Corporate Presentation Investor Relations Telefônica Brasil S.A. May, 2018
Disclaimer This presentation may contain forwardlooking statements concerning future prospects and objectives regarding growth of the subscriber base, a breakdown of the various services to be offered and their respective results The exclusive purpose of such statements is to indicate how we intend to expand our business and they should therefore not be regarded as guarantees of future performance Our actual results may differ materially from those contained in such forwardlooking statements, due to a variety of factors, including Brazilian political and economic factors, the development of competitive technologies, access to the capital required to achieve those results, and the emergence of strong competition in the markets in which we operate For a better understanding, we are presenting pro forma numbers combining Telefônica Brasil and GVT results for all financial and operational indicators for every period as of January, 2015 2
FOUNDATIONS AND POSITIONING MOBILE LEADERSHIP FIXED: FIBER AS NEW GROWTH ENGINE DIGITALIZATION UNIQUE FINANCIALS AND SHAREHOLDER REMUNERATION BACKUPS
Starting Point Solid track record and an irreplicable position with unique assets Value Drivers Sustainable mobile leadership Fiber as new growth engine Strong foundation for a convergent future Digitalization driving margin expansion Upside opportunity Potential upside from external environment Commitment to Shareholders Robust FCF generation and shareholder remuneration 4
Largest and most profitable Telco in Brazil, with a unique set of assets... Vivo s Share 2017 _National presence _Full portfolio for B2C and B2B 100%³ Player 4 19.2% 19.9% 16.8% 4.8% 15.3% _Unique and highly admired brand _Largest fiber operation in Latin America _Integrated organization with great talents Player 3 Player 2 19.0% 13.7% 16.1% 30.0% 27.4% 30.5% 31.4% 36.5% 39.7% 23.4% 56.6% 100 Million Customers¹ Customers ¹ Net Revenue Recurrent EBITDA OpCF² 5 1 - RGUs 2 - EBITDA CAPEX 3 - Including Vivo, AMX, TIM and Oi
an undisputable leadership position Solid leadership in Mobile Mobile accesses (million) Dec 17 31.7% 74.9 25.0% 24.8% 59.0 58.6 16.5% Strong position in Broadband BB accesses (million) Dec 17 31.2% 26.1% 8.4 7.4 22.1% 20.6% 6.3 5.9 Superior quality perception Net Promoter Score (NPS) Dec 17 39 Mobile B2C 13 10 7 Player 2 Player 3 Player 4 38.9 8 Fixed B2C -3 Player 2 Player 3 Player 4 Player 2 Player 3 Others -34 Player 2 Player 3 Market Share 6
and able to deliver consistent and superior results even in challenging times Total Net Revenue Recurrent EBITDA OpCF¹ R$ Billion 42.1 CAGR 1.3% 42.5 43.2 R$ Billion 12.7 CAGR 7.3% 13.7 14.7 R$ Billion 4.4 CAGR 22.9% 5.7 6.7 2015 2016 2017 2015 2016 2017 2015 2016 2017 Margin 30.2% 32.1% 33.9% CAGR 15-17 CAGR 15-17 OpCF Margin² 2017 1.3% -1.2% -2.7% -5.0% Vivo Player 2 Player 3 Player 4 7.3% 4.9% 1.9% -4.7% Vivo Player 2 Player 3 Player 4 15.4% 10.5% 11.1% 5.9% Vivo Player 2 Player 3 Player 4 7 1- OpCF: EBITDA Capex 2- OpCF (EBITDA-Capex)/ Net Revenue
FOUNDATIONS AND POSITIONING MOBILE LEADERSHIP FIXED: FIBER AS NEW GROWTH ENGINE DIGITALIZATION UNIQUE FINANCIALS AND SHAREHOLDER REMUNERATION BACKUPS
Over the last years, Vivo generated strong results in the mobile business, especially in the postpaid segment and data services Net Mobile Service Revenues¹ R$ Billion CAGR 15-17 3.6% Solid and consistent revenues growth in Postpaid² YoY 10.9% 8.6% 9.0% 23.6 24.3 25.4 CAGR 15-17 1.7 1.3 1.1 11.4 14.1 18.3 10.4 8.9 6.0 2015 2016 2017-19.0% 26.7% -24.4% Outgoing voice Data and Digital Services Incoming voice 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 2015 2016 2017 Data and digital services as the main lever for future growth 33.5% 23.3% 48% 58% 30.2% 72% 2015 2016 2017 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% _4G potential still high as only 46% of our customer base is on 4G while we cover 85% of population _Large opportunity for upselling data in Hybrid and Family Plans _Rebound in prepaid with expected economy pick-up % Mobile Data over MSR Data and Digital Services Revenues YoY 1- Simplified view, the chart s breakdown does not disclose other services revenues 2- YoY evolution does not include wholesale, M2M and other services revenues 9
based on solid and consistent operational results, reflected in high market and revenue share, lower churn and improving ARPU Absolute leadership in the mobile market Leading to unrivaled value proposition and ARPU Mobile Market Share Postpaid Churn Prepaid Migration to Hybrid 42.4% 42.1% 41.8% 28.4% 30.2% 31.7% 2015 2016 2017 Total Postpaid 43% mobile revenue share 1.87% 1.79% 1.76% 1.1% 1.0% 1.0% 13% 18% 2015 2016 2017 2015 2016 2017 Supported by strongest level of postpaid net adds Voluntary churn Vivo Postpaid 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 42.4% 45.3% 49.1% 2,719 2,317 3,381 2015 2016 2017 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 39% postpaid share of net adds Total ARPU R$ per month 13.0% 3.0% 27.6 28.5 24.5 2015 2016 2017 30% Higher than competitors average Data ARPU R$ per month 35.2% 28.6% 11.8 16.0 20.5 2015 2016 2017 Net Adds (thousand) Customer Mix 10
Vivo s strategy focused on offering more for more is paying off PREPAID POSTPAID First operator with a complete weekly offer (voice, data and SMS) Vivo created family plan concept, with all services available to all family members % Prepaid with Vivo Turbo R$/client/month R$/client/month # of additional lines +50% +31% 36 59 2015 2017 Other offers Vivo Turbo Other postpaid Family Plans 2016 2017 11
supported by our robust nationwide mobile network, which provides a unique network availability and the best customer experience 4G Cities 4G Coverage Leadership Map* % pop. covered 60% 85% 16 States 516 2016 Feb 18 2,667 248 cities + Leadership in 3G, with 93% of population coverage *Leadership in number of 4G covered cities 12
boosted by the best spectrum holding in the market, a crucial factor in fulfilling the exponential data consumption growth 2,600MHz _ Nationwide coverage with 20+20MHz bandwidth 30+30MHz in 478 in cities such as São Paulo, Rio de Janeiro, Niterói and Florianópolis 1,800MHz _ Spectrum optimization: 1,800MHz refarming and carrier aggregation 700/850MHz _ Best positioned in premium spectrum bandwidth in Brazil _ 700MHz already available in 472 cities, 1,356 expected in 2018 13
FOUNDATIONS AND POSITIONING MOBILE LEADERSHIP FIXED: FIBER AS NEW GROWTH ENGINE DIGITALIZATION UNIQUE FINANCIALS AND SHAREHOLDER REMUNERATION BACKUPS
Despite historical decline in fixed voice, Vivo has been presenting double-digit growth in UBB and IPTV Net Fixed Revenues R$ Bn Strong momentum in key revenue lines CAGR 15-17 -0.7% CAGR 15-17 FTTH Revenue R$ million IPTV Revenue R$ million Data and IT 4 17.0 17.0 16.7 2.4 2.6 2.6 2.6% CAGR 15-17 +40.5% +63.4% xdsl³ UBB Pay TV ² 1.6 1.6 1.8 1.9 2.3 1.7 1.9 2.8 1.9 5.0% 20.2% 5.1% 2015 2016 2017 2015 2016 2017 Reducing exposure to mature voice business Voice and others¹ 9.3 8.6 7.7-9.0% % of Non-Voice Revenues over Fixed Revenues 50.0% 53.4% 58.0% 2015 2016 2017 2015 2016 2017 1- Includes voice, interconnection and other services. 2- Includes DTH and IPTV. 3- Includes other broadband revenues (VAS and installation fee). 4- Corporate Data and IT 15
Strong performances in FTTH and IPTV are leading to customer mix and ARPU improvement Broadband Accesses and ARPU Pay TV Accesses and ARPU BB Accesses Thousand CAGR 15-17 Pay TV Accesses Thousand 30% take-up IPTV over FTTH CAGR 15-17 TOTAL FTTH FTTC¹ xdsl 7,117 7,296 7,432 8% 12% 17% 46% 45% 44% 46% 43% 39% 2% 48% 0% -6% TOTAL IPTV DTH 1,732 1,713 1,588 10% 15% 24% 90% 85% 76% -6% 49% -14% 2015 2016 2017 Average speed of 22Mbps (+24% yoy) for B2C customers 2015 2016 2017 BB ARPU R$ per month CAGR 15-17 +10.9% 41.9 2015 2016 2017 FTTH Accesses Thousand Net Adds 212 300 402 2015 2016 2017 TV ARPU R$ per month CAGR 15-17 45.1 51.6 81.7 +8.8% 91.3 96.8 2015 2016 2017 IPTV Accesses Thousand Net Adds 76 82 128 2015 2016 2017 1- FTTC (Fiber to the Cabinet) includes Cable accesses 16
UBB is a clear growth opportunity in Brazil UBB² penetration still very low Composition of Brazilian fixed broadband market (Million) but already growing fast Brazil subscriber growth YoY 2016-2017 61 Only 7% of UBB² penetration 7.1% UBB² +47.0% 24 4 33 Potential Market¹ Connected with BB Connected with UBB² Not Connected -1.5% -2.8% FBB TV Fixed Voice 17 1 - ABC Household and B2B 2 - UBB: Speeds above 34 Mbps (FTTH, FTTC and Cable)
and Vivo is expanding existing footprint and accelerating its learning curve for FTTH deployment FTTH Expansion Acceleration in 2017: FTTH FTTC FTTx 2017 new cities FTTH footprint 16 New FTTH cities 19k vertical structures Cities HPs million 87 128 7.0 11.4 215 18.4 _Superior FTTH deployment _Scale and learning curve gains leveraging on TEF Group _Field operations and channels prepared for quick launch Increasing Operational Know-How Technical Complaints Jan'17-50% Oct'17 Churn FTTH 4Q16-9% 4Q17 Capex/ HP -32% 2015 2017 18
Vivo had a successful track record in new FTTH cities launched in 2017, quickly leading the UBB market Network occupancy Pouso Alegre - MG 6% 8% 13% Mo.1 Mo.2 Mo.3 MS UBB (>34Mbps) 3 months after launch 89% ARPU R$ / month +39% Overall customer base Pouso Alegre Vitória da Conquista - BA 23% 35% +46% 10% 55% Mo.1 Mo.2 Mo.3 Overall customer base Vitória da Conquista 19
And to continue capturing the UBB opportunity, Vivo will invest an additional R$2.5bn in order to boost FTTH expansion in the next 36 months Footprint Evolution FTTH HPs (M) 7.0 Acceleration Project +1.0 Base Plan +3.0* 2017 12m 24m 36m * 4,200 km additional backbone R$2.5Bn In 2020 _1.0 M additional clients (33% expected take-up) _>R$ 1 Bn in additional UBB revenues in 2020 _EBITDA margin accretive _Cities above 50k inhabitants _Selected neighborhoods in cities already covered _Favorable competitive areas _Cherry-picking based on IRR 20
The Fiber Acceleration Project will be cash flow accretive from year 3 CLEAR GUIDELINES AND OBJECTIVES INVESTMENT CORRELATED TO REVENUE GENERATION FUNDING _Cities with >50k inhabitants _Cherry-picking of highpotential homes _Additional 3.0 million FTTH HPs _Threshold of IRR >17% _>R$1bn in additional UBB revenues in 2020 _90% of incremental revenues coming from new fixed customers _60% on Network Expansion _40% on Installation and CPEs (variable to access growth) _Leveraging on the Telefónica Group s global scale and expertise and synergies on existing infrastructure _Increased Capex efficiency and smart allocation _Maintaining solid capital structure and flexibility _Self-funding contribution Maintain strong shareholder remuneration benefiting from growth profile 21
FOUNDATIONS AND POSITIONING MOBILE LEADERSHIP FIXED: FIBER AS NEW GROWTH ENGINE DIGITALIZATION UNIQUE FINANCIALS AND SHAREHOLDER REMUNERATION BACKUPS
Digitalization is a driver for margin expansion and improvement in customer experience Digitalization Scope Prioritization of digitalization initiatives R$ 29 bn Total annual OpEx (2017) R$ 11 bn 1/3 OpEx Perimeter of OpEx influenced by digitalization +Potential for digitalization - - Commissions Back office Administrative processes Advertising Billing and collection Top-ups Customer care Installation and Maintenance Cost with own stores Improvement in customer experience + Annual gross Opexsavings of at least R$1.2 Billion (by 2020) 23
In the digital space, we plan to achieve promising results and have ambitious targets for the future Fronts KPIs 2017 2020 Fostering sales and top-ups through digital channels _Online hybrid plan activations _% of digital top-ups x5 _Online FTTH B2C sales 24% >50% 19% >30% Enhanced customer care experience _Unique users of Meu Vivo _Call center calls 14 million 45 million -15% YoY -30% vs 2017 24
In the digital space, we plan to achieve promising results and have ambitious targets for the future Fronts KPIs 2017 2020 More efficient and friendly payments & collection _Penetration of e-billing 43% >80% _Collections through digital channels 50% >75% _Digital credit scoring 55% >65% Robust IT and improved technical support _IT legacy systems (B2C customers in Full Stack) <5% >90% _Incidents solved remotely 50% >70% 25
which have been already yielding significant savings across key Opex lines Reduction of Opex within the digitalization perimeter is contributing to continued cost control Opex within Digitalization Perimeter Approximately 1/3 of Total Opex BILLING & POSTING Opex lines evolution -15% YoY 1Q17 1Q18-6% YoY CALL CENTER -10% YoY 1Q17 1Q18 INSTALLATION & MAINTENANCE -7% YoY 1Q17 1Q18 PHYSICAL TOP-UPS -21% YoY 1Q17 1Q18 1Q17 1Q18 26 26
FOUNDATIONS AND POSITIONING MOBILE LEADERSHIP FIXED: FIBER AS NEW GROWTH ENGINE DIGITALIZATION UNIQUE FINANCIALS AND SHAREHOLDER REMUNERATION BACKUPS
In 2017, we presented real growth across all lines 2 0 1 7 N O M I N A L G R O W T H Y o Y % Service Revenues¹ +3.6% Recurring EBITDA +7.3% >2.9% Inflation (IPCA) A new cycle of real growth across all lines Net Income +12.8% Consecutive cost reduction in the last 8 quarters Operating Cash Flow Free Cash Flow +17.8% +20.1% Recurrent operating costs reduced almost 3% in the last two years vs. accumulated inflation of more than 9% 1- Ex-regulatory effects. Note: All figures presented are recurring 28
And to support our unique positioning, we will invest accordingly in the next three-year period to further improve quality, customer experience and accelerate revenue growth New Capex Guidance for the 2018-2020 Period Up to R$24 billion Recurring Capex focused on 4G, Fiber expansion and IT transformation R$2.5 billion Incremental, non-recurring Capex for the execution of the Fiber Acceleration Project (2018-2020) aiming to speed up our already successful expansion of FTTH Non-recurring Capex envelope does not change long-term downward trend in Capex/Sales 29
Total Capex is clearly focused on capturing growth opportunities Investing in higher return growth projects while reducing investments in legacy Lower unitary cost of growth technologies 2 0 1 6-2 0 1 8 3G -27% Copper -38% DTH -53% 2/3 of R$24bn Capex plan oriented for growth 2 0 1 6-2 0 1 8 4G +44% FTTH +174% IPTV +108% IT +8% _Cost of FTTH deployment 32% lower vs. 2015 _Cost of 4G expansion optimized with 700MHz roll-out Spectrum and larger technological cycles in mobile are behind us _Vivo already has a superior spectrum portfolio in Brazil Additionally, the Fiber Acceleration Project Capex will be fully directed to growth in FTTH _Optimization with 1.8GHz refarming and 700MHz roll-out 30
14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% As a result, Vivo s ROCE should expand at a premium to the expected risk-free rate RETURN ON CAPITAL EMPLOYED¹ EVOLUTION ABOVE RISK -FREE RATE 13.75% 10% 8% 7.00% 6.75% 8.00% 8.00% 2016 2017 2018 2019 2020 Vivo ROCE Risk-Free Rate 1- ROCE ex-goodwill 31
A strong financial discipline guarantees solid conversion of Operating Cash Flow into Free Cash Flow CONVERSION OF OpCF TO FCF¹ (R$ Bn) 88.0% 84.4% 86.1% 4.4 3.9 5.7 4.8 6.7 5.7 2015 2016 2017 OpCF FCF from Business Activities Cash Conversion C A G R 1 5-17 OpCF +22.9% FCF +21.5% 1- FCF after taxes and interest 32
- 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 allowing Vivo to sustain a solid capital structure and boost shareholder remuneration LOW LEVERAGE RESULTING IN STRONG RATINGS Net Debt/EBITDA YE2017 0.26x _Rating Ba1, Negative Outlook _One notch above sovereign rating _Rating braaa, Stable Outlook _One notch above sovereign rating IMPROVED PROFITABILITY AS A FOUNDATION OF OUR SOLID SHAREHOLDER REMUNERATION 2016 2017 2018 Payment of Dividends¹ (R$ Bn) 3.3 4.1 4.6 + 17. 6 % C A G R 16-18 R$20.5 billion distributed as dividends¹ since 2013 1- Includes Interest on Capital 33
In a nutshell, our past execution positions Vivo with a strong present and a brilliant vision for the future TODAY TOMORROW (2018-20) Absolute leader in REVENUES in the Brazilian telco space (70% share of incremental revenues in the last 3 years) _Acceleration of Total Revenues _Sustaining solid Mobile Service Revenue growth _Resuming Fixed Revenue growth _>R$1bn in additional UBB Fixed Revenues in 2020 from the Fiber Project, further improving evolution _Sustainable margin increase, maintaining the current pace of EBITDA growth The most efficient Company with the largest OpCF in the sector (+5.0 p.p. in OpCF margin since 2015) Second to none SHAREHOLDER REMUNERATION in the industry (Dividend Yield 6% in 2017) _Annual gross Opex savings of >R$1.2bn from digitalization by 2020 _2018-20 Capex: up to R$24bn + R$2.5bn envelope for the Fiber Acceleration Project _OpCF margin, excluding the Fiber Project, consistently above 20% as of 2020 _At least +2 p.p. already in 2018 (vs. 2017) _Continuous ROCE expansion _Strong FCF and Net Income evolution with double-digit growth in 2018 (vs 2017) _R$4.6bn to be paid as dividends¹ in 2018 (+13% YoY) _Unmatched shareholder remuneration 1- Includes Interest on Capital. 2- Based on gross dividends of R$2.82 per preferred share declared during 2017. Note: Trends excluding eventual non-recurring items. 34
FOUNDATIONS AND POSITIONING MOBILE LEADERSHIP FIXED: FIBER AS NEW GROWTH ENGINE DIGITALIZATION UNIQUE FINANCIALS AND SHAREHOLDER REMUNERATION BACKUPS
Expectations for an economic recovery represent a potential upside GDP Growth 1 % YoY 2.5% 3.0% - 2.5% 1.0% -3.5% -3.5% 2015 2016 2017 2018E 2019-20E Inflation¹ % YoY 10.7% 6.3% 3.0% 3.5% 4.0% - 4.0% 2015 2016 2017 2018E 2019-20E Interest Rate¹ Unemployment 2 % annual rate % 14.3% 13.8% 8.5% 7.0% 8.0% - 8.0% 6.3% 11.5% 12.6% 12.4% 11.6% - 10.9% 2015 2016 2017 2018E 2019-20E 2015 2016 2017 2018E 2019-20E 1) Source: Focus (May 11, 2018 GDP numbers were revised by IBGE; 2) Source: Telefônica Brasil estimates. 36
while a regulatory simplification trend might provide an additional upside Potential to optimize real estate portfolio Reduction of concession s obligations Revision of quality goals 37
Highlights 1Q18 Consolidated in R$ million 2018 Pro forma (ex-ifrs 15)¹ 2018 Data (Reported) 1Q18 1Q17 % 1Q18 1Q17 % Net Operating Revenues 10,759.0 10,590.1 1.6 10,789.0 10,590.1 1.9 Net Operating Service Revenues 10,449.8 10,334.2 1.1 10,403.1 10,334.2 0.7 Net Mobile Service Revenues 6,425.7 6,208.0 3.5 6,379.0 6,208.0 2.8 Net Operating Fixed Revenues 4,024.1 4,126.2 (2.5) 4,024.1 4,126.2 (2.5) Net Handsets Revenues 309.1 255.9 20.8 385.9 255.9 50.8 Operating Costs (6,993.8) (7,076.2) (1.2) (6,994.5) (7,076.2) (1.2) EBITDA 3,765.3 3,513.9 7.2 3,794.5 3,513.9 8.0 EBITDA Margin % 35.0% 33.2% 1.8 p.p. 35.2% 33.2% 2.0 p.p. Net Income 1,078.8 996.2 8.3 1,098.0 996.2 10.2 Capex (ex-licenses) 1,547.4 1,328.2 16.5 1,547.4 1,328.2 16.5 Operational Cash Flow 2,217.9 2,185.8 1.5 2,247.1 2,185.8 2.8 Total Accesses (thousand) 97,812 97,236 0.6 97,812 97,236 0.6 Total Mobile Accesses 75,098 73,997 1.5 75,098 73,997 1.5 Total Fixed Accesses 22,714 23,239 (2.3) 22,714 23,239 (2.3) 1) New accounting standard in force since January 2018, which requires revenue to be recognized based on the contract with the customer, not necessarily aligned with billing. For Vivo, revenue recognition of mobile offers with handset subsidy will change, as the subsidy will now be distributed between services and handset. In addition, certain costs to acquire a customer through a contract will now have to be capitalized if the amortization period is >12 months. 38
Financial Figures 1Q18 Consolidated in R$ million 2018 Pro forma (ex-ifrs 15) 2018 Data (Reported) 1Q18 1Q17 % 1Q18 1Q17 % Net Operating Mobile Revenues 6,734.9 6,464.0 4.2 6,764.8 6,464.0 4.7 Net Mobile Service Revenues 6,425.7 6,208.0 3.5 6,379.0 6,208.0 2.8 Outgoing Voice 1,159.7 1,672.2 (30.6) 1,165.4 1,672.2 (30.3) Interconnection 265.1 272.7 (2.8) 265.1 272.7 (2.8) Data and Digital Services 5,000.4 4,258.7 17.4 4,947.9 4,258.7 16.2 Messaging P2P 307.2 372.8 (17.6) 307.2 372.8 (17.6) Internet 3,127.8 3,394.2 (7.8) 3,075.3 3,394.2 (9.4) Digital Services 1,565.4 491.8 218.3 1,565.4 491.8 218.3 Other Services 0.6 4.5 (86.5) 0.6 4.5 (86.5) Net Handset Revenues 309.1 255.9 20.8 385.9 255.9 50.8 % Data and Digital Services Revenues / MSR 77.8% 68.6% 9.2 p.p. 77.6% 68.6% 9.0 p.p. Consolidated in R$ million 2018 Pro forma (ex-ifrs 15) 2018 Data (Reported) 1Q18 1Q17 % 1Q18 1Q17 % Net Operating Fixed Revenues 4,024.1 4,126.2 (2.5) 4,024.1 4,126.2 (2.5) Voice 1,542.6 1,796.3 (14.1) 1,542.6 1,796.3 (14.1) Interconnection 42.7 50.4 (15.4) 42.7 50.4 (15.4) Broadband¹ 1,230.7 1,064.0 15.7 1,230.7 1,064.0 15.7 UBB 792.1 646.5 22.5 792.1 646.5 22.5 xdsl 438.6 417.5 5.1 438.6 417.5 5.1 Corporate Data and IT 588.5 584.7 0.6 588.5 584.7 0.6 Pay TV 471.5 478.6 (1.5) 471.5 478.6 (1.5) Other Services 148.2 152.2 (2.6) 148.2 152.2 (2.6) % Non-Voice Revenues² / Net Operating Fixed Revenues 60.6% 55.2% 5.4 p.p. 60.6% 55.2% 5.4 p.p. 1) Broadband Revenue includes residential customers and SMEs; 2) Non-voice revenue includes revenue from Broadband, Corporate Data and IT, Pay TV and Other Services. 39
Mobile Operating Figures 1Q18 Thousand 1Q18 1Q17 % 4Q17 % Total Mobile Accesses 75,098 73,997 1.5 74,940 0.2 Postpaid 37,499 33,825 10.9 36,772 2.0 M2M 6,674 5,279 26.4 6,321 5.6 Prepaid 37,599 40,171 (6.4) 38,168 (1.5) Market Share 31.9% 30.5% 1.4 p.p. 31.7% 0.2 p.p. Postpaid 41.4% 42.0% (0.7) p.p. 41.8% (0.4) p.p. M2M 41.6% 39.8% 1.8 p.p. 41.5% 0.1 p.p. Net Additions 158 219 (27.6) 378 (58.1) Postpaid 727 435 67.4 1,107 (34.3) Market Share of Postpaid Net Additions 27.4% 39.3% (30.3) 34.0% (19.4) Market Penetration 113.0% 116.9% (3.9) p.p. 113.4% (0.4) p.p. Monthly Churn 3.1% 3.3% (0.2) p.p. 3.3% (0.2) p.p. Postpaid ex. M2M 1.6% 1.7% (0.0) p.p. 1.7% (0.1) p.p. Prepaid 4.5% 4.7% (0.2) p.p. 4.8% (0.3) p.p. ARPU (R$/month) 1 28.6 28.0 2.1 29.2 (2.2) Voice 6.4 8.8 (27.6) 7.3 (12.8) Data 22.2 19.2 15.8 21.9 1.4 Postpaid ex. M2M ARPU 1 52.6 52.0 1.1 52.9 (0.6) Prepaid ARPU 1 12.9 13.6 (5.5) 13.6 (5.6) M2M ARPU 1 2.6 3.0 (13.9) 2.8 (6.3) 1) Pro forma figures, excluding the effects of IFRS 15 40
Fixed Operating Figures 1Q18 Thousand 1Q18 1Q17 % 4Q17 % Total Fixed Accesses 22,714 23,239 (2.3) 22,857 (0.6) Fixed Voice Accesses 13,679 14,242 (4.0) 13,837 (1.1) Residential 8,728 9,237 (5.5) 8,899 (1.9) Corporate 4,510 4,561 (1.1) 4,498 0.3 Others 442 444 (0.6) 441 0.3 Fixed Broadband 7,443 7,336 1.5 7,432 0.1 UBB 4,643 4,227 9.9 4,541 2.3 FTTC 3,231 3,268 (1.1) 3,251 (0.6) FTTH 1,412 959 47.2 1,290 9.5 Others 2,800 3,109 (9.9) 2,891 (3.2) Pay TV 1,591 1,661 (4.2) 1,588 0.2 IPTV 430 281 52.9 381 12.9 DTH 1,161 1,380 (15.8) 1,207 (3.8) Voice ARPU (R$/month) 37.4 41.9 (10.8) 38.7 (3.4) Broadband ARPU (R$/month) 55.2 48.6 13.7 56.1 (1.7) Pay TV ARPU (R$/month) 99.1 94.7 4.6 98.3 0.7 41
IFRS Income Statement 1Q18 Consolidated in R$ million 1Q18 1Q17 % 4Q17 % Gross Operating Revenue 16,334.4 16,570.4 (1.4) 16,536.7 (1.2) Mobile 10,331.2 10,153.0 1.8 10,357.6 (0.3) Fixed 6,003.2 6,417.4 (6.5) 6,179.1 (2.8) Net Operating Revenue 10,789.0 10,590.1 1.9 11,033.5 (2.2) Mobile 6,764.8 6,464.0 4.7 6,850.0 (1.2) Fixed 4,024.1 4,126.2 (2.5) 4,183.6 (3.8) Operating Costs (6,994.5) (7,076.2) (1.2) (7,266.9) (3.7) Personnel (959.3) (911.9) 5.2 (949.4) 1.0 Costs of Services Rendered (2,776.8) (2,911.2) (4.6) (2,828.4) (1.8) Interconnection (284.1) (393.0) (27.7) (371.5) (23.5) Taxes and Contributions (413.7) (457.4) (9.6) (437.6) (5.5) Third-party Services (1,369.1) (1,415.7) (3.3) (1,360.5) 0.6 Others (709.9) (645.1) 10.0 (658.8) 7.8 Cost of Goods Sold (484.4) (472.7) 2.5 (534.6) (9.4) Commercial Expenses (2,227.7) (2,245.4) (0.8) (2,346.7) (5.1) Provision for Bad Debt (398.0) (357.7) 11.3 (372.1) 7.0 Third-party Services (1,735.8) (1,806.3) (3.9) (1,857.8) (6.6) Others (93.9) (81.4) 15.4 (116.8) (19.6) General and Administrative Expenses (374.0) (367.7) 1.7 (382.3) (2.2) Other Net Operating Revenue (Expenses) (172.3) (167.3) 3.0 (225.5) (23.6) EBITDA 3,794.5 3,513.9 8.0 3,766.6 0.7 EBITDA Margin % 35.2% 33.2% 2.0 p.p. 34.1% 1.0 p.p. Depreciation and Amortization (1,998.3) (1,943.6) 2.8 (1,990.9) 0.4 EBIT 1,796.2 1,570.3 14.4 1,775.7 1.1 Net Financial Income (172.7) (290.4) (40.5) (177.8) (2.9) Gain (Loss) on Investments 0.5 0.8 (37.5) 0.2 150.0 Taxes (526.0) (284.5) 84.9 (81.2) 547.8 Net Income 1,098.0 996.2 10.2 1,516.9 (27.6) 42
Debt 1Q18 Consolidated Currency March 2018 Interest Rate Due Date Short-Term Long-Term Total Local Currency BNDES UR LTIR LTIR + 0.00% to 3.38% 2023 658.3 770.1 1,428.5 BNDES R$ 2.5% to 6.0% 2023 71.4 147.3 218.7 BNDES R$ SELIC D-2 + 2.32% 2023 76.5 291.8 368.3 BNB R$ 7.0% to 10.0% 2022 15.1 51.0 66.1 Confirming R$ 101.4% to 109.7% of CDI 2019 395.3-395.3 Debentures 4th Issue - Series 3 R$ IPCA + 4.0% 2019 0.7 40.4 41.1 Debentures 1st Issue - Minas Comunica R$ IPCA + 0.5% 2021 25.5 76.6 102.1 Debentures 4th Issue - Single Series R$ 100% of CDI + 0.68 spread 2018 1,340.7-1,340.7 Debentures 5th Issue - Single Series R$ 108.25% of CDI 2022 17.1 1,996.9 2,014.0 Debentures 6th Issue - Single Series R$ 100.00% of CDI + 0.24% 2020 22.8 999.5 1,022.3 Financial Leases R$ - 2033 52.9 338.2 391.1 Contingent Consideration R$ - 2025-451.1 451.1 Foreign Currency BNDES UMBND ECM + 2.38% 2019 142.6 47.4 190.0 Total 2,818.8 5,210.3 8,029.2 Consolidated in R$ million 03/31/2018 12/31/2017 03/31/2017 March 2018 Short-Term Debt 2,818.8 3,033.4 4,455.1 Amount Year Long-Term Debt 5,210.3 5,428.4 6,367.8 (R$ miillion) Total Debt 8,029.2 8,461.8 10,822.9 2019 612.0 Cash and Cash Equivalents¹ (4,366.4) (4,062.1) (6,296.1) 2020 1,416.2 Net Derivatives Position (127.9) (143.8) 22.3 2021 1,286.7 Contingent Consideration Guarantee Asset² (451.1) (446.1) (424.3) 2022 1,234.5 Net Debt 3,083.8 3,809.9 4,124.8 After 2022 660.9 Net Debt / EBITDA³ 0.21 0.26 0.30 Total 5,210.3 1) Includes the investment in BNB given as a guarantee for the loan from that bank. 43 2) Alignment of the classification criterion for the asset backing the contingent consideration to calculate pro-forma net debt. 3) LTM EBITDA.
Effects of IFRS 15 on our 1Q18 results R$ million 1Q18 w/o IFRS Pro forma¹ Δ% YoY IFRS Adjustments 1Q18 w/ IFRS Reported¹ Δ% YoY Net Operating Revenue 10,759.1 1.6% 29.9 10,789.0 1.9% Net Service Revenue 10,449.9 1.1% (46.8) 10,403.1 0.7% Net Mobile Service Revenue 6,425.8 3.5% (46.8) 6,379.0 2.8% Net Fixed Revenue 4,024.1 (2.5%) 0.0 4,024.1 (2.5%) Net Handset Revenue 309.1 20.8% 76.7 385.9 50.8% Operating Costs (6,993.7) (1.2%) (0.8) (6,994.5) (1.2%) Personnel (964.2) 5.7% 4.9 (959.3) 5.2% Commercial Expenses (2,222.0) (1.0%) (5.7) (2,227.7) (0.8%) EBITDA 3,765.3 7.2% 29.2 3,794.5 8.0% EBITDA Margin 35.0% 1.8 p.p. 0.2 p.p. 35.2% 2.0 p.p. Net Income 1,078.8 8.3% 19.2 1,098.0 10.2% IFRS 15: new accounting standard in force since January 2018, which requires revenue to be recognized based on the contract with the customer, not necessarily aligned with billing. For Vivo, revenue recognition of mobile offers with handset subsidy will change, as the subsidy will now be distributed between services and handset. In addition, certain costs to acquire a customer through a contract will now have to be capitalized if the amortization period is >12 months. 1- Reported figures and YoY variation consider in 2017 IAS 18 accounting and in 2018 IFRS 15 accounting, while pro forma figures and YoY variation consider in 2017 and 2018 IAS 18 accounting. 44 44
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