AMX

Business Context and Reporting Period

Company: América Móvil, S.A.B. de C.V.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2006
Accounting Standards: Mexican Financial Reporting Standards (Mexican FRS), with reconciliations to U.S. GAAP provided.

América Móvil is the largest provider of wireless communications services in Latin America. As of December 31, 2006, the company reported approximately 124.8 million wireless subscribers across 15 countries. The company operates primarily through its Mexican subsidiary, Telcel, and significant operations in Brazil, Colombia, the Southern Cone, the Andean region, Central America, the United States (TracFone), and the Caribbean (Codetel).

A significant corporate event during the period was the merger with América Telecom (Amtel), the company's former controlling shareholder, approved on December 13, 2006. The merger was accounted for on a historical basis similar to a pooling of interests, resulting in the assumption of approximately Ps. 14,426 million in liabilities and the elimination of management fees previously paid to Amtel.

Key Financial Metrics (2006)

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased by 23.6% in 2006 compared to 2005, driven primarily by subscriber growth (33.7% increase to 124.8 million) and increased traffic. Service revenues grew 26.8%.
• Profitability: Operating income surged 67.2% year-over-year. The operating margin improved from 18.7% in 2005 to 25.3% in 2006, attributed to improved margins in Brazil, Mexico, and Colombia, and reduced equipment subsidies.
• Subscriber Base: Wireless subscribers grew by 31.5 million. Mexico remained the largest market (46.6% of revenue), followed by Brazil (16.9%).
• Acquisitions: The company acquired Codetel (Dominican Republic) in December 2006 for U.S.$2.42 billion. While consolidated for one month, it added 2.1 million wireless subscribers. The company also acquired TELPRI (Puerto Rico) in March 2007 (subsequent event).
• Financing Costs: Comprehensive financing cost decreased significantly from a cost of Ps. 2,690 million in 2005 to a negligible cost of Ps. 27 million in 2006, largely due to a decrease in net interest expense and other financing costs, offset by a decrease in foreign exchange gains.

Guidance, Outlook, and Risks

Outlook and Capital Expenditures: Management has budgeted capital expenditures of approximately U.S.$3.3 billion for 2007, primarily for expanding GSM network capacity. The company expects to finance these expenditures through funds generated from operations and new debt financings. No specific revenue or earnings guidance was provided in the text.

Key Risks and Contingencies:

• Regulatory Risks: Significant exposure to government regulation in Mexico and Brazil. In Mexico, Cofetel introduced number portability rules (effective Q1 2008) and interconnection fee frameworks that may reduce revenues. In Brazil, ANATEL is expected to implement cost-based interconnection fee methodologies in 2008, which could impact revenues if the company is deemed to have significant market power.
• Competition: Intense competition in wireless markets, particularly from Telefónica Móviles, leading to price reductions and increased marketing costs. The introduction of number portability may increase churn.
• Legal Proceedings:
  • Interconnection Fees (Mexico): Telcel is challenging Cofetel's resolution on interconnection fees; while an injunction was obtained, the outcome is uncertain.
  • Antitrust (Mexico): Cofeco has initiated administrative proceedings against Telcel regarding alleged anti-competitive behavior.
  • Patent Litigation (Brazil): A Brazilian company claims patent infringement regarding caller ID technology. A preliminary injunction suspended the patent, but potential damages could reach U.S.$270 million.
  • Tax Assessments (Mexico): The Mexican Tax Administration System (SAT) has assessed Ps. 271.6 million and Ps. 522 million regarding royalty deductions. The company believes it will successfully challenge these.
• Exchange Rate Risk: The company has significant debt denominated in U.S. dollars (approx. 56.7% of total debt). A 10% depreciation of operating currencies against the U.S. dollar would result in a foreign exchange loss of approximately Ps. 2,279 million.

Investor Verification Checklist

• Merger Accounting: Verify the impact of the Amtel merger on historical comparability, as financials were restated on a pooling-of-interests basis.
• Regulatory Impact in Mexico: Monitor the final resolution of the Cofetel interconnection fee dispute and the implementation of number portability in 2008.
• Brazilian Regulatory Changes: Assess the potential impact of ANATEL's 2008 cost-based interconnection fee methodology on Brazilian operating margins.
• Debt Maturity Profile: Review the maturity schedule of the Ps. 111 billion debt, noting that Ps. 25.3 billion is short-term and a significant portion is denominated in U.S. dollars.
• Legal Contingencies: Evaluate the potential financial impact of the Brazilian patent litigation (up to U.S.$270 million) and Mexican tax assessments if the company's legal challenges are unsuccessful.
• Acquisition Integration: Monitor the integration and performance of the recently acquired Codetel (Dominican Republic) and TELPRI (Puerto Rico) operations.