Telefônica Brasil - Q1 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Welcome to Vivo First Quarter 2023 Earnings Call. This conference is being recorded, and the replay will be available at the company's website at ri.telefonica.com.br. The presentation will also be available for download. This call is also available in Portuguese. To access, you can press on the globe icon in the lower right side of your Zoom screen, and then choose to enter the Portuguese room. After that, select Mute Original Audio for a better experience.

Speaker 11

Para acessar nossa conferência em português, clique no ícone do globo no lado inferior direito de sua tela Zoom e selecione a opção Portuguese Room. Ao acessar a nova sala, certifique-se de silenciar o áudio original para uma melhor experiência.

Operator (participant)

We would like to inform you that all attendees will only be listening the conference during the presentation, and then we'll start the question and answer section when further instructions will be provided. Before proceeding, we would like to clarify that any statements that may be made during this call regarding the company's business prospects, operational and financial projections and goals are the beliefs and assumptions of Vivo's executive board and the current information available to the company. These statements may involve risks and uncertainties as they relate to future events, and therefore depends on circumstances that may or may not occur. Investors should be aware of events related to the macroeconomic scenario, the industry, and other factors that could cause results to differ materially from those expressed in respective forward-looking statements. Present at this conference, we have Mr. Christian Gebara, CEO of the company, Mr.

David Melcon, CFO and Investor Relations Officer, and Mr. João Pedro Carneiro, IR Director. I will turn the conference over to Mr. João Pedro Carneiro, Investor Relations Director of Vivo. Please, Mr. Carneiro, you may begin your conference.

João Pedro Soares Carneiro (IR Director)

Good morning, everyone, and welcome to Telefônica Brasil's Conference Call to present the first quarter 2023 results. The call will start with our CEO, Christian Gebara, commenting Vivo's financial and operating highlights, followed by an update on the progress of our B2B and B2C digital ecosystems and ESG initiatives. Our CFO, David Melcon, will go through our cost and CapEx evolution, net income, shareholder remuneration, and free cash flow generation. I now hand it over to Christian.

Christian Gebara (CEO)

Thank you, João. Good morning, and thank you for joining our Earnings all. I start representing the highlights of a very strong first quarter for Vivo, a period when we reached our highest total revenue year-over-year growth in over a decade, expanding top line by 12.1%, driven by an expansion of 15.9% of our mobile service revenue and by further improvement of our fixed business. This off the charts performance was a result of yet another positive quarter in operating terms, with mobile postpaid access growing 15.4% on a yearly basis, while our FTTH subs base expanded 16.8%. We have been able to grow EBITDA above inflation for a few quarters in a row, and this one was no exception, as we presented a 9.6% year-over-year expansion.

This result, coupled with the reducing CapEx intensity you should see throughout the year, allowed us to generate BRL 3.1 billion in free cash flow in the first 3 months of 2023, with a robust growth of 26.4% versus the first quarter of 2022. This confirms the conditions for us to maintain a leading shareholder remuneration in the industry going forward. Going to slide 4. In the first quarter of 2023, our total revenue reached BRL 12.7 billion, the highest result the company produced in a single quarter in its history. More importantly, the 12.1% year-over-year evolution is the best we had in over 10 years, confirming that we are on the right track to continue delivering above inflation top-line expansion going forward.

Our revenue mix keeps on improving as we see our core services expanding. On the mobile side, service revenues grew 15.9% year-over-year with a strong performance both in pre and postpaid. In addition, smartphones and other electronics, which we're increasingly see as key element to enhance customer loyalty, accelerated 20.6% in the period. On the wireline business, FTTH and B2B data, ICT and digital services continue to be the driver of transformation, enhancing our growth profile through highly demanded products that only Vivo can offer on a large scale. On slide five, we present the main achievements of our mobile operations in the quarter. We closed March 2023 with 98.1 million mobile subs, of which 60% in postpaid.

The 15% year-over-year growth of our customer base enabled us to further expand our market share, reinforcing our leadership in all mobile segments. One of the key elements behind the market outperformance is how successful we have been in controlling and reducing churn. Over the last five years, our postpaid churn reduced 37% to a monthly average of 1.09% in the first quarter of 2023. Churn reduction, jointly with the ARPU recomposition we have been experienced over the last quarters, is a powerful platform to provide above-market results going forward. On slide 6, you can see the key highlights of our initial 5G deployment. We closed the quarter with 58 cities covered with our 5G standalone network, moving forward to offer in the near future the technology in all top populated places in Brazil.

Apart from being within our coverage area, to use 5G, our customer must have a 5G-enabled device. At the moment, almost 70% of the smartphones we are selling in our stores are 5G ready for prices starting from as low as BRL 1,300. The device affordability, coupled with our accelerated footprint expansion, has been a driver for fast customer migration from 4G to 5G. As such, 20% of our pure postpaid users are already enjoying Vivo's 5G experience, and this take-up is much faster than what we saw a decade ago when we launched 4G. This is important, as the migration to 5G not only will enable us to be more efficient in terms of investment deployment, but also creates room for more data consumption, which in turn will serve as an important driver for product upsell and improved monetization.

Turning to slide 7, we move to fiber. In the first quarter of 2023, we added over 1 million fiber to the home premises to our footprint, which now reaches 24.4 million homes in 436 cities. Our second-to-none network reach allowed us to maintain the undisputed leadership of the fiber market in Brazil with 5.7 million customers, growing 16.8% year-over-year. Apart from the infrastructure advantage, Vivo has a unique ability in Brazil as the only player being able to bundle in a single plan, fiber and mobile postpaid. This bundling strategy is an extremely powerful tool to extend the customer lifetime value, protecting our investment to capture new users and improving our overall return profile. In fact, Vivo Total, which is our fully convergent offer, had a churn of only 0.39% per month in the quarter.

Moving to slide eight. Here we can see that our digital B2B services generate BRL 813 million of revenues in the quarter, up 32% year-over-year, representing 6.4% of our top line in the period. We have been consistently growing this pool of revenues to a tune of 35% per year on average over the past five years. As such, we are on the brink of seeing our digital B2B revenues be greater than our non-core revenues, demonstrating how efficient we have been becoming relevant in new verticals to replace fading legacy technologies. Even so, we're just beginning this journey, as only a small fraction of our B2B customers are already using cloud, cybersecurity, and digital service from our portfolio of solutions.

By using the key assets we have, such as a strong brand and the 5,000 B2B sales reps with nationwide presence, we have a huge potential market to explore. Let's move to slide 9. Here, for the first time, we start to put numbers on some of the verticals we have been developing to consolidate our digital B2C ecosystem. Before that, I would like to point out that Brazil is a country with a low penetration of basic services such as health, education, and financial products.

We firmly believe Vivo should be in a unique position to bridge this gap and accelerate inclusion through digitalization, relying on a low acquisition cost that takes advantage of a set of assets that includes a long-standing relationship with 112 million customers, massive big data capabilities, channels comprised of 1,800 stores and an app with over 22 million unique users per month, and one of the top 10 most valuable brands in the country. Going to numbers. On the left-hand side of the slide, you can see that in the first quarter of 2023, the financial services we offer to our customers base generated BRL 94 million in revenues. The financial service we offer to our customer base generated BRL 94 million in revenues, up 55% year-over-year.

Here we have key contributions from Vivo Money, our personal loan platform, which closed the quarter with a portfolio of BRL 239 million, up over five times year-over-year. We are also accelerating the sale of insurance for electronic devices such as smartphones, tablets, smartwatches, and laptops. At the moment, we have over 300,000 smartphones insured with us in partnership with Zurich Seguros. We are also moving ahead to go beyond tech and offer insurance for pets, bikes, homes, among others. Another important source of revenue and churn reduction has been the sale of video and music OTTs through our invoice, bundled with our postpaid and FTTH plans or on a standalone basis. We currently build more than 2.2 million OTT subscribers, generating BRL 101 million of revenues in the quarter, up 53% year-over-year.

Vivo is one of the top telcos in the world in terms of partnership with content providers. As we see, this is a key advantage in maintaining our customer loyalty and satisfied with the completeness of our portfolio. Moving to slide 10. In addition to financial services and OTT distribution, we are developing other verticals that will complement our digital ecosystem strategy. Starting with health and wellness. In March, we invested BRL 60 million to acquire Vale Saúde Sempre, a startup that provides access to over 5,000 labs and clinics nationwide, and was already acting as a partner to our eHealth initiative, Vida V. We already have more than 70,000 lives covered by our subscription-based products. Moving to education.

We recently made the commercial launch of Viva E, the employability platform we have in partnership with Ânima, offering over 400 hours of content packed in short duration courses. On smart homes, we see space not only to sell virtual assistants, lamps, sensors and other products, but also to have a recurring revenue stream through our Vivo Guru solution, which offers our customers access to professionals dedicated to help with tech doubts and configurations. We see the business of selling electronic devices beyond smartphones as very attractive as this generates important inflows to our stores and allow us to be a one-stop shop for tech needs of our customers. In the first quarter of 2023, we registered BRL 69 million in revenues from this vertical, up 95% year-over-year.

Here, apart from the smartphone products, we sell laptops, wearables, and accessories, the latter being reinforced by our recently launched brand, Ovi. Moving to slide 11. On ESG this quarter, we highlight that we are well on track to achieve the goal of having 40% of women occupying our leadership roles, as at the moment, 36.8% of the positions are held by them. We are not only fomenting the presence of women in the executive position, but also in field service operations through the program Mulheres de Fibra. Still on diversity, in the first quarter, Vivo sponsored the Lollapalooza Music Festival, allocating the largest part of its tickets to Black people from peripheral communities and Black influencers and entrepreneurs through the Presença Preta or Black Presence movement.

Going to the right-hand side of the slide, you can see that we continue to expand our distribution generation program, having inaugurated seven new power plants, totaling 55 plants in function out of the 85 we have as a goal. We are also recognized by the Carbon Disclosure Project for the 3rd year in a row as a supplier engagement leader, helping implement sustainable practice throughout the entire value chain. Davi will take us through the financial highlights of the quarter.

David Melcon (CFO and Investor Relations Officer)

Thank you, Christian, and good morning, everyone. On slide 12, you see that we were able to maintain our cost of operation, which comprised 68% of our cost and expanded 11% year-over-year, growing below revenues. Here, personal cost continues to be one of the main drivers, as this line is not only impacted by the annual salary increase, but also by the insourcing of staff to support our winning B2B digital services strategy and additional headcount related to new businesses. Apart from that, commercial and infrastructure costs remain well under control, while the provision for bad debt was slightly lower on a yearly basis, denoting how relevant our services have become to our customers.

Looking at the cost of service and goods sold, which mostly increase in line with our effort to sell high growth solutions and products such as digital services, handsets, IT equipments, and accessories, the expansion of 18% year-over-year was lower than the increase in revenues coming from these verticals. For the quarters to come, we see a path to improve the annual evolution of costs, not only from the opportunities around digitalization and simplification, which we continue to capture, but also from the recently completed integration of Oi's mobile assets that resulted, for example, in the termination of the transition service agreement with Oi that had a cost of almost BRL 50 million this quarter and consume around 1 percentage point of EBITDA year-over-year growth. This integration will also boost the capture of synergies related to the network costs, IT platforms, and customer care, among others.

In March, we started to amortize for tax purposes the goodwill arising from the acquisition that will generate more than BRL 1 billion cash during the next five years. Slide 13. As guided in the previous quarter, Vivo's CapEx for 2023 will be below BRL 9 billion, thus providing an important savings compared to the BRL 9.5 billion invested in the previous year. This first quarter figure already point to this lower CapEx intensity, with investments clocking in at BRL 1.7 billion or 13.3% of revenues, our lowest ratio ever. As a result, we saw a robust expansion of 23.7% year-over-year of our operating cash flow in the quarter, with the last 12 months margin recovering the 21% level.

These results put us in a unique spot as we continue to invest in top-tier technologies, such as 5G and fiber, while being able to optimize capital allocation as on mobile synergies arising from the recent spectrum acquisition start to kick in, while on fiber, most of the footprint deployment is done. On slide 14, you see that our net income expanded 11.3% year-over-year in the quarter, reaching BRL 835 million. Even though we are still seeing increasing pressure coming from the financial results due to the increased debt level and higher interest rate, the 17% expansion of our operating income in the period more than compensate this factor. Year-to-date, we have already declared BRL 1.2 billion of dividends and interest on capital.

We invested BRL 72 million in the quarter to buy back our shares. We kick off the year with a very robust allocation of capital towards our shareholders, something that will continue to be one of the key elements of our strategy. On slide 15, you can see that our free cash flow generation reached BRL 3.1 billion in just 3 months, growing 26% year-over-year. Looking at last 12 months figure, we closed the quarter with a free cash flow yield of 12%, a number hard to be matched by companies of any industry. Thank you. Now we can move to the Q&A.

Operator (participant)

Thank you. We are going to start the question and answer section for investors and analysts. If you wish to ask a question, please press raise hand button. If your question has already been answered, you can leave the queue by clicking on the same button. Wait while we pull for questions. Our first question comes from Fred Mendes from Bank of America. Please, Mr. Freddy, your microphone is open.

Fred Mendes (Equity Research Analyst)

Hello. Good morning, everyone, thanks for the call. I have two questions here on my side. The first one on cost. I mean, you already mentioned a little bit, but it was, cost grew, like, 12%, personnel itself 23%. A little bit higher than what we had here. Just wondering if with the lower inflation in 2023, there is room to reduce this cost or given that the other business, they are growing, you know, this line should stay high throughout the year. This will be the first one. The second one on the B2B digital. Once again, some acceleration, you know, already 6.5% of your revenue.

Do you believe that there is room to continue to grow at this pace as you add more products? Or it's just kind of a one-off? Basically trying to understand the potential of this line here for the next years. Thank you.

David Melcon (CFO and Investor Relations Officer)

Hi, Freddy. I will start with the first question. Yes, as we showed the slides, we have divided the cost in two parts. Now, the first one will be linked to the evolution of the new businesses, more like cost of goods sold and so on. We are expecting this to continue grow. Just to remind you that those revenues will have no CapEx allocated. In terms of operating margin, operating cash flow margin will be very positive. Regarding the second one that you mentioned about inflation, we are working with different levers to make sure that we reduce those costs. In fact, despite some lines are increasing, particularly the one have to do with personal cost, we explained it. They are explained by just specific projects.

If we look to all the OpEx or overall, we see a lot of opportunities both in simplification and digitalization. A part of the synergies coming from Oi to reduce and to improve the trends, starting from the next quarter, second quarter this year, we will see some improvements on the trends.

João Pedro Soares Carneiro (IR Director)

If the-

I continue, Freddy, with the B2B. As you know, we've been giving a lot of visibility to our evolution in B2B digital services. This quarter was 32%, if you see what happened in the last five years, the trend is exactly the same. No positive evolution of the services. Here we believe there is room for growth for many reasons. First, because Vivo has a unique channel footprint for B2B, coming from the small companies to the large corporations. We are more than 5,000 sales reps distributed nationally with the relationship with all type of customers that allow us to sell more services. The second thing is that after the pandemic, that was accelerated the need for digitalization in companies.

Christian Gebara (CEO)

If you look the level of digitalization, penetration of digital services in all types of companies, is still very low in Brazil. Talking about cloud, cybersecurity, notebooks, and many other type of services that we sell. We're talking here much more recurrent services rather than a hardware sale. The mix is much more for recurrent services. We see ourselves

We can prove it. We're one of the key partners of the large techie companies. If you look at Cisco, Microsoft, Google, Huawei, among others, they search for our partnership because we have the footprint, we have the relationship, and we can build the customers in an easy way to distribute their services. Apart from what they have as services, we are also investing in having people here that understand the services in depth, that can help the sale, but more important, can help the management of the services once it's implemented in our customer base. That's the reason that we bought one company last year, Vita IT. That's the reason that we are hiring people as well. One of the answers of the pure personal cost is also related to increased capability, internal capability of being able to deploy and manage B2B services.

Going forward, we don't give trend, but everything that we see is very positive for the role that B2B can play in our future revenue and mix. Don't know if João, your question about the B2B and the cost for it, otherwise I can complement.

Fred Mendes (Equity Research Analyst)

Perfect, Christian. That be very clear. If I just may, on these two points, if I just may a follow-up here. Sorry for the third question, but it looks like the deal with Winity is about to be approved. It's already approved. Just wondering if with this, let's say, higher spectrum, there is room to further decrease the CapEx in 2023. It's already lower than 22. Thank you.

Christian Gebara (CEO)

It's not approved. Yesterday, we had a positive decision of the technical team from the antitrust, from CADE. It's a first step in the antitrust. Yesterday, they approved with no restriction the deal, as we expected, because now it's the secondary use of a frequency, the spectrum that was bought by Winity. We still need to grow through all other stages in the antitrust and the stages that we need to go through in Anatel. It was a positive step in the antitrust, but we still need to have final approval there and also approval in Anatel.

Fred Mendes (Equity Research Analyst)

Perfect. Very clear, Christian. Thank you.

Christian Gebara (CEO)

Go for it.

David Melcon (CFO and Investor Relations Officer)

Thank you. Our next question comes from Marcelo Santos from JP Morgan. Please, Mr. Marcelo, you may proceed.

Marcelo Santos (Senior Sell-Side Equity Analyst)

Hi. Good morning, Christian, David, João. Thanks for taking my questions. The first question is for David regarding the working capital. I think on the first quarter, we saw a big release of BRL 1.3 billion in working capital. How should we think about this line going forward and what are the main moving parts here that investors should keep in mind? And the second question is for Christian. I wanted to discuss a bit more Vivo Money. Could you please discuss the types of loans that you're giving there? What are they for? What are the average size? Are these to buy mobile phones or general loans? Any more color on these loans would be quite interesting. Thank you very much.

David Melcon (CFO and Investor Relations Officer)

Thank you, Marcelo, for the question. I will start with the first one. Look, at Telefônica Brasil, we have shown very strong capital generation over the last few years, and working capital has been one of the key parts, no? The key reasons why the working capital is still positive this quarter, I will summarize in two. The first has to do with the FISTEL tax, which is, you know, we have an injunction obtained in relation not to pay the FISTEL tax since 2020. This is something that is impacting our costs because we are recognizing the cost in our financial statements, we are not paying.

This had a impact in the last 12 months, annual impact of BRL 750 million, positive impact in the working capital. The second one has to do with the monetization of the tax assets that we have in our balance sheet. Not only the one that have to do with the taxation of the ISMS and physical fees, which is the most relevant. That just in the quarter, just the physical fees that we have monetized, amount to around BRL 500 million. On top of that, we are always working with initiatives on working capital, that taxes is one of just the key areas. Just, those two are explaining a significant part of it.

On top of that, we keep working and something that is important that for the second quarter, we still have some tax assets that will be monetized. That mean that will be cash coming in, where the positive impact on the results was already recognized in the previous year, no? In summary, these are the key element for the working capital positive, and we continue. We expect positive trend in the second quarter.

Christian Gebara (CEO)

Marcelo.

Marcelo Santos (Senior Sell-Side Equity Analyst)

Thank you, David.

Christian Gebara (CEO)

To Vivo Money, okay. Going back, Vivo Money was launched in October 2020, no. It's one of the financial services we offer in our fintech platform. It's a personal loan. It's available for Vivo's customers because we know this customer better. Now we can access their credit risk using our big data and data analytics. We understand the profile, we can minimize risk, and we can be very assertive offering the right amount of loan to the right customers. Now, the range goes from BRL 500-BRL 50,000. On average is BRL 5,000. Is very fast and practical the way they hire it. Is 100% digitally that we do that. The money is not related to smartphone acquisition at the moment.

It's a direct loan the customer can use it the way they want it. If you look the number, the evolution. If I look the number of contracts that have been generated, that's been multiplied by 2, 3, 4 last year. Today we have in the loan platform, approximately 239 million BRL being lent. It's part of our strategy to reinforce our position of a digital hub. I think it, of course, it will help also enable the acquisition of products as a way to finance it. It's a way that we're gonna use it more, as you mentioned, the smartphone or any other device for the smart home.

Nowadays, the funds raised through our FIDC fund based on receivable rights, we are the only participant at the moment, but we are looking for others. That's the way we are doing the financing of funds. Don't know if you have more questions, Marcelo, about Vivo Money.

Marcelo Santos (Senior Sell-Side Equity Analyst)

Perfect. It was pretty clear. Thank you very much, Christian and David.

Christian Gebara (CEO)

Thank you, Marcelo.

Operator (participant)

Our next question comes from André Salles, from UBS. Please, Mr. André , your microphone is open.

André Salles (Equity Research Analyst)

Hi, good morning, everyone. Thanks Christian, João, and David for the space here to ask a question. The first one will be in terms of the price sub schedule. If you guys could please share the company views on the price sub schedule on your mobile plans, both postpaid and prepaid. The next question will be the developments of the capital reduction discussion with Anatel. If you guys could please just comment on that. The follow-up here is that after a potential approval from the regulator, there are some additional internal steps that the company needs to make, right? Such as shareholder, debtholder, meetings and approvals. Regarding these internal steps, could you please give the expected timing for this to happen? Thank you.

Christian Gebara (CEO)

Marcelo, we've been Sorry, André Salles. We've been increasing price according to inflation every year. In April now, we're gonna have price increase for almost half of our hybrid customer base, more than half of our postpaid. In January, you already increased mostly all our fixed products, FTTH, IPTV, and Voice. Our strategy is always to adjust price. Even in January, there were some hybrid that we already adjusted. If you look the entry point of our hybrid, it went from BRL 50.99 to BRL 57. We also had to increase, based on inflation, our individual postpaid, our family plans. We're following with the calendar to increase prices. Even the Vivo Total was recently increased. In April, we have more increase in the mobile.

In the fixed, we have more increase, not only the one in January, because it was 100%, but in June we also have increase in our fixed customer base. Prepaid, we also aim to increase because we need to pass over inflation. Would be great to have the marketing, the market following us on that because the price of prepaid has been in the same level for a long time. We are aiming also to capture the inflation on prepaid as another one in the mobile space. That's basically what we've been doing in price. Regarding the capital reduction that you mentioned, as you know, we have in February, we announced that we would do this reduction. Also, we already asked Anatel for that. We filed in February 15th.

They have six months to analyze. We are confident with the approval, giving our very strong financial position. After that, once it's approved, we need to comply with all the other necessary steps of this kind of operation, such as the general shareholder meeting that we need to approve. That's a period that we have to do to get it approved. On schedule, waiting for Anatel approval.

André Salles (Equity Research Analyst)

Okay, that's clear. Thanks, Christian.

Christian Gebara (CEO)

Thank you, André .

André Salles (Equity Research Analyst)

Thank you.

Operator (participant)

Our next question comes from Marco Nardini from XP. Please, Mr. Marco, your microphone is open.

Marco Nardini (Equity Research Analyst)

Hello, good morning. Thank you for taking my questions. I actually have two here on my side. The first one is regarding the competitive environment in FTTH. We saw once again a strong performance in top-line growth this quarter. Can you provide us some further details on that, please? The second one is regarding the EBITDA margin drop year-over-year. Can you give us some color on the end of the TSA contract with Oi in February impacts on margins? Also, as David already mentioned, the increase in personal expenses and higher share of digital services. What should we expect on margin performance over the next quarters, please? Thank you.

Christian Gebara (CEO)

Marco, I start with the FTTH. As I said, you know, we are increasing our footprint. We have today 24.4 million home pass. We increased the connection of customers as well. We have today 5.7%. It's good to highlight also, we increased 18.7% the home pass. We increased 16.8% the home connected, and we increase in similar level the revenues coming from FTTH. We are in a very strong position. If the market is a lot, it's very competitive, as you mentioned. There are many players. We're talking about very small players to large players like us, that we are the number one in the market.

In general, the number of net adds has been reduced. Vivo stands out. Now, if you look the last net add number available in March, Vivo gained 60,000. The second player gained 39,000. We are gaining market share in strong position, and as I said also, we are bundling that with mobile. 75% of the sales or FTTH in our stores are in Vivo Total. Either the customer is already a mobile and is acquiring fiber, or he ends up being both with Vivo. The competitiveness of the markets is very strong.

We have different type of competitor, small ones, medium ones, and large ones, but we have the largest network, the largest customer base, and the only one in national basis with the possibility to offer the Vivo Total bundling, not only mobile and fiber, but also digital services, as I highlighted. It's important to say that apart from selling IPTV, we are the key channel for OTT video, and we have 2.2 million subscribers that's paying OTT through Vivo. That's the overall vision on FTTH. I don't know if you want any specific question on that.

Marco Nardini (Equity Research Analyst)

That's super clear. Thanks.

Christian Gebara (CEO)

The EBITDA, I think Davi will talk, it's important to highlight our very strong growth in absolute terms, 9.6% of EBITDA growth, well above inflation. That shows that we are in the right direction. Important also to highlight the mix of service that we are selling now. We are very positive of our strategy of selling more digital services. We highlighted the 6.2% of the B2B, we are also giving more color on the B2C. These service may come, some of them, with lower margin, they have no CapEx. Highlighting the growth in absolute terms of our EBITDA, also highlighting the growth in our operating cash flow margin that is also growing and is a very high number. Davi.

David Melcon (CFO and Investor Relations Officer)

Marco. Marco, thank you for the question. As Christian say, I mean, we prefer to look to the operating cash flow margin because the evolution of the revenue is very strong, particularly on the new services. In terms of operating cash flow margin, they are similar, could be similar to the telecom services, but we cannot look just from, on EBITDA, you know. We look this quarter, we are back to the 21% operating cash flow margin, looking to the last 12 months, as we show on the slide 13 in our presentation. We are very positive in terms of seeing operating cash flow margin expansion, looking to the last 12 months for the coming quarters, as we are reducing CapEx and also we are improving our efficiencies.

Regarding your specific question on the transition service agreement we had with Oi, we agreed at the beginning of the deal BRL 172 million for the next 12 months after the acquisition. That happened the 20th of April of 2022. We have done an early termination of this contract as we have already merged the customers. From the second quarter compared to the previous, the first one, just on this contract, as I say on the call, there will be BRL 50 million less costs on top of the rest of the costs that we had to facilitate the migration of customers at call centers. There were customers calling our call centers to clarify what was about the migration to the new services.

Those costs will not happen again for the rest of the year. That's why, as I say, we are positive that the second quarter we will see an improvement on the costs trends, this second quarter now also for the coming quarters.

Marco Nardini (Equity Research Analyst)

Thank you, Christian and Davi.

David Melcon (CFO and Investor Relations Officer)

Thank you, Marco.

Victor Ricciuti (Equity Research Analyst)

Our next question comes from Victor Ricciuti from Credit Suisse. Please, Mr. Victor, you may proceed.

Hi, good morning, Christian, Davi, João. Thanks for taking my question. The first one is regarding the competition in the mobile segment. As you are already mentioned, you are being able to increase prices for almost the whole client base. At the same time, you are able, being able to also reduce churn. We were wondering how are you receiving competition in the mobile segment, and how should do you expect it to continue throughout 2023? My second question is regarding the Oi client base. The Oi incorporation happened already one year ago, now you can increase prices to this client base.

Could you provide us some color around the commercial strategy for the Oi client base going forward? Thank you.

Christian Gebara (CEO)

Thank you, Victor. I'm Christian. I'm trying to answer. Yes, it's a very competitive market. It has been competitive for so many years. It's still very competitive. What I try to highlight here is, first, there is the need of pass over inflation, and we are doing that to be able to increase revenues and now in regard because we have like investment, we need to increase revenues to increase our profitability. We are doing that. Hopefully we're gonna be followed by the market. The second thing is that I think the value proposition of Vivo is unique. We have the best coverage combining mobile and fixed that give us increased loyalty.

That's why I think we also see the good performance in churn at both mobile, fiber, and Vivo Total. We're being able also to increase lifetime value, reducing churn with more services to our customer base. Now let's take into focus here the mobile access. We have 98 million access in our customer base. It's a growth of 14.2% in prepaid, but 15.4% in postpaid. That's a combination of attributes that we have, infrastructure, a complete digital service value proposition, customer service that we focus in giving best experience and many others that I talked over the presentation. Going forward, we continue with our strategy. We are combining the inflation change that we need to put in prices with highlighting the value proposition that we can offer to customers.

Very competitive and our strategy is focused on what I just described. Regarding Oi, yes, we have full integration. We finalized the process. The customers that we had, we disconnected. In final numbers, we are closer to 9 million rather than 12 million. That was the first number that we received. Concentrated most of them, in our case, in prepaid, although we had some also in hybrid. There is no specific strategy of like increasing prices for this base. It's also very mixed, you know, the number of customers that we have. There was a lot of migration from customers that were Oi to Vivo customer base even before the deal or the incorporation was concluded. We also had migration of 14 of customers from Oi in other regions where we haven't received geographically the customers.

Our strategy is the same. We are doing what we normally do. We try to upsell to customers. We try to move customers from prepaid to hybrid, from hybrid to within hybrid to higher plan. We are adding digital services, some of them to have hybrid plus digital services. We are also migrating hybrid to pure postpaid. Has no specific action to what we got from Oi, rather than integrating the customer here, migrating to our plans, and try to give them the best experience once they have now a coverage of network and channel that they didn't have when they were in the other operator.

Daniel Federle (Equity Research Analyst)

That's very clear. Thank you, Christian.

Christian Gebara (CEO)

Thank you, Victor.

Operator (participant)

Our next question comes from Daniel Federle from Credit Suisse. Please, Mr. Daniel, your microphone is open.

Daniel Federle (Equity Research Analyst)

Good morning. Thank you very much for the opportunity to do a follow-up question here. We are seeing telecoms, and I could say especially Vivo, growing faster than they used to, growing faster than normal. My question is, in a scenario of like a more positive pricing environment, if this more positive pricing environment allow for a 1, 2 percentage points more in growth, should we expect this additional growth to pass through EBITDA? 1, 2% more in revenue should translate to 1, 2 percentage points additional in EBITDA margin, or are there, like, reinvestments, additional costs associated to this scenario? Thank you.

Christian Gebara (CEO)

I don't know if I would talk about Daniel, about margin, but growth, you know, for EBITDA. We don't give trends. There are many things implied in what you just said. First, we are growing in revenues in all segments, so I wouldn't specify the growth in mobile. We are growing mobile, we are growing fixed, and we are growing in digital services. The dynamic of these three segments are totally different. If you talk B2C, B2B, you are creating either other dimension. As we try to reflect here, that we've been able to grow in all of them. Also important to highlight that what we call non-core, that used to represent 9% of our revenues, now represents 7%. We took out DTH from our value proposition.

We are now offering the service. We disconnected or migrated the customer they used to have. Even with this movement, we grew fixed in total 3.5%. We are also growing handsets and electronics because we believe that's a way also to increase flow to our stores, is a way to increase lifetime value. It's proved that the customer is much more loyal, and they see us a technology partner rather than just a telco. There's a combination of strategies here. It's very difficult just to isolate mobile and believe that there is a mobile rationality, and that would be reflected in EBITDA. If I talk about the specific telco service, maybe your assessment is correct, but here we are talking about the combination of services and segments that give us this absolute growth.

As David said, we are also very focused on the operating cash flow margin that we already set here. A target for CapEx, BRL 9 billion maximum this year. We already presented a number for CapEx in first quarter, lower than we had the previous quarter. This is the strategy. Try to mix more revenues, opening up our spectrum to have more sources of revenues, controlling costs based on digitalization, understanding that some of these sources of revenues have different EBITDA margin, but maybe a better operating cash flow margin, since some of them don't depend on CapEx. That's the view, that's the strategy. We wanted to show this quarter with more color that we are going the right direction.

Operator (participant)

Perfect. Thank you, Christian.

Christian Gebara (CEO)

Thank you, Daniel.

Operator (participant)

Our next question comes from Felipe Cheng from Santander. Please, Mr. Felipe, your microphone is open.

Felipe Cheng (Equity Research Analyst)

Hi, thank you for the opportunity to make some questions. The first one is regarding shareholder distributions for this year, right? Given that free cash flow generation was very strong in this first quarter. Just wondering, what is your expectations for dividend distributions in 2023, and if we could see a very a rising level of distributions relative to 2022. My second questions is regarding B2C ecosystem revenues, right? We already saw a relevant contribution of financial services and sale of OTT this quarter. Just wondering what other opportunities do you see, right, which could further complement your ecosystem going forward, right? Eventually, if you plan to do this through partnerships or M&A. Thank you.

David Melcon (CFO and Investor Relations Officer)

Thank you, Felipe. I will start with the first one. I mean, you know, we have a practice to distribute 100% payouts. This is something that will continue. We have a very strong cash flow generation, not only this quarter, but also in the previous years. That's why we launched the project of capital reduction to close the gap between the net income that we have generated this quarter, this year with the cash flow generation that will continue as in previous periods very, very strong. No? That's it. 100% payouts. I'm working on the capital reduction as Christian explained before.

Christian Gebara (CEO)

Felipe, I don't know if you have more questions in the, this, shareholder, but otherwise I go to the B2C ecosystem. As I said, now, we are leveraging on the assets that we have. A customer base, channel, big data, billing capability and brand. We see ourself as one of the unique players in the market among sectors to be able to create a digital ecosystem in Brazil. Again, the key focus is serving through digitalization customers that don't have access in the physical terms to service that we believe are very essential to our lives. We're gonna do that, and we're gonna open up the numbers quarter-over-quarter. This quarter, we gave more color in the financial services and entertainment. We may give more color in the future to the other verticals that I described here.

We are doing that, as you question, in different models. Some of them is pure distribution like entertainment. Others are JVs, like the education that we did with Ânima. Some may also have acquisition as the one in health that we bought, Vale Saúde Sempre, to accelerate the creation of our platform, that is Vida V. Others will be minority stakes, as we are doing with our venture capital fund, Vivo Ventures. We already have two investments in fintechs, one in Open Finance, Klavi. The second one, Klubi, that is in consortium, that we're gonna have a digital platform to sell consortium, that it's a typical Brazilian model of selling something in installments, financing the acquisition, cars, real estate, and why not electronics.

Each of these verticals will have a specific model, either partnership, M&A, distribution. We're gonna give more color over the quarters as soon as we develop more each of them. That's the vision. We believe that with all the assets that I described before, that we are among different sectors in Brazil, we are in a unique position to be the winner of the construction of our ecosystem.

Operator (participant)

Perfect. Very clear. Thank you, Christian and David.

Christian Gebara (CEO)

Thank you.

David Melcon (CFO and Investor Relations Officer)

Thank you, Felipe.

Operator (participant)

The question and answer section is over. We would like to hand the floor back to Mr. Christian Gebara for the company finals final remarks. Please, Mr. Christian, you may proceed.

Christian Gebara (CEO)

Okay. Thank you for all of you for participating. As you could see, we start very strong this year. It's a reflection of the strategy that I've been communicating along the last quarters, and that will give very robust and clear results that give us optimism about the next quarters. We're gonna be always at your disposal, David, myself and our IR team, to answer any questions that you may have. Thank you again, and have a great day.

Operator (participant)

Vivo's conference call is now closed. We thank you for your participation and wish you a very good day.