Millicom Matches Expectations

Millicom International Cellular S.A. (MICC - Analyst Report), a Luxemburg-based leading global wireless service provider in various emerging markets, declared its second quarter 2009 financial results yesterday. The results of the reported quarter were mostly in line with our estimates. The company excludes the earnings results of Asian operations from its consolidated financial statements as these operations are expected to be disinvested by the first quarter of 2010.

Total revenue of $814.3 million in the second quarter was an improvement of 5% year over year as well as 4.6% sequentially. This was primarily due to impressive contribution from the Amnet & Navega division and the African region. Acquisition of Amnet Telecommunications Holding Ltd., a leading provider of fixed broadband and cable television services in various Central American regions has started generating solid revenue as fixed broadband service has become the fastest growing segment within the communications sector in both Central & South America. This is also the most significant revenue generating region for Millicom. Adjusted diluted EPS (excluding special charges and discontinued operations) during the same quarter was $1.12 compared to $1.22 in the prior-year quarter.

EBITDA during the second quarter was $371 million and EBITDA margin was 45.6%, up 3.4% year over year. This was more than management’s long-run target of 45%. Millicom guided EBITDA margin to remain near 45% during fiscal 2009, a respectable level for telecommunications carriers.

The company is exploring all options to improve its highly leveraged balance sheet. Management has taken several decisions, the first of which is to reduce its capital expenditure. Millicom had approximately $2.23 billion of total debt and $833 million of cash & marketable securities at the end of the second quarter of 2009. Since a major part of fiscal 2008 capital spending was earmarked to improve network coverage, it is expected that the company will now benefit from service expansion.

Management has stated that capital spending will decrease to $750 million in 2009 compared to $1.43 billion in the previous year, improving the company’s ability to generate sizable positive free cash. During the first half of 2009, Millicom generated $191.6 million of positive free cash (cash flow from operations less capital expenditures). Disinvestment of Asian operations will reduce capital expenditures by $100 million per annum and is also likely to provide $500 million - $700 million of cash to the company.

However, we remain concerned with weak global economic conditions and lingering foreign exchange rate volatility that may impact near-term prospects of Millicom.  This is particularly important as the company operates mainly in untapped networking regions of Central & Latin America, and Africa. Precipitous appreciation of the U.S dollar with respect to the local currencies may hinder financial performance.

Millicom is facing stiff competition from several global telecom operators like America Movil (AMX - Analyst Report), Telekom Argentina (TEO - Analyst Report), Telefonica S.A. (TEF - Analyst Report), and Telefonos de Mexico (TMX - Analyst Report). As a result, Millicom has been contending a meaningful decline of ARPU (average Revenue per User).  In the second quarter of 2009 ARPU was $9.7 compared to $9.9 in the previous quarter and $12.6 in the year-ago quarter. We maintain our Hold rating for Millicom.