RESULTS Investor Relations Telefônica Brasil S.A. May, 2017
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, 2015. 2
HIGHLIGHTS ACCELERATING REVENUES ENHANCING PROFITABILITY IMPROVING DIFFERENTIATION Non-voice representing 63% of Service Revenues (+11 p.p. yoy) Double-digit growth in Data Revenues +34% yoy Accelerating mobile service revenues +5% yoy (+3.9% yoy in 4Q16) Recurring costs dropping for the fifth quarter in a row -1.1% yoy 33.2% Recurring EBITDA Margin (+1.8 p.p. yoy) 20.6% OpCF Margin (+3.5 p.p. yoy) Accelerated commercial activity: 2.3x postpaid net adds FTTH accesses +38% yoy Superior network: Record evolution in new cities covered with 4G +304 Customer Experience: #1 position in ANATEL s Satisfation Index¹ in mobile (prepaid and postpaid) In, strong improvements in key business segments, continued efficiency in costs and a robust financial management led Vivo to generate R$678 million in Free 2 Cash Flow, +203% yoy 1- Satisfaction and Perceived Quality Survey held by ANATEL in 2016. Vivo leads when considered only the four major operators. 3 2- Free Cash Flow from business activity. Does not include R$655.1 million payment made in related to the clean-up of the 700MHz 4G spectrum acquired in 2014.
KEY FINANCIALS Acceleration of service revenues and consistent EBITDA expansion leading to outstanding FCF evolution in Total and Mobile Service Revenues Recurring EBITDA and EBITDA Margin 3.9% 1.0% 0.4% 1.8% 2.0% 4Q16 Total Service Revenues Mobile Service Revenues 5.0% 9.0% 7.0% 5.0% 3.0% 33.8% 33.2% 31.4% 7.0% 7.1% 7.3% 4Q16 Recurring EBITDA Recurring EBITDA Margin 37.0% 32.0% 27.0% 22.0% Capex R$ Bn and Capex/Sales Free Cash Flow¹ R$ Bn 4.0 3.0 2.0 1.0 0.0 25.8% 14.3% 12.5% 2.8 1.5 1.3 4Q16 Capex seasonally lower in 1Q with expected acceleration over the next quarters according to the plan 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 3.5000 3.0000 2.5000 2.0000 1.5000 1.0000 0.5000 0.0000 +203% 0.2 1.5 0.7 4Q16 Threefold growth in FCF as a result of strict discipline on costs, capital allocation, working capital and financial management Capex ex-licenses Capex/Sales 1- figures do not include R$655.1 million payment related to the clean-up of the 700MHz 4G spectrum acquired in 2014. 4
TOTAL SERVICE REVENUES Double-digit growth in non-voice products drives service revenue acceleration Non-voice businesses soared 24.0% yoy in Total and Non-voice Service Revenue annual growth supported by resilient evolution in mobile and fixed data Mobile Data & Digital and Fixed UBB Revenues annual growth 33.9% 3,662 4,905 Non-Voice % over Service Revenue 24.0% 14.9% 15.2% 1.0% 1.8% 2.0% 4Q16 Total Serv. Revenue Non-voice Serv. Revenue 52.1% 59.1% 63.3% % over Service Revenue Mobile Data & Digital and Fixed UBB Revenues 36.2% 47.5% 37.0% 4,259 3,108 554 Mobile Data & Digital Services 16.7% Fixed UBB 647 5
MOBILE BUSINESS Continuous expansion of mobile revenues fueled by postpaid growth and higher data contribution Net Mobile Service Revenue¹ R$ Million Mobile Breakdown Service Revenue 5.0%² 6,316 5,911 6,208 343 273 357 3,108 3,934 4,259 7,000.0 6,000.0 5,000.0-23.6% 4,000.0 3,000.0 37.0% 2,000.0 Internet growing 56.6% 71% 74% +3.0 p.p. Postpaid Revenue³ % 10% 6% Prepaid Revenue³ % 2,444 2,036 1,672 1,000.0-31.6% 29% 26% -3.0 p.p. 4Q16 0.0-12% -6% Outgoing voice Data and Digital Services Incoming voice Column2 Prepaid Postpaid Evolution of top-ups impacted by pre to postpaid migration which contributes to higher postpaid growth 1- Simplified view, the chart s breakdown does not disclose other services revenues. 2- When excluding effect of MTR cuts growth would be 7.3% in. 3- Does not include wholesale, M2M and other services revenues. 6
MOBILE BUSINESS Increasing market share leadership with solid trends, mainly in postpaid Total Mobile: leading market share with the best customer mix Postpaid: enhancing growth and customer loyalty Mobile Market Share +2.1 p.p. 42% market share in postpaid Customer Base Mix COMPETITORS Postpaid net adds (Thousand) 2.3x Prepaid to Hybrid Migrations +17.1% 28.4% 30.5% POSTPAID PREPAID 46% 54% Focus on bundled offers and value added services Prepaid Weekly Offers¹ (Customer Base) +28.1% 26% 74% Incentivizing adoption of digital offers 185 435 Reducing churn levels (postpaid exc. M2M) -0.1 p.p. Positive net portability against all major players once again in 1.8% 1.7% Kantoo Inglês 1- Also includes the R$39.99 offer which lasts for 30 days. 7
MOBILE BUSINESS Execution of commercial strategy focused on value and data, driving superior ARPU Rational pricing strategy improves ARPU in all segments leading to solid total ARPU evolution Entry price of pure postpaid plans Postpaid ARPU +3.8% +4.1% +12% 26.9 28.0 Data 53% 69% 35.8% % of Vivo Turbo base in high-end offers Outgoing Prepaid ARPU +0.8% Voice 47% 31% --31.1% 29% 64% 71% 36% Total ARPU R$ per month Entry level High-end 8
FIXED BUSINESS Robust evolution in broadband partly compensating voice decline Voice maturity and regulation continue to weigh on fixed revenue Net Fixed Revenue R$ Million but mid-term trend is expected to improve Clear uptake of high-value fixed services -2.2%¹ 4,218 4,281 4,126 Revenue evolution stable yoy when adjusting for regulatory effect FTTH Revenue R$ million +39.8% IPTV Revenue R$ million +45.8% 564 630 574 401 406 417 554 616 647 476 486 479 1.9% 4.0% 16.7% Reduced regulatory impact on revenue growth reduction of fixed revenue growth due to regulatory effects (VC, TU-RL, TU-RIU) Increased resilience of fixed voice customer base 2,224 2,144 2,009 0.5% -9.6% -3.1 p.p. -2.2 p.p. 78% 4Q16 Voice and Others² Pay TV³ UBB xdsl Data and IT 4 % of fixed voice revenues packaged as monthly fees 1- When excluding effect of VC, TU-RL and TU-RIU cuts growth would be stable in. 2- Includes voice, interconnection and other services. 9 3- Includes DTH and IPTV. 4- Corporate Data and IT.
FIXED BUSINESS Customer and ARPU trends continue to be solid in high-end fixed services Strong commercial activity in FTTH and IPTV combined with resilient ARPU increase in BB and Pay TV Broadband and Pay TV accesses breakdown Broadband and Pay TV ARPU evolution BB Accesses Thousand TOTAL 7,214 7,336 FTTH 10% 13% FTTC¹ 45% 45% 2% 38% Broadband ARPU R$ per month +9.2% Robust ARPU growth both in BB and Pay TV for the 7 th consecutive quarter xdsl 45% 42% 0% -5% 44.5 48.6 Pay TV Accesses Thousand TOTAL 1,787 IPTV 10% DTH 90% 1,661 17% 83% -7% 57% -14% Pay TV ARPU R$ per month +6.6% 88.8 94.7 1- FTTC (Fiber to the Cabinet) includes Cable accesses. 10
CAPEX In the Company invested in key technologies to sustain superior network quality Sustained Capex execution to reach guidance for 2017 aimed on 4G and fiber deployment Capex R$ Billion and % over Net Revenues Solid acceleration in 4G expansion Number of new 4G cities 12.5% 8.0 1.3 Capex plan for 2017-19 (annual average) Lower capex accrued in 1Q due to seasonality, with stronger level expected for next quarters in line with guidance Execution focused on 4G and fiber New cities in the quarter Existing cities 185 198 226 516 +290 820 +304 2Q16 3Q16 4Q16 Optimized Capex allocation focused on growth Capex allocation % population covered 47% 48% 49% 60% 65% +37% +30% +39% Continuously decreasing investments in legacy while shifting focus to future, growth technologies FTTX IPTV 4G 11
COSTS AND MARGINS Solid and consistent cost contention across the board during the quarter COST EVOLUTION BREAKDOWN R$(80) MILLION ΔYOY MAIN HIGHLIGHTS 33.8% 33.2% 31.4% 31.4% 31.9% -1.1% -2.0% -1.8% -1.9% -1.8% 2Q16 3Q16 4Q16 Personnel Costs 4.5% 3.2% -0.9% 4Q16 Cost of Services Rendered -1.3% -6.8% -4.9% 4Q16 Commercial Expenses¹ 4.0% -5.2% -2.3% 4Q16 ı 12.9% of total Opex ı Savings from rightsizings in the last years ı 41.1% of total Opex ı Interconnection tariff reductions ı Synergies in TV content ı 26.7% of total Opex ı Higher expenses due to increased commercial activity in key segments Recurrent Costs Recurrent EBITDA Margin Bad Debt / Gross Revenue Ratio 2.2% 2.1% 2.2% 4Q16 ı 5.1% of total Opex ı Credit and collection actions continue maintain bad debt stable 1- Excluding bad debt. 12
SYNERGIES Impact from operational synergies in free cash flow amounts to R$0.5 bn in Guaranteed NPV Cash Flow Synergies NPV R$ Billion % of captured value over R$ Million Accumulated² 22 Best Case Revenues 155 549 REVENUES 5.5 17 76% Opex 203 858 OPEX 6.6 1.5 6.6 28% EBITDA Capex 359 9 1,407 (77) 99% CAPEX FINANCIAL AND TAX 4.1 3.6 5.9 5.0 Best Case Integration Plan¹ Already Captured 89% 85% Direct CF Indirect CF Impact on OpCF³ 368 163 531 1,330 1,263 2,593 1- Trending NPV of synergies points to a total of R$25 bn. 2- Cash Flow Synergies accumulated since 2Q15. 3- Does not include tax and financial cash flow synergies. 13
EFFICIENCY COMMITMENT Expected margin improvement underpinned by our efficiency project, focused on streamlining processes across the Company Adapt our operating model to address evolving customer digital demands Big Tickets currently being addressed are: Commercial efficiency Prioritized by top management to increase profitability Zero back-office and zero paper Simplification of our operating model Leveraging analytics and transformation initiatives Optimization of infrastructure and use of resources DIGITAL IN EVERYTHING WE DO 14
NET INCOME Expansion in driven by EBITDA growth and improved financial management Net Income R$ Million and % yoy REPORTED R$ Million % 7.3%¹ 1.6% -8.3% -16.4% 13.3%² (339) 64 (30) 27 56 1,218 879 996 Non-Recurring Items exc. Non- Recurring Items EBITDA exc. Non- Recurring Items D&A Financial Result Taxes MAIN VARIATION DRIVERS NON-RECURRING ITEMS positively impacted by the sale of towers, in the net amount of R$338.9 million FINANCIAL RESULT Positively impacted by lower interest rates and lower average indebtedness in the period D&A INCREASE Explained by higher investments in recent years 1- Refers to Recurrent EBITDA evolution reported. For purposes of this build-up, variation excludes net effects of non-recurrent items. 2- Net income decreased -18.2% when compared to non-recurring figure. 15
FREE CASH FLOW Strong cash flow generation in all lines support robust financial profile Free Cash Flow¹ generation with improvements across the board Improving further financial structure through strong cash generation R$ Million EBITDA (CAPEX) (Interest and Income Taxes) (Working Capital) FCF from Business Activity (1,492) (1,328) (1,100) (1,098) (459) (410) 224 678 3,275 3,514 R$ Million +239 +164 +454 Shareholder remuneration in 2017 Payment Date Gross Amount Amount per share (PN³) Payment of R$4.1 bn in dividends/ioc already declared²: Aug 22, 2017 Dec 13, 2017 Total R$1,568 mn R$2,518 mn R$4,086 mn R$0.96 R$1.54 R$2.50 +49 +3 Gross Debt R$ Billion 8.9 10.8 Mar/16 Mar/17 Net Debt R$ Billion 0.35 0.33 4.7 4.5 Mar/16 Mar/17 Net Debt Net Debt / EBITDA +21.3% -2.9% 1- FCF does not include income tax on IOC. 2- Based on 2016 net profit. 3- Gross amounts per ON: R$0.87 on Aug 22 and R$1.40 on Dec 13. 16
HIGHLIGHTS Another quarter of strong results across the board, outperforming the market Accelerating revenue growth driven by data Margin improvement and outstanding cash flow generation Enhancing network differentiation and customer satisfaction 17
FOR FURTHER INFORMATION: INVESTOR RELATIONS +55 11 3430.3687 ir.br@telefonica.com www.telefonica.com.br/ir