Oi S A : 3Q20 Earnings Conference Call Transcript

Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

Operator

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Oi S.A.'s Conference Call to discuss the 3Q20 results.

This event is also being broadcast simultaneously on the Internet via webcast, which can be accessed on the Company's IR website, www.oi.com.br/ri, together with the respective presentation.

We would like to inform that during the Company's presentation, all participants will be able to listen to the call. We will then begin the Q&A session when further instructions will be given. In case you need any assistance during the Company, please request the operator's help by pressing *0.

We also would like to inform you that this conference will be conducted in English by the management of the Company and the conference call in Portuguese will be conducted via simultaneous translation.

This conference call may contain some forward-looking statements that are subject to known and unknown risks and uncertainties that could cause such expectations to not materialize or differ materially from those in the forward-looking statements. Such statements speak only as of the date they are made, and the Company is under no obligation to update them in light of the new information or further developments.

We will now turn the conference over to Mr. Rodrigo Abreu, CEO. Please, Mr. Rodrigo, you may proceed.

Rodrigo Abreu:

Thank you. Good morning, everybody. Welcome to our 3Q call. And as usual, it is always good to have you with us and talk about the progress on the execution of our transformation plan. 3Q20, as you know, was the first full quarter under the effects of the COVID-19 pandemic.

So it is important to put that into context when looking at the results. But you also see that, in our view, the Company did a pretty good job in managing it. And at the end of 3Q, not only we were going to talk about the results, but also about a very significant event that happened to our transformation, which was the approval of our judicial recovery plan amendment at Oi's second general creditors meeting. This approval was already validated by the judicial recovery court at the very beginning of 4Q, and this allows us to keep executing our transformation journey and its key movements.

Let us first take a look at some of the highlights of the quarter, which, as usual, will be detailed in the upcoming charts. Turning to page 3. As we can see in 3Q, despite the pandemic, the Company continued to deliver, we believe, on both the operational and the transformational front. And the approval of the plan amendment was an addition to that, paving the way to the sustainability that the plan looks for.

Starting with the operational results on the top left corner, we can see that fiber had yet another stellar quarter. We had 1.75 million FTTH customers reached with 7.9

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

million homes passed with fiber, and this continues to maintain the very fast pace of deployment that we have been showing consistently for the several last quarters.

We reached an average of almost 150,000 new customers per month on the quarter with an average of almost 400,000 new homes passed per month. And this obviously puts the Company on its track in terms of the strategy for fiber. Still on the operational front, talking about mobile in the left low corner, we can see that mobile, despite the pandemic, actually had a pretty good recovery.

And on a sequential basis, we had a 2.1% growth in postpaid and 8.2% growth in prepaid revenue despite the fact that overall, there was a little impact on year-over- year growth for the mobile segment. The postpaid showed positive growth. The prepaid showed negative growth.

But on average, the quarter showed very good recovery considering the pandemic situation. This all led to very good results in revenue, and we showed 3.5% of sequential revenue growth, which, obviously, is a very positive feat considering the impact of the pandemic on mobile revenues.

We can see that this happened with a very good contribution from pretty much all segments, but we would like to highlight the residential segment, which consistently had been a source of concern, given the decline of copper revenues, but we can see that, thanks to the very good performance of fiber we are now on the positive route on the residential segment as well.

All of that actually was complemented by a very good work on the cost side. We continue the progress of our simplification and efficiency efforts. And all of that led to almost 10% of OPEX reductions year-over-year, which led to a positive EBITDA growth year-over-year of 2.4%.

In terms of cash, obviously, this is one of our key metrics, and the cash management of the Company actually did very well during the quarter, and we ended 3Q with R$5.7 billion in cash, missing some of the concerns in terms of the cash burn that had been shown in some of the previous quarters.

And finally, on the transformational side, the GCM approval lets the unlocking of many of our M&A processes, and we now have defined dates for the judicial processes that will conclude the operations for the sale of towers, data centers and our mobile operation.

On the infrastructure company side, we continue to have our M&A process firmly in course, and we would expect to actually have the first results of that by the end of this year, beginning of next year.

So next, turning to page 4. Let us look at some of the details, starting with fiber. On fiber, due to the scale and speed of our fiber deployments, Oi can once again content for the overall broadband market leadership with a very strong competitive position. We always said that this was something that the Company wanted to achieve by resuming its position on broadband due to the fiber operations, and it is happening.

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

As we can see, we continue to outrun all of our large peers in terms of the fiber deployments. And if we look at what happened during the last 12 months, we have now surpassed the combination of our three largest competitors by almost 17%.

This consolidates our lead in the overall ultra-broadband market for all technologies. And if we look at the net adds for ultrabroadband, which is above 34 Mbps, in the 3Q20, we can see that we beat the second player by almost 20%. And if we look for the results in September, we can see that also we were the best performance in all of the broadband technologies and speeds for the first time in a very, very long time.

Obviously, when we look at the scenario, the ISPs continue to do very well. But we would like to put that into perspective, in terms of the sheer number of customers that we have been adding on fiber on a monthly basis and obviously looking at our last results of 3Q. When we look at the top 5 ISP fiber customer base, we can see that the largest player has a little bit over 500,000 subscribers. And the top 3 player is already on the range of slightly over 300,000 subscribers.

Putting that into perspective, Oi, during the quarter, added top three ISP just by its fiber subscribers. So we continue to be very competitive not only against the large operators, but also competing with small players whenever we are present. All of that led to a market share increase in ultrabroadband, and by the way, we were the only company that actually continues to increase and push market share consistently quarter after quarter.

So next, turning to page 5. Let us look at how this performance was translated into revenues for fiber. Fueled by continued efficiency and the rapidly expanding base coupled with the introduction of new plants, our fiber revenues have grown almost 5x year-over-year. We can see that the number of homes passed has already reached a very large number of close to 8 million homes passed, and we expect to close the year with around 9 million homes passed.

In terms of homes connected, we are also already very, very close to 2 million subscribers at this point in 4Q, and we closed 3Q with almost 1.8 million subscribers. Looking at that, we can highlight the take-up rate as well during 3Q, which was above 22%, getting very, very close to the 25% plan that we had for 2022.

So we are really accelerating the take-ups and solidly on track to executing the plan that we said we would execute on the fiber deployments. When we combine that with the new plans that were launched during the quarter, not only the 400-megabits-per- second plan, but also the 500-megabits-per-second plan, we can see that our base starts to shift slightly to higher speed plans.

So during the 3Q, we already had close to 5% of our fiber customer base moving to the higher-end plans. And this led also to an increase in our fiber ARPUs of over 3%. We are already reaching during 3Q, an ARPU of close to R$90, R$88 to be more precise. All of that led to very positive results in the revenue, and we reached over R$400 million in revenues.

And highlighting as well that B2B on the small and medium enterprises started to gain some traction, and we have a firm and solid plan to continue expanding this

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

expansion. All of that was actually instrumental to reach an inflection point in our residential revenues, as we can see on the next slide.

On page 6, we can see that as we said in our plan, fiber would be the way to replace the old legacy copper revenues, and this is already happening. We see that fiber is poised to become the largest component of our residential revenues, helping the segment return to sequential growth for the first time in 11 quarters. So it is a long time after this happened, but now that it happened, it is consistently happening, and we see a no-return path for this inflection point.

Starting with the net adds in terms of number of residential RGUs on the left-hand side, we can see that in 3Q, for the first time, we now have a positive net add for residential RGUs.

And when we look at the broadband customer mix, we can also see that we increased almost 2 points compared to the last quarter and almost 30 points compared to the 3Q19. And we have fiber representing already virtually 40% of our customer base mix.

In terms of revenues, we can also see that the revenue mix has been improving and fiber is already the #2 components, poised to become #1 very soon. But we also can see that the fiber revenues have already surpassed all of the copper broadband revenues, and it is very close to reaching the copper voice revenues.

When we look at the declines and growth in all of the revenue components, obviously, we continue to experience the decline in the legacy revenues at the clip of minus 31% on copper, minus 35% on copper voice and minus 35% on copper broadband. And also, with a slightly less inclined curve on DTH of minus 14, but the fiber revenues grew 491%. And this led, on the 3Q, the residential revenue to grow sequentially 2.7% to R$1.625 billion.

Obviously, this is very positive, and it is all due to the acceleration of fiber that continues. And as we can see, our annualized revenues at the end of 3Q for fiber alone are already almost R$1.7 billion. Obviously, this shows very good operational results. They are coming, and the fiber strategy is working.

On the next page, on page 7, we can also look at the details of mobile. And in mobile, as you know, we had the segment that was hardest hit from the pandemic. But we can see also that recovery started to occur here in 3Q. Our mobile revenues, they resumed sequential growth in the quarter, with a great resiliency of postpaid results, both on the quarter-over-quarter and year-over-year metrics, while prepaid obviously suffered a little bit more initially, but experienced a fast recovery from the early days of the pandemic. Oi continues to charge ahead on mobile, not only on the results but also on the innovation, and we did our 5G pilot launch in Brazil.

On the revenues, we can see that we have a 4.8% sequential revenue growth, and this was due to growth both in postpaid and prepaid. When we look at the details year- over-year, postpaid continued to show a very good performance of almost 4% and prepaid was hard hit with 9.6 negative growth. But again, starting to show the signs of recovery and already growing sequentially.

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

On postpaid, it is also worth highlighting that our customer base grew almost 10% year-over-year. And on prepaid, we can see AV recovery in the top-ups. The top-ups have gone down from 1Q20 to the 2Q20, but they started to go up again on the 3Q20, and we have a pretty good number considering the beginning of the year.

Next, let us look at B2B and wholesale on page 8. Both segments also felt the hit of pandemic on traffic. But we can see that B2B also is starting to recover from the early impact, especially on traffic, showing sequential revenue growth, in particular, with the help of IT services. While the wholesale revenues, they also improved to stability with the recovery of nonregulated revenues, and, as we showed, good prospects with increased sales to ISPs.

On the B2B side, we can see that we had stability on the corporate segment and obviously growth on a sequential basis. And on the small and medium customers, we reached again stability from the second to the 3Q20, but we are also working on a recovery plan that will benefit from our FTTH deployments also for the segment.

In terms of IT revenue evolution, the highlight is that we are already reaching almost R$190 million in the quarter. It is a 50% compound growth since the launch of Oi S.A., which points to the correct direction of our strategy in terms of corporate revenues, and obviously, having IT increasing quarter after quarter as a percentage of our revenue mix.

On the wholesale front, we also had a growth considering the results from last year to this year. We faced some challenges during the beginning of the pandemic, but the numbers, as a whole, they stabilized. And we can see that the unregulated revenue also started to increase again, while the low-speed legacy regulated revenue, in particular, due to the impacts of traffic, had a slight decline. But on the wholesale front, it is also worth highlighting that our net sales to ISPs have increased dramatically.

And when we look at the results compared with last year, it is almost a 400% increase, showing that this is a very promising segment that we believe will be one of basis of the growth in infrastructure for the future to come. So moving on to page 9. Let us look at our cost efforts. And here, the focus on simplification and efficiency continues to pay off, leading to progress on digital transformation, further OPEX reductions and a return to annual EBITDA growth.

On the OPEX side, as we already highlighted at the beginning of the presentation, we had an almost 10% reduction virtually in all cost components. And how did we do that? We did that through a combination of several different initiatives, starting with digital first. And in this case, the pandemic actually helps to move things to digital faster, both internally and externally. And this led to numbers such as 85% of the interaction of our clients through digital channels, leading to a great reduction in terms of the human contact, which, obviously, is more costly components of customer care.

We also had close to R$140 million in savings with front office and back office optimization due to robotization and automation of processes, and our customer care operation continues to deliver very good results on cost reductions. This was aided by innovative solutions such as the increase of the use of our digital assistance and of our artificial intelligence and also a very good increase in the usage of our self-care solutions such as Minha Oi.

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

On the structure and processes front, we also had some very important progresses during the quarter. And in addition to that, right after the end of the quarter, we announced an incentive program for our workforce reduction that will lead to an annualized savings of over R$200 million next year.

On the operational front, we also focused heavily on efficiency, in particular, on the legacy costs, which led to OPEX reduction by virtually shutting down all of the legacy portfolio sales, reducing the number of legacy stations and migrating, whenever possible, from copper networks to fiber. All of that led to a growth in routine EBITDA of 2.4%, and it is important to notice that we also increased the EBITDA percentage.

Next, talking about CAPEX on page 10. We can see that the CAPEX strategy was a continuation of the things that have already started to occur since the launch of our strategic plan. And the allocation profile of the CAPEX continues to evolve in full alignment with the Company's fiber strategy, obviously increasing the allocation to FTTH and significantly reducing the investment in legacy.

As we can see on the FTTH compared to last year, we had a 20-point increase from 3Q19 to 3Q20 in the allocation to fiber. And a 13 points reduction on the legacy, in particular, the copper investments. Obviously, this is important, aligned with our strategy to center the activities of the Company around the core aspects of fiber. But despite the CAPEX driven, our cash management was really tight, as we can see on page 11.

On page 11, we demonstrate that we had a strong commitment to financial discipline, and this allowed the Company to control the cash consumption, obviously with the approval of the plan amendment, helping to ensure that the funding option is necessary to deliver the execution of the transformation plan are now in sight, both with the execution of our M&A processes, but also with the reduction and deleveraging of the Company, considering not only the repayment of debt, but the restructuring of part of it.

On the cash flow side, we ended the quarter with close to R$5.7 billion in cash after having started it with just slightly over R$6 billion. So a cash consumption overall of less than R$400 million and considering the investment period that the Company is going through to fund our fiber expansion, this is a very positive result. This was helped by the increase in routine EBITDA. And we also had one extraordinary effect in the quarter, which is the anticipation of the Fistel payments, the surplus of Fistel which helped us increase the cash by slightly over R$400 million.

Obviously, we also continue to count on the noncore effects; and given the approval of the GCM, the noncore effects going forward will continue to occur, coupled with the sale of some of our core assets. And this helped the Company to bring in close to R$200 million during the quarter.

On the debt, we see an increase to R$21.2 billion of net debt and this was an effect primarily of the increases in interest, FX variation and the fair value amortization increase due to the progression of the period of the debt. Obviously, we see all of that under the lights of the approval of our judicial recovery amendment.

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

And obviously, the sale of the UPI will help us address a key concern of the Company, which is that the funding of, not only the investments for the time to come, but also to the reduction of the debt.

And all of the projects continue working very well and progressing very well, towers, data centers, mobile, the infrastructure company and also the initial phases of our efforts on TV.

All of that will leads to adapt to prepayments and deleveraging of the Company, both by repaying bridge loans and BNDES and by repaying local banks and ECAs already with the restructuring of 55% announced and approved during the GCM. In addition to that, we also have added in the plan, funding optionalities to do a funding transition during this period while we complete all of our operations by resorting to some pre- approved options in our plan to fund the transformation journey.

This has components such as a potential bridge from the UPI mobile sale in an amount of up to R$5 billion, 2 other lines of R$2 billion each and the flexibility for additional funds guaranteed by the structuring of the InfraCo model that we have put together, which will allow it if they required to be releveraged without any impact on the plan. So next, in order to do all of that, how are we tracking our transformation plans.

And on page 12, you will be able to verify that we are having that with a very structured and disciplined approach. To ensure the successful transition of the model, the Company is carrying out an integrated execution of 15 transformation programs, covering virtually all of the aspects of the change that the Company is going through.

Starting with all of the M&A processes, then looking at the creation of all of the structures that we will represent the future of the Company in terms of the InfraCo and the transformation of the new Oi and the creation of our so-called client company, all the way to the efforts of the support areas in looking at digital transformation, transforming our organization and obviously tapping very firmly and very strongly on the regulatory agenda.

Finally, going to all of the cost and cash initiatives such as a drastic cost-out program in all areas of the Company, a deleveraging of our legacy costs as we have announced several times before, a very deep review in our procurement processes and our actions to allow for short-term financing during this transition.

All of that is obviously complemented by the very, very close follow-up of the business execution management with the CMO approach, which is the transformation management office approach, that follows all of those initiatives with a great level of detail. So as we can see, we have lots of work for 2021.

And on slide #13, we can see what is the expected timeline that points to a complete transition of the model by the end of 2021. As we have highlighted already, during September, October, we had the approval of our plan amendment in our general creditors meeting and the confirmation by the judicial court of the plan approval. At the end of November, we expect to conclude the competitive bidding processes for both the UPI towers and the UPI data center.

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

In mid-December, we also had an announcement of the date for the competitive bidding process for the UPI mobile, and then we expect the closing with cashing of both towers and data centers.

And starting next year, we will have the InfraCo and TV Co, UPI auctions and finally leading to the closing of the large processes during 3Q and 4Q. And all going according to plan, we already have a set date for the end of the judicial recovery, which is by October '21.

So looking at all of that, what to expect in terms of where are we going by the end of next year? And on page 14, we can see the Company has and is executing on a very clear vision. At the end of the transformation process, or we will have 2 very strong pillars with clear and distinctive value propositions.

On one end, the new Oi, which will be an integrated company with technology and digital services platforms that will help people and companies transform the lives and businesses. And we are calling this client's company, a digital experience company. It not only will be a customer-centric company, but will leverage on a very, very strong customer brands, and this can be shown in the launch of several new initiatives by this quarter and last quarter, such as the launch of the Oi place marketplace for connectivity services and products, by the launch of Oi Expert, which is our help desk service to all of our customer base, which is already gaining a lot of traction.

But the continued acceleration of Oi Play which is our content play in terms of aggregating streaming services by our points program, which has been completely renewed by the use of JOICE, by the use of our self-help care tools, and obviously, by the launch of several new digital services to come. The possibilities are endless, and we can see that not only we will do that to the customer side, but also to the corporate side with the continued evolution of Oi solutions.

On the other hand, we will have the InfraCo, which, without any question, we will be the largest telecommunications infrastructure company in the country, massifying optical fiber, enabling the very rapid expansion of broadband, not only for the new Oi, but also for the entire country, expanding and enabling the 5G services through the use of our very capilar (29:22)fiber and also enabling business services across the country.

And we see that the InfraCo already has a mantra, which is one infrastructure, multiple networks and all of the futures for the operators in the country. So the largest neutral network player, enabling all types of connectivity services based on our extensive fiber network.

So in closing, on page 15, we can see that we continue to successfully stabilize and improve our operations. We have already redefined our strategic model, and we are delivering a very strong acceleration of our fiber optics plan. The approval of our judicial recovery plan amendment in September was a firm validation of our ambitious model to accelerate growth. It will enable the creation of the largest infrastructure company in Brazil, and we will bring back Oi to the long-term sustainability that we all have been looking for.

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

The structural separation model we will allow for conciliating both strong growth and financial stability, both for the infrastructure company and for Oi S.A. And the plan amendment also allows for a significant injection of resources into the Company through the sale of the UPIs, helping secure both investments for the long run and a critical reduction in our company debt.

And this transformation will be relentlessly pursued through the integrated execution programs that we showed you and that we are executing on a daily basis. And having said that, we highlight once again that this management team and the Board of Directors continue fully committed to executing this new strategic model with rigor and speeds. And not only we have this commitment, but we also have our full confidence on the successful execution of our plan.

So in general, those were the highlights we would like to present for 3Q. And we believe that we will move on now to the Q&A section.

Fred Mendes, Bradesco BBI:

Good morning, everyone, and thanks for the call. I have two questions here, more for the FTTH. The first one, when I compare your performance on the FTTH with the second largest competitor, definitely a really strong potential. So I just want to know, Rodrigo, here, why are you seeing the main competitive advantage that you are seeing right now? And if there is any specific region where you are performing better, I think the main goal is to understand how sustainable is this, let's say, 150,000 homes connected per month, for how long we can see that and if there is no proper improvement. This will be the first one.

And then the second one on the same line, you already reached the take-up rate of something like 22%. I guess the target for the mid- to long-term is close to 25%. So I am just wondering if there is room to revise this long-term target or if you prefer to be conservative at this point.

Rodrigo Abreu:

Thank you, Fred, for the questions. And while starting with the first one, we obviously have been having a very strong performance, and we believe that this is across the board, Fred. It is not specific in one region or another. It is in the entire country. And obviously, what we have been doing is we have been doing a deployment that is based on a very, very fine grain approach and a selection of targets that we have done a while ago.

Obviously, this points to a large demand base potential that we have seen in the entire country. As we have highlighted a few times before, we believe that this overall number of viable homes for fiber broadband in Brazil is above 30 million. It is actually closer to 40 million, and that is the reason why we have, in our plan amendment, increased our targets for the infrastructure company to cover over 30 million homes.

And so you can say that we are just starting because in reality, we are still less than 1/3 of the way. And when we look at how can we do that, what is the main competitive advantage. The product to begin with, is a very good competitive advantage. We are

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

competing with an existing customer base where people do not have fiber yet. That is based on FTTC or is based on coax.

And it is unquestionable. When you look at the quality difference in terms of stability, in terms of performance that we have a superior product. Obviously, when we compete with local ISPs and when we compete with fiber directly, we can also point out to our main competitive advantage being in the very strong performance of our overall core network. Remember that the fiber product is not only what goes into the customer home, but it is also how this whole traffic is managed and carried out in the core backbone and the core backhauls.

Obviously, we rely, we believe, on the strongest backbone and backhaul infrastructure in the entire country. And we do not have many of the limitations in terms of traffic capacity that many or even most of those local players have. And this has allowed us to maintain a very consistent performance even during times of great stress to network traffic with increases close to 40%, 50%.

So it is a combination of competitive advantages on the technical side. But then I can still point to yet 2 additional components, and we highlighted those before already. One of them is the very strong sales channel that the Company developed. Oi was the only company to actually develop sales channels across the country, in the entire country.

As you know, is the only company that covers almost virtually all of the country's municipalities. And this, even though this is not being used to sell copper anymore and we highlighted that, obviously, the knowledge of the local channels and the knowledge of how to work in the entire country has helped us tremendously. And finally, I cannot go without mentioning the deployment machine that we have. We do have a deployment machine that is based on a very steep learning curve that was done since the beginning of the project, and that also relies on a company that we control. It relies on state hedges.

So we control our field team. We control the quality of our field team. We control the speed of our field team. We can very rapidly redeploy our field team to do work whenever is needed and more productive for us. And as such, it is really a very good combination of a lot of factors.

There is no silver bullet here in terms of competitive advantage. And we believe that this is good. Because in reality, it makes our growth not super easy to replicate. It is not just throwing money around. It is actually a combination of a lot of things that have developed over time.

In terms of the take-up rate, just going back to what I pointed out in the response to your first question. Obviously, we had planned when we launched the plan back in the middle of 2019. We have planned for reaching 25% take-up by 2022, so 3 years after the launch of the plan.

And we will certainly get there way sooner. And when we redone the plan with the plan amendments and the separation, the structural separation with the increase in investments on the infrastructure company, we saw that, yes, this number can be

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

increased. It can be increased for the infrastructure company. And by the same token, it can be increased at Oi.

So we are looking at the number which is already higher than this. And I would say that it can approach the 30% take-up rate. And when we look at the numbers for both companies, the 30% take-up rate actually leads to a plan a few years down the road on the infrastructure company to have at least 10 million homes connected as part of its plan.

And obviously, we believe that the vast majority, over 70% of those will come from Oi itself. But we can also benefit, especially in the areas where Oi directly does not operate from the growth in ISPs.

As you saw, we highlighted in one of the charts that our sales to ISPs have increased tremendously. And we could benefit not only from providing backbone and backhaul, but also by doing partnerships with them and selling the complete FTTH approach, including the homes connected.

Fred Mendes:

Perfect, Rodrigo. Very clear. Thank you.

Marcelo Santos, JPMorgan:

Good morning. Thanks for taking my question. The first would be on fiber ARPU, we saw a good improvement. Do you see room to see further improvements as you continue to migrate clients to faster speeds, and also continue to add more products, RGUs per subscriber?

And linked to the first question is regarding DTH, which saw sequential growth. So I kept wondering when you are adding these fiber clients, are you initially adding them with DTH? And if that is the case, is there room to migrate into IPTV later and boosting up the ARPU? That is my question. Thank you very much.

Rodrigo Abreu:

Thank you, Marcelo. On the fiber ARPU, yes, we obviously believe that there is space to grow, and this is a combination of, obviously, having a stable customer base that keeps increasing.

And if you recall, we have been publishing the fiber ARPU and mentioning that while we continue growing at the very fast speeds, the fiber ARPU also will be increasing just by the sheer effect of the increase in the customer base and the fact that as we add another 100,000, 150,000 subs a month, this will be added over a base that is getting bigger every day.

So the impacts of dilution, will already play a part in increasing ARPU and stabilizing ARPU around higher numbers. But obviously, when we look at the speeds, and we show that, not only we have reached an interesting number already with a product for 400 Mbps that was launched not too long ago, we have now launched the 400 Mbps.

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

We obviously believe that we will continue increasing our launch in higher speeds. And this will help us move the base to a higher quality base, in particular, those users that were still looking for reasons to switch.

And when we move to higher speeds, one thing is, hey, should I just transition my 120-megabit Internet for 200-megabit Internet. In our view, the answer is obviously, yes, because it is much better quality that the switch is worth it. But when you start launching the 400 to 500 and up, then the switch becomes more attractive and clearer. And this brings a customer base, a piece of the customer base, which is naturally a higher-paying customer base. So yes, we do see room to improve.

In terms of additional products, we have started expanding the Oi Play approach, so the streaming services. Obviously, IPTV will play a part in that, and it will continue to grow.

But I would like to highlight that in the future, and so this is part of the whole strategy of the client company and the centrality on customers and the focus on customer experience. We believe that we can add additional components of ARPU, which are not necessarily telecom services.

Just to give you an idea, we have launched our Oi Expert service and the Oi Expert actually provides a number of services to the home in terms of helping configure and run and troubleshoot issues with home connections. And as you know, in many cases, the issues are actually due to customer devices.

We are looking at not only expanding our technology to be able to detect that automatically, but also to offer services to help consumers in their own homes, and this has already gained a significant traction. We are also launching other services in terms of offers for the home. The Oi Play will play a part in that. We are carefully curating products that can be offered to complement our fiber services, and obviously we see room to improve.

In terms of DTH, no, we have not used the strategy of actually going in first with DTH and then migrating to IPTV. The DTH strategy started on its own, and it helped that, obviously, with our local presence in pretty much all of the country and a good sales channel approach. We were able to expand DTH, in particular, in areas where there is no other option in terms of TV services, no fiber, not even cable.

So I would say that it is a service that is slightly more resilient than the segment as a whole. But when we look forward, without a question, the structural trends, not only in Brazil, but globally, is that DTH TV is probably coming down.

In our case, what we did to sustain this positive performance was that we closed very good partnerships with installers and we obviously also closed a very good partnerships with companies that are helping us work on the electronics on the setup boxes. And this has been proving very helpful in maintaining our customer base and even increasing revenue slightly in some cases.

So the market, again, is migrating to OTT. We will see that this migration will be negative in the long run to DTH, but it will be positive to Oi fiber and to streaming into Oi Play. And so it is a very good performance, but we see it as a natural component of

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

the strategy, and also a little bit of the situation. As you saw, TV had a slight less negative time given the pandemic because the consumption of content increased during this last period.

But we see the structural long-term with still a slightly decline on the overall numbers. But that is it in terms of DTH.

Marcelo Santos:

Thank you very much.

Maria Tereza Azevedo, Santander:

Thanks for the call, and congrats for the fiber execution. Rodrigo, can you comment a little bit on how do you see the fiber ARPU behaving more longer term? Do you think it is sustainable to keep the same levels as you enter more challenging regions? And do you see room for even inflation path through in the longer term? That will be my first question.

And then as a follow-up question, if you could comment on the CAPEX for 2021. Is it going to be already mostly allocated under the InfraCo vehicle and it will also be funded through in that vehicle?

Rodrigo Abreu:

Thank you, Maria. In terms of the fiber ARPU, I believe that I touched on many of the points to your question when talking about the sustainability of the increase, given not only the move to higher speeds, but to additional services.

But in terms of pricing power and inflation, which was the second component of your question, we obviously believe that there is always a fine balance between applying all of the adjustments according to inflation versus maintaining the growth. So obviously, this is carefully analyzed on a strategic basis, every single month.

But just comparing fiber and fixed broadband in general, to the dynamics that we saw in the past in mobile, we are obviously talking about 2 very, very different scenarios. On fiber and on fixed, in general, the switching is obviously a lot more complex. So it is not as easy to just go into a store and change a SIM card. We are talking about installation, we are talking about the customer drop.

We are talking about CAPEX investment. We are talking about a more difficult process for the consumer. But also, in particular, a lot more costly effort by the part of the competitor when having to switch an existing customer. And this, by its turn, naturally put some barriers into how aggressive pricing can be. It's obviously one thing to say, "Hey, I have a plane flying here in the case of mobile and the seats are empty.

So let us just make sure that the next ticket is a cheaper ticket, so we can feel the plane." This is not the case in fixed broadband. Because in fixed broadband, you still have to actually add another seat to the plane. And you have to go and add the ONT which is the customer device, you have to build the customer drop.

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

So it is not as easy to go to pricing war, so to speak, on fiber. And obviously, this helps not only protect a little bit the pricing in the overall market, but it avoids pricing wars, and it helps to pass-through some of the inflation. So obviously, this is a market that is still growing.

We believe that there is still a lot to be done in terms of pricing models, but we see less subjects to all of the very sharp fluctuations that occurred naturally in mobile. So it is a more protected pricing environment.

On the CAPEX front, yes, every year, we do have a greater allocation of CAPEX to fiber as a whole. And in our case, we do have a higher number of CAPEX going next year to the infrastructure company set up.

Just let us remember that when we talk about the infrastructure company, we do not expect to have this closed by the beginning of the year. It is obviously at the end of the year.

But what we have been doing internally, we are already separating the operations, and we have different entities actually receiving the investments and the infrastructure company entity is already separate from the rest, and we are already allocating CAPEX to it. And this is just a natural progression from the CAPEX allocation model that we showed.

So when we look at the over R$7 billion of CAPEX, give or take, that we have been talking about, every year, we are increasing the percentage of fiber and next year will be no different. Let us remember that all going well in the competitive process for the mobile sale at the end of the year.

Next year, we will have a different year in mobile. We are also obviously going to invest in mobile because we need to keep up our speed and performance, and now we are going to do that. But in reality, we do not need to be concerned with actually investing for the super long term if the operation is closed. And this will allow us to optimize that moving a greater part of the CAPEX to fiber.

And the idea is, on the infrastructure company, to finance as much as possible of this CAPEX already with the structure of the infrastructure company itself. There are several models that allows us to do that even with the guarantees of the shares of the infrastructure company itself, even before we close a deal of selling the controlling stake.

And as such, we obviously have it already planned for the infrastructure company next year. It is also important to highlight yet another thing in terms of CAPEX, which is what we are doing is not only increasing CAPEX, but we are also increasing the efficiency of this CAPEX.

Compared to when we started the project back in 2019, we have already significantly reduced our unitary prices on installation on the ONTs, on the fiber itself and this has been helping us to accelerate the fiber deployment without proportionally accelerating

CAPEX.

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

So this is very important. The unitary CAPEX numbers are showing very positive results. Obviously, we gained scale. We gained an important scale, not only in the overall deployments, but also with the sheer base that we have. And this has helped us to be a lot more efficient in procurement.

So we do have that well planned. And we believe that probably close to 70%, if not more, we will already be in the infrastructure company next year in terms of CAPEX.

Maria Tereza Azevedo:

Perfect. If I may just make a very last question. Can you just comment on the strategy for 5G in terms of the spectrum auction?

Rodrigo Abreu:

Sure. As you saw, there were some very recent news regarding the 5G model. We are obviously analyzing that. There was a manifestation of ANATEL yesterday. And we believe that the 5G approach to us is actually very clear.

We do have a view that while we do not close the transaction, so until the moment we closed the mobile transaction, our mobile operation will be an independent operation. And as such, we obviously will consider the participation on the 5G. We do have our plans in terms of what to do with the spectrum should the transaction close.

Let's just remember that on the 5G front, obviously, 5G, especially on the 3.5 gigahertz spectrum, is used certainly for mobile services, but there is a very good potential as well, especially if you consider some specific regions in the country, to use that spectrum to provide FWA service, fixed wireless access service, in particular, in the areas where the density to provide the full fiber coverage on the retail front is still not there.

So there are areas where we do have fiber coming up to the seats, but it will be less effective, or with slightly fewer positive returns, not the returns would not be possible. It is less slightly positive returns in terms of actually deploying fiber all the way to the end. So the 5G is an option for fixed wireless access.

And we believe that we should be able to look at the auction and make our decision whether to participate and how to participate having this into consideration. We also believe that, obviously, looking at 5G, there is a second component, not only the spectrum itself, but we believe that it's positive to have the 5G auction resolved in terms of its model, in terms of its definition of time line, which is the use of fiber itself.

So the speed up of the 5G deployment will help us accelerate the wholesale services of the infrastructure company. We believe that there is absolutely no way in which 5G can be deployed all over the country without using a significant amount of the infrastructure company fiber services.

So all in all, this is the approach. But obviously, the very recent news of the model of the auction are just under review right now as we speak.

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

Maria Tereza Azevedo:

Perfect. Thank you very much, and congratulations again.

Carlos Sequeira, BTG:

Good morning. Thank you for taking my questions. I have a couple, please. One is, can you give us an update on negotiations with ANATEL to move one of those credits through the new legislation, please? And also, on the same line of discussion, there is another piece of legislation, the former PL 6229, which is now in the Senate. And the question here is, what are the benefits of this new legislation if approved to Oi?

And the second question relates to Oi mobile, the auction of the mobile division, which is now scheduled for December 14. What the sale will be booked in 2020? And if so, the taxable gains that are going to be generated by this transaction would be fully compensated by the accumulated losses of 2020, please?

Rodrigo Abreu:

Thank you. So on your first question there, ANATEL credits, we are well advanced into the process. As you recall, ANATEL not only favorably recognized the proposal, which was already formally submitted to the AGU, so much so that they voted in favor of our restructuring plan, amendment of the restructuring plan.

And obviously, we are now just on the final phases of having that saddled about closing the transaction. The expectation is that we will be able to sign this transaction with the AGU very, very soon, and then it moves on to the final signature of the Ministry of Communications.

We have already discussed this both with the AGU and with ANATEL and with the Ministry itself. And now we believe that there will be no issues in that the transaction should be signed this year.

About the 6229, as you know, this is in the agenda for voting in the upcoming weeks. There was the definition of a new reporter. The reporter mentioned that, yes, there are some things that need to be reviewed. It is a center Rodrigo Pacheco. But in reality, as everybody believes that this is an important project, especially for this year, given that the pandemics has brought, unfortunately, an increase in the number of companies that have filed for judicial recovery.

So there is, we believe, political will to have the project approved. It we will be a beneficial project at the country, and it should be approved that we believe still this year. If not, now in November, where we believe that before the break at the end of the year, this project should be approved.

Obviously, the project is positive because, in particular, for our case, the project brings the possibility of migrating our existing transaction that is being discussed and signed with the AGU and ANATEL to more favorable conditions. If you recall, our ANATEL credits have been taken out of the plan and into Law 13,988, with a 50% discount and 84 months.

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

And this new condition under Law 6229, and when approved, and our transaction already allows us to actually move to the more favorable conditions. If approved, we would be able to actually increase the haircut to 70%, the overall discount on the debt to 70% and increased the terms of payment to 120 months from the 84.

Obviously, there will be additional positive things in terms of the 6229, and the 6229 will help all companies actually to avoid the almost situation where a company under judicial recovery is actually paying taxes on capital gains, which doesn't make any sense if, obviously, there is some tax credits to be used.

We believe that those 2 will be very favorable. And as far as your last question, remember that we need to close the transaction. But obviously, our projections show that when we look at just the isolated effects of our operations as we have them today, we have ample space to accommodate for some of the gains.

So unfortunately, the tax credits in terms of tax loss carryforward for us is enough in the separate entities to accommodate and compensate for the transactions that we expect in the short term.

Carlos Sequeira:

Thank you very much, Rodrigo.

Soomit Datta, New Street Research:

Two or three quick questions, please. First of all, just back to fiber (60:53 TECHNICAL DIFFICULTY)

Rodrigo Abreu:

Soomit? I guess Soomit has dropped from the connection.

Operator:

As there are no questions, I would like to turn the floor over to the Company for the final remarks.

Rodrigo Abreu:

Thank you. We will make sure to take Soomit's question later on, and we will follow-up with him. So his questions do not go unanswered.

But overall, thank you guys for another call. We continue, again, as we highlighted, firmly committed to making this plan work. We have the full management team and the full Board really committed to it. We believe that the results have been good.

We believe that there is still a ton of work to do. But given what we were able to do over the last 18 months in terms of delivering on the plan, we believe this will continue to be the case next year as we prepare for the final phases of our restructuring. And so thank you for participating with us in the call. We hope to talk to you soon in our next earnings call at the beginning of next year.

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Conference Call Transcript OI's 3Q20 Results (OIBR3 e OIBR4 BOVESPA) (OIBRC e OIBRQ NYSE) November 13, 2020

Thank you. Have a great day.

Operator:

This concludes Oi S.A.'s conference call. We would like to thank you for your participation. Have a good day.

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