Telecom Argentina SA (TEO) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to the Telecom Argentina third-quarter 2010 earnings conference call. Today's call is being recorded.

Participating on today's call we have Mr. Franco Bertone, Chief Executive Officer of Telecom Argentina; Mr. Adrian Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Finance Director; and Ms. Solange Barthe Dennin, Manager of Investor Relations.

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

Okay, good morning to everybody, and thank you for participating on this conference call.

As mentioned, the purpose of this first call is to share with you the consolidated results of Telecom Argentina that correspond to the third quarter fiscal year 2010 ended on last September 30th.

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

And 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-and-A sessions, 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 more general factors such as changes in general market or economic conditions, in legislation, or in regulation.

Our press release dated November 2, 2010, a copy of which is being included in our Form 6-K report to be furnished at 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 of the presentation distributed today, is to go over, first, a general market overview, then we'll go over some business highlights. And after that we'll go over some specifics of the evolutions of our financial figures and we end -- we will end the call with a Q-and-A session.

Now, I'll go over a brief macro overview as an introduction to the general operating environment. In slide three of the presentation, we can see some snapshots of the macroeconomic scenario. We can note that the global economic recovery is being driven by emerging markets with increasing demand for agricultural commodities where Argentina is a strong producer.

Locally, industrial production is reaching pre-crisis levels, although an energy shortage during the winter cap, the output showing -- slowing the pace of growth. On the other hand, the agricultural sector has recuperated from a severe drought in 2009, although future growth from their sector is expected to be lower in the coming years.

On an aggregate basis, we can say that Argentina is growing at a high rate although this could be slower in the future. Private consumption is one of the main reasons the Argentine economy is growing so fast, mainly due to wage increases and to negative real interest rates which promotes consumption over savings among the population.

Moreover, inflation has increased as a consequence of the strong demand from the private sector mentioned before, coupled with the expansion of the public spending. In this context of an economy that grows with steady FX rates, technological products like handsets, smartphones, PCs and laptops, items that support our business have become more affordable.

Related to the fiscal and trade balance, we can say that economic recovery and increasing prices for Argentine exports have enhanced fiscal revenues through taxes on exports together with unconventional funding like utilization of Central Bank resources, these have improved the fiscal balance.

Finally, trade balance slightly decreased due to the growing imports that have grown 50% year-on-year, compensated with rising commodity prices and growing exports to Brazil, which helps to sustain a filled strong trade surplus.

Regardless the challenging macroeconomic context for Argentina, our Company has well performed in this quarter, in -- both in terms of business and operations as we will explain during the conference call.

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

Thank you. Very, very good morning to everyone. The results achieved by the Company during the third quarter of 2010 are satisfactory. We grew strongly in customer base, revenues and market share. Margin also improved in a context that remains competitive and challenging.

As highlighted in slide five, the quarter was positive in all segments, Fixed, Mobile and Broadband. In our Argentina Mobile business, revenues rose by 22% in the nine months period, showing an acceleration in the third quarter with a 27% year-on-year growth.

This was delivered to a record level of net adds of 654,000 and a 11% ARPU increase in the quarter. This together with our performance in smartphone sales has contributed to continued VAS revenue growth that currently reached 42% of the service revenue.

In the Fixed line segment broadband ARPU increased 15% year-on-year, together with a sustained churn reduction and increasing net adds. Our fixed voice telephony also delivered a marginal 1% growth year-on-year.

Financial performance was good as well as revenue rose in the third quarter by 21% year-on-year, while rentability has only marginally diluted due to strong growth in cost pressure. Third quarter net income rose by 47%, year-on-year, also thanks to a substantial reduction in financial expenses.

Please refer to slide six of the presentation. As I already mentioned, in this quarter we posted a quarterly record in net adds with 654,000 additional mobile lines, reaching nearly 16 million clients in Argentina with a year-on-year increase of 14%. Although not all our competitors published their quarterly figures yet, we estimate we have outperformed the market, increasing our share among the three main players by about 1% in the last 12 months. We also estimate our share in the third quarter of 2010 to exceed 50% of net adds.

Our strategy for smartphone sales and brand positioning is paying off with an increase in postpaid subscriber growth, which currently represent approximately 30% of our customer base. We continue focusing in the high-value segment, providing exclusive and premium handsets with personalized customer service under our Personal Black brand.

Slide seven shows service revenues in Argentina, that increased by 21% compared to the first nine months of 2009 as a result of a larger subscriber base and incremental VAS usage. VAS revenues grew by 40% on year-on-year, representing now 39% of service revenues in the first nine months of 2010 and a 42% in the third quarter. ARPU rose by 11%, reaching ARS45 in the third quarter from ARS40.7 in the third quarter of last year, although the customer base expanded strongly. For the same period SMS per user grew 27% on a year-to-year basis.

SAC and SRC cost rose to 15.9% in the third quarter from 14.3% of last year of service revenues due to a change in the mix of sold items and an increase in the average cost as imported devices are subject to the so-called technological tax. This additional tax increase factor in SRC aggregate cost over service revenues by approximately 1%. Moreover, we experienced higher handset sales while maintaining advertising costs under control.

Please do turn to slide eight for the evolution of our mobile revenues in the Argentina market. The first nine months of 2010, total revenues reached ARS6.7 billion, an increase of 22% or ARS1.2 billion when compared to the previous year. Value-added service played a significant role in revenue expansion, with an increase of ARS668 million at 40% year-on-year growth.

Prepaid traffic and monthly fees revenues grew significantly as well, 19% and 12% respectively, due to the client-base expansion and successful service package offering. Handset sales grew by 32% on a year-to-year basis.

Let's go, move to Fixed services in slide nine. Our Fixed Line service continued to grow at a rate of about 1% a year. This past quarter the average revenue billed to user grew by 5% compared to third quarter 2009, reaching ARS43.4, mainly due to supplementary service, commercial bundling with ADSL and package pricing that resulted in increase of minute sales per client.

Slide 10 shows the evolution of broadband subscriber base. Three quarter -- the third quarter of 2010 experienced a stronger growth than previous quarter, adding 56,000 subscriber and reaching 1.3 million connections, an increase of 14% compared to 2009. This represents an estimate share of 35% among the top three providers in the market.

Additionally, thanks to successful promotion and pricing strategies, broadband ARPU rose by 15% compared to third quarter 2009, reaching ARS78 per month while churn declined by -- declined, sorry, to 1.3% per month in the third quarter of 2010 from 1.6% that was the figure in the third quarter of 2009.

Slide 11 shows the evolution of Fixed line revenues where Internet is the key driver of revenue of growth, increasing 31% from the nine months -- the first nine months of 2009. Third-party revenues totaled ARS3.4 billion, an increase of 12% or ARS358 million compared to last year.

Regulated tariffs in the Fixed business continue to be frozen at 2001 levels and notwithstanding due to the growth experienced in (technical difficulty) deregulated part of our business, we continue to show a decrease in dependency on regulated price cum services that now represents 45% of total Fixed Line revenues versus 49% a year ago.

Both monthly fees and voice measured services grew by 5% due to the customer base expansion, packaging, package offers, new services and higher penetration of supplementary services. On the other hand, interconnection service revenue decreased by 3% due to lower prices and decreasing incoming traffic from third-party operators.

Please turn to slide 12 for CapEx. Investments in fixed asset increased 5% year-on-year. In the first nine months of this year, we invested in excess of ARS1 billion, equivalent to approximately 10% of total revenue.

As a fully integrated Company, we continue to invest in a -- with a convergent approach under the view that the common platform to which Fixed and Mobile access networks are connected and through which we give service to our customers. We have focused our CapEx in order to improve customer mobile broadband experience, accelerating deployment of fiber to the cell side as well expanding secure and integrated backbone network. We also invested in IT solutions in order to upgrade customer care and business operation performance and to reduce cost of roaming while improving coverage.

With that I'll pass the call to Adrian, our CFO, that will go over the financial. Thank you.

Thank you, Franco. The business highlights just mentioned have reflected into significant results in terms of revenues, profit and net income. Please refer to slide 14 where we can see the evolution of revenues and operating profit before depreciation and amortization.

In the nine-month period of 2010, consolidated revenues reached ARS10.5 billion, growing by 18% when compared to those obtained in the same period of 2009. Such revenue growth has allowed us to partially offset general cost increases produced by higher commercial effort, increased labor cost and cost pressures on other items that resulted in an operating profit before depreciation and amortization's increase of 15% that totaled ARS3.3 billion.

In line with these dynamics and as anticipated in previous conference calls, margins have decreased to 31.3% in the nine-month period of 2010 from a 32.2% margin in the nine-month of 2009. For further details, please refer to slide 15 where we can see the breakdown of our consolidated cost structure. Marketing and sales expenses represented 22%, while labor and interconnection costs represented 12.8% and 9.7% respectively of our consolidated revenue. Marketing and sales expenses were influenced, as Franco mentioned before, mainly by the increase in mobile gross adds, the change in the mix of handset sales, higher volume of handset upgrades and the impact of the technological tax that resulted in a higher tax and SRC cost.

The participation of labor costs in total revenues has risen due to salary increases considered to unionized, I believe, under the new collective bargaining agreement affected as from July 2010 and those granted to non-unionized workers in the last 12 months.

On the other hand, savings in interconnection and network usage, both, were achieved due to the stimulation of on-net traffic and by higher network investments that allowed reduction in domestic roaming expenses thereby achieving significant cost efficiency. Also it is notable, the decrease in bad debt expenses of 8% when compared to the nine months of 2009.

As seen in slide 16, operating profit growth of 14% year-on-year growth, reaching ARS2.3 billion. Please also note that in the nine months of 2010, financial and holding results accounted for -- in a loss of ARS44 million, a decrease of ARS273 million versus the nine months of 2009. This was mainly due to lower foreign exchange losses of ARS207 million versus the nine months of 2009 together with a gain in net financial interest of ARS50 million in 2010 versus a loss of ARS22 million in the same period of last year as a consequence of the significant reduction in leverage experienced by the Company.

Consequently, thanks mainly to these operating results, but also to the reduction in financial expenses, net income reached ARS1.3 billion for the nine-month period ended in September 2010, equivalent to a year-on-year growth of 30%.

Finally, in slide 17 we can see our strong operating free cash flow generation in the last 12 months. Despite a growth in CapEx, the full disbursement of income taxes and the payment of the first installment of dividend distribution, we were able to report a net cash position of ARS850 million that represented a reduction in net debt in the last 12 months of ARS993 million. With the current capital structure, the Company has benefited from lower interest expenses and FX exposure while having an outstanding financial flexibility.

Last but not least, we would like to remind you that Telecom Argentina will be paying the second dividend installment on next December 20th for ARS364 million, equivalent to ARS0.37 per share or ARS1.85 per ADR.

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

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions)

And we have a question from Rizwan Ali with Deutsche Bank.

Yes. Good morning. I just wanted to understand the dynamics in your wireless sector. I see that SMS now is representing even higher percentage of total revenues. So what is the incentive of -- I mean, have you changed your tariffs for SMS texting? And also is it batting into your voice ARPUs? That's the first question.

And second is when do you expect to do negotiations you're your labor with regards to wages or wage increases?

Rizwan, we missed your second question. Yes. Can you please repeat your question?

When are your labor negotiations? Okay. When are your labor negotiations? I mean, inflation is pretty high in Argentina. You must be giving wage increases. And so I want to know when is your next wage negotiation?

Okay. And you mentioned something about SMS, right?

Yes. I mean, is it batting into your voice revenues? And what incentives are you giving clients to increase the SMS usage?

Okay. Well, the -- as far as the basic pricing policy we have for mobile services, we haven't incorporated any specific price incentive at all in this nine months. As a matter of fact, rates, at least the nominal rates have been increased twice this nine months with individual increases between 10% and 20% depending on the particular rate and particular service.

This percentage, obviously, do not reflect directly on our revenues because of discounts and commercial offers, and mainly the very highly growing use of on-net services. So the net effect on the actual bill a customer pays is marginal, but certainly we did not promote the growth with discounts.

The SMS growth is strong but is, I would say, quite traditional. I mean, we have been experiencing this percentage growth over the last at least two years. We are now at a rate about 300 short messages per line -- per month, that is a strong usage. But I would say that the additional factor of growth of mobile revenues and particularly value-added service revenue is the -- is web surfing through 3G downloads. That's the new factor, and the new -- base of customers that is growing faster than the others and is pushing percentage of value-added services although service revenue traditionally has been high, in the low 30% as this quarter exceeded 40%.

As far as your second question about negotiation with the union, we have a one-year negotiating period. I mean, the contract has been agreed and signed for a 12-months period and the 12 month starts July 3rd this year. So we are talking negotiation early June, mid of next year.

Thank you.

(Operator Instructions) Our next question comes from Rodrigo Villanueva with Bank of America Merrill Lynch.

Hi, good morning. I was wondering if you could please provide us with a breakdown between mobile voice and mobile broadband subs. And also if you think it would be fair to say that most of the net adds are coming from mobile broadband? Thank you.

Well, as far as the mobile voice and -- versus broadband, the figure we can provide here is that our current base of 3G handset is in excess of 1 million and out of this about 300,000 are PC downloads. Okay.

I think you were also looking for a figure of split between net adds between voice and broadband, that will take us an extra minute to check for you.

Okay, thank you very much.

(Operator Instructions)

Yes, here is the figure. I mean, the net adds for the last 12 months has been close to 2 million. Of this about 10% were downloads.

Okay. Yes. Can I ask a question on CapEx? I was wondering if we should expect the CapEx investment to accelerate in the fourth quarter. And also if you could give us some forecast for 2011. Thank you.

Yes, for 2011, it's a bit early for us. But you certainly can expect an acceleration of CapEx expenditure that is traditionally in the Company in the fourth quarter. So we expect basically the fourth quarter to have a CapEx an additional ARS1 billion that will take us to about ARS2 billion over the 12-month period, that will approximately be 14% of top-line revenues.

Okay, thank you very much.

Okay.

(Operator Instructions) Our next question comes from [Claire Assistoni] with Debtwire.

Hi, good morning. I would like to ask if given you have an interesting cash position, if you're thinking of using those cash positions for strategic acquisitions.

As you noticed, we have a cash position, a positive balance. But at the moment we are not having any concrete prospect of an acquisition or a solid investment, although we are continuously reviewing available options in the market. But at the moment, we have nothing to -- ready in that respect.

The cash position today is around ARS50 million. It's likely to be in the very same range at the end of the year since we have one additional payment of dividend by the end of December.

Okay. Thank you very much.

Our next question comes from [Federico Chateau] with Raymond James.

Hi, good morning. My question is given that you are canceling a personal debt by December of this year, if you're planning to issue any debt.

Hi, Federico.

Hi.

Well, as you noticed in the -- as Franco was mentioning, we have a strong cash position. And this cash will allow us to finance our next dividend payment. So, no, at this time we are not thinking of any debt issue for the short term.

Okay, thank you.

(Operator Instructions) And we do have a follow-up question from Rizwan Ali with Deutsche Bank.

Yes, just a follow up. I wanted to -- I mean, if the government changes, do you think there is any possibility of wireline increases or tariff increases in the future? I know it's more of a hypothetical question, but I mean is there any reason to believe that wireline tariffs would ever increase in Argentina?

Well, (inaudible) striving and representing our request to the authority and substantiating them on the basis of cost. As you know, it's not an issue of retail tariffs only, it's also the interconnection where termination rates for Fixed line in this market is at record low level of ARS1 a minute -- ARS0.01 per minute. So we are certainly doing our best to get the situation changed, but we don't base our plans on that happening any time soon.

Thank you.

Our next question comes from Michel Morin with Barclays Capital.

Yes, good morning, everyone. I was wondering if you could update us on the latest discussions around the potential spectrum auctions as we look forward to 2011 and any other regulatory items that you think we should be monitoring going forward. Thank you.

About the three points you raised, well, if we are waiting as we believe the market is waiting for a spectrum auction from the relevant authority in the country, two bandwidths are expected to be auctioned, a relatively small bandwidth in the 850 megahertz band and a larger one in the 1900 megahertz.

The auction has been announced formally by the commutation authority, has to happen as would be -- to happen in the near future, that was -- announcement was made around the month of August, and so far the auction has been not confirmed. We are obviously interested to it, and we currently don't have a firm date.

The other important issues on the regulatory agenda are, I will say, two. One is introduction of possibility for mobile services that will happen by the end of 2011, although a specific timetable is still being discussed between the -- among the operators and with the regulator.

And the other issue is, that is being settled is the one related to the universal service charge that basically will take place concerning the future, what has been the market practice in the past as well as far as the Fixed line service in concerned.

And for the mobile operators and for the new entrants into the market, going to enter the market after the year 2000, there has been an agreement that the majority of the contribution to be paid by the operator will be used to jointly fund expansion of the mobile infrastructure in areas that currently have lower density of (inaudible).

Okay, thank you. And then if I can follow up on that, is there any discussion around mobile termination rates potentially coming down, and if you can remind us where those stand at the moment in Argentina?

It's currently being considered and analyzed. As a matter of fact, it's been on the table of the regulator for the last 12 months. We do not believe there will be -- we don't expect specific changes. We believe they are fairly competitive. There might be a change in the sense of moving from a calling card prepaid type of structure into a termination charge, but we'll -- as a consolidated result in our company, the effect of either way will be pretty neutral to our consolidated result.

Right, but perhaps they could be more relevant for one of -- for some of your competitors who are more mobile focused?

Obviously, we have the -- fewer mobile operators have a significant exposure to it, yes.

Right, okay, thank you very much.

Thank you.

(Operator Instructions) And we have a follow-up question from Michel Morin with Barclays Capital.

Given that no one else is asking, let me fire away again. So given the news in recent weeks or months, is it fully -- can we be fairly confident now that the antitrust concerns that had been impacting your -- the outlook for your Company are now fully behind you as of right now?

And then, separately, one of your competitors was or has been also being scrutinized in terms of their activities on the broadband side. There was some discussion around them possibly having to shutdown their broadband operations. Is there -- given the recent changes, should we anticipate that perhaps it will be business as usual and that perhaps will not happen?

Yes, as far as the antitrust resolution about a few weeks ago, yes, I think you say correct wording, I will believe that all the problems we experienced over the last few years are behind our shoulders.

The Company as well as their shareholders have committed to comply with the request of the antitrust in terms of additional governance mechanism within the Company that will not interfere with our operation as they do reflect the way we already are operating in a very competitive market and we have Telefonica and Movistar, we'll always see them as competitors, and we always dealt with them as competitors of the regulation introduced by the antitrust commission. It doesn't change the way we operate at all.

As far as the [Cybercell] case, we rather prefer to comment on the commercial side, and the reality is very much business as usual in the sense that beside the questioning and the pressure that they are being subject to, their customer base has been stable. They -- we grew more than they did that there is no news in that because we have been outperforming their net add growth for the last three years. So we believe that in the future the market will remain fairly stable in terms of growth.

And in terms of market share, we'll continue to improve our market share. We hope the -- our competitor will go the other way around, but marginal changes we are expecting in the market. As a matter of fact, the market over the last few weeks has turned even more competitive. And we don't expect the market scenario to change because of institutional and regulatory issues that Cybercell is currently addressing.

Okay, thank you very much, very helpful.

Okay.

(Operator Instructions) And there are no further questions. I would like to turn the conference back over to Mr. Insussarry for any additional or closing remarks.

Well, thank you very much for being at this quarterly conference. Please contact our Investor Relation department for any additional question you may have. Have a nice day, and we expect to meet with you soon again. Thank you.

And that concludes today's teleconference. Thank you for your participation.