Telefônica Brasil S.A. (VIVT3) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. This is again Diego Aragão, Latin American telecom analyst at Goldman Sachs. Today, I have with me Mr. Christian Gebara, CEO of Telefónica Brasil, together with David Melcon, CFO of the company. Christian, David, it's very good to see you guys. Great to see you. Hopefully, next year, we can be in person joining this conference. But hopefully, we will be soon getting touch in person, okay? So look, thank you again for joining us for this conference this year.

And maybe as a starting point, why don't you provide some views and takes on the main impacts from COVID-19 so far, the expectations for the year?

Okay. Thank you, Diego, and thank you everyone for joining this session that we're going to talk about Vivo, our brands here in Brazil. As we stated when we presented the second quarter results from March to April, we faced difficult moments in Brazil. As you know, we closed all our stores and there was a lot of concern about everything in the country as in other parts of the world. So we had, at that moment, a huge impact in the sales of smartphone. We had also a huge impact in the net adds of postpaid in this first moment. And we also have, in the first weeks of the crisis, also an important impact in the prepaid, in the top-up because people were at home, they were not able to top up. After this first week, then I think we also stated that during the second quarter call, and then I can also emphasize that, for July, we started seeing a recovery in different lines of our business starting for the stores. Today, we have more than 90% of our stores are open. So it's a very different reality than what we had in April or even in May, although they are not working in full capacity. There are some limited working hours and also some limited capacity to handle customer care inside the store. But of course, we can see very positive inflection in the sales of smartphones and even in the net adds of postpaid. For you to have an idea, we had negative figures in April. We had negative figures in May. We have almost 0 net adds in June, and we have a positive number for July. The same in the smartphone sales. We are not presenting any results for the third quarter, but the negative trend that we saw in these previous months became positive also in the months after the first 2 difficult moments that we had -- 2 difficult months that we had. In the prepaid, also, there was also a very positive inflection. And I think that's not because there was just a demand that was not fulfilled during the first weeks. But also, I think this government aid, the government -- the Brazilian government is giving some help that we call the corona voucher, that is some money for the most needed people, and it has a very positive impact in our top-up. So we saw that in the months starting from June -- May, June and now very strong also in July, and it's continued to be positive in August. So general terms, this mobile business is doing much better than we saw in the beginning of the crisis. In FTTH, only to end with this question to go up to the next one, the net adds were already very positive after the first month of the crisis. I think people staying at home, they were looking for a better connectivity. And our FTTH stands out as the best connectivity. And so we saw very strong net add numbers for FTTH, even in the second quarter, as we presented, and they are still stronger in the first month of the third quarter. So in summary, good recovery.

That's super helpful, Christian. And I guess let's go more deeply in each one of the segments, starting with the mobile business. And I would say that, look, given the current global trend of telcos seeking new revenue streams, aside from traditional telecom services, what do you see as a potential new growth avenue that Vivo could track, let's say, to monetize the largest mobile client base in Brazil?

I think the mobile by itself still has room to grow. Brazil is a country that will still have room to grow in 4G penetration. So when you -- smartphone, 4G smartphone penetration, that is over 70%, but still have 20%, 25% of customers to capture in this penetration. And when they are using the 4G, they are using more data. So there is room for upsell. We still have, as we said before, with more prepaid customers, we also have the opportunity to migrate to hybrid and then to migrate to pure postpaid. so the core business is still there. Talking about the -- your question about working together with OTTs, we saw that as a huge opportunity, and we saw there is an opportunity in the different segments that we tackle. There is one segment -- let's start from the top. The top -- the pure postpaid, there is a huge opportunity to bundle what is our postpaid services with an OTT service. And we launched it during the pandemia. It was supposed to be launched in April. We postponed a little bit, what we call Vivo Selfie. Vivo Selfie, it is a postpaid plan that comes together with one specific digital service. So we launched it in the first phases, Netflix, Spotify and Rappi, that is a delivery service here in Brazil. That's from Colombia, that is very strong in Brazil, sort of Uber Eats, that, together with our plan, you select one of them. So the ticket, the ARPU is higher. We buy the services in a wholesale deal, and we resell it with a good price positioning for us and also for deployment to penetrate more this OTT business and services in Brazil. So our vision for this is to grow with more partners. So we are also launching now a premier that is pay TV, soccer TV, that we are also launching together with our postpaid, the Selfie premier, and we are launching new ones in the coming months. So there is a huge opportunity to bundle content, digital services together with those postpaid services. Going a little bit down the pyramid of our segmentation. When we talk about hybrid, I know we talked about prepaid, we see another type of opportunity. These customers, most of them don't have a bank account or don't have access to a good education or don't have access to a good health plan. So why can't we offer to these customers? I think there is some attributes that we are -- we have that are unique. We have a very strong brand that is Vivo. We have a channel capillarity online and off-line that is difficult to beat. We have a huge customer base, and we have a billing capability. Also some of these customers that don't have a bank account or credit card, and we can bill them. So we're going to start with financial services. We are launching tomorrow our Vivo Money that we call our ability to lend money. So it's credit business. We are talking to some banks for some type of partnership to do more than credit. We are working with some health companies to launch a type of health marketplace, that is still in the initial phases of negotiation. And we are also talking about the location. So we think that there are 4 pillars: entertainment, education, health and financial services, specifically for this mid- to low segmentation in our mobile business that there's room to grow. And I think we have lots of attributes that these companies are willing to partner with us. So some of them will be pure partnership and commercial distribution. Some of them, we are considering also some joint venture to explore more of the business and putting together Vivo and a strong brand in one of these areas. Gaming is another one that we are also working on, some specific deals to do e-gaming.

Very interesting, Christian, indeed, I mean, a lot of things going on. If I would just step back a little bit. I mean, the second -- let's say, the second pillar you mentioned regarding like the Vivo Selfie, those new plans. I mean, do you see this as a better way to monetize the data and to have like a better data monetization in Brazil? I mean, because for a few years, we've been seeing like data traffic exploding significantly, right? If I am not mistaken, data traffic has been growing in the range of 30% to 40% over the past couple of years, while when we look to ARPU, data ARPU, of course, it's a little bit tricky to analyze. But when we look to overall ARPU, it has been just growing much lower than these. So that being said, do you think that this new approach and the new -- this new plan would be a better way for you to properly monetize the data and the investments you have made on the 4G side?

Yes, I think that's a way to look at it. Yes, you're right. That's something that we have in mind. I think there is also another -- I think, other objective. Now we want to increase ARPU. And I think giving more data, more for more, it's not working anymore because people are getting -- especially in this postpaid, we're talking about postpaid, we have 2 type of postpaid customers: the individual and the family plan. The family plan, I think we found a way to do it well, and we are bringing innovation there as well. But in the individual plan, the Selfie is an individual plan. It's only for one person. You can give more data, but people -- normally, they don't need much more than what we offer already. The competition is growing with the data allowance. So there is no more to give. Now I think we've reached a very high limit. So why -- what can you give to these customers to increase the ARPU? So I think that's one of the reasons of having digital services embedded -- embedded digital service. The second one is how can I raise switching barriers. So once you buy the services through Vivo, I think when you consider -- even if you consider one day to switch, I think your willingness will be much lower. Now I have already my Spotify associated with my plan with Vivo. I already have my Netflix associated with my plan with Vivo. So I think you create an ecosystem around Vivo's billing capability, around Vivo's brand, around Vivo's customer care that will make much more difficult for customers to consider something different from Vivo. Of course, adding to this formula, there is the fixed business of the fiber that we talked before. So how can I be the technological partner of my customer? Now how can I be the digital partner of my customer? So I am the one providing connectivity, mobile and fixed. I am the one offering them also a very good deal to get what they want in entertainment, maybe what they want in financial services, maybe what they want in health and education. So -- and then I have Meu Vivo, our app, Meu Vivo, our e-care app. How can I manage all my digital life through this app.? That's our vision as well. So all these services that I talked to you about, Selfie, or many others that we will launch, the one in financial service, maybe the one in health, maybe the one in education, we will have Meu Vivo at our e-care app as the entry point to manage all these digital lives. So I think we are betting, and I think we are positive that we may win, that Meu Vivo could be the entry point for this digital life organization because I think people sometimes, they get very confused for what they have, hired what they don't have, what the subscription. So why not play important role in organizing this for our customers? And also, we have the support. Now we have our stores, have 1,600 stores in Brazil. That is, for some customers, this physical support, consultancy from our stores can also help people develop their digital lives.

That's quite helpful, Christian. And I guess just to -- eventually, I don't know, maybe trying to quantify, like, what is the opportunity you're seeing in this mid- to low segment with the credit, with the health care, education and gaming, you mentioned. I mean, how should we be thinking about, let's say, the revenue opportunity for Vivo if you end up succeeding on those initiatives?

Yes. I don't know if we are talking like we are being open about the figures that we see. What we see is some business that, maybe individually, they are not so big as the ones that we used to have. But I think we're adding up this, we're going to end up having something very relevant. And I think also on partially the relevance by itself I think is the relevance of the whole concept of being a Vivo customer. Now and I think going forward, that will be very necessary to have the whole thing together. We are -- we have some business planned for the business by itself, but I don't think we are opening up the numbers, the figures. I think when it's got a little bit more time, I think we're going to be able -- and we are discussing about that, how we're going to present to the market our evolution in the services. Now I think there in B2B, we are a little bit more ahead because we are selling much more cybersecurity. We are selling a little bit more in IoT, although we believe IoT will be huge, excluding machine to machine. IoT will be huge in 5G. We are sending more cloud. So we're positioning ourselves as the right partner for the companies, also for the digitalization. We are one of the key partners of Cisco. We are one of the key partners of Microsoft in Brazil. And going forward, I think we're going to increase even more. In the B2C is the same. We want to be the key partners. We already conquered this position in the handsets with Apple with Samsung in the top, we want to be also the same with digital services considering here Netflix, Spotify or many other areas that we think we're going to grow much more in the future.

That's helpful, Christian. And I guess maybe on this digitalization topic and moving from the top line to your cost side, I mean, Vivo has been unlocking solid margin gains from digitalization, right? We've been following these over the past couple of years, great job in there. Congrats for these. So what are the main opportunities could come from this front? I mean, how much margin could expand in the coming years, driven by new digital initiatives?

I will also ask David to help me with this question, to share a little bit more with him like the presentation. Just want to highlight something. I think we talked a lot about digital channels as the way to interact with our customers. We put a lot of effort doing that in the last years. I talked about Meu Vivo, our e-care. So I think it's also good to share like we have like last month, 18 million customers, users, unique users using this channel. So it's today, one of the key channels for our relationship for our customers. Now the penetration of the e-care of Meu Vivo in the postpaid is very high. And the hybrids is considerably high, and the prepaid is growing. So I think Meu Vivo will be a key channel for interaction with our customer. There's something else that also we've been investing. And I think we are one of the top companies in Brazil in artificial intelligence, it's called Aura. It's the way for us to interact with our customers through artificial intelligence. That's from Meu Vivo. Of course, there is a button that we can talk to Aura, but more importantly, the Meu Vivo by itself in this topic is that we're using WhatsApp. WhatsApp today is one of the key channels for us to interact with our customers and, most of the times, artificial intelligence. So prepaid customer could interact with our WhatsApp channel, ask about the top-up balance, and Aura would reply. Even to schedule a fiber FTTH installation, we use Aura. Aura will send a confirm, what could be a more best time for installation, are you okay with that. If you're not, they give you the options for you to change the time that you want this. And also call center, 30% of the prepaid and the hybrid calls are already handled by our [ solution ]. So there's room for -- to grow it even more using these digital channels as the key channel to interaction. And e-commerce is the same. E-commerce, during the crisis, the COVID crisis, increased tremendously. We also have now a marketplace not selling only our products, we are selling people's products, people's -- our or partner's hardware. And we are selling also marketplace going beyond smartphones and accessories getting to television and many other things because we are connecting other stores in our stores. We have 60 million users going through our channels. Why not use it much more to address also another stores consider our marketplace? So going forward, we see there is a lot of opportunities to use more e-commerce, more e-care, more artificial intelligence in our call centers that will help us increase margin. At the same time, we have to consider that we are entering in different business with partners selling digital services. The margins are different from pure telco. So we need to see the combination of the margin, considering all the costs that we're going to be avoiding through digitalization. But at the same time, when we become a company that's more technological partner that has partnerships, not only the distribution of digital channels, but also in the fiber. Now we're going to talk about fiber a little bit later, and I can imagine. But now I have a deal with American Tower that I'm paying for home connect. That is different from having my CapEx and having a very much lower OpEx. I'm paying for a home connected. So it also impacts my margins. So considering these differences in margins, what is customer care or sales and commissions or even other back office that we're going to be avoiding with digitalization? We have lower margin services when we have partnerships, and we have lower margin deployment on fiber when we do that for partnerships. I don't know, Dave, if you want to add something else on these figures about the cost and the margin evolution.

No. No. I think -- I mean, Christian, as you already said, I think there are still quite a lot of what we call non-quality costs. So these are costs that are not of a value to the customer. And just here, just to try to do things on the old way, particularly on legacies and traditional channels, that we are moving out of those because they are more effective and more efficient and add more value to the customers. And just -- I mean, we will talk later on also on the network, we have also -- looking for opportunities of network sharing and few other things that are structural changes that allowed us to be reducing costs for the last 5 years and still having space to continue maintaining this path because all the changes that we are doing are about structural changes, that will bring savings from now on. And customers are giving more value to each one of these new services that are coming with lower cost to share, the telecom services.

That's very helpful, David and Christian. And I guess maybe just shifting topics here, speaking about like the fiber business, if you can just first, provide some details on your current strategy for the fiber expansion and also on the FTTH residential broadband, I guess, this could be the starting point.

Yes. I think when we were in New York 3 years ago, we said that we go for fiber now that we wanted to become the leading FTTH company in Brazil. Today, we are in Latin America, but our objective was in Brazil, and that we were going to invest much more in fiber to deploy more home pass and, of course, in the end, connecting more customers. And I think we made it a reality. So if you look at our evolution of the fiber business, we may end this year with 14 million home pass. I think when we talked in New York, we had half of this number. So last year, we ended the year with 13 and -- less than 13, we ended this quarter with 13, and we're going to end the year with 14. If you look at the number of new cities that we launched in the last years, as in 2018, over 30 new cities, in '19 was 43 new cities. And this year, already in the first half of the year, we already launched in 53 new cities. So we are growing in a very important base. And home connected, as I said, July was our record number for net gain. So we are in the right track, and we will continue investing on that. And the revenue is growing also in -- aligned with this strategy. So our fixed business, we like more and more in the FTTH. It's contributing more and more. If you look in the mix, what is the new technology is already more relevant what is legacy technology. And we are -- actually are also putting a lot of profitability analysis to choose where to put our CapEx. So when we see some numbers of our revenue going down in a very negative way in legacy technologies because we decided not to invest more, example, DTH, ESL and even FTTC as we are overlaying FTTC or FTTH. So I think it's a very strong decision for profitability for the best cash generation that we could offer to our shareholders. So FTTH is given results, and we're still dealing with this transition period of having the other legacy still being relevant and being with a negative growth. Going forward, as we presented to the market, we're going to continue doing organic growth, but we are looking for partnerships. We have the one, the American Tower that I mentioned before to you. That's already in place with good results. We have another one with Fenix tower. There is also a tower company that is also deploying fiber. So we have more than 10 -- the 14 cities this year with the 2 of them already launched, with more to be launched, and the model is different. We split the CapEx, and we pay for home connected. We have the franchising business that also we presented before in different -- in other core results, that where we don't have the revenue, but we have a royalty fee, but we have some other partners investing in very small cities that we don't -- we cannot reach in time. So we have someone having the deployment of the CapEx there. We have no CapEx, but we have the royalty for the franchising, and we also have the ability to cross-sell in the future. Going forward, apart from all these models that we are open to having partnerships, we are creating a fiberco together with the Telefônica. So it's going to be Telefônica, Vivo and a partner. We started the process. We already have a very good list of NDAs and nonbinding offers to be part of this deal with us. We're going to go through the process of the data room and opening up more information to these ones that are interested. And we hope to the end of the year to have binding offers to start to be operating with this fiberco in the first semester of the next year. With that, we have an ambitious plan to reach more than 24 million home pass in 3 years. Now that's the plan that we presented, and that's what we are aiming for to have in 2024, more than 24 million. So going from the end of this year, 14 million, getting more, 10 million, in this period of 4 years.

That's quite helpful, Christian. So which one of these models would you see bringing faster results? And maybe if you can just share with us like the revenue opportunity you'll see when you combine those -- I guess, you mentioned like 4 different business approach on the fiber front.

I don't know if I get the question, but I think it's going to be a combination -- it's a combination -- in the end -- let's forget franchise, okay? In the end, all the other models, if it's organic, CapEx. Either if it's through American Tower or is through [ 5 Brazil ], 100% of the revenues are from -- for Vivo, okay? Vivo is handling the customer relationship. Vivo is handling the customer care. Vivo is able to do the totalization through mobile plus FTTH and also is able to sell all the digital services that we talked before. So the customer is Vivo. So for the customer, it's indifferent, if they are in an organic model, if they are in a partnership model. We believe that we have an opportunity now to accelerate fiber. As we don't want to be investing more than I used to invest, we need to do different models and that's involving, splitting the CapEx investment with someone else. So through the fiberco part of the CapEx will be in the fiberco. If it's through American Tower partnerships, part of the CapEx is with American Tower. In the end, we still have last mile, where we still have the CPEs. That's also our responsibility, and we keep the relationship as a set with the customer. What we want here, Diego, is to accelerate. Now as I said, we want the fixed business to being positive figures. And to do that, we need to accelerate what is FTTH revenue to compensate the loss that we're going to have in legacy technologies. Also, some of this loss will be accelerated for our decision of not investing more. And when we do overlay also through this -- through FTTH in overlaying FTTC already. So we're also accelerating the decrease in the revenues coming from these 2 technologies. But I don't think there is other way for us to go forward. And I think we have a unique position to be the leader in postpaid, the leader in mobile Internet deployment. And also being the leader in the FTTH. Being the leader is also the opportunity for us to grow faster. And that's why when we launch a fiberco deal in the market, we see lots of companies, financial services or industries -- financial partners or industrial partners, will need to partner with us because we see the opportunity in Brazil because the penetration of ultra-broadband is still very low. And Vivo has all the attributes to be the winner in this battle.