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Executives

Pedro Insussarry – Finance Director

Stefano De Angelis – Chief Executive Officer

Adrián Calaza – Chief Financial Officer

Analysts

Federico Rey Marino – Raymond James Latin America

San Dhillon – Barclays Capital Securities Ltd.

Sean Glickenhaus – HSBC Securities USA, Inc.

Telecom Argentina S.A. (TEO) Q1 2013 Earnings Call April 30, 2013 11:00 AM ET

Operator

Good day everyone, and welcome to the Telecom Argentina First Quarter 2013 Earnings Conference Call. Today's call is being recorded.

Participating on today’s call, we have Mr. Stefano De Angelis, Chief Executive Officer of Telecom Argentina; Mr. Guillermo O. Rivaben, Head of the Mobile Unit; Mr. Adrián Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Finance Director and Mrs. Solange Barthe Dennin, Manager of Investor Relations.

At this time, I'll turn the call over to Mr. Pedro Insussarry. Please go ahead.

Pedro Insussarry

Good morning to everybody. On behalf of Telecom Argentina, I would like to thank everybody for participating in this conference call. The purpose this call, as Karenna has just mentioned, is to share with you the consolidated results of the Telecom Argentina group that correspond to the first quarter 2013 ended last March 21, 2013.

We'd like to remind you that for all those that have not received our press release or presentation, you can call on our Investor Relations office or download them from the Investor Relations section of our website located at www.telecom.com.ar/investors. Additionally, this conference call is being broadcasted through the webcast for feature available in sub-section and you can also replayed through the same channel.

Before we continue with the conference call, I’d like to go over some Safe Harbor information and other details of the call as we usually do in our quarterly conference call. We’d like to clarify that during the conference call and Q&A session, we may produce certain forward-looking statements about Telecom’s future performance, plans, strategies and targets.

Such statements are subject to uncertainties that could cause Telecom’s actual results and operations to differ materially. Such uncertainties include, but are not limited to, the effects of public emergency law and complementary regulation, the effects of ongoing industry and economic regulation, possible changes in demand for Telecom products and services, and the effects of more general factors such as changes in general market or economic conditions, in legislation or in regulation.

Our press release dated April 29, 2013, a copy of which is being included in the Form 6-K report to be furnished to the SEC, describes certain factors that may affect any forward-looking statements that we may produce during this session.

Furthermore, we urge the audience of this conference call to read the disclaimer clause contained in slide one of the presentation. The agenda for today’s conference call is as seen in slide two, is first to go over the general market overview followed by the discussion of the business highlights, a review of our financial figures and finally we’ll land with our traditional Q&A session.

Having gone through these procedural matters, I will go over a brief macro overview as an introduction to the general operating environment. Please refer to slide three, where we include some snapshots of the current Argentine macroeconomic scenario. The levels of economic growth continue showing signals of a weak recovery where certain sectors are exhibiting positive trends while others like agriculture and construction continued to be the main lagers.

The harvest period has started and will be a key factor for the rest of the year in terms of the level of economic activity and constraints in the external factor. Interest rates remain low in real terms stimulating private spending, especially private consumptions, that is also affected by the levels of wage increases, government transfer to the private sector and inflation levels.

It is worth mentioning that different sectors of the economic are in the process of reaching agreements with the unions, with their labor union are necessary step to sustain consumption levels. Moreover, the continuous uncertainties in the FX market might affect the normal evolution in terms of activity and prices in the economy. The trade balance continued to deteriorate due to lower agricultural exports and increasing energy imports. On the fiscal front, the national tax collection rose by 26% year-on-year, especially helped by VAT, income tax and import related factors. This performance was achieved thanks to a steady consumption trend, increase in import and higher nominal prices in the economy.

And having gone through this introduction of the macro context in which we operate, let me pass the call to our CEO, Stefano De Angelis, who will go over the business highlights.

Stefano De Angelis

Thank you, Pedro. Good morning to everyone. Please refer to Slide 5, where we show the business highlights for the first quarter of the year. On the Mobile Business, the postpaid segment experienced an outstanding performance (inaudible) two-thirds of the quarterly net-adds and contributed to a consistent VAS revenue expansion. At the time, we continued streamlining our customer acquisition and our retention cost. Regarding the fixed business, it is worth mentioning the [data fair] which is evolution has funded a strong year-on-year growth rate, thanks to the solid position into our corporate client market. In rotated broadband services, we continue announcing our value proposition with compelling offers and focusing on the upsell of our broadband services that increased our (inaudible) and helped to control charge. When it comes to our financials, we are being able to sustain revenue growth even with limited nominal price adjustment.

Moreover, we continue to deliver healthy cash generation reaching P$1.4 billion in the last 12 months. Thanks to the fixed cost on policy came to deliver the impact of incremental costs mainly coming from direct and indirect level expenditures.

Please turn to Slide 6, to comment on the Mobile business performance. Our progress in smartphone phase and mobile Internet services continues to deliver solid set of results has been passed to consolidate revenue share this year. postpaid clients expanded by 7% year-on-year and in first quarter represent more than two-thirds of our work further in net debt expanding for 53% of our domestic mobile subscriber base with a 3% year-on-year expansion, in total 19.1 million access lines.

Mobile ARPU showed a 13% year-on-year increase to the consolidate level of charge, while the consumption levels in terms of minutes and texts per user expanded by 6% to 1% year-on-year. ARPU increase was achieved, thanks to a better capital mix and higher penetration of value-added services despite the very moderate global in tradition of services. In terms of market share, we estimate that among the three main providers of the market, Telecom Personal maintains a 33.5% market share in terms of subscribers.

Now, please go to Slide 7, where you can see that our Mobile business continue leveraging from value-added services with revenue expansion. Thanks to our successful smartphone and mobile internet value proposition together with our progress on customer convenience to improve customer’s value perception.

In this quarter, the value added services represents 55% of service revenues. As seen in the chart on the right side, SAC and SRC before capitalization decreased year-on-year in first quarter to 14.5% of service revenues down from 16.4% one year ago. Efficiency was achieved mainly in advertising and handset subsidy. SAC and SRC, we’re focus towards in leading the up sale of plans and backs in the postpaid section.

Please turn to slide eight for a snapshot of our Paraguayan operations. Our appliance in Paraguay reached $2.3 million expanding by 6% year-on-year specifically postpaid customers rose by 19% year-on-year, showing a solid market position leveraging the mobile internet services to sustain revenue expansion and market position.

In this quarter, we started to acquire our first LTE capital as we were the firth operators to launch 4G services in this country. We expect that these events will strengthen our market position based on value and innovation and we contribute and continuing growing in the postpaid segment and value-added services revenues. It is worth mentioning that new regulation would again, on that course, promotion include the incoming/outgoing traffic ratios and include the competitive environment.

In the first quarter, we’re seeing revenues converted to pesos rose by 52% year-on-year while operating income before D&A increased by 32%, which should also highlight that the local currency appreciation to the Argentine peso amplifies the performance of revenues and profits dominated in peso.

Slide nine shows the evolution of mobile revenues growing in the first quarter of the year by 20% year-on-year to P$4.4 billion. Mobile internet revenues posted the highest year-on-year growth rate of the business with a 42% increase while traditional data and content revenues expanded by 22%.

Retail voice and wholesale services were up 13% and 5% respectively while equipment sales rose by 28%. The Paraguayan operation posted a 32% growth in pesos and now account for 6% of consolidated mobile revenues. (inaudible) as we move to the performance of the fixed business. The fixed broadband subscriber base grew by 4% while its ARPU rose by 20% year-on-year making wireline broadband revenues increased by 26% in first quarter 2013 when compared to that one year ago.

These results were achieved, thanks to the continued value enhancing proposition with compelling offers that includes video streaming services, bandwidth increases and the synergies coming from the commercial agreement with the leading satellite TV providers to offer combined products.

Now in order to continue with our value proposition, we are targeting to make a variable by year end at the commercial outlook of 10 megabit per month to 60% of our capital base.

Slide 11 shows the performance of fixed-line totaling 4.1 million with a monthly payable P$49.5 increasing 6% year-on-year with the monthly churn of 0.6% in the first quarter. Moreover, we continue to achieve outstanding results in the corporate ICB segment, where we were able to reach a robust revenue performance of 31% growth year-on-year. Thanks to our approach of an end to establish integrator.

As we can see on Slide 12, we are seeing both the revenues increased 4%. Thanks to higher penetration of supplementary services, as well as flat pricing and despite tariff of bundled services from being without changes. As noted in the previous slides, data services expanded by 31% year-on-year. Thanks to appealing and integrated ICB offers to the corporate segment, while Internet services expanded by 26% year-on-year. Both services represented the 49% of our consolidated fixed revenues. As of the first quarter total is P$1.6 billion showing an overall expansion of 14%.

Slide 13, shows the evolution of our consolidated capital expenditures having invested P$741 million in the first quarter or 12% of revenues. Our efforts are focused towards the overall network capacity increase, the enhancement of the availability of voice and data services, so as to deliver and improve customer experience. One of our main priorities continues to be the FTTC network rollout in key areas with the aim of launching retail high speed broadband offer by year-end. Moreover, the 3G mobile network enhancement continues to be our top priorities. So [I preferred the payment] for additional services of our customers and the lack of additional spectrum. To better explain how we plan to achieve this growth (inaudible) the main action plan of our CapEx program.

On the Access Network launch, we have launched a scientific deployment plan to migrate to 6-sector site architecture, while we continue exploring the incremental coverage to unconventional sites that both will contribute to add incremental capacity and coverage. On the frequency (inaudible) site, spectrum refarming, and speeding 3G devices, penetration to increase the delivery of data services widely optimize spectrum utilization.. Moreover, speeding of our FTTx deployment should reposition us in the top level of the market in terms of broadband availability and capacity.

On the backbone of our network, our plan to include increasing capacity to address the continuous growth in data traffic as well as to increase the security in our trust of network with addition of fiber optic range. We also plan to add backhaul capacity to improve customer experience in mobile services while adding new technology that will reduce the current level of network workflow.

In Slide 16, we show the main KPIs for the next year of our CapEx program. In the sense, we should be traveling the number of 3G sites more than 90% of our sites should be connected with Ethernet technology while we should be doubling our International Bandwidth Capacity. Finally, we should multiply the FTP signals of cabinets by more than 5 times, significantly improving the capacity, the availability, and our fixed broadband access.

Now, with that, we go to Adrián who will go over our financial performance. Thanks.

Adrián Calaza

Thank you. The business performance that Stefano described was reflected in our financials, allowing us to continue both in terms of revenues and profits.

In Slide 17, we are showing the evolution of consolidated revenues and operating income before depreciation and amortization. In the first quarter of 2013, consolidated revenues reached P$6 billion with a growth of 18% when compared to the same quarter of 2012, even with limited price adjustments in our businesses as we said before.

It’s important to underline that revenues coming from regulated tariffs, which is less than 9% of total revenues. There have been basic signs less than last year, due not only to the growth of Mobile and Broadband businesses, especially because of (inaudible).

Operating income before depreciation and amortization totaled P$1.8 billion representing 30% of revenues and growing by 9% year-on-year with some specific postpaid items impacted significantly as we will see in the next slide.

In slide 18, we continue evolution of our operating income before depreciation and amortization will defect of the different cost items on the margin. In this first quarter, the 18% revenue growth was partially compensated especially by the increase in labor cost, labor related costs and taxes.

Salary expenses grew 28%, as those were impacted mainly by weight adjustments and higher social security expenses. Meanwhile, taxes increased due to the impact of higher turnover tax rates collected by the provinces, that reached to 5.3% of revenues up from 12.6% one year ago making the overall item of taxes and fees with voluntary authorities to increase by 30% year-on-year.

Additionally, the other item that has been growing significantly is the value-added service costs. But in this case as the consequence of a 165% growth of revenues specifically related to that.

Furthermore, the cost control efforts allowed to maintain almost all of the other items in the same range or below the growth of revenues. Even with higher volumes or activity during the same period of last year including interconnection marketing and sales and overhead such as service fees, maintenance and materials. As a result of this combination, total operating expenses reached 4.3 billion pesos, which are taking a 23% year-on-year increase.

Moreover, in slide 19, we can see the composition and the marginal analysis of our costs structure. Direct costs, labor costs represented 20% of our total operating costs of 14.3% of revenues. The increase in labor costs derived in a negative impact in the margin of 110 basis points. In the same direction, taxes and regulatory fees that have increased by 30% year-on-year now represents 14% of our operating costs and 9.9% of our revenues with a negative impact in the margin of almost 500 basis points.

These two effects represent over 80% of the margin loss reported for the quarter. On the cost savings side, we have streamlined our commercial costs through the redefinition of agent commissions and targeting the handset subsidies in contract upsell, increasing marketing and sales costs by 16% year-on-year with a positive contribution of 50 basis points in our margin.

Finally, as we just mentioned costs related to value of the services more than doubled following the evolution of revenues and increasing penetration with 23% of our costs structure and 2.2% of our revenues.

Please turn to Slide 20 to consider the performance of our operating income. The operating income before depreciation and amortization performance together with a lower impact of amortization and depreciation led to an operating income of P$1 billion representing an 18% margin in the first quarter of the year and growing at a higher pace when compared with the full-year 2012 evolution.

This results together with a positive in financial in holding results allowed us to both the net income attributable to Telecom Argentina of P$802 million growing by 15% year-on-year. Regarding our financial position, in slide 22, you can see that the Telecom Argentina Group continues to report a healthy free cash flow generation that amounted to P$1.4 million in the last 12 months allowing us to reach a net cash position exceeding P$4 billion.

So having concluded with the presentation, we are now more than pleased to answer any question you may have. Thank you very much.

Question-and-Answer Session

Operator

(Operator Instructions) And first we’ll go to Federico Rey with Raymond James.

Federico Rey Marino – Raymond James Latin America

Yes, hi, good morning, everybody. I would like if you can give us an idea of salary increases for this year? Thank you.

Stefano De Angelis

Thank you for the question. For the salary increase, at the moment, the discussion regarding the TLC contract has not started. We start to discuss this in the next month between May and June. Please give us the opportunity to set what is happening in the market. In the market, we had a reduction with every other sectors. And what is happening today? We are moving into a dynamic operating level profit of between 22% to 24% and this would be normally a strong benchmark for our discussion, another opportunity that we made slower reach to discuss with the units of difference in months, let’s move from the 12 months of the time horizon to 18 months or 24 months, that maybe give us some further flexibility.

Federico Rey Marino – Raymond James Latin America

Thank you very much.

Operator

We have no further questions. We’ll go to San Dhillon.

San Dhillon – Barclays Capital Securities Ltd.

San Dhillon here from Barclays, just a quick question on your smartphone penetration and what the ARPU uplift is you are seeing from your traditional handset users to those who move on to smartphones? Thank you.

Stefano De Angelis

We are generally aware that consider for the mobile unique, so let’s tell you we have sustained growth in terms of smartphone compared with the rest of the market. and today, we have reached more than 20% of our customer base is smartphones and when you see the [cellular] or you can see the pace, in the near future, we are running at a 50% penetration in our sell out expense on smartphones. If you go to the call region, we are today in about 96% of our cellular, they are a 3G handset.

San Dhillon – Barclays Capital Securities Ltd.

Are you seeing from that migration to 3G handset smartphones?

Stefano De Angelis

Can you repeat the question please because we are cutting off?

San Dhillon – Barclays Capital Securities Ltd.

I just want to get a sense of what are ARPU up-list is for traditional low end mobile users versus someone who upsells himself to a smartphone, what kind of, what is the mix change in your ARPU?

Stefano De Angelis

Well actually, if we take a – we have a program specific for smartphone customers that is our program that we call Personal Black. Today, in that segment, we are at 250 Argentinean pesos in terms of ARPU compares with a regular postpaid based customer that is I believe 135 pesos. And that’s the rate between our regular postpaid and a postpaid customer that uses a kind of smartphone program.

San Dhillon – Barclays Capital Securities Ltd.

Wonderful, thank you very much guys.

Operator

We’ll go to Sean Glickenhaus.

Sean Glickenhaus – HSBC Securities USA, Inc.

Hi, how are you? Thanks for the update on the fixed broadband strategy. Just a quick question, sorry, if you’ve already covered this, but I was wondering the – you had a decline sequentially in the broadband subscribers, I was hoping you could loss some market share, I was just hoping you could explain what’s going on in the market? Thanks.

Stefano De Angelis

In term of the broadband wireline market, they’re in two sides. What is happening on the market, generally, we feel very rational approach from the main competitors in terms of pricing. On the other hand, we see a market that is going to saturation in Argentina and in the Northern Region when where we operate meaning that we do not see a substantial customer base, a market customer base increase. But what you got (inaudible) in Telecom Argentina, we see in January and February we experienced negative net add, in the month of March, we move back to a positive. And the fact of that we are now, is not only that the marketing levels, what we are working strongly is on the natural. An example, we have more than 50,000 backlog lines at the (inaudible). So, if we will behave well in the next month to work strongly on the network more than in the marketing, I am sure that we will be able to move back to a growth, that again, it’s not driven by marketing, by the market – by a demand that is existing and today and that’s (inaudible).

Sean Glickenhaus – HSBC Securities USA, Inc.

Understood, thanks very much.

Operator

We have no further questions in queue.

Stefano De Angelis

Okay, thank you to everybody for participating in our call and if any further questions, just don’t hesitate to call us, especially our Investor Relations team. Good morning to everybody. Bye-bye.

Adrián Calaza

Bye, thank you.

Operator

Once again this does conclude today’s conference. We just thank you all for your participation.

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