Megacable Hldgs Sab Ord

Good morning. My name is Nikki, and I will be your conference operator. At this time, I would like to welcome everyone to the MEGA Cables earnings conference call. All ends have been placed on mute to prevent any background noise. There will be a question and answer session after the speaker's opening remarks, and instructions will be given at that time. Thank you. I will now turn the call over to Genia Vargas of iAdvise Corporate Communications for opening remarks.

Thank you, Nikki. Good morning and welcome to Metacable's first quarter 2020 conference call. At this time, I would like to introduce Metacable's management and today's presenters. Mr. Enrique Yamuni, Robles, Chief Executive Officer, Mr. Raimundo Fernandez, Deputy Chief Executive Officer, and Mr. Luis Zeta, Chief Financial and Administrative Officer. The gentlemen will be discussing the quarterly results prior to moving on to the question and answer session. It is important to mention that certain comments made today may constitute forward-looking statements which do not account for future economic circumstances, the company's performance, or financial results. These are subject to various conditions and could materially change throughout the year. Please review the complete disclaimer representing the financial learning report that was issued yesterday. You may contact us at 212-406-3691 if you did not receive the quality report or if you require any assistance. At this point, I will turn the call over to Mr. Enrique Yamone to begin his presentation. Please go ahead, Mr. Yamone.

Thank you, Kenya. Good morning, and thank you all for joining us as we review the results of the first quarter of 2020. As you are all aware, the first quarter of the year has been quite challenging for all of us. The health crisis generated by the COVID-19 virus and all the economic repercussions that have resulted have not only affected our everyday lives and our economics, but also promised to impact the plans that we have set for this year and maybe change our way of life. Regarding results, the company has been able to deliver even in this situation, achieving growth both operationally and financially, mainly due to our operational strength together with our capacity to adapt. During the quarter, we reached subscriber growth across the three major segments of the services, as well as in the number of unique subscribers, ARPU continues its solid growth trend, partly due to the added services, which effectively generate a value differentiation to our subscribers. Financially, we reached EBITDA growth that surpassed revenue growth, which means a significant margin increase It was due to our diligent focus on cost efficiencies and responsive investment given the challenging conditions. On the corporate segments, however, we saw the cancellation of some projects and others we saw delays in the implementation, which were not a surprise given the circumstances. We're working towards raising our current revenue base to turn back this situation, however, There is a lot of uncertainty about how this segment will evolve in the coming months, where a substantial drop in terms of government channel is expected and the recovery of SMB segment is in jeopardy, so that the situation of the segment in the short term remains unclear. About COVID-19, Megacavity has aggressively implemented the necessary measures and protocols to face this pandemic in the best way we can to ensure customers and employees safe, as well as the business continuity. All staff eligible to do home office are doing so, including our call centers, where over 1,000 people continue to work without interruptions. On the other hand, approximately 75% of all our employees continue operating inside and in the field. With the highest security measures, none of our services has been affected or will be affected by this situation. The company adequately plans in anticipation to the market and the contingency phases announced by the government The capacity increases required for the higher bandwidth consumption that users have registered to ensure the continuity and quality of its service. The telco sector is very resilient, and even more for this crisis in particular, due to the request to the population to stay at home. In order to face the change in our everyday life, our services have become critical. Both the residential segment, SMEs, and all businesses and professional services need connectivity for distance learning or for home office purposes. Not to mention recreation, which has been enhanced by the new trends in data consumption, like streaming and gaming. In the same line, having access to news or other sources of information is essential. Looking to the coming months, the repercussions on the economy are still uncertain. There is a decrease in GDP as expected, and it is expected to continue for at least the second quarter before starting a recovery, as well as a decrease in the income of families. However, our industry has already demonstrated its resilience in previous economic crises created for different reasons, which together with the need of people to remain in their homes allows us to think that we will be one of the companies that will be less affected and should be considered not only resilient, but candidate for a steady growth. Regarding the projects, we are carrying out the GPON, or Video Evolution Migration. It's interrupted. So it's uninterrupted, I'm sorry. That is, design stages are underway, and the execution will continue as planned. We will move on as we see the evolution of market conditions. And aside from a delay of a month or two as a result of restrictions in traveling and mobility of persons due to the sanitary emergency, the project is expected to be carried out as according in the plan. On the submarine cable, we have concluded its construction phase, and now it's fully operational. We are excited about the benefits that this infrastructure will bring to the company in terms of cost savings and better service offer, as well as for La Baja region by significantly improving their connectivity capabilities. Finally, I am pleased to announce that at the General Ordinary Shareholders Meeting Shareholders approved a dividend payment for 1.5 billion pesos, representing 15% of 2019 consolidated EBITDA in line with our dividend policy. The payment will be carried out in one installment in May 27. Thank you for your attention, and I now pass the word over to Raimundo. Raimundo, please go ahead.

Thank you, Enrique, and good morning, everyone. It is great to be speaking with you, and I hope you all are staying healthy and safe. Let us review the operating results for the quarter, where we saw solid growth, mainly due to the strategies we have implemented since the last quarter of last year, including, in the operating side, successful commercialization and a tight control over quality additions. All the information coupled with the effect of the current health crisis which translates into people seeking entertainment and connectivity opportunities from their homes. And Mega Cable is well positioned to absorb this additional demand due to all our work and investment in infrastructure in the past. Regarding financials, we have focused on those lines of costs in which we can be more efficient, as well as to be more selective in terms of the smart investments that we do, reducing traditional capex and focusing in strategic projects like NGB Plus and Network Evolution. Moving on to the results, unique subscribers grew 2% when compared to the first quarter of last year. while REUs rose to more than 8.5 million, a 6% increase. This was mainly due to the subscriber increases that Enrique mentioned across the three segments of the massive market. In terms of broadband, the company rose to more than 3.1 million subs at the end of the quarter, 193,000 net ads when compared to the same quarter of 2019. On a sequential basis, we reached 49,000 net ads when compared to fourth quarter 2019. As I mentioned, Megacable is very well positioned to absorb the increase in bandwidth volume. We are carefully managing the demand that arise as a result of higher traffic. However, we are satisfied with the performance of our infrastructure in the face of the crisis so far. The access, IP core, and our backup capacity are well prepared to support these roles. We remain as committed as ever to invest in the right technology towards customer demand and satisfaction. Video subscribers increased by 1%, while broadband grew 7% and telephony 15% compared to the same quarter of 2018. resulting in 2.34 REUs per unit subscriber. The video segment rose to more than 3.2 million subs at the end of the quarter, recording net ads of 37,000 when compared to the same quarter of 2018. On a sequential basis, 9,000 new subscribers were added. xView also achieved 47,000 net additions during the quarter, to reach more than 874,000 subscribers. HD high-definition service rose to approximately 1.1 million users, which means 57,000 net ads during this period. Additional services continue to be a differentiator in our service over the competition, especially our XView platform, whose new generation is underway. while also continuing to provide additional revenue that is reflected in the ARPU's growth that we provide. Moving on to the telephony segment, we reached nearly 2.2 million subs during the quarter, recording 280,000 net ads on an annual basis and 56,000 net ads versus the previous quarter. Regarding the MVNO, During the quarter, it grew at a very good pace, and now we have more than 18,000 lines. We are confident that our disruptive offer, both in terms of content and rates, coupled with an excellent customer service, will help us gain in market position in the short term. As a result of the retention strategy implemented at the end of last year, the level of gross addition decreased along with the churn rate. This generated a better acquisition and retention of subscribers. with the consequent savings in OPEX resulting from lower commissions paid. The selective and better quality sales strategy is paying off, given that despite a lower number of gross ads were achieved this quarter, the net additions were even higher due to a better churn rate. Output per unique subscriber rose to 416.9 pesos. a 7% increase compared to the same quarter of 2019. This growth was mainly due to higher REUs per unit subscriber, rates adjustment on existing clients, and the contribution from add-on services. Regarding the output per services, an increase was recorded across the three services. Video grew by 6%, while broadband and telephone increased by 2%, respectively, when compared to the same quarter of 2018. Now, in the corporate telecom segment, revenue increases were below expectations. All have remained practically flat compared to the same quarter of 2018, as a result of lower revenues from the government, which, as you recall, had a remarkable fourth quarter of last year. Thus, some of those contracts were advanced to fall within the budget assigned of that year. Excluding this effect, growth should have been recorded during the quarter, supported by the increase in connectivity and infrastructure revenues in the business and corporate channels. In the same line, Metro Carrier grew by 4%, mainly due to the cancellation of the Mexico Connectado project. which until last year was still active. Nevertheless, during the period, the company recorded net additions to continue growing in its connectivity and managed security solutions, while the off-net cities continued to gain traction and increase in its contribution. To conclude, NGV Plus and the GPOM project continues to develop according to plan. For the company, these are key projects that will greatly strengthen our ability to compete in the coming years. And therefore, it is important that they continue its execution. We have made sure to negotiate the best conditions in terms of financing and development to make it so. Thank you for your attention. Luis will now review the financial highlights. Luis?

Thank you, Raimundo. And good morning, everyone. I will now give you more details regarding financial results before taking your questions. Consolidated revenues for the first quarter rose to 5.5 billion pesos, a 7% increase when compared to the same quarter of the previous year. This was mainly due to revenue increase across the three services in the massive segment. During the quarter, massive segment revenue grew by 8% when compared to the first quarter of 2019. with broadband increasing 8%, video 7%, and telephony by 18% as a consequence of a larger subscriber base and a higher ARPA. Regarding the corporate telecom segment, revenues increased by 2% when compared to the first quarter of 2019, mainly affected by government projects. As Raimundo mentioned, MetroCarrera grew 4% on the cancellation of Mexico Conectados SCT project. Excluding this effect, the growth would have been around 16%. OLA and NCA remain in line with previous year, but it's important to consider that OLA recorded historic revenue numbers in Q419 by accelerating execution of recognition of several projects, impacting somehow on the figures for this quarter. In terms of the revenue breakdown, the market accounted for 82% of the total revenue, while corporate continues to represent 18%. Both cost of services and operating expenses grew only by 6% compared to first quarter of 2019. This is below revenue growth. Paid commissions decreased due to a lower sales volume when compared to previous quarters. As well as the more efficient transport network, which reduced the cost of links as a result of previous year investment. All the above resulted in a consolidated EBITDA of almost 2.8 billion, representing an 8% increase when compared to the first quarter of 2019, and a consolidated margin of 50.1%. On the other hand, EBITDA for cable operations accounted for approximately 2.6 billion, increasing 9% when compared to the same period of previous year for a 51.7 margin. Net profit for the quarter reached 1.3 billion pesos, representing a 12% increase when compared to the first quarter of last year. The higher growth than levels was mainly due to effect net profit due to the revalorization of our positive USD or US dollar position. The company's net debt reached 3.7 billion pesos at the end of the quarter, a decrease when compared to the end of 2019 due to the cash generation. On an annual basis, the net debt increase was due to result of net debt refinancing during the third quarter of last year. During the quarter, additional debt in the amount of 1.3 billion pesos was contracted to support the company's liquidity position. All the above resulted in a net debt to EBITDA ratio of 0.36 times, while interest coverage ratio reached 24 times. still at a very healthy level. In terms of capex, during the first quarter, the company invested 1.2 billion pesos, representing 22.6% of the previous revenues. The lower level of investment was mainly due to the migration of the traditional capex to the project, GPON and network evolution, sorry, which is still in the design phase. and such is not yet reflected in CAPEX. Given the current effect situation, we will be more selective regarding investment. However, the main project that we are carrying out are still in progress. Finally, regarding the guidance we set out for this year, at this point, the company believes that there is not sufficient information and certainty to enable us to accurately measure the impact of the pandemic for the coming months. As we have always been conservative at this point, the guidance we provided in January is no longer valid, given the circumstances. Thank you for your attention. At this moment, we will now move to the Q&A session. Operator, please go ahead.

At this time, if you would like to ask a question, please press the star and 1 on your touch-tone phone. You may withdraw your question at any time by pressing the pound key. Once again, to ask a question, please press the star and 1 on your touch-tone phone. And our first question comes from Rodrigo Villanueva with Bank of America. Please go ahead. Your line is open.

Yes, thank you. Good morning, Enrique, Raymundo, Luis. I have a couple of questions. The first one is related to I mean, the savings that you achieved in the first quarter related to costs and expenses. I was wondering if you could elaborate on the measures that you have been taking and if you think this is sustainable over the coming quarters. And then the second question is if you could please remind us the exposure of the corporate segment to the government and also if you think it's likely to see more government projects being canceled or delayed. Thank you.

Sure, Rodrigo. Hello, this is Raimundo. Nice talking to you, and thank you for the questions. The first one regarding the saving costs and expenses that we have. Let me tell you how this works in our company and why we have that effect. As you recall, and I said in my speech, during the last poll, we threatened our strategies towards higher quality of sales and looking for a reduction in churn. During this first quarter, we did have a reduction in gross ads and a reduction in the churn. Finally, we increased subscribers in the three segments. How could this happen if we have less gross ads because we have less churn? Having said that, we have totally less operations on the field. We have less commissions. We have less drug rolls. We have less expenses in gasoline, all the travel expenses that we have in our cruise. So a lot of these savings come from that what we call internally a snowball of the growth. So we proved to be very efficient during this quarter because of the spreading of our credit measures. when we provide new sales on that part. That is part of our cost and expenses savings that we have. Also, as you know, we continue to invest in our network, for example. So in terms of broadband, more and more traffic is staying in our caching system. More and more traffic is traveling within our own network, so we have a better proportion of broadband expenses in that part. So I can continue to go on and on, but those are part of the cost and expenses efficiencies that we experience. Whether those are sustainable or not, it's part of our company. If we continue to be efficient and also when you have, for example, a less cost coming in the future for gross ads, we should have a saving in terms of the employee commission and truck rolls that we do. So that's our view internally, and I don't know if Luis and Enrique wants to say something else regarding the cost and office savings. Something I'm missing on that?

No, I think you have a very clear picture of what's been happening and what we expect to continue. But I would like to talk about the second question you had, Rodrigo, about the government. telecom services that they have postponed or canceled in the first quarter. I think that this pandemic has changed everything. I mean, in Mexico, we have over 2,000 counties, you could say counties. And all those guys, all those presidentes municipales, they want to travel to Mexico City as much as they want. And the money they spend in every trip to Mexico City because they don't go alone is humongous. It's a lot of money spent in that. And everyone had the idea that it was much better to do their meetings in person so they would do a trip to Mexico City for a 15-minute meeting with some federal office. And they will spend in Mexico City three days. That was extremely expensive because all the people that travel and all the meals and all the drinking and everything was expensive. Now it's demonstrated that it's very inexpensive to do video conferencing. And it's as efficient as doing a face-to-face meeting. So I would think that the telecom services in municipalities and the federal government is going to be much more critical and much more needed. And most of the meetings and reunions and all the gathering that the government have to do to coordinate and come to agreement, now they understand and they know that it can be done to a telecom conference. That's on one side. The other is that the Mexican government canceled the last year. For instance, they asked us to finish the school year or the school cycle in the summer, the last spring, to sustain the services without charges because they didn't have budget for that. And they would look for budgets for the new school year that was supposed to start in September last year. They didn't find value. They didn't do anything. They canceled the internet at schools. They canceled Mexico Conectado. So now the pupils can't do remote learning. Now they are doing TV classes online, which is technology of 19th century. I hope they understand that telecom is really important for schools. And it's really important for pupils, for students. And it's really important for people at their homes. They have implemented a lot of subsidizing for all different things, but not one for telecom at their homes and students and teachers and schools. And that's much more needed than some of the programs that they have in place. So we think that it will change, it should change, it must change. That will help us, that will help all the telecom companies.

Rodrigo, and this is Raimundo again. Let me ask what Enric is telling you regarding, because some of you and the majority are asking regarding the corporate segment. Let me address that. that both MetroCarrier and Ola, and mostly MetroCarrier. MetroCarrier is a company that has a very steady customer base. It's very similar in a sense to what we have in the massive market. Meaning, whoever has the connectivity in the high end needs the connectivity, okay? Regardless the government exposure or not, we provide a 4% growth in Metro Carrier compared to last year, regardless of Mexico Conectado. If we put Mexico Conectado on top, our growth wouldn't be higher still. So even though we have some exposure to government or some exposure to the crisis, Metro Carrier will continue to provide good results because we already have a customer base. It might affect the growth, okay, but the company is still there. We are a very steady subscriber base in MetroCarrie 2. Ola has a double effect too. Ola has a steady customer base. that provides recurrent revenue, but not as high as Metro Carrier, because it has more projects, like Enrique says, more cloud infrastructure and minor services projects, okay? And it's not the nature of infrastructure like Metro Carrier to have a long, long term contracts on that part, but still, we have a steady customer base within Metro Carrier. Metro Carrier, if we recall, fourth quarter last year, we provide, if I can recall, $430 million. OLAF, sorry, OLAF, thank you. OLAF provides $430 million, fourth quarter revenue on that, because not only government, but companies did invest what they didn't invest in the third quarter, or they provide what they were going to invest in the first quarter, they did it on that one. So it's not that much that is government exposure, but it's more of temporality. We expect, regardless of COVID, on that part, we're confident that we will have a good second quarter without getting me and myself into trouble because of what Luis told you. We are not in a condition to provide and to sustain and to maintain a guidance. No company has done that in this unsteady market, but we can tell you that still Ola continues to move with good projects, at least second quarter on that one, and it does not have that high exposure only to government, we have good projects coming from the private enterprises. Like Enrique said, cloud is increasing substantially. The only thing is that still in Ola, the percentage of cloud services, and so it grew by a tremendous percentage, it is still not the high amount of revenue provided by our company. We still depend on security, which is really good, which is growing, and some infrastructure services. All around that, we have a very good corporate segment, regardless of pandemic and government in that part, for all that we're saying. We're growing in the off-net cities where we are, we've just been there for three or four years. Most of the cities is Monterey, Mexico, and other cities that we have. And our sales force continues to learn and to provide a better branding. So there are particular things that benefit our corporate segment. And that's why during the quarter, we still provide a 2% increase. regardless of PCTV, and 4% in MetroCard. So I wanted to be clear what's our view on the organization of our corporate segment, because it is in the best interest of everybody that is being asked regardless of Rodrigo. So I don't know if I went too far, but I wanted to be very clear on corporate in that part.

No, no, Ramon, thank you. Thank you, Enrique, as well. Very, very clear. Have a good weekend and stay safe. You too, Rodrigo.

And our next question comes from Marcelo Santos with J.P. Morgan. Please go ahead.

Hi, good morning to all. Thanks for taking the question. I know we already talked a lot about the corporate. I just wanted to ask a follow-up on that one. How much of your corporate revenues... actually come from SMEs or smaller companies? And wouldn't these be more at risk in a big crisis like this? This would be the first question. And the second question is regarding the decline in churn, how much can you attribute that to the COVID and how much to your strategy of lower growth as in lower churn? I mean, I believe you have a much more clear view on that because maybe at the end of March, trend started to change because of Coviso. Can you help us to separate the effects? Thank you very much.

Sure, Marcelo. Regardless corporate revenue that you say there, of course we have some exposure to the medium size and some small, but the massive market Where you see our massive results, that's where we have the micro-businesses. It's in the market, not in Metro, Carrier, and Ola. When you account for our 3.6 million unique subscribers, or 8.5, 8.6 million REUs, those ones include micro-businesses which are the ones that have the highest effects of the crisis. Those are the non-essential businesses that are closing some of our markets. Those are the restaurants, the small restaurants. Those guys have an ARPU, for as ridiculous as it might sound, the ARPU is very similar than the one that we have in residential. Four or five years ago, we are selling that product for the micro at 400 pesos or 500 pesos tax-included. So you can consider the effect that we might have in those micro businesses within the massive market and where we have several ways to deal and to work with them. We have some pandemic special emergency packages for them because if they are closed, we're in trouble. But it still is part of our massive market and we have a very clear view of them. It's not, of course, The majority of the market, you know, is a portion of that market where it is. So you cannot take the effect for the corporate revenue that Metro Carrier and all. Those are higher prices. They still are effective? Yes, yes. But in a way, way less measure than what we have for the micro businesses in the massive markets. Now, related to the COVID effect that you say, what we have and what Enrique said, we are an essential service. We pass from the disposable income to the basic expense of the people, meaning they need to have electricity, gas, water, and product. It might not be entertainment, but they also need entertainment for a secure park. So what we felt at the end of the quarter, you know, as I said, we have several effects, positive effects in our massive results. One, as I said, is the strategies that we provide towards the end of last year that reduces our growth and our churn. But other one, of course, is the COVID result of home office and students at home you know, and secure working on distance, that one makes people come, pay on time, and get lower insurance because they need the service. What we experience is that every time we disconnect the service, more and more people come in the next two or three hours to pay and reconnect. whether before they were taking longer to do it because they were not at home. We experienced also an increase in calls because of the dependency of those kind of services. So going into the future, going into the rest of the pandemic, we have no doubt that our service is of our first need. way higher of course that other ones that are are over there but higher they needed what we will see in the future the economic effect of the decline of the gross product of the country you know that one is our our our part we have all different emergency packages for them and we have looking to our company and how it will look. And as I said, we have a very steady subscriber base. Some of them might be affected. That part that is affected will provide into the future also savings for the company in terms of less gross ads, less commissions, less employees from the field. We've seen that already and we know that's what going to happen, we will provide that packages during May and June, and that effect will come back as soon as we pass that for that few people that can and cannot pay for our services. We won't let them go. We will keep them provided a very small service called emergency during the summer. That package will continue to provide the least amount of connectivity needed to make calls, but not to put in risk our business. And that package also will return the subscribers to the original package as soon as we finish in May and June, this part. Having said all that, still the future for Mega Cable with the COVID, doesn't look back. That's all we want to say. We cannot tell you all the details because it's not right to do it, because it's not wise, it's not right, it's not the thing we should do. But we can tell you that what we see going into the future is that we are not an airline, we are not a hotel, We are an essential company that turned 25 years ago from an entertainment cable pay TV into a full, not full, but the first telecommunication company for the community that we serve. People know that. People on the field and communities are depending on us. And we're ready, like Enrique says, and I would like to say, we are providing business continuity. And business continuity means we're going to collect money, we're going to provide these services. People know they are receiving that. We have protected companies to do all the collection of those services without people having to go on the street. So we are well prepared. And also, we start doing that. When we did the home office and all that, it was way before the government announced the security of the pandemic. So that's why you see good results and people working and no problem with increase in bandwidth. So it's looking okay for the effects, Marcelo, that we have, even though it is a crisis. It's not really saying, no, we don't want to be arrogant. We want to be realistic, but it doesn't look that bad into the future.

I think the question is actually how much it helps your churn reduction. So not that it hurt, but my question was, I thought it helped you because people wanted more internet. Yes, yes. How much it helped? Was it already?

Yeah, sorry. I told you a lot of things going into the future and I didn't answer how much it helped. But if you can see what was our trend in terms of churn on that part, okay, we were already at 2.5%. 3% short for the fourth quarter, 2019, and now we're at 2%. So some of that came from COVID, okay, at the end of the quarter, but it was not in the rest of the quarter. It was not in January and February. You know, some of that came at the end of the quarter. So all I can tell you is that it is between the 2.3 and 2, but we have a positive trend coming from our effect. So it is not all of that kind that you see on that part.

Perfect. Thank you very much.

No, thank you, Marcelo. Sorry for giving you all that explanation that did not answer the question.

No, I like the explanation. Thanks a lot.

Just in case nobody else asked that, you know, we wanted to say that.

Our next question comes from Luis Yance from Compass. Please go ahead.

Oh, hi, guys. Just a follow-up on questions. I mean, on your U.S. dollar exposure, you know, the way I understand it is, you know, about 20% of your OPEX is U.S. dollar and 85% of your CAPEX is U.S. dollars. I was wondering, given the sharp depreciation, especially on the CapEx side, how much were you able to secure perhaps a lower Mexican peso and how much of your cash is actually in dollars that could help you offset that? And what does that mean in terms of the, you know, because you mentioned that you're being more selective on the CapEx, but some of the main key components will keep going. So just to get a sense, you know, in Mexican pesos, what sort of capex should we expect for this year? That's the first question on the capex. And then on the OPEX side, that 20% of the U.S. dollar, could you offset it with some of the initiatives you mentioned you're doing on the OPEX side? Or should we expect in terms of margins, we saw a margin expansion year over year in the first quarter. Should that continue or should that flatten out going forward or perhaps even some sort of a, margin compressor. If you could comment on that, that would be helpful. Thank you.

Sure. Sure. Thanks for the question. And to start with the position we have in cash in U.S. dollars. Basically, as a treasury policy company, we always keep in cash in hand an important amount in U.S. dollars to be conservative and to be ready for our obligations and our duties. And that's the main reason why you saw an improvement in our effects. And basically, we keep one or two months of operations for our obligations in US dollars. And in terms of our OPEX, we certainly are aggressively talking to our vendors and looking for best way of getting out of this. looking for the better solution for both. And this will help us a little bit. Yes, of course, it's not going to erode the depreciation of Mexican pesos. But basically, we are talking to our old vendors and positively getting some responses. So yes, that will help. Not sure it will completely net the impact of dollar. That's almost impossible. In terms of capex, 85% of that is in U.S. dollars, as you said. Basically labor and some other topics are on Mexican pesos, but the rest is in U.S. dollars. So the exposure there will continue. But again, that's something that we will look very closely. and we will find out what is the best outcome for that as the evolution of this crisis and economic crisis will hit. We want to be sure that we continue with our strategic projects, the network evolution and the NGB. So we are certain that this industry is based on technology, and we will not want to delay the technology ones. And the rest, there could be a couple of projects that could be delayed or could be set for next year or whatever. So we are taking care of that, and if we can reduce capex to the levels that are affordable, we will do it. And also, the last thing that you have to take in consideration is that the Network Evolution Project was arranged or was negotiated with vendors, and we have commercial credit for 25% of the project is in six months, and 75% of the project will be 12 months of credit, meaning that we still have time to find out where the exchange rate will set off after this crisis period. We think that in both cases we are in good treasury position to afford the following months.

In addition, Luis, also the part that we are exposed of the optics, some part of that is capped. and we are already negotiating. We have negotiated with our vendors that cut those caps, the evaluation of the currency. What I can tell you is that whether it's programming, whether it's maintenance, we have policies coming in dollars from the international vendors. All of them, we are not taking the full amount. All of them, we have... negotiate and get discounts, and some of them we have capped for the office. In terms of the capex, we normally do the same. We squeeze any margin that the suppliers might have. Of course, we have done that, and we're doing that as part of our work, but capex is in dollars. like Luis had just said, the majority of that. What we can have is going into the future, some of the non-priority projects might be delayed a little bit, might be reduced because of the lower amount of new ads and subscribers and things like that. that are coming into the future. But the two main projects that we have, which is the evolution of our video platform and the evolution of our network, those ones will continue to be. And what we see as management, and we have the board support on that part, is that we're a technology company, that we need to be ahead of everybody else in that part. And we are well positioned in our balance sheet to do it. And maybe it's the time that we have another competitive advantage to our competitors. We can do that, and we won't stop on that part. As we said, it might be a little bit delayed, everything on that, and that will get that effect to the capital of those delays, but they are not interrupted, like the ricochets. Those projects are not uninterrupted. They will continue to be. So we expect lower capex on that part in terms of problems, but we maintain our two main projects because those will provide short and long-term advantages for our company by far. So those are our views.

Great. Thanks a lot for the detail. And just to follow up on that, when we put all that together, you know, that lower non-essential capex and the potential delays, What's a rough number we could think of for CapEx for this year relative to, you know, the 400 million that we were thinking? Is it how much lower? Is it 350, 300? It's still unknown. Just to give us.

That's a very quick and direct question, and I'm going to answer again in 45 minutes to tell you that we are going to have a reduction of that amount for the small projects that are not critical for the company. But at the same time, remember that in terms of pesos, we have an effect in pesos. So we don't want to tell a specific amount. We will reduce capex in dollars, okay, and we have an effect in pesos on that part. And we are negotiating all of that and looking into how it looks into the future, so we cannot tell you an exact amount on that. It's not fair on our part on this kind of conference, but it is going to be reducing dollars, and we have an effect on the exchange, and we want to spend the critical projects like video and network evolution.

Great. Fair enough. Just an unrelated question. I mean, you mentioned that, you know, some of your... your micro businesses are accounted on the mass market. Could you give us a sense of, you know, within your mass market, you know, what percentage of that would be those micro businesses that could end up, you know, having a complicated time going forward, but even residential, if there's a portion like a lower end residential that you feel it's more risk just to get a sense of, you know, how resilient that mass market or could be going forward.

Thanks. Sure, Luis. Around 7% of the domestic market is what we have that. And as I said, for what we saw over there, a small portion of those are the ones that are as of today being approached with economic problems within the megacablet. So take one and multiply by the other one. And it's not It is something we are aware of. We have a special inside unit working with them to hold those, at least for May and June. But as I said, having to tell you that 7% of the massive market is the micro businesses and a small portion of those having the effect, I should not run too many numbers, too

Just to clarify, 7% you said of your microbusiness?

Yes, 7.7%.

Okay, great. And then my last question is, I know it's very hard to give guidance at this point in time. And I understand you should be much more resilient than most other industries, even on a scenario of a sharp GDP decline. But If you could share what you've seen so far in this quarter, second quarter, have you seen sort of the same dynamics that you mentioned on the first quarter still continuing, or have you started to see perhaps churn go up a bit and subscriber growth go down a bit? Anything you can comment that would be helpful, what you're seeing so far in this quarter.

Without taking that, as you said, as a guidance, or anything, what we can tell you so far is that we are operating very positive. We have a good response from the people coming and paying and having the service. We still have a great demand for our service as of today because the people that had not broadband are coming to get the service. We cannot tell you whether that's going to be May. May is going to be different than what we have today in April. So that's the reality of what we have out there so far.

Let me give you some analogies we did for this situation. In the last world crisis that we had was the Lehman Brothers going broke. It was 2008, 2009. The crisis was very big. Mexico dropped its growth in almost 6%, around 6% in 2008. 2009, sorry. 2009. At that time, there was not a state home politics. All of us were in the streets. We were poorer, but we were in the streets. We were working, and the telecom was as advanced as now. We had a much lower penetration of broadband, broadband that was not as popular back in 2008, 2009. We never dropped our EBITDA below the previous year. We raised our revenues. We grew in EBITDA. Margins declined because the dollar devaluation was big in 2008. The dollar devaluated by 30% almost at a certain point. Then it went back to better levels. But we consider that crisis is going to be harder, it's going to be bigger, especially because the Mexican government is not taking the right measures. We hope they will reconsider and do better things. But this crisis affects less our company because telecom has become more crucial for families and companies. So we are in a better position as a company. The economy is going to be in a worse position, because this is going to be larger, bigger. It's going to last longer, maybe. But considering what happened in 2008, 2009, we don't think we will be in a worse position than we were in those years. And that's the analysis we have made.

Great. Thanks a lot for the call, and congratulations on the quarter, and stay healthy, guys. Stay healthy, guys. Thank you, Luis.

Our next question comes from Andre Coelho from Scotiabank. Please go ahead.

Yes. Thank you for taking my question. Enrique, I think you made a fascinating comment regarding the efficiencies that are coming from the pandemic in terms of the of companies, organizations, governments suddenly realizing the enormous savings that can be obtained by digital transformation, basically. And I was wondering, Ricky, we're hearing that some corporations, some companies are actually thinking in subsidizing the broadband connection of employees at home so that the employee pays, say, only half of the amount and then the company pays the other half. And this is a way by which companies can ensure that employees stay well connected and that they have a safe, secure, and fast connection. So I was wondering, Enrique, if Megacable was exploring some options where you can work with companies in order to provide connectivity for employees on a subsidized basis, if this is a trend that you're starting to see.

It should happen. It would depend on... what's the number of people that can do home office. In our organization, for instance, we have learned that we can do maybe 2,500 people, about 10% to 15% of the total employee base. That includes call center. and that includes engineering and the corporate office, but that's about it. And they do need a very efficient broadband connection to do home office. And I think that there's going to be a lot of people that will realize that. And it's much cheaper to pay for broadband. than to pay for a space, physical space at the company's office because then you have to pay air conditioning and you pay obviously power and other needs of the employee, rent and everything. So it's much cheaper to do a home office. But that's not, we don't think that that's going to be a trend, but it's not going to happen immediately after the pandemic. I think that after the pandemic, people will return to, a lot of them, a lot of people will return to their offices. And over time, they may be, you know, put in place plans to disperse their employees, at least for certain days of the week. so they can share spaces, one space for two employees and some of them will work from home at some certain points or certain days. I think that will happen. I think that's one of the trends that will happen. And the other is the need for the government to subsidize broadband in those families that can't afford broadband because they need it for school, Teachers need broadband, and I think that's what should happen first before home office is going to be home from school. I don't think that it's going to be a good idea for schools to reopen this school cycle because the pandemic peak is going to be in two weeks, and they want to return students by the first of June. I don't think that's realistic. I don't think that's something that's going to happen. If you consider that in a lot of homes in this country, grandpas live with grandchildren. They live in the same home, a lot of them, because their children got married and they never left home, or because the children moved their parents to their home to live. Also, it happens here a lot more than it happens in countries like the United States or Europe. Grandparents live in the same homes than grandchildren. And so they can't isolate the grandparents. So it's going to be, every country has different solutions and different problematics. And I think that we will have to take different measures than other countries. like Europe or developed countries. But I'm pretty sure that telecommunication services is going to be much more needed and it will be the government like ours have to realize and will realize that they will have to subsidize the telecom services. And on the other hand, pay television and streaming is one of the cheapest and inexpensive entertainment that is going to be available out there. It's much cheaper to stay at home and watch a BOD movie or that it's only $2 or $3 for the whole family than going to a movie and paying $5 or $3 per ticket for every member of the family, plus buying popcorn and a pop soda and a chocolate, whatever. I think we are the most inexpensive and more efficient way of entertainment and as well as the most needed services for this new way of life.

Thank you. Thank you very much. That was a very good answer. And I have just one follow-up question. Ramon, if you can just explain to us, in the press release you mentioned that you passed almost 9 million homes, right? But I was wondering if that number actually includes small and medium-sized companies, or if we should think of 9 million-plus SMEs passed.

True, Andre. What I said is that we have 8.6 million REUs. At that time, I was meaning, and that was answering the question that I think Luis was asking regarding the micro-businesses on that part, where I said that out of our unique subscribers, which are 3.6 million unique subscribers, we have 7% micro-businesses. That's what I refer to, okay? In terms of HomePass is a little bit more than that. It's 8.8 million HomePass. I don't know if that's clear, Andre, if that includes CSI.

No, no. Actually, it's clear. But actually, I mean that to know if the HomePass that you published on page one of your report, which is nearly 9 million, right, 9 million HomePass, if that number includes small and medium-sized companies that you pass with your network.

Yes, it does.

Okay, thank you.

And our next question comes from Juan Pablo Alba from Credit Suisse. Please go ahead.

Hello, good morning, and thank you for taking my question. My first question is regarding the collection. If you could please elaborate a little bit more on from what you've seen in your previous statistics, how beautiful is this collection? That's my first question. And my second question is, Boring from the past crisis, the definite crisis. I know it's too late to tell, but if you were to, if you could point out a little bit more, Colin, how you think of 2021 in terms of the corporate sector, how could it go back to its normal growth levels across the pandemic? So if you could go straight back to the growth levels, or could it be more gradual?

I got the first question. Okay. Okay, okay.

It was a little difficult to understand your question. I'll try to rephrase that and tell us if I'm right, or tell me if I'm right. The first one was collection. Collection. That one I got it. And if we had problems or how was the behavior of that, and the second one was on our Corporate business and how we see it for 2021 or the remainder of 2020.

Exactly. Yeah, just how fast could the recovery be in 2021 in the corporate business. Yeah.

Over in 2021 corporate business. Okay.

I didn't get that. Okay. You want to go? No, no. Collection is our massive market. So far, we have no problem with collection, as I said. Some of the micro businesses are experiencing problems, which it can translate into some of the insurance. But collection for our companies reported on insurance, you can see that we have a decline in insurance, so we don't have any problem on collection. Regarding the corporate business, it's a little bit different. We have some segments of the market, like hospitality, that we will be taking care of. on that part. Hotels. Hotels, meaning hotels on that part that we're working with them. It still is a small portion of our collection, and so far we don't have any problems with them as of April. That's what we can say.

And the second one is the corporate, the behavior for 2021, we think, again, We have the two different businesses. In petro-carriage, we don't think it's going to impact. It's very stable. The growth will come back. And in OLA, we depend on the projects, and that will depend basically on the evolution of the economy in the following month. So we are not certain if the economy is going to be impacted on the second half of the year and how deep it will go, or it will be only... So that's difficult to see for now. What we think overall is that we are a very resilient company. We are in a very unique industry. So we think we will, for 2021, we will certainly be there and we will be back.

And Juan Pablo, like I said before, if I understand the question and the concern, Metro Carrier, which is aimed at connectivity and infrastructure, it has a very steady customer base and revenue generated that more than ever requires more bandwidth. So that one is very clear that even for some projects might be delayed, the steady of our customer base will secure that business unit even with growth. Ola, it is a company aimed at solution and infrastructure and cloud and connectivity and managed services. It does also have a customer base because all the contracts are 36 months, are going into the future. We don't expect to take the full amount of the crisis on that part. Of course, it has a higher delay in projects than what we have with MetroCarrot. So if we have more going into the future concern, let's call it that way, it has to be OLA. The good part about OLA is that we are every day more into the cloud services and collaboration, like Enrique was saying. All those video conferencing, all those security that we provide in the network are coming from OLA. OK. A big portion of OLA is secured through the existing customer base, and even though we will forecast and we will see and pretend that some projects into the future might be delayed, we are still looking at a good, as I said, a good second quarter, and we will see what we will have into the third and fourth quarter.

Thank you very much. That was very clear. Thank you. Thank you, Pablo. Thank you.

And our next question comes from Carlos Legarreta from GBM. Please go ahead.

Hi, thank you. Good morning, and thank you for taking the questions. I have two, if I may, please. The first one is, what are your thoughts on being more active on the share buyback front? And the second one, could you provide us more color as to how the cost of content is evolving? Given the growing number of exclusive subscribers, it seems pleasantly surprising to us that you have been able to continue growing the margin on the cable segment. Thank you.

Okay, second question was how can we manage to recover a cable business or video cable business?

How is the cost of content evolving?

Okay, sorry, Carlos, on the first one? And the first one was on the buyback of stock?

Ah, okay. Okay, let me answer. The second one, okay, and then I'll let Luis or Enrique answer the other one. Regarding the cost of content, like I said, a small portion or some portion of that one is denominated in US dollars. It is not a full exposure to that. By far, we have a lot of our contracts secured in pesos, the majority of them. And the ones that are in dollars, we have some caps and negotiations. So what we can tell you, Carlos, is that you cannot assume that the cost of programming will be fully affected by the U.S. dollars by far. It is not affected. strongly by the U.S. dollar. So we are very secure that we have good negotiations, good caps in the majority of our content, not to be too much worried about that part either. Even though it's going to have an impact, it is not going to be strongly affected by the U.S. dollar on that part. And regarding Enrique?

Yeah, regarding the buyback program, we have thought about it. We have not made any decisions about it. We will have to evaluate the economic situation. We think that the stock is very, very cheap now, very low, and it should come back. But we have not made a decision. It makes sense. I mean, we have a very underleveraged balance sheet. But we just have to wait and see what happens with the exchange rate and how the economy evolves. I think that the stock is going to come back. It should come back. I mean, the company is very resilient, and we – We think, as most of the market thinks, that our stock is undervalued at this point. But we have not made a decision. We have a buyback program that liquidity found that is about $30 million or something like that. But we almost never exercise it. We do very little with that. But it's not a bad idea, but we have not made a decision. That's something that we would have to discuss with the board. Thank you. Thank you for the question.

And our next question comes from Alejandro Gajostra from BBVA. Please go ahead.

Hi, Enrique. I'm on the list. I have a follow-up question. You'll be providing subscribers with the opportunity to doing a temporary downgrade into their services for a couple of months, during May and June. I was wondering what are your thoughts on this? What do you think could be the impact on the ARPUs in the second quarter? Because you mentioned that approximately half of your smaller companies have approached you already sharing financial difficulties, but what do you expect from the rest of the mass market customer base? What do you think would be the impact of this measure? How many customers do you think take advantage of this opportunity and if it's possible that this measure could be extended into the third quarter as well. Thank you.

Sure, Alejandro. As I said, we have all the attention of the company towards collection and customer retention and customer satisfaction. We don't expect to have a huge amount of subscribers going into emergency package. We see some of them having to do downgrade during the May and June period. As you know, we have all different rates and packages, but we are the smaller output in the industry, so our reduction is not going to be significant. and those subscribers that we might move there, we don't expect to be that many because the package that we have, it has some conditions that they need to be met by the service that we provide to the subscribers, like not able to watch video, for example, over the broadband. That's something that we are providing with the government too in order to support the business continuity. This means that if you get to WhatsApp or you get to Facebook, they won't be able to watch the video. They will be able to be connected. So that's a cue that we will always receive payment on that part. We expect some downgrades, but not that many because of the nature of the business that we provide and because it's been very essential for us on that one. So don't worry about that. I don't see that much impact. The worst time of the year is going to be May and June, but as we said, it's very essential of the service, and we don't expect to continue to have those packages after the May and June conditions. We made very clear that any retention package, it will be over May and June for that small portion of customers that might not even keep the lower packages that we have. Regardless, the micro businesses, like I said, 7% of our subscriber, unique subscriber base on that part goes to micro-businesses, and as of today, what we experience is a small portion of them having to close or coming to us, asking us for a suspension of the service during those months. As a micro-business that is closed, we cannot retain them even paying 300 or 400 pesos. The business is closed. What we saw is a small portion of those ones in the areas where we are that are asking for that retention package. So we, as of today, see some more positive effects in collection and bandwidth use and the necessity of our service than any problem with collection. And that's part of our journey, which is at the lowest part that we've ever been before. So hopefully we'll navigate through the COVID pandemic in good health, our organization, Alejandro.

Thank you, Ramon.

There appear to be no further questions at this time. I would like to turn the floor back over to Mr. Yamoni for any closing remarks.

Thank you very much. As always, it's a pleasure to discuss our results with you. We hope that you all remain healthy and safe, and we look forward to catching up with you really soon under more positive circumstances. Please have a wonderful weekend and afternoon.

Thank you. Thank you all. Like Enrique said, our mind is on the continuity and the health of our employees in providing the great service to all of them. It's been a good quarter, but the more important thing is for all of you to be healthy and for all of us too. We're happy to be here and talking to you on any comments on a one-to-one basis that you want to do into the future. You know, we are up to discuss anything that you might have. Thank you all. Thank you.