ARCHIVE  2010

Millicom Keeps Profits Stable in Central America

February 17, 2010

Last week, Millicom reported its financial and operational results for Q4 2009. The operator leads in Guatemala, El Salvador and Honduras — the three markets where it has mobile operations — while the other operators have taken the backseat. Millicom showed net addition gains in all three markets and is maintaining a stable market share, but as the exhibit shows, most of the net adds come from Guatemala and Honduras where, according to our Q4 2009 Mobile Demand Forecasts, penetration is still below 100% of the population.

Exhibit: Millicom’s mobile subscribers in Central America on a quarterly basis, 2008-2009

Source: Millicom

Due to Central America’s challenging economic conditions in 2008 and 2009, Millicom’s Q4 2009 revenue ($330m) still lags Q1 2008 levels ($340m) despite having more than 3m new customers (a 32% rise from Q1 2008). This suggests that the decline in ARPU has overshadowed subscriber growth. How did this affect Millicom’s profitability? Very little; EBITDA margins have remained stable at 55% over the last eight quarters meaning that for Millicom, the last customer has been cheaper to acquire and serve than the average client base – a source of envy for other operators in the world. It also shows the importance of having a customer base that makes mostly on- net calls, where costs to terminate those minutes are low for the operator compared with off-net where it has to pay interconnection fees. This advantage is significant for Miilicom’s cost structure. Likewise, Millicom has been able to sustain margins even facing fierce competition from challenger Digicel in Honduras and El Salvador, which added more than 700,000 subscribers in 2009 alone.

Going forward, the challenges for Millicom are clear: Competition in the mobile space is going to shift from voice to data, where costs to provide those services are higher due to the need to invest in expanding networks (fixed and mobile). The economics of data services are different from those of voice services; on-net traffic costs are no longer a variable and what matters for customers is the quality and speed of the networks, device or handset, along with customer service and content. Since the mobile broadband market is still very small, Millicom could face strong competition from any mobile operator with enough resources to build a compelling 3G network.

— Jose Magana, Senior Analyst

Related resources:

Honduras: Operators Pin Hopes on Broadband and Mobile Data Services
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Latin America Fixed Communications Forecasts
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