Telecom Argentina SA (TEO) 2011 Q1 法說會逐字稿

Please standby. Good day, everyone, and welcome to the Telecom Argentina First Quarter of 2011 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 Mrs. Solange Barthe Dennin, Manager of Investor Relations. At this time, I would like to turn the call over to Mr. Pedro Insussarry. Please, go ahead, sir.

Okay, good morning to everybody and thank you very much for participating in this conference call. As mentioned, by Charlene, our moderator, the purpose of this call is to share with you the consolidated results of Telecom Argentina that correspond to the first quarter of fiscal year 2011, which ended on the last of March, 31st. We would like to remind you that, for all of those that have not received our press release or presentation, you can call our Investor Relation's Office or download them from the Investor Relation's 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. Before we continue with the conference call, I would like to go over the typical disclaimer 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 in operations to differ materially. Such uncertainties include, but are not limited to, the effects of general public emergency law and complementary regulations. The effects of an ongoing industry and economic regulations, [powerful] changes in demand for telecom products and services and the effect of marginal factors, such as changes in the general market or economic conditions in legislation or in regulation.

Our press release, dated March 2, 2011, a copy of which has been included in the Form 6-K report, to reference to the SEC, describes certain factors that may affect any forward-looking statements that we may produce during this session. Furthermore, we urge the audience of this conference call to read the disclaimer clause contained in slide one of the presentation. As usual, in our quarterly conference calls, the agenda for today, as seen in slide two, is to go over the general market overview. Then, we will go over some business highlights and, after that, we will go over some specifics of the evolution of our financial figures and we will end the call with the traditional Q&A session.

I will now go over a brief macro overview as an introduction to the general operating environment. In slide three, we included some snapshots on the current Argentine macroeconomic environment. We can note that the macro conditions are giving support to the growth of our business. During the first quarter, the Argentine economy continued its growing trend. Being primary, consumption the main driver of the economy while the investor production leaded the expansion where car production and construction materials showed the best performance in the sector.

Going forward, it is possible that in the next quarters, the Indonesian restraints could slow down the industrial output if winter temperatures are severe. Moreover, the agricultural period of harvest has begun and the production would be near to record levels in the context of high commodity prices. In the context of high inflation, increasing consumption, investments in construction, and the expenditure in tourism have been the ways the population is reacting to inflation on the contrary to savings that have been discouraged by low real interest rates.

Telecommunication services have benefited in this context, thanks to an increase in demand for telecom's goods and, although, indications remains high, our cost structure suffered a reduced impact from it. On the fiscal front, the balance seems stable. However, it has slightly improved, taking into account the reduction in the use of unconventional resources, like Central Bank and National Pension Fund transfers to the Treasury. Nonetheless, subsidies to the private sector continue growing, particularly in sectors like energy and transport together, with high contracts for social plans.

Also, despite government measures to limit imports, these have been growing at a higher pace in exports, yet, with increasing commodity prices which benefited Argentina, with better terms of trade. Particularly, in the first quarter, trade surpluses increased by 10% when compared to the first quarter of 2010. In this challenging macroeconomic context, our company has more than well performed in the quarter, both in terms of business and operations, as we will explain during this conference call. After having gone through this introduction, let me pass the call to Franco Bertone, who will go over the business highlights, Franco.

Thank you, Pedro, and good morning, everyone. This quarter of 2011 delivered strong results. We continued to lead in the mobile market and retaining the number one position for the net adds for the second year in a row, capturing valuable customers and successfully developing the customer interest for mobile Internet and other valuable services.

As highlighted in slide five, in this quarter, our mobile ARPU increased 16% year-on-year thanks to booming value-added service revenues, fostered by mobile-Internet, social networking, and SMS. We introduced tablet devices into the market, maintaining our innovation leadership. In the fixed broadband business too, we kept pursuing product innovation to (inaudible) shared our service delivery from the competition. Moreover, in the fixed voice, we have seen the migrating customer to flat plans has increased the minutes of usage and grown ARPU at 6% year-on-year. The financial performance displays the same profitability with strong cash flow generation and the net income increase of 53% year-on-year.

Let's now address with some details of our mobile operation, referring to slide six of the presentation. In the Argentine mobile market, we experienced strong quarterly results with a 16% year-on-year ARPU increase and a customer base growing 13% and posting a 200 base point increase in our estimate market share to 32.7%. These represent a net add in market share in excess of 60% over the last 12 months. We strengthened our leadership with Smartphones and tablets, 3G clients more than doubled, boosting non-SMS VAC usage.

Slide seven shows TA's value-added service revenues growth at an unprecedented 72% year-on-year. This was achieved with continued expansion of 3G services, which drove SMS revenues to record levels. We launched with exclusivity the Motorola Xoom tablet. While increase its smartphone penetration, market penetration, the VAC and SRC dropped to 15% of the service revenue because of lower subsidies.

Slide eight shows how our mobile revenues evolved in Argentina, reaching ARS2.7 billion this quarter, a 33% increase or ARS673 million compared to first quarter in 2010. Value-added service plays the strongest part in revenue expansion, posting a ARS463 million increase. Pre-paid traffic voice and monthly fees revenues were up 8%. Mobile interconnection revenues were up 7%, handset sales up 63%.

Let's move now to the wireless business in slide number nine. Broadband subscribers base grow substantially in line with the competition. The innovation in service delivery was taken to the market with mobile and fixed broadband bundling and ADSL-2 were our latest protocols. The customer can experiment a speed increase in their broadband connection at hours of the day of their preference. In general, broadband maintains a sustained ARPU growth and share reduction, while the estimated market share among the three players continues at 35%.

In slide ten, it shows that lines in service kept growing at the 1% rate. The average monthly bill was up 6% when compared to the first quarter of 2010, reaching ARS44 a month. Complementary services and the continued migration to flat plans delivered the results despite frozen [tariff]. Bundled services with fixed broadband, also contributes to growth, as well as to customer loyalty. The evolution of wireline revenues is shown on slide 11. Third party revenues totaled ARS1.2 billion, a 13% -- 14% increase, or ARS150 million, compared to the first quarter of 2010. Internet broadband is a key revenue growth driver, increasing 25% year-on-year, followed by data services, at 15% year-on-year expansion. Meanwhile fixed telephony business posted 9% growth for monthly fees, a 6% growth for voice, major services, and a 14% growth for interconnection revenues.

Slide 12 shows the CapEx was affected by this quarter's seasonality, totaling ARS335 million, or 8% of consolidated revenue. Still we maintain a higher budget of ARS2.5 billion for the year, focusing CapEx in the network capacity and quality service for the growing throughput of data traffic. In the near future, additional spectrum will substantially contribute and expand mobile users' broadband experience. These were the business highlights and I will call to Adrian to go through the financials of the quarter.

Thank you. Good morning to everyone. The business highlights mentioned by Franco Bertone have reflected into significant results in terms of revenues and profitability. Please refer to slide 14, where we can see the evolution of revenues and operating profits before depreciation and amortization.

In the first quarter of 2011, consolidated revenues reached ARS4.1 billion, growing by 27% when compared to the first quarter of 2010. We can also see the contribution of regulated revenues currently accounts for 13% of total revenues, decreasing mainly because of the outstanding performance of value-added services in recent years. Our operating profit before depreciation and amortization presents also strong growth of 26% when compared to the first quarter of 2010, almost maintaining margins on a year-on-year comparison, counting to underline, taking into account the cost pressure context of the country as mentioned by Pedro.

For further details, please refer to slide 15, where we can see the breakdown of our consolidated cost structure. So a few remarks about our construction that we would like to highlight part. Our marketing and sales efforts in preparation to number portability, the higher fiscal pressure from local and provision jurisdictions and the continued search for efficiency in the [cocktail] connection costs and others. This is reflected in the evolution of our costs as a percentage of revenues, where the main variations were marketing and sales expenses, representing 22.6%, increasing from 20.1% in the first quarter of last year, while interconnection costs represented 8.9% of consolidated revenues from 10.8% in the same quarter of last year.

As seen in slide 16, due to the strong performance of the operating profits, before depreciation and amortization, the operating profit growth at 28% year-on-year growth, reaching almost ARS1 billion, thanks to debt expansion and positive financial results arriving from the cancellation of all debt instruments in the Argentine operation. We reached the first -- in the first quarter of 2011, a total net income of ARS628 million, equivalent to a growth of 53% on an annual basis.

On the financial side, in slide 17, you can see our performance in free cash flow generation in the last 12 months that reached ARS1.9 billion, even after paying ARS1.1 billion in taxes. This led us to a net cash position of ARS1.7 billion as of March 31st that represented an increase of ARS852 million in the last 12 months. It is worth mentioning that in April, Telecom Argentina paid a cash dividend of ARS915 million. So having concluded this -- with the presentation, we are more than pleased to answer any questions you may have. Thank you very much.

And the question-and-answer session will be conducted electronically. (Operator Instructions). And we'll take our first question today from Mauricio Fernandes with Merrill Lynch.

Thank you. Good morning, everyone. I have a couple of questions. First on the challenge that Telecom Argentina has for -- to keep margins, given the inflationary environment. And the question is whether -- what kind of measures are you -- have been recently taking to try to preserve margins despite inflation? And secondly, clearly, as also probably as a result of inflation, you've been able to pass through customers and price increase, given the ARPU that seems to be going up. And what kind of rates do you think are reasonable to expect for ARPU growth going forward? Or if you're not giving the specific number, if you think you can basically offset whatever the inflation is with the ARPU? And if I may, a third question, I apologize, is an update on the spectrum auctions in Argentina, please? Thank you.

Well, it's a challenge of keeping margins, it is definitely a challenge. I think we posted some success in that. I would say -- I would make a general comment on that in saying that the overall pressure that we have on our margin, on the cost side, is quite limited. It's nowhere near to the inflation rates that are currently being valued for the Argentina market. So that helps us and this is a measure of managing supply and achieving increasing efficiency of our operations.

We did adopt and we did pass a repricing of our products, as the whole industry did. In retrospect, we were last of the operators to, in the last few months, to set up a price increase on our regulated tariffs. As a matter of fact, these price increases are pretty nominal. As a matter of fact they do change the nominal prices as they are filed with the authorities. The net effect, as these prices increase, is the blended effect, and the net effect of these price increases have on the actual price paid by our customers is very different.

As a matter of fact, the average cost per minute and the average cost per mega bandwidth in the ADSL or the average cost for short messages keeps dropping over time, as an effect of promotions, on net traffic, and various forms of commercial activity that we apply to, not only new customers, but also the existing base. So in general terms, we are stern believers that our prospects of growing revenues and margin depends more on the development of existing customer base than on the price of the services that we charge.

As far as your question about whether we can sustain the current ARPU growth over time, I would say that the current growth we experience is almost twice as much as the guidance we gave to the market with the two-year plan. So we certainly believe that ARPU growth will soften over time. But that's all you see, what we achieve in the current quarter. And as a matter of fact, the physical metrics that are behind it, in terms of minutes of usage and bandwidth of usage and number of messages exchanged by our customers are the main drivers of the growth we experience.

As far as your last point about the spectrum auction, we are in line with that. We reserved a substantial financial resources from our net profit of 2010 to face that commitment without debts. And we are really hopeful that that will happen in the near future, as the overall efficiency of our operations will benefit from that. At the time being, we have to invest a lot of physical structures to cope with the growth of our customer base, and particularly the growth of their data usage, and obviously having available additional spectrum, the overall growth can be supported with high levels of quality and more efficiency of CapEx deployment.

Okay. Thank you very much.

Thank you.

(Operator Instructions). And we'll return to Mauricio Fernandes.

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

So the questions are difficult to answer. The exact date of the option is still unknown to the market. We definitely hope that it will happen at the earliest. In terms of megahertz they will become available rather than -- the prevailing factor is not what will be -- what the bandwidth that will be optioned but what is the frequency cap that applies to individual operators into individual areas of operation.

As far as we are concerned in the metropolitan area of Buenos Aires we have an ability to grow at 7.5 megahertz and that in the northern and southern parts we can grow 10 megahertz of our existing frequency locations. So that's what we will be bidding for. A similar thing could apply to the other players in the market. At what price we are not prepared to disclose. And obviously we don't know.

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

Not at this round. We believe that there is a following round of spectrum options in the 1.7 to 2.1 gigahertz bandwidth that has been announced and should be put in place at a later date. That will definitely require additional -- the frequency cap to be lifted that is a common request from all operators and I think the Regulator is considering that option. But that would not be part of the [first] 850 and 1,900 option we are expecting shortly for which the current frequency cap would still apply.

Okay and on a completely different subject clearly vast percentage of revenues is outstanding in Telecom Argentina now 40% actually 46%. Do you have any benchmark because clearly in the case of Argentina I think SMS plays a key role here explaining why it's so high and is there any market you're looking at as a besides probably Italy -- but is there any market you're looking at as a benchmark to what you can do in Argentina?

I think we are the benchmark for the others.

To be humble

No, we still believe there is a scope for growth. Our experience over the last year or so is showing that there is a scope for growth in that. Argentina has extraordinary development in value added services from the times of offshore messaging. And the rate of growth that we are experiencing enormous amounts and therefore (inaudible) browsing content and the rest is much stronger obviously of the one we currently have in SMS. So I think we are entering the Phase Two a post SMS phase in which we expecting the market to be as buoyant as it's been for the SMS in the past. But we are really happy to be the benchmark for the others.

Okay, thank you very much.

(Operator Instructions). And we'll go next to Jasmine Earnshaw with MBA Lazard.

Hi thank you very and congratulations on fantastic results. I was surprised with the 6% voice ARPU growth. Could you elaborate give us more color on that and do you see that repeating going forward? Thanks

Jasmine can you repeat your question you came out pretty low.

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

Okay, so you mean in fixed line ARPU?

Yes.

Okay, well I think it's -- thank you for your remarks and I understand attracted your attention since we are operating with frozen tariffs on regulated services and that apply to fixed line business. The 6% is the result of supplementary services we have been introducing to the market that are built on top of services which frozen tariffs do apply and that's one factor.

The second factor is that there is a growing percentage of our customer base that is in excess of 30% of the base itself that did migrate from tariff kind of billing to flat services that we have been offering since a while. And the flat packages are set to a level of minutes of usage that is above the average of the customer base and that's consequently the flat tariff is slightly above ARPU of the non-flat traffic customers. So the combined effect of supplementary services and flat pricing has been delivering this 6%. It is slightly higher of the 5% that we had in the past quarter but is a sustained and sustainable trend for the future as well.

Okay great thanks.

You're welcome

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

Okay

Well thank you very much for attending our conference call for the quarter and please keep in touch with us for any additional -- any further questions you may have. We will be at your disposal. Thank you very much for your attention.

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