Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefônica Brasil first quarter of 2019 earnings conference call. Today with us, representing the management of Telefônica Brasil, we have Mr. Christian Gebara, the CEO of the company, Mr. David Melcon, CFO and Investor Relations Officer, and Mr. Luiz Plaster, IR Director. We also have a simultaneous webcast with a slide presentation on the internet that can be accessed at the site ri.telefonica.com.br. There will be a replay facility of this call on the website. After the company's remarks are over, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during this conference, please press star zero for an operator.
Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company's management, beliefs, and assumptions, and on information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions because they relate to future events, and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the company's future results and could cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mr. Luiz Plaster, Investor Relations Director of Telefônica Brasil. Mr. Plaster, you may begin your conference.
Thank you. Good morning, everybody, and thank you for joining us in this conference call for Telefônica Brasil's 2019 first quarter results. The call will be divided into four parts. To start, Christian Gebara, our CEO, will give you an overview of our operating and financial highlights for the first quarter of the year, and then go over our commercial and CapEx evolution. Our CFO, David Melcon, will comment on digitalization initiatives, efficiency commitment, and financial results. We will move over to Chris.
Thank you, Plaster. Good morning, everyone, and thank you for taking part of our first quarter 2019 results call. I start by commenting on the highlights from the quarter. We have been transforming our business over the last quarters, relying much less on legacy, obsolete technologies such as voice, copper, and DTH, while focusing on key strategic services such as postpaid and ultra-broadband, which are backed by our unique network infrastructure and unparalleled capacity to deliver the best connectivity everywhere. Such transformation improves not only our customers' experience, but also impacts positively our results. In the first quarter of 2019, our postpaid customer base that represents 56% of our mobile customer base grew 9% year-over-year, while revenues coming from hybrid and pure postpaid had a high single-digit 8% growth.
Moreover, we continued to lead the fiber expansion in Brazil. As a result, we have been able to keep addressing the increasing demand for high-speed connections with an expansion of 44% year-over-year of our FTTH customer base that led to 50% increase of FTTH revenue in the same period. The superior performance of our higher value service allowed us to reach BRL 11 billion in revenues in the quarter, close to 2% growth year-over-year. Here, it's also important to notice the evolution of our mobile service revenues, which increased 1.6% in the period, contributed to 4.7% expansion of mobile revenues, including handsets. We have been working hard to enhance the profitability and returns of the business by being more efficient, leveraging opportunities arising from digitalization and simplification that enable us to improve the use and deployment of our resources.
As a result, our EBITDA expanded almost 3% in the quarter with almost BRL 4 billion with a margin of 35.6%, while our net income that's also benefited by an efficient financial management grew a strong 22% year-over-year, reaching BRL 1.3 billion. All of these strengths allow us to reinforce our unmatchable positioning in terms of cash generation and shareholder remuneration. In the first quarter of 2019, our free cash flow expanded 16% year-over-year, reaching BRL 1.2 billion, while up to this date, we declared BRL 1.3 billion of increased in cash. Moving now to the details of our main businesses on slide four, then the evolution of our mobile revenues.
The result was driven both by improvement of mobile service revenue that returned the growth by expanding 1.6% year-over-year, backed by a solid 8% growth of postpaid revenues and by the sale of handsets that reached almost BRL 600 million after growing 55% year-over-year. On slide five, you see that we remain as the undisputed leader of mobile markets, sustaining a total share of 32% that reached 40% when we consider all postpaid customers. Over the last months, we have adopted a value-focused strategy that applied price increases both to our existing and new customers, starting with postpaid and hybrid during the fourth quarter of 2018.
These price moves had important positive effect on ARPU that grew 4% year-over-year to BRL 29.5 in the quarter, but also a limited impact on churn that got to 1.74% in the period, and net adds that were slower in the first quarter of 2019, but with a clear recovery in the month-over-month performance. To complete our portfolio rationalization cycle in March and April 2019, we increased prices of our main prepaid offers by 20%. Another bold move aiming to improve the revenue trends of this segment. Moving to slide six, we present the performance of our fixed revenues that dropped 3.2% in the first quarter of 2019. The transformation of our fixed revenues mix remains in place, and although we depend less and less on voice, it still impacts the overall evolution. It represents 36% of total fixed revenues and dropped 18.4% year-over-year.
On the brighter side, the growth of remaining 64% of fixed revenues is accelerating, expanding 8.2% year-over-year, driven by the strong performance of our fiber-related revenues that are heavily benefited by the investment in the expansion of our footprint. FTTH revenues reached BRL 437 million, growing 15% year-over-year, while IPTV revenues are close to BRL 200 million mark, increasing 45% year-over-year. On slide seven, we can see the fixed revenues transformation is totally connected to the improved. In the first quarter of 2019, 68% of our broadband customers were serviced by our fiber network, a six percentage point increase versus a year ago, with a 44% increase of our FTTH access. This performance allow us to exceed the mark of 2 million FTTH customers. As a result, total broadband ARPU continue to grow double digits, expanding 15% year-over-year and reaching BRL 62.
On the right-hand side of the slide, we see that the same thing is happening with our pay TV business. By March 2019, we had 41% of our pay TV customers on IPTV, an expansion of 14 percentage points versus the first quarter of 2018. The 44% year-over-year growth of our IPTV customer base allowed us to further increase our IPTV ARPU that grew 10% to BRL 102. Moving to slide eight, you can see we continue to focus on the expansion of our fiber footprint. In the first quarter of 2019, we built our FTTH network in nine new cities, taking our service to a total of 130 cities. More importantly, we are increasing the number of HPs, homes passed, with FTTH that already exceeded the 9 million mark delivered in more than 300,000 new premises in the period.
Our expansion plan involves reaching the northern regions of Brazil where we did not offer fixed services but already had a solid mobile presence. To do so, we took our FTTH network to important state capitals such as Manaus, Belém, São Luís, and Teresina. High potential cities, which were underserved in terms of ultra broadband. On slide nine, we give you more details on investments made in the quarter. CapEx reached BRL 1.7 billion, 15.5% of our revenues, 10% higher than a year ago, in line with expected expansion for the year. We continue to invest to further improve our best-in-class network to be able to provide an unrivaled data experience for our customers. As a result, investment in fiber increased 34% year-over-year, allowing us to be present in 247 cities with FTTx and improved penetration over existing HPs.
Moreover, we keep accelerating investments in 4G and 4.5G with an 8% increase year-over-year, focused on the expansion of our 4.5G network that's already present in more than 1,000 cities and concentrates 63% of the Brazilian population. Therefore, by allocating our investment in a smarter, more efficient way, we have been able to consistently improve returns. I pass it on to our CFO, David Melcon.
Good morning, everyone, and thank you, Christian. Moving to slide 10. We have demonstrated for quite some time our ability to be efficient by transforming the way we work and relate with our customers. In the first quarter of 2019, our operating expenses grew only 1.1% year-over-year, well below inflation of 4.6% in the period, mainly due to the cost associated with accelerated handset sales. Excluding the cost of goods sold, our expenses dropped 2.9%. Personnel costs that represent 12.8% of total OpEx decreased 5.8% due to the ongoing organizational restructuring undertaking in past quarters. Cost of service rendered that account for 40% of the total OpEx increased 2.8%, driven by the higher cost due to the expansion of our mobile and fixed networks.
Commercial expenses decreased 1.5% in the period as a result of our digitalization and simplification efforts that drastically reduce expenses with call centers, back office, billing, and posting. In the first quarter of 2019, commercial expenses represent 25% of our total OpEx. The total cost increase presented in the first quarter of 2019 is unrelated to the higher cost of goods sold, which increased 55.7% year-over-year as a result of our accelerated handset sales that grew more than 55% year-over-year, and a stronger commercial push to drive revenue growth. Cost of goods sold represent 10% of our total OpEx in the period. Turning to slide 11. We give you an update on our main digitalization initiatives. We identify a potential reduction of BRL 1.6 billion in cost in the period 2018 to 2021 as a result of the implementation of such initiatives.
Since the beginning of 2018, we have already captured 36% of the total, meaning we still have a lot of room to improve our cost structure. In this sense, in the first quarter of 2019, we were able to watch the representative cost buckets driven by the evolution of main KPIs. Top-up commissions cost reduced by 21% year-over-year, benefit by the adoption of digital top-ups, which already represent 24% of all top-ups made by our customers. Call center cost dropped 20% per year with a reduction of 23% in income calls in the call center. As we simplify products, improve customer experience, and shift interaction with channels such as our eCare app, IVR, website, Facebook, and others. Printing and posting cost reduced by 90% in comparison to the same period of last year, with a growth of 30% in e-billing penetration year-over-year.
Technical support costs reduced 80% year-over-year with an impressive rate of 79% of resolution through digital channels. Now moving to slide 12. Net income for the first quarter of 2019 reached BRL 1.3 billion, 22% higher than year ago. This positive evolution is driven by higher EBITDA, the continued expansion of revenues from growing businesses and cost control efforts leveraging on digitization, and also due to better financial results, mainly related to the reduction of net debt and financial update of extraordinary credit referring to decision on the payment of the PIS/COFINS on ICMS generated in 2018.
As a result of the impressive generation of net income throughout 2018, we already started to deliberate on the shareholder remuneration with a declaration of BRL 700 million of interest on capital in February, an additional BRL 570 million in April, totaling BRL 1.1 billion of interest on capital already declared in 2019. This confirms our commitment to remunerate our shareholders while maximizing value by investing to capture growth opportunities. A combination that is unique to Vivo in the Brazilian telecom space. Turning to slide 13. In the first quarter of 2019, the generation of free cash flow from business activity grew 16% year-over-year, reaching BRL 1.2 billion as a result of our improved operating and financial performance. With continued EBITDA growth, lower interest and income taxes payments, and optimized working capital.
That allows us to further enhance our return on capital employed, especially by consistently reducing investments on lower return projects based on legacy technology and focusing on high return projects related to 4.5G and FTTH. By increasing cash generation, our leverage has been consistently reducing. Our net debt position reached BRL 1.3 billion in March 2018, a 42% decrease versus last year. Thank you. Now we can move to the Q&A.
Thank you. The floor is now open for questions. If you have a question, key press star then one on your touchtone phone at this or any time. If at any point your question is answered, you may remove yourself from the queue by pressing star then 2. In case you are following the conference call via webcast, please click on question to the host to send your question. Questions will be taken in the order they are received. We do ask that when you pose your question, that you pick up your handset to provide optimum sound quality. Also, please note that this call is being recorded. Please hold while we poll for questions. The first question will come from Maria Azevedo of UBS.
Hi. Good morning. Thanks for the call. My first question is on postpaid. Do you expect the sequential improvement in the postpaid ARPU to continue in the coming quarters? If you can share your views on postpaid competition. Some of your competitors are suggesting that they could be more aggressive in data bundles throughout the year. Do you see any threats from that? What would be your strategy to reply to any competitive intensification in the market? Thank you.
Hi, Maria. Thanks for the question. In the postpaid, as we gave the numbers for the last quarter, for the first quarter, we've been improving our net adds. It's been positive. We started January with around 139,000, and we ended March with a higher number of 251,000. As we said also, we increased prices for the pure postpaid in September, and then we increased prices for the hybrids in the end of the year in December. For now on, we're going to work with this price point. What we are trying to bring always to the market is innovation, and to try to put more value in our hybrid product, but also in our family plans for the pure postpaid. We continue this trend.
I cannot reveal what's going to be our innovation in our portfolio going forward, but we are confident that we're going to keep the benefit and advantage that we offer as Vivo with coverage, brand, customer services, and many other attributes that have been putting us in the leadership of this segment with 40% of market share.
Perfect. Thank you, Christian. My second question would be on CapEx. If you can share with us what would be the preferred CapEx allocation in terms of FTTH versus mobile, and if you can share your expectations in terms of 5G and the upcoming 5G auction, and whether your CapEx budget already would include your mobile network upgrade towards 5G for the coming years. Thank you.
Maria, as you said, our CapEx was BRL 1.7. We have an expected CapEx for the year of BRL 9 billion. It also can be a little bit lower depending on the efficiency that we have in the allocation of these resources
As is also said, I think, in the last quarters, now we have this BRL 26.5 for the three-year 2018, 2019, 2020 of total CapEx. We increased this BRL 2.5 dedicated to fiber, so fiber would be around for this three years of BRL 7 billion. That continues to be our target. The main areas of deployment are new cities for fiber, also some overlay and also new neighborhoods in cities where we are present. Also, we continue to deploy 4G and 4.5G, so that continues to be our main allocation on new technologies, and that's not only infrastructure, but also CPEs related to the new customers that we are acquiring. As we also showed, we got a good net add also for this quarter. For 5G, we are getting prepared. As we are deploying fiber, we are deploying more sites for 4G, for 4.5G.
We are preparing ourselves for when it comes as a reality for Brazil, and we are following the schedule that we have for the government that, for Anatel, that mainly is going to be March 2020, the auction. Getting prepared to it and waiting for the decision of the auction date.
Perfect. Thank you very much.
The next question will come from Susana Salaru of Itaú. Please go ahead.
Hi, guys. Thank you for taking our question. Christian, the first question, if you could elaborate a bit more on the competition on this FTTH and if the performance of the new cities are in line above or below expectations in terms of revenue share or market share. That will be our first question. The second question would be related to the PL 79. What is your expectation towards the PL 79 approval and implementation? Thank you.
Okay, Susana. Thanks for the question. The FTTH, as you said, we deployed new cities, 9 cities, but we also improving our presence in existing ones. It has been in line with our plan. I think we talked about home connected over home passed to reach in 3 years a 33% penetration, and we are ahead of this plan with the new cities. It is being commercially very successful, and that give us more room to be as aggressive as we were in the last year. While we reached 30 cities, more importantly, the number of cities is the number of homes that we want to pass. We are now in 9 million, and we keep our objective to be in 18 months or 20 months, close to 15 million.
It keeps the way we presented in the past, and performance has been better than we expected in home connect over home passed. Regarding the PL, we are positive. We have a new congressman, we need to know as a sector, we explained the great advantage and benefits for the society of having the PL 79, bringing much more resources to new technology rather than the legacy. We are positive and optimistic, as I think some of you also met with the congressman and got some reports as we have seen line of our thoughts for this happening.
Thank you, Christian. Very clear. No, that is it. Thank you. Very clear.
The next question will come from Valder Nogueira of Santander.
Hi. Good morning, guys. Quarter-over-quarter, you have been beating Street's skepticism regarding the positive inflows from your digitalization. I'll come back with the question again. How much more there is to milk from this cow? That's the first question.
Sorry, Valder. You were asking about digitalization? Because it was very bad, the quality. Your question is how much more can we do in digitalization? That's the question?
Yes, both on the revenue, mostly on the cost side, which you have been beating market skepticism quarter-after-quarter.
Now, back to you.
Hi, Valder. This is David. I mean, the line is not good. Let's try to answer the question, and if you have any follow-up question then, let's talk afterwards. Over the last two, three year, we have been focusing on the transformation of the digitalization across the company, working on the commercial front, non-commercial front, back office, and front office. We launched last year a program that will take four years, and we have a target to capture BRL 1.6 billion savings in four years. This is part of, as we have discussed in other calls, around one-third of total OpEx is linked to a digitalization opportunity. Costs that could be addressed by digitalization, that related to non-quality OpEx that should be reduced.
In line to give you some view around what should be the opportunity, these are the numbers that we are publishing today. It's BRL 1.6 billion savings in four years, but we have already captured around one-third. There are still two-thirds of the BRL 1.6 billion to come in the next two years and a half. It's on the cost side.
Okay. The second question is. Go ahead, please.
No, please, Valder. Continue.
Okay. The second question has to do with the non-ultra broadband
Connection service base. How do you see these performing going forward? We have seen more decent performance on ultra broadband and FTTH. What about the rest of the broadband connections? How is the dynamic working in terms of offers, your positioning? How is that playing out?
Okay. ADSL, I don't know if you mean only in São Paulo or also FTTC. The ADSL in São Paulo, in the most relevant neighborhood, we are replacing that with FTTH. Of course there is a decrease now because we need to be offering a better speed. What we're trying here is to sustain as much as we can, but our focus is in the replacement and the overlay. Some neighborhoods, maybe the overlay is not going to be profitable enough, so we need to deal with that, with the price point that we believe is the right one, considering there is competition, but there is no competition. Going forward, it's been a very selective strategy to deploy FTTH where we believe there is upside.
Where we don't believe there is upside, we're going to deal with a price point that we think is a reasonable one. If there is competition, or if there is no competition. Going forward, let's see how we can replace that either with 4.5G or with 5G, if we don't believe FTTH is going to be profitable enough to deploy. I think also you asked about digital services in the revenues. I think that's an intrinsic part of our value proposition. We talked about voice and SMS and data, and I think now we need to talk about the four things, and digital service should be embedded in our offers. I think customers demand that.
We've been doing that successfully with some unique apps coming from education to language courses, also to NBA, NFL, and also a specific and exclusive deal with Amazon Prime Video that was also successful. Going forward, I believe we continue doing that, it will be the same. Now doing more digital services, cloud security, and others.
Thank you, Christian. Thank you, David.
The next question will come from Fred Mendes of Bradesco.
Good morning, everyone, and thanks for the call. I have two questions as well. The first one, just going back a little bit to the mobile service revenue, and was definitely stronger than what I had here. Just trying to understand. Of course, there was a price increase, I think especially in the hybrid plans, but I didn't see the interconnection revenue. Just wondering if there was a specific impact there and that eventually helped the top line growth. This would be the first one. On the second one, the line, the other revenues and expense, historically these lines comes at a negative point, something like from 150 to 200 million BRL per quarter, and in this quarter was positive. Just try to get an understanding here and how should we think about this line, throughout 2019. Thank you.
Hi, Fred. I will take the second one, then we'll go back to the first one. I believe the second one, you're talking about the other revenues and expenses now that reduced it in this quarter. This is something we have already seen in the two quarters in a row. There are two main factors. One is lower expenses with labor and civil contingency, where the lawsuit dropped more than 20% year-to-year. Here we are benefiting from the new labor law reform that was issued last year. In addition to this, we have higher revenue from recurring contractual fines with suppliers and also some small impact from recovery tax in the period. As you can see in two quarters in a row, we believe that none of those factors are one-offs, and these end up being part of our recurring business.
The first question, Fred, was what about people? The first question, I don't know, it was addressed. Do you have any? Because the line is not so good. Have you answered all the questions?
Yes, exactly. Sorry. I think, the call is a bit hard to understand. Exactly, I didn't see the revenue from the interconnection. I was just wondering if for some reason there was a positive impact from that, and eventually that helped with strong mobile service revenue, or if this result was mainly given the positive impact from the price increase that you guys made throughout the last months.
As I said, Fred, we raised prices. That was the main reason of the positive effect. Now, we could be able to gain also net adds, controlling churn, and being able to capture this price increase that we made in both hybrid and pure postpaid.
Okay. Thank you very much, Christian and David.
Thank you.
The next question will come from Soomit Datta of New Street Research.
Hi. Thank you. Two questions, please. One on wireless and one on fixed. On the wireless side, we saw an improvement in the service revenue momentum. I think that was driven by a large improvement on the postpaid side, as discussed, coming from price increases. I think that implies quite a sharp step down in prepaid revenues, presumably. The last couple of quarters, the presentations have featured a focus on prepaid. I think you launched some initiatives. The weakness had improved, but it's not really mentioned in this quarter's presentation. I was wondering, is that math right? Has the prepaid revenue deteriorated? Philosophically, as you look forward this year, how do you view the prepaid market, given what we've heard from TIM and how competitive that part of the market is? That's the first question on wireless.
Second, please, on the fixed side, I think the broadband ARPU stepped up sequentially. Again, if I've got my math right, it looks like the fiber ARPU actually fell slightly sequentially whilst the DSL ARPU increased. I don't know if that's right, but if it is, could you help explain why the fiber ARPU would be going down, whilst the DSL ARPU is going up? Thank you.
On the mobile, I think we focus on the postpaid specifically because we raised prices in September and December, and they had a positive improvement for the revenues. In the prepaid, the economic situation in Brazil is still like the one that we saw in previous quarters. We don't see a big improvement. That's why we also decide to improve price by the end of March, beginning of April. We have the two key offers. There is one that is weekly, and the other one is biweekly. That was stagnated in a price point of BRL 9.99 and we improved to BRL 11.99. That's aimed to be more rational, and I believe that we need, as a sector, more rationalization in the price. Are we being in the same price point, as I said, and competitors giving more data, free social network.
We are trying to move this market up. That's why we believe that these revenues in prepaid, we could grow, but also depends on competition and also depends on the economic situation of the country now. That's what we are working for. So far, stable movement and not so positive as I showed in the postpaid. In the fiber numbers, I don't know if there is a specific movement from the last quarter for this first quarter. That's given to the season of the comparison. If you compare like the year-over-year, there is a positive movement in ARPU. We are also increasing prices for the fixed products in the next month. That's also giving positive ARPU movement for these customers. Focus in FTTH, and we are trying to control as much as we can the ADSL customers.
Okay. Thank you.
Once again, if you have a question, please press star then one. Again, it is star then one if you wish to ask a question.
Okay. Thank you very much for participating in our call, and talk to you soon or in the next second quarter results. Thank you so much.
Thank you. This concludes today's conference call. Thank you for attending today's presentation. You may now disconnect. Have a great day.