TIM S.A. current report, Q2 FY2023

TIM S.A. Form 6-K Summary

Business context and reporting period

TIM S.A. is a Brazilian telecommunications operator providing mobile, fixed-line and multimedia communications services nationwide. TIM Brasil Serviços e Participações S.A., a Telecom Italia Group subsidiary, owned 66.59% of TIM S.A. as of June 30, 2023. The filing reports individual and consolidated quarterly information for the three and six months ended June 30, 2023, compared with June 30, 2022. Amounts are in thousands of Brazilian reais unless otherwise stated.

Ernst & Young performed a limited review and reported that nothing came to its attention indicating that the interim information was not prepared, in all material respects, under applicable Brazilian and IFRS interim-reporting requirements. The review was not an audit.

Key financial metrics

Metric	2Q23	2Q22	6M23	6M22
Consolidated net revenue	R$5,863,260	R$5,368,081	R$11,503,415	R$10,095,275
Consolidated operating profit	R$1,038,826	R$732,226	R$1,818,338	R$1,427,121
Consolidated net profit	R$626,472	R$279,538	R$1,038,908	R$684,903
Basic and diluted EPS	R$0.26	R$0.12	R$0.43	R$0.28
Net cash from operating activities	Not separately provided	Not separately provided	R$4,087,439	R$2,293,473

Six-month consolidated revenue increased approximately 13.9%, while operating profit increased approximately 27.4% and net profit increased approximately 51.7%.
Six-month consolidated gross margin was approximately 50.1%, compared with 50.7% in the prior-year period. Operating margin improved to approximately 15.8% from 14.1%, and net margin improved to approximately 9.0% from 6.8%.
Service revenue was R$15,535,074 on a gross basis, including R$14,573,233 from mobile services and R$961,841 from landline services. Goods sold contributed R$704,054 before deductions and taxes.
Six-month consolidated operating cash flow increased approximately 78.2% year over year to R$4,087,439. Capital additions to property, plant and equipment and intangible assets totaled R$2,214,227.
Parent-company cash and cash equivalents were R$3,067,012 at June 30, 2023, compared with R$1,785,100 at December 31, 2022. The filing does not provide a June 30, 2023 consolidated cash balance in the balance-sheet table.
Parent-company loans and financing totaled R$4,789,575, including R$2,170,578 classified as current. Lease liabilities totaled R$13,101,549, including R$2,106,253 current. These balances indicate substantial lease-related financial obligations beyond conventional borrowings.
Parent-company shareholders’ equity was R$25,327,084. Current liabilities exceeded current assets by R$3,980,316, primarily due to the Cozani acquisition and obligations related to 5G licenses. Management stated that positive operating cash flow supported the going-concern assessment.

Material changes versus the prior comparable period

Revenue growth was accompanied by stronger operating leverage: selling expenses increased more slowly than revenue, while general and administrative expenses declined modestly on a parent-company basis.
Financial expenses remained significant. Consolidated six-month financial expenses declined to R$1,337,014 from R$1,423,953, while financial revenues declined to R$691,401 from R$732,283.
Depreciation and amortization increased to R$3,611,664 from R$3,088,653, reflecting the expanded asset base and acquired operations.
Operating cash generation improved materially, although financing cash outflows increased to R$3,315,276 from R$1,360,729, primarily reflecting lease payments, interest and shareholder distributions.
Cash used in investing activities was R$253,864, compared with R$4,962,777 in the prior-year period, which included the acquisition of Cozani.
TIM completed the merger of Cozani effective April 1, 2023. Cozani’s assets, rights and obligations were transferred to TIM S.A., with no capital increase or issuance of new shares.

Guidance, outlook, risks, contingencies and unusual items

The filing does not provide formal financial guidance or quantitative full-year targets.
The Cozani acquisition had total recorded consideration of approximately R$7,211,585, including goodwill of R$2,636,426. The merger was intended to simplify the corporate structure, eliminate overlapping authorizations and improve operating and investment efficiency.
Approximately R$748 million of Cozani-related contractual obligations remained outstanding at June 30, 2023: approximately R$712 million was retained and deposited in court in connection with purchase-price adjustments, and R$77 million represented contingent consideration pending arbitration.
Possible-loss legal and administrative proceedings totaled approximately R$20,770,529, including R$18,647,813 of tax matters. Provisions for probable losses totaled R$1,288,667, comprising civil, labor, tax and regulatory proceedings.
Management recognized tax credits related to the non-levy of IRPJ and CSLL on SELIC adjustments in cases of undue payments. The company’s specific lawsuit remained pending final judgment, with an estimated principal of R$535 million and total recorded amount of approximately R$635 million including adjustments.
TIM reported R$3,807,899 of possible-loss exposure related to FUST and FUNTTEL contributions and other substantial tax disputes. These matters could affect future cash payments if the company is unsuccessful.
TIM continued implementing its conduct adjustment term with ANATEL. The filing states that the third-year obligations were completed, while the fourth and final year began in July 2023.
The 5G asset and related obligations became available for use in the second quarter of 2023. Capitalization of related interest ceased, and approximately R$3,930 million was recorded in authorizations.
TIM paid R$520,000 of interest on shareholders’ equity during 2023 and paid R$290,000 on July 12, 2023. The Board also approved a new share buyback program running through December 12, 2024, subject to applicable limits.
TIM holds a 49% interest in I-Systems. I-Systems reported a six-month net loss of R$85,059, resulting in TIM’s equity-method loss of R$41,679.
TIM disclosed an arbitration proceeding involving its financial partnership with Banco C6 and related entities. Depending on the outcome, the partnership may be terminated. The company held a 1.44% Banco C6 interest and reported related financial instruments at fair value.

Important facts for investors to verify

Reconcile the parent-company balance-sheet data presented for June 30, 2023 with consolidated liquidity, debt and cash figures, because the extracted balance-sheet table does not clearly provide all June 30 consolidated values.
Monitor the R$748 million Cozani purchase-price and contingent-consideration obligations, including the court deposit and arbitration outcome.
Assess the liquidity implications of R$13.1 billion of lease liabilities, R$4.8 billion of loans and financing, and the R$4.0 billion excess of current liabilities over current assets.
Evaluate exposure to the R$20.8 billion of possible-loss legal and administrative proceedings, particularly tax matters of R$18.6 billion and FUST/FUNTTEL claims.
Confirm the sustainability of operating cash flow after 5G investment, lease payments, regulatory obligations, debt service and shareholder distributions.
Track execution of the final year of the ANATEL conduct adjustment term and any effect on licenses, penalties or operating requirements.