Telefonica Brasil SA (VIV) 2017 Q3 法說會逐字稿

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

(Operator Instructions) Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the company's management beliefs and assumptions and on information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events, and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the company's future results and could cause results to differ materially from those expressed in such forward-looking statements. Please note this event is being recorded.

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

Good morning everybody, and thank you for joining us in this conference call for Telefónica Brasil's 2017 third quarter results. The call will be divided as follows. To start, Eduardo Navarro, our CEO, will give you an overall view of our operating and financial results for the third quarter of the year. Secondly, Christian Gebara, our COO, will go over our commercial and CapEx evolution. Finally our CFO, David Melcon, will discuss our efficiency commitments, digitalization initiatives and financial results. We will then move to Q&A.

I now pass the word to Eduardo.

Thank you, Plaster, and good morning to everybody on the call. Regarding our third quarter 2017 results, we maintained our trend of revenue acceleration which once again confirms and reinforce our leadership. We continued solid mobile revenue growth above inflation 3.7% year-over-year even with one time effect for wholesale revenues in the third quarter of last year that make the comparison more difficult. Driven by another set of strong performance in ultra-broadband and mobile digital revenues, our total sales revenue continued to accelerate growing 2.4% year-over-year. The exposure to voice continues to decrease every quarter and non-voice revenues now represent a significant 68% of our overall services revenues.

In recurring costs moving to the mid of the slide, the third quarter of this year was the 7th quarter in a row where we saw a drop, minus 1% year-over-year, taking our EBITDA margin to a solid level of 33.8%, 1.9 percentage points higher when compared to the third quarter of the previous year. We continue to be as committed as ever to controlling costs and the optimization of our cost structures with the digital transformation of the company.

When you look at net income, we see a 28.3% increase year-over-year reaching BRL 1.2 billion in the quarter. As you can see, our results are in line with the perspective share issue in the past and we continue to outperform in terms of profitability. Moving to the right-hand side of the slide, let me update you on the ongoing works to improve differentiation and guarantee that we will consolidate its leadership through innovation and a superior customer experience. Our accelerated commercial activity in the quarter resulted on a remarkable number of postpaid net additions reaching almost 1 million and in FTTH a margin of 150,000 net additions meaning that we now have approximately 1.2 million fiber-to-the-home customers. In regards to our superior network, our handset 4G deployment took us to an additional 442 cities this quarter totaling 1,403 new cities in this year. Moreover during 2017 we already deployed 12 new FTTH cities, further increasing our UBB footprint.

We also launched a renewed mobile portfolio focus on value with features and services that are unique to Vivo and in line with our more for more strategy. Christian will comment more on that later in the presentation.

In summary, I'm very pleased to another quarter of very positive results and give you some color what we are doing to build for the future.

Moving to our financial on Slide 4, we see that our positive top line evolution combined with expressive EBITDA expansion continues to result in double-digit cash flow growth. Our total sales revenues keep growing at accelerated pace 2.4% year-over-year driven mainly by the mobile business which grew at a normalized rate of 6.2% year-over-year when you exclude one times revenues from wholesale agreements in the third quarter of last year.

In terms of [HDA] in cost contention, we continue focus on our value-driven strategy based on commercial rationality and end-to-end digitalization. The result this quarter was a clear acceleration of HDA growth, 7.8% on a year-over-year base, which is equivalent to 5.3% year-over-year increase in real terms, the highest in last year's, taking our EBITDA margin to 33.8%, an increase of 1.9 percentage points year-over-year.

In CapEx we saw another ramp-up in the third quarter, taking CapEx over sales to 20.1% for the quarter in accordance with our investment plan for the year. When looking at accumulated CapEx in 2017, the rate stands at 16.6%.

Finally, as I stated before, the result is a consistent double-digit cash flow generation taking our operating cash flow in the first 9 months of the year to BRL 5.4 billion.

Now I pass to Christian, our COO. Christian, please.

Thank you, Eduardo. Good morning everyone.

This was another very positive quarter for Vivo enforcing our leadership in key segments. As Eduardo said, this quarter we grew 2.4% in total service revenues year-over-year. Before going through the slides, I'd like to highlight our key operational initiatives and results for the third quarter.

We maintained our focus in expansion of 4G coverage including acceleration of the 700 megahertz and 4G+ deployment. We launched a new feature to enable prepaid and hybrid views to share data services reinforcing our data-centric approach. We continue to expand our high speed data network, deploy FTTH in 7 new cities in this quarter. We also increased our IPTV footprint in São Paulo State, and finally we increased significantly B2B digital service revenues mainly driven by security and IoT services.

Getting now into details of our main businesses on Slide 5, we present evolution of our mobile service revenues which increased 3.7% year-over-year, mostly driven by data and digital services that went up by 28.2%. Moving to the right-hand side of the slide, the graph on the top shows that mobile data revenues already represent 73% of total mobile service revenues. This is a result of our efforts to reduce our dependence on voice by launching new services, offer more attractive bundles and increasing data allowance in mobile appliances. Our postpaid revenues maintained a solid growth of 8.5%, already representing 75% of our total mobile service revenues.

The left-hand side of Slide 6 shows that our mobile market share increased 1.5 percentage points in the last year reaching 30.8% with 42.3% in postpaid. This quarter we had the highest postpaid growth since fourth quarter of 2015 reflecting a good execution of our strategy focus on best network quality, superior customer experience, innovative offers and brand preference. I would also like to highlight that the machine-to-machine business we continue to expand our leadership with a solid 40.4% market share. On the right-hand side of the slide you can see that we also have the best customer-base mix in the market with postpaid representing almost 50% of our total. Our digital media plans play a key role in customer loyalty reducing churn by 50% when compared to overall postpaid churn. Our data went up 26.3% year-over-year, while overall ARPU increased 2.1%. The breakdown of ARPU also shows that data already represents 73% compared to 59% of last year.

Slide 7 illustrate that Vivo continues to innovate enhancing its market differentiation in order to improve its profitability. This week besides adjusting price and data allowances, and in line with our more for more strategy, we launched new unique features to Vivo (inaudible) postpaid plan. These features include exclusive data allowance for video and music streaming and no data consumption for mobility apps with low data traffic such as Waze, Cabify, and Easy Taxi. There is also another new feature, Vivo Travel, with 7 days of international roaming per year per user.

In the prepaid and hybrid plan, we included data sharing feature contributing for a better use of data allowances and reinforcing Vivo's community benefits. We continue to provide relevant value-added services in our bundles adding benefits to customers. We are offering embedded digital services such as NBA, GoRead, Vivo Sync, Viva PlayKids, Studio+ and language classes apps. Finally, I would also like to highlight our strategy to encourage the use of digital channels had very positive results. Meu Vivo, our e-care app adoption accelerated reaching almost 13 million unique users per month, up 50% year-over-year with an impressive 22 million app downloads so far.

Moving to Slide 8, we present our performance of the fixed business. We continued to focus on ultra-broadband services, which grew at relevant rate minimizing the impacts of voice decline. This quarter, in-service revenues increased by 0.5% year-over-year, but when excluding regulatory effect, we grew 1.8%.

In ultra-broadband FTTx, we reported 23.1% revenue growth, while ex-DSO revenues grew 13.3%. As you can see on the right-hand side of the slide, we were able to expand the relevance of our premium products. Our focus on expansion of FTTH footprint is reflected with an impressive 31.5% growth in revenues, while IPTV followed the same strategy with 76.8% growth year-over-year. Additionally, in new city we reached high occupancy rate within the first 4 months when compared to previous performance, for instance in Barra Mansa, we reached 54% occupancy and in Volta Redonda 39%. I would also like to point out that we increased digital services revenues by 29% year-over-year, mainly driven by security services that grew more than 100% and IoT 34% in the same period. Additionally, our B2B ultra-broadband revenues went up by 16% year-over-year.

On Slide 9, you can see that we continued to attract fixed customers to premium services. On the left-hand side of the slide shows that our FTTH customers-base had an impressive growth of 45% year-over-year. Only this year we added 310,000 fiber-to-the-home customers. We continue increasing our premium customer-base (inaudible) our profitability with higher price which was reflected in overall broadband ARPU growth of 16.5%.

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 stand-alone DTH. We managed to increase 54% our IPTV customer-base, focusing on customer totalization. In the last 12 months, our total Pay TV ARPU grew 7.2%. Broadband and Pay TV ARPU have considerably grown for the last 9 quarters. I would like to anticipate that we will deploy IPTV in all main capitals until the end of this year, and in the first half of 2018, the technology will be available in all cities where we already have FTTH.

Moving on to Slide 10, we present our CapEx execution in the third quarter, closing the first 9 months of the year with BRL 5.3 billion in line with our annual guidance of BRL 8 billion. On the right-hand side of the slide, you can see that we maintain our primary focus on an aggressive expansion plan for premium technologies. We are heavily investing on growth of 4G coverage. In 2017, we already reached almost 2,000 cities and roll out 4G+ in 96. We are currently using the 700 megahertz spectrum in 199 cities, almost 200.

In addition, we deployed FTTH in 12 new cities this quarter increasing our footprint to 83 of which 41 cities with IPTV. In these new cities (inaudible) broader market with an average of 82% of share. Finally, we are also investing in end-to-end digitalization of IT infrastructure and processes. We aim to switch off 100 legacy IT systems in the next 4 years leading to full stack solution that will help reducing our IT OpEx and CapEx.

Now I will 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 for the seventh quarter in a row decreasing 1% in comparison to the same period of 2016. Once more, we would like to highlight management commitment to controlling cost, so the cost and pursuit of efficiencies are end-to-end digitalization of our company balancing cost savings and business and sustainability.

Personnel cost increased 1% mainly due to the collective agreement with base days in September 2016, partially offset by savings from rightsizing initiatives that took place last year. Cost of service rendered fell 4.7% explained by the additional interconnection tariff reduction in February 2017, synergies in TV content and lower mobile content costs. Commercial expenses excluding bad debt increased 3.7% in the period in line with our successful acceleration of commercial activity in key segments as we have been addressing during the last quarters.

Bad debt remains under control reaching 3.5% of the net revenues for the second quarter in a row due to the combination of credit and collection actions aimed at guaranteeing its stability. As a result, we reported an acceleration of our OIBDA growth reaching 7.8% on a year-over-year basis and an EBITDA margin of 33.8%, an increase of almost 2 percentage points when compared to the previous year.

Moving to Slide 12, we present an update on our synergy evolution to the usual breakdown that you have seen over the last quarters. The company has already secured by the end of this quarter an NPV of BRL 18 billion, already securing 81% of total NPV included in our best cases scenario of BRL 22 billion.

An important point to highlight this quarter is that we have an improvement in the capture of revenue synergies which reached almost BRL 1 billion since the second quarter 2015, supporting overall capital generation of BRL 3.7 billion in the same period. In OpEx, we increased 2 percentage points of value capture quarter-over-quarter versus the best cases scenario reaching 108%.

In terms of cash flow, this represents BRL 1.2 billion already achieved. When looking at cash flow contribution, in this quarter alone we delivered BRL 609 million of which BRL 399 million in direct cash flow mainly driven by EBITDA contribution.

Turning to Slide 13, we are pleased to disclose the digitalization methodology that has driven our efforts to enhance the internal processes aiming to achieve our operating efficiency goals and align with improvements in customer experience. Moving to the left-hand side of the slide, we have an overview of our total annual cost and the (inaudible) of the annualized OpEx with potential to be partially positively impacted by the digitalization initiatives. As you have seen, it's a significant portion representing approximately 1/3 of our annual total spend.

In the middle of the slide, we highlight the initiatives with high potential to improve efficiency and therefore customer experience measured through the chart with vertical axis measuring the potential for digitalization and the horizontal axis measuring the potential benefit in the customer experience.

As we have addressed in previous quarter, we are focusing on initiatives such as billing correction, customer care and apps due to the relevance between the digitalization process. E-billing continues to evolve with penetration increasing 21 percentage points year-over-year in September while users of digital channels and virtual recharges grew 50% and 28% respectively in the same period contributing to the acceleration of our EBITDA margin.

Also these measures are the most impacting initiatives, we are also working on other plans, sales tax commissions, back office, administrative processes, advertising, installations, maintenance and cost associated to our stores. This way we believe we will be able to optimize our cost structure and improve the customer experience, turning our company into a digital company for a digital world.

Now moving to Slide 14, net income for the quarter reached a solid BRL 1.2 billion, representing a strong double-digit annual expansion of 28%. The main drivers for these results were the increase in EBITDA and lower interest rate partially offset by higher tax cost.

Turning to Slide 15, in the 9 months of 2017, our free cash flow from business activity reached BRL 4.6 billion, BRL 1.3 billion higher than the same period for the previous year. We closed the 9 months with a strong capital generation, thanks again to a solid EBITDA evolution and improved working Capital allocation combined with rigorous financial discipline.

On August 22, we paid the first installment of the shareholder remuneration plan for the year in the amount of BRL 1.6 billion. On December 13, we will pay another BRL 2.5 billion, summing up to a total payout of close to 100% of the 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 45% during the year, thanks to the before-mentioned capital generation and reducing our leverage to 0.1x annual EBITDA.

Thank you. Now we can move to the Q&A.

(Operator Instructions) The first question comes from Richard Dineen of UBS.

Just 2 questions on kind of high level I guess. Firstly just on the telecom which is I guess is still making its way through congress, just if you can give us an update on where you see that? It seems like perhaps there's a sense that your authorities are a bit more -- perhaps a bit more cautious about the idea of "giving away" these assets, that they may be more aggressive in their demands for a price or compensation to move those concessions to authorizations? And secondly, I guess -- I've seen some headlines and Eduardo just had some comments on China telecom as a potential investor perhaps in a controlling investor in Oi, how would you view that scenario? Any color on the above would be fantastic gentlemen?

I'm starting by the second question about China telecom. I've seen that what they comment not so much -- is more is that we are very favored competition, Oi, that's for us it's very good to have a healthy player in the Brazilian market. I see -- my all concern that I see that we are welcome players that are very aligned with our shareholder remunerations and my comment was not regarding any specific company or a Chinese company, no, in specific terms was that I potentially -- now we potentially call the concern about the interest of state other companies here, it's not only -- not only state companies, any kind of companies that could not be committed to return to their shareholders. Now this has been my own point, my own concern, it's not specific to the Chinese companies, and again I see -- more than welcome every competitors that could be committed to shareholder remuneration. Your first question about the telecom view, we continue to be I think optimistic about the evolution. As you know it's now (inaudible) they can have, they can (inaudible) to send to be filed by the president, to be voted on the senate (inaudible), on safety commissions. No, I must take one of those 3 issues. We are very confident that the -- basically -- the fundamentals of the build is still there. We do not see any value at all in using resources, dedicate the resources to services that has no value to society at all like public phones, like fixed line. In the meantime that we have schools that has no access to Internet, of rural areas with no mobile, I think that it's -- now it's make no sense at all. Most of the Brazilian authorities that we are discussing about these including Minas certification, Minas of health that will be impacted by those kind of solution. I think that last week I've been discussing these even with the Minister for Finance Mr. Meirelles, and we are very convinced that it's very positive for the society in general. For Vivo I think it's nice to have -- for now this is not an absolute essential view, but we -- that expected now in fourth quarter contributes to improve our cash flows, but more in Vivo. I absolutely convinced that's very good for society. We are very open to discuss this with any sector of society that will discuss about this. The concern that you have raised about the value of the [reversible] assets, we are more -- and open to discuss. I've seen that there is some people that are not there from Minas with the initial trend to overvalue the value of those assets. We have to remember that we have a strong condition that only the part of those assets that are re-associated to the fixed business is -- should be considered reversible, and as the time moves not only in that -- this discussion should finally be taking in 2025 if not now, if not anticipated. What we believe is that in 7 years from now the pressure of -- (inaudible) of those assets that are related to fixed assets will be very, very low. And I think this will have to be discussed and again very confident that we could convince anyone about develop those view -- of this view to the Brazilian society.

And just so that -- I guess it was just the question was in the context I suppose of the headline recently that Oi had been refused -- its TAC application had been refused and I was just wondering whether that was -- represented a sort of change in tone from the authorities, I don't know, [TCU] or whatever, which may be taking a harder line on these sort of -- actually kind of it's for the sector?

For me, Richard, the main reason of -- at least according to my knowledge, no, there's Oi tax -- the tax Oi had been refused is that in order to sign a TAC the authority must be 100% certain that the order part can -- the backing reinforces will be applicable. And I think that now at least what I -- we listen that between Anatel (inaudible) now, we are not 100% sure that under the current scenario that OYE will be able to deliver the commitments they could assume for the future. For me this is the only reason. So I do not see any reason that they could approve, they should approve our TAC and not approve OYE's TAC. I've seen this from the net, it was the same. I think that the only reason to approve or not to approve the order is the certainty that Telefônica can communicate, can deliver the commitments that was from investment and at this point now on their order due to the situation could be more difficult to OYE to assume this commitment for the future.

The next question is from Fred Mendes of Bradesco.

I have 2 questions. The first one we saw an increase in the VAT to represent 50% of services revenue versus 10% in the last quarter, but did you (inaudible) in the tax over gross revenue decreased only 60 basis points quarter-over-quarter to 25.2%. So I was just wondering if you can see an even lower level of tax on the gross revenue due to the benefit of the VAT? This would be my first question. And also the second one I guess on a related topic, which fragments already consider the (inaudible) on the portfolio you're already offering, I mean, it looks like (inaudible) -- all of the postpaid clients already have this benefit, so can you -- if you'd be seeing this in the next quarters, do you have more benefits to pick you up on this then? So just kind of wanted to understand the dynamics.

Hi Fred, this is Christian. I'm answering the second question. We included the VAT in prepaid and in control hybrids by May, so in this quarter, the benefit is for these two segment. And we just launched a new service for postpaid this week, so postpaid -- pure postpaid, you no have cards in the portfolio. And in B2B, we basically have in a very limited segment. So as to your second question, VAT is in prepaid and control, and postpaid is being implemented in our new portfolio that was launched at this weekend.

Hi Fred, this is David Melcon. Regarding your third question, I mean, looking to the evolution of the gross operating revenues and the net operating revenues which I understand is what you're asking, the difference between the gross and the net and the taxes, we see that they're both -- one is growing -- the gross is growing 2% and the net is growing 1.8%, so we believe is very linear. So there is no anything with a variation on those trend.

Just if you allow me a follow-up question, I mean, how long do you -- I mean, how high can this VAT as a percentage of gross revenue do you think you can reach in the next quarters assuming that there are also some fragments that you do not completely implement these procedures, I mean how high can it go you think?

Fred, we don't give like guidance about that, but what we see is that we've been able to develop very exclusive and relevant partnerships in regulated services, like I think one of them I -- some of them I mentioned during my speech, we have exclusive deal there, NBA, we have a very good deal with GoRead that is a real content in magazines. We are developing new things also for B2B with cloud, securing, et cetera, and we see also value-added services growing standalone or being very much approached, or (inaudible) from partners of many famous entities to have very good deals for Vivo. So we believe that's going to keep growing, but we don't give guidance in the number.

The next question is from Susana Salaru of Itau.

First question on the digitalization initiative, how far are we in those initiatives? When do you expect those initiatives to be at the peak? I would expect that -- I mean, just correct me if I'm mistaking, by the end of 2018, we should reach the peak of the initiatives, and if you could elaborate which one are the most advised (inaudible) and which one we believe it is -- is going to be the latest one to be implemented? That would be our first question. And second, on the prepaid topups, we know that's a very sensitive way to monitor the economy, I guess I was wondering if you already seeing a pickup -- a marginal pickup in the prepaid topups in the latest weeks?

Hi, Susana, this is Christian answering the questions. Okay, I think this digitalization is ongoing process. What I said is that we saw a peak in the number of users in our Meu Vivo app, that's our e-care app that was like 13 million unique users on average of last quarter. That for us is an impressive number. And that we are bringing new functionalities to this app to bring more customers to use this as a channel instead of either receiving a physical deal or calling our call center. And also these are like the first 2 things that we are trying to reduce digitalization. So the first movement is going to be in the B2C mobile is where we are more advanced and that depends on I think 2 elements, one that we have the capability, not only IT, but also process, and I think we are inventing a lot in IT to be able to offer that and B2C mobile is the most advanced one. We are implementing full stock. We're starting to already having 1 city with our full stock being implemented at centers here in the state of São Paulo. So we are little bit ahead of other sectors for that segment. The second thing that is important is the adoption. So we are also investing a lot in convincing and educating customers to use the digital channel instead of the more traditional ones, that also takes time. So if you -- after looking when you're going to see this, I think it's going to be a process of few years, no, so maybe going to see more in the mobile -- in the B2C mobile in the first years, then we're going to see together in the B2C fig, and then B2B because we have a more important transformation process in our (inaudible) if you take more. So again we are convinced that we are in the right direction. The results are being very positive, but it's a long journey. And regarding the second question that you talk about the prepaid, I think it's soon to say that we see a pick-up in the economy. What we see is that we'll be very good migrating prepaid to control. To migrate prepaid to control, you need have a very robust and healthy prepaid customer-base and we see that we are continuing this trend. Also we see the adoption our prepaid (inaudible) offer being increasing and increasing and able to up-sell also more data to our current customer-base. So good result, but nothing that I can tell reflecting that people consuming much more.

Sorry, this is Eduardo. If I can just add some (inaudible), it's related to a question about macro, I see the (inaudible) about macro -- interesting about macro to relate with consumption like Christian has answered here, but I think there is another impact from the macros that's the drop of inflations. What you see is that it's even tougher to pass through inflation to prices than to -- to revenue than to cost. On the cost we already have -- and usually to be regulated it's labor cost, it's energy, it's (inaudible) and that is always stated by (inaudible) to better own those low-cost instrument, inflation is back to directory. It's not the same on revenues or it's not easy. For me there is some (inaudible) on this new environment that we're replacing now with a low inflation maybe, we are going to see maybe in the last (inaudible) we are going to see lower nominal increase both in revenues and in cost, but I think that is going to lead us to a margin expansion, (inaudible) what I've seen in this quarter. I think that the EBITDA growth that we presented this quarter, 7.8% is helping inflation obviously, it could be approximately 5% renew increase in EBITDA, I think is much healthy and I think slight or bit we can relate it to initiatives in cost-cutting internal initiatives, but also to a decrease in inflation. I think that is the positive impact of lower inflation in the future could be very positive to the business.

The next question comes from Andre Baggio of JP Morgan.

I have 2 questions. The first one with regards to FTTH, I see that you're doing a big push. Can you describe a little bit how the economics of the FTTH is big, it's -- and do you expect DTH to eventually become meaningful, let's say, majority of your broadband access in São Paulo or in Brazil?

What is the second question, sorry? The first one I understand, what did you ask about São Paulo?

No, let's say if the FTTH should become like say the majority of the connections in your region?

Okay. So for FTTH, okay, first let's (inaudible) your question, so we are investing as you said, and it's true, we are growing our revenues in FTTH in very robust way, 31.5% that's what we reported in the last quarter. The number of [PAXs] is also growing like 45%. We are convinced that what we have is the long-lasting solution for broadband is the one that can offer very high speeds and it's our strong -- not only for São Paulo, for outside São Paulo as well where we have 83 cities, with this year at 12 new cities, we're going to end the year with 16 cities (inaudible) is for this technology. The economics I think is (inaudible) a lot depending on the city where we deploy it. Of course we don't deploy in cities with most -- more in B segments and in very concentrated, you have a much better return, when you go to smaller cities with more city -- and maybe with a more dispersed customer-base, future customer-base, the economics are very different, okay, so it's difficult to tell a number, it really depends on the geography. In São Paulo, everything they'll be reviewing is to build on FTTH. There are some areas that we're going to keep DTSL, so it's difficult to say when it's going to be that we'll have more from -- off the other, if you only have DTH. Of course when we reach areas where we have DTSL and we go to FTTH and the customer has the acquisition power to switch, we see -- switch technologies here also in areas outside São Paulo, but our only competitor there has copper, and we bring the FTTH that our take-up is very high. So it will depend on the evolution of the market, but if we have a very broad [home-pad] in São Paulo, with still a lot of room for growth, so we're talking about on average of 20%, so we can grow much more in the home-pad that we already have in the state.

And the second question, that's on mobile, you're giving away much more data for a lot of applications like Waze, Spotify, and so on. How do you monetize that value and have you increased your price or have you been getting some money out of these apps for the traffic that you take from them, or are you -- you'll be doing more for the clients, and so how do you monetize those?

Okay, so this new portfolio is very focused on high-end customers, as you can see that we are offering this for customers like paying a bill of over BRL 270 per month, it goes to BRL 389 et cetera. It replaces previous portfolio and we are giving more data, but we are also increasing price on average BRL 20. We are segregating what we call streaming and music from the normal apps, so the Internet, so some of them we gain also revenue share because some of them are our services, so they are included like people music that's ours, and we also want to include some of others that we have partnerships. So there are 2 ways. Also we're going to sell more value-added service because of that. And again I think we are bringing innovation to our customers. Now we are very focused on the family plan, so apart from the prices that I gave you, if you add more members, you're also paying more. So I think we are very well focused in this top of the pyramid, and bringing more functionalities, more benefits, but also charging more.

The next question comes from Mathieu Robilliard of Barclays.

I have two questions please. The first one with regards to mobile, so you've built your dominance or your very strong position in video because you've invested early and more in 3G and obviously you've also invested in 4G, but the -- all of your competitors are trying to catch up. So maybe if you could share with us some data points and elements showing how you think your network fares compared to other players in the market, that would be helpful to understand, if you can continue to -- or if you're maintaining that network advantage. And then second question please with regards to your capital structure. So obviously Brazil doing better from macro point of view, EBITDA grows very strong and you are de-levering the balance sheet more and more. How should we think about the right capital structure going forward? I mean do you think this is the right level of debt for you, or do you think you're compelled -- makes sense to de-lever?

Hi Mathieu, this is Christian, I'm going to answer the first, and David is going to answer the second. So I think you point out some of the elements of our winning strategy. In 3G we have almost 4,000 cities, and the second player has 3,300 more or less, so I think we are ahead in 3G. In 4G we are speeding up. It's true that the other players are also doing the same, but today we -- I think this year we built more cities than any other one in the country, so we reached more than 75% of population coverage and we believe that we are going to keep a very strong coverage that will differentiate us from others because you can also have to add a 3G because you feel the full experience when you don't have 4G for any operators. Apart from that I think it's good to highlight that because our frequency portfolio that I think is -- it's not the best one of the two best in the country. We have 30 megahertz of 2.6, we bought 10 megahertz later on of some very specific and very relevant capitals. We have the 700 megahertz, we have 1800 megahertz in many series that allow us to do what we're doing before everyone, that we are doing 4G+, that we are putting together 2 or 3 frequencies. We already have almost 100 cities that we offer the 4G+ that is double the speed of the 4G. And also I think also customer that needs to see some measures that not only the corporate, it is also the experience and Vivo is leading, #1 or 2 depending on the cities that you see in the past experience. Combine that with the best experience that we can offer in the stakes, I think we have a winning infrastructure proposition that will keep their way in the future. I think I -- hopefully I answered your question and I will pass it to David.

Hi Mathieu, this is David. Regarding your second question, we have the practice to distribute to 100% of the net income from the previous year, no, and this is what we are going to continue. In addition to these, we are always monitoring what are the key macro indicators particularly around interest rate and exploring where we can generate value -- additional value to our shareholders while liberating the company. So far we are having additional -- we believe that the flexibility that the balance sheet is giving us and the shareholder is the right thing considering the current interest rate. However, it's something that we are always as a team monitoring, so if in the future we believe that this new macro environment allowing us to de-lever the company, we will analyze it and look (inaudible).

Would you consider paying more than 100% of the net income or just one of the potential ways to do that?

This could be one of the options. As you know we are very focused on the capital generation and this is also very important for us in terms to maximize the return for our shareholders, no? And then we're always looking to ultimately how to distribute the cash flow that we are generating. So I think it's very -- everything is easily ignored to also (inaudible) interest rate. Up to now the interest rate we have in Brazil will have a more (inaudible) interest rate, so we believe that this was not an asset -- the right thing now is to de-lever the company. Now the scenario changing, so we will look for alternatives to maximize this distribution to our shareholders, but always looking to the whole scenario, more than just the cash flow generated.

The next question comes from Valder Nogueira of Santander.

First question if by any means spectrum license solution is [flexibilized], either by coming legislation or by whatever other option Anatel and the ministry may have, would you be interested in acquiring more spectrum? That's question #1.

(inaudible). I think, yes, I think spectrum is a very valuable asset. I think that what's the strength that could be changed, will be considered alternatives, all that could be either -- not by directive from the board, but even you can (inaudible), I think this is something that we always be looking at if there is an opportunity, the regulator is changing, this opportunity has created value to us, so that will be considered. Although we expect to have now if any, it's the best in the market.

And the 700 I think we start using it, so we already have like 200 cities, we're expecting to have double of this number in the next months and we are doing also some reforming of 3G to 4G, so in the moment as Eduardo said, we are pretty well-covered because of decisions taken in the past are being very keen on buying it, but again spectrum is also something that for our business is critical.

We were not meeting the short in the medium-term, but of course something was short term, it's for the long term.

Yes, because there may be some forced opportunities for the global mix to be more flexible in the spectrum, don't you agree?

Yes, there are discussions. I think that's -- those discussions have to be taken carefully, no, because the same -- we are taking the same time and as we are discussing the (inaudible) I think this is necessary discussions that should be taken very carefully.

And the second question is we saw a positive number in working capital in the quarter. It came better than I believe most of the street expected. However, I believe a part of it may be nonrecurring. Is that a fair reading?

Hi Valder, this is David. In the working capital FX is always driven by seasonality, no, because we're comparing only the minus CapEx with the free capital generation. Looking towards we are doing -- every quarter we are always trying to maximize the generation of the free cash flow, here we are working on opportunities on payment terms, collection churns, we're accelerating collections and also we are also optimizing all the assets that we have in our warranty that will allow us to reduce the cash flow payments. So I believe that this is a seasonality effect, but doesn't really change the positive number that we have in our year-to-date, the first 9 months. I'm looking for the rest of the year normally the payment, the cash flow -- I'm sorry, the CapEx was growing in the fourth quarter and normally the payment terms of the CapEx are longer than the OpEx cost, so we believe that this is a trend that is sustainable.

The next question is from Mauricio Fernandes of Merrill Lynch.

I have a question on Pay TV. There was a decline year-on-year in subscribers by 8% and revenues are basically flat, we also saw America more than Brazil reporting a decline in fixed line plus pay television revenues. I think you've been vocal before about defocusing the strategy away from pay television. The question is whether we should expect going forward a decline in your revenues, Pay TV revenue specifically please?

Hi Mauricio, this is Christian. I think in our situation it's something different, it's not that we are stepping out TV, I think we are focusing in one technology, that's IPTV rather than DTH. So I think our total revenues, they are impacted by this change in strategy. If you look exclusively what we did in IPTV, we can see that the number of subscriber it's growing, so the same quarter last year in IPTV we had something more than 200,000 customers. This quarter we ended the period with 351,000 customers, so it's a clear change from DTH to IPTV, and what we are doing IPTV, it will also bring more revenues specifically in this technology of more than 75%, and what we decided to do is to deploy IPTV in more cities now. So today we are concentrating in 43 cities out of the 80-something that we have as DTH. Our decision is to bring IPTV to all of them. So we're doing this last quarter of the year in many capitals where we have FTTH, and we'll do the rest by the end of next semester of 2018. So again I think in the long run it may be reflected in the change of our revenue mix and we don't give the guidance what's going to be in real growth, but it's going to be a change in mix, more IPTV and much fewer physical numbers in customers with DTH.

And while we're on the subject and in fact because of the changing -- expected change in mix away from DTH, I think this will be reflected in your potential interest in SKY Brasil should AT&T decide to resell it. It seems that that's been the speech for some time, I just want to confirm that that's still really the case.

We are focused in IPTV, Mauricio, that's the right approach.

The next question is from Daniel Federle of Crédit Suisse.

My first question is if you -- could you share with us some color on the strong performance in the corporate segment in the fixed line market? Is it related to one-off contributions from a specific contract or this is a recurring effect in the numbers? And my second question is related to the new prices, the new postpaid plan, what is the average -- weighted average increase in prices overall in the base with this automatic migration?

Daniel, that question, on your first question, I think we shared in the previous meetings that we are doing a very strong transformation program in B2B. So we are seeing some results of that, if you see only like the mobile data for instance in this segment is growing much over 30%. If I look only fiber broadband in the segment, it's growing over 15%, and also I mentioned some digital service that in IoT and security also we are growing a lot and machine-to-machine we are above 40% market share. And this specific quarter, yes, this we are also dealing with large corporations as our customers and in this quarter we had a very good contract in one of the customers that are also helping our results. So I think it's a combination of this high-volume specific large corporation deals that we can see happening once in a while that happened in this quarter, but also the fundamentals of the business considering specifically what I told you, mobile, fixed broadband and digital service are also showing good results. About the second question, I don't -- you wanted to ask about the price of the new portfolio, postpaid, what specific thing that you wanted to like share with you?

Yes, because you mentioned that the increase was in average BRL 20, right?

Yes.

But are you able to share with us the weighted average increase in the price because we don't know exactly the mix of the amount for the highest plan?

Our portfolio is very -- our portfolio is very simple and I think I can give you some of the numbers. So I think we are very focused in family plans as I said before. This family plan has extended value and value add more dependent, okay, so depending on the number of dependants that you add you have and also to pay more, some 1 or 2 or 3 included in the original price depending on the plan that you are. So what I was telling I think in the previous question was like let's consider the first one. So we had BRL 249.99 for 6 giga plan. This one increased 20%, we went to BRL 269 and we're giving now 10 giga, okay? So we -- more data and increasing BRL 20. The other -- and we have also the other benefits that I said before, the special apps and also the ones that you can use for streaming and video. There was another one that was 8 giga that we were selling at BRL 369, we increased to BRL 389 and another BRL 20 and now we are offering 15 gigas. There was another one BRL 469 that we offered 12 gigas, we went to BRL 489, another 20 gigas -- no, BRL 20 and we're offering 20 gigas this time. And the other one BRL 569, that went to BRL 589 and offering instead of 30, 50 gigas. What we want to show here is that we are very focused in family, we are giving more data, but also depending on the number of dependants we are charging more, we're increasing BRL 20 and again we are focusing the top of the pyramid, customers that are willing to spend this amount of money.

The next question comes from Julio Arciniegas of RBC.

I see (inaudible) is benefiting from tax benefit of the value-added services such as content. However, more of this revenue growth is slightly lower than in previous quarter and by looking more at ARPU, it's almost flat. So is the company seeing some pressure in the pricing dynamic in the market?

I think also when you compare -- this is Christian, I think when you compare quarter the evolution of the mobile is also in the last year we had important wholesale agreement. So that is impacting the growth rates. Excluding that the growth rate would be higher. So it was a long-term agreement that in the beginning of the contract had more revenues because we needed to implement some adjustment in our network to be able to afford to this new traffic from the wholesale agreement. Apart from that I think you also need to consider inflation. Inflation this quarter is much lower than previous quarters. So increasing price depend on the inflation rate, so we are not able to give the same increase when inflation is around 3% compared to other numbers much higher than this one that we had in quarters before. And again I think our strategy continued to be of selling. We are increasing prices in all segments, prepaid, control and now as I showed in postpaid; and we are bringing innovation to differentiate other offer from other competitors. So I think we've followed the same trend, I think the results in net add prove that we are in the right direction. I think ARPU is increasing considering that we have the inflation much lower and the comparison year-over-year is impacted by the wholesale agreement that we had in 2016.

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

I just like now to thank you very much for taking -- participating in this call, and I hope we have the chance now to see one-to-one meetings in the next week that you have different events that we are going to meet, and again thank you very much for your participation.

Thank you. This concludes today's Telefónica Brasil 3Q '17 results conference call. You may disconnect your lines at this time.