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

Good morning. Welcome to Megacable's Second Quarter 2026 Earnings Conference Call. With us this morning, we have Mr. Enrique Yamuni, CEO; and Mr. Raymundo Fernández, Deputy CEO; and 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 oor revise any forward-looking statements. I will turn now the call to Mr. Enrique Yamuni, Sir, you maybe you may begin.

Good morning, everyone, and thank you for joining us today. I am pleased to present Megacable's results for the second quarter of this year, a period in which we continue to grow our brand and has characterized our company in recent years, growing even faster than the market despite the challenging competitive and macroeconomic environment. Our net additions came within the range we have communicated and remain stable, which speaks of the quality of our platform and the discipline behind our growth. Aligned with this approach, our continued subscriber growth pace led to surpass the 6 million Internet users mark. And as in previous periods, this trend has been accompanied by growth in revenue, thus providing that our subscribers are actively contributing to value creation. The company has entered a clearly defined strategy phase. Over the past 4 years, we have expanded and modernized our network, taking our footprint beyond 19 million homes passed and transforming Megacable into a predominantly fiber-based operator. Most of that expansion is now behind us. Our broader priority is to capture more value from the investments already made, increase penetration, monetize the network and adapt execution to the specific conditions of each market. And regarding our most recent expansion, it is worth noting that during the first half of the year, we have added more than 0.5 million new homes passed, but we have also upgraded more than 600,000 homes passed from HFC to FTTH for a total of more than 1.1 million new fiber homes built in the first 6 months of the year. Our growth strategy goes beyond consistently expanding our homes passed footprint. It also focuses on migrating subscribers to the latest technology and providing them with a superior service experience. As a result, 88% of our subscribers are transferred to GPON technology, substantially strengthening our ability to deliver high-quality services and higher bandwidth capabilities. And most importantly, we have shifted all of these while maintaining optical CapEx level. We continue to convert and build our network and still maintain investment figures in line with the ranges we have shared or evidence of the efficiencies, which will -- with which we are now deploying our capital. Within the interest price segment, we continue restructuring our corporate business in order to address a highly competitive market we're integrating connectivity when services and solutions have become essential. During this period, we began to see signs of stabilization. Financially, revenue and EBITDA continued to grow and net income remained strong among our best quarterly results since the second quarter of 2023. Our margin held stable rather than widening due to the onetime impact of our [indiscernible] promotions of last year. This effect is seasonal and distinct from the structural cost actions I described earlier. Once we move past it, we expect margins to resume to steady growth. Our [indiscernible] remains a source of strength as reflected in [indiscernible] rating recent reversion of our national scale AAA rating with a stable outlook. It is important to highlight that despite the dividend paid this quarter, which required no additional debt, our net-to-debt-to-EBITDA ratio remained within the 1.1 to 1.2x range. This means we do not need to presume [indiscernible] the leveraging as an objective. Cash [indiscernible] above that level can support shareholders' distributions for strategic opportunities that meet our operating and return criteria. Capital allocation remains disciplined. Investment in the first half following the seasonality we have seen in prior years remain consistent with our annual plan and marked the lowest first half CapEx levels since the expansion project was announced. As we move beyond the peak of the expansion cycle, every peso invested must support network quality penetration, productivity or an attractive return. Regarding artificial intelligence, we are focused on improving operational efficiencies. Our current objective is to enhance processes and functions to their digitalization. In addition, we are introducing this technology into the most critical areas of the business aiming to achieve cost and expense efficiencies. The structural responsible for the implementation of AI has already been established, and we expect to share the results with you so. In the meantime, we continue to pursue other opportunities to improve efficiencies, including workforce reduction across corporate back office, field sales, field sales and operational areas, mainly due to the automation and digitalization of current processes. As a result, we have reduced [indiscernible] accounts by more than 1,300 positions at the compared to year-end of'25. In [indiscernible], Mercari has completed a major expansion cycle and is moving into a face center on execution and returns. Our priorities are clear: grow broadband we discipline protect the consumer experience; monetize the footprint, improve efficiencies into the organization; and preserve the financial flexibility that has long distinguished the company. The resilience of this company lies not only in the homes we have built and our steady subscriber growth that in our proven ability to efficiently migrate and acquire subscribers already in fiber. With that, let me turn the call over to Raymundo for the operational review.

Thanks, Enrique, and good morning, everyone. Building on Enrique's remarks, the second quarter was characterized by a steady and disciplined operating growth. The company emphasizes profitable and sustainable improvement ensuring that subscriber additions are accompanied by a strong monetization performance. While our commercial execution continued to support subscriber growth, prioritizing quality additions, the operating focus is increasingly shifting from adding scale to extracting more value from the scale or replace, highlighting efficiency and operational productivity. Let me begin with Broadband. We added 112,000 Internet subscribers sequentially and surpassed 6 million subscribers at quarter end. These results remain within the 100,000 to 150,000 range we have communicated and was above the first quarter. On a year-over-year basis, the Internet base increased 8.5%, equivalent to 474,000 net additions over the last 12 months. That growth is supported by superior network. At quarter end, our footprint reached 19.8 million [indiscernible], up 9% year-over-year across approximately 111,000 kilometers. More importantly, 88% of our subscriber base has already been migrated to a full cyber -- fiber service compared with 80% a year ago. Our increasingly fiber-based platform allow us to offer higher speeds, expand capacity and improve reliability, strengthen both customer experience and the competitive position of our service, while giving us a stronger infrastructure form which to pursue operating efficiency. In content, the mix continued to chip from traditional video toward a broader digital proposition. Traditional video closed at 3.8 million subscribers, while uses of our streaming applications reached 2.4 million. As a result, unique Video subscribers totaled roughly 4 million subscribers at quarter end. Our objective is to serve different viewing preferences through a combination of linear channels, applications and other digital formats. Our MVNO operations also continued to expand Mobile lines increased 26% year-over-year to 781,000 with 40,000 sequential net additions. Mobile complements our fixed service and extend the customer relationship beyond the home, adding a converse dimension to our value proposition shown remain at the same level compared with the first quarter an increase on an annual comparison to reach 2.0% for Broadband, maintaining these levels in a competitive market indicates that service quality and our overall value proposition remains sound. ARPU measure of our Internet subscribers on the methodology introduced at year-end 2025 was MXN 438.8, and decline on a sequential basis. This decrease is primarily attributable to the temporary effect of commercial promotions implemented last year. Nevertheless, this commercial strategy contributed to strengthened customer acquisition a rotation, driving subscriber base growth and long-term value creation. We continue to manage our [indiscernible] together, balancing monetization, retention and sustainable subscriber growth. The Corporate Telecom segment showed decreased improvement this quarter. After several quarters of contraction, revenue increased 5% year-over-year in the quarter and 0.1% in the first half. Looking ahead to the second half of the year, we remain optimistic, our diversified portfolio and a dedicated team focused on delivering value position us to build on this momentum. To conclude, we are successfully transitioning from expansion to a stage of consolidation, marked by the pursuit of efficiency and higher productivity, including process automation and digitalization in which AI will play a very relevant role. Overall, the operating platform remains strong. Subscriber growth continues within the range we have communicated. The fiber transition is well advanced, [indiscernible] is stable and corporate has returned to growth. Our priorities for the remainder of the year are to improve penetration, deepen the customer relationship capture more value from the existing footprint and advance the efficiency initiatives now underway. Thank you for your attention. I will now turn the call over to Luis for the financial review.

Thank you, Raymundo, and good morning, everyone. Let me begin by the top line. Second quarter consolidated revenue totaled MXN 9.3 billion, an increase of 7% year-over-year. Revenue growth moderated slightly when compared to the first quarter, while subscriber growth remained within the operating range we have communicated. By segment, mass market revenue increased nearly 8% year-over-year to MXN 8 billion and remained the main driver of consolidated growth. . Corporate revenue rose approximately 4% in the quarter, making a return to growth after several quarters of contraction. Mobile revenue totaled MXN 274 million, marking an all-time high for the segment. The strong performance was driven by continued subscriber growth and the ongoing integration of mobile services into the company's bundled offerings. As Enrique mentioned earlier, this quarter's revenue included a onetime effect related to a promotional offer during last year's [ OneThing ] campaign, which granted subscribers 1 month of free service. The benefit associated with this promotion was recognized between May and June of this year for eligible subscribers, while the initial contributed to subscriber growth and retention. We don't expect any recurring impact from this promotion in future periods. Moving down the [ PL ]. Cost of services totaled MXN 2.5 billion up 5% year-over-year, while SG&A was MXN 2.6 billion, an increase of 11%, make [indiscernible] with labor costs reflecting both the annual minimum wage adjustments and the working force build during the expansion phase. Labor expense declined sequentially from its first quarter peak, although it remained above the level recorded in the second quarter of 2025. EBITDA reached MXN 4.2 billion, up 6% year-over-year. The EBITDA margin was 44.9% compared to 45.4% in the second quarter of 2025, reflecting a cost base that has not yet fully adjusted to the company's current operating base. We have taken actions to align head count and strengthen cost growth through productivity gains. The benefit should develop over time rather than appear in a single quarter. Net income was approximately MXN 252 million, an increase of 11% year-over-year and higher than the figure recorded in the first quarter. Financing costs were an important contributor. Interest expense declined more than 19% from the prior year period. Our predominantly peso-denominated debt profile with a significant variable rate component has allowed the company to benefit from the current interest rate environment and a favorable foreign exchange backdrop while maintaining a conservative approach to financial risks. Capital expenditure totaled MXN 2.2 billion in the quarter, equivalent to 23.4% of revenue and MXN 4.2 billion or 2.3% of revenue for the entire fiscal. We are confident reducing our CapEx forecast for 2026. And now we expect to be among 23% to 25% for the entire year. At quarter end, cash and investments were MXN 4.7 million. Total debt was MXN 26.2 billion, and net debt was MXN 21.6 billion, an annual decrease of 8%. Net debt-to-EBITDA was 1.31x compared to 1.56x in the same period last year and 1.25x in the first quarter with a sequential increase mainly reflected the dividend payment of last May. Interest coverage was 6.81x, and leverage remains within the 1.1 to 1.3x range we considered conservative. In summary, revenue continued to grow. Corporate return to positive territory and lower financing costs supporting strong net income. Margin performance remains our principal area of focus with actions already underway to moderate labor costs. At the same time, the balance sheet remains conservative and provides flexibility for investment and shareholder distribution with no additional debt. Thank you for your trust. I will now open the floor for questions.

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

Questions. So the first question is regarding the ARPU. So I mean, what we saw -- the weakness we saw just to be sure, it was an accounting effect of a discount that you gave last year. So just why was recognized now? And if we should look for the ARPU of the first quarter as a good indication of what's expected to come? And the second question is, you said, I think, 20% to 24% CapEx range for the year. How do you think of the CapEx for next year?

Thank you, Marcelo. Yes, as we explained, we have the promotion for the [indiscernible] promotion that contributed to subscriber growth at the end of last year and take the -- now we have to -- it was so successful that the subscribers, what we provide to them is 1 month for free that has to provide it at the end of a certain period. That period ended in May and June, and it hit us in that part. So we believe it's a onetime effect. Taking away that we will have an increase in the -- slight increase in the [indiscernible] pretty similar to what we have before, but not a decline on that. That's a promotion that was successful, and as I said, was at the end of last year, and you shouldn't expect that to be something that affects on a regular base, let's call it that way. More than that, we are more focused and part of the -- what we're trying to send the message is that from here on after this period of big expansion, we're in a process of bringing more productivity, more efficiency, trying to go into the macroeconomic part of the Megacable, bringing a good range of subscribers between the 100,000 to 150,000 scribers per quarter, probably in the middle of the range normally, okay, but trying to focus into the churn that has a decline compared to last year, okay? And we will focus into increasing and trying to bring those margins back to the company, where at the end, we know that the effect of the revenue can send a message of lower ARPU on that. But we feel comfortable that you will see a second half getting to the levels that the company normally provide. And the other one, the CapEx, Luis?

Yes, Marcelo, thank you for the question. Yes, confirming that we are taking our CapEx between 23% and 25% for 2026. And for 2027, we stick to the previous message we have said that the CapEx will be around 22% to 24%. And also, Marcelo, I'd like to add to what Luis says, we expect a good second half in terms of CapEx, when control and as a different years, we are not expanding our [indiscernible] who are migrating less subscribers because we have 88% of subscriber already migrate. So the CapEx point towards expansion is less unless every time. I'd like to point that the organic CapEx is around 15% of revenue. So we're very happy with what we will see into the fusion to come. Don't have any doubt that the CapEx that we sold you around that 22% to 24%, it will be in the lowest range for next year, even though we don't likely to set. But I'm very confident that we can have in the lowest part of the range, we're telling you about. And that will release many things for the company, including free cash flow on that part.

Thank you, Marcelo. I don't know if we answered everything. We talk too much.

No, you answered very well, but there's a follow-up. This 15% you mentioned of organic CapEx, what's included in there?

Well, pretty much everything we need to keep the growth -- the regular growth of subscriber within the plan, the fiber compass that we have. As we said, we did mention, we're close to 20 million compass on that part. What is not included is to continue to upgrade HFC to fiber or to expand kilometers of fiber within the expansion territories, the rest is included on that.

The next question comes from the line of [indiscernible] from HSBC.

The first 1 is regarding the -- could you quantify what is the impact of the promotion that you had in 2Q and whether it would impact even the month of July. So will it impact in the 3Q results. The second one is on your EBITDA margin. I mean, now that you are very focused on expanding your current network, do you expect -- where do we expect the EBITDA margin to reach in the longer term? Is it in line to your previous guidance?

Thank you, Fanny, for the question. Again, the promotion of the Bonten impact cost in July. As we say, that promotion is very clear. It's a promotion that we provide subscribers amount for free, that is reflected in May and June, not in July. So you don't expect that to happen in July. Of course, in a competitive market, we have a promotion, but that's a very particular promotion that we do at the end of November, which is the one thing or the Black Friday for us in Mexico. So I don't expect that to happen. We expect to go back to a better level and not having this nonreturning effect. The rest of the promotion normally are on a month-to-month basis, and you'll see you have that in the last 3 to 4 years. This is a particular one that, again, don't expect to affect us. The other one is the EBITDA margin that we have margin, as we said, Enrique mentioned, it is special at the end of this quarter, we decreased more than 1,000 employees within the company. We continue to digitalize, automate and use the AI within the company. We are really, really focused in having an expansion of the subscriber base having also a decreasing cost and OpEx of the company through efficiency and productivity that will continue to bring EBITDA and better margin to the company. And at the end, the CapEx that we say decreasing to the levels that Luis is telling you between 23% to 25% for 2026 and 22% to 24% for 2027 and decreasing above. I'm pretty sure that's going to continue to bring better margins and better numbers for the company.

Maybe a quick follow-up. Could you quantify what is the impact of this one-off promotion?

The impact of the 1-month promotion will have the revenue growth in levels between 7% to 9%. And so it will be the usual growth in revenues for the quarter compared to the previous year, and the EBITDA levels will be around also 8.5% to 8.7%. So that's basically the impact of the promotion.

And that's a very good question [ Fannie ], and I don't know if it's clear for everybody. But taking away that promotion, everything would look very different.

The next question comes from the line of Andres Cardona from Citi.

I have one question about capital allocation, you have been explaining us how the rate is declining to net leverage is at 1.3x. And I wonder if something will change on the dividend policy? Or if at this point time, you are evaluating inorganic growth? How should appetite that there you may want to -- you may be willing to controlling or even have a minority stake in any given inorganic growth opportunities just exploring capital allocation.

You want to [indiscernible]. Okay, let me go. Thank you, Andres, for that. Look, we know we're creating free cash flow. We're very happy in that. We have several options within the management and the Board and were presented to the Board. It's clear that we will do what's best for the company and the shareholders. Within all those, we feel comfortable with the dividend policy that we have now is one of the highest in the industry on the part, give you a good yield on that part. But we are not against restructuring our debt. As we say, we feel comfortable between the 1 to 1.3x. On that part, we are telling you that we are not also very strong into looking to repay debt on that part, but more infrastructure. Other options that we have on that free cash flow is the M&A opportunities that may arise. We are active on that part. We want to be active in the market. We have the balance, we have the position. So for every opportunity that bring to the shareholders, management is pursuing those opportunities. So it can be all of the bond, whatever is the best for the shareholders, whether we do an M&A, whether we increase dividends, whether restructuring the debt, whether -- whatever else it can be around. Some people can tell us about doing the buybacks of the shares. For me -- not for me, for the management here, it will be the least likable to be. We would like to do something better, M&A, restructuring, dividends, whatever it comes to the to our opportunities. So the good thing is that we're in a very, very good balanced cash flow generation, creation, growth of the company to be a strong participant of all of those opportunities. .

Just a follow-up here if you tie M&A, you say the condition that you have the control of this potential deal or you are open to have co-control or even minority stake?

Well, as we said, Andres, at this point, we're very interested in looking for M&A opportunities. We are not close to whatever best for the shareholders on that part. If controlling is the best for this organization, of course, that's a priority, but we will look for what the best. As we can see, our position is very positive to be a strong player in the M&A market.

And the next question comes from Lucca Brendim from Bank of America.

I also have 2 from my side. The first one, you accelerated revenues in the corporate business this quarter. I wanted to understand if this is the new normal, if there are one-offs and how can we expect this line going forward? And then the second one, how long do you guys think you can maintain the current net adds that you have in the 100,000, 150,000 net adds per quarter. Is this something that can last for the next 2, 3 years? How long do you think it can last?

Thank you, Lucca. Revenue, as we said, we went through a transition from high ARPU connectivity to a lower ARPU connectivity and bring in value-added services on top of that, that's part of the market. Now we are 3 fixed telco companies that provide fiber plus another enterprise companies that also provide. So it has taken us a while to transform that one because to a familiar with the technology. But normally, we sell dedicated secure cybersecurity lines on the corporate level compared to the GPON. Once you GPON, GPON is a best effort and spread the band between different companies. It has a lower ARR. So we went to that transition, and it's taking quite a while to transform the way we provide services to the subscribers. We are very happy that now looks like we stabilized and we were growing. I expect that to continue to be slightly, but strike to be is a challenge. But I will say it has to be positive, not negative on that part going into the future. We're very committed like particularly that business unit, even so it's 15% of our company. It has a lot of possibility. We are very efficient in doing that, and we expect that to happen into fusion. Now regarding the net adds coming into the next years, Well, you all have told us about market penetration, about how broadband reaches almost 90%. It is around 7% according to the figures that we have for urban penetration, 83% nationwide. So 87% some room to grow yes, marginal because the levels you are getting at lower economic levels. So we have to be very careful on that. And the other part to growth on that part is getting that market between 4 people going from 1 side to the other. And that's what makes the challenge for everybody. is a very competitive market between the [indiscernible] with companies that tolerate companies that over tariffs to get there. The good thing is that we have, I believe, the best content proposition with the best connectivity proposition. We are the 1 that provides the highest bandwidth to start with the 200 megabits on the [indiscernible]. And as I said, we are not a cable company. We are a fiber telco company. Our lines are already -- so we're very, very well positioned. But that doesn't mean it's going to be between 100 million, 150 million for the next 3 or 4 years, that will be too optimistic of our part. I believe we can continue to bring between 100 million to 150 million pretty much in the range of 120,000, 125,000. That's where we feel it has to be and also because we are not only focusing bringing more subscribers. We are focused on bringing continued growth of the subscriber but producing the share, as I said in my remarks, shown compared to last year decreased on the broadband, slightly decrease in a very competitive market with the World Cup and every coming. And I say they work out because the World cup took away money from the market, and that's a pressure that comes to all of us for new ads and for whatever it is in the market to keep track. So next we managed to cap the 2%. So we would like to focus in retaining subscriber in the organic market doing expansion in territories that bought in a very, let's say, strategic way. I would like to 100,000 gross ads and 30,000 disconnections because of the -- that only contributed to a decrease of the margin. So we're focusing the right balance, and I believe that taking away the promotion of last year, with continued big trend to bring those kind of results.

The next question comes from Emilio Fuentes from [indiscernible].

I was wondering, you mentioned your efficiency initiatives backed by AI, do you have any expectations of what would be the margin tailwind from these initiatives?