AXTEL Announces Third Quarter 2010 Results

Axtel, S.A.B. de C.V. (BMV: AXTELCPO; OTC: AXTLY) ("AXTEL” or "the Company”), a leading Mexican fixed-line integrated telecommunications company, announced today its unaudited third quarter results ended September 30, 2010^(1).

Highlights:

• In the third quarter, AXTEL increased RGUs by 61 thousand, including 44 thousand broadband subscribers. For the nine-month period, AXTEL has generated 169 thousand RGUs, including 106 thousand broadband subs. Revenues related to mass-market Internet services increased 59% during the quarter.
• In September, AXTEL launched the "AXTEL X-tremo” marketing campaign, the first "fiber-to-the-home” broadband service in Mexico with bandwidth offers of up to 100 megabits per second available in certain areas of Monterrey, Mexico and Guadalajara. AXTEL expects to have service in 100 areas with approximately 400 square kilometers of coverage by year-end.
• On the regulatory front, a recent resolution from authorities on fixed-to-mobile termination rates provides further support to AXTEL’s case and enhances competitive conditions within the industry.

Revenues from operations

Revenues from operations totaled Ps. 2,700 million in the third quarter of year 2010 from Ps. 2,732 million for the same period in 2009, a decrease of Ps. 32 million, or -1%.

Revenues from operations totaled Ps. 10,625 million in the twelve-month period ended September 30, 2010, compared to Ps. 11,205 million in the same period in 2009, a decrease of Ps. 580 million, or 5%.

Sources of Revenues

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

Local services. Local service revenues totaled Ps. 969 million in the third quarter of 2010, compared to Ps. 998 million for same period in 2009, representing a decrease of Ps. 28 million, or -3%. This is explained by Ps. 13, Ps. 5 and Ps. 11 million decreases in monthly rents and value-added services, measured services and cellular revenues, respectively, reflecting adoption of our price competitive packages introduced in the first quarter of this year and as well as a change in the mix of traffic between residential and business customers. The reduction in voice revenues is being compensated by a significant increase in mass-market internet revenues of Ps. 35 million. For the twelve month period ended September 30, 2010, local revenues totaled Ps. 3,881 million, compared to Ps. 3,922 million registered in the same period in 2009, a Ps. 41 million, or 1%, reduction. Revenues coming from monthly rents and value-added services represented 69% of local revenues during the three-month period ended September 30, 2010.

Long distance services. Revenues totaled Ps. 294 million in the third quarter of 2010, compared to Ps. 290 million for same period in 2009, representing an increase of Ps. 4 million, or 1%. This is explained by more traffic from selected business customers during the third quarter of 2010. Bill traffic volume increased 2% while revenues per minute declined 3% year-over-year. For the twelve month period ended September 30, 2010, long distance revenues totaled Ps. 1,113 million compared to Ps. 1,183 million registered in the same period in 2009, a Ps. 70 million, or -6%, reduction.

Data & Network. Data and network revenues amounted to Ps. 612 million in the third quarter of 2010, compared to Ps. 583 million in the same period in 2009, an increase of Ps. 29 million. Mass-market, or, "on-demand” internet services revenues increased Ps. 35 million year-over-year while dedicated internet and VPN services to business customers declined Ps. 6 million, or 1%, during the same period. Dedicated Internet and VPNs represented 84% of data & network revenues during the quarter. For the twelve month period ended September 30, 2010, data and network services revenues totaled Ps. 2,422 million from Ps. 2,496 million registered in the same period in 2009, a decrease of Ps. 74 million.

International traffic. In the third quarter of 2010, international traffic revenues totaled Ps. 315 million, a decrease of Ps. 53 million or -14% versus same quarter of previous year explained by a 7% decline in traffic and a 7 % price decrease caused by both, a change in the on- net vs. off-net traffic mix and lower off-net traffic prices. For the twelve month period ended September 30, 2010, revenues decreased -7% compared to the same period in 2009 explained by a 1% increase in traffic negatively affected by a change in the mix of on- and off-net traffic and lower off-net traffic prices.

Other services. Quarterly revenue from other services increased Ps. 65 million, or 22%, mostly explained by a Ps. 21 million increase in revenues from integrated services contracts and Ps. 29 million increase in revenues from equipment sales. For the twelve month period ended September 30, 2010, other services revenues totaled Ps. 1,352 million from Ps. 1,376 million registered in the same period in 2009, a decrease of a Ps. 23 million.

Consumption

Local Calls. Local calls excluding our largest wholesale customer totaled 483 million in the third quarter of 2010, compared to 447 million for same period in 2009, representing an increase of 36 million, or 8%. The volume increase is explained by the 10% growth in the average number of lines in service, while reduced traffic in the aftermath of Hurricane Alex in July and the extended independence celebration holiday in September reduced the ratio of local calls per line in the third quarter of 2010 compared to the same period in 2009. For the twelve month period ended September 30, 2010, local calls totaled 1,790 million excluding our largest wholesale customer, compared to 1,702 million registered in the same period in 2009, an increase of 89 million calls, or 5%.

Cellular ("Calling Party Pays”). Minutes of use of calls completed to a cellular line excluding our largest wholesale customer amounted to 167 million in the three-month period ended September 30, 2010, compared to 148 million in the same period in 2009, an increase of 13% equivalent to 19 million minutes due to further penetration of commercial offers including cellular minutes for an additional monthly payment and by more competitive prices vis-à-vis competitors sustained by lower termination tariffs. For the twelve month period ended September 30, 2010 and excluding our largest wholesale customer, cellular minutes increase 68 million, or 12%, from 556 million registered in the twelve-month period ended September 30, 2009, to 624 million in the same period in 2010.

Long distance. Excluding our largest wholesale customer which represents less than 3% of total volume, outgoing long distance minutes amounted to 458 million for the three-month period ended September 30, 2010 from 437 million in the same period in 2009, a 5% or 21 million minute increase, resulting from increased traffic of existing business customers. Domestic long distance minutes represented 95% of total traffic during the quarter. For the twelve month period ended September 30, 2010 and excluding our largest wholesale customer, outgoing long distance minutes amounted 1,755 million, compared to 1,737 million registered in the same period in 2009, an increase of 18 million of minutes, or 1%, explained by the existing business customers increased traffic and further penetration of mass-market offers including national and international long distance minutes within a monthly rent.

Operating Data

RGUs and Customers. As of September 30, 2010, RGUs (Revenue Generating Units) totaled 1,292 thousand, an increase of 19% or 205 thousand from the same date in 2009. During the third quarter of 2010, net additional RGUs totaled 61 thousand, compared to 50 thousand in the third quarter of 2009. As of September 30, 2010, total customers totaled 744 thousand, an increase of 19% or 118 thousand from the same date in 2009. Net customer additions totaled 17 thousand for the quarter. A the end of the third quarter 2010, WiMAX customers reached 321 thousand, compared to 131 thousand a year ago.

Voice RGUs (lines in service). As of September 30, 2010, lines in service totaled 1,025 thousand, an increase of 9% or 85 thousand from the same date in 2009. During the third quarter of 2010, gross additional lines totaled 86 thousand compared to 89 thousand in the third quarter of 2009. Disconnections in the third quarter of 2010 totaled 69 thousand, compared to 62 thousand in the year-earlier quarter. Net adds totaled 16 thousand for the third quarter of 2010, compared to 26 thousand net adds in the same period of 2009. As of September 30, 2010, residential lines represented 68% of total lines in service.

Broadband RGUs (broadband subscribers). Broadband subscribers increased 82%, totaling 267 thousand as of September 30, 2010. During the third quarter of 2010, broadband subscribers increased 44 thousand compared to 24 thousand in the same period of 2009. Continuation of positive response from customers to AXTEL’s broadband products, our marketing campaign, competitive commercial offers and the reliability of our WiMAX platform contributed to record strong broadband additions in the third quarter. The increase in broadband subscribers comes from new customers as well as up-selling existing subscribers from non-data or dial-up service to broadband access solutions. Broadband penetration reached 26% at the end of the third quarter of 2010, compared to 16% a year ago.

Internet subscribers. As of September 30, 2010, Internet subscribers totaled 279 thousand, including 12 thousand dial-up subscribers. As of September 30, 2009, Internet subscribers represented 160 thousand, including 13 thousand dial-up subs.

Line equivalents (E0 equivalents). We offer from 64 kilobytes per second ("kbps”) up to 100 megabytes per second ("Mbps”) dedicated data links in all of our thirty-nine existing cities. We account for data links by converting them to E0 equivalents in order to standardize our comparisons versus the industry. As of September 30, 2010, line equivalents totaled 446 thousand, a decrease of 40 thousand from 486 thousand registered on the same date in 2009.

Cost of Revenues and Operating Expenses

Cost of Revenues. For the three-month period ended September 30, 2010, the cost of revenues represented Ps. 741 million, an increase of Ps. 29 million, compared with the same period of year 2009, mostly due to an Ps. 18 million increase in fixed-to-mobile termination costs —traffic increased 13%— and direct costs associated to equipment sales and integrated services contracts, compensated with lower leasing costs on transport and access links. For the twelve month period ended September 30, 2010, cost of revenues reached Ps. 2,910 million, a reduction of Ps. 226 million in comparison with the same period in year 2009 due primarily to Ps. 292 million and Ps. 97 million reductions in long-distance termination and leased links costs, respectively.

Gross Profit. Gross profit is defined as revenues minus cost of revenues. For the third quarter of 2010, the gross profit accounted for Ps. 1,959 million, a decrease of Ps. 61 million compared with the same period in year 2009. The gross profit margin decrease from 73.9% to 72.5% year-over-year, mostly due to reduced business from our largest wholesale customer and pressured margins on the international traffic segment. For the twelve month period ended September 30, 2010, our gross profit totaled Ps. 7,716 million, compared to Ps. 8,069 million recorded in the same period of year 2009, a decrease of Ps. 354 million or -4%.

Operating expenses. For the third quarter of year 2010, operating expenses totaled Ps. 1,124 million compared to Ps. 1,051 million for the same period in year 2009. The main reasons for this increase are a 4% inflation adjustment to wages and salaries implemented in July 2010, larger marketing expenses which are supporting mostly our mass-market commercial efforts and a Ps. 39 million increase in maintenance and utilities expenses in the third quarter 2010 compared to same period in 2009. For the twelve month period ended September 30, 2010, operating expenses totaled Ps. 4,374 million, coming from Ps. 3,901 million in the same period in 2009. Personnel represented 46% of total operating expenses in the twelve month period ended September 30, 2010.

Adjusted EBITDA⁽⁵⁾. The Adjusted EBITDA totaled Ps. 834 million for the three-month period ended September 30, 2010, compared to Ps. 969 million for the same period in 2009. As a percentage of total revenues, Adjusted EBITDA represented 30.9% of revenues in the third quarter of 2010, 456 bps lower than the margin recorded in the year-earlier quarter. For the twelve-month period ended September 30, 2010, Adjusted EBITDA amounted to Ps. 3,342 million, compared to Ps. 4,033 million in the same period in year 2009.

Depreciation and Amortization⁽¹⁰⁾. Depreciation and amortization totaled Ps. 767 million in the three-month period ending on September 30, 2010 compared to Ps. 754 million for the same period in year 2009, a increase of Ps. 13 million or 2% reflecting 17% higher capital expenditures made in the twelve-month period ended September 30, 2010 compared to investments made in the same period in year 2009. Depreciation and amortization for the twelve-month period ended September 30, 2010 reached Ps. 2,957 million, from Ps. 3,047 million in the same period in year 2009, a decrease of Ps. 90 million, or -3%.

Operating Income (loss). In the three-month period ended September 30, 2010, the Company recorded an operating income of Ps. 68 million compared to an operating income of Ps. 215 million registered in the same period in year 2009. For the twelve month period ended September 30, 2010 our operating income reached Ps. 385 million when compared to the result registered in the same period of year 2009 of Ps. 1,121 million, a decline of Ps. 736 million.

Comprehensive financial result. Net interest expense for the third quarter 2010 decreased 17% compared to 2009 explained by the US$300 million issuance of the 2019 Senior Notes and partial prepayments of the 2012 Term Loan and 2013 Senior Notes. The Ps. 119 million FX gain recorded in the third quarter 2010 is explained by the 1% peso appreciation against the U.S. dollar compared to a 2% depreciation recorded in the third quarter of 2009 that generated the Ps. 186 million FX loss. Variations in the change in fair value of financial instruments are partially explained by a 3% decrease and 41% increase in the price of AXTELCPO in the third-quarter 2010 and 2009, respectively, affecting the valuation of the zero-strike-calls. The reduced comprehensive financial loss for the twelve month period ended September 30, 2010, compared to 2009, is mostly explained by the 7% Mexican peso appreciation in the 2010 period, compared to a 25% depreciation for the twelve month period ending September 30, 2009.

Debt. The decrease in total debt is mostly explained by (i) Ps. 2,375 million from the 2019 Senior Notes, (ii) Ps. (1,842) million prepayment of 2012 Term Loan and 2013 Senior Notes, (iii) Ps. 255 million in amortizations in financing and lease obligations and (iv) by the non-cash effect of the Mexican peso appreciation against the US dollar affecting favorably the valuation of our debt denominated in foreign-currency.

Cash. As of the end of the third quarter of 2010, our cash and equivalents balance totaled Ps. 1,182 million, compared to Ps. 1,932 million a year ago. Fifty one percent of the cash balance is maintained in dollars, the rest in pesos.

Capital Investments. In the third-quarter of 2010, capital investments totaled Ps. 1,000 million, compared to Ps. 616 million in the year-earlier quarter. Accumulated for the twelve-month period ended September 30, 2010, capital investments totaled Ps. 3,358.3 million, compared to Ps. 2,868 million in the same period in year 2009. Access represented close to 60% of this figure.

Other Investments. During the third quarter 2010, the Company acquired 1.3 million fully-funded "zero-strike-calls” (ZSC), settlement in cash, with a strike price of 1 cent, at an average option premium of $7.45 pesos. As of September 30, 2010, the Company maintained an economic position equivalent to 30.4 million AXTELCPOs in ZSC.

Financial Statements

For the three Months Ended September 30, 2010 Compared with Three Months Ended September 30, 2009

Assets

As of September 30, 2010, total assets sum Ps.22,565 million compared to Ps.22,487 as of September 30,2009, an increase of Ps. 78 million.

Cash and equivalents. As of September 30, 2010, we had cash and cash equivalents of Ps. 1,182 million compared to Ps. 1,932 million in the same date of year 2009, a decrease of Ps. 750 million or 39%.

Accounts Receivable. As of September 30, 2010, the accounts receivable were Ps. 2,696 million compared with Ps. 2,150 million in the same date of 2009, an increase of Ps. 546 million.

Property, plant and equipment, net. As of September 30, 2010, property, plant and equipment, net, were Ps.15,598 million compared with Ps.15,052 million as of September 30, 2009, an increase of Ps. 545 million. The property, plant and equipment, net, without discounting the accumulated depreciation, was Ps. 31,568 million and Ps. 28,283 million as of September 30, 2010 and September 30, 2009, respectively. The increase in property, plant and equipment is due to a higher investment during this period.

Liabilities

Total liabilities was Ps.14,681 million as of September 30, 2010 compared to Ps.14,336 million as of September 30, 2010, an increase of Ps.346 million or 2%.

Accounts payable & accrued expenses. On September 30, 2010, the accounts payable and accrued expenses were Ps.2,932 million compared with Ps.2,273 million on September 30, 2009, an increase of Ps.659 million or 29%.

Stockholders Equity

On September 30, 2010, the stockholders equity of the Company was Ps.7,884 million compared with Ps.8,151 million as of September 30, 2009, a decrease of Ps.268 million. The capital stock remained unchanged at Ps.7,562 million as of September 30, 2010 and September 30, 2009.

Liquidity and Capital Resources

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

Net resources provided by operating activities were Ps.1,681 million for the three-month period ended on September 30, 2010 compared to Ps.418 million recorded in the same period of year 2009.

Net resources used in investing activities were Ps. (1,018) million for the three-month period ended on September 30, 2010 compared to Ps. (915) million recorded in the same period of year 2009. These flows primarily reflect investments in fixed assets of Ps. 1,000 million and Ps. 616 million, respectively.

Net resources (used in) provided by financing activities were Ps. (515) million and Ps. 1,153 million for the three-month period ended on September 30, 2010 and 2009, respectively.

As of September 30, 2010, the ratio of net debt to Adjusted EBITDA and the ratio of interest coverage of the company was placing in 2.7x and 3.5x, respectively. As September 30, 2009 the ratio of net debt to Adjusted EBITDA and interest coverage, was 2.1x and 4.2x, respectively.

Since the beginning of operations of the Company, AXTEL has invested Ps.31,568 million in infrastructure. The Company expects to do more investments in the future, according to the expansion of the network in other geographical areas of Mexico in order to gain market and to maintain its current infrastructure and network.

Liquidity and Capital Resources

For the Twelve Months Ended September 30, 2010 Compared with Twelve Months Ended September 30, 2009

Net resources provided by operating activities were Ps.3,914 million for the twelve-month period ended on September 30, 2010 compared to Ps.2,194 million recorded in the same period of year 2009.

Net resources used in investing activities were Ps.3,439 million for the twelve-month period ended on September 30, 2010 compared to Ps.3,158 million recorded in the same period of year 2009. These flows primarily reflect investments in fixed assets of Ps.3,358 million and Ps.2,868 million, respectively.

Net resources (used in) provided by financing activities were Ps.(625) million and Ps.680 million for the twelve-month period ended on September 30, 2010 and 2009, respectively.

Other important information

1) Figures in this release are presented based on Mexican financial reporting standards (FRS) in nominal pesos.

2) Revenues are derived from:

3) Cost of revenues include expenses related to the termination of our customers’ cellular and long distance calls in other carriers’ networks, as well as expenses related to billing, payment processing, operator services and our leasing of private circuit links.

4) Operating expenses include costs incurred in connection with general and administrative matters which incorporate compensation and benefits, the costs of leasing land related to our operations and costs associated with sales and marketing and the maintenance of our network.

5) Adjusted EBITDA is defined as net income plus interest, taxes, depreciation and amortization, and further adjusted for unusual or non-recurring items. For additional detail on the Adjusted EBITDA Reconciliation, go to AXTEL’s web site at www.axtel.com.mx

6) Earnings per CPO are calculated dividing the net income by the average number of Series A and Series B shares outstanding during the period divided by seven. The number of outstanding Series A and Series B shares was 96,636,627 and 8,672,716,596, respectively, as of September 30, 2010.

7) Net Debt to Adjusted EBITDA: The figure comes from dividing the net debt, including cash and mark-to-market of derivative instruments, at the end of the period by the respective Adjusted EBITDA.

8) Revenue Generating Unit, or RGU, represents individual service subscriber who generates recurring revenue for the Company. Total RGUs include the sum of all lines in service and broadband service customers or subscribers.

9) Breakdown of AXTEL’s revenues including its largest wholesale customer:

10) 802.16e WiMAX is a new IP-based voice and data wireless technology designed to deliver voice and data solutions, under fixed, portable, nomadic and mobile environments, to residential and business customers.

11) Depreciation and amortization includes depreciation of all communications network and equipment and amortization of pre-operating expenses and cost of spectrum licenses, among others.

About AXTEL

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

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

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