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

Greetings, and welcome to the Axtel First Quarter 2021 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. Sir, you may begin.

Thank you, Christine, and welcome, everyone. Today's conference call will be hosted by Mr. Eduardo Escalante, Axtel's Chief Executive Officer; Mr. Bernardo García, Executive Director of Strategic Planning and Business Development; and myself. Axtel's financial information, including first quarter report, is available in our corporate website at axtelcorp.mx. 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 discussed in this call based on new information available. Now let me turn the call over to Eduardo for his initial remarks. Eduardo, please?

Thank you, Adrian, and thanks, everyone, for being with us today. Before reviewing our financial results, I would like to comment about the company's performance and relevant events this quarter. After a complicated 2020, we are moving into 2021 with better prospects for our organization and our clients, particularly enterprise and infrastructure customers. We remain working remotely, in particular people who don't have to be on site or in clients' premises or in network support functions, waiting for a much-needed widely available vaccination program in Mexico to protect the well-being of our collaborators in Axtel. Until then, we will start the transition to a hybrid in-office and remote working scheme under the Axtel Digital project. Business perspectives are improving, although first quarter revenues reflect the contracted acquisition of new projects that prevailed last year. Government segment performance remained challenging since we don't see yet a robust funnel of digital transformation projects with federal government entities. The quarterly performance and prospects of Axtel Networks, our infrastructure unit, remain aligned with our positive view for the year. Concerning our EBITDA, the result was in line with our plan as the reductions in the government segment and nonrecurring enterprise segment revenues were compensated by the benefits from digitalization and optimization initiatives we have constantly been introducing since the beginning of last year. Revenues in Alestra, our services business unit, are generated by maintaining existing contracts and the acquisition of new projects. Gross acquisition generates growth above current revenue base and compensates for customers' disconnections and price contractions, common for certain services in our industry. In 2020, enterprise segment acquisition declined 16% compared to 2019, particularly in the second and third quarters. In the first quarter of this year, we experienced an 11% growth in the quarterly average acquisition compared to first quarter 2020, a promising number for the rest of the year. Concerning the government segment, we are emphasizing opportunities with state and local governments to compensate for the uncertainty in value-added and digital transformation projects with federal government entities. We will continue presenting enhanced information and communications technology solutions to federal government clients concurrently with redoubling efforts with the state and local governments. In March, Alestra hosted the first edition of its virtual event Frecuencia Alestra to showcase the latest innovations in IT and digital transformation solutions. This successful event, which was attended by more than 2,300 participants, will complement the in-person Alestra Fest event currently on hold due to the health crisis. Also in the quarter, NAVE, our business accelerator program, celebrated its first 5 years of promoting digital B2B scale-ups and start-ups. As a beacon of the new reality in Axtel, this year's fifth NAVE edition has been completely virtual. In the quarter, we continued conversations with investors that did not participate in the competitive process last year. Our objective is clear: attract their interest and potentially close a transaction for the infrastructure business unit primarily. This year, we are not conducting a large-scale competitive process with the defined time line and thresholds as we did last year for the whole company. Therefore, we are uncertain about the timing of this process. Along with our objective of value maximization by attracting new investors, we are moving to legally separate the 2 business units. In this analysis, we are taking into consideration all relevant aspects, legal, regulatory, operational and contractual considerations, under corresponding implications. We will share any updates concerning the attraction of new investors or the path for the corporate separation once we have further information available. Throughout the rest of the year, we will continue pursuing opportunities with enterprise and Axtel's Networks customers amid more favorable economic expectations. We will emphasize refocusing on opportunities with the state and local government entities. Axtel Digital will continue to drive the reshaping of our operations and processes, from the design and ordering of new solutions to the completion of the cash conversion cycle, producing a more streamlined and efficient operation. And as always, we will continue maximizing cash flow to improve our capital structure and pursue all strategic efforts to attract new investors to our business units. With that, Adrian will now make some additional remarks and present the summary of the operating and financial results of the quarter.

Thank you, Eduardo. We finished the quarter with $69 million in cash compared to $157 million at the end of December. In the quarter, we deployed $63 million to reduce $60 million in the outstanding amount of our 2024 senior notes and another $15 million to pay short-term bank loans. Additionally, this quarter, we incurred $19 million cash outflow related to the effect of previous year's tax refiling, in which we amended the recognition of certain expense from 100% onetime to 15% per year 6-year deduction. This adjustment was booked in our last year's financial results. Over time, the net effect of this adjustment will be reduced to $4 million. In the quarter, we started conversations to renew for another 3 years the $50 million committed revolving credit facility with our relationship bank. And at our Annual Shareholders Meeting in March, a MXN 200 million share buyback program was approved. We started using the program at the end of the quarter, and we'll continue to evaluate our participation, always considering market conditions and our liquidity and capital structure targets, among others. I will now move on to review our financial results for the first quarter. Total revenues were down 9% year-over-year in the quarter. Services business unit revenues declined 13% in the quarter, explained by 7% and 37% decline in enterprise and government segment revenues, respectively. The decline in enterprise segment revenues in the quarter is due to a 9% decline in Standard services, which comprises voice, data, Internet and hosting services, all asset-based products or solutions; and a 12% decline in Value-added services, which includes system integration, managed services and most of the nonrecurrent projects. These declines were partially compensated by the third family of services under our new classification, Digital Transformation, which includes cloud, cybersecurity, managed applications and collaboration solutions, which increased 7% in the quarter. Voice-related revenues included in Standard services explained 85% of the decline of this family. Two factors affected voice results in the quarter: a secular decline in prices and volumes and the direct impact from COVID in volume as personnel in many of our clients' premises continue working remotely. Value-added services declined 12% in the quarter, mostly explained by the 59% decline in nonrecurrent revenues. This slow start of the year translated into fewer wiring and equipment sales project as premises and capacity expansions were not yet a priority for clients. The 7% improvement in Digital Transformation revenues is explained by the continued opportunities for cloud, cybersecurity and collaboration solutions. This is a positive trend that industry analysts expect to continue growing double digit in the next 5 years. Concerning the government segment, revenues declined due to the termination of contracts and reduction in nonrecurrent revenues. Nonrecurrent revenues, which represented almost 20% of revenues in the first quarter of last year, declined 80% year-over-year. This quarter, Digital Transformation services were the least affected with a 14% decline year-over-year in the government segment. As Eduardo mentioned earlier, there is a funnel of potential projects with federal government entities but not as robust as it was years ago. With respect to Axtel Networks, our infrastructure unit, it recorded MXN 1,230 million in the quarter, including MXN 614 million in revenues coming from Alestra. Total revenues increased 5%, a mix of flat inter-unit revenues and up 11% in revenues from third-party customers. With respect to services provided to third parties, the revenues increase is explained by dark fiber capacity use services mostly. We continue making progress with mobile operators, providing a suite of solutions in the quarter. Cost of revenues excluding depreciation and amortization charges declined 15% due to a reduction in Alestra's cost, in line with its decline in revenues. Services unit costs declined 12% in the quarter in line with its 13% decline. Infrastructure business unit cost increased 53% due to a reclassification of certain intra-business units costs. Lower nonrecurrent revenues in Alestra and the increased proportion of gross profit coming from the infrastructure unit, which carries a larger margin than Alestra, contributed to an improvement in the contribution margin from 70.7% to 72.8% in the quarter. Operating expenses declined 8% vis-à-vis first quarter 2020, explained by an 8% reduction in rents, maintenance, outsourcing expenses and another 8% decline in personnel expenses. Operating expenses in Alestra declined 18% and increased 3% in Axtel Networks in the first quarter. Benefits in personnel, maintenance and lower debt provisions charge contributed to lower expenses in Alestra. In Axtel Networks, lower rents benefits were offset by personnel and maintenance expenses that were reassigned from Alestra. EBITDA in the quarter totaled MXN 916 million, declining 4% when compared to first quarter 2020 EBITDA, adjusted for the extraordinary benefit from the data center transaction. EBITDA for our services and infrastructure business units were MXN 378 million and MXN 538 million, respectively, a 10% decline for Alestra and a 1% increase in Axtel Networks, adjusting for the benefit of the data center transaction. CapEx in the quarter was MXN 274 million or $13 million compared to $16 million in the first quarter of 2020, excluding the $20 million invested in spectrum frequency renewals at that time. Cash balance totaled $69 million at the end of the quarter compared to a starting balance of $157 million. The variation in cash balances is explained by $20 million in working capital investment, $13 million in CapEx, $9 million in interest expenses and $19 million in paid taxes. Additionally, we recorded $82 million in debt movements and $1 million in the foreign exchange effect and others, which was compensated by the $13 million cash inflow from releasing the escrow funds in January. At the end of the quarter, net debt was $627 million, and the ratio of net debt to EBITDA was 3.2x. Debt related to IFRS 16 represented $22 million at the end of the quarter. Christine, if you could please open the call for questions now.

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

Two questions, please. The first one is we didn't quite catch the comment you made, Eduardo, on the divestment process. So if you could revisit that, that will be great. And the second, for Adrian perhaps. The cash tax payment this quarter was atypically high for the company. I would like to know what's behind that and if you expect that to normalize going forward.

Carlos, let me take the second question and then Eduardo will take your first question. The tax payments in the quarter was high, as I've mentioned in the introduction. We made the $19 million payment, which was recorded in our books last year, a provision to a change in accounting recognition. From an expense that was deducted onetime 100% in a year, it was adjusted to be 15% per year, deducted throughout 6 years. So that affected our tax payments in the quarter, $19 million, which will be compensated over time. We will use those -- part of those payments to reduce future cash tax payments, and the net amount over time will be down to $4 million only. And the first question, Eduardo?

Sure. Thank you for the question, Carlos. Let me give you a little bit of detail on where we stand regarding the divestment process. Last year, we did the process in 2 separate phases. In phase 1, we received offers, nonbinding offers, for the business units as well as for the whole company, for Axtel as a whole. Since we had very good offers at the time for the whole company, we decided to move into the second phase of the formal process with the offers for the whole company. At the end of the year, we were not able to close the transaction with any one of the interested parties. So what we decided to do this year was back to where we had ended the first phase. And that is we review the offers we had for each separate unit, and we decided to engage in conversation with investors, in particular investors who had expressed interest to the nonbinding offers for the infrastructure business unit. And that's where we stand today. We are in negotiations with those investors in order to try to close a transaction for the infrastructure business unit. I mentioned before that we are not conducting a large-scale formal competitive process. And by that, we mean we are not open to receiving offers from other investors other than the ones we are engaging. Of course, we are willing to open negotiations with the rest, but we are closely working with a handful of interested parties.

Okay. That's the part that wasn't quite clear. I appreciate the clarification.

You're welcome.

Thank you, Carlos.

[Operator Instructions] Our next question comes from the line of Alejandro Chavelas with Crédit Suisse.

Two questions from my side. The first one related to the divestment process. This kind of suggests that the sale of the services unit is on hold for the moment, the comment that you made. Or how should I read this? And the second one that you mentioned, the reclassification of expenses from -- if I'm not mistaken, from the services business to the infrastructure business, could you comment a little bit more on that? What was the reclassification? And what was the impact?

Yes. Alejandro, let me take your second question. As we have progressed in the separation of the 2 business units and we're moving into creating independent corporate entities, we have been drilling down and going into more detail about every single expense to allocate them to whichever business unit it should be. So that's something that we continuously do. And from the end of 2020 moving into 2021, there were some expenses that were in the services business unit last year that were reallocated to the infrastructure business unit this year and vice versa. So in net, this year, we're seeing a small change due to that that's increasing the expenses in infra cost -- in infrastructure business unit vis-à-vis what it had last year and benefit in Alestra, the services business unit, compared to what it had last year. This is not material as such. But for comparison purposes, it kind of changes the base. So we're talking about expenses in the order of less than MXN 50 million per year, which, as I said, it's not relevant in the overall picture. But this is just a process of fine-tuning every single item and allocate into the corresponding business unit.

That's great to hear. And regarding the divestment of the services unit?

Sure, Alejandro. Thank you for the question. We are still interested in the divestment of both business units, as we have communicated to the market before. However, the interest of potential investors has been mainly focused towards the infrastructure business unit, so therefore, the negotiations that we are engaged in have been towards that business unit. That has been the priority in the last few weeks, and we think it will continue to be so again since that is where the interest has been focused on.

Okay. But I do recall that in past quarters, you have mentioned that you have some people interested in the services unit. Are those discussions still ongoing? Or right now, are they at a pause? Any color there helps a lot.

We have not ruled out the possibility of selling the services business unit. But I would say the negotiations ongoing are much more active on the infrastructure side.

Thank you, Alejandro.

[Operator Instructions] Mr. de los Santos, it appears we have no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thank you, Christine, and thank you, everyone, for participating in our call today. If you have any further comments, as always, we're available in our IR department and myself as well. Thank you. Have a good day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.