Company Quick10K Filing
Telecom Argentina
20-F 2019-12-31 Filed 2020-03-18
20-F 2018-12-31 Filed 2019-03-27
20-F 2017-12-31 Filed 2018-04-20
20-F 2016-12-31 Filed 2017-04-26
20-F 2015-12-31 Filed 2016-04-29
20-F 2014-12-31 Filed 2015-04-24
20-F 2013-12-31 Filed 2014-04-14
20-F 2012-12-31 Filed 2013-04-15
20-F 2011-12-31 Filed 2012-04-30
20-F 2010-12-31 Filed 2011-06-29
20-F 2009-12-31 Filed 2010-06-29

TEO 20F Annual Report

Part I
Item 1.Identity of Directors, Senior Management and Advisers
Item 2.Offer Statistics and Expected Timetable
Item 3.Key Information
Part I - Item 3 Key Information &Mdash; Selected Financial Data Telecom Argentina S.A.
Item 4.Information on The Company
Part I - Item 4 Information on The Company Telecom Argentina S.A.
Item 4A.Unresolved Staff Comments
Item 5.Operating and Financial Review and Prospects
Part I - Item 5 Operating and Financial Review and Prospects Telecom Argentina S.A.
Part I - Item 5 Operating and Financial Review and Prospects Telecom Argentina S.A
Item 6.Directors, Senior Management and Employees
Part I - Item 6 Directors, Senior Management and Employees Telecom Argentina S.A.
Part I - Item 6 Directors, Senior Management and Employees Telecom Argentina S.A
Item 7.Major Shareholders and Related Party Transactions
Part I - Item 7 Major Shareholders and Related Party Transactions Telecom Argentina S.A.
Part I - Item 7 Major Shareholders and Related Party Transactions Telecom Argentina S.A
Item 8.Financial Information
Part I - Item 8 Financial Information Telecom Argentina S.A.
Item 9.The Offer and Listing
Part I - Item 9 The Offer and Listing Telecom Argentina S.A.
Item 10.Additional Information
Part I - Item 10 Additional Information Telecom Argentina S.A.
Item 11.Quantitative and Qualitative Disclosures About Market Risk
Part I - Item 11 Quantitative and Qualitative Disclosures About Market Risk Telecom Argentina S.A.
Item 12.Description of Securities Other Than Equity Securities
Part I - Item 12 - Description of Securities Other Than Equity Securities Telecom Argentina S.A.
Part II
Item 13.Defaults, Dividend Arrearages and Delinquencies
Item 14.Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15.Controls and Procedures
Part II Telecom Argentina S.A.
Item 16A.Audit Committee Financial Expert
Item 16B.Code of Ethics
Item 16C.Principal Accountant Fees and Services
Part II Telecom Argentina S.A.
Item 16D.Exemptions From The Listing Standards for Audit Committees
Item 16E.Purchases of Equity Securities By The Company and Affiliated Purchasers
Item 16F.Change in Registrant's Certifying Accountant
Item 16G.Corporate Governance
Part II Telecom Argentina S.A.
Item 16H.Mine Safety Disclosure
Part III
Item 17.Financial Statements
Item 18.Financial Statements
Item 19.Exhibits
Part III Telecom Argentina S.A.
Note 1 - Description of Business and Basis of Preparation of The Consolidated Financial Statements
Note 2 - Regulatory Framework
Note 3 - Significant Accounting Policies
Note 4 - Merger Between Telecom Argentina and Cablevision
Note 5 - Cash and Cash Equivalents and Investments. Additional Information on The Consolidated Statements of Cash Flows
Note 6 - Trade Receivables
Note 7 - Other Receivables
Note 8 - Inventories
Note 9 - Goodwill
Note 10 - Property, Plant and Equipment
Note 11 - Intangible Assets
Note 12 - Right of Use Assets
Note 13 - Trade Payables
Note 14 - Financial Debt
Note 15 - Salaries and Social Security Payables
Note 16 - Deferred Income Tax Assets/Liabilities
Note 17 -Taxes Payables
Note 18 - Leases Liabilities
Note 19 - Other Liabilities
Note 20 - Provisions
Note 21 - Commitments
Note 22 - Equity
Note 23 - Financial Instruments
Note 24 - Revenues
Note 25 - Operating Expenses
Note 26 - Financial Results, Net
Note 27 - Earnings per Share
Note 28 - Financial Risk Management
Note 29 - Balances and Transactions with Companies Under Section 33 - Law No. 19,550 and Related Parties
Note 30 - Restrictions on Distribution of Profits
Note 31 - Subsequent Events To December 31, 2019
EX-2.5 tm2010840d1_ex2-5.htm
EX-2.6 tm2010840d1_ex2-6.htm
EX-4.9 tm2010840d1_ex4-9.htm
EX-4.10 tm2010840d1_ex4-10.htm
EX-8.1 tm2010840d1_ex8-1.htm
EX-12.1 tm2010840d1_ex12-1.htm
EX-12.2 tm2010840d1_ex12-2.htm
EX-13.1 tm2010840d1_ex13-1.htm

Telecom Argentina Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 tm2010840d1_20f.htm FORM 20-F

 

As filed with the Securities and Exchange Commission on March 18, 2020

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 20-F

 

(Mark One)

 

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
   
OR
   
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
   
OR
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                       to                        
   
OR
   
o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

For the transition period from                       to

 

Commission file number: 1-13464

 

TELECOM ARGENTINA S.A.
(Exact name of Registrant as Specified in its charter)
 
Republic of Argentina
(Jurisdiction of incorporation or organization)
 

Alicia Moreau de Justo 50

(C1107AAB) - Buenos Aires

Argentina

(Address of Principal Executive Offices)
 

Gabriel Blasi

(Tel: 54-11- 4968-4019, E-mail: GBlasi@teco.com.ar,

Alicia Moreau de Justo 50, 10th Floor, (C1107AAB), Buenos Aires, Argentina)

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class Trading Symbol   Name of Each Exchange On Which Registered
American Depositary Shares,
representing Class B Ordinary Shares
TEO   New York Stock Exchange
Class B Ordinary Shares,
nominal value P$1.00 per share
TECO2   New York Stock Exchange*

 

 

 

*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

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Class A Ordinary Shares, nominal value P$1.00 each 683,856,600
Class B Ordinary Shares, nominal value P$1.00 each 628,051,575
Class C Ordinary Shares, nominal value P$1.00 each 113,178
Class D Ordinary Shares, nominal value P$1.00 each 841,666,658

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes   x No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes   x No

 

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.

x Yes   o No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes   o No

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x Accelerated filer o
Non-accelerated filer o Emerging growth company o

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o

 

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

US GAAP o   International Financial Reporting Standards as issued
by the International Accounting Standards Board
x
  Other o

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17   o Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

o Yes   o No

 

 

 

 

TABLE OF CONTENTS

 

 

 

    Page
PRESENTATION OF FINANCIAL INFORMATION   1
FORWARD-LOOKING STATEMENTS   3
GLOSSARY OF TERMS   5
         
    PART I    
         
ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   12
ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE   12
ITEM 3.   KEY INFORMATION   12
ITEM 4.   INFORMATION ON THE COMPANY   36
ITEM 4A.   UNRESOLVED STAFF COMMENTS   57
ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS   58
ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   85
ITEM 7.   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   97
ITEM 8.   FINANCIAL INFORMATION   101
ITEM 9.   THE OFFER AND LISTING   102
ITEM 10.   ADDITIONAL INFORMATION   103
ITEM 11.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   124
ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   126
         
    PART II    
         
ITEM 13.   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   127
ITEM 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   127
ITEM 15.   CONTROLS AND PROCEDURES   127
ITEM 16A.   AUDIT COMMITTEE FINANCIAL EXPERT   128
ITEM 16B.   CODE OF ETHICS   128
ITEM 16C.   PRINCIPAL ACCOUNTANT FEES AND SERVICES   128
ITEM 16D.   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   130
ITEM 16E.   PURCHASES OF EQUITY SECURITIES BY THE COMPANY AND AFFILIATED PURCHASERS   130
ITEM 16F.   CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT   130
ITEM 16G.   CORPORATE GOVERNANCE   130
ITEM 16H.   MINE SAFETY DISCLOSURE   131
         
    PART III    
         
ITEM 17.   FINANCIAL STATEMENTS   132
ITEM 18.   FINANCIAL STATEMENTS   132
ITEM 19.   EXHIBITS   132

 

 

 

 

PRESENTATION OF FINANCIAL INFORMATION

 

Telecom Argentina S.A. is a company incorporated under the laws of Argentina. As used in this Annual Report on Form 20-F (the “Form 20-F” or “Annual Report”), the terms “the Company,” “Telecom,” “we,” “us,” and “our” refer to Telecom Argentina S.A. and its consolidated subsidiaries as of December 31, 2019. Unless otherwise stated, references to the financial results of “Telecom” are to the consolidated financial results of Telecom Argentina and its consolidated subsidiaries. Telecom is primarily engaged in the provision of fixed and mobile telecommunications services, data services, Internet services and cable television services.

 

The term “Telecom Argentina” refers to Telecom Argentina S.A., excluding its subsidiaries. The term “Cablevisión” refers to Cablevisión S.A., together with its consolidated subsidiaries. The term “Merger” refers to the merger between Telecom and Cablevisión, effective as of January 1, 2018, through which Cablevisión was merged with and into Telecom Argentina, with Telecom Argentina being the surviving entity. Telecom Argentina’s most significant subsidiaries as of December 31, 2019 were Núcleo S.A.E (provision of mobile telecommunication services in Paraguay), PEM S.A.U. (investments), Adesol S.A. (holding company in Uruguay), AVC Continente Audiovisual S.A. (broadcasting services) and Telecom Argentina USA Inc. (telecommunication services in the United States). In 2019, Telecom absorbed Última Milla S.A., CV Berazategui S.A. and the split off assets from PEM S.A.U., which were subsidiaries of Telecom. For more information on Telecom’s subsidiaries, see Note 1.a) to our Consolidated Financial Statements (as defined below).

 

Our consolidated financial statements as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017, and the notes thereto (the “Consolidated Financial Statements”) are set forth on pages F-1 through F-88 of this Annual Report.

 

Our Consolidated Financial Statements, which are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), have been approved by resolution of the Board of Directors’ meeting held on March 9, 2020 and have been audited by an independent registered public accounting firm.

 

Due to the high level of inflation prevailing in Argentina during the period 2016-2018, management analyzed the parameters established by IAS 29 “Financial reporting in hyperinflationary economies” - paragraph 3, which describe the conditions to consider an economy as hyperinflationary, and concluded that, with respect to Argentina, such conditions have been met for accounting periods ending after July 1, 2018. Such conditions remained during 2019. Therefore, we have restated our Consolidated Financial Statements and the financial information for all the periods reported in this Annual Report based on certain price indexes to take into account the effect of inflation in Argentina. The Consolidated Financial Statements and the financial information included in this Annual Report for all the periods reported are presented on the basis of constant Argentine Pesos as of December 31, 2019 (“current currency”). See “—Risk Factors—Risk Relating to Argentina—Inflation could accelerate, causing adverse effects on the economy and negatively impacting Telecom’s margins and/or ratios,” “Item 5—Operating and Financial Review and Prospects—Factors Affecting Results of Operations” and Note 1.e) to our Consolidated Financial Statements.

 

Telecom Argentina and its subsidiaries maintain their accounting records and prepare their financial statements in Argentine Pesos, which is their functional currency, except for Núcleo and other subsidiaries in Paraguay, which have Guaraníes as their functional currency, Telecom Argentina USA, which uses U.S. dollars as its functional currency, and Adesol and other subsidiaries incorporated under the laws of Uruguay, which use Uruguayan Pesos as their functional currency. Our Consolidated Financial Statements include the results of these subsidiaries translated into Argentine Pesos. Assets and liabilities are translated at year-end exchange rates and income and expenses accounts at average exchange rates for each year presented, and then restated in terms of the current currency by applying an average index to take into account the effect of inflation in Argentina (for more information see Note 1.e) and 3.b) of our Consolidated Financial Statements).

 

Certain financial information contained in this Annual Report has been presented in U.S. dollars. This Annual Report contains translations of various Argentine Peso amounts into U.S. dollars at specified rates solely for convenience of the reader. You should not construe these translations as representations by us that the Argentine Peso amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated. Except as otherwise specified, all references to “US$,” “U.S. dollars” or “dollars” are to United States dollars, references to “EUR,” “euro” or “€” are to the lawful currency of the member states of the European Union and references to “P$,” “Argentine Pesos,” “$” or “Pesos” are to Argentine Pesos. Unless otherwise indicated, we have translated the Argentine Peso amounts using a rate of P$59.89 = US$1.00, the U.S. dollar ask rate published by the Banco de la Nación Argentina (Argentine National Bank) on December 30, 2019. On March 12, 2020, the exchange rate was P$62.82 = US$1.00. As a result of fluctuations in the Argentine Peso/U.S. dollar exchange rate, the exchange rate at such date may not be indicative of current or future exchange rates. Consequently, these translations should not be construed as a representation that the Peso amounts represent, or have been or could be converted into, U.S. dollars at that or any other rate. See “Item 3—Key Information—Exchange Rates,” and “Item 3—Key Information—Risk Factors—Risks Relating to Argentina— Devaluation of the Argentine Peso and restrictions on the exchange of Argentine Pesos into foreign currencies may adversely affect our results of operations, our capital expenditures and our ability to service our liabilities and pay dividends.”

 

   
PRESENTATION OF FINANCIAL INFORMATION TELECOM ARGENTINA S.A.

 

1

 

 

Certain amounts and ratios contained in this Annual Report (including percentage amounts) have been rounded up or down 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 Securities and Exchange Commission maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Securities and Exchange Commission. Telecom Argentina’s telephone number is 54-11-4968-4000, and its principal executive offices are located in Alicia Moreau de Justo 50, (C1107AAB) Buenos Aires, Argentina. Our internet address is https://institucional.telecom.com.ar. The contents of our website and other websites referred to herein are not part of this Annual Report.

 

This Annual Report contains certain terms that may be unfamiliar to some readers. You can find a Glossary of these terms on page 5 of this Annual Report.

 

Our financial statement data as of and for the years ended December 31, 2017 and prior are not comparable with our financial statement data as of and for the year ended December 31, 2018 and any date and period thereafter because of the Merger, which was consummated on January 1, 2018 (the “Merger Effective Date”). We have accounted for the Merger as a business combination using the acquisition method of accounting under IFRS 3 for assets and liabilities of Telecom Argentina as of January 1, 2018. The Merger constituted a “reverse acquisition,” pursuant to which Cablevisión (the absorbed entity) was considered the accounting acquirer and Telecom Argentina (the surviving entity) was considered the accounting acquiree (See “Item 5—Operating and Financial Review and Prospects”). Accordingly, the financial information for periods prior to the Merger Effective Date reflect the historical financial information of Cablevisión, as restated in terms of the current currency to take into account the effect of inflation in Argentina. The information as of and for the year ended December 31, 2018 and the following years incorporates, based on the figures corresponding to Cablevisión, the effect of applying the acquisition method to Telecom Argentina to its fair value in accordance with IFRS 3 and the operations of Telecom Argentina as from January 1, 2018. Such figures are presented in this Annual Report restated in terms of the current currency to take into account the effect of inflation in Argentina.

 

The factors that were considered in determining that Cablevisión should be treated as the accounting acquirer in the Merger were:

 

(i)the relative voting rights in the surviving entity (55% for the former shareholders of Cablevisión and 45% for the former shareholders of Telecom Argentina);
(ii)the composition of the board of directors in the surviving entity and other committees (audit, supervisory and executive);
(iii)the relative fair value assigned to Cablevisión and Telecom Argentina; and
(iv)the composition of the key senior management of the surviving entity.

 

Accordingly, Cablevisión’s assets and liabilities were recognized and measured in the consolidated financial statements at their pre-Merger carrying amounts, while the identifiable assets and liabilities of Telecom Argentina were recognized at fair value as of the Merger effective date. Goodwill resulting from the application of the acquisition method was measured as the excess of the fair value of the consideration paid over the net fair value of Telecom Argentina’s identifiable assets and liabilities. The retained earnings and other equity balances recognized in the consolidated financial statements of the combined entity are the sum of the respective amounts of the individual financial statements of Telecom Argentina and Cablevisión immediately before the Merger (excluding comprehensive income and Other deferred, as approved by the shareholders at the Ordinary and Extraordinary Shareholders’ Meeting of Telecom Argentina and the Extraordinary Shareholders’ Meeting of Cablevisión held on August 31, 2017).

 

The financial information as of and for the years ended December 31, 2017 and earlier that was previously reported in our annual reports on Form 20-F for the years ended December 31, 2017 and earlier reflect the financial information of Telecom Argentina, accounting acquiree in the Merger. Therefore, such financial information is not directly comparable to the financial information as of and for the years ended December 31, 2017 and earlier included in the 2018 Annual Report, this Annual Report and any other subsequent annual report, which reflect the financial information of Cablevisión (the absorbed entity), considered the accounting acquirer in the Merger.

 

For more information, see Note 4 to our Consolidated Financial Statements.

 

   
PRESENTATION OF FINANCIAL INFORMATION TELECOM ARGENTINA S.A.

 

2

 

 

FORWARD-LOOKING STATEMENTS

 

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:

 

·our expectations for our future performance, revenues, income, earnings per share, capital expenditures, dividends, liquidity and capital structure;

 

·the continued synergies expected from the Merger;

 

·the implementation of our business strategy;

 

·the changing dynamics and growth in the telecommunications and cable markets in Argentina, Paraguay, Uruguay and the United States;

 

·our outlook for new and enhanced technologies;

 

·the effects of operating in a competitive environment;

 

·industry conditions;

 

·the outcome of certain legal proceedings;

 

·regulatory and legal developments; and

 

·other factors identified or discussed under “Item 3—Key Information—Risk Factors.”

 

This Annual Report contains certain forward-looking statements and information relating to Telecom that are based on current views, expectations, estimates and projections of our Management and information currently available to Telecom. These statements include, but are not limited to, statements made in “Item 3—Key Information—Risk Factors,” “Item 5—Operating and Financial Review and Prospects” under the captions “Critical Accounting Policies” and “Trend Information,” “Item 8—Financial Information—Legal Proceedings” and other statements about Telecom’s strategies, plans, objectives, expectations, intentions, capital expenditures, and assumptions and any other statement contained in this Annual Report that is not a historical fact. When used in this document, the terms “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “will,” “may” and “should” and other similar expressions identify forward-looking statements. Forward-looking statements 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 actual results, performance or achievements of Telecom to be materially different from any future results, performance or achievements that may be expressed or implied by forward-looking statements. These factors include, among others:

 

·our ability to successfully implement our business strategy and to achieve synergies resulting from the Merger;

 

·our ability to introduce new products and services that enable business growth;

 

·uncertainties relating to political and economic conditions in Argentina, Paraguay, United States and Uruguay, including the policies of the new government in Argentina;

 

·the impact of political developments, including the policies of the new government in Argentina, on the demand for securities of Argentine companies;

 

·inflation, the devaluation of the Peso, the Guaraní and the Uruguayan Peso and exchange rate risks in Argentina, Paraguay and Uruguay;

 

·restrictions on the ability to exchange Argentine or Uruguayan Pesos or Paraguayan Guaraníes into foreign currencies and transfer funds abroad;

 

   
FORWARD-LOOKING STATEMENTS TELECOM ARGENTINA S.A.

 

3

 

 

·the impact of currency and exchange measures or restrictions on our ability to access the international markets and our ability to repay our dollar-denominated indebtedness;

 

·the creditworthiness of our actual or potential customers;

 

·nationalization, expropriation and/or increased government intervention in companies;

 

·technological changes;

 

·the impact of legal or regulatory matters, changes in the interpretation of current or future regulations or reform and changes in the legal or regulatory environment in which we operate, including regulatory developments such as sanctions regimes in other jurisdictions (e.g., the United States) which impact on our suppliers;

 

·the effects of increased competition;

 

·reliance on content produced by third parties;

 

·increasing cost of our supplies;

 

·inability to finance on reasonable terms capital expenditures required to remain competitive;

 

·fluctuations, whether seasonal or in response to adverse macro-economic developments, in the demand for advertising;

 

·our capacity to compete and develop our business in the future; and

 

·the impact of increased national or international restrictions on the transfer or use of telecommunications technology.

 

Many of these factors are macroeconomic and regulatory in nature and therefore beyond the control of the Company’s management. Should one or more of these risks or uncertainties materialize, or underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. The Company 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 our actual results, performance or achievements to differ materially from our future results, performance or achievements expressed or implied by such forward-looking statements. Readers are encouraged to consult the Company’s filings made on Form 6-K, which are periodically filed with or furnished to the United States Securities and Exchange Commission.

 

   
FORWARD-LOOKING STATEMENTS TELECOM ARGENTINA S.A.

 

4

 

 

GLOSSARY OF TERMS

 

The following explanations are not provided as or intended to be technical definitions, but only to assist the general reader to understand certain terms used in this Annual Report.

 

2G (second-generation mobile system): Second-generation protocols using digital encoding and includes GSM, D-AMPS (TDMA) and CDMA. These protocols support high bit rate voice and limited data communications.

 

3G (third-generation mobile system): Third-generation mobile service, designed to provide high speed data, always-on data access, and greater voice capacity. 3G networks allow the transfer of both voice data services (telephony, messaging) and non-voice data (such as downloading Internet information, exchanging email, and instant messaging). The high data speeds, measured in Mbps, are significantly higher than 2G, and 3G networks technology enable full motion video, high-speed Internet access and video-conferencing. 3G technology standards include UMTS, based on WCDMA technology (quite often the two terms are used interchangeably), and CDMA2000.

 

4G (fourth-generation mobile system): Fourth-generation mobile service using the LTE technology (Long Term Evolution technology).

 

Access (or Accesses): Connection provided by Telecom Argentina to Internet services.

 

ADS: American Depositary Shares issued by JP Morgan, listed on the New York Stock Exchange, each representing rights to five (5) Class B Shares under a Deposit Agreement.

 

ADSL (Asymmetric Digital Subscriber Line): A type of digital subscriber line technology (DSL); a data communications technology that enables faster data transmission over copper lines than a conventional voiceband modem can provide.

 

AFIP (Administración Federal de Ingresos Públicos): The Argentine federal tax authority.

 

AFJP (Administradoras de Fondos de Jubilaciones y Pensiones): Private entities that were in charge of managing the funds of the Private Pension and Retirement System established by Law No. 24,241, until its nationalization in November 2008 pursuant to Law No. 26,425.

 

AFTIC (Autoridad Federal de Tecnologías de la Información y de las Comunicaciones): The decentralized and autonomous agency in the scope of the PEN appointed as the ENACOM in the LAD. AFTIC was replaced by the ENACOM.

 

AMBA (Area Metropolitana Buenos Aires): An area comprising the Autonomous city of Buenos Aires and the greater Buenos Aires area, which constitutes the most densely populated region of Argentina. Telephone calls within the area are considered local.

 

Analog: A mode of transmission or switching that is not digital, e.g., the representation of voice, video or other not in digital form.

 

ANSES: The Argentine administrator of social security pension and retirement benefits.

 

ANSES —FGS: The Fondo de Garantía y Sustentabilidad del Sistema Integrado Previsional Argentino managed by ANSES.

 

Argentine GAAP: Generally Accepted Accounting Principles in Argentina, which we used before the adoption of IFRS.

 

ARBU (Average Revenue Billed per User): The average monthly revenue billed per user of our fixed telephony services, calculated by dividing total monthly basic charges and traffic revenue by weighted-average number of fixed telephony lines in service during the relevant measurement period.

 

   
GLOSSARY OF TERMS TELECOM ARGENTINA S.A.

 

5

 

 

ARPU (Average Revenue per User): The average monthly revenue per user of our mobile telephony, Internet and cable television services, calculated by dividing total revenue (including revenue earned from cable and Internet subscription fees, mobile telephony subscription fees, cable premium services, pay-per-view fees and additional outlets but excluding mainly handset, out collect (wholesale) roaming, cell site rental and activation fee revenue) by weighted-average number of subscribers of each service during the relevant measurement period.

 

Auction Terms and Conditions: Terms and Conditions approved by SC Resolution No. 38/14 for the awarding of frequency bands.

 

Backbone: Main connection network (mainly by fiber optics) that connect local areas.

 

Basic Telephone Services: The supply of fixed telecommunications links that 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).

 

BCBA (Bolsa de Comercio de Buenos Aires): The Buenos Aires Stock Exchange is a qualified entity according to Section 32 of Law No. 26,831, which acts by delegation of BYMA (Bolsas y Mercados Argentinos).

 

BCRA (Banco Central de la República Argentina): The Central Bank of Argentina.

 

Broadband: Services characterized by a transmission speed of 2 Mbps or more. These services include interactive services such as video telephone/video conferencing (both point-to-point and multipoint); video monitoring; interconnection of local networks; file transfer; high-speed fax; e-mail for moving images or mixed documents; Broadband videotext; video on demand and retrieval of sound programs or fixed and moving images.

 

Broadcasting: Simultaneous transmission of information to all Nodes and terminal equipment of a network.

 

BYMA (Bolsas y Mercados Argentinos S.A.): The Buenos Aires stock exchange.

 

Cablevisión: Cablevisión S.A., together with its consolidated subsidiaries, dissolved without liquidation as a result of the Merger.

 

Carrier: Company that makes available the physical telecommunication network.

 

CDMA (Code Division Multiple Accesses): A digital wireless technology used in radio communication for transmission between a mobile handset and a radio base station. It enables the simultaneous transmission and reception of several messages, each of which has a coded identity to distinguish it from the other messages.

 

Cell: Geographical portion of the territory covered by a base transceiver station.

 

Cellular: A technique used in mobile radio technology to use the same spectrum of frequencies in one network multiple times. Low power radio transmitters are used to cover a “Cell” (i.e., a limited area) so that the frequencies in use can be reused without interference for other parts of the network.

 

Channel: The portion of a communications system that connects a source to one or more destinations. Also called circuit, line, link or path.

 

Churn: The termination of a mobile telephony, cable television or Internet services customer’s account. The churn rate is determined by calculating the total number of disconnected customers of each of our mobile telephony, cable television and Internet services over a given period as a percentage of the initial number of customers for such services as of the beginning of the applicable measurement period. Because most of our mobile telephony services are provided under the Personal brand, historical average monthly churn rates for mobile telephony services customers, included in this Annual Report for comparative purposes, reflect Telecom’s operations prior to the consummation of the Merger.

 

CNC (Comisión Nacional de Comunicaciones): The Argentine National Communications Commission, which was replaced by the AFTIC, which was replaced by the ENACOM (in December 2015).

 

CNV (Comisión Nacional de Valores): The Argentine National Securities Commission.

 

CONATEL: National Communications Commission of Paraguay.

 

   
GLOSSARY OF TERMS TELECOM ARGENTINA S.A.

 

6

 

 

COSO: Committee of Sponsoring Organizations of the Treadway Commission.

 

CPI: Consumer Price Index.

 

Customer / Subscriber / Access: a client of any of the services we provide. A single subscriber may contract for multiple services, and we believe that it is more useful to count the number of accesses a subscriber has contracted for, than to merely count the number of our subscribers. For example, a subscriber that has fixed line telephony service and broadband service is counted as two subscribers rather than as one subscriber.

 

CVH: Cablevisión Holding S.A.

 

D-AMPS (Digital-Advanced Mobile Phone Service): It is a digital version of AMPS (Advanced Mobile Phone Service), the original Analog standard for mobile telephone service in the United States.

 

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 are rapidly replacing the older Analog ones. 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.

 

DWDM (Dense Wavelength Division Multiplexing): Technology for multiplying and transmitting different wavelengths along a single optical fiber contemporaneously.

 

ENACOM (Ente Nacional de Comunicaciones) or the Regulatory Authority: Argentine Communications Body within the scope of the Ministerio de Modernización, acting as regulatory authority as of the date of this Annual Report. The ENACOM absorbed the functions of AFTIC.

 

ENTel (Empresa Nacional de Telecomunicaciones): National Telecommunications Company which operated the telecommunications system in Argentina prior to the Transfer Date.

 

Personal Envíos: Personal Envíos S.A.

 

Fiber Optic: Thin glass, silica or plastic wires, building the infrastructure base for data transmission. A Fiber Optic cable contains several individual fibers, and each of them is capable of driving a signal (light impulse) at unlimited bandwidth. Fiber Optics are usually employed for long-distance communication: it can transfer “heavy” data loads, and the signal reaches the recipient, protected from possible disturbances along the way. The driving capacity of Fiber Optics is higher than the traditional copper cable ones.

 

Fintech: Fintech Telecom LLC.

 

FTTC (Fiber to the Curb or Fiber to the Cabinet): In the case of FTTC the fiber connection reaches the equipment (distribution cabinet) located on the pavement, from where copper connections are run to the customer.

 

FTTH (Fiber to the Home): In the case of FTTH the fiber connection terminates inside the customer premises.

 

GCL: General Corporations Law.

 

GDP: Gross Domestic Product.

 

GPON: Gigabit-capable Passive Optical Network. A flexible optical fiber access network capable of supporting the bandwidth requirements of business and residential services. GPON systems are characterized, in general, by an optical line termination (“OLT”) system and an optical network unit (ONU) or optical network termination (“ONT”) with a passive optical distribution network interconnecting them. There is, in general, a one-to-many relationship between the OLT and the ONU/ONTs, respectively.

 

GPRS (General Packet Radio Service): An enhanced second-generation mobile technology used to transmit data over mobile 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 mobile technology used worldwide, which works on 900 MHz and 1,800 MHz band.

 

   
GLOSSARY OF TERMS TELECOM ARGENTINA S.A.

 

7

 

 

IASB: International Accounting Standards Board.

 

HFC (Hybrid Fiber-Coaxial): Network that incorporates both optical fiber and coaxial cable to create a broadband network.

 

ICT (Information and Communication Technology): Broad area concerned with information technology, telecommunications networking and services and other aspects of managing and processing information, especially in large organizations.

 

ICT services (Information and Communication Technology services): Services to transport and distribute signals or data, such as voice, text, video and images, provided or requested by third-party users, through telecommunications networks. Each service is subject to its specific regulatory framework.

 

IFC: International Finance Corporation

 

IFRS: International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

IGJ (Inspección General de Justicia): General Board of Corporations.

 

INDEC (Instituto Nacional de Estadísticas y Censos): The Argentine National Statistics and Census Institute.

 

IP (Internet Protocol): A set of communications protocols for exchanging data over the Internet.

 

IRU: Indefeasible Rights of Use.

 

IT: Information Technology.

 

LAD (Ley Argentina Digital): Law No. 27,078, Argentina’s Digital Law.

 

Law No. 26,831 (Ley de Mercado de Capitales): Argentine Capital Markets Law.

 

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 rate regulations and meet certain minimum annual standards regarding the expansion of its telephone system and improvements in the quality of its service 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 are in force were the rate regulations and those related to the quality of service; the obligations related to the expansion of the network are no longer in force.

 

Merger: Merger between Telecom Argentina and Cablevisión, effective as of January 1, 2018.

 

M2M: Machine to Machine, information exchange between two remote machines.

 

MBOU: Mb per user per month.

 

MMS (Mobile Multimedia Services): Represent an evolution of the SMS and the Enhanced Messaging Service (“EMS”) using various mono-medial elements (text, design, photos, video-clips and audio), which are synchronized and combined allowing them to be packed together and sent to GSM-GPRS platforms.

 

Mobile service: A mobile 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.

 

Modem: Modulator/Demodulator. A device that modulates digital data to allow their transmission on Analog channels, generally consisting of telephone lines.

 

Multimedia: A service involving two or more communications media (e.g., voice, video, text, etc.) and hybrid products created through their interaction.

 

   
GLOSSARY OF TERMS TELECOM ARGENTINA S.A.

 

8

 

 

NDF (Non Deliverable Forward) Agreement: A generic term for a set of derivatives that covers national currency transactions including foreign exchange forward swaps, cross currency swaps and coupon swaps in nonconvertible or highly restricted currencies. The common characteristics of these contracts are that they involve no exchange of principal, are fixed at a predetermined price and are typically settled in U.S. dollars (or sometimes in Euros) at the prevailing spot exchange rate taken from an agreed source, time, and future date.

 

Network: An interconnected collection of elements. In a telephone network, these consist of switches connected to each other and to customer equipment. The transmission equipment may be based on fiber optic or metallic cable or point-to-point radio connectors.

 

Node: Topological network junction, commonly a switching center or station.

 

Nortel: Nortel Inversora S.A., the direct parent company of Telecom Argentina S.A. until November 30, 2017, when it was absorbed by Telecom Argentina pursuant to the Reorganization.

 

Northern Region: the Argentine government’s privatization program as set forth in the State Reform Law approved in August 1989 and subsequent decrees, the “Privatization Regulations” provided for the division of the Argentine telecommunications network operated by ENTel into two regions, the northern region (the “Northern Region”) and the southern region (the “Southern Region”) of Argentina. Additionally, these two regions are set forth in Decree No. 1,461/93, which ratified the Resolution No. 575/93 which approved the list of conditions for the public offer for the provision of mobile telecommunication services.

 

OTT (Over the Top): Over the Top applications or services are those services that bypass traditional network distribution approaches and run over, or on top of, internet networks. OTT refers, in general, to content from a third-party that is delivered to an end-user over the internet that is not provided directly by end-user Internet Service Provider.

 

Outsourcing: Hiring outsiders to perform various telecommunications services, which may include planning, construction, or hosting of a network or specific equipment belonging to a company.

 

Packs: Packages integrated by SMS and minutes that can be purchased or added to those plans that recharge credit.

 

PCS (Personal Communications Service): A mobile communications service with systems that operate in a manner similar to cellular systems.

 

PEN (Poder Ejecutivo Nacional): The executive branch of the Argentine government.

 

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 to which the service is available and expressed as a percentage.

 

Personal: Telecom Personal S.A. Until November 30, 2017, Telecom Argentina owned 100% of Personal. Commencing December 1, 2017, pursuant to the Reorganization, mobile services provided by Personal have been provided by Telecom Argentina.

 

Platform: The total input, including hardware, software, operating equipment and procedures, for producing (production platform) or managing (Management platform) a particular service (service platform).

 

PP&E: Property, plant and equipment.

 

Privatization Regulations: The Argentine government’s privatization program as set forth in the State Reform Law approved in August 1989 and subsequent decrees.

 

Pulse: Unit on which the rate structure of the regulated fixed line services is based.

 

Quadruple play: Means the integration of fixed and mobile telecommunication services as well as pay television and Internet services.

 

RECPAM (Resultado por exposición a los cambios en el poder adquisitivo de la moneda): Restatement Adjustment Gain (Loss).

 

Regulatory Bodies: Collectively or individually, the ENACOM, the AFTIC, the SC and the CNC.

 

Reorganization: Corporate reorganization pursuant to which Telecom Argentina absorbed Sofora, Nortel and Telecom Personal.

 

   
GLOSSARY OF TERMS TELECOM ARGENTINA S.A.

 

9

 

 

Roaming: A function that enables mobile subscribers to use the service on networks of operators other than the one with which they signed their initial contract. The roaming service is active when a mobile device is used in a foreign country (included in the GSM network).

 

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, which was replaced by the AFTIC and subsequently by the ENACOM.

 

SCMA (Servicio de Comunicaciones Móviles Avanzadas): Mobile Advanced Communications Service.

 

SEC: The Securities and Exchange Commission of the United States of America.

 

Service Provider: The party that provides end users and content providers with a range of services, including a proprietary, exclusive or third-party service center.

 

SMS (Short Message Service): Short text messages that can be received and sent through GSM-network connected mobile phones. The maximum text length is 160 alpha-numerical characters.

 

Sofora: Sofora Telecomunicaciones S.A., the indirect parent company of Telecom Argentina S.A. through its participation in Nortel until November 30, 2017, when it was absorbed by Telecom Argentina pursuant to the Reorganization.

 

Southern Region: See “Northern Region.”

 

SRMC (Servicios de Radiocomunicaciones Móviles Celular): Cellular Mobile Radiocommunications Service.

 

STM (Servicio Telefónico Móvil): Mobile Telephone Service.

 

TDMA (Time Division Multiple Accesses): A technology for digital transmission of radio signals between, for example, a mobile handset and a radio base station. TDMA breaks signals into sequential pieces of defined length, places each piece into an information conduit at specific intervals and then reconstructs the pieces at the end of the conduit.

 

Telecom Argentina USA: Telecom Argentina USA, Inc., a corporation organized under the laws of the State of Delaware.

 

Telecom Italia: Telecom Italia S.p.A.

 

Telefónica: Telefónica de Argentina S.A.

 

Telintar: Telecomunicaciones Internacionales de Argentina Telintar S.A.

 

Terms and Conditions: See “Auction Terms and Conditions.

 

TLRD (Terminación Llamada Red Destino): Termination charges from third parties’ mobile networks.

 

Transfer Date: November 8, 1990, the date on 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 ENTel.

 

Tuves Paraguay: Tuves Paraguay S.A.

 

UMTS (Universal Mobile Telecommunications System): Third-generation mobile communication standard.

 

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.

 

URSEC (Unidad Reguladora de Servicios de Comunicaciones): Uruguayan Regulatory Authority.

 

   
GLOSSARY OF TERMS TELECOM ARGENTINA S.A.

 

10

 

 

Value Added Services (VAS): Services that provide a higher level of functionality than the basic transmission services offered by a telecommunications network such as video streaming, “Personal Video,” “Nube Personal” (Cloud services), M2M (Machine to Machine communication), social networks, “Personal Messenger,” content and entertainment (SMS subscriptions and content, games, music, etc.), MMS and voice mail.

 

VLG Argentina: VLG S.A.U., an Argentine corporation that is a shareholder of Telecom Argentina and controlled by CVH. (formerly known as VLG Argentina, LLC).

 

   
GLOSSARY OF TERMS TELECOM ARGENTINA S.A.

 

11

 

 

PART I

 

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.KEY INFORMATION

 

Selected Financial Data

 

The following table presents certain selected consolidated financial data. It is to be read in conjunction with the rest of this Annual Report, in particular, the sections “Presentation of Financial Information,” “Item 4 —Information on the Company” and “Item 5—Operating and Financial Review and Prospects,” and the Consolidated Financial Statements. The selected consolidated income statement data for the years ended December 31, 2019, 2018 and 2017 and the selected consolidated financial position data as of December 31, 2019 and 2018 are derived from, and are qualified in their entirety by reference to our Consolidated Financial Statements.

 

The selected consolidated income statement data for the year ended December 31, 2016 and the selected consolidated financial position data as of December 31, 2017 have been restated pursuant to IAS 29 to reflect the effect of hyperinflation in Argentina. As a result of such restatement, the selected financial information included in this Annual Report differ from previously reported financial information.

 

The selected consolidated financial position data as of December 31, 2016 and the selected consolidated financial position and income statement as of and for the year ended December 31, 2015 have not been presented as they cannot be provided on a restated basis without unreasonable effort or expense.

 

   
PART I - ITEM 3 KEY INFORMATION — SELECTED FINANCIAL DATA TELECOM ARGENTINA S.A.

 

12

 

 

 

CONSOLIDATED SELECTED INCOME STATEMENT AND FINANCIAL POSITION DATA

 

   2019   2018   2017   2016 (8) 
   (P$ million, except per share and
per ADS data in P$)
 
INCOME STATEMENT DATA                    
Total revenues   237,024    258,518    102,531    92,926 
Operating costs (without depreciation, amortization and impairment of Fixed assets)   (159,940)   (171,803)   (65,436)   (61,852)
Operating costs – depreciation, amortization and impairment of Fixed assets   (61,289)   (54,014)   (15,082)   (12,127)
Operating income    15,795    32,701    22,013    18,947 
Other, net (1)    (5,513)   (28,551)   1,640    6,530 
Income tax (expense) benefit   (14,170)   4,366    (8,486)   (9,253)
Net (loss) income    (3,888)   8,516    15,167    16,224 
Other Comprehensive (Loss) Income, net of tax    (2,150)   2,308    (1,088)   (2,411)
Total Comprehensive Income    (6,038)   10,824    14,079    13,813 

Total Comprehensive Income attributable to Telecom Argentina

   (6,198)   9,885    13,983    13,725 
Total Comprehensive Income attributable to Non-controlling Interest    160    939    96    88 
Number of shares outstanding at year-end (in millions of shares) (2)    2,154    2,154    0.120    0.120 
Net (loss) income per share (basic and diluted) (3)    (2.04)   3.78    12.64    13.58 
Net (loss) income per ADS (4)    (10.20)   18.92    n/a    n/a 
Dividends per share (5)    16.63    20.58    35,510    20,037 
Dividends per ADS (6)    83.13    102.92    n/a    n/a 
                     
FINANCIAL POSITION DATA                    
Current assets    50,778    51,516    16,347    n/a 
PP&E, Intangible assets and Rights of Use Assets    338,049    323,583    77,436    n/a 
Goodwill   185,141    185,295    49,157    n/a 
Other non-current assets    4,182    11,479    1,775    n/a 
Total assets    578,150    571,873    144,715    n/a 
Current liabilities    85,981    82,219    28,646    n/a 
Non-current liabilities    182,323    137,504    31,415    n/a 
Total liabilities    268,304    219,723    60,061    n/a 
Total equity    309,846    352,150    84,654    n/a 
Equity attributable to Telecom Argentina    305,078    347,186    83,353    n/a 
Equity attributable to Non-controlling Interest    4,768    4,964    1,301    n/a 
                     
Total Capital Stock (7)    2,154    2,169    1,200    n/a 

 

 

 

(1)Other, net includes Earnings from associates, Debt financial expenses and Other financial results, net.
(2)Number of ordinary shares outstanding at year-end (excludes treasury shares for the year ended December 31, 2018). For the years ended December 31, 2017 and 2016, the Company has divided the net income attributable to the shareholders of the Controlling Company of each period based on 1,184,528,406 ordinary shares, which arise as a result of multiply 120,000 ordinary shares of Cablevisión outstanding for such years by the exchange ratio established in the pre-merger commitment (1 ordinary share of Cablevisión for each 9,871.07005 new shares of Telecom Argentina).
(3)Calculated based on the weighted average number of ordinary shares outstanding during each period (2,153,688,011 ordinary shares for the years 2019 and 2018 and 1,184,528,406 ordinary shares for the years 2017 and 2016). For the years ended December 31, 2017 and 2016, the Company has divided the net income attributable to the shareholders of the Controlling Company of each period based on 1,184,528,406 ordinary shares, which arise as a result of multiply 120,000 ordinary shares of Cablevisión outstanding for such years) by the exchange ratio established in the pre-merger commitment (1 ordinary share of Cablevisión for each 9,871.07005 new shares of Telecom Argentina).
(4)Calculated based on the equivalent in ADSs to the weighted average number of ordinary shares outstanding during each period (430,737,602 ADSs for the year 2019, 430,737,602 ADSs for the year 2018 and 236,905,681 ADSs for the years 2017 and 2016).
(5)Dividends per share translated into U.S. dollars amounts to US$0.27, US$0.35, US$1,237.69 and US$819.70 as of December 31, 2019, 2018, 2017 and 2016 respectively. The translation into U.S. dollar was made using the ask rate published by the Banco de la Nación Argentina (National Bank of Argentina) prevailing as of the date when dividends were available to Telecom Argentina’ shareholders.
(6)Dividends per ADS translated into U.S. dollars amounts to US$1.35 as of December 31, 2019. The translation into U.S. dollar was made using the ask rate published by the Banco de la Nación Argentina (National Bank of Argentina) prevailing as of the date when dividends were available to Telecom Argentina’ shareholders.
(7)Ordinary shares of P$1 of nominal value each.
(8)Comparative figures as of December 31, 2016 arise from the consolidated financial statements of Telecom as of December 31, 2018, which have been restated in terms of the current currency as of December 31, 2019 to consider the effect of inflation in accordance to the requirements of IAS 29.

 

   
PART I - ITEM 3 KEY INFORMATION — SELECTED FINANCIAL DATA TELECOM ARGENTINA S.A.

 

13

 

 

OTHER SELECTED DATA

 

   2019   2018   2017   2016 
Number of fixed telephony services lines (thousands)(1)   3,183    3,544    12.7    7.7 
ARBU (in P$/month) (national + international) (5)   442.2    416.6    36.5    32.8 
Internet access (thousands)   4,123    4,138    2,318    2,166 
ARPU Internet (in P$/month) (6)   1,058.8    1,172.2    1,369.3    1,136.6 
Personal Mobile telephony services lines (thousands)   19,084    18,316    n/a    n/a 
ARPU Personal (in P$/month) (7)   317.1    329.1    n/a    n/a 
MBOU Personal (in Mb per user/month) (2)   3,411.4    2,771.2    n/a    n/a 
Núcleo’s customers (thousands)(3)   2,373    2,409    n/a    n/a 
ARPU Núcleo (in P$/month) (8)   347.0    317.4    n/a    n/a 
MBOU Núcleo (in Mb per user/month) (2)   6,754.4    4,927.7    n/a    n/a 
Cable TV subscribers (thousands)   3,517    3,532    3,503    3,528 
ARPU Cable TV (in P$/month) (9)   1,165.4    1,314.2    1,285.2    1,168.7 
Headcount (4)   23,728    25,343    11,384    10,236 

 

 

(1)Includes lines customers, own usage, public telephony and Integrated Services Digital Network (“ISDN”) channels.
(2)Correspond to customers with consumption higher than 10Mb.
(3)Including Wi-Max Internet customers.
(4)Including temporary employees, if any.
(5)Includes P$84.6 pesos, P$197.0 pesos, P$22.0 pesos and P$22.1 pesos related to the restatement in terms of the current currency as of December 31, 2019 in accordance to IAS 29 as of December 31, 2019, 2018, 2017 and 2016, respectively.
(6)Includes P$188.6 pesos, P$547.9 pesos, P$825.6 pesos and P$765.0 pesos to the restatement in terms of the current currency as of December 31, 2019 in accordance to IAS 29 as of December 31, 2019, 2018, 2017 and 2016, respectively.
(7)Includes P$60.7 pesos and P$154.9 pesos related to the restatement in terms of the current currency as of December 31, 2019 in accordance to IAS 29 as of December 31, 2019 and 2018.
(8)Includes P$66.3 pesos and P$150.3 pesos related to the restatement in terms of the current currency as of December 31, 2019 in accordance to IAS 29 as of December 31, 2019 and 2018.
(9)Includes P$205.3 pesos, P$623.6 pesos, P$774.9 pesos and P$786.6 pesos related to the restatement in terms of the current currency as of December 31, 2019 in accordance to IAS 29 as of December 31, 2019, 2018, 2017 and 2016, respectively.

 

   
PART I - ITEM 3 KEY INFORMATION — SELECTED FINANCIAL DATA TELECOM ARGENTINA S.A.

 

14

 

 

Exchange Rates

 

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 published by Banco de la Nación Argentina). See “Item 10—Additional Information—Foreign Investment and Exchange Controls in Argentina.”

 

   Average(1)   End of Period 
Year Ended December 31, 2016   14.99    15.89 
Year Ended December 31, 2017   16.73    18.65 
Year Ended December 31, 2018   29.26    37.70 
Year Ended December 31, 2019   49.31    59.89 
March 2020 (through March 12, 2020)   -    62.82 

 

 

 

(1)Yearly data reflect average of month-end rates.

 

Sources: Banco de la Nación Argentina

 

Capitalization and Indebtedness

 

Not applicable.

 

Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

Risk Factors

 

This section is intended to be a summary of more detailed discussions contained elsewhere in this Annual Report. The risks described below are not the only ones that we face. Additional risks that we do not presently consider material, or of which we are not currently aware, may also affect us. Our business, results of operations, financial condition and cash flows could be materially and adversely affected if any of these risks materialize and, as a result, the market price of our shares and our ADSs could decline. You should carefully consider these risks with respect to an investment in Telecom Argentina.

 

Risks Relating to Argentina

 

Overview

 

A substantial majority of our property, operations and customers are located in Argentina, and a portion of our assets and liabilities are denominated in foreign currencies. Accordingly, our financial condition, results of operations and cash flows depend to a significant extent on economic and political conditions prevailing in Argentina and on the exchange rates between the Argentine Peso and foreign currencies. In the recent past, Argentina has experienced severe recessions, political crises, periods of high inflation and significant currency devaluation. The Argentine economy has been volatile since 2011, with years of economic growth and others with recession. For example, Argentina’s economy grew in 2017, but contracted in 2018 and 2019. Several factors have impacted negatively the Argentine economy in the recent past, and may continue to impact it in the future, including among others, inflation rates, exchange rates, commodity prices, level of BCRA reserves, public debt, tax pressures, trade and fiscal balances, government policy and the international context.

 

Devaluation of the Argentine Peso and restrictions on the exchange of Argentine Pesos into foreign currencies may adversely affect our results of operations, our capital expenditures and our ability to service our liabilities and pay dividends.

 

Since we generate a substantial portion of our revenues in Argentine Pesos (functional currency of Telecom Argentina), any devaluation may negatively affect the U.S. dollar value of our earnings while increasing, in Peso terms, our expenses and capital expenditures denominated in foreign currency. The Argentine Peso has been subject to significant devaluation against the U.S. dollar in the past and may be subject to fluctuations in the future. A depreciation of the Argentine Peso against major foreign currencies may also have an adverse impact on our capital expenditure program and increase the Argentine Peso amount of our trade liabilities and financial debt denominated in foreign currencies. As of December 31, 2019, approximately 63% of our liabilities were denominated in foreign currencies.

 

   
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Though Telecom seeks to manage the risk of devaluation of the Argentine Peso by entering from time to time into certain NDF agreements to hedge some of its exposure to foreign currency fluctuations caused by its liabilities denominated in foreign currencies (mainly U.S. dollars), Telecom remains highly exposed to risks associated with the fluctuation of the Argentine Peso. The Company also has financial assets denominated in U.S. dollars, as well as international operations that generate profits in foreign currencies, that help, to a certain extent, reduce the exposure to liabilities denominated in foreign currencies. See “Item 11—Quantitative and Qualitative Disclosures About Market Risk” and Note 28 to our Consolidated Financial Statements.

 

In 2019, the Argentine Peso continued its rapid devaluation against the U.S. dollar and other major foreign currencies. According to the exchange rate information published by the Banco de la Nación Argentina, the Argentine Peso depreciated by 58.9% against the U.S. dollar during the year ended December 31, 2019 (compared to 102.2%, 17.4% and 21.9% in the years ended December 31, 2018, 2017 and 2016, respectively). As a result of the Argentine Peso’s increased volatility, the Argentine government and the BCRA implemented several measures to restore market confidence and stabilize the value of the Peso. Such measures included, among others, a US$55.7 billion stand-by credit agreement (“SBA”) with the International Monetary Fund (“IMF”), from which, as of the date of this Annual Report, Argentina has drawn the equivalent of US$44 billion, measures intended to control money supply during 2018 and the first half of 2019 that have been since relaxed, an increase of short term interest rates and the sale by the BCRA of foreign currency reserves.

 

In addition, in September 2019, in light of the economic instability and the significant devaluation that followed the primary elections as described below, the Argentine government and the BCRA adopted a series of measures reinstating foreign exchange controls, which apply with respect to access to the foreign exchange market by residents for savings and investment purposes abroad, the payment of external financial debts, the payment of dividends in foreign currency abroad, payments of goods and services in foreign currencies, payments of imports of goods and services, and the obligation to repatriate and settle for pesos the proceeds from exports of goods and services, among others. Other financial transactions such as derivatives and securities related operations, were also covered by the new foreign exchange regime. Following the change in government, the new administration extended the validity of such measures, which were originally in effect until December 31, 2019, and established further restrictions by means of the recently enacted Productive Reactivation Law (as defined below), including a new tax on certain transactions involving the purchase of foreign currency by both Argentine individuals and entities. Although the official exchange rate has stabilized since the adoption of the foreign exchange controls, we cannot assure you that the official exchange rate will not fluctuate significantly in the future. There can be no assurances regarding future modifications to exchange controls. Exchange controls could adversely affect our financial condition or results of operations and our ability to meet our foreign currency obligations and execute our financing plans.

 

The success of these measures is subject to uncertainty and any further depreciation of the Argentine Peso or our inability to acquire foreign currency could have a material adverse effect on our financial condition and results of operations. We cannot predict the effectiveness of these measures. We cannot predict whether, and to what extent, the value of the Argentine Peso may depreciate or appreciate against the U.S. dollar or other foreign currencies, and how these uncertainties will affect demand for the fixed and mobile telephony services, Internet services and cable television services we provide. Furthermore, no assurance can be given that, in the future, no additional currency or foreign exchange restrictions or controls will be imposed. Existing and future measures may negatively affect Argentina’s international competitiveness, discouraging foreign investments and lending by foreign investors or increasing foreign capital outflow which could have an adverse effect on economic activity in Argentina, and which in turn could adversely affect our business and results of operations. We cannot predict how these conditions will affect the consumption of services provided by Telecom Argentina or our ability to meet our liabilities denominated in currencies other than the Argentine Peso. Any restrictions on transferring funds abroad imposed by the government could undermine our ability to pay dividends on our ADSs or make payments (of principal or interest) under our outstanding indebtedness in U.S. dollars, as well as to comply with any other obligation denominated in foreign currency. See “Item 10—Additional Information—Foreign Investment and Exchange Controls in Argentina.”

 

Economic and political developments in Argentina, and future policies of the Argentine government may affect the economy as well as the operations of the telecommunications industry, including Telecom Argentina.

 

The Argentine government has historically exercised significant influence over the economy, and telecommunications companies in particular have operated in a highly regulated environment. The Argentine government may promulgate numerous, far-reaching regulations affecting the economy and telecommunications companies in particular. On August 11, 2019, mandatory primary elections were held in Argentina. As a consequence of the results of primary elections in Argentina, which indicated that President Macri could not be reelected and by replaced by the opposition candidate Alberto Fernández, the political and economic environment became subject to uncertainty. Between August 12 and August 30, 2019, the Peso lost approximately 32% of its value with respect to the U.S. dollar and BCRA’s international reserves decreased by approximately US$11.6 billion. During the same period, the BYMA index lost approximately 10.6% of its value.

 

   
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In response to the rapid decline in the value of the Argentine Peso and continued market uncertainty following the results of the primary elections, the BCRA announced several monetary and exchange risk management measures to contain the volatility of the exchange market. See “—Devaluation of the Argentine Peso and restrictions on the exchange of Argentine Pesos into foreign currencies may adversely affect our results of operations, our capital expenditures and our ability to service our liabilities and pay dividends.”

 

In October 2019 Alberto Fernández was elected president of Argentina with approximately 48.24% of the votes and took office on December 10, 2019. President Alberto Fernández announced and implemented a wide range of economic and policy reforms. On December 21, 2019, the Argentine Congress adopted the Law of Social Solidarity and Productive Reactivation (Ley de Solidaridad Social y Reactivación Productiva en el Marco de la Emergencia Pública, or the “Productive Reactivation Law”). The Productive Reactivation Law covers a wide range of political and economic areas and adopts measures that will significantly impact the Argentine economy, including the declaration of the public emergency in economic, financial, fiscal, administrative, pension, tariffs, energy, sanitary and social matters, and the delegation to the PEN of certain powers normally reserved to Congress or otherwise not within the purview of the PEN (including the ability to make determinations in the renegotiation of public tariffs, establish pension increases, among others). The Productive Reactivation Law also significantly increased certain taxes applicable in Argentina while also providing tax incentives for production and tax benefits to the most impoverished sectors. The Fernández Administration indicated its intention to pursue a sovereign debt restructuring designed to render Argentina’s debt sustainable. To that effect, legislation was enacted by Congress empowering the PEN to conduct such transactions.

 

As of the date of this Annual Report, the long-term impact of these measures and any future measures taken by the current administration on the Argentine economy as a whole and the telecommunication sector in particular remains uncertain. It is not possible to predict the effect of such reforms with certainty and they could be disruptive to the economy and fail to benefit or adversely affect the Argentine economy and the telecommunications industry, and in turn, our business, results of operations and financial condition. We are also unable to predict the measures that the Argentine government may adopt in the future, and how they will impact on the Argentine economy and our results of operations and financial condition.

 

In the event of any economic, social or political crisis, companies operating in Argentina may face the risk of strikes, expropriation, nationalization, mandatory amendment of existing contracts, and changes in taxation policies including tax increases and retroactive tax claims. In addition, Argentine courts have sanctioned modifications on rules related to labor matters, requiring companies to assume greater responsibility for the assumption of costs and risks associated with sub-contracted labor and the calculation of salaries, severance payments and social security contributions. Since we operate in a context in which the governing law and applicable regulations change frequently, also as a result of changes in government administrations, it is difficult to predict if and how our activities will be affected by such changes.

 

We cannot assure you that future economic, regulatory, social and political developments in Argentina will not adversely affect our business, financial condition or results of operations, or cause the decrease of the market value of our securities.

 

Inflation could accelerate, causing adverse effects on the economy and negatively impacting Telecom’s margins and/or ratios.

 

Argentina has experienced repeatedly, including in recent years, periods of high inflation. Inflation has increased since 2005 and has remained relatively high since then. There can be no assurance that inflation rates will not be higher in the future. Furthermore, the INDEC experienced in the past periods of political interventionism that raised serious concerns about the reliability of the data published by the agency. Future political intervention in the INDEC could jeopardize the agency’s autonomy and therefore affect the reliability of the statistics it publishes.

 

The National CPI variation was of 53.8% in 2019 and 47.6% in 2018. Efforts made by the Argentine government to contain and reduce inflation have not achieved the desired results and inflation remains a significant problem for the Argentine economy. If the value of the Argentine Peso cannot be stabilized through fiscal and monetary policies, an increase in inflation rates could be expected. For additional information, see Note 1.e) to the Consolidated Financial Statements.

 

Because the majority of our revenues are denominated in Pesos, any further increase in the rate of inflation not accompanied by a parallel increase in our prices would decrease our revenues in real terms and adversely affect our results of operations. Further, higher inflation rates generally lead to a reduction in the purchasing power, thus increasing the likelihood of a lower level of demand for our fixed and mobile telecommunications, cable television and Internet services in Argentina.

 

   
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The Argentine government may exercise greater intervention in private sector companies, including Telecom Argentina.

 

In November 2008, Argentina nationalized its private pension and retirement system, which had been previously administered by the AFJPs, and appointed ANSES as its administrator. Argentina’s nationalization of its pension and retirement system constituted a significant change in the Argentine government’s approach towards Argentina’s main publicly traded companies. A significant portion of the public float of certain Argentine publicly traded companies is currently owned by the Argentine government through ANSES-FGS, including Telecom. See “Item 7—Major Shareholders and Related Party Transactions.” The Argentine government exercised in the past, and may exercise in the future, influence over corporate governance decisions of companies in which it owns shares by combining its ability to exercise its shareholder voting rights to designate board and supervisory committee members with its ability to dictate tax and regulatory matters. Additionally, since the AFJPs were significant institutional investors and active market traders in Argentina, the nationalization of the private pension and retirement system affected the access to financing in capital markets for publicly traded companies as well as the liquidity of their securities within the market.

 

In addition, prior administrations took several steps to re-nationalize the concessions and utilities that were privatized during the 1990s. We cannot predict whether the Fernández administration or future administrations will take similar or further measures, including nationalization, expropriation and/or increased Argentine governmental intervention in companies. Government intervention in the industries in which we operate could create uncertainties for investors in public companies in Argentina, including Telecom Argentina, as well as have a material adverse effect on our business, financial condition and results of operations. See “—Economic and political developments in Argentina, and future policies of the Argentine government, may affect the economy as well as the operations of the telecommunications industry, including Telecom Argentina.”

 

Argentina’s economy contracted in 2019 and 2018 and may contract in the future due to international and domestic conditions which may adversely affect our operations.

 

The Argentine economy has experienced significant volatility in the past few years and recent decades, characterized by periods of low or negative GDP growth, high and variable levels of inflation and currency devaluation. Argentina’s economy contracted during 2019 and 2018 and the country’s economy remains unstable notwithstanding the efforts by the Argentine government to address inflation and foreign exchange instability. Substantially all of our operations, properties and customers are located in Argentina, and, as a result, our business is, to a large extent, dependent upon economic and legal conditions prevailing in Argentina. If economic conditions in Argentina were to further deteriorate, they could have an adverse effect on our results of operations, financial condition and cash flows.

 

Global economic and financial crises, and the general weakness of the global economy, tend to negatively affect emerging economies like Argentina’s economy. Global financial instability or increasing interest rates in the United States and other developed countries may impact the Argentine economy and prevent Argentina to be put back on track to growth or could aggravate the current recession with consequences in the trade and fiscal balances and in the unemployment rate.

 

Moreover, Argentina’s economic growth might be negatively affected by several domestic factors such as an appreciation of the real exchange rate which could affect its competitiveness, reductions and even reversion of a positive trade balance, which, combined with capital outflows could reduce the levels of consumption and investment resulting in greater exchange rate pressure. Additionally, abrupt changes in monetary and fiscal policies or foreign exchange regime could rapidly affect local economic output, while lack of appropriate levels of investment in certain economy sectors could reduce long-term growth. Access to the international financial markets could be limited. Consequently, an increase in public spending not correlated with an increase in public revenues could affect the Argentina’s fiscal results and generate uncertainties that might affect the economy’s growth level.

 

In recent years, several trading partners of Argentina (such as Brazil, Europe and China) have experienced significant slowdowns or recession periods in their economies. If such slowdowns or recessions were to recur, this may impact the demand for products coming from Argentina and hence affect its economy. Additionally, there is uncertainty as to how the trade relationship between the Mercosur member States will unfold, in particular between Argentina and Brazil. We cannot predict the effect on the Argentine economy and our operations if trade disputes arise between Argentina and Brazil, or in case either country decided to exit the Mercosur.

 

   
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In addition, the global macroeconomic environment is facing challenges. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa and over the conflicts involving Iran, Ukraine, Syria and North Korea. Moreover, political and social crises arose in several countries of Latin America during 2019, as the economy in much of the region has slowed down after almost a decade of sustained growth, among other factors. There have also been concerns on the relationship among China and other Asian countries, which may result in or intensify potential conflicts in relation to territorial disputes, and the possibility of a trade war between the United States and China. In addition, United Kingdom exited the European Union (“Brexit”) on January 31, 2020, and is currently undergoing a transition period ending on December 31, 2020, the long-term effects of which remain uncertain. The medium and long term implications of Brexit could adversely affect European and worldwide economic and market conditions and could contribute to instability in global financial and foreign exchange markets. Finally, the novel coronavirus has caused significant social and market disruption in recent months, which are also expected to have an adverse impact in Argentina’s economy. See “—The novel coronavirus could have an adverse effect on our business operations.

 

During 2019, the Argentine economy was adversely affected by some of aforementioned factors. If international and domestic conditions for Argentina were to worsen, the Argentine economy could be negatively affected as a result of lower international demand and lower prices for its products and services, higher international interest rates, lower capital inflows and higher risk aversion, which may also adversely affect our business, results of operations, financial condition and cash flows.

 

The novel coronavirus could have an adverse effect on our business operations.

 

In late December 2019 a notice of pneumonia originating from Wuhan, Hubei province (COVID-19, caused by a novel coronavirus) was reported to the World Health Organization, with cases soon confirmed in multiple provinces in China, as well as in other countries. Several measures have been undertaken by the Argentine government and other governments around the globe, including the use of quarantine, screening at airports and other transport hubs, travel restrictions, suspension of visas, nation-wide lockdowns, closing of public and private institutions, suspension of sport events, restrictions to museums and tourist attractions and extension of holidays, among many others. However, the virus continues to spread globally and, as of the date of this Annual Report, has affected more than 150 countries and territories around the world, including Argentina, Paraguay, Uruguay and the United States. To date, the outbreak of the novel coronavirus has caused significant social and market disruption. For example, the Dow Jones declined by about 28% between February 11 and March 12, 2020. The long-term effects to the global economy and the Company of epidemics and other public health crises, such as the on-going novel coronavirus, are difficult to assess or predict, and may include a further decline in the market prices of our Class B Shares and ADSs, risks to employee health and safety, risks for the deployment of our services (including by limiting our customer support and domiciliary service repairs and installations, among others effects resulting from government measures) and reduced sales in geographic locations impacted. Any prolonged restrictive measures put in place in order to control an outbreak of a contagious disease or other adverse public health development in any of our targeted markets may have a material and adverse effect on our business operations. Moreover, considering that some of our strategic suppliers are located in China, the delivery of equipment and fixed assets that are material to us may be impacted, which would have an adverse effect on our business operations. We may also be affected by a decline in the demand of our products, or the need to implement policies limiting the efficiency and effectiveness of our operations, including home office policies. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term. Additionally, we cannot predict how the disease will evolve (and potentially, spread) in Argentina, nor anticipate what additional restrictions the Argentine government may impose.

 

Argentina’s ability to obtain financing from international markets is limited, which could affect its capacity to implement reforms and sustain economic growth.

 

After Argentina’s default on certain debt payments in 2001, the government successfully restructured 92% of the debt through two debt exchange offers in 2005 and 2010. Nevertheless, holdout creditors filed numerous lawsuits against Argentina in several jurisdictions, including the United States, Italy, Germany and Japan, asserting that Argentina failed to make timely payments of interest and/or principal on their bonds, and seeking judgments for the face value of and/or accrued interest on those bonds. Judgments were issued in numerous proceedings in the United States, Germany and Japan. Although creditors with favorable judgments did not succeed, with a few minor exceptions, in enforcing on those judgments, as a result of decisions adopted by the New York courts in support of those creditors in 2014, Argentina was enjoined from making payments on its bonds issued in the 2005 and 2010 exchange offers unless it satisfied amounts due to the holders of defaulted bonds. The Argentine government took a number of steps intended to continue servicing the bonds issued in the 2005 and 2010 exchange offers, which had limited success. Holdout creditors continued to litigate and succeeded in preventing the Argentine government from regaining market access.

 

Between February and April 2016, the Argentine government entered into agreements in principle with certain holders of defaulted debt and put forward a proposal to other holders of defaulted debt, including those with pending claims in U.S. courts, which resulted in the settlement of substantially all remaining disputes and closure to 15 years of litigation. On April 22, 2016, Argentina issued bonds for US$16.5 billion, and applied US$9.3 billion of the proceeds to satisfy payments under the settlement agreements reached with holders of defaulted debt. Since then, substantially all of the remaining claims under defaulted bonds have been settled.

 

   
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As of the date of this Annual Report, although litigation initiated by bondholders that have not accepted Argentina’s settlement offer continues in several jurisdictions, the size of the claims involved has decreased significantly.

 

In addition, since 2001 foreign shareholders of some Argentine companies initiated claims for substantial amounts before the International Centre for Settlement of Investment Disputes (“ICSID”) against Argentina, pursuant to the arbitration rules of the United Nations Commission on International Trade Law. Claimants allege that certain measures of the Argentine government issued during the economic crisis of 2001 and 2002 were inconsistent with the norms or standards set forth in several bilateral investment treaties by which Argentina was bound at the time. To date, several of these disputes have been settled, and a significant number of cases are in process or have been temporarily suspended by the agreement of the parties.

 

Between 2016 and early 2018, Argentina regained access to the market and incurred approximately in US$96.3 billion of additional debt. However, as a result of various external and internal factors, during the first half of 2018, access to the market became increasingly onerous. On May 8, 2018, the Macri administration announced that the Argentine government would initiate negotiations with the IMF with a view to entering into a stand-by credit facility that would give Argentina access to financing by the IMF. On June 7, 2018, the Argentine government and the IMF staff reached an understanding on the terms of the SBA for disbursements totaling approximately US$50 billion, which was approved by the IMF’s Executive Board on June 20, 2018. The SBA was intended to provide support to the Macri administration’s economic program, helping build confidence, reduce uncertainties and strengthen Argentina’s economic prospects. On June 22, 2018 the Argentine government made a first drawing of approximately US$15 billion under the SBA. Argentina has received disbursements under the SBA for US$44 billion. Notwithstanding the foregoing, the current administration has publicly announced that they will refrain from requesting additional disbursements under the agreement, and instead vowed to renegotiate its terms and conditions in good faith.

 

Following the execution of the SBA, in August 2018, Argentina faced an unexpected bout of volatility affecting emerging markets generally. In September 2018, the Macri administration discussed with the IMF staff further measures of support in the face of renewed financial volatility and a challenging economic environment. On October 26, 2018, in light of the adjustments to fiscal and monetary policies announced by the Argentine government and the BCRA, the IMF’s Executive Board allowed the Argentine government to draw the equivalent of US$5.7 billion, bringing total disbursements since June 2018 to approximately US$20.6 billion, approved an augmentation of the SBA increasing total assets to approximately US$57.1 billion for the duration of the program through 2021 and the front loading of the disbursements. Under the revised SBA, IMF resources for Argentina in 2018-19 increased by US$18.9 billion. IMF disbursements for the remainder of 2018 more than doubled compared to the original IMF-supported program, to a total of US$13.4 billion (in addition to the US$15 billion disbursed in June 2018). Disbursements in 2019 were also nearly doubled, to US$22.8 billion, with US$5.9 billion planned for 2020-21.

 

On August 28, 2019, the Macri administration issued a decree deferring the scheduled payment date for 85% of the amounts due on short-term notes maturing in the fourth quarter of 2019, governed by Argentine law and held by institutional investors. Of the deferred amounts, 30% will be repaid 90 days after the original payment date and the remaining 70% will be repaid 180 days after the original payment date, except for payments under Lecaps due 2020 held domestically, which will be repaid entirely 90 days after the original payment date. Amounts due on short-term notes held by individual investors will be paid as originally scheduled. In December 2019, the Fernández administration further extended payments of a series of short term notes denominated in U.S. dollars until the end of August 2020, which were held by institutional investors.

 

Moreover, in December 2019, the Fernández administration further extended by decree payments of a series of short term Argentine-law governed treasury notes denominated in U.S. dollars held by institutional investors through August 2020. Additionally, on February 11, 2020, the Argentine government decreed the extension of maturity to September 30, 2020 of a dollar-linked treasury note governed by Argentine law, which had been originally subscribed to a large extent with U.S. dollar remittances, to avoid a payment with Argentine pesos that would have required significant sterilization efforts by the monetary authority. Also in February 2020, the Argentine Congress enacted a law enabling the government to take all necessary steps toward rendering the Argentine sovereign debt governed by foreign law sustainable. According to a timetable published by the Argentine government, a restructuring offer to private creditors would be launched during the second week of March 2020, which would expire by the end of March 2020. Additionally, an IMF team visited Buenos Aires in February, 2020 to discuss the recent macroeconomic developments and learn more about the Argentine authorities’ economic plans and policies. On February 19, 2020 the IMF staff issued a statement concluding that in light of recent developments and the materialization of certain risks to debt sustainability that were considered during the previous Debt Sustainability Analysis (DSA) published in July 2019, the IMF staff assesses Argentina’s debt to be unsustainable. Accordingly, the IMF staff stated that “a definitive debt operation—yielding a meaningful contribution from private creditors—is required to help restore debt sustainability with high probability”.

 

   
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Without renewed access to the financial market the Argentine government may not have the financial resources to implement reforms and boost growth, which could have a significant adverse effect on the country’s economy and, consequently, on our activities. Likewise, Argentina’s inability to obtain credit in international markets could have a direct impact on the Company’s ability to access those markets to finance its operations and its growth, including the financing of capital investments, which would negatively affect our financial condition, results of operations and cash flows. In addition, we cannot predict the outcome of any future restructuring of Argentine sovereign debt. We have investments in Argentine sovereign bonds amounting to P$1,178 million as of December 31, 2019. Any new event of default by the Argentine government could negatively affect their valuation and repayment terms, as well as have a material adverse effect on the Argentine economy and, consequently, our business and results of operations.

 

The Argentine banking system may be subject to instability which may affect our operations.

 

In recent years, the Argentine financial system grew significantly with a marked increase in loans and private deposits, showing a recovery of credit activity. In spite of the fact that the financial system’s deposits continue to grow in nominal terms, they are mostly short-term deposits and the sources of medium and long-term funding for financial institutions are currently limited. In 2019, although nominal private deposits in pesos increased 36% year-over-year (fueled by the growth of savings and current accounts with a 46% increase) and nominal time deposits increased 25% year-over-year, such nominal increases did not match inflation for the period. Peso-denominated loans increased at a slightly higher pace than that of 2018. During the same period, loans in foreign currency (composed mainly of corporate loans) evidenced a decrease of 33% at the end of 2019. In 2019, private deposits in U.S. dollars declined by 33%.

 

Financial institutions are particularly subject to significant regulation from multiple regulatory authorities, all of whom may, among other things, establish limits on commissions and impose sanctions on the financial institutions. The lack of a stable regulatory framework, or changes to such regulatory framework by the government, could impose significant limitations on the activities of the financial institutions and could induce uncertainty with respect to the financial system stability.

 

The persistence of the current economic crisis or the instability of one or more of the larger banks, public or private, could 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, lower sales of devices and the possibility of a higher level of uncollectible accounts or increase the credit risk of the counterparties regarding the Company investments in local financial institutions.

 

Exchange controls and restrictions on transfers abroad and capital inflows limit the availability of international credit.

 

We are subject to Argentine and international anti-corruption, anti-bribery and anti-money laundering laws. Our failure to comply with these laws could result in penalties, which could harm our reputation and have an adverse effect on our business, financial condition and results of operations.

 

The United States Foreign Corrupt Practices Act of 1977, the Organization for Economic Co-Operation and Development Anti-Bribery Convention, the Argentine Anti-Money Laundering Law (Ley de Prevención del Lavado de Activos), the Argentine Corporate Criminal Liability Law (Ley de Responsabilidad Penal Empresaria) and other applicable anti-corruption laws prohibit companies and their intermediaries from offering or making improper payments (or giving anything of value) to government officials and/or persons in the private sector for the purpose of influencing them or obtaining or retaining business and require companies to keep accurate books and records and maintain appropriate internal controls. In particular, the Argentine Corporate Criminal Liability Law provides for the criminal liability of corporate entities for criminal offences against public administration and transnational bribery committed by, among others, its attorneys-in-fact, directors, managers, employees, or representatives. In this sense, a company may be held liable and subject to fines and/or suspension of its activities if such offences were committed, directly or indirectly, in its name, behalf or interest, the company obtained or may have obtained a benefit therefrom, and the offence resulted from a company’s ineffective control.

 

It may be possible that, in the future, there may emerge in the press allegations of instances of misbehavior on the part of former agents, current or former employees or others acting on our behalf or on the part of public officials or other third parties doing or considering business with us. We will endeavor to monitor such press reports and investigate matters which we believe warrant an investigation in keeping with the requirements of compliance programs, and, if necessary make disclosure and notify the relevant authorities. However, any adverse publicity that such allegations attract may have a negative impact on our reputation and lead to increased regulatory scrutiny of our business practices.

 

If we or individuals or entities that are or were related to us are found to be liable for violations of applicable anti-corruption laws (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we or other individuals or entities could face civil and criminal penalties or other sanctions, which in turn could have a material adverse impact on our reputation, business, financial condition and results of operations.

 

   
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Risks Relating to Telecom and its operations

 

We face substantial and increasing competition in the Argentine fixed and mobile telephony, cable television and Internet businesses.

 

The fixed and mobile telephony, cable television and Internet businesses in Argentina are competitive. Our competitors may consummate transactions that result in a further consolidation and convergence. Therefore, we may lose a portion of our market share which may create additional risks and adversely impact our financial condition and results of operations. See “—We may become subject to burdensome government regulations, ordinances and laws affecting the services we offer which could adversely affect our operations.”

 

We compete with other cable television operators that have built networks in the areas in which we operate, providers of other pay television services, including direct broadcasting, direct-to-home satellite and multi-channel multi-point distribution system services, licensed suppliers of basic telephone services and cooperative entities providing utility services and also with free broadcasting services which are currently available to the Argentine population in certain areas from four privately-owned television networks (including one owned by Grupo Clarín) and their local affiliates and one state-owned national public television network. We expect competition to increase in the future due to a number of factors, including the development of new technologies.

 

In relation to mobile services, we anticipate that we will have to devote significant resources to the refurbishment and maintenance of our existing network infrastructure to comply with regulatory obligations and to remain competitive with respect to the quality of our services. In addition, we must comply with the obligations arising from the acquisition of the 4G spectrum. We also expect to continue to devote resources to customer retention and loyalty in such services.

 

Technological innovation relating to fixed and mobile telephony, cable television and Internet transmission increases the level of competition that we face and requires us to make frequent investments to develop new and innovative programming services and products to attract and retain fixed and mobile telephony, cable television and Internet customers. We cannot assure you that we will be able to make the investments necessary to remain competitive, or that we will be able to attract new and retain our current customers. A substantial loss of customers to competitors would have a material adverse effect on our business and results of operations.

 

Additionally, our ability to successfully invest in, and implement, new technologies, coverage and our wireless network may be impaired if we fail to obtain certain municipal authorizations, as well as by an adverse macroeconomic condition in Argentina. If we are not successful in making such investments, the growth of our business and quality of our services would be adversely affected. Further, if we are unable to make these capital expenditures, or if our competitors are able to invest in their businesses to a greater degree and/or faster than we are, our competitive position will be adversely impacted.

 

We also face competition from other cable television and Internet service providers. Certain competitors of the cable television and Internet business have well-established name recognition, larger customer bases, and significant financial, technical and marketing resources. This may allow them to devote significant resources to the development and promotion of their business. These competitors may also engage in more extensive research and development, adopt more aggressive pricing policies and make more attractive offers to advertisers. Competitors may develop products and services that are equal or superior to our offers or that achieve greater market acceptance. As a result, competition may have a material adverse effect on our operations.

 

Moreover, the products and services that we offer may fail to generate revenues or attract and retain customers. If our competitors present similar or better responsiveness, functionality, services, speed, plans or features, our customer base and our revenues may be materially affected.

 

Competitiveness is and will continue to be affected by the business strategies and alliances deployed by our competitors. We may face additional pressure on the prices that we charge for our services or experience a loss of market share in the services we provide. In addition, the general business and economic climate in Argentina may affect us and our competitors differently; thus our ability to compete in the market could be adversely affected.

 

Additionally, if in the future licensees of ICT services are allowed to register and provide subscription broadcasting service by satellite link, it will ease the entry of new competitors into the market. As a result, we may face additional pressure with respect to prices we charge for our services or experience a loss of participation in the subscription broadcasting market.

 

Given the range of regulatory, business and economic uncertainties we face, it is difficult to predict with precision and accuracy our future market share in relevant geographic areas and customer segments, or to anticipate a decrease in demand for the products we offer that could result in a reduction of our revenues and market share, or the speed with which such 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, results of operations and cash flows.

 

   
PART I - ITEM 3 KEY INFORMATION — SELECTED FINANCIAL DATA TELECOM ARGENTINA S.A.

 

22

 

 

Our revenues are cyclical and depend upon the condition of the Argentine economy.

 

Revenues generated by our fixed and mobile telephony, cable television and Internet operations have proven cyclical and depend on general economic conditions. In the past, a general economic downturn in Argentina has had, and would be expected to have in the future, a negative effect on our revenues and a material adverse effect on our results of operations. Historically, for example, increases in losses of cable television subscribers have corresponded with general economic downturns and regional and local economic recessions. In particular, the 2001-2002 Argentine economic crisis had a material adverse effect on our revenues.

 

We may become subject to burdensome regulations, ordinances and laws affecting the services we offer which could adversely affect our operations.

 

Activities in the fixed and mobile telephony, cable television and Internet businesses are subject to risks associated with the adoption and implementation of laws and governmental regulations that reflect changing governmental policies over time. The Argentine government has historically exercised significant influence over the economy, and telecommunications companies in particular have operated in a highly regulated environment. In the past, the Argentine government promulgated numerous, far-reaching regulations affecting the economy and telecommunications companies in particular. Existing regulations could further increase penalties that may be imposed by the regulatory authorities. 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 mobile networks. For example, municipalities usually restrict areas where antennas may be deployed, negatively impacting our mobile service coverage, which in turn affects the quality of our services. Municipal and provincial tax authorities have also brought an increasing number of claims against us, which we are replying. If changes to existing laws and regulations lead to negative consequences for the Company, our business, financial condition, results of operations and cash flows may be adversely affected.

 

After the deregulation of Argentina’s telecommunications and media industries, the Broadcasting Law (as defined below), the LAD and their implementing regulations have been amended on a number of occasions, modifying requirements to hold or transfer broadcasting licenses. In addition, we are subject to the regulations of certain other governmental entities, including the SCI, which has issued resolutions requiring Argentine cable television operators to apply a formula to calculate their customers’ monthly subscription prices. We can offer no assurances that we will not be subject to similar regulations in the future, which could force us to modify the prices of subscription services and have a material adverse effect on the revenues generated by our activities relating to the cable television and Internet businesses.

 

The regulatory authorities have imposed increasing burdens and new regulations on companies that could increase the penalties they can impose for breaches of the regulatory framework.

 

Additionally, the LAD established that licensees of ICT services may freely set their prices which shall be fair and reasonable, to offset the costs of exploitation and to tend to the efficient supply and reasonable margin of operation. If prices are deemed unreasonable, and the ENACOM consequently imposes restrictions on our prices, our operating margins may be adversely affected. Our ability to comply with the conditions in our license, as well as the relevant provisions in applicable regulations and laws, may be affected by events or circumstances outside of our control, and therefore we cannot predict whether such events or circumstances result in an adverse effect on our financial condition, our operations and cash flows.

 

In certain municipalities, regulations have been adopted requiring us to upgrade and/or modify our cable television systems. We will seek to continue to upgrade our existing cable systems, including any network upgrades or modifications required by regulatory or local authorities if we have sufficient cash flow and financing is available at commercially attractive rates. Although currently applicable local ordinances provide that certain penalties may be imposed, including the suspension of the right to use the air space, municipalities have generally not imposed penalties on non-compliant cable systems operators. As of the date of this Annual Report, no fines have been imposed to us in relation to this matter.

 

The Auction Terms and Conditions approved by Resolution SC No. 38/14 established strict coverage and network deployment commitments that will require significant capital expenditures from Telecom. Additionally, many municipal governments have issued regulations that, in our view, exceed their authority, which frequently limit, hinder or restrict the installation of the infrastructure required to comply with such commitments. Therefore, such legislation negatively impacts the obligations that we and our competitors assumed in the mobile telephony business pursuant to the requirements set out in the Regulation for the Quality of Telecommunications Services.

 

We may also be subject to additional and unexpected governmental regulations in the future. For more information on the regulatory framework, see “Item 4—Information on the Company—Regulatory Authorities and Framework.”

 

   
PART I - ITEM 3 KEY INFORMATION — SELECTED FINANCIAL DATA TELECOM ARGENTINA S.A.

 

23

 

 

Technological advances and replacement of our equipment may require us to make significant expenditures to maintain and improve the competitiveness of the services we offer.

 

Our industries are subject to significant changes in technology and the introduction of new products and services. We cannot predict the effect of technological changes on our business. New services and technological advances related to the telecommunications, cable television and Internet industries are likely to offer additional opportunities to compete against us on the basis of cost, quality or functionality. It may not be practicable or cost-effective for us to replace or upgrade our installed technologies in response to our competitors’ actions. Responding to such change may require us to devote substantial capital to the development, procurement or implementation of new technologies, and may depend on the final cost in local currency of imported technology and our ability to obtain additional financing. No assurance can be given that we will have the funds to make the capital expenditures to improve our systems, compete with others in the market or replace equipment used in connection with our businesses.

 

Moreover, Internet, cable television and mobile telephony services, which we expect 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, we must invest in network, constantly upgrade our access technology and software for the internet service market, improve the commercial offers and the user experience and continue to enhance our mobile networks by expanding our network. See “Item 4 —Information on the Company—The Business.” 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, mobile and Internet network facilities) may need to be rebuilt in whole or in part, at substantial cost, to remain competitive. These enhancements and the implementation of new technologies will continue requiring increased capital expenditures.

 

The media industry is a dynamic and evolving industry, and if it does not develop and expand as we currently expect, our results and operations relating to our cable television and Internet businesses may suffer.

 

We expect to derive an increasing amount of revenues from our activities in the cable television and Internet industries, but we may not do so if these non-traditional media operations do not develop and expand as we currently expect. The role of cable television in Argentina became increasingly important in the past. More recently, non-traditional technologies, including “Over-The-Top” services (which are services provided by a telecommunications provider through Internet Protocol (“IP”) networks not necessarily owned by the provider, including communications, content and cloud-based offerings), such as technologies used by Netflix or other IP operators, have come to play a larger role in the Argentine telecommunications industry. These companies take advantage of the deregulation of the sector to bring their services through third-party networks without paying any fee or right to use it. These technology and new services areas are in the early stages of development, and growth may be inhibited for a number of reasons, including:

 

·the cost of connectivity;

 

·concerns about security, reliability, and privacy;

 

·unexpected changes in the regulatory framework;

 

·the appearance of technological innovations;

 

·the ease of use; and

 

·the quality of service.

 

Our business, financial condition and results of operations will be materially and adversely affected if these markets do not continue to grow or grow more slowly than we anticipate.

 

In addition, unlike the Argentine cable television industry, which has traditionally been dominated by companies located in Argentina, competitors in the other services we provide may be based outside of Argentina and enjoy certain competitive advantages such as scale and access to financial resources on terms that are better than those available to us.

 

   
PART I - ITEM 3 KEY INFORMATION — SELECTED FINANCIAL DATA TELECOM ARGENTINA S.A.

 

24

 

 

We may not be able to renew programming contracts on favorable terms.

 

We purchase basic and premium programming from approximately 52 programming suppliers. Several programming suppliers agreed to offer volume discount pricing structures because of the growth and market share shown by our cable television operations. Participants in the cable television industry negotiate the terms of a majority of the respective programming contracts that had originally been denominated in U.S. dollars to provide for Peso-denominated pricing formulas generally linked to the number of subscribers and without minimum purchase requirements. As a consequence, contract terms are generally shortened and pricing provisions are adjusted in order to transfer the benefit of increases in the monthly fee for basic cable television services to the programming companies. The new contracts also provide for automatic termination upon the occurrence of major macroeconomic disruptions. We cannot assure you that we will be able to regularly negotiate renewals of our programming contracts at current cost levels, particularly since many of our suppliers have U.S. dollar-based costs. Additionally, suppliers are expected to seek price increases as a reflection of economic conditions in Argentina. There can similarly be no assurances that we will be able to obtain volume discounts in the future.

 

We may not be able to renew some leases of the facilities for the installation of our fixed and mobile telephony, cable television and Internet systems.

 

Our fixed and mobile telephony services, cable television services and Internet services are distributed through networks installed in facilities leased from third parties, either through the lease of space on roofs or on utility poles. We regularly renegotiate the renewal of short-term lease contracts for the use of poles in different areas of the country in the ordinary course of our business. If we are not able to renew some of those lease contracts, our operations in such areas may be suspended if alternative third-party facilities are not promptly obtained on a cost-efficient basis. Underground distribution of our wire network would require additional governmental authorizations and significant capital expenditures that we may not be able to afford or that we may be restricted from making pursuant to the terms and conditions of our indebtedness and our existing covenants. There can be no assurance that such renewals of lease contracts will be granted.

 

Our revenues may be adversely affected by an increase in churn rates, with respect to mobile telephony, cable television and Internet services, or reductions in fixed telephony lines in service, with respect to fixed telephony services.

 

Our revenues depend significantly on our ability to retain customers by limiting churn rates, with respect to mobile telephony, cable television and Internet services, or net reductions in fixed telephony lines in service, with respect to fixed telephony services. Any substantial increase in churn rates, with respect to mobile telephony, cable television and Internet services, or reductions in lines in service, with respect to fixed telephony services, may have a material adverse effect on our revenues and results of operations. For further information about churn rates see “Item 4—Management of Churn” and “Item 5—Operating and Financial Review and Prospects—Consolidated Results of Operations—(A.1) 2019 Compared to 2018.”

 

Our revenues relating to our cable television services are subject to uncertainty due to, and may be adversely affected by, the formula set forth in Resolution No. 50/10 to estimate monthly fees paid by cable television subscribers.

 

SCI Resolution No. 50/10 approved certain rules governing pay television services. These rules provide that cable television operators must apply a formula to calculate their monthly subscription prices. The price arising from the application of the formula was to be informed to the Office of Business Loyalty (“Dirección de Lealtad Comercial”), requiring cable television operators to adjust such amount semi-annually and inform the result of such adjustment to that Office. The Company challenged Resolution No. 50/10 and requested the suspension of its effects and its nullity.

 

A decision issued on August 1, 2011 in re “LA CAPITAL CABLE S.A. v. Ministerio de Economía-Secretaría de Comercio Interior de la Nación”, by the Federal Court of Appeals of the City of Mar del Plata ordered the SCI to suspend the application of Resolution No. 50/10 with respect to all cable television licensees represented by the Argentine Cable Television Association (“ATVC”), including us. The injunction was notified to the SCI and the Ministry of Economy on September 12, 2011 and became fully effective. The PEN filed an appeal against the decision issued by the Court of Appeals of Mar del Plata. Such appeal was dismissed, for which the PEN filed a direct appeal to the Supreme Court, which was also dismissed.

 

Notwithstanding the foregoing, between March 2011 and October 2014 certain resolutions were adopted based on Resolution No. 50/10 regulating the prices that Cablevision should charge for such months to its customers. These resolutions were challenged and suspended as a result of the aforementioned injunction. However, each Resolution had a valid period of three to six months, with the last one expiring in October 2014.

 

   
PART I - ITEM 3 KEY INFORMATION — SELECTED FINANCIAL DATA TELECOM ARGENTINA S.A.

 

25

 

 

In September 2014, a decision was rendered in a case brought by the Municipality of Berazategui against Cablevisión ordering the submission of all cases relating to these resolutions to the jurisdiction of the Federal Courts of Mar del Plata, which had issued the decision on the class action in favor of ATVC.

 

In April 2019, La Capital Cable S.A. was served with notice of the resolution issued by the Federal Court of First Instance No. 2 of Mar del Plata declaring the unconstitutionality of certain sections of a law on which the SCI had found the legal basis for the issuance of Resolution No. 50/10 and the successive resolutions. The declaration of unconstitutionality implied that these resolutions are not applicable to the companies grouped by ATVC, including Telecom. However, the PEN filed an appeal against that resolution.

 

On December 26, 2019, the Federal Court of Appeals of Mar del Plata rejected the grievances of the Argentine government and confirmed the decision rendered by the Court of Mar del Plata which declared the unconstitutionality of the sections of the law on which the SCI issued Resolution No. 50/10 and the subsequent resolutions were based. The Argentine government may file an appeal against the decision issued by the Court of Mar del Plata.

 

The Company’s Management, with the assistance of its legal advisors, considers that it has strong arguments for its defense. However, an adverse outcome in the above mentioned cases, which we cannot exclude, would have an adverse effect on our results of operations and financial condition.

 

Actual or perceived health risks or other problems relating to mobile handsets or transmission masts could lead to litigation or decreased mobile communications usage.

 

The effects of, and any damage caused by, exposure to an electromagnetic field were and are the subject of careful evaluations by the international scientific community, but until now there is no scientific evidence of harmful effects on health. We cannot rule out that exposure to electromagnetic fields or other emissions originating from wireless handsets will not be identified as a health risk in the future.

 

Telecom complies with the international security standards established by the World Health Organization and Argentine regulations -which are similar and mandatory for all Argentine mobile operators. Our mobile business may be harmed as a result of any future alleged health risk. For example, the perception of these health risks could result in a lower number of customers, reduced usage per customer or potential consumer liability, all of which could have a material adverse effect on our financial condition and results of operations.

 

Our operations and financial condition could be affected by union negotiations and Argentine labor regulations.

 

In Argentina, labor organizations have substantial support and considerable political influence. In recent years, the demands of our labor organizations have increased mainly as a result of the increase in the cost of living, which was affected by increased inflation, higher tax pressure over salaries and the consequent decline in the population’s purchasing power.

 

In addition, in the absence of a union agreement concerning convergent services, if we are unable to reach an agreement with the unions on work conditions, or in case of a lack of recognition among union associations, we may be adversely affected by individual labor claims, class actions, higher union contributions expenses, impacts to our operations, impairment of services due to inefficient processes, union conflicts, direct action measures and social impacts which may also affect the quality and continuity of our services to our customers and our reputation.

 

Certain labor unions have initiated claims against the Company alleging non-compliance of certain conditions provided for in the collective bargaining agreements that could allow them to negotiate the inclusion of some suppliers’ employees in their collective bargaining agreements. If labor organization claims continue or are sustained, this could result in increased costs, greater conflict in the negotiation process and strikes (including general strikes and strikes by the Company’s employees and the contractors and subcontractors’ employees) that may adversely affect our operations. See “Item 6—Directors, Senior Management and Employees—Employees and Labor Relations.”

 

In addition, certain telecommunication unions have initiated claims against the Company alleging non-compliance of certain conditions provided for in the collective bargaining agreements that could allow them to negotiate the inclusion of some suppliers’ employees in their collective bargaining agreements. See Note 20 to our Consolidate Financial Statements.

 

   
PART I - ITEM 3 KEY INFORMATION — SELECTED FINANCIAL DATA TELECOM ARGENTINA S.A.

 

26

 

 

Moreover, the Argentine government has enacted laws and regulations requiring private sector companies to maintain certain salary levels and provide their employees with additional benefits. On December 13, 2019, the Fernández Administration declared a labor emergency for a 180-day term. In this context, during the labor emergency period, payments for severances without cause double the amounts contemplated in the labor code for such severance in normal circumstances.

 

We are or may be involved in legal and regulatory proceedings that could result in unfavorable decisions and financial penalties for us.

 

We are party to a number of legal and regulatory proceedings, some of which have been pending for several years. We cannot be certain that these claims will be resolved in our favor. Responding to the demands of litigation claims and responding to, or initiating proceedings against, regulatory bodies may divert management’s time attention and financial resources.

 

For example, Argentine law incentivizes individuals to pursue employment-related litigation and certain judicial rulings have created a negative precedent in these matters and could increase our labor costs. The Company is also exposed to employment-related claims of employees of suppliers, contractors and commercial agents claiming direct or indirect responsibility of Telecom based on a broad interpretation of the rules of labor law.

 

Further, customers and consumers’ trade unions have in the past initiated different claims against us regarding improperly billed charges. See Note 20 to our Consolidated Financial Statements. Although we have taken certain actions to reduce risks in connection with these claims, we cannot assure that new claims will not be filed against us in the future.

 

The Company has in the past been subject to technical sanctions from regulatory bodies, mainly related to the delay in repairing defective lines, installing new lines and/or service failures. Although sanctions are appealed in the administrative stage, if the appeals are not resolved in our favor in administrative or judicial stage or if they are resolved for amounts larger than those recorded, these proceedings could have an adverse effect on our financial condition, results of our operations and cash flows.

 

As of December 31, 2019, we recorded provisions that we estimate are sufficient to cover contingencies considered probable. However, we may face increased risk of employment, commercial, regulatory, tax, consumer trade union and customers’ proceedings, among others. If this occurs, we cannot guarantee that those proceedings will not have an adverse effect on our results of operations and financial condition. See Note 20 to our Consolidated Financial Statements.

 

The enforcement of the Law for the Promotion of Registered Labor and Prevention of Labor Fraud may have a material adverse effect on us.

 

The Law for the Promotion of Registered Labor and Prevention of Labor Fraud (Ley de Promoción del Trabajo Registrado y Prevención del Fraude Laboral), among other things, establishes a Public Record of Employers subject to Labor Sanctions (“Repsal”) and defines a series of labor and social security infringements as a result of which an employer shall be included in the Repsal.

 

The employers included in the Repsal are subject to sanctions, such as: the inability to access public programs, benefits, subsidies or credit from state-owned banks, the inability to enter into contracts and licenses of property owned by the Argentine government, or the inability to participate in the awarding of concessions of public services and licenses. Employers that commit the same infringement for which they were added to the Repsal within a 3-year period after the final first decision imposing sanctions cannot deduct from the Income Tax the expenses related to their employees while such employer continues to be included in the Repsal. This new regulation applies to both Telecom and its contractors and subcontractors, whose employees could initiate claims to Telecom for direct or indirect responsibility.

 

As of the date of this Annual Report, Telecom has no sanctions registered in the Repsal. However, if sanctions are applied in the future they could have a significant impact on Telecom’s financial position, result of operations and cash flows.

 

   
PART I - ITEM 3 KEY INFORMATION — SELECTED FINANCIAL DATA TELECOM ARGENTINA S.A.

 

27

 

 

A cyberattack, could adversely affect our business, balance sheet, results of operations and cash flow.

 

In general, information security risks have increased in recent years as a result of the proliferation of new and more sophisticated technologies and also due to cyberattack activities. As part of our development and initiatives, more equipment and systems have been connected to the Internet. We also rely on digital technology including information systems to process financial and operational information. Due to the nature of our business and the greater accessibility allowed through the Internet connection, we could face an increased risk of cyberattacks. In the event of a cyberattack, we could experience an interruption of our commercial operations, material damage and loss of customer information; a substantial loss of income, suffering response costs and other economic losses; and it could subject us to more regulation and litigation, affecting our reputation. As a result, a cyberattack could adversely affect our business, results of operations and financial condition. As of the date of this Annual Report, our insurance policy does not cover damages caused by cyberattacks and other similar events.

 

Operational risks could adversely affect our reputation and our profitability.

 

Telecom faces operational risks inherent from its business, including those resulting from inadequate internal processes; fraud; employee errors or misconduct; failure to comply with applicable laws and regulations; failure to document transactions properly; systems failures (including our systems, the implementation of corporate systems as identified in “Item 4—Information Technology strategy” and cloud services); errors or failures not foreseen in the foundational projects that the Company is carrying out for updating its core systems; inadequate maintenance of posts or its electrification by proximity to the electric network; inadequate environmental management including reverse logistics of goods and materials in disuse that could become hazardous waste; incomplete or inadequate municipal authorizations and permissions resulting from changes in operations or changes in regulations; failure to preserve the secrecy and content of telecommunications required by law; weaknesses in datacenters’ energy scheme; the loss or improper use of confidential information, launching of “Internet of Things” products and services without proper security measures; excessive dependence on certain providers with which a large number of operations are concentrated due to the exclusivity of the technology or service they provide, economic convenience or for strategic reasons; among others. Moreover, certain assets of the Company could be damaged by acts of vandalism or theft of components or by works of third parties on public thoroughfare that damage infrastructure that do not have a second safety path to provide the service. These events could result in direct or indirect losses, inaccurate information for decision making, adverse legal and regulatory proceedings, technical failures in the Company’s ability to provide its services, damages to third parties, and harm our reputation and operational effectiveness, among others.

 

Telecom maintains insurance policies to cover its main assets, particularly its properties. If economic and financial conditions in Argentina were to deteriorate (i.e. devaluation, inflation, etc.), the insurance coverage may not be representative of the market value of the properties which could result in losses for the Company.

 

Telecom’s suppliers of goods and services are contractually obliged to comply with laws and regulations (including tax, labor, social security, anti-corruption, money laundering standards, etc.). Additionally, our suppliers shall comply with a set of conduct standards, such as the Code of Ethics, established by Telecom, and must require similar compliance by their employees and subcontractors. Despite these legal safeguards and monitoring efforts made by Telecom in relation to its suppliers, we cannot assure you that they will comply with all applicable regulations. As a result, Telecom could be adversely affected despite our contractual rights to claim for compensations for damages that they could cause to us.

 

Telecom has risk management practices at the highest levels including a Risk Management Committee designed to detect, manage and monitor the evolution of operational risks. However, the Company can give no assurances that these measures will be successful for effectively mitigating the operational risks that Telecom faces and such failures could have a material adverse effect on its results of operations and could harm its reputation.

 

Any failure by a strategic supplier to comply with its legal and contractual obligations could adversely affect our operations and any action or restriction by a foreign government against a strategic supplier could adversely affect our reputation.

 

We rely on strategic suppliers of equipment and materials to provide us with equipment and materials that we need in order to expand and to operate our business. As a result, we are exposed to risks associated with these suppliers, including restrictions of production capacity for equipment and materials, availability of equipment and materials, delays in delivery of equipment, materials or services, and price increases. If these suppliers or vendors fail to provide equipment, materials or services to us on a timely basis or otherwise in compliance with the terms of our contracts with these suppliers, we could experience disruptions or declines in the quality of our services, which could have an adverse effect on our revenues and results of operations.

 

   
PART I - ITEM 3 KEY INFORMATION — SELECTED FINANCIAL DATA TELECOM ARGENTINA S.A.

 

28

 

 

Telecom’s suppliers of goods and services are contractually obliged to comply with applicable laws and regulations (including tax, labor, social security, anti-corruption, money laundering standards, etc.). Despite these legal safeguards, as well as monitoring efforts by Telecom, we cannot ensure that our suppliers will comply with all applicable standards. As a result, our financial condition and reputation could be adversely affected.

 

The U.S. Congress and certain regulatory agencies have raised concerns about American companies purchasing equipment and software from Chinese telecommunications companies such as Huawei, one of our strategic suppliers, including concerns relating to alleged violations of intellectual property rights and potential security risks. The U.S. Government is likewise urging other countries to avoid the operations of Chinese companies such as Huawei in their territory, citing concerns regarding potential use of the equipment for espionage. Our reputation could be adversely affected if such actions or restrictions were imposed on Huawei or if the equipment and materials we purchase from Huawei is thought to pose a security risk for our network. We cannot predict whether additional restrictions targeting Huawei, including restrictions that would prevent us from acquiring supplies from Huawei in the future, will be adopted directly.

 

We and/or our administrators are subject to environmental and safety regulations whose non-compliance could result in increased costs and/or penalties for our administrators.

 

Some of the goods and facilities used in our operation are subject to federal, state and municipal environmental and safety regulations. If such rules are not adequately complied, they could result in fines, potential delays or inability to obtain authorization for our facilities and operations which could have an adverse effect in our business, but also could result in penalties for the Company’s administrators. In addition, according with global trends, new and stricter standards may be issued, or authorities may enforce or construe existing laws and regulations in a more restrictive manner, which may force us to make expenditures or incur increased costs to comply with such new rules.

 

Restrictive covenants in Telecom’s outstanding indebtedness may restrict its ability to pursue its business strategies.

 

Telecom has outstanding financial debt that contain a number of restrictive covenants that impose significant operating and financial restrictions on it and may limit Telecom’s ability to engage in acts that may be in its long-term best interests. These agreements governing its indebtedness include covenants restricting, among other things, Telecom’s ability to:

 

·incur or guarantee additional debt;

 

·enter into sale and leaseback transactions;

 

·create liens on its assets to secure debt; and

 

·merge or consolidate with another person or sell or otherwise dispose of all or substantially all of its assets.

 

A breach of any covenant contained in the indentures governing Telecom’s notes or the agreements governing any of its other indebtedness could result in a default under those agreements. If any such default occurs, the holders of such indebtedness may elect (after the expiration of any applicable notice or grace periods) to declare all outstanding amounts, together with accrued and unpaid interest and other amounts payable thereunder, to be immediately due and payable. If any of Telecom’s debt, including its notes, were to be accelerated, its assets may not be sufficient to repay in full that debt or any other debt that may become due as a result of that acceleration.

 

   
PART I - ITEM 3 KEY INFORMATION — SELECTED FINANCIAL DATA TELECOM ARGENTINA S.A.

 

29

 

 

We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined or fluctuations in interest rates.

 

As of December 31, 2019, US$1,316.7 million of our outstanding debt was indexed to the London Interbank Offered Rate (“LIBOR”).

 

In 2017, the Financial Conduct Authority (the “FCA”) announced its intention to phase out LIBOR by the end of 2021. It is not possible to predict the further effect of the rules of the FCA, any changes in the methods by which LIBOR is determined, or any other reforms to LIBOR that may be enacted in the United Kingdom, the European Union or elsewhere. Any such developments may cause LIBOR to perform differently than in the past, or cease to exist. In addition, any other legal or regulatory changes made by the FCA, ICE Benchmark Administration Limited, the European Money Markets Institute (formerly Euribor-EBF), the European Commission or any other successor governance or oversight body, or future changes adopted by such body, in the method by which LIBOR is determined or the transition from LIBOR to a successor benchmark may result in, among other things, a sudden or prolonged increase or decrease in LIBOR, a delay in the publication of LIBOR, and changes in the rules or methodologies in LIBOR, which may discourage market participants from continuing to administer or to participate in LIBOR’s determination, and, in certain situations, could result in LIBOR no longer being determined and published. If a published U.S. dollar LIBOR is unavailable after 2021, the interest rates on our debt which is indexed to LIBOR will be determined using various alternative methods, any of which may result in interest obligations which are more than or do not otherwise correlate over time with the payments that would have been made on such debt if U.S. dollar LIBOR was available in its current form. Further, the same costs and risks that may lead to the discontinuation or unavailability of U.S. dollar LIBOR may make one or more of the alternative methods impossible or impracticable to determine. Any of these proposals or consequences could have a material adverse effect on our financing costs.

 

Additionally, we are exposed to the fluctuations of the interest rates applicable to our indebtedness indexed to variable interest rates. We may also incur additional variable-rate debt in the future. Increases in interest rates on variable-rate debt would increase the Company’s interest expense, which would negatively affect our financial costs.

 

We may be unable to refinance our outstanding indebtedness, or the refinancing terms may be materially less favorable than their current terms, which would have a material adverse effect on our business, financial condition and results of operations.

 

There is no assurance that we will be able to extend the maturity or otherwise refinance our outstanding indebtedness, or we may be required to agree to refinancing terms that may be materially less favorable than the terms of our current loans and notes. Any amendment to or refinancing of our indebtedness could result in higher interest rates and may require us to comply with more burdensome restrictive covenants, which may have a material adverse effect on our business, ability to meet our payment obligations, financial condition, and results of operations.

 

If we are unable to refinance our debt in favorable terms, we may be forced to reduce or delay capital expenditures or research and development expenditures, seek additional equity capital, restructure our debt, curtail or eliminate our cash dividend to stockholders, or sell assets. In addition, if we are unable to secure an extension or refinancing of our existing indebtedness, including our outstanding Class A Notes maturing in June 2021, we may not have sufficient liquid assets to repay our obligations thereunder. Non-payment of those obligations or any other default under any of our debt instruments could, in turn, result in a default and acceleration of our other outstanding debt obligations, which would have a further material adverse effect on our business, ability to meet our payment obligations, financial condition, and results of operations. See Note 14 and 28 to our Consolidated Financial Statements.

 

 

Risks Relating to Telecom Argentina’s Shares and ADSs

 

The New York Stock Exchange (“NYSE”) and/or the Buenos Aires Stock Exchange (by delegated authority of BYMA) may suspend trading and/or delist Telecom’s ADSs and Class B common shares, respectively, upon occurrence of certain events relating to Telecom’s financial situation.

 

The NYSE and/or the BYMA may suspend and/or cancel the listing of Telecom’s ADSs and Class B common shares, respectively, in certain circumstances, including upon the occurrence of certain events relating to Telecom’s financial situation. For example, the NYSE may decide such suspension or cancellation if Telecom’s equity becomes negative.

 

   
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The NYSE may in its sole discretion determine on an individual basis the suitability for continued listing of an issuer in the light of all pertinent facts. Some of the factors mentioned in the NYSE Listed Company Manual, which may subject a company to suspension and delisting procedures, include: “unsatisfactory financial conditions and/or operating results,” “inability to meet current debt obligations or to adequately finance operations,” and “any other event or condition which may exist or occur that makes further dealings or listing of the securities on the NYSE inadvisable or unwarranted in the opinion of NYSE.”

 

We cannot assure you that the NYSE and/or BYMA will not commence any suspension or delisting procedures in light of Telecom’s financial situation, including if Telecom’s equity becomes negative. A delisting or suspension of trading of Telecom’s ADSs or Class B common shares by the NYSE and/or BYMA, respectively, could adversely affect Telecom’s results of operations and financial conditions and cause the market value of Telecom’s ADSs and Class B common shares to decline.

 

Under Argentine corporate law, shareholder rights may be fewer or less well defined than in other jurisdictions.

 

Our corporate affairs are governed by our bylaws and by Argentine corporate law, which differ from the corporate regulatory framework that would apply if we were incorporated in a jurisdiction in the United States (such as Delaware or New York), or in other jurisdictions outside Argentina. Thus, your rights under Argentine corporate law to protect shareholders’ interests relating to actions by our Board of Directors may be fewer and less well defined than under the laws of those other jurisdictions. Although insider trading and price manipulation are illegal under Argentine law, the Argentine securities markets may not be as highly regulated or supervised as the U.S. securities markets or markets in some of the other jurisdictions. In addition, rules and policies against self-dealing and regarding the preservation of shareholder interests may be less well defined and enforced in Argentina than in the United States, or other jurisdictions outside Argentina, putting holders of our Shares and ADSs at a potential disadvantage.

 

Changes in Argentine tax laws may adversely affect the tax treatment of our Shares and/or the ADSs.

 

In September, 2013, the Argentine income tax law was amended by the passage of Law No. 26,893 (the “Argentine Income Tax Law”). The Argentine Income Tax Law establishes that the sale, exchange or other transfer of shares and other securities is subject to a capital gain tax at a rate of 15% for Argentine resident individuals and foreign beneficiaries.

 

Until the enactment of Law No. 27,430, in force since fiscal year 2018, there was an exemption for Argentine resident individuals if certain requirements were met. However, there was no such exemption for non-Argentine residents. For transactions made until December 31, 2017, many aspects of the Argentine Income Tax Law as they apply to the holding and sale of ADSs still remain unclear and they were subject to further regulation and interpretation which may adversely affect the tax treatment of our Shares underlying ADSs and/or ADSs. The income tax treatment of income derived from the sale of ADSs or exchanges of shares from the ADS facility may not be uniform under the revised Argentine Income Tax Law. The possibly varying treatment of the source of income could impact both Argentine resident holders as well as non-Argentine resident holders.

 

Law No. 27,430 requires the capital gains tax to be paid for transactions carried out between September 2013 (when taxation on the sale of shares for nonresidents was introduced) and the effective date of the tax reform, providing that no tax, however, will be due for stock exchange transactions as long as the tax has not yet been paid due to the lack of regulations for the withholding or collection by the stock exchange agents or intermediaries.

 

Consequently, holders of our Class B Shares, including in the form of ADSs, are encouraged to consult their tax advisors as to the particular Argentine income tax consequences of owning our Shares or the ADSs.

 

Our shareholders may be subject to liability under Argentine law for certain votes of their securities.

 

Under Argentine law, a shareholder’s liability for losses of a company is limited to the value of his or her shareholdings in the company. However, shareholders who have a conflict of interest with us and who do not abstain from voting at the respective shareholders’ meeting may be liable for damages to us, but only if the transaction would not have been approved without such shareholders’ votes. Furthermore, shareholders who willfully or negligently vote in favor of a resolution that is subsequently declared void by a court as contrary to the law or our bylaws may be held jointly and severally liable for damages to us or to other third parties, including other shareholders.

 

   
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The price of our Class B Shares and the ADSs may fluctuate substantially, and your investment may decline in value.

 

The trading price of our Class B Shares is likely to be highly volatile and may be subject to wide fluctuations in response to factors, many of which are beyond our control. The market price of our ADSs declined by 58% and 27% in 2018 and 2019, respectively. This decrease in value has been largely attributed to Argentina’s most recent macroeconomic crisis. Other factors include:

 

·fluctuations in our periodic operating results;

 

·changes in financial estimates, recommendations or projections by securities analysts;

 

·changes in conditions or trends in our industry;

 

·events affecting equities markets in the countries in which we operate;

 

·legal or regulatory measures affecting our financial conditions;

 

·departures of management and key personnel; or

 

·potential litigation or the adverse resolution of pending litigation against us or our subsidiaries.

 

The stock markets in general have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies involved. We cannot assure you that trading prices and valuations will be sustained. These broad market and industry factors may materially adversely affect the market price of our Shares and the ADSs, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions in the markets in which we operate, such as recession or currency exchange rate fluctuations, may also adversely affect the market price of our Shares and the ADSs. In particular, currency fluctuations could impact the value of an investment in Telecom Argentina. Although Telecom Argentina’s ADSs 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.

 

Future sales of substantial amounts of Telecom Argentina Class B Shares and ADSs, or the perception that such future sales may occur, may depress the price of Telecom Argentina Class B Shares and ADSs.

 

Following periods of volatility in the market price of a company’s securities, that company may often be subject to securities class-action litigation. This kind of litigation may result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our business, results of operations and financial condition.

 

Restrictions on transfers of foreign exchange and the repatriation of capital from Argentina may impair your ability to receive dividends and distributions on, and the proceeds of any sale of, the Class B Shares underlying the ADSs.

 

After almost four years of unrestricted capital flows, the Argentine government recently reimposed restrictions on the conversion of Argentine currency into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Argentina. Beginning in September 2019, the Argentine government implemented monetary and foreign exchange control measures that included restrictions on the transfer of funds abroad, including dividends, without prior approval by the BCRA or fulfillment of certain requirements. In such a case, the Depositary for the ADSs may hold the Argentine Pesos it cannot convert for the account of the ADS holders. In addition, any future adoption by the Argentine government of restrictions to the movement of capital out of Argentina may affect the ability of our foreign shareholders and holders of ADSs to obtain the full value of their Class B Shares and ADSs, and may adversely affect the market value of the ADSs.

 

Trading of Telecom Argentina’s Class B Shares in the Argentine securities markets is limited and could experience further illiquidity and price volatility.

 

Argentine securities markets are substantially smaller, less liquid and more volatile than major securities markets in the U.S. In addition, Argentine securities markets may be materially affected by developments in other emerging markets, particularly other countries in Latin America. Our Class B Shares underlying ADSs are less actively traded than securities in more developed countries and, consequently, an ADS holder may have a limited ability to sell the Class B Shares underlying ADSs upon withdrawal from the ADSs facility in the amount and at the price and time that it may desire. This limited trading market may also increase the price volatility of the Class B Shares underlying the ADSs.

 

   
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Holders of ADSs may be adversely affected by currency devaluations and foreign exchange fluctuations.

 

If the Peso exchange rate falls relative to the U.S. dollar, the value of the ADSs and any distributions made thereon from the depositary could be adversely affected. Cash distributions made in respect of the ADSs may be received by the depositary (represented by the custodian bank in Argentina) in Pesos, which will be converted into U.S. dollars and distributed by the depositary to the holders of the American Depositary Receipts (“ADRs”) evidencing those ADSs if in the judgment of the depositary such amounts may be converted on a reasonable basis into U.S. dollars and transferred to the United States on a reasonable basis, subject to such distribution being impermissible or impracticable with respect to certain ADR holders. In addition, the depositary will incur foreign currency conversion costs (to be borne by the holders of the ADRs) in connection with the foreign currency conversion and subsequent distribution of dividends or other payments with respect to the ADSs.

 

The relative volatility and illiquidity of the Argentine securities markets may substantially limit your ability to sell the Class B Shares underlying the ADSs on the BYMA at the price and time desired by the shareholder.

 

Investing in securities that trade in emerging markets, such as Argentina, often involves greater risk than investing in securities of issuers in the United States, and such investments are generally considered to be more speculative in nature. The Argentine securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States, and is not as highly regulated or supervised as some of these other markets. There is also significantly greater concentration in the Argentine securities market than in major securities markets in the United States. The ten largest companies in terms of market capitalization represented approximately 92% of the aggregate market capitalization of the BYMA as of December 31, 2019. Accordingly, although shareholders are entitled to withdraw the Class B Shares underlying the ADSs from the depositary at any time, the ability to sell such shares on the BYMA at a price and time shareholders might want may be substantially limited.

 

We are traded on more than one market and this may result in price variations; in addition, investors may not be able to easily move shares for trading between such markets.

 

Trading in the Class B Shares underlying ADSs or ADSs in the United States and Argentina, respectively, will use different currencies (U.S. dollars on the NYSE and pesos on the BYMA), and take place at different times (resulting from different trading platforms, different time zones, different trading days and different public holidays in the United States and Argentina). The trading prices of the Class B Shares underlying ADSs on these two markets may differ due to these and other factors. Any decrease in the price of the Class B Shares underlying ADSs on the BYMA could cause a decrease in the trading price of the ADSs on the NYSE. Investors could seek to sell or buy the Class B Shares underlying ADSs to take advantage of any price differences between the markets through a practice referred to as “arbitrage.” Any arbitrage activity could create unexpected volatility in both our share prices on one exchange, and the ADSs available for trading on the other exchange. In addition, holders of ADSs will not be immediately able to surrender their ADSs and withdraw the underlying Class B Shares for trading on the other market without effecting necessary procedures with the depositary. This could result in time delays and additional cost for holders of ADSs.

 

As a foreign private issuer, we will not be subject to U.S. proxy rules and will be exempt from filing certain reports under the Securities Exchange Act of 1934.

 

As a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act of 1934 (the “Exchange Act”) related to the furnishing and content of proxy statements, and our officers, directors, and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not be required under the Exchange Act to file annual and current reports and financial statements with the SEC as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act, and we are generally exempt from filing quarterly reports with the SEC under the Exchange Act.

 

In addition, if a majority of our directors or executive officers are U.S. citizens or residents, we will lose our foreign private issuer status and we will fail to meet additional requirements necessary to avoid such loss. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory for us. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher for us. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We will have to present our financial statements under US GAAP and may also be required to modify certain of our policies to comply with corporate governance practices applicable to U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

 

   
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If we do not file or maintain a registration statement and no exemption from the Securities Act of 1933 (“Securities Act”) registration is available, U.S. holders of ADSs may be unable to exercise preemptive rights granted to our holders of Class B Shares underlying ADSs.

 

Under the GCL, if we issue new shares as part of a capital increase, our shareholders may have the right to maintain their existing ownership percentage in the Company through the subscription of a proportional number of shares of the same class in case the capital increase is made in shares of all four of our classes of shares in their respective proportions, or through the subscription of a proportional number of the shares of the class being issued if the relative proportion among the four classes is not respected. Rights to subscribe for shares in these circumstances are known as preemptive rights. In addition, shareholders are entitled to the right to subscribe for the unsubscribed shares remaining at the end of a preemptive rights offering on a pro rata basis, known as accretion rights.

 

According to our Bylaws, in the case of a capital increase through the issuance of all four of our classes of common stock (Class A ordinary shares, Class B Shares, Class C ordinary shares and Class D ordinary shares), accretion rights of the holders of each class shall be limited to the shares of the same class for which there has been no subscription. Also if, after accretion rights have been exercised within the Class B and Class C shares, there are any unsubscribed shares, such unsubscribed Class B or Class C shares may be subscribed by the shareholders of the rest of our classes of common stock, with no distinction, in proportion to the shares of common stock for which such shareholder has subscribed on such occasion.

 

Upon the occurrence of any future increase in our Class B Shares, U.S. persons (as defined in Regulation S under the Securities Act) holding our Class B Shares underlying ADSs or ADSs may be unable to exercise preemptive and accretion rights granted to our holders of Class B Shares underlying ADSs in connection with any future issuance of our Class B Shares underlying ADSs unless a registration statement under the Securities Act is effective with respect to both the preemptive rights and the new Class B Shares underlying ADSs, or an exemption from the registration requirements of the Securities Act is available.

 

We are not obligated to file or maintain a registration statement relating to any preemptive rights offerings with respect to Telecom Argentina’s Class B Shares underlying ADSs, and we cannot assure that we will file or maintain any such registration statement or that an exemption from registration will be available. Unless those Class B Shares underlying ADSs or ADSs are registered or an exemption from registration applies, a U.S. holder of Telecom Argentina’s Class B Shares underlying ADSs or ADSs may receive only the net proceeds from those preemptive rights and accretion rights if those rights can be assigned by the ADS depositary. If the rights cannot be sold, they will be allowed to lapse. Furthermore, the equity interest of holders of shares or ADSs located in the U.S. may be diluted proportionately upon future capital increases.

 

Our status as a foreign private issuer allows us to follow alternate standards to the corporate governance standards of the NYSE, which may limit the protections afforded to investors.

 

We are a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under NYSE rules, a foreign private issuer may elect to comply with the practices of its home country and not comply with certain corporate governance requirements applicable to U.S. companies with securities listed on the exchange. We currently follow certain Argentine practices concerning corporate governance and intend to continue to do so. For example, according to Argentine securities law, our audit committee, unlike the audit committee of a U.S. issuer, will only have an “advisory” and/or “supervisory” role, such as assisting our board of directors with the evaluation, the performance and independence of the external auditors and exercising the function of our internal control. Accordingly, holders of our ADSs will not have the same protections afforded to shareholders of U.S. companies that are subject to all of the NYSE corporate governance requirements.

 

We are organized under the laws of Argentina and holders of the ADSs may find it difficult to enforce civil liabilities against us, our directors, officers and certain experts.

 

We are organized under the laws of Argentina. A significant portion of our and our subsidiaries’ assets are located outside the U.S. Furthermore, almost all of our directors and officers and some advisors named in this Annual Report reside in Argentina. Investors may not be able to effect service of process within the U.S. upon such persons or to enforce against them or us in U.S. courts judgments predicated upon the civil liability provisions of the federal securities laws of the U.S. Likewise, it may also be difficult for an investor to enforce in U.S. courts judgments obtained against us or these persons in courts located in jurisdictions outside the U.S., including judgments predicated upon the civil liability provisions of the U.S. federal securities laws. It may also be difficult for an investor to bring an original action in an Argentine court predicated upon the civil liability provisions of the U.S. federal securities laws against us or these persons.

 

   
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In addition, a portion of our assets is not subject to attachment or foreclosure, as they are used for the performance of the public service we provide. In accordance with Argentine law, as interpreted by the Argentine courts, assets which are necessary for the provision for an essential public service may not be attached, whether preliminarily or in aid of execution.

 

Prior to any enforcement in Argentina, a judgment issued by a U.S. court will be subject to the requirements of 517 through 519 of the Argentine Federal Civil and Commercial Procedure Code if enforcement is sought before federal courts or courts with jurisdiction in commercial matters of the Autonomous City of Buenos Aires. Those requirements are: (1) the judgment, which must be valid and final in the jurisdiction where rendered, was issued by a competent court in accordance with the Argentine principles regarding international jurisdiction and resulted from a personal action, or an in rem action with respect to personal property which was transferred to Argentine territory during or after the prosecution of the foreign action; (2) the defendant against whom enforcement of the judgment is sought was personally served with the summons and, in accordance with due process of law, was given an opportunity to defend against foreign action; (3) the judgment must be valid in the jurisdiction where rendered, and its authenticity must be established in accordance with the requirements of Argentine law; (4) the judgment does not violate the principles of public policy of Argentine law; and (5) the judgment is not contrary to a prior or simultaneous judgment of an Argentine court. Any document in a language other than Spanish, including, without limitation, the foreign judgment and other documents related thereto, requires filing with the relevant court of a duly legalized translation by a sworn public translator into the Spanish language.

 

Cablevisión Holding S.A. (“CVH”), and through CVH, GC Dominio S.A. (“GC Dominio”), have the ability to determine the outcome of any shareholder decision relating to significant matters affecting us.

 

CVH owns Class D Shares representing 28.16% of Telecom Argentina’s total capital stock —directly and indirectly through its wholly owned subsidiary VLG. GC Dominio owns 26.44% of the total capital stock of CVH, which represents in 64.24% of the voting stock and votes of CVH. Fintech Telecom LLC (Fintech or FTL) owns Class A Shares representing 20.83% of the total capital stock of Telecom Argentina, and additionally owns Class B Shares in the form of ADSs representing 9.2% of total stock of Telecom Argentina.

 

On April 15, 2019, FTL, CVH and VLG entered into the Voting Trust Agreement (as defined below) pursuant to which FTL and VLG contributed certain shares to the Voting Trust (as defined below). Except in respect of certain veto matters, the co-trustee appointed by CVH must vote all the shares contributed to the Voting Trust on all matters presented for vote generally to Telecom Argentina stockholders, in the same manner that CVH votes its shares in Telecom Argentina or as instructed by CVH. For more information about the Voting Trust, see “Item 7—Major Shareholders and Related Party Transactions—Major Shareholders—Telecom Shareholders’ Agreement.”

 

Through its ownership of Telecom Argentina Class D Shares and pursuant to the arrangements resulting from the Telecom Shareholders’ Agreement and the Voting Trust, CVH, as a general matter, has the ability to determine the outcome of any action requiring our shareholders’ approval. In addition, our bylaws provide Class A and Class D Shares, and the directors appointed by Class A and D Shares, with veto powers, with respect to certain matters relating to us. See “Item 7—Major Shareholders and Related Party Transactions—Major Shareholders—Telecom Shareholders’ Agreement.”

 

We conducted transactions with the shareholders of Nortel and/or Sofora, including Fintech and its affiliates in the past, and with CVH and its affiliates as from January 1, 2018. Certain decisions concerning our operations or financial structure may present conflicts between our interests and those of our shareholders.

 

Nevertheless, all of our related-party transactions are made on an arm’s-length basis. Related-party transactions involving Telecom Argentina that exceed 1% of its shareholders’ equity are subject to a prior approval process established by Law No. 26,831, Telecom’s Bylaws and the Rules of the Executive Committee to verify that the agreement could reasonably be considered to be in accordance with normal and habitual market practice. See “Item 7—Major Shareholders and Related Party Transactions—Related Party Transactions.”

 

The existence and outcome of any public tender offer for our Class B Shares and/or ADSs could affect the price of our Class B shares and ADSs.

 

On June 21, 2018, CVH informed the Company that it was promoting and formulating a mandatory public tender offer for all Class B Shares issued by Telecom Argentina due to the acquisition of control in Telecom Argentina. The mandatory public tender offer has been suspended by Argentine courts. See “Item 4—Information on the Company—Significant 2019 Events—Public Tender Offer due to change of control.” The existence and outcome of any tender offer for our shares and/or ADSs would have an impact over the prices of our Class B shares and ADSs, which could result in a decline in the value of your investment.

 

   
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ITEM 4.INFORMATION ON THE COMPANY

 

INTRODUCTION

 

The Company

 

Telecom Argentina was created by Decree No. 60/90 of the PEN 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 corporation (sociedad anónima) under Argentine law. The duration of Telecom Argentina is 99 years from the date of registration with the IGJ (July 13, 1990). Telecom Argentina conducts business under the commercial name “Telecom.”

 

We are one of the largest private-sector companies in Argentina in terms of revenues, net income, capital expenditures and number of employees. In terms of subscribers, we are one of the largest telecommunications, cable television and data transmission service providers in Argentina and one of the largest providers of cable television services across Latin America. Additionally, we are an important Multiple Systems Operator (“MSO”) (a company that owns multiple cable systems in different locations under the control and management of a single, common organization) in Argentina in terms of subscribers.

 

We offer our customers “quadruple play” services, combining mobile telephony services, cable television services, Internet services and fixed telephony. We also provide other telephone-related services such as international long-distance and wholesale services, data transmission and IT solutions outsourcing and we install, operate and develop cable television and data transmission services We provide our services in Argentina (mobile, cable television, Internet and fixed and data services), Paraguay (mobile, Internet and satellite TV services), Uruguay (cable television services) and the United States (fixed wholesale services).

 

As of December 31, 2019, (i) our mobile telephony business had approximately 19,084 thousand subscribers in Argentina and approximately 2,373 thousand subscribers in Paraguay, (ii) our Internet business reached approximately 4,123 thousand accesses, (iii) our cable television business had approximately 3,517 thousand subscribers and (iv) we had approximately 3,183 thousand fixed telephony lines in service.

 

In 2019, our revenues amounted to P$237,024 million, our net loss amounted to P$3,888 million, our Adjusted EBITDA (see the purpose of use of Adjusted EBITDA and reconciliation of net income to Adjusted EBITDA in “Item 5—Operating and Financial Review and Prospects—(A) Consolidated Results of Operations—Adjusted EBITDA”) amounted to P$77,084 million and we had total assets of P$578,150 million.

 

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 19711.

 

The Merger

 

On June 30, 2017, Telecom Argentina and Cablevisión executed a preliminary merger agreement providing that Telecom Argentina would absorb Cablevisión, in accordance with the provisions of Sections 82 and 83 of the GCL, subject to prior satisfaction or waiver of certain conditions stated in the preliminary merger agreement, including certain regulatory approvals (the “Merger”).

 

Cablevisión’s capital stock was owned, directly and indirectly, by Cablevisión Holding S.A. (60%) (“CVH”) and Fintech Media (LLC) (40%).

 

Pursuant to the terms of the Merger, and to the provisions of Section 83, item c) of the GCL, shareholders of Cablevisión received for each share of Cablevisión 9,871.07005 new common shares of Telecom Argentina, an exchange that was considered fair from a financial perspective by two independent valuation experts.

 

On July 7, 2017, Fintech Telecom, certain of its affiliates and CVH entered into an agreement, including provisions relating to our governance, which would become effective upon the Merger becoming effective, and provisions regarding share transfers and other matters that became effective immediately. See “Item 7—Major Shareholders—Telecom Shareholders’ Agreement.”

 

All the conditions to which the Merger was subject were satisfied and the Merger was consummated on January 1, 2018.

 

   

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As of the Merger Effective Date, Telecom Argentina succeeded in all of the assets and liabilities (including registered assets, licenses, rights and obligations) of Cablevisión and will continue the operations of Cablevisión, generating the corresponding operative, accounting and tax effects.

 

Since the Merger, we have advanced the convergence of the services we provide and have increased our investments in state-of-the-art infrastructure of mobile technologies and the deployment of a high-speed fiber optic network.

 

Significant subsidiaries

 

As of December 31, 2019, Telecom Argentina’s most significant subsidiaries are Núcleo S.A.E, PEM S.A.U (“PEM”), Adesol S.A., AVC Continente Audiovisual S.A. and Telecom Argentina USA Inc. In 2019, Telecom absorbed Última Milla S.A, CV Berazategui S.A. and the split off assets from PEM, which were all Telecom’s subsidiaries as of December 31, 2018. For detailed information on the Telecom’s subsidiaries, see Note 1. a) to our Consolidated Financial Statements.

 

Significant 2019 Events

 

Public Tender Offer due to change of control

 

On June 21, 2018, CVH informed the Company that it was promoting and formulating a mandatory public tender offer (“PTO”) for all Class B Shares issued by Telecom Argentina listed on BYMA (including outstanding Class C Shares of Telecom Argentina that might be converted into Class B Shares before the expiration deadline) (the “PTO Shares”) at a price of P$110.85 per PTO Share. CVH promoted the PTO under regulations applicable at the time mandating a tender offer following a change of control in the Company.

 

Pursuant to public releases published by CVH, as part of the administrative process to authorize the PTO, the CNV expressed its disagreement with the price announced by CVH, and took the position that the price per PTO Share should be US$4.8658 payable in Argentine Pesos at the foreign exchange rate in effect on the business day immediate prior to the settlement of the PTO. CVH considered the CNV’s position unfounded and sought judicial relief.

 

On November 1, 2018, the Federal Civil and Commercial Court No. 3 confirmed a preliminary injunction obtained by CVH, and ordered the CNV to abstain for six months from issuing any decision with respect to the authorization of the PTO. The injunction was extended on May 9, 2019. On July 19, 2019, the Chamber I of the Federal Civil and Commercial Court of Appeals lifted the injunction, and held in its decision that an appeal by CVH of any decision by the CNV with respect to the PTO would have a suspensive effect. However, as explained below, the PTO remained at the time subject to the injunction obtained by a shareholder of CVH -Daniel Burgueño- in separate legal proceedings.

 

Mr. Carlos Burgueño, a shareholder of CVH, separately initiated court proceedings with the Federal Contentious Administrative Court No. 1, Secretariat No. 1 seeking to obtain a declaratory judgment to the effect that the issuance by the CNV of Resolution No. 779/18 regulating Law No. 26,831 had terminated CVH’s obligation to conduct the PTO. The relevant provisions of Resolution No. 779/18 regulating Law No. 26,831, specifically Section 32, paragraph k) thereof, exclude from the mandatory tender offer regime certain changes of control, including those resulting from mergers into companies with publicly traded shares that comply with certain conditions. On May 9, 2019, the court issued an injunction suspending the PTO until the CNV resolves on the applicability of Resolution No. 779/18. This injunction was extended on November 15, 2019.

 

On December 27, 2019, CVH informed Telecom that on such date CVH was served with notice of a judgement by the Federal Contentious Administrative Court No. 1 in favor of Mr. Burgueño, confirming that CVH’s obligation to conduct a tender offer to acquire the PTO Shares as a result of the change of control in Telecom terminated upon the issuance by the CNV of Resolution No. 779/2018. The court also ordered the CNV to deem the proceedings initiated by CVH with the CNV in connection with the PTO concluded and to pay all court costs and expenses related to Mr. Burgueño’s complaint. CVH publicly informed that it will adopt all measures aimed at complying with the abovementioned judgment in due course.

 

Merger of Telecom, Ultima Milla, CV Berazategui and the split off assets from PEM

 

In 2019, Última Milla S.A, CV Berazategui S.A. and the split off assets from PEM merged into Telecom. On February 19, 2020, the CNV provided the administrative authorization of the such merger and ordered to file it to the IGJ for its registration. See Note 3.d) to our Consolidated Financial Statements.

 

   

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AVC Continente

 

In September 2019, Telecom and the shareholders of AVC Continente Audiovisual S.A. (AVC Continente) entered into a Call and Put Option Agreement that for a period that expires in September 2024 enables the parties to cause the transfer of 100% of the shares of AVC Continente to Telecom for a total price of US$720,000 (plus an additional amount of 45,536 CATV average monthly fees). See Note 3.d.1.b) to our Consolidated Financial Statements.

 

Appointment of CEO

 

On October 24, 2019, the board of directors of the Company appointed Mr. Roberto Daniel Nóbile as CEO of Telecom Argentina, from January 1, 2020. Mr. Nóbile succeeded Mr. Carlos Moltini, which ceased in his duties as CEO on December 31, 2019, to assume new responsibilities in the Company, focusing on the Company’s strategic plans.

 

Cancellation of Treasury Shares

 

Between May 28, 2013 and November 5, 2013, Telecom acquired a total of 15,221,373 Class B Shares. These shares were held in treasury, and represented less than 1% of the Company’s total capital stock. During 2019 and in accordance with the provisions of section 67 of Capital Markets Law No. 26,831, all those treasury shares were cancelled and Telecom’s capital was reduced in an amount of P$15,221,373. As of the date of this Annual Report, Telecom does not hold any more Class B shares in treasury. See Note 22 to our Consolidated Financial Statements.

 

Recent Developments

 

Telecom Argentina’s Notes

 

On January 31, 2020, and in connection with the Global Notes Program for a maximum outstanding amount of US$3,000 million or its equivalent in other currencies, the Company issued Series 3 and Series 4 notes for a total principal amount of P$3,197 million and P$1,200 million, respectively. See Note 31 to our Consolidated Financial Statements.

 

IDB Loan

 

On February 4, 2020 we supplemented a loan agreement among Telecom Argentina, the Inter-American Investment Corporation and IDB for a total amount of up to US$300 million, dated May 29,2019. Pursuant to this supplement, the Company received from IDB Invest two new disbursements for (i) an amount of US$50 million maturing on November 15, 2023 and bearing interest of LIBOR plus 4.6% which will be repaid in eight consecutive semiannual installments commencing in May 2020, and (ii) an amount of US$75 million maturing on November 15, 2022 and bearing interest of LIBOR plus a variable spread of 7-7.75% which will be repaid in six consecutive semiannual installments commencing in May 2020. See Note 31 to our Consolidated Financial Statements.

 

Núcleo’s Notes

 

On March 12, 2020, Núcleo, issued a new Series of Notes in an amount of 100 million of Guaraníes (approximately P$948 million as of the issuance date) under its Global Issuance Program, with a maturity of 60 months from the issuance date. Capital will be settled in a single payment of 100% of the total capital at maturity on March 11, 2025. The Notes bear interest from issuance until its maturity date at a fixed annual rate of 8.75%. Interest will be paid quarterly in arrears since the issuance date, with the last interest payment occurring at maturity.

 

THE BUSINESS

 

The Executive Committee and the CEO have a strategic and operational vision of Telecom as a single business unit in Argentina that is consistent with the current regulatory context of the converged ICT services industry. The Executive Committee and the CEO receive periodic economic and financial information of Telecom and its subsidiaries treating all operations as a single segment. On the basis of this information, they assess the evolution of business as a single unit of generation of results, managing resources accordingly to achieve the objectives. Under applicable accounting principles (provided by IFRS 8), it was defined that the Company has a single segment of operations in Argentina.

 

Also, Telecom carries out activities abroad (Paraguay, Uruguay and the United States). These operations are not analyzed as separate segments by the Executive Committee and the CEO, who analyze the consolidated information of Telecom and its subsidiaries in Argentina and abroad, taking into account that activities of foreign companies are not significant for Telecom. For a breakdown of total revenues by category of activity, please see “Item 5 – Operating and Financial Review and Prospects.” For more information see Note 1.c) of our Consolidated Financial Statements.

 

   

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Main Products and Services

 

As of December 31, 2019 we offered our customers a diverse range of services, including:

 

·Mobile Telephony Services: Services offered under the brand “Personal,” including voice communications and high-speed mobile Internet, among others; and sale of mobile communication devices (handsets, modems MiFi and wingles), which we have the ability to finance through alliances with certain financial entities. The services are supported in the different technologies of the mobile network (2G/3G/4G);

 

·Internet Services: High-speed Internet services offered under the “Fibertel” brand. Subscribers also gain to access a Wi-Fi network free of cost outside their homes throughout the Fibertel Zone;

 

·Cable Television Services: We offer a wide range of cable television services under the brand “Cablevisión” such as “Cablevisión Clásico,” our basic, analog cable television product; “Cablevisión Digital,” provided through a digital decoder that gives subscribers access to radio and music channels, among others, and certain premium channels; “Cablevisión HD,” provided through a high definition decoder that grants access to over 90 high definition channels; “Cablevisión On Demand,” that grants subscribers access to an “On Demand” service that includes a wide range of content; and “Cablevisión Flow,” that enables our subscribers to access TV content on multiple devices such as smartphones, tablets and smart-TVs; and

 

·Fixed and Data Services: voice communications, supplementary services, interconnection with other operators, data services, and IT solution outsourcing, among others.

 

ØMobile Telecommunications Services

 

Overview

 

Our mobile telecommunications service offerings in Argentina under the brand “Personal” include voice communications, high-speed mobile Internet content and applications download and online streaming, among others, as well as the sale of mobile communication devices (handsets, Modems MiFi and wingles, smart watches).

 

As of December 31, 2019, we had approximately 19,084 thousand mobile subscribers in Argentina.

 

Through Personal, we provide mobile services on 850 MHz and 1,900 MHz bands, through GSM and 3G technology through the Servicios de Telefonía Móvil (“STM”), Servicios de Radiocomunicaciones Móviles Celular (“SRMC”) and PCS networks. In addition, Personal offers LTE technology service (through the SCMA network) relying on the frequency bands awarded to Personal in 2014 and 2015 (1730-1745 MHz; 2130-2145; 713-723 MHz and 768-778 MHz).

 

Residential and Corporate Services

 

We offer mobile telecommunication services to residential and corporate subscribers through a variety of flexible options. These options include prepaid, post-paid and “Abono Fijo” (mixed) plans.

 

·Prepaid Plans. Under prepaid plans, subscribers pay in advance for services, using prepaid credit. Since there are no monthly bills, prepaid plans allow subscribers to communicate with maximum flexibility while maintaining control over their consumption. Prepaid credit can be purchased through prepaid cards or virtual credit on our website, by phone, at ATMs and drugstores, or through authorized agents. Our mobile telecommunication subscribers may browse the Internet, make and receive local, national and international calls and buy multimedia content. We offer a variety of “packs” which enable customers to use the abovementioned services at lower prices. These packs may include a fixed amount of minutes to make national or international calls, SMSs, and a quota of megabytes to access the Internet, among other services.

 

·Post-Paid Plans. Under post-paid plans, subscribers pay a monthly fee for a particular plan, plus charges for additional services not included in such plan. Most of the plans we offer include a quota of megabytes for browsing the Internet and unlimited airtime for on-network calls and SMS. Depending on the price, some plans include an amount of free seconds or unlimited airtime for off-network calls. Once the included seconds have been used, subscribers can continue using the mobile service at a set price per second. Subscribers can also buy packs of additional megabytes to continue browsing the Internet after they have used the megabytes included in their monthly plan. The charges for additional airtime, megabytes or multimedia content, are added to the following month’s bill. Under post-paid plans, we also offer M2M plans, based on the “Internet of Things” (IoT) concept, which refers to the digital interconnection of everyday objects with the Internet, and are specially focused on business customers. These plans include solutions such as geolocation and fleet monitoring, refrigeration control, information security solutions, sales management solutions, and cloud solutions for information storage and protection.

 

   

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·Abono Fijo. Under the “Abono Fijo” plans, a subscriber pays a set monthly bill. As in post-paid plans, most of these plans include a quota of megabytes for browsing the Internet, unlimited airtime for on-net and off-net calls, SMS and a fixed amount of credit that can be used to buy packs or multimedia contents. Once the prepaid seconds have been used or the Internet quota has been met, the subscriber can obtain additional credit by recharging its line through the prepaid system.

 

In 2019, we continued to drive our strategy with a focus on brand repositioning with the concept “The fastest 4G network in the country,” supported by investments made in new mobile sites and in the modernization of existing sites. We seek to strengthen the positioning of the Personal brand in the market by reinforcing the qualities most valued by customers: coverage capacity and connectivity speed.

 

In line with the convergent model, Flow’s “Zero Rating” (Flow Pass) was implemented for high-value mobile customers, through which Flow traffic carried on the Personal mobile network is not discounted from their data quotas.

 

In August 2019, Personal was the first operator to launch the eSIM service, the new generation of SIM that does not require the insertion of a physical chip in the smartphone. It is a new milestone of Personal innovation that enhances the experience of our customers. This development reinforces our strategy of growing sales and after-sales processes, and expanding the portfolio of new services linked to the Internet of Things (IoT).

 

During 2019, we worked in international services with a focus on increasing efficiency in international traffic management, minimizing the cost of the service to sustain the simplification and evolution of the roaming offer and achieve a higher perceived quality.

 

As in 2018, we included international roaming service in the plans we offer. Customers have available in their plans an amount of gigas for the use of data roaming service and free WhatsApp in Uruguay, Paraguay, America and Europe, among others.

 

Through Club Personal, Telecom’s free, nationwide fidelity program, Telecom offers customers discounts on third-party products (cinemas, restaurants, ice cream shops, theaters, supermarkets, gasoline, among others) and points that can be exchanged for products. In 2019, we consolidated Club Personal as our single loyalty program “Convergent Club Personal,” offering and communicating our convergence benefits in a unified way through a new online application that allow customers of Personal, Cablevisión and Fibertel brands to use the Club Personal program discounts. As part of our ongoing development of customer service platform, we will strive to enter into new partnerships to enhance the catalog of discounts with nationally and internally recognized and entertainment venues. In 2020 we expect to continue our efforts to improve our fidelity program by targeting awards according to revenues generated by our customers.

 

Wholesale Services

 

Our mobile telecommunications infrastructure also enables us to provide the wholesale services summarized below.

 

·International Business. During 2019, we continued to strengthen our position in the international roaming services market, including new locations and services 3G, 4G LTE and CAMEL agreements (Customized Applications for Mobile Network Enhanced Logic), in order to provide a better user’s experience to our subscribers. In 2019, we entered into 10 GPRS, 17 3G, 31 LTE and 37 CAMEL agreements, reaching a total of 412 commercial international roaming agreements, covering more than 180 countries.

 

·Domestic Business. Our wholesale services are comprised of call termination in a mobile network (TLRD), interconnection traffic (which include origination, transit and transport charges), national roaming sold to other operators in connection with the use of our network, as well as sales and leasing of infrastructure sites.

 

Network and Equipment

 

In terms of infrastructure, during 2019 we made efforts to improve the services we provide by deploying the 4G / LTE network, together with the technological reconversion of our 2G / 3G networks, and deploying fiber optics to connect all homes with broadband, which also had an impact in on fixed and data network. We also implemented the new IMS platform (IP Multimedia Subsystem) functionalities, geared towards the convergence and evolution of services such as VoLTE (Voice over LTE), VoWifi (Voice over Wi-Fi) or VoIP (Voice over IP). By the end of 2019, approximately 10% of voice traffic was carried over this platform, with about 1 million registered lines and 4.5 million provisioned lines.

 

During 2019, service providers in Argentina continued to make significant capital expenditures in new network infrastructure for the enhancement and deployment of 3G and 4G technology, which allows for higher transmission speeds needed for data transfer, video calling and Internet browsing.

 

   

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The deployment of 4G reaches 1,689 localities with coverage of 98% of the population of major cities. In addition, the deployment of 4G + services continued to advance throughout the country, thanks to the solution of Carrier Aggregation 4G (use of two simultaneous frequency bands). Our customers with access to our 4G network perceive a better service experience, primarily with faster speeds that reach 300 Mbps, with capacity to reach speeds of 1,000 Mbps.

 

Additionally, we continued to increase the number of radio base stations connected with optical fiber and full IP protocol, allowing for the availability of needed broadband, in the present and for future services.

 

Competition

 

The market for residential, corporate and wholesale mobile telecommunications services in Argentina is characterized by intense competition. Operators are free from regulation to determine the pricing of services, except that the ENACOM sets prices for wholesale local interconnection services. There are currently three mobile operators offering nationwide service. Telecom, Telefónica Móviles Argentina and América Móvil. According to the statistics published by the ENACOM, the penetration of mobile service in Argentina has reached 146.2% of the population in 2016, 139.9% in 2017, 132.9% in 2018 and 128.6% in 2019. This information regarding penetration of mobile service is an estimate, based on demographic data from Argentina’s 2010 national census as there are no official statistics published in Argentina, and only considers lines serviced by the three operators providing nationwide mobile telecommunications services.

 

Nextel

 

Until June 30, 2019, through Nextel, we provided Integrated Digital Enhanced Network (“IDEN”) telephony services to customers which enabled us to offer “push to talk” technology to such mobile services customers. In January 2018, we began a campaign to migrate Nextel customers to the Personal brand. During, 2019, we completed the migration of customers from Nextel to Personal and the Nextel network was shut down.

 

ØInternet Services

 

Overview

 

We provide broadband Internet services in Argentina. Broadband Internet access, often shortened to “broadband,” is high data rate Internet access. Broadband can be delivered through four technologies: cable modem (HFC), ADSL, optic fiber (FTTC and FTTH) and wireless; being cable Modem and ADSL the most widely used. We market our cable Modem services through our “Fibertel” brand and in partnership with other Internet services providers. We market our ADSL service through “Fibertel” and “Fibertel Lite” brands and in partnership with other Internet services providers.

 

With respect to access networks, our strategy aims to satisfy the rising broadband demand, mainly for downloading videos and multimedia content from the Internet. In this respect, we intend to continue the expansion of our access fiber optics infrastructure, using different modalities and technologies, which have been optimized based on demand of services provided and different geographic locations.

 

During 2019, we continued deploying our FTTH network granting more customers access to ultra-high internet velocity with speeds of 300MB and also upgrading the customer base average speed by migrating customers to our HFC network (i.e., technologies that replace copper with fiber optics in different points of the transmission network). As of December 31, 2019, the number of customers with access FTTH technology has grown 76% compared to December 31, 2018. Internet dial-up service represents a marginal percentage of our revenues. We continue to provide this service to a small market where broadband service is not available.

 

In order to increase our access to the Internet, we have acquired some IRUs on a submarine facility of Latin America Nautilus (LAN), which connects Argentina with the United States (Miami) through a submarine fiber optic ring. These rights, which last for 15 years, allow the interconnection of our IP backbone with IP Transit providers in Miami. We have also contracted international capacity under lease modality (IP Transit) in Buenos Aires to ensure better performance regarding regional traffic. In order to have a reliable service these IP Transit is provided by two capacity providers in a redundancy geographical path (Latin American Nautilus and Telxius Cable Argentina).

 

Residential and Business

 

As of December 31, 2019, we provide data transmission and Internet services, including traditional broadband, Internet dedicated lines (fiber links for corporate customers), private networks, national and international video streaming, transportation of radio and TV signals and videoconferencing services. As of December 31, 2019, we had approximately 4.1 million Internet subscribers, as compared to 4.14 million subscribers as of December 31, 2018.

 

   

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We believe that Fibertel is the broadband service that offers the best selection of speeds in the Argentine retail and corporate market and at competitive prices. During 2019, we continued to improve the quality of the service and customer experience. Through the Fibertel brand, we provide high-speed Internet services in the AMBA, Córdoba, Rosario, Campana, Río Cuarto, Posadas, Salta, Olavarría, Pergamino, Mar del Plata, Bahía Blanca and Santa Fe, among other cities in Argentina.

 

The internet connectivity products we provide through the Fibertel brand are specially tailored to the needs of each residential or corporate user, and include specific solutions such as virtual private network services, traditional Internet protocol (“IP”) links and corporate products that offer additional services. As of December 31, 2019, our customers had an average access to networks of 48.4 megabytes.

 

Additionally, we offer international IP access through well-known global backbone providers.

 

Network and Equipment

 

In order to continue bringing fiber optic to customers, we consolidated the deployment of the different fiber optic architectures (FTTH and HFC), substantially improving the possibility of offering high speed services. This deployment encompassed residential and corporate customers, new neighborhoods, gated communities, high-rises and shopping centers. With respect to the FTTH networks, their deployment allowed us to expand coverage. With respect to HFC, the reduction of the serviced areas resulted in a greater capacity for users. HFC users were also switched to Docsis 3.1 carriers, which also allowed us to increase the network capacity and provide higher speeds and IP video deployment.

 

Competition

 

We face nationwide competition in the Internet service market in Argentina from Telefónica, AMX Argentina Gigared and Telecentro (providing a triple-play offer), among others. During 2019, both Telefónica and AMX accelerated their investments for the construction of their fixed FTTH networks, increasing their penetration and ability to serve households in different areas of the country. This presents a new challenge for us with respect to the competitive scenarios of prior years, as new players with international support are aggressively entering the market. Our data services business faces competition from Telefónica, AMX Argentina (commercially known as Claro), and from several providers of niche data services such as Level 3 Argentina, IPlan and others.

 

ØCable Television Services

 

Overview

 

We deliver a two-way network with a bandwidth capacity of more than 1 GHz to approximately 81% of the homes passed through our cable network (87% in AMBA). Through these networks, we offer additional revenue-generating services and products, such as premium services and pay-per-view.

 

As of December 31, 2019, we had approximately 3.5 million cable subscribers.

 

Our Cable Television Networks and Operating Regions

 

As of December 31, 2019, our principal cable networks were located in AMBA. We also operated cable networks in other cities within the provinces of Buenos Aires, Santa Fe, Entre Ríos, Córdoba, Corrientes, Formosa, Misiones, Salta, Chaco, Neuquén and Río Negro. As of December 31, 2019, Telecom served approximately 3.5 million cable television customers. As of December 31, 2019, Telecom’s cable network covered approximately 51,000 kilometers, and its interurban fiber optic network passed through approximately 12,000 kilometers.

 

Retail and Corporate Programming and Other Cable Television Services

 

In 2019, we invested significant resources to expand the variety of programming options in order to appeal to potential new subscribers and meet their needs. Our cable television services revenues are derived primarily from monthly subscription fees for cable service. To a lesser extent, our cable television services revenues also derived from connection fees and advertising and fees for premium and pay-per-view programming services, digital packages, DVR, HD packages, video-on-demand services (VOD) and magazine distribution.

 

We purchase basic and premium programming from more than 50 signal providers. Programming arrangements are primarily denominated in Argentine Pesos. Fees paid to signal providers under these arrangements are linked to the growth of our cable television subscriber base and the fees charged.

 

   

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Basic Digital Service

 

We offer the digital service in AMBA and other cities of Argentina (such as Córdoba, Rosario, Santa Fe, among others). This service gives subscribers the option to increase the number of channels offered and includes an onscreen programming guide.

 

HD Services

 

We offer high definition versions of our Basic HD and our Premium HD Packages, such as Cablevisión Max HD, in locations where the required technology to broadcast this format has been deployed. This programming package includes a large variety of genres such as sports, movies, series, documentaries and music, with high resolution and better image quality. This offer also includes open air channels under an HD format.

 

Through our HD platform, we broadcast events using 3D technology for subscribers of the Premium HD service program that have the necessary equipment for this type of technology. We offer our HD customers a new VOD service that enables them to purchase programs or packages offered through an onscreen programming guide, with access to certain free services.

 

The Flow STB service (which provides all of its programming in HD) offers our clients the option to pause, rewind, start from the beginning and record contents. On the other hand, during 2019 we incorporated the option to access different apps such as YouTube and Netflix, and in the case of Netflix the client may conduct integrated content search.

 

Premium Services

 

Our customers are given the option to acquire premium additional packages not included in the basic package by paying an additional fee. These packages and services include channels in addition to those included in the basic package, provide exclusive content, and divide such content by movie genres, adult programs and sports, or a combination of these categories. Premium subscribers receive a free digital box that enables them to access this service and gives them the option to choose pay-per-view programs.

 

Over The Top Services

 

In order to enhance our customers experience while accessing our content offer, we offer a digital platform branded “Flow” that integrates television channels with On demand content. Through Flow – which uses the fastest fiber optic network in the country - , our customers are able to watch television at any time and place and from any device (such as tablets, smartphones and smart TVs, among others). Flow allows us to distribute contents through an IP structure coupled with digital television quadrature amplitude modulation, which included adequate security measures. Flow enabled Telecom’s customers to use new modern functions such as lineal streaming, reverse electronic program guide, the possibility to “start over” a program, access to “video on demand”, contents and “cloud DVR” (which permits subscribers to save content in the providers database instead of the subscribers digital recorder).

 

Network and Equipment

 

Our network’s trunk or backbone portion in AMBA consists entirely of fiber optic cable. We built a fiber optic cable ring around the City of Buenos Aires that provides network redundancy (which helps ensure network availability in the event of a network device or path failure resulting in unavailability) and improves overall network reliability. We have deployed a similar fiber optic network architecture in Córdoba and Salta, in the Central Region, and in the cities of Santa Fe, Paraná and Rosario in the Litoral Region.

 

Cable television and data signals are transmitted from the main headend—the control center of the cable system, where incoming signals are amplified, converted, processed and combined for transmission to the customer—to the hubs that provide services to specific areas. Each hub concentrates and transmits the cable television and data signals it receives via fiber optic cable to optical nodes. At each node the signals are converted from optic to electric codes and are then re-transmitted via coaxial cable to a distribution node. From there, the signal is transmitted to the subscriber’s domicile along a coaxial or “drop” cable.

 

Our cable networks outside of the areas described above are built with coaxial cable architecture. We intend to continue extending the fiber optic cable and other technological improvements that currently exist in AMBA and the main cities of the other three regions, such as hybrid fiber coaxial technology, to other operational cities within such regions as part of its long-term plan to expand and improve its network capacity.

 

   
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Competition

 

With respect to cable television transmission, we face competition from other cable television operators and providers of other television services, including direct broadcasting, satellite and wireless transmission services. As a result of the non-exclusive nature of our licenses, our cable systems frequently have been overbuilt by one or more competing cable networks, in addition to the satellite television service that is also available. Free broadcasting services are currently available in Argentina. In the AMBA Region, these services primarily include four privately-owned channels and their local affiliates, and one state-owned national public television network. In addition, the Argentine government has distributed digital boxes to certain sectors of the population that provide free access to certain channels in connection with the Argentine Terrestrial Digital Television System.

 

Paid television industry is highly fragmented, and our largest competitors are Telecentro S.A., which is focused in the AMBA Region, and DirecTV Argentina S.A. (“DirecTV”) (satellite television), present throughout the entire country. In addition, Telefónica and AMX consolidated their offer of video products together with fixed broadband, in the context of the development of their fixed network. Telecom also considers Over-The-Top internet video system providers such as Netflix, Prime Video and On Video as competitors.

 

Among paid television systems, competition is driven primarily by:

 

·price;
·programming services offered;
·customer satisfaction; and
·quality of the system.

 

ØFixed and Data Services

 

Overview

 

We own and operate a fixed local line telephone network, public long-distance telephone transmission facilities and a data transmission network in the Northern Region. Following the opening of the entire Argentine market to competition in 2000, we expanded our footprint to the Southern Region of Argentina, to provide nationwide coverage. Fixed and Data Services are comprised of the following:

 

Residential and Corporate Telephony Services

 

·Basic Telephone Services. We provide Basic Telephone Services, including local, domestic and international long-distance telephone services and public telephone services. As of December 31, 2019, we had approximately 3,183 thousand fixed telephony lines in service.

 

·Other telephone services. We provide our customers other related supplementary services such as call waiting, call forwarding, conference calls, caller ID, voice mail, itemized billing and maintenance services.

 

Wholesale Services

 

During 2019, we remained one of the leading providers of wholesale telecommunications solutions for various fixed and mobile operators, independent operators, local operators, public telephony licensees, cable operators, internet service providers, TV and radio channels, production companies and other service providers. Wholesale services include:

 

·Interconnection services. Interconnection services include, among others, traffic and interconnection resources, dedicated Internet access services, transport of video signals in standard definition and high definition (which allows our clients to play multimedia content via Internet without the need of download), streaming audio and video, dedicated links, backhaul links for mobile operators, Internet Protocol Virtual Private Network and data center hosting/housing services.

 

·Data and Internet services. During 2019, Telecom focused its business development on the IP transit service, which is demanded by the different operators and internet service providers to sell Internet connectivity to their customers in different market segments, generating a significant increase in the consumption of bandwidth, both locally and internationally. This management decision allows us to strengthen our position as a provider of solutions for the broadcasting segment by offering transportation solutions for audio and video signals both as dedicated private links and on the Internet. We also provide solutions to cable operators and TV channels for the distribution of video signal.

 

   
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·International Long-Distance Service. We hold a non-expiring license to provide international telecommunications services in Argentina, including voice, data services and international point-to-point leased circuits. Revenues consists mainly of connectivity to the Argentine telephone network, bandwidth capacity under IRU, international point to point lease circuits and data and IP transit services. During 2019, in furtherance of regulatory requirements, Telecom began negotiations with local operators related to the national interconnection business and to a new modality of network infrastructure sharing (RAN Sharing), which is expected to optimize 4G local coverage mobile deployment.

 

During 2019, Telecom increased sales of IP and Datacenter hosting housing services to customers in Uruguay. During 2019, we continued our efforts to promote wholesale products that generate higher margins , which include services for OTTs and for temporary events. Our presence in the United States through our subsidiary Telecom USA, enabled us to revitalize trading links with leading providers of content and services in the cloud of the United States.

 

Corporate Data Services

 

We serve leading companies in the Argentine market as well as the national government, provincial governments and municipalities. These large customers demand cutting-edge technology and solutions tailored to their needs, including voice, data, Internet and Value Added Services.

 

In response to the constant changes demanded by the market, we maintained our strategy to position ourselves as an integrated service provider for large customers by offering convergent ICT solutions, including fixed and mobile voice, data, Internet, multimedia, datacenter and application services through sales, consulting, management and specialized and targeted post-sale customer services.

 

The main solutions offered to large customers in recent years —that also continued during the year ended December 31, 2019— included, among others:

 

·expansion of the truncated digital communications system for various agencies of the Autonomous City of Buenos Aires;

 

·extension and renegotiation of 911 systems for public safety management;

 

·a datacenter solution in alliance with Oracle to optimize operations for a supply chain management company;

 

·the launch of the “connected-car” solution in association with Chevrolet, integrating the Jasper service. Jasper is a platform for the administration of “Internet of Things” (IoT) services which allows both us and the client to set up the accounts, create automation rules, and generate reports to measure traffic volume, among other variables, and

 

·implementation of unified communications, networking, collaboration and firewall solutions, with CISCO technology, for an insurance company.

 

The data services business includes nationwide data transmission services, virtual private networks, symmetric Internet access, national and international signal transport and videoconferencing services. These services are provided mainly to corporations and governmental agencies. We also provide certain value added services, including electronic standard documents telecommunication software exchange and fax storage and delivery service. Our corporate 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. The corporate data transmission services we provide are mainly Ethernet and IP services.

 

During 2019, we maintained our focus on ICT solutions and the sale of data services and dedicated Internet accesses. This strategy is supported by the world class multi-site network of datacenters focused on communications, with over 7,000 square meters used to keep computer technology services throughout Argentina. Through this infrastructure, we offer a broad services portfolio including dedicated hosting and housing, connectivity, cloud services which enable our customers to optimize their costs by increasing the security of their information and avoiding hardware and software obsolescence issues. All the services are provided with support, security, connectivity and the ability to engage further management, professional, monitoring, storage and backup services.

 

In addition, we continued investing in our major datacenter in the city of Pacheco, province of Buenos Aires consolidating its position as leader in the market and enhancing the level of services supplied. These investments are intended to support business growth in the next few years with the highest market standards.

 

   
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Network and equipment

 

Our network strategy, for the medium- and long-term ranges, focuses on satisfying the demand of the services we provide, improving our customers’ experience and promoting technology evolution.

 

With respect to the “core” network, we seek to continuously increase the capacities and availability of the services offered to our customers. In addition, we continued implementing the standardization of protocols and network architectures, to enhance the efficiency of our operation and maintenance, with cost reductions on those activities.

 

Competition

 

As of the date of this Annual Report, the main licensees providing local and/or fixed long-distance telephone service are Telmex, AMX Argentina (commercially known as Claro), Level 3 Argentina (commercially known as “Level 3 Communication” formerly “Global Crossing”), IPlan, Telecentro, Telefónica (principally in the Southern Region) and Telecom (principally in the Northern Region). Telefónica has the dominant market share for provision of telecommunications service to retail customers in the Southern Region. If our competitors increase their presence in the Northern Region, we expect that we will face additional pricing pressure and experience a slight loss in market share in the Northern Region.

 

Regarding data services, our main competitors are Centurylink and Edgeconnex (an international datacenter specialized company that increased its market presence during 2019).

 

Finally, and regarding wholesale services, the main competitors in Argentina for connectivity services are Centurylink (formerly “Level 3 Communication” and “Global Crossing”), Telefónica, ARSAT (a Government owned company) and Silica (Datco Group). This competition causes permanent pricing pressure and forces Telecom to deploy commercial strategies to mitigate the impact of those initiatives on its market share. On the other hand, and in relation with local interconnection traffic, the ENACOM sets prices for this service.

 

ØSubsidiaries in Paraguay and Uruguay

 

Paraguay

 

We provide nationwide mobile telecommunication services in Paraguay through our subsidiary, Núcleo, under the brand “Personal”. Telecom holds 67.5% of the capital stock of Núcleo and the remaining 32.5% is held by ABC Telecomunicaciones S.A., a Paraguayan corporation. Núcleo was granted licenses to provide commercial mobile services, Internet access and videoconference and data transmission services in Paraguay.

 

In 2019, Núcleo continued its innovation efforts in the residential customer sector by proposing Flow to its customers, an unique and disruptive product that we believe captivated the attention of the market. Through Flow —which uses the fastest fiber optic network in the country—, its customers are able to watch television at any time and place and from any device. Flow counts with more than 100 channels (of which more than 80 are in HD) and a catalog of more than 6,000 titles of movies and TV shows “On demand.”

 

Núcleo had 2.4 million mobile subscribers both as of December 31, 2019 and 2018.

 

Núcleo is the controlling company of Tuves S.A., holding a 99.99% of its capital stock. Tuves S.A.’s main activity is the distribution of satellite TV and audio signals to customers’ homes.

 

Network and Equipment

 

In 2019, Núcleo continued the deployment of the fixed network, reaching 350 thousand homes, which allowed to improve the country connectivity and the economic convenience to its customers.

 

Competition

 

Currently, there are four participants in the mobile telecommunications services market in Paraguay. Operators provide services using 2G, 3G and 4G technology. The Paraguayan market is highly competitive. As of December 31, 2019, Núcleo’s main competitor was Tigo (a Millicom International Cellular subsidiary). Tigo holds a significant market share in terms of revenues.

 

In relation to Flow, there are two other operators that offer similar services in the Paraguayan market, Tigo and Claro, being Tigo the main competitor with its “OneTV” service.

 

   
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Uruguay

 

Telecom provides management and administration services to companies that render cable TV services in Uruguay under the brand Cablevisión through Telemás S.A., one of the Adesol’s subsidiaries.

 

As of December 31, 2019, Adesol had approximately 142,000 subscribers in Uruguay provided cable television services under different technological platforms.

 

Strategic Agreement

 

During 2019 an agreement was signed between Antel and Telemás S.A. This alliance allows customers to access Flow through Antel Internet access service “Fiber in your home.” Customers of this Internet plan throughout the country can incorporate a Set Top Box of Cablevision Flow. This new Set Top Box also has Youtube and Netflix applications integrated into the platform and also applications of local radios and music.

 

Network and Equipment

 

During 2019 we offered services through UHF (Ultra High Frequency) and DTH (Direct To Home) Platform in Montevideo and the metropolitan area comprising Ciudad del Plata (department of San José) and different locations in the department of Canelones (Southern Area).

 

During 2019, Telmas S.A. completed the migration process of its customers in the Southern Area from the UHF platform to the satellite platform, as provided by Decree No. 387/017.

 

This process involved the coordination and technical visit of more than 86,000 customers and 220,000 Set Top Boxes. It had a total cost of US$14.5 million, of which US$7 million were received as a compensation from the Uruguayan State.

 

This evolution towards the satellite product, together with the platform Flow, which allows customers to enjoy the programming grid and on demand contents from any device, is another step forward that places our Cablevisión brand at the forefront of the industry and strengthens its leadership in Montevideo and different areas in Canelones and San José.

 

Competition

 

The television market in Uruguay has approximately 700 thousand subscribers. DirecTv Uruguay holds a 27% share in that market after Cablevisión, which holds a 20% share, and the rest is divided among different local distributors. Only Directv can sell its services across the whole country, while Cablevision and the rest of the cable television operators have only territorial licenses. Although Cablevision maintained its market share throughout the last years, the exponential growth of Directv led to the detriment of the rest of the operators.

 

In Montevideo, Cablevisión leads the market with a 24% share, followed by Directv with a 19% share.

 

The market showed a downward trend, marked by the increase of online entertainment alternatives, mainly NETFLIX, which increased its customers base during 2019 by 25%, representing 70% of the TV market subscribers.

 

INFORMATION TECHNOLOGY STRATEGY

 

Following the Merger, we have been implementing various initiatives towards a convergent business structure by merging duplicative processes and platforms in order to create synergies and efficiencies within our organization, which we believe enable us to improve the quality of the services we provide. Among the highlights of the year 2019, we can mention:

 

·Business Support Systems Transformation (the “#FAN Program”). The FAN Program is an initiative to implement a comprehensive refurbishment and convergence of the platforms that we rely on to manage our customer relationships (CRM), including the delivery, charging, billing and collections methods, by integrating different cloud and “on premise” frameworks. In 2019, we deployed the #FAN Program for prepaid mobile customers in 16 localities. Also, we gave customers an option to switch from a prepaid plan to a postpaid plan during 2019, but only in some selected localities.

 

·Real Time Decision and Diagnostics Tools. We continued the developing of our “Real Time Decision” capabilities. This allows us to execute personalized and analytically optimized decisions, giving customers a unique, differential and personalized offer. We also simplified our mobile diagnostic tool, performing the analysis of events in real time and allowing the creation of incidents in our incident’s management tools, allowing quick resolution of the reported failures.

 

   
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·Corporate Systems. We improved the efficiency of our corporate and financial systems by deploying the same solutions throughout our subsidiaries. We also started the necessary steps to migrate certain of our legacy systems to state of the art systems (e.g. SAP S4). Additionally, back office processes (support activities for the management of the Company) were defined to be considered in the implementation of SAP Hana S4 and Ariba (implementation is planned for the second quarter of 2020). Also, in 2020, we implemented Concur, a tool that promotes self-management for minor expenses and travels. Finally, we have also continued our efforts to shut down legacy processes and systems that are no longer in use.

 

·Digital Office. We pursued efforts to digitalize our office space and ensure an efficient use of our technology resources (e.g. replacing equipment unifying corporate networks).

 

Technical systems and operational support

 

·We continued developing the OSS program (Operation Support System) to provide a comprehensive vision and follow-up to all the technical projects that will be key to the transformation of the operation and our business. The highlights were:

 

vWorkforce Management: we finished the migration of all the technical bases of Argentina and Uruguay that manage the HFC network and we began the migration of the application to the cloud.
vDiagnostic Portal: we carried out the implementation of the new portal for the basic technical diagnosis of our customer’s incidents.

 

·We developed a multi-platform automatic activation system that allows the activation, validation and verification of the services subscribed by our customers during the sales and post-sales processes, reducing installation and repair times at our clients’ homes.

 

·We unified in a single tool the services provided by six incidents reporting tools, unifying claims administration. This had an impact on more than 4,000 operations per month.

 

·We integrated more than 80 network tools in our new fault management system, which deals with more than 100 million of events per month, reducing response times by more than 88%.

 

Datacenter Operations

 

During 2019, we continued to implement technological updates in the main business support systems. These updates allowed to provide greater stability and performance to the main Telecom systems.

 

The Service Assurance Program was launched in replacement of the Legacy Stabilization Program to focus on maximizing the availability and performance of the critical services that support our business. It was created to define preventive and corrective actions that allow leveraging continuous improvement. Within this framework, significant improvements were made to the operating models that support Field Service, Customer, Digital and Flow business processes. Also, a review model of operational processes was implemented with Cloud, SaaS (Software as a Service) or PaaS (Product as a Service) providers to ensure that the different migrations or launches respond to the operational needs of the business, providing better response time to complaints from our customers.

 

MARKETING AND CUSTOMER CARE

 

Sales and Marketing

 

Telecom’s marketing strategy focuses on cross-selling the full range of services to its subscribers, to offer innovative services to its existing customers, and to upgrade existing broadband customers to higher speeds. An increase in the number of subscribers who receive all of Telecom’s fixed and mobile telecommunications, cable television and Internet services, together with an increase in the numbers of services provided to its existing subscribers is expected to result in an increased ARPU.

 

Telecom’s marketing activities included:

 

·advertising on television, radio, newspapers, billboards on the streets and local programming channels offered to customers;
·personal visits to current and potential customers;
·telemarketing directed to potential and former customers, as well as current customers who have not subscribed to any premium services;
·mailing information and special promotional material to current and potential customers; and
·special events for Telecom’s customers, some of which are sponsored jointly with programming providers.

 

   
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Customer Support

 

Telecom’s customer service operations related to cable television services and Internet services are provided through a unified center (the “Contact Center”) available 24 hours a day and 365 days a year. Telecom’s cable television services and Internet services customers can contact the Contact Center by phone, e-mail and chat through its website, as well as through social media such as Twitter and Facebook. Accessibility through social media is particularly important in Latin American countries and especially in Argentina, which has a high degree of social media penetration.

 

Telecom’s customer service operations related to fixed and mobile telephony services, Internet and cable television services include specialized call centers and approximately 6,700 customer service representatives consisting of in-house and third-party personnel. By calling the customer service hotline, mobile telephony customers can make inquiries about their accounts. Our model of care includes a special telephone channel for high-value customers (“Black” and “Business” accounts). In line with current market demands, we also provide the option for account self-management through special online portals, therefore simplifying the procedure and providing our customers with alternatives. Access to these online portals includes processes for validating customer identities and analyzing behavioral patterns to anticipate their needs.

 

Telecom has special customer service programs specifically tailored to the convergent solutions we provide. We implemented and unified in a single contact center platform the different client-to-provider contact channels (including telephone, face-to-face contacts, social networks (Twitter, Facebook) and Multimedia (chat, email)). Services provided to our mobile customers will tentatively be incorporated to this platform during 2019. We implemented a real-time decision platform to deliver personalized customer service.

 

In addition, Telecom also offers a paperless option for invoices and other customer service processes, replacing them with free digital invoices.

 

In 2019, Telecom’s customer satisfaction indexes have been remained above its goal of 85%, based on top two box methods, confirming the excellence of the services we provide. Telecom believes that its attention to customer service differentiates it from its competitors and is rewarded with customer loyalty.

 

SUSTAINABILITY

 

Telecom carries out its activities and operations taking into account the importance of telecommunications services and the Company’s global impact on the communities it caters to.

 

The Company’s management considers the contribution of telecommunications to the Argentina’s economic and social development of the country. For this reason, Telecom has developed a social investment plan that focuses on the promotion of the use of technology as a tool for the progress and the growth of communities. The plan currently is comprised of two initiatives:

 

·Digit@lers: free programming courses aimed at young people who are interested in developing their future in the technology industry; and

 

·Nuestro Lugar (Our Place): promotes the responsible, safe and creative use of technology in children and teenagers, through cyber-citizenship and educational robotics workshops in schools. It also includes teacher training for the use of mobile technologies in the classroom.

 

As operators of fixed and mobile telephony, cable television and Internet, we understand that technology has great potential to collaborate with the development of our society and the people who are part of our community. Therefore, we promote the social use of technologies and digital literacy to generate new capabilities and promote human development.

 

Telecom has been an adherent member of the United Nations Global Compact since 2004, and complies with the 10 principles of human rights care, employment quality, environmental care and the fight against corruption. Telecom’s commitment is ratified every year and is part of our sustainability model. Also, this model is based on the Code of Ethics and Conduct of the Company that incorporates, through declarations of principles and values, moral and ethical foundations of a universal nature within the organization.

 

The sustainability management plans and monitors the actions in this area, and coordinates the Action Plan with an operational group, comprised of managers from all Company’s internal areas, to advance in the management of social and environmental impact.

 

With the commitment of the entire organization, the Company seeks to sustain the maximum economic performance in balance with the impacts and opportunities in the society and its environment.

 

The 2019 Sustainability Plan promoted good practices aimed at all stakeholders - community, collaborators, suppliers, environment, customers and investors - and aimed to enhance the contribution of social and environmental performance of Telecom.

 

   
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MANAGEMENT OF CHURN

 

Churn refers to the termination of a mobile telephony, cable television or Internet services customer’s account. The churn rate is determined by calculating the total number of disconnected customers of each of our mobile telephony, cable television and Internet services over a given period as a percentage of the initial number of customers for such services as of the beginning of the applicable measurement period. Reductions in fixed telephony lines in service refers to the reductions of fixed telephony lines in service that form part of the public telephone network, or are connected to such network, as of the end of two relevant measurement periods. We seek to enforce a strict disconnection policy, which provides for the disconnection of cable television services after a three-month period of non-payment and delivery of a notice of disconnection. With respect to Internet services, we disconnect services after a two-month period of non-payment and delivery of a corresponding notice of disconnection. With respect to mobile telephony services, we disconnect services after a 150-day period of non-payment and delivery of a notice of disconnection. Because most of our mobile telephony services are provided under the Personal brand, historical average monthly churn rates for mobile telephony services customers, included in this Annual Report for comparative purposes, reflect Telecom’s operations prior to the consummation of the Merger.

 

REGULATORY AUTHORITIES AND FRAMEWORK

 

Our activities are affected by, and will continue to be affected by, among others, rules and regulations applicable in Argentina, Paraguay and Uruguay, which we describe below. Our fixed wholesale telecommunications operations in the United States are subject to the authority of the Federal Communications Commission (the “FCC”).

 

REGULATORY AUTHORITIES

 

The regulatory authorities described below are primarily responsible for regulating the ICT services we provide. Other authorities also have jurisdiction over different aspects of our operations, including, without limitation, antitrust authorities, the CNV, the public registry of commerce and tax authorities.

 

Argentina

 

The ENACOM is the principal regulatory body responsible for the regulation, control and supervision of the ICT sector. The ENACOM is an autonomous federal agency within the purview of the Secretary of Public Innovation (which, in turn, is under the supervision of the Cabinet of Ministers).

 

Paraguay

 

Our mobile telecommunications services in Paraguay are subject to the authority of the CONATEL. Our subsidiary Personal Envíos (which received authorization to operate as an Electronic Payment Company) is supervised by the Central Bank of Paraguay.

 

Uruguay

 

Our subsidiary Adesol is a related party of Bersabel S.A. and Satélite Visión S.A., entities that own licenses to provide subscription broadcasting services in Uruguay and are subject to the authority of the URSEC.

 

REGULATORY FRAMEWORK

 

Argentina

 

In Argentina, the provision of fixed and mobile telecommunications services, Internet services and cable television services (subscription broadcasting services) are highly regulated, and the regulatory framework is continuously evolving. The legal and regulatory framework applicable to our business includes:

 

·Argentine Digital Law of 2014 (Law No. 27,078 as amended by Decree of Need and Urgency No. 267/15 and Decree No. 1,340/16, or the “LAD”), which establishes the legal and regulatory framework applicable to information and communication technologies (“ICT”) services;

 

·Law No. 19,798 (to the extent it does not conflict with the LAD);

 

·the Transfer Agreement and the Privatization Regulations that regulated the privatization process; and

 

·the licenses for providing telecommunication services granted to Telecom and the List of Conditions and their respective regulations.

 

   
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The Argentine Digital Law

 

The LAD provides for a single country-wide license and individual registration for information and communication technologies (ICT) services (Licencia Única Argentina Digital). Pursuant to the LAD, licensees of ICT Services are required to set prices that (i) are fair and reasonable, (ii) cover the exploitation costs and (iii) tend to maximize the efficiency of the supply of these services while maintaining a reasonable operating margin. The LAD also amended the Universal Service (see “—Universal Service”), includes a declaration of public interest of the development of ICT and its associated resources in order to ensure complete neutrality of ICT networks and grant all users the right to access, use, send, receive or offer any content, application, service or protocol through Internet without any restrictions or discrimination. The LAD allows licensees of ICT Services to provide audiovisual communication services (except for those provided through satellite link).

 

In the past few years, the regulatory framework applicable to services provided by Telecom in Argentina went through a significant number of changes allowing, as of January 1, 2018, the joint provision of fixed and mobile telecommunications services, cable television services and internet services, known as “quadruple play.”

 

Telecom’s License

 

Telecom holds a non-expiring Unique Argentine Digital License (Licencia Única Argentina Digital), which allows Telecom to provide the following services:

 

·local fixed telephony;
·public telephony;
·domestic and international long-distance telephony;
·domestic and international point-to-point link services;
·value added services (VAS);
·data transmission;
·videoconferencing;
·transportation of audio and video signals;
·Internet access;
·mobile telecommunication services (STM);
·mobile radio communication services (SRMC);
·personal communication services (PCS);
·advanced mobile communication services (SCMA);
·subscription broadcasting service (by physical and/or radio electric link); and
·radio electric service of concentration of links (SRCE).

 

UNIVERSAL SERVICE

 

The licensees of ICT Services are required to make contributions to the Universal Service Fiduciary Fund equivalent to 1% of the total accrued revenues from the provision of ICT Services, net of taxes and charges. The regulation adopted a “pay or play” mechanism for compliance with the mandatory contribution to the Universal Service Fiduciary Fund, pursuant to which licensees required to make contributions may make certain deductions or submit claims (including for or with respect to amounts incurred by the licensees in the provision of certain services relating to the achievement of universal access of telecommunications services throughout Argentina).

 

For information on the impact on the Company of the Universal Service regulation, including discrepancies between Telecom and the regulators with respect to deductible amounts, see Note 2.d) to our Consolidated Financial Statements.

 

SPECTRUM

 

·SC Resolution No. 38/14

 

Pursuant to SC Resolution No. 38/14, the auction for frequencies of the Personal Communication Services (PCS), the Cellular Mobile Radiocommunication Services (SRMC), as well as frequencies of the new spectrum for the Advanced Mobile Communications Service (SCMA) were awarded to us. Personal presented its economic bids and was awarded Lots 2, 5, 6 and 8 by Resolution SC N° 79/14 (SCMA) and Resolutions SC N °80/14, 81/14, 82/14 and 83/14 (PCS and SRMC).

 

 

   
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Through SC Resolution No. 25/15, issued on June 11, 2015, Personal was assigned the remaining of Frequency Bands which formed Lot No. 8.

 

Secretary of Modernization Resolution No. 865/2019, published in the Official Gazette on June 5, 2019, provided that the SCM (Mobile Communications Services) providers awarded spectrum under an auction relating to SCM must enter into automatic national roaming agreements or other alternative technical infrastructure sharing solutions to assure coverage in roads and locations between 500 and 10,000 inhabitants, during the period established for the fulfillment of its obligations of network deployment and coverage, and up to the end of the award. The Company has filed with ENACOM the agreement concluded with Telefónica within the framework of the provisions established in this regulation with the ENACOM.

 

·ENACOM Resolution No. 3,687-E/17 call for the on-demand frequency allocation

 

ENACOM Resolution No. 3,687-E/17 provided the call to Mobile Communications Service providers to bid for the allocation of certain frequencies (the radio spectrum from 2,500 to 2,690 MHz). Such resolution, detailed the procedure for the selection of the providers (among those qualified to participate in the call) as well as their obligations and compensation.

 

On July 5, 2017, the ENACOM notified us that the frequencies included in one of the aforementioned lots (Lot C) were assigned to Personal. However, such assignment is no longer effective as a result of a resolution of the ENACOM issued in 2019.

 

OTHER MATERIAL REGULATIONS

 

Telecom is also subject to the following material regulations in Argentina, among others:

 

·Regulation of ICT services, which regulates the relationship between the Company and its customers of ICT services.

 

·Regulation of number portability. The new general rules governing number portability were approved in April 2018, including fixed telephony services. The approval of the schedule of implementation of such services is still pending.

 

·Regulation of radioelectric spectrum fees. The use of radioelectric spectrum is subject to the payment of fees. In February 2018, the ENACOM updated the value of the radioelectric spectrum fee per unit and established a new regime for mobile communications services, which substantially increased the amounts to be paid in this regard. Through Resolution No. 4,266/2019 issued on October 8, 2019, the ENACOM modified the base of calculation of radioelectric spectrum fees related to SRMC, STM, PCS and SCMA for the affidavits that expire after the date of issuance of the Resolution. Such modification represents a reduction in the applicable rate for payment of radioelectric spectrum fees for these services.

 

·Resolution No. 286/18 of the Ministry of Modernization approved new interconnection and access regulations, which became effective on July 3, 2018. According to this resolution, the terms, conditions and prices may be freely set by ICT service providers. ICT service operators are obligated to provide interconnection to other ICT service providers upon request, under technical and economic conditions no less favorable than those granted to themselves or third parties.

 

The ENACOM established maximum and minimum prices for essential facilities. Essential facilities include (i) origination or local termination; (ii) co-location; (iii) local transit service; (iv) port; (v) signaling function; (vi) loop and local customer sub-loop; (vii) the transportation service (LD), when there is no substitute offer for contracting; and (viii) any other function or network element that the authority determines as such, ex officio or at the request of a party.

 

Through Resolution No. 4,266/2019 the ENACOM decided, on a provisional and exceptional basis, that the reference exchange rate applicable to the interconnection charges established under the ENACOM Resolutions Nos. 4,952/2018, 1,160/2018 and 1,161/2018, for calls made as from August 1, 2019, will be of P$45.25 for each U.S. dollar. In subsequent months, the exchange rate to be applied may not exceed 6% of the exchange rate established for the previous month and in no case it may exceed the selling exchange rate established by Banco de la Nación Argentina prevailing on the last business day of the month in which the services are rendered. This Resolution was applicable to services provided until December 31, 2019.

 

·Buy Argentine Act. According to the provisions of Law No. 27,437 (as supplemented by Decree No. 800/2018 and Resolution No. 91/2018 of the Secretariat of Industry), Telecom Argentina—as a public fixed telephony services licensee—and its respective direct subcontractors, must prioritize the purchase or lease of domestic goods and services.

 

   
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Paraguay

 

In Paraguay, our subsidiary Núcleo has a license to provide mobile telecommunication services (STM and PCS) and a license for the installation and provision of Internet and data services throughout the country. These licenses have been granted for renewable five-year periods. Núcleo is supervised by the CONATEL. Personal Envíos, a company controlled by Núcleo, is authorized by the Central Bank of Paraguay to operate as an Electronic Payment Company (EMPE), and its corporate purpose is restricted to such service. Tuves Paraguay, a company controlled by Núcleo, has a license for the provision of telecommunications services and also the distribution of digital audio and television signals to homes, for the term of five years. The license was granted in March 2010 and renewed in March 2015 for a term of five years.

 

Uruguay

 

Adesol is a subsidiary of the Company incorporated in Uruguay, which has contractual relationships with several licensees that provide subscription television services through various systems in such country and are under the oversight of the URSEC.

  

In relation to the Law of Communication Services in Uruguay, Adesol is analyzing the possible consequences that the change in the regulatory framework could generate in relation to the migration of services required by Decree No. 387/17. The licensing companies submitted to the URSEC a migration plan that was finalized in July 2019.

 

For more information in relation to the Regulatory Framework to which our operations are subject, also see Note 2 to our Consolidated Financial Statements.

 

DISCLOSURE PURSUANT TO SECTION 219 OF THE IRAN THREAT REDUCTION AND SYRIA HUMAN RIGHTS ACT OF 2012 (ITRSHRA)

 

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act, which requires a 34’ Exchange Act registrant to disclose in its annual or quarterly reports filed with the SEC whether the issuer or any of its affiliates has knowingly engaged in certain activities, transactions or dealings with the government of Iran, relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction during the period covered by the annual or quarterly report. Disclosure is required even when the activities were conducted outside the United States by non-U.S. entities and even when such activities were conducted in compliance with applicable law.

 

In accordance with our Code of Ethics and Business Conduct, we seek to comply with all applicable laws.

 

Activities relating to Iran

 

During 2019 we had two activities relating to Iran: (i) our roaming agreement (mobile services) with Mobile Company of Iran (MCI) (formerly TCI), which allows our mobile customers to use their mobile device on a network outside their subscriber’s home network (see “Glossary of Terms—Roaming”) and (ii) our international telecommunications services agreements with international carriers (fixed services), which cover delivery of traffic to Iran through non-Iranian carriers.

 

On December 28, 2018, Telecom Argentina notified Mobile Company of Iran (MCI) the decision to terminate the IRA agreement signed by both parties related to Voice Roaming Service, in February 1, 2019. Notwithstanding the foregoing, and in order to properly document the termination of the roaming service, on February 1, 2019, a notarial certificate was issued stating the termination at a technical level of said service.

 

After the date of termination of the agreement, Telecom Argentina will issue and receive invoices for traffic consumptions up to that date.

 

i.Roaming agreements (mobile services)

 

Like all major mobile networks, in response to the competition and customers’ demands, Telecom Argentina entered into roaming agreements with many foreign mobile networks, including MCI (until February 1, 2019), to allow their customers to make and receive calls abroad.

 

Roaming agreements are entered into using standard terms and conditions including the one relating to Iran. Entering into roaming agreements is an activity carried out in the ordinary course of business by a mobile network operator.

 

   
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Roaming agreements are generally reciprocal. Pursuant to a roaming agreement, when our mobile customers are in a foreign country covered by the network of an operator with which we have a roaming agreement (the “Foreign Operator”), our mobile customers may make and receive calls on their mobile phone using the Foreign Operator’s network. Likewise, the Foreign Operator’s customers may make and receive calls using our networks when these customers are in Argentina.

 

The Foreign Operator bills us for the calls made and received by our roaming customers at the rate agreed upon in the applicable roaming agreement. We then bill these customers according to the specific roaming fees in their subscription agreement. Likewise, we bill the Foreign Operator for the calls made and received by its clients using our networks for those calls, at the roaming rate agreed upon in the applicable roaming agreement, and then the Foreign Operator bills its clients according to their customer agreements. Roaming agreements do not, generally, contemplate other fees or disbursements.

 

As of December 31, 2019, the consolidated impact on net profit (loss) arising from our roaming agreements with MCI was as follows:

 

·our total revenues under roaming agreements with MCI were approximately P$0.01 thousand (P$0.015 thousand in current currency as of December 31, 2019).
·our total charges paid under roaming agreements with MCI were approximately P$2.21 thousand (P$3.31 thousand in current currency as of December 31, 2019).

 

These revenues and charges are immaterial to our consolidated revenues and operating expenses. Because we do not separately allocate costs directly attributable to the service provision or other overhead costs to these transactions, the amount of our consolidated net profits earned under these agreements is not determinable, but it does not exceed our gross revenues from the agreements.

 

ii.Commercial Agreements with International Carriers (fixed services):

 

We maintain commercial agreements with international carriers located in countries other than Iran, which permit those carriers to deliver traffic from Iran to our networks and from our networks to Iran.

 

Telecom Argentina’s total charges paid under commercial agreements with international carriers regarding delivery of traffic to Iran were approximately P$2.17 thousand (P$2.68 thousand in current currency as of December 31, 2019).

 

During 2019, and regarding incoming traffic, Telecom charged mainly Verizon Communications Inc. (United States), Francia Orange Espagne S.A.U and Telecom Italia Sparkle S.p.A (Italy) for their traffic terminated in Telecom’s network. With respect to incoming traffic, Telecom does not know the country of origin of such traffic. During 2019, and regarding outgoing traffic, Telecom has sent traffic to the “Designated Countries” (countries designated by the U.S. Department of State as state sponsors of terrorism and are subject to U.S. economic sanctions and export controls) mainly through the aforementioned carriers.

 

Activities relating to Syria and Sudan

 

In addition to the mandatory disclosure pursuant to ITRSHRA described above, our activities that directly or indirectly relate to Syria and Sudan, during 2019, were the following:

 

i.Roaming agreements (mobile services)

 

During 2019, we maintained roaming agreements with MTN Sudan and MTN Syria. On December 28, 2018, Telecom Argentina notified MTN Sudan and MTN Syria the decision to terminate the IRA agreement signed by both parties related to Voice Roaming Service since February 1, 2019. Notwithstanding the foregoing, and in order to properly document the termination of the roaming service, on February 1, 2019, a notarial certificate was issued stating the termination at a technical level of said service.

 

After the date of termination of the agreement, Telecom Argentina SA will issue and receive invoices for traffic consumptions up to that date.

 

   
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As of December 31, 2019, the approximate revenues, expenses, receivables and payables from roaming agreements with the Designated Countries were as follows:

 

   December 31, 2019 
Roaming agreements (mobile services)  Revenues   Expenses   Receivables   Payables 
   In thousands of P$ 
Syria   0.01    4.65    0.48    4.29 
Sudan       0.07        0.07 
Total   0.01    4.72    0.48    4.36 
% of respective consolidated total amounts    (a)    (a)    (a)    (a) 

 

 

(a)Less than 0.001%.

 

   December 31, 2019 (in current currency) 
Roaming agreements (mobile services)  Revenues   Expenses   Receivables   Payables 
   In thousands of P$ 
Syria   0.02    6.96    0.48    4.29 
Sudan       0.10        0.07 
Total   0.02    7.06    0.48    4.36 
% of respective consolidated total amounts    (a)    (a)    (a)    (a) 

 

 

(a)       Less than 0.001%.

 

ii.Commercial Agreements with International Carriers (fixed services):

 

We also maintain commercial agreements with international carriers from countries other than the Designated Countries which permit those carriers to deliver traffic from the Designated Countries to our networks and from our networks to such countries.

 

Regarding outgoing traffic, during 2019, Telecom has sent traffic to the Designated Countries mainly through Verizon Communications Inc. (United States), IBASIS (Holland) and Telecom Italia Sparkle S.p.A (Italy).

 

As of December 31, 2019, the total approximate expense for delivery of traffic terminated in the Designated Countries was:

 

Commercial Agreements with
International Carriers (fixed services)
  December 31, 2019 
   In thousands of P$ 
Syria   52.43 
Total outbound costs   52.43 
% of consolidated operating expenses   (a) 

 

 

(a)       Less than 0.001%.

 

Commercial Agreements with
International Carriers (fixed services)
 

December 31, 2019

(in current currency)

 
   In thousands of P$ 
Syria   64.82 
Total outbound costs   64.82 
% of consolidated operating expenses   (a) 

 

 

(a)       Less than 0.001%.

 

Regarding incoming traffic, Telecom Argentina charge the relevant international carrier for their traffic terminated in Telecom’s network. Consequently, Telecom Argentina does not know the country of origin of such traffic.

 

Accordingly, our total payables and receivables from international carriers include balances arising from traffic related to the Designated Countries but it is not possible to segregate them.

 

The outbound costs described in the table above are wholly immaterial with respect to the Company’s consolidated operating expenses for the period presented.

 

   
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CAPITAL EXPENDITURES AND RIGHTS OF USE ASSETS

 

The following financial information for the year ended December 31, 2019 and December 31, 2018 reflects the effect of the Merger effective as of the Merger Effective Date (i.e., January 1, 2018). The Merger constituted a “reverse acquisition” under IFRS 3, pursuant to which Cablevision (the absorbed entity) was considered the accounting acquirer and Telecom (the surviving entity) was considered the accounting acquiree. Accordingly, the following information of Telecom for periods prior to the Merger Effective Date reflects the financial information of Cablevisión restated in terms of the current currency to take into account the effect of inflation in Argentina.

 

The following table sets forth our capital expenditures for each of the years ended December 31, 2019, 2018 and 2017:

 

   Year ended December 31, 
   2019   2018   2017 
       (P$ million)(1)     
Land and buildings   918    654    349 
Switching equipment   2,856    878    - 
Mobile network access, external wiring & transmission   31,300    34,594    9,532 
Computer equipment and software   12,182    7,967    883 
Other   16,608    16,764    18,584 
Subtotal tangible capital expenditures   63,864    60,857    29,348 
Licenses   14    1,298    1,241 
Subscribers acquisition costs   1,610    2,074    - 
Other   1    1,098    - 
Subtotal intangible capital expenditures   1,625    4,470    1,241 
Total capital expenditures in PP&E and intangible assets   65,489    65,327    30,589 
Right of use assets   5,376    98    60 
Total capital expenditures in PP&E and intangible assets and Right of use assets   70,865    65,425    30,649 

 

Our capital expenditures were approximately US$1,086 million in 2019, US$1,273 million in 2018 and US$636 million in 2017, and represented 27.6%, 25.3% and 29.9% of our consolidated revenues, respectively. We estimate that our capital expenditures in 2020 will be approximately US$643 million. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Expenditures.”

 

We expect to finance these expenditures through cash flows generated by our operations and financing provided by third parties.

 

PP&E

 

As detailed below, our principal physical properties consist of transmission equipment, access facilities, outside plant (external wiring) and switching equipment. These assets are, at present, mainly located throughout AMBA and the Northern Region. Some of our assets are located in areas that may be subject to natural disasters and severe weather, and which may be adversely affected in the future by climate change.

 

We believe that our assets are, and for the foreseeable future will be, adequate and suitable for their respective uses. The table below shows the carrying the amount of PP&E:

 

   As of December 31, 2019 
   Services rendered
in Argentina
   Other abroad   Total 
       (P$ million)(1)     
Land and buildings   31,236    494    31,730 
Switching equipment   3,891    753    4,644 
Mobile network access, external wiring & transmission   130,113    5,851    135,964 
Computer equipment and software   20,548    1,788    22,336 
Materials   19,865    1,327    21,192 
Others   30,019    2,420    32,439 
Total PP&E, net carrying value   235,672    12,633    248,305(2)

  

 

 

(1)The allocation of work in progress among items is estimated.
(2)Excluding valuation allowance for materials for P$1,506 million and impairment of PP&E for P$802 million.

 

   
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All the above-mentioned assets were used to provide service to our customers.

 

As of December 31, 2019, we have entered into purchase commitments relating to PP&E totaling P$10,344 million. Our current major suppliers of PP&E are Sagemcom BroadBand Sas, Huawei International Co. Limited, IBM Argentina S.R.L., Arris Solutions Inc., Cisco Systems, Technicolor Connected Home USA LLC and Nokia Solution and Networks Argentina.

 

ITEM 4A.UNRESOLVED STAFF COMMENTS

 

None.

 

   
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ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

You should read the following discussion in conjunction with the rest of this Annual Report, in particular, the sections “Presentation of Financial Information,” “Item 4 —Information on the Company” and the Consolidated Financial Statements, including the notes to those financial statements, which appear elsewhere in this Annual Report. Our Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB. See “Item 3—Key Information—Selected Financial Data.” The following discussion and analysis are presented by the Management of our company and provide a view of our financial condition, operating performance and prospects from Management’s perspective. The strategies and expectations referred to in this discussion are considered forward-looking statements and may be strongly influenced or changed by shifts in market conditions, new initiatives that we implement and other factors. Since much of this discussion is forward-looking, you are urged to review carefully the factors referenced elsewhere in this Annual Report that may have a significant influence on the outcome of such forward-looking statements. We cannot provide assurance that the strategies and expectations referred to in this discussion will come to fruition. Forward-looking statements are based on current plans, estimates and projections, and therefore, you should not rely solely on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statements in light of new information or future events. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predict and are generally beyond our control. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. Please refer to “Forward-Looking Statements,” “Item 3—Key Information—Risk Factors” and “—Trend Information” below for descriptions of some of the factors relevant to this discussion and other forward-looking statements in this Annual Report.

 

Management Overview

 

We believe that telecommunications can contribute to the development of the countries in which we operate, boosting local economies by providing them with access to high value-added communication and connectivity services. To this end, we intend to continue to invest in the most modern mobile technology infrastructure, as well as in the deployment of a high speed fiber optic network to deliver the best contents to our customers.

 

We are focusing our efforts on several strategic pillars. We believe that the deployment of an infrastructure appropriate to our needs will allow us to offer more services, with a sophisticated fixed-mobile network comparable to those of the largest companies in the world.  We are also promoting a deep in-house cultural transformation to support the goals of our convergent business and to strengthen the focus on the customer. 

 

During 2019, we prioritized the integration of the merged companies, focusing on the people, the organizational culture, the administrative processes, the technological tools and the key factors to achieve competitiveness and ensure the long-term sustainability of our businesses.

 

Consolidated revenues in 2019 were P$237,024 million compared to P$258,518 million in 2018 and P$102,531 million in 2017. The decrease of P$21,494 million in 2019 (a 8.3% decrease) was mainly due to lower Mobile, Internet and Cable Television service revenues and equipment revenues, only partially offset by higher fixed and data services revenues. Revenues in 2019 were mainly driven by revenues from mobile services, internet services, premium cable television services and fixed and data services.

 

Net loss in 2019 was P$3,888 million compared to a gain of P$8,516 million in 2018 and P$15,167 million in 2017. Net loss attributable to Telecom Argentina represented P$4,396 million in 2019 as compared to net income reaching P$ 8,145 million in 2018 and P$14,969 million in 2017.

 

For a detailed analysis of our results of operations for fiscal year 2019, see “—Years ended December 31, 2019, 2018 and 2017” below. For a discussion of the factors that may affect our results of operations see “Item 3—Key Information—Risk Factors” and “—Years ended December 31, 2019, 2018 and 2017—Factors Affecting Results of Operations” and “—Trend Information” below.

 

Non-IFRS Measures

 

The following discussion and analysis summarizes relevant measures of results of operations presenting items by nature. The Company believes that the presentation of the measure “adjusted EBITDA” provides investors and financial analysts with appropriate information that is relevant to understanding the Company’s past and present performance as well as our projections of future performance (see the purpose of use of adjusted EBITDA and reconciliation of net income to adjusted EBITDA in section “Adjusted EBITDA”). Moreover, adjusted EBITDA is one of the key performance measures used by Management for monitoring the Company’s profitability and financial position, at consolidated levels.

  

   
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Critical Accounting Policies

 

Our Consolidated Financial Statements, prepared in accordance with IFRS, are dependent upon and sensitive to accounting methods, assumptions and estimates that we use as a basis for its preparation. We have identified critical accounting estimates and related assumptions and uncertainties inherent in our accounting policies, which we believe are essential to an understanding of the underlying financial reporting risks. Additionally, we have identified the effect that these accounting estimates, assumptions and uncertainties have on our Consolidated Financial Statements. For more information, see Notes 3.v) and 23 to our Consolidated Financial Statements.

 

Years ended December 31, 2019, 2018 and 2017

 

For purposes of these sections, the fiscal years ended December 31, 2019, 2018 and 2017 are referred to as “2019,” “2018” and “2017,” respectively.

 

Our results of operations are determined in accordance with IFRS as issued by the IASB. Telecom provides customers with a broad range of telecommunication services. To fulfill its purpose, Telecom conducts different activities that are distributed among the companies in the Group. For further information about our main products and services, see “Item 4—The Business—Main Products and Services”

 

Factors Affecting Results of Operations

 

Described below are certain factors that may be helpful in understanding our operating results. These factors are based on the information currently available to our Management and may not represent all of the factors that are relevant to an understanding of our current or future results of operations. See also “Item 3—Key Information—Risk Factors.” Additional information regarding trends expected to influence our results of operations is analyzed below under “—Trend Information.”

 

The Argentine Economy

 

Although a significant portion of our financial liabilities are denominated in foreign currencies, a substantial majority of our assets, operations and customers are located in Argentina. Accordingly, our financial condition, results of operations and cash flows depend to a significant extent on economic and political conditions prevailing in Argentina. The Argentine government has exercised and continues to exercise significant influence over many aspects of the Argentine economy. Accordingly, Argentine governmental actions concerning the economy could significantly affect private sector entities in general and our operations in particular, as well as affect market conditions, prices and returns on Argentine securities, including our outstanding securities and our shares. Our operating results, financial condition and cash flows have been and will be affected by fluctuations in the Argentine economy. For more information on these macroeconomic and political conditions, see “Item 3—Key Information—Risk Factors—Risks Relating to Argentina”.

 

During 2019, aggregate economic activity in Argentina was mainly affected by periods of volatility in the exchange rate and financial indicators, which increased after the primary elections held in August. After a modest economic recovery registered through the second quarter of the year, the financial turmoil in the third quarter generated a double dip in the activity. In general terms, most economic sectors were adversely affected by the general macroeconomic context to different degrees (with the exception of the agricultural sector that outperformed significantly). Regarding the international context, the global economy registered a slowdown with the slowest pace of growth since the global financial crisis of 2008. The economies of developed countries have also been affected (such as the United States, the Euro zone and certain Asian countries). The slowdown in activity has been even more pronounced in emerging markets, including Brazil, China, India, Mexico and Russia. Specifically and considering Argentina’s main trading partners, activity in Brazil continues to register an increase of its output of a low magnitude, while China registered a slowdown in its demand, which has been driven by needed regulatory efforts to reduce its debt and exacerbated by the macroeconomic consequences of increased trade tensions.

 

   
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Effect of Inflation

 

Pursuant to International Accounting Standards (“IAS”) 29 (Financial Reporting in Hyperinflationary Economies), the financial statements of entities whose functional currency is that of a hyperinflationary economy must be restated. IAS 29 does not prescribe when hyperinflation arises, but includes several factors of hyperinflation. Since July 1, 2018, Argentina has been categorized as a hyperinflationary country, since certain macroeconomic indicators and events during 2018 evidenced that the qualitative and quantitative factors identified in IAS 29 (the quantitative factor being when the country’s projected three-year cumulative inflation rate exceeds 100%) were satisfied. Therefore, we have restated our Consolidated Financial Statements and the financial information for all the periods reported in this Annual Report based on certain price indexes to take into account the effect of inflation in Argentina. The Consolidated Financial Statements and the financial information included in this Annual Report for all the periods reported are presented on the basis of constant Argentine Pesos as of December 31, 2019. See “Item 3—Key Information—Risk Factors—Risks Relating to Argentina—Inflation could accelerate, causing adverse effects on the economy and negatively impacting Telecom’s margins and/or ratios,” and Note 1.e) to our Consolidated Financial Statements.

 

The CPI index has registered an increase of 47.6% on a year-over-year comparison for 2018, and an increase of 53.8% for 2019.

 

The financial information issued for comparative purposes must also be presented in the current currency as of December 31, 2019 and must be restated using the annual index of the current year.

 

As a result of applying the comprehensive inflation restatement, the Company will record an increase in the value of non-monetary items, such as PP&E, Intangible Assets (including Goodwill) with an impact on deferred taxes and an increase in the Company's equity, including shareholders contributions.

 

Income Tax Inflation Adjustment

 

Law No. 27,430, as amended by Law No. 27,468, provides that, effective as from the fiscal year beginning on or after January 1, 2018, the inflation adjustment procedure set out in the income tax law shall be applicable to any fiscal year in which the variation of the IPC price index, accumulated over the 36 months immediately preceding the end of the relevant fiscal year, exceeds 100%.

 

In the first, second and third year as from its effectiveness, this procedure shall be applicable as long as the accumulated variation of the IPC, calculated from the beginning of the first year to the end of each year exceeds 55%, 30% and 15%, respectively, in addition to meeting the aggregate 100% threshold mentioned. In order to calculate income tax inflation adjustments, since the amendment of Law No. 27,541, one-sixth of the income tax inflation adjustment shall be computed in each fiscal year, and the remaining five-sixths shall be computed in equal parts, in the five immediately following fiscal years.

 

During 2018, we did not reach the 55% threshold. Therefore, it did not apply the inflation adjustment regime in such fiscal period. However, as of December 31, 2019, the accumulated variation of the IPC exceeds the threshold set for the application of the income tax inflation adjustment for tax purposes. Accordingly, and pursuant to a comprehensive interpretation of applicable regulations, the Company recognized the corresponding accounting impact, that amounted to a loss of P$15,194 million as of December 31, 2019.

 

Effects of Fluctuations in Exchange Rates between the Argentine Peso and the U.S. dollar and other major foreign currencies

 

In 2019, the Argentine Peso continued its devaluation against major foreign currencies, particularly the U.S. dollar. According to exchange rate information published by the Banco de la Nación Argentina, the Argentine Peso depreciated by 58.9% against the U.S. dollar during the year ended December 31, 2019 (compared to 102.2%, 17.4% and 21.9% in the years ended December 31, 2018, 2017 and 2016, respectively).

 

Also, since September 2019, following the economic instability and the significant devaluation of the Peso that took place after the primary elections, foreign exchange controls and restrictions to the transfer of currency abroad were reinstated. The Fernández administration sought to future prevent additional demand for foreign currency by establishing a new tax on the acquisition of foreign currency at a rate of 30%. See “Item 10—Additional Information—Foreign Investment and Exchange Controls in Argentina.”

 

   
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The majority of our revenues are in Pesos whereas a portion of the costs regarding materials and supplies related to the construction and maintenance of our networks and services are incurred in foreign currencies. Also, the high level of competition limited our ability to transfer to our customers the fluctuations in the exchange rates between the Peso and the U.S. dollar and other major foreign currencies. In addition, any devaluation of the Peso against foreign currencies may increase operating costs (partially offset by the increase of revenues in foreign currencies), capital expenditures and the cost of debt, which will adversely affect our results of operations, considering the net effect on revenues and costs. Additionally, any significant devaluation of the Peso, such as the devaluation that occurred in December 2015, May 2018, June 2018, and August 2019 results in an increase in the cost of servicing our debt and, therefore, may have a material adverse effect on our results of operations. See “Item 3—Key Information—Risk Factors—Risks Relating to Argentina—Devaluation of the Argentine Peso and restrictions on the exchange of Argentine Pesos into foreign currencies may adversely affect our results of operations, our capital expenditures and our ability to service our liabilities and pay dividends.”

 

Internal Growth

 

We have focused on increasing our broadband Internet penetration by providing and offering bandwidth connectivity to our existing cable television subscribers, telephony customers and new customers.

 

Total monthly ARPU for mobile telephony services in Argentina was P$ 317.1 pesos in December 2019 as compared to P$ 329.1 pesos in the same month of 2018. Total monthly ARPU for Internet services was P$ 1,058.8 pesos in December 2019 as compared to P$ 1,172.2 pesos in the same month of 2018. Total monthly ARPU for our cable television services was P$ 1,165.4 pesos in December 2019 as compared to P$ 1,314.2 pesos in the same month of 2018.

 

Total monthly ARBU in our fixed telephony services was P$ 442.2 pesos in December 2019 as compared to P$ 416.6 pesos in the same month of 2018.

 

For the calculation of ARPU and ARBU, see “Item 3—Key Information—Other Selected Data.”

 

Price of services

 

The LAD established that licensees of ICT services may freely set their prices which shall be fair and reasonable, to offset the costs of exploitation and to tend to the efficient supply and reasonable margin of operation. However, the ENACOM is entitled to observe the prices we set if it understands that they do not comply with the provisions of Section 48 of the LAD. If prices were observed and we are forced to reduce them, our operating margins may be negatively affected. Before the LAD came into force, the prices that Telecom charged in its fixed telephony service (including both monthly charges and measured service charges), installation charges, public telephone charges and charges for Internet dial-up traffic were subject to regulation.

 

The impact of the service price adjustments on our results of operations is particularly relevant as a result of inflationary pressures on our costs structure. If we are unable to adjust the prices of the services we provide based on inflation rates, our results of operations will be adversely affected.

 

Competition

 

The fixed and mobile telephony, cable television and Internet businesses in Argentina are competitive. We need to make significant investments to refurbish and maintain our existing network infrastructure to comply with regulatory obligations and to remain competitive with respect to the quality of our services.

 

With respect to cable television services, we compete with other cable television operators that have built networks in the areas in which we operate, providers of other pay television services, including direct broadcasting, direct-to-home satellite and multi-channel multi-point distribution system services, licensed suppliers of basic telephone services and cooperative entities providing utility services, as well as with free broadcasting services which are currently available to the Argentine population in certain areas from four privately-owned television networks and one state-owned national public television network. We also consider Over-The-Top media services, such as Netflix, Prime Video and On Video, as competitors. Among cable television services competition, is driven primarily by price, programming services offered, customer satisfaction and quality of the system.

 

Regarding mobile services, we compete with other two operators that offer nationwide services, Telefónica Móviles Argentina and América Móvil. The market of residential, corporate and wholesale mobile telecommunication services distinguishes due to the fact that operators are free from regulation to determine the pricing of services, except that the ENACOM sets prices for wholesale local interconnection services.

 

 

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With respect to Internet services, certain competitors have well-established name recognition, larger customer bases and significant financial, technical and marketing resources. Well-known competitors continue to increase their penetration and ability to serve household in different areas of the country. For more information, see “Item 3— Key Information—Risk Factors— We face substantial and increasing competition in the Argentine fixed and mobile telephony, cable television and Internet businesses.”

 

Technology Developments and Capital Expenditures

 

Improvements in technology influence our customers’ demand for services and equipment. For example, demand for fixed-line telecommunications services has been affected by continued significant growth in mobile business. Growth in the telephony as well as cable television services businesses at present is being affected by the expansion of broadband for individuals and corporations and our continuous updating of commercial and support systems. The increase in broadband adoption has also proven to be a critical factor in facilitating the offering of Value Added Services to customers and the combination of product made available to customers.

 

In Internet services, we must constantly upgrade our access technology and software, embrace emerging transmission technologies and improve the responsiveness, functionality, coverage and features of our services.

 

In the mobile business, to provide subscribers with new and better services, Telecom must enhance its mobile networks extending 3G and 4G technology and bandwidth for mobile data transmission. Moreover, Telecom is developing a LTE infrastructure expeditiously, in response to regulatory requirements (arising from the acquisition of the 4G spectrum) and development in the market for the mobile services.

 

In addition, as new technologies develop, equipment may need to be replaced or upgraded, and network facilities (in particular, mobile and Internet network facilities) may need to be rebuilt in whole or in part, at substantial cost, to remain competitive. These enhancements and the implementation of new technologies will continue requiring increased capital expenditures. See “Item 4—Information on the Company—Capital Expenditures” and “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Expenditures.”

 

Tax pressures and litigation

 

Local municipalities in the regions where we operate have introduced regulations and proposed various taxes and fees for the installation of infrastructure, equipment and expansion of fixed-line and mobile networks. Local and federal tax authorities have brought an increasing number of claims against us. We disagree with these proceedings and are generally contesting them. Also, jurisprudential changes in labor and pension matters have generated higher claims from employees and former employees and also increased claims from employees of a contractor or subcontractor alleging joint liability. We cannot assure you that current laws and regulations applicable to the economy generally or specifically to the telecommunications industry will not become more burdensome, 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, results of operations and cash flows as well.

 

(A)Consolidated Results of Operations

 

Effective as of the Merger Effective Date (i.e., January 1, 2018), Cablevisión merged into Telecom Argentina. We have accounted for the Merger as a business combination using the acquisition method of accounting under IFRS 3 for assets and liabilities of Telecom as of January 1, 2018. The Merger constituted a “reverse acquisition,” pursuant to which Cablevisión (the absorbed entity) was considered the accounting acquirer and Telecom Argentina (the surviving entity) was considered the accounting acquiree. Accordingly, the financial information for 2017 reflect the financial historical information of Cablevisión restated in terms of current currency as of December 31, 2019. Therefore, our financial statement data as of and for the year ended December 31, 2017 is not comparable with our financial statement data as of and for the years ended December 31, 2019 and 2018. Additional information concerning the presentation of the financial information, accounting treatment and other information required by IFRS 3 related to the merger is provided in Notes 3 and 4 to our Consolidated Financial Statements, and we recommend that you read it in conjunction with this Annual Report.

 

The consolidated financial statements and the related information included in this Annual Report have been presented on the basis of the current currency as of December 31, 2019 to take into account the effect of inflation in Argentina in accordance with the requirements of IAS 29.

 

The Company restated all the non-monetary items in order to reflect the impact of the inflation restatement reporting in terms of current currency as of December 31, 2019. Consequently, the main items restated were Property, Plant and Equipment, Intangible assets (including goodwill), Rights of Use, Inventories, certain Investments in subsidiaries and the Equity items, having an impact in deferred tax with the exception of Equity items. Each item must be restated since the date of the initial recognition in the Company’s Equity or since the last revaluation. Monetary items have not been restated because they are stated in terms of the measuring unit current as of December 31, 2019.

 

   
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Before applying the restatement, the Income Statement generally reported costs in currency at the time at which the underlying transactions or events occurred. Therefore, pursuant to IAS 29 those items were restated in terms of current currency as of December 31, 2019.

 

The effect of inflation on the monetary position is included in the Income Statement under Other financial results to our Consolidated Financial Statements, amounting to P$7,599 million, P$ 20,619 million and P$2,934 million as of December 31, 2019, 2018 and 2017, respectively.

 

The items of the Consolidated Statement of Cash Flows must also be restated in terms of current currency as of December 31, 2019. The gain arising from the restatement has an impact on the Consolidated Income Statement and must be eliminated from the Statement of Cash Flows because it is a non-monetary item.

 

According to Resolution JG No. 539/18, the general price index must be determined by reference to the Internal Wholesale Price Index (IWPI) through 2016, considering for the months of November and December 2015 the average variation of the Consumer Price Index (CPI) of the City of Buenos Aires, due to the fact that during those two months no IWPI measurements were published at national level. Since January 2017, changes in the general price index must be determined by reference to the National Consumer Price Index (National CPI). The tables below present the evolution of these indexes in the five years ended December 31, 2019 according to official statistics (INDEC) following the guidelines described in Resolution JG No. 539/18:

 

    As of December
31, 2015
    As of December
31, 2016
    As of December
31, 2017
   

As of
December 31,
2018

    As of
December 31,
2019
 
                               
Variation in Prices                                        
Annual / Period     17.2 %     34.6 %     24.7 %     47.6 %     53.8 %
Accumulated 3 years     72.5 %     102.2 %     96.6 %     147.8 %     183.2 %

 

For further information see Note 1.e) to our Consolidated Financial Statements and see “Item 3 — Risk factors—Risk Related to Argentina—Inflation could accelerate, causing adverse effects on the economy and negatively impacting Telecom’s margins and/or ratios”

 

For 2019, we reported net loss of P$3,888 million, compared to net income of P$8,516 million for 2018, and net income of P$15,167 million for 2017. Net loss attributable to Telecom Argentina totaled P$4,396 million. Net income for 2018 decreased by P$6,824 million in 2018 as compared to 2017, totaling P$8,145 million, from P$14,969 million reported in 2017.

 

Consolidated revenues in 2019 amounted to P$237,024 million as compared to P$258,518 million in 2018 and P$102,531 million in 2017. The decrease of P$21,494 million in 2019 (a 8.3% decrease) was mainly due to lower Mobile, Internet and Cable Television service revenues and equipment sales, partially offset by higher fixed and data services revenues. The increase of P$155,987 million in 2018 (a 152.1% increase) was mainly due to the combination of Telecom’s and Cablevisión’s operations. Revenues in 2019 and 2018 were mainly generated by revenues by sales of internet services, premium cable television services and mobile services, while revenues in 2017 were mainly generated by revenues by sales of internet services and premium cable television services, and to a lesser extent to mobile services.

 

In 2019, operating costs (including depreciation, amortization and impairment of Fixed assets) amounted to P$221,229 million, representing a decrease of P$4,588 million, or -2.0% as compared to 2018. In 2018, operating costs (including depreciation, amortization and impairment of Fixed assets) amounted to P$225,817 million, representing an increase of P$145,299 million, or 180.5% as compared to 2017. The decrease in costs in 2019 is mainly a consequence of decreases in Taxes and fees with the Regulatory Authority, Commissions and advertising, Cost of equipment and handsets and Interconnection and transmission costs. This decrease was partially offset by an increase in depreciation, amortization and impairment of Fixed assets and an increase in the charge for bad debt expenses. The increase in 2018 was mainly due to Merger.

 

Telecom carries out its activities in Argentina and abroad (Paraguay, Uruguay and the United States). These operations are not analyzed as a separate segment by the Executive Committee and the CEO, who analyze the consolidated information of companies in Argentina and abroad, taking into account that the activities of foreign companies are not significant for Telecom. The operations that Telecom carries out abroad do not meet the aggregation criteria established by the standard to be grouped within the “Services rendered in Argentina” segment, and considering that they do not exceed any of the quantitative thresholds identified in the standard to qualify as reportable segments, they are grouped within the category “Other abroad segments” according to the requirements of the IFRS 8.

 

However, since operations abroad are not material, the explanations set forth below reflect mainly developments and information attributable to our operations in Argentina.

 

   
PART I - ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS TELECOM ARGENTINA S.A.

 

63

 

 

(A.1) 2019 Compared to 2018

 

   Years Ended
December 31,
         
   2019   2018   Total Change 
   (P$ million)   %   (P$ million) 
Revenues   237,024    258,518    (8.3)   (21,494)
Operating costs (without depreciation, amortization and Impairment of Fixed assets)   (159,940)   (171,803)   (6.9)   11,863 
Adjusted EBITDA(1)   77,084    86,715    (11.1)   (9,631)
Depreciation, amortization and impairment of Fixed assets   (61,289)   (54,014)   13.5    (7,275)
Operating income   15,795    32,701    (51.7)   (16,906)
Earnings from associates   (187)   363    n/a    (550)
Debt financial expenses   (16,657)   (52,262)   (68.1)   35,605 
Other financial results, net   11,331    23,348    (51.5)   (12,017)
Income tax (expense) benefit   (14,170)   4,366    n/a    (18,536)
Net (loss) income   (3,888)   8,516    n/a    (12,404)
                     
Net (loss) income attributable to:                    
Telecom Argentina (Controlling Company)   (4,396)   8,145    n/a    (12,541)
Non-controlling interest   508    371    36.9    137 

 

 

(1)Adjusted EBITDA is a non-GAAP measure. See the purpose of use of adjusted EBITDA and reconciliation of net income to adjusted EBITDA in section “Adjusted EBITDA.”

 

Net loss for 2019 amounted to P$3,888 million and was mainly affected by an increase in debt financial expenses of P$4,050 million, as a result of the partial refinancing of our financial debt, and by the recognition of a loss of P$15,194 million corresponding to the effect of the income tax inflation restatement in accordance with the provisions of Law No. 27,430, as amended by Law No. 27,468. See “—Factors Affecting Results of Operations—Income Tax Inflation Adjustment.”

 

Revenues

 

   Years Ended
December 31,
         
   2019   2018   Total Change 
   (P$ million)   %   (P$ million) 
Mobile Services   82,195    88,881    (7.5)   (6,686)
Internet Services   52,649    58,061    (9.3)   (5,412)
Cable Television Services   49,406    55,485    (11.0)   (6,079)
Fixed and Data Services   37,562    35,612    5.5    1,950 
Other services revenues   774    735    5.3    39 
Service Revenues   222,586    238,774    (6.8)   (16,188)
Equipment revenues   14,438    19,744    (26.9)   (5,306)
Revenues   237,024    258,518    (8.3)   (21,494)

 

During 2019, total consolidated revenues decreased 8.3% amounting to P$237,024 million as compared to P$258,518 million in 2018. The decrease in 2019 is mainly a consequence of lower mobile, internet and cable television services revenues and equipment revenues, partially offset by higher fixed and data services revenues.

 

Consolidated revenues were mainly fueled by services revenues.

 

Services revenues amounted to P$222,586 million in 2019, decreasing 6.8% as compared to P$238,774 million in 2018 and represented 93.9% of consolidated revenues. Equipment revenues amounted to P$14,438 million in 2019 as compared to P$19,744 million in 2018, and represented 6.1% of consolidated revenues.

 

The effect generated by the restatement in terms of the current currency as of December 31, 2019 increased consolidated revenues by to P$42,843 million and P$121,358 million in 2019 and 2018, respectively.

 

Consolidated revenues for 2019 and 2018 are comprised as follows:

 

   
PART I - ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS TELECOM ARGENTINA S.A

 

64

 

 

Mobile Services

 

For 2019, mobile services revenues amounted to P$82,195 million (a decrease of P$6,686 million or 7.5% as compared to 2018), and our mobile services revenues remained the principal contributor to our total services revenues for 2019 (34.7% of consolidated revenues in 2019 as compared to 34.4% in 2018). The decrease in 2019 is mainly due to lower revenues generated from Personal mobile services in Argentina which amounted to P$71,063 million (a decrease of P$7,531 million or 9.6% compared to 2018), in turn due to a decrease of approximately 3.7% in ARPU, partially offset by an increase in our customer base of 4.2%.

 

Personal's mobile customers amount to 19.1 million and 18.3 million as of December 31, 2019 and 2018, respectively, of which 7.7 million and 7.2 million, respectively, correspond to postpaid customers, respectively. The main ratios related to the services provided to these customers were:

 

·60% of total are prepaid customers and 40% consist of postpaid customers as of December 31, 2019, compared to 61% and 39% respectively, as of December 31, 2018.
·Mobile internet services revenues represent 76% of Personal’s customer total services revenues.
·The ARPU is P$317.1 pesos as of December 31, 2019 (vs. P$329.1 pesos as of December 31, 2018), representing a 3.7% decrease. The effect generated by the restatement in terms of the current currency as of December 31, 2019 included P$60.7 pesos and P$154.9 pesos in ARPU of December 2019 and 2018, respectively.
·The average churn rate per month amounted to 2.9% in December 2019 (vs. 2.6% average in December 2018).

 

On June 30, 2019, all services identified under the Nextel brand (including the radio service over IDEN network) were discontinued. We offered customers a new option to continue communicating under the Smart Radio brand, which is a service for direct and immediate voice connections with multimedia messaging for companies and governments. It offers the best benefits of Personal 3G / 4G network and also for WiFi. In addition, hard equipments were incorporated, such as CAT S31 and Cyrus CM17, which have dedicated buttons specially designed for work contexts, either in a construction or in industrial facilities.

 

Regarding infrastructure, the Company continued to enhance the mobile internet experience of its customers through the deployment of its 4G and 4G+ network throughout the country, which currently covers more than 1,689 locations from La Quiaca to Ushuaia, and reaching more than 13.6 million customers with 4G devices throughout the country. Accompanying these improvements, through a massive communication campaign, the 4G Personal Network was promoted as the fastest in the country -based on the results of international benchmarks that measure network standards through the worldwide experience of customers-.

 

On the other hand, in early 2019, Personal and Fibertel brands came together to offer the best Wi-Fi connectivity and 4G service experience, with benefits for Club Personal customers.

 

ARPU of Mobile Services in Argentina

 

A monthly operational measure used in the