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Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the TelefĂłnica Brasil First Quarter of 2019 Earnings Conference Call. Today, with us, representing the management of TelefĂłnica Brasil, we have Mr. Christian Gebara, the 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 at the site www.telefonica.com.br/ir. There will be a replay facility of this call on the website. [Operator Instructions]
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 TelefĂłnica Brasil. Mr. Plaster, you may begin your conference.
Thank you. Good morning, everybody, and thank you for joining us in this conference call for TelefĂłnica Brasil 2019 first quarter results. The call will be divided.
[Audio Gap]
To start, Mr. 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 [ questions ].
Thank you, Plaster. Good morning, everyone, and thank you for taking part of our first quarter 2019 results call. I'll 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 technology such as voice, [ copper ] and DTH, while focusing on key strategic service such as [indiscernible] 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 customer's experience, but also impacts positively our results.
In the quarter of 2019, our postpaid customer base represented 56% of our overall 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. We have an expansion of 44% year-over-year for FTTH customer base that led to 50% increase of FTTH revenue in the same period. The superior performance of our higher value service allowed us to reach BRL 11 billion in revenues in the quarter, close to 2% growth year-over-year.
It is also important to note the evolution of our mobile service revenues, which increased 1.6% in the period, contributed to 4.7% expansion of mobile revenues, including handsets. We have been working hard to enhance the profitability and returns of the business by being more efficient, leveraging opportunities that are presenting 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 BRL 4 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 BRL 1.3 billion.
All of these strengths allow us to reinforce our unmatchable positioning in terms
[Audio Gap]
generation and shareholder remuneration. In the first quarter of 2019, our free cash flow expanded 16% year-over-year reaching BRL 1.2 billion while up to this date we declared BRL 1.3 billion of interest on capital.
Moving now to the details of our main businesses on Slide 4, present evolution of our mobile revenues. The result was driven both by an improvement in mobile service revenue that returned and grew profit by expanding 1.6% year-over-year backed by a solid 8% growth of postpaid revenues and by the sale of handsets that reached almost BRL 600 million after growing 55% year-over-year.
On Slide 5, you see that we remain as the undisputed leader of mobile markets sustaining a total share of 32% that reached 40% when we consider [ all ] postpaid customers. Over the last month, we have adopted a very focused strategy like price increases both for existing and new customers starting with pure postpaid and hybrid during the fourth quarter of 2018. This price improvement had an important positive effect on ARPU that grew 4% year-over-year to BRL 29.5 in the quarter, but also limited impact on churn that got to 1.74% in the period and net adds that were [ strong ] in the first quarter of 2019, but with a clear recovery in the month-over-month performance.
To complete our portfolio rationalization like 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 the segments.
Moving to Slide 6, we present the performance of our fixed revenues that dropped 3.2% in the first quarter of 2019. The transformation of fixed revenues mix remains in place and although we depend less on voice, it did impact the overall evolution, it represents 36% of total fixed revenues and dropped 18.4% year-over-year. On the other side, the growth of mainly 64% of fixed revenues is accelerating, expect 8.2% year-over-year driven by the strong performance of our fiber-related revenues that are benefited by the investments in the expansion of our footprint. DTH revenues reached BRL 437 million, growing 50% year-over-year while IPTV revenues are close to BRL 200 million, while increasing 45% year-over-year.
On Slide 7, you can [indiscernible] revenue transformation is totally connected to the improved, in first quarter of 2019, 68% of our fiber broadband customers were serviced by our fiber network, a 6 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 million FTTH customers. As a result, total broadband ARPU continued to grow double-digit expanding 13% year-over-year and reaching BRL 62.
On the right-hand side of this slide, the same thing is happening to our Pay TV business. By March 2019, we had 41% of our Pay TV customers on IPTV, an expansion of 14 percentage points versus the first quarter of 2018. The 44% year-over-year of IPTV customer base allowed us to further increase our IPTV ARPU that [indiscernible] BRL 102.
Moving to Slide 8. We continue to focus on the expansion of our fiber footprint. In the first quarter of 2019, we built our FTTH network in 9 new cities taking our service to a total of 130 cities.
More importantly, we are increasing the number of HPs, homes passed, with FTTH that already exceeded the 9 million mark with more than 300,000 new premises in the period. Our expansion plan involves reaching the northern regions of Brazil where we did not offer fixed service, [indiscernible] already had a solid mobile presence. To do so, we took our FTTH network to important state capital such as Manaus, BelĂ©m, SĂŁo LuĂs and Teresina, high potential cities, which were underserved in terms of ultra-broadband.
On Slide 9, we give you more details on investments made in the quarter. CapEx reached BRL 1.7 billion, 15.5% of revenue, 10% higher than a year ago, in line with expected expansion for the year. We continue to invest to further improve our best-in-class network to be able to provide [ an arrival date ] experience for our customers. As a result, investment in fiber increased 34% year-over-year allowing us to be present in 247 cities with FTTx and improved penetration over existing HPs. Moreover, we keep accelerating investments in 4G and 4.5G with an 8% increase year-over-year, focused on the expansion of our 4.5G network, that's already present in more than 1,000 cities and concentrates 63% of the Brazilian population. Therefore, by locating us in a smarter, more efficient way, we have been able to consistently improve returns. I pass it on to our CFO, David Melcon.
Good morning, everyone. Thank you, Christian.
Moving to Slide 10. We have demonstrated [indiscernible] our ability to be efficient by performing the way we work and relating customers. In the first quarter of 2019, our operating expenses were only 1.1% year-over-year, well below inflation of 4.6% in the period, mainly due to the costs associated with accelerated handset sales. Excluding the cost of goods sold, our expenses dropped 2.9%. Personnel cost that represent 12.8% of total OpEx dipped 5.8% due to the ongoing organizational restructuring undertaken in the quarter. Cost of service rendered that accounts 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, ex-bad debt decreased 1.5% in the period as a result of our digitalization and simplification efforts that drastically reduced expenses with call centers, back-office, billing and posting. In the first quarter of 2019, commercial expenses represent 25% of our total OpEx. The total cost increase presented in the first quarter of 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 revenues. Cost of goods sold represent 10% of OpEx in the period.
Turning to Slide 11. We'll give you an update on our main digitalization initiatives. We identified a potential reduction of BRL 1.6 billion in cost in the period 2019-2021 as a result of implementation of such initiatives. Since the beginning of 2019, we have already captured 36% of the total, meaning we still have a lot of room to improve our cost structure. [indiscernible] these cost buckets driven by the evolution of [indiscernible]. Top-up commissions cost reduced by 21% year-over-year, benefiting from the addition of digital top-ups, which already represent 24% of all top-ups made by our customers. Call center costs dropped 12% year-over-year with a reduction of 23% in income cost in the call center.
As we simplified products, improved customer experience and swift interaction with channels such as our [indiscernible] app, IVR, website, Facebook and others.
Printing and posting cost reduced by 19% 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 [indiscernible] rate of 79% of resolution through digital channels.
Now moving to Slide 12. Net income for the first quarter of 2019 reached BRL 1.3 billion, 22% higher than a year ago. This positive evolution is driven by higher EBITDA, [indiscernible] expansion of revenues from growing businesses and cost control efforts, leveraging on digitalization and also due to better financial results, mainly through the resolution of net debt and financial update of the extraordinary credit [indiscernible] decision on the payment of the [indiscernible] fees on [ ISMS-generated ] [indiscernible] fee. 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 million of interest on capital in February and additional BRL 570 million in April, totaling BRL [ 1.3 billion ] of interest on capital already declared in 2019. This confirms our commitment to remunerate our shareholders, while maximizing value, investing to capture growth opportunities. A combination that is unique to Vivo in the Brazilian telecom space.
Turning to Slide 13. In the first quarter of 2019, the generation of free cash flow from business activity grew 16% year-over-year reaching BRL 1.2 billion 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 allowed us to further enhance our capital employed, especially by consistently reducing investments on low-return projects based on legacy technology and focusing on high-return projects related to 4.5G and FTTH. Also by increasing cash generation, our leverage has been consistently reducing. Our net debt position reached BRL 1.3 billion in March 2019, a 42% decrease versus last year.
Thank you. And now we can move to the Q&A.
[Operator Instructions] The first question will come from Maria Azevedo of UBS.
So my first question is on postpaid. Do you expect the sequential improvement in the postpaid ARPU to continue in the coming quarters? And if you can share your views on postpaid competition, some of your competitors were 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?
Hi Maria, thanks for the question. In postpaid, as we gave the numbers for the last quarter, for the first quarter, [ note ] improved in our net adds. So [indiscernible] 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 pure postpaid in September and then we increased prices for the hybrid in the end of the year in December. So for 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 plan 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 benefit 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. 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 5G and the upcoming 5G auction and whether your CapEx budget already would include your mobile network upgrade towards 5G for the coming years?
Maria, so as you said, our CapEx was BRL 1.7 billion. We have like an expected CapEx for the year of BRL 9 billion, it also can be a little bit lower depending on the efficiency that we have in allocation of the resources. As we've also said, I think, in the last quarter, now we have BRL 26.5 billion for the 3 years, 2018, '19, '20 of total CapEx. We increased BRL 2.5 billion dedicated to fibers and fiber would be around for the 3 years of BRL 7 billion, that's continued to be our target. And the main areas of deployment, new series for fiber, also some overlay and also new neighborhoods in cities where we are present and also we continue to deploy 4G and 4.5G, so that continues to be our main allocation, our new technologies and that's only -- not only infrastructure, but also cities related to the new customer that we are acquiring as we also showed we've got a good net adds also for this quarter. For 5G, we are getting prepared. So as we are deploying fiber, we're deploying more fiber for 4G. For 4.5G, we are preparing ourselves for when it comes as a reality for Brazil and we are forming the schedule that we have for the government that for [ ANATEL ] that mainly is going to be March 2020 the auction. So going to prepare for it and waiting for the decision of the auction date.
The next question will come from Susana Salaru of ItaĂş.
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 from both revenue share or market share, that will be our first question. The second question would be related to the PL 79. What's your expectation towards the PL 79 approval and implementation?
Okay. Susana, thanks for the question. For the FTTH, we are -- as you said, we deployed new cities, 9 cities, but we're also improving our presence in existing ones. It's been like with our plan I think we talk about home connected over home passed to reach in 3 years a 32% penetration and we are ahead of this plan with the new cities. So it's being commercially very successful and that give us more room to be as aggressive as we were in the last year. Note that while we've reached 30 cities, but more important than number of cities is number of homes that we want to pass and we are now in 9 million and we keep our objective to be in 18 months or 20 months close to 50 million. So it keeps the way we presented in the past. And performance has been better than we expected in home connect or home passed. Regarding the PL, we're expecting -- we are positive now we have a new congressman. So we needed -- now as a sector, we explained the great advantage and benefits for the society of having the PL 79, bringing much more resources to new technology rather than the legacy and we are positive and optimistic as I think some of you also met with the congressman and got some good [indiscernible] in same line of our thoughts for this happening.
The next question will come from Valder Nogueira of Santander.
Quarter-over-quarter, you have to keep the teams [indiscernible] regarding the positive [ eflows ] 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, Valder, you're asking about the transition [indiscernible] very bad, the quality, so your question is how much more can we do in digitalization. Is that the question?
Yes. For the revenue, but mostly on the cost side, which has been -- you have the [indiscernible].
This is David. I mean, regarding the [indiscernible] service, let's try to answer the question. If you have any further questions, we will follow up you with. So over the last 2, 3 years, we have been focusing on the transformation of the digitalization for the company, working on commercial -- on the commercial front, noncommercial front, back-office and front-office. So we launched the [ Vivo ] program that will take 4 years, and we have a target to capture BRL 1.6 billion savings in 4 years. And we think within -- we have discussed in other calls, around 1/3 of total OpEx is linked to digitalization opportunity. Now [indiscernible] could be addressed by digitalization and related to non-quality OpEx, that should be reduced. So in line to give you some view around what should be the opportunity so -- the numbers that we are publishing today, so it's BRL 1.6 billion saving in 4 years, that we have already captured 1/3 -- around 1/3, so there are 2/3 for the BRL 1.6 billion to come in the next 2.5 years, which is on the cost side.
Okay. And the second question is...
No. Please, Valder, continue.
Okay. The second question has to do with the non-ultra-broadband connection service base. How do you see these performing going forward? We have seen a decent performance on ultra-broadband and FTTH, but what about the rest of the broadband connections. How is the dynamic working in terms of offers, your positioning, how is that playing out?
Okay, we -- Valder, ADSL -- as you said -- as you can -- I don't know if you mean all in SĂŁo Paulo or [indiscernible] SĂŁo Paulo. In the most [ relevant neighborhood ] we are replacing that with FTTH. So, of course, there is a decrease [indiscernible] it's like we need to be offering a better speed. So what we are 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 now, so we need to deal with that with the price point that we believe is the right one considering if there is competition, if there is no competition. So going forward will be a 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 price point that we think is the reasonable one, if there is competition or if there is no competition. And going forward, let's see how we can replace that either with 4.5G or with 5G if we don't believe FTTH is going to be profitable enough to deploy. And I think also you asked about digital services in the revenues. I think that's an intrinsic part of our value proposition. We talked about voice and SMS and data. I think now we need to talk about the 4 things and digital service should be in that, is in our offer, I think customers demand that. We'll be doing that successfully with some unique apps coming from education to language courses, but also to NBA, NFL and also specific and exclusive deal with Amazon Prime Video, that was also successful. Going forward, we need to continue doing that and it would be the same, doing more digital service as cloud security and others.
The next question will come from Fred Mendes of Bradesco.
I have 2 questions as well. The first one is just going back a little bit to the mobile service revenue, was definitely stronger than what I had here, so just trying to understand, of course there was a price increase, especially in the hybrid plans, but I couldn't see the interconnection revenue, so just wonder if there was a specific impact there and that essentially helped this top line growth. This will be the first one. And then on the second one, the line the other revenues and expense [indiscernible] lines comes in a negative point something like 150, 250 -- 150 -- BRL 150 million to BRL 200 million per quarter. And then in this quarter was positive, so just trying to better understand here and how should we think about this line throughout 2019?
Hi Fred, so I will take the second one, then we will go back to the first one. I believe the second one -- thinking about the earlier revenues and expenses, now that reduced in this quarter. Now this is something that we've already seen in the 2 quarters in a row, and there are 2 main factors. One is the 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 these, we have high revenue from recurring contractual signs with suppliers and also some -- a small impact from recovery happened in the period. So as you can see in 2 quarters in a row, we believe that none of those factors are one-offs and these are ending up being part of our recurrent business.
The first question, Fred, was about asking for, but the first question [indiscernible] you have answered the line is also good. So have you answered all the questions?
Yes, my second, saw that. I think -- because it is a bit hard to understand. So exactly it is. I did not see the revenue from interconnection. So just wondering if there was -- for some reason, there was a positive impact from that and then you mentioned that you have this strong mobile service revenue or if this result was mainly given the positive impact from the price increase that you guys made throughout the last months?
Okay. I'll take it first. As I said, new raised prices, that was the main reason of the positive effect, note that we've been able to gain also net adds, controlling churn and being able to capture this price increase that we made in both hybrid and pure postpaid.
The next question will come from Soomit Datta of New Street Research.
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 presentations featured the focus on prepaid. I think you've launched some initiatives, the weakness had improved, but 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 have heard from TIM and how competitive that part of the market is. That's the first question on wireless. And then secondly is on the fixed side. I think the broadband ARPU stepped up sequentially. Again, if I got my maths 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?
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 prepaid. The economic situation in Brazil is still like the one that was [ present ] in previous quarters. We don't see a big improvement. So that's why we've also tried to improve price by the end of March, beginning of April. So we have [indiscernible] offers that is, one that is weekly and the other one is weekly. That was stagnated in a price point of BRL 599 and we improved to BRL 1199 and that's aimed to be more rational and I believe that we need as a sector more rationalization in the price, probably being in the same price point as I said and competitors giving more data, free network -- free social network, and so we are trying to move this market up. And that's why we believe that this revenues in prepaid we could grow, but also depends on competition and also depends on the economic situation [indiscernible] and also that's what we're working for. So far, stable movement and not so positive as I showed in the prospect. In the fiber numbers, I don't know if there is a movement from the last quarter for the first quarter, but [indiscernible] given the season of the compares, if you compare like year-over-year, there is a positive movement in ARPU. We are not increasing prices for the fixed products in the next month, that's positive ARPU movement for these customers. We're focusing FTTH and we're trying to control as much as we can in the area of [ cell customers ].
[Operator Instructions]
Okay. Thank you very much for participating in our call, and talk to you soon or in the next second quarter results. Thank you.
Thank you. This concludes today's conference call. Thank you for attending today's presentation. You may now disconnect. Have a great day.