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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of the

Securities Exchange Act of 1934

For the month of March 2013

Commission File Number 1-13758

PORTUGAL TELECOM, SGPS, S.A.

(Exact name of registrant as specified in its charter)

Av. Fontes Pereira de Melo, 40

1069 - 300 Lisboa, Portugal

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F x Form 40-F o

 Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o No x

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Portugal Telecom

Consolidated Annual Report 2012

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Portugal Telecom

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Telecommunications in Portugal

Telecommunications in Brazil

(a) Oi’s earnings are proportionally consolidated based on PT’s 25.6% effective interest in Telemar Participações, the controlling shareholder of Oi Group.

Other telecommunications businesses

(a) These stakes are held by Africatel, which is controlled 75% by PT. (b) These stakes are consolidated through the equity method of accounting. (c) On 13 January, PT announced that it has entered into a definitive agreement for the sale of its stake in CTM to Citic Telecom International Holdings Limited.

Other businesses

Systems and IT [PT Sistemas de Informação 100%]; Innovation, research and development [PT Inovação 100%]; Backoffice and shared services [PT PRO 100%]; Call centres and telemarketing services [Contax in Brazil 44.4% and PT Contact 100%]

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Macroeconomic environment

1. International economic background

The year 2012 was characterised by a global economic slowdown and by the contraction of GDP in the Eurozone, as a result of: (1) the restrictive fiscal policies and the deleveraging of the private sector in the main developed economies; (2) China’s lower demand and fear of a hard landing, and (3) the uncertainty associated with the sovereign debt crisis in the Eurozone. In 1H12, the yields of the southern European government bonds reached new peaks due to the spillover of the financial crisis to other economies in the region, even though it was visible a reduction of the risks faced by the Eurozone. Greece slashed its debt by more than Euro 100 billion by swapping it’s privately held bonds for new, longer maturity bonds with less than half the nominal value, which paved the way for Eurozone ministers to give the final approval to the latest rescue package for the country, amounting to Euro 130 billion. In June, in response to escalating problems, Spain agreed on a programme to support the restructuring of its banking sector, with financiang of up to Euro 100 billion. In Italy, the focus was on the unexpected resignation of Italian Prime Minister, Mario Monti, after seeing the Government support withdrawn. The stabilisation of the financial markets was visible in 2H12, which translated into the narrowing of the peripheral economies public debt securities spreads against Germany.

GDP Growth (%)

Source: World Economic Outlook, IMF, October 2012

The reduction of the risks faced by the Eurozone, visible as from 2H12, can be explained by several policies put in place by Europe’s policy setters and the European Central Bank (ECB), namely by: (1) the two Long Term Refinanciang Operations (LTRO) made by the ECB in order to provide the region with decent excess liquidity; (2) the introduction of the Eurpean Stability Mechanism (ESM) which provides financial assistance to members of the Eurozone in financial difficulty, functioning as a permanent firewall for the Eurozone with a maximum lending capacity of Euro 500 billion; (3) the decision of the ECB to cut its benchmark rate to 0.75%, at the lowest level ever, and to lower the interest rate on the deposit facility to zero; (4) the maintenance of ECB’s bond buying programme, which helped to secure financing needs of the banking sector, and (5) the proposal of a single banking supervision mechanism, built around the European Central Bank, which would supervise all Eurozone banks by 2014 in order to strengthen the Eurozone and make the financial sector less vulnerable to crisis.

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Bond spread vs. Bund — Selected Economies

(Basis points)

Source: Bloomberg

The Southern European indexes were pressured in 1H12 due to rumors of a Spanish bailout. These fears were fueled by Spain’s 2011 budget deficit of 8.5% of GDP, 2.5pp above the 6% goal set by the Eurogroup and the growing capital needs of its financial institutions. Notwithstanding, the conditions in global financial markets eased significantly since July 2012, reflecting substantial progress to improve fiscal sustainability and mutual support mechanisms in the European Union, leading most European equity indexes, particularly those from core European countries, to show significant gains: PSI20: +2.9%, FOOTSIE: +5.8%, CAC40: +15.2% and DAX: +29.1%. The US markets continued to show strong gains, as they benefited from a more expansionary monetary policy by the Federal Reserve (FED) and better prospects for the US economy: Dow Jones: 7.3%, SPX: +13.4%, and Nasdaq: +15.9%. In China and Brazil, the roll-out of more rate cuts by Banco Central do Brasil and slower but still robust economic growth in China, resulted in rising equity markets: Shanghai Composite 3.17% and Bovespa 7.4%.

Source: Bloomberg

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The Brent oil price per barrel fell between 1Q12 and 2Q12, from USD 123.8 to USD 97, recovering in 2H12 and closing 2012 at USD 111.9, having increased about 4% when compared to the price observed at the end of 2011.

Source: Bloomberg

Source: Bloomberg

1.1. United States

In 2012 the U.S. GDP grew 2.2%, accelerating from the 1.8% growth observed in 2011, although the pattern of activity proved uneven throughout the year. After a very robust growth in the final quarter of 2011, the activity registered a slowdown in 1H12, followed by a stronger growth in 3Q12 and decelerated in the ending of the year. Private consumption grew moderately. The productive investment proved weak, reflecting high uncertainty about the fiscal framework and low levels of business confidence. The Eurozone crisis led the U.S. exports to lose momentum in 2H12 after a relatively strong performance in 1H12 and boosted the appreciation of the dollar against the euro and the valuation of Treasuries, regarded as a refuge asset in 1H12. These effects were reverted in 2H12 due to the stability of the Eurozone, after the strong commitment of the ECB to defend the euro, which resulted in the appreciation of the euro and interrupted gains in the fixed rate market.

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The labour market continued showing signs of improvement, with the unemployment rate declining to 7.8% from 8.5% in 2011. The other positive aspect in the economy for 2012 was the housing market, which began to show signs of a turnaround. Housing prices, sales of new and existing homes, the housing starts and business confidence in the sector recorded an upward trajectory.

Source: Bloomberg

Annual inflation ended the year at 2.1%, down from 3.2% in 2011 and above the 2% target set by the US monetary authority, but with a clearly downward trend since 2011. In this context, the Federal Reserve (FED) extended Operation Twist until the end of 2012, increasing the average maturity of assets held on its balance sheet and announced, in September 2012, the third round of quantitative easing (QE3), under which USD 40 billion of mortgage-backed securities will be bought on a monthly basis, and pledged to keep rates near zero until the unemployment rate drops to 6.5%, as long as inflation expectations do not climb above 2.5%. Finally, in December, with the end of Operation Twist, the FED reinforced the asset purchase program at USD 45 billion of long-term Treasuries. By the end of the year, the U.S. Senate passed a bill, which includes higher income taxes on individuals who make at least USD400 thousand and couples who make more than USD450 thousand, designed to back the nation away from the fiscal cliff, potentially averting a critical challenge to the nation’s economic recovery and forestalling a feared negative reaction from the stock markets.

Source: Bloomberg

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1.2. Economic and monetary union — Eurozone

The Eurozone slid into a double-dip recession in 2012. In 4Q12, the GDP in the Eurozone contracted 0.60% q.o.q showing the most drastic single quarter fall in economic output in four years. The annual GDP contracted 0.4% in 2012, decelerating from the 1.4% growth registered in 2011, as the region faced significant headwinds, including weak external demand, deleveraging by European banks and summer drought. European countries responded to the escalation of the sovereign debt crisis in 2012 with a combination of bailouts, expansionary monetary policy and unprecedented austerity measures, which had a big impact on the European population and economy. The unemployment rate soared throughout 2012 and stood at its record high of 11.7% in December, while the business sector remained feeble and industrial output fell for the 12th consecutive month in December 2012. The month of December was marked by increased political tensions in Italy and the approval of the first steps towards the creation of a banking union in 2014.

GDP Growth (%)

Source: World Economic Outlook,IMF, October 2012

Notwithstanding such sluggish growth, the annual inflation rate stood at 2.5% (2.2% observed in December 2012), primarily reflecting the increasing energy and food prices. This reduction of the annual inflation rate was possible notwithstanding the European monetary authority (ECB-European Central Bank) decision to decrease the reference interest rate to its historical minimum of 0.75% in July, which then left unchanged in December due to higher energy prices, rising taxes and the fact inflation fell from 2.5% to 2.2% in November. In December, the ECB reduced its Eurozone economic outlook for 2013, forecasting further contraction against a backdrop of high unemployment. The midpoint of the new ranges shows Eurozone GDP contracting 0.3% in 2013, against a previous forecast that predicted growth of 0.5%. Additionally, against a backdrop of lack of confidence of economic agents and low liquidity in the inter bank markets, the ECB also implemented non-conventional measures, including (1) liquidity injections in the banking system, (2) acquisition of sovereign debt securities in the secondary market, particularly of those countries in the peripheral economies, and (3) suspension of the minimum rating threshold needed for the ECB to accept Portuguese sovereign debt securities as collateral in funding operations, as it was the case for Greece and Ireland. As a result of these measures, at the end of July, Ireland was able to undertake two debt sale operations with maturities of 5 and 8 years, simultaneously with an operation to exchange shorter term maturities for longer term and, in October, Portugal made a similar operation exchanging public debt that matured

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in September 2013 for bonds maturing in October 2015 amounting to close to Euro 3.8 billion. This was a clear first step towards the return of these countries to the credit markets.

Source: Bloomberg

Although reaching its one year minimum on 24 July 2012, at 1.209 Euro to US Dollar, the Euro strengthened against the US Dollar in 2012 following Mario Draghi’s speech reiterating that the European Central Bank (ECB) would do whatever it takes to preserve the Eurozone. In 2012, the euro appreciated 1.8% against the dollar, to 1.319 Euro/USD.

Source: Bloomberg

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2. Economic activity in PT’s main geographies

2.1. Portugal

In Portugal, the economic situation in 2012 was mainly characterised by the implementation of the economic and financial adjustment programme. Portugal is being perceived as a country committed to the ongoing adjustment programme. Along with the supportive stance of the ECB, this is translating into a very visible decline in Government bond yields which led the debt markets to re-open for non-financial corporations as well as for banks. Nevertheless, the financial constraints imposed on the Portuguese economy as a result of the sovereign debt crisis and the need to deleverage remained in 2012. The continuing deleveraging in the private financial and non-financial sectors, coupled with a strongly restrictive fiscal policy and the cooling of activity in the Eurozone contributed to a contraction in real GDP of 3.2%, with significant declines in consumption and investment and with rising unemployment levels, reaching close to 16% of the active population. Household spending fell 5.6%, reflecting the sharp drop in disposable income. Private consumption was still penalised by relatively high inflation, pressured by higher indirect taxes. Exports maintained a positive performance in 2012, notwithstanding a deceleration trend, with growth of 3.3% in real terms.

Following elections in June 2011, Portugal’s new government has been implementing the measures agreed as part of the Euro 78 billion financial support package signed with the European Union / European Commission (EU/EC), the European Central Bank (ECB), and the International Monetary Fund (IMF). This financial adjustment programme began to be implemented in May 2011, having already been the subject of six(1) favourable reviews by creditor officers. According to the IMF, the programme is broadly on track, despite stronger headwinds. Portugal’s budget deficit was revised to 5.0% of GDP in 2012 (up from 4.5%), 4.5% of GDP in 2013 (up from 3%) and 2.5% of GDP in 2014 (up from 2.3%). The relaxation of the budget targets came with the announcement by the Portuguese government of new austerity measures for 2012 and 2013, which include a capital gains tax and an increase in the average rate of income tax, as well as an increase in workers’ social security contributions. In spite of the challenges in meeting the deficit targets, the commitment for fiscal consolidation has been very clear, and was reflected in a Euro 15 billion cut in primary expenditure in 2011-2012.

Source: Ministry of Finance

(1)  The sixth quarterly review of Portugal’s economic program by the EC, ECB and IMF took place in 12 to 19 November.

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The government deficit fell from 9.8% of GDP in 2010 to 5.0% of GDP in 2012, despite the significant deviation of revenue compared to budgeted amounts, benefiting from the proceeds received from the privatisation of ANA (Airports of Portugal) and the major effort to reduce government expenditure, namely in spending on goods and services, investment spending and net interest expense. Nevertheless, tax revenues registered a negative evolution in 2012, resulting primarily from changes in the economic climate, reflected in particular in consumption and imports. Government debt also maintained an upward trend, reaching 120.6% of GDP, 13 percentage points more than in 2011.

Sources: INE, Bank of Portugal, Ministry of Finance, European Commission, OECD, ES Research. * In 2011 and 2012 assuming the efects of the integration of Banks Pension Funds

2.2. Brazil

In 2012, the Brazilian economy posted a slowing 1.5% growth, following the weak investment performance, which showed a negative evolution. A critical factor was infrastructure bottlenecks that discouraged investment, to the extent that the government started with concessions to the private sector to relieve this infrastructure bottlenecks, helping to foster business confidence and a turnaround in investment. On the other hand, the exchange rate has contributed positively to the performance of the economy, since the intervention of the Ministry of Finance and the Central Bank of Brazil (BCB) in order to maintain the currency value between 2.0 and 2.1 Real / Dollar was responsible for the stabilisation registered against the Dollar since May last year. The reduction in the pace of expansion in 2012 led the government to change the focus of its economic policy, passing measures to favour oriented investment recovery over the coming years. In December, the Government and the BCB took three steps to reduce controls on foreign exchange flows, by: (1) facilitating the financing to the export sector; (2) extending the tax exemptions to foreign companies’ issuances of debt, and (3) reducing the compulsory amounts to deposit with the BCB on short positions in dollars. In 2012, Brazil continued to exhibit favourable conditions in the labour market, recording the lowest average historic annual unemployment rate at 5.5% of the workforce.

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Source: World Economic Outlook,IMF

Source: Bloomberg

Inflationary pressures, which were already present in 2011, were extended throughout 2012, making the consumer price index surpass the goal for the third consecutive year, having reached an average annual inflation of 5.4%, with an annual increase of 5.8% at year end. The primary budget surplus declined from 3.1% of GDP to around 2.4% of GDP, causing the Brazilian Central Bank to revert the trend of tightening monetary policy in September 2012, after seven cuts in the reference interest rate, leading the Selic rate to decrease from 11% to 7.25%.

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Source: Bloomberg

2012 was a year of major changes in domestic economic policy, with the understanding that the economic downturn in 2012 should be attributed to barriers to the expansion of the productive capacity of the country. Domestic demand was robust but failed to be accompanied by aggregate supply. These policy changes are likely to have positive consequences in the future.

Source: Bloomberg

2.3. Africa

African economies, which had rebounded quickly following the slowdown caused by the global recession, were undermined last year by the Arab uprisings. With the recovery of North African economies and sustained improvement in other regions, growth across the continent is expected to have accelerated to 4.5% in 2012. Sub-Saharian Africa is expected to continue growing strongly in the near term, with regional differences in prospects reflecting in part economies’ varying exposure to external shocks. External risks remain elevated. The strong recovery of foreign investment, with the exception of Northern African countries, spurred external flows. The appetite of Asian and Latin American emerging economies for natural resources triggered a boom of international commodity prices, which underpinned resource-seeking investment in Africa. Prices are expected to remain at

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levels favourable for African exporters, notwithstanding downside risks such as inflation and commodity price swings.

2.3.1. Angola

In 2012, Angola’s economy has continued to evolve at a considerable pace, projected to expand 6.8% in 2012 mainly driven by the growth in the oil sector (with Angola consolidating its position as the second largest oil producer in Africa), the start of the USD 9 billion Liquefied Natural Gas (LNG) project, and also by an increasingly better performance of non-oil sectors. The monetary policy followed by the Angolan authorities was supported by a benign pace of price growth, leading the National Bank of Angola (BNA) to cut the key interest rate to 10.3%. Inflationary pressures are projected to fall to 9.0% in 2012.

With the completion of the Stand-By Arrangement, aimed to increase fiscal and monetary discipline, reform the exchange rate system, improve public financial management, create a sound banking system and enhance fiscal transparency, the IMF continued to monitor the Angolan economy and confirmed the good performance and progress. The balance of the IMF was generally positive, showing the recovery of liquid foreign reserves to balanced levels, reduction in inflation, stabilisation of interest rates and the achievement of a scenario of exchange rate stability. In parallel, the IMF highlighted the significant progress in terms of transparency of public accounts.

The Angolan authorities presented the new Sovereign Fund of Angola (FDSEA), with an initial capital of USD 5 billion, which will serve mainly to invest in infrastructure promoting the hotel industry, agriculture, water and electric supply and communications, in order to create conditions for attracting foreign investment.

Source: World Economic Outlook,IMF

The Kwanza maintained a smooth depreciation trend of less than 2% against the USD, with the exchange rate standing at USD 1: AOA 95.82 at the end of 2012. In accordance with the amended Foreign Exchange Law, domestic banks will be obliged to hold a minimum of 80% of their capital in Kwanzas by the end of 2012. Angola plans to create its first bond market in 2013, to be overseen by Angola’s Capital Markets Commission, setting the stage for a stock market within two years.

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Source: Bloomberg

2.3.2. Namibia

The Namibian economy is expected to grow by 4.0%(2) in 2012, supported by a strong rebound of the primary sector, most notably minerals. The manufacturing sector is also expected to register strong growth owing to increased production of beverages. The inflation rate increased close to 6% driven by food and fuel prices, reflecting the impact of high oil prices and a substantial depreciation of the South African rand caused by the current account deficits and strong labour tensions in South Africa.

Source: World Economic Outlook,IMF

The government launched a major three-year fiscal initiative in 2011/2012 to ease infrastructure bottlenecks and enhance job creation. The government’s temporary Targeted Intervention Program for Employment and Economic Growth led to an increase in development spending in the last year, which will require focus on the government’s medium-term fiscal plan to deliver fiscal surplus by 2014/2015.

(2)  IMF estimates in October 2012 World Economic Outlook.

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The IMF said the economic outlook appears promising, although facing important downside risks, namely a fragile external climate that poses risks for commodity demand and prices. Further deterioration of the Eurozone economies could generate significant negative spillovers to the Namibian economy through trade linkages as a large share of Namibia’s total exports are destined for Europe. However, Commercial banks, mostly subsidiaries of South African banks, are well capitalised and profitable, with little direct exposure to the financial turmoil in Europe.

2.3.3. Cape Verde

In 2012, Cape Verde’s growth has slowed given the weak economic situation in the Eurozone and weak domestic demand. Turism and emigrant inflows are underpinning Cape Verde’s economic performance, notwithstanding the significant reduction in foreign direct investment. Overall, coordination of macroeconomic policy has been strengthened with fiscal policy adjusted in the course of 2012 to support the Bank of Cape Verde’s (BCV) tightening of monetary policy from late 2011.

GDP growth is projected to have slowed to about 4.3% in 2012 (down from 5.0% in 2011), reflecting the negative external environment due to the adverse and yet to be resolved European economic and financial conditions, notwithstanding the positive impact of the domestic demand supported by higher public investment. Consumer price inflation remained under control, falling to 2.3% in 2012 (end of period, down from 3.6% in 2011).

Source: World Economic Outlook,IMF

Monetary conditions began tightening after mid-2011 as the BCV adopted a more restrictive monetary stance by (1) broadening and raising reserve requirements; (2) restarting open market operations to absorb escudo, and (3) raising intervention interest rates. The exchange rate is pegged against the Euro.

2.3.3. São Tomé & Príncipe

São Tomé & Príncipe’s economy is gradually recovering after a marked slowdown in 2009 that reflected a decline in foreign direct investment as a result of the global financial crisis. In 2012, GDP is estimated to have grown 4.5% as externally financed projects helped drive activities in construction, trade, tourism, and agriculture. Growth

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momentum is expected to increase as exploratory drilling for oil continues. The public authorities expect oil production to start in 2015. The exchange rate is pegged against the Euro, since January 2010.

Source: World Economic Outlook,IMF

2.4. Other geographies

2.4.1. East Timor (Timor-Leste)

In 2012, growth is estimated to have remained strong at about 10% on the back of government spending. Inflation in Dili remained high, having decreased slightly to 12.0% in 2012, due to shortages of key consumer goods and additional demand arising from midyear election.

Spurring private sector development by creating a business-friendly environment remains a priority to deepen the economy and mitigate its heavy reliance on government spending funded by petroleum revenue.

The government launched its “Strategic Development Plan” targeted at transforming Timor-Leste into an upper-middle-income country by 2030 by increasing public investment to improve the country infrastructures. These commitments, together with a target of achieving high economic growth, align Timor-Leste with the inclusive economic growth agenda now being pursued in Asia and the Pacific. Given the buoyant petroleum demand and rising prices, the outlook for economic growth and poverty reduction is promising.

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Source: World Economic Outlook,IMF

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02

Regulatory background

Portugal

Number Portability. Pursuant to the transposition, on 13 September 2011, of the new regulatory framework for the electronic communications sector, on 28 October 2011, and following a public consultation, ANACOM adopted, on 1 March 2012, a decision to amend the Number Portability Regulation. The amendments focus mainly on the obligation for the operators (fixed and mobile) to ensure the implementation of portability within one working day, except for cases expressly set out in the Regulation, and on reinforcement of subscribers’ rights within number portability.

The amended Regulation is in effect since 13 September 2012.

Digital Terrestrial Television. PT Comunicações has carried out the complete fulfilment of all obligations imposed under the licence awarded by ANACOM, having successfully concluded the process of channel update, in accordance with ANACOM’s determination of 4 April 2011, wherein ANACOM approved the final decision regarding the switch of channel 67 (838-846MHz) consigned to PT Comunicações for the mainland, by channel 56 (750-758MHz), within the scope of provision of the digital terrestrial television service (DTT).

PT Comunicações is expecting the publication of the criteria, by means of a governmental ordinance, for compensation of the costs it has incurred within the process of the aforementioned channel switch associated with MUX A.

On 24 March 2011, ANACOM issued a decision regarding the subsidies granted for the purchase of DTT equipments by citizens with special needs, population groups with low income and institutions with a certain social relevance. PT Comunicações is granting subsidies in accordance with this decision, which, after two extensions, currently is in force until 26 April 2013.

On 31 March 2011, ANACOM approved the Information and Promotion Plan to be implemented by PT Comunicações within the scope of the DTT obligations. PT Comunicações has carried out the television campaign it was bound to (ceased on November 2011), which was followed by the television campaign promoted by ANACOM, aired until the analogue swith-off.

On 7 April 2011, ANACOM decided on the reimbursement procedures regarding the costs of instalation and equipments incurred by populations covered by complementary means (DTH), envisaging to ensure equal access to DTT. PT Comunicações is also complying with this decision, which, after two extensions, is also in force until 26 April 2013.

On 23 March 2012, ANACOM aproved the adoption and implementation of an additional instalation subsidy for digital television reception, aimed at beneficiaries of the subsidisation programme, namely families whose applicant has more than 65 years of age or families in social isolation for conjunctural or structural reasons. This decision is also currently in force until 26 April 2013.

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The analogue swith-off, on 26 April 2012 was successfully completed.

Wholesale Reference Offers. On 28 March 2012, ANACOM approved the final decision on the procedures to be followed in evaluating the quality of service of regulated wholesale offers. This follows notification of the respective draft decision to the European Commission (EC), to the Body of European Regulators for Electronic Communications (BEREC) and to the national regulatory authorities of the other Member States of the European Union.

This decision determines that PT Comunicações shall amend the several reference offers that establish deadlines for repairs (local loop unbundling, leased lines, Ethernet accesses, bitstream and wholesale line rental) within 30 business days after notification of ANACOM’s final decision, in accordance with several criteria.

Leased Lines Reference Offer (ORCA) and Ethernet Accesses Reference Offer (ORCE). On 14 July 2012, ANACOM approved a final decision on amendments to the leased lines reference offer (LLRO) and to the reference Ethernet leased lines offer (RELLO), the draft decision of which has been notified to the European Commission (EC), the Body of European Regulators for Electronic Communications (BEREC) and national regulatory authorities of other Member States of the European Union. By letter dated 4 June, EC stated that it had no comment to make on the matter.

PT challenged this decision before the courts, having filed a suit on 2 November 2012, as PT considered that it contained a set of illegal aspects.

Wholesale market for voice call termination on individual mobile networks. On 30 April 2012 ANACOM approved its final decision on the specification of the obligation on price control in the wholesale market for voice call termination on individual mobile networks, concluding a process that begun on April 2011, with the launch of the corresponding public consultation.

In this decision the cost model for mobile termination and the maximum prices to be applied by the three mobile operators considered to have significant market power (SMP) were approved, as follows:

·                  On 7 May 2012: 2.77 euro cents per minute;

·                  On 30 June 2012: 2.27 euro cents per minute;

·                  On 30 September de 2012: 1.77 euro cents per minute;

·                  On 31 December 2012: 1.27 euro cents per minute.

Prices are billed per second from the first second and independent of the origin of the call.

Public Consultation on Relevant Markets 4 & 5. On 6 February 2012, ANACOM approved the draft decision concerning the definition of the markets of wholesale (physical) network infrastructure access (RM4/2007) and  wholesale broadband access (RM5/2007), evaluation of significant market power (SMP) and the imposition, maintenance, modification or suppression of regulatory obligations.

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In line with its decision taken in 2009, in this draft decision ANACOM proposes to maintain the national scope of RM4 and the geographic segmentation in RM5, which is divided in Non Competitive Areas and Competitive Areas (the latter unregulated). According to this draft decision PT will continue to be considered to have SMP in RM4 and RM5-NC.

According to the draft decision concerning access obligations in the market of wholesale (physical) network infrastructure access, beside the obligation of granting unbundled access to copper loops and subloops and to ducts and poles, at national level, ANACOM intends to impose a geographical differentiated obligation to grant virtual access to optical fibre (advanced bitstream): this obligation would not be imposed in 17 municipalities, which are considered to have conditions for other operators to invest in fibre.

Still according to the draft decision, PT would also be forced to demonstrate to ANACOM that the difference between its retail prices and the prices of the wholesale offers made available to other operators does not result in a margin squeeze.

The public consultation took place until 5 April 2012 and a final conclusion is still pending.

Spectrum. On 6 January 2012, ANACOM approved the final report of the auction for the allocation of rights of use of frequencies in the 450 MHz, 800 MHz, 900 MHz, 1800 GHz, 2.1 GHz and 2.6 GHz bands.

The multiband auction raised a final amount of Euro 372 million from the winning bidders, as follows: Euro 113 million (Optimus), Euro 113 million (TMN) and Euro 146 million (Vodafone).

In February 2012, the WRC 2012 adopted the Resolution No. 232 (WRC-12) on the allocation of the 700 MHz band to mobile services. This is the first assignment that allows a globally harmonised use. It is expected to have profound implications at European level, particularly in Television Broadcasting and in mobile networks and services.

In March 2012, the European Parliament and the Council published the Decision No. 242/2012/EU establishing the first multiannual radio spectrum policy. This first program is focused on identifying new spectrum bands for the provision of broadband electronic communications services and in establishing the criteria and methodology for creating an European Spectrum Inventory. The Commission is already preparing the first steps of implementation of this decision.

Cost Accountig System (CAS) On 29 February 2012, PT Comunicações requested ANACOM to review the weighted average cost of capital (WACC) to be used in the regulatory cost accounting model of the company, for the year 2011. The preliminary value of WACC was set at 11% and PT Comunicações requested a change to 14.78%. By decision of 30 August 2012, ANACOM approved its final decision on the issue, establishing the WACC for 2011 in 11.7%.

On 2 January 2012 ANACOM approved the report of the preliminary hearing on the results of the CAS for 2006, issued the corresponding declaration of conformity, and established a set of determinations and recommendations aimed at improving the CAS.

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On 27 April 2012 ANACOM granted to an independent entity, the auditing process of the results of PTC’s CAS for the years 2008 and 2009. On 23 October 2012, the Regulator announced it had granted to an independent entity the process of revision of PT Comunicações’s CAS and the auditing of the CAS results for years 2010, 2011 and 2012. Both auditing processes are still ongoing.

On 2 November 2012, ANACOM notified PT Comunicações, in a preliminary hearing, with the report of the auditing to the CAS 2007, the corresponding declaration of conformity, and a set of determinations and recommendations in order to improve the CAS. On 18 January 2013 ANACOM issued the final decision.

Compensation for the negative operating margins of the mandatory services. Under the Concession Agreement, PTC has the right to be directly compensated by the State for the negative operational margins resulting from the mandatory provision of fixed telex service, fixed switched data transmission service, telegram service, broadcasting and distribution service of telecommunications broadcasting signal, and maritime mobile service. On 27 August 2012, the General Inspection of Finance produced a report on the compensation of these negative operating margins for the year 2006, which states that the calculation of the amount of compensation shall be determined by calculating the aggregate margin of the various mandatory services (and not for each service, as was the practice so far), to the detriment of PT Comunicações.

PT Comunicações challenged this decision.

Regulation on the settlement and collection of regulatory fees. On 27 April 2012, ANACOM corrected the value of the fees owed to PT Comunicações for the exercise of the activity of supplier of networks and electronic communications services for the year 2011, after computing the actual administrative costs and revising the value of provisions for that year. After these corrections, operators were reimbursed.

On 26 November 2012, ANACOM settled the contributory percentage (applicable to all providers of electronic communications networks and services with annual revenues superior to 1.5 million euros) at 0.5538%.

Universal Service. On 25 November 2011, ANACOM decided not to oppose the proposal for the fixed telephone service residential tariffs, within the scope of the Universal Service (US), as presented by PT Comunicações on 4 November 2011. Prices were implemented as from 1 January 2012.

On 25 November 2011, ANACOM decided not to oppose the proposal for the tariffs to be applied to calls originated on PT Comunicações network and terminated on other operators’ networks, as presented by PT Comunicações on 18 November 2011. Prices were implemented as from 1 January 2012.

Net Cost of the Universal Service (NCUS). On 12 July 2012, SVP Advisors, S.L. was granted the auditing to the NCUS for years 2007, 2008 and 2009. The process is not yet concluded.

On 12 October 2012, ANACOM made its final decision on the substantiation of the concept of abnormally high access costs, under the methodology applicable to the calculation of the NCUS, determining that for this purpose

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should be considered the costs of customers which are situated in the last third of customers with higher access costs.

On 23 October 2012, the Regulator announced to have granted to SVP Advisors, S.L. the auditing to the NCUS for years 2010, 2011 and 2012. This process is also ongoing.

On 31 October 2012, PT Comunicações submited to ANACOM the calculations of the NCUS for the year 2011.

Designation of the Universal Service Providers. On 14 February 2012, ANACOM made its final decision concerning the Public Consultation on the process of  Designation of the Universal Service Provider(s) wich took place at the end of 2011 and issued its recomendations to the Government.

In Ordinance 318/2012, of 12 October, the Ministeries of Finance, Economy and Employment launched three tenders for the designation of the company(ies) to provide the Universal Service, in order to select one or more companies that the Portuguese State will hire for the provision (anywhere in the country, and to all users regardless of their geographical location) of:

·                  Connection to a public telecommunications network at a fixed location and provision of public telephone services through that connection (Tender 1);

·                  Publicly available telephones offer (Tender 2); and

·                  Comprehensive directory and a directory inquiry service (Tender 3).

The grant of the components of connection to a public communications network at a fixed location and publicly available telephone services and public pay telephones will be based on the criterion of the lowest price. Each of these components is divided into three geographical areas: North, Centre, and South & Islands.

To select the company responsible for providing a comprehensive directory and a directory inquiry service, the criterion will be the highest remuneration payable to the State. This component has a national scope.

The granting period for each of the services was set at five years, in a framework of technological neutrality.

The deadline for the submission of applications to the tenders for the purpose of pre-qualification, ended on 28 November 2012. Between 27 December 2012 and 3 January 2013 took place the preliminary hearing to the stakeholders on the draft qualification report. The final report was published on 2 February 2013, with the following results:

·                  PT Comunicações, Optimus, Zon and Vodafone qualified for Tender 1 and for Tender 2;

·                  PT Comunicações, Vodafone and Plurimarketing qualified for Tender 3.

According to the schedule in the programs of the tenders, the final results should be known until 28 June 2013.

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Law on the Financing of the Universal Service. On 23 August, Law 35/2012 was published, creating the compensation fund of the universal service of electronic communications, foreseen in the Electronic Communications Law, and intended to finance de net costs associated to the provision of the Universal Service.

Consumer. On 27 October 2011, ANACOM approved a draft decision on the required procedures for subscribers to terminate contracts (in whole or in part) entered into by users and electronic communications undertakings in respect of the provision of publicly available electronic communications services.

On 29 March 2012, ANACOM approved its final decision, having determined operators to implement the measures set out is said decision and amend their general terms/contracts and information made available to the public in respect of standardised offers accordingly within 90 business days from the date of the final decision. Under this decision, undertakings are obligated to explicit the content of the termination declaration issued by the subscriber, the documents to submit with said declaration, form, means and contacts to submit the termination request.

Network security. On 22 December 2011, ANACOM approved a draft decision on the circumstances, format, and procedure applicable to the report of security breaches or loss of integrity with a significant impact on the functioning of electronic communications networks and services available to the public. This draft decision also contains the conditions in which ANACOM considers there is a public interest in disclosing said information to the public, as well as its content, means and deadlines.

This draft decision is still pending a final decision by ANACOM, although there have been interactions between ANACOM, PT and Apritel to address this issue.

Cloud Computing. On 27 September 2012, the European Commission issued a communication on “Unleashing the Potential of Cloud Computing in Europe”, within the strategy pertaining to the implementation of the Digital Agenda. According to its communication, the EC aims at enabling and facilitating faster adoption of cloud computing throughout all sectors of the economy, which can cut ICT costs and boost productivity, growth and jobs.

In this communication, the EC put forward a set of measures that, in its view, are key to promote cloud computing and ensure users rights. The EC stated that it would launch three cloud specific actions:

·                  Key Action 1: Cutting through the Jungle of Standards

·                  Key Action 2: Safe and Fair Contract Terms and Conditions

·                  Key Action 3: Establishing a European Cloud Partnership to drive innovation and growth from the public sector

On 12 December 2012, the DG Justice organised a workshop on “Cloud Computing Contracts, which purpose was mainly to explore stakeholders’ experiences and views on cloud computing contracts with the Commission. The commission and stakeholders discussed future possible developments of the market, issues relating to cloud computing contracts, based on existing practice, economic impact of these issues in cloud computing contracts and the possible ways forward.

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The Commission considered the workshop a first step to find precise feasible mandate for the Expert Group that shall be formed to address cloud computing issues. It is expected that said group will issue some guidance on fair and balanced contract terms, possible ways to increase trust of costumers and users and to introduce more legal certainty among providers, costumers and users, particularly in terms of security (of the service and information stored) and protection of privacy, and how to ensure balance in order not to impair provision of said services.

Cinema Law. On 6 September 2012, was published the Law nr. 55/2012 establishes the State action principles for the promotion, development and protection of cinema and cinematographic and audiovisual activities, commonly known as the Cinema Law.

The Law foresees:

·                  The obligation to pay an annual fee of Euro3.50 per subscription of television services; the amount of the annual fee will increase 10% annually up to a maximum of Euro5; the annual fee is calculated based on the average number of subscriptions existing in the preceding calendar year, calculated in accordance with the information contained in the quarterly reports published by ANACOM;

·                  The obligation to participate in film and audiovisual production ensured through an annual investment in national cinematographic works, which amount will be annually set by statute, but not less than the percentage equivalent to at least 1% of the revenues of the Video on Demand service;

·                  The obligation to create an area dedicated to national works where, upon request of their distributors and rights holders, all supported works are available along with other national productions for the purpose of sale or rental in conditions that confer the right to a percentage of not less than 50% of revenues to its rights owners.

Roaming. Regulation (UE) Nr. 531/2012 of the European Parliament and of the Council, of 13 June 2012, on roaming on public mobile communications networks within the Union (“Roaming III”) entered into force on 1 July 2012.

Roaming III covers a period of 10 years, between 1 July 2012 and 30 June 2022, and is more comprehensive than the two previous versions of the Regulation.

Beside price caps (subject to a glide path) in retail voice and SMS communications, and in wholesale voice, SMS and data communications, this version of the Regulation also features:

·                  Extension of transparency and consumer protection measures (bill-shock) beyond the EU territory;

·                  Aplication of a price cap to retail data roaming communications;

·                  At wholesale level, operators must attend all reasonable requests for access, and must publish a reference offer no later than 1 January 2013;

·                  Decoupling of roaming services, no later than 1 January 2014.

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Net Neutrality. Net Neutrality debate continued during 2012, with the European Commission and BEREC promoting several initiatives, including public consultations and requests of information to the operators. There were also guidelines and reports published on the matter.

Statistical Information. On 30 August 2012, ANACOM approved the final decision on new statistical indicators that mobile service providers are required to report to this Authority on a quarterly basis, as regards Machine-to-Machine (M2M) communications and mobile broadband.

Public Consultation of the EC on the reduction of NGA roll-out costs. Between 27 April 2012 and 20 July 2012 a Public Consultation was held on the reduction of NGA roll-out costs, highlighting the need for more coordination, information and transparency between the different stakeholders.

According to the EC, 80% on the investment costs in NGA networks relate to the deployment of civil infrastructure, as is the case of trenching and laying of ducts, and up to 30% of these costs are due to inefficiencies. The EC is of the opinion that the NRAs and the Member-States may intervene at this level, making infrastructures sharing mandatory, including those of the utility companies.

The EC published the report on this public consultation on 22 November 2012.

EC Draft Recomendation on NGA Non Discrimination and Cost Models. On 5 December 2012, the EC sent its draft Recommendation on NGA non-discrimination and costing methodologies to BEREC.

The draft recommendation expands on the principles set out by Commissioner Kroes, in July 2012, that price orientation to costs could be more flexible in certain circumstances, in return of a tighter control of non discrimination at wholesale level.

It is anticipated that BEREC issues its opinion on this draft recommendation by March 2013. The EC should take in utmost account the opinion of BEREC and submit the project for approval by the Council of Ministers. The EC intends to adopt the final recommendation in mid-July 2013.

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03

Strategic profile

Business context: consumer and business trends driving network scarcity

Global telecommunications sector

Consumer habits are changing. The surge of new devices and faster networks coupled with the proliferation of new innovative players in the telecommunications, media and technology market are creating new needs and changing consumer habits. Consumers are demanding digital content, a full mobility experience and access to data everywhere. Content is going digital, with usage time of online content growing faster than that of offline content, namely in gaming, video and music. Mobility has become the norm as consumers have more personal devices and spend an increasingly higher share of their online time using these devices, especially for data services. This new consumer demand for access to data and content across several devices is paving the way for new consumer cloud services, where users can have their personal contents virtualised and available seamlessly on every device, everywhere.

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As consumers go digital, so do companies need to transform their business models to adapt to new consumer habits. As companies undergo their digital transformation, they become increasingly dependent on information technologies, and search for more efficient and effective solutions. Telecommunication operators need to address these new needs by delivering integrated solutions, encompassing communications, networks and information technologies, and by offering flexible, scalable and secure cloud services.

Network investment is critical. The increasing digitalisation of consumers and companies is leading to a surge in usage of heavy data services. This surge is generating a ‘data tsunami’ that is flooding communication networks around the globe, particularly in mobile networks driven by the exponential growth of mobile video consumption. This new paradigm of network scarcity places a significant premium in network investment as operators strive to enhance customer experience for increasingly more demanding customers.

Proliferation of new access technologies. The deployment of new access technologies and networks continues to be an overriding trend across the sector, with operators announcing plans, trials and investments in Next Generation Access Networks (NGAN) namely fibre-to-the-home (FTTH) networks in the fixed business and Long Term Evolution (4G-LTE) in the mobile business. Both technologies offer more speed, lower latencies and higher

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reliability. FTTH improves customer experience by providing higher and guaranteed speed, download and upload symmetry and lower latency. Moreover, fibre investment also supports an enhanced mobile network, with high-quality fibre connections for mobile base stations. The mobile 4G-LTE technology is also critical to offer a seamless connectivity experience everywhere, thus addressing the increasing need for mobility with a high quality connection. Both FTTH and 4G-LTE dramatically improve efficiency of data transmission, thus enabling significant cost reduction for operators.

Challenging context in mature markets. As operators strive to cope with network investments, the sector is facing a significant increase in competition in mature markets, in both fixed and mobile communications.  In the wireline market, traditional telcos are threatened by both cable and mobile operators. CableCos are placing a significant bet on DOCSIS 3.0, a next-generation access technology that enables cable to compete with fibre solutions. In Europe alone, the number of DOCSIS 3.0 households is expected to grow 44% annually up to 2015. On the other hand, LTE is being rolled-out at a global level, and its high speed and low latency create an opportunity for mobile operators to compete on the residential arena.

On the mobile market competition is also heating-up, due largely to regulators pushing an aggressive decrease in mobile termination rates, which in Europe are expected to reach 1.9 eurocents per minute in the short term. These levels open opportunities for aggressive offerings by attacker operators, including low-cost all-net bundles that dilute incumbent operators’ network externalities. Such offers are being launched in several countries with strong customer take-up.

Emerging markets remain attractive as a growth engine. Emerging markets continue to appeal to telecommunication operators as they remain sources of scale and growth. Simultaneous growth in population and GDP per capita is driving the emergence of new consumers in the middle and upper classes. The new demand thus created has untapped potential in traditional telecom services, with penetration of most services still to reach levels of mature markets. In fact, emerging markets are accounting for most of the telecommunications sector growth, having grown faster than mature markets (CAGR 2009-2012 in fixed and mobile revenues of 6.0% and 12.5% respectively for emerging markets versus 0.8% and 1.6% in mature markets respectively). This trend is expected to persist in the medium term (CAGR 2012-2015 in fixed and mobile revenues of 7.7% and 9.4% respectively for emerging markets versus -0.2% and 1.1% in mature markets respectively).

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New competitive boundaries at a global level. The broad telecommunications sector is expected to continue to expand at a global level, but an increasingly larger share is now occupied by adjacent sector players such as equipment manufacturers, internet service providers and media players. These players are taking advantage of improved connectivity and platform-agnostic technologies to offer over-the-top and cloud based services. Telecom operators are expected to maintain traditional access services and a billing relationship over which users access a myriad of services from adjacent players such as music (iTunes), video (YouTube), photos (Facebook, Picasa, Flickr), apps (Google, App Store) and retail (Amazon, Ebay). These adjacent competitors are being able to build strong global brands. For example, in the equipment manufacturers market, Apple and Samsung accounted for 50% of total global revenues, up from only 16% in 2007. The expansion of the competitive boundaries is creating additional pressure for telecommunication operators, but also creating significant opportunities. In fact, between 2011 and 2012 there have been more than 300 deals globally in which Telco operators acquired players in adjacent sectors, such as cloud providers, internet companies or software developers.

Telecommunications context in Portugal

Bundled offers paving the way to convergence. The Portuguese telecommunications market has been changing with triple-play packages gaining traction in the fixed market. In Portugal there are 1.8 million triple-play customers, which account for 57% of the total Pay-TV subscriptions. Triple-play success is driven by the intrinsic value of pay-TV as an attractive entertainment alternative and by the differentiated content enabled by set-top-boxes. The transformation towards a triple-play based market was initiated in 2008 and continued throughout 2012 with the consolidation of cable operators in the voice segment and of Telco operators in the TV segment. As a result of its relentless and focused investment in pay-TV and bundled offers, PT has significantly improved its dynamics in voice and broadband, whilst being able to achieve triple-play leadership.

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In response to strong customer appetite for an integrated quad-play offering, PT further enhanced its bundled offering with a quad-play convergent offer with TV, broadband, fixed voice and mobile voice, becoming the only national player providing a real convergent offer with the same invoice, customer support and commercial touch points.

Competitive landscape. The telecommunications competitive landscape is expected to change significantly in Portugal, with the announced consolidation of the largest cable operator with the third mobile operator, thus creating a new integrated telecom operator in Portugal.  This transaction will further increase the focus on bundled offers, going from triple to quad-play as the two integrated players leverage on the strength of being an integrated telecommunications operator and on the consumer appetite for bundles that will provide them with simplicity, convenience and economy.

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PT’s positioning: a geographically diversified customer-oriented innovative company

PT is an international operator focused in three main geographies, Portugal, Brazil and Africa. In addition, PT also has investments in Asia, namely in Macao and in East Timor, as at 31 December 2012. PT serves more than 100 million customers worldwide and generates 58.4% of its revenues(1) outside Portugal, including 53.3% from Brazil.

In Portugal, PT is a customer-oriented company focused on innovation and execution, managing its business along customer segments with a cross functional collaboration to deliver the best customer experience. PT has clear priorities to create value in all customer segments, leveraging its unique assets.

PT’s key priority on the business-to-consumer market will be to explore convergence to grow market share based on simplicity, convenience and value-for-money. While convergence is the key priority on the consumer side, PT will strive to conclude the transformation of its consumer business in each segment. In the residential segment through bundled offers leveraging on an advanced Pay-TV service that already enabled the inflection of the historical downward trend in the wireline business and triple-play leadership.  In the personal segment, PT will continue moving towards a more simple and easy tariff structure and will continue to explore the data opportunity.

On the business-to-business market PT’s key priority is to increase penetration of IT/IS services (cloud, outsourcing and BPO), thus increasing relevance of our relationship with business customers. In order to achieve this, PT developed and implemented a three-tier approach to the B2B market: (1) Residential+ customers, with an offering based on convergent voice and broadband; (2) Connected+ customers, served mainly with multi-employee connectivity services, including mobility solutions for itinerant employees, and simple software solutions, and (3) Integrated+ customers, served with a full range of telecommunications and technological services such as unified

(1)  2012

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communications, outsourcing of ICT services, application integration, M2M and specific IT/IS solutions, business process outsourcing and IT consultancy. Key feature in this last segment is providing an end-to-end approach to customers by supporting their IT transformation.

At the international level, PT is focused on improving the operational performance of its assets and on the sharing of best practices across the various businesses. The expansion of international operations to multiple geographies is one of the most important catalysts of value creation in the telecommunications sector and PT has built a relevant portfolio of international operations.

Strategic objectives. PT remains committed to a cost, operational, financial and strategic discipline, aiming at focusing on the development of its resources in its core businesses and in its core regions, Portugal, Brazil and Africa. PT established five new medium-term objectives: (1) grow customers in scale; (2) increase its exposure to international operations; (3) lead consumer market in convergence and enterprise market in ICT; (4) become a top tier reference in technology, customer experience and operational effectiveness in the sector and (5) be a reference in terms of sustainability.

Portuguese operations

Residential: Reshaping TV experience. PT has been leveraging on the increased capacity of its new generation access networks to provide a differentiated and sophisticated TV experience anchored on premium content and a multi-screen strategy with seamless access to content on PCs, TVs and smartphones. Meo, PT’s triple-play service, offers a differentiated customer experience through (1) a non-linear experience with video-on-demand, pause and restart-TV, (2) a complete ecosystem for TV apps (Facebook, games, music, Kids and Sapo); (3) interactive features providing additional depth over key channels and contents and (4) user generated content with  Meo Kanal, a channel creating service that created the first network effect on TV. The differentiation of Meo is not limited to fibre customers, as PT has also invested in a premium satellite service, with the current DTH service offering eight HD channels, digital recording, video-on-demand and interactive apps. Residential segment performance has been anchored on the success of our triple-play offering that has achieved market share leadership on the back of its differentiated value proposition.

Personal: Driving growth through mobile data and convergence. The Personal segment strategy is focused on two main drivers: (1) increase mobile data usage, with a strong push for smartphone adoption, the promotion of value-added mobile apps and the development of tiered data bundles for all consumer needs, and (2) tiered pricing

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plans on voice, simple and easy to choose, which reinforce post paid value proposition and endeavour to block the “on-net” effect through enhanced pre-paid tariffs and with segment specific strategies.

Smartphones drive retention, higher data usage and higher ARPUs and TMN is leveraging on partnerships and key suppliers to provide customers with a broad set of smartphones, including own-branded models designed according to Portuguese consumer preferences. TMN is also leveraging on internal skills, namely with the well-known brand Sapo, to develop apps that can generate new revenue streams whilst also contributing to enhance the value of mobile data. Additionally TMN remains focused on designing new tariff plans, like the “e”, an innovative prepaid plan, or the “Unlimited” post-paid plan, which are simpler and customisable and aimed at catalysing the upselling of internet and lock-in of high value customers, shifting away from pricing competition.

Consumer: Explore convergence to grow market share based on simplicity, convenience and value-for-money. PT is leveraging on its leading position in all consumer segments to meet consumer’s demand for (1) simplicity, a single mobile network to talk freely and without barriers to all other networks in Portugal; (2) convenience, a single brand for voice, internet, and TV inside and outside the home, with a single commercial contact point; a single customer care centre for fixed and mobile services; a single invoice with all core services included, allowing for a higher predictability in spending and (3) economy, as the concentration of all services under MEO’s brand allows PT to transfer the subsequent economies of scale to customers, allowing for immediate savings for Portuguese families.

Enterprise: Increase penetration of IT/IS services, namely cloud outsourcing and BPO. Through investments in infrastructure and telecom-IT convergence, PT intends to develop and market advanced integrated solutions for the corporate and SME segments aimed at promoting the penetration of IT/IS and BPO services, thus increasing customer share of wallet and loyalty. PT will also leverage on its new leading-edge data centre to develop a differentiated cloud computing offering for companies, in close cooperation with its leading industry partners.

Reinforce leadership in all market segments where PT operates. With the launch of its pay-TV service in 2008, PT was able to turn around its residential business, becoming a unique success case in Europe. In fact the transformation of a business with declining revenues into a sustainable growing business that has achieved triple-play leadership is a unique case in Europe. To continue this innovation path and reinforce our leadership in all segments PT recently launched its quad-play offer. This offering leverages on PT’s unique skills to match the increasingly need of individuals for seamless communication and data services in multiple devices and locations. M4O, PT’s quad-play offer, provide customers with simplicity, convenience and economy, allowing the customer to integrate all the telecommunications services under a single invoice without surprises, a single customer support and a single touch point network.

Excel in customer experience. In a context of major market transformations and economic uncertainty, understanding and addressing customer needs throughout their life cycle with a flawless execution is a crucial factor for success. Understanding and exceeding these customer needs has been always a key concern for PT and we continue to improve our ability to excel in customer service with several initiatives, namely the integration of our IT systems and the launch of a self-care web portal, making it easier for the customer to manage their profile, contracts, invoices and products.

International operations

Maximise the strategic value of PT’s international assets, reinforcing the focus on Brazil and sub-Saharan Africa. Given PT’s scale, growth prospects and starting position, the Brazilian market remains a key priority. Africa will

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continue to be a source of growth, where PT will continue to explore value-creating investment opportunities through partnerships.

Brazil: data growth and convergence. In Brazil, through its investment in and partnership with Oi, PT will focus its efforts on leveraging its successful experience in developing innovative and technologically advanced solutions for corporate customers, fixed-mobile convergent offers, mobile broadband, pay-TV and triple-play services to contribute significantly to improve further Oi’s operational and financial performance, considering its strong presence in the Brazilian market and the potential for future growth.

Africa and Asia: Opportunistic M&A and consolidation. PT continues to focus on improving the efficiency of international operations through sharing of best practices amongst all its subsidiaries and through an increased proximity with PT’s operations around the world to better follow-up key developments in each geography.

Focus on operational and commercial excellence of all assets, ensuring the sharing of best-practices. By reinforcing operational and commercial excellence in all operations and promoting the sharing of best-practices amongst all businesses, PT will be able to fully tap the potential of each operation, taking into account the market development status in all segments as well as its competitive positioning.

Focus on innovation and execution

Innovation: structured approach and partnerships. A clear focus on innovation has been at the heart of PT’s investments and projects in recent years, aiming to anticipate future consumer and technology trends, thus enhancing the company’s ability to deliver disruptive solutions to the marketplace. We developed a structured approach to promote the culture of innovation across the whole company and aiming to establish a balanced portfolio of projects. We are constantly reviewing allocation of capital, people and mindshare of the organisation across 3 time horizons and risk levels: (1) incremental innovation (business as usual, low-risk and short-term optimisations); (2) planned innovation (business development, medium-term and medium-risk developments), and (3) exploratory innovation (structural projects, which are long-term and high-risk by nature). To develop a winning go-to-market strategy and reduce investment risks we work with a broad network of partners in leading edge companies, abroad and in Portugal.

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Execution: next generation networks. PT is and will continue to be in the forefront of fibre rollout in Portugal and in Europe, having already covered 1.6 million homes passed with FTTH, totalling 890 thousand km of fibre, 46% of the population and approximately 74% of GDP, thus placing Portugal as the most penetrated country in Europe with

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46% of households covered, an initiative that was recognised by the FTTH Council Europe with the innovation award “Deployment and Operation of FTTH networks”. PT aims at leveraging its FTTH investment not only to provide advanced and high-speed data and video services to its corporate and residential customers but also to cover TMN’s base stations with fibre in order to allow higher download and upload speeds for TMN’s data customers (92% of TMN sites are already connected with fibre and 100% of 4G-LTE sites with IP/Ethernet technology), and simultaneously paving the way for LTE rollout. In effect 4G-LTE services were launched in March 2012, with the LTE network covering 20% of population in Portugal from beginning. PT increased its coverage to 80% of population by April 2012 and to 90% by the end of 2012. Finally, PT also leverages the most comprehensive WiFi network in Portugal, that was recently extended for 200 thousand hotspots around Portugal, enabling automatic traffic offload from mobile to fixed networks, which enhances customer mobility though a seamless subscriber authentication and handover between hotspots. PT developed an integrated all-IP fixed and mobile network, supporting differentiated service levels and advanced traffic management (opportunity for optimisation of capacity investments), allowing more availability and flexibility and increasing cost efficiency.

Integrated customer-centric organisation. PT abandoned a company structure organised around fixed and mobile platforms, and changed to a structure centred on the specific needs of each segment, implementing a new organisation around five customer segments: Residential, Personal, SMEs/SoHo, Corporate and Wholesale. The re-organisation process also focus in achieving a leaner company with superior operational efficiency with several decision processes and layers being eliminated and the number of directors being reduced.

Excel in customer experience. PT is implementing an extensive transformation programme ensuring an integrated view of customer touch points which was underpinned by common it platform. We now have convergent stores, a unique self-care portal, that allows the customer to manage all its PT services through only one log in, and a 360º view of our customers with the new CRM system. Field forces and call-centres have an integrated management and their processes have been reviewed for leaner operations. A multi-year transformation programme on IT is also being implemented to enable business transformation and increase efficiency

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04

Research and development

PT was ranked as the second placed operator in Europe in terms of R&D investment as a percentage of revenue, and sixth in the world, according to “The 2012 EU Industrial R&D Investment Scoreboard”.

A clear focus on innovation, underpinned by the forecasting of future consumer and technology trends, have been at the heart of PT’s investments and projects in recent years, thus enabling the company to deliver disruptive solutions to the marketplace. As a response to consumers’ evolving habits, PT has built a service offering based on three emerging needs: mobility, digitalisation and virtualisation of services and content. Aware of its role in society, which is reflected in PT’s strategy, these solutions were designed with sustainability in mind, focusing on efficiency and reduction in environmental footprints.

Innovation has always been a characteristic of PT, but the company’s cultural transformation and change in mentality over the past few years has underlined its importance. The existing innovation management methodology, part of the OPEN Programme, promotes a culture of innovation across the whole company, maximising employees’ potential for creativity and innovation. Within the scope of this programme, initiatives are managed so as to guarantee diversified capital allocation, systematic monitoring and control of results, and in accordance with their respective timeframe: (1) Incremental Innovation — short term actions focused on continuous improvement; (2) Planned Innovation — development of technological and product roadmaps for the medium term; (3) Exploratory Innovation — analysis of the main technological trends which influence the future of the ICT sector in the long term.

This vision for the future is reflected in the Innovation/R&D projects which represented in 2012 an investment of around Euro 167 million,  and which included the following:

Technology Infrastructure

·                  Continued strong focus on Next Generation Networks, including the development and consolidation of the country’s largest FTTH network — 46% of Portuguese households have access to this network. It was also in 2012 that PT’s first 4G/LTE products came to market, the first commercial launch of its kind in Portugal.

·                  Construction of the 6th largest Data Centre in the world which will eventually span 75,500m2 and have the capacity for 50,000 servers and 30 Petabytes of data.

Consumer Segment Solutions

·                  Development of multiplatform solutions which enable mobility: MEO Go!, an application for video streaming (TV, VOD) on many screens while on the go; and Cloud PT, the newly launched personal cloud solution for this segment.

·                  Launch of MEO Kanal, the pioneering service which allows MEO customers to share content (photos, videos, music) through a personalised TV channel.

·                  Continued co-development of proprietary smart phones at very competitive prices (e.g. TMN A15).

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B2B Segment Solutions

·                  In the area of advanced IT/IS solutions, especially those reflecting PT’s focus on Cloud technology, the portfolio of SmartCloudPT available services was expanded, both through internally-developed and partner solutions.

·                  The launch of the SmartM2MPT platform (http://www.smartm2mpt.pt) took place in 2012, which includes a range of Machine to Machine services such as fleet management, asset localisation, connectivity management, public lighting management and smart metering.

·                  Continued development of the multiannual organisational transformation programme with the aim of achieving significant efficiency gains and service quality increases (e.g. Click — new tool for field force management).

·                  Implementation of projects in the area of sustainability, as part of the ongoing objective of minimising PT’s environmental footprint, specially geared towards the development of green offer products and services (e.g. home energy consumption through the MEO Energy solution).

·                  As regards exploratory innovation, the internal R&D units launched and participated in projects in strategic innovation areas, including several projects which received grants from some of the main R&D financing programmes at national and international level (QREN, FP7). Renewed focus was also put on sustaining an Innovation Ecosystem, in which PT collaborates on initiatives with suppliers, other operators, universities and research institutions.

Technology and Innovation Conference

PT’s Technology & Innovation Conference took place on 29 and 30 October 2012 in Lisbon, Portugal. The conference was hosted by PT’s CEO and by the leadership team. This event was an exceptional opportunity to meet PT’s leadership team and to ascertain how PT is leveraging investments in state of the art technologies, future proof networks and innovation roadmaps for both the B2C and B2B market segments.

The event included:

·                  Presentations by PT’s leadership team;

·                  Smartcity: Live demos of PT’s most innovative solutions, organised in thematic areas - Home, Education, Health, Business and Public Services;

·                  Presentations by eighteen leading-edge Portuguese companies, including certain technological partners of PT.

PT was able to gather in Lisbon investors controlling more than 1 trillion dollars, more than 80 market participants, and 56 worldwide journalists. This event was also open to PT’s employees and to the general public, reaching an impressive 5,200 attendees in total.

A.            Incremental Innovation

PT wants to harness the innovation potential of its employees, and so continuously challenges them to participate in innovative actions across many different areas. Through the Idea Market, employees are encouraged to participate in management challenges. In 2012, over 2,500 employees took part, contributing a total of 2,437 ideas during this period. This tool for managing innovative ideas works simply: the employee contributes an idea which the participant community comments on and can invest in through an online platform, leading to the eventual approval or rejection of the idea by the Market. If the idea is approved and considered as beneficial to company

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operations, it is sent for implementation. The authors of implemented ideas are acknowledged and their ideas highlighted in the company’s internal communication channels.

Overall, since the launch of the Idea Market, over 7,000 ideas have been submitted and validated, leading to 273 innovative implementation actions, in the following main areas:

·                  Improved customer experience (22% of the implemented ideas);

·                  New products and services (20%);

·                  New organisation culture and behaviour (16%);

·                  Cost reduction (11%).

OPEN AWARDS

At the end of each year, the innovation management team identifies the most innovative projects of the year, based on the results achieved. This list of projects is presented and put to an internal vote by the whole organisation, and the winners are each presented with an “OPEN Award” by the Executive Board at the largest internal event of the year, as a way of acknowledging the excellence of the implementation.

B.            Planned Innovation

Based on changing market trends, the innovation roadmap is reviewed on a regular basis, with the deep involvement of the various technology, operational and business departments in PT. The integrated medium term view afforded by the roadmap allows for clearer planning, and the resulting synergies can lead to more innovative solutions and a competitive advantage in the marketplace.

1                 Products and Services

a)             Consumer Segment Solutions

Over the years, PT has consistently focused on creating innovative and competitive solutions, thereby allowing it to establish and consolidate its position in the various markets where it operates. By launching products which adapt to the changing needs of consumers, PT ensures customer loyalty, while at the same time gaining new customers through solutions which promote greater proximity and involvement.

MEO Services

Widely regarded as a success story, the MEO IPTV service reached the number 1 position in the national triple play market (TV + Telephone + Internet) in 2012, a mere 4 years after its launch. This was made possible as a direct result of the strategy of providing a unique service to customers, based on high levels on interactivity and an excellent user experience.

In 2012, PT maintained a focus on developing applications which enable a complete interactive user experience, whether through special content apps (e.g. MEO Local, Oscars 2012, “Toca a Mexer”, “Morangos com Açucar” and “Ídolos”) or through the development of interactive features for regular programming. As regards this latter development, the advances made in interactive advertising should be highlighted, allowing viewers to access

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additional information directly from commercials as they were watching them (e.g. Continente, Warner and Nokia Lumia 800 from TMN). It is also worth underlining the contribution of the newly launched exclusive channels, many of which with a strong interactive element, such as Secret Story 3, TVI Ficção and Bola TV. Finally, the country’s first interactive news channel - called SIC Notícias Interactivo - was launched during 2012, in partnership with Impresa.

2012 was also the year that MEO Kanal was launched to the public. This service allows customers to share multimedia content (photos, videos and music) through a personal MEO TV channel. This channel can be shared with friends and family, who access it using a PIN code, or with the whole MEO viewer community.

MEO Interactive also gained new and innovative solutions, such as MEO Energy, a service for monitoring home energy consumption in real time, which includes tariff recommendations based on one’s actual consumption profile, and suggestions on how to lower the energy bill. Additionally, the SAPO Voucher application was made available on the MEO platform, allowing customers a quick an easy way to avail of daily deals though the TV.

Multi-platform services

In order to guarantee that PT continues to be at the forefront of market trends, including the increasing consumption of content on the go, MEO continued to develop its multi-platform strategy, introducing new features to the MEO GO! app, such as the ability to download content (Video On Demand) for offline viewing without the need of an internet connection.

Leveraging investments made in data storage infrastructure, PT launched its personal cloud solution in late 2012, making 16GB available free to subscribers. In its initial phase, this service was made available on an invitation-only basis, with 100,000 invitations being sent in the first month. Currently, CloudPT is available as a service through the site (www.cloudpt.pt) and as a specific application for PCs (Windows, Mac, Linux and Firefox extension) and mobile devices (iOS and Android).

Mobile Solutions

PT continues to develop a diversified mobile product offering, both internally and through partnerships with world class players in the field. For 2012, highlights included the development and launch of proprietary mobile phones (e.g. TMN A15), and the inclusion of new top of the range phones and tablets such as the iPhone 5, Samsung Galaxy SIII, Samsung Galaxy Note II, Nokia 808 and HTC Windows Phone 8X (this last phone marked the launch of Microsoft new mobile operating system).

Several new mobile solutions were also developed, including the following:

·                  MultiSIM 4G: 4G-LTE mobile internet service which allows users to share one credit limit among several devices (e.g. smart phone, tablet, PC). This innovative solution allows for greater mobility, is easy to use and economical for customers.

·                  4G-LTE Broadband: having reached around 90% national population coverage by the end of 2012, PT focused on delivering faster than ever mobile internet access through a range of 4G dongles under the brand names MEO and TMN.

·                  TMN Wallet: the new mobile payments solution was rolled out as a pilot involving PT employees and selected vendors, allowing participants to pay for purchases using their mobile phones and supporting a range of technologies (NFC, QR Codes, SMS and USSD).

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·                  Mobile Parking: this service allows users to pay for public parking through their mobile phones and was initially - and successfully - implemented in the Sintra Municipality, with a view to expanding to other areas.

b)             B2B Segment Solutions

IT/IS Services and Solutions

Given the current economic climate, and investments already made in network infrastructure and cloud computing, PT has been strengthening its strategic positioning as an efficiency and productivity enabler for business customers. The company has continued to concentrate on bringing new solutions into its SmartCloudPT portfolio, both internally developed services (e.g. private servers and corporate email) and solutions provided by external partners (e.g. GuestCentric, Microsoft Office 365). All SmartCloudPT solutions can be tailored to a business’s needs, with a pay-as-you-grow model that can enable customers to reduce their over IT costs.

Also in relation to the SmartCloudPT service offering, PT was certified as a SAP Cloud Partner, leading to the inclusion on this platform of a suite of SAP solutions at competitive prices and adapted to business consumer needs. SmartCloudPT has thus become the first platform of its type in the Iberian market to obtain this certification.

Sector-specific solutions

During 2012, PT reinforced its commitment to the Health sector, focusing on the development of innovative solutions for implementation in major players at national level. Important steps were taken in the development of a new version of Medigraf, a telemedicine solution which enables remote consultations and diagnoses, sharing of medical tests, visualisation and manipulation of medical images, as well as simultaneous online communication between medical professionals.

Moreover, the past year also witnessed scope revisions within the chronic disease management solution initiatives, with the first steps being taken towards the development of Integrated Chronic Disease Management System (SIGDC). This solution will enable an integrated and continuous view of patient pathologies, leveraged on information provided by a variety of health care providers, health centres/clinics/hospitals and the patients themselves, promoting overall cost reduction and a greater focus of preventative care. Furthermore, following the acceptance of a proposal submitted to the QREN national funding programme, PT joined the TELE-R project, which aims to develop a computer-assisted cognitive rehabilitation platform for the rehabilitation, re-education and reintegration clusters.

PT has also strengthened its support of the Education sector by providing solutions aimed at improving the overall effectiveness of the national education system. The service offering in this area enables improved communication between the various stakeholders (schools, students and parents/guardians), and with this in mind 2012 saw the implementation of SAPO Campus in several Portuguese schools. This solution, developed in partnership with Aveiro University, provides a simple platform where students can access school content and share their own content with the participant community. SAPO Campus has so far been rolled out in 14 school groups which encompass a total of 49 individual schools.

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In addition, PT also continued to expand its Fibre Optic network, and by year end around 40% of Portuguese schools had access to the country’s largest FTTH network.

Regarding the development of solutions for Public Administration, PT focused on innovative solutions for several public bodies, aimed mainly at fostering proximity to citizens. For example, a special widget for MEO Interactive was developed for the Santarem Municipality, thereby providing a multi-platform communication channel with citizens, as the same content was also available through the PC or mobile phone.

As for supporting Small and Medium Enterprises in Portugal, 2012 saw the launch, in collaboration with Microsoft and the Portuguese Economy and Employment Ministry, of the PME Digital initiative, with the goal of helping Portuguese small businesses to use ICT to increase their productivity and competitiveness. PT’s solutions within this initiative are based mainly on the SmartCloudPT platform. Furthermore, special solutions tailored for particular sectors were also launched during this period, namely the OfficeBox Hotel and Tourism package for the hospitality industry.

Machine-to-Machine

Consolidating the strategy followed in previous years, 2012 saw the launch of the SmartM2MPT range of services, the new PT brand for Machine-to-Machine. Included in the services that have already been rolled out are: managed connectivity (i.e. real time management and supervision of all communications taking place involving machines and equipment), equipment monitoring (e.g. public lighting management), real time measuring of electricity and water consumption, and geo-referenced asset localisation (e.g. for fleet management). By bringing these kind of advanced solutions within reach of Portuguese companies, PT is contributing positively to their efficiency and the evolution of current business models.

c)              Environmental sustainability

In recent years, PT has sought to reorient its products to be in line with its Sustainability objective, developing more environmentally-friendly products and services — as part of a green offer — including the following:

·                  MEO Energy: given the increasing importance of energy consumption to families, both in terms of cost control and carbon footprint concerns, PT developed MEO Energy, a solution for controlling home energy use in a user friendly manner, offering the possibility of viewing consumption information on the TV. Estimates have suggested that, on average, a consumer can reduce energy consumption between 20 and 40% using this tool.

·                  Equipment reconditioning and reuse: PT aims to rationalise use of materials and equipment as part of its environmental sustainability objective. Bearing this in mind, a partnership was entered into with Cisco to recover, recondition and reuse set top boxes and home gateways, leading to reductions in waste and costs, and also providing a positive contribution to minimising environmental footprints.

·                  Environmentally friendly packaging: new ecological product packaging has been developed with the goal of improving the sustainability of product life cycles. Packaging is made from recycled or recyclable materials, and contains information about the correct disposal of the product constituents at the end of its useful life (e.g. mobile phone, battery).

·                  Cloud offering: opting for PT’s cloud services has a positive impact on the environment as it leads to a reduction in investment in IT equipment by individual customers, who instead choose to purchase IT services as they need them, reducing waste and improving efficiency.

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2                 Technological Infrastructure

PT’s services are supported by a cutting edge infrastructure that allows for better quality access to these services and, therefore, to a richer and distinctive user experience. In line with the company’s strategic objectives in 2012, PT continued to invest in the improvement of its technological infrastructure.

a)             Network Infrastructure

In the fixed line network, PT strengthened its investment in FTTH, with 1.6 million houses in Portugal having access to this network, which represents about 46% of the population and approximately 74% of the Gross Domestic Product. The investment being made in this area in recent years has allowed the company to expand its network to non-residential customers, with more than 40% of schools having access to FTTH, as well as 40% of Portuguese companies.

In the mobile network, the roll-out and launch of the 4G-LTE network was the focus of the company’s investments in cutting edge technology. PT reached, by the end of 2012, 90% national population coverage, with the quality of the 4G-LTE network considered a benchmark in the field. In order to support the network’s mobile data capacity and quality, PT ensured more than 92% of mobile base stations were connected with fibre.

Lastly, important steps were taken towards convergence and optimisation of the fixed and mobile networks:

·                  Unified management of all networks and evolution to all-IP;

·                  Integrated cross-network service platforms;

·                  Unified customer access to services, seamlessly across fixed, mobile and Wi-Fi networks;

·                  Expansion of 100Gbps connections between the main hubs on the network, a technological improvement in which PT was a pioneer;

·                  Continued progress in the migration of all networks to the IPv6 protocol (near completion).

b)             Data Centres

To support the company’s strategic objectives, in 2012, PT began the construction of the Covilhã Data Centre, which will be one of the world’s largest, due to become operational by the end of the first semester of 2013. The new Data Centre will be more than 75,500 sqm in size and will be able to house over 50,000 servers with 30 Pbytes capacity. It will be connected to PT’s backbone (100 Gbps), allowing for the exportation of data storage capacity and other technology services. This project represents a significant contribution to the country’s economic development and will create hundreds of direct and indirect jobs.

The Data Centre PT will also be world class, from the sustainability and energy efficiency standpoint. Besides the fact that it will be highly efficient, saving 144,000 tons of CO2 emissions and reducing energy consumption by 40%, Data Centre PT will also use environmentally responsible cooling systems (free cooling) and solar power. With this investment, PT will avail of an unparalleled technology and telecommunication services development platform, thereby strengthening its commercial portfolio by deploying more and better services to its clients.

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3                 Operational Efficiency

Maintaining a focus on efficiency and operational excellence, several initiatives were developed with corresponding positive impacts on business processes, resource management and customer relationship management. These initiatives were based on four system architecture principles: use of standards, reference data, service orientation (SOA) and canonical data models. In this way PT was able to speed up new processes implementation and alteration.

The following main projects, developed in this area in 2012, should be highlighted:

·                  CRM ONE Project: in 2012 PT continued its phased implementation of a single CRM solution for all the group companies based in Portugal (PTC and TMN), enabling improvements in the quality of service provided, in the relationships established with customers, in the focus of commercial efforts and in the capabilities of the sales force (cross-selling, acquisition and retention of customers);

·                  Login PT: the purpose of the Login PT project is to improve customer experience, providing simple and unified access to PT’s products and services through various multi-platform applications (television, internet, smartphones, tablets and PCs);

·                  Click Software: this project provided the field force operational management with a toolkit that helps task allocation to technicians and monitors activities in the field. Technicians are able to test the network remotely in real time, thereby making them more autonomous. The allocation and automatic routing requires less human intervention and allows more accurate activities scheduling. Using GPS it is possible to optimise the route used by technicians throughout the day. The positive effects can be seen at many levels, for example in the reduction of travel times, better appointment control, cost reduction and higher customer satisfaction;

·                  Unified fixed line telephone and internet billing: as part of ICT resource convergence and process simplification policy, in 2012 PT unified the billing of its fixed line telephone and internet services. In this way, it became possible to issue a single bill for all fixed line services, leading to a reduction in billing costs and making customers lives easier.

C.            Exploratory Innovation

Forecasting trends and behaviour is of strategic importance in modern business, especially in a sector marked by intensive investment patterns and a rapid pace of change. In this context, exploratory innovation plays a key role in reaching the standard of competitiveness required to be successful and maintain a sustainable business, ensuring market leadership in the long run. Apart from internal capabilities developed in this field, PT is also an active member of an innovation ecosystem, containing strategic partners from suppliers to other telecommunications operators, universities and research institutions.

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1                 Exploratory Innovation driven by internal units

PT Inovação develops the majority of PT’s exploratory innovation projects, focusing on technological infrastructure optimisation, OSS/BSS platforms and applications and services development technologies. SAPO, PT’s internet portal, also develops exploratory innovation projects, focusing mainly on software development and integration, and multi-platform applications.

Many of PT’s exploratory innovation projects have been acknowledged and supported by national and international funding programmes, helping in this way to reduce the risks associated to this kind of long term projects, where the return on investment is generally hard to determine. In 2012, several projects were funded under the QREN, EU-CIP and EU-FP7 programmes, in a wide range of research areas, such as health, cloud services and networking, smart cities, machine-to-machine, network management (mobility and off-load), energy efficiency, identity management, privacy and security.

a)             PT Inovação

During 2012, PT Inovação worked in several fields of exploratory knowledge, including the following:

·                  Development of a tool dedicated to the research in planning and optimisation of LTE radio networks;

·                  Design of a cognitive solution for the use of TVWS (TV White Spaces) in LTE. Assessment of QoS gained by using TVWS in a real scenario/pilot;

·                  Evaluation of an energy efficient algorithm for hybrid access macro-femto handover in urban environments with high Access Point density;

·                  Implementation and evaluation of an indoor localisation solution based on WiFi;

·                  Design and experimentation of network virtualisation techniques and “networks-on-demand” (NaaS — Network as a Service);

·                  Integrated solutions development and demonstration of Cloud Networking (Cloud + Network), based on OpenNebula and IP/MPLS VPN technologies, in multi-domain scenarios; implementation of the respective client and administration portals;

·                  Design and implementation of an integrated solution for cloud computing resources and services management in IaaS environments, with operation support systems (OSS);

·                  Design and implementation of a Cloud service broker (CSB) for recommendation and running of Cloud services in a PaaS environment;

·                  Design and implementation of a cloud services integrated portal, including IaaS, PaaS and NaaS components;

·                  Design and prototyping of an access control mechanism in 3GPP PCRF for LTE/EPC environments, using network metrics and indicators;

·                  Design and prototyping of a policy server for discovery processes and network selection (ANDSF) in 4G / LTE / EPC / Wi-Fi environments;

·                  Design and prototyping of connectivity and network off-load management in heterogeneous environments (e.g. Windows, OSX, Android);

·                  Studies in the area of coherent optical networking and adaptive signal processing;

·                  Prototyping of a simplified authentication system using mobile devices;

·                  Study and specification of use-cases for automatic fraud detection and unauthorised access to admission management systems;

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·                  Design and prototyping of a Keystroke Dynamics system for fraud detection in systems access;

·                  Design, development and packaging of a safe message processing framework (SEF);

·                  Experimentation and prototyping of an augmented reality mobile application based on Computer Vision, in a mobile worker context;

·                  Development and testing of a Mobile Augmented Reality Gaming scenario applied to a large corporate team building event;

·                  Exploiting new interaction concepts in the area of facial expression recognition;

·                  Experimentation and prototyping of mobile-IPTV convergent applications, exploiting interactions between tablet/smart phone and TV viewing;

·                  Experimentation and prototyping in the machine learning domain applied to a personal mobile assistant;

·                  Experimentation and prototyping with emergent web technologies: HTML5, NoSQL, server-side JavaScript;

·                  Participation in various other initiatives regarding future internet, smart cities, M2M, privacy/security and cloud.

Many of these projects were carried out under international cooperation programmes, which were mainly developed along these four lines:

·                  In the context of projects promoted by the European Union (within its Framework Programmes FP7 and CIP), with the following 12 projects:

·                  FIVER — Development of architecture for access network based on FTTH. Quintuple-play services offer: IP data (GbE), voice (LTE femtocell), HDTV (UWB), LAN (WiMAX), and home security / control (WiMAX);

·                  COGEU — Analysis of new approaches for the exploration of TV White Spaces (TVWS) and the evaluation of gains achieved with the use of 3G/LTE TVWS (e.g. capacity);

·                  C2POWER — Optimisation of energy efficiency in cellular networks through cooperation between RATs;

·                  ALICANTE — Development of an ecosystem for advanced distribution and adaptation of digital multimedia content in heterogeneous environments;

·                  SAIL — Development of Cloud Networking, aimed at integrated management and control of IT and network resources, demonstrated through prototypes;

·                  MEDIEVAL — Definition of a new mobile architecture for multimedia services;

·                  SOCIETIES — increase in the knowledge of PSS for Community Smart Spaces (CSS);

·                  Cloud4SOA — Development of interoperability mechanisms for Cloud Computing infrastructure. Development of a pilot to integrate a Service Delivery Framework (SDF) in a Cloud Computing environment;

·                  VOICES — Improved access to content and services in emerging countries. Development of pilots in Africa on health, agriculture and reforestation;

·                  SEMIRAMIS — Design and testing of a secure infrastructure, authentication, authorization, management and information sharing involving public and private entities;

·                  WHERE2 — Design, development and evaluation of techniques for indoor mobile terminal location with accuracy similar to outdoor GPS environments;

·                  IoT — develop a platform for service creation and deployment for the “Internet of Things”, specifically in the area of health. To accelerate introduction of these services, the platform should provide: orchestration, i.e. service composition based on IoT reusable components; self-

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management, to automate service configuration testing; and interoperability through technological abstraction.

·                  In EURESCOM’s strategic studies in telecommunications (e.g. Project P2252 - Telco strategic positioning options regarding WebRTC).

·                  In the EUREKA Celtic-Plus Programme and ITEA 2, through the GreenT- Green Terminals for Next Generation Wireless Systems project, and involvement in the CarCoDE proposal - Platform for Smart Car to Car Content Delivery.

·                  In the QREN programme, with AAL4ALL - Padrão de Cuidados Primários para Serviços AAL (Ambient Assisted Living), GreenT- Green Terminals for Next Generation Wireless Systems and APOLLO projects.

Regarding intellectual property, PT Inovação filed one provisional patent request and converted another two provisional requests into permanent requests (one of which was an international patent request):

·                  Provisional patent request:

·                  “Dispositivo com proteção tripolar a inserir no ponto de fronteira e que agrega em simultâneo a malha RC”.

·                  Conversion of provisional patent requests into permanent requests:

·                  “Método de Equalização Não-Linear do Canal Ótico no Domínio da Frequência”, co-developed with Aveiro University; entension requested under PCT.

·                  “Filtro Seletivo de Canais de Televisão Integrado num terminal de fibra ótica”.

Additionally, a national patent request was granted with the number 104925 for “Cobertura MBMS”.

b)             SAPO

SAPO has assumed an increasingly important role in the development of innovative solutions, thereby enhancing the delivery of pioneering products and services in the market and extending this philosophy throughout the organisation. Currently, SAPO employs over 200 people in the development of R&D activities.

In recent years, R&D activities in SAPO have been centred around the development of multiplatform applications, web content creation and sharing and the development of online advertising platforms.

2                 Research and Development Partnership Ecosystem

PT’s approach to exploratory innovation is largely characterised by cooperation and networking, centred on partnerships with other leading companies and institutions at national and international level. This partnership network forms an exploratory innovation ecosystem and guarantees PT access to cutting edge technology and the possibility to create new market solutions.

The partnerships which make up this ecosystem combine various competencies, and can be grouped into (a) technological partnerships; (b) strategic partnerships; (c) partnerships with universities and R&D institutions.

a)             Technological Partnerships

In recent years, PT’s innovation strategy has placed great importance on developing partnerships with leading suppliers. For example, as part of the next generation network (FTTH, LTE) implementation strategy, several

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strategic partnerships were established with companies such as Corning, Cisco and Huawei. These partnerships led to supply contracts and to the development of a number of solutions adapted to the Portuguese market. As regards equipment vendors, in 2012 PT strengthened its cooperation with companies like Samsung and ZTE.

In 2012, PT established an important partnership with SAP for the deployment of SAP HANA services through the SmartCloudPT platform. Also in the business solutions area, PT and Microsoft launched a product targeted to SMEs, with the goal of helping small businesses to use ICT to increase their productivity and competitiveness.

b)             Strategic partnerships with Telecom Operators

Following previous initiatives along these lines, PT continued to pursue partnerships with leading telecom operators, with a view to cooperating in projects and sharing best practices. To this end, PT and Singapore’s leading operator, Singtel, collaborated on several joint initiatives for the sharing of knowledge, benchmarks and best practices at the operational and commercial levels.

c)              Cooperation with Universities and Research Institutes

PT has increasingly cooperated with several international and national universities, launching joint exploratory initiatives. A prime example of this type of partnership is the one with Carnegie-Mellon Portugal, in which PT maintains its status as a key industrial partner. Projects developed within this partnership include:

·                  SENODs (Cyber-Physical Systems Technologies for Energy-Optimized Data Centres) - aligned with the company’s sustainability strategy, this project aims to develop a solution for monitoring environmental conditions in Data Centres. In 2012, the solution architecture was revised and updated, thereby enabling additional cost optimisation in the setting up and running of the solution, as well as the development of an interface for use by the various stakeholders on multiple platforms (PC, mobile phone, tablet). These improvements were tested in pilots and will roll out during 2013.

·                  NeTS (Next Generation Network Operations and Management) - this project aims to develop a new operational framework for IPTV network management which will result in improved performance and reliability. After an initial phase of data modelling using parametric, non-parametric and clustering techniques, recent developments included: (1) study of the detection and classification of network errors, and (2) first phase development of a prototype for network analysis. Apart from the access component, NeTS is also addressing other IPTV network components and issues such as voice and spam over VoIP, scaling and dissemination of video on demand, and fault prediction in MPLS and BGP.

·                  TRONE (Trustworthy and Resilient Operations in a Network Environment) - Development of the first prototype of a framework for intrusion event data collection, which will be implemented on PT’s network in order to increase the robustness of security systems. A model was also developed for fault detection in virtual environments with the aim of providing real time detection of changes in systems, networks and services and thereby limiting the scale of security attacks.

At a national level, PT has been engaging with a growing number of universities. In 2012, initiatives were developed with the universities of Aveiro, Porto, Coimbra, Beira Interior, Minho, Trás-os-Montes e Alto Douro and Lisboa (IST). In addition, a new project was developed with the Eduardo Mondlane University of Maputo, Mozambique.

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With the aim of launching innovative projects to create new technological solutions and support new business strategies, PT has also been establishing partnerships with nationally renowned research institutions. Accordingly, initiatives were developed with various institutions — like INESC (Porto and Coimbra), Instituto das Telecomunicações and Instituto Pedro Nunes — in areas such as network efficiency and optimisation, data storage in cloud environments, development of new cloud services and advanced entertainment solutions.

From a great number of projects developed in cooperation with universities and research institutions throughout 2012, the following can be highlighted:

·                  AC2DC — exploiting multidimensional data structures in data warehousing environments, supported in cloud computing;

·                  Business Box — creation and development of a commercial offering adapted to SME communication and information processing requirements in an African context;

·                  Cloud9 — study of SaaS existing architectures, standards, APIs and the implementation of OSSaaS technology, using available computing infrastructures;

·                  Compensação Digital Adaptativa — coherent optical networking and adaptive signal processing;

·                  Face Express — development of tools for teaching children to recognize emotions through facial expression;

·                  HappyHour.SAPO — development of an innovative system that will allow merchants to implement marketing campaigns and promote their products to potential customers that are near their premises;

·                  Multipass v2 — identify, determine and implement scenarios and services in the field of digital identity management technology, to turn mobile devices into digital “wallets” that allow access to a range of integrated services;

·                  REACTION — computational journalism with recovery, extraction and information aggregation mechanisms for news management by analysing news content available online;

·                  Sapo Campus — social communication tool to be used in teaching or corporate contexts based on the production and aggregation of used-generated content;

·                  SmartServ — IPTV recommendation service technology and EPG (Electronic Programming Guide) evolution;

·                  Vídeo Interativo de Comunicação — interactive videos that allow individual manipulation of multimedia objects, and the definition of new playback and interaction sequences, thereby enabling personalised communication.

With the intent of promoting a closer relationship between the industry and universities, the SAPO Labs project has the main objective of developing innovative projects in the area of technology, with a start-up incubation environment.

3                 Innovation in International Operations

In 2012, PT strengthened its presence as a global telecommunications operator by reaching 100 million customers in four continents. Through its international operations, PT fosters its innovation culture across the various geographies in which it is present.

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PT Inovação has been a major ambassador of this culture and has centres of innovation in Brazil and in several African countries, as well as providing leading edge solutions to its international clients outside of PT.

From PT’s international operations, the following innovative solutions stand out:

·                  Brazil (Oi): Oi has similar innovation practices to PT (e.g. replication of OPEN innovation programme in Oi through the INOVA project). Therefore, there have been numerous interactions between the two companies, resulting in cloud, smart cities and TV partnerships. PT Inovação Brazil also deepened its cooperation with Oi, and new projects are planned for the near future;

·                  UNITEL (Angola): next generation network growth and improvement in Luanda and in other Angolan provinces. Launch of an employment channel in the SAPO Angola Web Portal, as a response to the growing needs of this emerging economy;

·                  MTC (Namibia): in 2012, 4G-LTE was launched in Namibia, Afica’s first convergent 4G-LTE commercial offering. Innovative data service campaigns were maintained, of which one successful example is the Netman service. As a result, MTC has reached a milestone in revenues from data services, which are among the highest in Africa. In Voice services, the most successful products are Aweh Aweh, which offers special tariffs for customers, and T38, with reduced price per minute and recharging periods. At the end of 2012, the WACCS submarine cable came into operation, leveraging international connections. In addition, projects were developed to provide power to BTS from alternative energy sources (solar and wind);

·                  CVT (Cape Verde): In 2012 a new and more competitive 3G commercial offering was launched. Additionally, CVT deployed new services, both wireline and wireless, aimed at increasing customer loyalty. Examples of these new services are: 1) Powa Swag, targeting young people; (2) Tokspera - waiting ring, (3) Stika-m-saldo — airtime credit, (4) Da$aldo — International Top Up, (5) Grilo ao segundo All net — data services pricing plan with per second billing, (6) Bla bla bla — international vouchers.Similarly to PT, CVT launched an e-billing service. At the end of the year, the WACCS submarine cable came into operation. By participating in this new infrastructure, CVT increases its future international interconnectivity. Furthermore, new investments were made in an inter-island submarine cables network;

·                  CST (São Tomé e Príncipe): in 2012, the 3G commercial offer was launched. As an integral part of CST’s growth strategy, new campaigns and price tariffs were developed, for example “Fla Só”, a special price plan for friends and family. As regards sustainability, the project aimed at delivering alternative energy sources to remote BTS continued in 2012, and new Education initiatives were launched to bring computers and internet to the country’s schools, and also to improve physical conditions in the most run-down schools;

·                  CTM (Macao): the data services offer was improved through further investment in 2G and 3G networks and the building of fibre optic connections (FTTH) for corporate clients;

·                  TT (East Timor): Continued development of infrastructure and 3G services, with a sustained focus on innovative campaigns and pricing plans, such as: TT Amigo (family and friends), Toke Livre (non-compulsory top up tariff), and Kredit Lai (one day credit loan). Multiple community centres with internet access were opened, covering mainly isolated areas. The BTS renewable energy (solar) supply project was also continued.

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05

Financial Review

Consolidated income statement

(1) Following PT’s strategic investment in Oi and Contax on 28 March 2011, PT proportionally consolidated the earnings of these businesses as from 1 April 2011. (2) Businesses in Portugal include wireline and TMN. This caption includes the impact of the decline in regulated mobile termination rates (MTRs). (3) Operating costs = wages and salaries + direct costs + commercial costs + other operating costs. (4) EBITDA = income from operations + post retirement benefits + depreciation and amortisation. (5) Income from operations = income before financials and income taxes + curtailment costs + losses (gains) on disposal of fixed assets + other costs (gains).

Consolidated operating revenues

In 2012, consolidated operating revenues increased by Euro 452 million to Euro 6,599 million (+7.4% y.o.y). This increase is primarily related to the impact of the proportional consolidation of Oi and Contax in 1Q12, as the earnings of these businesses were proportionally consolidated as from 1 April 2011, and is partially offset by the contribution of Dedic/GPTI in 1H11, as this business was fully consolidated up to 30 June 2011 and then integrated in Contax following the completion of the exchange of PT’s interest in this business for an additional stake in Contax. Excluding the impact of these changes in the consolidation perimeter, amounting to Euro 802 million, and

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also the impact of the depreciation of the Brazilian Real against the Euro (Euro 279 million), consolidated operating revenues would have decreased by only 1.2% y.o.y to Euro 5,942 million in 2012. This decrease was the result of revenue decline in Portuguese telecommunications businesses (Euro 191 million), notwithstanding a higher contribution from Oi (Euro 83 million) and revenue growth in other international operations, namely MTC in Namibia (Euro 21 million), Timor Telecom in East Timor (Euro 9 million) and Contax in Brazil (Euro 8 million).

In 2012, revenues from Portuguese telecommunications businesses decreased by 6.6% y.o.y to Euro 2,701 million, primarily due to: (1) revenue decline in the Enterprise customer segment (Euro 86 million, -8.8% y.o.y), reflecting the economic backdrop, penalising SMEs and leading the public administration and larger corporates to strong focus on cost cutting, notwithstanding a continued improvement in the sequential quarterly trend (-9.8% in 1Q12; -8.8% in 2Q12; -8.4% in 3Q12, and -8.1% in 4Q12) as a result of a significant progress in the performance of large corporates due to gains in both market share and share of wallet; (2) the decline in the Personal customer segment (Euro 80 million, -10.4% y.o.y), as a result of lower customer revenues (Euro 56 million, -9.1% y.o.y), reflecting challenging and deteriorating economic and competitive environment, namely in voice and wireless broadband, and lower interconnection revenues (Euro 20 million, -29.3% y.o.y) following the regulated tariff declines, and (3) the decrease in other revenues in the Portuguese telecommunications businesses (Euro 54 million, -11.9% y.o.y), including wholesale, as a result of: (i) lower revenues from accesses and traffic (Euro 31 million), reflecting lower prices resulting from adverse regulatory decisions and lower volumes as operators continue to build networks; (ii) revenue decline in public phones (Euro 3 million), and (iii) revenue decline in the directories business (Euro 11 million). The total direct impact of regulation in revenues amounted to Euro 36 million in 2012, including declining MTRs (Euro 27 million), which declined from Euro 3.50 cents to Euro 2.77 cents as from 7 May 2012, to Euro 2.27 cents as from 30 June 2012, to Euro 1.77 cents as from 30 September 2012 and to Euro 1.27 cents as from 31 December 2012 and lower roaming wholesale and retail prices (Euro 7 million). Excluding the impact of regulation, revenues in Portuguese telecommunications businesses would have declined by 5.4% y.o.y in 2012. These negative effects were partially offset by an increase in revenues from Residential customer segment, from Euro 682 million in 2011 to Euro 712 million in 2012 (+4.3% y.o.y). This continued growth was achieved on the back of the continued strong performance of MEO triple-play offer (voice, broadband and pay-TV), which is highly differentiated and also more resilient to unfavourable economic conditions. As a result, in 2012, non-voice revenues in Portugal represented 51.2% of service revenues, having grown 5.0pp y.o.y.

In 2012, Oi’s revenues stood at Euro 3,042 million (R$ 7,631 million) compared to Euro 2,412 million in 2011 (R$ 5,612 million). This increase reflects the effect of the proportional consolidation in 1Q12 (Euro 788 million), partially offset by the impact of the depreciation of the Brazilian Real against the Euro (Euro 241 million). Adjusting for these effects, the contribution of Oi to PT’s consolidated operating revenues in 2012 would have increased by Euro 83 million. This performance reflected: (1)  the increase in revenues associated with the Personal mobility segment, including an increase in sales and other operating revenues, reflecting Oi’s strategy to broaden the scope of its presence in the mobile market, including a stronger focus in the postpaid and higher income segments, thus strenghting Oi’s presence in the handset market and increasing the penetration of data and value added services, and (2) the growth observed in Oi’s enterprise segment, which reflected the growth in fixed and mobile broadband and in mobile data. These effects were partially offset by the decline observed in the residential segment, which reflects mainly the line loss albeit increasingly with lower churn in fixed line and higher growth in broadband and pay-TV. Oi’s revenues were proportionally consolidated as from 1 April 2011, based on the 25.6% direct and indirect stake that PT owns in Telemar Participações, the controlling shareholder of the Oi Group, which fully consolidates Oi.

Other revenues, including intra-group eliminations, increased by 1.6% y.o.y in 2012 to Euro 856 million, including the impact of the proportional consolidation of Contax in 1Q12 (Euro 148 million), that was proportionally consolidated as from 1 April 2011, partially offset by the contribution of Dedic/GPTI business in 1H11 (Euro 134

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million), that was fully consolidated up to 30 June 2011 and integrated in Contax as from 1 July 2011. Excluding the impact of these changes in the consolidation perimeter and the impact of the depreciation of the Brazilian Real (Euro 38 million), other revenues would have increased by Euro 37 million (+5.3% y.o.y), reflecting higher contributions from all international assets, including the 20.4% y.o.y and 13.0% y.o.y increases at Timor Telecom and MTC, respectively.

The contribution from fully and proportionally consolidated international assets to operating revenues stood at 58.4% in 2012, while Brazil accounted for 53.3%.

Consolidated Operating Costs (excluding post retirement benefit costs and depreciation and amortisation)

Consolidated operating costs excluding depreciation and amortisation costs and post retirement benefits increased by Euro 371 million (+9.4% y.o.y) to Euro 4,330 million in 2012, as compared to Euro 3,959 million in 2011. This increase is primarily related to the impact of the proportional consolidation of Oi and Contax in 1Q12, as the earnings of these businesses were proportionally consolidated only as from 1 April 2011, partially offset by the contribution of Dedic/GPTI in 1H11, as this business was fully consolidated up to 30 June 2011 and then integrated in Contax following the completion of the exchange of PT’s interest in this business for an addition stake in Contax. Excluding the impact of these changes in the consolidation perimeter, totalling Euro 562 million, consolidated operating costs would have decreased by 5.0% y.o.y (Euro 190 million), primarily as a result of: (1) the 5.5% y.o.y decline in Portuguese telecommunication businesses (Euro 87 million), reflecting the cost cutting efforts and the decline in direct costs due to lower revenues; and (2) a lower contribution from Oi (Euro 93 million), reflecting the impact of the depreciation of the Brazilian Real against the Euro (Euro 169 million), which more than offset higher third party costs, wages and salaries and commercial costs.

Wages and salaries increased by Euro 82 million (+8.0% y.o.y) to Euro 1,102 million in 2012, as compared to Euro 1,020 million in 2011. This increase relates primarily to the impact of the proportional consolidation of Oi and Contax in 1Q12, partially offset by the contribution of Dedic/GPTI in 1H11. Excluding the impact of these changes in the consolidation perimeter, totalling Euro 84 million, wages and salaries would have decreased by 0.3% y.o.y (Euro 2 million), primarily explained by (1) a decline of 4.2% y.o.y (Euro 11 million) at the Portuguese telecommunication businesses, due to lower variable and overtime remunerations, higher efficiency levels in certain internal processes and lower personnel costs as a result of the reorganisation plan implemented in the 4Q11, and also (2) a lower contribution from Contax, including the impact of the depreciation of the Brazilian Real against the Euro. These effects were partially offset by a higher contribution from Oi (Euro 22 million), reflecting increased staff levels and a reorganisation to create new regional commercial structures, as part of the strategy to improve regional operational performance, which more than offset the impact of the depreciation of the Brazilian Real against the Euro. Wages and salaries accounted for 16.7% of consolidated operating revenues in 2012.

Direct costs increased by Euro 80 million (+7.9% y.o.y) to Euro 1,092 million in 2012, reflecting primarily the impact of the proportional consolidation of Oi and Contax in 1Q12, amounting to Euro 177 million. Adjusting for this effect, direct costs would have decreased by 9.6% y.o.y (Euro 97 million) in 2012, primarily as a result of: (1) a reduction in the Portuguese telecommunication businesses (Euro 23 million), reflecting mainly lower traffic costs at TMN, following the impact of the regulatory MTR cuts and lower roaming interconnection costs and also lower costs associated with the directories business, declines that were partially compensated by higher costs associated with international traffic and higher programming costs on the back of continued customer growth and investment in the differenciation of the MEO content offering, and (2) a lower contribution from Oi (Euro 63 million), reflecting primarily the impact of the depreciation of the Brazilian Real against the Euro (Euro 50 million) and also a reduction

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in interconnection costs due to lower VU-M tariffs. Direct costs accounted for 16.6% of consolidated operating revenues in 2012.

Commercial costs, which include costs of products sold, commissions and marketing and publicity, increased by Euro 51 million (+9.8% y.o.y) in 2012 to Euro 568 million, reflecting primarily the impact of the proportional consolidation of Oi and Contax in 1Q12, amounting to Euro 39 million. Adjusting for this effect, commercial costs would have increased by 2.2% y.o.y (Euro 12 million) in 2012, mainly due to a higher contribution from Oi (Euro 19 million), reflecting higher costs of product sold and commissions, explained by a more intense commercial activity that translated into higher sales, and notwithstanding the impact of the depreciation of the Brazilian Real against the Euro. This effect and a higher contribution from other international operations, namely Africatel businesses, were partially offset by a reduction at the Portuguese telecommunications business (Euro 26 million), explained by: (1) lower costs of goods sold, due to lower equipment sales, lower subsidies and also lower average cost of handsets as a result of favourable contracts signed with key suppliers; (2) lower commissions, wich was a solid performance as it was achieved against a backdrop of continued customer growth, thus refleting lower churn, and (3) lower marketing and publicity expenses, due to a strong focus on cost efficiency. Commercial costs accounted for 8.6% of consolidated operating revenues in 2012.

Other operating costs, which mainly include support services, supplies and external services, indirect taxes and provisions, increased by Euro 158 million in 2012 to Euro 1,567 million, as compared to Euro 1,408 million in 2011, reflecting primarily the impact of the proportional consolidation of Oi and Contax in 1Q12, partially offset by the contribution of Dedic/GPTI in 1H11. Excluding the impact of these changes in the consolidation perimeter, totalling Euro 261 million, other operating costs would have decreased by 7.5% y.o.y (Euro 103 million) in 2012, basically due to: (1) a lower contribution from the Portuguese telecommunication businesses (Euro 27 million), reflecting primarily lower maintenance and repair expenses, support services and other third party services, which benefited from the roll out of PT’s FTTH network and the extensive field force transformation programme; and (2) a lower contribution from Oi (Euro 71 million), reflecting the impact of the depreciation of the Brazilian Real against the Euro (Euro 80 million) and lower provisions for bad debt and contingencies, effects that more than offset increases in third party costs and indirect taxes.

EBITDA

In 2012, EBITDA increased by Euro 81 million to Euro 2,269 million (+3.7% y.o.y). This increase is mainly explained by the impact of the proportional consolidation of Oi and Contax in 1Q12, as the earnings of these businesses were proportionally consolidated as from 1 April 2011, partially offset by the contribution of Dedic/GPTI in 1H11, as this business was fully consolidated up to 30 June 2011 and then integrated in Contax. Excluding the impact of these changes in the consolidation perimeter (Euro 240 million) and also the impact of the depreciation of the Brazilian Real against the Euro (Euro 77 million), EBITDA would have decreased by 3.8% y.o.y. EBITDA performance in the period was impacted by a lower contribution from Portuguese telecommunications businesses (Euro 105 million) as a result of revenue decline (Euro 191 million), notwithstanding a 5.5% y.o.y reduction in operating costs excluding D&A and PRBs, which reflects a continued focus on cost cutting and the improvement in gross margin from the residential segment. This performance was partially offset by higher contributions from: (1) Oi (Euro 6 million), and (2) other international operations, namely MTC (Euro 6 million) and Timor Telecom (Euro 6 million).

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(1) EBITDA = income from operations + post retirement benefits + depreciation and amortisation. (2) EBITDA margin = EBITDA / operating revenues

EBITDA from the Portuguese telecommunications businesses amounted to Euro 1,201 million in 2012 (-8.0% y.o.y), equivalent to a 44.5% margin. The EBITDA performance is the result of the decline in service revenues (Euro 194 million), which have high operating leverage. In effect, while service revenues minus direct costs declined by Euro 171 million, EBITDA only declined by Euro 105 million, reflecting a resilient focus on cost cutting and profitability of operations. Operating costs decreased by 5.5% y.o.y on the back of: (1) pay-TV having reached critical mass which translates into healthier gross profit in the pay-TV business; (2) lower traffic costs at TMN, reflecting the regulated MTR cuts and lower roaming interconnection costs also due to regulatory decisions; (3) rollout of FTTH and 4G-LTE, which has a superior quality of service leading to lower customer support and network maintenance costs; (4) lower commercial costs, including commissions and marketing and publicity, and (5) lower staff costs, reflecting the impact of the reorganisation implemented in 4Q11, a lower level of variable and overtime remunerations and also higher efficiency levels in certain internal processes. These favourable declines in operating costs were partially offset by an increase in provision charges, which reflected the existing economic environment in all business segments.

In 2012, Oi’s EBITDA stood at Euro 909 million (R$ 2,280 million), compared to Euro 748 million (R$ 1,739 million) in 2011. The Euro 161 million increase reflects primarily the effect of the proportional consolidation in 1Q12 (Euro 227 million), partially offset by the impact of the depreciation of the Brazilian Real against the Euro (Euro 72 million). Adjusting for these effects, Oi’s EBITDA would have increased by Euro 6 million over the same period of last year, explained primaily by the growth in revenues as referred to above, which was partially offset by higher supplies and external services and also higher personnel costs reflecting the efforts associated to the turnaround process. Oi’s EBITDA was proportionally consolidated as from 1 April 2011, based on the 25.6% direct and indirect stake that PT owns in Telemar Participações, the controlling shareholder of the Oi Group, which fully consolidates Oi.

Other EBITDA increased by 17.9% y.o.y (Euro 24 million) to Euro 159 million in 2012 primarily due to: (1) the impact of the proportional consolidation of Contax in 1Q12 (Euro 14 million), and (2) the solid growth in Timor Telecom and MTC, of 21.8% y.o.y and 7.5% y.o.y, respectively.

Fully and proportionally consolidated international assets represented 50.4% of PT’s consolidated EBITDA in 2012. Brazilian businesses accounted for 43.0% of EBITDA in the period and fully consolidated African businesses accounted for 6.0%.

Net Income

Post retirement benefits costs remained broadly flat at Euro 58 million in 2012, notwithstanding the impact of the proportional consolidation of Oi in 1Q12 (Euro 1.5 million).

Depreciation and amortisation costs increased to Euro 1,391 million in 2012, compared to Euro 1,326 million in 2011, reflecting primarily the impact of the proportional consolidation of Oi and Contax in 1Q12, amounting to Euro 161 million, partially offset by the contribution of Dedic/GPTI in 1H11, amounting to Euro 8 million. Adjusting for these effects and also the impact of the depreciation of the Brazilian Real against the Euro, depreciation and

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amortisation costs would have decreased by 2.9% y.o.y (Euro 38 million) in 2012, explained primarily by a lower contribution from the Portuguese telecommunications businesses (Euro 22 million), namely due to the swap of TMN’s 2G equipment to 4G-LTE enabled equipment, which led to an accelerated depreciation of 2G equipments in 1H11, up to 30 June 2011.

Curtailment costs decreased to Euro 2 million in 2012, as compared to Euro 36 million in 2011, reflecting mainly the reorganisation undertaken at the end of 2011.

Net gains on disposals of fixed assets increased from Euro 9 million in 2011 to Euro 33 million in 2012, reflecting primarily capital gains recorded by Oi in 4Q12 of Euro 30 million in connection with the disposal of mobile towers.

Net other costs (gains) improved to a gain of Euro 9 million in 2012 from net losses of Euro 33 million in 2011, reflecting primarily  gain recorded in 2012 regarding the estimated net compensation for prior years costs supported by PT with the universal service obligation under the Concession Agreement, partially offset by certain non-recurring provisions and adjustments recorded in 2012 and the impact of the proportional consolidation of Oi and Contax in 1Q12.

Net interest expenses increased to Euro 499 million in 2012 as compared to Euro 297 million in 2011. This includes the impact of the proportional consolidation of Oi, Contax and its controlling holding companies in 1Q12, amounting to Euro 66 million. Adjusting for this effect, net interest expenses would have amounted to Euro 433 million in 2012, an increase of Euro 135 million compared to 2011, reflecting: (1) an Euro 51 million interest gain recorded in 1Q11 on the cash deposits in Brazilian Reais that were used to pay the strategic investments in Oi and Contax on 28 March 2011; (2) a higher contribution from Oi, Contax and its controlling holding companies (Euro 44 million), reflecting the impact of the increase in its average net debt partially offset by the effect of the depreciation of the Brazilian Real against the Euro, and (3) the interest gain of Euro 33 million recorded in 2011 related to the outstanding receivable from Telefónica regarding the disposal of Vivo. The cost of net debt, excluding the proportional consolidation of Oi and Contax, stood at 4.4% in 2012, an increase compared to 3.3% in 2011 mainly due to the interest gain recorded in 2011 related to the outstanding receivable from Telefónica regarding the disposal of Vivo, while the cost of gross debt stood at 4.5%, which compares to 4.3% in 2011.

Equity in earnings of affiliates amounted to Euro 210 million in 2012, as compared to Euro 209 million in 2011. In 2011, this caption included a gain of Euro 38 million related to the disposal of the investment in UOL for a total consideration of Euro 156 million. Adjusting for this effect, equity accounting in earnings of affiliated companies would have increased from Euro 172 million in 2011 to Euro 210 million in 2012.

Net other financial losses, which include net foreign currency losses, net losses on financial assets and net other financial expenses, decreased from Euro 125 million in 2011 to Euro 97 million in 2012, reflecting primarily: (1) higher foreign currency losses recorded in 2011 by Portuguese operations and Oi, explained mainly by the impact of the depreciation of the US Dollar against the Euro on net assets denominated in US Dollars and by the impact of the depreciation of the US Dollar against the Brazilian Real on Oi’s net debt denominated in US Dollars, respectively, and (2) lower net other financial expenses at Oi, related mainly to financial taxes and certain banking services. Additionally, the impact of the proportional consolidation of Oi, Contax and its controlling holding companies in 1Q12 (Euro 15 million) was offset by the financial taxes incurred in Brazil during 2011 in connection with the transfer of funds for the investment in Oi (Euro 14 million).

Income taxes increased to Euro 148 million in 2012, from Euro 108 million in 2011, corresponding to an effective tax rate of 31.2% and 20.4%, respectively. This increase is primarily explained by: (1) the impact of the increase in the maximum statutory tax rate applicable in Portugal, from 29.0% to 31.5%; (2) higher non-taxable interest income and

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equity gains in 2011, and (3) lower gains resulting from adjustments to prior year income taxes. Adjusting for non-taxable interest income and equity gains and for adjustments to prior year income taxes, the effective tax rate would have increased from 25.3% in 2011 to 28.4% in 2012, reflecting primarily the increase in the maximum statutory tax rate applicable in Portugal as referred to above.

Income attributable to non-controlling interests amounted to Euro 95 million, including the impact of the proportional consolidation of Oi and Contax in 1Q12 (Euro 3 million). Adjusting for this effect, income attributable to non-controlling interests would have amounted to Euro 91 million in 2012, an increase of Euro 7 million compared to Euro 84 million in 2011, reflecting higher income attributable to non-controlling interests of the African businesses (Euro 10 million) and Contax (Euro 4 million). These effects were partially offset by lower income attributable to non-controlling interests of Oi (Euro 7 million) as a result of the completion of its corporate simplification in March 2012.

Net income amounted to Euro 230 million in 2012 compared to Euro 339 million in 2011. This decrease is mainly explained by: (1) the gain of Euro 38 million recorded in 2011 related to the completion of the disposal of the investment in UOL, and (2) higher interest expenses primarily related to the increase in average net debt and the Euro 51 million interest gain recorded in 2011 on the cash deposits in Brazilian Reais that were used to pay the strategic investments in Oi and Contax on 28 March 2011.

Shareholder Remuneration

PT announces that its Board of Directors will propose a dividend per share of Euro 0.325 in relation to fiscal year 2012. This proposal is subject to shareholder approval at the AGM and is made in the context of the shareholder remuneration policy for fiscal years 2012 to 2014, approved by the Board of Directors and disclosed to the market on 27 June 2012, which includes an annual cash dividend of Euro 0.325 per share. For complete information on PT¹s shareholder remuneration, please refer to the press release indicated above.

Capex

Capex amounted to Euro 1,317 million in 2012, equivalent to 20.0% of revenues, as compared to Euro 1,224 million in 2011. This increase is primarily related to the impact of the proportional consolidation of Oi and Contax in 1Q12, partially offset by the contribution of Dedic / GPTI in 1H11. Excluding the impact of these changes in the consolidation perimeter, amounting to Euro 117 million, capex would have decreased by 2.0% y.o.y. This decrease was a result of lower capex from the Portuguese telecommunications businesses (Euro 92 million, -14.1% y.o.y), which stood at Euro 555 million in 2012 and continued to be directed towards investments in future proof technologies, namely FTTH, and 4G-LTE. The decrease in capex from the Portuguese telecommunications businesses was partially offset by: (1) higher capex from Oi (Euro 65 million), due to investments undertaken in 2012 to expand 2G and 3G coverage and increasing broadband speed and capillarity, effects partially offset by the impact of the depreciation of the Brazilian Real against the Euro, and (2) higher capex from certain international operations, namely MTC (Euro 18 million), reflecting investments in the African submarine cable, optical fibre and 4G.

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(1) Oi’s capex excludes the acquisition of 4G licenses in 2012 for a total amount of R$ 400 million, equivalent to Euro 41 million proportionally consolidated by PT.

Capex from the Portuguese telecommunications businesses decreased by 14.1% y.o.y to Euro 555 million in 2012. Capex performance reflected the strong investments made during the past years, namely in the 2008-2011 period, in the deployment of the FTTH network, in the modernisation of the 2G network already 4G-LTE enabled, and in the reinforcement of 3G and 3.5G networks in terms of coverage and capacity, leading now to a decrease in technology capex, notwithstanding the investments in the deployment of the 4G-LTE network.

In 2012, Oi’s capex reached Euro 630 million (R$ 1,579 million) compared to Euro 444 million (R$ 1,034 million) in 2011. This increase reflects primarily the effect of the proportional consolidation of Oi in 1Q12 (Euro 121 million), partially offset by the impact of the depreciation of the Brazilian Real against the Euro (Euro 50 million). Adjusting for these effects, the contribution of Oi to PT’s consolidated capex would have increased by Euro 114 million mainly due to investments undertaken in 2012 to expand 2G and 3G coverage and increasing broadband speed and capillarity.

In 2012, other capex remained stable at Euro 132 million, as the increase in capex at MTC (Euro 18 million), reflecting the investments in the African submarine cable, optical fibre and in 4G rollout, was offset by lower capex in the Brazilian contact centre businesses, including Contax and the contribution of Dedic / GPTI in 1H11 (Euro 9 million), and also by a lower capex at Timor Telecom (Euro 5 million).

Cash Flow

Operating cash flow stood at Euro 875 million in 2012 and Euro 1,185 million in 2011. Excluding the impact of the proportional consolidation of Oi and Contax in 1Q12 (Euro 34 million), consolidated operating cash flow would have amounted to Euro 840 million in 2012 and the decline is explained primarily by: (1) a lower EBITDA minus Capex (Euro 127 million), reflecting mainly the Euro 131 million decline at Oi; (2) an increase in working capital investment (Euro 143 million), reflecting primarily the one-off reduction in the payment cycle to certain suppliers undertaken in 4Q10 following the cash inflow from the Vivo transaction, leading to lower payments to suppliers in 1Q11, and (3) lower provisions and adjustments (Euro 88 million), which represent a non-cash item included in EBITDA and its reduction is mainly related to Oi.

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(1) Free cash flow excludes the cash out-flow related to the investments in Oi and Contax (Euro 3,728 million in 1Q11) and the cash inflow regarding the third and last instalment related to the Vivo transaction (Euro 2,000 million in 4Q11). (2) This caption includes the disposal of the investment in UOL in 1Q11 for a total amount of Euro 156 million, partially offset by the acquisition of an investment in Allus in 2Q11 for a total amount of Euro 44 million. (3) The increase in this caption reflects mainly the payments of certain legal actions at Oi in 1Q12, partially offset by financial taxes incurred in 1Q11 related to the strategic investment in Oi.

In 2012, consolidated free cash flow amounted to negative Euro 255 million, while excluding the proportional consolidation of Oi and Contax free cash flow stood at positive Euro 251 million (Euro 191 million in 2H12). In 2011, adjusting for the cash out-flow related to the acquisition of PT’s investments in Oi and Contax (Euro 3,728 million) and the cash in-flow related to the third and last instalment received in 4Q11 in connection with the disposal of Vivo (Euro 2,000 million), consolidated free cash flow stood at Euro 533 million. The decline of Euro 787 million in consolidated free cash flow is primarily explained by: (1) a lower operating cash flow (Euro 310 million) as referred to above; (2) the proceeds received in 1Q11 from the disposal of the investment in UOL amounting to Euro 156 million; (3) lower dividends received from Unitel (Euro 126 million in 2011 and Euro 50 million in 2012); (4) an increase in deposits relative to legal actions (Euro 46 million), primarily related to the proportional consolidation of Oi, and (5) an increase of Euro 210 million in interest payments, reflecting a higher contribution from Oi, Contax and its controlling holding companies (Euro 53 million), including the proportional consolidation in 1Q12 (Euro 10 million), and an increase at Portuguese operations related mainly to the interest received in 1Q11 on the cash deposits in Brazilian Reais used to pay the strategic investments in Oi and Contax. These effects were partially offset by the acquisition of an investment in Allus by Contax in April 2011 (Euro 44 million).

Consolidated Net Debt

Consolidated net debt excluding the proportional consolidation of Oi, Contax and its controlling holding companies, and adjusted for the tax effect on payments made to the Portuguese State in connection with the pensions transaction, amounted to Euro 4,565 million as at 31 December 2012.

Total consolidated net debt amounted to Euro 7,711 million as at 31 December 2012, as compared to Euro 6,613 million as at 31 December 2011, an increase of Euro 1,098 million reflecting: (1) the negative free cash flow generated in the period (Euro 255 million); (2) dividends paid by PT to its shareholders (Euro 557 million corresponding to the 2011 dividend of Euro 65 cents) and by its subsidiaries to non-controlling interests (Euro 99 million); (3) the amounts paid by Oi to non-controlling shareholders in connection with the completion of its corporate simplification process (Euro 296 million); (4) a payment by TMN in January 2012 of the LTE license (Euro 83 million), and (5) the acquisition by Oi of PT’s own shares (Euro 23 million). These effects were partially offset by the impact of the depreciation of the Brazilian Real against the Euro, which resulted in a net debt reduction of Euro 232 million.

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(1) This caption includes primarily the payment related to LTE license in Portugal in 1Q12 and the dividends paid by PT’s subsidiaries to non-controlling interests. (2) This caption corresponds to the tax credits on the amounts paid to the Portuguese State in December 2011 and 2012 under the transfer of unfunded pension obligations, which were adjusted in 4Q12 to reflect certain tax credits used in the period.

As at 31 December 2012, total consolidated gross debt amounted to Euro 11,099 million, of which 84.6% was medium and long-term and Euro 3,723 million is related to the proportional consolidation of Oi, Contax and its controlling holding companies. Excluding gross debt related to the proportional consolidation of Oi and Contax, gross debt would have amounted to Euro 7,375 million, of which 81.1% was medium and long-term and 81.8% was set at fixed rates.

Excluding the proportional consolidation of Oi and Contax, the amount of cash available plus the undrawn amount of PT’s committed commercial paper lines and facilities totalled Euro 3,016 million at 31 of December 2012, which includes Euro 400 million of undrawn committed commercial paper lines and facilities.

In 2012, excluding the proportional consolidation of Oi and Contax, PT’s average cost of net debt stood at 4.4%, compared to 3.3% in 2011, adjusted for the Euro 51 million interest gain on cash deposits related to the strategic investment in Oi. Cost of gross debt stood at 4.5% in 2012 as compared to 4.3% in 2011. As at 31 December 2012, the maturity of PT’s net debt, excluding Oi and Contax, was 5.6 years.

Post Retirement Benefit Obligations

As at 31 December 2012, the projected post retirement benefits obligations (PBO) from Portuguese operations related to pensions and healthcare amounted to Euro 503 million and market value of assets under management amounted to Euro 399 million, compared to Euro 474 million and Euro 345 million as at 31 December 2011, respectively. In addition, PT had liabilities in the form of salaries due to suspended and pre-retired employees amounting to Euro 730 million as at 31 December 2012, which are not subject to any legal funding requirement.  These monthly salaries are paid directly by PT to the beneficiaries until retirement age. As a result, total gross unfunded obligations from Portuguese businesses amounted to Euro 834 million as at 31 December 2012 and after-tax unfunded obligations amounted to Euro 625 million. PT’s post retirement benefit plans for pensions and healthcare in Portugal are closed to new participants. In addition, PT proportionally consolidates Oi’s net post retirement benefit obligations, which amounted to Euro 73 million as at 31 December 2012 (Euro 62 million as at 31 December 2011).

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(1) The increase in the market value of funds resulted mainly from the 25% positive performance of assets under management that more than offset the payments of benefits made by the funds.

Total gross unfunded obligations from Portuguese businesses decreased by Euro 78 million to Euro 834 million as at 31 December 2012, primarily as a result of payments of salaries to suspended and pre-retired employees, amounting to Euro 160 million in 2012, partially offset by the recognition of post retirement benefit costs, amounting to Euro 31 million, and net actuarial losses totalling Euro 50 million. Unfunded obligations from Oi increased from Euro 62 million as at 31 December 2011 to Euro 73 million as at 31 December 2012, as net actuarial losses recorded in the period, amounting to Euro 23 million, more than offset a contribution of Euro 10 million made in January 2012 to cover the deficit position of the BrTPREV pension plan.

(1) In 2012 and 2011, this caption excludes the service cost related to active employees transferred to the Portuguese State amounting to Euro 22.3 million and Euro 25.1 million, respectively. (2) In 2012, this caption includes primarily contributions to pension funds made by Oi (Euro 10.4 million) and refunds net of healthcare expenses paid regarding healthcare plans from Portuguese operations (Euro 1.8 million). In 2011, this caption includes refunds net of healthcare expenses paid amounting to Euro 5.3 million and termination payments amounting to Euro 3.8 million.

Equity

As at 31 December 2012, shareholders’ equity excluding non-controlling interests amounted to Euro 2,293 million, a decrease of Euro 535 million in 2012. This decrease is primarily explained by: (1) the Euro 43.5 cents dividend per share paid in May 2012 (Euro 372 million), corresponding to the second instalment of the 2011 fiscal year dividend (Euro 65 cents per share), following the interim dividend payment of Euro 21.5 cents per share declared in December 2011 and paid in January 2012; (2) the negative foreign currency translation adjustments (Euro 376 million), mainly related to the impact of the depreciation of the Brazilian Real against the Euro, and (3) the net actuarial losses recognised in the period (Euro 53 million, net of tax effect). These effects were partially offset by the net income generated in the period of Euro 230 million and a gain recorded directly in shareholders’ equity in connection with Oi’s corporate simplification.

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(1) This caption includes primarily a gain recorded directly in shareholders’ equity as a result of the corporate simplification of the Oi Group.

Consolidated Statement of Financial Position