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

Good morning, ladies and gentlemen. Welcome to the Desktop earnings call to discuss our earnings for the second quarter of 2026. This earnings call is being recorded and it can be replayed through the company's website, ir.desktop.com.br. The presentation is available also for downloading. [Operator Instructions] Before we proceed, we would like to say that the prospects are based on the beliefs and assumptions of the company's administration and the current information available to the company. These declarations can involve risks and uncertainties as they are related to future events. They depend on circumstances that may or not occur. Investors, analysts and journalists should consider that events related to the macroeconomic environment, the market and other factors can make results differ materially from those listed in certain statements and perspectives. In this conference, we have Denio Alves Lindo, the CEO at Desktop; Bruno Leao and André Falcão. And I would like to pass the word on to Mr. Denio to begin the presentation.

Good morning, everyone, and welcome to the earnings call for the second quarter at Desktop. Today, I have the presence of Bruno Leao, our Financial Director for M&A and Investor Relations; and André Falcão, our Revenue Director. We want to start off with the highlights in the quarter operationally and financially, and then I'll pass the word on to André and Bruno for the results. The results in the second quarter confirm with numbers, the agenda we've been reinforcing throughout the last quarters, profitability, discipline in capital allocation and an increase in operational results into cash. We ended the quarter with 4,000,860 (sic) [ 4,860,000 ] homes passed and 1,200,000 homes connected. We also advanced with the profitabilization of the base with the expansion of additional services and accelerating the convergence and B2B avenues. With this, the ticket reached BRL 102, a growth of 5.4% in the annual comparison. And these are some of the main factors that justify the growth of the net revenue by 8% in regards to the second quarter of 2025. And the adjusted EBITDA reached this amount, a growth of 12% in the annual comparison, once again, above the growth of our revenue with a margin of 54%, an expansion of 2 percentage points. Our adjusted net income was BRL 29 million in this quarter, and this was still impacted by a higher level of financial expenses with the high rate of Selic and IPCA. And the main highlight in the quarter was cash generation. The FCO plus adjusted CapEx reached BRL 97 million, an increase of BRL 67 million compared to the second quarter of 2025. Finally, the higher cash generation was translated directly into an improvement of the capital structure. We ended the quarter with a leverage of 2.2 -- 2.21x, sorry, a reduction of 0.3x compared to the second quarter of 2025. Overall, the second quarter reinforces Desktop's ability to balance growth, profitability and cash generation while also preserving financial strength and solidity in the long term. Now I'll pass the floor on to André as he provides details on our commercial performance in the quarter.

Thank you, Denio. Good morning, everyone. We continue with the consolidated geographic presence in the interior of the state of Sao Paulo with 58,000 kilometers of networks, 4.9 million households serviced and presence in 200 cities. In line with what we've been mentioning in the last quarters, we're not performing new market openings due to prioritization of our cash generation, so our coverage remains stable. We ended the quarter with 1,200,000 homes connected, a growth of 2% compared to the second quarter of '25 and practically stable if we were to compare with the first quarter. When it comes to organic net adds, we recorded approximately 6,000 net disconnections in the period. We were able to keep throughout the quarter the same criteria that we've been applying since the beginning of the year, calibrating the pace for new activations based on customer quality, channel efficiency and returns on capital and not based on volume at any cost. Desktop has a mature and resilient commercial platform, fully capable of accelerating sales whenever we deem appropriate. Both indicators on the side show the direct result of this choice. The first is the channel. Digital sales reached 71% of the total amount in the quarter, our highest level in history, with an increase of 15 percentage points compared to the second quarter of 2025. This is an indicator that matters beyond commercial efficiency. Digital sales historically attract customers with lower delinquency rates, and that translates into a healthier base and better cash generation throughout our contracts. Then secondly, the average ticket, which ended the quarter at BRL 102, a 5.4% increase in the year-over-year analysis. This advance is mainly due to three movements, a complete and structured commercial portfolio associated with a customer profile that's more adherent to higher value-added plans. Then we also had the ongoing advance of profitability of our customer base, adding services such as streaming, antivirus and MVNOs, among other solutions. And third, a growing weight or significance of our customers on B2B, which continue to present excellent levels of return on capital for the company. These initiatives increased revenue per customer while strengthening the relationship throughout the contract. Overall, the quarter has an operation that grows revenue by quality and not volume, a healthier base, more efficient channel and better returns on invested capital. Now I'm going to pass the floor to Mr. Bruno Leao as he provides details on the company's financial results.

Thank you, Falcão. Good morning, everyone. Well, now we're going to provide details on the main financial earnings in the quarter. Slide 7 shows the evolution of the three main earnings lines, our net revenue, adjusted EBITDA and our adjusted net income. When we begin with the net revenue, we closed the second quarter with BRL 322 million, which was an increase of 8% compared to the second quarter of '25. This advance was driven above all by the management of the average ticket through different measures to monetize our base and launch new products and also the gradual maturity of initiatives such as B2B and MVNO and also the growth of our customer base in the annual comparison. The adjusted EBITDA totaled BRL 172 million in the quarter, which was an increase of 12% compared to the second quarter of '25, once again, at a faster pace than the revenue. With this, the adjusted EBITDA margin reached 54%, a 2 percentage growth in the year-over-year comparison. This performance is mainly due to three initiatives: drop in spending on third-party services, which includes administrative providers, legal advisers and technology; a leaner organizational structure, optimization of our workforce and the reduction of investments in advertising and [ propaganda ], which also fell in absolute terms. In regards to the adjusted net income, the quarter reached BRL 29 million in total with an adjusted net margin of 9%. The 17% drop compared to the second quarter of '25 is mainly due to a higher volume of financial expenses, reflecting the higher level of the yield curve. Part of this impact was offset by the operating gains that were already captured in the EBITDA. Slide 8 presents the evolution of the company's cash generation. The adjusted FCO excludes the financial results and CapEx suppliers and added up to BRL 174 million in the quarter, 16% higher compared to the same period last year. Now the adjusted CapEx added up to BRL 77 million in the quarter, which is equivalent to 24% of the net revenue. This level represents a drop of 35% compared to the second quarter of '25, and also a reduction of 16 percentage points as a proportion of the net revenue, which provides evidence of the growing discipline in our capital allocation. This behavior directly reflects the slowdown in the pace of new activations, the greater reuse of equipment and a more efficient allocation of investments. As a result, the chart on the right combines FCO and adjusted CapEx, and it shows a cash generation of BRL 97 million in the quarter. This number represents an expansion of BRL 67 million compared to BRL 31 million in regards to the second quarter of '25, and it also represents some advances compared to BRL 54 million in the first quarter of this year. Slide 9 also shows the company's consolidated cash flow. And this time, unlike the previous pages in the accumulated view of the first half of '26. From an adjusted EBITDA of BRL 347 million in the first half of the year, the adjusted operating cash flow added up to BRL 314 million, a conversion of 91% of the adjusted EBITDA. In the CapEx block, investments added up to BRL 163 million in the semester, which was equivalent to 25% of our net revenue. And this volume is 32% lower than what was registered in the first half of '25. So a drop of 15 percentage points if we compare with the net revenue. Most of this is directed to customer equipment and services with BRL 102 million, 63% of the total CapEx. Our network represents 15%, information technology represents 10% and other investments complete these remaining 12%. We also registered BRL 53 million in M&A payments referred to portions of acquisitions completed in previous periods. In our financing, our cash consumption was BRL 83 million, mainly reflecting our variation in the debt and interest and dividends paid during this period. With this, we end the semester with BRL 492 million in liquidity. To wrap up, Slide 10 shows the company's capital structure. Desktop's gross debt, including banks and M&A obligations ended the quarter by BRL 2.013 billion. If we consider the cash equivalent position, BRL 492 million. And if we were to consider -- we ended at 2.21x net debt to annualized pro forma EBITDA, drop of 0.3x compared to the 2.51x in the second quarter of '25. And 83% represent the financial debt and 16% M&A obligations, maintaining the profile concentrated mainly in the long-term insurance. As for the pro forma amortization schedule, the profile remains balanced, only 12% of our total obligations will mature in '26 with a higher concentration between 2031 and 2032. Well, it's also worth noting that the average spread of our financial debt remained at CDI plus 0.4% in the quarter, well below the CDI plus 1.1% observed in the second quarter of '25. This result is due to the initiatives for liability management, which we performed in '25, which made it possible to extend the debt profile, reduce its average cost and really strengthen the company's capital structure. So with that, we end the quarter with a solid financial position, adequate liquidity and also a declining leverage and an increasingly efficient capital structure. Now I'm going to pass the floor back to Denio.

Thank you, Bruno and André. Before we wrap up, I really want to reinforce that the second quarter confirms our consistency in strategy. We delivered more revenue, more margin and above all, a lot more cash with a more qualified customer base and a more solid capital structure. We continue to be prepared to accelerate commercially when we believe it is the most appropriate time without giving up on discipline in our capital allocation and commitments to sustainable value creation. I want to thank you once again, thank all of our employees, customers, partners and shareholders for commitment and trust. Now we'll open up for Q&A. Thank you all so much.

[Operator Instructions] Our first question comes from Cesar at Santander.