Oi SA em Recuperacao Judicial

OTC:OIBZQ

Earnings Call Analysis

Introduction and Key Themes

In the first quarter of 2024, Oi S.A. faced significant challenges and made notable progress along three key pillars: strengthening and growing their fiber operation, navigating through a core supervised reorganization plan, and addressing the legacy business issues. These pillars serve as the backbone of Oi's strategy to achieve a more sustainable and efficient operational model while balancing its assets and liabilities【4:0†source】.

Revenue Trends and Fiber Focus

Oi's quarterly results highlighted a mixed bag of revenue trends. The company experienced a 12.9% year-over-year decline in consolidated net revenue, reaching BRL 2.2 billion. This downturn was largely driven by reduced demand for legacy services like copper and DTH. Despite this, core revenue totaled BRL 1.6 billion, representing 72% of total revenue, anchored by the fiber business, which itself generated BRL 1.2 billion【4:0†source】【4:1†source】. In the fiber sector, Oi saw stabilization and is starting to resume growth in net additions, particularly from early March onwards.

Operational Efficiency and Cost Management

Oi's operational efficiency initiatives bore fruit this quarter as evidenced by a 14% reduction in expenses year-over-year, excluding infrastructure and rental costs【4:1†source】. Notably, personnel expenses saw a significant drop of 12.8% to BRL 436 million, driven by a reduction in the workforce by 4,300 employees or 19.4% from the previous year. Third-party services costs also dropped by 15.6%, mainly due to successful renegotiation of contracts. These measures contributed to a marked 66% reduction in network maintenance expenses【4:0†source】【4:1†source】.

Strategic Shifts and Market Position

Oi emphasized a strategic shift toward higher-margin ICT services in their B2B segment, accounting for approximately 30% of B2B revenues, up from previous quarters【4:0†source】. This focus enabled Oi Solucoes to pursue more sustainable profitability despite a conservative approach in competitive processes, which affected revenue growth. The company also highlighted its decision to focus on regions with existing coverage rather than expanding into new areas, aiming to increase penetration in households where they already have services.

Debt and Financial Health

Oi's financial health remains precarious with a gross debt of BRL 27.4 billion as of Q1 2024, impacted by interest rate and exchange rate variations【4:0†source】. However, the planned reorganization seeks to mitigate this through the approval of a new debt profile that features extended maturities, reduced interest rates, and new financing to improve liquidity. The company anticipates a significant reduction in its debt load upon the successful implementation of this reorganization plan.

Looking Ahead

Looking forward, Oi anticipates capturing significant savings from their legacy systems due to the cost reduction strategies approved by Anatel. They expect these efficiencies to enhance their cash consumption profile and EBITDA margins over time. The upcoming receipt of the fourth tranche of the DIP funding (approximately $133 million) is expected to provide short-term liquidity to begin creditor payments and further support reorganization initiatives【4:2†source】.

Conclusion

In conclusion, Oi has made substantial progress in their transformation journey, balancing operational efficiency with strategic market presence. The company is working diligently to stabilize and grow through its fiber and ICT services while methodically addressing its legacy service costs and debt profile. Oi's focus on cost control, strategic market penetration, and financial reorganization lays the groundwork for a more robust future performance【4:0†source】.

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for joining Oi S.A.'s conference call for Q1 '24. The original audio for this conference call will be Portuguese, and we will have simultaneous interpretation into English to access the simultaneous interpretation feature, click on interpretation using the globe icon at the bottom of the Zoom screen and choose the language of your preference, Portuguese or English.

We also remind you that this meeting is being recorded and will be available at a later date on the company's IR website. [Operator Instructions]. I will now hand it over to Mr. Mateus Bandeira Oi's CEO. You may proceed.

[Mateus Bandeira, executive]

Good morning, everyone. Welcome to our earnings call for the first quarter of 2024. I'm here with Cristiane Barretto, our CFO; Rogerio Takayanagi, Director of Strategy and Transformation; and Thalles Paixao, our Legal Director. As I did in the last quarter, I will give you an overview of Oi's 3 transformation pillars for this first quarter. So the first pillar refers to the focus on strengthening and growing our fiber operation, combined with the continuous process of improvements in search of a more sustainable and efficient operational model, both in B2C and B2B. The second pillar relates to that restructuring process and our core supervised reorganization plan, which is a fundamental condition for Oi to balance its assets and liabilities to maintain its viability. And the third and final pillar relates to the search for resolving the legacy business, mainly through the migration to an authorization model that allows us to seek significant efficiencies, reduction of costs and resuming the arbitration process where we see compensation for historical imbalances in the concession.

Now moving to Slide 4. We highlight the main results related to the first pillar. In the first quarter of this year, the pace of revenue growth was significantly impacted by an accelerated dynamics of the reduced demand for legacy services, especially those linked to copper technology and also by the prevailing macroeconomic conditions that impacted us last year, and it has a direct effect on the pace of growth in the fiber industry as a whole. Nova Oi recorded revenue of BRL 2.2 billion with a 12.9% drop compared the first -- with the first quarter of '23, mainly due to the impact of the noncore revenue copper and DTH services.

Even so, core revenue totaled BRL 1.6 billion, reaching 72% of our total revenue. The fiber revenue, the main growth driver for Oi totaled BRL 1.2 billion, remaining practically in line with the previous year. It's important to highlight that we are resuming growing in net additions in this first quarter with improvements in gross additions and multi-churn especially from March onwards. In the case of Oi Solucoes, in addition to the accelerated decline in revenue from our traditional telecommunication services, the company has adopting a more selective commercial strategy in search of healthy margins, which makes us more conservative in competitive processes.

And that leads to impacts on the growth in our revenue, but to pursue better profitability for Oi Solucoes. It's still approximately 30% of B2B revenues already come from ICT services with high growth potential. In addition, we continue to achieve good results in our efforts to improve the company's operational efficiency. We've generated positive results this quarter as evidenced by the continued reduction in operating expenses. Expenses, excluding infrastructure, rental expenses and added to CapEx had a notable reduction of 14% year-over-year.

Finally, I would like to highlight the enormous opportunity that we have to transform the cost base, making our Oi significantly more efficient by reducing legacy expenses as we migrate customers to new technologies and reduce copper infrastructure within a migration scenario to the authorization regime. On Slide 5, about our restructuring process. We made important progress with the approval of Oi's reorganization plan at the general creditors assembly on April 19. This is extremely important. And with the approval of the plan by the Supervisory Court, we will direct all efforts towards the plan's implementation, which we hope will occur soon. I divide our next steps related to restructuring and to 3 main flows. First, regarding the reorganization plan approval, we hope to obtain it in the short term. We will then have a deadline for creditors to choose their payment options within the plan. And finally, we will have capital increase to capitalize part of the credits from restructuring option 1 as well as new common shares that will give rise to changes in Oi's shareholder base.

This will require the consent of Anatel and CADE's antirtrust authority. For the sale of the ClientCo UPI upon approval of the plan, we will publish a public notice for the competitive process. ClientCo has around 4 million connected homes. It will bring high value to its potential buyers or buyer. We have divided this UPI in up to 5 regional lots. Proposals will be opened at a hearing and up to 30 days from the publication of the notice. Proposals will be evaluated. And if necessary, if there is no winning proposal, we will have a second round of this competitive process as provided already in the reorganization plan.

After the deadline for obtaining relevant regulatory approvals, we will close the transaction. As for new resources, we expect in May, the inflow of $133 million from the fourth tranche of the DIP, which will give us the liquidity in the short term to begin payment of creditors until no funds are raised for the company, totaling something around $650 million or $655 million. $655 million is probably more approximate.

On the regulatory front, Slide 6, following the process of an agreed solution for the existing points between Anatel and Oi arising from the STFC concession contracts and the arbitration procedure. Anatel's Board approved unanimously the out-of-court dispute resolution agreement presented by the [ continental ] Solutions Committee in the Federal Accounting Court. The term approved by Anatel's Board brings an important variety of conditions, investments, commitments to maintain essential services, connection of schools, among others.

Something that is relevant to our interest, it authorizes the immediate migration to the authorization model. This is fair and expected by the company, as I said in our previous conference call. We will no longer be a concession, and this will enable us to demobilize activities associated to legacy -- as a consequence, this will bring significant cost reductions for us. We still have a governance right that has to be respected to validate the terms of the agreement by the parties.

And then we expect that the accounting courts and the prosecutor's office give their opinion, and the company expects a definition of the Accounting Courts Board still in the first half of 2024. Obligations relating to Anatel Penalties transaction will be addressed until the end of the arbitration and investment commitments relating to the migration will be assumed in part, in significant part by V.tal and reimbursed by Oi when the outcome of the arbitration is reached.

In addition to the obligation to maintain the provision of services and regions covered exclusively by Oi company may undertake an additional investment commitment depending on residual balance from the arbitration in favor of Oi. When the out-of-court dispute resolution agreement is signed, we will resume arbitration immediately, and we expect a partial decision in the short term. I now give the floor to our colleague Takayanagi, Director of Strategy and Transformation, who will talk about operations and revenue in the next slides.

[Rogerio Takayanagi, executive]

Thank you, Mateus. Now moving to Slide 8, when we talk about the evolution of revenue. Core operations account for 72% of our total revenue highlighting the continued importance of fiber and ICT services in B2B and driving our growth trajectory in reducing dependence on legacy services that now represent just a fraction of our revenues. Consolidated net revenue fell 12.9% when compared to the first quarter of '23. And this result, as Mateus mentioned, was impacted by noncore services, which follow the trend of accelerated reduction, especially in the noncopper based technologies. And core revenues also show a drop of 6.8% year-on-year. This decline can be attributed to 2 main factors. In B2B, the decline is associated with the evolution of traditional telecom services, combined with a more selective commercial approach based on profitability in competitive processes we've been participated for B2B contract renewals.

On the fiber side, well stabilized due to the greater focus on the quality of the incoming customer base and repositioning of sales channels. As of March, we already see a resumption of growth in fiber. On the next slide, Slide 9, we have the results and some important developments regarding Oi Fibra in the first quarter of '24. Here, we highlight the maintenance of revenue performance, which was practically in line in the year-on-year comparison, supported by a robust base of customers with more than 4 million connected homes. As we mentioned previously, throughout 2023, there still challenging macroeconomic scenario led to a reduction in that industry growth and intensification of competition.

Over the past year, we reduced commercial intensity, review and processes, launched the new portfolio at the end of the year and focus on managing the customer base in line with the market dynamics. One impact of this movement was on the ARPU, which showed a reduction of 1.7% compared to the same period of last year. In this context, the company's focus on quality, repositioning channels and strengthening of the brand were the main support to ensure the stabilization of revenue and resumption of Oi Fibra's growth in the first quarter of '24.

On the right side of the slide, we show important data that highlighted this movement. During this period, the total number of connected home showed growth in net additions with another 16,000 new customers added to the base after 2 consecutive quarters with reductions. And this evolution was driven mainly by sales from digital channels with an annual growth of 25%. And that accounts already for 35% of that. So we were also the official sponsors of Big Brother Brasil 2024 program, and this action wanted to increase the reach in -- of Oi Fibra and also improving our reputation. Due to the focus on quality, churn also improved in March 2024. We emphasize our continued commitment to providing a superior quality service to our customers. Oi stood out again as one of the main fiber companies in the country, leading in 296 cities that offer the fastest broadband service in 14 states according to Anatel data from March. In the 2023 satisfaction and prestige quality survey carried out by Anatel, Oi achieved high levels of satisfaction being the best rated broadband operator among national operators.

Finally, as I've already mentioned in the release of the fourth quarter results of '23. Our growth will continue to focus on areas with existing coverage employing a multifaceted strategy that encompasses local and digital channels. We are also adapting our approach to regional dynamics, adapting price, channels and marketing strategies to align with the specific local requirements and preferences.

Moving to Slide 10, I would like to highlight also Oi Solucoes performance. The revenues of Oi Solucoes were impacted this quarter by the evolution of traditional services, which showed an accelerated decline due to the maturity of these services. In addition to the adoption of selective commercial approach during the negotiations and renewal of contracts, we keep focusing on seeking healthy margins for the company. Oi Solucoes total revenues fell by 18% year-on-year.

The telecom line had a 19% reduction, while the others line, which concentrates services based on copper technologies had a 33% drop. ICT revenues correspond to about 30% of Solucoes's revenue in the first quarter of 24%, a 3-percentage point increase compared to the fourth quarter of last year. As you can see on the right side of the slide, some ICT verticals had a significant growth. SaaS revenue increased impressive 69%, while the Cloud revenue saw solid 42% year-over-year. We will continue to focus on capturing growth opportunities in these areas with more potential.

Now I'll turn it over to Cristiane Barretto, our CFO, to present slides on our cost structure and financial performance.

[Cristiane Sales, executive]

Thank you. On Slide 11, I would like to highlight that this quarter, the implementation of efficiency initiatives resulted in reductions in all direct cost items. On the left-hand side, routine operating expenses totaled about BRL 2.4 billion, in line with the previous quarter and with a growth of 3% compared to the same period of last year due to variable lease expenses, mainly excluding rent and insurance costs, which reflect the dynamics of the current fiber model based on the rental of V.tal's FTTH infrastructure, our routine costs and expenses had a reduction of 10.5% year-on-year.

On the right-hand side, personnel expenses had a significant drop of 12.8% to BRL 436 million. This reduction is mainly due to continuous efforts and structural optimization, leading to a reduction of 4,300 employees or 19.4% compared to the previous year. Third-party services presented a reduction of 15.6% year-on-year, showing significant savings in the acquisition of content and energy costs due to the renegotiation of contracts of 20% in energy costs.

Also important reductions in other lines such as general expenses resulting of a major effort to renegotiate contracts and to capture additional benefits for the company. Finally, we achieved great results in Q1 in the network maintenance line with a reduction of 66% compared to the previous year. This is a consequence of efficiencies from new initiatives to manage the legacy operation in line with current regulatory forecasts.

On Slide 12, I will detail the opportunity we have in the legacy cost reduction plan. This program was initiated 2 years ago. And starting this year with now the migration of the concession to the authorization models, we've identified all efforts to capture these benefits. These efficiencies will be captured as we migrate legacy clients into other technologies. And we switch off legacy structures that are not being used always according to legislation. Implementation will be done in Sprint's prioritizing actions with greatest potential for cost reduction. Mainline impacted are telecom infrastructure, network maintenance, electricity, customer relations and G&A.

These items represent an annualized OpEx of around BRL 3 billion, with more than 2/3 of this cost made up of legacy expenses. For each of these costs, we will have specific actions with opportunities to reduce costs through this regime migration, improving Oi's cash consumption profile and EBITDA margin.

On Slide 13, routine EBITDA continued to be penalized by the loss of legacy services, especially those linked to copper, which rely on maintaining expenses to comply with regulatory requirements. There are also opportunities to improve margins through initiatives to reduce costs. Most of them connected to the potential of savings in the legacy as we move into the authorization model, as we said previously. On the right-hand side, CapEx in the first quarter totaled BRL 139 million, representing 6.4% of revenue, the lowest ever recorded by the company.

Significant annual reductions of 36% and sequential reductions of 25% were leveraged by the gradual capture of efficiency both in wealth and legacy services and in core operations through efficient allocation of resources with a focus on profitability. This level of CapEx represents the company's new level aligned with Oi's transition to a business model with low CapEx needs. It reflects a disciplined and strategic allocation of CapEx aimed at promoting sustainable growth with opportunities for future efficiency.

Now moving to Slide 14, we focus on our cash position in the first quarter of '24, which close to BRL 2.1 billion at the end of the period, practically stable in relation to the previous quarter, benefiting from the entry of the third tranche of the DIP despite the operational consumption already expected for the period. Furthermore, there was a generation of working capital due to longer supplier payment term in the context of the reorganization plan negotiations.

On Slide 15, we see that the gross debt of Oi reached BRL 27.4 billion in the first quarter '24 impacted by the impacts of interest rate and exchange rate variations during the quarter. The company's debt profile will be completely changed with the approval of the plan approved at the General Meeting of Creditors on April 19. On the right side of this slide, we list the new characteristics of the debt, achieving the objectives of selling maturities, reducing interest, renewing debt and obtaining new financing to provide liquidity to Oi. Through discounts, we will get capitalization of credits of Option 1 and also issuance of participatory debt. And for Option 2, we will have longer terms and lower interest rates.

Now I will turn over back to Mateus for his final remarks.

[Mateus Bandeira, executive]

Thank you. In conclusion, I'd just like to reinforce that we have made substantial progress on critical fronts with some important steps planned throughout this year and for the reorganization of the company. In the operation, we resumed growth of fiber-connected homes from March onwards with improvements in gross additions and also churn. It's important to remind that we are balancing that with better control of our channels. So we had a 25% growth in digital channels, for example. In midterm, this will probably lead to more sustainable results. We will keep on focusing on the profitable growth of our operations and on all solutions as well to accelerate the sales of ICT solutions. So it will be growth based on the migration of traditional telecom services to ICT solutions also improving our coverage through our hub of partners and also mitigating the drop on core services.

In terms of efficiency, we hope that throughout the year, we will capture significant savings with the legacy systems during the year because of the accelerated cost reduction we've had, especially after the approvement of the agreement with Anatel. On the regulatory front, after the approvement of the out-of-court dispute resolution agreement by Anatel's Board of Director, we expect that the next step will be the ratification of the terms of the agreement with the Federal Accounting Court, which will allow us to resume the arbitration procedure and to carry out the migration to the authorization model.

Regarding this reorganization, the next expected taps in the short term are the receipt of the fourth tranche of the DIP and the approval of the reorganization plan in May, hopefully. So we began to direct all efforts to implement reorganization plan with a capital increase for credit capitalization and the sale of UPI client goal as our main objectives for the upcoming months. Thank you very much.

And now we can open for questions.

[Operator]

[Operator Instructions] I am going to hand over to Mr. Luis Plaster, IR Director, to answer the questions. Mr. Luis, you may proceed.

[Luis Plaster, executive]

Thank you. We have received some questions in writing. The first one is from Leonardo, UBS. He asks if we can talk about the dynamic of net addition. He sees an important recoverage in Q1 '24. What is this due to? What are the regions we believe that have more growth potential for 2024. And he would like us to talk about the pricing strategy for fiber for 2024.

[Rogerio Takayanagi, executive]

Yes. Thank you, Leonardo, for your question. actually, several questions in one. Well, as for regions, Oi is very strong. And as we said, in 296, we lead in most of these cities, and we want to continue with this strategy. As we mentioned, we do not plan to expand into new cities. We want to increase our penetration in the households where we already have services available. That's already more than 20 million households. From a results perspective, what we have today, the positive results for Q1, as we said, is due to not just an acceleration in sales, also our sponsoring of the Big Brother show helped. But in processes, the quality of sales and the reduction in churn has also helped us to improve.

Looking forward, the expectation is that this continues the same. The strategy is still consistent, but of course, it will evolve. The focus is to ensure balance between growth and ongoing improvement of sales channels so that we have higher quality, and this is going to be very helpful for us in the long term. As for pricing, the idea is to keep a level of rationality looking for profitability, a competitive portfolio that is according to the market, but always looking at regional dynamics. We adjust according to our needs.

[Luis Plaster, executive]

Thank you, Taka. We also have a question about B2B Oi Solucoes. Leonardo says that Oi Solucoes has these operations after ClientCo was sold, and we saw an annual decrease in revenues. Looking at ICT, what is the perspective? What is the strategy for this specific business for the next years?

[Unknown Executive]

Yes, regarding Oi Solucoes, we have defined our strategy some years ago. It's an important transformation strategy for a connectivity provider into a solutions provider. So this decrease is connected to connectivity. So telecom services and those connected to copper legacy. So this movement will continue the contraction. But looking forward, the strategy is to transform, replacing this revenue coming from connectivity by a TIC revenue -- ICT revenue. We want to be a solutions provider, and we want to increase this portfolio. As we provide new services, most of all those connected to ICT, we will replace this connectivity revenue by other more sustainable revenue streams. That demand level -- less investments and therefore, lead to greater profitability.

[Luis Plaster, executive]

Thank you. We have another question from Leonardo. What about the debt? The debt for this quarter has increased. Can we maybe discuss the expected impacts of renegotiation and also of the reorganization plan? How will that impact future debt levels?

[Unknown Executive]

Yes. Thank you for your question. Yes, there was a growth of BRL 2 billion in debt. That has to do with interest rates, FX exchanges and the DIP. So this was expected. We are not paying interest rates for the debt until negotiation has concluded. We expect to reduce by about 70% the debt. And with this volume and also generating more cash, we want to balance Oi's future. So that is the answer for this question.

[Luis Plaster, executive]

We also have here on the platform, a question from [ Jean Martin Bao ] and also from [ Deere Medal ]. They ask whether Oi plans to monetize its share V.tal, so divesting all shares that they have in that company? Or do they expect to keep its shareholding position.

[Mateus Bandeira, executive]

Thank you for your question, [ John ]. In the feasibility study that was performed together with the reorganization plan. We plan to fully monetize our participation in V.tal. Of course, we are going to assess the best option to do to maximize the return of our participation, whether fully or partially. Thank you.

[Luis Plaster, executive]

Thank you, Mateus. I'm also tracking to see if we have more questions. So here is a question by [ Jan Oliver Vasconcellos ]. So he asks, are there negotiations underway to sell reversible assets, assets that will be returned to the state? And what about the Oi's participation in other business are being negotiated?

[Mateus Bandeira, executive]

Thank you for your question regarding those assets that are to be returned to the state. We have nothing like that underway because we need to wait for the approval of the agreement. So we are not studying the sales of these assets at this point. As for the other business, the divestitures are relevant are already part of our reorganization plan.

[Luis Plaster, executive]

Thank you, Mateus. We have a question about a topic that is not related to the earnings call topics. But something that is going to be addressed at assembly meeting of the company. The question is what are the justifications for the overall remuneration budget that is being saved for 2024. The one is being -- is going to be assessed and voted tomorrow at our assembly meeting. This is a question made by [ Juries Anges].

[Unknown Executive]

Thank you, [Juries]. You gave us the opportunity to talk about this topic. It's a very controversial topic we know. But this is something to be discussed at the assembly of shareholders, which is the forum to decide that. The overall remuneration budget relates to fixed remuneration, variable remuneration of the Board and also the severance payments that are not related to the leadership payments. Historically speaking, in the past years, Oi has always presented as usual as part of the administration proposal. The budget that is at the limit for the payment of bonus, those are, for example, target related.

And in the past years, the company has not paid those amounts at the levels they have been authorized. So since 2021, we have executed payments way below the levels or the total budget approved at the assemblies meeting. But of course, we need to present the maximum budget and that is going to be decided during the shareholders' meeting. So in the past 3 years, we have not paid as much -- and of course, this involves fixed payments and also variable payments to pay the leaders that are involved in the reorganization plan. But again, shareholders are the ones who decide on this topic, and this is not a matter for our earnings call.

[Luis Plaster, executive]

Thank you for your question. I'm just going to check whether we have any additional questions here on the platform. We have another question from [Osvaldo's polder Filo]. So when we get to the authorization regime with the proper governance, of course, after its approval. What would be the plan related to the copper-based services all over Brazil, which is widespread.

[Rogerio Takayanagi, executive]

This plan has not been approved yet. But once it is approved and once, we are able to migrate to an authorization regime, the impact of Oi's commitment is to ensure the continuity of services at the size where there are no alternatives to those services to make sure that we are not going to have any lack of services there. So we have enough technology to ensure continuity of services aiming at the maximum efficiency in terms of investments, but we will keep providing services to a wide range of sites and cities considering this condition when there are no other viable alternatives there.

[Luis Plaster, executive]

Thank you very much, Taka. Let me just check here if you have any additional questions on the platform. We have a question from audience. He says with the proposal of regrouping 10:1. Is there the intention of capitalizing funds to pay debt in the future through new shares?

[Cristiane Sales, executive]

Thank you for your question. Yes, part of the credits that opted for Option 1, this is subject to regulatory approval, and it will take place after the grouping, which will take place in the assembly that will be held tomorrow on May 10.

[Luis Plaster, executive]

Thank you, Cris. One second, we're going to check the platform for more questions. There are no additional questions. We have addressed all the questions for this call, and I'll give the floor back to Mateus for his final remarks.

[Mateus Bandeira, executive]

Once again, thank you all very much for joining in this conference call, and I hope to see you the next time around with our new results and the next steps for our plan that will take place throughout May and June. Thank you very much.

[Operator]

Thank you. Oi's Q1 '24 earnings conference call is now closed. For more information, please visit the company's IR website, www.oi.com.br/ri, -- you may all disconnect now. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]