NOS, S.G.P.S., S.A. (NOS) Earnings Call Transcript & Summary

Hello, everyone. Thanks for joining NOS Second Quarter 2025 Results Conference Call. We'll have a presentation followed by Q&A, as usual. But this time, we'll start with Manuel Eanes, who is the [ Ex-com ] member in charge for B2B. He will go through some slides on Claranet Portugal to give you a bit more color since this is the first quarter that we are actually consolidating the company. Then Luis, our CFO, will go through the rest of the presentation before Q&A. I'll now hand you over to Manuel.

Thank you, Pedro. Hi, everyone. I'd like to give you a quick update on Claranet and to explain why we believe that we have now on IT a much bigger and better growth engine. The first note is that the Claranet 's acquisition boosts NOS's exposure to a 4x larger and faster-growing market. Basically, the -- we estimate the telco market in Portugal to be -- the B2B market in Portugal to be worth EUR 1.1 billion and the IT market in Portugal to be worth around EUR 4.6 billion with basically much, much higher structural growth. We believe that this growth is possible to basically by driving expansion in 3 key purchase areas where either we have significant competitive advantages or have a high growth potential. We'll see that in the next page. We can -- we'll be able to reinforce our position in managed services and in professional services as well. Actually, basically, we doubled the size of our IT services business with the acquisition of Claranet. And we also believe that even the resale part of the business is key in the sense that it puts the NOS Group in the center of the deal flow of the key manufacturers in Portugal of hardware and software, and that presents a very relevant opportunity for services growth as most of the manufacturers will tell you. The second is that IT brings -- or this acquisition brings relevant scale and a full breadth of not only solid offer partnerships and talent to our IT business. First of all, Claranet brings the set of practices that we aim to be present in, in the IT arena in the full breadth. So it is a great way to structure the way we look at the IT business and the practices of cloud and infrastructure, applications, security, workplace, data and AI and third-party software. We believe that these are the exact arenas where we want to be present, where we believe we have the synergies and the competencies. And we believe that we now have the full breadth with which to address the market. The second is that we are as a group now, very relevant to a number of key technology partners in this market. The transversal partners of Microsoft, HPE and HP and the practice-specific partners of Cisco, AWS, Cloudflare, Dell, Adobe, EasyVista, Fortinet, Palo Alto and Google. I believe these are very relevant names in the technology arena. And I believe that they all regard the NOS Group as a relevant partner in Portugal. The third note is that we have now as a group, a very relevant scale and a very relevant competence. We have 19-plus FTEs managing professional and managed services in IT in Portugal, a very large engineering team and over 200 cloud certifications with which to help our Portuguese customers address their digital transformation needs. We believe that we -- with this acquisition, we have very relevant growth levers to pull. First of all, we have an increase -- actually a very significantly increased sales footprint in enterprise and mid-market, which crossing with a full breadth of IT services brings a full potential that is very relevant for the future. The second is we have practices in our portfolio, namely cloud, cybersecurity and data and AI, which have in themselves a very high potential for growth. And third, we have a strategic cooperation with the Claranet Group that benefits us both ways. First of all, the ability to serve multinationally -- multinational customers; and the second, to leverage the scale of our practices in multinational environment of the Claranet Group. So back to the beginning of my very short presentation, that was to say that we have a bigger and better growth engine for IT with which to show you progress in the next few quarters.

So good morning, and once again, welcome to our conference call. Just an additional comment on Claranet. This quarter, we fully consolidated Claranet Portugal for the first time. And for consolidation purposes, in accordance with IFRS 15, revenues from contracts where Claranet acts as an agent should be recognized on a net basis. Therefore, the EUR 216 million of Claranet gross revenues of 2024 under the Portuguese GAAP must now be consolidated for EUR 130 million of net revenues. It's a 40% adjustment, but only for consolidation purposes. Well, now following the update on Claranet Portugal, we will now briefly review the quarterly results and then open for Q&A. The main highlights for this quarter are strong operational performance with the RGU trends significantly improving quarter-on-quarter. Consolidated top line revenues growing year-on-year and EBIT increasing faster than revenues with AI and transformation programs progressing well. And operational performance, CapEx reduction and working capital improvement, pushing recurring free cash flow and a solid balance sheet with leverage below reference level despite the acquisition of Claranet Portugal and the dividend payment. So a quick overview on our main KPIs. Revenues increased by 3.2% and EBITDA rose 5.9%. This positive performance, along with a CapEx reduction of minus 2% led to improved EBITDA minus CapEx of 22%. Recurring free cash flow, excluding extraordinary income related to legal procedures and Cellnex tower sale increased 8.8%. And net income, also excluding nonrecurring activities, grew 16%, reflecting a solid operational performance. On the operational performance side, this was another strong quarter of Fiber to the Home expansion. Over 5.9 million households are now covered by NOS' Gigabit network with FttH representing 86% of the households passed. This is a significant increase of 78,000 households quarter-on-quarter and 313,000 year-on-year. But despite the challenging competitive market, NOS' strong offers and commercial capabilities delivered a very strong second quarter with a 2% increase to 10.7 million RGUs. With almost 58,000 net adds this quarter not only represented a significant improvement compared to the previous quarter, but also exceeded the results of the second quarter '24. On unique fixed access, we increased almost 2% to 1.5 million. The second quarter showed some new dynamics as net adds recovered to 8,300, driven by lower levels of churn, competitive WOO offers and naked broadband that is gaining momentum and changing the mix of new customers. With 46 net adds in the quarter, mobile increased 3.3% year-on-year, reflecting a stronger performance both in postpaid and in prepaid. Postpaid had 116 net additions, posting very strong results above the previous 6 quarters, driven by WOO and NOS initiatives in app and cross-sell. Prepaid net additions decreased by 70,000 in this quarter, but this not only represents a recovery from Q1, but also exceeds the results of last year. So in summary, a solid operational performance and a strong recovery from the previous quarter. Now moving to Audiovisuals and Cinema business. A later Easter holiday and 3 strong releases led to a 44% increase in cinema ticket sales this second quarter. The Audiovisual segment also performed strongly, driven by Lilo & Stitch and Mission Impossible, and we had 5 audiovisual films ranked in the top 10 this quarter, boosting NOS performance. On the financial performance side, NOS consolidated revenues increased by 3.2% year-on-year to EUR 458 million, driven by the resilient performance of the Telco segment and the robust growth of Audiovisuals and Cinema divisions. Telco revenues rose by 2.3%, primarily due to the strong growth on the B2B sector, which posted a 9.6% increase, supported by healthy growth in recurring services of 6%, along with a significant rise of resale. The B2C segment experienced a slight decline of 0.3%, indicating early signs of deceleration due to increased competition impacting ARPU despite stronger operational activity. The new IT business showed a small decline of 0.8%, mainly driven by a reduction in the volatile resale of equipment and licenses. However, this was almost fully offset by a solid 10% growth in IT services. So IT net revenues accounted for EUR 49.3 million, while the gross revenues accounted for EUR 77.9 million. The Audiovisuals and Cinema division reported strong growth levels, increasing by 31% year-on-year, driven by a 44% increase in cinema attendancy, supported by a strong lineup of movies. NOS's operational performance and the solid results of NOS transformation program supported on Gen AI-driven efficiency program continued to deliver a solid 5.9% EBIT (sic) [EBITDA] increase, significantly above revenues with a robust contribution from Telco, IT and Media segments, which recorded increases of 4.2%, 18.8% and 34%, respectively. At the same time, NOS CapEx decreased 2% to EUR 91.7 million, driven by a 3.6% reduction in customer-related investments and by a 2.3% decrease in base CapEx. Expansion CapEx, however, saw an exceptional increase this quarter, driven by a temporary peak in NOS FttH projects. IT CapEx increased by EUR 400,000 to EUR 1.7 million, driven by customer-related investments to support business growth, and Audiovisuals and Cinema CapEx declined 20% to EUR 4.2 million, reflecting a return to a more normal spending level. As a result, improved operational performance and efficient CapEx management drove a 22% increase in EBITDA AL minus CapEx. Consolidated net income declined by 28% to EUR 58 million, primarily due to fewer positive extraordinary effects in second quarter '25 compared to the same period last year. These effects included the tower sale to Cellnex and gains from legal procedures, which resulted in a net impact of minus EUR 30.5 million this quarter. However, recurring net income increased by 16% to EUR 57.4 million, mainly driven by a strong EBITDA growth, lower depreciations and amortizations and reduced financial costs. This performance was achieved despite the EUR 15 million decline in noncurrent income, mainly driven by an interconnection favorable court decision during second quarter '24. Very similar reality in free cash flow that declined by 72% to EUR 38 million, primarily due to a minus EUR 102 million in extraordinary effects related to the tower sale and gains from legal procedure. which positively impacted by almost EUR 83 million in second quarter '24. However, this quarter, these effects have a negative impact on additional EUR 23 million in taxes. Despite this, a strong operational performance, lower investment and the reduction in working capital contributed to a 9% year-on-year increase in recurring free cash flow even after accounting for higher tax paid. Finally, this quarter, NOS' debt increased to EUR 1,145 million, primarily due to the Claranet Portugal acquisition and the dividend payment. Despite this increase, the company maintains a conservative financial leverage ratio of 1.7x, well below the reference threshold of 2x. Additionally, NOS benefits from a lower average cost of debt, now below 3%, representing a decrease of 0.3% quarter-on-quarter and 1.1% year-on-year, reflecting the lower interest rates. And at the end of March, the company held EUR 278 million in cash and liquidity. With this, we conclude our presentation, and we are now ready to answer to your questions.

[Operator Instructions] Our first question comes from the line of [ Molly Witkin ] from Goldman Sachs.

I have a couple, please. Firstly, I was wondering if you could give us a little bit more color on the competitive environment that you're seeing in consumer, particularly with DG in terms of pricing and promotional incremental differences versus last quarter? And my second question is, how should we think about the capacity for further OpEx efficiencies and synergies at Claranet? Are there any one-off integration costs that we should think about in the coming quarters or one-off CapEx amounts that we should incorporate?

Okay. Thank you very much, Miguel Almeida here. What concerns the competitive environment, so we have to be aware of the context. We have since November last year, a new player in the market that has entered the market with heavy discounts compared with the prices that were in place at the time. So this is the context. When we look at the dynamics -- taking into consideration that this is the context, we are quite happy with the dynamics. You can see from the operational numbers that we are actually posting this quarter, positive net adds. And I think that tells you a lot about the churn we are having in the company. We have seen from a trend point of view, the second quarter of this year in terms of operations was actually better than the first quarter. So things are progressing in the right direction. And overall, we are very -- well, given the context, I would say, happy with our performance and how things are evolving. In terms of synergies or integration costs from Claranet Portugal, we will not have any integration costs. And what concerns synergies is not our priority. Our priority, as Manuel Eanes mentioned, is to grow the business. We have a significant ambition in terms of growth, and that's where our focus will be. So I wouldn't expect any costs and not much from synergies also.

Our next question comes from the line of Ajay Soni from JPMorgan.

I had a couple. The first is around your net adds, which obviously were pretty strong this quarter. I just wondering if you could give us a bit of color on what portion of those mobile net adds and fixed RGUs are coming from your second brand versus your first brand? And my second question is around your naked broadband. So what's the main difference here? You mentioned it's a bit of a growth here for you. So a bit more detail around that would be helpful.

Okay. In terms of weight, if we take gross adds as the metric, WOO is still -- even though it's closed, it's still below 10% in terms of wireline RGUs. Of course, as you can imagine, if this -- we were talking about net adds, this weight is obviously bigger than that. But in terms of acquisition, it has been more or less stable, around slightly less than 10% of our gross adds. In what concerns naked broadband, I'm not sure where your curiosity is. We have naked broadband offers in both brands, so in WOO and NOS at significantly different prices, and we believe also a significantly different customer experiences. So it's consistent with the overall positioning of both brands. It's -- in both cases, it's naked broadband. But what we are offering customers is different. And what we are charging customers is also, well, significantly different. It's almost twice as much at NOS than WOO.

Our next question comes from the line of [ Jose Osina ] from CaixaBank.

I have a question on the transformation program. Could you detail the expected savings from this program? How much out of them have already materialized? And if you could also explain the amount of provision, which are linked to this program. How much out of them have been already provisioned?

Okay. So about the transformation program, not easy to know the exact number that has already been achieved. Well -- but we believe that for the year, we have done already about 50% of the transformation that we expected, okay? But this is a long-term transformation program that we expect to continue to bring the efficiencies for a long time. But...

Yes. Well, you have different -- very different things under this umbrella, all with the same objective of efficiency. We believe that we will keep expanding our EBITDA margin for quite some time, meaning that we are far from over in our initiatives. To give you an example in what concerns Gen AI, the benefits of implementing company-wide Gen AI are just coming in. So we believe that it will increase significantly over the next few quarters. And we are talking about always recurrent costs that we are taking away from the company. So we are very optimistic in what concerns margin expansion coming from this transformation program, coming from efficiencies, which, as I mentioned, have very different shapes and forms, but are far from being exhausted.

Okay. Just a further question. Could you indicate out of the improvement in EBITDA reported in this second quarter, how much out of it would stem from this transformation program?

Well, everything that doesn't come from top line is coming from this transformation program because on the other side, you have inflation, you have salary inflation, you have different areas of inflation. And the way to achieve this 6% growth in EBITDA this quarter is coming basically from the cost structure that is this quarter lower than it was 1 year ago. And most of it -- actually more than 100% of it is coming from this transformation program.

Our next question comes from the line of Antonio Seladas from A/S Independent Research.

I have 2 questions. First one is still with the price evolution. So according to your metrics, prices -- blended prices are coming down by around 1% in consumers. So this is something that we can expect for the coming quarters? You mentioned that you are happy with the results. So I guess that you were thinking about tougher pressure on prices. I don't know if you can comment on this. And second question is related with your division IT. I don't know if you mentioned about growing the business. I guess that you have some -- you are expecting some synergies on the revenue side. I don't know if you can share with us what kind of synergies are you expecting?

I'm not sure that I fully got the question on prices, but we don't expect prices to evolve in any direction up or down in the coming months. We don't see space for that. Again, I stress this in either direction, up or down. When you look at our revenues, B2C revenues this quarter, I think it's important to understand that we have 3 main impacts that drove the revenues on the quarter down from the same quarter last year. And 2 of those impacts are one-offs. So you cannot extrapolate from that. And the 3 impacts are basically the fact that this year, we didn't do the price increase linked to inflation, which is a one-off. And if we have done that, obviously, we would be discussing today year-on-year growth in terms of B2C revenues. But I stress, this is a one-off. It doesn't mean anything concerning the future. The second one-off was the fact that we had new regulation concerning off-bundled data. And that has, again, a one-off impact. This was end of last year, it's a one-off impact. And if not for that, we would be growing revenues again. And then the third one is the one that is not one-off is the fact that given the mix of our products, we are experiencing some price erosion, which will continue to materialize in the sense that we keep having today some weight coming from our digital brand WOO, which has lower prices and as such, brings ARPU down. So basically, this is the dynamic, but most of the impact is coming from 2 one-offs and cannot be extrapolated. The third one, obviously, we are expecting to be around for quite some time.

Regarding B2B, we believe that there are 3 sources of revenue synergies. First of all, we have a full breadth of IT services coverage to help businesses perform their digital transformation. And this wider breadth put into a combined sales force will give us added revenue potential. The second is that we have a wider coverage. Claranet did not cover the full market, not in enterprise and not in the mid-market and NOS in telecom does. So we believe that this added market coverage will produce results. And the third is that we have basically doubled our scale in key practices. Scale -- global scale means double maturity and means more competitiveness and an aggregated value proposition. And we believe that this combination will give us a higher success rate in the businesses that we have in our deal flow. So we believe that this combination will produce a much better result.

Our next question comes from the line of Mathieu Robilliard from Barclays.

I had 2 questions, please. First, in terms of the price increase that you did not do. I understand that one of your competitors actually did increase prices. And I was wondering if that had any impact in terms of the profitability numbers between you and that operator positively, I would expect. But if you can comment on that, that would be interesting. And second, on the IT division, you flagged the very strong growth potential of that division. And I was wondering if you could give a bit more color on the data center and cloud business. A number of companies in Europe have sold their data centers. I think you have kept yours. If you can confirm that. And also if you could give a sense of who are the main players and maybe even what is your capacity when expressed in megawatt hours, that would be very interesting.

Thank you. Well, you're right. One of our competitors did increase prices beginning of this year. I'm not in a position to know what exactly happened with them. What we can see in terms of portabilities, as you asked from us to them or vice versa, we didn't see any relevant change. So in terms of market dynamics, I cannot say that we witnessed some -- any kind of impact driven by that price increase.

So regarding the data center business, we believe that the data center business is depending on which scale you look at it, it can be still a big opportunity. What we're seeing is that there is some move back to operate a cloud and to on-prem out from the cloud, given some bad surprises that some big customers had on cloud costs. So now the pressure to drive IT efficiency has driven some of them back. The second is the sovereign issue, which is makes public customers that still haven't had their problems fully solved in the cloud environments to build or to share local environments in the cloud. So we believe that there is still room to grow in the cloud -- well, in the data center business. And we also are ready for that growth in the sense that we can grow still 3x our current capacity with the assets that we have and the assets that we acquired with Claranet. So we're confident that we'll still able to help customers in their hybrid environments do whatever movements they feel are more appropriate to their strategy. And we believe that we have a role to play in the service area.

And can you give any color in terms of what kind of capacity you have or you're not disclosing that?

No. I wouldn't like to disclose that. But what I can tell you is that we can still grow 3x without changing our asset structure.

There are no further questions at this time. So I'll hand the call back to Pedro Cota Dias, Head of IR for closing remarks.

Okay. Thanks. So as usual, please get in touch if you have any questions or follow-ups. Thanks for tuning in, and we hope to see you after summer for the third quarter results. Goodbye.

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.