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

Luis Plaster, IR Director. We also have a simultaneous webcast with 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 would turn the conference over to Mr.

Luis Plaster, Investor Relations Director of Telefônica. Brasil. Mr. Plaster, please begin your conference..

first, our CEO, Christian Gebara will comment on our operational performance and give an update on the steady recovery of our top line. Then he will go over our commercial initiatives and accelerated FTTH expansion. Then our CFO, David Melcon will comment on cost management investments and financial highlights.

To conclude, Christian will comment on our ongoing ESG initiatives and then move to the Q&A session. Now, I hand over to Christian..

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

In mobile, Vivo's leading position in terms of quality and customer experience, resulted in 844,000 postpaid net additions. Currently our postpaid customer base accounts for almost 60% of our total mobile access. In this quarter we also posted another set of impressive addition in fiber.

A key lever for future revenue growth that saw record net adds for the third quarter in a row, with 267,000 new customers reaching 3.1 million homes connected.

As you can see on the right-hand side of the slide, our mobile service revenues fell minus 1% year-over-year and the impact of temporary confinement measures still lingers in some segments of our business.

On the other hand, the same line grew 3.3% quarter-over-quarter, which supports our more optimistic view that is a typical factor to soon have less impact on our operation. Our fiber revenues made up of FTTH and IPTV increased 47.3% year-over-year and 14.5% quarter-over-quarter.

This impressive evolution is fueled by our efforts to expand our fiber footprint and the strength of the product that proved its unique value in terms of best-in-class connectivity for our customers. Shifting to cost.

We remain focused on our digitalization and simplification initiatives that helped to reduce recurring cost, ex-cost of goods sold by 3.4% year-over-year, taking EBITDA margin to 40% advancing, 0.3 percentage points quarter-over-quarter.

Lastly, driven by the resilience of the business in our education and rational capital allocation, we registered solid cash flows throughout the year posting BRL7.5 billion in operating cash flow into September, expanding the margin 3.4 percentage points year-over-year to 23.5%.

By aligning that with the decision in financial management, we were able to deliver BRL8.9 billion of free cash flow, 50% higher than the same period of the previous year. In fact in the first nine months of 2020, we have reached a higher level of free cash flow than in whole of 2019.

On Slide 4, I would like to show how Vivo has been able to consistently recover its revenue through its crucial role in the delivery of high guarantee connectivity. Postpaid revenues showed an evolution of 1.2% compared to second quarter 2020.

And net additions has started to recover with the opening of stores and prepaid continues its sharp advance increasing revenues by 13% quarter-over-quarter. In our fixed business, FTTH sales continue to outperform, growing 16.8% quarter-over-quarter, supported by the expansion of our fiber footprint that continues at full speeds.

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

On Slide 5, you can see that our total mobile revenues remained stable as we continue to see the impact of temporary confinement measures that were partially offset by the positive evolution of handset sales and prepaid. Handsets revenues decreased 10.1% year-over-year as the impact of the pandemic on stores operation has started to ease.

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

Prepaid revenues grew 5.8%, driven by continuous effort related to quite acquisition and customer base management as we're responsive for the original level of net additions in recent months and higher accuracy of top-ups.

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

Prepaid, which accounts for 43% of mobile access and 20% of mobile service revenue saw its ARPU growth to levels of both the first quarter '20 and a strong level of net additions, we allow for higher request to postpaid going forward. Moving to Slide 6.

In the third quarter '20, we again reaffirmed our mobile leadership supported by our superior customer experience and quality of service.

Our overall mobile market share stood at 33.3%, the highest in the last 14 years and we had a significant improvement in postpaid churn that reduced 0.56 percentage point year-over-year and it's now at the lowest level in five years. On the bottom end side of the slide, we show the breakdown of prepaids ongoing performance.

This quarter we had 1.466,000 net adds, the highest level since 2012, because of our continuous efforts to attract new customers, improve customer base management. Finally postpaid reported last quarter's trend of disconnections and posted strong additions in Q3.

427,000 as commercial activity started to pick up and the migrations from pre-to-postpaid posted stronger results. On Slide 7, we show that our fixed revenues dropped minus 6.6% because of the maturity points. Our strategic decision to stop selling DTH Pay TV and CapEx optimization for copper-based services.

On the other hand, we see very important trend in fiber business that continues to transform the mix. On the right-hand side of slide, you can see that growing business were up 8.3% increase in relevance over fixed revenues and now accounts for 60% of the total.

This trend shows why we are confident that this segment will be the driver of future growth. Our FTTH and IPTV revenue call for the success of our accelerated fiber deployment. FTTH revenues were up 56% year-over-year, while IPTV were up 26.9% resulting in a combined growth of 47.3%.

Now moving to Slide 8, our getting edge fiber products continue to attract more and more customers. As a result, we posted record FTTH net additions for the third quarter in a row that now represents half of our broadband customer base.

FTTH and adds totaled 267,000 in the third quarter of 2020, reaching 3.1 million access of 34% year-over-year increase. Broadband output rose 17% year-over-year to BRL 77.7 and FTTH customers have significantly higher ARPU than those from other corporate based technologies.

Moving to the right-hand side of the slide to present the growth over IPTV business, IPTV access increased 26% year-over-year contributed to the improvement of B2B ARPU by 2% reaching BRL 180.

I would like to highlight that this impressive figures are the combination of accelerated FTTH deployment plan with the strength of the product we're delivering. Fiber connectivity is a future true technology whose demand is consistently growing preferred for current home office and homeschooling leaders.

Moving to Slide 9, this quarter I would like to present the distinct fact of capabilities that people had to capture opportunities to create value in the digital space. People is the largest and most recognized telco in the country with 94 million access and one of the top eight most valuable brands in Brazil, estimated at $2.2 billion.

Then helps with almost 19 million unique users that access our e-care app over more than 1,600 stores that make us comparable to the largest retailers in Brazil. And it shows hundred million visitors per month that our catalogue portal shows the potential to reach and capillarity that the company has a diverse in the technology market.

People is a gateway for the digital life of our customers. And for this reason, we launched a digital marketplace that offers everything technology related at our online store. Just to mention other examples of our ability to expand our reach, I would like to highlight the following initiatives.

We recently launched Vivo Money, a digital law platform that offers fast and simple personal trends, probably to customers based on credit scoring that use billing data to improve accuracy.

You will also find partnerships with various apps and OTTs to offer cobranded mobile plans when data and digital services such as Spotify, Netflix and Rappi, are jointly promoted as equal business for variable proposition. The same strategy has been used to sell fiber plus OTTs such as Netflix and Amazon Prime Video.

Furthermore, we're venturing into other segments such as [e-education] to capture even more opportunities. One of them Vivo Meditação a wellness app focused on meditation and mindfulness has more than 1.6 million downloads since its launch in July 2017.

Another recent initiative is our strategic partnership with [indiscernible] to offer benefits in health services to Vivo customers, which represents of course that you are the more relevant participation in that sector.

Moving to Slide 10, we have another quarter with impressive results regarding our fiber deployment that continues at full speed adding additional 1.5 million FTTH homes passed to our footprint. In Q3, we enter 28 new cities with FTTH reaching a total of 244 and we expect to end this year with 268 cities.

We continue our organic expansion, while also accelerating the overlay of copper and FTTC networks that allows us to improve net adds and ultra-broadband ARPU while protecting our consumer base.

Additionally, I would like to point out that the creation of our neutral fiber vehicle is a classic example several investors have demonstrated their interest in the project and we are confident that the vehicle will be operational in 2021.

Finally as you can see on the right-hand side of the slide, we reached 14.6 million HPs offer in the third quarter 2020. And we expect to reach approximately 16 million HPs at the end. With that we will more than double the number of stages launched in homes passed when compare to in 2019. Now I'll pass it on to our CFO, David Melcon..

Good morning everyone and thank you Christian. On a lighter level we saw how are persistent cost efficiency supported by digitalization and simplification initiatives reduced costs by 3.4% year-on-year.

D&A and personal costs decreased 3.3% year-over-year benefited by continuous cost control initiatives, but also by government measures such as temporary work day productions. Commercial spaces had 11% decrease driven by your continue digitalization and automation efforts and by lower provision for bad debt that decreased 29% quarter-over-quarter.

This reflects the increased value that our customers are giving to connectivity and maintaining their payments up to date, as well as our measures to mitigate the effects of COVID such as offering the option to pay in installments.

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

In addition, I would like to present a few figures related to our digitalization initiatives that are the main driver of our sequential cost production story. In the third quarter 2020, we had 11 percentage points year-over-year increase of customers receiving [e-bills reaching 79% or 63%] of the payments were made to digital platforms.

We also reduced by 20%, the number of calls center calls through the growing use of digital channels like Meu Vivo and AURA. Automized 915 processes across the company with the use of robots that allowed us not only to reduce cost, but also to improve the customer journey.

On Slide 12, we can see that through efficient capital allocation, we're able to deliver solid cash flow generation combined with expansion of our FTTH footprint and cutting-edge technologies.

In the first nine months of the year our CapEx contracted 70% year-over-year to BRL 5.4 billion driven by our strategy to prioritize investments in growing technology that currently accounts for 72% of our total expenditure.

This rational approach can also be seen on the right-hand side of the slide as capital located to fiber technologies increased 20% year-over-year while legacy decreased 53%. Additionally, I would also like to share with you that network sharing agreement with TIM is underway and evolving according to expectation.

This agreement corroborates our commitments towards OpEx and CapEx optimization. Now moving to Slide 13, you can see our solid net income generation allows for the maintenance of superior shareholder remuneration.

Net income for the quarter is total BRL 1.2 billion growing 25% year-over-year, contributing to the creation of BRL 2 billion of interest on capital so far this year. Moreover, I would like to remind you about the payment of dividends based on net year and net profit for a total of BRL 5.8 billion.

The first tranche was paid in August and the second of BRL 2.2 billion will be paid in December 2020. Turning to Slide 14, accumulated free cash flow for the first nine months of 2020 grew 50% year-over-year, reaching BRL 8.9 billion should pass in the free cash flow for the whole 2019.

These outstanding results were driven by the EBITDA contraction caused by lower economic activity partially compensated by our strong cost reduction, lower CapEx as we continue to focus investments on growing technologies, lower financial costs and income tax expenditures, and working capital improvements as a result of the postponement of some regulatory tax payments and lower CapEx and OpEx disbursements.

By maintaining a robust cash flow generation and solid balance sheet, we continue to successfully implement our strategy and invest in selective assets, making Vivo a stronger company, allowing us to look to the future with confidence. Now I would like to pass the word back to Christian..

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

Regarding our environmental initiatives we launched a national campaign called Recycle with Vivo to increase the awareness of the appropriate disposal of electronic waste.

This campaign implies and encourage societies to reflect on the necessity of recycling, that can be done in more than 1,600 collection points available to Vivo stores and other strategic points across the country. Moreover, we inaugurated our first biogas power plant in [indiscernible].

We produced more than 11,000 megawatts hour per year and it's one of the 70 renewable power plants in our Distributed Generation project that expect to be fully operational in 2021. Moving to the center of the slide, we had some important recognitions in the social dimension.

Focus on Telefônica, Vivo was the first Brazilian recipients of UNESCO's Hamdan Prize for teacher effectiveness through the Connected Schools Project. This project was launched in 2015 to promote inclusion of educators in the digital ecosystem and foster the development of ICT skills among students.

The platform offers approximately 40 distance education courses covering a wide range of subjects and targets basic education teachers on all over for Brazil. The success of this initiative was tested by more than 300,000 new subscriptions it had so far in 2020, 3 times more than last year.

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

To conclude, we took an important step towards the higher level of governance. The conversion of preferred shares into ordinary shares was approved by the extraordinary shareholder meeting and especially general meeting of preferred shareholders granting tag along and the voting rights to all shareholders.

There are just a few of many initiatives that we have at Vivo to help society reach a more sustainable future for a conscious consumption of goods. Prediction of our carbon footprint, but also to be more equal interest.

I would like to invite all of you that are interested in our ESG efforts to have a look at our sustainability report that is available on our Investor Relations website. Thank you. And now we can move to Q&A..

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

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

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

Hi, Rodrigo, as you know that this law the reform deal, the PLC 79 was signed for law in October 2019, last year. Now, we need to go through the process. So what, and I know is doing, they are working on the regulation of this new Telecom framework.

So in the end of June they opened a public process to hire through the International Telecommunications Union across all these firms to support the industry in the calculation of everything related to the migration of the fixed telephony concessions to an authorization. Also there is appraisal reversible asset.

There are many analysis of the current cost models. There are many other calculations that we need to go through. So we're still waiting to have more definitions in the coming months. So it's a long process. We started, we are optimistic but it's still very early for me to say if we're going to reach the right price for this migration.

That will hopefully, yes, but it's still in the process of having ANATEL getting the support to have the calculation for us to start discussing. So that's in this point.

In the prepaid, the same as in other mobile services, we've been raising in the postpaid the hybrid raise price, as I said at the end of the third quarter not as we did in the last year that the reason the beginning of the third quarter, the increase is lower than we used to have because inflation is much lower as well.

But we keep our strategy of giving more for more. So I think we'll be successfully doing that. In the prepaid, we are also increasing our offers. It's difficult to talk about specific offer in the prepaid since we have different ones. We've been trying to drive our weekly and bi-weekly offers to drive prices up.

We are not giving as others, competitors are giving lots of social networks for free. So I think we've been very, very rationale. Although the market in the prepaid, specifically, as you mentioned is still hasn't had or perform the way we expect as we are moving prices.

So I would expect more price increase in the prepaid as happened in the hybrid and the postpaid. But we don't see this movement with our competitors. So let's see what happens in the next months. I think we had a very strong results with prepaid this quarter. I think the slide to quality proves to be right in moments where people needed to be connected.

So we could see a robust net adds for Vivo an increase in revenues for prepaid and we are still trying to move price up. As far as we can do that, specifically in offers that have more frequency than our weekly and bi-weekly offers that people have at the moment..

Our next question comes from Marcelo Santos, JPMorgan. Please proceed..

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

We saw a steeper deterioration, if you could please comment this breaking down and how much business, the economy, how much of the lower focus or maybe higher competition from other fiber players. Just trying to understand why it's getting worse? Thank you..

Hi, Marcelo. Thank you for the question. First in the prepaid you're right, we had a very strong results of 5.8% year-over-year growth in prepaid. So we had to prefer to do it through the forms usage it's at 13% increase. I think that there are many, many things related to this performance. The first one I answered to Rodrigo before.

I think when quality is required Vivo stands as the number one. So I think people are now home office, home schooling, home entertainment and when you need a good connection, if you consider the penetration that we have with 3G plus 4G or 4.5G together, we are the top one. So I think that's the first one.

Second one, I think we have been working and we have a lot of capabilities in managing our customer base. So I think we've been doing that well, proposing the right offer to the right customer to improve the engagement with Vivo and not only with our service but also digital service.

I think the right way to do that, I think it also proves to be good strategy and actually very good because improving number of net adds as well. Also on commercial activity we are being fairly precise acting the right points of sales to attract the right customers to be Vivo.

So I think also the number that you're seeing there that's also proved that. So that's the combination of both more customers, lower churn and also increase in the ARPU.

As you can see also in our presentation, if you see the ARPU, there we have the third quarter of this year is much higher than they had not only the second quarter where we were very strongly impacted by the COVID but also in the first quarter of this year pre-COVID impact.

And there is a final comment that I would add Marcel, the government at the Brazil, it's given money for people who were in vulnerable situation also helping people to consume and that also has an impact, a direct impact in our prepaid performance.

So with the recognition of all even when there is a reduction of head of the government, we continue to see a strong movement in our customer base. We just tried lot of engagement, conception going up for customer. That's first, I think answer but now let's go to the second one and then if you have any question in the first one, I'll go back.

In the fixed revenues as we said in the last quarter as well, we are optimizing our CapEx allocation I think that's the first decision. We are putting all the strength of our CapEx all this FTTH and reduced when started COVID our deployment of CapEx related to new customers in or DSL that has an impact.

Because we cannot grow the revenues in these two lines as we use to do because there is a better allocation with better return, but has a direct impact in revenues.

Point, also legacy services is decreasing as we've just showed the number of minus 18% that the combination of factors but it's something that we're going to continue to see because voice is getting and not used as we used to in the past.

And the third is the DTH, no DTH, we stopped a long time ago to acquire new customers has a direct impact in our revenues. But I think - again it's a wise decision. We are focusing just in IPTV or fiber plus, OTT. If you look the breakdown of our revenues what we call this legacy services.

They still represent 40% but these represent almost 50% one year ago. So going forward, we're going to see these legacy services going out and what's the new ones the FTTH plus IPTV growing in a reverse way as we're deploying more HPs than we are penetrating more our network. We're going to click more convergence.

So we're going to see these numbers going up. The only one that I also would highlight corporate data, and I see still we are also optimistic about this line this quarter, we were impacted by companies being closed and not signing for new deals.

That was a temporary effect that we believe in the months to come it will be corrected by new companies and our current customers also investing more in data and specifically talking about B2B [indiscernible]..

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

My first question is on the topic side, we have a lot of positive trends going on right now open ramps [ph] and the network sharing the neutral fiber networks in which you are going to participate probably a more gradual rollout of 5G.

How should we think on the CapEx trend more mid and long-term? Is it fair to assume that the CapEx should continue to go down over the next years, finally reaching low teens?.

Hi Maria, thank you for your question. Let's just go back a little bit to talk about the CapEx now in 2018 you know it was said that we would increase CapEx because we had a model like to expand our fiber footprint in a more accelerated way.

And that's why we've got in this 2018 additional CapEx and that was also forecasted to be might build in 2019 might build in 2020. So, we were at the time that we were in Investor Day 2018 we said that it must reach 14 million HPs with this additional CapEx that we were presenting at the moment.

So just want to highlight that because we're going to end this year with 16 million HPs its more than what we said at the time and we're using an amount of envelope much lower than what they were predicted at the time. So even 2018 the topic was lower than what we said 2.5 last year was lower than nine.

And this year it's going to be much lower, not only because we are more efficient, but also because about the impact of the COVID. And as I said in the question before we are prioritizing what is growth technology and not investing the legacy - also has a very good CapEx allocation.

Going forward as I said we're going to continue growing fiber we're going to continue growing 4.5G. We'll continue to grow 5G. We are understandings and we just started the 5G DSS. We're going to have the auction next year. So there's a lot of commitment that we will need to comply.

And we will to keep Vivo leading the internet arena both in mobile intersects.

So and we're looking for alternative models the one that will match the neutral one that view is a little bit of pressure on CapEx or the same thing we have with our American Tower is already a CapEx allocation that is different because American Tower is responsible for part of it.

Same thing we have with Phoenix Tower different one that we have in the franchise because in franchise there is no CapEx review is 100% CapEx in the franchisee and in the neutral that is the plan that we have for the future to continue to grow.

We're going to also have a different CapEx allocation that will allow us with lower CapEx I am not giving you guidance, but not lower CapEx accelerate from what do you have to be 16 million so in 2024 have more than 24 million HPs. That will be a different allocation more pressure on OpEx, but lower pressure on CapEx..

Thank you very much Christian. And then as a follow-up question, the FTTH execution is impressive.

Can you comment a little bit on the different strategies in large, mid and small markets competition wise? Do you think that the expectation is to ARPU continue to grow and how accretive do you expect the fiber spinoff to be and if you see any consolidation opportunity in the fiber market for that new vehicle as well? Thank you..

So I think as I said - [indiscernible] the fiber market segment is competitive. But we've been very successful in any new city that we enter. We have a competition there no it's, as you know there are thousands of small players.

So any new city that we enter we face any type of competition and we've been very successful deploying more not only for us to have an idea. This was the 28 new cities that we were not present.

And if you consider this - the full year of 2020, we're talking about 104 and usage is not that compared to the year before that was bought 43 new cities, we are more than doubling the number of cities and more than doubling the number of HPs.

So we are very confident with our strategy going to the cities and we are not being limited by the presence of competition.

Hard work in our case is also as we present it keeps growing and being able to sell in a better mix, we are selling much more higher speeds and people are willing to pay a little bit more to have a better quality in their connection and here fiber has the best better proposition by far.

Reached 300 megabits, we also can able to add to our broadband proposition not only IPTV, Pay TV, but also OTTs I think successfully Vivo as has been deploying FTTH, plus Netflix, plus Amazon Prime Video plus many others that we are coming to announce in the next month. So also that's going to help drive up.

And also seeing are both in a total figure of mobile plus FTTH. European gives the trigger that Vivo has and I don't see this mobile apps.

Though the ability to protect or to expand our mobile customer base with a combined offer that would put together the fixed FTTH, IPTV eventually the whole OTT, mobile and many other digital service that we're putting into place that I just mentioned, some of them to increment our share in the wallet of digital services over customer going beyond only talking about telecommunication.

I think the trigger here is that we're going to go beyond just considering telecommunications and the ARPU does want to capture..

Our next question comes from Mathieu Robilliard, Barclays..

I had three questions. The first one was around the outlook for Q4, on the one hand, you're exiting the quarter with very strong volume growth in mobile? And really, the question is about mobile. On the other hand, I don't know how the situation is evolving in Brazil in terms of COVID locked reduce mobility obviously.

I don't I think you had percentages mobility then in Europe? But I was wondering how you see the Q4 when you look at these two elements together, I mean can we expect an acceleration of mobile because you have better volumes and the price increase or you think that could be a bit of deterioration in the economic environment? The second question was about costs.

So if I look at what you've done over the past five years, you basically have been able to reduce cost five years in a row, which is very impressive? And I was wondering, how we should think about the next one year or two, because on the one hand, I understand that maybe some of the costs have come down, because the legacy revenues indeed have come down.

And that will be the period at some point so maybe less cost cutting opportunities.

Also as you just mentioned, you're slightly you mean slightly shifting the model in terms of your infrastructure, sharing more with others, which means CapEx to OpEx? So the simple question is, do you still see overall reduction in OpEx in the next year or two? And then lastly, can you give us what is your best estimate or best guess for when the spectrum auctions the 5G spectrum auctions will take place is it 2021 or could it shift to 2022? Thank you..

So Mathieu, this is Christian. I will answer number one and number three and then I ask David to answer number two. The number three, are we expect to be in next year. We don't have a final date so waiting for an [indiscernible] to publish the rules of the auction.

The Minister of Telecommunications said that it most likely would happen in the first semester of 2021. But we don't have any official confirmation. So I believe it's going to be next year that's the third question. The first question Brazil situation here is getting better and I am talking about COVID situation. So, we are now fully operational.

And regarding our commercial channels we still have some areas where we are not working and at the same hour that we used to work in our stores. And of course, there is limitation of capacity in our store that has an impact in our sales. But what we see weekly is a change in a positive way.

We see cities coming from more conservative phases in isolation or protocols going to softer phases, and that's positive for our business..

.:.

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

So we pay for the future. So the cost has to do with running the company, we see actual room to keep reducing. As you mentioned, also we're moving to a model where it would be less CapEx, more OpEx. Also we're moving to more digital space, but it's going to be higher revenue that will bring with lower revenues with lower margins.

So how do we prefer to look at it is we are planning to keep growing our EBITDA because all those revenues would bring positive margins always. And also to keep accelerating and to put focus on the operating cash flow margin.

And also, if you look for the thirty-nine months of the year, we have an operating capital margin of 23.5%, which is growing 3.4% year-over-year. So this is how we monitor our business. And we make sure that independently which line is recognized, we are always improving our profitability.

And this is what they simply ask to keep accelerating the cash flow generation not that you can see that this quarter has been impressed..

Our next question comes from Carlos Sequeira, BTG Pactual..

So I know the I know the FTTH operation is growing superfast. Net additions are impressive. Vivo is the largest FTTH operator by a good margin. So everything is going super well.

In the FTTH business what strikes me is there any way to grow in [size] I mean you have CapEx under the control, free cash flow generation is amazing? Are there any ways to do it even faster to build out the network even faster? The issues are engineering or why not try to move even faster with FTTH given how well we were doing? And also if that is not possible organically, would it make sense to try to go for inorganic strategy in the area to grow faster please? Thank you..

Hi, Carlos thank you for the question. It's Christian. Yes, I think you answered part of it its right there is also always a CapEx control as well, not to deploy much lesser than we are doing. I think we being also very precise in where we want to enter with our Alfa network.

And that is part of our success, we are entering the right places and right cities and also capturing the digitalization of the right customers for Q4 - that is also blending our fast speed, as I said before, with the FTTH deployment.

I think going faster, I think the decision and as I said no, when we went to New York, and we said in our Investor Day that will end this year with 14 million in solid with a huge number we are ending this year which is 16 million or so that's our ability to go faster and so there with the same capital with a lower CapEx.

So I think that's proven that really so Vivo of doing more with less. No, and that's the number that we are presenting at this year. And this number is still not counting a lot what people do with partnerships.

As we also mentioned, so when we sign-up our partnership we miniaturize with American Tower, that would give us another 800,000 HPs that's part of the structure of going faster with lower CapEx but we sign with Phoenix is another example work faster with lower CapEx.

And that's why we decided to do it bigger and larger and that's what we put in place our infra core project that it's very well advanced it's progressing very rapidly. There is - we have a series of investors interested and be part of this project.

As we said in the last quarter, we expect to be fully operation in 2021, that will help us to go over 24 million HPs by 2024. What is over 24 million is the number that could be good. And also extrapolate what we predicted when we said we would get 14 million in 2018. So this process is doing very well.

We have investors [token] and checking - in the data room. And hopefully in the next month, we'll be able to sign it and be operational. And M&A in your question, we haven't seen so far, targeted mode combines our expansion strategy with the quality of the network that we did.

But once we have this vehicle in place, I think part of the growth of this vehicle and talking about the infra-quote that we're deploying could be expansion through M&A.

So it's not and we are always checking the assets that are available in the market to find something that could combine the excellent infrastructure in the construction of the network That's for us is the number one requirement with the footprint that we need to expand our FTTH logo of course we're going to see and look at it and maybe be able for an acquisition in the future..

Thanks, Christian. Can I make one follow-up question on that to, one thing that is that - I'm curious to hear how you're seeing that, is a competition between your fiber operation and net services, coaxial cable network.

How are you? When you have a direct competition? How are you faring compared to net especially after the pandemics when I think the quality differential became more clear than before?.

Carlos, I think there is - always a limitation of the quality that we expect from your network. No, I think the pandemic was the climax of the need of speed, and in a span - and upload and download.

That's something that you'll get much better when you're talking about fiber, and for low usage, also imaginary one at home using at the same time, the network and the other things that fiber has an advantage. So given that speed, upload, download, and for the usage of the network and fiber shows up to be the best alternative.

And I think the number that we are foreseeing and add by themselves improves the strength of our value proposition.

Although it's difficult to compare the numbers from one company to the other because sometimes they are deploying in one area that I'm not when we're face-to-face I think it's a clear advantage of this priority, especially the technology that's fiber versus coaxial as you just mentioned..

Our next question comes from Susana Salaru, Itaú..

Thank you for taking our questions. Hi. Our first question is regarding the EBITDA margin front, we have been seeing Telefônica being with sustained EBITDA margin at 40% level, despite what happened with the pandemic.

So going forward with a more healthy top/down scenario, could you just elaborate why you're expecting for margins to be if you should expect the same margin live or we could see room for improvement? That would be our first question? The second question, I did a follow-up on the prepaid again, apologies, I actually I didn't fully understand you guys are about to do a price up in prepaid or you already did a price up or three more, four more? Thank you..

On good base to sell are - no, we're not going to have a price increase in prepaid right now. I think we're trying to as I said now try to manage our customer base in a better way to have people increasing the top of the Vivo.

And here its playing - was asking before, how to do that, okay, calling the right offers, the right customers in the right moments, expanding their usage with Vivo weekly-by-weekly, monthly offers.

And trying to combine that with also bringing value proposition specific to the hybrid product because that gives us the opportunity to migrate from prepaid to cloud - sufficient is always the strategy. Look at the different segments at the same time, because the impact in one is directly affecting the performance of other.

As I said also before, where - we are always trying to push the market up as we're doing the pure postpaid, what we're doing there however, and we trying to do also in the prepaid the response is lower from competition, the prepaid is still a lot of aggressiveness in the prepaid arena. So we cannot stand out in a negative way towards our customer.

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

Second question this is our rate just regarding the margin. So if you look at the margin EBITDA margin for the first nine months, show we're up we have 40.3% the margin, which is growing 0.4% percentage points plus year-over-year. And also even though the current situation were good even to improve in a permanent numbers or margins.

For the future, as I mentioned before, we were optimistic - we're optimistic about the EBITDA generation more than just the margin up. But let me just give you two examples now. We're moving to a world where we have the commission's more through push and net. Now we are going to e-commerce where the unitary cost is almost zero.

We're moving from a world where we have call centers where we need to pay people just attending those calls that we are moving to a world particularly in our case that we're moving to Vivo as we have more than 18 million unique users per month that each one of their queries are solved without incremental costs.

Not so just allowing us to be a company, significantly more digital, but also more efficient and to put more OpEx on those costs that will add more value to the customers and we have more return for shareholders.

So we are working on this mix, to make sure that the EBITDA and also to focus on operating costs, operating cash flow is growing year-over-year..

Our next question comes from Diego Aragao, Goldman Sachs..

Good morning, Christian, David and team thank you for taking my question. Actually, I just want to follow-up on the question regarding your FTTH. You have this business in over 250 cities now.

And I was wondering if you can comment a little bit more about the competitive landscape in these cities, where you operate but not with the caps of the operator? In fact, we've eventually in the smaller and regional fiber providers are using some of this - let's say smaller ASP players in the cities.

And also looking forward how fast you can - you can grow into new cities and how competitive should be the new cities you are planning to add? Thank you..

Diego, thank you for your question. So in large cities I think you are more about this mobile app, but in big cities we normally we face competition from the cable in large cities. It's depending on the cables, but mostly our competition which is with the cable. So but I answer look I can do before, I think fiber has an advantage as technology.

And I think that seen the numbers and a robust number that we're showing. In smaller cities yes as you're right, we face competition for small players in that IPTV.

Here, there is a combination of things no first, technically Vivo will present a better proposition and not only the infrastructure that we built, but also the equipment reporting the homes place and the customer's premises. I think Vivo plays a different game.

And we are in a better quality situation that could be perceived by customers and experienced with the fiber. Second, we got very good customer care. Now and already we have a store.

We have our service from people and all that experience and expertise that we have in place in the new cities that we have to certainly design a very well-defined strategy to enter a new neighborhood or in a city.

Third we have IPTV for customers who want to have Pay TV most of these competitors don't offer IPTV or built offer IPTV satellite that we have. Also apart from IPTV, interesting dealers, Netflix and Amazon Prime Video in a good price and also built in a fiber build, but also a final advantage.

And we start playing convergence build that household something that is more in place of getting out of. So we still have cross benefits, but going forward we could be a little bit more advantages if we put convergence or total offer from Vivo combining mobile with FTTH.

So, we are very pretty confident as I said before also these are the all these things that we have. So we have a local fiber competitor and we've been successful. And we are going to accelerate. We see a very positive outlook going forward. I think we have the demand for digitalization, the demand for homes connected growing in Brazil.

We do have just 20% of homes in Brazil with ultra broadband. So there's a lot of room still to be captured and we are in the right place in the right moments because Vivo decided to do fiber. A long time ago, Vivo had the largest fiber infrastructure in Latin America.

And Vivo had the best mobile customer base, all this combined into strong brand and the channel prepared to sell mobile, fixed and digital. I think we have an unbeatable offer. So confidence and the need for digitalization is more than evidence now, after all we went through and secured going through of the COVID bad situation..

Thank you, Christian super clear, that's very helpful. Look, just quickly on the mobile business, you had like a pretty strong additions in the prepaid. So the question is, how do you see, the prepaid and postpaid mix going forward.

Let's say maybe two, three years from now where this mix should be? Because I just want to understand is there still room to the quarter. That's a good way to postpaid migration, going forward? Thank you..

No, I don't see that, I think what we saw in the prepaid as I said before, is a combination of factors that gave us this strong performance and we are positive that we are organically very well into prepaid. And I think here it's more in the alternative side.

I think the benefit of being able to care for so much - so many customers in the last month last quarter give us the opportunity now that we have our channel in place.

Again to migrate prepaid to hybrid bigger than proposition that we have in Vivo for the different segments, it's very clear, and Vivo - we are very able to show to customer's that advantage of being in each of the segments.

So we don't have this risk right now of just reverse migration, I think the opportunity is much more in the right recreational of hybrid and hybrid to fewer. And in the future, trying to give more customers with fiber and with a mobile in Vivo. It's the contribution of prepaid in our results we will be lower or the postpaid will be stronger.

I think is the natural movement of migrating pre to hybrid to be in place in Vivo so maybe the postpaid will be even more relevant going forward. No so we even though we are doing well in the prepaid discussing and capturing now are the right candidates after some time first to be migrated to hybrid and we are willing to do so..

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

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

Thank you. This concludes today's Telefônica Brasil's 3Q 2020 results conference call. You may disconnect your lines at this time. Have a good day..