Corporate Presentationstatic.telefonica.aatb.com.br/Arquivos/Download/... · 5-3.2 % transformation of fixed revenue mix underway, benefited by outperforming fiber-related revenues

Telefônica Brasil S.A.Investor Relations

CorporatePresentation

June, 2019

2

2019: MAIN MESSAGES TO THE MARKET

Revenues

EBITDA

Cash

Gradual revenue improvement driven by price increases and expressive fiber growth

Continued EBITDA expansion as a result of efficient cost control and digitalization

Double-digit growth of FCF even with higher investments benefited by tax gains

Unmatched shareholder remuneration, producing one of the highest dividend yields in BrazilRemuneration

3

REMARKABLE UBB OPPORTUNITY IN BRAZIL, AS PENETRATION IS STILL

LOW AND DEMAND CONTINUES TO RISE

Penetration of UBB¹ in Brazil remains very low… …especially in smaller cities, demonstrating there is a lot of space for the opportunity to be captured

30

61

22

9

Potential Market² Connected

with BB

Connected

with UBB¹

Not

Connected

1- UBB: Speeds above 34 Mbps (FTTH, FTTC and Cable). 2- ABC Household and B2B.

Penetration

over Potential

Market

15%

UBB in Brazilian CitiesUBB Penetration

(Households)

23%

3%

13%

1%

UBB Growth(Households)

70%

155%

123%

386%

43 cities• > 500 thousand pop.

• 21.7 MM households

• 14.6 MM accesses

268 cities• 100 to 500 thousand pop.

• 18.2 MM households

• 9.7 MM accesses

352 cities• 50 a 100 thousand pop.

• 8.0 MM households

• 2.6 MM accesses

4,907 cities• < 50 thousand pop.

• 21.5 MM households

• 4.3 MM accesses

4

ACCELERATED FIBER EXPANSION, LAUNCHING 9 NEW CITIES IN 1Q19 AND

REACHING NEW REGIONS OF BRAZIL

Strong presence throughout Brazil, already delivering >300k HPs and 9 new cities in 1Q19

FTTH Cities FTTH HPs Million

Cities launched in 1Q19

› Boituva/SP

› Cabedelo/PB

› Catanduva/SP

› Mafra/SC

› Santa Maria/RS

› São Bento do Sul/SC

› São José do Rio Pardo/SP

› Varginha/MG

› Vitória/ES

RS

SC

PR

SPRJ

MGES

BA

MS

GO

MT

ROAC

AM

RR

PA

AP

MA

PI

CE RN

PEAL

SE

PB

TO

DF

Expanding our presence to northern regions of Brazil, entering untapped high-potential capitals

121130

+9

2018 1Q19

8.79.0

+0.3

2018 1Q19Teresina/PI

Pop.: 0.8M

Manaus/AMPop.: 1.8M

Belém/PAPop.: 1.5M

São Luís/MAPop.: 1.0M

5

-3.2%

TRANSFORMATION OF FIXED REVENUE MIX UNDERWAY, BENEFITED

BY OUTPERFORMING FIBER-RELATED REVENUES

Weight over Fixed Revenues

6.3%8.0% 8.2%

1Q17 1Q18 1Q19

64%52% 57%

FTTH + IPTV revenues already representing 16.3% of fixed revenues, with a CAGR 17-19 of 55.2%

Fixed Revenues¹ R$ Million

1,7261,409

1,2311,386

471471

588 616

4,0243,894

1Q18 1Q19

Voice and Accesses Broadband

Pay TV Data and IT

YoY

4.8%

12.6%

-18.4%

0.0%

Transforming the fixed revenue mix

Fixed Revenues ex-Voice YoY%

FTTH Revenue R$ million and YoY% IPTV Revenue R$ million and YoY%

182292

437

1Q17 1Q18 1Q19

50%

1- The chart’s breakdown does not disclose other services revenues.

82138

199

1Q17 1Q18 1Q19

45%

6

139

227251

Jan/19 Feb/19 Mar/19

IN MOBILE, RATIONAL PRICING STRATEGY LEADING TO ARPU INCREASE,

WITH LIMITED IMPACT ON CHURN

Undisputed mobile leadership with expanding market share

Postpaid

Market Share

40.1%

30.5%

31.8%32.1%

1Q17 1Q18 1Q19

…as an isolated effect of the price increase carried out for hybrid customers…

9% 11%

20%

Pure Postpaid Hybrid Prepaid

…that contributed to an ARPU expansion with limited impact on churn

28.4 29.5

1Q18 1Q19

1.71% 1.74%

2018 1Q19

3.8%

Mobile Market Share

Postpaid Net Adds Thousand

Price increase of entry plans %

Total ARPU R$ per month Postpaid Churn ex-M2M

September/18December/18

March and

April/19¹

1- In March/19, Vivo increased prices of the 15-day prepaid offers in 20%, while the same increase was performed for the 7-day prepaid offers in some regions in April/19.

Postpaid Net

Adds in 1Q19

617k

In 1Q19, we had a softer volume of postpaid net adds, with recent improving trends…

7

IMPROVED MOBILE REVENUES GROWTH WITH RECOVERING MSR AND

CONTINUED EXPANSION OF HANDSET SALES

Mobile Revenues¹ R$ Million

1.6%

MSR²

YoY

55.1%

8.0%

-20.8%

MSR improving over the last quarters with strong postpaid

growth

7.5%

5.4%

8.0%

3Q18 4Q18 1Q19

Human Postpaid Revenue Growth YoY%

4.7%

-1.0%0.0%

1.6%

3Q18 4Q18 1Q19

Mobile Service Revenue Growth YoY%

1- The chart’s breakdown does not disclose other services revenues. 2- Mobile service revenues.

1,431 1,133

4,948 5,345

386 5986,765

7,081

1Q18 1Q19

Voice Data and Digital Services Handsets

8

DIGITALIZATION AND SMART CAPEX ALLOCATION TO CONTINUE TO

IMPROVE EBITDA AND OPCF MARGINS

36%already

captured

R$1.6bnannual Opex

savings by 2021¹ arising from digitalization

EBITDA expansion due to cost control through digitalization and simplification

1- In the 2018-2021 period.

Recurring Costs Performance 1Q19 vs. 1Q16

12.3%

-1.2%

Inflation Recurring Costs

EBITDA Growth %Real and Consensus

5.5%4.3% 5.1%

2018 2019C 2020C

Digitalization Development

7.7 8.0 8.0

0.5 1.0 1.08.2 9.0 9.0

2018 2019E 2020E

Base Capex Fiber Acceleration Project

CapexR$ billion

Investments focused on cutting-edge technologies, improving returns and customer experience

Smart Capex allocation led to savings in 2018

Reducing investments in legacy technologies

(2G, 3G, Copper and DTH)

R$7 billion in 3 years to be invested in FTTH expansion

Robust investment in 4G/4.5G focused on enhancing quality

R$3 billion in 3 years to be invested in transforming our IT

platform

9

IN 2018, WE REGISTERED A NEW TAX ASSET OF R$6.2 BN RELATED TO

CONTRIBUTIONS OF PIS/COFINS OVER ICMS MADE BY TELESP AND VIVO

Impact on Income Statement in 2Q and

3Q supporting relevant additional profit

in 2018

Record Net Income registered in 2018 producing unique level of remuneration

Note: numbers shown above do not consider other one-offs registered in 2Q18 and 3Q18 which impacted results of these quarters. Considering these one-offs, the net effect of all one-offs on net income would be of R$3.6 billion.

Tax assets compensating payments of federal taxes during the next years generating an incremental

source of cash while allowing for stronger shareholder remuneration

Cash effect arising from Federal Tax

credits (approx. R$2 billion/year)

Other processes still waiting for final

decisions could generate extra gains in

the future (R$1.7 bn to R$2.2 bn)

EBITDA

Financial

Result

Tax Asset (Balance Sheet)

Impact from decisions for TELESP and Vivo on income statement and balance sheet

2.0

1.8

3.8

1.4

1.0

2.4

3.4

2.8

6.2

2Q18: TELESP (2003-2014)

3Q18: Vivo (2004-2013)

TotalR$ billion

10

STRONG CASH FLOW GROWTH BOOSTED BY CASH TAX GAINS LEADING

TO HIGH LEVEL OF SHAREHOLDER REMUNERATION

Record Net Income registered in 2018 allowing for unmatchable remuneration

Free Cash Flow expanding double-digit driven by solid operating performance and tax gains

Free Cash Flow From Business Activities R$ million

5,739 6,9201,165

2017 2018 1Q19

Growth YoY

+16%

FCF to be boosted by approx. R$2 billion per year going

forward due to tax assets registered in 2Q and 3Q18

Cash tax gains represent approx. 8% of current market cap

Extra proceeds more than compensate additional Capex

envelope defined for fiber acceleration project (2018-20)

4,609

8,9281,342

2017 2018 1Q19

Growth YoY

+22%

Net Income R$ million

Net Income almost doubled in 2018, driven by

continuous cost control, solid EBITDA growth, and

the non-recurring effects in the year

R$7.0 billion of dividends and IOC declared in

2018, plus R$1.3 billion in IOC already declared in

2019

3.3 4.1 4.6

7.0

2015 2016 2017 2018

R$/share (PN³)

Payment of R$ 7.0 billion in dividends + IOC¹

2019 remuneration is 52% higher YoY

Payment Date² Gross Amount

R$ 3.2 bn

R$ 3.8 bn

R$ 1.95

R$ 2.33

Aug 20, 2019

Dec 17, 2019

R$ 4.28 R$ 7.0 bnTotal

Dividends and IOC deliberations R$ Billion

+52.3%

FCF 2018

R$ 6.9 bn

R$ 1.3 billion of Interest on Capital already declared based on 2019 financial statements

RECORD DISTRIBUTION OF DIVIDENDS AND IOC IN 2018, BOOSTED BY

STRONG NET INCOME AND CASH GENERATION

+52.3%

Schedule of Payments

111- Based on 2018 net income. To be approved by the General Shareholders Meeting. 2- The Company’s Executive Board decided that the dividends and IOC will be paid out on Aug 20, 2019 and Dec 17,

2019 if ratified by the General Shareholders’ Meeting. 3- Gross amount per ON: R$3.89.

+55 11 3430.3687

[email protected] | www.telefonica.com.br/ir

For further information:

Investor Relations

1Q19 RESULTS COMPARATIVE

Total Revenues 1Q19 YoY% Recurring Costs 1Q19 YoY%

Mobile Revenue 1Q19 YoY% Recurring EBITDA 1Q19 YoY%

1.7% 1.3% 1.7%

-9.5%

Fixed Revenues (YoY%)

-3.2% -2.0% +11.6%

11.0 8.9 4.2R$ billion

4.7% 7.6% 1.2%

-3.8%

Mobile Service Revenue (YoY%)

+1.6% +6.3% +0.4%

7.1 3.3 4.0R$ billion

2.9% 4.3% 5.3%

-20,9%

Recurring EBITDA Margin

35.6% 33.1% 35.7%

3.9 3.0 1.5R$ billion

1.1%

-0.1% -0.2% -5.1%

Costs ex-COGS

-2.9% N/A -0.9%

7.1 6.0 2.7R$ billion

13

5.1

-14.6%

1.8

-3.9%

3.9

-5.4%

1.2

24.4%

14

DETAILED 1Q19 MOBILE MARKET

23.4%

36.9%

13.3%

17.8%

Vivo Claro TIM Oi

41.0

24.5 20.611.0

55.8%

43.4%37.4%

29.1%

-8.0%

2.0%

12.0%

22.0%

32.0%

42.0%

52.0%

62.0%

Vivo Claro TIM Oi

18.029.5 22.8 16.1

Share of postpaid net adds 1Q19 Postpaid customers (million) and mix of postpaid customers

Mobile ARPU 1Q19 R$

Even so, we remain as undisputed leaders in postpaid,

with the best mix and ARPU of the industry

Lower level of net adds in 1Q19 due to price

increases, especially in hybrid

15

1Q19 HIGHLIGHTS

HIGHLIGHTS

1Q19 1Q18 ∆% YoY 1Q19 1Q18 ∆% YoY

NET OPERATING REVENUES 10,975 10,789 1.7 10,975 10,789 1.7

Net Mobile Revenues 7,081 6,765 4.7 7,081 6,765 4.7

Net Handsets Revenues 598 386 55.1 598 386 55.1

Net Fixed Revenues 3,894 4,024 (3.2) 3,894 4,024 (3.2)

OPERATING COSTS (7,072) (6,995) 1.1 (6,614) (6,995) (5.4)

EBITDA 3,903 3,795 2.9 4,360 3,795 14.9

EBITDA MARGIN 35.6% 35.2% 0.4 p.p. 39.7% 35.2% 4.6 p.p.

NET INCOME 1,387 1,098 26.3 1,342 1,098 22.2

CAPEX 1,696 1,547 9.6 1,696 1,547 9.6

OPERATING CASH FLOW (EBITDA - CAPEX) 2,207 2,247 (1.8) 2,665 2,247 18.6

TOTAL SUBSCRIBERS (THOUSAND) 94,994 97,812 (2.9) 94,994 97,812 (2.9)

Mobile Subscribers 73,529 75,098 (2.1) 73,529 75,098 (2.1)

Fixed Subscribers 21,465 22,714 (5.5) 21,465 22,714 (5.5)

Consolidated in R$ millionPro forma (ex-IFRS 16)¹ Reported

16

1Q19 MOBILE AND FIXED REVENUES

NET OPERATING REVENUES | MOBILE SERVICES

NET OPERATING MOBILE REVENUES 7,081 6,765 4.7 7,048 0.5

Net Mobile Service Revenues 6,482 6,379 1.6 6,480 0.0

Data and Digital Services 5,345 4,948 8.0 5,152 3.7

Voice 1,133 1,431 (20.8) 1,327 (14.7)

Others 5 1 702.4 1 334.6

Net Handset Revenues 598 386 55.1 567 5.5

0

NET OPERATING REVENUES | FIXED SERVICES

NET OPERATING FIXED REVENUES 3,894 4,024 (3.2) 4,038 (3.6)

Broadband6 1,386 1,231 12.6 1,409 (1.6)

FTTH 437 292 49.6 426 2.6

Other Technologies 949 939 1.1 983 (3.5)

Pay TV 471 471 0.0 494 (4.5)

IPTV 199 138 45.1 200 (0.1)

Other Technologies 272 334 (18.5) 294 (7.5)

Corporate Data and IT 616 588 4.8 618 (0.2)

Fixed Voice 1,409 1,726 (18.4) 1,502 (6.2)

Others 12 7 61.9 15 (19.6)

Consolidated in R$ million

Consolidated in R$ million

∆% QoQ

1Q19 1Q18 ∆% YoY 4Q18 ∆% QoQ

1Q18 ∆% YoY 4Q181Q19

17

1Q19 MOBILE OPERATING

OPERATING PERFORMANCE | MOBILE SERVICES

Thousand 1Q19 1Q18 ∆% YoY 4Q18 ∆% QoQ

TOTAL SUBSCRIBERS 73,529 75,098 (2.1) 73,160 0.5

Postpaid 41,023 37,499 9.4 40,406 1.5

M2M 8,684 6,674 30.1 8,212 5.7

Prepaid 32,506 37,599 (13.5) 32,754 (0.8)

MARKET SHARE 32.1% 31.8% 0.3 p.p. 31.9% 0.2 p.p.

Postpaid 40.1% 41.4% (1.3) p.p. 40.6% (0.4) p.p.

Prepaid 25.7% 25.9% (0.2) p.p. 25.3% 0.4 p.p.

ARPU (R$/month)2 29.5 28.4 3.8 29.3 0.7

Postpaid (Human) 53.2 52.4 1.6 52.0 2.2

M2M 2.9 2.6 10.4 2.7 8.9

Prepaid 12.1 12.9 (6.2) 12.6 (4.5)

MONTHLY CHURN 3.2% 3.1% 0.1 p.p. 4.1% (0.9) p.p.

Postpaid (ex-M2M) 1.7% 1.6% 0.1 p.p. 1.7% 0.1 p.p.

Prepaid 5.0% 4.5% 0.5 p.p. 6.8% (1.8) p.p.

18

1Q19 FIXED OPERATING

OPERATING PERFORMANCE | FIXED SERVICES

Thousand 1Q19 1Q18 ∆% YoY 4Q18 ∆% QoQ

TOTAL SUBSCRIBERS 21,465 22,714 (5.5) 22,029 (2.6)

Fixed Broadband 7,386 7,443 (0.8) 7,458 (1.0)

FTTH 2,034 1,412 44.1 1,893 7.5

Other Technologies 5,352 6,031 (11.3) 5,564 (3.8)

Pay TV 1,522 1,591 (4.4) 1,567 (2.9)

IPTV 617 430 43.5 579 6.6

Other Technologies 904 1,161 (22.1) 988 (8.4)

Voice 12,558 13,679 (8.2) 13,005 (3.4)

MARKET SHARE | Fixed Broadband 23.9% 25.4% (6.2) 24.3% (1.6)

Market Share | FTTH 32.1% 38.8% (17.2) 32.7% (1.9)

MARKET SHARE | Pay TV 8.8% 8.9% (0.3) 8.9% (0.7)

Market Share | IPTV 80.6% 84.6% (4.8) 80.1% 0.6

MARKET SHARE | Voice 34.0% 34.3% (0.9) 34.1% (0.3)

ARPU | Broadband (R$/month) 62.2 55.2 12.7 62.9 (1.0)

ARPU | Pay TV (R$/month) 101.8 99.0 2.8 103.9 (2.0)

ARPU | Voice (R$/month)5 35.5 40.8 (12.9) 36.9 (3.7)

19

1Q19 IFRS INCOME STATEMENT

Consolidated in R$ million 1Q19 1Q18 ∆% YoY 4Q18 ∆% QoQ

GROSS OPERATING REVENUE 16,683 16,334 2.1 16,787 (0.6)

Gross Operating Mobile Revenue 10,846 10,361 4.7 10,692 1.4

Gross Operating Fixed Revenue 5,837 6,003 (2.8) 6,095 (4.2)

NET OPERATING REVENUE 10,975 10,789 1.7 11,085 (1.0)

Net Operating Mobile Revenue 7,081 6,765 4.7 7,048 0.5

Net Operating Fixed Revenue 3,894 4,024 (3.2) 4,038 (3.6)

OPERATING COSTS (6,614) (6,995) (5.4) (7,039) (6.0)

Personnel (904) (959) (5.8) (1,034) (12.6)

Costs of Services Rendered (2,450) (2,777) (11.8) (2,825) (13.3)

Interconnection (305) (284) 7.4 (302) 1.2

Taxes and Contributions (409) (414) (1.1) (380) 7.6

Third-party Services (1,379) (1,369) 0.7 (1,320) 4.5

Others (356) (710) (49.9) (824) (56.8)

Cost of Goods Sold (754) (484) 55.7 (735) 2.6

Commercial Expenses (2,216) (2,228) (0.5) (2,184) 1.5

Provision for Bad Debt (426) (398) 7.0 (365) 16.8

Third-party Services (1,724) (1,736) (0.7) (1,711) 0.7

Others (66) (94) (29.6) (108) (38.9)

General and Administrative Expenses (306) (374) (18.2) (380) (19.3)

Other Net Operating Revenue (Expenses) 15 (172) n.a. 119 (87.4)

EBITDA 4,360 3,795 14.9 4,046 7.8

EBITDA Margin % 39.7% 35.2% 4.6 p.p. 36.5% 3.2 p.p.

DEPRECIATION AND AMORTIZATION (2,588) (1,998) 29.5 (2,323) 11.4

Depreciation (1,888) (1,343) 40.6 (1,661) 13.7

Amortization of Intangibles (397) (353) 12.3 (358) 10.7

Others Amortizations (304) (302) 0.6 (303) 0.2

EBIT 1,772 1,796 (1.3) 1,724 2.8

FINANCIAL RESULT (90) (173) (48.1) (125) (28.3)

GAIN (LOSS) ON INVESTMENTS (0) 1 n.a. (1) (90.0)

Taxes (340) (526) (35.3) (111) 206.5

NET INCOME 1,342 1,098 22.2 1,487 (9.7)