Telefônica Brasil Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 11 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to VIVO First Quarter 2023 Earnings Call. This conference is being recorded and the replay will be available at the company's website atri.teleconica.com.pr. The presentation will also be available for download. This call is also available in Portuguese.

Operator

To access, you can press on the globe icon in the lower right side of your Zoom screen and then choose to enter the Portuguese room. After that, select Miu Tu Regional Audio for a better experience. We would like to inform you that all attendees will only be listening to the conference during the presentation, and then we'll start the question and answer when further instructions will be provided. Before proceeding, we would like to clarify that any statements that may be made during this call Regarding the company's business prospects, operational and financial projections and goals are the beliefs and assumptions of Vivo's Executive Board and the current information available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore depends on circumstances that may or may not occur.

Operator

Investors should be aware of events related to the macroeconomic scenario, the industry and other factors that could cause results to differ materially from those expressed in respective forward looking statements. Present at this conference, we have Mr. Christian Jabara, CEO of the company Mr. David Malcolm, CFO and Investor Relations Officer and Mr. Jean Pedro Carneiro, IR Director.

Operator

Now I will turn the conference over to Mr. Jean Pedro Carneiro, Investor Relations Director of Vivo. Please, Mr. Canero, you may begin your conference.

Speaker 1

Good morning, everyone, and welcome to Teflonica Brazil's conference call The call will start with our CEO, Christian Gebana, commenting Vivo's financial and operating highlights, followed by an update on the progress of our B2B and B2C digital ecosystems and ESG initiatives. Then our CFO, David Malcon, We'll go through our cost and CapEx evolution, net income, shareholder remuneration and free cash flow generation. I'll now hand it over to Christian.

Speaker 2

Thank you, Joao. Good morning, and thank you for joining our earnings call. I start by presenting the highlights of a very strong Q1 for VIVO, A period when we reached our highest total revenue year over year growth in over a decade, expanding top line by 12.1%, driven by an expansion of 15.9 percent of our mobile service revenue and by further improvement of our fixed business. This off the charts performance was a result of yet another positive quarter in operating terms, with mobile postpaid access growing We have been able to grow EBITDA above inflation for a few quarters in a row, and this one was no exception, as we presented a 9.6 percent year over year expansion. This result, coupled with the reducing CapEx intensity you should see throughout the year, allowed us to generate BRL3.1 billion in free cash flow in the 1st 3 months of 2023 with a robust growth of 26.4% versus the Q1 of 'twenty two.

Speaker 2

This confirms the conditions for us to maintain a leading shareholder remuneration in the industry going forward. Going to Slide 4. In the Q1 of 2023, our total revenue reached BRL12.7 billion, The highest result the company produced in a single quarter in its history. More importantly, the 12.1% year over year evolution is the best We had in over 10 years confirming that we are on the right track to continue delivering above inflation top line expansion going forward. Our revenue mix keeps on improving as we see our core services expanding.

Speaker 2

On the mobile side, service revenues grew 15.9% year over year with a strong performance both in pre- and postpaid. In addition, smartphones and other electronics, which were increasingly see SG element to enhance customer loyalty accelerated 20.6% in the period. On the wireline business FTTH And B2B data, ICT and digital services continue to be the driver of transformation, enhancing our growth profile through On Slide 5, we present the main achievements of our mobile operations In the quarter, we closed March 2023 with 98,100,000 mobile subs, of which 60% in Boss Bate. The 15% year over year growth of our customer base enabled us To further expand our market share, reinforcing our leadership in all mobile segments. One of the key elements behind the market outperformance is how successful we have been in controlling and reducing churn.

Speaker 2

Over the last 5 years, Our postpaid churn reduced 37% to a monthly average of 1.09% In the Q1 of 2023, churn reduction, jointly with the ARPU Over the last quarters is a powerful platform to provide above market results going forward. On Slide 6, You can see the key highlights of our initial 5 gs deployment. We closed the quarter with 58 cities covered with our 5 gs standalone network moving Apart from being within our coverage area, to use 5 gs, our customer must have a 5 gs enabled At the moment, almost 70% of the smartphones we are selling in our stores are 5 gs ready for prices Starting from as low as BRL1.3000, the device affordability coupled with our accelerated Footprint expansion has been a driver for fast customer migration from 4 gs to 5 gs. As such, 20% of our pure postpaid users are already enjoying Vivo's 5 gs experience, and this take up is much faster Than what we saw a decade ago when we launched 4 gs. This is important as the migration to 5 gs not only will enable us to be more efficient Turning to Slide 7, we move to fiber.

Speaker 2

In the Q1 of 'twenty three, we added over 1,000,000 fiber to the home premises to our footprint, which now reaches 24 400,000 homes in 436 cities. Our second to none network reach allowed us to maintain The undisputed leadership of the fiber market in Brazil with 5,700,000 customers, Growing 16.8 percent year over year. Apart from the infrastructure advantage, Vivo has a unique ability in Brazil In fact, Vivo Total, which is our fully convergent offer, had a churn of only 0.39% per month in the quarter. Moving to Slide 8. Here, we can see that our digital B2B services generated BRL813 million of revenues in the quarter, Up 32% year over year, representing 6.4% of our top line in the period.

Speaker 2

We have been consistently growing this pool of revenues to a tune of 35% per year on average over the past 5 years. As such, We are on the brink of seeing our digital B2B revenues be greater than our non core revenues, demonstrating how efficient we have been becoming relevant in new verticals to replace Fading legacy technologies. Even so, we are just beginning this journey as only a small fraction of our B2B customers are already using cloud, cybersecurity retain digital service from our portfolio of solutions. Therefore, by using the key assets we have, such as a strong brand and 5,000 B2B sales reps with nationwide presence, we have a huge potential market to explore. Let's move to Slide 9.

Speaker 2

Here, for the first time, we start to put numbers on some of the verticals we have been developing to consolidate our digital B2C ecosystem. But before that, I would like to point out that Brazil is a country With a low penetration of basic services such as health, education and financial products, we firmly believe Vivo to be in a unique position to bridge this gap And accelerate inclusion through digitalization, relying on a low acquisition cost that takes advantage of a set of assets that includes A long stand relationship with 112,000,000 customers, massive big data capabilities, channels comprised of 1 point I8000 stores and an app with over 22,000,000 unique users per month and one of the top 10 most valuable brands in the country. Now going to numbers. On the left hand side of the slide, you can see that in the Q1 of 2023, the financial services we offer to our customers Beis generated BRL984 million in revenues. So the financial service we offer to our customer base generated BRL94 million in revenues, Up 55 percent year over year.

Speaker 2

Here, we have key contributions from Vivo Money, our personal loan platform, which closed the quarter with a portfolio of BRL239 1,000,000, up over 5x year over year. We are also accelerating the sale of insurance for electronic devices such as smartphones, tablets, smartwatches and laptops. At the moment, we have over 300,000 smartphones insured with us in partnership with Zurich Seguros. We are also moving ahead to go beyond tech And offer insurance for pets, bikes, homes, among others. Another important source of revenue and churn reduction has The sale of video and music OTTs through our invoice bundled with our postpaid and FTTH plans or On a stand alone basis, we currently bill more than 2,200,000 OTT subscribers, generating BRL101 million of revenues in the quarter, up 53% year over year.

Speaker 2

Vivo is one of the top telcos in the world in terms of partnership with content providers. As we see, this is a key advantage Maintaining our customer loyalty and satisfied with the completeness of our portfolio. Moving to Slide 10. In addition to financial services and OTT distribution, we are developing other verticals that will complement our digital ecosystem strategy. Starting with health and wellness.

Speaker 2

In March, we invested BRL60 1,000,000 to acquire Vallisold Syncre, A startup that provides access to over 5,000 labs and clinics nationwide and was already acting as a partner to our eHealth initiative, Now we already have more than 70,000 lives covered by our subscription based products. Moving to education. We recently made the commercial launch of VIVA E, the employability platform we have in partnership with Anima, offering Over 400 hours of content packed in short duration courses. On smart homes, we see space not only to sell virtual assistants, lamp We see the business of selling electronic devices beyond smartphones as very attractive as this generates important inflows to our stores and allow us to be a one stop shop for tech needs of our customers. In the Q1 of 2023, we registered BRL 69 1,000,000 in revenues from this vertical, Up 95% year over year.

Speaker 2

Here, apart from being a smartphone apart from the smartphone products, we sell laptops, Wearables and accessories, the latter being reinforced by our recently launched brand Ovi. Moving to Slide 11. On ESG this quarter, we highlight that we are well on track to achieve the goal of having 40% of women Our leadership roles, as at the moment, 36.8% of the positions are held by them. We are not only forming the presence of women in the executive position, but also in field service operations through the program, Still Diversity, in the Q1, VIVO sponsored the Lollapalooza Music Festival, allocating the largest part of its tickets to black people from Communities and black influencers and entrepreneurs through the presence a preta or black presence movement. Going to the right hand side of the slide, you can see that we continue to expand our distribution generation program, having inaugurated 7 new power plants, For the 3rd year in a row as a supplier engagement leader, helping implement sustainable practice throughout the entire value chain.

Speaker 2

Now David will take us through the financial highlights of the quarter.

Speaker 3

Thank you, Christian, and good morning, everyone. On Slide 12, you see that we were able to maintain our cost of operation, which comprise 68% of our cost and expanded 11% year over year, growing below revenues. Here, Personal cost continues to be one of the main drivers as this line is not only impacted by the annual salary increase, but also By the insourcing of staff to support our winning B2B digital services strategy and additional headcount related to new businesses. Apart from that, commercial and infrastructure costs remain well under control, While the provision for bad debt was slightly lower on a yearly basis, denoting how relevant our services have become to our customers. Looking at the cost of service and goods sold, which mostly increased in line with our effort to sell High growth solutions and products such as digital services, handsets, IT equipments And accessories, the expansion of 18% year over year was lower than the increase in revenues coming from these verticals.

Speaker 3

For the quarters to come, we see a path to improve the annual evolution of costs, Not only from the opportunities around digitalization and simplification, which we'll continue to capture, But also from the recently completed integration of Oi's mobile assets That resulted, for example, in the termination of the transition service agreement with Oi that had a cost Of almost BRL50 1,000,000 this quarter and consumed around 1 percentage point of EBITDA year over year growth. This integration will also boost the capture of synergies related to the network costs, IP platforms and customer care, among others. Additionally, in March, we have started to amortize for tax The goodwill arising from the acquisition that will generate more than BRL1 1,000,000,000 cash During the next 5 years. Going to Slide 13, as guided in the previous quarter, Vivo's CapEx for 2023 will be below BRL9 billion, thus providing an important savings Compared to the BRL9.5 billion invested in the previous year. This first quarter figure Already point to this lower CapEx intensity, with investments clocking in at BRL1.7 billion Or 13.3 percent of revenues, our lowest ratio ever.

Speaker 3

As a result, we saw a robust expansion Of 23.7 percent year over year of our operating cash flow in the quarter, with the last 12 months margin Recovering the 21% lever. These results put us in a unique spot As we continue to invest in top tier technologies such as 5 gs and fiber, while being able to optimize Capital allocation as mobile synergies arising from the recent spectrum acquisition start to kick in, While on fiber, most of the footprint deployment is up. On Slide 14, You see that our net income expanded 11.3 percent year over year in the quarter, reaching BRL 835,000,000. Even though we are still seeing increasing pressure coming from the financial results due to the increased debt level and higher interest rate, The 17% expansion of our operating income in the period more than compensate this factor. Year to date, we have already declared BRL1.2 billion of dividends and interest on capital.

Speaker 3

In addition, we invested BRL72 1,000,000 in the quarter to buy back our shares. As such, we kick off the year with a very robust allocation of capital towards our shareholders, something that will continue to be one of the key elements of our strategy. Finally, On Slide 15, you can see that our free cash flow generation reached BRL 3,100,000,000 in just 3 months, Growing 26% year over year. Looking at last 12 months figure, we closed the quarter With a free cash flow yield of 12%, a number hard to be matched by companies of any industry. Thank you.

Speaker 3

And now we can move to the Q and A.

Operator

Thank you. We are going to start the question and answer section for investors and analysts. Our first question comes from Freddie Manges from Bank of America. Please, Mr. Freddie, your microphone is open.

Speaker 4

Hello. Good morning, everyone. Thanks for the call. I have two questions here on my side. The First one on cost.

Speaker 4

I mean, we already mentioned a little bit, but it was cost grew like 12%, personnel itself 23%, A little bit higher than what we had here. So just wondering if with the lower inflation in 2023, there is room To reduce this cost or given that the other business, they are growing this line, it should stay high throughout the year. This will be the first one. And then the second one on the B2B Digital. Once again, some acceleration, already 6.5% of your revenue.

Speaker 4

Do you believe that there is room to continue to grow in this space as you add more products? This is kind of a one off. Basically trying to understand the potential of this line here for the next years. Thank you.

Speaker 3

Hi, Freddie. I will start with the first question. I mean, as we shot the slides, I mean, we have divided the cost in 2 parts. Now the first one We'll be linked to the evolution of the new businesses, more like cost of goods sold and so on. So we're expecting this to continue to grow.

Speaker 3

But Just to remind you that those revenues will have no CapEx allocated. So in terms of operating margin We'll be very positive. Regarding the second one that you mentioned about inflation, we are working with different levers to make sure that we reduce those costs. And in fact, despite some lines are increasing, particularly the one have to do with personnel cost, we explained that They are explained by just specific projects, but if we look to all the OpEx overall, we see a lot of opportunities, Both in simplification and digitalization, a part of the synergies coming from Oi to reduce and to improve the trends Starting from the first from the next quarter in Q2 this year, we will see some improvements on the trends.

Speaker 2

I continue, Fred, with the B2B. So as you know, we've been giving a lot of Visibility, our evolution, the B2B Digital Services, this quarter was 32%, but If you see what happened in the last 5 years, the trend is actually the same, no positive evolution of the services. Here, we believe there is room for growth for many reasons. First, because Vivo has a unique Channel footprint for B2B coming from the small companies to the large corporations. Now we are more than 5,000 Sales reps distributed nationally with the relationship with all type of customers that allow us to sell More services.

Speaker 2

The second thing is that after the pandemic that was accelerated, the need for digitalization in companies. And if you look at the level Of digitalization or penetration of digital services in all types of companies is still very low in Brazil. Talking about cloud, cyber securities, notebooks and many other type of services that we sell. It's much more we're talking here much more of recurrent services rather than hardware sale. So the mix is much more for recurrent services.

Speaker 2

And we see ourselves, because we can prove it, we're one of the key partners of the large techie So if you look at Cisco, Microsoft, Google, Huawei among others, they search for our partnership Because we have the footprint, we have the relationship and we can build the customers in an easy way to distribute their services. And apart from What they have as services, we are also investing in having people here that understand The services in-depth that can help the sale, but more important, can help the management of the services once it's implemented in our customer That's the reason that we bought one company last year, VITAITE. That's the reason that we are hiring people as well. So one of the Answers of WIO personal cost is also related to increased capability internal capability of being able to deploy and manage B2B So going forward, we don't give trend, but everything that we see is very positive for the role that B2B can play In our future revenue and mix,

Speaker 5

I don't know if you

Speaker 2

can follow your question about the B2B and the cost front, otherwise I can't comment.

Speaker 4

Perfect, Christian. That'd be very clear. If I just may on these two points, if I just may follow-up here, sorry for the third question, but It looks like the deal with VINITY is about to be approved, is already approved. So just wondering if with these, let's say, high spectrum, There is room to further decrease the CapEx in 2023. It's already lower than 2022.

Speaker 4

Thank you.

Speaker 2

It's not approved. We yesterday, we had a positive decision of the technical team From the Ertsey Trust, from KADE. So it's a first step in the Ertsey Trust. So yesterday, they approved with no restriction The deal, as we expected, because it's the secondary use of a frequency spectrum that was bought by Winiti, But we still need to grow through all other stages in the antitrust and the stages that we need to go through in Anatel. So it was a positive step in the antitrust, but we still need to have final approval there and also approval in Anatel.

Speaker 4

Perfect. Very clear, Christian. Thank you.

Speaker 6

Go for it.

Speaker 3

Thank you.

Operator

Our next question comes from Marcelo Santos from JPMorgan. Please, Mr. Marcelo, you may proceed.

Speaker 6

Hi. Good morning, Christian, David, Joao. Thanks for taking my questions. The first question is for David regarding the working capital. Think on the Q1, we saw a big release of BRL1.3 billion in working capital.

Speaker 6

How should we think about this line going forward? And what are the main moving parts here that investors should keep in mind? And the second question is for Christian. I wanted to discuss a bit more Vivo Money. Could you please discuss the types of loans that you're giving there?

Speaker 6

What are they for? What are the average size? Are these to buy mobile phones or general loans? Any more color on these loans would be quite interesting. Thank you very much.

Speaker 3

Thank you, Marcelo, for the question. I will start with the first one. Cook, Stefanica Brasil, we have shown very strong cash flow generation over the last few years, And working capital has been one of the key parts. So the key reasons why the working capital is still positive this quarter, I will summarize in 2. The first have to do with the fiscal tax, which is we have an injection obtained In relation not to pay the fiscal tax since 2020, this is something that is impacting our cost Because we are recognizing the cost in our financial statements, but we are not paying.

Speaker 3

So this had an Impact in the last 12 months, annual impact of BRL750 1,000,000 positive impact in the working capital. The second one Has to do with the monetization of the tax assets that we have in our balance sheet, not only the one that have to do with the taxation of the ISMS and PC COFINS, which is the most relevant, that just in the quarter, just the PC COFINS that we have monetized Amount to around BRL 500,000,000. On top of that, we are always working with initiatives of working capital that Taxes is one of just the key areas, but just those 2 are explained a significant part of it. On top of that, We keep working and something that is important that for the Q2, we have still have some tax assets That will be monetized. That means that will be cash coming in where the positive impact on the results was already recognized in the previous year.

Speaker 3

So in summary, these are the key elements for the working capital positive, and we continue we expect positive trend in the second quarter.

Speaker 2

Marcelo, going to Vivo Money, okay. So going back, Vivo Money was launched in October 20 No, it's one of the financial services we offer in our FinTech platform. It's a personal loan. It's available for Vivo's customers because we know this customer better. We can access their credit risk Using our big data and data analytics, so we understand the profile, we can minimize risk, and we can be very assertive Offering the right amount of loan to the right customers.

Speaker 2

Now the range goes from R500 RAYS to RAYS50,000, on average, it's RAYS5,000. It's very fast And practical, the way they hired is 100% digitally that we do that. The money is not related to smartphone acquisition At the moment, it's a direct loan and the customer can use it the way they want it. If you look the number, Evolution, if I look the number of contracts that have been generated, that's being multiplied by 2, 3, 4 last year. So today, we have in the loan platform approximately BRL 239 million Being lent, it's part of our strategy to reinforce our position of a digital hub.

Speaker 2

I think it of course, it will help also enable the acquisition of products as a way to finance it. So it's a way that we're going to Use it more, as you mentioned, the smartphone or any other device for the smartphone. Nowadays, the funds raised through our FIDEC, a fund based on receivable rights, we are the only participant at the moment, but we are looking for others. So that's the way we are doing The financing of Affant. I don't know if you have more questions, Marcelo, about Vivo Money.

Speaker 6

No, perfect. It was pretty clear. Thank you very much, Christian and David.

Speaker 3

Thank you, Marcelo.

Operator

Our next question comes from Andre Salis from UBS. Please, Mr. Andre, your microphone is open.

Speaker 7

Hi, good morning, everyone. Thanks, Christian, Jean and David for the space here to ask a question. The first one will be in terms of the price up schedule. If you guys could please share the company views on the Price up schedule on your mobile plans, both postpaid and prepaid. And the next question will be the developments of the capital reduction discussion with Dan Atell.

Speaker 7

So if you guys could please just Comment on that and the follow-up here is that after a potential approval from the regulator, there are some additional internal steps that the company needs to make, right, such as shareholder debt holder meetings and approvals. So regarding these internal steps, Could you please give the expected timing for this to happen? Thank you.

Speaker 2

So Marcelo, we've been sorry, Andre. We've been increasing price according to inflation Every year, so in April now, we're going to have price increase for Almost half of our hybrid customer base, more than half of our postpaid, in January, you already increased Mostly all our fixed products, FTTH, IPTV And voice. So our strategy is always to adjust price. Even in January, there were some hybrid that we already adjusted. So if you look the entry point Of our hybrid, it went from 50.99 to 57.

Speaker 2

We also had to increase Based to inflation, our individual postpaid, our family plans, so we're following with the calendar to increase prices, even the VIVO Total That was recently increased. So in April, we have more increase in the mobile. And in the fixed, we have more Increased not only the one in January because it was 100%, but in June, we also have an increase in our fixed customer base. Prepaid, we also aim to increase Because we need to pass over inflation, would be great to have the marketing the market following us on that Because the price of prepaid has been in the same level for a long time, so we are aiming also To capture the inflation on prepaid as another one in the mobile space. So That's basically what we've been doing in price.

Speaker 2

Regarding the capital reduction That you mentioned, as you know, we have in February, we announced That we would do is this reduction. So we already asked I'll tell for that. So we filed in February 15, and they have 6 months to analyze, And we are confident with the approval of giving our very strong financial position. And after that, once it's approved, We need to comply with all the other necessary steps of this kind of operation, such as the general shareholder meeting That we need to approve. That's a period that we have to do to get it approved.

Speaker 2

So on schedule, waiting for Nana Tel approved.

Operator

Our next question comes from Marco Nargini from XP. Please, Mr. Marco, your microphone is open.

Speaker 8

Hello. Good morning. Thank you for taking my questions. I actually have 2 here on my side. The first one is regarding the competitive environment in FTTH.

Speaker 8

We saw once again a strong performance in top line growth this quarter. Can you provide us some further details on that, please? And the second one is regarding the EBITDA margin drop year over year. Can you give us some color on the end of the TSA contract with Oi in February impacts on margins? And also, as David already mentioned, The increase in personnel expenses and higher share of digital services, what should we expect on margin performance over the next

Speaker 2

So Marco, I'll start with the FTTH. So as I said, we are increasing our footprint. So we have today 24,400,000 home pass. We increased The connection of customers as well, so we have today 5.7%. It's good to highlight also we increased 18.7 percent, the home passed, we increased 16.8 percent, the home connected And we're increasing similar level, the revenues coming from FTTH.

Speaker 2

So we are in a very strong position. If the market It's a lot it's very competitive, as you mentioned. There are many players. We are talking about very small players to large Players like us that we are the number 1 in the market. And on general in general, the number of net adds Has been reduced, but VIVO stands out.

Speaker 2

Now if you look at the last net add number available in March, VIVO gained 60,000. The 2nd player gained 39,000. So we are gaining market share in Strong position. And as I said also, we are bundling that with mobile. So 75% of the sales of FTTH in our stores Are in Vivo Total.

Speaker 2

So either the customer is already a mobile and is acquiring fiber or it ends up being both With VIVO, so the competitiveness of the market is very strong. We have different type of competitor, Small ones, medium ones and large ones, but we have the largest network, the largest customer base And the only one in national basis with the possibility to offer the VIVO Total, bundling not only Mobile and fiber, but also digital services, as I highlighted, it's important to say that apart from selling IPTV, we are the key Channel for OTT Video and we have 2,200,000 subscribers that's paying OTT through VIVO. So that's the overall vision on NTH. I don't know if you want any specific question on that.

Speaker 8

That's super clear. Thanks.

Speaker 2

And the EBITDA, I think that Vivo will talk, but it's important to highlight our very strong growth In absolute terms, 9.6 percent of EBITDA growth, well above inflation. That shows that we are in the right direction. And important also to highlight the mix of service that we are selling now. We are very positive of our strategy of selling more Digital services, we highlighted the 6.2% of the B2B, and we are also giving more color on the B2C. This service may come, some of them, with lower margin, but they have no CapEx.

Speaker 2

So highlighting the growth in absolute terms of our EBITDA, also highlighting the growth in our operating cash flow margin that is also growing And it's a very, very, very high number.

Speaker 3

So the VIVO Yes. No, Matos, thank you for the question. As Christian said, I mean, we prefer to look to the operating cash flow margins because the evolution of the revenue is very strong, particularly on those new services. That in terms of operating cash flow margin, they are similar could be similar to the telecom services, but we cannot look just on EBITDA. So we look this quarter, we are back to the 21% operating cash flow margin looking to the last 12 months as we show on the Slide 13 in our presentation.

Speaker 3

We are very positive in terms of seeing operating cash flow margin expansion looking to the last 12 months for the coming quarters As we are reducing CapEx and also we are improving our efficiencies. Regarding your specific question on transition service agreement we had with Oi, we agreed at the beginning of the deal BRL172 1,000,000 For the next 12 months after the acquisition that happened the April 20, 2022, so we have done an early termination of this contract We have already merged the customers. So from the Q2 compared to the previous the first one, just on this Contract, as I said on the call, there would be BRL50 million less costs on top of the rest of the costs that we had To facilitate the migration of customers, call centers there were customers calling Call centers to clarify what was about the migration to the new services. Those costs will not happen again for the rest of the year. That's why, as I say, we are positive that the Q2, we will see an improvement on the cost trends, This is the 2nd quarter now also for the coming quarters.

Speaker 8

Thank you, Christian and David.

Speaker 3

Thank you, Marco.

Operator

Our next question comes from Victor Ricchiuti from Credit Suisse. Please, Mr. Victor, you may proceed.

Speaker 9

Hi, good morning. Christian, David, Joao. Thanks for taking my question. The first one is regarding the competition in the mobile segment. As you already mentioned, you are being able to increase prices Almost the whole client base.

Speaker 9

And at the same time, you're able been able to also reduce churn. So we were wondering how are you perceiving competition in the mobile segment? And how should do you expect To continue throughout 2023. And my second question is regarding the OE client base. So the OE Incorporation happened already 1 year ago.

Speaker 9

So now you are you can increase prices To this client base, so could you provide us some color around the commercial strategy for the OE client base going forward? Thank you.

Speaker 2

Thank you, Victor. Christian, I'm trying to answer. Yes, it's a very competitive market. It has been competitive for so many years. What I try to highlight here is, first, there is the need of passover inflation, and we are doing that To be able to increase revenues and no regard because we have like investments, so we need to increase revenues To increase our profitability, so we are doing that.

Speaker 2

So hopefully, we're going to be followed by the market. The second thing is that I think the value proposition of Vivo is unique. We have the best coverage combining mobile and fixed That give us increased loyalty, so that's why I think we also see the good performance in churn At both mobile fiber and Vivo Total, we're being able also to increase lifetime value, Reducing churn with more services to our customer base. So let's take into focus Here in the mobile access, we have 98,000,000 access in our customer base. It's a growth of 14.2% in prepaid, but 15.4% in postpaid.

Speaker 2

That's a combination of attributes that we have, Infrastructure, complete digital service value proposition, customer service that we focus Invest experience and many others that I talked over the presentation. So going forward, we continue with our strategy. We are combining the inflation change that we need to put in prices with highlighting the value proposition that we can offer to customers. So very competitive, and our strategy is focused on what I just described. Regarding Oi, Yes, we have full integration.

Speaker 2

We finalized the process. The customers that we had, we disconnected. So in final numbers, we are closer to EUR 9,000,000 rather than EUR 12,000,000. That was the first number that we received, Concentrated most of them, in our case, in prepaid, although we had some also in hybrid. There's no specific strategy of growing of like increasing prices for this base.

Speaker 2

It's also very mixed, The number of customers that we have, there was a lot of migration from customers that were owing to VIVO Customer base, even before the deal or the incorporation was concluded, we also had the migration reporting of customers from Norway in other regions Where we haven't received geographically the customers, so our strategy is the same. We are doing what we normally do. We try to upsell to customers. We try to move customers from prepaid to hybrid, from hybrid to within hybrid to Higher plan, we are adding digital services, some of them to have hybrid plus digital services, and we are also migrating hybrid to pure postpaid, Has no specific action to what we got from Huawei rather than integrating the customer here, migrating to our plans And try to give them the best experience once they have now a coverage of network and channel that they didn't have when they were in the other operator.

Operator

Our next question comes from Daniel Ferdelli from Credit Suisse. Please, Mr. Daniel, Your microphone is open.

Speaker 5

Good morning. Thank you very much for the opportunity to do a follow-up question here. So we are seeing telecoms and I could say especially VIVO growing faster than they used to, growing faster than normal. And my question is, in a scenario of like a more positive pricing environment, If this is more positive pricing environment allow for a 1, 2 percentage points more in growth, should we This additional growth to pass through EBITDA, so 1, 2 percentage more in revenue should translate to 1, 2 percentage No points additional in EBITDA margin or are there like reinvestments, additional costs associated to this scenario? Thank you.

Speaker 2

I don't know if I would talk about Daniel about margin, but growth, no, for EBITDA. We don't give trends. So there are many things implied in what you just said. No, first, we are growing in revenues In all segments, so I wouldn't specify the growth in mobile. We are growing mobile, we are growing fixed and we are growing In digital services and the dynamic of these three segments are totally different.

Speaker 2

And if you talk B2C, B2B, you are creating either other dimension. And as we try to reflect here that we've been able to grow in all of them. Also important To highlight that what we call non core that used to represent 9% of our revenues now represents 7%. We took out DTH from our value proposition. We are now offering the service and we disconnected or migrated the customer they used to have.

Speaker 2

Even with this movement, we grew fixed in total 3.5%. We are also growing handsets And electronics, because we believe that's a way also to increase flow to our stores, it's a way to increase lifetime value, And it's proof that the customer is much more loyal, and they see us as a technology partner rather than just a telco. So there's a combination Of strategies here, so it's very difficult just to isolate mobile And believe that there is a mobile rationality and that would be reflecting EBITDA. If I talk about the specific telco service, maybe your assessment is correct. But here, we are talking about the combination of services and segments that give us this absolute growth.

Speaker 2

And as David said, We are also very focused on the operating cash flow margin. We have already set here a target for CapEx, €9,000,000,000 maximum this year. We already presented a number of our CapEx in the Q1, lower than we had Previous quarter, so this is the strategy, try to mix more revenues, open up Our spectrum to have more sources of revenues, controlling costs based on digitalization, Understanding that some of these sources of revenues have different EBITDA margin, but maybe A better operating cash flow margin since some of them don't depend on CapEx. So that's the view. That's the strategy, And we wanted to show this quarter with more color that we are going in the right direction.

Operator

Our next question comes from Felipe Chang from Santander. Please, Mr. Felipe, your microphone is open.

Speaker 10

Hi. Thank you for the opportunity to make some questions. The first one is regarding shareholder distributions for this year, right, given that free cash flow generation was very strong in this Q1. Just wondering what is your expectations for dividend distributions in 2023? And if we could see a very A rising level of distributions relative to 2022.

Speaker 10

And my second question is regarding B2C Ecosystem Revenues, Right. We already saw a relevant contribution of financial services and sale of OTT this quarter. So just wondering what other opportunities do you see, Right, which could further complement your ecosystem going forward, right? And eventually, if you plan to do this through partnerships or M and A. Thank you.

Speaker 3

Thank you, Felipe. I will start with the first one. I mean, we have a practice to distribute 100% payouts. This is something that We continue. We have a very strong cash flow generation, not only this quarter, but also in the previous years.

Speaker 3

That's why we launched the project of capital reduction to close the gap between the net income that we have generated this quarter, This year with the cash flow generation that will continue as in previous periods, very, very strong. So that's it. So 100 percent payout and working on the capital reduction as we Christian explained before.

Speaker 2

So, Felipe, I don't know if you have more questions in the shareholder, but otherwise, I go to the B2C So as I said, now we are leveraging on the assets that we have, customer base, channel, big data, Building capability and brand, and we see ourselves as one of the unique Players in the market among sectors to be able to create a digital ecosystem in Brazil. And again, The key focus is serving through digitalization customers that don't have access in the physical terms To service that we believe are very essential to our lives. So we're going to do that and we're going to open up the numbers quarter over quarter. This quarter, we gave more color in the financial services and entertainment. We may give more color in the future to the other verticals that I described here.

Speaker 2

We are doing that, as your question, in different models. Some of them is pure distribution like entertainment. Others Our JVs like the education that we did with Anima, some may also have acquisition as the one in health That we bought Vale Sauge Semper to accelerate the creation of our platform that is Others will be minority stakes as we are doing with our venture capital fund, VIVO Ventures. We already have 2 investments in fintechs, 1 in Open Finance, The second one, Kluby, there is a consortium that we're going to have a digital platform to sell consortiums that it's a typical Brazil model of selling something in installments financing, the acquisition, cars, real estate and why not electronics. So each of these verticals will have a specific model, either partnership, M and A distribution, and we're going to give more color over the quarters as soon as we develop more each of them.

Speaker 2

So that's the vision, and we believe that with all the assets that I described before, that we are among different sectors in Brazil, we are in a unique position to be the winner Of the construction of our ecosystem.

Speaker 10

Perfect. Very clear. Thank you, Christian and Savi.

Speaker 3

Thank you. Thank you,

Operator

The question and answer session is over. We would like to hand the floor back to Mr. Christian Jobara for the company final remarks. Please, Mr. Christian, you may proceed.

Speaker 2

Okay. So thank you for all of you for participating. As you could see, we started very strong this year. It's a reflection of the strategy that we've been Communicating along the last quarters and that would give very robust and clear results That gives us optimism about the next quarters, and we're going to be always at our disposal, Davia, myself and our IR team to answer any questions that you may have. So thank you again.

Speaker 2

Have a great day.

Operator

Vivo's conference call is now closed. We thank you for your participation and wish you a very good day.

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Earnings Conference Call
Telefônica Brasil Q1 2023
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