Vivo Earnings: A Rational Competitive Environment Continues to Provide Benefits

Telefonica Brasil (Vivo) VIV continues to reap the benefits from recent wireless market consolidation, with solid revenue growth and margin expansion. Efforts to expand the fiber network have also driven improving broadband customer growth. We believe Vivo remains well-positioned in the Brazilian telecom market. We are maintaining our fair value estimate at $13 per ADR and we believe the shares remain undervalued.

Vivo lost 168,000 net wireless customers during the quarter as pricing changes taken earlier in the year drove customers to the postpaid market from prepaid. The firm added 551,000 net postpaid phone customers during the quarter, holding its leading share of the market roughly stable. We estimate the shift in customer mix and higher pricing lifted average revenue per customer by about 6% excluding the impact from disconnecting inactive acquired Oi customers over the past year (11% as reported). Total wireless service revenue increased 9% year over year, a solid mark given the maturity of the business.

The fixed-line business is showing signs of renewed momentum. Vivo added 72,000 net broadband customers, its best result in over five years. More than 90% of its broadband customers are now on its fiber network, up from less than half three years ago. Revenue per broadband customer rebounded from a weak second quarter, increasing 2% sequentially and 4% year over year. This business remains fiercely competitive but consolidation among the dozens of smaller players in the market may be starting to improve pricing discipline.

Total revenue increased 7.5% year over year while the EBITDA margin expanded more than one percentage point to 42%, aided by a price adjustment related to the Oi acquisition. Even without this benefit, the EBITDA margin still expanded slightly to 41%. Free cash flow has totaled BRL 7.6 billion ($1.5 billion) thus far in 2023, up more than 17% versus a year ago.