Telefonica Brasil SA (VIV) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefónica Brasil Second Quarter of 2017 Earnings Conference Call. Today, with us representing the management of Telefónica Brasil, we have Mr. Eduardo Navarro, CEO; Mr. Christian Gebara, COO; Mr. David Melcon, CFO and Investor Relations Officer; 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 in Engage-X platform. There will be a replay facility for this call on the website. (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 management's 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 Telefónica Brasil.

Mr. Plaster, you may begin your conference, Sir.

Hello, everybody, and thank you for joining us in this conference call for the second quarter of 2017 results of Telefónica Brasil. The call will be divided in 3 parts, as follows: In the first part, Eduardo Navarro, who is our CEO, will give you an overall view of our operating and financial results for the second quarter of the year. In the second part, Christian Gebara, our COO, will go over our commercial acceleration and CapEx evolution. Finally, our CFO, David Melcon, will discuss our efficiency commitment and financial results.

We will then move to Q&A. I now pass the word to Eduardo.

Thank you, Plaster. Good morning to everyone on the call, and thank you for joining us. Starting with Slide 3. In second quarter 2017, we delivered yet another quarter for revenue acceleration confirming our long standing trend that is unique to build and continues to strengthen our leadership.

Our Non-voice revenues continue to increase and we see in our quarters resilient mobile service revenue grow approximately 5% year-over-year, followed by Mobile Data and Digital Services, which grew 32%.

In ultra- broadband, we see another example of stability of the growth stem at 12% year-over-year.

In recurring cost, moving to the middle of the slide, the second quarter this year was the sixth quarter in a row, where we saw a drop, minus 0.6% year-over-year. Taking our current EBITDA margin to 33%, 1.6 percentage points higher, when compared to the second quarter of the previous year. What this proves, once again, of our strong commitment to controlling costs and continued (inaudible).

In terms of operational cash flow measured EBITDA minus CapEx, we see another increase, plus 2.5 percentage points year-over-year, reaching a margin of 18.3% in the first semester of this year.

Moving to the right-hand side of the slide as shared with you in the previous quarter. Let me give you an update of our first improved differentiation and guarantee that legal continues to consolidate with leadership in key segments. Our included commercial activity, once again resulted in a 2.3x more postpaid adds -- net adds than an year ago and the record FTTH net addition in the quarter 124,000.

Our remarkable deployment of 4G in the quarter took us to an additional 657 cities, meaning that 71.4% of population can now count on our superior 4G mobile network. In 60 of those cities, we have already deployed 4G plus service, through care (inaudible) . Covered most of the mega cities and we will continue to roll out on accelerated pace, leveling the launch of new cities that have a 700 megahertz spectrum.

In addition, we continue to expand our UBB footprint and have deployed fiber-to-the-home in 5 new cities. The performance has been outstanding and we are able to achieve stronger penetration in a very short time.

In summary, I'm very pleasured to report on our quarter for enforced leadership, we boost revenue growth, enhanced the profitability and very strong cash flow leverage.

Moving to our key financials on Slide 4. Let me once again reiterate our consistency, both in terms of top line growth and cash flow generation. A claim that's particular to [viewing].

Our total service revenue continues to accelerate 2.3% year-over-year, driven mainly by the business -- the mobile business, which grew 4.8%. It came up to be active area in the cost control. We continued focus on our value-driven strategy based on the commercial rationality, boosted on efficiencies and end-to-end digitalization. The results on a quarter of consistent EBITDA growth, 6.9% on a year-over-year base, which is accompanied by margin expansion.

In CapEx, we see a ramp up in second quarter taking CapEx over Sales to 17% in accordance with our investment plan for the year. Our focus, as pointed out in the previous slide, is and will continue to be on accelerated deployment of 4G and FTTH. The point of this (inaudible) when combined with our very creative financial (inaudible) is an expressive 53.4% year-over-year free cash flow growth, totaling BRL 2.6 billion in the first half of this year.

Now I pass it to Christian, our COO. Christian?

Thank you, Eduardo. Good morning, everyone. This was another very positive quarter for Vivo, reinforced our leadership in key segments. As Eduardo said, this quarter, we grew 2.3% of revenues year-over-year.

Before going through the slide, I would like to highlight our key operational initiatives and results for the second quarter. We maintained our focus on the expansion of 4G coverage, reaching almost 1,500 cities of which 60 were 4G plus, including their main capitals. We continue to expand our high-speed data network, deploying FTTH in 5 new cities. We launched new bundling offers for mobile users with relevant digital services. Our mobile strategy focus on quality and data continued to encourage prepaid customers to adopt high-end offers. (inaudible) increase significantly digital service revenues, mainly driven by security and call services.

Getting now into the details of our main business. On Slide 5, we present the evolution of our mobile revenues, which increased 4.8% year-over-year, mostly driven by Data and Digital services that went up by 32.4%. I would like to highlight that Internet revenues had a strong growth of 44.1%.

Moving to the right-hand side of the slide, the graph on the top shows that mobile data revenues already represent 72% of total mobile service revenues. This is the result of our efforts in reducing our dependence in voice by launching new services, offering more attractive bundles and increasing data allowances on mobile plans.

Our postpaid revenues grew 10% representing already 75% of our total mobile service revenues.

The left-hand side of Slide 6 shows that our mobile market share increased 1.8 percentage points in the last year, reaching 30.7% with 42.3% in postpaid. In postpaid, we had an impressive performance with 59% share of net adds this quarter, reflecting a good execution of our strategy and focus on best network quality, superior channel experience, innovative offerings and (inaudible) awareness. We also have the best customer base mix in the market, with postpaid representing 47% of the total. I would also like to highlight our excellent performance in profitability this quarter with positive figures against all major players once again.

On the right-hand of the slide, you can see that we continue to focus on high-value services. On our postpaid plan, Vivo Familia, access increased 19% year-over-year and 60% of new pure postpaid adds are family plans. Meanwhile, our hybrid customer base grew 17% in the same period.

Additionally, we were able to increase prepaid migration to hybrid plans by 31% year-over-year. On prepaid, we encouraged data usage through our bundle prepaid offer Vivo Turbo, increasing customer base by 20% year-over-year, with 74% of users in higher offers. Also, we are expanding our partnerships in order to enhance value-added services portfolio and added more value to customers.

In our new prepaid and hybrid plans, we are already offering embedded relevant digital services such as NBA, Gowith and language (inaudible) apps. Finally, in mission-to-mission business, we continue to expand our leadership with a solid 41% market share.

Slide 7 illustrates that execution of our mobile data strategy is paying off. We already reached 71.4% of covered population with 4G network, increasing 11 percentage points this year. Additionally, the main capitals in the country, São Paulo, Rio de Janeiro, Brasilia, Belo Horizonte, Giuncho, Porto Alegre, already have 4G plus deployed through Carrier Aggregation and we also plan to launch in another 11 capitals already in July. We believe that there is this given opportunity to expand our 4G services and enhance customer experience. Of all customers, 81% have smartphones and 4G represents 37%.

In addition, customers' 4G services are consuming more data. In the second quarter, 4G data traffic had a strong growth of 144% year-over-year. Moreover, 4G handset in our days almost doubled in the last year and we continue to lead this market with 30% -- 35% of share.

Finally, data ARPU went up 30.8% year-over-year, while overall ARPU increased 3.6%. The breakdown of ARPU also showed that data already represents 72% compared to 57% of last year.

Moving to Slide 8, we present our performance in the fixed business. We continue to focus on broadband services which grew at relevant rates minimizing the impact of voice decline. This quarter, we had a decrease in service revenues of 1.3% year-over-year but when including regulatory effects, we grew 0.2%.

In Ultra-broadband, FTTx, we reported 20.1% revenue growth while our xDSL revenues grew 3.5%. As you can see on the right-hand side of the slide, we were able to expand the relevance of our premium products. Our main focus on expansion of FTTH footprint is reflected in an impressive 32.8% growth in revenues while IPTV follows the same strategy with 60.7% growth year-over-year.

In addition, we deployed FTTH in 5 new cities this year. Barra Mansa, Volta Redonda, (inaudible), Petropolis and Tesresopolis. Especially, in the cities out of Sao Paulo, we have an excellent performance in sales compared to previous FTTH rollouts. For instance, in Barra Mansa, we reached 40% of our initial fiber network capacity in less than 30 days after the service launched. I would like to point out that (inaudible) increased digital service revenues by 12% year-over-year, mainly driven by secured service that grew 104% and Cloud Services 16% in the same period. Additionally, our B2B Ultra broadband revenues went up by 13% year-over-year.

On Slide 9, you can see that we continue to attract customers to premium fixed service. The left-hand side of the slide shows that our FTTH customer base had an impressive growth of 45% year-over-year, surpassing 1 million users. Only this year, we had almost 200,000 new fiber-to-the-home customers. This growth was sustained by profitability since our broadband ARPU increased 10.9% percent. I would also like to highlight that for B2C broadband customers, our average [speed] increased 22% year-over-year.

On the right-hand side of the slide, it's clear that we followed a more selective approach for new Pay TV customers in order to assure the best return on investment, especially in standalone DTH. We managed to increase 65% our FTG customer base, focusing on customer totalization. In the last 12 months, our Pay TV ARPU grew 4.9%. Broadband and Pay TV ARPU have consistently grown for the last 8 quarters.

Moving on to Slide 10, we present our CapEx execution the second quarter, closing the first half of the year with BRL 3.1 billion in line with our annual guidance of BRL 8 billion. We maintain our primary focus on our aggressive expansion plan of premium technologies. We're heavily investing on growth, increasing our CapEx by 106% in fiber, 284% in IPTV and 90% in 4G year-over-year.

On the right-hand side of the slide, you can see that we are roughly expanding our 4G coverage across the country. In the second quarter, we deployed LTE network in 657 new cities, an all-time record so far, covering 71.4% of the population or 1,477 cities.

In addition, we are increasing mobile capacity and space enhancing our customers network experience. On the subject, we are deploying Career Aggregation, where 60 cities where customers experience 4G plus in the second quarter.

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

Thank you, Christian, and good morning, everyone. Moving to Slide 11, we are pleased to announce that recurring cost reduced more than 2% in the last 2 years since GVT's acquisition in the second quarter of 2015, in comparison to an inflation of 12% in the same period. In addition, this is the sixth consecutive quarter with cost reduction, demonstrating management commitment to control costs and continuous efforts in the pursuit of efficiencies, as Eduardo highlighted at the beginning of the presentation.

Regarding Personnel Costs increased 0.6% mainly due to the collective agreement, with paid date in September '16, partially offset by savings from rightsizing initiatives that took place last year.

Cost of Service fell 5%, explained by the additional interconnection tariff reduction in February '17 and tendered it in TV content and network maintenance.

Commercial Expenses excluding bad debt increased 5.3% in the period, in line with our successful acceleration of commercial activity in key segments.

Bad debt remains under control reaching 2.2% of gross revenues for the second quarter in a row. Due to the combination of credit and collection actions, (inaudible) are granting its stability. As a result, we reported a very consistent growth of 6.9% in our Recurrent EBITDA on a year-over-year basis and continue to improve our recurrent EBITDA margin reaching 33%, an increase 1.6 percentage points when compared to the previous year.

Turning to Slide 12. We have now completed 2 years of synergy (inaudible) since (inaudible) . The company has raised it (inaudible) , by the end of this quarter, an NPV of BRL 17 billion more than guaranteeing the Best Case NPV of synergies calculated during the due diligence and already securing almost 80% of total NPV included in our Best Cases scenarios of BRL 22 billion.

An important point to highlight this quarter is that we have now taken almost all the necessary actions to capture full opportunities going forward guaranteeing more than 100% of the Best Case NPV in this front. In CapEx, we are close to guaranteeing the Best Case NPV with value capture of 90% and we continue to optimize our network deployment by liberating GVT's infrastructure.

On the revenue front, this is a continuous uptick of cross-selling activities. At this line, is directly demand related, we will see a steady increase as economy improves. In terms of cash flow contribution, we delivered BRL 453 million in the second quarter, of which BRL 375 million indirect cash flow, mainly driven by EBITDA contribution.

Moving to Slide 13. We present some of the results achieved by our efficiency initiatives addressed in the last quarter's core results. We're focus on optimizing customer care through digitalization, improving the customer experience and as a result increasing profitability. The first level is an end-to-end e-billing and e-collection process where we increase our e-billing penetration by 12 percentage points in comparison to the same period of last year. The efforts to incentivize digital bills in our stores have resulted in more than 70% of new postpaid customers adopting the service, which reduce paper-billing costs and reinforce our sustainability commitment.

The second level is related to e-care. We achieved a reduction of 11% in cost that require human assistant. Thanks to higher use of digital channels, which increased more than 50% year-over-year.

The last level is related to e-commerce. In this field, for example, we see a constant increase of digital recharges and then consume 27% of our sales of our premium products are now happening through digital channels. In terms of recharges, we see a strong increase in those made through digital channels where the average commission can be up to 40% lower than in physical channels. Once again, we confirm our commitment to the digital in everything that we do. Improving our customer satisfaction, guaranteeing a differentiated experience and increasing agility.

Moving to Slide 14. Net income for the quarter reached BRL 873 million, almost 25% higher than the same period last year, mainly driven by the increase in EBITDA and lower interest rate. And partially offset by higher tax cost due to a higher level of interest on capital distributed in the second quarter last year.

Turning to Slide 15. In the first half of this year, our free cash flow from business activity reached BRL 2.6 billion, almost BRL 1 billion higher than the same period of 2016. We closed the seventh semester with a strong capital generation through improvement in almost all lines, thanks again to a solid EBITDA evolution and positive results from our smart Capital allocation combined with rigorous financial discipline.

Starting next month, on August 22, we will pay the first installment of dividend and interest on capital of the year, in the amount of BRL 1.6 billion. And on the December 13, we'll pay another BRL 2.5 billion, summing up to a total payout of around 100% of 2016 net income equivalent to BRL 2.5 per share.

In summary, we continue to sustain a very solid financial profile. Our net debt has reduced 29% during the year, thanks to the before mentioned capital generation representing just 0.2x annual EBITDA.

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

(Operator Instructions) Today's first question comes from Maria Azevedo of UBS.

My first question is on your quadruple-play strategy. Do you expect a more aggressive cross-selling strategy like a main competitor? Or will you use it more as a selective retention tool? And as a follow-up question. Can you please comment on this FTTH expansion plans going forward? Will you wait for the pending TAC and the Telco Reform approvals to pursue such investments? And do you have any visibility on those? That will be it.

Hi Maria, this is Christian for the first question. We'll be more selective, we are trying to give benefit to a customer, who is fixed annual buyer with Vivo. For the moment, we have all channels already fully integrated selling both services, mobile and fixed. But what we do is when a customer, he is with us in fixed and also in mobile, depending on the plan that they have, in fixed and the mobile, we give extra data -- extra mobile data. So it runs from 1 giga to 10 giga depending on the plans that the customer has in the fixed and in the mobile. So we don't do that only in retention, we do that proactively, when the consumer is with both services of the company. We just started doing that in all channels. But again, do not discount it's cross benefits and that's our strategy for the moment.

This is Eduardo, Maria. Regarding to your question about FTTH deployment. There is a high demand for the product what we see now in every city (inaudible) the demand is higher than our expectations. And we plan to continue this in the coming years. Depend only if you're going to have the TAC roll out, it will condition, if we are going to some cities or all the cities. In case, the tax is approved knowing the -- we are confident that there is a high probability that TAC is going to be approval by [Q2]. We're going to follow (inaudible) that have the ability on. In the case it's not approved, we'll continue with the same number of installations but we can concentrate in cities, in which they have more commercial attraction. Concerning the concession (inaudible) , Vivo is not in our short-term plans even in the (inaudible) to require some quarters in order to do all the necessary regulation. I do not see the law being approved it's not, it's not always like (inaudible) it's not a top priority for the government. Seems to be now that the following involvement are the National (inaudible) reforms, we do the tax reforms. And the -- they are the leaders (inaudible) I hope that I am wrong, my plan "A" that's not going to be a poor short. And I see it I am convinced that we'll (inaudible) time more consensus on the society that the lowest option necessary we've come, I have no doubt about this. My doubt is much more and it's just coming now and until the end of this year or during the next year, it depend more on political situation or political (inaudible) . Than they absolutely condition that it's necessary. In the meantime, what we do is we are doing our private (inaudible) independent of any concession change and everything that could come now would be an upside.

And our next question comes from Susana Salaru of Itaú.

We saw that the bulk of the synergies coming from EBITDA was already unlocked, so it seems to be the case that margin expansion going forward will come much more from just utilization initiative. So based on Slide 13, I was just wondering, first, how long should we expect for these initiatives to actually to be fully unlocked, the e-billing, e-care and e-commerce. And if -- is it possible to give us some kind of quantitative metric or if you could quantify what would be the combination of these 3 utilization initiatives that could be -- what they could be in terms of cost savings? That would be our first question. The second question is regarding the competitive landscape. We saw that -- we have been seeing that the Postpaid performance of Telefonica continues to be very, very strong, but we saw that the market has been changing in terms of postpaid focus. So I just was wondering if there is any reaction that Telefonica is considering regarding the change the competitive landscape specifically under postpaid segment?

Susana, this is Christian. I would start answering the first and the second then I will pass to David to complement in the first question, okay. So in digitalization, our -- we have a strong focus in convert more customers to e-billing so figures that you said, more than 70% of all the postpaid new customers that we have in our stores that (inaudible) Postpaid. We're acquiring new stores. We have already and we are doing that also we have a very strong number for our fixed service (inaudible) call center and also for our stores. So I think for the new ones coming in, digital billing is going to be strongly penetrated. Moreover, we still have the base -- the customer base to convert and we have a strong focus also any customer that gets to a store, any customer that calls our call center, try to convert this customers to the e-billing. The e-billing comes together (inaudible) because to convince customer to use e-billing, we need to have a very good app for each year, and our focus here is for Meu Vivo or myVIVO, our app. We have it much better developed for mobile and we are working more for the fixed business and also for B2B. Every single quarter, we are bringing new features for Meu Vivo, for attracting more customers and to increase usage. And also for instance, when we talk about data sharing, you can only assign data to the members of your family and in your plan using Meu Vivo. If you want to schedule a visit to the store, only using our Vivo. And we're bringing new features in the next month to drive more consumers to Meu Vivo and then they get used to the app and then they get used to the e-billing as well. E-commerce is another movement, we sell a lot through e-commerce for the fixed business. What we're trying to achieve in the fixed business is 100% in sales -- the sales and (inaudible) in the e-commerce. Some of this -- the sales that we have they start in the e-commerce and they finalize in the call center. Because the customer then have some questions and they want someone to talk to him. So we're trying to get as much as we can 100% digital sales. But I can tell you that a huge number of sales and a (inaudible) percentage that is very high in the stakes already started and the customer is feeling many of -- most of the information online but finalized in the call centers. So the goal here is 100%.

In the mobile, still a little bit more difficult because of the handsets. Customer that want to see the handset, or they want to change their handsets, especially because we have buybacks, we have many initiatives that bring customers to the store. But we are being much more successful, for instance, in migrating prepaid to hybrids through online channels. So I think also that's going to be positive for the following months and the quarters and the years. So that's our strong commitment and then we can talk a little bit about the numbers but (inaudible) the 2 big cost lines that we're going to reduce is call center calls and we're going to reduce paper for billing. In the competitive scenario, before I finish and pass it to David. In the competitive scenario, in the postpaid as I said, we saw I think there were probably close to June numbers. In the quarter, our net debt for postpaid were like very strong, 2.3x what we had in the second quarter 2016. Therefore, capture almost 60% of net adds of the market. So we continue to be very confident that we have the right strategy there and the right combination that attributes that you drive consumers to our offer and you'll keep the ones that we already have (inaudible) to Vivo.

Thank you, Chris. And Susana, just to elaborate on the first question. We cannot give guidance on what would be the savings for the future. But we can say that we believe that around 1/3 of our cost base so we can talk about 8 -- something between BRL 8 billion or even BRL 9 billion per year could benefit from this digitalization. Here, we're talking about, as Christian mentioned, lots of initiatives that we not only reduce our cost but also improve our efficiency, also improve our quality of our services. In each one of those 3 fronts, we would like to give you the subject information every quarter to track the progress that we are doing on those areas. We are just giving a specific number on cost and this will help us to continue improving our margins quarter-over-quarter, despite the synergies. As I said before, I've already -- are close to the run rate, particularly, on the OpEx side.

And our next question today comes from Mauricio Fernandes of Bank of America Merrill Lynch.

Maybe to Christian and Eduardo, the -- both team and core have been very active trying to get into the higher end of subscribers, postpaid, low-end or higher end now. There hasn't been, based on your comments until recently, any significant impact in terms of increasing churning postpaid or the rest of the subscriber base? Just wondering if there's been any change to that, particularly, given the update you've given to control plans recently?

Hi, Mauricio. Thank you for the question. Regarding a profitability, we kept a positive share in the quarter, I guess all major players. In churn for postpaid, second quarter was 1.8%. So also better than previous year. So again, we are closely monitoring the movement of our competitors. As you said, I've seen it being very active in hybrid and also into postpaid. So we're selectively moving in some products or in some regions. But again, in the hybrid, I think we -- each of the player is working in its own customer base. Again, we presented our numbers, increased a lot the hybrid customer base, increased a lot the volume of customer that are migrating from prepaid to hybrids. So maybe, my competitors also, maybe also more successful migrating prepaid to hybrids. In the postpaid, I think the comparison is trickier. I think we have some attributes that the others don't have. Not just talking about our superior network footprint for Internet, 3G, Postpaid, 4G, channel experience, (inaudible) whatever. But also we have some attributes and features in the postpaid, data sharing plans of our family plans, that's allow you to put more members in the same plan. So I think you need to calculate the price of the plan and when you consider that you can add members and something that the Vivo offers is that the possibility to assign data to each of the member and control it through our e-care app. So I think the comparison also should consider all this. So again, strong numbers, very control churn, good numbers in profitability and very strong share of net adds.

And also on the revenue side specifically. The company seems to have reached the level of wireless revenue growth -- service growth of somewhere between 4.5% and 5% for the last few quarters year-on-year. Is that something, you feel happy about? Or that is something, we -- the market in general should expect that to improve? And on the fixed line, there seems to be an inflection now with a lower decline, in fixed line revenues of 1.3%. Is that enough already this quarter to expect over the next few quarters that we're going to continue to that trend towards eventually the positive number?

Look, in the mobile, we don't give projections in a numbers. But in the mobile, we have more inflation so we're very like -- it's a very good number. What we can say about the mobile is, as I said, now we have 47% of our mobile customer base is postpaid. And it continues migrating customers from prepaid to postpaid. So we believe we can do more. And also, I talked a little bit about 4G penetration. No, I said like smartphone over 80% but only 37% in 4G. So there is room also to migrate customers from 3G to 4G and when they migrate from 3G to 4G, they also want to consume more data. So also, opportunity for us to up sell data plan through any of the plans that a customer has. Prepaid, also we're being very successful in migrating Meu Vivo Turbo to high-end offers. In hybrid, going up to the scale as well and of course, also migrating hybrid to postpaid to pure postpaid. So we see room for growth and that's our expectation. But again, happy with the results of both inflation. In the fixed business, we were like this quarter impacted by regulatory effects as I said before as well. So if I take it out, it would be slightly positive. There is still a strong pressure on B2B. B2B more dependence on voice and the macroeconomic environment is still very unstable. So we suffered more on this line that impacts the whole number to our fixed business. NPV, as also I think I said, during my presentation. We are like focusing much more in IPTV. Now also again, in the short burst, strong number of over 60% growth in revenue . And we are like if you compare TV revenues this quarter. It was slightly negative and last year, it was 14% positive. Why? Because we are focusing in IPTV and not so much in DTH, especially DTH standalone The return over the investment is much more positive for the company. But again the revenues of the fixed business will see a decline.

Going forward, our focus, we continue to be an IPTV (inaudible) so only like trying to make us Broadband and not selling DTH standalone. So an FTTH again, or FTTx, strong number 20% growth even (inaudible) sales, 3.5 growth, continued focusing expansion of FTTH. So also expecting growth coming from this line. So not giving any trend but some of the elements of our fixed business and you can try to see what (inaudible) going to be.

Mauricio, this is Eduardo. I have just (inaudible) Question answer. During the first quarter after many, many, many quarters of decreasing revenues in mobile (inaudible) at the market yet we see these 3 major operators, including the mobile revenues. Now I'm glad with massive results and (inaudible) in our sales. I think in the both numbers, there is room for all and that issue are noted. There is high demand for mobile services and this should bring a (inaudible) to the market, I think that there is room for all of us to recover in market now and to leave this tradition to be a reflectionary services and it started to grow high end (inaudible) .

And our next question today comes from Daniel Federle of Crédit Suisse.

Are you expecting any positive impact in the wake of the fact that the control plans are now embedding a larger amount of non-telecom services like the NBA, the English courses on the fiscal efficient side. I think, it could bring some benefit on taking lower ICMS tax in the coming quarters. Is that correct?

Good question. I think if I expect, what Daniel? Tax impact?

Yes, if you're expecting a decline in the ICMS tax payments in the coming quarters in the wake of the control plans embedding a larger amount of non-telecom services, which are not taxed by ICMS like the NBA, content or English courses, right?

Yes, this is David, Daniel because part of the (inaudible) now is related to value-added services. But (inaudible) decision here to deploy value-added services in our offering is much more of the relevant of the services. And of course, I need to see the market moving in that direction so we also have to mention our customers to offer more -- through -- having the same drive. Now so that's why maybe it took longer to launch this service that we launched. We tried to look for exclusive deals so NBA, as you said as an example, with exclusive deal with Vivo. We had another very strong deal, with a Video for gold rate so we have all the magazines available in some of the plans. And also we have a specific one, that was also exclusive with Vivo of our language course app. So we did that in May for hybrid and we did that in June for prepaid and we may do it in future for postpaid. But here what we are considering is the relevance of the service that we are offering and we have responded for a demand of value-added service from our customers.

Daniel, this is Eduardo. We have complement and in both cases, control and prepaid, we have options result to the exile services. Then if our customers want to have a plan and the (inaudible) service can option, it can option forum like this. Okay, then we are going to have a fixed (inaudible) but the main reason is to provide a more appealing offer to our customers.

And our marketing strategy now is very driven on highlighting the services and also stimulating customers to use them.

And our next question comes from Carlos Sequeira of BTG Pactual.

So my first question is postpaid net adds were super strong, I mean you continue to lead in that segment. So my question is why did the company decide to cut prices over the controlling plans in mid-July? I mean is there a big difference in performance when I compare controlling plans, should appear postpaid. So I'm trying to understand the strategy on the price cuts. That's one question. And the second one is on the new cities, with FTTH. You were ready to defy out of the 19 each tele for these year. How many cities would you open if the tax were not approved at least? I guess it's somewhere in the middle but I'm not so sure?

Hi, Carlos, this is Christian. Let me answer the first question and then I'll go to the second, okay. In the Hybrid, I think, there were some movements now that we need to mention. In the beginning of the year, we raised price and then when you compared to all competitors, we became in the past, we were all very similar in the hybrid pricing. And in the beginning of this year, we raised price more than others. And then secondly, we also gave more data in the prepaid, also to response to both customer demand and also competitive movements. So when you see the prepaid with more data than you used to have and also see our price much higher than the price of our competitors. We decided that we should also -- not moving price but increase the data allowance. So data allowance because prepaid, we're giving more so we need to compensate that also in the hybrid otherwise it is difficult to migrate. And price, we used to be very similar to our competitors. So at least we cannot be such a price gap as we were 2 months ago. Moreover, if you see not only price, my competitor they are offering music for free, WhatsApp for free and some are also offering subsidies for hybrid, something that we don't do. So I think just moving with much more for us to be able to continue to migrate and have like compelling offer to our customer that using Vivo Turbo with us. And also compared to our competitors, having similar price considering that we don't give so much off net minutes as they do. We don't give it WhatsApp and we don't give music for free. And in some cases, we also don't give subsidies. So that's the explanation of the movement. Considering the fixed, for this year we had a plan that considered TAC, also, we also had an obligation for the purchase of GVT. So we had in the end 19 cities that (inaudible) for this year. Okay, so 7 coming from the GVT operation, 11 coming from TAC and another one coming from commercial reasons. The TAC, it's like, as Eduardo said, maybe we expected the TAC to happen before. We had already 3 cities that we were almost finished the deployment, we couldn't stop. So we launched it in 3 cities. For the rest of the year, out of the 8 cities remaining for the TAC we won't do date, we do 11 before, because some of them are already in very advanced work. But even in the cities when we focus in more premium areas than the areas that we agreed to focus before. And we're going to add another commercial city. We're going to keep the same number of the synergies but instead of 19, we may end up with 16 cities this year.

And our next question comes from Mathieu Robilliard of Barclays.

First one in terms of the competitors (inaudible) when looking at the business/corporate segment, I remember a year ago about, when you held your Investor Day, clearly leveraging the few concepts of GDP into your mobile assets outside of Sao Paulo was key to the strategy (inaudible) growth. Some of your competitors are saying that competition has in fact increased on the corporate segment. So I wanted to know how you're progressing there? If you're happy about the development? If you're taking market share? So that's the first question. And the second question kind of -- I guess more of a long-term question. As you highlighted you continue to roll out FTTH into new cities you have an obligation to move out but also for commercial reasons. But if you think into less attractive geographies that you don't cover yet. How do you think about the alternative between something based on 4G and that could be an interesting way to tap customers with not a lot of CapEx against FTTH. I know you tried in the past fixed wireless and you kind of dropped it. But is that's still something you could consider for reaching these low densities in poor economics?

Okay, it's Christian, Mathieu. For the first question, I think, we were more interested in B2B outside Sao Paulo, is that correct ?

That's absolutely correct.

So what we said like, of course, we did not have network outside Sao Paulo. Now we have a GVT network to deploy. What I said maybe before or in other calls is the main focus of the GVT network outside Sao Paulo was B2C that makes a difference in Brazil. You have some areas of some neighborhoods or some streets that are very residential and other that are very corporate related. So what we tried to do starting last year was to focus more the network also to get this customer that are corporate and are all residential. And I think some results are coming. We have seen very positive growth in broadband for small and medium companies outside Sao Paulo that is a very positive movement and I think is going to help a lot in the results for B2B. Also, in the general expansion outside Sao Paulo, we are reinforcing our commercial area both on workforce. And second through indirect sales channel. Some of them are very focused in mobile. Now we're converting 100% in both mobile and fixed. So we see a positive upside for B2B especially SMEs outside Sao Paulo with both broadband. And in the end also, we've bundled offers of benefits, cross benefits between mobile and fixed for as (inaudible) company. So that's our perspective and it's positive. And also for the large corporation of course, every place where GVT network is present. We've reduced this slice of (inaudible) operator and now we're using GVT network. The footprint is not that as huge as we need but of course it's helping us to be more precise and be more effective in offering also for large corporations.

Mathieu, concerning your question about our long-term goals in FTTH. What you see is that there is a huge market in Brazil, 75% of ABC households, they do not availability on our B2B services. And what you see is that in most of these case, it's -- the 4G is not ideal (inaudible) explore the (inaudible) Broadband. Once you're able to install the service in both cities, there is a clear plan for this. (inaudible) is the question? Okay, profitability of this deployment. It follows objectives to be as much as reputation came (inaudible) as part of this if we're able to change the concession and we really going to change with the modern labor that we can use in order to expand this. There is a huge (inaudible) in the market and of course, you have a CapEx limitations, we're not going to expand more CapEx than you have in this space in the market. There is some execution (inaudible) you are entering in 19 cities, and it nearly can double but we cannot multiply by (inaudible) and what with new cities. And we ought to be looking forward making alternative models that you can leverage (inaudible) infrastructure. There is a market there and we'll finalize alternative models wanted in next CapEx in order to achieve these markets.

And our next question today is from Fred Mendes of Bradesco.

I have 2 questions. The first one is expense on third-party services, which are likely higher than our estimates and most likely driven by commissions. How can I expect we've learned to perform in the next quarters? This will be my first question. And the second one, have you observed any improvement in the prepaid recharge in the last months, that will be -- those will be my 2 questions.

Hi, Fred. It's Christian for the second question. We see like the prepaid as a percentage in last quarter it's a comparative growth this year with the growth that I had last year, it's still negative but it's better than the year before. So I think the prepaid, it comes strongly related to the economy. And I think in employment, we haven't seen any big change in Brazil. So I think it's early to see that the prepaid is getting better because of the economy. So and again, we had better performance than last year but it's still below what we would like to have. On the other hand, it's also important to consider that. As we have a record number of migration of prepaid-to-hybrids also being very successful bringing the best prepaid customers to the postpaid plan. So again, only looking for the prepaid numbers, we double and we are immigrating if it's maybe, it's not at the best -- the best (inaudible) . And as yet, good thing that we are seeing (inaudible) , that maybe it shows a little bit of a better performance is that, we have a strong number of customers already in our bundles offer, Vivo Turbo. What we're trying to do now is migrating them from low-end of Vivo Turbo to high-end of Vivo Turbo. And again, we've been very successful doing that and we have a very strong volume of customers migrating. We've seen prepaid before migrating to postpaid. We've seen prepaid, we see a lot of customers also migrating to high-end class. So again, it's early to say that there is a strong improvement but better than 2016. Good performance for migration and good performance for migrating prepaid from low-end to high-end Vivo Turbo.

Fred, this is Eduardo. Thank you for your question. And your question both started with in order commission expenses as most of this are commissions. As I've said in those presentation, the number of net adds in the postpaid this quarter was 2.3x higher than the same quarter of last year. The same in FTTH. Note this higher commission activity, (inaudible) in (inaudible) more commissions, now in more commission expense maybe it's why the third-party (inaudible) this quarter compared to previous quarter.

And our next question comes from Jose Quintana of Scotiabank.

(inaudible) I was wondering if you can give just some idea what impact we should expect from the Terra acquisition in terms of sales and maybe the margins? Perhaps, you can give some idea. And also when we should expect the consideration of Terra in financial results? And finally, also you having idea of what impact label reform could have on your numbers, if you are running analysis of the potential benefits of that reform?

Good question, (inaudible) for second question. If we are able to say (inaudible) impacted (inaudible) in billions. We are running numbers, maybe now it's too early to say. Your question about Terra, the impact will be very limited to us -- Terra revenues and to be able to present less than 1%, it's 0.5%, 0.7% of Vivo revenues. We're not going to do -- perform another (inaudible) because it's absolutely non-material. What you can expect and also we can expect some acceleration of our digital activity. So there it's like advertising or some digital services to small-medium companies. Terra has some tradition, some backgrounds of providing very interesting services. These are going to use now this (inaudible). The price, it was a very, the price (inaudible) BRL 250. We can in (inaudible) BRL 60 million, what means that the final price was 109. With the deepest, (inaudible) they will have fight with prepaid and it will be multiple roughly flat but it's very low. Now again, it's not material recognition, but not believing that it can accelerate looking forward to all the growth just by getting the (inaudible) that it brings to our operation.

And our next question comes from Andre Bobagario (sic) [Baggio] of JPMorgan.

So I'm interested in 2 things. What is the B2B strategy? We have seen a scaling down of the Pay-TV strategy and I just wonder for the future (inaudible) , something that Vivo could reconsider? Or that's something that's really we should see fading away or maybe just migrating to the fiber-to-the-home?

Hi, Andre. This is Christian. We're like -- and our strategy is to focus on providing fiber-to-the-home. Our main focus would be on IPTV. Until today, we only have in Sao Paulo, we are considering expanding outside of Sao Paulo. Also in the Pay TV, when we don't have IPTV and the customer wants the triple play, our solution is going to be DTH, the hybrid DTH that we have and keeping on that solution. What we're not forcing anymore is to have strategy that is focused, for instance, in voice with DTH or DTH standalone. So we're going to use (inaudible) as a way to make us more loyal with Vivo and to be able to totalize the customers with all the communication (inaudible) . It's not a business by itself, there'll be wanting to expand independently. So that's the strategy going forward.

Okay. And the second question is that we're seeing impressive number of Vivo on (inaudible) make it's possibly running directly and indirectly out of companies. So now we could see some people that use to run Vivo t a cloud and then indirectly (inaudible). So is this a good thing like seeing the sense that other competitors may follow this strategy of more in the core and less on price? Or this could see as a threat because the competitors will have access to some valuable marketing information from Vivo than we could have -- they could fear on the results (inaudible) for that?

Well it's difficult to say what the strategy they are going to follow. I think there is some more elements in other groups that are beyond one person or 2 people like the (inaudible) So again, it's spark up the industry, some changes, people change. And let's see, I think, we have like our focus we are very confident that we have the best assets and then we have the combination of infrastructure, of channel, of marketing experience, of brands, that in my opinion is difficult to replicate.

So I'd like to thank you all for the call and again, see you next quarter. Thank you.

And thank you. This concludes today's Telefónica Brasil Second Quarter 2017 Results Conference call. You may now disconnect your lines at this time, and have a good day.