Telefonica Brasil SA

BOVESPA:VIVT3

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefónica Brasil First Quarter of 2020 Earnings Conference Call. Today with us, representing the management of Telefónica Brasil, we have Mr. Christian Gebara, CEO of the company; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. Luis Plaster, IR Director. We also have a simultaneous webcast with the slide presentation on the Internet that can be accessed at the site www.telefonica.com.br/ir. There will be a replay facility for this call on the website. [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.

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

[Luis Plaster, executive]

Good morning, everybody, and thank you for joining us in this conference call for Telefónica 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 operational and commercial performance for the first quarter of the year as well as the efforts we've been take -- making to expand our FTTH footprint and digitalize our customer care. Then our CFO, David 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.

[Christian Gebara, executive]

Thank you, Plaster. Good morning, everyone, and thank you for taking part in our first quarter 2020 results call. I start by talking about our initiatives to help Brazil fight the COVID crisis on Slide 3.

At Vivo, we are committed to assist the country navigate for the health and economic distress caused by the coronavirus. We have taken emergency measures to assure customers remain connected, entertained and in 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 ensure 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 0 rating the usage of collaboration tools, amongst other things. Given the delicate financial situation that some of our customers are facing, we offered the possibility of negotiating their debts with 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 Não demita/Do not fire movement, guaranteeing jobs for the next months, and all of our eligible employees are working from home 5 days a week and counting on health assistance with telemedicine platforms. To support government's fight against coronavirus, we are leveraging on 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 Telefónica 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 4. I comment on the highlights of the first quarter '20. The constant improvement in our customer base mix continues to translate into higher profitability and cash generation. Fiber, our main lever of revenue growth and value proposition, had the highest level of net add 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 postpaid 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 shock 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 cost has had an expressive year-over-year reduction of minus 3.3%, leading our recurring EBITDA to grow 1.6% and setting our EBITDA margin at 40.9%.

Finally, we continue to generate solid cash flows while heavily investing in our network and services. In Q1, CapEx totaled BRL 1.6 billion, resulted in BRL 2.8 billion of operating cash flow, took a margin of 25.7% of our revenues. Free cash flow expanded 81.9% year-over-year, reaching BRL 2.1 billion.

On 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 2 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 '19 was benefited by the higher average price increases applied during that period. Due to these factors, our postpaid revenue growth was 0.3% year-over-year despite the solid number of net adds that will be registered in January and February, which we'll give further detail on the next slide. In prepaid, we recorded our best yearly performance since 2015, representing 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% year-over-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 figures since October 2006, dating back almost 14 years. We also registered the highest level of postpaid net adds over the last 3 quarters despite the slowdown caused by the COVID-19 crisis. We had 272,000 net adds within our stores closed during the second half of March, which affected our capability to upsell customers for hybrid to pure postpaid, and the call 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 feel and branded channels, contributing 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 made digitally increased 5.3 percentage points year-over-year. Additionally, migrations from prepaid to hybrid that are initially increased 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 copper-based service, 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 optics business to growth in the future.

Data and ICT continued 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 9 -- 29.3%. On the bottom right, you can see that the strategic decision to prioritize profitability and discontinue the sale of DTH continues to weight on the year-over-year evolution of our fixed revenues. If we exclude the 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 8. This quarter, we had a record level of fiber net adds, 175,000, and accelerate IPTV adoption that contributed to a growth of broadband and Pay TV ARPUs. FTTH access in Q1 stood at 2.7 million access, a 13% growth year-over-year and now represents 39% of our broadband customer base. As a result, broadband ARPU rose 16% year-over-year to BRL 72, 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 ARPU by 7%, reaching BRL 180.

Finally, I would like to highlight and thank all technicians that are out on the field, taking the adequate health and hygienic 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're expanding to fresh markets and new regions, while we also accelerated 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 connections over homes-passed, reaching 22.7%, even with a significant increase of 739,000 additional home-passed in Q1, summing up 11.7 million home-passed in FTTH. Having a strong FTTH footprint, not only give us the tools to transform our fixed business by capturing the ever-increasing demand for high-quality connectivity, but also help us defend our postpaid customer base, offering them the best value proposition. It's worth saying that the COVID-19 crisis increase hasn't changed our ambition to expand our fiber network. We will continue to enter in new cities and overlay our copper and FTTC networks to continue 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 to -- in the first quarter of 2020, 20% of our FTTH sales were made from 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 '19.

Meu Vivo app already had 16.7 million unique users with 70 million access each month. In March 12, 2020, for instance, we saw a month-over-month increase of 34% in the number of customers using Meu Vivo fixed. Our artificial intelligence platform, AURA, had 1.6x more access on WhatsApp than in previous quarter and successfully avoided 6.9x more calls to human agents than in previous year. In fact, AURA is already retaining more than 20% of all incoming calls. AURA's constant evolution provides the most advanced, relevant and simple channel for interaction with our customers, being reachable by Meu Vivo, phone, call center or via WhatsApp and other relevant chatbots. I now pass it on to our CFO, David Melcon.

[David Sanchez-Friera, executive]

Good morning, everyone, and thank you, Christian.

On Slide 11, you can see that our strong cost reduction led to significant EBITDA margin expansion in the first quarter. Our recurring cost reduced 3.3% year-over-year, which led to an incremental 1.2 percentage points to our recurring EBITDA margin that ended the quarter at 40.9%. Personnel costs were up due to the in-sourcing 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 good solds 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 digitalization and automation efforts. In fact, we continue to develop digitalization and simplification in our operations to keep improving our cost structure and customer experience. In the first quarter, we had 75% of our customers receiving e-billing, a 15 percentage point year-over-year increase and 55% of the payments were made through digital platforms. We have already automized 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 [ iCAR ] channels like Meu Vivo 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 show that our profitability has expanded at the same time as we invest in opportunities to reinforce revenue growth. Our operating cash flow increased 4.5% year-over-year in the quarter, reaching BRL 2.8 billion and a margin of 25.7%. This is a result of a solid operating performance that allowed us to register BRL 4.4 billion of recurring EBITDA and robust investment in the amount of BRL 1.6 billion. 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 reduced time to market and optimized 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 2020 stood at BRL 1.1 billion, a reduction of 14% compared to the previous year due to the growth of depreciation and income tax cost that were partially offset by our continuous cost discipline and EBITDA expansion. Based on the net income for the first quarter 2020, we have already declared BRL 420 million of interest on capital. We declared BRL 150 million in February and BRL 270 million in March.

We also remind you of the payments that will be made in 2020 regarding the dividend declared last year, total of BRL 5.8 billion. Out of that, BRL 3.6 billion will be paid in August and BRL 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 BRL 2.1 billion, excluding nonrecurrent figures, such as the sales of towers. The results was impacted by recurring 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 for regulatory taxes and lower CapEx and OpEx disbursements. The strength of our balance sheet place us in a very solid position to fight the current COVID crisis. The strong cash generation allowed us to end March 2020 with BRL 5.5 billion in cash, leading to a net cash position of BRL 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.

[Operator]

[Operator Instructions] Our first question comes from Susana Salaru, Itaú.

[Susana Salaru, analyst]

The first question is regarding the parley, the agreement between Telefónica and TIM. We realized that we should be -- 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 Oi Móvel assets. TIM mentioned in the report -- in its 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 in the same page as things progressing quickly in the analysis.

[Christian Gebara, executive]

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 approval from CADE, the competency (sic) [ competition ] agency here, but still needs to finalize the process in CADE. No, so there is a week that we still need to wait to see the final decision if it 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. The agreement has 2 specific fronts, in 2G and 4G. So I guess, once it's approved, that we start working, that 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, with CADE in this week, that in the second week -- in the second semester, sorry, we'll be starting to implement that in both 2G and in 4G, and we start capturing some of the results this year, may be 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 early March 10, as you know. And when Vivo and TIM expressed their joint interest in analyzing the acquisition of Oi Móvel text 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 corporate that's being sold that is in a specific legal situation.

We started getting the information, as you mentioned, because that's the part of -- important part of the process for us to access the information that is available -- to be able, if we decide to do -- to make a binding offer. So we started getting the information, and we are at the beginning of this process. And it -- I cannot precisely tale -- tell you how long it will take, but it's going on. As you said, it's going on.

[Operator]

Next question comes from Vitor Tomita, Goldman Sachs.

[Vitor Tomita, analyst]

So 2 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 our 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.

[Christian Gebara, executive]

Vitor, I will answer the first one. So handset, as I said in the introduction, we had 2 weeks of the month March that all our physical channels were closed. So although we have e-commerce, e-commerce cannot cover, especially in the first 2 weeks, where there was a strong concern about the society, about everything. So people, even if they could reach our online channel, sales in general for all sectors were reduced. So of course, we were impacted by the -- our handset sales because of the closure of our stores.

We started -- reopened 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 city, we still have them all closed. So in terms of volume of sales, this 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, a few people come into our stores to buy it. April was better than end of March. So we see a slight recovery of people coming back to channels, even in the line 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 -- our postpaid customers that also travel to buy accessories and handsets. They will be more limited to buy it Brazil. So too early to say the final impact. We see April being better than what we saw in the first 2 weeks of the crisis.

I think the second question about -- was about prepaid. Now I think prepaid has similar effect in a different type of client and customer segments. In the first 2 weeks, we closed all stores, but not only stores, all our top-up points of sales they're not -- they are more than -- and we're 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, January and February. As you could see, we reported a 0.5% decrease in prepaid revenues, and that was highly impacted by the final 2 weeks, otherwise, our trend was going to continue to be positive.

So now in April, as we see the isolation, people were more outside homes than they were in the beginning of the crisis. We see at the same time, in parallel, they're getting better, our prepaid as well, much better than it was in the end of March.

It's early to say what's going to be the impact going forward. We still need to see how it's going to be this gradual return process if it's going to work, if it's going to last then we're going to see also unemployment, how it's going to perform. So many variables still not controlled to give you a final answer. But April, as you asked, better than end of March.

[Operator]

Next question comes from Marcelo Santos, JPMorgan.

[Marcelo Santos, analyst]

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 were just -- is more of your internal initiatives? And how do you expect this line to behave in the second quarter, your OpEx, in general, given the impacts on COVID? That would be the first question.

The second question is this -- is regarding the postpaid behavior, so the behavior of your clients. Do you see any risk of down-trading given that perhaps many of your clients have also WiFi-ed their homes and probably might need less connectivity -- mobile connectivity now? These are the 2 questions.

[Christian Gebara, executive]

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 them, most of it, this impact, like in the -- almost all this impact is strongly related to our change in channel mix. So we're selling much more in digital channel than we used to do. There are more digitalization in a lot of -- each year in customer care initiatives in the company, and there's a lot of automation that has also impacted our OpEx.

So mostly, it's related to simplification, this digitalization going on before the COVID crisis. So going forward, we believe e-commerce will gain more share and may impact positively in our commercial OpEx, okay? 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, okay? But the other one is when the service itself is much more related to channel mix, okay, keeping the trend of regaining sales of services as this crisis is surpassed. The second question was regarding...

[David Sanchez-Friera, executive]

Postpaid churn.

[Christian Gebara, executive]

Postpaid. Yes. I don't see that way. I think that postpaid has a lot of other benefits rather than unli-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 number that we see, we see less than 50% of people staying at home. So we see more than 50% of people going out their homes, so they're using mobility, they're using data in mobility. We believe that, hopefully, this crisis will be over and people will keep their lives. So I don't see this specific segment of postpaid 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 service that we see the usage of the service is 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 chart, it's very low this quarter, no. So I don't see that we're going to be impacted the way in our postpaid.

[Operator]

Our next question comes from Fred Mendes, Bradesco.

[Frederico Mendes, analyst]

I have 2 questions as well. I mean the first one, just to understand this drop in the ARPU on this quarter. When you look at year-over-year, it's a 3.6% drop. So of course, the year, there is the tough comps from the price increase in the first Q '19. There is also the upselling of your hybrid plans.

But just to get a better understanding if there is -- of course, there's COVID issue now, but just 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 for to understanding the dynamic of the FTTH and the opportunities. You are growing like 30% the number of users and you still, let's say you lost a market share that went to 24%. I think it was 31% a year ago. So is the business -- is the sector that's going like 50%, give or take, year-over-year?

So I'm just wondering, of course, this comes more -- much more from the smaller ASPs, but I just wonder 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, as well, a bunch of players and we cannot really tell any specific one. And also, was -- 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.

[Christian Gebara, executive]

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 '19. That is not repeated this quarter. So that's the main factor. That is also the factor of the 2 weeks of stores closed. When we closed our stores, the most impacted service is the mobile and the postpaid. So our sales of pure postpaid was very impacted by these 2 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 with handset sales, is through postpaid that also contributed to the ARPU impact that was 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. No, we can't discuss specific market shares in state-by-state. But I think the true is that our net adds is very strong. It's one of the highest net adds 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 home passed in more than 700,000, that is a record for us. And even increasing home passed in a record number that was 700,000, our penetration in home connect over home passed is 22.7%, slightly higher than it was in first quarter '19, where we didn't put so much home passed in the market. We are doing that in new city, but we are also doing overlay over copper 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 postpaid customers from Vivo. So in some cases, offering DSL is not enough, even offering FTTC with 25 megabits of speed is not enough.

Market share, it's hard to 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 that's -- don't know if there is any specific one. And going forward, we'll continue with our plan to be strong and deliver in FTTH in Brazil, deploying more homes and more cities, as we describe it along these last 3 years.

[Frederico Mendes, analyst]

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

[Christian Gebara, executive]

Fred, we don't give the number. It's much lower, okay? There are 2 types though, over DSL that is mostly São Paulo; and over FTTC that's mostly where DDD had a network; and pure FTTH from scratch. FTTC is much lower, but ADSL is 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.

[Operator]

Next question comes from Maria Tereza Azevedo, Santander.

[Maria Azevedo, analyst]

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 new markets, but you have some for FX impacts. 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?

[Christian Gebara, executive]

So thank you, Maria Tereza, for the question.

Yes, your comments in the beginning are all right and they're still true. So we are going to do -- we're going to keep our strategy of expanding FTTH. So we had a plan. Last year, we covered more than 2 million home passed. As I told you, this quarter, we already cover 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 partnerships, not the franchising that I'm going to address, but with partnership. And this partnership, the Q1 that we have at the moment, use 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 passed that I described before.

And then there is a franchisee that is not in this number. The number is still limited. We launched with a huge success 3 cities with 2 different partners, and we have a plan to launch more cities in the coming months. We don't say the cities because of commercial purpose. So that part of the cap is continue to go on. You're right, there are some CapEx that is related to exchange rate to the -- 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 Vivo, but because of Telefónica Group, and most of these providers are net and are worldwide providers of the group.

And 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. No -- and I described it, I think before the DTH. We decided to stop DTH. There is a lot of CapEx involved in the new adds of DTH, not in the infrastructure itself, but when you have a new add that result in CP and work related to this legacy technology. So we may have some flexibility in stopping some of the legacy technology that we still have in our portfolio, such as copper or even a low-end FTTC. So we are working on the flexibility that we have, but it's still too early to address what's going to be the impact because, as I said before, the crisis is 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 and the vision of the company, a fiber company, that has the best technology in fiber. Glad that with the best technology, mobile is still there.

[Maria Azevedo, analyst]

Perfect. And my follow-up question would be a little bit on your views on the regulatory environment. Do you think -- do you have any views you can share with us on your first reading on the 5G auction rule? Do you expect it to be postponed to next year?

And also, if you have any update on fiscal and discussions about further regulatory waivers that the sector can benefit from? That would be very helpful.

[Christian Gebara, executive]

Yes. We postponed, I don't know if you call it regulatory, but we postponed some of the taxes that we had to pay, no. So I think that's not by all of you. So like you had the fiscal tax that was supposed to be paid in the first quarter is going to be paid in the -- in August -- starting in August. We've been working very closely with ANATEL, with the ministry, trying together as a sector, 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.

And the 5G, there was the public consultation. We addressed all the questions that you had. We gave our comments that finalized like a 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 they have an answer to give you.

We are -- we keep investing in 4.5G. That's our best for mobile, not only for the near term, but for the mid-term and even long term because I think the 2 technology, 5G and 4G, will co-live for a long time, especially in the penetration of smartphones and even the covers that we're going to have in 5G versus 4G for the next years. And we are putting fiber, as I said. And fiber is also contributing to the -- our network as a whole, and the fiber will be necessary for the 5G in the future. So pretty confident that our strategy is the right one and continue, and responding to the milestones defined by the government.

[Operator]

Next question comes from Carlos Sequeira, BTG Pactual.

[Carlos Sequeira, analyst]

Most of the questions I had were answered. But I want to make a follow-on -- a quick follow-on, on -- so on FTTH, if possible. So if I'm not mistaken, the guidance for this year was you'll pass nearly 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 passed the 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?

[Christian Gebara, executive]

Yes. Carlos, this is Christian. Yes, you're right. We did a lot. It -- 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. No that's so -- I would multiply by 4 what we did in the first quarter. That's my answer. But of course, we are confident that we were doing more than 2 million, as you said.

And I think last year was around 2.7 million. And we don't give exact figures, but we're going to be above 2 million, as you said. And I think there is, depending on the blended that we do between overlay and greenfield, some licenses in some cities, so there are some other constraints, that is not CapEx constrained in this case because we're confident that is the strategy going forward. So you're right, above 2 million.

[Operator]

Next question from Rodrigo Villanueva, Bank of America.

[Rodrigo Villanueva, analyst]

I hope you and your families 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.

[Christian Gebara, executive]

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 3-year and 800,000 home passed. We are totally on schedule. We are not addressing these 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 totally at the pace that we expected, and we may accelerate if we -- 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 franchise, and 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 to hold the investment, to hold the CapEx. It's not ours. It's someone else, though they're our partner, and the partner has to be willing to do the investment, no. So it depends on the financial situation.

We have like a pipeline of investors. We're also being very -- we have been controlling that very closely because we want the partner, although the customers is not ours, and the customer is the partner's customer. Our brand is endorsing the technology. So we need to be very careful to who we select to do that. So we have a few that confirmed their commitment to launch cities this year. We have like 2 new cities to be launched in the next 2 months. And we keep going. So again, we need to wait what's going to be the final impact in other partners that shows interest in the past to see if they continue to be interested after the crisis.

On the other hand, one of the -- of one of the -- one specific dimension of this franchising partner is converging 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 if you're in a small city, then you have the risk of being attacked by people's deployment of their own service. Maybe you could convert yourself in a franchisee. And if you accept them to be the franchisee, he is 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 3 cities that we have franchising, cities in the center of the country, their deployment and their penetration has been very, very high, no. Some of -- most of the cities, the channel were not closed or they had ways to do that over WhatsApp or even door-to-door, and they are extremely happy with the results.

Also, if you look at the franchising business, and when you compare being a franchisee of a fiber company rather than being a franchisee of a retailer, maybe it's going to be a moment that someone who decides to be a franchisee opts to be a Vivo franchisee other than being any other retailer. They may be more impacted with the crisis than we're seeing right now. I don't know if I answered your question, but that's what we can officially share about the 2 partnerships.

[Operator]

[Operator Instructions] This concludes the question-and-answer section. I would like to turn the floor back to Mr. Christian Gebara for any closing remarks.

[Christian Gebara, executive]

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.

[Operator]

Thank you. This concludes today's Telefónica Brasil 1Q '20 Results Conference Call. You may disconnect your lines at this time. Have a great day.