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

Good morning, ladies and gentlemen. Welcome to Vivo's Third Quarter 2026 Earnings Call. This conference is being recorded and the replay will be available at the company's website at ir.telefonica.com.br. The presentation will also be available for download. This call is also available in Portuguese. [Operator Instructions] [Foreign Language] Before proceeding, we would like to clarify that any statements that may be made during this conference call regarding the company's business prospects, operational and financial projections and goals are the beliefs and assumptions of Vivo's Executive Board and the current information available to the company. These statements may involve risks and uncertainties as they relate to the future events and, therefore, depend on circumstances that may or may not occur. Investors should be aware of events related to the macroeconomic scenario, the industry and other factors that could cause results to differ materially from those expressed in the respective forward-looking statements. Present at this conference, we have Mr. Christian Gebara, CEO of the company; Mr. Rodrigo Monari, CFO and Investor Relations Officer; and Mr. João Pedro Soares Carneiro, IR Director. Now I will turn the conference over to Mr. João Pedro Soares Carneiro, Investor Relations Director of Vivo. Mr. Carneiro, you may begin your conference.

Good morning, everyone, and welcome to Vivo's Third Quarter 2026 Earnings Call. Today, our CEO, Christian Gebara, will walk you through our operational and commercial performance. the continued evolution of our connectivity in digital ecosystem as well as our key ESG developments. Then Rodrigo Monari, our CFO, will provide more details on costs, profitability, investments, cash generation and shareholder remuneration. With that, let me turn the call over to Christian.

Thank you, João. Good morning, everyone, and thank you for joining us today. Vivo maintained strong momentum in the third quarter, once again delivering consistent results across the business. Our customer base expanded further with postpaid access reaching 74.7 million, up 7.1% year-over-year, while homes connected with fiber increased 10.8% to 8.4 million. At the same time, our fiber footprint expanded to 32.4 million homes passed. Commercial momentum translated to another quarter of revenue expansion well above inflation. Total revenues grew 7.2% year-over-year, supported by a 7.4% increase in mobile services revenue and 2.7% growth in fixed revenues. Profitability climbed at an even faster pace. EBITDA rose 10%, with the margin reaching 44.5%, 1.1 percentage points above the previous year. This performance was also reflected in cash generation, operating cash flow totaled BRL 12.7 billion in the first 9 months, up 13.5%, while free cash flow amounted to BRL 7.3 billion. Over the same period, net income advanced 23.3% to BRL 5.3 billion. Our robust cash generation and balance sheet give us to invest in future opportunities while continuing to deliver attractive returns to our shareholders. We have already committed BRL 7.3 billion in shareholder remuneration in 2026 and still have interest on capital and buyback program at our disposal. Moving to Slide 4. The ongoing transformation of our revenue mix remains a key driver of Vivo's consistent top line growth. Total revenues reached BRL 16 billion in the quarter, increasing 7.2% year-over-year. Mobile service revenues advanced 7.4%, supported by a 9.2% increase in postpaid. While FTTH revenues rose 5.7%. Handsets and electronics also made a strong contribution, up 26.6% compared with last year. During the quarter, we rebalanced Vivo total revenues, aligning the allocation of mobile and fiber with prices that better reflect the market reality of each product. This does not change the underlying trend with services revenues maintaining a healthy pace, up 6% year-over-year. Beyond the headline growth, the composition of our revenues also continues to evolve favorably. Recurring revenues now represent 84.9% of service revenues, 1.6 percentage points higher than a year ago. further enhancing the resilience of our revenue base. New businesses continue to gain relevance accounting for 12.5% of total revenues in the last 12 months. This progression reflects our ability to deepen customer relationships and capture opportunities beyond traditional connectivity. Turning to Slide 5. Our mobile business delivered another quarter of high-quality expansion, combining a growing customer base, higher monetization and disciplined churn. Total mobile accesses reached BRL 106.4 million, up 3.4% year-over-year. Excluding M2M and Dongles, our postpaid base expanded to 53.4 million accesses supported by over 900,000 net additions in the quarter. Monetization also strengthened mobile ARPU reached a new high of BRL 32.9 with the underlying trend remaining positive even when excluding the previously mentioned impact from the rebalance of Vivo total revenue. Meanwhile, postpaid churn stood at just 1% underscoring the loyalty of our customer base. In prepaid, we brought to the market an innovative value proposition that goes beyond connectivity. Our new flagship offer starts at BRL 35 for 30 days and incorporates additional benefits, such as discount of up to 60% in drugstores through Vale Saúde Farma as well as Google cloud storage. 5G is also playing increasingly important role in our premium positioning. Our 5G customer base now totals 28.1 million representing 1/3 of mobile access, excluding machine to machine and Dongles. And for the third consecutive year, Opensignal recognized Vivo as the fastest 5G network in the world. Together, these indicators highlight Vivo's unique ability to combine scale, monetization and loyalty, allowing us to create a more compelling customer experience. On Slide 6, our fiber business maintains a healthy trajectory, driven by network expansion convergence and superior service quality. We ended the quarter with 8.4 million FTTH access, up 10.8% year-over-year. Vivo Total remained the main engine behind this performance rising 27.8% year-over-year to 4 million access. Notably, growth has also come with excellent customer retention. Fiber churn declined once again. reaching low levels at just 1.4% despite the continued expansion of our customer base. FTTH ARPU also improved year-over-year when excluding the rebalancing associated with Vivo Total. Network utilization is improving as well. Our footprint now covers 32.4 million homes and take-up rate advanced 1 percentage points to 26%, supported by 213,000 FTTH net additions in the quarter. quality remains a key differentiator. Vivo ranked first in 4 broadband Internet performance categories in nPerf's worldwide survey among large countries reinforcing the strength of the connectivity experience we provide. Moving to Slide 7. Our B2C ecosystem is enabling us to capture a greater share of our customers' digital lives combining our superior connectivity with an increasingly broad portfolio of services. On the last 12-month basis, B2C revenues reached BRL 47.5 billion, up 7.6% year-over-year. Connectivity revenues rose 6.4%, while new businesses increased 37.1% to BRL 2.3 billion. These deeper relationships are translating directly into higher monetization, monthly B2C revenue per RGU climbed to BRL 69.8 from BRL 64.6 a year ago across a base of 56.7 million RGUs. Our new businesses are also scaling rapidly across multiple verticals. Consumer electronics advanced 69.4%, Health and Wellness rose 46.4%, OTTs increased 30.5% and Financial Services were up 13.6%. Together, these activities now account for 3.6% of total revenues. We continue to enrich this ecosystem with offers that extend well beyond traditional telco services. During the quarter, Vivo became the first telecom operator in Latin America to launch Apple care services. Already more than 50% of iPhone Pro devices sold in vivo stores include the service, providing an encouraging early indication of customer demand for integrated protection solutions. In addition, we launched new streaming bundles starting at BRL 49.90, where customers can combine up to 6 streaming services for a fixed monthly fee with the convenience of managing their subscriptions and paying for everything through a single bill. By progressively bringing connectivity entertainment and financial services, health, AI and consumer technology into the same ecosystem, we are deepening customer relationships, creating new monetization opportunities and ultimately unlocking greater customer lifetime value. Turning to Slide 8. B2B is another key avenue for diversification. As we broaden our capabilities to address the technology needs for companies of all sizes. On a last 12-month basis, B2B revenues reached BRL 14.2 billion, up 7.2% year-over-year. Connectivity expanded 4.7% while digital B2B grew 10.9% and now accounts for 8.9% of Vivo's total revenues. This momentum is broad-based across our digital capabilities. Cybersecurity increased 15.9%, Cloud services advanced 12.4%, Digital Solutions were up 12.1% and IoT messaging progressed 6%. Our ambition, however, goes beyond selling the video products. We are bringing together connectivity with digital services to offer integrated solutions that address increasing complex enterprise needs. A good example is our partnership with Palo Alto Networks for new Agentic security operation center. The solution incorporates AI agents into threat prevention, detection and response processes alongside 24.7 monitoring, local specialists and Telefonica's global cybersecurity ecosystem. These capabilities strengthened VIVO's positioning as a leading provider of integrated digital solutions allow us to address a wider share of our enterprise customer technology needs. Next, on Slide 9, we showcase our constant drive to innovate and enhance the quality and reach of our connectivity with the launch of Vivo [ Satélite ]. Through our partnership with Starlink, Vivo became the first mobile operator in Brazil to cover nearly 100% of the country. By complementing our terrestrial network, we have extended our coverage into rural and remote tariffs without material impact on profitability. At the core of this initiative is direct-to-device technology liming smartphones to connect directly to satellites with our relying on terrestrial infrastructure. This allows us to expand our geographic footprint well beyond our traditional mobile network that already covers over 98% of the population but only around 20% of the Brazil's territory. Currently, more than 50 million eligible Vivo customers are the first in the country to experience this capability, access to messaging, GPS and of course via selected app avail even in the most remote areas of the country. Looking ahead, we have a clear road map that includes the rollout of commercial models across B2B and B2C alongside further improvements in connectivity speeds as the technology evolves. Moving to Slide 10. We are making further progress on our ESG agenda through meaningful engagement and external recognition. On the environmental front, we raised our operational emissions targets for Scope 1 and 2 from 90% to 95% by 2035, while preserving our net 0 commitment by 2025. We also published our 2026 climate action plan, setting the road map that will guide our transition towards a low-carbon economy. Beyond our own operations, we are actively engaging society in sustainability discussions. Encontro Futuro Vivo 2026 brought together, 19 panelists and more than 9 hours of content generating 62 million views. Our efforts are being a knowledge across all dimensions. Vivo placed first among large corporations in the Atos diversity equity inclusion assessment, ranked in top 10 for the first time ever in the Merco talent ranking and received the Compliance Prong of the Year Award for the second consecutive year. Additionally, we were once again named among Brazil's best companies to work for recognized as best IT and telecom company by Valor Econômico and attain the highest level of governance in FGV's Corporate Governance maturity Index. Taking together, these achievements demonstrate how climate action, diversity, governance and talent are embedded in our strategy and contribute to sustainable long-term value creation. With that, I will hand it over to Rodrigo, who will take you through our financial performance. Thank you.

Thank you Christian, and good morning, everyone. Turning to Slide 11. Disciplined cost management and operating leverage once again enable profitability to outpace top line growth, complemented this quarter by gains from migration-related asset sales. Total costs rose 5% year-over-year, below the 7.2% increase in revenues. Cost of operations were broadly stable while cost of services and goods sold advanced at 15.6%, reflecting the evolution of our business mix. We think this line, the increase in cost of goods sold was consistent with the expansion in consumer electronics revenues and B2B equipment. Cost of sales grew a moderate 3% reflecting the evolution of digital services and the continuous pension of B2C offerings. In expenses, we continue to demonstrate solid discipline notably, commercial and infrastructure expenses declined 0.9%, while the provision for bad debt remained at health 1.8% of gross revenue supported by our robust credit scoring and premium customer base. Other revenues were BRL 365 million in the quarter, including BRL 352 million in gains from copper sales and BRL 14 million from real estate. As a result, EBITDA once again grew at a double-digit rate, reaching BRL 7.1 billion, while the margin expanded by 1.1 percentage points to 44.5%. These results demonstrate our continued ability to combine costs, disciplined operating leverage and portfolio transformation to convert top line expansion into stronger profitability. On Slide 12, we remain focused on the strategic investments that support our future development while progressively reducing the capital intensity of the business. CapEx totaled BRL 7.2 billion in the first 9 months of 2016, representing 15.2% of revenues, down from 15.7% in the same period last year, underscoring our continued improvement in capital efficiency. Our investments remain concentrated mainly on our strategic infrastructure including the continued expansion of 5G and fiber. At the same time, operating performance is translating into strong cash generation. In the first 9 months of the year, operating cash flow before leases reached BRL 12.7 billion, 13.5% higher year-over-year. After these the figure stood at BRL 80.4 billion, up 17%. This improvement is also evident in our cash flow margins. On a last 12-month basis, operating cash flow margins before this reached 27.2%, while the after margin advanced 18.1%. These figures highlight the scalability of our model we continue to invest in network quality and future opportunities while converting an increasing share of revenues into cash. Moving to Slide 13. Our solid operating performance is turning into higher net income and robust cash flow generation. Net income reached BRL 5.3 billion in the first 9 months of the year, increasing 23.3% versus previous year. In the third quarter alone, we recorded BRL 2.5 billion, up 3.1% year-over-year, making for another quarter of strong bottom line growth. Free cash flow amounted to BRL 7.3 billion in the first 9 months, 6.1% above the same period last year. In the third quarter, it reached BRL 2.4 billion, advancing year-over-year. On the last 12 months basis, this represents a free cash flow yield of 10%. Our balance sheet also remains very strong. Excluding leases, we closed September with a net cash position of BRL 2.4 billion, even considering leases, net debt stood at BRL 13.8 billion equivalent to only 0.5x EBITDA. The combination of higher earnings, cash generation and low leverage provide us with significant financial flexibility to invest in future opportunities while continuing to deliver attractive returns. Finally, on Slide 14, we continue to improve our levels of shareholder remuneration and confirm our guidance for the year. As of today, we already disbursed BRL 7 billion to investors with an additional BRL 325 million interest and capital that we paid in December this year. totaling over BRL 7.3 billion in remuneration. In addition, BRL 1 billion remains available under our current share buyback program through February '27. Notably, with 2 months remaining in the year, we have already declared 4.5% more interest on capital than the entire year of 25%, underscoring how value creation to shareholders remain a main pillar of our strategy. Our operating performance, growing cash generation and solid financial position give us confidence in meeting our guidance for while maintaining the flexibility to continue investing in business and preserving a sound capital structure. As always, our approach is centered on disciplined septal allocation. Investing in Vivo's long-term development, we -- while delivering compelling returns to our shareholders. Thank you. We are now ready to take your questions.

[Operator Instructions] Our first question comes from Luis Chagas of XP.

Congrats on the results. I have 2 questions here. The first 1 regards prepaid pricing. You recently raised prepaid prices. So how did you see the reaction from customers and from competitors here? And the second question regards OpEx we saw that commercial and infra costs fell year-over-year even with the commercial activities. This is the third quarter level a good run rate? Or did the one-offs help this quarter? And how much of the renegotiation and fee Brazil savings, is it still to come.

Thank you Luis. Thank you for the question. Also, as I said, we just launched a new offer. We are moving price up in the prepaid only to remind you, like quarters ago, we already took off was up from the offer. And now we are trying to move it above the BRL 30 that is the common offer in the market. So we launched this new one that is BRL 35, 30 days and apart from the data, it also offers like discount in drugstores. And additionally, we also included a cloud storage, a Google cloud storage. So we started like a few weeks ago, difficult to tell you what's going to be the impact. But we are very confident about the movements that we are making in the mobile segment. I think our results are a reflection of that. We do believe that we need to be changing or moving price up to be able to upsell. So now we have this prepaid offer is 35. We have the control, the hybrid entry point also with increase in front book and in the customer base that we had during the year. And we are also offering like opportunities to cross-sell digital services to both segments. So that's the movement that we have. As you saw, our postpaid grew 9.1%, prepaid 2.9% negative, but we could see increase in ARPU and also the frequency of recharge and the amount we charged by our customers in prepaid. It's early to say that is the consequence of the new offer, but we are very positive. We are driving in the right direction. Concerning costs, I think that you see -- I think we presented -- I don't know specific that you were asking about the commercial infrastructure. Yes, it was like I think the reason here is lower network infrastructure costs. No, I think there are some benefits that we're already capturing by the migration, the concession authorization that with some more quarters, we're going to capture even more. There is a little bit that is from the consolidation of Brazil. But more importantly is that we are keeping commercial activity in a very high level, as you could see, our acquisition of customers in both segments, mobile and fiber keep in a very high level. So that's part of the business that we are doing here. try to reduce costs, being more digital and also keeping and capturing savings from the migration from authorization -- from concession to authorization.

Our next question comes from Gustavo Miele of Goldman Sachs.

I'll have 2 questions as well. The first 1 I think it would be great to hear from you guys quite an update here on the outlook for the competitive environment in the postpaid market. We know that the fourth quarter is usually a bit different from other quarters in terms of competitive landscape because of like Friday. So if you could comment a bit on how you're seeing the movements from competitors on this specific segment, I think that would be great. This would be the first one. And the second one, more specific to the results, we noted that accounts receivables rose I think it was like BRL 1.1 billion quarter-over-quarter. It was a relevant increase. So just to understand a bit whether this is maybe a one-off? And what would be the effect impacting this specific line of the balance sheet.

So Gustavo, thank you for the questions. I'll start to answer and then I may ask Rodrigo to complement. We don't see any change in the fourth quarter performance. Actually, we are very positive about the fourth quarter. We had already in October Apple launch, the iPhone team and also the fund that brings people to our stores. So we see the opportunity to sell more. We've been very, very good at selling, not only smartphone but services and convergence. And as I stated, not only insurance but now Apple Care that were the first one. So we are driving a flow of customers to our stores. We now started November. It's always a very busy month digitally, but also physically in our 1,800 stores. So I don't see any movement. Our strategy continue to be the one that I just described before. More specifically, in the postpaid that you were asking, we are trying to drive convergence where we have availability of fiber. We grew a lot the number of convergent customers. Now we reached, like in Vivo Total, 4 million is our record number. and we still have other conversion to migrate to Vivo Total and other customers that are only fiber that could migrate to also to Vivo Total. We are adding more digital servers that's also help increase our ARPU. Apart from the Apple Card that I just described, we are launching a lot of OTTs promotions that put together 3 to 6 streaming OTT and it drives price from BRL 49.9 per month up to, I don't know, depending on the ones that you select. Again, we've been very successful. We are reaching annual revenues of BRL 1 billion in revenues just coming from video and music OTTs Again, playing the game of November and December, optimistic about the flow to stores and online e-commerce and also very confident of our ability to sell more services to those that are coming to our stores to buy either a smartphone or any other electronic device. Concerning like the receivables, Rodrigo can give you more. We've been very successful commercially. That has a specific and impact in the receivables that we have for this quarter. But it's -- the region of all this is the success of being able to sell more. And you could see the lines of mobile service, fiber service, but more importantly, also electronics as sale. Now we have on record. I think one of the most like the highest -- in volume is the highest. Bunning Growth is one of the highest 26.6% of handset and electronics sale year-over-year when you compare. So BRL 1.1 billion in the quarter. that drove these receivables that you have, but you're going to find ways to mitigate that and to drive it in cash. I don't know if you want to complement anything.

Gustavo, just to bring forth, Christian, here is I have no concerns about accounts receivables. And I think I always emphasize that cash generation is one of the most important pillar of our strategy. The last year, free cash flow increased 11.4%. And I'm very confident this year, we keep the same pace we have seen in the last years.

The next question comes from Gustavo Farias with UBS.

Congrats on the results. So two on my end as well. First one, if you could update us on the capital allocation priorities for 20 and especially in the light of a consolidating market in fiber and potential M&A activity. And my second question, if you could also comment on any expectations or how you are preparing and any anticipated effects of the tax reform on financials?

So Farias, I don't know if I get your first question. So I think the structure of our capital structure, we are always assessing it as I think we described before. We have today a very well adapted to the environment that we leave here in Brazil for current high interest rates. So I think that's giving us a lot of benefits. And also, we are being able to remunerate our shareholders using all the mechanism that we have today available. So again, if we expect taxable base or our earnings before taxes to expand over coming years, of course, no, it's also driven by the strong performance that we're having. Of course, we can access and reaccess what is the best capital structure. For the moment, we do believe that we have the right one to face the situation that we have right in Brazil. If we need to do M&A, we have many ways to do that. We are open to M&A. We are accessing targets. We haven't come to any conclusion about anything to be acquired in the near term. But of course, we have conversations that we stated in the market a few weeks ago about preliminary conversations that we had with one specific ISU. So again, if it comes to the conclusion that we want to buy someone, we have many ways to find the right the right mechanism to finance it. Regarding what was the second question? Tax reform? No. What was -- can you repeat it, please?

Yes. No. Just regarding the tax reform, if you guys have any anticipated expected impacts going forward.

I think the result a challenge of implementing it. Also we've been preparing ourselves operationally speaking, to be able to implement the tax reform. Of course, we still don't have all the rules that we need to implement, but whatever is available is going to be enough for us to put it in process. We are very confident that in the bottom line, the impact will be neutral for us. We may have some increase in some of the text depending on what's going to be defined by we just have CBS. We don't have the total amount. And -- but again, we also have the compensation of -- we have during our chain that we can compensate some of the tech that we paid during the process. So let's see what's going to be the final number. we're going to be prepared to do it. And we believe that apart from the operational challenge of implementing it, the bottom line impact for Vivo will be neutral.

The next question comes from Leandro Bastos with Citi.

I have 2 questions also. The first I wanted to double-click a little on the fiber to mobile reallocation, you guys mentioned for Vivo Total. If you can just, I don't know, quantify a little better what was the impact in the quarter and just discuss what has been the rationale for this change. So this would be the first question. And the second, if you could comment a little bit still on mobile. How can we think about the outlook for price ups into next year, especially thinking about postpaid back book given the new context of -- given the new macro backdrop in Brazil competitive landscape in mobile. I know there are many moving pieces and maybe a little early to tell, but with the visibility you have today, how can we think about the pricing strategy into next year. So I think those would be my questions.

Okay. Thank you, Leandro. So going to the first one, we had this rebalance of Vivo Total is our convergent offer. The key objective is to better reflect the commercial positioning and the pricing of the bundle. Now of course, there is always the allocation, what is mobile and what is fixed. And we believe that we had to reassess it based on what we see as mobile and fiber service prevailing in the market. We have market price available above the line and below the line. And as a result, we access it and agnostic was that we needed to rebalance putting more in mobile plan than in fixed plan. For us, it's difficult because, of course, we are much more focused on convergent and thinking of the service revenue as we grew 6% of thinking of the total revenue that we grew 7.2%. But if we need to show the 2 revenue separately, we need to assess it based on the plants that are being market both for mobile and for fiber. Having said that, we decided to relocate it with a more close reality of being practiced in the market for both mobile and fiber based on competition and based in the market dimension. So that's the reason. It doesn't change the service revenue. It's just more fair in the distribution among the 2 plants, if we consider that they could be sold separately. For mobile, we are again -- we are -- as I said, we drop up price in prepaid. We are driving up prices based in front book and back book. As you know, we do that formally in April in August. That's what we did in 2026. For instance, 70% of the hybrid was like I'm talking about the back book, had a price increase in April. The rest was in August. The postpaid the same, 78% in April. The rest was in August. Vivo Total that worst is very important. We had everything 100% of price increase in April. I don't want to give you an advance of what's going to be the right time for this. But okay, if there is inflation, we keep the strategy of moving prices up, and we have like normally twice a year, part in the first semester, the rest in the second summer we may keep it or not, but that's what I can share with you. The more important than that is that we are creating also play very strong in prepaid 35%, I think, is important price point to start to have the prepaid. The light that is the 1 based in credit card that there is no credit risk for Vivo. So we are doing that with annual plans. Also, we raised price. Now the annual plan is starting from BRL 30. Again, it's 3 eyes, but there is a commitment for 12 months. the postpaid, the family plans, the Vivo total and again, digital services embedded in all offers to rise ARPU up. So that's the strategy that I can share with you right now.

The next question comes from Rogério Araújo from Bank of America.

I have Just one question on the growth momentum in the mobile market. Vivo has outperformed one of the peers. What do you attribute that better performance from Vivo. And also, do we expect this better relative performance to be sustainable, everything you can share your thoughts internally would be great.