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August 4, 2009
Telefónica’s Q2 financial and operational results for its Central American mobile operations reveal just how competitive the region’s market is: During the quarter, Telefónica lost 24,500 net subscribers (around 29,500 in prepaid with a gain of 4,800 postpaid users). Financially, the operator was able to hold its EBITDA margins above 41% while revenue grew just 3% compared with the same period in 2008.
The second quarter is historically the weakest in terms of revenue due to the Easter holiday and airtime promotions for Mother’s Day, but operationally, the fact that net additions remained negative for a consecutive quarter despite heavy advertising in Guatemala and El Salvador shows that Telefónica is having a hard time recovering lost ground in terms of additions. On the other hand, financial results suggest that losing some of these customers might not be such a tragedy considering most of them were unprofitable. Nevertheless, we believe that Telefónica faces the risk of becoming a less relevant player if it keeps losing market share and does not move to protect its valuable postpaid customer base — even former niche player Digicel is aggressively going after contract customers.
The fact that Telefónica showed positive postpaid net additions (América Móvil reported negative net additions in Q2 2009) is a big achievement for Telefónica, considering that these are the most profitable customers and the fact that the operator lags Tigo and Claro in deploying a 3G network in Guatemala and El Salvador. I believe, though, that most of these additions in Panama came from mobile broadband, which should encourage the operator to accelerate the launch of a 3G broadband service in larger markets in the region. So far, Telefónica disclosed a capex of $10.65m (compared to $3.91m in Q1 2009), which could be interpreted as the company moving toward expanding its network, but we anticipate it will take some time to match Tigo and Claro’s infrastructure. Also, the numbers are well below 2008’s levels (where capex averaged around $42.4m per quarter), a logical consequence of a more cautious investment pattern due to the economic crisis since the operator is enjoying operational cash flows well above the levels we saw in 2008 ($72.5m per quarter in 2009 compared with $36.9m in 2008).
In terms of usage, Telefónica has kept its mobile traffic stable at 1,691m minutes, compared with 1,690m minutes in Q1 2009, so advertising has at least helped to keep remaining customers calling at the same pace. Considering that two of Telefónica’s markets (El Salvador and Panama) have a penetration exceeding 100%, I believe that traffic data will not change dramatically going forward and that the importance of value-added services coming from data will keep rising in the region.
— Jose Magana, Analyst
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