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

Good morning, and welcome to Megacable's First Quarter 2023 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. Good morning, everyone, and thank you for joining us today. The special strategy that we have outlined in the company determination to keep performing in a competitive market have led us to start this year with a stronger pace in net adds than that of the previous year. We recorded the highest quarterly figures of net additions in Unique Subscribers in RGUs in the last 2 years. This quarter, we have entered into 7 new territories and expanded our network coverage to more than 900,000 additional homes on track to meet our goal of 2.5 million homes for the full year. This sustaining -- thus sustaining the growth in subscribers for the coming periods. The expansion strategy is now consistently being reflected in the number of kilometers we activate, which during this quarter, also reached a record high figure in the company's history. I want to highlight that following the announcement of this ambitious initiative at the end of the third quarter of 2021, we have effectively activated more than 16,000 new kilometers of fiber network and added nearly 3.2 million new homes passed. Also, during this period, we have already incorporated nearly 440,000 new subscribers, including a big portion in the new territories. We believe that these results are right encouraging, especially considering that 80% of those subscribers signed up in the last 9 months. We are thrilled about it. And we are thrilled also what we can achieve in the next periods. Also, very relevant, the company's balance has remained at a very healthy levels despite the investments we have carried out. The company leverage remains well below when compared to other players in the industry, thus providing Megacable with flexibility to carry out its investment plans. The significant investments made to reach new markets and modernize our network has played a significant role in subscriber growth, which has occurred in the midst of a repetitive environment. Our legacy territories have continued to grow with the back of our unique value of our products offering, both territories have contributed to the subscriber growth we have achieved, which as said is the largest figure in the last 2 years. We have always been committed to providing our service to the state-of-the-art technology in order to meet the growing connectivity and billion needs of our subscribers. Such is the case of our video service, we wish thanks to our integrated XView and XView Plus platforms, has positioned itself for the best in the market with unhatched integrating or integration capabilities. We have now -- we are now certain that our customers recognize and value our service, which continues to have excellent feedback as well as user metrics. As of quarter end, XView is recording more than 90 million interactions on a monthly basis, as that is considering only the native content that Megacable provides to its subscribers. On top of that, we have all the content coming from the other OTTs that can be integrated into our service, which at quarter end account for more than 670,000 users. Regarding the MVNO business, during the quarter, we have -- we were able to revert the trend we saw during 2022. The active lines growth is now more visible and it should rise at a faster pace in the next periods. It is also important to highlight that MVNO ARPU has become one of the highest in the industry due to the business' focus on postpaid services. Despite the company's expansion during this quarter, we managed to reach another record high EBITDA figure, which proves that given in this investment scenario, we have not lost focus on efficiencies and cost savings, which has been part of the company's DNA since the beginning. As we continue to increase the penetration in new territories, we expect margins to recover in the coming periods. Before concluding, I would like to announce that at the General Ordinary Shareholders' Meeting held yesterday, the shareholders approved a dividend payment of MXN 2.5 billion, representing 20% of the consolidated EBITDA for 2022. The payment will be carried out in one installment on May 25. Wrapping up, our results continue to improve in line with expectations, driven by a strong execution of our strategy. Despite persistent economic headwinds, our financial strength and disciplined capital allocation have provided the flexibility to accelerate critical investment projects and sales, high return growth opportunities with growing -- while growing our shareholders' future value. I will turn the call over to Raymundo to discuss our operational performance. Raymundo, please go ahead.

Thanks, Enrique, and good morning, everyone. During this period, key operational metrics showed faster growth than previous quarters, reflecting a solid pace of additions in both new and existing markets as well as the attractive value proposal of our portfolio of solutions, even in the face of a challenging inflation environment and increased competition. As Enrique mentioned, we remain focused on expanding our coverage which is already consistently reflected in the kilometers of network that we have added in recent quarters. We will continue to work to ensure that this growth can be replicated in the same dimension in subscribers and revenues growth for the company. Both of them will grow at a higher pace in the next periods. Unique Subscribers growth has been outstanding. We are truly very happy about it. In the organic territories, Megacable not only retained the highest market share with a very strong penetration, but also managed to increase subscribers. While for the expansion [indiscernible] we are already achieving close to 20% of market share with some of the old neighborhoods in [indiscernible]. Our strategy is based upon great quality of construction, outstanding product base on the XView -- based on the XView platform with the Android TV interface and operational efficiencies. Furthermore, the market perception and our research stories validate the increase of our Net Promoter Score among existing subscribers, recognizing speed migration and net usage. I would like to highlight that in line with the current footprint expansion, but also supported by the growth achieved on the existing footprint, the figure of gross adds for the quarter was a record high in the company's history for the 3 services in the mass segment. We continue to apply a very aggressive sales strategy focusing on highlighting the benefits of our services and the value proposition we offer to our customers. Moving to results. Unique subscribers for the quarter increased 9% year-over-year, the highest figure in the last 2 years, reaching 4.5 million with 361,000 net additions, including 142,000 that corresponded to this period. By segment, Internet subscriber grew 10% compared to the first quarter of 2022, totaling 4.3 million, resulting in 392,000 net additions, out of which 147,000 corresponded to this period. We are aware of the bandwidth consumption trends, which will require higher speed for a satisfied navigation experience. Therefore, we continue to do speed increases in all of our bundles. At quarter end, 65% of our subscriber base has a speed of 50 megabytes or higher compared to a little above 50% in the same period of last year. At quarter end, 52% of our subscribers already received their service to an FTTH network. As a result of the deployment of fiber in new territories, but also the converse version we continue to carry out in other HFC territories that we consider necessary. Currently, 50% of our network is already FTTH. Video subscribers reached 3.8 million, growing 6% and adding nearly 220,000 versus the first quarter of 2022. In the sequential comparison, it came 86,000 net adds. Our Xview Plus platform maintain a solid growth rate going from 2.5 million subscribers at the end of the quarter -- first quarter of 2022 to 3.7 million this period, an increase of 46% or more than 1.1 million net additions. The Telephony segment recorded 3.6 million subscribers, growing 16% compared to the first quarter of 2022, representing 489,000 net additions, of which 174,000 corresponded to this period. The MVNO services totaled 377,000 subscribers down year-over-year but up 6% against last quarter with 20,000 net additions. As we stated in the previous quarter, the growth in terms of new lines is now visible, considering that we have already concluded the cleanup strategy. We are proud of the subscriber mix that we have achieved, including mostly postpaid services with a very attractive revenue contribution, those making us one of the companies with the higher ARPU among the MVNOs and also MNOs. Churn rates improved on an annual basis with broadband at 1.9%, video up 2% and telephony up 2.1%. In this line, it is worth noting that despite the entry into new territories, the churn rate for this quarter remained below first quarter 2022. At the end of the quarter, RGUs totaled 11.6 million, 10% more than the 10.5 million for the first quarter of 2022, supported by a stronger growth of subscribers, mainly derived from our expansion and reflected in the RGUs per unique subscribers which went from 2.52 in the first quarter '22 to 2.56 this period. Both metrics are expected to steadily grow over the next quarter as infrastructure development advances in new markets. ARPU per unique subscriber was MXN 420.4, remaining stable compared to past quarter. This is mainly due to successful marketing campaigns that have offset the promotional bundling fees, we are offering in the new markets, which are temporary. So we can expect the full contribution to the company's revenues in the following months. Turning to ARPU by segment. Broadband remained practically unchanged compared to the first quarter of 2022. Video rose by 2%. Telephony decreased 17% and MVNO increased 40% as a result of the customer base optimization. Regarding the Corporate Telecom segment, revenues for the quarter grew 17% when compared to the same quarter of the previous year. With MetroCarrier, ho1a, and MCM, reporting annual growth rates of 17%, 24% and 14%, respectively. This was mainly due to better revenue coming from the corporate and government segments in MetroCarrier and ho1a, respectively. I want to highlight that the company is not only focused on the expansion initiative but we are also committed to reinforce the value proposition in our existing territories as we continue with the network conversion and strength of the HFC network. Our vision remains to have the best technology and network infrastructure. So our conversion plan remains in its course. To conclude, I would like to emphasize that the company's strategy remains oriented towards providing an attractive value offering featured by its quality and technological edge, all the above, leverage on operation, operating efficiency through the execution of our expansion plan and the migration of existing territories and the continuous development of our video services. 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, and welcome, everyone. During the first quarter of 2023, consolidated revenues rose 9% year-over-year to MXN 7.2 billion, driven by the solid performance recorded our 3 Mass services, coupled with the double-digit growth in the corporate segment. The Mass segment revenues for the quarter was MXN 5.8 billion, increasing 7% year-over-year. Revenues for broadband, video and mobile services posted annual growth rates of 9%, 8% and 26%, respectively, reflecting the stronger subscriber growth in new markets as well as in our existing footprint. Meanwhile, telephony revenue fell since its use is further declining as customers opt for Internet and mobile services. The Corporate segment revenues totaled more than MXN 1.3 billion, up 17% compared to the first quarter of 2022 with MetroCarrier, ho1a and MCM, growing at 17%, 24% and 14%, respectively. It is important to note that ho1a revenues for this period is normalized since the previous quarter was exceptionally high. In the same line, revenues for PCTV increased 15.7% when compared to the same period of last year. As a result of all the above, the company's revenue mix was 81% coming from Mass market and 19% coming from Corporate. Cost of services reached MXN 2 billion, up 17% year-over-year, while SG&A rose 15% on the same comparison amounting MXN 1.9 billion. The aforementioned was mainly derived from the undergoing expansion of the company, coupled with a higher labor cost as a result of the increase in the minimum wage and the operations in the Corporate segment with lower margin contribution. Quarterly consolidated EBITDA went up 1% year-over-year, amounting to nearly MXN 3.3 billion. EBITDA margin for the quarter stood at 45.7%, implying an expansion of 230 basis points compared to 43.4% in the fourth quarter of 2022. In the same line, quarterly EBITDA for cable operations reached MXN 3.1 billion with a margin of 47.3%. The performance of these metrics is consistent with the expected pressure in costs related to the expansion into new territories. Net income decreased compared to first quarter of 2022, amounting to MXN 797 million, due to the high depreciation resulting from the substantial investments made over the last few years as well as the higher financial expenses derived from the interest rate hike and additional debt taken to accelerate growth projects. Nevertheless, it is worth mentioning that the net income on a sequential basis hike a 43% from fourth quarter of 2022. Moving into the balance sheet. As of March 31, 2023, net debt was MXN 14.4 billion compared to MXN 4.8 billion recorded at the same period of last year. The increase comes from the issuance of long-term local notes for MXN 7 billion in July 2022 and additional debt arranged to accelerate our expansion plan. Nevertheless, net debt-to-EBITDA and interest coverage ratios stood at 1.12x and 7.2x, respectively, remaining at the sound level and still providing us with a wide flexibility to fund our growth plans. As for CapEx, the figure totaled MXN 2.2 billion, representing 31% of quarterly revenues and the majority allocated to our geographic expansion and network modernization. The current level of CapEx is below the 40% mark as the investment deployment is usually slower at the first month of the year. So we remain with the same target for CapEx deployment for the full year rounding 40% of revenues. With this, I conclude my remarks. Now let me turn back the call to the operator to open the line for Q&A.

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

Good morning, Enrique, Raymundo, Luis. I have two. One is, if you could provide a bit of what has been the competitive response in the new areas that you are entering? How has been the environment in these areas? And the second, if you could comment a bit on the price increase you conducted or you will conduct, I think, on in May, what -- how much of an impact could that be? What kind of magnitude are we talking about?

Sure, Marcelo. This is Raymundo. As I stated in my remarks, we are very pleased about the results of the new territories regardless of competition. We are not targeting to a price war, but more of a quality of the products and the XView platform. We have very aggressive promotional campaigns, but not really below to most of what we have in the existing territories of Megacable in that part. Right now, we can tell you that we have around 13% penetration of those markets regardless of the 950,000 new home passed that tells you that in some of the territories, we already achieved 20%, penetration. And when we go to market share, we're very happy to have -- our goal was to have 1/4 of the share, trying to hit for more than that. We're getting that after pretty much 3 quarters of what we have of the expansion program. If you can go through our numbers, we added less than 500,000 home passed in the second quarter last year as well as the third quarter, and we increased to 900,000 in fourth quarter and again 900,000 in this quarter. So pretty much even so we announced the expansion program at the end of 2021, we really started performing at second half and at the end of 2022. So, right now, our market share and penetration, it is really well achieved on that part. We have a much more better market share, is still because we bundle very efficiently with our XView platform, which not only is based on the quality of construction of our new network, is one of the reasons, but also the way we -- we're very efficient in how we commercialize, we do the go-to-market and also the product of the XView platform. In those existing territories, I can -- we can tell you that truly majority of our subscribers, as you can see people play package. So one of our main advantage is also, of course, video. How our competitors are reacting, as I said, is not a matter of pricing. They are focusing on their existing subscribers and they are trying to retain them. But our job is to be very creative to see how we can do that go-to-market. The main goal for us right now is not only to build those home passed, but having the organization ready to meet now the capacity to have to sell. That's where organizational management is focusing right now to speed up the process. As you can see for our results, we increased the number of gross adds that we're very happy about that. It is incredible, a big challenge to go from, let's say, 140,000 gross adds per month to almost 180,000 gross adds per month that we have to do in the territory on that part. And we need to increase that number. That's where we're focusing. So we're very pleased to the results in the competitive in the new areas, regardless whether there is fiber or not fiber from the existing competition, whether it's Telmex, Totalplay or Televisa, we've been very successful so far as we are in the existing territories. Remember that in our existing territories, we hold the majority and the main market share that we have. Regardless the price increase, we are targeting order inflows to the beginning of May. It will depend on the market and the package that you have. Some of them will have a MXN 30 and other ones will have a MXN 40 increase. So you can add not only subscriber base, will have that increase. So the contribution will not be -- what we are expecting is to have a contribution of 3 points pretty much on the revenue coming from the price increase. You have to take into consideration that as we continue to increase gross adds, the number of gross adds has a promotional fee that is still below our [indiscernible] here, that's why ARPU losing more. So expect that EBITDA will grow, yes, in the coming periods to come on that part, as we are more efficient and also because of price increases, but consider that we will have a negative impact for the number of gross adds with a promotional fee. That will -- I will assume that, that will answer your 2 questions, Marcelo.

No, it's very comprehensive. Just one clarification on the first. You said that you have 13% penetration in some of the new markets in the average. In some markets, you got 20%. And then you said, the goal is to have, and then I didn't get the number of the goal.

Remember that when we launched and we announced the market, our goal was to achieve 20%. A 20% and having pretty much 1/4 of the new territories that was what we forecast and we plan as our, let's say, conservative or base goal. What I can tell you right now is that, that with only 2 quarters or 3 quarters in there, we are already in average, having 13% penetration. But in some of the neighborhoods, neighborhoods not system or markets, we have already achieved 20% penetration in some of them, which please us very much about that.

Our next question is from Carlos de Legarreta with Itau.

I guess you have pretty addressed this, Luis. But on the CapEx side, I was a little surprised to see it coming down year-over-year despite the fact that, as you mentioned, you added a record number of homes passed and kilometers. So I mean, I'd love to understand better the relationship between this, but I guess you did address that for the full year, you continue to expect a similar number now?

Yes, sure. And you have to take in consideration that a lot of our investment, and we mentioned several times that we placed orders ahead of time, and that was part of our inventory during the last year. And they were -- a lot of them were used to build network kilometers that we have been activating also during this year. So there was a backlog of kilometers and homes passed that were activated in this period. And that trend continues. We still have the inventory or warehouse cut, let's say, that is in the peak right now. And that shows the materials that we have ready to be deployed. And we are building new kilometers, and you will see them activated on second quarter. And in the second quarter and especially in the second half, you will see a higher consolidation of CapEx. Remember that CapEx becomes CapEx only when we activate kilometers.

Great. And secondly, I guess thinking about financing and given the dividend that your shareholders' meeting just a group, I suppose you're going to go for more debt. If you can talk about how those negotiations are going, that will be helpful.

Okay. Well, yes, and that's right, you are right point. And we are going to get additional debt within this month. And the month of June, we are going to have additional debt with the banks. We already signed and we are disposing or getting the money on April, and you will see that further information. We are getting ready for all the investment and not all the disbursements that are ahead of us. So yes, we are on top of that, and it's already arranged and we don't see any trouble on that. And we see, of course, that our net debt ratio is going a little bit up, but we are still on healthy levels.

But are you going to do that with only through banks? Or are you going to continue with the bond program?

The bonds program is targeted for next year. So, we -- remember, the next year also, we have a deal with bank credits. So we have to refinance that, and we will do through the bonds and additional cash for CapEx for the next year. So the bond is targeted for next year.

This is Enrique. Everything is going according to what we have planned, the financial plans, the subscriber acquisition, the CapEx we have been exercising. And on top of that, we have been more efficient in our CapEx than probably we had planned and also the number of homes passed that we are reaching is larger. So we are happy with the results and the execution with -- that the equipment here has been doing.

And exchange rate has given us some help as well. So that's part of...

Our next question is from Andres Coello with Scotiabank.

The first one is on the Corporate segment, very good growth there, 17% revenue growth. But with very low margins, partly the margin that we expect 20% in the first quarter. So why is the margin so much lower than residential and perhaps you can give us a long-term view on margins for the business segment? And I have another question.

Yes. Andres, basically, when the mixing our revenues in corporate are -- or the mix is more on equipment, of course, you cannot charge a large portion of margin on those. And ho1a was one of the biggest drivers in the Corporate segment. So that is also a mix together with some reduction in the margins of MCM and that's also seasonal. And our expectation, as I've mentioned by business is that margins for MetroCarrier will be around 40%, 45%, which is higher than MCM gets margins between 30% to 35%. Ho1a is really on the 13% to 15%. Most of the time, PCTB is basically flat or margins of 3% to 5%, which is not the -- their goal is not to be a high-margin entity. So those are basically the drivers. And of course, mobile is also lower margin than the other massive market services.

For that one, Andres, regardless the margin that we have, as you are aware, for MCM and MetroCarrier is higher, the one that which is explaining you is ho1a, that is, it's one that has more projects related to infrastructure. That's when you hit pretty much around 15% to 20%, close to 20% of market. The other ones even in the Corporate segment, the margin that we have close to 45% in MCM, with 43% in MetroCarrier higher -- are even higher than the peers in the massive market. So we're doing very well in Corporate as well and consider that every time we talked about margins in this company, we're really talking about full corporate margins, too. It does include any corporate that we have in Megacable is included on the margins that you are receiving for every business unit. So it is a pretty good margin what we have incorporated in that one. The MetroCarrier will continue to grow. Right now, our revenue, if you can see -- that was -- that was some years ago where I was dreaming to get to MXN 4 billion in corporate sales. Now we are above MXN 5 billion a year in that part. You'll see -- in this quarter, we saw at MXN 1.2 billion in revenues in Corporate. So we're growing every year. Every year 15% to 20% of that segment and I particularly remember, I'm very happy of what we have been doing in the segment where we -- is very competitive with some margins. We managed also to keep efficiency as well as in the massive market.

Okay. That was very clear. And my second question is on the strategy. Yes. My second question is on the strategy. if I look at Totalplay revenues are now 40% bigger than yours and that you have invested 2x your CapEx. And I'm asking this question because when I see your coverage maps, for example, in Tijuana, when I see Monterrey, when I see Cancún, do you think over the last week [indiscernible] almost 100% [indiscernible] following. They cover an area and then you go and cover the same area. So I'm just wondering, going forward with the rest of your expansion plan, would you continue to cover areas where the other countries are [indiscernible] in order to gain customers from them? Or are you looking to go into areas where mobile is present. And again, if you can just confirm to us why there is such a almost 100% overlap in the major cities with Totalplay, and also with Telmex, Izzi and with Televisa also in other cases.

Sure, Andres. And it's a very good question on that part. As I said, those markets that you mentioned on Tijuana and those markets were going with full MCPH, and we're going to areas where there is Totalplay, Izzi and Telmex, in some of the areas. Telmex, is already with fiber. The majority of the network of that part from Izzi is coming from HFC, DOCSIS 3.0 or DOCSIS 3.1. And then we have Totalplay with fiber. But our try is to be very efficient in the way we build. We are building to a much more better ratio of home passed over kilometers. That means our drops are shorter. We're very tight on the quality and the way we authorize and we'll operate that. And we're coming with the XView platform. In those areas where we are -- we have a better proposition in price. Totalplay has a much more higher price than what we have on that period. That's why we've been very successful in bringing subscribers to where we are. We need to bring -- we want to bring much more higher pace. We will do that as long as we have the structure, the organizational structure, not the product only to do that. In products, I believe our 19 million of the production of XView Plus, just in our platform like Enrique was saying in his remarks, prove that it's a very well-received video product that Telmex [indiscernible] have. It is way better than that what our competition has both Izzi and DOCSIS 3.0. And our net promoter score in those areas is the highest among of all the peers. We are working strongly -- is having those people in those markets to get to know the brand Mega, which is, of course, for all, for them, it's a new company. That's what is taking effort from our marketing department to get on the go-to-market. But as I said, we're very pleased of the results in the markets where we are already. Deep penetration that I told Carlos in his question before yours, we have to be very clear that we're reaching that penetration, of course, not of the whole area, let's say, of the Tijuana market, for example, but in the areas where we built. So we are still growing subscribers as long as we continue to build kilometers in the areas that we opened at the second half of 2022. So that's our strategy, and we're not going to move away from the book. It's against efficiency, good service, the good product that we have and a good quality of the network to be built. And yes, we are going to be the national footprint network with HFC, and with FTTH. We're going to double the amount of what we have in that part.

And Raymundo, let me ask you, do you think you have better quality than Totalplay? Do you have any data to support that you are delivering a better product than Totalplay?

Well, right now, what is being shown in the markets, Totalplay has a good quality of perception. They are in the markets where we have. The data is still very, very long to tell you because we are opening. The data that we have is that in the -- for the subscribers that we have, they are very pleased. And the Net Promoter Score that we have is outstanding for the customers that we have. We believe that we have a better service and the data is coming from our results on this market and some research that we do.

Andres, this is Enrique. For obvious reasons, we don't like to compare us with other players. Political risks. But -- our main goal is to have an excellent service that gives the subscriber the best value for the market, the best value out there for their services. In some articles, in the press or the media says that we do not have the best speed, which is -- we think it's a distortion news. Because the speed depends on what kind -- what's the speed that the customer buys or the customer gets from the -- not what the customer gets, what he buys, what he's paying for. Our subscribers, as Raymundo explained, we have been getting higher and higher speeds. And about what percentage is over 50 megabytes now?

65%.

65% is over 50 megabytes. The rest is under 50 megabytes yet. They will all move to higher speeds, obviously. In some cases, we do it without price increases. In some cases, they have to pay a higher fee. So if they don't get higher speed, it's because they feel they don't need them. Maybe they are not a subscriber of a streaming service. They are okay with the streaming service that we provide, the own Megacable streaming service that has over 15,000 hours of content. It's a VOD that has movies and series and news and a lot of things. They can do the reverse video, where they can go back 48 hours in most of our live channels. So the subscriber, a lot of times, they don't feel they need to pay for a higher speed. That's why our subscribers pay a lower -- a lower tariff, let's say, let's put it that way. But if they need a higher speed, they can get it. And they can get it very efficiently with very good quality. That's what I would like to explain. The market gets from us what they want and what they need.

And also look at the penetration of the companies in that part, Enrique says, we internally are very pleased, Andre, that we get above 40% penetration historically at Megacable, above 40%. We're the only company that is above 40% on that part. Now, we are the higher market share. That market penetration, not only market was a market share is way above 50% in the area where we are with FTTH and HFC. Now we're at 30s. After building so many, we have 12.5 million home passed that will increase coming from 9.5%. So we have 3 more coming from organic and expansion of our network to those 12.5 million home passed. We're still below the 17 or 19 that all companies have -- and of course, way below what [indiscernible] Look at the penetrations that they have in their markets. Okay. How they split? And look at the penetration that it is in Megacable market? Even with Totalplay TV into some of our markets for more than 5 or 6 years. Totalplay penetration is at 25%. Ours is a [indiscernible] With the mix of HFC and FTTH, and as I say, 55%, just 55% is FTTS. That proved that the other 45% of the HFC is very good, and we will increase that by end of 2023 to 70% of FTTH in the whole network of Megacable. So those are our results. We should be doing something good in terms of product quality and go to market that make us get that market share. And we're based on like Enrique said, external information and our information, and that's our position right now.

Our next question is from [ Bami Kanamori ] with HSBC.

My first one is regarding leverage. I mean I understand that you expected the ratio increase to the current levels. But where do you see the leverage trending, let's say, in 2023 and 2024? Because it's like the EBITDA ramp-up will probably take more time, but your CapEx spend will be very high. So I'm just trying to understand. I mean, if not the exact number, the range where you expect the leverage to be -- net leverage to be at 2023 and 2024. That's the first question.

You get that, Luis?

I didn't get the beginning of the question.

[ Bami ] is asking about the leverage of debt, if I could understand the question on that part and how we are over see -- how do we see 2024 in terms of what the leverage that we're going to have and when EBITDA is going to rebound and provide that. It is like Enrique said, [ Bami ], our plan -- our expansion plan and company strategies is going according to it. I mean, we're over there. We always target to increase leverage. Leverage is going to be increased this year and next year, that's for sure. Still, we believe that we will -- we look on our net debt ratio at around 1.5, below that if we can it is a very healthy well ratio. But we look at the EBITDA to continue to grow. And by the end of this year, we expect EBITDA in the expansion plan not to be negative, but to be positive, which is something that is affecting us in this result. Because we're still doing the go-to-market. 2024 is going to look completely different in that part. We will take that on that to continue to expand the home passed and the construction, but we will have EBITDA positive coming from the expansion areas that we have. And if you look at this company in -- from 2024 to 2025 and 2026, -- it is a really, really good view at the end of the time. I'd like to say that. Our EBITDA, for sure, we have no doubt that we'll continue to grow and our free cash position will start repaying interest by this comment. So our EBITDA less CapEx that we will maintain and not maintain -- maintaining the same level that we have, but as a percentage of revenue is going to decrease. We will have a really, really good position in the next 2 years after we stopped taking the debt and finish the buildup of the expansion plan. The expansion plan calls for 50,000 kilometers. That's what we announced when we have both coming from expanding territories and also from the existing ones we have, that we will continue to grow as we always do year-over-year. That will put us in a company with 17 million to 18 million home passed, and a really good size of EBITDA with a very low CapEx that we have and bringing down the net debt ratios to below 0.5, a very, very, very healthy net debt ratio once we repay interest or for whatever we want to do in 2 years. We will decide. So that's how we view on how we manage the Board to agree to these business plans. And we're very pleased management that is going according to expectations. And I hope you think the same.

[ Bami ] just to make clear -- this is Enrique again. The company plan is going according to what we forecasted. Our debt ratio will never go up above 2x EBITDA. We never go up that ratio.

Maximum, 1x.

Yes. In the worst case. We will never go above that, which is a very healthy level and very, very healthy compared to the telecom market peers that we have. And everything is going to according to our plan. We -- I mean, by the end of 2026, the leverage ratio is going to be extremely low. And the EBITDA is going to be much higher than what we have now. And we have our own product, what to do with the cash.

Yes. That's very clear. So my second question is regarding your ARPU per subscriber. So once your expansion plan is done and you reach your, let's say, your targets by 2026, '27. Where do you expect that ARPU per subscriber to trend? So if you can give us on what your expectations are, that will be great.

The ARPU -- the trend of the ARPU for the following, go ahead -- once we reach 25,000 subscriber base, normalized.

The ARPU will continue to increase on that part. It did not increase in this quarter because the number of gross adds from the new territories and those new subscribers has a promotional fee during the first months to attract subscribers. That's very normal in the industry. So as long as the number of those adds compare to the base of Megacable, let's say, if you are adding gross adds and selling 150 million, 160, 170 over the 4.5. If you continue to do that in the future over a much more higher base, the contribution of that low ARPU subscriber will be lower to the whole existing company. So you can expect the ARPU to continue to increase. It's going to come that increase because we're going to do rate decreases because our ARPU is the lowest in the industry. Because we continue to increase the adoption of XView Plus and apps. Right now, we have around 650,000 apps, which is not part of the -- is not the XView but is third-party apps on that part. We grow 10% just in one quarter compared to what we had before, and that's contributed to the increase in the ARPU. So as long as we stabilize that, you can bet our ARPU is going to increase.

Our next question is from [ Raul Fernandez ] with Interactive.

My question has been answered in the previous comments.

Our next question is from Luca Brendan with Bank of America.

So my question is regarding margin expansion on cable. The EBITDA margin had a little bit of a decline in the last 2 quarters. So I just wanted to get more color on what have been the drivers for that? I know there was the expansion plan and also expansion in mobile. I wanted to know if there was something else to consider here? And also looking forward, how we can think about those margins going forward? More expansion, margin should be pressured even further and also with mobile growing more, this could also affect it.

Yes. Look, you are right at the point, basically, the cost for the reduction in margin in cable operations comes from the expansion plans as we have less efficient territories. On the territories we are just starting. We are not really expect to have the same number of subscribers per kilometer since day 1. So that -- there are some fixed costs and fixed expenses of salaries that we have to face in day 1 for those territories. And that makes -- that hits the margin overall on the cable operations. And as you also mentioned, the mobile services have lower margins. And as they grow, they will pressure a little bit the margin. And there were also some non-recurring things that came on Q4 mainly that impacted. But that most of the impact comes from the expanding territory. And Raymundo?

And Luca, let me complement what Luis is telling you. He has, of course, all the details on that part. And what we see is that those levels that we have before 49 were great levels. We would like to go back to those. It's going to be tough to get to that 49 back again. What we -- and you can see on your numbers is that we took a 4-point decrease in margin because of the expansion. Now we are pretty much 3-point below to what we are at. We feel for everything that Luis is telling you, a corporate segment, growth of Corporate segment, growth of MVNO, different pressures that we have in OpEx, whatever. We feel that we are going to continue to have -- you compared to that, the EBITDA best margin in the industry. And it will be between 47% to 48%. That's what we feel. Of course, I will tell you closer to 48% instead of the 49.3%, 42% which is killing me. But that's how we see that. We see that the main expansion and the hit that we have in 2020 to second half was to build all the infrastructure, not the variable kilometers of network, but to build warehouses, warehousing operational offices, getting the organization in place to be able to sell. Now it's variable kilometers on that part. We should be much more efficient in order to bring that and those areas continue to increase penetration. So our margin in those areas will continue to increase. The margin was hit because of the expansion not because of Megacable in that part. So you can expect the levels that we have right now because of the expansion, but we will come back to close to where we were after we finished the expansion part of the project.

Our next question is from Alejandro Azar with GBM.

First, just a follow-up on questions on CapEx. If I recall, if CapEx is going to go back to the 40% to sales over the rest of the year. And Raymundo, you mentioned the price increase was going to have an impact of 3 percentage points on revenues. That's the first one. And the second one is on competition, what are you seeing on competition in your expansion plan? Because we're hearing from other players that they are being more careful on users growth. And the last one is -- and I don't know if you have already answered this, but on cost and margins, you mentioned operating leverage will take you to better margins in the next couple of quarters and years. But as new promotions get, this hurts your ARPU momentarily. So when do you think -- is this '24 or '25, when the company has a more robust operating leverage and then we could see a higher EBITDA growth.

Yes. Like Luis said, we are still growing and targeting that 40% CapEx. We want to build the rest of the 2.5 million compounds that we have for this year. That's one where we are and the CapEx will come also from subscriber CPE equipment, not only from networks. So as long as we grow, we have that pressure. Yes, as I said internally, and those subscribers who are aiming 3 basis points of the price and the rate increase that we have. But that's not going to be the main reason for growth in the EBITDA. That's going to compensate the new subscribers that has a lower ARPU. So you cannot account that the 3% is going to keep this straight to the revenue because some -- or the ARPU, because of some -- or the majority, all of the new subscribers will come with a lower ARPU. And as you know, we're increasing gross adds. So what I'm trying to explain is, as long as with the gross adds continued to increase, they will contribute with a lower ARPU to the existing one. So you have to compensate ARPUs in between subscribers with low because they are new and promotional with rate increases and also with the sales of ads and the takeup on RGUs per unique subscriber. That's how we're going to drive.

Raymundo, If I may, would you remind us the promotional period, is that 3 months, 6 months?

The majority of the market will have that for 6 months. We see it pretty much what the competition does. I mean, we're below competition. Competition comes with, in some parts, with 12 months time, in the majority and in some more conservative 6 months. We believe which will -- we don't have to go to 12 months. We can stay in 6 months on that part. That's our strategy. And that's how we reached 147,000 gross or increase in broadband subscribers in the quarter, which was the highest among the peers by far. And we did that, with the lowest amount of home passed compared to our peers. So checkup penetration and the growth that we have compared to home passed. And again, we're very, very pleased with the results. Competition you say is careful about what they seem to [indiscernible] Well, some of them announced they are not going to spend home passed and other ones are spending 1/3, 1/4 of what we're doing in our plan. We're not planning to move to where we are because of the good results and the problem that we have on that area. And what I say about the margins is the margins are going to continue to be pressured, okay? In this coming part because of the expansion program, the huge amount of kilometers are home passed and subscribers coming on the quarters to come. I did not say that it is going to be a rebound in the next quarter or 2 quarters to come. I'm saying that it's going to come in the quarters to come. I will tell you that 2024 will look well much more better in terms of margin. But for me, it will be more important to tell you that we went down to 40% -- 44% margin in the last quarter, now we're up to 45%. So that's a level only 3 points below to what we have before 4 points to what we have before with regardless of getting a company that goes from 9.5 million home passed and it's going to get to 17 million or 18 million home passed. Regardless of that big growth, we only took 3 basis points before and still are way above our peers. So that's where we will continue to focus in having efficiency. Regardless of what I'm telling you, we continue to look into ways to improve efficiency in terms of cost and expenses. All that say, I would like to keep it to ourselves. We're very tight in cost, but still we are looking for better productivity of our employees and better automatization of the operation that will bring us. So that's our view of the company Megacable.

Very clear, Raymundo. One more, if I may, to Luis, thinking perhaps '26-'27. How would the CapEx ratio to sales look without growth? What is the maintenance -- purely maintenance?

Sure. And we consider that our margins are going to be -- sorry, our CapEx to revenues is going to be rounding 20% and maybe below that, below.

Below that.

Yes, because that 20% includes still grow the right boxes, new clients, but purely maintenance, would that be like 15% or lower?

Not below 15%. No.

That will include, of course, the few kilometers that will be built after that, we will still be building new kilometers as the cities grow, we will include them, of course. So it's tricky to specifically get to 15%, as you mentioned. So we will say that it will be between 19%, 20% overall and including some growth at the end when we are done with the new cities.

Let me justify why we believe that to the conversion of the network in terms of going from FTTH 2.5 gig, that's what we have right now to 10 gig for FTTH, that is in the way that will come on the migration in years to come, not now. I'm telling you in years to come, is really cheaper because you don't have to do anything to the external cap. You don't have to change any passive part of the network, not fiber, not fabs, not everything, where the customer is connected. Besides that, our CPCs or the OTTs, daily 1 CPCs that we have, with the 4K capability will not have to be replaced in our opinion, in years to come -- in some years to come. So our investment in CPC is also cheaper to what we have between 2020 and 2022. Our CapEx would sure get between 15% to 20%, and that's what we're targeting with management of EBITDA of 47% or 48%. So if we looked at double the size, as we said, or increasing the number of kilometers of home passed, I'm sure we get to the penetration rate of subscribers, which sure we look very good into '26 and '27 timeframe.

Our next question is from Alejandro Gallostra with BBVA.

I have a question about pricing. You've mentioned multiple times the European discounts in order to gain traction in new territories. But could you tell us what the discount that you're offering in this new territories and how these prices with and without discounts compare to the prices of your competitors? And how'd you [indiscernible] that you will not initiate a price for? And also, I also like to know what's been the churn experience in these territories after all the discounts ended?

I can tell you, for example, in terms of the double play that we have, and we have good speed and we are target below what other companies have, for example, Telmex in that part, our double-play pays at MXN 350 with 50 megabytes, is very competitive. It's the same price that we have in the existing territories. Our triple play below what the competition has. Subscribers of Totalplay and Izzi has an ARPU. The ARPU form, as you can see the ARPU that they have. So we're targeting below that. And we do that in every market that we have. Because we are in organic -- inorganic is below, what they have in their existing territories without them having our competition. That's why we managed to have the penetration that we have coupled with the product and the network that we have over there. Right now, we're selling at MXN 400 and MXN 500 regarding whether it is double or triple, or whether you put a credit card, those part of the little details, I can tell you that we are below the ARPU that they have by around 10%.

That's with the discount, Raymundo?

With the discount, you take MXN 50 less, that's what I'm telling.

So that we are below over 10%.

Over 10%. On the discount. Once they think to have that, okay, after the 6 months, we're only MXN 10, MXN 20, MXN 50 below competition looking into different territories. We don't want to start the price war. We want to continue to have our existing pricing structure when we finish the promotional rate. What I can tell you is when they finish that they pay the same that we have in organic pretty much. So some of the research that you can see, there are shows that Megacable subscriber target to the lowest ARPU. So that's why we have the highest penetration, the lowest income in the house. And that's why we're below competition across all the different systems that we have. So we don't make any big difference once we see the promotional period, they will have and are very similar of what we have in our existing territories, which, of course, tried to increase with adds and rate increases. And the second part you asked about the churn. The churn when you start very aggressive campaign has 2 components. One component is from people that face the promotion and disconnect in the first 60 to 90 days. We have that very clear and identified. But what I can tell you is that when we pass that promotion from those sales that we do, which is normal. It's part of the scrap that we do in the first 60 days of something that is coming from the market. When we got that churn, it's below to what we have right now, slightly below to what we have rented. So it is very, very good level of churn in the expansion categories.

Okay. That's great. So it's my understanding that once discounts and the pricing won't be -- will not be that different from your competitors. So how do you plan to differentiate your product from the rest?

As I told you, we have the 3 access of the -- of our strategy. I think we have a great, great network already built. In our existing territories, we'll convert our network in that part. I said that 55% of the network is FTTH and 70% by the end of the year. Regardless, when we have the also in HFC, the best plan in HFC, because all our roads are at 225 compound, 250 and 500. You can count that is way better than in the United States. So 1 is network. The other 1 is product, our product, XView product platform is way better than the competition in that part. That's proven by the 90 million of production that we have in the existing subscribers and growing across. And the other 1 is company efficiency. Our Net Promoter Score is increasing, our margin is good. That's how we managed to keep those prices below competition. We will continue to have that strategy.

Okay. Understood. Second question, if I may, very quickly. In spite all the answers you've given during the call, I still don't have clear when you expect EBITDA growth to accelerate. I believe you -- I believe Enrique said that probably at the end of this year, most probably in '24, but I would like it to be more specific, when you expect EBITDA growth to accelerate. And I would also like to understand if EBITDA growth acceleration should come mainly from this recovery in prices once discounts stabilize or EBITDA growth should come mostly from efficiencies.

So well, first of all, Alejandro, let me tell you, we are increasing new kilometers, and that will be the case for the following 7, 8 quarters. We will be increasing the number of subscribers for the following same number of quarters and beyond that. One, the subscriber base is kind of to stabilize. Then, you would see the EBITDA margins to grow and to go up and also, of course, the EBITDA. We still have negative EBITDA in the new territories. And it's going to be slowly improving. Is it going to be improving? But it's not something that you're going to see in Q4 or Q3 this year. This is going to be getting to -- going to see or positive EBITDA creation, but it's going to be slow. So for 2025, definitely, you're going to see a change as Raymundo established, and that's going to be shown even before 2025. So second half of 2024, you're going to see the EBITDA acceleration in the peaking. And of course, the CapEx reduction, and that's going to -- that's when we are going to see the cash flow second half of 2024, cash flow going up like crazy.

The increase Alejandro in EBITDA for 2023 is going to be a shift for sure compared to 2020. There's going to be a growth inhibitor for -- you just have to count on what the dividend of the first quarter, the efficiencies that we have and the growing of subscribers for the next quarters to come. So the trend of growing EBITDA. It is real.

Our next question is from Andres Coello with Scotiabank.

For a follow-up is going to be a quick one. Are you still in conversation with Televisa, is that is still going on? Pressure on Izzi and Megacable, is that still going on or are there are no ongoing negotiations?

I couldn't understand.

Are there still conversations with Televisa?

No. The answer is no.

And the next question is from Marcelo Santos with JPMorgan.

Very quickly. When you said the maximum leverage that you would not surpass, was it 3x net debt-to-EBITDA? Just to clarify.

No. No. No. I mentioned too and everyone here make faces to me. The expansion plan doesn't consider going up over 1.5x EBITDA. The number that I mentioned is that, it's going to be EBITDA, it's going to be in 2024. So we're still a year to reach that in the 1.4x -- or below 1.5x. But we don't know what new opportunities or what new things could occur, right. So we just won't have room to above that. But the expansion plan doesn't consider anything over 1.5x.

Thank you for asking us. I mean it's clarifying.

Thank you. I'd like to turn the floor back over to management for web platform questions.

Okay. We have one from Citi. The financial reports reported at the [indiscernible] when looking at investment flow, there is a near MXN 2 billion expense. Can you please share some details about what is this about?

Yes. Some of the flows are coming from some financial funding tools, temporary financial tools. And those will be repaid before the end of -- before the end of the year. So it's a short term.

We have no more questions. So I'll turn it over to Mr. Yamuni for final remarks.

Okay. Thank you very much. And -- as a final remark, please, as always, it is a pleasure to discuss our results with you. Please contact our Investor Relations department if you have any questions or concerns, regarding the company. Have a wonderful day and in Mexico have a wonderful long weekend. Next Monday is a holiday here. Thank you very much. And we're open -- we request if you have any questions. Thank you very much.

Yes. We're very, very pleased, and we appreciate all your questions regardless our expansion plan in the company. It really was a good -- a very good session. And as Enrique said, have a very nice weekend, and we're open to any questions that you may have, individual. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.