Telecom Argentina S.A. — FY2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 18, 2020. The filing presents consolidated results under IFRS as issued by the IASB, restated into constant Argentine pesos as of December 31, 2019 under IAS 29. The filing is an annual report, not a standalone fourth-quarter filing.
Business context
Telecom Argentina provides mobile and fixed telephony, Internet, data, cable television and content services, principally in Argentina, with operations in Paraguay, Uruguay and the United States. The 2019 results include the post-January 1, 2018 combination with Cablevisión. Comparisons with 2017 are not directly comparable because of the reverse-acquisition accounting treatment for the merger.
- 2019 year-end subscribers/accesses included approximately 19.1 million Personal mobile lines in Argentina, 2.4 million Núcleo customers in Paraguay, 4.1 million Internet accesses, 3.5 million cable television subscribers and 3.2 million fixed telephony lines.
- The Argentine peso depreciated 58.9% against the U.S. dollar in 2019, while National CPI inflation was 53.8%.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | P$237,024 million | P$258,518 million | Down 8.3% |
| Adjusted EBITDA | P$77,084 million | P$86,715 million | Down 11.1% |
| Adjusted EBITDA margin | 32.5% | 33.5% | Down 1.0 percentage point |
| Operating income | P$15,795 million | P$32,701 million | Down 51.7% |
| Operating margin | 6.6% | 12.6% | Down 6.0 percentage points |
| Net income/(loss) | Loss of P$3,888 million | Income of P$8,516 million | Decline of P$12,404 million |
| Net loss attributable to Telecom Argentina | P$4,396 million | Income of P$8,145 million | Decline of P$12,541 million |
| Basic and diluted EPS | Loss of P$2.04 | P$3.78 | Turned negative |
Service revenue declined 6.8% to P$222,586 million and equipment revenue declined 26.9% to P$14,438 million. Mobile revenue fell 7.5%, Internet revenue 9.3% and cable television revenue 11.0%, while fixed and data services revenue increased 5.5%.
Operating costs excluding depreciation, amortization and impairment declined 6.9% to P$159,940 million, mainly reflecting lower regulatory taxes and fees, commissions and advertising, equipment costs, and interconnection costs. These savings were partly offset by higher bad-debt expense, which increased 16.7% to P$6,331 million.
Depreciation, amortization and impairment increased 13.5% to P$61,289 million. The 2019 total included P$2,143 million of spectrum impairment and P$421 million of other fixed-asset impairment. The adoption of IFRS 16 also increased depreciation and financial expense while reducing reported operating lease costs.
Cash flow, debt and liquidity
- Cash flow from operating activities was P$81,933 million, up from P$51,699 million in 2018, primarily due to higher customer collections.
- Cash flow used in investing activities was P$44,790 million, including P$50,798 million of cash acquisitions of property, plant and equipment and intangible assets.
- Cash flow used in financing activities was P$25,043 million, including P$35,528 million of cash dividends, P$36,503 million of debt repayments and P$58,507 million of debt proceeds.
- Cash and cash equivalents increased to P$25,582 million from P$10,601 million.
- Total financial debt was P$151,996 million, comprising P$35,280 million current and P$116,716 million non-current debt. Contractual debt obligations totaled P$182,187 million, including future interest.
- Operating working capital remained negative at P$26,097 million, and the liquidity ratio declined to 0.59 from 0.63.
- Approximately 63% of liabilities were denominated in foreign currencies. Management reported a net foreign-currency liability position of P$137,670 million, or approximately US$2,299 million; the unhedged position was approximately US$2,252 million.
- Debt included variable-rate exposure of approximately P$48,554 million. NDF contracts reduced net unhedged variable-rate debt to approximately P$22,202 million; management estimated that a 100-basis-point rate change would affect financial results by approximately P$222 million.
Material changes versus 2018
- Revenue and operating profitability weakened despite lower cash operating costs. The principal drivers were lower real pricing and ARPU across mobile, Internet and cable services, lower handset volumes and Argentina’s recessionary and inflationary environment.
- Mobile customers in Argentina increased 4.2% to 19.1 million, but Personal ARPU declined 3.7% to P$317.1 per month and monthly churn increased to 2.9% from 2.6%.
- Internet customers were broadly stable at approximately 4.1 million, but Internet ARPU declined 9.7% to P$1,058.8. Cable television ARPU declined 11.3% to P$1,165.4.
- Fixed telephony lines declined 10.2%, although fixed-service ARBU increased to P$442.2 from P$416.6.
- Headcount declined 6.4% to 23,728 employees.
- Equity declined to P$309,846 million from P$352,150 million, reflecting dividends and the 2019 net loss.
- The company cancelled 15.2 million treasury shares during 2019, reducing stated capital.
Guidance, outlook and unusual items
- Management estimated 2020 capital expenditures of approximately US$643 million, compared with approximately US$1,086 million in 2019. Planned investment focuses on 4G/4G+, fiber, FTTH, network capacity, data centers and digital transformation.
- Management expects to fund capital expenditures through operating cash flow, cash on hand and third-party financing, but acknowledged that access to domestic and international capital markets remains uncertain.
- The 2019 net loss included a P$15,194 million income-tax inflation-adjustment loss under Argentine tax law. Financial results also included P$7,599 million of RECPAM, compared with P$20,619 million in 2018.
- Subsequent financing included January 2020 Series 3 and Series 4 notes totaling approximately P$4,397 million and February 2020 IDB Invest disbursements totaling US$125 million before issuance expenses.
- The filing identified COVID-19 as a subsequent risk that could disrupt operations, customer demand, employee availability, equipment deliveries and suppliers, particularly those located in China.
Principal risks and contingencies
- Argentina’s inflation, recession, currency devaluation, exchange controls, sovereign-debt restructuring and political or regulatory intervention could impair margins, cash flow, capital expenditures, debt service and dividend remittances.
- Foreign-currency liabilities and variable-rate debt create material exchange-rate and interest-rate exposure. The company also had US$1,316.7 million of debt indexed to LIBOR as of December 31, 2019.
- Refinancing risk is significant, including obligations maturing in 2021 and restrictive debt covenants that could accelerate borrowings following a default.
- The telecommunications, Internet and cable markets are highly competitive and require substantial continuing investment. Customer churn, lower ARPU, technology changes and OTT competition may pressure revenue.
- The business is highly regulated. Material matters include spectrum fees, universal-service contributions, interconnection charges, pricing rules and infrastructure-sharing obligations.
- Legal and regulatory proceedings include labor, consumer, tax, spectrum-fee and cable-pricing claims. Provisions for contingencies totaled P$5,820 million at year-end. The filing states that provisions cover contingencies considered probable, but possible losses remain uncertain.
- The dispute concerning SCI Resolution No. 50/10 and cable television pricing remained unresolved. The auditor highlighted the matter without modifying its opinion.
- Goodwill was P$185,141 million, including approximately P$183,992 million associated with Argentine operations. Its impairment assessment depends on management projections, discount rates, inflation, exchange rates and long-term growth assumptions.
Important facts for investors to verify
- Reconcile reported revenue, EBITDA and cash flow in constant pesos with nominal-peso and U.S.-dollar metrics; inflation restatement and exchange-rate movements materially affect comparability.
- Review the detailed debt maturity schedule, refinancing plans, covenant compliance and post-year-end financing, including the 2021 maturities.
- Assess the sensitivity of cash flow and equity to further peso depreciation, exchange controls and restrictions on dividend or debt-service remittances.
- Test whether the planned US$643 million 2020 capital-expenditure program is consistent with operating cash generation and available financing.
- Monitor ARPU, churn and subscriber trends, particularly the decline in Internet and cable ARPU and the increase in Personal mobile churn.
- Review the status and potential exposure of the Resolution No. 50/10 pricing dispute, universal-service claims, spectrum-fee proceedings and consumer and labor litigation.
- Evaluate the recoverability of goodwill and deferred tax assets under updated macroeconomic assumptions.
- Confirm the impact of COVID-19, subsequent exchange-control changes and any Argentine sovereign-debt restructuring on operations, suppliers, liquidity and debt access.