Axtel, S.A.B. de C.V. ($AXTELCPO)

And today, I'm joined by Armando de la Peña, Chief Executive Officer; and Adrian de los Santos, Chief Financial Officer. Financial information for both Axtel and Controlado Axtel, including the unaudited first quarter report is available on our corporate website. We will begin today's session with an overview of our business performance followed by a Q&A segment. For your convenience, this webcast is being recorded and will be available on our website. Before we begin, please note that today's discussion may include forward-looking statements. These statements reflect management's current views and expectations and are subject to risks and uncertainties that could cause actual results to differ. Axtel assumes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. With that, I will now hand the presentation over to Armando.

Thank you, Nancy, and welcome, everyone, to our conference call. I hope everyone is doing well. Let me start with an overview of our first quarter performance and relevant events. First quarter revenues increased by 6% and 8% in the enterprise and government segment, respectively. Despite solid new contract acquisition in the wholesale segment, comparable revenue and comparable EBITDA were affected by the absence of revenue and expenses benefits from the extraordinary agreement with a major wholesaler mobile operator in the first quarter of 2025. We expect EBITDA performance to improve progressively over the coming quarters as commercial activity strengthens. During the quarter, we adjusted the organization to better align costs with a cautious economic environment and to mitigate the impact of recent labor law changes in Mexico. The rightsizing of the organization and retirements resulted in an 11% reduction in total headcount, including 16% in senior management. Severance costs are expected to be recovered in less than 14 months. optimizing personnel expenses, while retaining and developing critical talent remains a key priority. From December of 2022 through the end of the first quarter of this year, revenues per employee increased by 42% and by 72% when measured against senior management. These initiatives are helping us build a more agile company with fewer management layers and refreshed leadership. We consolidated our commercial structure, integrating enterprise, government and business lines and at Axtel we combine commercial and operational capabilities. New contract acquisitions in the enterprise segment improved as the quarter progressed. The year started at a slower pace during January and February, but picked up in March when new contract acquisition increased by 12% compared to January levels. Like 2025 when enterprise acquisition began to slow down after July. This year, we are seeing an upward trend, supporting favorable expectations for the second half of the year. Performance across the enterprise segment business line resulted in an overall revenue growth of 6%. IT and cybersecurity services grew 16%, Telecom increased 4%, including a 10% increase in mobility. In the wholesale segment, excluding the extraordinary benefits from the agreement with a wholesale operator in the first quarter of last year, revenues have declined slightly with a single-digit range. However, momentum improved in March with new contract acquisition, 12% above January levels. Our excellent demand for cross-border connectivity solutions remains strong. We are capitalizing on this opportunity through the recent deployment of the next-generation fiber infrastructure connecting Queretaro in San . In addition, Axtel became the first operator in Mexico to deploy Cisco Quatro -- optical network and its IP core. This technology addresses raising traffic in driven demand, enable a more scalable,, efficient and high-performance network while reducing complexity, operating cost and energy consumption. The Government segment delivered an 8% revenue growth supported by higher recurring revenues that offset decline in non procuring revenues. At the federal level, we are observing delays in budget allocation and we expect funding to be in flowing during the second quarter. At the state and local level, the first quarter is characterized by service revenue renewals with new public tenders or actions emerging in the second quarter and execution or implementation taking place mainly in the second half of the year. In the quarter, Axtel entered into a 12-year agreement with Tecnologico in Monterrey to operate its Opti-Tier 3 data center located on the Monterrey count. The facility holds computing storage and application for the entire system. Under this agreement, Technologico Monterrey becomes the Alport tenant and the remaining capacity will be incorporated into Axtel colocation service offerings. This transaction reinforces Axtel evolution as a critical infrastructure operator with long-term vision. Axtel's optimization of key processes through artificial intelligence and advanced automatization focused on simplifying operational workflows and increasing productivity. We are conducting a comprehensive review of transversal and core processes in our company, identifying quick wins and progressive implementation of a solution in the short and medium term. We estimate savings of at least MXN 75 million in the year, in addition with the opportunity to adapt this internally developed AI capabilities into customized solution for enterprise customers in the future. On March 12, we held the Annual Shareholders' Meeting for Axtel and Controlado Axtel supported by consistent cash flow generation and reduced leverage, extend shareholder approved a $10 million dividend payable in early May. Consequently, Controlado Axtel shareholders approved a $5.5 million dividend. These represent the first dividend in Axtel history and reflects our improved financial and operational performance. Axtel shareholders also approved up to MXN 100 million per share buyback program, consistent with prior years. This action refer our commitment to shareholder return while maintaining disciplined capital allocation. We expect gradual improvement through the remainder of the year, driven by stronger enterprise contract acquisitions, sustained demand for wavelength and dark fiber -- net and a more active engagement with further govern entities. Our streamlined organization and refresh leadership within Enterprise and Government segments should help optimize expenses while promoting the stronger commercial momentum. We will also remain vigilant with our capital allocation process to meet our cash flow objectives of the year. 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 $10 million under our syndicated term loan, consistent cash flow from operations enabled us to continue reducing debt and thereby interest expenses. In recent weeks, we have initiated refinancing discussions for the remaining balance under the syndicated bank facility and a bilateral loan with an international export agents. These transactions are expected to further improve interest margins, extend maturities and optimize the mix between peso and dollar-denominated debt. During the quarter, S&P Global Ratings upgraded Axtel's credit rating from BB- to BB with a stable outlook, reflecting the strength of our customer contracts, solid performance across our 3 business segments and disciplined financial management resulting in lower debt and improved net leverage. The rating upgrades achieved over the past 6 months underscore our resilience in uncertain conditions to focus on strengthening our capital structure and cash flow generation. During the quarter, we recorded a onetime reorganization charge of MXN 347 million. Given its extraordinary and nonrecurring nature, our EBITDA guidance for the year would be measured as comparable EBITDA, excluding this charge. First quarter revenues decreased 1% year-over-year. Solid performance in the Enterprise and Government segments, partially offset a decline in the wholesale infrastructure segment. Enterprise segment revenues increased 6% in the quarter, primarily driven by a 16% growth in IT and cybersecurity services. This growth reflects higher cybersecurity revenues from existing customers as well as the contribution of certain onetime projects. Telecom revenues increased 4% year-over-year, supported by solid performance in management services, partially offset by a decline in collaboration services. Both revenue declined 15%, representing now 6% of total enterprise segment revenues. Government segment revenues grew 8% year-over-year, driven by a 28% increase in recurring revenues. This performance reflects more penetration of telecom services among existing federal customers. During the quarter, the revenue mix consisted of approximately 70% federal and 30% state and local government entities. Wholesale infrastructure revenue declined 32% year-over-year, reflecting a difficult comparison vis-a-vis third quarter of 2025 from extraordinary revenues from services rendered in prior years to a major wholesale mobile customer. Excluding this extraordinary effect, revenues will have declined slightly, mainly due to lower wholesale access connectivity revenues from international wholesale operators. Our Infrastructure segment or Axnet, is facing net disconnections in legacy services from global customers of international carriers that historically serves their network services in Mexico through Axtel. This data traffic is migrating to modern high-capacity solutions like Cloud Express, where network requirements are increasingly designed and confer in cloud-based environments. First quarter cost of revenues, excluding depreciation and amortization, increased 14% year-over-year, mainly driven by a higher cost in the Enterprise segment. As a result, total contribution margin reached 69% compared to 73% in the prior year quarter. Enterprise segment costs increased 21%, translating into lower contribution margins, mainly due to higher proportion of nonrecurring revenues compared to last year which carry lower margin. Government segment cost increased 1%, reflecting margin expansion supported by a greater share of recurring revenues. Wholesale segment costs declined 2%, a lower rate than the decline in revenues, resulting in lower margins for the quarter. Commercial and operating expenses are allocated to the 3 business segments, while corporate expenses remain centralized. Commercial and operating expenses increased 15% year-over-year, mainly reflecting an unfavorable comparison base due to the extraordinary bad debt provision benefit reported in the wholesale segment in the first quarter of last year as well as a 5% increase in personnel expenses. General corporate expenses increased 3% during the quarter, driven primarily by higher personnel expenses associated with inflationary pressure. Comparable EBITDA reached MXN 739 million in the quarter, a 31% decline compared to the first quarter of last year. This reflects lower contribution margins in the wholesale segment as well as higher commercial and operating expenses. EBITDA margin stood at 25%. Comparable EBITDA excludes the onetime reorganization charge of MXN 347 million. CapEx for the first quarter totaled $19 million, equivalent to 11% of total revenues compared to $13 million or 9% of revenues in the same period last year. Cash balance at the end of the first quarter was $35 million compared to $73 million at the beginning of the quarter. First quarter free cash flow was negative $3 million, resulting from $42 million in EBITDA, $14 million of negative working capital, $19 million in CapEx and $11 million in interest expenses. Additionally, during the quarter, we have reported $15 million in debt reductions and the $20 million charge related to the reorganizational process. At the end of the quarter, net debt stood at $481 million, resulting in a net debt to comparable EBITDA ratio of 2.6x compared to 2.3x a year ago. With this, we conclude our presentation and open the call for questions concerning Axtel and Controlado Axtel. Nancy, please open the call for and the webcast for questions from participants.

[Operator Instructions] Our first question comes from Oriel Santen. Oriel, please proceed with your question.

Thanks for the presentation. I just have 2 questions. One is related to the infrastructure or the wholesale business. Looking forward with this segment, do we expect to see more impact of the AI base or maybe more like cloud type, we could see any more impact like that.

Yes. And the second question, Oriel.

Yes, sure. You could start with the first one and then I'll phrase the second one. .

Yes, we will see a more active contracts opportunities related to AI. As you know, there's a big momentum happening in mainly Queretaro and Monterrey. They are being data centers in these 2 regions of the country. There is also a big investment in the south of the United States. So connectivity within the Mexico data centers and the south of the United States is becoming a very important business opportunity for us. That's why we invest in the connectivity with Queretaro and Texas. Also, there are opportunities to connect through Cancun, Florida and the Southeast states of the United States in order to have another route closer kilometer-wise to the ones within the country. Also, that brings an opportunity to connect with data centers in the East of the United States and with Central and South America, mainly Colombia. So we do see -- foresee good contracts with hyperscalers, as Adrian was saying the wavelengths have increased significantly in the last 2 to 3 years. So we do see an impact -- a positive impact in everything that's needed to support AI and cloud.

Okay. So we can expect that Axtel start providing these cloud AI services to trying to retain or maybe to get us more customers right now?

Yes, there are 2 impacts. The first one, just answer is referring to the infrastructure needed for AI, but as I say a lot of connectivity related to AI solutions, yes, -- we launched last year AI solution for our customers. We are -- as we explained, investing a lot of efforts, dedicated team some partnerships that we have made with a new and very growing company in Canada in order to launch different solutions and programs to our customers. Also, we have some team making -- in India. So yes, we are going to have a participation in these solutions and also to become a consultant to our customers because you have to have a lot of intra approach within the companies to capitalize AI opportunities. It's not just to have the particularly solutions that can increase productivity in a personal basis, it's to have better processes, better data lake reliable and to really transform the way the companies operate on an AI-based environment, Oriel.

Okay. Great. And on the share repurchase program, do you have a level where you are going to stop buying or maybe you are to spend more on dividends?

Let me take this one, Oriel. And -- yes, we always analyze how to distribute and retribute shareholders we decided and the shareholders approved a dividend payable in the next couple of weeks. And that's the way we think we can better retribute shareholders at this moment. We haven't used the -- our share buyback program. Volume, it's relatively low in our share in our stock so we -- it's not very likely and it's not quite efficient to use necessarily the back program to -- shareholders. We cannot operate 365 days a year. We have restrictions as to sort to blackouts and also to certain times of the day at the beginning and at the closing. So the Board decided that it was more efficient to directly retribute shareholders by paying a dividend this time. Notwithstanding, we're always analyzing when to coming into the market and use the buyback program. .

Our next question comes from Isaac Gonzalez. Isaac, please proceed with your question.

I have 2 questions, if I may. The first one regarding the headcount reduction, you provide us more color on this where these cuts are coming from? And should we expect any impact in operational efficiency? And when should this efficiency start to be reflected in the results? And the second one is on guidance. Does it already incorporate these impacts of the headcount reductions? Or do we see adjustment going forward?

Yes. Let me get the first one, Isaac. Thank you for your question. Related to headcount reduction, as we focus on having a more agile organization. So we first saw which areas would be integrated and reduce our managerial and positions. Since 3 years now, we have been looking forward to have agile decision-making and authorization processes. Also process is more automated and interacting within each other. So that's mainly the support for taking these optimization decisions. Also, there were some areas very repetitive processes and very intensive headcount that we could automatize using AI. So the reduction has been all over the company 10% to 12% as stated. And it's mainly based on automatization and reducing levels in decision-making. That's where -- and when are they going to be reflected, the process was made in February. So since March, we are beginning to see the savings of this cost strategy.

Yes. Isaac, thanks for your question. This is Adrian de los Santos. To complement on this question about the guidance and whether it's reflected. Yes, it's reflected in our guidance. We mentioned comparable EBITDA since the end of last year, beginning of this year when we were planning and making our budget and objective for the year. This was something that was already underway. Obviously, due to sensitivity, we did not disclose anything in advance, but it's embedded in our guidance.

Our next question comes from [ Luis David Carena ]. Luis David, please proceed with your question.

My question is on the -- how are you viewing the market in terms of M&A potential acquisitions and activity. We are seeing a lot of A lot of recent news, for example, from Televisa, Planning Taqua, AT&T assets. Yesterday, we read a note about America Mobil considering acquisitions. How do you in this environment? And do you consider there is going to be activity relevant for Axtel in these.

And thanks for your question. This is Adrian de los Santos. The nature of our industry, and I think pretty much all capital-intensive industries. M&A, it's part of the business. Yes, there had been some rumors about transactions and some transactions that had been executed recently in Mexico and obviously all over the world. tells part of this industry, there are always possibilities. There are always analysis all sort of investment opportunities are analyzed or organic and focus specific targeted businesses that can complement one of our business lines. For example, it's always on the table, major transactions involved being shareholders. That's part of our day-to-day whenever there is something relevant. As always, we will announce it. But it's the nature of the industry and -- Axtel in that industry, and we just live with that as part of our strategy. .

And I have another quick question regarding -- and for example, StarLink, how are you feeling with these market trends? Do you consider extra to be more defensive to its business to business nature? Or are you seeing a change in trends regarding this?

Let me take that one, Adrian. Starting mainly focused on -- well, it's everywhere, not mainly focused on locations that doesn't have a capacity or the closeness to the fiber in order to be served with optic fiber and through micro waves so that's a very good option. Some of our customers, mainly in the financial sector or government -- federal government base need that type of connectivity in remote areas or locations. We do use StarLink. They are a partner for us. We can offer StarLink solutions. But it's not the main need for B2B customers. As you know, our customers are mostly B and medium-sized enterprise organizations. So StarLink is a complement to the connection through fiber optics. We do not see starting affecting this type of solutions. And also, we add cybersecurity we are IT, mobility. So starting is part of the ecosystem, but it's not a direct threat that could affect us. It could affect us positively because we offer StarLink as a complement to the connectivity to our customers.

And the last one, regarding the data center activity. Do you expect more partnerships like the one we take of Monterrey? Are you expecting to capitalize on these trends by connecting the data centers or of more partnerships like this one? And how could we expect revenue to increase or to be benefited from these kind of partnerships in the following quarters?

Yes. Thank you. There are 2 types of businesses, the connectivity one and managing or hosting in data centers. Referring to connectivity, yes, we do see a trend of growing trend for the next, I don't know, forever, maybe 5 years and so on. So that's a big opportunity for Axnet and our big connectivity business. Relating to making some type of partnership as we deal with Tecnológico de Monterrey, right? At this moment, we don't have another opportunity already identified. We have some -- we have some or several customers that they use our services based on our own data centers, some of them are in the financial segment. And we offer them and government also has our services. And also if you host or you offer services related to data centers, you have the opportunity to sell cybersecurity to also offer solution to optimize the cost of our customers in public clouds -- so we do see a very good future. But at this moment, we don't have an opportunity in the short term as we have with Tecnológico de Monterrey.

We have another question from the Q&A function. Considering the nonrecurring expenses this first quarter, do you still maintain your EBITDA guidance for 2026 for this year?

Nancy, thanks for repeating the question. Yes, as we said, we see, at least for now, a better business environment conditions than the end of last year. We see a healthier funnel in terms of business opportunities. And hopefully, that can be materialized into new contracts and increased revenues. And we will start seeing the benefits of the reorganization and reduction in expenses. And further automation in terms of processes and all the benefits that should produce with the streamlined operation and obviously with the use of AI internally. Yes. And just to make it clear, this is comparable EBITDA, that's our guidance for the year.

I think let me just add on that. The results for January and February, mostly because March was a very good month are reflecting the funnel that we had on the last quarter of last year. As you recall, the end of last year was very -- was impacted by the external environment and by a more cautious investment for our customers, both in government and enterprise. So what we saw this quarter was the implementation of low slow fourth quarter so with the funnel that we have in this first quarter, the second and third quarter will improve because our solutions in average have a 3-month period for installing and implementing everything that's needed. So there's a 3-month delay on seeing the funnel implementing with our customers.

Thank you. We have another question regarding the reorganization program? Are you done or still planning more staff reduction, Adrian?

Nancy, thanks for the question. This is something that it's never possible to guarantee. The business environment is different today than what it was 20, 30 years ago. There's a lot of dynamism in the market. And obviously, we have to always look after our people, but also profitability and retribute shareholders. Personnel represents our largest cost. It's about 25% to 30% of revenues. And we have always to optimize having the best people and having margins that are according to what we see in terms of return to investors. We don't see anything in the foreseeable future, but nevertheless this is something that is always an ongoing process, as mentioned before. .

Thank you, Adrian. And we have one more question. What are the exact dates of the dividend payment of Axtel and Controlado Axtel?

For Axtel, it was announced yesterday, the dividend payment will be made May 4. And the payment has to flow to Controlado Axtel and in order to be pay out to Controlado Axtel shareholders. So we said -- we estimate it will be mid-May that the dividend will be distributed for Controlado Axtel shareholders. An announcement will come shortly. And just to add on regarding dividend payments. Controlado Axtel dividend will be payable with the earnings coming after 2014 and Controlado Axtel dividend payment will come from earnings before 2014. That's related to the retention at the individual level so that's something would be last. So we wanted to share that with all of you. .

Thank you, Adrian. Regarding our debt, the dollar-denominated debt. And given the actual exchange rates, are we considering prepaying some of the dollar-denominated debt and also another related question, are we planning to convert part of this debt to a fixed rate to avoid future volatility?

Yes. We have 80% of our revenues in pesos. So we try to be not too far from that percentage in terms of peso-denominated debt. However, we also look to maximize cash flow, debt in pesos carries a higher interest expense and I think it's part of the management to maximize and optimize risks, and that's one of the roles we play. We are approximately 60% today in our debt in pesos vis-a-vis less than 30% a couple of years ago. So we have made significant progress. We also always analyze whether to fix the interest rates from variable to fixed. The fixing interest rates obviously carries the risk of significant movements that can go either way. And it restricts certain flexibility if you want to make prepayments because although debt may be prepayable. If you have a hedge -- long-term hedge of interest rate swap, you have that you will have a mixed match in that respect. So yes, we do consider that all the time, and we try to make what's best in terms of cash flow maximization.

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 require any additional information, please feel free to reach out. Have a great day.