Telefônica Brasil CEO: ‘The market needs to be consolidated'

With a high number of service providers, rising deployment and customer activation costs and overlapping networks, Telefónica believes that the Brazilian fiber-to-the-home (FTTH) market is moving towards a necessary consolidation.

 And it is willing to be an active participant in this process.

“The market needs to be consolidated. It's clear for everyone. We started with fiber before anyone else. We now have 24mn homes passed, 5.5mn customers and [we] are the only one able to offer, with this size of operation, a convergent offer,” Telefônica Brasil CEO Christian Gebara (pictured) told investors in an earnings call.

According to the company, its Vivo Total convergent plan, bundling postpaid and fiber, represented around 70% of Q4’s FTTH net additions.

Gebara, however, believes it is not commercially feasible having three fiber networks in the same locality. The market, he cautioned, needs more rationality.

“In the past, there was a feeling that everyone could build a network and everyone would be successful. I don’t think that’s going to happen anymore.” To prove his point, he said that numbers of net additions for the main ISPs and fiber broadband carriers in the country have slowed down. 

Coupled with that, he mentioned high interest rates, which significantly increase the capital cost for deploying and passing the network, as well as to connect and maintain the service for customers – although not necessarily for Telefônica.

“Having said all that, I believe consolidation needs to happen and will happen. We are open to see what the opportunities are. We may have a lot of overlap with most of the players, which could be a reason not to buy.”

In addition to network overlaps, a second element assessed by Telefônica in potential M&As is the quality of the fiber assets to be absorbed, he said.

Telefônica has not yet found any such potential asset, but continues to map the market, which Gebara said is now much keener on this consolidation process than one year ago.

During the year, Telefônica expanded its FTTH network to 3.7mn new homes (homes passed) in 82 new localities, with 874,000 new clients. The company’s FTTH service is now available in 409 localities.

Relying on its co-investor CDPQ in neutral fiber network FiBrasil, Telefônica plans to reach 29mn homes passed with fiber by 2024. 

CAPEX

Fiber, together with 5G and digital services, is one of Telefônica’s investment focuses for the upcoming months. The telco announced 2023 capex guidance of 9bn reais – slightly down from the 9.5bn reais invested in 2022, although more than the 8.6bn reais spent in 2021.

The projected capex for the year excludes possible investments in licenses, such as spectrum permits, and leasing.

Specifically, Telefônica's spending will go toward reinforcing mobile network quality, expanding 5G coverage, expanding the number of homes connected via FTTH and modernizing systems. 

In comparison, TIM invested 4.73bn reais in 2022. TIM is also projecting 13.3bn reais in 2023-25 capex.

In a recent report, Credit Suisse wrote that Telefônica, too, had room to reduce capital expenditures, as well as to further increase prices in its mobile plans – which Gebara said should now occur in the prepaid segment.

But Telefônica's capex reduction is also related to one-off aspects. 

The difference in capex between 2022 and projected capex for 2023 is almost the same value of Telefônica’s costs with Oi's customers integration, of 544mn reais last year. This pressure will not be repeated this year.

At the same time, Telefônica’s board approved a share buyback program, to come into force as of February 23, with the goal of “increasing shareholder value through the efficient application of available cash” and “optimize the company’s capital allocation.”

The telco said that the maximum amount being eyed with this program is 500mn reais. “We firmly believe our shares are undervalued and we are looking for extra 500mn reais,” said Gebara in the call.

BASE

The company ended 2022 with 112mn accesses, up 13.7%. Gebara said that Telefônica Brasil is now one of the Brazilian companies, of all sectors, with the largest number of clients.

Of its base total, 98mn were mobile accesses, up 16.8%, with postpaid growing by 18.2% to 58.7mn.

Total revenues hit 12.6bn reais in the quarter, up 10.1%, and 48bn reais in full year, up 9.1%, a better performance than that of its main direct competitors.

“2022 was a transformational year for Vivo and the telecommunications industry in Brazil, with the initial deployment of 5G standalone and the mobile market consolidation, both of which are bringing significant improvements to the quality of service and customer experience,” Gebara said.