TIM S.A. — 1Q21 Form 6-K Summary
Business context and reporting period
TIM S.A. is a Brazilian telecommunications provider offering mobile, fixed-line and broadband services across Brazil, with ADRs listed on the NYSE. The filing reports individual and consolidated quarterly information for the three months ended March 31, 2021, prepared under Brazilian accounting standards and IFRS. Ernst & Young performed a limited review and reported no matters indicating a material departure from the applicable standards; the information was not audited.
Financial performance and position
| Metric | 1Q21 | Comparable period or balance |
|---|---|---|
| Net revenue | R$4.340 billion | R$4.215 billion in 1Q20; up 3.0% |
| Gross profit | R$2.247 billion | R$2.254 billion in 1Q20 |
| Operating profit | R$592 million | R$523 million in 1Q20; up 13.4% |
| Net income | R$277 million | R$173 million in 1Q20; up 60.3% |
| Basic and diluted EPS | R$0.11 | R$0.07 in 1Q20 |
| Net cash from operating activities | R$1.950 billion | R$489 million in 1Q20 |
| Capital expenditures | R$1.324 billion | R$904 million in 1Q20; up 46.5% |
| Cash and cash equivalents | R$2.717 billion | R$2.575 billion at December 31, 2020 |
| Cash and securities | R$4.319 billion | Up R$2.723 billion year over year |
| Gross debt, including leases | R$10.235 billion | Includes R$8.180 billion of leases and R$2.545 billion of bank financing, partially offset by derivatives |
| Net debt | R$5.917 billion | R$8.561 billion in 1Q20 |
Reported gross margin was approximately 51.8%, operating margin approximately 13.7%, and net margin approximately 6.4%. Management reported normalized EBITDA of approximately R$2.0 billion, up 4.5% year over year, with a 46.6% normalized EBITDA margin, up 0.7 percentage points. Normalized net income was R$277 million, up 57.9%.
Material changes versus the prior comparable period
- Total service revenue grew 3.3% year over year. Mobile service revenue increased 2.8% to R$3.947 billion, while fixed service revenue increased 12.1% to R$281 million.
- Postpaid revenue increased 3.9%, while prepaid revenue declined 4.1%. Mobile ARPU increased 6.6% to R$25.5, and human postpaid churn was 2.7% per month.
- TIM Live revenue increased 20.4%; the broadband customer base increased 13.3% to 662,000 connections, and TIM Live ARPU increased 6.1% to R$89.6.
- Reported operating costs and expenses increased 1.5% to R$2.319 billion. Bad-debt expense declined 34.5% to R$123 million, while personnel costs increased 8.0% and network and interconnection costs increased 14.8%.
- Net financial expense improved to R$225 million from R$251 million, primarily because of lower financing interest and lower monetary restatement of contingencies, partly offset by higher lease interest.
- Operating cash flow improved substantially, supported by lower supplier-related working-capital outflows, tax recoveries and reduced credit-loss expense. Investing cash outflow increased to R$854 million, mainly because of higher network and technology investment.
- Net debt declined year over year despite higher capital spending. Excluding lease effects, management reported net cash of R$2.480 billion and net debt to EBITDA of 0.70x.
Guidance, outlook, commentary, risks and unusual items
- Management emphasized infrastructure expansion, including 4G coverage in 4,121 cities, 700 MHz coverage in 3,468 cities, VoLTE in 4,086 cities, more than 3.5 million FTTH homes passed, and 6.4 million total FTTH and FTTC homes passed.
- Approximately 95% of first-quarter capital expenditure was directed to infrastructure, including IT, 4G, transport networks and FTTH. The company stated that investment was accelerating in preparation for the potential integration of Oi Mobile assets.
- In April 2021, TIM entered into two three-year foreign-bank loan agreements totaling approximately R$1.1 billion. The company also received authorization to issue up to R$5.75 billion of infrastructure incentive debentures.
- On May 5, 2021, TIM agreed to sell 51% of FiberCo to IHS while retaining 49% and control. FiberCo's enterprise value was set at R$2.6 billion, including R$1.028 billion payable to TIM and R$609 million contributed to FiberCo cash. Closing is subject to asset contributions and regulatory approvals from, among others, Anatel and CADE.
- The FiberCo plan targets 8.9 million FTTH homes within four years. Management expects the transaction to reduce consolidated capital expenditure and provide proceeds that can support the Oi Mobile acquisition and other investment obligations; these benefits are not yet realized.
- COVID-19 restrictions affected handset sales and store operations, but management reported no material impairment indicators or material effect on core telecommunications operations through the reporting date. A prolonged economic slowdown or additional restrictions could affect demand, collections and cash flow.
- Probable legal and administrative provisions totaled R$908 million. Possible-loss proceedings totaled R$18.331 billion, including R$16.690 billion of tax matters; these amounts are not accrued as liabilities under management's risk assessment.
- A tax assessment originally totaling R$1.265 billion was partially resolved in April 2021. The company reported confirmed partial success of R$1.4 billion in updated values, with the remaining matter continuing before the Brazilian administrative tax appeals process.
- Approximately R$790 million of 2020 Fistel charges remained suspended at quarter-end with no defined payment date, although TIM paid approximately R$73 million of related CFRP fees in 1Q21.
Key facts for investors to verify
- Reconcile normalized EBITDA and normalized net income with reported IFRS figures and identify all normalization adjustments.
- Monitor execution, financing and regulatory approvals for the Oi Mobile acquisition and the FiberCo transaction, including the timing and use of transaction proceeds.
- Assess the sustainability of revenue growth and margin expansion amid COVID-19 restrictions, prepaid weakness, higher personnel costs and rising network expenses.
- Evaluate liquidity after increased capital expenditure, new borrowing, lease obligations and potential acquisition funding; confirm the calculation of net debt excluding leases.
- Track the resolution and cash exposure of the R$18.331 billion of possible-loss proceedings, the R$1.265 billion tax assessment and suspended Fistel obligations.
- Confirm that the company remains compliant with financing covenants, Anatel obligations and the four-year Conduct Adjustment Agreement timetable.