Telefonica Brasil SA

BOVESPA:VIVT3

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefônica Brasil Third Quarter of 2020 Earnings Conference Call. Today, with us, representing the management of Telefônica 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 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. [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 Telefônica Brasil. Mr. Plaster, please begin your conference.

[Luis Plaster, executive]

Thank you. Good morning, and welcome to Telefônica Brasil's conference call to discuss third quarter 2020 results. The call will be divided as follows: First, our CEO, Christian Gebara, will comment on our operational performance and give an update on the steady recovery of our top line, then he will go over our commercial initiative and accelerated FTTH expansion. Then our CFO, David Melcon, will comment on cost management, investments and financial highlights. To conclude, Christian will comment on our ongoing ESG initiatives and then move to the Q&A session. Now I hand over to Christian.

[Christian Gebara, executive]

Thank you, Plaster. Good morning, everyone. Thank you for taking the time to attend the third quarter 2020 earnings call. I would like to start by talking about Vivo's strong operating performance in key segments that confirms our consistent operating improvement and our once again robust cash flow generation.

In mobile, Vivo's leading position in terms of quality and customer experience resulted in 844,000 postpaid net additions. Currently, our postpaid customer base accounts for almost 60% of our total mobile access. In this quarter, we also posted another set of impressive addition in fiber, a key lever for future revenue growth, that saw record net adds for the third quarter in a row with 267,000 new customers, reaching 3.1 million homes connected.

As you can see on the right-hand side of the slide, our mobile service revenues fell minus 1% year-over-year and the impact of temporary confinement measures still lingers in some segments of our business. On the other hand, the same line grew 3.3% quarter-over-quarter, which supports our more optimistic build that is a typical effect that soon will have less impact on our operations.

Our fiber revenues, made up of FTTH and IPTV, increased 47.3% year-over-year and 14.5% quarter-over-quarter. This impressive evolution is fueled by our efforts to expand our fiber footprint and the strength of the product that proved its unique value in terms of best-in-class connectivity for our customers.

Shifting to costs. We remain focused on our digitalization and simplification initiatives that helped to reduce recurring costs ex cost of goods sold by 3.4% year-over-year, taking EBITDA margin to 40%, advancing 0.3 percentage points quarter-over-quarter. Lastly, driven by the resilience of the business and our efficient and rational CapEx allocation, we registered solid cash flows throughout the year, posting BRL 7.5 billion in operating cash flow into September, expanding the margin 3.4 percentage points year-over-year to 23.5%, highlighting that with efficient financial management, we were able to deliver BRL 8.9 billion of free cash flow, 50% higher than the same period of the previous year. In fact, in the first 9 months of 2020, we reached a higher level of free cash flow than in all 2019.

On Slide 4, I would like to show how Vivo has been able to consistently recover its revenue to its crucial role in the delivery of high-quality connectivity. Postpaid revenue showed an evolution of 1.2% compared to second quarter 2020, as net additions started to recover with the opening of stores. And prepaid continued its sharp advance, increasing revenues by 13% quarter-over-quarter.

In our fixed business, FTTH sales continued to outperform, growing 16.8% quarter-over-quarter, supported by the expansion of our fiber footprint and continues at full speed.

Finally, handset sales rose 90.3% in comparison to second quarter '20 since almost all our stores are now open. All things considered, we can see the business value proposition along with the growing relevance of customers' digital lives are proving key to the fast and sound recovery of our business.

On Slide 5, you can see that our total mobile revenues remain stable as we continue to feel the impacts of temporary confinement measures that were partially offset by the positive evolution of handset sales and prepaid. Handset revenues increased 10.1% year-over-year as the impact of the pandemic on stores' operations started to ease.

Mobile service revenues fell minus 1%, mainly because of a difficult comparison base versus the third quarter of 2019 when we implemented significant price increases at the beginning of the quarter. In the third quarter of 2020, the increases took place at the end of the quarter and impacted a smaller portion of our postpaid customer base.

Prepaid revenues grew 5.8%, driven by continuous efforts related to client acquisition and customer base management that were responsible for the encouraging level of net additions in recent months and higher recurrence of top-ups.

Moving to the right-hand side of the slide, we showed the postpaid that accounts for 57% of access, and 80% of mobile service revenue has seen ARPU recover to prepaid COVID levels as we continue with our more for more strategy.

Prepaid, which accounts for 43% of mobile access and 20% of mobile service revenue saw its ARPU grow to level of both first quarter '20, and the strong level of net additions will allow for higher migration to postpaid going forward.

Moving to Slide 6. In the third quarter '20, we again reaffirmed our mobile leadership supported by our superior customer experience and quality of service. Our overall mobile market share stood at 33.3%, the highest in the last 14 years. And we had a significant improvement in postpaid churn that reduced 0.56 percentage points year-over-year and is now at the lowest level in 5 years.

On the bottom left-hand side of the slide, we show the breakdown of prepaid's ongoing performance. This quarter, we had 1,466 net adds, the highest level since 2012 because of our continuous efforts to attract new customers and improve customer base management.

Finally, postpaid reverted last quarter's trend of disconnections and posted strong additions in Q3, 427,000 as commercial activity started to pick up and migrations from pre to postpaid posted stronger results.

On Slide 7, we show that our fixed revenues dropped minus 6.6% because of the maturity of voice, our strategic decision to stop selling FTTH and Pay TV and CapEx optimization for copper-based services. On the other hand, we see very positive trends in fiber business that continues to transform the mix.

On the right-hand side of the slide, you can see that growing businesses were up 8.3%, increasing their relevance over fixed revenues and now account for 60% of the total. This trend shows why we are confident that the segment will be the driver of future growth. Our FTTH and IPTV revenues drove further success of our accelerated fiber deployment. FTTH revenues were up 56% year-over-year, while IPTV were up 26.9%, resulting in a combined growth of 47.3%.

Now moving to Slide 8. Our cutting-edge fiber products continue to attract more and more customers. As a result, we posted record FTTH net additions for the third quarter in a row that now represent half of our broadband customer base. FTTH net adds totaled 267,000 in the third quarter '20, reaching 3.1 million access, a 34% year-over-year increase. Broadband ARPU rose 17% year-over-year to BRL 77.7 as FTTH customers have significantly higher ARPU than those from other corporate-based technologies.

Moving to the right-hand side of the slide to present the growth of our IPTV business. IPTV access increased 26% year-over-year, contributing to the improvement of Pay TV's ARPU by 2%, reaching BRL 108.

I would like to highlight that these impressive figures are the combination of our accelerated entities deployment plan with the strength of the product we are delivering. Fiber connectivity is a future-proof technology whose demand is consistently growing, driven further by current home office and home schooling needs.

Moving to Slide 9. This quarter, I would like to present the distinct set of capabilities that Vivo had to capture opportunities and create value in the digital space. Vivo is the largest and most recognized telco in the country with 94 million access and one of the top 8 most valuable brand in Brazil estimated at $2.2 billion. That felt -- with the almost 19 million unique users that access our e-care app, Meu Vivo, our more than 1,600 stores that make us comparable to the largest retailers in Brazil, and the 200 million visits per month with our Terra home portal show the potential reach and capillarity that the company has in the Brazilian technology market.

Vivo is a gateway for the digital life of our customers. And for that reason, we launched additional marketplace that offers everything technology-related at our online store. Just to mention other examples of our ability to expand our reach, I would like to highlight the following initiatives. We recently launched Vivo Money, a digital loan platform that offers fast and safe personal credit to postpaid customers based on credit scoring that uses our big data to improve accuracy.

Vivo also signed partnerships with various apps and OTTs to offer co-branded mobile plans, where data and digital services such as Spotify, Netflix, and Rappi are jointly promoted as equal business offers and propositions. The same strategy has been used to sell fiber plus OTTs such as Netflix and Amazon Prime Video.

Furthermore, we are venturing into other segments such as e-health and education to capture even more opportunities. One of them, Vivo Meditação, a wellness app focused on meditation and mindfulness, had more than 1.6 million downloads since its launch in July 2017. Another recent initiative is our strategic partnership with Yalo and Dr Consulta to offer benefits in health services to Vivo customers, which represents our first step toward a more relevant participation in that sector.

Moving to Slide 10. We had another quarter with impressive results regarding our fiber deployment that continues at full speed, adding an additional 1.5 million FTTH homes passed for footprint.

In Q3, we entered 28 new cities with FTTH, reaching a total of 244, and we expect to end this year with 268 cities. We continue our organic expansion while also accelerating the overlay of copper and FTTC networks that allows us to improve net adds and ultra broadband ARPU while protecting our customer base.

Additionally, I would like to point out that the creation of our neutral fiber vehicle is advancing as planned. Several investors have demonstrated their interest in the project. And we are confident that, as they hope, it'll be operational in 2021.

Finally, as you can see on the right-hand side of the slide, we reached 14.6 million FTTH HPs, homes passed, in the third quarter '20, and we expect to reach approximately 16 million HPs at the year-end. With that, we will more than double the number of cities launched and homes passed when compared to 2019.

Now I'll pass it on to our CFO, David Melcon.

[David Sanchez-Friera, executive]

Good morning, everyone, and thank you, Christian. On Slide 11, we show how our persistent cost efficiency supported by digitalization and simplification initiatives reduced costs by 3.4% year-over-year. G&A and personnel costs decreased 3.3% year-over-year, benefited by continuous cost control initiatives, but also by government measures such as temporary workday productions. Commercial expenses had an 11% decrease driven by our continuous digitalization and automation efforts and by lower provision for bad debt that decreased 29% quarter-over-quarter. This reflects the increased value that our customers are giving to connectivity and maintaining their payments up-to-date as well as our measures to mitigate the effects of COVID, such as offering the option to pay in installments.

On the other hand, cost of service rendered increased 7.4% in the third quarter, driven by expenses related to network expansion, tariff readjustments and higher FISTEL cost due to the positive evolution of our mobile customer base.

In addition, I would like to present a few figures related to our digitalization initiatives that are the main driver of our sequential cost production story. In the third quarter 2020, we had 11 percentage point year-over-year increase of customers receiving e-bills, reaching 79% of all bills sent, while 63% of the payments were made through digital platforms. We also reduced by 20% the number of calls, so the growing use of e-care channels like Meu Vivo and Aura. We automated 915 processes across the company with the use of robots that allowed us not only to reduce costs but also to improve the customer journey.

On Slide 12, we can see that through efficient CapEx allocation, we're able to deliver solid cash flow generation, combined with the expansion of our FTTH footprint and cutting-edge technologies. In the first 9 months of the year, our CapEx contracted 17% year-over-year to BRL 5.4 billion, driven by our strategy to prioritize investment in growing technologies. That currently accounts for 72% of our total expenditure. This rational approach can also be seen on the right-hand side of the slide, as CapEx allocated to fiber technologies increased 20% year-over-year, while legacy decreased 53%.

Additionally, I would also like to share with you that our network-sharing agreement with TIM is underway and evolving according to expectations. This agreement corroborates our commitment towards OpEx and CapEx optimization.

Now moving to Slide 13. You can see our solid net income generation allowed for the maintenance of superior shareholder remuneration. Net income for the quarter stood at BRL 1.2 billion, growing 25% year-over-year, contributing to the declaration of BRL 2 billion of interest on capital so far this year. Moreover, I would like to remind you about the payment of dividends based on last year's net profit for a total of BRL 5.8 billion. The first tranche was paid in August and the second of BRL 2.2 billion will be paid in December 2020.

Turning to Slide 14. Accumulated free cash flow for the first 9 months of 2020 grew 50% year-over-year, reaching BRL 8.9 billion, surpassing the free cash flow for the whole 2019. These outstanding results were driven by the EBITDA contraction caused by lower economic activity, partially compensated by our strong cost reduction, lower CapEx as we continue to focus investments on growing technologies, lower financial costs and income tax expenditures and working capital improvement as a result of the postponement of some regulatory tax payments and lower CapEx and OpEx disbursement.

Maintaining a robust cash flow generation and solid balance sheet, we continue to successfully implement our strategy and invest in selective assets, making Vivo a stronger company, allowing us to look to the future with confidence.

Now I would like to pass the word back to Christian.

[Christian Gebara, executive]

Thank you, David. To conclude today's presentation, I would like to say that thanks to our increased focus on effective ESG practices, Vivo was chosen as one of the top 10 companies in the new S&P/B3 ESG index.

Regarding our environmental initiatives, we launched a national campaign called Recycle with Vivo to increase the awareness of the proper disposal of electronic waste. This campaign invites, encourages societies to reflect on the necessity of recycling. That can be done in more than 1,600 collection points available to Vivo stores and other strategic points across the country. Moreover, we inaugurated our first biogas power plant in Rio de Janeiro, which will produce more than 11,000 megawatts hour per year, and it's 1 of the 70 renewable power plants in our distributed generation project that we expect to be fully operational in 2021.

Moving to the center of the slide. We had 2 important recognitions in the social dimension. Fundação Telefônica Vivo was the first Brazilian recipient of UNESCO's Hamdan Prize for teacher effectiveness through the Connected Schools project. This project was launched in 2015 to promote the inclusion of educators in the digital ecosystem and foster the development of ICT skills amongst students.

The platform offer approximately 40 digital education courses, covering a wide range of subjects and target basic education teachers from all over Brazil. The success of this initiative was attested by more than 300,000 new subscriptions it had so far in 2020, 3x more than last year.

Another recognition came from Great Place to Work as Vivo was elected 1 of the 150 best companies to work in 2020 and also joined the Early Childhood ranking, highlighting our ability to adopt practices that care for and promote the well-being of children and their families.

To conclude, we took an important step towards a higher level of governance. The conversion of preferred shares into ordinary shares was approved by the Extraordinary Shareholder Meeting and a special General Meeting of preferred shareholders, granting tag-along and voting rights to all shareholders.

They're just a few of many initiatives that we have at Vivo to help society reach a more sustainable future for a conscious consumption of goods, prevention of a carbon footprint, but also to be more equal and just. I would like to invite all of you that are interested in our ESG efforts to have a look at our sustainability report that is available on our Investor Relations website.

Thank you, and now we can move to Q&A.

[Operator]

[Operator Instructions] Our first question comes from Rodrigo Villanueva, Bank of America.

[Rodrigo Villanueva, analyst]

So my first question is related to the process to migrate concessions to authorizations. I was wondering, Christian, if you can share with us your views on this process, how is it going and what are your plans regarding this. That would be my first question.

And secondly, do you see appropriate economic conditions in Brazil to raise prepaid wireless prices? And if so, when would you expect to do so?

[Christian Gebara, executive]

Rodrigo, as you know, this law, the reform bill, the PLC 79, it was signed into a law in October 2019, yes, last year. Now we need to go through the process. So what Anatel is currently doing, they are working on the regulation of this new telecom framework. So they -- in the end of June, they opened a public process to hire, through the International Telecommunications Union, a consultancy firm to support the agency in the calculation of everything related to the migration of the fixed telephony concessions to an authorization.

So there's reversible asset. There are many analyses of the current cost models and many other calculations that they need to go through. So we're still waiting to have more definitions in the coming months, so it's a long process. We started. We're optimistic, but it's still very early for me to say if we're going to reach the right price for this migration. Now, hopefully yes, but it's still in the process of having Anatel getting the support to have the calculation for us to start discussing. So that's in this point.

In the prepaid and the same as in other mobile services, we've been raising -- in the postpaid and the hybrid, we raised price in the -- as I said, in the end of the third quarter, not as we did in the last year that we raised in the beginning of the third quarter. The increase is lower than we used to have because inflation is much lower as well. But we keep our strategy of giving more for more. So I think we've been successfully doing that.

In the prepaid, we've also been increasing our offers. It's difficult to talk about specific offer in the prepaid since we have different ones. We've been trying to drive our weekly and biweekly offers to drive prices up. We are not giving as other competitors are giving lots of social networks for free. So I think we've been very, very rational, although the market in the prepaid specifically, as you mentioned, still hasn't acted or performed the way we expect as we are moving prices. So I would expect more price increase in the prepaid has happened than the hybrid and the postpaid, but we don't see this movement with our competitors.

So let's see what happens in the next months. I think we had a very strong result with prepaid this quarter. I think the flight to quality proves to be right in moments where people needed to be connected. So we could see a robust net add for FIFO, an increase in revenues for prepaid. And we are still trying to move price up as far as we can do that, specifically in offers that have more frequency than our -- than weekly and biweekly offers that Vivo has at the moment.

[Operator]

Our next question comes from Marcelo Santos [ Berco ], JPMorgan.

[Marcelo Santos, analyst]

The first is just following up on the prepaid success. Did this also have anything to do with some sort of higher focus on Vivo, on prepaid? Some initiatives you need to drive this very, very strong result? So I think that's the first question. Any change in strategy?

And the second question, on the legacy business in the fixed line, we saw a steeper deterioration. If you could please comment this breaking down and how much of this is the economy, how much is the lower focus or maybe higher competition from other fiber players? So just trying to understand what -- why it's getting worse.

[Christian Gebara, executive]

Marcelo, thank you for the question. First, on the prepaid, you're right, we had a very strong result of 5.8% year-over-year growth in prepaid. So we had it in the open and to compare to the quarter, it's a 13% increase. I think that there are many, many things related to this performance, the first one I answered to Rodrigo before. I think when quality and -- is required, Vivo stands as the #1. So I think people are now home office, home schooling, home entertainment. And when you need a good connection, if you consider the penetration that we have, the 3G plus 4G, 4.5G together, we are the top one. So I think that's the first one.

Second one, I think we have been working then with a lot of capabilities in managing our customer base. So I think we've been doing that well, proposing the right offer to the right customer to improve the engagement with Vivo and not only with our service, but also digital service, I think the right way to do that. I think it also proves to be good strategy that we've been following, actually very good because of the improving number of net adds as well.

Also, our commercial activity, we've been very precise, acting the right point of sales to attract the right customers to Vivo. So I think also the number that you're seeing there, that's also from that. So that's a combination of both more customers, lower churn and also increase in ARPU. I think as you can see also in our presentation, if you see the ARPU that we have in the third quarter of this year is much higher than we had, not only in the second quarter, but we were very strongly impacted by the COVID, but also in the first quarter of this year, pre-COVID impact.

There is a final comment that I would add, Marcelo, the government at the -- Brazil, as you know, is giving money for people in more vulnerable situation, also helping people to consume. And that also has an impact, the right impact in our prepaid performance. So with the combination of all, even when there is a reduction of the end of the government, we continue to see a strong movement in our customer base, reduced churn, a lot of engagement and consumption going up per customer. That's first, I think [indiscernible] but let's go to the second one. And then if you have any question, the first one, I'll go back.

In the fixed revenues, as we said in the last quarter as well, we are optimizing our CapEx allocation. I think that's the first decision. We are putting all the strength of our CapEx on this FTTH and reduced when it started, COVID, our deployment of CapEx related to new customers in FTTC or DSL. That has an impact because we cannot grow the revenues in this July that we used to do because there is a better allocation with better return but has a direct impact in revenues.

Voice, also, legacy services is decreasing. As you know, we just showed a number of minus 18%. That's a combination of factor, but it's something that we're going to continue to see because voice is getting not used as we used to in the past.

And the third is DTH. DTH, we talked a long time ago to acquire new customers, has a direct impact in our revenues, but I think so, again, it's a wise decision. We are focusing just in IPTV or fiber plus OTT. If you look at the breakdown of our revenues, what we call these legacy services, they still represent 40% but they used to represent almost 50% 1 year ago.

So going forward, we're going to see these legacy services going down and watch the new ones, the FTTH plus IPTV, growing in a robust way as we are deploying more HPs and we are penetrating more of our network. We are going to play more conversions. So we're going to see those numbers going up.

The only one that I also would highlight, corporate data and ICT. We are also optimistic about this line. This quarter, we were impacted by companies being closed and not signing for new deals. That was a temporary effect that we believe in the months to come, it will be corrected by new companies and our current customers also investing more in data and specifically talking about P2P.

[Operator]

Our next question comes from Maria Tereza Azevedo, Santander.

[Maria Azevedo, analyst]

My first question is on the CapEx side. We have a lot of positive trends going on right now, Open RAN, the network sharing, the neutral fiber networks in which you're going to participate, probably a more gradual rollout of 5G. How should we think on the CapEx trend more mid- and long term? Is it fair to assume that the CapEx should continue to go down over the next years, finally reaching low-teens?

[Christian Gebara, executive]

Maria, thank you for your question. Let's just go back a little bit to talk about the CapEx. Now in 2018, we said that we'd increase CapEx because we had a model like to expand our fiber footprint in a more accelerated way. That's why we got in this 2018 an additional CapEx, and that was also forecasted to be BRL 9 billion in 2019, BRL 9 billion in 2020. So we were -- at the time that we were at Investor Day in 2018, we said that we would reach 14 million HPs with this additional CapEx that we were presenting at the moment. So I just want to highlight that because we're going to end this year with 16 million HPs. It's more than what we said at the time. And we're using an amount, an envelope, much lower than it was that we predicted at the time.

So even 2018, the CapEx was lower than what we said, BRL 2.5 billion. Last year, it was lower than BRL 9 billion. And this year, it's going to be much lower, not only because we are more efficient, but also because of what the impact of the COVID. And as I said in the question before, we are prioritizing what is growth technology and not invest in the legacy so it also has a very good CapEx allocation.

Going forward, as you said, we're going to continue growing fiber. We're going to continue growing 4.5G. We are continuing to grow 5G. We are understanding that we just started the 5G DSS. We're going to have the auction next year. So there's a lot of commitment that we need to combine, and we will, to keep Vivo leading the Internet arena, both in mobile and the fixed.

So -- and we are looking for alternative models, the ones that -- the neutral ones that will ease a little bit of pressure on CapEx. So the same that we have with American Tower is already a CapEx allocation that is different because American Tower is responsible for part of it, the same that we have with Phoenix Tower. Different one that we have in the franchising because in franchising, there is no CapEx for Vivo. It's 100% CapEx in the franchisee.

And in the neutral, that is the plan that we have for the future. To continue to grow, we're going to also have a different CapEx allocation that will allow us with lower CapEx. I'm not giving you guidance, but not -- lower CapEx to accelerate from what we have today, 16 million towards 2024, have more than 24 million HPs. That will be a different allocation, more pressure on OpEx but lower pressure on CapEx.

[Maria Azevedo, analyst]

And then as a follow-up question. The FTTH execution is impressive. Can you comment a little bit on the different strategies in large, mid- and small markets, competition-wise? Do you think that the expectation is to ARPU continue to grow? And how accretive you expect the fiber spin-off to be? And if you see any consolidation opportunity in the fiber market for that new vehicle as well?

[Christian Gebara, executive]

So as I said, the FTTH, the fiber market segment is competitive, but we've been very successful in any new city that we enter. We have a competition there. It's -- as you know, there are thousands of small players. So any new city that we enter, we face any type of competition, and we've been very successful deploying more [indiscernible] have an idea, this quarter, 28 new cities that we were not present. And if you consider the full year of 2020, we're talking about 104 new cities. Now that's compared to the year before. That was what, 43 new cities. We are more than doubling the number of cities and more than doubling the number of HPs. So we are very confident with our strategy going to the cities, and we are not being limited by the presence of competition.

ARPU, in our case, is also as were presenting, it's growing. I think we've been able to sell in a better mix. We are selling much more higher speed, and people are willing to pay a little bit more to have a better quality in their connection, and here, fiber has the best value proposition by far, reaching 300 megabits.

We've also been able to add to our broadband proposition not only IPTV, Pay TV, but also OTTs. I think, successfully, Vivo has been deploying FTTH plus Netflix plus Amazon Prime Video plus many others that we are coming to announce in the next months. So also, that's going to help drive ARPU.

And also seeing ARPU in a total figure of mobile plus FTTH here, I think is the figure that Vivo has that I don't see the small players, the ability to protect or to expand our mobile customer base with a combined offer that will put together the fixed, the FTTH, IPTV eventually, all of the mobile and many other digital service that we are putting into place here, and then I just mentioned some of them, to increment our share in the wallet of digital services of our customers, going beyond only talking about telecommunication. I think the figure here is that we're going to go beyond just considering telecommunications and the ARPU that we want to capture.

[Operator]

Our next question comes from Mathieu Robilliard, Barclays.

[Mathieu Robilliard, analyst]

I had 3 questions. The first one was around the outlook for Q4. On the one hand, you're exiting the quarter with very strong volume growth in mobile. And really, the question is about mobile. On the other hand, I don't know how the situation is evolving in Brazil in terms of COVID lockdown, reduced mobility. Obviously, I don't think you had [indiscernible] mobility than in Europe. But I was wondering how you see the Q4 when you look at these 2 elements together? I mean can we expect an acceleration of mobile because you have better volumes than the price increase? Or you think there could be a bit of a deterioration in the economic environment?

The second question was about costs. So if I look at what you've done over the past 5 years, you basically have been able to reduce cost 5 years in a row, which is very impressive. And I was wondering how we should think about the next 1 year or 2 because on the one hand, I understand that maybe some of the costs have come down because the legacy revenues in fixed have come down and that will disappear at some point, so maybe less cost-cutting opportunities. Also, as you just mentioned, you're slightly shifting the model in terms of your infrastructure, sharing more with others, which moves CapEx to OpEx. So the simple question is, do you still see overall reduction in OpEx in the next year or 2?

And then lastly, can you give us what is your best estimate or best guess for when the spectrum auctions, the 5G spectrum auctions, will take place? Is it around '21? Or could it shift to 2022?

[Christian Gebara, executive]

So Mathieu, this is Christian. I'll answer number one and number three, and then I ask David to answer number two.

Number three, we expect it to be next year. We don't have a final date. We're still waiting for Anatel to publish the rules of the auction. The Minister of Telecommunication said that it most likely would happen in the first semester of 2021, but we don't have any official confirmation. So I believe it's going to be next year. That's the third question.

The first question, Brazil's situation here is getting better. I'm talking about COVID situation. So we are now fully operational regarding our commercial channels. We still have some areas where we're not working at the same hour that we used to work in our stores. And of course, there is limitation of capacity in our store. That has an impact on our sales. But what you see weekly is a change in a positive way. We see cities coming from more conservative phases in isolation or protocols going to softer phases, and that's positive for our business.

So what we see, we are not giving trends for the revenues. But what we see is more growth in stores, more people looking for connectivity, more demand for smartphones and accessories. We have now Black November. We're going to have Christmas. So besides the economic signs and the COVID signs are positive for our business, I'm not giving you any trend. And we expect that we are able to capture this positive trend wave coming from these 2 movements, the economic one and the COVID and the health one.

Going to costs, I'll ask David to take you through the [ complementary ].

[David Sanchez-Friera, executive]

Mathieu, this is David. Talking about the costs, I mean you're right. So we have been reducing costs year-over-year for more than 4 years. But we believe that there is still room to continue reducing the costs. We present through the slides we are working on e-care, e-commerce, billing, payments and many other initiatives that's reducing our costs.

So I would say, for the future, so the costs have to do with running the company. We see still room to keep reducing. As you mentioned also, we are moving to a model where it would be less CapEx, more OpEx. Also we're moving to more digital space but there's going to be higher revenue. That will bring lower revenue, lower margin.

So how do we prefer to look at it is we are planning to keep growing EBITDA because all those revenues will bring positive margin always, also to keep accelerating and to put focus on the operating cash flow margin. So if you look for the first 9 months of the year, we have an operating capital margin of 23.5%, which is growing 3.4% year-over-year.

So this is how we monitor our business and we make sure independently, which line is recognized. We are always improving our profitability, and this is what is helping us to keep accelerating the cash flow generation, but you can see that this quarter has been impressive.

[Operator]

Our next question comes from Carlos Sequeira, BTG Pactual.

[Carlos Sequeira, analyst]

So I know the [ FTT ] operation is growing super fast. Net additions are impressive. Vivo is the largest FTTH operator by a good margin. So everything is going super well in the FTTH business. What strikes me is, is there any way to grow even -- I mean you have CapEx under control. Free cash flow generation is amazing. Are there any ways you do it even faster to build out the network even faster? The issues are engineering or -- why not try to move even faster with FTTH, given how well we were doing?

And also, if that is not possible organically, would it make sense to try to go for inorganic strategy in the area to grow faster, please?

[Christian Gebara, executive]

Carlos, thank you for the question. This is Christian. Yes, I think you answered part of it. Yes, it's right. There is also always a CapEx control as well, not to deploy much less than we are doing. I think we've been also very precise in where we want to enter with our network, and that is part of our success. We are entering the right places in the right cities and also capturing the totalization of the right customers for Vivo, that it's also blending our postpaid, as I said before, with the FTTH deployment.

I think going faster, I think the decision -- and as I said when we went to New York and we said in our Investor Day that this year with 14 million, it sounded a huge number. We are ending this year with 16 million. So that's our ability to go faster and so there with the same comment with a lower CapEx. So I think that's proven the ability of Vivo of doing more with less, and that's the number that we are presenting this year.

This number still is not counting a lot what we're going to do with partnerships, as we also mentioned. So one, we've signed up partnership in Minas Gerais with American Tower that would give us another 800,000 HPs. That's part of the strategy of going faster with lower CapEx. When we signed up with Phoenix is another example of going faster with lower CapEx. And that's why we decided to do it bigger and larger, and that's why we put in place our InfraCo project. That is very well advanced, is progressing very rapidly. There is -- we have a series of investors interested in being part of this project.

As we said in the last quarter, we expect to be fully operational in 2021. That will help us to go over 24 million HPs by 2024. What is over 24 million? It's a number that could be good and also extrapolate what we predicted when we said that we would get 14 million in 2018. So this process is doing very well. We have investors talking -- checking data in the data room. And hopefully, in the next months, we'll be able to sign it and be operational.

And M&A, in your question, we haven't seen, so far, a target that would combine our expansion strategy with the quality of the network that we did. But once we have this vehicle in place, I think part of the growth of this vehicle, and I'm talking about the InfraCo they very deployed, could be expansion through M&A. So it's not -- and we are always checking the assets that are available in the market. If we find something that could combine the excellent infrastructure in the construction of the network that, for us, is the number one requirement with the footprint that we need to expand our FTTH, of course, we're going to see and look at it and maybe be able of an acquisition in the future.

[Carlos Sequeira, analyst]

Can I make one follow-up question on that, too? One thing that is -- that I'm curious to hear how you're seeing that is the competition between your fiber operation and NET Serviços' coaxial cable network? How are you -- when you have direct competition, how are you faring compared to NET, especially after the pandemic, when I think the different -- the quality differential became more -- clearer than before.

[Christian Gebara, executive]

I think there is always a limitation of the quality that you expect from your network. I think the pandemic was the climax of the need of speed. And in upload and download, that's something that you get much better when you are talking about fiber. And parallel usage of those, so imagine everyone at home using at the same time the network, the other thing that fiber has an advantage.

So given that speed, upload, download and parallel usage of the network fiber shows up to be the best alternative. And I think the number that we are presenting that as, by themselves, they prove the strength of our value proposition, although it's difficult to compare the numbers from one company to the other because sometimes they are deploying to one area that we're not. But when we're face-to-face, I think it's a clear advantage of the superiority, especially the technology that's fiber versus coaxial, as you just mentioned.

[Operator]

Our next question comes from Susana Salaru, Itaú.

[Susana Salaru, analyst]

Our first question is regarding the EBITDA margin trends. We have been seeing Telefônica being able to sustain EBITDA margin at 40% level despite what happened with the pandemic. So going forward with a more healthy top-down scenario, could you just elaborate what you're expecting for margins to be, if you should expect the same margin level or you could see room from improvement? That would be our first question.

The second question, just a follow-up on the prepaid again. Apologies, actually, I didn't fully understand. You guys are about to do a price up in prepaid? Or you already did a price up, offering more for more?

[Christian Gebara, executive]

On prepaid, Susana, no, we're not going to have a price increase in prepaid right now. I think we're trying to -- as I said, trying to manage our customer base in a better way to have people increasing their top-ups with Vivo. And here, it's playing as it was asked before, how do you do that? Okay, doing the right offer to the right customers in the right moments, expanding their usage with Vivo weekly by weekly, monthly offers and trying to combine that.

We're also bringing a value proposition specific to the hybrid product because that gives us the opportunity to migrate from prepaid to hybrid. So I think it's always the strategy. Look at the different segments at the same time because the impact in one is directly affecting the performance of the other.

As I said also before, we are always trying to push the market up as we do in the pure postpaid, what we do in the hardware and we're trying to do also in the prepaid. The response is lower from competition in the prepaid. There's still a lot of progressiveness in the prepaid arena. So we cannot stand out in a negative way towards our customers.

So we are looking in rational ways to increase in more for more. But if you're not going to see a price increase as -- in absolute terms as you used to see in hybrid or pure postpaid as we also did in this quarter, although inflation is much lower as in all and room for improvement or increase is also lower.

Second question, David, Susana.

[David Sanchez-Friera, executive]

Susana, this is David. Just regarding the margin, so if you look to the margin, EBITDA margin for the first 9 months, so we're up. We have 40.3% margin, which is growing 0.4 percentage point year-over-year, so even though the current situation, however, even to improve in accumulated numbers on margin. And for the future, as I mentioned before, I mean we're optimistic. We're optimistic about the EBITDA generation more than just the margin.

But let me just give you 2 examples. We are moving to a world where we have the commissions more through [ pull ] channels. Now we are going to e-commerce, where the unitary cost is almost 0. We are moving from a world where we have to call the call centers, where we need to pay people just attending those calls, that we are moving to a world, particularly in our case that we are moving to Meu Vivo, that we have more than 18 million unique users per month. That's -- each one of their queries are sorted without incremental cost.

So this is allowing us to be a company significantly more digital, but also more efficient and to put more OpEx on those costs that will add more value to the customers and we have more return to our shareholders. So we are working on this mix to make sure that the EBITDA and also to focus on operating cash flow is growing year-over-year.

[Operator]

Our next question comes from Diego Aragão, Goldman Sachs.

[Diego Aragão, analyst]

Actually, I just want to follow up on the question regarding your FTTH. You have this business in over 250 cities now. And I was wondering if you can comment a little bit more about the competitive landscape in these cities where you operate but not with the category operator, in fact, with eventually smaller and regional fiber providers. Are you seeing some of these, let's say smaller ESP players in these cities? And also looking forward, how fast you can grow into new cities and how competitive should be in the new cities you are planning to add?

[Christian Gebara, executive]

Thank you for your question. So in large cities, we -- I think you asked more about the small player. But in big cities, we -- normally, we face competition from the cable. In large cities, it's depending on the [indiscernible] but most of this competition is with the cable. So what I answered to Carlos before, I think fiber has an advantage as technology, and I think that's seen in the numbers, in the robust numbers that we are showing.

In smaller cities, yes, you're right, we face competition for small players in FTTH. Here, I think there is a combination of things. First, technically, I think we present a better proposition, not only in the infrastructure that we built, but also in the equipment that we put in the home -- in customers' premises. I think Vivo plays a different game, and we are in a better quality situation that could be perceived by customers in the experience with the fiber.

Second, we come with a very good customer care. Now normally we have a store, and we have our service to Vivo and all the experience and expertise that we have in place in the new city that we enter. So I think it's a very well-defined strategy to enter a new neighborhood or a new city.

Third, we have a Pay TV for customers who want to have TV. Most of these competitors don't offer a TV or they offer TV satellite. And we have also, apart from IPTV, interesting deals with Netflix and Amazon Prime Video in a good price and also built in the fiber build. That's also a final advantage. And we start playing convergence. Now that's also something that small players cannot offer. So we still have gross benefits, but going forward, it could be a little bit more advantageous if we put convergence or a total offer from Vivo combining mobile with FTTH.

So we are very, pretty confident, as I said before. And also, these [indiscernible] local fiber competitor and we've been successful. And we are going to accelerate. We have -- we see a very positive outlook going forward. I think we have the demand for digitalization, the demand for the homes connected growing in Brazil. We still have just 20% of homes in Brazil with ultra broadband, so there's a lot of room still to be captured. And we are in the right place in the right moment. Because Vivo decided to do fiber a long time ago, Vivo has the largest fiber infrastructure in Latin America, and Vivo has the best mobile customer base. All this combined into a strong brand and a channel prepared to sell mobile, fixed and digital, I think we have an [ immediate ] offer. So confident, and the need for digitalization is more than evident now, after all we went through and still going through with the COVID situation.

[Diego Aragão, analyst]

Super clear. That's very helpful. Look, just quickly on the mobile business. You had like pretty strong additions in the prepaid. So the question is, how do you see the prepaid and postpaid mix going forward? Let's say, maybe 2, 3 years from now, where this mix should be? Because I just want to understand if there's still room to be further -- let's say prepaid to postpaid migration going forward.

[Christian Gebara, executive]

No. We don't see that. I think what we saw in the prepaid, as I said before, is a combination of factors that gave us this strong performance. And we are positive that we are all doing very well in the prepaid. And I think here, it's more in the opposite side, I think the benefit of being able to capture so much -- so many customers in the last month, last quarter, give us the opportunity now that we have our channel in place again to migrate prepaid to hybrid. I think the better proposition that we have in Vivo for the different segments is very clear. And we've been successfully able to show to customers the advantage of being in each of the segments.

So we don't have this risk right now of this reverse migration. I think the opportunity is much more in the right migration of free to hybrid and hybrid to pure. And in the future, try to give more customers with fiber and with mobile in Vivo.

If the contribution of prepaid in our results will be lower or the postpaid will be stronger I think is this natural movement of migrating pre to hybrid will be in place in Vivo. So maybe the postpaid will be even more relevant going forward. So even though we are doing well in the prepaid, these customers that we are capturing now are the right candidates after some time first to be migrated to the hybrid, and we are willing to do so.

[Operator]

This concludes the Q&A session. I would like to turn the floor back to Mr. Christian Gebara for any closing remarks.

[Christian Gebara, executive]

So thank you all for joining our call. If you have any additional questions, please access our IR team and hope to see you soon. Okay. Thank you.

[Operator]

Thank you. This concludes today's Telefônica Brasil 3Q '20 Results Conference Call. You may disconnect your lines at this time. Have a good day.