TIM S.A. (TIMS3) Earnings Call Transcript & Summary

Good afternoon, everybody. So this is Diego Aragão, Latin American telecom and technology analyst at Goldman Sachs. Today, I have with me Mr. Pietro Labriola, CEO of TIM Brasil. Pietro, it's a pleasure to have you here. Thank you very much for joining us today.

So Pietro, I guess just as a starting point, what can you share with us related to -- when we think about like the COVID-19, what is the latest in terms of impact? And if you can share some thoughts on the expectations for the year, especially considering that -- the fact that the economy in Brazil is starting to reopen again.

Yes. I think that the worst is behind us. For sure, the second quarter was the worst quarter, and we can tell that now because we are having more evidence in the third quarter of the improvement that we are having in the different line of our revenues. We closed the second quarter in the negative area. And we are expecting to close the third quarter close to 0 in terms of revenues year-over-year. We cannot say that it's completely out because we have to wait the fourth quarter to understand the impact on the economy related to the fact that the Brazilian government is going to reduce by 1/2 the contribution to the low-income classes, the so-called Auxílio Emergencial. It started already in September. It was reduced by BRL 600 to BRL 300. But in September, we are not experiencing a worsening about the trends that we have seen. Which are these trends? Prepaid is progressively improving month-over-month. And we are close to 0 year-over-year in terms of recharges, and we are close to recover completely the number of recharges. On the postpaid, the reopen of all the shops allow us to return to increase the level of acquisition in August with positive net adds. And in September, we are fully improving this number. So all the things are proceeding. On the cost side, if you remember during the call of the second quarter, we thought that perhaps we could have some impact from the reopening of the shops because some costs could come back to increase. But at this stage, we are managing the situation. We are exploiting the improvement at the cost efficiency level by automatization and digitalization. This is for TIM, but looking also to the competitive environment, it appears a situation quite rational. I'm not looking at irrational offer in the different -- of the different player in the so-called above the line arena. What is above the line? Are the price that are advertised to all the customers. Then we can see mainly for retention or some specific activity below the line, some offer, but this is something that always happen and do not generate any kind of impact on the overall. So in synthesis, the situation from the COVID is in a recovery. To say that we are completely out, let's wait the mid of October, so we can see the first month without the full contribution of the state of Auxílio Emergencial. Looking at the market competitiveness, what we are experiencing is we continue to see the rational approach by all the main player. Third, relative to the TIM number, we are seeing a good improvement. And we expect to be close to 0 already in the third quarter in the year-over-year revenues.

Perfect, Pietro. And look, I guess if we would just step back a little bit and think about like the revenue, right? Clearly, this is the main area that has been like a concern during the COVID-19. But for some time, we're just discussing about like the revenue trends for the industry. Clearly, the industry has been improving over the past couple of years. We've been seeing like some very positive trends on the top line growth. And the market today remains pretty much focused on selling, let's say, traditional data plans, right? But I want to get the chance that we have you with us today to discuss like new revenue opportunities. For instance, TIM has been very vocal on the opportunity for the industry to seek new revenue streams and better monetize its customer base in Brazil, right? And so can you elaborate a little bit more on your initiatives and new partnerships to open up new revenue streams for mobile operators in the country?

Yes, sure. Perhaps it's important to state at the beginning that we still have a long way of data growth monetization, mainly in a more rational market for the following years. So as I used to say to all my team, we have to continue to be focused on the area that will pay our salaries for the next 2, 3 years. And in this area and what we are doing, to have also the correlation with your question, is try to avoid to compete mainly on price or amount of the giga. This is reason for which we try to exploit a different kind of approach, trying also to join new source of revenue with a different position. What I mean? For example, we didn't launch during the COVID what we have already planned to do on the contract in the prepaid. So we wait July to launch the first offer with the Controle offer. That is the telco services joined with financial services. So what we are offering to our customers the possibility to get a Controle plan jointly with a digital bank account with specific characteristic advantages for our customer. It will allow us, just to share with you, our claim is within Controle, you can have a digital account, a digital bank account. That is something that the market really appreciated as a must-have during the COVID for all the situation. And jointly with that, you can get also a credit card that in Brazil, differently from other countries, is an important -- something that is really important in the mindset of the population. Why we are doing that? First of all because in this way, we are putting on the table an offer that is different from the other player and do not compete only on price and giga but go as different kind of services. In the meantime, the rich customer that we get and that open a bank account, we receive a remuneration from the bank. But this is not only this one. Based on our capability to reach specific thresholds, we are going to gain up to 15% of the shares of this bank. That could be something that we can monetize in the future. Keep in mind why this idea, also to explain better why we move in this situation. The asset of the telco players today are customer base, capacity or capability to charge and collect money from their customers, customer care and the sales channel. This is something that, let me say, the digital work is not if you look at Facebook, WhatsApp, digital banking but also other OTT as Netflix. Until they stay with services that can be charged only by credit card, they don't need of anyone. But as soon as they start to need to increase the penetration through the pyramid of the population mainly in emerging markets, they need of someone that is able to charge off this customer because credit card is not something that has 100% penetration. They need someone that is able sometimes to have some shop as experience to show something. They need someone that is able also to manage the customer in terms of claims because in the emerging market, it's not necessarily true that everything can be done in a digital way. So our idea is to start to exploit these capabilities that are traditionally capability of a telco player, to try to monetize in a different way which partnership that can be just a commercial partnership. And so we earn money for charging the customer in name of the player is, for example, the case of the entertainment hub. As you remember on the postpaid, we have launched 2 years ago TIM Black Família. That is an entertainment hub where we're going to sell Netflix, Amazon, Disney, HBO because they need to increase their penetration. And this is good for us because in some way, we earn some money. But in the same way, we are starting to compete on a different battlefield. It is not only just competition of price and giga. This is an approach. All the other approach is the one that is -- I think that we are the first in the world that have applied that. And so it's difficult to be understood. We put also the possibility with a newcomer to get also a percentage of the shares of the company. So we have the remuneration for the commercial activity. But in the meantime we have in 2, 3 years the possibility to better valorize this asset. Why that? My customer base, 40 million, 50 million customer have an evaluation of BRL 800. The evaluation of a customer in the digital banking world is something between BRL 2,000 and BRL 4,000, but they don't want to become a bank. The choice of the threshold of 50% is just to avoid to exceed the threshold that give to TIM the obligation to become a bank. So we are thinking in the following years to follow this kind of activity. And there are several areas that the COVID has put under the spotlight that are interested in these kind of things. Let's start to imagine also the case of telemedicine, of remote health, remote learning, all this kind of stuff. We have several companies that are looking for someone that in partnership to help them to manage the customer because no one is able to start from scratch, starting from scratch to build capability to charge 50 million customer, to build a customer care because I repeat, Brazil is different from U.S. and Europe. We don't have a huge penetration of credit card, and we will never reach a penetration of 100%. So this is the idea and our strategy in which area we are working. Financial services, the example that I explained, the partnership with C6. That is a full digital bank. But on the financial services area, we are trying also to find a different way to operate on the low-income classes, the classes, the social classes that will never add a bank account. These people have understood that they must find a way to digitalize their money. And here we are. When I say we, I mean TIM, Vivo, Claro, Oi. As an industry, we can transform our prepaid in a debit card. Today, we are already able to transform BRL 2 billion per month from cash in digital money that we put where? Here. Once you have it, you have here. You can go on the beach and buy a coco, just taking a picture of a QR code that where is price and transfer money to the mobile, from the mobile to the guy that is selling that. This is a common view that we have with the other telco player, where we have decided to try to cooperate because we are not going to compete on the traditional pie of the telecommunication services. We are going to get a slice of another pie that is in the financial services world. This is it for the financial services. Another area in which we are working is, let me say, we call that digital advertising, but sometimes we call that data monetization. But data monetization in reality is misleading because it's not trying to make money for the use of the data consumption, but it's trying to make money using the profiling data of our customer. That is the way in which Google, Facebook, Instagram and all these kind of OTT players are making money, reselling to third parties customer profiling to make advertising. Here, we have a huge opportunity differently from the past. I don't know how much of you know that by the end of 2021, third parties' cookies will be prohibited. So the big company that are advertising, that were putting at the pricing on the digital, used to buy cookies to profile the customer. "I want to show my advertising only to Diego Aragão or only to the Italian people that live in Brazil and Rio de Janeiro, mainly in Ipanema." To do that, they were used to buy third-party cookies to profile, not to show to everybody it is advertising but only to the Italian people that live in Brazil, Rio de Janeiro and Ipanema. But tomorrow, the cookies will be not permitted. Who can substitute them? Here we are, the telco player, because we have this kind of information. And also in this area, we are talking with the other player, Vivo, Claro, Oi because this is an opportunity for the industry. Again, it doesn't mean that we do not continue to compete on our traditional take of pie. We will do that for sure, but we are adding another pie that can generate money for their money new source of revenue. And what is important? To act in this area, we don't need to do a huge investment. Why? Because the profiling of our customer is something that we have to do in any case for us. The future market in our company is profile the customers to be able to do the right offer to the right customer. So I must know which are the characteristics of these customers. So it's something that we are already doing with our data, with our big data, with our artificial intelligence. So once we do that for us, respecting all the rules and the new law for data privacy, we can do that also for the third parties. Third is all the world of IoT. That is something that everybody are telling that is wonderful. But just to avoid, to stay only on PowerPoint and claim, by the end of October, we will announce the agreement with one of the main car manufacturer in Brazil where we are -- we were chosen as the connectivity player for the new connected car. That is an important element because once you start to put a SIM in the car, you can have several business model that you can develop, B2B or B2C, because I can sell to all the customers by the car a further connectivity in the car, to have a kind of mini-WiFi spot when you are with your family in the car. In the meantime, you can develop further business models that are more related to the self-driving car, so on and so forth. So these are the...

Pietro, let me interrupt you for a moment. Let me just make 2 very quick questions related to these topics. So if you can use as an example one of these 3 initiatives that you just spoke about, how those things have been progressing so far? And how fast do you think the industry can move forward with this idea or strategy or plan to properly monetize the customer base?

About C6, we started only in July, but the trend of customer acquisition is very positive and good. And during the third quarter financial result, we will disclose all the number because we have to agree also with the counterpart due to the confidentiality, but they are promising. So on the financial part, the [ free step ] place or the part that is more mature is this part with C6. About the transformation of prepaid and digital wallet is something that will happen in 2021 if we'll continue in the good way in which we are dealing among all of us and could be an opportunity more for 2022, 2023. About IoT is a reality. We are already starting. So let's tell in this way because perhaps it's more clear. While we expect that with the traditional core business, due to the consolidation, that will be one of the next question that you will ask me, we expect to further improve this market. We are putting other element that we'll enter with different speed and that will allow us to have constant improvement in our results. So I'm not telling you that all these things will happen in 2021. There will be something that will allow us to improve our revenue profile in 2021, other things in 2022. But differently from the past, we are trying to understand how to better monetize our asset. And this is the way that help us to work in 2 different layer: evolve on the traditional business and transform part of our company in the mid- and long term. I can understand that it's quite difficult sometimes to believe on that because as human being, we are used to evaluate things based on what's happened in the past. Now in a more formal way, we used to say, which is the benchmark? Not necessarily I can tell you if there is a benchmark because Brazil is different from other countries. I mean to say in Italy that Brazil is much more digital than Italy. We're the first -- we are in the first 3 places in the world in terms of penetration of digital services in the world. We have a penetration of digital services that is higher compared to U.S. or Europe. So I cannot look for a benchmark in U.S. Financial services. In U.S., no one need of a digital wallet because the penetration of credit card is more or less 100%. In Europe, the same. Here, we have 50% of population that will never be able to have a credit card. So the comparison sometimes do not allow us to show better this opportunity that sometimes are unique. Now it's our job to find, to try way to better explain that. And starting from the next conference call, we'll try to put KPI a number with our IR to let better understood all these elements.

That's great. I think it will be very, very helpful for the industry, Pietro, indeed. So look, let's shift gears a little bit now and discuss the residential fiber business, right? I mean can you give us an update on the progress of TIM Live, your expansion strategy? And what is the status today? And what are the main goals for the segment, let's say, in the next 12 to 18 months?

Okay. Very clearly, we were surprised also from the amount of NDA that was required to us to sign. So we have a huge interest in this business. But this is something not new for the market because now everybody are looking for infrastructural business. So -- and I don't have to explain to you, looking also to Europe is the case of our main shareholder, Telecom Italia, a discussion about the opportunity to create a company that work only in the infrastructure and that a noncore customer, that is a company that will manage the customer. So this is a market trend. The good thing is that we were the first one to have this idea because again now we are hearing about the Vivo, Oi too, but we started before them. I think that we have more opportunity. So let's -- we have 25 NDAs already signed. We are doing the screening of that. We expect in the following week, by the end of September, to choose fiber, to try to finalize everything by the end of December. Why we want to finalize by the end of December? Because here, the name of the game is to be fast because everybody want to put FTTH in Brazil. Thanks to God, Brazil is not a country. It's a continent. So it's like if we discuss about all Europe. So there's no problem. We will not have the problem on too many people in Germany because if someone is going to put FTTH in Germany, we can choose France or Belgium. So there's no problem. But it's important to be first because the first players that start to develop in a specific area will have a competitive advantage compared to us, to the other. And we want to use this opportunity to further accelerate the coverage compared to what we had in the plan because it's clear that one of the weakness was until we have TIM Live inside our balance sheet in terms of CapEx, it's always difficult to further speed up the process. Because every time all the people will start to ask us, "Your CapEx or revenues are not growing with the same speed," let's remember 3% of our revenues are from fixed, 10% from CapEx -- I mean TIM Live. TIM Live is 3% of our revenue and 10% of our CapEx. So because this is a start-up in some way, to better work, it's better to separate the things. We are going to create this company that will act only to build and wholesale infrastructure FTTH. We will have an exclusivity agreement for the first 6 months. It will allow us to continue to keep on our balance sheet, the revenue and the management of the customer with the OpEx related. We'll not have the CapEx that will be in this company. And we will be the main anchor customer of this company. Why I'm mentioning that? Because a lot of players want to enter in Brazil to build fiber optics. We have seen also some tower company. But we are seeing as these player are having some difficulties because they don't have an anchor customer. So one of the main element of opportunity come from the situation is that we can have an infrastructure company that will unlock some value because the revenue that the company will have will be evaluated with a different ratio compared if it is inside the mobile. And there they guarantee that they are building a fiber network and will have someone that will buy to sell to the end user customer. This is an important element. So when we are here on the market that other company, other players want to come in Brazil to be the fiber optic networks is an issue. If they don't have a noncore customer, it's a difficult business model. This is the reason for which we had more than 25 fund or industrial partner that were interested in TIM Live. So we are proceeding. We will close -- we expect to close everything by the end of December. Which will be the advantages for us? A further acceleration of the coverage because one of the things that we will do is that we'll not -- we are not building this company just to do what it was in our plan but to further accelerate the plan. And so it will allow us to explore the opportunity of the development of FTTH in Brazil that now it's an important opportunity. Compared to the other player, I think that we are the player that can gain the most from this move. Why? Because we don't have legacy. Let's imagine for a second, Claro. Claro has net that is 50% of market share on cable operation on TV, mainly on cable operation. Cable TV or cable technique will never be able to reach the speed that you can reach with the fiber. And mainly it's impossible to have in the cable technology a symmetric connectivity. So what will happen? They are in front of a dilemma. Invest and change cable with fiber but with 0 adding revenues because you don't have an upside and a lot of CapEx. So not to do that, use the cable operation as a cash cow. But in the meantime, you will start to bleed during all the period. In the case of the other player, they still have copper. So once you move a customer from copper to fiber, you don't have the ARPU increase that you can have if the customer is completely new. This is the reason for which compared to the other 3 main player in Brazil, we are the player that can gain the most from this situation. For me, it's quite clear because it's the dilemma that was also Telecom Italia had in Italy. Once you have a customer, they pay to you BRL 40, BRL 50, BRL 60 for copper with ADSL or whatever with the FTTC. They will not pay much more for FTTH.

Very quickly on -- sorry, Pietro. Very quickly on this front, how do you see the competition with those smaller ESP players in Brazil? Either on the B2B side but also like on the B2C, right? So far, they have been very focused on the B2C, but I also want to understand whether or not you are considering in capturing an opportunity on the B2B side.

What's happening is that when you look at the local player, there's also a fiscal issue. You know that the local players are able to grant a specific fiscal advantage until they are below a certain amount of customer. So once you get this one and you try to enlarge or to increase the scope, the issue is that the number that you were reading on the balance sheet are not the same that you look to when they are in your balance sheet. So I'm not looking there, but what is important? We are not looking to buy customer base. We are interested to enlarge our infrastructure. This is most important element for which usually we do not evaluate small ISP.