Telefonica Brasil SA

BOVESPA:VIVT3

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefónica Brasil Fourth Quarter of 2018 Earnings Conference Call.

Today, with us, representing the management of Telefónica Brasil, we have Mr. Christian Gebara, the CEO of Telefónica Brasil; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. Luis Plaster, the IR Director. We also have a simultaneous webcast with a slide presentation on the Internet that can be accessed at the site www.telefonica.com.br/ir.

There will be a replay facility for this call on the website. [Operator Instructions]

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the company's management's beliefs and assumptions and on information currently available.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the company's future results and could cause results to differ materially from those expressed in such forward-looking statements.

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

Mr. Plaster, you may begin your conference.

[Luis Plaster, executive]

Thank you. Good morning, everybody, and thank you for joining us in this conference call for Telefónica Brasil's 2018 fourth quarter and full year results.

The call will be divided as follows: to start, Christian Gebara, our CEO, will give you the highlights for the year and then go over our commercial and CapEx evolution. To conclude, our CFO, David Melcon, will comment on our digitalization initiatives, efficiency commitments and financial results. We will then move to Q&A.

I now pass the word to Chris.

[Christian Gebara, executive]

Thank you, Plaster. Good morning, everyone, and thank you for taking part of our fourth quarter and full year 2018 results call.

Before I elaborate on the highlights for the year, I would like to take the opportunity to thank Eduardo Navarro who remains as our Chairman of the Board for his inspiring leadership and brilliant performance during his tenure as Telefónica Brasil's CEO. I had the honor of working closely with Edward these past couple of years as Chief Operating Officer. And I'm sure that we, as a company, could not be better positioned to continue to capture all the opportunities that we have in the Brazilian telecom space.

To do so, I would like to reinforce our commitment to the achievement of the objectives that we already had in place, for the inclusion of a strategy that is focused on 3 main pillars: capturing growth opportunities, especially in high value services, allowing us to improve our revenue mix as we continue to invest in cutting-edge technology such as fiber and 4.5G, to keep providing the best customer experience and connectivity in and out of home; expanding the company's profitability by laboring on the capture of efficiencies, mainly through the evolution of our digitalization initiatives, which are transforming the way we work internally and relate to our customers; strengthening our status as a unique generator of cash and net profit in the Latin TMT space, allowing us to continue to provide unmatched shareholder remuneration without hampering our ability to invest and further enhancing our competitive position.

Now moving to Slide 4. Let me comment on the highlights that we had during the year. With this significant combination of assets, coverage, grant and customer experience, we are able to finish 2018 with 55% of our mobile customers on postpaid after recording 3.6 million net additions, which is 7% higher than in 2017. We captured a record-breaking 604,000 FTTH net adds, an increase of 50% in comparison to last year's performance. We accelerated expansion of our proven technology footprint, ensuring future revenue growth by connecting 30 new cities with FTTH, reaching a total of 131 while also closing 2018 with 3,140 cities and 1,000, 4.5G cities.

Consequently, we continue to accelerate the improvement of our revenue mix, depending less and less on legacy technologies such as voice and DTH, while we accelerate our exposure to businesses such as postpaid, broadband and IPTV, among others.

In 2018, 70% of our revenues came from growing businesses which reached the strong expansion of 10% year-over-year. In parallel, the fourth quarter of 2018 was the 12th consecutive quarter in which we reduced costs on an early basis, representing 3 years in a row of decreasing OpEx. In 2018, our recurring operating costs reduced 2% year-over-year, taking our accumulated EBITDA margin to 35.6%, well above market expectation at the beginning of the year. As a result of the very strong operating performance presented throughout the year, our financials reached unprecedented levels, reinforcing our position as a player that offers both value and growth components in its [ equity ] story.

In 2018, we registered a record-breaking BRL 8.9 billion of net income, almost doubling the previous year's figures, while in terms of free cash flow, we generated BRL 6.9 billion, 21% more than in 2017. As a result, we are able to propose our highest ever amount of shareholder remuneration, BRL 7 billion, a growth of 52% versus 2017, underpinning our commitment to the generation of solid returns for our shareholders.

Moving now to the details of our main businesses on Slide 5, we present the evolution of our mobile revenues, which increased 3% year-over-year. This performance was mainly supported by data and digital services that grew 6.3% and by our plan to accelerate smartphone sales, which posted handset revenues by 70% in the fourth quarter, driving this line to represent 7.2% of our mobile revenues in the period.

Moving to the right-hand side of the slide, the chart shows that our quarter-over-quarter base mobile services revenues grew 4.1%, 1 percentage point more than a year ago, which clearly represents a sign of sequential recovery, a trend that should be maintained going forward. This performance was primarily driven by our postpaid revenues that sustain a consistent growth of 5.3% year-over-year, which is well above inflation. The increase in price and strong level of net additions contributed to this positive result, combined with our unique value proposition to leverage on important partnerships with relevant content players to increase differentiation. In addition, B2B mobile service revenue demonstrated a promising trend once again in the fourth quarter of 2018, contributing to maintain solid evolution of postpaid revenues.

Meanwhile, our prepaid business that throughout 2018 was heavily affected by negative macroeconomic indicators and cash competition begun to show initial signs of recovery at the end of the year. The reposition of our prepaid offers to include more benefits and a more effective management of our customer base allow us to improve prepaid growth additions and top-ups. As a result, on a quarter-over-quarter basis, prepaid revenues grew for the first time over the last 5 quarters with a 2.6% increase. As the economy picks up in 2019, we are confident that these trends of improvements will remain in place for the next quarters.

Moving to Slide 6, you can see that our leadership in postpaid net adds in 2018 and control trend level have enabled us to enhance our already comparable customer mix. On the left-hand side of the slide, the graph shows that we were able to maintain our leadership in mobile market share, reaching 31.9% share in total and 40.5% in postpaid. In the machine-to-machine business, we also preserved our strong lead by reach of 41.5% market share.

In postpaid, we had a robust performance in 2018, once again leading in net additions with a share of 31%. This was a result of the 13.6 postpaid net adds recorded in the year, a growth of 7% in comparison to 2017. This performance allowed us to further improve the profile of our customer base in which postpaid represents 55.2% of the total, 6.1 percentage points higher than a year ago. An important part of the postpaid net adds for the year was achieved through our continued effort to migrate customers to higher value offers as you can see on the right-hand side of this slide. Moreover, we continue to protect our existing base by improving the loyalty of our customers, and as a consequence, our churn continues to be very low. As a result, and even in a scenario of more intense competition, we are able to increase mobile ARPU, which went up 0.5% year-over-year in 2018, driven by 10.1% growth of data ARPU in the same periods.

Moving to Slide 7, we present the performance of our fixed business, which dropped 3.5% in the fourth quarter of 2018 as legacy businesses such as voice and DTH is still weighted heavily over the total. That said, we continue to accelerate the transformation of our fixed revenue mix, which means that we depend less and less on these services.

Broadband grew 12.3% year-over-year in the quarter, leveraged mainly by Ultra Broadband, that we had an exceptional growth of 33.8% year-over-year. The result of this revenue mix transformation, as you can see on the right-hand side of this slide, is that fixed revenue, excluding voice and DTH, are constantly gaining more relevance and traction, growing 10.5% year-over-year 2018 and are representing 56% of total fixed revenues.

Our focus on the expansion of FTTH is reflected by a remarkable 44% growth in revenues while IPTV, that follows the same strategy, presented a 59% increase year-over-year. In fact, total TV revenue grew for the third consecutive quarter, driven by expressed IPTV adoption. Finally, B2B have been improving trends in the fixed business with more growth in broadband and digital services such as security, cloud and IoT.

On Slide 8, you can clearly see that our strong commercial performance in FTTH and IPTV led to significant ARPU increase in 2018. The left-hand side of the slide shows that FTTx continues driving growth. Our customer base had a strong increase of 10% year-over-year. Specifically, in FTTH, access grew by 47%, including 152,000 net additions in the quarter. Our premium customer base contributed to an overall broadband ARPU growth of 11.8%.

On the right-hand side of the slide, we present our focus on customer totalization for IPTV, which now represents 37% of total Pay TV base. We managed to grow by 52% our Pay TV customer base with 43,000 net additions in the quarter. In the last 12 months, our total Pay TV ARPU grew 6%, reaching more than [ 100 milhares ]. I would like to highlight that overall broadband and Pay TV ARPU have consistently grown for the last 14 quarters.

On Slide 9, we give you more details on the success of our UBB strategy, which bring in results that are exceeding our internal expectations in cities where we launched FTTH in 2017 and 2018. In 2018, we beat our goals and launched a record number of 30 new FTTH cities, representing an expansion never done before by any other Brazilian player, allowing us to reach 121 FTTH cities and surpass the amount of cities covered by FTTC, which currently stands at 120. We deployed approximately 2 million FTTH homes passed, focusing not only on footprint expansion to new cities but also on the increase of penetration in existing areas. As a result, we have been able to further penetrate HPs, homes passed, in large cities such as São Paulo.

On the right-hand side of the slide, you can see that we continue to deliver strong results in cities launched in the past couple of years. In 2 of the cities launched in 2017, our take up over installed capacity is already higher than 80%, exceeding, by far, our long-term targets. We were also able to capture important share of the broadband market, especially on high speeds. In Jataí, a city launched in October 2018, the numbers are equally impressive. Two months after launch, 43% of the installed capacity was already sold while we captured 18% of the broadband market and became the absolute leader in broadband.

Moving to Slide 10, we present our CapEx in more detail, which reached BRL 8.2 billion in 2018. Our investments were mainly focused on higher returns, future-proof technologies and IT transformation. As we have been capturing some CapEx efficiencies and improving the allocation of resources, we were able to end the year with an expenditure lower than what we initially planned without diverging from any of our strategic objectives. On the right-hand side of the slide, the graph shows that 70% of our investments are focused on growth, especially in 4G, 4.5G, FTTH and IPTV. As a result, we strongly expanded our fiber footprint, reaching 241 cities, 121 cities of them with FTTH, as I said, all of which already have IPTV availability. We are also enhancing the quality of our 4G network. At the year-end, we covered 88% of the Brazilian population, reaching 3,100 cities with 4G and a milestone of 1,000 cities with 4.5G coverage. In addition, we improved the quality of our size, increasing fiber connected sites by 57% year-over-year.

I now pass it on to our CFO, David Melcon.

[David Sanchez-Friera, executive]

Good morning, everyone, and thank you, Christian. Moving to Slide 11. One of the main cornerstones of Telefónica Brasil equity story has been, for quite some time, our ability to be efficient in terms of cost, allowing us to transform the way that we work and relate with our customers by leveraging on digitalization and simplification initiatives.

In the fourth quarter of 2018, our costs reduced for the 12th consecutive quarter on a yearly basis, reaching minus 1.4% EBITDA margin to a recent high of 37%. Personnel costs, that represent 13.7% of total OpEx, increased 1.1%, significantly below inflation due to the ongoing organizational restructuring undertaken in the last quarters.

Cost of service rendered, which accounts for 40% of our total OpEx, decreased slightly, minus 0.1%, driven by the higher costs related to the expansion of our mobile and fixed networks, entirely offset by lower regulatory access and interconnection costs.

Commercial expenses, excluding bad debt, decreased 6.9% in the period as a result of our digitalization and simplification efforts that drastically reduced expenses with call centers, back office, billing and posting. In the fourth quarter of 2018, commercial expenses represents 26.3% of our total OpEx.

Finally, the bad debt over gross revenue ratio presented a slight year-over-year decrease, reaching 2.2% thanks to our credit and collection actions, and utilization of big data and analytics.

Turning to Slide 12. We give you an update on the evolution of our main digitalization initiatives that, once again, enable us to significantly reduce value representative cost buckets.

In the fourth quarter, we had a 43% year-over-year increase of online fixed B2C sites. The percentage of digital top-ups reached 23%, increasing 3 percentage points year-over-year. Our Vivo unique users increased 22% year-over-year while calls to our call centers reduced 24% compared to the previous year. The penetration of e-billing reached 58% of our total customer base, with almost 2/3 of our credit scoring being conducted through digital channels. 100% of the stores are operating in our full stack platform and 73% of our technical support are already digital.

In cost terms in the quarter, billing and posting costs reduced 15% as a result of increased e-billing adoptions by our customers. Call center costs dropped 17% year-over-year, as we treat customers' interactions through digital channels such as e-care app, website, Facebook and others. Installation and maintenance costs reduced by 10% in comparison to the same period of last year. Commissions of physical top-ups continue to decrease rapidly, 30% year-over-year as we incentivize top-ups through digital channels.

We think that implementation and evolution of digitalization will be absolutely critical for anyone to succeed in the telecommunications sector. As customers are demanding more and more self-care, easy solutions related to the interaction with the company require that we urgently move into a simple and more efficient business model.

Now moving to Slide 13. Net income for 2018 reached a record level of BRL 8.9 billion, 93.7% higher than 1 year ago. The main drivers behind this evolution were higher EBITDA due to the strong expansion of revenue from growing businesses and cost control efforts, leveraging on digitalization to register annual cost reduction for the third consecutive year. The non-recurring effects registered in the year, which impacted positively both EBITDA and financial results in BRL 3.8 million, net of taxes. These non-recurring effects were mainly related to gains that we had during the year on the Superior Court of Justice, recognizing our right to deduct ICMS from the basis of calculation of the PIS/COFINS contribution for a period between 2013 and 2014.

Turning to Slide 14. In 2018, the generated free cash flow from business activity reached an unprecedented level by growing 21% year-over-year to BRL 6.9 billion, mainly as a result of our improved operating and financial performance with a strong EBITDA growth, global interest, and income taxes payments and optimized working capital. That allowed us to further reduce our leverage. Our gross debt decreased 27% year-over-year while our net debt position reached BRL 2.2 billion in December 2018, a 42% decrease versus 1 year ago.

Moving to Slide 15. As a result of the impressive generation of net income and cash flow throughout the year, for 2019, we are proposing BRL 7 billion of total shareholder remuneration, a growth of 52% in comparison to 2017 and more than double the amount that we paid just a few years ago in 2015. The BRL 7 billion will be paid in 2 tranches, one due in August 2019 and the other due in December 2019.

For 2019, we already started to deliberate on the shareholder remuneration with a declaration of BRL 700 million of interest on capital on February 15. This confirms our commitment to remunerate our shareholders while maximizing value by investing to capture growth opportunities, a combination that is unique to Vivo in the Brazilian telecom space.

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

[Operator]

[Operator Instructions] The first question will come from Valder Nogueira of Santander.

[Valder Nogueira, analyst]

The first question is I just heard what David mentioned about the dividends and how the company explained that. We've seen the proposal of the administration. It is understanding that the payout of your earnings this year should be around 70% to 80%. I haven't seen the full numbers yet. Why not 100%? That's the first question.

[David Sanchez-Friera, executive]

Okay, Valder, we'll go over this question. If you see our total remuneration for the year is BRL 7 billion, which is if you compare the payouts of the free cash flow it's even more than 100%. When you compare it to the net results, it's around 78%, but you need to consider that some of the result that we'll have during the year, mainly the one-off that we have, the tax one-off, will not impact benefit the cash until the next 2 or 3 years. That's why our recommendation we have decided BRL 7 billion is representing more than 50% increase year-over-year, it's more 100% payout of free cash flow and therefore, we think is the right dividend number.

[Valder Nogueira, analyst]

Does it have any relation to a still uncertain scenario on potential taxation of dividends and interest of capital going forward? Or it was just the decision itself?

[David Sanchez-Friera, executive]

No, it had nothing to do with going forward, it's just for the year.

[Valder Nogueira, analyst]

Okay. And my section question. You guys announced the partnership with Globo in order to sell the global content on the mobile platform. And I believe that the subscription should also be applicable to your broadband offers because you can log in. What do you expect to be the counterattack of competition? Because this is one of many initiatives that you guys are making that are proposing a very good value for your subscribers in terms of how to build the content that they want on whatever platform that they have, while the main competitor on Pay TV is not necessarily that many multidevice as you guys are. How do you expect them to react to this offer?

[Christian Gebara, executive]

Valder, this is Christian. I think this deal that you mentioned is part of our strategy of being much more as digital service hub. We've been talking about partnerships with different partners. You mentioned the one that we have with Globosat but we also signed with Amazon Prime, we also signed with Netflix, we also we have signed with NBA, NFL. So our position here is that we are going to leverage as much as we can in the strength of our brand, our channel, our possibility of bundle that with our services, and we want to be this hub and of course, we want to be a player -- playing a very important role, especially in this OTT video arena. Different from others, may be our penetration in Pay TV is much lower, so we have lots to capture there selling 4G, or 4.5G or Ultra Broadband together with content. And that's our strategy going forward. So it's one of the partnerships that was signed, and we're going to come with others in the future.

[Operator]

The next question will come from Diego Aragão of Goldman Sachs.

[Diego Aragão, analyst]

Two quick questions, if I may. The first one, on the fixed and voice decline, this seems to be worsening in recent quarters. And I was wondering if you can give us some colors on the market dynamics that could help justify this acceleration on the fixed-to-mobile substitution. For instance, was this performance driven by residential or B2B clients? And also, can you walk us through the main initiatives that you are taking to protect this revenue base? This will be my first question.

[Christian Gebara, executive]

Diego, this is Christian. Yes, there is an effect of the relevance of these services for customers. We are bundling as much as we can to protect. Once you're bundled, you're also giving all the benefits of voice, to fixed voice to mobile, and they become much more unlimited, the usage of the fixed voice. So before, in the past, maybe there was so it effects in the amount that they paid. So we think it's a condition of the market. You can charge, bundling that as much as we can do now, but of course, there is some excess consumption that we don't see anymore because it's included in the bundle that we put together with the broadband. That's the reality of the market right now.

[Diego Aragão, analyst]

Perfect, Christian. But just quickly, so this was driven mostly by the residential, is that right?

[Christian Gebara, executive]

Yes, mostly by the residential, that's the largest impact. But we also have B2B customers included now. And the same strategy of bundling is in place for both. But yes, we see movement. This negative performance mainly the residential. But again, we are bundling as much as we can. Once you bundle, you are including everything in the bundle. Once you include everything, maybe in the past the [indiscernible] was not included, there was some excess consumption that we could bill. Now we don't bill anymore because it's included in the package.

[Diego Aragão, analyst]

And the second question very quickly, on your depreciation, we saw a major increase in this line item in the quarter despite the fact that you have been investing in FTTH for some time now. Can you just help us to understand what's going on? And also to see whether or not this should be the next -- the current level for the line?

[David Sanchez-Friera, executive]

Thank you, Diego, for the question. This is David. So regarding the depreciation, we have an increase this year. As you know, every year, we need to review the [indiscernible] of our assets and therefore, this will have an increase on depreciation, around BRL 260 million that was recognized in the fourth quarter and related to the full year. And also we're obviously increasing our investment year-over-year and therefore, this will also bring additional costs.

[Operator]

The next question will come from Maria Azevedo of UBS.

[Maria Tereza Azevedo, analyst]

So my first question is on your FTTH strategy. Did you see competitive threats from potential 5G fixed wireless broadband? Considering that you executed very well your CapEx allocation for this 2 million homes passed, do you see room to invest less than the guided BRL 2.5 billion extra CapEx or maybe to expand further your geographical rollout?

[Christian Gebara, executive]

This is Christian. We don't see any other technology competing with FTTH for the moment. I think, as being proven by our performance in every place that we get, that is the best ultra-broadband solution, so we don't see 5G, at the moment, for what we see as technology or even devices available that we have a competition right now. So we'll continue investing on FTTH. And as I said, we had one of our largest deployments for 2018, increasing to 9 million homes passed. Going forward, our plans for number of homes and number of customers connected is still the same. What we can see is more efficiency in the usage of this CapEx, and I think in 2018 was one of the case, we capped the plan in number of homes connected and passed and cities that we reached with lower CapEx. So going forward, that may happen as well. And then we'll see if we'll expand the footprint or not. But our plan is still the same one that we presented in New York, ambitious one, to increase homes passed and connect as much customers as we can.

[Maria Tereza Azevedo, analyst]

And my second question is on mobile competition. Are you also seeing those stronger signs of recovery in prepaid revenue in the first quarter '19 as well? Do you see room for segment ARPU growth in 2019? And if you can talk about competition in mobile in general, that would be very helpful.

[Christian Gebara, executive]

Yes, we see a very competitive market, as you described. We've been -- still been capturing most of the postpaid customer base. I think that was the number that we showed for the year. We kept the leads in the percentage as the main driver being not only migrating prepaid to postpaid but also upselling from control to postpaid and upselling within the segments. While we see here that we're moving prices up, we increased price in postpaid and in hybrid in September and in December. There was movement from the competition but still giving much more benefit that we give for the same price. And then I see for the prepaid, as you mentioned, we presented a better number for the fourth quarter. It's still negative. The negative sign here is driven by the macro but also driven by our ability to continue migrating customers to hybrid. And here, I see opportunity to be more rational and increase price. I think we've been stuck in this same price point for longer, and we don't see that in the hybrid and postpaid because, as I said, we moved prices during the last years, and more precisely, in September and December for hybrid and postpaid, and we expect to move also prices in the prepaid.

[Operator]

The next question will come from Fred Mendes of Bradesco.

[Frederico Mendes, analyst]

I have two questions as well. I think the first one related to what Maria just said. But just trying to understand a little bit more here the dynamics of your ARPU on the postpaid XM [indiscernible]. When I look here, of course, there is more decrease year-over-year but still there was a decrease and as you -- Christian just mentioned, you did increase the prices. You did anticipate the price increase for this year, so I mean I was expecting an increase in ARPU actually. So maybe I believe this had something to do with the mix, more hybrid [indiscernible]. But want to understand if there's something else here with this ARPU, this will be the first one. And then the second one is related to cost. As you pointed out, you have been doing a great job here for the last 2 years. So just wondering, when we look to 2019, if we can expect once again OpEx to decrease on a year-over-year basis or if you believe that most of the low-hanging fruits were already ripped?

[Christian Gebara, executive]

Fred, this is Christian again. On the ARPU, there is the mix influence here. And as I said, we kept a very strong migration from prepaid to hybrid. That's always impacting the overall postpaid ARPU that you see. So although we increased price as I said, we had 2 increase, in September and in December, but the volume of the hybrids is still very high. So on the average, the ARPU is impacted by this. So it's mainly mix. We don't see -- if your question was, downgrade, we don't see it. Of course, there is always, as I said, we improved price, competition followed in some ways, but it's still giving more benefits that we do. So I think there is -- there would be a good movement from the market to increase prices and keep benefits to avoid no more -- for 2 more, so if that what you are trying to drive here. No giving more. We give something else when we increase price, but trying to control that to keep ARPUs growing as we see in different segments, but also in the mix, together the postpaid, trying to keep it stable or growing. In the cost, there is a lot to be done, digitalization is the driver that we are having here to drive costs down. I think David mentioned some of the KPIs that we follow. There are call center calls, penetration of e-billing and we still see room to do more. So, we are not only making more digital the interaction that we have with our end customers, but we are also implying that you are going to use more digital processes and tools to automate internal processes that is also bring cost reduction. So we are positive about our gain of efficiency going forward.

[Operator]

The next question will come from Mathieu Robilliard, Barclays.

[Mathieu Robilliard, analyst]

I had a question with regards to broadband. Obviously, you're doing very well in terms of rolling out your fiber network, progressing in new cities, so I guess expanding your reach. Yet when we look at just broadband customers as a whole, the number is a bit flat because there's probably some migration into fiber from ADSL and maybe some market share loss in other parts. My question is really, as you continue to expand in new cities, should we expect that this, at some point, to see the total broadband customers grow? And is that, in your view, something that can happen already in 2019 or later on? So that's the first question. And second, in terms of 2019, you touched on the competitive environment. And I was wondering what kind of scenarios have you built into your internal planning for 2019 with regards to the macro environment and competition in general compared to 2018?

[Christian Gebara, executive]

So for the first question, you're right. As you see, separately, we have a strong growth in FTTH, but we have to consider that DSL, especially the one, the copper one in São Paulo, the customer base is still very large, and there is some overlay or some churn there related to other players also attacking the scope of our customer that, on the average, is difficult to see the growth that you correctly point out. So going forward, we're going to continue growing FTTH. Some of this will be overlay or FTTC areas mainly that we have outside São Paulo. So I don't know if the number of customers will be the driver that will be following our performance, but I think it's much more the revenue growth that we are expecting to have was the revenues coming from which our broadband become much more relevant than what's coming from this legacy technology. So Mathieu, I wouldn't be so focused on the number of customers because, as I said, the customer base that we still have in ADSL, especially in São Paulo, is too large and comparisons may be hard to have. Focus on growing FTTH and growing revenues on total, that's -- and also ARPU increase once we have the FTTH, also we can have the opportunity to increase ARPU. And also selling IPTV still bring it much higher. Don't know if that answered your first question. I'm going to your second one.

[Mathieu Robilliard, analyst]

Yes, it does.

[Christian Gebara, executive]

So the second, I don't know if it was more general. We're optimistic about the economy. We, as I said, we're making movements for more rational behavior in mobile and fixed, as I said, so we expect competition to follow. And if the economy recovers, we expect to be a good scenario for telecoms in 2019.

[Operator]

The next question will come from to Susana Salaru of Itaú.

[Susana Salaru, analyst]

Actually, we have two questions here. First, regarding the 5G. Do you expect the 5G option to happen this year or next year? And if that would affect your dividend policy or your payout dividend. That would be our first question. The second question is a little bit more related to the P&L for the fourth quarter. If you could elaborate a bit more on the effect that generated the positive results of approximately BRL 120 million in other operating revenue in this quarter. That will be our second question.

[Christian Gebara, executive]

Susana, this is Christian. So as I think I mentioned in the beginning, we had a very strong deployment for 4G in 2018. 4.5G, note there is the possibility of aggregate frequencies and offer more speed. For 2019, we continue on this track to deploy more and more 4G and more and more 4.5G. We are preparing the network for 5G, but we don't expect that to happen this year because there is no environment, even like hardware and services, that require 5G in Brazil for the moment. So our plans are for 5G not happening this year but we are preparing ourselves for that, and again, focusing on deploying more and more 4G, more and more customers in 4G. We still have room to have more customers. I think we have less than 60% of customers with 4G devices and still there's room for having more customers with 4G, 4.5. And once we have these customers with these devices, the opportunity to upsell plans with more data. So focusing still 4G and using the 700 megahertz frequency that we started using like last year or 1.5 years before and preparing ourselves when the 5G is a reality in Brazil, but we don't expect it to be this year.

[Susana Salaru, analyst]

Sorry to interrupt. Just a clarification. You don't expect to be a reality or you don't expect the auction to happen this year?

[Christian Gebara, executive]

The reality, we don't expect but I don't think there is a reality for 5G now because there is no device. And the auction, we don't have an answer for when it's going to happen, but we expect that not to happen in 2019.

[David Sanchez-Friera, executive]

Susana, this is David just for the second question. I mean the impact in the other lines are fragmented and composed by some important cost reductions mainly in contingencies. Labor contingency is reduced by 45% year-over-year, mainly on the back of significant results of incoming calls during the year, incoming claims, mainly due to the labor reform that's enforced since the end of last year. In addition, service contingency are also dropping due to the action taken by the company reviewing the [indiscernible] process and addressing the main issues that generate most of those claims. In addition, we have other costs that are -- typically happen at the end of the year, which are some additional proceeds coming from contractor fines and tax recovery that, as I say, happen every quarter, particularly the fourth quarter. And this is why, if you look at evolution of the margins year-over-year, you see that normally, the fourth quarter is usually a higher margin than the rest of the year but includes all recurring costs that happens through the year, but nothing exceptional.

[Operator]

The next question will come from Cesar Medina of Morgan Stanley.

[Cesar Medina, analyst]

I only have one question. Any updates on what do you expect for the teleco reform? I mean today you have pension in Congress being debating. When would you see the timeline for the telco being discussed on [indiscernible].

[Christian Gebara, executive]

This is Christian. As you know, it's a new Congress, a new government. We are very optimistic because we believe that this law will benefit the society and are in line with our plan to focus more on new technologies rather than legacy. But we don't have a concrete timetable for that to happen. But optimistic and we believe that this still will go through, but I cannot give you more details about the timing.

[Operator]

The next question will come from Marcelo Santos of JPMorgan.

[Marcelo Santos, analyst]

My first question is about broadband deployment. You mentioned on Page 9 of the presentation some of the best cases you had in '17 and '18. I wonder if you could comment a bit on the cases which were not so good or where you had more difficulties in the cities you launched in? And what kind of hurdles are you finding in these cities where you had more difficulties? And the second question would be about the interconnection revenues. I think we saw a 27% sequential expansion in interconnection and you mentioned in the release that there was some settlement. So I was wondering, this 27% increase quarter-over-quarter hit mostly on the settlement? Or was there any, let's say natural increase in interconnection? These are my two questions.

[Christian Gebara, executive]

Marcelo, this is Christian. The cities, yes, there are some that we have a little bit lower penetration. Here it's important to highlight that it's the penetration over an installed capacity, not this homes passed, so it's the installed capacity. But once we've been able to select where we want to enter, our performance has been better. There were some cities that were before that we had the agreement of the merger of the position of GVT so maybe they were not so attractive, that's the one that we are picking out. So as we see now is that we are getting, on average, very good results. In some cases, there are small players that are able to retain more customers that we see in others is the one that we presented here. But in the end, we still haven't put together all of our strength that it would be the mobile plus the fixed. We're still playing with the fixed by itself with some -- very few cross benefit. And once we put all together, our strength will be even larger. So I think this is an example, maybe it's one of the best examples. But again, once we put all our strength, mobile plus fixed together, the channel that we have, I think we can capture this easily in any city that we decided to get in. So again, positive about the outcome. And in some cities, there are small players that may cause us some more difficulty, but we still haven't used all our tools to capture the market. And now I will pass to David to answer the second one.

[David Sanchez-Friera, executive]

Marcelo, I will cover the second question. The collection revenues have some seasonality during the year, mainly for settlements with other operator, and thus, it's difficult to compare quarter-over-quarter. But in terms of what can you expect for the future, for now going out, we expect these revenues overall being almost flat year-over-year. Therefore, compensating the drop of termination rates with higher traffic as a result of the unlimited, all-net traffic offers that we have now since the last 3 years in the Brazilian market. So overall will be -- we expect this to be flat.

[Operator]

The next question will come from Carlos Sequeira of BTG Pactual.

[Carlos Sequeira, analyst]

So I have a couple of questions. One is would you consider making an extraordinary dividend payment to leverage up the company's balance sheet if interest on equity and tax benefits are discontinued? I know there is this discussion. And if you have done any study on what would be the ideal leverage in that scenario? And the second one, on CapEx, can you share with us your CapEx expectations for this year? And what would be a long-term CapEx ratio, please?

[David Sanchez-Friera, executive]

This is David. So regarding the first question, as you know, the benefits that we have in Telefónica Brasil, we have very low leverage. We only have BRL 2.2 billion net debt, which represents only 0.1% of the total. This gives us a lot of flexibility to face the potential tax reform that could happen during the year. So this is something we are analyzing internally, but as far as we don't know what this tax reform is going to -- which change it's going to bring, for the moment our only draft analysis. So once we have more visibility about this potential reform, then we will consider and we'll propose, we will recommend some review of our capital structure if it's the case.

[Carlos Sequeira, analyst]

Okay. And on the CapEx?

[Christian Gebara, executive]

For CapEx, Carlos, this is Christian. As we said last year, no, we don't give guidance, but what we presented was 26.5 over 3 years. That would mean 8.5% in first year, we were able to respond for the plan that we had with lower CapEx for 2018. For 2019 and '20, we keep the same plan as a ceiling with the opportunity to be more efficient with more scale and to do what we need to do with lower than what would be for the ceiling for the 26.5. So we keep the same number.

[Operator]

The next question will come from Julio Arciniegas of RBC.

[Julio Arciniegas, analyst]

One question related to broadband performance. The company have some few losses this quarter and you mentioned that it was driven by the competition in the corporate base. Can you give us some color of this competition? Basically, is this competition based on price from competitors? Or due to network upgrades that actually competitors are doing in the areas where you have copper? And my second question is related to some of your comments before about the effect of bundles in fixed revenues. Can you give us a rough idea of how much from the fixed base is already in these sort of bundles? Basically, I would like to have, more or less, an idea of how long can last this affect?

[Christian Gebara, executive]

Okay. Julio, this is Christian. Related to the copper network in São Paulo, that was the one that I mentioned before. Yes, there are some new competitors. As you know there are many small players in different cities of the state of São Paulo that when they get there with an offer of speed that it's above what we can offer with the copper for your pure ADSL. That's the main reason why we may lose a customer. So it's difficult to respond when we don't have the overlay of FTTH. So again, it's kept in the speed that we can offer the copper. So that's the main reason. Sometimes, outside São Paulo, we have FTTC, we can respond better. But when we are in São Paulo with pure ADSL, difficult to respond, getting to the limit of 4 or 10 megabit depending on the area and the distance from the central. So that's the main reason. Also there are many players attacking smaller cities and São Paulo is the reality that we face. Regarding bundle, I was talking about voice. We bundle voice as much as we can in both B2C and B2B broadband plans. So the majority of our customers have a bundle, broadband plus voice. So it's protected as much as we can. But the point was more that when you bundle and you offer all the calls to fixed and to mobile included, the price is flat. Also, we don't have access expenditure from the customer when they are not bundled. So that was my point to describe why revenues were not growing, because we are bundling everything. We protect but we don't have additional revenues from usage beyond the plan that they have in the bundle.

[Julio Arciniegas, analyst]

No. If I might follow up on that. I do understand the point. But basically, I would like to know what percentage is already in this sort of bundle. Basically, I want to assess for -- I don't know. 20% of the base has already this bundle. 80% of the base still has to go through the process?

[Christian Gebara, executive]

No, the vast majority is already bundled, the ones that have voice and broadband. But we don't give the number, but the vast majority.

[Operator]

This concludes the question-and-answer section. At this time, I would like to turn the floor back to Mr. Christian Gebara for any closing remarks.

[Christian Gebara, executive]

Thank you, again, for taking part in our call. I have interacted with our [indiscernible] during my previous role and now, as a CEO, I shall expect to maintain this channel open and strengthen our relationship going forward. So thank you, everyone.

[Operator]

Thank you. This concludes today's Telefónica Brasil 4Q '18 Results Conference Call. You may disconnect your lines at this time.