How Brazil’s leading ISPs are performing

Brazil’s main internet service providers (ISPs), with shares listed on the stock market, as well as non-public regional telecom operators, have released their operating and financial figures for the second quarter and the first half of the year.

All in all, the picture looks good. The figures show that fiber-to-the-home (FTTH) has maintained its momentum despite the macro headwinds. Virtually all of the players have maintained sound rates of homes-passed this year compared with last year.   

In order to cope with demand and to enable them to carry out M&As, most of them have also upped their capex in comparison with 2021. 

Nonetheless, the figures also ring some alarm bells. High inflation and rising interest rates are pressing costs, additions of new clients have cooled in some cases and, as a result of higher opex, many of them have dipped into the red, reversing the profits seen in 2021.

Furthermore, certain players reported increases in churn rates due to customer delinquencies.

BNamericas digs into the figures, summarizes the main highlights and breaks down how the five main players are making their investments.

BRISANET

The largest ISP in Brazil, with 2.3% of the national fixed broadband market as of July, northeast-focused Brisanet invested 614mn reais (US$119mn) in the first six months of the year, up from 367mn reais in the same period of 2021.

The figures include acquisitions of property, plant and equipment, as well as of intangible assets.

Of the total spending in 1H22, 230mn reais went to the purchase of 5G radio base station (antennas) equipment, as part of a 5G pilot rollout that Brisanet expects to have in operation before the end of the year.

In last November’s 5G auction, Brisanet paid more than 1bn reais (US$182mn) for a regional block in the 3.5GHz band in Brazil's northeast, at a premium of more than 13,000%.

The company also won a regional block in the 3.5GHz band comprising mid-western Brazil, making a bid of 105mn reais, at a premium of more than 4,000%.

In an earnings call with investors and analysts, Brisanet CEO Roberto Nogueira said he expects to see revenues coming from 5G in the second half of 2023. He also announced an extra 50mn reais for 5G investments until the end of 2022, on top of Brisanet’s recurring capex.

Of the 377mn reais invested in the first half of the year in fixed/intangible assets that are already “in operation” – that is, related to existing infrastructure – 5.5mn reais was maintenance capex, with the remainder applied to Brisanet’s organic expansion.

This latter included 1.05mn homes passed with fiber, 266,000 customer premise installations and 20mn reais in backbone DWDM (backbone lighting, or activation) spending through a contract with Brazilian optical equipment company Padtec.

That also involved 25mn reais allotted to Brisanet’s Agility Telecom franchise and 5mn reais to IT systems development, among other things.

Brisanet said it added 26,000 new customers in June alone and 134,000 in H1, taking its subscriber total to 977,229 in nine states. 

The company ended June with 5.5mn homes passed in 149 cities, compared with around 5.1mn and 139 cities at the end of March and 3.08mn and 100 cities as of June 30, 2021. It is targeting 6.5mn homes passed and 1.1mn customers by the end of 2022. 

Via franchise unit Agility Telecom, Brisanet provides services to another 211,000 customers in five states, with over 953,000 homes passed.

The company posted net revenues of 454mn reais in 1H22, up from 334mn reais in the same six months of 2021, and 237mn reais in 2Q22, up from 170mn reais.

Hurt by rising costs, however, Brisanet made a loss of 1.3mn reais in 2Q22, compared with a net profit of 14.5mn reais in 2Q21.

ALGAR TELECOM

Minas Gerais-based telco Algar Telecom invested 512mn reais in 1H22 and 291mn reais in 2Q22, up 86.8% and 111.9% year-on-year, respectively.

The funds went to expansion and the connection of new customers, its existing network, the integration of Vogel Telecom's networks, as well as “the continuous improvement of the quality of our operations” amid a macroeconomic scenario “that remains challenging,” the company said in its financial statement.

Algar's investments in expanding networks and increasing customer numbers were down 13.6% year-on-year to 167mn reais in 1H22, and by 13.1% in 2Q22 to 83.6mn reais. 

However the overall increase in investments was mostly due to existing operations, or “maintenance capex”, which rose by 147% in 1H22 and 321% in 2Q22.

At the end of June, the B2B segment accounted for 67% of the company's total revenues, which is in line with Algar Telecom's decision to geographically expand its operations with a focus on the corporate segment.

As such, total B2B accesses totaled 3.59mn (+55.9%), of which 254,700 were broadband (+14.1%), 3.03mn mobile (+65%) and 310,300 fixed voice (+25.7%).

In B2C, in turn, accesses fell 3.4% to 2mn in 2Q22, with broadband contributing 525,800 (+4.4%), mobile telephony 1.08mn (-3.2%) and fixed telephony 394,100 (-12.5%).

Algar also said it ended June with 758,300 fiber accesses overall, up 19.5% year-on-year.

"What we're doing now are infrastructure works in the cities, things that aren't really visible, to allow standalone [pure 5G] in 2.3GHz and the insertion of other frequencies as they are released, specifically the 3.5GHz band," CEO Jean Borges told BNamericas in June.

In the CEO’s view, 5G “will only become viable as an investment if we go to an increasingly intense business line of use cases in the industry.”

Like Brisanet, Algar Telecom also fell into the red and reported a net loss of 3mn reais in 2Q22, compared with a profit of 48.3mn reais in the same quarter of last year.

DESKTOP

Desktop, whose operations are concentrated on São Paulo state, reported adjusted capex of 249mn reais in 1H22, down from 295mn real in the same six months of last year.

The company ended June with 3.5mn homes passed with fiber, up 122% year-on-year, and 711,000 customers, up 114%, breaking a new record of net adds. The ISP said it passed 370,000 homes with fiber between April and June.

Of its adjusted cash flow from investments, 100mn reais went to the new geographic expansion and expansion in regions where it already operates, and 85mn reais to connect new customers, Desktop reported.

"Within a more challenging macro environment and increased competition, we accelerated the pace of net additions to 44,000 subscribers in the quarter, compared with 40,000 in the first quarter and 32,000 in the second quarter of 2021," chief revenue officer Ermindo Cecchetto said in an earnings call.

According to CEO Denio Lindo, all new customers in the quarter came exclusively from organic operations – that is, not from acquisitions. 

Desktop ended June with more than 46,000km of network deployed, up 270% year-on-year, and had a presence in 133 cities, compared with only 54 in June 2021. 

Cecchetto said that the company is closely watching its take-up rate (homes passed turned into clients) in the cities where it operates. 

He added that, levels are within expectations in “the vast majority” of the localities and in some of them take-up rates are actually "outstanding".

The company is not seeing any “incremental challenge” related to the existing competition with big telcos. “The competition level has remained the same,” said Lindo.

With respect to acquisitions, Desktop will be “even more judicious and diligent” given the macro challenges and its own share price levels, CFO Bruno Leão said, adding that the group still remains “upbeat” about market opportunities.

Desktop's net revenues grew 129% to 169mn reais in 2Q22, and 148% to 325mn reais in 1H22. 

The company also reported adjusted net income of 9.87mn reais in 2Q22 and 23.9mn reais in 1H22, up 71% and 96%, respectively.

However, net debt, including M&As, soared to 843mn reais at end-June, compared with 368mn reais on June 30, 2021, pushing up the firm’s leverage ratio to 2.8 from 2.2.

Leão said that, despite this increase, the ratio remains at “heathy” levels.

VERO

Brazilian regional ISP Vero, controlled by investment fund Vinci Partners, reported investments of 507mn reais in 1H22, compared with 453mn reais in the same period of 2021.

Net operating revenue ended the second quarter at 156mn reais, a year-on-year increase of 56.9%, and 310mn reais in 1H22, rising 62.7%.

Vero, however, reported a net loss of 5.2mn reais in 2Q22, against a profit of 14.5mn reais in 1Q21. Year-to-June, the loss reached 309,000 reais, compared with 29.7mn reais in 1H21, which the company said was mostly due to costs related to acquisitions.

The operator's network reached 29,200km in June, of which 20,400km corresponded to fiber accesses and 8,800km to fiber backbone.

Vero was present in 196 cities with 700,000 clients at the end of June, with 2.6mn homes passed (+79.5%).

The figures include organic presence and acquisitions, the latest of which was ISP Renovare, closed on July 1, but already included in the 2Q22 results. 

Vero also leases V.tal's neutral network to support the expansion of its broadband offer.

“The expansion strategy combines the growth of our operations with profitability. In 2Q22, the average ticket showed a significant increase, reaching 116.38 reais in the organic operations and 112.45 reais in consolidated terms [including the acquired companies], a variation of 6.00 reais compared with 2Q21," CEO Fabiano Ferreira said in a statement.

In May, Ferreira told BNamericas that the company was negotiating with a new fund to support its expansion.

Later, it was reported that the company, through Vinci Partners, is talking with FiBrasil, the neutral network of Telefônica Brasil and Canada’s pension fund CDPQ.

UNIFIQUE

With a strong footprint in Santa Catarina state and a growing presence in Rio Grande do Sul state, Unifique invested 81.6mn reais in its operations in 2Q22, down 6.4% year-on-year, and 171mn reais in 1H22, up 18.1%.

Of the total spent in 2Q22, 27.4mn reais went to equity investments (-21.9%), 48.2mn reais to acquisition of fixed assets (+13%) and 6mn reais to the acquisition of intangible assets (+31.9%).

The investments in fixed assets were those related to activation of clients, network expansion (homes passed and gateways) and network infrastructure overall.

The company said it ended June with 23,700km of fiber deployed and 510,000 homes connected (new FTTH clients) during the second quarter, flat compared with the previous quarter and up 38% year-on-year.

Unifique also said it reached 1.85mn homes passed at end-June, up 6.8% from the end of March and a 53% year-on-year increase, with net adds of 139,180 in the quarter, up 37.5% year-on-year.

However, the firm’s customer churn rate reached 2.26% in the quarter, versus 1.59% in the same quarter of 2021.

According to the company, this increase was motivated by contractual terminations resulting from non-payment and customer deliquencies.

Unlike some of its peers, the ISP ended the quarter in the black with a net profit of 33.9mn reais, doubling the 16.8mn reais in profit reported last year.

Net revenues also grew to 142mn reais in 2Q22, up from 105mn reais in 2Q21.

However, impacted by M&As, the group's total debt load increased 9.9% in the period to 533mn reais.

This week, Unifique announced the conclusion of the acquisition of companies Proserver and Netloan, adding to that of Sygo Internet, cleared by regulator Anatel earlier this month.