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

Greeting, and welcome to the Axtel Second Quarter 2021 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Adrian de los Santos, CFO. Thank you, sir. You may begin.

Thank you, Laura, and welcome, everyone. Today's conference call will be hosted by Mr. Eduardo Escalante, Axtel's Chief Executive Officer; Bernardo García, Executive Director of Strategic Planning and Business Development and myself. Axtel financial information, including second quarter report is available in our corporate website at axtelcorp.mx. 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 in this call based on new information available. Now let me turn the call over to Mr. Escalante 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 in the quarter. Let me start by commenting that remote working continues for most of our employees, even though we are experiencing an increasing number of collaborators that have been vaccinated. We continue promoting vaccination among our personnel and their families and should have start the transition to a hybrid in office and remote working scheme once health authorities allow this, and most of our people are vaccinated. Second quarter results reflect improving business activity on Alestra's enterprise customer base, consistent strong performance in Axtel networks and challenging conditions with government customers. Value-added and digital transformation services of enterprise segment customers and third-party infrastructure unit revenues increased 12% and 13%, respectively, on a sequential basis and 7% and 5%, respectively, year-over-year, reflecting the acceleration in the acquisition of new projects since the end of last year, particularly since March. EBITDA improved 25% on a sequential basis and 1% year-over-year, adjusted for the extraordinary benefit obtained in the 3.5 gigahertz spectrum transfer agreement executed in June last year. EBITDA growth also reflects operating efficiencies, helping to compensate the negative performance from government and enterprise segment voice services. Less volatile economic conditions and improving investment sentiment contributed to a 17% sequential growth in the acquisition of new projects from enterprise segment customers. On a year-over-year basis, gross acquisition increased 45% as the economic shutdown due to COVID and the volatile conditions prevailing in the second quarter 2020, limited the interest of customers to services beyond Internet, collaboration and security solutions. With the June election's uncertainty behind us and improving global conditions, we are starting to see a pickup in demand for comprehensive digital transformation projects from customers. First semester, government segment revenues are down 32% compared to last year. Although the decline in nonrecurring revenues is larger than that of recurring revenues, we do not foresee a funnel of imminent new projects that could help close the gap between actual and forecasted government segment revenues for this year. Besides pursuing business opportunities with federal government entities, we continue working to expand our presence with the state and local governments. In the quarter, Alestra was awarded with certifications and recognitions from different technology partners, including Dell Technologies Platinum Partner, AWS Direct Connect and VMware Cloud Verified. Confirming our position as a reliable IT and digital transformation services provider with more than 25 years of experience in the Mexican IT and telecom industry. Regarding the process to attract new investors, in the quarter, we maintained conversations with investors interested in our infrastructure business unit. Once we have any relevant information that do not jeopardize the possibility to progress in our objective to attract new investors, we will immediately share such information with you all. Absent a major third spike in COVID contagions, we are optimistic that the global recovery, particularly in the U.S., will continue help in the Mexican economy, and therefore, the prospects for a strong acquisition of new infrastructure and enterprise segment projects. We will also continue implementing digitalization and optimization initiatives and remain very strict on the profitability criteria of all our investments. In the second half of the year, we expect a stronger cash flow as seasonal first semester negative working capital turns around. In summary, I am confident conditions are in place to continue improving the performance of Axtel in the rest of the year. With that, Adrian will now make some additional remarks and present a summary of the operating and financial results for the quarter.

Thank you, Eduardo. In the quarter, we entered into foreign exchange forward agreements for $46 million. We executed all transactions resulting in a blended forward exchange rate of approximately MXN 20 per dollar. At this point, we have covered approximately 70% of our CapEx and interest payment obligations up to November this year. We will continue to proactively manage our foreign exchange and interest rate risks to reduce volatility in our financial obligations. Since March, we have acquired 1.5 million Axtel CPOs under our share buyback program, considering market conditions, our liquidity and regulatory compliance, among others, we will continue participating in Axtel CPO market in the second semester. I will now move on to review our financial results for the second quarter. Operational and financial total revenues were down 3% year-over-year in the quarter. Revenues of our services business unit, Alestra, declined 7% in the quarter, explained by 2% and 27% declines in Enterprise and Government segment revenues, respectively. The decline in enterprise segment revenues in the quarter is explained by 6% and 1% decline in standard and value-added services, partially compensated by the 14% increase in digital transformation solutions. Voice revenues explains almost 70% of the decline in standard services. Voice revenues continued declining due to its secular trend and the fact that it's now being substituted by collaboration solutions at a faster pace. The 5% decline in dedicated VPN and Ethernet connectivity is explained by the transition of customers to next-generation software-defined network services. Value-added services marginally declined in the quarter as a 12% increase in system integration revenues didn't compensate the decline in managed services revenues. Digital transformation revenues from enterprise segment customers increased 14%, supported by a 20% growth in cloud and cybersecurity services and a 7% increase in collaboration solutions. Recurrent government revenues declined 37% and nonrecurring increased 42% year-over-year. The renewal or extension of services awarded from federal government entities is now focused on more basic connectivity services, and it's being contracted for shorter periods of time. This quarter, standard services and digital transformation services from government segment customers declined 50% and 19% year-over-year. Meanwhile, value-added services increased 23% due to nonrecurring revenues in the quarter. With respect to our infrastructure business unit, Axtel Networks, its revenues increased 5%, 1% growth from interunit services and 10% increase from third-party customers. Revenues from Alestra represented 44% in the period. With respect to services provided to third parties, the revenue increase is explained mostly by dark fiber capacity use services. Cost of revenues, excluding depreciation and amortization charges, declined 6% due to a decline mostly in Alestra's cost. Alestra cost of revenue declined 5% in the quarter, roughly in line with the 7% decline in revenues. In the second quarter, infrastructure business unit costs increased 17% because the cancellation of provisions associated to the spectrum transaction in the second quarter of 2020 affected comparisons. Operating expenses declined 4% vis-à-vis second quarter last year, explained by a 9% reduction in personnel maintenance and marketing expenses. Operating expenses declined 5% in Alestra and 3% in Axtel Networks in the quarter. Alestra also benefit from lower marketing expenses during the quarter. EBITDA in the quarter totaled MXN 1,141 million, increasing 1% when compared to second quarter last year, adjusted for the extraordinary benefit from the spectrum agreement. EBITDA margin was 38.3% in the quarter, reflecting the high contribution margin of dark fiber capacity use revenues in Axtel Networks and the efficiency initiatives in both business units. EBITDA for our services and infrastructure business units were MXN 434 million and MXN 707 million, respectively, a 14% decline for Alestra and a 12% increase in Axtel Networks, excluding the extraordinary benefit of the spectrum transaction. It's worth mentioning that sequentially, EBITDA for Alestra and Axtel Networks increased 15% and 31%, respectively, reflecting the improving acquisition trend in Alestra and the continued strong performance in Axtel Networks. CapEx in the quarter was $17 million compared to $80 million in the second quarter of last year. Cash balance totaled $66 million at the end of the quarter compared to a starting balance of $69 million. Cash flow in the quarter was $4 million, resulting from $57 million in EBITDA, a $15 million investment in working capital, the $70 million in CapEx just mentioned, $20 million in interest expenses and $1 million in paid taxes. Additionally, we recorded $7 million in net debt movements during the quarter. As of the end of the quarter, net debt was $625 million, and the ratio of net debt-to-EBITDA was 3.1x. Debt related to IFRS 16 represented $20 million at the end of the quarter. Now Laura, if you could please open the call for questions.

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

First, regarding your infrastructure business. Could you provide some color on how much revenues you get from connecting telecommunication towers with last mile fiber? And who are your main clients here? Or if, on the other hand, you do not expect to generate much from this business until the 5G roll out in the county accelerates? That's my first question. And my second question, I obviously would like to ask for additional color about the sale of the infrastructure business, at least about the timing or the valuation range or anything really, given how relevant this transaction is for the company valuation and the fact that we haven't got any meaningful update since last year. Anything on this side would be very, very helpful.

Alejandro, thanks for your question. The revenues from fiber to the tower with -- well, let's start breaking down revenues in the infrastructure business unit. As I mentioned, the revenues from third-party customers represent about 44 -- 56% in the quarter. And out of that amount, we have revenues from wholesale customers, connectivity, transport. We have revenues from connecting connectivity to towers to mobile operators. And we have other similar fiber-based services with customers. Regarding the breakdown of revenues to mobile operators, particularly fiber to the tower. It's within the customer mobile segment, and we're not disclosing that much detail for competitive reasons. But it's something that's been trending positive. And you asked for customers. Basically, we provide service to mall operators in Mexico. All of them and to a pretty much nonrelevant or no revenues to the mobile business of the incumbent. And about your second question, Bernardo is going to take that for you.

Yes, Alejandro, thank you for your question. Regarding the timing for this type of processes, it will be [ speculative ] specifying a timing for this. It is a step-by-step process with discussions one-on-one with potential investors and being relying on 2 parties in the end is not possible to assign a specific time limit for this type of processes. And so that's something that we will release information in a timely manner when it's appropriate for that. And you were asking also about valuation. Well, you have to have in mind that this is the largest neutral fiber optic in Mexico. So it has the benefit of high enjoying long-term contracts with cash flow visibility and significant potential to capture the opportunities that are presented by the growth in the market. The growth in traffic, the growth in streaming, social media, IoT, mobile deployments that are demanding more and more fiber to connect. These kind of assets merits attractive valuations. And that's the general idea behind all this strategy.

Bernardo, are you still aiming for a double-digit valuation here? Or do you think it is still feasible to reach those valuations?

Well, it will be premature to talk about specific numbers. Alejandro, we are very confident that this is a highly valuable asset in the company, and we are seeking to maximize it through the process.

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

Just to follow-up on Alejandro's question. I mean, I understand you cannot talk about timing or valuation or any of that regarding the infrastructure unit. But perhaps it could be helpful. If you could help us understand what sort of capital allocation decisions could be taken after it materializes? Would you be thinking about paying a dividend, repay your senior notes or perhaps a combination of both?

Carlos, thanks for your question. Obviously, it will depend, first of all, on the structure and nature of any potential transaction. We have been -- or it could take different alternatives how we could structure any divestment of a business unit. And assuming there is a transaction where the infrastructure business unit is entirely divested, either as a subsidiary or as independent company spun off from Axtel. The idea will be both to reduce -- or the concept we will be seeking it to reduce leverage in the remaining business to leverage sustainable long-term leverage ratio; and second, to flow cash flow to shareholders as much as possible. Obviously, keeping the leverage ratio at the remaining business in a long-term sustainable level that, as we have said, our -- the goal is 2.5x net debt-to-EBITDA for Axtel today for a business that without the infrastructure assets, we will have to analyze what that will be.

Okay. Adrian, that's helpful. And going back to the business per se. I'm sorry if you mentioned this in your remarks, and perhaps [indiscernible]. But given the results of the first semester, are you reiterating your guidance for the year in terms of revenue, EBITDA and Capex.

Yes, Carlos, we are maintaining the guidance that we set at the beginning of the year. It will be different -- the EBITDA -- expected EBITDA definitely will come from a different mix. As we mentioned and as Eduardo elaborated on his remarks, government segment is underperforming. Infrastructure unit, it's going above what we had in our business plan. And also, we have been able to obtain benefit from efficiency. So it will be a different mix, but we think we can achieve our EBITDA target for the year.

Okay. So given this mix, perhaps the margin could be a slightly higher than -- you think, maybe?

Yes, that's also correct.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Adrian de los Santos for closing remarks.

Thank you, Laura, and thanks, all of you that participating in today's call. If you have any further questions, please do not hesitate to contact our IR department or myself. Have a great day. Thanks again.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your evening.