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.

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