Earnings Call: Q1 2019

May 9, 2019

Earnings release

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefonica Brasil First Quarter of twenty nineteen Earnings Conference Call. Today, with us representing the management of Telefonica Brasil, we have Mr. Christian Guebara, the CEO of the company Mr. David Melclone, CFO and Investor Relations Officer and Mr. Luis Pasteur, IR Director. We also have a simultaneous webcast with a slide presentation on the Internet that can be accessed at the site www.telephonica.com.brir. There will be a replay facility of 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. Before proceeding, let me mention that forward looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward looking statements are based on the company's management, beliefs and assumptions and on information currently available. Forward looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the company's future results and could cause results to differ materially from those expressed in such forward looking statements. Now I will turn the conference over to Mr. Luis Plaster, Investor Relations Director of Telefonica Brasil. Mr. Plaster, you may begin your conference. Thank you. Good morning, everybody, and thank you for joining us in this conference call for Telefonica Brasil twenty nineteen First Quarter Results. The call will be divided into the following To start, Christian Gebara, our CEO, will give you an overview of our operating and financial highlights for the first quarter of the year and then go over our commercial and CapEx evolution. Then our CFO, David Melcon, will comment on digitalization initiatives, efficiency commitment and financial results. We will then move on to Chris. Thank you, Clasor. Good morning everyone and thank you for taking part of our first quarter twenty nineteen results call. I start by commenting on the highlights from the quarter. We have been transforming our business over the last quarters, relying much less on legacy, obsolete technologies such as voice, copper and DTH, while focusing on key strategic services such as postpaid and ultra broadband, which are backed by our unique network infrastructure and unparalleled capacity to deliver the best connectivity everywhere. Such transformation improves not only our customers' experience, but also impacts positively our results. In the fourth quarter of twenty nineteen, our postpaid customer base that represents 56% of our mobile customer base grew 9% year over year, while revenues coming from hybrid and pure postpaid had a high single digit 8% growth. Moreover, we continue to lead the fiber expansion in Brazil, and as a result, we have been able to keep addressing the increasing demand for high speed connections, with an expansion of 44% year over year of our FTTH customer base, that led to 50% increase of FTTH revenue in the same period. The superior performance of our higher value services allowed us to reach BRL11 billion in revenues in the quarter, close to 2% growth year over year. Here it is also important to notice that the evolution of our mobile service revenues, which increased 1.6% in the period, contributed to 4.7% expansion of mobile revenues, including headsets. We have been working hard to enhance the profitability and returns of the business by being more efficient, leveraging opportunities arising from digitalization and simplification that enable us to improve the use and deployment of our resources. As a result, our EBITDA expanded almost 3% in the quarter, reaching almost BRL4 billion with a margin of 35.6%, while our net income that's also benefited by an efficient financial management grew a strong 22% year over year, reaching R1.3 billion dollars All of these strengths allow us to reinforce our unmatchable positioning in terms of generation and shareholder remuneration. In the first quarter of twenty nineteen, our free cash flow expanded 16% year over year, reaching billion dollars while up to this date we declared R1.3 billion dollars of interest in capital. Moving now to the details of our main businesses on Slide four, then the evolution of our mobile revenues. The result was driven both by an improvement in mobile service revenue that returned the growth by expanding 1.6% year over year, backed by a solid 8% growth of postpaid revenues and by the sale of Hands that reached almost R600 million dollars growing 55% year over year. On Slide five, you see that we remain as the undisputed leader of mobile market, sustaining a total share of 32% that reached 40% when we consider Over the last months, we have adopted a value focused strategy that applied price increases both to our existing and new customers, starting with pure space and hybrid during the fourth quarter of twenty eighteen. These price movements had an important positive effect on ARPU that grew 4% year over year to dollars in the quarter, but also a limited impact on churn that got to 1.74% in the period and net adds that were soaring in the first quarter of twenty nineteen, but with a clear recovery in the month over month performance. To complete our portfolio rationalization cycle, in March and April 2019, we increased prices of our main prepaid offers by 20%, another bold move, aiming to improve the revenue trends of this segment. Moving to slide six, we present the performance of our fixed revenues that dropped 3.2% in the first quarter of twenty nineteen. The transformation of our fixed revenues mix remains in place, and although we depend less and less on voice, it still impacts the overall evolution. This represents 36% of total fixed revenues and dropped 18.4% year over year. On the right hand side, the growth of remaining 64% of fixed revenues is accelerating, expanding 8.2% year over year, driven by the strong performance of our fiber related revenues that are heavily benefited by the investment in the expansion of our footprint. FTTH revenues reached R437 million dollars growing 50% year over year, while IPTV revenues are close to R200 million dollars markup increasing 45% year over year. On slide seven, we can see that this revenue transformation is totally connected to the improved revenue In the first quarter of twenty nineteen, 68% of our broadband customers were serviced by our fiber network, a six percentage point increase versus a year ago, with a 44% increase of our FTTH access. This performance allowed us to exceed the mark of 2,000,000 FTTH customers. As a result, total broadband ARPU continued to grow double digits, expanding 50% year over year and reaching R62 dollars On the right hand side of the slide, you can see that the same thing is happening with our Pay TV business. By March 2019, we had 41% of our PayTV customers on IPTV, an expansion of 14 percentage points versus the first quarter of twenty eighteen. The 44% year over year of our IPTV customer base allowed us to further increase our IPTV ARPU that grew to BRL102. Moving to slide eight, you can see that we continue to focus on the expansion of our fiber footprint. In the first quarter of twenty nineteen, we built our network in nine new cities, taking our service to a total of 130 cities. More importantly, we are increasing the number of HPs home passed with FTTH that already exceeded the 9,000,000 mark and delivered more than 300,000 new premises in the period. Our expansion plan involves reaching the moderate regions of Brazil where we did not offer fixed services, already had a solid mobile presence. To do so, we took FTTH network to important state capitals such as Manaus, Belen, San Luis and Tigratina, high potential cities which were underserved in terms of ultra broadband. On Slide nine, we give you more details of investments made in the quarter. CapEx reached BRL1.7 billion, 15.5% of revenues, 10% higher than a year ago, in line with the expected expansion for the year. We continue to invest to further improve our best in class network to be able to provide an unrivaled data experience for our customers. As a result, investment in fiber increased 34% year over year, allowing us to be present in two forty seven cities with FTTx and improved penetration over existing HPs. Moreover, we keep accelerating investments in four gs and 4.5 gs, with an increase year over year, focused on the expansion of our network, that is already present in more than 1,000 cities and concentrates 63% of the Brazilian population. Therefore, by allocating our investment in a smarter, more efficient way, we have been able to consistently improve returns. I'll pass it on to our CFO, David Melcon. Good morning, everyone, and thank you, Christian. Moving to Slide 10. We have demonstrated for Covancement our ability to be efficient by transforming the way we work and relate with customers. In the first quarter of twenty nineteen, our operating expenses grew only 1.1% year over year, well below inflation of 4.6% in the mainly due to the cost associated with accelerated handset sales. Excluding the cost of goods sold, our expenses dropped 2.9%. Personnel costs that represent 12.8% of total OpEx decreased 5.8% due to the ongoing organizational restructurings undertaken in last quarters. Cost of service rendered that account for 40% of the total OpEx increased 2.8%, driven by the higher cost due to expansion of our mobile and fixed networks. Commercial expenses, decreased 1.5% in the period as a result of our digitalization and simplification efforts that drastically reduced expenses with cost centers, back office, billing and posting. In the first quarter of twenty eighteen, commercial expenses represent 25% of our total OpEx. The total cost increase presented in the 2019 is not related to the higher cost of goods sold, which increased 55.7 year over year as a result of our accelerated handset sales that grew more than 55% year over year and a stronger commercial push to drive revenue growth. Cost of goods sold represent 10.1% of total OpEx in the period. Turning to Slide 11, we give you an update on our main digitalization initiatives. We identify a potential reduction of BRL1.6 billion in cost in the period twenty eighteen-twenty twenty one as a result of the implementation of such initiatives. Since the beginning of 2018, we have already captured 36 of the total, meaning we still have a lot of room to improve our cost structure. In this sense, the '20 were able to represent cost buckets driven by the evolution of main KPIs. Top up commissions cost reduced by 21% year over year, benefited by the adoption of digital top ups, which already represent 24% of all top ups made by our customers. Call center costs dropped 12% year over with a reduction of 23% in income costs in the call center, as we simplify products, improve customer experience and shift interaction to digital channels such as our eCare app, IVR, website, Facebook and others. Printing and posting cost reduced by 90% in comparison to the same period of last year, with a growth of 30% in e billing penetration year over year. Technical support cost reduced 8% year over year with an increase of 79% of resolution through digital channels. Now moving to Slide 12. Net income for the 2019 reached BRL 1,300,000,000.0, 22% higher than a year ago. This positive evolution is driven by higher EBITDA, the continued expansion of revenues from growing businesses and cost control efforts, leveraging on digitalization and also due to better financial results, mainly related to the reduction of net debt and financial update of extraordinary credit referring to the decision on the payment of the PISS and COFINS on ISMS generated in 2018. As a result of the impressive generation of net income throughout 2018, we already started to deliberate on the shareholder remuneration with a declaration of BRL 700,000,000 of interest on capital in February, an additional BRL $570,000,000 in April, totaling BRL 1,800,000,000.0 of interest on capital already declared in 2019. This confirms our commitment to remunerate our shareholders while maximizing value by investing to capture growth opportunities, a combination that is unique to being involved in the Brazilian telecom space. Turning to Slide 13. In the first quarter of twenty nineteen, the generation of free cash flow from business activity grew 16% year over year, reaching BRL 1,200,000,000.0, mainly as a result of our improved operating and financial performance, with continued EBITDA growth, lower interest and income taxes payments and optimized working capital. That allows us to further enhance our return on capital employed, especially by consistently reducing investments on lower return projects based on legacy technology and focusing on high return projects related to 4.5 gs and FTTH. Also by increasing cash generation, our leverage has been consistently reducing. Our net debt position reached 1,300,000,000.0 in March 2019, a 42% decrease versus last year. Thank you. And now we can move to the Q and A. Thank you. The floor is now open for questions. If at any point your question is answered, you may remove yourself from the queue by pressing star, then 2. In case you are following the conference call via webcast, please click on Question to the Host to send your question. Questions will be taken in the order they are received. We do ask that when you pose your question that you pick up your handset to provide optimum sound quality. Also, please note that this call is being recorded. Please hold while we poll for questions. The first question will come from Maria Azevedo of UBS. Hi, good morning. Thanks for the call. So my first question is on postpaid. Do you expect the sequential improvement continue in the coming quarters? And if you can share your views on postpaid competition. Some of your competitors are suggesting that they could be more aggressive in data bundles throughout the year. Do you see any threats from that? And what will be your strategy to reply to any competitive intensification in the market? Thank you. Hi, Maria. Thanks for the question. In postpaid, as we gave the numbers for the last quarter for the first quarter, no, we've been improving our net adds. So it's been positive. We started January with around $139,000 and we ended March with a higher number of $251,000 As we said also, we improved we increased prices for the fuel postpaid in September and then we increased the prices for the hybrid in the end of the year in December. So from now on, we're going to work with this price point. What we are trying to bring always to the market is innovation and to try to put more value in our hybrid product and also in our family plans for the pure postpaid, and we continue this trend. I cannot reveal what's going to be our innovation in our portfolio going forward, but we are confident that we're going to keep the benefits and advantage that we offer as VIVO with coverage, brand, customer services and many other attributes that have been putting us in the leadership of this segment with 40% of market share. Perfect. Thank you, Christian. My second question would be on CapEx. If you can share with us what would be the preferred CapEx allocation in terms of FTTH versus mobile? And if you can share your expectations in terms of five gs and the upcoming five gs auction and whether your CapEx budget already would include your mobile network upgrade towards five gs for the coming years? Thank you. Maria, so as you said, our CapEx was 1,700,000,000 We have like an expected CapEx for the year of $9,000,000,000 It also can be a little bit lower depending on the efficiency that we have in the location of these resources. As we also said, I think, in the last quarters, no, we have this 26.5 for the three year 2018, 2019, 2020 of total CapEx. We increased this EUR 2,500,000.0 dedicated to fiber. So fiber would be around for this three years of EUR 7,000,000,000. That's continued to be our target. And the main areas of deployment is new cities for fiber, also some overlay and also new neighborhoods in cities where we are present. And also, we continue to deploy four gs and 4.5 gs. So that continue to be our main allocation of new technologies, and that's only not only infrastructure, but also CPEs related to the new customers that we are acquiring. And as we also showed, we got a good net adds also for this quarter. For five gs, we are getting prepared. So as we are deploying fiber, we are deploying more sites for four gs. For 4.5 gs, we are preparing ourselves for when it comes as a reality for Brazil. And we are following the schedule that we have for the government that for NATEL that mainly it's going to be March 2020, the auction. So getting prepared to it and waiting for the decision of the auction date. Perfect. Thank you very much. The next question will come from Susana Salaru of Itau. Please go ahead. Hi, guys. Thank you for taking our question. Christian, the first question is if you could elaborate a bit more on the competition on this FTTH and if the performance of the new cities are in line above or below expectations in terms of revenue share or market share? That would be our first question. The second question would be related to the PL-seven zero nine. What's your expectation towards the PL-seven zero nine approval and implementation? Thank you. Okay, Susana. So thanks for the question. So the FTTH, we are as you said, we deployed new cities, nine cities, but we are also improving our presence in existing ones. It's been in line with our plan. I think we talked about home connected over home path to reach in three years at 33% penetration, and we are ahead of this plan with the new city. So it's being commercially very successful, and that give us more room to be as aggressive as we were in the last year, while we reached 30 cities, but more importantly, the number of cities and the number of homes that we want to pass. And we are now in EUR 9,000,000, and we keep our objective to be in eighteen months or twenty months close to EUR 15,000,000. So it keeps the way we presented in the past. And performance has been better than we expected in Home Connect over Home Pass. Regarding the PL, we're expecting we are positive. Now we have a new congressman, so we need to know as a sector, we explained the great advantage and benefits for the society of having the PL 79, bringing much more resources to new technologies rather than the legacy. And we are positive and optimistic as I think some of you also met with the congressman and got some reports as we say in line of our thoughts for this happening. I don't know, Susana, anything? Very clear. The next question will come from Valder Nogueira of Santander. Quarter over quarter, you have been keeping strict skepticism regarding the positive inflows from your digitalization. I'll come back with the question again. How much more there is to milk from this cow? That's the first question. Sorry, brother. You were asking about digitalization, obviously, it was very bad, the quality. So your question is how much more can we do in digitalization? That's the question. Yes, both on the revenue, but mostly on the cost side, which has been you have the BT market skepticism quarter after quarter. Vardian. This is Alid. I mean the line is not good, so let's try to answer the question. I don't have any further questions, so let's talk afterwards. So over the last two to three years, we have been focusing on the transformation of the digitalization across the company, working on the commercial front, noncommercial front, back office and front office. So we launched last year a program that will take four years, and we have a target to capture BRL 1,600,000,000.0 savings in three in four years. And this is part of as we have discussed in other calls, around onethree of our total OpEx is linked to a digitalization opportunity, not cost that could be addressed by digitalization that related to non quality OpEx that should be reduced. So in line to give you some view around what should be the opportunity, so this the numbers that we are publishing today. So it's EUR 1,600,000,000.0 savings in four years that we have already captured, onethree around onethree. So there are still twothree of the EUR 1,600,000,000.0 to come in the next two point years. It's on the cost side. Okay. The second question is go ahead, please. No. Please, Roger. Continue. Okay. The the second question has to do with the non ultra broadband connection subspace, how do you see this performing going forward? We have seen a decent performance on ultra broadband and FTTH, but what about the rest of the broadband connections? How how is the dynamic working in terms of offers, your positioning? How is that playing out? Okay. Like we how do I like? ADSL, we as you say, like as you can I don't know if you mean only in Sao Paulo or also FTTC? But the ADSL in Sao Paulo, In the most relevant neighborhood, we are replacing that with FTTH. So of course, there is a decrease, no, because it's like we need to be offering a better speed. So what we're trying here is to sustain as much as we can, but our focus is in the replacement and the overlay. But some neighborhoods, maybe the overlay is not going to be profitable enough, so we need to deal with that with the price point that we believe is the right one. Considering there is competition, there is no competition. So going forward, it's been a very selective strategy to deploy FTTH where we believe there is upside. Where we don't believe there is upside, we're going to deal with a price point that we think is a reasonable one. If there is competition, there is no competition. And going forward, let's see how we can replace that either with 4.5 gs or with five gs if we don't believe FTTH is going to be profitable enough to deploy. And I think also you asked about digital digital services in the revenues. I think that's an intrinsic part of our value proposition. We talked about voice and SMS and data. And I think now we need to talk about the four things, and digital service should be embedded in our offers. I think customers demand that. We've been doing that successfully with some unique apps coming from education to language courses, but also to NBA, NFL and also a specific and exclusive deal with Amazon Prime Video that was also successful. Going forward, we believe continue doing that and it needs to be the same, not doing more digital services, cloud security and others. Thank you, Chris. Thank you, David. The next question will come from Fred Mendez of Bradesco. Good morning, everyone. Thanks for the call. I have two questions as well. The first one, just going back a little bit to the mobile service revenue, it was definitely stronger than what I had here. So just trying to understand, of course, was a price increase, especially in the hybrid plans, but I didn't see the interconnection revenue. So just wondering if there was a specific impact there and that eventually helped the top line growth. This would be the first one. And then on the second one, the line the other revenues and expenses, historically, this line comes in a negative point, something like BRL 150,000,000 to BRL 200,000,000 per quarter. And then in this quarter, was positive. So just try better understand here and how should we think about this line throughout 2019? Thank you. Hi, Fred. So I will take the second one, then we'll go back to the first one. I believe the second one, you're talking about the other revenues and expenses, now that reduced it in this quarter. Now this is something we have already seen in the two quarters in a row. And there are two main factors. One is lower expenses with labor and civil contingency, where the lawsuit dropped more than 20% year over year. So here, we are benefiting from the new labor law reform that was issued last year. In addition to this, we have higher revenue from recurring contractual fines with suppliers and also some small impact from recovery tax in the period. So as you can see in two quarters in a row, we believe that none of those factors are one offs, and these are ending up being part of our current business. The first question, Fred, was not about FIFA. But the first question, I don't know if positive, Fred. You have any questions? The line is not so good. So have you answered all the questions? Yes, exactly. Sorry, I think, yes, the call is a bit hard to understand. So exactly, I didn't see the revenue from the interconnection. So I was just wondering if there was for some reason, there was a positive impact from that and then eventually that helped with strong mobile service revenue? Or if these results was mainly given the positive impact from the price increase that you guys made throughout the last months? Okay. I think the first we as I said, we raised prices, and that was the main reason of the positive effect. We could be able to gain also net adds, controlling churn and being able to capture this price increase that we made in both hybrid and pure phosphates. Okay. Thank you very much, Christian and David. Thank you. The next question will come from Sumit Dahta of New Street Research. Hi. Thank you. Two questions, please. One on wireless and one on fixed. On the wireless side, we saw an improvement in the service revenue momentum. I think that was driven by a large improvement on the postpaid side as discussed coming from price increases. But I think that implies quite a sharp step down in prepaid revenues presumably. The last couple of quarters, the presentation has a feature, the focus on prepaid. I think you launched some initiatives. The weakness had improved, but it's, it's not really mentioned in this quarter's presentation. So, I was wondering, is that math right? Has the prepaid revenue deteriorated? And philosophically, as you look forward this year, how do you view the prepaid market given what we've heard from Tim and how competitive that part of the market is? That's the first question on wireless. And then second, please, the fixed side, I think the broadband ARPU stepped up sequentially. Again, if I've got my math right, it looks like the fiber ARPU actually fell slightly sequentially whilst the DSL ARPU increased. I don't know if that's right, but if it is, could you help explain why the fiber ARPU would be going down whilst the DSL ARPU is going up? Thank you. So on the mobile, I think we focus on the postpaid specifically because we raised prices in September and December, and they had a positive improvement for the revenues. In the previous period, the economic situation in Brazil is still like the one that we saw in previous quarters, we don't see a big improvement. So that's why we also decided to improve price by the March, April. So we have the two key offers, that is one that is weekly and the other one is weekly. That was stagnated in a price point of $9.99 and improved to 11.99 that's aimed to be more rational, and I believe that we need as a sector more rationalization in the price, where we being in the same price point, as I said, and competitors giving more data, free social network. And so we are trying to move this market up. And that's why we believe that these revenues in prepaid, we could grow, but also depends on competition, and also depends on the economic situation. So that's what we are working for. So far stable movement, and not so positive as I showed in the post paid. In the fiber numbers, I don't know if there is a specific movement from the last quarter for this first quarter, but that's given the season of comparison. If you compare like the year over year, there is a positive movement in ARPU. We are also increasing prices for the fixed products in the next month. That's also a positive ARPU movement for these customers. Again, focus on FTTH, and we are trying to control as much as we can the ADSL customers. Okay, thank you. Okay, so thank you very much for participating in our call, and talk to you soon or in the next second quarter results. Thank you so much. Thank you. This concludes today's conference call. Thank you for attending today's presentation. You may now disconnect. Have a great day.