Letter from the Chief Executive Officer to Ordinary General Shareholders’ Meeting of Megacable Holdings S.A.B. De C.V.
Dear Shareholders and Members of the Board of Directors,
In 2013, we achieved major results thanks to the confidence and the hard work of all who are part of this great company. The atmosphere of optimism and confidence to obtain even better results allowed us to achieve a significant increase in the number of subscribers in spite of the uncertainty of the domestic economy and the strong competition that characterized this period.
Our strategy is clear: Megacable seeks to generate products that are competitive in every market in which operate, especially in those segments with limited purchasing power, which represent great opportunities for growth. This strategy also has a goal of maintaining our customers’ loyalty by providing excellent service and attention because this will allow us to achieve a more solid and sustained growth to strengthen customer loyalty still further.
Despite the strong competition we faced in the period, we achieve a slightly greater growth in the territories where we have more presence, thanks to the strengthening of the data, telephony and cable television network, as well as the improvement in service quality through our digitalization project.
The evolution of the Broadband service has resulted in higher growth than has been reported on television. The great difference that sets Megacable apart from other providers is the speed of our network, because our fiber optic and coaxial network allows us to offer our subscribers speeds of 10, 20, 50, 100 and 200 Megabytes per second, a service in which we do not have any representative competitors.
Megacable on Demand will offer to our more than 2 million subscribers their favorite television programs and channels live, wherever they may be, whenever they want and via any device, whether television, tablet, telephone, etc., which represents a significant competitive differential advantage for us.
Metrocarrier maintains its growth thanks to the efforts targeted at the corporate markets and its dedication to penetrate vertical markets by taking advantage of the coverage of Megacable’s national network.
We transmit all sports events live, which has contributed to our regional positioning on being the only provider with 100% of the events of the season.
Our advertising continues to gain acceptance and positioning among our potential subscribers and customers, because the formula of including recognized characters of television series in the commercials has caught the audience’s attention.
We held the third MEGATEC Symposium, which brings together the country’s entire technical area, as well as certain some members of our value chain to discuss topics related to technology and business trends. In addition to this Symposium, we created the Megacable University, an institution we established for the technical training of our people, which had a significant effect on their obtaining knowledge of our technical area and improving their understanding of the customer and consequently the quality of our services. The Megacable University is being supported by different professors, who are also our business partners in the areas of network infrastructure, installations, etc.
With the introduction of the “National Preventive Maintenance Plan” (NPMP), we are looking to certify the quality of our network and service at national level. Proof of this is that in 2013 we achieved a 66% reduction in problems in these areas.
The presence of our network through three border crossings (Nogales, Reynosa and Ciudad Juárez) allows us to achieve a transmission capacity in the region of 200 Gigabytes per second. We are developing other functions continually by looking for new alternatives to improve our international capacity still further because our internal network gives us the approximate capacity of 1.1 Terabytes per second, but we are currently only using 18% of this capacity.
Megacable’s main results in 2013 are summarized below:
CABLE TELEVISION
In this segment, which is reaching 2,143,773 subscribers, we also continued with our digitalization process, we added more than 153 thousand new digital cable television subscribers, which represent a 13% increase from 2012 to 2013, placing 1,574.798 additional boxes in the market.
We are one of the companies that offers the most high-definition channels in Mexico. We have a network ready to provide a service of extreme quality on a digital cable television platform with a high capacity for growth in the highest quality HD (High Definition) format. We currently have 50 HD channels and we estimate to increase them to around 70 by next year. This growth also will have a positive impact on television revenues.
We launched the Megacable on Demand service, which is based on the Cisco Videoscape Unity platform. With its service, we became the first cable company that will offer a multi-screen service to customers in Mexico and one of the first providers that offers this type of service in Latin America.
Megacable on Demand will enable our subscribers to enjoy their favorite televisions shows and channels live, wherever they are, whenever they want and using any transmission device. We currently have 20 live channels and we hope that in the coming years, we will be able to double this offer, as well as more than offering more than 3 thousand hours of series and movies.
Cable television revenues increased by 5% from 2012 to 2013, contributing to service income with Ps. 5,790 million. Moreover, average revenue per user (ARPU) for this segment remained on a par with 2012, reaching Ps. 227.7.
BROADBAND
The market share of our Broadband services within the subscriber base maintains a constant growth. At Megacable, we continue preparing for the future through our main competitive advantage: connection speed. In the period, our network architecture, which operates using DOCSIS 3.0 technology, increased by nearly 50%. This infrastructure is capable of delivering higher speed, rapidity and benefits in connections of over 100 megabytes per second.
Broadband subscribers increased by 14% compared to 2012, reaching 950,705 subscribers in 2013, thus increasing the base by 116 thousand in comparison to 2012. This segment generated revenues of Ps. 2,128 million, with a year-on-year increase of 18%.
The Company is confident that this trend will continue in 2014 and is also fully aware and understands that the Broadband is the key to future success in our industry. We are also convinced that Megacable is fully prepared to take advantage of its strengths to meet this challenge. In addition, the average revenue per user (ARPU) for this segment increased by 1%, from Ps. 198.4 in 2012 to Ps. 200.8 in 2013.
TELEPHONY
We are continuing to update our Megafon technology platform by introducing the newest in the world market, the IMS platform (IP Multimedia Subsystem), which is the newest in the market. With this, our customers will be able to enjoy integration services of their fixed lines with their cellular telephone line, as well as various applications that we will be offering in the coming months.
The complete restructure of the telephony platform will generate significant savings in the implementation process and a substantial offer in our service to our customers.
Megafon offers competitive rates and packages in addition to including value-added services at no extra cost. These are some of the advantages that we offer the Mexican market and that have gained greater customer loyalty for us. In this manner, the Company recorded 577,539 subscribers, which represents a 4% increase over 2012 through the addition of 22 thousand new subscribers to our base in 2013.
The segment contributed Ps. 1,222 million to the Company’s revenues in 2013. The ARPU of this segment increased from Ps. 182.1 to Ps. 181.7 year-on-year due to the reduction of fixed-to-mobile interconnection charges, the deductions achieved by the adoption of Triple Play and the decrease in additional consumption (extra minutes, long distance and calls to cell phones).
CORPORATE SEGMENT
Created as a business unit responsible for developing commercial customers, it maintains a relationship with the Company’s transport area. We are developing a strategy to realign the Metrocarrier services and that has been streamlined very strongly for Megacable. We have the infrastructure, the fiber optics, the knowledge and the most important factors, which is the relationship with the customer. This Metrocarrier evolution process will enable us to offer a very robust range of services to companies.
We are also developing another strategy to bring fiber optic to industrial parks using Gigabyte-capable Passive Optical Network (GPON) technology, which enables the delivery of high quality services at more than 300 Megabytes per second in commercial and other specific areas. We also have the capacity of up to 2.5 Gigabytes per second to meet the requirements of customers in this area who demand greater capabilities and Broadband access.
REVENUE GENERATING UNITS (RGUs) AND UNIQUE SUBSCRIBERS
Our RGUs achieved the figure of 3,672,017, with a year-on-year growth of 5%, and we managed to obtain 1.63 RGUs per unique subscriber compared with 1.59 in 2012. The number of unique subscribers totaled 2,250.484 at December 2013, which represents a growth of 3% compared to 2012. Moreover, the ARPU per unique subscriber increased from Ps. 357.2 to Ps. 385.6 year-on-year due to the already- mentioned additional services contracted by our subscribers.
HOMES PASSED AND NETWORK KILOMETERS
Megacable has the most extensive and modern fiber-optic and coaxial cable network in the country. The network passes by more than 6.6 million homes, covers an area of 46,958 km and has a 97% two- way transfer. In 2013, the network increased by approximately 3 thousand kilometers, which allowed us to increase the number of homes passed by approximately 6%. In addition, GTAC added more than 19 thousand kilometers to our fiber optic network.
AVERAGE MONTHLY CHURN RATE
The average monthly churn rate in the cable television and telephony segments increased 19 base points in cable television, from 2.8% to 3.0% year-on-year and telephony reached 21 base points, increasing from 3.6% to 3.8% year-on-year. Broadband remained in line with 3.2%
SERVICE INCOME
Service income reached Ps. 10,279 million, an increase of 15% compared to 2012. 56% of our total revenue comes from the Cable Television segment, 21% from the Broadband segment, 12% from the Telephony segment and finally 11% of the “Other” segment. The latter are represented primarily by the MCM, Ho1a and Metrocarrier operations.
NET PROFIT
The Company achieved a net profit of Ps. 1,941 million, remaining in line year-on-year, achieved mainly from the “Must Carry/Must Offer” benefit. Offset by the Fiscal Reform, some deferred taxes were paid in advance, which resulted in an increase in the effective rate due to a larger tax base.
Operating expenses increased 14% year-on-year, mainly due to the growth of the network, the efforts made in the digitalization project and the brand positioning strategy. Depreciation and amortization was another item that had a negative affected due to its increase of 11% from 2012 to 2013 as a result of the Company’s CAPEX policy of CAPEX and growth.
Earnings per share reached Ps. 1.12, equivalent to Ps. 2.24 by CPO.
BALANCE SHEET
The Company continues to increase its liquidity through cash generation, which grew 5%, taking into account that Ps. 1,568 million were paid in May, October and December 2013. The Company’s cash is 18% higher than liabilities with cost, which combined with the existing lines of credit, puts us in a privileged position to capitalize on the opportunities for growth as a result of the reforms, as well as to improve our competitive position.
We strengthened our financial position by having renegotiated the bank loan, which remains in the amount of Ps. $2,100 million, at a 28-day TIIE rate plus 0.49 %.
The Company’s shareholders’ equity increased year-on-year by 4%, mainly due to the increase in retained earnings from 2012 to 2013 from Ps. 360 million to Ps. 11.361 million.
CAPITAL INVESTMENTS
The CAPEX investments in 2013 amounted to approximately Ps. 2,000 million, which was mainly allocated to the expansion and modernization of the network, the purchase of CTC/subscriber equipment.so
Sincerely,
Enrique Yamuni Robles
Chief Executive Officer
Megacable Holdings S.A.B. de C.V.
“In my capacity as Secretary of the Board of Directors, I hereby certify the authenticity of this letter”
Manuel Urquijo Beltrán
Secretary of the Board of Directors
