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

Good morning, and welcome to Axtel's Second Quarter 2026 Earnings Webcast. My name is Nancy Llovera, Axtel's Investor Relations and Corporate Finance Manager. And today, I am joined by Armando de la Pena, Chief Executive Officer; and Adrian de los Santos, Chief Financial Officer. Financial information for both Axtel and Controladora Axtel, including the unaudited second 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 session. 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. Welcome, everyone, to our conference call. I hope everybody is doing well. Let me start with an overview of our second quarter performance and relevant events. Second quarter results showed an improving trend, primarily in comparable EBITDA, which increased 17% sequentially with the first quarter. Compared to recent quarters, we are also seeing improving momentum in both Enterprise and Government segment revenue. Enterprise segment revenue remained stable year-over-year, reflecting the slowdown in the acquisition of recurring contracts during the fourth quarter of 2025 and the first 2 months of 2026. Since March, we have been seeing a recovery in the Enterprise segment alongside improving macroeconomic indicators. New recurring contracts increased 38% sequentially, which we expect will translate into higher revenues in the coming months. The decline in recurring revenues was offset by stronger non-recurring revenues, allowing Enterprise segment sales, excluding voice to increase 1% year-over-year. We expect Enterprise segment to do well in the second semester. The Wholesale segment achieved an 18% sequential increase in revenues during the quarter, supported by a new high-capacity dark fiber contracts. The pipeline for both high-capacity LAP services and high-capacity dark fiber opportunities remain attractive, although sales cycles continue to be extended. We continue to see demand for capacity across our transport network, particularly our next-generation fiber infrastructure connecting Queretaro data centers with McAllen. In the Government segment, recurring revenues grew 34% in the second quarter, helping offset the decline in non-recurring contracts. We expect a larger number of opportunities with federal entities as activity in this segment typically leads towards the latter part of the year. This should support revenue growth in a full year 2026 compared with 2025. As part of our artificial intelligence strategy, we signed an agreement with The Owl Solutions to commercialize its supply chain data analytics platform in Mexico. We also held an internal AI hackathon in collaboration with AWS, bringing together more than 80 engineers to develop and implement Agentic AI use cases focused on improving Axtel operational efficiency and customer experience. In June, we hosted customer events with Freshworks, Fortinet and Microsoft, focused on how automation, cybersecurity and artificial intelligence solutions can help organizations to improve efficiency, resilience and data-driven decision-making. In cybersecurity, Axtel was recognized by Cato Networks as Partner of the Year in Latin America and achieved premier certified partner status by KnowBe4. At ITW in Washington, D.C., we showcased our digital infrastructure and cross-border connectivity capabilities. We have more than 100 meetings with international carriers and service providers. Through Axtel Networks, we have built the first-generation cross-border network between Mexico and the United States, designed to scale and support demanding digital ecosystems for hyperscalers and data centers. The organizational adjustment implemented in March contribute to maintain personnel expenses below second quarter of 2025 levels despite inflationary pressures and new labor regulations in Mexico. At the same time, together with SimplyAsk, a Canadian partner, we continue to advance internal initiatives focused on translating the adoption of artificial intelligence into tangible business results in the medium and long term. In May, we distributed a $10 million dividend approved at our Annual Shareholders' Meeting. In addition, we continue reducing our debt, repaying more than $25 million during the first half of this year. We expect to continue improving our operational and financial performance throughout the remainder of the year, driven by a stronger momentum in Enterprise and Government segments. In Axnet, we continue to see growth opportunities for both LAP and dark fiber capacity demand. As always, we maintain a strict discipline in resource optimization and capital allocation as we work towards achieving our objectives for the year. I will now hand the call over to Adrian for additional remarks and to discuss Axtel's second quarter results.

Thank you, Armando, Nancy, and good morning to all. In June, we executed a $210 million credit agreement with 4 financial institutions to refinance $160 million of existing debt and secure a $50 million committed revolving facility. This financing enables the company to extend its maturity profile with no significant maturities until 2029, while also obtaining more favorable financing conditions. The new credit agreement has an initial term of 3 years with an option to extend for an additional year on the first anniversary and if exercised, a second 1-year extension on the second anniversary. Concerning our ongoing hedging strategy, we maintained slightly over 60% of our U.S. dollar-denominated CapEx expenses and interest payments hedged throughout the third quarter of this year. In July, we began executing peso-dollar hedging contracts for a portion of our fourth quarter dollar obligation. Let me now move on to review our financial results for the second quarter. Second quarter revenues decreased 3% year-over-year, primarily reflecting lower revenues in the Wholesale and Government segments. Enterprise segment revenues remained stable compared to same period last year. IT and Cybersecurity revenues increased 5%, driven by continued growth in cloud and cybersecurity solutions, supported by expanded services for existing clients and execution of non-recurring projects. Telecom revenues decreased 1% year-over-year, mainly due to lower collaboration solutions revenue, partially offset by solid growth in managed network and mobile services. Voice revenues declined 12% and represented approximately 6% of Enterprise segment revenues, reflecting the ongoing migration from traditional voice services towards digital communication solutions. Government segment revenues declined 6% year-over-year, mainly due to lower non-recurring systems integration revenues within the Federal segment and less contribution from state and local entities. This decline was partially offset by strong growth in connectivity solutions. Year-to-date, the revenue mix was approximately 70% federal and 30% state and local government. Wholesale infrastructure revenues declined 13% year-over-year, reflecting a difficult comparison against the second quarter of 2025, which benefits from higher upfront revenues associated with the large high-capacity contracts obtained in 2025. The segment continues to experience the gradual termination of legacy direct access services to international carriers that serve their global clients through Axtel in Mexico. Cost of revenues, excluding depreciation and amortization, remained flat year-over-year, primarily driven by lower costs in the Government and Wholesale segment, mitigated by increased costs in Enterprise segment. As a result, gross profit decreased 4% with gross margin reaching 72% compared to 73% in the prior year's quarter. Enterprise segment costs increased 6% year-over-year, resulting in lower contribution margin. It was mainly driven by a higher proportion of non-recurring revenues compared to the prior year, which carry lower margins than recurring revenues. Government segment costs declined 15% year-over-year, driving an increase in gross profit and margin expansion. Performance benefited from a more favorable revenue mix with a higher contribution from recurring services and connectivity solutions. Wholesale segment costs declined 6% year-over-year. Gross profit declined 15%, reflecting lower revenues and changes in revenue mix during the quarter. Commercial and operating expenses are allocated to the 3 business segments, while corporate expenses remain centralized. During the quarter, commercial and operating expenses declined 1% year-over-year, while corporate expenses decreased 2%, reflecting efficiencies generated from the organizational restructuring implemented during the first quarter of the year. EBITDA for the quarter reached MXN 862 million, although very positive on a sequential basis, it represented a 10% decline compared to the second quarter of 2025. This decline reflects lower contribution from the operating segments as well as a MXN 25 million negative swing in net other income versus the prior year quarter. As a result, comparable EBITDA margin stood at 29% for the quarter compared to 32% a year ago. CapEx for the second quarter totaled $19 million, equivalent to 11% of total revenues compared to $21 million or 13% of revenues in the same period of last year. Cash balance at the end of the second quarter was $38 million compared to $35 million at the beginning of the quarter. Free cash flow was positive $35 million in the quarter, resulting from $50 million of EBITDA, $8 million of positive working capital, $19 million of CapEx and $13 million of interest expense. Additionally, during the quarter, we recorded $9 million in debt reductions and $10 million in dividend payment. At the end of the quarter, net debt stood at $472 million, resulting in a net debt to comparable EBITDA ratio of 2.5x compared to 2.3x a year ago. With that, we conclude our presentation and open the call for questions regarding Axtel and Controladora Axtel. Nancy, if you could please go ahead and open the webcast for questions from participants.

[Operator Instructions] Our first question comes from Andres Coello with Scotiabank. Andres. We can not hear you, Andres.

Can you hear me?

Yes.

2 quick questions. The first one is if there are any changes to guidance to revenue and free cash flow guidance, if you can please help us understand that. And the second question is on Axnet. Just wondering how do you see hyperscalers activity in Queretaro and other areas and whether the construction of data centers, et cetera, may positively impact Axnet. Results are still down year-over-year. I'm wondering if that will change in the second half.

Good morning, Andres. And thanks for your question. The guidance, I mean, seems challenging full year guidance given results in the first semester. However, we see significant better trends in the Enterprise segment in the second quarter resulting from better acquisition of new contracts. And also, we have -- and it's embedded in our estimates for the year. There's a couple of relevant projects in the Government segment that we expect or hopefully, we can close in the second semester. There's always significant seasonality in the Government segment, and we are seeing more activity in that respect. So in that matter, along with high capacity contracts in Axnet that are on the table and perhaps might also contribute to better performance in the second semester vis-a-vis first semester. And lastly, some contracts that will result in more efficiency in terms of expenses that we have been negotiating for some time could also boost the results in the second semester. These are -- this will contribute to, sort of, nonlinear benefits for third and fourth quarter. And if we're able to close on this, we could be near our guidance. I understand that it's challenging. But in terms of EBITDA, that's where we're seeing right now. In terms of free cash flow, we usually have the ability to manage investments and some expenses in close relation to revenues. So if revenues are not performing, CapEx deployment and certain expenses associated to this -- to revenue growth do not materialize, therefore, making net cash flow not as affected as revenues not being performing. So I would say that free cash flow usually is less volatile, more stable than revenues and EBITDA. So those are the prospects for the full year guidance at this moment.

Thank you for your questions. Related to the hyperscalers and data centers that has been installed in Queretaro, we do see some opportunities for us, several opportunities with the capacity needed from McAllen to Queretaro. As we speak, we are working on those opportunities, but this tend to take a long time. So we expect the second semester, maybe at the end of the third quarter or beginning of the fourth quarter to fulfill or to close these opportunities, and that will help us with the Axtel numbers, as net numbers. We do see a new opportunity with these data centers related with the new Mexican law to produce your own electricity needs. That will help the data centers. And also, there are some industrial parks that do have electricity capabilities. And they are beginning to explore or to install some data centers in the northern part of Mexico in Monterrey, and there could be also opportunities close to the border. So we do see a more possibility trends related to Axnet in the months and years to come.

Our next question comes from Isaac Gonzalez with GBM.

Just one question. You mentioned that the weaker operating leverage offset the efficiencies of the headcount this quarter. Should we expect those efficiency gains to become more visible in the EBITDA margin during the second half?

Thanks for your question. The EBITDA margin was reduced in the quarter, not necessarily but by not reflecting the benefit of the reorganization in the first quarter. I think the main contributor to the lower EBITDA margin is the mix between recurring and non-recurring revenues. Just on a broad sense, recurring revenues have up to 70 -- 60% to 70% gross margins, whereas the non-recurring revenues, by it's nature, that have no CapEx behind are in the 20s, high 10% margin. So I mean -- and it depends on the project itself, but that's probably the main reason that took the EBITDA margin down to 29% this quarter. What do we expect? We expect more recurring revenues in the quarters to come as the acquisition of recurring contracts has improved. To generate recurring revenues, we need to close new services or new contracts that are medium, long term on a recurring basis and then implement those and start booking revenues 3, 4, 5 months later on. So we have seen better acquisition since March probably, as mentioned by Armando, and that should contribute to better recurring revenues in the months and quarters to come.

Let me add to that. Just to be precise, each opportunity that we foresee, it takes us approximately 3 months for booking. So the trend of acquisition that we -- that did begin to improve in April, May, June, we will have those recurring revenues in third quarter and fourth quarter. That will help with the mix between recurring and non-recurring, as Adrian was saying. The other thing to consider is that we are implementing AI solutions in our repetitive processes that are labor-intensive and that they could be optimized and make them totally autonomous. So we do see savings related to that on the third and fourth quarter of the year. So that will give us also a lower expense ratio in corporate and also in the business lines. That's another thing we have to consider for the end of the year.

Our next question comes from [ Luis David Carena ] with [ Olario Capital ]