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

Greetings and welcome to the Axtel Fourth Quarter 2020 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Adrian de los Santos, Chief Financial Officer for Axtel. Thank you. You may begin.

Thank you, Melissa, and welcome, everyone. Today's conference call will be hosted by Mr. Eduardo Escalante, Axtel's Chief Executive Officer; Mr. Bernardo Garcia, Executive Director of Strategic Planning and Business Development; and myself. Axtel's financial information, including our fourth quarter report, is available in our corporate website at axtelcorp.mx. Due to the closing of the data centers transaction in January 2020, and for comparison purposes, we might make reference to pro forma information, which will adjust for the effect in revenues, costs and expenses of these data centers in -- of these set of the data centers records 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 the statements in this call based on new information available. Now let me turn the call over to Eduardo Escalante for his initial remarks. Eduardo, please?

Thank you, Adrian, and welcome, everyone, to this call, my first as Axtel's CEO. Let me start by briefly commenting on the performance and strategic projects in Axtel. Last year, we placed the well-being of our employees and the continuity of our customers' operations as key priorities. We have stretched our internal capabilities to assist customers with connectivity capacity, collaboration and cybersecurity requests that, overnight, became critical. Regarding our organization, I share a strong empathy to all collaborators that have been affected by COVID. But I am also grateful for the commitment of the Axtel organization and the way we put to work the innovation and digitalization initiatives that we have been refining and implementing internally for years. In 2020, the impact of COVID on EBITDA and working capital was MXN 40 million and MXN 63 million, respectively. At year-end, 85% of our collaborators continued working remote. Positive fourth quarter results supported our full year performance. Nonvoice Enterprise segment revenues in Alestra and recurrent Axtel Networks revenue posted 6% and 4% increases, respectively, in the fourth quarter. Government segment revenue within Alestra declined 18% year-over-year. However, fourth quarter revenues increased 15% on a sequential basis, reflecting some stabilization at a new normal in a complicated year after the austerity measures implemented by the federal government in April. Amidst the COVID health crisis and subsequent economic recession, full year revenues marginally declined 1% in the year, reflecting a resilient critical portfolio of services, supported by the diligent organization focused on a comprehensive digital transformation process. Axtel Networks' third-party revenues increased 8% in the year, whereas Alestra Nonvoice Enterprise segment revenues increased 5%, partially compensating sharp declines in Enterprise segment, Voice and Government revenues. In 2020, our collaborators implemented over 100 innovation initiatives that contributed close to MXN 160 million in EBITDA and CapEx savings. In July, we shared our EBITDA guidance at the same level of 2019, adjusted for the data centers transaction. A solid performance in Axtel Networks and value-added and digital transformation services to Enterprise customers in Alestra, combined with efficiencies in our operations, compensated the underperformance in government and legacy services, resulting in an EBITDA 2% above our guidance and 2019 results. At the beginning of 2019, we announced the separation of Axtel's operations into 2 business units to participate in the growth opportunities presented by broadband and infrastructure demand originated for streaming, social media consumption, IoT and mobile deployments. The separation also permitted Alestra, our services unit, to shift its portfolio focus towards digital transformation and value-added services. After a detailed evaluation, we determined that an avenue to reflect the value of the new operating model could be achieved by attracting new investors, particularly for Axtel Networks. In January 2020, we have started the formal competitive process with this objective, including the possibility to attract investors' interest for Axtel as a whole. In October, we decided to narrow the process to investing in the whole company [ only ]. And in December, we announced the termination of such competitive process as valuation proposals did not reflect the intrinsic and potential value of the 2 business units. This year, we are resuming activities to separate the 2 business units into independent corporate entities. At the same time, we are establishing conversations with infrastructure-focused investors that did not participate in the last phase of the competitive process. The objective of value maximization by attracting new investors remains a priority for the company. Many of the investors with whom we are establishing conversations are familiar with our 2 business units. We plan to update investors on the recent performance of the business units and perspectives for the industry with a focus on attracting interest mainly for the infrastructure business unit. Although at present times, we are still living complicated days due to COVID, the vaccination progress in many parts of the world is bringing brighter perspectives for the year. In Axtel, we will remain vigilance on commercial opportunities presented to both business units; continue developing more agile, efficient and streamlined processes to lead Axtel digital projects; and remain focused in value maximization initiatives, including the corporate separation of the business units and the potential divestment of Axtel Networks. With that, Adrian will now make some additional remarks and present a summary of the operating and financial results of the quarter.

Thank you, Eduardo. We finished the year with $157 million in cash, excluding $13 million in escrow balance, which, by the way, were released to Axtel in early January. As of December, we maintained $65 million in debt we drew down to strengthen our liquidity, plus the $56 million from the data center's transaction we haven't used to reduce indebtedness yet. Given our perception of improved market risks, we're starting using liquidity to reduce debt this month. In the year, Axtel generated $39 million in cash flow before debt movement and excluding data centers and other capital structured transactions. Notwithstanding extended payment conditions offered to customers during the year, the quality of our accounts receivable was reflected in an extraordinary collection in the last quarter, contributing to a positive $3 million working capital for the year. At the end of the year, we maintained a position of 59 million Axtel CPOs under our share buyback program. In our upcoming annual shareholders meeting, we will propose a new amount for this year. Regarding our guidance, we estimate investments for CapEx of $98 million. With this CapEx, and assuming a positive GDP of 3.2%, we expect revenues of MXN 12,780 million and EBITDA of MXN 4,420 million, a 3% growth over last year. I will now move on to review our financial results for the quarter and full year 2020. On a comparable basis, total revenues were down 7% year-over-year in the quarter. Services Business unit revenues declined 7% in the quarter, explained by 3% and 19% (sic) [ 18% ] declines in Enterprise and Government segment revenues, respectively. The decline in Enterprise segment revenues in the quarter is explained by a 9% decline in telecom and a 31% increase in IT services revenues, explaining the 9% decline in telecom revenues. Voice revenues declined 36% and the rest of telco services remains unchanged year-over-year. The relevant decline in voice revenues is explained by a secular decline in trend and the impact in voice volumes due to remote work in many banks and corporate clients' offices. Data and Internet revenues declined 4% in the quarter. 2/3 of the decline is explained by lower revenues from dedicated data access services and 1/3 uses renegotiation of a relevant Internet access contracts. Revenues from managed network services increased 3% in the fourth quarter, while collaboration solutions revenue increased 12% in the quarter due to increased demand for this type of services after COVID. IT services revenues from Enterprise customers improved 31% in the quarter, supported by a 33% increase in cloud and cybersecurity services and a 29% in revenues from system integration and digital innovation solutions. Voice revenues represented 14% of Enterprise segment revenues this quarter, whereas the other 86% nonvoice revenues increased 6% in the quarter. Concerning Government segment, fourth quarter revenues declined 18% as fourth quarter 2019 revenues were strong even for a pre-COVID period. In the year, telecom and IT revenues represented 48% and 52% of revenues, respectively. Within Government telecom services, data, managed networks and collaboration services represented 91% of revenues in the quarter. Voice revenues made up the other 9%. Government telecom revenues increased 1% in the quarter as a 25% increase in managed network services compensated the decline in all other telecom revenues. With respect to Government IT services, fourth quarter revenues declined 30%, notwithstanding, recording at 15% sequential growth due to the termination of some cloud and cybersecurity contracts. For the full year, Government telecom and IT revenues were down 11% and 5%, respectively. Government revenues trended off in the third and fourth quarters, reflecting our efforts in partially renewing contracts after the federal government implemented its authority measures in late April last year. With respect to Axtel Networks, our infrastructure business unit, it recorded MXN 1,290 million in the quarter, including MXN 614 million in revenues coming from Alestra. Total revenue declined 4%, a mix of 2% increase in interunit revenues and down 9% in revenues from third-party customers. With respect to services provided to third parties, a decline in dark fiber capacity use contracts explained the performance. Revenues under these kind of contracts are recorded upfront. Therefore, more transactions booked in the fourth quarter of 2019 explained the decline in fourth quarter 2020. For the full year, revenues from third-party customers in Axtel Networks increased 8%, posting gains in all services, except for spectrum leasing. Moving to our cost. Cost of revenues, excluding depreciation and amortization charges, declined 14% on a comparable basis due to better margins in Alestra's nonrecurring revenues and lower costs in Axtel Networks. Services unit cost of revenues declined 7% in the quarter, in line with the 7% decline in revenues. In the fourth quarter, infrastructure business unit costs declined 24%, while revenues declined 4%, explained by the substitution of leased-links with owned infrastructure and by an intrabusiness unit reclassification of certain costs in the year. Operating expenses declined 3% vis-à-vis fourth quarter 2019, explained by an 11% reduction in rent, maintenance, outsourcing, expenses and bad debt provisions. Personnel expenses increased almost 20% due to a onetime rightsizing organization provision created in the quarter. All digitalization and optimization initiatives continued translating in a more efficient agile operation. Operating expenses in Alestra declined 10% and increased 5% in Axtel Networks in the fourth quarter. Fourth quarter expenses in Axtel Network is affected by a relevant debt provision benefit in the fourth quarter of 2019. Without this effect, expenses would have increased only 2%, explained by the onetime rightsizing provision just mentioned. EBITDA in the quarter totaled MXN 1,052 million, declining 5% when compared to 2019 EBITDA adjusted for the data centers transaction. EBITDA for our services and infrastructure business units, adjusted for the data centers transactions, were MXN 512 million and MXN 540 million, flat and a 10% decline, respectively. CapEx in the quarter was MXN 657 million or $32 million compared to $30 million in the fourth quarter of 2019. CapEx for the year totaled $103 million, including $22 million in spectrum frequencies renewal. As of the end of the quarter, net debt was $602 million and the ratio of net debt-to-EBITDA was 3.1x, excluding EBITDA contribution from the data centers transaction. Debt related to IFRS 16 represented $90 million at the end of the quarter. Before taking your questions, let me hand the call back to Eduardo for a brief comment. Please, Eduardo?

Thanks again, Adrian. I want to take this opportunity to recognize Rolando Zubirán's trajectory in Alestra and Axtel, leading to a continuous evolution in line with industry trends since 1999. Since 2016, he successfully managed the Alestra-Axtel merger, and lately, implemented the separation of Axtel's operating model into 2 business units. I wish him well on his retirement. Now Rolando wants to share some words with you. Rolando?

Thank you, Eduardo. Thanks for your kind words. What I would like to do is to take a couple of minutes to thank you all, investors, analysts, rating agencies, bank and bankers and all the financial community for the interest and support you have placed in Axtel. I had the privilege to serve as Alestra's CEO since 1999 and Axtel after the Alestra-Axtel merger back in 2016. With the merger, I got the opportunity to manage a publicly traded company and started this relationship with the institutional investment community. The scrutiny on public companies is a key positive element of efficient markets. I am taking with me many experiences from this bilateral interaction with all of you. I am grateful for the opportunity of having led Alestra and Axtel for the last 22 years, participating in a continuous evolution along with the industry, complemented by acquisitions, divestments and mergers. Throughout this time, I was blessed to be joined by a professional and resourceful management team, which remains in Axtel. I also want to mention that I have worked alongside Eduardo for many years, and I am positive that under his leadership and experience, Axtel's best years are still to come. So after 22 years, I am retiring from this great organization, this fantastic company to spend more time with my family, and eventually taking on some personal and family projects. With this, I would like to thank you all, and please stay safe. Thank you. Back to you, Adrian.

Thank you, Rolando. I wish you well as well. Now moving on to Q&A, let me just comment that Eduardo Escalante can only join us for very few minutes. He has a really important meeting that he had to move on. So I would appreciate if we start with your questions directly to him. He might perhaps take only 1, 2 questions. So Melissa, if you please open the call for questions.

[Operator Instructions] Our first question comes from the line of Alejandro Gallostra with BBVA.

My first question is related to the infrastructure business. I understand the difficult annual comparison base that you mentioned, Adrian. But I would like to better understand what is behind this sequential deceleration in the business. And if the declining from payment contracts that you mentioned in the press release, it should be compensated in future quarters? Or how should we think about the performance of this business going in 2021? And my second question is related to taxes. And I would also like to understand what is behind the large amount in taxes that you report this quarter. And the third question, if I may, is related to the percentage of your revenues that are in U.S. dollars and also the percentage of operating expenses that are in U.S. dollars. And why you are assuming -- working with an exchange rate of MXN 21, given that most estimates point to a strong peso throughout the year?

Thank you, Alejandro, for the questions. Let me begin by your last comment regarding the exchange rate for the year. As you know, the exchange rate has shown significant volatility since the end of last year, well, a large part of last year, but particularly, the appreciation at the end of last year and early this year. When we develop the budget and the guidance for the year, as you know, it's an extensive bottoms-up exercise. So at that time, we were forecasting MXN 21 as exchange rate for the budget for this year. We decided to maintain that just to be conservative. But certainly, today, it looks like it's a little high. Still, we do expect to see some volatility along 2021. For the other questions, let me turn it to Bernardo for the infrastructure business question and to Adrian for the percentage of revenues and the amount of tax. Bernardo?

Yes. Good morning, Alejandro. Good to hear from you. The infrastructure business unit is still maintaining a strong growth last year. What Adrian was explaining is that during the year 2020, we didn't have a big onetime revenue as the one we had in the year before. So big projects like that, that came in the last quarter in 2019 happened every now and then. In this year, 2020, we had big projects, but -- whose revenues are tied to the deployment of the projects, and so that could create a good expectation for 2021. So these big items that have onetime revenues create some, let's say, temporary distortion in the business. So you have to look at the business more in detail to see that. For this year, we see the infrastructure business unit continuing a strong growth fast, coming from the growth of fiber-to-the-tower, basically, and long-term contracts that we signed during the last part of last year. So that's related to [ infra co ]. Adrian?

Yes, Alejandro, regarding the items that we incur in dollars in our P&L. In Axtel, both units are -- considering Alestra and Axtel Networks, 12% of the revenues come in dollars, and this is an approximate, maybe 11%, 12% quarter-on-quarter, depending. But on average, it's about 12% of the revenues, 26% of the costs and about 10% to 12% of the operating expenses. If you do the math of how these percentages affect the amount, you come down to EBITDA-neutral in peso terms, meaning that it's not affected by the exchange rate in pesos. Obviously, if the peso depreciates, whatever amount in pesos that you convert into dollars, it's a lesser amount. And about the taxes in the fourth quarter, let me explain. We have 2 items under the tax of MXN 1,242 million. One is the cost tax that reflects a provision of about MXN 375 million that we made in the fourth quarter. It's related to an adjustment that we think we will have to make in -- due to the recording of deduction in a criteria and -- a fiscal criteria, whether we made it as a 1-year deduction versus an, over time, amortized item that should have been deducted over a 5-year period. So that's the effect of MXN 375 million. And then we have MXN 500 million approximately that -- the 12% appreciation of the peso in the fourth quarter reflected in FX gain, that we had to use NOLs or tax losses that we have. So that's a noncash item. And also another, about MXN 300 million noncash items due to an adjustment in the fiscal value of property, plant and equipment. That's the 3 main elements in the tax amount for the quarter.

And Bernardo, I think that you're very positive about the future performance of the infrastructure business. Could you share with us what's the growth that you expect to see in this business during 2021? Or at least do you expect this business to grow faster than the overall company or in line with the growth that you just published a few minutes ago?

Yes, Alejandro, for the plan for this year, and based on what we've -- and the trend that we are having on the infrastructure business unit, I can tell you that we take growth in revenues from third parties this year of 9%. And that's a signal of the well -- how well the market is receiving the new value proposition of the infrastructure business units.

Our next question comes from the line of Carlos Legarreta with GBM.

My first question is for Eduardo, please. If you could briefly talk about your vision for Axtel. And how should we think about the company's shareholders' distribution policy once the infrastructure unit is divested?

Carlos, unfortunately, as I mentioned, Eduardo had to leave the call. He had to attend a meeting actually in person in Mexico City. I invite you to join ALFA's call later today and ask him about that. I think he will be happy to answer your question during ALFA's call.

I appreciate that, Adrian. So if I could turn my question to you, the second one would be -- if you could talk about the breakdown by business unit in your top line, in the guided top line. And particularly in CapEx, it seems a little high compared to what I understand relevant to your previous comments. I mean, obviously, 2020, you have the effects from renewal. So -- but what is the driver between the growth that you are expecting for 2021?

Yes. Yes, you're right, the CapEx in the fourth quarter was a bit higher than what we were looking in reference to previous quarters. We had some projects in the fourth quarter that will contribute to the 2021 business plan, some projects with financial institutions, some projects, particular with an operator for our infrastructure unit, that we invested in the fourth quarter. But the benefits will come in 2021. Also, we had about a $4 million investment related to the separation, the phase that we're moving in 2021 regarding the 2 business units. So that was part of the CapEx that we recorded in the fourth quarter. So that's why it was a bit higher than the CapEx we had in the 2 previous quarters. Lastly, fourth quarter CapEx is usually higher on a seasonal basis. If you look at previous years, fourth quarters tend to be a bit higher than what the first, second and third quarters of every other year.