Telecom Argentina (TEO) is the major local telephone company in the northern region of Argentina, including Buenos Aires, which has a population of 2.9 million people. The telecommunications industry is well situated in today's global economy. In the digital era, the need to be connected 24/7 becomes increasingly necessary. The global population and the global economy are growing, bringing telecommunications to the forefront of human need. Both rural and urban areas require connectivity, and the infrastructural development of telecommunications has become vital in nearly every country around the globe. While many industries survive off cyclical demand with consumer tastes and preferences, the telecom industry is critical, recession or boom. Consumers and businesses demand faster voice, video, and data services, sending telecom companies into a frenzy to develop the most reliable and efficient networks and keeping their services the most competitive they possibly can be.
Telecom Argentina will benefit in the coming years with the developments in 5G technologies, a consistent increase in the subscriber base and revenue growth across its business segments, and the synergies provided by the merger with Cablevision, the #1 pay-TV and leading broadband provider in Argentina.
Emergence of 5G Technologies and IoT Globally Provides Bright Outlook for Telecom and TEO5G, "fifth generation", is the coming wave in technological development in the telecom industry. 5G, when deployed, will increase download speeds, network response times, and improve connectivity between all types of devices. Swedish networking company Ericsson (ERIC) projects that the 5G market will surpass $1.2 trillion in total value within the next ten years. While current technological developments continue at a rapid pace on 4G capabilities, the introduction of 5G technology will enable increased efficiencies for video streaming as well as new applications including driverless cars, telemedicine, and smart manufacturing. Telecommunications companies who take advantage of the 5G technologies will be able to keep up with growing data demands in the wake of its new uses in the coming decade. This will result in increased revenues, decreases in operational costs leading to higher margins, and finding new ways to generate revenues from all the additional uses of data.
While it's obvious that the American giant telecom companies have already invested billions preparing for 5G roll-outs in the next few years, some may be wondering what Telecom Argentina has been doing to prepare for customer demand of this new technology. Telecom Argentina has teamed up with Nokia (NOK) to begin trial runs of 5G technology. In a recent trial in the Puerto Madero district of Buenos Aires, Telecom Argentina and Nokia successfully reaches download speeds of 10Gbps. Though 5G is still a few years away from being rolled out in large scales throughout Argentina, the trials shed light on positive development from TEO in its 5G investments.
Along with emergence of 5G technologies, the growth in the Internet of Things (IoT) has caused telecom companies to adapt their networks to be better suited for connectivity in the new age. In another strategic partnership, Telecom Argentina partnered with Huawei to create a cloud core network and use network functions virtualization (NFV) to improve operational efficiencies and shorten its time-to-market with new products and services. With the new cloud core networks technology, Telecom Argentina will be able to offer improved enterprise communications services as well as operations within the Internet of Things. The International Data Corporation predicts that global spending on IoT will grow at 19.2% CAGR through 2020, reaching a total spending value of $1.7 trillion. Telecom Argentina's recent ability to provide services in this space will be crucial for its future success in the changing telecom market.
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The Latin American market is projected to be of the highest growth area for cloud infrastructure through 2022.
Increase in Revenues Across Segments as Subscriber Growth Remains StrongMoving through Q1 2018, Telecom Argentina saw strong growth across its revenue segments as subscribers increased in both mobile and fixed service platforms. Q1 2018 revenues stood at 30.7 billion pesos, a 27% year over year increase from 2017 and increased EBITDA to 11.8 billion pesos, representing EBITDA margins of 38%. Revenues are still largely driven by mobile and broadband services, currently constituting approximately 59% of total revenues across the board. However, newer segments are advancing quickly as well.
The handsets segment, which only comprises 2.2 billion pesos, rose 36% from Q1 2017 versus the overall revenue growth across all segments of 27%.
Telecom Argentina Q1 2018 Earnings Call Slides
The figure above shows in greater depth the diversification of the revenue segments for TEO.
Driving the revenues for Telecom Argentina is the fast growth of data usage, data penetration, and total 4G subscribers across the platforms. Data usage for subscribers grew 59% between Q1 2017 and Q1 2018, signaling that consumers are more active and more demanding of fast network speeds and the most updated capabilities. This will play in well when Telecom Argentina rolls out its 5G technologies in the next few years. Data penetration also grew 13% while total 4G subscribers have risen 61% in the past year alone from 6.5 million to 10.5 million.
In order to meet the demand for the fast-growing subscriber base, Telecom Argentina announced a three-year $5 billion U.S. dollar Capex plan for 2018-2020. The objectives of the major investments are to increase telephone and mobile internet radio bases, extend next-generation networks, and to improve the connectivity infrastructure to provide multi-play services.
Recent Merger with Cablevision Provides Synergies to Become Dominant Telecom Force in ArgentinaAs mentioned earlier, Cablevision is a leading pay-tv and broadband provider in Argentina and is also the #2 pay-tv provider in Uruguay. Telecom Argentina announced that their vision for the merger is to, "Create the leading company in convergent solutions that will fulfill the digital life of people and facilitate the digital operations of enterprises and corporations."
What do they mean by this? The combined forces will provide a number of synergies that will improve the operations of each company. The most immediate will be operational savings leading to higher margins as the combined companies will be able to save on advertising costs, create SG&A optimization, and reduce fixed maintenance costs. The increased operational margins will lead to higher free cash flow, giving more flexibility to invest more heavily in network advancements. Cablevision and Telecom Argentina plan to invest heavily in fiber upgrades as well as upgrade the coverage network due to overlap of subscribers between the two companies in the northern region with TEO's fixed telephone market and Cablevision's cable network.
Furthermore, the two merged companies will now be able to offer combined services, leading to churn reduction and increased loyalty for both client bases as the services will be integrated and have more capital infusions to consistently upgrade the services and keep them optimal.
The figure below displays some of the ways in which Telecom Argentina and Cablevision will be combining their offerings moving forward for their customer bases.
Telecom Argentina & Cablevision Merger Presentation, 2017
Though Telecom Argentina isn't the largest player in the Argentinian market, the merger and its consistent subscriber growth will help it continue to eat up market share in the coming years. The telecom industry is rather non-cyclical and consumer demand for the company's services should not drop significantly in the case of an economic downturn. The recent run-down in share price of over 40% and its price to earnings ratio of roughly 15X provide an attractive entry point for Telecom Argentina. However, this isn't a growth stock. It's not going to rebound to $38-40 in just a few months. Investing in Telecom Argentina is investing in its future ability to carry out a powerful telecommunications partnership in Argentina and to continue to develop in the face of rapidly changing technology. A 2-year investment in Telecom Argentina should yield benefits from the synergies of the merger and TEO's increasing capabilities and customer base.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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