Telefonica Brasil Extends Its Wireless Lead During Q4; ADRs Remain Attractive

Telefonica Brasil (Vivo) reported a solid end to 2022 while extending its share repurchase program by another BRL 500 million and asking regulators to approve plans to expand shareholder returns by up to BRL 5 billion in future years. We are maintaining our $12 fair value estimate per ADR, and we continue to believe Vivo shares are very attractive. The firm generated BRL 7.1 billion in cash flow ($1.4 billion equal to $0.83 per ADR) during 2022 after funding nearly BRL 10 billion in network investment. Management expects capital spending to decline to around BRL 9 billion in 2023, which should allow for another year of strong cash generation.

Revenue increased 10% year over year thanks to the Oi asset acquisition, continued wireless customer growth, and a continuing rebound in the fixed-line business. Wireless service revenue increased 14%. Vivo added nearly 1 million net new postpaid phone customers during the quarter, far stronger than its two rivals and taking its base to more than 42 million. The firm did the bulk of the cleanup of the Oi customer base last quarter but still disconnected another 184,000 inactive postpaid customers this quarter. With the three major carriers now reporting figures that exclude acquired inactive Oi accounts, we have a better picture of the Brazilian wireless market. Vivo holds roughly 40% customer and revenue share, putting it well ahead of America Movil and TIM, which hold around 30% share each.

Fixed-line revenue was up nearly 3% year over year during the quarter. Vivo added 59,000 net new broadband customers, its fourth consecutive quarter in the black after three years of steady losses, leaving market share stable versus a year ago at around 15%. Revenue per broadband customer also increased 5% year over year. The firm’s fiber network expanded to 1 million new homes during the quarter to reach 23.3 million in total, about one third of the country.