Executive Summary / Key Takeaways

• Telefônica Brasil (Vivo) is strategically transforming from a traditional connectivity provider into a comprehensive digital service hub, leveraging its extensive mobile and fiber infrastructure to drive high-value growth and enhance customer lifetime value.
• The company consistently delivers robust financial performance, with Q2 2025 total revenue growing 7.1% year-over-year, outpacing inflation, and EBITDA expanding 8.8% with a 40.5% margin, driven by strong postpaid mobile and Fiber-to-the-Home (FTTH) expansion.
• A pivotal catalyst for future value is the migration of fixed voice services from a concession to an authorization regime, projected to unlock BRL 4.5 billion from asset sales (BRL 3 billion from copper, BRL 1.5 billion from real estate) and generate recurring cost savings by 2028.
• Vivo maintains a strong commitment to shareholder returns, reaffirming guidance to distribute at least 100% of net income for 2025 and 2026, supported by robust free cash flow generation and a low leverage ratio of 0.4x EBITDA.
• Technological leadership in 5G and FTTH, coupled with a disciplined convergence strategy (Vivo Total), provides a significant competitive moat against rivals, fostering customer loyalty and enabling cross-selling of new digital services in both B2C and B2B segments.

The Evolution of a Telecom Giant: Vivo's Strategic Transformation

Telefônica Brasil S.A., widely known by its Vivo brand, stands as Brazil's largest telecommunications operator by revenue, a position forged through a history of strategic expansion and market consolidation. Incorporated in 1998 as Telecomunicações de São Paulo S.A. - TELESP, the company's rebranding to Telefônica Brasil S.A. in October 2011, following the acquisition of Vivo, marked a pivotal shift. This foundational journey has propelled Vivo beyond mere connectivity, positioning it as a comprehensive digital service hub. Its overarching strategy is to maximize customer lifetime value by offering an integrated ecosystem of mobile, fixed, and digital solutions, underpinned by a relentless focus on network quality and operational efficiency.

The Brazilian telecom landscape is intensely competitive, with major players like TIM Participações S.A. (TIMB) and América Móvil S.A.B. de C.V. (AMX) (Claro brand), alongside smaller regional operators and the restructuring Oi S.A. (OIBR). Vivo differentiates itself through a superior combination of network quality, extensive coverage, a diversified product portfolio, and robust distribution channels. While competitors like TIMB may exhibit agility in subscriber acquisition through aggressive pricing, Vivo's strength lies in its ability to foster deeper customer loyalty through bundled services and a premium experience. Claro, with its multinational scale, presents a formidable challenge in market reach, yet Vivo's deep integration into the Brazilian market and customer-centric innovations provide a distinct advantage. Against Oi, which has faced financial instability and slower innovation, Vivo's offerings demonstrate superior integration and performance, particularly in broadband and mobile services.

Technological Edge: Powering Brazil's Digital Future

Vivo's competitive moat is significantly strengthened by its technological leadership, particularly in 5G and Fiber-to-the-Home (FTTH). The company has rapidly deployed 5G, with coverage extending to 596 cities across Brazil and reaching 64% of the population by Q2 2025. This rapid adoption, coupled with successful upselling efforts, is driving Average Revenue Per User (ARPU) upward while maintaining very low churn rates. Vivo's 5G network was recognized with the 5G Global Winner award by Opensignal for having the fastest 5G download speed in the world among large landmass countries, a tangible benefit that translates into superior customer experience and reinforces its premium market positioning.

In the fixed segment, FTTH remains a key growth engine. Vivo expanded its fiber footprint to over 30.1 million homes passed by Q2 2025, adding more than 2 million additional homes passed over the past year. The company's strategic acquisition of CDPQ's stake in FiBrasil, pending regulatory approval, will consolidate its leadership in fiber, increasing Vivo's holding to 75.01%. This move is expected to unlock significant synergies, leveraging FiBrasil's 4.6 million homes passed network, where Vivo is already the primary customer, to accelerate penetration beyond its current 16% to Vivo's 24%. These fiber investments are crucial for delivering high-speed internet and supporting the growing demand for digital services, further solidifying Vivo's competitive advantage against rivals who may have less extensive or less advanced fiber infrastructure.

Strategic Execution: Convergence and Digital Diversification

Vivo's strategy is meticulously executed across its core mobile and fixed segments, with a strong emphasis on convergence and diversification into new digital businesses. In mobile, the postpaid segment continues to set the pace, achieving 7% year-over-year growth in Q2 2025 and now comprising 67% of the total mobile customer base. This growth is fueled by successful migrations from prepaid to hybrid and pure postpaid plans, alongside the expansion of 5G access. Mobile ARPU is consistently driven upward by these initiatives and the increasing adoption of 5G services.

The "Vivo Total" convergence plan is a cornerstone of this strategy, surging over 63% in Q2 2025 and reaching 2.9 million customers. This all-in-one solution, which bundles mobile and fiber services, significantly reduces churn by 1 percentage point compared to standalone fiber offerings and enhances customer lifetime value, despite some ARPU dilution from bundled discounts. New Vivo Total plans now include partnerships with leading OTT platforms like Netflix (NFLX), Globoplay, and Disney (DIS)+, further enriching the value proposition.

Beyond core connectivity, Vivo is rapidly expanding its B2C and B2B digital services, transforming into a broader digital service hub. New businesses represented 11.2% of total revenues over the last 12 months in Q2 2025, a 1.7 percentage point increase year-over-year. For B2C customers, demand for music and video OTT subscriptions remains very strong, growing 34.5% year-over-year in Q2 2025. The Vivo Pay platform has expanded to include diverse insurance products and credit alternatives, such as FGTS anticipation, PIX, and installments. In March 2025, Vivo acquired i2GO for up to BRL 80 million to strengthen its smartphone accessories segment.

In the B2B segment, Vivo recorded its strongest year-over-year growth in recent history, up 13.3% over the last 12 months in Q2 2025. Digital B2B services, including cloud, IoT, messaging, and cybersecurity, were key contributors, growing 31.3% and now accounting for 8.2% of total revenues. The acquisition of IPNET, a Google (GOOGL) solutions integrator, in October 2024, contributed BRL 64 million in revenues in Q4 2024 and significantly bolstered Vivo's cloud offerings. Despite this growth, only 15% of Vivo's 1.7 million B2B customers currently acquire digital services, indicating substantial untapped potential, particularly among mid- to low-sized companies.

Robust Financial Performance and Capital Allocation

Vivo consistently demonstrates robust financial performance, reflecting its effective strategic execution and disciplined management. In Q2 2025, total revenue reached BRL 14.6 billion, a robust 7.2% year-over-year increase, significantly outpacing inflation. This was driven by high single-digit expansion in both mobile services and fixed revenues. EBITDA grew an impressive 8.8% year-over-year, achieving a margin of 40.5%, a 60 basis point expansion attributed to disciplined cost management and operational efficiency.

The company's capital allocation strategy prioritizes high-return investments, primarily in 5G and fiber expansion, with 76% of investments directed towards growth initiatives in the first half of 2025. This focus has led to a CapEx to revenue ratio decline of 0.7 percentage points year-over-year to 14.8% in the first half of 2025. Operating cash flow in the first half of 2025 reached BRL 7.3 billion, up 12.5% year-over-year. Net income for the first half of 2025 rose 13.5% year-over-year to BRL 2.4 billion, underscoring strong operating execution and financial discipline.

Vivo maintains a healthy liquidity position, with a net cash flow of BRL 3.9 billion at the end of June 2025, providing resilience against high interest rates. Net debt, including IFRS 16 effects, totaled BRL 10.7 billion, resulting in a low leverage ratio of 0.4x EBITDA over the last 12 months. The free cash flow yield for the last 12 months remained close to 8%, with a free cash flow margin of 17.6% year-to-date in Q2 2025.

Concession Migration: A Transformative Value Unlock

A significant catalyst for future value creation is the migration of Vivo's fixed voice service from a concession to an authorization regime. This "game changer" was formalized on April 11, 2025, with the signing of a Single Term of Authorization with ANATEL. This transition is expected to unlock substantial value, with an estimated BRL 3 billion from the sale of copper infrastructure (net of extraction costs) and BRL 1.5 billion from the sale of real estate assets (net of demobilization costs). These asset sales, along with recurring cost savings from reduced maintenance and network expenses, are projected to be realized gradually, reaching full potential by the end of 2028, with a significant portion captured in 2026 and 2027. The net income in coming quarters is expected to benefit from these asset sales. This strategic move also enables the accelerated migration of over 1 million copper-based customers to modern fiber or mobile technologies, enhancing service quality and operational efficiency.

Outlook and Shareholder Returns

Management has reaffirmed its commitment to shareholder remuneration, guiding for a distribution of at least 100% of net income for each fiscal year from 2024 to 2026. In 2024, Vivo exceeded this guidance with a payout of 105.3%. So far in 2025, the company has already paid BRL 5.2 billion to shareholders and declared an additional BRL 1.7 billion in interest on capital. A share buyback program with approximately BRL 1 billion available through February 2026 further underscores this commitment. The company's EPS is expected to grow 8.3% in 2025, significantly outpacing the industry average.

Vivo anticipates continued revenue growth above inflation, driven by its ability to cross-sell more services to its extensive customer base, segmenting offerings to meet diverse needs. Price adjustments for postpaid and hybrid plans are planned, with some already implemented in the front book (February 2025) and back book (starting April 2025). While prepaid revenue decline is primarily due to successful migration to higher-value plans, management hopes to implement price increases in this segment soon. The ongoing CapEx optimization, with investments focused on growth initiatives in 5G and fiber, is expected to maintain a positive trend in reducing capital intensity over revenues.

Key Risks and Challenges

Despite a compelling investment thesis, several risks warrant investor attention. Regulatory approvals, particularly for the FiBrasil acquisition, remain pending from CADE and ANATEL. The successful execution of the concession migration and the realization of its projected BRL 4.5 billion in asset sales and cost savings are subject to operational complexities and market conditions for copper and real estate. Intense competition in the mobile and fiber segments, including from new entrants like digital banks offering competitive mobile plans, could pressure pricing and market share. While Vivo's strategy emphasizes value and convergence, price-sensitive customers may still be swayed by aggressive promotional tactics from rivals. Furthermore, the macroeconomic environment in Brazil, including inflation and interest rate fluctuations, could impact consumer spending and operational costs.

Conclusion

Telefônica Brasil (Vivo) presents a compelling investment case, underpinned by its strategic transformation into a diversified digital service provider and its unwavering commitment to infrastructure leadership. The company's robust financial performance, characterized by consistent revenue growth above inflation, expanding EBITDA margins, and strong free cash flow generation, reflects the effectiveness of its convergence strategy and disciplined operational management. The ongoing migration from a concession to an authorization regime for fixed voice services is a significant value unlock, promising substantial asset sales and recurring cost efficiencies that will bolster future profitability and cash flow.

Vivo's technological prowess in 5G and FTTH, coupled with its "Vivo Total" convergent offering, provides a formidable competitive advantage, fostering customer loyalty and enabling the successful cross-selling of a growing portfolio of digital services. While the Brazilian telecom market remains competitive, Vivo's integrated ecosystem and focus on customer lifetime value position it favorably against rivals. With a clear commitment to shareholder remuneration and a low leverage profile offering flexibility for future growth initiatives, Vivo is well-positioned to capitalize on Brazil's accelerating digital transformation, making it an attractive prospect for discerning investors seeking long-term value in the communication services sector.