20-F 1 dp146599_20f.htm FORM 20-F

 

 

As filed with the Securities and Exchange Commission on February 25, 2021

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 

Washington, D.C. 20549 

 

FORM 20-F 

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934


For the fiscal year ended December 31, 2020
OR
 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

OR 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

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, 32º andar
04571-936 São Paulo, SP, Brazil
(Address of principal executive offices)
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

David Melcon Sanchez-Friera
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, E-mail and/or Facsimile number and Address of Company Contact Person) 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class 

Trading Symbol(s) 

Name of each exchange on which registered 

Common Shares, without par value VIVT3 New York Stock Exchange*
American Depositary Shares (as evidenced by American Depositary Receipts), each representing one Common Share VIV 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 Common 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, 2020 was:

Title of Class 

Number of Shares Outstanding
(excluding treasury shares) 

Common Shares 1,688,174,171

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes      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.

Yes      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.

Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files):

Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filers,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer      Accelerated Filer      Non-accelerated Filer      Emerging Growth Company

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

   U.S. GAAP

   International Financial Reporting Standards as issued by the International Accounting Standards Board

   Other

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.

Item 17      ☐ 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).

Yes      No

 

 

 

 

 

 

 table of contents

 

 

Page

 

Introduction i
Glossary of Telecommunication Terms ii
Cautionary Statement Regarding Forward-Looking Statements iv
Presentation of Financial Information vi
Part I 1
Item 1.    Identity of Directors, Senior Management and Advisers 1
Item 2.    Offer Statistics and Expected Timetable 1
Item 3.    Key Information 1
Item 4.    Information on the Company 19
Item 4A.    Unresolved Staff Comments 61
Item 5.    Operating and Financial Review and Prospects 61
Item 6.    Directors, Senior Management and Employees 75
Item 7.    Major Shareholders and Related Party Transactions 87
Item 8.    Financial Information 89
Item 9.    The Offer and Listing 100
Item 10.    Additional Information 103
Item 11.    Quantitative and Qualitative Disclosures About Market Risk 128
Item 12.    Description of Securities Other Than Equity Securities 128
Part II 131
Item 13.    Defaults, Dividend Arrearages and Delinquencies 131
Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds 131
Item 15.    Controls and Procedures 131
Item 16.    [Reserved] 131
Item 16a.    Audit Committee Financial Expert 131
Item 16b.    Code of Ethics 132
Item 16c.    Principal Accountant Fees and Services 133
Item 16d.    Exemptions From the Listing Standards for Audit Committees Procedures 133
Item 16e.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers 134
Item 16f.    Change in Registrant’s Certifying Accountant 135
Item 16g.    Corporate Governance 135
Item 16h.    Mine Safety Disclosure 140
Part III 141
Item 17.    Financial Statements 141
Item 18.    Financial Statements 141
Item 19.    Exhibits 141
Signatures 144

 

 

 

 

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 (as defined below);

 

·“ADSs” are to our American Depositary Shares, each representing one of our common shares;

 

·“ANATEL” are to Agência Nacional de Telecomunicações – ANATEL, the Brazilian telecommunications regulatory agency;

 

·“B3” are to B3 S.A. – Brasil, Bolsa, Balcão, the São Paulo stock exchange and a Brazil-based financial market infrastructure provider;

 

·“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;

 

·“Central Bank” are to the Banco Central do Brasil, the Brazilian Central Bank;

 

·“CMN” are to the Conselho Monetário Nacional, the Brazilian Monetary Council;

 

·“common shares” are to the common shares of Telefônica Brasil;

 

·“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, formerly wholly-owned subsidiaries of Telefônica Brasil prior to our 2016 corporate restructuring;

 

·“GVTPar” are to GVT Participações S.A., a formerly wholly-owned subsidiary of Telefônica Brasil prior to our 2016 corporate restructuring;

 

·“IASB” are to International Accounting Standards Board;

 

i 

·“IBGE” are to Instituto Brasileiro de Geografia e Estatística, the Brazilian Institute of Geography and Statistics; 

 

·“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;

 

·“NYSE” are to the New York Stock Exchange;

 

·“Operating GVT” are to Global Village Telecom S.A., a formerly wholly-owned subsidiary of Telefônica Brasil prior to our 2016 corporate restructuring;

 

·“preferred shares” or “preferred stock” are to the shares of non-voting preferred stock of Telefônica Brasil, which were all converted into common shares of Telefônica Brasil effective as of after market close on November 20, 2020. Our preferred shares ceased to trade on November 23, 2020;

 

·Real,” “reais” or R$ are to the Brazilian real, the official currency of Brazil;

 

·“SEC” are to the U.S. Securities and Exchange Commission;

 

·“TData” are to Telefônica Data S.A., a formerly wholly-owned subsidiary of Telefônica Brasil prior to our 2018 corporate restructuring;

 

·“Telefonica” are to Telefónica S.A., our parent company;

 

·“Terra” are to Terra Networks Brasil Ltda. (formerly known as Terra Networks Brasil S.A. prior to the change in its corporate form as of September 30, 2020), a wholly-owned subsidiary of Telefônica Brasil; Terra provides digital and advertising services;

 

·“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 conducted cellular operations including SMP (as defined in the Glossary of Telecommunication Terms), nationwide; and

 

·“Vivo Participações” are to Vivo Participações S.A. (formerly TELESP Celular Participações S.A.) and its consolidated subsidiaries (unless the context otherwise requires).

 

Unless otherwise specified, data relating to the Brazilian telecommunications industry included in this annual report was obtained from ANATEL.

 

The “Glossary of Telecommunications Terms” that begins on the following page defines certain technical terms used in this annual report.

 

ii 

Glossary of Telecommunication Terms

 

The following explanations are not intended as technical definitions, but to assist the reader in understanding certain terms as used in this Annual Report.

 

AICE: Acesso Individual Classe Especial is a mandatory plan offered by telecommunication providers to low-income customers. Includes different pricing schemes for the Basic Plan (Plano Básico) and the Mandatory Offer Alternative Plan (Plano Alternativo de Oferta Obrigatória).

 

Analog: A mode of transmission or switching that is not digital, e.g., the representation of voice, video or other modulated electrical audio signals, which are not in digital form.

 

Cellular service: A cellular telecommunications service provided by means of a network of interconnected low-powered base stations, each of which covers one small geographic cell within the total cellular telecommunications system service area.

 

Digital: A mode of representing a physical variable such as speech using digits 0 and 1 only. The digits are transmitted in binary form as a series of pulses. Digital networks allow for higher capacity and higher flexibility through the use of computer-related technology for the transmission and manipulation of telephone calls. Digital systems offer lower noise interference and can incorporate encryption as protection from external interference.

 

DTH: A special type of service that uses satellites for the direct distribution of television and audio signs for subscribers.

 

EILD: Exploração Industrial de Linha Dedicada, or industrial exploration dedicated lines which are regulated by ANATEL.

 

FTTC: Internet access through Fiber Optic (“Fiber to the Curb”).

 

FTTH: Internet access through Fiber Optic (“Fiber to the Home”).

 

FWT: Fixed-phones using the wireless network (“Fixed Wireless Telephone”).

 

GSM: Global System for Mobile Communications, a service rendered by concession from ANATEL for a specific frequency range.

 

Interconnection fee: Amount paid per minute charged by network operators for the use of their network by other network operators.

 

Internet: A collection of interconnected networks spanning the entire world, including university, corporate, government and research networks from around the globe. These networks all use the IP (Internet Protocol) communications protocol.

 

IP (Internet protocol): An interconnection protocol for sub-networks, in particular for those with different physical characteristics used by the Internet.

 

IPTV: Pay TV with video broadcast offered through the use of the IP protocol.

 

Measured services: all calls that originate and terminate within the same area code within our concession region.

 

MMDS: (Multichannel Multipoint Distribution Service): Wireless telecommunications technology, used for general-purpose broadband networking or, more commonly, as an alternative method of cable television programming reception.

 

MTR: Tarifa de Terminação Móvel, or Mobile Termination Rate.

 

MVNO (Mobile Virtual Network Operator): Wireless communications services provider that does not own the wireless network infrastructure over which the MVNO provides services to its customers.

 

iii 

Net additions: the total number of new customers acquired in any period minus the reduction in the number of customers.

 

Network: An interconnected collection of elements. In a telephone network, these consist of switches connected to each other and to customer equipment. The transmission equipment may be based on fiber optic or metallic cable or point-to-point radio connections.

 

NGN: next-generation network is a body of key architectural changes in telecommunication core and access networks. The general idea behind the NGN is that one network transports all information and services (voice, data, and all sorts of media such as video) by encapsulating these into packets, similar to those used on the Internet.

 

PGO: Plano Geral de Outorgas, or General Plan of Grants.

 

PGMU: Plano Geral de Metas de Universalização, or General Universal Service Targets Plan.

 

PGMQ: Plano Geral de Metas de Qualidade General, or Quality Targets Plan.

 

SCM: Serviço de Comunicação Multimídia or multimedia communication services.

 

SeAC: Serviço de Acesso Condicionado or Conditional Access Service, a service rendered pursuant to an authorization granted by ANATEL to provide Pay TV service throughout all regions of Brazil.

 

SMP: Serviço Móvel Pessoal or Personal Mobile Service, a service rendered pursuant to an authorization granted by ANATEL to provide mobile service in a specific frequency range.

 

SMS: Text messaging services for wireless devices, which allow customers to send and receive alphanumerical messages.

 

STFC: Serviço de Telefônia Fixo Comutado, or the transmission of voice and other signals between determined fixed points. In this annual report, we refer to STFC as “fixed telephone services.”

 

Switch: Devices used to set up and route telephone calls either to the number called or to the next switch along the path. They may also record information for billing and control purposes.

 

Universal service: The obligation to supply basic service to all users throughout a national territory at reasonable prices.

 

VOIP: Voice over Internet Protocol, is a technology for transmitting voice using the Internet.

 

VOD: Video on demand systems allow users to select and watch/listen to video or audio content on demand.

 

WAP: Wireless Application Protocol, an open and standardized protocol started in 1997, which allows access to Internet servers through specific equipment, a WAP Gateway at the carrier, and WAP browsers in customers’ wireless devices.

 

WCDMA: Wide-Band Code-Division Multiple Access, a technology for wideband digital radio communications of Internet, multimedia, video and other bandwidth-demanding applications.

 

Wireless devices: wireless appliances that we sell, including cellular handsets, wireless handheld devices and wireless broadband cards.

 

xDSL: A technology that allows high-speed transmission of text, audio and video, generally over standard telephone lines (“Digital Subscriber Line”).

 

iv 

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 duration and severity of the 2019 outbreak of coronavirus, or COVID-19, and its impacts on our business (see “Item 3. Key Information–D. Risk Factors—Risks Relating to the Brazilian Telecommunications Industry and Us— Our business, operations and results have been, and may continue to be, adversely impacted by the effects of the COVID-19 pandemic” and “Item 4. Information on the Company—A. History and Development of the Company—Recent Developments—COVID-19 Pandemic”);

 

·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;

 

·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;

 

·our ability to consummate the transactions contemplated by the Oi Agreement (as described herein) or, if consummated, to successfully integrate the assets and operations contemplated thereunder or to realize expected benefits;

 

·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;

 

v 

·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.”

 

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.

 

vi 

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 as issued by the IASB (“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.

 

The significant and relevant estimates and judgments applied by the Company in the preparation of these financial statements are presented in the following notes: trade accounts receivable (Note 4); income and social contribution taxes (Note 7); property, plant and equipment (Note 12), intangible assets (Note 13), provisions and contingencies (Note 19), net operating revenue (Note 24); pension plans and other post-employment benefits (Note 30) and financial instruments and risk and capital management (Note 31).

 

Our financial statements prepared in accordance with IFRS as of December 31, 2020 and December 31, 2019 and for the years ended December 31, 2020, December 31, 2019 and December 31, 2018 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, 2020 and 2019 and for each of the three years in the period ended December 31, 2020 are prepared 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, 2020.

 

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.

 

vii 

Part I

 

Item 1.Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2.Offer Statistics and Expected Timetable 

 

Not applicable.

 

Item 3.Key Information

 

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, 2020 and for the years ended December 31, 2020, 2019 and 2018 have been audited by PricewaterhouseCoopers Auditores Independentes. The report of PricewaterhouseCoopers Auditores Independentes on the consolidated financial statements appears elsewhere in this annual report.

 

Results of Terra are consolidated into our financial statements as from July 3, 2017. 

 

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,
   2020  2020  2019  2018  2017  2016
   (in millions of U.S. dollars) (1)  (in millions of reais)
(except for share and per share data)
                   
Income Statement Data:                  
Net operating revenue    8,299    43,126    44,268    43,463    43,207    42,508 
Cost of sales    (4,367)   (22,693)   (22,159)   (21,026)   (20,272)   (20,823)
Gross profit    3,932    20,433    22,109    22,437    22,935    21,685 
Operating income (expenses), net    (2,666)   (13,853)   (14,895)   (12,981)   (16,302)   (15,317)
Operating income    1,266    6,580    7,214    9,456    6,633    6,368 
Financial income (expenses), net    (110)   (573)   (820)   1,827    (903)   (1,234)
Equity pickup        1    1    (6)   1    1 
Income before taxes    1,156    6,008    6,395    11,277    5,731    5,135 
Income and social contribution taxes    (238)   (1,238)   (1,394)   (2,349)   (1,122)   (1,050)
Net income for the year    918    4,770    5,001    8,928    4,609    4,085 
Attributable to:                              
Controlling shareholders    918    4,770    5,001    8,928    4,609    4,085 
Non-controlling shareholders                         
Basic and diluted earnings per share:                              
Common shares    0.56    2.90    2.78    4.96    2.56    2.27 
Preferred shares    0.53    2.77    3.06    5.45    2.82    2.50 
Cash dividends per share in reais, net of withholding tax:                              
Common shares    0.56    2.92    3.12    1.95    1.73    1.65 
Preferred shares            3.29    2.15    1.90    1.81 

1 

   As of December 31,
   2020  2020  2019  2018  2017  2016
   (in millions of U.S. dollars)(1)  (in millions of reais)
(except for share and per share data)
                   
Balance Sheet Data:                  
Property, plant and equipment, net    8,535    44,353    42,847    34,115    33,222    31,925 
Total assets    20,925    108,738    108,290    102,561    101,383    102,066 
Loans and financing—current portion    508    2,638    3,049    1,340    1,621    2,543 
Loans and financing—noncurrent portion    1,647    8,557    7,671    1,625    2,320    3,127 
Debentures—current portion    201    1,045    1,077    124    1,413    2,120 
Debentures—noncurrent portion    192    1,000    2,027    3,050    3,108    1,434 
Shareholders’ equity    13,385    69,557    70,456    71,607    69,461    69,244 
Attributable to:                              
Controlling shareholders    13,385    69,557    70,456    71,607    69,461    69,244 
Non-controlling shareholders                         
Capital stock    12,233    63,571    63,571    63,571    63,571    63,571 
Number of shares outstanding (in thousands)(2)    n/a    1,688,174    1,688,694    1,688,694    1,688,694    1,688,694 

 

   Year ended December 31,
   2020  2020  2019  2018  2017  2016
   (in millions of U.S. dollars)(1)  (in millions of reais)
Cash Flow Data:                  
Operating activities:                  
Net cash (used in) generated by operating activities    3,722    19,342    17,721    11,941    12,641    11,440 
Investing activities:                              
Net cash (used in) generated by investing activities    (1,233)   (6,409)   (7,927)   (5,676)   (8,438)   (6,895)
Financing activities:                              
Net cash (used in) generated by financing activities    (2,033)   (10,564)   (9,782)   (6,934)   (5,258)   (4,777)
Increase (decrease) in cash and cash equivalents    456    2,369    12    (669)   (1,055)   (232)
Cash and cash equivalents at beginning of year    653    3,393    3,381    4,050    5,105    5,337 
Cash and cash equivalents at end of year    1,109    5,762    3,393    3,381    4,050    5,105 

_______________

(1)Translated for convenience only using the commercial offer rate as reported by the Central Bank as of December 31, 2020 for reais into U.S. dollars of R$5.1967 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 1,688,174,171 outstanding shares, composed entirely of common shares, net of 2,810,752 treasury shares.

 

2 

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. The real/U.S. dollar exchange rate reported by the Central Bank was R$3.259 per US$1.00 on December 31, 2016, an appreciation of 20% against the rate of R$3.905 per US$1.00 reported on December 31, 2015. In 2017, the real depreciated by 1%, with the exchange rate reaching R$3.308 per US$1.00 on December 31, 2017. In 2018, the real depreciated an additional 16%, to R$3.875 per US$1.00 on December 31, 2018. In 2019, the real depreciated an additional 4% to R$4.031 per US$1.00 on December 31, 2019. The real/U.S. dollar exchange rate reported by the Central Bank was R$5.197 per US$1.00 on December 31, 2020, which reflected a 29% depreciation of the real against the U.S. dollar during 2020 due primarily to the impact of the COVID-19 pandemic on the Brazilian economy.

 

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.

 

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,            
2016    3.2591    3.4500    4.1558    3.1193 
2017    3.3080    3.2031    3.3807    3.0510 
2018    3.8748    3.6796    4.1879    3.1450 
2019    4.0307    3.9443    4.2602    3.6519 
2020    5.1967    5.2426    5.9372    4.0213 
Month                    
August 2020    5.4713    5.4612    5.6510    5.2760 
September 2020    5.6407    5.3943    5.6528    5.2532 
October 2020    5.7718    5.6219    5.7803    5.5205 
November 2020    5.3317    5.4347    5.7718    5.2821 
December 2020    5.1967    5.1263    5.2789    5.0578 
January 2021    5.4759    5.3562    5.5089    5.1626 
February 2021 (through February 24, 2021)    5.4182    5.4067    5.5044    5.3423 

_______________

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.

 

3 

On February 24, 2021, the exchange rate was R$5.4182 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. You should carefully read and consider the following risks, along with the other information included in this Annual Report on Form 20-F. 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 materialize and, as a result, the market price of our common shares and our ADSs could be affected. The risks described below are organized by risk category and these categories are not presented in order of importance. However, within each category, the risk factors are presented in descending order of importance, as determined by us as of the date of this annual report. We may change our vision about their relative importance at any time, especially if new internal or external events arise.

 

Summary of Risk Factors

 

Summary of 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 common 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.

 

·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 common shares and ADSs.

 

·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 common shares and ADSs.

 

·Any further downgrading of Brazil’s credit rating could reduce the trading price of our common shares and ADSs.

 

Summary of Risks Relating to the Brazilian Telecommunications Industry and Us

 

·Our business, operations and results have been, and may continue to be, adversely impacted by the effects of the COVID-19 pandemic.

 

·Extensive government regulation of the telecommunications industry and our concession agreements may limit, in some cases, our flexibility in responding to market conditions, competition and changes in our cost structure or impact our fees.

 

·Our concession may be terminated by the Brazilian government under certain circumstances.

 

4 

·A review of our concession agreements and/or the implementation of a new regulatory framework in Brazil could have a materially adverse effect on our operations.

 

·Our current radiofrequency licenses may not be renewed for additional periods.

 

·We are exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs.

 

·We are dependent on key personnel and the ability to hire and retain additional personnel.

 

·We depend on key suppliers to obtain the necessary equipment and services for our business.

 

·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 make investments based on demand forecasts that may become inaccurate due to economic volatility and may result in revenues that are lower than expected.

 

·Consolidation in the telecommunications market may increase competition in the near future and may change Brazilian market dynamics.

 

·The transactions contemplated by the Oi Agreement may not be consummated, and if they are consummated, we may be unable to successfully integrate the assets and operations contemplated thereunder or to realize expected benefits.

 

·We face significant competition in the Brazilian market.

 

·Other risks such as changes to the fees, rates, rules and requirements established by ANATEL that apply to our mobile and other telecommunications services, the issuance of new regulations by ANATEL affecting many areas of our operations, continual changes and evolution in the telecommunications industry, our ability to comply with ANATEL’s quality of service obligations, the new Brazilian General Data Protection Law and internet regulations in Brazil, our ability to comply with covenants under our debt agreements and environmental regulations, and effects of man-made and natural disasters and cybersecurity risks on our network and service continuity.

 

Summary of Risks Relating to the Common Shares and the ADSs

 

·Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons. 

 

·Holders of our ADSs are not entitled to attend shareholders’ meetings and may only vote through the depositary.

 

·Holders of our ADSs or common shares might be unable to exercise preemptive rights with respect to the common shares unless there is a current registration statement in effect which covers those rights or unless an exemption from registration applies. 

 

·An exchange of ADSs for common shares risks the loss of certain foreign currency remittance and Brazilian tax advantages. 

 

·Holders of our common shares will be subject to, and holders of our ADSs could be subject to, Brazilian income tax on capital gains from sales of common shares or ADSs.

 

Certain Factors Relating to our Controlling Shareholder

 

·Our controlling shareholder has power over the direction of our business. 

 

5 

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 common shares and ADSs.

 

The Brazilian federal government frequently exercises significant influence over the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, changes in interest rates, changes in tax policies, wage and price controls, foreign exchange controls, currency devaluations, capital controls and limits on imports. Our financial condition, as well as our business and results of operations and the market price of our common 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:

 

·exchange rates and currency fluctuations;

 

·exchange controls and restrictions on remittances abroad, (including with regards to the payment of dividends) such as those imposed in 1989 and early 1990;

 

·growth or downturn of the Brazilian economy;

 

·inflation;

 

·energy policy;

 

·interest rates and monetary policies;

 

·liquidity of domestic capital and lending markets;

 

·fiscal policies and changes in tax laws;

 

·economic, political or social instability;

 

·labor and social security policies, laws and regulations; and

 

·other political, diplomatic, social and economic developments in or affecting Brazil.

 

Uncertainty over whether the Brazilian federal government will implement changes to the policies, regulations or standards affecting these or other factors in the future may affect economic performance, which may have an adverse effect on us and the trading price of our common shares and ADSs. Past economic and political instability has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian securities markets, which has adversely affected us and the trading price of our common shares and ADSs.

 

Political instability may materially adversely affect the Brazilian economy, our business, and the market price of our common shares and ADSs.

 

Brazil’s political environment has historically influenced and continues to influence the performance of Brazil’s economy, as well as investor and general public confidence, resulting in economic slowdowns and an increase in the volatility of securities issued by Brazilian companies.

 

The President of Brazil has the power to determine policies and issue government measures relating to the Brazilian economy and, as a result, affect the operations and financial performance of companies, including us. We cannot predict what policies the President of Brazil will establish or whether such policies or changes in existing policies will have an adverse effect on the Brazilian economy or our business, results of operations, financial condition and the market price of our common shares and ADSs.

 

6 

In addition, any difficulties the Brazilian government may face establishing a majority in Congress could result in a government impasse, political unrest and mass demonstrations and/or strikes that could materially adversely affect our operations. Uncertainties about the implementation of changes in monetary, tax and social security laws and policies, may contribute to economic instability. These uncertainties and any new measures may increase volatility in the Brazilian securities market.

 

In the past years, the Brazilian markets have experienced increased volatility due to uncertainties arising from investigations conducted by the Brazilian federal police and the Brazilian federal prosecutor’s office, including “Operation Car Wash” (Lava Jato), which have impacted Brazil’s economy and political environment.

 

Developments in these cases of unethical conduct have materially adversely affected and may continue to materially adversely affect us. There can be no guarantee that any of the investigations will not lead to greater political and economic instability or whether new allegations against government employees and officials and/or private companies will arise in the future. In addition, we cannot predict the result of these investigations or their impact on the Brazilian economy or the Brazilian stock market.

 

Inflation and government efforts to curb inflation may contribute to economic uncertainty in Brazil, adversely affecting our business and results of operations.

 

In the past, Brazil has recorded high inflation rates, which, combined with other measures taken by the Brazilian government to fight inflation and speculation on what measures would be taken, has materially adversely affected the Brazilian economy. The measures taken by the Brazilian government to control inflation have included maintaining strict monetary policies and high interest rates, which restricted the availability of credit and reduced economic growth. The COPOM often adjusts interest rates in Brazil during periods of economic uncertainty in order to achieve the inflation targets established by the Brazilian government. Inflation, the Brazilian government’s efforts to curb inflation and speculation regarding the future measures, has had material adverse effects on the Brazilian economy and contributed to economic uncertainty in Brazil, which increases volatility in the Brazilian capital markets and may materially adversely affect our business and results of operations.

 

According to the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), or IPCA, Brazilian inflation rates were 4.3%, 3.7%, 2.9% and 6.3% in 2019, 2018, 2017 and 2016, respectively. In 2020, inflation, as measured by the IPCA, registered 4.52%. In the past, the Brazilian government’s interventions to curb inflationary pressures included the maintenance of a restrictive monetary policy with high interest rates that restricted credit availability and reduced economic growth, causing volatility in interest rates.

 

Over the recent years, the inflation scenario has evolved positively. This has allowed a reduction of the Selic rate (Sistema Especial de Liquidação e de Custódia), the Central Bank’s policy rate. As established by the Monetary Policy Committee of the Central Bank (Comitê de Política Monetária do Banco Central do Brasil—COPOM), the SELIC decreased from a high point of 14.25% in mid-2016 to 4.50% at the end of 2019 and to 2.00% at the end of 2020, its historical minimum. Brazil may experience high levels of inflation in the future and inflationary pressures may lead to the Brazilian government’s intervening in the economy and introducing policies that could harm our business and the price of our common shares and ADSs.

 

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 television 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 (Índice de Serviços de Telecomunicações), or IST, adjusted by a productivity factor, or X Factor, which is defined by ANATEL Resolution 507/2008.

 

The IST is an index composed of other domestic price indexes (including the IPCA, IGP-DI and IGP-M, among others) 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

 

7 

apparent adverse effects of inflation on our operations. The productivity factor, pursuant to which ANATEL is authorized to adjust fee rates, is calculated based on a compensation index established by ANATEL to incentivize operational efficiency and to share related gains in earnings from fixed-line services with customers through fee rate adjustments. 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.

 

Inflation and government measures to combat inflation, along with speculation about governmental measures, have had significant negative effects on the Brazilian economy in the recent past, including heightened volatility in the Brazilian securities market. These policies may be incapable of preventing increases in the inflation rate. In the event of an increase in inflation, we may not be able to adjust the prices we charge our customers to offset the effects of inflation on our cost structure, which may adversely affect us.

 

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 common shares and ADSs.

 

The Brazilian currency has been historically volatile and has been devalued frequently over the past three decades. Throughout this period, the Brazilian government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. Although long-term depreciation of the real is generally linked to the rate of inflation in Brazil, depreciation of the real occurring over shorter periods has resulted in significant variations in the exchange rate between the real, the U.S. dollar and other currencies. The exchange rate between the U.S. dollar and the Brazilian real has experienced significant fluctuations in recent years. In 2014 and 2015, the real depreciated 13.4% and 47.0%, respectively, against the U.S. dollar. In 2016, the real appreciated 16.5% against the U.S. dollar. In 2017, the real depreciated 1.5% against the U.S. dollar, followed by another depreciation of 17.1% in 2018, and 4.0% in 2019. The real/U.S. dollar exchange rate reported by the Central Bank was R$5.196 per US$1.00 on December 31, 2020, which reflected a 22.4% depreciation in the real against the U.S. dollar during 2020 due primarily to the impact of the COVID-19 pandemic on the Brazilian economy. On February 24, 2021, the exchange rate was R$5.4182 per U.S.$1.00. There can be no assurance that the real will not again depreciate against the U.S. dollar or other currencies in the future. 

 

As of December 31, 2020, none of our total indebtedness of R$13.0 billion was denominated in foreign currency. Approximately 10.7% of our operating costs and expenses are payable or linked to payment by us in U.S. dollars or Euros. By contrast, 99.8% 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. In addition, the IST inflation index 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.

 

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 and other derivative instruments. 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 a small part of our planned capital expenditures are 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.

 

8 

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 common 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. The prices of shares traded on the B3, for example, have historically been sensitive to fluctuations in interest rates in the United States, as well as variations of the main U.S. stock exchanges. Additionally, crises in other emerging countries or the economic policies of other countries may reduce investor demand for securities of Brazilian companies, including our common shares and ADSs. Any of the foregoing developments may adversely affect the market value of our common shares and ADSs and hinder our ability to access the capital markets and finance our operations in the future on acceptable terms and costs, or at all.

 

To the extent that economic problems in emerging market countries or elsewhere adversely affect Brazil, our business and the market value of our common shares and ADSs could be adversely affected. Furthermore, we cannot assure you that, in the event of adverse developments in emerging market economies, the international capital markets will remain open to Brazilian companies or that the resulting interest rates in such markets will be advantageous to us. Decreased foreign investment in Brazil may negatively affect growth and liquidity in the Brazilian economy, which in turn may have a negative impact on our business. Disruption or volatility in the global financial markets could further increase negative effects on the financial and economic environment in Brazil, which could have a material adverse effect on us.

 

Any further downgrading of Brazil’s credit rating could reduce the trading price of our common shares and ADSs.

 

We may be harmed by investors’ perceptions of risks related to Brazil’s sovereign debt credit rating. Rating agencies regularly evaluate Brazil and its sovereign ratings, which are based on a number of factors including macroeconomic trends, fiscal and budgetary conditions, indebtedness metrics and the perspective of changes in any of these factors.

 

Brazil was downgraded to non-investment grade status by S&P in September 2015, by Fitch Ratings in December 2015, by Moody’s in February 2016 and downgraded again by Fitch in May 2016. Brazil’s sovereign rating is currently rated by the three major risk rating agencies as follows: BB- by S&P and Fitch Ratings and Ba2 by Moody’s.

 

Brazil’s sovereign credit rating is currently rated below investment grade by the three main credit rating agencies. Consequently, the prices of securities issued by Brazilian companies have been negatively affected. A reversal of the current recovery of the Brazilian economic activity, instability in the political environment, change in fiscal austerity guidelines, among other factors, could lead to a revision of the agencies’ outlooks, which could be followed by further ratings downgrades. Any further downgrade of Brazil’s sovereign credit ratings could heighten investors’ perception of risk and, as a result, cause the market price of our common shares and ADSs to decline.

 

Risks Relating to the Brazilian Telecommunications Industry and Us

 

Our business, operations and results have been, and may continue to be, adversely impacted by the effects of the COVID-19 pandemic.

 

Since December 2019, SARS-CoV-2, a novel strain of coronavirus referred to as COVID-19, has spread throughout the world. On January 31, 2020, the World Health Organization announced that COVID-19 was a global health emergency and on March 3, 2020, the World Health Organization categorized COVID-19 as a pandemic. The COVID-19 pandemic has resulted in numerous deaths and the imposition of local, municipal and national governmental “shelter-in-place” and other public health measures, border closures and other travel restrictions, causing unprecedented economic disruption in much of the world, including in Brazil. The local, national and international response to the virus is quickly developing, fluid and uncertain. During March and April of 2020, state, local and municipal authorities within Brazil promoted and enforced public

 

9 

health measures, including social isolation and quarantine measures, and have enacted regulations limiting the operations of “non-essential” businesses. In mid-March 2020, São Paulo and other Brazilian states declared a state of emergency. Although the Brazilian government has determined that the telecom sector is an essential service, which allows us to continue our field maintenance activities without violating restrictions on movement that have generally been imposed to combat the pandemic, in accordance with the recommendations of the authorities, we transitioned a substantial majority of our employees to work from home.

 

In Brazil generally and in particular regions where we have a significant employee presence, facilities or critical operations, the outbreak of COVID-19 has impacted our ability to manage day-to-day operations and service our customers and has resulted in, among other things, loss of revenue, although we have also experienced a decrease in our costs of operations due to lower variable costs such as sales commissioning, call centers, billing and advertising. We have implemented corporate and personal travel restrictions for employees and vendors, cancelled events and enabled work-from-home for many employees by equipping them to safely support customers remotely. We have also implemented additional safety measures for our retail stores and field operations teams. Additionally, we have been required to temporarily close or reduce operations at some of our retail locations, facilities and customer call centers. Retail locations were closed temporarily, but started reopening in the second quarter of 2020, with reduced hours of operation and customer capacity limitations, as stay-at-home orders began to ease in São Paulo and other Brazilian cities. As a result of travel and other public health restrictions enacted by local government, our third-party call center was forced to reduce its hours of operation in March 2020 for several weeks, resulting in longer than normal hold times during that period, as well as lower upselling from prepaid to postpaid plans, which are typically made through this channel, resulting in decreased revenues. Due to stay-at-home orders easing in the primary markets in which the Company operates, operations are in the process of normalizing as of the date of this annual report, but we may be required to temporarily close or reduce operations at more of or all of our retail locations, facilities or call centers again if there is a resurgence of COVID-19 in the markets in which we operate. The foregoing effects, and other effects of COVID-19, may continue for an unknown period of time.

 

Our business has been, and may continue to be, negatively impacted by the effects of, or precautions taken to avoid exposure to, COVID-19, such as reduced travel or recommendations or mandates from governmental authorities to avoid large gatherings or to self-quarantine, and by the resulting disruptions to economic conditions and financial markets. Such impacts include, but are not limited to:

 

·Reduced sales of certain of our products and services, such as handset sales and upsells made through our retail stores and upsells through our call centers and other channels, as a result of public health measures;

 

·Disruptions to our third-party providers, including those who provide many of our information technology, call center functions, certain accounting functions and other critical vendor services;

 

·Reduced workforces caused by, among other things, the temporary inability of the workforce to work due to illness, quarantine, or government mandates, or temporary unwillingness to work due to health concerns;

 

·Reduced customer demand or customer payment of accounts receivables as a result of adverse economic conditions resulting from the COVID-19 pandemic;

 

·Reduced availability of certain equipment in the supply chain due to increased demand; and

 

·Increases in provisions for bad debt as a result of increased unemployment and the inability of certain customers to pay bills and late fees as a result of disruptions caused by the COVID-19 pandemic.

 

Potential future impacts include, but are not limited to:

 

·Service disruptions or reduced bandwidth for copper-based broadband customers due to significant short-term increases in bandwidth usage due to individuals working from home and/or significantly higher expenses attributable to infrastructure investments required to meet such higher network utilization trends;

 

10 

·Imposition of governmental requirements preventing our termination services as a result of non-payment, thus encouraging customer defaults on invoices, resulting in a decline in our cash flows from operations and an increase in our expected losses on trade receivables;

 

·Increased supply chain risks such as increased scrutiny or embargoing of goods produced in infected areas;

 

·Increased health insurance and labor-related costs arising from illness, quarantine and the implementation of social distancing and work-from-home measures;

 

·Reduced employee productivity and a negative impact on the execution of our business plans and operations as employees must balance working remotely from home with personal responsibilities, such as child care and education;

 

·Increased risk of phishing and other cybersecurity attacks, and increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information about us, our customers or other third parties as a result of employees or third-party vendors’ employees working remotely; and

 

·In the event of continued restrictions on certain activities, or a natural disaster, power outage, connectivity issue or other event that impacts our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue to support our customers’ needs and respond to inquiries through call center operations or to perform necessary or routine repairs, maintenance and installation activities, which could adversely affect our operations and sales.

 

The foregoing impacts, and other impacts of COVID-19 discussed elsewhere in these risk factors, are broadly consistent with those generally affecting the economic, financial, regulatory and political conditions in Brazil and elsewhere in the world, and are generally applicable to the industries and markets in which the Company and its subsidiaries operate. These impacts could materially increase our costs, negatively impact our consumer and business sales and damage the Company’s financial condition, results of operations, cash flows and liquidity position, possibly to a significant degree.

 

We cannot predict the full effect of the pandemic on our business or on the Brazilian economy. Federal, state and municipal governments in Brazil may announce further restrictions on the general population and we cannot predict what effect this will have on our operations and sales in the long term. We cannot predict the duration of the pandemic, the effectiveness of governmental or other measures taken to attempt to curb the pandemic, or the duration of any such measures. In addition, following the pandemic and the termination of any such governmental restrictions, the needs and preferences of our customers may have been altered. The impact of the COVID-19 pandemic is rapidly evolving, and the continuation or a future resurgence of the pandemic could precipitate or aggravate the other risk factors that we face, which in turn could further materially and adversely affect our business, financial condition, liquidity, results of operations and profitability, including in ways that are not currently known to us or that we do not currently consider to present significant risks. The extent of the impact of the COVID-19 on our operational and financial performance in the longer term will depend on future developments, including the duration of the outbreak and related travel advisories and restrictions and the impact of the COVID-19 on overall demand for travel, all of which are highly uncertain and beyond our control. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, clients, suppliers and shareholders.

 

For more information about specific measures that we have adopted and potential impacts on our business operations, see “Item 4. Information on the Company—A. History and Development of the Company—Recent Developments—COVID-19 Pandemic” and “Item 5. Operating and Financial Review and Prospects— A. Operating Results—Overview—Effects of the COVID-19 Pandemic.”

 

11 

Extensive government regulation of the telecommunications industry and our concession agreements 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 in Brazil. ANATEL, the main telecommunications industry regulator in the country, regulates, among other things:

 

·industry policies and regulations;

 

·licensing (including licensing of spectrum and bidding processes);

 

·fees and tariffs;

 

·competition incentives and restrictions (including our ability to grow by acquiring other telecommunications businesses);

 

·service, technical and quality standards;

 

·consumer rights;

 

·penalties and other sanctions;

 

·interconnection and settlement arrangements; and

 

·universal service obligations.

 

The Brazilian 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 concessions is a precondition to our success. However, because of the changing nature of our regulatory framework, we cannot provide assurances that ANATEL will not adversely modify the terms of our authorizations and/or licenses. According to our operating authorizations and licenses, we must meet specific requirements and maintain minimum quality, coverage and service standards. Our failure to comply with such requirements may result in the imposition of fines, penalties and/or other regulatory responses, including the termination of our operating authorizations and concession. Any partial or total termination of any of our operating authorizations and licenses 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 been reviewing and introducing regulatory changes, especially regarding asymmetric competition measures and interconnection fees charged among local providers of telecommunications services. Asymmetric competition measures can include regulations intended to rebalance markets in which a market participant has distinct market power over other competitors. The adoption of disproportionately asymmetric measures could have a material adverse effect on our business, financial condition, revenues, results of operations and prospects.

 

With respect to interconnection fees, these are an important part of our revenue and cost bases. Such fees are charged by telecommunications service providers to each other in order to allow interconnected use of each other’s networks. To the extent that changes to the rules governing interconnection fees reduce the amount of fees we can receive, or our ability to collect such fees, 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:

 

12 

·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;

 

·imposition of significant fines or penalties regarding failures to comply with regulatory obligations;

 

·delays in the granting of, or the failure to grant, approvals for rate increases; and

 

·antitrust limitations imposed by ANATEL and CADE.

 

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, the expansion of our network to provide (i) despite significant reductions in public pay-phone services requirements permitted under Decree No. 9,619 of December 2018, expansions may be necessary under specific conditions and (ii) the provision of private individual telephone service for locations reaching a population of more than 300 inhabitants may be required upon request by any consumer, as well as certain quality of service targets (reviewed by Resolution No. 717, issued on December 2019, which remains under implementation). Our ability to satisfy the terms and conditions may be affected by factors beyond our control, and our failure to comply with the requirements of our concession may result in the imposition of fines up to R$50 million per incident and/or other government actions, including the imposition of a precautionary ban on marketing our services, or the termination of our concession. Any partial or total termination of our concession or authorizations would have a material adverse effect on our financial condition and results of operations.

 

Furthermore, the concession agreements establish that all assets owned by us, and 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 ANATEL’s interpretations of current regulations, reversible assets will be automatically returned to ANATEL’s possession upon expiration of the concession agreements in accordance with regulations in force at the time of such expiration, and would not be available to creditors in the event of insolvency, bankruptcy or similar events, although there are differing interpretations, even among government agencies, and ongoing discussions regarding the treatment of reversible assets as a result of the passage of Law No. 13,879/2019, or the New General Telecommunications Law, on October 4, 2019. See “—Review of our concession agreements and/or the implementation of a new regulatory framework in Brazil could have a materially adverse effect on our operations.”

 

As of December 31, 2020, the net book value of our reversible assets, calculated in accordance with ANATEL’s interpretation of current regulations, is estimated at R$6.7 billion. These assets are comprised of switching and transmission equipment, public use terminals, external network equipment, energy equipment and systems and operations support equipment.

 

A review of our concession agreements and/or the implementation of a new regulatory framework in Brazil could have a materially adverse effect on our operations.

 

The expiration date of our fixed line concession agreements in São Paulo is December 31, 2025. These agreements contain a provision allowing ANATEL to review the concession agreements every five years and include revisions to terms and conditions that relate 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.

 

13 

On June 24, 2014, ANATEL opened a public review and comment period for the revisions of the terms of fixed-line concession agreements with respect to the 2016-2020 period. However, when the agency released the new version of the agreements in June 2017, operators disagreed with the inclusion by ANATEL of certain provisions and decided against executing new agreements with the agency. As a result, the agreements with respect to the 2011-2015 period remain in force. In December 2018, although the new concession contracts had not yet been signed, the Brazilian government published Decree No. 9,619/2018, called PGMU IV, which approves the revision of the PGMU targets. The new plan replaces some obligations, mainly related to public telephony, for obligations related to 4G mobile network. These targets have been criticized by several of the local operators. In November 2020, Anatel issued Resolution nº 737, which amended the Concession Contracts for the provision of Fixed Telephone Services (STFC), in Local, National Long Distance (LDN) and International Long Distance (LDI) modalities.

 

On October 4, 2019, Law No. 13,879/2019 (resulting from PLC Nº 79/2016), or the New General Telecommunications Law, was published. This law revises the telecommunications regulatory framework and represents a significant impact on this industry. The law allows fixed-line concessions operators to migrate from a concession regime (in which the underlying assets must be reverted to the government at the end of the concession) to an authorization regime, although further rulemaking remains under way to fully implement the law and permit operators to migrate to the new regime. For more information about the New General Telecommunications Law, see “Item 4. Information on the Company—B. Business Overview—Regulation of the Brazilian Telecommunications Industry—Other regulatory matters—Updated Regulatory Framework.”

 

Any changes on laws, rules or regulations could have a material adverse effect on our operations and financial condition. Changes to our concession agreements or to the current regulatory framework may entail the imposition of new requirements, including obligations to make specific investments and/or capital expenditures. ANATEL may also impose new service targets on us with values that we are not able to predict.

 

Our current radiofrequency licenses may not be renewed for additional periods.

 

Generally, current spectrum authorizations are valid for 15 years and can be renewed only once. Although the newly-approved New General Telecommunications Law admits successive spectrum renewals, we cannot guarantee that our existing licenses will be renewed.

 

According to the New General Telecommunications Law and the Decree nº 10.402 issued in June 2020, ANATEL may determine specific conditions for the renewal of our existing licenses, such as mandatory “refarming” processes in certain spectrum bands or refuse renewal requests altogether. A refarming process can reduce the amount of spectrum available for each operator, depending on the configuration of the new blocks.

 

Our current 850 MHz authorizations will expire between 2020 and 2028. In September 2020, Anatel’s Board of Directors decided, during an extraordinary meeting, to approve the renewal of our 850 MHz authorizations for primary use until 2028. However, specific conditions for renewal are still under discussion between Anatel and service providers. If a renewal in 2028 is not allowed, it would be necessary to compete for new licenses in a spectrum auction. In addition, the coverage of our mobile services would be significantly affected by a loss of or failure to renew spectrum licenses. Further, in certain regions, our services may be unavailable, particular in the event of a failure to renew or obtain all licenses for such regions. In the event of any of the foregoing circumstances, our business, financial condition, revenues, results of operations and prospects could be materially adversely affected.

 

We are exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs. 

 

The Company is required to comply with Brazilian anti-corruption laws and regulations on the same subject in jurisdictions where it has its securities traded. In particular, the Company is subject, in Brazil, to Law no. 12,846/2013 and, in the United States, to the U.S. Foreign Corrupt Practices Act of 1977. Additionally, the Company’s operations may be subject to, or otherwise affected by, economic sanctions programs and other forms of trade restrictions (hereinafter, referred to as “sanctions”) including those administered by the United States, including the US Treasury Department’s Office of Foreign Assets Control. 

 

14 

Although the Company has internal policies and procedures designed to ensure compliance with the abovementioned anti-corruption laws and sanctions regulations (to the extent applicable), there can be no assurance that such policies and procedures will be sufficient or that the Company’s employees, directors, officers, partners, agents and service providers will not take actions in violation of the Company’s policies and procedures (or, otherwise in violation of the relevant anti-corruption and sanctions laws and regulations) for which the Company, its subsidiaries or they may be ultimately held responsible. Violations of such laws and regulations could lead to financial penalties, damage to the Company’s reputation or other legal consequences that could have a material adverse effect on the Company’s business, results of operations and financial condition.

 

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, with extensive 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 the 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 contingent liabilities resulting from our contracting structure, which includes third-party service providers. Such potential liabilities may involve labor claims by third-party providers that are treated as direct employees as well as joint liability claims relating to wage or overtime pay complaints and workplace injury claims. If a significant portion of these contingent liabilities is decided against us and for which we have not made adequate 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 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:

 

15 

·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 are 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 that 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.

 

Consolidation in the telecommunications market may increase competition in the near future and may change Brazilian market dynamics.

 

Mergers and acquisitions may change market dynamics, create competitive pressures, force small competitors to find partners and impact our financial condition; and may require us to adjust our operations, marketing strategies (including promotions), and product portfolio.

 

The entry of a new market participant with significant financial resources or potential changes in strategy by existing telecommunications service providers can change the competitive environment in the Brazilian market. We may be unable to keep pace with these changes, which could affect our ability to compete effectively and have a material adverse effect on our business, financial condition and results of operations.

 

Additional joint ventures, mergers and acquisitions among telecommunications service providers are possible in the future. If such consolidation occurs, it may result in increased competition within our market. We may be unable to adequately respond to pricing pressures resulting from consolidation in our market, adversely affecting our business, financial condition and results of operations. We may also consider engaging in merger or acquisition activity in response to changes in the competitive environment, which could divert resources away from other aspects of our business.

 

The transactions contemplated by the Oi Agreement may not be consummated, and if they are consummated, we may be unable to successfully integrate the assets and operations contemplated thereunder or to realize expected benefits.

 

Our ability to consummate the transactions contemplated by the Oi Agreement is subject to various closing conditions. These include customary closing conditions in addition to others that, despite being usually applicable to this type of transaction, are beyond our control, such as the requirement to obtain approvals from certain governmental regulatory authorities. We believe that the most significant risk posed by these closing conditions is related to the governmental regulatory approvals that are required to be granted by the Brazilian competition authority (CADE) and telecommunications regulator (ANATEL), which as of the

 

16 

date of this annual report, have not yet been granted.  Moreover, as of the date hereof, it is possible that the approvals required for the consummation of the transactions contemplated by the Oi Agreement acquisition may not be obtained or, if they are obtained, could impose unanticipated or adverse conditions or otherwise modify the terms thereof, including the re-allocation of assets among us and the other two operators that were awarded the winning bid together with us, pursuant to our joint bid. Therefore, depending on these conditions, it may not be possible to consummate the Oi Agreement transaction according to the expected timeline or at all. See “Item 4. Information on the Company—A. History and Development of the Company—Recent Developments—Execution of Purchase Agreement for Acquisition of UPI Mobile Assets of the Oi Group.”

 

In addition, achieving the targeted synergies, such as operating and long-term strategic cost-savings, of the Oi Agreement will depend in part upon whether we can integrate the assets and operations contemplated thereunder in an efficient and effective manner. We may not be able to accomplish this integration process smoothly or successfully. We and Oi operate numerous systems, including those involving clients, spectrum, infrastructure, management information, accounting and finance, sales, billing, and regulatory compliance. Moreover, the integration of the assets and operations acquired will require the dedication of significant management resources, which may distract management’s attention from day-to-day operations. Potential employee uncertainty and lack of focus during the integration process may also disrupt our business and result in undesired employee attrition. An inability of management to successfully integrate the assets and operations contemplated by the Oi Agreement into our business could have a material adverse effect on our business, results of operations and financial condition. An inability to realize the full extent of, or any of, the anticipated benefits and synergies of the acquisition of assets and operations under the Oi Agreement, as well as any delays encountered in the integration process, could have an adverse effect on our business, results of operations and financial condition.

 

We face significant competition in the Brazilian market. 

 

In 2020, competition in the Brazilian telecommunications sector was quite stable, with a more rational approach due to the COVID-19 pandemic. Telecommunications operators continued to focus on improving their base of accesses by attracting customers to higher-value products. In the mobile side of the business, we believe the main strategy pursued during the year by such market participants, including us, was to upsell prepaid customers to hybrid plans (“planos controle”) and pure postpaid plans, in order to increase overall ARPUs and profitability. In the fixed side of the business, we have seen competition both from large and small players in order to capture customers’ demand for connectivity or upgrades for higher speeds driven by the pandemic effects, especially through the increased rollout of fiber optic networks. In addition, customers are demanding higher quality and more data availability, which require higher investments in development, modernization, expansion and continuous improvement in service quality and customers’ experience.

 

As a result, we have faced significant competition, mainly driven by the following factors: (1) commercial and pricing pressures from new portfolios launched by competitors; (2) competitors increasing 4G, 4.5G and fiber optic network 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 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 Dec 17, 2018, ANATEL established the 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) for the years 2020 through 2023. The related rates established by ANATEL are set forth in the following table:

 

17 

   2020  2021  2022  2023
Sector 31 (fixed)            
TU-RL    0.00134    0.00117    0.00104    0.00096 
TU-RU1    0.00166    0.00176    0.00183    0.00188 
TU-RU2    0.00118    0.00120    0.00122    0.00122 

 

In February 2020, ANATEL established the reference values for MTR for the years from 2020 until 2023. The table below shows the reference values for each region (corresponding to different Brazilian states) in the General Authorization Plan (Plano Geral de Autorizações), or PGA:

 

Year  PGA Region I  PGA Region II  PGA Region III
2020    0.01338    0.01503    0.02687 
2021    0.01380    0.01527    0.02814 
2022    0.01422    0.01550    0.02947 
2023    0.01468    0.01578    0.03082 

 

We cannot assure you that new mobile service plans will not be suspended by ANATEL, that the mobile interconnection fees we negotiated will not be changed, nor that future negotiations regarding mobile termination rates will result in favorable terms and values. If the readjustments to mobile interconnection fees that we negotiated are canceled 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 has the authority to issue new regulations affecting many of our areas of operations.

 

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 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”); (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 and/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 renewing licenses costs; and (5) ANATEL’s general plan of updating the regulations targets several areas of vital importance for our business (including both our fixed telephony and mobile businesses), which may cause either an increase in operating costs, an increase in competitive pressure, or a decrease in our revenues, among other adverse effects.

 

For a detailed description of the regulations issued by ANATEL and their impact on our business, see “Item 4. Information on the Company—B. 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 and the creation of new digital services, such as the example of over-the-top (OTT) players that provide voice and messages over IP. Also, new products and technologies may become superior to, and render obsolete, the products and services we offer and the technologies we use, thus requiring our constant investment in new technology and innovation.

 

18 

Such new technologies will demand changes in the regulatory environment, challenging both governmental agencies and telecommunication companies. Companies that provide OTT services, which have characteristics similar to telecommunications services, are currently not subject to the same rules as the telecommunications operators. This gap can bring additional challenges to the telecommunications industry, as current developments in the regulatory framework for OTTs are inconsistent and still unclear.

 

We are subject to certain risks related to conditions and obligations imposed by ANATEL for the use of the spectrum needed for the 4G services we offer.

 

In 2012, we acquired 40MHz on the 2.5GHz to 2.69GHz frequencies for the amount of R$ 1.05 billion. In order to meet the coverage requirements, we had the obligation of implementing 4G coverage in 1,094 cities by December 31, 2017. The remaining coverage commitments in cities with less than 30,000 inhabitants could be fulfilled with other frequency bands until December 31, 2019. Verification of compliance with these targets is controlled by ANATEL and, regarding the cities with less than 30,000 inhabitants, is in progress.

 

Regarding the 700MHz spectrum, ANATEL has allocated the band for the provision of fixed, mobile and broadband services. On September 30, 2014, 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 were responsible for financing and managing the band cleaning process (Analog TV switch off) which was implemented through a legal entity specifically incorporated for this purpose, as set forth in the bidding process and applicable regulations (EAD).

 

Since June 2019, all Brazilian municipalities are ready to activate LTE coverage in the 700 MHz band. Notwithstanding, ANATEL may impose additional coverage requirements with respect to future spectrum auctions relating to the implementation of 5G coverage.

 

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.

 

If we are not able to meet targets and obligations set forth in the bid documents, ANATEL may execute 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. Additionally, the inefficient use of any frequency may lead to the loss of the usage license. Furthermore, ANATEL may also impose new targets, conditions and/or obligations on us that we are not able to predict (see “—Review of our concession agreements and/or the implementation of a new regulatory framework in Brazil could have a materially adverse effect on our operations.”). Any of the above factors could have a material adverse effect on our operations and financial condition.

 

Our sales could be suspended as a result of issues with the quality of our services.

 

ANATEL and other judicial 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 action plan for improvement. In July 2012, ANATEL suspended mobile service sales from three of our main competitors, Oi, Claro and Tim, as a 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 new plan can be presented to and approved by ANATEL, which may materially affect our business and results of operations.

 

19 

We will be subject to risks related to noncompliance with data protection laws and the new Brazilian General Data Protection Law, which provides for application of sanctions, including financial penalties, in case of noncompliance.

 

In 2018, the President of Brazil approved Brazilian Law No. 13,709/2018, named the General Personal Data Protection Law (Lei Geral de Proteção de Dados), or the LGPD, which came into force on September 18, 2020, a comprehensive data protection law establishing the general principles and obligations that apply across multiple economic sectors and contractual relationships. Certain aspects of the LGPD will be subject to further regulation to be enacted by the National Data Protection Authority (Autoridade Nacional de Proteção de Dados – “ANPD”), which is not operational yet, and should result in changes to the LGPD’s approach that are not yet defined as of the date of this annual report. However, the administrative sanctions provisions of LGPD will only become enforceable as of August 1, 2021, pursuant to Law No. 14,010/2020. The LGPD establishes detailed rules for the collection, use, processing and storage of personal data in all economic sectors, regardless of whether data is collected in a digital or physical environment. In general, our services and processes depend on personal data. The way in which we collect, store and manage this data must comply with the provisions of the LGPD.

 

Once the administrative sanctions of the LGPD become enforceable, in the event of a violation of the LGPD, we may be subject to (1) legal notices and the required adoption of corrective measures, (2) fines of up to 2% of the our or our economic group’s revenues up to a limit of R$50.0 million per infraction, (3) publication of the infraction following confirmation of its occurrence, (4) the blocking and erasing of personal data involved in the infraction, (5) partial or complete suspension of the infringing processing activities for up to one year and (6) partial or complete prohibition to engage in processing activities. The effectiveness of such administrative sanctions, however, has been postponed to August 2021. Moreover, we may be liable for property, moral, individual or collective damages caused by us, including by third party providers that process personal data for us, and jointly liable for property, moral, individual or collective damages caused by our subsidiaries, due to non-compliance with the obligations established by the LGPD and certain other sector-specific laws and regulations on data protection still in force. If we are unable to use sufficient measures to protect the personal data we manage and store or to maintain compliance with the LGPD, we may incur material costs which could have an adverse effect in our reputation and results of operations.

 

We may be held liable for material, punitive, individual or collective damages to the data subjects due to its processing and treatment and could be held individually or severally responsible for material, punitive, individual or collective damages caused by us, our subsidiaries, service providers that process personal data on our behalf or our affiliates due to non-compliance with the obligations set forth by the LGPD, which may adversely affect our reputation and results and, consequently, the value of our ADSs and common shares.

 

In the event of failure or insufficiency in the adoption of measures to protect the personal data that is processed or to maintain compliance with the Brazilian General Data Protection Law, we may incur relevant costs, such as the payment of fines and indemnities, implementation of adjustment measures, and loss of business, as well as such failure or insufficiency having an adverse effect on our reputation and results of operations. As a result, we may be held liable even before the Brazilian General Data Protection Law sanctions come into force since consumer protection authorities and the Public Prosecutor’s Office have already been active in pursuing data privacy violations even before the LGPD became effective. Accordingly, failures in the protection of the personal data processed by us, or any failure to implement adequate data protection measures in response to applicable legislation, may subject us to high fines, the disclosure of the incident to the market, the payment of indemnities, the elimination of personal data from the database in question and the suspension of access to our databases, prohibition of our activities related to the processing of infringed data in addition to civil sanctions, which may adversely affect our reputation and results.

 

In addition, despite the fact that the administrative sanctions of the LGPD will not become applicable until August 2021, the application of administrative sanctions under other laws that deal with privacy and data protection issues may still apply, such as the Consumer Protection Code and the Brazilian Civil Rights Framework for the Internet. These administrative sanctions may be imposed by other public authorities, such as the Public Prosecutors’ Offices, the National Consumer Secretariat and consumer protection agencies. We may also be subject to liability in the civil sphere for violation of these laws. Sanctions imposed against us by these authorities may also adversely affect our reputation and results and, consequently, the value of our ADSs and common shares.

 

20 

Internet regulation in Brazil is still limited and several legal issues related to the Internet are uncertain.

 

In 2014, Brazil enacted a law, which we refer to as the Brazilian Civil Rights Framework for the Internet (Marco Civil da Internet), setting forth principles, guarantees, rights and duties for the use of the Internet in Brazil, including provisions about internet service provider liability, internet user privacy and internet neutrality. In May 2016, further regulations were passed in connection with the referred law. The administrative penalties imposed by the Brazilian Civil Rights Framework for the Internet include notification, fines (up to 10% of the revenues in Brazil of the relevant entity’s economic group in the preceding fiscal year) and suspension or prohibition from engaging in data processing activities. The Brazilian Civil Rights Framework for the Internet also determines joint and several liability between foreign parent companies and local Brazilian subsidiaries for the payment of fines that may be imposed for breach of its provisions. Administrative penalties may be applied cumulatively. Daily fines may be imposed in judicial proceedings, as a way to compel compliance with a Brazilian court order. If for any reason a company fails to comply with the court order, the fine can reach significant amounts. We may be subject to liability under these laws and regulations should we fail to adequately comply with the Brazilian Civil Rights Framework.

 

However, unlike in the United States, little case law exists around the Brazilian Civil Rights Framework for the internet and existing jurisprudence has not been consistent. Legal uncertainty arising from the limited guidance provided by current laws in force allows for different judges or courts to decide very similar claims in different ways and establish contradictory jurisprudence. This legal uncertainty allows for rulings against us and could set adverse precedents, which individually or in the aggregate could seriously harm our business, results of operations and financial condition. In addition, legal uncertainty may harm our customers’ perception and use of our service.

 

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, which would have a material adverse effect on our financial condition.

 

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 and reputation. 

 

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, remediation, conduct adjustments, fines, suspension of activities and other penalties, investments to upgrade our facilities or change our processes, costs to redress any loss of reputation or the curtailment of our operations. The identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory agencies, enactment of more restrictive 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, assets and financial condition.

 

Man-made or natural disasters, including extreme weather conditions due to climate change (high temperatures, floods, thunderstorms) or other unexpected events could adversely affect networks, systems, infrastructure and service continuity.

 

Our operations may be suspended or interrupted for an indeterminate period in case of adverse events, such as a result of damages to our transmission bases, natural disasters, climate change or other environmental events or natural or man-made disasters, including fire, explosion, storms, geopolitical disruptions, civil unrest or health crises (such as the COVID-19 pandemic) or any other unexpected events.

 

21 

Climate change poses a number of potential risks for telecommunications operators like us, from both a physical and regulatory perspective. Global climate change may exacerbate the severity and frequency of natural disasters. The rising intensity and frequency of occurrence of storms, heatwaves and earthquakes could increase the damage to our infrastructure and failures of our wireline and wireless networks caused by such natural disasters. Should severe natural disasters occur in quick succession, we may not have sufficient resources to repair and restore our infrastructure in a timely and cost-effective manner. The increase in likelihood of our infrastructure being damaged by natural disasters could have a material adverse impact on our operations.

 

Rising mean temperatures could increase our operating costs due mostly to the increase in refrigeration needs of network equipment. High temperatures also can affect the telecommunication equipment producing failures, write-offs and early retirement and therefore increase the risk of service disruption; therefore, cooling is essential.

 

An increase in severity and extreme weather events such as floods and landslides can damage our infrastructure, mainly our telecommunication network assets. They can cause physical damage to our infrastructures and therefore could produce service and operations disruptions. An increase in energy costs is one of our main climate-related risks. The Telecom sector is not especially dependent on fossil fuels but is very dependent on electricity consumption for its networks, so an increase in electricity prices due to a shortage of natural resources could have a significant impact on our energy-related operating expenses.

 

If we are unable to mitigate or prevent any such damage in the event of a natural or man-made disaster and any other unexpected events, the suspension or interruption of our operations could have a material adverse effect on the continuity of our operations, our financial results and compliance with applicable regulations.

 

Companies operating in the telecommunication industry, including us, may be harmed by restrictions regarding the installation of new antennas for mobile services.

 

Currently, hundreds of municipal laws in Brazil limit the installation of new antennas for mobile service. This scenario 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 radio frequencies of the antennas. Despite the existence of a federal law approved in 2015, that addresses this issue by establishing new guidelines to create a consolidated plan for the installation of antennas, as long as the municipal laws remain unchanged, the risk of non-compliance with regulations and of having services of limited quality in certain areas continues to exist.

 

Additional antenna installation is also limited because of concerns that radio frequency emissions from base stations may cause health problems and other environmental impacts. 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 (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. Perceived risks may, however, delay the expansion of our network if we experience problems in finding new sites, which in turn may delay expansion and affect the quality of our services. 

 

For instance, 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 and restricts the installation of new antennas. 

 

New laws may create additional transmission regulations, which in turn, could have an adverse effect on our business. Health concerns regarding the effects of radio frequency emissions may also 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.

 

22 

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.”

 

Information technology is key to our business and we could be subject to cybersecurity risks.

 

The risks derived from cybersecurity are among our most relevant risks. Despite advances in the modernization of the network and the replacement of legacy systems, we operate in an environment increasingly prone to cyber-threats. Therefore, it is necessary to continue to identify and remedy any technical vulnerabilities and weaknesses in our operating processes, as well as to strengthen our capabilities to detect and react to incidents. This includes the need to strengthen security controls in the supply chain (for example, by focusing on the security measures adopted by our partners and other third parties), as well as to ensure the security of the services in the cloud.

 

Telecommunications companies worldwide face continuously increasing cybersecurity threats as businesses have become increasingly more digital and dependent on telecommunications and computer networks and cloud computing technologies. Cybersecurity threats may include gaining unauthorized access to our systems or propagating computer viruses or malicious software to misappropriate sensitive information like customer data, corrupt our data or disrupt our operations. Unauthorized access may also be gained through traditional means such as the theft of laptop computers, data devices and mobile phones. Further, our employees or other persons may have unauthorized or authorized access to our systems and leak data and/or take actions that affect our networks or otherwise adversely affect us or our ability to adequately process internal information.

 

We manage these risks through a number of technical and organizational measures, which are part of our digital security strategy, including, access control measures, backup systems, log review of critical systems, vulnerabilities checks, network segregation measures and protective systems such as firewalls, intrusion prevention systems, virus scanners and other physical and logical security measures. However, the application of these measures cannot guarantee the mitigation of all risks.

 

Risks Relating to the Common 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, six 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 any judgments obtained in the United States or other jurisdictions outside Brazil against us or such other persons. 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 ADSs are not entitled to attend shareholders’ meetings and may only vote through the depositary.

 

Under Brazilian law, only shareholders registered as such in our corporate books may attend shareholders’ meetings. All common shares underlying our ADSs are registered in the name of the depositary.

 

23 

A holder of ADSs, accordingly, is not entitled to attend shareholders’ meetings. Holders of our ADSs may exercise their limited voting rights with respect to our common shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional steps involved in communicating with ADS holders. For example, we are required to publish a notice of our shareholders’ general meetings in certain newspapers in Brazil. Holders of our shares can exercise their right to vote at a shareholders’ general meeting by attending the meeting in person or voting by proxy. By contrast, holders of our ADSs will receive notice of a shareholders’ general meeting by mail from the ADR depositary following our notice to the ADR depositary requesting the ADR depositary to do so. To exercise their voting rights, ADS holders must instruct the ADR depositary on a timely basis. This voting process will take longer for ADS holders than for direct holders of our shares.

 

We cannot assure you that holders will receive the voting materials in time to ensure that such holders can instruct the depositary to vote the shares underlying their respective ADSs. In addition, the depositary and its agents are not responsible for failing to carry out holder’s voting instructions or for the manner of carrying out your voting instructions. This means that holders may not be able to exercise their right to vote and may have no recourse if our shares held by such holders are not voted as requested.

 

Holders of our ADSs or common shares might be unable to exercise preemptive rights with respect to the common shares unless there is a current registration statement in effect which covers those rights or unless an exemption from registration applies. 

 

Under Brazilian law, if we issue new shares for cash as part of a capital increase, we generally must grant our shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage. Rights to purchase shares in these circumstances are known as preemptive rights. Holders of our ADSs or common shares in the United States will not be able to exercise any preemptive rights unless a registration statement under the U.S. Securities Act of 1933, as amended, or the Securities Act, is effective with respect to that future issuance of shares, 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 ADSs 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—Description of our Bylaws—Preemptive Rights.”

 

An exchange of ADSs for common 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 common shares into foreign currency, and to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for common 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 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 by the Central Bank to regulate foreign investments in ADSs, including with regard to the exchange of ADSs for common shares and the remittance of funds arising from the sale of these common 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 common shares. There can be no assurance that the depositary’s

 

24 

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 common shares will be subject to, and holders of our ADSs could be subject to, Brazilian income tax on capital gains from sales of common 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 common shares are expected to be treated as assets located in Brazil for purposes of the law, and gains on the disposition of common 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. 

 

In case of any assessment by the Brazilian tax authorities, the gains arising from the disposal of ADSs made are subject to capital gain tax in Brazil at (i) progressive rates ranging from 15% to 22.5%, or (ii) 25% if the non-Brazilian holder is located in a tax haven jurisdiction. 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 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 and its affiliates can decide most of the matters that require shareholder approval.

 

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.

 

Pursuant to Brazilian Law, the transaction required approval by both ANATEL and CADE. On December 22, 2014, ANATEL approved the transaction and imposed certain obligations, that included (1) the maintenance of current GVT services and plans within the same geographic scope in which GVT previously operated, 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, since the same economic group cannot hold more than one STFC license in the same geographic area. Telefônica has satisfied both obligations.

 

25 

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.

 

In November 2015, ANATEL consented to our corporate reorganization involving Telefônica Brasil S.A., GVT Participações S.A. and its subsidiaries. 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.

 

On March 14, 2016, the corporate reorganization was approved by our board of directors and was completed on April 1, 2016, after the approval by an extraordinary shareholders meeting of the relevant companies.

 

On July 3, 2017, Telefônica Data S.A., or TData, a wholly-owned subsidiary of the Company, acquired all the shares of capital stock of Terra Networks Brasil S.A. from SP Telecomunicações Participações S.A., one of the controlling shareholders of the Company. The purpose of the Terra Networks Transaction is to expand and integrate our offering of digital services, in order to provide additional value to our customer base and TData’s. Effective as from December 1, 2018, TData was merged into the Company as part of a corporate restructuring. See “—Historical Background—Restructuring Involving TData” for more information.

 

We are registered with the CVM as a publicly held company and our stock is traded on the B3 – Brasil, Bolsa, Balcão under the symbol “VIVT3”. 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 a part of this annual report on Form 20-F.

 

As of December 31, 2020, we had 1,688,174,171 outstanding common shares (excluding treasury shares), with no par value per share. Our shareholders’ equity amounted to R$69.6 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. 

 

26 

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. 

 

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. 

 

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 the 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 

 

Through a series of transactions from 2007 to 2009, Telefónica acquired an indirect holding in the voting shares of Telecom Italia through its holdings in the Italian company TELCO S.p.A. 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 was involved with or had decision-making powers over TIM’s operations in Brazil, although Telefónica held an indirect interest with respect to TIM’s operations in Brazil. They were also legally and contractually forbidden from exercising any voting rights in TIM’s operations in Brazil. 

 

On June 16, 2014, TELCO, S.p.A.’s Italian shareholders exercised their right to a spin-off, in accordance with the shareholders’ agreement. 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 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% of Telecom Italia’s common shares with voting rights, previously held by Telefónica, S.A. 

 

27 

As a result, Telefónica no longer held, directly or indirectly, any economic interest in Telecom Italia by the end of 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, 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.

 

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. 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 we understood did not compromise the terms of the GVT acquisition or its value. On March 25, 2015, CADE’s administrative tribunal approved the transaction based on 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 of R$15,812,000,038.03, through the 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. 

 

After the merger and as a result of the acquisition, our corporate structure was as follows: 

 

28 

 

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 delivering 46.0 million of its treasury shares, representing 0.95% of its share capital, in exchange for 58.4 million preferred shares of Telefônica 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 in the Company. 

 

On March 14, 2016, our board of directors approved a corporate restructuring in order to simplify our organizational structure. In the previous corporate structure, GVT Participações S.A. (“GVTPart”) was 100% owned by Telefônica Brasil. On the date of the merger, GVT was split and its net assets were transferred in part to GVTPart and in part to POP. The portion of the spun-off net assets of GVT concerning the goods, rights and obligations related to telecommunications activities were transferred to GVTPart and the remaining portion, concerning the assets, rights and obligations related to the other activities of non-telecommunications were transferred to POP. GVTPart was subsequently merged into Telefônica Brasil, resulting in the following corporate structure:

 

 

The corporate restructuring did not result in a capital increase or change in ownership of the Company’s shareholders and was ratified by an extraordinary shareholders’ meeting on April 1, 2016. 

 

29 

Acquisition of Telefônica Transporte e Logística Ltda. 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 that provides logistics services. 

 

Acquisition of Terra by TData 

 

On July 3, 2017, we announced that our wholly-owned subsidiary, TData, acquired all the shares of the capital stock of Terra Networks Brasil S.A. (“Terra”) from SP Telecomunicações Participações S.A. (“SPTE”), one of our controlling shareholders (the “Terra Networks Transaction”). Terra is a provider of digital services (own and third-party value-added services (“VAS”) and carrier billing, as well as mobile channels for sales and relationships) and advertising. The purpose of the Terra Networks Transaction was to expand and integrate our offering of digital services, in order to provide additional value to our customer base and TData’s, as well as to provide TData’s offering of services to Terra’s customer base and subscribers. In addition, the Terra Networks Transaction was intended to amplify TData’s advertising business as a result of Terra’s nationwide operations and expertise. The total price paid by TData as consideration for the acquisition of shares issued by Terra was R$250 million, paid in a single installment using TData’s cash on hand, with no need for financing. The Terra Networks Transaction was not subject to any regulatory authorizations or approvals by us and was completed on July 3, 2017. 

 

Restructuring Involving TData 

 

On October 30, 2018, our board of directors approved the terms and conditions of the merger into the Company of its wholly-owned subsidiary TData, as well as the proposal for the convening of an Extraordinary General Meeting of the Company for November 30, 2018, to resolve on the merger.

 

The merger involved the Company and its wholly-owned subsidiary TData, as shown below: 

 

 

The merger aimed to standardize the rendering of services, as well as simplify the Company’s organizational and corporate structure. After the implementation of the merger, the corporate structure involving the companies is as follows:  

 

 

The merger was approved by an Extraordinary Shareholders Meeting of the Company on November 30, 2018 and it did not result in a capital increase or change in the Company’s shareholders’ equity. The merger was completed with operational effects as from December 1, 2018. 

 

30 

Restructuring involving the subsidiary Terra Networks Brasil S.A. and Telefônica Infraestrutura e Segurança Ltda. 

 

On September 26, 2019, we announced that our wholly-owned subsidiary, Terra Networks Brasil S.A., or Terra, acquired all the shares of Telefônica Infraestrutura e Segurança Ltda., or TIS, from Telefónica Ingeniería de Seguridad S.A. and Telefónica Digital España S.L.U. (the “TIS Transaction”). 

 

TIS is dedicated to the exploration and provision of services and technology of information security systems, technical support and other services related to infrastructure, technology and information. 

 

The purpose of the TIS Transaction is to allow Terra, which performs, among other activities, the development of computer systems, in order to expand consulting and operational assistance, maximize the commercialization of systems, licenses and applications, enabling the expansion of the portfolio of professional and managed services and the integration of TIS and Terra’s commercial offerings, unlocking the generation of added value for the Company’s client portfolio as the activities of Information Technology, Security, IoT (Internet of Things) and Connectivity, all to be provided under common management. 

 

The total price paid for the acquisition of the shares issued by TIS was R$70.84 million, in a single installment, without any financing, using only the available cash from Terra. Said amount was calculated based on the economic value of TIS as of June 30, 2019, according to the discounted cash flow criterion, supported by an appraisal report commissioned by us. 

 

The TIS Transaction’s purchase and sale agreement contains customary terms and provisions for such transactions, including seller’s representations and warranties, indemnities and others. The TIS Transaction was also preceded by an accounting, financial and legal due diligence process regarding TIS. The TIS Transaction is not subject to obtaining any regulatory authorizations or approvals by the Company’s bodies, having been approved by Terra’s Board of Executive Officers according to its bylaws on September 26, 2019. The TIS Transaction did not change Telefônica Brasil’s shareholding structure nor caused any dilution to its shareholders.

 

Launch of Vivo Money Credit Rights Investment Fund (FIDC)

 

In August 2020, in connection with the launch of our Vivo Money service, we structured the Vivo Money Credit Rights Investment Fund (a special purpose investment fund known as a Fundo de Investimento em Direitos Creditórios, or FIDC), which was established in the form of a closed company for an indefinite term. The objective of the FIDC is to provide its quota holders an equity return on their shares by investing in the acquisition of (i) eligible credit rights, with supporting documents, which meet the eligibility criteria and the conditions of assignment, and (ii) financial assets, observing all indexes of composition and diversification of the fund’s portfolio. Eligible credit rights to be acquired by the FIDC are originated from credit transactions carried out electronically by our customers exclusively through our Vivo Money electronic platform. The FIDC began its operations on September 14, 2020, issuing 2,000 junior subordinated quotas with an initial unit face value of R$1,000. On December 1, 2020, we made a new contribution to the FIDC in the amount of R$2 million, with the issuance of an additional 2,000 junior subordinated quotas with an initial unit face value of R$1,000. As of December 31, 2020, we held 4,000 junior subordinated quotas with an initial unit face value of R$1,000, which will not have a defined remuneration parameter and are subordinated to senior quotas and subordinated mezzanine shares, in that order of priority, for the purpose of amortization and redemption. Residual returns from this FIDC, if any, are paid to us as holders of subordinated quotas. The FIDC had an immaterial impact on our results of operations, cash flows and liquidity position in 2020.

 

Corporate Governance Restructuring Involving Conversion of All Outstanding Telefônica Brasil Preferred Shares into Common Shares, and All Outstanding Telefônica Brasil ADRs Backed by Preferred Shares into ADRs Backed by Common Shares

 

At an extraordinary shareholders’ meeting held on October 1, 2020, our shareholders approved, effective as from such date, among other things: (1) the conversion of all of our preferred shares into common shares, at a ratio of one common share for each preferred share (the “Conversion”); and (2) amendments to our by-laws. At a special meeting of holders of our preferred shares, held on that same date, our preferred

 

31 

shareholders ratified the conversion of all of our preferred shares into common shares. After the conversion of the preferred shares into common shares, which formally occurred after the market closed on November 20, 2020, our ADRs backed by preferred shares were exchanged for ADRs backed by common shares, and our subscribed and fully-paid share capital was R$63,571,415,865.09 divided into 1,690,984,923 common shares, all with no par value. All our common shares continue to trade under the ticker symbol “VIVT3” on the B3 (and our ticker symbol “VIVT4” under which our preferred shares traded on the B3 was suspended on November 23, 2020), and our ADRs backed by common shares began trading on the NYSE under the ticker symbol “VIV.”

 

Restructuring involving the sale of shares of Telefônica Cibersegurança e Tecnologia do Brasil Ltda. to Telefónica Cybersecurity Tech, S.L., an indirect subsidiary of Telefónica S.A.

 

In a meeting held on November 1, 2020, our Board of Directors approved the execution, on the same date, of the Quotas Purchase and Sale Agreement, or the CyberCo Brasil Purchase and Sale Agreement, pursuant to which we sold the totality of the quotas we held, representing the entire capital stock of our subsidiary, Telefônica Cibersegurança e Tecnologia do Brasil Ltda., or CyberCo Brasil, to Telefónica Cybersecurity Tech, S.L., or TTech, an indirect subsidiary of Telefónica S.A., for the total amount of R$116.4 million, supported by an independent external report prepared by a specialized company.

 

On the same date, and as a preliminary step to the implementation of this transaction, certain of our assets, contracts, and employees were transferred to CyberCo Brasil, all strictly related to cybersecurity activities. The transaction will allow us, as an exclusive distributor of Cyberco Brasil, to strengthen ourselves in the cybersecurity market by expanding its portfolio of products and services. In addition, we will benefit from greater competitiveness due to the global scale of the partner dedicated to cybersecurity activities. The transaction also ensures the continuity of the provision of cybersecurity services by our B2B area to our customers, as it includes the execution of certain contracts that regulate the provision of cybersecurity services between CyberCo Brasil and us. The CyberCo Brasil Purchase and Sale Agreement contains customary terms and provisions for this type of transaction. The transaction does not alter our shareholding structure or cause any dilution to our shareholders, generating value for them by accelerating our growth and increasing our operational efficiency.

 

The transaction is not subject to any regulatory authorizations or other approvals in addition to those obtained from the Company’s bodies on October 30, 2020 and November 1, 2020. CyberCo Brasil was originally created under the registration name of BLSK Serviços de Telecomunicações Ltda. After changing its name, location and corporate purpose, CyberCo Brasil’s shares were transferred from Terra to Telefônica Brasil on September 9, 2020.

 

Capital Expenditures

 

Year Ended December 31, 2020

 

In 2020, we invested R$7,973.3 million, a 9.85% decrease over the amount we invested in 2019 (R$8,844.3 million), primarily due to the slowdown in 4G investment, reduction in legacy technology (copper network and DTH) investments, optimization of inventory and reduction of investments associated with B2B commercial activity.

 

Investments in projects were strongly focused on network investments (which accounted for 79% of investments in 2020) and included expenditures on items such as radio access network (eNode-Bs and carriers), transmission backhaul and backbone, FTTH and IPTV. The investments helped 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.

 

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 network, mobile 4G network and dedicated corporate networks. We continue to invest in expanding our national data transmission backbone to meet the increase in data traffic throughout Brazil.

 

32 

The following table sets forth our capital expenditures for each year in the three years ended December 31, 2020.

 

   Year ended December 31,
   2020  2019  2018
   (in millions of reais)
Telefônica Brasil               
Network    6,327.9    7,273.6    6,881.2 
Technology / Information Systems    1,154.2    1,185.0    999.3 
Others(1)    491.2    385.7    319.4 
Total capital expenditures    7,973.3    8,844.3    8,199.9 

_______________

(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 spectrum licensing costs. The spectrum licensing costs amounted to R$184.3 million in 2020, relating to the 850Mhz license renewal provision in the state of Rio de Janeiro

 

Year Ended December 31, 2019

 

In 2019, we invested R$8,844.3 million, a 7.86% increase over the amount we invested in 2018 (R$8,199.9 million), Investments in projects were strongly focused on network investments (which accounted for 82% of investments in 2019) and included expenditures on items such as radio access network (eNode-Bs and carriers), transmission backhaul and backbone, FTTH and copper network. The investments helped 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.

 

Year Ended December 31, 2018 

 

In 2018, we invested R$8,199.9 million, a 2.52% increase over the amount we invested in 2017 (R$7,998.3 million), Investments in projects were strongly focused on network investments (which accounted for 84% of investments in 2018) and included 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 helped 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.

 

Recent Developments

 

COVID-19

 

We are closely monitoring the evolution of the COVID-19 pandemic in Brazil and globally, in order to take preventive measures to minimize the spread of the virus, ensure the continuity of operations and safeguard the health and safety of our personnel. Based on the information available as of the date of this annual report, we present below a summary of the main effects of the COVID-19 pandemic on our business and results of operations:

 

·Our stores were entirely closed in March 2020 and started reopening in April 2020, subject to reduced hours of operation and customer capacity limitations, which remained in effect for the rest of the year. This affected the sale of handset and other accessories, upselling from hybrid to postpaid plans and postpaid additions, which are typically made at our retail locations, resulting in a loss of revenue;

 

·We experienced a contraction in mobile revenues in the first semester of 2020 of R$364.8 million, or 2.6%, compared to the first semester of 2019, due to net disconnections of approximately 174,000 on prepaid and postpaid plans in the same period, as well as and downgrades of plans by our customers and lower handset sales given the temporary closing of our stores;

 

33 

Table of Contents 

·Our third-party call center was forced to reduce its hours of operation in March 2020, due to stay-at-home orders, affecting customer service and upselling from prepaid plans to postpaid plans;

 

·Costs related to sales, such as sales commissioning and advertising, also contracted due to lower commercial activity and call center working hours reductions. As a result, commercial expenses fell by 9.0% year-over-year in 2020 compared to 2019;

 

·We experienced an increase in provisions for bad debt of R$58.0 million, or 3.4%, in 2020 compared to 2019, as a result of increased unemployment and the inability of certain customers to pay bills and late fees as a result of disruptions caused by the COVID-19 pandemic, but offset in part by relief measures we implemented such as offering customers the possibility of making payments in up to 10 installments, without fines or interest. As a result, the increase in provisions for bad debt experienced in the first half of 2020 was partially offset by a reduction in such provisions in the second half of 2020 when compared with the second half of 2019; and

 

·We postponed the payment of TFF taxes (taxa de fiscalização do funcionamento), as permitted by government measures implemented in 2020 in response to the pandemic, in the amount of R$671.1 million, which will be paid in 2021.

 

See also “Item 3. Key Information—D. Risk Factors— Risks Relating to the Brazilian Telecommunications Industry and Us—Our business, operations and results have been, and may continue to be, adversely impacted by the effects of the COVID-19 pandemic.”

 

Execution of Purchase Agreement for Acquisition of UPI Mobile Assets of the Oi Group

 

On January 28, 2021, we executed the Purchase and Sale Agreement of Shares and Other Covenants, or the Oi Agreement, by and among Oi Móvel SA - In Judicial Recovery, as seller, Telefônica Brasil, Tim S.A. and Claro S.A., as Buyers, and Oi S.A. - In Judicial Recovery and Telemar Norte Leste S.A. - In Judicial Recovery, as intervening parties and guarantors of the seller’s obligations. The Oi group is currently undergoing a judicial reorganization process (recuperação judicial) in Brazil and the Oi Agreement was executed in connection with a judicial auction held on December 14, 2020 for the sale of assets of the Oi group’s mobile business operations (Grupo Oi’s Personal Mobile Service), or the UPI Mobile Assets, after the joint offer made by us and the other Buyers was declared the winning bid in the competitive bidding process under the judicial auction, which was approved by the Brazilian Judicial Reorganization Court (Juízo da Recuperação Judicial).

 

Under the Oi Agreement, Telefônica Brasil is entitled to a selection of assets that will comprise its share of the UPI Mobile Assets, consisting of:

 

·Clients: approximately 10.5 million (corresponding to approximately 29% of UPI Mobile Assets’ total customer base) – according to ANATEL’s database of April 2020. The allocation of customers among the Buyers considered criteria intended to enhance competition among the Brazilian telecom market operators;

 

·Spectrum: 43MHz as a national weighted average based on population (approximately 46% of UPI Mobile Assets’ radiofrequencies). The division of frequencies among the Buyers conforms strictly to the spectrum limits established by ANATEL; and

 

·Infrastructure: including agreements for the use of 2.7 thousand mobile access sites (corresponding to approximately 19% of UPI Mobile Assets’ total sites).

 

In addition, under the Oi Agreement, the completion of the acquisition of the UPI Mobile Assets by the Buyers will take place according to the segregation plan for such assets, pursuant to which the UPI Mobile Assets will be segregated and contributed by the Oi Group to three different specific purpose entities, or SPEs, such that Telefônica Brasil will acquire the totality of the shares of one SPE that will hold the assets to be attributed to Telefônica Brasil pursuant to the aforementioned segregation plan, which will be separate and independent from the other SPEs. Similarly, the other two Buyers will each acquire the totality of the shares of the respective remaining SPEs, which will each hold the respective assets to be attributed to each of the two other Buyers.

 

34 

Table of Contents 

The total consideration agreed to be paid by the Buyers under the Oi Agreement amounts to: (i) R$16,500.0 million, of which R$15,744.0 million comprises the base purchase price and R$756.0 million relates to amounts to be paid as consideration for transitional services to be rendered by the Oi Group to the Buyers for a period of up to twelve months, under a transitional services agreement to be entered into among the parties, or the Transitional Services Agreement; and (ii) R$819.0 million, as consideration for services to be rendered by the Oi Group to the Buyers under a take-or-pay data transmission capacity agreement to be entered into among the parties, or the Capacity Agreement.

 

Subject to the terms, conditions and payment schedule agreed upon between Oi Group and the Buyers, the consideration owed by the Buyers to Oi will be paid upon effectiveness of the transaction, which will occur on the date of the execution of the Transitional Services Agreement. Under the terms of the Oi Agreement, Telefônica Brasil will disburse an amount corresponding to 1/3rd of the total consideration, equivalent to approximately R$5.5 billion. Subject to the continuity of the current market conditions and necessary internal approvals, as well as, in light of our robust financial position and strong cash flow generation, we intend to use our own resources to finance the transaction.

 

The completion of the acquisition is also subject to certain precedent conditions usually applicable to this type of transaction and set forth in the Oi Agreement, such as the prior consent of ANATEL and approval by the Brazilian competition authority (CADE), as well as, if applicable, the submission to the general shareholders’ meeting of the Company, under the terms of article 256 of the Brazilian Corporations Law. As of the date of this annual report, the regulatory approvals that are required to be granted by the CADE and ANATEL have not yet been granted.  Moreover, as of the date hereof, it is possible that such approvals required for the consummation of the transactions contemplated by the Oi Agreement acquisition may not be obtained or, if they are obtained, could impose unanticipated or adverse conditions or otherwise modify the terms thereof, including the re-allocation of assets among us and the other two operators that were awarded the winning bid together with us, pursuant to our joint bid.

 

We believe that the transactions contemplated by the Oi Agreement, once and if consummated, will generate benefits for our shareholders through the generation of revenues and efficiencies resulting form operational synergies, as well as for our customers, as a result of the assets acquired, which reinforce our commitment to excellence in the quality of the services we provide and finally, for the Brazilian industry as a whole, due to the resulting changes that reinforce the industry’s capacity to make investments and create technological innovations sustainably, further contributing to the ongoing digitalization of the country. We believe our acquisition of a portion of the UPI Mobile Assets marks another important step in achieving our purpose of increasing digitalization to bring people together (Digitalizar para aproximar).

 

B.Business Overview

 

We are the leading mobile telecommunications company in Brazil (with a 33.6% market share as of December 31, 2020, based on accesses), with a particularly strong position in postpaid mobile services (37.7% market share as of December 31, 2020, 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 December 2020, we reached 20.3% of total market share in FTTH (fiber-to-the-home) accesses in Brazil, or 45.7% considering only the state of São Paulo, consolidating our leadership in key businesses for high-value services.

 

Our Vivo brand, under which we market our mobile services, is among the most recognized brands in Brazil. The quality of our services and the 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, 2020, our average revenue per mobile user, or ARPU, of R$29.06 represented a significant premium relative to the market average. In 2020, we captured 35.6% of the 9.0 million net additions 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 entertainment, cloud, security 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.

 

35 

Table of Contents 

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 in 2015, a high-growth telecommunications company in Brazil that offered 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 IPTV and DTH (a satellite technology);

 

·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

 

According to data regarding market share published by ANATEL in December 2020, we are the leading provider of mobile telecommunications services in Brazil in terms of accesses.

 

Our mobile portfolio includes voice and broadband internet access through 3G, 4G and 4.5G as well as value-added services (such as Vivo Meditação, Vivo Bem, Vivo HomeFix, Vivo BTFIT, Go Read, Ubook,

 

36 

Table of Contents 

Hube Jornais, Kantoo Inglês, NBA and NFL), prepaid plans with data sharing features, family plans, voice mail and voice mail speech-to-text translation, caller identification, voice minutes in unlimited bundles to mobile and fixed phones, ringtones, and innovative services such as multi-media backup, cloud-based services to save texts, entertainment and music apps, advertising platforms, among others.

 

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 fiber (FTTH – fiber-to-the-home and FTTC – fiber-to-the-curb) and xDSL technologies, with speeds ranging from 1Mbps to 300Mbps.

 

Through the GVT acquisition in 2015, we were able to further expand our data services by providing high-speed broadband to high-income customers across our target markets. GVT provided services that were complementary to our own, with limited overlap with the services we already provided. Such complementary services included 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.

 

In 2020, we covered 100% of the municipalities in our concession area in the state of São Paulo and hundreds of others throughout Brazil, reaching more than 6.3 million fixed broadband customers in total, and we expanded our national fiber network to reach approximately 25 million homes, of which almost 16 million alone consisted of FTTH technology.

 

In mobile broadband, we use a variety of technologies to provide wireless internet services to our customers. Our 3G network is currently available nationwide. In addition, we offer HSPA+ technology, which is commercially known as 3G Plus. This technology allows customers with compatible terminals (including handsets) to reach up to three times the speed of traditional 3G. In December 2020, we covered 4,558 municipalities with our 3G network, reaching 96.0% of Brazil’s population. We also offer 4G LTE technology, which, by the end of 2020, was available in 3,598 municipalities, reaching 90.8% of Brazil’s population, and also 4.5G LTE through carrier aggregation in 1,872 municipalities, reaching 73.1% of the Brazilian population.

 

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, 2020, had 1.2 million Pay TV customers, including 891 thousand IPTV customers.

 

Network Services

 

Our network management technology ensures comprehensive management and supervision of all our network processes and network performance for our wholesale clients.

 

The Network Management Center monitors the critical network operational parameters of the countrywide transmission backbone, IP networks, mobile and fixed packet/circuit core networks, VAS/Multimedia platform and global services, radio access network, infrastructure and online services performance, as well fixed access network across the country, broadband networks, network interconnection, portability and IPTV/DTH. The center can identify abnormalities in both our network (fixed and mobile) and third-party networks including networks of other operators and other corporate clients, using failure, signaling, quality and service monitoring systems. The Network Management Center is integrated with maintenance and operations teams that maintain and operate mobile and fixed network elements, as well as infrastructure and transmission, in addition to the radio network elements and computing bases, service platforms and communications backbones.

 

37 

Table of Contents 

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. Currently, our monitoring process has been supported by automated systems (RPA - Robotic Process Automation) which increases the effectiveness on incident correlation, recovery and management. This advancement gives our team more efficiency and speed in detecting and solving problems in our networks. 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 fixed network technology has been a project to exchange optical cabinets, used for offering voice and data services for Multi-Service Access Nodes, which allows us to offer broadband service to many clients who did not previously have this service. 

 

In addition, we are widely applying advanced virtualization solutions (NFV) in order to support the transition to the next generation of mobile networks, known as fifth-generation or 5G, which will meet the future market and customer expectations providing massive devices connection (IoT), extremely low latency and higher data transfer rates.

 

Network and Facilities

 

We provide services referred to as 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. 

 

In addition, we are able to offer a complete portfolio of wholesale products, including L2L, IP, Ethernet and MPLS. All of these products are used to meet the demands of other network operators and regional internet providers. 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.

 

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 forms a network layer that enables connectivity between the various platforms as 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 such 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.”

 

38 

Table of Contents 

At the end of 2019, we had 561 local and long-distance interconnection agreements and 193 agreements for the provision of local and long-distance traffic.

 

An interconnection is a link between compatible telecommunications networks that enables 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 (including Value-Added Services)

 

Following Vivo’s purpose of “digitalizar para aproximar”, in 2020 we put even more energy into developing partnerships with major players in strategic segments such as education, health, entertainment and financial services. Focusing on delivering the best customer experience, we excluded from our portfolio more than forty services with little relevance, improved the value proposition of our traditional plans by bundling with new digital services, and we provided our best services free of charge at the beginning of the pandemic, when the customers were readapting at home to our new online way of life.

 

In order to contribute to customers in social isolation through COVID-19, we promoted free and unlimited access to our main services. Customers were able to listen to music on Tidal, read the main news on the Forbes app, entertain children with Playkids and even have access to remote technical support, 24/7 for installation and configuration of electronic equipment at home with Vivo Guru. Vivo offered a total of 11 apps, free for 60 days, which also made it possible for customers to study English, take courses and prepare for entrance exams at home, access over 400 thousand ebooks, audiobooks and podcasts, among other benefits. One of the most accessed services was Vivo Meditação, focused on mental health, which featured a special category with meditations to help clients of all ages to control anxiety, reduce stress, sleep better and have a more balanced life during the critical periods of the pandemic.

 

In June 2020 we launched a new portfolio of postpaid plans, Vivo Selfie, created for people interested in new ways to connect with what they like. The plan is based on the concept of co-creation with relevant brands in their segments, whose services are important in people’s daily lives. Each plan includes a subscription to one of the services, an additional data package to use the partner’s app and many other benefits of the Postpaid plans. With these plans, we bring more benefits to consumers through innovative partnerships with companies that are a reference in the digital and entertainment world - Spotify Premium, Disney +, Netflix, Rappi, Premiere and Telecine. In November, Vivo launched Disney+ exclusively, being the only carrier to launch the service in 2020, with an exclusive offer that delivered a free 30-day trial to Vivo customers on stand-alone subscriptions and discounts on the Selfie Disney+  plan.

 

In October 2020, we launched our personal credit service for Vivo’s hybrid and postpaid customers, called Vivo Money. Vivo Money allows customer to obtain credit ranging between R$1,000 to R$30,000, in a fast and practical manner through a 100% digital platform. It also offers competitive interest rates, starting at 1.99% per month, according to the customer’s credit profile analysis, and the payment term varies from six to 24 months. The launch of Vivo Money is highly strategic for us, as it reinforces our position as a hub for digital services, offering our customers far more than telecommunications services. Moreover, expanding our financial services is one of our top priorities for the development of new services that generate value for our customers.

 

39 

Table of Contents 

Also in October 2020, we expanded our education services portfolio, which has over 20 course and language applications, and launched the partnership with Babbel. The service enables robust development of writing, speaking and listening skills in 14 languages. Through this partnership, we have also expanded the value proposition of traditional voice plans with the creation of bundles that package Babbel’s app in voice plans and grant access to the service at no additional cost to customers.

 

In the ehealth segment, we launched an important partnership with Yalo, where the customer has access to Dr. Consulta’s medical services, discounts on medical appointments in person or by teleconsultation, on exams, medications and gym. In October 2020, we offered an exclusive promotional subscription through our loyalty program (Vivo Valoriza) and in December 2020 we expanded the partnership by including carrier billing as a subscription method.

 

We continue to bring new partnerships in digital services, giving the customer the choice to subscribe to important entertainment, security and assistance services by paying directly with Vivo’s bill and thus breaking the credit card barrier. In March 2020, we launched a partnership with Garena’s Free Fire, one of the most popular mobile games of the moment. In May 2020, we launched Safe Connect in partnership with Mcafee, a service that guarantees customer’s safety when browsing the internet. In September 2020, we launched Vivo Assistência Casa, an exclusive product for the Fixed Voice customer, in which the customer can count on services that facilitate their day-to-day activities and bring greater comfort in unforeseen situations, through a specialized care center. We ended the year with the exclusive launch of Amazon Prime, which offers multiple advantages for subscribers with free shipping on e-commerce and various entertainment benefits through Prime Video, Amazon Music, Prime Gaming and Prime Reading.

 

In 2019, Vivo launched its corporate open innovation program - Vivo Discover - which is focused on enabling innovation impact through the change of mindset and new business development, allowing executives to create and capture value through the adoption of startups solutions for internal pain points or generation of new business for Vivo´s clients. Currently, the main pillar of this program is “Vivo Shaper”, an initiative whose main goal is to create and develop “innovation ambassadors” throughout the entire organization. Every year, the program selects 25 senior executives that go through a six-month course learning key methodologies and topics such as design thinking, enabling change, managing scouting activities (i.e. searching for startups that are a good fit for a specific need), or how to develop a new business with startups for revenue generation. During the program, each “Shaper” must identify real cases where startups can supply the solution and execute its implementation from start-to-adoption using what they learned through their innovation journey. By transforming knowledge into impact, they drive innovation across the organization, while also stimulating their teams and peers to leverage what they learn and practice during the program.

 

Regarding the development of open innovation in the Telefónica Group, we highlight the Telefónica “Open Innovation” unit, which is an open, global program designed to connect entrepreneurs, startups, investors, and public and private partners to support local ecosystems by investing in start-ups from the seed phase to scale-up via different initiatives including Wayra. There are approximately 500 active startups in the global portfolio.

 

We believe the integrative nature of Telefónica Open Innovation enables innovation to be developed in different stages. It is structured around some initiatives as below:

 

·Open Future: Regional open innovation strategy of Telefónica in partnership with public and private partners;

 

·Wayra (open innovation hub of the Telefónica Group as a whole, as well as an initiative of Vivo Discover in Brazil), which operates prospecting startups early stage to generate business and potential investments in the form of venture capital supporting companies to scale.

Wayra X – Telefónica’s first open innovation Digital Hub to invest in global and digital scale-ups.

 

·Telefónica Innovation Ventures (TIVs): Network of funds and our corporate venture capital vehicle for investing in late-stage startups. We finance and fuel technological companies in key markets and create strategic partnerships aligned with Telefónica’s global strategy.

 

40 

Table of Contents 


Telefónica Tech Ventures: the Venture Capital global vehicle for cybersecurity, founded by TIVs and Eleven Paths, to invest in the best Cyber Security Startups and develop new business together.

 

In 2020, Telefónica was recognized among the 25 corporations that most support entrepreneurship (Top 25 Corporate Startups) and has received the “Corporate Startup Accelerator”, a special award, recognizing Wayra, the group’s global open innovation hub.

 

Wayra Brasil has supported 79 startups and made more than R$19 million in investments since 2012. As of December 31, 2020, Wayra had 32 startups in its portfolio. About 47% of our current startups have done business with Vivo helping in the digital transformation process. Some great examples are: Gupy, a recruitment platform responsible for all hiring process at the Company; VOLL, a startup offering a platform helps aggregate and manage transportation alternatives for employees (i.e. a mobility marketplace), improving efficiency and enabling cost reductions.

 

In addition to investment, connections, mentoring and consulting with founders, Wayra also develop partnerships in order to maximize opportunities for the group. Agro IoT Lab, an IoT-focused field application development program was a great example that was carried out in 2019 at Pulse with Wayra, Vivo, Ericsson and Raízen. This initiative generated new investments in Startups through Wayra and also new products and services launched in 2020 from the partnership between Vivo and the startups IoTag and Ativa. Those products are Vivo Smart Machinery (Vivo Maquinário Inteligente) that provides telemetry and management of heavy vehicles in the field and Vivo Smart Weather (Vivo Clima Inteligente), a solution that provides the connectivity of weather stations to support the farmer in making better decisions about planting and harvesting on the farm. 

 

Wayra is continuously scouting startups aligned with its investment thesis that in 2020 had as priority areas technologies solutions focused on artificial intelligence, IoT, cybersecurity, advanced analytics, health, education and financial services.

 

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 

 

We sell LTE and WCDMA devices such as 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 Samsung, Apple, Motorola, LG, TCL, Xiaomi, Positivo, Multilaser, ZTE and Flex (WNC and Blucastle) and our gadgets suppliers are Samsung, Harman (JBL), Apple, Alfacomex (Logitech and Geonav), Razer, Oex, Positivo (Anker and Positivo), Easy Mobile, DPC (Binatone Motorola), Allied (Google), Timbro (Amazon), Customic (Customic and Pop Socket), Multilaser, Comesp (Laut), Flex (Mitrastar), Chansport (Xtrax) and ELG. 

 

Devices and gadgets sales continued to show strong grow in 2020, in line with our strategy to gain market share in this important market, through strong communication and brand awareness initiatives built on our “You can find everything at Vivo” (in Portuguese, “Tem tudo na Vivo”) campaign, a call to action emphasizing that Vivo can provide everything customers need, and also through our sales channels, which focused on attracting high-value customers to our physical and online stores.

 

41 

Table of Contents 

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 – 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

 

·Special Class Individual Access (Acesso Individual Classe Especial – AICE): a plan created specifically for families enrolled in social programs from the Brazilian government.

 

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 Alternative Service Plan 

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$0.18539
Local Minutes–charges in excess use of the allotment Sector 31 R$0.11425 R$0.04633
Minimum time billing 3 seconds 3 seconds
Reduced Hours    
Charge per answered call (minutes deducted from allotment) 2 minutes 2 minutes
Charge per answered call after the allotted duration Sector 31 R$0.23249 R$0.23249

 

As of the date of this annual report, the subscription to the AICE plan costs R$ 10.97 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.

 

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 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.

 

42 

Table of Contents 

Long-distance rates

 

Rates for domestic long-distance calls are computed based on the time of day, the 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 (15). Customers of any local and long-distance operator may use Code 15 when dialing long-distance to benefit from our rates. In March 2020, ANATEL approved Resolution No. 724, which established the Standard for the implementation and monitoring of tariff freedom in the Fixed Telephone Service (STFC) for use by the general public, in the National Long Distance mode. Since then, the company has been free to determine domestic long-distance fees according to the market.

 

We also offer international long-distance rates, which are also available to all users using Code 15. International long-distance call charges are computed based on the time of day, the day of the week, duration and destination of the call, and may also 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. We are free to negotiate our fees for international calls based on the international telecommunications market, to which our main competitor is Embratel.

 

With respect to long-distance calls, we have developed alternative rate plans for residential and corporate customers.

 

Mobile services rates

 

Regarding 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. This rate is revised annually and the rate of inflation is measured by the IGP-DI index. The maximum rate applies to all service plans, but mobile operators are allowed 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 the Company in our authorizations was based on the previously existing or bidding prices, and has been adjusted annually based on a formula contained in our authorizations. As of the date of this annual report, the most recent adjustment was approved in September 2020 and established tariffs of R$0.17608 for regular hours and R$0.12325 for reduced hours.

 

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 allowed free negotiations for mobile interconnection fees (MTR).

 

In December 2013, ANATEL established the reference values for MTR for 2014 and 2015, and in July 2014, for the years 2016, 2017, 2018 and 2019. The table below shows the ranges for these reference values:

 

Year 

Reduction 

MTR 

  in % in reais
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

43 

Table of Contents 

In February 2020, ANATEL established the reference values for MTR for the years ranging from 2020 until 2023. The table below shows the reference values for each region (corresponding to different Brazilian states) in the General Authorization Plan (Plano Geral de Autorizações), or PGA, in reais:

 

Year 

PGA Region I 

PGA Region II 

PGA Region III 

2020 0.01338 0.01503 0.02687
2021 0.01380 0.01527 0.02814
2022 0.01422 0.01550 0.02947
2023 0.01468 0.01578 0.03082

 

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 providers, subject to a price cap and to compliance with the regulations established by ANATEL, which include 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—Interconnection Fees.”

 

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 other services. Data transmission rates are not regulated by ANATEL, except for EILD (wholesale links up to 34 Mbps) and High Capacity Data Transport (wholesale links above 34 Mbps). Multimedia services operators can freely set the rates for alternative service plans.

 

TV rates 

 

Pay TV rates are not regulated. Service providers are allowed to freely set the rates for alternative service plans.

 

Taxes 

 

The cost of telecommunication 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 4% 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 Telecommunication Services (Fundo de Universalização dos Serviços de Telecomunicações), or FUST; (3) Fund for Telecommunication Technological Development (Fundo para o Desenvolvimento Tecnológico das Telecomunicações), or FUNTTEL; and (4) Fund for Telecommunication Regulation (Fundo de Fiscalização das Telecomunicações), or FISTEL.

 

Billing

 

For postpaid customers, 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. For prepaid customers, billing is available online.

 

44 

Table of Contents 

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.

 

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 canceled 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. As of January 2018, bad debt provisions

 

45 

Table of Contents 

were adjusted due to changes brought by IFRS9, including new criteria that follow an expected credit loss model, adopting a percentage of risk for each debt payment profile until the moment of effective loss (100%). The percentages were calculated according to the historical behavior of delinquency for each segment. 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 a lawsuit to be initiated. This rule is applied for outstanding debt through October 8, 2014; after this period, the amount ranges for bad debt write-offs 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 required for debts over R$100,000 open for more than 365 days.

 

In the year ended December 31, 2020, the monthly average of partial suspensions, for mobile and fixed services (Pay TV included), was 4.5 million lines and the monthly average of total suspensions was 892.357 lines. Provisions for doubtful accounts in the year ended December 31, 2020 were 2.8% 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 fixed telephone, data and Pay TV services throughout Brazil pursuant to licenses and authorization. We operate mobile voice and broadband services throughout Brazil, under the mobile service (SMP) authorization. We also offer a variety of value-added services, some of them through commercial partnerships. The following table sets forth population, gross domestic product (GDP), and per capita GDP statistics for each state in our service regions at the dates and for the years indicated:

 

   Last Available IBGE Data from 2018 (1)
Area  Pop. (million)  Percent of Brazil’s pop.  GDP(R$ million)  Percent of Brazil’s GDP  Per capita GDP (reais)(2)
                
São Paulo State    45.5    21.8%   2,210,562    31.6%   48,542 
Rio de Janeiro State    17.2    8.2%   758,859    10.8%   44,223 
Minas Gerais State    21.0    10.1%   614,876    8.8%   29,223 
Rio Grande do Sul State    11.3    5.4%   457,294    6.5%   40,363 
Paraná State    11.3    5.4%   440,029    6.3%   38,773 
Santa Catarina State    7.1    3.4%   298,227    4.3%   42,149 
Bahia State    14.8    7.1%   286,240    4.1%   19,324 
Federal District    3.0    1.4%   254,817    3.6%   85,661 
Goiás State    6.9    3.3%   195,682    2.8%   28,273 
Pernambuco State    9.5    4.6%   186,352    2.7%   19,624 
Pará State    8.5    4.1%   161,350    2.3%   18,952 
Ceará State    9.1    4.4%   155,904    2.2%   17,178 
Mato Grosso State    3.4    1.7%   137,443    2.0%   39,931 
Espírito Santo State    4.0    1.9%   137,020    2.0%   34,493 
Mato Grosso do Sul State    2.7    1.3%   106,969    1.5%   38,926 
Amazonas State    4.1    2.0%   100,109    1.4%   24,533 
Maranhão State    7.0    3.4%   98,179    1.4%   13,956 
Rio Grande do Norte State    3.5    1.7%   66,970    1.0%   19,250 
Paraíba State    4.0    1.9%   64,374    0.9%   16,108 
Alagoas State    3.3    1.6%   54,413    0.8%   16,376 
Piauí State    3.3    1.6%   50,378    0.7%   15,432 
Rondônia State    1.8    0.8%   44,914    0.6%   25,554 
Sergipe State    2.3    1.1%   42,018    0.6%   18,443 
Tocantins State    1.6    0.7%   35,666    0.5%   22,933 
Amapá State    0.8    0.4%   16,795    0.2%   20,247 
Acre State    0.9    0.4%   15,331    0.2%   17,637 
Roraima State    0.6    0.3%   13,370    0.2%   23,189 
Total    208.5    100.0    7,004,141    100.0    33,593 

_______________

(1)According to IBGE data (2018) collected at https://www.ibge.gov.br/ – subject to revision.

 

(2)Average per capita GDP for Brazil, weighted by the percentage of the population represented by each state.

 

46 

Table of Contents 

Seasonality

 

Our business and results of operations are not materially affected by seasonal fluctuations in the consumption of our services.

 

Marketing and Sales

 

Our commercial distribution network (marketed under the Vivo brand), as of December 31, 2020, consisted of 243 own sales outlets throughout Brazil. In addition, we also have approximately 13,000 sales outlets run by authorized dealers (including exclusive dealers and retail channels), maintaining a solid capillarity strategy that contributed to our leadership position in the Brazilian telecommunications market.

 

As of December 31, 2020, we had approximately 360,000 points of sale where prepaid mobile service customers could purchase credits using the Distribution or Online channels. 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 customers through the following physical sales channels:

 

·Vivo stores: we continue to focus on the transformation of the traditional PoS (Point of Sale) into the PDX (Point of Experience), reaching eight iconic stores, six Stores-in-Store and 243 Plus Stores (a concept created to serve small and medium cities) as of December 31, 2020. By advancing on infrastructure, systems, customer service, micromanagement and capillarity improvements we believe we continue to provide an efficient, profitable and enchanting service. In 2020, in response to the pandemic restrictions, we accelerated the digitalization of our stores by releasing “Vivo em Casa”, a tool where anyone can contact our store´s sales force.

 

·Exclusive dealers: this channel is composed of select 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. We are also constantly updating and enhancing these stores to provide a better purchase experience to the customer, to ensure an experience that is consistent with our own stores. In 2020, these dealers were also impacted by the restrictions imposed by the COVID-19 pandemic. In order to minimalize this impact, we made available to them our “Vivo em Casa” solution.

 

·Retail channel: our retail channel sells postpaid and prepaid products and recharge services that are marketed by our partners’ own sales teams. This channel maintains a strong partnership relation with retailers through our sales incentive program (tying compensation to sale performance). In 2020, we changed and standardized all the contracts with our retail partners, in order to increase the quality and profitability of our sales.

 

·Distribution channel: the broadest and most complex sales channel across our markets, this channel allows our prepaid customers to purchase data and voice credits. In order to be as close as possible to potential and existing customers, this channel comprises authorized agents, lottery stores, post offices, bank branches and small retailers, such as pharmacies, newspaper stands, bookstores,

 

47 

Table of Contents 

stationery shops, bakeries, gas stations, bars and restaurants. The channel is currently responsible for the majority of our prepaid sales (90%) and mobile recharges (75%). In 2020, despite all the restrictions imposed by the pandemic, we regained the leadership of the prepaid market. This is a result of our continuous stimulus to commercial and operational efficiency, by improving our micromanagement tools that enable real-time control of distribution capillarity, sales force and supply of all of 360,000 points of sales.

 

·Door-to-door sales: this channel has strengthened after the transformation started in 2019, by expanding the sales force, focusing on quality and high-value clients and becoming key in fiber sales in locations where we have deployed new facilities. This channel represents 40% of all fiber sales in the B2C segment. In a year with a lot of restrictions imposed by the COVID-19 pandemic, this channel played the most important role to meet our client, respecting all healthy measures.

 

·Outbound Telesales: characterized by the lack of geographical limitations, our outbound telesales channel can reach existing and potential customers across the whole country, offering our full product portfolio, from prepaid to postpaid products, as well as fixed voice, broadband and TV bundles. In 2020, facing the challenges imposed by the self-regulation in the telecom sector in Brazil, this channel has focused on increase the client base by identifying new clients and offering suitable plans to our’ existing clients according to their consumption profile. This channel contributed with almost 230 thousand unit sales per month.

 

Customer service

 

2020 has brought a significant increase in demand for Telecom Industry, which has become an essential service for the whole society. We were already moving towards the digitization of our channels, offering technology as a means of bringing people together. Then, with the need for physical distance, our purpose of digitizing to get closer has gained even more relevance.

 

Countless challenges happened simultaneously, and all this care for people started at home: in a record time of just 15 days, in March, we moved several areas of the company so that we could put Self-Service Operations working from home full time, in complete safety.

 

Our team has shown the importance of synergy for a surprising result, based on the DNA Vivo Program, which permeates the daily life of our entire company, in a reliable, easy, enchanting and efficient relationship. From March to October 2020, around 50% of the calls were answered by people working from their homes.

 

Our more than 25,000 call center employees have provided an advisory service to customers, when we also worked intensively to encourage the use of digital channels for Self-service, with a leading role in the digital transformation of Brazil. The results of this change have already appeared during 2020: there was a reduction of over 15% in telephone contacts to call centers compared to the same period in 2019 and a significant increase in customers on digital channels. In 2020, there were more than 270 million interactions from Aura, Vivo’s artificial intelligence platform. Meu Vivo App unique users base has grown by 17% in December 2020 compared to December 2019, and from January 2020 to October 2020, Whatsapp service interactions exceeded 130 million.

 

We have ended 2020 certain that we have the best resources: human and technological to face the barriers of physical distance together. These results have proven our constant efforts to improve the customer experience, whose cycle we follow end to end: sell, serve, charge and retain.

 

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.

 

In 2017, we started the program for network virtualization, UNICA. In 2020, we accelerated the virtualization program in order to reach the necessary requirements for 5G and IoT networks.

 

48 

Table of Contents 

For voice services, we remain focused on the evolution and convergence of the mobile and fixed networks based on All-IP IMS technology, encouraging technological advancement and offering new services to our customers, at the same time increasing redundancy, reliability and capacity levels.

 

As part of convergence and modernization of the voice network, we have been deploying new IMS clusters over UNICA infrastructure as well and new IMS clusters are upcoming soon.

 

In the case of our mobile voice network, we have started offering VoLTE and VoWiFi services to our customers adding important voice improvements like HD voice (native in VoLTE) and new SRVCC (Single Radio Voice Call Continuity) enhancements that will improve call continuity with new handover scenarios among IMS (LTE) and CS (Circuit Switch). Besides that, we have been working on voice over 5G (VoNR) in order to have this service as soon as this network becomes available.

 

For our fixed voice network, the offer of VoFTTH, SIP trunking, SIP interconnections, etc. has been increasing in our network as part of new cities launching plan, energy efficiency and site demobilization and voice digitization plans, synergies between fixed and mobile networks and so on. To support significant VoIP growth, the modernization and consolidation of the new IMS Core and SBCs were planned and deployed. As a benefit, we expect to have cost savings for equipment, lines, manpower and maintenance.

 

In terms of our Telecom database, we have already started our network modernization in order to have new UDC clusters over a virtualized infrastructure. Such movement will allow us to have the new components that are necessary for 5G networks especially for 5GSA (Stand Alone) architecture.

 

For Data Core we have been offering the LTE-M, Nb-IoT and private LTE networks providing new services for B2B and B2C markets. At the same time, we have already started our planning for Data Core network modernization preparing our network to offer 5G services.

 

As more services migrate to IP, the 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 services and video on demand. At the same time, the expansion of fiber to customer homes and the launch of our 4.5G services (Carrier Aggregation) strongly increases bandwidth demands over the networks. As a result, three main drivers have surfaced as critical to business: availability, performance and cost-effectiveness.

 

To reach these goals it is essential to optimize network resources and find synergy multipliers. This optimization process has started with the integration of Vivo’s and GVT’s IP backbones through our network and avoiding redundant infrastructure. For this purpose, we have designed a robust architecture, using two distinct backbones to provide public and private services using multi-protocol network infrastructures, to guarantee service reliability to our clients.

 

Nonetheless, as more and more bandwidth is offered to customers, the need to bridge the gap between revenues and investment to cope with greater traffic becomes increasingly clear. The next step of network simplification entails a deeper-level evolution, which was initiated in 2018 through the exchange of existing routers for new ones with a higher capacity to allow for the unification of specialized routers, reducing network layers, bringing services and content nearer to customers and ultimately, transforming the backbone into one multiservice network.

 

The new design acknowledges service evolution, as voice, messages and circuits become data packets, reducing the need for growing capacity in multiple steps. We believe that in the coming years, layer simplification could allow us to bring content even further to the edge, improving costs and quality at the same time.

 

 Those actions are expected to optimize investment in an aggressive traffic increase context and lay the grounds to deliver the next step in data services quality. Even though bandwidth has been the main technical advantage for several years, latency will take over as the main broadband selling point. To reduce network latency means delivering more responsive services and obtaining higher customer satisfaction.

 

49 

Table of Contents 

To achieve this result, we believe service should be decentralized and nearer the edge of the network, closer to customers, which we have done by expanding the use of caching solutions throughout the network, making content locally available to our customers, reducing traffic costs while strongly improving the user experience without increasing access investments.

 

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 operator’s networks, reducing the need for mobile site expansion.

 

Finally, as the Internet address numbers in Brazil were exhausted in 2014 and our own resources are reaching critical levels, we have seen strong growth in the next version of the IP protocol, the IPv6. Vivo has completed IPv6 project in 2017, which is important to guarantee full connectivity to our clients and support sales to keep expanding our customer base.

 

Given the growing demand for connectivity and consequently the exponential increase in capacity in the IP transport network, in addition to meeting this delivery on time, it is necessary to direct more automation and autonomy to the IP transport network, to simplify its management. Because of this new need, we have worked to bring an orchestration concept to the IP transport network with the application of the Software Defined Networks (SDN) model. Continuing within an operating model based on Command Interface (CLI) has become impractical. This is especially true when vendors develop artificial intelligence and machine learning capabilities in their software and allow networks to become even more automated with self-healing and self-learning. In addition to the control functions, the SDN is being proposed to provide support for management functions, configuration creation and activation of network elements, triggered by the operational support systems (OSS). Thus, the SDN aims to be a complement to the OSS.

 

In addition to bringing the concept of SDN, we have been working on developing and promoting a model of Interfaces North (NBI) and Interfaces South (SBI), of SDN controllers, standardized for any supplier, whether OSS or Network elements. This evolution aims at an abstraction of the transport network regardless of the supplier present in it, which translates time and cost reduction with the development of specific systems for management, provisioning of services/infrastructure, network inventory and path control. For our company, SDN is the clear definition of open and standardized interfaces and models that could allow the direct and perfect integration of network nodes and systems. To this end, we have defined a set of categories and use cases within the scope of a project called iFusion that is in progress, from which the Interface requirements are derived. Support for the entire set of use cases is a mandatory requirement for all vendors in the SDN Control layers.

 

In projects related to Local Area Network (LAN), we provide local connectivity to all platforms and servers that provide telecommunications service, fixed or mobile. The Local Area Network works as access for all services to the data network by connecting them to the IP Backbone.

 

We are evolving the Standard Ethernet Local Area Network (LAN) structure for the TRILL protocol (RFC 6326). The use of this protocol makes it possible to increase the resilience of the environment, allowing a considerable reduction in the faults that occurred and that could sometimes cause affectation in the service of the final client. We are also implementing the concept of decentralization in Technical Data Centers with Top of Rack (TOR) and End-of-Row (EOR) switches allowing cost savings with structured cabling, energy reduction, space and cooling. To keep up with network growth, in 2020 we increased site capacity by providing increased port capacity on 15 existing sites. Also in 2020, we implemented switches at 30 sites to support the fixed network quality measurement solution.

 

To improve customer experience with our services, we continue to use the Cache solution to reduce bandwidth consumption on the IP backbone by locally storing content from partners such as Google, Netflix, Akamai and Facebook. This enables us to optimize network resources and improve quality of service. In 2020, we increased capacity on 8 existing sites as network data traffic increases, and we implemented 2 new sites. 

 

Regarding Network Security projects, in a digital world where telecommunication networks are becoming increasingly complex, the security of networks becomes an indispensable factor for the success of

 

50 

Table of Contents 

our customers and for their business. We continued working constantly in 2020 to protect our network from a variety of targets and kinds of attacks, making it as difficult as possible for attackers and ensuring the uninterrupted functioning of our services.

 

Over the years, attackers have become much more sophisticated, using zero-day vulnerabilities and bypassing all traditional security defenses, therefore, besides tightening our perimeter security, we have kept been focused on automation to allow more visibility and proactivity to minimize risks and keep the confidentiality, integrity and availability. Periodic tasks such as analyzing attacks notifications, auditing firewall rules and evaluating security elements performance have been the main areas subject to automation, allowing security professionals to focus on more complex problems.

 

Always observing the evolution of the threats and the potential of the attacks, in 2020 we continued to increase the traffic capacity to be detected and mitigated by the protection tools, considering attacks coming from inside and outside our network.

 

We offer IPTV service through the FTTH network using the Open Platform, created to revolutionize the way that we deliver IPTV services. This platform consists of Pay TV with video broadcasting offered through the IP protocol. It consists of several global partners, developing modules in partnership with us and connecting into our existing Global Video Platform. Our local team customized the middleware for Set-Top-Box, creating one standard version which brings better time-to-market for new developments and product releases, as well as future convergence between IPTV and OTT platforms. Several components were integrated to create a whole new ecosystem for IPTV, such as the inclusion of Instant Channel Change (ICC), Retransmission and Applications providing a better user experience. Additional services, such as pay-per-view and VoD, are also available.

 

We have made IPTV services available to more than 200 cities throughout Brazil, maintaining along 2020 the growth we achieved in these services in 2019, offering IPTV services to an increasing number of new cities. We also built additional Points of Presence (PoPs), increasing new local channels and made the quality of IPTV services available to remote localities.

 

Besides the expansion to other cities, the features were incremented on the client for a better experience, such as:

 

·Time Shift;

 

·Catch Up;

 

·new Apps like Netflix, Amazon and YouTube;

 

·and in the future 4K content;

 

The interface of IPTV services was changed to improving the customer experience. More channels were deployed offering new entertainment for customers. The CDN platform growth has secured our ability to offer more VoD titles and OTT services.

 

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), and the continuous evolution of TV services.

 

We continued to expand the capacity and coverage of our mobile networks in order to absorb the growth in voice and data traffic, further away from the competition, with significant growth in 4G coverage and 5G DSS “Dynamic Spectrum Sharing”, while remaining as the 3G technology leader.

 

As of December 31, 2020, our mobile network covered 4,691 cities in Brazil in the LTE Advanced Pro, LTE, WCDMA and GSM / EDGE digital technologies. The number corresponds to 84.3% of the total cities in Brazil or 96.7% of the Brazilian population. As of December 31, 2020, our 2G / GSM-EDGE network extends across 3,757 cities. In the same period, the 3G / WCDMA network was present in 4,558 cities. 

 

51 

Table of Contents 

The 4G / LTE technology launched in 2013 was an important advance for our mobile network since it provides higher transmission rates than 3G. In 2020, we continued to expand the coverage of this technology and by the end of November, our 4G network reached 3,530 cities.

 

The 5G DSS “Dynamic Spectrum Sharing” was launched in 2020 with 4G frequencies sharing, and as of the end of the year, we had a local presence in eight Brazilian cities.

 

Since 2015, we have started to develop network sharing in 4G with Oi and TIM. At the end of 2020, 128 Brazilian cities had radio base stations shared providing new 4G coverage in 299 cities using TIM or OI’s Network through RAN Sharing. In 2017, we have also started to develop 3G network sharing with Claro and at the end of 2020, 140 Brazilian cities had radio base stations shared providing new 3G coverage in 141 cities using Claro’s Network through RAN Sharing. In 2018, we have also started to develop 3G network sharing with TIM, and at the end of 2020, 47 Brazilian cities had shared radio base stations providing 3G new coverage in 72 cities using TIM’s Network through RAN Sharing. In 2019, we have also started to develop network sharing in 4G 700 MHz with TIM (as a Proof of Concept), and at the end of 2020, 10 Brazilian cities had shared radio base stations providing 4G new coverage in 10 cities using TIM’s infrastructure through RAN Sharing. In 2019 Vivo and TIM signed a network sharing agreement for 2G, 3G and 4G technologies, aiming at network expansions and synergies. At the end of 2020, 118 Brazilian cities had shared 3G/4G radio base stations providing new 3G/4G coverage in 118 cities using TIM’s infrastructure through RAN Sharing. The strategy of Radio Access Network Sharing allows us to fulfill part of the ANATEL’s obligations that were imposed as part of our spectrum acquisitions, additionally, it reduces network deployment costs and to provide new coverages with lower costs.

 

We have deployed our LTE network with 700 MHz, 1,800 MHz, 2,100MHz and 2,600 MHz frequencies in 2020, activating LTE Advanced Pro technology (commercially known as 4,5G), aiming at coverage, capacity and customer experience improvements. At the end of December 2020, we reached 1,738 cities with this technology.

 

Fraud detection and prevention

 

During 2019, 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 a reduction of 31% in losses related to subscriptions, from R$65.8 million in 2019 to R$50.4 million in 2020. The primary cause of this reduction was the improvement of certain rules and the revision of certain detection processes, in addition to improvements in the controls used to monitor fraud events that occurred during the year, allowing us to capture more cases of fraud in less time, reducing the average ticket, in addition to the implementation of Facial Biometrics in sales processes in Fixed On-site Channels

 

·Identity Fraud: also known as “social engineering,” an identity fraud takes place through call centers or resellers, where a caller has access to information belonging to our existing clients contacts our call centers and makes unauthorized changes and activations. We had a 73% increase in cases in 2020, from 626 cases in 2019, to 1,085 cases in 2020. This increase is related to the higher volume of complaint cases, arising from internal fraud, in addition to fraud related to Prepaid Migration, ownership change and chip change. Despite this increase, we managed to implement Biometrics in the face-to-face channels in November 2020 for this scenario, aiming to reduce this kind of fraud.

 

52 

Table of Contents 

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—Interconnection Fees.”

 

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.

 

We have a roaming agreement with MTN Irancell. During 2020, we recorded US$12.24 in roaming revenues and US$126.55 of expenses payable to MTN Irancell under this agreement. See “—C. Organizational Structure—Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act” for further information.

 

Network sharing agreement 

 

In 2014, Telefônica Brasil executed a network sharing agreement with Nextel in order to provide mobile services coverage (voice, data and SMS) through our 2G and 3G network to 67 area codes. ANATEL approved the agreement and the execution of the operation in March 2014. In 2016, the parties decided to review the network sharing agreement and extend it throughout the national territory and decided to enter into a RAN Sharing Agreement in order to provide Nextel the network conditions to fulfill its mobile coverage obligations. RAN Sharing agreement was approved by CADE in July 2016 and by ANATEL in August 2016.

 

In March 2015, Claro and Telefônica entered into a RAN Sharing agreement in order to provide telecommunication coverage in rural areas in Brazil, which was approved by CADE and ANATEL.

 

In December 2015, Telefônica, Oi and TIM entered into a RAN Sharing agreement in order to provide mobile services coverage (voice, data and SMS) through the 4G network and comply with coverage commitments assumed by the operators. The agreement was approved by CADE and ANATEL.

 

In August 2016, ANATEL approved the agreement between Telefônica and TIM to share electronic equipment and mobile sites for the fulfillment of obligations related to providing telecommunication coverage in rural areas.

 

In December 2019, Telefônica Brasil and TIM had entered into two network sharing agreements regarding electronic equipment and mobile sites on 2G, 3G and 4G networks, in order to (i) decommission outdated technology; (ii) 4G coverage expansion; and (iii) gain spectrum and cost-efficiency. Both agreements are under ANATEL and CADE scrutiny.

 

The approval of the aforementioned agreements, however, does not exempt the providers from fulfilling their obligations, nor from the coverage of the entire area. In the case such agreements are terminated before the expected deadline, each provider must meet its coverage commitments with its own network, under the penalty of extinction of the use of radio frequencies’ authorizations.

 

Competition

 

Competition in the fixed and mobile markets continued to be intense in 2020. Faced with the high demand for connectivity, Brazilian telecoms have focused on modernization and innovation as levers to remain competitive in the market. The leading companies have been directing efforts and investments toward the digital transformation of business operations, aiming to improve the balance between customer growth

 

53 

Table of Contents 

and loyalty, revenue growth and margins. For these reasons, the major operators accelerated the 4.5G coverage, rolled out fiber and continued to include value-added services in the offers in order to differentiate their mobile and fixed portfolios.

 

The Brazilian consumer market is increasingly knowledgeable and demanding, expecting not only the best service delivery, as well as the best cost-benefit. Therefore, operators have prioritized the expansion and digitalization of company-customer interactions.

 

In the mobile market, we continued to lead in market share, with a 33.6% share according to information from ANATEL as of December 31, 2020. This year, the competition remained intense in 4G and 4.5G network coverage expansion and subscribers’ growth.

 

We lead the mobile market in 13 states: Acre, Amazonas, Amapá, Bahia, Espírito Santo, Mato Grosso, Mato Grosso do Sul, Minas Gerais, Pará, Rio Grande do Sul, Roraima, São Paulo and Sergipe. TIM, a Brazilian telephone company and subsidiary of Telecom Italia lead the mobile market in four states: Alagoas, Paraná, Rio Grande do Norte and Santa Catarina. Oi leads mobile services in three states: Paraíba, Ceará and Pernambuco. Claro Brasil or Claro is a mobile operator controlled by the Mexican company America Móvil Group, and leads mobile service in seven states: Distrito Federal, Goiás, Maranhão, Piauí, Rio de Janeiro, Rondônia and Tocantins (according to ANATEL, as of December 2020).

 

On the fixed front, the wireline and pay TV services reported net disconnections, according to ANATEL. In broadband, the market continued to expand mainly in ultra-broadband and fiber accesses. Our main competitors in fixed telecommunications services are Claro Brasil (which includes NET, Claro and Embratel) and Oi, which is stronger in the fixed services outside the State of São Paulo. TIM (a subsidiary of Telecom Italia) has been offering its fixed broadband network ‘TIM Live’ in twenty cities. SKY, currently controlled by AT&T, has pay TV and broadband services (LTE TDD 4G). In addition, we have competition from thousands of regional service providers throughout the country.

 

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 – PGMU), and Quality Regulations.

 

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 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 the possession of the reversible 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 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. 

 

54 

Table of Contents 

On October 4, 2019, Law No. 13,879/2019 (resulting from PLC Nº 79/2016), or the New General Telecommunications Law, was published. This law revises the telecommunications regulatory framework and represents a significant impact on this industry. For more information about the New General Telecommunications Law, see “—Other regulatory matters—Updated regulatory Framework”. 

 

The companies that operate concessions under the public regime are Telefônica Brasil, Oi, Algar, Sercomtel and Claro (Claro for domestic and international long-distance service). These companies provide fixed-line telecommunications services in Brazil that include local and long-distance services (domestic and international). 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 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. Under an authorization, the government does not provide a guarantee to the authorized company of a financial-economic equilibrium (equilíbrio econômico-financeiro), as is the case under concessions. Fixed voice authorization license holders are entitled to freely compete with the concessionaires in their respective areas without any limitation. 

 

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. 

 

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 Claro, 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 – PGO), and special obligations regarding network expansion and modernization contained in the PGMU.

 

In January 2017, ANATEL held a public consultation relating to the new rules of the PGO containing an exclusive chapter aimed at verifying the migration of fixed telephony concessions for authorizations, in accordance with the new legal framework discussed in the Congress at that time. However, the changes in the General Telecommunication Law were approved only in October 2019. Despite ANATEL’s efforts in 2017, a series of regulations to create the conditions proposed under the new Law must be prepared and revised.

 

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 per infraction.

 

Our operations are regulated as follows:

 

55 

Table of Contents 

·Fixed line voice services (local and long-distance) under concession agreement in the state of São Paulo and under authorization agreement in the rest of the Brazilian territory. The concession was granted in 1998 by the Brazilian Government and renewed in December 2005 for an additional period of 20 years. It 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, for which the authorization was granted in 2001 by the Brazilian Government for the whole Brazilian territory;

 

·Mobile voice and broadband services, in all 26 states and the Federal District, under the personal mobile service (Serviço Móvel Pessoal - SMP) authorizations.

 

·Multimedia communication services, such as audio, data, voice and other sounds, images, texts and other information throughout Brazil. We operate under a nationwide SCM authorization, valid for an indefinite term;

 

·Pay TV services, throughout all regions of Brazil under the conditioned public service (Serviço de Acesso Condicionado), or SeAC authorization. We operate a SeAC authorization, which is valid for an indefinite term;

 

·Private Limited Services – SLP, which accounts for the provision of telecommunication services in the private regime, intended for specific groups of users defined by the provider and which covers multiple applications, including data, video, audio, voice and text communication; 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 – 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”. Most wholesales services are also regulated by ANATEL Resolution No. 694, dated July 17, 2018 – General Competition Targets Plan (Plano Geral de Metas de Competição - PGMC).

 

We set forth below details of the concession, authorizations, licenses and regulations that regulate our operations.

 

Quality regulations in Brazil

 

In December 2019, ANATEL approved the new Quality Regulation (“RQUAL”), which changes the way the agency will monitor the performance of telecommunications operators. In addition to promoting quality indicators increasingly associated with consumer experience and widespread dissemination of results, the concept of responsive regulation was introduced, encouraging advanced corrective actions to problems, rather than solely imposing fines when goals are not met.

 

Providers will be evaluated for certain quality requirements and will receive annual “seals” from “A” to “E” in each Brazilian municipality. If the provider has quality deterioration in a municipality compared to the previous label and is in the last two positions (seals D or E), customers may terminate their contracts without paying penalties (if the service was contracted at the time the provider’s quality seal was superior).

 

Seals will be awarded annually with quality measurements per municipality and state, as well as Brazil as a whole, based on three indicators: quality of service index, perceived quality index and user complaint index.

 

An independent entity, funded by the providers, will measure the quality of services, but ANATEL will able to contract complementary measures. In addition to this entity, the regulation amended the consumer rights regulations, creating the obligation to establish an ombudsman, directly linked to the company’s presidency.

 

56 

Table of Contents 

The full implementation of this new regulation will not take place until 2022. ANATEL has set a deadline of 18 months for the Implementation Group to develop the Operational Manual, making the first measurements. and publication of the Reference Values Document (“DVR”) to only then apply quality seals.

 

RQUAL already revoked most of the existing indicators in the old quality regulations (“RGQs”). The reimbursement criteria in the Services Regulations were also revoked, and only the RQUAL provisions are in force.

 

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 that is valid until December 31, 2025 was reviewed in 2006 and 2011. According to Resolution Number 678/2017, a new revision must be made on December 31, 2020. Until then, the 2011 contract remains valid.

 

Other regulations have been adopted to revise certain aspects of our concession. On June 30, 2011, ANATEL determined the new basis of calculation of the biannual concession fees. 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 in April 2019, based on 2018 revenue. The next payment is therefore scheduled for 2021 based on 2020 revenue. See Note 1 to our Consolidated Financial Statements.

 

In addition, the Brazilian government published Decree No. 7,512/2011 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 – 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 – AICE).

 

On June 27, 2014, ANATEL held a public consultation for the PGMU. Since there was no mutual agreement between ANATEL and operators for the signature of the 2015 concession agreement contracts, the new version of the PGMU was also delayed. In December 2018, although the new concession contracts have not yet been signed, the Brazilian government published Decree No. 9,619/2018, which approves the revision of the PGMU targets. The new plan replaces some obligations, mainly related to public telephony, for obligations related to the 4G mobile network. These targets have been criticized by most of the local operators. 

 

Also, in December 2018, ANATEL initiated a public consultation for the last PGMU revision, concerning the period between 2021 and 2025 (PGMU V). The public consultation was concluded and ANATEL’s board of directors approved the new revision on November 26th, 2020. The main change in comparison to PGMU IV concerns the goals that must be met to replace the reduction in the number of public phones required. ANATEL proposed to replace 4G targets, established in the previous plan, with the construction of a backhaul in municipalities that do not have an optical fiber connection yet. Now, the proposal approved by Anatel must be evaluated by the Ministry of Communications.

 

According to our concession agreements, all assets owned by us which are indispensable to the provision of the services described in such agreements are considered “reversible assets”. As per ANATEL’s recent interpretation of current regulations, these assets will be automatically returned to ANATEL upon the expiration of the concession agreements, in accordance with the regulation in force at that time, and would not be available to creditors in the event of insolvency, bankruptcy or similar events. With the recent Law No. 13,879 approval (October 2019) and the new regulatory framework, this rule might cease to exist in light of the possibility of transforming concessions into authorizations.

 

57 

Table of Contents 

On October 4, 2019, Law No. 13,879/2019 (resulting from PLC No. 79/2016), or the New General Telecommunications Law, was published. This law revises the telecommunications regulatory framework and represents a significant impact on this industry. For more information about the New General Telecommunications Law, see “—Other regulatory matters—Updated Regulatory Framework”.

 

For information about regulations affecting rates we can charge under our concession agreements, see “—Rates, Taxes and Billing.”

 

Obligations on concessionaires to provide fixed line service under the public regime 

 

We and the other concessionaires are subject to the General Universal Service Targets Plan (Plano Geral de Metas de Universalização – PGMU), which requires that concessionaires undertake certain network expansion activities with respect to fixed-line services. The timing for network expansion is revised by ANATEL from time to time. If any given concessionaire does not fulfill its obligations under the PGMU, 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 Plan. 

 

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 

 

In December 2018, Decree nº 9.619/2018 came into force, approving the revision of the PGMU. The new plan, called PGMU IV, replaces some obligations, mainly related to public telephony, for obligations related to the 4G mobile network. These targets have been criticized by several of the local operators. On November 26th, 2020, ANATEL approved the last PGMU revision, concerning the period between 2021 and 2025 (PGMU V). The only change in comparison to PGMU IV concerns the goals that must be met to replace the reduction in the number of public payphones required. ANATEL proposed to replace 4G targets, established in the previous plan, with the construction of backhaul in municipalities that do not have an optical fiber connection yet. Now, the proposal approved by Anatel must be evaluated by the Ministry of Communications.

 

Mobile services 

 

In October 2016, ANATEL approved new spectrum use regulations, which facilitate access to radio frequencies and generates efficiency in its use, due to the simplification of procedures and necessary documentation. The regulation also alters spectrum pricing (for non-bidding grants), rules for extending use authorization and new rules for frequency use on a secondary basis prior to primary use.

 

In July 2018, ANATEL approved Resolution nº 695, which establishes new spectrum pricing regulations, with calculation methods and conditions for spectrum reserve prices and renewals costs. This new regulation took effect in May 2019.

 

In November 2018, ANATEL approved Resolution nº 703, which establishes new spectrum cap regulation. There are two groups of bands with specific limits for a given area:

 

·Frequencies up to 1 GHz: each operator may hold up to 35% of the bands;

 

·Frequencies between 1 GHz and 3 GHz: each operator may hold up to 30% of the bands.

 

All these limits can be extended by up to 40%, through competitive constraints that may be imposed by ANATEL. For frequencies above 3GHz, the limits will be determined in the specific auction terms.

 

58 

Table of Contents 

Mobile service licenses (SMP)

 

Previously, spectrum authorizations were valid for 15 years and could be renewed only once. Although the recently approved New General Telecommunications Law allows successive spectrum renewals, we cannot guarantee that our existing licenses will be renewed. 

 

According to the New General Telecommunications Law and the Decree nº 10.402 issued in June 2020, ANATEL may determine specific conditions for the renewal of our existing licenses, such as a mandatory “refarming” processes in certain spectrum bands or refuse renewal requests altogether. A refarming process can reduce the amount of spectrum available for each operator, depending on the configuration of the new blocks. 

 

Our current 850 MHz authorizations will expire between 2020 and 2028. In September 2020, Anatel’s Board of Directors decided, during an extraordinary meeting, to approve the renewal of our 850 MHz authorizations for primary use until 2028. However, specific conditions for renewal are still under discussion between Anatel and service providers. If a renewal in 2028 is not allowed, we would be required to compete for new licenses in a spectrum auction. In addition, the coverage of our mobile services would be significantly affected, and our services could become unavailable in certain regions. 

 

Typically, renewed licenses required payment of 2% of net operating revenues earned in the region included in the authorization, every two years for the duration of the extension period. In the 15th year, we must pay 1% of the aforementioned amount. 

 

In July 2018, however, ANATEL published Resolution No. 695 with a new Public Spectrum Price Regulation. The Resolution establishes new criteria for license renewal costs. The formula considers factors such as grant time, revenue earned in the region and the amount of spectrum used by the company. Part of the payment can be converted into investment commitments.

 

Our SMP authorizations include the right to provide mobile services for an unlimited period but restrict the right to use the spectrum according to the schedules listed in the respective radiofrequency authorizations. The table below sets forth our current SMP authorizations, their locations, band and spectrums, date of issuance or renewal and date of expiration:

 

Region 

Frequency 

Bandwidth (MHz) 

Notes 

Year of Exp. Date 

Notes 

Brazil (9) 450 MHz 14 (1) 2027  
Brazil (9) 700 MHz 20   2029  
Brazil (9) 850 MHz 25 (2) 2021-2028 (3)
Brazil (9) 900 MHz 5 (4) 2023-2035 (5)
Brazil (9) 1800 MHz 20 (6) 2023-2035 (5)
Brazil (9) 2100 MHz 20-30 (10) 2023  
Brazil (9) 2500 MHz 40 (7) 2027-2031 (8)

_______________

(1)State of São Paulo (municipalities with CN 13 to 19), state of Minas Gerais and North East (AL, CE, PB, PE, PI, RN e SE).

 

(2)Except regions 2’, 4’, 6’, 7’, 7’’ and 10.

 

(3)Regional licenses: expiration and renewal dates are dependent on the region. The license in Rio de Janeiro is due to expire in 2020.

 

(4)Only in regions 3, 4, 4’, 5, 6, 7, 8 and 9. Not in regions 1, 2, 2’, 5’, 6’, 7’, 7’’ and 10.

 

(5)Regional licenses: expiration and renewal dates are dependent on the region. The license in MG Interior is the first to reach its renewal date in 2020.

 

(6)20 MHz is the most common bandwidth, but it is higher in some regions (up to 50 MHz).

 

(7)40 MHz is the most common bandwidth, but it is 60 MHz in some regions.

 

(8)Band X will expire in 2027 and Band P will expire in 2031.

 

59 

Table of Contents 

(9)Telefónica Brazil uses high and low frequencies spectrum in all regions of Brazil.

 

(10)30MHz in regions where the bandwidth from 1900 MHz frequency has been migrated to 2100 MHz frequency.

 

Regions 

States& towns included in the regions 

1 SP (City)
2 SP (Interior)
2’ SP - towns of sector 33 of the PGO
3 RJ and ES
4 MG
4’ MG - towns of sector 3 of the PGO
5 PR and SC
5’ PR - towns of sector 20 of the PGO
6 RS
6’ RS - towns of sector 30 of the PGO
7 AC, DF, GO, MS, MT, RO and TO
7’ GO - towns of sector 25 of the PGO
7’’ MS – towns of sector 22 of the PGO
8 AM, AP, MA, PA and RR
9 BA and SE
10 AL, CE, PB, PE, PI and RN

 

In 2013, we changed the terms of our authorization regarding Band “L” (1.9 GHz) in certain locations, adapting their blocks of frequencies to 2.1 GHz and aligning them with the Band “J” (3G), which enables more efficient use of the spectrum. In 2018, this alignment process was completed at the national level with respect to the following areas: Northeast region, 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; Altinópolis, Aramina, Batatais, Brodowski, 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 in São Paulo; and Paranaíba in Mato Grosso do Sul. This change is foreseen in the bidding document No 001/2007. We do not have Band “L” in the states of Amazonas, Roraima, Amapá, Pará and Maranhão and in the cities of Londrina and Tamarana, Paraná. 

 

In 2012, Telefônica acquired 40MHz on the 2.5GHz to 2.69GHz frequencies for the amount of R$ 1.05 billion. In order to meet the coverage requirements imposed by ANATEL, we had the obligation of implementing 4G coverage in 1,094 cities by December 31, 2017. The remaining coverage commitments in cities with less than 30,000 inhabitants could be fulfilled with other frequency bands until December 31, 2019. ANATEL is responsible for verifying compliance with such targets and has not yet completed its review of our compliance with our coverage commitments for the year ended December 31, 2019. 

 

Currently, we have made 4G services available in over 3,100 municipalities. Telefônica has deployed and continues to deploy 4G coverage by serving its customers through the use of its own network or by established agreements of RAN-sharing approved by ANATEL. 

 

In order to complete the 450 MHz frequency requirements, we had the obligation to meet voice and data demand in remote rural areas. As a commitment, we are required to provide infrastructure and service operating in any frequency band 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. In these areas, we are also required to provide free broadband to schools located in rural areas. 

 

Regarding the 700MHz spectrum, ANATEL has allocated the band for the provision of fixed, mobile and broadband services. On September 30, 2014, 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 are responsible for financing and managing the band cleaning process (Analog TV switch off) which was implemented through a legal entity specifically incorporated for this purpose, as set forth in the bidding process and applicable regulations (EAD). 

 

60 

Table of Contents 

Since June 2019, all Brazilian municipalities are ready to activate LTE coverage in the 700 MHz band. In November 2020, ANATEL attested that 9 out of 17 obligations have been fulfilled by the operators. According to the Agency, the other obligations would either be concluded in 2020 or were linked to activities that still need to be carried out, however this situation does not imply any type of noncompliance on the part of the operators in relation to what should have been done. 

 

In December 2015, ANATEL auctioned the remaining spectrum lots in the 1800 MHz, 1900 MHz and 2500 MHz bands, from which Telefônica acquired seven lots of 2.5 GHz frequency band offering a total of R$ 185.4 million. These lots are associated with six different States, in the capital cities of the States of São Paulo, Rio de Janeiro, Porto Alegre, Florianópolis, and Palmas, and one countryside city of the State of Mato Grosso do Sul. Such frequencies are already being used for the provision of mobile broadband service on 4G.

 

Multimedia communication services (SCM) 

 

Our multimedia services include broadband in several technologies, including fiber UBB services.

 

Obligation to provide fixed broadband access 

 

We have assumed in the past the obligation to provide free Internet access to public schools in the area comprising in our concession area during the term of the concession agreement (until 2025). The number of schools for which we should provide broadband is determined by the school census provided by the National Education Ministry, which is published on a yearly basis or sometimes in longer intervals. Our obligation targets are adjusted according to the latest census released.

 

Pay TV services 

 

Regulations for pay TV services – SeAC 

 

We are authorized to provide Pay TV Services (Serviço de Acesso Condicionado - SeAC) throughout Brazil by means of different technologies (Fiber, DTH and coaxial). 

 

Law No. 12,485/2011 established the most important aspects of this service, including the imposition of minimum national content requirements, carrier obligations and rights and cross-ownership restrictions. 

 

Since 2019, the Brazilian Congress has been discussing bills amending SeAC law. Among the proposals is the review of limitations to cross-control between telecom providers and content producing and programming companies. Regulatory asymmetries between SeaC and OTT services are also under debate.

 

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 the 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; and

 

61 

Table of Contents 

·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.

 

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 interconnection costs.

 

In 2007, ANATEL published a new version of the 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 determining the following:

 

·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%; and

 

·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 (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 – STFC) rules relating to fixed telephone service and the Personal Mobile Service (Serviço Móvel Pessoal – SMP), rules relating to mobile services.” 

 

In December 2016, ANATEL held a public consultation to discuss a new interconnection regulation (RGI). The new document aims to solve the large number of disputes in the agreements for voice and data traffic among companies. ANATEL has proposed that in cases of default the cut in the provision of interconnection could be done without the regulator’s authorization. In addition, the new document aims to establish a list of prohibited practices in interconnection relationships and to make the interconnection technology-neutral. The new rules were published in July 2018 (Resolution No. 693).

 

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 the 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 replaced the reference values previously set out in Act No. 7,272. 

 

62 

Table of Contents 

On July 1, 2014, ANATEL established gradual decreases in MTR, based on a cost model for the years 2016, 2017, 2018 and 2019 and, in December 2018, ANATEL established the reference values for MTR for the years ranging from 2020 until 2023 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 – STFC) rules relating to fixed telephone service and the Personal Mobile Service (Serviço Móvel Pessoal – SMP) rules relating to mobile services.”

 

In addition, the General Competition Plan (Plano Geral de Metas de Competição – PGMC) determined that the in 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; and 60% of the total traffic exchanged from February 24, 2015 to February 23, 2016. Since February 24, 2016, the MTR is owed to the mobile service provider when its network is used to originate or terminate calls (full billing). These conditions were further modified by ANATEL in February 2015, after promoting a Public Consultation. 

 

In July 2018, ANATEL edited the new the General Competition Plan (“Plano Geral de Metas de Competição – PGMC), approved by Resolution No. 694, which modified the preexisting rules regarding the interconnection fee to be paid of the outbound traffic, as follows:

 

·From January 1, 2013 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%; and

 

·From February 24, 2018 onwards: 50% / 50%.

 

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, ANATEL’s decision established values for 2018 based on a bottom-up cost model. 

 

In December 2018, ANATEL established values for fixed interconnection fees ranging from 2020 until 2023:

 

   Interconnection fees for Sector 31
Year  TU-RL  TU-RIU1  TU-RIU2
2020    0.00134    0.00166    0.00118 
2021    0.00117    0.00176    0.00120 
2022    0.00104    0.00183    0.00122 
2023    0.00096    0.00188    0.00122 

 

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 that is valid from 2016 until 2019. 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.

 

63 

Table of Contents 

On December 17, 2018, ANATEL approved through Act No. 9,920 a revision of the EILD reference table, valid for 2020 onwards.

 

Mobile Virtual Network Operator (MVNO) 

 

In 2001, ANATEL approved rules for companies to be licensed as MVNOs. In 2016, ANATEL authorized MVNO companies to be affiliates of other certain network operators, and for that reason, we have signed agreements with companies authorized to operate as an MVNO in Brazil.

 

Brazilian MVNO regulations allow two operating models: “authorized” (in which MVNO holds its own SMP authorization but operates under an MNO’s network) and “accredited” (in which the company doesn’t hold an SMP authorization and acts as an MNO’s representative and offers services jointly). In August 2019, ANATEL held a public consultation about regulatory barriers to IoT expansion and proposed changes in MVNO regulations. These changes, if adopted, would reduce regulatory restrictions on many aspects of the “accredited” model, such as the representation of multiple MNOs, more autonomy on numbering resources and network agreements.

 

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. 

 

Civil rights framework for the Internet 

 

On April 23, 2014, at the opening of NetMundial, former President Dilma Rousseff approved the Civil Rights Framework for the Internet (“Marco Civil da Internet”), which was enacted as Law 12,965/2014. The act adopts strict Net Neutrality rules that guarantee equality of treatment for data traffic in the network and preserves the business model of Brazilian broadband offered in packages with different speeds. After three public consultations released by CGI.br (the Brazilian Internet Steering Committee), the Ministry of Justice and ANATEL, the Brazilian government published Decree 8,711/2016, which regulates the law. It establishes the regulation for Net Neutrality and mechanisms to protect the data stored by service and application providers, as well as determining the circumstances in which data can be obtained by the public administration.

 

We believe these measures will offer our clients greater protection with respect to how their personal information is used and shared, and creates opportunities for new services that make use of aggregated information.

 

In June 2016, the Brazilian House of Representatives put into consultation a draft of law regarding Personal Data Protection. The original text of this law is based on the European Union’s Directives on Data Protection (Directive 95/46/EC), and as such, imposes restrictive rules on the express consent to process personal data, international data transfer, processing of sensitive data, among others.

 

In August 2018, the Brazilian government passed the Brazilian Data Protection Law (Law 13,709/2018). The law increases citizens’ control over their personal information, requiring explicit consent for the collection and use of data. It also established requirements relating to options for viewing, correcting and deleting such data. The law will take effect in 2020 in order to allow public and private entities to adapt to the new rules. On December 27, 2018, the Brazilian government created the National Data Protection Authority (Autoridade Nacional de Proteção de Dados – “ANPD”) by means of an executive order (Provisional Measure No. 869/2018), which will be responsible for supervising matters of private data usage and imposing eventual penalties foreseen in the Law of Personal Data Protection.

 

After a two year grace period, in September 2020, the Brazilian President signed the bill in the Brazilian National Congress that brought the Brazilian Data Protection Law into effect. However, sanctions and fines related to LGPD will only take effect from August 2021 onward, as established by Law 14.010/2020.

 

64 

Table of Contents 

Furthermore, after the approval of Decree 10,474/2020 that created the regimental structure of the Brazilian Data Protection Authority, all five Directors of the ANPD were appointed and officially approved by the Brazilian Senate in October 2020.

 

For additional information on our data protection and data privacy policies and procedures, see “Item 16g. Corporate Governance—Corporate Governance Practices—Data Protection and Privacy Initiatives.”

 

Resolutions published

 

A series of new regulations, published by ANATEL as well as other regulatory bodies in Brazil, became effective in 2020. The most relevant among these regulations were:

 

·Resolution No. 718: Amends the Regulation on Restricted Radiation Radiocommunication Equipment and revokes the Regulation for the Use of Femtocells;

 

·Resolution No. 719: Approves the General Licensing Regulation;

 

·Resolution No. 720: Approves the General Granting Regulation (RGO);

 

·Resolution No. 724: Approves the Standard for the implementation and monitoring of tariff freedom in the Fixed Telephone Service (STFC) for use by the general public, in the National Long Distance mode;

 

·Resolution No. 725: Revision of universalization obligations according to the General Plan of Goals for Universalization of the Fixed Telephone Service (STFC) Provided in the Public Regime, approved by Decree No. 9,619, of December 20, 2018;

 

·Resolution No. 728: Amends the Regulation on Local Areas for the Fixed Telephone Service (STFC) Intended for Use by the General Public and the STFC Numbering Regulation;

 

·Resolution No. 729: Approves the Tax Revenue Collection Regulation;

 

·Resolution No. 734: Approves the User Council Regulation);

 

·Resolution No. 735: Amends the Regulation on MVNO, the General Portability Regulation and the General Regulation on Consumer Rights of Telecommunications Services;

 

·Resolution No. 737: Approves the amendment of the Concession Contracts for the provision of Fixed Telephone Services (STFC), in Local, National Long Distance (LDN) and International Long Distance (LDI) modalities; and

 

·Resolution No. 740: Approves Cybersecurity Recommendation for Telecommunications.

 

Public consultations published 

 

In 2020, ANATEL announced a series of public consultations. The most relevant among these public consultations were:

 

·ANATEL Public Consultation No. 5: Regulation regarding the adaptation of STFC Concessions for Authorizations.;

 

·ANATEL Public Consultation No. 9: Bidding Notice for radio frequency spectrum for the provision of telecommunications services, including fifth-generation (5G) networks.;

 

·ANATEL Public Consultation No. 19: Proposed Regulation regarding the continuity of the Provision of the Fixed Telephone Service (STFC) for use by the General Public (RCON);

 

65 

Table of Contents 

·ANATEL Public Consultation No. 25: Subsidies for the elaboration of a proposal for the use of reinforcers/ repeaters of signals by mobile service (SMP) providers..;

 

·ANATEL Public Consultation No. 37: Proposal for Telecommunications Services Numbering Regulation;

 

·ANATEL Public Consultation No. 48: Proposal for the assignment and allocation of VHF and UHF radiofrequency bands and the Regulation on Use Conditions for “White Spaces”;

 

·ANATEL Public Consultation No. 50: Technical and operational requirements for the 3,5 GHz radiofrequency bands;

 

·ANATEL Public Consultation No. 51: Revisions on the Regulation for the Use of Radio Spectrum (RUE);

 

·ANATEL Public Consultation No. 56: ANATEL’s Regulatory Agenda for the 2021-2022 biennium;

 

·ANATEL Public Consultation No. 65: Subsidies for the Simplification of Telecommunications Services Regulation Framework;

 

·ANATEL Public Consultation No. 77: Revision of the General Telecommunications Services Consumer Rights Regulation (RGC);

 

·ANATEL Public Consultation No. 78: Update of radiocommunication services attributions in Brazil, according to World Conferences;

 

Other regulatory matters 

 

Regulation for competition 

 

ANATEL launched in December 2016 a Public Consultation for the Regulation that set price references for the wholesale products. The proposal aims to determine that ANATEL’s Cost Model should be the only source of information for the validation of these prices. 

 

In July 2018, ANATEL approved the revision of the General Competition Plan (PGMC – Plano Geral de Metas de Competição) - Resolution No. 694/2018. The regulation establishes a new relevant market (high capacity data transport) and introduces the concept of retail competitiveness levels for each municipality (ranging from category 1 - fully competitive - to category 4 - non-competitive areas where public policies are necessary to enable services). 

 

For each relevant market, the asymmetric measures may vary according to the competition category assigned to each municipality. 

 

In addition, the new PGMC introduces the concept of Small-Scale Provider (PPP – Prestadora de Pequeno Porte), which will be considered by the Agency in the creation of asymmetric rules (in the context of PGMC and possibly in other regulations). By the definition brought by Anatel, PPP’s designation applies to any company that does not account for more than 5% of the retail market share in which it operates. 

 

Productivity factor 

 

The X Factor is a regulatory instrument used to incentivize operational efficiency gains in the telecommunications sector, so that related gains in earnings are shared with the consumer through annual tariff readjustments. Under the X Factor calculation methodology, the calculation mechanism, including the inputs and products relating to the Company’s applicable operations that are included in the calculation, are established by ANATEL.

 

In October 2017, ANATEL approved the new methodology for calculating the productivity factor, or X Factor, for fixed telephony services. The new regulation uses a cost-based model to segregate revenues and

 

66 

Table of Contents 

costs for services. Under the new formula, although gains for retail broadband services were excluded, the methodology continues to consider the productivity gains of services rendered under the fixed voice authorization. Although this standard represents an evolution in the calculation methodology with the exclusion of gains in retail broadband services, there is still what we regard as an undue inconsistency when factoring in the productivity gains of the fixed voice authorization because the calculation does not distinguish between fixed voice services provided under the public and the private regime.

 

We have voiced our opposition to the methodology for calculating the X Factor on a number of occasions. Although we have not initiated any formal proceedings with respect to this issue before ANATEL, we have expressed our criticism of this issue during the public consultation phase that preceded formal adoption of the standard, and annually each time we deliver our data to ANATEL for its calculation of our X Factor.

 

Updated Regulatory Framework 

 

On October 4, 2019, Law No. 13,879/2019 (resulting from PLC Nº 79/2016), or the New General Telecommunications Law, was published. This law revises the telecommunications regulatory framework and represents a significant impact on this industry. 

 

The law allows fixed-line concessions operators to migrate from a concession regime (in which the underlying assets must be reverted to the government at the end of the concession) to an authorization regime, although further rulemaking remains underway to fully implement the law and permit operators to migrate to the new regime. According to the Law, ANATEL will be responsible for estimating the gains obtained by operators as a result of migrating from one regime to the other. Operators will be required to invest such gains in broadband-related projects, which will need to be defined by ANATEL. If an operator chooses not to migrate to the authorization regime, existing contracts could be renewed beyond 2025, at ANATEL’s discretion. In December 2019, a public consultation was launched to hire an independent consulting firm to assist ANATEL in formulating the rules to be followed by operators who wish to migrate from the concession regime to the private (authorization) regime, and this process remains ongoing. 

 

Furthermore, the New General Telecommunications Law also provides for the possibility of renewing a spectrum’s exploration authorization multiple times, so long as ANATEL’s requirements and stipulations are met. Under the previous model, each authorization renewal was limited to a single renewal. In addition, it created the possibility of a secondary spectrum trading market among authorized operators, where trades can be placed directly between them. Similarly, companies holding the rights to explore Brazilian satellite positions can have their permits renewed on an unlimited basis. However, these aspects of the law are still subject to implementation through regulations, which have yet to be passed. 

 

Finally, under the New General Telecommunications Law, the FUST law was revised to clarify that radio and video broadcasting services are not subject to taxation under the FUST. 

 

Telecommunications Self-Regulation System (SART)

 

In March 2020, Telefónica and the main telecommunications service providers in Brazil launched a joint initiative aimed at establishing the sector’s first comprehensive self-regulation program. The Telecommunications Self-Regulation System (SART) proposes to establish common rules and procedures that must be followed by all participating companies, in relation to the most relevant topics regarding the relationship between providers and customers, such as telemarketing, offers, billing and customer care.

 

Although the initiative is still restricted to large operators, SART will be open to any telecommunications company that wants to participate and commits itself to the principles defined by the program. The main benefit for participating companies is the definition of procedures and rules that should improve the service provision and result in greater consumer satisfaction, promoting an environment that stimulates a more principle-oriented approach to regulatory issues. However, for the implementation of such a program without any conflicts with Anatel’s regulations, it will be necessary to modify the General Regulation on the Rights of Telecommunications Service Consumers (RGC), currently under public consultation, in order to make it more principle oriented and less operational.

 

67 

Table of Contents 

C.Organizational Structure

 

On December 31, 2020, 73.53% of our voting shares were controlled by our three major controlling shareholders: SP Telecomunicações Participações Ltda. with 19.67%, Telefónica S.A. with 29.77% and Telefônica Latinoamérica Holding, S.L. with 24.09%. Telefônica Latinoamérica Holding, S.L., or Telefônica Latinoamérica, is the controlling shareholder of SP Telecomunicações S.A., or SP Telecomunicações. Telefónica Latinoamérica is a wholly-owned subsidiary of Telefónica S.A. Therefore, Telefónica S.A. was the beneficial owner of 73.58% of our voting shares, as Telefónica Chile S.A., holder of 0.06% of our voting shares, is also a wholly-owned subsidiary of Telefónica S.A. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.”

 

Our current general corporate and shareholder structure is as follows:

 

 

Significant Subsidiaries

 

Our significant subsidiaries are Terra Networks Brasil Ltda. (formerly known as Terra Networks Brasil S.A.), or Terra, Telefônica Infraestrutura e Segurança, or TIS, POP Internet Ltda., or POP, and Telefônica Transporte e Logística Ltda., or TGLog, all of which are wholly-owned by us and headquartered in Brazil.

 

On September 30, 2020, Terra Networks Brasil S.A., a wholly-owned subsidiary of Telefônica Brasil, deliberated in favor of changing its corporate form from a corporation (sociedade anônima) to a limited company (sociedade limitada), in the process changing its legal name to Terra Networks Brasil Ltda. The deliberation occurred through an extraordinary shareholder’s meeting.

 

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. 

 

68 

Table of Contents 

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 on 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 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 with Iranian Operators

 

Some subsidiaries of our controlling shareholder, Telefónica, including us, have entered into roaming agreements with Iranian telecommunication companies. 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 Telefónica group customers, and for inbound roaming, the Iranian operator pays the relevant subsidiary roaming fees for use of the respective network by its customers.

 

Regarding Iran, we have a roaming agreement with MTN Irancell (“Irancell”). During 2020, we recorded US$12.24 in roaming revenues and US$126.55 (before taxes and US$163.77 after taxes) of expenses payable to Irancell under this agreement.

 

In addition, as part of the Telefónica group, we adhere to the roaming agreements with Telefónica’s subsidiaries described below.

 

Telefónica’s subsidiaries, other than our Company (which arrangements are described above), were party to the following roaming agreements with Iranian telecommunication companies in 2020:

 

(1)Telefónica Móviles España S.A. (“TME”), Telefónica’s Spanish directly wholly-owned subsidiary, has respective roaming agreements with (i) Mobile Telecommunication Company of Iran (“MTCI”), (ii) Taliya (“Taliya”), and (iii) Telecommunication Kish Co (“TKC”). During 2020 TME recorded the following revenues related to these roaming agreements: (i) 29,483.36 euros from MTCI, (ii) no revenues from Taliya and (iii) no revenues from TKC.

 

(2)Telefónica Germany GmbH & Co. OHG (“TG”), Telefónica’s German 69.22% indirectly-owned subsidiary, has respective roaming agreements with (i) MTCI and (ii) MTN Irancell (“Irancell”). During 2020 TG recorded the following revenues related to these roaming agreements; (i) 314 euros from MTCI and (ii) 3,052.01 euros from Irancell.

 

(3)Telefónica UK Ltd (“TUK”), Telefónica’s English directly wholly-owned subsidiary, has a roaming agreement with Taliya. During 2020 TUK recorded no revenues from Taliya.

 

(4)Pegaso PCS S.A. de C.V. (“PCS”), Telefónica’s Mexican directly wholly-owned subsidiary, has a roaming agreement with Irancell. During 2020 PCS recorded 15.35 euros in roaming revenues under this agreement.

 

69 

Table of Contents 

The net profit recorded by Telefónica’s subsidiaries pursuant to these agreements and arrangements 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 this purpose, Telefónica’s subsidiaries intend to continue maintaining those agreements, which are still outstanding.

 

The Telefónica group does not currently have any forthcoming plans to enter into new roaming arrangements with Iranian telecommunication companies. However, the Telefónica group may consider entering into such arrangements in the future.

 

D.       Property, Plant and Equipment

 

On December 31, 2020, we had fixed and mobile operations in 2,693 properties, 1,424 of which we own, of which 113 are administrative buildings. Besides that, we have entered into standard leasing agreements to rent the remaining properties, under which 137 administrative areas, 2 kiosks and 245 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 operational risks.

 

Pursuant to Brazilian legal proceedings, 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, 2020, the net book value of our property, plant and equipment amounted R$44.1 billion (R$42.8 billion on December 31, 2019), which included reversible assets in the amount of R$6.7 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 and solid waste, 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 the installation and operation of radio/cell base stations and antennas. According to the stage of the project, the environmental licenses may be: (1) a preliminary license, which approves the location and design of the project and 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 the 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. 

 

70 

Table of Contents 

Besides environmental licensing, other environmental regulations may affect our operations, such as, among other matters, regulations related to air emissions, soil and water pollutants, 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, environmental protected areas, 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 caused. 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 developer and their management, in addition to the damage it can cause to our reputation as a responsible company. Whenever soil contamination is suspected, we conduct periodic environmental investigations to assess any possible liability with respect to this fact. 

 

We are subject to administrative review of our activities and corporations found to violate 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, be at a competitive disadvantage to match the requirements of global sustainability index such as Dow Jones Sustainability Index and ISE (Index of corporate sustainability from B3 – the Brazilian stock exchange), 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, our reputation and operations from environmental damage, including specific insurance coverage relating to civil and environmental matters. 

 

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. In 51 cities (that cover more than 40% of our clients) we have a certified Environmental Management System that meets ISO 14,001 requirements since 2016. 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 to address this challenge we established a global target that at least 50% of our energy consumption would come from renewable sources by 2020 and 100% by 2030. However, in 2018 we decided to acquire Renewable Energy Certificates (RECs), which offset our energy consumption from non-renewable sources, ensuring that from 2019 on 100% of our current energy consumption either directly originates from clean and renewable sources, or is offset by RECs that represent energy originated by clean and renewable sources. This has more than halved our greenhouse gas emissions compared to 2015.

 

In 2020, we became the first telco in Latin America to announce that we achieved carbon neutrality by combining of renewable energy and carbon credits generating positive social and environmental impacts. By promoting Amazon communities' qualification for sustainable agro-extractivism and forest management, REDD+ Jari Valley carbon project, turns them into partners for the maintenance of the forest resources, reducing CO2 emission that could be caused by deforestation. Moreover, the second phase of the distributed generation project has been expanded to many Brazilian regions and should represent the supply of more than 80% of our low voltage energy consumption by 2021.

 

71 

Table of Contents 

Therefore, on a net basis, we have reached our goals well before the stipulated deadline. 

 

Also, to comply with Brazilian Federal regulations, (National Solid Waste Policy - Law 12,305/10) as 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 ensuring proper disposal of these materials. In the fixed line telecom business, we offer the option of home collection or store return of the equipment in case of disconnection due to default or end of the contract. Through Call Center or via web form, customers can schedule pick-ups or choose the closest store for permanent disposal. These materials undergo triage and can be refurbished to be used again with full technical capacity and layout conditions. These processes ensure that almost all of the collected electronic waste is recycled or reused. 

 

Moreover, we perform periodic environmental investigations to assess any possible liability with respect to contamination of soil and groundwater, including internal audits of our Environmental Management System (EMS), conducted by our sustainability unit at planned intervals.

 

Item 4A.Unresolved Staff Comments

 

None.

 

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.

 

Effects of the COVID-19 Pandemic

 

The COVID-19 pandemic has created significant volatility, uncertainty, and economic disruption. We are closely monitoring the evolution of the COVID-19 pandemic in Brazil and globally, in order to take preventive measures to minimize the spread of the virus, ensure the continuity of operations and safeguard the health and safety of our personnel. Based on the information available as of the date of this annual report, we present below a summary of the main effects of the COVID-19 pandemic on our business and results of operations:

 

·Our stores were entirely closed in March 2020 and started reopening in April 2020, subject to reduced hours of operation and customer capacity limitations, which remained in effect for the rest of the year. This affected the sale of handset and other accessories, upselling from hybrid to postpaid plans and postpaid additions, which are typically made at our retail locations, resulting in a loss of revenue;

 

·We experienced a contraction in mobile service revenues in the first semester of 2020 of R$364.8 million, or 2.6%, compared to the first semester of 2019, due to net disconnections of approximately 174,000 on prepaid and postpaid plans in the same period, as well as and downgrades of plans by our customers and lower handset sales given the temporary closing of our stores;

 

·Our third-party call center was forced to reduce its hours of operation in March 2020, due to stay-at-home orders, affecting customer service and upselling from prepaid plans to postpaid plans;

 

72 

Table of Contents 

·Costs related to sales, such as sales commissioning and advertising, also contracted due to lower commercial activity and call center working hours reductions. As a result, commercial expenses fell by 9.0% year-over-year in 2020 compared to 2019;

 

·We experienced an increase in provisions for bad debt of R$58.0 million, or 3.4%, in 2020 compared to 2019, as a result of increased unemployment and the inability of certain customers to pay bills and late fees as a result of disruptions caused by the COVID-19 pandemic, but offset in part by relief measures we implemented such as offering customers the possibility of making payments in up to 10 installments, without fines or interest. As a result, the increase in provisions for bad debt experienced in the first half of 2020 was partially offset by a reduction in such provisions in the second half of 2020 when compared with the second half of 2019; and

 

·We postponed the payment of TFF taxes (taxa de fiscalização do funcionamento), as permitted by government measures implemented in 2020 in response to the pandemic, in the amount of R$671.1 million, which will be paid in 2021.

 

During the second half of 2020, we started to see a gradual return in our business towards pre-COVID-19 levels. Our Mobile Revenues stabilized in the third quarter of 2020 (a 0.0% change compared to the same period in 2019) and showed growth in the fourth quarter of 2020 (a 1.6% increase compared to the same period in 2019), whereas our net additions both in prepaid and postpaid were very positive (a net increase of 4.0 million compared to the same period in 2019). In our fixed business, legacy and B2B segments still have not recovered while FTTH and IPTV services showed impressive performance due to increased demand for connectivity during the year, which we were able to meet given our services were deemed essential by the government (thus assuring that our technicians could continue to work and installing our products even while stay-at-home orders remained in effect). However, the full impact of the COVID-19 pandemic on our business, financial condition, and results of operations will depend on numerous evolving factors that we may not be able to accurately predict and that will vary by market, including the duration and scope of the pandemic, the impact of the pandemic on economic activity, and actions taken by governments, businesses, and individuals in response. See also “Item 3. Key Information—D. Risk Factors— Risks Relating to the Brazilian Telecommunications Industry and Us—Our business, operations and results have been, and may continue to be, adversely impacted by the effects of the COVID-19 pandemic.”

 

Brazilian economic environment

 

The Brazilian economy was severely affected by the COVID-19 crisis in 2020. The social distancing measures adopted during the first months of the COVID-19 outbreak reduced consumption of goods and services and resulted in a sharp drop of the GDP in 2Q20 (-9.6% q/q s.a.). In order to mitigate the effects of the pandemic in the economy, the Brazilian government adopted monetary and fiscal measures. On the monetary front, the central bank reduced the basic interest rates and announced measures to provide liquidity to the system. On the fiscal front, the government provided a fiscal package that included financial aid for households, companies and regional governments, and expenditure on public healthcare. The economic measures along with the reopening of the economy in the third quarter of 2020 allowed a relatively fast recovery of the GDP, which grew 7.7% quarter over quarter in 3Q20, although it remained 4% below the pre-crisis level. A negative consequence of the fiscal package was a sharp increase in the fiscal deficit and public debt. Moreover, the structural reform agenda was delayed, while the government has kept the commitment with the fiscal adjustment once the crisis is over. Finally, financial markets have reacted very negatively to the crisis. The Brazilian currency was negatively affected by a higher global risk aversion, drop in commodity prices and deterioration of the fiscal scenario.

 

The Brazilian economy has experienced a relatively low rate of growth this decade, amid economic crises. According to market data, in 2020, the Brazilian GDP contracted by approximately 4.4%, affected by the COVID-19 crisis. Previously, according to IBGE (Instituto Brasileiro de Geografia e Estatística), the Brazilian GDP had increased 1.4% in 2019, 1.8% in 2018 and 1.3% in 2017, after a contraction of 3.3% in 2016 and 3.5% in 2015.

 

Consumer prices, as measured by the IPCA, rose to 4.52% in 2020, in line with the target band established by the Central Bank of 4.00% +/- 1.5%. In 2019 and 2018, inflation measured by IPCA was 4.3% and 3.7%, respectively. Inflation, as measured by the Brazilian general price index (Índice Geral de Preços - Disponibilidade Interna), or IGP-DI, calculated by FGV, which includes wholesale, retail and home-building prices, stood at 23.08%, compared to 7.7% in 2019 and 7.1% in 2018, affected by the exchange rate depreciation.

 

73 

Table of Contents 

As the inflation rate measured by IPCA stood in line with the target of 4.0%, under the economic recession environment, the Central Bank decreased the basic interest rate (Sistema Especial de Liquidação e de Custódia), or SELIC rate, to 2.0% by the end of 2020, from 4.5% as of the end of 2019.

 

Brazil closed 2020 with a trade balance surplus of US$51.0 billion, higher than the surplus of US$48.0 billion in 2019. Exports fell by 6.9%, registering US$ 209.9 billion, while imports decreased by 10.4%, to US$ 158.9 billion. Foreign Direct Investments inflows into the country have decreased to US$ 34.2 billion (accumulated in the year ended December 31, 2020), compared to US$ 69.2 billion in 2019. International reserves in the year ended December 31, 2020 were US$355.6 billion, compared to 356.9 in US$ December 31, 2019.

 

The public sector fiscal deficit increased significantly in 2020, reflecting both the drop in public revenues due to the economic recession and the increase in fiscal expenditures to mitigate the negative impacts of the COVID-19 crisis. The nominal fiscal deficit reached 13.6% of the GDP in December 2020, compared to 5.8% in December 2019’s result. Gross public debt rose to 89.3% of GDP in December 2020, from 74.3% of GDP in December 2019. As a result, the Brazilian risk premium has increased. J.P. Morgan Emerging Markets Bond Index Plus (EMBI + Brazil), which tracks total returns for traded external debt instruments in emerging markets, increased to 260 basis points by the end of 2020, from 214 basis points at the end of 2019 and 276 basis points at the end of 2018.

 

The Real depreciated against the U.S. dollar in 2020 by 28.9%. The exchange rate on December 31, 2020 was R$5.1967 per US$1.00, from R$4.0307 per US$1.00 on December 31, 2019.

 

Our business is directly affected by the external environment and the Brazilian economy. Higher volatility of the Brazilian Real against the U.S. dollar may affect the purchasing power of Brazilian consumers and cause a negative impact on 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 our industry and therefore reduced the adverse effects of inflation on our business. The IST for the twelve-month period ending December 2019 was 4.6% 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, 2016 through 2020:

 

   Inflation Rate (%) as Measured by IGP-DI(1)  Inflation Rate (%) as Measured by IPCA(2)  Inflation Rate (%) as Measured by IST(3)
December 31, 2016   7.2    6.3    6.0 
December 31, 2017   (0.4)   2.9    3.2 
December 31, 2018   7.1    3.7    5.5 
December 31, 2019   7.7    4.3    4.6 
December 31, 2020   23.1    4.5    9.3 

_______________

(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.

 

74 

Table of Contents 

Discussion of Critical Accounting Estimates and Policies 

 

The preparation of the financial statements requires the use of certain critical accounting estimates and the exercise of judgment by the Company’s Management in applying the Company’s accounting policies. These estimates are based on experience, better knowledge, information available at the end of the fiscal year, and other factors, including expectations of future events that are believed to be reasonable in the circumstances. Settlement of transactions involving these estimates may result in values that are different from those recorded in the financial statements due to the criteria inherent in the estimation process. The Company reviews its estimates at least annually. 

 

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.

 

Estimated losses for impairment of accounts receivable 

 

In determining whether the credit risk of a financial asset has increased significantly since the initial recognition and in estimating the expected credit losses, we consider reasonable and bearable information that is relevant and available. This includes quantitative and qualitative information and analysis, based on our historical experience, credit assessment and considering forward-looking information. Although we believe that the assumptions used are reasonable, actual results may be different. 

 

Additional information on estimated losses for impairment of accounts receivable is disclosed in Note 4 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 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. 

 

75 

Table of Contents 

The carrying value of goodwill and the key assumptions used in performing the annual impairment assessment are disclosed in Note 14 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 Note 19 to our consolidated financial statements. 

 

Pension and other post-retirement benefit plans 

 

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, 2020, the key financial assumption used to measure the obligation as well as the sensitivity of our pension liability on December 31, 2020 and of the income statement charge in 2018, 2019 and 2020 to changes in these assumptions, is disclosed in Note 30 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 Note 31 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, 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. 

 

76 

Table of Contents 

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 7, 8 and 17 to our consolidated financial statements. 

 

Revenue recognition 

 

Revenue recognition - revenue from unbilled services 

 

We have billing systems for services with intermediate cut-off dates. Thus, at the end of each month, there are revenues already received by us, but that are not effectively invoiced to our customers. These unbilled revenues are recorded based on estimates, which take into account historical consumption data, the number of days elapsed since the last billing date, among others. Because historical data are used, these estimates are subject to significant uncertainties.

 

Additional information on revenue recognition is disclosed in Note 24 to our consolidated financial statements.

 

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 Música, Vivo Educa, Vivo Sync, Vivo Play Kids, Vivo NBA, Vivo Família Online, Vivo Meditação, among others; and

 

77 

Table of Contents 

·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, caller identification, voice mail and cellular blocker, among others.

 

Results of Operations 

 

In September 2020, we acquired direct control of Telefônica Cibersegurança e Tecnologia do Brasil Ltda., or CyberCo Brasil. CyberCo Brasil was controlled by Terra Networks Brasil Ltda., or Terra. On November 1, 2020, our Board of Directors approved the execution of the Purchase and Sale Agreement, pursuant to which we sold the totality of the quotas we held in CyberCo Brasil, representing all of its capital stock, to Telefónica Cybersecurity Tech, SL, or TTech, an indirect subsidiary of Telefónica S.A., our parent company, for the total amount of R$116.4 million, generating an increase in equity of R$39 million and an immaterial impact on our net income.. Notwithstanding, results from CyberCo Brasil are not material and therefore our results of operations for the years ended December 31, 2020, 2019 and 2018 are comparable with our results of operations for the years ended December 31, 2017 and 2016. For more information, please see Note 1.c to our consolidated financial statements and “Item 4. Information on the Company—A. History and Development of the Company— Restructuring involving the sale of shares of Telefônica Cibersegurança e Tecnologia do Brasil Ltda. to Telefónica Cybersecurity Tech, S.L., an indirect subsidiary of Telefónica S.A.”

 

The following table sets forth certain components of our net income for each year ended December 31, 2020, 2019 and 2018 as well as the percentage change of each component. 

 

   Year ended December 31,  Percent change
   2020  2019  2018  2020-2019  2019-2018
   (in millions of reais)
Net operating revenue    43,126.5    44,268.2    43,462.7    (2.6%)   1.9%
Cost of sales    (22,693.1)   (22,159.0)   (21,025.7)   2.4%   5.4%
Gross profit    20,433.4    22,109.2    22,437.0    (7.6%)   (1.5%)
Operating expenses:                          
Selling expenses    (11,871.5)   (12,701.3)   (12,832.7)   (6.5%)   (1.0%)
General and administrative expenses    (2,525.0)   (2,498.1)   (2,599.0)   1.1%   (3.9%)
Other net operating income (expenses), net    544.0    304.0    2,450.9    78.9%   (87.6%)
Total operating income (expenses), net    (13,852.5)   (14,895.3)   (12,980.8)   (7.0%)   14.7%
Operating income    6,580.9    7,213.9    9,456.2    (8.8%)   (23.7%)
Financial income (expenses), net    (573.4)   (820.1)   1,827.2    (30.1%)   (144.9%)
Equity pickup    0.7    0.7    (5.9)   -    (112.9%)
Income before taxes    6,008.2    6,394.5    11,277.5    (6.0%)   (43.3%)
Income and social contribution taxes    (1,237.7)   (1,393.5)   (2,349.2)   (11.2%)   (40.7%)
Net income for the year    4,770.5    5,001.0    8,928.3    (4.6%)   (44.0%)
Net income attributable to:                          
Controlling shareholding    4,770.5    5,001.0    8,928.3    (4.6%)   (44.0%)
Net income for the year    4,770.5    5,001.0    8,928.3    (4.6%)   (44.0%)
                          

78 

Table of Contents 

Results of Operations for the Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019

 

Gross operating revenue 

 

Our gross operating revenue decreased by 5.1% to R$63,195.4 million in 2020 from R$66,571.9 million in 2019. Service revenue decreased by 4.7% to R$57,293.4 million in 2020 from R$60,129.6 million in 2019, mainly due to effects caused by the COVID-19 pandemic besides the maturity of fixed and mobile voice, prepaid and DTH, partially offset by the positive performance of key businesses, such as postpaid and FTTH. Sale of goods revenue decreased by 8.4% to R$5,902.0 million in 2020 from R$6,442.3 million in 2019, due to the effects caused by the COVID-19 pandemic, such as the temporary closing of our stores during the year, which impacted the sales of mobile handsets and accessories. The table and descriptions below set forth explanations for these variations:

 

   Year ended December 31,  Percent change
   2020  2019  2020-2019
   (in millions of reais)
Gross operating revenue    63,195.4    66,571.9    (5.1%)
Services (1)    57,293.4    60,129.6    (4.7%)
Sale of goods (2)    5,902.0    6,442.3    (8.4%)
Deductions from gross operating revenue    (20,068.9)   (22,303.7)   (10.0%)
Taxes    (13,022.7)   (13,894.4)   (6.3%)
Services    (11,981.4)   (12,678.8)   (5.5%)
Sale of goods    (1,041.3)   (1,215.6)   (14.3%)
Discounts granted and return of goods    (7,046.2)   (8,409.3)   (16.2%)
Services    (4,968.3)   (6,319.6)   (21.4%)
Sale of goods    (2,077.9)   (2,089.7)   (0.6%)
Net operating revenues    43,126.5    44,268.2    (2.6%)
Services    40,343.7    41,131.2    (1.9%)
Sale of goods    2,782.8    3,137.0    (11.3%)

_______________

(1)These include telephone services, use of interconnection network, data and SVA services, cable TV and other services.

 

(2)These include sale of goods (handsets, sim cards and accessories) and equipment of the “Soluciona TI.”

 

Net operating revenue 

 

Net Operating Revenue decreased by 2.6% to R$43,126.5 million in 2020 from R$44,268.2 million in 2019, due to the decrease in revenues from telecommunication services, as a result of the effects of the lower

 

79 

Table of Contents 

commercial activity related to the COVID-19 pandemic and the reduction in outgoing voice and interconnection revenues, resulting from decreases in mobile and fixed termination rates mandated by ANATEL. These factors were partially offset by the robust fixed broadband evolution, mainly due to strong growth in ultra-broadband revenues driven by higher adoption of FTTH and footprint expansion, increase in data transmission and value-added services revenues from the successful upselling of mobile data bundles, strong migration to 4G and 4.5G and higher smartphone penetration within our customer base.

 

Cost of sales 

 

Cost of sales increased by R$534.2 million, or 2.4%, to R$22,693.1 million in 2020 from R$22,158.9 million in 2019. The table and descriptions below set forth explanations for these variations:

 

   Year ended December 31,  Percent change
   2020  2019  2020-2019
   (in millions of reais)
Cost of goods sold    (2,878.5)   (3,157.0)   (8.8%)
Depreciation and amortization    (8,865.9)   (8,624.2)   2.8%
Outside services and other    (5,865.3)   (5,545.9)   5.8%
Interconnection and network use    (1,332.5)   (1,087.8)   22.5%
Rental, insurance, condominium and connection means    (1,284.9)   (1,388.2)   (7.4%)
Personnel    (775.8)   (758.8)   2.3%
Taxes, charges and contributions    (1,690.2)   (1,597.1)   5.8%
Cost of sales    (22,693.1)   (22,159.0)   2.4%

 

Cost of Goods Sold: Cost of goods sold decreased by R$278.5 million, or 8.8%, to R$2,878.5 million in 2020 from R$3,157.0 million in 2019, mainly due to the lower commercial activity and the temporary closure of our physical stores due to the COVID-19 confinement measures.

 

Depreciation and Amortization: Costs related to depreciation and amortization increased by R$241.7 million, or 2.8%, to R$8,865.9 million in 2020 from R$8,624.2 million in 2019, because of the higher level of investments made by the Company in the expansion of 4G and 4.5G network and the acceleration of FTTH deployment in 2020 combined to the review of the assets useful life done by the end of 2019. 

 

Outside Services and Other: Costs related to outside services and other increased by R$319.4 million, or 5.8%, to R$5,865.3 million in 2020 from R$5,545.9 million in 2019, primarily due to higher costs with maintenance activities. 

 

Interconnection and Network Use: Costs related to interconnection and network use increased by R$244.7 million, or 22.5%, to R$1,332.5 million in 2020, from R$1,087.8 million in 2019, primarily as a result of the higher interconnection costs, due to tariff adjustments in the period. 

 

Rental, Insurance, Condominium and Connection Means: Costs related to rent, insurance, condominium and connection means decreased by R$103.3 million, or 7.4%, to R$1,284.9 million in 2020, from R$1,388.2 million in 2019 due to lower rental expenses. 

 

Personnel: Personnel expenses increased by R$17.1 million, or 2.3%, to R$775.8 million in 2020 from R$758.8 million in 2019, driven by the internalization of strategic activities partially compensated by the reduction of back-office functions, as a result of the digitalization of multiple processes within the Company. 

 

Taxes, Charges and Contributions: Taxes, charges and contributions increased by R$93.1 million, or 5.8%, to R$1,690.2 million in 2020, from R$1,597.1 million in 2019, primarily due to higher regulatory fees arising from the positive evolution of the mobile customer base.

 

80 

Table of Contents 

Operating expenses 

 

Operating Expenses decreased by R$1,042.9 million, or 7.0%, to R$13,852.5 million in 2020, from R$14,895.3 million in 2019. The table and descriptions below set forth explanations for these variations:

 

   Year ended December 31,  Percent change
   2020  2019  2020-2019
   (in millions of reais)
Selling expenses    (11,871.5)   (12,701.2)   (6.5%)
General and administrative expenses    (2,525.0)   (2,498.1)   1.1%
Other operating income (expenses), net    544.0    304.0    78.9%
Total    (13,852.5)   (14,895.3)   (7.0%)

 

Selling Expenses: Our selling expenses decreased by R$829.8 million, or 6.5%, to R$11,871.5 million in 2020 from R$12,701.3 million in 2019, mainly due to the lower commercial activity and the growing digitalization and automation of customer service processes such as back-office, billing and posting, combined to the increasing adoption of our digital self-service app Meu Vivo. 

 

General and Administrative Expenses: Our general and administrative expenses increased by R$26.9 million, or 1.1%, to R$2,525.0 million in 2020, from R$2,498.1 million in 2019, due to lower expenses with the maintenance of buildings and administrative and judicial consultancy firms. 

 

Other Operating Income (Expenses), Net: Other operating income, net increased by R$240.0 million, or 78.9%, to an income of R$544.0 million in 2020, from R$304.0 million in 2019. In 2019, other operating income (expenses), net was primarily related to the sale of assets such as data centers, towers and buildings, which were partially offset by expenses with taxes and contingencies. In 2020, the exceptional income registered was related to the sale of towers and rooftops in the first quarter of 2020 in the amount of R$75.7 million and reduced civil and labor contingencies.

 

Financial income (expenses), net  

 

For the year ended December 31, 2020, financial expense, net reached R$573.4 million, a decrease of R$246.7 million, from an expense of R$820.1 million for the year ended December 31, 2019, primarily because of the exceptional financial effect registered in 2020, in the amount of R$495.9 million, primarily resulting from exceptional income resulting from the above-mentioned judicial decisions relating to the exclusion of ICMS tax from the PIS/COFINS tax base.

 

Income and social contribution taxes 

 

We recorded an expense from income and social contribution taxes in the amount of R$1,237.7 million in 2020, compared to an expense of R$1,393.5 million in 2019, a reduction of R$155.8 million as a result of a decrease of 8.8% in income before income tax and social contribution against the prior year.

 

The effective rate of income and social contribution taxes increased to 20.6% in 2020 compared with 21.8% in 2019, primarily as a result of lower interest on shareholders’ equity distributed in comparison to the prior year.

 

Results of Operations for the Year Ended December 31, 2019, Compared to the Year Ended December 31, 2018

 

For a discussion of our results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018, please see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018” of our annual report on Form 20-F for the year ended December 31, 2019.

 

81 

Table of Contents 

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, 2020, we had R$5.8 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.

 

In addition, we expect to use cash on hand to pay the consideration due by us under the Oi Agreeement upon the consummation of the transactions contemplated thereby, if the required regulatory approvals and other conditions to closing are obtained.

 

Our management believes that our sources of liquidity and capital resources, including working capital, are adequate for our present requirements.

 

While the COVID-19 pandemic has not materially impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets. The pandemic and resulting economic uncertainty could adversely affect our liquidity and capital resources in the future. Based on past performance and current expectations, we believe our strong cash and cash equivalents and short term investments position are critical at this time of uncertainty, and allow us to use our cash resources for working capital needs, capital expenditures, investment requirements, contractual obligations, commitments, and other liquidity requirements associated with our operations. See “Item 3.D. Risk Factors—Risks Relating to the Brazilian Telecommunications Industry and Us—Our business, operations and results have been, and may continue to be, adversely impacted by the effects of the COVID-19 pandemic.”

 

Sources of Funds

 

Our cash flow from operations was R$19.3 billion in 2020, an increase of 9.1% over the R$17.7 billion in 2019. The increase in cash flow from operations is due to the better collection/collection performance, inventory turnover and taxes to recover, which are mainly comprised of ICMS taxes. Additionally, there was a reduction in variable expenses with call center and sales commissions due to lower commercial activity and call center working hours reductions as a result of the COVID-19 pandemic.

 

For a discussion of our sources of funds for the year ended December 31, 2019 compared to the year ended December 31, 2018, please see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Sources of Funds” of our annual report on Form 20-F for the year ended December 31, 2019.

 

Uses of Funds

 

Our cash flow used in investing activities was R$6.4 billion in 2020, against R$7.9 billion in 2019. The variation in the cash flow used in investment activities is due to the new investment schedule we implemented due to the COVID-19 pandemic.

 

Our cash flow used in financing activities recorded an outflow of R$10.6 billion in 2020, compared to an outflow of R$9.8 billion in 2019. The increase in cash flow used in financing activities of R$782.6 million in 2020 compared to 2019 was mainly due to higher lease payments (IFRS 16).

 

For a discussion of our uses of funds for the year ended December 31, 2019 compared to the year ended December 31, 2018, please see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Uses of Funds” of our annual report on Form 20-F for the year ended December 31, 2019.

 

82 

Table of Contents 

Indebtedness

 

As of December 31, 2020, our total debt was as follows:

 

Debt  Currency  Annual interest rate payable  Maturity  Total amount outstanding (in millions of reais)
PSI    R$                  2,5% to 5,5%    2023    0.1 
Debentures 1st issue - Minas Comunica    R$                  IPCA + 0.5%    2021    29.4 
Debentures 5th issue - Single Series    R$                  108.25% of CDI    2022    2,015.2 
Finance Leases (1)    R$                      2044    10,818.7 
Suppliers finance arrangements    R$                  114.6 to 149.0% of CDI    2021    375.7 
Total debt                   13,239.2 
Current                   3,682.5 
Non-current                   9,556.7 

_______________

(1)Our finance leases are related to towers and rooftops, IT equipment leases, infrastructure rent and other means of transmission.

 

Interest and principal payments on our indebtedness as of December 31, 2020 due in 2021 and 2022 total R$3,635.8 million and R$3,210.9 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, 2020, 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 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. 

 

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 and other derivative instruments. 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 continue to face exchange rate exposure with respect to our planned capital expenditures, however, as a small part of our planned capital expenditures are 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.

 

83 

Table of Contents 

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.

 

For more information, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

 

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$7.9 billion, R$8.8 billion and R$8.2 billion for the years ended December 31, 2020, 2019 and 2018, 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 our “adjusted net income” (as defined below) in respect of each fiscal year to the extent earnings are available for distribution.

 

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 is 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 deliberated in favor of the distribution of dividends and interest on shareholders’ equity of R$ 5.0 billion, R$5.8 billion and R$7.0 billion in 2020, 2019, and 2018, respectively.

 

Our management expects to meet 2021 capital requirements primarily from cash provided from our operations. Net cash provided by operations was R$19.3 billion, R$17.7 billion and R$11.9 billion in 2020, 2019 and 2018, 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, 2020, in addition to the interim dividend and interest on own capital payments made in 2020, management decided to propose an additional proposed dividend to shareholders in the amount of R$1.5 billion. The proposal to pay dividends will be approved at the shareholders’ meeting that will approve the 2020 annual report. See “Item 3. Key Information—D. Risk Factors—Risks Relating to the Common Shares and the ADSs— Holders of our ADSs are not entitled to attend shareholders’ meetings and may only vote through the depositary.” and “Item 10. Additional Information—B. Memorandum and Articles of Association—Description of Our Bylaws—Voting Rights.”

 

Accounting Pronouncements

 

The accounting policies adopted in the preparation of the consolidated financial statements for the year ended December 31, 2020 are consistent with those used in the preparation of the consolidated annual

 

84 

Table of Contents 

financial statements for the year ended December 31, 2019, except for the changes required by the new pronouncements, interpretations and amendments approved for the IASB, which came into effect as of January 1, 2020, as follows:

 

Changes to IFRS 3: Definition of business

 

In October 2018, the IASB issued changes to the definition of business in IFRS 3, to help entities determine whether an acquired set of activities and assets consists of or not in a business. They clarify minimum requirements, eliminate the assessment of whether market participants are able to replace any missing elements, include guidelines to help entities assess whether a purchased process is substantive, better define business and product definitions, and introduce a test of optional fair value concentration.

 

Amendments to IAS 1 and IAS 8: Definition of material omission

 

In October 2018, the IASB issued changes to IAS 1 and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, to align the definition “material omission” or “materially distorted disclosure” in all standards and to clarify certain aspects of the definition. The new definition states that “the information is material if its omission, distortion or obscuration can reasonably influence decisions that the main users of the general purpose financial statements make based on these financial statements, which provide financial information on the entity’s specific report”.

 

The adoption of these changes had no impact on the consolidated financial statements in the initial adoption period (beginning as of January 1, 2020).

 

New IFRS pronouncements, issues, amendments and interpretations of the IASB

 

In addition to the standards issued and amended mentioned above, on the date of preparation of these financial statements, the IASB had issued IFRS 17 - Insurance Contracts (a standard not yet issued in Brazil), a new comprehensive accounting standard for insurance contracts that includes recognition and measurement, presentation and disclosure.

 

IFRS 17 will come into force for periods beginning on or after January 1, 2021, requiring the presentation of comparative figures. Early adoption is permitted if the entity also adopts IFRS 9 and IFRS 15 on the same date or before the initial adoption of IFRS 17. This standard does not apply to the Company.

 

The Company does not anticipate the early adoption for the year ended December 31, 2020 of any pronouncement, interpretation or amendment that has been issued before application is mandatory.

 

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. The evolution of products and services now includes features such as machine learning, cognitive computing and artificial intelligence.

 

The table below presents our investments in the development, update and modernization of systems to support the launch of new products and services. In 2020, we invested R$27.4 million in development and innovation.

 

R&D investments  2020  2019  2018
   (in millions of reais)
Development and Innovation (business incubator and tests)    27.4    50.3    62.1 

 

Patents and Licenses

 

Our principal intellectual property assets include:

 

85 

Table of Contents 

·permission to use the trademark name “Telefônica” and all names derived from “Telefônica”;

 

·our commercial brands in Brazil, “Vivo,” and sub-brands such as “Vivo Fixo”, “Vivo TV”, “Vivo Internet”, “Vivo Fibra”, “Vivo Selfie”, “Meu Vivo”, “Vivo Empresas”, “Vivo Play”, “Vivo Easy”, “Vivo Money” and “Vivo Ads” as our advertising service, among others;

 

·the trademark “Aura” that is Vivo’s Artificial Intelligence;

 

·permission to use the trademark “Terra” that provides media and digital services.

 

·permission to use the trademark “ElevenPaths”, Telefônica’s cybersecurity brand.

 

In September 2016, the Brazilian Trademark Office recognized the “Vivo” trademark as of “high reputation”, thus protected in all branches of activities within Brazilian territory.

 

D.Trend Information

 

Consumption patterns in Brazil were strengthened by the COVID-19 pandemic and social isolation: customers are demanding not only reliable and faster connectivity, but also a complete aggregation of meaningful digital services with a personalized customer experience. Furthermore, brand reputation, promotion of ESG initiatives and concerns with security and data privacy supported by the new general data privacy law (LGPD) in effect since 2020 are becoming increasingly important to customers’ choices.

 

Accordingly, we intend to continue efficiently investing in modern infrastructure for the mobile and fixed segment, supported by partnerships and alternative expansion models, aiming to extend our 4.5G, 5G and FTTH footprints and cement our reputation as the best connectivity platform in Brazil. Moreover, Meu Vivo and Aura will continue to be an important source of differentiation through a simplified and personalized experience. Vivo is also quickly advancing beyond telco services, by becoming a reference to its customers in digital services. These initiatives are the most effective way to address our customers’ needs and, in addition, to empower us to take advantage of both short and long-term opportunities, such as the growing digitalization of Brazilian companies and the innovative wave of 5G.

 

In the macroeconomic scenario, Brazil has a positive outlook for consumption and is expected to continue its process of recovery in 2021 from COVID-19’s impacts. Government plans to resume significant political and economic reforms in 2021, such as Tax and Administrative reforms. A more pro-market stance also impacts the regulatory environment, for instance with migration from concession to authorization model and the evolution to self-regulation. These trends may contribute to boosting the recovery of the telecommunications sector. On the revenues side, convergence, exponential data consumption and digital services over connectivity will be key to continued growth. In addition, we expect a competitive environment more prone to M&A and more focused on delivering new digital products and services, as well as providing better quality and customer experience, which will increasingly require investments in efficient, best-in-class technologies such as FTTH, 4.5G and 5G.

 

In this context, Telefônica Brasil is well structured to maintain its leadership in the Brazilian telecommunications market and to continue serving its 95 million access in fixed and mobile business. Moreoever, we believe our strategic pillars, #temvivopratudo (There is a Vivo for everything), #temtudonavivo (Vivo has everything), #DNAvivosomos (Vivo DNA in everything we are), #DNAvivofazemos (Vivo DNA in everything we do) and #vivosustentabilidade (Vivo Sustainability), will allow us to achieve our purpose of increasing digitalization to bring people together (Digitalizar para aproximar).

 

E.Off-Balance Sheet Arrangements

 

None.

 

F.       Tabular Disclosure of Contractual Obligations

 

Our contractual obligations and commercial commitments as of December 31, 2020 are as follows:

 

86 

Table of Contents 

   Total  Less than 1 year  1-3 years  4-5 years  More than 5 years
   (in millions of reais, as of December 31, 2019)
Contractual obligations               
Loans, financing and leases (1)    11,194.5    2,637.8    4,387.1    2,477.6    1,692.0 
Debentures    2,044.6    1,044.7    999.9         
Derivatives    (5.6)   (3.0)   10.2    10.2    (23.0)
Pension and other post-retirement benefits    954.6    22.2    8.6    9.3    914.5 
Total contractual obligations    14,188.1    3,701.7    5,405.8    2,497.1    2,583.6 
Commercial commitments                          
Trade accounts payable    6,613.0    6,613.0             
Total commercial commitments    6,613.0    6,613.0             

_______________

(1)Includes the 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 to our consolidated financial statements. 

 

For additional information, see note 31 g.3 to 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, 2020)
2022    3,268.9 
2023    2,119.2 
2024    1,551.7 
2025       926.5 
2026 and forward    1,690.5 
Total    9,556.7 

 

G.Safe Harbor

 

See “Cautionary Statement Regarding Forward-Looking Statements.”

 

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 elected and dismissed by the shareholders at the shareholders’ meeting, serving for a term of three years with the possibility of re-election.

 

 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 in April 2022.

 

 The following are the current members of the board of directors:

 

87 

Table of Contents 

Name 

Position 

Date of Appointment 

Eduardo Navarro de Carvalho Chairman April 11, 2019
Julio Esteban Linares Lopez Director April 11, 2019
Antonio Carlos Valente da Silva Director April 11, 2019
Claudia Maria Costin Director June 10, 2019
Francisco Javier de Paz Mancho Director April 11, 2019
Sonia Julia Sulzbeck Villalobos (1) Director April 11, 2019
Luiz Fernando Furlan Director April 11, 2019
Narcís Serra Director April 11, 2019
José Maria Del Rey Osorio Director April 11, 2019
Ana Theresa Masetti Borsari Director April 11, 2019
Juan Carlos Ros Brugueras Director February 21, 2020
Christian Mauad Gebara Director April 11, 2019

_______________

(1)Mrs. Sonia Villalobos was elected by preferred shareholders on a separate vote, with no participation of the controlling shareholder, prior to the Conversion of all our preferred shares into common shares after market close on November 20, 2020 (see “Item 10. Additional Information—B. Memorandum and Articles of Association— Description of Our Bylaws—History of Share Capital—Conversion of Our Preferred Shares into Common Shares”).

 

Below are brief biographies of our directors:

 

Christian Mauad Gebara is 48 years old and is our Chief Executive Officer and member of our Board of Directors. He is also President of SP Telecomunicações Participações Ltda, and CEO of Innoweb Ltda., Pop Internet Ltda., Terra Networks Brasil Ltda. and Telefônica Infraestrutura e Segurança Ltda. He is Chairman of the Board of Directors of Telefônica Factoring do Brasil Ltda., Chairman of the Board of Trustees of Fundação Telefônica and 1st Vice-Presidente of the Board of Executive Officer of SindiTelebrasil (Since July/2019). He was our Chief Operating Officer (March/2017 – December/2018), Executive Vice President - Chief Revenue Officer (September/2015 – February/2017), Vice President of Consumer Mobile (July/2015 – August/2015), Vice President of the B2C division (“Negócios PF” - February/2015 - June/2015) and Vice President of the National Individual Market (July/2013 – January/2015). Previously, he was the Vice President National Individual Market (April/2013 – July/2013), Vice President New Business Strategy (July/2011 – March/2013) and Vice President of Synergy Integration and New Businesses (January/2011 – June/2011) at Vivo S.A., which was extinct due to its incorporation by the Company. Since 2006, Mr. Gebara has held a wide variety of positions within the Telefónica Group – Telefónica Spain and Telefónica América Latina, both in Madrid. Before joining the Telefónica Group, he worked at McKinsey & Company (Spain), JP Morgan Chase (USA), Banco ABC Brasil and Citibank (Brazil). He graduated in management from the Fundação Getúlio Vargas in São Paulo and has an MBA from the Graduate School of Business at Stanford University.

 

Eduardo Navarro de Carvalho is 58 years old and is Chairman of our Board of Directors, member of our Nominations, Compensation and Corporate Governance Committee and member of our Strategy Committee. He is Chief Strategy and Corporate Affairs Officer of Telefónica S.A. (since February 2020). He is also Patrono Nato of Fundación Telefónica (since September/2012). Mr. Navarro was a member of the board of directors of Telefónica Audiovisual Digital (June/2016 – April/2018); the Communications, Corporate Business, Trademark and Sustainability Officer of the Telefónica Group (January 2019 – February 2020); Chairman of the board of directors of Telefônica Factoring do Brasil Ltda. (December 2016 – February 2019); Chief Executive Officer of the Company (November/2016 – December/2018); Chairman of the Board of Trustees of Fundação Telefônica (until December/2019), Officer of SindiTelebrasil (November/2016 – July/2019) CEO of Telefônica Data S.A. (until November/2018, when the company was extinct due to its incorporation by the Company); President of SP Telecomunicações Participações Ltda, and CEO of Innoweb Ltda., Pop Internet Ltda. and Terra Networks Brasil S.A. He was the Chief Commercial Digital Officer of Telefónica S.A. (February/2014 – January/2017) and Global Director of Strategy and Alliances at Telefónica S.A. (2011 – 2014). He graduated in Metallurgical Engineering from the Federal University of Minas Gerais, Brazil.

 

88 

Table of Contents 

Julio Esteban Linares Lopez is 75 years old and is a member of our Board of Directors, Chairman of our Strategy Committee and member of our Control and Audit Committee. He is also a member of the Supervisory Board of Telefónica Deutschland Holding AG; Administrador Solidário of Telefónica de España, S.A.U. and of Telefónica Móviles España, S.A.U.; trustee of Telefónica Foundation (since June/2000). Mr. López was Vice President of the board of directors of Telefónica S.A. (September/2012 – July/2017) and was COO of Telefónica, S.A. (December/2007 – September/2012). He is a member of the GSM Association Board (since October/2012); trustee of Mobile World Capital Barcelona Foundation (since December/2012) and of CEDE Foundation (Confederación Española de Directivos y Ejecutivos) (since June/2014); member of the Executive Commission (since January/2015), member of the Board and Chairman of the Digital Society Committee of CEOE (Confederación Española de Organizaciones Empresariales) (since May/2016); member of COIT (Official College of Telecommunications Engineering) (since December/2014), member of AEIT (Spanish Association of Telecommunications Engineers) (since December/2014), member of the Advisory Board of Higher Technical School of Engineers Telecommunications (since July/2015) and trustee of Cred100do Foundation (since November/2019). Previously he held the offices of Officer of Telecom Italia (November/2007 – December/2013); Executive Officer of Coordination, Development of Businesses and Synergy at Telefónica S.A. and member of its board of directors and Secretary of its Executive Committee (December/2005 – December/2007). Mr. López graduated in Engineering of Telecommunications from Universidad Politécnica of Madrid.

 

Antonio Carlos Valente da Silva is 68 years old and serves as a Member of our Board of Directors and Chairman of our Quality and Sustainability Committee. He was a member of the Consejo Asessor of Telefónica Internacional S.A.U (2015 – 2016); Chairman of the Board of Trustees of Fundação Telefônica (December 2010 – December 2016); Valente was Chief Executive Officer of Telefônica Brasil S.A. and member of the Appointments, Compensation and Corporate Governance Committee of Telefônica Brasil S.A. (January/2007 — March/2015); Chief Executive Officer of Telefônica Data S.A. (until March/2015), Vice-President Officer of SP Telecomunicações Participações Ltda. (until May/2015), Chairman of the board of directors of Telefônica Factoring do Brasil Ltda. (until May/2015), member of the Control Committees of Media Networks Brasil Soluções Digitais Ltda. (until May/2015), Telefônica Transportes e Logística Ltda. (until May/2015) and Telefônica Serviços Empresariais do Brasil Ltda. (until May/2015). He was the Chief Executive Officer of the merged 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. Mr. Valente was also Chairman of the Junta Directiva of Telefónica Venezuela (November/2015 – March 2017). He is also Chairman of Everis, a quotaholder of SmartWare Consulting EIRELI and member of the Board of Directors of Dom Rock (since June/2019), member of the Board of Directors of Padtech Holding S.A. (since July 2020), chairman of the Advisory Board of CPqD, (Brazilian Telecommunications Research and Development Center) (since February/2020), member of the board of directors of Cinnecta (since June/2018), member of the board of Directors od AENZA Perú (since December/2020), member of the Advisory Board of Virtueyes (since September/2020) and member of the Board of Directors of Ativa (since January/2021). He was a member of the Advisory Board of CPqD (since July/2008 until February 2020 when he became chairman of the Advisory Board. He used to work as a volunteer at Fundação Lemann (2017 – July/2018). Mr. Valente was Chairman of the Official Spanish Chamber of Commerce in Brazil (2011-2015); Chairman of Telebrasil (Brazilian Association of Telecommunications), Chairman of SindiTelebrasil (National Union of Fixed and Mobile Telephone Service Operators); Chairman of Febratel (Brazilian Federation of Telecommunications) (2010–2013) and Chairman of the Euro-chambers in Brazil (an association that gathers the main Chambers of Commerce from the European Union in Brazil). He was also a member of the CDES - Economic and Social Development Council of the Presidency of the Republic of Brazil (until 2016), and until the end of 2017, Mr. Valente was a member of the Board of Executive Officers of ABDIB - Brazilian Base Industries Association), member of COINFRA (FIESP’s Infrastructure Commission) and member of the Advisory Board of Catenon Brasil. 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.

 

89 

Table of Contents 

Francisco Javier de Paz Mancho is 62 years old and is a member of our Board of Directors and Chairman of our Nominations, Compensation and Corporate Governance Committee. Mr. de Paz is also a member of the board of directors of Telefónica S.A., Telefónica Móviles Argentina S.A. and Pegaso PCS, S.A. of CV. He is also Chairman of the board of directors of Telefónica Ingeniería de Seguridad S.A. He was Chairman of the board of directors of Telefónica Gestión de Serviços Compartidos Espanha S.A. (September/2014 – March/2016), member of the Advisory Board of Telefónica América Latina (2008 – 2016) and Chairman of the board of directors of Atento Inversiones y Teleservicios (December/2008 – December/2012) and Vocal of the Comité Ejecutivo del Consejo Superior de Cámaras (2006 – 2014). Mr. Mancho holds degrees in Information and Publicity and a degree in law from the Executive Management Program of IESE (Universidad de Navarra).

 

Juan Carlos Ros Brugueras is 59 years old and serves as a member of our Board of Directors and member of our Control and Audit Committee. He is also a partner at the Law Firm Brugueras, Alcantra & García Bragado, located in Madrid, Spain (since 2013). He was an external legal consultant for matters related to Latam Telecom for KPMG Spain (May 2013 - 2016). He holds a degree in Law from the University of Barcelona (1985).

 

Sonia Julia Sulzbeck Villalobos is 57 years old and a member of our Board of Directors and our Quality and Sustainability Committee. She is a member of the board of directors of LATAM Linhas Aéreas and EcoRodovias. She also participates in the Board of Directors of CFA Society Brasil, a non-profit association that gathers around 1000 professionals that have a CFA certification (Chartered Financial Analyst) in the country. She is a founding partner of Villalobos Consultoria Ltda. (since 2009). She holds a degree in Public Administration from EAESP/FGV, from 1984, and became a master in Finance, from the same institution, in 2004. She was the first to receive the CFA certification in Latin America (1994).

 

Luiz Fernando Furlan is 74 years old and is a member of our Board of Directors and of our Nominations, Compensation and Corporate Governance Committee. He is also a member of the Quality and Sustainability Committee and the board of directors of BRF S.A. He is Chairman of the Board of LIDE – Grupo de Líderes Empresariais (Brazil). Mr. Furlan was the Chairman of the Deliberative Board of São Paulo Negócios Brazil (June 2017 – February 2020), member of the Comisión Nombramientos Retribuciones y Buen Gobierno and of the board of directors of Telefónica S.A. (until December/2019), acted as a member of the Global Ocean Commission in the USA (2013 – 2015), Chairman of the board of directors of Fundação Amazonas Sustentável “FAS” (Brazil) (2008 – 2015), institution within which he has become an honorary member; also acted as a member of the Advisory Board of AGCO Corporation in the USA (2010 – 2016). Previously he served as Minister of State at the Ministério de Desenvolvimento, Indústria e Comércio Exterior of Brazil (2003 – 2007). He holds a degree in Chemical Engineering from FEI (University of Industrial Engineering) and in Business Administration from the University of Santana – São Paulo, with extension and specialization courses in Brazil and abroad.

 

Narcís Serra is 77 years old and is a member of our Board of Directors. He is also the Vice President of the board of directors of Telefónica Chile S.A. Mr. Serra holds a doctorate in economics from the Universidad Autónoma de Barcelona and is President of Barcelona Institute for International Studies (IBEI). 

 

José María Del Rey Osorio is 69 years old and serves as a member of our Board of Directors and Chairman of our Control and Audit Committee. He is also a member of the Comision de Auditoria y Control y del Directorio of Telefónica del Perú. Mr. Del Rey was a member of the Board of Director of Telefônica del Perú (2005 – 2012); worked as an economist at Servicios de Estudios Económicos de EDES e INITEC, in the National Institute of Industry’s (INI) companies and in the management and planning of the INI’s corporation. He holds a degree in Economy and Business Administration from the Universidad Autónoma de Madrid.

 

Ana Theresa Masetti Borsari is 49 years old and serves as a member of our Board of Directors and a member of our Strategy Committee. She is also General Manager of Peugeot Automóveis do Brasil (Peugeot, Citroën e DS - Groupe PSA) (since October 2015). She was Regional Manager (Southwest of France) of Peugeot França (September 2013 – October 2015). She holds a Law degree and a Masters’ degree from Universidade de São Paulo.

 

90 

Table of Contents 

Claudia Maria Costin is 65 years old and serves as a member of our Board of Directors and a member of our Quality and Sustainability Committee. She is also a member of the Board of Trustees of Fundação Telefônica, director of the Center for Excellence and Innovation in Education Policies at Getulio Vargas Foundation, CEIPE FGV (since November 2016); columnist of the newspaper A Folha de São Paulo, writing weekly articles on education (since October 2016); professor of Public Politics at Fundação Getúlio Vargas at Rio de Janeiro (since 2013) and member of the Boards of FTD (since 2019), Escola Mais (since 2018) and Instituto Unibanco (since 2017). She was a member of the Global Commission for The Future of Work at ILOInternational Labour Organization, an agency of the United Nations (2017 – 2018); visiting professor at the School of Education at Harvard University (2016 – 2018); Global director for of Education at Banco Mundial (2014 – 2016); Secretary of Education of the city of Rio de Janeiro (2009 - 2014); member of the Board of SEAC-Sustainability External Advisory Board of Dow Chemical (2009 – 2014). She holds a degree in Public Administration, a Masters’ degree in Economy and a Doctorate in Management from Escola de Administração de Empresas de São Paulo Fundação Getúlio Vargas (EAESP/FGV).

 

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.

 

Board of Executive Officers 

 

The Board of Executive Officers consists of at least three (3) and no more than fifteen (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 

Christian Mauad Gebara Chief Executive Officer April 12, 2019
Breno Rodrigo Pacheco de Oliveira General Secretary and Legal Officer April 12, 2019
David Melcon Sanchez-Friera Chief Financial and Investor Relations Officer April 12, 2019

 

Below are brief biographies of our executive officers:

 

Breno Rodrigo Pacheco de Oliveira is 45 years old and serves as our General Secretary and Legal Officer. He is also the General Secretary and Legal Officer of Innoweb Ltda., POP Internet Ltda., Terra Networks Brasil Ltda.. and Telefônica Infraestrutura e Segurança Ltda.; Corporate Secretary of our board of directors, member and Chairman of the Deliberative Council of Visão Prev Sociedade de Previdência Complementar, Officer of SP Telecomunicações Participações Ltda., and Officer of Fibrasil Infraestrutura e Fibra Ótica S.A., TLF 01 Empreendimentos e Participalçoes Ltda., Telefônica Cloud e Tecnologia do Brasil Ltda., TLF 03 Empreendimentos e Participalçoes Ltda. and of TLF 04 Empreendimentos e Participalçoes 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 Deliberative Board of Fundação Sistel; member of the board of directors of Companhia ACT de Participações and Companhia AIX de Participações, and member of the Board of Trustees of Fundação Telefônica. Mr. Oliveira was the General Secretary and Legal Officer of Telefônica Data S.A. (until November/2018, when it was extinct due to its merge into the Company). He was General Secretary and Legal Officer of Global Village Telecom S.A. and GVT Participações S.A. (until April/2016, when these companies were extinct due to their merge into the Company); Officer of the following merged 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/2013, when these companies were extinct due to its incorporation by the Company). He was a member of the board of directors of Tectotal Tecnologia sem Complicações S.A. (until June/2016 date in which the company was sold). He holds a law degree from Universidade do Vale do Rio dos Sinos – UNISINOS, Brazil.

 

91 

Table of Contents 

David Melcon Sanchez Friera is 50 years old and serves as our Chief Financial and Investor Relations Officer (since April/2016). He is also the Chief Financial Officer of Innoweb Ltda., POP Internet Ltda., Terra Networks Brasil Ltda. and Telefônica Infraestrutura e Segurança Ltda., as well as the Officer of SP Telecomunicações Participações Ltda., Vice Chairman of the Board of Telefonica Corretora de Seguros Ltda., member of the Board of Trustees of Fundação Telefônica and member of the board of directors of Telefônica Factoring do Brasil Ltda. He was also Chief Financial Officer of Telefônica Data S.A. (until November/2018, when the company was extinct due to its incorporation by the Company). Mr. Melcon has more than 20 years of global experience in the Telecommunications industry in Latin America and Europe. He was the Transformation Officer of Telefónica S.A. (October/2014 – January/2016); Chairman of the Supervisory Board of Telefonica Slovakia and, in the same period, he was a member of the board of directors of Tesco Mobile Czech Republic (March/2013 – June/2014); Vice-Chairman of the board of directors and Chief Financial Officer of Telefonica Czech Republic (August/2012 – September/2014); member of the board of directors of Telfin Ireland Ltd. – Ireland (April/2010 – December/2012) and Financial and Control Officer of the Telefonica Group in Europe (June/2007 – July/2012). Prior to this, he started his career at Arthur Andersen. Mr. Melcon holds a degree in Economics and Business Administration from the University of Zaragoza (Spain), and a Master in Audit and Business Analysis from the University Complutense – Madrid (Spain).

 

For the biography of Mr. Christian Mauad Gebara, see “—Board of Directors” above.

 

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.

 

B.Compensation

 

For the year ended December 31, 2020, the aggregate amount of compensation paid to all our directors and executive officers was approximately R$27.8 million, of which R$17.5 million corresponded to salaries and R$10.3 million corresponded to bonuses.

 

For the year ended December 31, 2020, 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, casting 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;

 

92 

Table of Contents 

·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;

 

·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 canceled 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 of the authorized capital determined by the bylaws, therein defining the terms and conditions of such issuance;

 

·approving the issuance of commercial paper for public distribution and depositary receipts;

 

·authorizing the disposal of assets directly related to public telecommunications services;

 

·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 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 an interest in other companies on a definitive basis and the encumbrance and creation of a lien on or sale of an equity interest;

 

·authorizing the offering of ordinary nonconvertible unsecured debentures;

 

·approving the organizational structure of the company; with the possibility of assigning to the officers of the Board of Executive Officers limits to the exercise of such authority, 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) timing of the issuance, (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;

 

93 

Table of Contents 

·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.

 

One of the members of our board of directors was elected by preferred shareholders in a separate voting process, prior to the Conversion of all our preferred shares into common shares after market close on November 20, 2020 (see “Item 10. Additional Information—B. Memorandum and Articles of Association— Description of Our Bylaws—History of Share Capital—Conversion of Our Preferred Shares into Common Shares”), and the others were 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. Decisions of the statutory Fiscal Board are not binding on the company under Brazilian Corporate Law. 

 

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. 

 

The following are the current members of the Fiscal Board:

 

Members 

Alternates 

Date Appointed 

Gabriela Soares Pedercini (1) Alexandre Pedercini Issa(1) May 28, 2020
Cremênio Medola Netto Juarez Rosa da Silva May 28, 2020
Charles Edwards Allen Stael Prata Silva Filho May 28, 2020

_______________

(1)Mrs. Gabriela Soares Pedercini and Mr. Alexandre Pedercini Issa were elected by preferred shareholders on a separate vote, with no participation of the controlling shareholder, prior to the Conversion of all our preferred shares into common shares after market close on November 20, 2020 (see “Item 10. Additional Information—B. Memorandum and Articles of Association—Description of Our Bylaws—History of Share Capital—Conversion of Our Preferred Shares into Common Shares”).

 

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:

 

94 

Table of Contents 

·Control and Audit Committee;

 

·Nominations, Compensation and Corporate Governance Committee;

 

·Quality and Sustainability Committee; and

 

·Strategy Committee.

 

Control and Audit Committee 

 

Our Control and Audit Committee was created by our Board of Directors in December 2002 and is comprised of 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 and whenever called by its chair, and shall report its conclusions to the board of directors. Our Control and Audit Committee and our statutory Fiscal Board may have some similar attributes. 

 

The Control and Audit Committee, among other responsibilities that may be required by the board of directors, is responsible for, and charged with, informing and providing recommendations to the board of directors regarding the following:

 

·Submitting to the board of directors the appointment of the independent auditor as well as the replacement of such independent auditors; the Control and Audit Committee shall also: (a) recommend the compensation to be paid to the Company’s independent auditors; (b) issue opinion on the hiring of the independent auditor to render any other service to the Company; and (c) supervise the independent auditor’s activities in order to assess their independence, the quality and the adequacy of the services considering the Company’s necessities;

 

·Examining the Company’s management report and financial statements, including capital budgets, making the necessary recommendations to the board of directors;

 

·Examining the financial information prepared and disclosed regularly by the Company;

 

·Examining the report of the related parties’ transactions as established by our Related Party Transactions Policy (Política para Transações com Partes Relacionadas);

 

·Assessing the effectiveness and sufficiency of the Company’s internal controls as well as the internal and independent audit procedures, making recommendations deemed necessary to the improvement of policies, practices and procedures; the Control and Audit Committee shall also: (a) supervise the activities of the Company’s internal control departments; (b) supervise the Company’s activities related to internal audit and compliance, including complaints received by the Company’s Hotline related to the scope of its activities, opining on or due referring the complaints; and (c) assess the effectiveness and sufficiency of the risk and contingency control and management systems;

 

·Examining the management bodies’ proposals regarding modification of the share capital, issuance of debentures convertible into shares or subscription bonus, the transformation of our corporate form, merger or spin-off, making the recommendations it deems necessary to the Board of Directors;

 

·Assessing the compliance, by the Company’s Board of Executive Officers, of the recommendations made by the external and internal independent auditors, as well as inform the board of directors regarding possible conflicts between internal audit, external audit and/or the Company’s Board of Executive Officers; and

 

95 

Table of Contents 

·Preparing an annual opinion to be disclosed with the Company’s financial statements, in accordance with applicable law.

 

 The following are the current members of the Control and Audit Committee: 

 

Members 

Date Appointed 

José María Del Rey Osorio (Chairman) April 12, 2019
Julio Esteban Linares Lopes April 12, 2019
Juan Carlos Ros Brugueras April 15, 2020

 

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 shall meet two (2) times per year and whenever called by its chair. The Nominations, Compensation and Corporate Governance Committee, among other responsibilities that may be assigned by the board of directors, is charged with:

 

·Making recommendations on proposals to amend the Company’s bylaws;

 

·Examining proposals for the appointment of members of the other Committees, to be further submitted to the Board of Directors;

 

·Opining on proposals for the appointment and withdrawal of the members of the Board of Executive Officers, to be further submitted to the Board of Directors;

 

·Deciding on proposals for hiring, establishing compensation and promoting the Company’s vice-presidents and officers of levels A, B and C;

 

·Annually assessing the management’s overall compensation, including benefits of any kind and representation fees, taking into consideration their responsibilities, time spent on duties, professional capability and reputation, and the value of their services at the market;

 

·Deciding on the annual adjustment of the employees’ compensation at management level (annual program, premises and budget) and at non-management level (program, premises and budget), including collective bargaining agreement to be entered with the unions representing the employees of the Company in each category, as well as examining and approving the Company’s programs regarding the share of profits whenever any rule is changed therein; and

 

·Examining corporate governance matters submitted to it by the Board of Executive Officers, making recommendations to the Board of Directors whenever required.

 

The following individuals are the current members of the Nominations, Compensation and Corporate Governance Committee:

 

Members 

Date Appointed 

Francisco Javier de Paz Mancho (Chairman) April 12, 2019
Luiz Fernando Furlan April 12, 2019
Eduardo Navarro de Carvalho April 12, 2019

 

Quality and Sustainability Committee 

 

The Quality and Sustainability Committee, formerly know as Service Quality and Marketing Committee, until April 15, 2020, 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

 

96 

Table of Contents 

Committee shall meet two (2) times per year and whenever called by its chair. The Committee is responsible for the 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 as well as to monitor the Company’s performance in matters related to the sustainability of our business. The Quality and Sustainability Committee, among other responsibilities that may be assigned by the board of directors, is charged with:

 

·Assessing and monitoring the adequacy of the Company’s customers service as well as suggesting improvements whenever any opportunity appears;

 

·Examining, analyzing and following-up periodically the Company’s Responsible Business Plan, as well as its sustainability indexes, recommending possible actions whenever any opportunity appears

 

·Examining, analyzing and following-up periodically as to the scores for the quality indexes of the main services rendered by the Company and the quality levels of the Company’s customer services, making recommendations on possible actions whenever any opportunity appears; and

 

·Examining, analyzing and following-up periodically on the Company’s quality plans and actions:

 

The following individuals are the current members of the Quality and Sustainability Committee:

 

Members 

Date Appointed 

Antonio Carlos Valente da Silva (Chairman) April 12, 2019
Sonia Julia Sulzbeck Villalobos April 12, 2019
Claudia Maria Constin April 15, 2020

 

Strategy Committee 

 

The Strategy Committee was created on October 7, 2016 and provides assistance to our Board of Directors. The Strategy 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 shall meet two (2) times per year and whenever called by its chair. The Strategy Committee, among other responsibilities that may be required by the board of directors, is charged with informing and making recommendations to the board of directors regarding the following:

 

·Analyzing and accompanying the Company’s strategic plans; and

 

·Examining other matters of strategic interest of the Company, as submitted by the Board of Executive Officers.

 

The following individuals are the current members of the Strategy Committee: 

 

Members 

Date Appointed 

Julio Esteban Linares Lopez (Chairman) April 12, 2019
Eduardo Navarro de Carvalho April 12, 2019
Ana Theresa Masetti Borsari April 15, 2020

 

D.Employees

 

As of December 31, 2020, we had 32,759 employees, distributed in 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: 38.5% in production and operations; 35.8% in sales; 18.2% in customer care; and 7.2% in support.

 

As of December 31, 2019, we had 32,793 employees, distributed in 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: 38.5% in production and operations; 36.6% in sales; 17.9% in customer care; and 7.0% in support

 

97 

Table of Contents 

As of December 31, 2018, we had 32,638 employees, distributed in 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: 35.9% in production and operations; 38.1% in sales; 19.1% in customer care; and 6.9% in support.

 

Approximately 13% of our employees are union members, represented by unions that relate to their respective state (or the Federal District). Accordingly, we have employees represented by the unions of all 26 states plus one in the Federal District. In turn, 12 of these unions are associated with the National Federation of Telecommunications Workers (Fenattel) and the other 8 unions are associated with the Interstate Federation of Workers and Researchers in Telecommunications (Fitratelp) and 7 unions were disbanded from the Fenattel and formed a new federation called A Livre. Finally, the union of the Federal District is not affiliated with any Federation.

 

Our management considers relations with our workforce 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

 

We have offered defined benefit plans to our employees since before the privatization, which took place in 1998. Beginning in 2000, we decided to establish defined contributions plans. Those plans were administered exclusively by Fundação Sistel de Seguridade Social until 2005.

 

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.

 

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. This is the plan for new enrollments. 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 the length of service.

 

Considering the total workforce, 32% of our employees are participants in 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 shares (including ADSs representing common shares) or of our total equity share capital. We currently have three share ownership plans in place:

 

(1) Performance Share Plan (PSP) and Talent for Future Plan (TFSP)

 

The general shareholders’ meeting of Telefónica S.A. (our indirect controlling shareholder), held on June 8, 2018, approved new long-term incentive plans, Performance Share Plan (“PSP”) and Talent for Future Plan (“TFSP”), for executives of Telefónica S.A. and of other entities within the Telefónica group, including us.

 

The Plans consist of the possibility, for the executives of the Telefónica Group that are invited to participate in it, to receive a certain number of shares of Telefónica after a period of three years, through the prior assignment of a certain number of theoretical shares or units (the “Units”), which shall serve as a basis for determining the number of ordinary shares in the capital stock of Telefónica (the “Shares”) which may be delivered under the Plan as variable remuneration, depending on the achievement of the objectives established for each of the cycles in which the Plan is divided. The plans shall have a total duration of five (5) years, and it shall be divided into three (3) independent cycles (the “Cycles”), each with a measurement period of three (3) years, according to the following measurement calendar:

 

·First Cycle: from January 1, 2018 through December 31, 2020.

 

98 

Table of Contents 

·Second Cycle: from January 1, 2019 through December 31, 2021.

 

·Third Cycle: from January 1, 2020 through December 31, 2022.

 

At the end of each cycle, there is an evaluation to determine if the minimum performance conditions were met: Telefónica’s Total Shareholder Return (“TSR”) against a group of comparison and the Free Cash Flow (“FCF”) Goals.

 

The TSR is regarded as the metric for determining the generation of value for our shareholders in the medium and long term, for the purposes of the Plan, as the return on investment taking into account the cumulative change in the value of the Telefónica Share and dividends and other similar items received by the shareholder over the Cycle in question. The Weighting corresponding to this Objective shall be 50% percent of the total number of Shares to be delivered to the Participants under the PSP.

 

The FCF is established as the Plan’s metric to encourage commitment to the sustainable achievement of long-term strategic objectives. This objective shall be established and approved each year by our Board of Directors. Fifty (50) percent of the number of Shares to be delivered under the Plan shall be determined based on the FCF level generated by us in each year, comparing this with the value set in the budgets approved by our Board of Directors for each year. In this regard, the partial achievement of this objective shall be calculated annually, and the final achievement of the FCF shall be an average of the partial achievements calculated each year.

 

In order to receive Shares under the Plan, participants must maintain, for at least twelve (12) months of the cycle, an active relationship with us or any of our subsidiaries which, on the starting date of each cycle, maintain, on the delivery date, an active relationship with a participating company. In case of termination, only if it takes place once twelve (12) months have elapsed since the starting date and if it is in accordance with other PSP rules.

 

·PSP - Cycle 2018-2020: with 94 executives (including 2 executives appointed under the Bylaws) of Telefônica Brasil having the potential right to receive 740,345 shares of Telefônica S.A.

 

·PSP - Cycle 2019-2021: with 94 executives (including 3 executives appointed under the Bylaws) of Telefônica Brasil having the potential right to receive 995,237 shares of Telefônica S.A.

 

·PSP - Cycle 2020-2022: with 106 executives (including 3 executives appointed under the Bylaws) of Telefônica Brasil having the potential right to receive 601,444 shares of Telefônica S.A.

 

·TFSP - Cycle 2018-2020: with 122 executives of Telefônica Brasil having the potential right to receive 101,000 shares of Telefônica S.A.

 

·TFSP - Cycle 2019-2021: with 152 executives of Telefônica Brasil having the potential right to receive 128,000 shares of Telefônica S.A.

 

·TFSP - Cycle 2019-2021: with 170 executives of Telefônica Brasil having the potential right to receive 136,400 shares of Telefônica S.A.

 

(2) Global Employee Share Plan (“GESP”)

 

Telefónica’s Shareholders’ Meeting, held on July 8, 2018, approved an incentive for the acquisition of Telefónica’s shares by the Telefónica Group employees and its subsidiaries called Global Employee Share Plan, GESP. This program is not available to the members of the board of directors or Fiscal Board. GESP aims to instigate the shareholder’s culture and a sense of belonging among all employees.

 

The plan has a duration of two years. In the first year, the employee can invest R$108.00 to R$648.00 every month, deducted from the payroll, for 12 months. The shares are held until the end of the second year, when compensation stocks are to be delivered, i.e., for every two shares acquired by the employee (up to a limit of €840), he shall receive a free share in August 2021. The delivery relies on the beneficiary remaining in our employment and on the general conditions of the plan.

 

99 

Table of Contents 

Item 7.Major Shareholders and Related Party Transactions

 

A.Major Shareholders

 

In accordance with our bylaws, we have one class of capital stock authorized and outstanding: common shares (ações ordinárias), which have full voting rights.

 

On December 31, 2020, Telefónica S.A. owned 29.77% of our common shares, Telefónica Latinoamérica Holding, S.L. owned 24.09% of our common shares and SP Telecomunicações owned 19.67% of our common shares. Since Telefónica Latinoamérica Holding, S.L. is a wholly-owned subsidiary of Telefónica and owns 60.60% of the equity share capital of SP Telecomunicações, Telefónica has effective control over 73.58% of our outstanding common shares. Accordingly, Telefónica can control the election of our board of directors and to determine the direction of our strategic and corporate policies. None of Telefónica, Telefónica Latinoamérica Holding, S.L. or SP Telecomunicações has any special voting rights beyond those ordinarily accompanying the ownership of our common shares.

 

Telefónica S.A.’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 shares by Telefónica, SP Telecomunicações, Telefónica Latinoamérica Holding, S.L., any other shareholders known to us to beneficially own more than 5% of our common shares and our officers and directors, based on 1,688,174,171 common shares outstanding as of December 31, 2020 (excluding treasury shares). We are not aware of any other shareholder that beneficially owns more than 5% of our common shares.

 

Shareholder’s Name  Number of common shares owned  Percentage of outstanding common shares
SP Telecomunicações    332,695,590    19.67%
Telefónica S.A.    503,329,803    29.77%
Telefónica Latinoamérica Holding, S.L.    407,279,213    24.09%
All directors and executive officers as a group    35,952     

 

As of December 31, 2020, there were a total of 139 ADR holders of record and 148,936,960 ADSs outstanding, representing 148,936,960 common shares or 8.8% of outstanding common 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 28 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 a part or have been a party in the last fiscal year. 

 

100 

Table of Contents 

Telefónica S.A.

 

In 2020, there were transactions between companies regarding the Brand Fee contract, for the assignment of use of brand rights. The amounts involved totaled R$ 423 million in expenses. 

 

Telxius Cable Brasil Ltda (formerly Telefônica Internacional Wholesales Services Brasil Ltda.)

 

In 2020, there were transactions between companies related to IP transit services and international transmission infrastructure for various data circuits and connection services contracted. The amounts involved totaled R$ 314 million in expenses.

 

Telefónica International Wholesale Services, S.L.

 

In 2020, there were transactions between companies regarding Infrastructure services for international transmission for various data circuits and connection services contracted. The amounts involved totaled R$ 88 million in expenses.

 

Telxius Torres Brasil Ltda.

 

In 2020, there were transactions between companies related to sale of infrastructure assets owned by the Company, assignment of sharing contracts and subsequent assignment of rights to use infrastructu