Desktop S.A. (DESK3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, welcome to the Earnings Call for Desktop to discuss the earnings for the fourth quarter and the full year of 2024. [Foreign Language]

[Foreign Language] which led us to be recognized for the award as the best choice for the Best Internet in State of São Paulo. Moving on to Slide 5. I would like to highlight the main indicators financially in the quarter and for the year of 2024, demonstrating another cycle of strong growth, and the delivery of consistent results. With the net revenue concentrated in B2C, we were able to deliver solid growth of 14% compared to 2023, adding up to total net revenue of BRL 1.13 billion. In B2C, we were able to have recent launches of new services, including news streaming, telemedicine, antivirus, cloud and some converging offerings with fiber and mobile. We see relevant potential to add more revenue and profitability to the company with these new products. And we also have a structured cross-selling and upselling program that's already under implementation, so we can add more to our tickets through these levers. In the new growth avenue through B2B, we also started to reap the first fruits of the planning and structuring that was done in the beginning of -- throughout 2024 as a reflects of our financial discipline and our focus on profitability. The adjusted EBITDA also had a solid performance, adding up to BRL 150 million in the quarter, a growth of 11% in the year, and 2% in the quarter. In the consolidated numbers for 2024, we were able to get an adjusted EBITDA of BRL 579 million, an increase of 16% over 2023. Growth above revenue, which refers to an EBITDA margin gain of 1%. Our adjusted EBITDA reached an all-time high in the fourth quarter, adding up to BRL 54 million. And in the current annual year reached BRL 199 million, a significant growth of 33% compared to the previous year and which refers to a net margin gain of 3%. Another focus in the company has been an improving cash conversion. The operational cash flow adjusted in addition to the CapEx in 2024, reached BRL 105 million, an advance of 48% compared to the year of 2023. Operationally, we continue to expand our infrastructure and our customer base with consistency and diligence. We ended 2024 with 4,480,000 homes passed, among which 1,131,000 already had connected customers. In the last quarter alone, we registered 23,000 new organic net additions, taking our monthly average of net adds to approximately 10,000 throughout '24. These results demonstrate that we're on a solid path, increasing our customer base and ensuring we have healthy margins, always focusing on customer experience and maximizing returns for our shareholders. Now I'll pass on the floor to our Revenue Director, Andre Falcao.

Thank you, Denio. Thank you, guys. Good morning. I'm going to talk about our results and our business approach. Our growth is not related only to financial numbers, but also our geographic expansion and infrastructure in the network, consolidating Desktop as the main benchmark regionally when it comes to fiber broadband. We currently have 194 cities covering 4.5 million households with robust infrastructure of 55,000 kilometers of fiber. In '24, we expanded our operations even more with the entry into new strategic municipalities, strengthening our presence in markets with the greatest potential. This territorial growth associated with the evolution of the commercial ecosystem has consistently driven our customer base. At the end of '24, we reached 1.13 million connected homes, and an 11% growth year-over-year and 2% compared to the third quarter, proving the growing demand for our services. In addition, the organic net adds maintained solid levels even in a challenging market. In the fourth quarter, we added 23,000 net new customers, accumulating an increase of 29% versus '23 indicating the success in addressing the traditional sales and operations challenges in the end of the year. With an expectation of 27,000, we demonstrate the solidification of our expansion of the customer base delivered in 2024. Operational performance reflects the consistency of our expansion strategy. The increase in efficiency in customer conversion and strengthening of our presence in the interior of Sao Paulo. By combining growth and quality, we continue to maximize the use of our infrastructure and consolidate our regional leadership position. To continue generating value for our customers and to drive diversification and growth in our revenue, we're pleased to announce a significant expansion in our portfolio. As of March 17, '25, we officially launched our new converged offer, Desktop Mais, which combines high-speed fiber Internet with mobile plans. Initially available in 60 cities, this initiative marks another step in Desktop's evolution, expanding opportunities for acquisition and profitability of our customer base and reinforcing our competitiveness in the telecom sector. With this, we've created a more integrated ecosystem, adding even more value to our customers and driving loyalty. The new offering provides plans with 600 mega in fiber Internet and 10 or 15 gigabyte in mobile franchisees. In addition to benefits such as an unlimited WhatsApp, streaming services included and digital security with Kaspersky Antivirus. This combination of connectivity, convenience and added value reinforces our commitment to delivering the best possible experience to users. This is another strategic step in the consolidation of Desktop as the main connectivity platform in the interior and near the coast of São Paulo. Now I'm going to pass on the floor to Bruno Leao.

Thank you, Falcao. Good morning, everyone. In the next slides, we're going to provide you more details on our financial results. On Slide 9, we have the main lines from the results with important highlights for the annual and quarterly variations. Desktop continues to have consistent growth throughout '24, levered by the ongoing expansion in the customer base and operational efficiency gains. The net revenue reached to BRL 1.13 billion in the year, a growth of 14% compared to 2023, reflecting the acceleration of our commercial strategy and the reduction of our churn. In the fourth quarter, we reached BRL 292 million, an increase of 11% year-over-year and 2% higher than the previous year -- than the previous quarter, sorry. There's a relevant potential to leverage more revenues within the B2C channel that's already built through the leverage of our products launched in 2024. Still following the pilot format such as streaming telemedicine, MVNO and antivirus. And also through the new B2B channel with customers that have a higher ticket and there are lower margin increases in OpEx and CapEx, representing one of the initiatives with the highest marginal ROIC in the company. We maintained our discipline when it comes to cost and expenses, which allowed us to have growth in our adjusted EBITDA, exceeding the growth of our net revenue, which reached BRL 579 million in this year, a growth of 16% over '23. And in the quarter, we had BRL 150 million and an annual growth of 11%. The biggest financial highlight in the fourth quarter was the company's adjusted net income all-time high, which reached a level of BRL 54 million, accumulated adjusted net income in 2024 of BRL 199 million, 33% above '23. This advance reflects the company's expansion, strict cost controls and greater tax efficiency with the acceleration of the incorporation of M&As. On Slide 10, we have details of our cash generation in 2024. Desktop achieved BRL 510 million in operating cash flow, which represents a conversion of our EBITDA into operating cash flow of 88%, an increase of 6 percentage points compared to 2023. The CapEx added BRL 423 million in the year with the biggest highlight being the BRL 195 million directed to the activation of new customers maintaining unit values. And it's important to mention also the payment of BRL 129 million in M&A installments, provided in our schedule. We ended the year with a cash flow of BRL 384 million, ensuring financial strength and the ability to continue investing in Desktop's expansion. At the top of our Slide 11, we bring the comparison of our cash generation in '24 versus '23. Our adjusted FCO (sic) [ OCF ] added to the CapEx reached BRL 105 million, an increase of 48% compared to '23. This increase was driven by three main factors: our EBITDA growth, increasing operating cash generation, improvement in the dynamics of working capital with more adjusted terms and suppliers, and a reduction in tax payments due to the acceleration of M&A mergers. On the other hand, we increased strategic investments, reflecting the company's acceleration. The main drivers of our CapEx were the expansion of the customer base with the higher volume of installations, investments in modernizing the backbones, data center and access networks, ensuring quality and scalability of our infrastructure, which were partially offset by better term management and CapEx suppliers. On the bottom part of the slide, we have details of our liability management movements performed in the year of 2024. So with the fundraising, reaching BRL 1 billion to refinance pervious more expensive and shorter debt, they resulted in a reduction in the average spread of CDI plus 2.7% to CDI plus 1.3%, and the extension of the debt from 4.2 years to 5.4 years. As a result, we ended the year with the greatest balance sheet robustness. On Slide 12, we have a more detailed vision of the composition and schedule of our indebtedness. We ended '24 with a net debt of BRL 1.46 billion, with a net debt to pro forma EBITDA ratio of 2.4x, which represents stability versus comparative periods. Our maturity schedule is well distributed with more than 65% of the obligations concentrated between '28 and 2031, ensuring that future maturities are manageable and do not impact Desktop's growth capacity. With this structure, we remain well positioned to maintain significant growth, ensuring liquidity, predictability and an optimized financial cost, focusing on generating value for our shareholders. Now I'll turn the floor back to Denio.

Thank you, Bruno and Andre. I would like to end this by once again thanking all of our customers and partners and shareholders as well as our 4,500 employees. Thank you so much for your time and attention. Now we'll move on to the Q&A session.

[Operator Instructions] Our first question comes from Camila Koga, Bradesco BBI.

I have two hear on my side. If you could just talk about the third -- the fourth quarter. And how we can think about this from now on? And the second is about the CapEx as you had more homes passed, but even for the CapEx on gross adds, that was a little higher as well. So if you could share the reasons for this and how you've seen this number now in the beginning of the year?

Thank you for your question. This is Andre Falcao. Here, when we look at this ticket vision, we had an occasional variation, but it's a positive perspective. We have a plan implemented that considers some adjustments for the anniversary of the contracts, restructuring to B2B as well to accelerate this and profitability also in our base, which should also be intensified with the evolution of some internal processes as well as a perspective for an update in pricing, considering a more rational competitive scenario we're facing. Besides this, we also have maturity in the portfolio with more high-end products and a new avenue for convergence as well that we should be exploring even more now. So the perspectives are very positive in this scenario.

And to add on to that, in regards to the CapEx, this is Bruno now. We've had many variations that were occasional variations in the fourth quarter, but that are important to clarify. In regards to the network -- the CapEx for networks, we add some new cities, which added on to the new ports. And in regards to the activation CapEx, there's also an occasional unit effect considering the variation of the dollar that got worse in the last quarter and got back to its previous level already. Then there's also seasonality in the end-of-year purchases where we can have prices that are better normally and terms that are better. So just as in the past, we performed purchases that were bigger in the fourth quarter, which, of course, included increase the maintenance and backbone CapEx, concentrating purchases of many different projects in this period. We continue to be focused on leading the technological advances in the sector, and we're preparing to have the capacity to service our customers with XGS-PON from 2026 onwards. And we also want to highlight that in the others line in CapEx, we had an occasional variation in the investments for the company due to the new headquarters for the company that represented about BRL 10 million.

[Operator Instructions] Our next question is from Mr. Luis Chagas from XP.

Can you all hear me?

Yes.

Well, here on our side, we have two questions. One is a follow-up of the arch issue. Could you guys talk about what the mindset is in regards to the price transfers this year? If you could give us some more details on when the schedule would be for this transfer. And the second is about M&A. I wanted to understand if you guys have already been looking at some bigger deals, if you could also talk about the negotiation with Vivo, if that's still active?

Well, thanks for the question here, Luis. But just to add on to what I also mentioned in Camila's question on the ticket in a very positive scenario commercially, an all-time high in sales for the company and also very efficient results, so we're growing in digital channels. And we're also seeing a trend in the competitive market with more rationality. So I think that's taking place very close to our markets, and that's in line with our plans. I won't get into details about this yet. On one side, we have the customer base, where we transfer prices following the contractual anniversary rules. And this is all in our schedule, but to not give out a guidance, I'm not going to get into more details. But then in regards to M&A, considering the challenge, macroeconomic challenges, the price of our shares. We still have been very disciplined analyzing opportunities that are inorganic, but even more selectivity when it comes to the quality and price of the assets. Besides our strategy that's focused on B2C and companies in surrounding areas that are regional leaders that also have a potential to accelerate our organic growth. We've also been looking at B2B companies that are capable of accelerating our growth in this avenue. In regards to the question about Vivo, we continue to listen to proposals, not only from this player, but any other strategic players that may come up with opportunities that are beneficial to shareholders, but we still don't have anything on the table. We're still focused on doing our work, delivering our growth with efficiency and that's what we're going to also deliver in '25.

[Operator Instructions] Our next question comes from Mr. Fernando Obata, Itaú BBA.

We'd like to explore the growth of the company? And if you could give us some more color on the B2B strategy? And then, of course, the expectations are Desktop Mais. What do we expect for this year, specifically in this sense?

Thanks, Fernando for your question. We're going to start off with MVNO, but this is one of the main levers in the company for growth. There was a soft launch of this service, which was important lab for us. And now we're ready to really advance with the MVNO and converging plans that are going to be explored in our acquisition, but also with our base. And then to be concentrated in the city of São Paulo, we have an important benefit we need to consider with management and logistics. That becomes a little less complex. So we're super confident with value creation for customers and shareholders. We start off with 60 cities, but we've been working on this in phases. And we have the capacity to advance in this volume of cities as well. So we're just taking a step-by-step approach to guarantee the quality and level of services that customers know they can find when it comes to Desktop. About the company's growth, our objective is to continue to lead organic growth in the country, when we consider net adds versus homes passed, but there's an important uptick. When we reach a structure that is robust in the commercial engines that we've been working on in the last 2 years, then our priority will really be the efficiency and quality, gearing towards growth that's rational and healthy. So we have the channels very well structured, and we're going to grow in the best and healthiest way possible when we think about the future. On B2B, we've had some structuring work done that was very important, especially when you consider the geography and understanding of how the distribution of our employees will be and how to build this team. We have a functional team that's been operating and B2B has a characteristic that's very specific with the funnel that's a little more long term. But we're already working on this, and the expectation is that we'll have some positive results. But within 2025, we should already accelerate this in a relevant manner. And our expectation is that if things work well as planned, we will advance with good level of speed. And if we have any friction in between, we'll advance anyways because what we're doing is really structural just as what we've done in B2C in the last 2 years, where we're really preparing a capacity to skyrocket in B2B. So when we look at this internally and externally, it's really positive.

[Operator Instructions] Our next question comes from Mr. Lucca Brendim at Bank of America.

I have two here. The first one is related to the CapEx. You've explored a bit of what we -- of what happened last year and how things should change now. But I want to look at this in a more structural approach looking ahead. I don't know if you guys have a specific guidance on this, but I'd like to understand if the CapEx level is pretty much this when we look at the full year, if there's a trend of a drop, maybe if you could give us also like a percentage of the revenue from a nominal perspective. But then the second is about the MVNO. If you could give us some details on how you've conducted the process? And did you guys have like a specific partnership with a special operator? Or did you do this separately or differently? Any kind of information related to this would be very positive.

Thank you, Lucca, for your questions. I'll start off with the MVNO one first. We operate MVNO through Surf and navigate through the TIM network. So this is our format and we use the same structure. Then we've surrounded ourselves by many internal processes to guarantee the best level of quality, and we're going to advance with this operation and our networks to guarantee the correct logistics, correct services for customers and the markets we start off within 60 cities all have a local service center for customer support. They're all trained and supplied accordingly. And so we're advancing in a very careful manner to ensure the quality, which is something that is nonnegotiable on our side. Then in regards to the CapEx trends, as I mentioned, in the fourth quarter of 2024, we had many different variations. And if we look at the year of 2024, it's a great baseline. For 2025, the mindset is pretty much similar to the mindset in 2024. That's the biggest focus, which is efficiency, and we've been investing a lot more energy from our team when it comes to efficiency initiatives and cash generation. So the mindset is pretty much the same. We're focused on investments that are greater with better risk return base. When we talk about this, first of all, we consider the expansions, the increases of network capacity, where we see a demand that's greater than our capacity. Then we also have some occasional investments in new cities where we really feel very comfortable in regards to the characteristics that are macroeconomic and microeconomic. And when it comes to activation, which is the biggest CapEx line, the idea is that we should actually keep our unit CapEx kind of offsetting any kind of salary adjustments to really improve the processes internally.

[Operator Instructions] Our next question comes from Mr. Gustavo Farias at UBS.

Guys, can you hear me?

Yes, we can hear you.

I have two questions on my side. First, about the outlook and expansion for '25. We saw you got back to expanding in new cities in Q4. And I just wanted to understand a bit of the expectation in regards to the expansion in regard -- especially related to homes passed. And the second question is related to all of the liability work and liability management you've done in 2024 with the prepayment of debt, changes in the debt profile. And I'd like to understand if you see space for a reduction in this leverage in '25 and especially if this is a strategic focus that you're considering in 2025 as well?

Well, thanks for the question. Gustavo, this is Bruno here. On network investments, as I mentioned, our mindset is still the same, prioritizing investments related to the expansion of the ports. But of course, we always look at opportunities for new cities. So we do have a specific cluster that we already have a very close infrastructure and our idea is to work on this even more in the next few months. So I think that will lead to a very relevant increment in the homes passed in the next quarters. In regards to leverage, we have an important movement that took place in '24 with fundraising that added up to BRL 1 billion and led to a reduction in the average spread of CDI plus 2.7% to CDI plus 1.3% and an extension of our term of the debt on average to 5 -- 4.5 (sic) [ 4.2 ] to 5.4 years, but we still see marginal opportunities to improve this even more when we consider our terms and the price of our debt. So these initiatives should help mitigate higher interest rate challenges in '25. In regards to leverage, our expectation is when it comes to the growth of our revenue and EBITDA, we really want to, as we go over time and grow, we want to deleverage the company.

[Operator Instructions] Our next question is in writing by Mr. Eduardo Vasconcelos at Teletime. And he says, Desktop's role is to launch a mobile phone service in all cities that offer fixed broadband. What are the intentions for expansion in 2025?

Thanks for the question, Eduardo. This is Andre Falcao here. And to add on to a bit of this topic, we started off with a converging offering in 60 cities, but there's a positive expectation to advance. We started off with the cities where we have stores already in customer support units. And then we're also testing our capacity for scalability. And we're working on these 60 cities because we're absolutely secure that we'll be able to work on this format with good margins and really understand adherence from the market so that we can work on all of the internal flows so that the customer will really have transparency and a fluid process. So this is not a limitation. It's not a geographic limitation. We're just working on the step by step to be able to respect the capacity to work on this with the greatest excellence. But we understand that the next steps are really to continue advancing in cities where we -- thank you.

[Operator Instructions] The Q&A session is ended. And we would like to pass on the word to the CEO of the company for his final remarks.

Thank you so much, everyone, for your time and attention. I'd like to highlight that Desktop has always been a company that was able to face challenging situations and always demonstrated resilience and perseverance to achieve its objectives. So we continue to look forward, paving the path to sustainable growth and ongoing growth. We're -- in the last quarters, we've gone through an important process to search for efficiency operationally and financially. And we intend to not only become the company that most grows and is a leader in the telecom consolidation market, but also that offers the best products that are most loved by customers with levels of excellence and investing strongly in technology, engineering systems and artificial intelligence and ongoing improvements in our processes and corporate culture, we believe strongly that we're setting the path that's promising. Thank you once again to all of our customers, shareholders and employees.

The Desktop earnings call is officially ended. We want to thank everyone for their participation. Have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]