Telefonica Brasil S.A.

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefônica Brasil third quarter of 2021 earnings conference call. Today with us, representing the management of Telefônica Brasil, we have Mr. Christian Gebara, CEO of the company, Mr. Davi Melcon, CFO and Investor Relations Officer, and Mr. João Pedro Carneiro, IR Director. We also have a simultaneous webcast with slide presentation on the internet that can be accessed at the site www.telefonica.com.br. There will be a replay facility for this call on the website. After the company's remarks are over, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during the conference call, Please press star zero for an operator. Before proceeding, let me mention that forward-looking statements are being made under the same harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the company's management beliefs and assumptions and on information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the company's future results and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr. João Pedro Carneiro, Investor Relations Director of Telefonica Brasil. Mr. Carneiro, you may begin your conference.

Good morning, everyone, and welcome to Telefonica Brasil's third quarter 2021 earnings call. Today's call will be divided in three parts. First, our CEO, Christian Gebara, will present Vivo's main financial and operating figures as well as initiatives on the digital ecosystem and ESG highlights. Then our CFO, David Melcon, will give you more information regarding our cost and capex structure, net income, shareholder remuneration, and free cash flow. We will then move to Q&A. Now I hand it over to Christian.

Thank you, João. Good morning, everyone, and thank you for joining our running calls. We start on slide three with the highlights of a very positive quarter for Vivo. In which we had fixed revenues returning to year-over-year growth after four years, mobile service revenue boasting the highest rate of annual evolution in six years, and solid profitability results that led us to maintain a robust interest on capital distribution and accelerate the buyback of our shares. In mobile, we reached 82 million access in September after growing 7.2% year-over-year. As a result of the accelerated expansion in accesses, our mobile service revenue expanded 5.7% year-over-the-year in the quarter. Both the number of accesses and the rate of mobile service revenue growth are the best since 2015, denoting the strong momentum we are having on mobile with low-turn, improved portability, and market share leadership. In fixed, in third quarter 21, We were able to post year-over-year growth for the first time after four years, up 0.4%, achieving a much-awaited inflection point in a business that represents approximately one-third of our total revenues. The result was driven by the expressive growth of 14.8% of our core fixed business with our start-late fiber-to-the-home broadband, expanding 37.2% versus 34.20% as we accelerate the rhythm of monthly net ads that during the first nine of the year surpassed the 100,000 mark on average. Our solid revenue performance allowed us to achieve EBITDA growth even during a period when inflation expanded double digits. EBITDA was up 2.1% year-over-year with a margin standing at 40% as costs remain largely under control due to the future financial management leverage on digitalization. All of these factors led us to register a net income of 1.3 billion reais in the quarter, up 8.5% year-over-year, giving us the base to continue providing the best shareholder returns in the industry by means of dividends and interest on capital deliberation, as well as share buybacks. Going to slide four, our total revenue expanded 2.2% year-over-year in the third quarter of 21, Benefits by a solid performance of core revenues, which grew 5.9% versus third quarter 2020. Looking at the service core revenue, thus excluding handsets, we see an expansion of 80% year-over-year. Accelerating versus previous quarter, as the demand from both B2C and B2B customers for high-quality connectivity and cutting-edge technological solutions is allowing us to improve the revenue profile and access-based mix. Consolidating Vivo as a go-to player when it comes to the provision of a digital ecosystem. Turning to slide five, here we present our mobile revenue performance, which in the third quarter of 21 was remarkably strong in comparison to previous quarters. In fact, the 5.7% year-over-year growth of our mobile service revenue was the highest since the second quarter of 15. were driven by a 7.3% growth in POSPATE that came in well ahead of earlier periods. POSPATE was only not benefited by the robust customer base expansion, which I will say on the next slide, but also by price increases in July and August 2021 applied to part of our hybrid and pure POSPATE customers. Prepaid, in its turn, saw its light 0.6% year-over-year, declining in revenue in the third quarter of 2021. But it's interesting to note that, on a sequential basis, we posted a growth of 3.9% as customer base increased and continues to shift to our weekly VivoProject Turbo offer, which guarantees higher usage and recurrency than daily offers. It's important to note that, in the third quarter of 2021, Our handset revenue dropped 19.8% EOV a year, partially hurt by the ongoing chipset supply shortage that impacts the whole smartphone industry, but also by a tough comparison basis versus the third quarter of 2020, which was atypically high in terms of sales, as most of our stores were closed During the second quarter 2020, does create a higher demand for handsets in the third quarter of the year. As a result of all these moving pieces, mobile revenues expanded 3.2% year-over-year in the quarter. Moving to slide 6, we can see that according to the latest public available data, Vivo continues to hold the top spot in terms of overall mobile market share, which is also true when looking at the post-bate and prepaid segments. This is underscored by our best-in-class network, unique brand recall within the sector and widespread distribution channel. Our unchallenged advantage was strengthened during the third quarter of 2021 when we added 1.3 million new mobile customers, 996,000 in post-paid and 292,000 in prepaid. As a result, we surpassed the mark of 82 million mobile access for the first time since second quarter 2015, growing 7.2% year-over-year. It's important to point out that not only our customers are choosing to stay at Vivo and increase their lifetime value, as we can see from the very low 1.2% post-paid turn rate, Registrar in the third quarter of 2021, but also that clients and other operators are increasingly joining our base, as demonstrated by the 134% year-over-year increase we had on cost-paid portability net ends. On slide 7, we are very pleased to announce that our total fixed revenue grew 0.4% year-over-year in the third quarter of 2021, expanding our early basis for the first time since the third quarter of 2017. allowing us to finally reach a growth inflection point in this very important portion of our business. This is the result of years of investment in future-proof fiber-to-the-home technology that has placed us in the forefront when it comes to capturing the strong demand for high-speed connectivity and on the development of a comprehensive portfolio of solutions aimed at connecting and digitalizing businesses. We are able to dedicate our full force to the core fixed business by taking, in the past, Assertive strategic decisions that accelerated the loss of non-core fixed revenues but allow us to focus on what will bring sustainable growth and positive shareholder impacts going forward. As such, while the non-core fixed business continued to drop to the tune of 21.3% year-over-year, the core fixed business grew 14.8% as all services lines posted double-digit growth. With FTDX broadband up 11.6%, IPTV up 23.4%, and corporate data and ICT up 17.1%, the latter reaching the impressive mark of almost R$ 800 million of revenue in the quarter. Moving to slide 8. We highlight the performance of 12 fiber-to-the-home business, which in the third quarter of 2021 generated 1.5 billion reais in revenues, considering both FTTH broadband and IPTV. To reach this result, third quarter fiber revenues have been growing at a rhythm of 40.3% per year over the past two years. Main living by broadband that posted a 1921 CAGR of 46.3% and already surpassed 1.1 billion reais, but also helped by a solid 25.1% CAGR in IPTG. Moving to the right-hand side of the slide, we see that in the first nine months of 2021, we added 978,000 new FCTH broadband customers already outgrowing the total net X posted in 2020. This is happening as during 2013 we are having a very strong average of monthly net X at 109,000, well ahead of bigger posted in 2020 and in 2019. It's interesting to note that while the fiber access base, 1921 K, The revenue of 32.3% is quite solid. It comes short of the revenue evolution by some 8 percentage points, denoting that fiber top line is coming not only from new access, but also from pricing power and improved customer mix. On slide 9, you can see that we are doubling down our fiber ambition, as we believe Brazil presents an unparalleled opportunity in terms of the relevant asymmetry between The demand for high-quality, high-speed, and reliable connectivity, which in the long run can only be provided by players with pure fiber solutions like Vivo, and the still faulty offer of infrastructure enabled to provide such services. In this sense, we are updating our 2024 homes path target to 29 million homes, thus proposing to add around 11 million new homes paths on top of the 18.3 million we currently have. The organic portion of this expansion will be composed by the rollout of our FTTH network in new and existing cities and by the overlay of existing FTDC and copper networks in selected areas. Here, we are being benefited by a 60% drop over the past two years of our cost per home pass, which, say, on average, is around R$160. The deployment expertise and efficiency coupled with the growing scale have enabled us to reach this important optimization. The home path expansion will also have a partnership component with the users of neutral infrastructure companies such as FIBRAZIL, which should contribute with almost 6 million homes passed to the 29 million targets, thus accelerating our time to market in mid-sized cities outside of São Paulo. Moving on to slide 10. Here we would like to give you more granularity on what is behind one of the main levers of B2B's revenue growth, B2B digital services. Over the last 12 months, 23% of our total revenue came from our B2B business, of which 20%, or approximately, 1.9 billion AIs were generated through the sales of cloud, security, IT solutions, and equipment, and IoT and messaging services. with a growth of over 35% year-over-year, which is in line with the performance of high-growth B2B tech companies around the globe. In Brazil, we are seeing companies of all sizes increasingly digitalizing their businesses as new ways of managing their processes and relating with their customers arise. As such, at Vivo, we want to move away from the model of being just a connectivity provider for our B2B customers. by having in place a digital ecosystem of solutions offering both services designed in-house, such as IoT and messaging, but also products from top-tier partners, such as Microsoft, Amazon, and Cisco. We firmly believe these B2B digital services will continue to expand in scope, bringing as a quality recurring revenue flow with a compelling growth profile and customers with a high lifetime value. Then in 2011, we present our most Recent initiatives aimed at complementing our B2C digital solutions ecosystem, which is comprised of verticals such as entertainment, financial services, health and wellness, connected homes, marketplace, and education. We just signed a memorandum of understanding with Anima Educação, Brazil's largest high-quality education company, to form a joint venture aimed at creating a business platform to offer digital nanocourses The courses will be sold not only to VIVO customers, but to anyone who wants to enjoy accessible, quality content that can help in building skills according to personal interests and career aspirations. The JV will have a 50-50 call control by both VIVO and ANIMA, with a dedicated and fully dependent team to run the operation. Moreover, the new call We'll be able to take advantage of important assets and expertise for inspiring companies to gain scale attractions such as Vivos client acquisition, go-to-market and billing capabilities, and animate educational content, academic operations, and online learning platforms. This is another step we take to position Vivos as a company that goes beyond offering top-notch telecommunication services, using our assets, tools, and reach to promote the digital inclusion through education. On slide 12, I would like to comment on the evolution of initiatives including our ESG agenda. We continue to expand our distributed energy generation program and now plan on having 83 renewable energy plants functioning by the end of 2022, of which 19 are already fully operational. Here, we highlight the inauguration of our first biogas plant in the northeast region in the state of Pernambuco, with the capacity to generate over 18,000 MWh per year. On the diversity front, we just launched our new internship program offering 750 intern positions of which 50% will be served by Black students. Moreover, we are striving to make our leadership team significantly more diverse. By the end of 2021, 30% of all leadership positions at Vivo will be occupied by women. We are also working with WIDA, the Telefónicas Groups Innovation Hub, to support disruptive startup scale in their business and their businesses. Recent investees include the fintech startup Olivia, which offers an AI and machine learning-backed financial advisor solution, the security startup Gabriel, that develops technologies focused on security and image monitoring, Alicerce, A social ad tech that delivers high-quality, affordable tutoring for children and young adults. Game Safer, a cybersecurity startup that provides user authentication and anti-fraud services for online games. All of them present significant cross-sell opportunities with people. As always, I believe it is important to stress that ESG themes are a centerpiece of all that we do as a company to create value for society and all other stakeholders in a sustainable and compliant way. Now I hand it over to David to take us through the financial highlights of the quarter.