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

Good morning. Welcome to the Megacable's First Quarter 2025 Earnings Conference Call. With us this morning, we have Mr. Enrique Yamuni, CEO; Raymundo Fernández, 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.

Good morning, everyone, and thank you for joining us today. Our first quarter results once again demonstrate the strength and resilience of our business model. We continue reporting subscriber revenue growth and delivered the highest EBITDA margin in the past 10 quarters. Despite ongoing macroeconomic uncertainty, including international trade tensions and lower GDP growth, these results also reflect the strategic [ clarity ] and operational discipline that have guided our company through many cycles, positioning us as one of the most consistent performance in the Mexican telecom industry. Regarding our operating results, during this period, we continued to grow our subscriber base within expected [indiscernible] range, maintaining a healthy pace of gross additions, even with the price increase we carried out at the beginning of the period. A key driver of this performance continued to be the resilient support coactivity offering, particularly Internet services, which has become an essential part of daily life for millions of people. Since the pandemic, it has proven its critically important across multiple aspects of society, from remote work and education, for entertainment and communications. This has positioned Internet as a core product of our commercial strategy, consolidating its role as a fundamental service. The corporate results remain in the same levels with the connectivity vertical growing in line with the expectation with a reduced contribution from special projects during the period. During this quarter, the integration of ho1a, Metrocarrier and MCM into MCM business Tech-Co was carried out with the objective of generating greater synergies to maximize profitability. We are convinced that this new structure will allow us to better serve our corporate clients, strengthen our B2B portfolio and accelerate margin expansion across the segments. The increase in revenue coupled with operative efficiencies in a tight controlling costs were reflected in EBITDA growing faster than revenue, leading to highest EBITDA margin in the last 10 quarters. This in line with the company's expectation of margin expansion was driven by higher penetration in the new territories. We believe this trend will be sustainable in the short and medium term as we continue consolidating efficiencies across operations, both in legacy and new markets. Regarding our investment initiatives during the quarter, the pace of network construction was lower, as we focus on consolidating records, news, in optimizing the use of our existing infrastructure. We anticipate increased activity in the upcoming quarters to continue progressing towards our goal of doubling this company infrastructure sites compared to the end of October 2021. Our current strategy prioritize capital efficiency, scale utilization and deeper market penetration. This is reflected in the CapEx to revenue ratio, which is lower than in 2024. At the same time, we remain focused on our network evolution and strategy. We're steadily advancing towards becoming a full [ fiber ] company, keeping in mind that in a very competitive market, having the best and more advanced technology, we speak to [ see it ] coupled with a preference for innovation and a culture of continuing service improvement. At quarter end, approximately 80% of our total network is [indiscernible]. These results together with those of 2024, contributed that yesterday, at our annual ordinary shareholders meeting, the payment of a dividend for approximately MXN 2.9 billion was approved, equivalent to 20% of the EBITDA recorded last year. This represents one of the most attractive dividend yields in the market, close to 8%. Looking ahead, our expectations for 2025 remain unchanged. We are confident in the resilience of our services, particularly Internet. So our current efforts are fully centered on completing our expansion plan. We anticipate that revenue and EBITDA growth will accelerate in the coming periods, despite the challenging environments, driving towards global reach levels, which, in addition to the already lower CapEx to revenue ratio will significantly improve our expectations for higher cash generation. We face the rest of the year with clarity and focus support by a stable platform, strong fundamentals and our proven ability to execute our strategy. Before I hand it over to Raymundo, the call, I would like to emphasize that with no doubt, we are the best-positioned telco company within the market with great revenue growth, low ARPU, high margins, great product quality, customer-oriented service state-of-the-art network and technology and finally, a great organization. Under this basis, great results should continue in the future. Now please Raymundo go ahead with the rest of the [ publish ].

Thanks, Enrique. Good morning everyone. During the first quarter of the year, our operating efforts were focused mainly on two fronts: continue with a solid growth trend in our operating metrics; and consolidate our corporate telecom segment into a single operation. We can proudly say that we have reached significant achievements in each of these lines. Regarding our first one, this quarter, unique subscribers reached 5.6 million, growing 10% year-over-year, representing a net-net addition of 524,000 subscribers, of which 93,000 were registered this quarter. This growth is within the ranges expected by the company, including gross additions that remains at the same level of previous quarters and the effect of a slightly higher disconnection rate resulting from the price increase we made in February. By segment, Internet subscriber increased 11% on a year-over-year basis to 5.4 million, equivalent to 539,000 net additions, of which a 100,000 were added this quarter, a figure within the expected quarterly growth range of 100,000 to 150,000 net values. Telephony subscribers grew 14% in a year-over-year basis. Equivalent to 596,000 net additions in the last 12 months, of which 84,000 were recorded this quarter, thus the number of telephony subscribers exceeded the 4.8 million mark benefit by our service modeling [indiscernible]. The MVNO segment registered almost 576,000 subscribers, representing an increase of 25% on a year-over-year basis. As a result of the net addition of 115,000 subscribers in the last 12 months, including 22,000 this quarter. Remember that this service is focused on rounding our value offering. On the video side, subscribers totaled 3.8 million, decreasing 21,000 subscribers this quarter, a trend consistent with global industry shifts and a sales mix more inclined towards double play. Nevertheless, our XView platform, a key part of our value offering video segment continues to strengthen its subscriber base, reaching 3.5 million, which represents an increase of 15% year-over-year. equivalent to 458,000 net additions, of which 58,000 were registered this quarter, reflecting our efforts to match customers' digital preference. Likewise, app subscriber grew 34% year-over-year to 1.1 million, representing 276,000 net addition. During this quarter, churn rates increased sequentially standing at 2.1% for Internet and 2.5% for video and telephony, mainly due to the price adjustment carried out in January. In line with the above, ARPU per unique subscriber remain unchanged in both annual and sequential basis, totaling MXN 417.5 this quarter, due to a higher number of double play bundles in relation to the unique subscribers. On the second front, as announced by the company in January, we started integration between ho1a, Metrocarrier and MCM. Therefore, as of this quarter, the results of these three subsidiaries are now consolidated within MCM business sector. This consolidation was way beyond reported. So this quarter, we work in the integration of the sales force consolidation of the back end and front end support systems, definitions of the new roles for the administrative personnel and everything related to the infrastructure consolidation among other relevant tasks. We are certain that the results of this strategy will soon be reflected in synergies and value creation for our company. To close I would like to emphasize that the trend of the company continues to reflect growth. Our key operating indicators remain strong at healthy levels, positive to continue bringing more and more families with the best connectivity towards our cutting edge network, in a world where Internet remains essential in the daily life. Thank you for your attention. I will now hand the call to Luis in the financial review.

Thank you very much Ray. Good morning, everyone. In the first quarter, we successfully navigated a challenging macro environment and delivered resilient results that reflect our ability to maintain steady revenue growth and preserve financial strength. Consolidation revenues reached MXN 8.6 billion during the quarter, an 8% year-over-year growth, primarily driven by a solid performance in our [indiscernible] market segment that grew 9% year-over-year, reflecting the sustained momentum from Internet and telephony subscriber expansion. Our corporate segment increased 1% year-over-year, driven by the 14% growth in the content business. Corporate telecom remained practically unchanged due to a weaker performance in the special project segment. Nevertheless, we anticipate sequential improvement throughout next quarters, driven mainly by steady growth on the connectivity vertical. Cost of services for the first quarter increased 5% year-over-year to MXN 2.3 billion, reflecting inflationary pressures, but remaining below revenue growth. SG&A rose 10% year-over-year to MXN 2.4 billion, primarily due to operating charges, mainly on labor costs on wages and commissions. Quarterly EBITDA increased by 8% year-over-year, totaling MXN 4.0 billion. EBITDA margin expanded to 46.3% compared to 46.1% a year ago, thus underscoring our operational efficiencies in new territories despite a challenging environment. During the quarter, net income reached MXN 722 million, representing decrease year-over-year, predominantly impacted by significantly higher depreciation without any cash flow defects, which were up 15% year-over-year, [ same ] that are related to our infrastructure investments and credits to the existing network. Additionally, net income was pressured by higher interest expenses and foreign exchange [ fluctuation ]. However, on a sequential basis, a 38% increase was recorded, supported by a lower financial expense. It is important to mention that in line with the prevailing environment of lower interest rates, this should help to support the net income recovery in the following periods. This quarter's capital expenditures lowered as planned for the benefit of our cash flow generation. Consequently, CapEx to revenue ratio was 26.8% this quarter, down from 29.5% in the same period of last year. Our balance sheet remains strong and healthy. Now they closed the quarter -- net debt [ closed the quarter ] at MXN [ 21.1 ] million, representing a sequential decrease. Therefore, net debt -- net debt-to-EBITDA ratio improved to 1.41x from the 1.50x recorded year-end of 2024, showing our commitment to responsible leverage, which remains among the lowest in the industry. Our debt remain [indiscernible] in Mexican pesos mitigated foreign currency exposure. Our interest coverage ratio was 5.2x as for the quarter end, reflecting a [indiscernible] trend in meeting it's financial commitments. Before concluding, I'd also like to note that during the quarter, Megacable see segment portfolio expanding accounts receivable from [indiscernible] including the segment of our [ APD state facilities ] or our relationship with [indiscernible] that will provider end customer. To conclude, certainly, in the first quarter 2025, we saw a steady growth in the revenues and EBITDA. Our disciplined expense management and [ client ] profitability and seasonal costs and [ reasonable ] economic environment. But all in all, we remain optimistic for 2025 as we continue to balance the [indiscernible] capital allocation to get selected growth opportunities. Thanks for the trust, I will now open the floor for questions.

[Operator Instructions] Our first question comes from Marcelo Santos from JPMorgan. Marcelo, please go ahead.

I have two. You had a strong margin evolution this quarter. I think the second half last year was a bit weaker, but it had very good recovery. How could we think margins going forward? That's the first question. And the second question is regarding the CapEx outlook. Do you still expect CapEx as a percentage of revenue to be a bit below what it was last year? Or could you provide some updated views about this year and the evolution. Thank you very much.

Yes, Marcelo, thanks for the question. The EBITDA margins, yes, we foresee a consistent increase or expansion on the following -- but this is more a general growth as you established in the first point of last year was similar with a weaker second quarter. We expect a run around I think from increase in the basis points and I think the margins.

And let me complement that. There are several factors moving around margin performance. Two of the most relevant are the fact that demand in expansion territories continues to rise mostly in line with the higher penetration. The second is the fact that the margin is below that of the organic territories. And the more weight of the results of expansion have when compared to the consolidated figures, this should drive consolidated margin down. All in all, the expectation of the company to see a slight margin expansion on a sequential basis. That will be our point in the first quarter. And then, Luis, he was asking relatedly CapEx level for 2025.

Yes, we expect to see CapEx generally increased in [indiscernible] as a percentage of revenues. [indiscernible] we expect levels to around [ 28% ] for 2025.

Complementing what Luis is telling you, this percentage that we expect, of course include this expansion and special CapEx that we have, since we haven't finished all the special projects that we have. It's not only the organic, but is the organic [indiscernible] the special product CapEx that we have, and we're very proud to continue to decrease as we promised before in the other conference.

Perfect. Just to clarify on the margins. Do you expect expansion on a sequential basis, not annual, also annual, but sequential, just to be sure.

On annual basis, we expect an expansion. It's difficult to say on a sequential basis as the market is almost 200 basis points increase in this quarter compared to the previous one. But all in all, for the annual basis, we see an expansion in the market.

Okay. The next question comes from the line of Vitor Tomita from Goldman Sachs.

Two questions from our side. The first one is on how you are seeing the competitive environments right now. If you could give us a bit more color with some competitors potentially not raising prices this year, and you having already successfully implemented price up in January. And our second question would be that on ARPUs. Given the competitive environment and the reduction in video subscribers, should we expect ARPU to continue to maybe trend down a bit or remain a bit flattish, a bit pressured? Or do you see room for ARPU to begin growing this year, adopt more positive trends, now that your expansion in homes [ passed ] has decelerated and the new users should be a declining percentage of total users.

Thank you, Vitor. Regarding the first question on the competition environment. As we are all aware, the main competitor -- not the main, but the high competitor in this case [indiscernible] has announced in the past that they won't increase the rates in the lower grade package regardless whether that company uses money or not. That's something that we don't agree, and it should be a push into the regulator to put effort on that component and the industry should follow a healthy profit in that part. So it doesn't make any sense, and we're fighting on that part. Having said that, we cannot increase significant unit prices for the double-play package, if [indiscernible] does not do that. The good part for that for Megacable is that we have lived with that in the past with a low ARPU on that part. That's why when we increase rates, we try to increase to a certain segment of the market that we cannot do it in that. We have power to manage this problem with the competition. Regardless of the play and [indiscernible] two main competitors, they all have the strategy selling double and triple play package, increasing apps. We are all competing on that. That's why during this quarter, we also include in our offering, our triple play offer, that's why we're pushing triple play. We include two of the main apps, one before, Paramount+ and now we're including Amazon Prime. So we believe we have a very robust offer. All of this with increasing margin that lease was reported, all of this with the increase of subscribers that we have. So in the worst case scenario, we continue to provide growth in revenue and EBITDA and slightly increasing margins like we say, with all this competitive environment, we're very, very proud. The resilience of our network the 80% of the fiber that Enrique told us make us very competitive and resilient to any attack in the market with the low ARPU that we have. That will be my view of the competition and the competitive market on that part. Now regarding the ARPU, there is no question about the trend of the video service observed in many markets and ours is not an exception. In this context, context, we would like to highlight that megawatts resilient and the less operator to report video disconnections, as our subscriber base shifts to higher percentage of double play, this increase the average ticket per customer. This has been offset in the past. It -- as I said, it would generate increases and the apps that we're doing. That's why you see that the ARPU remains steady. Also, there is a big number of subscribers in the expansion market that has a promotion that -- that have not been able to grow. All that in the future, it has to continue to slightly increase. I know we have said that in the past but it is hard to do it with all the different factors that I'm explaining to you. I don't know if I put too many factors, but that's the view completely of the organization. The next question comes from the line of Lucca Brendim for Bank of America.

So I have two questions on my side. The first one is related to churn. Churn increased this quarter, and you guys mentioned it was mainly due to the price increases in January. So I just wanted to check if everything is already back to the normal levels at the end of the quarter and if we can expect the next quarter to already be back? And the second one, do you guys already have any view on the new proposed changes to the telecommunications laws in Mexico? Or you think it's still too soon to have any view on that?

Thank you, Lucca. I will take the one with the churn and we'll address the telecommunication proposal, new law proposal as a second part. Regarding the churn, we expect the churn not to be below what we have in an average last year. As we said, the churn was affected during this quarter because of the price increase. Last year was on a different seasonality because the price increase was not in general. So that's the reason why we have a slight increase in the churn. So we expect to have shown very similar to what we have as an average in the past year. You can look into that and then you'll find. So it will be lower than what we have right now, okay, in that part, but close to what we have last year, probably between 1.9% and 2% churn on that part and we're happy on that [ level ] of churn because of the high growth that we have in subscribers. That's probably be one. And then regarding the telco.

Well, as you know, is was released two days ago. Actually was released at 10 p.m. the day before yesterday. We've been in communications with some people in the government and all the Congress and with certain chambers in Mexico like the Chamber of thought, Radio and Television Broadcasters. As you know, we are acting members of [indiscernible], used to be Chairman there. And then we've been talking to other operators, wireless in [indiscernible] and fixed telecommunications. With me, we have received good feedback from Congress. They are very much willing to discuss and improve, but it's on the -- I think they have realized that they have made -- there are some things that can be tempered or softened and getting them better [ at all ]. I think that will happen. All chambers, all the operators, all the companies are being rolling with the government and the Congress to accomplish that. I think the result is going to be much, much better than what we've seen. And of course, well, the government puts on the table something to negotiate for sure, it's farther than we expected. But I think we will have a much better result at the end. Also, let me add that regardless of what it says there that it might put some [ red glass ] into that regulation that we, of course, don't agree. We believe that any changes in the industry related to regulation, it is different that something is allowed to compare to something is able to meaning that in order to provide services to get into the underground of the networks to get into providing services to final end subscribers, all that. The industry has more than 160,000 kilometers of last mile plus [indiscernible]. All of that is impossible to restructure in a day-to-day. So what we believe is that we have with the government that has more control instead of independent regulator. We don't like it, but we did it in the past. At the end, the economics and the logic of the country will prevail. So we believe our plans are the same. We continue to grow. There are some things like Enrique said that we will have to agree and negotiate. But we're secure that all our plans will continue to do, and they will be delivered in the future.

The next question comes from the line of Carlos de Legarreta for Itau.

Just on the corporate side, the results have been relatively soft in the past couple of quarters. I just want to understand if this is due to easy comparisons or your overall seeing a weaker demand. And also on that line or more generally, the year-over-year expansion that you had in EBITDA margin, to what extent -- this is related to the ratio of the three corporate brands [indiscernible].

[indiscernible]. He is talking about the corporate bonds.

There were some -- based on the last year quarter that it was strong in the corporate, but we expect to detect growth in the corporate segment to reach [ 5% to 10% ] in the following quarter.

[indiscernible] start getting some of the synergies that we set between that, that getting the ho1a, Metrocarrier and MCM into one single company in that part. Of course, it will give us a payback on the revenue like you say, between 5% to 10%, that's what we expect for the year, mostly from corporate and residential services. It's been top of government contracts in that part. And the rest, we still have that synergies to come from that merge between the companies. The other one is the year-over-year. How much was that [indiscernible].

I don't known if the margin expansion explained by the synergies in corporate? Or there's maybe an improvement also on the mass market segment.

It is mostly from the mass markets -- it is from the mass market terms on that part. We still haven't seen that. The synergies are going to be over the size of the MCM at the beginning on that part between 15% to 20% of the SG&A than it has before. We believe MXN 150 million to MXN 200 million will come on a year basis, coming from that synergy. What we are more excited is that we will continue to have a pace of growth in the corporate coming from the merger of those three divisions into a new Tech-Co. So the margin is coming from -- on that product. That is coming because of the improvement of the margin in the expansion systems as we are having more subscribers and time passes by, we have better margin expansion that contribute to the already good margin and excellent market margin that we have in the organic. Our next question comes from the line of Alejandro Lavin from Santander.

So first of all, congrats on the solid execution. As you mentioned, it is a tough environment, but yet you're still showing decent results, solid results. So congrats on that. Now delving deeper into the EBITDA breakdown, right? I see that you provide that the breakdown in your press release in page #5, EBITDA grew 8% year-on-year, right? But if we look at the breakdown operating profit is flat year-on-year and depreciation is up 15%, which is then the main driver of the EBITDA expansion year-on-year. So if we get a little picky with the growth or the quality of growth, we would like to see operating profit also growing 8% or all the lines growing 8% and not depreciation driving the entirety of the EBITDA growth. So I would like to hear your thoughts on this, I guess, on this parity and especially thinking of the rest of the year or going forward, if this trend could be repeated going forward?

You have to consider that we are coming from a very, very intensive CapEx side. And all these investments are basically increasing depreciations in the larger factor than for and maybe larger than the growth that they're cutting the rates. So that's mainly [indiscernible] for the depreciation growing 15%. Yes, we would like to have that normalized and we can expect that to be true, when, one, we are completed with the expansion and the conversion of the network to [indiscernible].

Thank you for the question, Alejandro. We all need to understand the time of our organization on the call. We, at the end of 2021, have the ho1a presented to our Board. We plan to expand the company doubling the size and also to rebuild all the network to fiber. At this point, at the beginning of 2025, we achieved more than 17.5 million part of where we at the beginning of 9 million. We were very successful in doubling the infrastructure of the company. We have been very successful in operating the network from HFC. We took 45,000 kilometers of HFC out and build fiber. So we shield our systems to competition having the best technology. And all of that managed with the low ARPU and high margins. What we're doing in 2025, '26, '27 and on is to continue to present growth of EBITDA and revenues and continue to decline CapEx. As you have that continued EBITDA growth, you will see that the operating and depreciation will become more steady compared to the growth of EBITDA, and you will have a higher generation of free cash flow and of course, a return on higher margins. So this company cannot be measured on April 2025, has to be measured on the project of 5 years that is a view that we have as an administration here.

Yes, understood. I understand perfectly that you invest upfront and you harvest these investments throughout several years. So I'm only, I guess, asking if you expect these conversions, let's say, in a couple of years, 2, 3 years when as you mentioned, you start investing in growth in these projects and then EBITDA continues contributing and growing higher and higher or EBIT in this case and then the lines conversion, that's it, just a normal investment cycle, right?

Exactly [indiscernible]. Yes, you have the perfect view. Thank you for the question. And the next question comes from the line of [indiscernible] from [indiscernible].

A quick one is just on CapEx. I'm sorry, on cash and cash flow. Your taxes have been very low in the last 2 years, and I think, I guess, that's because you are using your depreciation of the network. But I'm just wondering when would you -- when should we see higher taxes on the cash flow in the next couple of years.

Well, we expect the taxes to [ be ] flat as we are at the same level of percentage. The same level of percentage, we are on basically 30%, which is a flat rate in Mexico. So we don't foresee an increase in cash. And you're right, we are using depreciation over years to reduce the taxes, but once we reduce the depreciation, the taxes will go up, the profit will go up. So it will be a percentage of the net income coming up.

Yes, Luis. But just to clarify, before the expansion plan, you were having like MXN 1.5 billion in cash taxes. 2023, 2024, you have MXN 500 million, even though you're a bigger company, that's what I'm saying. So it's been lower now. So when should we see that you eat up all your tax credits in the next couple of years from the expansion plan, I mean.

Yes. It will take like a couple of years to get out of that situation because of the depreciation. As we said, we are coming out the [indiscernible] cycle. The decision will take a couple of years to be digested. And yes, it will go up as the net income goes. So it will be basically a percentage of the net income.

Okay. And one more if I may. Considering the strong free cash flow quarter this 2025, are you expecting positive free cash flow for the entire year?

Yes. Absolutely.

But that is not enough to cover the dividend that you announced, right?

Yes. Well, we meant before dividends, cash flow is very positive.

We have no more questions through the phone. We have two questions through the chat one from Andres Coello and [indiscernible] related to the telco law. I think we have answered that.

So we do expect to have a much better relationship with this government that will last for sure. I mean it's -- we have open communications we work with these guys. And I think everything will now much better.

Okay. Well, with no more questions in the queue. This session is concluded. I pass the call over to Mr. Enrique Yamuni for final remarks.

Thank you very much, and we for sure we are alert to any doubts you have or any more information that you may need. As a final reminder, please contact our Investor Relations person if you have any questions or concerns related to the company. Have a wonderful day and a great weekend.

Thank you all for being in the conference.