MARIO CESAR ARAUJO TIM Brasil CEO
Agenda 2006 results highlights The Brazilian market context 2007-09 Plan overview Summary 1
Since we met a year ago Net service revenues (4Q06) we achieved leadership in EBITDA margin VAS revenues (4Q06) Business segment customer base and maintained our position of best-performer on Customer satisfaction/preference Awareness (TIM Brasil regained 2006 Top of Mind among mobile operators) Coverage (TIM Brasil remains the only operator with national coverage) ARPU Market share of net and gross additions Market share of GSM lines 2
Leadership with profitability BR GAAP Net share (%, 2006 eop) Service revenues (R$bi, 4Q06) EBITDA margin (%, FY06) Market share Revenue share* Δ% 06-05 24.1% in IAS TIM Brasil 38.2% 25.4% 2.7 31.7% 24.5% 68% Vivo -5.2% 29.1% 2.6 30.7% 23.7% -14% Claro 38.1% 23.9% 1.9 22.5% 13.3% N/A * Oi and Telemig/Amazonia Celular revenues are estimated 3
Commitments fulfilled IAS 2006 target* 2006 performance Subscribers (Mln, eop) Net revenues growth (%, eop) EBITDA margin** (%) 20.2 26.0% 25.4 ~24 8,784 23.4% 10,836 +7.8pp 24.1% >20% >20% 16.3% 2005 2006 2005 2006 2005 2006 * Telecom Group Meeting with the Financial Community 2006 ** Organic Local currency excluding exceptional items 4
Agenda 2006 results highlights The Brazilian market context 2007-09 Plan overview Summary 5
Growing economy and widening consumer market Real GDP growth Minimum-salary increase vs. inflation 4.9% 2.9% 3.4% 3.7% 4.0% Minimumsalary increase 8.3% 15.4% 16.7% Increasing purchasing power of lower income classes 2.3% Inflation 7.6% 5.7% 3.1% 3.9% 4.1% 4.2% 2004 2005 2006 2007E 2008E 2009E 2004 2005 2006 2007E 2008E 2009E PAC* estimate 4.5% 5.0% 5.0% PAC* inflation estimate 4.1% 4.5% 4.5% Stability and increase of purchasing power * Government infrastructure investment program to accelerate economy Source: EIU, Brazilian Central Bank 6
Regulatory framework 2006 2007 2008-09 F-M termination rate Arbitration Arbitration Fully Allocated Cost model Stability of interconnection tariff in the medium term M-M termination rate B&K(45/55) < Jun Pay per use > Jul Pay per use Pay per use Positive for a fair regulatory environment Number Portability (F+M) - Definition Implementation Additional opportunity to consolidate leadership in high-value customer segments 3G/Wi-Max licensing - Public consultation +licensing Commercial deployment Availability of wireless broadband Unbundling Partially regulated Commercially not viable Expected upgrade of regulation Commercially viable Increase of competition in the fixed-line market 7
Telecom growth driven by mobile and BB CAGR 06-09 Lines (millions) 100 86 Mobile 112 120 126 7.9% Revenues (R$ bn) 82 85 86 77 71 Mobile 25.1 30.3 35.8 38.5 40.5 6.5% at comparable regulatory framework 10.1% Fixed (voice) Fixed (BB) 39 37 36 36 36-1.0% 4 6 8 9 10 20.5% 2005 2006 2007E 2008E 2009E Fixed (voice) Fixed (BB) 40.6 39.6 38.4 37.3 35.6 5.7 6.8 7.9 8.8 9.5 2005 2006E 2007E 2008E 2009E -3.4% 11.9% Fixed-line losing ground, but still a significant market (~R$46 bn, ~60% of total) Limited competition in fixed-line vs. mobile Opportunity for challengers of fixed-line operators Source: Internal estimate 8
Mobile residual market in lower classes and increase of churn Mobile penetration* by social class 93% Gross Million additions lines, gross mix adds evolution Million, % 59% 43 40 39 38 28% Fresh market 14 11 8 5 High income Medium income Low income (> 3 MS**) (1-3 MS) (<1 MS) Churn market 29 (68%) 29 (72%) 31 (81%) 33 (85%) % of population 11% 31% 58% 2006 2007E 2008E 2009E Residual market in lower income social classes Increase of churn market * People more than 10 years old ** Minimum salary = R$350,00 Source: IBGE (PNAD, 2005) 9
Agenda 2006 results highlights The Brazilian market context 2007-09 Plan overview Summary 10
TIM Brasil strategic objectives, guidelines... Market evidence Strategic goals Guidelines Mobile leadership TIM #1 in service revenues Consolidate our positioning (revenue growth consistently above market average), increasing profitability 1 2 End-to-end segmentation to attract and maintain high value customers Operational efficiency to support customer base expansion Low-ARPU clients approach Residual market in lower income classes Ensure profitability of low ARPU clients 3 Develop new business model oriented to low-arpu customers Convergence Fixed-line = R$ 46 billion market Capture fixed-line revenues (increase share of spending on TIM Brasil customer base) Defend TIM mobile leadership 4 New convergent products HZ with fixed numbering Virtual PABX Internet broadband access... 11
... and main targets IAS Subscribers (mln, eop) Net revenues (R$ bln) EBITDA margin (%) 25.4 ~10% >33 ~7% 10.8 >10% ~4% from convergence 22% CAGR TIM (06-09) CAGR competitors (06-09) + >6pp >28% ~1p.p. from Low-ARPU clients approach 2006 2009 2006 2009 Market share 25.4% ~27% 29.4%* ~33%* 2006** 2009 Improving customer base mix (% post-paid) Focus on high value customers Holding voice ARPU Stimulating VAS take-up * Estimated service revenue share ** Figure adjusted considering Bill & Keep elimination starting from 01/01/06 Improve efficiency 12
Mobile leadership: key initiatives of the end-to-end approach focus on 2007 Offer Sales Caring Post-paid Business Improvement of data solutions Multi-regional/ customized bundling Offer/promotion customization Dedicated BU for LA/Top SME Value/revenue driven commissioning Dedicated people/ skills New sales opportunities (e.g. inbound VAS up-sell) Consumer Improve segmentation: from terminals to tariff plans VAS innovation Subsidies in accordance to offer/customer value Channel mix optimization (e.g. increase of telesales) Premium caring (oneto-one) for VIP clients Pre-paid On-net community plans Chip only Zero subsidy Channel mix optimization (e.g. newsstands) Alternative channel approach (e.g. web, IVR, SMS) 13
Mobile leadership: operational efficiency (fixed costs) % of Fixed Costs (FY06) Key initiatives Opportunity (07-09) Commercial fixed costs 32% Improve effectiveness of call centre traffic management (Prerouting) New contract models with 3 rd parties call centres Continuing optimization of advertising expenditure ~3% reduction of cost per client per year Industrial OPEX 33% Leverage TIM Brasil existing IP network Use of alternative technology for BTS connection Selective IT outsourcing (e.g. data centre, application management) ~20% reduction of cost per minute in the period G&A 11% Rigorous control of non-productive activities Positive impact of group restructuring ~1p.p. reduction of G&A/ net revenues percentage HR 19% Limited headcount growth, focused on commercial activities Progressive optimization of regional operations ~18% increase in net revenues/employee 14
Low-ARPU clients: increasing need for a new business model % of net additions (06E-10E) Mobile market worldwide evolution Subscribers, bln 0,3 0,1 0,2 4,0 2,6 1,1 1,2 0,9 0,6 0,6 1,7 2,9 1998 2002 2006E 2010E Emerging markets 86% Developed countries 14% ARPU vs. EBITDA for selected operators EBITDA Margin (%) 70% 60% 50% 40% 30% 20% 10% 0% MTS Russia MTS Ukraine SMART - Philippines Sonatel China Mobile Turkcell Mobilink Pakistan 0 10 20 30 40 50 Monthly ARPU (US$) New business models characterized by: Lower air-time prices (leveraging on price/volume elasticity) Lower denomination vouchers Use of extensive, indirect distribution channels Increase of electronic caring Source: Merril Lynch Wireless Matrix (2007), Pyramid 15
Our convergence approach: matching different demands with a portfolio of technologies LA Brazilian demand characteristics High speed dedicated data connection (>10Mbps) 100% guaranteed bandwidth Large number of simultaneous users High customization TIM technologies/offer Data Voice Dedicated PABX links Hosting/ WiMax Management HSPA (in IP Solutions mobility) SME Internet connection between 512Kbps and 8Mbps* Cost optimized QoS Medium-low interest of intra-group communication Limited/affordable customization WiMax HSPA IP Solutions Office Zone/ GSM Residential Internet connection between 64Kbps and 2Mbps* Low QoS Standard voice telephony (fixed and mobile) with no customization WiMax HSPA EDGE Home Zone/ GSM * Nominal speed connection 16
CAPEX evolution breakdown IAS, R$ Bln 100%= Administrative Commercial IT Network 2.6 1.9 6.3 5% 1% 13% 24% 34% 21% 21% 22% 62% 54% 43% 1% Leveling-off network CAPEX (excluding licenses and convergence plan) Shift of investments: From roll out to quality From 2G to 3G 2005 2006 2007-2009 CAPEX/revenue 29% 18% 15% 17
TIM Brasil Targets 2006 Actual 2007 Targets 2009 Targets Customer Portfolio (Mln SIM) 25.4 ~29 > 33 M/S TIM Brazil on SIM Revenues Growth Organic* EBITDA margin Organic* CAPEX (Bln ) 25.4 % ~26 % ~ 27 % 23.4 % > 15 % > 10 % (CAGR 06-09) 24.1 % ~ 23 % > 28 % 0.7 ~ 2.4 (Cum. 07-09) Revenues Trend adjusted for B&K** 2006: 16.5% 2007: > 10% CAGR 06-09: ~ 10% EBITDA margin adjusted for B&K** 2006: 22.4% Op. Free Cash Flow (mln ) Positive from IIIQ 06 Break even (yearly basis) ~15% on Rev. (Year 2009) *Local currency excluding exceptional items, IAS Gaap ** Figure adjusted considering Bill & Keep elimination starting from 01/01/05 18
Agenda 2006 results highlights The Brazilian market context 2007-09 Plan overview Summary 19
Summary Achieved leadership in service revenues and profitability in 2006 Profitable growth over the next three years to be accomplished by: Consolidating our mobile leadership (focus an high-end customers) and pursuing operational efficiency Developing a new approach to guarantee profitability of low-arpu clients Developing convergent solutions to defend our mobile leadership and capture new revenue streams 20