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