Telefônica Brasil S.A. — FY 2019 Form 20-F
Reporting period: Year ended December 31, 2019. Filed February 20, 2020. This is an annual report, not a standalone fourth-quarter filing. Financial statements are audited and prepared under IFRS as issued by the IASB; amounts below are in Brazilian reais unless stated otherwise.
Business context
Telefônica Brasil provides mobile, fixed-line, broadband, pay-TV, wholesale and digital services under the Vivo brand. It reported 32.9% mobile market share and 39.4% postpaid share at year-end. Management emphasized higher-value postpaid and fiber growth, network investment, digital services and operating efficiency.
Key financial metrics
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net operating revenue | R$44.27bn | R$43.46bn | +1.9% |
| Gross profit | R$22.11bn | R$22.44bn | -1.5% |
| Operating income | R$7.21bn | R$9.46bn | -23.7% |
| Net income | R$5.00bn | R$8.93bn | -44.0% |
| Operating cash flow | R$17.72bn | R$11.94bn | +48.4% |
| Net cash used in investing | R$7.93bn | R$5.68bn | Higher outflow |
| Capital expenditures | R$8.84bn | R$8.20bn | +7.9% |
Gross margin was approximately 49.9% versus 51.6%; operating margin was 16.3% versus 21.8%; net margin was 11.3% versus 20.5%. Cost of sales rose 5.4%, while net service revenue was nearly flat; handset and accessory revenue increased, lifting sales-of-goods revenue. These margin comparisons are affected by IFRS 16 adoption in 2019.
Cash and cash equivalents were R$3.39bn at year-end. Total debt, including lease liabilities and contingent consideration, was R$13.82bn; the filing reports net debt of R$9.92bn and a net-debt-to-equity ratio of 14.08%, versus 3.11% in 2018. Current assets of R$18.64bn exceeded current liabilities of R$17.73bn. The company said it had no material unused sources of liquidity and believed its resources were adequate for current requirements.
Property, plant and equipment was R$42.85bn, up from R$34.12bn; this increase includes IFRS 16 right-of-use assets. Total assets were R$108.29bn and shareholders’ equity was R$70.46bn.
Material changes versus the prior year
- Revenue growth was modest: stronger postpaid, data, FTTH and handset sales offset declines in voice, prepaid and DTH services. ANATEL-mandated termination-rate reductions weighed on voice and interconnection revenue.
- Reported profit fell sharply in part because 2018 included substantial one-time benefits from court decisions allowing ICMS exclusion from the PIS/COFINS tax base: R$3.39bn in other operating income and about R$2.93bn in financial income. Those benefits did not recur comparably in 2019.
- IFRS 16 was adopted on January 1, 2019 using the modified retrospective approach, without restating prior periods. The company initially recognized R$8.62bn of right-of-use assets and lease liabilities. The change shifted lease costs from rent to depreciation and interest, affecting reported expenses, debt and comparability.
- Capital expenditure rose to R$8.84bn, with 82% directed to network projects, particularly fiber and 4.5G expansion.
- Financing cash outflow increased to R$9.78bn, reflecting higher dividend and interest-on-equity payments and debt repayments. Dividends and interest on equity paid during 2019 totaled R$6.18bn.
Outlook, commentary and risks
No quantified 2020 revenue, earnings or margin guidance is provided in the supplied filing text. Management expected to fund 2020 capital requirements primarily from operating cash flow and described continued investment in FTTH, 4.5G, network modernization and digital services. It identified 5G and IoT as longer-term opportunities.
- Regulatory transition: Brazil’s October 2019 telecommunications law allows fixed-line concessionaires to migrate to an authorization regime, subject to further rulemaking and investment commitments. The company’s São Paulo fixed-line concession runs through 2025; the value and treatment of reversible assets and migration terms remain relevant uncertainties.
- Spectrum and network obligations: Some spectrum licenses approach renewal dates, including 850 MHz authorizations beginning to expire in 2020. ANATEL had not completed verification of certain 4G coverage commitments.
- Competition and execution: Intense pricing and investment competition, fiber rollout by rivals, and customer demand for higher data capacity could pressure margins or require sustained capital spending.
- Brazil and currency exposure: Revenue is overwhelmingly in reais, while approximately 10.2% of operating costs and expenses are payable or linked to U.S. dollars or euros. The real depreciated 4.0% against the U.S. dollar in 2019; foreign-currency debt was nil at year-end, and the company uses derivatives to manage exposure.
- Contingencies: The filing reports R$26.10bn of possible-loss tax proceedings and R$5.65bn of possible-loss regulatory proceedings, as well as significant civil and labor matters. These are not all recorded as provisions; outcomes and amounts remain uncertain.
- Unusual legal item: The company settled an SEC FCPA proceeding in May 2019 concerning tickets and hospitality for the 2013 Confederations Cup and 2014 World Cup, paying a US$4.125m civil penalty without admitting or denying the SEC’s findings.
- Other risks: Cybersecurity, data-protection-law implementation, supplier and contractor exposure, and Brazilian political and economic conditions are identified as material risks.
Management reported effective disclosure controls and internal control over financial reporting. PwC gave an unqualified opinion on the IFRS financial statements and internal controls, while highlighting IFRS 16 adoption, tax and regulatory litigation, and unbilled-revenue estimates as critical audit matters.
Most important facts for investors to verify
- Separate the 2018 court-related tax and financial benefits from recurring operating performance; confirm the size and timing of any remaining tax credits and offsets.
- Assess IFRS 16’s effect on 2019 operating costs, depreciation, interest, debt and cash-flow presentation; prior-year figures were not restated.
- Review debt maturities, lease obligations and interest-rate exposure: reported debt includes R$9.19bn of lease liabilities, and much of the reais-denominated debt is linked to CDI.
- Track resolution of the new telecommunications law, concession migration rules, reversible assets and spectrum renewals or coverage verification.
- Evaluate the classification and potential cash impact of tax, regulatory, civil and labor contingencies, particularly the large possible-loss tax exposure.
- Confirm shareholder approval and payment timing for proposed additional 2019 dividends of approximately R$2.20bn; the filing says these required approval at the 2020 shareholders’ meeting.