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

Greeting, and welcome to the Axtel Q3 earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Adrian de los Santos, CFO of Axtel. Please proceed.

Thank you, [ Latonia ], and good morning, and welcome, everyone, to our conference call. Today's call will be hosted by Mr. Eduardo Escalante, Axtel's Chief Executive Officer; Bernardo Garcia, Executive Director of Strategic Planning and Business Development; and myself. Axtel financial information, including third quarter report, is available in our corporate website at axtelcorp.mx. Let me comment 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?

Thank you, Adrian, and thanks, everyone, for being with us today. I hope each of you and your families are safe and healthy. Before reviewing our financial results, I would like to comment about the company's performance and relevant events in the quarter. One of the top priorities of the company in the world being of our employees. In July and August, we experienced the highest level of COVID cases in Mexico and many other countries since the start of the pandemic. This third wave of infections peak in late August unfortunately, decreased rapidly without impacting the continuity of the operations in Axtel. Based on the conditions prevailing at this time, we estimate that we will continue transitioning to a hybrid, virtual and in-person, office model during the rest of the year. Acquisition of new enterprise segment contracts maintained a strong pace in the quarter. Gross acquisitions were 60% higher than a year ago, supported by cloud and cybersecurity solutions. However, unfortunately, the implementation and therefore, revenue recognition of new contracts is being delayed due to the shortage of semiconductors and logistic complexities affecting industries worldwide. Revenues from onetime equipment sales are also impacted by limited availability of equipment and customers with time-sensitive budgets are not willing to commit into contracts due to uncertain delivery dates. This effect is expected to represent a significant direct impact in the second half of the year. Results this quarter reflect an underperformance in our service business units as less dark fiber capacity use contracts in our infrastructure -- and less dark fiber capacity use contracts in our infrastructure business unit. Despite the impact from the shortage in semiconductors, digital transformation services revenues from enterprise segment customers continue growing double digit in the quarter, 15% year-over-year, although not sufficient to compensate the decline in standard services, particularly voice revenues. Our Government segment continued struggling to secure relevant long-term contracts. Ax-Net or infrastructure business unit reported lower revenues as dark fiber capacity use contracts recorded a significant reduction compared to an extraordinary figure in third quarter of last year. During the quarter, Axtel Networks presented its data center connect solution, enabling connectivity between any data center and cloud infrastructure in the world with low latency and high reliability. Axtel Networks continue expanding its fiber footprint in Queretaro, integrating Mexico's most important data center clusters in the Queretaro, Mexico City corridor. Also in the quarter, Alestra launched Alestra Móvil, the first enterprise MVNO in Mexico, Alestra Móvil enables companies to seamless transfer their capabilities, experience, tools and fixed technologies to a mobile device supported by AT&T Mexico's network. Regarding our strategic process, we continue to engage with potential investors in the quarter. Current and future business prospects for the infrastructure unit and digital transformation and mobile growth opportunities for enterprise customers remain anchoring the interest of potential investors. Given conversations are still ongoing, we cannot provide further comments at this time. In the company, we are taking actions to improve our profitability and diminish the impact of external and internal factors influencing our performance. The last month, we have been adjusting our organization, processes and products according to these factors and current market trends, and we'll continue this process through the end of the year. We are also adjusting our inventory and equipment sales processes to take into consideration the semiconductor shortage and the logistics complications that will continue through next year. We'll continue with the restructuring of our Government segment to recuperate our fair share with several government entities and further diversified into local and state governments and public universities. And very importantly, evaluate strategic projects and opportunities to accelerate top line growth for both business units. Let me reiterate our commitment to pursue all the avenues mentioned earlier to improve the profitability and top line growth in Axtel, currently with the conversations with strategic investors to maximize opportunities and value for our shareholders and all the stakeholders. 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. In the quarter, we repaid $20 million under one of our committed revolving loan facilities as market conditions have remained stable for an extended period of time. With this reduction, our unused available balance on their existing committed facilities is approximately $40 million. As Eduardo mentioned, different factors have affected our performance this year and it is difficult to precisely quantify their short-term economic impact in our results, particularly our EBITDA as we are facing a challenging fourth quarter. I will now move on to review our financial results for the third quarter. Total revenues were down 11% year-over-year. Revenues of our service business unit Alestra declined 10% in the quarter, explained by 4% and 35% decline in Enterprise and Government segment revenues, respectively. Enterprise segment revenues in the quarter is the result of a 15% increase in revenues from digital transformation solutions and 7% and 15% declines in standard and value-added services revenues, respectively. Voice revenues continue declining double digits in the quarter, explaining over 60% of the decline in standard services. Value-added services declined 15% in the quarter, mostly explained by over 15% reduction in nonrecurrent managed services revenues in the quarter. Digital transformation revenues from enterprise segment customers increased 15%, supported by a 12% growth in cloud and cybersecurity services and 64% increase in managed application solutions. Recurrent government revenues declined 45% and nonrecurrent revenues increased significantly in the quarter, due to a very low figure in the third quarter of 2020. This quarter, Government segment, standard services, value-added and digital transformation solutions revenues all declined double digits. As mentioned before, we continue adjusting our Government segment operations to increase our opportunity to capture more federal government projects and to expand their presence beyond federal government entities. Furthermore, we don't foresee further material revenue declines from the level recorded this quarter as a greater number of projects in the pipeline seem to have multiyear conditions compared to current 3-month renewals. With respect to Axtel Networks, our revenue declined 7%, flat interunit performance and down 13% with revenues from third-party customers. The decline, as mentioned before, is due to dark fiber capacity contracts. Cost of revenues, excluding depreciation and amortization charges, declined 14%, due to related declines in revenues at both business units. Alestra cost of revenues declined 7% in the quarter as Government segment value-added services costs did not decline in line with revenues. On the other hand, infrastructure business units cost declined 14%, in line with the 13% decline in third-party revenues. Operating expenses declined 7% vis-a-vis third quarter 2020, explained by an 11% reduction in personnel, maintenance and marketing expense. Operating expenses declined 16% in Alestra and increased 4% in Axtel Networks in the quarter. Onetime credits that benefit rent expenses in third quarter of last year explains Ax-Net's 4% increase. EBITDA in the quarter totaled MXN 912 million, down 15% when compared to third quarter of last year. EBITDA margin was 33% this quarter. EBITDA for Services & Infrastructure business units were MXN 387 and MXN 525 million, 13% and 17% decline for Alestra and Ax-Net, respectively. CapEx in the quarter was $24 million compared to $17 million in the third quarter of last year. Year-to-date CapEx summed $55 million, 22% less than the same period of last year. Year-to-date CapEx is distributed 64% for Axtel Networks and 36% for Alestra. Cash balance totaled $53 million at the end of the quarter compared to a starting balance of $66 million or $46 million adjusted for the $20 million we repaid into one of our committed revolving lines of credit in September. Cash flow in the quarter was positive [ $16 ] million, resulting from $46 million in EBITDA, minus [ $1 ] investment in working capital, $24 million CapEx and $5 million in interest expense. Additionally, we recorded $27 million in net debt movements this quarter. As of the end of the quarter, our net debt was $613 million, and the ratio of net debt to EBITDA maintained at 3.1x. Debt related to IFRS 16 represented $60 million at the end of the quarter. And now, [ Latonia ], if you could please open the call for questions.

[Operator Instructions] Our first question comes from Andres Coello with Scotiabank.

First, I would like to ask you what appears to be a little bit of a contradiction here because new enterprise contracts were up 60% but enterprise sales were down, right? And this is according to you because of the semiconductor shortage. So I was wondering if you could give us a normalized figure. What would have happened if there was no semiconductor shortage? More or less what would have happened to sales and [indiscernible], and whether without this inconvenience, you will have probably, at this point, be above or below your guidance for the year. So if you could just give us an idea of normalized [indiscernible]. That's my first question.

Andres, this is Adrian de los Santos. We had 2 effects related to the semiconductors. First is projects that were canceled or were -- has been postponed. That's an amount north of -- thus far, we have quantified with name over MXN 50 million in those. And second, we have -- which is more relevant, we have an increase of over 50% or 60% in the volume of orders in process. That is from the time we signed the contract with the customer and the -- by the by the time we're able to finish the installation set up and being able to build. That has increased in that percentage. So if we go back a few months or a couple of -- even a quarter, that will represent, on a monthly basis, north of MXN 10 million per month. So if we account for that over the period mentioned, that will have placed the enterprise segment more or closer to what we expected for the quarter. Taking into consideration that the voice revenues that had been affected more than what we anticipated. So in a nutshell, we probably could have been north of MXN 40 million to MXN 50 million in EBITDA on the Services business unit, had not been affected by the semiconductors. That's an estimate we have at this moment, considering also the impact on voice revenues.

Okay. Very clear. And my second question is on the strategic process. I know you cannot comment, but in the press release, you mentioned investors which is plural. So I was just wondering just to confirm with you that you are talking to more than one investor, that it's a group of investors. Just a confirmation that it's plural.

Andres, this is Bernardo. Thank you also for posting the question. We've been talking with several investors over this process. And we're in different levels of progress with each one, as you know, since we are now bringing all the attributes of the business, putting instead on the table. This process is being conducted with more than one interested party over this time, conversations continue so far.

So you're talking to more than one party at this point?

We've been talking to more than one. Maybe on a specific week, we are talking with one while we were in some special, let's say, conditions for the stage of the process. And yes, if you talk in the average period, we've been talking with more than one, of course. And we have, of course, several prospects in sight.

Our next question comes from Jamie Nicholson with Credit Suisse.

I have 2 questions. My first relates to your cash needs in the fourth quarter. If you can update us on what your CapEx budget is? And also, do you expect working capital to be a use or a source of cash in 4Q? That's my first question. And then secondly, if you could provide any color on your liability management strategy, given that your bond call price steps down in November. And I'm just wondering if you would be considering further liability management or would that wait until after you've completed the process with potential investors?

Jamie, nice hearing from you. Your first question, in the fourth quarter, you asked about cash flow. With respect to CapEx, thus far, we have invested $55 million. Our estimate at the beginning of the year was pretty much close or $100 million for the year. We definitely will not go that far. We think it would be somewhere in the $80s million. Therefore, we expect around $25 million to $30 million in the fourth quarter. Usually, fourth quarter is the period when we invest most in every year. And working capital we're expecting to improve our net investment for the year. Thus far, we have $35 million invested. We think that some projects that are pending collection, they were scheduled will be collected in the fourth quarter. We also have seasonality, financial sector, government customers. There are some particular industries that prepaid services in the -- before the end of the year. So we think we should be able to improve our working capital investment by somewhere between $10 million to $15 million at least in the fourth quarter. And your second question regarding the liability management. Well, definitely we're always analyzing what's the most efficient structure. We're aware that in mid-November, there will be a step down in the premium for calling the -- for early redemption of the senior notes. However, we have to balance that along the strategic projects that we have on the table. So we will work and analyze the 2. And if it makes sense, we will move forward with something or perhaps wait until the best moment to do something.

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

I have 2 questions. The first, just regarding the results year-to-date, if we were to annualize those, I mean, the full year results would run, I think, importantly below guidance. And I did see that you mentioned in the fourth quarter, you expect a challenging one. So does that mean we should just not look at the guidance as a reference? And if so, are you willing to provide a new guidance for the year? And for the second one, I mean, I understand you can't disclose a lot about the process with investors. But I think what the market would like to hear something about timing. So if you can comment anything related to that, that will be great.

Carlos, let me take your first question. Guidance is always very relevant no matter what we try to reach or over -- or exceed the guidance every year. So we're not just getting readers scrapping the guidance number. However, as we mentioned, there are factors that definitely will affect performance in the fourth quarter. We have a significant gap to fill to reach our guidance. At this moment, given that we're not able to quantify entirely the impact on the semiconductors complexities. We were not putting new guidance. But definitely, it's very challenging to meet our EBITDA guidance this year. And Bernardo will take your second question, Carlos.

This is a step-by-step process with one-on-one discussions with potential investors. So we don't have a strict time lines on this. So it will be hard to speculate on that. So we will get -- we will have to continue on this step-by-step approach.

Our next question comes from Alejandro Gallostra with BBVA.

I have a question that is probably more simple for Bernardo. It would be great to know why the due diligence process is taking that long? Can they typically going to take [ 18 ] months. So it will be good to know what is the time in your diligence process, why is it taking so long? This is -- maybe because this is not your #1 priority, maybe because you are having second thoughts, maybe you are not so convinced about selling this infrastructure business anymore, or maybe because it's taking you [ long ] to find several interested parties to choose from? So any color on that would be very helpful.

Thank you for the question, Alejandro, good to hear you. This is a very important process. The objective is to maximize value for the company. And so that we have to search internationally for the best potential investors into this. And these conversations have been based on taking the full value of the infrastructure business unit, which you know have very attractive prospects in the long run with very valuable assets. And we have been positioning all those values on the table, also the opportunities in mobile and digital transformation solutions in the service business unit are some aspects of the business that are very attractive. So the -- we started with a long list of investors, and we've been searching for the maximization approach for the product. So it's not unusual to take this time, and we won't rush at the risk of not getting the value maximization that we're looking for.

I understand what you're saying. So taking the timing of the table, could you please comment on how committed are you about selling this business or what would be the probabilty of you not selling this business.

We are committed to attracting the best offers or proposals for the business to create value for the shareholders of Axtel. That's totally the commitment, and that's the highest priority we're having in the M&A area. No doubt about that.

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

Thank you, everyone, for participating in today's call. And as always, we remain available for any further questions or conversations you may have. Thanks, everyone, and have a nice day.

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