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

Good morning, and welcome to Desktop's Third Quarter 2025 Earnings Call. Today, I am once again pleased to have the presence of our Chief Financial M&A and Investor Relations Officer, Mr. Bruno Leao, and our Chief Revenue Officer, André Falcão. I will start the presentation by highlighting the main results for this quarter, both operational and financial indicators. And subsequently, Bruno and André will bring a more detailed vision of numbers and factors that have influenced our performance. The third quarter was marked by strong operational and financial evolution with important advances in efficiency, cash generation and consolidation of the company's position in the São Paulo telecommunications market. Net revenue reached BRL 311 million, an increase of 8% when compared to the same period last year, driven by the increase in the customer base and the improvement in network penetration. Adjusted EBITDA totaled BRL 164 million, an increase of 11% when compared with the year-on-year and a margin of 53%, the highest recorded by the company since 2020. This result reflects a continued focus on operational efficiency and discipline in cost management. Adjusted net income was BRL 35 million, a result impacted by the still high level of interest, but which keeps the company at a solid level of profitability and value creation. Highlights for the quarter were the strong cash generation. Operating cash flow plus adjusted CapEx reached BRL 75 million, a significant increase of 187% when compared to the third quarter of 2024, a direct result of initiatives aimed at the operational efficiency and discipline in capital allocation. We ended the quarter with 4.8 million homes passed; 1,198,000 active accesses as well as 23,000 organic net additions, reinforcing the healthy and sustainable pace of growth of our base. In addition to the numbers, it is worth highlighting some important milestones of the quarter. On the technology front and in line with our permanent focus on offering not only the best products, but also the best services, we recently launched a new version of our self-service app. We have already surpassed 1.1 million downloads and reached the excellent score of 4.8 in the app stores in both Apple and Google, the best average score among all telecom operators in Brazil. Most importantly, today, we already have more than half of our customers using our app recurrently, improving their customer experience, bringing new revenues to the company and reducing our operating costs. On the B2B front, which is one of the company's revenue growth avenues, Desktop was one of the companies selected in the first management committee notice. And in the coming months, we will bring quality connectivity to more than 75,000 students in the public school system. On the financial front, we concluded in October the ninth issue of debentures in the amount of BRL 800 million, improving our debt profile and strengthening the company's capital structure. These advances show that Desktop continues to evolve on all fronts with efficiency, innovation and discipline, consolidating its role as the main regional telecom platform in Brazil. I now give the floor to our Revenue Director, André Falcão.

Thanks, Denio. Good morning, everyone. Let's now talk about the company's operating performance in the third quarter, which reflects the commercial consistency and execution discipline of the Desktop. We ended the quarter with 1.2 million connected homes, up to 2% from the second quarter '25 and 8% year-on-year, a result that reinforces the company's ability to consistently deliver growth through its various sales channels and to maintain efficiency in commercial management. Desktop maintains a solid and capital presence with 58,000 kilometers of network, 4.8 million household reach and operations in 200 cities in the interior and coast of São Paulo, consolidating its position as the main regional telecommunications platform in the state of São Paulo. In digital sales, we remain at a high level with a 56% share of the total sales, demonstrating the continuous advance of the digitalization of the customer journey and the efficiency of our online channels. Besides this, we continue to work to consolidate the B2B, which is a strategic avenue for the evolution of our business and the profitability of the base, generating real value for the customer and also for the company in a win-win relationship. These results demonstrate the company's ability to operate, discipline, efficiency and focus on profitability, keeping the customer at the center of all decisions. I now give the floor to Bruno Leao.

Thank you, Falcão. Good morning. In the following moments, we will detail more of our financial results. Net revenue for the quarter reached BRL 311 million, an increase of 8% when compared to the third quarter of 2024, reflecting consistent commercial execution. Adjusted EBITDA totaled BRL 164 million, an increase of 11% when compared to the third quarter of 2024, with a margin of 53%, the highest since 2020. This level is due to the company's focus on shares and profitability gains. Adjusted net income was BRL 35 million with a margin of 11%, still impacted by the high interest rate environment. On Slide 8, we bring a new view with the objective of showing in a clearer way the evolution of Desktop's quarterly cash conversion. Adjusted FCO (sic) [ OCF ] which basically purges financial revenues and expenses as well as CapEx suppliers totaled BRL 163 million, which represented a growth of 9% when compared to the previous quarter and 20% when compared to the third quarter of '24, sustaining a consistent pace of operational conversion. Adjusted CapEx, including the inclusion of the carryover payment of CapEx suppliers was BRL 88 million, representing 28% of net revenue and a reduction of 23% versus the second quarter of 2025 and 20% in the annual comparison, reflecting the greater selectivity in the capital allocation and the capture of operational efficiencies with emphasis on the lower level of purchases and the highest level of reuse of customer equipment. As a result, FCO plus adjusted CapEx totaled BRL 75 million, a significant increase of 187% compared to the third quarter of 2024 and 112% over the second quarter of 2025, demonstrating a significant improvement in cash generation and effectiveness of efficiency implemented throughout the year. On Slide 9, we'll show you the consolidated cash flow for the 9 months of 2025 accumulated. Operating cash flow reached BRL 436 million with a 92% conversion of adjusted EBITDA. In terms of investments, CapEx totaled BRL 385 million, mainly concentrated in customer installation and maintenance. This distribution reinforces the prioritization of investments directly linked to the revenue generation and sustainable expansion of the base. We also saw -- had BRL 49 million allocated to M&A payments and BRL 34 million related to debt service and interest payments, ending the period with BRL 353 million in cash. Slide 10 shows the evolution of the company's capital structure. Desktop's net debt, including bank debt, debentures and M&A installments ended in the quarter at BRL 154 billion (sic) [ 1.54 billion ], resulting in a leverage of 2.35% (sic) [ 2.35x ] of net debt to annualized pro forma EBITDA, showing a reduction compared to the previous quarter. When we add lease commitments, the company's broad net debt reaches BRL 164 billion (sic) [ 1.64 billion ], 2.5x annualized pro forma EBITDA lower compared to second quarter of '25. Composition of debt remains mostly concentrated in long-term debentures, 74% representing bank debt and 21% related to M&A obligations. New authorization schedule, the company -- amortization schedule, the company maintains a balanced profile, greater concentration between 2028 and 2032, which provides predictability for long-term planning. It's worth noting that the ninth issue of debentures in the amount of BRL 800 million was only completed in October. So the photograph presented here in the third quarter of 2025 does not yet reflect the effect of this operation nor the other liability management initiatives, which are underway. For this reason, the liability management chart should be interpreted pro forma, considering the lengthening of the debt profile and the cost reduction that the new issuance, together with the prepayment of the sixth issue of debentures will provide. The average spread of the bank debt falling from CDI 8% (sic) [ CDI plus 0.8% ] to CDI plus 3% (sic) [ CDI plus 0.3% ]. These actions will strengthen the company's commitment through a solid, sustainable capital structure aligned with its growth plan and with financial discipline and value creation. Now I'll turn the floor to Denio.

Thank you so much. And before closing, I would like to thank all the employees, customers, partners and shareholders who continue to trust Desktop and contribute to the company's success. We remain firm in the journey of offering the best connectivity experience and building an increasingly solid, profitable and innovative company. Thank you very much. We now move on to the question-and-answer session.

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

I have 2 questions. The first is regarding the EBITDA margins. We saw an increase -- important increase of margin. And I would like to understand from you how you are seeing this moving on. Do you think it will make it easier to have operational leverage moving forward? I know this was on your agenda. Second question is about CapEx. Just to understand how you understand the perspectives for the fourth quarter and if you see a smaller or lower CapEx for the second semester and CapEx for 2026.

Thank you for your question, Luis. Until we have a more favorable macroeconomic scenario, we're going to continue focusing on efficiency and generating cash more than on growth. There are lots of initiatives that are maturing, which are important drivers for margin improvement and cash flow. In terms of revenue, we were able to expand our portfolio and include more streaming and B2B products. We have already seen positive impacts between the quarters in sequence. And we continue focus on reducing churn, which really impacts the B2C revenue positively. In terms of costs and expenses, besides renegotiating contracts, we also have implemented new systems, which has been very essential to unlock operational efficiencies. The CapEx issue regarding network CapEx, we did one relevant city this year, which had a risk of -- positive risk on returns -- return on risk, and we're seeing good results there. Then we will focus mainly on broadening imports and investing in places where our capacity is lower than demand. In terms of client CapEx, we also reduced -- positively reduced our use of equipment, focused on improving on the revenue for B2B and other products and then -- and increasing clients for B2C.

[Operator Instructions] Our next question comes from Mr. Leonardo Cintra from Itau BBA.

Two questions on my end. First, I would like to go over EBITDA margin with you a little bit, especially adjusted EBITDA margin, highest level since 2020. Question is just if you see this as sustainable, we can count on the margin moving forward. And if we can think about this or consider this a good margin for the next quarters? And the next question is a quick question you might be able to comment on if you're able to mention possible news which came out about a deal with Claro. Any news on timing for this decision or if you can update the market about this, it would be great.

Leonardo, good morning, Denio here. I'll answer you about the Claro deal, and then Bruno will answer about the rest, okay? So about Claro, as I usually say, we are always open to assessing opportunities for the best returns to shareholders. We've been over this in the past and specifically related to Claro, there are conversations underway, but there's nothing concrete. If there's any evolution on this subject, we will let the market know through the correct channels, okay?

Bruno here. About margins, we are always working for gains in efficiency and elevating margins. So in 2023, we saw a significant evolution, especially with the capture of synergy. We see that 2024 and '25 bring greater gains, and that's where we'll continue to focus moving forward.

If you could just -- if I could just follow up on one of those questions. We see a net adds of 23 for the quarter, and there was an operational challenge, which was more difficult during the second quarter. My question is if we could consider this a more normalized level, looking at the third and fourth quarters, given that churn has also improved? Just to understand how we should think of net adds for the next quarters.

Thank you, Leonardo, for the question. André Falcão here, take advantage of that question and also talk about churn and talk a little bit about net adds growth and churn. When we discuss growth on our end, we have demonstrated our capacity to grow in a healthy and sustainable way, even in a scenario where our partners have retracted in the market. We could even be growing more than we grow. But because of an internal decision, we are adjusting our growth rates given the macro scenario and until we have a greater predictability, we are able to focus on efficiency and cash flow. So the message is we're going to continue to adjust this in a confident way. So we don't have any impact on the ecosystem that we have built. But the focus is efficiency and cash flow generation. Besides this, we are accelerating B2C and B2B, which obviously brings results -- well, reflects on the results of the second -- of the third quarter, but also brings potential for growth. So with this, we're able to generate revenue with levels of investment, which are controlled. About churn, we saw important growth of churn and dealt with some issues until the month of July and saw a structural improvement in August. Central to the company involving all of the business areas, CFO, operations, have a multifunctional working group here, which is continuous and supported on a data-driven model. We have been able to work on the risks and initiatives of association. So we're confident this is a mature issue, a mature subject and with good perspectives for the next quarters.

[Operator Instructions] Our next question comes from [ Rafael Freitas from the LYNK ].

Can you talk about strategies for the company for reducing churn, given that in the current semester, we've already seen improvement on this, given -- what is a doable target given the dynamic in the situation?

Thanks for the question. André Falcão once again. I commented on churn, but it's been very clear that we have more selective entrance of new clients. There are processes where we assure that the client is healthy or there's no delinquency. We have also made changes to the rules. And this is something which helps us to focus much more on quality than volume for volume. As I said, we could be doing more. So additionally, these initiatives are for all areas. We have also moved forward, including with our capacity -- with a more matured capacity for understanding. So we can predict deviations and risks associated to our operations. So we are confident that the evolution of churn is structural. About the market, we are confident with the market, and we understand that our rhythm and capacity for -- so we understand that it's more of a market issue than our capacity to navigate this. We have made it clear that we are able to evolve well. These channels are very important to keep the client close to us and assure confidence to clients. We will continue moving forward with what we consider predictable and comfortable.

One more question from Rafael Freitas from the LYNK. So can you talk about the company's strategies for reducing churn given that in the current quarter, we've already seen improvement in this metric. What do you think is a doable target considering the demands for this in the market? We've also seen a drop in CapEx for installation and net adds from 500 to 400. What is this strong difference? Any structural measures were taken that caused this? Can we consider this new price of BRL 400 as a new reality for projecting CapEx?

I think churn has already been answered about CapEx. As we said, the second quarter, we had systemic issues where there was an increase of consumption in the services. We also had a task force to deal with the backlog. And we're not buying, and -- which also has a positive effect on unit CapEx for the third quarter.

[Operator Instructions] The questions-and-answer session will now be closed. We will pass the word to the CEO of the company, Mr. Denio Alves Lindo, so he can officially make the final considerations and close the call.

Thank you, everyone, for your attention. I would like to say we continue to grow sustainably and in a controlled manner. And in this macro, challenging is to strengthen the cash flow generation, and that's what we are delivering. We are occupying new services and scaling up our pathway as we decrease CapEx. We continue to bet on technological evolution with better use of technology and AI tools and focused on client experience. Thanking our shareholders and clients and a strong embrace.

The Desktop conference for the third quarter results is closed. We would like to thank you all for your participation and wish you a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]