Telefônica Brasil S.A. (NYSE:VIV) Q4 2023 Earnings Call Transcript

Telefônica Brasil S.A. (NYSE:VIV) Q4 2023 Earnings Call Transcript February 21, 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 Fourth Quarter 2023 Earnings Call. This conference is being recorded and the replay will be available at the company’s website at ri.telefonica.con.br. The presentation will also be available for download. This call is also available in Portuguese. [Operator Instructions] Before proceeding, we would like to clarify that any statements that may be made during this conference call regarding the company’s business prospect, 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 result to differ materially from those expressed in the respect to 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. Please, Mr. Carneiro, you may begin your conference.

João Pedro Soares: Good morning, everyone and welcome to Vivo’s fourth quarter and full year 2023 earnings call. Christian Gebara, our CEO, will walk us through Vivo’s operational and financial performance, followed by an update on our digital ecosystem and ESG evolution. Then David Melcon, our CFO, will go through our cost and CapEx management, free cash flow generation, and outlook for shareholder remuneration. With that, I turn the call over to Christian.

Carneiro: Good morning, everyone and welcome to Vivo’s fourth quarter and full year 2023 earnings call. Christian Gebara, our CEO, will walk us through Vivo’s operational and financial performance, followed by an update on our digital ecosystem and ESG evolution. Then David Melcon, our CFO, will go through our cost and CapEx management, free cash flow generation, and outlook for shareholder remuneration. With that, I turn the call over to Christian.

Christian Gebara: Thank you, João. Good morning everyone. I hope you all had a great start to 2024. Firstly, I would like to invite you all to join us for our Vivo Day that, will be held during the morning of March 5th at Teatro Vivo in Sao Paulo. The event will be an excellent opportunity to hear from Vivo’s top executives about our strategy for the next few years. We look forward to seeing you there. Now moving to the results. We closed out the year with another record breaking quarterly performance. Our customer base totaled 113 million access, one of the largest among all Brazilian companies, with postpaid and fiber continuing to expand, allowing for sustained real top line growth. Total revenue increased by 6.9% year-over-year in the fourth quarter and 8.4% in the full year.

Looking at mobile service revenue, the performance was even better, up 8.7% in the last quarter and 10.8% in the year. We are able once again to combine growth with improved profitability. EBITDA grew 9.9% year-over-year in the quarter, thus closing the year up 10.6% versus 2022. As a result of EBITDA expansion and CapEx intensity reduction, operating cash flow accelerated to R$12.4 billion in 2023, while free cash flow generation expanded double-digit on an annual comparison to R$8.1 billion. Bottom line performance was also a highlight, as net income hit R$5 billion in 2023, up 23%. This strong result give us further confidence to maintain a robust level of shareholder remuneration as David will detail later. On Slide 4, we show our consistent revenue expansion in the Mobile segment that represented over 70% of total revenue in the quarter.

We saw increase of 8.4% year-over-year as Vivo is in the best position to meet customers’ ever growing needs for connectivity and tech products. Fixed revenues fueled by fiber continue to show a positive evolution, as we outpace their market in connecting homes and businesses with FTTH and offer the broadest portfolio of digital service. We see a clear path, to maintain this trend going forward. Moving to Slide 5, you can see the enhancement of two key mobile KPIs, churn and ARPU. Postpaid churn reached its lowest historical level, 0.97% per month, demonstrating the result of offering the best-in-class value proposition. At the same time, postpaid continues to gain relevance within the overall mix, and we have increased the penetration of digital service across our customer base, resulting in ARPU growth of 8% year-over-year, reaching its highest level in the last four years.

The accelerated adoption of 5G will be another driver supporting further demand for mobile connectivity. During the fourth quarter of 2023, 5G ready device represented 89% of all smartphones sold by Vivo and more than 30% of pure postpaid customers already had a 5G ready smartphone. We expect this ramp up to continue in 2024, with more and more customers having access to the benefits of this technology. Turning to Slide 6, we comment on Vivo’s fiber operation. We have the largest and fastest growing FTTH footprint, which is available to 26.2 million homes and businesses throughout Brazil. By the end of the year 2024, our target is to reach 29 million homes passed. During 2023, we led the market in net additions connecting almost 700,000 fiber customers, while improving FTTH ARPU evolution as well.

Moreover, Vivo Total, our convergent offer that combines fiber, and mobile postpaid services totaled 1.3 million customers, more than double than previous year. This unique value proposition, puts Vivo in a privileged position, to address the opportunities around convergence, and the recent demand for this product, is a positive indicator of its potential going forward. Moving to Slide 7, we show that Digital B2B services summed up to R$3.4 billion in 2023, up 25% year-over-year. During the last three years, these services increased this relevance over Vivo’s total revenues from 3.3% in 2020 to 6.5% in 2023. We see room for this to continue as Vivo has the best B2B sales team and portfolio of solution to help Brazilian companies of different sizes and sectors in their digitalization process.

Recently, the Brazilian mobile industry launched three anti-fraud network services and became a pioneer of Open Gateway with a global initiative led by the telecom center in collaboration of GSMA, aimed at transforming telco’s network into programmable platforms through standardized APIs. The APIs launched by Vivo and our peers, are focused on combating digital fraud in financial institutions such as banks and fintechs through number verification, SIM swap and device location. The GSMA Open Gateway ecosystem in Brazil, we experienced significant improvements throughout 2024, with new partners joining the initiative. Moving to Slide 8, we bring an update of some of the key new sources of revenues in B2C. Financial services revenues totaled R$403 million in 2023, which represented 0.8% of Vivo’s total revenue, up 36% year-over-year.

One of the highlights was, Vivo Money that finished the year with a portfolio of R$358 million in personal loans, doubling versus the previous year. There was also an expansion of the smartphone insurance customer base that, grew 20% year-over-year and now offers coverage for over 300,000 devices. The distribution of video and music, OTTs through our invoices generated R$563 million in revenues during this year, corresponding to 1.1% of Vivo’s total revenues. This partnership with the main content providers, keep on contributing to differentiate our offer, increase our share of wallet and decrease churn. Throughout 2023, we expanded our consumer electronics portfolio beyond smartphones, comprising of six different categories, accessories, smart homes, games, wellness, audios and notebooks.

This complete portfolio boosted our Black Friday sales and was the main driver for the 52% revenue growth. If we sum up revenues from financial services, OTTs and consumer electronics, they totaled R$1.3 billion, or 2.6% of Vivo’s total revenues in 2023. We are confident, of the evolution of these initiatives, and we will give you more details at our upcoming Vivo Day. Turning to Slide 9, I’m proud to share more important recognitions of our commitment to ESG in the year that marked our 25th listing anniversary in B3 and New York Stock Exchange. Vivo was considered the most sustainable company in Brazil by B3 Corporate Sustainability Index. We were also ranked as one of the most sustainable companies in the world, by the S&P sectorial ranking and by Corporate Knights.

On the environmental front, Vivo reduced emissions from its operation Scope 1 and 2 by 90% since 2015, reaching the first target of our Net Zero plan. As a result, during COP 28, we’ve received the Climate Guardian Award. Moreover, we were successful in making our team a better reflection of Brazil’s diversity, with 37% of executive leadership positions occupied, by women and 42% of employees, self-declared black. Now David will comment on our financial performance.

David Melcon: Thank you, Christian and good morning everyone. On Slide 10, we break down our cost structure into two parts. First, cost of services and goods sold increased 2.6% year-over-year, reflecting higher revenues from the sale of customer electronics, and the acceleration of B2B revenues. Then cost of operations grew 6% year-over-year as costs related to the higher commercial activity and customer base expansion, were partially compensated by our continued focus on digitalization and streamlining. I would also like to highlight that during the quarter, we registered a positive net effect of R$292 million, related to the renegotiation of tower leasings contracts coming from the Oi Mobile acquisition that, was partially offset by lower levels of tax recoveries and sale of legacy network equipment on a year-over-year basis.

As a consequence of this leasing renegotiation, we have canceled all the unused towers acquired from Oi, corresponding to 70% of the sites coming from this transaction, reducing our IFRS 16 debt and enabling savings that boost our free cash flow from 2024 onwards. Overall, total costs were up 4.8% year-over-year, well below the evolution of total revenues, translating into a strong EBITDA margin of 42.5%, up 1.1 percentage point. This improvement in Vivo profitability reflect our commitment to cost efficiency. Turning to Slide 11, we close out the year with CapEx below R$9 billion as guided, which translates into an important reduction of our CapEx to sales ratio, dropping from 20% in 2022 to 17% in 2023. This unique combination of reduced capital intensity, with improved profitability translated into a strong 26.7% year-over-year operating cash flow growth that, led us to the highest operating cash flow margin ever at 23.7%.

We are positive about the CapEx outlook, as we shut down legacies technologies such as copper 2G, 3G and focus on investment on future proof networks like fiber and 5G. Additionally, revenues from new businesses are CapEx light, and contribute to a lower CapEx intensity. Moving to Slide 12, we show the progress of Vivo profitability metrics. Net income was 23% higher than the previous year, reaching R$5 billion in 2023 and free cash flow generation grew double-digit, reaching R$8.1 billion. This improvement in our cash position combined with the payment of senior debt and 5G licenses obligations allow financial net debt, to reduce substantially in comparison to the previous year. Even if we include IFRS 16 leases, leverage remain well controlled at 0.7 times EBITDA.

All these metrics demonstrate how robust Vivo’s financial position is, placing us in an unmatched position that combines growth with profitability. Now let’s move to Slide 13. Here we detail the components of 2023 shareholder remuneration on our guidance for the period 2024-2026. Throughout 2023, we paid R$2.5 billion of interest on capital, R$1.8 billion in dividend and we executed almost R$500 million of our share buyback program, totaling R$4.8 billion in shareholder remuneration. In December 2023, we canceled 11 million shares, corresponding to 0.7% of the company’s total share, in addition to the 13 million shares already canceled in February 2023. In November 2023, we released to the market a formal guidance, of our commitment to pay to shareholders, a value equal to, or greater than 100% of net income in 2024, 2025 and 2026.

The distribution or resources to shareholders will be through dividends, interest on capital, capital stock reduction, and share buybacks. The first tranche of the capital reduction in the value of R$1.5 billion was approved at the Extraordinary Shareholder Meeting held on January this year and will be paid before the end of July 2024. As you can see, Vivo finished the year in a stronger financial position and with several instruments, to consolidate its position as a leading company in terms of growth, profitability and shareholder remuneration. Thank you and now we can move to the Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Frederico Mendes from Bank of America. Please, Mr. Mendes, your microphone is open.

Frederico Mendes: Thank you. Hello. Good morning, everyone, and thanks for the call. I have two questions here. The first one related to the working capital. There was a major decline quarter-over-quarter, that’s basically like R$900 million in the suppliers line. I think that was the main driver for the negative working capital. And my understanding is that, you guys opted to pay to prepay some contracts, due to better financial conditions. So just trying to understand this move. I think it happened also in the 4Q ’22, but not at the same magnitude. So just trying to understand, what happened and what we can expect next on this front. This will be my first one. Then my second one related to the line orders. Just to understand this renegotiation of towers related to the Oi deal, if this is a benefit that we can continue to see forward, or that’s basically something that only happened this quarter?

Anyways and I think any explanation on this line will be very helpful as well? Thank you very much.

David Melcon: Well, thank you. Thank you, Fred. So regarding the first question on the working capital, look, during the last few years, we have consistently show a very strong free cash flow. In fact, this year, we grew almost 12%. However, if we look across the quarters, there is always some seasonality impacting mainly the last quarter of every year. So if we look specifically this year, in the last quarter. As you say, there is some payments – more payments on – to suppliers at the end of the year, but this is a normal business that we do normally do, and this is also impacted by lower taxes recovery that, we had in this period. So it’s important to look at the working capital in a 12-months basis, and not just for single quarters.

So for the future, I would say the sustainability of the cash flow is mainly on the back of a very strong EBITDA that we had also this year and this is what we had over the last few years. Also reduced CapEx intensity that, is also what we expect also for the future. And also in terms of control on IFRS 16 payments and finally, tax payments that we are also controlling thanks to acceleration also – on interest on capital that we declare, this quarter and we’ll continue doing it. So this is on the first one. Regarding the second one, Fred, on the other revenues. The other revenues and costs include several items and again also show some volatility during the quarters. This quarter, the main one, as you say have to do with the towers. But even if we look to the total amount, this quarter, we had R$349 million.

But if we look to the fourth quarter last year, the number was also above R$300 million, no it was R$303 million. So and this quarter, as I say, it’s mainly is the negotiation of towers that is also compensated, by other less positive coming from taxes and lower network equipment sales that we have previous year and we didn’t have that one. So for me, the most important, even if you strip out the line of further revenues and costs this quarter, and also the previous year. The EBITDA growth for the quarter would have been similar, to the reported amounting to around R$9.6 million. And if you do the same for the full year, the EBITDA growth would have been exactly the same R$10.6 million. So this is something that is very – is to look to the rationality that, we have every year, but at the end of the day, our growth is mainly on the sustainability and the strong performance of the commercial side.

Frederico Mendes: Perfect. Super clear, David. Thank you, Christian, as well.

David Melcon: Thank you.

Christian Gebara: Thank you, Fred.

Operator: Our next question comes from Marcelo Santos from JPMorgan. Please, Mr. Santos, your microphone is open.

Marcelo Santos: Hi, good morning, Christian, David, João. Thanks for the opportunity to ask questions. I think, David, you mentioned in your explanation on the future free cash flow to the Fred question, that you expect lower CapEx intensity. Could you please – is it possible to share a bit more light on what we expect – how do you expect CapEx to behave – your plan to deploy homes passed, I think it ends next year, right? You’re close to getting to your goal. How would CapEx behave after that? So any color there, I think would be interesting. And also on the margin outlook, you had a strong margin this year. There were some effect in the others line, but as you mentioned, if you exclude the other line, also the EBITDA increased well. How do you see margin going forward? Is there room for some expansion of margin in the coming years? These are the two questions? Thank you.