Telefonica Brasil SA

BOVESPA:VIVT3

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefonica Brasil First Quarter of 2022 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. Joao Pedro Carneiro, IR Director. We also have a simultaneous webcast with slide presentation on the Internet that can be accessed at the site, www.telefonica.com.br/ir. 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 session. At that time, further instructions will be given. [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. Joao Pedro Carneiro, Investor Relations Director of Telefonica Brasil. Mr. Carneiro, please proceed.

[João Carneiro, executive]

Good morning, everyone, and welcome to Telefonica Brasil's earning call for the first quarter of 2022. Today's call will be divided in 2 parts. To start, our CEO, Christian Gebara, will briefly comment on the acquisition of Oi's Mobile Assets, then go over Vivo's financial and operating highlights, followed by an update about our digital ecosystems and ESG initiatives. Afterwards, David Melcon, our CFO, will go through our cost and CapEx structure, net income, free cash flow and shareholder remuneration.

Now I hand it over to Christian.

[Christian Gebara, executive]

Thank you, Joao. Good morning, everyone, and thank you for joining our earning call. Starting on Slide 3, we show you how a long-awaited deal with Oi's -- Oi Mobiles asset to generate value for Vivo and reinforce our leadership in the Mobile segment. We acquired 43 megahertz of spectrum on a nationwide basis, 2, 700 and 12.5 million mobile access, of which 4.6 million are postpaid. As a result, Vivo's total access base will jump from 100 million to 112 million, allowing us to become mobile market leader in 5 additional Brazilian states, extending our leadership to 17 states that represent 60% of Brazil's GDP and 67% of the population.

Regarding synergies, our initial calculations point to an NPV of BRL 5.4 billion in cost and CapEx savings and avoidance, net of investments and integration costs. This is composed optimizations amounting to BRL 1.8 billion in network, BRL 1.7 billion in spectrum, and BRL 1 billion in commercial on top of BRL 0.9 billion in fiscal benefits. Moreover, the customer base incorporated generated approximately BRL 135 million in monthly net revenues in March 2022, from which we expect to extract margins above 70%, both in EBITDA and operating cash flow terms when the synergies reach their running rates. Moving to the steps we have ahead. During the next week, we will start to proceed with the full customer base migration, when users coming from Oi will be fully integrated in our networking systems. This migration will be done gradually and should be completed by the end of the first quarter of 2023. For more details about the assets and synergies, please access the specific presentation available on our Investor Relations website.

Now going to Slide 4. We had a very positive result in the first quarter '22, reached an impressive milestone of 100 million access, the largest ever in our history. And our postpaid customer base totaled 51 million access in the quarter after growing 11% year-over-year, while our FTTH Homes Connected continue to grow remarkably, up 29% year-over-year. Such strong performance drove our top line to grow 4.6% year-over-year, the best annual evolution we had since 2015, with mobile service revenues up 5.7%, while our fixed business expanded 1.9%, confirming the positive trends seen over the past couple of quarters. This positive revenue performance was enough to offset cost pressures arising for alternative business models and higher inflation resulting in EBITDA growth of 1.3% versus first of -- first quarter 2021. Our strong operating momentum combined with solid financial trends led to a free cash flow generation of BRL 2.5 billion, up 12.6% year-over-year. This allow us to continue investing in growth technology and in organic opportunities, while maintaining the best shareholder remuneration profile of the industry.

On the next slide, you can see that we continue to successfully transition into an improved mix of revenues with inflation-linked products such as mobile postpaid, handsets, fiber, IPTV and B2B solutions, representing almost 80% of our results. This premium product exposure is unique to Vivo, helping us navigate well during tighter economic cycles, supported by our outperforming core businesses.

Moving to Slide 6. Here we detail the evolution of our mobile and fixed core revenues with positive performance across the board. On the left-hand side, you can see that our mobile revenues rose 6.1% year-over-year as our strong bottom of net additions, both in postpaid and prepaid combined for more rational competitive environment helped us reach mid-single-digit growth in both products. On top of that, handsets revenues had another robust quarter, up 10% versus first quarter '21. Moving to our core fixed business, revenues grew 11.9% year-over-year, driven by 26% expansion of FTTH, which on a 12-month basis is getting closer to reach the landmark of BRL 5 billion in revenues. Additionally, B2B data, ICT and digital service continue to outperform, up 13.1% year-over-year as demand for complete solutions continues to grow the company, increasing the additional footprint.

Moving to Slide 7. Here we show how our operating results confirm that our customers continue to choose Vivo when opting for high-quality connectivity. We closed first quarter '22 with 85.3 million mobile access, up 7.1% year-over-year with an impressive 10.6% increase of our postpaid base. This performance was driven by continued prepaid to hybrid migration, while churn remained at historical low levels and portability figures more than doubled, hitting another record. In fact, around 25% of all net additions in the quarter came from other carriers, which attests that the strength of our brand, good value proposition and unmatched customer experience are paying off.

Regarding our FTTH operations, we expanded our homes passed by 4.2 million premises year-over-year, reaching a total of 20.5 million HPs in 341 cities, while connecting 1.1 million new customers, that's totaling 4.8 million homes connected. For the foreseeable future, we continue to execute on our convergent strategy that is being spearheaded by our Vivo Total offering, which truly bundles FTTH broadband, mobile postpaid and digital services in a single plan. We believe that this solution will be key for us to reach our targets in terms of FTTH penetration, while reinforcing our strategy of increasing the lifetime value of our customer base.

On Slide 8, we update our digital B2B figures, which is composed of high-growth tech service that already account for 5% of our total revenues. We closed the last 12 months ended in March 2022 with BRL 2.2 billion in B2B digital revenues, growing an impressive 41% year-over-year. Cloud businesses continue to command this performance by nearing triple-digit growth rates as we distribute the best solutions available in the market by partnering with companies that are hyperscalers adding managed services. In addition, IoT and messaging revenues rose 32% year-over-year, while digital solutions grew 24%. These positive figures reflect our successful strategy of providing our B2B customers a wide range of solutions that go beyond connectivity, leveraging one of the most relevant B2B omnichannel platforms in the country.

On Slide 9, we provide more color on the new elements of our B2C digital ecosystem that will help us leverage this development even further. As you know, we announced the creation of Vivo Ventures with an initial investment of BRL 320 million to be disbursed over the next 5 years. The goal here is to acquire 10% to 20% stakes in up to 20 growth stage start-ups with pre-money valuation of over BRL 100 million, which must be focused on providing innovative solutions related to entertainment, smart home, financial services, education, health or another segment that have relevant cross-sell potential with our current value proposition. With that in mind, Vivo increased its participation in the Brazilian tech market, helping the industries to escalate their business, and as a result, accelerate our digital ecosystem, while profiting from the financial return that these players can potentially provide us with.

Going to the right-hand side of the slide, we show how our existing services have adapted to the change in consumption patterns of our customers. In this sense, we recently launched Vivo Play, a CapEx-light video streaming platform, offering access to live channels that can be bundled with a wide range of over-the-top applications for affordable prices starting from BRL 29.9 per month. Currently, we have the third largest telco in the world in terms of number of partnerships with different content providers of testing the attractiveness of key -- Vivo's key assets, such as brand, channel, customer base and billing capability. Moving to the bottom of the slide, we highlight the recent reposition of our mediatech arm, Terra, that runs the fourth largest news portal in the country with almost 70 million unique users and over 650 million -- 650 million pageviews per month. Terra will leverage on its unique big data capability to offer customized data-driven solutions related to content and advertising.

Moving to Slide 10, where we present some of our ESG accomplishments and projects that represent the cornerstones of our company's purpose, Digitalize to Bring Closer. Regarding the environment in the first quarter of '22, we reached 23 operating power plants for the use of distributed generation on track to comply with our target of having over 80 plants in operation by the end of 2022. We have also advanced in matters of governance, equality and diversity. As of April 2022, Vivo elected the new Board of Directors, increasing the number of women to 4 accounting for 32% (sic) [ 33% ] of the new composition. On the diversity front, we hired 375 new black interns, 50% of the available positions, who joined us in the first quarter of this year and launched the Acolhe Platform to promote assistance for victims of races in partnerships with Zumbi dos Palmares University.

Now I pass the word to David to comment on our financial results.

[David Sanchez-Friera, executive]

Thank you, Christian, and good morning, everyone. On Slide 11, we present our OpEx evolution for the quarter, which was up 7% year-over-year. Our cost of service and goods sold that represent 31% of our total expenditure grew 10% year-over-year as we expand our exposure to high-growth services such as the digital solution being offered by B2B and B2C. Moreover, as our handset sales grew double digit in the quarter, we felt a similar impact on cost of goods sold.

Moving to the cost of operations. Here we continue to capture gains arising from our digitalization efforts and efficient financial management that helped reducing spending on customer service and bad debt. Inflation impact online such as personnel and third-party contract led to a year-over-year growth of 5.6% in these cost buckets that represent 69% of our total OpEx. All in all, we were able to maintain the cost evolution well below the inflation registered in the period, which is clearly a positive result.

Moving on, Slide 12 show that Vivo has been able to improve CapEx allocation and grow its operating cash generation. We ended the quarter totaling BRL 1.9 billion in investments directed to the most up-to-date technologies. In this sense, fiber remains at the centerpiece of our strategy, representing around 1/3 of our CapEx. It's also worth noting that we have already started investing in the deployment of 5G, leveraging on the spectrum we acquired last year. As a result, our operating cash flow measured as EBITDA minus CapEx rose 4.8% in the quarter, amounting to BRL 2.6 billion. This allowed us to reach a sound operating cash flow margin level of 23.2%, monetizing the incremental revenues generated in the quarter.

Now on Slide 13, we show that our free cash flow grew double digit regardless of the reduction of net income in the period. In the first quarter of this year, our net income dropped 20% year-over-year, mainly impacted by non-cash items such as increasing depreciation and amortization that is mainly related to the amortization of our recently acquired 5G spectrum licenses. The later also led to higher debt, which coupled with growing interest rates, increasing our financial expenses. Nevertheless, we were able to generate BRL 2.5 billion of free cash flow, up 12.6% year-over-year, which was 3x higher than our net income.

Moving now to Slide 14. Our strong cash generation allowed us to deliver second to none shareholder remuneration, while accommodating for our investment needs and inorganic transactions done recently, maintaining a low level of debt as we registered a net cash position before leases of BRL 2.9 billion in the quarter. In this sense, over the last 12 months, we declared BRL 6.3 billion to our shareholders in the form of dividends and interest on capital. On top of that, in the first quarter this year, we invested BRL 115 million in share buyback and plan to continue executing the program in place until February 2023, while maintaining our historically high payout levels.

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

[Operator]

[Operator Instructions] Our first question comes from Bernardo Guttmann, XP.

[Bernardo Guttmann;XP Investimentos;Analyst, analyst]

Actually, I have 2 questions here. The first one about the margins. I would like to understand if there is any other element besides Oi Mobile that could drive the EBITDA margin up in the coming quarters, perhaps digitalizations too has some positive marginal effect here? And the second about the synergies, I would like to understand basically the company's rationale for not giving more complete guidance that reflects the market repair and its revenue synergies. If you could add a little more color on this front?

[Christian Gebara, executive]

Bernardo, this is Christian. I'm going to go to the second and then I'll leave the view of the first, okay? I think we have always gave a lot of clarity related to OpEx and CapEx. And for the moment, we believe that it's what we can assume as a very strong and very reliable number, and it's a very high number for synergies. So we understand that serving these customers the best network in the Northeast, mainly where we are getting the 12. -- most of the 12.5 million customers, where we have not only the best Internet mobile network, but also the best channel, both offline and online, and all the other assets that Vivo can leverage to offer to these customers, it's a lot.

So we are very confident of the ability to capture all of this, and add to that, the frequency there we get nationally that we offer as a much better services and CapEx avoidance for the whole geography. Of course, we do also believe that going forward, our ability to cross-sell or sell much more services to this customer base considering that we can offer by a convergent offer, fixed plus mobile that we can offer digital service, that we can also on this ecosystem that we are deploying in health, in education, and entertainment that can also be very attractive, also the financial services that we are deploying, Vivo Money, Vivo Pay, could also be very beneficial to these type of customers considering they are mostly hybrid and prepaid.

But for the moment, I think we are fine and very positive with the synergies that we presented that we will certainly capture it, but, of course, we believe there are upside going forward in managing better this customer base. And also, why not capturing more customers around the country that may choose Vivo as their preferred provider. Regarding margins, I give to David, and then there's anything I complement.

[David Sanchez-Friera, executive]

Bernardo. So regarding the margin, I mean, if you look to the margin, we have this quarter, it's almost 40%, which is a very strong margin. And if you look to the details of the costs, you see 1/3 of the costs are somehow linked to the new sales revenue that we have around B2B and also cost of goods sold on equipment and handset. So the more we grow on those costs, the more we will grow also on revenue. That's why we have a record growth on revenues for the last 6 years, as we are growing 4.6%. But if we look to the cost of operations, the rest of the costs that represent around 70% or 69% of the total costs, you see that mainly the only cost which is growing has to do with personnel costs.

On the rest on the other one, particularly commercial infrastructure is almost flattish, G&A also down, [ EBITDA is ] also down. So we see that there's a potential, and the team here is working very hard to accelerate the digitalization that is helping us to reduce those costs and also to improve the quality of our service. Now for -- so for the future, we see that some of those trends will continue. So we'll continue digitizing. There is still plenty of space in both in back office and front office.

But on top of that, I think we're also changing the mix of the costs. So I think that before used to be CapEx, now they are turning into OpEx. And let me give you an example on the deployment on fiber on these neutral fiber networks, we are seeing that now we are reducing our intensity in CapEx, which is a very good news in terms of our return on capital. But in the other hand, perhaps, we are not growing as much as we were growing before on EBITDA margin. So now we suggest that it's better to look to operating capital margin, that if you look to the case of Vivo this quarter, we are showing a 23.2%, which is, again, we believe record in our industry, and we are growing also year-over-year that is was [ 33.1% ].

And as you mentioned and Christian mentioned the synergies, the synergies that we have declared have to do with OpEx and CapEx, that mean that we will be able to have incremental revenues coming from the revenues from a customer from Oi without or limited costs in both OpEx and CapEx. So the figures, these are the margin that will benefit from the integration. So the answer is yes, there's space...

[Christian Gebara, executive]

Yes. And operating cash flow, apart from the margin of 23.2%, we had a growth of 4.8% year-over-year. So that also contributes to what David just said about the view on the operating cash flow.

[Operator]

Our first question comes from Leonardo Olmos, UBS.

[Leonardo Olmos, analyst]

I have a couple of questions. The first one is more strategic and the second is more financial. The first one is regarding Vivo Money. If you could discuss the growth in credit portfolio and what's the potential to see in this product? And also Vivo Ventures, kind of a similar question, what type of investments that you see that are on your pipeline? What can you tell more about Vivo Ventures? And the second question is related to financial expenses. It was way above what we expected. And we want to understand if we should expect similar net financial expenses in the coming quarters? I'm talking about BRL 0.5 billion in the first quarter or should we expect BRL 2 billion for net financial expenses for the full year '22?

[Christian Gebara, executive]

So, this is Christian. I will start with Vivo Money and Vivo Ventures, then I hand it to David, okay? So Vivo Money, I don't know which type of detail you need, but we launched this in October 2020, okay? So we've been very conservative in deploying the service because we want to do it right, especially because we are normally dealing with our own customer base. So once we get into the financial service, we need to do that in a way that we preserve the customer experience that this customer they have when they are dealing with Vivo.

Our loans or credit, it ranges from [ 1,000 to 50,000 ], that's the maximum. In the first quarter of '22, the number of contracts, they grew 4.7%. So we have now more than 10,000 customers already using the services, and we already lent BRL 52 million, okay? That's more or less where we stand right now. So that's what we are growing in the origination of new contracts and we are growing also in the money that we are lending to customers. What we are trying to do here apart from lending money is trying to associate this with our portfolio. Here, I'm talking about devices and accessories, how can I use this platform to leverage the sales of handsets and devices in our own stores, online and offline. So we started doing that right now, just started as an option for payment of a new device. Of course, they need to go through our credit approval and that we have been conservative, as I said, considering the situation that we faced in Brazil in credit.

So far the funds that are [ raising approval ], which are for the moment, we are the only participant. So we may consider having other participants, but for the moment, we are doing that with for all funds. So that's the situation that we have for Vivo Money. It's growing. And we've been trying new segmentation and also new type of combined value proposition, as I said, together with the sale of one device. I'm going to go to the second for the first -- okay, second part of the first question, if you don't have any more questions with Vivo Money.

If you go to Vivo Ventures, we announced in April 11, the creation of our Corporate Venture Capital Fund. Here in Brazil, we have Vida that it's -- was very relevant, but very focused in seed money, okay? So we invested on average, BRL 1.5 million and was in the very seed stage of companies. And we did that with successful investments, and I mentioned the recent ones, Alicerce in education, Gabriel in security, Olivia in financial tech, among -- [ Gapi ] in HR and among others.

And we realized also that apart from the investment that was very limited because we didn't have the fund -- we didn't have the strategy of going in the growth stage that we could have an opportunity also to follow some of these investments in the growth stage in the next stage of their development, consider that most of them were very successful. Also, we realized that most of these companies when they were successful, they were leveraged also in Vivo's assets. So they were connecting to us.

We could be also a customer of this company, not only for our own services as the case of Gapi that as an HR company, but also blending their services to our value proposition in the case of Alicerce or others that we are planning to do in the near future. So getting money from Vivo has 2 values, not only the money by itself, but also being -- having the access of assets that we can offer that is our customer base, our billing capability and the strength of our brand. So we decided to do more and go to the next stage that is the growth stage. So we established this Venture Fund, there's going to be over 5 years, BRL 320 million.

The tickets here will be larger than -- higher than the one that I told you about Vida, that was [ BRL 1.5 million ]. Here, we're talking about [ BRL 15 million to BRL 20 million ] tickets per company. We expect to get up to 20% of stake in this company. So pre-money valuation we are considering here between [ BRL 100 million and BRL 200 million ]. The focus will be mainly in the B2C ecosystem. So we're talking about entertainment, we're talking about health, education, logistics and e-commerce platform like smart home connectivity, so everything related to the vision that we also presented in our B2C ecosystem. So if I have answered your questions, now I will give to David, and I complement anything in about the other one.

[Leonardo Olmos, analyst]

Yes, very much.

[David Sanchez-Friera, executive]

Leo. So let me answer the second one. I mean you're right that you say the financial expenses in the quarter are growing 60% -- above 60% year-over-year. And let me give you -- explain you what are the key reasons and then we can talk about what should be the -- I mean, the outlook for the future. So the first reason why those costs are going up, it's because the local interest rate has gone up. So if you look at the interest rate 1 year ago in the first quarter last year, was around 3%, now we are talking about 13%. So 10 percentage points off.

The second reason is last quarter last year, we acquired the 5G frequency. And this, of course, this has an impact on financial expenses. When you look to the IFRS 16, which are the debt coming from infrastructure, it's almost flattish even though we increased it slightly, BRL 700 million year-over-year. And then the fourth one, the 4 reasons why those costs are going up, it had to do with the monetary update of some of the, let's say, non-financial liability that we have in our balance sheet, particularly when we talk about provisions and so on, we need to update those provisions every quarter based on interest rate.

But these are not cash items. So -- because if you look to the evolution of the free cash flow, we have seen that we have a growth of 12%. So having a higher financial expenses doesn't need to be a negative thing. So we are investing -- we are improving the capital structure of the company. And we are bringing assets that would generate even more value to our shareholders. Here, we are talking about 5G last year. And we are about also -- we show in the next quarter the acquisition of Oi. But at the same time, our free cash flow is going up with a better mix in our balance sheet. So these costs will continue going up through the year. But all in all, we believe that this is -- I mean this is positive for shareholders and this we are generating value as we are acquiring assets that will bring a higher return for our shareholders.

[Operator]

Our next question comes from Victor Ricciuti, Credit Suisse.

[Victor Ricciuti Gomez, analyst]

I have 2 from my side, the first one regarding repricing. So as inflation has not decreased yet, what are Vivo's plan around repricing for 2022? And do you plan on repricing pure postpaid more actively this year or should it be seen more on control plans? And the second one is regarding B2B. So Vivo has been reporting strong growth in its business, and you've stated that you expect to continue growing in the future. But as B2B has an intrinsic [ lower ] over EBITDA margin, how do you see margins going forward? Should we see it partially offsetting the benefits from Oi?

[Christian Gebara, executive]

So Victor, this is Christian. [indiscernible], B2B, we are very positive about our strategy. As I said before, we have the best channel, omnichannel. So we have like -- it's only for you to have an idea, 5,000 B2B reps visiting customers. And we -- as we stated a long time ago, our strategy here is to be the technology partner of these customers. So we're going to beyond connectivity. Although connectivity is still relevant, and you could see that our data revenues also increased, we are selling much -- many more services. And here the focus will be mainly in cloud, IoT and cyber. Actually, Telefonica established 3 companies that we have here in Brazil as well, one focus in Telefonica tech, one focus in cyber, another one in IoT, and the third one in cloud. So the services are going to be part of the value proposition.

Yes, you're right, the margin is lower, but they are -- in most of them, the CapEx is almost inexistent. So as David stated before, we should look for operating cash flow. We may give up some margin in EBITDA, but in operating cash flow, we're going to contribute a lot to the future of the company. And moreover, we are developing a very strong relationship with these customers and that will be all may be the sole technology provider. So when we see in our number, almost like 100% growth in cloud, even if we are selling hyperscales, we are combining that with managed services. So that's why we have the differentiation relationship and the credibility to be there help the customer, not only buying the service, but implementing these services in their company.

So positive continue with the strategy, happy with the number that we have in the last 12 months, BRL 2.2 billion in digital service for B2B, although margins are much lower than the one you use for connectivity. The CapEx is also a different story from what you use also when you deploy 5G or fiber. So that was the first one. The second one, B2B is repricing -- you're talking about repricing of all services? And if I answer on B2B...

[Victor Ricciuti Gomez, analyst]

Yes. Exactly. What are Vivo's turn around repricing for 2022? And will you plan on being more active on postpaid -- pure postpaid repricing or should we see happening more on control plans?

[Christian Gebara, executive]

No, we are doing like the inflation repricing in both. We are doing -- we did part of hybrid already this quarter, and we're going to do more in the -- maybe in between the second and the third quarter. In postpaid, we're also doing in the second, the third quarter the repricing following the contract that we have, and we are doing also in fiber. We did part of it in the beginning and we're going to do also that along the year. So we are reflecting repricing as inflation is going up.

In the prepaid, although our ARPU increased, our revenues increased, we believe there is opportunity of repricing. So we need to follow the market and also is expecting competitors to follow this trend of also repricing prepaid upon inflation. I think that's the segment where the market hasn't followed inflation evolution so far.

[Operator]

Our next question comes from Marcelo Santos, JPMorgan.

[Marcelo Santos, analyst]

I think the first question would be about the sustainability of the pace of net adds in fiber. We have seen some of your competitors claim that the current environment is tough and to attract quality customers who need to be in a lower number, but you continue to add at a healthy pace. How do you see this going forward given this macroeconomic environment? And the second question is more on the mobile. So we were gaining on prepaid to hybrid migration. But given this inflationary environment, how do you see this continuing? Is there still further space? Your prepaid base is already pretty small. So are we reaching the limit or is there further space [ picking ]? These are the 2 questions.

[Christian Gebara, executive]

Okay, Marcelo, I'm going to go to the second, then I'll go to the first. Our prepaid base is not small, no, I wouldn't say that. We have -- we grew the prepaid base. So we have 334.4 million customers. And actually, we are also receiving customers from Oi. So I would say that our prepaid base is very relevant. And if you consider our mobile customer base, we grew in this quarter year-over-year, 7.1%, 2.2% in prepaid and 10.6% in postpaid. Of course, we still have the strategy and I think a very successful strategy of migrate prepaid to postpaid or prepaid to hybrid in this case, and we believe that there is room to continue doing that. And we are very happy to be still very attractive as the destination of prepaid customers because we are growing our customer base.

So we continue doing that. And we're going to continue doing also the migration from prepaid to hybrid, but also attracting customers from pure postpaid. So as you see, I think also in the presentation, we show the net portability of Vivo is growing. It's growing much more than it grew in an year before. So we multiply like the number that we had in the first quarter of '21 by 2.1x. So it also shows that we attracted also for customers not only from our own customer base, but customers coming from the other operators. And in the postpaid churn also even in this complicated macroeconomic environment that you said, we still keep postpaid churn in 1.2%.

So if I will answer also FTTH, Marcelo, and if you have more questions, I come back to mobile. In the FTTH, we are #1 company in the FTTH deployment. So we reached 20.5 million home passed. We are in 341 cities. We also increased by 1.1 million the number of customers connected with our FTTH services. So although there is competition, of course, there is the macro impact, maybe the other competitors that are giving you the overview of the market, they don't have the same footprint that we do, and also the possibility of blend together, fiber with mobile and digital services.

So even if the situation in the macro is challenging for everyone, we believe we have assets that are difficult to replicate at the moment, especially the composition of our value proposition, the footprint of our channel, that is 1,700 stores, the door-to-door, the e-commerce and the app, Vivo, and also the combination of digital service that we have partnerships of many and the most relevant [ video watch ]. So if you see the numbers of share -- evolution of share in FTTH market in the last months, you could see, although the market didn't grow the way it used to do in the past, Vivo is capturing share from other operators.

[Operator]

Our next question is from Joshua Mills, BNP Paribas.

[Joshua Mills, analyst]

Just a couple from my side. The first would just be on the inflation effect. So if you could firstly talk about how the mechanism for putting through inflation-linked prices to your contracts work this time period? Is it an automatic thing or do you have to go out and ask them voluntarily to take those services? It sounds like everyone in the market is putting prices up.

So it shouldn't be an issue. But just a bit of clarity on that mechanism would be great? And then secondly, talking about the impact of inflation on your cost base, you talked about the impact on labor costs this year. How should we expect that to develop into the second half of 2022 and also 2023, given where Brazil inflation is? And when you make the agreements with your workers, is there any contract term in there already, which directly links payment to inflation?

[Christian Gebara, executive]

Joshua, this is Christian. Let me start with the first question. I think the revenue mix that we have is unique here in Brazil, because we have the recurrency of payments that we received from most of our services. So the penetration of postpaid fixed services and in Vivo's total revenue is much higher than any other. So we could say that 80% of our revenues are recurrent. So people paying the bill with a monthly fee. In this case, we have by contract, the right of increased price with inflation. So we are covered in this sense. And, of course, there is also handset prices that are always driven not only by inflation, but dollar price, excess rate, and we've been always giving it in the price point that we sell it, because we could not absorb this exchange or inflation evolution.

Well, we don't have 100% associated with inflation that I described before, the prepaid revenue that in our increase represents less than what all the other revenues that I described before. In prepaid, it depends more in the market dynamics. We believe we should increase price. Price has been very similar in the last years, and there is opportunity regarding the inflation that is now in its peak to increase prices in this segment as well. All the rest by contract, we have the ability to increase and been doing so in the last quarters. If I respond -- if I answer your questions in revenues, I will give it to David to talk a little bit more about costs, Joshua.

[David Sanchez-Friera, executive]

Joshua, as I mentioned before, I mean, we have the ability to be able to being also part of a large group, Telefonica to negotiate some of the costs with vendors, allowing us to have some of them down year-over-year despite having an inflation on [ digital ]. Particular, talking about the labor cost and personnel costs, here, we are trying to renegotiate every year, and this year will be in September. Unfortunately, we cannot disclose any information, but it's something that we will start say in a few months to see what will be the impact for the future, but we cannot disclose anything at that moment.

[Joshua Mills, analyst]

Great. And so maybe just one very small follow-up. On energy costs, which quite a few telcos have talked about as a rising headwind. How exposed are you there, and do you have any hedging mechanisms in place should energy costs rise in the future?

[David Sanchez-Friera, executive]

So regarding energy costs, even though, I mean there is a pressure on that one, here, we have been working over the last few years to be in a company more sustainable, but at the same time, to have also some savings. So we have already having a high percentage of our energy coming from different alternative sources that bring the unitary cost significantly below what should be in the market. So we are hedging here with the local market on different instruments. So we have not been penalized perhaps as other markets or other companies on that one. Even though it's a relevant cost for our base, but it's a cost that we are managing to have it below inflation.

[Operator]

Our next question comes from Fred Mendes, Bank of America.

[Frederico Mendes, analyst]

I have 2 questions as well. I think the first one is more like a follow-up from the last question about the mobile front. But it's more like a reconciliation as well. I mean when I look at the numbers, I mean, you increased your base of clients on the postpaid by 7.5% year-over-year, and mobile service revenue growth was at 6%. And you had a price increase in July to have returns of 8%, right? So just I mean, once I look at the net adds -- on the postpaid net adds, it looks like they are entering at a very, very low price.

I do understand that this upselling, they usually enter at a very low price, but just want to get a view from you at which level these guys are entering or if in order to get to sell the [ 4P ] a bundle, you are eventually giving us some price on the postpaid to get a higher overall view? That will be my first question. And also as a follow-up pretty much from this one. If you keep your net adds at the same level, we should see mobile service revenue growth acceleration over the next quarters as we increase price, right? This should be -- and I know that you don't give a guidance, but that should be the trend as long as you keep the net adds at the same level?

[Christian Gebara, executive]

Fred, this is Christian. Yes, maybe your calculation is correct. So we are not giving trend. Regarding the additions of new customers, no, they are not entering in a very low price, that's not correct. I think the mix, if you consider postpaid, there is a combination of mix that the hybrid is growing faster and it's contributing to the effect of ARPU. But it's not that we are lowering price, and also the impact of the convergence is not at the moment affecting the mobile ARPU. Although we are very focused in customer ARPU, and we're going to do more of this and try to give you more clarity on these numbers because we want to having this very large customer base trying to sell more customers, sell more services to the same customers. So we're going to do that fiber and mobile and digital services.

At this moment, what we could show you is that, yes, we had a very strong commercial activity in both prepaid and postpaid. In the postpaid, we increased migration from prepaid to hybrid, but also we captured a lot of customers from the market, as I said before, the portability went up. So it's more of a mix, hybrid and postpaid rather than the entry point being low. And also the price increase, we didn't do all of the price increase that we're expecting. We are following the right timing of the contracts to do price increase. So there are some price increase still to be done in hybrid and pure postpaid this year that may impact the total revenues. But we are very positive of our commercial attractiveness and then the ability to capture more customers and also migrate customers from prepaid to postpaid. As in the previous question, they were asking, the base is still very large and is getting larger and give us ability to have a lake to be able to migrate more. That's I think [ of the 2 ] questions. So yes, we are positive about the future.

[Frederico Mendes, analyst]

Perfect. Perfect. Thank you, Christian. Very clear. And if I may, just a follow-up here, just try to understand the dynamics. When you have a price increase, let's say, you have a price increase to 50% of your base, do you see usually a lot of downgrades of the plan, which means that you're giving the price increase, let's say, that goes through your base, but actually, the client, it takes a lower ticket plan, it doesn't count as a churn. Is that something that help -- that happens a lot or you actually, once you have a price increase, the impact of the price increase is much higher than this, let's say, downgrade of plans in your base?

[Christian Gebara, executive]

Fred, yes, you answered the question, yes, in that, yes, it's higher than the downgrade. We -- you -- we had our downgrades since the beginning, not only now, I think we've been able to manage it better. And -- but there is some feel, yes, but the impact is more positive than negative, and I think that's the dynamics. What we've been now trying to do more is how do you increase price and what are you offering? So we are going to digital services combination, that is also helpful, because in the past, as you remember, I would give more data. Now sometimes you do that, but then we need to plan things out, and also that we are doing upgrade with digital services, and now we're trying to do also combination with the fixed. So that gives us room to do upgrade of ARPU, ARPU of the customer and not ARPU of the services and keeping the customer much more loyal.

[Operator]

The question-and-answer session is concluded. Please, Mr. Christian Gebara, go ahead.

[Christian Gebara, executive]

So thank you, everyone for joining our call. We are very happy and positive about the good start of 2022, and very enthusiastic about the rest of the year given our strength in the commercial activity and portfolio, and the strategy that we defined some years ago be in place right now giving this great outcome. So any other questions that you may have, our team here is totally available to answer them. So thank you once again.

[Operator]

Thank you. This concludes today's Telefonica Brasil first quarter 2022 results conference call. You may disconnect your lines at this time. Have a nice day.