Megacable Holdings, S. A. B. de C. V. (MEGACPO) Earnings Call Transcript & Summary

Good morning, and welcome to Megacable's Fourth Quarter 2019 Conference Call. [Operator Instructions] It's now my pleasure to turn the call over to Kenia Vargas of i-advize Corporate Communications. Please go ahead.

Thank you, Keith. Good morning, everyone, and welcome to Megacable's Fourth Quarter 2019 Conference Call. At this time, I would like to introduce Megacable's management and today's presenters. Mr. Enrique Yamuni Robles, Chief Executive Officer; Mr. Raymundo Fernández, Deputy Chief Executive Officer; and Mr. Luis Zetter, Chief Financial and Administrative Officer. The gentlemen will be discussing the quarterly results before moving on to the question-and-answer session. It is important to mention that certain comments made today may constitute forward-looking statements, which do not account for future economic circumstances, the company's performance or financial results. These are subject to various conditions and could materially change throughout the year. Please review the complete disclaimer presented in the financial earnings report that was issued yesterday. You may contact us at (212) 406-3696 if you did not receive the quarterly report or you require any assistance. At this point, I would like to turn the call over to Mr. Enrique Yamuni to begin his presentation. Please go ahead, Mr. Yamuni.

Good morning to all, and thank you for joining us as we review the results for the fourth quarter of 2019. I would like to start by saying that this past quarter and full year period, once again, demonstrated the resiliency of the business and its ability to continue adapting to challenges in the market to grow both operationally and financially. This was a clear downturn by a national economic slowdown that continues affecting general consumption levels. Mega's GDP growth for 2015 -- 2019 also diminished the growing capacity of the markets in which we participate. Despite the many challenges, the company continued to grow by fine-tuning of our strategy along the way. As such, the number of subscribers grew across the 3 massive market segments during the quarter, while quality-added service and bundled packages allowed us to continue increasing RGU per unit subscribers. Let us start with XView, where we were able to achieve the second best quarter of the year in terms of net additions. The number of content views also continued to rise as well as the revenue contribution of the platform. And even to -- and even though the product is already a consumer favorite, the next-generation promises to be a further step in terms of product differentiation versus other options in the market. As part of our increasing commitment to offer subscribers top-notch infrastructure, the construction phase of the submarine cable is almost complete. At this point, the largest cables are being put in place, so that we may start using this infrastructure. We expect this project will well connect the Baja California territory connecting it to reliable and high-speed services. With regards to the MVNO, the future product launch took place during the month of November. We have received very positive market feedback. This service, which includes the sub territories aims to position our offerings as the most complete and valuable. We are confident that as the project grows, the contribution of the MVNO to the results will be a very profitable business with enough targets. Also, we would like to announce a project to the construction of new FTTH cable with digital technology that will be deployed throughout the main series of Megacable projects. In an estimated period of over 2 years, this project concludes the migration of subscribers who are going to receive this -- their service through HFC technology to the new level. And the subsequent reutilization of the equipment of the HFC networks in northern and other regions to continue supporting better coverage growth. This will be our most aggressive investment plan so far, and one that we will lead to the evolution of our network towards the newest infrastructure technology. This short-term investment would represent savings when compared with continuous update of our existing network in the long-term. By doing this, we will accelerate bandwidth capacity growth across all of our regions. Thus, strengthening our competitive position. We are fortifying our businesses for the long-term and the returns are there to justify these investments. Thank you for your attention, and I will turn the voice to Raymundo, so he will dig deeply into this -- all this things. Please go ahead, Raymundo.

Thank you, Enrique, and good morning, everyone. Let us review the operating results for the quarter. As Enrique mentioned, we have been faced with a challenging economy. Thus, our intent is to focus on actions that preserve revenue and profitability level. Therefore, during the quarter, we took action in order to seek quality additions with bundles tailored to subscriber needs together with a less aggressive connection strategy. This is reflected in lower gross additions during the quarter, but this allowed us to maintain revenue growth with a more stable subscriber base. Moving on to results. At the end of the period, we recorded a 3.6 million unique subscribers, while RGUs rose to more than 8.4 million, a 6% increase when compared to the fourth quarter of 2018. This was mainly due to subscriber increases across all 3 segments of the massive market. Video subscribers increased by 1%, while broadband grew 5% and telephony 18% when compared to the same quarter of 2018, resulting in 2.33 RGUs per unique subscriber. The video segment rose to more than 3.2 million subs at the end of the quarter, recorded net adds of 23,000 when compared to the same quarter of 2018. On a sequential basis, we continue to record subscriber growth despite the previously mentioned economic challenges. XView posted one of its best quarters of the year, achieving 110,000 installations to reach more than 827,000 subscribers. We won all our subscriber [indiscernible] platform. We are convinced that the high-quality content available and all the [ frequency ] focus will continue to determine the success of this program. On the other hand, during the quarter, we achieved 102,000 new subscriptions to our HD service to reach more than 1 million. Additional services continued to be an important differentiator of our service and an additional source of revenue. In terms of broadband, the company rose to nearly 3.1 million subs at the end of the quarter, 155,000 net adds when compared to the same quarter of 2018. On a sequential basis, we reached 31,000 net adds when compared to third quarter 2019. Innovation and efficiency and the implementation of technology has been our approach. This has allowed us to, as of this period, begin offering bundles to the residential market with 350 megs, 500 megs, and 1 gigabit of broadband speed. This is part of our commitment to offer quality services with higher capacity, giving the growing demand for more bandwidth. The Telephony segment reached more than 2.1 million subs during the quarter, recorded 318,000 net adds on a yearly basis and 57,000 net adds registered in the previous quarter. Therefore, Megacable's product mix has already reached 52% of our subscriber base with triple-play packages compared to 44% a year ago. This is a result of bundle strategy aimed at triple-play package, double and single-play packages now represent a lower share of the total subscriber base at 29% and 19%, respectively, compared to 33% and 23% at the end of 2018. Regarding churn, during the quarter, we recorded higher rates than fourth quarter 2018 in the 3 services of the massive market, mainly due to the retention strategies implemented in the last quarter of 2018 after the contingency period that we suffered. On a sequential basis, churn rates were lower than third quarter 2018 as a result of a seasonality effect with better collection. ARPU gain per unique subscriber rose to MXN 410.3, a 6% increase when compared to the same quarter of 2018. This growth is mainly due to higher RGUs per unique subscriber, rate adjustment on existing price, and the contribution coming from add-on services. Regarding ARPU per services, Video and broadband grew by 6% and 8%, respectively, when compared to the same quarter of last year, while Telephony decreased 3% due to the income allocation policies were reviewed as per 2018. In the Corporate Telecom segment, ho1a reached a significant 109% increase when compared to the same quarter of 2018. The company took -- continues to make efforts into its market positioning and development for implementing and managing cybersecurity solutions, like security [indiscernible]. Metrocarrier grew by 3% during the period due to contracts in which both -- all our Metrocarrier participates, which required that revenue be recognized through ho1a . Additionally, during this period, provisions have to be captured on the basis of IFRS 15. However, the managed security solutions continue to be successful in the market, while the off-net series continue to gain traction. The synergies between these 2 companies continued to be the main driver of growth in this segment and will be greatly complemented by the Infrastructure segment. Finally, we also compliment on the investment project mentioned by Enrique, the rationale is to go and get some competition, a state-of-the-art technology, less CapEx in the mid and long-term, update our CPE platform, a speed of digitalization and long-term subscriber stability. Also, the corporate market will also be benefited by the synergies of this technology. It enhances shareholder value with no doubt. Now Luis Zetter will take you through the financial highlights. Luis?

Thank you, Raymundo, and good morning, everyone. I will now give you more details regarding the financial results before taking your questions. Consolidated revenue for the quarter rose to MXN 5.6 billion, an 11% increase when compared to the same quarter of the previous year. This was mainly due to revenue increases across the 3 services in the massive segment, coupled with an outstanding quarter by ho1a and the corporate market. On an annual basis, 2019 revenues increased 11% when compared to 2018 to reach MXN 21.6 billion, above the guidance we've set for the year. Moving to the Massive segment. During the quarter, revenue grew by 8% when compared to the same quarter of 2018, with video increasing 8%, broadband 9%, telephony by 6%, given the larger number of subscribers and a higher ARPU. For the full year, video revenues increased 10%, while broadband grew by 9% and telephony decreased 2%, given the change in the revenue allocation carried out during 2019. Regarding Corporate Telecom segment, revenues increased an outstanding 29% when compared to the fourth quarter of 2019, with a significant 109% increase in ho1a during this quarter. Metrocarrier grew by 3%, MCM increased 4%. As Raymundo mentioned, in Metrocarrier, we have some adjustments, but it is not going to follow in the future. So we will see Metrocarrier on regular levels going forward. On annual basis, the Corporate Telecom segment recorded a 25% increase when compared to 2018, mainly as a result of an excellent year for ho1a, which grew 65%, followed by Metrocarrier with 19% increased, while MCM grew 9%. In terms of the revenue breakdown, the massive market now accounts for 79% of total revenue, while corporate represented 21% compared with 82% and 18%, respectively, a year ago. In fourth quarter '19, cost of services increased by 20% compared to fourth quarter '18, given the record sales figures from ho1a, that includes a sales mix with a higher equipment sales component. Cost per cable operations increased 9%, slightly above the revenue growth and mainly due to advertising and promotions to support the launch of new products during this period. Operating expenses increased by only 2% below revenue growth due to operational efficiencies and a favorable comparison due to the extraordinary expenses in fourth quarter '18. On a yearly basis, cost of services increased by 17%, while SG&A grew only 8%, again below revenue growth for the year. All the above resulted in a MXN 2.5 billion consolidated EBITDA, representing an 11% increase when compared to the fourth quarter of 2018, in a consolidated margin of 45%. On the other hand, EBITDA for cable operations accounted for MXN 2.3 billion, increasing 8% when compared to the same period of 2018 for a 48% margin. On an annual basis, consolidated EBITDA grew by 9% to MXN 10.2 billion, with a 47% margin, while EBITDA for cable operations during the same period rose to MXN 9.5 billion, recording a 6% increase when compared to 2018 and a 49% margin. The new IFRS 16 generated a positive effect of approximately MXN 69 million in the lease expense reductions for this period. Excluding this effect, consolidated EBITDA for the quarter will have risen to MXN 2.5 billion with a 43.5% margin. Net profit for the quarter reached almost MXN 888 million, representing a decrease when compared to the fourth quarter of 2018. This was mainly due to a higher depreciation component as a result of investments made in the previous years, a higher interest expense and the IFRS 16 impact. On a yearly basis, net profit reached MXN 4.3 billion, a 5% decrease when compared to 2018. At the end of 2019, the company's net debt reached [ MXN 4.9 million ], an increase when compared to the end of 2018, due to the additional debt signed during the year. On a sequential basis, an increase was recorded as a result of less amount of cash available given the investments made during the period. At the end of the quarter, the net debt-to-EBITDA ratio rose to 0.47x, while interest coverage ratio reached 15x, still very healthy level. Finally, in terms of CapEx, during the fourth quarter, the company invested almost MXN 2 billion, which totals more than MXN 6.5 billion during the year, representing 30.2% of 2019 revenues, in line with the established guidance. We continue investing in the construction of new kilometers to improve the network capacity and the acquisition of subscriber equipment as well as the special projects carried out during the period. To close, I want to mention that the fiber investment, once if in place, will generate cost savings in terms of network operation and maintenance. Due to the characteristics of this technology, it implies an investment that in the short term will be reflected in CapEx to revenue ratio, but that in the medium and long-term will take us to lower levels than those previously estimated. This investment does not affect shareholder value rather it enhances it. Thank you for your attention. At this moment, we will now move to the Q&A session. Operator, please go ahead.

[Operator Instructions] We'll take our first question from Miguel Dávila with Itau.

Raymundo, Enrique, Luis, so for my first question, a couple of minutes ago, Televisa, during their conference call, they mentioned that they were going to have a lot of focus on Guadalajara specifically. So have you seen any increase in the competitive pressure from Televisa in your key regions? For my second question, also, I wanted to ask that during the three-quarter '19 conference call, you mentioned that if GDP growth was above 1%, this could help you reduce the pressure on being less aggressive to retain your subscriber base. So in general, what is your outlook for economic growth? And yes, that will be my questions.

Sure, Miguel. Well, as we know we have captured a decent competition in general markets and we are competing the majority of the market with Televisa in terms of the Corporate segment. They are very focused on Guadalajara and other part. We are also focusing Los Mochis that we're going to in terms of Mexico City, Monterrey, and we continue to focus in terms of growing ourselves when it makes sense. When it makes sense for the return of what we're doing. So far, Corporate market has been growing at 20% year-over-year, between ho1a, Metrocarrier and [indiscernible]. So we're doing very fine. And we are not worried about what we're doing in that part while used to competition. So if they announced that they are focusing more on Guadalajara, they always been in Guadalajara for a long time. So welcome [indiscernible] the same that we might be doing in other parts of the [indiscernible]. And also, Sky is also competition in all these segments. So they don't see what they are trying to do. And coming to this market, we have a very good network service and penetration. And with this investment that we announced, we are reinforcing that. That relates to the first point that you mentioned. The other one is we have a really economical slowdown in 2018, that makes everybody suffer in this period. We believe our results are very good considering the economic situation. We've managed not to lose subscribers in the 3 segments. Actually, we earned subscribers indeed on that part. And we continue to roll on a slow growth, but a steady growth in broadband and Telephony. For the 2020 as well as everybody, we expect a little recovery in the economy, but it's not going to be a [indiscernible], but it's going to be slightly better than what we've had in 2018. Some of the government contracts that were not awarded at the beginning of 2018, they were beginning to fill more than at the end of last year, in this quarter, and that's why we also have a good end of the year with ho1a for that seasonality section. So we expect 2020 to bring Megacable a good growth in Corporate segment because we have a really, really, really good network growth. And we know that synergies between all our Metrocarrier. And again, a continued growth in the massive market participating. I don't know if that answers, Miguel, all -- the 2 questions.

We take our next question from Alejandro Gallostra with BBVA.

Enrique, Raymundo, Luis. I would like to know your thoughts about the pay-TV industry. I mean, the penetration in the country is still very reasonable, but the pace of net additions in the country is clearly slowing down among the largest players. So I'd like to know what you expect for this business going forward. And if you think that bundling the service with OTT is a solution? And my second question is regarding CapEx and the comments that you made at the beginning of the call regarding the prospects of building FTTH networking from cities to expand coverage over the next 2 years. I was wondering if this would change your initial CapEx expectations for the next 2 years. So you already have this spending in line.

Alejandro, let me go ahead. If Enrique want to jump into the answer, they will do it in a second. Regarding pay-TV industry, there are a lot of issues to consider there. In terms of product, we're launching during this year, our second step of the XView project or NGV we call it, Next Generation Video. We're very excited about that because it brings all the functionality of the Android, and Android TV platform, that will really enhance and make a completely different experience for the subscribers, integrating all the OTT apps that you are mentioning there, and allowing our subscribers to do the research like if it was seamless from a mobile to a TV. They can have access to YouTube, to Google in that part or the Google Play Store that they have. They have a huge amount of apps already integrated there. These new products will come to [indiscernible] probably announce some positive to see. They also continue to be -- going straight to consumer, they also maintain going through the operators. So the integration of all the apps that we have plus all the content that we have in the past with the new user interface that enhances the voice remote, the Google Assistant, all the products with Android, we're very excited about those will bring a new refresh to video as well as XView in the last 12 to 18 months, where we reached 850,000 subscriber pretty much. So we're very excited. Regarding competition, once you integrate those apps into our offer, we don't see any reason why not to have economies of a scale and not to have the quality of service provided by one single operator or integrator like we consider ourselves in that part. Our problems is still will be economy. Economy is a major contributor for its rollout. We can talk to people regardless it operates, but we need to grow the market still. And as you know, 2018 was not the best year for video because the economy was stagnated at that time. We expect a little bit growth, and with the launch of the new XView platform to get much better in that part. Still, the driver for massive market will continue to be a product. Also, the second question you have, with all these new upgrades and continuing -- this is not a single operator that we do, it's a smarter way to do the operator of the network. We are bringing new technologies that are OTT technologies in new cities. So we will operate the majority of the subscriber city based and will allow us to do the digitalization in the cities where we are not. It will reuse what we have. So we have great advantages. And for video, the majority of our subscribers now will have access to a bi-directional or 2-way platform, and an Android platform, like -- I might describe, if you know, some of our subscribers need to be upgraded to the platform that we're launching, and they pay for that. Now they will have access automatically to this new platform. So for video and for the new platform that we have or the new developer of the network, it's only great news for everybody in that part. Related to the CapEx that this will bring, Luis can complement what I'm saying.

I would like to do some comments about the pay television business. Yes, the penetration of pay television in Mexico is still low. The problem, as Raymundo mentioned, is basically economic. It's not warranty, or it's not the desire of people to obtain or get this service. What's the future for that? In my personal -- in our personal -- in our opinion, [indiscernible], years ago, maybe 10 years ago, the money invested in content world -- in the world was maybe $10 billion, $20 billion, I don't know. There's no figure. We didn't paid attention in the past about the investment done in production or content products. Today, if you -- companies are public. They release their numbers in production. If you add all the money invested in production alone in the U.S. with -- in the U.S. companies like Netflix, Amazon, Google, HBO, the Denver's NBC, CBS, Univision, Televisa in Mexico, we are talking about $50 billion more a year. So the hours of content that are valuable out there that come out every year is huge. So people is not watching less television or watching -- or consuming less content, they are consuming a lot more. And we are the company. We have broadband, we've had a platform. And we will have a better platform in the future to consume that content. I don't see why our penetration in pay television will not rise. And I don't see why broadband consumption will not rise. So the future is very good. Certain companies don't have the ability to be able to present consumption -- or present content the way the consumer wants. We allow them to record. We allow them to start over. We allow them to go back in programming or even in time. We allow them to search in any platform they want to search. So we think that the future for pay-TV in our company, in our platform, with our technologies, is very bright. And with the broadband, with the capacities of broadband that we have currently and we're offering to the homes and to the companies and what we will do in future with all the investments in technology, why is the business we're doing, I don't see why this company will not run in the most desired service in the cities we operate.

Luis, do you want to say something about the CapEx?

Sure. So with this investment, this FTTH network that we have been mentioned. Basically, we will equal the dollar amount that we were targeting or forecasting to spend in the following 5 years. So the CapEx for 5 years remains the same. The advantages we have is that we will be able to recover a lot of equipment currently installed in the regions we're installing FTTH and that equipment will allow us to speed up the capacity and the regions that we are covering, transferring that FTTH equipment to those regions. And on top of that, continue with having the newest technology available for our subscribers. So yes, the CapEx for the following 2 years, is going to be higher than maybe the forecasted numbers. But for the total 5 years, it'll be the same, reducing basically in year 3 and going even further down for years 4 and 5.

And it will reduced in the long term.

Pretty much in the next 3 to 4, 5 years, you had it equal, but we're investing for a platform that will be used in the years to come. If you are aware about what we were doing with GPON on that part, we can wish -- we can easily operate the distribution and also the use of the equipment and the network that we have right now will allow us to get the fiber deeper to prepare fiber-to-the-home in the order less, not important, but it's more a city smart than the higher cities that we are doing. So it's a fairly smart [indiscernible] plus also it does include what Luis has said, the operator for the CPE platform for the new speeds WiFi and everything that you need in the home. So it is on short term, one-time [indiscernible] investment. So also, we need to say that we've got really, really good conditions that we cannot disclose, while we did this as a whole project, not only in terms of the cost of technology, also in terms of the technology itself and in terms of the payment terms that we have. So we're very, very happy that this is the best way to go ahead of competition and to put Megacable ready, as Enrique said, to run for the future.

Okay great. So basically what Luis is saying that -- so basically that means that the CapEx will be higher in actual terms over the next 2 years or also as a percentage of sales. I don't know if you could also give us some guidance for 2020?

For the following 2 years, will be basically the impact. And in the third year, we will see a reduction to lower levels than we have today. So it's only 2 years. But I don't know if you want to provide a guidance on capital...

Yes, let's do the guidance because it also -- they need to understand that is not a significant increase in the CapEx also. It does include the CapEx in the first year and the second year on that part, but it brings also a huge amount of savings in CapEx for the oversees as we continue to reuse. But [indiscernible].

As you recall, the CapEx for this year was -- almost $340 million. We expect for 2020, the CapEx around the $400 million.

That's it. I don't know if you want to go ahead with the...

With rest of the guidance?

Yes, let's say about the guidance.

Revenues, we expect growth between 8% and 9%. In EBITDA numbers, we are expecting 7% to 8% growth. Subscribers, on video, we expect 2% to 3% growth. Internet, 6% to 8%. And Telephony, between 8% and 10%.

We'll take our next question from Leonardo Olmos with Bank of America.

I have 2 questions on unrelated subjects. The first one is related to Axtel. They have been even more vocal in talking about sharing infrastructure or monetizing the infrastructure they have. I'd like to know if you have any type of view on the matter, if you think there is any type of partnership or acquisition that you see is available. On their national infrastructure they want to share? And the second question, like I said, it's unrelated as related to taxes. We have seen some movements from the government to increase tax paid by the companies. We saw the AMX case earlier this week, and we believe you paid a little bit, a low rate of pretax profit. So just for us to have an idea. Do you have any type of conversation with the government that could change your tax rate or do any type of agreement or change in the regime or something like that? So those 2 questions.

Thank you, Leonardo. This is Enrique. On Axtel side, we don't know yet that we are going to participate in that they are -- they stated that they will do a separation of their business. 1/3 -- one will be infrastructure and the other one is going to be our service component. And they are doing that obviously to try capture value. They think that infrastructure is going to be more high-value separated with -- from our services than the work they had by now altogether. We don't know yet if we will do anything with -- we'll try go into the process of buying that. We will -- I will guess that is more likely that we will not. But we don't know yet. We are analyzing the information that they're going to be sending and we will make a decision in the next 30 days, 45 days about that. And we well -- our infrastructure is very good, is at the same level of Axtel's infrastructure, but with a lot more popularity. We have a lot more reach. We reach a lot more businesses and a lot more -- obviously, bigger reach in the homes. And we will have to take a look at that. But we don't know yet. And the other question is?

It was related tax rate.