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

Good morning, and welcome to Axtel's First Quarter 2025 Earnings Webcast. I am Nancy Llovera, Axtel's Investor Relations and Corporate Finance Manager. And today, I am joined by Armando de la Pena, Axtel's CEO; and Adrian de los Santos, CFO. Financial information for both Axtel and Controladora Axtel, including the unaudited first quarter report, is available on our corporate website. We will begin with an overview of our business performance, followed by a Q&A session. For your convenience, this webcast is being recorded and will be available on our website. Please note that information discussed today may include forward-looking statements. These statements reflect management's current views and are subject to certain risks and uncertainties. Axtel is under no obligation to update or revise any forward-looking statements, whether due to new information, future events or otherwise. And now I will hand it over to Armando.

Thank you, Nancy, and welcome, everyone, to our conference call. I hope everybody is doing well. Let me start with an overview of our first quarter performance and relevant events. Results in the first quarter were positive, marked by solid growth across our 3 business segments: Enterprise, Government, and Wholesale. Both EBITDA and cash flow generation were strong, leading to a 2.3x net leverage ratio, the lowest since the merger of Axtel and Alestra in 2016. The strong revenues were driven by robust performance in Government and Enterprise segments, particularly in IT and cybersecurity. Additionally, Wholesale experienced a double-digit growth, which benefited mainly from the closing of agreements with a major mobile customer and increases in wholesale access services to international carriers and data center operators. Net recurring revenues from Enterprise new contracts totaled MXN 46 million in the first quarter, 9% higher compared to the same quarter of last year. In Wholesale, net recurring revenues increased 12% compared to a year ago, reflecting the increasing demand for wavelengths from hyperscalers, local and international operators. Axnet has been gradually reestablishing its position as the most reliable metro provider of wholesale access service in Mexico. Our international participation and proximity to customers is helping to build a robust funnel of wholesale opportunities in the future. In recent months, customers have been delaying some projects, adding to uncertainty caused by global trade realignment. Nevertheless, we consider our services to be essential for the efficient and secure operation of our customers. And while they may temporarily defer their IT and communication investments, we remain optimistic and confident that the uncertainty will be short-lived. Our very special commercial model continued to deliver more stable, improving results. Sales quotas, funnel and ultimately revenues are meticulously analyzed by business line, product industry and sector. The integration of commercial representatives with business line specialists is progressing well as evidenced by the funnel generation that should contribute to acquisitions and revenues in the second half of the year. In the quarter, we also made further progress with strategic partners. In March, we obtained the Oracle Cloud Infrastructure certification, enabling us to market and operate Oracle hybrid cloud services. Additionally, we reached an agreement with HP Enterprise to market private infrastructure for processing and artificial intelligence models. Our cybersecurity partnerships have also been seeing remarkable achievements. We reached the Diamond Innovator level with Palo Alto Networks, reflecting our commitment to specialization and excellence in cybersecurity. At Check Point's Engage event in Mexico, we received the Best Performance 2024 award and were promoted to Partner Elite, the highest level of collaboration. The Government segment posted a strong first quarter, reflecting a strong activity with state, local and federal government entities. Revenues increased by over 50%, including a 16% growth in recurring revenues. As in the fourth quarter, we continued to see positive collection indicators, reflecting our diligent work in providing high-quality services to government customers. For Axnet, revenues grew a solid 31%, and we achieved an 11% growth in wholesale access revenues and recorded an extraordinary benefit from the conclusive agreement with a major model wholesale customers. Through this definitive agreement, we have exceeded our equity participation in Altán Redes and collected an undisclosed amount from the termination of agreement established under the Concurso Mercantil in 2022. Axnet will continue serving this client with connectivity, hosting and other services. In March, we held the shareholders meeting for Axtel and Controladora Axtel. For Axtel, shareholders approved up to MXN 100 million for our share buyback program matching the amount approved in 2024. In the extraordinary meeting of Axtel, shareholders approved the cancellation of approximately 1.8% of Axtel shares accumulated through our share buyback program of last year. Our closing strategy for the Enterprise segment in 2025 focuses on account penetration in 200 new potential customers and cross-selling with tailor-made plans for our top 300 customers. In the Government segment, we aim to maintain a strong performance with both federal and local government entities. For Axnet, our priorities are connectivity to the United States and promoting high-capacity services to hyperscalers and wholesale operators. I will now hand it over to Adrian for additional remarks and discuss Axtel's first quarter results.

Thank you, Armando, Nancy, and good morning to all. In March, we prepaid $39 million under our syndicated term loan. Cash flow from operations, strong collections during the quarter and the extraordinary payment received from the agreement with the wholesale mobile client enabled us to continue reducing gross debt and interest expenses, while pushing back relevant debt maturities until the second half of 2026. Given the prevailing interest rate levels and the applicable margin to our debt, we anticipate $50 million in interest expenses for 2025 compared to over $65 million last year. Concerning our risk management, in the first quarter, we executed $30 million in exchange rate forwards at an average rate of MXN 20.31 per dollar to fully mitigate foreign exchange risk for dollar-denominated interest and CapEx obligations for the second quarter. This April, we executed an additional $20 million in forwards to mitigate up to 70% of FX risk up to the third quarter this year. We will continue executing our 6- to 9-month rolling bar forward strategy in upcoming weeks and months. In March, Standard & Poor's confirmed Axtel's BB- rating and stable outlook. As stated on its report, continued improvement in cash flow generation and net leverage ratio could generate an upside rating scenario for Axtel. Let me now move on to review our financial results for the first quarter. First quarter revenues increased 13% year-over-year. Enterprise segment revenues increased 5% in the quarter, explained by the combined 12% increase in digital transformation and system integration services revenues. Digital transformation revenues growth was supported by a 17% increase in cloud and cybersecurity service revenue. Voice revenues declined 8% in the quarter, representing 7% of total Enterprise segment revenues compared to 8% in the first quarter of last year. Connectivity services increased 3% year-over-year, resulting from a 5% increase in data and Internet and 4% decline in VPN and Ethernet services. Government segment revenues increased 54% year-over-year, driven by a 16% improvement in recurring service revenues. In the quarter, we also recorded a relevant nonrecurring system integration services revenue associated to the project of Mexico's international freight digital processing platform that we are providing. This quarter, the revenue mix was 69% federal and 31% state and local entities. Revenues from Wholesale Infrastructure segment customers increased 31% in the quarter, explained by the 11% in wholesale access or connectivity and the extraordinary recognition of certain services rendered to a major wholesale mobile customer in previous year. In the quarter, nonrecurring upfront capacity contracts were almost new compared to MXN 24 million in the first quarter of last year. As in the case of wavelength, Axnet has an attractive pipeline of upfront capacity contracts for the rest of the year. First quarter cost of revenues, excluding depreciation and amortization charges, increased 22% year-on-year, mostly due to an increase in Government segment costs. The contribution margin declined by 1.9 percentage points year-over-year. Enterprise segment cost of revenues increased 9%, slightly higher than the increase in revenues explained by a higher proportion of cloud services, which carry a lower margin. Government segment cost of revenues increased 88% due to an increase of more than 10x in nonrecurring revenues carrying tighter contribution margin. Concerning Wholesale Infrastructure segment, costs increased 13%, mostly related to the 11% revenue increase in wholesale access. In respect to expenses, all commercial and operational expenses are distributed within the 3 business segments, while corporate expenses remain unallocated. In the quarter, commercial and operational expenses declined 4% due to the extraordinary uncollectible provision benefit related to a major wholesale customer. Excluding uncollectible provisions, commercial and operational expenses will have increased 5%. General corporate expenses increased 5% compared to first quarter of last year, reflecting a 4% increase in salaries, in line with inflation, and a 10% increase in maintenance expenses affected by contracts denominated in U.S. dollars. EBITDA was MXN 1,074 million in the quarter, 34% higher than the EBITDA recorded in the first quarter of last year. EBITDA will have increased 23%, excluding the wholesale mobile customer uncollectible provision benefit. CapEx in the quarter was $13 million compared to $21 million in the first quarter of 2024. Cash balance at the end of the quarter totaled $47 million compared to a starting balance of $62 million. Cash flow was positive $24 million, resulting from $53 million in EBITDA, $2 million in negative working capital, $13 million investment in CapEx, and $13 million in interest expenses. Additionally, we recorded $40 million net debt reduction in the quarter. As of the end of March, net debt was $471 million, and the ratio of net debt/EBITDA was 2.3x compared to 2.9x a year ago. And with this, we conclude our presentation and open the call for questions concerning Axtel and Controladora Axtel. Nancy, please go ahead and open the webcast for questions from participants.

[Operator Instructions] Our first question comes from Emilio Fuentes with GBM.

I just was wondering, on your opening remarks, you mentioned you saw some temporary slowing on customer spending due to current uncertainty. I just want to know like the specifics of what you meant? Where in your product line or service line you saw this? And how significant is it? And is it something that should be like a 1 quarter impact? Or am I reading it wrong?

Yes. Thank you, Emilio, for your question. No, it's not a big concern that we have. As you recall, most of our revenues come from long-term contracts, 24 to 36 or 48 months. So what we are looking is to a slow growth rate for new revenues that are coming from new contracts with customers. It's mainly in international or big Mexican companies. And it's not that they are canceling or that we are having trouble in getting new customers. It's in closing some big projects that we have been working for the past months, and we expect to close those on the second or the third quarter. But it's not a concern that we have at the moment. And as you can see, in Axnet, we have a lot of movement going on, mainly on wavelength, also in Government. So it's a part of contracts for special solutions with some big customers, mainly.

Our next question comes from Alex Azar.

Quick questions just -- and I'm sorry for my voice. The first one is on your guidance. If the uncollectible account, the recovery that you had this quarter was embedded on your guidance because -- and if not, should we expect, let's say, lower figures in the second quarter due to this nonrecurring income in this quarter?

Alex, this is Adrian de los Santos, and thanks for your question. To some extent, yes, it is included in our guidance. As we have mentioned in previous conference call, we always estimate and include some extraordinary benefit every year in our guidance or budget. As we have said, our business is mostly based on projects, and given that projects have certain projected revenues and expected costs and expenses that are provisioned over time, until these projects are concluded, we don't have 100% certainty of the exact revenues, costs and expenses associated. And therefore, what I'm trying to say is that we do have an extraordinary benefit usually every year in the amount of close to MXN 300 million. That's been the average for the last 3, 4 years. So long story short, yes, this is something that's embedded in our guidance. And also, it's something that we've been working with the client for many months, and we have a certain expectation of when it will come to termination.

And regarding your client relationship, let's say, that problem, that was resolved, that that's a done deal and you are continuing to provide services now. Is that correct? I don't know if I explained myself.

Yes. We did continue providing services to this client always. We never discontinued or never had any issue in that part. What happened is that the multiple agreements and contracts and past due accounts that were captured under the Concurso Mercantil, all of that was concluded, was a termination agreement. And we continue providing services. We have a good relationship with this client. It's an important client for our Wholesale business. And we have plans to even increase business in the future.

Okay. And my last question is on Controladora and Axtel. And I'm kind of scratching my head. Recently, Alpek and Alfa finished their transformation plan and Alpek just announced it might merge their Controladora shares 8 to 6 months post the spin-off. Nemak did the same, probably it took them 1 year. Why is Axtel taking -- I think we have 2 years already. Should we expect a merger or there is something that we are not at link or I'm not looking at?

No, it's a fair question, Alex. we have said the Board of Controladora Axtel has to make the first move, has to decide that it's the way they want to move forward. That decision has not been made. As a matter of fact, the shareholder mix in all these former Alfa subsidiaries you mentioned was different than the shareholder mix in Axtel. Perhaps that might be one of the reasons. But in any case, it's something that the Board of Controladora Axtel is aware and they are on top of it. And perhaps the timing for doing something has not come yet. It's something that's not a possibility, but it's not being started as of now yet.

Congrats on the results.

Thank you, Alex.

We have one more question from Emilio Rinconi.

I actually have 2 questions. The first question is, can you provide the exact amount of the benefit from the uncollectible provision? And the second question would be, given that you already achieved your long-term objective of a leverage ratio of 2.5x, do you have any new ratio or range that you could provide where you feel comfortable?

Emilio, thanks for your questions. We cannot disclose the exact amount. I mentioned that excluding all the uncollectible provision line from first quarter this year and first quarter 2024, our EBITDA will have increased 23%. That can give you a sense of the magnitude. We cannot give further details, as you may imagine, this is a relationship between a client and Axtel. It's information we don't disclose for competitive reasons. And second, these were private agreements as well that we have an obligation to not disclose. But I hope that the reference I gave you about the EBITDA growth, excluding the uncollectible provisions item, can give you a sense of its magnitude. And concerning the leverage ratio, yes, we made this achievement in the quarter, as Armando mentioned, the lowest since 2016. It's still a volatile environment, as you can imagine. We feel that if we can maintain or go towards a 2x net leverage ratio, it's, to an extent, a mark that could make the Board decide on what's the best use of cash flow, whether to continue reducing debt or distribute directly to shareholders. We have distributed, through our buyback program in previous years, some of that. And also, we think that reducing debt lately has been probably the best use of funds given high interest rate levels that we have seen over the last 24 months. So we think it's probably in the best interest of shareholder value creation at this time to continue reducing interest expenses by means of reducing gross debt.

We have another question from the Q&A function. After the $75 million debt repayment, what is the expected annual interest expense?

Thank you, Nancy. We paid $67 million in interest expenses in 2024. This year, we think, assuming the interest rate in dollars and pesos remain somehow as they are today, interest expenses will be $50 million. If we were to do a 12-month pro forma calculation, it will be $48 million. So we're looking forward to continue reducing interest expenses until we feel that interest rates are at a more comfortable level and probably enter into some sort of liability management to secure long-term rates.

And regarding liability management, are you currently considering issuing bonds in the debt market? Or are you going to continue with the bank debt strategy?

Yes, we have that on the table. We continuously monitor and analyze conditions in the capital market. We think to fix interest rate long term in dollars at this moment still not a level that we feel comfortable. We have received certain readings about conditions for Axtel and we have an expectation that continuing producing improvement or better results, increasing cash flow, reducing debt, and better interest rate environment and risk in Mexico and globally, obviously, could give us a better situation than right now. But yes, it's an option, and we have it on the table as always.

Thank you, Adrian. And what is the estimated net leverage ratio by the end of this year?

We think it should be under $450 million net debt, more or less. And the ratio should be around 2.2x, more or less. That's our expectations given exchange rate conditions remaining somehow where they are now.

Thank you. Regarding the share buyback program, do you have any plans on restarting it anytime soon?

It's something that, again, we also analyze. We were in a quiet period until today. We will consider and assume that market conditions should improve in upcoming weeks, months to help us come back to -- or to start using our buyback program. Second, we have also prioritized the reduction in debt as the use of cash flow over the last few months. So yes, we have plans to use our program, although I cannot confirm at this moment exactly when we will start buying back. It's something that we don't disclose as such in specific.

Regarding Axnet or the Wholesale segment, how are the hyperscaler business going so far? Armando?

Yes. There are 2 types of services that are having high demand. One of them is the wavelength. There's a new trend begun 2 years ago to have a wavelength capacity that cuts. At the moment, we have a lot of funnel and we are enthusiastic about the revenues in the future coming from wavelength in one extent. And with the hyperscalers, also there's a lot of investment in connecting mainly Querétaro data centers with the U.S. through the border, through the northern border, we're talking about Laredo, McAllen and such. And also with [indiscernible] on Cancun and Veracruz. And that investment is ongoing now. So we see Axnet to have a very, very good year. We are doing good numbers so far. So we feel comfortable that the investment in Mexico for big contracts and big capacity will remain, and we see that business going very well.

We have another question from Alejandro Gallostra with BBVA.

I'd like to dig deeper into the impact of the collectible benefit this quarter. You mentioned that when adjusting for this uncollectible benefit, the growth in EBITDA would be 23% year-on-year. I just wanted to clarify if you also had to make an adjustment on any potential uncollectible benefits from first quarter 2024 to get to this 23% growth rate, or you're only adjusting the first quarter 2025?

Alejandro, thanks for your question. Yes, the comparable growth or comparable numbers, yes, it's apples-to-apples. It's excluding the provisions in both first quarter '24 and first quarter '25.

All right. And then I also have another follow-up question regarding Controladora Axtel. And I'd like to know what's the relationship that you have with the Board of Controladora Axtel? Given the large amount of shares that they own, I would say that you have a close relationship with them, or they reach out to you quite often. And I'm just surprised to hear that you don't have any idea of why there is anything holding them back from making the decision of merging the shares. I was just wondering what's the relationship that you have with them? And how come you don't have any idea at all of what is holding them back?

Alejandro, thank you for the question. We have a very close relationship with them. As we have said in the past, that's not a priority for the management. We are focused on having growth in EBITDA and free cash flow. And in the Board meetings, it has been discussed. And it's not a subject that I will address or put on the table. It's a thing that the Board members have to decide. But yes, we do have a close relationship. And I don't have any idea of when we're going to begin with that discussion.

I am going to think through the answer, but do you have any idea of why it is taking so long? What they are thinking about?

No, I don't have any idea.

Have you asked them?

Yes. No, let me complement on that. If you look at the documents, the Board of Controladora Axtel has common board members at Axtel. So yes, the relationship is the same between management and the Board of Axtel and Controladora Axtel. To some extent, it's a subset of the Board of Axtel. And it's something that the bottom line is the decision is not to do something today. It doesn't mean that it could not happen in the future. The management or mandate is to focus on the priorities of growth and profitability. And about your question about Controladora Axtel shareholders, as you know, this entity came from the spin-off from Alfa. So shareholders might be similar, common to shareholders in Alfa. But that's information we don't have in detail, we don't know exactly who are the shareholders -- we don't know exactly who is every shareholder in Axtel or Controladora Axtel.

As soon as we have any information, we will address it Alejandro, and we will keep you informed. But at the moment, we don't have it. Sorry about it.

We have a follow-up question from Alex Azar with GBM.

Just a quick one. I wanted to get your color on the competitive landscape when you -- you guys are growing in cybersecurity, in the Internet of Things. When investors, analysts talk to the incumbent in Mexico, they want to grow -- they are deploying capital aggressively in this sector, connecting data centers, towers. So I wanted to get what is your competitive advantage or your differentiator versus Telmex or them?

Let me get this one. Thank you, Alex, for your question. We are a business-to-business company. We have strong relationships with our customers and with our partners or suppliers. We invest a lot in training and certification of our human capital. One of our core values is related to be customer-oriented. And as I have said in the past, culture is very important, to have motivated, trained, very reliable professionals, and all our strategy or specialization verticals develop solutions early with our customers to have a bolder view of their future, their needs. That's one of our competitive advantages. As you know, whoever can invest in equipment, the equipment is available and everybody can buy equipment. And so it depends on your pockets, if you have big pockets or no. Our way to address the market is to have that common understanding of where are our customers going and what are their main needs, their automatization or AI strategy for the future. So that's our competitive advantage. And we have been successful in the last 3 years, and we have acquired some shares of market share in the past 3 years in Mexico. So I don't know if that is clear, Alex.

Yes. Yes, Armando. And one more, if I may. What are your thoughts on all the changes in terms of regulatory changes, regulatory oversight in Mexico?

Yes. We are still reviewing and trying to understand if there are main challenges going forward. I think, and that's my personal view, that we are not as affected as other players. As I told you, we are mainly business to business and our customers rely on our reliability. So I think there are other type of industry players that will be more affected one way or the other with the new laws. But we are still reviewing everything, and we are being very close with the Mexican authorities and to understand this new law. But anyway, we know how to compete, and we will be successful if we keep this closeness with our customers. And being business to business, we are not that exposed.

We have one final question from the Q&A function. In the last quarter, you mentioned potential joint venture opportunities related to cross-border activities, particularly involving the U.S., Southern states and Mexico. Could you provide an update on the status of these deals?

Yes. Thanks, Nancy. We continue analyzing and having sort of preliminary conversations and looking for the best way to further participate in that opportunity. Regardless of current situation in terms of trade and global politics, South U.S. and Mexico has been and will continue to be a great opportunity, will continue to be an integrated market. And we have done some investments in our site to further increase and strengthen our connectivity to the border. And we want to go further. We want to go further with potentially infrastructure and/or services into southern states of Texas, Arizona and New Mexico. But we still have nothing defined yet. It's an important objective for the company, but we don't have details yet or the definitive project or partner to execute this opportunity.

Thank you, Adrian, Armando. There are no further questions at this time. Thank you all for your interest in Axtel and for joining us today. If you need any further information, please don't hesitate to reach out. Have a great day.