Brazil
Feature

Spotlight: The investment plans of Brazil's leading ISPs

Bnamericas Published: Tuesday, November 22, 2022

Internet service providers (ISPs) continue to be the trailblazers of fixed broadband growth in Brazil, even though network expansion has slowed amid increased competition and a challenging macroeconomic context.

In a recent report, Fitch wrote the “meaningful” Brazilian market share captured by regional ISPs from incumbents Telefônica, TIM, Oi and Claro will not grow anymore and could even fall.

“We see room for more consolidation among ISPs as these companies need to scale. The market is changing a little bit. When interest rates are high, as they are now, it becomes more expensive for companies to grow organically. And the weaker ISPs are likely to exit the market or merge to cut costs,” Fitch analyst Alexandre Garcia, one of the study's authors, told BNamericas.

In September, ISPs held a combined share of 35.7% in fixed broadband, compared with 38.7% a year earlier, and 43.5% in fiber broadband, down from 47.1%, according to regulator Anatel.

The group includes Alloha, (2.9% of the fixed broadband total), Brisanet (2.4%), Algar (1.8%), Desktop (1.7%), TIM (1.7%), Vero (1.6%), AmericaNet (1.3%) and Triple Play (1.2%).

BNamericas takes a look at the plans of the main players in this segment.

ALLOHA

Alloha Fibra, the ISP holding controlled by Brazil’s EB Capital, plans to invest over 800mn reais (US$150mn) next year, in line with the investment projection for 2022.

Funds will go to networks, fiber deployment and construction, but the amount does not include potential acquisitions.

In January-September, Alloha’s investments amounted to 600mn reais, with total cash capex related to past acquisition processes surpassing 1bn reais, CFO Felipe Matsunaga said in a statement.

Following a series of M&As in 2020 and 2021, Alloha decided to hit the brakes this year amid a more challenging economy. But the M&A strategy is expected to return in 2023 in a more cautious way.

Alloha is present in 20 states and operates a 114,000km backbone, with fiber backhaul in 650 municipalities and fiber-to-the-home (FTTH) in 270 localities. The group is Brazil’s third largest fiber broadband player and fourth largest fixed broadband one.

In addition, the company has 1,400 points-of-presence (PoPs, or interconnection points and network traffic exchange) across the country. 

The company intends to slow down the pace of fiber deployments (homes passed) to focus on adding clients for its deployed infrastructure.

Alloha had 7.6mn homes passed with fiber by October, of which 1.3mn were clients (up 46% year-on-year). Year to October, nearly 240,000 clients were added.

This gives it an untapped base of 6.3mn that could become clients – the so-called take-up rate. Matsunaga said that the company is targeting a take-up rate of 17%.

BRISANET

Northeast-focused Brisanet invested 741mn reais in property, plant and equipment, as well as intangible assets, in the first nine months of the year, compared to 628mn reais in the same period of 2021.

Total disbursements should be between 900mn reais and 1bn reais next year, CEO José Roberto Nogueira told investors in an earnings call.

Of this year's total, 230mn reais went to the purchase of 5G radio base station (antennas) equipment, mostly from Huawei. In last year's 5G auction, Brisanet paid more than 1bn reais 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%.

Brisanet intends to start selling the 5G connection service in the second quarter of 2023, said Nogueira. Initially, sales were expected to start in March.

Around 527mn reais of Brisanet’s nine-month capex went to fixed/intangible assets “already in operation” – that is, to its operational business. Of this, 7.6mn reais referred to maintenance capex, and the rest to organic expansion.

This expansion included 1.4mn homes passed and 392,000 customer installations and 28mn reais in backbone DWDM (backbone activation). That also involved 27mn reais for Brisanet’s Agility Telecom franchise and 8mn reais for IT systems development, among others.

Brisanet added 62,531 customers in Q3 and passed fiber in 347,796 premises, taking its subscriber base to 1.03mn in nine states. The company ended September with 5.86mn homes passed.

In a statement, Brisanet said the expectation of improvement in purchasing power of lower-income families, its largest customer base, has not yet materialized. 

Besides, inflation and the pricing strategy adopted by competitors continue to exert pressure on the market. As a result, Brisanet projects ending 2022 with 1.1mn clients, growing by just 50,000 subscribers in the last quarter.

Brisanet also reported around 27,000km of backbone infrastructure and more than 59,000km of FTTH networks.

At the end of October, the company was present in 153 localities, serving more than 1.06mn customers. Due to slower expansion, Brisanet does not plan to reach bigger cities in the next months.

“We will further reduce investment in fiber next year,” said Nogueira.

The company posted net revenues of 707mn reais between January and September, up from 524mn reais a year ago. 

Despite the rising costs, Brisanet managed to revert losses and ended the quarter in the black, with 22mn reais in net income. 

ALGAR TELECOM

Minas Gerais-based Algar Telecom invested 484mn reais in January-September, and 193mn reais in 3Q22, up 3.9% and down 6.8% year-on-year, respectively.

Of the total in the first nine months, 356mn reais (down 4.6%) went to expansion and the connection of new customers, as well as maintenance. 

In Q3, this capex was 99mn reais, down 37.4%. 

“The reduction, compared to 159mn in 3Q21, is explained by the strategic decision to direct resources as a priority to connecting new customers in regions where we already operated, leveraging the infrastructure built and the acquisitions made in recent years,” the company said in a statement.

Consolidated operating costs and expenses, excluding depreciation and amortization, increased 9.3% in the quarter year-on-year. 

According to the company, this was due to the global economy, intensified by the pandemic, which culminated in shortages in the global supply chain and consequent inflationary pressure.

Added to this, the company also dealt with costs and expenses arising from the acquisition of Vogel Telecom in August 2021.

At the end of September, 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, B2B accesses totaled 3.86mn (+49.3%), of which 250,800 were connectivity (246mn of which fiber, +11.5%), 3.28mn mobile (+57.2%) and 323,700 fixed voice (+23.5%).

In B2C, in turn, accesses fell 2.2% to 2mn in Q3, with broadband contributing 530,000 (+5.2%), 518,400 of which fiber (+14.9%). Mobile telephony contributed 1.08mn (-2%) and fixed telephony 386,400 (-11.3%).

"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.

5G “will only become viable as an investment if we go to an increasingly intense business line of use cases in the industry,” he said.

Algar Telecom reported net income of 28.6mn reais in Q3, down from 94.7mn reais in 3Q21, hit by the increase in interest rates on financial expenses.

DESKTOP

Desktop, whose operations are concentrated on São Paulo state, reported adjusted capex of 347mn reais between January and September.

The company is now accelerating network evolution, simplifies and digitizes processes and products, and implements best business practices.

“Given the advance of uncertainties regarding the macroeconomic scenario, Desktop focused its efforts in Q3 on initiatives aimed at maximizing efficiency in all areas of the company, as well as on the profitability of investments made in network and M&As,” Desktop said in a statement.

The company has been focusing on accelerating incorporations, resizing headcount and renegotiating contracts. It ended September with 3.7mn homes passed with fiber, up 94% year-on-year, and 749,000 customers, up 93%. The average pace of homes passed slowed from 300,000 to 217,000 in Q3.

Desktop's network reached 46,700km, over two times bigger than in September 2021, with 37,300km corresponding to FTTH and 9,400km to backbone. The company was present in 136 localities in September, up from 133.

As for M&As, the company said it is even more judicious and disciplined about acquisitions given the macro scenario to avoid excessive leverage, but many inorganic opportunities still exist.

During 3Q22, the company acquired 70% of Fasternet, with 115,000 subscribers, and 100% of IDC Telecom, with 40,000 subscribers, both of which operate in São Paulo state.

Desktop posted net revenues of 188mn reais, doubling the figure of 2Q21. Net profit more than doubled, to 25.1mn reais. 

VERO

Vero Internet, controlled by Brazilian investment fund Vinci Partners, reported investments of 582mn reais year-to-September.

In Q3, the company posted net revenues of 186mn reais, a year-on-year increase of 82.2%, and net profit of 6.33mn reais, down 43.2% as financial expenses and debt financing grew.

Vero had 721,000 clients, up 64%, and 2.7mn homes passed, with the potential to reach a total of 4.5mn addressable homes passed. 

Its network spanned 29,600km, 20,900km of which accounted for FTTH and 8,800km for backbone.

The group also leases V.tal's and FiBrasil’s neutral network to support the expansion of its broadband offer. 

Vero was present in 200 localities in Minas Gerais and Brazil’s south, launching in 12 this year.

Of the total, 49 localities came from organic expansion and rest through acquisitions.

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

OTHER PLAYERS

Sumicity

Sumicity received a green light from the communications ministry to raise up to 550mn reais on the financial market through debentures (infrastructure bonds).

The resources would be used for the implementation of transport and access networks, as well as telecom network infrastructure in four states in the southeast and the Federal District. 

This is Sumicity's first investment project approved under the infrastructure financing modality.

Unifique

Unifique is planning to launch mobile services in January, after acquiring frequencies in the 5G auction in 2021, CFO José Wilson Junior told investors in a Q3 earnings call. 

According to the executive, this mobile operation will be based on roaming and antenna sharing agreements. 

Unifique reported net profit of 31.1mn reais in Q3, up 40.1%. Costs amounted to 95.6mn reais, up 54.3%, taking net debt to 55mn reais. The company had 600,325 accesses at the end of September, up 41.3%, and 2.29mn homes passed with fiber, up 69%.

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