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

Good morning, and welcome to Megacable's Third Quarter 2022 Earnings Conference Call. With us this morning from Megacable, we have Mr. Enrique Yamuni, CEO; Mr. Raymundo Fernandez, Deputy CEO; and Mr. Luis Zetter, CFO. Let me remind you that the information discussed in today's earnings call may include forward-looking statements on the company's future financial performance and prospects, which are subject to risks and uncertainties. Megacable undertakes no obligation to update or revise any forward-looking statements. I will now turn the call over to Mr. Enrique Yamuni. Sir, you may begin.

Thank you very much, and good morning to everyone, and thank you for joining us today. During the third quarter, the macroeconomic situation continued to generate a challenging environment for the industry and for Mexican families, including a rising inflation, the increase in Mexico's -- the Banxico's, the Mexican Central Bank reference rate and lower annual growth expectations. In this context, Megacable continued to make steady progress in its business strategy and growing EBITDA. While entering new territories and reaffirming its commitment to offering quality services adding the best value for the market. The remarkable subscriber growth achieved during this quarter confirms that the strategies that we have implemented are paying off. We are convinced that this is only the beginning of the positive trend and that increases for the coming periods should be higher to meet the goals that we have set for the company. It is worth noting that successful sales strategy of the company, which continues to be reflected in the highest level of gross adds for the quarter a proof of the subscriber progress and service position, and this growth is coming from both legacy footprint as well as from expansion to new territories. In that regard, we have added 11 new cities at quarter end and 3 more cities and towns will be announced before year-end. Regarding financial results, continued to be very solid revenue figures for the period reflect an outstanding performance for the corporate segment. This revenue comes from a balanced mix, including the government, corporate and enterprise markets. Regarding EBITDA margin, EBITDA margin erosions is mainly due to the higher cost and expenses inherent to the current operating volume. The EBITDA margin should bounce back, as we continue to increase penetration in the new territories. Moving into our new generation video platform, the integration capabilities and the friendly user interface of Xview continue to position our service on top of the subscribers preference. We are certain that we have the best video product and the market acceptance is being reflected in the close to 90 million interactions registered on a monthly basis. Regarding the GPON Evolution project we can confirm, it has been concluded with a progress of 100%. We are very satisfied with what we have accomplished with this initiative since fiber deployment, together with the evolution of HFC, including [indiscernible] to reach a lower number of homes per node will ensure the quality of our services in all our footprint. As per our expansion plan, we can probably say that we are finally seeing [ a site ] of the total potential of the project. The contribution of the new territories is now visible on the subscribers and RGUs for the quarter. It has been very challenging since we are subject to external factors that are raised in the market such as extended delivery times, electronic equipment shortages and public safety, [ driven ] through the contribution from the new territories is not at the levels that we expected. We are confident there are more noticeable ramp up is underway, starting in the fourth quarter, considering the current fiber rollout capacity of the company. We are aware of the challenges of our current macroeconomic environment, but we are confident that the measures we have deployed to contain those factors, together with the positive reception we have registered in new markets by offering higher-quality products and a great customer service will allow us to achieve greater [ operating ] transactions in the next quarters. Regarding CapEx, it is important to clarify that even though we are -- that even -- that we are behind schedule in terms of activated kilometers, the associated investments have already been reflected in the CapEx figures. We have been working closely to overcome the delays we have been facing in the fiber rollout. As a result, we expect a substantial change in the activation of additional kilometers in the coming periods. Another aspect to finally -- to highlight was the successful placement of MXN 7 billion in long-term local notes issued during this quarter with the participation of various players in the financial market, including brokerage firms, AFORES and investment funds. Thus, the over subscription recorded reflects the high confidence that the investors have in Megacable. This transaction will strategically allowed us to continue strengthening our operating and financial position by recognizing short-term debt and accelerate our outline expansion plans represented our first time participation in the Mexican debt markets and the highest credit ratings from the Fitch and HR Ratings. We are convinced that under the strategic path, we are not only over building the foundation for growth, only building the foundation for growth in the coming periods, but we are also laying the grounds that will allow us to achieve our medium and long-term objectives with the consolidation starting in 2023 of the new territories that we have entered. I will turn the call now over to Raymundo to discuss our operational performance. Raymundo, please go ahead.

Thanks, Enrique, and good morning, everyone. The first 9 months of the year have been marked by the beginning of the execution of the most important project for the company. This ambition expansion project has been undergoing for several months now, and we are currently offering our innovative services in 11 additional cities and towns with the expectation of increasing that number significantly before year's end. Despite the many challenges that we have found along the way, the company continues to move forward with our plan to consolidate a national presence and take advantage of the opportunities that the market presents. In line with our expectations and as we mentioned in previous calls, this quarter reflects the growth of subscribers coming from the new territories. The aforementioned, coupled with the contribution from our existing footprint has resulted in the highest net add figure in the last 2 years. In this regard, please be assured that we are conducting all necessary studies to strategically select regions where we plan to enter without losing focus on our main operating and financial metrics to [ warrant ] sustainable growth. There is still a lot to do. And despite the fact that we have already added close to 1 million new home passed during the last 9 months, the pace should pick up significantly in the coming periods once we have fine-tuned our building strategy to reach the growth we're looking for. Moving into the results. RGUs rose to more than 10.8 million, which represents net additions of 278,000 during the quarter compared to only 66,000 recorded during the second quarter of 2022. In the same comparison, unique subscribers recorded 84,000 net adds during the quarter compared to 11,000 on the previous quarter, reaching almost 4.3 million subs. On an annual basis, RGUs grew 7%, while unique subscribers grew 4% when compared to the same quarter of last year. As a result, RGUs per unique subscriber reached 2.54 this quarter, comparing favorably with the 2.49 in the third quarter of 2021. Internet subs exceeded the 4 million mark during the quarter due to more than 100,000 net adds recorded in the quarter. On an annual basis, 260,000 subscribers were added, which represents a 7% growth when compared to the third quarter of 2021. The investment that we have carried out since 2020 to migrate subscribers to fiber technology, as well as to increase the bandwidth capacity of our network resulted in 54% of our customer base getting a 50 meg speed [ higher ] compared to only 18% a year ago. In the same line, at quarter end, 45% of our subscribers are receiving their service through our FTTH network. The Video segment added 49,000 net adds during the quarter totaled 3.6 million subs, while on the annual comparison, it increased by 2%. Our new generation platform, XView recorded 650,000 annual net additions and 207,000 sequential net additions to approach 3 million TV outlets. 60% of our subscriber base already joined this service [ in the contact ]. In the same line, telephony subscribers grew 11% versus the third quarter of 2021, reaching almost 3.3 million and recording 129,000 net adds on a sequential basis, mostly due to the bundling strategy of the company. The MVNO service recorded 65,000 net additions in the last 12 months. It is important to mention that this represents a sequential decrease derived from the conservative approach we have maintained in recent quarters in terms of adding new subscribers, as we seek to prioritize ARPUs, and therefore, higher revenue generation of our volume. In that sense, more than 82% of the total 410,000 active lines were postpaid customers. This mix has proven to support revenue generation, as postpaid customers have a higher ARPU than the rest of the MVNO market. On the churn side, following the normalization of several factors that affected the churn rate for the previous quarter, this indicated a decrease on a sequential basis with broadband at 2.3%, video at 2.4% and telephony at 2.5%. This becomes even more important when realizing the challenges of the current economic situation. Regarding ARPU per unique subscriber, it contracted slightly on a sequential basis because under our commercial strategy, new subscribers have promotional rates during the first months of these services, so that as these rates normalize, the contribution of new customers to revenues will grow, and they will be reflected in ARPUs. By segment, ARPU grew 1.1% year-over-year at the Internet service and 2.4% of video, while telephony was down 12.2% compared to the third quarter of 2021. Now the Corporate segment recorded its highest quarterly figure in the history of the company, reaching MXN 1.2 billion, a now outstanding 26% growth when compared to the third quarter of 2021. This was the result of double-digit growth across all the companies that integrate this segment, highlighting Megacable's performance in the connectivity service for the B2B market, as well as the higher revenue in the corporate and government markets in all. To conclude, the results obtained this quarter showed the greater growth trend that we expect for the following periods, as we continue to grow in those markets, where we already have presence and the contribution of new markets is gaining traction. In addition, our expansion strategy continues to make steady progress to reach more cities same that will be soon announced. With this, I conclude my remarks. Now I would like to hand the call over to Luis, who will shed broader color on the financial results.

Thank you, Raymundo. Good morning, everyone, and welcome. In the third quarter 2022, consolidated revenue grew in the range of 10% on an annual basis to more than MXN 6.7 billion, following the combined effect of a solid performance at the Corporate segment, a larger subscriber base achieved in the mass market. Compared to the third quarter of 2021, the Mass segment revenue was up 6% year-over-year, totaling MXN 5.4 billion, mainly due to the broadband and video growth of 8% and 5%, respectively, driven by a higher subscriber base, but this offset the 2% decline in telephony revenue. Compared to the third quarter of 2021, the Mass segment revenue was up 6% year-over-year, totaling MXN 5.4 billion, mainly due to broadband and video growth of -- sorry, I am skipping a line. Regarding Corporate segment, during this period, revenue grew 25% versus the third quarter of 2021, the largest growth rate for the quarter since the end of 2019, to reach MXN 1.3 billion, supported by the strong performance of all businesses. Metrocarrier revenue increased 34%, positioned as the highest growth rate in the segment, while ho1a revenue rose 17%, MCM climbed 16% and PCTV increased 12%. Metrocarrier revenue for the quarter includes onetime revenue contracts for around MXN 50 million. Excluding those, pro forma revenue growth will have been a healthy 25% growth. Cost of services for the quarter stood at 13% year-over-year, reaching MXN 1.8 billion. This was due to the overall growth of the company, including higher bandwidth capacity and the growth of the MVNO business. In the same way, SG&A increased 15% versus the same period last year, totaling MXN 1.7 billion, mainly due to the inflationary pressures, higher wages and activities costs, coupled with the expansion of the company. Consolidated EBITDA went from MXN 3 billion in the third quarter 2021 to MXN 3.2 billion this period, growing 5% with a margin of 47%. As Enrique mentioned, margin is going through a pressure period effect inherent to our growth and investment strategies, as we have been increasing our operations capacity to support the broader following periods, thus having an upward effect on cost and expenses. Furthermore, despite registering a solid increase in the net adds, most of them count on promotional rates that temporarily affect our profitability margin. Therefore, as we continue to add more subscribers and that promotional rates normalize, EBITDA generation will go up and margins should improve. Net income totaled MXN 823 million this quarter due to a higher depreciation and interest paid items, in line with the investment we have made and the higher level of debt recorded as of quarter end. Moving into the balance sheet. Net debt increased from MXN 4.3 billion in the quarter -- in the third quarter of 2021 to MXN 10.3 billion at the end of this quarter as a result of higher gross debt and lower cash and equivalents balance in line with the investment that Megacable has deployed to drive this expansion plan. Because of the above, net debt to EBITDA ratio and interest coverage ratio stood at 0.81 and 11.18x, respectively. Regarding CapEx, following the investment required by our expansion plans, this reached MXN 2.7 billion, representing 41% of quarterly revenues and 39% year-to-date. Finally, the solid fundamentals of the sector, together with the positive recovery trend shown by the Corporate segment and incremental results projected for the Mass segment during the following periods will not only allow us to overcome the challenges of the current economic situation, but also drive us a greater generation of value for the benefit of all our stakeholders. With this, I conclude my remarks. Now let me turn back the call to the operator to open the line for questions-and-answers. Operator?

[Operator Instructions] Our first question comes from the line of Marcelo Santos with JPMorgan.

I have 2. The first is a comment, I wanted you to comment a bit deeper on -- you said that the contribution of new territories is not what you expected. Is this because it's taking longer time to deploy the network because the economic situation is not as good as expected, it's because of competitive environment? If you could just say more clearly what is behind your expectations and how do you see that affecting the whole plan? And the second question is on margins. So I understand you were facing some margin pressure because you're deploying infrastructure, you have costs, you are bringing in users with discounted ARPUs in the beginning, they have discounts [ when ] joined. But could you -- could we assume that you're kind of reaching the bottom of margins because from now on, you're going to start adding subscribers at a faster pace and dilute those costs? Or should we still see further margin pressure in the next couple of quarters?

Thank you, Marcelo. Thank you for the question. This is Raymundo. Your first question regarding the [ status ] contribution of the new territories and the plan, yes, we know you were expecting more than the 450,000 home pass that we have. What we can tell you, as Enrique mentioned in his opening remarks, we have much more kilometers built and it's part of our CapEx that is already -- already said. The problem we have, and we want to be very clear, is regarding the time of electronic equipment to be received and to be activated. So you can expect from the fourth quarter to have a much more larger amount of home pass and kilometers to be activated. We are very confident you will find them. And nothing has changed with the expansion program that the company had not for the fourth quarter and not for 2023. What we expect is to have a much more larger base of contribution to the kilometers when compared to the company. That one you can count on that. So it's -- nothing will change because of competition and economics, nothing related to that. It's just a matter of execution regarding to the ability to have the hubs, the sites, deals and those kilometers with electronic activated, Enrique was very clear. We already activated 11 cities, as we speak. We are opening 30 more new territories with different sites of -- by year-end. And those will be between October and December, mostly will be in December because of all the electronic I'm telling. So being very clear, you will have an increase in kilometers and home passed for sure, and you will continue to have that, that in 2023 because nothing has changed in our expansion plan, okay? The second one, I will divide that between myself and probably Luis with regarding the margin pressure that we have. We always say that we will have pressure once we enter new markets. We have to get broadband. We have to pay network. We have to pay electricity. Everything related to the fixed cost of the network with an operating system with few subscribers because we are beginning to sell. Even so I want to be clear that the response that we have in those markets has been really positive, and we will talk about that later on. We are very, very happy about the results of the expansion, but we're just offering those, those territories. So it's normal that the margin of those territories is below what we have. But those territories that we opened in 2022 will recover the margins that we have, and we normally have in the past. We will have new territories that will put pressure. So we don't expect to be below those 2 points of the margin that we already reflect in this report, and maybe you, Luis, want to say something else or I was very, very, very detailed on my answer.

No. And in addition to this temporarily less efficient operations on the new markets, you have to take in consideration that we are growing faster in lower-margin revenues, I mean, the mobile business and the corporate business has had lower margins than cable operators -- operations. So that has to do also with the impact in margin for the quarter.

Just to clarify, 30 new cities, 3-0.

3-0. You can count cities, everything that has houses, towns and people living there. So without that [ job ], there are some important things that you will see, and of course, other ones that are of a smaller size. But our first plan is to go for the main cities of our country that we did not have. So the majority are some large cities around all the territory, not I don't want to say in the north in the [indiscernible] or in the central, it's all around everything that makes economic sense and midsize cities that we feel and we believe that they are not well covered by our competition and where we have very successful being sell in the first phase of our expansion plan that we already opened this year.

Our next question comes from the line of Alejandro Gallostra with BBVA.

I have a few questions. First, I see that you connected 84,000 unique subscribers this quarter. What's the percentage of those new homes connected that come from legacy regions versus new regions? That's my first question.

Yes, Alejandro, thank you for the question. From the subscribers that we have, what I can tell you is that out of the growth of the -- and let me talk about the year-end, what will have happened here. We have growth in the organic segment. We have not lost subscribers. We continue to present growth and our growth in broadband and some of the unique subscribers, mostly broadband is around 2% in the organic segments, where we have. The rest is coming from the expansion plan that we have. Let me jump into broadband, for example. In broadband, we have around 100,000 subscribers coming from new territories, plus some other ones that we have before that we start with a little test on 2021. So you can count on 100,000. That means that 80,000 is coming from organic. So 45% is coming from organic and 55% is coming from expansion plan.

So you mentioned one -- I'm sorry, previous example, broadband, you said one -- can you give the figures, I'm sorry?

Yes. That was the numbers for the year. For this quarter, out of the 80,000 unique subscribers as well, 60% is coming from expansion and 40% -- 65% is coming from expansion and 35% is coming from organic.

Okay. Regarding my second question, I see that you have passed almost 1 million new homes this year. However, you previously mentioned that you plan to pass more than 2 million new homes in 2022, you even mentioned between 2 million and 2.5 million new homes this year. Is this still your year-end target? And related to this question, you have spent $400 million in CapEx during the first 9 months of 2022. How should we think about CapEx going into Q4?

Sure. You can expect, let's say, that our floor is 750,000 home pass, and we are targeting to reach that 1 million. So you can go between 750,000 home pass and 1 million for fourth quarter this year.

Additional.

Additional, yes. Luis, I don't know if you want to take -- Luis, you want to go...

Let me clarify on that -- the active kilometers so far, our expense plan. The kilometers, lot of the kilometers are built already. The problem is the electronic and the site. We've been -- the delay is there. The supply chain for the electronic is the one that has been affecting mostly the project. But we are starting to receive that delayed electronic already. So that's why we will activate those kilometers that are already built, but is they are not active. That's why Raymundo is giving you somewhere between 750,000 new homes passed and 1 million new homes passed for this quarter. That doesn't mean that we will build those territories or they are -- we will actually build those. A lot of them is -- have been built already. And yes, for 2024, you should expect the same level of CapEx.

For '23.

For '23, I'm sorry, you should expect that.

For the fourth quarter...

And for the fourth quarter is in line with our expectation and our projections that will be around 40% for the year.

40% of the annual CapEx will be in the fourth quarter, okay.

[indiscernible].

And one quick question, if I may. Can you please give us more color on what's behind the significant quarter-on-quarter pressure in ARPUs. You mentioned that it's because of initial promotions in new regions and that eventually, these ARPUs should recover. But if you continue into new regions with initial promotions, we should continue to see pressure in ARPUs going for several years. Is that correct? Or how should we think about that?

Remember that the promotional rate catch up is temporary. So we have very 2 steps. The first one was a very aggressive promotional rate that we put as we enter the markets. That one has a period that is going to finish. And as soon as we finish, we have to go soft. That's the strategy that we have and now that we're facing in those systems, where we already have more than 6 months, okay? We will adjust our promotional rates a little bit higher than that, so we can increase our ARPUs. Of course, there's going to be pressure on ARPUs going forward because the amount of kilometers of the expansion plan for the fourth quarter and 2023, like Enrique said, okay? It's put a lot of new subscribers into promotional rate. But we plan to shorter the pillars of that promotional rate. So the hit in the ARPU is not that strong. What I'm trying to say and what I want to say is that we expect the ARPUs to stay pretty much, where we are right now, regardless of the pressures that we have for the new territories. How are we going to do that? We still have some room in the organic and on the subscribers that we acquired at the beginning of the period of 2022 to increase rates on those territories. I don't know if I'm clear on that, Alejandro.

Yes, very clear.

Our next question comes from the line of [ Ricardo Oviedo ] with GBM.

Regarding the margin -- this quarter's margin, could you -- if we excluded the expansion cost, what would your margin look like this quarter? And additionally, I mean, your leverage has been going up. Do you have any maximum leverage ratio that you're willing to reach?

Well [indiscernible], yes, regarding the margin for the organic cities, there's always a reduction in the margin in the third quarter and the fourth quarter. It's a seasonal thing. But it will still keep close to the 50% that we have presented on previous years, 49% to 50%. And again, remember that we have been growing other lower margin operations in corporate and mobile.

And the leverage ratio.

And the leverage ratio, we still think that the 0.81x EBITDA is really low. So we think that we could reach, I don't know, if there's an M&A opportunity still in the country, which we don't see yet close, we can go up to 3 or 3.5x without suffering to start with. And...

But that doesn't mean we're going...

No, no, no. That's what I'm saying, there's no M&A opportunity. We're not getting into those levels. But I think 1 to 1.5 will be very, very, very easy.