Telefônica Brasil S.A.
Q2 2021 Earnings Call Transcript

Published: 28 Jul 2021

[Operator:]

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to the Telefonica Brasil Second Quarter of 2021 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. Luis Plaster, IR Director. We also have a simultaneous webcast with the slide presentation on the internet that can be accessed on the site www.telefonica.com.br/ir. 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.

[Luis Plaster:]

Thank you. Good morning everyone and welcome to Telefonica Brasil's earnings call for the second quarter of 2021. Today the call will be divided in two parts. First, our CEO, Christian Gebara, will presents Vivo's main financial and operating figures, as well as the digital ecosystem and ESG highlights. Then our CFO, David Melcon, will give you more information regarding our cost and CapEx structure, free cash flow and shareholder remuneration. Now, I hand it over to Christian.

[Christian Gebara:]

Thank you, Plaster. Good morning everyone and thank you for joining our earnings call. On Slide 3, we showed that this quarter was marked by a positive evolution of revenues, customer acquisition, activation, as well as net profits. In mobile, postpaid access reached 47 million, up 9.2% year-over-year, taking the total mobile access base to 81 million, the highest level since 2015. In fiber, we posted 300,000 net additions and now have 4 million homes connected with FTTH, 41.3% more than the second quarter of 2020. At the end of the second quarter 2021, we had a total of 97 million access including mobile and fixed, which is a million more than the first quarter of 2021. Total revenues also continued to accelerate up 3.2% year-over-year with core revenues growing an impressive 8.2% and are already representing close to 90% of the total. FTTH and mobile services revenues were the main drivers increasing 49.7% and 3.1% respectively. EBITDA grew 3% to R$4.2 billion with a margin of 39.7% and net profit totaled R$1.3 billion jumping 20.9% year-over-year. As for shareholder remuneration, we deliberated R$1.3 billion of interest on capital so far this year, which translated into a dividend yield of 7.7% in the last 12 months. Furthermore, we registered an extraordinary tax gain of R$2.1 billion due to the Supreme Court decision to deduct ICMS from the basis of PIS/COFINS contributions, which we estimate will be an additional source for cash for the next 12 months.

[David Melcon:]

Thank you, Christian, and good morning, everyone. In Slide 14, we highlight our cost mix and evolution in the second quarter. Vivo is evolving from a pure telco company into a digital hub, offering services that go beyond connectivity, both for B2C and for B2B customers. This transformation is not only supporting and enhancing revenue growth, but also changing our cost base mix. The cost of service and goods sold, which are the catalysts to underpin positive revenue trends, accounted for 29% of the total cost, and increased 22% year-over-year as B2B demand for services and products continues to recover and B2C customer base accelerate growth, both in digital content and handset sales. On the other hand, OpEx from operation that represent 71% of total cost reduced 2.9% year-over-year, benefited from our efforts to capture efficiencies and improve our operating model by eliminating non-quality costs. It's also important to point out that digitalization initiatives continue to ramp up, contributing to offset inflation.

[Operator:]

Thank you. Our first question comes from Leonardo Olmos, UBS.

[Leonardo Olmos:]

Hello. Good morning, everyone. I have a few questions all in the theme of mobile pricing strategy. Even though you increased prices in the first half of 2021 as the competitors did, your ARPU is still negative. So my first question is what is cause of this? And then in the same topic, we saw maybe the reason for that is a strong level of net additions, especially in the last 12 months. Could you discuss that if the net additions – the high number of net additions following the negative ARPU? And the last part of my question is what should trigger a more comparing mobile revenue growth going forward? Thank you.

[Christian Gebara:]

Leo, can you repeat the second question, please?

[Leonardo Olmos:]

Yes. The second question is trying to understand why the ARPU is – had a negative growth, the mobile ARPU, if that is caused by the large number of net additions that it had in the last 12 months?

[Christian Gebara:]

This one I got. Thank you. This is Christian answering. The ARPU, yes, the mix, it changed. So if you talk about – let's talk about the postpaid ARPU, for instance. No, we had a lot of net adds coming from the hybrid that has lower ARPU. So of course, that changes the total ARPU for the postpaid, no? So that's the main reason explaining that. In the prepaid, the government aid, no, that the one that they were giving in the last year, and then they stopped for a while, now impacting the ARPU in the first months of this quarter was the reason, also we see this difference, no? So what is important here is that our customer base is increasing, and our revenue is also increasing in both postpaid and prepaid. So in the postpaid, it's more for the mix, as you said, net adds being accelerated with acceleration of also migration, and with a lot of hybrid impacting the total ARPU of post. And the prepaid that was – when there was the cease of the aid of the government, we saw recurrency going a little bit down. Customers used to have more recurrency. And then it got back to the levels that we saw before. So we are confident of the growth, and it's growing also in the revenues and total revenue. So that's the main reasons behind the ARPU evolution.

[Leonardo Olmos:]

Okay. Yes, then the last part of my question, should we expect maybe a stronger mobile revenue growth in third quarter and fourth quarter?

[Christian Gebara:]

We don't give guidance, but we are positive about the evolution of the mobile. The economy is recovering, and we are doing a good performance commercially. And June was a good month. Now it's the last month of the quarter, of this quarter. So we are positive about the trend.

[Leonardo Olmos:]

Very clear, Christian. Thank you very much.

[Operator:]

Our next question comes from Vitor Tomita, Goldman Sachs.

[Vitor Tomita:]

Hello. Good morning, all and thanks for taking our question. Two questions on our side. The first one is, if you could comment on which of the digital ecosystem initiative do you see as having the most potential to gain relevance in the near term, and we should see as most promising for the long-term and big data applications? And the second one is, if you could elaborate on how you see the current state of your B2B customer base following pandemic impact and on key trends for the B2B business that we should keep in mind going forward? Thank you.

[Christian Gebara:]

Thank you, Vitor. In the digital ecosystem, it's a combination of sectors and verticals. Now let's – it's a little bit behind. If you go to the attributes and the assets that we believe we have, I think we described it in the presentation, and I think we mentioned it more than once in the previous call. I think it's – when you talk about ecosystem and not comparing ourselves with any other telecom, comparing ourselves with other players that want to be a digital ecosystem, it's difficult, and I don't see any other in Brazil with the number of access, with the number of stores plus online capabilities, with the strength of the brand, with the users already in the digital channels, with the capability in big data and for platform that we consider ourselves one of the top-three companies in the country. And also the existence of a portal, that's Terra that also help us to have more views and more users connected to our platform. So having all this, we are betting in some areas. Now as I said before, financial service is one that we see capabilities that we could leverage on that. Again, this is a little bit more crowded environment because everyone is trying to be in this, but we believe that because we have some capabilities that others don't have, we have been able, for instance, in Vivo Money to lend money to customers, then maybe the banks, they don't have interest or they don't have access to any information about discussion that we do have in the digital wallet. I also believe that we are already a wallet for prepaid customers that every month top-up using one of our digital channels. So why not using the same channel and the same app to buy other digital services? So financial service is one. Health and wellness is the second one. We announced already that our partnership with Teladoc, one of the leading company in telemedicine in the world. So believe that we're going to be able to attract other partners, and be a real relevant health platform. And again, I'm not competing with health plans because we are not a health plan. We are giving access to health to customers that don't have the possibility to have a private health plan. And again, it's out of the target of most of the largest players in the market. Then there is education. We may announce soon something new on this area as well. The fourth one that is already there is entertainment. So we are doing a lot already. Here, we are partnering with the big ones, and we're distributing entertainment through mobile plans that is Vivo Selfie and also through our fiber. We're saying in this presentation that 40% of our new customers, new activations, they buy fiber plus entertainment, could be Netflix or Disney+ or others that we are announcing very soon. The other one is marketplace. We want to be a marketplace, Vivo Shopping, not only selling our services and our products, but also selling products and services of others. And then the connected home; we believe that once we are installing fiber, we could also install more things in the automated home. So we are not only deploying that in our stores, having all the accessories and all the devices related to automated home able to sell there. We are selling that in the marketplace and also we are helping our team, installation team also to help customers installing it, and we're going to charge for that. So that's why also we got a partnership in one company that is specialized in technical support, for call center or digital channels. We are also deploying marketplace and also partnership of Dotz that gives loyalty points to customers to use their platform. So it's a combination. So combining all of them, we believe that being centered in the customer, having the customer, if the recoveries that they already have with Vivo could increase engagement, we could increase lifetime value and then we have a very lower customer acquisition cost because that's all important. This new business, today they're being measured only by the number of customers. We are measured by many other KPIs. And in our case, we're going to be able to bring customers with a lower customer acquisition cost because it's going to be marginal, because we're going to sell our service plus other services. And we are able to increase our ARPU and reduce our churn. So I think it's a win-win situation in the case of Vivo. If you have a second question, Vitor, maybe I got the first one, and the second.

[Vitor Tomita:]

Sure. So...

[Christian Gebara:]

B2B, sorry. B2B, okay the numbers of B2B, the growth that we have in mobile and in FTTH, they are driven by both, okay, both B2C and B2B. And if you go to – specifically to data, ICT, that the number that we show in our core fixed revenues, we saw a very important growth of 14.8%. Now in this figure, it's in the quarter, we are talking about more than BRL800 million, that shows a positive trend for B2B. What we see right now is with the recovery of the economy, the demand for connectivity and other type of mobile solutions, private LTE and many others and also equipment acquisition for many solutions that we are getting prepared to sell is increasing. And also the group Telefonica is also developing some verticals in cybersecurity, cloud, IoT, through Telefonica Tech. And we also see the demand for this type of services growing. So we are positive about B2B trends.

[Vitor Tomita:]

Perfect. Thank you very much.

[Operator:]

Our next question comes from Marcelo Santos, JPMorgan. Please proceed.

[Marcelo Santos:]

Good morning. Thanks for taking my questions. My first question is regarding the fixed broadband environment. If you could please comment a bit on how do you see the competitive environment with so many players coming to the market and also established players deploying their fiber vehicles? And what do you think the end game is going to be in Brazilian ultra-speed fiber? And the second question is about the core revenues on the fixed line, which saw some deceleration this quarter versus the previous one. So could you please comment on the trends on the fixed core revenues and how do you see this going forward? Thank you.

[Christian Gebara:]

Hi, Marcelo’s, it's Christian again. So first, let's talk about our performance, and then I'll talk a little bit more about the others. So some years ago, we said that we was – like we were planning to have additional investment to deploy fiber in Brazil. We had the objective, the goal, to get to 14 million home pass by the end of 2020. And we end the year with more than that. And now we are with more than 17 million home pass. So our bet and our strategy to be the leading company fiber proved to be the right one. Also, in the meantime, also lately, we closed the deal to create the first virtual network neutral – sorry, neutral network in fiber in Brazil with CDPQ and Telefonica Infra. Now it's already up and running, and we have the objective of not only the second semester of this year to deploy 500,000 home passed, adding to the 1.6 brownfield that we carved out from Vivo and objective in four years to get to more than 5.5 million home pass. So what we see now that everyone is – we see small players now trying to increase their share or even being – acquiring smaller companies and also we see other competitors also deploying their neutral network. That was proof that we were right, and we started first. So that's why we have the leadership in home pass and in home connected. Going forward, now we also have a vehicle that the one that we created with CDPQ, that's FiBrasil, that allow us to look for some possible M&A. If we find anyone that has the standard of technical solution, the standard in the fiscal discipline and financial discipline that we require, and if the right pricing because, again, we are the ones with the largest scale to deploy fiber with the expertise of our group that is also the leading fiber provider in Europe. So we just want to buy what is really reasonable in a financial standpoint. What we see is some players that you asked; most of them don't overlap with our network. They are in very, very small cities. Some of them start to overlap in some cities, not necessarily the overlap in the same neighborhood. Of course there is no room for many players in the same place. And when it happens, I think Vivo has unique assets to be the winner, apart from being the number one, with the strongest brand and with the technical network that allow us to give very high speeds, upload and download, that when we face competition, that proves to be differentiation, and that proves to be what gives us the leadership and the ownership of the customer. We also have the TV content. Some customers – still more than 30% still buy with IPTV. Most of these competitors don't have this alternative. We have the physical stores, we have the digital channels that I said before. And we have also the agreements for digital services. So when the customer doesn't want to buy the IPTV, we have very good competitive offers that blend our fiber with Netflix, Disney+, as I said before, and many other partnerships that we've announced very soon. And finally, when we need to play the convergence, we are the one with the leading market share in mobile and with the leading market share in postpaid that combined with the FTTH to give us a unique position to be the winner in the number one in the market. Again, I think the others, the market should be a little bit more rational. I don't see room for so many players competing in so many cities face-to-face. Regarding – sorry, the second question. Can I go to the second one? Marcelo, did I answer the first one?

[Marcelo Santos:]

Yes. Very, very comprehensive. Thank you.

[Christian Gebara:]

Okay. So about the core, the good thing is that if you consider fixed and mobile, the core represents almost 90% of our revenues, okay? So that's the first point. Then if you go to the core fixed revenue, as you asked, there is a slight change, okay? That's a lot driven by B2B. That was the previous question. B2B has very seasonal revenue. Sometimes, we have a very big deal being closed in one quarter. There's a lot of equipment sales also related to this deal. It could change a little bit the evolution. The good thing I think here is to highlight is that data and ICT that is a B2B business is growing, is growing double-digit. When you see IPTV, IPTV is growing, is growing almost 30%. And if you focus in FTTH, that is the driver of the core fixed revenues, it's growing almost 50%. So when we see our revenues, considering that in a quarter, more than R$1 billion of our revenue is already FTTH. If I add that to IPTV, we're talking almost R$1.4 billion in FTTH plus IPTV. That's very unique and if you annualize this number, it puts us in a very strong position as the leading player in FTTH in the country and in Latin America. So just a small change and of course now, we're going to have growth from a very important base of revenues already coming from fixed core revenues, what give us a positive trend for the future in the evolution of the total revenues of the fixed business.

[Marcelo Santos:]

Perfect. Thank you. Thank you very much.

[Operator:]

Our next question comes from Fred Mendes, Bank of America.

[Fred Mendes:]

Hey. Good morning, everyone and thanks for the call. I have two questions as well. I think the first one is a follow-up from Leo's first question. I do understand that obviously there was a change in the mix. The net adds are really strong. But even when I look at the mobile service revenue, right, and then I look at all of the net adds you're doing, and I look at your competition, the dynamics for me, they look a bit different than what we would be expecting in terms of the mobile service revenue. So I'm just wondering if you are seeing a little bit more of competition or maybe – and then as a second question as a follow-up for the first one, as you expand your FTTH and you combine your offers and your operative core fee, maybe you are giving some discounts on the mobile service, and that's what is impacting your mobile service revenue? Thank you.

[Christian Gebara:]

Hi, Fred. No, the second question is not the reason. We are not giving a lot of discount, and I don't think that is what is impacting the ARPU. I think the ARPU and the evolution of course is a very competitive market. And of course we are not seeing – we don't have the inflation that used to have, that could allow us to increase much more price. But if you consider, for instance, for one of the questions asked before, what I see for the next quarters, we increased price for hybrid. That is the most important part of the revenues coming from B2C postpaid in June. So most of the impact would be captured in the next quarter. So I'm very confident about our ability to keep attracting good customers for Vivo. Again, we are not lowering price to attract more customers. We are not doing that. And if you see our price in prepaid, hybrid and postpaid, we are not with the lowest price, far from that. And also we don't give a lot of things for free, different from some of the competitors. So confident that we continue to keep a good positive trend. And in the prepaid, we are attracting lots of new customers. We're going to be able to migrate these customers, and we are doing and as we've been doing for so many years, migration from prepaid to hybrid and from hybrid to postpaid. We just need to find the right customers to the right plan. Now what's important, and what we expect the market to be rational is not giving up a lot of data to the wrong segment. Otherwise, it's going to be very difficult to migrate. So we need to have the right volume of data for the prepaid to be able to migrate it to the hybrid with a differential offering the data and also be able also to drive the hybrid to the postpaid. Moreover, what we are doing, of course, we're going to combine FTTH with postpaid for some customers. And we're going to combine the digital service to increase ARPU as well. And our churn is very low, one of the lowest level of churn of the last quarter. So we are positive that we're going to be able to capture revenues and continue to grow.

[Fred Mendes:]

Thank you, Christian. Thank you. Very clear. And if I may, just one more related to the CapEx, there was a significant increase in this quarter. Obviously, you were expanding significantly your network. But just trying to understand the dynamics of the homes pass and homes connect. Obviously, there is a lot of demand for that. Everyone is – or a lot of players are moving to the FTTH deployment. So if we are seeing an increase in this cost or even in the labor to do it or they basically remain the same? Thank you.

[Christian Gebara:]

No, it's more the comparison with the second quarter of last year. It was a tough quarter, especially because stores were closed, and people were more concerned about having someone installing fiber in their homes. Although after the first month that was difficult, we could recover it very rapidly, especially because we have the best services in the market and people were asking for a good connection, upload and download, and fiber is the key technology for that. I think we're getting scale in deploying fiber. So it's not a unit cost that is increasing. And of course we are – we have more homes passed – also we have more home pass. We have more the opportunity to sell more, selling more. Our core net adds this quarter is much higher than net adds and if you go to gross adds, now that is impacting by the CapEx. It's also very much higher than it was in the second quarter. But I think it's what we expected before. I think the CapEx this quarter is much more of a comparison of a tough second quarter 2020 with the impact in the first months of the pandemic. Going forward, we're going to keep growing in the customer base of fiber, that requires CapEx, but we are confident and that we are reducing churn, that's going to be with the payback better than we used to have. And we're in a good trend – in a good trend and very optimistic about it.

[Fred Mendes:]

Perfect. Thank you, Christian. Very clear.

[Operator:]

This concludes the question and…

[Christian Gebara:]

Okay. So thank you, everyone, for participating in Vivo's second quarter results call. As I said, we are optimistic about our performance going forward, leverage on the economy's recovery and in our unique position in Brazil. As always, now our team is available for any additional question that you may have. Thank you, all.

[Operator:]

Mr. Christian, proceed with your closing remarks.

[Christian Gebara:]

Sorry, I thought was – I already made them, but I will repeat. So thank you, everyone, for participating in our Vivo second quarter results call. As I said, we are optimistic about our performance going forward, no, leveraging on the economy's recovery and in Vivo's unique position in Brazil. Now as always, our team is available for any additional question you may have. Thank you all for participating.

[Operator:]

Thank you. This concludes today’s Telefonica Brasil’s second quarter 2021 results conference call. You may disconnect your lines at this time. Have a good day.