Voice service pays dividends

New technology is boosting TIM Brazil’s bottom line

 

However according to the latest earnings, released in August, a lot of work still needs to be done. It’s easy to see supporting evidence for the so-called turn-around. Sound results can be seen in the good pace of growth in the base of subscribers, an improvement on network quality metrics, skyrocketing total traffic in minutes and the substantial improvements in financials.

In the last 18 months, TIM adopted an innovative offer: moving from charging per minute to charging per call, and extinguishing the traditional long distance barrier in Brazil. “Now we can see the Brazilian market as a single market, and we are happy to enable the creation of the largest community base in the country with 44 million users”, says Luca Luciani, CEO. In fact 28 million users joined the Infinity and Liberty plans during this period.

Playing the FMS game
As the sole ‘pure-mobile’ company in the market, TIM sees voice service as the central part of its strategy; more than 85 percent of its revenue comes from this sector. The Brazilian telecommunications market is worth around R$100bn per year, and the majority of it is voice. With that vision, the company’s strategy is focusing on stimulating higher usage, especially by playing the fixed-to-mobile substitution game. Taking a look in their Q2 2010 release, outgoing traffic more than doubled in one year to 12.2bn minutes. Breaking the numbers down into users, the average minutes per customer reached 110 minutes per month in Q2 compared with 73 minutes per month a year ago – but this is still one of the lowest in the world. Looking at the long distance business the traffic performance results are astonishing, with an increase of 1500 percent compared with last year, reaching leadership position in the very traditional and monopolistic market.

Supportive network
Network quality is currently very much in the spotlight, especially following Apple’s successful iPhone launches. As such TIM made a tough decision – to take a more conservative approach to selling data services while strengthening its network. Investments this year might reach R$2.5bn, on top of the recent acquisition of Intelig (one of the largest telecoms infrastructures in Brazil), which was considered vital to support the boom in traffic.

After successfully forming a robust and proprietary network to support its ever-growing traffic, TIM has now positioned itself to firmly enter into the data sector. Avoiding the flat-fee concept (and the doubtful economic value behind it), TIM once more showed that innovation is in its DNA. For its post-paid customers the company launched an offer of charging internet access per minute instead of per megabit, as it is more convenient and easier for the user to manage. For pre-paid customers the company is pursing the as yet unexploited market of casual internet use in the lower social classes. Basically TIM offers, via a customised smartphone, a substitute for the internet café, allowing connectivity to social networks (such as Facebook and Twitter) on a pre-paid daily charge. Their offer is a quarter of the price normally spent at café-style internet points, and the company sees it as a real universalisation of internet access in Brazil.

Preserving financials
Taking a look at TIM’s financial performance, gross service revenues recorded a high single digit increase year over year. If we split the performance of the outgoing voice revenue, the growth rate reaches double digits. Despite all commercial initiatives, the company seemed to successfully manage operating expenses, yielding an EBITDA expansion of over 20 percent year over year.

The year of 2010 seemed to be a very exciting one for telecommunications in Brazil, with turn-around cases like TIM and recent M&A activities. After the corporate turmoil solved, TIM seems to be one of the few players that can act in an attacker mode, with a very clear composition of a pure-mobile company supported by a heavy infrastructure. Past almost two years, the goal to maintain good balance between growth and financial return is likely to be accomplished. After such a successful business turn-around TIM now looks ready for a new challenge.