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

Good morning, and welcome to Megacable's Second 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 statement. I will now turn the call over to Mr. Enrique Yamuni. Sir, you may begin.

Thank you very much and good morning. Thank you for joining us today. I would like to provide you with an overview of our company's performance and highlight the significant advances we made this quarter. First, in terms of the expansion. Our growth and value maximization plan is performing as it was planned. The organization has been investing not only in the network expansion but also in the evolution of the network of the rest of the territories. During this quarter, we have added up to now this year 900,000 homes passed of new builds, which put us on track to beat our initial goal of 2.5 million households passed by the end of the year. Nevertheless, In addition, we have also converted 400,000 new homes passed in the HFC footprint. As a result of the before mentioned, at quarter-end, 56% of our network is already full fiber technology, not only due to the expansion but also because of the conversion to GPON. Our building capacity is a reality. In this quarter alone, we have entered 7 new territories, totaling around 45 new cities for the whole project, which presented a significant challenge for the company. As we look ahead, we plan to reach more than 60 new cities overall by year-end. We remain confident in realizing the expansion's full potential revenue, profitability, and shareholder value. The revenue we are generating is in line with expectations, recording double-digit growth on a year-to-year comparison, supported by subscriber growth in the regional and expansion territories. The invested CapEx so far is below the estimates we had for the year, which reflects our efficiency in terms of the costs per homes passed, recording the best levels in the industry. 2022 and 2024 are expansion years with more CapEx intensity, where the company will have pressure in margins and leverage, but as we have mentioned before, this was expected, and continues to be within the expected ranges. Looking into the future, doubling the size of the company and maintaining the debt levels of past years is more viable than ever. Moving into consolidated results. Subscriber growth continues the growing trend observed since the second half of 2022. It is important to mention that we continue to see net adds in both the expansion and the regional territories, resulting in the highest quarterly RGU net adds figure in the history of the company. This was also supported by a stable churn rate, despite the price adjustments we carried out last May. In terms of ARPU, the big bulk of added subs that came from the increase of gross adds, and therefore with promotional rates, were compensated by the pricing, bundling and upgrade strategies. Also, the corporate market is in the same line as these increases. The challenge has been enormous, but we already reached more than 30,000 employees, more than 20% when compared to those of last year. Now, moving to financials, revenue and EBITDA continues to grow on a year-to-year basis. We are certain that as we move ahead, higher increases will be achieved, as the operations from the expansion territories improve their profitability, coupled with the existing territories, that remain at very attractive margins. The strength of the balance sheet has allowed us to continue growing, and remains still within reasonable levels, but this is necessary to execute the plans we have set. Despite the significant investments made since 2020, we maintain a healthy financial position that provides room to continue advancing in our modernization and expansion, keeping our leverage levels at the lowest in the industry. Our commitment to maintaining financial stability, while executing our ambitious expansion plan is reflected by Fitch Ratings, with the reaffirmation of our credit rating of AAA, which also highlights our positioning and operational performance relative to our peers, as we make use of our modern infrastructure to offer high-quality services at competitive prices, without jeopardizing our profitability and value proposal. As we continue with the execution of our initiatives to take the company to a nationwide footprint, we are still committed to generating value for our shareholders. In that line, during the quarter we carried out the distribution of our annual cash distribution of more than MXN 2.5 billion, with a very attractive dividend yield. To conclude, our quarterly performance was positive, as we are achieving our goals in terms of subscriber additions, expansion and modernization at an accelerated pace, without leaving behind our regional territories, which continue to grow and generate positive results. The level of investments remains reasonable, and although it has led us to a more leveraged position, these resources are aimed at maximizing value for our stockholders in the periods to come. I will turn the call over to Raymundo to discuss our operational performance. Raymundo, please go ahead.

Thanks, Enrique. Good morning, everyone. The growth of our key operating metrics remained aligned to the positive trend observed since the second half of last year, showing a sequential acceleration in subscribers to reach record figures in terms of RGUs, largely driven by the investments in infrastructure and activation of new territories, as reflected in the numbers of added kilometers and homes passed. In addition to these efforts, our network modernization initiatives allowed us to keep attracting and gaining customers in legacy markets as well. Related to the expansion, we added 5,000 kilometers of fiber, as well as close to 1 million homes passed in the second quarter, bringing the total to nearly 1.9 million for the year so far. However, the efforts and investments of the company are not only aimed at expansion, as of June, we have migrated over [ 2,300 ] kilometers from HFC to FTTH technology. This represents 400,000 additional homes passed in full fiber technology, which in addition to the [ over 45,000 ] kilometers that we already had, accounts for the total of 56% with fiber, that Enrique mentioned. The company's commitment towards providing the best service through state-of-the-art technology, will continue to drive these updates, in line with the vision of becoming a full fiber player at some point. Transitioning to our results, unique subscribers for the quarter increased 12% year-over-year, to 4.7 million, representing roughly 500,000 net additions, of which 151,000 corresponded to this period. This figure not only beats the record figure of the previous quarter, but also represents a faster sequential growth rate. By segment, Internet subscribers grew 14% compared to the second quarter of 2022, totaling 4.4 million, resulting in 536,000 net additions, of which 163,000 corresponded to this period. We continued to perform speed upgrades on all packages, which provides the subscribers with a pleasant navigation experience, and ultimately contributes to service differentiation. Our superior infrastructure, either state-of-the-art fiber network or enhanced HFC technology, is more than capable of handling these upgrades. It is worth noting that at the end of the quarter, over 86% of our subscriber base enjoys speeds of 50 megs or higher, compared to around 50% in the same period last year. At the end of the quarter, our network of more than 86,000 kilometers covered nearly 13.5 million homes passed, out of which, 56% is already FTTH technology. This compares to 69,000 kilometers and 10.1 million homes passed a year ago. Video subscribers reached 3.8 million, growing 9% and adding 302,000 versus the second quarter of 2022. On a sequential basis, this segment recorded nearly 84,000 net adds. At the end of the quarter, the subscriber base of our Xview platforms was 2.6 million, up 42% or over 786,000 net additions compared to the same quarter of last year. In the same period, Xview set top boxes reached more than 3.9 million. Regarding Xview platform, it continues to contribute to the Video segment, maintaining Mega as one of the few companies that continue to add video subscribers. This is mainly because there is no other interactive TV platform that offers the same functionalities and exclusive benefits. As of June, this platform has more than 92 million interactions registered on a monthly basis. The Telephony segment recorded 3.8 million subscribers, growing 20% compared to the second quarter 2022, representing 629,000 net additions, of which 184,000 belong to this period. At the end this period, RGUs reached 12 million, up 14% against the 11 million of the second quarter 2022, the highest growth rate ever recorded, largely driven by the entrance into new markets. Consequently, RGUs per unique subscriber in the second quarter 2023 totaled 2.57 million, compared to 2.53 million in the same period last year, which are expected to gradually climb as we progress in our expansion. The MVNO subscribers totaled 391,000, decreasing 10% year-over-year but increasing 4% when compared to the previous quarter. This growth resulted in approximately 14,000 net additions during this period, reflecting our disciplined approach in attracting and retaining high quality postpaid customers. This service, which has proven to be an added value for our fix segment subscribers, have stood as the one with the highest ARPU in the industry. Churn rates improved on an annual and sequential basis, with Broadband at 1.9%, Video at 2.0%, and Telephony at 1.9%. This result is more relevant when considering the price increases performed in May. The lower churn rate is the result of our efforts towards increasing customer satisfaction, including an improved Net Promoter Score, which reflects the expanded service offerings, the superior infrastructure, coupled with competitive pricing and seamless integration of our services. ARPU per unique subscriber was MXN 420.8, down year-over-year but remaining stable on a sequential basis. As Enrique mentioned, this performance is of great significance considering the current competitive landscape and the promotional packages, pricing strategies, and offers deployed, which were carefully implemented to tap into the comparative advantages of our portfolio. Turning to ARPU by segment, broadband and video remained stable compared to the second quarter 2022; while Telephony decreased. On a sequential basis, Broadband increased 2%, while Telephony decreased also by 2% and Video remained at the same level. Regarding the ARPU of the MVNO service, it increased 38% when compared to the second quarter of 2022, as a result of our strategy to drive revenue growth by focusing on quality subscribers with revenue contribution. As for the corporate telecom segment, revenue in the second quarter of 2023 posted an annual increase of 16%, with MetroCarrier, ho1a and MCM growing 15%, 31% and 9%, respectively. This performance was supported by special projects in both the public and private sectors. It is worth noting that we will continue to see double-digit growth in this segment due to our expansion plan and new markets. In conclusion, our strong operational performance this quarter reflects our focused efforts on expanding our infrastructure, attracting and retaining customers, and enhancing our service offerings. The significant sequential growth in the number of subscribers, driven by intensified investments in infrastructure deployment, demonstrates the success of our expansion strategy. As we continue to execute our expansion plan, we anticipate further growth in RGUs and sustained improvement in the key operating metrics, while remaining committed to providing a compelling value proposal that meets the needs of our customers. 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 second quarter 2023, consolidated revenue reached close to MXN 7.4 billion, up 10% when compared to the same period last year, given a strong and sustained subscriber growth recorded at all business segments, but also due to the boost of our Corporate Segment that continues to grow at double-digit rate. The Mass Segment revenue increased 9% compared to the second quarter last year, amounting to MXN 6 billion. By segment, revenue for Broadband, Video and Mobile Services grew 12%, 9%, and 2% in a year-over-year basis, respectively, driven by a stronger subscriber growth. As for the MVNO business, revenue continued to rise, recording a 23% increase on a year-to-year basis, mainly due to a higher ARPU. The Corporate Segment revenue climbed 15% year-over-year, totaling close to MXN 1.4 billion, with MetroCarrier, ho1a and MCM, growing at 15%, 31% and 9%, respectively. Meanwhile, revenue for PCTV decreased slightly when compared to the same period last year. Consequently, the Mass segment's contribution to the company's revenue was 82%, thus 18% came from the Corporate segment. Cost of Services rose 24% year-over-year, reaching nearly MXN 2.2 billion while SG&A increased 15%, totaling less than MXN 1.9 billion. These variations largely reflect the company's continued expansion, the strong growth in labor, as well as revenues coming from ho1a, with a larger component of equipment sales. Quarterly consolidated EBITDA increased 1% year-over-year, amounting to MXN 3.3 billion pesos. EBITDA margin for the quarter stood at 44.6%, down on a sequential and annual basis. Meanwhile, quarterly EBITDA for cable operations totaled close to MXN 3.1 billion, with a margin of 46.1%. As mentioned in the last quarter, our margins will remain pressured by cost and expenses related to our expansion, with expectations to start a gradual recovery towards 2024. Net Income in the second quarter amounted to MXN 868 million, representing a decrease compared to the same period last year. This decline is attributed to a higher net financial expense, as a result of the higher debt, as well as the increased costs and expenses associated with the expansion. We would like to clarify that the level of depreciations and amortizations for the quarter is lower than that of the 1Q '23, mainly due to one-offs recorded in the first quarter of the year. The accrued figure of the first half now is in line with what we could expect from the coming periods. Moving into the balance sheet. As of June 30, 2023, net debt was MXN 18.3 billion, compared to MXN 7.8 billion recorded at the same period last year. This variation is attributed mainly to the issuance of long-term local notes for MXN 7 billion in July 2022 as well as additional credit facilities signed during this period to accelerate our expansion plan and refinance other maturities. Nevertheless, net debt to EBITDA ratios stood at 1.4x, well below other competitors and in line with our estimations. This leverage ratio provide us wide flexibility to move forward in our critical growth projects. On the other hand, interest coverage ratio for the last 12 months reached 6x, still at healthy levels. As for CapEx, the figure totaled MXN 2.9 billion during the quarter, for a total of MXN 5.2 billion during the first half of the year, representing 35.6% of the revenues for the same period. This is below the 40% mark we targeted as we continue with our investments in infrastructure. It is important to note that due to the company's operative efficiencies in the execution of these investments, we have the most efficient cost per homes passed in the industry. The investments we are doing are being reflected in the cash generation of the company, which, this quarter also included the dividend payment of last May. These items were almost offset by the additional debt signed during the period to refinance other maturities. The following periods should reflect less pressured figures, with no other dividend payment or maturity until next year. 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 the line Vitor Tomita with Goldman Sachs.

Apologies if I ask anything that was answered during the opening statements, I was having some audio issues earlier in the call. So 2 questions from my side. The first one is if you could give us some more color on how you are seeing the competitive landscape for Cable? And particularly, if you have noticed any difference in competitive dynamics following Telmex recent increase in fiber investment and commercial investment or on the other hand, following Totalplay's move to slow down its growth from the second part there onwards. And second question from our side would be following up also on a discussion from the first quarter's conference call, if you could provide an update on the maximum leverage you would be comfortable with this year.

Yes, Vitor, this is Raymundo. I don't know if you listened correctly, it seems that we have some problems on the audio. I hope it's correct right now. We are not aware of that. Regarding your first part of the question about the competitive landscape. Well, as you know, Telmex has already deployed fiber over a big amount of kilometers that they have in service. They announced that since previous quarter. We are used to compete with them, whether it's fiber or copper when they have it. They are targeted to a double-play package. We have our triple play offer, which is really robust with the HBO platform. That's why we are able to capture market share in the markets in the original markets and the expansion programs that we have. As you all are aware, Totalplay decreased the expansion plan that they have. They stay at the number of kilometers that they already have around 17.5 million home passed that they have in that area. And what they have is a slow growth compared to what we have right now. We are entering new markets, capturing subscribers from them, from Izzi and from Totalplay, from [indiscernible]. In that sense, we don't have a big difference in that area in that part. We normally try to target areas where we feel that there is a big potential because there is only 2, but in some of them, it's already 3 of them that we have. So we're taking subscribers from all of them, and we know that Totalplay decreased the number of, let's say, gross adds that they have. They didn't have the same expansion that we have over this territory. They need to lower the increasing margin like they did lower the expenses. So they have not able to get the gross adds that we provide in this quarter. If you look at our numbers, we provide above 400,000 gross adds. And that's how we are able to grow more than our competition in that area. Regarding Izzi, well, Izzi is in some territories where we are entering. They are still mainly focused on HFC technology, not that much in fiber. The number of home passed that they increased in fiber is very low compared to what we have during this quarter. As you are aware, we put almost 1 million more home pass additional in new territories, but also 400,000 home passed in the existing territories in fiber. So we're really, really quick turning our company to a full fiber company and increasing in a higher speed than what we have. And we're very satisfied with that. How do we see it competitive? We see that we will continue to gain market share. Our main goal is to operate correctly. We increased our labor force, the number of employees that we have is above 30,000. We were 25,000 a year ago. So it is a really good effort and big challenge to increase more than 20% of our labor force because we depend on labor to sell and to store. We proved that we can deliver new kilometers. Now we are increasing the number of gross adds, and that's where we are focused. It is not easy to increase, but will reach, as I said, ways higher gross adds than any of our competitors for the quarter, and we will continue to maintain or to increase the number of gross adds that we have. That's the key. We also increased rates what is still on an ARPU below our competition. So we will continue to see an increasing -- slight increase in rates in the future, so we can compensate the open to new territories. So at the end, we have a better network, increasing huge penetration to come, our program, our expansion front, I believe [ is double ]. It is something that we announced at the end of '21, and we start building new homes at the second half, exactly the third quarter of 2022. Right now, it's 1 year after we started the program, and we continue to increase growth of subscribers and bringing now above 10% revenue growth compared to last year. The pressure is in EBITDA, yes, it is still in EBITDA because it's normal for the expansion. So better product and the execution that we're doing, we believe we're going to do that very good in capturing market share and market penetration, according to like Enrique said, the plan that we have at the beginning. And, Luis, you feel more comfortable talking about the maximum leverage of debt that we have.

Sure. The debt ratio to EBITDA that we are expecting -- the net debt to EBITDA, we expect that to happen in the second quarter of 2024, and we are still targeting between 1.5 and 1.7x EBITDA.

Which is very manageable.

Which is still very, very manageable.

Very clear.

You have to take into consideration that our EBITDA is going to be growing at a much higher rate in future months.

Our next question comes from the line of Marcelo Santos with JPMorgan.

I want to ask a bit about CapEx. You are deploying very quickly. You're deploying the network in a very fast pace. And at the same time, you said you are being more efficient, you are spending less. Could you please update how should the CapEx profile look in the next couple of years, like 2023, '24, '25. You gave some indications in the past. Just wanted to see how this look now? And the second is just that you mentioned that you have the lowest cost per home passed in the industry. Is there any figure that you could share and you could discuss just for us to understand it better?

Sure, Marcelo. In respective to CapEx of revenues, and we think for the year, we are going to go below the 40% that we pronounced 6 months or a year ago. We expect that to be between 36% to 38% for this year. We expect to remain around the same in the following year and decreasing with attendance or trend to decrease by the second half of 2024. In 2025, we will of course, and we will stay with high 20%s, low 30%s. In the following years, we should be dropping to low 20%s -- low to mid-20%s in terms of CapEx.

Okay.

And related to the investment per home passed, we just made a calculation based on the figures that were public on the latest issue of the latest reports quarterly reports for all the companies, and that's where we just developed CapEx among the homes, the new homes passed for the new potential customers. And that's basically the calculation, not scientific calculation behind that.

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

So recently, we've seen that one of your competitors are seeing an increase in churn and the other one reported net disconnections. Are you implementing any retention strategies for those clients that currently have a promotion price? Are you worried overall with competition? And secondly, Televisa management set the example by investing in their own stock. I know you are firm believers of the expansion plan. So are you planning on doing something similar?

This is Enrique. I wish I could have bought stock before today, but obviously, for ethical reasons and for regulations, I couldn't do. But I'm sure a buyer, a stock buyer, would think that everyone should be a stock buyer of Megacable. I mean, the valuation is very low. But when they did it, they announced that the management, the CEOs are going to buy stock of Izzi. Not they're announcing a buyback program from Televisa. And we are not planning on that either. We're not planning to do a buyback. I mean it's up to the directors or management of Megacable, where personally they want to buy or not. I personally would buy.

No, no. And let me tell you my opinion on that part. Of course, we are buying our own stock. That's normal. We do it all the time with the ethical restraints that we have as management of the company. But -- why will we have to announce if we have a really, really competitive and really believable plan in this company, we don't need to tell you that. I mean our plan is still to double the size of the company. As Luis mentioned, we're going to double the EBITDA in the years to come, and we will retain CapEx leverage around the low 20%s or even below, if I've been aggressive. Luis also want me to go aggressive, but that's it. So we will generate free cash flow. And that's going to be in a very short period of time. I mean we announced the expansion program at the second half of 2021, what at the second half of 2023, it's only be really 1 year of building the company into that expansion. We already cash on that part. We have already built 20,000 kilometers of fiber of expansion. We put 1 million home passed just this year. I mean we are making this to be believable and there is no way a company like this with the expansion and the way that we manage the company cannot get to good financial key indicators in the years to come. So we are aware of the announcement of Televisa management on that part. But really -- I mean, that's them. We didn't see the announcement on other companies in that part. We believe that we're doing the right thing and the market should acquire that as soon as they see that is believable and we believe we are sending the message to be like that. The growth of subscriber is coming, the growth of revenue is coming. The CapEx that we're supposed to invest is really efficient because of the way that we manage how we build, how we invest also the exchange rate help us in that part. That's for sure. But we have a huge amount of the CapEx in pesos because labor that we built is in pesos. So if we build that 1,000 kilometers that I say, 10,000 kilometers that we have already built or the 5,000 during the quarter, we paid out in pesos and still, we managed to do and deliver that. So that will be the message that I would like to send at this very moment. Now the increase in churn of the promotional, remember that what we have is a low ARPU compared to the competition. Our promotion campaigns are aggressive, but not really so much aggressive that what we have in the legacy territories. We continue to manage the same promotion pretty much in the majority of our markets. And the only thing that we do is after we have that promotional period, we have an increase in rate, but it's, let's say, right calculated so we don't produce churn coming from the subscriber because of the end of that promotion. That means a subscriber that has, let's say, he's paying 10. He's not going to pay 20 when he finishes the promotional. He's going to raise from 10 to 12. So it's not a huge hit on that part. However, after a certain period of time, we expect those subscribers to continue to increase rates, and that's positive for the future. The huge amount of subscribers that we have that have low ARPU and will finish the promotional campaigns that will hit or get some increase on rate for them, can get another increase of rate after a year. So that's the strategy that we have, and that's how we will manage to continue to increase our revenue, and that will improve margins in the future.

Our next question comes from the line of Carlos Legarreta with Itau.

Last time I remember you talked about the penetration in new markets, which was around 13%. Can you provide an update on that, please? And secondly, I mean, following up a little on Ricardo's question, I guess the churn is impressive that it remains flattish sequentially, and it's actually down year-over-year significantly. Do you think that's attributable to the higher quality of the new product or perhaps that you're seeing a better, I don't know, the economic or disposable income in your clients? I mean, what do you think is behind this definitely positive performance in the churn rate?

Sure, Carlos. Our current level of penetration in the new markets remains at the same level of 12%, 13%. And that's because we continue to add new home pass on that part. We are very happy with the target that we have in the much more older territories that we have on that part. But as an average, you can count on the 12%, 13% of that point. And it's according to plan, I want to say that. Now regarding the churn, I agree with you that we have a good churn rate for that part. Remember that we have a low ARPU, low rates for those subscribers. And also we migrate to fiber, as we said. Last year, we built 23,000 kilometers of fiber of the existing territory that was 2021 and part of 2022. This year, we're migrating another 400,000. But it's not only the migration. With the network that we have, HFC that we are taking away from existing -- from the new GPON territories, what is cleaning the nodes. So we can provide, as I said in my remarks, sorry about the quality of the audio, but as I said, we have more than 80% of our subscribers now above 50 megabits and moving into 80 megabits in the territories and without making difference or significant difference between the HFC and the GPON. That means the quality of our network is improving as the Net Promoter Score is improving. So we have -- and we are facing a strong competition. We are tough on the field. That means we are going for our subscribers, and we offer them the right role. And that's how we managed to continue to have the churn. We don't expect the churn to decrease, to be honest. I expect that to remain and put some pressure. It's slightly pressure. But that's part of competition, business and growth that we have on that part.

And if I may, a follow-up, I guess, for Luis, at the CapEx level, is the lower intensity that you're expecting now for the full year, is that because of the efficiencies? Or is that because the peso is stronger against the USD compared to the start of the year?

Well, thanks for the question, Carlos. And this is a mix mainly on -- it comes a lot from exchange rate, of course, but it's also due to a more efficient result in the CapEx than planned. But again, this is going as planned and we will continue with the expansion without delay.

I appreciate the color.

Our next question comes from the line of Lucca Brendim with Bank of America.

Two here from my side. First of all, in regards to margins, I wanted to know what can we expect going forward if this is the level that should be sustained for the next quarter, we should see some expansion? Or with the growth we should see further compression in margins? And then second of all, in regards to the expansion to new territories, the clients that you are gaining, how much of that is coming from other players and how much is coming from people that didn't have the service before?

Thank you, Lucca. And well, first of all, related to the margin, of course, there are pressures. Every new market we open comes with investments first and revenues later. And we continue to see some pressure on that. So my take is that we will continue with similar margins with some pressure on those. And we will continue with that for the following 3 quarters, 3 to 4 quarters. So improving the last -- this 3 to 4, but yes, with pressures mostly in the following 2.

Sure. And regarding the customers, that depends on the market we're bringing, but big cities that already have above 80%, 85% penetration of broadband over home pass. Of course, we are taking the subscribers from the competition. You can count 85% pretty much is coming from competition in an average and between the small cities with lower penetration than the high cities, but the majority is coming from competition.

Our next question comes from the line of Phani Kanumuri with HSBC.