Telefonica Brasil

Telefonica Brasil (Vivo) posted modestly accelerating growth during the second quarter, with revenue up 7.6% year over year. Wireless service revenue increased 6.6%, equal to the average of the prior five quarters, while broadband revenue increased 11.2%, the fastest pace in two years.

Why it matters: The market didn't like Vivo's results, sending shares down 6%, but we believe the quarter was solid. The firm is using its scale and bundling ability to take share in core wireless and broadband markets. The EBITDA margin expanded from the prior year, albeit only modestly absent nonoperating items. Wireless pricing was the sore spot. Revenue per postpaid phone customer increased only 0.8% year over year. We suspect some investors fear that Vivo's newer "Lite" plans are pushing customers to trade down, and that this trend may continue with TIM launching similar plans this month. However, prepaid revenue per customer has increased sharply at Vivo, up 7% year over year during the quarter. We estimate revenue per phone customer, whether prepaid or postpaid, increased 5%-6%. Vivo also added net prepaid customers for the first time since 2023.

The bottom line: We maintain our fair value estimate of $14 per ADR and our no moat rating. We view the shares as roughly fairly valued. While we like Vivo's scale, the Brazilian telecom market remains very competitive. Revenue per wireless customer is insufficient to drive strong returns on capital, and competitive intensity has increased somewhat. The broadband business remains highly fragmented and in need of consolidation. Revenue per fiber customer dropped 2% from a year ago, and has been drifting lower for several years.

Key stats: Despite competitive challenges, Vivo continues to generate steady free cash flow, though higher working capital needs have pulled this figure down about 15% through the first half of 2026. The firm's balance sheet remains very strong, with net debt including leases at only 0.4 times EBITDA.

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Our $14 per ADR fair value estimate for Telefonica Brasil (Vivo) uses an exchange rate of BRL 4.90 to $1, down from BRL 5.30 previously. We expect revenue growth to average 5% annually over the next five years, driven primarily by the wireless business. We believe the three major Brazilian wireless carriers will remain generally rational in their pricing and promotional offers, allowing Vivo to maintain market share over time even as it raises prices. The ability to bundle broadband and wireless services, which only it and America Movil can do on a large scale, should enhance Vivo's ability to attract and retain customers.

Fixed-line revenue has returned to growth despite continued pressure in the phone business (still about 10% of fixed-line revenue) and the transition away from older broadband technology. We expect fixed-line revenue growth to remain about 7% in 2026 as Vivo benefits from fiber network expansion and continues to push into new areas, like cloud computing, with partners. However, smaller players also continue to invest aggressively to expand their networks, which will likely create stiff price competition. We expect fixed-line revenue growth to slow beyond this year and remain around 5% annually near the end of our forecast.

Management expects capital spending to steadily decline as a percentage of sales as capital-light add-on offerings, like music services, grow. However, we aren't as enthusiastic about these services. We model capital investment remaining around 17% of revenue over the next several years. Spending will likely be directed toward steadily expanding and augmenting fiber and 5G wireless networks.

Management’s efforts to control costs and discipline around marketing efforts have allowed Vivo to post margin gains in recent years. We expect rational industry pricing and improved efficiency running the fiber network will enable margins to expand modestly in the coming years. We assume the EBITDA margin hits 42% in 2030 from 41% over the past three years.

We don’t believe Telefonica Brasil (Vivo) has an economic moat despite its leading position in the wireless market and its extensive fixed-line presence. While recent consolidation in the wireless industry should allow profitability to improve in the coming years, we expect returns on capital will still fall short of the firm’s cost of capital.

Vivo is the largest Brazilian wireless carrier with about 38% market share based on the number of customers served and a bit higher share based on wireless service revenue. Given the high fixed costs typical of the wireless industry, this share position should provide a cost advantage, yet Vivo has failed to earn attractive returns on capital in recent years, reflecting the long history of stiff competition in the Brazilian market. From 2014 through 2021, we estimate industrywide wireless service revenue was flat while local inflation averaged more than 5% annually, leaving revenue about one third lower in real terms.

The structure of the Brazilian wireless business has improved since then. Brazil’s largest carriers (Vivo, TIM, and Movil) carved up Oi’s wireless business in 2022, reducing the number of major carriers to three from four. The three firms have started to emphasize differentiated offerings over price to attract customers, which has allowed average revenue per customer across the industry to start moving higher. Industrywide revenue is growing faster than the rate of local inflation for the first time in several years, a trend we expect to continue.

The Brazilian fixed-line telecom market is one of the most highly fragmented in the world, with hundreds of companies building infrastructure. Most of these firms serve only very small areas, but three major players have built fiber aggressively in recent years. Traditional cable operator America Movil’s (Claro) network reaches more than 40 million locations, about 55% of the country, and it is upgrading this network with fiber. Bankrupt legacy phone company Oi sold its fixed-line business to a new venture, V.tal, that has managed to reach more than 22 million locations, while Vivo has expanded to nearly 30 million. TIM has also built fiber in several locations. Outside of these four firms, six others have built fiber to at least 3 million locations. Worse yet, these 10 firms serve less than 60% of total broadband customers nationally.

While we don’t have good data on the number of providers that reach the typical Brazilian home or business, we suspect at least three firms serve many locations, especially in wealthier areas. Few telecom markets globally have proven capable of supporting three broadband providers, let alone four or more. Driving an acceptable return on network investment requires a healthy mix of customer penetration and pricing discipline, which tends to break down when too many players chase customers in each location.

Vivo earns decent margins across its wireless and fixed-line operations (EBITDA is typically around 40% of revenue), but customers don’t spend enough to drive acceptable returns on investments in network equipment and spectrum licenses. We believe Vivo will need to execute well over the next five years without economic or political disruption just to reach an acceptable return on capital.

Vivo is the largest telecom carrier in Brazil and benefits from scale-based cost advantages in both the wireless and fixed-line markets.

Owning a high-quality fiber network enables Vivo to offer converged services throughout much of the country, while buttressing wireless backhaul, improving network speeds and capacity.

With a rock-solid balance sheet, Vivo should be able to weather whatever competitive or economic challenges arise or capitalize on attractive investment opportunities.

The telecom market in Brazil has been plagued by price wars that have prohibited all carriers from consistently earning economic profits.

Fluctuations in Brazil's economy can pressure disposable income and, in turn, wireless demand. A weak economy has also pressured the real in recent years, hurting ADR holders.

Parent Telefonica's interests may not align with Vivo's minority shareholders. In particular, Telefonica may prefer to pull cash out of Vivo rather than invest in growth or to improve the structure of Brazil's telecom market.