Earnings Call Transcript - TIMB Q2 2025

Operator, Operator

Good morning, everyone. Welcome to TIM S.A. 2025 Second Quarter Results Video Conference Call. We would like to inform you that this event is being recorded.

Vicente Ferreira, Investor Relations Officer

Hello, and welcome to our earnings conference for the second quarter of 2025. I'm Vicente Ferreira, Investor Relations Officer of TIM Brazil. This video highlights our recent performance and how we see the market evolving in the first half of the year. After that, we have a live Q&A with our CEO, Alberto Griselli; and our CFO, Andrea Viegas. Please note that management may make forward-looking statements in this presentation may contain them. Refer to the disclaimer on the screen and on our Investor Relations website. Now let's review our results.

Alberto Mario Griselli, CEO

Hello, everyone. I'm Alberto Griselli, CEO of TIM Brazil. The first half of 2025 has demonstrated strong execution and a clear strategic vision, resulting in solid financial and operational outcomes. Service revenues increased by 5.4% compared to the previous year, driven by mobile services, while EBITDA rose by 6.5%, indicating improved profitability with a 49.5% margin. Our operating cash flow saw significant growth, and we remain committed to enhancing distributions to shareholders. We continue to lead in 5G technology, which enables us to offload traffic from 4G. Currently, 30% of traffic is carried via our 5G network. Furthermore, TIM has been recognized as the most sustainable company in Brazil, leading the B3 Sustainability Index. Although global volatility has increased as we conclude the semester, we are actively implementing our strategic initiatives. Our network modernization is speeding up, we are expanding partnerships, and we are identifying new revenue opportunities. We are on track to achieve our targets for 2025. Our service revenue growth is primarily tied to mobile. In the second quarter, total service revenue rose by 5.1% year-over-year, while mobile revenue grew at an even faster rate of 5.6%. TIM's strategy to combine volume and value initiatives is effective, as reflected in our mobile ARPU, which is the highest in the industry at nearly BRL 33 per month, growing in the mid-single digits. We also gained more than 450,000 new postpaid customers in the second quarter. Postpaid services are becoming increasingly important, representing nearly 70% of mobile service revenues, demonstrating a shift towards more stable and higher-value customer segments. We have experienced 14 consecutive quarters of strong postpaid revenue growth. In the second quarter, we sustained this double-digit growth, concluding the first half with a 12.2% year-over-year increase. This success is attributed to robust ARPU dynamics, controlled postpaid upselling, and a healthy customer base with low churn rates and migrations from prepaid to postpaid. In the first quarter, we introduced the concept of 360-degree presence in select markets, starting with Sao Paulo, and are now extending this to other regions. This project involves tripling our network, brand, and channels to enhance customer experience and perception. In Sao Paulo, we have modernized half of our committed sites, benefiting nearly 250 cities and around 10 million people. This network upgrade improves coverage, capacity, and energy efficiency. Following this implementation, we have enhanced our overall download leadership compared to competitors, and for the first time, we are also leading in 5G. Good coverage alone is not enough; we focus on both coverage and throughput capacity. Minas has also seen progress as we doubled the number of cities with 5G, impacting another 10 million individuals. We increased our commercial presence with 13 new stores in 2025, including a flagship location. Transitioning to new revenue streams, our B2B IoT strategy is thriving. We've witnessed substantial growth in contracted revenues, especially in agribusiness, utilities, and logistics, and we are consolidating our leadership in the latter as interest grows from our peers. We anticipate the sector will maintain a rational approach similar to traditional mobile. As early pioneers of digital connectivity on Brazilian highways, we now cover about 7,000 kilometers of roads, with much of this accomplished in partnership with significant logistics companies. We are also moving up the value chain by adding solutions to our connectivity, such as video monitoring and specialized road lighting, enhancing our integrated offerings for clients across various sectors. Advancing our B2B IoT opportunities will expand our addressable market and create new growth avenues. Our digital ecosystem is also broadening, with collaboration with Eletrobras resulting in the launch of our first two markets for energy sales to corporate clients, with nationwide expansion anticipated by September. Through this partnership, we are offering high-voltage clients discounts of up to 30% on their energy bills, aiming to reach about 2 million customers. Our sales efforts are bolstered by TIM's existing SME initiatives. Additionally, our 5G fund is yielding positive results, as investments grow businesses and enhance valuations, contributing positively to the fund’s overall performance. A new investment in a financial service company is underway, focused on providing credit as a service to increase access to capital and lessen reliance on traditional banking. Regarding infrastructure, TIM is leading in 5G development across the country. It has been three years since we began deploying this transformative technology. We currently reach 70% of the urban population and are top in cities with 5G. The rapid expansion of our coverage has resulted in a fivefold increase in the number of 5G devices since 2022, now accounting for 28% of total devices. This combination of availability and adoption is critical for shifting traffic from 4G to 5G. In state capitals, 5G represents 30% of data traffic, with record levels in Sao Paulo at 36%. Customers utilize 5G networks for over half of their time, indicating strong adoption. Due to this environment and the lower cost of 5G data—just 30% of 4G costs—TIM is utilizing resources more efficiently. Another crucial element driving operational efficiency and cost savings is artificial intelligence. The company has identified 100 use cases, prioritizing 56 for strategic value, piloting 24, and implementing 7 projects focused on operational improvements. Most pilot projects aim at cost efficiency, with some exploring commercial opportunities. Six new projects are set for development in the second half of 2025. This structured pipeline reflects the team's commitment to leverage advanced technology and innovation for optimizing operations and enhancing business performance. Now, I will hand over to our CFO, Andrea, for detailed financial insights.

Andrea Palma Viegas Marques, CFO

Hello, everyone. I'm Andrea Viegas, CFO of TIM. I'm pleased to share that we've delivered another quarter of consistent performance, reinforcing our ability to stay on track with our guidance in a dynamic environment. Once again, we are seeing the benefits of disciplined cost control. Our efficiency program is running at full speed, helping us keep cost growth below inflation. It's important to note that this multidisciplinary initiative impacts all expense lines and enables us to continue investing in key areas of our business. This strategy has consistently driven improvement across all major operating metrics. We have sustained positive momentum in both EBITDA and EBITDA after lease, showing another quarter of margin expansion. On the lease front, as I mentioned last quarter, we have several initiatives underway to optimize our industrial costs, including lease and tower contract negotiation, evolution of our rail sharing, and new partnerships in tower development. Our bottom line continues to expand at a healthy pace, marking another quarter of strong earnings growth and reinforcing the consistency of our financial delivery. As Alberto mentioned, we've now completed 3 years of 5G operations. Since then, we have been reaping the benefits from the efficiency brought by this technology, which has become one of the key levers in our CapEx management strategy. All of this supported our operational cash flow, which once again posted double-digit growth. This performance highlights our strong first-half results and confirms our commitment to our strategy. Now back to Alberto.

Alberto Mario Griselli, CEO

Thank you, Andrea. Before we conclude, I would like to highlight our ESG achievements. We disclosed our annual report with significant strides in our commitments, among others, the use of renewable energy, promotion of diversity and inclusion policies, and prioritization of accessibility for people with disabilities. These efforts have earned TIM recognition across multiple sustainability indexes and awards, reinforcing our leadership in corporate responsibility. Looking ahead to the second half of 2025, TIM is focused on executing its strategic initiatives to meet its targets. Key areas include: first, developing new partnerships with a special focus on financial services. We expect to announce new initiatives in the coming months, filling the space left by C6 Bank expanding our presence within the financial service sector. Second, advancing B2B IoT solutions with the expansion of our portfolio and services to reinforce our presence in selected verticals. Third, accelerating the implementation of efficiency initiatives under our program, supporting our ability to expand margins. Fourth, securing the implementation of a new approach to leases, renegotiation with reduced prices; tower company switches are a key lever, sharing infrastructure and reducing exposure is now an option. Fifth, improving broadband operations while proactively monitoring market movements. I want to emphasize our consistent trajectory of progress, the company's commitment to innovation, operational excellence, and sustainable growth as we drive forward into the remainder of the year. Thank you all for your attention. And now let's move to the live Q&A session.

Operator, Operator

Our first question comes from Marcelo Santos from JPMorgan.

Marcelo Peev dos Santos, Analyst

I have 2 questions on my side. The first is the outlook for lease lines in the remainder of the year. So I think the first couple of quarters, the lines didn't increase that much. So just wanted to see how we should expect to progress, especially now that you have these new tower projects. So an update would be great. And the second I would like to see if there's an evolution in management's thoughts about the fixed business. I think in the previous call, you have discussed that you're considering a full spectrum of possibilities for what to do with this business. I just want to see if something has evolved from the last call to this call.

Alberto Mario Griselli, CEO

Marcelo. So let me take the second one, and then I will pass to Andrea for the first one on the tower. So when it comes to the fixed business, in terms of inorganic progress, there is no additional news to be shared at this stage. So we are on the organic side, focusing on optimizing the business. So you see that for us, it's more that the scenario remains competitive. And we are tweaking our operations. So you will see that basically, we are losing fewer customers and increasing our customer base. And so we are doing some small adjustments and progress there. In terms of non-organic opportunities, we are at the same stage as last quarter. So basically, we got from one extreme divestment of the asset, whereby we will lose our strategic optionality on the other extreme some kind of larger deals that are, by definition, more complex. And in the middle, some more balanced opportunities that are the ones where we are focusing. And as soon as we have an update, we're going to share it with the market, but nothing to date. I will pass to Andrea for the tower.

Andrea Palma Viegas, CFO

Marcelo, related to the towers, as we mentioned before, this year is very challenging regarding the lease, especially due to inflation and our rollouts. We are keeping negotiations with our partners, which is a very hard negotiation but we are positive that we will achieve our goal this year, which is to increase lease in line with the inflation rate. We also are studying some alternatives as I mentioned, and as soon as we have news about this, we will share it. But we are constantly keeping the negotiations with our partners.

Alberto Mario Griselli, CEO

If I can add on the negotiation a few points, Marcelo, basically, what we've found over the last months is that some of the main players are more willing to negotiate than in the past, while others are less willing to negotiate now. What we are literally looking for is some win-win situation, whereby we got towers that are above market price to what we consider to be a fair market price. We have some negotiation, let's put it this way, counter-positive things to be put on the table like the extension of the contracts and this sort of thing. Then there is a specific tower company that is less inclined to negotiate with us. We have already communicated that we are going to decommission all towers that are above what we consider to be fair market prices. Of course, it's not something that's going to happen in the super short term because we need to wait for contract leases to expire, and so there is a pattern there and not to pay fees or fines related to the early termination. But we are committed to decommission towers that are not in line with market prices, and we're already doing it.

Operator, Operator

Our next question comes from Gustavo Farias from UBS.

Gustavo Farias, Analyst

Congrats on the results. Two from my end. The first one, if you could give a little bit more color on CapEx and leasing efficiency measures and the outlook for CapEx intensity for the second semester, especially in light of this whole network modernization in Sao Paulo and the 5G expansion in Mina Gerais. And the second one, if you could comment on the sales and marketing expenses and how to think about this line going forward, especially considering the ongoing commercial efforts in Sao Paulo at the opening of new stores and so on and so forth.

Alberto Mario Griselli, CEO

Okay. Let me go with the first round of answers here. When it comes to CapEx efficiency, as we said, these are related to the modernization of our infrastructure, basically what has been negotiated last year. The good news is that what we were expecting in terms of improvement in TCO are materializing. We are in the middle of the total swap of Sao Paulo capital. So the swap is performing well in terms of network performance. If you look at the benefits of what we are doing for customers, you will see that we reached #1 position in coverage and average speed, meaning both 4G and 5G. Now we are best-in-class in both 4G and 5G. From that perspective, the modernization project is delivering what was expected to deliver in terms of increased coverage and capacity, and better service to our customers. At the same time, when you look at efficiency, what we are measuring now is that what we expected is also materializing. Some of this is more negotiating like unit pricing, this sort of stuff. Some are related to TCO and complications that include other costs like wind space and energy consumption. All these benefits are materializing. What we designed in our plan is reflected in our guidance being delivered in Sao Paulo, and therefore, now the expansion in our bigger capitals is taking the same approach to capture the same benefits. Of course, this is coupled with increased commercial penetration in those regions. The 206 approach is made up of and built on network robustness to deliver in the midterm, increased commercial performance. This comes also with new points of sale and increased communication. We are putting all the levers in place. When it comes to the second question, which is related to marketing and sales, in there, you've got a lot of cost categories, each with different dynamics. So you have some structural projects like - I will mention a few. So in that category, you have carrying costs, and we are implementing a number of initiatives to increase the level of efficiency, like the artificial intelligence projects that are reported in the presentation. Then you have commercial costs. What is happening is that we are shifting a bit more of our sales to e-commerce, and e-commerce is more efficient versus other channels. At the same time, if you remember, we internalized the e-commerce migration 1.5 years ago; gross addition more recently, when you internalize, basically, you put CapEx to internalize, but then you don't pay commissions.

Andrea Palma Viegas, CFO

E-billing also shows reductions in our costs related to this. If you look forward to the second half, we have more campaigns than the first half. So in this first half of the year, we have a very good performance compared to last year. In the second half, we have more campaigns such as Father's Day, Black Friday, and Christmas Day. So there is seasonality between the two halves of the year.

Alberto Mario Griselli, CEO

It's okay? Did we answer your questions?

Gustavo Farias, Analyst

Yes. Super clear.

Operator, Operator

Our next question comes from Vitor Tomita from Goldman Sachs.

Vitor Tomita, Analyst

Two questions from my side. The first one is more on the mobile revenue side; the release sites there was growth in customer-generated revenues driven by customers, but also driven by roaming revenues and some interoperator agreements. Could you give a bit more color on this and whether this was due to any major new agreements since I remember that initial booming roaming was more related to a change in our plans to include more international roaming. And my second question would be a bit of a follow-up on the tower efficiency point that other questions raised. If you could give a bit more color on that initiative of a new RFQ partnership for 1,000 new towers and on how that differs from the way you typically negotiate or think about tower construction. You also cited that building towers is more of an option now. So I just wanted to dig a bit more on that.

Alberto Mario Griselli, CEO

Okay, Vitor. Let me address the first question and then I'll pass it to Andrea for the second one. In examining our revenue generation drivers, particularly those from user-generated sources in our report, we can see various improving metrics. Specifically, user-generated revenues and postpaid services are key contributors. Aside from these, there are several other elements involved. These include a roaming agreement we mentioned in previous calls, progress in our B2B IoT sector, and a mix of drivers at the customer platform level. Overall, the numbers appear relatively stable. Keep in mind that we had a factor last year, like C6, that is not present this year. There are some business areas, such as mobile advertising and data, that are experiencing double-digit growth. This aligns with our core strategy focused on mobile and the incremental revenue opportunities we are pursuing. Roaming falls under this category as it enhances our primary offerings. Additionally, new revenue streams like B2B IoT and mobile advertising and data are growing more rapidly and are contributing to our overall growth, in direct alignment with our strategy to diversify our revenue portfolio.

Andrea Palma Viegas, CFO

Vitor, the negotiation that we made with our tower companies is more related to extending the time of the contract and getting discounts with this. When we are talking about AFT and another opportunity that we are studying, as Alberto mentioned, we have some partners that we are not reaching an agreement with them and have very high monthly fees with this tower company. So the alternative will be to build a tower. Another thing is in the contract of B2B, sometimes, we are in a place that only we and the tower company are not interested in building a tower in this agribusiness or road. So this is also an alternative for us. Until now, we have already negotiated 30% of our tower contracts, and we believe that we still have room to negotiate much more.

Alberto Mario Griselli, CEO

If I may add, look at it this way. It's like we have a cost line that we really want to control. We are putting in place all the levers and alternatives that we have to drive the cost down. As Andrea said, you have the negotiation, you got the RAN-sharing agreements, and you have a make versus buy option. We are putting in all the options in place because we think that we have more flexibility and more levers to get this cost line to where we want.

Operator, Operator

Our next question comes from Luis Shagas.

Unidentified Analyst, Analyst

From my side, I have two. The first one is regarding OpEx. What are the main drivers behind the increase in network and interconnection costs? Are these pressures likely to persist? Or do you expect normalization in the coming quarter? The second question is regarding competition. What's your view on the competitive pressure from new entrants in regions like the Northeast? How are you responding to protect market share there?

Alberto Mario Griselli, CEO

So Luis, let me go on the first one and then I will pass the OpEx question to Andrea. If you look at the overall market, it's our view that we are in a rational market with competition focused on quality from our main players and peers, let's put it this way. You see some positive movements in the last quarter, whereby some of the more for more from book price adjustments have been executed. I believe we're starting some potential adjustments according to a more strategic front book prices for pure postpaid also. Overall, my read on the competitive dynamics is that it's rational. Of course, there are some regional competitors that tend to be a bit more aggressive and are playing more on the price levers as we commented in the first quarter. We are looking at this very closely. We are not reacting on prices at this point in time; we're focusing more on our levers in terms of quality of services to make customers happier and less sensitive to price movements or regional competitors. So far, my take is that the threat is limited, but we look at these aspects and will respond as things evolve over time.

Andrea Palma Viegas, CFO

Luis, the increase in network interconnection is related to the increase in international roaming costs and also provider costs. We have increased the number of customers actually using the service for international roaming. The provider cost increased because we launched a new portfolio with significant demand onboard, and also because more customers are acquiring this kind of plan. For us, this is a positive view, I cannot say this because all these have a good margin for us. There is probably an increase in our provider costs because we have more revenue related to this. As we mentioned in the past, we have an adjustment between cost and revenue that contributes positively to the margin for the year. So the increase in these expenses is related to more customers and more revenue.

Alberto Mario Griselli, CEO

Okay, Luis, did we answer your question?

Unidentified Analyst, Analyst

Yes.

Operator, Operator

Our next question comes from Gustavo Farias from UBS.

Gustavo Farias, Analyst

One additional question. I'd like to take a look at prepaid. We've seen sequential growth in ARPU versus the first quarter. Just wanted to have an outlook on how you're seeing the segment perspectives ahead, especially in light of numbers from AMX last week, which also showed some improvements.

Alberto Mario Griselli, CEO

Okay, Gustavo. Now when you look at prepaid, one of the main drivers of our dynamics, I feel our competitive dynamics are related to the prepaid to control migration. This is something that we will keep doing. We have been doing it, and it is accretive to our revenue growth and is one of the drivers of prepaid revenue performance. As we commented in the previous calls, we are also working on opportunities for improvement in the frequency of recharges, and we have implemented a number of initiatives on the offer side, channel side that will increase communication and capillarity, and what we're putting in place. This basically, if you look forward, should allow us to soften the decline of prepaid revenues from one side while sustaining postpaid revenues with prepaid to control migration. It's a general trend, I would say. I won't comment on others. On our peers' performance, I would say that a lot of what you see is strongly related to the prepaid to control migration strategies of each operator, and each one of us has its own.

Operator, Operator

Without any more questions from analysts, I'm turning the floor to Mr. Alberto Griselli for his final remarks. Please proceed, Mr. Alberto.

Alberto Mario Griselli, CEO

Thank you all for joining today's video call. I think we wrapped up the first half with strong momentum. Despite external challenges, we are staying true to our strategy and consistently delivering solid results. Looking into the second half, I'm generally excited for what the second half holds for us. We've got a robust plan in place and the confidence to make it happen. I would also like to provide my heartfelt thanks to our entire team for their commitment and drive. I look forward to catching up with some of you in the upcoming one-to-one meetings.

Operator, Operator

This will conclude the second quarter of 2025 conference call of TIM S.A. For further information and details of the company, please access our website at tim.com.br/ir. You can disconnect from now, and thank you once again, and have a wonderful day.