Earnings Call Transcript - VIV Q1 2023

Operator, Operator

Ladies and Gentlemen, welcome to Vivo's First Quarter 2023 Earnings Call. This conference is being recorded, and a replay will be available on the company's website at ri.teleconica.com.br. The presentation will also be available for download. This call is also offered in Portuguese. Before we continue, we would like to clarify that any statements made during this call regarding the company's business prospects, operational and financial projections, and goals are based on the beliefs and assumptions of Vivo's Executive Board and the current information available to the company. These statements may involve risks and uncertainties related to future events and therefore depend on circumstances that may or may not occur. Investors should be mindful of events related to the macroeconomic environment, the industry, and other factors that could lead to results differing materially from those expressed in forward-looking statements. Present at this conference are Mr. Christian Gebara, CEO; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. Joao Pedro Carneiro, IR Director. Now I will hand the conference over to Mr. Joao Pedro Carneiro, Investor Relations Director of Vivo. Please begin, Mr. Carneiro.

Joao Pedro Carneiro, IR Director

Good morning, everyone, and welcome to Telefonica Brasil's conference call to present the first quarter 2023 results. The call will start with our CEO, Christian Gebara, commenting Vivo's financial and operating highlights, followed by an update on the progress of our B2B and B2C digital ecosystems and ESG initiatives. Then our CFO, David Melcon, will go through our cost and CapEx evolution, net income, shareholder remuneration, and free cash flow generation. I now hand it over to Christian.

Christian Gebara, CEO

Thank you, Joao. Good morning, and thank you for joining our earnings call. I start by representing the highlights of a very strong first quarter for Vivo, a period when we reached our highest total revenue year-over-year growth in over a decade, expanding top line by 12.1%, driven by an expansion of 15.9% of our mobile service revenue and by further improvement of our fixed business. This strong performance was a result of yet another positive quarter in operational terms, with mobile postpaid access growing 15.4% on an annual basis, while our FTTH expanded base grew 16.8%. We have been able to grow EBITDA above inflation for a few quarters, and this one was no exception as we presented a 9.6% year-over-year expansion. These results, coupled with the reducing CapEx intensity you should see throughout the year, allowed us to generate BRL 3.1 billion in free cash flow in the first 3 months of 2023, a robust growth of 26.4% versus the first quarter of 22. This confirms our conditions to maintain a leading shareholder remuneration in the industry going forward. In the first quarter of 2023, our total revenue reached BRL 12.7 billion, the highest result the company produced in a single quarter in its history. More importantly, the 12.1% year-over-year evolution is the best we've had in over 10 years, confirming that we are on the right track to continue delivering above inflation top line expansion going forward. Our revenue mix keeps on improving as we see our core services expanding. On the mobile side, service revenues grew 15.9% year-over-year with strong performance in postpaid. In addition, smartphones and other electronics, which were increasing as a key element to enhance customer loyalty, accelerated 20.6% in the period. On the wireline business, FTTH and B2B data, ICT and digital services continue to be the drivers of transformation, enhancing our growth profile through highly demanded products that only Vivo can offer on a large scale. We closed March 2023 with 98.1 million mobile subs, of which 60% are postpaid. The 15% year-over-year growth of our customer base enabled us to further expand our market share, reinforcing our leadership in all mobile segments. One of the key elements behind the market outperformance is how successful we have been in controlling and reducing churn. Over the last 5 years, our postpaid churn reduced 37% to a monthly average of 1.09% in the first quarter of 2023. Churn reduction, combined with the ARPU composition we have been experiencing over the last quarters, is a powerful platform to provide above-market results going forward. We closed the quarter with 58 cities covered with our 5G stand-alone network, moving forward to offering the technology in all densely populated areas in Brazil. Currently, almost 70% of the smartphones we are selling in our stores are 5G ready, starting from prices as low as BRL 1,300. The device affordability coupled with our accelerated footprint expansion has been a driver for fast customer migration from 4G to 5G. As such, 20% of our pure postpaid users are already enjoying Vivo's 5G experience. This migration to 5G will not only enable us to be more efficient in terms of investment deployment but also create room for more data consumption, which in turn will serve as an important driver for product upsell and improved monetization. In the first quarter of 23, we added over 1 million fiber-to-the-home premises to our forte, now reaching 24.4 million homes in 436 cities. Our second to none network allows us to maintain the undisputed leadership in the fiber market in Brazil with 5.7 million customers, growing 16.8% year-over-year. Vivo has a unique ability as the only player being able to bundle in a single plan fiber and mobile postpaid. This bundling strategy is an extremely powerful tool to extend customer lifetime value, protecting our investment to capture new users and improving our overall return profile. In the first quarter of 2023, our digital B2B services generated BRL 813 million of revenues in the quarter, up 32% year-over-year, representing 6.4% of our top line in the period. We see ourselves as being able to explore a huge potential market going forward. In summary, our results reflect a strong start to the year, and I am confident we will maintain this momentum going forward.

David Melcon, CFO

Thank you, Christian, and good morning, everyone. On Slide 12, you see that we were able to maintain our cost of operation, which comprises 68% of our cost, while it expanded 11% year-over-year, growing below revenues. Personnel costs continue to be one of the main drivers, impacted by the annual salary increase and in-sourcing to support our B2B digital services strategy. Additionally, commercial and infrastructure costs remain under control, while the provision for bad debt was slightly lower year-over-year, demonstrating the relevance of our services to our customers. Looking at the cost of services and goods sold, this mostly increased in line with our efforts to sell high-growth solutions and products like digital services and handsets. The 18% year-over-year expansion was lower than revenue growth from these verticals. We see a path to improve the annual evolution of costs, not only from simplification but also from the recently completed integration of Oi's mobile assets. This integration will boost the capture of synergies related to network costs, IT platforms, and customer care. Additionally, we recently began amortizing the goodwill arising from the acquisition, which will generate over BRL 1 billion cash in the next 5 years. Our CapEx for 2023 will be below BRL 9 billion, providing significant savings compared to BRL 9.5 billion invested last year. This first quarter figure already points to lower CapEx intensity, with investments at BRL 1.7 billion or 13.3% of revenues, our lowest ratio ever. As a result, we saw a robust 23.7% year-over-year expansion of operating cash flow in the quarter, and our last 12 months margin recovered to the 21% level. We continue to invest in top-tier technologies like 5G and fiber while optimizing capital allocation. Looking at net income, it expanded 11.3% year-over-year in the quarter, reaching BRL 835 million, despite pressure from increased debt and higher interest rates. Year-to-date, we declared BRL 1.2 billion of dividends and interest on capital, and we invested BRL 72 million in share buybacks. Our free cash flow generation reached BRL 3.1 billion in just 3 months, growing 26% year-over-year.

Fred Mendes, Analyst

I have 2 questions here on my side. The first one on costs. I mean, Dave already mentioned a little bit, but cost grew like 12%, personnel itself, 23%, a little bit higher than what we had here. So just wondering if the lower inflation in 2023 allows for a reduction in this cost or, given that the other businesses are growing, this line should stay high throughout the year. This will be the first one. And then the second one on the B2B, once again, some acceleration already 6.5% of your revenue. Do you believe that there is room to continue to grow in this space as you add more products, or is this going to be a one-off? Basically trying to understand the potential of this line here for the next years.

David Melcon, CFO

Fred, I will start with the first question. As we showed on the slide, we have divided the costs into two parts. The first one will be linked to the evolution of the new businesses, more like cost of goods, and so on. So we expect this to continue to grow. To remind you, those revenues will not have CapEx allocated, so operating cash flow cash flow margin will be very positive. Regarding the second point about inflation, we are working with different levels to make sure that we reduce those costs. Despite some lines increasing, particularly those linked to personnel costs, we explained that they are due to specific projects. Overall, we see many opportunities in simplification and digitalization. From the Oi integration, we expect to reduce and improve trends starting from the second quarter this year, and we will see some improvements in the trends.

Christian Gebara, CEO

If I can continue, Fred, regarding the B2B. We believe there is room for growth for many reasons. First, because Vivo has a unique channel footprint for B2B, supported by over 5,000 sales reps nationally, enabling us to service small to large corporations. After the pandemic, there was an accelerated need for digitalization in companies. The penetration rate for digital services in companies in Brazil is still very low, offering significant growth potential. Additionally, we are one of the key partners of large tech companies like Cisco, Microsoft, Google, and others. We are investing in building internal capabilities to deploy and manage B2B services better. Going forward, we don’t give specific trends, but we see a very positive role for B2B in our future revenue and mix.

Fred Mendes, Analyst

Perfect. Christian, that will be very clear. If I may follow up on these two points, sorry for the third question, but it looks like the deal is about to be approved. I am wondering if, with this high spectrum, there is room to further decrease the CapEx in 2023, which is already lower than in 2022.

Christian Gebara, CEO

It's not approved. Yesterday, we had a positive decision from the technical team in the antitrust from CADE. It's a first step in the antitrust. They approved it with no restrictions to the deal as we expected, because it's the secondary use of frequency that was bought by Winity. However, we still need to go through all other stages in the antitrust and also approval in Anatel. It was a positive step in the antitrust but we still need final approval there.

Marcelo Santos, Analyst

The first question is for Dave regarding working capital. I think in the first quarter, we saw a big release of BRL 1.3 billion in working capital. How should we think about this line going forward? What are the main moving parts that investors should keep in mind? The second question is for Christian. I wanted to discuss Vivo Money. Could you please discuss the types of loans that you're giving there? What are they for? What are the average size? Are these to buy mobile phones or general loans? Any more color on these loans would be quite interesting.

David Melcon, CFO

Thank you, Marcelo, for the question. I will start with the first one. We've shown a strong cash flow generation over the years, and working capital has been a key component. The key reasons for this positive working capital in this quarter are twofold. First, we have an injection related to the fiscal tax in 2020. It has a positive impact of BRL 750 million in working capital. The second is the monetization of tax assets in our balance sheet, roughly BRL 500 million in the quarter. We expect to keep working on initiatives regarding working capital, and there are more tax assets to be monetized in the second quarter, which should also have a positive impact.

Christian Gebara, CEO

Marcelo, going on Vivo Money. Vivo Money was launched in October 2020. It's a personal loan available for Vivo's customers. This is feasible because we can assess credit risk using our big data and data analytics. The loans range from BRL 500 to BRL 50,000, with an average of BRL 5,000. The process is entirely digital, and customers can use it however they wish. Currently, we have BRL 239 million in total loans. This service reinforces our position as a digital hub. It may help finance smartphones or other devices, but it is essentially a direct loan.

Andre Salles, Analyst

The first one would be in terms of the price schedule. If you could share the company views on the price schedule for your mobile plans, both postpaid and prepaid. The next question would be about the developments of the capital reduction discussion with Dana Teoe. After potential approval from the regulator, there are additional internal steps that the company needs to take, right? Could you provide expected timing for this to happen?

Christian Gebara, CEO

We increase prices according to inflation each year. In April, we will have price increases for about half of our hybrid customer base, more than half of our postpaid. We already increased most of our fixed products in January. Our strategy is to consistently adjust prices while enhancing the value proposition to our customers. Regarding the capital reduction, we announced in February that we would do this reduction. We've already filed in February, and they have six months to analyze. We are confident in getting approval due to our strong financial position.

Marco Nardini, Analyst

The first question is regarding the competitive environment in FTTH, as we saw once again a strong performance in top line growth this quarter. Can you provide further details on that? The second question is regarding the drop in EBITDA margins year-over-year. Can you explain the impact of the termination of the PSA contract with Oi in February on margins?

Christian Gebara, CEO

I'll start with FTTH. We are expanding our footprint, which allows us to reach 24.4 million homes. We have seen 5.7 million customers with FTTH, growing 16.8% year-over-year. It's a competitive market, but Vivo stood out with net gains leading the market. We are bundling FTTH with mobile and enhancing revenue from both segments. On the EBITDA side, our growth in absolute terms is still strong, reaching 9.6% growth in EBITDA. We are committed to expanding our digital services that, while they may have lower margins, provide significant operating cash flow.

David Melcon, CFO

As Christian pointed out, we prefer to look at operating cash flow margin because the evolution of revenues is quite strong. The transition service agreement we had with Oi had an agreed cost of BRL 172 million for the next 12 months, and we terminated it early because we merged the customers. Consequently, we will see a BRL 50 million reduction in costs from this contract in the second quarter.

Victor Ricciuti, Analyst

The first one regarding the competition in the mobile segment. You mentioned that you are able to increase prices for almost the entire client base while also reducing churn. How do you perceive the competition in the mobile segment and do you expect it to continue throughout 2023? My second question is regarding the Oi client base. Now that the Oi incorporation happened over a year ago, could you provide some color around the commercial strategy for the Oi client base going forward?

Christian Gebara, CEO

Yes, it’s a competitive market that has persisted for many years. We are adjusting prices according to inflation and working to enhance our services, which increases customer loyalty and lifetime value. We completed the integration of Oi's customers, and our strategy remains the same. We aim to upsell and migrate customers to higher plans while enhancing their experience. There is no specific action tailored for the Oi customers, as we focus on integrating them into our offerings.

Daniel Federle, Analyst

We see Telecoms, especially Vivo, growing faster than usual. In a more positive pricing environment, if this allows for an additional 1 or 2 percentage points more in growth, should we expect this additional growth to translate to EBITDA?

Christian Gebara, CEO

I wouldn't specify margin growth rates, as our growth strategy encompasses all segments and varies between B2C and B2B. We are growing in all areas, including digital services. It's difficult to isolate mobile to predict its EBITDA impact. We are focused on a balanced strategy that enhances revenue streams while controlling costs.

Felipe Cheng, Analyst

The first one is regarding shareholder distributions for this year, given that free cash flow generation was strong in the first quarter. What are your expectations for dividend distributions in 2023? The second question is regarding B2C ecosystem revenues. We already saw a relevant contribution from financial services and OTT sales this quarter. What other opportunities do you see to complement your ecosystem going forward?

David Melcon, CFO

We have a practice of distributing 100% payout, a practice that will continue. Our strong cash flow generation and the upcoming capital reduction underscore this. That's our stance on shareholder remuneration.

Christian Gebara, CEO

As for the B2C ecosystem, we see ourselves in a unique position due to our assets, capabilities, and brand. We will provide more insight as we progress with verticals, including our financial services, OTT distribution, and other digital initiatives. Our strategies encompass joint ventures, partnerships, and acquisitions to enhance our ecosystem.

Operator, Operator

The question-and-answer session is over. We would like to hand the floor back to Mr. Christian Gebara for the company's final remarks. Please Mr. Christian, you may proceed.

Christian Gebara, CEO

Okay. Thank you for your participation. As you could see, we started very strong this year. It's a reflection of the strategies communicated over the last quarters, which provides us optimism about our future prospects. We are available for any questions you may have. Thank you again, and have a great day.

Operator, Operator

Vivo's conference call is now closed. We thank you for your participation and wish you a very good day.