Nancy Llovera: Good morning, and welcome to Axtel's Q3 2026 earnings webcast. My name is Nancy Llovera, Axtel's Investor Relations and Corporate Finance Manager. Today I am joined by Armando de la Peña, CEO, and Adrián de los Santos, CFO. Financial information for both Axtel and Controladora Axtel, including the unaudited Q3 report, is available on our corporate website. We will begin today's session with an overview of our business performance, followed by a Q&A segment. For your convenience, this webcast is being recorded and will be available on our website. Before we begin, please note that today's discussion may include forward-looking statements. These statements reflect management's current views and expectations and are subject to risks and uncertainties that could cause actual results to differ. Axtel assumes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Nancy Llovera: With that, I will now hand the presentation over to Armando.
Armando de la Peña: Thank you, Nancy. Welcome everyone to our conference call. I hope everyone is doing well. Let me begin with an overview of our performance and key developments of the Q3. During the quarter, the board of directors of Axtel and Controladora Axtel received proposals to acquire 100% of the shares of each company through separate tender offers. While supporting the information requirements associated with both processes, we have remained focused on executing our business strategy and advancing our priorities of accelerating revenue growth, improving profitability, and consistently generating operating cash flow. As previously disclosed, transactions of this nature involve multiple work streams and remain subject to the independent decision of each shareholder, as well as the required regulatory approvals.
Armando de la Peña: The interest from investors reflects the strength of Axtel's business model, confidence on its long-term strategy, and above all, the results achieved through the commitment and dedication of our employees over the past several years. On the Q3 results, the results were positive, reflecting 8% growth in combined enterprise and government segments revenues, together with an 8% reduction on the company's expenses, excluding reorganization costs. The improvement in expenses offset the impact on contribution margin, which declined due to a stronger growth in non-recurrent revenues compared to recurrent revenues. During the quarter, we continued working on the re-engineering of key processes, incorporating artificial intelligence as an enabler of efficiency, scalability, and continuous improvement. Our efforts have been focused on processes with the greatest cost impact and the highest automation potential. As part of this effort, we deployed our first AI-powered solutions within service assurance and customer support.
Armando de la Peña: These tools provide a unified view of relevant information for multiple platforms, reducing manual activities, accelerating diagnostics, and improving response times. The first phase contributed to an 8% headcount optimization and supported improvements in profitability. As a result, the company recognized a non-recurring reorganization expense of MXN 144 million in September. The acquisition of new contracts in enterprise segment is currently 5% below the cumulative level recorded through September of last year. This performance reflects caution in our customers' investment decisions, particularly in the H1 of the year. Recurring contracts acquisitions have shown improvement in recent months, evidenced by a growth of 20% in the Q3 compared to the Q1 of the year. Non-recurring contracts acquisitions increased 53% over the same period, helping to offset the revenue gap. The government segment delivered a strong quarter, with recurring and non-recurring revenues increasing 25% and 84%, respectively.
Armando de la Peña: This performance was driven by a successful execution of projects and the continued expansion of opportunity across digital infrastructure, telecommunications, and data center services. Based on current activity levels and our commercial pipeline, we expect positive momentum to continue throughout the remainder of the year. Performance in the wholesale segment was affected by lower revenues from dark fiber sales contracts. On the positive side, recurring revenues from high-capacity transport services remained stable compared to the Q3 of last year and increased 5% sequentially, delivering the strongest quarter of the year. We continue to see a strong demand for wavelength services, helping offset the decline in network links purchased by international carrier customers. Axtel participated in Mexico Connect 2026, promoting cross-border digital infrastructure.
Armando de la Peña: During this event in Mexico City, we held more than 60 meetings, exchanging perspectives on Axtel's ability to enable scalable and resilient connectivity between Mexico and the United States, supporting today's most demanding digital ecosystems. During the quarter, we formalized a strategic alliance with Tec de Monterrey to establish an AI research laboratory within its innovation district. Through this initiative, we seek to create a collaborative ecosystem among academia, industry, and technology organizations to accelerate innovation, to develop solutions with tangible business impact, and to contribute to the transformation of the specialized talent required by Mexican digital economy. Axtel continued to strengthen its cybersecurity capabilities through collaboration with Fortinet. We integrated SOAR, Fortinet Security Orchestration, Automation, and Response platform, to enable faster threat detection, automated remediation, and more efficient security operations.
Armando de la Peña: Among more than 270 initiatives worldwide, Axtel was recognized at PegaWorld for the Alestra Order Management project, reaffirming our capabilities in automation and digital transformation. Performance in enterprise and government segments, together with continued demand for wavelength services in Axtel, demonstrated ongoing improvements. In addition, efficient operational management and disciplined capital allocation continue to support strong cash flow generation and balance sheet deleveraging. Management is focused on accelerating revenue growth, optimizing resource allocation, and implementing more agile and efficient processes for the benefit of our customers and shareholders. Now I will pass it to Adrián.
Adrián de los Santos: Thank you, Armando, Nancy, and good morning to all. In August, we executed a new $65 million three-year term loan with Export Development Canada to refinance an existing facility. This agreement has an option to extend for an additional year on the first anniversary and if exercised, a second one-year extension on the second anniversary. Concerning our ongoing hedging strategy, we have maintained over 60% of our US dollar-denominated CapEx and interest payments hedged throughout Q3 2026. We executed new hedging contracts for Q4 and will proactively monitor market conditions to continue our rolling forward strategy for the remaining of the year and Q1 2027. Let me now move on to review our financial results for Q3. Q3 revenues increased 3% year over year, primarily driven by growth in the enterprise and government segments.
Adrián de los Santos: Enterprise segment revenues increased 2% compared to the same period last year. IT and Cybersecurity revenues grew 15%, supported by continued Cloud adoption among existing customers and non-recurring Cybersecurity projects in the financial and commercial sectors. These projects reflect the ongoing investments organizations are making to enhance business resilience against evolving threats and the modernization of their technology infrastructure. Telecom revenues decreased 1% year over year, mainly due to lower collaboration and connectivity solutions revenue, partially offset by growth in managed networks and mobile services. Voice revenues declined 11% and represented approximately 6% of Enterprise segment revenue, reflecting continued migration towards digital communication platforms and collaboration solutions. Government segment revenues increased 41% year over year, supported by the implementation of new digital infrastructure and data center projects within the federal government.
Adrián de los Santos: Recurring revenue increased 25%, driven by strong demand for telecom connectivity services, while non-recurring revenues increased 84%, reflecting higher system integration revenue. Year to date, the revenue mix was approximately 77% from federal entities and 23% from state and local government. Wholesale infrastructure revenues declined 18% year over year, reflecting a challenging comparison against Q3 2025, which reflected a benefit from a large upfront revenue dark fiber contract recorded in that year. Excluding for this contract, wholesale access revenues remained stable compared to the prior year and delivered the strongest quarter of 2026. Growth in high-capacity wavelength services particularly offset the broader reductions in legacy direct access services provided to international carriers serving their multinational customers in Mexico through Axtel. This trend reflects the continued evolution of network architecture and customer requirements towards higher capacity, next-gen connectivity solutions.
Adrián de los Santos: Cost of revenues, excluding depreciation and amortization, increased 21% year over year, primarily driven by higher activity levels in the government and enterprise segments. As a result, gross profit decreased 4%, while gross margin was 67% compared to 72% in the prior year quarter. Enterprise segment costs increased 13% year over year, resulting in lower contribution margins. This was mainly driven by a higher proportion of non-recurring revenues compared to the prior year, which typically carry lower margins than recurring revenue. Government segment costs increased 42% year over year in line with revenue growth. Gross profit increased 40%, maintaining stable margins compared to prior year. Performance benefited from growth in both recurring and non-recurring revenues, maintaining the same revenue mix. Wholesale segment costs increased 25% year over year despite lower revenues.
Adrián de los Santos: As a result, gross profit declined 28%, reflecting lower margin revenues from dark fiber contracts, which carry a higher margin. Turning to expenses, total expenses declined 8% year over year. Commercial and operating expenses, which are allocated to the three business segments, decreased 4% year over year, reflecting continued focus on operational efficiency. Corporate expenses, which remain centralized, decreased 36%, reflecting efficiencies from the organizational restructuring initiatives implemented in the first and third quarters, as well as a one-time benefit related to employee benefit provisions. During the quarter, we reported MXN 144 million in reorganization expenses associated with the personnel optimization initiative previously discussed. Excluding this expense, comparable EBITDA reached MXN 917 million in the quarter, increasing 1% year over year and 6% sequentially.
Adrián de los Santos: Year over year growth reflects a combination of lower contribution from the wholesale segment and higher non-recurring revenues in the enterprise segment, largely offset by the 8% reduction in total expense. As a result, comparable EBITDA margin stood at 29% in the quarter compared to 30% a year ago. CapEx for the third quarter totaled $20 million, equivalent to 11% of total revenues compared to $30 million or 18% of revenues in the same quarter of last year. Cash balance at the end of the third quarter was $44 million compared to $38 million at the beginning of the quarter. Free cash flow was positive $23 million during this quarter, resulting from $53 million in EBITDA, -$3 million of negative working capital, $20 million in CapEx, and $8 million in interest expense. Additionally, during the quarter, we recorded $8 million in debt amortization and $8 million in reorganization expenses.
Adrián de los Santos: At the end of the quarter, net debt stood at $454 million, resulting in a net debt to comparable EBITDA ratio of 2.4 times compared to 2.3 times a year ago. With that, we conclude our presentation and open the call for questions regarding Axtel and Controladora Axtel. Nancy, if you could please go ahead and open the webcast for questions from participants.
Nancy Llovera: Thank you. We will now open the floor for questions. If you would like to participate, please click the raise hand button and we will take questions in the order received. You may also submit your questions at any time through the Q&A function. We will pause for a moment to allow for questions. Our first question comes from Emilio Fuentes with GBM. Emilio, please proceed with your question.
Emilio Fuentes: Hi. Thank you for taking my question. Could you share your current revenue split between recurring revenue and non-recurring revenue? If possible, at a business segment level? Thank you.
Adrián de los Santos: Hi, Emilio, and thanks for your question. Approximately 90-plus percent of revenues in the enterprise segment are recurring. That is a number that moves a little bit from quarter to quarter, and has been on average, historically, close to 93% to 94% on the enterprise segment. In the government segment, the recurring revenues are more volatile from year to year. On average, they tend to be about 50/50. Although this year and last year, non-recurring revenues have come higher as contracts have less duration. Federal government has been entering into one-year contracts rather than three-year contracts. This year-to-date, recurring in the government improved from last year. We are now about 80%. In the wholesale segment, except for dark fiber contracts, everything else, it is recurring revenues. This year, the dark fiber contract has been reduced vis-a-vis last year, for example.
Adrián de los Santos: This year, it is above 80% compared to an average of more or less in that range. That is the average mix that we have for this segment.
Emilio Fuentes: Thank you.
Adrián de los Santos: You are welcome.
Nancy Llovera: Thank you, Emilio Fuentes. Our next question comes from Inigo Alvarez with GBM. Inigo, please proceed.
Iñigo Alvarez: Hello, good morning. Could you provide us an update of the competing tender offers and the expected timeline for the potential transaction?
Adrián de los Santos: Inigo, good morning. This is Adrián. We do not have a timeline. Investors, the potential investors, not really under the control of the company. What I can say is that, as Armando de la Peña mentioned, we have been helpful providing information that is necessary to move with the processes. We are focused on doing our business, continuing focusing on our objectives, our strategy, because we cannot control this. At the end of the day, we would have to continue running the business. Having said that, the processes continue progressing, but it is difficult for the company to give you a precise timeline or estimate.
Iñigo Alvarez: Pretty clear. Thank you very much.
Adrián de los Santos: You are welcome.
Nancy Llovera: Thank you, Emilio. Our next question is regarding results. What drove the contraction in contribution margin this quarter?
Adrián de los Santos: Yes. Thanks for the question, Nancy. The contribution margin was affected mainly by two elements, as the first question from Emilio. The higher mix of non-recurrent revenues carry lower margin vis-a-vis recurring revenues. Nonetheless, there is no CapEx behind the non-recurrent revenue. After CapEx, I will say that the two kinds of revenues tend to generate similar cash flow for the company. But on a contribution margin, that is the main effect that we see when we have higher non-recurrent revenues vis-a-vis recurring revenues. The second is dark fiber contracts. Compared to last year, we have recorded approximately MXN 150 million year to date in lower dark fiber contracts. These revenues carry high margin. There is significant CapEx behind them. Again, as I mentioned, the effect on the contribution margin obviously has that implication.
Adrián de los Santos: We have been able to be more efficient and maintain expenses under control. A significant portion of the lower contribution margin has been offset by lower expenses.
Nancy Llovera: Thank you, Adrián. Another question is, what are your expectations for Axtel going forward, and what are the key growth drivers?
Adrián de los Santos: In the infrastructure business segment, the two main drivers are wavelength services. Wavelength services are high capacity services provided to local or Mexican and international operators. We have seen demand. We have a robust pipeline, and it continues growing. In Q3, wavelength services offset the decline in legacy access for multinational companies provided through international operators. That is a service that is disconnecting over time, and the wavelength services are becoming to offset that. The other driver is dark fiber contracts. These tend to be long negotiations, 3, 6, even up to a year during the negotiation process. We have a couple of relevant potential dark fiber contracts in the pipeline. Hopefully, we are successful in closing all of these or part of these in the year. Also, there are some dark fiber opportunities for next year.
Adrián de los Santos: We have a good funnel of opportunities in Axtel for both wavelength services and dark fiber contracts. As a matter of fact, the comparison to last year is difficult because last year we were very successful with a project with a large global company regarding a dark fiber contract, which is difficult to replicate every year. But we have good prospects for the segment.
Armando de la Peña: Let me add on that one, Adrián. The prospects are mainly based on our connection with new fiber from Querétaro to McAllen. As stated last year, we invest in more than 1,000 kilometers in order to connect Querétaro data centers with Texas. The other is the alliance that we made with Trans Americas Fiber that will enable us, with a submarine cable, to connect with the East of the United States and Central and South America. Some of these potential customers that Adrián was referring are based on our investment and alliances that we have made in the past months or years.
Nancy Llovera: Thank you, Alan. Regarding guidance, how do you see the EBITDA figure for Q4 or full year 2026?
Adrián de los Santos: Guidance, it is still achievable. As I said, if we are successful in these dark fiber contracts closing in Q4, we could reach our guidance. However, this is a process that we do not control the timing. We are pretty close in a couple of projects, but we depend on those to get to the guidance. If we are not able to close either these projects, we perhaps might be slightly below or just there in terms of EBITDA. In terms of revenues, we think we will be pretty close, again, in the enterprise and government segment. On wholesale, it will depend, as I said, on the dark fiber contracts that are on the pipeline.
Armando de la Peña: Let me add on to that one. When we estimated the guidelines for this year, we were expecting a totally different ballgame. We are close to achieve our guidance in a new operative and strategic model that we foresee in the past. As you can see, we have been very active in non-recurring revenues that have lower margins. So we had to take that in consideration also. We had to do some AI implementation to improve our service and to be more agile and more efficient. So, the guidance that we will achieve or close to achieve, it is based on a different mix of strategy that we expected or we foresee at the beginning of the year.
Nancy Llovera: Thank you, Armando. Again. Our next question is regarding this quarter's reorganization charge. What are the annual savings do you expect, and when will they materialize?
Adrián de los Santos: The savings, in terms of more efficient expenses or reduced expenses, we expect a payback of approximately one year. So that is the expected benefit in terms of contributions to EBITDA.
Nancy Llovera: Okay. Thank you.
Armando de la Peña: Let me add on that one. We have been measuring the efficiency or the profitability of our collaborators. Since 2022, in the last four years, we have improved by three times the revenues per employee. All the decisions that we have to be made in order, supported by implementation and AI, are helping us to be a more agile and a leaner organization.
Nancy Llovera: Perfect. Thank you, Adrián and Armando. Now, in relation to the tender offer proposals, what is the deadline from 40 Trust Delco Holdings to submit its formal financial offer?
Adrián de los Santos: The management really is not making decisions on these processes. It is up to the board of directors. At the end of the day, the board of directors' role is to look after the best interest of shareholders in general, and probably there is no deadline as such, as long as the processes are moving. I would say that timing depends on one another rather than a deadline. This was not a result of an open competitive bidding process where we have set a deadline. That is why there is no such thing as a deadline. However, as I said, how fast one moves, obviously, has to be the reference for the other party.
Nancy Llovera: Thank you. Regarding the price, what is your point of view? Does it reflect the company's real value?
Adrián de los Santos: Given the processes and the situation in that respect right now, I wouldn't say much about that. It's an obligation that once there's a tender offer in the market, the board of directors will have to comment on the merits of the offer about 10 days into the tender offer. We will have to wait until then. That's something we can comment at this moment.
Nancy Llovera: Thank you, Adrián. Now, going back to our business, could you clarify Axtel's role in the new AI and data center projects and the associated investment requirements?
Armando de la Peña: Let me get that one. First, let me talk about AI. We have two strategies. One is related to our internal operation and IT infrastructure. We have been very proactive in order to have both an optimization of our core processes as Axtel, transformation of Axtel. The other one is related to foster an individual or area-wide use of AI tools. It's a hybrid strategy in order to get the most of having AI and employee participation, and to improve specific areas or specific things that we have to improve. In the other part, the core process of the company. That's inside Axtel.
Armando de la Peña: Going to the market, we have seen a very big opportunity in helping medium-size or medium-big Mexican companies, not international, that they need a lot of help because there is some implementation or foundation that has to be improved before trying to get into AI and its benefits. We see a big opportunity for us there. We have been very proactive in order to define a marketplace of solutions in order to serve the market. Related to data centers, let me tell you that the investment that we have made to connect Querétaro to the border is a very important one. We still have a lot of capacity on that route in order to serve the data centers. Also, as you know, we have a long-distance fiber all over Mexico, and with the partnership that we have with Trans Americas Fiber as well.
Armando de la Peña: If there is any opportunity as the one that we have from Querétaro to McAllen to connect other parts of Mexico with a border or through sea cables, we will look into it, and we will make the financial evaluation. We are seeing this as a big opportunity, mostly for Axtel and for the IT services that we provide. We are not thinking at this moment to build a big data center or anything like that. We have enough capacity to serve our customers in our own data center, and also we are helping our customers to go into the public cloud as well.
Adrián de los Santos: Just to complement on that, Axtel does not serve hyperscalers, LLMs, that kind of clients of significant capacity in data centers. We use our cloud and data center capabilities to serve enterprise clients.
Nancy Llovera: Thank you, Armando. Thank you, Adrián. Another question is, could you give us an overview of the evolution of the pipeline of new contracts in the IT enterprise segment, and the drivers to sustain such evolution?
Adrián de los Santos: Yes. The two segments are among the fastest-growing in terms of revenues in Axtel, average 15% to 17% annually. Also, the industry is growing similar, slightly below, broadly. The trend and pipeline of projects is related to Cloud. The Cloud continues to grow, both hybrid with the sort of solutions that we have with AWS and Azure, as well as within our data centers. Everything that comes with Cloud and with connectivity, there is a Cybersecurity need behind it. So Cybersecurity also is growing. The threats are moving probably at a faster pace than the capability to try to protect from them. So these are the two sort of services within, and solutions within IT enterprise segment pipeline. In terms of sectors, financial sector definitely is the one that is always investing and moving ahead of any other industry for obvious reasons.
Adrián de los Santos: Retail department stores, the business models that have large presence, large distribution are obviously also at the forefront of the IT requirements to become more efficient and also to protect their data that is widespread across all their premises. So that is more or less the description of opportunities in IT enterprise segment.
Nancy Llovera: Thank you. There are no further questions at this time. Thank you all for your interest in Axtel and for joining us today. If you require additional information, please feel free to reach out. Have a great day.
