As filed with the Securities and Exchange Commission on February 26, 2016
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR | |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015 | |
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR | |
o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report________________ | |
For the transition period from ________________ to ________________ |
Commission file number: 001-14475
TELEFÔNICA BRASIL
S.A.
(Exact name of Registrant as specified in its charter)
TELEFÔNICA
BRAZIL S.A.
(Translation of Registrant’s name into English)
Federative
Republic of Brazil
(Jurisdiction of incorporation or organization)
Avenida
Engenheiro Luis Carlos Berrini, 1376, 28º andar
04571-936 São Paulo, SP, Brazil
(Address of principal executive offices)
Alberto Manuel Horcajo Aguirre
Telephone +55 11 3430 3687
Avenida Engenheiro Luis Carlos Berrini, 1376, CEP 04571-936, São Paulo, SP, Brazil
Email: ir.br@telefonica.com
(Name, Telephone, Email and/or Facsimile and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered |
Preferred Shares, without par value | New York Stock Exchange* |
American Depositary Shares (as evidenced by American Depositary Receipts), each representing one share of Preferred Stock | New York Stock Exchange |
* | Not for trading purposes, but only in connection with the registration on the New York Stock Exchange of American Depositary Shares representing those Preferred Shares. |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
The number of outstanding shares of each class (excluding treasury shares) as of December 31, 2015 was:
Title of Class |
Number
of Shares Outstanding |
Shares of Common Stock | 569,354,053 |
Shares of Preferred Stock | 1,119,339,972 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. o Yes x No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x Accelerated Filer o Non-accelerated Filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP o | International Financial Reporting Standards as issued by the International Accounting Standards Board x | Other o |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
Page
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INTRODUCTION
References in this annual report to “Telefônica Brasil,” “we,” “our,” “us,” “our company” and “the company” are to Telefônica Brasil S.A. and its consolidated subsidiaries (unless the context otherwise requires). All references in this annual report to:
· | “ADRs” are to the American Depositary Receipts evidencing our ADSs; |
· | “ADSs” are to our American Depositary Shares, each representing one share of our non-voting preferred stock; |
· | “ANATEL” are to Agência Nacional de Telecomunicações – ANATEL, the Brazilian telecommunications regulatory agency; |
· | “BM&FBOVESPA” are to the BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros, the Brazilian Securities, Commodities and Futures Exchange or São Paulo stock exchange; |
· | “BNDES” are to Banco Nacional de Desenvolvimento Econômico e Social, the Brazilian Development Bank; |
· | “Brazil” are to the Federative Republic of Brazil; |
· | “Brazilian Corporate Law” are to Law No. 6,404 of December 15, 1976, as amended; |
· | “CADE” are to Conselho Administrativo de Defesa Econômica, the Brazilian competition authority; |
· | “CDI” are to Certificado de Depósito Interbancário, the Certificate for Interbank Deposits; |
· | “Celular CRT” are to Celular CRT Participações S.A. and its consolidated subsidiaries, formerly Vivo subsidiaries before Vivo’s corporate restructuring; |
· | “Central Bank” are to the Banco Central do Brasil, the Brazilian Central Bank; |
· | “CMN” are to the Conselho Monetário Nacional, the Brazilian Monetary Council; |
· | “CTBC Telecom” are to Companhia de Telecomunicações do Brasil Central; |
· | “CVM” are to the Comissão de Valores Mobiliários, the Brazilian Securities Commission; |
· | “Federal District” are to Distrito Federal, the federal district where Brasilia, the capital of Brazil, is located; |
· | “FGV” are to the Fundação Getúlio Vargas, an economic private organization; |
· | “General Telecommunications Law” are to Lei Geral de Telecomunicações, as amended, the law which regulates the telecommunications industry in Brazil; |
· | “Global Telecom” are to Global Telecom S.A., formerly a Vivo subsidiary before Vivo’s corporate restructuring; |
· | “GVT” are to Operating GVT and GVTPar, collectively; |
· | “GVTPar” are to GVT Participações S.A., the controlling shareholder of Operating GVT; |
· | “IASB” are to International Accounting Standards Board; |
· | “IBGE” are to Instituto Brasileiro de Geografia e Estatística, the Brazilian Institute of Geography and Statistics; |
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· | “IFRS” are to International Financial Reporting Standards, as issued by the IASB; |
· | “IGP-DI” are to the Índice Geral de Preços - Disponibilidade Interna, an inflation index developed by the FGV used by fixed broadband and mobile service providers to adjust their prices; |
· | “IGP-M” are to the Índice Geral de Preços ao Mercado, an inflation index developed by the FGV used by TV and cable service providers to adjust their prices; |
· | “IOF Tax” are to Imposto sobre Operações de Crédito, Câmbio e Seguros, a tax on credit, exchange and insurance transactions; |
· | “IPCA” are to Índice Nacional de Preços ao Consumidor Amplo, the consumer price index, published by the IBGE; |
· | “IST” are to Índice de Serviços de Telecomunicações, the inflation index of the telecommunications sector; |
· | “Number portability” are to Portabilidade Numérica, the service mandated by ANATEL that provides customers with the option of keeping the same telephone number when switching telephone service providers; |
· | “NYSE” are to the New York Stock Exchange; |
· | “Oi” are to Oi S.A., the mobile operator branch of Telemar; |
· | “Operating GVT” are to Global Village Telecom S.A.; |
· | “Real,” “reais” or R$ are to the Brazilian real, the official currency of Brazil; |
· | “SEC” are to the U.S. Securities and Exchange Commission; |
· | “Telebrás” are to Telecomunicações Brasileiras S.A.–Telebrás; |
· | “Telefonica” or are to Telefonica S.A., our parent company; |
· | “TJLP” are to Taxa de Juros de Longo Prazo, or long-term interest rate; |
· | “UMBNDES” are to a monetary unit of the BNDES, consisting of a currency basket of BNDES debt obligations in foreign currencies, which are mostly denominated in U.S. dollars; |
· | “U.S. dollar,” “U.S. dollars” or “US$” are to U.S. dollars, the official currency of the United States; |
· | “Vivo” are to Vivo S.A., a formerly wholly owned subsidiary of Telefônica Brasil, which conducts cellular operations including SMP (as defined in the Glossary of Telecommunication Terms), nationwide. |
· | “Vivo Participações” are to Vivo Participações S.A. (formerly TELESP Celular Participações S.A.) and its consolidated subsidiaries (unless the context otherwise requires); and |
Unless otherwise specified, data relating to the Brazilian telecommunications industry included in this annual report were obtained from ANATEL.
The “Glossary of Telecommunications Terms” that begins on page 138 provides the definition of certain technical terms used in this annual report.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this Annual Report can be identified, in some instances, by the use of words such as “will,” “expect,” “aim,” “hope,” “anticipate,” “intend,” “believe” and similar language or the negative thereof or by the forward-looking nature of discussions of strategy, plans or intentions. These statements appear in a number of places in this Annual Report including, without limitation, certain statements made in “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk” and include statements regarding our intent, belief or current expectations with respect to, among other things:
· | the size and growth rate of the Brazilian telecommunications market; |
· | the accuracy of our estimated demand forecasts; |
· | our ability to successfully execute our strategic initiatives and capital expenditure plans; |
· | our ability to secure and maintain telecommunications spectrum and infrastructure licenses, rights-of-way and other regulatory approvals; |
· | our ability to comply with the terms of our concession agreements; |
· | decisions by applicable regulatory authorities to terminate, modify or renew our concession agreements or the terms thereof; |
· | new telecommunications regulations or changes to existing regulations; |
· | technological advancements in our industry and our ability to successfully implement them in a timely manner; |
· | our ability to successfully integrate GVT’s operations or to realize expected benefits; |
· | network completion and product development schedules; |
· | the level of success of competing networks, products and services; |
· | the possible requirement to record impairment charges relating to goodwill and long-lived assets; |
· | increased competition in the Brazilian telecommunications sector; |
· | the cost and availability of financing; |
· | uncertainties relating to political and economic conditions in Brazil as well as those of other emerging markets; |
· | inflation, interest rate and exchange rate risks; |
· | the Brazilian government’s policies regarding the telecommunications industry; |
· | the Brazilian government’s tax policy; |
· | the Brazilian government’s political instability; |
· | adverse decisions in ongoing litigation; |
· | regulatory and legal developments affecting the telecommunications industry in Brazil; and |
· | other risk factors discussed under “Item 3. Key Information—D. Risk Factors.” |
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We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. Because of these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not occur. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements.
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PRESENTATION OF FINANCIAL INFORMATION
We maintain our books and records in reais. We prepared our consolidated financial statements included in this annual report in accordance with IFRS.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying our accounting policies. Those areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 3 to our consolidated financial statements.
Our financial statements prepared in accordance with IFRS as of December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, December 31, 2014 and December 31, 2013 have also been filed with the CVM, the local securities regulator in Brazil and made publicly available. Our selected financial information included in “Item 3. Key Information—A. Selected Financial Data” should be read in conjunction with, and is qualified in its entirety by, our financial statements and “Item 5. Operating and Financial Review and Prospects” appearing elsewhere in this annual report.
The consolidated financial statements as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 are in compliance with IFRS, as issued by the IASB and also with the pronouncements, interpretations and guidance issued by the IASB and the IFRS Interpretations Committee, or the IFRIC, which entered into force as of January 1, 2015.
We have made rounding adjustments to reach some of the figures included in this annual report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.
Results of Vivo Participações and Vivo are consolidated into our financial statements for nine months in 2011, as from April 1, 2011. Consequently, our results of operations for the year ended December 31, 2011 are not comparable with our results of operations for the years ended December 31, 2015, 2014, 2013 and 2012.
Results of GVT Participações S.A. are consolidated into our financial statements for the eight months starting on May 1, 2015 and ending on December 31, 2015. Consequently, our results of operations for the year ended December 31, 2015 are not comparable with our results of operations for the years ended December 31, 2014, 2013, 2012 and 2011.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
A. | Selected Financial Data |
The selected financial data presented below should be read in conjunction with our consolidated financial statements, including the notes thereto included elsewhere in this annual report. Our consolidated financial statements included herein as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 have been audited by Ernst & Young Auditores Independentes S.S. The report of Ernst & Young Auditores Independentes S.S. on the consolidated financial statements appears elsewhere in this annual report.
On March 25, 2011, the boards of directors of Vivo Participações, our former subsidiary, and Telefônica Brasil approved the terms and conditions of the corporate restructuring of both companies, which was approved unanimously by the shareholders of both companies on April 27, 2011.
Our consolidated financial statements include Vivo Participações and Vivo as of April 1, 2011 through the full consolidation method. Because Vivo Participações and Vivo are consolidated into our financial statements as of April 1, 2011, our results of operations for the years ended December 31, 2011 are not comparable with our results of operations for the year ended December 31, 2015, 2014, 2013 and 2012. Results of GVT are consolidated into our financial statements as from May 1, 2015. Consequently, our results of operations for the year ended December 31, 2015 are not comparable with our results of operations for the years ended December 31, 2014, 2013, 2012 and 2011. For further information on our corporate restructurings, see “Item 4.A Historical Background—Corporate Restructuring Involving Telefônica Brasil and Vivo Participações” and “Item 4.A Historical Background—GVT Acquisition.”
The following tables present a summary of our selected financial data at the dates and for each of the periods indicated. You should read the following information together with our audited consolidated financial statements and the notes thereto included elsewhere in this annual report and with “Item 5. Operating and Financial Review and Prospects.”
Year ended December 31, | ||||||||||||||||||||||||
Income Statement Data: | 2015 | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||
(in millions of U.S. dollars)(1) | (in millions of reais) | |||||||||||||||||||||||
(except for share and per share data) | ||||||||||||||||||||||||
Net operating revenue | 10,317 | 40,287 | 35,000 | 34,722 | 33,919 | 29,117 | ||||||||||||||||||
Cost of goods and services | (5,210 | ) | (20,345 | ) | (17,223 | ) | (17,542 | ) | (16,557 | ) | (15,035 | ) | ||||||||||||
Gross profit | 5,107 | 19,942 | 17,777 | 17,180 | 17,362 | 14,082 | ||||||||||||||||||
Operating expenses, net | (3,766 | ) | (14,702 | ) | (12,668 | ) | (12,248 | ) | (10,152 | ) | (8,290 | ) | ||||||||||||
Equity in earnings (losses) of associates | 1 | 2 | 7 | (55 | ) | 1 | 4 | |||||||||||||||||
Operating income, net | 1,342 | 5,242 | 5,116 | 4,877 | 7,211 | 5,796 | ||||||||||||||||||
Financial expense, net | (217 | ) | (848 | ) | (362 | ) | (215 | ) | (291 | ) | (141 | ) | ||||||||||||
Income before tax | 1,125 | 4,394 | 4,754 | 4,662 | 6,920 | 5,655 | ||||||||||||||||||
Income and social contribution taxes | (249 | ) | (974 | ) | 183 | (946 | ) | (2,468 | ) | (1,293 | ) | |||||||||||||
Net income | 876 | 3,420 | 4,937 | 3,716 | 4,452 | 4,362 | ||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||
Controlling shareholders | 876 | 3,420 | 4,937 | 3,716 | 4,453 | 4,355 | ||||||||||||||||||
Non-controlling shareholders | — | — | — | — | (1 | ) | 7 | |||||||||||||||||
Basic and diluted earnings per share: | ||||||||||||||||||||||||
Common Shares | 0.55 | 2.15 | 4.12 | 3.10 | 3.72 | 4.40 | ||||||||||||||||||
Preferred Shares | 0.61 | 2.37 | 4.53 | 3.41 | 4.09 | 4.84 | ||||||||||||||||||
Cash Dividends per share in reais, net of withholding tax: | ||||||||||||||||||||||||
Common Shares | 0.52 | 2.04 | 2.04 | 1.86 | 2.57 | 4.78 | ||||||||||||||||||
Preferred Shares | 0.58 | 2.25 | 2.25 | 2.04 | 2.82 | 5.26 |
1
Balance Sheet Data: | As of December 31, | |||||||||||||||||||||||
2015 | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||||||
(in millions of U.S. dollars)(1) | (in millions of reais) | |||||||||||||||||||||||
(except for share and per share data) | ||||||||||||||||||||||||
Property, plant and equipment, net | 7,805 | 30,477 | 20,454 | 18,442 | 17,604 | 17,147 | ||||||||||||||||||
Total assets | 26,041 | 101,685 | 73,065 | 69,504 | 70,251 | 65,489 | ||||||||||||||||||
Loans and financing—current portion | 569 | 2,222 | 1,509 | 1,237 | 1,270 | 1,000 | ||||||||||||||||||
Loans and financing—noncurrent portion | 1,141 | 4,455 | 2,123 | 3,215 | 3,774 | 3,969 | ||||||||||||||||||
Debentures—current portion | 31 | 121 | 755 | 287 | 702 | 469 | ||||||||||||||||||
Debentures—noncurrent portion | 877 | 3,424 | 3,412 | 4,015 | 2,254 | 788 | ||||||||||||||||||
Shareholders’ equity | 17,560 | 68,567 | 44,950 | 42,894 | 44,681 | 43,331 | ||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||
Controlling shareholders | 17,560 | 68,567 | 44,950 | 42,894 | 44,681 | 43,326 | ||||||||||||||||||
Noncontrolling shareholders | — | — | — | — | 5 | |||||||||||||||||||
Capital stock | 16,280 | 63,571 | 37,798 | 37,798 | 37,798 | 37,798 | ||||||||||||||||||
Number of shares outstanding (in thousands)(2) | 1,688,694 | 1,123,269 | 1,123,269 | 1,123,269 | 1,123,884 | |||||||||||||||||||
Cash Flow Data: | Year ended December 31, | |||||||||||||||||||||||
2015 | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||||||
(in millions of U.S. dollars)(1) | (in millions of reais) | |||||||||||||||||||||||
Operating activities: | ||||||||||||||||||||||||
Net cash provided by operating activities | 2,535 | 9,897 | 9,384 | 9,576 | 10,054 | 8,128 | ||||||||||||||||||
Investing activities: | ||||||||||||||||||||||||
Net cash used in investing activities | (3,746 | ) | (14,626 | ) | (7,608 | ) | (5,543 | ) | (3,721 | ) | (2,007 | ) | ||||||||||||
Financing activities: | ||||||||||||||||||||||||
Net cash provided by (used in) financing activities | 1,376 | 5,373 | (3,627 | ) | (4,622 | ) | (2,089 | ) | (4,729 | ) | ||||||||||||||
Increase (decrease) in cash and cash equivalents | 165 | 644 | (1,851 | ) | (589 | ) | 4,244 | 1,392 | ||||||||||||||||
Cash and cash equivalents at beginning of year | 1,202 | 4,693 | 6,544 | 7,133 | 2,889 | 1,497 | ||||||||||||||||||
Cash and cash equivalents at end of year | 1,367 | 5,337 | 4,693 | 6,544 | 7,133 | 2,889 |
(1) | Translated for convenience only using the commercial offer rate as reported by the Central Bank as of December 31, 2015 for reais into U.S. dollars of R$3.9048 to US$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate as of that or any other date. In addition, translations should not be construed as representations that the real amounts represent or have been or could be converted into U.S. dollars as of that or any other date. |
(2) | As of the date of this annual report, we held 2,291 thousand treasury shares. |
Exchange Rates
The Central Bank allows the real/U.S. dollar exchange rate to float freely and has intervened to control the exchange rate volatility. However, the exchange market may continue to be volatile, and the real may depreciate or appreciate substantially in relation to the U.S. dollar. The Central Bank or the Brazilian government may intervene in the exchange rate market.
Since 1999, the Central Bank has allowed the real/U.S. dollar exchange rate to float freely, and, since that time, the real/U.S. dollar exchange rate has fluctuated considerably. In 2010, the real appreciated by 4.3% against the U.S. dollar. In 2011 and 2012, the real depreciated by 12.6% and 8.9%, respectively, against the U.S. dollar. In 2013 and 2014, the real depreciated further 14.6% and 13.4%, respectively against the U.S. dollar. On December 31, 2015, the year-end real/U.S. dollar exchange rate was R$3.9048 per US$1.00.
The Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments ranged from a daily to a monthly basis, floating exchange rate systems, exchange controls and dual exchange rate markets. We cannot predict whether the Central Bank or the Brazilian government will continue to let the real float freely or intervene in the exchange rate market by returning to a currency band system or otherwise. The real may depreciate or appreciate substantially against the U.S. dollar.
2
The following tables set forth the selling exchange rate, expressed in reais per U.S. dollar (R$/US$) for the periods indicated, as reported by the Central Bank.
Exchange Rates of R$ per US$1.00 | ||||||||||||||||||
Period-End | Average(1) | High | Low | |||||||||||||||
Year ended December 31, | ||||||||||||||||||
2011 | 1.8758 | 1.6746 | 1.9016 | 1.5345 | ||||||||||||||
2012 | 2.0435 | 1.9550 | 2.1121 | 1.7024 | ||||||||||||||
2013 | 2.3426 | 2.1605 | 2.4457 | 1.9528 | ||||||||||||||
2014 | 2.6562 | 2.3547 | 2.7403 | 2.1974 | ||||||||||||||
2015 | 3.9048 | 3.3387 | 4.1949 | 2.5754 | ||||||||||||||
Month | ||||||||||||||||||
August 2015 | 3.6467 | 3.5143 | 3.6467 | 3.4425 | ||||||||||||||
September 2015 | 3.9729 | 3.9065 | 4.1949 | 3.6725 | ||||||||||||||
October 2015 | 3.8589 | 3.8801 | 4.0010 | 3.7386 | ||||||||||||||
November 2015 | 3.8506 | 3.7765 | 3.8506 | 3.7010 | ||||||||||||||
December 2015 | 3.9048 | 3.8711 | 3.9831 | 3.7476 | ||||||||||||||
January 2016 | 4.0428 | 4.0524 | 4.1558 | 3.9863 | ||||||||||||||
February 2016 (through February 25) | 3.9400 | 3.9743 | 4.0492 | 3.8653 |
Source: Brazilian Central Bank.
(1) | Annually, represents the average of the exchange rates on the last day of each month during the periods presented; monthly, represents the average of the end-of-day exchange rates during the periods presented. |
On February 25, 2016, the exchange rate was R$3.9400 to US$1.00. The real/dollar exchange rate fluctuates and, therefore, this exchange rate may not be indicative of future exchange rates.
B. | Capitalization and Indebtedness |
Not applicable.
C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
D. | Risk Factors |
This section is intended to be a summary of more detailed discussions contained elsewhere in this annual report. The risks described below are not the only ones we face. Additional risks that we do not presently consider material, or of which we are not currently aware, may also affect us. Our business, results of operations or financial condition could be impacted if any of these risks materializes and, as a result, the market price of our preferred shares and our ADSs could be affected.
Risks Relating to Brazil
The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, could adversely affect us and the trading price of our preferred shares and ADSs.
In the past, the Brazilian government has intervened in the Brazilian economy and made changes in policy and regulations. The Brazilian government’s actions to control inflation and affect other policies have often involved wage and price controls, currency devaluations, capital controls, limits on imports, among other things. Our business, financial condition, results of operations and the market price of our preferred shares and ADSs may be adversely affected by changes in government policies, especially those related to our sector, such as changes in telephone fees and competitive conditions, as well as general economic factors, including:
· | currency fluctuations; |
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· | exchange control policies; |
· | internal economic growth; |
· | inflation; |
· | energy policy; |
· | interest rates; |
· | liquidity of domestic capital and lending markets; |
· | tax policies; and |
· | other political, diplomatic, social and economic developments in or affecting Brazil. |
Uncertainty over the possibility of the Brazilian government implementing changes in policy or regulation affecting these or other factors in the future may contribute to economic uncertainty in Brazil and heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian companies. In addition, possible political crisis may affect the confidence of investors and the public in general, which may result in economic deceleration and affect the trading prices of shares issued by companies listed on the stock exchange, such as us.
Our business may be vulnerable to the current disruptions and volatility in the global financial markets.
The Brazilian economy is subject to risks and adjustments arising from international financial conditions. In general, the global financial markets presented less volatility and less unfavorable liquidity conditions than in previous years. However, foreign and national financial institutions, including some of the largest commercial banks, investment banks, mortgage lenders, guarantors and mortgage insurance companies, could still experience significant difficulties, including runs on their deposits and inadequate liquidity.
Various governments may continue to intervene in their financial systems and perform fiscal and monetary adjustments. There is no assurance, however, that these measures will be successful in stabilizing conditions in international financial markets.
The conditions in the global financial markets may have a material adverse effect on our ability to access the capital markets under appropriate financial conditions, which may adversely affect our operations. Furthermore, an environment of economic downturn may negatively affect the financial stability of our customers, which could result in a general reduction in Brazil’s economic activity and the consequent loss of income for us.
Political instability may have an adverse impact on the Brazilian economy and on our business.
Political conditions in Brazil may affect the confidence of investors and the public in general, as well as the development of the economy. The first year of Dilma Rousseff’s second term was marked by an unstable political scenario. The ongoing investigations into allegations of corruption in state-controlled enterprises and the unstable political scenario that has slowed the pace of the fiscal adjustment were factors that may have contributed to the decline of the confidence of investors and the public in general, resulting in the current recession. The unstable political scenario may also have an adverse impact on our business, financial condition, results of operations and the market price of our preferred shares and ADSs.
Inflation and government efforts to curb inflation may contribute to economic uncertainty in Brazil, adversely affecting our business and results of operations.
Brazil has historically experienced high rates of inflation. Inflation and certain governmental measures taken in the attempt to curb inflation have had significant negative effects on the Brazilian economy. In 2015, inflation measured by the Brazilian consumer price index (Índice de Preços ao Consumidor), or IPCA, reached 10.67%, above the upper limit of 6.5%, established by the CMN. In 2016, the Brazilian monetary policy will continue to use the IPCA as reference for the inflation target. The inflation target for 2016 is set at 4.5%, allowing 2 percentage points below or above this target, which is similar to the target for 2015. If the Central Bank’s assessment is that
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inflation will be above this target, it may raise interest rates, directly affecting the cost of our debt and indirectly reducing the demand for products and services related to telecommunications. In 2016, factors that may adversely affect consumer inflation are, among others, the further depreciation of the real against global benchmark currencies, a possible decision by the Brazilian federal government to raise utility prices (such as electricity tariffs) and potential tax increases.
Currently, fixed broadband and mobile service providers use the internal general price index (Índice Geral de Preços - Disponibilidade Interna), or IGP-DI, to adjust their prices and TV and cable service providers use the market general price index (Índice Geral de Preços ao Mercado), or IGP-M. The IGP-DI and IGP-M are inflation indexes developed by the Fundação Getúlio Vargas, a private organization. Since 2006, telephone fees for fixed line services have been indexed to the telecommunication services index, or IST, adjusted by a factor of productivity, which is defined by ANATEL Resolution 507/2008. The IST is an index composed of other domestic price indexes that is intended to reflect the telecommunications industry’s operating costs. As a result, this index serves to reduce potential discrepancies between our industry’s revenue and costs, and thus reduce the apparent adverse effects of inflation upon our operations.
The authorization by ANATEL to adjust the rate of fees, which is pegged to the IST, is reduced by a factor of productivity, which is calculated based on a compensation index established by ANATEL to share earnings from fixed charge services with their users. The IST is calculated based on a 12-month period average. This may cause increases in our revenues above or below our costs (including salaries), with potentially adverse impacts on our profitability.
Increases in interest rates may have a material adverse effect on our business. The Monetary Policy Committee of the Central Bank (Comitê de Política Monetária do Banco Central do Brasil) sets the basic interest rate for the Brazilian financial system based on the future inflation rate and the central inflation target. On December 31, 2015, the basic interest rate was 14.25% per year, compared to 11.75% per year on December 31, 2014. The basic interest rate remained stable on January 20, 2016 and is currently 14.25% per year. Although the current market consensus points to an IPCA above upper limit of the target, the Copom justified its decision based on higher external uncertainties, especially the Chinese economy slowdown. The Central Bank stated that it will remain vigilant. As a result, the Central Bank may keep the overnight rate (Sistema Especial de Liquidação e de Custódia – Selic) stable for the next months and may increase rates depending on how the macroeconomic scenario evolves. Such rate increases may adversely affect our business and results of operations.
Fluctuations in exchange rates may adversely affect our ability to meet liabilities denominated or linked to foreign currencies or reduce our income in foreign currency, and may have a material adverse effect on the market value of our preferred shares and ADSs.
The exchange rate between the U.S. dollar and the Brazilian real has experienced significant fluctuations in recent years. The real depreciated 49% against the U.S. dollar between 2000 and 2003, appreciated by 32% from 2004 to 2011 and depreciated by 86% from 2012 to 2015 (calculated according to the annual average exchange rates).
As of December 31, 2015, 16.5% of our total indebtedness of R$10.2 billion was denominated in foreign currency (of which 10.6% was denominated in U.S. dollars). As of December 31, 2015, we had currency hedges in place to cover all of our financial foreign currency-denominated indebtedness.
Approximately 32.0% and 8.3% of the costs relating to our network infrastructure and services provided by outside vendors is payable or linked to payment by us in U.S. dollars or Euros, respectively. By contrast, 99.6% of our revenue is generated in reais, except income derived from hedging transactions, international long-distance interconnection fees and services to customers outside of Brazil.
To the extent that the value of the real decreases relative to the U.S. dollar or the Euro, our commitments payable or linked to payment by us in foreign currencies become more expensive. Although our accounts receivable denominated in foreign currencies would also appreciate, the net effect could adversely affect our revenue and expenses.
Nearly all of our transactions denominated in foreign currencies are covered by hedge transactions. Since May 2010, we have been using a “net balance coverage” strategy, pursuant to which we seek to hedge our net foreign exchange exposure arising from invoices issued or received in foreign currencies. Our corporate market risk
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department periodically reviews our foreign currency invoices and manages our commitments linked to foreign currencies to limit our overall foreign currency exposure. We believe this strategy has substantially reduced our exposure to fluctuations in exchange rates.
Additionally, the IST does not adequately reflect the true effect of exchange rate fluctuations. Thus, our revenue, when translated to U.S. dollars, does not adequately reflect the true effect of exchange rate fluctuations, which may affect our results of operations.
Political, economic and social developments and the perception of risk in other developed and emerging countries may adversely affect the Brazilian economy, our business, and the market price of Brazilian securities, including our preferred shares and ADSs.
The market for securities issued by Brazilian companies may be influenced, to varying degrees, by economic conditions in both developing and developed economies. The reaction of investors to developments in other countries may have an adverse impact on the market value of securities of Brazilian companies. Crisis in other emerging countries or the economic policies of other countries may reduce investor demand for securities of Brazilian companies, including our preferred shares. Any of the foregoing developments may adversely affect the market value of our preferred shares and hinder our ability to access the capital markets and finance our operations in the future on acceptable terms and costs, or at all.
Exchange controls and restrictions on remittances abroad may adversely affect holders of our preferred shares and ADSs.
Brazilian law allows for the Brazilian government to impose temporary restrictions on capital outflows whenever there is a significant imbalance in Brazil’s balance of payments or a significant possibility that such imbalance will exist. Such restrictions could hinder or prevent the holders of our preferred shares or the custodian of our shares in Brazil, Citibank N.A. (acting as the agent for the depositary), from remitting dividends abroad. The Brazilian government last imposed restrictions on capital outflows for a six-month period at the end of 1989. If similar restrictions are introduced in the future, they would likely have an adverse effect on the market price of our preferred shares and ADSs.
Risks Relating to the Brazilian Telecommunications Industry and Us
Extensive government regulation of the telecommunications industry and our concession may limit, in some cases, our flexibility in responding to market conditions, competition and changes in our cost structure or impact our fees.
Our business is subject to extensive regulation, including any regulatory changes that may occur during the terms of our concession agreements and our authorizations to provide telecommunication services. ANATEL, the main telecommunications industry regulator in Brazil, regulates, among other things:
· | industry policies and regulations; |
· | licensing; |
· | fees and tariffs; |
· | competition, including our ability to grow by acquiring other telecommunications businesses; |
· | telecommunications resource allocation; |
· | service standards; |
· | technical standards; |
· | quality standards; |
· | interconnection and settlement arrangements; and |
· | universal service obligations. |
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Brazil’s telecommunications regulatory framework is continuously evolving. The interpretation and enforcement of regulations, the assessment of compliance with regulations and the flexibility of regulatory authorities are all marked by uncertainty. We operate under authorizations and a concession from the Brazilian government, and our ability to maintain these authorizations and concession is a precondition to our success. However, because of the regulatory framework, we cannot provide assurances that ANATEL will not adversely modify the terms of our authorizations. Furthermore, according to the terms of our operating authorizations and concession, we must meet certain requirements and maintain minimum quality, coverage and service standards. Failure by us to comply with these requirements may result in the imposition of fines or other regulatory responses, including the termination of our operating authorizations and concession. Any partial or total revocation of any of our operating authorizations or our concession would have a material adverse effect on our business, financial condition, revenues, results of operations and prospects. In recent years, ANATEL has also been reviewing and introducing changes in the applicable regulation, especially regarding the interconnection fees among telecommunications service providers in Brazil. Interconnection fees, which are fees charged by telecommunications service providers to each other to interconnect to each other’s networks, are an important part of our revenue and cost bases. To the extent that changes to the rules governing interconnection fees reduce the amount of interconnection fees we are able to collect, our businesses, financial conditions, revenues, results of operations and prospects could be materially adversely affected.
Therefore, our business, results of operations, revenues and financial conditions could be negatively affected by the actions of the Brazilian authorities, including, in particular, the following:
· | the introduction of new or stricter operational and/or service requirements; |
· | the granting of operating licenses in our areas; |
· | limitations on interconnection fees we may charge to other telecommunications service providers; |
· | delays in the granting of, or the failure to grant, approvals for rate increases; and |
· | antitrust limitations imposed by ANATEL and CADE. |
We may be unable to successfully accomplish expected synergies of the GVT acquisition.
In order to achieve the full potential of expected GVT synergies, we will depend on our ability to continue to effectively integrate GVT’s business and management into our business and management. The integration of GVT into Telefônica has been progressing according to schedule; however, there are inherent risks to any integration that may harm the process. We have to integrate certain systems and processes, such as customer service, field operations, investments optimization, as well as GVT’s services into our mix of products. While the integration process has progressed smoothly so far, it consumes time and brings uncertainties to the business.
An inability to fully capture the benefits of synergy opportunities, including delays on integration process, would have an adverse effect on our operations and financial results.
Our concession may be terminated by the Brazilian government under certain circumstances.
We operate our fixed line business in the state of São Paulo under a concession granted by the Brazilian government. According to the terms of the concession, we are obligated to meet certain universal service requirements and to maintain minimum quality and service standards. For example, ANATEL requires that we satisfy certain conditions with respect to, among other things, expansion of our network to provide public pay-phone service for all locations with a population over 100 inhabitants, expansion of our network to provide private individual telephone service for all locations with a population over 300 inhabitants and several targets of quality of service. Our ability to satisfy these and other terms and conditions may be affected by factors beyond our control. Our failure to comply with the requirements of our concession may result in the imposition of fines up to R$50.0 million or other government actions, including the termination of our concession. Any partial or total revocation of our concession would have a material adverse effect on our financial condition and results of operations.
Moreover, the concession agreements establish that all assets owned by us, which are indispensable to the provision of the services described in such agreements, are considered “reversible assets” (bens reversíveis) and are deemed to be part of the concession assets. According to recent interpretation by ANATEL of current regulation,
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reversible assets will be automatically returned to ANATEL upon expiration of the concession agreements, according to the regulation in force at that time and would not be available to creditors in the event of insolvency, bankruptcy or similar events. The most recent net book value of our reversible assets is dated December 31, 2015 and estimated at R$7.9 billion, which is comprised of switching and transmission equipment and public use terminals, external network equipment, energy equipment and system and operation support equipment.
The expiration date of our fixed line concession agreements is December 31, 2025. The concession agreements contain a provision allowing ANATEL to review the concession terms in 2015 and 2020. This provision permits ANATEL to update the renewed concession agreements with respect to network expansion, modernization and quality of service targets in response to changes in technology, competition in the marketplace and domestic and international economic conditions. In December, 2015, ANATEL received a request from the Ministry of Communications to postpone the review of the concession agreement in order to provide the proper time for analysis. As a result, such review will now take place on April 30, 2016.
We are dependent on key personnel and the ability to hire and retain additional personnel.
We believe that our success will depend on the continued services of our senior management team and other key personnel. Our management team is comprised of highly qualified professionals, each with an average of over 30 years of experience in the telecommunications industry. The loss of the services of any of our senior management team or other key employees could adversely affect our business, financial condition and results of operations. We also depend on the ability of our senior management and key personnel to work effectively as a team.
Our future success also depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, sales and marketing personnel. Competition for such personnel is intense, and we cannot guarantee that we will successfully attract, assimilate or retain a sufficient number of qualified personnel. Failure to retain and attract the necessary technical, managerial, sales and marketing and administrative personnel could adversely affect our business, financial condition and results of operations.
We depend on key suppliers to obtain necessary equipment and services for our business.
We depend on certain key suppliers of equipment and services, especially telecommunications network equipment and handsets, for the execution and development of our business. These suppliers may delay delivery, alter prices and limit supply as a result of problems related to their own businesses, over which we have no control. If these suppliers are not able to deliver equipment and services regularly, we may face problems with the continuity of our business activities, which may have an adverse effect on our business and results of operations.
We are subject to liabilities relating to third party contractors, which may have a material adverse effect on our business and results of operations.
We are exposed to eventual liabilities resulting from our contracting structure for third party service providers. Such potential liabilities may involve claims by third party providers that are treated as direct employees as well as claims for secondary liability resulting from work place injury, wage parity and overtime pay complaints. If a significant portion of these liabilities are decided against us and for which we have not made provisions, our financial condition and results of operation may be adversely affected.
Furthermore, if the contracting of third party service are considered to involve the main activities of the company, it may be characterized as a direct employment, which would significantly increase our costs and as a result we may be subject to administrative proceedings by the relevant labor regulators and may be required to pay fines to the third party service providers.
Certain key inputs are subject to risks related to importation, and we acquire other key inputs from a limited number of domestic suppliers, which may further limit our ability to acquire such inputs in a timely and cost effective manner.
The high growth in data markets in general and broadband in particular may result in a limited supply of equipment essential for the provision of such services, such as data transmission equipment and modems. The restrictions on the number of manufacturers imposed by the Brazilian government for certain inputs, mainly data transmission equipment and modems, and the geographical locations of non-Brazilian manufacturers of these inputs, pose certain risks, including:
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· | vulnerability to currency fluctuations in cases where inputs are imported and paid for with U.S. dollars, Euros or other non-Brazilian currency; |
· | difficulties in managing inventory due to an inability to accurately forecast the domestic availability of certain inputs; and |
· | the imposition of customs or other duties on key inputs that are imported. |
If any of these risks materialize, they may result in our inability to provide services to our customers in a timely manner or may affect the prices of our services, which may have an adverse effect on our business, financial condition and results of operations.
We make investments based on demand forecasts that may become inaccurate due to economic volatility and may result in revenues that lower than expected.
We make certain investments, such as the procurement of materials and the development of physical sites, based on our forecasts of the amount of demand that customers will have for our services at a later date (generally several months later). However, any major changes in the Brazilian economic scenario may affect this demand and therefore our forecasts may turn out to be inaccurate. For example, economic crises may restrict credit to the population, and uncertainties relating to employment may result in a delay in the decision to acquire new products or services (such as broadband or Pay TV). As a result, it is possible that we may make larger investments based on demand forecasts than were necessary given actual demand at the relevant time, which may directly affect our cash flow.
Furthermore, improvements in economic conditions may have the opposite effect. For example, an increase in demand not accompanied by our investment in improved infrastructure may result in a possible loss of opportunity to increase our revenue or result in the degradation of the quality of our services.
Review of our concession agreements may have a materially adverse effect on us.
On June 27, 2014, as set forth in our concession agreement for fixed line services in the state of São Paulo, ANATEL opened a public comment period for the revision of the terms of our concession agreement. The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service universalization, rates and fees and quality of services, among others. We submitted our comments on time and according to the established rules. Depending on the evaluation made by ANATEL of the contributions and the Federal Government’s final decision regarding the terms of universal service goals, ANATEL may impose new targets, with values that we are not able to predict, which may have a materially adverse effect on our financial condition and results of operations.
Consolidation in the Brazilian telecommunications market may increase competition in the near future.
Some of the main telecommunication groups in Brazil have been going through a series of mergers and acquisitions. On February 19, 2014, Oi S.A., or Oi, and Portugal Telecom SGPS, S.A., or Portugal Telecom, entered into a subscription agreement pursuant to which Portugal Telecom agreed to subscribe to Oi common and preferred shares as part of a capital increase by contributing all of the share capital of PT Portugal SGPS, S.A., or PT Portugal, to Oi. According to the valuation report, the shares of PT Portugal were valued at an amount between €1,623.3 million (R$5,296.4 million) and €1,794.1 million (R$5,853.9 million).
Furthermore, on December 8, 2014, Oi’s board of directors approved the general terms and conditions for the sale of all of the shares of PT Portugal to Altice S.A., or Altice. The sale involves substantially all of PT Portugal’s operations in Portugal and Hungary. The transaction was approved by the shareholders of Portugal Telecom on January 22, 2015. At closing, on June 2, 2015, Oi transferred to Altice all of the shares issued by PT Portugal for €5.8 billion, subject to certain adjustments.
On May 18, 2014, AT&T announced an agreement to acquire DirecTV (one of the shareholders of SKY Brasil) in a stock-and-cash transaction for US$95 per share. The expected synergies are primarily driven by increased
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economies of scale in video. The two companies, DirecTV and AT&T, have more than 26 million video subscribers in the United States, and the merger is currently under review by U.S. Department of Justice and the Federal Communications Commission because their combined operations will have a significant impact on the U.S. Pay TV market. DirecTV currently has approximately 21.2 million customers in its Latin American operations, which include Brazil.
On October 23, 2015, Oi S.A. announced a proposal by the investment group, Letter One, to enter into exclusive negotiations with respect to a possible consolidation of the Brazilian telecommunications sector, involving a business combination with TIM Participações S.A. According to the proposal, Letter One would make a capital contribution of up to US$4.0 billion in Oi S.A., subject to the consolidation activities. However, on October 26, 2015, TIM Participações S.A. communicated to the market that it has no negotiation in place with the aforementioned parties in relation to any potential consolidation in the Brazilian market.
Mergers and acquisitions may change the market dynamic, create competitive pressure and force small competitors to find partners and may require us to adjust our operations, financial condition, marketing strategies (including promotions) and product portfolio.
We face significant competition in the Brazilian market.
The Brazilian telecommunications market growth (in revenues) remained stable in 2015, mainly due to the required reductions in mobile termination rates as well as a decrease in the use of traditional services (fixed voice and lower speed broadband). By contrast, premium services such as ultra-broadband and mobile postpaid boosted the revenues of telecommunications companies. Customers are demanding higher quality and more data availability, which require investments in the development and expansion of new technologies (Fiber and 4G), pressing companies’ results.
Additionally, the following factors have also impacted competition in the telecommunications sector: (1) commercial and pricing pressures from new mobile portfolios launched by competitors; (2) competitors increasing 3G and 4G coverage, improving the quality of service provided by them; and (3) low-cost alternative services, such as voice and text services provided over IP and Video on Demand, may affect our competitive position in the market.
We continuously monitor the market progress in order to anticipate future challenges and opportunities and how to address them. Nevertheless, our operational results, market position, competitiveness in the market and margins may be negatively affected if we are unable to keep the same pace as our competitors.
Our results of operations may be negatively affected by the application of the Fixed Commuted Telephone Service (Serviço de Telefonia Fixa Comutada), or STFC, rules relating to fixed telephone service and the Personal Mobile Service (Serviço Móvel Pessoal), or SMP, rules relating to mobile services.
We receive payments for the termination of calls in our fixed network. On May 18, 2014, ANATEL established a gradual decrease in termination rates for the STFC concessionaries, including TU-RL (Urban Usage Rate), TU-RIU1 (Interurban Usage Rate Level 1) and TU-RU2 (Interurban Usage Rate Level 2). In addition, in 2014, ANATEL established gradual decreases in mobile interconnection fees, also known as mobile termination rates, or MTR, based on a cost model. Such figures appear in the following table:
2015 | 2016 | 2017 | 2018 | 2019 | |
Sector 31 (fixed) | |||||
TU-RL | N/A | 0.01139 | 0.00574 | 0.00289 | 0.00146 |
TU-RU1 | N/A | 0.05339 | 0.02191 | 0.00899 | 0.00369 |
TU-RU2 | N/A | 0.06129 | 0.02348 | 0.009 | 0.00345 |
Mobile | |||||
Region I | 0.16751 | 0.09317 | 0.04928 | 0.02606 | 0.01379 |
Region II | 0.16237 | 0.10309 | 0.05387 | 0.02815 | 0.01471 |
Region III | 0.14776 | 0.11218 | 0.06816 | 0.04141 | 0.02517 |
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We cannot assure that new mobile service plans will not be suspended by ANATEL, or that the mobile interconnection fees we negotiated will not be changed and future negotiations regarding mobile termination rates will be as favorable as those that were previously set by ANATEL. If the readjustments to mobile interconnection fees that we negotiated are cancelled or if negotiated mobile interconnection fees in the future are less favorable to us, our business, financial condition, revenues, results of operations and prospects may be adversely affected.
ANATEL’s annual regulations regarding interconnection fees could have an adverse effect on our results.
ANATEL has the authority to issue new regulations affecting many of our areas of operations. Such new regulations could have an adverse effect on our operating results because: (1) ANATEL could significantly reduce the interconnection fees we are able to charge, thereby reducing our revenues (see “—Our results of operations may be negatively affected by the application of the Personal Mobile Service (Serviço Móvel Pessoal), or SMP, rules relating to mobile services”); (2) ANATEL may allow more favorable conditions for economic groups without significant market power; (3) the granting of new licenses may increase competition in our area from other operators, which could adversely affect our prices or market share, thereby reducing our revenues; (4) ANATEL may require that revenue received for the usage of the SMP network must be included in the calculation of operating revenue, which will increase the cost of renewing licenses; and (5) ANATEL’s general plan of updating the telecommunications regulations targets several areas of vital importance for the mobile telecommunications business, such as regulations (A) to improve the quality of services, which may cause an increase in operating costs, (B) of virtual mobile operations, or MVNO, which may cause an increase in competitive pressure, (C) against SMP providers exercising market power to negotiate lower mobile termination rate fees, which could cause a decrease in our revenues from the mobile termination rate fees we are able to charge to SMP providers, and (D) relating to multimedia communication. For a detailed description of the regulations issued by ANATEL and their impact on our business, see “Item 4. Information on the Company—Business Overview—Regulation of the Brazilian Telecommunications Industry.”
The industry in which we conduct our business is continually changing and evolving technologically, which demands adequate changes in the regulatory environment.
The telecommunications industry is subject to rapid and significant technological changes. Our future success depends on our ability to anticipate and adapt in a timely manner to technological changes. We expect that new products and technologies will emerge and that existing products and technologies will be further developed.
The advent of new products and technologies could have a variety of consequences. These new products and technologies may reduce the price of our services by providing lower-cost alternatives, for instance over-the-top, or OTT, players (that provide voice and messages over IP), and creation of new digital services. New product and technologies may also be superior to, and render obsolete, the products and services we offer and the technologies we use, thus requiring investment in new technology.
Furthermore, such new technologies will demand changes in the regulatory environment challenging the government agencies and telecommunication companies. For example, companies that provide OTT services, that have some characteristics of the telecommunications service, are not subject to the same rules that a telecommunications operator, this gap can bring additional challenges to telecommunications operators. Currently, it is unclear what the level of regulation for this type of service will be.
Resolution No. 600, approved in November 2012, establishes relevant markets and asymmetric measures which were intended to stimulate the competition in such markets. We are subject to review by ANATEL to decide if we have a significant market power in a specific relevant market and, as a result, are subject to asymmetric measures. Both relevant markets and asymmetric measures will be evaluated every four years beginning in 2016 and the list of companies deemed to have significant market power will be reviewed every two years. Such asymmetric measures may have material adverse effect on our financial condition and results of operations.
On November 23, 2015, the Ministry of Communications opened a public consultation on the new regulatory framework for telecommunications until January 15, 2016. In this regard, in the short term, the public debate involves the exemption of obligations associated with STFC, when provided in the Public Regime, in order to ensure the sustainability of a business in a noticeable decline. Failure to implement these exemptions can compromise the operational and financial results of the concessionaires.
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The Brazilian Government has authority to establish which public services should be provided under the Concession Regime and under the Authorization Regime. Services under a Concession Regime, in general, are considered essential to society and therefore must conform to a set of rules to ensure the continued provision and accessibility to the entire population. The Fixed Broadband Service is currently provided under the Authorization Regime, however current proposals being analyzed include the possibility of switching such services to a Concession Regime. Such changes, when altering the current dynamic of the fixed broadband market, could result in adverse outcomes in our financial and operating results.
Lastly, the concept of reversibility of assets associated with our concession agreement and its current regulation, needs to be adjusted given the advent of technological convergence, with companies sharing their infrastructure between different services, both under Concession and Authorization regimes. The revision of the regulation of reversible assets would remove the current legal uncertainty imposed on concessionaires and stimulate a more efficient use of assets.
Changes to any of the above described regulations may have a material effect on our financial condition and results of operations.
We are subject to certain risks related to conditions and obligations imposed by ANATEL for the use of the spectrum needed for the LTE services we offer.
In 2010, ANATEL required multichannel multipoint distribution service, or MMDS, companies, including us, to return a significant portion of the 2.5GHz spectrum we owned at that time. In addition, on June 12 and 13, 2012, ANATEL held a public auction for 273 lots of 4G, on the 2.5GHz to 2.69GHz frequencies. We acquired the “X” band, with a nationwide coverage, for R$1.05 billion. According to spectrum cap rules for bidding processes, we had to return the remaining portion of the 2.5GHz spectrum we previously owned to operate our MMDS services. In order to meet the coverage obligations and the schedule defined by ANATEL, we have made 4G services available to 183 metropolitan areas in Brazil including cities with over 200,000 residents. To complete the coverage requirements, we will need to implement 4G coverage as follows:
· | by December 31, 2015: all cities with over 200,000 residents; |
· | by December 31, 2016: all cities with over 100,000 residents; |
· | by December 31, 2017: 787 cities with between 30,000 and 100,000 residents and 117 cities with fewer than 30,000 residents; |
· | by December 31, 2018: another 117 cities with fewer than 30,000 residents; and |
· | by December 31, 2019: 156 more cities with fewer than 30,000. |
The coverage from commitments on 4G technology in the 2.5 GHz band set for December 31, 2015 consisted in covering the 88 municipalities with a population between 200,000 and 500,000 inhabitants, excluding capital cities, which were prior period goals. Telefônica deployed 4G coverage in these municipalities and serves its customers through the use of its own network or by agreement of RAN-sharing approved by ANATEL in December 2015. Verification of compliance with these targets will be made by the Agency under a supervisory throughout 2016, on schedule not yet defined.
Two thirds of the of coverage commitments related to cities between 20,000 and 100,000 inhabitants, and all referring to cities with less than 30,000 inhabitants may be fulfilled with other frequency bands.
In 2012, ANATEL auctioned a 450 MHz frequency lot that is tied to the 2.5 GHz band, to meet voice and data demand in remote rural areas. Under band “X,” which we acquired in the bidding process, we will be required to provide infrastructure in rural areas in the states of Alagoas, Ceará, Minas Gerais, Paraíba, Pernambuco, Piauí, Rio Grande do Norte, Sergipe, and countryside of São Paulo, for a total of 2,556 municipalities. The schedule for providing infrastructure in the rural areas requires that 100% of municipalities have infrastructure in place by December 2015, with a transmission rate of 256Kbps and by December 31, 2017, all of these municipalities will be expected to have 1Mbps. ANATEL is currently analyzing whether the obligations that should have been met by the end of 2015, set out in the auction regarding the frequencies of 2.5GHz and 450 MHz, were met.
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The targets established by ANATEL for the fast-paced implementation of networks could be impacted by (1) our ability to obtain licenses for the construction of new sites at the speed necessary to achieve the coverage targets, (2) the capacity of our suppliers to deliver the equipment necessary for this expansion, which may increase the price of such equipment, and (3) lack of qualified resources to meet the expected implementation pace.
Regarding the 700 MHz spectrum, ANATEL has allocated the band for the provision of fixed, mobile and broadband services. On September 30, 2014, ANATEL held the public bidding for 18 blocks of 4G, on the 708 to 803 MHz frequencies. We acquired 20 MHz (10+10 MHz) with nationwide coverage, for R$1.92 billion, at the minimum price, plus R$904 million for the band cleaning (migration of broadcasters that currently occupy the band and interference management). According to the auction rules, the winning bidders will be responsible for financing and managing the band cleaning process and ANATEL has deducted the cleaning cost associated with two blocks for which no bids were made.
In January, 2016, the Ministry of Communications postponed the Analog TV Switch Off to December 2018 in the state capitals/biggest cities and by December 2023 in the remaining cities. The 700 MHz frequency must be completely cleaned and ready to use by December 2019, even in the cities where the Switch Off will occur later on. In those cases, the TV signal will be redirected to other frequency.
If we are not able to meet targets and obligations set forth in the bid documents, ANATEL may use our bank guarantees, we may be subject to fines and/or have our licenses to operate these frequencies revoked, negatively affecting our business and results of operations.
Our sales could be suspended as a result of issues with the quality of our services.
ANATEL and other judiciary and administrative agencies have the authority to suspend our sales in an attempt to improve the overall quality of telecommunications services. Sales suspensions are generally applied to the services for which there have been complaints by consumers and the consumer protection agencies. When applied, the suspension is temporary and usually lifted once the company presents an improvement action plan. In July 2012 ANATEL suspended mobile service sales from three of our main competitors, Oi, Claro and Tim, as result of a considerable increase in consumer complaints. The suspensions lasted about 20 days and ANATEL requested that all telecommunications companies, including us, present an action and investment plan to improve the mobile network. Although our action plan was approved by ANATEL in September 2012, if a similar increase in customer complaints occurs in the future, we may face suspension of one or more of our services until a plan can be produced and approved by ANATEL, which may materially affect our business and results of operations.
Certain of our debt agreements contain financial covenants, and any default under such debt agreements may have a material adverse effect on our financial condition and cash flows.
Certain of our existing debt agreements contain restrictions and covenants and require the maintenance or satisfaction of specified financial ratios and tests. Failure to meet or satisfy any of these covenants, financial ratios or financial tests could result in an event of default under these agreements.
We are subject to environmental laws and regulations. Failure to comply with governmental laws and regulations could subject us to penalties that could have an adverse effect on our business.
Our operations and properties are subject to a variety of environmental laws and regulations governing, among other things, environmental licensing and registries, protection of flora and fauna, air emissions, waste management and remediation of contaminated areas, among others. Our failure to comply with present and future requirements, or the management of existing and identification of new contamination, could cause us to incur substantial costs, including cleanup costs, indemnification, compensation, fines, suspension of activities and other penalties, investments to upgrade our facilities or change our processes, or curtailment of operations. The identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory agencies, enactment of more stringent laws and regulations or other unanticipated events may arise in the future and give rise to material environmental liabilities and related costs. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
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Companies in the telecommunication industry, including us, may be harmed by restrictions regarding the installation of new antennas for mobile services.
Currently, there are approximately 250 municipal laws in Brazil that limit the installation of new antennas for mobile service, which has been a barrier to the expansion of mobile networks. Those laws are meant to regulate issues related to zoning and the alleged effects of the radiation and radiofrequencies of the antennas. The federal law, that establishes new guidelines to create a consolidated plan for the installation of antennas was approved in 2015, however, it is still pending specific regulation. Despite the federal initiative, as long as the municipal laws remain unchanged, the risk of noncompliance with regulations and of having services of limited quality in certain areas continues to exist.
Additional antenna installation is also limited as a result of concerns that radio frequency emissions from base stations may cause health problems. These concerns could have an adverse effect on the wireless communications industry and, possibly, expose wireless providers, including us, to litigation. Based on information from the World Health Organization, or WHO, we are not aware of any evidence in the latest medical research that conclusively establishes any relationship between radio frequency emissions of base stations and health concerns. However, perceived risks may delay expansion of our network if we experience problems in finding new sites, which in turn may delay expansion and may affect the quality of our services.
In May 2009, the Brazilian government published Law No. 11934/2009 that limits the exposure for fields with frequencies up to 300 GHz. The new law uses the exposure limits determined by the International Commission on Non-Ionizing Radiation Protection and recommended by the WHO. In addition, this law further restricts the installation of new antennas.
New laws may create additional transmission regulations, which in turn, could have an adverse effect on our business. Also, health concerns regarding the effects of radio frequency emissions may discourage the use of mobile telephones and may result in the adoption of new measures by governments or any other regulatory interventions, any of which could materially and adversely affect our business, results of operations and financial condition.
We face risks associated with litigation.
We are party to a number of lawsuits and other proceedings. An adverse outcome in, or any settlement of, these or other lawsuits could result in significant costs to us. In addition, our senior management may be required to devote substantial time to these lawsuits, which they could otherwise devote to our business. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”
Risks Relating to the Preferred Shares and the ADSs
Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.
We are organized under the laws of Brazil, and all of our executive officers and our independent public accountants reside or are based in Brazil. Also, seven of our twelve directors reside or are based in Brazil. Substantially all of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of the ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests due to actions by us, our directors or executive officers than would shareholders of a U.S. corporation.
Holders of our preferred shares and ADSs generally do not have voting rights.
In accordance with Brazilian Corporate Law and our bylaws, holders of our preferred shares, and therefore of our ADSs, are not entitled to vote at meetings of our shareholders, except in limited circumstances set forth in “Item 10. Additional Information—B. Memorandum and Articles of Association.”
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Holders of our preferred shares might be unable to exercise preemptive rights with respect to the preferred shares unless there is a current registration statement in effect which covers those rights or unless an exemption from registration applies.
Holders of our preferred shares will not be able to exercise the preemptive rights relating to the preferred shares underlying their ADSs unless a registration statement under the U.S. Securities Act of 1933, as amended, or the Securities Act, is effective with respect to the shares underlying those rights, or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement. Unless we file a registration statement or an exemption from registration applies, holders of our preferred shares may receive only the net proceeds from the sale of their preemptive rights by the depositary, or if the preemptive rights cannot be sold, they will lapse and they will not receive any value for them. For more information on the exercise of these rights, see “Item 10. Additional Information—B. Memorandum and Articles of Association—Preemptive Rights.”
An exchange of ADSs for preferred shares risks the loss of certain foreign currency remittance and Brazilian tax advantages.
Beginning on March 30, 2015, the different forms of foreign portfolio investments in Brazil, including investments via Depositary Receipts, have been regulated by CMN Resolution 4,373, of September 29, 2014 or Resolution No. 4,373, which revoked the former rule (CMN Resolution 2,689, of January 26, 2000) that had been in effect for the previous 15 years. Resolution No. 4,373 provides for the issuance of Depositary Receipts in foreign markets in respect of shares of Brazilian issuers, and pursuant to this regulation, the ADSs benefit from the certificate of foreign capital registration, which permits Citibank N.A., as depositary, to convert dividends and other distributions with respect to preferred shares into foreign currency, and to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for preferred shares will then be entitled to rely on the depositary’s certificate of foreign capital registration for five business days from the date of exchange. Thereafter, they will not be able to remit non-Brazilian currency abroad unless they obtain their own certificate of foreign capital registration, or unless they qualify under CMN Resolution No. 4,373, which entitles certain investors to buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration. CMN Resolution No. 4,373, of September 29, 2014, replaced both CMN Resolution No. 1,927 and CMN Resolution No. 2,689 as of March 30, 2015. Further rules will be issued by CVM and the Central Bank regulating foreign investments in ADSs, including with regard to the exchange of ADSs for preferred shares and the remittance of funds arising from the sale of these preferred shares.
If holders of ADSs do not qualify under Resolution No. 4,373, they will generally be subject to less favorable tax treatment with respect to our preferred shares. There can be no assurance that the depositary’s certificate of registration or any certificate of foreign capital registration obtained by holders of ADSs will not be affected by future legislative or regulatory changes, or that additional Brazilian law restrictions applicable to their investment in the ADSs may not be imposed in the future.
Holders of our preferred shares will be subject to, and holders of our ADSs could be subject to, Brazilian income tax on capital gains from sales of preferred shares or ADSs.
Brazilian Law No. 10,833 provides that gains on the disposition of assets located in Brazil by nonresidents of Brazil, whether to other nonresidents or to Brazilian residents, will be subject to Brazilian taxation. The preferred shares are expected to be treated as assets located in Brazil for purposes of the law, and gains on the disposition of preferred shares, even by nonresidents of Brazil, are expected to be subject to Brazilian taxation.
Based on the fact that the ADSs are issued and registered abroad, we believe that gains on the disposition of ADSs made outside of Brazil by nonresidents of Brazil to another non-Brazilian resident would not be subject to Brazilian taxation, since they would not fall within the definition of assets located in Brazil for purposes of Law 10,833. However, considering the general and unclear scope of Law No. 10,833 and the absence of judicial/administrative court rulings in respect thereto, we cannot be assured that such an interpretation of this law will prevail in the courts of Brazil. Brazilian tax authorities also do not provide clear guidance in this respect, and may treat such transaction as subject to capital gain tax in Brazil at the rate of 15% (or 25% if the non-Brazilian holder is located in a tax haven jurisdiction), plus potential fines and interest. Therefore, if the income tax is deemed to be due, the gains may be subject to income tax in Brazil at a rate of 15.0% (general taxation) or 25.0% (if the nonresident seller is located in a tax haven, a country which does not impose any income tax, which imposes it at a maximum rate lower than 20.0%, or in which the laws impose restrictions on the disclosure of ownership
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composition or securities ownership or the identification of the effective beneficiary of income attributed to nonresident holders). See “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations.”
Certain Factors Relating to Our Controlling Shareholder
Our controlling shareholder has power over the direction of our business.
Telefónica S.A., or Telefónica, our controlling shareholder, and its affiliates currently own directly and indirectly approximately 94.47% of our voting shares and 73.58% of our total capital stock. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.” As a result of its share ownership, Telefónica has the power to control us and our subsidiaries, including the power to elect our directors and officers and to determine the outcome of any action requiring shareholder approval, including corporate reorganizations and the timing and payment of our dividends. Given this degree of control over our company, circumstances could arise under which the interests of Telefónica could be deemed to be in conflict with the interests of our other shareholders.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
General
We were incorporated on May 22, 1998, as a corporation (sociedade anônima) organized under the laws of the Federative Republic of Brazil, as a result of the restructuring and privatization of Telecomunicações Brasileiras S.A. and its operating subsidiaries, or the Telebrás System, which monopolized the provision of public telecommunications services in virtually all areas of Brazil prior to 1998. We were incorporated under the name Telesp Participações S.A. and after subsequent reorganizations we were named Telecomunicações de São Paulo S.A. – TELESP. After our merger with Vivo Participações in October 2011, we changed our corporate name to Telefônica Brasil S.A.
On September 18, 2014, we entered into a stock purchase agreement with Vivendi S.A. to acquire all of the shares of GVT Participações S.A., or GVT, the controlling shareholder of Global Village Telecom S.A., or Operating GVT, which was approved by our board of directors on the same date.
According to Brazilian Law, the transaction must be approved by both ANATEL and CADE. On December 22, 2014, ANATEL approved the transaction and imposed certain obligations, which include (1) the maintenance of current GVT services and plans within the same geographic scope in which GVT operates today, requiring, in addition, that the successor company expand its operations to at least ten new municipalities within three years beginning on January 26, 2015; and (2) the waiver of the STFC license held by GVT within 18 months of ANATEL’s decisions, because regulations establish that the same economic group cannot hold more than one FSTS license in the same geographic area. We understand that obligations imposed do not compromise the terms of the GVT acquisition or its value. In addition, ANATEL required that the subsequent swap transaction, which contemplates that Vivendi will exchange a portion of its stake in Telefônica Brasil for a portion of Telefónica S.A.’s indirect stake in Telecom Italia be subject to a distinct and specific approval process.
On March 25, 2015, CADE provisionally approved the GVT acquisition, subject to a series of obligations imposed to prevent any undesired concentration effects of the merger. Such obligations require that we:
· | Maintain, for at least three years, the current geographical coverage for STFC, SCM and SeAC services; |
· | Maintain, for at least three years, the current average broadband speed for GVT’s customers on a nationwide basis. The reference as of December, 2014 is 15.1 Mbps; |
· | Maintain, for at least three years, the current average broadband speed for GVT’s customers in São Paulo. The reference as of December, 2014 is 18.25 Mbps; and |
· | Do not exchange, directly or indirectly, classified information, strategic or competitively sensitive information with any other company or between management and representative responsible for subsidiaries of Vivendi Group, Telefónica Group and Telecom Italia Group related to its operations in the Brazilian market. |
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In November 2015, ANATEL consented to our corporate reorganization involving Telefônica Brasil S.A. and Global Village Telecom S.A. The approval was subject to certain conditions such as the end of overlap licenses of STFC, SCM and SeAC within 18 months and the obligation to present a list of all assets from the companies incorporated in our STFC (Sector 31, Region III) concession area, confirming the absence of reversible assets burdened judicially (by means of a negative certificate), or in case of attachment, present the appropriate requests for replacement.
The prior consent mentioned allows us to capture the benefits of the corporate reorganization. Besides, a reduction in the telephonic fixed service’s basic fee will take place transferring tax gains related to this operation to our customers.
We are registered with the CVM as a publicly held company and our stock is traded on the BM&FBOVESPA under the symbol “VIVT3” (formerly “TLPP3”) for common shares and “VIVT4” (formerly “TLPP4”) for preferred shares. We are also registered with the SEC in the United States and our ADSs are traded on the NYSE, under the symbol “VIV” (formerly “TSP”). Our headquarters are located at Avenida Engenheiro Luis Carlos Berrini, 1376, 04571-936, São Paulo, SP, Brazil. Our telephone number is 55-11-3430-3687 and our website is www.telefonica.com.br/ir. The information on our website is not part of this annual report on Form 20-F.
As of December 31, 2015, we had 569,354,053 outstanding common shares (excluding treasury shares), with no par value per share, and 1,119,339,972 outstanding preferred shares, with no par value per share. Our shareholders’ equity was in the amount of R$68.6 billion as presented in our audited financial statements prepared in accordance with IFRS.
Historical Background
Corporate Restructuring Involving Telefônica Brasil and Vivo Participações
On July 28, 2010, our controlling shareholder, Telefónica, reached an initial agreement with Portugal Telecom for the acquisition of 50% of the capital stock of Brasilcel, N.V., or Brasilcel. As a result of this transaction, Telefónica held 100% of the capital stock of Brasilcel. At that time, Brasilcel held approximately 60% of the capital stock of Vivo Participações. On December 21, 2010, Brasilcel was merged into Telefónica.
Due to the acquisition of control of Vivo Participações, on February 16, 2011, Telefónica, through its subsidiary SP Telecomunicações Ltda., or SP Telecom, launched a public tender offer for the common shares of Vivo Participações (the only shares with voting rights) held by minority shareholders. As a result of the public tender offer, on March 18, 2011, SPTelecom acquired 10,634,722 common shares of Vivo Participações, representing 2.66% of its shares, resulting in the Telefónica group’s ownership of 62.1% of Vivo Participações.
On December 27, 2010, the boards of directors of Vivo Participações and Telefônica Brasil approved the terms and conditions of a corporate restructuring, which provided for the merger of shares issued by Vivo Participações into Telefônica Brasil. The corporate restructuring was approved by ANATEL on March 24, 2011, and on April 27, 2011, the shareholders of Vivo Participações and Telefônica Brasil approved the merger of shares issued by Vivo Participações into Telefônica. On June 14, 2011, the board of directors of both companies approved a second corporate restructuring, pursuant to which Vivo Participações became our wholly owned subsidiary. The terms and conditions of the second corporate restructuring were approved unanimously by the shareholders of both companies on October 3, 2011. Vivo Participações was merged into us, and the holders of the merged shares of Vivo Participações received new shares in the company.
In addition to the concentration of the equity ownership mentioned above, the purpose of the corporate restructuring was to simplify the organizational structure of the companies, both of which were publicly held, so as to: (i) focus all authorizations for the rendering of SMP services (originally held by Vivo Participações and Vivo), and (ii) simplify the current corporate structure, eliminating the structure of Vivo Participações, which due to the concentration of commitments, had become a holding company.
Moreover, the corporate restructuring provided for the rationalization of the cost structure of the two companies and facilitated the integration of the businesses and the generation of synergies, thus positively impacting both companies. Due to the merger of Vivo Participações into us, our capital was increased by R$31.2 billion, reflecting the economic value of the shares issued as a result of the merger. The merger did not change the identity of the controlling shareholders of the companies.
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Additionally, as a consequence of this merger, on July 6, 2011, Vivo Participações filed a statement with the SEC in order to cancel the registration of its American Depositary Shares, or ADS, program since all of its ADSs were converted into ADSs of Telefônica Brasil. The SEC approved the deregistration on July 7, 2011.
A third stage of the corporate restructuring was approved by ANATEL on August 16, 2011. On October 3, 2011, our shareholders approved the merger of Vivo Participações into us and Telefônica Brasil absorbed Vivo Participações’ equity, extinguishing Vivo Participações, which further simplified and rationalized our cost structures. On the same date, we changed our name from Telecomunicações de São Paulo S.A. – TELESP to Telefônica Brasil S.A., to reflect our nationwide operations. On October 18, 2011, ANATEL approved transfer of the authorization for the provision of SMP services in the state of Minas Gerais from Vivo Participações to Vivo.
As a result of this name change, the ticker symbols for our shares were also changed as of October 6, 2011 (inclusive), from TLPP3, for the common shares, and TLPP4, for the preferred shares, to VIVT3 and VIVT4, respectively, with the subsequent change of our trading name to TELEF BRAZIL. Our ticker symbol for the ADRs on the NYSE was changed to VIV, from TSP.
Telefónica and Telecom Italia Agreement
The Italian company TELCO S.p.A. had a 22.4% interest with voting rights in Telecom Italia, and is its major shareholder. Telecom Italia holds an indirect interest in TIM Participações S.A., or TIM, a Brazilian telecommunications company. None of Telefónica, Telefônica Brasil or any other affiliate of Telefónica is involved with or has decision-making powers over TIM’s operations in Brazil, although Telefónica does hold an indirect interest with respect to TIM’s operations in Brazil. They are also legally and contractually forbidden from exercising any voting rights in TIM’s operations in Brazil. TIM and Telefônica Brasil compete in all markets in which they operate in Brazil and maintain usual and customary contractual relations with one another as well as with the other players in the telecommunications industry (many of which are regulated and reviewed by ANATEL), and notice is given to ANATEL and CADE, when required, concerning the commitments assumed pursuant to these contracts so as to ensure total independence of their operations.
On September 24, 2013, Telefónica entered into a shareholders’ agreement with the other shareholders of TELCO S.p.A. whereby Telefónica subscribed and paid for shares (without voting rights) of TELCO S.p.A. in the amount of €324 million. As a result of this capital increase, the share capital of Telefónica with voting rights in TELCO S.p.A. remained unchanged at 46.18%, although its ownership interest increased to 66%. Thus, the governance of TELCO S.p.A., as well as the obligations of Telefónica to abstain from participating in or influencing the decisions that impact the industries where they both operate, remained unchanged.
On January 1, 2014, Italian shareholders of TELCO S.p.A. granted Telefónica an option to purchase all of their shares in TELCO S.p.A. The ability to exercise this call option was subject to approvals from the applicable antitrust authorities and telecommunications regulatory agencies as applicable (including in Brazil and Argentina). The call option was available since January 1, 2014 and remained available during the shareholders’ agreement mentioned above was in effect, except (i) during the period between January 15 and February 15, 2015 and (ii) during certain periods in the event that the Italian shareholders of TELCO S.p.A. requested TELCO S.p.A.’s spin-off.
On December 4, 2013, CADE announced its decision to approve, subject to the limitations described below, the acquisition, by Telefónica, of the total interest held by Portugal Telecom in Brasilcel, which previously controlled Vivo Participações. The transaction had previously been approved by ANATEL and its completion (requiring no prior approval from CADE at the time) took place immediately after approval from ANATEL, on September 27, 2010. Pursuant to CADE’s decision of December 4, 2013, Telefônica was required to (1) obtain a new shareholder and share control over Vivo Participações with Telefónica, under the same conditions applied to Portugal Telecom when it held an interest in Brasilcel or (2) Telefónica should cease to have, either directly or indirectly, equity interest in TIM.
Additionally, on December 4, 2013, CADE announced its decision to impose a R$15 million fine on Telefónica for violating the intent and purpose of the agreement executed by and between Telefónica and CADE (as a requirement to approve the initial purchase transaction of Telecom Italia in 2007), due to the subscription and payment, by Telefónica, of non-voting shares of TELCO S.p.A. in the context of its recent capital increase. This decision also required that Telefónica would dispose of its non-voting shares held in TELCO S.p.A. The deadlines for compliance with the conditions and obligations imposed by CADE in both decisions were classified as confidential by CADE.
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In order to strengthen its firm commitment to the obligations previously assumed by Telefónica to not interfere with decisions that affect Telecom Italia and, consequently, TIM Brasil, Telecom Italia’s business in Brazil, Telefónica pointed out, in a material communication, that Mr. César Alierta Izuel and Mr. Julio Linares López had decided to resign with immediate effect, from the position of Directors at Telecom Italia. Additionally, Mr. Julio Linares López decided to resign, with immediate effect, from his position on the list presented by TELCO S.p.A. for potential reelection to the board of directors of Telecom Italia.
Likewise, Telefónica, notwithstanding the rights defined in the TELCO S.p.A. shareholders’ agreement, stated in a material communication that it decided not to exercise its right to appoint or nominate directors of Telecom Italia.
On June 16, 2014, TELCO, S.p.A.’s Italian shareholders exercised their right to a spin-off, in accordance with the shareholders’ agreement. The implementation of the spin-off was approved by the shareholders on July 9, 2014 and was subject to approval from ANATEL and CADE. When approved by ANATEL and CADE, the spin-off would consist of the shares held by Telecom Italia being spun-off to four new companies, each of which would be wholly owned by one of TELCO, S.p.A.’s shareholders and each of which would hold shares of Telecom Italia, S.p.A. proportional to their holding in TELCO, S.p.A.
As a result of the spin-off, Telefónica S.A. would indirectly hold 14.77% of Telecom Italia S.p.A. of which 8.3% would be exchanged with Vivendi as consideration in the GVT acquisition and 6.47% would be tied to debentures issued by Telefónica S.A. in July 2014 convertible into shares of Telecom Italia upon maturity.
On December 22, 2014, ANATEL authorized the spin-off of TELCO, S.p.A. conditional on the suspension of all control rights of Telefónica S.A. in Telecom Italia, S.p.A. and its subsidiaries. In addition, ANATEL authorized the GVT acquisition, subject to certain regulatory obligations. On March 25, 2015, CADE approved the spin-off of TELCO S.p.A. and the GVT acquisition, subject to certain regulatory obligations. Such obligations are in accordance with the transaction and are already being fulfilled.
On April 7, 2015, ANATEL approved the swap transaction to exchange 12% of our common shares and 0.7% of our preferred shares owned by Vivendi for 8.3% Telecom Italia’s common shares with voting rights, previously held by Telefónica, S.A..
On July 29, 2015, Telefónica, S.A. entered into an agreement with Vivendi, S.A. through which Telefónica, S.A. committed to transfer its treasury shares representing approximately 0.95% of its capital stock in exchange for Telefônica Brasil S.A. preferred shares (received by Vivendi, S.A. in the GVT acquisition) representing approximately 3.5% of our capital stock. Pursuant to this agreement, Vivendi, S.A. has committed to, among other obligations: (i) refrain from selling the Telefónica shares during specified periods (lock up), and (ii) comply with certain restrictions that, in case of sale, and once the lock up periods have lapsed, would ensure an orderly sale of such shares.
On July 30, 2015, Vivendi S.A. announced that after the closing of the New York Stock Exchange on July 30, 2015, it sold 67.9 million preferred shares of Telefônica Brasil S.A. (representing 4.0% of our capital stock).
As a result of the above, Telefónica no longer held, directly or indirectly, any economic interest in TELCO on December 31, 2015.
Restructuring Involving the Subsidiaries of Telefônica Brasil
On March 15, 2012, our board of directors approved a corporate restructuring of our wholly owned subsidiaries to align the services provided by each such subsidiary and to concentrate all telecommunication services in one company. The restructuring was finalized on July 1, 2013.
The restructuring was implemented by means of a spin-off and mergers involving only our wholly owned subsidiaries, A. TELECOM S.A., or A. TELECOM, Telefonica Data S.A., or TData, Telefônica Sistema de Televisão S.A. and Vivo. The mergers did not result in an increase in our capital stock or in the issuance of new shares by us, and the corporate restructuring did not give rise to a change in the equity interests held by our shareholders. As a result of the restructuring, value added services and innovative services provided by several wholly owned subsidiaries of the company were consolidated under TData and other telecommunications services were consolidated under Telefônica Brasil, which, as a final step to the corporate restructuring, merged these subsidiaries.
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Since the completion of the merger, all services which are exclusively telecommunications services have been provided by us, Telefônica Brasil. Other services, including value added services, have been performed by our wholly owned subsidiary, TData. We were required to separate our services into separate companies because the telecommunications laws in Brazil and our concession agreement require that we only perform telecommunications services. ANATEL approved the corporate restructuring in May 2013.
Acquisition of GVT
On September 18, 2014, we entered into a stock purchase agreement with Vivendi and certain of its controlled companies, or collectively, Vivendi, and with GVTPar, Telefónica, S.A. and Operating GVT, pursuant to which we agreed to purchase all of the shares of GVTPar, the controlling shareholder of Operating GVT. This acquisition was approved by our board of directors on September 18, 2014.
As consideration for the acquisition, we agreed to pay a portion of the price in cash and a portion in kind, in the form of our common and preferred shares, as follows: (1) €4,663,000,000 to be paid in cash on the closing date, as adjusted pursuant to the stock purchase agreement, and (2) our common and preferred shares amounting to 12% of our total share capital following the capital increase contemplated in the stock purchase agreement and the merger of shares of GVTPar, which must be in the same proportion as our existing common shares and preferred shares. The total consideration was paid after the conclusion of (A) a capital increase, the proceeds of which were used to pay the cash consideration described in (1) above, and (B) the merger of shares of GVTPar into us.
On December 22, 2014, ANATEL approved the transaction and imposed certain obligations, which include (1) the maintenance of current GVT services and plans within the same geographic scope in which GVT operates today, requiring, in addition, that the successor company expand its operations to at least ten new municipalities within three years beginning on January 26, 2015; and (2) the waiver of the FSTS license held by GVT within 18 months of ANATEL’s decisions, because regulations establish that the same economic group cannot hold more than one FSTS license in the same geographic area. We understand that obligations imposed do not compromise the terms of the GVT acquisition or its value.
On March, 25 2015 CADE’s administrative tribunal approved the transaction on the basis of certain confidential commitments offered by us and Vivendi S.A. The commitments include the execution of two merger control agreements: the first between CADE and us and the second between CADE and Vivendi S.A.
On March 25, 2015, our board of directors approved the public offering of shares, including shares in the form of ADSs, pursuant to a capital increase in the amount of R$15,812,000,038.03, through issuance of 121,711,240 common shares, at a price of R$38.47 and 236,803,588 preferred shares, at a price of R$47.00 as well as an additional 6,282,660 preferred shares pursuant to the exercise of the over-allotment option.
On May 28, 2015, our shareholders approved the ratification of the Stock Purchase Agreement and Other Covenants, entered into by the Company, as Buyer, and Vivendi S.A. and its subsidiaries, Société d’Investissements et de Gestion 108 SAS and Société d’Investissements et de Gestion 72 S.A., as Sellers, whereby all the shares issued by GVTPar, the controlling shareholder of Global Village Telecom S.A., were acquired by us.
Therefore, as provided for in the stock purchase agreement, we paid a portion of the GVT acquisition price in cash, receiving shares of GVTPar and GVT Operator, and another portion in shares, to FrHolding108 as a result of the merger of GVTPar’s shares into us, representing 12% of our capital stock after the merger.
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After the merger and as a result of the acquisition, our corporate structure is as follows:
On June 24, 2015, the transaction for the exchange of shares between Telefónica and Société d’Investissements et de Gestion 108 SAS, a company controlled by Vivendi S.A. was completed, through which FrHolding108 transferred to Telefónica 76,656,559 shares representing 4.5% of our capital stock, including 68,597,306 common shares representing 12% of such class of shares and 8,059,253 preferred shares representing 0.72% such class of shares, in exchange for 1,110,000,000 shares representing 8.2% of the common shares of Telecom Italia, S.p.A., previously held by Telco TE, S.p.A., a subsidiary of Telefónica.
On July 29, 2015, Vivendi S.A. sold 67.9 million preferred shares, representing 4% of our capital stock. On the same day, Telefónica S.A. announced that it entered into an agreement with Vivendi’s subsidiary Société d’Investissements et de Gestion 108 SAS, through which Telefónica committed to deliver 46.0 million of its treasury shares, representing 0.95% of its share capital, in exchange for 58.4 million preferred shares of Telefonica Brasil, S.A., (received by Société d’Investissements et de Gestion 108 SAS. in the context of the acquisition of GVT Participaçoes, S.A.). On September 16, 2015, the exchange of shares was concluded. Consequently, Telefónica S.A.’s interest in the Company was increased by 5.2% in relation to the total preferred shares of the Company, and by 3.5% in relation to the total capital stock of the Company. Conversely, SIG108 shareholding interest in the Company was reduced by the same proportion. Therefore, from that date on, SIG108 does not hold any interest at the Company.
Acquisition of Telefônica Transporte e Logística Ltda. (TGLOG) by TData
On October, 28, 2015, TData, as buyer, and Telefónica Gestión de Servicios Compartidos España S.A., as seller, entered into a Stock Purchase agreement that resulted in the acquisition of Telefônica Transporte e Logística Ltda., a company headquartered in Brazil which provides Logistics services.
Capital Expenditures
Year Ended December 31, 2015
In 2015, considering the consolidation effect of GVT from May 1, 2015, we invested R$7,667.5 million, a 16% decrease over the amount we invested in 2014, primarily due to the cost of acquiring the new 700 MHz frequency spectrum, in an amount of R$2,770 million. However, the consolidation of GVT’s investment partially compensates for the decrease in investments with spectrum licenses (20% increase in capital expenditures, excluding licenses). Investments in projects are strongly focused on network (which accounted for 86% of investments in 2015, excluding licenses) and include expenditures on items such as radio access network (Node-Bs, eNode-Bs and WCDMA carriers), transmission backhaul and backbone, FTTH and copper network. The investments help sustain our commercial and revenue growth while maintaining the quality of the services provided and are also designed to prepare us for medium-term growth.
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To meet the needs of an increasingly data driven and connected society, significant investments were made to support the strong growth of data usage in our residential fiber, mobile 3G/4G and dedicated corporate networks. We continue to invest in expanding our national data transmission backbone to meet the increase in mobile data traffic throughout Brazil.
The following table sets forth our capital expenditures for each year in the three-year period ended December 31, 2015.
Year ended December 31, | ||||||||||||
Telefônica Brasil | 2015 | 2014 | 2013 | |||||||||
(in millions of reais) | ||||||||||||
Network | 6,557.6 | 5,517.0 | 4,683.3 | |||||||||
Technology / Information Systems | 870.3 | 590.4 | 569.5 | |||||||||
Others(1) | 239.6 | 3,033.0 | 780.5 | |||||||||
Total capital expenditures | 7,667.5 | 9,140.4 | 6,033.3 |
(1) | Consists primarily of handset sales made to corporate customers for the length of their contracts, furniture and fixtures, office equipment and store layouts and an amount of R$2,770 million in 2014 and R$0.1 million in 2015 related to the acquisition of the new 700MHz frequency spectrum, and R$451 million in 2013 related to the upgrade of the 1,900 MHz frequency for 3G usage. |
Year Ended December 31, 2014
In 2014, we invested R$9,140.4 million, a 52% increase over the amount we invested in 2013, primarily due to the cost of acquiring the new 700 MHz frequency spectrum, in an amount of R$2,770 million; however, we also increased the capital expenditures for projects (14% in capital expenditures, excluding licenses).
Year Ended December 31, 2013
In 2013, we invested R$6,033.3 million, a similar amount to what was invested in 2012. However we increased the capital expenditures for projects and decreased our expenditures for spectrum licenses compared to 2012. Investments in projects in 2013 were strongly focused on network (which accounted for 84% of investments in 2013, excluding licenses) and helped sustain our commercial and revenue growth while maintaining the quality of the services provided.
B. Business Overview
We are the leading mobile telecommunications company in Brazil (28.4% market share as of December 31, 2015, based on accesses), with a particularly strong position in postpaid mobile services (42.4% market share as of December 31, 2015, based on accesses). We are also the leading fixed telecommunications company in the state of São Paulo where we began our business as a fixed telephone service provider pursuant to our concession agreement. In the same period, we reached almost 65% of market share in ultra-fast broadband accesses with speeds higher than 34 Mbps in the state of São Paulo.
According to ANATEL’s customer service performance index, we are and have been the highest-quality mobile operator in Brazil. Our Vivo brand, under which we market our mobile services, is among the most recognized brands in Brazil. The quality of our services and strength of our brand recognition enable us to, on average, achieve higher prices relative to our competition and, as a result, generally earn higher margins. As of December 31, 2015, our average revenue per mobile user, or ARPU, of R$25.8 represented a significant premium relative to the market average of R$15.3 (considering the average Mobile ARPU of Claro, TIM and Oi for the third quarter of 2015). In 2015, we captured 49.8% of the net additions of 5.5 million in the postpaid mobile segment. We offer our clients a complete portfolio of products, including mobile and fixed voice, mobile data, fixed broadband, ultra-fast broadband, or UBB (based on our Fiber to the Home, or FTTH and Fiber to the Curb, or FTTC infrastructure), Pay TV, information technology and digital services (such as e-health, cloud and financial services). We also have one of the most extensive distribution networks of the sector, where our clients can obtain certain services, such as purchasing credit for prepaid phones.
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We seek to continue to increase our operating margins by focusing on developing and growing our product offerings so that they comprise an integrated portfolio of higher-margin services. As part of this strategy, we acquired GVT, a high-growth telecommunications company in Brazil that offers high-speed broadband, fixed telephone and Pay TV services to high income customers across its target market, primarily located outside the state of São Paulo.
Our Operations and Services
Our operations consist of:
· | local and long distance fixed telephone services; |
· | mobile services, including value-added services; |
· | data services, including broadband services and mobile data services; |
· | Pay TV services through DTH (a satellite technology), IPTV and cable; |
· | network services, including rental of facilities, as well as other services; |
· | wholesale services, including interconnection; |
· | digital services; |
· | services designed specifically for corporate customers; |
· | the sale of wireless devices and accessories. |
Fixed Voice Services
Our fixed line services portfolio includes local, domestic long-distance and international long-distance calls provided both on the public and private regime.
Local Service
Fixed local services include activation, monthly subscription, public telephones and measured services. Measured services include all calls that originate and terminate within the same area code within our concession region, which we refer to as local calls.
Intraregional, Interregional and International Long-Distance Services
Intraregional long-distance services consist of all calls that originate in one local area or municipality and terminate in another local area or municipality within our concession region. Interregional long-distance services consist of state-to-state calls within Brazil and international long-distance services consist of calls between a phone line in Brazil and a phone line outside Brazil. We were the first telecommunications company to be granted the authorization to develop local, intraregional, interregional and international services throughout Brazil, including outside our concession area.
Mobile Services (including Value Added Services)
According to data regarding market share published by ANATEL, we are among the leading providers of mobile telecommunications services in Brazil.
Our mobile portfolio includes voice and broadband internet access through 3G and 4G as well as value-added services, including voice mail, voice mail translation in speech-to-text (“Vivo Torpedo Recado”), caller identification, voice minutes in unlimited bundles to other mobile phones of postpaid customers, ring tones (“Vivo Som de Chamada”), and innovative services such as multi-media backup, cloud based services to save texts (“Vivo Torpedo Center”) and our “MultiVivo” services, which allow the customer to share a 3G, 3G Plus and 4G connection with up to five mobile devices. All these services can be bought directly by the client at Vivo Service Stores (“Lojas de Serviços Vivo”).
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We also offer wireless roaming services through agreements with local mobile service providers throughout Brazil and other countries, allowing our subscribers to make and receive calls while outside of our concession areas. We provide reciprocal roaming rights to the customers of the mobile service providers with which we have such agreements.
Data Services
We provide fixed broadband through xDSL technologies, coaxial cable and FTTX. Under the brand Vivo Internet Fixa we offer internet with speeds ranging from 1Mbps to 10Mbps and under the brand Vivo Internet Fibra we offer the Ultra Broadband service with speeds of 50, 100, 200 and 300Mbps.
In 2015, we covered 100% of the municipalities in our concession area in the state of São Paulo, reaching more than 7.1 million fixed broadband customers nationwide, and we expanded our fiber network in São Paulo to reach 4.7 million homes.
In 2010, we began offering the “Banda Larga Popular,” an initiative of the government of the state of São Paulo to provide broadband at affordable prices to the low-income population. This product currently has a top speed of 2Mbps.
In mobile broadband, we offer the HSPA+ technology, commercially known as 3G Plus. This technology is already being offered in 100% of our WCDMA coverage, allowing customers with compatible terminals to reach up to three times the speed of traditional 3G. We also offer the LTE system in a new spectrum (2.6 Ghz). Initially we covered the host and sub-host cities of the 2013 FIFA Confederations Cup and 2014 FIFA World Cup, in compliance with the schedule established by ANATEL, and subsequently expanded the coverage to other locations pursuant to the criteria established by ANATEL. By the end of 2015, 183 municipalities relied on our 4G coverage, including primarily the state capital cities, the Federal District and cities with a population of more than 200,000 inhabitants.
Through the GVT acquisition, we were able to further expand our data services by providing high speed broadband to high income customers across our target markets. GVT’s last mile architecture is based on Fiber to the Cabinet, or FTTC technology, with broadband commercial speeds of up to 300 mbps. GVT provides services that are complementary to our own, with limited overlap with the services we provide. Such complementary services include fiber broadband to locations in the state of São Paulo (outside of the city of São Paulo, where we already have a large presence) and nationwide. GVT has more than 3.1 million high-speed broadband clients, of which almost 91% are located outside the state of São Paulo.
Wireless Internet (SMP)
We use a variety of technologies to provide wireless internet services to our customers. Our 3G network is currently available nationwide. In addition, we provide 3G Plus technology to customers with compatible handsets, offering higher speeds and transmission rates than the traditional 3G network. We also provide LTE or 4G technology, which as of December 31, 2015 was available in 183 municipalities, reaching 46.6% of Brazil’s population. As of December 31, 2015, our 3G network was available in 3,524 municipalities, reaching 88.8% of Brazil’s population, and our 2G network was available in 3,757 municipalities, reaching 91.3% of Brazil’s population.
In 2014, Vivo conducted a systematic change in the offer and fruition of data packets within the SMP, blocking data usage after consumption of the total contracted volume. This change, which began with the customers who use the SMP in the prepaid billing model, to enhance the user experience in handling this type of connection. In 2015, we began adopting the new system of offer and fruition of data packets within the SMP for customers who used the service in the post-paid billing model.
With the adoption of this new model, Vivo strengthened the guarantee that consumers can monitor their respective consumption data at any time in the relationship portal with the client, known as “My Vivo” or even by through the application “My Vivo”.
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Pay TV Services
We began offering subscription-based television, or “Pay TV,” services via DTH (“direct to home,” a special type of service that uses satellites for the direct distribution of television and audio signals to subscribers) on August 12, 2007. We currently provide Pay TV services by means of DTH and IPTV (a type of service that offers video broadcast through the use of IP protocol) technologies and as of December 31, 2015, had 1.8 million Pay TV customers, including 171,000 IPTV customers. We currently offer DTH to the entire state of São Paulo and offer IPTV and cable in the metropolitan area of the city of São Paulo. With the GVT acquisition, we have also been able to expand our Pay TV services by offering GVT’s services, which include a combination of standard channel line ups and interactive services like Video-on-Demand, or VoD, to a wider range of consumers.
Network Services
Our network management technology ensures comprehensive management and supervision of all our network processes and network performance for our wholesale clients. Our network management centers are located in São Paulo, Brasilia and Minas Gerais. These centers monitor all regions of the country, but each has a different function.
The network management center in São Paulo monitors the critical network operational parameters of the countrywide transmission backbone, IP networks and broadband networks. The network management center in Brasília monitors the critical operational parameters of core networks and services platforms. The network management center in Minas Gerais monitors the critical operational parameters of the radio access network and infrastructure. These centers are able to identify abnormalities in both our network and in third-party networks, using failure and signaling monitoring systems. In addition, quality and service standards are constantly monitored. The network management centers are integrated with maintenance and operations teams that maintain and operate cellular network elements, as well as cellular infrastructure and transmission, in addition to the radio network elements and computing bases, service platforms and communications backbones.
Our network provides for continuity of service to our customers in the event of network interruptions. We have developed contingency plans for potential catastrophes in our switchboard centers, power supply interruptions and security breaches.
We continuously aim to consolidate our network and increase its offerings, to deliver the best possible service to our customers and to meet their expectations. Some of the improvements we have made in recent years include advancements in the migration of time-division multiplex switches to next generation network switches, which offer new digital services to our clients and reduce our maintenance costs, including improvements in levels of security, power supply, battery and air conditioning infrastructure. The most significant implementation of technology has been a project to exchange optical cabinets, used for offering voice and data services without broadband internet, for Multi-Service Access Nodes, which allows us to offer broadband service to a large number of clients who did not previously have this service.
The fixed-wireless services, or FWT, is a fixed voice service provided using mobile infrastructure. It is aimed at lower income customers mainly outside São Paulo and as of December 31, 2015 we had more than 750 thousand fixed voice accesses using this technology.
Network and Facilities
We provide industrial exploration of dedicated lines (Exploração Industrial de Linha Dedicada), or EILD, pursuant to our concession agreement and our authorization agreements. The EILD consists of the rental of dedicated circuits and clear channel protocols for the provision of services to third parties.
The EILD are used to meet the demands of other carriers. The circuits are requested with different service level agreements, and we are required to provide the facilities with contingency routes, sites and equipment to improve the service against points of failure. In 2016 we expect to meet demand of more than 500 Gbps of bandwidth in special circuits.
Our network consists of an access layer that connects our clients through our copper or optical networks, which are connected to voice and data centers. These centers are interconnected locally or remotely through transmission equipment connected predominantly with fiber optics and occasionally through a microwave network, which together form a network layer that enables connectivity between the various central aggregate service platforms as
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well as interconnection with other carriers. Our network strategy is based on the expansion of the fiber optic access network to allow greater coverage and broadband services for our customers, as well as to develop an integrated multiservice network and multimedia applications. As a telecommunication service provider, we do not manufacture equipment for the construction of our networks and facilities. We buy the equipment from qualified suppliers in Brazil and abroad and through this equipment we implement our networks and facilities through which we supply our services.
Wholesale Services (including Interconnection)
We have continuously adapted and expanded our network topology aiming to develop new business opportunities throughout Brazil by offering services to other telecommunications companies. The result has been a significant increase in the number of providers that use our wholesale services.
As part of our wholesale services, we provide interconnection services to users of other network providers. We earn revenue from any call that originates from another mobile or fixed-line service provider network connecting to one of our customers. We charge the service provider from whose network the call originates an interconnection fee for every minute that our network is used in connection with the call. See “—Operating Agreements—Interconnection Agreements.”
At the end of 2015, we had 298 local and long-distance interconnection agreements and 118 agreements for provision of local traffic and long-distance.
The interconnection is a link between compatible telecommunications networks which permits that a fixed or mobile service user of one network can adequately communicate with the users of a network from another provider.
All providers of telecommunication services (fixed or mobile) are required to provide interconnection upon request to any other telecommunication collective service provider. The conditions for interconnection agreements may be freely negotiated among the parties. The agreements are required to be formalized by contract, whose effectiveness depends on ANATEL’s approval. If any given agreement is contrary to the principles of free competition or conflicts with other regulations, ANATEL may reject it. If the parties cannot reach an agreement on the terms of interconnection, including the interconnection fee, ANATEL may determine those terms and conditions by arbitration.
Digital Services
We continue to make strides in 2015 in the process of becoming a digital telecommunications company in areas such as financial services, machine-to-machine operations, e-health solutions, safety, video, education and advertising. In the e-health area, for example, we have over 2.9 million clients as well as a wide portfolio of products directed towards the B2C segment. Also, in education we have over 2.5 million clients proving services with recognized value to our customers. With these new developments, we aim to democratize access to health, wellness and education services ensuring quality and innovation in the services delivered.
Corporate
We offer our corporate clients comprehensive telecommunications solutions and IT support designed to address specific needs and requirements of companies operating in all types of industries (retail, manufacturing, services, financial institutions, government, etc.).
Our clients are assisted by our highly qualified professionals who are capable of meeting the specific needs of each company with voice, data, broadband and computer services solutions, including hardware and software (for example, anti-virus software). We work to consistently achieve greater quality and efficiency in our services and increase our level of competitiveness in the market.
Sale of Devices and Accessories
In addition, we sell handsets and accessories at our physical stores, to customers who purchase our digital services. We sell only GSM and WCDMA devices such as handsets, smartphones, broadband USB modems and devices that are certified to be compatible with our network and service. We have special offers on smartphones, USB modems and other data devices for customers of bundled packages. Our current device suppliers are Motorola, LG, Samsung, Sony, Alcatel, Apple, D-Link, ZTE and JBL (Harman).
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Rates, Taxes and Billing
Rates
We generate revenue from (i) activation and monthly subscription charges, (ii) usage charges, which include measured service charges, (iii) interconnection fees that we charge to other telecommunications service providers, and (iv) other additional services. Rates for all telecommunications services are subject to extensive regulation by ANATEL. We set forth below the different methods used for calculating our rates.
Local Rates
Our concession agreement sets forth three mandatory plans for local fixed service, and allows us to design alternative pricing plans. Customers have a choice among three plans that we are required to offer or any other alternative plan that we may choose to offer. ANATEL must be informed of any alternative plan and notified of its implementation. The three main mandatory plans are:
· | Local Basic Plan: for clients that make mostly short-duration calls (up to three minutes), during regular hours; |
· | Mandatory Alternative Service Plan (Plano Alternativo de Serviços de Oferta Obrigatória or PASOO): for clients that make mostly long-duration calls (above three minutes), during regular hours and/or that use the line for dial-up service to the internet; and |
· | Individual Special Class Access (Acesso Individual Classe Especial or AICE): a plan created specifically for families enrolled in the Brazilian government’s social program. |
The following table outlines the basic billing requirements and gross rates for the Local Basic Plan and the Mandatory Alternative Plan as of the date of this annual report:
Characteristics of Plan | Local Basic Plan | Mandatory | ||||||
Monthly Basic Assignment | ||||||||
Allowance (minutes included in the residential assignment) | 200 minutes | 400 minutes | ||||||
Commercial Assignment Allowance (minutes included in the commercial assignment) | 150 minutes | 360 minutes | ||||||
Local Call Charges | ||||||||
Regular Hours | ||||||||
Completing the call (minutes deducted from the allotment) | — | 4 minutes | ||||||
Completing the call after the terms of the allotment Sector 31 | — | R$0.17318 | ||||||
Local Minutes–charges in excess use of the allotment Sector 31 | R$0.11293 | R$0.04329 | ||||||
Minimum time billing | 30 seconds | — | ||||||
Reduced Hours | ||||||||
Charge per answered call (minutes deducted from allotment) | 2 minutes | 4 minutes | ||||||
Charge per answered call after the allotted duration Sector 31 | R$0.21878 | R$0.17318 |
As of the date of this annual report, the subscription to the AICE plan costs R$7.73 (excluding taxes) and allows for 90 minutes of local fixed-line calls per month. Any additional fixed or mobile calls may be made only if the customer purchases prepaid credits. The prices of mobile and long-distance calls are determined pursuant to a standard plan.
We may offer alternative plans with any pricing structure. However, we must notify ANATEL of any alternative plan before the publication and implementation of any such plan.
Our concession agreement also sets forth criteria for annual fee adjustments for all of our plans for local fixed service. We derive a substantial portion of our revenue from services subject to this price adjustment. The method of price adjustment is an annual price index correction applied by ANATEL to our local and long-distance fees that reflects the inflation index for the period and a productivity factor, which is calculated based on a compensation index established by ANATEL to share earnings from fixed charge services with their users. Currently, the inflation
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index used by ANATEL is the IST, which reflects variations in telecommunications companies’ costs and expenses. ANATEL has consistently complied with the fee range set by the concession agreements.
Long-Distance Rates
Rates for domestic long-distance calls are computed on the basis of the time of day, day of the week, duration and distance of the call, and also may vary depending on whether special services, including operator assistance, are used. We have several options of domestic long-distance calling plans for consumers using our carrier dial code, or Code 15. Customers of any local and long-distance operator may use Code 15 when dialing long-distance and will benefit from our rates. To readjust the long-distance local rates, ANATEL applies an annual price index correction that reflects inflation.
We also offer international long-distance rates, which are also available to all users using Code 15. International long-distance call charges are computed on the basis of the time of day, day of the week, duration and destination of the call, and also may vary depending on whether special services are used or not, including operator assistance. Our rates for international services are not subject to regulation and are not required to follow the annual rate adjustment described above for other services. Therefore, we are free to negotiate our fees for international calls based on the international telecommunications market, where our main competitor is Embratel.
We have developed alternative rate plans for our residential and corporate customers with respect to long-distance calls.
Mobile Services Rates
With respect to our Local Basic Plan, as described above, and certain roaming charges incurred in connection with alternative service plans, our authorizations provide for a mechanism to set and adjust rates on an annual basis. The maximum rate is calculated as the current rate plus the rate of inflation. The maximum rate is revised annually and the rate of inflation is measured by the IGP-DI index. The maximum rate is applicable to all service plans; however, mobile operators are able to freely set the maximum rates for alternative service plans (other than with respect to certain roaming charges).
The initial price cap agreed by ANATEL and us in our authorizations was based on the previously existing or bidding prices, and has been adjusted annually on the basis of a formula contained in our authorizations. The latest price adjustment of the Local Basic Plan took place in November 2015 and averaged a 10.02% increase throughout the different states in Brazil.
Other telecommunications companies that interconnect with and use our network must pay certain fees, primarily an interconnection fee. The interconnection fee is a flat fee charged per minute of use that directly affects the mobile services rates. Since 2005, ANATEL has permitted free negotiations for mobile interconnection fees, or MTR.
In December 2013, ANATEL established the reference values for MTR for 2014 and 2015. In July 2014, ANATEL established values for the years 2016, 2017, 2018 and 2019. The table below shows the ranges for these reference values:
Year |
Reduction in % |
MTR |
2014 | 25 | 0.22164 – 0.25126 |
2015 | 33 | 0.14776 – 0.16751 |
2016 | 37 | 0.09317 – 0.11218 |
2017 | 47 | 0.04928 – 0.06816 |
2018 | 47 | 0.02606 – 0.04141 |
2019 | 50 | 0.01379 – 0.02517 |
Interconnection Fees
We are paid interconnection fees by any fixed-line or mobile service provider that either originates or terminates a call within our network. We also pay interconnection fees to other service providers when we use their network to place or receive a call. The interconnection agreements are freely negotiated among the service
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providers, subject to a price cap and in compliance with the regulations established by ANATEL, which includes not only the interconnection basic costs including commercial, technical and legal aspects, but also the traffic capacity and interconnection infrastructure that must be made available to requesting parties. If a service provider offers to any party an interconnection fee below the price cap, it must offer the same fee to any other requesting party on a non-discriminatory basis. If the parties cannot reach an agreement on the terms of interconnection, including the interconnection fee, ANATEL can establish the terms of the interconnection. For additional information about interconnection fees, see “—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies—Interconnection.”
Data Services Rates
We receive revenue from charges for data transmission, which includes our fixed broadband, dedicated analog and digital lines for privately leased circuits to corporations and others services. Data transmission rates are not regulated by ANATEL, except for EILD. Multimedia services operators are able to freely set the rates for alternative service plans.
TV Rates
Pay TV rates are not regulated. Service operators are able to freely set the rates for alternative service plans.
Taxes
The cost of telecommunications services to each customer includes a variety of taxes. The main tax is a state value-added tax, the Imposto sobre Circulação de Mercadorias e Serviços, or ICMS, which the Brazilian states impose at rates ranging from 7% to 35% on certain revenues from the sale of goods and services, including telecommunication services.
Other taxes include: (1) Federal Social Contributions (Contribuição para o Programa de Integração Social), or PIS, and Social Security Financing Contributions (Contribuição para o Financiamento da Seguridade Social), or COFINS; (2) Fund for Universal Access to Telecommunications Services (Fundo de Universalização dos Serviços de Telecomunicações), or FUST; (3) the Telecommunications Technological Development Fund (Fundo para o Desenvolvimento Tecnológico das Telecomunicações), or FUNTTEL; and (4) Fund for Telecommunications Regulation (Fundo de Fiscalização das Telecomunicações), or FISTEL.
Billing
We send each contract customer a monthly bill covering all of the services provided during the previous monthly period. Pursuant to Brazilian law, telephone service providers are required to offer their customers the choice of at least six different monthly payment dates.
We have a billing and collection system with respect to local, national and international long-distance voice, subscriptions, broadband, data, IT services, outsourcing, television and third-party services. For invoice payments, we have agreements with various banks. These agreements include options for customers to select their preferred payment type: direct debit, payment to a bank, Internet and other collection agencies (including lottery-playing facilities, drugstores and supermarkets). We aim to avoid losses in the implementation of new processes and the roll-out of new products through the monitoring of billing, collection and recovery controls. The billing process is audited by the Brazilian Association of Technical Standards (Associação Brasileira de Normas Técnicas), or ABNT. These practices are closely monitored by our revenue assurance team, which measures every risk of revenue loss detected along the billing and collection chain. These risks are managed to minimize revenue losses.
Co-billing
In accordance with Brazilian telecommunications regulations, we use a billing method called “co-billing” for both fixed and mobile services. This method allows billing from other phone service providers to be included within our own invoice. Our customers can receive and subsequently pay all of their bills (including the fees for the use of services of another telephone service provider) on our invoice. To allow for this method of billing, we provide billing and collection services to other phone service companies. We have co-billing agreements with national and international long-distance phone service providers. Similarly, we use the same method of co-billing to bill our services to customers of other fixed and mobile providers. This service is charged to the long-distance operator, by means of a call record described in the invoice.
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For customers who use our long-distance services through operators that have no joint billing agreement with us, we use direct billing through the national registry of clients.
Value Added Services
Value added services such as entertainment, information and online interactivity services are available to mobile prepaid as well as postpaid customers through agreements with content suppliers. These agreements are based on a revenue-sharing model.
Third-party Services
We incorporate third party services in our billing, collection and transfer process. These services are later passed on to the third party contractor.
Collection
Our collection policies with respect to customers in default follow ANATEL regulations, as well as those of Serviços de Telecomunicações, or RACO, and the Foundation for Consumer Protection and Defense (Fundação de Proteção e Defesa do Consumidor), or PROCON. For mobile, fixed and Pay TV customers, as a general rule, if payment is more than 15 days overdue, service can be partially suspended by blocking out-going calls that generate costs to the customer. If payment is more than 30 days overdue after this partial suspension, the service can be fully suspended, disabling all services (out-going and incoming calls), until payment is received. We offer an installment payment plan for clients with overdue balances. However, if accounts are not paid after 30 days following the total suspension, the contract can be cancelled and reported to credit protection agencies.
The collection process for customers in default involves several steps, from an internal interactive voice response, SMS contact, email contact, followed by a late payment notice, and finally reporting customer information to an external credit bureau. Concurrently with our internal process, delinquent customers are also contacted by collection agencies. Customer risk profile, overdue debt and other quality issues are used to increase strategy efficiency and maximize debt recovery efforts. Amounts overdue by over 105 days, except for accounts receivables from interconnection fees and government and corporate customers (there is a specific rule for those exceptions), are considered provisions for doubtful accounts. In accordance with Brazilian regulations, bad debt write-offs are permitted for late payments of zero to R$5,000 if they are over 180 days late or R$5,001 to R$30,000 if they are over 365 days late. Late payments of over R$30,001 that are open for more than 365 days require the commencement of a lawsuit. This rule is applied for outstanding debt through October 8, 2014, after this period, amount ranges change as follows: zero to R$15,000 if they are over 180 days late or R$15,001 to R$100,000 if they are over 365 days late. Lawsuits are demanded for debts over R$100,000 open for more than 365 days.
In the year ended December 31, 2015, the monthly average of partial suspensions, for mobile and fixed services, was 3.7 million lines and the monthly average of total suspensions was 749,025 lines. For Pay TV services, the monthly average of partial and total suspension was 168,249 terminals and 40,164 terminals, respectively. Provisions for doubtful accounts in the year ended December 31, 2015 were 2.02% of the total gross revenue.
Our Markets of Operation
Our concession agreement allows us to operate in the state of São Paulo, except for a small region that is still subject to an earlier concession. In addition, we offer telephone, data and Pay TV services throughout Brazil pursuant to licenses and authorization.
The following table sets forth population, gross domestic product, or GDP, and per capita income statistics for each state in our service regions at the dates and for the years indicated:
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On December 31, 2015 | Last Available IBGE Data from 2012 | |||||||||||||||||||||
Area | Frequency Range (MHz) | Population (in thousands)(1) | Percent of Brazil’s population(1) | GDP (in millions of reais) (2) | Percent of Brazil’s GDP (2) | Per capita income (in reais) (2) | ||||||||||||||||
São Paulo State | 450, 700, 850, 1800, 1900, 2100 and 2500 | 41,262 | 21.63 | % | 1,408,904 | 32.08 | % | 34,145 | ||||||||||||||
Rio de Janeiro State | 700, 850, 900, 1800, 2100 and 2500 | 15,990 | 8.38 | % | 504,221 | 11.48 | % | 31,534 | ||||||||||||||
Minas Gerais State | 450, 700, 850, 900, 1800, 2100 and 2500 | 19,597 | 10.27 | % | 403,551 | 9.19 | % | 20,592 | ||||||||||||||
Rio Grande do Sul State | 700, 850, 900, 1800, 1900, 2100 and 2500 | 10,694 | 5.61 | % | 277,658 | 6.32 | % | 25,964 | ||||||||||||||
Paraná State | 700, 850, 900, 1800, 2100 and 2500 | 10,445 | 5.48 | % | 255,927 | 5.83 | % | 24,503 | ||||||||||||||
Santa Catarina State | 700, 850, 900, 1800, 2100 and 2500 | 6,248 | 3.28 | % | 177,276 | 4.04 | % | 28,371 | ||||||||||||||
Federal District | 700, 850, 900, 1800, 2100 and 2500 | 2,570 | 1.35 | % | 171,236 | 3.90 | % | 66,624 | ||||||||||||||
Bahia State | 700, 850, 900, 1800, 2100 and 2500 | 14,017 | 7.35 | % | 167,727 | 3.82 | % | 11,966 | ||||||||||||||
Goiás State | 700, 850, 900, 1800, 1900, 2100 and 2500 | 6,004 | 3.15 | % | 123,926 | 2.82 | % | 20,641 | ||||||||||||||
Pernambuco State | 450, 700, 1800, 1900, 2100 and 2500 | 8,796 | 4.61 | % | 117,340 | 2.67 | % | 13,339 | ||||||||||||||
Espírito Santo State | 700, 850, 900, 1800, 2100 and 2500 | 3,515 | 1.84 | % | 107,329 | 2.44 | % | 30,535 | ||||||||||||||
Pará State | 700, 850, 900, 1800, 2100 and 2500 | 7,581 | 3.97 | % | 91,009 | 2.07 | % | 12,005 | ||||||||||||||
Ceará State | 450, 700, 1800, 1900, 2100 and 2500 | 8,452 | 4.43 | % | 90,132 | 2.05 | % | 10,663 | ||||||||||||||
Mato Grosso State | 700, 850, 900, 1800, 2100 and 2500 | 3,035 | 1.59 | % | 80,830 | 1.84 | % | 26,632 | ||||||||||||||
Amazonas State | 700, 850, 900, 1800, 2100 and 2500 | 3,484 | 1.83 | % | 64,120 | 1.46 | % | 18,404 | ||||||||||||||
Maranhão State | 700, 850, 900, 1800, 2100 and 2500 | 6,575 | 3.45 | % | 58,820 | 1.34 | % | 8,946 | ||||||||||||||
Mato Grosso do Sul State | 700, 850, 900, 1800, 1900, 2100 and 2500 | 2,449 | 1.28 | % | 54,471 | 1.24 | % | 22,242 | ||||||||||||||
Rio Grande do Norte State | 450, 700, 1800, 1900, 2100 and 2500 | 3,168 | 1.66 | % | 39,544 | 0.90 | % | 12,482 | ||||||||||||||
Paraíba State | 450, 700, 1800, 1900, 2100 and 2500 | 3,767 | 1.97 | % | 38,731 | 0.88 | % | 10,283 | ||||||||||||||
Alagoas State | 450, 700, 1800, 1900, 2100 and 2500 | 3,120 | 1.64 | % | 29,545 | 0.67 | % | 9,468 | ||||||||||||||
Rondônia State | 700, 850, 900, 1800, 2100 and 2500 | 1,562 | 0.82 | % | 29,362 | 0.67 | % | 18,793 | ||||||||||||||
Sergipe State | 450, 700, 850, 900, 1800, 2100 and 2500 | 2,068 | 1.08 | % | 27,823 | 0.63 | % | 13,454 | ||||||||||||||
Piauí State | 450, 700, 1800, 1900, 2100 and 2500 | 3,118 | 1.63 | % | 25,721 | 0.59 | % | 8,248 | ||||||||||||||
Tocantins State | 700, 850, 900, 1800, 2100 and 2500 | 1,383 | 0.73 | % | 19,530 | 0.44 | % | 14,117 | ||||||||||||||
Amapá State | 700, 850, 900, 1800, 2100 and 2500 | 670 | 0.35 | % | 10,420 | 0.24 | % | 15,563 | ||||||||||||||
Acre State | 700, 850, 900, 1800, 2100 and 2500 | 734 | 0.38 | % | 9,629 | 0.22 | % | 13,127 | ||||||||||||||
Roraima State | 700, 850, 900, 1800, 2100 and 2500 | 450 | 0.24 | % | 7,314 | 0.17 | % | 16,236 | ||||||||||||||
Total | 190,756 | 100.00 | % | 4,392,094 | 100.00 | % | 23,025 |
(1) | According to the 2010 Census published by IBGE in 2011 (latest data available). |
(2) | According to the most recent IBGE data (2012). Nominal Brazilian GDP was R$4,392,094 million as of December 2012 calculated by IBGE, subject to revision. |
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Seasonality
Our business and results of operations are not materially affected by seasonal fluctuations in the consumption of our services.
Marketing and Sales
As of December 31, 2015, we had 301 of own sales outlets throughout Brazil. In addition, we also have approximately 12,000 sales outlets run by authorized dealers (exclusive dealers and retail channel), maintaining a solid capillarity strategy during the year.
Brazil’s unstable macroeconomic environment negatively affected the performance of our distribution network in 2015, with commercial operation focused more significantly to efficiency in investments. Commercial partners focused on value-added services, which substantially contributed to our operational sustainability.
In the main retail chains, the performance focused on advancing sales of postpaid services without a presence of Vivo promoters in this channel. In order to maintain our services in strategic cities and locations where there are currently no sales outlets for our services, we worked with telesales and door-to-door services companies to improve our operations in these areas. We currently have approximately 65 third-party companies and 2,200 salespeople.
In 2015, we had approximately 600,000 points of sale where prepaid mobile service customers could purchase credit, including our own stores, authorized agents, lottery stores, post offices, bank branches and small retailers, such as pharmacies, newspaper stands, bookstores, stationery shops, bakeries, gas stations, bars and restaurants. Prepaid phones can be credited remotely or by purchasing cards containing credits. Credits may also be purchased through credit and debit cards, call centers, Vivo PDV (M2M using a cell phone for transferring the credit), personal recharge (using the phone itself to recharge credits), as well as certain certified internet websites.
We bring our solutions to our clients through the following sales channels:
· | Vivo stores: focused on individual clients and located in strategic points, our own stores provide a highly trained team built to guarantee the best sales experience for the customer. The main focus of this channel is innovation. As a result, most stores also offer self-service terminals for value added services and purchases of pre-paid credit. We also offer special treatment for premium clients with scheduled appointments via the internet to assure that they are not required to wait in line. In addition, to improve customer experience, we launched our first concept store at Eco Berrini and renovated strategic stores. |
· | Exclusive dealers: The exclusive dealers channel is composed of selected companies that have been certified to provide our full product portfolio. These dealers comprise a wide distribution network throughout the country. Although the channel offers the entire product portfolio, its focus is on the postpaid product. Furthermore, we also renovated some stores to provide a better purchase experience to the customer. |
· | Retail channel: Working closely with the main retailers in Brazil, the retail channel is focused on prepaid credit and data services. In order to improve operational efficiency, our number of sales promoters was reduced. In addition, we developed an incentive program for retailers, focusing on increase sales of our postpaid product Controle. |
· | Door-to-door sales: aiming to approach corporate and individual clients, we use physical channels of assistance, such as door-to-door sales of services by outsourced small companies and our own team of consultants. Our main focus is on voice products. |
The highlight in physical channel performance was just possible because of significant development of the digital channels.
Vivo’s self-service channel “Meu Vivo” reached a volume of access 63% higher than the previous year. This result reflects the efforts and relevant usability improvements of the channel, mainly in the Meu Vivo application, that increased the volume of downloads by 126% compared to the previous year. From the “Meu Vivo” application, customers can, for example, schedule a visit to a Vivo store, manage their data consumption and check their points of Vivo’s relationship program, Vivo Valoriza.
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In 2015, our relationship with the customer was improved through other service channels that simplify customer interaction with the company and allow full use of products and services. As a result, channels such as Vivo Guru (aid environment for device configuration), Vivo Forum (collaborative environment where customers help each other) and the Virtual Assistant “Vivi,” reached an access volume of 48% higher than 2014.
Even with the economic instability, there was a strong growth in sales of digital channels, due to the maintenance of the strategic focus on digitalization of channels and processes:
· | Growth of 557% in sales of fixed residential products originated in the digital channels as result of investments in strategic projects such as full sales automation. |
· | Growth of 218% of Black Friday’s sales originated in the digital channels comparing to the previous year. |
· | Development and continuous improvement of digital top up channels, increasing revenue by 39% in this digital channel. |
· | Growth of 395% in residential mobile sales originated in the digital channels, with increasing participation of digital channels in our migrations and upgrades. |
Customer Service
In 2014, we advanced the unification of our fixed and mobile services in order to simplify management and improve customer service. We are working to combine existing systems and unify operations. The new service model provides for the migration from a product-focused service to a customer-focused service. Customers will be served by a single representative regardless of the number of products and services they use. This will increase flexibility and efficiency in fulfilling customers’ requests. In addition, we will be able to increasingly differentiate the most profitable customers as well as continually seek greater efficiency in those that bring less revenue. These actions will improve the quality of our competitive model, dedicating the best resources to high-value customers.
The year of 2015 was marked by the evaluation of the existing operating frameworks and identification of our best practices in order to define the most suitable model to increase efficiency and customer satisfaction. In recent months, various work fronts were established, initially contemplating the planning and development of activities. When it comes to customer service, we are working on the integration of the systems used by the operation, on the definition of processes and business rules and on the internalization of operations considered essential to transform the customer experience across all channels and touch points.
We continuously worked to expand, standardize and integrate digital channels, seeking to provide an “omni-channel experience.” Among others, we expanded the SMS channel for the entire customer base, offering another option for users to contact each other. We also launched a new version of our mobile phone application, which reached nine million contacts in December 2015. Moreover, we refined assertiveness and scope of our Virtual Agent, Vivi, which is capable of answering more than 90% of the questions using artificial intelligence. In addition, we were able to speed up the process of providing answers to our customers, resulting in a 60% adherence to the electronic channel of our Customer Relationship Center. Finally, the maturing of customer care via social networks and the expansion of the Online Forum has also been improved upon.
In 2015, we also focused on customer satisfaction, resulting in the improvement of all indicators. There was a progressive reduction in the contact rate, an increased availability of agents, a decrease in call transfers and an increased resoluteness in the first contact, achieving a very positive numbers in reducing demands for questions and complaints on through the customer care center. We also took the lead of Fundação PROCON’s ranking for the rate of solved inquires within the telecommunications industry in the City of São Paulo, reaching 92.29%. In the State of São Paulo ranking, both Telefônica/Vivo and GVT were the leaders, with 89.18% and 91.72%, respectively. All these results, plus the satisfaction survey with customers, show that we are taking the right measures, listening to customers and converting contacts received into a positive experience with the brand. With regard to quality, we focus heavily on transforming the customer experience. We had a continued reduction in the rate of contacts in 2015, reaching positive results in reducing demands for questions and complaints. We also ranked highly in the index of resolved complaints and we have the best position in relation to the performance index of care (índice de atendimento ao cliente), or IDA, measured by ANATEL, among the four major national players that provide mobile
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telecommunications services. We were ahead of other competitors in 75 of the 81 months measured, with data up to August 2015, the most recent month of disclosure by ANATEL.
In 2016, we will continue to work on enriching content and expanding features available on each channel, as well as seeking an agile integration between them, so the client will be able to obtain the same standard of response and services across the portfolio. The focus is to keep on accelerating the digitization of customer care, providing more flexibility, standardization and convenience, which are decisive factors for increased satisfaction.
Technology
In order to offer a greater variety of integrated services, we have incorporated a series of new technologies in our voice and data networks.
Voice network is being modernized with the use of new generation technology that improves redundancy, reliability and capacity. In addition, we have already started the implementation of Voice over LTE, or VoLTE technology that will allow us to offer voice services over LTE access instead of CS Fallback, or CSFB, which we currently use. As a result, we expect a faster call completion comparing with CSFB. We expect to improve the voice communication experience, offering voice service with HD quality that is native for VoLTE technology. We also have already started to implement Voice over FTTH technology that will allow us to offer voice services over FTTH access instead of voice over copper currently used. As a benefit, we expect to have cost savings for equipment, lines, manpower and maintenance. We also expect to offer new voice services. In order for that to be possible, a new Core infrastructure has already been installed in Telefonica and Vivo networks: the IMS Core, an ALL-IP framework that uses the IP protocol as the main protocol for the network.
We have capacitated the network to support traffic bursts of enterprise inbound and outbound call centers service, such as contact center and outbound dialing, by developing and implementing high capacity and scalability core elements. This is a growing demand and we are ready to be competitive.
As more services migrate to IP, our IP backbone has become a strategic asset to support customer demands and increase revenues. The migration of sensitive and demanding services such as voice and television to IP has also increased the demand for higher quality broadband networks and is further augmented by growing products like cloud and video on demand. At the same time, the expansion of fiber to customer homes strongly increases bandwidth demands over the networks. As a result, three main drivers have surfaced as critical to our business: availability, performance and cost effectiveness.
To reach this goal, the integration of mobile and fixed IP backbones was essential. We have designed a robust architecture, using two distinct backbones to provide fixed and mobile services using both mobile and fixed multi-protocol networks infrastructures, to guarantee service reliability to our clients.
To cope with greater traffic, core network capacity has been expanded, introducing more 100-gigabyte Ethernet interfaces and reducing aggregate layers, resulting in a simpler yet more scalable network. Moreover, by absorbing other existing networks obtained by means of earlier acquisitions into both backbones, we have been able to simplify the network and reduce operational costs.
We further optimized costs by sharing access networks with other Brazilian operators, in which IP backbones played a key role in connecting and transporting traffic among different operators networks, reducing the need for mobile sites expansion.
Nonetheless, robust and reliable networks are not enough to meet customers’ expectations. As content gains importance in the data world, quality of experience becomes a key concept to improve revenue without compromising costs. Extensive use of caching solution on GVT network made content locally available to our customers, not only reducing transport cost but also strongly improving user experience without increasing access investments.
In 2014, Latin America faced IP exhaustion, which is the depletion of the pool of unallocated IP addresses. This IP exhaustion could potentially interrupt all new sales of IP based services. After a successful adoption of CGNAT (Carrier Grade NAT), to maintain client base growth, IPv6 has been deployed and is already running in the network, currently representing almost 200Gbps of traffic. This action ensures we can keep offering new services to a growing user base.
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With regards to the local area network, or LAN, as there is an increase in IP services, we have aimed to create a design that can absorb an exponential port growth for services without increasing operational costs. The result was the adoption of a new network implementation, using top of rack, or TOR, and end of row, or EOR, architecture. The technology reduces the amount of equipment on site and drastically decreases the use of cables, by placing small switches inside server racks, where cables are kept confined. From the rack to the site’s core switches, only one pair of fiber is sufficient. The result is a significant savings in operating expenditures, as well as space, energy and air conditioning, despite the significant increase of network ports on site. Recently, the deployment of Fabric technology, which helps avoid LAN interruptions, increases the reliability of service in our local networks without losing flexibility and quick service deployment to customers. In 2015 the TOR and EOR implementation structure was expanded together with the Fabric technology, providing more reliable, efficient and scalable network infrastructure. Jointly, the Link Aggregation technology was used to optimize network ports. Documents ETP were issued with implementing specifications for 29 sites.
During the course of 2014, we saw a variety of targets and natures of attacks with regards to cyber security, with special attention to the mobile terminal, where we already offer a comprehensive suite of applications for mobile security. On the network side, besides tightening our perimeter security, we have focused on automation. Periodic tasks such as analyzing attacks notifications, auditing firewalls rules and evaluating security elements performance were the main areas subject to automation, allowing security professionals to focus on problems that are more complex. In addition, these actions improve network performance, extending the lifespan and reducing costs related to the network.
In 2015, we developed a Trouble Ticket Security solution, or TTSEC for management and automation of incident response, which sent to the CSIRT. The solution deployment is expected in the first quarter of 2016, and the tool will be ready to accommodate incidents generated from 9 Autonomous System (AS) Numbers (183 CIDR) managed by Telefonica and VIVO.
The Firewall Rule Optimizer, or FRO solution was deployed in the third quarter of 2015, reducing the time for analysis and increasing perform diagnostic compliance of internal and external standards.
We offer the IPTV service through the FTTH network using a new platform that is well recognized in the world (Global Video Platform). This platform consists of Pay TV with video broadcasting offered through use of the IP protocol. We made several improvements in the platform, such as the inclusion of Instant Channel Change (ICC), Picture in Picture (PiP), Live Pause, applications (Social Networks, Weather, Health, Multi-view, News, Kids and others) providing a better user experience. Additional services, such as pay-per-view and VoD, are also available.
In 2015, we did continue the improvements in global video platforms aiming to increase competitiveness in the ITS market. New features like Timeshift and Catchup TV will implemented and we will expand all the services to other cities in the state of São Paulo.
The IPTV platform also offers games, interaction and connectivity services through third party content, as well as OTT, content for the broadband users, through the applications developed for smart TVs, smart phones with Google’s Android and Apple’s iOS, and STBs and PCs. A new service, OTT Live, will deliver broadcast channels to those devices.
We also offer digital television service via satellite (DTH) to the subscribers in the state of São Paulo that receive broadcast/PPV content through a Ku band antenna and standard Set Top Box (with Smart Card), also available with a Personal Video Record (PVR) service.
In 2016, we intend to integrate our satellite solution with GVT, which currently offers the same service over these technologies. This will allow us to provide a unique offer throughout Brazil, including outside the state of São Paulo. After four years, we expect to use one satellite and one Middleware solution that will integrate with our system and network.
Our development plan contemplates the use of the most advanced technology available, focusing on integration with the internet and an increase in the number of multimedia transmission services, with an emphasis on DSL, FTTH (GPON), NGN, DWDM, ROADM and relays technologies of TV over IP protocol (IPTV), satellite (DTH), and the continuous evolution of TV services.
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We currently offer HSPA+ technology, commercially known as 3G Plus, across 100% of our WCDMA coverage, allowing customers that have compatible terminals to achieve up to three times more than traditional 3G rate. Since 2013, we offer the LTE system in spectrum (2600 MHz). At the end of 2015, 183 Brazilian cities had 4G availability.
In 2015, we started to develop the network sharing in 4G with Oi and TIM. At the end of 2015, 31 Brazilian cities had radio base stations shared, and in 8 cities we provided new 4G coverage with RAN Sharing using infrastructure from TIM or Oi .The strategy of Radio Access Network Shared allow us to fulfill part of the ANATEL’s requirements due the LTE spectrum acquisition.
In 2015, we also began working on the Olympics project, in order to provide coverage and capacity in areas catering to the Olympics, such as airports, tourist areas, shopping centers and some Olympic venues.
Fraud Detection and Prevention
During 2015, we continued our work in combating the two main types of fraud, as follows:
· | Subscription fraud: is a type of fraud that occurs when the issuance of one or more accesses are granted without the consent of the real “holder” of identification documents with the main objective of evading payment. We had an increase in subscription fraud-related losses, from R$14.2 million in 2014 to R$32.9 million in 2015. The main cause of this increase was the review of detection processes and improvement of the filters of the tools that monitor fraud. |
· | Identity Fraud: also known as “social engineering”, identity fraud takes place through call centers or dealers, where a caller who has access to information belonging to our existing clients reaches out to our call centers and makes unauthorized alterations and activations. We had a 100% reduction in identity fraud losses in 2015, from R$199 thousand in 2014 to R$1.4 thousand in 2015. The main reason for this reduction was the identification of cases in lesser time, resulting in great reduction of this loss on our expense accounts. |
Operating Agreements
Interconnection Agreements
The terms of our interconnection agreements include provisions with respect to the number of connection points and traffic signals. See “—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies.”
We believe that we have adequate interconnection agreements with fixed-line operators necessary to provide our services and that we have all the necessary interconnection agreements with long-distance carriers.
Roaming Agreements
We provide international GSM roaming in over 200 destinations worldwide by means of over 500 roaming agreements with local service providers.
Mobile Virtual Network Operating Agreements
Mobile virtual network operating, or MVNO, agreements allow other companies to provide SMP services using our network. These agreements also allow such companies to cross sell services with their own core business. MVNO agreements are also beneficial because they serve as source of revenue of telecommunications operators and they optimize investments in IT and network infrastructure. Under a full MVNO model, or authorized model, operators use their own name to act in the entirety of the operating chain, including sales, distributions, billing, interconnection agreements, and client phone numbers. Under the brand reseller model, or accredited model, the operator is responsible for marketing, distributions of SIM cards and other value added services, but the original operator is responsible for all other aspects of operations.
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Full MVNO model (authorized)
In 2014, we signed two MVNO agreements, the first one with Sisteer and the second one with Virgin Mobile. Sisteer has experience as a Mobile Virtual Network Enabler, or MVNE in Europe and in Brazil and is planning to run a mobile operation. Virgin Mobile is a worldwide pioneer in the MVNO model and is already running three MVNO operations in Latin America, all of which are with sister company, Movistar, in Chile, Colombia and Mexico.
Brand Reseller model (accredited)
In December 2014, we signed the first Brand Reseller MVNO agreement in Brazil with +AD Credenciada de Telefonia S.A. +AD launched a prepaid operation in October 2015 and since then it has gained more than five thousand customers.
Network Sharing Agreement
In 2014, Telefônica Brasil announced that a networking sharing agreement with Nextel was signed to provide mobile services coverage (voice, data and SMS) through our 2G and 3G network to 67 area codes. The contract has a term of five years, with a minimum payment of R$1.0 billion for the whole period, as follows: (i) R$44.3 million in the first year; (ii) R$132.1 million in the second year; (iii) R$237.1 million in the third year; (iv) R$263.0 million in the fourth year and (v) R$361.5 million in the fifth year. Term and payments are subject to the fulfillment of the contractual obligations assumed by the parties.
ANATEL approved the agreement and the execution of the operation in March 2014. The network sharing has been fully operational since July 31, 2014, when the Parties had executed the Notice of Network Full Availability.
Competition
In 2015, competition remained strong in the Brazilian telecommunications market. By October 2015 Brazil reached nearly 362 million accesses of fixed and mobile phone, pay TV, broadband fixed and mobile according to Telebrasil and Teleco.
After our acquisition of GVT, the Brazilian telecommunications market is still waiting for further consolidation news, based on rumors about a possible merger between TIM and Oi.
We face intense competition in all businesses we operate, primarily from other mobile service providers and fixed services operators. Most of these competitors are part of large, national or multinational groups and, therefore, have access to capital, new technologies and other benefits.
In the mobile market we continued in the lead with a 28.4% market share as of December 2015. The 4G technology continued to expand. In December 2015, there were 25.4 million 4G lines. We remain the leaders in such technology with a 37.6% market share, according to ANATEL.
We also lead mobile market share, measured in terms of the number of mobile accesses in 11 States: Acre, Amazonas, Amapá, Espirito Santo, Minas Gerais, Mato Grosso, Mato Grosso do Sul, Roraima, Rio Grande do Sul, Sergipe and São Paulo. TIM Celular or TIM, a Brazilian telephone company and subsidiary of Telecom Italia lead the mobile market in seven states: Alagoas, Ceará, Pará, Pernambuco, Paraná, Rio Grande do Norte and Santa Catarina. Oi leads mobile services in two states: Maranhão and Paraiba. The group has a concession of fixed line telephone in all states to offer fixed services. Claro Telecom Participações or Claro is a mobile operator controlled by a Mexican company, America Movil Group, and leads mobile service in seven states: Bahia, Distrito Federal, Goiás, Piauí, Rio de Janeiro, Rondônia and Tocantins.
Our main competitors in fixed telecommunications services are: America Móvil (which includes NET, Claro and Embratel), TIM (which offers broadband services under the Live TIM brand) and SKY (currently controlled by AT&T).
In 2015, Claro, Embratel and NET operations were consolidated into a single company under José Antonio Guaraldi Félix’s management. After the restructuring, the group strengthened its commercial activity focused on convergence. The fixed broadband follows as flagship portfolio that includes: cable TV, fixed telephone and mobile
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services. Similar to NET and Claro, Oi is stronger in the fixed services outside the state of São Paulo and remains focused on the convergence strategy between fixed and mobile services.
Live TIM experienced significant growth and reached 220,000 customers by the end of 2015.
SKY provides satellite Pay TV service and offers from low to high price packages to its target customers and in 2015 significantly expanded its broadband operations through LTE TDD 4G technology (long term evolution-division duplex time). In December 2015, according to ANATEL, SKY registered 5.4 million customers in Pay TV.
Regulation of the Brazilian Telecommunications Industry
Our business, including the services we provide and the rates we charge, is materially affected by comprehensive regulation under the General Telecommunications Law and various administrative rules thereunder. We operate under a concession agreement that authorizes us to provide specified services and subjects us to certain obligations, according to the General Universal Service Targets Plan (Plano Geral de Metas de Universalização), or PGMU, and the General Quality Targets Plan (Plano Geral de Metas de Qualidade), or PGMQ.
ANATEL is the regulatory agency established by the General Telecommunications Law, and is administratively and financially independent from the Brazilian government. Any proposed regulation by ANATEL is subject to a period of public comment and, occasionally, public hearings, and its decisions may be challenged in Brazilian courts.
Concessions and Authorizations
In accordance with the General Telecommunications Law concessions are licenses to provide telecommunications services that are granted under the public regime, while authorizations are licenses to provide telecommunications services granted under the private regime.
Companies that provide services under the public regime, known as the concessionaires, are subject to certain obligations as to quality of service, continuity of service, universality of service, network expansion and modernization.
A concession may only be granted pursuant to a public bidding process. As a result, regulatory provisions are included in the relevant concession agreements and the concessionaire is subject to public service principles of continuity, changeability and equal treatment of customers. In addition, ANATEL is authorized to direct and control the provision of services, to apply penalties and to declare the expiration of the concession and the return of assets from the concessionaire to the government authority upon termination of the concession. Another distinctive feature of public concessions is the right of the concessionaire to maintain certain economic and financial standards, which are calculated based on the rules set forth in our concession agreement and was designed based on a price cap model. The concession is granted for a fixed period of time and is generally renewable only once.
The companies that operate concessions under the public regime are Telefônica Brasil, Oi, CTBC Telecom, Sercomtel and Embratel (Embratel for domestic and international long distance service). These companies provide fixed-line telecommunications services in Brazil that include local, intraregional, interregional and international long-distance services. All other telecommunications service providers, including the other companies authorized to provide fixed-line services in our concession region, operate pursuant to authorizations under the private regime.
Companies that provide services under the private regime, known as authorized companies, are generally not subject to the same requirements regarding continuity or universality of service; however, they may be subject to certain network expansion and quality of service requirements that are obligations set forth in their authorizations. Authorizations are granted for an indeterminate period of time. Under an authorization, the government does not guarantee to the authorized company an economic-financial equilibrium, as is the case under concessions.
An authorization is a license granted by ANATEL under the private regime, which may or may not be granted pursuant to a public bidding process, to the extent that the authorized company complies with the objective and subjective conditions deemed necessary for the rendering of the relevant type of telecommunication service in the private regime.
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The General Telecommunications Law delegates to ANATEL the power to authorize private regime companies to provide local and intraregional long-distance services in each of the three fixed-line regions and to provide intraregional, interregional and international long-distance services throughout Brazil. ANATEL has already granted authorizations for companies to operate in Region III, our concession region. ANATEL has also granted other authorizations for companies to operate in other fixed-line regions and authorizations to provide intraregional, interregional and international long-distance services throughout Brazil competing with Embratel, which operates under a long-distance fixed-line concession.
Concessionaires, including us, can also offer other telecommunications services in the private regime, which primarily include data transmission services, mobile services and Pay TV.
Obligations of Telecommunications Companies
Pursuant to the concessions and authorizations, we and other telecommunications service providers are subject to obligations concerning quality of service, network expansion and modernization. Telecommunication concessionaires are also subject to a set of special restrictions regarding the services they may offer, which are listed in the General Grants Plan (Plano Geral de Outorgas), or PGO, and special obligations regarding network expansion and modernization contained in the PGMQ.
In 2008, a presidential decree published with the PGO increased the flexibility of telecommunications provider groups as fixed line concessionaires by allowing such providers to provide services in up to two of the three regions established by the PGO. Before this decree, telecommunications provider groups holding fixed-line concessions could offer fixed line services in only one region under the public regime.
Any breach of telecommunications legislation or of any obligation set forth in concessions and authorizations may result in a fine of up to R$50 million.
Our main operations are regulated as follows:
· | Fixed line voice services (local and long distance), in the state of São Paulo, pursuant to the Serviço de Telefonia Fixa Comutada, or our concession agreement, granted in 1998 by the Brazilian Government, which was renewed in December 2005 for an additional 20-year term beginning on January 1, 2006. The concession authorizes us to provide fixed-line telecommunications services in the state of São Paulo, except for a small area (Sector 33) and to place and manage public telephones in our concession area. We also provide fixed-wireless services throughout our concession area; |
· | Mobile voice and broadband services, in all 26 states and the Federal District, under the personal mobile service (Serviço Móvel Pessoal), or SMP authorization. We operate under SMP authorizations with 15-year terms, that can be renewed for an additional 15-year term; |
· | Multimedia communication services, such as audio, data, voice and other sounds, images, texts and other information throughout the state of São Paulo, under multimedia communication service (Serviço de Comunicação Multimídia), or SCM authorization. We operate under a nationwide SCM authorization, valid for an indefinite term; |
· | Pay TV service, throughout all regions of Brazil under the conditioned public service (Serviço de Acesso Condicionado), or SeAC authorization. We operate under SeAC authorizations, which are valid for indefinite terms; and |
· | Wholesale services, such as interconnection, governed by the interconnection agreements discussed under “—Operating Agreements—Interconnection Agreements,” industrial dedicated line (Exploração Industrial de Linha Dedicada), or EILD, which are regulated by ANATEL Resolution No. 590, dated May 15, 2012 and Mobile Virtual Network Operator, or MVNO agreements described under “—Operating Agreements—MVNO Agreements.” |
We set forth below details of the concession, authorizations, licenses and regulations that regulate our operations.
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Fixed Services
Our Concession Agreement
We are authorized to provide fixed line services to render local and domestic long-distance calls originating in Region III, which comprises the state of São Paulo, except for Sector 33, established in the PGO.
The current concession agreement, dated from December 22, 2005, was renewed on January 1, 2006, and will be valid through December 31, 2025. On December 27, 2010, ANATEL approved Resolution No. 559, which established new revisions for the concession agreement on May 2, 2011, December 31, 2015, and December 31, 2020.
On December 29, 2015, ANATEL published Resolution 659, which established a new date for the revision of the concession agreements. ANATEL has set the date of April 30, 2016 to finish such review.
Since the renewal of our concession agreements, several new regulations are undergoing discussions or have been adopted to revise certain aspects of our concession. On June 30, 2011, we revised our concession agreement to determine the new basis of calculation of the biannual concession fees.
In addition, the Brazilian government published Decree No. 7,512 which proposed the General Plan for the Universalization of Fixed Telephone Services under the Public Regime (Plano Geral de Metas para a Universalização do Serviço Telefônico Fixo Comutado Prestado no Regime Publico), or PGMU III. It set forth new targets for public pay phones (Telefone de Uso Público) availability in rural and low-income areas and targets related to low-income fixed line services (Acesso Individual Classe Especial), or AICE. On June 27, 2014, ANATEL opened two public comment periods; the first, Consulta Publica No. 25 aims to revise the PGMU, and the second, Consulta Publica No. 26, aims to revise the fixed line concession agreements. We have submitted our comments and ANATEL is reviewing all comments submitted. The revised version of the agreement must be published by April 30, 2016.
Pursuant to the concession agreement, all assets owned by us which are indispensable to the provision of the services described in the concession are considered reversible assets and are deemed to be part of the concession assets. These assets will be automatically returned to ANATEL upon termination of the concession agreement, and as a result we may not encumber such assets.
Every two years, during the new 20-year period of our concession, we are required to pay a renewal fee, which amounts to 2% of the total revenue in the previous year, calculated based on the revenues and social contribution of fixed line basic and alternative plans. The most recent payment of this biennial fee was made on April 30, 2015, based on 2014 revenue. The next payment is scheduled for 2017 based on 2016 revenue. See Note 1 to our Consolidated Financial Statements.
On April 8, 2008, we entered into an amendment to the concession agreement to substitute the obligation to install telecommunications service posts with an obligation to roll out broadband network infrastructure throughout the municipalities serviced by such concessionaires.
On October 23, 2012, ANATEL published Resolution No. 598, which addresses population density, setting deadlines to meet access requests and benchmarks for use of the public telephone plant and the establishment of a list of agencies that can request access to its location, review of deadline for proposing service plans and the establishment of universal obligations disclosure.
For information about regulations affecting rates we are able to charge under our concession agreements, see “—Rates, Taxes and Billing.”
Obligations and Restrictions on concessionaires to provide fixed line service under the public regime
We and other concessionaires are subject to the General Universal Service Targets Plan (Plano Geral de Metas de Universalização), or PGMU, and the General Quality Targets Plan (Plano Geral de Metas de Qualidade), or PGMQ, each of which respectively requires that concessionaires undertake certain network expansion activities with respect to our fixed-line services and meet specified quality of service targets. The timing for network expansion and benchmarks for quality of service are revised by ANATEL from time to time. If any given concessionaire does not
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fulfill its obligations under the PGMU and the PGMQ, ANATEL may impose various monetary penalties and such concessionaire may lose its license if ANATEL determines that it will be unable to provide basic services under the two General Plans.
Concessionaires are also subject to certain restrictions on alliances, joint ventures, mergers and acquisitions, including:
· | a prohibition on holding more than 20% of the voting shares in any other concessionaire, unless previously approved by ANATEL, according to ANATEL Resolution No. 101; and |
· | a prohibition on concessionaires to provide similar services through related companies. |
Fixed line service under the private regime
In 2002, we began providing local and interregional services in Regions I and II and Sector 33 of Region III, and international long-distance services in Regions I, II and III, which constitute regions in Brazil that are outside of our public regime concession area.
Public Telephone Regulation
On June 30, 2014, ANATEL published the new Public Telephone Regulation. Among the new rules, it opened up the possibility of advertising on the public telephones and the possibility of alternative payment modalities.
Mobile Services
Mobile Service Licenses (SMP)
Our authorizations to provide mobile services throughout Brazil consist of two licenses—one to provide mobile telecommunications services, and another to use the respective frequency spectrum for a period of 15 years. The frequency license is renewable for an additional 15-year period upon payment of 2% of net operating revenues over usage charges in the region described above, during the last year of each license and every two years for the duration of the extension period.
In order to transfer our services to SMP, we were required to comply with several technical and operational conditions, including, among other things, the adoption of a carrier selection code for long-distance calls originating from our network.
Our renewed SMP authorizations include the right to provide mobile services for an unlimited period of time but restrict the right to use the spectrum according to the schedules listed in the old authorizations. The table below sets forth our current SMP authorizations, their locations, band and spectrums, date of issuance or renewal and date of expiration:
Band Expiration Date | |||||
Authorization |
800 MHz |
900 MHz |
1800 MHz |
1900 MHz |
2100 MHz (3) |
Rio de Janeiro | Band A November 2020 |
Extension 1 April 2023 | Extensions 9&10 April 2023 |
Band L April 2023 |
Band J April 2023 |
Espírito Santo | Band A November 2023 |
Extension 1 April 2023 | Extensions 9&10 April 2023 |
Band L April 2023 |
Band J April 2023 |
Amazonas, Roraima, Amapá, Pará and Maranhão | Band B November 2028 |
Extension 2 April 2023 | Extensions 7, 9&10 April 2023 |
— | Band J April 2023 |
Minas Gerais (except for “Triângulo Mineiro” region) | Band A April 2023 |
Extension 2 April 2023 | Extensions 11&14 April 2023 |
Band L April 2023 |
Band J April 2023 |
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Band Expiration Date | |||||
Authorization | 800 MHz | 900 MHz | 1800 MHz | 1900 MHz | 2100 MHz (3) |
Minas Gerais (“Triângulo Mineiro” region) | — | Band E April 2020 |
Band E April 2020 |
Band L April 2023 |
Band J April 2023 |
Bahia | Band A June 2023 |
Extension 1 April 2023 | Extensions 9&10 April 2023 |
Band L April 2023 |
Band J April 2023 |
Sergipe | Band A December 2023 |
Extension 1 April 2023 | Extensions 9&10 April 2023 |
Band L April 2023 |
Band J April 2023 |
Alagoas, Ceará, Paraíba, Pernambuco, Piauí and Rio Grande do Norte | — | — | Band E April 2023 Extensions 9&10 April 2023 |
Band L December 2022 |
Band J April 2023 |
Paraná (except for Londrina and Tamarana) and Santa Catarina | Band B April 2028 |
Extension 1 April 2023 | Band M April 2023 |
Band L April 2023 |
Band J April 2023 |
Paraná - Londrina and Tamarana | Band B April 2028 |
— | Band M April 2023 Extension 10 April 2023 |
— | Band J April 2023 |
Rio Grande do Sul (except for Pelotas, Morro Redondo, Capão do Leão and Turuçu) | Band A December 2022 |
Extension 1 April 2023 | Band M April 2023 |
Band L April 2023 |
Band J April 2023 |
Rio Grande do Sul (Pelotas, Morro Redondo, Capão do Leão and Turuçu) | — | — | Bands D&M April 2023 |
Band L December 2022 |
Band J April 2023 |
Federal District | Band A July 2021 |
Extension 1 April 2023 | Band M April 2023 |
Band L April 2023 |
Band J April 2023 |
Goiás and Tocantins | Band A October 2023 |
Extension 1 April 2023 | Band M April 2023 |
Band L April 2023 |
Band J April 2023 |
Goiás (Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão) | — | — |
Extensions 7 to 10
Band M
|
Band L December 2022 |
Band J April 2023 |
Mato Grosso | Band A March 2024 |
Extension 1 April 2023 | Band M April 2023 |
Band L April 2023 |
Band J April 2023 |
Mato Grosso do Sul (except for Paranaíba) | Band A September 2024 |
Extension 1 April 2023 | Band M April 2023 |
Band L April 2023 |
Band J April 2023 |
Mato Grosso do Sul (Paranaíba) | — | — |
Extensions 7, 9&10
Band M
|
Band L December 2022 |
Band J April 2023 |
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Band Expiration Date | |||||
Authorization | 800 MHz | 900 MHz | 1800 MHz | 1900 MHz | 2100 MHz (3) |
Rondônia | Band A July 2024 |
Extension 1 April 2023 | Band M - April/23 | Band L April 2023 |
Band J April 2023 |
Acre | Band A July 2024 |
Extension 1 April 2023 | Band M April 2023 |
Band L April 2023 |
Band J April 2023 |
São Paulo | Band A August 2023 |
— | Extensions 9&10 April 2023 |
Band L April 2023 |
Band J April 2023 |
São Paulo (Ribeirão Preto, Guatapará and Bonfim Paulista) | Band A January 2024 |
— | Extensions 5, 9&10 April 2023 |
Band L April 2023 |
Band J April 2023 |
São Paulo (Franca region) | Band A August 2023 |
— | Extensions 5, 9&10 April 2023 |
Band L April 2023 |
Band J April 2023 |
São Paulo (Altinópolis, Aramina, Batatais, Brodosqui, Buritizal, Cajuru, Cássia dos Coqueiros, Colômbia, Franca, Guaíra, Guará, Ipuã, Ituverava, Jardinópolis, Miguelópolis, Morro Agudo, Nuporanga, Orlândia, Ribeirão Corrente, Sales de Oliveira, Santa Cruz da Esperança, Santo Antônio da Alegria and São Joaquim da Barra) | — | — | Extensions 9&10 April 2023 |
Band L December 2022 |
Band J April 2023 |
In 2013, we changed the terms of our authorization regarding Band “G” (1.9 GHz) in certain locations, adapting their blocks of frequencies to 2.1 GHz and aligning them with the band “J” (3G) which provides a more efficient use of the spectrum. The alignment has not occurred in the following areas: Northeast, with the exception of Bahia and Sergipe; Pelotas, Morro Redondo, Capão do Leão and Turuçu, in Rio Grande do Sul; Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão, in Goiás; and Paranaíba in Mato Grosso do Sul. This change is foreseen in the bidding document No 001/2007. We do not have band “G” in the northeast region and in Londrina and Tamarana, Paraná.
On June 12 and 13, 2012, ANATEL held a public bidding for 273 4G lots in the 2,500 to 2,690 MHz frequencies. We acquired the “X” band, with a nationwide coverage, for R$1.05 billion. Given the rules of the public bidding process, which limited the total spectrum each service provider could hold within this frequency, we agreed to relinquish bands “P,” “T” and “U” used for MMDS services within 18 months of obtaining the “X” band.
In order to meet the coverage obligations and the schedule defined by ANATEL, we have made 4G services available to 183 metropolitan areas in Brazil including cities with over 200,000 residents. To complete the coverage requirements, we will need to implement 4G coverage as follows:
· | by December 31, 2015: cities with over 200,000 residents; |
· | by December 31, 2016: cities with over 100,000 residents; |
· | by December 31, 2017: cities with between 30,000 and 100,000 residents; and |
· | by December 31, 2019: cities with fewer than 30,000 residents. |
ANATEL auctioned a 450 MHz frequency lot that is tied to the 2.5 GHz band, to meet voice and data demand in remote rural areas. Under band “X,” which we acquired in the bidding process, we will be required to provide infrastructure in rural areas in the states of Alagoas, Ceará, Minas Gerais, Paraíba, Pernambuco, Piauí, Rio Grande do Norte, Sergipe, and countryside of São Paulo, for a total of 2,556 municipalities. The timetable for providing
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infrastructure in the rural areas requires that 100% of municipalities have infrastructure set up by December 2015, with a transmission rate of 256Kbps and by December 31, 2017, all of these municipalities will be expected to have 1Mbps. ANATEL is currently overseeing whether the obligations that should have been met by the end of 2015, set out in the auction regarding the frequencies of 2.5GHz and 450 MHz, were met.
In December, 2015, ANATEL and CADE approved the agreement between Telefônica Brasil, TIM and Oi for the construction, implementation and mutual assignment of network tools for supporting the Personal Mobile Service (voice and broadband) in the 2.5 GHz band, in order to make compliance with the scope of commitments between 2015 and 2017 and the expansion of 4G coverage, considering municipalities with a population over 30 thousand inhabitants. The operation involves the search for more efficiency of resources application of rationality and presenting a solution to the urban planning and environmental restrictions on the deployment of the new radio base stations (cell sites).
ANATEL did not accept, however, the proposed agreement to do the RAN Sharing in conurbations, since interference was detected. The agency has decided that until a technological solution is found against this interference, there can be no sharing in these cities.
On July 18, 2012, ANATEL notified us that we would be required to present an improvement plan for SMP services. We presented our plan and it was approved by ANATEL on September 10, 2012. We have since been required by ANATEL to meet certain quality and service targets. ANATEL evaluates such quality and service improvements every three months.
In September 2014 we won one of the three lots offered for auction by ANATEL for the sale of 700 MHz national frequency bands. The value of the frequency range was the minimum price of R$1.9 billion plus R$903.9 million related to cost payment obligations relating to the redistribution of TV and RTV in order to avoid harmful interference problems in radio communication systems. Therefore, we will increase our service delivery capacity with 4G technology throughout Brazil and will operate in the 700 MHz frequency range, with a band of 10 + 10 MHz, plus the 2.5 GHz frequency band with 20 + 20 MHz acquired in the 2012 public bid.
On March 10, 2015, we officially constituted the Managing Entity of the Redistribution Process and TV Channel Digitization and RTV - EAD as established in the Bid 700MHz frequency auction.
The shutdown in the city of Rio Verde (GO), which was to take place in November 2015, was not done, despite the converter’s distribution process and advertising have gone as planned. Advertising and distribution of antennas in the next city of schedule, Brasilia, is already being done, but there is the possibility that the analog signal shutdown be delayed. It is important to emphasize that the shutdown of the analog signal follows the schedule established by ANATEL, with 2018 as the deadline for shutdown across country. In addition, the shutdown of the analog signal in the municipalities may occur early if the percentage of households ready for digital TV reaches 93%.
Finally, on January 22, 2016, the Ministry of Communications issued the Decree No. 378, changing the analog transition timeline of sound broadcasting services and imaging and television relay to SBTVD-T, postponing the switch off in most locations. Thus, the transfer of resources related to the first installment of the payment obligations relating to the Redistribution Process and TV Channel Digitization and RTV - EAD that would be made by the Company on January 31, 2016 has been extended to January 31, 2017, this amount being adjusted by the IGP-DI until the new date of transfer.
In December, 2015, ANATEL auctioned the remaining spectrum lots in the 1800 MHz, 1900 MHz and 2500 MHz bands, where Telefônica acquired seven lots of 2.5 GHz frequency band offering a total of R$ 185.4 million. These lots are associated to six different States, five of them in the capital cities of the States of São Paulo, Rio de Janeiro, Porto Alegre, Florianópolis, and Palmas and one in an interior city of the State of Mato Grosso do Sul. Such frequencies will be used for provision of mobile broadband service on 4G. The signing of the terms is still pending.
Mobile Services Obligations
The mobile service authorizations of Telefônica Brasil involve obligations, established by ANATEL, to meet quality of service standards relating to the system’s ability to make and receive calls, call failure rates, the network’s capacity to handle peak periods, failed interconnection of calls and customer complaints.
To restructure the process of assessing the quality of mobile service, with the inclusion of new processes and measurement of new indicators to check the quality of mobile broadband and the quality perceived by the user, and the modernization of existing indicators, ANATEL approved the Regulation for the Management of Quality of Provision of Personal Mobile Service (Regulamento de Gestão da Qualidade da Prestação de Serviço Móvel Pessoal), or SMP-RGQ.
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The SMP-RGQ provides for the assessment of the network connection and their respective data transmission rate, assessing aspects of availability, stability and connection speed for the data network. In addition, the rule established the formation of a Quality Measurement Process Deployment Group (Grupo de Implantação de Processos de Aferição da Qualidade), or GIPAQ, which is responsible for implementing the processes on the quality indicators for the “Instant Transmission Rate Guarantee “and “Average Transmission Rate Guarantee.”
The methodology and procedures regarding the collection of data connection indicators has been defined by a group composed of providers, ANATEL and the entity responsible for the measurement of the rate of data transmission indicators (Entidade Aferidora da Qualidade), or EAQ, which shall be responsible for implementing these processes and which has been hired by the mobile operators, as a group, starting with February 29, 2012. All costs associated with implementing the new procedures for measuring quality are borne by the providers of SMP services.
Initially, targets were defined by at least 60% of the speed hired by users and 20% of the instant speed. In November 2013 and November 2014, ANATEL raised the target values to 80% of speed hired by users and 40% of the instant speed, according to the definitions of the Resolution 575/2011.
In July 2012, ANATEL suspended the sale and activation of the mobile lines of three major Brazilian operators. We were not affected by this measure. Since then, ANATEL has requested the submission of an Action Plan for Quality Improvement of the Mobile Telephone from operators. We had our plan approved on September 10, 2012. The measurement results of the indicators defined on the PMQ were published in August 2012 and are under an ongoing monitoring process set forth by ANATEL.
Multimedia Communication Services (SCM)
Our multimedia services include broadband and wireless internet services as well as fiber UBB services.
Authorization to Provide Multimedia Services
On January 29, 2003, ANATEL granted our multimedia communication license nationwide, allowing A. TELECOM S.A. (formerly Assist Telefónica), our wholly owned subsidiary at that time, to provide voice and data services through points-of-presence (POPs), which are comprised of private telecommunications networks and circuits. In addition to A. TELECOM S.A., ANATEL granted multimedia communication licenses to T-Data (formerly T-Empresas) and Emergia.
As a result of our merger with and into Vivo S.A. and pursuant to the concession agreement, we are not able to provide services other than telecommunications. Consequently, we submitted a request to ANATEL for the cancellation of T-Data’s multimedia communication license and the unification of our multimedia communication licenses under Telefônica Brasil. On September 3, 2014, ANATEL granted Telefônica Brasil a nationwide multimedia communication license.
Obligation to provide fixed broadband access
As a telecommunications concessionaire, we have the obligation to provide free Internet access to public schools in our concession area during the term of the agreement (until 2025). The number of schools for which we should provide broadband is determined by the National Education Ministry school census. Currently our obligations include 10,149 schools, of which 9,814 were met.
Pay TV services
Authorization to provide Pay TV Services – SeAC
On March 14, 2007, ANATEL granted A. TELECOM S.A. authorization to provide services of Pay TV via satellite (Direct to Home – DTH). DTH is one of the special types of subscription TV services that utilize satellites for the direct distribution of television and audio signals for subscribers. The launching of the commercial transaction occurred on August 12, 2007.
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On October 31, 2007, the board of ANATEL concluded its regulatory review of the agreement between us and Grupo Abril, which included a special license that allows us to offer Pay TV and broadband services. In November 2012, ANATEL approved the adoption of service licenses for subscription television by the Telefónica group to the conditional access service.
Following the merger of Telefônica Brasil S.A. and Vivo S.A., the company requested the adjustment of the Multimedia Multipoint Distribution Service (MMDS), the Pay TV via satellite Direct to Home – DTH, and the Cable TV service licenses, to the SeAC single license. On January 25, 2013 it was issued by ANATEL.
Regulations for Pay TV Services– SeAC
On September 12, 2011, the Brazilian Congress adopted Law 12,485/2011 as a result of Bill 116, which establishes a new legal framework for audiovisual communication with restricted access. This law opens the Pay TV market by enabling telecom operators to offer audiovisual content to subscribers through their networks, creating a new service called Pay TV Services (Serviço de Acesso Condicionado), or SeAC. The absence of restrictions on foreign capital to be invested in Pay TV providers, as well as the elimination of restrictions for the provision of other telecommunications services through fixed line concession, allow us to provide Pay TV services, as well as other telecommunication services previously limited under the General Telecommunications Law.
Pursuant to Law 12,485/2011, the Pay TV service has replaced current cable subscription TV services, subscription TV, MMDS and DTH, giving power to ANATEL to regulate the Pay TV service. As a result of this law, ANATEL introduced in December 2011 the proposed regulations for Pay TV services through Public Consultation No. 65/2011, including license grants, installation and licensing of stations and mandatory distribution programming channels. The Public Consultation was finalized on February 2, 2012 and resulted in Resolution No. 581, issued by ANATEL on March 28, 2012, as well as the new Authorization Terms of the SeAC.
Law No. 12,485/2011 also established an annual payment to Condecine (Contribuição para o Desenvolvimento da Indústria Cinematográfica) to be made by providers of telecommunication services and amended Law No. 5,070/1966 by revising the amount due as Inspection Fee (Taxa de Fiscalização de Funcionamento) for telecommunication stations from 45% to 33% of the Installation Fee (Taxa de Fiscalização de Instalação). The amount due to Condecine is approximately 12% of the Installation Fee for telecommunication services and must be paid yearly by March 31 of each year.
As a result of Law No. 12,485/2011, the National Cinema Agency (Agência Nacional do Cinema), or ANCINE issued one public consultation by the end of 2011 and one public consultation in 2012 to regulate the registration of economic agents. In 2013, we had our licenses adapted to the new regulation and was recognized as an economic agent by ANCINE. In 2014, ANCINE recognized Telefônica Brasil S.A. as a Pay TV content packer.
Interconnection Fees
In accordance with ANATEL regulations, we must charge fees to the other telecommunications service providers based on the following:
· | Fee for the use of our local fixed service network (TU-RL) - we charge local service providers an interconnection fee for every minute used in connection with a call that either originates or terminates within our local network, with the exception of calls between other providers of local fixed service, for which a fee is not charged; |
· | Fee for the use of our fixed service long-distance network (TU-RIU) - we charge long distance service providers an interconnection fee on a per-minute basis only when the interconnection access to our long-distance network is in use; |
· | Fee for the use of mobile network (MTR) – we charge mobile service providers an interconnection fee on a per-minute basis only when the interconnection access to our mobile network is in use; |
· | Fee for the use of leased lines by another service provider (EILD). We also lease transmission lines, certain infrastructure and other equipment to other providers of telecommunications services. |
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Fixed Service
In July 2005, ANATEL published new rules regarding interconnection. The main changes are: (i) an obligation to have a public offering of interconnection for all services, besides interconnections fees between providers of fixed and mobile telephone services; (ii) an offer of interconnections for Internet backbone providers; (iii) establishment of criteria for the treatment of fraudulent calls; and (iv) reduction of service times for interconnection requests.
In 2006, we completed the implementation of the interconnection with the mobile service providers in regions with heavier traffic, assuring the proper billing for such calls. This movement reduced the interconnection costs.
In 2007, ANATEL published a new version of Fixed Network Compensation Regulation that changed the rules to determine the interconnection fees. Local and long distance rates that were set at all times became variable according to the rules of public service tariffs. A 20% increase was applied to tariffs of mobile service operators without significant market power in their regions.
On May 7, 2012 Resolution No. 588/12 was published. It determined that:
· | A maximum of two minutes of interconnection should be paid for the use of the local network on reduced hours. |
· | The reduction of interconnection fees from domestic and international long distance calls by 30% of the value of the local fixed service network interconnection fee (TU-RL) and the reduction of 25% and 20% by December 2012 of the value of the long distance network interconnection tariffs (TU-RIU). |
· | The remuneration between networks will not occur until this traffic imbalance is greater than 75% compared to 25% |
· | The partial Bill & Keep by December 31, 2013 and full Bill & Keep by December 31, 2014. |
On July 1, 2014, ANATEL established gradual decreases in fixed service network interconnection fees, or TU-RL, based on a cost model for the years 2016, 2017, 2018 and 2019, as described under “Item 3. Key Information—D. Risk Factors—Risks Relating to the Brazilian Telecommunications Industry and Us—Our results of operations may be negatively affected by the application of the Fixed Commuted Telephone Service (Serviço de Telefonia Fixa Comutada), or STFC, rules relating to fixed telephone service and the Personal Mobile Service (Serviço Móvel Pessoal), or SMP, rules relating to mobile services.”
Mobile service
In November 2009 ANATEL unified the licenses of all mobile operators, resulting in the consolidation of interconnection fees, reducing the number of fees for the use of mobile network from 2 to 1.
On December 2, 2013 Act no. 7,272 was published, establishing the MTR reference values for providers determined to be a Significant Market Power (PMS), which became effective on February 24, 2014. On August 28, 2014, Act no. 7,310 was published, replacing the reference values previously set out in Act no. 7,272.
On July 1, 2014, ANATEL established gradual decreases in mobile interconnection fees, or MTR, based on a cost model for the years 2016, 2017, 2018 and 2019, as described in “Item 3. Key Information—D. Risk Factors—Risks Relating to the Brazilian Telecommunications Industry and Us—Our results of operations may be negatively affected by the application of the Fixed Commuted Telephone Service (Serviço de Telefonia Fixa Comutada), or STFC, rules relating to fixed telephone service and the Personal Mobile Service (Serviço Móvel Pessoal), or SMP, rules relating to mobile services.”
In addition, the General Competition Plan (“Plano Geral de Metas de Competição – PGMC) determined that the relationship among PMS and non-PMS providers in the mobile network, the interconnection fee should be paid only when the traffic out of a network in a given direction is greater than 80% of the total traffic exchanged until February 23, 2015; 60% of the total traffic exchanged form February 24, 2015 to February 23, 2016. And from February 24, 2016, the MTR will be owed to the mobile service provider when its network is used to originate or terminate calls (full billing). However, in February 2015, after promoting a Public Consultation, ANATEL modified the rules regarding the interconnection fee to be paid of the outbound traffic:
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· | Up to February 23, 2015: 80% / 20% |
· | From February 24, 2015 to February 23, 2016: 75% / 25% |
· | From February 24, 2016 to February 23, 2017: 65% / 35% |
· | From February 24, 2017 to February 23, 2018: 55% / 45% |
· | From February 24, 2018 to February 23, 2019: 50% / 50% |
· | From February 24, 2019: Full Billing. |
Notwithstanding, TIM and Claro have filled a law suit to suspend the modification of the rules concerning the tariff reduction on the fixed-mobile introduced by Resolution 649. They obtained on February 2015 a favorable restraining order that determines the reduction as initially established by General Plan of Competition Goals (“PGMC”). Nevertheless, this decision may be revoked at any time since it is an interim decision without a definitive nature.
TU-RL and TU-RIU
On May 18, 2014, the proposed standards were approved for setting maximum values of fixed interconnection fees and for the values of mobile interconnection, based on Cost Models. In addition, values for fixed and mobile interconnection were published through the acts: No. 6210 for TU-RL and TU-RIU and No. 6211 for MTR.
For fixed and mobile termination fees, the decision of ANATEL established values for 2018 based on a bottom-up cost model. For 2016 and 2017 intermediate values will be adopted.
EILD
On May 18, 2014, ANATEL approved the proposed standard for setting maximum values of Industrial Dedicated Line (EILD), based on Cost Models. Values for EILD were published through Act No. 6212, which contains a single reference table which will be valid from 2016 until 2020. In addition, the general competition plan requires companies with significant market power to present a public offer every six months informing standard commercial conditions, which is subject to approval by ANATEL.
Mobile Virtual Network Operator (MVNO)
In 2001, ANATEL approved rules for companies to be licensed as MVNOs. We have signed agreements with companies authorized to operate as an MVNO in Brazil.
Internet and Related Services in Brazil
In Brazil, Internet service providers, or ISPs, are deemed to be suppliers of value-added services and not telecommunications service providers. ANATEL requires SCM operators to act as carriers of third-party internet service providers. The Brazilian House of Representatives is considering a law that would penalize Internet service providers for knowingly providing services that allow illegal goods or services to be sold on the Internet, and would impose confidentiality requirements on Internet service providers regarding nonpublic information transmitted or stored on their networks.
Exemptions for telecommunications infrastructure
In connection with “Plano Brasil Maior,” a policy instituted to promote the Brazilian technology industry and foreign trade, the Brazilian Government established the special tax regime for the taxation of national broadband plans (Regime Especial de Tributação para o Plano Nacional de Banda Larga). This regime provides tax exemptions for telecommunications companies for broadband network expansions.
Another initiative set forth by “Plano Brasil Maior” and approved by the government on May 5, 2014, established exemptions for machine-to-machine services. It sets reductions on both rates that compose Telecommunications Inspections Fund (FISTEL). The Installation Inspection Rate (TFI), which is charged for each
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enabled chipset, decreased from R$26.83 in 2013 to R$5.68 in 2014. The Operations Inspection Rate (TFF), paid every year for each chipset held by a Brazilian operator, decreased from R$12.40 in 2013 to R$1.89 in 2014.
On January 14, 2015, the Ministry of Communications published a decree that reduces national technology requirement in RePNBL. Some requirements were reviewed in mobile and electrical networks, in order to accelerate projects and attract more investments.
June 30, 2015 was the deadline for submission of projects covered by RePNBL. 1,167 projects were approved, totaling investments of R$15.1 billion, reaching 3,699 cities in all Brazilian states. We had 143 projects authorized, totaling approximately R$4.3 billion.
Civil Rights Framework for Internet
On April 23, 2014, at the opening of NetMundial, President Dilma Rousseff approved the Civil Rights Framework for Internet, which was enacted as Law 12,965/2014. The final text has highlighted Net Neutrality, guarantying equality of treatment for packages. Moreover, it preserves the business model of Brazilian broadband that offers packages with different speeds. Certain parts of the law went into effect on June 23, 2014 and others depend on further regulation to be valid.
In early 2015, two public consultations took place, one by CGI.br and other by the Minister of Justice, to discuss the regulation of the Civil Rights Framework, approved in 2014.
On March 31, 2015, ANATEL published a public consultation in order to subsidize its position on the regulation of network neutrality provided for in the Civil Rights Framework. The deadline for contributions ended on May 19, 2015.
Personal Data Protection
In Brazil, after a sequence of public consultations regarding the Data Protection Bill of Law, which was based on the European Union’s Directives on Data Protection, and as such, imposes restrictive rules on the express consent to process personal data, international data transfer, processing of sensitive data, among others, the Ministry of Justice published a draft as a result of a compilation of the contributions made during the consultations, that will be soon discussed by the Brazilian Congress.
Resolutions Published
A series of new regulations, published by ANATEL as well as other regulatory bodies in Brazil, became effective in 2015. The most relevant among these regulations were:
· | Resolution No. 649: Amend the General Plan on Competition Targets - PGMC, approved by Resolution No. 600, of November 8, 2012. |
· | Resolution No. 654: Approves the conditions to the measurement of the satisfaction level of costumer’s perceived quality about the telecommunication services. |
· | Resolution No. 655: Approves the regulation for the monitoring of national products and systems acquisition commitments and establishes specific rules for the fulfillment of the commitment acquisition of national technology products. |
Public Consultations Published
In 2015, ANATEL announced a series of consultations to the civil society. The most relevant among these public consultations were:
· | Public Consultation No. 1: Discussion with society about the Replacement of Basic Payment Method Propositions of public telephones (TUP) presented by STFC concessionaires. |
· | Public Consultation No. 4: Public consultation for Fines Implementation Methodology for Universal Service Obligations. |
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· | Public Consultation No. 8: Public Consultation to receive subsidies aimed at assisting the formation of ANATEL’s position on the regulation of the proposed network neutrality in the Civil Rights Framework for Internet. |
· | Public Consultation No. 10: Proposal for Regulation regarding measurement conditions of the Degree of Satisfaction and Quality Perceived by the Telecommunications Service Users. |
· | Public Consultation No. 11: Proposal of fines application methodologies in case of obstacle to the Oversight Activity. |
· | Public Consultation No. 14: Proposal of Application Manual for Measurement of Degree of Satisfaction and Perceived Quality along the Telecommunications Service Users. |
· | Public Consultation No. 15: Consultation with civil society about the proposed Regulatory Agenda for the 2015-2016 cycle and revocation of the General Plan for Regulation Updates of Telecommunications in Brazil (PGR), approved by Resolution No. 516, of October 30, 2008. |
· | Public Consultation No. 17: Proposal for revision of the Acts designating Groups Holder of Significant Market Power (SMP) in the relevant markets under the sole paragraph of art. 11 of the Competition General Plan (PGMC), approved by Resolution No. 600, of November 8, 2012. |
· | Public Consultation No. 18: Proposal for General Regulations of Accessibility in the Collective Interest Telecommunication Services. |
· | Public Consultation held by the Ministry of Communications: Public consultation to discuss the regulatory model. |
Other Regulatory Matters
TAC
In late 2013, ANATEL published Resolution 629, which defines guidelines to be followed in the execution of projects associated to the Adjustment Conduct Terms (TAC). The RTAC (approved by resolution 629/2013) foresees the suspension of processes related to failure to comply with obligations set out by ANATEL and any related fine, applied or estimated, under predetermined conditions.
On January 5, 2016, ANATEL published a decision defining the list of priority projects in case of TAC´s signature between any telecommunication group and ANATEL. It will be accepted: (a) Transport infrastructure based on fiber until the municipal capital; (b) Transport infrastructure through high capacity digital radio until the municipal capital; (c) Deployment of Mobile Personal Service (SMP) providing 3G technology in cities that currently does not have such service; (d) Deployment of Mobile Personal Service (SMP) providing 4G technology in cities with more than 30 thousand inhabitants that currently does not have such service; (e) Copper network shortening through FTTC technology in order to provide Broad Band Service. Furthermore, ANATEL published the factor of regional inequalities to stimulate the implementation of these projects in less developed areas.
Methodology for fines calculation
On August 21, 2014, ANATEL approved the methodology for calculating fines. Methodologies have been defined for eight different types of infractions. The calculations are based on references values plus a number of variables, depending on the infraction. The new rules will apply in cases where there were no further sanctions.
Furthermore, ANATEL put in place two public consultations in 2015. Public Consultation no. 04/2015 was about the methodology to apply fines related to Universal Service Obligations and Public Consultation no. 11/2015 has discussed methodologies to apply fines related to obstacles for the supervision activities.
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Utility Pole Sharing
On December 2014, ANATEL and the Brazilian Electricity Regulatory Agency (Agência Nacional de Energia Elétrica – ANEEL) approved a joint resolution establishing the reference value for sharing utility poles between electricity distributors and telecommunications providers. The resolution aims to solve conflicts and define rules for the use and occupation of utility poles.
The resolution establishes a reference value of R$3.19 as the price to be paid by telecommunications providers to energy companies for each attachment point. The posts of electricity companies are used by telecom operators for fixing wiring services like fixed telephone, cable TV and broadband.
The resolution also provides that an adjustment schedule should be agreed between the parties addressing cases of pole occupation that do not comply with standards. All the regularization costs should be funded by telecommunications services providers.
General Regulation of Consumer Rights - RGC
On March 10, 2014, ANATEL published Resolution 632, which approved the General Regulation of Consumer Rights. This regulation brings important changes in service, billing and supply of all telecommunications services. It also establishes a period ranging from 120 days to 24 months from the date of publication for entering into compliance with the new rules. Most of the new rules that expand the rights of those who use the telecommunications services entered into force on July 8, 2014.
On July 14, 2015, ANATEL approved Resolution No. 654, which establishes the measurement of the satisfaction level of customer’s perceived quality about the telecommunication services. The resolution discipline the general conditions for carrying out research on the quality perceived by users of telecommunications services.
Regulatory Agenda 2015-2016
On June 29, 2015, ANATEL put in public consultation its proposed Regulatory Agenda for the 2015-2016 cycle, and revocation of the General Plan of the Telecommunication Regulatory Update in Brazil (PGR). 33 topics of interest to the sector were included on it, which over the 2nd half of 2015 or the year 2016, would have some progress or would have final approval. Among the listed were: Civil Rights Framework for Internet, Revision of the Concession Agreement and PGMU, review of the quality management model, review of spectrum management model, review the arrangements and scope of telecommunications services, review of the regulation of the SeAC and review of regulatory reversible assets.
New regulatory model
On November 23, 2015, the Ministry of Communications, opened public consultation on the new regulatory framework for telecommunications. The consultation is based on a series of questions under four basic axes - purpose of the public policy, universal policy, public regime versus the private regime, and public concession. The original deadline for contributions was originally December 23, 2015, but the Ministry decided to postpone until January 15, 2016.
C. Organizational Structure
On December 31, 2015, 94.31% of our voting shares were controlled by three major shareholders: SP Telecomunicações Participações Ltda. with 51.46%, Telefónica S.A. with 34.67% and Telefônica Internacional S.A. with 8.18%. Telefónica Internacional S.A., or Telefónica Internacional, is the controlling shareholder of SP Telecomunicações S.A., or SP Telecomunicações. Telefónica Internacional is a wholly owned subsidiary of Telefónica S.A.. Therefore, Telefónica S.A. was the beneficial owner of 94.31% of our voting shares. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.”
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Our current general corporate and shareholder structure is as follows:
Significant Subsidiaries
Our subsidiaries are Telefonica Data S.A., or TData, and GVT Participações S.A., or GVT Part., both wholly owned subsidiaries headquartered in Brazil.
Associated Companies
Aliança Atlântica Holding B.V. (Aliança): Headquartered in Amsterdam, Netherlands, this entity is 50% owned by Telefônica Brasil and holds proceeds generated from the sale of its Portugal Telecom shares in June 2010. For more information, see “Item 4. Information On The Company—A. History and Development of the Company—Historical Background—Corporate Restructuring Involving Telefônica Brasil and Vivo Participações.”
Companhia AIX de Participações (AIX): Headquartered in Brazil, this entity is 50% owned by Telefônica Brasil and holds a 93% equity interest in the Refibra consortium, which was formed to finalize a network of underground fiber pipelines in Brazil in order to make them commercially viable.
Companhia ACT de Participações (ACT): Headquartered in Brazil, this entity is 50% owned by Telefônica Brasil and holds a 2% equity interest in the Refibra consortium.
With the implementation of IFRS 11 Joint Arrangements in January 1, 2013, our investments in these entities were accounted for retroactively using the equity method.
Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act. Section 13(r) requires an issuer to disclose in its annual or quarterly reports filed with the SEC whether the issuer or any of its affiliates has knowingly engaged in certain activities, transactions or dealings with the Government of Iran, relating to Iran or with designated natural persons or entities involved in terrorism or the
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proliferation of weapons of mass destruction during the period covered by the annual or quarterly report. Disclosure is required even when the activities were conducted outside the United States by non-U.S. entities and even when such activities were conducted in compliance with applicable law.
The following information is disclosed pursuant to Section 13(r). None of these activities involved U.S. affiliates of Telefónica or the Company.
Roaming Agreements
Various subsidiaries of our controlling shareholder, Telefónica, have entered into roaming agreements with Iranian telecommunication companies, certain of which are or may be owned or controlled by the government of Iran. Pursuant to such roaming agreements these subsidiaries’ customers are able to roam in the particular Iranian network (outbound roaming) and customers of such Iranian operators are able to roam in the network of Telefónica’s relevant subsidiary (inbound roaming). For outbound roaming, these subsidiaries pay the relevant Iranian operator roaming fees for use of its network by our customers, and for inbound roaming the Iranian operator pays the relevant subsidiary roaming fees for use of our network by its customers.
We have a roaming agreement with Irancell. We recorded no revenues under this agreement in 2015. In addition, as part of the Telefónica group, we adhere to the roaming agreements with Telefónica’s subsidiaries described below.
Telefónica’s subsidiaries were party to the following roaming agreements with Iranian telecommunication companies in 2015:
(1) | Telefónica Móviles España (“TME”), Telefónica’s Spanish directly wholly-owned subsidiary, has respective roaming agreements with (i) Mobile Telecommunication Company of Iran (“MTCI”), (ii) MTN Irancell (“Irancell”), (iii) Taliya (“Taliya”) and (iv) Telecommunications Kish Co. (“TKC”). During 2015, TME recorded the following revenues related to these roaming agreements: (i) 137,997.05 euros from MTCI, (ii) 5,346.42 euros from Irancell, (iii) none from Taliya and (iv) 6.94 euros from TKC |
TME also holds Roaming Hub through its 55% directly-owned subsidiary, Link2One, a.e.i.e. (“L2O”). L2O provides a roaming hub service to Irancell enabling the latter to maintain a relationship with other members of the hub. Some members of the hub are also entities of the Telefónica Group. Under this roaming hub service, for 2015, L2O has billed Irancell 158,957.38 euros.
(2) | Telefónica Germany GmbH & Co. OHG (“TG”), Telefónica’s German 63.22% indirectly-owned subsidiary, has a roaming agreement with MTCI. TG recorded 249,902.03 euros in roaming revenues under this agreement in 2015. |
(3) | Telefónica UK Ltd (“TUK”), Telefónica’s English directly wholly-owned subsidiary, has a roaming agreement with Irancell. TUK recorded 3.65 euros in roaming revenues under this agreement in 2015. |
(4) | Telefónica Argentina, S.A. and Telefónica Móviles Argentina, S.A. (together TA), Telefónica’s Argentinean directly wholly-owned subsidiaries, have a roaming agreement with Irancell. TA recorded 61.37 euros in roaming revenues under this agreement in 2015. |
(5) | E-Plus Mobilfunk GmbH& Co. KG (“E-Plus”), Telefónica’s German 100% indirectly-owned subsidiary, has respective roaming agreements with MTCI, Irancell and Taliya. During 2015, E-Plus recorded 4,303.13 euros from Irancell. |
(6) | Pegaso Comunicaciones y Sistemas, S.A. de C.V. (“PCS”), Telefónica’s Mexican directly wholly-owned subsidiary, has a roaming agreement with Irancell. PCS recorded no revenues under this agreement in 2015. |
(7) | Telefónica Celular de Nicaragua, S.A. (“TCN”), Telefónica’s Nicaraguan 60% indirectly-owned subsidiary, has a roaming agreement with Irancell. TCN recorded no revenues under this agreement in 2014. |
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The net profit recorded by Telefónica’s subsidiaries pursuant to these agreements did not exceed the related revenues recorded thereunder.
The purpose of all of these agreements is to provide the Telefónica group’s customers with coverage in areas where the group does not own networks. For that purpose, Telefónica’s subsidiaries intend to continue maintaining these agreements.
International Carrier Agreement with Iran
Telefónica de España has an international carrier agreement with Telecom Infrastructure Company of Iran, or TICI.
Pursuant to this agreement, both companies interconnect their networks to allow international exchange of telephone traffic. Telefónica de España recorded 4,569.00 euros in revenues under this agreement in 2015. The net profit recorded by Telefónica de España pursuant to this agreement did not exceed such revenues.
The purpose of this agreement is to allow exchange of international telephone traffic. Consequently, Telefónica intends to continue maintaining this agreement.
D. Property, Plant and Equipment
On December 31, 2015, we had fixed and mobile operations in 2,764 properties, 1,492 of which we own, of which 21 are administrative buildings. Besides that, we have entered into standard leasing agreements to rent the remaining properties, under which 49 administrative areas, 10 kiosks and 300 retail stores are leased.
Our main physical properties for providing fixed line telephone services involve the segments of switching (public switching telephone network, or PSTN), transmission (optic and wireless systems), data communication (multiplex devices, IP network), infrastructure (energy systems and air conditioning) and external network (fiber optic and metallic cables), which are distributed in many buildings throughout the state of São Paulo and in the main cities outside the state of São Paulo. Some of these buildings are also used for administrative and commercial operations.
Our main physical property for mobile services consists of transmission equipment, switching equipment, base stations, and other communication devices, such as voicemail, prepaid service, short message service, home location registers, signaling transfer point, packet data switching network and gateways. All switches, cellular sites, administrative buildings, administrative facilities, warehouses and stores are insured against damages for operation risks.
Pursuant to Brazilian legal procedures, liens have been attached to several properties pending the outcome of various legal proceedings to which we are a party. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.” In addition, certain of our properties are still pending the applicable licenses and approvals from the local fire departments.
We are constantly making improvements to our facilities and network to meet customer demand and to improve the level of services we offer our clients.
On December 31, 2015, the net book value of our property, plant and equipment amounted R$30.5 billion (R$20.5 billion on December 31, 2014), which included reversible assets in the amount of R$7.9 billion.
Environmental Matters
Brazilian Federal, State and Municipal legislation provide for the control and protection of the environment. These laws govern the appropriate use of natural resources, control of atmospheric emissions and noise, treatment of effluents, handling and final disposal of hazardous materials, amongst others.
Under these laws, certain environmental licenses must be secured prior to the construction, installation, expansion and operation of facilities that use natural resources or that may pollute the environment, including those related to installation and operation of radio/cell stations and antennas. According the stage of the project, the environmental licenses may be: (1) a preliminary license, which approves the location and design of the project and
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must be obtained in the early stages of the project or activity to certify its environmental feasibility; (2) an installation license, which authorizes the installation of the project or activity in accordance with the specifications set forth in approved plans, programs and projects; or (3) an operation license, which authorizes commencement of operations once the conditions for compliance with the preliminary and installation licenses are met, and may impose additional conditions applicable to the project’s operations.
Besides environmental licensing, other environmental regulations may affect our operations, such as, among other matters, regulations related to emissions into the air, soil and water, take-back systems, recycling and waste management, protection and preservation of fauna, flora and other features of the ecosystem, water use, interference with areas of cultural and historical relevance and with Conservation Units (UCs) or their surroundings, Permanent Preservation Areas (APPs) and contaminated areas.
Regarding the last subject matter, in accordance with the Environmental National Policy (Law No. 6,938/1981), the owner of a real estate property located in a contaminated area may be compelled by the relevant environmental agency to clean up the area, regardless of fault and the damage causes. Environmental authorities have been adopting an increasingly stringent position in connection with the handling of contaminated areas, including the creation of environmental standards to preserve the quality of land and underground water. Non-compliance with guidelines set by the relevant environmental and health authorities with respect to surveys and analyses of potentially contaminated areas or the exposure of persons to toxic fumes or residues may result in administrative and legal penalties for the developments and their management. We perform periodic environmental investigations to assess any possible liability with respect to contamination of soil.
We are subject to administrative review of our activities and corporations found to be in violation of these administrative environmental regulations can be fined up to R$50 million, have their operations suspended, be barred from entering into certain types of government contracts, be required to repair or provide indemnification in respect of any environmental damages they cause, be required to suspend tax benefits and incentives, among others.
In Brazil, violating environmental rules or regulations may result in civil, administrative or criminal liability. With respect to civil liability, Brazilian environmental laws adopt a standard of unlimited strict, several and joint liability in determining the obligation to remediate damages caused to the environment. In addition, Brazilian courts may pierce the corporate veil when and if it poses an obstacle to the full recovery of environmental damages.
We have a series of systems in place to protect our networks and operations from environmental damage.
Additionally, we have systems in place for the proper disposal of batteries and oil, in our construction operations and to address other environmental issues that may arise in the operation and maintenance of our properties. We also maintain the control of radio frequency energy levels transmitted by our antennas, in accordance with current legislation. The energy consumption of our network infrastructure is very high and as a result we have implemented energy efficient technologies in order to reduce consumption and meet greenhouse gas emission reduction targets. We have also invested in clean energy as the source of our energy consumption, reaching the amount of 23% currently consumed from this type of source.
Also, to comply with Brazilian Federal regulations, (National Waste Policy - Law 12,305/10), we were the first telecommunications company in Brazil to offer collection points at all of our stores for old mobile phones, accessories and batteries, where customers and other individuals can dispose of their used equipment. We properly dispose of these hazardous materials. Lastly, we have implemented an environmentally friendly data center, which includes intelligent air conditioning, water reuse, bicycles and bike racks, water taps with flow control and dual flush discharge, among other measures.
Moreover, we must emphasize that we perform periodic environmental investigations to assess any possible liability with respect to contamination of soil and groundwater. Currently, we are executing remediation measures in the following units located at the Municipality of São Paulo: (i) Ibirapuera; (ii) Brooklin; (iii) Santa Efigênia; (iv) Santo Amaro; (v) Paraíso; and (vi) Itaquera.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. | Operating Results |
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other information appearing elsewhere in this annual report and in conjunction with the financial information included under “Item 3. Key Information—A. Selected Financial Data.” We prepared our consolidated financial statements included in this annual report in accordance with IFRS.
Overview
Our results of operations are principally affected by the following key factors.
Brazilian Economic Environment
The Brazilian economy has experienced varying rates of growth this decade. According to market data, the Brazilian GDP decreased by approximately 3.5% in 2015 compared to 0.1% in 2014.
Consumer prices, as measured by the IPCA, increased 10.67 % in 2015. Accordingly, growth in consumer prices was above the upper limit of the percentage points of the inflation target established by the Central Bank of 4.5%. In 2013 and 2014, the increases in IPCA were 5.9% and 6.4%, respectively. Inflation, as measured by the Brazilian general price index (Índice Geral de Preços - Disponibilidade Interna), or the IGP-DI, calculated by the FGV, which includes wholesale, retail and home-building prices, increased 5.5% and 3.8% in 2013 and 2014, respectively. In 2015, the IGP-DI increased 10.70%.
As inflation rates measured by IPCA remain above the upper limit of the inflation target, the Central Bank increased the basic interest rate (Sistema Especial de Liquidação e de Custódia), or SELIC rate, to 14.25% by the end of 2015, from 11.75% as of the end of 2014.
Brazil closed 2015 with a trade balance surplus of US$19.7 billion, compared to a deficit of US$3.9 billion at the end of 2014. Exports fell by 15.1% to US$191.1 billion, and imports decreased 25.1%, to US$171.6 billion. Foreign Direct Investments inflows into the country have decreased, reaching US$75.1 billion, compared to US$97 billion in 2014. The portfolio investments have also decreased to US$18.2 billion in 2015, in comparison to US$41 billion in 2014. As a result of this performance of external accounts, international reserves at the end of 2015 were US$369 billion, a decrease of US$5.8 billion compared to December 31, 2014.
This worsening in domestic economic data, such as inflation and interest rates, was accompanied by a primary fiscal deficit of 1.88% of the GDP, and, in addition to increased risk aversion in the capital markets, led Brazil to lose the investment grade by two rating agencies. In September this year, S&P was the first to remove the investment grade from the country, followed by Fitch in November. The three main agencies (S&P, Fitch and Moody’s) hold negative outlook. The J.P. Morgan Emerging Markets Bond Index Plus (EMBI + Brazil), which tracks total returns for traded external debt instruments in emerging markets, reached 523 basis points by the end of 2015, up from 259 basis points at the end of 2014 and 224 basis points at the end of 2013.
As a consequence, the real depreciated against the U.S. dollar in 2015 by 47%. The exchange rate on December 31, 2015 was R$3.9048 per US$1.00, from R$2.6556 per US$1.00 on December 31, 2014.
Our business is directly affected by the external environment and the Brazilian economy. If the Brazilian economy stays for a prolonged period in this recessive scenario, then demand for some telecommunications services is likely to decline. Similarly, depreciation of the Brazilian real against the U.S. dollar may reduce the purchasing power of Brazilian consumers and, as a consequence, negatively affect the ability of our customers to pay for our telecommunications services.
Impact of Inflation on Our Results of Operations
Before 2006, the fees we charged our customers were periodically adjusted by ANATEL based on the inflation rates measured by the IGP-DI.
Starting in 2006, telephone fees were indexed to the IST, which is a basket of Brazilian indexes that reflect the telecommunications sector’s operating costs. Such indexing reduced inconsistencies between revenue and costs in
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our industry and therefore reduced the adverse effects of inflation on our business. The IST for the twelve month period ending December 2015 was 11% according to the most recent data published by ANATEL.
The table below shows the Brazilian general price inflation (according to the IGP-DI, IPCA and the IST) for the years ended December 31, 2011 through 2015:
Inflation Rate (%) as Measured by IGP-DI(1) | Inflation Rate (%) as Measured by IPCA(2) | Inflation Rate (%) as Measured by IST(3) | ||||||||||||
December 31, 2015 | 10.7 | 10.67 | 11.14 | |||||||||||
December 31, 2014 | 3.8 | 6.4 | 5.9 | |||||||||||
December 31, 2013 | 5.5 | 5.9 | 5.0 | |||||||||||
December 31, 2012 | 8.1 | 5.8 | 4.9 | |||||||||||
December 31, 2011 | 5.0 | 6.5 | 4.9 |
(1) | Source: IGP-DI, as published by the FGV. |
(2) | Source: IPCA, as published by the IBGE. |
(3) | Source: IST, as published by the Agência Nacional de Telecomunicações. |
Discussion of Critical Accounting Estimates and Policies
The preparation of the financial statements included in this annual report in accordance with IFRS involves certain assumptions and estimates that affect the amounts presented for revenue, expenses, assets and liabilities and disclosures of contingent liabilities in the notes to the financial statements. Therefore, the uncertainty relating to these assumptions and estimates could lead to results that require a significant adjustment to the accounting value of assets or liabilities affected in future periods. Although we review these estimates and assumptions in the ordinary course of business, the presentation of our financial condition and results of operations often requires our management to make judgments regarding the effects on our financial condition and results of operations of matters that are inherently uncertain. Actual results may differ from those estimated under different variables, assumptions or conditions. For a summary of significant accounting policies and methods used in the preparation of those financial statements, see Note 3 to our Consolidated Financial Statements. The areas involving a higher degree of judgment or complexity are described below.
Accounting for long-lived assets
Property, plant and equipment and intangible assets, other than goodwill, are recorded at acquisition cost. Property, plant and equipment and intangible assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives. Intangible assets with indefinite useful lives, including goodwill, are not amortized, but are instead, subject to an impairment test on a yearly basis and whenever there is an indication that such assets may be impaired.
Accounting for long-lived assets and intangible assets involves the use of estimates for determining the fair value at their acquisition dates, particularly for assets acquired in business combinations and for determining the useful lives over which they are to be depreciated or amortized as well as their residual value. Useful lives are assessed annually and changed when necessary to reflect current evaluation on the remaining lives in light of technological change, network investment plans, prospective utilization and physical condition of the assets concerned.
The carrying values and useful lives applied to the principal categories of property, plant and equipment, and intangibles, are disclosed in Notes 12 and 13 to our consolidated financial statements.
Impairment of nonfinancial assets, including goodwill
An impairment loss exists when the accounting value of an asset or cash-generating unit exceeds its recoverable amount, which is the higher between the fair value less selling costs and the value in use. The estimated fair value less selling costs is based on the information available from transactions involving the sale of similar assets or the market price less additional costs regarding the disposition of such asset. The value in use is based on the model of discounted cash flow. Cash flows are derived from the budget and do not include activities of reorganization for which the company has not yet been committed or significant future investments that will improve the group of
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assets of the cash-generating unit subject to the test. The recoverable amount is sensitive to the discount rate used in the method of discounted cash flows as well as to the projected future cash flow and the expected future growth rate used for the purposes of determining terminal value. Furthermore, additional factors, such as technological obsolescence, the suspension of certain services and other circumstantial changes are taken into account.
The carrying value of goodwill and the key assumptions used in performing the annual impairment assessment are disclosed in Notes 3(i) and 13 to our consolidated financial statements.
Provisions for tax, labor, civil and regulatory proceedings
We record provisions for tax, labor, civil and regulatory claims where an outflow of resources is considered probable and a reasonable estimate can be made of the likely outcome. The assessment of the likelihood of loss includes assessing the available evidence, the hierarchy of laws, the available jurisprudence, the most recent court decisions and its materiality in the legal system as well as the evaluation of the case by external counsels. Provisions are reviewed and adjusted to take into account changes in circumstances such as the applicable prescriptive period, results from tax inspections or additional exposure identified based on newly issued court decisions. A significant change in these circumstances or assumptions could result in a corresponding increase or decrease the amount of our provisions.
Additional information on provisions for tax, labor, civil and regulatory proceedings is disclosed in Notes 3(p) and 19 to our consolidated financial statements.
Pension and other post-retirement benefit plan
The cost of defined benefit retirement plans and other post-employment medical care benefits and the present value of pension and other postretirement obligations are determined using actuarial valuation methods. The actuarial valuation methods involve the use of assumptions about discount rates, expected future salary increases, mortality rates, health care costs trend rates and future increases in retirement benefits and pensions. The obligation of a defined benefit is highly sensitive to changes in these assumptions. All assumptions are reviewed at each year-end. The mortality rate is based on mortality tables available in the country. Future increases in wages and retirement benefits and pensions are based on expected future inflation for Brazil. The assumptions reflect historical experience and our judgment regarding future expectations.
The value of our net pension obligation on December 31, 2015, the key financial assumption used to measure the obligation as well as the sensitivity of our pension liability on December 31, 2015 and of the income statement charge in 2013, 2014 and 2015 to changes in these assumptions, is disclosed in Note 32 to our consolidated financial statements.
Fair value of financial instruments
When the fair value of financial assets and liabilities presented on the balance sheet cannot be obtained in active markets, it is determined using valuation techniques, including the method of discounted cash flow. The data obtained for the use of these methods are based as much on the information prevailing in the market as possible. However, when it is not feasible to obtain such information in the market, a certain assumption level is required to establish the fair value. The assumption includes consideration of the data that was used, such as the liquidity risk, credit risk and volatility. Changes in the assumptions regarding these factors could affect the presented fair value of financial instruments.
Additional information on fair value of financial instruments is disclosed in Notes 3(k), (l) and (m) and 33 to our consolidated financial statements.
Taxes
There may be uncertainties regarding the interpretation of complex tax regulations and the amount and timing of future taxable income. We record provisions based on reasonable estimates for potential disagreement with tax authorities from the jurisdictions in which we operate. The value of these provisions is based on several factors such as experience from previous tax audits and different interpretations of tax regulations by the taxable entity and the competent tax authority in charge. Such differences of interpretation may arise in a wide variety of subjects,
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depending on the prevailing conditions in the domicile of the company. As a result, we may be required to pay more than our provisions or to recover less than the related judicial assets recognized.
We evaluate the recoverability of deferred tax assets based on estimates of future results. This recoverability ultimately depends on our ability to generate taxable profits over the period in which the temporary difference is deductible. The analysis considers the reversal period of deferred tax liabilities, as well as estimates of profits from operations, based on updated internal projections reflecting the latest trends.
Determining the proper valuation of the tax items depends on several factors, including an estimate of the period and the realization of the deferred tax asset and the expected date of payments of these taxes. The actual flow of receipt and payment of income tax could differ from estimates made by us, as a result of changes in tax laws or of unexpected future transactions that may impact tax balances.
Additional information on taxes is disclosed in Notes 3(q), 8 and 17 to our consolidated financial statements.
Revenue recognition
Customer Loyalty Program
We have a customer loyalty program that allows customers to accumulate points when generating traffic for the use of our mobile services. The accrued points may be exchanged for handsets or services, provided the customer has a minimum stipulated balance of points. The consideration received is allocated to the cost of handsets or services and the related points earned based on the relative fair value. The fair value of the points is calculated by dividing the discount value granted as a result of the customer loyalty program by the amount of points needed to carry out the redemption. The fair value accrued on the balances of generated points is deferred and recognized as income upon redemption of points.
For determining the quantity of points to be recognized, we apply statistical techniques, which take into consideration assumptions such as estimated redemption rates, expiration dates, cancellation of points and other factors. These estimates are subject to variations and uncertainties due to changes in the redemption behavior of the customers.
A change in the assumptions regarding these factors could affect the estimated fair value of the points under the customer loyalty program and it could affect the apportionment of revenue among the elements and, as a result, revenues in future years.
Multiple-element arrangements
Bundled offers that combine different elements are assessed to determine whether it is necessary to separate the different identifiable components and apply the corresponding revenue recognition policy to each element. Total package revenue is allocated among the identified elements based on their respective fair values.
Determining fair values for each identified element requires estimates that are complex due to the nature of the business.
Changes in estimates of fair values could affect the apportionment of revenue among the elements and, as a result, revenues in future years.
Additional information on revenue recognition is disclosed in Note 3(u) to our consolidated financial statements.
Provision for doubtful debts
We provide services to consumer and business customers, mainly on credit terms. We know that certain debts due to us will not be paid through the default of a small number of our customers. Estimates, based on our historical experience, are used to determine the level of debts that we believe will not be collected. These estimates include such factors as the current state of the economy and particular industry issues.
Additional information on provision for doubtful debts is disclosed in Notes 3(b) and 6 to our consolidated financial statements.
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Sources of Revenue
The breakdown of our gross operating revenue is presented net of discounts granted. In addition, we categorize our revenue according to the following groups:
· | Fixed and mobile telephone services |
Includes revenues from fixed and mobile telephone, principally:
· | Local: includes the sum of revenues from monthly subscription fees, installation fees, local services, public telephones and fixed-to-mobile revenues; |
· | Domestic long-distance: includes the sum of fixed-to-mobile revenues and domestic long distance calls and domestic long-distance calls placed on public telephones; |
· | International long-distance: includes the sum of revenues from international long distance calls and international long-distance placed on public telephones; and |
· | Usage charges: include measured service charges for calls, monthly fee and other similar charges. |
· | Data Transmission and value added services |
· | Wholesale: includes the sum of infrastructure rental revenues; and |
· | Value Added Services: VIVO Call Sound, Vivo Online Security, List Assistance, E-Health messages, and P2A Interactivity Services (Kantoo, Vivo Gol de Placa, Vivo Ligue Bebe, Vivo Futebol, Vivo Nutrição); and |
· | Data Transmission: Fixed and mobile data including FTTH, xDSL, cable on the fixed side and 3G and 4G on the mobile side. |
· | Interconnection fees |
· | Interconnection fees are amounts we charge other cellular and fixed-line service providers for the use of our network. |
· | Pay TV |
· | Includes TV services through satellite, cable or IPTV technology. |
· | Sale of goods and equipment |
· | The sale of wireless devices and accessories. |
· | Other Services |
· | Other services include integrated solution services offered to residential and corporate clients, such as Internet access, private network connectivity and leasing of computer equipment; and |
· | Other telecommunications services such as extended service, detects, voice mail and cellular blocker, among others. |
Results of Operations
The following table sets forth certain components of our net income for each year ended December 31, 2015, December 31, 2014 and December 31, 2013 as well as the percentage change of each component. In 2015, we acquired 100% of shares of GVT Participações S.A. See Note 4 to our consolidated financial statements and “Item 4.A Historical Background—GVT Acquisition.” for further information.
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Results of GVT are consolidated into our financial statements as from May 1, 2015. Consequently, our results of operations for the year ended December 31, 2015 are not comparable with our results of operations for the years ended December 31, 2014 and 2013.
Year ended December 31, | Percent change | Percent change | ||||||||||||||||||
2015 | 2014 | 2013 | 2015-2014 | 2014-2013 | ||||||||||||||||
(in millions of reais) | ||||||||||||||||||||
Net operating revenue | 40,286.8 | 35,000.0 | 34,721.9 | 15.1 | % | 0.8 | % | |||||||||||||
Cost of services and goods | (20,345.1 | ) | (17,222.7 | ) | (17,542.2 | ) | 18.1 | % | (1.8 | %) | ||||||||||
Gross profit | 19,941.7 | 17,777.3 | 17,179.7 | 12.2 | % | 3.5 | % | |||||||||||||
Operating expenses: | ||||||||||||||||||||
Selling | (12,005.5 | ) | (10,466.7 | ) | (9,686.1 | ) | 14.7 | % | 8.1 | % | ||||||||||
General and administrative | (2,142.4 | ) | (1,803.9 | ) | (2,177.9 | ) | 18.8 | % | (17.2 | %) | ||||||||||
Other operating expenses, net | (554.2 | ) | (397.7 | ) | (383.4 | ) | 39.4 | % | 3.7 | % | ||||||||||
Total operating expenses, net | (14,702.1 | ) | (12,668.3 | ) | (12,247.4 | ) | 16.0 | % | 3.4 | % | ||||||||||
Equity in earnings (losses) of associates | 2.0 | 6.9 | (55.1 | ) | (71.0 | %) | (112.5 | %) | ||||||||||||
Operating income | 5,241.6 | 5,115.9 | 4,877.2 | 2.5 | % | 4.9 | % | |||||||||||||
Financial expenses, net | (848.2 | ) | (362.0 | ) | (214.8 | ) | 134.3 | % | 68.5 | % | ||||||||||
Income before taxes | 4,393.4 | 4,753.9 | 4,662.4 | (7.6 | %) | 2.0 | % | |||||||||||||
Income and social contribution taxes | (973.2 | ) | 182.7 | (946.5 | ) | (632.7 | %) | ̶ | ||||||||||||
Net income | 3,420.2 | 4,936.6 | 3,715.9 | (30.7 | %) | 32.9 | % | |||||||||||||
Net income attributable to: | ||||||||||||||||||||
Controlling shareholding | 3,420.2 | 4,936.6 | 3,715.9 | (30.7 | %) | 32.9 | % | |||||||||||||
Net income | 3,420.2 | 4,936.6 | 3,715.9 | (30.7 | %) | 32.9 | % |
Results of Operations for the Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
Net Operating Revenue
Net operating revenue increased by 15.1% to R$40,286.8 million in 2015 from R$35,000.0 million in 2014 mainly due to the consolidation effect of GVT from May 1, 2015, which totaled R$3,950.3 million. Excluding such effect, net operating revenue increased by 3.8% or R$1,336.5 million in 2015 to R$36,336.5 million.
Gross Operating Revenue
Our gross operating revenue increased by 16.0% to R$60,997.5 million in 2015 from R$52,602.9 million in 2014, primarily as a result of the consolidation effect of GVT from May 1, 2015, which totaled R$6,955.7 million. Excluding that effect, gross operating revenue increased 2.7% or R$1,438.9 million in 2015 to R$54,041.8 million, driven by increases in revenues from telecommunications services and sale of goods and equipment. The table and descriptions below set forth explanations for these variations:
Year ended December 31, | Percent change | |||||||||||
2015 | 2014 | 2015-2014 | ||||||||||
(in millions of reais) | ||||||||||||
Telecommunications services (a) | 57,063.6 | 49,178.0 | 16.0 | % | ||||||||
Sale of goods and equipment | 3,933.9 | 3,424.9 | 14.9 | % | ||||||||
Gross operating revenue | 60,997.5 | 52,602.9 | 16.0 | % | ||||||||
Value-added and other indirect taxes | (20,710.7 | ) | (17,602.9 | ) | 17.7 | % | ||||||
Net operating revenues | 40,286.8 | 35,000.0 | 15.1 | % |
(a) | It includes revenues from: telephone services; data transmission and value added services; interconnection fees charged; pay TV and other services. |
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Telecommunications services: Revenue from telecommunications services increased by R$7,885.6 million in 2015, or 16.0%, compared to 2014, primarily as a result of the consolidation effect of GVT from May 1, 2015, which totaled R$6,955.7 million. Excluding that effect, telecommunications services revenue increased by 1.9% or R$929.9 million in 2015, driven by (1) a double-digit increase in Data Transmission and Value Added Services Revenues from the successful sales of mobile data plans and packages and higher smartphone penetration within our customer base and (2) a double-digit increase of Pay TV Revenues from increases in our DTH and IPTV customer base and increased adoption of high definition television services, partially compensated by the decreasing Outgoing Voice and Interconnection Revenues, result of the 33% decrease in mobile termination rates mandated by ANATEL, which became effective in February 2015, as described in “Item 4. Information On The Company—B. Business Overview—Regulation of the Brazilian Telecommunications Industry—Mobile Services—Interconnection Fees—Mobile service”, were the main factors that contributed for the variation.
Sale of goods and equipment: Revenues from the sale of goods and equipment in 2015 increased by R$509.0 million or 14.9% compared to 2014, impacted by (1) the greater share of higher-value devices in the handset portfolio, and (2) the increase in prices due to the depreciation of the Real (R$) against the U.S. Dollar (US$).
Cost of Services and Goods
Cost of services and goods increased by R$3,122.4 million, or 18.1%, to R$20,345.1 million in 2015 from R$17,222.7 million in 2014, mainly due to the consolidation effect of GVT from May 1, 2015, which totaled R$2,216.4 million. Excluding such effect, cost of services and goods increased by 5.3% or R$906.0 million in 2015 to R$18,128.7 million. The table and descriptions below set forth explanations for these variations:
Year ended December 31, | Percent change | |||||||||||
2015 | 2014 | 2015-2014 | ||||||||||
(in millions of reais) | ||||||||||||
Cost of goods sold | (2,597.1 | ) | (2,107.1 | ) | 23.3 | % | ||||||
Depreciation and amortization | (5,269.6 | ) | (4,067.3 | ) | 29.6 | % | ||||||
Outside services and other | (5,400.9 | ) | (4,074.1 | ) | 32.6 | % | ||||||
Interconnection fees | (2,595.9 | ) | (3,176.3 | ) | (18.3 | %) | ||||||
Rent, insurance, condominium fees, and leased lines | (2,051.1 | ) | (1,556.4 | ) | 31.8 | % | ||||||
Personnel | (813.6 | ) | (549.4 | ) | 48.1 | % | ||||||
Taxes, fees and contributions | (1,616.9 | ) | (1,692.1 | ) | (4.4 | %) | ||||||
Cost of services and goods | (20,345.1 | ) | (17,222.7 | ) | 18.1 | % |
Cost of goods sold: Our cost of goods sold increased by R$490.0 million, or 23.3%, to R$2,597.1 million in 2015 from R$2,107.1 million in 2014, impacted by (1) the greater share of higher-value devices in the handset portfolio, and (2) the increase in prices due to the depreciation of the Real (R$) against the U.S. Dollar (US$).
Depreciation and amortization: Costs related to depreciation and amortization increased by R$1,202.3 million, or 29.6%, to R$5,269.6 million in 2015 from R$4,067.3 million in 2014, primarily as a result of the consolidation effect of Telefônica and GVT as of May 1, 2015, which totaled R$841.1 million. Excluding that effect, depreciation and amortization increased by 8.9% or R$361.2 million, particularly influenced by (1) the acquisition of the 700MHz license in December 2014, and (2) to additions to fixed assets in the year.
Outside services and other: Costs related to outside services and other increased by R$1,326.8 million, or 32.6%, to R$5,400.9 million in 2015 from R$4,074.1 million in 2014, primarily as a result of the consolidation effect of Telefônica and GVT as of May 1, 2015, which totaled R$701.2 million. Excluding that effect, outside services and other increased by 15.4% or R$625.6 million, driven by (1) higher expenses with network maintenance and purchase of TV content, and (2) higher expenses with electricity, due to the increase in unit prices.
Interconnection fees: Costs related to interconnection fees decreased by R$580.4 million, or 18.3%, to R$2,595.9 million in 2015, from R$3,176.3 million in 2014, primarily as a result of the 33% decrease in mobile termination rates mandated by ANATEL, which became effective in February 2015. Excluding the consolidation effect of GVT from May 1, 2015, which totaled R$113.3 million, interconnection fees decreased by 21.8% or R$693.7 million.
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Rent, insurance, condominium fees and leased lines: Costs related to rent, insurance, condominium fees and leased lines increased by R$494.7 million, or 31.8%, to R$2,051.1 million in 2015, from R$1,556.4 million in 2014, primarily as a result of the consolidation effect of GVT from May 1, 2015, which totaled R$220.3 million. Excluding that effect, rent, insurance, condominium fees and leased lines increased by 17.6% or R$274.4 million, impacted by higher rental and leasing expenses in connection with sites where we install our antennas, due to the expansion in 4G coverage and focus on service quality.
Personnel: Personnel expenses increased by R$264.2 million, or 48.1%, to R$813.6 million in 2015 from R$549.4 million in 2014, primarily as a result of the consolidation effect of GVT from May 1, 2015, which totaled R$280.8 million. Excluding that effect, personnel decreased by 3.0% or R$16.6 million, benefited by the organizational restructuring that took place throughout the year, partially offset by (1) the increase in salaries from collective bargaining agreement of 7.0% granted in January 2015 and (2) higher expenses with health insurance.
Taxes, fees and contributions: Taxes, fees and contributions decreased by R$75.2 million, or 4.4%, to R$1,616.9 million in 2015, from R$1,692.1 million in 2014, due to lower regulatory taxes. Excluding the consolidation effect of GVT from May 1, 2015, which totaled R$59.7 million, taxes, fees and contributions decreased by 8.0% or R$134.9 million.
Operating Expenses
Operating expenses increased by R$2,033.8 million, or 16.1%, to R$14,702.1 million in 2015, from R$12,668.3 million in 2014, primarily as result of the consolidation effect of GVT from May 1, 2015, which totaled R$1,127.9 million. Excluding such effect, operating expenses increased by 7.2% or R$905.9 million in 2015 to R$13,574.2 million. The table and descriptions below set forth explanations for these variations:
Year ended December 31, | Percent change | |||||||||||
2015 | 2014 | 2015-2014 | ||||||||||
(in millions of reais) | ||||||||||||
Selling expenses | (12,005.5 | ) | (10,466.7 | ) | 14.7 | % | ||||||
General and administrative expenses | (2,142.4 | ) | (1,803.9 | ) | 18.8 | % | ||||||
Other net operating income (expense) | (554.2 | ) | (397.7 | ) | 39.5 | % | ||||||
Total | (14,702.1 | ) | (12,668.3 | ) | 16.1 | % |
Selling expenses: Our selling expenses increased by R$1,538.8 million, or 14.7%, to R$12,005.5 million in 2015 from R$10,466.7 million in 2014, primarily as a result of the consolidation effect of GVT from May 1, 2015, which totaled R$836.4 million. Excluding that effect, selling expenses increased by 6.7% or R$702.4 million, was influenced mostly by (1) higher commissioning expenses linked to the growth of the mobile subscriber base and the higher share of data, in addition to (2) higher publicity and marketing expenses.
General and administrative expenses: Our general and administrative expenses increased by R$338.5 million, or 18.8%, to R$2,142.4 million in 2015, from R$1,803.9 million in 2014, primarily as a result of the consolidation effect of GVT from May 1, 2015, which totaled R$231.2 million. Excluding that effect, general and administrative expenses increased by 5.9% or R$107.3 million, driven by higher expenses with third-party service contracts.
Other net operating income (expense): Other net operating expenses increased by R$156.5 million, or 39.5%, to R$554.2 million in 2015, from R$397.7 million in 2014. This increase is a result of the consolidation effect of GVT from May 1, 2015, which totaled R$60.3 million. Excluding that effect, other net operating income (expense) increased by 24.2% or R$96.2 million, mostly affected by the higher civil contingencies in the period.
Financial Expenses, Net
For the year ended December 31, 2015, net financial expenses reached R$848.2 million, increasing by R$486.2 million or 134.3% when compared to the period ended December 31, 2014, mainly due to higher average indebtedness in 2015, as a result of the consolidation effect of GVT from May 1, 2015. Such consolidation effect resulted in an additional R$ 461.8 million of net financial expenses, from May 1, 2015 to December 31, 2015. Excluding that effect, net financial expenses increased by 6.7% or R$24.4 million in 2015.
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Income and Social Contribution Taxes
We recorded an expense from income and social contribution taxes in the amount of R$973.2 million in 2015, compared to an income of R$182.7 million in 2014. This variation was a result of Law No. 12,973, which became effective in 2014. Law No. 12,973 caused us to revise our tax basis of certain intangible assets resulting from business combinations, which resulted in a positive impact of R$1,196 million in 2014. For additional information, see “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations” and Note 28 to our consolidated financial statements.
The effective rate of income and social contribution taxes increased to 22.2% in 2015 compared with -3.8% in 2014, as 2014 result was impacted by the revisions described, apart from a higher distribution of interest on shareholders’ equity during 2014, which is deductible for purposes of calculating income and social contribution taxes based on income.
Results of Operations for the Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
Net Operating Revenue
Net operating revenue increased by 0.8% to R$35,000.0 million in 2014 from R$34,721.9 million in 2013 mainly due to the variations in our gross operating revenue discussed below.
Gross Operating Revenue
Our gross operating revenue increased by 1.3% to R$52,602.9 million in 2014 from R$51,908.0 million in 2013, primarily as a result of the increases in revenues from telecommunications services. The table and descriptions below set forth explanations for these variations:
Year ended December 31, | Percent change | |||||||||||
2014 | 2013 | 2014-2013 | ||||||||||
(in millions of reais) | ||||||||||||
Telecommunications services (a) | 49,178.0 | 48,428.2 | 1.5 | % | ||||||||
Sale of goods and equipment | 3,424.9 | 3,479.8 | (1.6 | %) | ||||||||
Gross operating revenue | 52,602.9 | 51,908.0 | 1.3 | % | ||||||||
Value-added and other indirect taxes | (17,602.9 | ) | (17,186.1 | ) | 2.4 | % | ||||||
Net operating revenues | 35,000.0 | 34,721.9 | 0.8 | % |
(a) | It includes revenues of: telephone services; data transmission and value added services; interconnection fees charged; pay TV and other services. |
Telecommunications services: Revenue from telecommunications services increased by R$749.8 million in 2014, or 1.5%, compared to 2013, primarily as a result of (1) a double-digit increase in Data Transmission and Value Added Services Revenues from the increased sales of data services, higher smartphone penetration within our customer base and migration of fixed broadband clients to higher speeds, increasing ARPU and (2) a double-digit increase of Pay TV Revenues from increases in our DTH and IPTV customer base and increased adoption of high definition television services, partially compensated by the decreasing Outgoing Voice and Interconnection Revenues, result of the 25% decrease in mobile termination rates mandated by ANATEL, which became effective in February 2014, as described in “Item 4. Information On The Company—B. Business Overview—Regulation of the Brazilian Telecommunications Industry—Mobile Services—Interconnection Fees—Mobile service”.
Sale of goods and equipment: Revenues from the sale of goods and equipment in 2014 decreased by R$54.9 million or 1.6% compared to 2013, primarily as a result of the decline in the number of handsets sold due to the restrictive subsidy policy to which we are subject and which is currently granted only on sales of handsets to postpaid users with 4G data plans.
Cost of Services and Goods
Cost of services and goods decreased by R$319.5 million, or 1.8%, to R$17,222.7 million in 2014 from R$17,542.2 million in 2013. The table and descriptions below set forth explanations for these variations:
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Year ended December 31, | Percent change | |||||||||||
2014 | 2013 | 2014-2013 | ||||||||||
(in millions of reais) | ||||||||||||
Cost of goods sold | (2,107.1 | ) | (2,117.9 | ) | (0.5 | %) | ||||||
Depreciation and amortization | (4,067.3 | ) | (4,265.1 | ) | (4.6 | %) | ||||||
Outside services and other | (4,074.1 | ) | (3,645.4 | ) | 11.8 | % | ||||||
Interconnection fees | (3,176.3 | ) | (3,842.3 | ) | (17.3 | %) | ||||||
Rent, insurance, condominium fees, and leased lines | (1,556.4 | ) | (1,428.0 | ) | 9.0 | % | ||||||
Personnel | (549.4 | ) | (522.1 | ) | 5.2 | % | ||||||
Taxes, fees and contributions | (1,692.1 | ) | (1,721.4 | ) | (1.7 | %) | ||||||
Cost of services and goods | (17,222.7 | ) | (17,542.2 | ) | (1.8 | %) |
Cost of goods sold: Our cost of goods sold decreased by R$10.8 million, or 0.5%, to R$2,107.1 million in 2014 from R$2,117.9 million in 2013, primarily as a result of a decline in the number of handsets sold as a result of the more restrictive subsidy policy, focused on handsets with 4G plans.
Depreciation and amortization: Costs related to depreciation and amortization decreased by R$197.8 million, or 4.6%, to R$4,067.3 million in 2014 from R$4,265.1 million in 2013, primarily as a result of the gain from the periodical review of the useful life of our fixed assets, which resulted in an increase in the average useful life for certain of our fixed assets. The total decrease in depreciation resulting from this review was R$528.4 million in 2014.
Outside services and other: Costs related to outside services and other increased by R$428.7 million, or 11.8%, to R$4,074.1 million in 2014 from R$3,645.4 million in 2013, primarily as a result of increases in (1) expenses related to plant maintenance and (2) the purchase of TV and mobile content.
Interconnection fees: Costs related to interconnection fees decreased by R$666.0 million, or 17.3%, to R$3,176.3 million in 2014, from R$3,842.3 million in 2013, primarily as a result of the 25% decrease in mobile termination rates mandated by ANATEL, which became effective in February 2014.
Rent, insurance, condominium fees and leased lines: Costs related to rent, insurance, condominium fees and leased lines increased by R$128.4 million, or 9.0%, to R$1,556.4 million in 2014, from R$1,428.0 million in 2013, primarily as a result of higher rental expenses in connection with sites where we install our antennas, which we increased as part of our continuing efforts to improve quality and increase capacity and coverage.
Personnel: Personnel expenses increased by R$27.3 million, or 5.2%, to R$549.4 million in 2014 from R$522.1 million in 2013, primarily as a result of our collective bargaining agreement, which was revised in January 2014 and renewed in September 2014.
Taxes, fees and contributions: Taxes, fees and contributions decreased by R$29.3 million, or 1.7%, to R$1,692.1 million in 2014, from R$1,721.4 million in 2013, primarily as a result of a reduction in the costs related to tax inefficiencies we had prior to our corporate restructuring, which was completed on July 1, 2013.
Operating Expenses
Operating expenses increased by R$420.9 million, or 3.4%, to R$12,668.3 million in 2014, from R$12,247.4 million in 2013, primarily as result of an increase in selling expenses, which was partially offset by a reduction in general and administrative expenses. The table and descriptions below set forth explanations for these variations:
Year ended December 31, | Percent change | |||||||||||
2014 | 2013 | 2014-2013 | ||||||||||
(in millions of reais) | ||||||||||||
Selling expenses | (10,466.7 | ) | (9,686.1 | ) | 8.1 | % | ||||||
General and administrative expenses | (1,803.9 | ) | (2,177.9 | ) | (17.2 | %) | ||||||
Other net operating income (expense) | (397.7 | ) | (383.4 | ) | 3.7 | % | ||||||
Total | (12,668.3 | ) | (12,247.4 | ) | 3.4 | % |
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Selling expenses: Our selling expenses increased by R$780.6 million, or 8.1%, to R$10,466.7 million in 2014 from R$9,686.1 million in 2013, primarily as a result of our focused sales efforts to increase the higher-value services that we provide, particularly in postpaid mobile voice and data as well as fiber.
General and administrative expenses: Our general and administrative expenses decreased by R$374.0 million, or 17.2%, to R$1,803.9 million in 2014, from R$2,177.9 million in 2013, primarily as a result of stricter cost controls with savings primarily concentrated in rental costs and the effects of the review of the useful life of our fixed assets, which resulted in an increase in the average useful life for certain of our fixed assets.
Other net operating income (expense): Other net operating expenses increased by R$14.3 million, or 3.7%, to R$397.7 million in 2014, from R$383.4 million in 2013. This increase is a result of the proceeds received from the sale of assets in 2013, which did not recur in 2014.
Financial Expenses, Net
For the year ended December 31, 2014, net financial expenses reached R$362.0 million, increasing by R$147.2 million or 68.5% when compared to the period ended December 31, 2013, mainly due to higher average indebtedness in 2014.
Income Tax and Social Contribution
We recorded income from income tax and social contribution in the amount of R$182.7 million in 2014, compared to an expense of R$946.5 million in 2013. This variation was a result of Law No. 12,973, which became effective in 2014. Law No. 12,973 caused us to revise our tax basis of certain intangible assets resulting from business combinations, which resulted in a positive impact of R$1,195 million. For additional information, see “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations” and Note 27 to our financial statements.
The effective rate of income tax and social contribution decreased to -3.8% in 2014 compared with 20.3% in 2013, which is a result of the revisions described above as well as an increase in the distribution of interest on shareholders’ equity during 2014, which is deductible for purposes of calculating income tax and social contributions based on income.
B. Liquidity and Capital Resources
General
We fund our operations and capital expenditures primarily from operating cash flows, loans obtained from financial institutions or development banks, and debentures. As of December 31, 2015, we had R$5.3 billion in cash and cash equivalents. We do not have any material unused sources of liquidity.
Our principal cash requirements include:
· | the servicing of our indebtedness; |
· | capital expenditures; and |
· | the payment of dividends. |
Our management believes that our sources of liquidity and capital resources, including working capital, are adequate for our present requirements.
Sources of Funds
Our cash flow from operations was R$9.9 billion in 2015, an increase of 5.1% compared to R$9.4 billion in 2014. The increase in cash flow from operations is a reflection of the consolidation effect of GVT from May 1, 2015. In addition to the effects of the GVT acquisition, (1) an increase in revenues from telecommunications services, due to higher Data Transmission and Value Added Services and Pay TV revenues, and (2) an increase in the sale of goods and equipment, partially offset by (1) an increase of costs of services and goods, due to higher
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personnel, network maintenance and rental and leasing expenses and (2) an increase in operating expenses, impacted by higher selling expenses, were drivers for the variation.
Our cash flow from operations was R$9.4 billion in 2014, a decrease of 2% compared to R$9.6 billion in 2013. The decrease in cash flow from operations was a result of higher costs during the year, particularly with (1) expenses with third party services, due to network expansion and maintenance efforts in our fixed and mobile networks and (2) selling expenses, due to higher commercial activity, mainly in the mobile postpaid and fixed broadband and Pay TV businesses. Extraordinary tax benefits and organizational restructuring events have also impacted cash flow from operations, positively in 2013 and negatively in 2014. Additionally, a decrease in the fixed-to-mobile tariffs, resulting from changes in regulation, impacted our net operating revenue during 2014.
Uses of Funds
Our cash flow used in investing activities was R$14.6 billion in 2015 compared to R$7.6 billion in 2014. The increase in cash flow used in investing activities of R$7.0 billion in 2015 compared to 2014 was primarily due to the GVT acquisition (R$8.5 billion, net of cash acquired from GVT).
Our cash flow used in investing activities was R$7.6 billion in 2014 compared to R$5.5 billion in 2013. The increase in cash flow used in investing activities of 37% in 2014 compared to 2013 was primarily due to (1) an increase in investments in residential fiber, mobile 3G/4G and dedicated corporate networks and (2) the payment of license fees.
Our cash flow used in financing activities recorded an inflow of R$5.4 billion in 2015 compared to an outflow of R$3.6 billion in 2014. The decrease in cash flow used in financing activities of R$9.0 billion in 2015 compared to 2014 was due primarily to the R$16.1 billion Capital Increase performed by the Company in 2015, which was used principally to pay for the acquisition of GVT, partially offset by an increase in payment of dividends and interest on equity in 2015 compared to 2014 (R$1.2 billion), along with increased net payments of loans, financing and debentures (R$7.3 billion).
Our cash flow used in financing activities was R$3.6 billion in 2014 compared to R$4.6 billion in 2013. The 22% decrease in cash flow used in financing activities in 2014 compared to 2013 was due primarily to a R$2.1 billion decrease in payment of dividends and interest on equity in 2014 compared to 2013, partially offset by a decrease in the amount of debentures issued and renegotiated in 2014.
Indebtedness
As of December 31, 2015, our total debt was as follows:
Debt |
Currency |
Annual interest rate payable |
Maturity |
Total amount outstanding (in millions of reais) |
BNDES loans and financing | UR TJLP | TJLP + 0.0% to 9.0% | 2023 | 2,409.5 |
BNDES loans and financing | R$ | 2.5% to 8.7% | 2023 | 404.6 |
BNDES loans and financing | R$ | IPCA + 2.95% + TR | 2016 | 30.7 |
BNDES loans and financing | R$ | SELIC D-2 + 2.32% | 2023 | 147.5 |
BNDES | UMBND | ECM(1) + 2.38% | 2019 | 594.1 |
BNB – Banco do Nordeste loans and financing | R$ | 7.0% to 10.0% | 2022 | 99.1 |
Debentures 4th issue - Series 3 | R$ | IPCA + 4% | 2019 | 33.5 |
Debentures 1st issue - Minas Comunica | R$ | IPCA + 0.5% | 2021 | 91.6 |
Debentures 3rd issue - Single Series | R$ | 100% of CDI + 0.75 spread | 2017 | 2,086.9 |
Debentures 4th issue - Single Series | R$ | 100% of CDI + 0.68 spread | 2018 | 1,332.8 |
Resolution 4131 | US$ | 2.36% and Libor + 2.00% | 2017 | 1,087.9 |
Finance Leases (2) | R$ | - | 2033 | 296.7 |
Contingent Consideration | R$ | - | 2025 | 377.7 |
Suppliers finance arrangements | R$ | - | 2016 | 1,228.7 |
Total debt | 10,221.3 | |||
Current |
2,343.0 | |||
Noncurrent | 7,878.3 |
(1) | The Currency Basket Charge (Encargos da Cesta de Moedas), or ECM, is a rate disclosed by BNDES on a quarterly basis. |
(2) | Our finance leases are related to towers and rooftops, IT equipment leases, infrastructure rent and other means of transmission. |
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Interest and principal payments on our indebtedness as of December 31, 2015 due in 2016 and 2017 total R$2,343.0 million and R$3,920.1 million, respectively.
The agreements that govern the majority of our outstanding loans and financings contain certain standard restrictive covenants, including financial covenants. These agreements may provide for the acceleration of the full balance of our obligations in the event of any default. In general, these agreements are subject to acceleration of maturity upon: (i) the inclusion in our shareholders’ agreement, bylaws or articles of incorporation or those of the companies that control us of conditions leading to restrictions or loss of ability to pay financial obligations arising from these agreements ; (ii) a conviction or final judgment against us in connection with child labor, slave labor or a crime against the environment; or (iii) liquidation, dissolution, insolvency; voluntary bankruptcy, judicial or extrajudicial recovery to any creditor or class of creditors.
As of December 31, 2015, we were not in default of any of our obligations and therefore none of our liabilities were subject to acceleration.
Foreign Exchange and Interest Rate Exposure
We face foreign exchange risk due to our foreign currency-denominated indebtedness, accounts payable (including our capital expenditures, particularly equipment) and receivables in foreign currency. A real devaluation may increase our cost of debt and certain commitments in a foreign currency. Our revenue is earned in reais, and we have no material foreign currency-denominated assets, except income from hedging transactions, interconnection of international long-distance services and services rendered to customers outside Brazil. Equity investments in foreign companies also suffer effects with variations in the exchange rate.
On December 31, 2015, 16.5% of our R$10.2 billion of financial indebtedness was denominated in U.S. dollars and UMBNDES. See Note 33 to the Consolidated Financial Statements. Devaluation of the real causes exchange losses on foreign currency-denominated indebtedness and commitments and exchange gain on foreign currency-denominated assets and corporate stakes in foreign companies.
We use derivative instruments to limit our exposure to exchange rate risk. Since September 1999, we have hedged all of our foreign currency-denominated bank debt using swaps. Since May 2010, the company began using net balance coverage, which is the hedging of net positions in foreign exchange exposures, or assets (issued invoices) minus liabilities (received invoices) for foreign exchange exposures, substantially reducing our risk to fluctuations in exchange rates. We could still continue to face exchange rate exposure with respect to our planned capital expenditures however, as approximately 36.6% is denominated or indexed in foreign currencies (mostly U.S. dollars). We systematically monitor the amounts and time of exposure to exchange rate fluctuations and may hedge positions when deemed appropriate.
By far the largest part of our reais denominated debt originally pays interest as a percentage of the CDI or has been swapped to do so. The CDI – Certificate of Interbank Deposits (Certificado de Depósito Interbancário) is an index based upon the average rate of operations transacted among the banks within Brazil. With the CDI being a floating rate, we remain exposed to market risk. This exposure to the CDI is also present in long derivatives positions and financial investments, which are indexed to percentages of the CDI.
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Capital Expenditures and Payment of Dividends
Our principal capital requirements are for capital expenditures and payments of dividends to shareholders. Capital expenditures consisted of additions to property, plant and equipment and additions to intangible assets, including licenses which totaled R$7.7 billion, R$9.1 billion and R$6.0 billion for the years ended December 31, 2015, 2014 and 2013, respectively. These expenditures relate primarily to the expansion of our network. We may seek financing for part of our capital expenditures and cash management assistance from the Brazilian government, in particular from BNDES, which is the main government financing agent in Brazil, as well as from the local or foreign capital markets or from local and foreign financial institutions. See “Item 4. Information on the Company—A. History and Development of the Company—Capital Expenditures.”
Pursuant to our bylaws and Brazilian Corporate Law, we are required to distribute a mandatory minimum dividend of 25% of “adjusted net income” (as defined below) in respect of each fiscal year to the extent earnings are available for distribution. Holders of preferred shares are assured priority in the reimbursement of capital, without a premium, and are entitled to receive cash dividends that are 10% higher than those attributable to common shares.
Adjusted net income, as determined by Brazilian Corporate Law, is an amount equal to our net income adjusted to reflect allocations to or from (i) legal reserve, (ii) statutory reserve and (iii) a contingency reserve for anticipated losses, if any.
We may also make additional distributions to the extent that we have profits and reserves available to distribute. All of the above distributions may be made as dividends or as tax-deductible interest on shareholders’ equity. Interest on shareholders’ equity are tax-deductible payments pursuant to Brazilian Corporate law, that a company may make, in addition to dividends, which the company may treat as financial expenses for tax and social contribution purposes. For more information on the payment of interests on shareholders’ equity, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividends and Dividend Distribution Policy—Dividends and Interest on Shareholders’ Equity.” We paid dividends and interest on shareholders’ equity of R$3.7 billion, R$2.4 billion and R$4.5 billion in 2015, 2014 and 2013, respectively.
Our management expects to meet 2016 capital requirements primarily from cash provided from our operations. Net cash provided by operations was R$9.9 billion, R$9.4 billion and R$9.6 billion in 2015, 2014 and 2013, respectively.
Adjustments to net income for purposes of calculating the basis for dividends include allocations to various reserves that effectively reduce the amount available for the payment of dividends. For the fiscal year ended December 31, 2015, in addition to the interim dividend and interest on own capital payments made in 2015, management decided to propose (i) the allocation of R$700 million of profits available for distribution to Reserve of Modernization and Expansion and (ii) an additional dividends payment to shareholders in the amount of R$1.3 billion. The proposal to allocate profits to Reserve of Modernization and Expansion and to pay dividends will be approved at the shareholders’ meeting that will approve the 2015 annual report. See “Item 3. Key Information—D. Risk Factors—Risks Relating to the Preferred Shares and the ADSs—Holders of our Preferred Shares and ADSs generally do not have voting rights” and “Item 10. Additional Information—B. Memorandum and Articles of Association—Description of Our Bylaws—Voting Rights.”
Accounting Pronouncements
The consolidated financial statements were prepared and are being presented in accordance with IFRS.
We adopted effective January 1, 2015 all the applicable standards, revisions of standards and interpretations issued by the IASB, including:
IAS 19 Defined Benefit Plans: Employee Contributions – Amendments to IAS 19: These amendments require that an entity consider contributions of employees or third parties in accounting for defined benefit plans. These amendments require that such contributions that are linked to the service be attributed to the periods of service as negative benefit. The amendments clarify that, if the amount of the contributions does not depend on the number of years of service, the entity is authorized to recognize such contributions, as service cost reduction in the period in which the service is rendered, instead of allocating these contributions to the periods of service. Amendments become effective as from July 1, 2014 on a retrospective basis. The application of this amendments did not have any impact on the Company’s consolidated financial statements.
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Annual improvements - 2010-2012 cycle:
· | IFRS 2 Share Based Payments: This amendment changed the definition of vesting relating to the purchase conditions and its implementation is effective beginning on or after July 1, 2014. The Company does not believe that these amendments may significantly impact its financial position. |
· | IFRS 3 Business Combinations: This amendment changed the subsequent accounting for contingent consideration in a business combination. Contingent consideration on acquisition of a business that is not classified as equity is subsequently measured at fair value through profit or loss, whether or not included in the scope of IFRS 9 Financial Instruments. This change is effective for new business combinations after July 1, 2014. The Company considered the application of these changes to the business combinations occurred upon acquisition of GVTPart. (Note 4). |
· | IFRS 8 Operating Segments: These amendments are related to: (i) the aggregation of operating segments, which can be combined / aggregated whether they are in accordance with the criteria of the rule, in other words, if the segments have similar economic characteristics and are similar in other qualitative aspects. If they are combined, the entity shall disclose the economic characteristics used to assess whether the segments are similar; and (ii) the reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities. These amendments became effective as from July 1, 2014. Considering the fact that the Company and its subsidiaries operate in a sole operating segment, this amendment did not have any significant impact on the Company’s financial statements. |
· | IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets: The amendments to IAS 16.35 (a) and IAS 38.80 (a) clarify that a revaluation can be made as follows: i) adjust the recorded gross amount of asset to market value or, ii) determine the market value and proportionally adjust the recorded gross amount so that the resulting recorded amount is equal to the market value. IASB also clarifies that the accumulated depreciation/amortization is the difference between the recorded gross amount and the asset’s book value (i.e., the recorded gross amount – accumulated depreciation/amortization = book value). The amendment to IAS 16.35 (b) and IAS 38.80 (b) clarifies that the accumulated depreciation/amortization is eliminated so that the recorded gross amount and the book value is equal to the market value. Amendments become effective as from July 1, 2014 on a retrospective basis. Considering that the revaluation of fixed or intangible assets is not allowed in Brazil, the application of the amendments to this amendment did not have any impact on the Company’s financial statements. |
· | IAS 24 Related Party Disclosures: The amendment to this standard clarifies that a management entity of other entity that provides key personnel for provision of management services is a subject related to related party disclosures. Additionally, an entity that used a management entity shall disclose the expenses incurred with management services. Amendments become effective as from July 1, 2014 on a retrospective basis. The application of these amendments does not entail significant impacts on the Company’s financial position. |
Annual improvements - 2011-2013 cycle:
· | IFRS 3 Business Combinations: The amendments to this standard clarify that joint arrangements (and not only joint ventures) are not included in the application of IFRS 3. The amendments are effective on or after July 1, 2014 on a prospective basis. The application of these amendments did not have any significant impact on the Company’s consolidated financial statements. |
· | IFRS 13 Fair Value Measurement: This amendment is related to the application of the exception to financial assets portfolio, financial liabilities and other contracts. The amendment is effective as from July 1, 2014. The application of this amendment did not have any significant impact on the Company’s consolidated financial statements. |
· | IAS 40 Investment Property: Amendment to this standard clarifies the relationship between IFRS 3 and IAS 40 for classification of property as investment property or property occupied by owner. The description of ancillary services determined in IAS 40, which provides a difference between investment property and owner of occupied property (IFRS 3) is used to determine whether the operation refers to the purchase of an asset or a business combination. This amendment entered in force as from July 1, 2014 on a prospective basis. The application of this amendment did not have any significant impact on the Company’s consolidated financial statements. |
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C. Research and Development, Patents and Licenses
Research and Development
We operate in a fast-paced, dynamic and convergent industry, which demands that our products and services be continuously revamped to keep up with growth expectations. Accordingly, our Strategic Innovation Unit (created in 2005) continues to develop new products and services to be tested or launched by us in the near future.
In addition, to keep pace with constant innovation, we created a business incubator that allows us to easily handle emerging business opportunities of large sizes or risks that otherwise would be difficult to manage by our current business units. In 2015, we invested R$0.5 million in innovation.
The table below presents our investments in development, update and modernization of systems to support the launch of new products and services. In 2015, we invested R$47.9 million in development.
R&D investments | 2015 | 2014 | 2013 | |||||||||
(in millions of reais) | ||||||||||||
Development | 47.9 | 37.6 | 18.2 | |||||||||
Innovation (business incubator and tests) | 0.5 | 0.6 | 0.2 | |||||||||
Total | 48.4 | 38.2 | 18.4 |
Patents and Licenses
Our principal intellectual property assets include:
· | permission to use the trademark name “Telefônica” and all names derived from “Telefônica”; |
· | our name “Telefônica Brasil S.A.”; |
· | our commercial brands in Brazil, “Vivo,” “GVT,” “Global Village Telecom” and sub-brands such as “Vivo Fixo,” Vivo TV,” “Vivo Internet,” “Meu Vivo,” “Vivo Empresas,” “Vivo Play” and “Vivo Fibra” among others; and |
· | our past commercial brands, “Super 15” for long-distance services, “Speedy” for broadband products, “DUO” for telephone and broadband service and “TRIO” for telephone, broadband and Digital TV service. |
D. Trend Information
We are fully engaged and aware of next year’s challenges and opportunities, having the strategies and required resources to deliver the services and products expected by the market as well as guarantee market leadership and the long term business sustainability. In 2016, a highly complex macroeconomic scenario in line with tight policies will shape telecommunication market dynamic through an intensification in competition and pressure on price discount, against this background, the segment revenues could suffer a negative impact.
Brazilian telecommunications market requires an expansion of 4G and ultra-broadband structures in order to meet new customer demands, which include higher speed and more data consumption. At first glance, telecommunications players will have substantial investments to expand the current technologies which, at the same time, address new customer habits and maintain the sector’s sustainability.
We intend to simplify customer experience by offering full telecommunications solutions including mobile, fixed and digital services together with a better customer support will be a competitive edge which will build a profitable loyal customer base, and we believe the future revenue growth will be driven by mobile and fixed data services for both segments, corporate and individual, hence the increased use of connected devices.
We are already planned and addressed efforts to overcome challenges and market changes and respond quickly to business opportunities.
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E. Off-balance-Sheet Arrangements
None.
F. Tabular Disclosure of Contractual Obligations
Our contractual obligations and commercial commitments as of December 31, 2015 are as follows:
Total | Up to year | 1-3 years | 4-5 years | After 5 years | ||||||||||||||||
(in millions of reais, as of December 31, 2015) | ||||||||||||||||||||
Contractual obligations | ||||||||||||||||||||
Loans, financing and leases (1) | 6,676.6 | 2,222.1 | 2,798.7 | 925.9 | 729.9 | |||||||||||||||
Debentures………………………………….. | 3,544.7 | 120.9 | 3,349.0 | 60.9 | 13.9 | |||||||||||||||
Pension and other post-retirement benefits | 85.3 | — | 33.4 | 3.7 | 48.2 | |||||||||||||||
Total contractual obligations | 10,306.6 | 2,343.0 | 6,181.1 | 990.5 | 792.0 | |||||||||||||||
Commercial commitments | ||||||||||||||||||||
Trade accounts payable | 8,440.9 | 8,373.2 | — | — | 67.7 | |||||||||||||||
Total commercial commitments | 8,440.9 | 8,373.2 | — | — | 67.7 |
(1) | Includes present value of minimum lease payments on operating leases of rental of equipment, facilities and stores, administrative buildings, and cell sites and contingent consideration relating to the GVT acquisition. See Note 4 for our consolidated financial statements. |
Long-Term Debt – Loans, financing, leases and debentures
Amount | ||||||
Year ending December 31, | (in millions
of reais, as of December 31, 2015) | |||||
2017 | 3,920.1 | |||||
2018 | 2,227.7 | |||||
2019 | 716.0 | |||||
2020 | 270.8 | |||||
2021 | 140.1 | |||||
2022 and forward | 603.6 | |||||
Total | 7,878.3 |
G. | Safe Harbor |
See “Cautionary Statement Regarding Forward-Looking Statements.”
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. | Directors and Senior Management |
We are managed by a Board of Directors (Conselho de Administração) and a Board of Executive Officers (Diretoria).
Board of Directors
Our Board of Directors comprises a minimum of five and a maximum of 17 members, all shareholders, elected and dismissed by the shareholders at the shareholders’ meeting, serving for a term of three years and may be reelected. The following is a list of the current members of our Board of Directors, their respective positions and dates of their election. The members of our Board of Directors are currently mandated until the ordinary general meeting scheduled to take place up to April 2016.
Name |
Position |
Date of Appointment |
Antonio Carlos Valente da Silva | Chairman | April 16, 2013 |
Santiago Fernández Valbuena | Vice-Chairman | April 16, 2013 |
Antonio Gonçalves de Oliveira | Director | April 16, 2013 |
Eduardo Navarro de Carvalho | Director | April 16, 2013 |
Francisco Javier de Paz Mancho | Director | April 16, 2013 |
José Fernando de Almansa Moreno-Barreda | Director | April 16, 2013 |
Luciano Carvalho Ventura | Director | April 16, 2013 |
Luis Javier Bastida Ibarguen | Director | April 16, 2013 |
Luiz Fernando Furlan | Director | April 16, 2013 |
Narcís Serra Serra | Director | April 16, 2013 |
Amos Genish | Director | May 28, 2015 |
Roberto Oliveira de Lima | Director | April 16, 2013 |
Set forth below are brief biographies of our directors:
Antonio Carlos Valente da Silva is 63 years old and has served as Chairman of the Board of Directors of Telefônica Brasil S.A. since December 2006. He is also the President of the Board of Trustees of Fundação Telefônica. He was Chief Executive Officer of Telefônica Brasil S.A. between January 2007 and March 2015, and member of the Committee of Appointments, Compensation and Corporate Governance of Telefônica Brasil S.A. in the same period. He was Chief Executive Officer of Telefônica Data S.A., Vice-President Director of SP Telecomunicações Participações Ltda., Chairman of the Board of Directors of Telefônica Factoring do Brasil Ltda., member of the Control Committees of Media Networks Brasil Soluções Digitais Ltda., Telefônica Transportes e Logística Ltda. and of Telefônica Serviços Empresariais do Brasil Ltda. He was the Chief Executive Officer of the extinguished companies Vivo S.A., A. TELECOM S.A., Telefônica Sistemas de Televisão S.A., Ajato Telecomunicação Ltda., Lemontree Participações S.A., GTR-T Participações e Empreendimentos S.A., Comercial Cabo TV São Paulo S.A. and TVA Sul Paraná S.A. He was the Chief Executive Officer of Vivo Participações S.A. from May 10, 2011 until October 3, 2011. He was the President of Telebrasil (Brazilian Association of Telecommunications), President of SindiTelebrasil (National Union of Fixed and Mobile Telephone Service Operators) and President of Febratel (Brazilian Federation of Telecommunications) from 2010 through 2013. He was President of Ahciet (Asociación Iberoamericana de Centros de Investigación y Empresas de Telecomunicaciones) from 2007 to 2011. He was president of the Official Spanish Chamber of Commerce in Brazil from 2011 to 2015 and former President of the Euro-chambers in Brazil (an association that gathers the main European Chambers of Commerce in Brazil). He is also a member of the CDES (Economic and Social Development Council of the Presidency of the Republic of Brazil), member of the Advisory Council of CPqD, (Brazilian Telecommunications Research and Development Center), member of the Board of Executive Officers of ABDIB (Brazilian Infrastructure and Base Industries Association), and member of COINFRA (FIESP’s Infrastructure Commission). He has a degree in Electrical Engineering from PUC/RJ and has significant experience in the telecommunications market, in which he has been working since 1975. He has a post graduate degree in business and administration from PUC/RJ and has concluded several specialization courses in telecommunication systems in Brazil and abroad, as well as several specialization courses in business management, including corporate strategy at MIT/Sloan.
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Santiago Fernández Valbuena, is 57 years old and acts as Vice Chairman of the Board of Directors of Telefônica Brasil S.A. and CEO of Telefónica Internacional, S.A. Mr. Valbuena is Sole Manager of Telefónica Capital, S.A. and Alternate Officer of Telefonica Chile, S.A. He is also Main Officer of Colombia Telecomunicaciones, S.A., E.S.P., Director Owner and Vice Chairman of Telefónica Móviles Mexico, S.A. de C.V. and Chairman of Telefónica America S.A. He is also CEO of SP Telecomunicações Participações Ltda. Since 2012 he has been a member of the Board of Directors of Telefónica S.A. In 2010 he was named the Strategy, Finance and Development Officer of Telefónica group. From 2002 to 2012 he was CFO and finance officer of Telefôncia Group. During this time he was also responsible for the procurement, human resources and systems area of the Group, as well as internal auditing, corporate development, and was responsible for our subsidiaries. In 1997, he joined the Telefónica group as head of Fonditel, the pension and social security arm of the Telefónica group in Spain. He has served as a member of the board of directors of Portugal Telecom and Endemol Holding, in the Netherlands. Previously, Mr. Valbuena was an officer of Société Generale Valores and of Beta Capital in Madrid. He holds an economics degree from the Universidad Complutense in Madrid and a PhD and Master in economics from Northeastern University in Boston.
Antonio Gonçalves de Oliveira is 71 years old and has served as a member of our Board of Directors and Control and Audit Committee since September 2011. Mr. Oliveira is the vice-president of the Association of Friends of the Museum of Contemporary Art of the University of São Paulo since 2011. He was also a member of the Board of Directors of Paranapanema S.A., from April 2012 to April 2014, and a member of the Fiscal Board of Klabin S.A., from April 2010 until April 2013. He was a member of the Board of Directors of Vivo Participações S.A. from March 2001 to September 2011, and of its Control and Audit Committee from July 2005 to September 2011, being its president for 5 years. Mr. Oliveira was also a member of the Board of Directors of TELESP Celular S.A. and a member of the Board of Directors and of the Control and Audit Committee of the following companies: Tele Sudeste Celular Participações S.A., Telemig Celular Participações S.A., Telemig Celular S.A., Tele Leste Celular Participações S.A., Tele Centro Oeste Celular Participações S.A. and Celular CRT Participações S.A., until these companies ceased to exist, due to their incorporation by Vivo Participações S.A. Mr. Oliveira was the Chairman of the Fiscal Council of Bahia’s Electricity Company (Companhia de Eletricidade da Bahia), or COELBA, from April 2006 to April 2008, chairman of the Association of Friends of the Museum of Contemporary Art of USP (Associação de Amigos do Museu de Arte Contemporânea da USP), from 2006 to 2010, member of the Fiscal Counsel of Iguatemi Shopping Centers, from 2007 to 2008, and was in the Fiscal Board of Melpaper, from 2009 to 2010. Mr. Oliveira was also a member of the Council of Representatives of the Federation of Industries of the State of São Paulo (Federação das Indústrias do Estado de São Paulo), or FIESP. Mr. Gonçalves de Oliveira is an elected member of the Advisory Board of The Welfare Fund for Employees of Banco do Brasil (Caixa de Previdência dos Funcionários do Banco do Brasil), or PREVI, and from 2003 to 2004, he was also a member of the Council of Social and Economic Development of the Brazilian government and of the Working Group for Small and Medium Enterprises in Mercosul, nominated by the Brazilian government. He was member of the Steering Committee and Management of the Banco do Povo de Estado de São Paulo, member of the Board of Executive Officers of ADEBIM (Associação de Empresas Brasileiras para a Integração de Mercados) and Chairman of the Deliberative Board of the Association of Employees of Banco do Brasil ANABB, for eight years. In the role of sociologist, he was President of the Association of Sociologists of the State of São Paulo, for 6 years, and director, for 4 years of the Latin American Association of Sociology. Mr. Oliveira was the executive coordinator of the National Movement of Micro and Small Enterprise (Movimento Nacional da Micro e Pequena Empresa). Mr. Gonçalves holds a degree in Social Sciences, a master’s degree in Communication Sciences and a post-graduate degree in Sociology of Organizations from the University of São Paulo (Universidade de São Paulo) in Brazil. He also holds a specialist title in Human Resources from Fundação Getúlio Vargas in São Paulo and extension courses on business management topics. Mr. Oliveira is Certified Counselor by the Brazilian Institute of Corporate Governance, IBGC, due to his experience in supervisory boards, management boards and fiscal boards.
Eduardo Navarro de Carvalho is 52 years old and is a member of our Board of Directors and President of the Service Quality and Marketing Committee. He was, from 2010 to February 2014, Director of Strategy and Alliances at Telefónica S.A. and is currently Chief Commercial Digital Officer of Telefónica S.A. as well as a member of its Board of Executive Officers. Previously, he was responsible for Strategic Planning and Regulatory at Telefónica Internacional S.A. From 1999 and 2005, he served as Vice President of Corporate Strategy and Regulatory Group at Telefonica in Brazil, participating in the Steering Committee of several companies of the Telefónica group in Brazil. He worked for five years as a consultant at McKinsey & Company (1994-1999), during which he led projects in Brazil, Spain, Portugal and South Africa, focusing on strategies in the areas of Industry, Infrastructure and Telecommunications. He began his professional experience in the steel industry, where he worked from 1986 and
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1994 in Group ARBED in Brazil. He graduated in Metallurgical Engineering from the Federal University of Minas Gerais, Brazil.
Francisco Javier de Paz Mancho is 57 years old and is a member of our Board of Directors and of our Nominations, Compensation and Corporate Governance Committee. Mr. Mancho is also a member of the Board of Directors of Telefónica S.A. and Telefónica de Argentina S.A., and Chairman of Telefónica Gestión de Serviços Compartidos Espanha S.A. since September 2014. He was the Chairman of Atento Inversiones y Teleservicios from December 2008 to December 2012. From June 2004 until December 2007, he was the President of Mercasa. He was Deputy Chairman and Manager of Corporate Strategy of Panrico Donuts Group (1996–2004), General Manager of International Trade of the Ministry of Tourism and Commerce (1993–1996), General Secretary of the Socialism Youth and Member of the Executive Council of PSOE (1984-1993). He also served the following posts and responsibilities: Director of the Tunnel of Cadí (2004-2006), Chairman of the Patronal Pan y Bollería Marca (COE) (2003-2004), Director of Mutua de Accidentes de Zaragoza (MAZ) (1996-2004), Director of the Panrico Group (1998-2004), Chairman of the Commercial Distribution Centre of the Ministry of Tourism and Commerce 1994-1996), Member of the Economic and Social Board and its permanent Commission (1991-1993 and 1996-2000), and Director of Tabacalera S.A. (1993-1996). Mr. Mancho holds degrees in Information and Publicity and a degree in law studies from the Executive Management Program of IESE (Universidad de Navarra).
José Fernando de Almansa Moreno-Barreda is 67 years old and is a member of our Board of Directors and President of the Nominations, Compensation and Corporate Governance Committee. He is a member of the Board of Directors of Telefónica S.A. He is also a member of the Board of Directors of Telefónica Latinoamérica S.A., Telefónica Móviles México S.A. de CV, and BBVA Bancomer Mexico. Mr. Almansa joined the Spanish Diplomatic Corps in 1974 and served from 1976 to 1992 as Embassy Secretary of the Spanish Embassy in Brussels, Cultural Counselor of the Spanish Representation to Mexico; Chief Director for Eastern European Affairs and Atlantic Affairs Director in the Spanish Foreign Affairs Ministry; Press and Political Counselor to the Spanish Permanent Representation to the North Atlantic Council in Brussels; Minister-Counselor of the Spanish Embassy in the Soviet Union; General Director of the National Commission for the 5th Centennial of the Discovery of the Americas and Deputy General Director for Eastern Europe Affairs in the Spanish Foreign Affairs Ministry. In January 1993, Mr. Almansa was appointed Chief of the Royal Household by His Majesty King Juan Carlos I. He held this post until December 2002 and is currently Personal Adviser to His Majesty King Juan Carlos I. Mr. Almansa holds a law degree from the Universidad de Deusto, Bilbao, Spain.
Luciano Carvalho Ventura is 68 years old and has served as a member of our Board of Directors and of the Service Quality and Customer Service Committee since 2005. He is the officer responsible for LCV Corporate Governance. He is a member of Fiscal Board of CSU CardSystem. He has been a member of the Board of directors Lojas Salfer S.A. from 2008 to 2010, a member of the Board of Directors of Y. Yakakka since 2002, and has been a member of the Advisory Board of José Alves Group, since 1999. He holds an MBA from Escola de Administração de Empresas de São Paulo–Fundação Getúlio Vargas, a post-graduate degree in finance from Escola de Administração de Empresas de São Paulo da Fundação Getúlio Vargas, a degree in Business Management from Escola de Administração de Empresas da Universidade Federal de Pernambuco, and a degree in Economics from Faculdade de Ciências Econômicas da Universidade Federal de Pernambuco.
Luis Javier Bastida Ibarguen is 70 years old and is a member of our Board of Directors and President of the Control and Audit Committee. Since 2002, he has acted as an independent consultant. During 2000 and 2001, he worked in Banco Bilbao Vizcaya Argentaria, where he was a member of the Steering Committee and head of the Global Asset Management Division. Mr. Bastida began working at Banco Bilbao Vizcaya Argentaria in 1988. From 1994 to 2000, he was Chief Financial Officer (CFO), reporting directly to the Chairman. From 1976 to 1987, he worked at Banco Bilbao, where he had different responsibilities, mainly in areas related to finance. From 1970 to 1976, he worked for General Electric in New York and Spain. At General Electric, he was a member of the Finance Management Program and the International Finance Program and worked in various capacities in the Finance and Strategic Planning Functions. He holds degrees in Business Sciences at the E.S.T.E. University in San Sebastián–Spain and holds an MBA from Columbia University in New York.
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Luiz Fernando Furlan is 69 years old and is a member of the Boards of Directors of Telefônica Brasil S.A. (Brasil), Telefónica S.A. (Spain), BRF S.A. (Brasil), AGCO Corporation (USA). Previously, he was Chairman of the Board of Directors at Sadia S.A., from 1993 to 2002 and from 2008 to 2009, company within which he held numerous executive positions from 1976 to 1993. He was Co-Chairman of the board of BRF S.A. from 2009 to 2010, as well as a member of the board of Amil Participações S.A. from 2008 to 2013, as well as a member of the advisory board of Panasonic (Japan) and ABERTIS Infraestructuras S.A. (Spain). He served as Minister of Development, Industry and Foreign Trade of Brazil from 2003 to 2007. Since 2008, he has been the Chairman of the Board of Directors of Fundação Amazonas Sustentável “FAS” (Brazil), and up to 2013, he is also member of Global Ocean Commission (USA) and member of Conselho Superior de Gestão em Saúde de São Paulo (Brazil). He holds a degree in Chemical Engineering from FEI (University of Industrial Engineering) and in Business Administration from University of Santana – São Paulo, with extension and specialization courses in Brazil and abroad.
Narcís Serra Serra is 72 years old and is as a member of our Board of Directors and of our Control and Audit Committee. From 1991 to 1995, he was Vice President of the Government of Spain, and from 1982 to 1991, served as Minister of Defense. From 1979 to 1982, he was the Mayor of Barcelona. Mr. Serra holds a doctorate in economics from the Universidad Autónoma de Barcelona and is President of Barcelona Institute for International Studies (IBEI).
Amos Genish is 56 years old and our Chief Executive Officer as well as a member of our Board of Directors and of our Nominations Compensation and Corporate Governance Committee. He is also CEO of Global Village Telecom S.A., Innoweb Ltda., POP Internet Ltda., Telefônica Data S.A. and GVT Participações S.A. He is also the Chairman of the Board of Directors of Telefônica Factoring do Brasil Ltda. and VP of SP Telecomunicações Participações Ltda. Mr. Genish is the Statutory Officer of SindiTelebrasil, the National Union of Fixed and Mobile Telephone Service Operators (Sindicato Nacional das Empresas de Telefonia e de Serviço Móvel Celular e Pessoal). Mr. Genish was Senior Executive Vice President (1989-1994) and President (1995-1996) of Edunetics, a software company listed on NASDAQ until its acquisition by the National Education Corporation in 1996. From 1997 to 1998, he held senior management positions with Gilat Satellites Network, an Israeli communications company, as part of its rural telephony division. Mr. Genish was part of the founding team of GVT since 1999, presiding over its successful IPO in 2007 and during the acquisition of control in 2009 by Vivendi. Mr. Genish was a member of the Executive Board of Directors (management board) of Vivendi S.A. until 2012. He holds a degree in economics and accounting from the University of Tel-Aviv, Israel, and has extensive experience in the high-tech telecommunications industry.
Roberto Oliveira de Lima is 64 years old and serves as a member of our Board of Directors and a member of the Service Quality and Marketing Committee. His career includes positions in the information technology and financial areas at groups such as Saint Gobain, Rhodia and Accor. From 1999 to 2005, he was Chairman and CEO of the Credicard group. From 2005 to 2011, he was the Chief Executive Officer of Vivo Participações S.A. and Vivo S.A. Since then he has served on the boards of companies such as Edenred in France, Naspers Holdings in South Africa and Grupo Pão de Açúcar, Rodobens and Natura in Brazil. In January 2014, he became Chairman of the Publicis Group Worldwide in Brazil. Since September 2014 he is the Chief Executive Officer of Natura Cosméticos S.A. He holds a degree in Public Administration and a graduate degree in Accounting and Financial Management, both from Fundação Getúlio Vargas, Brazil. He also holds a master’s degree in Finance and Strategic Planning from the Institute Superieur des Affaires, Jouy en Josas, France.
There is no family relationship between any of the directors named above. There is no arrangement or understanding with major shareholders, customers, suppliers or others, pursuant to which any director referred to above was selected as such.
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Board of Executive Officers
The Board of Executive Officers consists of at least three (3) and no more than 15 members, who may or may not be our shareholders, must be resident in the country, are appointed by our Board of Directors for a period of three (3) years, may be reelected, and who may remain in office until reappointed or replaced. Our Board of Executive Officers is responsible for our day-to-day management and for representing us in our business with third parties. Any of our executive officers may be removed at any time by a decision of the Board of Directors.
The following are the current members of the Board of Executive Officers, their respective positions and the date of their appointment.
Name |
Position |
Date of Appointment |
Amos Genish | Chief Executive Officer | May 28, 2015 |
Breno Rodrigo Pacheco de Oliveira | General Secretary and Legal Officer | April 23, 2013 |
Alberto Manuel Horcajo Aguirre | Chief Financial Officer, Investor Relations and Corporate Resources Officer | August, 7, 2013 |
Set forth below are brief biographies of our executive officers:
Breno Rodrigo Pacheco de Oliveira is 40 years old and serves as General Secretary and Legal Officer of Telefônica Brasil S.A., Global Village Telecom S.A., GVT Participações S.A., Innoweb Ltda., POP Internet Ltda. and Telefônica Data S.A. He is also Corporate Secretary of the Board of Directors of Telefônica Brasil S.A., a member of the Deliberative Council of Visão Prev Sociedade de Previdência Complementar and Officer of SP Telecomunicações Participações Ltda. Mr. Oliveira is also Corporate Secretary of the Board of Directors of Telefônica Factoring do Brasil Ltda., Corporate Secretary and member of the Board of Directors of Telefônica Corretora de Seguros Ltda., member of the Board of Directors of Companhia ACT de Participações and Companhia AIX de Participações He was Officer of the following extinguished companies: Vivo S.A., A.Telecom S.A., Telefônica Sistema de Televisão S.A., Ajato Telecomunicação Ltda., Lemontree Participações S.A., TVA Sul Paraná S.A., GTR-T Participações e Empreendimentos S.A. and Comercial Cabo TV São Paulo S.A. until July 1, 2013, when these companies were merged into us. He was also General Secretary and Legal Officer from February 3, 2011 to October 3, 2011 of Vivo Participações S.A. (when it was merged into the company) and of Vivo S.A. from April 2005 to February 2011. He holds a law degree from Universidade do Vale do Rio dos Sinos – UNISINOS, Brazil.
Alberto Manuel Horcajo Aguirre, is 52 years old. He is currently our Chief Financial Officer, Investor Relations and Corporate Resources Officer as well as Chief Financial Officer and controller of Telefônica Data S.A. He is also a member of the Board of Trustees of Fundação Telefônica; Chief Financial Officer and Corporative Resources Officer of Global Village Telecom S.A., GVT Participações S.A., Innoweb Ltda. and POP Internet Ltda.; Officer of SP Telecomunicações Participações Ltda. and member of the Board of Directors of Telefônica Corretora de Seguros Ltda. He was formerly an executive officer of Vivo and has also been global services officer of the Telefonica Group in Madrid, where he was responsible for logistics, real estate, workspace and customer services. Mr. Aguirre has also served as purchasing director from 2004 to 2011. He was an officer in the areas of finance, human resources and general services, in our operations in Spain, Argentina, Brazil, Peru and of the Telefonica Group as a whole. Mr. Aguirre was CEO of Atento in Madrid from 2001 to 2004. Since 2002, he has served as an independent board member for the Lantero Group in Spain and was previously a board member of Transportes Azkar, also in Spain. Mr. Aguirre has also been CEO of Ardizia, the investment firm, from 1999 to 2001. Since 2010, he is patron of the Institute for Education and Research in Madrid of the University of Navarra. He holds a law degree from the Universidad Complutense in Madrid and was a Fulbright scholar at Columbia University from 1986 to 1988. In 2011 he was part of the Stanford Executive Program for advanced operations design.
For the biography of Amos Genish, see “—C. Board Practices—Board of Directors.”
There is no family relationship between any of the executive officers named above. There is no arrangement or understanding with major shareholders, customers, suppliers or others, pursuant to which any executive officer referred to above was selected as such.
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B. Compensation
For the year ended December 31, 2015, the aggregate amount of compensation paid to all our directors and executive officers was approximately R$82.6 million, of which R$40.3 million corresponded to salaries and R$42.3 million corresponded to bonuses.
For the year ended December 31, 2015, our directors and officers did not receive any pension, retirement or similar benefits. For a description of our pension plan, see “—D. Employees—Pension Plans.”
C. Board Practices
Board of Directors
Our Board of Directors typically meets once every three months and the Chairman may call special meetings. Our Board takes action by majority vote, provided the majority of its members in office are present, with the Chairman having, in addition to his or her regular vote, the deciding vote in the event of a tie. The specific responsibilities of the Chairman include representing the Board in the General Shareholders Meetings, chairing the General Shareholders Meetings, selecting the Secretary from among those present, and calling and chairing meetings of the Board.
Our Board of Directors is responsible, among other things, for:
· | establishing our general business policies; |
· | electing and removing, at any time, the members of our Board of Executive Officers, and establishing their responsibilities with due regard for legal and statutory provisions; |
· | supervising our management and examining, at any time, our corporate records, and requesting information regarding the execution or the process of execution of any agreements and other acts; |
· | calling General Shareholders Meetings; |
· | approving the financial statements, management reports, proposals for allocation of the company’s results and the submission of such documents to the General Shareholders Meeting; |
· | appointing and deposing external auditors, as well as the responsible for wholesale operations; |
· | determining the distribution of interim dividends; |
· | determining the payment of interest on equity “ad referendum” of the General Shareholders Meeting; |
· | authorizing the purchase of our shares to be cancelled or kept in treasury; |
· | appointing and removing the person responsible for internal auditing; |
· | approving the budget and annual business plan; |
· | deliberating on the issuance of new shares by increasing the corporate capital within the limits authorized by the bylaws; |
· | approving the issuance of commercial paper and depositary receipts; |
· | authorizing the disposal of assets directly related to telecommunications public utilities; |
· | approving agreements, investments and obligations in an amount greater than R$250 million that have not been contemplated in the budget; |
· | approving employment and compensation plans, incentive policies and professional development, regulation and staffing of the company, and the terms and conditions of collective bargaining agreements to |
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be executed with unions representing various categories of the company’s employees and adhesion or disassociation from pension plans, all with respect to employees of the company; the Board of Directors can, at its own discretion, assign to the company’s Board of Executive Officers limits to deliberate on these matters;
· | authorizing the acquisition of interest in other companies on a definitive basis and the encumbrance and creation of lien on or sale of an equity interest; |
· | authorizing the offering of ordinary nonconvertible unsecured debentures; |
· | approving the organizational structure of the company; the Board of Directors can assign to the officers of the Board of Executive Officers limits to the exercise of such powers, subject to legal and bylaws provisions; |
· | approving and modifying the internal regulations of the Board of Directors; |
· | deliberating as to the issuance of warrants; |
· | deliberating, by delegation of the General Shareholders Meeting, about the following aspects related to the company’s issuance of debentures: (i) opportunity to issue, (ii) time and conditions of expiration, amortization or redemption, (iii) time and conditions of the payment of interest, of the participation in the profits and of the premium of repayment, if any, (iv) method of subscription or placement, and (v) the type of debentures; |
· | approving the establishment of technical and advisory committees for advice on matters of interest to the company, to elect members of such committees and approve the committees, internal regulations, which shall contain specific rules concerning their organization, functions, powers, and compensation of members; |
· | authorizing the sale of property, the creation of in rem guarantees and the provision of guarantees on behalf of third parties, and setting limits on the practice of such acts by the officers; |
· | establishing, as an internal regulation, the limits for the officers to authorize the disposition or encumbrance of permanent assets, including those related to public telecommunications services which are disabled or inoperable; |
· | approving the company’s participation in consortia in general, and the terms of such participation; the Board of Directors may delegate such powers to the officers and establish limits, as it seeks to develop activities in line with the company’s purpose; |
· | setting the limits for the officers to authorize the practice of reasonable gratuitous acts for the benefit of employees or the community of which the company is a part of, including the donation of unserviceable assets to the company; and |
· | approving the creation and dissolution of subsidiaries of the company, in Brazil or abroad. |
The members of our Board of Directors are all shareholders, one of them being elected by the preferred shareholders in a separate voting process and the others being elected by the holders of common shares.
Fiscal Board
Brazilian Corporate Law and our bylaws each require that we maintain a statutory Fiscal Board (Conselho Fiscal). Our permanent, statutory Fiscal Board, which is a separate and distinct entity from our outside auditors, is primarily charged with certain advisory, reporting, oversight and review functions with respect to the company’s financial statements. Our statutory Fiscal Board is also responsible for rendering opinions on management’s annual report and management proposals, including financial statements, to be submitted at shareholders meetings relating to a change in the company’s capital composition, investment plans, budget, debenture issuances or subscription bonuses, payment of dividends and consolidations, mergers and spin-offs. However, the statutory Fiscal Board, as required by Brazilian Corporate Law and our bylaws, has only an advisory role and does not participate in the management of the company. Indeed, decisions of the statutory Fiscal Board are not binding on the company under Brazilian Corporate Law.
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In accordance with Brazilian Corporate Law and our bylaws, the Fiscal Board consists of a minimum of three (3) and a maximum of five (5) active members and an equal number of alternates. The members of the Fiscal Board are elected for a period of one (1) year and may be reelected.
One member of the Fiscal Board and his or her alternate must be elected by holders of preferred shares in a separate voting process. The following are the current members of the Fiscal Board:
Members |
Alternates |
Date Appointed |
Flavio Stamm | Gilberto Lerio | April 23, 2014 |
Cremênio Medola Netto1 | - | April 23, 2014 |
Charles Edwards Allen | Stael Prata Silva Filho | April 23, 2014 |
Committees
Brazilian Corporate Law does not require a corporation to maintain committees responsible for ethics, corporate governance or compensation. Nevertheless, our Board of Directors has created the following committees:
· | Control and Audit Committee; |
· | Nominations, Compensation and Corporate Governance Committee; and |
· | Service Quality and Marketing Committee. |
Control and Audit Committee
Our Control and Audit Committee was created by our Board of Directors in December 2002 and comprises a minimum of three (3) and a maximum of five (5) directors, who are not members of our Board of Executive Officers, and who are appointed by the Board of Directors to serve as members of the Control and Audit Committee for the duration of their respective terms as members of the Board of Directors. The Committee has its own charter, which was approved by the Board of Directors. The Committee provides support to the Board of Directors.
According to its charter, the Control and Audit Committee shall meet four (4) times per year (once every three (3) months) and report its conclusions to the Board of Directors. We anticipate that there will be some similar functions between the Control and Audit Committee and our statutory Fiscal Board.
The Control and Audit Committee, among other responsibilities that may be required by the Board of Directors, is charged with informing and providing recommendations to the Board of Directors regarding the following:
· | the appointment of the independent auditors, as well as the terms and conditions of their contracts and, if necessary, their termination and renewal; |
· | the analysis of the company’s accounts, compliance with certain legal requirements and the adoption of generally accepted accounting principles; |
· | the results of each internal and independent audit and management’s response to the auditor’s recommendations; |
· | the quality and integrity of the company’s internal control systems; |
· | the performance of the independent auditors, requesting that their opinions on the company’s annual reports and the contents of the main audit reports be clear and precise; and |
· | any communications with the internal auditors about any significant deficiencies in our control systems and identified financial conditions. |
________________________
1 Note: On December 31, 2015 Mrs. Fabiane Reschke resigned the position of alternate member of the Fiscal Board. The position shall remain vacant until the ordinary general meeting which shall be held on 2016.
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The following are the current members of the Control and Audit Committee:
Members |
Date Appointed |
Luis Javier Bastida Ibarguen | April 23, 2013 |
Antonio Gonçalves de Oliveira | April 23, 2013 |
Narcís Serra Serra | April 23, 2013 |
Nominations, Compensation and Corporate Governance Committee
Our Nominations, Compensation and Corporate Governance Committee was established in November 1998, and was restructured in October 2004, and consists of three (3) to five (5) directors appointed by the Board of Directors to serve for the duration of their respective terms as members of the Board of Directors. The Committee meets from time to time, depending on the availability of its members and when called by its chair. The Nominations, Compensation and Corporate Governance Committee, among other responsibilities that may be required by the Board of Directors, is charged with informing and providing recommendations to the Board of Directors regarding the following:
· | the appointment of executive officers for our company and our subsidiaries; |
· | the parameters on compensation for our executive officers and administrators; |
· | the terms and conditions of executive officers’ employment agreements; |
· | the review of the Board’s compensation plan and any amendments; |
· | the incentive plans related to compensation; |
· | the compensation policy for directors and executive officers of the company; and |
· | the annual corporate governance report. |
The following individuals are the current members of the Nominations, Compensation and Corporate Governance Committee:
Members |
Date Appointed |
José Fernando de Almansa Moreno-Barreda | April 23, 2013 |
Amos Genish | May 28, 2015 |
Francisco Javier de Paz Mancho | April 23, 2013 |
Service Quality and Marketing Committee
The Service Quality and Marketing Committee was created on December 16, 2004 and provides assistance to our Board of Directors. The Committee consists of at least three (3), and at most five (5), members of our Board of Directors selected periodically to serve for the duration of their respective terms as members of the Board of Directors. The Committee meets from time to time, depending on the availability of its members and when called by its chair. The Committee is responsible for review and analysis of quality indices measuring our principal services and to ensure that the requisite degree of commercial assistance is furnished to our clients.
Members |
Date Appointed |
Eduardo Navarro de Carvalho | April 23, 2013 |
Luciano Carvalho Ventura | April 23, 2013 |
Roberto Oliveira de Lima | April 23, 2013 |
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D. | Employees |
As of December 31, 2015, we had 33,847 employees. We have full-time and part-time employees, Our part-time employees work primarily at our stores and call centers. Our employees are divided into the following categories: 40.6% in our network plant operation, maintenance, expansion and modernization; 51.5% in sales and marketing; and 7.8% in administration, finance and investor relations, human resources, inventory, technology, legal and strategic planning and management control.
As of December 31, 2014, we had 18,419 employees. We have full-time and part-time employees. Our part-time employees work primarily at our stores and call centers. Our employees are divided into the following categories: 26.3% in our network plant operation, maintenance, expansion and modernization; 64.1% in sales and marketing; and 9.6% in administration, finance and investor relations, human resources, logistics and legal.
As of December 31, 2013, we had 18,532 employees, divided into the following categories: 26% in our network plant operation, maintenance, expansion and modernization; 62% in sales and marketing; and 12% in administration, finance and investor relations, human resources, inventory, technology, legal and strategic planning and management control.
Approximately 8.5% of our employees are union members. These unions have state representation, so we have employees represented by the unions of all 26 states plus the Federal District. In turn, 19 of these unions are associated with the National Federation of Telecommunications Workers (Fenattel) and other 8 unions are associated with the Interstate Federation of Workers and Researchers in Telecommunications (Fitratelp). Besides these 27 unions, we have employees represented by São Paulo Engineers’ Union.
Our collective bargaining agreement for these employees was renewed for 85.5% of our employees on September 1, 2015 and will expire on August 31, 2016. For the remaining employees the negotiation process was transferred for 2016.
Our management considers relations with our work force to be very good. We have never experienced a work stoppage for a significant period or that had a material effect on our operations.
Pension Plans
Before December 1999, the Fundação Sistel de Seguridade Social (SISTEL) plan, a defined benefit plan that supplemented government-provided retirement benefits, was adopted for all the employees of the former Telebrás System and we were contingently liable for all of the unfunded obligations of the plan.
In January 2000, we and the other companies that formerly belonged to the Telebrás system agreed to divide the existing SISTEL plan into 15 separate plans, resulting in the creation of private plans covering those employees already enrolled in the SISTEL plan. These new private pension plans, called PBS plans, were still administered by the Fundação Sistel and have retained the same terms and conditions of the initial plan. The division was carried out to allocate liability among the companies that formerly belonged to the Telebrás system according to each company’s contributions with respect to its own employees. Joint liability among the SISTEL plan sponsors continues with respect to retired employees, who will necessarily remain members of the PBS plans.
Under the PBS plans, we made monthly contributions to each plan according to a percentage of the salary of each employee who was a participant of such plan. Each employee member also made a monthly contribution to their plan on the basis of age and salary. Pension benefits of members of PBS plans vested at the same time their retirement benefits vested under the government-provided retirement plan. Fundação Sistel operates independently from us, and its assets and liabilities are fully segregated.
Beginning in 2000, we decided to establish defined contributions plans, and offered these to participants in our PBS plans, as well as to employees who do not already have a pension plan. Unlike the PBS plans, which are defined benefits plans, the defined contribution plans are financed by contributions from participating employees, as well as by our contributions as sponsor, which are credited to the individual accounts of the participants. We are responsible for all management and maintenance expenses of these plans, including the risks of death and permanent injury of the participants.
In 2005, we created a closed social security entity called Visão Prev Sociedade de Previdência Complementar to manage the pension plans of the Telefónica group in Brazil. From 2005 to 2010, management of all plans was transferred from Fundação Sistel to Visão Prev, except for PBS-A Plan which continues to be managed by Fundação Sistel.
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In 2011, the Visão Telesp, Visão Telefônica Empresas, Visão Assist and Visão ATelecom plans were consolidated into the Visão Telefônica plan. Following the acquisition of the Tevecap S.A., or TVA, companies, we became sponsors of Abrilprev, a defined contribution plan, for employees of these companies.
On September 1, 2013, we began offering the Visão Multi Pension Plan to our employees who do not have a pension plan. This plan was launched in order to standardize private pension benefits following the corporate restructuring of our subsidiaries in Brazil. In this plan, participants can make basic contributions of 1-2% and additional contributions of 0-5% of salary and we contribute a percentage between 50% to 125%, depending on length of service.
In July, 2014, a spin-off of the Abrilprev plan covering employees of the TVA companies was approved and its management transferred to Visão Prev. This plan is now called Visão TVA.
In September 2015 the merger of the plans CelPrev Telemig, Visão Celular CRT, Visão Telebahia Celular, Visão Telergipe Celular, Visão Telerj Celular, Visão Telest Celular, TCP Prev by the plan Visão Telefônica was approved. Also in September 2015 the merger of the plan Visão TVA by the plan Visão Multi was approved.
In May 2015 the company also became a sponsor of private pension plans of the open entity Brasilprev that were offered to GVT’s employees.
Considering the total workforce, 25% of our employees are participants of our private retirement plans.
E. | Share Ownership |
None of our directors or executive officers beneficially owns, on an individual basis, 1% or more of our common or preferred shares (including ADSs representing preferred shares) or of our total equity share capital. We currently have two share ownership plans in place:
1) | Performance & Investment Plan (“PIP”) |
The general shareholders’ meeting of Telefónica S.A. (our indirect controlling shareholder), held on May 18, 2011, approved a new long-term incentive plan – Performance & Investment Plan, or the PIP, for executives of Telefónica S.A. and of other entities within the Telefónica group, including us. The plan grants a certain number of shares of Telefónica S.A. to selected participants who meet the necessary requirements of the program.
The new PIP program was divided in three cycles (2011, 2012 and 2013), each of which has a three-year duration, with the start date of each cycle occurring in July 1 of each year. The cycles are independent of each other.
The executives of Telefónica group are eligible to participate in the program and they must remain in the Telefónica group for a minimum period of three years starting from the date they were qualified. In order to deliver the shares to executives at the end of each three-year cycle, the Telefónica group performs an analysis to determine if the evaluation indicators of the shares of Telefónica, which are primarily measured in terms of the total return to shareholders, or TRS, have been achieved.
The distribution of shares related to the first cycle (2011-2014) did not occur, given that the minimum TRS set forth in the program was not achieved.
The next distributions of shares are scheduled as follows:
· | Cycle 2013-2016: scheduled to occur in June 2016, with 72 executives (including two executives appointed pursuant to the bylaws) of Telefônica Brasil having the potential right to receive 274,572 initial shares of Telefónica S.A., which, as of December 31, 2015, accrued R$9.1 million. |
In 2014, Telefônica approved the extension of this program for three cycles, each lasting three years, beginning on October 1, 2014 and ending on September 30, 2017. The number of shares is communicated early in the cycle, and after the period of three years from the grant date, the shares are transferred to the participant if the specified TRS is reached.
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The next distributions of shares are scheduled as follows:
· | Cycle 2014-2017: scheduled to occur in September 2017, with 77 executives (including two executives appointed pursuant to the bylaws) of Telefônica Brasil having the potential right to receive 368,983 initial shares of Telefónica S.A., which, as of December 31, 2015, accrued R$6.6 million. |
· | Cycle 2015-2018: scheduled to occur in September 2018, with 128 executives (including two executives appointed pursuant to the bylaws) of Telefônica Brasil having the potential right to receive 771,058 initial shares of Telefónica S.A., which, as of December 31, 2015, accrued R$2.9 million. |
2) | Talent for the Future Share Plan (“TFSP”) |
The Annual General Shareholders’ Meeting of Telefónica held in 2014 approved a long-term program in order to reward the commitment, outstanding performance and high potential of its Executives globally with the allocation of shares of Telefónica.
Participants do not need to pay for their initial shares. The initially expected total duration of the plan is three years. The beginning of the cycle was on October 1, 2014 and will last until September 30, 2017. The number of shares is stated in the beginning of the cycle and, after the period of three years from the grant date, the shares will be transferred to the participant if the goal is reached.
The delivery of shares is conditional upon: (i) maintain an active working relationship in the Telefónica Group at the date of the cycle’s consolidation; and (ii) the achievement of results which represent the fulfillment of the objectives set for the plan. The level of success is based on the comparison of the evolution of shareholder remuneration considering price and dividends (Total Shareholder Return - TSR) of Telefónica share, vis-à-vis the evolution of TSRs corresponding to a number of companies quoted in the telecommunications industry, which correspond to the Comparison Group. The maximum number of shares allocated in the first open cycle on December 31, 2015 is as follows:
· | Cycle 2014-2017: scheduled to occur in September 2017, with 68 managers of Telefônica Brasil having the potential right to receive 66,500 initial shares of Telefónica S.A., which, as of December 31, 2015, accrued R$967 thousand. |
· | Cycle 2015-2018: scheduled to occur in September 2018, with 106 managers of Telefônica Brasil having the potential right to receive 81,000 initial shares of Telefónica S.A., which, as of December 31, 2015, accrued R$327 thousand. |
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. | Major Shareholders |
In accordance with our bylaws, we have two classes of capital stock authorized and outstanding: common shares (ações ordinárias) and preferred shares (ações preferenciais). Our common shares have full voting rights. Our preferred shares have voting rights only under limited circumstances. On December 31, 2015, Telefónica S.A. owned 34.67% of our common shares, Telefónica Internacional owned 8.18% of our common shares and SP Telecomunicações owned 51.46% of our common shares. Since Telefónica Internacional is a wholly owned subsidiary of Telefónica and owns 55.28% of the equity share capital of SP Telecomunicações, Telefónica has effective control over 94.47% of our outstanding common shares. Accordingly, Telefónica has the ability to control the election of our Board of Directors and to determine the direction of our strategic and corporate policies. None of Telefónica, Telefónica Internacional or SP Telecomunicações has any special voting rights beyond those ordinarily accompanying the ownership of our common and preferred shares.
Telefónica’s shares are traded on various stock exchanges, including exchanges in Madrid, Barcelona, Bilbao, Valencia, London, New York, Lima and Buenos Aires.
Telefónica is one of the largest telecommunications companies in the world in terms of market capitalization and number of customers. With its strong mobile, fixed and broadband networks, and its innovative portfolio of digital solutions, Telefónica is transforming itself into a “Digital Telco,” a company that will be even better placed to meet the needs of its customers and capture new revenue growth.
The following tables set forth information relating to the ownership of common and preferred shares by Telefónica, SP Telecomunicações, Telefónica Internacional and our officers and directors based on 571,644,217 common shares and 1,119,340,706 preferred shares outstanding as of December 31, 2015. We are not aware of any other shareholder that beneficially owns more than 5% of our common or preferred shares.
Shareholder’s Name | Number of common shares owned | Percentage of outstanding common shares | ||||||
SP Telecomunicações | 294,158,155 | 51.46 | % | |||||
Telefónica S.A. | 198,207,608 | 34.67 | % | |||||
Telefónica Internacional | 46,746,635 | 8.18 | % | |||||
All directors and executive officers as a group | 1,511 | — |
Shareholder’s Name | Number of preferred shares owned | Percentage of outstanding preferred shares | ||||||
SP Telecomunicações | 38,537,435 | 3.44 | % | |||||
Telefónica S.A. | 305,122,195 | 27.26 | % | |||||
Telefónica Internacional | 360,532,578 | 32.22 | % | |||||
All directors and executive officers as a group | 21,805 | — |
As of December 31, 2015, there were a total of 243 ADR holders of record and 188,546,298 ADRs outstanding, representing 188,546,298 preferred shares or 17% of outstanding preferred shares. Since some of these ADRs are held by nominees, the number of record holders may not be representative of the number of beneficial holders.
B. Related Party Transactions
Transactions with related parties are submitted to review by our related parties committee and, when necessary, approval by our board of directors and shareholders, in compliance with our bylaws. We believe that all related party transactions are carried out according to guidelines, criteria and market rules in order to provide sufficient transparency to contracts between related parties.
Note 29 to our consolidated financial statements presents, in tabular format, more detailed financial information with respect to transactions and balances with related parties. We provide below a summary description of our material transactions with related parties to which we are currently party or have been party in the last three years.
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Telefónica S.A.
On January 2, 2008, we entered into a copyright licensing agreement, or Brand Fee agreement with Telefónica S.A., with respect to the brand “Telefonica.” The amounts in connection with these agreements totaled R$337 million in 2015, R$327 million in 2014 and R$292 million in 2013.
Telefônica Internacional Wholesales Services Brasil Ltda.
On June 3, 2002, we entered into a supply agreement for the IP Band with Telefônica Internacional Wholesales Services Brasil Ltda., with respect to the internet transit service, which is a connection dedicated to the transportation of internet traffic. The amounts in connection with these agreements totaled R$174 million in 2015, R$147 million in 2014 and R$138 million in 2013.
Some international roaming services are provided by companies in the Telefónica group.
C. | Interests of Experts and Counsel |
Not applicable.
A. | Consolidated Statements and Other Financial Information |
See Note 19 of our Consolidated Financial Statements.
Legal Proceedings
We are party to legal proceedings incidental to the normal course of our business. The main categories of such proceedings include:
· | administrative and judicial litigation with Instituto Nacional da Seguridade Social, the National Institute of Social Security, or INSS; |
· | administrative and judicial proceedings relating to tax payments; |
· | lawsuits brought by employees, former employees and trade unions relating to non-compliance with the labor legislation; |
· | civil judicial proceedings regarding consumer rights; and |
· | other civil suits, including litigation arising out of the breakup of Telebrás and events preceding the breakup. |
Our policy with respect to provisioning for contingencies classifies the various legal proceedings to which we are party as “probable,” “possible” and “remote.” We and our subsidiaries are parties to labor, tax, civil and regulatory claims and set up a provision for contingencies for which the likelihood of loss was estimated as probable. Our senior management classifies each legal proceeding into one of these three categories (probable, possible and remote) based upon the advice of internal and external counsel and specialized technical advisors in charge of each matter. Due to the level of provisioning and based on its analysis of the individual cases, our management believes that no additional liabilities related to any legal proceedings will have a material effect on our financial condition or results of operations, other than as described below.
There are no material proceedings in which any of our directors, any members of our senior management, or any of our affiliates is either a party adverse to us or to our subsidiaries or has a material interest adverse to us or to our subsidiaries.
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Tax Matters — Probable Loss
Federal Taxes
On December 31, 2015, the company was party to federal administrative and judicial proceedings relating to (i) claims resulting from the non-ratification of compensation and refund requests, formulated by the company; (ii) social contributions relating to an alleged failure to pay 11% on the value of invoices, billing and receipts from service providers hired for the transfer of labor; (iii) CIDE levied on the remittance of funds abroad relating to technical services, administrative assistance and to services of similar nature, as well as royalties; (iv) fixed: non-inclusion of interconnection and EILD expenses in the FUST base and Wireless carrier: non-inclusion of revenues from interconnection in the FUST tax base; (v) contribution to Empresa Brasileira de Comunicação, created by Law No. 11,652/08; (vi) TFI/TFF on mobile stations; (vii) IRRF on interest on shareholder’s equity; (viii) Public Price for Numbering Resources Management (PPNUM) by ANATEL instituted by Resolution No. 451/06;; (ix) Social Investment Fund (Finsocial) offset amounts; (x) failure to pay withholding social contribution levied on services rendered, remuneration, salaries and other salary bases; (xi) COFINS – Requirement resulting from non-inclusion of financial income into the tax base; (xii) additional charges to the PIS and COFINS tax base, as well as additional charges to COFINS required by Law No. 9718/98; (xiii) Tax on Net Income (ILL); (xiv) non-inclusion of interconnection and EILD expenses in the FUNTTEL base and Wireless carrier; and (xv) non-inclusion of revenues from interconnection in the FUNTTEL tax base
In the opinion of management and our legal advisors, the chances of loss in the foregoing federal administrative and judicial proceedings is probable. On December 31, 2015, total consolidated provisions for these federal administrative and judicial proceedings amounted to R$2,558.2 million.
State and Municipal Taxes
State Taxes
On December 2015, the company was party to administrative and judicial proceedings in progress referring to (i) ICMS tax credits on electric power and tax credits without documentation; (ii) ICMS not levied on telecommunication services; (iii) disallowance of ICMS tax incentives for cultural projects; (iv) environmental administrative fine; (v) disallowance of ICMS credits referring to Covenant 39; (vi) co-billing; (vii) fixed asset ICMS tax credit reversal; and (viii) ICMS tax on internet (data) infrastructure lease payments. On December 31, 2015, total consolidated provisions for these state level administrative and judicial proceedings amounted to R$156.4 million.
Municipal Taxes
On December 31, 2015, the company was party to tax claims at a municipal level, both in the administrative and judicial sphere which, based on the opinion of our legal advisors, are classified as a probable loss, related to (i) real estate property tax (Imposto Predial Territorial e Urbano - IPTU); (ii) Service tax on leases of movable assets for supplementary or intermediate activities; (iii) Audit, control and surveillance tariff (taxa de vigilância, controle e fiscalização - TVCF); and (iv) Service tax retention on fixed duration service contracts. On December 31, 2015, total consolidated provisions for these municipal level proceedings amounted to R$20.0 million.
ANATEL
FUNTTEL – Fund for the Technological Development of Telecommunications
On December 31, 2015, GVTPart maintains administrative lawsuits which are waiting for judgment by First Instance Administrative Courts. These lawsuits refer to the levy of FUNTTEL contribution on other revenues (other than telecommunications), revenues and expenses transferred to other Operators (interconnection charges), as well as discounts and other taxes. On December 31, 2015, the total provisioned amount totaled R$1.5 million.
Tax Matters — Possible Loss
The following tax proceedings were pending as of December 31, 2015, and, in the opinion of our management and our legal advisors, the chance of loss in these cases is “possible.”
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Federal Taxes
On December 31, 2015, the company was party to various federal administrative and judicial proceedings, which are waiting to be tried at various court levels. On December 31, 2015, the total consolidated amount was R$5,909.0 million.
Key proceedings refer to: (i) Non-compliance manifestations due to the ratification of compensation requests made by the company; (ii) fine for distribution of dividends even in view of the alleged existence of outstanding debts payable to the federal government; (iii) social security contribution (INSS) on compensation payment for salary devaluation arising from losses caused by “Plano Verão” (Summer Plan) and “Plano Bresser” (Bresser Plan), SAT (Work Accident Insurance), Social Security and payables to third parties (INCRA and SEBRAE), supply of meals to employees, 11% retention (labor assignment); (; (iv) PIS levied on roaming; (v) CPMF levied on operations resulting from the technical cooperation agreement with the National Treasury Department (STN) (offsetting through the Integrated System of Federal Government Financial Administration - SIAFI) and on foreign-exchange contracts required by the Central Bank; (vi) IRPJ and CSLL related to deductions on revenues from reversal of provisions; (vii) Income tax and social contribution – disallowance of costs and miscellaneous expenses not substantiated; (viii) deductions of COFINS from loss in swap transactions; (ix) PIS / COFINS accrual basis versus cash basis; (x) IRPJ payable in connection with allocation of excess funds to Northeast Investment Fund (FINOR), Amazon Region Investment Fund (FINAM) or Economic Recovery Fund of the State of Espírito Santo (FUNRES); (xi) IRPJ on derivative operations; (xii) IRPJ and CSLL – disallowance of expenses related to the goodwill paid in the acquisition of Celular CRT S.A., goodwill arising from the privatization process, Vivo’s corporate restructuring and goodwill from the mergers of Navytree and TDBH; (xiii) goodwill on the acquisition of GVT Holding by Vivendi; (xiv) ex-tariff, abrogation of the benefit from the CAMEX Resolution nº. 6, increase in the import tariff from 4% to 28%; (xv) industrialization tax (IPI) on the dispatch from company premises of “Fixed access unit” equipment to clients on a lending agreement; (xvi) PIS and COFINS on value added services; (xvii) INSS on stock options, payment requirement for social security contributions on amounts paid by group companies to employees on behalf of the share purchasing plan; and (xviii) financial operations tax (Imposto sobre operações financeiras - IOF), payment requirements for intercompany and credit operations.
In the opinion of management and its legal advisors, the chances of loss in these proceedings are possible, but not probable and, consequently, we have not made any provisions in connection with these proceedings.
State Taxes
On December 31, 2015, the company was a party to various state administrative and judicial proceedings, which are ongoing in various court levels. On December 31, 2015, the total consolidated amount was R$12,922.0 million.
Key proceedings refer to: (i) provision of facility, utility and convenience services and rental of the “Speedy” service modem; (ii) international calls (DDI); (iii) undue credit related to the acquisition of items intended to property, plant and equipment (fixed assets); (iv) lack of proportionate credit reversal referring to the acquisition of property, plant and equipment items (fixed assets); (iv) amounts untimely recognized as ICMS tax credits; (v) service provided outside São Paulo state with ICMS paid to São Paulo State; (vi) co-billing, (vii) tax substitution with a fictitious tax base (tax guideline); (viii) use of credits related to acquisition of electric power; (ix) secondary activities, value added and supplementary services (ICMS CONFAZ Covenant 69/98); (x) tax credits related to opposition/challenges referring to telecommunications services not provided or mistakenly charged (ICMS CONFAZ Covenant 39/01); (xi) shipment of goods with prices lower than acquisition prices (unconditional discounts); (xii) deferred charge of ICMS - Interconnection (DETRAF – Traffic and Service Provision Document); (xiii) credits derived from tax benefits granted by other states; (xiv) disallowance of tax incentives related to cultural projects; (xv) transfers of assets among business units owned by the company; (xvi) communications service tax credits used in provision of services of the same nature; (xvii) card donation for prepaid service activation; (xviii) reversal of credit from return and free lease in connection with assignment of networks (used by the company itself and exemption from public bodies); (xix) DETRAF (CDR), (xx) ICMS on own consumption; (xxi) ICMS on exemption of public bodies; (xxii) issue of invoices with negative ICMS amounts; (xxiii) restructuring of ledger without prior authorization by the Treasury; and (xxiv) ICMS on monthly subscription.
In the opinion of our management and its legal advisors, the chances of loss in the foregoing state administrative and judicial proceedings are possible, but not probable and, consequently, we have not made any provisions in connection with these proceedings.
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Municipal Taxes
On December 31, 2015, the company was party to various administrative and judicial proceedings at the municipal level, which are ongoing various court levels. On December 31, 2015, the total consolidated amount was R$769.1 million.
Key proceedings refer to: (i) ISS – secondary activities, value added and supplementary services; (ii) withholding ISS; (iii) real estate property tax (Imposto Predial Territorial e Urbano - IPTU); (iv) Land Use Fee; (v) municipal fees; (vi) tariff for Use of Mobile Network (TUM), infrastructure lease; (vii) advertising services; (viii) services provided by third parties; (ix) business management consulting services provided by Telefonica Internacional (TISA); (x) service tax (ISS - Imposto sobre serviços) levied on caller ID services and on cell phone activation and (xi) service tax on continuous services contracts, provisions, reversals and cancelled invoices.
In the opinion of our management and our legal advisors, the chance of loss in the foregoing state administrative and judicial proceedings is possible but not probable and, consequently, we have not made any provisions in connection with these proceedings.
ANATEL
FUST – Universalization of Telecommunications Service
Writs of Mandamus filed separately by the fixed and mobile operators to recognize the right to include interconnection and EILD expenses in the FUST base for fixed services and interconnection revenue in the FUST base for mobile services. We have questioned such charges and the proceedings are waiting to be tried in the court of appeals.
As a result, ANATEL registered various infractions to constitute tax credits and other revenues that were not obtained from the provision of telecommunication services, on which ANATEL believes FUST is due.
On December 31, 2015, the total aggregate amount under dispute was R$3,647.3 million.
In the opinion of our management and its legal advisors, the chances of loss in the foregoing proceedings are possible, but not probable and, consequently, we have not made any provisions in connection with these proceedings.
FUNTTEL – Fund for the Technological Development of Telecommunications
On December 31, 2015, the company was party to administrative and judicial proceedings, which are waiting to be tried at the lower administrative court and the court of appeals.
Such proceedings concern the collection of contributions to FUNTTEL on other revenues (not related to telecom services), as well as on income and expenses transferred to other operators (interconnection).
On December 31, 2015, the total aggregate amount under dispute was R$911.8 million. In the opinion of our management and its legal advisors, the chances of loss in the foregoing proceeding are possible, but not probable and, consequently, we have not made any provisions in connection with this proceeding.
FISTEL – Telecommunications Supervision Fund
Due extension of the effective license period to use telephone switches in connection with use of landline phone carriers and extension of the right to use radiofrequency in connection with wireless service (wireless carriers), ANATEL charges the Installation Inspection Fee, TFI.
This collection is based on ANATEL’s understanding that such extension would represent a taxable event for TFI. We understand that such collection is unjustified, and separately challenged the aforesaid fee in court. On December 31, 2015, total consolidated amount was R$2,455.2 million, without the respective deposit in full.
In the opinion of our management and our legal advisors, the chance of loss in the foregoing proceeding is possible but not probable and, consequently, we have not made any provisions in connection with this proceeding.
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PPNUM – Price Relative to the Public Administration of Numbering Resources
Our former subsidiary Vivo, along with other wireless carriers in Brazil, are challenging in court the tariff charged by ANATEL for use by such carriers of the numbering resources managed by the agency. When charged by ANATEL, Vivo made a judicial deposit referring to the amounts payable. On April 23, 2009, the carriers received a favorable sentence and the lawsuit is currently waiting to be tried at the court of appeals. On December 31, 2015, the total aggregate amount under dispute was R$5.6 million.
In the opinion of our management and our legal advisors, the chance of loss in the foregoing proceeding is possible but not probable and, consequently, we have not made any provisions in connection with this proceeding.
Labor Litigation
We are also a defendant in several legal proceedings filed by former employees and outsourced employees (alleging joint or several liability), who claim, among other things, deficient overtime payment, unequal compensation, retirement wage supplements, health and security hazard compensation, free extension of health plan benefits to retirees of Company; and proceedings regarding our outsourcing practices.
In addition, we are also a defendant in four public civil actions filed by the Federal Ministry of Labor, which concerns contracting third-party companies in order to perform services related to our core business. Although the likelihood of loss of such actions is “possible,” no value amount has been attributed because currently we are unable to calculate the total amount we will owe in the event we lose and, as a result, we have not recorded any amounts.
Civil Claims
There are several civil claims against us. We have recorded R$1.0 billion in provisions for these proceedings where the risks are deemed probable, including the civil proceedings described below:
· | Expansion Plan–PEX. We are defendants in proceedings related to the possible right of individuals who purchased our shares in connection with our network expansion plan after 1996, to receive additional shares from us. These claims are in various levels of the court system. The chance of loss in such proceedings is classified on a case-by-case basis according to the facts presented in each proceeding. For the proceedings in which the chance of loss was classified as “probable,” we recorded a provision of R$190.0 million. |
· | The Company and/or its subsidiaries are parties to various civil proceedings related to consumers in administrative and judicial spheres, referring to non-compliance with services and/products sold. On December 31, 2015, provisioned amounts totaled R$ 435.8 million (R$ 325.6 million on December 31, 2014). |
· | The Company and/or its subsidiaries are parties to various civil proceedings of non-consumer nature in administrative and judicial spheres, all related to the ordinary course of business. On December 31, 2015, provisioned amounts totaled R$ 384.6 million (R$ 308.4 million on December 31, 2014). |
There are several civil claims against us for which the chance of loss is possible and for which we have not recorded provisions, including:
· | Pension Benefit Plan Spin-Off. Sistel Participants Association in São Paulo (ASTEL) and National Federation of Associations of Retirees and Pensioners and Participants in Pension Funds in Telecom (FENAPAS), they filed with two distinct - same object though - public civil action against the company, Sistel Foundation and others, claiming the annulment of the spin-off of the PBS pension benefit plan that occurred in 2000 which caused the creation of the specific TELESP–PBS pension benefit plan, and corresponding allocation of resources resulted from the technical surplus and fiscal contingencies existing at that time. The chance of loss in both of them is possible based on the opinion of our legal advisors. The amount involved in both cases cannot yet be determined until an expert appraisal report is conducted since it includes the spun-off portion of Sistel related to the telecommunication operators from the former “Telebrás System.” |
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· | Community Telephone Plan–PCT. We are subject to civil public action proposals claiming the possible right for indemnity of associates and entities hired for the construction of community networks connected to the network of fixed telephone operators and have not received shares for their financial investment in the municipality of Mogi das Cruzes, involving a total amount of approximately R$421.1 million. Based on the opinion of our legal advisors, the chance of loss is possible. The appellate court has ruled in our favor and changed the lower court decision. The plaintiff filed an appeal to the Supreme Court which has also ruled in our favor. |
· | Collective Action filed by SISTEL Participants’ Association (ASTEL) in the state of São Paulo, in which SISTEL associates in the state of São Paulo challenge the changes made in the Medical Care Plan for Retired Employees (PAMA) and claim for the reestablishment of the prior status quo. This proceeding is still in the appeal phase, and awaits a decision as regards the possible admission of the Special and Additional Appeals in connection with the Court of Appeals’ decision, which changed the decision rendering the matter groundless. The amount cannot be estimated, and the claims cannot be settled due to their unenforceability, in that it entails a return to the prior plan conditions. |
· | Services Quality Class Action. The Public Prosecutor Office of the state of São Paulo commenced a class action suit claiming moral and property damages suffered by all consumers of telecommunication services from 2004 to 2009 due to the bad quality of service and failures of the communications system. The Public Prosecutors Office suggested a total award against the company of R$1 billion. A judgment was rendered on April 20, 2010 imposing the payment of damages to all consumers who proved to be eligible for the award. Alternatively, if clients do not prove themselves eligible in a number compatible with the severity of the damage after a period of one year, the judgment establishes that R$60 million should be deposited in a special fund for protection of diffuse customer interests (Fundo Especial de Defesa de Reparação de Interesses Difusos Lesados). It is not possible to estimate how many consumers may present themselves in this procedure nor the values to be claimed by them. The parties filled an appeal and the effects of the sentence were suspended. The appellate court has ruled in our favor and changed the lower court decision. The plaintiff filed an appeal to the Supreme Court, which is awaiting decision. Despite the possible degree of risk, no value amount was attributed to this action because currently we are unable to calculate the total amount to be paid by us in the event we lose and, as a result, we have not recorded any provisions. |
· | The Company is party to other civil claims, at several levels, related to service rendering. Such claims have been filed by individual consumers, civil associations representing consumer rights or by the Bureau of Consumer Protection (PROCON), as well as by the Federal and State Public Prosecutor’s Office. The Company is also party to other claims of several types related to the normal course of business. On December 31, 2015, possible amounts totaled R$ 2,146.9 million (R$ 1,525.9 million on December 31, 2014). |
· | TGLog is a party to a civil execution proceeding filed with the 3rd Civil Court of Barueri – SP owing to alleged non-payment of transportation service bills. TGLog alleges that it made legitimate discounts owing to contract breaches and losses arising from damages to goods of its customers transported by claimant, which are also subject matter of another proceeding. On December 31, 2015, the case amounted to R$1.0 million. |
· | The Company has received fines regarding the noncompliance with SAC Decree. We currently have various actions (administrative and judicial proceedings). On December 31, 2015, amounts totaled R$12.9 million (R$ 10.9 million on December 31, 2014). |
· | Ownership of Caller ID. Lune Projetos Especiais Telecomunicação Comércio e Ind. Ltda., a Brazilian company, filed on November 20, 2001 lawsuits against 23 wireless telecommunications operators, including TELESP Celular Participações and its subsidiaries. The lawsuits allege that those operators violated patent No. 9202624-9, related to Equipamento Controlador de Chamadas Entrantes e do Terminal do Usuário, or Caller ID, granted to Lune by the Brazilian Institute of Intellectual Property, or the INPI, on September 30, 1997. Lune called on the operators to cease to provide Caller ID services and sought payment from them for the unauthorized use of the Caller ID system in an amount equivalent to the payment of fees received by such operators for use of the Caller ID system. On October 5, 2011, the law suit was judged groundless against the Phone Companies. The parties filled an appeal and the effects of the sentence were suspended. This decision is not final, and will be tried before the Court and Superior Court |
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of Justice. Otherwise, Ericsson Telecomunicações S.A., TC and Telerj Celular (formerly Vivo subsidiaries before our corporate restructuring) filed similar lawsuits against Lune and INPI and these lawsuits are still pending before the courts. In connection with this proceeding, a third company, Sonintel, and its two partners also brought an Ação de Oposição, whereby they reinvoked their rights to a previous patent related to Caller ID, and to which the above mentioned patent (No. 9202624-9) was linked. We believe, based on the opinion of outside counsel that the likelihood of an unfavorable outcome with respect to Lune’s claim against us is possible. We are unable to determine at this time the extent of any potential liabilities with respect to this claim.
· | Validity of Prepaid Plan Minutes. We and our subsidiaries, together with other Brazilian wireless telecommunications operators, are defendants in various lawsuits brought by the public prosecutor’s office and consumer protection associations challenging the imposition of a deadline for the use of purchased prepaid minutes. The plaintiffs allege that purchased prepaid minutes should not expire after any specified deadline. Conflicting decisions have been issued by the courts reviewing this matter. Although we believe that our criteria for imposing the deadline is in compliance with ANATEL’s rules, we believe, based on the opinion of outside counsel, that the likelihood of an unfavorable outcome with respect to this claim is possible. |
Regulatory and Antitrust Litigation
We were involved in several administrative proceedings relating to alleged breaches of obligations and other judicial proceedings relating to sanctions imposed by ANATEL at the administrative level. As of December 31, 2015, amounts recorded for those proceedings were R$3.7 billion, of which R$642.7 million are provisioned.
Administrative and legal proceedings discussing payment of 2% charge on revenue from interconnection services due to the extension of right of use of SMP-related radiofrequencies. Under clause 1.7 of the Authorization Terms that grant right of use of SMP-related radio frequencies, the extension of right of use of such frequencies entails payment every two years, during the extension period (15 years), of a 2% charge calculated on net revenue from the basic and alternative service plans of the service company, determined in the year before that of payment.
However, ANATEL determined that the 2% charge should be calculated on revenue from service plans and also on revenue from interconnection services and other operating income, which is not provided for by clause 1.7 of the referred to Authorization Terms.
Considering, based on the provisions of the Authorization Terms, that revenue from interconnection services should not be included in the calculation of the 2% charge for radiofrequency use right extension, the Company filed administrative and legal proceedings challenging these charges, based on ANATEL’s position.
Dividends and Dividend Distribution Policy
Priority and Amount of Preferred Dividends
The Brazilian Corporate Law determines that the shareholders of a company have the right to receive a minimum percentage of the distributable profits (mandatory dividends) comprising dividends and/or interest on shareholders’ equity, or distributable amount, of the corporation for each fiscal year. If such amount is not determined in the bylaws of the company, Brazilian Corporate Law specifies the criteria to determine the minimum amount of the dividend. See “Item 10. Additional Information—B. Memorandum and Articles of Association.” Moreover, each Brazilian company may issue new preferred shares for public distribution only if one of the following terms applies to the preferred shares: (i) the right to receive dividends equivalent to at least 25% of the adjusted net profit for the fiscal year, to be calculated in accordance with Article 202 of the Brazilian Corporate Law as follows: (a) priority in the receipt of dividends corresponding to at least 3% of the book value per share and (b) the right to an equal share of the profits attributable to the holders of common shares, after the holders of common shares have received a dividend equal to a minimum of 3% of the book value per share; or (ii) the right to receive dividends, at least 10% higher than those paid for each common shares; or (iii) tag-along rights of at least 80% of the price per share paid in the sale of control to be paid by the controlling shareholder and also including the right to receive dividends at least equal to the dividend paid to common shares.
According to our bylaws, we are required to distribute as dividends of each fiscal year ending on December 31, to the extent amounts are available, an aggregate amount equal to at least 25% of adjusted net income as a mandatory dividend. The annual dividend distributed to holders of our preferred shares is 10% higher than the dividend distributed to our common shareholders.
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As per our bylaws, our board of directors may declare interim dividends based on (i) the accrued profits recorded in our semiannual financial statements; (ii) the accrued profits recorded in our quarterly financial statements or in our financial statements of shorter periods, provided that the total amounts of dividends paid up every six months does not exceed the total amount within the capital reserve determined within article 182 of Brazilian Corporate Law; and (iii) the amount recorded on the profit and loss account or profit reserve account on our last annual or semiannual financial statements.
Under the Brazilian Corporate Law, a company is allowed to withhold payment of the mandatory dividend in respect of common shares and preferred shares if:
· | management and the fiscal board report to the shareholders meeting that the distribution would be incompatible with the financial circumstances of the company; and |
· | the shareholders ratify this decision at the shareholder’s meeting. In this case: |
· | management must forward to the CVM within five days of the shareholders meeting an explanation justifying the decision at the shareholders meeting; and |
· | the profits that were not distributed are to be recorded as a special reserve and, if not absorbed by losses in subsequent fiscal years, are to be paid as dividends as soon as the company’s financial situation permits. |
For the purposes of the Brazilian Corporate Law, net profits are defined as net income after income tax and social contribution for the fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to beneficiary parties’, employees’ and management’s participation in a company’s profits and founders’ shares.
Under Brazilian Corporate Law, adjusted net income is an amount equal to our net income adjusted to reflect allocations to or from (i) legal reserves, and (ii) contingency reserves for anticipated losses, if any.
At each annual shareholders meeting, the Board of Directors is required to suggest the allocation of net profits obtained during the preceding fiscal year. Under Brazilian Corporate Law, we are required to maintain a legal reserve, to which 5% of our net profits must be allocated for each fiscal year, until the reserve amounts to 20% of our paid-in capital. Net losses, if any, shall be charged against the accumulated profits, profit reserves and legal reserve, following this order.
Brazilian Corporate Law also provides for an additional allocation of net profits to special accounts, also to be recommended by management and subject to approval by shareholders at the annual shareholders meeting, including the amount of net profits that may be allocated to the contingency reserve for anticipated losses that are deemed probable in future years. Any amount so allocated in a previous year must be either:
· | reversed in the fiscal year in which the loss was anticipated, if the loss does not in fact occur; or |
· | written-off if the anticipated loss occurs. |
Net profits may also be allocated to the unrealized income reserve in case the total amount of mandatory dividends exceeds the amount of realized net income. Such allocation should also be suggested by management and subject to approval by shareholders at the shareholders meeting. For such purpose, realized income is the balance of net profits exceeding the sum of:
· | the positive net result of equity adjustment; and |
· | earnings, revenues or net profits from transactions or the accounting of assets and liabilities at market value, whose financial realization term occurs after the end of the next fiscal year. |
The amounts available for distribution are determined on the basis of financial statements prepared in accordance with the accounting practices adopted in Brazil.
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If the minimum dividend to be paid to the holders of preferred shares is not paid for the period set forth in our bylaws, which in no event shall be longer than three years, the holders of preferred shares will be entitled to full voting rights until such dividend is paid in full.
Payment of Dividends
We are required by law and our bylaws to hold an annual shareholders meeting until April 30 of each year to approve, among other issues, the allocation of net profits obtained during the preceding fiscal year and the declaration of dividends by decision of common shareholders, acting on the recommendation of the executive officers, as approved by the Board of Directors. The payment of annual dividends is based on the financial statements prepared for each fiscal year ending on December 31. Under the Brazilian Corporate Law, dividends are required to be paid within 60 days following the date the dividend is declared to the shareholders of record on the declaration date, unless a resolution by the shareholders sets forth another date of payment, which must occur before the end of the fiscal year.
A shareholder has a three-year period from the dividend payment date to claim dividends in respect of its shares, after which any unclaimed dividend distributions legally revert to us. Because our shares are issued in book-entry form, dividends with respect to any share are credited to the account holding the share and no action is required on part of the shareholder. We are not required to adjust the amount of paid-in capital for inflation.
If a shareholder is not a resident of Brazil, he or she must register with the Central Bank to be eligible to receive dividends, sales proceeds or other amounts with respect to his or her shares outside of Brazil. Our preferred shares underlying ADSs are held in Brazil by a Brazilian custodian, Citibank N.A., as the agent for the depositary, which is the registered owner of our shares.
Payments of cash dividends and distributions, if any, will be made in Brazilian currency to the custodian on behalf of the depositary, which will then convert those proceeds into U.S. dollars and will provide for U.S. dollars to be delivered to the depositary for distribution to holders of ADSs. If the custodian is unable to immediately convert the Brazilian currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely affected by devaluations of the Brazilian currency that occur before dividends are converted and remitted. Dividends in respect of the preferred shares paid to resident and non resident shareholders, including holders of ADSs, are not currently subject to Brazilian withholding tax.
Additional Payments on Shareholders’ Equity
Law No. 9,249, dated December 26, 1995, as amended, provides for distribution to shareholders of interest on shareholders’ equity, which may be computed against the amount of dividends to be distributed to the shareholders. A company may treat these payments as financial expenses for income tax and social contribution purposes. Currently, this interest is limited to the daily pro rata variation of the TJLP, a nominal long-term interest rate determined by the federal government that includes an inflation factor and cannot exceed the greater of:
· | 50% of net income (before deducting income taxes and the interest on shareholders’ equity) for the period in respect of which the payment is made, or |
· | 50% of the sum of retained earnings and profit reserves. |
Currently, any payment of interest in respect to preferred shares to shareholders (including the holders of ADSs) is subject to Brazilian withholding tax at a rate of 15%, or 25% in the case of a shareholder domiciled in a tax haven, and these payments may be included, at their net value, as part of any mandatory dividend. If payment of interest on shareholders equity is made for a beneficiary located outside of Brazil, the IOF tax triggers at a rate of zero. See “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations— Distributions of Interest on Shareholders’ Equity.”
We declare and pay dividends and/or interest on shareholders’ equity as required by Brazilian Corporate Law and our bylaws. The declaration of annual dividends, including dividends in excess of the mandatory distribution, requires approval by the vote of a majority of the holders of common shares, and depends on many factors. These factors include our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by shareholders. Our shareholders have historically acted on these matters based on
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recommendations by the Board of Directors. Within the context of tax planning, we may determine in the future that it is to our benefit to distribute interest on shareholders’ equity.
The following table sets forth the dividends or interest on shareholders’ equity paid to holders of our common and preferred shares since 2011 in reais.
Year | Description (Dividends or Interest on Shareholders’ Equity)(1) | Common Shares | Preferred Shares | |||||||||
(per share/in R$) | ||||||||||||
2015 | Div/Int | 3.195401 | 3.514941 | |||||||||
2014 | Div/Int | 2.122786 | 2.335065 | |||||||||
2013 | Div/Int | 3.946735 | 4.341409 | |||||||||
2012 | Div/Int | 2.567510 | 2.824261 | |||||||||
2011 | Div/Int | 4.783035 | 5.261339 |
(1) | Interest on shareholders’ equity is net of withholding taxes. |
Dividends and Interest on Shareholders’ Equity
On January 10, 2013, the Board of Directors approved the distribution of interim dividends of R$1,650 million declared on the basis of the balance sheet on September 30, 2012, which was paid on February 18, 2013.
On April 16, 2013, at the General Shareholders Meeting, the shareholders approved the distribution of dividends to the common and preferred shares in the total amount of R$1,499 million declared on the basis of the closing balance sheet on December 31, 2012, which was paid on November 26, 2013.
On August 19, 2013, the Board of Directors approved a payment of interest on shareholders’ equity for the common and preferred shares totaling R$220 million, which was paid on November 26, 2013.
On September 19, 2013, the Board of Directors approved a payment of interest on shareholders’ equity for the common and preferred shares totaling R$220 million, which was paid on November 26, 2013.
On October 18, 2013, the Board of Directors approved a payment of interest on shareholders’ equity for the common and preferred shares totaling R$538 million and the distribution of interim dividends to the common and preferred shares in the total amount of R$746 million, which was paid on November 26, 2013.
On December 18, 2013, the Board of Directors approved a payment of interest on shareholders’ equity for the common and preferred shares totaling R$760 million, which was paid on March 14, 2014.
On February 25, 2014, the Board of Directors of the Company approved the distribution of interim dividends of R$1,043 million, based on the existing profits in the balance of the fourth quarter of 2013, which was paid on March 27, 2014.
On April 23, 2014, at the General Shareholders Meeting, the shareholders approved the distribution of dividends to the common and preferred shares in the total amount of R$133 million declared on the basis of the closing balance sheet on December 31, 2013, which was paid on May 27, 2014.
On July 18, 2014, the Board of Directors approved a payment of interest on shareholders’ equity for the common and preferred shares totaling R$298 million, which was paid on December 19, 2014.
On August 18, 2014, the Board of Directors approved a payment of interest on shareholders’ equity for the common and preferred shares totaling R$299 million, which was paid on December 19, 2014.
On September 19, 2014, the Board of Directors approved a payment of interest on shareholders’ equity for the common and preferred shares totaling R$250 million, which was paid on December 19, 2014.
On October 20, 2014, the Board of Directors approved a payment of interest on shareholders’ equity for the common and preferred shares totaling R$306 million, which was paid on June 12, 2015.
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On November 17, 2014, the Board of Directors approved a payment of interest on shareholders’ equity for the common and preferred shares totaling R$463 million, which was paid on June 12, 2015.
On December 18, 2014, the Board of Directors approved a payment of interest on shareholders’ equity for the common and preferred shares totaling R$475 million, which was paid on June 12, 2015.
On January 30, 2015, the Board of Directors approved a payment of dividends for the common and preferred shares totaling R$2,750 million on the basis of the closing balance sheet on December 31, 2014, paid in two installments. The first installment of R$ 855 million was paid on June 12, 2015 and the second installment of R$ 1,895 million was paid on December 9, 2015.
On April 9, 2015, at the General Shareholders Meeting, the shareholders approved the distribution of dividends to the common and preferred shares in the total amount of R$19 million on the basis of the closing balance sheet on December 31, 2014, which was paid on December 9, 2015.
On May 12, 2015, the Board of Directors approved, subject to shareholder approval, a payment of interest on shareholders’ equity to common and preferred shares totaling and R$ 515 million and a distribution of interim dividends to common and preferred shares totaling R$270 million, on the basis of the existing profit in the balance sheet of April 30, 2015. The payment will be made to common and preferred shareholders who were registered in the Company’s books on May 25, 2015. The payment will be made by the end of fiscal year 2016, on a date to be determined by the Company’s Directors.
On July 20, 2015, the Board of Directors approved, subject to shareholder approval, a payment of interest on shareholders’ equity for the common and preferred shares totaling R$221 million. The payment will be made to common and preferred shareholders who were registered in the Company’s books on July 31, 2015. The payment will be made by the end of fiscal year 2016, on a date to be determined by the Company’s Directors.
On August 20, 2015, the Board of Directors approved, subject to shareholder approval, a payment of interest on shareholders’ equity for the common and preferred shares totaling R$237 million. The payment will be made to common and preferred shareholders who were registered in the Company’s books on August 31, 2015. The payment will be made by the end of fiscal year 2016, on a date to be determined by the Company’s Directors.
On September 18, 2015, the Board of Directors approved, subject to shareholder approval, a payment of interest on shareholders’ equity for the common and preferred shares totaling R$147 million. The payment will be made to common and preferred shareholders who were registered in the Company’s books on September 30, 2015. The payment will be made by the end of fiscal year 2016, on a date to be determined by the Company’s Directors.
On October 19, 2015, the Board of Directors approved, subject to shareholder approval, a payment of interest on shareholders’ equity for the common and preferred shares totaling R$88 million. The payment will be made to common and preferred shareholders who were registered in the Company’s books on October 30, 2015. The payment will be made by the end of fiscal year 2016, on a date to be determined by the Company’s Directors.
On November 19, 2015, the Board of Directors approved, subject to shareholder approval, a payment of interest on shareholders’ equity for the common and preferred shares totaling R$235 million. The payment will be made to common and preferred shareholders who were registered in the Company’s books on November 30, 2015. The payment will be made by the end of fiscal year 2016, on a date to be determined by the Company’s Directors.
On December 17, 2015, the Board of Directors approved, subject to shareholder approval, a payment of interest on shareholders’ equity for the common and preferred shares totaling R$303 million. The payment will be made to common and preferred shareholders who were registered in the Company’s books on December 30, 2015. The payment will be made by the end of fiscal year 2016, on a date to be determined by the Company’s Directors.
On February 19, 2016, the Board of Directors approved, subject to shareholder approval, a payment of interest on shareholders’ equity for the common and preferred shares totaling R$200 million. The payment will be made to common and preferred shareholders who were registered in the Company’s books on February 29, 2016. The payment will be made by the end of fiscal year 2017, on a date to be determined by the Company’s Directors.
B. | Significant Changes |