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

Greetings, and welcome to Axtel's Fourth Quarter 2021 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. Please begin.

Thank you, Joe, and welcome, everyone. Today's conference call will be hosted by Mr. Eduardo Escalante, Axtel's Chief Executive Officer; Mr. Bernardo García, Executive Officer, Planning and Development; and myself. Axtel's financial information, including our fourth quarter report, is available in our corporate website at axtelcorp.mx. Also, 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 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. Good morning, everyone, and thank you for joining us today. I hope you and your families are all staying safe and doing well. 2021 was a year with challenges and [indiscernible]. We have to become very flexible and nimble to adapt to continuous changing conditions. We experienced 3 COVID waves that required for individuals and for organizations to adapt to different levels of restrictions. Our digitalized processes, innovative mindset permitted the organization and our operations to run smoothly throughout the year. Concerning the industry, digital transformation services continued thriving, whereas legacy services like coils and connectivity, didn't perform as well, particularly with large corporate clients and multinational companies. Regarding digital transformation services, I would like to highlight the encouraging double-digit growth in revenues from cloud and cybersecurity solutions to our enterprise customers, which posted a 17% growth during the year. The adoption of these services is becoming a core element in the productivity and technological evolution of customers, from small to large multinational corporations and is expected to continue growing at double digits for years to come. Gross acquisition of Enterprise segment projects increased 21% in the year, although not entirely reflected in billing of new services due to the extended implementation periods as a result of the global semiconductor shortage. Infrastructure business unit revenues increased 1% year-over-year, driven by contract providing dark fiber to mobile operators and wholesale customers. Prospects for this business unit remain positive. Opportunities derived from next-generation mobile network deployments, like the December announcement made by an important mobile operator in Mexico, present attractive opportunities for fiber to the tower services, and consequently, an acceleration in the adoption of IoT solutions. Fiber to the data center, another growth driver for Axtel Networks, also entices good prospects as multiple large-scale data centers are under construction in the Mexico City, [ Teresa ] corridor. During the year, our operating expenses declined 7%, and our EBITDA margin reached 33.3%, resulting from the adoption of digitalization processes and optimization efforts. Concerning our balance sheet. In 2021, our net debt declined 5% or $28 million, supported by the positive cash flow, excluding tax payments of $53 million. This positive free cash flow resulted from a strong collection and reduced CapEx. Axtel debt has consistently decreased over the last 5 years. From 2016 to 2021, our net debt declined 41% and including a reduction of $176 million in the last few years. Results also reflect the continued underperformance of the Government segment, which declined 33% as contribution from federal government clients remain subdued by budget constraints, limited projects containing IP or value-added solutions and short-term rollover practice that reduces opportunity to participate in larger projects. Bonus revenues points from enterprise customers also negatively affect our results as if the climbing trend was accelerated by lower volume due to the fast adoption of new collaboration tools. Managing the COVID pandemic in Axtel remained a priority last year. First, ensuring the well-being of our employees and the continuity of our operations; and secondly, finding alternative solutions to mitigate global supply chain constraints, which translated in the loss of new contracts and revenues as customers were not committing to new projects with extended implementation periods. Other recent effect from COVID in 2021 was the downsizing of the physical footprint and operations of certain industries to adapt their businesses to new operating conditions. In 2021, Axtel reached the 71 percentile within the telecom industry in the Standard & Poor's Global Corporate Sustainability Assessment, improving our score 93% compared to previous year, a reflection of the company's commitment to ESG matters. With the aim of accelerating sales, ensure profitable income, and increase our share of wallet, we are redesigning our go-to-market approach in the Enterprise segment in this year. We are adjusting our sales model to a highly-specialized model for site product planning in high-growth digital transformation services such as cloud, cybersecurity and systems integration. This new commercial model was pilot tested with the cybersecurity product family last year with encouraging results. We also have positive expectations for mobile service opportunities in Alestra Móvil to serve corporate accounts and also to our mobile virtual network enabler, MVNE platform, to enable third-parties' mobile projects. The strategic process to attract investors for the Infrastructure business unit or the whole company has not resulted in a binding agreement yet. Global uncertainty and volatility and changes in the industry, among others, have influenced this process. We will continue pursuing opportunities to attract new investors to the company and concurrently, we will remain focused on the execution of our strategies and the implementation of our promising projects to move the company forward along industry trends and customer needs. We look forward to a still-uncertain year, but with plenty of opportunities to further improve the business prospects of Axtel in the short and long term. We will continue working to maximize the value of Axtel for our shareholders and all stakeholders in 2022. With that, Adrian will now make some additional remarks and present a summary of the operating and financial results of the fourth quarter and full year.

Thank you, Eduardo. We ended the year with $78 million in cash compared to $53 million at the beginning of the fourth quarter. As Eduardo mentioned, strong collections and reduced CapEx compensated the lower EBITDA, thus reducing our net debt by 5% and maintaining a net leverage ratio of 3.1x by the end of the year. At present, we maintain a position of 60.7 million Axtel CPOs under our share buyback program. In our upcoming Annual Shareholders Meeting in March, we will propose a new amount for this year. We have attractive initiatives and business opportunities for the year, including changes in our value chain and commercial approach to enterprise customers. While we expect positive performance in double-digit growth solutions like cybersecurity and cloud, other services like voice will continue to negatively influence our results. Based on the Mexico GDP growth of 3.2%, we estimate CapEx of $81 million, flat EBITDA of MXN [ 3,800 ] million and revenues of MXN [ 12,000 ] million in 2022. I will now move on to review our financial results for the fourth quarter and full year. Company revenues were down 9% year-over-year in the quarter and 8% for the full year. Revenues of our Services business unit, Alestra, declined [ 3% ] in the quarter and for the full year as well. Enterprise segment revenues declined 4% in the quarter, resulting from a 21% decline in voice and 2% in directory services. Digital transformation solutions increased 8% in the quarter, driven by cloud and cybersecurity services revenues, which increased 21%. Full year Enterprise revenues also declined 4% due to a 23% decline in voice, partially mitigated by a 17% growth in cloud and cybersecurity services revenues. Significant decline in voice revenues in the year is explained by its mature status in the technology evolution cycle, exacerbated by the impact in volume due to remote work and the adoption of digital collaboration tools. Although we don't anticipate a steep decline in 2022 as in 2021, its secular declining trend will continue at levels around 10% to 12%. Voice revenues represented 11% of Enterprise segment revenues in the quarter compared to 14% in the fourth quarter of 2020. Government revenues declined 32% and 33% in the quarter and full year, respectively. Recurrent Government revenues declined 23% in the quarter and 33% for the year. Nonrecurring Government segment revenues represented 17% of Government revenues in the year. As mentioned before, we continue adjusting our segment operations to participate in as many possible value-added opportunities with federal government and to expand our presence with state and local governments and public universities. With respect to Axtel Networks, our Infrastructure business unit, revenues were down 1% in the quarter and increased 1% for the year. Revenues from third-party customers performed very similar, down 2% in the quarter and 1% growth in the year. The increase in full year revenues resulted mostly from dark fiber contracts recorded in the second quarter of the year. Cost of revenues excluding depreciation and amortization charges declined 2% in the quarter and 9% for the year due to related declines in revenues at both business units. In the fourth quarter, cost of revenues did not decline in line with revenues due to a compression in the margin of nonrecurring revenues and the onetime benefit recorded in the fourth quarter 2020 in Alestra. For the full year, cost of revenue declined in line with revenues and represented 28% of revenues. Alestra cost of revenues declined 1% in the fourth quarter compared to a 10% decline in revenues due to the margin compression in nonrecurring revenues and the onetime benefit in fourth quarter 2020. Concerning the Infrastructure business unit costs, this increased 1%, maintaining relatively stable margins. Operating expenses declined 8% vis-à-vis fourth quarter 2020, explained by an 18% reduction in personnel, rent and maintenance. For the year, expenses declined 7% compared to 2020. Operating expenses declined 19% in Alestra and increased 4% in Axtel Networks in the quarter. A onetime benefit in tower rents in fourth quarter of 2020 explains Axnet's increase. EBITDA in the quarter totaled MXN 824 million, down 22% when compared to fourth quarter of last year. Fourth quarter other expenses include a MXN 40 million extraordinary charge related to organization efficiencies. In the year, EBITDA totaled MXN 3,793 million, a 10% decline compared to year 2020 without the extraordinary benefits from data centers and spectrum frequencies transactions. EBITDA for Services and Infrastructure business units declined 34% and 10%, respectively. 41% of full year EBITDA came from Alestra and 59% from Axtel Networks. CapEx in the quarter was $20 million compared to $32 million in the fourth quarter of 2020. Full year CapEx totaled $76 million, 27% less than CapEx in 2020. Cash balance totaled $78 million at the end of the quarter. Cash flow in the quarter was $30 million, resulting from $40 million EBITDA plus $30 million in positive working capital, minus $20 million in CapEx, $20 million in interest expense. Additionally, we recorded a $6 million outflow in debt movements during the fourth quarter. As of the end of the fourth quarter, Axtel's net debt was $574 million, and the ratio of net debt-to-EBITDA was 3.1x. Debt related to IFRS 16 represented $60 million at the end of the year. Joe, if you could please open the call for questions now.

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

I have actually 2, 1 for Eduardo. I think -- if you could please revisit your comments on the strategic initiatives and the possible asset sales. I understood you said that the conversations have not led to a binding offer, but I don't know if that's a yet. Or I mean are negotiations still in place? What should we expect there? And secondly, for Adrian, I guess, why are you expecting such a strong dilution in margin for 2022 as compared to 2021?

Sure, Carlos. And thanks for the question. Yes, it is correct. What I meant was the interest in attracting investors for Axtel or the Infrastructure business unit remains. We continue seeking to create value for our shareholders through that process. We will continue this year. [indiscernible] We will start holding faster with the diligent approach and the execution of our business initiatives and the implementation of projects that help us evolve with the industry trends and customer needs. And here, let me go to Bernardo so he can complement this strategic initiative answer. Bernardo?

Sure. As Eduardo was saying, the Alestra model was -- initiative was launched last year in conjunction with an alliance with AT&T and is dedicated to the corporate -- mainly corporate customers that we have in the company. We are very enthusiastic about the prospects of this business as it's been a long sort opportunity to enhance our portfolio that our customers want to have, and that integrates with the offers that we provide to our customers so that the collaboration and the convergence of fixed and mobile services is something that our clients were expecting. That's a growth prospect for the year, which is -- takes part of the attraction that it creates for the business unit's value going forward. On the line of business opportunity, we pilot tested live last year with great success in cybersecurity, a new approach where we have our highly-specialized, talented people acting in a different manner in front of our customers so that they provide the knowledge of the company in a closer manner. So that the customer saw the value of this last year, and we started gaining more contracts than before. And with this encouraging results, we are going full blown this year with other 4 lines of businesses in very high growth segments of the market. So we're very excited about this new strength that brings -- to drive the future growth of our company.

Carlos, this is Adrian de los Santos, and thanks for your questions. About the margins, you're asking what's the reason behind the compression in 2022 vis-à-vis 2021. There are a couple of reasons. For year 2022, we expect certain high-margin services to continue declining. As was repeatedly mentioned, voice will continue declining. Voice is a very high margin service and, obviously, when it's replaced by other services, it will not be -- the change in the mix will result in a margin compression. Second, the Infrastructure business unit, we, as mentioned, we have positive prospects, although not necessarily the significant growth that should come from the full blown deployment in new mobile technologies, which it's starting right now. That's our -- according to what we understand, but it will not be in full effect probably until the second half of the year. Data centers as well. There are multiple under construction at different advanced levels that also will come gradually throughout the year. So these revenues, we expect to pick up, but not necessarily from day 1 of the year. Therefore, the overall mix in revenues will have that change and influencing margins. And finally, we have very interesting plans for our mobile capabilities through Alestra mobile and the platform for third-party operators. And given that we are on MVNO, margins on mobile services are small. We have significant costs associated to mobile revenues, therefore all these changes will have an influence in the EBITDA margin in 2022. However, going forward, as we see full-blown opportunities for Infrastructure going into 2023 and the full effect of the line of Services, the growth that we expect from that project will help us to get back to margins that we have in previous years. I don't know if this answers your question.

Our next question is from Jamie Nicholson with Credit Suisse.

I'm wondering regarding your guidance of slightly lower EBITDA and slightly higher CapEx for 2022, do you still expect to generate positive free cash flow? And if so, would you deploy that in gross debt reductions such as any further liability management on your 2024 bond?

Jamie, this is Adrian de los Santos. Thanks for your question. Yes, we expect EBITDA to be flat vis-à-vis previous year. And in terms of cash flow, we expect -- last year, excluding taxes, we generated over $50 million. This year, we're expecting a relatively smaller number, but very positive in the area of $40 million in terms of cash flow. And yes, the answer is just to what would be the use of that cash flow. We don't know yet whether directly used to reduce debt or to be part of liability management or to keep it in cash in order to reduce net debt. But definitely, we continue with the objective of reducing our net debt ratio. We were analyzing alternatives and options regarding our capital structure concerning the senior notes. They mature in 2.5 years. So that's also part of an analysis that we have. We don't have any time pressure but we are still analyzing alternatives in that respect.

Okay. Great. And then just regarding your Infrastructure business. It seems like it's been pretty flat for a while. And I'm just wondering if that -- what are some of the drivers for that? Has that been that it's been targeted for a sale and there hasn't been a lot of investment or focus on it? Or do you expect any initiatives to restart growth in that business? Can you just clarify a little bit of the outlook on that business for its growth?

Sure, Jamie. This is Bernardo García. Thank you for your questions. Yes, the market has important drivers for growth, but the recent growth in the market has not been as originally expected. It has been delayed. As Eduardo was saying in the initial remarks, there's been some adjustments in the industry, like, for example, the shift from one mobile operator into a virtual operator that reduce the needs in the short term for fiber-to-the-tower connectivity. And also the delay in the construction of data centers, as was originally expected, that it would have a big growth in the country. That growth is happening. We see by the construction in [ teresaro ] of the main global operators, but it has come with a delay as what was originally expected. So the drivers for growth are still there, and they have been materializing. Like another example is 5G, that has been somewhat delayed, but now we've seen announcements from at least an important mobile operator that they are now going to introduce that in Mexico. So global trends are leading the path to the growth of this market, and it's happening just with a shift in time. So we still see that the prospects for the growth of this business is high, and the value of the assets is really what help us to tackle the opportunities. We can tell you that from the opportunities that we saw that were really active in the market, we have been able to capture the same high rate of performance that we had before. So we are very confident that we can continue capturing the growth when it materializes.

And then just to clarify, in terms of your guidance for 2022, are you expecting that business basically to be flat with '21 in terms of revenues and EBITDA? Or similar to your overall guidance, like flat revenues and slightly weaker EBITDA?

We expect similar to last year, stable cash flow. And that Bernardo said that one of the attractive drivers and the resilience in the Infrastructure business, it's the stability of its cash flow and EBITDA. As Bernardo said, even though the drivers has been delayed to some extent, the cash flow had been stable, and we expect similar results in 2022.

Great. And Adrian, I'm sorry, just one more question. I didn't quite catch what you said about your cash taxes expected for this year.

For this year, we expect cash payments of taxes in $2 million to $5 million. We don't expect anything above those numbers. You have to bear in mind that we still maintain NOLs in our balance sheet that should help us to compensate actual cash payments this year.

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

I can see your balance sheet, Adrian, maybe you can give you some color. I can see investments in shares of associated companies, a very big drop between the Q3 and Q4 from MXN 292 million to MXN 2 million. So I'm wondering why the investment in shares of shared companies came down so much during the quarter, if there was a write-off or something we should be aware of? And my second question is on operating leases, please. If you can -- if I look at the Bolsa filing, I see operating leases of around MXN 471 million. I just want to confirm with you, Adrian, that MXN 471 million is the right number for cash operating leases.

Yes, in terms of the investments in other companies or minority participations, we recorded an impairment in 2021 associated to our investment in Altan. We had a conversation with our auditors and taking a very prudent decision, we report that impairment. We're optimistic and we're -- we think the future of Altan in the industry and in Mexico, it's very valuable. But we prefer to take this conservative approach, and an impaired -- made the impairment of MXN 290 million. And concerning the leases, as I said, we -- in our debt, we have $16 million related to IFRS 16. Those are the leases that we record as liabilities or debt, mostly related to size and rents on switches, buildings, but mostly sites. We have over 1,600 sites or points of presence throughout the country. And the monthly rent of those, it's part of this IFRS 16 debt. I don't know if that was your question, Andres.

No, my question was more on the actual payment of yearly rent, the cash that you used to pay those operating leases. And in the Mexican Bolsa, you reported MXN 471 million of leases, but sometimes there are financial leases and sometimes there are operating leases. I was just wondering if you could give us the cash flow impact of the operating leases.

Yes, operating leases, including tower rents and everything else, it's about MXN 800 million to MXN 900 million on a yearly basis. That's the rent that we pay every year.

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

Just a housekeeping item. Adrian, I think you mentioned a nonrecurring item in Infrastructure in the fourth quarter. I didn't quite catch if you gave the amount. So if you could disclose that, that would be great.

Yes, it was in the expenses. I think it was not in Infrastructure. I think it was related to organization changes we made in the fourth quarter that we recorded a MXN 40 million charge or expense. Is that the one you're referring?

I mean I think so, but I thought you said something about -- that it was more on the revenue side and fiber-to-the-tower in 4Q '20. But perhaps I'm mistaken.

Oh, no. I was referring to a benefit in the fourth quarter of 2020 regarding rents that was positive for the expenses on the Infrastructure business unit in 2020, therefore it explains why it's shown as an increase in expenses in fourth quarter 2021. But really, it's just that nonrecurring benefit that we had for rents in the fourth quarter of 2020.

Right. And can you disclose the amount?

Yes, it was about MXN 15 million, 1-5.

[Operator Instructions] There are no further questions at this time. I would like to turn the call back to Adrian de los Santos for any closing remarks.

Thank you, everyone, for participating in our call today. As always, we're happy to take any further questions directly through our Investor Relations office or through myself. Thank you. Have a nice day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.