Telefonica Brasil SA (VIV) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefonica Brasil third quarter of 2016 earnings conference call.

Today with us representing the management of Telefonica Brasil, we have Mr. Amos Genish, CEO; Mr. David Melcon, CFO and Investor Relations Officer; Mr. Christian Gebara, CRO; Mr. Rodrigo Dienstmann, COO; and Mr. Luis Plaster, 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) Please also note today's event is being recorded.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the Company's management beliefs and assumptions and on information currently available.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the Company's future results and could cause results to differ materially from those expressed in such forward-looking statements.

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

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

As usual, 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, Christian Gebara, our Chief Revenues Officer, will go over our commercial strategy; our CFO, David Melcon, will discuss our financial results and synergies; and Rodrigo Dienstmann, our Chief Operating Officer, will explain our CapEx evolution; and finally we will move to Q&A.

Now, I pass the word to Amos.

Thank you, Plaster. Good morning, everyone. I'm very pleased to present our results for the third quarter of 2016. This quarter we continued with the positive performance we had earlier in the year with relevant revenues, EBITDA and cash flow growth.

On the quarterly basis, service revenues grew 2.2% year over year. Year-to-date service revenues growth reach now 1.6% year over year. During the quarter, top line growth was mainly driven by continued disciplinification of our data centric strategy, which allowed non-voice services to grow 16% compensating for the decline in voice services, which was almost 12%. Non-voice services over the year represent 57% of service revenues, up from 51% one year ago.

Mobile data and digital services continued to solidify growth to around 23%, which allowed our mobile business to grow by 4.9% in the quarter, while accumulating 2.6% growth year-to-date.

We maintain our leadership in the postpaid segment with a market share of 42.4% and a share of net additions slightly above. Premium services continued also to catalyze growth in the fixed business. Non-voice fixed services grew 10.4% year over year driven by FTTx, which grew almost 20%, and by IPTV, which grew around 63%. We hold 25% market share in broadband speeds above 34 mega per second and our IPTV grew -- our customer base grew around 40%.

On the cost side, we continued to contain cost by leveraging lean and zero waste programs as well as by continuing to capture benefits from synergies.

Recurring operating cost, which excludes restructuring charges, went down by 1.9% year over year on a quarterly and year-to-date basis despite inflation that reached 8.5% in the last 12 months. As a result of our consistent top line strategy and our cost contention efforts, we report a healthy growth of 8.1% of our recurring EBITDA with an EBITDA margin of 32%. Year-to-date, EBITDA growth reached 7.4%.

CapEx deployed continued to benefit from efficiency and effectiveness programs as well as from an improvement in exchange rates. Year-to-date, we have invested BRL5.2 billion, which represent a CapEx over net revenues ratio of about 16.4%. Even though the scheduling of our investment activities for the year considering an increase or acceleration in the fourth quarter, we expect still CapEx for the year excluding spectrum license to be around BRL8 billion.

As a result of a healthy EBITDA and CapEx evolution, operational cash flow, EBITDA minus CapEx, has grown in a cumulative basis around 43%. Year-to-date free cash flow, which includes charges -- changes in working capital and is net of financial expenses and taxes, is higher than the last year by almost BRL2 billion, equivalent to around 137% increase.

Finally, I would like to comment on the CEO transition process we recently started. Incoming CEO, Eduardo Navarro, has been already in Brazil since the announcement in October 10 and he is having quality interaction internally with myself, with the executive team, as well with external parties such as the head of ANATEL, the communication minister and other relevant partners and parties.

As we mentioned earlier, Eduardo has significant experience in the Brazilian telecom market and within the Telefonica Group. This is facilitating significantly the transition process, which we expect to be finalized earlier than originally planned, sometime in the near future. As proven in other cases, as earlier the future CEO assumes this role, the better it is in order to build certainty and confidence about the continuation of the strategy and the plans.

Now, I pass it to Christian Gebara, who will go in details about our commercial strategy and results.

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

We were able to maintain our absolute leadership in high value segments, notably in mobile postpaid and ultra-broadband with expressive growth on both. We continued to focus our efforts in reducing our dependency on voice revenues by intensifying 3P and 4P bundling, leveraging awareness and adoption of digital services and increasing data allowances on mobile plans.

We continued to implement a complete commercial efficiency program covering all channels and customer segments. We are also enhancing our digital experience in focusing excellence in customer services as We Care, fee billing and digital services. We believe that going digital is key for our business and we are prepared for it.

Moving on to slide 5 of the presentation, you can get a perspective about how we were able to grow 2.2% our top line. Our non-voice services revenues had a significant increase of 15.7% year over year especially in key products like mobile data with 23.3%, ultra-broadband with 19.3% and Pay TV with 9.3% growth. Non-voice services revenues already represented this quarter 57% of our total revenues, 6 percentage points more than one year ago.

This quarter we had an 11.5% decrease in mobile and fixed voice revenues, mostly affected by regulatory change and macroeconomic environment. To minimize these effects, Vivo has been consistently developing commercial initiatives such as bundles and migrating customers to flat fee plans.

Getting on details of our main business, on slide 6 we present the evolution of our mobile revenues, which grew 4.9% year over year or 7% excluding regulatory effects. This growth rate is significantly higher than the previous quarter mainly due to double-digit growth in data revenues and postpaid. Postpaid revenues grew 10.9%, now representing already 72% of our total mobile service revenues and 44% of our mobile customer base. Meanwhile, the prepaid revenues decreased 8.2% less than previous quarter. Part of this decline was due to our well succeeded strategy of migrating prepaid users to hybrid plans.

I would also like to highlight that our strategy to encourage the use of digital channels had very positive result this quarter. Prepaid migration to hybrid plans for digital channels increased more than 100% year over year, meanwhile postpaid users of our new Vivo app increased more than 150% year over year.

The left hand side of slide 7 shows that our mobile customer base declined 7% despite the strong revenue growth. This is a consequence of our strategy to focus on profitability and the base clean up of non productive customers implemented by the end of 2015. On postpaid, we maintain our leadership of 42.4% market share, capturing 46.2% of all net adds last August.

I would also like to highlight our performance in portability, with positive figures every month in 2016 as it was in 2015, increasing over 40% of our net ratio with compared to the previous quarter. Despite the challenging economic -- sorry, I think we had an interruption, so I will continue. Despite the challenging economic scenario and the higher competitive pressure in the mobile segment, we were able to maintain a healthy and stable 0.6% voluntary churn rate in postpaid, a direct consequence of our superior data centric value proposition, best network, inspirational brand and high quality channel experience.

On prepaid, we continued to increase penetration and loyalty of our weekly bundled offer Vivo turbo, increasing the number of active customers by 37% year over year. Also, the higher penetration of bundled offers, more sales of additional digital data packages and value-added services associated with the cleanup of non productive customers drove up our prepaid outgoing ARPU by 15.1% in the last 12 months.

On slide 8, you can see how our 4G offer continues to gain relevance. 4G traffic grew almost 190% year over year, while the number of 4G devices in our base grew an impressive 137%, which is 17 million handsets. We maintain our solid leadership in this segment with 36% market share, more than 8 percentage points ahead of the second player. We perceive that customers are capturing valuable benefits on our 4G experience allowing us to consistently increase our data offer aligned with higher prices.

As a consequence, we continued to drive up our ARPU, reaching BRL27.8 in the quarter, almost 15% more than one year ago. Data already represents almost 60% of our ARPU compared to 50% of last year. We have also brought innovation, the use of data plans. More recently we have enhanced MEU Vivo that allows customers to distribute data allowances per dependent subscriber directly via MEU Vivo app. Finally, in the machine-to-machine business, we continued to expand our leadership, we have a solid 39% market share.

Moving to slide 9, you can see our performance on the fixed business. We had a slight decrease in service revenue of 1.4% year over year, but if regulatory effects are excluded, our top line grew 1.2% in the last 12 months. We continued to be focused on premium services, which grew at a relevant rate. In ultra-broadband FTTx we reported 19.3% revenue growth year over year, while our Pay TV revenues grew 9.3%, with 63% growth on IPTV -- 63% growth on IPTV.

On slide 10, you can see that despite the decrease of 2% in our fixed customer base, we have improved our sales mix, increased the relevance of our premium products. Our FTTC customer base has grown 4% in the last 12 months and FTTH increased 34%. In 2016, we are able to capture 54% of all net adds in high speeds equal or above 34 megabits per second, maintaining our leadership position with 55% of market share in this segment. We are able to increase by 8% broadband ARPU or 10% if considered only FTTX.

On Pay TV, we followed a more selective approach for new customers in order to ensure the best return on investment especially in standalone DTH. We are able to increase 39% our IPTV customer base, while our total Pay TV ARPU grew 12% in the last 12 months.

In B2B, we have been diversifying our revenues through digital service, growing more than 46% year over year, mainly driven by IT security and cloud services. In addition, we launched our new Vivo business app to enhance B2B digital customer experience.

I now pass to our CFO, David Melcon, who will give a more detailed financial perspective on our third-quarter results.

Thank you, Christian, and good morning, everyone. Moving on to slide 11, in the third-quarter 2016 the recurrent operating cost reduced 1.9% compared to the same period of the previous year despite inflation, which reached 8.5% in the last 12 months. This is the third consecutive quarter with cost reduction mainly explained by the positive evolution on synergies and a selective commercial approach in addition to the enhanced use of digital channels that benefit our customer care costs.

Without interconnection cost, the expenses were almost flat, with a 0.8% variation year over year. As a result, we reported a very consistent growth of 8.1% in our recurrent EBITDA on a year over year basis, driven by an acceleration of service revenues and by the cost efficiency measures adopted by the Company besides the synergies already captured from the acquisition of GVT. Our recurrent EBITDA margin increased 2.1 percentage points, reaching 31.9% in this quarter.

On slide 12, I will elaborate more on our cost evolution by concept. Service rendered and G&A cost were almost stable year over year. Lower interconnection cost, energy expenses and reduction in third-party costs for field services due to insourcing compensate for higher cost related to network expansion.

Commercial expenses decreased BRL51 million year over year influenced by the results of our rationale commercial strategy and synergies generated by the brand unification done in April, eliminating communication redundancies that reduce advertising expenses. In addition, customer care costs declined due to higher adoption of these two channels such as our application MEU Vivo increasing by 37% since it launched in April 2016.

Cost of goods sold reduced BRL176 million as a consequence of the selective approach in handset, focusing strictly on higher value customer especially on the B2B segment.

During the third quarter of 2016, bad debt represents 3.2% of net operating revenues, 0.1 percentage points down on a year over year comparison. We continue to implement stronger credit controls by protecting our top line growth. Recurrent personnel cost evolution which excludes the provision for the restructuring program in the amount of BRL19.2 million in third-quarter 2015 grew 7.9%, still below the inflation in the period and affected by the collective agreement and the insourcing of field services and contactor employees.

Now moving to slide 13, net income for the nine months of the year reached BRL2.9 billion, 30% higher than the amount of the same period in 2015. When excluding the net impact of one-time events, namely the tower sales in the first quarter of this year and the provision for organizational restructuring in the third quarter last year and in the second quarter this year net profit would have increased 17%, mainly due to EBITDA growth in the period. The negative variation in depreciation and amortization is driven by the higher level of investment in recent years in addition to higher software and spectrum amortization.

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

Thank you, David, and good morning, everyone. Now on slide 14, as you know, during the past nine months we have been consistently pursuing the strategy of smart and effective CapEx contingent. In strict alignment with the marketing and commercial teams, we allocate CapEx considering what we call the strategic intent for each geography, customer segment and technology, always targeting the highest value markets.

Also, the macroeconomic environment especially the devaluation of the US dollar exchange rates helped us keep unitary prices down on purchases under the initial guidance mainly on customer, premises, equipment. As a result, our Q3 CapEx represented 18.2% of net revenues, keeping our year-to-date figure to the level of 16.4%, down 2.5 percentage points year over year for the nine months.

Out of our BLR6.2 billion spent so far in the last nine months, the largest part was, as always, allocated to growth project in the business units to increase revenues and to keep up traffic growth, mainly focusing on 4G coverage, 3G capacity and fixed business expansion.

As mentioned in the second quarter conference, in Q3 we have accelerated the network deployment and structural investments, which included the deployment of new sites, mobile sites, 3G and 4G, at a rate two times faster than Q3 -- in Q3 than first half; a faster fixed business expansion, adding 200,000 ultra-broadband facilities in existing cities and also launching a new city, Timoteo in Minas Gerais; and overall capacity increase and optimization of our optical and IP backbone.

For the last quarter of 2016, we intent to keep speeding up the network deployment and structural investments while maintaining a strong grip into CapEx effectiveness. This will help us prepare for the tough 2017 demands. Investments will continue to be mainly focused on 4G coverage, 3G capacity, backbone and backhaul expansions and the new FTTx footprints. We will launch one additional city Cachoeira do Sul with FTTx totally greenfield and we also add more than 130 4G cities to our current footprint until December.

Despite this acceleration, we are confident that the ratio of CapEx of our net revenues for 2016 will be under the initial guidance, pointing to an amount no higher than BRL8 billion including licenses for spectrum.

Thank you, Rodrigo. Now, moving to slide 15, thanks to a solid EBITDA evolution, the result of the smart capital allocation that Rodrigo just described combined with a strong financial discipline, we are showing a very consistent cash flow generation in 2016.

In the first nine months of 2016, free cash flow achieved BRL3.2 billion, doubling the free cash flow generated in the same period of last year with positive contribution in all lines but mainly in CapEx and EBITDA. When considering the extraordinary transaction, free cash flow represent 2.4 times the amount of the same period from previous year.

As of September 2016, net debt stood at BRL3 billion, down 35% year over year and representing just 0.2 times EBITDA, giving the Company flexibility to navigate challenging economic scenarios.

Turing to slide 16, now I would like to share with you the evolution on the synergy front. Since last quarter we evolved even further in the achievements of the key milestones that will guarantee the capture of synergies in the long run. As a result, execution of the activity is already secured by the end of the third-quarter 2016, showing an NPV on BR14 billion, fully guaranteeing the best case calculated during the due diligence and securing 64% of total NPV included in our best case scenario.

The increase in current NPV compared to the previous quarter was concentrate in OpEx savings as we secured additional recurrent savings in personnel cost due the cost for infrastructure completed in July this year. Even so, we continue to move further in all operational fronts and have already unified our TV content contract with all suppliers, leveraging a newer scale to reduce costs.

Moving on to slide 17, our solid execution on the synergies milestones allowed us to generate solid results already in the nine months of 2016, contributing strongly to our cash flow generation. Incremental revenues and OpEx savings from synergy initiatives mainly cross-sell to fixed B2C customers and a rationalization of commercial expenses from channel integration contributed in BRL576 million for the EBITDA in the year.

Including CapEx needed for the generation of synergy especially in IT integration, our direct cash flow generation reached BRL541 million in the year. Indirect cash flow generated from CapEx and OpEx avoidance reached BRL362 million, driven mainly by avoided investments in backbone routes using GVT's infrastructure.

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

(Operator Instructions) Richard Dineen, UBS.

A couple if I may. Could you maybe talk about virtualization of sales and customer care? Amos, I think you spoke last week of reducing call center staff from 30,000 to 10,000 by 2019. Could you clarify if that's a net impact or rather -- rather than insourcing and how impactful could that be? Is it baked in to your margin expectations or is it upside?

And secondly, just quickly, you mentioned about leveraging scale with TV content supplies. Just wondering if that was a reference to the global agreement, if you have any more details on that? And if scale is so important in content, why wouldn't you be interested in SKY Brasil as I think was reported yesterday by the press especially if that asset might have to be sold by AT&T for antitrust reasons? So any color on the above would be really helpful. Thank you. Thank you, guys.

Thank you for the three question. Quickly on each one of them. About the call centers reductions, I mean from 30,000 to 10,000 until 2019 that has been mentioned in the past is relating to part of our strategy plan to digitalize our business end to end. Substantial effort has been done in the backend IT systems as well as in the front end with the e-care, e-commerce and others that enable more digital interaction with our customers.

Our idea is to go from about 15% of digital interaction today to about 60% by the end of 2019. That's a real transformation that we're fully committed as a Company to invest the resources together as our consumer is more digital than ever and it's clearly more efficient as well.

We are working in a digital environment. Today in Vivo we have a [smart] concept in a digital building that enable this kind of quick solutions for those apps, full ownership, multidisciplinary equipment team and it's really moving very well.

So we're very confident that our goal for 2019 will be achieved. Again, this is part of our overall plan and within the concept of margin improvement, as we mentioned, year over year until 2019. So again within the plan, but again an ambitious plan and I'm sure it's doable.

About contents and Pay TV, as you mentioned, with relating to the synergies within GVT and Vivo earlier last year and some cost this year, one of the objectives of the synergies are relating to reduce TV content cost to our Pay TV operation. The consolidation of GVT and Vivo enable to consolidate a base about 1 million to each site, about 2 million.

We're negotiating with the content provider in Brazil for a while and we've reached an agreement with most of them and only lately with the last and most important one that's enabling us to have the final reduction in cost relating to our Pay TV operations that is part within the BRL25 billion tendency of NPV we mentioned last quarter. So it's again within the plan. But finally we can confirm it really happened with all the content provider.

Relating to SKY and relating to scale, why not to buy more assets and gain more reduction in content cost, generally yes, volume in Pay TV means lower content costs -- there's no doubt about it, yes. However, our view about any acquisition in the Pay TV business is more about how we're preferring investing in our organic growth, which we believe is the right path to go. We have all the access we need to continue lead this market and continue grow organically well.

And more about -- speaking to Pay TV, one should wonder if it's the time when Pay TV having a tendency of decline in customer base and revenues or having threats from [OTTs] is the right time for us to go in a big acquisition when -- again focus more on OTTs and video streaming and so on. So IPTV for us is a bigger focus than DTH. So again IPTV and OTTs are the direction we would like to go and not DTH just for the sake of scale. I hope this answers your question, Richard.

Yes. Thank you very, very much. Thanks for that, Amos. Very helpful as always. Thank you.

Andre Baggio, JP Morgan.

So I would like to know what has been the recent developments in terms of completion? How do you see the change in the marketplace? Like say we know that Oi in a financial restructuring, so how has that affected the business and growth for Vivo?

Relating to the competitive landscape, I will say that, as we mentioned in a previous call, we see a more rationale environment around us than it used to be maybe last year. So that's I think helpful. Every company has its main reason why they are back to focus on value and not volume. This I believe is a positive catalyst for the competitive landscape.

Just related to Oi, I will tell this as in the past, we don't see more deterioration or any deterioration in Oi operational performance due to the judicial costs they are going in this phase. So again I think we should separate between the legal process Oi is in today and their operational performance. I think operational performance did not change before and after. And I think Oi is a very valid competitor, especially on the mobile side and I don't think that kind of a situation and uncertainty there is changing a lot the competitive landscape than what it used to be maybe a year earlier. So I don't think that's something we should really build on as a positive factor by itself. I have -- is that answering your question, Andre?

Yes, of course. And just a final question, just the recent move in the exchange rate with the real appreciating a lot, this is -- how much that should help your ideas of generating cash flow or reducing CapEx and still generate some good free cash flow?

As we mentioned in the call, we have positive effect of the exchange rate this year. I think we all remember -- or you want -- it was positive. I mean it was not that significant. Remember we signed the contracts of last year with vendors on kind of a fixed exchange rate thanks to hedge of course, the situation in case the dollar continued to climb. Where we had the biggest benefits is capped on the setup boxes, which we couldn't really hedge or sign. It was really on a month by month basis. So there we saw some -- maybe BRL100 million plus benefit this year as a whole, not a big amount.

I think what might really -- clearly will be a big benefit if that rate of about BRL3 will continue as it seems like for next year, negotiation with vendors will be in a very different platform than it used to be when we did it last year, October-November last year when the dollar almost picked up.

So again it's not a leverage and I'm sure we will see that coming in our CapEx plan next year and that's why we reiterate that our CapEx plan for next year will continue to be around BRL8 billion, reducing percentage of CapEx as percentage of revenue. And that exchange rate is part of the benefits we're seeing in CapEx. And maybe David wants to add one more point to that.

Yes, Andre, also let me share with you that we have -- around one-third of our total CapEx is exposed to dollar rate, so we will benefit from these for next year, being able to invest, do more things with lower CapEx. So this will be a benefit for sure, yes.

Perfect. Thanks a lot, guys.

Thank you.

Susana Salaru, Itau.

First one we would like to discuss about the regulation. We have a bill, 3453, being discussed in the lower house. We just was wondering if you could discuss if you are happy with the guidelines that are in the text of the bill. What could improve and how do you see that evolving? That will be our first question.

The second question is more related to the cost side. One of the few costs that actually grew was personnel costs and one of the reasons for that [was] the insourcing process. So our question here is if that's already done, this insourcing process, or should we expect a little bit more to happen in the future? Thank you, guys.

Thank you, Susana, for the two questions. On the regulation side, of course we are pleased with bill 3453 or the proposed bill. I believe it's in the right direction to resolve some key issues in the macro regulation of the sector. On the concession side, no doubt that it's time to cancel concession concepts to avoid [permits] in Brazil. It's outdated -- as you know, service and outdated concepts. Moving to authorization will allow more flexibility for all operators, release some substantial liabilities, operational liabilities that should have a positive impact on our P&L.

Resolving a more bigger issue I believe than the operational liabilities is the subject of the reversible assets of the concessions to whom they belong and how to value them in the end of the concession in 2025.

As owing to the uncertainty today will give more clarity to the concessionaries and I think will build a new wave of investments in broadband fiber as to what kind of -- question will -- a little bit on the legal side, if fibers we're building are part of the concession business, just partially or none. I mean all of that could be discussed for another many years, although today giving more clarity and more certainty on those investments.

So this is no doubt going in the right direction and enabling selling non-productive assets at the same time to generate cash flow to be invested in productive business like broadband no doubt is a win-win to everyone else. So as we see the timeline in (inaudible), we cannot really estimate it. We finish by the end of this year or sometime in Q1 next year. But I think the process is going well at the Congress and there is a clear alignment and support of the ANATEL means of communication as well the operators again. Nothing is perfect, but it's within the reasonable expectation of everyone and I think we should really just hope it will go and approve.

On the mobile side, it's resolving one of the key issues of renewal, automatic renewal of spectrum which is not defined by regulator and it's currently up to 20 years. ANATEL can take back the Spectrum and build it again, yes. So you don't have the guarantee that the spectrum you have will belong to you after the expiration of 20 years and some spectrum in few years from now will get expired. And I think having the fast automatic renewal with a price established by clearly financial methods of ANATEL at least it's guarantee -- it will not save money, but it will guarantee that spectrum will come back to you and again continue the operational of the network, which is key of course to our customers as well. So that's an important move.

About insourcing and call center, I think we have a positive (inaudible). We're continuing insourcing in both field operation and call center. I think tendency will continue as we have good results of that insourcing. But again it's within the plan, continue as we expect in the next coming year. Thank you, Susana.

Perfect. Thank you.

Mauricio Fernandes, Bank of America Merrill Lynch.

Amos, the -- or maybe to Christian as well -- the fixed-line revenues had a relatively significant drop in this quarter. It was actually -- without the cut in interconnection, it was up 3% year on year in the second quarter and now almost 5% down. There is some I think comments and press release and then as you mentioned here on the corporate market, but just wondering what exactly drove it from a quarter to another. It seems like a big decline from a quarter to another.

And second -- apologies for coming back on SKY, but I just wanted to understand based on your previous comments here and as well as the headlines on the press, it seems that there's a really conceptual view against allocating capital towards Pay television in the traditional form. Just wondering, given that there is a price for everything, if that concept would be revised or reassessed in case particularly the regulation in Brazilian [tray] -- in case the potential valuation for the asset if it ever is put for sale becomes more attainable, more interesting? Thank you.

The first, as you mentioned, yes, we had the impact of the regulatory changes, okay. So it is impacting. Of course there was also in the other quarter, but is fully impacting in this quarter. And we have some volatility in B2B, especially in voice traffic. So apart from the macroeconomic environment that is pressing us in this segment, in the small companies, even in the large corporations they are renegotiating their contract with us. We also saw some voice volatility in this segment.

In the B2C, apart from the regulatory fact that you mentioned, we had a positive growth, okay -- it's like 1.3% growth on revenues. But the general service revenues for fixed was more impacted by the B2B, as we mentioned before.

So --

And, Christian, just before -- I'm sorry, Amos. But, Christian, just before that, could you say how much -- what percentage of B2B is on total voice just to --

Like we have a strong dependence on voice on B2B that we have today in B2C. But we don't give the number. But as I said, the number that I can give you is that B2C had a positive growth in general, not only voice, in everything together. And we have more bundled offers in B2C today than we have in B2B. So what we are working on is that -- as I mentioned in the beginning of my presentation, in bringing customers more to bundled offers at flat fees. Then maybe the situation in B2B is not as good as it is in B2C.

I see. Thank you. Amos, sorry for interrupting.

No, no, no. Just as I said, of course never say never. I think I have no of course any knowledge that SKY is for sale or will be on sale. But of course if any company will be on sale at that magnitude, at that importance in the market, then clearly people will evaluate the opportunity. But again the strategic business is a physics, that my chance depends on many factors, especially relating to economical viability and return on investment. But I think it's too early to get into the details at this stage.

Thank you, Amos.

Thank you, Mauricio.

Michael Moran, Morgan Stanley.

So a couple of things in terms of trends that you are seeing during the quarter. The first would be on interconnection, where we saw really the revenues collapse sequentially, but your costs are flat sequentially. So -- and I'm referring to the mobile revenue from interconnection. So if you can comment on what's happening there and how we should be thinking about this going forward?

And then secondly, if I'm doing the math right on your prepaid revenue trends, it looks like basically it has been flat year-to-date. There was no real sequential increase in the quarter. So the improvement you are seeing on the year on year is really just because of easier comps. So I just want to see if you could confirm that and if there is any reason to be a little bit more constructive about the fourth quarter on that. Thank you.

So on the second question, as I mentioned, we see that prepaid declined, but better performance than we saw in previous quarter. Now, I think there are two reasons for that or maybe two reasons for that. First is the -- I think we are being able to bundle more our offer. We have an offer that is Vivo Turbo and I think the first in the market that we launched like a few years ago and we being able to bundle this offer to our customers in a more aggressive way. So we have like a percentage of customers that today have this offer higher than it was one year ago.

Secondly, we are able also to offer more data and increasing some prices on this offer and customers are consuming data and also buying additional packages. That was also helping us in our revenues for this segment. And that in a way is offset by our successful migration of prepaid customers to hybrid plan that is in our control. We have been with very good results in the last quarter and that also in a way penalized the prepaid revenues by itself -- of course it helps the revenues of the Company in general, but it penalizes.

So even with this effect that are the two things that I told you that were positive for us were helping us to have a little bit more stable performance in the prepaid for this quarter. I don't know if it answered your question or if you --

Well, not completely. Sorry. So really the question was - and I know the year on year is improving.

Yes.

But really I was trying to understand if there is any momentum when you compare the third quarter versus the second quarter or even during the third quarter have you seen really your prepaid revenues grow or is the improvement really kind of the statistical effect of having easier comparison --

It is growing, it is growing. It is growing both the number of customers that are recharging with us and the amount they are recharging is slightly increasing as well. So we see a positive trend.

Christian Gebara Okay.

But as I said, my revenues are impacted not only by that, but only by the volume of customers that are taken from prepaid and moved to control. If I do this movement --

Yes, yes.

If I take the best customers, even if they are recharging more with me but I give them the possibility to have a control, I'm taking them from the prepaid revenues. So looking at it in an isolated way maybe don't give you the right perspective of this segment, this massive segment.

Got it, yes. Thank you. And on the interconnection question?

Michael, I think the third quarter in terms of interconnection revenues is more what you should see and should look to project revenues. In the second quarter typically we have things like these, like agreements with operators on bills that are challenged typically at the end of the year. On the second quarter we had some of those that increased the interconnection in mobile in the second quarter. But the third quarter is more the recurrent level.

Great. Thank you very much.

Fred Mendes, Bradesco.

I have two questions here; the number one regarding the synergies. I mean most of the OpEx, CapEx and tax synergies it is already secured while the revenue from synergies are quite modest. So basically when should we see a pickup in the synergies from revenues and if you could give us an update about the launch of the 4P? That's the first question.

And the second question regarding CapEx, just wondering is this reduction in CapEx 100% related to smart CapEx allocation or this is also related to the fact that competition is decreasing CapEx and there is no reason to be really aggressive now and if there is room for further cuts? Thank you.

Hi, Fred. This is Christian talking about revenues. As I said maybe in the last call, we've been like -- already like having all our channels selling both products, fixed and mobile. So today like 100% of our stores or our remote channels they are selling both services. What we are doing for the moment is cross benefits, some discounts for customers that are on fixed and they want to be mobile and vice versa.

For the next month we will continue doing that. We are not doing like an aggressive conversions bundle for the next quarter. What we are doing is cross benefits. So we're going to change the way we could give them benefits. And that we only can reveal in -- when we do it commercially. But we continue in this trend, gradually giving advantage for our customers to be both fixed and mobile.

Even in our loyalty program we are now integrating everyone in the same program for customers to be with Vivo, consume more with Vivo. They are going to get also benefiting points in both, together in the same program. So it's gradually doing it and I think we are waiting for the right moment and responding to the demand of our customers.

This is Rodrigo, just answering your question on CapEx. Of course, as you know, CapEx is not a one ingredient recipe, right. So I think the majority of the savings come from the smart allocation. But of course we also closely monitor the network quality and traffic trends and customer acquisitions. We also have some efficiency programs to recycle more customer, premises and equipment that reduces the CapEx. And of course the competitive positioning also helps us. So it is a mix. The thing is -- the number one requirement for any CapEx allocation is to have quality service to the highest value markets. So we are keeping that and we are comfortable with the level of CapEx because of that.

Perfect. Thank you, Christian, and thank you, Rodrigo. Very helpful.

Daniel Federle, Credit Suisse.

My first question is how are you seeing the immigration of postpaid customers from old plans to new plans and maybe cheaper plans?

And my second question is, if you could elaborate a little bit more on the bad debt dynamics? Thank you very much.

Hi, Daniel. Actually, we don't see this strong migration for old plans to cheaper plans. Now, I think we would see the positive movement for customers like migrating from 3G to 4G and the opportunity for us to migrate these customers to new plans with more data allowance.

We are actually being -- working a lot in giving not only more data, but also new features for the use of the data. Last quarter we talked about the carry over. I think that was a new innovation that we brought to the market so customers could use in the next months the data that they haven't consumed.

And this month we launched what we call an enhanced multi Vivo data sharing feature that allows customers to share among the dependents the allowance and they can control how much data they want to give to each of them. And also that is in the postpaid. So we see it's more a positive and upwards trend than the downward that you mentioned.

Of course there are some cases that when we increase price and we give more allowances there are some customers that may adapt themselves in a cheaper plan. But on the overall, we are being able to capture an upside and not the downside. And that's not only in the postpaid, as you mention, but also in the hybrid and in the prepaid.

In the prepaid, we are offering more data and increasing price with a good response. Actually, we are launching like more gigas per week and even per month and we have customers adopting this new offer. And in the control, we are also raising price and raising data and customer is going upwards. So in general it's positive movement more than the negative one that you mentioned. Don't know if I answered your question.

Just to cover the second question, so we have seen very good results on bad debt and this is a result of the smart cost control processes and this is about selling the right product to the right customers. And we have seen a small increase in bad debt in B2B this quarter, even though this is not even for seasonality. And the level we have for B2B this quarter are even below than the first quarter this year. So we are very positive on this process and we believe is helping us to maximize the top line growth.

Okay, thank you very much.

Leonardo Olmos, Santander.

A question on your fixed strategy, more specifically on broadband, just some questions in that subject. First of all, what is the concept to use FTTH versus FTTx? Which kind of theory you want to use those technology and what's the base for choosing each one? And going forward on some years, what's the expectation of mix between those two in your broadband services, I'm talking about B2C?

And finally, thinking on the lower -- the low-end client, how do you plan to monetize them probably on FTTx? What's the plan there, maybe selling Pay TV or building something else? Thank you.

I'll jump quickly and then Rodrigo and Christian can add. But FTTx is general terms to fiber to the cable or fiber to the home, yes. FTTC has still portion of its mile copper generally based on VDSL that enables speeds of 30 to 50 mega. FTTH is fully fiber and again enabling speed of 100 mega and up. And we have a different mix of FTTx in the base of Vivo. The GVT site came with mostly FTTx, a little bit FTTH, as GVT was involved to FTTx technology since day one, since 2000, but in the last year or two before the acquisition by Vivo moved to FTTH. While Vivo has a mix of DSL and FTTH to the Vivo fiber.

So again a mix of technology, each one of them has a modest history. While we are planning in the future moving more to FTTH, FFTC only of course, yes, and that depends on the investment case we are doing and in some areas where we have copper business in order not to invest in a full FTTH and we're finding out that returns on investment in FTTC will be better.

And so that's where that actually we are taking. And of course in more urban areas when the competitive landscape with the cable TV is more intense, FTTH is the only solution to go and that's where we see the difference. But again, I'll ask Rodrigo add his own view and Christian on the commercial side as well, yes.

So we have -- today we have three types of Pay TV services, one is the DTH standalone and that's clearly targeted at the cities where we don't have ultra-broadband, so customers will have a standalone product.

For those cities where we have FTTC or we have fiber to the home but we don't have scale, we use a hybrid DTH with some VOD capabilities interactivity and that's proven to be a well accepted solution. But that evolves. As we have scale, we may also deploy a local [head end] and then move on to IPTV.

And then we have the third one, which is the full IPTV over fiber. And again, we are working very intensively to reduce unitary cost of CPE. A lot of the customer, premises, equipments and set top boxes are moving more in software and cloud-based services, so we're working on that. And also to reduce the prices of head ends, local head ends because of the requirement of our local content so we can start -- gradually move more towards IPTV rather than DTH.

Is there anything else? Yes, I don't know if he answered your question and I don't know if there is anything else I can complement --

Yes, yes, the clarification you made was my point. Thank you very much for the reply.

Thank you. Very good.

Carlos Sequeira, BTG Pactual.

So I have a couple of questions; one is on the FTTC homes. You have deployed -- I mean my question is how many homes you have deployed this year in the city of Sao Paulo and what is the goal for next year on FTTC? And I think -- I'm asking this question because I think this could help accelerate broadband growth in Sao Paulo, right. So that's one.

And the second one is on new cities outside Sao Paulo what is the plan for 2017, please? Thank you.

Okay. So to-date we have pretty much deployed around 300,000 FTTC facilities. The idea for next year is really to double, double this number. So we are planning to have at least 600,000 new facilities for FTTC, not to mention FTTH. We also have a number of cities that we're going to launch next year -- no, we have seven cities outside of Sao Paulo and then the mix. We may come to 15 cities next year depending on the business case that have been rolled out. But you can expect that we're going to speed up tremendously the rollout of both FTTC and FTTH for next year.

Wonderful. Thank you very much.

Matthew Rodelar, Barclays.

So first with regards to mobile, if you could elaborate a little bit how you feel about your 4G and network and proposition compared to your competitors? I mean in terms of average speed as you can measure them, how do you think you fair against the main players? In terms of sulphide fiber connectivity, how do you think you stack up? So that will be the first question with regards to fixed.

So related to the previous question, is it fair to expect because you expand more outside of Sao Paulo and you expand FTTC in Sao Paulo that we could see a reacceleration of the broadband dynamics or the fixed in general?

And thirdly, coming back to the mobile business, obviously very strong performance and we can see that you have plenty of more for more initiatives that are working well. Is that something we should embed in the business model whereby you think that you can gradually continue to give more for more and that's one of the key drivers for growth in the next few years? Thank you.

On the 4G, I think we are -- we have a good coverage population wise. I think there are like small difference between the players, so I think we are confident that we have the coverage that we need to be more aggressive. And you can see the number of net adds that we have, the last number that we have, Vivo was the one who captured more in the 4G, more than the 1 million customers and we are still leading in market share. And also in some of the surveys in the market about our quality we position our self is good.

So we are happy with the coverage and of course we will continue to do that. We're focusing 4G as we believe that it's going to be a big, key technology for our customers for the next year and we're going to respond to this demand.

Regarding the mobile, as you said, like we don't give trends for the future, but we believe it's going to be good one. We got a very positive results for this quarter in revenues and in net adds. The last months of this quarter we were like more than 46% of share in net adds, increasing our market share.

And if you look at portability, we were positive the whole year, as I said before. And in the last three months of the quarter, we are positive in the global number and I guess all our competitors. So I think it all put us in a position of strong leadership that give us a positive trend for the future. I don't know if there is anything else that you --

Thank you so much.

And this concludes our question-and-answer session. I would like to -- at this time, I would like to turn the floor back over to Mr. Luis Plaster for any closing remarks.

Okay. Thank you all for your questions. Before we finish, I would like to give the word to our Chairman and future CEO Eduardo Navarro, who would like to leave you a message on this call.

Thank you, Plaster. Good morning, everybody. As Amos mentioned earlier, I'm already meeting with him and the executive team of Vivo -- by the way, it's a fantastic team, know them very well -- and will continue with an intense agenda of meetings and discussions on a regular basis. I also had the chance to meet with our relevant external parties.

Due to my previous role as Chief Commercial Digital Officer of Telefonica and the Chairman of the Board of Telefonica Brasil, I was already very familiar with the key elements of Vivo synergy plan and data centric strategy. I believe the plan and the strategy built by Amos and Vivo's executive team it's very solid and contains all the elements for the Company to continue delivering solid results.

I would like to emphasize that I'm very pleased what I have found now in Vivo and I'm very still committed to continue executing on the Company's current strategy and to continue delivering solid cash flow results to our shareholders, leveraging synergies and efficiencies.

As mentioned by Amos, we are advancing very well in the transition process. I'm very comfortable that we will be able to finalize the transition process in the near future. I'm fully ready to assume the CEO position and to work with Vivo's executive team to continue delivering on the plans of the Company. I'm looking forward to have a rich dialogue with all of you and to elaborate on our plans in future investor events.

Finally, I would like to thank very much Amos for the extraordinary work he has done at Vivo. Speaking as the Chairman of our Board of Directors, I wish he could stay for longer as CEO of the Company. In any case, I wish him good luck and success in his new endeavors. Thank you very much and I hope that you can have the chance now to meet in person in the short future.

Now, I will pass to Amos for a final comment.

Thank you, Eduardo. This is my last quarterly release with Vivo, especially coming on my birthday, interesting day. I would like to share my appreciation for you all on continued attention and feedback during the last two years. It was a pleasure to have such a rich and productive dialogue with the investment community. I would like also to thank Vivo Investor Relations team for the amazing support and contribution during this period.

I'm really proud of giving the key in the near future to Eduardo Navarro, a friend in the last 12 years, a colleague in the last two years. As I mentioned in the past, the right person in the right time to lead Vivo for a new heights. So I'm leaving with a very a good feeling about what we did in the past, but not [less] about what Eduardo and the team I'm sure will achieve in the future.

And I would like to wish all of the team and people at Vivo and our partners and all over and of course our clients and investors all the best and thanks for that amazing period I was -- I had the privilege to leave Vivo. Thank you all and good bye.

Thank you. This concludes today's Telefonica Brasil 3Q 2016 results conference call. You may disconnect your lines at this time and have a great day.