Axtel, S.A.B. de C.V. (AXTELCPO) Earnings Call Transcript & Summary

Greetings, and welcome to the Axtel 2020 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Adrian de los Santos, Chief Financial Officer. Thank you, sir. You may begin.

Thank you, Christina, and welcome, everyone. Today's conference call will be hosted by Mr. Rolando Zubirán, Axtel's Chief Executive Officer; Mr. Bernardo García, Executive Director of Strategic Planning and Business Development; and myself. Axtel's financial information, including our second quarter report is available in our corporate website at axtelcorp.mx. This quarter earnings report was released yesterday before the market opening and different than our usual after closing report, due to timing requirements in the strategic process currently underway in Axtel. Additionally, and due to the closing of the data center strategic agreement in January, for comparison purposes, we might prefer to pro forma or comparable information, which will adjust for the effect in revenues, costs and expenses of these data centers in 2019. A detailed reconciliation is included in the earnings report. Finally, let me remind you that information discussed in this call may constitute forward-looking statements regarding future events or future financial performance of the company. These statements reflect management's current views, which are subject to different risks. Therefore, the company disclaims any obligation to update statements in this call based on new information available. Now let me turn the call over to Rolando Zubirán for his initial remarks. Rolando, please?

Thank you, Adrian, and thanks, everyone, for attending our call today. Before reviewing our financial results, I would like to comment about the company's major events in this quarter, including an update on the implications of COVID-19 in Axtel. Axtel's first semester results reflect preparedness and resilience. Preparedness in respect to our digital agenda, contingency procedures and IT capabilities to switch most of our processes to operate remotely with no interruption to our client services. Resilience of our business model, which reflects the essential nature of our ITC (sic) [ICT] solutions. These attributes and a diligent execution resulted in 17% and 28% EBITDA growth compared to second quarter 2019 and first quarter 2020, respectively. Even excluding the extraordinary gain from the transfer of 3.5 gigahertz spectrum to Telcel, EBITDA increased 8% and 19% compared to second quarter 2019 and first quarter 2020, respectively. The COVID-19 pandemic has affected industries and companies in different ways. In Axtel, we continue prioritizing the well-being of our employees, assisting our clients and supporting the continuity of our operations. 85% of our employees remain working remotely, except for collaborators responsible for critical platforms, or engineers deploying services in public areas or our customers' premises. This pandemic has changed many business practices, some temporarily and some others on a permanent basis. We are seeing an accelerated adoption of digital transformation across all industries. Services, processes and practices that were expected to be transforming in the next 2 to 3 years are changing within months. Along with our business separation process, we started the Axtel digital project to immerse ourselves in the new reality. This will capitalize on all the experiences we learn after most of our workforce move to remote work and will leverage our current digital transformation initiatives by accelerating the adoption of these tools and practices. From the design and ordering of new solutions to the completion of the cash conversion cycle, Axtel is becoming an end-to-end digital company. Collaboration tools, cloud-based platforms, optimized office space and an extensive use of remote work practice are some of the adjustments we are currently working on at the company. In other words, we are fine-tuning the new and permanent operational and management business model of Axtel Digital. In the quarter, we entered into certain agreements with clients, whose business has been severely affected or shut down. We restructured certain contracts by renewing or extending the life of the contract, while providing short-term concessions. We also selectively provided extended payment terms to allow customers to navigate through the liquidity constraints prevailing in the quarter. Axtel revenues in the quarter were impacted with MXN 28 million due to concessions to clients. Additionally, working capital investment due to COVID-19 make a total of MXN 75 million. For the full year, we estimate an impact in our revenues and a working capital investment of about MXN 45 million and MXN 130 million, respectively. A still positive second quarter performance, is a combination of a resilience unaffected infrastructure business unit, a stable enterprise segment, performance and an underperforming government sector, particularly federal government entities. These effects, combined with the benefit of digitalization and cost containment initiatives contributed to a first semester performance in line with our pre-COVID expectations. Excluding the extraordinary gain from the 3.5 gigahertz spectrum transaction, infrastructure unit's EBITDA increased 33% versus second quarter 2019. Whereas services unit EBITDA decreased 12%, reflecting the impact of a 26% decline in Government recurrent revenues and enterprise segment, both revenues. In the quarter, we established the framework for the different agreements that will govern temporal and definite interactions between our 2 business units. Together with a leading global consultant, we used best practices from similar projects and adopted these to Axtel needs. The business separation together with all the digital transformation initiatives should help Axtel to better serve the new reality requirements from enterprise, wholesale and government customers. Derived from the business separation, we are introducing the Axtel Networks brand for our infrastructure business unit. Axtel Networks accumulates over 20 years of infrastructure investments made by Alestra, Axtel and Avantel. Axtel Networks' own identity is another stepping-stone on its strategy as the largest neutral infrastructure operator in Mexico, serving the needs of carriers, data centers, Internet giants and cloud and content providers. Axtel's 2 business units, Alestra and Axtel Networks continue moving forward, refining their separate business strategies. In late June, upon receiving regulatory approval, we signed an agreement to transfer 50 megahertz in the 3.5 gigahertz band to Telcel. After the decommission of WiMAX and the monetization of the mass market segment, we had no further use for this spectrum frequency. The agreement permitted the company to record an economic benefit of MXN 90 million during the quarter, and canceled provisions we booked after the concession expiration date in late 2018. After temporarily putting on hold the competitive process to attract investment and strategic proposals for the infrastructure business unit and the company, we are resuming the process this month. We decided to move forward with the process, giving more stable market conditions, clear evidence of the resilience and performance of Axtel Networks, and very importantly, the sustained interest from investors. We have seen that comparable assets for companies have maintained their valuation multiples supporting our expectation for a similar pre-COVID valuation. Challenges and uncertainty presented by COVID-19 are proving how diligent and resilient our company is. We are adjusting and shifting towards a digital Axtel to continue differentiating and providing the collaboration, security, cloud and connectivity services demanded by clients under the new environment. We are evidencing the essential nature of our services and starting to harvest the benefits of our business separation. Our customers, organization, community and shareholders are all important elements in this transformation process. Notwithstanding the unprecedented volatile first semester, maximizing value for all stakeholders will remain our guiding principle. With that, Adrian will now make some additional remarks and present a summary of the operating and financial results of the quarter. Adrian?

Thank you, Rolando. In the quarter, we drew down $47 million from our committed credit facility and MXN 315 million in short-term loan. We consider that given the unprecedented circumstances and significant liquidity constraints prevailing at the beginning of the quarter, having excess cash on hand was in line with our prudent financial management. As markets continue stabilizing and visibility for the rest of the year improves, we might gradually reduce this excess cash balance and eliminate the negative monthly carried cost of approximately $90,000. In addition to maintaining approximately 80% of our cash balance in dollars, in recent weeks, we took advantage of a rally in the peso and entered into $31 million in forward contracts to fix the exchange rate for our November coupon payment and July through October dollar-denominated CapEx obligations. The average peso-dollar exchange rate for this forward is MXN 22.31 per dollar. As reported, we formalized the agreement to transfer the 3.5 gigahertz spectrum in late June. Through a non-recourse factoring structure, we received the funds in early July, and simultaneously paid IFETEL. Given that the agreement was executed in June, but funds were not received and paid until early July, we recorded an extraordinary MXN 1,553 million account payable to IFETEL and an extraordinary MXN 1,906 million account receivable from Telcel in the end of the quarter balance sheet. As of today, both items had been eliminated from ARPU. Before discussing the detailed financial performance in the quarter, let me share with you our expected EBITDA and CapEx for the year. We expect 2020 EBITDA to reach a level similar to our pro forma 2019 EBITDA. This estimate is a combination of expecting a stable and resilient Enterprise segment, positive prospects for Axtel Networks, the extraordinary gain from the spectrum transaction, compensated for the uncertain underperforming Government segment. With respect to CapEx, we estimate the range between $80 million to $90 million, including the $22 million already invested in the renewal of spectrum frequencies. I will now review our financial results for the quarter. On a comparable basis, total revenues in the second quarter increased 2%. Services business unit revenue declined 4% in the quarter, explained by a 5% decline in Enterprise revenues and flat Government segment revenues. The decline in Enterprise segment revenues in the quarter is explained by a 9% decline in Telecom and a 22% increase in IT services revenues. Explaining the 9% decline in Telecom revenues, voice services revenue declined 38%, and the rest of telco services increased 1% year-over-year. The sharp decline in voice revenues is explained by its secular decline in trends and by a group of large contracts with lower voice pricing renegotiated in the second semester last year. Data and Internet revenue declined 3% in the quarter due to a 2% decline in dedicated Internet access revenues. Revenues from Managed Network services increased 1% in the quarter, while Collaboration Solutions revenues, very relevant in the new digital and virtual environment, increased 19% in the quarter. Fast-growing IT services revenues from Enterprise customers increased 22% in the quarter, supported by a 29% increase in cloud and cybersecurity services revenues. Voice-related revenues represented 15% of Enterprise revenues this quarter. The other 85% non-voice Enterprise segment revenues increased 4% in the quarter. Concerning Government segment, second quarter revenues were flat year-over-year in a mix of increased nonrecurring revenues and a 13% decline in recurring revenues. Austerity measures, combined with a reallocation of resources due to COVID-19 emergency, is causing the cancellation and postponement of contracts with federal government agencies. Within government telecom services revenues in the quarter, voice represented 7%, whereas data, Managed Network and Collaboration services represented 42%, 43% and 9%, respectively. Government telecom revenues increased 1% in the quarter, resulting from an over 100% increase in data and Collaboration services revenues, compensating a 37% decline in voice and Managed Network services. A decline in VPN services explain the decline in Managed Network revenues. With respect to government IT services, second quarter revenues declined 1%, explained by a 12% contraction in cloud and cybersecurity revenues, compensating -- compensated by the 18% increase in system integration revenues. Infrastructure business unit recorded MXN 1,316 million in the quarter, including MXN 610 million in revenues coming from Alestra Services business unit. Total revenues increased 14% or 29% excluding interunit revenues. Revenues billed to Alestra, external services business unit, increased 1%. With respect to services provided to third parties, increases in IP transit, lit fiber, transfer capacity and dark fiber revenues contributed to the 29% increase in revenues year-over-year. Cost of revenues, excluding depreciation and amortization charges, increased 3%, slightly higher than the 2% increase in consolidated revenues, mostly due to an increase from 3% to 4% in the percentage of nonrecurring revenues and an increase from 19% to 22% in the penetration of IT revenues in Alestra. Both IT and nonrecurrent revenues carry a lower margin. Services unit cost of revenues increased 3% in the quarter despite a 4% decline in revenue, mostly explained by the impact of cancellations in government contracts, resulting in a temporal run down in costs associated to canceled contracts generating no revenue. This temporal effect produced a year-over-year increase of 18% in Government segment costs, while revenues remained flat. In the second quarter, infrastructure business unit costs declined 11%, while revenues increased 14%, explained by a negative effect from the cumulative reclassification of certain costs that were previously booked in Alestra and a benefit from the cancellation of the provision associated to the 3.5 spectrum transaction. The effect in revenues and costs, explained before, resulted in a consolidated contribution margin of 73.6% in the second quarter similar to second quarter 2019. Operating expenses declined 5% vis-a-vis second quarter 2019, explained by an 11% reduction in rent and maintenance expenses, diligent efforts in account receivables generating a MXN 2 million positive delta in bad debt provisions; and digitalization and optimization initiatives, which translated in an almost flat personnel and contract services, which normally reflect inflation adjustments. Operating expenses in Alestra and Axtel Networks declined 13% and increased 3%, respectively, due to a reclassification of expenses in Axtel Networks which were booked in Alestra in the first quarter. EBITDA in the quarter totaled MXN 1,222 million, including the extraordinary MXN 90 million gain from the spectrum transaction, increasing 17% year-over-year. EBITDA for our services and infrastructure business units adjusted for the data center transaction were MXN 503 million and MXN 719 million. A 12% decline and 52% increase, respectively. Year-to-year EBITDA, which eliminates reclassification of costs and expenses, between these 2 units, normalizing for the data centers and 3.5 spectrum monetization, totaled MXN 922 million and MXN 1,164 million; an 18% decline and a 24% increase compared to first semester 2019, in line with our pre-COVID expectations. CapEx in the second quarter was MXN 433 million, including MXN 59 million in spectrum frequencies renewals or $80 million total, compared to $22 million in the year earlier quarter. Cash balance totaled $157 million at the end of the quarter, including $13 million in restricted cash. Excluding restricted cash and the $61 million drew down from our committed facility and short-term loans, cash balance stood at $84 million compared to $91 million at the beginning of the quarter. As of the end of the quarter, net debt was $593 million, and the ratio of net debt-to-EBITDA was 2.8x, not accumulating the last 12-month EBITDA contribution from the data centers divested in January. Debt related to IFRS 16 represented $17 million at the end of the quarter. With this, we're happy to take your questions now. Christina, you could please open the call for questions?

[Operator Instructions] Our first question comes from the line of Carlos de Legarreta with GBM.

Just to confirm, so we understand we're in the same channel, the EBITDA guidance that you provided is similar to the 2019 figure. Does that include the MXN 90 million from the proceeds of the spectrum sale?

Carlos, yes, you're correct.

Okay. And Rolando, I think you mentioned -- you quantified the impact of COVID-19 over 2020 figures. You mentioned, MXN 130 million in working capital. I think I missed the figure on revenue. If you could repeat it, please?

Yes. As I mentioned before, we had 2 types of impacts. One impact, it's mainly at the revenue level; and the other one is at the working capital level. Working capital level means that we have been extending the terms of payment for some specific and selective customers that are going through very difficult times. The numbers that I mentioned, let me just check here my notes.

Yes. It's for the working capital it's an estimated investment of MXN 130 million for the full year. We had MXN 75 million in the first semester.

Yes, the full semester. But in revenue, I think you also mentioned a figure in the press release that you also have an estimate for the full year?

Yes. In revenues, thus far, it's MXN 28 million and...

MXN 75 million for the full year.

75, okay. So if I may a follow up. Are you prepared to come up with a timeline for the proposal of the asset sale that you guys are reinitiating? Or is that just, I mean, in initial phases?

Hello, this is Bernardo. We don't have a specific timeline, but I can tell you it's a standard process where we are now open to receive the nonbinding offers. We're in that stage. It's going to be a similar process to the previous sales we had.

[Operator Instructions] Our next question comes from the line of Rodrigo Villanueva with Bank of America.

My first question is related to bad debt. I was wondering if you have experienced any type of bad debt increase so far this year. And in case you don't, are you expecting anything on this respect in the second half of the year? And my second question is related to CapEx. I was wondering if you could share with us the breakdown of your CapEx forecast between your services and the infrastructure divisions.

Yes, Rodrigo, regarding the bad debt, to some extent, first semester has been very positive. As I mentioned in my remarks, in the second quarter, we even had a positive provision number. We have been able to collect as normal in the Enterprise and Axtel network segment. In the Government, we're starting to see a slight deterioration in the end of the second quarter, but nothing material yet. But we do expect, indeed, an increase in bad debt, but nothing material. Mostly as mentioned, part of the working capital investment, we expect an extended collection period, particularly in the Government segment. We might go 15 to 30 days longer than average. But thus far, we don't estimate a material number with respect to bad debt. And regarding the CapEx, we estimate CapEx, as mentioned, between $80 million to $90 million. Let's round it up on $85 million. Excluding frequency renewals, we will be talking about $60 million in non-frequency CapEx for the year, rounding numbers. Probably we -- we think -- or the estimate right now, it's about 60% to 70% for Axtel Networks and the remaining balance at Alestra.

Our next question comes from the line of Martín Lara with Miranda Global Research.

In the case of the networks business, if you sell it, what is the multiple that you would expect in that transaction?