Oi(OIBRQ) - 2018 Q4 - Annual Report

Financial Performance - Net operating revenue for the year ended December 31, 2018, was US$5,693 million, a decrease from R$23,790 million in 2017[47] - Gross profit for 2018 was US$1,610 million, down from R$8,114 million in 2017, reflecting a decline of approximately 80%[47] - Net income attributable to controlling shareholders for 2018 was US$7,063 million, compared to a loss of R$3,736 million in 2017[48] - Total assets as of December 31, 2018, were US$17,355 million, a decrease from US$70,987 million in 2017[51] - Cash and cash equivalents at the end of 2018 were US$1,132 million, down from R$6,863 million in 2017[51] - Total current liabilities increased to US$2,643 million in 2018 from US$9,831 million in 2017[51] Dividends and Shareholder Returns - The company has not paid any dividends since January 1, 2014[46] - Oi must pay at least 25% of its consolidated annual net income as dividends or interest on shareholders' equity, but this may not be available due to financial conditions[160] - Under the RJ Plan, Oi is prohibited from declaring or paying dividends until the sixth anniversary of the Judicial Ratification of the RJ Plan[161] Debt and Financing - The company may seek to raise up to R$2.5 billion in capital markets and borrow up to R$2 billion under new export credit facilities[83] - As of December 31, 2018, the company had total outstanding loans and financings of R$30,379 million, with R$16,450 million after fair value adjustments[80] - The company is subject to financial covenants that limit its ability to incur additional debt, which could affect its operational flexibility[79] - As of December 31, 2018, R$17,873 million, or 58.8%, of the total consolidated loans and financings were denominated in currencies other than the real[148] - As of December 31, 2018, the company had R$12,256 million of loans and financings subject to variable interest rates, which could increase financial expenses[156] Market and Competition - The company faces significant competition from over-the-top (OTT) providers, impacting its ability to compete effectively in the market[71] - The company faces significant competition in the Brazilian telecommunications market, particularly from Claro and Telefônica Brasil, which may adversely affect its results of operations[106] - The company expects a continued decline in the number of fixed lines in service due to customer preference for mobile services[108] - The company faces increased competition from OTT services, which may adversely affect the average revenue per unit (ARPU) generated by its mobile customer base[112] Regulatory Environment - The Brazilian telecommunications industry is highly regulated, with potential changes in regulations that could adversely affect the company’s operations[59] - The company must comply with regulations regarding radio frequency emissions, which could impact its network expansion and service quality[67] - The Brazilian federal government has significant influence over the economy, which could adversely affect the company's business and financial condition[137] - The company faces risks related to potential changes in government policies that could adversely impact the telecommunications sector and its operations[145] Legal and Compliance Issues - The company is subject to numerous legal proceedings, with claims against it totaling R$27,586 million in tax proceedings, R$771 million in labor proceedings, and R$1,723 million in civil proceedings classified as "possible" losses[91] - The company has identified a material weakness in its internal control over financial reporting, which may affect its ability to report results accurately[86] - The company must continue remediation activities to improve its operational and financial systems, as failure to do so could lead to additional material weaknesses[88] Operational Challenges - Cybersecurity risks pose a threat to the company’s operations, potentially leading to significant business losses and reputational damage[75] - The company’s ability to adapt to rapid technological changes is critical for maintaining competitiveness in the telecommunications industry[70] - The company is experiencing pressure to maintain and expand its telecommunications services network, which may require significant managerial and financial resources[114] - The company is reliant on a limited number of strategic suppliers for equipment and materials, which poses risks of disruptions and delays[118] Employee and Management Risks - The company is dependent on key personnel, and the loss of senior management could adversely affect its business and financial condition[99] Customer and Revenue Risks - The average monthly churn rate for the Personal Mobility Services business was 4.0% in 2018, indicating a significant customer turnover[110] - The company is exposed to credit risks from customer payment delinquencies, which could negatively impact its financial condition and results of operations[96] Pension and Benefits - The company recorded an aggregate deficit of R$579 million in its Brazilian pension benefit plans as of December 31, 2018, which may require additional contributions[125] - The company has recorded R$575 million as a liability for pension benefits, which may increase due to actuarial deficits or investment losses[125] Strategic Initiatives - An agreement was signed with Huawei to acquire equipment and services to modernize network technologies over the next five years[244] - The projects supported by the Huawei agreement aim to expand mobile telephone coverage and fiber optic broadband capacity[244] - The modernization will allow the gradual use of 2G and 3G frequencies to provide 4.5G services across all municipalities served by the mobile network[244] - The network upgrade is intended to prepare for the implementation of 5G technology and Internet of Things (IoT) solutions[244] Judicial Reorganization - The company filed for judicial reorganization in June 2016 due to financial challenges and has since been working on a recovery plan[178] - The RJ Plan was confirmed by the Brazilian court on January 8, 2018, and is binding on all parties involved[181] - The company has received recognition of its RJ Proceedings in the United States, England, and Portugal, facilitating its restructuring efforts[184][193] - The PTIF and Oi Coop Composition Plans were confirmed by the Dutch District Court on June 11, 2018, allowing for the restructuring of claims against these entities[192] Claims and Payments - The aggregate amount of claims for holders of Defaulted Bonds recognized by the RJ Court was R$32,314 million[201] - Holders of Defaulted Bonds could elect to receive a Qualified Recovery, which included approximately US$195.61 in New Notes and 38.57 Common ADSs per US$1,000 of Bondholder Credits[206] - The settlement of the Qualified Recovery resulted in the issuance of US$1,653.6 million principal amount of New Notes and 302,846,268 new Common ADSs[210] - Under the RJ Plan, Oi will pay creditors 100% of recognized claims in 24 semi-annual installments starting August 2023, with 2.0% for the first 10 installments and 5.7% for the next 13 installments[218]