Telecom Argentina S.A.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Telecom Argentina is a telecommunications company, providing a range of services such as mobile and fixed-line telephony, internet, data transmission, and television services in Argentina and other countries of Latin America.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Telecom Argentina S.A. (TEO) faces a unique and challenging operating environment in Argentina, characterized by high inflation, fluctuating currency exchange rates, and regulatory interventions. Despite these challenges, TEO plays a key role in the country’s telecommunications landscape.

Business Overview:

Telecom Argentina S.A. (TEO) operates in the telecommunications sector, providing a range of services:

  • Mobile Services: This segment includes mobile telephony services like voice calls, text messaging, and data transmission through its mobile networks.
  • Internet Services: TEO offers high-speed broadband services to both households and businesses. This includes both fixed-line and mobile internet connections.
  • Cable Television Services: TEO is also a provider of cable television, offering a variety of channels and packages to subscribers.
  • Fixed-Line and Data Services: This segment includes traditional fixed-line telephony, long-distance services, and various data transmission options for businesses and residences.
  • Wholesale Services: TEO also provides wholesale services to other telecommunications companies, and these companies can use its existing infrastructure for their own services.

The bulk of TEO’s revenue is generated within Argentina. This can make the company very susceptible to any economic and political issues within the country.

Industry Analysis:

The telecommunications industry in Argentina is undergoing significant transformation driven by technological advancements, evolving customer preferences, and regulatory changes:

  • Competition: The market is highly competitive, with numerous players, both domestic and international, vying for market share.
  • Technology Evolution: The adoption of 5G technology is progressing in Argentina which would allow for better mobile services and more efficient data transmission.
  • Customer Base: Demand for digital services, such as high-speed internet and video streaming, is steadily growing, driven by changing consumer behaviors.
  • Currency fluctuations: One of the greatest and difficult factors that can impact a company in Argentina is the high volatility of its currency, where changes on a monthly basis are very common.
  • Inflation: Argentina has an exceptionally high inflation problem, which makes it difficult to measure business performance in a correct way.

Financials

Recent years have presented significant financial challenges for TEO due to both general economic conditions in Argentina and specific regulatory decisions. Here is an analysis using data from most recent 2022 annual filing which is the most relevant data:

  • Revenue: TEO has a total revenue of 384 billion pesos, split into the segments of mobile services (48%), internet services (26%), Cable TV services (14%), and fixed and data services (12%). This highlights a wide range of operations.
  • Adjusted EBITDA: The company generated an adjusted EBITDA of 132 billion pesos which amounts to 34.3% of its revenue.
  • Net Income: The company’s net income has greatly fluctuated recently and for 2022, they reported a net loss of 375 billion pesos.
  • Net Financial Debt: TEO has a financial debt of 399 billion, a significant figure.
  • Negative Equity: The company has a negative equity which means its liabilities are greater than assets.

Note that figures stated above are in nominal pesos, meaning they don’t account for inflation, and so must be reviewed with a caveat that they may not paint an accurate picture of business performance. Moreover, there’s been huge swings in the company’s financials caused by currency fluctuations, special charges, and re-organization efforts.

Moat Analysis:

TEO’s moat is not particularly strong or wide. Here is an analysis of some aspects of the company’s business:

  1. Intangible Assets: TEO operates a well-known brand name in Argentina, and it has a considerable customer base. However, competitors with larger global reach can threaten the brand with superior marketing and promotional capabilities.
  2. Switching Costs: The switching costs are moderately high for many services. For instance, it can be difficult to change internet providers if a company has set up its whole office infrastructure using a particular internet company. Similarly, cable providers and their contracts can create switching costs for customers.
  3. Network Effects: TEO has a large network across Argentina, but other large companies also exist in the country which means it has a medium effect.
  4. Cost Advantages: TEO does not have clear, sustainable cost advantages when compared with other companies in the telecom market.
  5. Size Advantage: While TEO is one of the largest telecom companies in Argentina it has a fairly average size compared to multinational telecommunications giants. Based on this analysis, I would give TEO a 2 out of 5 rating on moat. This implies there is some element of competitive advantage which exists, but it is not strong or widespread, and is potentially easily eroded by competitors.

Risks to the Moat and Business Resilience:

There are a number of factors that can affect the company’s moat:

  • Intense competition: Aggressive price competition among telecommunication companies could erode TEO’s margins and make revenue growth difficult.
  • Regulatory risks: Changes to local regulations are very difficult to predict, and are highly susceptible to the whims of the government, also a lack of regulatory predictability will harm long term prospects for the company, especially with the company’s debt denominated in USD.
  • Technological Disruption: Rapid changes in technology require continual investment and could make TEO’s offerings less relevant over time. For example, the move away from traditional services to new mobile and internet services.
  • Macroeconomic factors: Inflation can have a negative impact on the company’s returns by increasing the costs of operation and reducing the real value of its assets.
  • FX risks: The Argentinian currency is extremely volatile and changes in exchange rates can significantly impact the value of its assets and the company’s income which is primarily denominated in ARS (Argentinian Pesos), and can create losses as it has debts in USD (U.S. Dollar).

The company’s resilience is moderate:

  • The size of the company and its installed infrastructure makes it less susceptible to disruption.
  • The strong brand name provides somewhat stability to customer base.
  • Its management has some understanding of the market dynamics and is actively taking steps to grow revenues and manage costs.
  • Its financial position is weak though, and needs improvement.
  • Overall, the company seems to have some ability to bounce back but due to constant risk, uncertainty remains a key challenge.

Understandability Rating:

I would give the business a 3 out of 5 for understandability. While the core telecom business is well understood, there are additional complexities due to a wide range of offerings, intricate relationships with different segments of the business, and the regulatory framework. The impact of currency fluctuations and inflation also increase the complexity.

Balance Sheet Health Rating:

I would give the balance sheet a 3 out of 5 for health, based on this analysis. Key elements include:

  • High debts relative to equity, and the liabilities in foreign currency can create large losses if the local currency declines in value.
  • The company has a negative equity.
  • However, it has large assets as well, with much of these coming from operations, giving the company a way to generate money.

Additional Points of Analysis:

  • Recent Issues: The company is currently working towards a 5G rollout in the country. In the near-term, the company is focused on improving profitability by reducing costs, improving the efficiency of its operations, and growing revenues by focusing on new and upcoming areas.
  • Management Comments on recent issues: From the annual reports and the earnings calls, management has been very keen to emphasize their focus on the expansion of the company, which includes growth in the mobile network and internet segments. They also discuss cost control and capital expenditure efficiency often.
  • Controversies and Problems: The company also mentions significant exposure to changes in the FX market, in addition, several legal and regulatory proceedings can increase the uncertainty around the future prospect of the company.

It is essential to keep an eye on the effects of inflation and volatile FX rates on the company’s balance sheet, to analyze the effectiveness of their cost optimization efforts, and how their strategies for generating growth in other areas will play out.

The financial reports and the earnings call are highly detailed and complicated, so investors must pay attention to both the financial and non-financial aspects of the company to assess the future correctly.