Earnings Call Transcript
TELEFONICA BRASIL S.A. (VIV)
Earnings Call Transcript - VIV Q1 2022
Operator, Operator
Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefonica Brasil First Quarter of 2022 Earnings Conference Call. Today with us representing the management of Telefonica Brasil, we have Mr. Christian Gebara, CEO of the company. Mr. David Melcon, CFO and Investor Relations Officer, and Mr. Joao Pedro Carneiro, IR Director. We also have a simultaneous webcast with slide presentation on the internet that can be accessed at the site www.telefonica.com. There will be a replay facility for this call on the website. After the company's remarks are over, there will be a question and answer session. At that time, further instructions will be given. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the company's management beliefs and assumptions, and on information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions, because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the company's future results. It could cause results to differ materially from those expressed at such forward-looking statements. Now, I will turn the conference over to Mr. Joao Pedro Carneiro, Investor Relations Director of Telefonica Brazil. Mr. Carneiro, please proceed.
Joao Pedro Carneiro, Investor Relations Director
Good morning, everyone. And welcome to Telefonica Brazil's earning call for the first quarter of 2022. Today's call will be divided into two parts. To start, our CEO, Christian Gebara, will briefly comment on the acquisition of Oi's mobile assets, then go over Vivo’s financial and operating highlights followed by an update about our digital ecosystems and ESG initiatives. Afterwards, David Melcon, our CFO, will discuss our cost and CapEx structure, net income, free cash flow and shareholder remuneration. Now I hand it over to Christian.
Christian Gebara, CEO
Thank you, Joao. Good morning, everyone. And thank you for joining our earnings call. Starting on slide three, we show you the long-awaited deal with Oi's mobile assets which will generate value for Vivo and reinforce our leadership in the mobile segment. We acquired 43 megahertz of spectrum nationwide, 2,700 sites and 12.5 million mobile accesses, of which 4.6 million are postpaid. As a result, Vivo’s total access base will jump from 100 million to 112 million, allowing us to become the mobile market leader in five additional Brazilian states, extending our leadership to 17 states that represent 60% of Brazil's GDP and 67% of the population. Regarding synergies, our initial regulation points to an LPV of 5.4 billion reais in cost and CapEx savings from investments and integration costs. This is composed of optimizations amounting to 1.8 billion reais in network, 1.7 billion reais in spectrum, and 1 billion in housing commercial plus 0.9 billion in fiscal benefits. Moreover, the customer base incorporated generated approximately 135 million reais in monthly net revenue in March 2022, from which we expect to extract margins above 70% both in EBITDA and operating cash flow terms when the synergies reach their running rates. Moving to the steps we have had, during the next week we will start the process with this customer base migration. Users can finally be fully integrated into our network and systems. This migration will be done gradually and should be completed by the end of the first quarter of 2023. For more details about the assets and synergies, please access the specific presentation available on our Investor Relations website. Now going to slide four, we had a very positive result in the first quarter of 2022, with impressive metrics on a 100 million access, the largest ever in our history, and our postpaid customer base totalled 51 million accesses in the quarter after growing 11% year over year, while our FTTH homes connected continue to grow remarkably at 29% year over year. Such strong performance drove our top line to grow 4.6% year over year, the best result we had since 2015, with mobile service revenues up 5.7%, while our fixed business expanded 1.9%, confirming the positive trends seen over the past couple of quarters. This positive revenue performance was enough to offset cost pressures arising from alternative business models and higher inflation, resulting in EBITDA growth of 1.3% versus the first quarter of 2021. Our strong operating momentum combined with solid financial trends led to a free cash flow generation of 2.5 billion reais, up 12.6% year over year. This allows us to continue investing in growth initiatives, technology, and inorganic opportunities while maintaining the best shareholder remuneration profile in the industry. On the next slide, you can see that we continue to successfully transition into an improved mix of revenues with inflation-linked products such as mobile, postpaid handsets, fiber, B2C, and B2B solutions, representing almost 80% of our results. This premium products portion is unique to Vivo, helping us navigate effectively during tighter economic cycles supported by our outperforming core businesses. Moving to slide six, here we detail the evolution of our mobile and fixed core revenue positive performance across the board. On the left-hand side, you can see that our mobile revenues rose 6.1% year over year. As our strong net additions in both postpaid and prepaid combined with a more rational competitive environment helped us achieve mid-single digit growth in both products. Additionally, handset service performance was robust, with a 10% increase compared to the first quarter of 2021. Moving towards our core fixed business, revenues grew 11.9% year over year, driven by a 26% expansion in FTTH, which, on a 12-month basis, is nearing the landmark of 5 billion reais in revenues. Moreover, B2B data, ICT, and digital services continue to outperform, up 13.1% year over year, as the demand for complete solutions continues to grow, increasing our digital footprint. Moving to slide seven, here we show how our operating results confirm that our customers continue to choose Vivo for high-quality connectivity. We closed the first quarter of 2022 with 85.3 million mobile accesses, up 7.1% year over year. We also achieved a 10.6% increase in our postpaid base. This performance was driven by continued prepaid-to-hybrid migration while the churn rates remain at historic low levels, and portability figures more than doubled, hitting another record. In fact, around 25% of all net additions in the quarter came from other carriers, which attests to the strength of our brand, good value proposition, and unmatched customer experience. Regarding our FTTH operations, we expanded our home space by 4.2 million premises year over year, reaching a total of 20.5 million HPs in 341 cities while connecting 1.1 million new customers, totaling 4.8 million homes connected. For the foreseeable future, we continue to execute on our convergence strategy that is spearheaded by our Vivo Total offering, which bundles FTTH, broadband, mobile, postpaid, and digital services into a single plan. We believe this solution will be key for us to reach our targets in terms of FTTH penetration while reinforcing our strategy of increasing the lifetime value of our customer base. On slide eight, we update our digital B2B figures which are composed of high-growth tech services that already account for 5% of our total revenues. For the last 12 months ending March 2022, we achieved 2.2 billion reais in B2B digital revenue, growing at an impressive 41% year over year. Cloud businesses continue to lead this performance with near triple-digit growth rates as we distribute the best solutions that the market has, partnering with hyperscalers and adding managed services. Additionally, IoT and messaging revenues rose 32% year over year while digital solutions grew 24%. These positive figures reflect our successful strategy of providing our B2B customers with a wide range of solutions that go beyond connectivity, leveraging one of the most relevant B2B omnichannel platforms in the country. On slide nine, we provide more color on the new elements of our B2C digital ecosystem that will help us develop even further. As you know, we announced the creation of Vivo Ventures, with an initial investment of 320 million reais to be disbursed over the next five years. The goal here is to acquire a 10% to 20% stake in up to 20 growth-stage startups with pre-money valuations of over 100 million reais, which must focus on providing innovative solutions related to entertainment, smart home, financial services, education, health, or other segments that have relevant cross-sell potential with our current value proposition. With that in mind, Vivo increases its participation in the Brazilian tech market, helping industries to scale their business and, as a result, accelerate our digital ecosystem while profiting from the financial returns these players can potentially provide us with. Moving to the right side of this slide, we highlight how our existing services have adapted to the changing consumption patterns of our customers. We recently launched an epic flight video streaming platform, offering access to live channels blended with a wide range of over-the-top applications for affordable prices starting from 29.9 reais per month. Currently, we have the third-largest telco in the world in terms of the number of partnerships with different content providers, testing the attractiveness of people’s key assets, such as brand, channel, customer base, and billing capability. Moving to the bottom of this slide, we highlight the recent proposition of our media tech arm, Terra, running the fourth-largest news portal in the country, with nearly 70 million unique users and over 650 million page views per month. Terra will leverage its unique big data capabilities to offer customized data-driven solutions related to content and advertising. Moving to slide 10, where we present some of our ESG accomplishments and projects that represent a cornerstone of our company's purpose, which is to bring us closer. Regarding the environment, in the first quarter of 2022, we reached 23 operating power plants for the use of distributed generation, on track to comply with our target of having 30 plants in operation by the end of 2022. We have also advanced in matters of governance, equality, and diversity. As of April 2022, we will like the new board of directors increasing the number of women at Vivo to four, representing 32% of the new composition. On the diversity front, we had 375 new black interns, 50% of the available positions who joined us in the first quarter of this year, and launched their core A platform to promote a system for victims of racism in partnership with a university. Now I turn the call over to David to comment on our financial results.
David Melcon, CFO
Thank you, Christian, and good morning, everyone. On a lighter level, we present our topics evolution for the quarter, which was up 7% year over year. Our cost of service and goods sold, which represent 31% of our total expenditure, grew 10% year over year as we expand our exposure to high-growth services, such as the digital solutions being offered by B2B and B2C. Moreover, as our handset sales grew double digits in the quarter, we felt a similar impact on cost of goods sold. Moving to the cost of operations, we continue to capture gains arising from our digitalization efforts and efficient financial management, reducing spending on customer service and budget. Inflation impacts, such as personnel and third-party contracts, led to a year-over-year growth of 5.6% in this cost bucket, which represents 69% of our total OpEx. All in all, we were able to maintain the cost evolution below the inflation registered for the period, which is clearly a positive result. Moving on, Vivo has been able to improve CapEx allocation and grow its operating cash generation. We ended the quarter, totaling 1.9 billion reais in investments directly towards the most up-to-date technologies. In this sense, fiber remains the centerpiece of our strategies, representing around one-third of our CapEx. It's also worth noting that we have already started investing in the deployment of 5G, leveraging the spectrum we acquired last year. As a result, our operating cash flow, measured as EBITDA minus CapEx, rose 4.8% in the quarter, amounting to 2.6 billion reais. This allowed us to reach a sound operating capital margin level of 23.2%, monetizing the incremental revenues generated in the quarter. Now on slide 13, we show that our free cash flow grew double digits, regardless of the reduction of net income in the period. In the first quarter of this year, our net income dropped 20% year over year, mainly impacted by non-cash items such as increasing depreciation and amortization related to the amortization of our recently acquired 5G spectrum licenses. The latter also led to higher debt, which, coupled with growing interest rates, increased our financial expenses. Nevertheless, we were able to generate 2.5 billion reais in free cash flow, a growth of 12.6% year over year, which was three times higher than our net income. Moving now to slide 14, our strong cash generation allows us to deliver unparalleled shareholder remuneration while accommodating our investment needs and inorganic transactions, all while maintaining a low level of debt as well as a net cash position before leases of 2.9 billion reais in the quarter. In this sense, over the last 12 months, we've declared 6.3 billion reais to our shareholders in the form of dividends and interest on capital. Additionally, in the first quarter of this year, we invested 150 million reais in share buybacks and plan to continue executing the program in place until February 2023 while maintaining our historically high payout levels. Thank you. And now we can move to the Q&A.
Operator, Operator
Our first question comes from Bernardo Goodman from XP. Please proceed.
Unidentified Analyst, Analyst
Hi, good morning, everyone. Thanks for taking my question. Actually, I have two questions here. The first one is about the margins. I would like to understand if there are any other elements besides Oi's mobile assets that could drive the EBITDA margin up in the coming quarters. Perhaps digitalization will have some positive marginal effect here. The second question is about the synergies. I would like to understand the company's rationale for not providing more complete guidance that reflects the market and its revenue synergies. If you could add a little more color on this front, that would be great. Thanks.
Christian Gebara, CEO
Hi, Bernardo, this is Christian. I will tackle the second part of your first question. I think we've given a lot of clarity related to OpEx and CapEx. For now, we believe that we can assume a very strong and reliable number, and it's a very high number for synergies. So we understand that sort of discussing the best network in the Northeast, mainly where we are adding 12.5 million customers, we have not only the best internet and mobile network but also the best channels, both offline and online, and all the other assets that Vivo can leverage to offer to these customers. We are very confident in our ability to capture all of this. Our frequency acquisition nationally will also enhance our services and reduce CapEx for the whole geography. Of course, we also believe that going forward, our ability to cross-sell or sell more services to this customer base could be very beneficial, especially considering we can offer a converged offer of fixed plus mobile that we can also bundle with digital services. This is part of our ecosystem in health, education, and entertainment, which can attract this type of customer. For the moment, I think we are fine with the synergies that we presented; we are certainly capturing these. However, we also believe there is upside potential in managing this customer base more effectively and maybe capturing more customers across the country that may choose Vivo as their preferred provider. Regarding margins, I will give a brief overview and then there are others I can complement. If you look at the margin we have this quarter, it’s almost 40%, which is a very small margin. If you look at the cost details, one-third of the costs are somewhat linked to the new sales revenue we have around B2B and equipment enhancements, so the more we grow in those areas, the more we will grow revenue. That is why we have had record revenue growth for the last six years, not just 4.6% this quarter. But if you look at the costs of preparation, the rest of the costs that represent around 69% of the total cost, you’ll see that mainly the variables that are growing relate to personnel and commercial infrastructure costs, which are somewhat flat. We have seen that this digitalization is helping us reduce costs and improve service quality—this will likely continue into the future. We believe there is still potential in both back office and front office operations. However, the costs that used to be CapEx are now turning into OpEx, which helps reduce our capital intensity. This is great news regarding returns on capital. Therefore, we suggest that it's better to look at the operating capital margin. In the case of Vivo, we are showing 23.2% this quarter, which we believe is record in our industry, and we are also growing year over year. On top of that, the synergies we have relate to OpEx and CapEx, which means we will be able to have incremental revenue coming from our customers without only limited costs in both OpEx and CapEx, so both metrics will benefit from this integration. Therefore, our operating cash flow grew 4.8% year over year, contributing to the positive outlook. Thank you.
Operator, Operator
Our first question comes from Leonardo Olmos from UBS.
Leonardo Olmos, Analyst
Hi, good morning, everyone. I have a couple of questions. The first one is more strategic, and the second is more financial. The first question is regarding Vivo money. Could you discuss the growth in the credit portfolio and what potential you see in this product? Also, regarding Vivo Ventures, what types of investments do you see in your ROI pipeline? What can you tell us more about Vivo Ventures?
Christian Gebara, CEO
So this is Christian, I will start with Vivo Money and Vivo Ventures, then I will hand it over to David. Vivo Money launched in October 2020. We've been very conservative in deploying the service because we want to do it right, especially because we are normally dealing with our own customer base. Once we get into financial services, we need to preserve the customer experience for our customers. The credit ranges from 1,000 to 50,000—this quarter, the number of contracts grew by 4.7%. We have more than 10,000 customers already using the service, and we have already lent 52 million. This model is working as we stand right now. We're growing in new contracts and also in the money that we lend to customers. In addition to lending money, we are trying to associate this with our portfolio. We aim to leverage the sales of handsets and devices both online and offline in our stores through this platform. We have started this process where customers can finance a new device through our credit approval process. As of now, we are the only participant in this area and may consider having other participants in the future. So that’s the situation we have for Vivo Money; it is growing. For Vivo Ventures, we announced the creation of our corporate venture capital fund in Brazil focused on seed money. We invest an average of 1.5 million and focus on very seed-stage companies. We made successful investments mentioned as recent successes in education, financial tech, and HR, among others. Most of these companies leveraged our assets. We could also be a customer of these companies, not only for our own services but blending their services into our value proposition. We've also realized that we need to go toward the growth stage of investments, and this is a major opportunity to follow some of these investments in the growth stage. Therefore, we established a federal fund of 320 million reais, planned over five years, and we will do larger tickets for companies than what we did in the earlier rounds, investing about 15 to 20 million per company. We expect to acquire up to a 20% stake in these companies, focusing on the B2C ecosystem such as entertainment, health, education, logistics, and eCommerce platforms related to our B2C ecosystem. I hope I answered your questions; I will hand it over to David.
David Melcon, CFO
Hi, let me address the second question. You're correct; financial expenses in the quarter grew around 60% year over year. The main reason for this is the local interest rate has increased significantly. If you look at the interest rates one year ago, the first quarter last year, we acquired a 5G frequency, which affected financial expenses significantly. Moreover, the IFRS 16 impacts show that debt is now somewhat flattish, although it increased slightly by 700 million year-over-year. Lastly, the increase also reflects the monetary update of some non-financial liabilities we have in our balance sheet, particularly provisions, which we need to update every quarter based on interest rates—but these are not cash items. If you assess the evolution of our free cash flow, it’s important to note that in the first quarter, we achieved a growth of 12%. Higher financial expenses don’t necessarily indicate a negative trend. We are investing, improving the capital structure of the company, and acquiring assets that will generate more value for our shareholders, particularly in 5G. We believe these costs will continue rising throughout the year, however, we remain focused on generating value through these investments.
Operator, Operator
Our next question comes from Victor Ricciuti from Credit Suisse.
Victor Ricciuti, Analyst
Good morning, everyone. Thanks for taking my question. I have two questions. The first regarding repricing. As inflation has not decreased yet, what are Vivo's plans around repricing for 2022? Will repricing be more active this year or should it be seen more on your control plan? The second question concerns B2B. Vivo has been reporting strong growth in this business, and it is expected to continue growing. However, B2B has an interesting growth outlook with lower margins. How do you envision margins going forward? Should we expect them to partially offset the benefits from Oi?
Christian Gebara, CEO
Victor, this is Christian. Regarding B2B, we are very positive about our strategy. As I mentioned before, we have the best omni-channel approach. To give you an idea, we have 5,000 B2B representatives visiting customers. Our strategy has always been to be the technology partner for these customers, so while connectivity remains important, we also see increased data revenue as we sell more services. We are focusing on cloud, IoT, and cybersecurity. We've established three companies in Brazil focusing on tech, cyber, and IoT, along with a fourth in cloud. These services will heavily inform the value proposition. You're right; the margins are lower, but there is almost no CapEx required. We've indicated before that we should focus on operating cash flow. We may give up some margin in EBITDA, but our operating cash flow will significantly contribute to the company's future. Furthermore, we are developing strong relationships with these customers, which places us as a potential primary technology provider. We have seen almost 100% growth in cloud, and we are combining that with managed services for differentiation. We will continue to pursue this strategy and are pleased with our numbers over the last 12 months, with 2.2 billion reais in digital services for B2B. While the margins are lower, the CapEx differs significantly from Oi as we look to deploy 5G or fiber. For the second question about repricing, we are actively engaging in repricing due to the inflation impacts we are observing. We have already started hybrid pricing this quarter and are preparing to implement more adjustments in the second and third quarters for postpaid and fiber. Even in prepaid, while our ARPU increase is reflected in rising revenues, we believe there is opportunity to adjust pricing as the market hasn’t fully adjusted to inflation's influence. We expect competitors to follow suit on this trend as well.
Operator, Operator
Our next question comes from Marcelo Santos with JPMorgan.
Marcelo Santos, Analyst
Hi, good morning. Thank you for the question. My first question is about the sustainability of the pace of net ads for fiber. We have seen some of your competitors claiming that in the current environment it is tough to attract quality customers, yet you continue to add at a healthy pace. How do you see this going forward given the macroeconomic environment? The second question is regarding mobile. You have been gaining on prepaid-to-hybrid migration. Given this inflationary environment, how do you see this continuing? Is there still further space, or is your prepaid base already pretty small? Are we reaching the limit, or is there further space?
Christian Gebara, CEO
David will address the second question, and I'll cover the first. I wouldn’t say our prepaid base is small. We have grown the prepaid base, with approximately 34.4 million customers. We are continually receiving customers. I would say our prepaid base is relevant, and if you consider our mobile customer base, we grew this quarter by 7.1% overall, with a 2.2% increase in prepaid, and a 10.6% increase in postpaid. We have a successful strategy in migration from prepaid to postpaid or prepaid to hybrid. We still believe there is room to continue this, and we are pleased to attract new prepaid customers, evidenced by our growth. We did recently see additional migrations from prepaid to hybrid, but we also captured customers from pure postpaid. As you will see, the presentation will show growth in portability numbers, which have now doubled compared to the previous year. Yes, we are positive as a destination for new prepaid customers. We continue to target these migrations, in combination with our successful digital services. Regarding FTTH, we are the leading company in FTTH deployment, achieving 20.5 million homes passed. We’re also in 341 cities and increased our customer connections by 1.1 million this quarter. Despite competition, the macro impact may affect others, but we believe we have unique advantages that are difficult to replicate. Our composed value proposition includes our channel footprint, which includes 1,700 stores, door-to-door sales, e-commerce capabilities, and a robust digital services offering. We believe these factors enable us to provide superior service even during challenging macroeconomic conditions.
Operator, Operator
Our next question comes from Joshua Mills from BNP Paribas.
Joshua Mills, Analyst
Hi, thank you for the question. Firstly, could you explain how the mechanism for implementing inflation-linked pricing to your contracts works? Is this an automatic process, or do you inquire customers voluntarily? It seems like everyone in the market is increasing prices, so it shouldn't be an issue. Secondly, regarding the impact of inflation on your cost base, could you discuss how we might expect that to develop in the second half of 2022 and into 2023, especially given Brazil's inflation rate? When you arrange agreements with your workers, is there any provision in those contracts that explicitly links pay to inflation?
Christian Gebara, CEO
Josh, this is Christian. I will start with the first question. The revenue mix we have is unique in Brazil; the payment accuracy for most of our services is high. The penetration of postpaid fixed services in our total revenue is greater than any other form. Around 80% of our revenues are recurrent, with monthly fees. In this case, we have by contract the right to implement price increases tied to inflation, so we are covered in this sense. However, handset prices are driven not only by inflation but also by the exchange rate, which complicates absorption. The prepaid revenue depends more on market dynamics, and we believe there is an opportunity for price increases. In terms of labor costs and personnel impacts, we try to negotiate with vendors annually. This year we will begin engaging in September. Unfortunately, we cannot disclose specifics at this moment, although we are also negotiating energy costs that may rise. I've heard that energy costs are a challenge for other players in the sector; however, given the investments we've made over the years to become more sustainable, we have been mitigating risks. A substantial portion of our energy now comes from renewable sources, which reduces costs significantly below the market rate. Ultimately, we are managing our costs effectively.
Operator, Operator
Our next question comes from Freddie Mendes from Bank of America.
Freddie Mendes, Analyst
Hello, good morning, everyone. Thanks for the call. I have two questions as well. The first question is a follow-up regarding the mobile front. When I look at the numbers, you've increased your base of clients on the postpaid side by 7.5% year over year, while mobile service revenue grew by 6%. There was a price increase in July expecting 8% returns. I mean, could you explain at what price these clients are entering? Are you offering any discounts to bundle services? My second question relates to your expectations for mobile service revenue growth. If you manage to maintain the current net additions, should we expect acceleration in revenue growth, especially with planned price increases? I know you don’t provide guidance, but should this trend hold if net additions continue at similar levels?
Christian Gebara, CEO
Hi, Fred, this is Christian. Your observations are interesting. Regarding the additions of new customers, they are not entering at a very low price; that is not accurate. I think the mix shows that hybrid is growing faster, positively impacting ARPU. We aren't lowering prices necessarily. The impact of convergence is currently affecting mobile ARPU, and we are focused on customer ARPU, which is something we will work to clarify going forward. The strong growth in new customer base is excellent, but to address pricing, we haven't implemented all of the expected price growth yet; we are carefully timing these increases based on contract terms. There are still price hikes to come for hybrid and possibly even postpaid customers for this year, which can also affect overall revenues positively. We are very optimistic about commercial activity, both in terms of acquiring new customers and migrating existing ones from prepaid to postpaid as well as pure postpaid. Additionally, in our portfolio, the increase in portability reflects our attractiveness as a provider. We believe there's significant potential for further growth in revenue and customers. Thank you, everyone, for joining our call. We are very happy and optimistic about the good start for 2022. I'm very enthusiastic about the rest of the year, given our strong commercial performance and the strategy we have been implementing. If there are any additional questions, our team is here to respond. Thank you once again.
Operator, Operator
Thank you. This concludes today's Telefonica Brazil first quarter 2022 results conference call. You may disconnect your lines at this time. Have a nice day.