Telecom Argentina S.A. — FY2017 Form 20-F Summary
Business context and reporting period
The filing, dated April 20, 2018, covers the fiscal year ended December 31, 2017 and is prepared under IFRS as issued by the IASB. Telecom Argentina provides fixed-line, mobile, broadband, data, Internet, wholesale and related telecommunications services in Argentina, mobile services in Paraguay, and international wholesale services through the United States.
For fourth-quarter 2017, reported revenue was P$17,923 million, operating income was P$3,094 million, net income was P$2,029 million and net income attributable to Telecom Argentina was P$1,989 million. Historical 2017 results generally exclude Cablevisión’s operating results because the merger became effective on January 1, 2018.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | P$65,186 million | P$53,240 million | +22% |
| Total revenues and other income | P$65,319 million | P$53,323 million | +22% |
| Adjusted EBITDA | P$19,356 million | P$14,424 million | +34% |
| Adjusted EBITDA margin | 30% | 27% | +3 percentage points |
| Operating income | P$12,112 million | P$7,843 million | +54% |
| Operating margin | 19% | 15% | +4 percentage points |
| Net income | P$7,724 million | P$4,005 million | +93% |
| Net income attributable to Telecom Argentina | P$7,630 million | P$3,975 million | +92% |
| Net income margin | 12% | 8% | +4 percentage points |
| Cash flow from operating activities | P$19,332 million | P$11,365 million | +70% |
| Capital expenditures | P$11,143 million | P$11,386 million | -2% |
- Fixed Services revenue increased 36% to P$20,460 million, led by voice, Internet and data services.
- Personal Mobile Services revenue increased 17% to P$41,735 million. Mobile Internet revenue reached P$17,048 million, up 57%; ARPU increased 27% to P$142.3 per month, while Argentine mobile subscribers declined 2.7% to 19.0 million.
- Núcleo Mobile Services revenue increased 13% to P$2,991 million, aided by higher mobile Internet usage and the inclusion of Tuves Paraguay for part of the year.
- Operating expenses excluding depreciation and amortization increased 18% to P$45,963 million. Employee costs rose 30%, fees for services and maintenance rose 32%, and provisions rose 216% to P$590 million.
- Financial loss narrowed to P$486 million from P$2,244 million, primarily due to lower loan interest and higher investment and receivable income.
- Income tax expense increased to P$3,902 million from P$1,594 million, including a P$308 million benefit from tax-recourse claims.
- Cash and cash equivalents were P$2,831 million at year-end, down from P$3,945 million. Current assets were P$18,238 million versus current liabilities of P$21,987 million, producing a liquidity ratio of 0.83.
- Total financial debt was P$12,235 million, including P$3,194 million current debt and P$9,041 million non-current debt. Management reported low leverage and net financial debt of approximately P$3,260 million.
- Total assets were P$57,588 million, total liabilities were P$33,709 million and total equity was P$23,879 million.
Material changes versus the prior comparable period
- Profitability improved substantially as revenue growth exceeded expense growth, with adjusted EBITDA margin expanding from 27% to 30% and operating margin from 15% to 19%.
- Growth was concentrated in mobile data, higher service prices, fixed Internet and voice revenue. Subscriber counts declined in both Argentine fixed lines and mobile services, although ARPU increased.
- Operating cash generation increased significantly, but cash declined because of capital investment, debt repayments, dividends and investment purchases.
- Telecom completed the internal reorganization effective December 1, 2017, absorbing Personal, Nortel and Sofora. Personal’s mobile operations were therefore continued by Telecom Argentina from that date.
- The Cablevisión merger became effective January 1, 2018. The transaction created a convergent telecommunications and media company, but its effects are not reflected in the historical 2017 operating results.
Outlook, guidance, commentary and risks
- Management estimated 2018 capital expenditures of approximately US$1.554 billion, or about 24% of consolidated revenue, and approximately US$5 billion for 2018–2020. Funding is expected from operating cash flow and third-party financing.
- Management expects to integrate Telecom and Cablevisión networks and pursue quadruple-play offerings combining fixed and mobile telecommunications, Internet and pay television. Expected benefits include network, back-office and operating synergies, cross-selling and lower churn, but no assurance is given that these benefits will be fully achieved.
- In February and March 2018, Telecom borrowed US$1.0 billion under a syndicated term loan maturing in February 2019, with interest at LIBOR plus margins ranging from 1.25 to 2.25 percentage points. Proceeds are intended for capital expenditures, working capital and general corporate purposes.
- Argentina’s 2017 inflation was reported at 24.8%, and the peso depreciated 17.4% against the U.S. dollar. Management concluded Argentina was not hyperinflationary under IAS 29 at year-end, but continues to monitor the issue.
- Principal risks include peso devaluation, inflation, regulatory and tariff uncertainty, competition, spectrum and network deployment obligations, merger integration, labor costs, cyberattacks, customer credit risk, tax and regulatory claims, and restrictions that could affect payments or transfers abroad.
- The Company reported provisions of P$2,088 million for probable claims, including P$1,626 million of non-current provisions and P$406 million of current provisions. It also reported P$98 million of restricted cash and potential Universal Service Fund exposure: an unrecognized receivable of P$2,925 million and a potential obligation of approximately P$799 million.
- An AFA Plus project claim remains unresolved. Telecom had invested approximately P$182 million, including P$143 million in impaired assets, and intended to pursue recovery from the Argentine Football Association after mediation ended without agreement.
- The independent auditor issued an unqualified opinion and concluded that internal control over financial reporting was effective as of December 31, 2017.
Most important facts for investors to verify
- How the January 1, 2018 Cablevisión merger changes the company’s revenue mix, leverage, cash flow, capital expenditure requirements and accounting, including the estimated P$59 billion goodwill.
- The timing and cost of merger integration, the realization of expected synergies and compliance with spectrum-cap and antitrust conditions.
- Refinancing of the US$1.0 billion syndicated loan and other debt maturities during 2018–2019.
- The sustainability of revenue growth and margin expansion after adjusting for inflation, tariff increases, currency depreciation and subscriber declines.
- The recoverability of the P$774 million income-tax receivable and the P$2,925 million Universal Service Fund receivable, together with potential related liabilities.
- The effect of new Argentine spectrum fees, telecommunications customer rules, price restrictions and other regulatory changes introduced after year-end.
- The effect of IFRS 15 and IFRS 9 adoption from January 1, 2018, including estimated opening impacts of approximately P$547 million net positive retained earnings from IFRS 15 and P$482 million net negative retained earnings from expected credit losses under IFRS 9.