TIM S.A. (TIMS3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to TIM Participações 2020 First Quarter Results Conference Call. We would like to inform you that this event is being recorded. [Operator Instructions] We highlight that statements that may be made regarding the prospects, projections and goals of TIM Participações constitute the beliefs and assumptions of the company's Board of Executive Officers. Future considerations are not performance guarantees. They involve risks, uncertainties and assumptions as they refer to events that may and may not occur. Investors should understand the internal and external factors to TIM Participações may affect their performance and lead to different results than those planned. [Operator Instructions] Now I will turn the conference over to the CEO, Mr. Pietro Labriola, so he can present the main message for the first quarter of 2020. Please, Mr. Pietro, you may proceed.

Good morning, everyone, and thanks for attending our results conference call. Less than 2 months ago, on March 16, we were presenting our strategic plan and what's expected for the coming years. At that moment, Italy was already suffering the consequences of the pandemic, while in Brazil, we were starting to see the first impact. Social distance measures were in the very early stage. At TIM, we were focused on ensuring business continuity and reducing the risk for all our stakeholders. All of these changed since then. Some of our assumptions were right and others turned out to be wrong. However, the most important one related to the resilience of the telecom business was right. The sector and TIM, specifically, are demonstrating resilience in their numbers. For sure, the level of uncertainty under which we needed to operate today is much higher. But again, I'm happy with what we accomplished so far under such unprecedented conditions. I believe we have done a great job to adapt ourselves to the new environment, and we are reaping the benefits of being an agile company. I will start my comments with a review of our results, and then I will give a more complete update on the pandemic effects and what we expect to happen going forward. Bear in mind, all the figures are now shown under IFRS 16 standards. The first quarter was marked by a solid execution, mostly in line with our original plan until the outbreak hit Brazil. We closed the quarter with service revenue up 1.7% year-over-year, which could have been 3% if it wasn't for the COVID impact in prepaid. EBITDA came in very solid, up 8% versus last year under IFRS 16. In the old standard, growth was 4.5%. TIM continued to show its disciplined cost control and capacity to find more efficient ways to operate. TIM Live continue to shine bright with another consecutive quarter of 30% growth in revenues. Another product that is also developing very well is our family plan, which surpassed the 500,000 customer milestone. The partnership with C6 Bank, as announced in March, is being developed and we should see the finished product being launched this year. We also closed another important agreement with Google, taking our big data to the cloud. And finally, our network continued to grow. We added 2 additional states, Paraná and Santa Catarina, to our list of 100% 4G coverage. Although our revenues for the first quarter did not expand as fast as we expected due to the COVID impact in prepaid, we were still able to deliver resilient growth, thanks to a solid TIM Live performance and a better revenue mix, prepaid versus postpaid, that led positive contribution from mobile client generic revenues. On the mobile side, total ARPU grew close to 5% year-over-year with prepaid and postpaid ARPUs posting solid mid-single-digit expansion, demonstrating that our transition from volume to value is underway. The environment change will pose additional challenges, but we are working to have better value proposition and to give additional incentives to deepen the engagement with our customers, while we shift to a more digital relationship. On the fixed front, TIM Live's consistency in delivering a solid performance is very good news. In the beginning of the pandemic in Brazil, we estimated that we could face some hurdle to sell and install, but we were able to sustain a positive dynamic. Digital channels to sell and adding people at home to receive the visit of technicians are helping the acquisition process. In TIM Live, we closed the quarter with ARPU growing more than 6% and customer base up 20% versus first quarter 2019. As of April, TIM Live's coverage almost doubled versus a year ago. During the pandemic, we managed to launch 2 new cities in the state of Minas Gerais, opening a new cluster to be developed. We did not stop the rollout of our network because of the COVID crisis. Of course, our network teams are working much more carefully. But under this new condition, we managed to strengthen our mobile access network, increasing our coverage in 4G and 4.5G, while we expanded our presence with fiber for transport purposes and for FTTH in new regions. A flexible approach to our network based on self-provisioning, self-healing and self-caring strategy is proving to be the right choice. We are coping with the new demands of the moment, such as the increase in use of video conference apps, maintaining a high-level user experience. Despite this, I sense in the industry a growing concern about zero-rating apps. This experience is casting light on the risk for network management that all mobile operators face with these offers. In the first quarter, we continue to develop the initiatives to go beyond our core and to innovate in our CapEx deployments. The partnership with C6 could represent a very interesting opportunity for TIM to benefit from potential growth of the digital financial service segment. The combination of 2 types of remuneration, mainly in the form of activation piece and the equity attached to targets, create the possibility to generate value in the short and long terms. Mobile advertising standard revenues continue to grow solidly more than 70% this quarter. Meanwhile, we continue to develop new initiatives and capabilities. The partnership with the Ministry of Health was another trial of data reward for prepaid customers. As I mentioned earlier, we closed a contract with Google that will allow us to increase our big data capacity with more artificial intelligence and analytics application, while at the same time, taking advantage of cash cost efficiencies. We received important approvals for Anatel and CADE for the sharing agreement with Vivo. This project tackle the necessity to continuously strengthen our infrastructure and enhance our customer experience in the most efficient way. Our newest project related to TIM Live, which consists in finding the partner to accelerate the expansion of FTTH network and consequently the growth of the business unit, is developing fast. We already signed more than 20 NDAs with potential partners to go into more detail. We expect to form a short lease in the next couple of months, so we can start deepening negotiation in the second half of the year. Continuing with the innovation initiatives that are changing the way we operate, I want to highlight our digital transformation program. We have been talking about it for quite a while, but its importance was catapulted by this scenario we are facing today. We should look at this from 2 perspectives. One, related to the evolution the company made so far that helped TIM to adapt very fast to this new environment, ensuring no service disruption or quality deterioration. And two, the new opportunities that are being opened because of outbreak. Things that will take months or years to be implementing, we are implementing in weeks to cope with the demand of this new world. The COVID crisis created limitation to our physical channels for sales, credit and payments. But at the same time, it is running faster and deeper adoption of digital channels. This transition is helping efficiency gains that, together with other improvements, led costs to decrease by approximately 5% versus first quarter 2019. It is worth mentioning the evolution of our bad debt, confirming the trend we discussed in the last results call. Nominal numbers were showing stabilization, while collection was improving until the start of the crisis. We haven't seen a major deterioration since then, but it is possible to have some pressure coming from delinquency in future months. Well, if revenue are growing and costs are down, the consequence is a solid 8% growth in EBITDA with a margin expansion of 300 basis points to reach close to 46%. EBITDA minus CapEx reached a solid number of BRL 1 billion, while net profit grew more than 8% year-over-year. As I finish this overview of the first quarter trends, I will go into more details of the consequences of the pandemic and how we are reacting to it. As I mentioned during the opening of this event, the outbreak started to hit the country in the second half of March, when some regions initiated implementation of the quarantines. Despite the growing number of cases and deaths, experts say the social distancing measure helped to buy some time for the cities to have some level of preparation and that the peak of the outbreak could occur in May. As it happened in all countries, the quarantine completely changed the economic dynamics. In the case of Brazil, GDP consensus forecast moved from 2% growth to a 3.8% contraction for 2020. Monitoring the situation in Italy, we started to put in place a contingency plan based on business continuity in February. So when COVID hit Brazil, we were able to quickly respond. We focused our actions on 3 perspectives: our people, our customers and society as a whole. First, caring for our employees and third parties that work for TIM. We managed to have 99.9% of our workforce working from home in just 1 week. We were also the first operator to have 100% of its internal call center working remotely. And for the external ones, social distance measures were implemented. And with the help of our partners, we reached more than 65% under remote working. 100% of our stores were closed across the country, but we did not lay off any of our commercial personnel. We used one of the programs launched by the Brazilian government to suspend their contracts, but we complemented their salaries to guarantee the same income they had. Second, for our clients, the focus was resilience, reliability and customer engagement. We adjusted our network to adapt to a new shape of traffic, more dispersed during the day and more concentrated in residential areas. We also reinforced mobile coverage in areas near hospitals. Our digital channels received an additional attention in order to better support the customer demands, and some projects had their implementation accelerated to improve that support. Clients are being incentivated to use digital channels, with benefit in offering and easing of collection rules. The goal is to keep customers connected during the pandemic. And third, we also supported the society in the fight against the COVID-19 in a broader sense. TIM was a pioneer in giving access to anonymized data to help monitor the effectiveness of social distance measures. TIM also joined a combined effort with all the operators to provide population movement measurements. As a sector, the operators managed to discuss with those stakeholders, including OTTs player, to have a balanced approach to data consumption. And finally, we quickly implemented measures to help governments address communication channel for the population. The pandemic so far has provoked mixed impacts on the company. Some effects are positive, some neutral and, of course, others are negative. For sure, we will leave this phase a much more digital company, and the relationship with our customers will be even more digital. The resilience of our network is also something that will mark this moment. The reduced commercial activity in postpaid works both ways, negative for sale, positive for churn and commercial cost. But that hasn't materialized as an issue yet. TIM Live is a positive surprise up to this point with gross addition and installation with no major impact. Clearly, the most significant impact so far come from the prepaid recharges. In the early days of quarantine, they were down by 25%. By the end of March, the decline decelerated to a minus 20%. And now, we are seeing a mid-teen drop. The impact on our revenues today is much more modest than what it would have been years ago. So the shift in our revenue mix is helping TIM, but it's not enough to completely zero out the effect. During this period, we received a lot of questions related to concern over liquidity position of the company. Having a strong balance sheet and a conservative approach to indebtedness pay off in this moment. It is true that delinquency is an important risk for the sector. Therefore, at TIM, we took decisions to strengthen even further our position. We have sizable standby facility that we can access at any moment and we took an additional loan at a competitive cost. Another important element comes from the government through the flexibilization of FISTEL and CONDECINE payments. On top of all of that, the business performance in terms of cash generation give us confidence that we have a comfortable position to face the challenges of the moment. Summarizing what I've commented so far. The core of our strategy will not change, so we will push forward with the initiatives and projects we had in our plan. We are adjusting our approach and adapting the company for this new reality in the short term because we will have to operate under a much riskier environment than anticipated. The resilience of the business does not mean we are immune to the crisis. Our initial GDP assumptions are not valid anymore. The duration of the pandemic and the volatility of events only adds more uncertainties, so we expect to have more clarity on impact of COVID-19 on revenues and potential EBITDA versus 2020 guidance only at the end of the second quarter. Meanwhile, we confirm our focus on free cash flow, reiterating the guidance of EBITDA minus CapEx on net revenues of about 20% for 2020. With this, EBITDA minus CapEx should grow year-over-year in the mid-single-digit range. In closing, I hope the sector can learn the benefits of cooperating as we are doing during this pandemic. We are competitors, but we can work together to create positive impact for all of society and generate value for all our customers. Stay well, stay home. [Foreign Language]. Thank you. We will now open the floor for questions. Please, operator.

[Operator Instructions] Mr. Marcelo Santos from JPMorgan would like to make a question.

[Technical Difficulty] charging lower commercial expenses and how much was the normal efficiency gains, maybe you can see that by how much they improved in the last 2 weeks. And the second question is if you could comment a bit also on the postpaid sequential deceleration. The prepaid is clear from COVID, but was the postpaid also driven by COVID? Or are there other factors playing there?

Marcelo, this is Vicente speaking. Thank you for your questions. If you can, I'd like you to repeat your first question because I think it was a little bit cut from our end here, and we just heard the very last part of your question. So if you can repeat the first question, please?

Of course, sorry about that. The question is, if you could help us to understand how much of the margin improvement came from COVID, so lower -- cheaper channels recharge -- to recharge the prepaid, lower commercial expenses on COVID? And how much was from your normal efficiency gains initiatives?

Okay. Thank you again. Those questions will be answered by Pietro. Please, Pietro, proceed.

Yes. Yes, thank you. Let's start from the last one relating to the commercial expenses. On the first quarter, the efficiency mainly come from our efficiency plan because the impact of the COVID-19 was only in the last 2 weeks of March. So it isn't -- it didn't give us an important impact in terms of efficiency. While we see that, for example, in the second quarter or based on the experience of April, it will allow us to offset the part on which we could be hurt on the revenues. Related to the first question that is on postpaid, what is important to remember that last year, we did a price-up at the beginning of February. This year, we should price-up our customer base starting from the beginning, middle of March. But due to the COVID situation, we took the decision to postpone the price-up at the end of the outbreak. What is important to share with you is that, in any case, the communication to the customer base related to the price-up happened. So we communicated to our customer base at -- between the beginning of February and the end of February, the price-up. It will allow us to do the price-up as planned at the end of the outbreak. So in the postpaid, deceleration is also impacted by the comparison with the first quarter of last year when, at the beginning of February, we started the price-up.

Okay. Just a follow-up, by the end of the outbreak, you mean when the mobility restrictions are over like May or June? Or are we talking like much more months beyond when there is no impact of the outbreak anymore?

No, I think that we will be back at a first level of normality. So when the restriction in the mobility will be canceled, it will be possible to apply that. Keep in mind, to be clear, that we are used to apply a more-for-more approach. So it's not just a price-up, it's a price-up adding more giga to our customer base. This is really important because I think that what people are experiencing today during the outbreak is how much is important, the connection, to stay connected with the rest of the world and to communicate with friends and family. So I think that at the end of the outbreak, there will be, let me say, a better feeling with -- towards the telco operator.

Next, Susana Salaru from Itaú would like to make a question.

We have 2 questions. First, on the presentation, you mentioned that you are looking for a partner for TIM Live. Can you elaborate a bit what would be the role of your partner, and what kind of assets are you looking for? That would be our first question. And the second question on infrastructure, if you could let us know how much the traffic changed before the COVID crisis and during the COVID crisis, if the traffic increase are stable, or if you anticipate additional trust increase in data.

Susana, this is Vicente again, so your first question, I will pass to Mr. Adrian Calaza, our CFO. And the second one will be answered by Leonardo De Capdeville, our CTIO.

Susana, yes, you know that we are pretty happy with the results of our ultra-Broadband business unit. So TIM Live, we grew significantly during this last year. We're maintaining this almost 30% growth in terms of revenues, because you know very well that there are a lot of opportunities in order to service with ultra-broadband in the country. And the penetration of fiber, it's still below 20%. So we believe a lot of this business, especially for us, that it's almost everything greenfield. So the contribution to growth of TIM Live business is extremely important. But even though today, these revenues account only for slightly above 3% of our total revenues of the company. At the same time, this business today means a significant effort in terms of CapEx because almost 10% of our CapEx today is dedicated to the deployment of the FTTH. So that's the main reason that we are trying to apply the concept that Pietro brings of smart Capex. So we study a lot in the last year, especially. So we decided to go to this project of creating an infrastructure vehicle, where we will allocate all these secondary assets of last mile and installation in order to search for a partner that will help us to increase the deployment. So the main goal that we are presenting with this new project is to increase the deployment of FTTH going forward because we believe in this business. This vehicle will be pure infrastructure. It won't be exclusive for us after a period of time. And what we are trying to find is the right partner in order to allow us to increase infrastructure also because there is a need of infrastructure for everybody. So as we designed and as we showed in our planned communication, we will be -- we are ready on the market [ some ] phase. We have, as Pietro mentioned, we have signed a lot of NDAs. It was more than 20. We are very happy with the -- so far with this project. Hopefully, we can close the project by the end of this year. Hope I answered your first question, and then I leave the floor to Leo for the second one.

Susana, let's see, from mobile perspective, we can say that the traffic is almost flat, but we see a huge change in terms of profile. And I define data in 3 different ways. The first is geographically, we can see data of mobile traffic move from the traditional, let's say, downtown and commercial areas to residential areas. The second one is a deep change in terms of the usage. We can see that the apps that now we are most seeing the increase is mostly related with the streaming and some video conference apps. This streaming we can appoint at Netflix and YouTube. And we can see the reducing of the mobility apps like Waze, of course, and others like social network. The third change is we can see that there are some kind of offload for the WiFi. So the people that has WiFi at home is using more data. But in the other side, we can see that who depends from the mobile-only connection has been using data in more intensive way. So we felt this change, let's say, we can see that we are compensated. The traffic that is moved to WiFi with the increase of also the user for people that has just mobile connection. So overall, we can say that it is flat in a volume. We can see the increase in our voice usage on mobile side. And in a fixed, we see are increasingly for around 30 percentage of usage comparing the period before and after the COVID isolation -- social isolation. So overall, we can see that all the adjustment that we are promoting on our network is, let's say, handling data and keeping the quality, what is the most important. So the big pressure now is not just the volume on mobile, but is the changing of the usage. And what we are seeing in, let's say, very good way, is that the network is performing very well over this new challenge of profile changing.

Mr. Fred Mendes from Bradesco would like to make a question.

I have 2 questions as well. The first one, I think is in the line of what Marcelo asked in the beginning. But just to understand, when I look here at the presentation in the very first slide, you mentioned that if it was not for COVID, you'd be in line with the target for the year and then 3%. So I was just wondering if the impact really from COVID on this one is 1.3% on this quarter, I mean, give or take. I do understand that you postponed the price increase, but still, it looks like a significant impact for basically 15 days, all right? This will be the first one. And then my second one on the OpEx front, when I look at the G&A, it looks like that you increased your IT team to make the company more digital, more projects along this line. So just wondering if you can give us a visibility of the financial impact on SG&A. If this is correct, the statement, and about these projects as well.

Fred, this is Vicente again. Thank you for your questions. First question will be answered by Pietro on the revenue side. And then related to the cost, G&A, I'll pass to Adrian Calaza, our CFO.

Fred, I think that the impact in terms of revenues that we explained in the first chart of our presentation can be easily understand, if you remember that on an average basis, the 30% of our revenues come from prepaid. As we clearly stated in the last 2 weeks of March, we have an impact of the 25% so if you transform the percentage in absolute value, the 1.2% of difference -- 1.3%, is exactly the impact on the prepaid that was around BRL 40 million, BRL 50 million. Again, if you get the revenues of prepaid on a quarterly basis, if you divide it by 3 to have 1 month, you divide it by 2 to have the last 2 weeks and you apply the 30%, the number that come out is this BRL 40 million, BRL 50 million that is approximately what is missing as related to the COVID-19. We didn't put in this calculation to do something very easy, the fact that we didn't apply the price-up. So again, if we shouldn't have been impacted by COVID, our performance perhaps could be much better than 3%, as we mentioned in the first chart. Then I leave the stage to Adrian about the digital, but I would like to highlight that sometimes this kind of events allow us to understand that we can take much more challenges in the process of the digitalization of the company. And I think that this is a lessons learned that we are applying. And at the end of this COVID, we will have new lines of efficiency in our plan, one of which will be digital working. But again, now, I leave the stage to Adrian to elaborate.

Yes. Thank you, Pietro. And Fred, regarding the G&A costs, I noticed that this could be important questions coming from you. The fact is that G&A is -- because it's a mix of different costs. Clearly, IT maintenance is one of it. But I repeat, it's IT maintenance, what's happening? Our company, as Pietro mentioned and as we've been mentioning a lot in the last years, is becoming much more digital. It's not that we started to be digital now because of COVID, we've been working since a long period of time on this area. And of course, our industry has been switching a lot of importance from network also to the IT side. So of course, our infrastructure in terms of network is extremely important. But today, the industry and ourselves, especially, we are much more intense in terms of IT. So it's a kind of logic issue that you will also have additional impact in terms of maintenance of IT. If you saw what happened in the last years, we reduced significantly the OpEx on network. But at the same time, we did a lot of efforts on CapEx on the IT side. Well, of course, these IT projects or infrastructure needs to be maintained. So you will find additional maintenance going there. G&A has also an additional impact such as consultancies or such of different issues that also can hit specifically in some quarters and other. But you should expect some additional -- or some of this level going forward because the grouping of accounts that we do inside G&A also includes IT. Anyway, G&A accounts for 7% of our total OpEx. The growth or the decrease on this line could contribute less than 1% in each quarter. But again, this shows the importance for us of the IT infrastructure.

Ms. Maria Tereza Azevedo from Santander would like to make a question.

My first question is to Leo on the CapEx flexibility. How much do you think you can cut the CapEx in 2020 depending on how long this -- the economy headwind grow? And how relevant can the network agreement with Vivo be in terms of OpEx, but also especially in terms of CapEx savings? Is it going to add flexibility to your CapEx already in 2020?

Maria Tereza, let's see. In fact, we have a note in our plan in terms of infrastructure, how we are planning to get, let's say, a structural solution for the future. What can happen in 2020, and again, I guess that we analyze that weekly because the environment can change very significantly, is how we'll -- let's say, we'll move all the logistic chain. So when we're talking about the CapEx, we have to understand that we're dependent on our suppliers that depend not for, let's say, local manufacturers but sometimes abroad. So we needed to understand how it will be worked during this period of the COVID and after that. At the same time, we are seeing, as the previous question, that the traffic stopped the explosion growth and now is more, let's say, flat. We need to understand how will be the economic impact after the COVID crisis because probably it, let's say, bring some kind of change in terms of growth. So we have discussed every week about whether this plan can be keep or can be changed. So I guess that is uncertainty right now to talking about what happen on the next month because the environment is not so, let's say, clear. But again, what we are seeing is there is some kind of -- the deployment can be postponed or have this kind of impact from the supply chain. But again, we are talking about something that happened 5 weeks ago, so it's very difficult to demand that. The second point about Vivo, we are waiting for the final answer from the regulator and the CADE. And after that, we really believe that we can push this project because, again, the opportunity for reducing not just the CapEx but mainly the OpEx is very interesting for the both side. So again, it is part of our smart CapEx approach, we are keeping that on our [ north ] and we hope that after this official, let's say, answer, we can start the project. And it will take, let's say, a very important piece on our second half deployment.

Perfect. And my follow-up question is on the M&A strategy. If you guys can comment a bit on your initial views on the timing, how the due diligence process is working, if you have any funding strategy and expected synergies that you can share with us as of now.

Thank you, Maria. This is Vicente again. I will pass the floor to Mr. Pietro Labriola, and then Mr. Adrian can also give some of his views. Pietro, please.

Thank you. Maria, you very well understand that we are covered by an NDA, so we cannot disclose too much. But I think that also in your sentence, there were some key elements. We are proceeding with a due diligence, so it means that the things are moving on. And I think that this is the most important fact. We imagine that if we proceed and what we find during the due diligence is what we were expected, in the following month, we can think that we can move forward. But again, I think the most important element is that we are proceeding with due diligence. Before to leave the stage to Adrian, just to complement what Leo talked before related to the CapEx, I would like to highlight that, first of all, the MOU with Vivo is not just a way to do efficiency between 2 telco players in Brazil. That is an important sign for all the market that there are rooms to cooperate, to put and to do -- to spend money, CapEx in a more efficient and intelligent way, where there's no need to compete. And I think that we will be -- everybody open to further players that want to participate to this kind of approach in the future, giving a sign of better maturity of the market. The second, that at the beginning of this year, we completed a bid to choose our supplier for the mobile network that were finalized at the beginning of April. So I think that we'll have further saving that will come out from this important bid that was announced also by Mr. Gubitosi during the call of our main shareholder. Now I leave the stage to Adrian.

Thank you, Pietro. Maria, still regarding your first question about CapEx and if we could -- will be able to cut CapEx this year, just let me complement on one thing. Our CapEx plan is not a yearly CapEx plan because it could be extremely difficult to project your infrastructure development only in 1 year. Our CapEx plan is of 3 years. And on top of what Leo and Pietro mentioned, this is something that is extremely important. So if we need to postpone something, we can do it. It's not that the end of the infrastructure plan is in the 31st of December of 2020. So it's important. Anyway, as Pietro mentioned, in his speech, our target is our EBITDA minus CapEx, and we know how to work in terms of efficiency. On the M&A side, regarding -- I think that Pietro answered very well the question. The important thing here is that we are doing the due diligence of Oi mobile assets, and it's not a minor issue. This situation today of everything and everyone being virtual, it's not creating any issue. As a matter of fact the data room due diligence is vehicle. So we are managing the things very well. We'll see. We're analyzing information, and we'll see in terms of timing what could be in the following months to have some more news, okay?

Mr. Rodrigo Villanueva from Bank of America would like to make a question.

I have a couple of questions. The first one is related to the potential savings in commercial activity. I was wondering if you could please quantify any potential savings that you could achieve. I don't know if in the second quarter or in the -- I mean in other quarters remaining of the year, given the coronavirus lockdown and also the potential recession. And the second question is related to bad debt. I know that you have taken several measures already in order to keep bad debt under strict control. However, the macroeconomic environment that we are facing today is completely different than we have seen in the past. And so I was wondering if there are some measures to prevent bad debt to materially increase that you are already taking as we speak.

Thank you, Rodrigo. So both questions are related to OpEx on commercial savings, potential commercial savings and then bad debt. So I will leave the answers to Pietro and Adrian, so they can elaborate a bit on both topics.

Rodrigo, related to the potential savings on the commercial area, I think that what we can expect are material saving in the period of this kind of lockdown. Also we cannot say that in Brazil, we are in lockdown like Italy. But in any case, you can imagine for example, adding new acquisition, the saving on the acquisition cost is more or less 100% on the physical channel. And you know better than me that on the digital, the cost is much lower. We are receiving there something close between minus 10% and minus 20% of costs to the call center, and so this will be reduced. But in the meantime, we're experiencing an increase of the use of the digital application. Advertising, it's clear that in this period, if you cannot call people to come in the shops, it makes some sense to spend all the money of the budget that you have on advertising. So also in this area, we are having a significant reduction. So I think that these are material settings that can allow us to offset the risk that we have or mainly offset the risk that we have on the -- first on the top line. Related to the bad debt, we must be satisfied because with the exception of what can happen now with the COVID, we promised and we talked to all the market that we were putting under control this area of cost for our internal procedure. And this is something we were delivering. Now going ahead, it's difficult to say what we can expect. Also because in the month of April, we had the same situation. It seems that the customer stopped, reduced the payment in the first 17 days from the expiry date of the bill, and then recovered. It's like if everybody understood that perhaps telecommunication now is in the short list of the things you cannot miss. And so it's better to pay to avoid to stay without. Now if Adrian want, he can better elaborate and complement what I told you.

Yes, Rodrigo. I think that Pietro answered perfectly well. Only in the first question, if I can put something on top of that is that, of course, there will be significant savings on the commercial costs. But at the same time, we are also considering a lot the medium and long term. Because all the commercial costs, a portion of those, are related to our distribution channels. And most of these distributors are partners and some of them are in exclusivity. So everything we are doing, it's also considering not only this quarter or the next quarter, but also in the medium and long term. So this is extremely important because we are talking of our strategy going forward. On the second side of the bad debt, I think that Pietro mentioned everything. It was extremely important in these days what happens with a lot of initiatives in the Congress, in some states, of declaring our service as an essential service and that this service cannot be suspended if the customer wasn't paying. We managed to solve this issue. It was extremely important the resolution against the state of Sao Paulo in this area. So we are -- it's not that we are optimistic with the situation. But we think that the impact, if this doesn't extend significantly, shouldn't be important. Anyway, it's something that, as you know, we monitor every day. We have every day the collection numbers. But again, the good thing here is that all we've been doing last year in terms of systems, in terms of processes on the collection side, put us in a different situation.

Sorry, if I add one point that I think can add to answer again to you, Rodrigo, to Maria Tereza and to Fred. I think that Adrian had stated very well, we are not disposed to shut down cost and CapEx that cannot be future of our company. What we are doing, we are managing in a clever way our cost and CapEx base, remembering that we will come out from this outbreak and we will continue to compete and grow. So to avoid any kind of misunderstanding, we are not cutting costs or CapEx that can hurt us in the medium, long term.

Mr. Carlos Sequeira from BTG Pactual would like to make a question.

My question is a follow-up on the ultra-broadband strategy, please, and also trying to clarify. So there are more than 60,000 -- 6,000 ISPs in the country and other operators are doing deals with them now trying to work on franchise models and some type of partnerships. Are you looking at that possibility, too, under this strategy? Or this vehicle that you are putting together will be funded by a partner and that money would allow for the fast deployment of fiber, and then this partner will be a shareholder in this new vehicle?

Thank you, Carlos. This question, I'll pass to Adrian as well. So Adrian, if you can elaborate a little bit on TIM Live project, please?

Carlos, no, clearly, it's the second alternative. We know that, yes, there are a lot of ISPs -- small ISPs in the country. Their approach is different than ours. I won't say that it's worse or better, it's different. We feel more comfortable of growing on greenfield. Because as we were saying before, there are still a lot of opportunities on ultra-broadband in the country. And we think that there is a lack of infrastructure. So if this vehicle could work initially for us, but then without this exclusivity, it could be much more efficient, but always oriented to our growth tactics and strategy. So yes, this partner should help us to increase the deployment of fiber. And probably also with higher focus, so -- in terms of deployment of the last mile. So it's our design of this growth in terms of fiber. And we think that it could be extremely interesting in terms of infrastructure. The fact that we signed a lot of NDAs, more than 20 as we mentioned before, indicates that probably we are in the right direction.

Without any more questions from analysts, we will now start the Q&A section with the press and individual investors in English.

So the first question comes from Gabriela from Reuters. And she is asking, what is the percentage of the impact from COVID to the prepaid recharge? I think we already addressed that during the Q&A with analysts. But Pietro, if you can maybe elaborate a little bit more, I think it will help Gabriela. Please, Pietro?

Yes. Thank you, Gabriela. As we stated back, which is also to try to understand what we think was the impact there, in the last 2 weeks of March, we experienced a reduction of the recharges year-over-year at around 25%. I think that, perhaps, also there was a kind of, let me say, I don't want to be misunderstood, panic mode that put people on a too much safe side. During the month of April, going ahead, we experience an improvement. So we reach something close to 20%. And between the end of April and the beginning of May, this reduction is further improving, so I think that people are coming back to normality. In the meantime, I think that there were also 2 behaviors that acted this kind of situation. The first one is a higher use of the WiFi, because everybody stayed at home or in -- are trying to exploit more Wi-Fi. And the second fact that some of the traditional channel were shut down, and so it was more difficult for a part of our customer base to recharge. In the meantime, it pushed a lot also our same customer base to move towards digital channels that are much more efficient. What we think that in the medium, long term, what will happen that all the people that are experiencing digital today, we think that will continue to be digital when we'll be out from the COVID situation. And this will be a real good news for us and for the system. Because a more digital system, I mean, generally speaking, economic system, it's much more efficient. And it will open opportunity for new way of working and new business model.

Okay. The second question that we received from journalist comes from Rodrigo Carro from Valor newspaper and is related to the progression in the negotiation for the acquisition of service of mobile Oi. Again, I think we addressed it to a certain extent, this question, but I'll ask Pietro to give some additional words in this topic as well.

Rodrigo, as I mentioned before, I think that the real good news is that, finally, we were able to access that room and to proceed with due diligence. Until now, there were a lot of discussion, but nothing was materialized. The fact that finally, thanks also to the collaboration of Oi, we were able to enter. We are studying the element. And as I stated before, if everything proceeds, we think that in the next month we can do the next move if everything happens in the right way.

Thank you, Pietro. Now we have a question from an individual investor, [ Albert Suarez ]. And maintaining the same topic related to M&A, he says if the COVID crisis, to a certain extent, has changed our interest in acquiring the mobile part of Oi.

No, absolutely not, also because what we told, we do not expect that COVID would be forever. It's just a window, a strategic window in our life experience, but it's something that is going to end, that will be finished. And when you manage a company and you want to create value for your shareholders, you have to look always in the medium, long term. And in the medium, long term, the M&A process makes a lot of sense for us and for all the telco market in Brazil, and I think also for the country of Brazil. Three strong player can allow to Brazil to be a better place and to be a more digital country.

Thank you again, Pietro. We have the last question from an individual investors from [ Rodrigo Patinato ], and he asked about the perspective for TIM for 5G in Brazil and if we have any preference in terms of the technology to be adopted in the rollout of 5G. I think Pietro can elaborate a little bit on this topic and then Leo Capdeville, our CTIO, as well. So guys, please go ahead.

[ Rodrigo ], thanks for the question. And I think that I will do no mistake if I report what all the telco players are telling to the market. 5G at this stage is more a choice for the economic system and not an opportunity for the telco player. What I mean, we invest and we put money on the 4G, we are still exploiting the 4G. I read yesterday an interview of Paulo Cesar Teixeira of Claro that was declaring exactly the same. Today, they are investing a lot on 4.5G, but there aren't enough handset to exploit that. So today, 5G is a technology that can open new business model. And that can allow to Brazil, to the economic system of Brazil, to develop new business model to create new jobs, new opportunities. While for the telco player, the risk is that it's not directly something that can generate delta revenues. So for this reason, as we stated constantly, as telco player we can follow what can be an ad for the country if we will have an option that will be not expansion and we can take commitment about the coverage. But what is important at this stage of technology, I think that 5G is more an element important for the economic system that's not for all the telco players. Now I'll leave the stage to Leo to elaborate more on the technology side.

Thank you, Pietro. Don't forget that one important statement that we did was our contribution for Consulta Pública from Anatel for the 5G auction. And we start exactly in the line that Pietro mentioned. In a situation when we bring again one report that was done by Ministério da Economia, Economy Minister, about what can be the impact for the general economy on the country. And it's talking about BRL 243 billion. And let's say, the lower part of that is related with the telco operators, but all the economy can be impacted positively about that. Talking about technology, we have, let's say, talked that in the last 3 years, all the investment that we have moved on the network is already thinking about the future and, let's say, preparing the network for the 5G generation. We have to remember that we did last year, 3 different lives pilot in Brazil in 3 different cities with the 3 different technology about how the 5G can work and how our network is prepared to deal with that. So if we add this, if the new part of the core virtualization, the new data center, we are, let's say, very positive that we are in the direction to prepare the network for the 5G. And we are -- deal with all the technologies. So we are preparing our network to work with independently what kind of technology we have to face on the future. So I guess that it can be a very good opportunity, again, not just for us but for the country.

Thank you, Leo. So now we have some other questions. I will put them together as they are all related to our partnership, the partnership that we are looking for in the TIM Live project. So the questions come from Bruno, from TELETIME and from Anna Lobo, Convergência Digital. Basically, what they would like to understand is if we are not following the path of franchisees in the model that we are studying. So this is the first part of the question. And the second one is about the exclusivity of a potential agreement that we would have in this project. So I will leave that questions to Adrian. I think he addressed those 2 points as well. But maybe, Adrian, if you can clarify a bit on the franchisee topic and as well as exclusivity or not of this potential project.

Okay. Thank you, Vicente. Regarding the exclusivity, clearly, this will be an infrastructure vehicle that we will create. And of course, we will -- we would like to have an initial exclusivity period in terms of the use of this infrastructure. That at the end, we are interested in the growth also of this vehicle, so it's important that it would be also efficient in the usage of the fiber. You know that one operator only uses a small portion of the capacity over fiber. So at the end, it will be, of course, an initial period of exclusivity in terms of the usage of the infrastructure. But the purpose is that after this period, we'll be open to other operators. So I think this is the most important issue. On our side, this is the most correct approach in order to increase the infrastructure.

Thank you, Adrian. So now please, operator, we can proceed.

Ladies and gentlemen, without any more questions, I am returning to Mr. Pietro Labriola for his final remarks. Please, Mr. Pietro, you may proceed.

[Audio Gap] in Brazil has a very solid fundamentals to face these adversities. Focus, innovation and agility will be key to making the right decision to prepare the company for the reopening of the economy. We will be ready to take full advantage of the recovery independent of the shape it will take. Until then, we will maintain our focus on execution. I would like to thank you, the dedication and commitment of our team who are overcoming many challenges to make sure we serve the country in the best way during this moment of hardship. Together, we can do more. [Foreign Language]. Thank you once again for participating in our conference call. Stay safe and healthy. I hope we can virtually meet soon in the coming events we'll be doing with the financial market. See you soon.

We conclude the first quarter of 2020 conference call of TIM Participações. Your line can be disconnected from now on. For further information and details of the company, please access our website, ri.tim.com.br. Thank you.