RESULTS Investor Relations Telefônica Brasil S.A. July, 2016
DISCLAIMER This presentation may contain forward-looking 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 forward-looking 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, 2014. 2
HIGHLIGHTS Service revenue acceleration, continued margin expansion and optimized Capex driving outstanding cash flow generation Service revenue acceleration driven by improved mobile trends Net operating service revenue +1.6% yoy in vs +1.0% in 1Q16 (+3.9% yoy in excluding regulatory effects) Mobile service revenue +2.6% yoy in vs +0.4% in 1Q16 (+4.7% yoy in excluding regulatory effects) Mobile data and VAS: +24.0% yoy in vs +23.0% yoy in 1Q16 (56% of MSR in ) Fixed revenue +0.1% yoy in affected by regulatory impact (+2.8% yoy when excluding regulation) FTTx (+19.9% yoy in ) and Pay TV (+13.9% yoy in ) Rational commercial approach leading to solid access and ARPU growth in key services Focusing growth in key segments: leader in postpaid market share 1 (42.3%); solid FTTx base evolution (+10.0%) Continue to enhance annual ARPU growth in : Mobile +15.9%; Pay TV +12.3% and BB +7.4% Sustained EBITDA 2 expansion enhanced by synergies and efficiency Continued cost reduction (-1.8% yoy in vs -2.0% yoy in 1Q16) despite inflation (8.8% IPCA 12M) Maintaining high Recurrent EBITDA 2 growth (+7.0% yoy in and 1Q16) while improving EBITDA margin (31.4% in ; +180 bps vs ) Outstanding OpCF increase resulting from stronger EBITDA and Capex optimization EBITDA 2 -Capex growing 42.7% yoy in 1H16 and free cash flow 3 4 times higher than in 1H15 Capex continued to benefit from optimization (15.6% of sales in 1H16, below our initial guidance of 20% for 2016) Successful execution of synergies creating more confidence on delivering targets Concluded synergy activities generated R$557 million in free cash flow by the end of June, 2016 Already secured 55% of targeted NPV of R$22bn after concluding main synergy initiatives Solid execution with better results than initial estimation and additional opportunities identified in the process of integration building the case for a trending NPV of about R$25bn 1- Source: ANATEL. Last available market information of May, 2016. 2- Adjusted for the sale of towers in 1Q16, in the total amount of R$513.5 million and the provision for organizational restructuring in, in the total amount of R$101.2 million. 3- Includes proceeds from the sale of towers in 1Q16, in the amount of R$562.1 million and expenses from the provision for organizational restructuring in, in the amount of R$21.8 million. 3
Service revenue acceleration, continued margin expansion and optimized Capex driving outstanding cash flow generation KEY FINANCIAL HIGHLIGHTS R$ million % 1 % exc. Reg. impact 2 1H16 % 1 % exc. Reg. impact 2 Net Service Revenue 10,200 1.6 3.9 20,330 1.3 3.7 Net Mobile Service Revenue 5,984 2.6 4.7 11,895 1.5 3.8 Net Fixed Revenue 4,216 0.1 2.8 8,435 1.0 3.5 OpEx 3 7,209 (1.8) 14,365 (1.9) Recurrent EBITDA 3 3,302 7.0 6,577 7.0 Recurrent EBITDA Margin 3 (%) 31.4% 1.8 p.p. 31.4% 1.8 p.p. Capex 1,771 (14.2) 3,263 (14.7) Capex/Sales (%) 16.8% (2.9) p.p. 15.6% (2.8) p.p. EBITDA 3 CAPEX 1,531 49.7 3,314 42.7 Free Cash Flow 4 1,952 59.1 2,100 402.4 1- Considers TEF Brasil + GVT figures as of January, 2015. 2- Regulatory impact of tariff cuts (MTR/VC/TU-RL/TU-RIU). 3- Adjusted for the sale of towers in 1Q16, in the total amount of R$513.5 million and for the provision for organizational restructuring in, in the total amount of R$101.2 million. 4- Proceeds from towers' sale received in, in 1Q16 FCF affected by Fistel payment of R$1.0bn. FCF after financial expenses and taxes. 4
TOTAL REVENUES Higher share and growth acceleration in non-voice products continue to drive total revenues to a positive trend, despite regulatory effects Non-voice businesses grew 16.5% yoy in vs 15.5% yoy in 1Q16, supported mainly by mobile data, Pay TV and FTTx Service Revenues R$ Million 10,044 10,200 4,866 5,671 5,178 4,529 48% 52% Non-voice Services 3.9% 1.6% 56% 44% Voice Services 1 Adjusted 16.5% -12.5% 24.0% Mobile Data & VAS -2.7% Fixed Voice Non-voice Services 13.9% 19.9% TV Voice Services UBB Mobile Voice -17.4% Continuous delivery of data centric strategy driving resilient evolution in key services Voice revenues affected by regulation and service maturity 1- Excluding Regulatory Effect of tariff cuts (MTR/VC/TU-RL/TU-RIU). 5
MOBILE REVENUES Reaccelerating mobile revenues driven by postpaid growth and higher data proportion Mobile revenue increase driven by data Strong acceleration in postpaid revenues, which already represents almost 70% of MSR Net Mobile Service Revenue R$ Million 2.6% 4.7% 1.2% 5,830 5,911 5,984 73 52 104 385 357 330 2,686 3,050 3,331 2,686 2,452 2,219 1Q16 Outgoing voice Data and VAS Incoming voice 1 Adjusted 2.6% 42.7% -14.3% 24.0% -17.4% Others Accelerating growth vs 1Q16 Mobile Service Revenue Growth 6.3% % QoQ 9.5% 0.4% 2.6% +2.3 p.p. +3.2 p.p. +0.7 p.p. -12.3% -11.6% 1Q16 Prepaid Postpaid Total Mobile Breakdown Service Revenue Customer Base 2% 3% 33% 28% 65% 69% +0.2 p.p. 64% 57% +4.4 p.p. 36% 43% Postpaid Prepaid Other -7.4 p.p. -4.5 p.p. +7.4 p.p. 1- Excluding effect of MTR cuts. 6
MOBILE OPERATING With a rational and data centric strategy Vivo continues to lead in postpaid while protecting value in prepaid Regaining leadership in postpaid net additions maintaining best market position Selective approach improving prepaid ARPU and increasing penetration of prepaid bundles Postpaid Market Share 1 41.6% 42.1% 42.4% 42.4% 42.3% 3Q15 4Q15 1Q16 May/16 Share of Net Additions 1 37% 25% 24% 13% Accum/16 Vivo Player 2 Player 3 Player 4 Prepaid Offers Evolution % -42% Non-bundled Offers +34% Bundled Offers Incentivizing data usage and more frequent recharges Vivo Turbo share in the prepaid base growing 19 p.p. y-o-y Individual Postpaid Churn 1.9% 1.8% 1.7% 1.7% 1.8% 0.7% 0.8% 0.7% 0.8% 0.7% 3Q15 4Q15 1Q16 Postpaid exc. M2M Voluntary Vivo continued to achieve positive net portability ratio every month in. Prepaid % 12.3% 15.4% 3.4% -0.2% -2.9% -12.3% -11.6% -20.7% -21.5% 1Q16 Accesses Revenues Outgoing ARPU Selective approach to protect profitability 1- Source: ANATEL. Last available market information of May, 2016. 7
4G adoption has increased data consumption driving growth acceleration in Mobile ARPU MOBILE OPERATING Differentiated services continue to drive leading 4G adoption in our base enhanced by successful migration from 3G to 4G 160% 98% 37% 48% 4G Market Share 1 of population covered by the 4G network Average increase for MBoU MB per month 48% 2 33% 4G Handsets 1 4G Traffic Postpaid 3G 4G Prepaid Data consumption is accelerating, total ARPU boosted by upselling campaigns Total ARPU R$ per month Data 23.5 27.2 46% 56% 15.9% 40.0% Voice 54% 44% -4.7% 0.8% 3.0% 5.1% Total ARPU % 10.9% 15.9% 3Q15 4Q15 1Q16 1- According to ANATEL, May, 2016. 2- Average Megabytes per user. 8
Resilient growth in high value fixed segments FIXED REVENUES Robust evolution in Broadband and Pay TV compensating for regulatory impacts on voice Solid growth in the B2C segment Net Fixed Revenue R$ Million Net Fixed Revenue B2C R$ Million 0.1% 2.8% 1 Adjusted 3.6% -0.1% 2,666 4,214 4,218 4,216 621 564 610 0.1% -1.8% 2,573 400 401 398 476 554 570 423 476 482 2,295 2,224 2,157-0.5% 19.9% 13.9% FTTH growing 52% yoy IPTV grew 69% yoy Net FTTx Revenue B2C Revenues % -6.0% 1Q16 Voice and Others 2 Pay TV FTTx xdsl Data and IT 3 +3.1 pp 20.2% 17.2% Pent-up demand in B2C fixed leading to very strong and resilient growth in fiber 1- Adjusted for the regulatory effect of VC and TU-RL/TU-RIU cuts. 2- Includes voice, interconnection and other services. 3- Corporate Data and IT. 9
FIXED OPERATING Customer and ARPU trends continue to be solid in key fixed services Double digit growth in FTTx and Premium Pay TV and improved sales mix and pricing leading to strong ARPU growth, especially in Pay TV and FTTx BROADBAND BB Accesses 1 Thousand Total FTTH FTTC xdsl 7,080 7,248 7% 9% 45% 46% 49% 45% 2% 39% 6% -6% Focus on FTTx sales Leader in UBB 2 with 54% market share and 49% of net adds in 1H16 Broadband ARPU 3 R$ per month xdsl FTTx 41.6 44.6 39.3 43.7 41.2 47.3 7% 8% 5% PAY TV Pay TV Accesses Thousand Total IPTV DTH 1,786 1,762 130 194 1,656 1,568-1% 50% -5% IPTV growth related to strong up-take in FTTH sales Higher DTH net disconnection due to more selective approach Pay TV ARPU R$ per month 80.7 90.6 78.4 99.7 87.4 108.4 DTH IPTV 12% 9% 11% 1- FTTx includes FTTH (Fiber to the Home) and FTTC (Fiber to the Curb) accesses. 2- According to ANATEL, May, 2016 for speeds above 34Mbps. 3- Considering ADSL accesses for xdsl and Fiber for FTTx. 10
Cost Evolution % over Net Revenues COSTS AND MARGINS Synergies and efficiency continue to drive cost reduction and consistent EBITDA growth Adjusted Operating Costs 1 R$ Million 7,342 7,209 IPCA 12M -1.8% 8.8% Adjusted Costs % 10.7% 9.5% 8.4% Cost of Goods Sold 6.1% 5.1% -15.9% 6.6% 5.7% 5.4% 0.5% 0.9% Services Rendered, G&A and Others 34.2% 33.9% 0.0% -2.0% -1.8% 3Q15 4Q15 1Q16 Adjusted Costs Adjusted Costs exc. ITX Bad debt Selling Expenses 2 2.9% 3.0% 19.0% 17.9% 5.7% -5.0% Accelerating EBITDA 1 4 Growth % 5.9% 7.0% 7.0% Personnel 1 8.3% 8.7% 5.8% 2.6% 3.6% Recurrent EBITDA Margin 29.6% 31.4% +1.8 p.p. Rec. Service EBITDA Margin 3 33.2% 34.6% +1.3 p.p. 3Q15 4Q15 1Q16 1- Adjusted for the provision for organizational restructuring in, in the total amount of R$101,2 million. 2- Excluding bad debt 3- Service EBITDA Margin excludes mobile handset revenue and cost of goods sold. 4- Adjusted for the sale of towers in 1Q16, in the total amount of R$513.5 million. 11
COSTS AND MARGINS Synergies and efficiency continue to drive cost reduction and consistent EBITDA growth Cost Evolution Breakdown R$(134) Million Δ Δ R$ (98) Selling Expenses R$ (1) Services Rendered, G&A and Others Annual evolution benefited by interconnection tariff reductions compensating for higher expenses linked to network expansion R$ (101) Cost of Goods Sold Rational commercial strategy and sales force optimization reducing commercial expenses Benefiting from Synergies in Publicity and Channels due to brand unification R$ 17 Bad Debt R$ 50 Personnel Excluding the provision for organizational restructuring amounting to R$101.2 million in, which will generate savings of R$181 million/year 1 (R$70 million in 2016) Growing less than inflation in the period Cost of handset reduction due to more selective commercial approach focused on higher value customers -10.8% 251 224 Credit and collecting actions continue to sustain bad debt at stable levels even with macro deterioration 3.2% 3.2% 673 661 1H15 1H16 Subsidy Bad Debt % NOR 1- Total NPV of restructuring amounts to R$1.8bn. 12
Net income expansion in 1H16 driven mainly by EBITDA growth, towers' sale and lower financial costs in the period 1H16 Net Income R$ Million and % yoy NET INCOME REPORTED R$ Million 7.0% 7.8% -4.2% 3.4% 22.1% n.a. 42.3% % 570 280 27 19 272 1,347 1,646 1,918 1H15 EBITDA exc. Non-Recurring Items D&A Financial Result Taxes 1H16 Non-Recurring Items 1H16 after Non- Recurring Items Main variation drivers D&A increase Explained by the higher volume of fixed assets in the period due to higher investments in recent years Financial Result Lower costs in 1H16 due, mainly, to exchange rate variation in 1H15 associated to GVT s non hedged debt until April/15 Non-Recurring Items Positively impacted by the sale of towers in 1Q16, in the net amount of R$338.9 million and negatively impacted by the provision for organizational restructuring in, in the net amount of R$66.8 million 13
DIVIDENDS R$3.3 Billion of dividends and Interest on Capital (IOC) to be paid in two tranches during the 2H16 Schedule of payment of Gross Dividends and Interest on Capital already declared R$ billion based on 2015 Profit Dividends IOC R$1.2 Bn (R$0.3 Bi in Div. and R$0.9 in IOC) to be paid on Aug 23 rd 2016 1.7 R$3.3 Bn 1.6 R$2.1 Bn (R$1.3 Bi in Div. and R$0.8 in IOC) to be paid on Dec 13 th 2016 Continue sustaining the historical practice of strong payout over net profit 95.9% 98.5% 98.5% 99.2% 2012 2013 2014 2015 14
Smart and effective capex allocation focused on growth and quality CAPEX Lower Capex in 2016 benefited by smart allocation and efficiency projects Capex execution focused on growth and quality driving higher cash flow generation Capex R$ Billion and % over Net Revenues 18.0% 18.4% 3.6 3.8 15.6% 3.3 55.0% 2/3 of Capex in 1H16 oriented for commercial projects in the different BUs 12.1% 1H14 1H15 1H16 Smart Allocation Leveraging on Big Data to save network investments Focus on profitable growth Selective TV expansion Synergies Renegotiation of contracts neutralizing FX variation Capex avoidance using GVT s fiber infrastructure and sharing backbone routes B2C B2B Network IT Others OCF: EBITDA 1 (-) Capex R$ Billion 2.3 1H15 3.3 1H16 42.7% 1- Adjusted for the sale of towers in 1Q16, in the total amount of R$513.5 million and for the provision for organizational restructuring in, in the total amount of R$101.2 million. 15
Strong cash flow generation sustained capex effort and robust financial profile FREE CASH FLOW Sustained Free Cash Flow generation enhanced by tower sales Net debt reduction related to repayment of debt and cash generated in the period R$ Million 1H15 1H16 R$ Million (3,824) (3,263) EBITDA (CAPEX) 6,146 6,577 +430 +562 Gross Debt R$ Billion 10.2 8.6 YTD -15.6% (767) (789) (Interest and Income Taxes) -22 Dec/15 Jun/16 (1,138) (966) (Working Capital) +172 Net Debt R$ Billion Non-Recurring Items 1 Free Cash Flow 0 540 418 2,100 +540 +1,682 0.36 4.6 Dec/15 Net debt 0.21 2.9 Jun/16 Net debt / EBITDA YTD -36.7% 1- Proceeds from the sale of towers in 1Q16, in the amount of R$562.1 million and expenses from the provision for organizational restructuring in, in the amount of R$21.8 million, with the remaining to be paid in 3Q16. 16
Already executed synergy actions to secure R$12.2Bn in NPV SYNERGIES Synergies Billion Due Diligence view Base Case Post-Closing view Best Case Already Secured (by Jun/16) % from Base Case % from Best Case Main Synergy actions already executed REVENUES Operating Synergies R$ 9.6 R$ 16.3 R$7.2 75% 44% New national 3P portfolio Cross selling F-M and M-F OPEX Revenue Opex R$ 2.7 R$ 3.9 R$ 5.5 R$ 6.7 R$ 0.6 R$ 4.0 22% 103% 11% 60% Organization redesign in 2015 Brand Unification (advertising)/channels Renegotiation with suppliers Migration of leased circuits to own network Capex 1 Tax Synergies R$ 3.0 R$ 4.4 R$ 4.1 R$ 2.6 87% 63% R$ 5.9 R$5.0 114% 85% CAPEX Leveraging GVT s fiber infrastructure mainly in backbone and backhaul TAX Total Synergies R$ 14.0 R$ 22.1 R$12.2 87% 55% Unification of legal entities unlocking goodwill benefits Higher equity after the integration of GVT to leverage IOC 1- Includes Capex savings, Capex avoidance and Opex avoidance. 17
SYNERGIES Synergy results above initial estimations, combined with additional opportunities identified in the integration process, point towards an increased NPV of R$25Bn R$ Billion Synergies NPV +13% Operational Synergies NPV R$ Billion Revenues Opex Capex 16.3 5.5 6.7 4.1 4.6 Best Case +23% 20.0 5.5 9.8 Trending NPV Revenue synergies are unchanged Higher synergy capturing in field services reducing network, maintenance and installation costs +R$0.8Bn in NPV Higher optimization of advertising and commercial expenses due to better than expected synergies with brand, channels and portfolio integration +R$0.9Bn in NPV Organizational redesign opportunities generated additional synergies +R$1.8Bn in NPV 22.1 Best Case 25.0 Trending NPV Tax Synergies NPV R$ Billion IOC & Others Goodwill 5.9-15% 5.0 3.5 2.5 2.4 2.5 More conservative estimates for potential IOC benefits Initiated goodwill amortization as of April 1 st 2016 when we unified the legal entities Best Case Trending NPV 18
Impact from Operational Synergies in free cash flow amounts to R$557MM in 2016 Direct Cash Flow Synergies 1 SYNERGIES Indirect Cash Flow Synergies Impact of Synergies on Revenues 32 FY15 149 1H16 + Revenues Capex and Opex Avoidance Synergies Economic gains related to companies leveraging on each other assets, thus avoiding investments and expenses Impact of Synergies on Opex 68 128 - Opex Backbone (Capex) Sharing of Backbone routes of Vivo and GVT to improve redundancy and increase capacity R$99 Million Impact of Synergies on EBITDA Impact of Synergies on Capex (net of enabling investments) Impact on Direct OpCF FY15 100 FY15-99 FY15 1 FY15 1H16 277 1H16 16 1H16 293 1H16 + EBITDA - Capex + OpCF Backhaul (Capex) Use of GVT's fiber network to connect mobile sites, increasing capacity Fiber HP's (Capex) Vivo s avoidance of Capex to deploy FTTH in areas (in the state of São Paulo) which GVT had already covered by May 2015 Opex Avoidance 3 Opex related to Capex avoided (e.g. maintenance of links and backbone routes) Impact on 1H16 Impact on FY15 R$32 Million R$61 Million R$72 Million R$264 R$635 Million 1- Net of impact from upfront integration costs. 2- Negatively impacted by the provision for organizational restructuring in, in the total amount of R$101.2 million 3- Opex avoidance is not considered for Fiber HP s. 19
Results confirm once again strong performance from our datacentric and value driven strategy with solid synergy trends Service revenue acceleration with improved trends in mobile, especially in mobile postpaid Value-driven strategy with robust access and solid ARPU growth in key customer segments: mobile postpaid and Fixed UBB Sustained EBITDA growth acceleration with decreasing costs through efficiency and synergies despite inflation in the period Highlights Sustaining revenue increase and outstanding EBITDA and cash flow generation through sustainable commercial strategy, efficiency and synergies Solid Operating Cash Flow generation enhanced by optimized Capex while sustaining consistent shareholder remuneration Strong delivery of synergies allowing the company to secure 55% of total NPV included in the plan and see upside potential to our best case scenario 20
For further information: Investor Relations +55 11 3430.3687 ir.br@telefonica.com www.telefonica.com.br/ir