Earnings Call Transcript - VIV Q3 2020

Operator, Operator

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefônica Brasil Third Quarter of 2020 Earnings Conference Call. Today with us representing the management of Telefônica Brasil, we have Mr. Christian Gebara, CEO of the company; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. Luis Plaster, IR Director. We also have a simultaneous webcast with the slide presentation on the Internet, that can be accessed at the site www.telefonica.com.br/ir. There will be a replay facility for this call on the website. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the company's management beliefs and assumptions and on information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the company's future results and could cause results to differ materially from those expressed in such forward-looking statements. Now I would turn the conference over to Mr. Luis Plaster, Investor Relations Director of Telefônica Brasil. Mr. Plaster, please begin your conference.

Luis Plaster, Investor Relations Director

Thank you. Good morning and welcome to Telefônica Brasil's conference call to discuss third quarter 2020 results. The call will be divided as follows: first, our CEO, Christian Gebara will comment on our operational performance and give an update on the steady recovery of our top line. Then he will go over our commercial initiatives and accelerated FTTH expansion. Then our CFO, David Melcon will comment on cost management investments and financial highlights. To conclude, Christian will comment on our ongoing ESG initiatives and then move to the Q&A session. Now, I hand over to Christian.

Christian Gebara, CEO

Thank you, Plaster. Good morning, everyone. Thank you for taking the time to attend the third quarter 2020 earnings call. I would like to start by talking about Vivo's strong operating performance in key segments that confirm our consistent operating improvement and our once again robust cash flow generation. In mobile, Vivo's leading position in terms of quality and customer experience, resulted in 844,000 postpaid net additions. Currently, our postpaid customer base accounts for almost 60% of our total mobile access. In this quarter we also posted another set of impressive additions in fiber. A key lever for future revenue growth that saw record net adds for the third quarter in a row, with 267,000 new customers reaching 3.1 million homes connected. As you can see on the right-hand side of the slide, our mobile service revenues fell 1% year-over-year and the impact of temporary confinement measures still lingers in some segments of our business. On the other hand, the same line grew 3.3% quarter-over-quarter, which supports our more optimistic view that is a typical factor to soon have less impact on our operation. Our fiber revenues made up of FTTH and IPTV increased 47.3% year-over-year and 14.5% quarter-over-quarter. This impressive evolution is fueled by our efforts to expand our fiber footprint and the strength of the product that proved its unique value in terms of best-in-class connectivity for our customers. Shifting to cost. We remain focused on our digitalization and simplification initiatives that helped to reduce recurring costs, excluding the cost of goods sold, by 3.4% year-over-year, taking EBITDA margin to 40%, advancing 0.3 percentage points quarter-over-quarter. Lastly, driven by the resilience of the business in our education and rational capital allocation, we registered solid cash flows throughout the year posting BRL7.5 billion in operating cash flow into September, expanding the margin 3.4 percentage points year-over-year to 23.5%. By aligning that with the decision in financial management, we were able to deliver BRL8.9 billion of free cash flow, 50% higher than the same period of the previous year. In fact in the first nine months of 2020, we have reached a higher level of free cash flow than in the whole of 2019. On Slide 4, I would like to show how Vivo has been able to consistently recover its revenue through its crucial role in the delivery of high quality connectivity. Postpaid revenues showed an evolution of 1.2% compared to the second quarter 2020. Net additions started to recover with the opening of stores and prepaid continued its sharp advance increasing revenues by 13% quarter-over-quarter. In our fixed business, FTTH sales continue to outperform, growing 16.8% quarter-over-quarter, supported by the expansion of our fiber footprint that continues at full speed. Finally, handset sales rose 90.3% in comparison to the second quarter 2020, since almost all stores are now open. All things considered, we can see Vivo's value proposition along with the growing relevance of connectivity are proving key to this fast and sound recovery of our business. On Slide 5, you can see that our total mobile revenues remained stable as we continue to see the impact of temporary confinement measures that were partially offset by the positive evolution of handset sales and prepaid. Handset revenues decreased 10.1% year-over-year as the impact of the pandemic on store operations has started to ease. Mobile service revenues fell 1%, mainly because of a difficult comparison base versus the third quarter of 2019, when we implemented significant price increases at the beginning of the quarter. In the third quarter of 2020 the increases took place at the end of the quarter and impacted a smaller portion of our postpaid customer base. Prepaid revenues grew 5.8%, driven by continued effort related to acquisition and customer base management as we're responsive for the original level of net additions in recent months and higher accuracy of top-ups. Moving to the right-hand side of the slide, we show that postpaid accounts for 57% of access and 80% of mobile service revenue is seen ARPU recover to prepaid COVID levels as we continue with our more-for-more strategy. Prepaid, which accounts for 43% of mobile access and 20% of mobile service revenue saw its ARPU growth to levels of both the first quarter 2020 and a strong level of net additions, we allow for higher request to postpaid going forward. Moving to Slide 6, in the third quarter 2020, we again reaffirmed our mobile leadership supported by our superior customer experience and quality of service. Our overall mobile market share stood at 33.3%, the highest in the last 14 years and we had a significant improvement in postpaid churn that reduced 0.56 percentage point year-over-year and it's now at the lowest level in five years. On the bottom end side of the slide, we show the breakdown of prepaids ongoing performance. This quarter we had 1,466,000 net adds, the highest level since 2012, because of our continuous efforts to attract new customers and improve customer base management. Finally, postpaid reported last quarter's trend of disconnections and posted strong additions in Q3 with 427,000 as commercial activity started to pick up and the migrations from pre-to-postpaid posted stronger results. On Slide 7, we show that our fixed revenues dropped 6.6% because of the maturity points. Our strategic decision to stop selling DTH Pay TV and CapEx optimization for copper-based services. On the other hand, we see a very important trend in the fiber business that continues to transform the mix. On the right-hand side of the slide, you can see that growing business up 8.3% increased in relevance over fixed revenues and now accounts for 60% of the total. This trend shows why we are confident that this segment will be the driver of future growth. Our FTTH and IPTV revenue call for the success of our accelerated fiber deployment. FTTH revenues were up 56% year-over-year, while IPTV were up 26.9% resulting in a combined growth of 47.3%. Now moving to Slide 8, our newly launched fiber products continue to attract more and more customers. As a result, we posted record FTTH net additions for the third quarter in a row that now represents half of our broadband customer base. FTTH net adds totaled 267,000 in the third quarter of 2020, reaching 3.1 million access of 34% year-over-year increase. Broadband output rose 17% year-over-year to BRL 77.7 and FTTH customers have significantly higher ARPU than those from other copper-based technologies. Moving to the right-hand side of the slide to present the growth over IPTV business, IPTV access increased 26% year-over-year contributed to the improvement of B2B ARPU by 2% reaching BRL 180. I would like to highlight that these impressive figures are the combination of accelerated FTTH deployment plans with the strength of the product we're delivering. Fiber connectivity is a future true technology whose demand is consistently growing, preferred for current home office and homeschooling leaders. Moving to Slide 9, this quarter I would like to present the distinct fact of capabilities that Vivo had to capture opportunities to create value in the digital space. Vivo is the largest and most recognized telco in the country with 94 million accesses and one of the top eight most valuable brands in Brazil, estimated at $2.2 billion. Then helps with almost 19 million unique users that access our e-care app over more than 1,600 stores that make us comparable to the largest retailers in Brazil. And it shows hundred million visitors per month that our catalogue portal shows the potential to reach and capillarity that the company has a diverse in the technology market. Vivo is a gateway for the digital life of our customers. And for this reason, we launched a digital marketplace that offers everything technology related at our online store. Just to mention other examples of our ability to expand our reach, I would like to highlight the following initiatives. We recently launched Vivo Money, a digital loan platform that offers fast and simple personal loans to customers based on credit scoring that utilizes billing data to improve accuracy. You will also find partnerships with various apps and OTTs to offer co-branded mobile plans when data and digital services such as Spotify, Netflix and Rappi are jointly promoted as equal business for variable propositions. The same strategy has been used to sell fiber plus OTTs such as Netflix and Amazon Prime Video. Furthermore, we're venturing into other segments such as e-education to capture even more opportunities. One of them, Vivo Meditação, a wellness app focused on meditation and mindfulness has over 1.6 million downloads since its launch in July 2017. Another recent initiative is our strategic partnership with a health service provider to offer benefits in health services to Vivo customers, which represents of course more relevant participation in that sector. Moving to Slide 10, we have another quarter with impressive results regarding our fiber deployment that continues at full speed adding an additional 1.5 million FTTH homes passed to our footprint. In Q3, we entered 28 new cities with FTTH reaching a total of 244 and we expect to end this year with 268 cities. We continue our organic expansion while also accelerating the overlay of copper and FTTC networks that allows us to improve net adds and ultra-broadband ARPU while protecting our consumer base. Additionally, I would like to point out that the creation of our neutral fiber vehicle is a classic example where several investors have demonstrated their interest in the project and we are confident that the vehicle will be operational in 2021. Finally, as you can see on the right-hand side of the slide, we reached 14.6 million HPs offered in the third quarter of 2020, and we expect to reach approximately 16 million HPs at the end. With that, we will more than double the number of stages launched in homes passed when compared to 2019. Now I'll pass it on to our CFO, David Melcon.

David Melcon, CFO

Good morning everyone and thank you Christian. On a lighter level we saw how our persistent cost efficiency supported by digitalization and simplification initiatives reduced costs by 3.4% year-over-year. D&A and personal costs decreased 3.3% year-over-year benefited by continuous cost control initiatives, but also by government measures such as temporary workday reductions. Commercial expenses had an 11% decrease driven by our continued digitalization and automation efforts and by lower provisions for bad debt that decreased 29% quarter-over-quarter. This reflects the increased value that our customers are giving to connectivity and maintaining their payments up to date, as well as our measures to mitigate the effects of COVID such as offering the option to pay in installments. On the other hand, the cost of services rendered increased 7.4% in the third quarter driven by expenses related to major expansion, tariff adjustment, and higher fixed costs due to the positive evolution of our mobile customer base. In addition, I would like to present a few figures related to our digitalization initiatives that are the main drivers of our sequential cost reduction story. In the third quarter of 2020, we had an 11 percentage points year-over-year increase of customers receiving e-bills reaching 79% and 63% of the payments were made to digital platforms. We also reduced by 20% the number of call center calls through the growing use of digital channels like Meu Vivo and AURA. We have automated 915 processes across the company with the use of robots that allowed us not only to reduce costs but also to improve the customer journey. On Slide 12, we can see that through efficient capital allocation, we're able to deliver solid cash flow generation combined with the expansion of our FTTH footprint and cutting-edge technologies. In the first nine months of the year, our CapEx contracted 70% year-over-year to BRL 5.4 billion driven by our strategy to prioritize investments in growing technology that currently accounts for 72% of our total expenditure. This rational approach can also be seen on the right-hand side of the slide as capital allocated to fiber technologies increased 20% year-over-year while legacy decreased 53%. Additionally, I would also like to share with you that the network sharing agreement with TIM is underway and evolving according to expectations. This agreement corroborates our commitments towards OpEx and CapEx optimization. Now moving to Slide 13, you can see our solid net income generation allows for the maintenance of superior shareholder remuneration. Net income for the quarter totaled BRL 1.2 billion, growing 25% year-over-year, contributing to the creation of BRL 2 billion of interest on capital so far this year. Moreover, I would like to remind you about the payment of dividends based on net year and net profit for a total of BRL 5.8 billion. The first tranche was paid in August and the second amounting to BRL 2.2 billion will be paid in December 2020. Turning to Slide 14, accumulated free cash flow for the first nine months of 2020 grew 50% year-over-year, reaching BRL 8.9 billion thus surpassing the free cash flow for the whole of 2019. These outstanding results were driven by the EBITDA contractions caused by lower economic activity, partially compensated by our strong cost reductions, lower CapEx as we continue to focus investments on growing technologies, lower financial costs and income tax expenditures, and working capital improvements as a result of the postponement of some regulatory tax payments and lower CapEx and OpEx disbursements. By maintaining a robust cash flow generation and solid balance sheet, we continue to successfully implement our strategy and invest in selective assets, making Vivo a stronger company, allowing us to look to the future with confidence. Now I would like to pass the word back to Christian.

Christian Gebara, CEO

Thank you, David. To conclude today's presentation, I would like to say that thanks to our increased focus on effective ESG practices, Vivo was chosen as one of the top 10 companies in the new S&P/B3 ESG Index. Regarding our environmental initiatives, we launched a national campaign called Recycle with Vivo to increase the awareness of the appropriate disposal of electronic waste. This campaign encourages individuals and society to reflect on the necessity of recycling, that can be done in more than 1,600 collection points available to Vivo stores and other strategic points across the country. Moreover, we inaugurated our first biogas power plant. We produced more than 11,000 megawatt hours per year and it's one of the 70 renewable power plants within our Distributed Generation project that expects to be fully operational in 2021. Moving to the center of the slide, we had some important recognitions in the social dimension. Focused on Telefônica, Vivo was the first Brazilian recipient of UNESCO's Hamdan Prize for teacher effectiveness through the Connected Schools Project. This project was launched in 2015 to promote inclusion of educators in the digital ecosystem and foster the development of ICT skills among students. The platform offers approximately 40 distance education courses covering a wide range of subjects and targets basic education teachers all over Brazil. The success of this initiative was evident with more than 300,000 new subscriptions so far in 2020, three times more than last year. Another recognition came from Great Place to Work as Vivo was elected one of the 150 best companies to work in 2020, and also joined the early childhood ranking highlighting our ability to adopt practices that promote the well-being of children and their families. To conclude, we took an important step towards a higher level of governance. The conversion of preferred shares into ordinary shares was approved by the extraordinary shareholder meeting, granting tag along and the voting rights to all shareholders. There are just a few of many initiatives that we have at Vivo to help society reach a more sustainable future for conscientious consumption of goods. Prediction of our carbon footprint, but also to be more equal interest. I would like to invite all of you who are interested in our ESG efforts to have a look at our sustainability report that is available on our Investor Relations website. Thank you. And now we can move to Q&A.

Operator, Operator

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

Rodrigo Villanueva, Analyst

So my first question is related to the process to migrate concessions to authorizations. I was wondering, Christian, if you can share with us your views on this process, how's it going and what are your plans regarding this? That would be my first question. And secondly, do you see appropriate economic conditions in Brazil to raise prepaid wireless prices and if so when would you expect to do so? Thank you.

Christian Gebara, CEO

Hi, Rodrigo. As you know, the law reform deal, the PLC 79 was signed into law in October 2019. Now we need to go through the process. So what we're doing is working on the regulation of this new Telecom framework. So at the end of June, they opened a public process to hire firms through the International Telecommunications Union to support the industry in the calculation of everything related to the migration of the fixed telephony concessions to an authorization. There is appraisal of reversible assets and many analyses of the current cost models. So we're still waiting to have more definitions in the coming months. So it's a long process. We started, we are optimistic, but it's still very early for me to say if we're going to reach the right price for this migration. That will hopefully be the case, but it's still in the process of having ANATEL getting the support to have the calculation for us to start discussing. As for the prepaid, the same as other mobile services, we've been raising in the postpaid segment the prices; as I said at the end of the third quarter. Not as we did last year, where the increases were implemented at the beginning of the third quarter. This year's increase is lower than we used to have because inflation is much lower as well. But we maintain our strategy of giving more for more, so I think we'll be successful in that. In the prepaid sector, we are also enhancing our offers. It's difficult to discuss specific offerings in the prepaid sector since we have different ones. We've been trying to drive our weekly and bi-weekly offers to drive prices up. We're not offering as many free social network offerings as other competitors. So, I think we've been very rational. However, the market in the prepaid sector specifically as you mentioned, is still underperforming compared to our expectations. But we are seeing positive results with prepaid this quarter. I think the slide toward quality proves to be right in moments where people needed to be connected and thus, we could see robust net additions for Vivo and an increase in revenues for prepaid.

Operator, Operator

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

Marcelo Santos, Analyst

The first just following up on the prepaid success. This also has anything do with some sort of higher focus on Vivo on prepaid, some initiatives you need to drive this very, very strong result. So I think that's the first question. Any change in strategy? And the second question on the legacy business, in the fixed line. We saw a steeper deterioration, if you could please comment on this breaking down and how much business, the economy, how much of the lower focus or maybe higher competition from other fiber players. Just trying to understand why it's getting worse? Thank you.

Christian Gebara, CEO

Hi, Marcelo. Thank you for the question. First in the prepaid; you're right, we had very strong results of 5.8% year-over-year growth in prepaid, so we had to focus on improving forms of usage that resulted in a 13% increase. I think that there are many factors related to this performance. First, as I answered to Rodrigo before, when quality is required, Vivo stands as the number one. So, I think people are now in home office, home schooling and home entertainment, and when you need a good connection, Vivo proves to be the best choice. Second, we've been working on managing our customer base effectively. I believe that we're proposing the right offers to the right customers to improve engagement with Vivo; not only with our service but also digital services. I think this strategy has proven to be effective, yielding good results in terms of net additions. Also, on commercial activity, we are acting quite precisely in the right points of sale attracting the right customers to become Vivo customers. This combination of factors: more customers, lower churn, and an increase in ARPU, is reflected in the impressive results. As you can see in our presentation, the ARPU this quarter is much higher than it was in both the second quarter, which was heavily impacted by COVID, and also in the first quarter of this year pre-COVID impact. As for the second question regarding fixed revenues, as we mentioned in the last quarter, we are optimizing our CapEx allocation, focusing on FTTH. This decision directly impacts legacy services revenues which are declining; as we showed with a 6.6% drop this quarter. It's a combination of factors, one being the maturity services directly impacted by voice usage which continues to decline. Additionally, the DTH service sees reduced revenues since we are no longer acquiring new customers, but this is a wise decision as we focus on IPTV or fiber plus OTT. If you look at the breakdown of our revenues, legacy services represent 40% now, but that was nearly 50% one year ago. We will continue to see a decline in these legacy services while new lines such as FTTH and IPTV continue to grow.

Operator, Operator

Our next question comes from Maria Tereza Azevedo, Santander.

Maria Tereza Azevedo, Analyst

My first question is on the topic side; we have a lot of positive trends going on right now, network sharing, the neutral fiber networks in which you are going to participate, probably a more gradual rollout of 5G. How should we think of the CapEx trend more mid and long-term? Is it fair to assume that the CapEx should continue to go down over the next years, finally reaching low teens?

Christian Gebara, CEO

Hi Maria, thank you for your question. Let's just go back a little bit to discuss the CapEx now. In 2018, it was stated that we would increase CapEx because we had a model to expand our fiber footprint in a more accelerated manner. And that's why we incurred additional CapEx in 2018 and it was forecasted to continue into 2019 and 2020. At the time of the Investor Day 2018, we stated our goal of reaching 14 million homes passed with this additional CapEx. I just want to emphasize that we're going to end this year with 16 million HPs, which is more than what we set at that time while using a much lower CapEx envelope than previous projections. We have been efficient in our CapEx allocation; the impact of COVID contributed as well. We are prioritizing growth technology and moving away from legacy investments, so we have a very solid CapEx allocation. Going forward, we will maintain growth in fiber, 4.5G and will begin our 5G rollout. We are currently undertaking the 5G DSS. The auction is expected to occur next year, so there’s a lot of commitment required to maintain Vivo's leadership in both mobile and internet markets. We are also exploring alternative models, including neutral fibers, which will lessen CapEx pressure while allowing us to continue our expansion and grow effectively. That said, I’m not providing specific guidance on CapEx. However, the current trajectory towards reaching 16 million by 2024 suggests a different allocation model with lower CapEx pressure.

Maria Tereza Azevedo, Analyst

Thank you very much, Christian. And then as a follow-up question, the FTTH execution is impressive. Can you comment a little bit on the different strategies in large, mid and small markets competition wise? Do you think that the expectation is for ARPU to continue to grow and how accretive do you expect the fiber spinoff to be and if you see any consolidation opportunities in the fiber market for that new vehicle as well? Thank you.

Christian Gebara, CEO

The fiber market segment is competitive. But we've been very successful in any new city that we enter. As you know, we encounter competition from many smaller players, but any new city that we enter helps us expand our market presence and we've successfully deployed fiber in these areas. In the larger cities, we typically face competition from cable providers, resulting in Vivo proving to be a better option for those requiring quality service. When we enter new smaller cities, we apply a strategy that uniquely positions us against competitors. Vivo is known for superior customer care and this competitive edge gives us an advantage. We’ve established a strong infrastructure, offering IPTV to customers looking for Pay TV; most competitors don't offer IPTV or rely on satellite models. Furthermore, we bundle services and promotional offers such as Netflix and Amazon Prime Video, contributing significantly to customer retention. We continue to expand our network, and given that only 20% of Brazilian homes currently have ultra-broadband, there's ample growth opportunity available. We invested early in fiber, securing the largest infrastructure in Latin America, paired with an impressive mobile customer base. Considering the growing demand for connectivity, especially after the pandemic, we are confident in our strategic position. We can provide a comprehensive offer that encompasses mobile, fixed, and digital services.

Operator, Operator

Our next question comes from Mathieu Robilliard, Barclays.

Mathieu Robilliard, Analyst

I had three questions. The first one was around the outlook for Q4, on one hand, you're exiting the quarter with very strong volume growth in mobile? And really, the question is about mobile. On the other hand, I don't know how the situation is evolving in Brazil in terms of COVID lockdowns reducing mobility obviously. I don't think you had percentages in mobility like in Europe? But I was wondering how you see Q4 when you look at those two elements together, I mean can we expect an acceleration of mobile because you have better volumes and the price increase, or do you think that could be a bit of deterioration in the economic environment? The second question was about costs. So if I look at what you've done over the past five years, you basically have been able to reduce costs five years in a row, which is very impressive? And I was wondering, how we should think about the next one year or two because on one hand, I understand that maybe some of the costs have come down due to the legacy revenues indeed having come down. And that will be the period at some point, maybe less cost cutting opportunities. Also, as you just mentioned, you're slightly moving the model in terms of your infrastructure, sharing it more with others, which would mean CapEx to OpEx? So the simple question is, do you still see overall reduction in OpEx in the next year or two? Lastly, can you give us what is your best estimate or best guess for when the spectrum auctions for the 5G spectrum will take place? Is it 2021 or could it shift to 2022? Thank you.

Christian Gebara, CEO

So Mathieu, this is Christian. I will answer number one and number three and then I’ll ask David to answer number two. For number three, we expect that the auction will occur next year. However, we don’t have a final date as we are waiting for a public announcement to be made. However, the Minister of Telecommunications stated it would most likely happen in the first semester of 2021 but we don’t have any official confirmation. Regarding the first question, the situation in Brazil is improving in terms of COVID, and we are now fully operational. However, there are still some operational limitations in our stores that result in impacts on our sales. What we are observing is a positive change where cities that were under more conservative isolation measures are now easing into softer phases, and this positively affects our business.

David Melcon, CFO

Hi Mathieu, this is David. Regarding the costs, you are correct; we have been reducing costs year-over-year for more than four years. However, we believe that there is still room for further cost reductions. We presented several initiatives regarding e-commerce, billing, and payments, which are all designed to drive our quality and cost. Our aim is to keep generating improvements moving forward; so while it has been a historical performance like yours, it's a matter of continuing to lower those operating costs. As mentioned, we are transitioning to a model with more OpEx rather than CapEx. But we are also pushing for higher revenues which will offset the lower margins. Overall, we look at EBITDA growth because all these revenues will generate positive margins. Regardless of how the revenue lines adjust, we work to enhance profitability in all segments to ensure cash flow generation remains consistent across the board. This quarter, we achieved an impressive operating cash flow margin of 23.5%, which is a 3.4% year-over-year increase.

Operator, Operator

Our next question comes from Carlos Sequeira, BTG Pactual.

Carlos Sequeira, Analyst

So I know the FTTH operation is growing super fast. Net additions are impressive. Vivo is the largest FTTH operator by a good margin. So everything is going super well. In the FTTH business, what strikes me is, is there any way to grow in size? I mean, you have CapEx under control, free cash flow generation is amazing? Are there any ways to do it even faster to build out the network even quicker? The issues are engineering or why not try to move even faster with FTTH given how well we are doing? If that is not possible organically, would it make sense to try to pursue an inorganic strategy to grow faster, please? Thank you.

Christian Gebara, CEO

Hi, Carlos. Thank you for the question. Yes, I think you raised important points; managing our CapEx will be significant in maintaining the optimal speed of our FTTH deployments. We have been very precise in our entry strategies and capturing the right demand for our FTTH services. I think we’re effectively managing our speed and costs, ensuring we enter the right areas and attract the correct customer profiles; this has resulted in our remarkable growth. Looking ahead, we hope to grow faster, but we prefer to focus on selected cities with opportunities. We are not limited by the presence of competition. In fact, as you highlighted, partnerships such as with American Tower will facilitate our expansion. With our infra core project, we aim to be fully operational by 2021, which involves significant investor interest. Concerning M&A, although we haven’t identified specific opportunities yet, once our vehicle is in place, future growth expansions could look toward ventures in that direction.

Carlos Sequeira, Analyst

Thanks, Christian. Can I make one follow-up question on that? One thing I’m curious to hear how you're seeing is the competition between your fiber operation and the net services coaxial cable network. How are you? When you have a direct competition? How are you faring compared to net, especially after the pandemic when I think the quality differential became clearer than before?

David Melcon, CFO

Carlos, I think there is always a limitation to the quality that customers expect from the network. I think the pandemic highlighted the need for speed in upload and download capabilities. This factor has demonstrated to customers that fiber is the best alternative for connectivity, especially given the increased demand for simultaneous usage at homes. So, the quality of our services keeps solidifying our value proposition. It's also difficult to provide a direct comparison against each company because competitive dynamics may vary based on local deployments in specific areas. However, our data reflects that compared to coaxial offerings, fiber maintains a significant quality advantage.

Operator, Operator

Our next question comes from Susana Salaru, Itaú.

Susana Salaru, Analyst

Thank you for taking our questions. Hi. Our first question is regarding the EBITDA margin front; we have been seeing Telefônica maintaining a sustained EBITDA margin at 40% level, despite what happened with the pandemic. So going forward with a more healthy top-down scenario, could you elaborate on what you expect for margins? Could we see room for improvement?

David Melcon, CFO

In regard to our EBITDA margin for the first nine months, we achieved an EBITDA margin of 40.3%, which is up 0.4 percentage points year-over-year. We foresee long-term sustainability in our margins. As for future margin improvements, we are optimistic but also willing to focus on solid cash flow generation first. For example, we are transitioning to e-commerce which considerably lowers unit costs. Moving away from traditional call centers, we are shifting to Vivo with 18 million unique users per month to resolve queries without incurring additional costs. This will enable us to enhance our digital and operating efficiencies, allowing for higher margins and cash flows in the long run. The strategy centers around improving the profitability of our business over time.

Operator, Operator

Our next question comes from Diego Aragao, Goldman Sachs.

Diego Aragao, Analyst

Good morning, Christian, David, and team. Thank you for taking my question. I just want to follow up on your FTTH business. You have this business in over 250 cities now. I was wondering if you can comment a little bit more about the competitive landscape in these cities, where you operate but not with the caps of the operator? In fact, we’ve eventually seen smaller regional fiber providers using some of these smaller ASP players in those cities. Also looking forward, how quickly can you grow into new cities and how competitive should be the new cities you are planning to add? Thank you.

Christian Gebara, CEO

Diego, thank you for your question. In larger cities, we generally compete with cable providers. Seasonal factors alongside demand for better quality services play into our competitive edge. Regarding smaller cities, yes, we do face competitiveness from smaller players but we have strategies in place to ensure that our service triumphs over theirs. Our fiber technology stands out as it provides superior value and customer experience. Furthermore, as we enter new smaller cities, we’ve become adept at addressing local needs while ensuring customers are aware of the advantages of our services. We are confident in our strategy as we are expanding significantly. For this year, we are projecting strong growth and continue to see that there's a demand for digital connectivity, especially given the current situation with a low penetration of ultra-broadband across Brazil. As for the question regarding how competitive the landscape is, we’ll continue to scout the areas where competition arises, our focus will remain strongly on offering a high-quality service to our customers. Given that only 20% of Brazilian homes are currently connected to ultra-broadband, we view this as ample opportunity for future growth. Our brand strength, channel presence, and overall vision for what the customer roadmap looks like after leveraging many connection types and technologies puts us in an optimal position to scale fiber rapidly.

Operator, Operator

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

Christian Gebara, CEO

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

Operator, Operator

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