Telecom Argentina SA (TEO) 2007 Q1 法說會逐字稿

Good day, everyone. Welcome to the Telecom Argentina first quarter 2007 earnings conference call. Today's call is being recorded.

Participating on today's call, we have Carlos Felices, Chairman; Mr. Valerio Cavallo, Chief Financial Officer; Pablo Caride, Finance Director; and Pedro Insussarry, Investor Relations Manager. At this time, I will turn the call over to Mr. Felices. Please go ahead, sir.

Good morning. I would like to thank everybody for participating in this conference call. This is Carlos Felices speaking.

As an introduction to this conference call, I would like to go over some highlights of the quarter. As you were able to see in the press release distributed yesterday, we continue to deliver growth in terms of our operations and financial results. Our revenues continue to grow, showing an increase of 28%, reaching approximately ARS2.1 billion during the first quarter of the fiscal year 2007, mainly fueled by the expansion of our cellular and internet business. Our operating profit before depreciation and amortization showed an increase of 26% to ARS688 million, and our operating profit increased by 82%, reaching ARS358 million. Net income total was ARS135 million during the three-month period ended March 31, 2007. Moreover, we continue to deliver healthy levels of cash flow that allowed us to finance our CapEx programs that support the growth of our business and continue adjusting our capital structure.

On the operational side during the last 12 months, our customer base in the cellular business grew by 51%, our fixed lines in service by 4% and our ADSL customers by 111%. That's showing our competitive strength in the different markets that we serve.

We would like to point out that these results are in line with the main developments that we have expected for the first quarter of 2007 in terms of continuous expansion of our cellular and internet business and also consistent with the efforts that the Company is undertaking in order to offer its customers attractive solutions for their increasing and progressively sophisticated demands for telecommunication services in a trend of improving profitability.

After this introduction, I would like to pass the call to Valerio Cavallo and Pedro Insussarry, who will go into the specifics of the results that we have announced yesterday. Before the Q&A session, I will close our presentation with some final remarks.

Before we continue with the conference call, we'd [like a] translator during the conference call.

In the 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 May 10, 2007, a copy of which is being included in a Form 6-K report furnished to the SEC, describes certain factors that may affect any forward-looking statements that we may produce during this session. Furthermore, we ask the audience of this conference call to read a disclaimer clause contained in slide 1 on the presentation.

As usual, we would like to remind you that, for all those that have not received our press release or our presentation, you can call our office or download them from the Investor Relations section of our website at www.telecom.com.ar. Additionally, this conference call is being broadcasted through the webcast feature available in such section and can also be replayed through this same feature.

After having done these clarifications, let me pass the call to Valerio Cavallo.

Thank you. We'll get on with the conference call. The agenda for today's call, as seen in slide 2, is, first of all, the evolution of the Telecom Group and general overview of the context in which we operate. Then we will go through a brief description of the performance of our fixed-line operation, including the internet and data transmission business. And, finally, we will describe the evolution of our cellular business.

Going to slide 3 of the presentation, we are summarizing the most relevant issues of the market and the regulatory environment. The Argentine economy continues to expand strongly, where inflation continues to be the main concern, as the 12-month CPI was up summarily 9%.

The cellular market continues to grow, reaching a nominal penetration of over 80% of population. This growth resulted in incremental revenues but also with the strong commercial expenses associated to it. In a highly competitive and dynamic market environment, Personal implemented actions to strengthen its brand positioning, focusing on its quality of service and increase the market (inaudible) through the expansion of its distribution channels throughout the country. Furthermore, Personal continues to develop its CapEx plan and strengthening our network facilities and improving information technology to support the commercial and customer retention-related activities.

The fixed-line business continued to grow in a moderate pace with ADSL as the main driver. Competition is mainly focused in long distance, corporate and government accounts, as well as broadband services.

It's important to highlight that, in April, Telecom sold its subsidiary, Publicom, engaged in the directories business by an amount of up to summarily $60 million. The Telecom Group decided to divest in this non-core activity, although the obligations related to the distribution of directories to its customers will be fulfilled as usual. The proceeds from this transaction will be applied to the repayment of the Telecom Argentina notes.

Going to slide 4, the consolidated income statement shows that the Telecom Group has been able to offset the effects of the enhanced commercial activities and inflationary pressures in the overall cost structure, giving a strong expansion of the operating profit before depreciation and amortization, maintaining hedging to the level of [just a] year ago. Additionally, operating profit increased both in terms of a nominal pesos and margin, while net income for the quarter reached ARS135 million, which compares to ARS3 million registered in the first quarter of 2006. Finally, our net financial debt decreased by approximately ARS1.052 billion, or 25%, since March 2006, mainly due to the strong cash generation of the Group. It's important to note that, in April 2007, Telecom Argentina has performed a prepayment by the equivalent of approximately $81 million, thus reducing short to medium term cash needs. We can see that our financial ratios continue to improve and are comfortably within industry standards. With a net debt to EBITDA ratio of 1.2 times as of March 2007.

Going to slide 5, we are showing the evolution of the consolidated revenues, broken down by business segment. The rapid growth experienced in our cellular business permitted the participation of mobile revenues to account for 62% of total consolidated revenues as of the first quarter of 2007. Additionally, internet services and data transmission showed an increase of 21%, reaching a participation of 8% of total revenues.

Going to slide 6, we can see our CapEx broken down by company. CapEx for the first quarter of 2007 amounted to ARS104 million, ARS80 million and ARS14 million for Telecom Argentina, Telecom Personal and Nucleo, respectively. Total CapEx represented approximately 10% of revenues, with a 7% growth compared to registered in the first quarter of 2006. In the fixed-line business, CapEx is mainly oriented towards increasing the coverage and the speed of our ADSL access and the maintenance of the network. In addition, resources are being dedicated to the upgrade of our fixed-line network to the latest technology available, such as the development of a next-generation network using internet protocol technology that will permit us to enhance our portfolio of services, reduce maintenance costs and gain CapEx efficiency.

Regarding the cellular business in Argentina, we continue expanding our network in the south, consistent with the commercial success that Telecom Personal is achieving in that region, and also increasing capacity [beyond the] northern region of the country, as well developing the network in order to offer the most innovative services. Finally, consolidated investment in information technology are focused on enhancing efficiency and control by means of a new ERP system and further improving customer relations facilities through a new CRM system in the cellular business.

Carrying on through the evolution of our consolidated figures, I will pass the call back to Pedro, who will continue with a description of the fixed-line and cellular business.

Thank you. Going to slide 8, we can see that the main items of the income statement of Telecom Argentina on an unconsolidated basis. In the first quarter of 2007, revenues grew by ARS81 million, or 10%, as compared to the same period in 2006, totaling ARS890 million. The most dynamic segments were internet and the interconnection revenues coming from the cellular industry. Regarding costs, OpEx rose by ARS58 million, or 14%, due to the general price increases affecting the overall cost structure. Meanwhile, operating profit before depreciation and amortization amounted to ARS425 million, 6% higher than that registered in the previous year. Furthermore, the nominal amount of operating profit and respective margin increased due to the reduction in amortization charges. Finally, net income amounted to ARS135 million as compared to ARS3 million registered in the first quarter of 2006.

In slide 9, we note that the fixed lines and service continue to increase at the rate of approximately 4% year over year. This growth is a consequence of the intense commercial activity performed by Telecom Argentina in the retail market. Total voice traffic volume showed a positive trend in DLD and ILD segments. Moreover, local rates continue to be affected by the tariff freeze imposed by the Argentine government. In the first quarter 2007, the average revenue per fixed-line customer, including only voice-related services, remained stable at ARS39 per month when compared to the first quarter 2006.

In slide 10, you can see the evolution of the internet business. Total ADSL customers reached 526,000, 111% more than those registered in March 2006, reaching a penetration of approximately 13% of total Telecom lines and service. This expansion is a consequence of Telecom's strategy of launching high quality products at accessible prices, such as the Arnet 640KB Flat product, which showed an excellent performance during the period. In the ISP business, the ISP business registered an increase of 141% in the broadband segment, while dial-up ISP subscribers decreased by 23%.

Going to a description of the cellular business in Argentina in slide 12, we can see the unconsolidated income statement of Telecom Personal. Total revenues grew by ARS370 million, or 45%, when compared to the first quarter of 2006 to approximately ARS1.2 billion. Service revenues totaled approximately ARS1.1 billion, with an increase of 48%. This is mainly driven by a strong subscriber growth by higher levels of traffic and incremental use of value-added services.

With regards to operating costs, these have increased by ARS257 million, or 37%. Higher expenses are related to the expansion of the business, such as direct taxes and sales, interconnection commissions on prepaid cards, as well as to the efforts undertaken to capture the opportunities of the impressive growth evidenced in the market, evidenced through subscriber acquisition and retention costs.

Meanwhile, operating profit before depreciation and amortization amounted to ARS227 million, 99% higher when compared to that registered one year ago. On a [pre-SAC] and SRC basis, OPBDA increased by 57%, reaching a margin of 43%. It is very important to highlight that Telecom Personal is managing to achieve an important recovery of its OPBDA margin while the business continues to expand.

We can see in slide 13 the positive evolution of the subscriber base in Argentina. As of March 2007, customers of Telecom Personal increased by 3 million, or 47%, year over year and almost by 0.9 million, or 11%, when compared to December 2006. GSM customers represented 91% of the subscriber base by the end of the quarter. Telecom Personal continues to work towards the consolidation of its market position in the northern and Buenos Aires region and to gain market share in the southern region. Moreover, despite the high penetration of the cellular service, we continue to gain post-pay customers, although we're starting to see that the new subscribers are coming predominantly from the prepaid segment.

Going to slide 14, we can see that significant subscriber growth mentioned before was achieved with a 4% increase in ARPU when compared with the first quarter of 2006. Finally, as an example of the incremental participation of value-added services, outgoing SMS traffic increased by 73% when compared with the first quarter of 2006.

Going to slide 15, we can see the evolution of gross additions and subscriber acquisition and retention costs. It is important to highlight that SAC and SRC costs are starting to decline as a percentage of revenues. In addition, gross additions amounted to 1.4 million subscribers, 53% more than those registered in the same period of the previous fiscal year.

Finally, we see in slide 16 that our subsidiary, Nucleo, which operates in Paraguay, showed an increase in revenues denominated in pesos of 35% while maintaining a healthy level of OPBDA margin of 37%. Moreover, Nucleo has expanded its customer base by 93%, while ARPU has been affected by the effect of new subscribers that generate ARPUs below the average. Nucleo's operations delivered healthy levels of cash flow that permitted a substantial deleveraging of its balance sheet and has started to pay dividends to its shareholders.

Having concluded with the presentation, let me pass the call back to Carlos Felices for final remarks.

Okay. Thank you, Pedro. At the conclusion of what we have been discussing during this conference call, you can see that our operations continue to evolve very positively with sustained growth in terms of revenues and the confirmation of a positive cash flow generation. In particular, we are seeing a recovery in the operating margins of our wireless business.

Regarding 2007, we expect that our business will continue to grow mainly in the cellular and internet segments, that our margins will continue to improve, as we expect a recovery of efficiency in the scenario where the penetration in Argentina reaches maturity. It is important to mention that, according to our estimations Telecom Personal has achieved in growing in terms of revenues above the average of the market, thanks to its market positioning and ARPU performance, and this has resulted in an increase of our revenue share. We expect that consolidated margins will gradually improve, with an increase in the nominal amount of OPBDA.

In terms of our fixed-line business, we are focusing on our goal to maintain OPBDA in nominal terms, leveraging in the growth of opportunities coming from our broadband operations that should offset inflationary and wage-related pressures on our cost structure. Particularly, we expect that the current wage negotiations to close, and we expect to close an agreement with our unions in a short period of time.

In terms of CapEx, we will continue investing in the latest available technologies, such as the announced investment in an information highway in the fixed-line business and the introduction of the most innovative service in the (inaudible).

Finally, I would like to refer to the recent organization and model implemented by the Telecom Argentina Group that will facilitate the cooperation and synergies between our business segments. In particular, with this new model, management has a unified vision under Chief Operations Officer with responsibilities over both businesses, fixed and cellular, while the corporate functions are grouped under the responsibility of a Director of Corporate Matters.

Having concluded the presentation, we are more than pleased to answer any questions you may have. Thank you very much.

Thank you, Mr. Felices. (OPERATOR INSTRUCTIONS). We'll take our first question from Dan [Quitkowski with Schroeders].

Congratulations on the very good results. I've got four questions. Should I just go through them one by one?

That would be great, Dan.

The first question is in the drop in [MOUs] in Personal in the quarter. I realize that some of that's seasonal and also that there must be a prepaid effect there. What should we expect MOUs in Personal going forward?

I would say that the trend will continue to be what you've seen in the recent quarters, basically, the effect is-- First, we are gaining marginal customers. Second, we're seeing that the trend of incremental value-added services, mainly SMS has also an effect on MOUs. As long as we continue gaining penetration in the market, we'll gain more marginal customers. And the MOUs will continue to decline. Just to mention-- remember that ARPUs have increased year over year. The decline that you've seen in the first quarter is obviously due to seasonality, summer season here in Argentina. But, basically, we've been able to continue to increase the ARPU, and that's what we've mentioned before, basically due to the marketing strategies and the strategy that the Company implements.

Right. The second question is on Nucleo. Obviously, there's a sharp drop in ARPU there. What's the strategy at Nucleo? Is it now going--? Are you now sort of really pushing for subscriber growth at the expense of ARPU, or have I misread that?

The Paraguay market is a very particular market. It's a market that is, I would say, fairly penetrated. Obviously, we have much lower penetration in Argentina. But the most important characteristic of this market is that the subscriber acquisition costs are really, really minimal. So, basically, the cost of accessing additional customers is marginal. So, basically, pushing for growth an additional peso or dollar or guarani coming from Paraguay doesn't importantly a significant effort in terms of customer acquisition cost.

Okay. Great. The last two questions. You paid tax in the quarter. Can you remind me what the status is of your deferred taxes? Do you expect to pay taxes in 2007? I'm talking about cash taxes and also talking about the tax line in your income statement. And the second question is - what's your CapEx for the full year?

In terms of taxes, the only tax that is related to income or that can be applied as an advance payment to the income tax is the presumed minimum income tax that is basically calculated as a percentage of certain assets of a company. But in terms of income tax, we haven't paid any income tax. What you've seen is basically the effects of the deferred tax methodology that is used in the balance sheet of the Company.

Right. But, in your income statement, you have an outflow.

It's basically-- it's not a cash item. It's basically an accrued effect. It's basically the effect of the deferred income tax methodology.

Right. Okay.

One minor clarification, obviously, in the case of Nucleo. In Nucleo, we pay income tax. And, in the case of Publicom, we also paid income tax, but, obviously, we've recently divested that operation.

Great. And the CapEx?

We're estimating CapEx of approximately $450 million. 60% of that will be dedicated to the cellular operations.

Thank you very much. Congratulations.

Our next question will come from Marc Estigarribia from Citigroup.

Just a couple questions. Can you give updated guidance on your margins for the year? I believe in the last call you were pointing to gradually increase from '06. It seems like the first quarter you came through with a nice subscriber load and with profitability. I'm wondering if that's sustainable at this level, around 33%. Also, can you tell us when we should expect sort of a video product impact on the fixed-line business? Is that more of a three- to five-year story? Also, on the wage negotiations, I think they're asking for a 25% increase. You had guided more around 22% increase. Do you think that that we should expect that lower increase in wages?

I'll answer the question on margins, and I'll leave the other two questions to Carlos Felices. In terms of margins, we expect that margins will be somewhat in the level that you see in the first quarter. Basically, the dynamics there are an improvement in the cellular business and a gradual decrease in the fixed-line business. Basically, the guidance that we gave last quarter was that, by the end of the year, we should be seeing OPBDA margins in the cellular business in the proximity of approximately 20% and a decline in the fixed-line business. But we expect that EBITDA should be basically flat year over year during 2007.

Is that because of the lower subsidies or lower handset costs or a combination of both?

It's basically fueled by revenue growth, more efficiency in our cost structure and a lower impact of subscriber acquisition costs and subscriber retention costs.

The second question-- I thought that referred to [IPTV].

Yes; exactly, just an update on video launch.

You know that we are pending of regulatory approval. What we think is this approval will take place-- we expect it will take place sometime around the end of the year. What we are doing internally is making tests and working in order to be prepared for the moment that we receive the approval to operate in this line of business. But we don't expect any commercial activity before the yearend.

The second question regarding the unions and the request-- effectively, they are requesting percentages around 22% or 23%. The view of the Company is that the increase should not exceed 14% in this line. But we are still in discussions, and this is premature to have a definitive conclusion.

Can you also comment on the impact we should expect from the NGN network on the fixed-line side some sort of substantial impacts? Do you think we should feel that in '08 more than this year? And, also, on the mobile side, the path you're building towards 3G. I think there's an update on that on the mobile side for impact. Thank you.

Well, in the mobile side in 3G, we are in a campaign, and you will see in the days to come that we have started to move in the direction [toward] third generation in an area close to the downtown of Buenos Aires. It's the beginning of the process. We are in testing, and this we can-- we'll launch a campaign in order to announce to the public that we are ready to operate with 3G in this area that I mentioned to you before.

In terms of the NGN, what we are doing is we continue investing in fiber optics in order to progressively having better coverage of the north part of the country. It's a process that will take a period of time. It will take more than two or three years to be completed. And this is the plan.

Great. Thank you.

We'll take our next question from [Andreas Guerello] with Merrill Lynch.

Buenos tardes, senores. First, I would like to congratulate you on such a good quarter. Today, as you know, Mauricio Fernandez with Merrill Lynch raised the price objective for Telecom Argentina ADR from $25 to $28. I have two questions for you. First, how many subs do you expect to close the year, considering both Argentina and Paraguay? And, second, what is your expectation for Argentina's ARPU for 2007 and 2008? And I would like to know if there were any nonrecurring gains or accounting changes that supported the growth in margins last quarter.

As far as the ARPU of Telecom Personal in Argentina, we are expecting an average ARPU for the full year of more or less ARS40. There are no current results in the first quarter or during the year, except the sale of Publicom.

Extraordinary.

Extraordinary.

Okay. And what about the subscriptions for this year?

We believe that in Telecom Personal we will be able to be a little above 10 million customers to the end of the year.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). We'll take our next question from Roger Oey with BANIF.

I have questions on, first of all, in terms of margins. We saw some seasonality in terms of margins last year, fourth quarter, with the lower margins. Do you think this will happen again this year? The other question is regarding the growth itself. Penetration rates are already above 80% in Argentina, and you guys are still talking about growing the wireless business. What kind of penetration should we see for Argentina by the end of the year, and what's the limit you think is for the country in the medium to long term?

In terms of margin seasonality, Roger, basically, you should continue to see margin improvements, at least in the second quarter and the third quarter. And you may see a slight impact, again, of seasonality, basically in the fourth quarter. In that quarter, you have Mother's Day and Christmas season that are normally-- I would say two of the three key days in terms of consumption or acquisition of new cellular handsets and promotions in the industry. We expect that, in the second and third quarter, margins will continue to improve to the level that we've mentioned before, approximately 20%-- in the level of 20%. And, possibly, in the fourth quarter you may see an impact. But also remember that we've seen that traffic levels are strong. ARPUs are improving, and we expect ARPUs to continue to grow during the year.

In terms of penetration, although we've been consistently wrong year after year, but I think we're close to the area that we'll start to be right in terms of our estimations of penetration. We expect that penetration should be in the range of 90% by the end of the year. Currently, we are at 82%, an estimated penetration. And over that penetration, I would say that Argentina should enter into a maturity phase of single digit growth.

Okay. Another question is a delicate subject, but it's regarding Telecom Italia/Telefonica deal and how the authorities see this in Argentina. Do you think there's any kind of measures-- the government might take any measures as far as this deal? And what kind of inquiry do you get from authorities at this point?

Until now, we didn't receive any letter or any question from the regulatory authorities. This is what we can comment because we didn't receive any questions.

Okay. Thank you.

We'll take our next question from [Rajnesh Hawar] with JP Morgan.

My first question is on handset subsidies. It seems the handset subsidies dropped off quite a bit in the first quarter, despite your (inaudible) rising by some 53%. Is this sustainable? And the second question I have is on multiple SIM ownership. Have you seen any evidence? And, if you could, share some behavior aspects that could suggest that implied human penetration is actually lower than your suggested penetration of 82% to 83%. Thank you.

In terms of handset subsidies, basically the Company has reduced its handset subsidies, basically, in the prepaid segment. We have started to tighten in terms of the pricing policy. And, answering specifically your question, yes; we expect that this is sustainable in the long run. As a matter of fact, we continue to grow in terms of handset subsidies, having implemented these measures by the end of last year.

In terms of multiple ownership in the cellular business-- a difficult question with, I would say, no clear answer. We have some estimations that could indicate that less than 10% of the market has dual handsets. But, again, that's an estimation that we have.

Can I ask an additional question? Can you share with us your share of additional subscribers, incremental subscribers that are coming from south? And how much of your incremental subscribers for the rest of the year do you expect from south and the rest from north and Buenos Aires?

No. Unfortunately, we don't disclose the gross adds. And, in any case, call us at the office, and we can give you some flavor on that. But, basically, we don't disclose that information.

Okay. Thanks.

(OPERATOR INSTRUCTIONS). We'll take our next question from Carlos Gomez with Credit Suisse.

I have a quick question. Are you planning to use the full $60 million of receipts from Publicom to make repayments on your bonds next October?

No. According to the indenture of the bonds, we have to apply the proceeds of the sale of Publicom in a period of 45 days from the closing of the transaction. So you should expect a payment of approximately $60 million by the end of the month.

Okay. Thank you.

And there are no further questions at this time. Mr. Felices, may I turn the call back over to you for any closing remarks?

Once again, thank you for participating in our conference call, and please feel free to call our investor relation department for any additional questions you may have. Thank you much, and good day for you.

And that does conclude the conference for today. We thank you for your participation. Have a wonderful day.