Telmex Meets Analysts' Q1 Forecast

LOS ANGELES (04/27/2000) - Teléfonos de México SA de CV (Telmex) posted positive first quarter results, in line with analysts' forecasts, although its long-distance revenue fell due to what the company claims is a recurring illegal "bypass" situation, according to a statement issued yesterday by the dominant Mexican carrier.

Although not acknowledged in the release, Telmex's long-distance revenue has also been affected by the introduction of competition in 1997.

Telmex reported 26.45 billion Mexican pesos (US$2.81 billion) in revenue for the first quarter, which ended March 31, 2000, a 23.7 percent increase over the same period a year ago, when the company's revenue was 21.38 billion pesos.

Net income for the first quarter totaled 6.47 billion pesos, up from 5.42 billion pesos in last year's first quarter, a 19.4 percent increase.

Earnings per ADR (American Depository Receipt) were 94 cents, which is what a consensus from five analysts polled by First Call/Thomson Financial had predicted.

Revenue from long-distance service for the quarter reached 547 million pesos, a .2 percent decrease for the same quarter last year, due to an "illegal by-pass," Telmex said. Since 1997, Telmex has complained about foreign calls entering Mexico that are converted to local calls or domestic long-distance calls, and which affect Telmex's bottom line because it receives no revenue from "bypass" calls.

Operational profits for the long-distance service during the quarter totaled 2.56 billion pesos, which represents 38.2 percent of its revenue.

"Since 1997, Telmex has complained to the Mexican regulator Federal Telecommunications Commission (Cofetel) of unfair practices by MCI WorldCom Inc. and AT&T Corp.," Telmex spokesman Renato Flores said in an interview today.

Telmex's main competitors in México are Alestra, partly owned by AT&T, and Avantel, partly owned by MCI WorldCom Inc.

"The U.S. companies are involved in this illegal by-pass, which provides free or low-cost telecommunication access to small U.S. carriers, which finally not only harms Telmex's earnings, but Mexican fiscal revenue," Flores said.

Both MCI Worldcom Inc. and AT&T have asked the U.S. Trade Representative (USTR) and international organizations such as the World Trade Organization (WTO) and the Organization for Economy and Trade Development (OECD) to urge the Mexican government to promote fair competition in the telecommunications market.

According to the carriers, the Mexican government has not complied with international commitments established in the WTO Telecom Agreement.

According to a Dow Jones report from April 11, the phone traffic from the U.S. to Mexico is falling due to a "new breed of phone call smuggler" that charges 7 cents a minute to call México from the U.S. using calling cards.

Telmex has said it lost US$220 million in 1999 due to illegal calls, according to a Dow Jones article. Although the Mexican government says 20 percent of foreign calls are illegal, the industry claims the illegal foreign calls reach 50 percent, Dow Jones said.

Telmex reported that revenue from its Telcel's cellular carrier reached 4.67 billion pesos, a 82.6 percent increase than a year ago. The growth was a result of increased use of Telcel's pre-paid system, Telmex said.

Telmex reported an additional 1.22 million subscribers to bring its wireless subscriber total to 6.50 million, a 156.6 percent annual hike, according to the statement.

Telcel's operation profits grew 121 percent compared to first quarter last year, up to 1.14 billion pesos.

Local telephone service revenue grew 10.4 percent from the year-ago quarter.

Operational profits increased to 5.9 billion pesos, meaning a 37.8 percent in local service revenue.

During the first quarter, 83,671 subscribers were added to Telmex's Internet service, for a total of 486,425 subscriptions or a 164 percent annual increase.

To expand its telephone and Internet services beyond Mexico, Telmex owns part of carriers in the U.S., Puerto Rico, Guatemala, Ecuador and the Virgin Islands. In March, it launched a Spanish-language Internet portal aimed at Latin America. [See "MS ESC: Gates Details Microsoft's LatAm Portal", March 21, 2000].

Telmex has said it is interested in bidding for telecommunication licenses in Brazil. In December 1999, Telmex and SBC acquired Rio de Janeiro-based Algar Telecom, a cellular carrier with 900,000 subscribers. During the quarter, Telmex won a license from the Spanish government to start cellular phone services in Spain.

Meanwhile, Telmex faces an obligation to fulfill specific regulations ruled by Cofetel. The rules, which Telmex has labeled as illegal, must take effect by July, and address topics such as fair tariff prices and providing information to competitors. [See "Mexican Regulator Imposes Rules on Telmex", March 29, 2000].

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