Millicom International Cellular's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Millicom International Cellular SA (MIICF.PK)

Q1 2012 Earnings Call

April 18, 2012 8:00 am ET

Executives

Mikael Grahne – President and Chief Executive Officer

Francois-Xavier Roger – Chief Financial Officer

Analysts

Luigi Minerva – HSBC

Thomas Heath – Handelsbanken

Laurie Fitzjohn-Sykes – Citigroup Global Markets Ltd.

Mark Walker – Goldman Sachs

Jean-Charles Lemardeley – JPMorgan

Lena Osterberg – Carnegie

Cesar Tiron – Morgan Stanley

Stefan Gauffin – Nordea

Peter-Kurt Nielsen – Cheuvreux

Miguel Garcia – Deutsche Bank

Ric Prentiss – Raymond James & Associates

Andreas Joelsson – SEB Enskilda

Soomit K. Datta – New Street Research LLP

Kevin Roe – Roe Equity Research, LLC

Erik Pers Berglund – Danske Bank

William Miller – JM Hartwell

Sergey Dluzhevskiy – Gabelli & Company

Barry Zeitoune – Berenberg Bank

Sven Sköld – Swedbank AB

Fredrik Lithell – Handelsbanken Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Millicom Q1 2012 Results Conference Call. For your information, this conference is being recorded. May I also remind you, that this call is being audio streamed over the web and it’s accessible at www.millicom.com together with the presentation, summarizing the key features of the results?

I’d now like to hand the call over to your host today, Mr. Mikael Grahne, President and CEO, and Mr. Francois-Xavier Roger, CFO. Please go ahead gentlemen.

Mikael Grahne

Thank you, and welcome to you all. As usual, you can find the slides for this call on our website. Please go to slide number 3. In the first quarter of 2012, we accelerated our investments in our new organization structure, in our networks and in our product offering, including through pricing initiatives.

In Q1, we recorded underlying local currency revenue growth of 8.4%, up against the very strong quarterly growth that we recorded last year in Q1 at 12.7%. On a like-for-like basis, revenues grew by 9% in Q1 inline with our expectations and ambitions.

Our focus on new categories is delivering solid results. In Q1, we generated 88% of our revenue growth from services and products outside of the communication category, some of which we introduced only recently. This achievement reinforces our long held belief that innovation is the cornerstone of our future.

Last but not least, our voice and SMS business remains resilient growing by 2% in local currency in Q1. We produced an EBITDA margin of 44.2% for the quarter, down 2.9 percentage points in Q1. Half of the margin erosion versus last year come from our investments in new categories and services including category building, network investments in 3G and handset subsidies all intended to support our growth. The other half is due to price declines in some of our markets in Africa and in El Salvador, which have not generated the desired level of elasticity.

As in previous year, in 2012 we aim again to strike the right balance between profitable growth, cash flow generation and returns. In order to deliver profitable growth, we have to invest in new product and services which initially will not generate similar margins to the 46% overall margins that we had last year.

Slide 4; in Q1 we invested $172 million or 14.7% of revenues in CapEx. We expect CapEx to increase, but not to exceed 20% of revenues as we invest in the 3G network and IT and billing platforms. Despite our higher investment in OpEx and CapEx in Q1, operating free cash flow generation in the quarter remains strong at $310 million including proceeds from tower disposals of $68 million in the quarter.

Slide 5, local currency revenue growth for the quarter was 8.4% inline with our expectations. Revenue growth quarter-on-quarter tends to be uneven, as you can see on this chart, but the underlying trend is consistent with our ambition.

Slide 6, our focus on cross selling and up selling more services to our customer is what is driving our top line performance. Looking at the ARPU development by region, you can see that in Latin America, ARPU was essentially stable year-on-year.

In South America, ARPU has been growing positively for over a year. In Central America, ARPU declined by just under 5% year-on-year due to pricing pressure in El Salvador, which led us to return to negative growth in that market. In Africa, mobile ARPU was 6.8% lower year-on-year. ARPU in Africa will continue to decline for some time as we pursue penetration gains both in customers and usage.

Slide 8, the split of revenue by our five categories is set out on this slide. In Q1, we accelerated the implementation of our new organization structure, which will be instrumental in sustaining and/or accelerating growth in our markets. In the first quarter of the year, in excess of 80% of our recurring revenue growth was derived from products and services that were not marketed three years ago; demonstrating the relevance of our innovation and growth strategy.

At the same time, we managed to defend our communication revenues by growing voice revenues 1% and SMS revenues 8%. Our fastest-growing category was again the information category. And in particular is mobile data, which grow by over 50% in this quarter. Information contributed to more than half of the growth in the quarter. Our recurring revenues in the four categories of Information, Entertainment, Solutions, and MFS together grew by around 29% in the quarter in local currency. And this category is contributed to more than a quarter of our revenues in the first quarter.

Slide nine, as shown on this slide; the investments we have been making in the new categories are delivering solid results. This quarter, we experienced some slowdown in our revenue growth in communication, yet we managed to grow overall revenues as a high single-digit rate. thanks to our strategy to grow through innovation.

88% of our growth came from the four new categories in which we are focusing our investments namely, Information, Entertainment, Solutions, and MFS. The absolute revenue contribution outside our communication has remained consistent at around 70 million quarter-on-quarter.

Slide 10, we have seen a 4.7 percentage points increase in the contribution of VAS the group revenues over the past 12 months. In Q1, we generated over 30% of our revenues from non-voice services and more than 35% in Latin America on track to reach our ambition to deliver half of our recurring revenues from VAS by 2015 in the region.

Slide 11 and 12. once again this quarter, we managed to grow mobile data revenues by over 50% in Latin America. this growth was underpinned by the investments we have made in the category, both in the network and in subsidies. As you can see on slide 12, we are accelerating our subsidies further to position ourselves ahead of the expected (inaudible) market adaptation or mobile data services.

the gross margin in the Information category is one of the highest of all categories. The shift from datacards to handset over past 12 months is a healthy transition, as it allows us to control traffic and improve ROIC. We are pleased to see a parallel curve between traffic and revenue growth.

Slide 13, on this slide you can see the total 2G and 3G data revenue increased by 12% quarter-on-quarter to exceed $100 million in Latin America. $60 million of this revenue is derived from handsets, which recorded an 8% quarter-on-quarter increase in ARPU.

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