Good morning, ladies and gentlemen. Welcome to TIM Participações 2018 second quarter results conference call. We would like to inform you that this event is being recorded, and all participants will be in a listen-only mode during the company's presentation. There will be a replay for this call on the company's website. After TIM Participações remarks are completed, there will be a question and answer session for participants. At that time, further instructions will be given. We highlight that statements that may be made regarding the prospects, projections, and goals of TIM Participações constitute the beliefs and assumptions of the company's board of executive officers. Future considerations are not performance warranties. They involve risks, uncertainties, and assumptions as they refer to events that may or may not occur.
Investors should understand that internal and external factors to TIM Participações may affect their performance and lead to different results than those planned. Should any participant need assistance during this call, please press star zero to reach the operator. I'll turn the conference over to CEO, Mr. Stefano De Angelis, so he can present the main message for the second quarter of 2018. Please, Mr. Stefano, you may proceed.
Thank you. Good morning, everyone, thanks for attending our earnings release conference call. As you saw in our material fact last night, I'm resigning from the position of CEO, Mr. Foguel will take over in the next couple of days. This will be my last call with you. I will, however, remain on TIM Brasil board to secure a smooth transition. Let's move on the results, I will make some additional remarks on this topic at the end of my presentation. This quarter, we managed to post solid numbers with a consistent delivery in all fronts amid a worsening macroeconomic environment and some temporary impacts. Total net revenues accelerated its pace to 5.8% year-on-year growth, reaching BRL 4.2 billion.
This quarter, all revenue streams contributed to growth, with the highlights being the resilience of mobile service revenues, which grew 5.7% year-on-year, and the solid expansion of 41% in TIM Live revenues. We thus remain focused on the combination of ARPU uplift and expansion of high-value customer base. The transformation of our base helps to improve the resilience of our revenues, reducing the impacts from macro headwinds. Extraordinary events had limited impact this quarter, accounting for a negative effect of BRL 15 million or approximately 0.4% of mobile service revenues. This is a consequence of closing the quarter with 76% of our revenue coming from mobile bundle offers, growing bundle revenue at a solid pace of 35% year-on-year. We keep our focus in managing our customer base, using more and more analytic tools to help profiling our clients even better.
In the second quarter, 67% of our clients were in the recurring plans, up from 61% last quarter and 42% last year. Migration from free to post and new acquisitions remains strong. In the last 12 months, TIM added more than 3 million new lines to postpaid, excluding Machine to Machine one. We know the financial market looks more at net adds. Nonetheless, our strategy goes beyond the activation of new lines in postpaid. Since last year, we spent a good portion of our efforts in upselling clients inside the segments. In slide three, there is a drawing that will help you to understand our approach. The goal behind this strategy is to promote ARPU increases, and in order to do so, accurately profiling our customers to offer the best proposition is key.
The result of this strategy is generating positive ARPU trends in the three segments: prepaid, control, and pure postpaid. The combined effect in mobile ARPU shows expansion of 13% versus last year. A quick comment on prepaid. We know there is a concern around our prepaid disconnection, so it is worth mentioning we understand that this is an area we need to properly address, but we now see it as an opportunity looking forward. TIM was and still is the champion of the second voice SIM card. It is fair to say we are more exposed to SIM consolidation process. Our migration strategy is also an important factor behind the reduction of our prepaid base. On the fixed business front, we have exciting news. We're expanding TIM Live operation and arriving in Bahia. Salvador is the first city in the northeast with TIM's ultra-broadband service.
In parallel with the geographic expansion, we maintain a solid execution to sustain TIM Live strong revenue growth at 41% pace as a result of a 13% increase in ARPU. At the same time, our client base grew 22% year-on-year. TIM Live now accounts for 38% of our fixed service revenues. The launch of the new portfolio is producing interesting results. Quarter-over-quarter comparisons show the ARPU of new clients increasing in both FTTC and FTTH technologies. New customers in FTTH are entering with a 19% higher ARPU when compared to first quarter 2018. This is a consequence of higher speed mix and content being embedded into our offers.
In this phase, the key element in TIM Live's operation is adequately manage the phase-out of the FTTC network expansion, keeping practically the same footprint in the coming quarters, and the phase-in of the FTTH enlarging coverage to new cities, but as well as in Rio and São Paulo. To support all these developments, we keep evolving our networks, both mobile and fixed, targeting solid improvements in customer experience. TIM's network numbers show important progress. Number one in 4G coverage, more than 3,100 cities and 92% of urban population, more than 17,000 4G sites. Leadership also in the 700 MHz rollout. Close to 40% of the urban population is covered with this frequency. More cities and more sites to help closing the indoor coverage gap. Most populated city in Brazil will start to enjoy this benefit in the second half.
On the fiber front, we are accelerating the FTTH rollout, doubling our coverage to 415,000 addressable households. After the city of Mauá launched last quarter, we started the field test in other four cities. They will be officially launched beginning of August. Always targeting customer experience, we are putting additional effort to deploy Voice over LTE technology and expand our refarming strategy. VoLTE is available in 10 million devices in Brazil, and TIM reached, in the beginning of July, 5 million clients using this technology. Our coverage reached more than 1,500 cities with VoLTE. The benefit for customer experience are materializing. VoLTE clients experience 57% less call interruption, and the network takes 44% less time to have a call completed when compared to customers not using VoLTE technology. After our successful execution in refarming the 1.8 GHz frequency, we are now moving on to the 2.1 GHz.
We ran tests in Teresina, state capital of Piauí, which showed encouraging results. Download speeds were 14% faster after the frequency was redirected to 4G, and there was also an improvement in service availability. Talking about availability, the last report from Opensignal showed once more TIM as the leading player in the criteria that help measure the quality of the 4G coverage. As you all know, at TIM, we favor availability over download speeds. I quote Opensignal to explain our point. "Fast 4G downloads aren't very useful if you can only find them a small portion of the time." That doesn't mean we are not working to improve the speed of our 4G network. In the last 12 months, according to data extracted from Ookla speed tests, we have improved our download speeds by 14% and our upload speeds by 19%, while latency improved 26%.
TIM's digital transformation program is also a key driver for improving customer experience while benefiting the efficiency program. We are seeing strong results across the board. Digital sales are growing rapidly and became a vital element in our upselling strategy. Prepaid recharge mix is shifting towards digital channels. Self-care is becoming more and more relevant. MyTIM platform users grew by 62% in the last 12 months. TIM's mobile app appears as the best-rated among Brazilian telco in the App Store. Our new IVR is also playing an interesting role in reducing the necessity for human interactions. E-billing and e-collection adoption have also increased significantly by a 13% rate. This evolution not only improves satisfaction, but also opens the opportunity for cost reductions that, combined with our efficiency plan, led to a total OPEX that remains absolutely under control.
In the second quarter, costs were up 2.1% year-on-year, growing under inflation and within our guidance targets. We already reached 86% of our savings targets in June. Among our OPEX strength, it is worth explaining bad debt and other cost dynamics. For bad debt, it is important to highlight that 2% of gross revenues is a healthy level, and the expansion we are seeing is mainly explained by a larger revenue base exposed to delinquency. Control plans, that is the driver of our revenue expansion, for example, increased their gross revenue base exposed to default by 50% year-on-year. In the second quarter, there were still some non-recurring items, but less relevant than ones described last quarter. Regarding other cost lines, we saw a deterioration due to non-recurring items related to tax and civil contingencies, a combined impact on the yearly comparison of approximately BRL 30 million.
Consistent revenue expansion control cost gave us once more a robust EBITDA of BRL 1.6 billion, up by 13% year-on-year, while EBITDA margin was boosted to almost 38%. Reported net income in the first six months of the year totaled BRL 585 million, growing 67% year-on-year. The second quarter contributed with BRL 335 million in net income. In this context, the company announced yesterday another distribution of interest on capital of BRL 240 million to be paid in November 2018. The distribution follows the guidance disclosed last quarter to distribute between BRL 809 million in interest on capital this year. CapEx was boosted in the quarter to BRL 1 billion as a consequence of doing some catch-up from the first quarter, and also an acceleration in fiber investment and mobile access networks. Year-to-date CapEx totaled BRL 1.7 billion, up 12.5%.
Having for the first half an EBITDA of BRL 3 billion, EBITDA minus CapEx reached BRL 1.3 billion, growing 17% year-over-year. Operating free cash flow expanded BRL 443 million, reaching BRL 313 million at the end of the semester. As final remarks, I would like to highlight the resilience TIM Brasil is showing in face of a slow and unbalanced economic recovery. As you all know, expectations for the economy are also deteriorating, but I'm happy to say I'm leaving the company in much better shape and also able to face these kind of short-term uncertainties. So much so, the company is on track to deliver its guidance, which is being confirmed by the entire management team and the board. Being my last call, I would like to emphasize that it has been a great pleasure to interact with everyone in the last two years.
Thank you for the way analysts and the press have followed the great evolution of TIM. The company has undergone an important turnaround process, being recognized for its innovation, its focus on infrastructure, and its constant search for the best customer experience. I will remain in the group and the board of directors of TIM Brasil to fully support the transition towards the development and execution of the company's strategic plan. I'm sure the team that remains in the company is very talented and, along with the new CEO, will continue to achieve significant financial and operational results. In this way, TIM Brasil remains a relevant player in the sector landscape and the protagonist of the digital transformation in line with its DNA of innovation and with the brand position, evolution never stops.
We will now open the floor for questions, I kindly ask you to please focus on the issues related to the second quarter results. Thank you.
Thank you, Mr. Stefano. We'll begin the question and answer session. First, we will take questions from analysts, followed by the journalists, both in English. We ask each participant to restrict himself to two questions at a time. To ask a question, please press star one, and to remove the question from the list, press star two. Our first question comes from Susana Salaro, Itaú.
Hi. Good morning, guys. Our first question is related to TIM Live. We have been seeing the TIM Live rollout and the revenue performance is evolving very fast. We were just wondering if this is in line with the expectations or is it actually coming better than anticipated? If you could comment a little bit more on going forward, TIM Live specifically, because we see the other players in the market are reacting and deploying also fiber networks, if that could change the strategy of expanding to 13 cities or adjust this strategy. That will be our first question. The second question is related to Mr. Stefano, board member position. We just wondering if there is a formal period in which you have to stay in the board or there is no formality regarding that. Thank you.
Hi, Susana. Thanks for the question. I will address the second question. I leave the floor to Pietro for the TIM Live one. I will stay in the board. I will not just stay in the board. I will spend some time in August in order to support the best possible transition, as I told before, to secure the execution of our strategic plan. Let me say that there is no time constraint about this position. I will follow the mandate of the board members as a whole, as all the other board members.
Okay.
Hi, Susana. Pietro speaking.
Hi.
Related to TIM Live, we have to realize that, as you know, we are quite pragmatic. We are not completely satisfied about the speed that we have today in TIM Live because we can improve and achieve more. If I look at the situation compared with what we were planning, we are perhaps one month and a half of delay in some of the activity, but it's nothing that leave us worried about our plan. Because if you look at our net adds, we close something close to 5,000 net adds per month in the last two months. This is something below what we want to achieve, considering that all the activity that will increase our market potential on FTTH is coming, while the saturation of our network on the FTTC is increasing.
All in all, we confirm our target. We think that we have still room to further improve and achieve our target. About the competition, as we stated in the past, we are choosing area in which there's lower level of overlap. What we are doing is that we are trying to optimize our network availability in area where we have, let me say, older technology, where we can be a little more aggressive in our offer, always in an approach that is a below the line approach. Not declaring or putting on the market irrational price that can generate a price war.
Perfect. Very clear. Okay. Thank you. Stefano, best of luck.
Thank you. Bye.
Our next question comes from Walter Piecyk, BTIG.
Thanks. Can you give us a sense of when the prepaid base will stop being declining? I realize that these are customers that are shifting over to postpaid and non-paying customers, but how many more do you have to go before that will end? Thanks.
Okay. Thank you, Walter. I think that it's important to remember what we stated in the past. TIM was the main player in the prepaid market. As you remember, our strategy in the past was to become, to increase our penetration, and we become the most second SIM operator in the market. When you look and compare to the amount of SIM that we had in the past, I think that we will continue to have negative net adds on the postpaid for the following. Prepaid, sorry. I'm discussing about prepaid. We will continue to have negative net adds on the prepaid due to the consolidation of the market of the two SIM, because we were the operator with the highest number of SIM and with the highest penetration of second SIM.
What is important to realize is that the focus is not related to the amount of SIM, because we do not count as revenue the SIM, but we count the ARPU of the customer. As you can see, we are constantly increasing and improving the ARPU on the prepaid, while we are also migrating part of the prepaid to the control. I think that in this next six months, you will not see further improvement in the prepaid net adds.
Okay. Thank you. Then the second question is. I'm sorry.
And we-
The second question is I'm starting off. Go ahead.
No, what I mean is that we are available with our Investor Relations team to have one-to-one to explain in better details the number that are related to the prepaid.
I think that was a good explanation. My second question was on phone sales. América Móvil had mentioned a move to try and remove subsidies. Can you just refresh our memory in terms of your phone sales? Do you offer subsidies for postpaid customers? Have you considered maybe removing those subsidies? Maybe just talk a little bit about your handsets sold decline this quarter, maybe what some of the things that were going on with the customer base and why handset sales were down this quarter.
Okay. Keep in mind, just to be very fast. In the past, TIM had a huge amount of sale of handset exactly for the strategy of the second SIM. Let's remember that TIM was the operator that introduced in the Brazilian market handset with the dual SIM. This is due to the fact that TIM, we are discussing about 2011, 2012, was acting to increase the prepaid customer base. The way to do that was to transform the TIM sales team in a distributor of handset, commercialize mainly dual SIM handset. In the last three years, we progressively reduce our sales of handset because this kind of strategy makes no more sense. We started, as we stated, the last year with a small amount of subsidy on the postpaid segment.
Once you start to look at our revenues on the sales of handset, you can see that quarter-on-quarter, not year-over-year, we are more or less stable now, as we declared also in the past. We don't think that we are going to increase our level of subsidy in absolute value as total. What is happening is that the number of handset is decreasing as sales, and we are more focusing on handset of a higher level to corroborate our strategy to increase our penetration on postpaid. If you look at the overall market, what is important to highlight is that all the operators are losing market share in the sales of handset because it's the large distribution that is continuing to grow on that side.
Great. Thank you very much.
Our next question comes from Fred Mendes, Bradesco.
Good morning, everyone. Thanks for the call. I have two questions. The first question is, looking at the bad debt, I think that's the only line that came in weaker than we had here than expected. I think the last quarter, we talk about something like BRL 100 million per quarter on this line. I just want to understand how much of that is related to this concept with the other telecom operator, and eventually the trucker driver strike. If we look at the second half, we can still keep this idea of BRL 100 million per quarter. That would be my first question. The second question, it looks like finally the gap between growth and net revenue growth has closed completely.
Does it mean that the penetration of the VAS is at its maximum, or do you believe that we do have room for growth on this front still? Thank you.
Hi, Fred. Thank you for the question. First of all, regarding the bad debt, as you remember, I give you the answer about the BRL 100 million, and honestly, we are a little higher than BRL 100 million, but continue to stay in one very relevant KPI that is the participation in terms of gross revenues. Very important, Fred, to keep in mind that when you migrate the prepaid customers to the control, you expose your P&L to a natural increase into the bad debt, while on the other hand, you benefit from a reduction in other line of OPEX. Just to give you a very clear and important remarks. When we move a customer from prepaid to postpaid, we increase the ARPU of the customers, this is the first positive.
We reduce the volatility, we increase the loyalty, we reduce the OpEx for the recharge that don't forget that is between 6%-7% of the gross recharge. Our bad debt is not 6%-7%. At the end of the day, this is a non-negative impact on the P&L. As we mentioned in this quarter, when you look at the bad debt expansion, that is 57%, if I'm not wrong, this is exactly in line with the expansion of the gross revenues for Control, where there is another impact. We are increasing the revenues, and in the mix of the revenues, of the gross revenues coming from the Control, we are reducing the portion related to the prepaid platform.
As you know, the Control customers in the past were paying a monthly fee as a postpaid and was spending additional money in the prepaid platform where you have this 6%-7% cost in terms of participation to the revenues. The new offer in Control, that is the evolution of the industry, of the market, is now strongly reducing this prepaid component. When you look at the expansion of the revenue of the Control, you have also to consider that the billed postpaid gross revenues of these customers is growing more than the blended revenues one. Just to finalize, I wouldn't say that this is a good news, but if the Control platform continue to expand, the bad debt will naturally continue to expand accordingly.
What is important from our side and your side as analysts, to look at the participation of this bad debt in terms of the evolution of the gross revenues. Related to the, I leave to Pietro to discuss what is the strategy going forward about the value-added services. When you look at gross versus net revenues, as I told last time, you have also to look at the discount component. If you remember, in the last call, I said that the gross versus net revenues was in line, but if you eliminate the discount participation, we still have a limited gap. In this quarter, we are exactly with the same trend in gross revenues, not considering the discount, so before tax and the net one.
Looking forward, maybe that the discount component that is growing for our strategy that we discussed broadly after the first quarter results in our roadshow of upselling existing customers is made with dedicated offer that includes sometimes a discount when compared to what I normally call above the line offer. This is why we have this increase in discount, but this is not affecting the top line. This is not affecting the tax participation into the revenues. I leave Pietro to discuss about strategy looking forward.
Related to the VAS, what is happening is that our strategy in the bundle is not going to change. We are trying also to use the value-added services, including the bundle, to help us to increase and facilitate the migration from controlled to post, from prepaid to controlled. Just to give you idea, we are going to release in the next week an offer, a controlled offer without Deezer inside, because the commercial value of Deezer is BRL 15. Leaving Deezer in the postpaid allow us to convince the customer to move from controlled to the postpaid because they gain also something related to the value-added services.
Our strategy for the future, because you can know in the market that the value-added services that we call AVUL, that is not included in the bundle, is a source of revenue that mainly concentrated on the prepaid is decreasing. The approach that we are having is quite similar to the one that you have in the application store. We are going to have some kind of freemium approach. We give to our customer for free some service in a light version to be test the service and then to upgrade that. I think that we start to have some good news on this area starting from the first half of the next year.
Perfect. Thank you very much, Pietro, Stefano. Stefano, congrats on the great work and the best of luck in your new role. Thank you.
Our next question comes from Daniel Federle, Credit Suisse.
Hi, good morning. Could you please comment a little bit on the new infrastructure sharing agreement with Oi? It seems that the scope is larger now, so I would like to understand exactly the targets of this infrastructure sharing, if it's only for the mobile segment or if that could contribute to TIM Live as well. The second question on the new PGMC, I don't know if you had an opportunity to analyze all the details, but I'd like to hear from you any potential impact for TIM, any opportunity or threats coming from the new PGMC. Thank you.
Hi, Daniel. Thank you. I will pass to Capdeville and Mario. Yes. No, I'm sorry. I was discussing with Vicente. Just one point about the Oi agreement. As you probably know, we have for one year and a half strong, let's say, discussion with Oi also related to the 639 issue. We finalized at the beginning of this year a very good and strong agreement with them that was not just resolving the past, but also targeting the future with the aim of improving the infrastructure sharing that we continue to consider a very strategic target, not just for in Brazil, but for the evolution of the telecommunication sector in Brazil, considering the strong gaps that we still have in terms of digital divide. In this agreement, we have included both wireline and mobile topic.
Clearly, when we discuss about fiber, it's not exactly just pure wireline because you know that the distribution network serves both the wireline and the mobile one. Clearly, the target is to improve on both sides the quality and the capacity of our network. We will continue to pursue this kind of agreement, honestly, not just with Oi, but also with all the other relevant players in Brazil. About the PGMC, as you know, this is not 100% related to impacting the mobile business, but we strongly follow each regulatory evolution because it's clearly now a convergent world. Each piece of the puzzle you move into the regulation that refers to fixed impacts the global and convergent telecommunication business. Directly, we have no specific impact. There is, as you probably note, some change related to the interconnection tariff, but we make some simulation.
This is not having a significant impact, especially in terms of EBITDA. We are talking about some thousands of BRL. Now I pass to Capdeville to add some color to the sharing agreement with Oi.
Thank you, Stefano. Hi, Daniel. In fact, the news that we saw on the press in the last days was the approval by Anatel from the contract that we signed with Oi months ago. Basically, this contract that we did with Oi was to change the way that we are moving the sharing from the previous MORAN to MOCN. The main target for this new agreement is to use better the spectrum. Instead to have a 10 plus 10 in a sharing agreement, now we have a continuous 20 megahertz to share between the companies. The other part is that we are extending the RAN sharing for 1,800 in some regions. It is a small part of the agreement, but again, we are starting that. We need to submit it to Anatel and to CADE to approve this variation, this evolution of the previous RAN sharing contract.
As Stefano said, in fact, the infrastructure sharing is a continuous and ongoing discussion among our peers. We have a discussion about the fiber for the long haul and some capillarity with Oi, we have the same with Vivo, Claro, and other regional providers. It is part of the concept that we are trying to reduce the investment and to use the most efficiently the CapEx for the future. Okay?
Our next question comes from Valder Nogueira, Santander.
Good morning. Stefano, congratulations on your second successful mandate at TIM. Great job, keep on the board presence. Two questions here, one on TIM Live and another one on the PL 79. On TIM Live, how much of your TIM Live net adds have been or can be so far traced to sale to an existing TIM customer? Do you work with a target for this? When we look at the ARPU of TIM Live, which is currently 3.3 times larger than the average TIM ARPU, that is increasing. How much can we factor in of a higher ARPU coming from the TIM Live, without having to sell to the existing customer, which is a potential buyer, on the other hand, you have the bundle discount that you may have to offer? That's the first question on TIM Live.
Valder, Pietro speaking. Related to TIM Live, what is happening today is that we are working in some area with some specific technology that allow us to increase the speed of the existing customer base. We are working to upsell part of the existing customer base with higher speed and with higher ARPU, without specific additional CapEx or OpEx for this activity. It's clear that the increase of the ARPU is also coming from the fact that we are starting to increase the penetration on the new net adds from FTTH. I think that this will be a driver that will continue more and more in the following months once the new area on FTTH will be opened. We can give with the investor more details related to a better breakdown of these components.
We think that one important element of our growth on the fixed will be driven by the higher ARPU that we have on the FTTH. FTTH that compared to FTTC allow a future-proof further increase of ARPU. Because the cap of the increase of the speed is 2 giga. You can imagine that in one year, we can try to upsell the customer from 100 megabits per second to 300, 400. Try to keep the price or increase. We have to.
Okay, still on this question, how much of the TIM Live have you sold to an existing TIM mobile customer? What is the cross-sell there?
Today, to be transparent with you, we do not yet have a specific convergent strategy. We are developing, today we are something that is close to 35% of the TIM Live customer base with a mobile offer from TIM. This is an opportunity that we are going to leverage in the following months.
Okay. Now the second question is, one of the features of the PL 79, which is being put on hold in Congress, talks about automatic renewal of mobile spectrum. Okay? We know that some of the spectrum, especially the ones that were privatized together with the Telebras system, are coming to renew around 2023, 2024. How should we work with this possibility of the PL 79 not get approved or being postponed forever? What's the strategy regarding the renewal of the existing spectrum? Or would be an additional twist for you to engage in M&A of the spectrums that have a larger tenure to come due?
Fantastic question, Walter. You start from the PL 79, you end up with the M&A.
That's my job.
By the way, I leave to Mario to give you some additional color. First of all, the potential M&A strategy, I will tell you, is not driven by the mix of the expiration, but it's more related to the gap that we may have in some specific areas, some different layers. We will not address some specific spectrum because it's have an expiring date that is longer than another one. Honestly, we were not considering this as a fundamental variable in our M&A discussions. Regarding what we may expect, honestly, Walter, to imagine that the PL 79 will not be approved in the next, let me say, 18 months. Imagine. Let's give one year to the new government.
That is a very long time when you consider the content of the PL 79, the urgent need for the PL 79, but I think it's honestly quite impossible to imagine to arrive to 2022 with not having the PL 79 or something that will address that kind of issue approved by the government. What we expect looking forward is that the renewal, let me say, methodology and scheme will be similar to the existing one. That is, that probably this frequency, we will have a perpetuity scheme with some, let me say, cost to be paid on an annual basis. That is something that is already happening, part of our spectrum. I leave to Mario, if you want to add something, Mario, please.
Thank you, Stefano. Thank you all. Thank you for the questions. Can you hear me?
Yes.
Yes.
I hear perfectly. The point is that a reform in the concession renewal framework is necessary. We think that the so-called first ten days of the government to address it. From practical point of view, the spectrum that is expiring, the renewal in 2024 is original spectrum, in particular the E-band spectrum. We think that the ambition of the regulators, but also of the government, is to convert the fee for the automatic renewal of the spectrum in commitments on investment. This is more or less the plan. We believe this could be a second beginning, not only the renewal, but also the possibility not to cash out, but to invest in assets for the country and for the company.
That's an interesting angle because the PL 79, correct me if I'm wrong, it automatically renews the spectrum tenure, I have never heard that angle of you committing CapEx as a way to maintain the tenure of the spectrum. Is that a recent-
Yes. You see in the recent public institutional, I said about the so-called structural macro plan
The renewal of the frequencies, the fee related to the renewal frequency is considered a way of funding investments. Probably there will be the possibility to have a win-win arrangement. What's not possible, for example, with the first universal service fund.
Okay.
Not with this.
Okay. That's very interesting. Thank you for your feedback.
Okay. Bye.
Our next question comes from Diego Aragao, Goldman Sachs.
Hi, good morning, everybody. First, I just want to thank you, Stefano, for all the good work, and I wish you all the best for your future endeavors. Look, my first question is for the team. It's related to your recurring prepaid base. Can you provide further details about this segment? I want to understand the trends for ARPU and churn rate just for the recurring prepaid base. Also, what's your strategy for this segment? Thank you.
Diego. What is happening that now we have mainly two main offer that we are working on the prepaid. The first one is a monthly offer that is mainly pure voice and is the one that in the last period is giving us good results also because in Brazil, we still have a huge number of customers that are pure voice. As we always stated, we cannot forget that to have good results in Brazil, we have to work in all the segment. This offer is a monthly one, and what we are doing now is to try to upsell this customer from full unlimited on-net calls to full unlimited on-net and off-net calls. We are going to move this customer from a price offer of BRL 9.99 to BRL 19.99 and BRL 29.99. This is the offer that is working very well.
We are still increasing our penetration of weekly offer at BRL 9.99. This is still growing. I think that one of the next steps to further increase the ARPU will be to start to understand if it is possible in the market to not start with a recharge of BRL 10, but increase the level of entry-level recharge from BRL 10 to BRL 15. This is the next playing field that could allow to further increase the ARPU of our prepaid. What we are doing now is actually trying to give also some colors to the question that was related to the fact that we have negative net effect on the prepaid due to the fact that we have a lot of second SIM.
This is a big opportunity for us because having in our customer base customers that had used in the past TIM mainly as incoming SIM, gives us the opportunity to try to get this customer, transform this customer in a loyal TIM customer. One of the main issues that we still have today on this kind of customer is the perception. Nevertheless, we invested money in terms of advertising campaign related to our network. Coming from the past, mainly on the prepaid, customers that are still with our competitor think that our network is not completely good.
What we are going to do in a below-the-line approach is to try to stimulate this customer base to try the TIM network, because we are more than confident that today our network is at the same level or also better than the other, and try to increase the level of expenditure and ARPU. Again, with the Investor Relations, if you want, we can go more in depth on some numbers related to the mix of the different offer and increase of ARPU.
Very clear, Pietro. Thank you very much for that. The second question is related to your cost-efficiency plan. I know you guys have a guidance out there, given your results would imply the company reaching the margin guidance earlier than expected, at least my perception here. I was wondering if you can walk us through the stage of the cost-efficiency initiatives, just so we can try to quantify the opportunities for you going forward. Thank you very much.
Hi, Diego. It's Adrian answering. Yes, in fact, we've been performing better than expected in terms of efficiency. You know that we reached today almost 86% of the target that we guide for 2018. The strategy was very successful in terms of efficiency. We think that yes, there is maybe additional room in order to improve on this side. We hope we will do better on this. Regarding also and looking what can happen with the whole P&L in terms of revenues, regarding the actual situation of the macro. Again, yes, we've been improving margins above our expectations also. We think that we still can do better, but this is something that we will address in the next process of planning for the next years.
Okay. Thank you, Adrian. Thank you very much.
Our next question comes from Andre Baggio, JP Morgan.
Good morning, everyone. I have two questions. The first one is for Stefano. Stefano, we have seen TIM doing very good results in terms of growth, but we also saw recently Claro, the number 3 player, accelerating and even growing faster than TIM. Do you think that is anything that can be drawn from conclusion for what Claro has been doing well that could also be applied for TIM? Is it any kind of concern, or do you think that TIM position is solid the way it is?
Thank you, Andre. Generally speaking, first of all, you know that a lot of time when we compare trends, I like to highlight that you're not necessary to look just at year-over-year comparison, but also at quarter-over-quarter one. It's clear that Claro is doing a very good job, but when you look at quarter-over-quarter trends, you may see that the expansion in terms of top line, the trend of top line is very similar to TIM. We have a very irrelevant change in the delta of revenues between TIM and Claro in the last three months. I would highlight that the different rate of growth is more related to what happened last year. You may see that TIM has a quarter-over-quarter trend between first and second quarter 2017 and 2018, very similar.
It's zero point something change between first and second quarter. This is not exactly what happened on the other side. I don't know. I don't want to know. What I think is very important is to look at the evolution along the 2018 results. Having said so, I already and always state that Claro is doing a very good job. This means, unfortunately, on the other side, that the market is becoming more and more competitive because as you probably thought, there were some reaction also in the prepaid from Vivo.
It's a combination of a macroeconomic scenario that is probably affecting all the industry and clearly a combination of some aggressiveness in the offer that it's part of the business, it's part of the trend in the industry worldwide, and it was part of my job until today and will be part of the job of my team and the new CEO to address this issue and to continue to deliver the best results possible in this context.
Thank you. I guess the second question maybe is for Leo. Can you talk a little bit of what's going on in the cities there where the 700 MHz network has been activated? What was the perception of consumer download speeds? If that has also helping TIM to gain market share or even if that is helping to somehow to go to the fixed broadband. In the sense of wireless broadband. Just comment some more in general, the 700 MHz.
Hi, Baggio. In fact, remember that we explained that the first city, capital city that we launched the 700 was in Brasília, we increased very fast the traffic. It was because in Brasília at that time, we didn't have the 1800. We just have the coverage with 2.6 GHz. When we launched the 700, we saw a very huge growth of the traffic, not because we put more customer on 4G, but because the coverage get the indoor environment. With that, we can bring all this traffic to the 700. One interesting thing that we are seeing is that we launched the 700 Northeast last year, now we are capturing a very important part of the traffic. It is exactly what allowed us to launch the new refarming wave with the 2.1 GHz.
What I mean is with the 700, we capture all the traffic that we have in the indoor environment. We bring everything to the 4G. We reduced the usage of the 3G and with the VoLTE, even the calls now is going directly to the 4G. With that, we made the first refarming of a 2.1 GHz data is a frequency that now is used in Brazil for 3G. With the 700, we have this opportunity to open a new window of opportunity to refarming the 3G spectrum to 4G. In the end of this month, in July, we are expected that Anatel will give us the license to use the 700 in São Paulo City.
Just to give you a color, we already have more than 600 sites already installed in São Paulo City just waiting for the license from Anatel to restart the operation. What we expect in São Paulo is, first, to get more indoor coverage with the 700
Change a historical gap, because in São Paulo, every time that you complete a call, before you are using a higher frequency with 3G in 2.1 GHz. With the VoLTE and with the 700, you can stay in the call even in the most difficult indoor environment with very good quality. Our expectation about this combination of the 700 and the VoLTE is that we can improve in a very efficient way, the customer experience. I don't know if it is all that you expected to hear, but again, we are moving now in the southeast with the 700. The result is very good in terms of the quality and in terms of the coverage. We showed what a VoLTE means in terms of a reduction of a dropped call.
Just to give you other color, in São Paulo, we are talking about something around 0.2% of dropped calls, comparable with the 1.5% of non-VoLTE usage.
Sorry. Perfect. Thanks a lot, Leo, congrats to Stefano and others. Good job done.
Our next question comes from Maria Azevedo, UBS.
Thank you. Secondly, sorry for being six. Congratulations for the great work, thanks for the partnership. Our first question is on the CapEx side. Do you expect to concentrate your three-year CapEx guidance more on the fourth term, 2018 and 2019, than 2020? How would you treat any potential M&A in fiber assets in terms of CapEx avoidance? Should we assume it will be 100% CapEx avoidance? Even looking at those other assets that are there for sale, what is your view on buy versus build and your take on that? As a second question, I would like you to expand a bit on the B2B segment. You did some internal restructuring. We want to understand what are the opportunities that you see there and if you have started to see any more robust market recovery on the B2B. Thank you.
Hi, Maria. This is Adrian. I'll try to answer the first question. We didn't hear very good. I think there was some kind of a noise on the line. Regarding CapEx, I think that your question was what was happening in the second quarter and regarding the guidance for the three years and for this year. In fact, we see this growth of 12.5% in CapEx in the six months regarding last year as a positive thing. The thing is we are planning much better our CapEx along the year. We started before this year with the deployment of the network. We've been improving significantly internally on all the processes regarding the CapEx deployment. For us, we are confirming exactly what we said in terms of CapEx for the full 12 digits for the three years, and we maintain this number, especially this year.
Nothing changes on this side. Regarding, I think, your second question, that is also related to CapEx, in terms of M&A in an analysis of make or buy. Yes, we are always analyzing this issue. We're also assessing every opportunity that arises. Today, let us tell you that we are not with any specific analysis of specific opportunity. We've seen some cases that maybe are with very high prices, as you may know. Again, it's an ongoing analysis for us in terms of make or buy. I don't know if I addressed your question.
Hi, Maria. Pietro speaking. Related to the B2B, to be transparent and direct, we are not satisfied about the result on the B2B. Let's divide the B2B market in two. Corporate segment, that means large customer. On this area, we are very satisfied about our result. In the past, we have never been a reference in this area, and we are gaining important customer in the last period. This is an important element because it's in the big corporation that we can exploit in the future the development of new source of revenue as IoT and Machine to Machine, and perhaps we'll have in the following months, some good commercial partnership to further develop this area. On the SMB, I think that this is a segment in which all the operator are not satisfied, perhaps also because it's out of the spotlight.
This is the area in which the level of competition is less rational. I think that as all the operator, we have to think better about the possible development of this segment. We are working to complete change the business model and the go-to-market to further improve the result of our company.
Perfect. No, thank you very much, and thanks again for the good work and the partnership, Stefano.
Bye. Bye-bye.
Without any more questions from analysts, we'll now start the Q&A section with the press in English. We ask each participant to restrict himself to two questions at a time. To ask a question, please press star one, and to remove the question from the list, press star two.
The first question comes from Fabiola from Bloomberg, and the question is as follows: "Dear Stefano, congratulations on your new challenges. You've mentioned in the past that you're working on TIM's balance sheets to prepare it for M&A. I'd like to know if Sami Foguel will continue implementing this strategy.
Thanks, Fabiola, for the question. It's clear that any CEO of the company will continue to work on improve the balance sheet. This was a clear focus that we gave two years ago, and as the market remember, was stressed in the 20 years anniversary of TIM, say that it was the proper time to have TIM finally deliver strong, not just commercial result, but also financial result and a strong balance sheet. Moving to the M&A, we always stated that we see opportunities looking forward for a consolidation into the Brazilian market. In order to participate this consolidation organically or inorganic, you need to have a very strong balance sheet. The two things goes together looking at further improving the financial results of TIM Brasil and the footprint of TIM Brasil in the country.
Thank you, Fabiola. We'll move to the next question. It comes from Alexandre Melo, Valor Econômico. "How will TIM participate in the consolidation process of the sector in Brazil? What are the expectations in this area for the next 12 to 24 months? This year, will TIM Live reach more Northeastern states or some new region of the country?" Adrian, please.
Regarding M&A, and consolidation process in the country, we always said along these two last years that TIM should be a participant in this consolidation on the sector. We've been working a lot on the operational side, on the financial side, on every matter that prepared us in order to be in this position. Clearly, it will depend a lot if it fits in our strategy or not. We always said this. It has to make sense with our strategy. It's not that we will participate because we need something to do of M&A. No. It's a matter of strategy. Hopefully, we will maintain this path, and we'll see what happens in the next couple of years. For sure, in terms of consolidation of the market in the industry, something will happen in the next couple of years.
Our task is to be prepared, and we feel that we are. We just need to remember that maybe two or three years, this was the company target. Today, the situation, and we can say it with a lot of pride, the situation is completely different. We think that we can be a significant player in the consolidation. Related to TIM Live, we are going to offer further city. We are going to increase our coverage also in some area of Northeastern of the country. We cannot disclose now which are the city for clear reasons. Keep in mind that this is something that we have to state and repeat. The actual model of network for TIM Live allow us to very fast increase the coverage based on the opportunity of the market.
Remember that we are going to put the MSAN, so the network equipment, jointly with the antenna. Once we reach an antenna with the fiber and we see that around that antenna, there's the possibility to increase very fast, we are able to put an offer of TIM Live.
In the following weeks, we will disclose the area in which we are going to work in the last quarter of 2018 and the first quarter 2019.
We have another question from Ana Lobo, Convergência Digital. "Good morning. Infrastructure was a key element in the restructuring of TIM. Does this mean that TIM will prioritize CEMIG Telecom acquisition? A change in the strategy in prepaid made TIM to lose its second position in market share to rival Claro. Being in the third place in a market with four operators, does it hurt the company plans?" First, Adrian will address the main part and then Pietro on the prepaid and the market share issues.
Regarding the first part question about the process of CEMIG, it's the same thing in the previous question. We always analyze these cases if they fit in our strategy, if they make sense in this case, especially in terms of make or buy. We will look it on this sense. It depends, obviously, in terms of price, because when you make an analysis of make or buy, it's clearly that the price is one of the most important variables. Again, it's a matter of infrastructure. We need to increase our fiber infrastructures, as Leo always mention. Again, it's a matter of what the price we set it and if they make sense on a strategy.
Related to the second part of the question, what is important to remember is that TIM is the second player by far in terms of service revenue, and that is the focus that we continue to keep. We don't count the number of customers only, but we count the revenue in the ARPU.
Excuse me, ladies and gentlemen. Without any more questions, I'm returning to Mr. Stefano De Angelis for his final remarks. Please, Mr. Stefano, you may proceed.
It was two wonderful years that we spent together, so I would just say to you, "Arrivederci, and thank you once again. Bye-bye.
As we conclude the second quarter of 2018 conference call of TIM Participações, your lines can be disconnected from now on. For further information and details of the company, please access our website, www.tim.com.br/ir, and take the opportunity to download TIM IR app, available for Android and iOS platforms. Thank you.