Christian Gebara - Chief Executive Officer David Melcon - Chief Financial Officer, Investor Relations Officer Luis Plaster - IR Director.

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to the Telefonica Brasil, First Quarter of 2020 Earnings Conference Call. Today with us representing the management of Telefonica Brasil, we have Mr. Christian Gebara, CEO of the company; Mr. David Melcon, CFO and Investor Relations Officer; and Mr.

Luis Plaster, IR Director. We also have a simultaneous webcast with the slide presentation on the internet that can be accessed at the site www.telefonica.com.br/ir. There will be a replay facility for this call on the website.

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

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the company's future results and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr.

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

To start, Christian Gebara, our CEO, will introduce the company's actions and commitments to help Brazil overcome the COVID-19 crisis. Then he will present an overview of our operation and commercial performance for the first quarter of the year, as well as the efforts we've been making to expand our FTTH footprint and digitalize our customer care.

Then our CFO, David Melcon, will comment on our cost structure, efficiency, investments and financial results. We will then move to Q&A. I’ll now pass the word to Christian..

education, culture, entertainment, health, business and above all, other people. Moving to slide four, I’ll comment on the highlight of the first quarter 2020. The constant improvement in our customer base mix continues to translate into higher profitability and cash generation.

Fiber, our main lever of revenue growth and value proposition had the highest level of net ad ever, increasing our customer base by 30.4% year-over-year, reaching 2.7 million customers connected.

In mobile, Vivo's leading position in terms of quality and customer experience resulted in a year-over-year growth of 6.6% of our postpaid subscriber base, reaching 43.7 million customers, representing 58% of our total mobile access.

When looking at our revenue mix, we see that 75% of our total revenues come from recurring subscription fees that are more resilient to economic shocks and ensure the maintenance of our solid cash flow generation. Meanwhile, fiber revenues made up of FTTH and IPTV expanded 38.9% year-over-year and now represent 24% of all fixed revenues.

With this fast pace we remain confident that our fiber results will continue to drive our fixed business back to sustainable growth in spite of COVID-19 crisis. In terms of costs, we are focused on accelerating the benefits coming from digitalization and simplification.

In the quarter our recurring costs had an expressive year-over-year reduction of minus-3.3%, leaving our recurring EBITDA to grow 1.6% and setting our EBITDA margin at 14.9%. Finally, we continue to generate solid cash flows while heavily impacting our network and services.

In Q1, CapEx totaled BRL1.6 billion, resulted in BRL2.8 billion of operating cash flow before margin of 25.7% of our revenues. Free cash flow expanded 81.9% year-over-year, reaching BRL2.1 billion.

On slide five, you can see that our total mobile revenues decreased 0.1% year-over-year, impacted by the lower commercial TV during the last two weeks of March. The sale of handsets that are mainly sold at our stores that are now closed dropped 2.9%.

Adding to that, this quarter has a tough comparison base as first quarter 2019 was benefited by the average price increases applied during the period.

Due to these factors our postpaid revenue growth was 0.3% year-over-year despite the solid number of net ads that will be registered in January and February, which will be further detailed on the next slide. In prepaid, we recorded our best yearly performance since 2015, representing a drop of only 0.5%.

The good result was driven by our improved value proposition that allowed for price rationalization and the continuous active management of our customer base. As a result, our mobile service revenue growth of Q1 stood at 0.1% year-over-year.

Moving to slide six, in the first quarter 2020, we again reaffirmed our mobile leadership by delivering solid operating figures. In fact, we expanded our mobile market share to 33%, the highest figures since October 2006, dating back almost 14 years.

We also registered the highest level of postpaid net ads over the last three quarters, despite the slowdown caused by the COVID-19 crisis.

We had 272,000 net ads within our stores closed during the second half of March, which affected our capability to upsell customers for hybrid to pure postpaid, and your call centers operating on lower capacity from prepaid to hybrid.

Churn in the Q1 also showed good numbers, posting its lowest level in many years, with a reduction of 0.25 percentage points year-over-year. All of this reflects Vivo's superiority in terms of network quality, customer fee and branded channels, contributing to an outstanding overall user experience.

I would also like to point out, as you can see on the top right hand side of the slide, the success of our initiatives to stimulate the use of our digital channels. Since the beginning of COVID-19 crisis, we have accelerated this strategy to encourage customers to safely top-up from home.

As a result, the percentage of top-ups made digitally increased 5.3 percentage points year-over-year. Additionally, migrations from prepaid to hybrid that are initially increased 9 percentage points, gaining share over total migrations.

On slide seven we addressed our fixed revenues which dropped 3.6% due to the maturity of our legacy copper-based service and to our decision to stop selling DTH Pay TV, even though we continue to see solid trends in the growing side of the business.

As you can see in the right-hand side of the slide, our growing business were up 13% that are gaining more and more traction over time. We are confident that it will lead our fixed business to growth in the future. Data and ICT continue to have a solid performance, growing 13.8% year-over-year and broadly 6.6%.

Our FTTH and IPTV revenues reflect the success of our fast-paced fiber deployment. FTTH revenues rose 43.3% year-over-year, while our IPTV were up 29.3%. On the bottom right you can see that the strategic decision to prioritize profitability and discontinue the sale of DTH continues to wait on the year-over-year evolution of our fixed revenues.

If we exclude the DTH from our total fixed revenues, year-over-year drop would be of only 1% in the first quarter. I would also like to point out that the moment we're living is confirming the need for solid connectivity solutions for both business and households.

At Vivo, we believe that this will translate into a fight to quality of demand for first rate connectivity will surge. Our customers are increasingly experienced for the first time working or studying from home, and this is already changing their habits. We are prepared for that, thanks to our accelerated investments, especially in fiber.

Now, moving to slide eight. This quarter we had a record level of fiber net ads, 175,000 and accelerate IPTV adoption that contributed to a growth of broadband and Pay TV ARPUs. FTTH access in Q1 stood at 2.7 million accesses, a 13% growth year-over-year and now represents 39% of our broadband customer base.

As a result, broadband ARPU rose 16% year-over-year to BRL72, as FTTH customers have significantly higher ARPU than customers on other technologies. Moving to the right-hand side of the slide, we present the evolution of our IPTV business. IPTV access increased 22% year-over-year, contributing to the improvement of Pay TV ARPU by 7%, reaching BRL180.

Finally, I would like to highlight and thank all technicians that are out on the field, taking the adequate health and hygienic measures to assure that our customers are safe and remain connected. Moving to slide nine, we continue to expand our FTTH network to create a future-proof asset to provide the best fixed connectivity to our customers.

In Q1 we entered 22 new cities with FTTH, reaching a total of 186 cities. We're expanding to fresh markets and new regions, while we’re also accelerating the expansion process by overlaying our copper and FTTC networks. This is allowing us to defend and upgrade our existing customer base with lower investments and reduced time to market.

As you can see on the right-hand side of the slide, we are improving the penetration of home connectors over home pass, reaching 22.7%, even with a significant increase of 739,000 additional home pass in Q1, summing up 11.7 million home pass in FTTH.

Having a strong FTTH footprint not only give us the tools to transform our fixed business by capturing the ever-increasing demand for high-quality connectivity, but also help us defend our postpaid customer base, offering the best value proposition. It's worth saying that the COVID-19 crisis hasn't changed our ambition to expand our fiber network.

We will continue to enter new cities and overlay our copper and FTTC network to continue to gain presence with FTTH. Moving to slide 10. At Vivo we continue to simplify the use of digital platforms to improve customer experience and increase our operational efficiency.

We are constantly improving our e-commerce platform, aiming for it to become our front door for sales in the following years. In the first quarter of 2020, 20% of our FTTH sales were made from our digital platforms, growing 10 percentage points year-over-year.

In mobile, 17% of our sales were digital, also 10 percentage points higher than the first quarter ‘19. Meu Vivo app already had 16.7 million unique users with 70 million accesses each month. In March 12, 2020 for instance we saw a month-over-month increase of 34% in the number of customers using Meu Vivo fixed.

Our artificial intelligence platform Aura had 1.6x more access on Whatsapp than the previous quarter and successfully avoided 6.9x more calls to human agents than in previous year. In fact, Aura is already retaining more than 20% of all incoming calls.

Aura's constant evolution provides the most advanced, relevant and simple channel for interaction with our customers, being reachable by Meu Vivo phone, call center or via Whatsapp and other relevant chat bots. I’ll now pass it on to our CFO, David Melcon..

Good morning everyone and thank you Christian. On slide 11 you can see that our strong cost reduction led to significant EBITDA margin expansion in the first quarter. Our recurring cost reduced 3.3% year-over-year, which led to an incremental 1.2 percentage points to our recurring EBITDA margin that ended the quarter at 40.9%.

Personnel costs were up due to the insourcing of IT and security third party services in the fourth quarter last year, which we believe is key to accelerate our business performance. Prior to that, these expenses would have been shown in cost of service branded. Cost of goods sold were down mainly as a result of lower handset sales in the period.

Commercial expenses decreased 9.6%, driven by lower expenditure with sales commissions, call centers, billing and advertising, mainly due to digitalization and automation efforts. In fact, we continue to develop digitalization and simplification in our operations to keep improving our cost structure and customer experience.

In the first quarter we had 75% of our customers receiving e-billing, a 15 percentage point year-over-year increase and 55% of the payments were made through digital platforms. We have already automized 782 processes across the company with the use of robots that allowed us not only to reduce costs, but also to improve customer service.

Additionally, we have reduced by 35% the number of call center calls through the growing use of [inaudible] channels like Meu Vivo and Aura. We are continually pursuing all digitalization and simplification cost opportunities and are taking the measures to constantly improve the company's profitability.

On slide 12, we show that our profitability has expanded at the same time as we invest in opportunities to reinforce revenue growth. Our operating cash flow increased 4.5% year-over-year in the quarter, reaching BRL2.8 billion and a margin of 25.7%.

This is a result of our solid operating performance that allowed us to register BRL4.4 billion of recurring EBITDA and robust investment in the amount of BRL1.6 billion. We continue to invest in the most advanced technologies as we believe that this is a catalyst to improve our returns and value proposition.

In fact, 68% of our CapEx is being invested in growth. In the first quarter, our fiber spend grew 46% year-over-year, and we are managing to be more efficient, leading to reduce time to market and optimize financials. Now, moving to slide 13. Here, we present our solid shareholder remuneration that is back with robust net profit generation.

Our reported net income for the first quarter 2020 stood at BRL1.1 billion, a reduction of 14% compared to the previous year due to the growth of depreciation and income tax cost that were partially offset by our continuous cost discipline and EBITDA expansion.

Based on the net income for the first quarter 2020, we have already declared BRL420 million of interest on capital. We declared BRL150 million in February and BRL270 million in March. We also remind you of the payments that will be made in 2020 regarding the dividend declared last year; a total of BRL5.8 billion.

Out of that, BRL3.6 billion will be paid in August and BRL2.2 billion in December 2020. We are therefore not only investing to capture the best current and future growth opportunity, but also continuing to focus on creating value for our shareholders through a strong cash flow and high level remuneration.

Turning to slide 14, 2020 free cash flow grew 81% year-over-year and reached BRL2.1 billion, excluding non-recurrent figures such as the sales of towers. The results were impacted by recurring EBITDA expansion, backed by solid operating performance and contingent of costs.

Lower financial costs and income tax payments mainly driven by the reduction of interest rates and working capital improvements due to the postponement of the payment for regulatory taxes and lower CapEx and OpEx disbursements. The strength of our balance sheet places us in a very solid position to fight the current COVID crisis.

The strong cash generation allows us to end March 2020 with BRL5.5 billion in cash, leading to a net cash position of BRL1.3 billion, excluding leasing liability. Going forward, the most significant cash out in 2020 will be the dividend payment scheduled for August and December.

In this context, we will continue to successfully implement our strategy and drive digitalization for our customers and the Brazilian society as a whole. Thank you. And now, we can move to the Q&A..

Thank you. [Operator Instructions] Our first question comes from Susana Salaru, Itaú. You may proceed..

Hi, good morning guys. Thank you for taking our question. The first question is regarding the part, the agreements between Telefónica and TIM. We realized that we should be – we should expect significant OpEx and CapEx savings.

So if you could elaborate a bit more on how long do you expect that to be – how long it will take to be concluded, and what kind of savings should we expect from the CapEx side and the OpEx side? That would be our first question. The second question is related to the due diligence of Oi Móvel assets.

Tim mentioned in the report, in this earnings report that due diligence is progressing.

I just was wondering if you guys have the same view on the progress of the due diligence and if you're in the same page as things are progressing quickly in the analysis?.

Hi Susana, this is Christian. Thank you for the question. For the first, the agreement between Tim and Vivo, we had the approval ANATEL. We had approval from CADE, the competency agency here, but it still needs to finalize the process in CADE.

So there is a week that we still need to wait to see the final decision will be positive, and we believe it will, and if it's positive, we still need to plan to do what's going to be done in both fronts that this agreement has. The agreement has two specific fronts, in 2G and in 4G.

So I guess, once it's approved then we start working, then we're going to start deploying the second semester of this year.

We are not giving guidance on CapEx and OpEx reduction, but we expect, if it's approved finally with CADE in this week, that in the second week – in the second semester, sorry, we will be starting to implement that in both 2G and in 4G, and we start capturing some of the results this year, may be limited, but more results in the next year.

Concerning the second one, as you know we signed an NDA, so that's like what I share with you, what it can be shared. We have a material fact published early March 10 as you know, and when Vivo and TIM expressed their joint interest in analyzing the acquisition of Oi Móvel’s operations. That's the process.

It takes a long time, because it's a process with M&A, and it's a process also in a corporate that's being sold that is in a specific legal situation.

We started getting the information as you mentioned, because that's the important part of the process for us, to access the information that is available, to be able if we decide to do so to make a binding offer.

So we started getting the information and we are at the beginning of this process and it – I cannot precisely tell you how long it will take, but it's going on. As you said, it's going on..

Perfect. Thank you everyone. Very clear..

Next question comes from Vitor Tomita, Goldman Sachs. You may proceed..

Hello, good morning all. Good morning Christian, good morning David, good morning Plaster. So two questions on our side here.

First is whether given the current situation with online services and online retail gaining relevance, if that led to any changes in our retail strategy for handsets and accessories when thinking about the post COVID scenario? And the second question on our side would be, if you could give us any more color on how results have been trending initially in April with increasing impact from COVID? Thank you..

Hi Vitor, I will answer the first one. So handset, as I said in the introduction, we had two weeks of the month March, that all our physical channels were closed. So although we have e-commerce, e-commerce cannot cover, especially in this first two weeks where there was a strong concern about the society about everything.

So people, even if they could reach our online channel, sales in general for all sectors were reduced. So of course, we were impacted by our handset sales because of the closure of our stores. We started, reopened some stores in smaller cities, that's true.

So if you ask me the number of stores, out of our 1,500 stores that we have nationally, we have today around 50% of them that are open. Although in big capitals, in big cities we still have them all closed. So in terms of volume of sales, this 50% of stores do not represent the same percentage of sales.

So it's difficult for me to predict how it's going to be, the evolution of the handset. Of course there is an impact, because there is less stores, there are fewer stores and fewer stores means few people come to our stores to buy it. April was better than the end of March. So we see a slight recover of people coming back to channels.

Even in the line channel, the results that we see in April are better than the ones that we saw in March. So we need to wait and see what's going to be the evolution of the crisis; to be more precise about the evolution of our handset business. There is also the dollar impact. We need to see how it will be reflected in the smartphone price.

On the other hand, traveling being a little bit more limited will force people to buy smartphones in Brazil rather than this type of customer, our postpaid customers that also travels to buy accessories and handsets, they will be more limited to buy it in Brazil. So too early to say the final impact.

We see April being better than what we saw in the first two weeks of the crisis. I think the second question was about prepaid. No, I think prepaid has a similar effect in a different type of client-customer segments. In the first two weeks we closed all stores, but not only stores.

All our top-up points of sales that are not – that are more than – they were talking about hundreds of thousands, they were all closed and people were at home, so we saw a significant drop. Our prepaid revenue was going in a very good direction, January and February.

As you could see, we reported a 0.5% decrease in prepaid revenues, and that was highly impacted by the final two weeks, otherwise our trend was going to continue to be positive. So now in April, as we see the situation, like people were more outside homes than they were in the beginning of the crisis.

We see at the same time in parallel, they're getting better, our prepaid as well, much better than it was in the end of March. It's early to say what's going to be the impact going forward. We still need to see how it's going to be, this gradual return process, if it's going to work, if it's going to last.

Then we're going to see also unemployment, how it's going to perform. So many variables still not controlled to give you a final answer, but April as you asked is better than end of March..

Perfect! Thank you..

Next question comes from Marcelo Santos, JPMorgan. You may proceed..

Hi, good morning Christian. Good morning to all. Hope you're okay. The first question is about the sales and marketing expenses which we saw gains in this quarter.

Was there any of those gains related to COVID or is more of your internal initiatives? And how do you expect this line to behave in the second quarter, your OpEx in general given the impacts on COVID; that would be the first question. The second question is regarding the postpaid behavior, so the behavior of your clients.

Do you see any risk of down trading given that perhaps many of your clients have also Wi-Fi in their homes and probably might need less mobile connectivity now? There are the two questions..

The first question Marcelo, our costs, our OpEx is reducing mostly because of our simplification and digitalization initiatives that we put in place. So all of them, most of it, this impact, like I can – almost all this impact is strongly related to our change in channel mix, so we're selling much more in digital channel than we used to do.

There are more digitalization, a lot of – each year in terms of our care initiatives in the company and there's a lot of automation that has also impacted our OpEx. So mostly it’s related to simplification. This digitalization is going on before the COVID crisis.

So going forward we believe e-commerce will gain more share and may impact positively in our commercial OpEx, okay, so that's the first one. There is also cost of goods sold. I don't know if it's part of your question.

This one may be impacted by reduced sales of handsets, okay, but the other one is where the service itself is much more related to channel mix, keeping the trend of regaining sales of services as this crisis is surpassed.

The second question was regarding?.

Postpaid channel?.

Postpaid, yes, I don't see it that way. I think the postpaid has lots of other benefits rather than only data consumption. We also don't know how it's going to be people's behavior. I don't know, if I follow some of the number that we see, we see less than 50% of people staying at home.

So we see more than 50% of people going out of their homes, so they're using mobility, they're using data in mobility. We believe that hopefully this crisis will be over and people will keep their lives, so I don't see this specific segment of postpaid downgrading their plan because of the situation that they are more at home.

And also, there is a lot of benefits that we offer to these customers. There are some value-added services that we see the usage of the service is going up. So we're talking about a specific and very high-value.

There are magazines online, learning online, some other things in video, etcetera, there are gaining, more share in the usage of our customers, and as you can see the chart is very low this quarter. So I don't see that we're going to be impacted that way in our postpaid..

Great! Thanks a lot..

Our next question comes from Fred Mendes, Bradesco. You may proceed..

Hello! Good morning everyone. I have two questions as well. I mean the first one, just to understand this drop in the ARPU on this quarter, when we look at year-over-year, it's a 3.6% drop. So of course this year there is the tough comps from the price increase in the 1Q 2019. There is also the upselling of your hybrid plans.

But just to get a better understanding, there is – of course there is COVID, but just to get a better understand if there is an impact from competition here as well? This will be my first question. And then on the second question, it's more so to understanding the dynamic of the FTTH and the opportunities.

You are growing like 30% the number of users, and you still let's say lost market share that went to 24%; I think it was 31% a year ago.

So the business is affected, that's going like 50% give or take year-over-year? So I'm just wondering, of course this comes much more from the smaller ASPs, but I’m just wondering if there is a specific player that is showing more significant growth and is becoming more relevant or that's just like a mix of as well a bunch of players and we cannot really tell any specific one? And also, I only consider Sao Paulo, just as an estimate, if your market share will be close to 40% to 50%? Just trying to understand the potential here.

Thank you..

Hi Fred, this is Christian. I'm also trying to answer your questions. Yes, the first one you answered most of it. There is a lot of the impact of the price increase that we had in hybrid in the first quarter '19 that is not repeated this quarter. Also, that's the main factor. There is also the factor of the two weeks of stores closed.

When we closed our stores, the most impacted service in the mobile is the postpaid.

So our sales of pure postpaid was very impacted by these two weeks of channel that we have stores closed and the impact in the migration of prepaid to hybrid is less impacted, because most of it is still done by call center and part of it also already done by digital channels.

So the most impacted mobile services together with handset sales is through postpaid that also contributed to the ARPU impact that you described in the beginning of your question. About FTTH, I think there is something that is reassured that we are in the right direction, is the number that we are presenting for FTTH.

No, we can't discuss specific market shares in state-by-state. But I think the truth is that our net ads is very strong. It's one of the highest net ads that we ever presented. We are entering more cities than we used to do. So we just presented 22 new cities in this first quarter and in this quarter with 186 cities.

We also improved home passed in more than 700,000; that is a record for us. And even increasing home passed in a record number that was 700,000, our penetration in home connect over home passed is 22.7%, slightly higher than it was in the first quarter '19, where we didn't put so much home passed in the market.

We are doing that in new city, but we are also doing overlay over copper at over FTTC; that's also important to address. We are protecting these customers because we see as you mentioned, there is – of course there is competition from small and large players in some important cities.

We want to protect our customers because most of them are postpaid customers from Vivo. So in some cases offering DSL is not enough, even offering FTTC with 25 megabits of speed is not enough. Market share, it's hard to talk about market share by itself.

Brazil is a huge country as you know, and what we know is in important cities, important capitals, I'm talking about São Paulo, I'm talking about Rio, I'm talking about Presidio, Vivo is having a very, very strong performance.

So that's if there is any specific, but going forward we'll continue with our plan to be strong and deliver in FTTH in Brazil, deploying more homes and more cities as we describe it along these last three years..

Perfect! Christian, very clear. And if I may, just a follow-up.

When you're doing the CapEx on a Greenfield and the one that you do an overlay on copper, what is the difference in terms of CapEx; just percentage difference; just a ballpark number, please?.

Fred, we don't give the number. It's much lower, okay. There are two types; over DSL that is mostly Sao Paulo; over MPTC, that's mostly where DTT has its network and pure FTTH from scratch. FTTC is much lower, but then DSL is also lower. So they are lower, but we don't give the numbers.

It's lower the CapEx and the speed is also different because we can do it much quicker..

Perfect! Very clear Christian. Thank you..

On next question comes from Maria Tereza Azevedo, Santander..

Hi everyone, thank you for the question. My question is on the CapEx. I mean can you talk a bit on the CapEx flexibility that you have? You were clear that you will continue to build new fiber in new markets, but you have some FX impacts and on the other hand you have the network sharing view with TIM and the franchise strategy in smaller towns.

In the past you also mentioned about a potential infrastructure partner to new fiber builds in mid-sized cities. So can you comment a bit on how that is evolving and how much would you be able to cut the CapEx in a scenario for a more extended recession? Thank you..

So, thank you Maria Tereza for the question. Yes, you're comments in the beginning are alright and they feel true, so we are going to do – we are going to keep our strategy of expanding FTTH, so we had a plan. Last year, we covered more than 2 million home passed. As I told you this quarter, we already covered more than 700,000.

So we keep on the strategy of deploying at least what we deployed in a number of homes in 2019.

This deployment is organic, 100%, but it's also some of them is done with partnerships, not the franchising that I'm going to address, but with partnership, and this partnership, the Q1 that we have at the moment, use of American Tower in the state of Minas Gerais, that we launched the first city and we have planned and we're going to launch more than 10 cities this year.

So that also is adding to the home passed that I described before. And then there is a franchisee that is not in this number; the number is still limited. We launched with a huge success in three cities with two different partners, and we have a plan to launch more cities in the coming months. We don't say the cities because of commercial purpose.

So that part of the cap is continuing to go on. You're right, there are some CapEx that is related to exchange rate, but we have some limited, we have some coverage to protect ourselves.

And where we don't have the coverage, we're going to renegotiate because we also have the scale, not only because of Vivo, but because of Telefónica Group, and most of these providers are worldwide providers of the group.

Going forward we still need to know what's going to be the situation of the economy, what's going to be the impact in our revenues and how can we address this in OpEx and CapEx. I described it I think before the DTH. We decided to stop DTH.

There is a lot of CapEx involved in the new ads of DTH, not in the infrastructure itself, but when you have a new ad that resulted in CP and work related to this legacy technology. So we may have some flexibility in stopping some of the legacy technology that we still have in our portfolio such as copper or even a low with FTTC.

So we are working on the flexibility that we have, but it's still too early to address what's going to be the impact, because as I said before, the crisis is just starting or is in the middle or maybe it's going to finish in a very few weeks, so hard to say at the moment.

But our strategy, the vision as a company, a fiber company that has the best technology in fiber, glad that with the best technology in mobile, it is still there..

Perfect! Thank you very much Christian. My follow-up question would be a little bit on your views on the regulatory environment.

Do you think – do you have any views you can share with us on your first reading on the 5G auction rule? Do you expect it to be postponed to next year? And also if you have any update on fiscal and discussions about further regulatory waivers that the sector can benefit from, that would be very helpful. Thank you..

Yes, we postponed, I don't know if you call it regulatory, but we postponed some of the taxes that we had to pay, so I think that's not by all of you. So like we had the fiscal tax that was supposed to be paid in the first quarter, is going to be paid in August, starting in August.

We've been working very closely with ANATEL, who has been the ministry, trying together as a sector and agency and government to address the best way of the crisis and I think we're performing very well. The networks are all there and we are being able to support our customers in this difficult moment. At the 5G, there was the public consultation.

We addressed all the questions that you had. We gave our comments that finalized like few weeks ago and still waiting. I cannot tell you how it's going to be, the new calendar. We've been responding to all the milestones of the process, and let's see. I think it's still uncertain by everyone and so I have no answer to give you.

We are keeping that in for the 5G. That's our best for mobile, not only for the near-term, but for the mid-term and even long-term, because I think the two technologies, 5G and 4G, will live for a long time, especially the penetration of smartphones and even the covers that we're going to have in 5G versus 4G for the next years.

And we are putting fiber, as I said, and fiber is also contributing to our network as a whole, and the fiber will be necessary for the 5G in the future. So pretty confident that our strategy is the right one and continue and responding to the milestones filed by the government. .

Perfect! Thank you very much..

Next question comes from Carlos Sequeira, BTG Pactual..

Hi, good morning guys. Thank you for the call. Most of the questions I had were answered. But I want to make a follow-on, a quick follow-on FTTH if possible.

So if I'm not mistaken, the guidance for this year was you passed nearly 2 million homes and you just mentioned that you hope to do another – Christian, you just said you hope to do another 2 million homes.

But looking at what you did in the first quarter, it seems that you're more inclined towards making 3 million homes passed the year and also penetration rates were better. So would it be reasonable to assume you can get to the 25% penetration by the end of this year, please? Thank you..

Yes, hi Carlos, this is Christian. Yes, you're right. We did a lot. Of course, there is also a combination as I said before, of overlay and Greenfield. So when we do a little bit more of one and the other, we can be faster in the deployment. So it's hard to say one quarter versus other if there is a trend.

I would multiply by four, what we did in the first quarter, that's my answer. But of course, we are confident that we were doing more than 2 million as you said and I think last year was around 2.7 million and we don't give exact figures, but we're going to be above 2 million as you said.

And I think there is depending on the blend that we do between overlay and greenfield, some licenses in some cities, so there are some other constraints that is not CapEx constrained in this case, because we're confident that is the strategy going forward. So you're right, above 2 million..

Thanks Christian, thank you. Take care..

Next question from Rodrigo Villanueva, Bank of America..

Thank you. Good morning Christian and David, Plaster. I hope you and your families are well. I have a question related to the franchising team and the partnership with American Tower. I was wondering if you can give us an update on this respect and if you expect the COVID crisis has got an impact on the initial targets? Thank you..

Hi! So Rodrigo, thank you for the question. So in American Tower, I don't see any impact. I think as I said, the project has a three year and 800,000 home passed. We are totally on schedule. We are not addressing the cities now, but it's more or less between 14, 16 that we have for this year and we're going to accomplish it.

So totally at the pace that we expected, and we may accelerate if we can, but again, we are totally comfortable with the schedule that we have, so for this year around 14 to 16 new cities to be launched with this partnership.

Regarding the other one, the franchise, and this one is a little bit trickier, so I cannot tell what's going to be the COVID impact, because here you need to have someone else to invest, but they hold the CapEx. It's not ours, it's someone else, though they are our partner, and the partner has to be willing to do the investment no.

So it depends on the financial situation. We have like a pipeline of investors. We're also being very – we have been controlling that very closely, because we want the partner, although the customers is not ours, and the customer is the partner's customer, our brand is endorsing the technology, so we need to be very careful to who we select that.

So we have a few that confirmed their commitment to launch cities this year. We have like two new cities to be launched in the next two months and we keep it going. So again, we need to wait, what's going to be the final impact in other partners that shows interest in the past, to see if they continue to be interested after the crisis.

On the other hand, one of the specific dimension of this franchising partner is converting existing players into a franchisee. Maybe the situation that some of them may be facing will be helpful to join forces with a company like Vivo.

So, I don’t know, if you're in a small city, then you have the risk of being attacked by people's deployment of their own service. Maybe you could convert yourself in a franchisee and if you accept then to be the franchisee, he is protecting the business.

So I think there are many other alternatives that we may see as franchising business going forward and what we saw in the three cities that we have franchising, cities in the center of the country, their deployment and their penetration has been very, very high.

Most of the cities, the channels were not closed or they had ways to do that over WhatsApp or even door-to-door, and they are extremely happy with the results.

Also, if you look at the franchising business, and when you compare being a franchisee of a fiber company rather than being a franchisee of a retailer, maybe it's going to be a moment that someone who decides to be a franchisee opts to be a Vivo franchisee rather than being any other retailer.

There may be more impacted with the crisis that we're seeing right now. I don't know if I answered your question, but that's what we can officially share about the two partnerships..

Got it and it’s a very clear answer. I’m sorry if this question had already been asked because I got disconnected. Thank you very much..

Thank you..

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

So, thank you all for participating in our first quarter call. As you know we're always open for further questions if you have here with our team, and hopefully next quarter we're going to have a better situation for the country, for the world and maybe with much more positive outcomes and projections for the future. So thank you once again..

Thank you. This concludes today’s Telefonica Brasil 1Q 2020 results conference call. You may disconnect your lines at this time.

Have a great day!.