presentation 2q15 - eng

Investor RelationsTelefônica Brasil S.A.

Investor RelationsTelefônica Brasil S.A.July, 2015.

Results 2Q15_


For the first time, in this quarter we are presenting pro forma numberscombining Telefônica Brasil and GVT results for all financial andoperational indicators. For a better understanding of trends, we are alsopresenting pro forma information for all periods as of January, 2014.

This presentation may contain forward-looking statements concerning futureprospects and objectives regarding growth of the subscriber base, abreakdown of the various services to be offered and their respective results.

The exclusive purpose of such statements is to indicate how we intend toexpand our business and they should therefore not be regarded as guaranteesof future performance.

Our actual results may differ materially from those contained in suchforward-looking statements, due to a variety of factors, including Brazilianpolitical and economic factors, the development of competitive technologies,access to the capital required to achieve those results, and the emergence ofstrong competition in the markets in which we operate.

Disclaimer

2


1- Considers TEF Brasil + GVT figures as of January, 2014. 2- Includes Net Handset Revenues. 3 - The tax basis revision of certainintangibles due to the businesses combination (Law 12,973), whose net positive effect on the net income was R$1,196.0 million in the2Q14.

Net Operating Revenue2 (R$ million)

Net Fixed Revenue (R$ million)

EBITDA (R$ million)

EBITDA Margin (%)

Net Mobile Revenue (R$ million)

R$ million

3

2Q151 %YoY 1H151 %YoY

10,427.6

4,215.3

3,131.5

30.0%

6,212.3

5.4

3.1

2.8

(0.8) p.p.

7.0

20,792.1

8,350.6

6,246.0

30.0%

12,441.5

5.3

1.8

2.3

(0.9) p.p.

7.8

Recurrent Net Income3(R$ million) 932.9 (1.4) 1,404.1 (20.8)

Vivo’s results for the 2Q15 are solid and reflect the strength of our strategy

KEY FINANCIAL HIGHLIGHTS

Capex (R$ million) 2,063.2 0.2 3,824.0 7.5

EBITDA – CAPEX (R$ million) 1,068.3 8.4 2,422.0 (4.9)


Net Mobile Revenue

R$ Million

Data and VAS Revenues Growth

Mobile Service Revenue Share1

Accumulated in the last 12 months

1- Based on net mobile service revenues (MSR) accumulated in the last 12 months. For comparative purposes, we calculate the MSRbased on ARPU released by each. Some competitors’ ARPU may not eliminate intercompany resulting in an overestimated revenue.Considering that TIM and Oi still haven’t released 2Q15 results, we are using the same revenue of the 1Q15 in the 2Q15.

% of Data and VAS Revenue over MSR

46%37%

2Q14 2Q15

435 429400 481

1,1781,777

2,013

2,686

2Q14 2Q15

Growth of mobile revenue continue to outperform the market driven by robust data growth

4

-1%

20%

51%

2Q15 YoYR$ Million

Internet

VAS

SMS -11%

42%

29%

2Q14 YoY

33%19%

38%

25%19% 18%

Vivo Player 2 Player 3 Player 4

2,850 2,686

538 385

2,013 2,686

294383

11271

5,8076,212

2Q14 2Q15

-5.7%

YoY

-28.5%

33.5%

30.4%

7.0%

Mobile Service Revenues grow 5.7% in the 2Q15

Others

Data and VAS

Incoming voice

Outgoing voice

Handsets

-36.6%


Total Mobile Accesses

53.2 53.0 53.1

26.2 28.9 29.6

79.4 81.9 82.7

2Q14 1Q15 2Q15

-0.2%

13.1%

YoY

Postpaid Market Share and Mix

Million4.2%

Voluntary Churn2

0.9%

28.8% 29.3%

41.3% 41.7%

33%36%

2Q14 2Q15Total Market Share Postpaid Market Share Mix of Postpaid

0.2%

2.3%

QoQ

Customer Satisfaction Index¹Postpaid and Prepaid - June, 2015

0.20.2 0.2 0.2 0.2 0.2

0.3 0.3 0.3

0.40.3 0.3 0.3

0.30.3 0.3 0.3 0.3

0.30.4

0.4 0.4

0.50.4 0.4 0.4

jun/14 aug/14 oct/14 dec/14 feb/15 apr/15 jun/15

Control Plans Contract

7.36.8

6.3

Vivo Player 2 Player 3

Postpaid

7.47.0 7.0

Vivo Player 2 Player 3

Prepaid

We continue to solidify our leading mobile market position with robust growth in postpaid accesses due to our distinctive value proposition

5

Postpaid

Prepaid

1- Information based on internal data. 2- When the customer wants to leave our base proactively.


ARPUReais and % YoY

1- Teleco. 2- Includes smartphones and webphones. 3- Data cards, data packages and M2M, excluding eventual data user with no datapackage or plan. 4- Average data traffic of our customers as a percentage of the total data traffic in São Paulo, Rio de Janeiro,Brasília, Porto Alegre and Belo Horizonte.

Data ARPUR$/month

Data ARPU Growth

yoy

8.510.8

2Q14 2Q15

Highest data ARPU annual growth in the last 5 years

ARPU MixR$/month

37% 46%

63% 54%

23.3 23.5

2Q14 2Q15

15% 27%

4G Coverage1 Smartphone Penetration and Data users

58% 69% 71%

3341

44

2Q14 1Q15 2Q15

Smartphone Penetration Data Access

Million

4G Data Adoption

2

14%

22%28% 30%

jun/14 dec/14 mar/15 jun/15

4G Data traffic % 4G data traffic

3x

4

140 107 63 45

40% 39%33% 30%


# cities covered % of population

+13pp

+33%

YoY

Our high quality mobile network combined with the most valuable brand in the industry and innovative offer portfolio led to record data ARPU growth

6

Data

Voice

3


Net Fixed Revenue

Evolution without regulatory effect3

2,163 2,107

324 423

726 784

690712

183189

4,087 4,215

2Q14 2Q15

-2.6%

30.4%

7.9%

R$ Million

3.2%

1- Includes voice, accesses and network usage. 2- B2C segment. 3- Regulatory effect include VC and basic tariff reductions.

YoY

3.2%

715 711

482 495

224 250

1,421 1,456

1Q15 2Q15

3.1%5.6%

Strong acceleration of fixed revenue due to high growth in premium segments of pay TV and UBB

7

Others

Corporate Data and IT

BB2

Pay TV

Voice1

1,586 1,601

986 1,012

169 172

2,740 2,785

1Q15 2Q15

R$ Million

3%

10%

40%

2Q15 YoY

3%

9%

40%

1Q15 YoY

10%10%

R$ Million

Pay TV

Broadband

Voice

Pay TV

Broadband

Voice

2Q15 YoY1Q15 YoY

-0.3%-4.0%

-4%

3%

19%

-10%

2%

22%


Solid growth above 20% y-o-y in accesses…

… is leading to improved market share…

… and driving ARPU growth in the period.

1- FTTX includes FTTH (Fiber to the Home) and FTTC (Fiber to the Curb) accesses. 2- Consider speeds of 12Mbps and higher. Based onMay,15 for competitors, the last public information released by ANATEL. For Telefônica Brasil, we are using internal data.

MonetizationUBB

Pay TV

3,028 3,641

2Q14 2Q15

GVT Vivo Fiber

20%

14%

78%

YoY

FTTX Accesses1

Thousand

Share of Pay TV net addsJan-May/15

93%38% 19%

-77%Vivo +GVT

Player 2 Player 3 Player 4

1,4601,786

2Q14 2Q15

GVT Vivo

Pay TV AccessesThousand

36 37

2Q14 2Q15

57%

31%

3% 5%


UBB Market Share2

75 80

2Q14 2Q15

Broadband ARPUR$ per month

2%

Pay TV ARPUR$ per month

22%

26%

18%

YoY

Vivo continues to gain share and increase ARPU on the most attractive services

8

6%


Cost Evolution% of Net Revenues

Personnel• Collective bargaining

agreement of 7% (Jan,15) partially compensated by organizational restructuring in 1H15

Selling Expenses• Increased volume of

higher-value handsets and FX variation

• Higher commissions related to postpaid and data growth

ORGANIC

Cost evolution driven by higher selling expenses to promote growth, bad debt and energy costs partially offset by efficiency in G&A and personnel

9

8.3% 8.2%

29.7% 29.3%

24.0% 25.2%

2.6% 2.9%4.7% 4.5%

69.2% 70.0%

2Q14 2Q15

G&A and othersBad debt

Selling Expenses1

Services Rendered

Personnel 4.0%

3.7%

10.6%

17.0%

J YoY

2.1%

6.5%

Main variation drivers:

1- Excludes bad debt.

Services Rendered• MTR reduction• Higher leasing of

sites, maintenance, TV content

• Higher energy costs due to tariff hikes

G&A• Continued

stabilization of G&A expenses in different fronts

Bad debt• Provision for

uncollectibles in a more challenging macroeconomic environment


Recurrent Net Income1

1- Reflects the tax basis revision of certain intangibles due to the businesses combination (Law 12,973), whose net positive effect onthe net income was R$1,196.0 million in the 2Q14.Net profit reported in 2Q14 was R$ 2,142.1 million.

R$ Million and % yoy

YoY

2.8% 19.4% 180% 53%

ORGANIC

-1.4%

D&A increase

• Gain from the periodical review of the useful life of fixed assets that reduced D&A in 2Q14

• Increase in amortization of intangible assets generated by the incorporation of GVT as of May/15

Taxes

• Non recurrent tax gain due to review of certain intangibles generated by combination of business

• Tax benefit from IOC declared in 2Q15

Financial Results

• Exchange variation of GVT’s Loans and financing in foreign currency (R$60MM)

• Taxes related to the settlement of the cash portion relating to GVT acquisition (R$30MM)

946 933

86 297

78276

2Q14 EBITDA D&A Financial Result Taxes excludingnon recurrent tax

gain

2Q151

Recurrent Net Income remained almost stable on an annual comparison

10

Main variation drivers:

M R$ million

%

2,142.11


OCF: EBITDA (-) CapexCapex

Gross and Net Debt

3.6 3.8

18.0% 18.4%

1H14 1H15

Capex % Capex / Net Revenues

2.5 2.4

1H14 1H15

R$ Billion R$ Billion

Stable evolution on Capex and slight decrease in OCF despite exchange rate and inflation

7%

13.2 11.5

2Q14 2Q15

R$ Billion

7.04.2

0.570.33

2Q14 2Q15

Net debt Net debt / EBITDA

-5%

-40%

Gross debt

-13%

11

DISCOVER, DISRUPT, DELIVER

Strategy and Synergies_

Investor RelationsTelefônica Brasil S.A. 13

Management started integration planning early on

Integration best practices followed by VivoKey advances

25/Mar

2015Pre-

closing

2015Post-

closing

28/May

28/Jul

Final integration plan launched internally

Start of synergies initiatives (quick wins)

Management announcement

Roadshow and equity offering

Integration planning kick-off

Start Management bottom-up review of synergies potential

Review of synergies potential Review of synergies potential

Plan well and execute quicklyPlan well and execute quickly

Operate as one single company as quickly as possibleOperate as one single company as quickly as possible

Minimize disruptions: maintain day-to-day focus on prioritiesMinimize disruptions: maintain day-to-day focus on priorities


Post-closing analysis by Management confirms the Base Case scenario of Operational Synergies while pointing out to upside potential

Revenue Synergies

Opex Synergies

Capex Synergies

Total of Operational Synergies

• Cross-sell and customer loyalty on B2C and B2B

Due Diligence view /

Base Case

Post-closing view /

Best Case

Main sources of synergies

R$ 2.7 Bi

R$ 3.9 Bi

R$ 3.0 Bi

R$ 9.6 Bi

R$ 5.5 Bi

R$ 6.6 Bi

R$ 4.1 Bi

R$ 16.2 Bi

Operational Synergies

Base CaseNew Opportunities and changes on Best Case

• 3P portfolio integration• Revision of cross-sell potential

• Network Opex (leased lines, maintenance)

• Pay TV content costs• Organization (2017)

• New operational model for field operations in São Paulo

• New customer care model• SG&A expenses reduction• Anticipation of organization

redesign (2015)

• Network Capex avoidance (backbone, backhaul, São Paulo)

• Procurement gains on customer premise equipment

• Revision of assumptions• Procurement gains in Network

and IT


Value estimation of synergies / additional considerations

• Best Case synergies were based on the macro-economic scenario available during the exercise (June). The deterioration of the economic situation may impact Company’s ability to deliver estimated synergies

• In addition, it should be noted that Revenue Synergies mostly depend on market conditions (ex.: customers’ acceptance of the Company’s offers, competitive and macro-economic scenario, etc.) while some Opex and Capex Synergies depend on the Company’s success in negotiating revised terms with 3rd

parties (ex.: procurement gains), and other Opex and Capex Synergies depend solely on Company’s ability to execute (ex.: organization changes, use of expanded network to substitute leased lines)

• There are two types of Capex synergies:

i. Capex Avoidance (R$ 3.4 Bi, on the Best Case scenario): related mostly to leveraging GVT’s network to accelerate backhaul of Vivo’s mobile sites and to complementing Vivo and GVT’s networks to reduce future investments in backbone expansion

ii.Capex Savings (R$ 0.7 Bi, on the Best Case Scenario): related mostly to reduction in Capex running rate due to lower unitary spending (i.e. leverage larger scale of the combined entity and Telefonica Group’s purchasing power)

• The variation in exchange rate between deal announcement (in Aug. 2014) and deal closing (in May 2015), increased transaction value, thus increasing the value of Fiscal Synergies from R$ 4.5 Bi to R$ 5.9 Bi (R$ 4.0 Bi in Interest on Equity and R$ 1.9 Bi on Goodwill Amortization and other impacts)

• To conclude, much of the upside related to the Best Case estimations will be tested during 2016, allowing to confirm the assumptions taken in the last exercise. This will allow Management to have better visibility of actual value potential


Management has set-up a comprehensive integration plan, with key milestones in 2016, and a full set of KPIs that will be tracked

Anti-trust (CADE) approval

Closing

2015Pre-closing

2015Post-closing

201625/Mar 28/May

New Organizational Structure (1st Level)

26/March

Kick-off of Integration Planning project

31/March

Internal Launch of Integration project

June

Quick-wins (start of cross-selling activities in Consumer and Enterprise market)

June

Use of GVT IT, field operations and customer care systems to support

Vivo’s Fixed Customers in SP

18 days Roadshow and Capital Increase

R$ 3.9 Billion

30/March to 27/April

3 Play Portfolio Unification

Consolidation of Pay TV platforms and contents

Convergent (4P) offers

Launch of operational synergies fronts (Field Operations, Customer

Care, IT)

Organization redesign (under study)

Corporate Legal Merger (one company), followed by Brand

Integration

New field operations and customer care model for Fixed Customers in

SP

Start operation as one single company (organization, culture)

June


Synergy capture has started on many fronts

Revenue Synergies

OpexSynergies

CapexSynergies

• GVT sale pilot in 8 Vivo own stores

• 50 contracts renegotiated with providers and 40 RFPs in progress

• Backbone integration

• Initiated Mobile cross-sell among residential customers

• Improved competitive position when negotiating with Large Accounts

• Initiated migration of leased lines (from third parties to Vivo’s network, based on contract expiration)

• Initiated Fixed cross-sell

• 34% sales conversion upon customer inquiry, of which 40% result in 3 Play sales

• R$ 60M in annual savings as of now

• 8 backbone routes shared (out of more than 60 routes to be integrated until end of 2016)

• Mailing sent to over 400K Fixed customers

• Outbound sales conversion 2.7x above average• Inbound sales conversion 15% above average

• 8 successful Corporate negotiations, with full contract value of R$ 62 Million

• More than 200 leased lines migrated (out of more than 7,000 by 2019)

1

2

3

4

5

6

7

Examples of Recent Advances First measured impact until beginning of July

Key synergies enabling projects have been kicked off, including:- Project to unify 3P national portfolio in 2016

- Project to migrate Vivo Fixed customers to GVT's IT systems in 2016


Summary

• Outperforming the industry on mobile revenue growth

• Accelerating fixed revenue growth

• Expanding leadership in key segments

• Increasing substantially mobile data ARPU

• Growing EBITDA despite persistent macro-economic headwinds

• Planning early on and already executing integration

• Confirming Base Case synergies, with upside potential

Back Up_


1- Considers TEF Brasil and GVT figures consolidated as of May, 2015. 2- Includes Net Handset Revenues. 3 - The tax basis revision ofcertain intangibles due to the businesses combination (Law 12,973), whose net positive effect on the net income was R$1,196.0million in the 2Q14.

20

2Q15 results reported on financial statements (incorporating GVT from May 2015)

Net Operating Revenue2 (R$ million)

Net Fixed Revenue (R$ million)

EBITDA (R$ million)

EBITDA Margin (%)

Net Mobile Revenue (R$ million)

R$ million 2Q151 %YoY 1H151 %YoY

9,962.1

3,745.5

2,949.0

29.6%

6,216.6

15.6

34.1

15.9

0.1 p.p.

6.7

18,945.2

6,485.7

5,517.8

29.1%

12,459.5

10.0

14.9

8.0

(0.5) p.p.

7.6

Recurrent Net Income3(R$ million) 869.8 9.2 1,449.5 (0.5)

KEY FINANCIAL HIGHLIGHTS

Capex (R$ million) 1,903.0 17.8 3,172.7 21.3

EBITDA – CAPEX (R$ million) 1,046.0 12.5 2,345.1 (5.9)

Telefônica Brasil S.A. – Investor Relations

Av. Eng. Luis Carlos Berrini, 1376 – 28th floor – Cidade Monções – Sao Paulo/SP – 04571-000Phone: +55 11 3430-3687

E-mail: [email protected] available from the website: http://www.telefonica.com.br/ir

presentation 2q15 - eng

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