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Executives

Pedro Insussarry – Finance Director

Franco Bertone – CEO

Adrián Calaza – CFO

Analysts

Alex Garcia – Citi

Gregg Abella – Investment Partners

Jennifer Leonard – Morgan Stanley

Federico Chateau – Raymond James

Telecom Argentina (TEO) Q1 2012 Earnings Conference Call May 4, 2012 11:00 AM ET

Operator

Good day, everyone, and welcome to the Telecom Argentina, TEO, First Quarter 2012 Earnings Conference Call. Just a reminder today’s 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.

And at this time, it is my pleasure to turn the conference over to Mr. Pedro Insussarry. Please go ahead, sir.

Pedro Insussarry

Thank you, Gloria and good morning to everybody. On behalf of Telecom Argentina, I’d like to thank everybody for participating in this conference call. As Gloria mentioned, our moderator, the purpose of this call is to share with you the consolidated results of Telecom Argentina Group that corresponds to the first quarter of fiscal year 2012 that ended last March, 31, 2011.

We would like to remind you that for all those that have not received our press release or presentation, you can call Solange Barthe and her team or download via Investor Relations section of our website located at www.telecom.com.ar/investors. Additionally, this conference call is being broadcasted through our webcast feature available in such section and can also be replayed through this same channel.

Before we continue with the conference call, I would like to go over some Safe Harbor information and other details of the call, as we usually do in our quarterly conference calls. 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 and 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 and legislation or in regulation.

Our press release dated February 3, 2012, a copy of which is being included in our 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 conference calls, the agenda for today as seen in slide two, is to go over the general market overview, then we’ll go over some business highlights, and after that, we will go over some specifics of the evolution of our financial figures. And finally, we will end the call with our traditional Q&A session.

And having gone through these procedural matters, I will go over a brief macro overview as an introduction to the general operating environment. In slide three, we include some snapshots on the current Argentine macroeconomic scenario. Through the first quarter 2012 private consumption maintaining its emphasis being the main driver of the economy. The international context has shown improvements as moderate recovery in the US continues and in Europe somehow received although risks remain high.

Regarding domestic factors some decelerations has been noted after complicated fourth quarter of 2011. The measures taken by the authority seeing to come into effect interest rates have decreased and capital outflows that is, although the industrial production has accelerated.

Measures taken in the FX market and monetary policy being rather our commodities drove interest rates to low level stimulating or continue to stimulate prior consumption. And this trends inflation remains high, while we have started somewhat at the lower levels than previous year.

The fiscal front continues to show gradual deterioration despite the policies taken by the federal administration to transfer this to private sector mainly through reductions and subsidies on the external front after measures adopted in late 2011 to mitigate a potential deterioration of the balance and payments decreased to its lower level than last two years well extras remain rather stable, thanks to high commodity prices.

After having gone through this introduction of the macro context in which we operate, let me pass the call to Franco Bertone, who will go over the business highlights.

Franco Bertone

Thank you, Pedro and good morning to everyone. 1Q 2012 delivered solid topline growth in margin. Sales were strong and we kept growing more than the market basis. Overall performance spending line of exceeded guidance that we provided due to margin.

Please turn to slide five for first quarter business highlights. Mobile business have to continued to retain market leadership of cost savings, land refining contain and being those movements if you are not MNP were well received and strengthen our position in the market. Value-added services continued to be the main driver of growth increasing 44% year-on-year, and unprecedented 62% in the last service revenue.

Internet wireline revenues showed a strong performance. Our Bandwidth wireline 3G broadband product is providing – proving quite successful. FTTC service deployment program started and it’s ramping according to plan.

Bandwidth fiscal year was up IFRS reporting and margin were up 10% from sales marketing efforts along with operational roaming cost due to subsidized electrical power rates being discontinued by last quarter.

Nonetheless, financial performance very strong. Last week, we announced an $0.82 to the rate of dividend per share that will be faced are in excess. There is now a direct company phase of our mobile operation. And in slide six, it’s all public rate inflation

In the Argentina mobile market, we continue leading the growth with a 10% year-on-year well above peers. We scored top place in the quarter and being from this performance in the postpaid segment in anticipation of MNP. On an annual basis, postpaid subscriber grew about 17% year-on-year and currently represents 32% of our subscriber base. Meanwhile, mobile ARPU rose to P$55 also 16% year-on-year in the last quarter.

Please turn to slide seven, where we show that service revenue continue to expand as a consequence of the Value Added Service growth, it now represent more than half of our mobile service revenue as it reach a record level 15% participation of service revenue. But also its not relative to say that not only a net revenues grown by 38% and also internet service grow by 80% as the market start to adopt a more sophisticated service approach that reflected in our business development.

Having launch of Mobile Number Portability we have implemented several action plans and that could strengthen our market position, shaping a closer relationship with our customer base. Our Mobile business trend restarting to obtain in anticipation with a strong focus in customer relationship and personalization concepts. In addition, handset upgrades continue to yield our customer base, stimulate usage and facilitate upselling of services.

Distribution channel commissions were design to include (inaudible) and the quality of acquisitions together with customer retention. This generated some incremental costs this quarter affecting margin. In the first quarter of 2012, our subscriber acquisition and our retention costs before capitalization rose to 16.4% of service revenues, up from 15.3% reported in the same quarter of 2011.

Please turn to slide eight; we have a snapshot on our Paraguayan operation, which made some progress in its overall performance. Nucleo has been operating in a healthy macroeconomic environment and ranks number two in a consolidated four player’s marketplace.

This quarter the company continued its expansion trends to earn revenues and margins. We enjoy distinctive markets as we seen for innovation. ARPU increased by 8% in local currency driven our premium network quality and leadership in mobile Internet. Stronger management processes and find their cost themselves improve our operational performance in the market.

Moreover, revised regulation faster competition in SMSs and voice traffic through lower interconnection rate facing the market to a much healthier shape where (inaudible) demands and growth promotion will discontinue with a positive impact on MOU and TOU. Financially, Núcleo holds a sound financial position and thanks to an improved debt structure refinanced in local currencies with in longer tenors and competitive interest rates. On April 2, the company paid a dividend for the shareholders Telecom Personal have received a cube of equivalent of $5 million net of a (inaudible).

Slide number nine, shows how our mobile revenues evolved, reaching more than P$3.7 billion in the first quarter were 29% increase of P$822 million, when compared to the same quarter of 2011. Data services laid a strong good start in the revenue (inaudible) both being a P$367 million increase a 38% growth year-on-year followed by incremental increase of 80% equivalent to P$120 million or P$80 million.

Voice and broadband services were up 18% and 3% respectively, while equipment slightly low by 34%. Our Paraguayan operation also a year-on-year increase in our P$10 billion.

Please move to the wireline business that represented in slide 10. Broadband perform very well this quarter. Our subscriber days expanded 11% ARPU low 16% and quarter revenue to grow 31% year-on-year. Churn stayed low. Innovative services such as video streaming service Arnet Play or Arnet Turbo that moves the client bandwidth as well as its targeted 10-mega residential offer, contribute to client retention and improved customer experience.

Slide 11, shows that voice landline service has increased, close to 1% per year with an average monthly bill growing 7% year-on-year. Customers find attractive our flat pricing proposition with unlimited local call time or 100 to 300 call packages with no time limits.

The evolution of wireline revenues is shown in the next slide. Third-party revenues totaled P$1.5 billion, 14% increase year-on-year. Internet and data services are the main drivers of growth, increasing 31% and 21% year-on-year respectively. Meanwhile, fixed telephony business posted an 8% where we gave those services and 1% decrease in wholesale services.

Finally slide 13, shows CapEx rollout totaling $690 million a 13% of consolidated revenue and a 39% year-on-year increase. CapEx goals improved wireline fixed and mobile access capacity and core network. With initials FTTC deployment access bandwidth and we’re in the process of installing low-visual impact cell sites to extend our mobile access network at a popular stage.

Well these were the business highlights, I wanted to share with you. I will pass the call to Adrián, who will go over the financial performance.

Adrián Calaza

Thank you, Franco. Good morning to, everyone. The strong business evolution that Franco just mentioned allowed us to sustain the levels of growth in terms of revenues and profitability and to achieve robust cash flow generation.

In slide 15, the evolution of revenues and operating profit before depreciation and amortization have shown. Please note that starting the current fiscal year we have adopted IFRS reporting standards. And for a comparative purposes 2011 figures has been restated under such standards.

Consolidated revenues reached in the first quarter of 2012 P$5.1 billion with a strong growth of 24%, when compared to the first quarter of last year. While the contribution of revenues coming from fixed services with regulated tariff continue to (inaudible) for a 11% of the total.

Operating profit before depreciation and amortization for the first quarter of 2012 grew by 15% when compared to the same period of last year totaling P$1.6 billion. It is worth to mention than margins were affected by several effects particularly related actions to bandwidth and specific marketing campaigns initiated during the quarter together with the intense commercial activities that anticipated the implementation of Mobile Number Portability were some of the factors that impacted margins. This was covered by a general increase in overhead that was affected by inflation. In addition, higher cost of energy due to an (inaudible) of subsidies for both Telecom Argentina and Telecom Personal also impacted margins.

Now please refer to slide 16, with a breakdown of our consolidated cost structures percentages. As mentioned before, you can see the SAC and SRC increase slightly impacted increase, slightly impacted our marketing and sales expenses joined by higher labor related and energy costs is less two items included in outlook. These increases were partially compensated with a reduction in connection costs achieved through domestic roaming cost reductions and a restless focus in increasing the efficiencies to mitigate cost inflation effects.

As seen in slide 17, operating profit growth 8% year-on-year, reaching P$1 billion with the margin of 20%. This result on the positive financial and holding results, Telecom Argentina posted a total net income of P$708 million equivalent to a growth of 11% when compared to 2011. Net income attributable to Telecom Argentina slowness of the trend, totaled P$699 million.

Regarding to the financial position in slide 18, we illustrate our quickest flow generation of the last 12 months, where we are still perform – well performing, thanks to our strong operating free cash flow of P$1.9 million. It’s allowed us to reach a net cash position of nearly P$3 billion at the end of the first quarter.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today is from Alex Garcia with Citi.

Alex Garcia – Citi

Good morning, everyone. I have two questions. The first one is regarding what are the potential outcomes from your cash position, I mean what are the alternatives, how flexible that is I mean, is there deadline you guys have to use it that would be my first question, where you guys could invest and money. The second question is very quickly it’s on provision for bad debt. And I saw that it jump it 77% year-on-year just wanted to see there was anything punctual or you guys have observe it some change in anyone of that trend? Thank you that was the two questions I have.

Franco Bertone

Yes, I am – two questions as far as your use of our cash availability it’s really have no specific plan other than the increase of capital expenditure that are – we have been forecasting for the year. That includes a strong acceleration programs for data mobile, a brand new program for FTTC deployment and are usually the frequency spectrum action that we expect to be completed into the next quarter.

But your remark that bad debt while it’s a high percentage increase that is very low figure in absolute terms talking about and increase a P$30 million compared to last year. As you indicated is really related to a specific effect related to our form of permanent of sale of internet download that our sales as postpaid I would say with contract we must have meet to that at least the level of internet expansion our customers that basically the direct consequence of the shortage of spectrum within experiencing.

And therefore, level of service is there is a mix expectation of certain capital of customer that present to use mobile internet as a replacement of ADSL connections. There is no way, this is probably the design by just ways part of the population is expecting these service to perform. It doesn’t make those expectation is customer doesn’t use the service anymore at talks paying the bill that goes directly to bad debt it makes a significant percentage jump as you noted in percentage as I such before in terms of actual dollars either there limited effect to the P$30 million.

Alex Garcia – Citi

A follow-up question if I may it doesn’t you guys have not seen the impact coming from the cut in the subsidies on electric PUCO some of the movements we expect sort of like a reduction in the disposable income. That doesn’t have to do – those are – these are other things right? It doesn’t – they are not connected, right?

Franco Bertone

Yeah, correct. I mean the – we have not seen what you say as a matter of fact bad debt level remains with exception of specific case that I mentioned before, record low and we haven’t seen any impact on that performance coming from the overall microeconomic scenario constrain.

Alex Garcia – Citi

Okay, thank you guys. Thank you very much.

Franco Bertone

Thank you.

Operator

We’ll take our next question today from Gregg Abella with Investment Partners.

Gregg Abella – Investment Partners

Good afternoon guys. I am going to deal with the elephant in the room here for a second. With these metrics in my opinion if this company were located anywhere else in the free world, we wouldn’t be dealing with a $14 ADR because of the 30 year possibly 40. So let me ask a quick question. I think that the issue really overhanging the stock seems to be whether or not the government would take some steps to nationalize Telecom Argentina. So have you been contracted at any level by the government regarding possible nationalization?

Franco Bertone

Yes, thank you. Thank you for your question, now that we really find difficult to relocate somewhere else with our 26 million clients but we’re quite happy to operate here. No, we haven’t had any indication and honestly we don’t expect any surprise in that respect, and the payment of dividend that was approved as announced at shareholder meeting a week ago was approved and mostly by all the main shareholders including our (inaudible) shareholders and then I think is a good proof that we are in a quite carefully

Gregg Abella – Investment Partners

Well, then as a quick just a follow-up and you consider possibly that the things that other corporations do to address a severe under valuation of security such as a stock repurchase plan or something of that nature.

Franco Bertone

We have no plan in that respect, but always we are considering all the possibilities.

Gregg Abella – Investment Partners

If I would hope that, you would take a look at your valuation in the market and consider in the short-term some – doing something to support plus the stock because it just – this evaluation is just same.

Franco Bertone

Yeah. Appreciate your comment. Greg we share your views in some way and we look at our operation every day. Yeah, when we agree with the view on the metrics of the company.

Operator

(Operator Instructions) Our next question today is from Jennifer Leonard with Morgan Stanley.

Jennifer Leonard – Morgan Stanley

Hi, good morning. I was hoping you could provide us with an update on the 2012 labor negotiations and then I have a follow-up question on spectrum auction.

Franco Bertone

I’m sorry, yeah, labor negotiation has recently started. It is a process about two, three months and we expect it to be completed by the end of June but really too early to give you any indication. Just started as planned and according to usual early stage we have in rest of the industry cash.

Jennifer Leonard – Morgan Stanley

Okay, thank you. And then if you could just update us on the spectrum auction process at this point?

Franco Bertone

Well, the process is as a matter of fact somehow suspended or by being delayed on the verge of the conclusion of third phase. And the third phase is basically a pre-qualification process or defining has been made. Each one of the bidder had access to your common bid and tax (inaudible) as well as financial qualification based mainly in to some of the potential bidder not to qualify for the process. We are really waiting for the formal right solution only from the telecommunication authority any time in the next two to three weeks and after that and we expected and explain some very quick page number two with the actual option taking place hopefully in the first half of June.

Jennifer Leonard – Morgan Stanley

Okay thank you very much.

Franco Bertone

Thank you.

Operator

I will go next to (inaudible) with Barclays.

Unidentified Analyst

Thank you I would like to ask a question regarding the Voluntary Reserves to Finance Working Capital Investments in the country that you deed on Telecom Personal. According to your last balance sheet cash situation in teleconference now looked for your case. So it could elaborate a little bit on the reasoning why almost P$1.2 billion or being reserved on the subsidiary. Thank you.

Adrián Calaza

The reason why I mean our balance sheet is such that way is to comply with CMB resolution of last year. There really in concrete sense certified that known allocated. I mean all numbers non-distributed income should we allocated with specific reserve and they either being future dividend or future reserve. So, honestly there is no much contend and significance of those figures, because are really accounted figures and very, very deeper relation with the actual investment levels what we have is just the balance sheet has to be stated that way. And that’s why that would be – I would have give in a much important to the figure that you appear that because I said I mean that is – they carry no relation with the actual investment plans that we are executing.

Unidentified Analyst

Thank you.

Adrián Calaza

Thanks.

Operator

Next, we’ll go Federico Chateau with Raymond James.

Federico Chateau – Raymond James

Yes. Good afternoon, thanks for a call. I have two questions. The first one is related to your cash position considering that a big portion of that cash is a peso denominated. My question is what’s the room on the strategy of the company for preventing rental changes in the currency to affect your cash position? And the second one is regarding the – a working capital, we show this quarter net outflow of around $60 million, I was – the question is, is that something that you are going to see just this quarter and should we expect working capital to continue generate naturally cash flow going forward?

Adrián Calaza

Okay. I’ll try to answer your two questions. The first one related with the our cash position, we will try to apply it locally for CapEx spend and for – we will try to maintain our conservative approach with the financial use as discussed for preventing what you were mentioning – loosen out the – of the exchange rate. We are working with some instruments such as and yet our local funds that our – let’s say our coverage for an exchange rate evolution it’s basically our money that is intended for its growth. And relative to the second question, question on the working capital, it’s especially normal in this period of the year and in first quarter, we did a lot of our CapEx in the last quarter of last year. So we are saying basically saying all of this CapEx of the last quarter in the first of the year.

Federico Chateau – Raymond James

Okay, thanks.

Franco Bertone

Okay, thanks.

Operator

(Operator Instructions) And we will go back to Alex Garcia with Citi

Alex Garcia – Citi

Hi. Thanks for taking another question. When I look at slide eight from your presentation, and I see MOU and messages dropping but on the other hand, ARPU is coming up. Is it – my – the first thing that comes to my mind is that your clients are doing – using one of those messengers from the internet and typing less SMSs and calling less people. So it seems that there is – and we have seen that in the past. So I do understand that there is some change in the client behavior but my question is in terms of margins like when we look at voice, when we look at SMS and when we look at data plans, how do you describe yet, how does that changing behavior. First of all, if you agree with my observation that clients are using more broadband. And how does that play your margin?

Franco Bertone

Right, I think is a very important question, I think I made the remark on the (inaudible) I go back to it. What you note is very much – in the numbers it’s very much correct, our ARPU is increasing strongly, that physical in terms of message experiment and the MRU and particularly the message improvement are dropping. The main reason for it is that some time last year the message experiment was about year ago, we reshaped in a very deep manner our rates and pricing for incorrect access to prepaid customers.

We had I would say now we are in an adequate proposal for incentigrating internet browsing through our large prepaid customer base on the other end. The abilities, the qualities, and the capacities are the terminals that I will be celebrating that our customer base is very different and is very upgraded from what it was a year ago.

And therefore, we believe that was the right time and that was about March last year to take advantage of the capacity of internet browsing that the vast majority of the terminals used by our prepaid counter and nowadays has to reshape our pricing and push strongly for a data usage that inevitably, partially replace short messages and so that’s exactly what it is. And on the one side, you see a total reduce about 10%, but on the other end revenues from same SMS has increased as we discontinued certain, very aggressive levels of promotion and discount we have in place.

So the drop in physical number of messages exchanged by our customer did not affect SMS revenues at all, that as a matter of fact did increase. But – and most importantly, our internet browsing went up 80% in terms of revenues and the largest factor of it is that internet browsing and community is now including a substantial portion of our prepaid customer.

You may remember the launch of (inaudible) maybe a year ago, that is very successful and mentioned the market is P$1 per month per day or wide free internet browsing. If we go to margins, I think there is nothing in nature as profitable as SMSs and that we all know that and so we are making sure that revenues coming from that kind of services will now be affected by a lesser usage by our customers.

On the other end, the revenues that we generated and margin that we are generating on (inaudible) are quite attractive as well as they are not as high as the SMS one but as I’m sure you know technology platform that comes along with a Mobile network switch and really require just a server format to relay the SMSs while data services obviously require a much deeper level of the investment and more sophisticated platform.

So I mean it’s quite profitable and I think the overall balance all this things using the number we presented and where I mean overall how to increase overall profitability of the operation increase despite that most profitable element of it that SMS is going down into some value, but as we price economically. I hope I addressed the point but with very well good question.

Alex Garcia – Citi

No, no very clear, very clear. Thanks again guys.

Franco Bertone

Thank you.

Operator

And gentlemen there are no further questions at this time. I would like to turn the call back over to you for additional or concluding remarks.

Franco Bertone

Well, thank you so much for being in our conference call today. Have a good day and please get in contact with us that you’re convenient with our Investor Relations (inaudible). Thanks.

Operator

And ladies and gentlemen, that does conclude our conference for today. I’d like to thank everyone for their participation.

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