AXTEL Reports 2Q11 Results

Axtel, S.A.B. de C.V. ("AXTEL” or "the Company”), a leading Mexican fixed-line integrated telecommunications company, announced today its unaudited second quarter results ended June 30, 2011 ⁽¹⁾

For additional information, please contact Adrian de los Santos, Investor Relations Officer and Corporate Finance Director at IR@axtel.com.mx

Highlights:

• During the quarter, the Company reported important cost savings related to lower long-distance termination rates resolved by Cofetel. These lower rates are positive actions from regulators and reflect AXTEL’s long-time efforts to promote a level playing field in the industry.
• The productivity initiative implemented by AXTEL in 2011 continues to reflect positive results, as this quarter’s CAPEX declined 40% year-over-year, and operating expenses declined 8% compared to fourth-quarter 2010.
• Broadband subscribers, an important driver of mass-market revenues, continue to grow well-above industry levels. The Company reported 25 thousand net additions this quarter.

Revenues from operations

Revenues from operations totaled Ps. 2,693 million in the second quarter of year 2011 from Ps. 2,762 million for the same period in 2010, a decrease of Ps. 69 million, or 2%.

Revenues from operations totaled Ps. 10,771 million in the twelve-month period ended June 30, 2011, compared to Ps. 10,657 million in the same period in 2010, an increase of Ps. 114 million, or 1%.

Sources of Revenues

IMPORTANT DISCLOSURE. Unless otherwise stated, comments in this section exclude revenues generated by our largest wholesale customer (see note 9 for further information).

Local services. Local service revenues totaled Ps. 954 million in the second quarter of 2011, compared to Ps. 982 million for same period in 2010, representing a decrease of Ps. 29 million or 3%. This is explained by Ps. 23 and Ps. 28 million decreases in measured services and cellular revenues, respectively, compensated by a Ps. 22 million increase in monthly rents. As commercial offers including free local calls and fixed-to-mobile minutes at attractive prices continue growing, billed traffic will continue transitioning into monthly rents. Prices for cellular traffic billed outside modules declined 3% in the second quarter 2011 compared to the same period in 2010. Revenues coming from monthly rents represented 73% of local revenues during the three-month period ended June 30, 2011. For the twelve month period ended June 30, 2011, local revenues totaled Ps. 3,866 million, compared to Ps. 3,909 million registered in the same period in 2010, a marginal decrease of Ps. 43 million or 1%.

Long distance services. Revenues totaled Ps. 296 million in the second quarter of 2011, compared to Ps. 277 million for same period in 2010, representing an increase of Ps. 19 million, or 7%. This is explained by a 4% increase in billed-traffic volume year-over-year (mostly business customers) and a 3% increase in billed-traffic prices. For the full-year 2011, long distance revenues totaled Ps. 1,171 million compared to Ps. 1,109 million registered in 2010, a Ps. 62 million, or 6%, increase.

Data & Network. Data and network revenues amounted to Ps. 626 million in the second quarter of 2011, compared to Ps. 613 million in the same period in 2010, an increase of Ps. 13 million or 2%, driven by mass-market, or, "on-demand” internet services revenues that increased Ps. 48 million year-over-year while dedicated internet and VPN services to business customers declined Ps. 35 million or 7% affected by lower prices and our inability to access leased links from the incumbent during the second quarter of 2011. Dedicated Internet and VPNs represented 80% of data & network revenues during the quarter. During 2011, data and network services revenues totaled Ps. 2,558 million from Ps. 2,393 million registered in 2010, an increase of Ps. 165 million, or 7%.

International traffic. In the second quarter of 2011, international traffic revenues totaled Ps. 286 million, a decrease of Ps. 37 million or 13% versus same quarter of previous year, explained by a 3% decline in traffic volume and a 9% reduction in prices – lower prices partially affected by a 7% appreciation of the average MXN Peso against the US dollar. For the twelve month period ended June 30, 2011, revenues from International traffic totaled Ps. 1,169 million from Ps. 1,277 million, a decrease of 8% compared to the same period in 2010. This is mostly explained by a decrease in price influenced by a stronger Mexican peso vis-à-vis the US dollar.

Other services. Quarterly revenues from other services marginally decreased Ps. 2 million, explained by a Ps. 23 million contraction in revenues from integrated services contracts compensated by an increase in equipment sales to enterprise customers. For the twelve month period ended June 30, 2011, revenues for other services totaled Ps. 1,403 million from Ps. 1,287 million registered in 2010, an increase of Ps. 116 million, or 9%.

Consumption

Local Calls. Local calls excluding our largest wholesale customer totaled 471 million calls in the second quarter of 2011, compared to 460 million calls for same period in 2010, representing an increase of Ps. 11 million calls, or 2%. Billed local calls decreased 13 million while local calls included in commercial offers increased 24 million. Local calls included in commercial offers represented 78% of total calls in the second quarter of 2011. For the twelve month period ended June 30, 2011, local calls totaled 1,922 million excluding our largest wholesale customer, compared to 1,754 million registered in the same period in 2010, an increase of 168 million calls, or 10%.

Cellular ("Calling Party Pays”). Minutes of use of calls completed to a cellular line excluding our largest wholesale customer amounted to 155 million in the three-month period ended June 30, 2011, compared to 163 million in the same period in 2010, a decrease of 5% equivalent to 8 million minutes. Billed cellular minutes represented 76% of cellular minutes in the second quarter of 2011. For the year 2011 and excluding our largest wholesale customer, cellular minutes increased 39 million, or 7%, from 605 million registered in the twelve-month period ended June 30, 2010, to 645 million in 2011.

Long distance. Excluding our largest wholesale customer, which represents 5% of total volume, outgoing long distance minutes amounted to 482 million for the three-month period ended June 30, 2011 from 450 million in the same period in 2010, a 7% or 31 million minute increase, resulting from increased traffic of existing business and residential customers. Billed long distance minutes increased 13 million, or 4%, during the second quarter of 2011 compared to the same period in 2010. Domestic long distance minutes represented 95% of total traffic during the quarter. For the twelve month period ended June 30, 2011 and excluding our largest wholesale customer, outgoing long distance minutes amounted 1,883 million, compared to 1,734 million registered in 2010, an increase of 149 million of minutes, or 9%, explained by the existing business customers increased traffic and further penetration of mass-market offers including national and international long distance minutes within a monthly rent.

Operating Data

RGUs and Customers. As of June 30, 2011, RGUs (Revenue Generating Units) totaled 1,416 thousand, an increase of 15% or 185 thousand from the same date in 2010. During the second quarter of 2011, net additional RGUs totaled 24 thousand, compared to 62 thousand in the second quarter of 2010, influenced by the Company’s strategy to focus on high-value customers. As of June 30, 2011, total customers totaled 758 thousand, an increase of 4% or 31 thousand from the same date in 2010. Customer additions declined 2 thousand in the quarter.

Voice RGUs (lines in service). As of June 30, 2011, lines in service totaled 1,040 thousand, an increase of 3% or 31 thousand from the same date in 2010. During the second quarter of 2011, gross additional lines totaled 66 thousand compared to 87 thousand in the second quarter of 2010. Disconnections in the second quarter of 2011 totaled 67 thousand, compared to 61 thousand in the year-earlier quarter. Net-adds in the second quarter of 2011 resulted in -2 thousand, compared to 22 thousand net-adds in the same period of 2010. As of June 30, 2011, residential lines represented 69% of total lines in service.

Broadband RGUs (broadband subscribers). Broadband subscribers increased 69% year-over-year totaling 377 thousand subs as of June 30, 2011. During the second quarter of 2011, broadband subscribers increased 25 thousand compared to 36 thousand in the same period of 2010. Continued positive response from customers to AXTEL’s "Acceso Universal” and "AXTEL X-tremo” services, our marketing efforts, highly competitive commercial offers and the reliability of our network contributed to increase the number of broadband subs in the second quarter. Broadband penetration reached 36% at the end of the second quarter of 2011, compared to 22% a year ago. As of the end of June 2011, WiMAX broadband subs reached 332 thousand, compared to 182 thousand a year ago, while AXTEL X-tremo, or FTTH, subs totaled 18 thousand.

Internet subscribers. As of June 30, 2011, Internet subscribers totaled 385 thousand, including 8 thousand dial-up subscribers. As of June 30, 2010, Internet subscribers represented 235 thousand, including 12 thousand dial-up subs.

Line equivalents (E0 equivalents). We offer from 64 kilobytes per second ("KBps”) up to 100 megabytes per second ("MBps”) dedicated data links in all of our thirty-nine existing cities. We account for data links by converting them to E0 equivalents in order to standardize our comparisons versus the industry. As of June 30, 2011, line equivalents totaled 453 thousand.

Cost of Revenues and Operating Expenses

Cost of Revenues. For the three-month period ended June 30, 2011, the cost of revenues represented Ps. 691 million, a decrease of Ps. 58 million, compared with the same period of year 2010, mostly related to a decrease in domestic long-distance termination rates, which positively affected the cost of both, inbound international and domestic long distance traffic. For the twelve month period ended June 30, 2011, cost of revenues reached Ps. 2,963 million, an increase of Ps. 83 million in comparison with year 2010, due primarily to an increase in fixed-to-mobile termination (+15% increase in volume) compensated by a decline in long-distance termination costs.

Gross Profit. Gross profit is defined as revenues minus cost of revenues. For the second quarter of 2011, the gross profit accounted for Ps. 2,002 million, a decrease of Ps. 11 million compared with the same period in year 2010. The gross profit margin increased from 72.9% to 74.3% year-over-year, influenced by the reduction in long-distance termination costs. For the twelve month period ended June 30, 2011, our gross profit totaled Ps. 7,808 million, compared to Ps. 7,777 million recorded in year 2010, an increase of Ps. 31 million.

Operating expenses. In the second quarter of year 2011, operating expenses totaled Ps. 1,066 million, 2% lower than the Ps. 1,093 million recorded in the same period in year 2010. This is mainly explained by reductions in advertising, personnel and outsourcing expenses. For the twelve month period ended June 30, 2011, operating expenses totaled Ps. 4,424 million, coming from Ps. 4,301 million in the same period in 2010. Personnel represented 45% of total operating expenses in the twelve month period ended June 30, 2011.

Adjusted EBITDA, D&A and Operating Income

Adjusted EBITDA⁽⁵⁾. The Adjusted EBITDA totaled Ps. 935 million for the three-month period ended June 30, 2011, compared to Ps. 920 million for the same period in 2010. As a percentage of total revenues, Adjusted EBITDA represented 34.7% in the second quarter of 2011, 142 bps higher than the margin recorded in the year-earlier quarter. For the twelve-month period ended June 30, 2011, Adjusted EBITDA amounted to Ps. 3,383 million, compared to Ps. 3,476 million in year 2010.

Depreciation and Amortization⁽¹⁰⁾. Depreciation and amortization totaled Ps. 787 million in the three-month period ending on June 30, 2011 compared to Ps. 747 million for the same period in year 2010, a increase of Ps. 40 million, or 5%, reflecting 3% higher capital expenditures made in the twelve-month period ending on June 30, 2011 compared to investments made in the same period in the same year 2010 period. Depreciation and amortization for the twelve-month period ended June 30, 2011 reached Ps. 3,112 million, from Ps. 2,944 million in the same period in year 2010, an increase of Ps. 168 million, or 6%.

Operating Income (loss). In the three-month period ended June 30, 2011, the Company recorded an operating income of Ps. 148 million compared to an operating income of Ps. 173 million registered in the same period in year 2010. For the twelve month period ended June 30, 2011 our operating income reached Ps. 272 million when compared to the result registered in the same period of year 2010 of Ps. 532 million, a decline of Ps. 260 million.

CFR, Indebtedness, Cash, Investments and Derivative Instruments

Comprehensive financial result. Net interest expense for the second quarter 2011 decreased Ps. 6 million, or 2%, vis-à-vis second quarter 2010. During the second quarter 2011, a peso appreciation against the U.S. dollar of 1% generated a Ps. 106 million FX gain, compared to a FX loss of Ps. 144 million recorded in the second quarter of 2010 (generated by a 2% peso depreciation). Variations in the fair value of financial instruments are partially explained by 7% and 18% declines in the price of AXTELCPO during the second quarters of 2011 and 2010, respectively, which affected the valuation of AXTEL´s position held in its own stock through the zero-strike-calls instruments. The Ps. 359 million comprehensive financial loss for year ended in June 2011, compared to a Ps. 497 million comprehensive financial loss for year ended in June 2010, is mainly explained by the larger appreciation of the Mexican peso against the U.S. dollar in the 2010 period, as well as by a 8% increase in the price of AXTELCPO in the 2010 period compared to a 16% decrease in the 2011 period.

Debt. During the second quarter of 2011, total debt decreased Ps. 179 million, explained by (i) a net reduction of US$1 million in other financial obligations, (ii) a net reduction of Ps. 50 million in financial leases and (iii) an Ps. 11 million decrease in committed bank facilities. The 1% appreciation of the Mexican peso against the US dollar also contributed to reduce the peso value of dollar-denominated debt.

Cash. As of the end of the second quarter of 2011, our cash and equivalents balance totaled Ps. 906 million, compared to Ps. 1,153 million a year ago. Forty-seven percent of the cash balance is maintained in dollars, the rest in pesos.

Capital Investments. In the second quarter of 2011, capital investments totaled Ps. 511 million, or US$43 million, compared to Ps. 852 million, or US$67 million, in the year-earlier quarter. Accumulated for the twelve-month period ended June 30, 2011, capital investments totaled Ps. 3,076 million, compared to Ps. 2,974 million in year 2010. Access represented close to 60% of this figure.

Other Investments. As of June 30, 2011, the Company maintained an economic position equivalent to 30.4 million AXTELCPOs in ZSC.

Derivative Instruments. The following table summarizes the Company’s derivatives position as of June 30 , 2011.

Financial Statements

For the three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010

Assets

As of June 30, 2011, total assets sum Ps. 21,302 million compared to Ps. 22,385 million as of June 30, 2009, a decline of Ps. 1,083 million.

Cash and equivalents. As of June 30, 2011, we had cash and cash equivalents of Ps. 906 million compared to Ps. 1,153 million in the same date of year 2010, a decrease of Ps. 247 million or 27%.

Accounts Receivable. As of June 30, 2011, the accounts receivable were Ps. 2,052 million compared with Ps. 2,367 million in the same date of 2010, a decline of Ps. 315 million.

Property, plant and equipment, net. As of June 30, 2011, the net of depreciation value of property, plant and equipment was Ps. 15,414 million compared with Ps. 15,366 million as of June 30, 2010, an increase of Ps. 48 million. The property, plant and equipment without adjusting for the accumulated depreciation, was Ps. 33,615 million and Ps. 30,576 million as of June 30, 2011 and June 30, 2010, respectively. The increase in property, plant and equipment is due to a higher investment during this period.

Liabilities

Total liabilities were Ps. 13,632 million as of June 30, 2011 compared to Ps. 14,411 million as of June 30, 2011, a decrease of Ps. 779 million or 6%.

Accounts payable & accrued expenses. On June 30, 2011, the accounts payable and accrued expenses were Ps. 2,270 million compared with Ps. 2,438 million on June 30, 2010, a decrease of Ps. 169 million or 7%.

Stockholders Equity

On June 30, 2011, the stockholders equity of the Company was Ps. 7,700 million compared with Ps. 7,974 million as of June 30, 2010, a decrease of Ps. 274 million, or 4%. The capital stock remained unchanged at Ps. 7,562 million as of June 30, 2011 and 2010.

Liquidity and Capital Resources

Historically we have relied primarily on vendor financing, the proceeds of the sale of securities, internal cash from operations and the proceeds from bank debt to fund our operations, capital expenditures and working capital requirements. Although we believe that we would be able to meet our debt service obligations and fund our operating requirements in the future with cash flow from operations, we may seek additional financing with commercial banks or in the capital markets from time to time depending on market conditions and our financial requirements. We will continue to focus on investments in property, systems and infrastructure and working capital management, including the collection of accounts receivable and management of accounts payable.

Cash flow Statement

For the Three-Month period Ended June 30, 2011 compared with the Three-Month period Ended June 30, 2010

Net resources provided by operating activities were Ps. 785 million for the three-month period ended on June 30, 2011 compared to Ps. 602 million recorded in the same period of year 2010.

Net resources used in investing activities were Ps. (514) million for the three-month period ended on June 30, 2011 compared to Ps. (890) million recorded in the same period of year 2010. These flows primarily reflect investments in fixed assets of Ps. (511) million and Ps. (852) million, respectively.

Net resources (used in) provided by financing activities were Ps. (118) million and Ps. (136) million for the three-month periods ended on June 30, 2011 and 2010, respectively.

As of June 30, 2011, the ratio of net debt to Adjusted EBITDA and the ratio of interest coverage of the company was placing in 2.67x and 3.65x, respectively. As June 30, 2010 the ratio of net debt to Adjusted EBITDA and interest coverage, was 2.70x and 3.53x, respectively.

Since the beginning of operations of the Company, AXTEL has invested approximately Ps. 34 billion in infrastructure. The Company expects to do more investments in the future, according to the expansion of the network in other geographical areas of Mexico in order to gain market and to maintain its current infrastructure and network.

Cash flow Statement

For the Twelve Months Ended June 30, 2011 Compared with Twelve Months Ended June 30, 2010

Net resources provided by operating activities were Ps. 4,434 million for the twelve-month period ended on June 30, 2011 compared to Ps. 2,651 million recorded in the same period of year 2010.

Net resources used in investing activities were Ps. (3,105) million for the twelve-month period ended on June 30, 2011 compared to Ps. (3,375) million recorded in the same period of year 2010. These flows primarily reflect investments in fixed assets of Ps. (3,076) million and Ps. (2,974) million, respectively.

Net resources (used in) provided by financing activities were Ps. (953) million and Ps. 1,083 million for the twelve-month period ended on June 30, 2011 and 2010, respectively.

Other important information

About AXTEL

AXTEL is a Mexican telecommunications company that provides local and long distance telephony, broadband Internet, data and built-to-suit communications solutions in 39 cities and long distance connectivity to business and residential customers in over 200 cities. AXTEL provides telecommunications services using a suite of technologies including FWA, WiMAX, copper, fiber optic, point to multipoint radios and traditional point to point microwave access, among others.

AXTELCPO trades on the Mexican Stock Exchange and is part of the IPC Index. AXTEL’s American Depositary Shares are eligible for trading in The PORTAL Market, a subsidiary of the NASDAQ Stock Market, Inc.

Visit AXTEL’s Investor Relations Center on www.axtel.com.mx