Mobile World Congress Ministerial Programme 2016_ Opportunities & challenges in the Brazilian Telecom market Amos Genish 1
BRAZIL IN NUMBERS_ 5 th WORLD S LARGEST COUNTRY 8,5 MM km² ~2x size of EU Population 206 MM A SIZABLE TELECOM MARKET 67 MM households 8th biggest economy in the world GDP US$ 2,3 Tri US$ 123 Bi revenues 231 MM subscribers (5 th largest mobile client base in the world) 45 MM fixed accesses 24 MM of fixed broadband accesses 20 MM of TV subscribers Information makes reference to 2014 - Source: IBGE, FMI, Teleco, Analysys Mason e Anatel 2
TELEFONICA BRASIL: LEADING TELCO OPERATOR_ National Presence Integrated Offerings One Brand Individual Market Residential Market B2B Market 103 MM US$ 15 Bi 1º 1º Accesses Revenue 1º 30% 37% 1º 1º 43% EBITDA Margin Mobile Postpaid Market Share Ultra broadband* Market Share Information makes reference to 2014 - * Ultra broadband: > 12Mbps 3
BRAZIL S MARKET EVOLUTION_ 4,4% 2000 12 1998 GDP Growth R$ Trillion 1,4% 3,1% 2002 1,1% 5,8% 2004 3,2% 4,0% 2006 6,1% Telco Investments R$ Billion 5,1% 7,5% -0,1% 2008 2010 3,9% 1,9% 2012 3,0% 0,1% 2014 Total: R$ 308 bi (US$ 148 bi) 29 31 +10% 24 26 23 20 19 19 16 14 15 13 15 12 10 10 2000 2002 2004 2006 Source: Banco Central do Brasil 2008 2010 2012 Source: BNDES 2014 Mobile Growth (in million accesses) Penetration: (per capita) Legend: 47% Penetration CAGR 126% 104% +5% +19% 86 203 258 2005 2010 2015 Fixed Broadband Growth (in million accesses) Penetration: (households) Legend: Penetration CAGR Pay TV Growth (in million accesses) Penetration: (households) Legend: 8% Penetration CAGR 38% 27% 8% +11% +31% 4 15 25 2005 2010 2015 28% 17% +14% +18% 4 10 19 2005 2010 2015 Source: Anatel Source: Anatel Source: Anatel 4
OPPORTUNITIES_ Mobile Data Penetration (Mix 3G+4G) 4G Population Coverage % Postpaid Subscribers Mobile ARPU (US$) Remaining Base in 2G UBB Penetration Pay TV Penetration While other markets are well penetrated... 83% 91% 83% US$46 14% 73% 84% ITALY URUGUAY USA CANADA TURKEY JAPAN ARGENTINA... there is potential for further growth in BRAZIL_ 57% 45% 24% US$6 26% 9% 28% GROWTH POTENTIAL 5
IP CONVERGENCE TRENDS_ Demand for smartphone and OTT services Source: GSMA, Analysys Mason Smartphone share of total handsets in Brazil +89% 1 Surge in video demand Source: Cisco VNI: Forecast and Methodology, 2014 2019 29% 2011 2 Video traffic s share of total IP traffic in Brazil Strong data traffic growth Source: Cisco VNI: Forecast and Methodology, 2014 2019 Monthly mobile data traffic in Brazil (PB*/month) +9x CAGR: 56% 3 Decline in mobile voice Source: Analysis Manson Voice services share of mobile ARPU 83% -29% 59% -32% 4 40% 14 2% 2010 +37pp 38% 2015 72% 2020 2014 65% 84% 2019 14 +4,5x 64 602 2011 2014 2019 *PB = petabyte, 10 15 bytes or 1,000 terabytes 2010 Other Services 2015 2020 Share of mobile s total revenue 50% Voice 2015 6
BRAZILIAN ECONOMIC SCENARIO_ Unemployment Rate Income Distribution Inflation Rate Source: International Labour Organization Source: PNAD 2014, IBGE Source: IBGE 6.1% 6.5% 6.8% 7.2% LATAM s Avg.: 6,7% World s Avg.: 5,7% 4% R$ 3.620 (US$ 905) 6,4% 10,4% 2012 2013 2014 2015 14% R$ 1.448 (US$ 362) 2014 2015 GDP Growth Source: Focus *Forecast, not official 26% R$ 724 (US$ 180) Exchange Rate (BRL/USD) Source: Brazilian Central Bank 1,8% 2,7% 0,1% 2012 2013 2014-3,5% 2015* China: 6,7% India: 7,4% México: 2,6% 56% Only 4% of Brazilians earn more than USD 905 / month +48% 4,0 2,7 2014 2015 7
SECTOR S ECONOMICS_ Pressure on price Source: Banco Central do Brasil Mobile Industry s EBITDA Margin (FY14) Source: BofA Merrill Lynch Average Return of Invested Capital (Telecom sector in Brazil, in %) Source: Bloomberg 40% 46% 45% 40% 37% 30% 7,25% 10% 11,75% -35 p.p 10,8% 9,1% 6,3% 5.2% Acc. Inflation 2010-2015 Sector Inflation 2010-2015 Canada Mexico Germany Argentina Brazil ROIC Interest Rate 8
OUR STRATEGY_ Telefonica Brasil aims to strengthen its market leader position, to capture opportunities and face challenges, by enhancing customer satisfaction while improving capabilities VALUE PROPOSITION ENABLERS Outstanding Connectivity Coverage and capacity expansion Integrated Offering (B2C & B2B) Consolidate 3P nationally Fully integrated 4P offering, evolving to 5P Values and Customer Experience Deliver consistency and easiness Delight customers Big Data & Innovation Expand capacities to increase business impact of Big Data End-to-end Digitalization Digital first Front and back-end 9
ECOSYSTEM CHALLENGES_ HOW TO ENSURE LONG-TERM SUSTAINABILITY OF THE ECOSYSTEM? Regulatory Asymmetry Telecom services taxation 43,9% Taxation Telcos 43% Voice and Texting OTT s 0% 3% China 6% Japan Source: SindiTelebrasil 10% Indonesia 12,2% India 15% Paquistan 17,2% 18% USA Russia Brazil Regulatory Obligations Investments (annual) US$ 12 Bi 0% Import duties on Telecom equipment Simulation using base station for network communications from China, not include sales tax 36% Audit Tax (annual) US$ 1,2 Bi 0% 7% 16% 16% 18% Tax Residence in Brazil Chile Paraguay Venezuela Uruguay Brazil** * Estimated Values Source: Pitney Bowes, **blended (import tax and customs fees) 10
TELEFONICA S COMMITMENT TO BRAZIL_ Brazil = Opportunity Going Forward... From 1998 to 2014* Telefónica invested R$ 226 billion ( 55 bi) in Brazil Low penetration and pent-up demand (mobile data, Pay TV, UBB) Gap: customer expectations vs. service delivery 3,2 Investments (US$ Bi) * Not considering GVT investments Valued Brand Robust network National presence Full portfolio 2014 2015 2016 2017 11