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

Greetings, and welcome to Axtel's Third Quarter 2020 Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Adrian de los Santos. Thank you. You may begin.

Thank you, Sherry, 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, Chief Financial Officer. Axtel's Financial information, including our third quarter report, is available in our corporate website at axtelcorp.mx. Due to the closing of the data center transaction in January this year, we might make reference to pro forma 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. Also, let me remind you that information 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 discussed in this call based on new information available. Now let me turn the call over to Rolando 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 the quarter -- in this quarter, including an update on the strategic projects currently underway in Axtel. Third quarter results are positive, very much in line with our guidance for the year, reflecting a continued solid performance in Axtel Networks, our infrastructure business unit, and mixed results in Alestra, our services business unit, reflecting the contraction in the economy, particularly in the government segment and in voice-related services to corporate clients. Normalizing figures for the data center transaction closed in January this year. Year-to-date results for EBITDA is 4% up compared to 2019, reflecting the essential nature of our services and the diligent execution of our operations. As in the previous quarter, third quarter results reflected an unaffected infrastructure business unit increasing its EBITDA 22% versus comparable third quarter results of 2019. On the other hand, Alestra, our services business unit, showed positive results from IT and value-added services, which revenues increased 4% vis-à-vis comparable third quarter 2019. Federal government sector showed signs of stabilizations but continue underperforming compared to our pre-COVID plan, while enterprise purposed revenues continue trending down. Third quarter results confirmed the stability and visibility of Axtel Networks' results and the right focus of Alestra in digital transformation and value-added services. The Axtel Digital project will allow the virtualization and remote access of significant processes from the design and ordering of new services up to the completion of the cash conversion cycle, more agile, efficient and streamlined processes resulting from Axtel Digital will also serve as the foundation to build upon and assist our customers in their digital transformation projects. During the quarter, we continued implementing a complete and independent IT platforms, framework that will interact with our CRM and ERP and other critical systems, with lean procedures and state-of-the-art technology. Additionally, we further expanded the implementation of collaboration tools, and nurse in remote work practices, preparing the company for the new normal after the pandemic. Just in terms of office space, we estimate annual savings of over MXN 85 million in rental expenses, aiming at the right balance of on premise, collaborative spaces, and therefore, remote work to maximize efficiency and productivity of our processes and resources, while maintaining the commitment, culture and identity of our organization. Maintaining the well-being of our employees and supporting the continuity of the operations of our clients continues as our top priorities in the third quarter. Approximately 85% of our collaborators continue working remotely, while the percentage of COVID-19-tested employees reached 50%. Approximately 70% of the contingency support fund sponsored by employees and the company has been used to support collaborators and their families directly affected by COVID-19. The direct impact of the pandemic in the Enterprise segment, revenues represented MXN 35 million year-to-date. Additionally, working capital investments due to COVID-19 had a total of MXN 87 million year-to-date impact. And we estimate the recovery of 70% to 80% of this amount by the fourth or first quarter 2021. COVID-19 pandemic has also impacted [indiscernible]. For this reason, Alestra, our services business unit, supported the National Center for [ APDMA or logical contingencies and disasters. [Foreign Language] donating the connectivity and required software applications to enable a cloud-based contact center to provide free psychological support to the Mexican community. During the quarter, we entered the second phase of the competitive process to attract investors and strategic proposals for our infrastructure business unit and the entire company. As informed in July, interest from investors remained high, and in the quarter, we received attractive nonbinding offers for both Axtel Networks business units, and the company as a whole. After carefully considering all the merits of the different proposals, we concluded that those for Axtel as a whole have the best potential to maximize shareholder value. So we are proceeding with the next steps in the process, seeking a potential transaction for all Axtel, including its 2 business units, infrastructure and service. Due to the complexity of these kind of transactions, it is difficult to provide a clear timing for a potential closing. At this point in time and given the sensitivity of the competitive process and the binding agreements for confidentiality, we are in a position where we cannot disclose any further information. About this process. Now let me tell you about our traditional technology festival. In August, we concluded the 11th edition of the Alestra Festival with a 3-day virtual event where Alestra, along with technological partners, demonstrated its portfolio of solutions to face the challenges of the new reality and create innovative work environments and ecosystems. More than 1,300 users attended the conferences and more than 19,000 visited the on-demand channels. Cybersecurity and cloud and mega trends captured the most interest among the audience. Just to close my remarks, let me say the year-to-date EBITDA has reached 77% of our guidance. The extended Digital project is moving full steam ahead. The business separation continues presenting differentiated growth opportunities for both units, infrastructure and services. And our strategic competitive process is progressing in a positive swift way. In the last quarter, and into 2021. We will continue our diligent efforts to create value for our customers, organization and shareholders, while maintaining the well-being of our collaborators and the continuity of the operations of our clients as our top priority. With that, Adrian will now make some additional remarks and present the summary of the operating and financial results of the quarter. Adrian?

Thank you, Rolando. Our $150 million in cash, excluding the $13 million in escrow balance at the end of September, includes additional liquidity we drew down in the second quarter plus the $56 million from the data center transaction, we did not use the reduced debt in the first quarter. Assuming markets and geopolitical risks remain relatively stable and a potential new spike in COVID contagions do not materialize significantly in coming months, we could start reducing these nonoperating cash balance before the end of the year or beginning next year. Regarding our share buyback program, we maintain a position of MXN 58.9 million Axtel CPOs in treasury at the end of the quarter, out of which MXN 34 million were acquired this year at an average price of MXN 6.30 per CPO. Now let me proceed to review our financial results for the quarter. Other revenues were flat year-over-year in the quarter. Services business unit revenues declined 4%, explained by a 1% and 12% decline in enterprise and government segment revenues, respectively. The decline in Enterprise segment revenues in the quarter is explained by a 8% decline in Telecom and a 39% increase in IT services revenues. Explaining the 8% decline in Telecom revenues, voice services revenues declined 32%, and the rest of telco services marginally declined just 1% year-over-year. The relevant decline in voice revenues is explained by its maturing technological cycle and by the impact in voice traffic due to COVID-related remote work for many banks and corporate clients in the quarter. Data and Internet revenues declined 3% in the quarter due to a 22% reduction in revenues from dedicated data access services, which are migrating to cloud-based solutions like software-defined network services. Revenues from managed network services increased 4% in the third quarter while Collaboration solutions revenues declined 9% in the quarter due to a nonrecurring revenue from a solution we did implement in the third quarter of 2019. IT services revenues from Enterprise customers posted a strong improvement, 39%, supported by a 41% increase in cloud and cybersecurity service revenues, in line with the current technology trends. Voice revenues represented only 14% of Enterprise segment revenues in the quarter, whereas the other 86% non voice increased 6% quarter-on-quarter. Concerning government segment, third quarter revenues declined 12% as we terminated certain services and implemented adjustments in some others to accommodate the budget reductions in federal government entities. Telecom and IT revenues represented 48% and 52% of revenues, respectively, in the quarter. Within government telecom services, data, managed network and collaboration services represented 86% of revenues in the quarter. Government Telecom revenues declined 20% in the quarter as only Collaboration services revenues increased strong 152%. With respect to government IT services, third quarter revenues declined 4% as a positive, 35% in cloud and cybersecurity was not enough to compensate the 26% decline in system integration revenues. Moving to Axtel Networks, our infrastructure business unit, it recorded MXN 1,280 million in revenues in the quarter, including MXN 612 million coming from Alestra, our business -- our services business unit. Total revenues increased 8% or 15%, excluding inter unit revenues. Revenues booked from Alestra increased 1% with respect to services provided to third parties, increases in IP transit, spectrum leasing, [indiscernible] and our fiber contributed to the 15% increase in revenues year-over-year. Cost of revenues, excluding depreciation and amortization charges, increased 3% on a comparable basis, higher than the unchanged revenues year-over-year due to the impact of COVID-related adjustments in recurring revenues and a decline in the contribution margin of government revenues. Services unit cost of revenues increased 2% in the quarter despite a 4% decline in revenues due to the Telecom service revenues concessions or adjustment made in the quarter to both enterprise and government clients, which diminished top line revenues but left costs unchanged. In the third quarter, infrastructure business unit costs remained unchanged, while revenues increased 8%, explained by a intra business unit reclassification of certain costs starting in 2020. Adjusting for this reclassification, costs will have increased 15%, in line with the 15% growth from third party customers' revenues. The effect in revenues and costs explained before, resulted in a consolidated contribution margin of 71.7% compared to 72.6% in the third quarter of 2019. Operating expenses declined 4% vis-à-vis third quarter 2019, explained by a 13% reduction in rent, outsourcing expenses and bad debt provisions. Salaries increased only 1% year-over-year. All digitalization and optimization initiatives continued translating in a more efficient, agile operation. Operating expenses in Alestra and Axtel Networks declined 6% and 2%, respectively, in the quarter. EBITDA in the quarter totaled MXN 1,078 million, increasing 2% when compared to 2019 EBITDA, adjusted for the data center transaction. EBITDA for services and infrastructure units were MXN 445 million and MXN 634 million, a 17% decline and 22% increase, respectively. CapEx in the quarter was MXN 367 million or $70 million compared to $20 million in the third quarter of last year. CapEx for the first 9 months of the year totaled $71 million, including $22 million in spectrum frequency renewals. Cash balance totaled $163 million at the end of the quarter, including the $30 million in restricted cash. Excluding these restricted cash and the $63 million slowed down from our committed facilities and short-term loans in the second quarter, cash balance stood at $87 million compared to $81 million at the beginning of the quarter. As of the end of the quarter, net debt was $595 million, and the ratio of net debt-to-EBITDA was 2.9x, excluding the EBITDA contribution from the data center transaction. Debt related to IFRS 16 represented $15 million or $16 million at the end of the quarter. And with this, we're happy to take your questions. Sherry, if you could please open the call for questions?

[Operator Instructions] Our first question is from Carlos Legarreta with GBM.

The first one is related to the Government segment. Adrian, I know you mentioned it seems to reflect a lower budget or lower -- yes, lower resources allocated to the segment. But do you think this is an extension of what you saw last year? Or is it worsening because of the pandemic? If you could give us a little color of what to expect forward?

Yes. Carlos, this year, it's definitely different than last year. As you know, in April, the federal government enacted new rulings regarding more efficiencies, austerity measures, reducing budget up to 75% across all different ministries and institutes. So yes, it's different than last year due to that. However, we saw some stability at the end of the quarter. We're also having a very positive collection from this segment. So we think that the direct effect of the pandemic were mostly seen in April, May, June, up to July and starting to see more stability in August and September.

Okay. And just so we have -- like, moving on just so we have the same figure, as you guys do, could you disclose the EBITDA per segment in the last 12 months in USD, please?

The EBITDA per segment, last 12 months, I don't have it in front of me the LTM, I have the year-to-date, but I drop you an e-mail with the numbers.

[Operator Instructions] Our next question is from Alejandro [indiscernible] with Crédit Suisse.

Two questions -- Yes. Can you hear me, sorry? Okay, yes. 2 questions from my side. And the first one is we saw an impressive year-over-year improvement in TI revenues -- in IT revenues, sorry. I was wondering, do you think this is part of the normal pace of growth of this business? Or do you think it reflects virtualization efforts from your clients during the pandemic? Do you think this level of growth can continue in the following quarters? And my second question is regarding the sale process. Just if you could describe -- considering that you are now planning to sell the whole company rather than just infrastructure business as a base case. So any comment on that part would be great.

Alejandro, this is Rolando. Regarding your first question, if I understood it correctly, you're referring to IT type of services. Yes, here, just let me describe that we have classified all the family of services that we are supporting to our customer base in 3 different categories. We have a family of services that are mature, like boys and Internet. And then we have value-added services. And thirdly, we have what we call transformation, digital transformation type of services. IT services like cloud services and cybersecurity, of course, corresponds to this later categories of value-added services and digital transformation services. Both of these services are growing 1-digit and 2-digit, market wise. Therefore, we are navigating into -- in this wave of rapid acceleration, which is extremely needed by the -- our customer base in order to remain competitive in a global economy.

Yes. And concerning your second question, Bernardo will take that on. It's regarding the competitive process, right, Alejandro?

Could you repeat -- what -- yes, please.

Yes. How the next steps for the competitive process change you are now trying to -- or assuming the whole company will be sold integrated. So is there any change? Or how does this affect the competitive process? And what are the next steps?

Well, the first thing to say is that the way this process is now proceeding is just like the company is working today. So the good news is that we do not have to do more changes to the structure of the company. We are already working on their 2 business units, one for infrastructure and one for service -- for the service market. So the good news is that, that implementation, which was already in place at the beginning of this year and is working and is providing results. That's the type of structure that we will continue to have going forward. So that provides stabilities to the operations of the company through the rest of the process. And the rest is just to complete the the standard process. As you can imagine, some steps are needed in order to identify the final buyer and then signing a definitive contract. And after that, get the approval and take to closing. I don't know if that answers?

Yes, it does.

Alejandro, if I may complement the -- your first question regarding IT growth, to confirm the numbers, yes, indeed, the -- both the quarter and year-to-date growth in Alestra IT revenues, it's 18%. And since last year, IT revenues have been growing more or less at these levels. And as Rolando mentioned, it's the -- one of the services that we expect to have a strong growth in years to come.

So as a follow-up, you have not really seen an acceleration of the growth of this segment with the pandemic with virtualization of companies?

Yes, yes, we have seen -- concerning IT, in particular, as we mentioned, cybersecurity and cloud, in particular, because companies are working differently. Their particularly corporate multinational financial institutions that have a lot of employees on a virtual office or remote work. The way cybersecurity was approached in the past is different now that there are only a few employees on-premises. The way applications are accessed in the cloud vis-à-vis how it was done in the past. All this has been going through this comprehensive digital transformation. And we're seeing that acceleration, as I said, cloud and cybersecurity increased more than 30-something percent in the quarter.

Our next question is from Gilberto Garcia with Barclays.

Do you have any accounts payable or any other user companies that -- due to ALFA at this point?

Gilberto, if you'll recall, we paid significant amounts of the balance at the beginning of the year. And at the end of the quarter, we have inter companies with ALFA -- and the account payable to us, it's less than $2 million. So basically, it's not material at all. We do have other intercompany accounts receivable to other ALFA subsidiaries, but that's part of the services we provide as an IT telecom company.

[Operator Instructions] There are no more questions at this time. I would like to turn the conference back over to Mr. Adrian de los Santos for closing comments.

Thank you, Sherry, and thanks, everyone, for participating in our call today. As always, our Investor Relations area, and myself are available for any further comments you might have. Thanks.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day.