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Executives

Pedro Insussarry – Head of Finance

Franco Bertone – CEO

Adrián Calaza – CFO

Analysts

Marcio Fernandez – Merrill Lynch

Telecom Argentina S.A. (TEO) Q1 2011 Earnings Call May 3, 2011 11:00 AM ET

Operator

Good day everyone, welcome to Telecom Argentina First quarter 2011 Earnings conference call. Today call is being recorded. Participating on today’s call we have Mr. Franco Bertone, Chief Executive Officer of Telecom Argentina; Mr. Adrián Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Finance Director ; and Mrs. Solange Barthe Dennin, Manager of Investor Relations.

At this time, I’d like to turn the conference over to Mr. Pedro Insussarry. Please go ahead, sir.

Pedro Insussarry

Okay, good morning to everybody and thank you very much for participating in this conference call. As mentioned by [inaudible] our moderator the purpose of this call to share with you the consolidated results of Telecom Argentina and correspond to the first quarter fiscal year 2011 ended on last March 31st. We would like to remind you that for all those that have not received our press release or our presentation you can call our investor relations office or download them from the investor relation section of our website at www.telecom.com.ar/investors.

Additionally this conference call is being broadcasted through the website feature available in sub section and can also be replayed through this same feature. Before we continue with the conference call I would like to go over the typical Safe Harbor information and other details of the call. So we would 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 the public emergency law or complementary regulation, the effects of ongoing industry and economic regulation, possible changes in demand for Telecom products and services, and the effects of marginal factors such as changes in general market or economic conditions, in legislation, or in regulation.

Our press release dated March 2nd, 2011, a copy of which is being included in a 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.

As usual in our quarterly conference calls, the agenda for today as seen in slide two is to go over the general market overview, then we’ll go over through some business highlights, and after that we’ll go over some specifics of the evolution of our financial figures, and we will end the call with a traditional Q&A session.

I’ll go over the brief macro overview as an introduction to the general operating environment. In slide three, we include some snapshots of the current Argentina macroeconomic environment. You can note that a macro conditions are giving support to the growth of our business during the first quarter the Argentina economy continued its growing trends the private consumption the main driver of the economy while the investment protection leaded the expansion to our car production and construction materials show the best performance in the sector.

Going forward it is possible that in the next quarters the [inaudible] restrains could slow down the industrial output if winter temperatures are severe. Moreover the agriculture period of harvest has begun and the protection would be near to record levels in the context of high commodity prices. In the context of high inflation increasing consumptions investment in construction and expenditure in tourism have been the waves. The population reacted to inflation on the contrary to savings that have been discouraged by low real interest rates.

Telecommunication services have benefited in this context, expense and increase in demand for Telecom goods and all orientation with [inaudible] Our cost structure suffered a reduced impact from it. On the fiscal front the banner seems stable, I word it as slightly improved taking into account the production in the use of unconventional resources like certain bank and National Pension Fund transfers to the treasury.

None the less, subsidiaries to the private sector continued growing particularly in sectors like energy and transport together with high transfers for social plans. Also despite government measures to limit imports these have been growing at a higher pace than expected. Yes, with increasing commodity prices we have benefitted Argentina with better terms of trade particularly in the first quarter trade surplus decreased by 10% when compared to the first quarter 2010.

In this challenging macroeconomic context our company has more than well performed in the quarter both in terms of business and operations as we will see during this conference call. After having gone through this introduction let me pass the call to Franco Bertone who will go over with the business highlights. Franco?

Franco Bertone

Thank you Pedro, and good morning everyone. First quarter 2011 delivered a strong results. We continue leading the mobile market retaining number one from net adds for the second year in a row capturing valuable customer and successfully developing the customer interest for mobile internet and other value added services.

As highlighted in slide five in this quarter our mobile ARPU increased 16% year-on-year, thanks to booming value added service revenue fostered by mobile internet, social networking and SMS. We introduced tablet devices in the market maintaining our innovation leadership.

In the fixed broadband business too, we kept pursuing product innovation to differentiate our service delivery and competition. Moreover in the fixed voice we have seen that migrating customer to smart [ph] plans has increased the minutes of usage and grown ARPU 6% year-on-year. Financial performance with sustained profitability with strong cash flow generation and the net income increase of 63% year-on-year.

So let’s now drive to some detail of our mobile operations referring slide 6 of the presentation. In the Argentina mobile market we experienced strong quarterly result over a 16% year-on-year ARPU increase and a customer base growing 13% and posting 100 basis point increase in our estimate market share to a 32.7%. We represent net as in market share in excess of 60% over the last 12 months. We strengthen our leadership with tablet, 3G clients more than doubled boosting non SMS ADSL usage.

Slide 7 shows the value added revenue growth at an impressive 72% year-over-year. This was achieved with continued expansion of 3G services which drove non SMS revenues to record level. We launched with exclusivity the Motorola XOOM tablet while it increases maximum penetration with [inaudible] and SRC dropped to 16% of service revenue because of lower subsidies.

Slide 8 shows how our mobile revenues evolved in Argentina reaching 2.7 billion pesos this quarter, a 33% increase or 673 million compared to first quarter 2010. Value added service played the strongest part in revenue distinction posting a 463 million pesos increase. Prepaid traffic voice and a monthly fees revenues were up 8% mobile interconnection revenue up 7%, handset sale up 63%.

Let’s move now to the wireless business in slide number 9, the broadband subscriber base grow substantially in line with competition, innovation and service delivery which is taken to the market with mobile and fix broadband bundling and ADSL 2 turbo our latest project. Customer can experiment a speedy increase in their broadband connection at hours of day of their preference [ph] in general broadband [inaudible] to sustain ARPU growth and general reduction why the estimated market share along this replay is continued at 35%.

And slide 10 shows lines in service kept growing at the 1% rate the average monthly billable up 6% when compared to first quarter 2010 by reaching 44 pesos a month. Supplementary services and the continuing integration to slab plan delivered the result despite frozen tariff. Bundled services with fixed broadband also contributes to growth as well as the customer loyalty.

The evolution of wireline revenue as shown in slide 11, third party revenues totaled 1.2 billion pesos 14% increase or 150 million compared to the fiscal 2010. Internet broadband is the key revenue growth driver, increasing 25% year-on-year followed by data services with a 15% year-on-year expansion. Meanwhile fixed telephony business saw a 9% growth for monthly fee a 6% for five major services and a 15% growth for interconnection revenues.

Slide 12 shows that CapEx which was affected by this quarter seasonality [inaudible] 335 million or 8% of consolidated revenue. Still we maintain our budget of 2.5 billion for the year for using CapEx into major capacity and quality of services for the growing purpose of data traffic. In the future addition strength will substantially contribute to an expand mobile user broadband experience. These were the business highlight as I call to Adrián he will go through the financial of the quarter.

Adrián Calaza

Thank you, good morning to everyone. The business highlights mentioned by Franco Bertone have reflected into significant results in terms of revenues and profitability. Please refer to slide 14 where we can see the evolution of revenues and operating profit before depreciation and amortization. In the first quarter of 2011 consolidated revenue 4.1 billion pesos growing by 27% when compared to the first quarter of 2010. We can also see the contribution of regulated revenue currently account for 13% of total revenues decreasing mainly because of the outstanding performance of the value added service in recent years.

Our operating profit before depreciation and amortization present also strong growth of 26% when compared to the first quarter of 2010. Although maintaining margins on a year-on-year comparison wanting to underline taking into account the cost pressure context of the country as mentioned by Franco. So for further details please refer to slide 15 where we can see the breakout of our consolidated cost structure. Some few remarks about the cost structure that we would like to highlight are our marketing and sales efforts in preparation to number portability the higher fiscal pressure from local and provisional jurisdiction and the continued search for efficiencies in the interconnection from another.

This is reflected in the evolution of our cost as a percentage of revenue where the main variation were marketing and sales expense representing 22.6% increasing from 20.1% in the first quarter of last year. While interconnection calls represented 8.9% of consolidated revenues from 10.8% in the same quarter of last year.

As seen in slide 16, due to the strong performance of the operating profit before depreciation and amortization the operating profit grew at 38% year-on-year growth reaching almost one billion pesos thanks to the expansion and profited financial results arriving from the cancellation of debt instrument in the Argentina operation. We entered the first quarter of 2011 a total income of 628 million pesos equivalent to growth of 53% on an annual basis.

On the financial side in slide 17 you can see our performance in fact a slow generation in the last 12 months that reached 1.9 billion pesos even after paying 1.1 billion pesos in tax. This lead to us to net cash position of 1.7 billion pesos as of March 31st that represented an increase of 852 million pesos in the last 12 months. It is what [inaudible] Telecom Argentina paid a cash dividend of 915 million pesos so having concluded with the presentation we are moving to any question that you may have. Thank you very much.

Question-and-Answer session

Operator

(Operator Instructions) We will take our first question from Marcio Fernandez with Merrill Lynch.

Marcio Fernandez – Merrill Lynch

Thank you good morning everyone. Have a couple of questions first on the challenge that Telecom Argentina has to keep the margins given the inflationary environment and the question is whether what kind of measures are you have been recently taken to try to preserve margins despite the inflation. And secondly clearly as also probably as a result of inflation you’ve been able to pass through customer some price increase given the ARPU that seems to be going up and what kind of rights do you think are reasonable to expect from ARPU growth going forward. If not giving the specific number if you think you can basically offset whatever the inflation is with the ARPU and if I may a third question, I apologize is an update on the spectrum auction in Argentina please thank you.

Adrián Calaza

The challenge of keeping margins is definitely a challenge. I think we posted some success in that. I would say – I would make a general comment on that in saying that the overall pressure that we have on our margin on the cost side is quite limited. I mean it is nowhere near to the inflation rate that are currently being valued for the Argentina market so that help us and as a matter of managing supply and achieving increasing efficiency of our operations. We did adopt and we did pass a repricing on our products as all the industry as a matter of fact we were last of the operators over the last few months to adopt a price increase on our regulated carriage.

As a matter of fact these price increases are pretty nominal as a matter of fact they do change the nominal prices as they apply with the authority that the net effect that these prices increase and the blend to the fact net of effect that these prices increase have on the actual hike paid by our customer is very different. As a matter of fact the average cost per minute and the average cost for megahertz bandwidth in the ADSL or the average cost for short messages keep dropping over time as effect of promotion on traffic and therefore for commercial activity that we apply to not only to new customer also the existing base.

So in general terms we are stern believers that our prospect of growing revenues and margin depends more on the development of the existing customer base then on price of the services that we charge. As far as your question is about whether we can sustain the current ARPU growth overtime I would say that the current growth we experienced is almost twice as much as the guidance we gave to the market with a three year plan so we certainly believe that ARPU growth will soften overtime. That’s what you see is what we are achieving in the current quarter and as a matter of fact in the physical matrices that they are behind in terms of meaningful usage and bandwidth of usage and number of messages exchanged by our customer are the main driver of the growth we experienced.

As far as to your last point about the spectrum auction we are in line to that. We will serve a substantial financial resources from our net profit of 2010 to save that commitment without that and we are really hopeful that will happen in the near future as the – the overall efficiency of our operation will benefit from that. At the time being we have invested a lot on physical structures to cope with the growth of our customer base and particularly the growth of their data usage and obviously having available additional spectrum the overall growth we supported with high level of qualities and more efficiency of CapEx deployment.

Marcio Fernandez – Merrill Lynch

Okay, thank you very much.

Adrian Calaza

Thank you.

Operator

(Operator Instructions) And we will return to Marcio Fernandez.

Marcio Fernandez – Merrill Lynch

Thank you very much for the follow up. Any idea of how much the spectrum – well first of all how many megahertz are coming and how much spectrum? How much will that cost. Has the government gave any new indication of that and you mentioned you are confident that it will happen in the near term, is this still first half this year is it going to happen second half this year. Thank you.

Adrián Calaza

Sure, the question is difficult to answer. The exact date well of the auction is still unknown to the market. I mean we definitely hope that will happen at the earliest. In terms of megahertz that will become available rather than the prevailing factor is not what the bandwidth that will auctioned is what the 320 cap that applies to individual operators into individual area of operations. As far as we are concerned in the metropolitan area [inaudible] we have an ability to grow at 7.5 megahertz and in the North and Southern part where we can grow 10 megahertz of our exhibiting frequency allocation. So that what we will be bidding, similar thing would apply to the other players in the market. At what price? We are not prepared to disclose and obviously we don’t know.

Marcio Fernandez – Merrill Lynch

And is there any possibility that this cap on spectrum will be could be higher than what you were expecting?

Adrian Calaza

Not at this round we believe that there is a following round of spectrum auctioned in the 1.7 and 2.1 gigahertz bandwidth that is being announced and should be put in place at a later date. That will definitely require additional frequency [inaudible] that is a common request from all operator and I think the regulator is considering that option but that would not be part of the 850 and 1900 auction we are expecting shortly for which the currently frequency cap would apply.

Marcio Fernandez – Merrill Lynch

Okay, and then on two different subjects clearly as a percentage of revenues is outstanding in Telecom Argentina now 40%, actually 46%. Do you have any benchmark because clearly in case of Argentina I think SMS plays a key role here to explain why it’s so high and is there any market you are looking as there – besides probably Italy but is there any market that you are looking as a benchmark to what you can do in Argentina?

Adrián Calaza

I think we are the buying benchmark on the others I mean. But we still believe that there is a scope of growth I mean our experience over a year or so is showing that there is a scope for growth in that I mean Argentina has extraordinarily development in value added services from the time of short messaging. The rate of growth as we are experiencing on non SMS and therefore navigation browsing content and the rest is much stronger obviously of the longer term we had on internet so I think we are entering the phase two and [inaudible] SMS stage in which we are expecting the market to be as buoyant as it has been for the SMS in the past. But we are really happy to be the benchmark for the others.

Marcio Fernandez – Merrill Lynch

Okay, thank you very much.

Operator

(Operator Instructions) And we will go next to Jasmine [inaudible].

Unidentified Analyst

Hi, thank you very much and congratulation on a fantastic result. I was surprised at the 6% voice ARPU growth, could you elaborate and give us more color on that and do you see that repeating going forward. Thanks.

Franco Bertone

Jasmine can you repeat your question? You really came out pretty low.

Unidentified Analyst

Sorry, so the 6% voice ARPU growth what drove that exactly if you could add more colors to that and also do you see that repeating going forward?

Franco Bertone

In fixed line ARPU?

Unidentified Analyst

Yes.

Franco Bertone

Okay, well, I think – thank you for your remarks, I understand it attracts your attention since we are operating with growth in tariff on regulated service. They do apply to our fixed line business. The 6% is the result of supplementary service we have been introducing in the market that are built on top of services to which frozen tariff do apply and based on – the second factor is that there is a growing percentage of our customer base that is in excess of 30% of the base itself that did migrate from carriage kind of building to slab services that we have been offering since on wire. And then the flat [ph] packages are [inaudible] arrival of minutes of usage that is above the average of the customer base and that’s consequently the corresponding flat rate is widely above ARPU of the non-slab traffic customers. Its combined effect of supplementary priority service and flat slab pricing has been delivering this 6% or slightly higher of the 5% that we have in the past. That is a sustained and sustainable trend for the future as well.

Operator

(Operator Instructions) And it appears that we have no further questions.

Franco Bertone

Thank you very much for attending our conference call for the quarter and please keep touch with us for any additional and further clarification you may have we would be at your disposal, thank you very much for your attention.

Operator

And that will conclude today’s conference call. Thank you everyone for your participation.

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