Pyramid Points - Despite the Financial Crisis, Mobile Users Want to Remain with Tigo

On April 21, Millicom (Tigo) published its financial results for the first quarter of 2009. The numbers showed that Central American markets are indeed suffering from the economic slowdown, with revenue (excluding Amnet) dropping 4% to $327m compared with the same quarter in 2008. In terms of subscriptions, Millicom (Tigo) closed the quarter with a strong base of 11.53m, in line with our annual forecast of 12.15m by the end of 2009 (see Exhibit), as published in our Guatemala, Honduras and El Salvador Q1 2009 mobile forecasts. Cash generation ($131m for the quarter versus $89m in 2008 for the same period) was solid, consistent with a market that is showing clear signs of maturity but also — as we pointed out in our Honduras Country Intelligence Report 2009 — a consequence of cautious Capex spending toward 3G deployments. Also, EBITDA margins have moved upward to 56% from an already impressive 55%, showing that despite the slowdown, Tigo is coming out of the struggle practically unscathed.

In a presentation, Millicom pointed out some behavior changes from a subscriber’s perspective due to challenging financial conditions, such as more on-net calls, more buying on promotions and increased usage in multiple SIMs. In order to face this tough environment, I expect Tigo to focus more on protecting its subscriber base by keeping airtime promotions that increase usage and less on giving handset subsidies. Users who take advantage of cheap equipment and hold subscriptions with more than one operator are largely unprofitable, have low brand loyalty and spread their calls across subscriptions, extending the time for operators to recoup the subsidy and creating some noise in churn data. I also have seen Movistar focusing more on encouraging use of services and less on giving away equipment, and I believe the other two big regional players (Claro and Digicel) will follow suit.

In my opinion, Q1 was a good quarter for Millicom. However, as pointed out by the International Monetary Fund, economic conditions in Central America are likely to get worse in the short term. Tigo’s challenge is to keep increasing usage of data services, an area that all other operators have also clearly targeted. Similarly, I believe that 3G deployments can be delayed for a few months — thanks to the time gained by moving ahead of competition in 2008 — but not postponed indefinitely if Tigo wants to keep diversifying its revenue outside voice.

Related content:

Communications Markets in Honduras
Country Intelligence Report published March 2009
The telecom market in Honduras generated $863m in 2008. With low penetration in both fixed and mobile services, compared with larger markets such as Guatemala and El Salvador, Pyramid Research expects a 4.6% CAGR expansion driven by mobile data services and broadband Internet, which will offset declines in fixed circuit voice and dial-up Internet. Tigo will remain the leader while Digicel starts gaining position in the market. This Country Intelligence Report analyzes Honduras’ communications, media and technology industries, including key trends, regulatory pressures and the competitive landscape, making it an excellent complement to our Forecast products.

Latin America Mobile Demand Forecast, Q1 2009
Forecasts published March 2009
Updated on a quarterly basis, our Mobile Demand Forecast products provide complete pictures of demand trends for 19 geographical markets in Latin America. The Excel output includes five years of historical data and five years of market projections for metrics such as GDP, mobile penetration, subscriptions (by operator, type of package, technology), ARPS and total mobile service revenue (data and voice). The Forecasts are based on extensive field research and use a consistent methodology across all markets, aiming to capture the total spending, from an end-user perspective, on mobile communication services in each market.

Tigo Bolivia Gains an Edge in the Mobile Market by Deploying 3G
Latin American Regional Perspective published November 2008
In Q3 2008, Millicom launched 3G services in Bolivia under the Tigo brand. With a strong regional presence and financial strength, an underpenetrated market and the government-owned market leader remaining idle, Tigo should be able to successfully implement and commercialize its 3G offering in Bolivia. This Perspective examines the deployment and how it will affect data services in Bolivia.

Millicom’s Acquisition of Amnet to Shake Up the Claro and Telefónica Domain
Regional Perspective published October 2008
In July 2008, Millicom announced the acquisition of Central American broadband and pay-TV provider Amnet, what could be a key step in transforming Millicom from a mobile telecom provider into a broadband and content provider. With Central American markets moving toward more advanced data services and pay-TV, this acquisition positions Millicom to be able to provide multiplay services. This Perspective examines this opportunity for Millicom to expand beyond its traditional mobile services and how this would affect the markets.