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

Greetings, and welcome to the Axtel First Quarter 2022 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Adrian de los Santos, Chief Financial Officer. Thank you. Please go ahead.

Thank you, Donna, and welcome, everyone. Today's conference call will be hosted by Mr. Eduardo Escalante, Axtel's Chief Executive Officer; Mr. Bernardo Garcia, Executive Officer of Planning and Development and myself. Axtel's financial information, including our first 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 discussed 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 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. New business opportunities continue improving in the quarter as the economy moves forward from the latest COVID wave. We evidenced this recovery trend in the non-voice Enterprise segment revenues and gross acquisition of new projects, which increased 2% and 21% in the quarter respectively compared to first quarter 2021. As the year progresses, we expect the acquisition of new contracts to translate into revenues growth. During the quarter, we continue to experiencing supply chain constraints. The longer time to market translated into a negative effect on Enterprise segment revenues of approximately MXN 40 million in the quarter. In recent weeks, we noticed improvements particularly with the most affected equipment, the specialized switches and routers. These are also encouraging signs for the rest of the year. Among the drivers behind improving business opportunities is the demand for cloud and cybersecurity services from enterprise customers. Companies continue adopting and enhancing digital transformation solutions, adjusting their operations to new requirements on their hybrid working environments, contributing to the 27% increase in revenues from cloud and cybersecurity solutions to enterprise customers this quarter. Results in the quarter were affected by the underperformance in the Government segment and a decline in revenues from dark fiber contracts and Altan, an important wholesale mobile operator. Regarding this client, in the fourth quarter of 2021, we recognized an impairment for the value of our equity participation. This quarter, we are reducing the recognition of revenues until there is further progress under the concurso mercantil process. However, we are optimistic and supportive on the medium- and long-term business prospects of Altan and on its important role to promote competition in the Mexican Mobile Services segment. This customer represented less than 4% of total revenues in 2021. The level of acquisitions of new projects in the infrastructure unit was 29% higher than in the year-earlier quarter, with positive prospects for the second quarter and the rest of the year. In the quarter, our cash flow was better than anticipated due to positive collection and low CapEx. The first semester is usually intensive in working capital investment, but we were able to manage and maintain a strong cash balance from strong collections, particularly from enterprise customers. Also discussed in our February conference call, we are working in a project redesigning our commercial model to accelerate revenues and gain market share in high-growth services to enterprise customers, such as cloud, cybersecurity, system integration, managed networks and collaboration solutions. During the first quarter, we successfully concluded the installation of this new commercial model. Simultaneously, we are looking at alternative operating and commercial models to optimize the contribution from mature services, such as connectivity services. The implementation of this business alignment project should contribute to increase the acquisition of new businesses starting in the second half of the year. Axtel's mobility project, Alestra Movil gained traction in the quarter with the acquisition of new enterprise mobile customers. During the quarter, we presented Alestra Movil's new enterprise mobility management functionality, an integrated platform where our enterprise customers will be able to manage and configure different security levels on their employees' devices. All this, in addition to the reliable and intelligent multi-operator network platform, providing end users a high-quality experience. Investors continue to be attracted to Axtel's assets and business opportunities. Discussions include potential partnership opportunities in currently underway projects like cybersecurity and cloud to accelerate revenue growth and Axtel's strategic agenda. For the rest of the year, we expect to benefit from an improving investment sentiment and the contributions from projects under implementation. We will also continue working on digitalization initiatives to streamline our operations and optimize investments to maximize cash flow. With that, Adrian will now make some additional remarks and present the summary of the operating and financial results of the quarter. Adrian?

Thank you, Eduardo. Let me briefly comment about 2 resolutions from our Annual Shareholders Meeting, which occurred last March. Shareholders approved a maximum amount of MXN 200 million for our share repurchase program, maintaining the same amount approved the previous year. As always, we will evaluate our participation, considering market conditions on our liquidity and capital structure targets. Additionally, shareholders also approved the cancellation of 425 million shares, equivalent to 60.7 million Axtel CPOs held in our treasury from the share buyback program. Shares outstanding in equivalent CPOs now stands at 2,832 million CPOs. I will now move on to review our financial results for the first quarter. Company revenues were 10% down year-over-year in the quarter. Revenues of Alestra, our services business unit, declined 3% in the quarter. Enterprise segment revenue declined 1% in the quarter, resulting from a 2% increase in nonvoice services revenues and a 21% decline in voice-related revenues. Digital transformation solutions increased 17% in the quarter, driven by cloud and cybersecurity services revenues. Value-added services, including system integration and managed services revenues, also posted positive results, increasing 8% year-over-year. Enterprise segment voice revenues were down 21% year-over-year. However, on a sequential basis, revenue declined just 1%, reflecting some stabilization on its declining trend. Government segment revenues declined 14% in the first quarter, a 26% reduction in recurring revenues was partially offset by positive results in nonrecurring revenues. New business opportunities with federal government entities remained challenging during the quarter. We expect conditions to improve in the rest of the year but with no clarity yet at this time. With respect to Axtel Networks, our infrastructure business unit, revenues were down 17% in the quarter, explained by the lower revenues recorded in Altan and dark fiber contract revenues, which also posted a decline vis-a-vis first quarter last year. As mentioned before, we're building up an attractive dark fiber funnel, which could positively impact revenues in the rest of the year. Cost of revenues, excluding depreciation and amortization, declined 4% in the quarter, less than the 10% decline in revenues, contracting our gross margin by 200 basis points. Alestra cost of revenues declined 1% in the first quarter compared to a 3% decline in revenues due to increased costs associated to nonrecurrent managing networks and system integration revenues and mobility services. Concerning the infrastructure business unit, costs declined 22%. Operating expenses declined 5% vis-a-vis first quarter 2021, explained by an 11% reduction in personnel, rent and maintenance expenses compensating an increase in bad debt provisions. Operating expenses declined 14% in Alestra and increased 5% in Axtel Networks as efficiencies in personnel and maintenance expenses did not compensate the increase in bad debt provisions. EBITDA in the quarter totaled MXN 717 million, down 22% when compared to first quarter of last year. This quarter, 55% of EBITDA came from Alestra and 45% from Axtel network. CapEx in the quarter was $16 million compared to $13 million in the first quarter of last year. CapEx was allocated 60% for Axtel Networks and 40% for Alestra. Cash balance totaled $76 million at the end of the quarter compared to a starting balance of $78 million. Cash flow in the quarter was $2 million, resulting from $35 million in EBITDA, minus $14 million in working capital investments, $16 million in CapEx and a $5 million in interest expenses and cash taxes. Additionally, we recorded a $6 million outflow in debt movements during the quarter. As of the end of March, net debt was $585 million and the ratio of net debt-to-EBITDA was 3.3x. Debt related to IFRS 16 represented $16 million at the end of this first quarter. Donna, if you could now please open the call for questions.

[Operator Instructions] The first question is coming from [Luis Yount] of Compass.

It's [indiscernible] two quick questions on my side. And just to clarify, the way I interpret some of the announcements you made it sounded like the approach with Axtel now is kind of more towards partnerships, I guess, JVs eventually as opposed to an outright sale, which was kind of the focus in the past. Is that the case or selling the entire company continues to be the base case? That's my first question.

Thank you for the call. This is Bernardo. Well, you're right in terms of the partnerships are a way to improve or to accelerate investment on high-growth services that we are considering. As you know, we are enjoying a very high growth in cloud and cybersecurity in this last quarter. And that was something that happened along the past year also. So we are receiving signs of interest from investors, both from Mexico and from abroad who are already participating in other markets in this arena. That is part of the equation. And also, we are having conversations that include interested parties on the [indiscernible] business of Axtel. So yes, we are -- we see interested parties both at the level of Axtel and both at the specific investments for high growth services. And we're looking forward to maximize value for our shareholders in the combination that gets after all these negotiations.

And then my other question is, I guess, related to your financial results. I mean it was -- it seems like it was a difficult quarter, but you're maintaining the guidance for the year. And I guess that assumes that some of the things that you mentioned, some of the projects you're working on start contributing to revenues in the second half, et cetera. Is there anything else that we should assume in terms of that potential recovery as we go forward, especially on the infrastructure side? And I guess, on the margin side, we saw some meaningful compression on margins. I guess part of it is a function of lower revenues, but I just wonder if you can comment on the different cost pressures that you might be seeing with the inflation across the board in all companies, just trying to understand how is that impact for us mainly on the labor side, it's mainly on the component side? Anything you can share there would be helpful.

Yes. The guidance, we're maintaining our guidance. First of all, we expect results to improve throughout the year. As Eduardo mentioned, acquisition was very positive in the first quarter. We have visibility for good acquisition in the second quarter as well, which translate into higher revenues 4, 6 months later. So that's part of the improvement in results we have. As we mentioned, we had some negative effects in the quarter on the performance in the Government segment. We also have lower revenues from an important wholesale mobile customer. And in respect to this customer, it's in a legal process that's obviously very confidential. So we don't know what will be the outcome of that and therefore not clear on the impact for the year. So we expect the year to continue improving in terms of results. Therefore, we are maintaining our guidance. Regarding...

before you go into inflation, again, let me add a couple of things. As we mentioned before, [Luis], we are seeing some encouraging signs in the market. In particular, we are seeing an increased demand for our infrastructure services coming from the installation of new very high-scale data centers in Mexico. So we think that is going to be a very, very good factor in the market going forward during the rest of the year, as well as some of the large and important mobile operators in Mexico moving forward with the 5G, new technology deployment in our country. So we are seeing very encouraging signs in terms of demand that we expect to capitalize during the rest of the year and hopefully we'll be able to achieve the level of the guidance for the year.

Yes. And to answer the part of margins, I would like to comment that, first of all, the -- we're having a different mix in terms of revenues on the Enterprise segment. Declining voice revenues always put pressure on margins on the one hand. And the lower revenues on the infrastructure business unit this quarter also put pressure on the overall margins. As we're able to improve the results in the infrastructure unit, that will increase margins for Axtel in the rest of the year. We're seeing pressure in terms of costs, particularly equipment. On average, last year, we saw 10% to 15% increases in equipment and we're seeing something similar this year. Most of that, it's embedded on new prices on the offers -- of new offers to customers. So most of that is reflected in the new pricing components of our services. But yes, there is pressure on the technology and maintenance hasn't been that high in terms of increasing or putting pressure on our cost structure, but it's mostly related to dollar. So as long as the peso maintains some stability, we should be able to maintain stability in terms of margins on the maintenance costs.

And my last question is related to capital allocation, especially what pertains to buybacks. I know you mentioned you canceled a decent amount of shares you had on treasury and you approved a new buyback. And just wondering how limited you feel you could be because the stock is quite depressed, it makes a lot of sense to be buying at those levels. But just wondering, given the liquidity of the stocks and given the potential plans in the future to hopefully sell this asset, how do you balance that and the low liquidity with the attractiveness of buying back the stock and how limited you feel you are at this point? And how comfortable, I guess, you are that [indiscernible] as you buy back shares keeps increasing the stake on the overall company?

Yes, this is Eduardo. As Adrian mentioned before, our shareholders approved a maximum amount of MXN 200 million in order to do buybacks. So we do have resources to do so. We absolutely agree with you that the level -- the current level of the stock price is well below what we consider a reasonable value for it. However, we have decided to wait and see how the year evolves to make sure that our results and, in particular, our cash flow continues to be solid the rest of the year before implementing any buyback action. So it's -- we're in a little bit of pushing forward mode regarding the implementation of the projects that we discussed before in order to increase our revenues and waiting for those results to start coming in and transforming into a positive factor in our results in order to decide any buyback program.

The next question is coming from Andres Coello of Scotiabank.

I was wondering if you can repeat the percentage of revenues that are coming from Altan? I think you said 4% of the infrastructure division, can you just clarify? And my second question is, you said that you were not going to recognize Altan revenues for the rest of the year until there is clarity on the bankruptcy process. But I'm wondering if that means that there are current issues with collection with Altan paying the bills? Just wondering if it is bad or you just will stop rendering new services to Altan?

Thank you, Andres, for the questions. And let me clarify the comments we made. It is 4% of Axtel's revenues. Less than 4%, in fact, of Axtel's total revenues, what Altan represents. Today is quite early to make a decision regarding what the Altan impact is going to be going forward since we are going to a critical phase of concurso mercantil, they are going through a critical phase of the concurso mercantil. So we still do not have clarity of what the outcome is going to be. As we have said before, we fully support Altan. We think the model of Altan is very important for our country and the services that they are providing and plan to continue providing are key for the development of many underprivileged areas in Mexico. So we are very much committed to supporting Altan. Having said that, we have to wait until what the outcome is. We are -- today, we are following a conservative approach and already are registering it only partially the revenues of Altan. It is really still a little bit of a guess of how much we should do it since, again, we don't know what the outcome is going to be, but we decided to start making provisions in order not to have a larger impact down the road. Unfortunately, we cannot give you a number. But hopefully, the impact won't be that large. We are -- we do not plan to -- let me rephrase that. We do plan to continue receiving revenues from Altan -- payments from Altan, even though probably partial payments, not full payments for invoices, going forward. But again, it's difficult to know today what percentage of the total services will there be.

Our next question is coming from [Ricardo Oveido of GBM.]

First, a follow-up from Luis' question regarding margins. You mentioned that standard services have a higher margin than your value-added services. Could you provide us with some ballpark figures from the margins from these 2 services? Additionally, could you remind us the average time to maturity of your government segment contracts?

Your first question, margins for standard services gross margin usually are in the high 80s gross margin and value-added services are in the 70s range. So that's the level of -- the ballpark level of margins on these 2 family of services. And your second question was concerning Government segment contracts, what's the average life or what? Could you repeat it, please? .

Yes. Sure. Basically, the average time to maturity from the Government segment contracts?

Yes. Usually, government contracts goes from 2 to 4 years. In the last couple of years, we have seen that profile being reduced. We saw some contracts that were renewing for very short periods of time on a constant basis. And that changed the average life of our Government segment contracts from what I said, 2 to 4 years to probably 1 to 3 years. So that's where we are today. We have contracts that are maturing this year and some go to next year. However, the funnel or projects, some projects that we're seeing today that are -- that hopefully we can gain those, we're now seeing longer terms. We're seeing the 3-year average tenure back on the table with respect to federal government contracts.

[Operator Instructions] The next question is coming from Alejandro Gallostra of BBVA.

I have a couple of questions. The first one is regarding the partnership options that you are now considering, would these options involve any cash payment on your partner for your benefit? And would they only involve the infrastructure business? Or what are things that you're thinking here, the options in the partnership -- options that you're considering now?

Alejandro, this is Bernardo. Yes, that's a very interesting aspect of the negotiations. As you know, these businesses are part of the assets that we own and inviting a new investor, we do so with the expectation that they will acquire a percentage of that asset as a ticket to get into the business. And after that, we have together an investment plan to fund the investment of the project. So the approach is to that these projects should provide with a partial monetization of the assets for Axtel.

And these assets that you're talking about would be only related to the infrastructure business or it could be something else beyond that infrastructure business as well?

Well, it's both, Alejandro. It's based on the high-growth parts of the business. As we were saying before, on the infrastructure business, Eduardo explained that we are seeing demand picking up soon in terms of 5G growth and also data center growth in Mexico, and that is improving the prospects for the future of the [indiscernible] business. And that's what attracts investors to that part of the Axtel business. . On the service area, that's where we have the high-growth segments like the ones that grew 27% in this first quarter, that was cybersecurity and cloud. And that is one element of the attraction that the company is seeing today. And also, we start seeing some attraction also for investment on the mobility services that are -- that were recently launched by Alestra.

I see. And then the new partner will have the option to buy the remaining business in the future or they will remain as a partner with a minority stake?

Typically, what these partners seek is to have a local partner with strength and deep relationships as Axtel has. So the focus is to co-invest and have a long-term relationship. The specific percentages are not yet defined. It will depend on which approach maximizes value for Axtel.

Would you consider spinning off the resulting business that is involved in this partnership to give you more visibility to market? Or do you -- would may was part of Axtel some integrated business?

I think that's a very interesting possibility, Alejandro, to spin off those businesses. And that has to do a lot of the negotiation with the new partner for each of the business. That's the level of autonomy that the business should have. That's where we'll keep in order for that decision to happen.

I see. And would you say that the probability of signing a partnership is now greater than 50% when compared to the probability of selling the infrastructure business, which appeared to be the main option in the past? Would you say that now signing a partnership, you have a high probability of success right now?

It's hard to say at this moment, Alejandro. I don't know what's the answer to that, both. Right now, we're pushing for both options with the same energy at this moment.

Okay. So you would say that the outright sale of the infrastructure business is still a possibility?

Yes. Yes. Yes, of course.

Okay. And then the final question, if I may. It seems that the cloud and server security and digital transformation services are growing the fastest. And would you be able to give us an idea of how much they contribute to the overall company?

In terms of revenues, the contribution from digital transformation services to the Enterprise segment, one second, that's about 30% of revenues.

30% of the enterprise revenues. Okay. Thank you very much for your answers.

You're welcome.

[Operator Instructions] The next question is a follow-up coming from [Ricardo Oveido of GBM].

Just wondering, regarding Alestra mobility business, if it contributed to this quarter's top line and if you have any expectations for the full year?

Alestra Movil, it's starting. It contributed, but it's not material yet. What's encouraging is the acceptance of the service from enterprise customers. It's a platform that connects users to multi mobile operators. So whichever service is better at a certain point at the certain time, that's where the service goes. So that's becoming widely accepted from enterprise customers for their employees. So that's the quite interesting, and we are very encouraged by those signs and the pipeline of contracts as well but contribution was not significant yet this first quarter.

Thank you. At this time, I would like to turn the floor back over to Mr. de los Santos for closing comments.

Thank you, everyone, for participating in our call today, and we remain available for any further questions you might have. Thank you, again.

Ladies and gentlemen, thank you for your participation and interest in Axtel. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.