Telefônica Brasil S.A. (NYSE:VIV) Q1 2024 Earnings Call Transcript

Telefônica Brasil S.A. (NYSE:VIV) Q1 2024 Earnings Call Transcript May 8, 2024

Telefônica Brasil S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. Welcome to Vivo’s First Quarter 2024 Earnings Call. This conference is being recorded, and the replay will be available at the company’s website at ri.telefonica.com.br. The presentation will also be available for download. This call is also available in Portuguese. [Operator Instructions] We would like to inform that all attendees will only be listening to the conference during the presentation, and then we will start the question-and-answer section when further instructions will be provided. Before proceeding, we would like to clarify that any statements that may be made during this conference 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 depend 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 the 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. João Pedro Soares Carneiro, IR Director. Now, I’ll turn the conference over to Mr. João Pedro Soares Carneiro, Investor Relations Director of Vivo. Mr. Carneiro, you may begin your conference.

João Pedro Soares Carneiro: Good morning, everyone, and welcome to Vivo’s first quarter 2024 earnings call. Today, our CEO, Christian Gebara, will walk us through Vivo’s performance in connectivity and digital services for both B2C and B2B, as well as present our ESG advances. Then, our CFO, David Melcon, will give more color on cost and CapEx management, free cash flow generation, followed by an update on shareholder remuneration for 2024. With that, I’ll turn the call over to Christian.

Christian Gebara: Thank you, João. Good morning, everyone, and thank you all for joining us today. Before starting, I would like to express our solidarity with the population, our employees, customers, partners, and everyone affected by the tragedy in the state of Rio Grande do Sul. We are directing all efforts to restore our services in the affected areas as quickly as possible, acting on several fronts in this time of crisis. We joined forces with all operators and enabled roaming so that the customers of other telcos can connect to our network. In addition, we are offering data bonus of 10 gigabytes to our prepaid and hybrid customers in the region, and considering the difficulty of accessing some of the most impacted communities, we are providing the civil defense of Rio Grande do Sul with 60 satellite phones aimed at using extreme situations.

Moreover, through Fundação Telefônica Vivo, we launched a national match funding campaign open to the entire population to help with items of greatest needs such as food, hygiene, and cleaning products. Regarding the operation, we are evaluating the impact on infrastructure stores and the provision of service as a whole as we also face difficulties in accessing some locations to the roadblocks as well lack of electricity and damage provoked to our network. Now moving to the results. We kick off 2024 reporting another robust quarterly result with revenue, EBITDA, and net income growing above inflation. Our customer base expanded in our main products. Postpaid access were up 6.6%, while homes connected to FTTH grew double digits by 12.3%. Total revenues increased by 6.5%, mainly driven by an outstanding performance of mobile service revenues that were up 9.3%.

Our profitability figures were also highlight. EBITDA grew 6.8% year-over-year and net income expanded by 7.3% on an annual comparison. As a result of the strong operating momentum coupled with stable CapEx intensity, operating cash flow summed up R$3.4 billion, while free cash flow generation reached R$2.4 billion in the first quarter of the year. The strong start to 2024 reaffirms Vivo’s solid position to continue delivering sustainable growth and returns. On Slide 4, we show the breakdown of our top-line expansion. Mobile service revenues that represented 64% of total revenue in the quarter grew at a fast pace fueled by double-digit increase of postpaid revenues. Fixed revenues post a positive evolution as FTTH expanded at the mid-teen rate compensated the seasonal volatility of B2B digital revenues and the decline of other legacy service such as fixed voice and [copper] (ph) broadband.

This solid performance derives from our best-in-class value proposition for both B2C and B2B customers, combining connectivity with the broadest portfolio of services beyond the core. In first quarter 2024, B2B digital service summed up with B2C new businesses represented 9.5% of Vivo’s total revenue, up 0.9 percentage points year-over-year, that confirms the trends seen so far of the escalating significance. Turning to Slide 5, we highlight the main levers of our ongoing growth in mobile. Postpaid access continue to gain share in our customer base mix. While within the postpaid segment, the upselling for hybrid to pure postpaid increased by 75.7% year-over-year. As Vivo is in a unique position to meet customers’ ever-growing needs for connectivity, we see them staying longer and spending more with us.

Postpaid churn remained at its lowest historical level, 0.97% per month, while increased ARPU by 7.7% year-over-year, considerably above inflation. Now moving to fiber. Vivo’s FTTH footprint is available to 26.8 million homes and businesses throughout Brazil, getting close to our target of 29 million home passed by the end of this year. We continue to outpace the market in add additions with more than 170,000 new access during the quarter, totaling 6.3 million homes connected. As we offer a more premium portfolio in terms of speeds and digital services, FTTH ARPU reached R$91.4, its highest value in the last few years. Average FTTH speed sold is accelerating going from around 260 megabits to over 310 megabits. Vivo Total is an important driver of our outstanding performance in fiber and postpaid.

Our convergent offer totaled 1.5 million customers, more than doubling versus the previous year while presenting churn that is 1 percentage point lower than the standalone fiber. Vivo is in a privileged position to further increase its FTTH take-up rate — ratio, sorry, leverage its distinctive capability of offering a combined fiber and mobile plan to a nationwide basis. As we commented at our Vivo Day, we want to start giving you more color on our results split by customer segment, underscoring how new businesses are contributing to the top-line expansion. On Slide 7, we show the evolution of our B2C revenues in the last 12 months that represented around 76% of Vivo’s top-line. B2C revenue grew almost double the inflation in the period because of our second-to-none connectivity that’s been complemented by the advance of our new business portfolio.

Revenues coming from these services summed up R$1.4 billion in the last 12 months, up 34% year-over-year, representing 2.6% of our total result. The distribution of 2.7 million subscriptions of video and music OTTs generated R$597 million in revenues, whereas financial services contributed with R$425 million in the last 12 months. One of the highlight was Vivo Money that ended the quarter with a portfolio of R$420 million in personal loans. Our credit portfolio will further accelerate with the advent of new products, such as financing of fixed transactions paid in multiple installments. On Slide 8, we showed increasing relevance of digital service over total B2B revenues. During the last 12 months, B2B digital service reached R$3.5 billion in revenues, up 20% year-over-year, representing 31% of our B2B business and almost 7% of Vivo’s top-line.

In the first quarter of the year, we bring forth our absolute leadership in B2B by developing customized private network solutions for some of the most relevant companies in Brazil. We are confident about the opportunities to further increase the relationship we have with our 1.6 million B2B customers as we combine the best connectivity in the market with an [unrivaled] (ph) ecosystem composed of top-notch partners to support the digital transformation of Brazilian companies. Turning to Slide 9, I highlight some advance of our ESG agenda. CDP that has already considered Vivo as part of A list on Climate Change also recognized us as the only Brazilian telco leading in supplier engagement. Additionally, we rose three positions year-over-year in Merco’s Corporate Reputation Business Monitor that placed us in the top 20 companies with the best reputation in the country.

On the social front, Vivo continues to invest in black talents. For our Youth Apprentice and Internship programs, half of the positions were reserved for black students, and the latter ended up having 60% of opposition filled by black candidates. I’m also glad to share that Vivo was awarded by the United Nations for this initiative regarding the movements of 2030 ambition, Race is Priority, and Mind in Focus. Due to these and many other ESG accomplishments that we achieved during the years, we were considered the most sustainable company in Brazil among all sectors in the latest ISE B3 ranking. Now, David will comment on our financial performance.

David Melcon: Thank you, Christian, and good morning, everyone. On Slide 10, we show the cost evolution in the first quarter of the year. We were able to increase OpEx below revenues, even with an enhanced business performance. The increase of cost of services and goods sold was driven by greater revenues from digital services and sale of consumer electronics. The evolution of cost of operations was mainly related to higher commercial activity and customer base expansion that was partially compensated by the advances of our digital channels such as the launch of Vivo new app in March this year. We also point out that we registered a lower level of the other revenues in the quarter due to the reduced tax recoveries and sale of unused equipments versus last year.

Going forward, we are confident in our ability to further improve our cost efficiency, while supporting the growth of new businesses. Moving to Slide 11, CapEx totaled R$1.9 billion in the quarter, representing a CapEx to sales ratio of 13.8%, in line with the trend of lower CapEx intensity expected for the next years. 5G deployment continue to be one of our investment priorities, with Vivo being the only telco that cover all Brazilian cities with more than 200,000 inhabitants using this technology. This combination of robust operational performance with controlled CapEx translated into a strong operating cash flow generation, amounting to R$3.4 billion in the first three months of 2024, leading to an operating cash flow margin of 23.6% for the last 12 months.

Moving to Slide 12, net income expanded 7.3% year-over-year, reaching close to R$900 million in the quarter. Vivo’s cash position at the end of March this year surpassed financial debt by R$1.9 billion. In April this year, we used part of our cash position to pay R$2.2 billion in interest on capital. Even considering IFRS-16 leases, leverage remain under control at 0.5 times EBITDA. Free cash flow generation reached R$2.4 billion in the first quarter of the year. The year-over-year comparison is negatively impacted by the compensation of tax credits amounting to almost R$500 million last year. Overall, Vivo’s strong financial position provides flexibility to combine an attractive return to shareholders while investing across our main revenue drivers.

Slide 13 shows the main components to meet our guidance of paying out at least 100% of net income in 2024, ’25 and ’26. In March this year, we announced our new share buyback program, planning to invest up to R$1 billion until March 2025. As of today, we already bought back R$53 million in our own shares. The first tranche of the capital reduction in the value of R$1.5 billion will be paid out on July 10th this year. On April 23rd this year, we paid out R$2.2 billion of interest on capital declared during the previous year, while the interest on capital declared in the first four months of 2024 amounted to R$680 million. These initiatives demonstrate that Vivo is on track to meet its shareholder guidance, reaffirming its unique position as one of the top Brazilian companies regarding growth, profitability and shareholder remuneration.

Thank you. And now, we can move to the Q&A.

See also 15 Biggest Aircraft Carriers in the World and 15 Best Places to Retire in Montana.

Q&A Session

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

Unidentified Analyst: Hi. Good morning, everyone. Thank you for taking my questions. I have two here. The first one is on the net adds dynamics. You have had a very solid mobile service revenue growth for the past few quarters, which was also boosted by the net adds. How can we think about net adds going forward? Is there room to continue having positive net adds, not only on postpaid, but in the absolute numbers? Why are we seeing still a growing base of users in the market as a whole? Is that something that you think could be sustainable, and for how long? And second, on prepaid, we have seen a lot of price movements and some price — some offers being restructured, but we haven’t seen hikes in terms of the minimum you have to pay to be connected for a month. So, I wanted to know if there’s space for price hikes in prepaid still in the short term or not, and how are you seeing the dynamics for the prepaid competitive market? Thank you.

Christian Gebara: Okay. Lucas, it’s Christian. Okay? I will start with the one. In the net adds, what we see is, like, we are gaining customers, so we see a positive trend. But more than just talking about the absolute number, we see a very healthy and very positive migration across the segments that are relevant to us. And also, in prepaid, what we are trying to envision here is much more migration to hybrid, and we’ve been doing that in a very positive way. That’s why you also see a very good evolution of the overall mobile ARPU, 77.7%. But more importantly, we also migrating within the hybrids. So that’s why we just launched it, I think some few months ago, the new hybrids that have, like, entertainment, health, or education embedded in the value proposition.

But more importantly, we are migrating hybrid to postpaid. And that’s a movement that if you follow, like, for the last, like, years, that was not so usual, and it became very relevant in our in our strategy. So, if you see the number that we had, this number of migrating — this quarter of migration of hybrid to pure postpaid was more like 75% higher than what we had in the first quarter of the previous year. Not to talk about the penetration of digital service, the new business that we described or the Vivo Total that is the conversion. So, we are very positive about movements in the mobile. We’re keeping a very, very, very low churn, below 1%, and our abilities now not only attract new customer that we are doing, but also being able to migrate and upsell to the customer base that we have.

So, these two movements are going in a very strong direction and the right direction, so we are confident about our ability to be able to continue to monetize and keep customers even more loyal, having more products to the same customer base. Regarding prepaid, we had, like, a several, like, different movements in the pricing. So, I don’t know if I got your question, but we have now entry level of R$17 in the biweekly offer, used to be in November last year at R$15. We also increased the face value of our top up. It’s — most of channels outside Vivo is R$20. And so, we are moving up. And, also, we are continuing to migrate customers from prepaid to hybrid that’s driving ARPU up. Otherwise, we wouldn’t see 7.7% of ARPU evolution in the period.

Unidentified Analyst: Oh, very clear. Thank you.

Christian Gebara: Sure, Lucas.

Operator: Next question from Marcelo Santos with JPMorgan.

Marcelo Santos: Hi. Good morning, Christian, David. Thanks for the opportunity for making questions. I have two. The first, to Christian, I wonder if you could comment a bit on the fiber ARPU dynamics. It was up 2% year-over-year. In the fourth quarter, it was up 3%. Maybe you could discuss a bit the adjustment schedules? Provide some color on how this line should go forward without any guidance, of course? And the second question is on the CapEx outlook for David probably. David, could you provide us some view on how CapEx should behave this year? Should we expect a similar number to the previous year? Or are there any variables that should change that in this year? Thank you very much.

Christian Gebara: So, Marcelo, thank you for the question. Also, yes, you are right. There are many, many factors in the ARPU evolution. First, we’ve been able to be the winner of net adds of the market in the last quarters. So, this last — in the first quarter of 2024, it was the same. So, we are the one capturing more customers, and we are capturing customers in a very rational way. So, this rational way combines, having the right pricing for the quality of the service that we’re offering and also the ability to upsell through higher speeds. So, the average speed that we sold last year was close to 250 megabits and we are now above 300 megabits. Secondly, we are being able to put more digital services together with fiber.

So, when we talk about the 2.7 million subscriptions that we have in the video and music OTTs, there is a lot that is connected to the fiber sale. And then, there is Vivo Total, that is the last one that I also mentioned during my introduction that we reached more than 1.5 million customers already in this plan. That is also important because it is improving ARPU in general, the client ARPU, because here is together blending mobile and fiber, but also keeping customers more loyal to us as also we described here. There’s 1 percentage point lower churn when a customer is with fiber in the Vivo Total versus the standalone one. So, going forward, what we believe is that we are going to be able to continue to drive more speed up and also more services to the fiber, customer.

Going beyond just the connectivity, we are very keen on, what we call, smart homes. So, we are selling more services that are driven by WiFi connection in different rooms, also services that are connected to installing smart devices. So, we are very positive about ARPU evolution. Regarding price increase, we had one in for part of our customer base in January. We’re going to have another part of our customer base in June. So that’s more or less the two rounds that we have of price increase. January and June, I’m going to keep with them because we have inflation in the period. But more than just inflation, I think the ability of offering more services to our customer base is going to be what’s going to be driving our ARPU up and the evolution of our revenues in general.

I leave David for CapEx. I don’t know if you have more questions here, Marcelo?