Telefonica Brasil S.A.

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefonica Brasil first quarter of 2020 earnings conference call. Today with us representing the management of Telefonica Brasil, we have Mr. Christian Gebara, CEO of the company, Mr. David Melcon, CFO and Investor Relations Officer, and Mr. Luiz Plaster, IR Director. We also have a simultaneous webcast with a slide presentation on the internet that can be accessed at the site www.telefonica.com.br There will be a replay facility for this call on the website. After the company's remarks are over, there will be a question and answer section. At that time, further instructions will be given. Should any participant need assistance during the conference, please press star zero for an operator. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the company's management beliefs and assumptions and on information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the company's future results and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr. Luiz Plaster, Investor Relations Director of Telefonica Brasil. Mr. Plaster, you may begin your conference.

Good morning, everybody, and thank you for joining us in this conference call for Telefonica Brasil's 2020 first quarter results. The call will be divided as follows. To start, Christian Gebara, our CEO, will introduce the company's actions and commitments to help Brazil overcome the COVID-19 crisis. Then he will present an overview of our operation and commercial performance for the first quarter of the year, as well as the efforts we've been making to expand our FTTH footprint and digitalize our customer care. Then our CFO, Davi Melcon, will comment on our cost structure, efficiency, investments, and financial results. We will then move to Q&A. I now pass the word to Christian.

Thank you, Blaster. Good morning, everyone, and thank you for taking part in our first quarter 2020 results call. I started by talking about our initiatives to help Brazil fight the COVID crisis on slide three. At Vivo, we are committed to assist the country navigate through the health and economic distress caused by the coronavirus. We have taken emergency measures to assure customers remain connected, entertained, and have the same best-in-class network quality that they've always had. Due to the increase of data traffic during the last few weeks, we have reinforced our network capacity to assure the best connection for our customers. Thanks to that and to our differentiated mobile internet infrastructure and largest fiber network in the country, we have been able to sustain superior quality during this period. Additionally, we have opened over 100 TV channels for our B2C customers and are offering data bonuses for all mobile plans and free access to selected mobile apps. For B2B customers, We are zero-rating the usage of collaboration tools, amongst other things. Given the delicate financial situation that some of our customers are facing, we are offering the possibility of negotiating their debts with as in up to 10 installments, free of interest and charges. This initiative clearly targets customers that are in financial distress because of the crisis, so that they can continue to rely on our services during the challenging period. The health and financial stability of our employees are also equally important to us. Hence, we joined the non-demeanor do not fire movement, guaranteeing jobs for the next months and all of our eligible employees are working from home five days a week and counting on health assistance with telemedicine platforms. To support governments in fight against coronavirus, we are leveraging our big data capabilities to create mobility heat maps using consolidated and anonymized data and strictly respecting data privacy laws and policies. Finally, we are using the resources of Fundação Telefônica to expand reach and content of our learning platforms, which had access more than doubling year-over-year and provide basic food baskets to the families of the most vulnerable students. All of those initiatives are aligned with our purpose as a company, which is digitalized to bring closer. We want to make digitalization a part of Brazilian's lives, Reducing distances and barriers between people and what matters to most of them. Education, culture, entertainment, health, business, and above all, other people. Moving to slide four, I comment on the highlights of the first quarter 20. The constant improvement of our customer base mix continues to translate into higher profitability and cash generation. Fiverr, our main lever of revenue growth and value proposition, had the highest level of net ad ever. increasing our customer base by 30.4% year-over-year reaching 2.7 million customers connected. In mobile, Vivo's leading position in terms of quality and customer experience resulted in a year-over-year growth of 6.6% of our post-paid subscriber base reaching 43.7 million customers representing 58% of our total mobile access. When looking at our revenue mix We see that 75% of our total revenues come from recurring subscription fees that are more resilient to economic shocks and ensure the maintenance of our solid cash flow generation. Meanwhile, Fiber revenues made up of FTTH and IPTV expanded 38.9% year-over-year and now represent 24% of all fixed revenues. With this fast pace, we remain confident that our fiber results will continue to drive our fixed business back to sustainable growth in spite of COVID-19 crisis. In terms of costs, we are focused on accelerating the benefits coming from digitalization and simplification. In the quarter, our recurring costs had an expressive year-over-year reduction of minus 3.3%, leading our recurring EBITDA to grow 1.6% and setting our EBITDA margin and 40.9%. Finally, we continue to generate solid cash flows while heavily investing in our network and services. In Q1, CAPEX totaled R$1.6 billion, resulting in R$2.8 billion of operating cash flow with a margin of 25.7% over revenues. Free cash flow expanded 81.9% year-over-year, reaching R$2.1 billion. Slide 5, you can see that our total mobile revenues decreased 0.1% year-over-year, impacted by the lower commercial TV during the last two weeks of March. The sale of handsets that are mainly sold at our stores, that are now closed, dropped 2.9%. Adding to that, this quarter has a tough comparison base, as first quarter 2019 was benefited by the hybrid price increases applied during that period. Due to these factors, our post-paid revenue growth was 0.3% year-over-year, despite the solid number of net ads that were registered in January and February, which will be further detailed on the next slide. In prepaid, we recorded our best yearly performance since 2015, presenting a drop of only 0.5%. The good result was driven by our improved value proposition that allowed for price rationalization and the continuous active management of our customer base. As a result, our mobile service revenue growth of Q1 stood at 0.1% EOV year. Moving to slide 6, in the first quarter 2020, We again reaffirmed our mobile leadership by delivering solid operating figures. In fact, we expanded our mobile market share to 33%, the highest figure since October 2006, dating back almost 14 years. We also registered the highest level of post-pay net ads over the last three quarters, despite the slowdown caused by the COVID-19 crisis. We had 272,000 net ads within our stores closed during the second half of March, which affected our capability to upsell customers from hybrid to pure postpaid and recall centers operating on lower capacity from prepaid to hybrid. Churn in the Q1 also showed good numbers, posting its lowest level in many years, with a reduction of 0.25 percentage points year over year. All of this reflects Vivo's superiority in terms of network quality, customer care, brand and channels contributed to an outstanding overall user experience. I would also like to point out, as you can see on the top right hand side of the slide, the success of our initiatives to stimulate the use of our digital channels. Since the beginning of COVID-19 crisis, we have accelerated this strategy to encourage customers to safely top up from home. As a result, the percentage of top-ups may digitally increase 5.3%, 0.0% per year. Additionally, migrations from prepaid to hybrid debtor may digitally increase 9 percentage points, gaining share over total migrations. On slide 7, we address our fixed revenues which dropped 3.6% due to the maturity of our legacy corporate-based services and to our decision to stop selling DTH pay TV. Even though we continue to see solid trends in the growing side of the business. As you can see in the right-hand side of the slide, our growing business were up 13% that are gaining more and more traction over time. We are confident that it will lead our fixed business to growth in the future. Data and ICT continue to have a solid performance, growing 13.8% year-over-year and broadly 6.6%. Our FTTH and IPTV revenues reflect the success of our fast-paced fiber deployment. FTTH revenues rose 43.3% year-over-year, while our IPTV were up 29.3%. On the bottom right, you can see that the strategic decision to prioritize profitability and discontinue the sale of DTH continues to weigh on the year-over-year evolution of our fixed revenues. If we excluded DTH from our total fixed revenues, year-over-year drop would be of only 1% in the first quarter. I would also like to point out that the moment we're living is confirming the need for solid connectivity solutions for both business and households. At Vivo, we believe that this will translate into a fight to quality as demand for first-rate connectivity will surge. Our customers are increasingly experienced for the first time working or studying from home, and this is already changing their habits. We are prepared for that thanks to our accelerated investments, especially in fiber. Now moving to slide eight. This quarter, we had a record level of fiber net ads, 175,000, an accelerated IPTV adoption that contributed to a growth of broadband pay TV outputs. FTTH access in Q1 stood at 2.7 million access, a 30% growth year-over-year, and now represents 39% of our broadband customer base. As a result, broadband ARPU rose 16% year-over-year to 72 AIs, as FTTH customers have significantly higher ARPU than customers from other technologies. Moving to the right-hand side of the slide, we present the evolution of our IPTV business. IPTV access increased 22% year-over-year, Contributing to the improvement of pay TV output by 7%, reaching 180 reais. Finally, I would like to highlight and thank all technicians that are out on the field, taking the adequate health and hygiene measures to assure that our customers are safe and remain connected. Moving to slide 9. We continue to expand our FTTH network to create a future-proof asset to provide the best fixed connectivity to our customers. In Q1, we entered 22 new cities with FTTH, reaching a total of 186 cities. We are expanding to fresh markets and new regions, while also accelerating the expansion process by overlaying our copper and FTTC networks. This is allowing us to defend and upgrade our existing customer base with lower investments and reduced time to market. As you can see on the right-hand side of the slide, we are improving the penetration of home connectors over home paths, reaching 22.7%, even with a significant increase of 739,000 additional home paths in Q1, summing up 11.7 billion home paths in FTTH. Thank you very much. to gain presence with FTTH. Moving to slide 10, at Vivo, we continue to incentivize the use of digital platforms to improve customer experience and increase our operational efficiency. We are constantly improving our e-commerce platform, aiming for it to become our front door for sales in the following years. In the first quarter of 2020, 20% of our FTTH sales were made through our digital platforms, growing 10 percentage points year over year. In mobile, 17% of our sales were digital, also 10 percentage points higher than the first quarter of 2019. Meu Vivo app already has 16.7 million unique users with 70 million access each month. In March 2020, for instance, we saw a month-over-month increase of 34% in the number of customers using Mail Vivo fixed. Our artificial intelligence platform, Aura, had 1.6 times more access on WhatsApp than the previous quarter and successfully avoided 6.9 times more calls to human agents than the previous year. In fact, Aura is already retaining more than 20%. Good morning everyone and thank you Christian. On slide 11

You can see that a strong cost reduction led to significant EBITDA margin expansion in the first quarter. A recurrent cost reduced 3.3% year-over-year, which led to an increment of 1.2 percentage points to a recurrent EBITDA margin that ended the quarter at 40.9%. Personal costs were up due to the insourcing of IT and security third-party services, In the fourth quarter last year, which we believe is key to accelerate our business performance. Prior to that, these expenses would have been shown in cost of service rendered. Cost of goods sold were down mainly as a result of lower handset sales in the period. Commercial expenses decreased 9.6% driven by lower expenditure with sales commissions, call centers, billing and advertising. mainly due to our digitalization and automation efforts. In fact, we continue to develop digitalization and simplification in our operations to keep improving our customer structure and customer experience. In the first quarter, we had 75% of our customers receiving e-billings, a 15 percentage point year-over-year increase, and 55% of the payments were made through digital platforms. We have already optimized 782 processes across the company with the use of robots that allowed us not only to reduce costs but also to improve customer service. Additionally, we have reduced by 35% the number of call center calls through the growing use of e-care channels like MiuVivo and Aura. We are continually pursuing all digitalization and simplification cost opportunities and are taking the measures to constantly improve the company's profitability. On slide 12, we saw that our profitability has expanded at the same time as we invest in opportunities to reinforce revenue growth. On operating cash flow increased 4.5% year-over-year, in the quarter reaching 2.8 billion reais and a margin of 25.7%. This is the result of a solid operating performance that allowed us to register 4.4 billion reais of recurring EBITDA and robust investment in the amount of 1.6 billion reais. We continue to invest in the most advanced technologies as we believe that this is the catalyst to improve our returns and value proposition. In fact, 68% of our capex is being invested in growth. In the first quarter, our fiber spend grew 46% year-over-year, and we are managing to be more efficient, leading to reduce time to market and optimize financials. Now moving to slide 13, here we present our solid shareholder remuneration that is backed with robust net profit generation. Our reported net income for the first quarter of 2020 stood at R$ 1.1 billion, a reduction of 14% compared to the previous year due to the growth of depreciation and income tax costs that were partially offset by our continuous cost discipline and EBDA expansion. Based on the net income for the first quarter of 2020, we have already declared R$ 420 million of interest on capital, We declared R$ 150 million in February and R$ 270 million in March. We also remind you of the payments that will be made in 2020 regarding the dividend declared last year, a total of R$ 5.8 billion. Out of that, R$ 3.6 billion will be paid in August and R$ 2.2 billion in December 2020. We are therefore not only investing to capture the best current and future growth opportunity, but also continuing to focus on creating value for our shareholders through a strong cash flow and high-level remuneration. Turning to slide 14, in 2020 free cash flow grew 81% year-over-year and reached R2.1 billion, excluding non-recurrent figures such as the sale of towers. The result was impacted by recurrent EBITDA expansion, backed by solid operating performance and contention of costs, lower financial costs and income tax payments, mainly driven by the reduction of interest rates, and working capital improvements due to the postponement of the payment of regulatory taxes and lower CAPEX and OPEX disbursements. The strength of our balance sheet places us in a very solid position to face the current COVID crisis. A strong cash generation allowed us to end March 2020 with R$ 5.5 billion in cash, leading to a net cash position of R$ 1.3 billion, excluding leasing liability. Going forward, the most significant cash out in 2020 will be the dividend payment scheduled for August and December. In this context, we will continue to successfully implement our strategy and drive digitalization for our customers and the Brazilian society as a whole. Thank you, and now we can move to the Q&A.

Thank you. The floor is now open for questions. If you have a question, please press star 1. In case you are following the conference call via webcast, please click on the question to the host to send your question. Questions will be taken in the order they are received. We do ask that when you pose your question that you pick up your handset to provide optimum sound quality. Please hold while we poll for questions. Our first question comes from Suzano Salero, Itaú. You may proceed.

Hi, good morning, guys. Thank you for taking our questions. The first question is regarding the agreement between the Funica and team. We realize that we should expect significant OPEX and CAPEX savings. So if you could elaborate a bit more on how long do you expect that to be, how long it will take to be concluded, and what kind of savings should we expect from the CAPEX side and the OPEX side? That would be our first question. The second question is related to the due diligence of mobile assets. Tim mentioned in the report, in the earnings report that the due diligence is progressing. I just was wondering if you guys have the same view on the progress of the due diligence and if you're on the same page as Tim progressing quickly in the analysis. Thank you.

Hi Susana, this is Christian. Thank you for the question. For the first, the agreement between TIM and VIVO, we had the approval from Anatel, we had the approval from CADE, the competency agency here, but we still need to finalize the process in CADE. So there is a week that we still need to wait to see if the final decision will be positive, and we believe it will, and if it's positive, We still need to plan to do what's going to be done in both fronts that this agreement has. This agreement has two specific fronts, in 2G and in 4G. So I guess once it's approved and we start working, then we're going to start deploying the second semester of this year. We are not giving guidance on CAPEX and OPEX reduction, but we expect if it's approved, finally, we've got it in this week. that in the second semester we will be starting to implement that in both 2G and in 4G, and we start capturing some of the results this year, maybe limited, but more results in the next year. Concerning the second one, As you know, we signed an NDA, so that's like what I share with you, what can be shared. We have a material fact published in March 10th, as you know, and with Vivo and Team Express, their joint interest in analyzing the acquisition of all mobile operations. That's a process. It takes a long time, because it's a process with M&A, and it's a process also in a company that's being sold That is in a specific legal situation. We started getting the information, as you mentioned, because that's the important part of the process for us to access the information that is available to be able, if we decide to do so, to make a binding offer. So we started getting the information, and we are at the beginning of this process, and I cannot precisely tell you how long it will take, but it's going on. As you said, it's going on.

Perfect. Thank you, Gebara. Very clear.

Next question comes from Vitor Tonira, Goldman Sachs. You may proceed.

Hello. Good morning, all. Good morning, Christian. Good morning, Davir. Good morning, Plaster. So, two questions on our side here. First is whether, given the current situation with online services and online retail gaining relevance, if that led to any changes in your retail strategy for handsets and accessories? when thinking about the post-COVID scenario. And the second question on our side would be if you could give us any more color on how results have been trending initially in April with increasing impact from COVID. Thank you.

So, hi, Vitor. I will answer the first one. So, handset, as I said in the introduction, We had two weeks of the month March that all our physical channels were closed. So although we have e-commerce, e-commerce cannot cover, especially in these first two weeks, Where there was a strong concern about the society, about everything, so people, even if they could reach online channels, sales in general for all sectors were reduced. So, of course, we were impacted by our handset sales because of the closure of our stores. We started to reopen some stores in smaller cities, that's true. So if you ask me the number of stores out of our 1,500 stores that we have nationally, we have today around 50% of them that are open, although in big capitals, in big cities, we still have them all closed. So, in terms of volume of sales, the 50% of stores do not represent the same percentage of sales. So, it's difficult for me to predict how it's going to be the evolution of the handset. Of course, there is an impact because there is less stores. There are fewer stores and fewer stores and fewer people coming to our stores to buy it. April was better than the end of March. So, we see a slight recovery of people coming back Even in the online channel, the results that we see in April are better than the ones that we saw in March. So we need to wait and see what's going to be the evolution of the crisis to be more precise about the evolution of our handset business. There is also the dollar impact. We need to see how it will be reflected in the smartphone price. On the other hand, traveling being a little bit more limited, will force people to buy smartphones in Brazil rather than this type of customer, of postpaid customers that also travel to buy accessories and assets. They will be more limited to buy it in Brazil. So, too early to say the final impact. We see April being better than what we saw in the first two weeks of the crisis. I think the second question was about prepaid. No, I think prepaid is a similar effect. in a different type of customer segments. In the first two weeks, we closed all stores, but not only stores, all our top-up points of sales, they were talking about hundreds of thousands, they were all closed, and people were at home, so we saw a significant drop. Our prepaid revenue was going in a very good direction in January and February. As you could see, we reported a 0.5% decrease In pre-paid revenues, and that was highly impacted by the final two weeks. Otherwise, our trend was going to continue to be positive. So now in April, as we see that the isolation, like people were more outside homes than they were in the beginning of the crisis, we see at the same time in parallel the getting better, our prepaid as well, much better than was in the end of March. Thank you.

Next question comes from Marcelo Santos, JP Morgan. You may proceed.

Hi, good morning, Christian. Good morning to all. Hope you're all okay. The first question is about the sales and marketing expenses, which we saw gains in this quarter. Was there any of those gains related to COVID or just more of your internal initiatives? And how do you expect this line to behave in the second quarter, your optics in general, given the impacts on COVID? That would be the first question. The second question is regarding the post-state behavior, so the behavior of your clients. Do you see any risk of downgrading, given that perhaps many of your clients have also Wi-Fi in their homes and probably might need less

So, the first question, Marcelo, our costs, our OPEX is reducing mostly because of our simplification and digitalization initiatives that we put in place. So all of that, most of it, this impact, almost all this impact is strongly related to our change Thank you very much. E-commerce will gain more share and may impact positively in our commercial optics. So that's the first one. There is also cost of goods sold. I don't know if it's part of your question. This one may be impacted by reduced sales of handsets. But the other one, the service itself is much more related to channel mix. Keeping The trend of regaining sales of services as this crisis is surpassed. The second question was regarding postpaid. Yeah, I don't see that way. I think the postpaid has lots of other benefits rather than only data consumption. We also don't know how it's going to be people's behavior. I don't know if I follow some of the numbers that we see. We see less than 50% of people staying at home. So we see more than 50% of people going out of their homes. So they're using mobility, they're using data immobility. We believe and hopefully... This crisis will be over and people will keep their lives. So I don't see this specific segment of post-pay downgrading their plan because of the situation that they are more at home. And also there is a lot of benefits that we offer to these customers. There are some value-added services that we see the usage of the service going up. So we're talking about a specific and very high value, I don't know, magazines online, learning online, some other things in video, et cetera, that are gaining more share in the usage of our customers. And as you can see, the churn is very low this quarter. So I don't see that we're going to be impacted that way in our post-pays.

Rich, thanks a lot. Our next question comes from Fred Mendes Bradesco. You may proceed.

Hello. Good morning, everyone. I have two questions as well. I mean, the first one, just to understand this drop in the ARPU on this quarter, when you look year over year, it's a 3.6% drop. So, of course, here there is the tough comps from the price increase in the first Q19. There's also the upselling of your hybrid plans. But just to get a better understanding, there is Of course, there's COVID as well, but just get a better understanding if there is an impact from competition here as well. This will be my first question. And then on the second question, it's more towards understanding the dynamic of the FTTA and the opportunities. You are growing like 30%, the number of users, and I used to, let's say, lost a market share that went to 24%. I think it was 31% a year ago. So it's a business, it's a sector that's growing like 50%, give or take. So I'm just wondering, of course this comes much more from the small SPs, but I'm just wondering if there is a specific player that is showing more significant growth and is becoming more relevant, or that's just like a mix of a bunch of players and you cannot really tell any specific one. And also, once I only consider São Paulo, just as an estimate, if your market share will be close to 40% to 50%, just trying to understand the potential here. Thank you.

Hi Fred, this is Christian. I'm also trying to answer your questions. Yes, the first one, you answered most of it. There is a lot of the impact of the price increase that we had in hybrid in the first quarter 2019 that is not repeated this quarter. So that's the main factor. That is also the factor of the two weeks of stores closed. When we close all stores, the most impacted service, the mobile, is the postpaid. So our sales of pure postpaid was very impacted by these two weeks of channel that we have stores closed. And the impact in the migration of prepaid to hybrid is less impacted because most of it is still done by Call Center and part of it also already done by digital channels. So the most impacted mobile services together handset sales is Pure Postpaid that also contributed to the impactful impact that you described at the beginning of your question. About FTTH, I think there is something that is reassured that we are in the right direction is the number that we are presenting for FTTH. We can discuss specific market shares in state by state But I think the truth is that our net edge is very strong. It's one of the highest net edge that we ever presented. We are entering more cities than we used to do. So we just presented 22 new cities in this first quarter, ending this quarter with 186 cities. We also improved HomePass in more than 700,000. That is a record for us. And even increasing HomePass in a record number that was 700,000, our penetration HomeConnect over HomePass is 22.7%, slightly higher than it was in first quarter 2019, where we didn't put so much HomePass in the market. We are doing that in New City, but we are also doing overlay over Cooper and over FTTC. That's also important to address. We are protecting these customers because we see, as you mentioned, there is, of course, there is competition from small and large players in some important cities. We want to protect our customers because most of them are post-paid customers from Vivo. So, in some cases, offering DSL is not enough. Even offering FTTC with 25 megabits of speed is not enough. In market share, it's hard to We talk about market share by itself. Brazil is a huge country, as you know, and what we know is in important cities, important capitals, I'm talking about São Paulo, I'm talking about Rio, I'm talking about Brasilia, Vivo is having a very, very strong performance. So, I don't know if there is any specific one, and going forward, we continue with our plan to be Strong and the leader in FTTH in Brazil, deploying more homes and more cities as we described it along these last three years.

Perfect, Christian, very clear. And if I may, just a follow-up. When you're doing the CAPEX on a green field and the one that you do an overlay on copper, what is the difference in terms of CAPEX, just percentage difference, just a ballpark number, please?

Fred, we don't give the number. It's much lower. Okay, there are two types. No, there are three types. Over DSL, that is mostly São Paulo, over FTTC, that's mostly what GDT had in network, and pure FTTH from scratch. In FTTC, it's much lower, but in DSL, it's also lower. So, it's still lower, but we don't give the number. It's lower than CAPEX, and the speed is also different, because we can do it much quicker.

Perfect. Very clear. Christian, thank you.

Next question comes from Maria Teresa Azevedo Santander.

Hi, everyone. Thank you for the question. My question is on the CapEx. I mean, can you talk a bit on the CapEx flexibility that you have? You were clear that you will continue to build new fiber in your markets, but you have some for FX impact. And on the other hand, you have the network sharing deal with Tim and the franchise strategy in smaller towns. In the past, you also mentioned about a potential infrastructure partner to new fiber builds in mid-sized cities. So can you comment a bit on how that is evolving and how much would you be able to cut the capex in a scenario of a more extended recession? Thank you.

So, thank you, Maria Teresa, for the question. Yes, your comments in the beginning are all right, and they're still true. So, we are going to keep our strategy of expanding FTTH. So, we had a plan last year. We covered more than 2 million home paths. As I told you, this quarter, we already covered more than 700,000. So we keep on the strategy of deploying at least what we deployed in number of homes in 2019. This deployment is organic, 100%, but it's also some of them is done with partnership, not the franchising that I'm going to address, but with partnership. And this partnership, the key one that we have at the moment, is of American Tower in the state of Minas Gerais that we launched the first city and we have planned and we're going to launch More than 10 cities this year. So that also is adding to the Home Pass that I described before. And then there is the franchising that is not in this number. The number is still limited. We launched with a huge success three cities with two different partners. and we have a plan to launch more cities in the coming months. We don't say the cities because of a commercial purpose. So that part of the CAPEX continues to go on. You're right, there are some CAPEX that is related to exchange rate but we have some limited, we have some coverage to protect ourselves and where we don't have the coverage we're going to renegotiate because we also have the scale not only because of people but because of Telefonica Group and most of these providers are worldwide providers of the group. Going forward, we still need to know what's going to be the situation of the economy, what's going to be the impact in our revenues, and how can we address this in OPEX and CAPEX. I described it before, the DTH, we decided to stop DTH. There is a lot of CAPEX involved in the new ads of DTH, not in the infrastructure itself, but when you have a new ad, there is all the CP and work related to this legacy technology, so we may have some flexibility there. Thank you very much. It's just starting, or is in the middle, or maybe it's going to finish in a very few weeks. So, hard to say at the moment. But our strategy as a fusion, as a company, a fiber company that has the best technology in fiber, blended with the best technology mobile, is still there.

Perfect. Thank you very much, Christian. And my follow-up question would be a little bit on your views on the regulatory environment. Do you have any views you can share with us on your first reading on the 5G auction rules? Do you expect it to be postponed to next year? And also, if you have any update on CSTEL and discussions about further regulatory waivers that the sector can benefit from, that would be very helpful. Thank you.

Yeah, we postponed, I don't know if you call it regulatory, but we postponed some of the taxes that we had to pay, you know, so I think that's known by all of you. So, like, we had the fiscal tax that was supposed to be paid, the first quarter is going to be paid in August, starting in August. We've been working very closely with Anatel, within the ministry, trying to gather as a sector and agency and government. to address the best way the crisis and I think we're performing very well. The networks are all there and we are being able to support our customers in this difficult moment. At the 5G, there was the public consultation. We addressed all the questions that still had. We gave our comments that finalized like few weeks ago and still waiting. I cannot tell you how it's going to be the new calendar. We've been responding to all the milestones of the process. And let's see, I think it's still uncertain by everyone, and so I don't have an answer to give you. We keep investing in 4.5G, that's our bet for mobile, not only for the near term, but for the mid term and even long term, because I think the two technologies, 5G and 4G, will co-live for a long time, especially the penetration of smartphones and even the coverage that we're going to have in 5G versus 4G for the next years. Carlos Sequeira, BTG Pactual

Hi, good morning, guys. Thank you for the call. Most of the questions I had were answered, but I want to make a quick follow-up on FDTH, if possible. So, if I'm not mistaken, the guidance for this year was to pass a new 2 million homes, and you just mentioned that you hope to do another, Christian, you just said you hope to do another 2 million homes. But looking at what you did in the first quarter, it seems that you're more inclined towards making 3 million homes pass this year. and also penetration rates were better. So would it be reasonable to assume you can get to the 25% penetration by the end of this year? Please, thank you.

Yeah, hi, Cadu. This is Christian. Yes, you're right. We did a lot. Of course, there is also a combination, as I said before, of overlay and greenfield. So... When we do a little bit more of one and the other, we can be faster in the deployment. So it's hard to say one quarter versus other if there is a trend. So I'm going to multiply by four what we did in the first quarter. That's my answer. But, of course, we are confident that we are doing more than 2 million, as you said. And I think last year was around 2.7. And we don't give exact figures. Next question from Rodrigo Villanueva, Bank of America

Yes, thank you. Good morning, Christian and David Plaster. I hope you and your family are well. I have a question related to the franchising team and the partnership with American Tower. I was wondering if you can give us an update on this respect and if you expect the COVID crisis to have an impact on your initial targets. Thank you.

Hi, so, Rodrigo, thank you for the question. So, in American Tower, I don't see any impact. I think, as I said, the project has a three-year and 800,000 home paths. We are totally on schedule. We are not addressing the cities now, but it's more or less between 14, 16 that we have for this year, and we're going to accomplish it. So... We are totally at the pace that we expected and we may accelerate if they can but again we are totally comfortable with the schedule that we have so for this year around 14 to 16 new cities to be launched with this partnership. Regarding the other one, the franchising, this one is a little bit trickier, so I cannot tell what's going to be the COVID impact, because here you need to have someone else know the investment, they hold the cap, it's not ours, it's someone else, not our partner, and the partner has to be willing to do the investment, so it depends on their financial situation. We had a pipeline of investors. We've been controlling that very closely because we want the partner, although the customer is not ours, it's the partner's customer. Our brand is endorsing the technology, so we need to be very careful to who we select to do that. We have a few that confirmed their commitment to launch cities this year. We have two new cities to be launched in the next two months. and we keep going. So again, we need to wait what's going to be the final impact in other partners that showed interest in the past to see if they continue to be interested after the crisis. On the other hand, one specific dimension of this franchising partner is converting existing players into a franchisee. Maybe The situation that some of them may be facing will be helpful to join forces with a company like Vivo. So, I don't know, if you're in a small city, they will have the risk of being attacked by Vivo's deployment of their own service. Maybe you could convert yourself in a franchisee, and if you accept them to be the franchisee, he's protecting the business. So I think there are many other alternatives that we may see as franchising business going forward. And what we saw in the three cities that we have franchising, cities in the center of the country, the deployment and the penetration has been Thank you very much. Once again,

To ask a question, please press star 1. Please wait while we poll for questions. This concludes the question and answer section. I would like to turn the floor back to Mr. Christian Gebara for any closing remarks.

So, thank you all for participating in our first quarter call. As you know, we're always open for further questions if you have here with our team. And hopefully, next quarter, we're going to have a better situation for the country, for the world, and maybe with much more positives, outcomes, and projections for the future. So, thank you once again.

Thank you. This concludes today's Telefonica Brasil 1Q20 Results Conference Call. You may disconnect your lines at this time Have a great day