Telecom Argentina SA (TEO) 2011 Q3 法說會逐字稿

Good day everyone and welcome to the Telecom Argentina TEO third quarter 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 Ms. Solange Barthe Dennin, Manager of Investor Relations.

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

Good morning to everybody and on behalf on Telecom Argentina we would like to thank everybody for participating on this conference call. As our moderator mentioned, the purpose of this call is to share with you the consolidated results of Telecom Argentina that corresponds to the third quarter of Fiscal Year 2011 ended on September 30th.

We would like to remind you that for all those that have not received our press release or presentation, you can call our Investor Relations office or download them from the Investor Relations section at our website www.telecom.com.ar/investors.

Additionally, this conference call is being broadcasted through the webcast feature, available in such section and you can also be replay it through the same channel. Before we continue with the conference call, I'll go over the typical 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 actual results and operations to differ materially. Such uncertainties include, but are not limited to the effects of public emergency law and complementary regulations, 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, 2011, a copy of which is being included in the Form 6-K report to be furnished to the SEC, describes certain factors that may affect any forward-looking statements that we may produce during this session. Furthermore, we urge the audience of this conference call to read the disclaimer clause contained in slide 1 of the presentation.

As usual, in our quarterly conference calls, the agenda for today, as seen in slide 2, is first to go over 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'll end with a traditional Q&A session.

Having gone through these procedural matters, I will go over a brief macro description as an introduction of the general operating environment.

In slide 3, we can include -- we include some snapshots on the current Argentine macro economic scenario. We can note that we have performed in an environment of strong consumption. During the third quarter 2011, expansionary fiscal policies stimulated private spending through high transfers to social security programs and lax monetary polices.

In this context, sectors like banking, retail business, durable goods production and construction were the main drivers of growth during the quarter. The recent decline in commodity prices and the international financial crisis has presented a more challenging scenario for Argentina, with harder external financial conditions, where slower growth -- slower global growth pace is expected.

Regarding local consumption, spending was driven largely by negative real interest rates which encouraged consumer lending. Also, disposable income rose significantly due to real wage increases and the increasing government transfers to social security programs.

Consumer confidence remains in its four-year record, albeit inflation continues to be the main concern in the local economy.

On the fiscal front, fiscal surplus suffered a decline due to higher public spending related to the already mentioned causes such as the transfer to social plans and subsidies to the private sector.

The external sector -- in the external sector inputs rose significantly due to energy imports that more than doubled in the past year. In the third quarter, strong capital outflows affected local interest rates and added pressure to the local FX market, probably reducing aggregate demand in the following quarters.

In this challenging macro economic context for Argentina, our Company continues to report outstanding growth and results, both in general business and financials, as we will high lighten during this conference call.

And 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. We really had an outstanding performance this quarter. Mobile business continued to lead the market and our fixed business delivered a healthy growth.

Mobile business maintained a consistent growth in the postpaid segment, improving subscriber mix and increasing customer base profitability.

We continue to focus in value-added services where we target every client with mobile Internet access, creating client end services packs designed to meet the needs of each customer segment. We recently launched Arnet Play, a video streaming service. This creates value to our fixed broadband business that has been showing solid performance, increasing ARPU and 28% revenue growth with low churn.

Our financials show focus -- our focus on cost efficiency, delivering an improved EBITDA margin and a ARS1.8 billion net income in the nine month period of the year that represent a 36% year-on-year increase. Our financial position is sound as it consistently improved in recent years.

Let's now address some details of our mobile operation as we refer to slide 6 of the presentation [we made here]. In the Argentine mobile market we continue delivering strong quarterly results. ARPU increased 17% year-on-year and our customer base grew 11% as we posted close to 400,000 net adds in the third quarter of this year.

We increased our market share 150 basis points in one year, reaching 33.3% share of the mobile market. Among the three main operator in the Argentinean GSM market. Our revenue share also improved substantially.

Postpaid net adds grew throughout, accelerated consistently, leveraged by successful in all inclusive plans and effective customer acquisition campaign. This quarter we launched the third Facebook SIM card, which enables access to the social network whatever the handset or plan the client might have.

Please turn to slide 7 to see value added services revenue grew 58% year-on-year reaching a record level of 47% of service revenue for the nine month period of this year. We are expanding mobile Internet services to most of our plans, while our ARS1 per day mobile Internet offer addresses the prepaid customer base.

Our focus in increasing smartphone penetration stayed high. We increased customer profitability, reducing handset subsidy. The mix of the addition is increasingly more profitable.

In the third our subscriber acquisition and retention cost declined to 14.2% of service revenues from 15.9% as reported for the same quarter of 2010.

Slide 9 shows how our mobile revenues reaching ARS9.5 million in the nine month period, with a 34% increase or ARS2,382 million when compared to the nine months of previous year. Value added service played the strongest part in the revenue expansion posting ARS1,361 million increase, that is a 58% growth year-on-year.

Prepaid traffic voice and monthly fees revenues were up 16%, mobile interconnection revenue 9% and handset sales 44%.

Our Paraguayan operation posted a 56% year-on-year increase in Argentine pesos, as the revenues increased more than 30% in local currency and the Paraguayan currency appreciated versus the Argentinean pesos substantially.

Let us move to our wireline business as we representing in slide 9. As I mentioned before, we've launched our video streaming services branded Arnet Play, which will initially rollout more than 2,500 video titles in movies, series, in music, in shows using an adaptive bitrate technology that maximizes user experience, image quality and efficient network usage.

Arnet Play leverages our brand and our value proposition, extending the range of revenue-generating services, while the broadband business maintains strong growth with a sustained ARPU increase and low churn.

Slide 10 shows growing voice landlines in services at 1% a year. The average monthly bill is up 7% compared to third quarter 2010, nearly ARS47 a month. ADSL bundling and video streaming add value to our customer base. Moreover, migration to flat plans increases overall volumes of usage and revenues. In third quarter of this year, ARBU rose by 7% year-on-year because of incremental penetration of supplementary services.

The evolution of wireline revenues is shown in slide 11. Third party revenues totaled at ARS3.9 billion, a 15% increase, which is around ARS20 million additionally compared to nine months of 2010. Broadband and data services boosted the revenues growth, increasing 28% and 27% year-on-year respectively. Meanwhile, fixed telephony business posted 9% growth for voice measured services and 7% with a monthly fee. Interconnection revenue rose 12% year-on-year.

Slide 12 shows CapEx that is totaling ARS1,264 million, that is 9% on consolidated revenues, increasing 18% year-on-year. While these were the business highlights, now I'll turn the call to Adrian for the financials. Thank you. Thank you.

Okay, thank you, Franco. So the strong business performance just mentioned by Franco allowed us to maintain growth levels in terms of revenues, which combined with focus on cost structures and seasonality resulted in a significant increase of profitability in this quarter.

Please refer to slide 14, where we can see the evolution of revenues and operating profits before depreciation and amortization. In the first nine months period of 2011, consolidated revenues reached almost ARS13.4 billion, with a strong growth of 28% when compared to the first nine months of 2010. We can also see that the participation of revenues related to services with regulated tariffs continued to fall, currently accounting 12% of total revenues from 14% on the same period of 2010.

Our operating profits before depreciation and amortization for the nine months of 2011 grew by 28% when compared with the same period of last year, totaling ARS4.2 billion.

As Pedro mention that even with the particular macro economic scenario, operating profits before depreciation and amortization margin is 31%, similar level as one year ago. Even more, as we said before, growth rate accelerated in this last quarter.

For further details please refer to slide 15, where we can see the breakdown of our consolidated cost structure. And few remarks on our cost structure that we will like to highlight.

Efficiency in pricing combined with seasonality allowed us to reduce SAC and SRC expenses, and interconnection and network maintaining costs were reduced thanks to an efficient network deployment and to our permanent focus on costs to mitigate the effects of inflation.

This effort is reflected in the evolution of our costs as a percentage of revenues where marketing and sales expenses currently represent 23.2%, increasing from 22% in the nine months of 2010. While interconnection costs represent 8.2% of consolidated revenues, down from 9.7% in the same period of last year.

As seen in slide 16, operating profit rose 22% --rose at a 32% year-on-year growth rate reaching ARS3.1 billion, with a margin slightly above the one reported last year. Thanks to this expansion and positive financial and holding reserves partially offsetted by contingencies and severance charges, the Telecom Argentina Group posted a total net income of ARS1.8 billion, equivalent to a growth of 39% when compared with the same period of 2010.

On the financial side, in slide 17, we represent that our free cash flow generation in the last 12 months performed strongly up to ARS2.5 billion. This allowed us to reach a net cash position of ARS2 billion as of September 2011.

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

(Operator Instruction) Rodrigo Villanueva, Bank of America Merrill Lynch.

A couple of questions if I may. First, could you show us the reason for the q-and-q decline in fixed data revenues? Thank you.

Yes, I mean -- we had to think about really your question. Because it wasn't too clear for us -- where the drop in data revenue comes from. As of a matter of fact, there is drop in data revenue. The fact that in the second quarter this year, we posted a very substantial contract [progress] that -- with a particular contract with a government agency here in Buenos Aires that boosted the data revenue for that particular quarter.

If you put it on a string line the data revenue evolution of the last few quarters, you will see there's a tendency to grow with this particular strong growth in that particular quarter for that reason.

Okay. Thank you very much. My next question is on the reason behind the increase in other expenses? Thank you.

Rodrigo, as we mentioned before, this other expenses are coming from different contingencies and severance charges that we did this quarter.

Okay. Thank you very much.

Alex Garcia, Citigroup.

I have two questions. The first one is regarding the news we read on newspapers today. I know it may be a bit early to talk about it, but I just wanted to check with you guys if there's going to be any changes or any impact coming from a reduction on subsidies and if that's relevant?

And my second question is, you guys will sit on the release about the delays on the leftover auctions of license. I just wanted to have an idea from you guys or more color on what is the new schedule, what is the new expectations regarding those auctions? Thank you very much.

Yes, on the issue of the announcement made yesterday by government of some sort of intervention on public service subsidy, there were -- I mean, they mentioned several industries that will be affected by that, and they mentioned cellular telecom in particular. I mean, cellular telephony in our particular operational sales of personnel is affected as a consumer of public utilities, not in any other term. The power consumption of our mobile operations as is posted and recorded with the mobile legal entity is a minor element of cost and the reduction of the current types of subsidy that we enjoy is really negligible to the effect of our operations.

As far as you asked about the auction of new frequency are, I'm sorry to say, have been delayed again by three months. So we are now targeting some time in March next year. That is certainly affecting the ability of the industry as a whole to further develop, and there is no much that I can comment to you.

I mean, the efficiency of the usage on our current frequency allocated band is reaching I think record levels. There isn't much more we can get out of the frequency than we have, and so we hope that the auction will be released. We don't tell anything -- much more much more to say or comment other than what has been made public by the authority.

Okay. Thank you.

Ricardo Cavanaugh.

Basically, I have a question. But my first one would be on dividends. I know that legislation is fully in place for companies to be able to pay dividends, but we've learned that other companies, Argentinean companies, the government has opposed to the payment dividends. So the question would be, how do you foresee your capability of paying dividends basically, well, in the near future? That would be my first question.

Yes, what you read on the press today is a specific case related to a specific company where the government shareholding representative have already expressed a negative position a year ago. So there is nothing new in that.

We don't expect what happened in that particular case, where there is specific capital and structure of the company that is highly leveraged on the flow of dividend as is, sort to say, self-contained case, and we do not expect that to affect other industry and particularly our industry.

Okay. Thanks much for that clarification. Then just two additional ones. First, I have noticed that the margin, EBITDA margin, was quite strong basically. I think it was a little bit above what at least what I had expected. I expected the company to be able to get to an EBITDA margin that was going to be closer to 30% or even lower.

So my question will be, if you expect this margins to be sustained or if there were something -- a one time in the quarter allowing to pressure the dividend -- the margin in a high inflation environment?

And the second and final is on the smartphones. You have been selling, my understanding is, one out of every two smartphones in the country. How has that been the case in the quarter? Thank you.

At times we are pleased to surprise the analyst. I mean, there was some extra percentage point in rent ability. I think we enjoyed this quarter a very strong top line and we enjoyed also the seasonal benefit of certain title costs, particularly related to commercial campaign that are stronger in the following quarters.

So I mean the combination of a strong top line and the traditionally -- and a traditionally sort of under expenditure in the third quarter made a difference. I mean, where we do that a 2% difference; 29.7% was last year, 31.7% this year. It's promising for the future.

As far as the smartphone question you asked, yes, I'll confirm you that independent sources still indicate that more than one out of two smartphones sold in these markets comes from our brand. As a matter of fact, the growth that we keep experiencing of value added services is close to 60% year-on-year, as you saw from our previous comment really comes from that as well as from the new tariff scheme that we put in place for the prepaid base.

Okay. Excellent. Thank you very much.

Rizwan Ali.

My first question is -- and if you could just answer the previous question, which is, how sustainable is this margin? I mean, should we expect that the margin will going forward on an annual basis be around 30% or there is a chance of it improving?

Yes, I mean the --- do you want me to elaborate a bit on what I said before? Now the fairly high margin we had at this month despite of the actual operational performance, it was quite outstanding.

I must say that portability start date also is late a few month and is deep into the first semester next year. We were expecting it to be by this year-end. And there's a lot of substantial cost elements that are associated with it and that obviously has been moved a bit forward.

So I would just stress again that the strong increase you saw this month are coming from the combined effect of very strong saves in the quarter and some seasonality non-cost, as well as cost pushback to the next quarter because of external factors like, for example, the portability start date.

My second question is, your fixed wireline operations appear to still be doing reasonably well and at least I am not able to detect any migrational wireline traffic to wireless. I mean, do you keep track of like what percentage of the total voice traffic now is on wireless networks in your case -- in case of your company or the entire market, and why is it that we are not seeing the cannibalization that we have seen in other markets in Argentina?

Well, the answer is pretty straight forward -- check the types. The -- our fixed line tariffs are this low or that low compared to any other forms of telephony tariffs in the market that obviously remain attractive. If you compare our monthly fee as well as our per minute value, are a fraction of what do apply in comparable Latin American market.

That's an important situation, but on the other side, justify why the migration of traffic from fixed mobile, fixed mobile substitution doesn't happen as it happened in other markets. On the other hand, all growth is on the mobile platform. So what you really see is a stable or marginal growth of the fixed-line business because of the so convenient tariffs, regulated tariffs that are in place. We also are witnessing a construction, a residential unit construction activity that's really strong, particularly in the metropolitan area. That means a marginal growth of numbers of line is still happening, and that's basically what justifies what you notice.

One last thing is, I mean any forecast as to what kind of wireless penetration you can get and where does it stabilize?

Sorry, your question wasn't too clear. But you are asking about wireless penetration --

Yes, wireless penetration --

Okay.

-- where did this kind of level of?

It didn't show any sign really in that respect. I mean, we are well over 130%. We think that another 20% to go to get to European kind of levels. Well, we think we'll keep growing till we reach that level for few quarters in the future.

Jasmine Earnshaw.

I've a couple of questions. First, year-to-date CapEx seems lower at only ARS1.3 billion versus ARS2.5 billion you said earlier in the year. Do you have a revised target for the year?

Yes, we'll confirm our target for the year. I mean, we had a time shift in our procurement process that was to an extent related to the integration with of purchasing calendars within the Telecom Italia Group that generated some delay into issuing purchase orders for our suppliers and therefore executing them.

So it's a pure time difference. They may affect quite marginally some carry over to the next year, but substantially we will -- we can confirm in broad terms our announced level of CapEx for the year.

Okay. Great. Also could you -- can you say anything else about the large other expense someone asked before, ARS250 million in the quarter? Was that cash or non-cash?

Definitely it's not cash at the moment.

Okay. Great. I still have another question. Could you comment on the declining equipment subsidies we are seeing? Is the main driver lower device cost, maybe higher selling prices or a changing product mix and what do you see it going forward?

Yes, what you saw it's a target we have of keep reducing the cost of acquisition, particularly on the subsidy side. I think that our pricing is pretty accurate and it's pretty rigorous in that respect I mean to progressively restrict any area of subsidy into our customer base.

In this particular quarter, we also enjoyed some additional benefits in our purchasing of terminals with our supplier with note of credits, et cetera, et cetera that reduced somehow our cost of purchasing. Now in general terms, I think you can expect that -- that percentage of revenue that goes to subsidy keeps falling. Maybe not strong as in this quarter, but consistently falling.

Thank you. And I have one final question, which is more long-term. So this past month we've seen launches of higher speed broadband offerings by Cablevision, DOCSIS 3 and fiber-to-home by [MX]. So there's not a big concern in the short-term I think, but do you have any strategic plans for the long-term you can share with us, like any upgrade?

Yes, I mean it's -- we don't really carry any concern about our -- the ability of -- the current ability of our network in-- as it and as it will remain in the near future to carry and support the kind of services we are providing. The average speed of our broadband access is between 3 Mbs and 5 Mbs. Our video streaming service is, because of the technology we adopted, works very satisfactorily with 3 Mbs. Therefore, we don't currently have any application of service that would require a bandwidth in excess of what we can provide at the time for the time being.

Certainly, looking forward and in the future that requires a stronger upgrade, that will be part of our CapEx rollout in the next few years. And basically, we are looking into a fiber to the curb access network architecture that's in the particular implementation made by an operator like ourselves that already owns infrastructure, a residential infrastructure with a pair of cables, has his own forms of being implemented at reduced investment. So we are certainly moving to that.

As a matter of fact, the breakdown of the CapEx over the next three years will be strongly biased towards that. We don't have any time pressure to do it as our current commercial office do not require any higher speed of what we can provide. And besides some announcements from competition, they don't even provide any service that require those speed. But it certainly part of our long-term plan.

Okay. Great. Thank you very much.

(Operator Instructions)

Miguel Garcia.

First, I wanted to ask you a question about the salary increase you -- I think it was 20% in July. But when we look at the actual expense in cost of salaries, it increased only 13% from the previous quarter. And you're also saying that you are increasing the number of employees.

And the second question is regarding the percentage of 3G and -- or smartphones that you have in your subscriber base? Thank you.

As far as the salary increase is concerned, obviously we operate across the year with different time scale. We apply salary increases to certain categories of our employees, and therefore, it's not surprising that you saw a percentage increase in this quarter that is different from the (inaudible). So -- I mean, in the previous quarters. As a matter of fact, I mean, with July -- from July 1st we apply the yearly salary increase negotiated with the union to large customer -- a large base of employees we have.

And at different time of year, we apply salary increase for level of management and technical and administrative staff. The increase you saw in employees' base is the result of certain plans of in-sourcing that we are implementing in the Company.

Basically, we are targeting certain areas of technical areas, particularly of network and IT. Or we believe that certain know how that is currently shared with outsource or suppliers should be more protected within the Company, and therefore, we are applying certain policy of incorporating in our employment base activities or specialty activity there were in the past outsourced to contractors.

About -- in relation to your question about 3G and the smartphones, the percentage of 3G phones that we have in our base is approaching 15% and the devices is over 10%. The smartphone devices are 10% of the base.

Great. Thank you. And just to -- I wanted to confirm one thing. As you said, the CapEx guidance for this year is not changing. Is that the guidance ARS2.3 billion?

Right.

Okay. Thank you.

Jennifer Leonard.

Basically, just wanted to follow-up on the question on dividends in looking at the new capital control that we've heard about, do you think the capital controls will impair TEO's ability to pay dividends going forward?

I just like to refresh the comment I made to a similar question before. I mean, we don't expect that to happen. And I mean once -- a specific instance that were reported by the press today on a specific company, I think is a specific case that will not bite or affect our industry.

Okay. Thank you.

Alex Garcia.

Just wanted to have an idea regarding -- it's kind of hard to follow-up on dividends. The dividends that you plan to pay next year, will it be enough to redeem the preferred shares of Nortel and -- so that the dividends can reach the controlling shareholders? Thank you.

Yes -- as a matter of fact, we are unable to make comments on this, on your question. I think the issue will be as soon addressed. But I would say your guess could not be too far off the realty in the next year.

Thank you.

And it does appear that we have no further questions in the queue at this time.

Well, thank you very much for participating in our quarterly conference call. Don't hesitate to contact our Investor Relations department if you have any further question or enquiry about our operation.

Good morning to all of you -- good afternoon as matter of fact all of you. Have a nice day and we'll meet soon in the future. Thank you.

That concludes today's teleconference. Thank your participation. You may disconnect anytime and have a wonderful day.