Good morning, ladies and gentlemen. Welcome to TIM Participações 2018 first quarter results conference call. We would like to inform you that this event is being recorded, and all participants will be in 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 the CEO, Mr. Stefano De Angelis, so he can present the main messages for the first quarter of 2018. Please, Mr. Stefano, you may proceed.
Good morning, everyone. Thanks once again for attending our early release conference call. As you probably noticed, we are changing our communication process with one single conference call that is being simultaneously translated to Portuguese, some tweaks to our disclosure, and I will give a shorter presentation to leave more room for Q&A. With this, we are trying to address some recent feedbacks from the financial community. We hope it works well, and feel free to reach our IR team for any comments and further improvements. In this quarter, IFRS 9 and 15 were introduced. For the sake of comparison, we will discuss numbers on a pro forma basis, excluding the effects of this accounting change. You can find information on the new IFRS in our early release for financial statements. That being said, let's move to our first quarter results.
We started the year at a strong pace with consistent service revenue expansion, 6.4% year-on-year growth, reaching BRL 4 billion. The long-awaited and announced gap closer between gross and net revenues arose. Now the gap is only 50 basis points. This performance is a function of solid mobile service revenues and vigorous TIM Live revenues growth. A combination of higher value customer base expansion and ARPU uplift is taking the revenues continuous and solidly positive trend. Mobile ARPU was up close to 14% versus last year, with positive trends both in prepaid and postpaid segments. Our customer base shifts to value continues. 4G penetration is above 50%, and 61% of our clients are in recurring plans. Migration from pre to post and new acquisitions continue strong. That is why TIM is leading postpaid net addition with 3 million clients, excluding machine to machine, in the last 12 months.
We just announced an update in our mobile portfolio with a content and OTT-focused approach to differentiate even further and tackle key customer demands. We are adding to a strong offer portfolio of connectivity services, the most used apps in Brazil. On slide five, we have a summary of the new offer. The SMB portfolio was also upgraded using a similar approach. TIM Live is delivering strong numbers while we start to deploy commercially our FTTH product and to expand our footprint to new regions. Actually, in March, a new city was added named Mauá in the metro area of São Paulo, 11th largest city in terms of population of the state. First results are looking very positive. Our broadband portfolio was relaunched, with speeds now going up to two gigas.
We also included value-added services in the offer and video content strongly improved by a partnership with Fox that will give access to 11 different channels in both live streaming and on-demand. Meanwhile, our operation doesn't stop. Our ultra-broadband customer base reached more than 400,000 customers, growing in excess of 27% year-on-year. At the same time, ARPU reached almost BRL 71, up 12.5% versus last year. As a consequence of this TIM Live revenue totaled BRL 85 million, representing a growth of more than 43%. One of the most relevant pillars of this positive result is our infrastructure that is always in the center of our strategy. We are transforming the entire company to seek a better customer experience, changing from our culture to our IT architecture. We need, however, to start with a solid network, and ours seems to be on the right path.
We maintain our leadership in 4G coverage with more than 3,100 cities and 92% of urban population. Our coverage is not only the largest but also the best being attested by all the major network analysis players, RootMetrics, Ookla, and OpenSignal. Just to make an example, RootMetrics actually granted TIM the title of best mobile network experience in Brazil. In the first quarter, we are completing the coverage of the entire state of São Paulo, first operator to achieve that, and we are close to 1,000 cities with 700 megahertz layer. As we develop our 4G network in these frequencies, we can start to accelerate our WTTx coverage. This quarter, it increased threefold to reach 67 cities, and in the second half, we will accelerate further. On the fixed side, our FTTH addressable households reached more than 200,000, starting strong our path to reach 3 million in 2020.
We know customer experience is not only network. That's why the results of Anatel satisfaction surveys were an important outcome. We improved in all metrics compared to last year. Mobile general satisfaction we see is above market average in postpaid and on par in prepaid. In both segments, this is the third year of improvement. For broadband, TIM Live has a solid lead in general satisfaction, and we continue to rank number 1 in Netflix survey. Customer experience is being positively impacted by the digital transformation program we are putting in place, and the benefits are seen in cost as well. OPEX remained under control, down 0.7 year-on-year, despite volume-driven cost pressures generated by the positive commercial trends and strong network expansion. Also, our efficiency plan remains a relevant lever to control costs.
It is worth explaining that bad debt, in addition to the impact generated by the strong postpaid revenues growth, has some temporary effect that worsened the annual comparison. Last year, we had settlements with other service operators improving the results, and in first quarter 2018, we had some negative impact increasing the nominal level of provision that should not occur going forward. Consistent revenue expansion and controlled costs gave us a robust EBITDA of BRL 1.47 billion, up 16.4% year-on-year. Seventh quarter of EBITDA growth, while margin was propelled to 35.5%. CapEx was slightly down, summing approximately BRL 650 million. As a consequence, EBITDA minus CapEx expanded close to 40% versus last year and represented 20% of our net revenue. Last but not least, our net income totals BRL 250 million, increasing twofold year-on-year.
This opens the opportunity for us to announce BRL 230 million in interest on capital that will be paid in August. Also, we decided to share our expectation for distribution this year. If our guidance continues to be executed, we believe we can distribute between BRL 800 million and BRL 900 million in interest on equity. Important to highlight that there is no change in our plans. We are just sharing with the financial market and our shareholders something that was already set in our strategic plan disclosed in March. With this, I reach the end of my short but hopefully helpful speech. Before we start the Q&A session, I like to say that we started the year with very positive results, but we still have a lot to do going forward. We just launched a new portfolio in mobile for consumer and SMB segments.
The reposition of SMB is accelerating, and we will start to sequentially improve our performance starting from the second half of 2018. New fixed products are also just out, and the geographic expansion of TIM Live will accelerate in the coming months, giving additional support to our ultra-broadband customer base expansion. Last but not least, we are planning the first real convergent offer for the second half. As I said, a lot in front of us. With this, I close my speech to open the Q&A session. Thank you.
Thank you, Mr. Stefano. Now we'll begin the Q&A session. First, we'll 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. The first question comes from Fred Mendes, Bradesco.
Good morning, everyone, thanks for the call. I have two questions here. Number one, solid pickup on gross revenue. We are seeing growth of 5.9% year-over-year, way above the last quarter. Just trying to understand how should we read this. Does the VAS kind of reach its peak? On the other hand, a stronger mix of clients and higher ARPU should continue to drive this positive trend. This is the first question. The second question, EBITDA grew 16.5%, but if you adjust for the non-recurring items on the bad debt expense, the growth should be something like 18%. Just wondering if we should expect a reversal of this bad debt in the next quarter. Thank you.
Thank you, Fred. First question was about the gross revenues trend. Let me also give some color about this trend. We have shared along the last quarters this expectation that we have about to close the gap between net and gross revenues. We always stated that we were expecting this to happen along 2019, and this is happening. The good aspect is that the conversion trend between gross and net is happening in the net side, meaning that we are maintaining our guidance in terms of growth, both for gross and net revenues now. This trend will continue to improve, because if you look at the details, if you exclude discounts, a gap of approximately 500, from 200 basis points between net and gross, meaning that if you focus just on the tax impact.
We stated in the past, we will continue to narrow and we close the gap along the second quarter. Looking forward, when we look at the ARPU of our customer base, and this is why we opened this debate. I think that it is very important to understand where and how we expect to continue to maintain and also improve the trend in terms of gross and net revenues. If you look at our ARPU, starting from the first page, you may see as with 4G, we have very significant room for being competitive into the market and to upgrade and uplift our customer base. This is something that is happening.
It is something that the market probably do not perceive because we are not just as we put our strong job along 2016 and 2017 working on the uplift between prepaid and postpaid, but now we are strongly working in uplift the ARPU of the postpaid customer base, moving our customers from the lower plan into the TIM Controle to the higher plan in the TIM Controle, and moving the TIM Controle higher plan customers to the pure postpaid ones. This is a trend that is very positive in the last six months, and that is giving us the opportunity to increase the ARPU of the postpaid customer base, and will continue to be one of the main driver for the postpaid customer base. On the other side, as you may see, also in the prepaid, we have a very significant, as I said in the past, rooms for improvement.
We still have in the market a poor usage from this segment in terms of connectivity, especially connectivity. The prepaid customer base has to be managed with a one-to-one approach in order to give to any customer, depending from the ability to spend, the best offers in a more for more concept. This is the focus that we are now working in order to maintain this positive trend in terms of top line. Regarding the bad debt and the EBITDA, as I thought in the speech, we have some impact. Let's try to differentiate the question in terms of the year-on-year comparison and what we expect looking forward.
First of all, when we look at the year-on-year comparison, as you may see, if I'm not wrong, in page five of the earnings release, we are, let me say, reporting an organic comparison in terms of the debt, where you can see that the bad debt is growing 50%. The main driver of this is clearly the customer base. We have also to consider one aspect that is more technical, but it is important to share. The control customer base is now using a very poor amount of money in terms of recharge. You know how it works. In the past, the bundle of the control plan was poorer when compared to the present one. Some of the ARPU of this customer base and some of the revenues comes from the recharge of these customers.
Now, the most of the revenues from the control comes from the invoice. This means that on top of the growth of the revenues coming from these customers, we have a mix of these revenues in terms of generated by the prepaid component, postpaid component that is changing dramatically. Just to give you an idea, the invoice figure of the control is growing 100% year-on-year. This clearly creates a positive impact in OpEx in the recharge commission, and this is one of the drivers of the reduction of the commercial cost. On the other side, it generates an increase in the exposure to the risk of the debt. Moving back to the topic.
When you look at comparison with 2017, you may see that the figure of 2017 was impacted by some co-billing wholesale adjustment that the so-called term of the result that it's unfortunately a recurring procedure that happens each year in all the markets in order to adjust the dispute on interconnection and co-billing. This generated positive impact in the first quarter 2017. That reduced the, let me say, commercial retail bad debt presented as reported in the balance sheet. This year, we have some, I wouldn't say not so significant, this is important for you and for your model, impact in terms of the bad debt reported this first quarter 2018. What happening?
You may not expect we're going forward a growth of 80% of the bad debt on a year-on-year comparison, but you may expect to have a figure that is in the range of BRL 100 million per quarter. This is more or less, I think, a better guidance not to give you year-on-year comparison, but it is better to give a guidance on this component in absolute terms. Our expectation is to have this cost of around BRL 100 million per quarter in the forthcoming quarters of this current year.
Perfect. Thank you very much, Stefano. Very clear.
The next question comes from Julio Arciniegas, RBC.
Yes. Good morning. Thanks for taking my question. My question regarding the cost of acquisition. I see that the CAC has increased 15% versus the previous quarter and 40% increase year-on-year. However, seeing gross adds, they are actually declined versus Q4 and Q1 of 2017. Can you give us some color on what variables are driving the increase in the cost of acquisition? Is this an industry trend that basically the cost of acquisition is increasing for all the players? Thank you.
I will leave to Pietro the call to my question. Basically, it's a mix of the When you compare year-on-year, you have to keep in mind that first of all, along 2017, we start to introduce not that there will be a relevant amount, the lock-in offer that was something completely new for TIM, and this was part of our strategy to attack the pure postpaid segment. We started to introduce along with the second part, starting from the second quarter of 2017, the subsidy in our lock-in offer for the pure postpaid segment. Now in the comparison for still for this quarter on a year-on-year base, you have one quarter with this component in the acquisition cost when last year it was not present.
You have another impact that is the increase in the improvement in the mix of our customer base. When you compare to last year, we have strongly improved the, let me say, average ticket of our process, both for the increasing participation of pure postpaid and also because we have significantly increased the ARPU of our Controle plan that enters into our customer base. I don't know if Pietro
Yes. Just remember some elements to confirm what Stefano told. First of all, we are growing in terms of ARPU and of the value of the offer. Keep in mind that compared to the last year, this year, we have the ARPU of our customer that is on the Controle and the postpaid close between 5% and 10% higher due to the price up that was made in the first quarter of last year, towards the end of the first quarter of last year. And due to the fact that the value of the commission in the postpaid and the Controle is related to the expenditure of the customer, it's clear that if the expenditure of the customer grows, the commission can grow.
What is important to rely that in the application of our commissioning strategy, it doesn't grow proportionally, because what we are doing is that moving and changing our commissioning plan, what is happening that it grows less than the customer expenditure. Keep in mind that another stuff that cannot be appreciated compared to the last year, for example, in our sales channel, that is the part where we have the highest level of expenditure. The offer that is most sold is the offer, the so-called Controle deals that has an ARPU that is close to BRL 65. It worth for the 85% of the growth of our shop sales channel. While in the first quarter of last year, it was exactly the contrary. The most sold offer was the one of BRL 40. This growth is strongly related to the value of the customer that we are acquiring.
What is important, it doesn't grow in a proportional way, it grows less than proportionally.
Very clear. Thank you very much.
The next question comes from Daniel Federle, Credit Suisse.
Good morning, everyone. My first question is related to the prepaid market. You could comment a little bit on the trends, the macro recovery is already benefiting prepaid recharge. I remember that the recharge in 4Q were kind of soft. In the beginning of this year, you launched a new plan. I would like to understand a little bit how the trends are going in the prepaid market. The second question regarding the new TIM Controle plan and postpaid plans with free access to several social medias. I would like to understand if you see this as an implied huge increase in data allowances and if it's possible to jeopardize future growth that was expected to come from plan upgrades. Thank you very much.
Pietro speaking. First of all, related to the prepaid, we still don't see macro improvement impacting the prepaid. Perhaps this is also due to the fact that what is happening today is that, let me say, the best part of the prepaid is moving faster to the control. What is remaining in the area of the prepaid are the less rich social class in Brazil. Today, we are not still appreciating some macro move, and this is something that we are looking. Also taking a look at the overall number of the recharge in all the markets, not only for TIM but also for the other operator. When we move to the control and the postpaid, I think that what is important to rely that, first of all, we are not including in the existing package the unlimited social. It's a specific package that the customer has to buy.
Let's try to explain better. We have the plan at BRL 60 where the customer have already 3.5 GB. If he want to experience this new offer, he has to pay BRL 20 more. This is a different way to try to monetize the data consumption. If you consider on top of that usually 70%-75% of the data consumption of the customer in Brazil is made on these apps, and the first five app worth more or less for the 80% of the traffic, we think that this is a smart way to increase the customer expenditure. This is more true for Instagram, Facebook, this kind of social. You move to the offer that we included in the package, that is WhatsApp and Messenger, we look at that as a big opportunity. Why that?
First of all, it's really well appreciated by the customer, that in term of customer experience today, think that it's much easier to place a call from WhatsApp or Messenger while they are chatting than to close the window of WhatsApp, go to the agenda, and place a call. In the meantime, once our customer that bought our unlimited voice package stop to use the traditional network and use WhatsApp and Messenger to call, we have on the safe side the ARPU for the unlimited call. In the meantime, we are going to reduce our interconnection cost. I think that differently from what could be perceived, it's better to look at the offer in a better detail.
When we move on the postpaid segment, what we put was to add YouTube in the higher package that today work in our customer base, a percentage that is really marginal. It's more, let me say, a flagship than a real killer offer that will allow to grow in terms of net adds. I don't know if I was clear enough.
Yeah, pretty clear. Thank you very much.
The next question comes from Susana Salgado, Itaú.
Hi, good morning, guys. Thank you for the question. We have two questions on TIM Live. The first on the revenue performance. We saw a very good performance this quarter, year-over-year. Would you consider that this was in line with what were budget for the year, or it was above your expectation for the year? That would be our first question. The second question on TIM Live as well would be, if the book of the subscribers that are coming from TIM Live are through cross-sell or actual new clients that TIM is attracting. Thank you.
Hi, always Pietro. On the revenue side, I think that we are in line with what are our trend in terms of budget. Stefano told at the beginning, the first quarter is just to start. There's a long way in the next three quarter, we have to continue to deliver and execute our plan to guarantee the reach of the goal. Related to TIM Live, what is happening today, and this show big opportunity for the future, as Stefano mentioned in the speech, we are going to launch also a convergent offer. Today, the sale is not based on cross-selling. It's mainly new customer. This is another area where we can explore it also in the future.
As we explain also in the description of our plan, TIM Live going ahead can be also a clever way to offload also our network, because once we can see that in some antenna, we have high user customer, we can reach this antenna, build our TIM Live access, and do the cross-selling. I think that is something that we are going to experience more in the second half of this year and the first half of the next year.
Thank you, Pietro. Very clear.
The next question comes from Valder Nogueira, Santander.
Good morning, guys. Two questions. First of all, we have seen recently news on América Móvil or NET Serviços moving into fiber. What's your view on that, and how that can impact a potential bid for these fiber assets, for example, like Cemig Telecom or Copel Telecom from your end? That's the first question. The second question is, we're still on the public hearing for the new spectrum holdings legislation. Can you share with us your views on this new legislation?
Hello, Valder. Thank you for the question. About the FTTH potential expansion coming from América Móvil, this is clear to be very direct. We saw an opportunity in the low penetration and the poor speed of the present offer in Brazil. It's clear that everybody is looking at this as an opportunity. We were counting on having some competition. We cannot expect not to have competition, we have considered this. This is part of the game, I cannot say that this is a good news, clearly, but it's part of the game. We were honestly expecting to have, both from Vivo, with the new plan, and both from América Móvil, increasing competition in the FTTH.
This is the technology of the future, we should expect that all the players will run into, but we are not worried about this, and we do not expect to change our guidance and our expectation because of this. Relating to the spectrum, yes, it's clear that it's a good news for us that this topic is becoming more and more a relevant one, and that something may be expected, let me say, in a short term. You know that we want to increase our capacity in the network. This is something that is fundamental to have a good customer experience and to sustain the growth of the data usage and the data penetration in our customer base.
Net is extremely positive, especially for us that notwithstanding the steps that we are moving into the TIM Live FTTH, we continue to be not 100%, but we continue to be a relevant mobile player and a newcomer in the wireline broadband market.
Thank you. On this movement of AMX, do you see it as trying to explore this potential market that is not being tapped, or do you see it as more of a defensive play to the strong competition that NET is facing?
Both, and in my personal view, this is the move of the industry when we look at the incumbent or the integrated players. They are doing this, and I think we are not in the strategic decision, but I think they had to do both to defend existing market and to have new area of growth. Because they look at the opportunity, they need to have new customer base, and they need to defend the existing customer base for the increasing competition coming from us and from the other players that are improving their access network with FTTH. I think that it's both of these reasons.
Stefano, do you see that changing the potential dynamics for M&A involving these fiber assets like Cemig Telecom?
I think that the two points are not 100% connected. It's clear that in terms of moving back to the topic of capacity will be the big driver for the future, not just in Brazil. Each asset that represents an increase or improvement in capacity of a telco player, it's a relevant one and has to be assessed. This is part of the game, but not necessarily a part of the FTTH deployment. Because when you look, for example, at the assets of some of the company that's having the rumors of being part of M&A that not necessarily have access network, they have transport or distribution network. That is relevant not just for expanding the access network for FTTH, but also to support the capacity of both mobile and wireline access networks.
Yeah, that's a good point. Thank you for your answers, and congratulations on the numbers.
Next question, Mauricio Fernandes, Bank of America.
Good morning. Just wanted to touch on the topic of the royalty that will be paid now by TIM Brasil to Telecom Italia for the use of the brand. Just to understand why now, and why 0.5% of net revenue? Is it based on benchmarking? Is it something based on the cost assumed by Telecom Italia in the past? If there's any retroactive payment that will come as a result of the fact that it was not charged before, or whether it's going to be charged only from now on. Thank you.
Thank you, Mauricio. Sorry, the audio was not so good from your side. I understood that you asked about the trademark agreement. First is you asked why now. Let me try to address this point saying that this is something that should have happened 20 years ago, to be honest, because the trademark of TIM Brasil was registered by Telecom Italia. This is something that happened not just for TIM, but for all the, let me say, the global telco player also in other industry. This decision was studied for several years. I think this is important to understand that this is not part of a strategy from Telecom Italia. Our strategy as TIM Brasil was to growth, to invest, to develop our customer base. This was not a very relevant topic in the past.
We should also not ask just why now, but why not before? This is a positive news that this didn't happen before. This is something that is a benchmark also in terms of practice here in Brazil. You know perfectly that other company have similar agreement also with higher value. This move to the second question that is, you were using a benchmark. Yes, you know that for royalties, you have benchmark that moves from 20% to 0.1%. We were looking at what was available in terms of comparison. We find that 0.5% was below some, for example, regional benchmarks that we have here in Brazil. This a fair value. This was also stated by the fairness opinion that we use in order to support the decision. I think that it's also important to clarify two other points. First of all, to answer your question.
This is not retroactive. It will start to be paid when we will register the contract, and this will not happen before May. We took the decision yesterday. We will sign the contract in the next day. We will register the contract in the next week, and we will start to pay starting from the last week of May or the beginning of June. It will be part of the, for example, the second quarter results are for one month. This. Another clarification. This does not affect our guidance. We are strictly maintaining our full set of guidance. This does not change. Also because the figure, for example, for 2018, if you make some easy calculation, we are talking about BRL 50 million for this year. Last but not least, this is also another important fact.
In the recent past, Telecom Italia was also assessed by the tax authority why they were not receiving a payment for this asset, which was a property right of Telecom Italia. They have to pay in a tax assessment 0.5% of the supposed trademark agreement. Honestly, this is something that it is necessary. Do not forget that this was one of the relevant risk factors mentioned in our 20F because we were using, and we are still using as of today, a trademark that is not an asset of TIM Brasil. We have to regulate this situation. One of the, again, relevant points was also that Telecom Italia not only was not receiving money, but was paying money to the tax authority for this assessment that happened in the past. This is also disclosed in the Telecom Italia financial statement.
It is not something that is new in the market. This was part of the disclosure in the balance sheet of Telecom Italia. If you want to find additional information on this tax assessment in Italy, you may look at the Telecom Italia balance sheet.
Understood. Thank you very much, Stefano.
[audio distortion]
The next question comes from Andre Baggio, JP Morgan.
Good morning, everyone. I have two questions. The first one is that we're pleased to see the TIM margins going up. Right now, which levers do you think are the next ones that could be used by TIM to continue improving the margins?
Approximately BRL 26 billion in the first half. Andre, can you please repeat the starting part of the question because we didn't get it?
Oh, sorry.
Are you questioning about-
Which-
Go.
Yeah, just the additional things that you can do towards continue to increase the margins.
margin, okay. We were not catching if it was margin of revenue. Sorry. Sorry about this.
Margin.
Yeah. As part of the answer that I did in the past, we have two levers in order to Three, sorry. This is prepared because this will not be an easy and short answer. First of all, as you may see, we have still rooms to improve our cost base and to have this situation where we can expand revenues without affecting the commercial and the other customer related costs. This is thanks to the efficiency plan, the digitalization, but I would say not just the digitalization. What is very positive for us, and this is something that I always said also in the past, that the drivers of the profitability of the industry, especially in the mobile, is changing, and we are taking 100% of the benefit of this change. The interconnection cost is reducing.
The option that you have to move your effort in terms of customer acquisition is becoming more and more positively affected by the digitalization and by the de-materialization of the physical channel. The cost when you compare not just digital, but also, for example, telesales, that we strongly use for the upsell of our customer base, that have completely different sides of OpEx, of SAC, when you compare the historical and traditional sales channel. This is the first one. Let's call it structural efficiency. Second, we have, as I said before, very strong opportunity to upsell our customer base. The cost for upsell our customer base, again, is very low when compared to the cost that we have in order to manage the gross addition. We will continue to strongly work to capture new customers.
As you may see, looking at the segments ARPU, we have significant room for improving that spending per customer, taking 100% of the benefit in terms of profitability. I strongly believe that now that we have completely rebuild our one-to-one IT platforms that, as I told in the past, two years ago was an outsourced one that was not using real-time data. Now we are using 100% our internal resources. We have 100% of the process in our hand, and we have real-time information that allow us to strongly increase the redemption of our one-to-one offer. Again, the cost of this upsell is zero, and the benefit is 100% because the most of the upsell is for data plans that have no marginal cost associated.
Third, as I say in the speech, we are just at the early beginning of the wave of growth that I mentioned in my strategic plan. We are completely in line with our trend in terms of mobile service revenues. We know that we can maintain the trend, and we are at the beginning of exploring the opportunity of both the ultra-broadband side of our business plan and also the SMB one. We expect starting from the second half of 2018 to have a contribution to growth in terms of top line from this business as we go more and more month by month, expanding in line with our capacity and with our coverage, for example, for the FTTH. These are the main drivers that we expect that will continue to support our top-line growth.
Thank you. I have a second question. We have seen a change in Telecom Italia, the board of directors with Elliott demanding more corporate governance and other stuff. What changes could we expect in TIM Brasil based on what's going on in Telecom Italia? We just saw this new management fee, which is not something that investors really like, but what do you think could be other changes we could see in TIM Brasil?
Honestly, we do not expect to have significant change. We saw that all the shareholders of Telecom Italia continue to see TIM Brasil as a core asset. We know that we have this opportunity that we mentioned to continue to have a growth story in Brazil. When I look at my last two year in TIM Brasil, we are maintaining our strategic priorities. We are maintaining our effort without having any change in the direction coming from the situation in Telecom Italia. At the moment, but I cannot expect something different moving forward, the Telecom Italia still continue to see TIM Brasil as a core asset.
We continue to maintain our strategic plan that was built up two years ago with this strong focus on turnaround the company, improving our balance sheet, and the quality of our service for this aim to be the best telecommunication player in Brazil.
Okay, thanks a lot.
Our next question comes from Nicolas Didio, Berenberg.
Hi, good afternoon. Thanks for taking the question. I have two questions, basically. One is related to the fixed broadband. If I remember well, you had a partnership with ZTE. I just wanted to know if you can describe the exposure to ZTE in terms of equipments, and if you have contingency plan, if there was any issue there. The second question was about the recent issue between Vivo and Anatel on transforming the fines into investments. The Anatel president was indicating that discussions were still ongoing with you and Claro. I just wanted to have an update on that, please. Thank you.
On the fixed broadband, ZTE was and should be one of our supplier for the FTTH, for the OSP, to be very specific. At the moment, we are using other players technology because I don't know if you know the portfolio of ZTE, it's important to answer your question that it is focused on what is the risk for TIM Brasil on having ZTE as a provider. We are not now buying ZTE equipment also because they are developing a new OSP that is part of our projection starting from the end of 2018. This was part of a bid when we have alternative providers, we are working with them. We expect this issue to be solved honestly, but if this issue will not be solved, we have zero risk exposure to this topic for the deployment of our FTTH network.
In terms of the Vivo, the so-called TAC, I will move to Mario, just for you to know. All the players have this discussion in Anatel, so it is not just a topic that regards Vivo. You know that there was a big TAC that was discussed by Oi. Then with the recuperação judicial, let's call it Chapter 11, proceeded, it was stopped. Then there was the Vivo one. We are discussing our TAC with Anatel, with a very reduced figure when compared to Oi and Vivo one, and probably also the other players are doing the same. I don't know if Mario has something to add. Mario Girasole.
Hi, Nicolas. Mario Girasole, responsible for regulatory affairs. Just to complement, we have some processes. We are interested for some processes, have been interested in processes to explore this possibility to convert these processes in some commitment, some investment. Of course, we are talking about values very lower than discussed by the two concessionaires, Oi and Vivo. We are confident, as the President of Anatel, Juarez Quadros, told, that we can go to a successful negotiation for both parties. Probably in the next months, we will have evolution in that sense.
Can you just remind us the kind of numbers we talk about for you, even if it is smaller than Vivo and Oi?
We don't know, because it depends on the processes that we will include in this negotiation. These boundaries are not yet defined. When we define the processes, then we will have the value of these processes. Today, we are talking about conducts and concepts. We are not talking about values. We will talk about values when the technical area will transfer the process to the board, like the other two processes.
Of millions and not billions.
Of course, yes. Our units are millions, not billions.
Okay. Understood. Thank you.
The next question comes from Carlos Sequeira, BTG Pactual.
Hi, good morning. My question has to do with the FTTH project, please. First of all, I can't find it here, and I don't know if you made it public, but I'm looking for what is your expectations of homes passed with FTTH by the end of 2018 and 2019, please. Also, if you can give us an estimate of how much it will cost to pass a home and to connect a home with FTTH, please. Thank you.
I move to Leo who will discuss probably on our plans in terms of FTTH. You know that our target is to reach 3 million. You know that our target is to have additional cities in terms of coverage. If you look at the expected trend in terms of yearly growth, we expect to have, let me say, not a spike in any of the three years. I will tell you that the 3 million is well distributed along the three-year plan. That, again, Leo can follow my question. Regarding the cost, it's very important to know that when we discuss about FTTH, the cost, you know that the architecture is completely different when we discuss about FTTC or FTTH. The cost for FTTH strongly depends on how much you are able in order to sell about your network.
You build a very huge cabinet, let's call it this way, that is the OLT, that have a very strong capacity. The, let me think, saturation in terms of last mile that you know that for the FTTH, it's not exactly a last mile, so you have a longer access when compared to FTTC, strongly depends how much you can then use this cost. You know that clearly, we expect this technology to be more efficient long-term looking when compared to the existing FTTC. In order to achieve this goal, clearly, we have to strongly sell and use our access network in fiber in order, again, to dilute the cost of the construction of
Of the network.
Hi. Just to highlight some points about the FTTH strategy. We have to remember that we are reusing a big part of the mobile network. All the primary network, we are reusing the fiber, the tower, and the cabinet that we already have deployed from the mobile perspective. It helps us a lot to reduce specifically the cost of the home passage. It is below BRL 500, and when talking about the cost of the home connected, it is around BRL 1,500. What is very interesting to observe is that if you compare the business model of FTTC and FTTH, in FTTH, the home passage is cheaper than the FTTC. In the other hand, it's more expensive to connect the customer. The good point is that when you connect the customer, it means that the revenues is coming.
The payback of the FTTH is much better than in FTTC. The other point, the deployment for the coverage in FTTH, what we have observed is that is including better than what we expected. In the first quarter of this year, we achieved around 300,000 new home passage in the market and with the FTTH. Again, we are starting this project. What means that probably we can ramp up the speed and it should be faster in the future. Again, summarizing, we can see that it's faster to cover FTTH than FTTC. We are reusing the infrastructure of the mobile, what means that we can be very efficient in terms of the cost of the home passage and in the home connected, what is the most expensive part of the project, it is aligned with the growth of the revenues. Okay?
Okay, perfect. Thank you.
Without any more questions from analysts, we will now start the Q&A session with the press in English. To ask a question, please press star one, and to remove the question from the list, press star two.
We'll start with the questions from the webcast platform. First one comes from Bruno from Teletime, and he asks: What will be the impact of Fist el postponement payment for 2Q18?
Hi, Bruno. There is no impact at all. It's a matter of couple of days. The due date is normally between a weekend. It depends, could be on a Friday or on a Monday. The thing is, this is around the 31st of March. Normally some years, it's on the first quarter, and some other years is on the second quarter, no impact at all.
The second question, also from the platform, comes from Isabel Butcher from Mobile Time. She asks: In the financial statements of 2017, one of the highlights was data and content revenues. There was an increase of 43.2% in the fourth quarter. Did the first quarter of 2018 keep up with this growth? What are the expectations for the next quarter for these revenues?
Hi, Isabel. I think that we have to start to speak less about the composition of the ARPU, and we have to start to speak more and more about the overall ARPU. Compared to the past, when we had in the offer mainly voice call, and then the customer should buy data and value services. Today, all the offers, if you look at our TIM Controle, you have with BRL 60, data, voice, unlimited, and value services. The real distribution of this value starts to be less and less important. For this reason, I think that we don't have to continue to comment the growth of the single component, we have to comment the growth of the ARPU because our strategy is to continue to increase the ARPU of the customer, adding value to all the data or all the value-added services.
I repeat, the growth on single component could be misunderstood.
Another question now from Ana Paula Lobo from Convergência Digital, she asks: An operator is offering unlimited data. The new TIM package offers unlimited voice. Is the domestic market prepared to have unlimited data? Will us enter into the mobile situation unresolved already in the fixed broadband?
Related to the so-called unlimited data I think that it's important also to share something that perhaps is more a legend than the reality. When you look at the market where unlimited data is advertised, you can look in the bottom of the page of the advertising that is an unlimited data, but with a specific amount of data. If they exceed that amount of data, there will be the throttling, and so you will go to reduced speed. In reality, it's not a real unlimited data. Due to the Brazilian regulation, for us to launch an unlimited data offer, like for example, the one that is used in the U.S., is forbidden.
There is an operator that have launched an unlimited data offer, but with a huge promotion because the real price, if I'm not wrong, is above BRL 250 per month in promotion for a specific period. I think that it's more to test what is happening for the market, that not for a long-term sustainability. There are a lot of reports that show that Brazilian market is a market in which return on investment, due to the quality of the frequencies, the density of the population, the dimension, the size of the country, is very difficult to have one of the best return on investments. An unlimited data offer, I think that is not sustainable in the medium long run.
Another question now from André Loureiro, this time from IDC, he asks, "Could you elaborate on B2B strategy in IT portfolio for top enterprise segment, please?
Let's start from the top, so the so-called top segment. On the top segment today, our approach is mainly based in partnership with some players. Differently from what's happened with other players, we don't have in mind the short run to develop IT functionality and infrastructure. I think that this is an alternative approach because the traditional IT provider look at us as the natural partner to address the larger market. It's more an opportunity that attract compared to the approach of some other players that are used to offer their own offer. When we move on the SMB, so the small medium business, I think that in Brazil, it's one of the most difficult segment.
What we are doing today is to build a new approach because we think that looking at our market share, and sometimes in some area, we have, on the small and medium business, a market share that is also lower than the consumer one. We have good opportunity to grow. One of the main aspect that we are working on is to find a new sales channel, new sales model with a more affordable price. I think that this is one of the main issue, this is the key for the success of our strategy on the small medium business.
Now the question comes from Pedro, BNamericas. The question is related to refarming. The América Móvil Group has announced that it expects to complete the refarming of frequencies in 1.8 gigahertz throughout its network in Brazil next year. What is the forecast for TIM? The completion of this process will allow the 2G network shutdown?
Hi, Pedro. It's Leonardo. In fact, we start the refarming of 1.8 two years ago. We were the first company in Brazil to use that. Now, in fact, we are in a next step. We are preparing the refarming of 2.1 gigahertz. That is the frequency that is currently used for 3G. As we get this opportunity to bring in more customer to 4G, we are the leader in terms of 4G service in Brazil. We are seeing not just the opportunity to refarming the frequency from 2G to 4G, but now to restart to refarming the frequency from 3G to 4G. Your question about the 2G is relevant, but we have to think that the point here is not just about the network, the infrastructure, but mainly for the device.
From the smartphones, from the M2M that we have in Brazil, that we have a large base that still are using the 2G device. What we have to thinking about is, if it will be or not some kind of incentive from many different, let's say, involved on this process to accelerate the migration from this device 2G to 3G and 4G. In our perspective, the opportunity to switch off the 2G is interesting, not just for the cost avoidance, but mainly for to bring this kind of customer for the new data consumption, the new data world. Again, I guess that the most sensitive part of that is mostly related with the device size than with the infrastructure.
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.
Thank you for the participation of our release conference call. We will further discuss about the results and our strategic goals in the next meeting. We will participate in New York data conference. We will road show in the next weeks. I expect for you in July for our second quarter results. Thank you, and bye.
Thus, we conclude the first quarter of 2018 conference call of TIM Participações. Your lines can now be disconnected. 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 download for Android and iOS platforms. Thank you.