Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefónica Brasil Third Quarter of 2018 Earnings Conference Call. Today with us representing the management of Telefónica Brasil, we have Mr. Eduardo Navarro, CEO; Mr. Christian Gebara, COO; 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. [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. Please note today's conference is being recorded. Now I will turn the conference over to Mr.

Luis Plaster, Investor Relations Director of Telefónica Brasil. Mr. Plaster, you may begin your conference..

To start, Eduardo Navarro, our CEO, will give you an overall view of our operating and financial highlights for the third quarter of the year. Secondly, Christian Gebara, our COO, will go over our commercial CapEx evolution. Finally, 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 Eduardo..

Thank you, Plaster. Good morning, everybody, and thank you for taking part of our third quarter 2018 results call.

As I mentioned in the closing remarks of our second quarter results call, Brazil has now defined its President for the next 4-year cycle, and we at Telefónica Brasil are confident in establishing a pact having as counterparts the new administration or the companies in this civil society to advance in the digital transformation of the country, which will most certainly allow Brazil to transpose certain barriers and improve its outlook for the future as a more competitive environment.

Starting by Slide 3, by leveraging our -- on our unique asset base and irreplicable position in key high-value segments, we're able once again to deliver leading operational results in the third quarter of 2018.

Our unique value proposition based on providing the best connectivity inside and outside of the home and the best customer experience through innovation and quality allow us to reach almost 1 million net additions in postpaid in the quarter, already representing 53% of our mobile customer base.

A high record 167,000 net adds in FTTH, which is 46% higher than a year ago. And 50,000 new IPTV connections, 75% higher than the third quarter of last year. We are accelerating growth in the right products by improving the quality and profile of our customer base.

As a result, we are been able to transform our revenue mix, guaranteeing long-term sustainability, which already contributes to our ongoing marketing expansion. 69% of total revenues came from growing business, which reached a robust grow of 9.8% year-over-year in the first nine months of 2018.

Client expansion coupled with a strong 4.2% yearly reduction of our cost, which came as a consequence of our remarkable efficiency in capturing benefits from digitalization and simplification, led our current EBITDA to grow 5.3% in the quarter, yielding an impressive margin of 35.9%, the highest quarterly margin of recent years.

Such strong results are crowded by our unmatchable margin profitability and cash generation, which makes Vivo a unique value and growth play in the sector.

In the first nine months of the year, our net income reached a higher breaking level of BRL7.4 billion, which is 141% higher than a year before, after recording to be BRL3.2 billion of profit on the third quarter of 2018, positively impacted by an extraordinary tax gain registered in the period result from a judicial decision related to the payment of fiscal fees over ICMS for Vivo operations, similar to the one that we had in the second quarter related to Telesp.

David is going to give you much more detail on this, but I'd like to emphasize here that this BRL6.2 billion net that we accumulated in the first -- in the last 2 quarters. And he's going to explain that we are expecting still some more to come. This is not just accountable number. This is future cash.

These is -- these are tax that you have paid and now will have to be reverted. These are tax credits that are going to be reverted to the company in the quarter -- in the next quarter that will boost our tax generation. And David is going to give you more color because, again, this is not just account number, this is future cash for the company.

Our solid results and strict financial discipline also allow us to generate almost BRL5 billion in free cash flow in the first nine months of the year. These outstanding numbers enable us to declare so far BRL3.2 billion in interest on capital on this year, 32% more than we have declared in the full year of last year.

I remain very confident that we are on the right track, building the blocks to capture the most valuable market positions ahead of us. Moving to our key financial results on Slide 4, we will see that the third quarter of 2018 represent a total year-over-year drop in total revenues.

Although 69% of our revenues are growing at a very solid pace, as I stated before, the other 31%, which is composed of prepaid, fixed voice and DTH, continued to suffer due to increasing competition in mature adopted services.

In addition, revenue evolution is affected by a nonrecurrent large fixed contract signed in the third quarter of 2017, creating a tough comparison and by short-term pressure in mobile service revenues that is already been addressed and we improved our fourth quarter.

Nevertheless, in the first nine months of the year, we continued to deliver total revenue growth in comparison to 1 year ago as the performance in premium segments continues a somber level.

We are confident that our revenue trends in the middle term will continue to be solid on the back of our UBB, postpaid and IPTV growth, while prepaid and fixed voice also will benefit from a better macro environment. The third quarter 2018 was the 11th consecutive quarter in which we reduced our recurring cost on a yearly basis.

As a result, our EBITDA grow a solid 6.1% year-over-year in the first nine months, reaching a margin of 35.1%, which is 1.8 percentage points higher than the first 9 of last year. We invested BRL6.1 billion so far, representing 18.8% of our CapEx.

Our CapEx in the quarter had been accelerated in comparison to 2017, but we remain confident that we should end the year being more efficient than to what we are expected as we are been able to deploy our resource more effectively. More important, the high level of CapEx has not hampered our ability to expand our cash generation.

The proof is that our free cash flow grew 6.4% year-over-year in the last nine months, reaching BRL4.8 billion in spending more CapEx. In fact, our free cash flow will be further enhanced in the next year as a result of the tax credits arising from the judicial gains that I've just mentioned.

And finally, as previously stated, we registered a high record of reported net income in the first nine months in the period, BRL7.4 billion, which will certainly contribute to boost shareholder remuneration going forward. Now I pass to Christian, our COO.

Christian?.

Thank you, Eduardo. Good morning, everyone. This was a positive quarter for Vivo in our key growing businesses, with strong commercial performance in postpaid, both for broadband and IPTV. Getting on the details of our main businesses. On Slide 5, we present evolution of our mobile revenues which increased 1.8% year-over-year.

This performance was supported mainly by data and digital services, which grew 8.2%, and by our plan to accelerate smartphone sales, which boosted handset revenues by 72.4%. Our handset strategy has had positive results, and now it represents 6.5% of our mobile revenues.

Moving to the right-hand side of the slide, the graph shows that postpaid revenues maintained a solid growth of 7.1%, keeping the trend of real growth observed during the last 7 quarters. The increasing prices and the strong net additions contributed for postpaid positive results.

In addition, partnerships with relevant OTT players have differentiated our offering and enhanced their attractiveness. Meanwhile, prepaid revenues are still being affected by negative macroeconomic indicators and competition.

However, the reposition of our prepaid offers to include more benefits and the launch of Giga Chip are expected to bring more net additions and top up growth. Finally, B2B mobile service revenues had positive growth this quarter, contributing to maintain the high single-digit growth of postpaid revenues.

On the left-hand side of Slide 6, the graph shows that mobile market share continues to rise despite of our clear leadership. We were able to increase 0.9 percentage points year-over-year, reaching 31.8% share in total and 41.1% in the postpaid. In the machine-to-machine business, we continue to expand our leadership, with 42.5% market share.

In postpaid, we had a remarkable performance, increasing by more than 2.6 million access our customer base year-to-date, leading the market in net additions in every month since March 2018. I would like to highlight our strong customer base mix, with postpaid representing 53%, 5.2 percentage points more than in the third quarter of 2017.

On the right-hand side of the slide, you can see that we continue to put efforts on migrating customers to higher-value offers. In the first nine months of the year, we accelerated a migration from prepaid to hybrid plans, increasing 11% year-over-year.

Moreover, we continue to enhance postpaid customer loyalty, and as a consequence, our churn continued to be very low. Finally, we continue to increase overall mobile ARPU, which went up 0.3% year-over-year, boosted by 11% growth in data ARPU in the same period.

Moving to Slide 7, we present our fixed business performance which had positive results and growing services. We continued to focus on broadband services, mainly in ultra broadband, which had an exceptional growth of 28.5% year-over-year.

This quarter, fixed revenues decreased by 5.4% year-over-year, but if you exclude the onetime B2B revenue generated in the third quarter of 2017, they would have declined only 2%. The B2B deal also affected Data and IT revenues, which grew 4.1% year-over-year, excluding this effect.

The graph on the right-hand side also shows that the fixed revenues were impacted by the decreasing voice services and by the company's strategic decision of de-prioritizing the DTH business. When excluding these 2 services, fixed revenues would have grown 11.3%.

Our focus on the expansion of FTTH is reflected by an impressive 48.2% growth in revenues while IPTV, which followed the same strategy, presented a 44.3% growth year-over-year. Finally, in B2B, we have been reversing negative trends in the fixed business with more growth in broadband and digital services, highlighting security, cloud and IoT.

On Slide 8, you can clearly see our strong commercial performance in FTTH and IPTV and also our consistent ARPU growth. The left-hand side of slide shows that FTTx continues driving up growth. Our customer base had a significant increase of 10% year-over-year.

Specifically, in FTTH, access grew by 45% with our record net additions of 167,000 access in the quarter. Our premium customer base contributed for an overall broadband ARPU growth of 13.7%. On the right-hand side of the slide, we present our focus on customer digitalization for IPTV, which now represents 33% of total Pay TV base.

We managed to grow by 53% our IPTV customer base with 50,000 net additions in the quarter. In the last 12 months, our total Pay TV ARPU grew 2.3%, reached more than BRL100. I would like to highlight that, overall, broadband and Pay TV ARPU have consistently grown for the last 13 quarters.

On Slide 9, we detail the success of our UBB strategy, which is bringing outstanding results in cities where we launched FTTH. On the left-hand side of this slide, we show that in the cities launched in 2017, average broadband ARPU is 16% higher than overall broadband ARPU, with double play surpassing BRL100 from triple play over BRL149.

We also captured a high share of the market quite rapidly, reaching an average of 36% of broadband market share, going as high as 81% in the best case. Analyzing only ultra broadband, the results are even more impressive as we have an average of 73% of market share.

In addition, we are having an excellent take-up over home passed, with some cities surpassing a long-term target of more than 30% in a few months, with an average of 42% of penetration over installed capacity. On the right-hand side of the slide, you can see that the performance is even better in cities where we launched FTTH in 2018.

Until September, we launched FTTH in 16 cities, and we expect that by the year-end, we'll have more than 25 new cities launched. Our faster pace in deploying FTTH will enable us to end 2018 with 9 million FTTH home passed. In addition, we continue to enhance sales and technical performance leading to a higher-than-expected take-up rate in every city.

Furthermore, in those cities, average broadband ARPU reached BRL72, which is 5% higher than average ARPU in cities launched in 2017 and 21% higher than overall broadband ARPU. Moving on to Slide 10, we present our acceleration in CapEx execution, reaching BRL6.1 billion in the first nine months of the year in line with our expectations.

Furthermore, as we have been capturing capital efficiencies and improving allocation of resources, we should be able to end the year with an expenditure lower than what the we initially expected.

On the right-hand side of the slide, the graph shows that 69% of our investments are focused on growth and high-return technologies, such as 4G, 4G+, FTTH and IPTV. As a result, we strongly expanded our FTTx footprint, reaching 230 cities, 104 of them with FTTH. We're also enhancing the quality of our 4G network.

Currently, we cover 87% of the Brazilian population, an increase of 7 percentage points year-over-year. Moreover, we brought 4G+ coverage to 736 new cities in the year, reaching a total of 850 cities where 4G+ is available. Finally, we improved the quality of our sites, increasing fiber-connected sites by 38% year-over-year.

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

A 15% year-over-year increase of online fixed B2C sites. The percentage of digital top-up reached 22%, increasing 3 percentage points year-over-year. Meu Vivo apps users increased 46% versus the previous year. Calls to our call centers reducing at fast pace of minus 30%. Penetration of e-billing reached 53% of our total customer base.

More than 60% of credit scoring is being now conducted through digital channels. 100% of point of sales are operating on our new full stack platform. And 63% of all technical supports are already digital. Now let me update you about the main cost lines being impacted by these changes.

Billing and posting cost reduced minus 19% mainly due to the efforts made to incentivize adoption of e-billing by our new and current customers. Call centers cost dropped 13% year-over-year due to the increase of digital interactions through our e-care app, website, Facebook and others.

Installation and maintenance costs reduced by 8% in comparison to the same period of last year. As digitalization and Meu Vivo penetration goes up, commissions of physical top-ups are decreasing rapidly by 31% year-over-year.

Once again, Telefónica Brasil reinforce its commitment to transforming the industry, providing an unmatched experience to customers, prioritizing functionality, simplicity and efficiency while reducing cost in a sustainable way. Now moving to Slide 13.

Net income for the first nine months of 2018 reached a record level of BRL7.4 billion, 141% higher than in the first nine months of previous year.

The main drivers of these results were, first, nonrecurring effects registered in the quarter that had a positive impact on EBITDA of almost BRL900 million and on financial results of almost BRL750 million mainly due to a Superior Court of Justice ruling in favor of Telefónica Brasil that recognized the right to deduct ICMS from the basis of calculation of PIS and COFINS contribution for the period between 2004 and 2013.

And also, higher EBITDA due to our unprecedented cost control as a result of digitalization and simplification initiatives as well as mobile revenue expansion. These effects were partially compensated by higher tax levels in line with the higher net income level recorded in the period.

As we announced in the previous call, due to a significant -- a similar nonrecurring effect booked in the second quarter, the amount registered in the third quarter will have a progressive positive cash impact as the amounts involved will be compensated as tax credit in the next future. Moving to Slide 14.

Let me give you more details regarding the final judgment in the Supreme Court of Justice, which impacted positively our results in the second and third quarters of 2018. In March 2017, the Federal Supreme Court decided that ICMS, which is a state tax, must be deducted from the basis of calculation of PIS and COFINS contribution.

Since last year, the company adopted the new methodology according to this decision. Higher -- we had processes requiring the amount paid in the last few years by some of our incorporated companies.

In the second quarter of 2018, the process related to Telesp operations for the amount paid between 2003 and 2014 had its final decision positively impacting EBITDA by BRL2 billion and financial results by BRL1.8 billion, amounting to a total of BRL3.8 billion in the quarter.

In addition, in the third quarter of 2018, we had the final decision this time for Vivo related to the amount paid between 2004 and 2013, positively impacting the EBITDA by BRL1.4 billion and financial results by BRL1 billion, totaling BRL2.4 billion in the quarter.

Summing up, the positive impact on EBITDA in the first nine months of the year amounted to BRL3.4 billion while the financial results reached BRL2.8 billion, representing a total impact of BRL6.2 billion.

And unlike the other examples of companies that have a reversal of provisions similar legal matters, our case generated tax credits that will turn into cash as time goes by, boosting our cash generation and creating a potential for unprecedented shareholder remuneration in the future.

Finally, there are other processes still waiting for a final judgment which could generate extra gains in the future, which are -- total -- that would have a total impact of 10% of the market capital. Turning to Slide 15.

Free cash flow from business activity continues to represent an unbeatable performance even with a higher level of investment in 4.5G and FTTH rollout in the year.

In the first nine months of the year, we generated BRL4.8 billion of free cash flow as a result of our better operating performance, which were reflected by our solid EBITDA growth, lower financial cost in the period and continuous improvement in our working capital.

The shareholder remuneration of BRL4.6 billion related to 2017 net income is divided into tranches. In August, we already paid BRL2.4 billion, and in December this year, we'll pay the remaining BRL2.2 billion. Thank you. And now we can move to the Q&A..

[Operator Instructions]. The first question comes from Maria Azevedo with UBS..

My first question is on the competitive environment for mobile. We are seeing more aggressive data offers all across the board. Should we expect softer data ARPU growth from now on? And do you think the market is moving towards unlimited data plans? You were a little bit more aggressive on prepared this quarter.

Do you expect a more expensive stance in postpaid as well?.

Maria, this is Christian. Yes, I think we feel that there is more aggressiveness in prices in the market, although I think some of the changes that we see in the revenue performance is not only related to that. I think there is a macroeconomic impact in the prepaid as you -- I think we gave the details about performance on the prepaid.

We expect that to improve, but last quarters were negative. And I think it's more related to the macro environment that we see unemployment being high and also our ability to increase prices due to a lower inflation rate.

Regarding like specifically about competition, in the prepaid, we launched a new offer, a new offer that is very focused on acquisition.

And the prepaid is important for us to have robust customer base, not only for maintaining the top-up in the prepaid but also to have the opportunity to migrate in the future discussion these customers to the hybrid. I think we started some years ago with a weekly offer.

And what we saw in the last quarters is our competition that was coming not from daily offers to have more or less the same offer that we have, giving more benefits, like off-net voice or even social network. We avoided to be so aggressive. What we did in our position is to try to combine the chip value with biweekly offer to attract more customers.

So we are responding to some aggressiveness that we saw in the prepaid, but trying to be restricted to a position keeping our customer base with the offer we had before. In the postpaid, I think it's the same. Our churn is very controlled. If you see the net adds that we have in the market, we keep leading in the number of customers.

So we -- what we see is that customers follow their loyalty with Vivo, and they still are very attractive to our offer. But again, this competition is too strong in the aggressiveness in surprised. We need to respond. So going forward, we expect more rationality. And we had some increasing price in postpaid.

We also saw some of our competitors also increasing prices in postpaid. So we believe that's more rational, and the macro getting better could be positive for us..

Perfect. And as a follow-up question, on the CapEx side, do you expect an acceleration in mobile CapEx spending? Do you see the need to improve the quality gap you have a versus your competitors? And if you can share with us if you have initial views on 5G and fixed wireless broadband, that will be very helpful..

Okay. This is Eduardo, Maria. Thank you for the question. I think that all the CapEx for the mobile we've included to envelope that we have for total CapEx that's -- we're not going to increase. We believe that, normally inside this envelope, we can make adjustments in what we are doing to accelerate our deployments in mobile CapEx this year.

We have accelerated a lot in terms of 4G, in terms of 4G+. If -- and like Christian had explained, in the fiber sites. Again, I think we can do with the same envelope of CapEx that you have, that's the BRL8 billion. That's our recurring CapEx plus the BRL2.5 billion envelope that you have announced to the market for the 3-year period.

BRL8.5 billion -- in total, BRL8.5 billion for this year. BRL9 billion for next year in 2020. We can even, at least for this year, do slightly better. On the 5G. So we have prepared for the 5G. Yes, we are -- all the investments we are doing in fiber is making us ready for the 5G. But we do not see any key applications at least in 9 year.

I think that we do not see huge investment for 5G in the near next year or maybe something of 2020. But at least, in the next 2 years, we do not see the 5G to put pressure on our CapEx..

The next question comes from Mauricio Fernandes with Merrill Lynch..

Just on the question that Maria had on the price increase that you mentioned, Christian, as well on the overall competitive environment. Would you expect that to -- when was this implemented, first off? How much was it? And whether this should be able to offset the decline in -- you are reporting in prepaid.

And then specifically, on top of that is the second question but related to the first one, whether the competition has reacted or not. It seems it hasn't, based on your comments and based on the pricing that we've seen so far.

But just wanted to check whether you have seen any reaction from the competition, whether they followed the price increase or not..

Mauricio, it's Christian. We increased postpaid, pure postpaid, in September, and we increased hybrid in December. Some of our competitors already increased hybrid, and we believe they may also change the postpaid, okay? So that's what the signs that we have. So in hybrid, we're going to do in December because we cannot do before.

Some of the competitors already been hybrid, and we did postpaid to September. So that's the question about price increase. I don't know about the second one..

No, the second one, you already answered. So actually, if I may, as a second question then, the -- there's a -- in the presentation, there's a little error -- arrow, sorry, in prepaid, showing that it was declining by 15% and now 20%. And the arrow is showing it up in the fourth quarter.

Is it hope? Or is it already trends that we're seeing in the fourth quarter that lead to, particularly given the long-term Giga Chip in the third quarter, whether this is already allowing Vivo to turn around the trends in prepaid we've seen the last couple of quarters?.

Mauricio, that's the trend. It's more than hope. It's basically based on acquisition of new customers because we have here a combination of frequency of top-ups and number of customers. So we see the number of customers net adds in prepaid increasing.

So if you keep the other variables, the frequency and average value, we believe that we can have a better performance. We don't have the right number, we don't give the right number, but we see this going to be better than the management strategy that we presented year-over-year..

Next question comes from Fred Mendes with Bradesco..

I have two questions as well. Maybe first one, we saw a significant improvement here in the line of tax and contributions. I'm just trying to get an understanding of the reasons for that. It seems that's.

And as a second question, also, accounting here, if you can just give us a little bit more of color on the BRL490 million related to the contingent expense that you recognized in this quarter? This would be great as well..

Fred, you can see that -- thank you for the question. Just regarding your first question, we are doing structural changes across the company just to be more efficient, acceleration, simplification and digitalization. And also, we're having savings across all the line.

The one specific one that you are mentioning here is basically coming from the reduction of our base. Customer, particularly in prepaid, is bringing us some reduction on some taxes on fixed tel. Regarding the contingency, your second question. We have positive effects, but we also have negative effect in terms of tax contingency.

So this quarter, we have to recognize a provision for just a litigation that we have. That has been accounted in the quarter, but we will continue with the litigation. So that means that we are not expecting to have a negative impact on the cash. I will expect for the next couple of years for this much.

So it's just a provision, a one-off without cash out..

Okay, perfect, David. And if I may, just one more question, now more on the operating side. Based on the FTTH, when we look at the like smaller players, we see their EBITDA margin running like 45%, 50% and sometimes higher. Of course, there are a lot of moving parts to that.

But in your operation, are we seeing similar numbers to that, maybe a little bit larger or a little more? Just trying to get an understanding of the potential of this business for the next quarters..

Fred, we don't give the exact number, but I think it's -- our margins are high. It's more a CapEx decision, no? The new margins, I think we are pretty confident, no? And I don't know the economics of the small players. I think they have different ones, but I see our margin very high in this service..

Our economics have to be better and always have more scale....

I believe, no -- I don't what they do with their -- some of their -- no, we don't know the details of how they do that, but from our scale, the synergies in channels, the strength of our marketing and everything else, I think our margins should be higher. But we don't give it much further decision about CapEx and return..

Your next question comes from Julio Arciniegas with RBC..

I see the bad debt has increased during Q4 -- during Q3, actually. I think that is still the highest rate in the last few years. Can you give us some color over the drivers of this increase in the outlook? Should we basically assume that's a one-off? Or should it increase? And why is it increasing? And my second quarter is regarding prepaid.

Prepaid net adds, they have been very negative.

Can you give us some color of what is the driver of this negative year? Is migration -- how much is migration to postpaid versus subscriber losses or just how much it seems, disconnection?.

Okay. Julio, this is Christian.

The first question was about increase in what?.

Bad debt..

On bad debt, okay, and then I will give to David. So let me do in the prepaid. In the prepaid, I think -- as I said in the beginning, I think there is a macro impact, so -- especially in unemployment, so we see consumption going down. So that is impacting prepaid.

But on the other hand, even with this macro that is not so beneficial for the prepaid, we keep a very strong rate of migration. So I think, what the number that we said, that reaccelerated the number of customers that we migrated, 11%, net migration for prepaid to hybrid year-over-year if you put the nine months together.

So if you don't have a lot of consumption coming from the base that we have, and we are still migrating the best customers to higher plans. In this case, it's hybrid. This is a combination that we see being responsible for the result that is negative as you said in the prepaid.

And what I said to Mauricio in the previous questions, that we are trying to attract more customers to increase this lake of prepaid customers for, one, trying to increase the top-ups for customers that stay in the base, and second, to be able to migrate or to hybrid.

So it's always the combination of the two revenue, the hybrid plus the prepaid that are looking for..

Julio, this is David Melcon. Just to take your first question. I mean, we are seeing a slightly increase in bad debt, but considering that we are growing 10% in total accesses in postpaid and we are also are accelerating the growth in FTTH and also IPTV, we believe that the nets -- net-net is pretty positive.

And here, we are using analytics, big data to understand better what is right tally for the right customer. And particularly, talking about postpaid, where we have a very high margin with the subsidies, we can take some occasional risks.

So even though you see an increase in bad debt in the cost, the impact in OIBDA is very accretive and very positive. I think we are working in the right direction..

The next question comes from Carlos Sequeira with BTG Pactual..

So my question is, I mean, the numbers on the FTTH projects are amazing, right. The results are super strong. So my question is, why not accelerate the deployment further by increasing CapEx, right? Why limit it to BRL2.5 billion in the next 3 years? That's my question..

Carlos, this is Christian. I think it's also there will be execution points that is important to know whereas we are getting to more than 25 cities this year. In homes passed, I think what we saw, when we presented like in our Investor Day, we ended last year with 7 million home passed. We want to get this year with was 9 million home passed.

We expect the end of 2020 with more than 15 million home passed. So it's a huge acceleration from what we had in the past. Combine it with all of that, there's a lot of commercial efforts being involved. So I think we have the right number to be able to capture this opportunity. It's a great opportunity. We've been very successful.

But again, I think, to execute not only network but also the commercial part, I think we have the right number to go forward..

The next question comes from Diego Aragão with Goldman Sachs..

The first one is related to the handset subsidies. If I would make just a simple math here, taking into consideration your handset sales and your COGS, this would imply the lowest level of service do you see, if I'm not wrong, from the from the past five years.

So can you share some final thoughts on this?.

Yes, you're right. I think what we see the increase in smartphone sales is not related to subsidies, is we're selling smartphones to hybrid or prepaid customers or even other customers in our family plans that don't have the right for subsidies.

So what we see in the increase of representation of smartphones' overall total mobile revenues that reached 6.5% is because we see the opportunity to be a huge and important seller of smartphones and accessories. And we're going to drive our stores, and we have more than 1,700 stores.

And our technology hubs, so some not service smartphones and is not related to subsidy.

So we're clear?.

Okay, yes. Okay, so look -- and just a follow-up on Cadu's question. Clearly, your FTTH business is producing very solid results. So I just want to understand actually what your expectations for the satellite operation.

I mean, can you share with us how much are you investing in this business and whether would you consider to fully divest from the DTH operation? And in addition, can you quickly comment on weather effects had some impact to content costs in this quarter?.

Like, the DTH, I think it's -- as we said, we are de-prioritizing this service. But as you -- if you look at our network, FTTx, as I said, we're going to end the year with 9 million FTTH, but we have another 11 million that is FTTC.

This FTTC, when the customer requires a 3P solution, the only solution that we have is DTH because we don't have IPTV over FTTC. We only have IPTV over FTTH. So it's going to be depending on the customer demand. We're not going to be stimulating the sale of DTH.

But for sure, when the customer wants either to migrate from another competitor or they want a 3P offer, this offer is going to be voice plus FTTC plus DTH because we don't have any other alternative for this technology in the broadband. Everything that is FTTH, that is our future.

We are only growing FTTH network, is the number of also to Cadu, the 9 million, the 15 million home passed that we're going to get in 2020, all of that's going to be with IPTV over FTTH. So that's the combination in the number that we need to see. As you can see, what we're presented in Slide 10, we are reducing DTH CapEx, already at 39%.

Even our fixed business, if I take out the decrease that I have in voice in DTH, it would be much positive revenue growth in the fixed. So it's going to depend, depend on the demand of the specific customer. But we are also open for other type of partnerships with OTTs, selling broadband plus OTT.

And we launched already with a partnership with Amazon, exclusive partnership, and we're also launching with Netflix, among others. And in the content, yes, it is driven by $1, but we already have it negotiated. So we are pretty confident with the number that we have for content this year. The $1 is not going to impact us..

The next question comes from Marcelo Santos with JPMorgan..

I just wonder if you could give us a little bit more color on the processes that there is still ongoing and waiting for final judgment that you mentioned which could generate extra gains. You mentioned like 10% of the market cap, so BRL6.5 billion.

So how many processes are there? I mean, what else of information could you provide on that?.

This is Eduardo, before I pass it to David. When David mentioned a little more than 10% the market cap is the total, we have -- we had already 6.2%. We have a more or less something that will depend, that David is going to explain you more. More BRL2 billion, then you could have a total about BRL8 billion.

This BRL8 billion compared to our market cap would be between 12%, 13%. But David, you can give more color on this remaining BRL2.2 billion..

Marcelo, this is David. As we explained in the call, and we wanted to include one slide, which is #14, just to go through, I guess, sort of the detail because we believe this is a very relevant topic that will affect the shareholder remuneration in the next few years and also the free cash flow generation.

So we have already won the two main cases which amount to BRL6.2 billion, which are related to Vivo, which was the mobile operator, and Telesp, which was the fixed operator.

On top of these two large cases, we have small other companies, which was EBT, EBA and TeleMe, some few others for different years that could amount for an increment at BRL2 billion. So these will add up to more than BRL8 billion that will come through the free cash flow in the next, we expect, 3 -- around 3, 4 years.

So for the one that are remaining, as Eduardo mentioned, will amount between -- something between BRL1.7 billion and BRL2.2 billion, so we could say approximately of BRL2 billion. We are confident that we will have it in the next future, so could be a couple of years.

We are not in a hurry because we will compensate existing BRL6.2 billion over the last 2, 3 years. So no matter if this additional case is -- takes slightly longer because we cannot use this additional cash until we have already compensated each of that. So very positive.

And this, we really changed the trends of the free cash flow generation for Telefônica Brasil over the next 3, 4 years..

The next question comes from Vitor Tomita with Itaú BBA..

Two questions on our side. First, following up on Fred's question, should the tax and contribution line in cost of services remain at a much lower level than the previous quarters given the lower fiscal taxes and disconnections and other efficiencies in the third quarter? And a second question, if I may.

We also saw the announcement that the board approved the incorporation of Telefônica Data. Could you elaborate further on the potential benefits or savings that could come from this? And that's it..

Okay, this is Eduardo. I can start by the second one. First of all, thank you for your question. Up to now, we have some of our products sold through Telefônica S.A., some of our products sold through TData.

All the -- usually, to make it simple, all the telecom services, the connectivity, are usually sold by Telefônica S.A., and some of the value-added services, some of them on music or those, some of them, are sold through TData.

It creates confusion to our customers because when they receive our bundle, they, sometimes, they buy a bundle for BRL10 and they receive an invoice for BRL8 for Telefônica service, another BRL2 -- another invoice for BRL2 for TData. It creates confusion to our customers, complaints in our call centers.

And we believe that all those services are working. When the customer buys a product, sometimes he's buying connectivity plus content, together. It's makes no division, no differentiation between the connectivity and the content that comes together with the connectivity. Then it's a way to simplify our relationship with our customers.

We can have a -- it will have a strong implication in terms of our simplicity, in terms of our number of systems, in terms of calls to our call centers. And this is another simplification that's done in line with all the simplifications that we have done inside the company..

Vitor, let me take the -- this is David Melcon. Let me take the first question. If you look over all our main cost lines, we are seeing a drop year-over-year this quarter and even for the nine months of the year. This is consistent with evolution.

So I would say that the message is that we keep reducing cost overall, and we will continue doing this for the next quarters. Specifically, in the line of taxes and other contribution, here is mainly benefiting from the periodical disconnection from prepaid that we do regularly. So we also need to look to this rationality, comparing year-over-year.

But I will say, we are consistent with evolution. We want to continue improving our OIBDA margin that we have seen over the last few quarters. And we are committed to continue reducing the cost, particularly to protect the OIBDA and to able to absorb the pressure that we have been having on the -- on some of our commercial activities and the top line.

So our commitment is to protect our OIBDA and to be able to continue the path of the growing margins..

The next question comes from Soomit Datta with New Street Research..

It's Soomit at New Street. First question, please, on regulation.

Could you maybe give us a update as to where we are on issues like spectrum caps, which I understand we might be hearing something positive on later this week? Also, the PGMU and, dare I say it, PL 79, if there's anything that you've heard recently, which is additive, that would be helpful.

And then secondly, just on the fixed business, as you mentioned, there was a tough comp in Q3 '17 on the data line. Could you quantify that? And I guess, just sort of trying to do that, it looks like the underlying fixed business got a little bit better this quarter, a little bit less negative at the revenue line.

Is that is a trend, if that is the case, that you hope will going forward?.

I'm Christian, answering the second question. The third quarter 2017, we had B2B deal that was a lot focused on data and IT. It was around BRL150 million. If you exclude this deal, our growth would be minus 2%. So that's the quantification that we are sharing.

So it's BRL150 million in third quarter 2017, that excluding this amount would be the growth -- the negative growth would be minus 2% instead of the number we presented. Is it clear? And I pass to Eduardo for the second question..

Very clear, yes, that part..

This is Eduardo. Thank you for the question. We accelerate -- we expect that all those telecom reforms would accelerate with the new government. Now as I'm seeing some of them, there is some speculation that even then the PL 79 could be voted even in the -- during the rest of the year. We do not bet on this hypothesis.

But we believe that somehow that's going to receive support from the new government and should be approved soon. For the PGMU, I think the same. Now we are -- we have some discussions with ANATEL about how to calculate the impact.

ANATEL is assuming that all the reliefs that is given to the telcos in terms of our obligations for the PGMU should be considered as an obligation for the telcos, a new obligation, and we would like this to be considered in our calculation in our balance in which we would have something in our favor something against us.

And we will have -- we believe that those modifications in terms of physics, a number of public forums, it seems like this should be implemented immediately because we are spending money on things that have no value at all.

But the calculation, how it should impact our relationship with the concession, we believe this is still a long discussion to come. And on the -- on your first point about the decrease of the spectrum cap, we have nothing. We have no comments about this. So I have received nothing about this..

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

Well, I'd note -- I'd just like to thank you very much. And again, last time, when you finished the call, I told you here that this call here, you have a new President. Now what I can say is let's hope that a better future comes to our country in terms of the economy, the reforms.

And we can guarantee from our side, from Telefônica, that we give all the support, especially for everything that's related to digitalization. We are committed to that. It's a very important leverage for the country in the future, and I hope that our country is going to have a much brighter future. Thank you very much..

Thank you. This concludes today's Telefónica Brasil 3Q '18 Results Conference Call. You may disconnect your lines at this time..