Telecom Argentina SA (TEO) 2009 Q3 法說會逐字稿

Hi, we are about to begin. Good day, everyone, and welcome to the Telecom Argentina nine-month period and third-quarter 2009 earnings conference call. Today's call is being recorded. Participating on today's call we have Mr. Franco Bertone, Chief Executive Officer; Mr. Adrian Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Finance Director, and Ms. Solange Barthe Dennin, Manager of Investor Relations Division.

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

Okay. Good morning to everybody and thank you for participating on this conference call. As April has just mentioned, today's participants are Franco Bertone, our CEO; Adrian Calaza, our CFO; Solange Barthe Dennin, our IR Manager, and myself.

As you may know, the purpose of this call is to share with you the consolidated results of Telecom Argentina that correspond to the nine-month period of 2009 ended last September 30th.

As usual in our quarterly conference call, the agenda for today as seen in the slide two of the presentation that we distributed today, is first 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 our typical Q&A session.

Before we continue with the conference call, I would like to go over some Safe Harbor information and other details of the call. 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 public emergency law and complementary regulation, the effects of ongoing industry and economic regulation, possible changes in demand for Telecom's 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 November 10, 2009, a copy of which is being furnished in a 6-K report 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, we'd 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 Relations section at 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 the same feature.

Following with today's conference call and as an introduction to the general operating environment, I will go over the market overview described in slide three of the presentation. Some snapshots on the macroeconomic scenario that we can share with you as seen in slide three are that throughout the third quarter of 2009, the economic activity seems to stabilize while a modest recovery is expected for the end of the year.

Activity data for 3Q '09 suggests that the economy is emerging from recession, while the economic outlook for 2010 seems more positive than prior months. In the last four months, analysts estimate that the economic activity expanded at an average monthly rate of 0.5%.

Better than expected external conditions, lower interest rates, and sustained demand for commodities will allow Argentina to return to a moderate growth. These factors will help to reduce the expectations for further depreciation of the local currency.

Inflation remains high, although it shows some slowdown, especially in tradable goods. Some product services tariffs suffered some adjustments, especially those related to (inaudible) that had effect to the evolution of prices. In addition, consumer confidence has risen since March 2009, although it continues at low levels, mainly due to increasing unemployment and high inflation.

Argentina currently holds a strong trade surplus of around 5% of GDP which is explained by a significant drop of the imports coupled with a relatively better export performance. This surplus was essential to face in the first semester 2009 a high level of capital flight in the private sector which was fueled by uncertainties caused by mid-term elections. In 3Q '09 this outlook dropped significantly allowing the Central Bank to regain international reserves and to stabilize the exchange rate.

Fiscal balance continues to deteriorate as the evolution of expenditures has accelerated while tax revenues grow at a slower pace. Meanwhile, the Government seems to be working to normalize its relations with the capital markets by negotiating with hold-out of its debt. The telecommunications sector continues to demonstrate that it is a defensive sector in recessive periods outperforming overall economy performance within continuous expansion.

Regardless of the challenging macroeconomic context for Argentina, our Company has well performed in this quarter, both in terms of business and its operations, as we will see in the rest of the presentation.

And having gone through this introduction let me pass the call to Franco, who will go over some business highlights. Franco?

Thank you, Pedro. Good morning to everyone. In this nine-months period the Company continued to grow revenues, profits, margins, and market share amid strong competition, be in economic context far from ideal.

Slide number five highlights the expansion of our fixed, mobile, and broadband client base. Our market share increased in all three businesses. Results achieved in revenues and margins favorably compare with the challenging market condition that were experienced during this period. Mobile customer base growth was solid, well above the market. ARPU remain stables, thanks to strong value-added service performance, particularly wireless data and SMS.

Broadband and data were the main drivers of fixed revenue growth. Broadband ARPU continued upward with significant churn reduction, thanks to effective retention of existing customers through our brand recognition and competitiveness of value proposition to the marketplace. Our flow share reached 47% during this period.

Consolidated revenues grew by 14% to ARS8.9 billion, fixed line revenue grew by 13%, mobile revenue grew by 15% in the Argentina market.

Operating profit before depreciation and amortization increased by 13% compared with the nine-month period of 2008, totaling ARS2.9 billion. Third-quarter growth was 24%. Third-quarter operating profit before depreciation, amortization, margin over revenues grew to 32.6% from 32.1% last year. Operating profit increased 32% to ARS2 billion in the nine-month period of 2009, while third-quarter growth was 47%.

Net income totaled ARS1 billion, a 21% increase in the nine-month period, third quarter growth was 39%. Net debt is down to ARS143 million, an 88% reduction compared to a year ago. This resulted from strong cash flow generation, financial discipline and the cost control programs across the entire organization.

Please refer to Slide 6 of the presentation. In the last 12 months we added 2.1 million new customers to our mobile business reaching 14 million clients in Argentina, an increase of 17%. Once again, we outperformed the market. Our market share in September 2009 increased to 30.4% with more than 1.4 million net adds versus 1.28 million in the same period of 2008.

This quarter SAC and SRC were 40% of service revenue. Customer base expansion and retention of high-value customer was successfully pursued through different value proposition, including handset upgrade. Personal brand retained preference among youth.

Slide seven shows that growth did not dilute customer value. We were able to maintain a good mix of prepaid and postpaid customers with a strong percentage of value-added services in service revenue. Thanks to packaged pricing, ARPU was stable at ARS41 per month, while MOU continued to expand from previous quarter.

Slide eight displays the evolution of our mobile revenues in Argentina. Service revenues had increased 17% as a result of the larger subscriber base and incremental value-added service usage. VAS revenue grew by 35% or ARS434 million reaching ARS1.7 billion in the nine-month period of 2009.

In the third quarter the services represented 37% of total service revenues. In addition, monthly fees and prepaid traffic also grew significantly by 19% and 13% respectively. Handset sales including handset upgrades increased a moderate 5%.

In slide nine, we can see that our fixed line service continues to grow at a rate of 1.3% while our competitors remain stable. ARPU grew by 1% when compared to third quarter 2008, mainly due to attractive proposition of service bundle of local and long distance calls and value-added services. This quarter, we have extended throughout Telecom Argentina entire area of operation promotion denominated Superpack, a bundle of services that includes broadband access, flat rates for local calls and satellite TV through a commercial agreement with DirectTV. This now represents the opportunity to have a complete connectivity and entertainment package at an attractive price.

Slide 10 shows the evolution of broadband subscribers. Our subscriber base continued to increase significantly reaching 1.2 million, a 21% growth over the third quarter 2008. Here again, we outperformed the market. These results were delivered by improved network coverage, commercial size, innovative portfolio of services and top brand recognition.

Our market share reached 36% of the combined three main providers in marketplace. Effective promotion, pricing strategies, and the fact that customers that were incorporated during the last year have started to pay the full price of service increased ARPU by 21% when compared to third quarter 2008 reaching ARS68 per month while churn dropped to 1.6% from 1.9% in second quarter 2009.

Slide 11 shows the evolution of fixed line revenues. Third-party revenues reached more than ARS3 billion, an increase of 13% or ARS360 million compared to that reported in nine months period of 2008 even though regulated traffic continue to be frozen at 2001 level.

Regulated services now represent 51% of total fixed line revenues. It was 58% a year ago. Internet and data revenues posted 47% and 24% growth, respectively representing together an increase of ARS284 million.

Interconnection service revenues grew by 11% due to incoming traffic from third-party mobile operators that contributed higher interconnection revenues. The other side, public telephony revenues kept falling.

Monthly fees revenue registry grew 6% due to the customer base expansion, new services, and higher penetration of supplementary service. Despite the high penetration of mobile services, we are able to post a 3% increase in measured service revenue.

Service period CapEx that is shown in slide 12 totaled ARS1 billion. ARS520 million were invested in infrastructure to support both our fixed and mobile operations and ARS502 million were invested in mobile access and core platform of which around ARS240 million were allocated to 3G services.

Finally, we'd like to share with you our expectation for the operation of 2009. Assuming that the current macroeconomic condition remains stable, we continue to expect that our consolidated revenues for full fiscal year 2009 will grow in the range between 12% to 14%.

As we continue to work to mitigate the impact of inflationary pressure in our cost structure, this could allow us to maintain profitable margin at similar level as those registered in 2009. We expect our CapEx will be in the level of 14% of consolidated revenue versus 15% reported in 2008.

Having gone over our third quarter 2009 business highlights, I'd share with you our 2009 expectation, and therefore pass the call to Adrian, our CFO, who will continue with financial details.

Okay. Thank you very much Franco. Good morning to everyone. So this strength that Franco Bertone has just highlighted has turned into very good results both in terms of revenue evolution and levels of profitability, even taking into account the customer addition we have performed during the periods. Meanwhile, we have sustained high levels of cash flow generation similar to that evidenced in previous periods, despite we have started back to pay income tax.

In slide 14, we can see the evolution of revenues and operating profit before depreciation and amortization. The revenue growth has allowed us to increase our OPBDA by 14% reaching ARS2.8 billion with the margin of 32%. It is notable the increase in the level of profitability in the third quarter 2009 when compared to third quarter of 2008, although operating in an inflationary context and with strong customer acquisition.

Moreover, the expansion of our OPBDA and lower incidence of depreciation charges on revenues continued to [positively] impact our operating profit as seen in Slide 15.

Operating profit grew by 32% reaching ARS2 billion. In addition, net income reached ARS1 billion equivalent to a growth of 21%. When comparing 2009 financial results to those of the same period of 2008, we can note that our bottom line was negatively affected by the devaluation of Argentine peso, both against the US dollar and the euro. In the nine-month period of 2009, the peso depreciated around 10% and 15% against the dollar and euro respectively, being the main cause of the negative financial results reported this quarter. The differences in foreign currency exchange results between this period were a loss of approximately ARS319 million. Segregating this effect, net income would have risen 41%.

Operating profit reached ARS2 billion growing 32% against the same period of 2008 due to our outstanding operational results and the lower amortization.

Furthermore, as seen in slide 16, the expansion of the OPBDA at considered level of CapEx and despite we have returned to pay income tax, we were able to maintain a level of free cash flow of ARS1.5 billion in the last 12 months. This resulted in a significant reduction in leverage of more than ARS1 billion to reach ARS143 million of consolidated net debt at the end of the third quarter 2009. Thanks to this, we were able to cancel on October 15th the remaining portion of the debt issued in 2005 by Telecom Argentina five years in advance of the original repayment schedule. The amount paid in principal and interest was equivalent to ARS1.3 billion or $352 million.

Having cancelled the debt of Telecom Argentina, we have initiated a new period in the company where we foresee that we will have a greater financial flexibility, no significant restrictions imposed by the governance of the restructured debt and the lower interest expense on FX exposure.

In slide 17, we can see the unconsolidated statement for Telecom Personal. In this case, total revenues generated in Argentina grew by 15% to approximately ARS5.5 billion as a result of the expansion of the subscribers, the increasing traffic and usage service revenues increased by 17%.

Operating costs increased by 12% to ARS4.3 billion growing at a slower pace than the revenues. Higher expenses are mainly related to customer acquisition and retention action. Moreover, this evolution of cost is related to the impact of the inflation as we note, increases in labor cost, customer care, associated cost to new value-added service, information technology, transportation and freight. In addition, taxes have increased following the trend of revenues and due to higher rate.

Therefore, Telecom Personal in Argentina delivered a 23% increase in OPBDA, close to ARS1.5 billion for the nine-month period of 2009. It is very important to highlight that the OPBDA profitability continued to grow from 25% in the third quarter of last year to 26% of revenues for the quarter ended in September 2009.

Furthermore, operating profit increased by 29% to ARS1.2 billion, mainly due to the OPBDA expansion mentioned before and by the reduction in depreciation charges as the TDMA network was fully amortized in March 2008. Moreover, net income from Telecom Personal in nine-month period of 2009 climbed to ARS664 million, an increase of 21% when compared to that registered one year ago.

Finally, we can note that Telecom Personal made a dividend cash payment of ARS730 million to its shareholders Telecom Argentina and Nortel Inversora.

In slide 18, we can see the unconsolidated income statement of Telecom Argentina. In addition to that explained by Franco Bertone, we can note that revenues have growth at a higher pace than operating cost. Revenues grew by 14% with expenses increasing by 9% when compared to the same period of 2008. This was due to an extensive work in structural cost in the Telecom group.

Main cost variations were of lower costs with an increase of 21% partly due to one-time bonus payment granted to our employees in second quarter of 2009 and wage increases granted in July 2009 with service fee, transportation freight and network rental expenses also growing.

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

Thank you. (Operator Instructions). Our first question is from Alex Garcia of Raymond James.

Hi, good afternoon gentlemen. My question -- I have two questions. The first one if -- would be -- if you guys could detail us how is the market share performance in Paraguay? I mean, we have seen that you guys adopted the same disconnection policy off of the Argentine operation and the subscriber performance have been stable throughout the year. So, just wondering to have an idea of how much of that is in the economic slowdown that Paraguay has suffered more than its neighbors or how much is the competition developing, that's my first question?

Okay. Sorry Garcia, Franco Bertone. Answering to your question about Paraguay, yes, I mean, our market share has been in the range of 20% all across this year. I would say that the prevailing factor around this is the fact that we have aligned the parameters and the criteria of accounting for customer base in that market with the one we have in Argentina that were tighter criteria and that has generated some changes and alteration about our customer account and therefore, the market shares. I will say that's the main factor of what you have seen in [our report].

Okay. My second question is that -- I was wondering if you guys could detail a little about the agreement with DirectTV. I was wondering how can -- I mean I know that the more service you offer to the client the lower would be the disconnection rates or the churn rate, but I was just wondering do you have an idea how much -- any details on the agreement? I mean, do you guys receive a commission to get a net addition for DirectTV and vice versa or is there any monthly payment or revenue coming from that agreement? Thank you.

Okay. Well, this offer is a bundle offer with DirectTV but it doesn't mean that we have this -- we are offering the same invoice. So, it's a bundle offer with our portion of the billing on the service of Internet and voice and DirectTV delivers the invoice of the satellite TV service. The main goal of this offer is to deliver to the customer free services in a bundle offer with a price differential and a better customer service.

Okay, great. And if you gentlemen allow me to do just a last question. It's regarding the CapEx guidance that you guys have been talking about throughout 2009 of approximately 14% of net revenues. Do you guys keep that guidance?

Yes, as I mentioned during the presentation, we expect to maintain similar level as we anticipated around 14% of consolidated revenue. Further we had some delay in the execution of our investment plan in the first couple of quarters of the year but we will catch up and hit that target by the end of the year.

Okay, great. Thanks a lot, gentlemen. Have a great day.

Same to you.

Thank you.

Rizwan Ali, Deutsche Bank.

Good morning. My question is regarding your leverage. I mean, you --- of course, you've paid down the restructured debt but at current levels especially given your pretty strong cash flows the company appears to be underlevered. So, are there any plans to increase the leverage of the company here onwards?

Okay, well, we all see that our leverage level is lower even reaching zero, but I think that we feel comfortable with this situation more with the context that we are. We have a strong cash flow generation. So, in the short term we aren't seeing any change in this situation.

And let me just confirm the other two guidance you gave during your presentation, so you are saying revenues will be up between 12% and 15% in 2009 and --

Correct.

Margins flat.

I am sorry, what do you mean --?

And the margin will remain flat?

The profitability margin, yes, yes.

Can you give us some guidance on what you expect for next year?

Well, we are working on our planning process, so we don't have any figure yet. It's -- I think it's early for us to release them.

Okay. Thank you very much.

But we think that we will maintain this plan in our business.

Okay. Thank you.

Rodrigo Vadilinuva, Merrill Lynch.

Hi good afternoon. Two questions, if I may. Compared to your peers, your wireless net adds have been remarkably resilient; however, the share of postpaid subs have been decreasing. Could we expect margin contraction as a result of this going forward? And the second would be, is it reasonable to believe that churn could increase due to a higher share of prepaid subs? Thank you.

Yes, I think the effect we have detected is that there has been a marginal shift between the customer base on contract relation with the total customer base or specific base with prepaid type of service. As a matter of fact, what happened is that the growth of these two bases has been different and the prepaid base has drawn more than the other one, and therefore has slightly moved the percentage among the two. That still remains the strongest in the industry and I think that the result that we have posted in this quarter show that the shift of our customer base composition does not effect. Our margin as a matter of fact, they did increase over this year when compared to previous quarter and last year as well.

And so, your second question was --?

I was thinking that maybe -- well, I was asking if it's reasonable to believe that churn could increase as a result to higher share of prepaid subs?

No, really we don't expect that. We don't see our prepaid customer as a second tier type of customer. We have similar loyalty in our -- in the segment of our customer base and we don't expect that the increase of their share in the total market we serve would make any significant change in churn. As a matter of fact, churn figure are improving on all the three segments.

Okay. And one last question, if I may, is it fair to believe that your prepaid subs are on average a similar output as your postpaid subs?

Of -- the ARPU of this segment of customer base are quite different among this. As a matter of fact, postpaid is about twice as much as prepaid. The postpaid in the -- in the range of 80 basis per month.

Okay. Thank you very much.

Michel Morin, Barclays Capital.

Good morning, Michel Morin from Barclays Capital. I was wondering, when you look at your performance on the value-added services in the Mobile segment it's pretty spectacular. And I think that has been the theme for many of the wireless carriers reporting very strong growth in the Southern Cone, and I am wondering if you can comment a little bit about what you think is driving that?

We appreciate your comment. We are and we are strongly determined to remain the number one operator in Latin America in terms of percentage of value-added services of our service revenues. I think that we have a strong drive towards that. I think there is a strong focus into the company (inaudible) to retain that leadership that we have achieved over the years.

As a matter of fact, few weeks ago we launched as first mobile operator in the world the first MSN Messenger Live Service. That's another example of how we value innovation and we value value-added services on our customer base. And I think the results are being delivered and our customer are responding to our innovation drive. So, we feel we are in a comfortable position to retain the leadership looking forward.

Well, then specifically when you look at the difference from the second to third quarter where it went from 32% or 33% of service revenues to 37% is what -- and that's a very big jump, a much bigger jump than what you had seen in prior quarters. Was there a specific campaign targeting increased usage or is it new sales of smartphones? Was there anything in particular that you would point to that would give us confidence that these levels will not only be sustained but maybe even continue to increase?

I would say that the prevailing factor is the marketing of new packaging of products that have been pretty successful in the marketplace.

Great. Okay, thank you.

Thank you.

Alex Garcia of Raymond James.

Hi, gentlemen. Thanks for taking this -- another question. It's kind of like a follow-up on Rizwan Ali question. You guys have practically no VAS, and I would like to know how much would cost for you guys to issue debt in local terms and in US dollars to-date and at what levels would you guys go to the market, both local and internationally? Thanks.

Alex, this is Pedro Insussarry. With respect to -- first of all, just to add to what Franco and Adrian were mentioning with respect to the leverage, again, at this time we don't need to go to the market. I mean, the company is generating rich levels of cash and there is no need to go to the market in order to -- move to a couple of markets nor to the banks to request funding because we with the cash that we are generating it's more than sufficient in order to cover our financial needs in order to finance our CapEx plan.

Now, in terms of cost of debt in the local market unfortunately the local market is -- when you go to longer terms, you are talking about variable interest rates and for a company like Telecom Argentina, you could be talking about the similar LIBOR rates, the [Vadlav] rate plus something in the range of 150 to 200 basis for a three-year tenure. And for five-year tenure we should be -- in dollars, we should be below -- well below 7% interest rate.

But again, these are tentative costs. Again, at this time, we are not foreseeing the need to go to the markets to raise debt because again the cash flow that we are having is more than sufficient in order to cover our needs. Okay?

Okay, great.

April, do we have somebody in the queue or --

(Operator Instructions). Miguel Garcia of Deutsche Bank.

Thank you. Just wanted to get some color on this revenue from value-added services in Mobile. Is it still the case that most of these value-added services come from SMS? At some point, I remember, you mentioned that about 75% to 80% of the value-added services were SMS. I wanted to know today how much is SMS? And the second question is regarding the mobile broadband business, how many subscribers do you have right now using mobile broadband, and if it's possible, what percentage of those -- what revenue are those subscribers generating within their value-added services?

Yes, I mean, talking of value-added services on mobile service revenue, certainly the short messages are still the lion's share of the revenue, although their participation to the total is percentively -- in the percentage term is decreasing as all the other services are growing.

As a matter of fact, well, while what we experienced in these nine months is the strong increase of 3G services. We hit above 400,000 customer in the nine months that subscribed this kind of services, as well as a number of other applications among which I'd like to mention Personal music store that has been offered since the second quarter of this year and the MSN Live Messaging that has followed shortly. So, I mean, the value proposition that we are delivering to the market is increasing in width and depth and although so far the SMS are still representing the largest percentage and will remain so for, I think, quite a while.

So that would mean about 60%, 70% of the total value-added services?

That's correct.

And in terms of mobile broadband, those 400,000 subscribers you mentioned in 3G, that means mobile broadband or all type of services including --?

Altogether 3G although, I mean, that's the 3G customer that actually subscribed to the 3G network as a matter of fact are primarily using broadband services, and they are generating now, with a direct offering, twice as much as our average. So, I mean, they are valuable customers that are making the difference basically using broadband services.

Okay. So the 400,000, just to clarify, 3G services means a 3G handset and also mobile broadband right?

That's correct.

Okay, thank you.

(Operator Instructions). And it appears there are no further questions at this time.

Well, thank you very much for being at our conference today for our quarterly result. Please do not hesitate in contacting our Investor Relation Department for any further enquiries you may have. Good morning to all of you. Have a nice day and hope to meet you pretty soon again. Thank you.

That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.