Investor RelationsTelefônica Brasil S.A.
July, 2017
RESULTS 2Q17
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.
DISCLAIMER
2
2Q17HIGHLIGHTS
ACCELERATING REVENUES ENHANCING PROFITABILITY IMPROVING DIFFERENTIATION
Non-voiceRevenues already
representing
66%of Service Revenues
(63% in 1Q17)
Confirming acceleration inMSR of approx.
5% yoy
for the 2nd
consecutive quarter
Double-digit
revenue growth
in Mobile Data &
Digital Services
+32% yoy and UBB
+20% yoy
33.0%Recurring EBITDA
Margin
(+1.6 p.p. yoy)
Recurring costs dropping for the
6th quarter in a row
-0.6% yoy
18.3%OpCF Margin
in 1H17
(+2.5 p.p. yoy)
3
Accelerated commercial
activity:
2.3x postpaid
net adds yoy
and record FTTHnet adds
+124k
Superior mobile network:
+657 new
cities with 4G coverage and
+60 cities
with 4G+
Expansion of UBB footprint:
+5 new cities
with FTTH in 2Q17
In 1H17, Free Cash Flow¹ reached R$2.6 billion, representing a growth of 53.4% yoy as a result of strict discipline on costs, optimized capital allocation, working capital and financial management
1- Free Cash Flow from business activity. Does not include the R$655.1 million payment in 1Q17 related to the clean-up of the 700MHz 4G spectrum acquired in 2014, the proceeds from the sale of towers received in 2Q16, in the amount of R$562.1 million, and expenses from the provision for organizational restructuring in 2Q16, in the amount of R$21.8 million.
4
Continued increase of service revenues and consistent EBITDA expansion leading to strong FCF evolution
KEY FINANCIALS
Total and Mobile Service Revenues YoY
1.6% 2.0% 2.3%2.6%5.0% 4.8%
55.7%63.3% 65.5%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
70.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2Q16 1Q17 2Q17
Total Service Revenues Mobile Service Revenues
Non-Voice % over Service Revenue
Recurring EBITDA YoY and EBITDA Margin
7.0% 7.3% 6.9%
31.4%33.2% 33.0%
22.0%
27.0%
32.0%
3.0%
5.0%
7.0%
9.0%
2Q16 1Q17 2Q17
Recurring EBITDA YoY Recurring EBITDA Margin
Capex R$ Bn and Capex/Sales
1.81.3
1.8
16.8%
12.5%
17.0%
0.0%
5.0%
10.0%
15.0%
0.0
0.5
1.0
1.5
2.0
2.5
2Q16 1Q17 2Q17
Capex ex-Licenses Capex/Sales
Free Cash Flow from Business Activity¹ R$ Bn
Capex
acceleration in
2Q in accordance
with investment
plan for 2017
1.72.6
0.8000
1.3000
1.8000
2.3000
2.8000
3.3000
3.8000
1H16 1H17
+53.4%
4
1- Does not include the R$655.1 million payment in 1Q17 related to the clean-up of the 700MHz 4G spectrum acquired in 2014, the proceeds from the sale of towers received in 2Q16, in the amount of R$562.1 million, and expenses from the provision for organizational restructuring in 2Q16, in the amount of R$21.8 million.
47%57%
72%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
2Q15 2Q16 2Q17
75%
Consistent growth of Postpaid Revenues over the last quarters
Net Mobile Service Revenue¹R$ Million
Data and Digital Services Revenue% over Mobile Service Revenue
Data contribution remains on the rise, leading to another quarter of resilient mobile service revenue growth
5
MOBILE REVENUES
10% 9% 8%10% 10%
2Q16 3Q16 4Q16 1Q17 2Q17
Postpaid Revenues³
YoY%
2,2131,672 1,540
3,400 4,259 4,500
327273 233
2Q16 1Q17 2Q17
Outgoing voice Data and Digital Services Incoming voice Column2
-30.4%
YoY
-28.8%
32.4%
Internet growing 44.1% YoY
4.8%²
5,984 6,208 6,272
Postpaid Revenues over Mobile Service Revenues
1- Simplified view, the chart’s breakdown does not disclose other services revenues. 2- When excluding effect of MTR cuts growth would be 7.0% YoY in 2Q17. 3- YoY evolution does not include wholesale, M2M and other services revenues.
Market share expansion combined with high-value customer mix sustained by strong commercial activity
6
Accelerating postpaid growth driving superior customer mix
Complete portfolio with strong adoption of high-value offersTotal Mobile: leading market share with solid trends
MOBILE ACCESSES
6.9% 6.8% 7.5% 8.2% 9.7%
43%44%
45% 46%47%
35.0%
37.0%
39.0%
41.0%
43.0%
45.0%
47.0%
2Q16 3Q16 4Q16 1Q17 2Q17
Postpaid YoY Growth Postpaid Mix
Mobile Market Share
+1.8 p.p.
28.9% 30.7%
2Q16 2Q17
42.3% market share in postpaid
• Leading postpaid share of
net adds in 2Q17: 59%
• Reducing postpaid churn
to 1.8% in 2Q17 (vs. 1.9% in
2Q16)
• Positive postpaid
portability every month
against all major players in
2017
+19%
2Q16 2Q17
of new
pure postpaid adds are Family Plans
60%
+31%
2Q16 2Q17
+20%
2Q16 2Q17
Prepaid to Hybrid Migrations
% of Prepaid Customers on Vivo Turbo Offers
Family Plan Accesses¹
yoy growthin hybrid customer base+17%
of customershave higher-value offers74%
1- Considers family plans and plans with paid additional lines.
4G: superior quality, increased coverage and stronger adoption contributing to higher ARPU
Higher 4G scale improving customer experience…
…through strong adoption and consumption…
…helping to support ARPU
7
+144%
2Q16 2Q17
4G Traffic
PB per quarter YoY
43%28%
57%72%
27.2 28.2
2Q16 2Q17
Total ARPUR$ per month
--32.3%
YoY
30.8%
+3.6%
Data
Voice
Strong 4G growth opportunity ahead
MOBILE ACCESSES
• 71.4% of the population covered by
4G
• through carrier aggregation
already being offered in all main
capitals of Brazil¹
• 4G speeds averaging >20Mbps²
100%customers
81%smartphones
37%4G smartphones
1- São Paulo, Rio de Janeiro, Belo Horizonte, Porto Alegre, Brasília.2- Source: OpenSignal State of Mobile Networks: Brazil report.
YoY growth
of 4G handsets+99%
4G market share34.6%
• Reaching 69 FTTH cities in the country
• In Barra Mansa (RJ), we reached 40% penetration on our FTTH network in under30 days
2Q16 2Q17
+60.7%
Net Fixed Revenue | R$ Million
Improved fixed revenue trend as a result of double-digit growth in high-value fixed services
1- Includes voice, interconnection and other services.
2- Includes DTH and IPTV.
3- Corporate Data and IT.
Voice and Others¹ Pay TV² UBB xDSL Data and IT
2,157 2,009 2,002
482 479 472
570 647 685
398 417 412
610 574 592
4,216 4,126 4,163
2Q16 1Q17 2Q17
-7.2%
-1.9%
20.1%
3.5%
-2.8%
YoY
-1.3%
8
+32.8%
FTTH Revenue | R$ million
Clear uptake of FTTH and IPTV…
FIXED REVENUES
…with proven improvement as we expand our footprint
Fixed revenue
grows 0.2% YoY
when adjusting
for regulatory
effect
³
IPTV Revenue | R$ million
2Q16 2Q17
Record level of net adds in FTTH and IPTV driving ARPU improvement in broadband and pay TV
1- FTTC (Fiber to the Cabinet) includes Cable accesses. 9
FIXED ACCESSES
BroadbandAccesses and ARPU
Pay TVAccesses and ARPU
BB Accesses | Thousand
44% 41%
45% 44%
10% 15%
7,248 7,435
2Q16 2Q17
-5%
0%
45%
3%
YoY
xDSL
FTTC¹
FTTH
TOTAL
Pay TV Accesses | Thousand
DTH
IPTV
TOTAL
-15%
65%
-6%
YoY
61 71
124
4Q16 1Q17 2Q17
FTTH Accesses | Thousand Net Adds
25
29
42
4Q16 1Q17 2Q17
IPTV Accesses | Thousand Net Adds TV ARPU | R$ per month
90.6 95.1
2Q16 2Q17
BB ARPU | R$ per month
44.6 49.5
2Q16 2Q17
+10.9% +4.9%
89% 80%
11%20%
1,761 1,647
2Q16 2Q17
4G+ and FTTH rollout
Number of new 4G cities
3.1
8.014.8%
1H17 Capex plan for 2017-19
Capex allocation
Capex | R$ Billion and % over Net Revenues
The Company continues to focus investments on accelerated 4G deployment and FTTH so as to guarantee superior network quality
Sustained Capex execution to reach guidance for 2017
Optimized Capex allocation focused on growth
10
CAPEX
Capex execution in
line with guidance
for the year, with
expected acceleration
in 2H17
(annual average)
+106%
FTTX IPTV
+284% +39%
4G
+90%
Solid acceleration in 4G and FTTH expansion
+290
+304
+657
198 226516
820
1,477
2Q16 3Q16 4Q16 1Q17 2Q17
New cities inthe quarter
Existingcities
48%% population
covered 49% 60% 65% 71%
• Launch of in 60 cities, with speeds
twice as fast as traditional 4G
• 5 new FTTH cities in the year2Q16 2Q172Q16 2Q172Q16 2Q17
Solid and consistent cost contention across the board during the quarter
2Q17 COST EVOLUTION BREAKDOWN | R$(40) MILLION ΔYOY
5.8%
-0.9%
0.6%
2Q16 1Q17 2Q17
Personnel Costs YoY
-2.1%
-4.9% -5.0%
2Q16 1Q17 2Q17
-5.0%
4.0% 5.3%
2Q16 1Q17 2Q17
2.0% 2.2% 2.2%
2Q16 1Q17 2Q17
• 12.8% of total Opex• Savings from rightsizings in the last
years
• 39.9% of total Opex• Interconnection tariff reductions• Synergies in TV content and efficiency
in network costs
• 27.7% of total Opex• Expenses related to increased
commercial activity
• 5.2% of total Opex• Credit and collection actions continue
to maintain bad debt stable sequentially
11
COSTS AND MARGINS
Cost of Services Rendered YoY
Commercial Expenses¹ YoY
Bad Debt / Gross Revenue Ratio
1- Excluding bad debt.
-1.8% -1.9% -1.8%-1.1%
-0.6%
31.4% 31.9%
33.8% 33.2% 33.0%
2Q16 3Q16 4Q16 1Q17 2Q17
Recurrent Costs Recurrent EBITDA Margin
MAIN HIGHLIGHTS
-2.4% recurringcosts vs. 2Q15 (GVT’s acquisition)
+12.1% IPCAin the period
Accumulated free cash flow impact from operational synergiessince 2Q15 amounts to more than R$3 billion
12
SYNERGIES
1- Trending NPV of synergies points to a total of R$25 bn. 2- Cash Flow Synergies accumulated since 2Q15.3- Does not include tax and financial cash flow synergies.
Guaranteed NPV Cash Flow Synergies
5.9 5.0
4.13.6
6.67.0
5.5
1.7
22
17
Best Case Integration Plan¹ Already Captured
FINANCIAL AND TAX
CAPEX
OPEX
REVENUES
NPV | R$ Billion % of capturedvalue over
85%
90%
106%
32%
79%
Best
CaseRevenues 186
2Q17 2Q17Accumulated²
Opex
EBITDA
Capex
Direct CF
Indirect CF
Impact on OpCF³
181
367
8
375
78
453
735
1,039
1,774
(69)
1,705
1,341
3,046
R$ Million
Almost 80% of Best Case NPV already guaranteed
13
Optimized customer care processes through digitalization improving customer experience and increasing efficiency
EFFICIENCY COMMITMENT
E2E e-billing and e-collections: incentivizing e-billing adoption and
accelerating digital collection interactions
e-billing penetration YoY
+12 p.p.
Increased adoption of digitalization as a cost efficiency lever
e-commerce: promoting sales of products and services through digital
channels
Virtual Recharges¹ YoY • 27% of premium products
sales made through digital
channels
• Virtual recharges cost
40% less than in physical
channels
e-care: increasing number of unique users accessing our e-care channels
Digital channels unique users YoY
+34%• 11% YoY reduction
of calls that require
human assistance
• e-billing costs less
than 5% the cost of paper
billing
• >70% of postpaid adds in own
stores adopt digital bills
1- June/17 YoY growth of financial volume of virtual recharges.
Jun/16 Jun/17
Jun/16 Jun/17
+28%
Jun/16 Jun/17
2Q17 Net Income | R$ Million and % yoy
REPORTED | R$ Million
∆ YoY
%79.6%-13.7%6.9%¹ 24.8%²
MAIN VARIATION DRIVERS
TAXES
Explained by lower level of Interest on Capital distributed in
2Q17
FINANCIAL RESULT
Positively impacted by lower interest rates and lower average
indebtedness in the period
NON-RECURRING ITEMS
2Q16 negatively impacted by the provision for organizational restructuring,
in the net amount of R$67 million
1- Refers to Recurrent EBITDA evolution reported. For purposes of this build-up, variation excludes net effects of non-recurrent items.2- Net income increased 13.9% when compared to 2Q16 recurring figure.
0.2%
Double-digit expansion in 2Q17 driven by EBITDA growth and improved financial managementNET INCOME
14
700 766 873
67261 (4) 42 (193)
2Q16 Non-Recurring Items 2Q16 exc. Non-Recurring Items
EBITDA exc. Non-Recurring Items
D&A Financial Result Taxes 2Q17
9.2 10.4
Dec/16 Jun/17
4.1 2.9
0.29 0.21
Dec/16 Jun/17
Improving capital efficiency driving strong cash flow generation in all lines
Free Cash Flow¹ generation with improvements across the board
Improving further financial structure through strong cash generation
Gross Debt | R$ Billion
+13.0%
YTD
-29.3%
YTD
Net Debt Net Debt / EBITDA
Net Debt | R$ Billion
15
1- FCF does not include dividends, IOC and withholding tax.
2- Based on 2016 net profit.
3- Gross amounts per ON: R$0.87 on Aug 22 and R$1.40 on Dec 13.
FREE CASH FLOW
1H16 1H17R$ MillionYoYR$ Million
EBITDA
(CAPEX)
(Working
Capital)
(Interest and
Income Taxes)
FCF from
Business
Activity+918
+466
+116
-24
+360
2,636
(605)
(654)
(3,146)
7,042
1,718
(966)
(630)
(3,262)
6,577
Payment of R$4.1 bn in dividends/IOC already
declared²:
Shareholder remuneration in 2017 Payment Date Gross Amount Amount per share (PN³)
R$1,568 mn
R$2,518 mn
R$0.96
R$1.54
Aug 22, 2017
Dec 13, 2017
R$2.50R$4,086 mnTotal
Another quarter of consistent combination of growth and profitability
2Q17HIGHLIGHTS
Confirming revenue growth
accelerationdriven by outstanding
performance in postpaid and UBB
16
Sustained margin improvement and
cash flow generation
Enhancing network
differentiationin 4G and FTTH
FOR FURTHER INFORMATION:INVESTOR RELATIONS
+55 11 3430.3687
www.telefonica.com.br/ir