the country. Clearly, the market is not competitive as the mobile, and mobile we have five operators and four large in scale and the fixed business has a different characteristic, with generally you have mostly two major competitors probably with the right networks and the right resources to compete.

It's still very competitive market, but I think the fact that we can find the markets became more of a two player market and a three player market helping I believe to gain market share. But again it's hard to tell you where the growth is coming from the clearly good positioning portfolio and networks we have or the fact that the market is moving to more of a two player market than it used to be. But that's the best we could give you at this stage on the call. Do you have another one, Andre?

Yes, the second one is on mobile, we have seen a, yes I heard a question on mobile but I wanted to know where do you think is going to come the additional demand for mobile. Because I know that the demand for data of course is good but we have seen pricing going down, price per gigabyte going down, going down a lot in the last few years. Do you think that there is a chance for these prices start to stabilize. Do you see that as one of the possible driver of revenue. Or what could the other revenue drivers in the future for data in mobile?

Andrea, this is Christian. I'll try to help answer your question. We still see potential to 4G deployment, so we still have like room to convert more customers to 4G and converting to 4G it also means like consumption of more data. And also data plan, now we still have room to improve, no data plan penetration in our customer base now mainly in the hybrid and in the prepaid. So it is two elements we see potential to grow in 4G and in data penetration and data usage.

I will add to that Andre that if you look forward to what people called IoT Internet of Things, what used to be called M2M Machine-to-Machine. It fairly represents a great potential going forward for mobile business. I think we were trying to be the number one leader in the M2M market in Brazil; few years ago we've been the [fourth] one. So we are really gaining substantial track on the M2M or IoT.

There is many things coming on. I can tell you that Telefonica as a Group is really doing substantial investments in the platform relating to IoT. We signed with Nestle, an agreement for 0.5 billion machines being connected to sensors or Tesla in the US and many others coming even in Brazil we are negotiating with big companies if it's car connected, home connected and so on.

So clearly I think maybe you don't see this year but I think from next year on you will see an interesting evolution of the IoT business that will add some maybe new growth for the mobile business. That's my personal thinking about IoT.

Valder Nogueira, Santander.

Going in the regulatory discussion, the broad business verticalization process continues to be a recurring topic. When we hear the discussions regarding the future regulation of the sector, in there we have incentives to take broadband to more remote regions or to regions where have an [NPZ], let's say, calculation.

With this angle, do you see room for this reaching to these more remote areas to come with mobile rather than fixed. And do you believe that the government whatever it may be could be willing to have this flexibility going forward rather than just doing it fixed?

I would say that clearly every government so far and clearly going on for many years, are trying to launch broadband plan, [universalization] broadband plan with different names, yes. But so far none of them took off, that is the reality.

A lot of good intention of them took off, and the main reason for that so far, they've not been able to convince the operator with the incentive in place are good enough to -- for us to participate in the program. As you know, we have not been obliged, we can only be voluntary participants in such programs.

And I think in the last few months, there is more and more I would say the realization of the government about this and the new plans we are seeing (inaudible) in any direction of plans that will generate a positive NPV to operators. That's becoming a basic now understanding everywhere.

Clearly, we'll have to see what the final plan is coming and if we are to go forward with it, I believe every -- time is passing, it's clear that the incentive in place should be strong enough whether to go to those places where maybe demand is not that strong over there. The ARPU we might generate will not be as strong in where we are present today.

Clearly also we have substantial pent up demand in attractive areas which we focus in our investments. We still have huge pent up demand in state of Sao Paolo where we have still a (inaudible) slow speed, so basically a real priority for Vivo and even outside of Sao Paolo, many new cities we would like to launch. Because there are real interests there and we know that a good business can be done and not relating to any government campaign.

With respect to mobile, especially to fixed, I don't believe that any direction the government will take. I think there are mobile obligation that is a part of 3G, 4G licenses that's been applying. I think the key -- in issues I mentioned, they are actually starting to make sure that in addition to mobile services there is a fixed network. And if you look on traffic trends, you cannot have real growth in data without having [uploading] fixed. And I think there is no any indication so far government is planning to have a mobile infrastructure in the whole area as the only infrastructure for the future.

But don't you think that a more agnostic approach to the technology that you serve would make these go off making these broadband more universalized, more viable for you, the players and for the population?

Could be, I think 4G obligation would bring 4G to many places in the next few years and that might be good enough. The government continues to seeing fixed -- at least in key areas there, and we are not talking about rural areas only. FTTx today is very limited to major urban areas, there is many, many small cities that could be even attractive. But the lack of transmission and backbone make it less attractive.

So really the key issues is more than anything you have to value bring transmission to all those small and mid-sized cities in a country so large as Brazil. So it might be that user themselves could afford and pay the regular price that any customer pay in urban area, the question I would get with the transmission because that is the real cost. So again, a lot of discussion might be taken on that one and I think nothing will be finalized that quickly. So we will absolutely continue to follow the discussion.

My second question, we have seen even players that were not that active in disconnecting mobile services, now more active in doing this. There is of course the side of financial and operational discipline by being more active in that fashion, but when do you believe we will reach a point that this disconnections are become overdue. Are we there yet or is there still room for this discipline to be even tougher?

I think in our case, Vivo, I can tell you we have been done with that in December last year, and we did it quickly and made sure that the non-performance customers are [ARPU tower based] as quickly as possible. You might see some other operators continue getting there still in 2016, but I believe the market was inflated with non-performing customers for many years. Some companies took the decision to adjustment more quickly than others, but I believe at least on Vivo level that that process was completed in December 2015.

We don't have anything going on for 2016 and I believe again other operators might have more stuff to do in their ways. But I don't have visibility to their business.

Bernardo Teixeira, BTG Pactual.

It's (inaudible) in fact. So I had one question, Amos, and it is on the fact that you mentioned briefly on one answer about broadband and regulation, a few questions back. But the question is, how -- if you could give us an update on how the [fiber to the x] project is evolving in Sao Paulo? What type of market you are expecting to reach in the next quarters? When we could start to see it working? So just like a brief update on the [fiber to the x] project there.

Again, we clearly have a goal internally to expand our FTTx coverage to some 2 million houses over the next three years till 2018. We are in line with this plan, some of the strong growth we saw in Q1 are relating to continued expansion of FTTx, but also substantial improvement in the penetration where we already have a network.

I think we will have acceleration of that deployment mostly in 2017 and 2018. Again we are focusing on the synergies operationally, I mean, in 2017; few quarters in 2015, 2016 to some degree, integration of backbones and integration of other network pieces. I think the launch of the revised portfolio, the national unified portfolio we just launched in April 1st finally we have a free to play offer everywhere in Brazil, as Vivo including Sao Paulo, will have its own (inaudible) continue expanding the fiber.

So the IT system we have in place, the product offering is in place, and now we probably will continue to accelerate the fiber expansion itself. But we don't have immediate numbers to share with you for each quarter going on, but again I will tell you that there will be acceleration as we get into the next year, especially 2017 and 2018.

Diego Aragao, Morgan Stanley

Thanks for taking my question. I want to ask you about the ICMS tax increase, if I am not wrong, in the first month of the year most of the states increased this tax for the telcos, so I was wondering if this impacted your top line somewhat? And if so, how much was the impact from the tax increase? And in addition, do you know about any other state awaiting the possibility to raise the ICMS.

As you know, about 12 states increased their ICMS beginning of 1st January. As we mentioned in the last call we had, we planned like other operators to pass it to consumers which we did, and again our ARPU without taxes was not been affected. You might say that maybe demand been affected to some degree if people clearly would pay more in some states than what they used to pay because they will have to pay higher taxes on the bill.

However, as you can see from our B2C performance in Q1, it was very solid, 12% in the former GVT, 4% in former Vivo. So I think broadband is essential service today, I think (inaudible) and helping in that case. With respect to most states, we don't have any other states in the pipeline that mentioned planning raising ICMS beyond those 12 that have been already raising their -- announced the raise in 2015.

Matthew Rodelar, Barclays.

Thank you for taking the questions. First with regard to the concession change discussion, which obviously has been postponed. Is it a fair assumption to say that (inaudible) postponed, diversibilty of the assets could be part of the discussion and the conclusion whether it takes place this year or next year.

And then with regards to the sale of the towers, could you tell us what the impact on EBITDA is going to be? And finally, also on interconnection, so interconnection cuts on (inaudible) impact on revenues, can you tell us what is the net impact on EBITDA, is that a negative impact or a neutral impact?

Just with respect to concession, the other two questions I will let David respond. The renewal of the concession contract is a very complicated subject, taking time, and again it has been delayed again for -- several this year. I think the main issue on states that is creating the delays is exactly the issue of diversibilty of the concession assets. As you know the concession you have like two parts, one is operational I think changes, the floor obligations from pay phones on the street to overall obligation, installation in certain areas, this should have positive impact on our P&L, nothing significant a game changer but nice to have.

It is not in our plan, not in our business plan at this stage but again once we see what is coming we will be able to incorporate it. But again, if things start moving, moving target for the end of the year. The reason for this delay I believe is a discussion of diversibility of the assets, the key is we are talking about another almost nine years, 2025, and the government wants to anticipate the decision on those assets in exchange for again both investments. So that is clearly on stage today. If they will resolve those, give us back those assets today, what value should be discussed between what is the book value and economical value but there is some value to those assets, it should be back to the government in 2025.

Anyways this submission, what happened exactly in this basket, all of that is a very complex subject. And then if we are getting those back today, what we will give back to the government and clearly the discussion is more and more always of using that resources as investment in both and exactly in the areas where we are not maybe planning to go at this stage.

So this is clearly a complex subject and I don't think it would be -- and at this time -- been a request by ANATEL for (inaudible) make sense, it is a very complex subject. But again I think whatever model would come out of that is better than what we have today. I really believe in that. Okay?

And for the question, so I will take the next two questions that you had. The first one about the towers. And the decision of selling towers for us is not new. So we will have sold 7,000 towers in the last five years. Now we believe this was a great opportunity for the Company as the condition were favorable to us and better than the average similar transactions in the past. And this year will improve our profitability and also the cash flow generated in the year.

Regarding the cost, the cost will be standard cost that we are paying to the rest of the tower that we have currently rented.

And the third question regarding inter-connection rates. In the slide 3 of our presentations we are showing the impact of the regulatory impact that is mainly interconnection rates in both in mobile and in fixed. And we also showing the impact in EBITDA which in Q1 2016 amounts to BRL115 million.

Jonathan Dann, Royal Bank of Canada.

Simple question, now just could you just provide a bit of clarity on the contract and prepaid net adds to the quarter. And I think specifically this time around you are the first of the Brazilian companies to report. So I imagine that the others are going to talk about the porting ratios. Could you just comment on how whether or not your porting, your net porting, et cetera, from the other different operators?

And my question was how do you actually know you added 40% of the contract market versus a high 60s in 4Q?

These are like official data from ANATEL, January and February. So the -- we have the official data of postpaid customers and prepaid customers every single month. So we don't have for the full quarter yet because we don't have March, but we have January and February. So they have all the net adds of the market for each operator and we make the calculation to get to our percentage.

And the portability, the port in and port out as we also said, is official data. So from the last month of the 12 months and even the quarter, we have positive quarter portability ratio.

Alan Nicolas, Morningstar.

Thanks for taking my questions. First on, from your fixed line side, can you break -- or sorry, the wireless side, can you breakout minutes of use between contract and prepaid customers?

And secondly on the fixed side in the GVT footprint, how much of your revenue growth is coming from areas of GVT that have been in for a long time, and how much is from newer areas. And how many new cities do you plan to expand into this year and long-term?

Alan, we are not willing to mention a minutes of use, unfortunately. So I cannot help you with that. With respect to the question about GVT growth, I would say clearly we had very little new cities been launched this year, it's all relating to the previous territory. So it's old coverage and not new coverage. This year will be very timid launch of cities while next year we are planning about 10 cities to be launch. But this year will be a very small number, I mean two or three, maybe four maximum, but we are mostly gearing for a launch of next year, additional 10 cities.

Can you say on the MOU whether fixed or whether contract was greater than prepaid?

No we don't open this data, I don't think it is possible.

No we don't do that.

Walter Piecyk, BTIG.

On slide 8 you guys talk about 4G. I just want to -- as far as the phone mix. When you talk about 4G, that's LTE correct?

Yes, correct.

Okay. Some operators around the world call different things, 4G. So it doubled over the past six months that mix. I think that was like 13% a couple of quarters ago, now it's 26%.

Amos Genish: Yes.

So it looks like you got some good evidence now of those types of customers. Can you give us a sense of either usage differences or even ARPU differences from a 4G smartphone customer versus where they were coming from either from a feature phone or maybe a 2G or 3G smartphone.

You're like -- you are right. The penetration doubled. We are selling mostly 4G not only in our stores but also the market selling mostly 4G. So it is increasing and they are connecting people as their preference. And this is why we have the highest marketshare. And on the ARPU and the usage I think we presented ARPU 50% higher when we are in 4G smartphone. And in March, 4G is flat.

So and I'm sure we can try and work out the math on this, but maybe you can provide some help. If I look at the ARPU growth in the first quarter, 10% or 11%, very strong. You have these prepaid customers that were disconnecting, so that obviously helps. Is, I guess there might be some price increase based on inflation, I don't know.

Can you just give us a sense of that 10% or 11% growth, how that breaks down between this mix shift to the 4G customers, to the prepaid disconnects. And then try and give us some sense on how that's going to trend over the course of 2016.

Yes, in the prepaid, apart from the disconnection, is also increased price, and increased price in (inaudible) grouping and the hybrid increased price and then the postpaid increased price. And I think the combination of all these effects all together. And then also we are -- customers are consuming more data so also in the additional package of data transfer grouping we're selling more.

And also as I said at the beginning, we have our weekly offer, the Vivo Tudo, that we increased price. Now we are giving more data but increased the price. So almost BRL10 per week, we are increasing also in penetration. So it's a combination of all the factors that are increasing in ARPU.

And then finally the digital services the regulatory services we're selling also more. So a combination of all these factors are helping us increasing the ARPU.

So if we think then the 4G will increase and usage will increase. But maybe price increases are less of a factor going forward, then you should at a minimum see high single digit growth in ARPU from those factors. Does that sound accurate?

I don't have the answer for this question, because as we said before, we are like increase price and we are increasing adoption. There is still room for purchase, it's at 26% of our base is smartphone. So -- and it was 13% some quarters ago. So room to improve much more the penetration of 4G and penetration of data plan. So I think the combination of the two things will benefit our ARPU.

This concludes the question-and-answer section. At this time I would like to turn the floor back to Mr. Genish for any closing remarks.

Yes. Thank you all for your participation in our conference call. The IR team will be available to address any additional questions you may have regarding our results. And hope to see you next time in the release of our second quarter 2016 results in July. Thank you.

Thank you all, good bye.

The conference is now concluded. You may disconnect your lines at this time.