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

Good morning, ladies and gentlemen, and welcome to the Desktop conference to debate the results regarding the first quarter of 2025. This conference is going to be recorded, and the replay can be accessed through the company's website, ri.desktop.br. The present is available for download. [Operator Instructions] Before moving forward, I would like to say that prospective statements are based on the assumptions and beliefs of Desktop management and the current information is available for the company. Those records could involve risks and uncertainties as they have to do with future events and they depend on the circumstances that might or not occur. Investors, analysts and journalists should take into account that events related to the macroeconomic environment, the segment and other factors that can make that the results are tangibly different from what has been declared on the previous statements. Mr. Denio Alves Lindo, CEO of Desktop and is here today as well as Bruno Leao, the CFO for the company; and Mr. André Falcão, COO of the company. And now let's give it up for Mr. Denio, who is going to start the presentation. Mr. Denio, the floor is yours.

Good morning, everyone, and welcome to the teleconference of the first quarter results for Desktop. Today, I have the pleasure of having a Financial Director, M&A Manager, Mr. Bruno Leao as well as Revenue Director, André Falcão. I'm going to be starting this presentation highlighting the most important results addressing the most important operational indicators as well as financial indicators that will demonstrate our performance and our progress throughout the time. Next, we're going to have a more detailed perspective on the figures and the most important factors that have an impact on our results to deep dive into the company's performance in this quarter. In the beginning of 2025, facing a more challenging macroeconomic environment with global uncertainties and high tax rate, we adopted a conservative stance and resource allocation. We've become more diligent in terms of our areas as well as the quality of our new clients. We put our efforts into increasing market penetration in areas in which we have infrastructure so as to maximize our operational potential as well as our ROI levels. Even though we have a more challenging scenario, we were able to preserve our leadership in terms of [indiscernible] adherence. In terms of players in the market, Desktop has presented the best use of our network, which reflects our commercial strategy and how we serve in our coverage. In the first quarter of 2025, we started work in the city of Ribeirão Preto, the eighth largest city in the state of São Paulo with about 600,000 inhabitants and more than 13,000 companies, small and medium size. And now we're getting to the 20 largest cities in the countryside of São Paulo. Just reinforcing our local plans before having the city has similar conditions to Desktop regionally, locally and historically very successful, the market in Ribeirão Preto is turning out in terms of rising demand in the corporate world. And we're focusing on that and we have a plan to capture incremental revenues. Now let's go to the next slide in which I would like to highlight that we're standing out as we're able to deliver consistent growth. At the same time, we're going to ensure superior quality in providing services to our customers. The most important figures in this quarter goes to show that, that demonstrate a healthy growth when faced with this complex scenario and macroeconomic conditions. We've grown 10% a year in the net revenue, which goes to show that our adjusted EBITDA rate presented a higher growth than the net revenue growth, which shows we're growing operationally, controlling our costs as we strive to do. And the adjusted net profit was 5% below the previous year quarter. It's important to highlight that we have -- we do a reprofiling of our debt, and we did that the entire year last year, reducing the number -- those numbers in the company. With the conversion of the EBITDA and FCO above 80%. So we've had success in converting this into operational cash in a consistent manner, creating actual value to our shareholders. When it comes to operational aspects, we also had significant advances. We expanded our coverage to almost 4.7 million homes passed with about 1,000,200 already have connected customers. In the quarter, we added 28,000 new net customers exclusively organically, knowing that regardless of macro issues and the fierce level of competition, we've continued to have robust demand for our products and services, more than isolated numbers. And we can really highlight the Desktop has to deliver solid, robust, sustainable growth with discipline, maintaining profitability, cash generation and ensuring returns to our shareholders. Now I'll pass the floor to our Revenues Director, André Falcão.

Thank you, Denio. Good morning, everyone. I'll talk a little bit about the evolution of our portfolio with the recent launches carried out and subsequently, our operating results for the first quarter of '25. Now in May '25, we present an innovative portfolio designed for the present and prepared for the future. With this, we left the standard model adopted by the market and started to deliver real choices. All plans have Giga speed and cost the same amount, allowing each customer to choose for what makes the most sense for their lifestyle. With this news, the Giga Gamer and Giga Black also gained the new Giga Home Office, Giga Sports and Cinema and Giga Family. The only difference in the pricing is due to the Giga Black that adds other services and benefits with all of the Giga plans combined, positioning itself as the most premium plan available in the Brazilian market. All the Giga plans have WiFi and dedicated service as well as an antivirus for 3 devices. And along with these new Giga plans with the Disney+ is also going to be part of the company's portfolio and it can be added to any available plan. Now moving on to our results. From an operational perspective, we also have a geographic presence that's becoming even greater and more strategic. We reached 200 cities serviced with a network of more than 57,000 kilometers of network, which gives us scale, flexibility and speed in the implementation of these new markets. It's important to emphasize that Desktop's strategy continues to be -- to seek the increase of the penetration of the network that has already been built to capture efficiency gains and maximize the returns on investments made in previous quarters. However, in addition to this strategy, the company delivered expansion projects in 6 new cities during the quarter. And it's important to highlight that with the exception of Ribeirão Preto that was already mentioned by Denio, the other 5 cities opened represent small projects, essentially aimed to increasing the density of our coverage network, filling gaps in São Paulo without significant changes in the commercial dynamics. We reached 4.7 million households passed. And within this, the number of connected homes grew 11% compared to the first quarter of '24, adding up to 1.16 million customers, demonstrating the strength of our organic expansion model, supported by exceptional technical quality and service. The net adds, we delivered 28,000 organic customers in the quarter, in line with the same periods in previous years. Another relevant point is the average ticket of our base. As we usually explain, even with the country's macroeconomic situation being more challenging, we've been able to pass on the price to our customers, remembering that the impact always happens in a vintage way according to the customers' birthday month at the base. We had a clear improvement as the customers aging advances, customers with 13 to 24 months in the company have an average ticket of 6% higher than those up to 12 months in the company, reaching an average ticket above BRL 104. Now the average sales ticket that is the value of the new contract was stable at BRL 99, a little higher than the same quarter last year, indicating an improvement in the mix of new clients within the portfolio launched last year. So from an operational perspective, we're very consistent growing our base, maintaining tickets and ensuring predictability and financial health for the coming quarters. Now I'm going to pass on the floor to Bruno Leão.

Thank you, Falcão. Good morning, everyone. In the next few pages, I'm going to be providing some more details on our financial results. On Slide 10, we summarized what Desktop's trajectory has been since the year of our IPO, delivering consistent growth with significant profitability gains, consolidating its position as one of the main players in the telecom sector in Brazil. When we look at the net revenue, we see consistent progress over time as a result of the combination of increased penetration in the existing network, opening new cities and acquisitions. Desktop reached a net revenue of BRL 295 million in the first quarter of '25, a growth of 10% compared to the first quarter of '24. The adjusted EBITDA exceeded our net revenue growth in the quarter. It rose 11% versus the first quarter of '24 and reached BRL 153 million with a margin of 52%, the highest ever since the IPO in 2021. This shows that the company has been able not only to deliver growth, but also to preserve and even expand its profitability as well as preserve and expand its profitability overall. The large margin evolution over time reflects the maturity of our new organic growth areas and the synergies generated in the acquisitions with focus on the adjacencies where there is a great opportunity to capture operational efficiencies. The adjusted net income was BRL 41 million, 5% below the first quarter of '24 due to the increase in interest rates, which had a negative impact even with the positive contribution of the reduction of spreads through new funding in 2024. On Slide 11, we have a panorama of our cash generation and use in the first quarter of the year. There was a cash flow of BRL 124 million of operational cash flow with a conversion of 81% of our adjusted EBITDA. It's the eighth consecutive quarter above 80% conversion, which reinforces the consistency and predictability of Desktop's operating cash generation. In regards to the investments made, the total CapEx was BRL 156 million, distributed mainly in the expansion of the access network added -- which added up to BRL 13 million with a unit CapEx -- it's very competitive and under control in line with our search for greater efficiency, customer installation that added up to BRL 55 million, keeping a cost per addition in line with the last quarters. Maintenance was BRL 21 million invested to ensure the long-term maintenance of our service and the network quality differential. And besides this, there were BRL 13 million in payments related to M&A transactions as part of our financial schedule. We ended the quarter with BRL 337 million in cash, maintaining solid financial structure with room to continue investing diligently in organic and inorganic projects with the highest returns. Finally, it's worth reinforcing how our indebtedness is structured today, both in terms of composition and maturity profile. Most of our debt is financial and represents 72% of the total. The remaining 37% is divided between M&A installments and leases. Our net debt reached BRL 1.57 billion with a leverage ratio of 2.6x annualized pro forma EBITDA. Another important point is the debt amortization schedule. We had a very elongated and well-distributed profile over the next few years with only 12% of the bonds maturing in '25 concentrated in M&A payments. So to summarize, Desktop has a healthy balance sheet with controlled leverage, a good cash position and debt with extended maturities. This gives us the security we need to keep our growth strategy and to face different economic scenarios. Now I'm going to pass the floor back to Denio.

Thank you, Bruno and André. I want to thank you all once again, our customers, partners, shareholders and our 4,500 employees. Thank you for everyone's attention. I will now move on to the question-and-answer session.

[Operator Instructions] Our first question comes from Luis Chagas of XP.

On my side, I have two questions. My first one is related to leverage. And we saw it's going to be increasing about 2.5 to 2.6x. And the question is, how are you looking at this trajectory for '25 and so on? And the second is about efficiency. We saw you guys had an improvement in the EBITDA margin. And I think there was an improvement in the gross margin. But on the other hand, the SG&A went up 20% year-over-year compared with the first quarter last year. And my question on efficiency is what led to this improvement in the gross margin? And how are you considering this level of EBITDA ahead? Should we imagine this level in the next quarters? Or do you have any other initiatives for efficiency that would maybe consider an expansion in the margins up ahead?

Thank you for the question. This is Bruno here. Starting off with the second one in regards to the efficiency topic. Considering the macro scenario that's more uncertain and challenging, we've been investing a lot of energy with our teams on efficiency. We've been working on renegotiating contracts, automation of our systems, and we're reaching the maturity of some systems that are implemented. And also the shift in management structures that are lighter, reinforcing our essence and our speed as an ISP. And the main levers for synergy and maturity inorganic growth were delivered between 2022 and 2023. We have been following along with a lot of discipline. We can become more profitable as we've done in 2023, going from a margin. So despite all of this work in fixed broadband, we can still see that there's a lot of opportunities for new B2C services and B2B that should lock in more value for the built network to the company. About the leverage and cash generation, we've kept the EBITDA conversion in operational cash above 80%. We've been keeping this level in the last quarters. And in regards to the CapEx, we've been keeping up the unit costs in line with this in the last quarters for expansion of the network and also new customers. The maintenance CapEx was also in line. The biggest negative delta in the first quarter was [indiscernible]. In the second half and the end of the year, due to the closing of the targets of the suppliers, we were able to capture better negotiation in price and terms. The payments are concentrated in the first quarter, as you can see in 2024, where this line was negative and positive in all the other quarters. In the cash flow for funding, we have a challenge of higher CDIs, even with this offset by smaller spreads in the negotiation of the debt. Despite most of the work being done, there is still some opportunities to reduce this spread even more. On the efficiency measures that are implemented and prioritizing, we are being optimistic with the improvement of the cash allocation and also the EBITDA impact.

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

Please talk about the evolution of the churn and how you're looking at the pricing environment. Is there space for an increase of ticket acquisition?

Thank you, Gustavo. This is André Falcão. As we talk about the competitive scenario and the ticket, we're still optimistic with the ticket perspective in the company and comfortable with the competitive scenario, which is in line with what was expected. We have a healthy ticket for new customers, but also for mature customers. The new customers [indiscernible] portfolio and services as we presented today, and we've been able to pass along the prices with the mature customers. And then we also had a one-off challenge that generated a friction above expected and higher churn, but this was offset by [indiscernible]. And we had a -- there was an impact that was occasional in the ticket that should be still impacting the second quarter, but without any effect for the second quarter. So we have a one-off effect, but there's good perspectives if you look at the ticket scenario, what we've been doing internally considering the portfolio and our capacity to generate value.

[Operator Instructions] Our next question is from Leonardo [indiscernible].

I want to explore two new questions here. The first one you guys really highlighted, which is the company's focus on the installed base as a factor for growth organically, and you reached 28,000 net. But I want to understand if you guys consider space for this growth pace from now on, even getting into cities that are maybe a little more intense such as Ribeirão Preto. And I want to also know about the environment that's challenging and if you guys have been able to transfer prices and how we should consider the top line in the next quarters? Would it be more levered by volume or by the price transfer and price increase strategy and policy?

Thank you, Leonardo. We'll start off backwards to go straight into this topic. But on passing prices along, even in this challenging scenario, we have been able to transfer prices and we've been working to have a scenario that is more predictive on the level of friction per customer. So we've been able to understand this with greater precision and understand which customers we can increase prices with greater ease or those that may generate friction and which ones we should continue to advance with and be able to have a price increase. But we kept our pacing with an increase in the gross pace, impacting -- offsetting the occasional churn impact that I mentioned. So amid this macro scenario we're experiencing, we should move in a more rational way in the short term, prioritizing the efficiency and quality to the detriment of searching for volume at any cost. However, with the entire commercial ecosystem prepared for a quick acceleration moment. So it's a moment where we're going to prioritize value, generate new products, have more profitability in our base and a more positive scenario considering the ticket over time. So on the new city topic here in Ribeirão Preto, we're being very careful about these new cities because we understand we have a lot of opportunities in the current network and also considering the macro scenario. [indiscernible] entrance into this new city, Ribeirão and initially, we've had excellent results above the historical average of occupation for launches in previous years. This is valid to Ribeirão and the other 5 cities. From the 6 cities we launched, 5 are above the historic curve, and we've been able to profitabalize these new ports and also profitabalize the existing ports in our network, and we still have a lot of opportunities. So we're comfortable when we look at this. But in the short term, we're prioritizing the efficiency, quality and value.

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

There's just one more here. If you could give us an update, when we talk about products on the MVNO operation and how you guys have been seeing this evolve? And what's your mindset up ahead for the entire sector?

Thank you for the question, Gustavo. We've advanced, as I mentioned, we said we were going to do this in a very scheduled manner because we needed to guarantee a level of excellence and quality at Desktop. So we advanced to 60 cities in this acquisition. These are cities where we have a store, and we can guarantee the best logistics and quality of the services and in a way where it can really be a smooth journey for the customer. We've advanced and learned a lot with this new product. And we're close to in the next few months, starting to advance also and look at the base. So we had a positive perspective and a base of more than 1 million customers. And we have this opportunity also to -- that we're segmenting and setting so we can understand how to generate some specific offers that can generate value to the customers. And so we see that we have an MVNO. So it's not something that's going to change our thesis or dynamic, but it does generate real value. And over time, it's going to generate more revenue than it generates today. So we see the MVNO, the B2B and the evolution of the portfolio with new products. We just updated our portfolio, and we're already prepared for the future. So we bring in this mix for products with high value. And with this, we can generate revenue over time and also customers that have more products and services with us are going to be a lot more protected with less risk of churn. So it's a very positive relationship, and we should be exploring this a lot. This is our focus. We want to generate efficiency and value. Always looking at quality as well. So we're betting on this a lot.

Perfect. And a follow-up here. Thinking about the discussion of products. You guys have been structuring yourselves more and more for the B2B scale as well. So could you talk about this a little bit?

On B2B, we had a first quarter that was positive in line with the plan we had set. And our plan here is very ambitious. If you look at this business unit, and we are at a moment where we went from B2C in the last 2 years, structuring the fundamentals and now we have a very positive perspective. Internally, we're going to -- we have an important ambition, and we really bet that B2B will generate a lot of value to the company in the next quarters.

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

Thank you all for your time and attention. I want to finish by saying that despite a more challenging macro scenario, we continue to grow at levels that -- there are still opportunities for growth in the B2C market as well with a focus especially on the profitability and the profitability of the networks that are already built. [Audio Gap] [Statements in English on this transcript were spoken by an interpreter present on the live call.]