TIM S.A. 2020 Form 6-K Summary
Business context and reporting period
TIM S.A. filed audited individual and consolidated financial statements for the year ended December 31, 2020, on February 9, 2021. The company provides mobile, fixed-line, long-distance, data transmission and residential broadband services throughout Brazil and is controlled by TIM Brasil Serviços e Participações S.A., a Telecom Italia Group subsidiary.
In August 2020, TIM Participações S.A. was merged into TIM S.A. The company states that 2019 comparative operating data was presented using TIM Participações figures to provide an economically comparable basis. The financial statements were prepared under Brazilian accounting standards and IFRS and received an unqualified audit opinion from Ernst & Young.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenue | R$17.268 billion | R$17.377 billion | Down 0.6% |
| Gross income | R$9.271 billion | R$9.943 billion | Down 6.8% |
| Operating income | R$2.815 billion | R$4.587 billion | Down 38.6% |
| Net income | R$1.844 billion | R$3.860 billion | Down 52.2% |
| Net cash from operating activities | R$8.674 billion | R$7.233 billion | Up 19.9% |
| Capital expenditures | R$3.891 billion | R$3.853 billion | Up 1.0% |
| Normalized EBITDA | R$8.4 billion | R$8.1 billion | Up 3.2% |
| Normalized EBITDA margin | 48.5% | 46.7% | Up 1.8 percentage points |
Reported net margin was approximately 10.7%, compared with approximately 22.2% in 2019. Management attributed the reported net-income decline largely to non-recurring tax credits recognized in 2019. Normalized net income was approximately R$1.9 billion, down 1.8% year over year.
- Mobile service revenue declined 0.2% to R$15.610 billion.
- Fixed service revenue increased 11.1% to R$1.054 billion, supported by TIM Live growth.
- Product revenue declined 22.7% to R$603 million, primarily because stores were closed during parts of the pandemic.
- Bad-debt expense declined 26.1% to R$553 million, equal to approximately 2.3% of gross revenue.
- Depreciation and amortization increased 7.8%, reflecting the larger fixed-asset and lease base.
- Operating free cash flow was R$4.610 billion, an increase of R$1.320 billion from 2019.
Balance sheet, debt and liquidity
- Total assets were R$41.654 billion and shareholders’ equity was R$23.183 billion at December 31, 2020.
- Cash and cash equivalents were R$2.575 billion, while cash and securities totaled approximately R$4.646 billion.
- Gross debt was approximately R$10.257 billion, including R$8.217 billion of lease liabilities, R$2.345 billion of bank debt and the effect of hedging derivatives.
- Reported net debt was approximately R$5.611 billion, with net debt to normalized EBITDA of approximately 0.67 times according to management. The financial-statement leverage disclosure reports adjusted net debt of R$5.611 billion and a 0.65 times ratio.
- Excluding financial leases, management reported a net cash position of approximately R$2.767 billion and net debt excluding leases to EBITDA of negative 0.42 times.
- Financing excluding leases was fully hedged against foreign-currency exposure. The average cost of debt excluding leases was approximately 3.2% in 2020, versus 6.9% in 2019.
- TIM distributed R$1.083 billion of interest on shareholders’ equity for 2020. The statutory minimum dividend calculated by the company was R$398 million.
Material changes versus the prior comparable period
- Revenue was broadly stable despite COVID-19 disruption, but the mix shifted toward services and away from handset sales.
- Reported profitability declined materially because 2019 included approximately R$1.795 billion of PIS/COFINS-related tax-credit income and approximately R$1.229 billion of related financial-income adjustments.
- Normalized EBITDA and margin improved due to service-revenue recovery, fixed-broadband growth, cost control, digitalization and lower variable commercial expenses.
- Operating cash generation improved substantially, aided by working-capital changes, improved collections and lower payments related to legal proceedings.
- Cash and securities increased by approximately R$1.706 billion year over year, while reported net debt declined by approximately R$1.061 billion.
- The company’s corporate structure, share count and comparative presentation changed following the reverse merger of TIM Participações. Investors should adjust per-share and historical comparisons accordingly.
Guidance, outlook, commentary and unusual items
- Management expects recovery to accelerate in 2021 as the economy improves, digital-transformation initiatives expand, mobile-market consolidation progresses and 5G-related opportunities develop. No quantified 2021 financial guidance is provided in the filing text.
- COVID-19 caused store closures, reduced commercial activity, changes in traffic patterns and a shift to virtual work. Management reported no material impairment or inability to meet obligations, but warned that a prolonged economic slowdown could reduce demand, increase defaults and disrupt supply chains.
- TIM ended 2020 with approximately 21.8 million postpaid lines, 29.6 million prepaid users and 645,000 TIM Live customers. Residential broadband customers increased by approximately 80,000 during the year.
- Network and IT investments represented approximately 92% of 2020 capital expenditures. TIM reported 4G coverage in approximately 3,877 cities, more than 108,000 kilometers of backbone and backhaul fiber, and 6.4 million total fixed-broadband homes passed.
- TIM and Telefônica Brasil and Claro won the auction for Oi’s mobile assets. TIM’s expected share of the purchase and transition-service consideration is approximately R$7.3 billion, plus approximately R$476 million of present-value capacity-contract obligations. Completion remains subject to conditions including ANATEL and CADE approvals and other customary requirements.
- The company created FiberCo Soluções de Infraestrutura Ltda. to support a potential separation of residential fiber assets and the admission of a strategic partner. FiberCo had only R$1 of equity at year-end 2020.
- TIM recognized a R$155 million financial-revenue gain from the mark-to-market of an option to acquire an indirect approximately 1.4% interest in Banco C6. The option had a fair value of approximately R$161 million at year-end and was exercisable at management’s discretion.
- The company entered into a Conduct Adjustment Term with ANATEL involving approximately R$639 million of sanctions to be addressed through network, quality and customer-experience commitments rather than a direct cash payment.
- The principal key audit matter was the provision for tax contingencies. Tax matters totaled approximately R$16.985 billion, including R$399 million classified as probable and provided for and R$16.586 billion classified as possible losses and disclosed without provision.
Most important facts for investors to verify
- Reconcile reported versus normalized EBITDA, net income and cash-flow measures, particularly the effects of 2019 tax credits and other non-recurring items.
- Confirm the final consideration, financing structure, regulatory approvals, accounting treatment and closing timing of the Oi mobile-assets acquisition.
- Assess the scale and timing of lease obligations, which comprise the majority of reported gross debt.
- Review the probability, duration and potential cash impact of the R$16.586 billion of possible tax losses and the R$399 million tax-contingency provision.
- Monitor COVID-19 effects on customer churn, prepaid recharges, collections, handset sales and network operating costs.
- Verify the planned FiberCo transaction, strategic-partner terms and any resulting changes to TIM’s asset base, revenue model and capital requirements.
- Consider the effects of the reverse merger, share consolidation and revised share count when comparing historical earnings per share and market metrics.