Welcome to América Móvil third quarter 2017 conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Daniela Lecuona, Head of Investor Relations. Please go ahead, ma'am.
Thank you. Good morning, everyone. We have today on the line, Mr. Daniel Hajj, our CEO, Mr. Carlos García Moreno, CFO, Mr. Oscar Von Hauske, COO, and also from Telmex, Mr. Carlos Robles, CFO.
Thanks, Daniela. Welcome everyone. Thanks for being in the América Móvil third quarter of 2017 report. Carlos is going to make us a summary of the results. Carlos.
Perfect. Thank you, Daniel. Good morning, everyone. Well, the summer holidays came abruptly to an end as a number of natural disasters hit Mexico, Caribbean, and the U.S. At the same time, after a period of relative calm in financial markets, information on the likely acceleration of wage inflation in the U.S. earlier this month, revved up talk of future inflationary pressures, with the Fed signaling it will continue raising rates, which has brought about renewed volatility in emerging market currencies. Net subscriber additions for the third quarter came in at 330,000. On postpaid, we added 1.4 million subs, including nearly 700,000 in Brazil and 200,000 in Mexico. On the fixed line platform, we gained 345,000 broadband clients in the quarter, most of them in Brazil, 162,000, followed by Central America with 95,000 and Colombia.
Our active growth was concentrated on our mobile postpaid and fixed broadband clients, with 6% and 5% rates of growth respectively. Other segments registered net disconnections, particularly mobile prepaids, down 1.4%. Our pay TV subscribers were down 1.4% annually. Our third quarter revenues totaled MXN 244 billion, with service revenues coming in at MXN 210 billion. They were down 2.2% and 1.9% respectively in MXN terms. At constant exchange rates, service revenues actually posted a 1.5% year-on-year increase. Our adjusted EBITDA, excluding an item resulting from the arbitral ruling in Colombia, which is considered to be an operating expense, came in at MXN 66.3 billion, down 2.1% in MXN terms, in line with the decline in total revenues. At constant exchange rates, it was up 1.3% in the quarter.
Revenue and EBITDA growth rates reflect the impact of lost revenues in Mexico and Puerto Rico on account of the earthquakes and Hurricane Maria. In Puerto Rico, we provided bonuses to our prepaid clients and credited monthly fees to our postpaid clients. In Mexico, Telcel and Telmex opened their networks at no cost to the clients for five days following the earthquakes on September 19. Consolidated service revenue growth reflects also the normalization of the annual basis comparison in the U.S., since in the third quarter of 2016, we incorporated certain T-Mobile subscribers, including their revenues and EBITDA. In addition, in Puerto Rico, our expenditures have been affected by the need to clean up after the hurricane and to keep our networks operating on diesel, given the lack of electric power.
Excluding Puerto Rico, where service revenues collapsed 17.4%, and the U.S., revenue trends in our other operations remained very much in line with those seen through the second quarter, as you can see in the chart. As you can see the chart, service revenues, excluding again for correcting for Puerto Rico, were practically identical, both in terms of revenues and EBITDA, than what you have seen in the second quarter. We have effectively the same kind of rate of growth, adjusting for Puerto Rico and the change of the base in the U.S. Mobile data revenues led the way across our operations, maintaining a rate of growth of close to 20%, followed by fixed broadband revenues growing 5.5% and pay TV at 1.6%. In Latin America overall, mobile data revenues observed a 24.3% increase.
In our European operations, mobile data revenues were expanding 8%, with pay TV revenues growing 22%. The South American block posted the fastest rate of service revenue growth, 3.4%, followed by Europe, Central America, and Mexico. In Mexico, mobile service revenues continued to post a strong recovery, even in spite of the earthquakes. They were up 8.5% in the quarter, with mobile data revenues expanding 21.3%. In Brazil, mobile service revenues rose 3.5% on the back of 33.6% mobile data growth. EBITDA margin came down slightly from the prior quarter. It was roughly flat quarter-over-quarter, particularly after adjusting for Puerto Rico, at 37.1%. EBITDA margins have risen substantially in substantially all of our operations, with over 2 points improvements in Mexico and Brazil, 4 points in Chile, 7 points in Peru from the year-earlier quarter.
In South America, EBITDA is growing at a nearly 9% pace, followed by Central America with 6%. Mexico, at slightly below 1%, posted its first increase in 11 quarters. After comprehensive financing cost of MXN 22.9 billion, half of which arose from foreign exchange losses, mostly incurred as a result of the appreciation of the peso versus the dollar and the euro, we posted a net loss of nine and a half billion MXN in the quarter, principally on account of the Colombian ruling that we mentioned before. In the absence of such ruling, we would have had a net profit of two and a half billion MXN. After $85 billion in CapEx, our gross cash flow, that is EBITDA minus CapEx, stood at MXN 123 billion. The Colombian ruling reduced that amount by MXN 19 billion to MXN 104 billion.
That is the gross free cash flow that we have had in the nine months to September. This cash flow allowed us to acquire equity interest and pay down pension obligations in the amount of MXN 4 billion and MXN 6.2 billion respectively. We distributed to our shareholders MXN 5.3 billion, of which MXN 4.3 billion took the form of cash dividends. We were able to reduce also this cash flow that I mentioned by MXN 18 billion our net debt in flow terms. That is correcting for all the effects of valuations of different currencies. In flow terms, we actually paid down MXN 18 billion of debt. At the end of the quarter, we had MXN 575 billion in debt, down from MXN 629 billion at the end of last year.
The debt at the end of September was equivalent to 2.0 times the adjusted EBITDA of the last 12 months. That means that even after the Colombian ruling, the leverage ratio stayed roughly flat relative to where we were in the second quarter. With that, I would like to pass the floor back to Daniel so that we can begin the Q&A session. Thank you all. Bye-bye.
Thank you.
Thank you. We can start with the first question, please.
Excuse me. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your questions, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Amir Rozwadowski with Barclays.
Thank you very much, and good morning, folks, and thank you for taking the questions. I was wondering in regards to the recent natural disasters, is there any way to quantify the impact of the natural disasters on both your top line and EBITDA for the quarter? Specifically, I was wondering how to think about the size and scope of the potential impact to your Mexico business. You had mentioned that costs were disproportionately impacted, yet still delivered regional EBITDA growth. What would those metrics have looked like had we not had this impact?
Well, in Mexico, as you know, we had the earthquake in September 19, and what we do is we open the networks for the next five days so that people can talk and use data as they wish, as they need it. That's why we do it. We don't have too many in terms of costs in Mexico. Our infrastructure was okay. We don't have any big problem with our infrastructure. Some towers that we have some problems with. In terms of cost, there was not a big issue in Mexico. It was only the, let's say, the revenues that we don't get for these five days. Difficult to say a number, but that's what we have, no. In Puerto Rico, it's different. In Puerto Rico, we have the Hurricane Maria, and it's a big disaster in Puerto Rico.
We have our external plant with some problems. We have some difficulties with a lot of our services. No energy in the island still. We have a very small amount, small percentage of energy in the island, so we're putting diesel. I think the Puerto Rican telecom business, all the Puerto Rican economy is not gonna be doing well for the next maybe two quarters, the fourth and first quarter of next year. We're in the process of recovering everything.
I don't know exactly what's going to be the cost. We're still reviewing what are the problems and the infrastructure that was damaged. We're having a project to recover everything. What we already do is we give one month credit to all our postpaid customers and MXN 30 to all the prepaid customers. Still, we're going to give some credits, of course, to some of the fixed lines that are not working. Still, we don't have all our network working, so maybe we're going to need to give to some or to other ones, other credits in the postpaid business. We still don't know, depending on the recovery, but the Puerto Rican disaster was huge. It's big, what we have in Puerto Rico.
That's very helpful. If we could switch gears a bit here, Daniel, to the pricing environment in Mexico. This has obviously been a big focus over the last couple of quarters. If we take a look at sort of ARPU trends at up 8% year-over-year, how would you characterize the recent pricing environment? Do you believe that these types of growth trends are sustainable for the foreseeable future? There have been some concerns that with Red Compartida expected to meet its first coverage milestone early next year, could we see a renewed round of pricing discounts in the market? Do you think that some of the easing pressure we've seen over the last couple of quarters could continue?
Well, I'm going to give you the way I see things, okay? I think prices in Mexico are very low right now. They are low, so I don't think we have a lot of room to go worse, not to go down. That's why you see more stable. Competition is tough in Mexico, but prices are still very stable for the last six months. Let's see what's going to happen on the holidays, on November, December. It's going to be important, and, well, I think everybody needs to win money, so our competitors also needs to make money. The prices and the way they are doing things, maybe the promotions are too aggressive sometimes. I don't see that prices are going to go down. It's my perception, but, well, you never know, no? Prices are still very aggressive in Mexico.
As I said last time, in the U.S., they are very aggressive, and we are much lower than them. Maybe 30, I don't know the comparison exactly, but maybe 25%-30% lower than the U.S. at this moment, with all the competitive pricing that you are seeing in the U.S. I don't see much prices going down in Mexico.
Thank you very much. One last, if I may.
Red Compartida, I don't answer you on Red Compartida. Red Compartida is starting. I think it's going to start their first phase in May. I don't know exactly. Red Compartida was going to put networks where nobody has networks, but they are putting networks today where everybody has. They are putting where Telefónica is, where AT&T is, and Telcel is, that we already have infrastructure. I don't know exactly what's their strategy, but my understanding is that at the beginning, everybody thinks that Red Compartida was going to put infrastructure where nobody has. Still, we have 20 million Mexicans that they don't have coverage. The Red Compartida was going to be for that. What we're seeing is that they are putting infrastructure where everybody is. I don't know exactly.
Prices are low for us, but they are going to be low for them. Prices are very competitive in Mexico at this moment.
Thank you very much. Just one last one, if I may. There have been reports emerged that the IFT may consider a tightening of the gap between interconnection rates charged, allowing you to begin to charge your customers versus the zero rate we've seen in the past. Do you think that this is likely to go through? Any sense of how to think about the potential impact to the business?
We don't know. What we know is that the Supreme Court resolved that there's no interconnection rate, and that the IFT has to decide what's going to be the rate, okay. We're waiting for that. There's news saying what they are going to be, but we don't know. I don't want to talk because we really don't know what is going to be the resolution. Let's see, it's going to be maybe next week or the next one. It's going to be very soon, the decision on the IFT. That's not what's going to be the new interconnection for Telcel, but I think it's all the interconnections. I think it's going to be the new interconnection for 2018, and we're going to see what's going to be the new rates for those interconnections.
I don't think, personally, there's no way that could be a zero interconnection again. Let's see what's going to be the new rate.
Thank you very much for the incremental color.
Thank you.
Dear participants, please restrict your questions to two at a time. Our next question comes from Leonardo Olmos with Santander.
Hi, good morning. A very specific question on pay TV in Brazil. You mentioned on the release that you are reducing and disconnecting DTH clients. We just wanted to know what the strategy on pay TV and overall fixed in Brazil is. If the disconnections are in, I don't know what percentage of competition, and when we could be seeing service revenues in fixed going up again in Brazil. Thank you.
Yes. Well, when you look at the DTH market in Brazil, it's declining, the total market. What we've been seeing is that the disconnection mainly is in the low end of the base a lot of on collection problems there. We are trying to cancel those customers in order to become more profitable, that business. If you look at the total revenues of the pay TV business, satellite and cable, we are growing a little bit. We believe that we are winning a little bit of market share in revenue. We are really focused in increasing the ARPU of the customers and to improve profitability in that segment.
Okay, thank you.
I don't know if that answered your question.
Yes. I just want to know on overall fixed market, if there is, including broadband, including other revenues, if we could see some improvement in that line.
Well, talking a little bit about broadband, I think the third quarter was a good quarter for us in broadband. I think broadband is starting to ramp up the new adds of broadband, and I think for next year we're going to have, also the broadband penetration in Brazil is still low and there's still a good room to increase the broadband there. We see that we have a good opportunity in broadband for end of this year and next year in Brazil.
Okay. Thank you very much.
Thank you.
Our next question comes from Walter Piecyk with BTIG.
I think that was probably me, Walt Piecyk at BTIG. Are you there?
Sorry?
Daniel, can you hear me?
Yes.
Okay. I didn't know that whether she was calling on me or not. This first question is on the U.S. If you look at the margins, I mean, you had some obviously sequential revenue growth, but the growth adds weren't that much higher. Was there specific reasons in the U.S. that the margins went down sequentially?
No, let me explain what happened in U.S. I think, first I want to start that in the U.S., the competition is tough as promotions and competitions are very aggressive since all this year. What you could see year to date, we have 45% increase on EBITDA. The reason why in third quarter we are not increasing, and maybe in fourth quarter we're not going to increase, because last year we have like a set up in the third and fourth quarter. We start to reduce costs to be more profitable in all the customers that we're selling. That's the reason why U.S. is not showing the same growth that we have been doing because third and fourth quarter of last year were very good quarters. We grew EBITDA a lot in those quarters.
That's the reason. We have the same trend at the beginning of this year. That's why in the first and second quarter of this year, we have like 45%. First, second and third quarter, we have like 45% EBITDA growth all overall. You are not going to see the same trends that you have been seeing, but I think we're going to have good results even with tough competition, because we're having tough competition in prepaid market in the U.S. now. That's really what is happening.
Got it. Just back to the Mexican earthquake impact. If it's five days of free service, I mean, prepaid is whatever, it's usage based. Shouldn't we assume that your prepaid revenue would've been like 5%, 6% higher than it normally would since you weren't charging customers for those five days?
Yeah, it's the quarter. I don't make the math, but that could be. I think people maybe start to recharge a little bit more in the next days. When you finish the promotion, people start to recharge a little bit more than usual, so you have to take that off. Yes, it could be that. I don't know exactly the number. It's difficult to see what will be the number, but of course it could be better revenue than what we posted in this quarter.
Great. Thank you.
Thank you.
The next question comes from André Bacci with JPMorgan.
Hi, good morning, everyone. First question I have is in Brazil, you have done some progress of improving the margin, but there's still a good gap for TIM and Vivo. What do you think you can do in order to bridge this gap? Or are the cost of pay TV that you have that could weigh down this path towards closing the gap?
Well, I'm not going to compare against Vivo. I'm going to compare against us, and I think we're doing a very good cost-cut program in Brazil. It's not something that we're going to do this year. We're going to do it also next year. It's a program for three years, and I think it's going to give us very good results. We have a different cost structure in Vivo. I don't know how they account things, but we have more pay TV, we have more broadband. It's different company. What I think, if you could see really what's happening in Brazil, I think we have been, as Oscar is saying, gaining market share. Even that we have disconnections in DTH, we're gaining market share in TV. We are gaining market share in broadband. All overall in fixed, in revenues, we're gaining market share.
In postpaid, we're doing very good. I think the last thing that we need to fix is prepaid. Prepaid has been difficult. I think all overall, we're doing very good. We have 699,000 postpaid adds in the quarter. I think it was very good, and I think we're very excited about what we can do next year. Still with the cost-cutting plan that we have, it's becoming aggressive also for next year. What we're going to do is we're starting to be a little bit more aggressive in prepaid, intelligent, but more aggressive in prepaid. We think we could have a better 2018 than what we had in 2017. We are step by step, but we are doing much better in Brazil.
Perfect. The second question I have is regarding the U.S. You have an MVNO strategy in the U.S., and what we see in the U.S. that people are moving more and more for unlimited plans or with at least with a high consumption of data. How the MVNO model works in this process? Because in the end of the day, you have to pay for the megabytes that people consume. How can you balance the profitability of MVNO in a world of people using a lot of data?
Well, what you're going to see is that we're giving unlimited plans already. What you need to do is with the carriers to also have a good negotiation to allow you to give also and to be competitive in the market and to give also unlimited plans. That's more or less if the market moves to unlimited, I think everybody needs to move to unlimited, and we're going to move to unlimited. That's more or less what you're going to see. We're not the only MVNO, but I think as an MVNO, we're also very important for some carriers. And also the carriers want us to be competitive. I think it's what you have been seeing all this year. We already have a unlimited plan in TracFone, no?
Perfect. Thanks a lot.
The next question comes from Daniela Segre with Credit Suisse.
Good morning. Thank you very much for taking my question. My question is regarding the fixed-line operation with Mexico. Revenues are declining in the region. My question is if you could share with us more color on the main reasons for this declining fixed-line revenues in Mexico, and if you see any reason to see those revenues stabilize in the coming quarters. Thank you.
Sorry, can you repeat the question? I don't hear you very well.
Yes, sure. My question. Yeah. Do you hear me?
On the fixed-side. Yes.
Yeah. The revenues in the fixed line, in the wireline business in Mexico, what are the main reasons for the decline, and if you see any reason for those revenues to stabilize in the coming quarters?
Okay.
Yes. When you say the revenue side, basically two things are happening. The first one, it's the growth in the broadband market, it's been reducing in the last two quarters. It's mainly due to the highly competitive market in which we are playing. The second one is the fact that the long-distance revenues are declining due to the reduction in the traffic of other operators. Basically, what we could see looking forward, what we are putting is strategies to increase revenues so that they stabilize in the future and increase.
Daniel, if I may add to that. Notwithstanding this decline in long-distance revenue that has been happening for some time, if you look at
At the rate of growth of service revenues from the fixed line side in Mexico. It came out at 0.6% in the third quarter. The prior quarter had been 0.9%. The prior quarter, that's the first quarter, it had been -0.2%, and the prior quarter had been 1.4%, and a year ago, it had been -2.0%. The fact of the matter is that you can say that fixed line service revenues in Mexico have been really flat for the last year, essentially. Okay? Yes, there's been some changes, like reductions in long-distance revenues, but there's been good traction in new products, particularly in fixed broadband and corporate networks, and managed services that have been doing really well, particularly with the new services that we have been offering in cloud and so on. They have allowed us to compensate for the decline in both.
The service revenues, Mexico fixed line side, flat for the last year, and good growth in mobile. That is the one that is determining the growth of service revenues in Mexico.
Okay. Thank you very much.
Thank you, Daniel.
The next question comes from Richard Dineen with UBS.
Oh, hi. Good morning, everyone. Thanks for taking the question. Just a question on unbundled local loop. Maybe a question for Carlos Robles. Presumably, Telmex is pretty concerned by the ultra-low local loop unbundling rate set by IFT, MXN 68 per month per line. It's about a third of the rate in Europe, essentially what you're getting at Telekom Austria. I can't believe the cost stack is so radically different in Mexico. Just wondering if there's scope to appeal that rate as we head into 2018. As things stand, Mexico looks like it's about the most profitable place to do ULL on the planet. Just wondering whether we should anticipate some disruption there if the rate remains like that.
Just secondly, on the unbundling, if you can just give us an update on how many players are actively taking advantage of the ULL or maybe planning to do that to unbundle Telmex's last mile. That would be super helpful. Thank you, guys.
Yes. Just to mention about unbundling. The disaggregation offer of services of Telmex began two years ago in January.
Ladies and gentlemen, please hold.
Sorry. Thank you. All the main operators have been asking us for services, either the resale of products or the unbundling of the local loop. In terms of pricing, what I can tell you is that, yes, the price that we have in Mexico, it is much lower compared to that to other countries. If you compare Europe, in Europe you have EUR 9, and in Mexico you have only like EUR 3. It is a third of what is happening. At the end, this is one resolution of the IFT in which it will apply for this year and the next year. We will see what will happen in the coming resolutions of the IFT.
Sorry. If I understand that correctly, the current rate of MXN 0.68 is expected to continue into 2018 as well. Is that right?
For the moment, yes.
Okay. Understood. Thank you for those comments. Maybe just a super quick clarification. I think it was Walt's question earlier. Just to make sure, in Mexico, just trying to figure out the impact of the five days free service. Is there any sort of subscription credit for post-paid mobile or fixed-line customers for those five days in Mexico, the kind of thing that you did with the post-paid mobile customers in Puerto Rico? Or was that five days free?
It's totally different. In Puerto Rico, we give a credit-
Right
for our post-paid. In Mexico, we just open the networks in Mexico. There's no interruption. We have the service as usual. We only give that for open the networks to give it to people talks with their families, and to do that. That's only the reason why we do it in Mexico. It's different to what we do in Puerto Rico and what we do in Mexico.
Got it. Thank you, Daniel. Thank you for those comments, Carlos, as well. Thank you very much.
Thank you.
The next question comes from Julio Arciniegas with RBC.
Yes. Hello, thank you for taking the question. Some of your competitors in Colombia, they have mentioned that they are reinvesting heavily in acquisition and commercial activity. Have you seen some pricing pressure in the market? Can you give some color of the competitive dynamics in Colombia? My second question is regarding Puerto Rico. I saw that revenue was down 17%. How should we think about Q4, considering that part of the infrastructure has been repaired? Have you seen that repairing fixed networks is more challenging than mobiles in this market? Thank you.
Well, first, in Colombia, I think all the promotions and the market is very competitive always during all these years. I expect that it's gonna be the same in the end of this year and next one. I think everybody's
Is true. In Colombia, I can split in two. I think in the mobile, we're doing cost-cutting, and we're growing on postpaid, and we're growing revenue. We're recovering a little bit on what we have last year, so we're doing very good. In fixed, we're growing our paid TV and our broadband, and also we have a cost-cutting plan. All overall in Colombia, we're doing okay, and we feel we can do also a good 2018. We stop the decline in the EBITDA, start to grow our EBITDA, and I think we can sustain that. That's mainly we're doing very good in fixed, and in postpaid also, we're doing very good in Colombia. In Puerto Rico, as part of the infrastructure is still not working, we still don't know what we're going to do in the fourth quarter, in October, in November.
Depends on how fast we can recover our network today. We have a lot more infrastructure working than what we used to have when the hurricane passed, so we have been moving very fast. As you said, external plans and the fixed is much more difficult and take more time to recover than the wireless. We're thinking what strategy to do to give some wireless to the people until we recover the fixed. We are deciding and how long it's going to take us that recovery, and how we're going to compensate the people with. Still we don't know, and we're in the process of deciding that. Still, fourth quarter, maybe it's going to have some credits in the billing for some of our customers, and I hope much less in the first quarter of next year. The recovery has been doing good.
Still very difficult because we don't have energy in the island. Still, I understand, and what my people told me, sometimes we have 20%, 25% of the island with energy, and then sometimes with 15%-20%. Still a lot of that. The government said that at the end of December, they are going to recover everything, all the energy, so that will help a lot to give the service. A lot of our problems is energy at this moment.
Thank you very much for your question.
The next question comes from Fred Mendes with Bradesco.
Good morning, everyone. Thanks for the call. I have two questions. The first one is related to Argentina. How do you think that the competition will evolve in that market for the next quarters considering the M&A between Cablevisión and Telecom? Also on this line, AMX seems to be not a relevant convergent player in that market, at least yet.
What's the question?
My question is, with the overall leverage decreasing, if you see an opportunity for an M&A move in that market. That's my first question. Thank you.
Which market you are talking about? Sorry, we don't hear you.
Sorry, Daniel. We're talking about Argentina.
Argentina. Okay. Well, in Argentina, I think we're doing good. We're gaining market share. The revenues are doing okay. Our EBITDA is growing. What we have is a good challenge for next year because next year we're going to be allowed to give TV. We're going to have a strategy to do some home passes and to start giving broadband and TV and fixed to some of our customers. That's going to be the challenge in Argentina. We have the opportunity already to do it. Maybe it's not the resolution done, but maybe we're going to do also DirecTV-
Okay
the satellite TV. We are in the process of making an analysis and a strategy to give broadband and to give TV to some of our customers.
Okay.
That's more or less what we have.
Perfect. Thank you. My second question, just regarding the competition in Mexico. I had the impression that your competitors, they were decreasing the level of subsidies for the handsets, for the equipment. It seems that on this part, they adopt a different strategy and actually increase the subsidy. Just wondering if this reading is correct, and if it is correct, if there is any change you could also, let's say, change your strategy and be a little bit more aggressive. Thank you.
I think, yes. I think they have to do it because in my view, the way and the subsidy that they have been giving to the customers are not profitable. Of course, they need to change. If they want to be profitable, they need to change. Some of their promotions and the subsidies that they have been doing are non-profitable. Of course, they have to change, and if they want to be profitable, they have to do it. I don't know if they are going to stay that way or they are going to return to subsidies. You never know what the competition is going to do. Well, it's more rational what they have been doing.
Perfect. Thank you very much.
The next question comes from Mauricio Fernandez with Bank of America.
Thank you. Good morning. I would like to go back to the subject of paid television in Brazil, maybe to Oscar. Oscar, you mentioned that the declining subscribers and eventually, I am not sure if paid TV revenues are falling too or not, is more concentrated on DTH rather than cable. Particularly because it seems it is on the low end of customer base. Just wondering, with the economy improving already, even though not yet as much as expected for next year, I would have expected that to stabilize instead of still declining. Unless we are going through a structural change in which people are definitely cutting the service because they are watching video differently, through OTT and all that. Just wanted to get your perspective about what is driving that decline in DTH, and whether you see that happening as well in cable TV. Thank you.
I totally agree with you. If the economic improves, we see a lot of room in DTH because, as Daniel mentioned, the paid TV penetration is still very low in the country. If the economics improve, we will see an opportunity there. I think we have the right product. The problem is the economics. With a good economic, as you see, two years back, we were growing pretty good in those segments. If those segments come back, I think we will have a good opportunity. When you look at, as well, cable, the total market of paid TV has been declined. When you look at Net Serviços, we were growing pretty fast, and then we reduced when the economic has slowed down. But on the last quarter, we see an improvement in paid TV and as well in broadband.
If that will continue, we will see a 2008, a good year for not only broadband, as well, cable, paid TV, and in some segments of DTH. I agree with you. If the economics are right, I hope that we will have a good year next year if the economics improve.
Adding something to Oscar, Mauricio, is that I think I see DTH as a little bit as postpaid. You need to go to the customer, but to be profitable since the beginning. If you are going to give everything for free, then maybe they are not going to pay you never. The churn starts, and the churn is going to be very high. You need to have a good strategy to go to DTH, to these segments of the market. If you have a good strategy and you will be profitable since the beginning, then I think it may be a very good market. I think if the economy of Brazil recovers, I think there is a lot of people who is going to be interested in these products now.
Okay. Thank you, Daniel and Oscar.
The next question comes from Cesar Medina with Morgan Stanley.
Hi, thanks for the call. I have two questions. One on Colombia. What does the arbitration payment does to your carryover losses and the tax impact in the country? As in, what type of effective tax rate should we expect? The second one is, how should we think of the impact of currency movements from the Mexican peso on your overall debt? What % of the foreign-denominated debt is hedged?
On the part of the currencies, as we've mentioned several times before, we manage our FX position so that it does not necessarily correspond to the underlying debt. The notion of hedging doesn't apply necessarily to bringing everything into MXN because we do not generate all our revenues or EBITDA in MXN. That's what I would say. I think if you look at the structure of our revenues and EBITDA, 80% of our revenues coming from currencies, which are MXN, BRL, EUR, and USD. Okay? That's 80% of our revenues and 80% for EBITDA. That's basically the currency that we need to have exposure to, irrespective of what's the accounting effects that we might have in Mexico on account of this. As to the Colombia situation, currently, we don't have any tax losses in Colombia that we will carry forward. I think it's an issue.
We need to determine how things should be. What would be the impact of this measure. You know how it has been created. You have seen we have basically had to account for a new obligation that was established by the ruling of this arbitrage panel. It gave rise to a new obligation that has come up without anything in exchange for this. It's an obligation that has to go against our net worth of the company, of our equity, and that's why it has had an impact on income statement by way of a compensating expense. That's how it has been called. What effect it has in Colombia, well, I don't yet know. We need to look at this coming next year. Okay, thank you.
You're welcome.
Excuse me. Due to time constraints, we have time only for one more question. Our last question comes from Rodrigo Villanueva from Merrill Lynch.
Thank you. Good morning, Daniel and Carlos. My questions are related to two specific markets, Peru and Telekom Austria. We saw significant improvement on a sequential basis with EBITDA increasing in Peru by around 11%, and at Telekom Austria by around 14%. I was wondering if there's any one-off that we should be aware of, or if you could elaborate a little bit on the strong performance this quarter. Thank you.
On Peru, I think we're doing very good. The cost has been going down. We have been very careful on the cost and expenses in Peru. Even with the competition, the new competitor that is in the market for the last two, three years, we maintain our postpaid base as our revenue, so we don't lose a lot of market share. We're in a good position in the market, and we're reducing cost, we're reducing expenses, and that will allow us to increase our margin. It's not a one-off of anything, and we're doing good in Peru. We're happy how the company's developing in the last two quarters. In Telekom Austria, I think Telekom Austria also, there are good markets. The eastern countries have been doing also very good. Telekom Austria has been good. We're growing in broadband, we're growing in postpaid in some markets.
In pay TV, we are also growing, that allows us to give a better result.
I think generally, Telekom Austria, we're having very strong performance, as we've mentioned in the report on the fixed line platform. Fixed broadband is growing very fast, and now we have pay TV. Pay TV is also growing, I think it was something like 22% year-on-year. At the same time, on the mobile side, I think that we have seen a stronger revenue position than most everybody had expected on account of the phasing out of roaming charges that were very important for Austria in particular. It's been the end of the summer. Roaming charges came down, and it didn't really have much of an impact on our overall revenue. That, I think, speaks a lot about the strength of the operation today in Telekom Austria. Very strong fixed.
It has been good at managing this decline in roaming charges on the mobile side, and I think it has a good potential. Overall, the economy in Austria has been much stronger than maybe what we had expected at the beginning of the year. I think it's growing close to 3%. I think the expectation initially was 1.5%. The rest of the international footprint they are in Eastern Europe is also doing very good.
Yeah, remember that two, three years ago, we don't have anything. We were only mobile in all the Eastern Europe countries that we have. Today, we have fixed broadband TV in a lot of those countries. That allows us, it's giving us good results and allowing us to grow in pay TV, in broadband.
Building a convergent platform, which is what we've done in Latin America, is what we are doing in the European operations, it's paying well.
Understood. Thank you very much.
Thank you.
Thank you.
Excuse me again.
Thank you. Thank you very much.
We do have.
Yeah. One more question. Yes.
Yeah, we do have time for one more question. That comes from Mr. Carlos Legarreta with GBM.
Hi. Thank you. Good morning.
Good morning.
Just going back to Mexico operations. I'd love to understand a little more. You're seeing the increase in the wireless service revenues, which hasn't really been translating to higher profitability. Since we noticed a slowdown in the minutes of use year-over-year, at least when compared to the last few quarters, I'm wondering if the hampering, the slowdown, or certainly an improvement in EBITDA, but not as much as perhaps we anticipated. Do you think this is related to higher subscriber acquisition costs, perhaps?
I don't understand your question.
Sorry, I'll try to rephrase.
Yes.
We definitely saw an improvement in wireless service revenues in Mexico, even with the effect of the earthquake, right?
We would anticipate that that would improve, that would translate to better EBITDA margin for the country, that wasn't necessarily the case. I'm wondering, given that we are seeing the minutes of use still growing but at a much slower rate than before.
Yeah.
Do you think this is related from other subscriber acquisition costs, perhaps?
Yes. Of course. Remember that we're growing more on the postpaid side, that could be part of the reason why we are growing more on revenues, than what we grow on EBITDA. Not everything that grows on revenue goes directly to the EBITDA, because part of the revenues are also value-added services and other things. I think that's the reason, the subscriber acquisition cost, no?
You can say, for instance, if you look at sequentially, service revenue went from growing 2.3% in the second quarter to growing 3% in the third quarter. That's an increase from 2.3 to 3, or 0.7. If you look at EBITDA, in the second quarter, it got down 3.3% year-on-year, and now in the third quarter, it's up 0.9%. The increase is 4.2%. I don't know that we can take also too much more other than the basis of comparison also have an impact.
Correct. No, that's helpful. Thank you.
Thank you.
This concludes our question and answer session. I'd like to turn the conference over to Mr. Daniel Hajj for any closing remarks.
I'll just thank everybody for being in the call, and thank you. Thanks.
Thank you all. Bye-bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.