TELECOM ARGENTINA SA 20-F 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Date of event requiring this shell company report
Commission file number 1-13464
Securities registered or to be registered pursuant to Section 12(b) of the Act:
* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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TABLE OF CONTENTS
In this Annual Report on Form 20-F (the Form 20-F or Annual Report), the terms the Company, Telecom, Telecom Group, we, us, and our refer to Telecom Argentina S.A. and its consolidated subsidiaries, unless otherwise indicated.
The term Telecom Argentina refers to Telecom Argentina S.A. excluding its subsidiaries Telecom Personal S.A., Núcleo S.A., Telecom Argentina USA, Inc., Micro Sistemas S.A. and Publicom S.A. (entity sold on April 12, 2007). Unless otherwise stated, references to the financial results of Telecom are to the consolidated financial results of Telecom Argentina and its consolidated subsidiaries.
The terms Telecom Personal or Personal refer to Telecom Personal S.A., our subsidiary engaged in the provision of wireless communication services in Argentina. The term Núcleo refers to Núcleo S.A., Telecom Personals consolidated subsidiary engaged in the provision of wireless communication and Internet services in Paraguay.
Consolidated Financial Statements. Our Consolidated Financial Statements as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005, and the notes thereto (the Consolidated Financial Statements) are set forth on pages F-1 through F-75 of this Annual Report.
The Consolidated Financial Statements are presented in Argentine pesos and are prepared in accordance with Argentine GAAP considering the regulations of the Comisión Nacional de Valores (the Argentine National Securities CommissionCNV). Differences exist between Argentine GAAP and US GAAP which might be material to the financial information herein. Such differences involve methods of measuring the amounts shown in the Consolidated Financial Statements, as well as additional disclosures required by US GAAP and Regulation S-X of the Securities Exchange Commission (SEC). See Note 16 to our Consolidated Financial Statements contained elsewhere in this Annual Report for a description of the principal differences between Argentine GAAP and US GAAP, as they relate to us, and a reconciliation to US GAAP of net income and shareholders equity.
Exchange Rates. In this Form 20-F, except as otherwise specified, references to US$ and dollars are to U.S. dollars, references to P$ and pesos are to Argentine pesos and references to euro or are to the single currency of the participants in the European Economic and Monetary Union. The exchange rate between the dollar and the peso as of December 31, 2007 was P$3.149=US$1.00. Prior to January 6, 2002, the exchange rate had been fixed at one peso per U.S. dollar in accordance with the Convertibility Law during the period April 1, 1991 through January 6, 2002. However, as a result of the elimination of the fixed exchange rate and the devaluation of the peso, the exchange rate between the dollar and the peso has since declined substantially. As of June 25, 2008, the exchange rate (ask price) was P$3.018=US$1.00. Unless otherwise indicated, our Consolidated Financial Statements use the exchange rate as of each relevant date or year-end quoted by Banco de la Nación Argentina (Banco Nación). Such translation should not be construed as representing that the peso amounts actually represent actual dollar amounts or that any person could convert the peso amounts into dollars at the rate indicated or at any other exchange rate. For more information regarding historical exchange rates and the peso, see Item 3Key InformationExchange Rates. We have provided as a convenience, translations as of December 31, 2007 for other currencies which are mentioned in this Annual Report, including the Japanese yen (P$2.793=¥100), and the euro (P$4.6315=1).
Inflation Accounting. On August 22, 1995, the Argentine Government issued Decree No. 316/95 discontinuing the requirement that financial information be restated for inflation for any date or period after August 31, 1995. Effective September 1, 1995, in accordance with CNV resolutions and Argentine GAAP, we began accounting for our financial transactions on a historical cost basis, without considering the effects of inflation. Prior to September 1, 1995, our consolidated financial statements were prepared on the basis of general price level accounting, which reflected changes in purchasing power of the Argentine peso in the historical financial statements. The financial statements information for periods prior to August 31, 1995, was restated to pesos of general purchasing power at the end of August 31, 1995 (constant pesos). The August 31, 1995 balances adjusted to the general purchasing power of the peso at that date, became the historical cost basis for subsequent accounting and reporting.
However, as a result of the inflationary environment in Argentina and the conditions created by Law No. 25,561, the Consejo Profesional de Ciencias Económicas de la Ciudad Autónoma de Buenos Aires (the Professional Council of Economic Sciences of the City of Buenos AiresCPCECABA) approved on March 6, 2002, a resolution reinstating the application of inflation accounting in financial statements for fiscal years or interim periods ending on or after March 31, 2002. This resolution provided that all recorded amounts restated for inflation through August 31, 1995, as well as those arising between that date and December 31, 2001 are deemed to be stated in constant currency as of December 31, 2001 (the Stability Period).
On July 16, 2002, the Argentine Government instructed the CNV to accept financial statements prepared in constant currency. On July 25, 2002, the CNV reinstated the requirement to submit financial statements in constant currency, following the criteria of the CPCECABA.
Finally, on March 25, 2003, the Argentine Government reinstructed the CNV to preclude companies from presenting price-level-restated financial statements. Therefore, on April 8, 2003, the CNV discontinued inflation accounting as of March 1, 2003. We complied with the CNV resolution and accordingly recorded the effects of inflation until February 28, 2003. In October 2003, the CPCECABA discontinued inflation accounting as of September 30, 2003. Since Argentine GAAP required companies to prepare price-level restated financial statements through September 30, 2003, the application of the CNV resolution represented a departure from Argentine GAAP. The impact of not adjusting for the effects of inflation has not been material to the Consolidated Financial Statements of the Company prepared under both Argentine GAAP and US GAAP.
Certain amounts and ratios contained in this Annual Report (including percentage amounts) have been rounded up or down in order to facilitate the summation of the tables in which they are presented. The effect of this rounding is not material. These rounded amounts are also included within the text of this Annual Report.
The contents of our website are not part of this Annual Report.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Certain information included in this Annual Report contains information that is forward-looking, including, but not limited to:
· the impact of the emergency laws and subsequent related laws enacted by the Argentine Government;
· our expectations for our future performance, revenues, income, earnings per share, capital expenditure, dividends, liquidity and capital structure;
· the implementation of our business strategy;
· the effects of our debt restructuring process;
· our expectations regarding payments and prepayments of outstanding indebtedness;
· the effects of operating in a competitive environment; and
· the outcome of certain legal proceedings.
This Annual Report contains certain forward-looking statements and information relating to the Telecom Group that are based on the current expectations, estimates and projections of its management and information currently available to the Telecom Group. These statements include, but are not limited to, statements made in Item 5 Operating and Financial Review and Prospects under the captions Critical Accounting Policies and Trend Information and other statements about the Telecom Groups strategies, plans, objectives, expectations, intentions, capital expenditures, and assumptions and other statements contained in this Annual Report that are not historical facts. When used in this document, the words anticipate, believe, estimate, expect, intend, plan and project and other similar expressions are generally intended to identify forward-looking statements.
These statements reflect the current views of the Telecom Group with respect to future events. They are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict. In addition, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.
Many factors could cause the actual results, performance or achievements of the Telecom Group to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. These factors include, among others:
· uncertainties relating to political and economic conditions in Argentina;
· inflation, the devaluation of the peso and exchange rate risks;
· restrictions on the ability to exchange pesos into foreign currencies and transfer funds abroad;
· the elimination of indexes to adjust rates charged for certain public services;
· the final results of the contract renegotiation process with the Argentine Government regarding the adjustment to our rates charged for public services;
· the creditworthiness of our actual or potential customers;
· technological changes;
· the impact of legal or regulatory matters or reform and changes in the legal or regulatory environment in which we operate; and
· the effects of competition.
Many of these factors are macroeconomic in nature and are therefore beyond the control of the Telecom Groups management. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. The Telecom Group does not intend, and does not assume any obligation, to update the forward-looking statements contained in this Annual Report.
These forward-looking statements are based upon a number of assumptions and other important factors that could cause the Companys actual results, performance or achievements to differ materially from its future results, performance or achievements expressed or implied by such forward-looking statements. Readers are encouraged to consult the Telecom Groups periodic filings made on Form 6-K, which are filed with or furnished to the United States Securities and Exchange Commission.
The following explanations are not intended as technical definitions, but to assist the general reader to understand certain terms as used in this Annual Report.
Access charge: Amount paid per minute charged by network operators for the use of their network by other network operators.
Access deficit: The portion of costs related to the access network that are not covered by the revenues generated by the use or availability of subscribers connected to such network.
Access network: The elements that allow the connection of each subscriber to the corresponding local switch. They consist of the termination point, elements of outside plant and specific parts of the local switching equipment that make available the permanent connection from the termination point to the local switch.
ADSL (Asymmetric Digital Subscriber Line): A compression technology that allows combinations of services including voice, data and one-way full motion video to be delivered over existing copper feeder distribution and subscriber lines.
AFIP (Administración Federal de Ingresos Públicos): The Argentine federal tax authority.
AMBA (Área Múltiple Buenos Aires): The area of the Federal District (or Buenos Aires city) and greater Buenos Aires (Gran Buenos Aires), which extends to the city of La Plata to the South, the city of Campana to the North, the city of General Rodríguez to the West and the city of Monte Grande to the Southwest.
Analog: A mode of transmission or switching which is not digital, e.g., the representation of voice, video or other modulated electrical audio signals which are not in digital form.
APE (Acuerdo Preventivo Extrajudicial): An out-of-court restructuring agreement governed by Argentine Law No. 24,522.
Argentina: Republic of Argentina.
Argentine Bankruptcy Law: Law No. 24,522, as amended.
Argentine GAAP: Generally Accepted Accounting Principles in Argentina.
ARPU (Average Revenue per User): Calculated by dividing total revenue excluding mainly handset, outcollect (wholesale) roaming, cell site rental and activation fee revenue by weighted-average number of subscribers during the period.
Basic telephone services: The supply of fixed telecommunications links which form part of the public telephone network, or are connected to such network, and the provision of local and long-distance telephone service (domestic and international).
BCRA (Banco Central de la República Argentina): The Central Bank of Argentina.
CAT: Compañía Argentina de Teléfonos S.A.
Cellular service: A wireless telephone service provided by means of a network of interconnected low-powered base stations, each of which covers one small geographic cell within the total cellular system service area.
CER (Coeficiente de Estabilización de Referencia): The reference stabilization coefficient as calculated by the BCRA or any successor thereto, in accordance with the formula set forth in Annex I of Argentine Law No. 25,713. If the CER is abrogated, found to be inapplicable or not published, references to CER shall refer to any replacement measure adopted under Argentine law or, in the absence of any such replacement measure, any adjustment that shall be necessary to provide a substantially equivalent rate of return on the notes denominated in pesos (the Peso Notes) in comparison with similar notes issued in dollars.
CETs: Telecommunication centers where public telephone services are offered.
CNC (Comisión Nacional de Comunicaciones): The Argentine National Communications Commission.
CNT (Comisión Nacional de Telecomunicaciones): The Argentine National Telecommunications Commission, the former regulatory body, later replaced by the CNC.
CNV (Comisión Nacional de Valores): The Argentine National Securities Commission.
Company: Telecom Argentina S.A. and its consolidated subsidiaries.
Concurso preventivo: A voluntary reorganization proceeding governed by Argentine law.
Convertibility Law: Law No. 23,928 and its Regulatory Decree No. 529/91. The Convertibility Law fixed the exchange rate at one peso per U.S. dollar during the period April 1, 1991 through January 6, 2002. The Convertibility Law was partially repealed on January 6, 2002 by the enactment of the Public Emergency Law.
CPCECABA (Consejo Profesional de Ciencias Económicas de la Ciudad Autónoma de Buenos Aires): The Professional Council of Economic Sciences of the City of Buenos Aires.
CPP (Calling Party Pays): The system whereby the party placing a call to a wireless phone rather than the wireless subscriber pays for the air time charges for the call.
Decree No. 92/97: Decree issued on January 31, 1997 which implemented the Rate Rebalancing.
Digital: A mode of representing a physical variable such as speech using digits 0 and 1 only. The digits are transmitted in binary form as a series of pulses. Digital networks allow for higher capacity and higher flexibility through the use of computer-related technology for the transmission and manipulation of telephone calls. Digital systems offer lower noise interference and can incorporate encryption as a protection from external interference.
FACPCE (Federación Argentina de Consejos Profesionales en Ciencias Económicas): Argentine Federation of Professional Councils of Economic Sciences.
FCR: France Cables et Radio S.A.
February Agreement: An agreement entered into on February 28, 1992 and subsequently ratified by Decree No. 506/92 between the Argentine Government and Telecom Argentina. This agreement provides for the reduction of domestic long-distance rates from their then-current level. The reduction became effective on May 1, 1992.
Fiber Optic: A transmission medium which permits extremely high capacities. It consists of a thin strand of glass that provides a pathway along which waves of light can travel for telecommunications purposes.
Free Pulses: The number of Free Pulses included in the monthly basic charge prior to the issuance of Decree No. 92/97.
GPRS (General Packet Radio Service): An enhanced second-generation wireless technology used to transmit data over wireless networks. GPRS transmits and receives packets of data in bursts instead of using continuous open radio channels, and it is used to add faster data transmission speed to GSM networks. GPRS is packet based rather than circuit based technology.
GSM (Global System for Mobile Communications): A standard for digital cellular technology, originated in Europe, to provide pan-European roaming capabilities. The technology has been introduced and installed in almost all continents and it is the leading technology in the worldwide mobile industry. This standard is based on a digital transmission scheme providing expanded capacity by allowing multiple users over a single channel. GSM has supported the implementation of second generation services and is currently used to also provide third generation services.
Internet: A collection of interconnected networks spanning the entire world, including university, corporate, government and research networks from around the globe. These networks all use the IP (Internet Protocol) communications protocol.
Issuance Date: The date of issuance and delivery of the notes, cash consideration and cash interest payments pursuant to Telecom Argentinas APE, or August 31, 2005.
Law No. 25,561: Ley de Emergencia Económica y Reforma del Régimen Cambiario (see Public Emergency Law).
LIBOR: The London Interbank Offered Rate, the rate at which deposits in dollars are offered to prime banks in the London Interbank market.
List of Conditions: The Privatization Regulations, including the Pliego de Bases y Condiciones was approved by Decree No. 62/90, as amended. Pursuant to the List of Conditions, Telecom Argentina was required to comply with tariff regulations and meet certain minimum annual standards regarding the expansion of its telephone system and improvements in the quality of its service in order to maintain and extend the exclusivity of its non-expiring license to provide fixed-line public telecommunications services and Basic telephone services in the northern region of Argentina. After the market was opened to competition, the outstanding obligations that continue in force are the tariff regulations and those related to the quality of service; the obligations related to the expansion of the network are no longer required.
Network: An interconnected collection of elements. In a telephone network, these consist of Switches connected to each other and to consumer equipment for the transmission of data. The transmission equipment may be based on Fiber Optic or metallic cable or point-to-point radio connectors.
NGN (Next Generation Networks): A packet-based network able to provide services including telecommunication services and able to make use of multiple broadband, QoS (Quality of Service)-enabled transport technologies and in which service-related functions are independent from underlying transport-related technologies.
Nortel: Nortel Inversora S.A.
November Agreement: An agreement between Telecom Argentina and the Argentine Government providing for rates to be dollar-based and, at the election of each of Telecom Argentina and Telefónica, adjusted semi-annually according to the U.S. consumer price index. The November Agreement was ratified by Decree No. 2585/91 and became effective on December 18, 1991. Subsequently, in accordance with the Public Emergency Law, these rates were pesified at the exchange rate of US$ 1.00 = P$ 1.00. See Item 4Information on the CompanyThe BusinessVoice, Data and InternetRates.
Núcleo: Núcleo S.A.
PCS (Personal Communications Service): A wireless communications service with systems that operate in a manner similar to cellular systems.
Penetration: The measurement of the take-up of services. As of any date, the Penetration is calculated by dividing the number of subscribers by the population of the region and expressed as a percentage.
Personal: Telecom Personal S.A.
Pesification: Modification of the exchange rate by the Argentine Government pursuant to the Public Emergency Law.
Presubscription of Long-Distance Service: The selection by the customer of international and domestic long-distance telecommunications services from a long-distance telephone service operator.
Price Cap: Tariff regulation mechanism applied in order to determine tariff discounts based on a formula made up by the U.S. Consumer Price Index and an efficiency factor. The mentioned factor was established initially in the List of Conditions and afterwards in different regulations by the SC.
Privatization Regulations: The Argentine Governments privatization program as set forth in the State Reform Law approved in August 1989 and subsequent decrees.
Public Emergency Law: The Public Emergency and Foreign Exchange System Reform Law No. 25,561 adopted by the Argentine Government on January 6, 2002, as amended by Law No. 25,790, Law No. 25,820, Law No. 25,972, Law No. 26,077 and Law No. 26,204. Among others, the Public Emergency Law grants the executive branch of the Argentine Government the power to set the exchange rate between the peso and foreign currencies and to issue regulations related to the foreign exchange market and to renegotiate public service agreements.
Publicom: Publicom S.A.
Pulse: Unit on which the tariff structure of the regulated fixed line services is based.
Rate Agreement: The November Agreement, as supplemented by the February Agreement. The Rate Agreement, among other things, permits Telecom Argentina to effect aggregate rate reductions required pursuant to the List of Conditions by lowering rates for some or all categories of service, provided that the net reductions meet applicable targets.
Rate Rebalancing: The Rate Rebalancing established by Decree No. 92/97 which provides for a significant reduction in domestic and international long-distance tariffs, an increase in basic telephone charges, the elimination of Free Pulses and an increase in urban rates.
Regulatory Bodies: Collectively, the SC and the CNC.
RT: Technical resolutions issued by the FACPCE. The RT effective as of the date of this Annual Report are: 6, 7, 8, 9, 11, 14, 15, 16, 17, 18, 21, 22 and 23. These collective technical resolutions constitute Argentine GAAP, with the exception of RT 7 which establishes the auditing rules and RT 15 which regulates the role of the public accountant. In addition, RT 17 establishes that specific measurement questions not addressed by existing RTs must be resolved by applying general accounting measurement rules, the Argentine GAAP conceptual framework, the International Financial Reporting Standards issued by the International Accounting Standards Board (IASB), the International Accounting Standards developed by the International Accounting Standards Committee (IASC), the interpretations issued by the Standing Interpretation Committee (SIC) of the IASB and the interpretations of the International Financial Reporting Interpretations Committee (IFRIC) in the order listed.
SAC (Subscriber Acquisition Costs): In the wireless telecommunications industry, agents commissions, advertising expenses and handset subsidies are usually called subscriber acquisition costs.
Satellite: Satellites are used, among other things, for links with countries that cannot be reached by cable to provide an alternative to cable and to form closed user networks.
SC (Secretaría de Comunicaciones): The Argentine Secretary of Communications.
SEC: Securities and Exchange Commission of the United States of America.
Series B ADSs: Telecom Argentinas American Depositary Shares, listed on the New York Stock Exchange.
Sofora: Sofora Telecomunicaciones S.A.
SRMC (Servicios de Radiocomunicaciones Móviles Celular): Mobile Cellular Radiocommunications Service.
STM (Servicio Telefónico Móvil): Mobile Telephone Service.
Switches: These are used to set up and route telephone calls either to the number called or to the next switch along the path. They may also record information for billing and control purposes.
TDMA (Time Division Multiple Access): A standard of digital cellular technology that divides a single channel into a number of slots, enabling the transmission of multiple voice circuits per channel.
Telecom/Telecom Group: Telecom Argentina and its consolidated subsidiaries.
Telecom Argentina: Telecom Argentina S.A.
Telecom Italia: Telecom Italia S.p.A.
Telecom Italia Group: Telecom Italia and its consolidated subsidiaries, except where referring to the Telecom Italia Group as Telecom Argentinas operator in which case it means Telecom Italia and Telecom Italia International, N.V.
Telecom Personal: Telecom Personal S.A.
Telefónica: Telefónica de Argentina S.A.
Telefónica de España: Telefónica S.A. (from Spain).
TLRD (Terminación Llamada Red Destino): Termination charges from third parties wireless networks.
Transfer Date: November 8, 1990, the date upon which Telecom Argentina commenced operations upon the transfer from the Argentine Government of the telecommunications system in the northern region of Argentina that was previously owned and operated by Empresa Nacional de Telecomunicaciones.
UMTS (Universal Mobile Telecommunications System): Third generation mobile communications system.
UNIREN (Unidad de Renegociación y Análisis de Contratos de Servicios Públicos): Renegotiation and Analysis of Contracts of Public Services Division.
Universal Service: The availability of Basic telephone service, or access to the public telephone network via different alternatives, at an affordable price to all persons within a country or specified area.
US GAAP: Generally Accepted Accounting Principles in the United States of America.
Value Added Services: Services that provide additional functionality to the basic transmission services offered by a telecommunications network such as voicemail, message signaling, caller-ID, call transferring, call waiting, call conferencing, IVR dialing, ring back tones, personal e-cards, short message systems (SMS), national and international roaming, automatic call routing, access to wireless internet and access to email via BlackBerry.
W de ArgentinaInversiones: W de ArgentinaInversiones S.L.
Selected Financial Data
The following tables set forth our selected consolidated financial data for each of the years in the five-year period ended December 31, 2007. Our consolidated selected financial data should be read in conjunction with, and are qualified in their entirety by, our Consolidated Financial Statements and Item 5Operating and Financial Review and Prospects.
Our selected consolidated income statement data for the years ended December 31, 2007, 2006 and 2005 and the selected consolidated balance sheet data as of December 31, 2007 and 2006 have been derived from our Consolidated Financial Statements included elsewhere in this Annual Report. Our selected consolidated balance sheet data as of December 31, 2005 has been derived from our consolidated financial statements as of December 31, 2005 and 2004 and for the three years in the period ended December 31, 2005, which are not included in this Annual Report.
Our selected consolidated income statement data for the years ended December 31, 2004 and 2003 and our selected consolidated balance sheet data as of December 31, 2004 and 2003 have been derived from our consolidated financial statements as of December 31, 2004 and 2003 and for the three years in the period ended December 31, 2004. The consolidated financial statements as of December 31, 2004 and 2003 and for the three years in the period ended December 31, 2004 are not included in this Annual Report.
We maintain our financial books and records and prepare our financial statements in pesos in conformity with Argentine GAAP, which differ in certain aspects from US GAAP. For a summary description of the principal differences between Argentine GAAP and US GAAP as they relate to us, see Note 16 to our Consolidated Financial Statements.
As further discussed in Note 3.c to the Consolidated Financial Statements, we discontinued restating our financial statements into constant currency effective March 1, 2003, as required by a CNV resolution. Argentine GAAP required companies to restate financial statements for inflation through September 30, 2003. As stated in footnote 1 to the selected consolidated income statement and balance sheet data, figures for the year ended December 31, 2003 reflect adjustments for inflation until February 28, 2003. See Presentation of Financial InformationInflation Accounting.
Recent Accounting Pronouncements
As explained in Item 5Operating and Financial Review and ProspectsNew Accounting Standards under Argentine GAAP, in December 2006, the CNV approved RT 23 of the FACPCE, which had been adopted by the CPCECABA, Accounting for post-employment and other long-term employee benefits. As permitted by the CNV, we made use of the early adoption provisions and applied the standard as of January 1, 2007. The adoption of RT 23 did not have any impact on the Companys financial position, results of operations and disclosure.
On March 28, 2008, the FACPCE issued RT 24, Disclosures and auditing standards for cooperatives, which will be effective for fiscal years beginning on or after January 1, 2009. Since the Company is out of the scope of RT 24, its adoption will not have any impact on the Companys financial position, results of operations and disclosure.
Supplementary Unconsolidated Financial Information
For information regarding our financial and operating results on an unconsolidated basis, see Note 15 to our Consolidated Financial Statements.
CONSOLIDATED SELECTED INCOME STATEMENT AND BALANCE SHEET DATA
(1) Other, net includes gain on equity investees, financial results, net, other expenses, net and minority interest.
(2) Calculated based on 984,380,978 shares outstanding during each year.
(3) Calculated based on 196,876,196 ADSs outstanding during each year.
(4) For a description of these differences please refer to Note 16 to the Consolidated Financial Statements. The following tables show the principal reconciling items between our consolidated selected Argentine GAAP and US GAAP amounts shown for all years presented.
(i) Includes the classifications corresponding to the acquisition and sale of indefeasible right of use. No classification was recorded for revenue recognition (installation fees), since the amounts involved were immaterial. See Notes 16.II.g and 16.II.h to the Consolidated Financial Statements.
The following tables show, for the periods indicated, certain information regarding the exchange rates for U.S. dollars, expressed in nominal pesos per dollar (ask price). See Item 10Additional InformationForeign investment and exchange controls in Argentina.
(1) Yearly data reflect average of month-end rates.
Sources: Banco Nación
On June 25, 2008, the closing exchange rate (ask price) quoted by Banco Nación was P$3.018=US$1.00.
Capitalization and Indebtedness
Reasons for the Offer and Use of Proceeds
You should consider the following risks with respect to an investment in Telecom and investments in Argentine corporations that are not normally associated with investments in the securities of issuers in the United States and other jurisdictions.
Risks Relating to Argentina
Substantially all of our property, operations and customers are located in Argentina, and most of our indebtedness is denominated in or swapped to U.S. dollars. Accordingly, our financial condition and results of operations depend to a significant extent on economic and political conditions prevailing in Argentina and on the rates of exchange between the peso and the U.S. dollar. In 2001 and 2002 the Argentine economy experienced a severe recession as well as a political crisis. The abandonment of dollar-peso parity in 2002 led to significant devaluation of the peso against major international currencies and our need to restructure our financial indebtedness. Although general economic and political conditions have shown improvement in recent years, these conditions have affected and may continue to affect our financial condition and results of operations.
Devaluation of the peso will adversely affect our results of operations, our capital expenditure program and the ability to service our debt obligations.
Since we realize a substantial portion of our revenues in Argentina in pesos, any devaluation in the peso will negatively affect the U.S. dollar value of our earnings while increasing, in peso terms, our expenses and capital costs denominated in foreign currency (including costs of servicing our indebtedness denominated in foreign currencies). A significant depreciation in the Argentine peso against major foreign currencies also may have a material adverse impact on our capital expenditure program. It should be noted, however, that the exposure to the risk of devaluation of the peso has significantly decreased as a result of the mandatory and optional prepayments on the notes of Telecom Argentina. See Item 5Operating and Financial Review and ProspectsLiquidity and Capital ResourcesDebt Obligations and Debt Service Requirements and Item 11Quantitative and Qualitative Disclosures About Market Risk.
The Argentine peso has been subject to significant devaluation in the past and may be subject to significant fluctuations in the future. Given the economic and political uncertainties in Argentina, it is impossible to predict whether, and to what extent, the value of the peso may depreciate or appreciate against the U.S. dollar, the euro or other foreign currencies. We cannot predict how these uncertainties will affect the consumption of services provided by the Telecom Group or our ability to meet our debt obligations denominated in currencies other than the peso. Moreover, we cannot predict whether the Argentine Government will further modify its monetary policy and, if so, what impact any of these changes could have on the value of the peso and, accordingly, on our financial condition and results of operations.
Substantial inflation may return, which would negatively impact Telecom Argentinas margins.
Argentina experienced high levels of inflation during 2002, when the Argentine consumer price index increased 41% and the wholesale price index increased 118%. The level of inflation reflected both the effect of the peso devaluation on production costs and a substantial change in relative prices, partially offset by the elimination of public service rate adjustments and the large drop in demand resulting from the recession.
Although levels of inflation were lower in years 2003 and 2004, they began to increase in years 2005 and 2006 and remained relatively high in year 2007. The accumulated Argentine consumer price index for the period 2003-2006 increased approximately 31% and the accumulated wholesale price index increased approximately 28%. In 2007, the Argentine consumer price index increased 8.5% and the wholesale price index increased 13.9%. In the five-month period ending on May 31, 2008, the consumer price index increased 4.0% and the wholesale price index increased 5%. It should be noted, however, that the Instituto Nacional de Estadística y Censos (the Argentine National Statistics and Census Institute or INDEC) has undergone changes both in its management and in the methodology used to calculate the CPI index (Consumer Price Index). As a result, public credibility of the INDEC
as a reference for publishing Argentine inflation indexes has been adversely affected as from year 2007. There is also a substantial disparity between the inflation indexes published by the INDEC and the overall evolution of prices in the economy. Additionally, the target wage increase set by the Government for 2008 amounts to approximately 19.5%.
The Argentine Government has implemented several actions in order to monitor and control prices of the most relevant goods and services, such as price controls and restrictions on exports. Despite such actions, the Argentine economy continues to experience significant inflation. If the BCRA issues significant amounts of currency to finance public sector spending, to intervene in the foreign exchange market or to assist financial institutions in distress, or if the value of the peso cannot be stabilized by positive expectations for Argentinas economic future and/or strict fiscal and monetary policies, a significant increase in inflation rates can be expected. In addition, public sector spending has increased over the past years, a trend, that if it continues, may cause the Government to incur a fiscal deficit and lead to higher inflation. Since we derive the majority of our revenues from fees payable in pesos, any further increase in the rate of inflation not accompanied by a parallel increase in our rates would decrease our revenues in real terms and adversely affect our results of operations. As discussed below under Risks Associated with Telecom and its Operations, Telecom Argentinas ability to increase its regulated rates is subject to approval of regulatory authorities. We cannot guarantee that the permitted increases will be sufficient to counter inflationary pressures and cannot assure you that the results of any future rate negotiations will be favorable to us and to our financial condition.
Future policies of the Argentine Government are likely to significantly affect the economy as well as the operations of the telecommunications industry.
The Argentine Government has historically exercised significant influence over the economy, and telecommunications companies in particular have operated in a highly regulated environment. Due to the Argentine economic crisis of 2001 and 2002, the Argentine Government promulgated numerous, far-reaching regulations affecting the economy and telecommunications companies in particular. Under the Kirchner administration, the CNC adopted new interpretations of applicable regulations and imposed fines on telecommunications companies, particularly incumbent operators such as our company. See Item 8Financial InformationLegal Proceedings for more information. In addition, local municipalities in the regions where we operate have also introduced regulations and proposed various taxes and fees for the installation of infrastructure, equipment and expansion of fixed line and wireless networks. Local and federal tax authorities have also brought an increasing number of claims against us. We disagree with these proceedings and we are contesting them. However, we cannot assure you that the laws and regulations currently governing the economy or the telecommunications industry will not change, that the claims will be resolved in our favor, or that any changes to the existing laws and regulations will not adversely affect our business, financial condition or results of operations.
Argentina continues to face considerable economic, legal and political uncertainty.
Although general economic conditions have shown improvement and political protests and social disturbances have diminished considerably since the economic crisis of 2001 and 2002, the rapid and radical nature of the changes in the Argentine social, political, economic and legal environment over the past several years have given rise to significant uncertainties about the countrys economic and political future. Despite recent economic growth, it is currently unclear whether the economic and political instability experienced over the past several years could recur and Argentina may return to a period of recession, higher inflation, unemployment and greater social unrest. In addition, financial crises such as the outbreak of the subprime mortgage in the U.S. may negatively affect emerging economies like Argentina. Moreover, the decision of the Government of Cristina Fernández de Kirchner to raise export taxes on certain agricultural products has resulted in conflicts between the Government and the agricultural sector during 2008. If economic instability returns, there could be a material adverse effect on our results of operations and financial condition.
In the event of further social or political crises, companies in Argentina may also face the risk of further civil and social unrest, strikes, expropriation, nationalization, forced renegotiation or modification of existing contracts, and changes in taxation policies including tax increases and retroactive tax claims.
In addition, Argentine courts have issued rulings changing existing jurisprudence on labor matters and indicating an increase in the assumption by companies of the responsibility for, and the costs and risks associated with, utilizing sub-contracted labor.
As we operate in a context in which the governing law and applicable regulations change frequently, it is difficult to predict whether our commercial activities will be affected positively, negatively or at all by such changes.
Argentinas fiscal problems and sovereign debt default have negatively affected the macroeconomic environment.
The Argentine Governments history of fiscal deficit was aggravated by the devaluation of the Argentine peso in early 2002. Since almost all of the financial obligations of the Argentine Government were denominated in foreign currencies at the time the dollar-peso parity was eliminated, there was an increase in the cost of financial services (in terms of Argentine pesos) of the debt of the Argentine Government as a result of the devaluation in 2001 and 2002. Since the Governments fiscal revenues were denominated in large part in Argentine pesos, the Government was severely affected in its ability to carry out its payment obligations using foreign currency.
The Argentine Government defaulted on a significant part of its public debt in 2002. Due to a sustained lack of investor confidence in Argentinas ability to make payments due on its sovereign debt and in the Argentine economy generally, Argentinas opportunities to effectively raise capital in the international markets have been severely limited.
On September 17, 2004, the IMF approved the Argentine Governments request to defer repayment of about US$1.1 billion. On January 10, 2005, Argentina launched a formal offer to restructure more than US$100 billion of defaulted debt. On March 3, 2005, the Argentine Government announced that 76% of its creditors had accepted the offer. On June 2, 2005, new securities totaling approximately US$35.3 billion were issued by the Government and corresponding debt service payments were made. Finally, in January 2006, the Argentine Government completed an early repayment of all of its outstanding indebtedness with the IMF, an amount of approximately US$10.0 billion. However, there can be no assurance that the Argentine Government will not default on its obligations under the new bonds in the event that it experiences another economic crisis. In addition, Argentina will have to withstand any legal actions that may be filed by bondholders who did not accept the Argentine Governments 2005 exchange offer (approximately 24% of them). The Argentine Government is still in negotiations on its defaulted debt with certain international multilateral institutions such as the Paris Club.
After the economic crisis in 2001, the Argentine Government has maintained a policy of fiscal surplus. To be able to repay its debt, the Argentine Government may be required to continue adopting austere fiscal measures that could adversely affect economic growth.
A new default by the Government could lead to a new recession, higher inflation and unemployment and social unrest, which would negatively affect our financial condition and results of operations. In addition, the Governments default and its consequences may continue to negatively affect the ability of private companies, including Telecom, to obtain access to capital markets or other forms of financing.
The Argentine banking system may be subject to instability.
In recent years, the Argentine financial system has been characterized by extreme volatility. At the end of 2001 and during 2002, the Argentine Government restricted bank withdrawals and required the conversion of dollar deposits to pesos. This led to a significant decrease in commercial and financial activities, diminished spending and greatly increased social unrest, resulting in widespread public protests against financial institutions.
Argentinas economic growth and the relative stability of the countrys exchange rate and inflation evidenced since 2003 have allowed a gradual accumulation of deposits in Argentine financial institutions and improved the liquidity of the financial system. Since 2003, overall bank deposits continued to improve. The recovery in deposits was originally restricted to those of a short-term nature (mainly in demand deposit accounts and saving accounts), but longer term certificates of deposit started to increase in the second half of 2004, allowing a recovery of overall bank financing to the private sector accompanied by growth rates of 26% in 2004, 38% in 2005, 40% in 2006 and
43% in 2007. However, during 2008 certain events such as conflicts between the Argentine Government and certain sectors of the economy have deteriorated depositors confidence, which led to the decrease in deposits, the dollarization of certain deposits and an increase in interest rates.
Despite this recovery and the high level of reserves held by the BCRA, we cannot be sure that another collapse will not occur in the future. The Argentine banking systems collapse or the collapse of one or more of the larger banks in the system would have a material adverse effect on the prospects for economic growth and political stability in Argentina, resulting in a loss of consumer confidence, lower disposable income and fewer financing alternatives for consumers. These conditions would have a material adverse effect on us by resulting in lower usage of our services and the possibility of a higher level of delinquent and uncollectible accounts.
Shareholders may be liable under Argentine law for actions that are determined to be illegal or ultra vires.
Under Argentine law, a shareholders liability for losses of a company is limited to the value of his or her shareholdings in the company. Under Argentine law, however, shareholders who vote in favor of a resolution that is subsequently declared void by a court as contrary to Argentine law or a companys bylaws (or regulations, if any) may be held jointly and severally liable for damages to such company, to other shareholders or to third parties resulting from such resolution. In connection with recommending any action for approval by shareholders, the Board of Directors of Telecom Argentina frequently obtains and intends to obtain in the future, opinions of counsel concerning the compliance of the actions with Argentine law and Telecom Argentinas bylaws (or regulations if any). Although the issue is not free from doubt, based on advice of counsel, Telecom Argentina believes that a court in Argentina in which a case has been properly presented would hold that a non-controlling shareholder voting in good faith and without a conflict of interest in favor of such a resolution based on the advice of counsel that such resolution is not contrary to Argentine law or the Companys bylaws or regulations, would not be liable under this provision.
Risks Associated with Telecom and its Operations
It is possible that we will not be able to fully pay the interest or the principal of our indebtedness.
Having successfully completed the restructuring of our financial indebtedness in August 2005, we foresee being able to make payments of principal and interest on the notes issued pursuant to our APE. Nonetheless, this expectation is based on certain assumptions regarding macroeconomic factors which could affect significant components of our business.
If our assumptions are incorrect, or if there are unforeseen events which significantly and adversely affect our operations or if restrictions are imposed on our ability to transfer funds abroad, it is possible that we might not be in a position to make all of the interest and principal payments due under our indebtedness. Investment in our securities, therefore, involves a certain degree of risk. However, compliance with the prepayment provisions included in the terms and conditions of the Telecom Argentina notes issued pursuant to the APE and optional prepayments made on the notes have resulted, as of the date of this Annual Report, in the cancellation of the principal mandatory amortizations scheduled through April 2011 and 45.0% of the scheduled principal amortization payable in October 2011, and have thus reduced the possible impact of this risk. As of May 31, 2008, the outstanding principal amount of Telecom Argentinas indebtedness was approximately equivalent to US$521 million (which represents approximately 45.1% of Series A notes and 4.1% of Series B notes original principal amount), while its cash and cash equivalents amount approximately to US$156 million.
Under Argentine law, noteholders are entitled to the benefits of the exemption from withholding tax on interest payments provided they comply with the requirements established by the Argentine Negotiable Obligations Law. In addition, the terms and conditions of Telecom Argentinas listed notes call for payments to be made without withholding or tax reductions or any other current or future government charge. Although Telecom Argentina has fully complied with the applicable regulation, we cannot assure you that notes will be entitled in the future to the benefits of the exemption from withholding tax provided in the Argentine Negotiable Obligations Law. In the event our notes do not qualify for the exemption, we could be obliged to pay Argentine taxes on the listed notes and such obligation, if imposed, would generate additional unanticipated payments which could adversely affect our ability to satisfy our obligations under the notes and/or invest in our business.
Given that the debt instruments of Telecom Argentina are not guaranteed by any of Telecom Argentinas subsidiaries, such instruments will be subordinated structurally to indebtedness incurred by its subsidiaries with respect to any assets of those subsidiaries. Accordingly, upon the liquidation or reorganization of our subsidiaries, our right to participate in any distribution of their assets is subject to the prior claims of creditors of the relevant subsidiary, including trade creditors. As of December 31, 2007, our subsidiaries indebtedness was approximately equivalent to US$277 million, while our subsidiaries cash and cash equivalents as of December 31, 2007 amounted to approximately US$75 million. Subject to certain restrictions, our subsidiaries can incur additional debt and all of that debt will be structurally senior to the debt instruments of Telecom Argentina.
Our ability to operate our business will be constrained by the indenture governing the notes that we issued in connection with the APE.
The indenture governing the notes issued pursuant to Telecom Argentinas APE contains certain standard operating and financial restrictions and covenants that could adversely affect our ability to finance our future operations or capital needs or to engage in certain business activities. These agreements limit, and in some cases prohibit, except in certain permitted situations, our ability to:
· incur liens;
· incur indebtedness;
· sell certain types of assets;
· enter into sale and leaseback transactions;
· engage in transactions with our shareholders and affiliates;
· make capital expenditures not expressly permitted;
· make restricted payments (including loans and investments);
· impose payment restrictions affecting restricted subsidiaries;
· issue equity interests of Telecom Personal resulting in a loss of control of Telecom Personal;
· engage in other lines of business; or
· engage in certain mergers.
Our failure to comply with the covenants and restrictions in our indenture could accelerate the repayment of the notes which could have an adverse effect on our liquidity and our business.
In addition, the notes issued pursuant to Telecom Argentinas APE contain cash sweep provisions which will require Telecom Argentina to use any excess cash as defined in the notes, to prepay Telecom Argentinas notes, which will further limit our ability to finance our future operations or capital needs.
In March 2006, Telecom Argentina implemented certain modifications to the indenture governing the notes issued pursuant to the APE, after obtaining the approval of noteholders represented at an Extraordinary Bondholders Meeting. The approved modifications removed restrictions on capital expenditures for Telecom Personal and eliminated Telecom Argentinas obligation to reinvest in Telecom Personal any distribution payments received from Telecom Personal.
Our Series A and Series B notes contain mandatory prepayment terms and permit redemption at the option of Telecom Argentina.
The terms of the Series A and Series B notes that Telecom Argentina issued pursuant to the APE include mandatory prepayment terms that may require Telecom Argentina to prepay the principal amortization of the notes before their scheduled payment date. As of the date of this Annual Report, all principal amortization payments on the notes scheduled to be made through April 2011 and 45.0% of the principal amortization payments scheduled to be made in October 2011 have been paid and the outstanding principal amount of Telecom Argentina indebtedness as of May 31, 2008 is approximately equivalent to US$521 million (which represents approximately 45.1% of Series A notes and 4.1% of Series B notes original principal amount). All principal amortization payments were made on a pari passu basis, as required by the notes. In addition to making note payments (which are applied to prepay the remaining installments of the notes in direct order of maturity) or optional redemptions (which are applied pro rata
at par value), Telecom Argentina may retire the notes through purchases of the notes in the secondary market if the notes are available for purchase at a price below their par value. Telecom Argentina provides no assurance regarding the amount, timing or mechanism for any prepayment or redemption of the notes.
We are leveraged in foreign currency.
As of December 31, 2007, our total nominal consolidated bank and financial indebtedness, denominated in dollars, euro, yen and guaraníes amounted to the equivalent of approximately US$1,015 million, including accrued but unpaid interest and related derivatives. Our total consolidated peso-denominated debt amounted to P$63 million, equivalent to US$20 million. As of December 31, 2007, our total consolidated cash and banks and financial investments denominated in dollars, euro, yen and guaraníes amounted to the equivalent of approximately US$266 million and our total consolidated peso-denominated cash and banks and financial investments amounted to P$155 million, the equivalent of US$49 million. Our leverage may impair our ability to service our indebtedness or obtain additional financing in the future, to withstand competitive pressure and adverse economic conditions or to take advantage of significant business opportunities that may arise.
In addition, our subsidiary Telecom Personal is and will continue to be leveraged in foreign currency. As of December 31, 2007, Telecom Personals stand-alone outstanding debt was the equivalent of approximately US$265 million, of which a significant portion is denominated in U.S. dollars. As of December 31, 2007, Telecom Personals total cash and banks and financial investments denominated in dollars amounted to approximately US$36 million and Telecom Personals total peso-denominated cash and banks and financial investments amounted to P$107 million, the equivalent of US$34 million.
It should be noted, however, that the exposure to the risk of devaluation of the peso has significantly decreased as a result of the mandatory and optional prepayments on the notes of Telecom Argentina and the strong financial performance of Personal which has reduced its indebtedness. See Item 5Operating and Financial Review and ProspectsLiquidity and Capital ResourcesDebt Obligations and Debt Service Requirements and Item 11Quantitative and Qualitative Disclosures About Market Risk.
The Pesification and freezing of rates may continue to adversely affect Telecom Argentinas revenues.
In accordance with the Public Emergency Law, in January 2002, rates for Basic telephone services and long-distance services were converted to pesos and fixed at an exchange rate of P$1.00=US$1.00. The rates Telecom Argentina may charge in the future will be determined by negotiation between Telecom Argentina and the Argentine Government. According to the Public Emergency Law, while undertaking these negotiations, the Argentine Government must consider the effect of these rates on the competitiveness of the general economy, the quality of the services, the investment plans, consumer protection and accessibility of the services and the profitability of public services companies such as Telecom Argentina. In connection with these negotiations, on May 20, 2004, Telecom Argentina and Telefónica signed a Letter of Understanding with the Argentine Government whereby Telecom Argentina agreed, without waiving its right to continue negotiations, to maintain the current tariff structure charged to its customers for fixed line services until December 31, 2004 (the Letter of Understanding 2004).
On December 17, 2004, Law No. 25,972 was published in the Argentine Governments Official Bulletin. The law extended the term for the renegotiation of public works and services contracts specified in Article 9 of the Public Emergency Law until December 31, 2005. Law No. 25,972 also stipulated that the Argentine Government would not be bound in its renegotiation of these contracts by any regulations with respect to public works and services currently in effect. The law also confirmed that the effectiveness of the Public Emergency Law would continue until December 2005. The effectiveness of the Public Emergency Law was subsequently extended by Laws No. 26,077, 26,204 and 26,339 through December 31, 2008.
On March 6, 2006, Telecom Argentina executed a new Letter of Understanding (the Letter of Understanding 2006) with the Argentine Government pursuant to which Telecom Argentina will be permitted to raise certain rates and incorporate certain modifications to the current regulatory framework. Under the Letter of Understanding 2006, rate increases will be restricted to the termination charge for international incoming calls and the extension of the
time bands for peak-hour tariffs applied to local and domestic long-distance calls. Please see Item 4Information on the CompanyRegulatory Framework.
The Letter of Understanding 2006 contemplated the signing and effectiveness of the Minutes of Agreement of the Renegotiation upon the fulfillment of certain necessary steps. As of the date hereof, such fulfillment has yet to occur. Although we expect such fulfillment and effectiveness in the near future, we cannot guarantee if or when this will happen. We are unable to predict the outcome of the negotiations that are continuing with regard to further rate increases and the rate scheme which will be applied in the future. Moreover, we are unable to predict whether the Argentine Government, as a result of the current rate renegotiations, will impose additional conditions or requirements, and if these conditions or requirements are imposed, whether we will be able to meet them.
Rate restrictions may continue for a number of years and may affect revenues from fixed line and other services. While we intend to continue to strive to control operating costs and capital expenditures and improve productivity, those efforts may not offset, in whole or in part, the decline in operating margins that may result from mandatory rate freezing or reductions measured in dollar terms.
Additionally, since the end of the year 2005, the Argentine Government has implemented various measures to control inflation such as price controls of certain goods and services. In addition to price pressure from the competition, it is possible that services not currently regulated in this manner by the Argentine Government may be the subject of future price controls or that similar mechanisms affecting our economic and financial situation may be implemented.
We must comply with conditions in our license, and regulations and laws related thereto, and such compliance may at times be outside of our control.
We are subject to a complex series of laws and regulations with respect to most of the telecommunications services we provide. Such laws and regulations are often governed by considerations of public policy. We provide telecommunications services pursuant to licenses that are subject to regulation by various regulatory bodies. Any partial or total revocation of the licenses would be likely to have a material adverse impact on our financial condition and results of operations. Our dissolution and the declaration of bankruptcy, among others, are events which may lead to a revocation of our licenses.
Certain license conditions are not within our control. For example, any transfer of shares resulting in a direct or indirect loss of control in Telecom Argentina without prior approval of the regulatory authorities may result in the revocation of Telecom Argentinas license. Pursuant to the provisions of Telecom Argentinas List of Conditions as amended by Resolutions S.C. No. 111/03 and No. 29/04: (i) any reduction of ownership of Nortel in our capital stock to less than 51% without prior approval of the Regulatory Bodies; or (ii) any reduction of ownership of currently common shareholders in the capital stock with voting power of Nortel to less than 51% without prior approval of the Regulatory Bodies, may result in the revocation of Telecom Argentinas telecommunications license.
Nortel owns all of our Class A Ordinary Shares (51% of our total capital stock) and approximately 8.35% of our Class B Ordinary Shares (3.74% of our total capital stock) which, in the aggregate, represents approximately 54.74% of our total capital stock. We are directly controlled by Nortel by virtue of Nortels ownership of a majority of our capital stock; however, Nortels controlling interest is subject to certain agreements among Soforas shareholders. In addition, the Telecom Italia Group and W de ArgentinaInversiones (a company that is part of the Argentine Werthein Group) are each required to maintain direct ownership of at least 15% of the common stock of Sofora.
We operate in a competitive environment which may result in a reduction in our market share in the future.
We compete with licensed provider groups, comprised of, among others, independent fixed line service providers, wireless (cellular) and cable operators, as well as individual licensees, some of which are affiliated with major service providers outside Argentina. As of December 31, 2007, more than 500 licenses for local and/or long-distance services had been granted since the end of the exclusivity period.
We expect that we will face pressure on the rates we charge for services and we could experience loss of market share for Voice, Data and Internet services as a result of this competition particularly in the long-distance service and Internet businesses. In addition, the market for wireless services is very competitive as certain of our competitors have substantial telecommunications experience. In 2004, Telefónica Móviles, S.A. (Telefónica Móviles), the wireless affiliate of Telefónica, S.A., acquired the Argentine wireless business of Compañía de Radiocomunicaciones Móviles S.A. (Movicom) which resulted in Telefónica Móviles becoming Argentinas largest wireless operator in terms of numbers of subscribers at that time. The Internet services and wireless telecommunications markets, which we expect will continue to account for an increasing percentage of our revenues in the future, are characterized by rapidly changing technology, evolving industry standards, changes in customer preferences and the frequent introduction of new services and products. To remain competitive in the Voice, Data and Internet services market, we must invest in our fixed-line network and information technology in order to maintain and improve service quality and to prepare the network for the development and provision of new services that require enhanced capacity. Specifically, in the Internet services market, we must constantly upgrade our access technology and software, embrace emerging transmission technologies and improve the responsiveness, functionality, coverage and features of our services. To remain competitive in the wireless telecommunications market, we must enhance our wireless networks principally by expanding our GSM network coverage, provide 3G services, provide high service quality and attractive plans and facilitate the synergy between fixed and mobile communications. In the Wireless segment, we expect to continue to need to devote resources to customer retention and loyalty and to the replacement of handsets due to technological updates. These enhancements and the introduction of new services will demand increased capital expenditures and higher subscriber retention costs. We must also adapt to changing market conditions. Future technological developments may result in decreased customer demand for certain of our services or even render them obsolete. In addition, as new technologies develop, equipment may need to be replaced or upgraded or network facilities (in particular, wireless network facilities) may need to be rebuilt in whole or in part, at substantial cost, to remain competitive. Responding to these changes may require us to devote substantial capital to the development, procurement or implementation of new technologies.
We also anticipate that we will have to devote significant resources to the refurbishment and maintenance of our existing network infrastructure in order to comply with regulatory obligations regarding fixed line services and to remain competitive in the quality of our services. In addition, we may have to repair or replace our equipment lost due to theft or vandalism.
Certain operating and financial restrictions under the terms of our indebtedness (including limits on capital expenditures by Telecom Argentina) and the macroeconomic situation in Argentina may adversely affect our ability to successfully invest in, and implement, new technologies, coverage and services in a timely fashion. Accordingly, we cannot assure you that we will have the ability to make needed capital expenditures and operating expenses. If we are unable to make these capital expenditures, or if our competitors are able to invest in their businesses to a greater degree than we are, our competitive position will be adversely impacted.
Moreover, the products and services we offer may fail to generate revenues or attract and retain customers. If our competitors present similar or better responsiveness, functionality, services, speed, plans and features, our customer base and our user traffic may be materially affected.
Competition is and will continue to be affected by our competitors business strategies and alliances. Accordingly, we may face additional pressure on the rates we charge for our services or experience loss of market share in these areas. In addition, the general business and economic climate in Argentina, including economic turbulence and changes in levels of growth, interest rates, inflation rates and the instability of the dollar/peso exchange rate may affect us and our competitors differently, potentially to our relative disadvantage. We also expect that the level of competition in our markets will continue to increase in the future.
In light of the range of regulatory, business and economic uncertainties we face, as discussed in this Risk Factors section, it is difficult for us to predict with meaningful precision and accuracy our future market share in relevant geographic areas and customer segments, the speed with which change in our market share or prevailing prices for services may occur or the effects of competition. Those effects could be material and adverse to our overall financial condition and results of operations.
Future allocations of wireless frequency bands may affect the competitiveness of the Argentine wireless industry and could impact Telecom Personals competitive position within it.
The SC is responsible for the allocation of bands in the wireless spectrum within promulgated regulations. Telecom Personal cannot guarantee that its requests to participate in the reallocation process related to the bands to be released by Telefónica Móviles will be granted, or that the frequency bands will not be reallocated to existing or future competitors of Telecom Personal, negatively affecting Telecom Personals competitive position and ability to offer cellular services to its customers on a competitive basis. See Item 4Information on the CompanyRegulatory FrameworkRegulations Applicable to PCS Services for a detailed description of Telecom Personals license.
Nortel, as our controlling shareholder, and Sofora as Nortel´s controlling shareholder, exercise control over significant matters affecting us.
Nortel is our direct controlling shareholder. Sofora owns 100% of the common stock of Nortel, which represents 67.79% of the total capital stock of Nortel. As of December 31, 2007 Sofora was 50% owned by Telecom Italia Group, 48% owned by W de ArgentinaInversiones and 2% owned by France Telecom Group.
Telecom Argentina has been informed by W de ArgentinaInversiones that its option to purchase France Telecom Groups 2% interest in Sofora was exercised on February 1, 2008. Additionally, Sofora has notified Telecom Argentina that: (i) on February 12, 2008, Sofora received from France Câbles et Radio and from Atlas Services Belgium a letter notifying Sofora of such companies transfer of the 2% interest in Sofora, and requesting that such transfer be registered in favor of W de ArgentinaInversiones; (ii) Sofora replied to the letter sent by France Câbles et Radio and Atlas Services Belgium by requesting a copy of the prior authorization from the SC to said transfer of shares, arguing that a prior authorization of the SC was necessary in accordance to rules and regulations in effect; to this date, Sofora has not received any answer, and neither the buyers nor the sellers have submitted any proof of such authorization; (iii) with the goal of protecting the interests of Sofora, its controlled companies and their respective shareholders, a petition was submitted to the SC requesting it to determine if, in accordance to rules and regulations in effect, the parties participating in said transaction had to request the prior authorization of the relevant authorities; (iv) this request to the SC was submitted as well to enable Sofora to determine what to do with respect to the registration of the transfer requested by the interested parties; (v) as soon as the SC decides upon this matter, Sofora will take the steps necessary to comply with such decision. Likewise, W de ArgentinaInversiones has submitted a note to Sofora stating that it is its position that prior authorization by the SC was not necessary and requesting Sofora to immediately register the interest transfer. Additionally W de ArgentinaInversiones has informed Sofora that they have brought legal actions accordingly. As of the date of this Annual Report, Telecom Argentina cannot predict how the SC will decide on the petition submitted by Sofora nor the outcome of the legal action brought by W de ArgentinaInversiones.
Additionally, in 2003 the Telecom Italia Group acquired for an aggregate purchase price of US$60 million two call options on W de ArgentinaInversiones entire interest in Sofora, one for the purchase of 48% of Soforas share capital, which can be exercised within 15 business days after December 31, 2008, and an additional call option on 2% of Soforas share capital, which can be exercised between December 31, 2008 and December 31, 2013. At the time these call options were granted, the Argentine Antitrust Commission resolved and notified Telecom Italia International NV and W de Argentina-Inversiones that in the event the options granted under the Call Option Agreement executed on September 9, 2003 were to be exercised, such exercise will need to be notified in accordance with Sections 6 and 8 of Law No. 25,156. As of the date of this Annual Report, Telecom Argentina cannot predict whether Telecom Italia will exercise these options. See Item 7Major Shareholders and Related Party Transactions for additional information on the exercise of this option.
Through their ownership of Sofora, the Telecom Italia Group and W de ArgentinaInversiones currently have the ability to determine the outcome of any action requiring our shareholders approval, including the ability to elect a majority of directors.
We have been informed that pursuant to the shareholders agreement entered into between the Telecom Italia Group and the Werthein Group, the Telecom Italia Group and W de ArgentinaInversiones have agreed amongst themselves certain matters relating to the election of our directors and of Nortels and have given W de ArgentinaInversiones veto power with respect to certain matters relating to us.
We have engaged in and will continue to engage in transactions with these shareholders of Nortel and, at the present time, of Sofora, and their affiliates. Certain decisions concerning our operations or financial structure may
present conflicts of interest between these shareholders as direct or indirect owners of Telecom Argentinas capital stock and as parties with interests in these related party contracts.
Nevertheless, any transactions with related parties for an amount of over 1% of the shareholders equity of Telecom Argentina are put through a prior approval process established by Decree No. 677/01 and requiring involvement of the Audit Committee and/or an opinion of two independent valuation firms as well as subsequent approval by the Board of Directors in order to verify that the agreement could reasonably be considered to be in accordance with normal and habitual market practice. See Item 7Major Shareholders and Related Party TransactionsRelated Party Transactions.
Our operations and financial condition could be affected by union activity.
In Argentina, labor organizations have substantial support and have considerable political influence. The demands of our labor organizations have increased as a result of the general labor dissatisfaction resulting from the disparity between the cost of living (which was significantly affected by the increased level of inflation over the last three years) and salaries in Argentina as a result of the end of the Convertibility Law (although the Argentine Government has attempted to alleviate this economic disparity by increasing the minimum legal wage, imposing salary amounts which will initially be treated as non remunerative and setting target annual wage increases). Certain claims initiated in 2005 by labor organizations with respect to fixed line services led to negotiations that resulted in the improvement of salary levels and a reduction of working hours. See Item 8Financial InformationLegal ProceedingsOther Labor Claims. Moreover, labor organizations have advocated that certain of our non-unionized employees should be represented by trade unions. If the number of employees covered by trade unions increases, we may incur an increase in costs for the higher compensation that we and our contractors may need to pay to unionized employees.
In this context, we concluded several agreements with various labor organizations representing in particular our fixed-line telephony employees. Please see Item 6Directors, Senior Management and EmployeesEmployees and Labor Relations and Item 8Financial InformationLegal Proceedings.
The Argentine Government may order salary increases to be paid to employees in the private sector or changes in labor regulations, which would increase our cost of doing business.
The Argentine Government has in the past and may in the future promulgate laws, regulations and decrees requiring companies in the private sector to maintain minimum wage levels and provide specified benefits to employees (including higher levels of severance payments to former employees dismissed without proper cause). In the aftermath of the Argentine economic crisis, both the Government and private sector companies have experienced significant pressure from employees and labor organizations relating to wage levels and employee benefits. However, since early 2005 the Argentine Government has decided not to order new salary increases by decree. We cannot guarantee that the Government will not again adopt measures that will increase salaries or require us to provide additional benefits, which would increase our costs and, among other things, in the absence of an adjustment of regulated tariffs, reduce our profitability.
Moreover, the Argentine Congress has discussed certain modifications to labor regulations that, if approved, could materially impact our relationship with our employees by increasing the labor cost and decreasing the flexibility to provide services to our clients.
We are involved in various legal proceedings which could result in unfavorable decisions and financial penalties for us.
We are party to a number of legal proceedings, some of which have been pending for several years. We cannot be certain that these claims will be resolved in our favor, and responding to the demands of litigation may divert management time, attention and financial resources. Please see Item 8Financial InformationLegal Proceedings.
In addition, in recent years, certain changes in the treatment of employment matters under Argentine law have created new incentives for individuals to pursue employment-related litigation in Argentine courts. These changes include holdings that an employee of a subcontractor may file a direct action against the firm contracting the work,
that any cap on severance pay in cases of dismissal without cause is unconstitutional, that an employee may bring a civil action in the event of an occupational accident, and the passage of an amendment to the Employment Contract Act to restrict an employers ability to change the form and conditions of work expected of an employee. As a result of these changes, there may be a heightened risk of employment-related litigation. For example, former sales representatives of Telecom Personal have brought legal actions for what they consider to be the untimely termination of their contracts and have submitted claims for the payment of different items such as commission differences, seniority bonuses and lost profit. Some of these claims have been settled and others are still pending.
The tax authorities have reviewed certain interpretations that could affect the tax treatment of our bad debt expense and Fiber Optic improvements. Several claims for additional taxes have been brought against Telecom by the tax authorities and final resolution of such claims could result in our payment of additional taxes, accrued interest and fines. See Item 10Additional InformationTaxation and Item 8Financial InformationLegal Proceedings.
We may be subject to measures by the Argentine Government that may modify or impose obligations to provide telecommunications services without or with reduced compensation which may result in losses.
On June 12, 2002, the Argentine Congress passed Law No. 25,609, which was subsequently vetoed by the executive branch and sent back to the Congress where it is still being considered. Law No. 25,609 provides that Argentine telephone operators such as Telecom Argentina must provide indispensable telephony services to certain public entities even if these beneficiaries do not pay for these services. The implementation of Law No. 25,609 and subsequent regulations may impact Telecom Argentinas ability to set-off any amounts owed by these public entities against any amounts Telecom Argentina owes to the Argentine Government. In addition, the fulfillment of these obligations may result in losses for us. Please see Item 4Information on the CompanyRegulatory FrameworkLaw No. 25,609.
Certain regulatory measures that are still pending implementation, including regulations governing the unbundling of the local access (commonly known as local loop) and number portability, could have the effect of increasing competition for the services we offer. Moreover, the Government could modify some of the current regulations, without granting the Company corresponding compensation for changes in service requirements, could change its interpretation of existing regulations or introduce new obligations such as, among others, those relating to Universal Service regulation (See Item 4Information on the CompanyRegulatory FrameworkDecree No. 764/00), those relating to the provision of new customer services and those resulting from the 2000 and 2001 Price Cap SC reviews still pending. Any such changes could have a material impact on our operations. However, these potential obligations may be offset by measures in Telecom Argentinas favor, such as those contemplated in Resolution 41/07 (See Item 4Information on the CompanyRegulatory FrameworkTax Stability: Social Security Contribution Variations).
The enforcement of regulations aimed at protecting consumers might have an adverse effect on us.
The Consumer Protection Act No. 24,240, as amended and/or supplemented (the Consumer Protection Act) establishes a series of principles and rules for the protection of consumers and users. The Consumer Protection Act applies to the telecommunications industry and to any other industry in which consumers and users are involved.
On March 12, 2008, the Argentine Congress passed the legislative bill to reform the Consumer Protection Act, which was promulgated by the Executive Branch in Decree No. 565/2008 dated April 3, 2008, and published in the Official Bulletin on April 7, 2008.
This reform substantially amends various aspects of the Consumer Protection Act, the most important of which are: (i) the extension of the definition of a consumer; (ii) an increase in the fines that could be imposed to providers and the possibility that relevant administrative authorities may order providers to pay direct damages up to a maximum amount; (iii) the courts may order providers to pay punitive damages to consumers up to a maximum amount of P$5 million, depending on the seriousness of the breach, among other circumstances; and (iv) provisions governing the possibility that consumer associations commence class actions in representation of the rights of an indeterminate group of consumers.
These amendments might substantially increase the number of legal actions commenced against various companies that provide goods and services to individual users or consumers or to various groups or associations of consumers. This possibility might entail risks for Telecom Argentina and Personal concerning, among others, the collection of prices charged for its services, or the obligation to return amounts charged for its services. If such were the case, any of such consequences could have an adverse effect on our financial situation and on the results of our operations.
The BCRA has imposed restrictions on the transfer of funds outside of Argentina in the past and may do so in the future, which could prevent us from making payments on our debt and trade liabilities.
In 2001 and 2002, the Argentine Government imposed a number of monetary and currency exchange control measures that included restrictions on the free disposition of funds deposited with banks and tightened restrictions or limitations on the access to foreign exchange markets and transfer of funds abroad, including for purposes of paying principal and interest on debt and trade liabilities to foreign suppliers. Although these restrictions or limitations have generally been eliminated, restrictions on the access to foreign exchange markets and transfer of funds have in the past limited and may in the future limit our ability to make payments on our debt to creditors and trade liabilities outside of Argentina. There can be no assurance that the BCRA will not impose again similar restrictions for principal, interest and/or trade liabilities payments by us to our foreign creditors, or require its prior authorization for such purposes, which would limit our ability to service our debt and/or comply with payments related to trade contracts with foreign suppliers. See Item 10Additional InformationForeign Investment and Exchange Controls in Argentina.
There is no assurance that the market for our securities will provide proper levels of liquidity.
The future liquidity position of our securities, including Telecom Argentinas Series A and Series B notes, is uncertain. The liquidity of our securities will depend on numerous factors, many of which are outside of our control. The liquidity of our securities could be adversely affected by changes in market conditions and interest rates, both in Argentina and the global economy, as well as by any change in our financial condition and results of operations.
In particular, the liquidity of Telecom Argentinas Series A and Series B notes could be reduced by prepayments and repurchases carried out in accordance with the terms of the notes.
Fluctuations in Telecom Argentinas share price depend on various factors, some of which are outside of our control.
While the value of Telecom Argentinas shares has increased over the past five fiscal years, their value has declined during 2008. See Item 9The Offer and Listing.
The market price of our shares is subject to change due to various factors which are outside of our control such as changes in market expectations, changes in the economic and political situation of Argentina, changes in measures used by investors or analysts to value our stock or market trends unrelated to our performance. We cannot predict when such external factors will affect our stock price or whether their effects will be positive or negative.
In addition, future conversions of Telecom Argentinas Class C Shares could affect the trading price of Telecom Argentinas shares if a large number of converted shares are sold in the public markets within a short time period. See Item 6Directors, Senior Management and EmployeesShare OwnershipShare Ownership Plan.
Finally, currency fluctuations could impact the value of an investment in Telecom Argentina. Although Telecom Argentinas ADRs listed on the New York Stock Exchange are U.S. dollar denominated securities, they do not eliminate the currency risk associated with an investment in an Argentine company.
If we experience significant losses, we may be required to undertake a mandatory capital stock reduction or commence dissolution procedures.
Under Article 206 and paragraph 5 of Article 94 of the Argentine Companies Law No. 19,550, as amended, if at the annual shareholders meeting a corporation presents financial statements that report that the corporations losses exceed certain thresholds or reports negative shareholders equity, the corporation is required to reduce its capital
stock; or to commence dissolution proceedings unless its shareholders take action to increase the companys capital stock.
The requirements of Article 206 and paragraph 5 of Article 94 were temporarily suspended by governmental decrees until December 10, 2005, but have been in effect since that time.
Since Telecom Argentina reported significant accumulated losses for the year ended December 31, 2005, it qualified for mandatory reduction of its capital stock. Accordingly, the Ordinary Shareholders Meeting held on April 27, 2006 approved the use of Telecom Argentinas legal reserve and a portion of its inflation adjusted capital account to absorb accumulated losses and remediate this situation. See Item 9The Offer and Listing.
We reported net income for the fiscal year ended December 31, 2007, but we still had accumulated losses amounting to P$708 million as of December 31, 2007. Although we currently do not qualify for mandatory reduction of capital stock, we cannot guarantee that we will not report significant losses in the future and again qualify for capital stock reduction under Article 206 or under paragraph 5 of Article 94.
In past periods of macroeconomic distress, such as those in 1989 and 2002, Articles 206 and paragraph 5 of Article 94 have been temporarily suspended. However, we cannot guarantee that in any future periods of macroeconomic distress such suspension would occur.
Our consolidated financial statement under Argentine GAAP may not give you the same information as financial statements prepared under US GAAP.
There is a lower level of regulation of the Argentine securities markets and of the activities of investors in these markets as compared with the securities markets in the United States and certain other developed countries. We maintain our financial books and records and prepare our financial statements in conformity with Argentine GAAP, which differs in certain significant aspects from US GAAP. In this regard, we have included a description of the principal differences between Argentine GAAP and US GAAP as they relate to us in Note 16 to the Consolidated Financial Statements.
Telecom is one of the largest private-sector corporations in Argentina in terms of revenues. Telecom Argentina has a non-expiring license (the License) to provide fixed-line telecommunications services in Argentina. We also provide other telephone-related services such as international long-distance service and data transmission and Internet services, and through our subsidiaries, wireless telecommunications services, international wholesale services, and telephone directory publishing (until the sale of Publicoms subsidiary in April 2007).
As of December 31, 2007, our telephone system included approximately 4.21 million lines in service. This is equivalent to approximately 22 lines in service per 100 inhabitants in the Northern Region of Argentina and 367 lines in service per employee.
As of December 31, 2007, our Internet business has approximately 83,000 customers of its dial-up and private virtual network services (in these networks links between nodes are carried by open connections or virtual circuits) and approximately 783,000 customers of its ADSL service. Our Wireless reportable segment has approximately 10.67 million customers in Argentina and approximately 1.63 million customers in Paraguay.
Our goal is to be a leading provider of integrated communications, providing a wide variety of fixed and mobile telecommunication services, mainly in the territory of Argentina. Our purpose is to be a leader in operational excellence, in the provision of innovative services and in customer satisfaction.
We aim to maximize our business returns by building customer loyalty through innovative and attractive offerings that our competitors will find difficult to imitate. We believe that the main drivers of growth will continue to be our broadband business and wireless service offerings, enabled by increased penetration, higher access speeds and sale of Value Added Services.
Markets for fixed basic telecommunication services are either mature or close to maturity, resulting in tight competition, increased costs for operators, and declining prices. The use of high-technology exacerbates this situation even more by facilitating the entry of new players, the so-called technology competitors, which, with low and highly focused investments, fuel competitive pressure and reduce the industrys profitability.
Customers, for their part, are starting to place value on the increasing levels of empowerment, personalization and interactivity in telecommunication services with an emphasis on simplicity. Increasingly, the services for which consumers are willing to pay a premium are value-added, and the price of connectivity either fixed or mobile- no longer represents a determining factor in the purchase decision.
In this context, in which the industry is evolving towards an ICT (Information & Communication Technology) paradigm, the convergence of services constitutes a key opportunity to achieve market positioning by keeping abreast of emerging demands and counteracting the erosion of traditional revenue streams.
Conceptually, the convergence of services comprises different implementation stages ranging from simple commercial integrations to more complex structures in which different access networks and wide-ranging applications and services are combined to meet customers needs in a simple way.
We are in a privileged position to benefit from the convergence of services provided to fixed and mobile customers, which represents an advantage vis-à-vis companies operating purely in one of the fixed, mobile or cable businesses. In this regard, Telecom Argentina has undergone organizational changes, which have enabled it to launch several packages for customers, including broadband access and local calls, innovative wireless digital handsets, SMS services compatible with the fixed and mobile networks, Wi-Fi connectivity for home broadband, and recently, fixed video-telephony.
From an operating perspective, we aim to improve synergies, to which end we are designing and executing a plan to coordinate the development of our networks and information systemsan essential element for the provision of a broad portfolio of integrated services.
Key components of our strategy include:
· Retain customers and traffic on fixed networks through flat-rate offerings that target a broad market and increase ARPU on well-established products, maximizing profitability in mature businesses;
· Continue to migrate our traditional telephone infrastructure to the unified NGN architecture, which already has approximately 350,000 lines deployed with the new technology;
· Increase the penetration and deployment of broadband, which should enable us to speed up the convergence of fixed and mobile services and increase the Companys ability to offer innovative multimedia services;
· Continue the deployment of Fiber Optics to improve transmission capacity and increase access speed for our customers, which in turn enables the increased offering of combined Value Added Services;
· Expand coverage of our mobile service, completing the migration of mobile TDMA customers to GSM, and continuing the deployment of 3G mobile broadband technology;
· Prioritize customer service and quality; and
· Explore new technologies, such as IMS (IP Multimedia Subsystem), Wimax (Worlwide Interoperability for Microwave Access), Home Networking (which allows multiple computers to share files, printers and Internet connection) and IPTV (Internet Protocol Television) and mobile TV services, so as to be prepared to offer such advanced services when and as permitted by the Regulatory Bodies.
We understand that the successful achievement of these goals will largely depend on our ability to adapt with efficiency and speed to the requirements of a rapidly changing market, and to keep pace with the technological evolution required to continue delivering leading-edge services comparable to those provided in more developed countries.
The following chart shows our principal subsidiaries and affiliated companies as of December 31, 2007, and jurisdiction of organization.
(*) On April 12, 2007, Telecom Argentina sold its entire share participation in Publicom (99.99% of capital and voting shares of the subsidiary).
(**) Dormant entity.
Consolidated Subsidiary Information
The following table presents information relating to our consolidated subsidiaries for the fiscal year ended as of December 31, 2007:
(1) All incorporated in Argentina, except for Núcleo S.A. (Paraguay) and Telecom Argentina USA Inc. (USA).
(2) Interest held indirectly through Telecom Personal.
(3) Dormant subsidiary as of December 31, 2007.
As a consequence of the sale of our equity interest in Publicom on April 12, 2007, the former reportable segment Directory publishing has been accounted for as discontinued operations and included in a separate line in the reportable segment Voice, Data and Internet. See Note 12 to our Consolidated Financial Statements.
Our principal executive offices are located at Alicia Moreau de Justo 50, C1107AAB, Buenos Aires, Argentina, telephone number: 54-11-4968-4000.
Our authorized agent in the United States for SEC reporting purposes is Puglisi & Associates, 850 Library Avenue, Suite 204, P.O. Box 885, Newark, Delaware, 19715.
Telecom Personal and Núcleo Dividend Payments
On March 31, 2008, Telecom Personal paid its shareholders a dividend in an amount of P$220 million, as stipulated by the General Shareholders Meeting held on March 27, 2008, of which P$219.98 million were received by Telecom Argentina.
On April 15, 2008, Núcleo paid its shareholders a dividend in an amount in guaraníes equivalent to US$20.7 million, as stipulated by the General Shareholders Meeting held on March 14, 2008, of which US$14.0 million were received by Telecom Personal. In compliance with Paraguayan tax law, Núcleo withheld 15% of the amount distributed to Telecom Personal as income tax. Consequently, Telecom Personal received US$11.9 million in dividend proceeds and has a credit for taxes imposed on foreign earnings in an amount of US$2.1 million.
Mandatory and optional prepayment on the Notes
Due to the cash generation from operations in 2007 amounting to P$2,946 million, the Company has continued reducing its consolidated financial indebtedness. Telecom Argentina made mandatory prepayments amounting to P$889 million in 2007 and made an additional prepayment on April 15, 2008 amounting to P$822 million (which includes P$427 million of mandatory prepayment corresponding to excess cash). After giving effect to the principal prepayment made in April 2008, Telecom Argentina has cancelled all scheduled amortizations of the Series A notes and Series B notes payable through April 2011 and 45.0% of the scheduled principal amortization payments due October 2011. Consequently, as of the date of this Annual Report 45.087% of the original principal amount of Series A notes and 4.125% of the original principal amount of Series B notes remaining outstanding. See Item 5Operating and Financial Review and ProspectsLiquidity and Capital ResourcesDebt Obligations and Debt Service Requirements.
New Universal Service Regulation
Decree No. 558/08, published on April 4, 2008, recently caused certain changes to the Universal Service regime.
Decree No. 558/08 establishes that, with respect to obligations originated under Decree No. 764/00, the SC will assess the value of those that were complied with, and the level of funding from the Universal Service Fiduciary
Fund for those that are still pending. Likewise, the SC could choose to consider as Universal Service other undertakings which are carried out by the telecommunication services providers, and provide for their compensation so as to guarantee their continuity.
In defining Universal Service, the new regulation establishes two categories: a) areas with uncovered or unsatisfied needs; and b) customer groups with unsatisfied needs. It also determines that the SC will have exclusive responsibility for the issuance of general and specific resolutions regarding the new regulation, as well as for interpreting and applying it.
The Decree requires Telecom Argentina and Telefónica to extend the coverage of their fixed line networks, within their respective original region of activity, within 60 months from the effective date of publication of the Decree. The SC will determine on a case by case basis if the providers will be compensated with funds from the Universal Service Fiduciary Fund.
The Decree also requires telecommunications service providers to propose, within 60 days from its effective date of publication, a procedure to select a fiduciary institution and to provide a fiduciary agreement proposal, both subject to the SC approval.
The level of financing of Universal Service programs which were established under the previous regulation and are still ongoing will be determined by the SC, whereas telecommunications providers appointed to participate in future Universal Service programs will be selected by competitive bidding.
The Decree requires telecommunications service providers to contribute 1% of their revenues (from telecommunications services, net of taxes) to the Universal Service Fiduciary Fund and keeps the pay or play mechanism for compliance with the mandatory contribution to the Universal Service Fiduciary Fund.
Decree No. 558/08 also mandates the creation of the Universal Service Fiduciary Fund and orders that it must be established within 180 days from the date of publication. The providers of telecommunications services shall act in their capacity as trustors in this trust, which shall rely on the assistance of a Technical Committee made up by seven members (two members shall be appointed by the SC, one member shall be appointed by the CNC, three members shall be appointed by the telecommunication services providers two of which shall be appointed by Telecom Argentina and Telefónica and one by the rest of the providers and another member to be appointed by cooperative operators). This Technical Committee will be informed by the SC of the programs to be financed and will be entrusted with administrating and controlling the Universal Service Fiduciary Fund, carrying out technical-economic evaluations of existing projects and supervising the process of competitive bidding and adjudication of new Universal Services programs, with the prior approval of the SC.
At the date of issuance of this Annual Report, the management of Telecom Argentina and Personal have started to analyze the impact of this new regulation, which is still subject to further specifications to be issued by the SC. See Regulatory FrameworkDecree No. 764/00Universal Service Regulation.
Change of Enterprise Resource Planning (ERP) System: Successful Implementation of SAP
In January 2007, the Telecom Group successfully implemented its new SAP-based ERP system. The implementation replaced the previous ERP system and other works planning and control systems with a single, fully-integrated piece of multi-company software whose success has been proven in telecommunication companies all round the world.
The processes within the implementation scope of SAP included accounting, accounts payable, treasury, works in progress, logistics, fixed assets and materials and project management. During 2007 and the beginning of 2008 we continued with the implementation process by adding new features, including human resources management, foreign trade, real estate, float maintenance and special services which were succesfully implemented during March and April 2008.
Telecom Argentina was created by Decree No. 60 of the executive branch dated January 5, 1990 and incorporated as Sociedad Licenciataria Norte S.A. on April 23, 1990. In November 1990, its legal name was changed to Telecom Argentina STET-France Telecom S.A. and on February 18, 2004, it was changed to Telecom Argentina S.A.
Telecom Argentina is organized as a sociedad anónima under Argentine law. The duration of Telecom Argentina is 99 years from the date of registration with the Buenos Aires Public Registry of Commerce (July 13, 1990). Telecom Argentina conducts business under the commercial name Telecom.
Telecom Argentina commenced operations on November 8, 1990 (the Transfer Date), upon the transfer from the Argentine Government of the telecommunications system in the Northern Region previously owned and operated by Empresa Nacional de Telecomunicaciones (ENTel). This transfer was made pursuant to the Argentine Governments privatization program as set forth in the State Reform Law approved in August 1989 and subsequent decrees (the Privatization Regulations) which specified the privatization procedure for ENTel.
The Privatization Regulations provided for:
· the division of the Argentine telecommunications network operated by ENTel into two regions, the Northern Region and the southern region of Argentina (the Southern Region);
· the granting to Telecom Argentina and Telefónica of non-expiring licenses to provide basic telecommunication services in the Northern Region and Southern Region, respectively;
· the granting to Telintar and Startel, each joint subsidiaries of Telecom Argentina and Telefónica, of non-expiring licenses to provide international long-distance and data transmission, respectively; and
· the transfer by ENTel of substantially all of its assets and certain contracts into Telecom Argentina, Telefónica, Telintar and Startel.
On the Transfer Date, pursuant to the terms and conditions of a transfer contract (the Transfer Agreement), the Argentine Government sold 60% of the common stock to Nortel, a holding company formed at that moment by a consortium of investors including Telecom Italia among others. As of December 31, 2007, Nortels common stock was owned by an Argentine company named Sofora, which was organized in September 2003 and, as of December 31, 2007, was held 50% by the Telecom Italia Group, 48% by W de ArgentinaInversiones, a holding company incorporated in the Kingdom of Spain, and a company of the Werthein Group, and 2% by France Telecom Group. See Item 7Major Shareholders and Related Party TransactionsMajor Shareholders.
Pursuant to the Privatization Regulations, 10% of Telecom Argentinas common stock was transferred to a Share Ownership Plan for certain ex employees of ENTel and CAT by the Argentine Government, and the remaining 30% of Telecom Argentinas common stock was sold to investors, principally in Argentina, the United States and Europe, in an offering completed in March 1992. See Item 6Directors, Senior Management and EmployeesShare OwnershipShare Ownership Plan.
On the Transfer Date, Telecom Argentina also entered into a management agreement (the Management Agreement) with Telecom Italia and FCR, a subsidiary of France Telecom S.A. (jointly, the Operators) pursuant to which the Operators agreed to provide services, expertise and know-how with respect to the Telecom Argentinas activities. Since December 2003 and until the expiration of the Management Agreement on October 10, 2004, the Telecom Italia Group continued performing the Management Agreement as sole operator. The Telecom Italia Group has thereafter continued being the sole operator of Telecom Argentina.
On April 15, 1992, Telecom Argentina began to provide services to four of the six provinces formerly served by CAT.
Telecom Argentina provided public telecommunications services on an exclusive basis for a seven-year term, which expired on November 8, 1997. Telecom Argentina had the right, subject to regulatory approval and other conditions, to an extension of the period of exclusivity. On March 13, 1998, the Argentine Government issued
Decree No. 264/98, whereby the period of exclusivity was extended with respect to Basic telephone services until October 1999. The decree further provided for a transition period prior to the full liberalization of the telecommunications market.
On August 12, 1999, Perez Companc S.A. (owner of 25% of the ordinary shares of Nortel), and J.P. Morgan and J.P. Morgan Capital Corporation (jointly owners of 10% of the ordinary shares of Nortel) sold all of their shares of Nortel in equal parts to members of the Telecom Italia Group and the FCR Group.
Through September 30, 1999, Telecom Argentina provided domestic and international telephony services in the Northern Region on an exclusive basis. Commencing in October 1999, the Argentine Government implemented a deregulation plan introducing competition into the Basic telephone service market. See Regulatory FrameworkDeregulation Plan Established by Decree No. 264/98. The Argentine telecommunications market was opened to full competition beginning in November 2000. As a result, Telecom Argentina now offers services throughout Argentina and competes with Telefónica and with a number of additional operators throughout its markets.
On May 3, 2000, certain employees of Telecom Group participating in the employee Share Ownership Plan created by the Argentine Government in connection with the privatization of ENTel, sold 44,458,431 Class B Shares (represented by 7,600,000 ADSs and 6,458,431 shares) in an offering in the United States and in Argentina. Subsequently, other employees sold their shares in the market. The remaining shares issued pursuant to the Share Ownership Plan are in the process of being released from ongoing legal proceedings to enable their gradual conversion and sale in the public market. See Item 6Directors, Senior Management and EmployeesShare OwnershipShare Ownership Plan.
As of the date of this Annual Report, we conduct our business through five legal entities which represent five operating segments. We aggregate these operating segments into two reportable segments Voice, Data and Internet and Wireless- following the nature of the products and services provided.
The companies we aggregated to create the reportable segments are as follows:
(i) Dormant entity at December 31, 2007.
As a consequence of the sale of our equity interest in Publicom on April 12, 2007, the former reportable segment Directory publishing has been accounted for as a discontinued operation and included in a separate line in the reportable segment Voice, Data and Internet. See Note 12 to our Consolidated Financial Statements.
Voice, Data and Internet. Telecom Argentina owns a local telephone line network, public long-distance telephone transmission facilities and a data transmission network in the Northern Region. Telecom Argentina also owns a network in the Southern Region. Voice, Data and Internet services are comprised of the following:
· Basic telephone services. Telecom Argentina provides Basic telephone services, including local and domestic long-distance telephone services and public telephone services. As of December 31, 2007, Telecom Argentina had approximately 4.21 million lines in service;
· International long-distance services. Telecom Argentina provides international telecommunications service in Argentina including voice and data services and international point-to-point leased circuits;
· Data transmission and Internet services. Telecom Argentina provides data transmission and Internet connectivity services, including traditional dial-up and broadband connections, ADSL dedicated lines, private networks, national and international broadcasting signal transport and videoconferencing services. As of December 31, 2007, Telecom Argentina had approximately 83,000 dial-up and private virtual network services subscribers (in these networks links between nodes are carried by open connections or virtual circuits) and approximately 783,000 ADSL subscribers to our Internet service; and
· Other Basic telephone services. Other services provided by Telecom Argentina include supplementary services such as call waiting, call forwarding, conference calls, caller ID, voice mail, video calls and itemized billing, and telecommunications consulting and telecommunications equipment and maintenance services.
· Wireless Telecommunication. We provide wireless services through our subsidiaries in Argentina and Paraguay. Our subsidiary Telecom Personal provides wireless telephone service throughout Argentina via cellular and PCS networks. Telecom Personals service offerings include supplementary wireless Value Added Services. We also provide cellular and PCS services in Paraguay through Núcleo, a subsidiary of Telecom Personal. As of December 31, 2007, Telecom Personal had approximately 10.67 million wireless subscribers in Argentina and approximately 1.63 million in Paraguay.
See Note 14 to our Consolidated Financial Statements and: Item 5Operating and Financial Review and ProspectsYears ended December 31, 2007, 2006 and 2005Results of Operations by Reportable Segment for additional information as to our results of operations by reportable segment.
Voice, Data and Internet
Telecom Argentina is the principal provider of Basic telephone services in the Northern Region, and since late 1999 has also provided Basic telephone services in the Southern Region.
Since October 2000, the telecommunications sector in Argentina is completely open to competition. Our operations are subject to a complex series of laws and regulations of the Argentine Government. In addition, we are subject to the supervision of the Regulatory Bodies. See Regulatory Framework below.
The Argentine Government has taken certain measures that have affected revenues from the services we provide. By the enactment of the Public Emergency Law since January 6, 2002, the rates charged by Telecom Argentina for fixed line services such as measured service, public telephone service, national and international long-distance and monthly basic charges and installation charges have been pesified (regulated services since the Transfer Day). We cannot predict when the Public Emergency Law will cease to be effective or how these or other government regulations may affect our future revenues. See Rates below and Item 5Operating and Financial Review and ProspectsEconomic and Political Developments in Argentina.
Telecom Argentinas Telephone Network
Telecom Argentinas fixed-line telephone network includes installed telephones and switchboards, a network of access lines connecting customers to exchanges and trunk lines connecting exchanges and long-distance transmission equipment. The following table illustrates the development of Telecom Argentinas telephone network:
(1) Reflects total number of lines available in Switches. Since the year 2006, also includes NGN lines.
(2) Cumulative net lines installed since the Transfer Day.
(3) Reflects number of lines capable of generating traffic. Includes direct inward dialing lines, which do not use installed line capacity.
(4) Corresponds to the Northern Region of Argentina.
(5) Corresponds to lines requested by clients, but not yet installed.
Voice, Data and Internet Services include monthly basic charges, measured service charges, installation charges, public telephone services and interconnection services related to essential facilities, whose prices are regulated by the rules governing the license which establishes the maximum prices that can be charged to clients. Telecom Argentina is able to charge prices below the maximum regulated prices as long as the discount is applied equally to clients who share the same characteristics (under the so called principle of non-discrimination). In accordance with this ability, Telecom Argentina charges lower prices than the maximum regulated prices for many of the services offered.
The remaining services included in the Voice, Data and Internet reportable segment are not subject to regulation and, as a result, Telecom Argentina is able to set the corresponding rates.
a) Retail Residential and Business customers
Monthly Basic Charges. Telecom Argentina bills a monthly basic charge to its customers. The charge is based on pulses, valued at the price per pulse prevailing during the periods included in the invoice and, through January 6, 2002, translated to pesos at the applicable exchange rate of US$1.00 = P$1.00. The number of pulses varies depending on the type of customer. As of December 31, 2007, approximately 78% of lines in service were for residential customers and public telephony and approximately 22% were for professional, commercial and government customers. Additionally, due to the regulatory regime, Telecom Argentina is obliged to offer discounts to low consumption residential and retired customers.
Measured Service Charges. In addition to a monthly basic charge, Telecom Argentina bills a monthly measured service charge from almost all of its customers which is based on telephone usage. Measured service is billed at the price per minute at the time the call is made and, through January 6, 2002, translated to pesos at the applicable exchange rate of US$1.00 = P$1.00. Charges for local and domestic long-distance measured service vary with the price per unit of usage. The number of units of usage depends on the time of day, the day of the week, the distance traveled and the duration of calls. During the summer months (December through March) there is decreased consumption due to the fact that many customers are on vacation. Additionally, due to competition, Telecom Argentina offers discounts to customers mainly for domestic long-distance service, as semiflat plans that include a set quantity of minutes for a fixed change.
Local minutes were approximately 13.6 billion in 2007, 13.8 billion in 2006 and 13.9 billion during 2005. During the past three years, despite increased economic activity in Argentina and the growth in our fixed line customer base, the volume of local minutes has remained relatively stable due to the strong development that wireless telephony is experiencing and the resulting migration of traffic to that type of telecommunication service.
Domestic long-distance minutes were 3.0 billion in 2007, 3.0 billion in 2006 and 2.9 billion during 2005. The modest but positive growth in the domestic long-distance minutes is associated with the introduction of semiflat plans that permit the client to pay a fixed charge to get a set quantity of minutes for use during certain hours or days, or to certain numbers or places. Since the Northern Region was opened to competition in 1997, Telecom Argentina has maintained its position as the market leader for domestic long-distance traffic in the region.
In the years ended December 31, 2007 and 2006, approximately 77% of measured service revenue was generated by residential and professional customers, and approximately 23% was generated by business and government customers.
International Long-Distance Service. International long-distance traffic minutes increased to 198 million in 2007 from 130 million in 2006 and 125 million in 2005. Despite the competition and VoIP (Voice Over Internet Protocol) the volumes of this traffic shows a positive trend due to promotions to target the sector.
Since 1992, international tariffs have been reduced annually as a consequence of the application of the Price Cap described in RatesPrice Cap. Telecom Argentina also has reduced international long-distance rates in order to compete with the new providers of long-distance calling services.
Although Telecom Argentina still retains an important market share of international long-distance traffic in the Northern Region, over the past several years, there has been a gradual and constant decrease in Telecom Argentinas market share in that region due to strong growth in prepaid cards and the adoption of VoIP technology at competitive rates. However, Telecom Argentina continued to be the market leader for international long-distance in the Northern region in the last year.
Installation Charges. Revenues from installation charges consist primarily of fees levied for installation of new phone lines. Telecom Argentina offers discounts in multiple localities to reduce the rate authorized by the government, with the aim of stimulating demand in those areas. As a result, the penetration of fixed-line telephony has continued to demonstrate a slow growth in Argentina, whereas it is decreasing in various other parts of the world.
Public Telephone Services. As of December 31, 2007, there were 70,550 public lines installed of which 6,799 are in the Southern Region. Local and domestic long-distance traffic saw a systematic reduction as a result of the strong development of the cellular telephone industry in Argentina. As a result, public-telephony local traffic for the year 2007 fell to 556 million minutes compared to 702 million minutes for the year 2006 and 844 million minutes for the year 2005. Domestic long-distance public-telephony traffic over the same period was 243 million minutes, 306 million minutes and 379 million minutes for 2007, 2006 and 2005, respectively. In contrast, international long-distance public-telephony traffic has experienced consistent increases reaching 64.0 million minutes during the year 2007, from 52.4 million minutes in the year 2006 and 44.5 million minutes in the year 2005 due to several promotions, used to generate increased demand.
Other National Telephone Services. Telecom Argentina provides dedicated lines to businesses. Dedicated lines are dedicated point-to-point leased lines. In addition to installation fees, Telecom Argentina receives revenues from dedicated analog urban/interurban lines, which are calculated per number of pulses used, according to the price of urban/interurban calls applicable to calls of that distance.
Additionally, other national telephone services include charges for supplementary services (such as call waiting, call forwarding, conference calls, caller ID, voicemail and itemized billing).
New Voice Products and Services. Throughout 2007, Telecom Argentina introduced new products and services in the market, in response to customer needs and in line with its goal to increase ARPU in its access lines. The new products and services include the new line of Aladino handsets, and the offering of value-added packages for voice. Additionally, Telecom Argentina was the first fixed operator in Argentina to provide customers with SMS from fixed and video-call phones.
Data Transmission Services. The data services business includes nationwide data transmission services, virtual private networks, symmetric Internet access, national and international broadcasting signal transport and videoconferencing services. These services are provided mainly to corporations and governmental agencies. Telecom Argentina also provides certain Value Added Services, including electronic standard documents telecommunication software exchange and fax storage and delivery service. The data services business also includes the lease of networks to other providers, telecommunications consulting services, operation and maintenance of telecommunications systems, supply of telecommunications equipment and provision of related services. Corporate data transmission services are provided mainly through frame relay and ATM networks. However, in the past year, Telecom Argentina has developed an IP Virtual Private Network and has begun the migration of lines connected to
the ATM networks to the IP Virtual Private Network. Telecom Argentina has a non-expiring license to provide the aforementioned services.
Telecom Argentina began to offer integrated solutions to its corporate business clients with the objective of increasing customer loyalty, retention and overall satisfaction.
In response to market needs, Telecom Large Customers was created to serve as the integrated provider of convergence and ICT solutions. The new strategy is supported by the Data Center, a key component in this process, and by the creation of the Delivery Management Data Center and Value Added Services Support center. As a result of these efforts, we provide convergence solutions in which traditional voice and data services are bundled with Internet access, web, multimedia, ICT and Data Center services.
We have developed many successful partnerships with global IT leaders, allowing us to provide high-quality solutions. For example, we act as Positrons exclusive representative in Argentina for the provision of 911 services.
Internet. Telecom Argentina introduced residential Internet service under the brand name Arnet in 1998 and has been providing Internet-related services directly to its customers since November 2001. Telecom Argentina mainly offers this service in the major cities of Argentina. In recent years, Telecom Argentinas Internet service has experienced higher demand and usage in less populated areas of the country. The Internet services include basic Dial-Up service and high-speed ADSL service.
During the past several years, Internet service has experienced a significant technological change as a result of the introduction of ADSL. We have seen a constant decrease in Dial-Up access that has been more than offset by increased ADSL access. This change is illustrated in the following table:
(1) Includes ADSL access in the Northern Region and ADSL clients in the Southern Region
(2) Includes private virtual network services.
The increase in number shown in the table above are the result of Dial-Up customers migrating to ADSL service over the years and the acquisition of new ADSL customers.
The market for broadband has experienced significant growth in the years 2006 and 2007 throughout the country, increasing 68% and 60% respectively to reach approximately 2,504,000 connections at December 31, 2007.
Broadband Internet is delivered through three technologies: cable modem, ADSL and wireless; cable modem and ADSL being the most widely used. In the past year, ADSL connections exceeded the number of cable modem and wireless connections, in the Northern Region as well as in the rest of the country. Telecom Argentina markets its ADSL service through its Arnet brand and in partnership with other ISPs.
Until 2005, Telecom Argentina had sought to differentiate itself in the market by offering service prioritizing continuous increases in the speed of broadband services offered to its customers, offering the highest speeds on the market (for 5 MB download), and diversifying its service and payment plans (flat, time based, or by data volume).
In 2006 Telecom Argentina looked to significantly increase its market presence by adjusting its strategy and providing quality services at competitive speeds and prices nationwide. To this end, in March 2006 Telecom Argentina widely introduced the product Arnet 640 Kb (a 640kb speed ADSL service offered at a flat rate). Following its introduction, Arnet 640 Kb demonstrated strong growth that permitted Telecom Argentina to double its clients in one year, and to increase its market share nationwide, from 28.7 % in December 2006 to 30.7% in December 2007.
Telecom also implemented a new product that enables small to medium-sized companies to increase adoption of broadband, offering Internet access at speeds of up to 20Mb. In June 2007, a new broadband product Arnet Free was introduced, targeted at non-intensive users. With this product launch, Telecom Argentina
became the first Internet provider to introduce a broadband offering with no fixed charge. In September 2007, Telecom Argentina doubled the bandwidth for customers in the Interior, leveling it with the rest of the portfolio nationwide while a new product portfolio, offering integrated access solutions and Value Added Services for the stores, SME and Corporate segments was launched.
Additionally, Internet revenues include Internet access services. Telecom Argentina offers its 0610, 0611 and 0612 ISP services. The 0610 service at rates reflecting up to a 30% discount compared to normal city rates for connections lasting 30 minutes, depending on the time and day of the connection. Traffic generated by these services has been decreasing, falling from 5.9 billion minutes in 2005, to 4.0 billion minutes in 2006 and to 2.3 billion minutes in 2007 with similar effects on net sales. After the implementation of an agreement reached with the Argentine Government, Telecom Argentina offers Internet dial-up access to locations in its region through more than 98% of the installed lines.
Interconnection Revenues. Telecom Argentina collects fees from other operators related to interconnection services which primarily include local access, termination, and long-distance transport of calls, rent of circuits and commission on calling party pays fees. These fees are payable by mobile operators as well as fixed line operators. The increased revenues from the mobile operators reflect the dynamic growth of the cellular market.
International Long-Distance Service. Telecom Argentina holds a non-expiring license to provide international telecommunications services in Argentina, including voice and data services and international point-to-point leased circuits.
Revenues from wholesale international long-distance service reflect payments under bilateral agreements between Telecom Argentina (or our predecessor subsidiaries) and foreign telecommunications carriers, covering virtually all international long-distance calls into or out of Argentina using our network. Revenues from international long-distance service therefore consist mainly of:
· amounts earned from foreign telecommunications carriers for connection to the Argentine telephone network;
· international point-to-point leased circuits; and
· international data services.
Operating revenues from international long-distance service depend on the volume of traffic, the rates charged to local customers and the rates charged by each party under agreements between the Argentine provider and foreign telecommunications carriers. Settlements among carriers are usually made on a net basis. Incoming traffic with carriers measured in minutes accounted for 605 million in year 2007, 578 million in year 2006 and 517 million in year 2005.
Telecom Argentina is connected to international telecommunications networks mainly through the following submarine Fiber Optic cables: Unisur (Argentina Brazil Uruguay), Americas 1 and Americas 2, Columbus 2 and 3 (Europe), Atlantis 2 (Brazil Europe), Sea-Me-We (Europe Asia), Latin American Nautilus (LAN), a company of the Telecom Italia Group, and other minor cables.
In order to meet the growth in our ADSL customer base, Telecom Argentina has acquired several Indefeasable Rights of Use (IRUs) on LANs submarine cable, which connects Argentina with the U.S. (Miami) in a submarine fiber optic ring. These rights, which last for 15 years, allow the interconnection of the IP backbone of Telecom Argentina with IP Transit providers in the U.S.
Though our wholly-owned subsidiary in the United States, Telecom Argentina USA Inc., a corporation organized under the laws of the State of Delaware, we were granted an FCC 214 license by the Federal Communications Commission, or the FCC, for the provision of international long-distance telecommunications services in the United States. Telecom Argentina USA routes the majority of its traffic through its own switching capabilities and its business, at the moment, is mainly focused on wholesale long-distance international traffic
although it has begun to explore the retail market through prepaid cards and A.N.I. recognition (technology similar to caller ID that allows customer identification of a particular prepaid card).
Throughout 2007, commercial and interconnection relationships were established with 22 new operators in the United States, Western and Eastern Europe and Asia, enabling us to compensate for natural operator turnover.
Pursuant to the original terms of the Transfer Agreement, Telecom Argentina was permitted to adjust the rates it charged for domestic telephone calls in accordance with the monthly variation of the Argentine consumer price index, or, in certain circumstances, a weighted average of the Argentine Consumer Price Index and the devaluation of the Argentine currency against the dollar. The Convertibility Law, which took effect on April 1, 1991, however, prevented the operation of this indexing mechanism; as a general matter, the Convertibility Law prohibits peso-based price adjustment mechanisms.
On November 28, 1991, Telecom Argentina and Telefónica signed an agreement, known as the November Agreement, with the Argentine Government providing for rates to be dollar-based and, at the election of each of Telecom Argentina and Telefónica, adjusted semi-annually according to the U.S. consumer price index, or the US CPI. The November Agreement was ratified by Decree No. 2585/91 and became effective on December 18, 1991. On February 28, 1992, the Argentine Government and Telecom Argentina entered into a supplemental agreement, known as the February Agreement, which was ratified by Decree No. 506/92 (the November Agreement, as supplemented by the February Agreement, is referred to as the Rate Agreement).
Public Emergency Law. As a consequence of the severe and ongoing deterioration of the economic situation of Argentina, effective January 6, 2002, the Argentine Government introduced measures that have had and may continue to have a significant impact on the operations of Telecom Argentina, particularly on rates. On January 6, 2002, the Argentine Government enacted the Public Emergency Law and applicable regulations including Decree No. 293/02, putting an end to ten years of dollar-peso parity under the Convertibility Law. The Public Emergency Law also:
· converted to and fixed as pesos (at a rate of P$1.00=US$1.00) all tariffs for measured service, public telephone service, long-distance, some supplementary services and monthly basic and installation charges;
· eliminated contract clauses providing for adjustments to the value of payments with reference to the United States dollar or other foreign currencies as well as any indexation clauses (based on price indexes of other countries) or similar mechanism; and
· established that certain contracts signed between the Argentine Government and privatized companies (such as Telecom Argentina) will be renegotiated, including tariffs that Telecom Argentina may charge in the future.
Rate Rebalancing. At the time of ENTels privatization, the need for a future amendment of rates to rebalance the pricing of domestic and international charges was foreseen. Subsequent agreements established the right of licensees to a Rate Rebalancing and set forth some mechanisms to implement a new tariff structure.
Decree No. 92/97 provided for a significant reduction in domestic and international long-distance rates, an increase in basic telephony charges, the elimination of Free Pulses and an increase in urban rates. The Rate Rebalancing was undertaken as part of the Argentine Governments plan to create a competitive environment in the Argentine telecommunications industry.
The new rate schedule was intended to reduce cross-subsidies (particularly those existing between urban and long-distance services) to create a competitive environment beginning in the year 2000. The preservation of the licensees financial position was one of the main principles of the Rate Rebalancing. Decree No. 2,585/91 established that the Rate Rebalancing should have a neutral effect on the licensees revenues. In developing the tariff structure implemented by Decree No. 92/97, the Argentine Government relied on studies which demonstrated that because of the elasticity of demand for telephone service, an increase in demand for lower-priced services would compensate for the rate reductions. Decree No. 92/97 established corrective mechanisms to facilitate neutral results
on revenues. The Banco Interamericano de Reconstrucción y Fomento, or InterAmerican Bank for Reconstruction and Development, was responsible for making measurements on a semi-annual basis, over a two-year period, to determine the effects of the Rate Rebalancing.
Decree No. 92/97 provides for a mechanism to offset changes in revenue resulting from the Rate Rebalancing at the time of applying the Price Caps.
The variation in revenues resulting from the Rate Rebalancing for the two-year period beginning February 1997 was determined to amount to an increase of P$9.5 million in accordance with SC Resolution No. 4,269/99. In December 2007, the regulatory authority notified the Company of its intention to offset this amount with the Resolution No. 41/07 receivables. As a result, as of December 31, 2007, the Company recorded a reserve on the CNC final results, which was shown as a deduction from the Resolution No. 41/07 receivables.
Historical Rates. The rates charged by Telecom Argentina are subject to the regulations described under Regulatory Framework. The following table sets forth certain of our maximum month-end rates for various components of local service and domestic long-distance service in U.S. dollars(1):
(1) Figures shown do not include value added tax charged to customers. In accordance with the Public Emergency Law these rates were pesified at the exchange rate of US$1.00 = P$1.00.
Many of Telecom Argentinas charges, such as the monthly basic charge and measured service charges, are calculated using pulses, a basic service unit. Effective November 1, 1999, the maximum rate per pulse (which was denominated in dollars until December 31, 2001) was US$0.0469 (an increase of approximately 1.5% from the rate in effect from April 1999 through October 1999). As of the date of this Annual Report, this was the last time the maximum rate per pulse was changed. However, changes corresponding to years 2000 and 2001, although not directly applied on the price per pulse, were included in the 2000 and 2001 price cap negotiation. In March 2006, Telecom Argentina signed the Letter of Understanding 2006 with the Argentine Government that is intended to serve as a foundation for a forthcoming negotiation agreement and contemplates the increase in rates for incoming international calls and the extension of peak-rate calling periods. The new rate agreement contemplated by the Letter of Understanding 2006 has not yet been completed.
Price Cap. The List of Conditions required that rates be reduced annually until the Regulatory Bodies determine that there is effective competition in the markets we serve. A 2% (measured in real dollar terms) reduction in the prior years rates was required for each of the third through the seventh year following the Transfer Date (through November 7, 1997). In addition, following the extension of the exclusivity period, rates were required to be 4% lower (measured in real dollar terms) than the prior years rates. This requirement is maintained pursuant to the Rate Agreement, whereby Telecom Argentina is permitted to effect aggregate rate reductions by lowering rates for some or all categories of service, provided that net reductions meet the applicable targets. The application of annual reductions to the general level of rates established in the List of Conditions (price cap) has been implemented mainly by reducing the long-distance rates and (in Price Cap 1998) discounts to certain public entities, including the fire departments and public libraries. The Regulatory Bodies notified Telecom Argentina of the completion of the Price Cap 1998 audit which did not show a balance to be applied. In September 2007, the Regulatory Bodies finalized the 1999 Price Cap audit resulting in an amount payable by Telecom Argentina of P$10.2 million, the calculation of which is currently being reviewed by the management of Telecom Argentina. Telecom Argentina intends to offset this balance with the credit resulting from SC Resolution No. 41/07. See Regulatory FrameworkTax Stability: Social Security Contribution Variations.
Agreement with Argentine Government to Reduce Rates. On December 15, 1999, the Argentine Government, Telecom Argentina and Telefónica agreed to implement certain modifications to the tariff structure in order to facilitate Argentine Government actions to improve the level of competitiveness of the Argentine economy.
Among other issues, the agreement contemplated:
· a 19.5% reduction in the monthly basic charges for commercial and governmental customers;
· a 5.5% reduction in revenues from residential customers from local Basic telephone service (these reductions were made available to customers that requested the rate reduction); and
· the continuance of the 0610 Internet access dial-up charge to residential customers.
These tariff modifications were taken into account in the rate reductions when the price cap reduction of November 2000 was applied (Price Cap 2000). The rate modifications came into effect as of March 1, 2000. The reductions to residential customers were applied by means of different pricing plans.
The impact of the adjustments to these items through November 2000 was to be applied on a pro rata basis to the price cap reductions for the years 2000, 2001 and 2002, carried forward at an interest rate of 12%. Additionally, the impact of the adjustments described above for the period November 2000 to October 2001 was to be applied to the price cap reduction of November 2000.
On April 6, 2000, the Argentine Government, Telefónica and Telecom Argentina signed an agreement that set the price cap efficiency factor at 6.75% for the period of November 2000 to November 2001. The price cap reductions contemplated that 6% of this reduction would be implemented through:
· the continuation of the reduction in basic monthly charges for commercial and governmental customers and pricing plans for residential customers that came into effect as of March 1, 2000;
· provision by Telecom Argentina of 110 (information) services free of charge from January 2000 until November 2001; and
· no adjustment of the price per pulse in accordance with the Consumer Price Index in the United States in April 2000 and in October 2000.
The licensees were permitted to decide how to apply the remaining reduction. In the event that by November 2001 the reduction in these items had not achieved the efficiency factor of 6.75%, the Argentine Government was to determine which items shall be subject to additional reductions in order to achieve that goal. The 2000 Price Cap audit results are still pending. Should the determination result in an amount payable by Telecom Argentina, it will be offset with the Resolution No. 41/07 receivables.
In April 2001, the Argentina Government, Telefónica and Telecom Argentina signed an agreement that set the reduction of tariff or efficiency factor at 5.6% for the period from November 2001 to October 2002. However, in October 2001, a preliminary injunction against us carrying out any tariff adjustments by reference to the Consumer Price Index in the United States was issued. Telecom Argentina appealed this injunction arguing that if one part of the formula cannot be applied, the Price Cap system should be nullified. This appeal is currently still pending.
The Public Emergency Law explicitly prohibited tariff adjustments. See Item 8Financial InformationLegal ProceedingsConsumer Trade Union Proceeding. As of the date of this Annual Report, the price cap regime is suspended and it is unknown if and when it will come back into effect or be replaced by other tariff regulation procedures.
Installation Charges. Under the Rate Agreement, Telecom Argentina was required to gradually reduce installation charges so as to achieve pricing levels equal to those for internationally mature networks (estimated in the Rate Agreement to be US$250) and to eliminate distinctions between residential and commercial users. Decree No. 92/97 established that beginning in November 1997 installation charges may not exceed the amount charged in mature international markets. In accordance with this decree, the current maximum permitted charge is US$150 (pursuant to the Public Emergency Law, this charge was pesified at the exchange rate of US$1.00=P$1.00).
Telecom Argentina has been applying several promotions to installation charges. Average levels of promotional installation charges in 2007 were P$69.
Monthly Basic Charges. Until the effective date of Decree No. 92/97, customers were entitled to a certain number of Free Pulses per line depending on the category of each customer and the number of lines in the area. As a consequence of the application of Decree No. 92/97 and in order to offset tariff reductions in domestic and international long-distance services, Free Pulses were eliminated for all categories of customers, and monthly basic charges were equalized throughout the country. Decree No. 92/97, however, provided for a special reduced tariff that is available to certain low consumption residential and retired customers.
Long-Distance Tariffs. The application of annual reductions to the general level of rates established in the List of Conditions (price cap) has been implemented mainly by reducing the long-distance rates but especially in local service and discounts to certain public entities, including fire departments and public libraries.
Decree No. 92/97 reduced the average weighted domestic long-distance tariff by approximately 33%. Under this revised tariff schedule, interurban tariffs were significantly reduced, with maximum long-distance tariffs reduced by 56%. Calls within Provincial Code 1 (up to 30 Km) made within provincial cities are now billed at an urban tariff.
Letter of Understanding Relating to Basic Services. As part of our negotiations under Decree No. 293/02 on the tariff structure, on March 6, 2006, Telecom Argentina signed the Letter of Understanding 2006 with the Argentine Government whereby we agreed to increase certain tariffs and incorporate certain modifications to the current regulatory framework. In particular, the Government has agreed that Telecom Argentina can increase the termination charges applied to incoming international calls and reduce the time bands for off-peak local tariffs. As of the date of this Annual Report, Telecom Argentina is expecting the completion of certain administrative steps required for the National Executive to submit to the National Congress a proposed Memorandum of Agreement for Renegotiation. See Regulatory FrameworkLetter of Understanding 2006.
Tax on deposits to and withdrawals from bank accounts (IDC). On February 6, 2003, the Ministry of Economy, through Resolution No. 72/03, defined the mechanism to allow, going forward, tariff increases on Basic telephone services reflecting the impact of the IDC. The amount of tax charged must be shown separately in customers bills. Telecom Argentina has determined a remaining unrecovered amount of approximately P$23 million that arose before the issuance of Resolution No. 72/03. Prior to the issuance of Resolution No. 41/07, Telecom Argentina planned to claim such amount within the tariff renegotiation process. See Regulatory FrameworkLetter of Understanding 2006. In April 2007, Telecom Argentina provided the CNC with supporting documentation on this amount for its audit. Telecom Argentina had access to documentation of the Regulatory Bodys audits that corroborates the amounts claimed by Telecom Argentina and the application of a similar offsetting mechanism pursuant to Resolution N° 41/07. Therefore, Telecom Argentina recorded as Other receivables a total of P$23 million.
Network and Equipment
Telecom has continually prioritized network development, focusing on four fundamental pillars: range, capacity, quality and availability. Based on those premises, it has deployed more than 12,000 km of Fiber Optics, trying to reach the largest number of locations and customers, and has made progress in ensuring service availability, even in the most remote areas of the territory in which we operate.
Our unique Fiber Optic backbone is used by the Groups fixed, mobile and broadband services, and by third parties that lease our Internet access and transport capacity, including in many locations where no other company can provide such facilities.
Over the last two years, the introduction of DWDM (Dense Wavelength Division Multiplexing) has accelerated, leading to an increase in Fiber Optic transmission capacity. Additionally, in cases where we believe that future demand will be high, we have deployed SDH (Synchronous Digital Hierarchy) network rather than low-capacity PDH (Plesiochronous Digital Hierarchy) in order to increase future accessibility to broadband services.
Telecom is committed to maintaining and increasing the value of its network. To that end, it has conducted selective upgrades of the platforms that it believes will continue supporting both current and future services. It has accelerated the introduction of NGN-type customer lines, both replacing old generation equipment and meeting customer needs with new offerings. Additionally, it has increased broadband service capacity and coverage to address competitive offerings from other operators. It has also continued to develop its IP network and its interconnection with the main backbones of the U.S.
During 2007, there was significant new service activity, in terms of the variety and complexity of newly introduced services in the fixed telephony area. As regards future services, the Company is in an experimental phase with next-generation services platforms, that will enable, in the short term, the offering of advanced services to its business customers, as well as the deployment of IPTV services when and as permitted by the regulatory authority. We have also commenced a planning process for introducing new technologies to facilitate the deployment of new advanced services.
Milestones for 2007 include:
New Generation Switching (NGN or Next Generation Networks): The Company continued the deployment of NGN customer lines based on IP technology (Class 5) at an accelerated pace, both as a replacement for existing TDM technology and for the development of new areas (such as gated neighborhoods and country clubs). During the year, more than 350,000 new lines based on IP technology were installed.
Transmission: Broadband services have been disruptive in transmission networks designed for telephony. The availability of Fiber Optics, combined with the early introduction of DWDM, have enabled us to address the challenge of meeting annual growth rates in excess of 50% with transmission requirements that are seven times higher than those of telephone customers. During the year, new DWDM tracks were installed and the new SDH ring speed was increased to STM64.
Metroethernet: Having exceeded a 90% coverage of technical buildings in Buenos Aires, Rosario and Córdoba, the project has been broadened, taking metro switch deployments to more than 18 cities, where the combination of NGN, mobile and broadband services so require it. This deployment, together with the capacity to transmit Ethernet traffic in the long-distance network, is critical for future network development.
Backbone IP: The upgrade of the main nodes in the network was completed. Additionally, a large-scale IP access node deployment plan was started to facilitate the connection of business customers and the IP migration of voice services. This, coupled with a four-fold increase of the inter-urban transmission capacity, made it possible to serve the broadband needs of our customers, and prepared us for future deployment of new IP services. Additionally, in coordination with other national operators, we created a backup of procedures and links that aims to provide partial disaster recovery of Internet traffic.
ADSL: The deployment of ADSL services pursued two main objectives: a) to ensure the availability of the number of ports needed to meet growing connection demand, and b) to ensure quality in our ADSL services. To that end, we continued with the deployment of DSLAM (Digital Subscriber Line Access Multiplexor) 100% IP, and a constant adjustment of the transmission capacity of existing and new equipment was undertaken, monitoring the increase in service speed and the launch of 20 Mbit service. All the ADSL ports on the switching site were ADSL2+. To meet current traffic demands, 12 new BRAS (ADSL session aggregators) were installed, representing more than double the stock installed in late 2006.
Access network: During the year, progress was made with respect to our objective to ensure that all operations executed on external plant use the shortest loop possible from the switch to the subscriber. This requires taking active elements outside the switch, and prepare the network for high speed and bandwidth-demanding services like IPTV.
Atmosphere/RDS: On the ATM (Asynchronous Transfer Mode) network, which mainly supports corporate services, the new software was rolled out on 40 CPE (Customer Personal Equipment) nodes of NewBridge technology. Additionally, as part of the network maintenance plan, 46 new nodes of this technology were installed.
New Services: Several new services became technically available during the year, and changes were introduced to existing services, including, among others, video-calls, SMS on the fixed network, ADSL Access Evolution (20Mb) and Fixed GSM (provision of fixed telephony services through mobile telephony infrastructure).
At the National Supervision Center, Telecom Argentina conducts its control on networks and services. In 2007, the physical integration of supervisory positions for all networks in a single integrated department was completed. The Centers infrastructure was modernized, with an overhaul of its facilities and IT equipment.
We provide wireless services via cellular and PCS networks through our subsidiaries in Argentina and Paraguay.
Wireless Telecommunication Services in ArgentinaTelecom Personal
The market for wireless telephone services in Argentina is characterized by rapid growth and intense competition. Operators are generally free from regulation to determine the pricing of services, with the limited exception of calling party pays, or CPP, charges for termination of calls originating on a fixed line network. See Item 4Information on the CompanyRegulatory FrameworkCalling Party PaysCPP. The CPP model, implemented in Argentina in 1997, resulted in increased demand for wireless services in Argentina, while the openness of the market to new entrants and freedom from price regulation has resulted in a dynamic market for the supply of wireless services. Following consolidation in the industry in 2005, there are currently three wireless operators offering nationwide service. According to the CNC, penetration of cellular service in Argentina has increased from approximately 55% of the population as of December 31, 2005 to approximately 76% and 96% as of December 31, 2006, and 2007, respectively.
Beginning in the second half of 2003, service providers in Argentina commenced the transition to GSM technology. The introduction of GSM technology requires significant capital expenditure, as the technology requires the rollout of new network infrastructure. However, GSM technology is expected to fuel demand for cellular services because it supports a wide variety of enhanced services such as short message systems and data transmission.
Our wireless telephony services in Argentina are provided through our wholly-owned subsidiary, Telecom Personal. We provide wireless services throughout Argentina via STM, SRMC and PCS networks. Telecom Personal utilizes digital TDMA technology, GSM technology and 3G technology in its networks and primarily offers its services of STM and SRMC services on the 850 MHZ frequency band, and PCS service on the 1900 MHZ frequency band.
Prior to 1999, Telecom Argentina and Telefónica jointly operated Miniphone SA, a SRMC provider. Article 20 of Decree 264/98 required the division of this business venture to guarantee effective competition. Resolution SC No. 18,952/99 authorized the division of Miniphone and granted Telecom Personal and Telefónica Comunicaciones Personales S.A. the corresponding licenses for the SRMC as of October 1, 1999. Due to the technical impossibility of dividing the 850 MHZ network into two independent units, its property continues to be held by both companies in equal parts and is technically operated by an Enterprise Collaboration Association under the name Red Miniphone ACE.
Although Telecom Personal provides nationwide service in Argentina, its operations were initially concentrated in the AMBA and in the Northern Region of Argentina. The Northern Region includes the cities of Córdoba and Rosario, the largest cities in Argentina after Buenos Aires. Telecom Personal now provides nationwide service in the Southern Region of Argentina as well.
Telecom Personals business is growing rapidly. From December 31, 2006 to December 31, 2007, its subscriber base in Argentina grew approximately 27%. As of December 31, 2007, Telecom Personal had approximately 10.67 million subscribers. At December 31, 2006, Telecom Personal had approximately 8.43 million subscribers and at December 31, 2005, Telecom Personal had approximately 6.15 million subscribers. Growth in Personals cellular subscriber base results in growth in net sales in the wireless segment. Net sales of Personal for the year 2007, 2006 and 2005 were P$5,339 million, P$3,964 million and P$2,576 million, respectively.
Telecom Personal offers advanced supplementary wireless services, known as Value Added Services. Among the Value Added Services Personal offers, the following are notable: voice mail, message signaling, caller-ID, call transferring, call waiting, call conferencing, IVR (Interactive Voice Response) dialing, national and international roaming and automatic call routing, Personal Backtones (the first ringtone service in Argentina that allowed customers to select their own ringtones), Fotocomic (the first cartoon for cellular phones in the country), Personal E-Cards (the first electronic animated greeting cards for cellular telephones), Personal Messaging on-line (the first SMS service to be established between the companys website and its clients). The offering of these Value Added Services is expected to increase profitability by increasing ARPU and facilitating growth in MMS Mobile Message Service/ Data services thereby differentiating our service offerings from SMS. Telecom Personal has also introduced wireless Internet access. Telecom Personals ARPU in Argentina was approximately P$39 per month for years 2007 and 2006.
Telecom Personal wireless customers are offered a variety of flexible pricing options for wireless services. These options include prepaid, post-paid and cuentas claras plans. As of December 31, 2007, Telecom Personal had approximately 10.67 million subscribers. Of these, approximately 7.06 million were prepaid subscribers, representing 66.2% of Telecom Personals total customer base, approximately 1.13 million were post-paid subscribers, representing 10.6% of Telecom Personals total customer base and approximately 2.47 million were cuentas claras plan subscribers, representing 23.2% of Telecom Personals total customer base.
Prepaid Plans. Under prepaid plans, the customer pays in advance for telephone calls and Value Added Services through a prepaid card. When the card runs out of minutes, the customer can recharge the prepaid card through the prepaid system or can purchase virtual prepaid phone cards on Telecom Personal website, at ATMs, at kiosks and drugstores or through authorized agents. Since there are no monthly bills, prepaid plans such as the Personal Light Plan and the Ultra Light Plan allow subscribers to communicate with maximum flexibility while maintaining control over their consumption. Both plans come with caller ID and voicemail services. A subscriber can add credit to the card and make and receive local, national and international calls. With the Ultra Light Plan, the more credit a subscriber puts on the card, the lower the rates are per minute.
Post-paid Plans. Telecom Personal offers a National Flat Rate post-paid plan and a Local Flat Rate post-paid plan. Under both plans, a subscriber pays a monthly bill consisting of a monthly user fee plus Value Added Services and a charge for minutes used in excess of the amount included in the plan. These plans generally offer 100 to 400 free minutes per month. Once the free minutes have been used, the subscriber can continue using the wireless phone at a set price per minute. The charges for additional minutes will be added to the next months bill. Under the National Flat Rate Plan, a subscriber can make calls to and from any location within Argentina at a constant rate because the per minute rate includes the local public network, national long-distance and national roaming. Under the Local Flat Rate Plan, where the per minute rate includes the Local Public Network and Roaming, a subscriber can make local calls within any locality in the country but calls from one locality to another are charged at an extra rate.
Both post-paid plans include caller ID, voicemail and a personalized greeting. In cases where the plans use GSM technology, a subscriber will also receive call forwarding, GPRS, a multimedia personalized greeting, telephone technical support and call waiting.
Cuentas Claras Plans. Under the cuentas claras plans, a subscriber pays a set monthly bill and, once the contract minutes per month have been used, the subscriber can obtain additional minutes by recharging the phone card through the prepaid system.
As of December 31, 2007, Telecom Personals prepaid subscribers accounted for 66.2% of its total customer base, post-paid subscribers represented 10.6% of Telecom Personals total customer base and cuentas claras plan subscribers represented the remaining 23.2% of Telecom Personals total customer base. From December 31, 2006 to December 31, 2007, the percentage of prepaid and post-paid subscribers out of Telecom Personals total customer base increased while the percentage of cuentas claras plan subscribers decreased. As of December 31, 2006, Telecom Personals prepaid subscribers accounted for 65.7% of its total customer base, post-paid subscribers represented 9.0% of Telecom Personals total customer base and cuentas claras plan subscribers represented the
remaining 25.3% of Telecom Personals total customer base. As of December 31, 2005, Telecom Personals prepaid subscribers accounted for 65.6% of its then total customer base, post-paid subscribers represented 8.9% and cuentas claras plan subscribers represented the remaining 25.5%.
The following table presents selected information regarding Telecom Personals post-paid, prepaid, cuentas claras and total cellular subscriber bases for the periods indicated:
(1) Cellular subscribers means total registered and active cellular subscribers at the end of the relevant period. An active cellular subscriber is a cellular subscriber who makes or receives 3 phone calls within the last 90 days of such relevant period.
Network and Equipment
Personal currently provides digital mobile telephony services throughout the country, with service quality indicators comparable to those of world-class operators. Personals network structure consists of a wireless access segment, a call switching and routing core, and several Value Added Services platforms.
In recent years, Value Added Services such as text messaging, multimedia messaging and improvements in data connectivity, have become increasingly relevant. New services are being developed and implemented every year: Blackberry (mobile e-mail), Ring Back Tones, mobile intranet (wireless access to the corporate network), and services provided by the 3G network, such as wireless broadband data connectivity, video calls, and the possibility of downloading and playing music and video clips.
Currently, such services are provided throughout Argentina, through a network of more than 2,200 points of coverage. Access technologies now supported range from the analog to the digital standard with the highest worldwide penetration: GSM.
The new GSM network infrastructure, known as 3G, provides a substantial increase in voice and data traffic capacity, higher speed and flexibility for introducing new services.
The switching and routing core consists of national and international interconnected switches. These switches are being gradually migrated from the existing monolithic architecture to a more advanced, distributed architecture. The new architecture concentrates switching intelligence on a few central nodes and distributes the physical switching of calls geographically into less complex nodes. Additionally, it enables interconnecting nodes through a data network (VoIP), instead of through the classical circuit switching scheme. As a result, we expect to optimize investments and decrease transmission costs.
Migration towards a distributed switching scheme provides Telecom Personal the opportunity share with Telecom Argentina a single trunk network for data transmission. This approach to reuse of fixed and mobile services equipment is part of the Fixed-Mobile Convergence initiative undertaken by the Telecom Group.
The Value Added Services network is made up of a set of specialized servers and nodes, interconnected by a data network that is in constant development to enable the implementation of new services.
A major challenge during 2007 was the extension of the GSM network and its continued evolution to 3G, which will continue to consolidate in the next fiscal year.
Year-to-year growth in terms of GSM customer base and traffic was possible through the migration to distributed architecture, with no need for an increase in switches. In 2007, implementation of distributed
architecture continued, reaching fourteen switching points. Additionally, the total number of radio transmitters in service on the GSM network increased from 15,800 to approximately 21,500. Finally, three new nodes were installed to manage the GSM customer database, totaling eight nodes.
The circuit switching, signaling and package network was upgraded both in terms of hardware and software. In 2007, we migrated to the version currently used by the worlds leading operators, achieving performance improvements and enabling the implementation of advanced Value Added Services.
With respect to coverage, the area with service availability in the Southern Region was extended through an approximate 70% increase in the number of base stations. Coverage in the Northern region was reinforced through the addition of 140 new transmission points.
In Buenos Aires city and Greater Buenos Aires, we improved service quality for residential customers through the deployment of GSM in a new, broader range frequency band (850 MHz).
With respect to Value Added Services, the Intelligent Network (Red Inteligente) migration was completed. Previously operated by a supplier, it has now been implemented internally with next generation equipment, enabling the provision of innovative services for the business and corporate segments, and effectively controlling node operation.
Interoperability with the rest of Argentine mobile carriers has enhanced the functions of the multimedia messaging service and has triggered the launch of offerings that use this functionality, such as photo albums and the transmission of news content. The introduction of the latest generation platform has enabled us to provide such enhanced services.
Finally, the launch of GPS or location-based services, allows customers to access general information on their location.
Wireless Telecommunications Services in ParaguayNúcleo
We provide nationwide cellular services in Paraguay through our subsidiary Núcleo under the commercial name of Personal. Núcleo is 67.5% owned by Telecom Personal and 32.5% owned by ABC Telecomunicaciones S.A., a Paraguayan corporation. In 1997, Núcleo was granted a license to provide nationwide cellular service in Paraguay on the 850 MHz band. In 1998, Núcleo acquired the PCS license from Cable Insignia S.A., an entity owned 75% by Telecom Personal that was liquidated in October 2006. Núcleo began providing commercial cellular services in June 1998. Núcleo has also been granted licenses to provide internet access and videoconference and data transmission services in Paraguay.
As of December 31, 2007, Núcleo had an approximate 38% share of the cellular services market in Paraguay, with approximately 1,626,000 customers, an increase of approximately 462,000 customers, or approximately 39.7%, from December 31, 2006. As of December 31, 2006, Núcleo had an approximate 39% share of the cellular services market in Paraguay. As of December 31, 2006, Núcleo had approximately 1,164,000 customers, an increase of approximately 513,000 customers, or approximately 78.8%, from December 31, 2005. Núcleo had 651,000 customers as of December 31, 2005. For the year ended December 31, 2007, Núcleo had net sales of P$433 million. For the year ended December 31, 2006, Núcleo had net sales of P$355 million. For the year ended December 31, 2005, Núcleo had net sales of P$221 million.
The wireless service market in Paraguay continued experiencing a significant level of competition in 2007, one marked by price reductions, marketing promotions and launches of new products and services. In February 2007, Núcleo introduced per second billing in its calls. Currently, all mobile operators have implemented this tariff system.
With respect to commercial strategy, Núcleo increased efforts in the segmentation of plan and service offerings, and in the diversification of Value Added Services and products, initiatives supported by major promotion and advertising campaigns to consolidate the brand and strengthen its name recognition and market share.
During 2007, Núcleo completed the major commercial restructuring initiated in 2006 in its corporate segment, in which customers demand high-technology services, personalized care and customized solutions. The restructuring