Telefonica Brasil SA (VIV) 2014 Q3 法說會逐字稿

Good morning ladies and gentlemen. At this time we would like to welcome everyone to the Telefonica Brasil third quarter 2014 earnings conference call.

Today with us we have Mr. Paulo Cesar Teixeira, CEO of Telefonica Brasil, and Mr. Alberto Horcajo, CFO and Investor Relations Director of Telefonica Brasil.

Today we have a simultaneous webcast with slide presentation on the Internet that can be accessed at the site www.telefonica.com.br/ir. There will be a replay facility for this call on the website. After the Company's remarks are over, there will be a question-and-answer session. At that time, further instructions will be given. (Operator Instructions).

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the Company's management beliefs and assumptions, and on information currently available.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the Company's future results and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I will turn the conference over to Mr. Paulo Cesar Teixeira, CEO of Telefonica Brasil. Mr. Teixeira, you may begin your conference.

Good morning, ladies and gentlemen. I would like to thank you all for attending this conference for the third quarter of 2014 results of Telefonica Brasil.

On slide 3, we see the main highlights of today's call. We keep improving our performance in high end mobile segments. Our contract base expanded 23% year over year combined with strong [data] adoption. We achieved an impressive share of data in our revenues, reaching 38% of the total ARPU in this quarter, equivalent to our peer markets.

On the fixed side, our focus on high-end customers is also evident. We accelerate our Fiber-to-the-Home footprint with 2.2 million addressable homes in the state of Sao Paulo. Broadband accesses almost doubled year over year reaching out 322,000 at the end of September.

On the revenue side, our trends in the quarter are also very sound. Net service revenue achieved a solid annual growth of 4.6% when excluding regulatory effects. Our permanent efforts to achieve greater cost efficiency resulted in a cost reduction of 1% in the year-over-year comparison, despite our strong commercial activity during third quarter 2014.

As a result annual growth in recurrent EBITDA during this quarter reached 7%, confirming the trend presented in the last quarter.

Moving to slide 5 we present our consistent access evolution in the quarter. The chart on the left registers more than 95 million total accesses at the end of the third quarter 2014, an overall increase of 4.1%. Mobile accesses have grown 4.2% compared to the previous year, driven by contracts, which increased almost 23% in the same comparison.

Our prepaid strategy continues to be focused on value rather than number of accesses. Due to our strict connection policy and intensive migration to contract plans, prepaid accesses have decreased 3%. Actually, if you were to follow the second player's policy, we would have around 90 million additional accesses.

Fixed accesses recorded 15.6 million at the end of third quarter 2014, with an increased annual growth of 3.5% mainly explained by 26% growth in accesses of IPTV and DTH. Broadband accesses 1.6% higher, mainly because of the fiber-to-the-home performance. And 3% increase in fixed voice accesses led by our fixed wireless solution mainly outside the state of Sao Paulo.

Slide 6 shows that our super mobile strategy is leading to a consistent contract in data adoption growth. Both reflected in the accelerated positive evolution in data ARPU in the third quarter 2014. Our contract customer base grew 23% in the year-over-year comparison, and represents 34% of the total mobile accesses, the highest level among competitors.

Our contract share in offnet adds in the last 12 months features the remarkable amount of 61% with a consequent outstanding share of mobile revenue capturing; as Alberto will detail further in the presentation.

The improvement in the mix is highly driven by migration of prepaid customers to contract plans, which increased 20% in accumulated basis with clear benefits in churn reduction and ARPU increase.

Penetration of smartphones is also growing fast and reached 62% for our total customer base, an annual increase of 17 percentage points. Data services penetration is increasing on the same pace and currently represents 43% of our mobile base. Therefore, mobile data users reached 39 million accesses in the quarter, a growth of 62% in the year-over-year comparison. While data traffic in the same period soared by 78%.

As a result, data ARPU reached BRL8.9 in the third quarter recording a strong annual increase of 16% in the period, a CAGR of 22% considering third quarter 2012 and third quarter 2013 numbers.

Moving to slide 7, we describe how we're building a sustainable top position in 4G services. Vivo leads the market in 4G coverage with 111 municipalities already covered, represents 37% of the Brazilian population. The larger coverage is translated into an indisputable leadership in market share of accesses. Our market share in this technology reached 39% in August 2014.

We have the largest available slot in 4G spectrum in the 2.5 gigahertz frequencies. We also just acquired additional spectrum in the 700 megahertz auction for BRL1.9 billion, the minimum asking price, aiming to increase even more our capacity to provide 4G services.

As a result of this strong adoption, 4G traffic already represents almost 20% of the total data traffic in the main capitals of Brazil in October with [relevant] impacts in network quality and efficiency besides an improved customer experience.

Slide 8 presents our evolution of the process of transforming Vivo into a fiber company and enhance our position as a video player. We continue to fast expand our FTTH footprint in the [Helfo] region of Sao Paulo. We account for 3.4 million homes passed being 2.2 million commercially addressable.

Combined with that, we're maintaining our path of growth in net additions of Vivo fiber broadband by reaching 49,000 new customers in the third quarter, almost two times higher than the net adds reached one year ago. This positive trend is also reflected in our gross adds of FTTH broadband with speed above 50 megabits per second, which already represents almost 90% in the quarter, a level two times higher than the third quarter 2013.

DTH customer base experienced an improved annual growth of 30% in the period. In addition, net adds with IPTV technology increased almost two times in the year-over-year comparison. Our focus to create loyalty on (inaudible) fixed customers, this strategy allowed us to increase our triple play customer base 35% year over year.

Moving to slide 9, we present once again a sound evolution in the corporate segment in different forms, strengthening our strategy to be a convergent corporate provider. In 4G, our complete portfolio and coverage led us to annually increase six times our customer base in the quarter, reaching 550,000 customers in the segment only one year after its launch.

On the fiber side, our level of customers in the third quarter 2014 is 1.5 times higher than one year ago, supported by the expansion of [homes passed] in the field to better address opportunities with large corporations. It is important to highlight that our corporate penetration of accesses is very similar to highly mature markets reaching 35% by the end of the quarter.

In addition, we're also capturing important levels of revenue growth in data package and IT. 24% and 50% in accumulated basis respectively, aiming to strengthen our strategy for corporates while expanding our services to this segment including digital security, fleet management, multimedia and digital content.

Slide 10 shows the financial performance in the third quarter 2014 and accumulated in the year. In the quarterly analysis, service revenue grew 1.2% as a result of a combination of better trends in fixed revenues and the resilient mobile performance [in the face of] regulatory impact in the macroeconomic environment.

As a result of our cost discipline, we achieved an annual recurrent cost reduction of 1% in the quarter. This is particularly impressive in the environment of higher (inaudible) pressures and the strong commercial activity.

In this sense our recurrent EBITDA, annual evolution in the third quarter confirmed the positive trend presented last quarter with a 7% increase in the period. Net income reached BRL1 billion in third quarter 2014, an increase of 35% year over year. In accumulated terms, profit achieved BRL3.7 billion with a 48% increase over nine months 2013.

In terms of CapEx we accumulated BRL4.2 billion in the year a growth of almost 24% over 2013, representing 16% of net revenues with investments oriented to promote our quality differential.

Now, Alberto, will bring you some insights regarding financial performance.

Thanks, Paulo, and good morning ladies and gentlemen. On slide 12, we show the evolution of mobile service revenues. During this quarter, annual growth achieved 3.5% and reached 6.8% when excluding MTR cuts for the period. Data revenues accelerated their expansion, growing almost 21% year over year versus 19% in the previous quarter. This performance was made possible by a robust rise in Internet and value added service revenues as I will detail in the next slide.

Access and usage revenues were stable when compared to last year mainly due to lower contribution of prepaid recharges in the context of lower economic growth for the period being partially compensated by our continued positive evolution in the contract customer base.

The reduction of 27.6% in network usage revenues for the quarter reflects the 25% MTR cut effective in late February. Without this effect we assume an annual reduction of just 4.7% due to lower income traffic as a consequence of the increase in (inaudible) community and contract. Our leadership and clear focus on quality revenues is evident and supported by the numbers. We are pleased to report that we captured 68% of the markets incremental mobile service revenues in the last 12 months.

In slide 13 we present the details on the evolution of data and value added services, through targeted commercial actions and a steady growth in sales nationwide quarter after quarter data revenues already represent 38% of mobile service revenues.

This penetration is equivalent to the data penetration of some more mature and higher income markets and reflects the successful data adoption within our customers and the improved monetization of our portfolio of Internet and value added offers.

Internet revenues accelerated our annual growth rising 33% in the year-over-year comparison due to a strong sales of 3G and 4G plans and packages supported by the hike in the smartphone penetration in our base.

In addition, value added service revenues soar 43% in the period mainly driven by our education and online security services and the continued adoption of midi products.

Messaging revenues decreased 16% annually reflecting the maturity of the service as we have been mentioning in the last few quarters and as a consequence of our well performing strategy to promote the adoption of integrated offers of SMS, voice and Internet to improve data ARPUs.

Actually, as a result of the preference from our customers for Internet and digital services, SMS represents to-date only 20% of our data revenues. We strongly believe that Internet and value added service revenues should continue to be the driver of growth in the following quarters supported by our differentiated coverage, customer experience, innovative services and brand perception.

On slide 14, we show the recent evolution of fixed service revenues. Fixed net revenues evolution in the quarter confirms our continued improvement with a controlled decrease of just 3.2% year over year, when excluding regulatory impacts the variation is of 0.4% in the year-over-year and quarter-over-quarter evolutions.

Voice revenues were down 10% and continued to suffer from service maturity and mobile substitution. Although starting to be compensated by the recent fixed wireless revenue stream when excluding the mentioned regulatory impact, voice revenues have decreased 5.9% annually.

Data transmission revenues increased by 2.3% year over year versus 0.5% last quarter with a direct influence of the hike in higher ARPU FTTH customers. On the Pay TV side we have recorded an annual revenue growth of 23% in the quarter mainly due to the strong customer adoption in IPTV and DTH as Paulo previously mentioned.

Other revenues grew by 12.5% year over year as a consequence of the higher level of equipment sales (inaudible) touch to selected service contracts with our corporate customers.

Moving to slide 15 we present the main levers of our yearly margin evolution for the third quarter. General and administrative and personnel costs decreased 1.2% annually as a result of the past restructuring programs in the last two years combined with a strong cost control especially for infrastructure related expenses.

Services render expenses decreased 4.7% year over year due to the MTR cuts made last February. When excluding such effect, cost of services rendered increased 1.5% explained by our actions to improve network coverage and quality with the correspondent increase in site lease expenses beside higher available cost of content attached to sales of TV and mobile applications.

Subsidies and selling costs increased by 5.3% year over year reflecting our continued focus in capturing higher value customers with vigorous access evolution in contract, mobile data, fiber to the home, and TV segments. Our austerity on costs in different fronts in a highly inflationary environment resulted in a slight annual decrease of 1% in total recurring costs during the third quarter.

These evolution combined with a revenue increase mentioned before led to the annual increase of 7% in recurrent OIBDA during this quarter.

Now moving to slide 16. On the top left side we show there are accumulated CapEx in the year reached BRL4.2 billion representing close to 16.1% of sales, 3 percentage points higher than in the previous year. This evolution is aligned with the plan of expansion of fiber to the home in the state of Sao Paolo, investments in 3G capacity and 4G coverage, to guarantee a superior quality in the services we provide, and to strengthen our market leadership.

Gross debt decreased close to BRL400 million annually, mainly due to repayments in the period while net debt decreased close to BRL300 million on the back of higher interest on capital and dividend payments in the last 12 months.

Net debt stands at just 0.14 times last 12 months OIBDA. This stronger dividend payment is supported by our solid operating cash flow generation in the period which improved 23%.

In this quarter, as already mentioned by Paulo, Telefonica Brasil recorded by net income of BRL1 billion, 34% higher than a year ago, explained by an improved OIBDA evolution, recurrent positive impacts in depreciation resulting from the review of the useful life of fixed assets made last quarter, and combined with tax benefits related to the BRL900 million [declare] in interest and capital during the quarter.

Now Paulo will conclude with a final statements before we open for questions. Thank you very much.

Thank you, Alberto. This quarter was marked by our strong performance in capturing high quality revenues with the continued improvement in fixed revenues and accelerated mobile contract and data adoption in the period.

We have focused in efficiency initiatives with an important cost reduction in the quarter despite the strong commercial activity in the challenged environment.

As a result our recurrent EBITDA evolution complement the positive trend presented in the last quarters. Besides our excellent performance this quarter was marked by the worldwide relevant acquisition done by Telefonica Brasil, the purchase of leading broadband and TV operator GVT.

Although it is still pending approval, the deal will represent a breakthrough strategic step that will help us to create further differentiation against competition. Telefonica Brasil will consolidate as the leading integrated telco, number one in access, revenues, profitability and with an unmatched capabilities to attend high end customers.

Both companies hold a hands-on culture that drives our strategies and result-oriented performance. With this acquisition we expect to strengthen even more our differentials in coverage, in customer experience, innovative services and brand perception.

We look forward to the bright future ahead of us. Now, we are ready to take your questions. Thank you.

(Operator Instructions) Susana Salaru, Itau.

Actually, I have two questions here, first on the cost control, we saw that G&A, the line of G&A has a very strong decline of 7% year-over-year; so if you could just elaborate on what were the initiatives that actually delivered this decline? And if there is additional room for cost efficient coming from G&A? That will be the first question.

Then the second question is if you could just speak a little bit more, if you have some guidance in terms of FTTH, the penetration, you have already 3.4 million homes passed, what kind of penetration will you aim to reach in 2015 if there is any guidance for the mid-term also? Thank you.

Good morning Susana, this is Alberto Horcajo to address your first question on G&A evolution, well there is a number of impacts that are allowing us to reduce G&A. First of all, we have done some restructuring in our initiative activities. We have completed some BPO early in the year and that's given us some progress in improving unit costs related to some (inaudible) activities and initiative work. Also on the logistics front, we are improving our performance there, and that's also showing. And finally, I would highlight the progress in legal related issues where we have been able to reduce also our costs there.

In general, I would say that we are working hard to reengineer the way we sell, the way we take care of customers, and the way we invoice and deal with our customers on the financial front, and that -- with equal to a lot of promise, reminds me of the fact that we are facing a highly competitive environment and one with significant inflation pressure. So any initiatives that allow us to improve our productivity and to -- while not losing reliability, improve our performance is the way, the way forward for us. I hope this answers your first question, Susana.

Yes.

For the second question, Susana, its Paulo talking, thank you for the question. It is very important for us to grow very fast in the fiber, we have, we already in this period of time we grow a lot, if you see the figure that we show in the slide 8, we achieved now 3.4 million homes passed and 2.2 addressable homes. The total penetration to have now in the all markets in corporate and mass market, is around 15%, but it's very important to see that we are growing very fast in this period of time. Basically, in the corporate market we achieved high penetration levels 35%, is like the same that we have in matured markets.

In our vision it's possible to have this kind of penetration, but in Brazil we have some different situation in terms of people that are living in the rich areas in the poor areas where (inaudible) but I think we have the focus on this to capture all opportunities in this sense that you have the best coverage in terms of fiber in Sao Paulo, the main areas of Sao Paulo state and we have covered now the old area that you have copper and the old area that you have cable.

It is very important for us to pick up people that are in these areas to the fiber services. But basically is this as we are growing a lot in to thinking this 15 that we have now is the beginning of the process that you can achieve more penetration in the near future.

Perfect, thank you.

Maria Azevedo, UBS.

Thanks for taking the question. I would like to just add a bit on your future CapEx trends, how do you expect it to behave on the back of FTTH and mobile data growth going forward? And also in terms of CapEx to sales ratio as well? Thank you.

Maria, thank you for the question. In terms of CapEx, we are still prepared to achieve in the end of this year around 50% compared to the last year. Basically our focus is to have more investment in terms of capacity in 3G and more coverage in 4G and in fiber. If you see the number to show now we increased a lot in this year, the possibility to achieve this goals and increase the CapEx until September, 25% year-over-year in terms -- in comparison with last year. And focus to have now is to end this year around BRL6.3 billion CapEx in the total period of time.

It's okay for you, do you have more doubts.

Yes, but for the following years, should we still expect something above BRL6 billion, BRL6.5 billion? Or should we see a downward trend?

For the following year -- it is about this, for the following year we don't give guidance, okay.

Sure, and thank you. And just as a follow-up question, have you seen any other macro impact on the operations apart from lower prepaid recharges?

We have at the moment in Brazil, the mass market is more sensitive in terms of the macro economic scenario, but in the end of the year, I think the -- in our vision it's possible to (inaudible) this business. Basically we are now putting November some auctions in terms of new offers in postpaid in control plans in prepaid.

We recently changed the module -- the mode that we are charging data in prepaid. We are starting in two state of the country. But basically our vision it is possible to have in the end of this year, the total country in the new mode that's basically to stop the possibility to use the data, when the clients achieve the limit, the franchise that you, if you bought for this time, it's not possible to have travelling mode in this case and we think it's better for the quality of the network and the quality perception for the size of the client.

If they knew that we are putting in the market in November, that you are looking for this process is very important for us to achieve more of our base and basically to grow in the total market.

Okay. Thank you very much.

Valder Nogueira, Santander.

Very quick, do you guys have any update how are the discussions turning regarding the renewal of fixed line concessions? Is that anything already on the table being discussed with the regulator?

Hi Valder, thank you for the question. We are -- there are some studies, some possibilities to [board] the discussions, but we are waiting for the time to have the discussion with government. Basically we are still prepared for this and we have so many points that you need to address in this discussion. But I can't open this at this moment.

Okay. Thank you

Jonathan Dann, Royal Bank of Canada.

Two questions, on the fixed line with the fixed wireless access, do you think the offnet strategy changes or your offnet strategy changes after the acquisition of GVT or will you continue to offer those products?

And then secondly, have you decided on the date on which you will settle the spectrum bill? And will you pay all of it upfront?

Thank you Jonathan for the question. Basically, the FWT solution is a solution that we're addressing for the people that who don't have the fixed line basically in the service fixed now.

It is a pure fixed service, not the same service that we have in GVT. It's for the other segment. The people that prefer to have fixed tariff, fixed number to run the small business or to have in their house but it's not compete with the GVT services. That is basically in the areas that we have class A and B and the clients that are looking for the fixed broadband. It's different markets that we achieve in these two possibilities.

Our vision is to maintain the service in the next year. In this year we're thus in the last quarter basically because of the bad debt that we have in Brazil nowadays. But we're still more selective in this offer but our intention is to maintain this offer for the next year.

On the payment of the spectrum, we will be paying later in the year before the year runs out for the cost of the spectrum BRL1.7 billion. And later between 2015 and 2019 we will be contributing to the independent entity which will be taking care of the carrying of the spectrum according to our participation. And then there will be additional roughly BRL1.2 billion.

Has that answered your question?

It does. Can I ask a follow-up on the fixed wireless? Do you think -- I know previously you have not used satellite outside of Sao Paulo. Is there an argument to offer a sort of fixed wireless satellite mobile triple play outside of Sao Paulo and outside of the GVT areas to be, I guess, truly nationwide? Do you see that as an opportunity?

If you understand, when you talk DTH, DTH basically you have this possibility to offer nowadays in Telefonica Brasil just in Sao Paulo state. And GVT has this offer for all Brazil. It is a complementary situation and you are so prepared to offer this for all base that we have in Brazil in fixed and mobile services if you compare -- if you join the base from Telefonica Brasil and from GVT.

I think all the possibilities are open. Basically, we have the solution available in all Brazil, all our areas that we are covered by 3G in all Brazil. And it's possible to combine every possibility that we have, in our portfolio and the portfolio for GVT.

Thank you very much.

Thank you.

(Operator Instructions) Fabio Lezzi, BTG Pactual.

Just I have a question on the timing related to the regulatory approval of GVT transaction. What is the next steps to approve the -- to conclude the approval of the deal? And if you already filed at the antitrust agent to approve the deal and what is the timing to conclude the whole regulatory transaction? Thank you.

Thank you, Fabio, for the question. We are working this process. I think we are so updated on this so they have so many questions to solve in a big process like this. But we are so prepared to have -- to all the filings to -- subject to (inaudible) in this year.

I think we have got opportunity in the next year, probably in the mid of the next year for approval of this process. Basically on this -- it will depend from their decisions from the (inaudible) decision but we're still prepared to give all the information that we need to get the approval for this process.

Are you seeing any regulatory risk related to the cross ownership that somehow GVT since today we have GVT that is allowed to take the 8% of stake and today you have Telefonica. Do you see any risk from that looking at this cross ownership?

This is Alberto Horcajo. According to some of the requirements we expect to have from the regulator, GVT will have flexibility on our side to close our shares that they may hold in Telefonica Brasil after the closing of the deal.

So we're not anticipating any difficulty in fulfilling the expectation of the regulator in terms of ensuring that there are no conflicts of interests in our shareholding base.

Has that answered your question?

Yes, it does. And one final follow-up on this. Do you see any risk since the GVT has 8% of its base in Sao Paulo state? Do you see any risk of having divestment in this specific area that GVT also has overlapped presence in Sao Paulo state?

Well, this is an opinion from our side. We see very reduced overlap and we believe that when you look at the state of development of the market that should not be a concern. There is a panoply of remedies that the regulator may look into and potentially imposed.

But we're confident that there should be very, very limited impact to change the nature of a wholesome transaction as we're trying to complete. And that's our view really.

Okay, thank you guys. Good day.

(Operator Instructions) Jonathan Dann, Royal Bank of Canada.

Thank you for taking a second. It's just a thought, does the acquisition of GVT or the issue of shares in a rights issues, does that create distributable income to subsequently allow the larger company to distribute a larger percent of cash flow? So does that in any way improve, I guess is there any way cash dividends could be larger than net income post the rights issue and transaction?

This is Alberto again. Obviously, as we potentially expand our net income we will be in a position to distribute more to our shareholders. It is important to take into consideration that the expansion of our equity base also creates the opportunity for further payment of interest on our capital; subject of course to the generation of the necessary net income.

So yes, it does create an opportunity which we in the business by performing and delivering the results to try to capture to the benefit of shareholders.

Has that answered your question?

Thank you. I think so, yes. Thank you very much.

(Operator Instructions) There are no questions at this time. This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Teixeira for any closing remarks. I am sorry, we actually do have a question.

Eric Guo, Gabelli and Company.

Just a quick question, a follow-up on the CAPEX where the total, the BRL6.3 billion that you gave for the full year, does that BRL1.7 billion for the spectrum is that included in that BRL6.3 billion figure?

No, not included.

Okay, all right great. Thank you.

Thank you.

This concludes our question-and-answer session. At this time, I would like to turn the floor back to Mr. Teixeira for closing remarks.

Thank you all for attending our conference. As I told you during the presentation, we will continue to focus on growing high value customers and generating quality revenues.

The results are improving and we had EBITDA growth for the second quarter in a row. GVT will bring a series of opportunities for us. As I told you in my message, I think we have a bright future ahead.

Thanks again. I hope to see you again next quarter or any time soon. Thank you.

Thank you. This concludes today's Telefonica Brasil 3Q 2014 results conference call. You may disconnect your lines at this time.