Oi SA em Recuperacao Judicial

OTC:OIBZQ

Earnings Call Analysis

Fiscal Challenges Yet Strategic Progress for Telecom

Amid an unfavorable macroeconomic environment, revenues declined by 13.1%, mainly affected by noncore segments like copper and DTH. Cost reductions and efficiency improvements were highlights, with operating expenses dropping 12.4% from the previous quarter. A remarkable 70% debt reduction is envisioned based on creditor agreements, potentially bolstering the capital structure. However, accelerations in core services, including fiber, where revenues increased by 2%, hint at a strategy pivot toward more innovative and sustainable operations. Strategic CapEx allocation reflects a move to a low CapEx model, with current investments directed at improving the fiber business. The company is navigating through a delicate transition, aiming for enhanced margins through legacy cost-cutting and a growing fiber customer base.

Leadership Transition and Commitment to Transformation

The quarter marked a significant leadership change with the introduction of Mateus Bandeira as the new CEO, alongside Thalles Paixao, the Legal Officer. Bandeira's experience in restructuring and operational efficiency is expected to spearhead the company's ongoing transformation and reinforce strategic priorities.

Three Pillars Shaping the Company's Future

Management emphasized three main pillars integral to the company's sustainability: expansion and improvement of fiber business operations, restructuring of debt aligned with court reorganization, and reduction of legacy costs. These foundations are crucial for navigating the current financial and operational challenges.

Financial Highlights and Operational Efficiency

Revenues were BRL 2.3 billion, down by 13.1% year-on-year, primarily affected by macroeconomic headwinds and a decline in noncore sectors such as copper and DTH. However, core operations, chiefly fiber revenue, saw a 1.9% increase to BRL 1.1 billion, fueled by expanded connections. Operating costs and capital expenses dropped by 8%, reflecting the company's commitment to improving efficiency.

Negotiation Progress and Debt Optimization

The company hired Moelis & Company to advise on creditor negotiations, aiming to optimize the debt profile with promising terms agreed upon. These discussions lead to a creditor consensus that paves the way for the expected plan approval, liquidity provision, and subsequent execution of the restructuring plan in the first half of the year.

Debt Restructuring Plan and Capital Structure Improvement

The proposed plan looks to capture resources for executing business plans and reducing debts, with a potential 70% debt reduction based on creditors' decisions. The plan outlines a restructured debt profile, with the main credits to be amortized starting in 2027, aligning with asset sales and agreements for a more sustainable and capital-structured company.

Regulatory Milestones and Operational Adaptation

Significant strides have been made with Anatel and other regulatory bodies to address various contractual and arbitration issues. The anticipated Federal Accounting Court decision, expected within 30 to 60 days, will pave the way for necessary operational adaptations including legacy service cost reduction and migration to an authorization model to enhance long-term sustainability.

Core Operations and Fiber Revenue Performance

Core revenue decreased by 2% due to reduced B2B revenues from Oi Solucoes, overshadowing fiber and digital services growth. Nonetheless, Oi Fiber's revenue climbed by 2%, substantiating the company's growth focus within the fiber sector.

Market Leadership and Customer Satisfaction

Leveraging V.tal's expansion, the company emphasizes superior service provision, with Oi leading the market in broadband speed across several states, maintaining high customer satisfaction levels which is fundamental for future revenue growth.

Positive Outlook and Efficiency Initiatives

Boosted by branding campaigns and improved commercial processes, the company anticipates a turnaround in net additions by March 2024. Alongside cost-efficiency measures, this is projected to be a catalyst for future growth.

Performance Dynamics in ICT and Digital Services

Despite a reduction in traditional revenues, the company is offsetting this through fiber technology and digital services, notably with an impressive 87% growth in cloud revenue, demonstrating the strategic shift towards high-growth market segments.

Cost Restructuring and EBITDA Implications

The company's focus on cost restructuring has led to a decrease in operating expenses, although EBITDA was influenced by legacy losses and subdued core revenue growth. As Oi pursues cost-efficiency and scale benefits, margins are expected to improve alongside fiber customer base expansion.

Financial Position and Cash Management

Oi's total cash position ended the year at BRL 2.2 billion, showing a 12% decline due to operational consumption, one-off disbursements, and increased lease payments. The company's financial maneuvering revolves around maintaining a robust cash position while executing strategic initiatives.

Execution of Strategic Plans and Prospects for 2023

Highlighting progress in legacy sustainability and restructuring, the company is ready to resume growth in fiber offerings with a national scope in 2023. Approval of the restructuring plan and acquisition of liquidity will be major milestones as management is poised for executing all plan measures, affecting outcomes beyond the fourth quarter of 2023.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen. And thank you for joining our earnings conference call to discuss Oi S.A.'s fourth quarter results in 2023. I would like to inform you that this video conference is being held in Portuguese and simultaneously translated into English. In order to listen to the translation, click on the interpretation icon at the bottom of the screen and choose your preferred language, Portuguese or English.We also like to inform you that this video conference is being recorded and that it will be made available later on on the company's investor relations website. [Operator Instructions]I'd now like to turn the call over to Mrs. Cristiane Barretto, our CFO at Oi. Please, Mrs. Cristiane.

[Cristiane Sales, executive]

Good morning, everyone and thank you for joining our fourth quarter conference call. I'd like to introduce our new CEO Mateus Bandeira. This is the first time he's interacting with the market. Mateus took office as the CEO on the 1st of February and has been participating actively on our operational agenda having meetings with creditors and regulatory discussions with Anatel and with the [indiscernible]. Mateus has a wealth of experience in managing transformation, restructuring companies.Thalles Paixao, our Legal Officer is also going to be joining the call. [Indiscernible] to thank Mr. Rodrigo Abreu for all the contributions he's made in the past 4 years. He led the development of Oi Fiber and the sales of the UPIs Mobile and InfraCo. Rodrigo will continue to assist us in his position as a member of the Board of Directors.Now I'd like to turn the floor over to Mateus Bandeira, our CEO.

[Mateus Bandeira, executive]

Thank you, Cris. Thank you, everyone, for joining the call. Before we speak about the results themselves, I'd like to talk about the 3 main pillars we have in the company and our progress in them.We start on Slide 3. The first pillar is extremely important and directly connected to the strength or strengthening and growth of fiber business as coupled with the process of continuous improvements in operations. The second pillar has to do with the restructuring of the debt and it's key for the court to provide reorganization. And the last pillar has to do with the legacy, its costs. And without that, the company would not be sustainable.We're now on Slide 4 and we'll talk about the first pillar. We'll show some highlights of our results. In the fourth quarter, revenues were significantly impacted by the macroeconomic environment that was unfavorable and they were therefore lower and slower in the fiber industry as a whole. The macroeconomic scenario is challenging, but we continue to work tirelessly to improve the company's operating efficiency. And that can be seen in the positive results that we have such as reductions in operating costs and investments.Our revenue was BRL 2.3 billion in the fourth quarter. That's 13.1% reduction year-on-year. That's mainly due to the impact of noncore revenues, that is copper and DTH. Nonetheless, the core revenue amounted to BRL 1.6 billion, approximately 70% of our total revenue. Our fiber revenue, the main leverage for growth for us amounted to BRL 1.1 billion in the first -- in the fourth quarter, pardon me. That is a 1.9% growth year-on-year.That was boosted mainly by the increase of 111,000 connections in the year of 2023 and the total number of homes connected in our fiber network is 4 million.Oi Solucoes had a 9.3% reduction year-on-year, and that is mainly due to the drop in our B2B telecommunication services. When we look at operating costs and CapEx combined, we see a 8% reduction year-on-year. This is evidence to our continuous efforts to improve company's efficiency.Slide 5. Let's talk about the restructuring of the company. I'll give you an overview of our performance. In October 2022, the company hired Moelis & Company to support us in negotiating with creditors and to help us optimize the debt profile. In 2023, we had many discussions and different negotiations to make sure that we have, for example, the liquidity necessary to pay the DIP finance installments.On the 23rd of March, we concluded the negotiation phase with the SecexConsenso Commission with very favorable terms that I'm going to talk about later on in the call and that allowed to continue to make progress in the RJ, RJ being the core supervised organization.On the 25th of March, we had the general creditors meeting. It was going to take place on the 5th of March and then it was suspended and it was started on the 25th ended on the 26th of March. And the company showed consensus with most creditors being a Class III level and with suppliers being take or pay about the main commercial conditions in the RJ plan. We see this agreement with creditors as a very important milestone for the plan to be approved in the general creditors meeting on the 10th of April, hoping to have a bridge loan in April and the rest of the new money in the first half of the year.I'd now like to turn the call over to Thalles Paixao, who will be talking about our court supervised reorganization plan, our RJ plan.

[Thalles Paixao, executive]

We're now on Slide 6. I'd like to talk a little bit about the structure of the plan that we have proposed. And we understand that this plan is close to an agreement when it comes to its negotiation. We'll be capturing new resources with creditors and third parties to execute our business plan and pay the credits in the new plan.We have unsecured credits elected by the new financing with a senior position in the guarantee package with a payment being brought forward with the sales of assets. We have a participatory loan. We have special payment conditions for partners and suppliers and also the option to restructure credits for partner suppliers that are take or pay.On Slide 7, we see an overview of the general results of the RJ plan based on the structure that we agreed on with creditors. When I look at the financial debt reduction that was submitted to the RJ, we see that it can be a level of 70% reduction. That, of course, will depend on the decisions by the creditors and their choice of payment methods that we hope are going to be quite significant. We hope that we get to the 70% mark.Thinking about the debt profile with the main credits that are going to be amortized as of 2027 in the period in which the UPIs are going to be completed in their sales. And we're going to continue with the agreements with Anatel. The restructuring of the take-or-pay credit, mainly thinking of the towers and the satellites, is going to have an 80% reduction in the cash payments to creditors that amounted to BRL 12 billion. And the terms agreed and also thinking of the original conditions that we have. And of course, the shareholders will benefit from participating in a more sustainable company with an improved capital structure.Now I'll turn it over to our colleague to talk about the regulatory front on Slide 8. Following the discussions that began in October with the Federal Accounting Court, Anatel, the Ministry of Communications and Oi, we made significant progress this week. The foreign trade department's consensus group completed the phase of creating a solution for the existing issues between Anatel and Oi arising from the concession contracts and the arbitration.A governance procedure will be respected to validate the terms of the agreement by the parties prior to the assessment by the prosecutor's office and the Federal Accounting Court Board. The company expects the Federal Accounting Court to issue a decision in the first half of the year. It should happen in about 30 to 60 days tops. And Oi seeks to address the following points: immediate migration from concession to authorization, which is critical for the company to start demobilizing the legacy structure so that we can provide a new tech solution to our customers.The second point is the removal of the burden of asset reversibility, allowing the sale of these assets and that is also critical. And this has always been controversial, but it is going to allow us to sell the assets at fair prices and faster.The third point is addressing obligations related to Anatel fines transaction until the end of the arbitration and four, opportunity for Oi to continue defending its interest in arbitration with the expectation of receiving positive net amounts if we consider the investment commitments that we have made. We hope that the arbitration will be resumed after the agreement is signed and that a partial decision on the merits of the case will be known in the short term.On the operating front, because of the agreement, Oi seeks to immediately adapt its concession to an authorization model, as I mentioned, providing flexibility to better manage the profitability of the legacy services and the costs associated with them. We have a strong cost reduction plan that aims to capture strong efficiencies with a focus on copper decommissioning and customer migration actions to drive sustainability in the long run.I'll turn it over to Rogerio Takayanagi, Head of Strategy and Transformation, to talk about Oi's operating evolution and revenue.

[Rogerio Takayanagi, executive]

On Slide 10 now, we can see that the core operations already account for 72% of our total revenue, highlighting the importance of fiber and digital services in driving our growth and sustainability. Consolidated net revenue fell by 13% year-on-year. This fall can be attributed to the persistent impact of noncore services, especially copper-based services and legacy technologies, for example, satellites and microwaves.Now on the right-hand side, you can see that the core revenue decreased by 2% in 4Q '23 and that is mainly related to a decrease in B2B revenues from Oi Solucoes. And you're going to see later that this revenue is centered on core services which unfortunately surpassed the growth in the fiber and digital services.Now on the next Slide 11, we can see more details about our fiber performance. The highlight here is the growth of Oi Fiber whose revenue increased by 2%, mainly driven by the expansion of our customer base through the sales of high-speed broadband services. In the full year of 2023, fiber revenue showed a strong performance, achieving double-digit growth of up to or actually exceeding 10%.Now on the right-hand side of the slide, you can see V.tal's expansion and we are the controlling shareholder of the company. And we announced agreements with Sky and Vero-Americanet in the period, further improving the company's robust customer portfolio. Our rationale here is focused on providing special services, superior services to our customer.Oi stands out as one of the main fiber companies in the country, leading the market in 296 cities. And in a recent survey, Oi provided the fastest broadband service in 10 states, resulting in high levels of customer satisfaction. And there was another survey that showed how superior our customer satisfaction is.And we want to leverage our renewed commercial strategy centered on quality-focused initiatives to resume growth and net additions. To reach that goal, Oi will prioritize growth in areas with existing coverage, employing a multichannel strategy that encompasses local and digital channels, but especially digital channels. And also we are adapting our approach to different regions, adjusting prices, channels and marketing strategies to cater to specific local requirements and preferences.Looking forward, we are confident that our quality-focused differentiation strategy should generate future growth opportunities. We should note that the commercial activity has already shown improvements driven by Big Brother campaigns, which improved brand perception and led to better performance in gross additions. These factors, combined with greater efficiency in sales, should result in positive net additions in March 2024.On Slide 12, there was a decrease in traditional revenues, especially driven by core technologies in line with what we see in retail. Good news is that we have been replacing that technology with fiber and in combination with new digital services. We should highlight that ICT revenue performance grew by 16% year-on-year, playing a crucial role in the offset in the drop of the traditional services, which contributed to the 9.3% reduction in Oi Solucoes revenue.ICT revenues accounted for 32% of Oi Solucoes revenue in 2023, a 7 percentage points year-on-year increase. As you can see on the right-hand side, some verticals saw strong growth. Cloud revenue increased by a whopping 87%, while cybersecurity revenue saw a solid growth of 23% year-on-year. We have also seen a very significant acceleration in contracts for AI and cloud.Now I'll turn the conference over to Cristiane Barretto, CFO, to present our cost structure and financial performance.

[Cristiane Sales, executive]

On Slide 13, we can see the result of our efforts to restructure the company's cost profile. Routine operating expenses fell quarter-on-quarter due to savings in personnel and content acquisition as well as leasing and administrative costs, while one-off effects affected the year-on-year comparison. As you can see on the left-hand side, routine operating expenses came to BRL 2.300 billion, a 12.4% quarter-on-quarter drop and a 5.2% year-on-year increase. If we exclude the nonrecurring effect on the reversal of tax provisions in 4Q '22, costs would have fallen by 10.6% in the period.The personnel expenses fell by 7.6% to BRL 432 million. This reduction is due to our ongoing efforts in structure -- in optimizing the structure, which led to a reduction of 5,000 employees or 23% year-on-year. Third-party services remained stable year-on-year and significant savings in the acquisition of content and G&A, which fell 27% and 15% respectively were offset by lower electricity tax credits.Lease and insurance expenses fell by 12.6% year-on-year, mainly due to one-off efficiencies and also lower lease in the quarter. Over 50% of the 4Q costs, excluding personnel, are related to the legacy business, which places more emphasis on the importance of reducing those operations.On Slide 14, routine EBITDA was impacted by losses from the legacy business and lower growth in core revenues. I'd like to highlight that these results reflect the transition phase in which the company finds itself as margins will begin to improve as the company becomes more cost-efficient and the fiber customer base grows and the economies of scale begin to bear fruit. We will have great opportunities to improve margins through the implementation of strong legacy cost reduction initiatives.Now on the right-hand side of the slide, you can see that our CapEx came to BRL 186 million, roughly 8% of sales, a quarter-on-quarter reduction of 12.2 percentage points. This is a new CapEx level for the company in line with Oi's transition to a business model with low CapEx needs. It reflects a disciplined and strategic CapEx allocation aimed at promoting sustainable growth with opportunities for future efficiency. The biggest CapEx impact is related to the costs that we need to incur to improve the fiber business.On Slide 15, you can see our cash position in the quarter, which benefited from the mobile UPI price adjustment agreement and also the operational consumption that was expected in the period. We also had one-off disbursements and payments to suppliers in the quarter which generating -- which generated a working capital consumption of BRL 385 million. The disposal of the towers contributed to higher lease payments, which came to BRL 271 million. Our total cash position was BRL 2.2 billion at the end of the year, a drop of 12% when compared to the cash position as of September 2023.I'll turn it back to our CEO Mateus for his closing remarks. Thank you.

[Mateus Bandeira, executive]

So we have the 2023 -- progresses in 2023. And we have made substantial progress for sustainability in legacy and restructuring. As [indiscernible] mentioned initially, the second half of the year, not only the fourth quarter of 2023, was a time when we had readjustments in fiber. And we also had new launches in our offer portfolio. And in March 2024 and as of this stage, we're going to resume our growth in fiber with a national footprint and we're going to continue to make adjustments to the operating processes. And we also expect to have more efficiency in the legacy management.In March 2024, we had the main points in the SecexConsenso Commission. And following all of the expected governance postures, we're going to present it and have the courts, the accounting courts and the other courts have the confirmation of it and we're going to migrate to the authorization model. In the restructuring process in March 2024, we had final adjustments in the commercial package of the plan. And now everything that was discussed and negotiated is going to be seen in the documentation for the RJ plan.On the 10th of April, we're going to have the general creditors meeting and the plan is going to be voted on. And then we're going to have more liquidity, new money. We're going to have the approval of the plan in the second half of 2024 and then the challenge to execute all of the measures in the plan. I think these are the main points that we wanted to highlight that are going to have effects beyond the results of the fourth quarter of 2023.We'll now start the Q&A session.

[Operator]

[Operator Instructions] Let's start with our first question now. Leonardo Olmos from UBS.

[Leonardo Olmos, analyst]

I've got 2 questions. Could you talk a little bit about the disconnection? In fiber, there were 8,000 people churning. And there are some levels that have good net adds, some areas in Sao Paulo improved. So why do we see these net disconnections in the fourth quarter? And in 2024, do you already see any improvement in the first quarter? Do you have positive expectations?And the second question has to do with the ClientCo margin, the ClientCo. That could be negative due to the contract costs with V.tal. Is the ClientCo margin negative? And I think the main question is thinking about the future, can we expect to have a positive margin for ClientCo? In the past, you used to talk about a 15% EBITDA margin for ClientCo. What would be a normalized margin for them? And I know there's the sales and there's the concession. I'm thinking about the operation as is normalized.

[Unknown Executive]

Thank you, Leonardo, for the question. As to the disconnection, we see net growth. Your description is correct. From a margin and quality perception, we see that it has helped gain momentum in sales. The connections -- the disconnections are because of churn. We still have a high churn rate now that we have focused more on quality. So the churn that we see is inventory churn because of the lack of payment. And that's impacted by the macroeconomic scenario, of course.What we see in the first quarter is that this curve is changing. There is a continuation of net adds and a decrease in churn because of the improvement in commercial processes. As for the fiber product margin, as you know, this is a scale business, right? And we're transforming the model that was a CapEx-intensive model and now it's an OpEx-based model.And as the scale increases, not only for Oi thinking about the client base, but also with V.tal, with new clients, then there is a dilution of fixed costs and that should lead to an increase in our margin in the medium to the long term. So we are still investing in this transformation process.Thinking about fiber. We already had this 15% margin. We had it about a year ago. And we continue to seek improvement in efficiency. But we have lower margins in the very short term.

[Operator]

[Operator Instructions] Luis Plaster, our Chief IR Officer is going to have the floor now.

[Luis Plaster, executive]

Good morning, everyone. I'm going to be reading out the questions from the platform. If you would like to ask any questions, please send them through the Q&A icon. The first question is from [ Alessandro Cavalcanti ], an individual investor. His question is, when should the arbitration come to an end? Now this is going to be resumed. And the share of Oi and V.tal and ClientCo, once that has been sold, what is going to be remaining for Oi?

[Unknown Executive]

We expect a partial decision in 4 months at the latest. And the final decision between 20 -- or pardon me, 12 to 24 months.

[Luis Plaster, executive]

Now as for the second question, what is going to remain for Oi once ClientCo and V.tal share is going to be sold?

[Mateus Bandeira, executive]

It's mainly going to be B2B Oi Solucoes and our participation, our share in V.tal.

[Luis Plaster, executive]

Thank you, Mateus. We have a second question here in English. Let's just see how we're going to go about that. So being democratic here and answering questions in Portuguese and English. So this next question is going to be asked in English. We're going to answer the question in Portuguese, but we have our interpreters translating into English. So [ Stefano Peras' ] question, sell-side analyst from Morgan is can you please confirm that all financial creditors will be offered an opportunity to lend new money? And will creditors be able to participate pro rata to their holding of the financial liabilities? Thalles is going to be answering this question.

[Thalles Paixao, executive]

The answer is yes. All financial creditors will have the opportunity to lend new money and they will also have the chance to participate in the creditors' pool that will participate in the payments. The final plan is still subject to discussions when it comes to their terms or conditions with the main group of creditors and we are going to disclose the new version of the reorganization plan as soon as possible. And this is going to go to a vote in our creditors meeting in April.

[Luis Plaster, executive]

And we have another question here from [ Uri Silva Desanchos ], individual investor and he's asking what is the reason behind the reversal split of the stock with 10:1 instead of 5:1, which could be a solution? So Cristiane, if you could address that question, we would appreciate it.

[Cristiane Sales, executive]

Thank you very much. Well, we analyzed a few scenarios. And if you remember, we did that last year due to our stock volatility and we think that the 10:1 model would be interesting in the short and medium term, considering the future events that we have in our reorganization plan.

[Luis Plaster, executive]

Thank you, Cristiane. [Operator Instructions] We have another question from an investor. He said that we talked about increased net adds starting in March. And he's asking if that improvement is related to improvements in macroeconomic scenarios and also he's asking about the churn trends, if they are going to improve because of that.

[Unknown Executive]

Well, Plaster, thank you very much for your question. We believe there is still a big challenge in terms of the macroeconomic scenario and the competition, which is under pressure. So consumers oftentimes move from one carrier to the other because they find themselves unable to afford one of them.So what we have been doing here is to change our processes. When it comes to acquisition, for example, as we said in the presentation, we have been able to strike a good balance between quality and increasing volume. And all management processes related to payment and collection have been helping us, of course. Of course, this is a slower process. We can see the impacts coming so quickly, but we are going to start seeing improvements in the first half of this year or the first quarter.

[Luis Plaster, executive]

Okay. I'm going to wait for a few moments to see if we get more questions from our audience. If not, we can conclude our call for today. We don't have any more questions, so. Okay. We have another question about Anatel, but I think that we have already addressed it. It's about Anatel's arbitration procedure. With that, I believe that we can end our earnings call for today. So I'd like to turn the conference back to Mateus Bandeira for his closing remarks.

[Mateus Bandeira, executive]

Thank you so much for joining our earnings call. I'd like to thank the investors for their trust in our company. And our Investor Relations team is at your full disposal in case you have any further questions. See you in our next call. Thank you very much.

[Operator]

Thank you. This concludes Oi S.A.'s 4Q 2023 earnings call. If you have more questions, please access the company's IR website. You may disconnect now. Have a good day.