Millicom Earnings: Execution Struggles Continued as Expected Following June Warning

As telegraphed in its earnings warning at the end of June, Millicom’s TIGO SDB operational struggles continued during the second quarter. Consolidated profitability remains under pressure as revenue growth has lagged inflation and the firm spends on restructuring efforts. We are leaving our fair value estimate at $30 as we expect Millicom will take steps in the coming quarters to improve its overall position.

The firm’s operations in Colombia and Guatemala remain key sore spots, though for very different reasons. Colombia is a structurally unattractive market. Millicom’s operation increased service revenue nearly 3% year over year, well short of inflation given its wireless customer base expanded more than 4%. It also lost 4% of its fixed-line customers during the quarter alone. Millicom is moving forward with a plan to combine wireless infrastructure and spectrum in the country with Telefonica, which should help the firms compete against America Movil. Millicom only owns 50% of the Colombian business, which directly carries more than $900 million of net debt. As such, it contributes little to our Millicom fair value estimate, and we suspect the firm would be better served selling the business to allow management to focus elsewhere.

Conversely, Guatemala is Millicom’s most important market. It holds the market share lead in the wireless market, a duopoly with America Movil. Movil has promoted aggressively to gain share, and Millicom has responded to defend its customer base. While Millicom hasn’t lost a significant number of wireless customers, service revenue in the country declined 1.6% and EBITDA contracted nearly 8%. Millicom is largely at Movil’s mercy, but we expect the much larger Movil will compete rationally over the long term. We also agree that the recent spectrum auction in Guatemala demonstrated competitive restraint, as Millicom was able to close the gap in its holdings versus Movil at attractive prices.