Telefônica Brasil S.A. — 2022 Form 20-F
Reporting period: Fiscal year ended December 31, 2022; filed February 17, 2023. This is an annual report, not a standalone fourth-quarter filing. Financial statements are consolidated and prepared under IFRS as issued by the IASB, in Brazilian reais (R$).
Business context
Telefônica Brasil, which operates mainly under the Vivo brand, provides mobile and fixed-line telecom, broadband, pay TV, wholesale, digital and corporate services in Brazil. It reported 112 million total accesses, including 98 million mobile accesses. It led the mobile market with 38.9% share and had 41.9% share in postpaid mobile, according to ANATEL. Telefónica and its affiliates controlled 74.20% of the company at year-end.
Financial performance
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net operating revenue | R$48.04bn | R$44.03bn | +9.1% |
| Gross profit | R$20.61bn | R$19.25bn | +7.1% |
| Operating income | R$6.60bn | R$7.09bn | -6.9% |
| Net income | R$4.06bn | R$6.23bn | -34.9% |
| Cash flow from operating activities | R$18.94bn | R$18.07bn | +4.8% |
| Cash used in investing activities | R$14.20bn | R$8.13bn | Higher outflow |
| Cash used in financing activities | R$8.91bn | R$9.26bn | Lower outflow |
Gross margin was approximately 42.9% of net revenue, versus 43.7% in 2021; operating margin was approximately 13.7%, versus 16.1%; net margin was approximately 8.4%, versus 14.1%. These are calculated from the reported figures. Cost of sales rose 10.7%, faster than revenue, while financial expense, net, increased to R$1.77bn from R$1.13bn. The 2021 comparison benefited from a R$1.41bn tax credit related to the Supreme Court ruling on tax treatment of SELIC interest; 2022 also included a R$277m related tax effect.
Gross operating revenue was R$67.76bn, up 4.9%; service revenue grew 4.4% and device and goods revenue 8.9%. Net service revenue rose 8.9%, helped by Oi Mobile assets, fiber and corporate data services. Net goods revenue increased 11.5%. The filing attributes the 2022 decline in operating income in part to higher personnel, service and depreciation costs and lower other operating income; 2021 included a positive R$416.6m FiBrasil transaction result and higher tax recoveries.
Capital expenditures were R$9.72bn, down 26% from R$13.18bn in 2021, mainly because 2021 included 5G spectrum acquisition costs. Network investment accounted for 82% of 2022 capex. The cash-flow statement separately reports R$9.89bn of additions to property, plant, equipment and intangible assets.
Liquidity, debt and capital allocation
Cash and cash equivalents were R$2.27bn at year-end, down from R$6.45bn. Total reported debt was R$19.30bn: R$6.02bn current and R$13.28bn non-current. Debt included R$12.03bn of lease liabilities, R$3.74bn of debentures and R$1.07bn of foreign-currency borrowing. The company reported net debt of R$16.87bn using its stated measure, which also considers financial investments, Vivo Money receivables and derivative balances. Foreign-currency debt was 5.6% of total indebtedness; the filing says it hedges foreign-currency bank debt and monitors remaining exposure.
Cash from operations exceeded reported capex, but investing outflows rose to R$14.20bn, primarily due to acquisitions and capital contributions. Management said liquidity and capital resources were adequate for current needs, while noting no material unused sources of liquidity. Debt payments due in 2023 and 2024 were reported as R$6.02bn and R$3.15bn, respectively. The company was not in default at year-end. It paid R$3.5bn in dividends and interest on equity during 2022 and proposed an additional R$827m, subject to shareholder approval.
Material changes and unusual items
- Oi Mobile acquisition: Closed April 20, 2022. Telefônica Brasil acquired approximately 12.5 million customers, spectrum and access-site agreements for stated consideration of R$5.37bn; total consideration including contingent items was R$5.49bn. Garliava contributed R$1.12bn to revenue and R$4.5m to profit from acquisition through year-end.
- Price-adjustment arbitration: Telefônica Brasil and the other buyers disputed Oi’s post-closing price adjustment. The company sought up to R$1.08bn attributable to its share; R$515.6m was deposited in court following an injunction. The arbitration and adjustment remained unresolved in the filing.
- Tax rate changes: Complementary Law 194/2022 reduced ICMS rates on communications services in many states. The company recorded R$615.8m to be refunded to customers as a reduction of revenue; implementation and state-level application merit monitoring.
- Share repurchases and capital: The company repurchased shares and canceled 14.05m treasury shares in 2022. After year-end, the board proposed canceling another 13.38m shares and requested ANATEL consent for a possible capital reduction of up to R$5bn; neither should be treated as completed based solely on this filing.
- Other investments: The company launched the R$320m Vivo Ventures fund and acquired Vita IT through a subsidiary, with consideration of up to R$120m subject to agreed metrics.
Outlook, management commentary and risks
Management emphasized continued growth in mobile, fiber and corporate digital services, rollout of 5G, and investment in network capacity and quality. It expected connectivity demand, digitalization and B2B services in cloud, cybersecurity, IoT and data to support opportunities. The filing does not provide a quantified financial forecast or formal earnings guidance. Management noted inflation and higher interest rates were affecting costs and financing, though price increases broadly offset some cost pressure.
Key risks include Brazilian political, economic, inflation, interest-rate and currency volatility; intense competition and pricing pressure; cybersecurity and data-protection exposure; dependence on suppliers and infrastructure; regulatory changes, spectrum renewal and concession transition; and litigation. The fixed-line concession in São Paulo expires December 31, 2025, and the economic terms of migration to an authorization regime remained under regulatory and audit-court review. Renewal of certain 900 MHz and 1,800 MHz licenses was pending; ANATEL revoked the company’s 450 MHz authorization in December 2022.
Probable-loss provisions included R$2.48bn for tax matters, R$1.87bn for regulatory matters, R$1.19bn for civil matters and R$540m for labor matters. Possible-loss exposures included R$33.47bn in tax proceedings, R$5.84bn in regulatory and antitrust proceedings, R$2.18bn in civil claims and R$1.49bn in labor claims; these were generally unprovided. The filing also discloses R$29.78bn of uncertain income-tax positions under discussion. Amounts and descriptions across the filing are not always presented on identical bases, so detailed notes should be consulted.
PwC issued an unqualified opinion on the IFRS financial statements and concluded internal control over financial reporting was effective. Garliava, acquired in 2022, was excluded from management’s and PwC’s internal-control assessment; it represented 1.4% of year-end assets and 2.3% of annual revenue.
Important facts for investors to verify
- Review the final outcome and cash consequences of the Oi price-adjustment arbitration, including the court deposit and any additional consideration.
- Confirm the status, terms and timing of spectrum renewals and the concession-to-authorization process ahead of the 2025 fixed-line concession expiry.
- Reconcile the company’s net-debt measure, lease obligations and near-term maturities with cash generation and capital spending plans.
- Assess the drivers of lower operating and net margins, especially personnel costs, depreciation, financing expense and the absence of 2021 one-offs.
- Track customer refunds, state implementation and financial impact of the ICMS rate changes, and review the substantial unprovided tax and regulatory contingencies.
- Check shareholder approval and payment timing for the proposed R$827m additional dividend, and the status of the proposed share cancellation and potential capital reduction.
- Consider the limited internal-control assessment coverage of the newly acquired Garliava business and the valuation assumptions used for its acquired assets and liabilities.