Telefônica Brasil S.A. — 2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018; filed February 21, 2019. This is an annual report, not a standalone 2018 Q4 report, and the supplied filing text does not provide separate Q4 results. Financial statements are consolidated and prepared under IFRS in Brazilian reais (R$), unless noted otherwise.
Business context
Telefônica Brasil provides mobile, fixed-line, broadband, Pay TV, wholesale and digital services across Brazil, primarily under the Vivo brand. It reported 31.9% mobile market share and 40.5% postpaid mobile share at year-end. The company emphasized higher-value postpaid plans, fiber broadband, 4G/4.5G network expansion and digital services. Telefónica S.A. controlled 94.47% of voting shares.
Key financial metrics
| Metric | 2018 | 2017 | Change / comment |
|---|---|---|---|
| Net operating revenue | R$43.46bn | R$43.21bn | +0.6% |
| Gross profit | R$22.44bn | R$22.93bn | −2.2%; gross margin approximately 51.6%, versus 53.1% |
| Operating income | R$9.46bn | R$6.63bn | +42.6%; operating margin approximately 21.8%, versus 15.3% |
| Net income | R$8.93bn | R$4.61bn | +93.7%; net margin approximately 20.5%, versus 10.7% |
| Net financial result | R$1.83bn income | R$0.90bn expense | Improved substantially, mainly due to non-recurring tax-related effects |
| Cash from operating activities | R$11.94bn | R$12.64bn | −5.5% reported; management cited R$14.4bn excluding specified non-recurring impacts |
| Cash from investing activities | R$5.68bn outflow | R$8.44bn outflow | 2018 included R$2.5bn of judicial-deposit effects; excluding specified non-recurring impacts, outflow was R$8.2bn |
| Cash from financing activities | R$6.93bn outflow | R$5.26bn outflow | Higher dividends and no new debenture issuance in 2018 |
| Capital expenditures | R$8.20bn | R$8.00bn | +2.5%; focused mainly on network investment |
| Cash and cash equivalents | R$3.38bn | R$4.05bn | Decreased by R$0.67bn |
| Total debt | R$6.14bn | R$8.46bn | Includes loans, debentures, leases, supplier financing and contingent consideration; R$1.46bn current and R$4.68bn noncurrent |
| Net debt | R$2.22bn | R$3.81bn | Company-defined measure; net debt/equity ratio 3.11%, versus 5.48% |
| Total assets / equity | R$102.56bn / R$71.61bn | R$101.38bn / R$69.46bn | Equity increased approximately 3.1% |
Current assets were R$18.36bn and current liabilities R$17.16bn at year-end. The filing says management considered liquidity adequate, but also states there were no material unused sources of liquidity. EBITDA and an explicit EBITDA margin are not clearly provided in the supplied text.
Material changes versus 2017
- Gross service revenue fell 2.2%, reflecting maturity in fixed and mobile voice, prepaid and DTH services; stronger postpaid and FTTH performance partly offset the decline. Goods revenue rose 26.9% on handset sales.
- Net revenue increased modestly, while cost of sales rose 3.7%, including higher handset costs, depreciation and network site rental costs. Selling expenses fell 2.3%, with management citing digitalization and automation efficiencies.
- Reported operating and net income rose sharply, but results included significant, non-recurring judicial tax-credit effects described below.
- Capital expenditure increased as FTTH and 4.5G coverage expanded. Network investment represented 84% of reported capex; the company said it reached 30 new FTTH cities and 1,000 cities with 4.5G coverage during 2018.
- Debt declined, while cash dividends and interest on equity paid increased. The company merged wholly owned subsidiary TData into Telefônica Brasil effective December 1, 2018.
Outlook, unusual items and risks
- Unusual tax-related gains: A favorable Superior Court of Justice decision allowed exclusion of ICMS from the PIS/COFINS tax base. The filing reports R$3.39bn in related other operating income and R$2.93bn in related financial income, alongside R$4.92bn of PIS/COFINS credits recognized as recoverable. The tax authority initiated a review of the credits, and the company said it was pursuing measures to support their use. These effects materially boosted 2018 earnings and should not be assumed recurring.
- Cash flow effects: The release or conversion of judicial deposits, including FISTEL and EBC-related amounts, affected reported operating and investing cash flows. Management’s adjusted cash flow figures exclude specified non-recurring effects.
- Guidance and strategy: The filing provides no quantified 2019 earnings or revenue guidance. Management expects to maintain investment in customer experience, infrastructure modernization, automation and digital channels. It sees data and digital services as key longer-term growth drivers and is preparing for opportunities such as 5G.
- Leases and comparability: IFRS 16 adoption in 2019 was expected to add R$8.4–R$9.2bn of right-of-use assets and corresponding lease liabilities. It will change reported depreciation, interest expense and cash-flow classification.
- Brazil and currency exposure: The real depreciated 17.1% against the U.S. dollar in 2018. Nearly all revenue is generated in reais, while some operating costs and investment commitments are foreign-currency linked; the company said all foreign-currency financial debt was hedged.
- Regulatory and competitive risks: ANATEL regulates tariffs, interconnection, licenses, service quality and coverage obligations. Termination-rate changes can reduce revenue, while competition, network investment requirements and concession revisions may affect margins and capital needs. The fixed-line concession runs through December 31, 2025; the status of regulatory reform remained uncertain.
- Litigation and contingencies: At year-end, probable provisions totaled R$6.26bn. Possible-loss tax contingencies were R$36.10bn and possible regulatory claims R$6.12bn; these amounts are not recorded as provisions. A disputed ANATEL fine was approximately R$482m including updates and interest. The proposed conduct-adjustment agreement (TAC), involving fines of about R$3bn before monetary correction, was not signed and the fines returned to enforcement.
- Anti-corruption investigation: The company reported an ongoing internal investigation, part of a broader Telefónica Group investigation, into possible violations of anti-corruption laws. It was in contact with authorities and said the scope, duration and outcome could not be predicted.
- Dividends and governance: The company declared R$4.55bn of 2018 interest on equity, with payment scheduled by year-end 2019, and proposed an additional R$2.47bn distribution plus a R$1.70bn modernization and expansion reserve, subject to shareholder approval. Preferred shares generally lack voting rights but receive dividends 10% higher than common shares.
Important facts for investors to verify
- Separate the recurring operating trend from the one-time ICMS-related gains; verify tax-credit collection, tax-authority review and any further court outcomes.
- Reconcile reported cash flow with the R$2.5bn judicial-deposit effects and confirm the company’s definition of adjusted operating cash flow and net debt.
- Assess the effect of IFRS 16’s expected R$8.4–R$9.2bn lease liability on leverage, earnings presentation and cash flows.
- Track possible-loss litigation, the disputed ANATEL fine, the failed TAC negotiations and the progress and outcome of the anti-corruption investigation.
- Confirm shareholder approval and payment timing for proposed additional dividends, and monitor 2019 network capex and regulatory obligations.
The auditor issued an unqualified opinion on the IFRS financial statements and concluded that internal control over financial reporting was effective as of December 31, 2018.