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Edited Transcript of MEGACPO.MX earnings conference call or presentation 25-Oct-19 3:00pm GMT

Q3 2019 Megacable Holdings SAB de CV Earnings Call

Guadalajara Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Megacable Holdings SAB de CV earnings conference call or presentation Friday, October 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Enrique Yamuni Robles

Megacable Holdings, S. A. B. de C. V. - CEO, MD & Director

* Luis Antonio Zetter Zermeño

Megacable Holdings, S. A. B. de C. V. - Chief Financial & Administrative Officer

* Raymundo Fernández Pendones

Megacable Holdings, S. A. B. de C. V. - Deputy CEO

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Conference Call Participants

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* Andres Coello Ituarte

Scotiabank Global Banking and Markets, Research Division - Analyst

* Arturo Langa

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* Carlos Antonio de Legarreta Diaz

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Guilherme Haguiara

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Marcelo Peev dos Santos

JP Morgan Chase & Co, Research Division - Senior Analyst

* Rodrigo Villanueva

BofA Merrill Lynch, Research Division - VP

* Kenia Vargas-Trent

i-advize Corporate Communications Inc. - Senior Associate

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Presentation

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Operator [1]

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Good morning. My name is Miranda, and I will be your conference operator. At this time, I would like to welcome everyone to the Megacable earnings conference call. (Operator Instructions) Thank you.

I will now turn the call over to Kenia Vargas of i-advize Corporate Communications for opening remarks.

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Kenia Vargas-Trent, i-advize Corporate Communications Inc. - Senior Associate [2]

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Thank you. And welcome to Megacable's Third Quarter 2019 Conference Call. At this time, I would like to introduce Megacable's management and today's presenters: Mr. Enrique Yamuni Robles, Chief Executive Officer; Mr. Raymundo Fernández, Deputy Chief Executive Officer; and Mr. Luis Zetter, Chief Financial and Administrative Officer. They will be discussing the quarterly results before moving on to the Q&A 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 presented in the financial earnings report that was issued yesterday. You may contact us at (212) 406-3696 if you didn't receive the quarterly report or if you need any assistance.

At this point, I would like to turn the call over to Mr. Enrique Yamuni to begin his presentation. Please go ahead, Mr. Yamuni.

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Enrique Yamuni Robles, Megacable Holdings, S. A. B. de C. V. - CEO, MD & Director [3]

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Thank you, Kenia. Good morning to all, and thank you for joining us as we review the results of the third quarter for the year. During this period, the company managed to improve the level of net adds when compared to the first 6 months of the year despite the signs of economic recovery while also recording double-digit growth in revenue. According to the International Monetary Fund, domestic issues, lower growth of the global markets as well as roadblocks in the commercial relationship between the U.S. and Mexico have resulted in a continued deceleration of the Mexican economy during the quarter. GDP estimates continued to adjust downward as a result of these factors.

Excluding inorganic growth, RGUs across the 3 services in the massive segment grew at a faster pace than in the previous quarter. The company has aimed to offer attractive additional services in order to increase the ticket per subscriber. Services such as XView, HD and premium packages have allowed us to continue growing our ARPU per unique subscriber despite this challenging landscape.

For XView, we reported another strong quarter of net adds. Content consumption across the platform also continues to grow. We're certain that the new generation of platform will include more interesting features, will be the main driver in Europe in our pay-TV services in the upcoming years.

Once again, the Corporate Telecom segment reported impressive growth during the quarter, particularly ho1a, which has strong competitive advantage due to its broad portfolio of innovative products and services. Metrocarrier also has continued to penetrate market, achieving solid growth in both on-net and off-net cities during this quarter, while MCM continues to post good results for the period.

Moving on to the subject of our debt. During the quarter, we refinanced most of our debt, which left us in a solid leverage position. As has been our practice, we maintain a strong balance sheet and remain ready to take on the challenges and opportunities that may arise in the future.

In terms of the special projects that we have been working on the past 2 years, we are pleased to report that the integration of our very own data center will take place in mid-November. This facility will have top-tier technology operated by highly trained personnel, will focus on supporting growth in our corporate market business in order to see a new revenue source for Megacable.

Additionally, we are very pleased to announce that at the end of November, we will officially launch our MVNO service. At the beginning, this launch will take place through 11 cities with competitive partnerships and rates. Then we hope to expand the service to the entire Megacable territory. We believe that this product will not only support us in expanding our telco offer, it will also more strongly position our service with current and new subscribers, making us more competitive in the long term.

In conclusion, during the third quarter, we continued to work diligently to achieve the growth we anticipated despite the challenging situations we faced. Our aim is to continue to grow our businesses while, at the same time, expanding our portfolio of services as well as making investments to stay at the top of the technology and to boost our corporate segment and generate additional revenue. As a result of this, we expect that the company's strong position will continue generating value in the coming periods.

Thank you for your attention. At this point, I will turn the call over to Raymundo and Luis so that they may provide us with additional details regarding the company's operating and financial results. Raymundo, please go ahead.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [4]

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Thank you, Enrique, and good morning, everyone. Now we will review the operating results for the quarter.

To continue with Enrique's comments, the company does not perceive a recovery in the general economic activity. However, even in this scenario, we continue improving the figures of gross adds to similar levels we had in the first 9 months of last year, recording solid growth in data and telephony while slightly improving our video subs, all this regardless of the stagnation in the telco market across the 3 segments. We continue focusing on triple-play packages, therefore, improving our RGUs per unique subscriber, which has allowed us to maintain consistent growth in revenues.

Economic conditions have impacted the level of churn, especially in Video and Broadband, which increased 20 basis points compared to the previous quarter and to the third quarter of 2018. Telephony, on the other hand, decreased 20 basis points in both comparisons, supported by strategies implemented to motivate subscribers to maintain services.

Moving on to the results. At the end of the quarter, we reached 3.6 million unique subscribers in the massive segment, out of which more than 280,000 are small and medium enterprises. On the other hand, RGUs rose to MXN 8.4 million, a 7% increase when compared to the third quarter of last year. As a result, subscriber increased across all the 3 segments of the massive market. Video subscriber increased by 1%, while Broadband grew 6% and Telephony 19% when compared to the same quarter of last year. As a result, we reached 2.3 RGUs per unique subscriber.

The Video segment rose to more than 3.2 million subs at the end of the quarter, recording net adds of 44,000 when compared to the same quarter of last year. On a sequential basis, we posted a normal period of subscriber growth, adding 6,000 new RGUs.

XView continues to perform well. This quarter, we achieved more than 95,000 net additions, reaching a total of 717,000 subscribers. We are satisfied with the results of this platform so far, but we remain committed to improving the capabilities and features that this service can offer. On the other hand, during the quarter, we achieved 110,000 new subscriptions to our HD service to reach more than 912,000 subscribers.

In Broadband, the company rose to almost 3.1 million subs at the end of the quarter, 173,000 net adds when compared to the same quarter of last year. On a sequential basis, 44,000 net adds were recorded when compared to second quarter 2019. Growing demand for data continues to drive up high-speed Internet subscriptions. And Megacable remains very competitive in this market given its ability to offer reliable packages with 100 or up to 200 megs. Higher speeds will continue to be offered in the near future.

During this quarter, we installed approximately 1,000 new WiFi hotspots for a total of 9,600 across our coverage areas, to which we offer our subscribers connectivity in public places, such as malls and parks. More than 800 terabytes are downloaded through these networks so far.

The Telephony segment continues to grow, and during this quarter, surpassed 2 million subs, recording 335,000 net adds on a unit basis and 85,000 net adds versus the previous quarter. Even though this service is an add-on on a -- add-on to broadband, with the significant increase in subscribers, it also represented a 3.3% increase in gross revenue compared with the second quarter of this year.

As a result of our bundling strategy focused mainly on the sale of triple-play packages, our product mix has already reached 50% of our subscriber base with triple-play packages compared to 43% a year ago. Double- and single-play account for 30% and 20% respectively compared to 34% and 24% at the end of the previous year.

ARPU per unique subscriber rose to MXN 398.50 this quarter, a 5% increase when compared to the same quarter of the previous year. This increase was driven by higher RGUs per unique subscriber and also a result of the successful triple-play sales strategy.

Regarding ARPU per services. Video and Broadband remained practically flat when compared to the previous quarter and decreased when compared to the same period of last year. This was a seasonal effect caused by the back-to-school campaign that brings new subscribers with the special rate and a low contribution to ARPU in the early months. Additionally, Telephony ARPU continues to be affected by the review in our income allocation policies carried out this year to better reflect the value the market gives to the market segment.

In terms of the network, during this quarter, we built and activated more than 500 new kilometers to a total of 61,700 kilometers in the network while working to have the optimal combination of technologies in the network that allow us to deliver the best services, be it HFC or GPON. We are well aware of the fact that the trailing bandwidth consumption will only continue to increase. Therefore, we continue to stream nodes so more bandwidth is allocated per subscriber and ensuring that our network remains in excellent conditions.

The Corporate Telecom segment continues to grow despite a challenging economic situation. In that regard, ho1a reached a significant 85% increase when compared to the same quarter of last year. Ho1a continues its development and market positioning through LAN and WAN infrastructure, IT and cybersecurity solutions.

Additionally, Metrocarrier grew 29%. This growth is coming from both on-net and off-net cities. We, this quarter, grew more than 43% when compared to same quarter of last year. On-net cities have proved to be a successful growth strategy. And as a result, we are targeting new cities for the coming years in which we will continue to offer an excellent data transport service coupled with a wide portfolio of solutions.

All together, our corporate segment has doubled its revenue from 2016 to the present. The 3 business units are more mature with continued revenue growth, good margins and, on top of that, great customer satisfaction and brand awareness.

Now Luis will take you through the financial highlights. Luis?

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Luis Antonio Zetter Zermeño, Megacable Holdings, S. A. B. de C. V. - Chief Financial & Administrative Officer [5]

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Thank you, Raymundo, and good morning, everyone. I will now give you more details regarding the financial results before taking your questions.

Consolidated revenues for the quarter rose to MXN 5.4 billion, an 11% increase when compared to the same quarter of 2018. This is a result of outstanding growth in the corporate market mainly in ho1a and Metrocarrier coupled with higher revenues in the massive market.

Massive segment revenue grew by 8% when compared to the third quarter of 2018. Video rose by 10% and Broadband by 9%, while Telephony decreased given the change in the revenue allocation established beginning of this year, as we have mentioned in previous calls. Corporate Telecom revenues increased an outstanding 32% when compared to the third quarter of last year with a significant 85% increase in ho1a during this quarter, this coming mainly from contracts with private initiatives, Internet security services as well as some government projects. Metrocarrier grew by 29%, and MCM grew 6% in terms of the revenue breakdown, the massive market now accounts for 80% of total revenue while corporate represented 20% compared with 83% and 17% a year ago.

Cost of services increased 14% during the quarter mainly in the corporate segment given the higher component of equipment sales. In the cable operations segment, costs rose 10%, pretty much in line with the revenue growth.

Consolidated SG&A for the quarter increased 17% as a result of increase in utilities, full incorporation of Axtel OpEx and additional employees to support growth in ho1a and Metrocarrier and also the efforts to maintain the subscriber base in the massive market.

All the above resulted in a MXN 2.5 billion consolidated EBITDA, representing a 7% increase when compared to the third quarter of 2018 and a consolidated margin of 46%. On the other hand, EBITDA for cable operations accounted for MXN 2.3 billion, increasing 5% when compared to the same period of last year for a 48% margin. The new IFRS 16 generated a positive effect of approximately MXN 47 million in lease expense reductions for this period.

Net profit for the quarter reached almost MXN 1 billion, representing a decrease when compared to the third quarter of 2018. This was mainly due to a higher component of the financing interest belonging to the increase in the debt with cause that we increased during the year, also on a higher depreciation component and IFRS 16 impact.

With respect to debt, during the quarter, the financing of the MXN 6.5 billion that expired last July was successfully completed through bank loans. This was carried out in 2 tranches, the first for MXN 3 billion at a variable rate with a maturity of 3 years and the second for MXN 3.5 billion at a fixed rate and a maturity of 5 years. Thanks to the company's healthy balance sheet, we reached very competitive rates in both cases.

As a result of the above, company's net debt reached MXN 4.2 billion, a decrease when compared to the MXN 4.5 billion recorded in the second quarter mainly due to the cash generation during this period. Net debt to EBITDA ratio is now 0.43x, representing a low-levered balance, while interest coverage ratio reached 16x, still very healthy level.

Finally and in terms of CapEx, during the third quarter, the company invested more than MXN 1.5 billion, which totaled for more than MXN 4.5 billion for the first 9 months of the year, representing 28.4% of revenues for the quarter. We continue to invest in the construction of new kilometers to improve our network capacity and the acquisition of subscriber equipment as well as special projects carried out during the period.

Thank you for your attention. At this moment, we will now move to the Q&A session. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take the first question of the day from Guilherme Haguiara with Bradesco.

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Guilherme Haguiara, Banco Bradesco BBI S.A., Research Division - Research Analyst [2]

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My first question is about competition, and you mentioned a lot of efforts to retain your subscribers base. And we were just wondering if you could share with us some more details about how you view competition in the regions where you operate. I mean are your competitors being more aggressive on prices? And what are your strategies to mitigate this aggressiveness?

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [3]

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Sure, Guilherme. This is Raymundo, and thank you for the question. As you all are aware, we have competition in the majority of the markets, broadband coming from Infinitum, which they are our main competitor in that part. Also, in some of the areas, we've got Totalplay that competes with us. And in other ones, we have Televisa with the brand of izzi in some of our markets. Also, we have satellite for a long period of time been a competitor on the video part. So we're up to the competition in the majority of the markets where we are.

We are -- aim to retain subscribers, not just because competition as the main reason, but as we tried to describe our offerings, and I'm pretty sure you all are aware, economic growth of the country is practically with no growth, maybe 0 to 0.5% growth for the year, now deployed 0.3%. So what we have is a growth of population and not a growth of the GDP. So economic is hitting our industry in that part.

When we say that the market, this does stagnate, it doesn't mean the market is not going to grow. It's -- the market has an economic slowdown that affects the lower economic areas. In that case, our strategy is to try to maintain and keep with us the majority of the subscribers, trying to adjust rates and partnerships, and of course, going for all of them in that part. And that brings effort from the company to retain the subscribers in that part.

On the other hand, we post growth in video, data and Internet. That means our kilometers that are new kilometers in the areas where we are, we're trying to keep with the market and trying to get subscribers from other areas. Our gross adds in that part remain steady, a little bit below, and we're more focused on retaining the subscribers. What we're doing with the competition is not letting our subscribers go, trying to give a good service, improving the speeds of the speeds and also, as I said, increasing XView and HD services all across the platform with XView being well accepted in the majority and grow with at a very high speed.

So we have our strategy adjusted to the economic situation and to the competition. Our prices are the best in the market, too. We have a low ARPU and a low rate, and we see it in all the different segments of the market. So I don't know, Guilherme, if that answered the question.

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Guilherme Haguiara, Banco Bradesco BBI S.A., Research Division - Research Analyst [4]

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Sure, sure. That's perfect. My second question is more regarding your OpEx side. I mean we saw some pressure in your margins during the quarter. And I appreciate your comments on -- in some of the components. And we were just wondering if you could share more details about how the margin pressure from your client retention efforts contributed to this. I mean if you could basically lead us to what part of the pressure came from retention and what part of the pressure came from the growth of your Corporate Telecom segment.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [5]

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Yes. Well, that's -- your point is very clear. We have pressure from both. We're very happy that pressure comes from corporate. Finally, all the effort that we have in the commercial part for Metrocarrier and ho1a, that couples with operation of that -- those 2 segments are paying off. We continue to improve our revenues from those 2 business units. And we have pressure because of the labor is higher than what we have in the massive market, and we need to invest in all the employees, but there is also payoff from that part.

The other portion, as you say, is to retain and maintain subscribers from the massive market. We expect to forecast that we all have for next year is an increase on the GDP for the country. We normally have that in the time when we -- when the economy does not grow, the first one to hit is the telco industry in that part, the massive segment. If the economy comes and goes back to at least 1% to 1.5% growth, at least what analysts are targeting on that part, we expect to continue to improve the growth of subscribers and not to be so aggressive in the retention of the -- of that subscriber base that is causing us this pressure on the OpEx. As you described, it's mainly labor, commissions to retain those subscribers, the increase of the corporate segment on that part, et cetera, et cetera. We have pressures from gasoline in those parts, which comes coupled from the number of operations that we need to do to recover those subscribers. As you know, the churn increased, but it did not go higher because of all these efforts. Even though the market is steady in terms of video, data and telephony, that's what our numbers report, we posted a growth in subscribers and, therefore, in market share.

So we're happy with what we saw even though the short-term numbers put some pressure on the OpEx. And we still maintained the highest EBITDA in the industry -- EBITDA margin. So we're happy, and we are confident that we will continue to post good results in the quarters to come and years to come.

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Operator [6]

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And we can go next to Marcelo Santos with JPMorgan

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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Actually, I have 2. The first one is regarding the ARPU uplift on the Video. Could you correlate that a little bit with the pickup in the XView and the HD services? I mean how much of the ARPU increase is related to that? And should we expect the ARPU to continue growing if we continue to see a higher penetration of those services? That's the first question.

And second question is, given that the costs that you described and the pressures that you described in the margins in the fourth -- in the third quarter, probably the economy is going to still be tough in the fourth quarter, and you have the launch of the MVNO. So should the fourth quarter be a quarter with particular margin pressure? These are the 2 questions.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [8]

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Thank you, Marcelo. Regarding the video ARPU, it's a combination, as I described. We are growing the XView, but still, XView is at around 22% of the subscriber base that we have in video. That -- the good news is that XView and HD bring the ARPU up, the basis that we need to retain subscribers on that. And that combination is the one that makes the ARPU video not to grow but to remain steady. We expect that with economic to get better, the pickup of XView and HD will slightly increase video ARPU in the future. And also, the pressure of bringing -- the growth of data and telephony over video brings a decrease because of the discount that we have to allocate to the video proportion. So those are the 3 factors that affect not the growth in video but to keep the video at the level that it is. So we have one positive, which is XView and HD. And two, that is low ARPU subscribers to maintain on the ones that want to keep or want to be part of the churn. And the other one is the discount that we provide by the higher growth of data and telephony. That affects video. So that's the main reason. The good thing is focus on the unit ARPU. That's our message. We continue to post solid results and increase the ARPU per unique subscriber here.

In the other one, on margins, for the fourth quarter, well, fourth quarter, we expect to have -- and Luis can get deeper into that, we expect to have good results in terms of revenue well above our expectations in revenue for what we are providing to you as in the guidance and everything that we have there, both in corporate and the massive segment. And the entrance of the MVNO, even though at the beginning of the months, will not contribute to EBITDA. More than that, it will have some pressure because of the marketing effort we need to do. And we do not consider that it's going to affect fourth quarter because of the date that we're going to launch is going to be at the end of the year. It's not going to be that significant. We are targeting the majority for 2020. The first subscribers we're going to bring into the MVNO are aimed to our existing subscriber base, where we're going to have our marketing efforts doing in-house with our own TV channels and the service officers -- offices where we have the walk-in customers coming from the MVNO. So you cannot expect a big hit or a hit -- let me correct, a hit coming from the MVNO and the pressure of the fourth quarter.

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Luis Antonio Zetter Zermeño, Megacable Holdings, S. A. B. de C. V. - Chief Financial & Administrative Officer [9]

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Yes. And the margins we expect are slightly better than what we saw in Q3. Of course, we have to see if there are no changes in some key factors. But basically in the current environment, we expect that's slightly better than the Q3 or current quarter for the fourth quarter of 2019.

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Operator [10]

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And we'll go next to Rodrigo Villanueva with Bank of America.

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Rodrigo Villanueva, BofA Merrill Lynch, Research Division - VP [11]

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I have a couple of questions, if I may. The first one would be related to your MVNO. I was wondering if you could share with us preliminary targets for 2020.

And then the second question is mostly related to your revenue mix. Currently, it stands at around 80% for mass market and 20% for corporate. I was wondering if you could provide medium-term targets for these and also if it's reasonable to assume that longer term, mass market margin should remain at around high 40s and probably corporate in the low 30s. Is that a fair assumption?

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Enrique Yamuni Robles, Megacable Holdings, S. A. B. de C. V. - CEO, MD & Director [12]

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You want to go?

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [13]

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Okay. Yes, sure. Thank you, Rodrigo. Regarding the MVNO, we are targeting around 150,000 subscribers by the end of 2020, hopefully a little bit more than that. The commercial strategy is bundled with our existing massive and corporate and enterprises. So we're aiming today to add mobile data to all our subscribers. So we're targeting enterprise, corporate and massive market from the start to get to around 150,000 is going to not contribute to the EBITDA on the first year. We expect that to be on the second year pretty much and in the years to come, in the next 5 years, hopefully, it'll reach between 750,000 and hopefully to 1 million subscribers. That's what we have in our forecast. And we'll see how it goes as soon as we launch.

The launch, as I said, is going to be to our existing subscribers. We're not going to sell to the open market. We're not going to sell to systems where Megacable doesn't have operations. So we're going to use our internal sales force. We're going to use pretty much our marketing communication channels. So we will keep the expenditures at the lowest with no CapEx because the CapEx in that part is going to be aimed to the subscribers completely on the telephone, and we're not investing in infrastructure. As you know, we have a deal with Red Compartida. Hopefully, we will increase that to other players. But now Red Compartida is our partner, and we expect that to increase.

It's a great network. The 4.5G network that they have is completely open for our subscribers to get the benefit of that free bandwidth that they have. We test it, and we have it. We adjusted that. That's why it took so long because we work with Red Compartida and with ALTÁN, in this case, to do the final tuneup of the networks and the systems where we're launching. And so far, we see the systems where ALTÁN has the presence.

Regarding the revenue mix, as you know, we're 80-20. We expect that to keep in 20% and to increase slightly, but also the massive market will increase. And the way that market class, even though the increase in revenue is lower than what we're increasing in corporate, we'll keep it at maybe 20%. Hopefully, our aim is to get to 25% in the future years to come. That's what we would like to see of this company at 25%, 1/4 of the company in corporate in the next 3 to 5 years because we expect to grow in the massive market still, and the bases are very difficult.

Regarding the margins, I don't know, Luis, if you want to add on that regarding the high 40s and low 30s.

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Luis Antonio Zetter Zermeño, Megacable Holdings, S. A. B. de C. V. - Chief Financial & Administrative Officer [14]

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Yes. Thank you for your question. And yes, on the margins, that trend will continue. That's how we see it. The mass market will remain in high 40s. And enterprise will be, including PCTV, [they're unfund] thinking that you're considering PCTV within those numbers. So yes, that will continue to be around 33% to 34% margins.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [15]

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And in my -- as time passes by, the growth of Metrocarrier, MCM has higher margins than ho1a, PCTV, and ho1a, way higher margins than what PCTV has. So I do or we do expect that one to increase in terms of the margin on that. PCTV will remain constant, is a constant provider for cable and TV service through the pay-TV services. In that part, we don't see any growth. As you are aware of, it slightly grows. So ho1a will continue to provide those 17% to 18% margin on that, but Metrocarrier has good margin based on our own network, too, in that part.

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Luis Antonio Zetter Zermeño, Megacable Holdings, S. A. B. de C. V. - Chief Financial & Administrative Officer [16]

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Sure. The -- maybe you can look at this, thinking on the increasing revenues we get on the enterprise market, we'll have margins more close to the 40s as an average than around 33% or 34%.

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Rodrigo Villanueva, BofA Merrill Lynch, Research Division - VP [17]

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Understood. And just final question related to the MVNO. I assume that the 11 cities where you launched already are basically the ones that are covered by the ALTÁN network, correct? As ALTÁN keeps increasing coverage, you would expand to new cities, is that correct?

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [18]

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That rightly is our view. That's exactly what we're doing. If we don't -- we're not going to push any MVNO where we don't have the principal contract with our main provider. We have roaming agreement that is part of our business plans where we're not. So the aim is to have those subscribers consuming 97% to 98% of the partnerships in the city where we are, which is the behavior of mobile subscribers and data and also take advantage of our network because they have fixed data with us. So it's exactly what you're describing. As you know, ALTÁN is growing from the 30% initial coverage to 50%, and now it's targeting to be 70%. This -- the plan they have is to cover 92.5% of the population by year 2023, like in the gulf. So we're going to grow out with them in that part, which bring us a great advantage in terms of the network. So that really is -- and you've had it really well written.

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Operator [19]

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And we can go next to Andres Coello with Scotiabank.

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Andres Coello Ituarte, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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I think you mentioned in the press release that you put together some retention strategies in the pay-TV segment. I mean it caught my attention that Televisa disconnected cable customers on the pay-TV platform but you guys actually managed to grow a little bit your pay-TV base. And in the press release, you mentioned retention strategies. So I was wondering if you can give us some color as to what those retention strategies are. And I have another question.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [21]

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Sure, Andres. While our intention is continue to be focusing to doing things right and very, very -- on a very efficient way is to call them and to see, disconnect them because we don't have any payment. After 5 days, if they are disconnected, we go, and we send people. We do the call, and we see what their problem is. We send people to reconnect and to collect the money. And also, we negotiate with them if they require to have a retention package. Let's say they have a basic package with HD and 20 megabits or 30 megabits or 50, whatever they have. And they are out of work, or they don't have any -- their economic conditions go down. We provide them -- we talk to them to provide them with this lower -- with a lower-priced package. But we don't want anybody to leave the company in that part.

On the subscriber that has only video package, we try to provide them with a package with broadband, special package that made them feel more attractive and increase -- and save money from other companies and keep it in our company for the few subscribers that still have single package with us.

Those are pretty much -- we increase our labor. And part of our growth in the OpEx is because we have those calls to be made and those customers to go there because the main reason not to want to have our service is not because they want to disconnect from video or from data. It's because they can't afford. So we need to -- we break down our subscriber base per economic and socioeconomic level, per region, per part. It's different to have a high economic region like Guanajuato, Querétaro, the main central part of Mexico, than to have that in the southeast part of Mexico where economic, people's stronger than the other one. So that's pretty much what we do, try to be efficient and understand our subscribers' needs and adjust to the needs of the moment. And whenever they want, they can avail the service again. There is no more than that.

I don't know whether Televisa disconnects or not. We know that, for example, other companies, even Televisa increase rates. So that's something that benefits them in terms of revenue on the third quarter but maybe hit them in terms of subscriber. We don't -- we will look into increasing rates. We increase rates in October, which we believe is a much more better time of the year to do that than to do that in the third quarter where everybody has the pressure of the back-to-school campaign.

So our strategy has always been clear. We understand the subscriber needs. We wait for the right time. We wait for the year -- at the end of the year. We continue to bring solid results in revenue. And that's why we're so confident that revenues will be good in the fourth quarter. And hopefully, the good economy for the fourth quarter will take pressure away from what we look to do in the retention strategy, Andres.

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Andres Coello Ituarte, Scotiabank Global Banking and Markets, Research Division - Analyst [22]

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Okay. Very interesting answer, Raymundo. And I had another question on broadband. Also, you, Megacable and Televisa reported lower or fewer broadband additions in the third quarter compared to the prior year. And you already mentioned that economic slowdown, so the economy may be playing a role in the slowdown of broadband growth. But I have 2 questions there. First will be if you believe that broadband penetration levels in some cities like Guadalajara may already be starting to -- may be starting to show some saturation, in the sense that broadband penetration may already start to be higher, so it's a bit more difficult to grow broadband in metropolitan areas, if you believe that, that is the case or that, that may be behind the slowdown in broadband growth.

And the second one is if you believe that Sky's new broadband product may be, on the one hand, potentially cannibalizing some of Televisa's broadband growth in their cities, and in U.K., Sky putting a little bit more competition on the broadband segment.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [23]

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Thank you, Andres. I like how you put it, the 2 situations. Let me answer the first one. In the metropolitan areas of the main cities where we are, broadband penetration remains at 63%. The majority of the emerging countries or high-developed countries, they have a much more higher broadband penetration. Besides that, all the information that we get from the customers that we try to retain and we recover -- or we lost. We keep very close contact to them to understand what happened. None of them tell us that they don't want broadband because they don't need it or they already get to the point that they will -- won't use that kind of service. What they tell us is, "I cannot pay for that." So if we get economy to recover, I have no doubt that broadband will continue to grow and will be the driver for the growth of the massive market in the future to come. I have no doubt of that. We feel current that the point of saturation -- of course, if the economy decreases, we will stay at 62%, 63% or lower. That one is logical to expect. We need the economy to raise to get to that part on that day. Also, maybe we will adjust to more price or do other strategies like the [one in bulk] and you'll get broadband if we need to do that or want to do that. So we have different strategies that so far we haven't implemented.

The other one, we don't see the growth of Sky broadband in our systems. According to our study, we don't see that to be of a threat. More than that, they tell us that if -- let me put it this way. The number of subscribers that we have and the market share that we have in broadband and video proved that the part that the Sky or Dish has in our areas also has our competition, which is Infinitum, not the Sky broadband. We're target to -- and we fight with them on a very firm market for that market share, Sky and Dish with Infinitum and us with the double- or triple-play packages that we have in that area. It prove also that the subscribers that Sky has in some of the areas are off-net of our system. And it's logical to expect that they can have some of the broadband and improve their broadband where they did not have it or they have a full network to get to those areas. So we don't have in our numbers a competition strongly from Sky. At least it doesn't appear yet in our systems. I don't want to talk to something that is not part of the Megacable market, but that's our information and how we base our strategy.

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Operator [24]

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And we can go next to [Ricardo Oviedo] with GBM.

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Carlos Antonio de Legarreta Diaz, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [25]

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This is actually Carlos Legarreta. Just very quickly, 2 questions. The first one is your current RGU per unique subscriber is at 2.3. If I remember correctly, your target earlier was 2.7, yet Televisa just reported a figure almost at 2.9. Do you think it's reasonable for Mega to reach these levels as well?

And the second question would be, your competitors also seem to be struggling with the government segment, yet ho1a, while I understand has the largest share of customers from this segment, continues to grow at double digits. What is Mega doing differently?

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [26]

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Thank you, Carlos. For the RGUs, we got it to 2.3, and we were targeting more than that. But as you know, we've got a slowdown in the growth, a slowdown compared to what we had at the beginning in terms of data in that part. So if we have a higher growth in data, we will continue to improve the RGUs per unique subscriber on that part. If Telephony contribute with 17% growth, which is doing okay, we do foresee 2.5, 2.7. I don't know if we're going to target to 2.9. We are more worried -- and our concern is to get to a higher ARPU per unique subscriber, whether it comes on the base of Telephony or it comes on the base of HD or it comes on the base of XView or it comes with -- on base of increasing rates in 2020 once the economy gets better, okay? As you all are aware, we have the lowest ARPU in the industry. So we still have room to grow in that part. We just want to continue to be the main provider of massive and residential services in the systems where we are. So we will continue to increase. And I'm not so sure we can get to 2.9, but you can bet 2.5, 2.7 will continue to come in the future.

Related to government and ho1a, ho1a posted really good results and Metrocarrier also good results. And those 2, even though ho1a has a higher share of sales to the government, government sales still represent 20%, not more than 20% of what we sell in the corporate segment. ho1a having a higher -- but it's not the majority of the subscribers that have dependency on the government. They also have a big chunk on the one. What we have been doing right is to integrate [a geo spot] by ho1a and Metrocarrier as infrastructure, connectivity and IP solutions. We grow 100% cloud services within our subscribers. On the hand of ho1a, of course, the account base is low, but we have -- it is low, but we have 100% growth in revenue in that part.

Also, infrastructure in terms of security, it's a really great driver for that company. Everybody is worried about security. So our connectivity on Metrocarrier and with ho1a security services is going to be very good. Plus, we have operations in the on-net cities where we are. Those operations absorb the ho1a services in the last 3 to 4 years. And every quarter that passes by, we have a better situation. We will expect that continues to be in the quarters to come. I don't -- we don't see any reason why not. And mostly, our strength is not to depend on government so much into the corporate segment.

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Operator [27]

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And we'll go next to Arturo Langa with Itaú BBA.

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Arturo Langa, Itaú Corretora de Valores S.A., Research Division - Research Analyst [28]

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If I may, I have 3 quick ones. But first is just some housekeeping. But on the guidance for the year, EBITDA year-to-date, you're growing at 7%, which is a bit below what you were guiding last quarter year one, including Axtel's subscriber base. I was just wondering if, based on your comments that you made for the fourth quarter, if you're maintaining that growth guidance range of close to 10% or if we should expect something a little bit lower.

Also, I was wondering if you could share some comments regarding your data center business. We're seeing, for example, other competitors such as Axtel divesting in the data center business. And I believe you're going to -- you're close to launching one -- the first one from Megacable. Just what difference in the market are you seeing relative to them? And also, if you could share if this is a high-CapEx business and if you plan to build a lot more data centers, and if so, what impact would that have on your consolidated CapEx.

And then sorry for the last one. But on ALTÁN, I was wondering -- this is your provider for your MVNO. But we have 5G around the corner, maybe 2022, something like that, and we're not really seeing ALTÁN participate to date in -- aggressively in other spectrum. So I was just wondering how would ALTÁN -- considering you're equity partners, how do they plan to sort of keep up with the industry in terms of 5G? And also for your MVNO, what plans do you have on that front? That would be my questions.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [29]

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Sure. Let me -- Luis, you want to walk us through the good news with the guidance?

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Luis Antonio Zetter Zermeño, Megacable Holdings, S. A. B. de C. V. - Chief Financial & Administrative Officer [30]

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Yes. Regarding the guidance, we think that even though there's a little pressure on EBITDA mainly in -- on the lines and, of course, on video subscribers, but we think we are -- we will be capable of reaching -- there's a little bit of pressure on EBITDA, as you point out, but we will be capable of reaching our targets on that around the 10%.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [31]

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Yes, let me take that.

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Luis Antonio Zetter Zermeño, Megacable Holdings, S. A. B. de C. V. - Chief Financial & Administrative Officer [32]

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Data center.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [33]

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Related to the data center that we have, I think we have a difference with Axtel on that part. I mean so they have a longer time on that. We have a huge subscriber base, corporate base, and a great footprint across the nation. We also have our data center located in Guadalajara. So the future of data center will be to have a major availability zone in probably in Mexico City or Querétaro. But you will continue to look for each side across Mexico. One of them will be the West Coast or the west part of our country, which is located in Guadalajara. So far, we feel that the hyperscalers of these carriers, they like what we build and what we have. And also our corporate companies will look into that in the years to come.

Our facility is saying to our existing base as a complement of what we have, of what we're selling with ho1a. And also, part of that facility was also built for Megacable purposes. We do not expect to grow in terms of data centers but to put CapEx into that one. It's a high CapEx, high margin as of today. We want to get into that, and we will phase into what we already expect. The CapEx is part of what we are presenting, and what we report is part of our special projects and is part of the level of CapEx that we have reported to use. So we're not putting any more pressure above the levels of CapEx that we're expecting from the market and from our shareholders.

So we're happy that we did it. We are opening like Enrique said. It is a state-of-the-art data center and one of the best in the country. And hopefully, we will get more businesses coming, not from the data center, but the data center will bring bottle of revenues to the connectivity and the cloud services that ho1a sells. So it's part of our strategy to have an integrated account products for the corporate segment and our subscribers.

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Arturo Langa, Itaú Corretora de Valores S.A., Research Division - Research Analyst [34]

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Great. And just another question on ALTÁN.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [35]

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Oh, yes, yes. Sorry, I forgot ALTÁN. You're right. I was talking on the data center. ALTÁN has a brand-new 4.5G network. It has a great frequency for data. It is covering and aims to cover 92.5% or 92.3% of the population of this country. 5G is coming, but it's going to come slow, and it's going to come with main cities first and not to have all the coverage in the cities where we are. We're unique in that a lot of money for the ARPU that the subscribers represent so far. We expect to get good results from the market in the next 3 to 5 years. And then we'll see all the agreement that we can have with other companies to get use of 5G in the future to come.

We are not just married to ALTÁN. We're married to ALTÁN right now because it has the best network on 4.5 with no saturation and at great speeds to our subscribers. But we're open to do 5G, which, whoever comes in the future, if that's -- you are a subscriber of ALTÁN, it's not going to get you to that. Whoever of the other 3 will come, by that time, I'm pretty sure the customer base and the amount of bandwidth that we will consume will be of interest of any of the other 3 players.

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Operator [36]

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(Operator Instructions) We'll take a follow-up question from Carlos Legarreta with GBM.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [37]

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I think Carlos already make a question before.

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Enrique Yamuni Robles, Megacable Holdings, S. A. B. de C. V. - CEO, MD & Director [38]

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Yes.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [39]

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To follow up something. But if it's a follow-up, welcome, Carlos.

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Enrique Yamuni Robles, Megacable Holdings, S. A. B. de C. V. - CEO, MD & Director [40]

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Carlos is not there.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [41]

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No. Anything else?

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Operator [42]

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And it appears that we have no further questions at this time. I would like to return the floor back to Mr. Yamuni for any additional or closing remarks

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Enrique Yamuni Robles, Megacable Holdings, S. A. B. de C. V. - CEO, MD & Director [43]

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Thank you very much. And it's always a pleasure to have these conferences and these chats. Thank you very much for your interest. Please contact our Investor Relations department if you have any questions or concerns regarding the company. And thank you all. Thank you, Luis. Thank you, Raymundo.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [44]

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Thank you. We appreciate the time on the -- on following our company, our organization. We're very happy with the results and are looking to a better end of the year and a great further touch in the air.

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Enrique Yamuni Robles, Megacable Holdings, S. A. B. de C. V. - CEO, MD & Director [45]

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And despite the very difficult economic situation, we will continue to make our best efforts and to continue to deliver good results to the shareholders of the company and the market. Thank you very much, and have a great weekend.

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Raymundo Fernández Pendones, Megacable Holdings, S. A. B. de C. V. - Deputy CEO [46]

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Thank you.

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Operator [47]

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This will conclude today's program. Thanks again for your participation. You may now disconnect, and have a wonderful day.