Amidst the celebration of record-breaking quarterly performances and promises of robust shareholder remuneration, a subtle shift in Telefônica Brasil's (Vivo) strategy has gone largely unnoticed. The telecom giant's aggressive focus on reducing capital expenditure intensity, while initially appearing beneficial for short-term gains, might be setting the stage for a future investment crunch that could jeopardize its long-term growth and, ultimately, shareholder returns.

Vivo's impressive 2023 results, with net income soaring by 23% and free cash flow generation exceeding R$8 billion, have understandably captivated investors. The company's commitment to return at least 100% of net income to shareholders for the next three years further sweetens the deal. However, beneath this veneer of prosperity lies a potentially concerning trend: a rapidly declining CapEx-to-sales ratio.

Declining CapEx Intensity

In 2022, Vivo's CapEx intensity stood at 19.8%, driven by the integration of the Oi customer base and auction obligations. The company, acknowledging the extraordinary nature of these investments, projected a maximum CapEx of R$9 billion for 2023, which they subsequently achieved. Notably, the CapEx intensity for 2023 dropped to 17.2%, signaling the start of a downward trend.

While Vivo hasn't provided a specific CapEx figure for 2024, their emphasis on 'reducing capital intensity' suggests a further decline. This raises a critical question: Can Vivo sustain its ambitious growth trajectory while simultaneously curtailing its investments?

Vivo's CEO, Christian Gebara, highlights the company's focus on 'future-proof networks' like fiber and 5G, implying that legacy technologies will receive minimal investment. He further points to the CapEx-light nature of new businesses as a contributing factor to the declining intensity. This narrative, however, might be overlooking a crucial aspect: Network expansion is a continuous process, not a one-time investment.

While Vivo's fiber footprint is nearing its target of 29 million homes passed, maintenance and upgrades of existing infrastructure are critical for ensuring service quality and customer retention. Moreover, the 5G landscape is rapidly evolving, requiring continuous investment to stay ahead of the technology curve.

"Consider this: Vivo is the only telco covering all Brazilian cities with over 200,000 inhabitants using 5G technology. This impressive feat requires substantial ongoing investment to maintain coverage, upgrade equipment, and expand capacity as 5G adoption accelerates."

Potential Consequences of Underinvestment

By focusing solely on operating cash flow margin as a measure of profitability, Vivo might be creating an illusion of efficiency. While new businesses contribute to revenue growth without significant CapEx, they often come with lower EBITDA margins, ultimately impacting overall profitability.

Hypothesis: If Vivo's CapEx intensity continues to decline at the current rate, falling below 15% by 2025, the company could face a significant investment shortfall within the next 3 to 5 years. This could translate into:

- Compromised network quality

- Reduced coverage

- Inability to capitalize on emerging technologies

- Impact on customer satisfaction

- Hindered growth

While Vivo's generous shareholder remuneration plan is undoubtedly appealing in the short term, the long-term sustainability of such returns hinges on the company's ability to invest in its future. The potential for a CapEx time bomb ticking within Vivo's seemingly robust financial position is a concern that deserves closer scrutiny from investors and analysts alike.

Hypothetical CapEx Intensity Trend

"Fun Fact: Brazil has over 170 cities with populations exceeding 200,000. Imagine the financial commitment required to sustain and enhance 5G infrastructure across this vast urban landscape."