TIM S.A. current report, Q3 FY2020

TIM S.A. — Form 6-K Summary

Reporting period: Quarter and nine months ended September 30, 2020; report dated November 4, 2020. TIM provides mobile, fixed-line and broadband telecommunications services throughout Brazil. The interim information was prepared under Brazilian accounting standards and IAS 34/IFRS and received an unqualified limited review conclusion from Ernst & Young; it was not audited.

Financial performance and position

Metric	3Q20	3Q19	9M20	9M19
Net revenue	R$4.387 billion	R$4.337 billion	R$12.590 billion	R$12.791 billion
Gross income	R$2.336 billion	R$2.498 billion	R$6.710 billion	R$7.305 billion
Operating income	R$683 million	R$794 million	R$1.841 billion	R$3.652 billion
Net income	R$390 million	R$745 million	R$830 million	R$3.118 billion
Net margin	8.9%	17.2%	6.6%	24.4%

Reported 3Q20 gross margin was approximately 53.2%, versus 57.6% in 3Q19. Operating margin was approximately 15.6%, versus 18.3%.
Net revenue increased 1.2% year over year in 3Q20 but declined 1.6% for 9M20, reflecting COVID-19-related reductions in commercial activity. Service revenue grew 1.3% in 3Q20, while product revenue declined 33.6% year to date.
Normalized EBITDA was approximately R$2.1 billion in 3Q20, up 0.8% year over year. Operating free cash flow was R$1.3 billion, up 11.8%.
Net cash generated by operating activities was R$4.975 billion in 9M20, compared with R$3.481 billion in 9M19. Net cash used in investing activities was R$3.273 billion, including R$2.427 billion of additions to property, plant and equipment and intangible assets.
Capital expenditure was approximately R$850 million in 3Q20, down 8.0% year over year; 91% was allocated to infrastructure, including network, IT, 4G/700 MHz and fiber expansion.
Cash and cash equivalents were R$2.125 billion at September 30, 2020, compared with R$2.284 billion at December 31, 2019. Cash and short-term investments totaled R$3.638 billion at quarter-end.
Gross debt was approximately R$9.815 billion, including R$7.717 billion of lease liabilities, R$2.594 billion of bank financing and a R$496 million hedge position. Net debt was R$6.178 billion, or 0.74x EBITDA. Excluding financial leases, TIM reported net cash of approximately R$1.692 billion and net debt/EBITDA of negative 0.26x.
Balance-sheet shareholders’ equity was R$23.249 billion at September 30, 2020, compared with R$22.059 billion at December 31, 2019. Total liabilities were R$16.541 billion.

Material changes versus the prior comparable period

9M20 net income fell 73.4% year over year, principally because 2019 included approximately R$1.795 billion of PIS/COFINS tax-credit income and related monetary corrections. 9M20 also reflected higher financial expenses, including foreign-exchange effects.
3Q20 net income declined 47.6% year over year. The prior-year quarter benefited from interest-on-equity-related effects and a more favorable tax comparison.
Financial expenses increased to R$1.488 billion in 9M20 from R$1.068 billion in 9M19, while financial revenue decreased to R$725 million from R$1.461 billion. Management attributed the change mainly to foreign-exchange variation and the absence of the prior-year tax-credit monetary correction.
Bad-debt expense declined 46.2% year over year in 3Q20 to approximately R$108 million, or 1.8% of gross revenue. Normalized costs and expenses increased only 1.5%, below inflation.
Mobile ARPU rose 6.3% year over year to R$25.4. TIM Live connections increased 16.8% to 627,000, and TIM Live ARPU rose 9.3% to R$89.4.
The company ended 3Q20 with 51.2 million mobile users, down 6.2% year over year; the postpaid base grew 2.3% to 21.7 million, while prepaid users declined 11.6% to 29.4 million.
TIM Live revenue grew 29.1% year over year, and fixed service revenue grew 16.4%. Fiber-to-the-home coverage reached 3.1 million homes passed in 30 cities.
TIM Participações was merged into TIM S.A. on August 31, 2020. Management states that the transaction had no economic or tax impact, but the change affects legal presentation and comparability. TIM’s trading codes changed to TIMS3 on B3 and TIMB on the NYSE in October 2020.

Outlook, commentary, risks and unusual items

Management described a gradual recovery in commercial activity as Brazilian stores reopened, with improving prepaid recharges, postpaid additions and handset sales. Digital channels remained an important sales and service channel.
COVID-19 remains a material risk to demand, customer affordability, roaming, collections, device and SIM-card supply, store operations and network deployment. Management stated that it was not aware of material uncertainties regarding going concern and retained available credit lines.
TIM raised R$1.0 billion in 2020 pandemic-related liquidity financing, consisting of approximately R$574 million from Scotiabank and R$426 million from BNP Paribas. The company also fully repaid approximately R$1.0 billion of debentures in July 2020.
TIM, Telefônica Brasil and Claro submitted a R$16.5 billion stalking-horse proposal for Oi’s mobile assets, including R$756 million for transition services. The offerors obtained the right to match a higher bid; completion and ultimate terms remained subject to the competitive process and relevant approvals.
On October 7, 2020, the board approved R$500 million of interest on equity, payable November 10, 2020 to shareholders of record on October 19, 2020.
Recorded provisions for judicial and administrative proceedings were R$886 million at September 30, 2020. Possible-loss proceedings totaled approximately R$17.7 billion, including R$16.2 billion of tax matters; these amounts were not provisioned.
The company’s conduct-adjustment agreement with ANATEL involves commitments of approximately R$639 million, to be fulfilled through quality, customer-experience and infrastructure investments, including 4G expansion.
Foreign-currency borrowings were fully hedged through swaps, but the company does not apply hedge accounting. Lease liabilities are substantial and materially affect reported debt, depreciation and financial expenses under IFRS 16.
TIM announced a connected-car partnership with Fiat Chrysler Automobiles, with commercial connectivity offerings expected from the first half of 2021.

Investor verification checklist

Reconcile the 3Q20 and 9M20 reported results with the economic comparatives presented by management, particularly after the TIM Participações merger.
Separate recurring operating performance from the substantial 2019 PIS/COFINS tax-credit and monetary-correction benefits.
Confirm the composition of gross debt, lease liabilities, hedge assets and liabilities, and the company’s net-debt metrics excluding IFRS 16 leases.
Monitor execution, funding and regulatory approvals related to the proposed Oi mobile-assets acquisition.
Assess the potential cash and earnings impact of the R$17.7 billion of possible-loss legal and administrative proceedings and the R$886 million provision.
Track COVID-19 effects on prepaid recharges, churn, collections, handset sales, supply chains and store productivity.
Verify the timing and tax treatment of the R$500 million interest-on-equity distribution and subsequent corporate-restructuring disclosures.