Telefônica Brasil S.A. (NYSE:VIV) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Ladies and Gentlemen, welcome to Vivo First Quarter 2023 Earnings Call. This conference is being recorded, and a replay will be available at the company’s website at ri.teleconica.com.br. The presentation will also be available for download. This call is also available in Portuguese to access, [Operator Instructions]. Before proceeding, we would like to clarify that any statements that may be made during this call regarding the company’s business prospects, operational and financial projections and goals are the beliefs and assumptions of Vivo’s Executive Board and the current information available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore, depends on circumstances that may or may not occur.

Investors should be aware of events related to the macroeconomic scenario, the industry and other factors that could cause results to differ materially from those expressed in respective forward-looking statements. Present at this conference, we have Mr. Christian Gebara, CEO of the company; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. Joao Pedro Carneiro, IR Director. Now I will turn the conference over to Mr. Joao Pedro Carneiro, Investor Relations Director of Vivo. Please, Mr. Carneiro, you may begin your conference.

Joao Pedro Carneiro: 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 : Thank you, Joao. Good morning, and thank you for joining our earnings call. I start 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 of the charge performance was a result of yet another positive quarter in operating terms, with mobile postpaid access growing 15.4% on an early basis, while our FTTH expanded base expanded 16.8%. The — we have been able to grow EBITDA above inflation for a few quarters in a row, 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 with a robust growth of 26.4% versus the first quarter of ’22. This confirms the conditions for us to maintain a leading shareholder remuneration in the industry going forward. Going to Slide 4. 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 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 a strong performance, both in tread 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 driver of transformation, enhancing our growth profile through highly demanded products that only Vivo can offer on a large scale. On Slide 5, we present the main achievements of our mobile operations in the quarter. We closed March 2023 with 98.1 million mobile subs, of which 60% in 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, jointly with the ARPU composition we have been experienced over the last quarters is a powerful platform to provide above-market results going forward. On Slide 6, you can see the key highlights of our initial 5G deployment. We closed the quarter with 58 cities covered with our 5G stand-alone network moving forward to offering the near future, the technology in all top populated places in Brazil. Apart from being within our coverage area, to use 5G, our customers must have a 5G-enabled device.

At the moment, almost 70% of the smartphones we are selling in our stores are 5G ready for prices starting from 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. And this take up is much faster than what we saw a decade ago when we launched 4G — this is important as the migration to 5G, not only will enable us to be more efficient in terms of investment deployment, but also creates room for more data consumption, which in turn will serve as an important driver for product upsell and improved monetization. Turning to Slide 7. We move to fiber. In the first quarter of ’23, we added over 1 million fiber-to-the-home premises to our forte, which now reaches 24.4 million homes in 436 cities.

Our second to none network which allowed us to maintain the undisputed leadership of the fiber market in Brazil with 5.7 million customers, growing 16.8% year-over-year. Apart from the infrastructure advantage, Vivo has a unique ability in Brazil 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 the customer lifetime value, protecting our investment to capture new users and improving our overall return profile. In fact, Vivo Total, which is our fully convergent offer had a churn of only 0.39% per month in the quarter. Moving to Slide 8. Here, you can see that our digital B2B services generate BRL 813 million of revenues in the quarter, up 32% year-over-year, representing 6.4% of our top line in the period.

We have been consistently growing this pool of revenues to a tune of 35% per year on average over the past 5 years. As such, we are on the brink of seeing our digital B2B revenues a bit greater than our noncore revenues, demonstrating how efficient we have been becoming relevant in new verticals to replace fading legacy technologies. Even so we are just beginning this journey as only a small fraction of our B2B customers are already using cloud, cybersecurity and digital service from our portfolio of solutions. Therefore, by using the key assets we have, such as a strong brand and the 5,000 B2B sales reps with nationwide presence, we have a huge potential market to explore. Let’s move to Slide 9. Here, for the first time, we start to put numbers on some of the verticals we have been developing to consolidate our digital B2C ecosystem.

But before that, I would like to point out that Brazil is a country with a low penetration of basic services such as health, education and financial products. We firmly believe Vivo to be in a unique position to bridge this gap and accelerate inclusion through digitalization, relying on a low acquisition cost that takes advantage of a set of assets that includes a longstand relationship with 112 million customers, massive big data capabilities, channels comprised of 1.8000 stores and an app with over 22 million unique users per month and one of the top 10 most valuable brands in the country. Now going to numbers. On the left-hand side of the slide, you can see that in the first quarter of 2023, the financial services we offer to our customers, base generated BRL 94 million in revenues.

So the financial services we offer to our customer base in BRL 94 million in revenues, up 55% year-over-year. Here, we have key contributions from Vivo Money, our personal loan platform, which closed the quarter with a portfolio of BRL 239 million, up over 5x year-over-year. We also accelerated the sale of insurance for electronic devices such as smartphones, tablets, smart watches and laptops. At the moment, we have over 300,000 smartphones insured diverse in partnership with Proseguros. We are also moving ahead to go beyond tech and offer insurance for pet, bikes, homes, among others. Another important source of revenue and churn reduction has been the sale of video and music OTTs through our invoice bundled with our postpaid and FTTH plans or on a stand-alone basis.

We currently view more than 2.2 million OTT subscribers, generating BRL 101 million of revenues in the quarter, up 53% year-over-year. Divis one of the top telcos in the world in terms of partnership with content providers. As we see, this is a key advantage in maintaining our customer loyalty and satisfied with the completeness of our portfolio. Moving to Slide 10. In addition to financial services and OTT distribution, we are developing other verticals that will complement our digital ecosystem strategy. Starting with Health & Wellness. In March, we invested BRL 60 million to acquire [indiscernible] a start-up that provides access to over 5,000 labs and clinics nationwide and was already acting as a partner to our eHealth initiative, [indiscernible].

Now we already have more than 70,000 lives covered by our subscription-based products. Moving to education. We recently made the commercial launch of Viva E, the employability platform. We have in partnership with Anima, offering over 400 hours of content packing short duration courses. On smarthomes, we see space not only to sell virtual assistance, lamp sensors and other products, but also to have a recurring revenue stream through our Vivo Guru solution, which offers our customers access to professionals dedicated to help with tech outs and configurations. Additionally, we see the business of selling electronic devices beyond smartphones that’s very attractive as this generates important inflows to our stores and allow us to be a one-stop shop for techniques of our customers.

In the first quarter of 2023, we registered BRL 69 million in revenues from this vertical, up 95% year-over-year. Here, apart from being a apart from the smartphone products, we sell laptops, wearables and accessories, the latter being reinforced by our recently launched brand, OFI. Moving to Slide 11. On ESG, this quarter, we highlight that we are well on track to achieve the goal of having 40% of women occupying our leadership roles. And at the moment, 36.8% of the positions are held by them. We are not only formenting the presence of women in the executive position but also in field service operations for the program, Multifibra. Still on diversity. In the first quarter, we responsor the Lola Palooza Music Festival allocating the largest part of its tickets to black people from peripheral communities and black influencers and entrepreneurs through the Prescare or black presence movement.

Going to the right-hand side of the slide, you can see that we continue to expand our distribution generation program having inaugurated 7 new power plants totaling 55 plants infection out of the 85 we have as a goal. We were also recognized by the carbon disclosure project for the third year in a row as a supplier engagement leader, helping implement sustainable tractors throughout the entire value chain. Now David will take us through the financial highlights of the quarter.

David Melcon: Thank you, Christian, and good morning, everyone. On Slide 12, you see that we were able to maintain our cost of operation, which comprise 68% of our cost and expanded 11% year-over-year, growing below revenues. Here, personnel costs continues to be one of the main drivers as this line is not only impacted by the annual salary increase, but also by the in-sourcing of staff to support our winning B2B digital services strategy and additional headcount related to new businesses. Apart from that, commercial and infrastructure costs remain well under control, while the provision for bad debt was slightly lower on a yearly basis, denoting how relevant our services have become to our customers. Looking at the cost of service and good sold, which mostly increased in line with our effort to sell high-growth solutions and products such as digital services, handsets, IT equipment and accessories, the expansion of 18% year-over-year was lower than the increase in revenues coming from these verticals.

For the quarters to come, we see a path to improve the annual evolution of costs, not only from the opportunities around digitalization and simplification, which we continue to capture but also from the recently completed integration of Oi’s mobile assets that resulted, for example, in the termination of the transition service agreement with Oi that had a cost of almost BRL 50 million this quarter and consumed around 1 percentage point of EBITDA year-over-year growth. This integration will also boost the capture of synergies related to the network costs, IT platforms and customer care, among others. Additionally, in March, we have started to amortize for tax purposes, the goodwill arising from the acquisition that will generate more than BRL 1 billion cash during the next 5 years.

Going to Slide 13. As guided in the previous quarter, Vivo’s CapEx for 2023 will be below BRL 9 billion, thus providing an important savings compared to the BRL 9.5 billion invested in the previous year. This first quarter figure already point to this lower CapEx intensity with investments clocking in at BRL 1.7 billion or 13.3% of revenues, our lowest ratio ever. As a result, we saw a robust expansion of 23.7% year-over-year of operating cash flow in the quarter with the last 12 months margin recovering the 21% level. These results put us in a unique spot as we continue to invest in top tier technologies such as 5G and fiber while being able to optimize capital allocation as mobile synergies arising from the recent spectrum acquisition start to kick in while on fiber, most of the footprint deployment is done.

On Slide 14, you see that our net income expanded 11.3% year-over-year in the quarter, reaching BRL 835 million, even though we are still seeing increasing pressure coming from the financial results due to the increased debt level and higher interest rate, the 17% expansion of our operating income in the period more than compensate this factor. Year-to-date, we have already declared BRL 1.2 billion of dividends and interest on capital. In addition, we invested BRL 72 million in the quarter to buy back our shares. As such, we kicked off the year with a very robust allocation of capital towards our shareholders, something that will continue to be one of the key elements of our strategy. Finally, on slide 15, you can see that our free cash flow generation reached BRL 3.1 billion in just 3 months, growing 26% year-over-year.

Looking at last 12 months figure, we closed the quarter with a free cash flow yield of 12%, a number had to be matched by companies of any industry. Thank you, and now we can move to the Q&A.

Q&A Session

Operator: Thank you. We are going to start the question-and-answer session for investors and analysts. [Operator Instructions] Our first question comes from Fred Mendes from Bank of America.

Operator: Our next question comes from Marcelo Santos from JP Morgan. Mr. Marcelo, you may proceed.

Operator: Our next question comes from Andre Salles from UBS.

Operator: Our next question comes from Marco Nardini from XP.

Operator: Our next question comes from Victor Ricciuti from Credit Suisse.

Operator: Our next question comes from Daniel Federle from Credit Suisse.

Operator: Our next question comes from Felipe Cheng from Santander.

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 : Okay. So thank you for all of you for participating. As you could see, we start very strong this year. It’s a reflection of the strategies that have been communicating along the last quarters and that will give a very robust and clear results that give us optimism about the next quarters, and we’re going to be always at the disposal, Dave, myself and our IR team to answer any questions that you may have. So thank you again. Have a great day.

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