Millicom International Cellular S.A.
Q1 2013 Earnings Call Transcript

Published: 17 Apr 2013

[Operator:]

Good morning and good afternoon, ladies and gentlemen, and welcome to the Millicom Financial Results Conference Call. Today’s call will be hosted by Hans-Holger Albrecht, President and CEO; and François-Xavier Roger, CFO. Following the formal presentation by Millicom’s management, an interactive Q&A session will be available. I would now like to hand the call to Justine Dimovic, Head of Investor Relations. Please go ahead.

[Justine Dimovic:]

Welcome, everyone, to the Millicom first quarter results presentation. My name is Justine Dimovic, and I’m in charge of Investor Relations at Millicom. Today’s presentation slides can be found on our website at www.millicom.com. Before we start, I would like to remind everybody that the Safe Harbor statements would apply to this presentation and the subsequent Q&A session. With me today on the call are our President and CEO, Mr. Hans-Holger Albrecht; and our CFO, Mr. François-Xavier Roger. I will now hand over to Hans-Holger to give an overview of our Q1 results and operational performance, after which François-Xavier will take you through the financials and we will finish with a Q&A session. Without any further delay, I will now pass over to Hans-Holger.

[Hans-Holger Albrecht:]

Thank you, Justine, and good morning and good afternoon, everyone, and welcome to our conference call for the first quarter. Let me start with an overview of where we are at the end of this quarter, which has been another successful one for Millicom as far as I can see. Our underlying revenue growth accelerated to over 8% year-on-year, which is a strong achievement as we progress as you all know through a transition from mobile voice to a kind of a digital lifestyle. And last month, at our Capital Markets Day, we outlined our mid-term ambitions to double the revenue by the end of 2017 while maintaining strong profitability and enhancing cash flow generation and subsequently as well transforming Millicom into the digital lifestyle company of choice for the emerging markets we are operating in. And just to remind everyone, where it is coming from, I think the success rest on from five pillars on which we have made good progress in this quarter. The first one and the most important one of course still is mobile. We will build the highly value-oriented mobile access business, providing a full spectrum of innovative mobile services beyond mobile voice. We have achieved good results I think in this quarter by adding the highest ever number of new mobile data customers in Millicom’s history, which obviously as you all know is the future. The total mobile data customer base now passes over 7 million customers. The second pillar is Cable & Digital Media as we call it. By tapping into this kind of unique opportunity as we can see in the Latin American region, we want to build in the next coming years a $2 billion business. This quarter, we are seeing the success of our acquisition strategy as we are benefiting from the integration of Cablevision in Paraguay and this is even faster than we had anticipated. The third pillar of growth is MFS. Each of our current customer is a potential customer of Mobile Financial Services. Progress in the first quarter has been good again, with over $500 million passing through our mobile money services network in March. In our most advanced market, the amount transferred on one month was equivalent of 15% of the country’s GDP. The third pillar is Online. We are investing in high growth internet models and bringing the full spectrum of digital lifestyle services to the emerging markets. In the first quarter, we launched several new services and integrating online with the existing Millicom services. And the fifth pillar of our success is cost and CapEx optimization which we decided to kick off as well. We will focus on streamlining both OpEx and CapEx at global and at the country level. And as a key development, in the first quarter, we identified annual cost reduction opportunities of $100 million which can be realized within the next three years. So obviously we are still at the early days of our new strategy and starting to implement the kind of foundation to execute on the strategy we can see is there. So much about that. Let’s now go into the presentation of the first quarter a little bit more in detail and start by looking at the key events in the quarter. But if you go to slide number 6, you can see that in the first quarter of this year Millicom maintained momentum with like-for-like growth at 8.3% year-on-year. And our EBITDA margin was in line with our expectations at 39.7%, 40.5% excluding online just as a reference point. Our mobile business grew by 1.3% in local currency despite strong regulatory pressure, and some specific one-off events in the quarter. Like-for-like growth was 5% and what was very encouraging, this was a record quarter as I mentioned earlier for new mobile data customers, an 18% increase compared to the fourth quarter in 2012. And as I mentioned in my introduction and as seen in this quarter, our new divisions increasingly contributing to revenue and growth. In Q1, we announced plans to create a leading integrated operator when it comes to cable and mobile in Colombia through a merger of the holding company that owns 50% of Colombia Móvil, Tigo and UNE EPM. The exclusive negotiations are progressing well and I expect this to conclude as scheduled during the second quarter of 2013. In mobile financial services, we remitted $500 million of cash through our system in March. Customer penetration increased to 12.6% in the markets where our services have been offered for more than a quarter or one quarter. And in Q1, we also extracted the first synergies between our online division and existing business with customers of the Hellofood online food ordering service being able to pay for the orders using Tigo cash in Ghana, for example. Existing business such as Jumia and Kanui continued to perform well and we expanded into a number of new markets on both Africa and the Latin American continent. If you flip over to slide number 7, turning to the key financials. If you take the like-for-like local currency, revenue growth was 8.3% for the quarter accelerating from the fourth quarter in 2012. Looking at the contribution to revenue growth by divisions, slightly over half of the group recurring revenue growth came from mobile, 19% from online, 16% from MFS and the remainder from our cable and digital media division. I think this demonstrates the progress in diversifying our sources of revenue growth while at the same time maintaining the growth in our core business. And as you can see on slide 8, in Q1 2013, non-voice products and services or digital as you want to call them like this, accounted for close to 40% of our recurring revenues up seven percentage points from Q1 2012. From Q1 2012, digital has contributed $99 million in incremental reported revenue which is a strong figure as well. And notably, the non-voice contribution to revenue is expanding beyond mobile value added services with an increasing contribution of cable and digital media, MFS and online. Now let me give you an update on our operating performance in the quarter. Starting with the mobile side on slide10, as you can see, mobile revenue grew 1.3% in Q1, 5% on a like-for-like basis. Mobile ARPU declined by 6.8% or 3.3% excluding new regulatory impacts. The regulatory pressure that mainly came from MTR cuts was particularly strong in this quarter on group level. In fact, I think it was three times more than all of full year in 2012, so you see the kind of scale. Whether we’re encouraged by the progress of mobile RGUs per customers demonstrating the diversification of revenue streams in our mobile business. We are pleased with the continuous solid growth of mobile data revenue. In this quarter, we had the highest number of net adds in mobile data in Millicom history as I’ve said, was 788,000 new customers in the quarter. With this, I think our mobile data customer base passed 7 million and is now representing 15% of our customer base. The potential for future growth remains very high in this field especially when looking at the fact that over one-third of our customer base has an ARPU greater than $10 today. And in Q1 we experienced very strong growth if you go to the next slide in mobile data traffic and revenues. At group level, recurring revenues of the mobile information category grew by close to 35%. We maintained a strong pace of commercial investment in subsidies in our Latin American markets again the first quarter as we continue to see unmet demand for access to the Internet and obviously opportunities for rapid return on subsidies within a year. Met subsidies in local currency grew by close to 17.1% in the first quarter. The growing availability of attractively priced smartphones and lowering production cost for content is starting to accelerate mobile Internet uptake which is reflected in the record-breaking net additions in the quarter. If we then move to slide number 12 and the cable and digital media business, you can see we’re building momentum. With revenue growing at 10% year-on-year excluding Cablevision. Overall, I think the quarter showed a solid upward trend across the board in the cable business. Residential cable ARPU in the first quarter was over $30, growing 1.7% year-on-year. This is a good sign I think that our new customers we are getting in are of very good quality. We added 85,000 new homes passed in the first quarter and we could see the Cablevision acquisition bearing fruit with half of our 10,000 new cable customers coming from Paraguay in the first quarter. Moving over to MFS on slide 13, MFS revenues increased again strongly in the first quarter in local currency. I think it’s plus 147%. MFS penetration which is our current focus however reached 12.6% of Millicom’s mobile customer base in the countries where the service has been offered for more than one quarter. In our leading market in terms of penetration, once again Tanzania which is close to 40% of penetration by the end of the quarter. Rwanda and Paraguay are also growing with 26% penetration in both markets at the end of first quarter. And in Central America, we are approaching the inflection point as you can see as of today. We launched mobile financial services in Bolivia in January and again early signs are positive. At the end of the first quarter, we have made foreign remittances available to our customers in all markets in Central America. ARPU from MFS which we now report separately for mobile ARPUs has risen by 10% year-on-year despite the strong growth in adoption of the service. Moving forward to slide 14 and the online business in Q1, the online category generated revenues of $11 million and that EBITDA loss of $6 million. Despite growth being impacted by usual seasonality following the strong end of the year’s perfect season, we continue to be very excited by the opportunities in the online division. I think most important we saw the first synergies with Tigo Cash being used to pay for online services and we expect many more of those synergies going forward as we presented as well at the Capital Markets Day. To summarize in a nutshell the kind of operational performance, I will now hand over to François who would provide you with an update on the financial results.

[François-Xavier Roger:]

Thank you, Hans-Holger. Please turn to slide 16 for the financial highlights. Starting with revenue drivers, you will see that we are bringing more regularity to customer on ARPU data, to show our progress in our three strategic divisions, mobile, cable and digital media as well as mobile financial services. In Q1, our mobile consumer growth was the strongest ever reported by Millicom, especially with smartphone users growing at the fastest rate we ever achieved. Overall in Q1, which is seasonally the weakest for customer intake, customer numbers increased by 175,000, an 8% increase year-on-year to 47.4 million at the end of the quarter. Customer growth in Q1 was negatively impacted by an ongoing clean-up of the cost of mobile in a number of our markets. This will continue in Q2 to some extent. And I said customer growth was strong at 50% year-on-year. ARPU in the mobile division declined by 6.8% in local currency, affected by regulatory changes notably. In Q1, regulatory pressure was three times higher than in 2012, resulting in a 2.4 percentage points loss of revenue versus 0.8 percentage points in the whole of 2012. In addition, looking at year-on-year comparisons, 2012 was a leap year and in prepaid markets, this one day difference made quite an impact. Revenue in Q1 totaled $1.246 billion or 6.6% reported growth. On the like-for-like basis, revenue has grown by 8.3%, representing a slight acceleration compared to Q4 2012. The growth in Q1 is the same level as what we experienced overall in 2012 which shows the sustainability of our underlying growth. It is particularly impressive as the year-on-year trend was negatively impacted by the slightly quiet Easter period trend in Q1 this year and in Q2 last year. Reported EBITDA for the quarter was $494 million, down 4.4% from Q1 2012. EBITDA losses from online amounted to $6.2 million in the quarter. Consolidated EBITDA margin at 39.7% was 4.5 percentage points lower than in Q1 2012. Excluding online, EBITDA margin in Q1 reached 40.5%. This decline is coming from our continuing investment for future growth and is in line with our guidance on expectation. We will discuss the EBITDA margin in more details later on. We invested $193 million in CapEx during the first quarter which includes $70 million in spectrum in South America. This is about equivalent to 15.5% of revenues and it included $70 million of spectrum investments. Please turn to slide 17 for the financial performance on regional and divisional levels. Year-on-year South America was the strongest region for revenue growth this quarter at plus 8.7% with Central America fairly flat rate by 2.8% in local currency. The former Cablevision business in Paraguay is showing very positive results and exceeding expectations contributing $60 million to revenues in Q1. Slide 18. If we look at revenue evolution by division, mobile remains our strongest contributor with revenue reaching $1.31 billion in Q1 2013. All four pillars contribute almost equally, which is described very well with a relatively low risk and well-diversified part of our growth. The cable and digital media division contributed $10 million of revenue growth with excellent growth in Paraguay contributing an addition of $16 million. We see a good acceleration in growth since the rebrand into Tigo with Cablevision assets showing growth at 26.4% year-on-year. In MFS, revenue grew again strongly this quarter with revenue growth of $7 million. Our MFS RGUs increased by 416,000 in the first quarter with Africa again leading penetration growth. Another encouraging sign of the sustained growth in MFS is the increasing money flows. As an example, as Hans-Holger said, in March, we conserve over $500 million through our mobile money system. The online division contributed 19% of recurring revenue growth in the quarter with revenue of $11 million and EBITDA increase of $6 million. Q1 is seasonally a slower quarter than the Q4 end of the year festive season for online. In Q1, we strengthened our commitments to online and €85 million will be downstream as needed to finance growth by September 2013. We expect a significant take off of our online revenue in Q2 as the new initiatives launched in Q1 are ramping up. Slide 19. Moving to profitability and – moving to profitability, as mentioned, the decline in EBITDA margin this quarter was quite dominantly driven by investments in our new growth areas. If we take a closer look at the effect of each of these lines, we can see that we have almost entirely offset pricing pressure on voice by efficiency in gross margin as it was the case in Q4 2012. We continue to invest in growth even if it’s led to a 2.4 percentage point erosion in margin in Q1. For example in Q1, we increased sales and market income by $35 million to support growth in mobile data on MFS mainly with subsidies and we spent as well an additional $33 million in building category skills and organizations; other one-off events reduced the margin by another 0.9 percentage point; and finally, the EBITDA losses of online that you see the EBITDA margin further to 39.7%. To be clear, this is absolutely within our guidance of 2013 and this is within our expectation for the quarter. Slide 20. Normalized net profit was $143 million down 10% while normalized EPS was down 8% to $1.43 per share. This development are linked to the decline in reported EBITDA as a result of investments for growth, increase in corporate costs, network amortization and high overall debt, all of which have been partially offset by lower tax. As you can see on slide 21, our tax rate is below 30%. In Q1, we continued our tax mending efforts and our effective tax rate was 26.5% versus 26.8% a year ago. Slide 22. Free cash flow for Q1 2013 was negative by $57 million. This was a result of an increase in network and spectrum investments, the higher level of tax paid, and negative changes in working capital versus Q1 2012. We have seen more pressure in working capital from the increasingly postpaid nature of our business. Having said that, the change versus last year was minimal. $253 million of cash have been upstreamed during Q1 through a combination of dividend, management fees, and royalties. Slide 23. Net debt to EBITDA was stable versus last year at 1 times at the end of the quarter. Millicom had over $1.2 billion of cash on hand with approximately two-thirds kept in both U.S. dollar and euro. Slide 24. About 57% of the group gross debt excluding financial leases is denominated in local currencies, limiting of local foreign exchange exposure. U.S. dollar denominated debt is used in country where our long-term debt in local currency is either too expensive or not available. At the end of Q1 2013, 57% of gross debt was at fixed interest rates, reducing our exposure to interest rate volatility. Slide 25. Given the limited change in our debt structure, our guaranteed debt remains stable at 35% at the end of Q1 compared to 36% in Q4 last year. Out of the approximately $1.1 billion of debt in Central America, only 9% is guaranteed, and in South America it’s 11% of $1.1 billion of debt. In Africa, we have $634 million of debt which is almost fully guaranteed. Slide 26. Group EBITDA margin is expected to meet above 40% excluding online and to decline at a lower rate than ever in the – over the last 12 months. We expect that we start seeing the initial result of offsetting program in H2 2013. The CapEx to revenue ratio will peak at around 20% excluding spectrum acquisition. The online division is expected to deliver in excess of $100 million of revenues and EBITDA losses are in the range of – will be in the range of $125 million to $200 million. Losses will be on the high side of the range if we see an opportunity to accelerate growth and to ramp up launch of new businesses. Slide 27, shareholder remuneration is important to us and the board will propose to the AGM to be convened on the 28th of March – of May because the proposal to the AGM will be the payment of an ordinary dividend of $2.64 with 3%, a 10% increase versus the 2011 level. Such dividend is to be paid on the 7th of June. We reiterate our proposed dividend policy from no less than $2 per share and that leads 30% of normalized net income. I would like now to hand back to Hans-Holger for his concluding remarks.

[Hans-Holger Albrecht:]

Thank you, François and just to summarize at the end of Q4 I think, I spoke of Millicom’s ambitions of remaining a growth company and our mobile data was one of the cornerstones of our future growth and obviously, profitability. This quarter we gained more new mobile data customers than ever in our history. To me, this speaks of Millicom’s unmatched focus on – and relentless drive for new opportunities and the speed with which we are able to execute those significant transformations. We have a new clear growth strategy as we presented at the Capital Markets Day and medium targets that we want to double the size of the company within the next five years. I think the strategy is obvious, now it’s all about execution with the new management team we have in place and it reflects as well the kind of changes we announced today when it comes to the board of Millicom which I would try to draw your attention as well to in case you haven’t seen this kind of release. As you can see by this quarter, I think we are well on course and showing growth at a time when we are – so much energy build the foundation for our new pillars. So I hope you are as excited as I am and my management team about the journey we have ahead of us and we are open now to go to the Q&A session.

[Operator:]

Thank you. (Operator Instructions) The first question comes from Mark Walker from Goldman Sachs. Please go ahead.

[Mark Walker:]

Hi there guys. Thank you for the questions. My first couple are on MFS. [Tons in the air] [ph] mobile money transfers are now represents 15% of GDP. I just wonder if you could give us an idea of where this is in your other MFS markets and where we can go to and more specifically if you could talk about the opportunity in Colombia given that that market represents such a high percentage of the GDP in your footprint? Second question is, I wonder if there’s anything you can say about the commission rates on mobile money transfers. I think [Mpay's] [ph] transaction fee is 1%. The third question is on cable, I just wonder if you could update us on the UNE deal in terms of specifically the extent to which you see potential synergies achievable on the cost side from that deal? And final question on Africa, you lost 100,000 customers this quarter, I wonder if you could just update us from what you’re seeing in terms of competition and also to what extent MFS can potentially improve to churn in that market. Thank you.

[Hans-Holger Albrecht:]

If I take some of the question that I may hand over to François on some of them. If you talk about the opportunity when it comes to MFS in Tanzania which is probably the most developed and most advanced market and we still see growth opportunities going forward there in terms of penetration and in terms of growing (indiscernible). It is obvious that in those markets, particularly when it comes to Africa, we are the only choice and alternative people just want to do kind of financial transaction of bank, and therefore, obviously in Tanzania there is growth potential and it should be exactly the same in the other markets where we have launched the MFS. Africa, clearly, the kind of dominant growth area, but we can see in Paraguay and in Latin America as well that the growth potential is there in terms of penetration, and in terms of volume, you will transfer (indiscernible). If you talk about Colombia, we are about to – we are analyzing the situation that there is a great potential for us. It’s a slightly different market and slightly different market position for us because we are mainly – we are very strong when it comes to data. In that respect it's probably more going to be more of data-based auditing solution but the kind of system like we have developed and the kind of expertise we have developed in the other market should help us as well to grow to Colombia. The fee is in range, what you said [is a representation] [ph] of 1% kind of range, so we don’t see any kind of – or there’s no major difference to what you have seen on other competitors. I think the second question was about the Cable deals and opportunities we have in terms of expanding the services and as you said at the Capital Markets Day, for us the kind of prime goal obviously, is to look for consolidation opportunities and capable opportunities in markets that we are present today. We are strong believers in the combination of mobile and cable. We are strong believers in the kind of bundling effect and the kind of benefits to get in terms of churns and revenues. So this is the kind of first time we looked and we can’t be too concrete obviously to talk about deals in the pipeline. However, next to this we still see opportunities as well for cable outside the mobile footprint particularly when it comes to Latin America, so we would look opportunistic at opportunities there as well. But the main focus right now is on closing the transaction when it comes to Colombia which – UNE which will be a big acceleration for the cable business. And then the last point I think was the situation in Africa on the fact that we lost 100,000 customers. We can see except maybe for DRC where the situation is a bit tougher, the competitive landscape is easing. Ghana seems to be more stable. Tanzania seems to be more stable. In Senegal, we’re recovering from a tougher situation. So we believe that towards the second half of the year, the outlook should be better in Africa. The competitive level is decreasing, as with the exception for DRC. We have a new team in place that work on Africa dedicated and looking to get a new sales approach and marketing initiatives in order to regain the momentum. So by the second half of this year, I think we should be out of worst when it comes to the African situation. DRC is a special case. It’s very competitive and more complicated, but that’s the only market where – which I would select at this time.

[Mark Walker:]

Thanks. Sorry, but just briefly follow up on the Africa answer, is it the case that you can use MFS as a genuine competitive opportunity to reduce churn or do you think that certain lead time on these services is too short and for that to provide that kind of opportunity. Thanks.

[Operator:]

Thank you. The next question comes from Laurie Fitzjohn from Citi. Please go ahead.

[Laurie Fitzjohn:]

Hi, great, thank you. Just two questions. Firstly on growth, I mean as you stated, underlying growth was strong at 8% but obviously the more reported local currency growth fell from 5.5% to 4.0% in Q1. Could you give some more color around as to how you set the headwinds to change going forward, for example MTR headwind in Q1 would have lessen through the year? And then maybe some more color around how big was the impact from the leap day, Easter falling on Q1 and just to get an idea of that gap between the underlying and the reported will be very useful. And then secondly, on the increase in the subsidies of smartphone, I mean, with the increase in net capital, is that driven by a step up in your subsidy level and therefore should we see that benefiting growth later on the year? Thanks.

[Operator:]

We apologize for the pause in the presentation. Please remain on the line. Thank you. Please go ahead.

[Justine Dimovic:]

Thank you.

[Operator:]

We apologize, you will need to repeat your question. Thank you.

[Laurie Fitzjohn:]

Apologies. Okay. First question on growth just to understand more the gap between the underlying growth at 8% and the reported growth decline from 5.5% to 4.0%, if you can give some more color around the headwinds going forward, for example the MTR headwind in Q1, how you see that developing? And then also how big was the headwind from the lap in the leap day and Easter falling in Q1 that you understand more how that gap between underlying and reported will converge hopefully through the year? And then secondly, on the increased take-up of smartphones, was this driven by an increased subsidy level? And therefore, should we see that benefit growth later on in the year? Thanks.

[Hans-Holger Albrecht:]

Okay. On the underlying growth, we had in the first quarter 2013, we lost about 2.4 percentage point of growth in revenues linked to MTR cuts which happened versus the first quarter of 2012. It happened in a very significant way in Honduras. We have two decreases of interconnection rights in Q1. We have some decrease in interconnection rights in Paraguay and Bolivia last year, and we had this in Tanzania as well by 70%. So you know what happens, we may go through different cycles. I must say that in 2011, we had very little of it. In the first nine months of 2012, we had little of it and then we had a lot in Q4 last year and Q1 this year. So once again, 2.4 percentage point of growth lost in Q1. If we look at the same comparisons over the whole of 2012, we had lost only 0.8 percentage point of growth, which means that we have lost this quarter three times more so it’s very significant. We are less exposed to the good news and we are far less exposed to interconnection rights. It accounts only for 6.2% – for 6.5% of our total revenues today. So even if they decrease further in the future, we are far, far less exposed. And I think we have a more diversified portfolio of revenues and sources of revenues as well. Regarding and then taking the opportunity to answer your question, on smartphones, there is indeed a decline of the cost of smartphones. We start seeing very good smartphones with good customer experience around $60, which is good. But the additional penetration of data services, which has been extremely attractive this quarter as you could see. It’s a combination of an easier access from a management point of view to the category with the lower cost of smartphone, as well as increased subsidy on our side. We increased, again, subsidy year-on-year this quarter by 17%, which is roughly speaking twice as high as the level of revenue loss. We had the same level on regarding last year. We believe that this is the right time to acquire additional customers and they start now. Unexplained wealth because we see that our data revenues have been growing at 35% in the quarter year-on-year.

[Laurie Fitzjohn:]

Okay, thank you. One very quick follow up if I may. Off with the 2.4 percentage point headwind in Q1, can you say what you expect that to be for the rest of the year based on the current announced MTR cuts for the last...

[Hans-Holger Albrecht:]

When you have this, you carry it basically for a year except that it can take us off in number or steps so we can expect that the impact will suffer a little bit over time. So we’ve certainly have a similar impact in Q2. Might even be slightly higher because some of these, for example, in Tanzania, it has been introduced at the beginning of March so we will see a little bit more of it in Q2 but let’s say Q3 probably similar. Q4 follows because we started to have some of these new measures implementing in Q4 last year. And in Q3, we should start seeing a little bit, some positive impact of the cover up decision that we have made to counteract it.

[Laurie Fitzjohn:]

Okay. Thank you.

[Operator:]

Thank you. The next question comes from JP Davids from Barclays. Please go ahead.

[JP Davids:]

Yes, hi, good afternoon. I just have a follow up on M&A/expansion and then a question on e-commerce. Firstly, on the M&A side, did you look at NIHD Peru when it was up for sale? And secondly, just in terms of expansion maybe you can touch on your chances of success with the Myanmar license the way you are short-listed? Then secondly in terms of e-commerce, just wanted to find out if you’ve seen any notable step up in competitive intensity on that front in terms of other challenges trying to drive traffic on to their own platforms? Any color there would be appreciated. Thank you.

[Hans-Holger Albrecht:]

So we come to the first question, Peru we didn’t look at so it can be a pretty straightforward that that’s a no. When it comes Myanmar and the chances there, it’s – I mean we are now at the stage where we received yesterday the kind of full document about the education, the license condition, and the process. So this one we have to analyze more carefully and make an adjustment call. How do we proceed and if we proceed, and then obviously it depends on the decision by the government. So at this stage really we are turning the kind of pace where we analyze the situation and then come with a concrete modernization of this later. And that’s all we can see really at this stage. There’ll be more final steps in former – not in former process but in kind of eve process now it becomes more serious and then we come back with the key estate. If it comes to the informal side and the kind of landscape, we don’t see any kind of change compared to the previous quarters. The operations are still performing well as we mentioned before and there is no kind of new competitors coming and there’s nobody of the big competitors coming in our market. Africa, for sure, not. And Latin America as well. On the kind of the areas we have been focusing on, there is no change in the competitive landscape. So the opportunity is still exactly the same and the market position are exactly the same as we have them presented at the Capital Markets Day or during the last quarter call.

[JP Davids:]

Thank you.

[Hans-Holger Albrecht:]

Thank you.

[Operator:]

Thank you. The next question comes from Andreas Joelsson from SEB. Please go ahead.

[Andreas Joelsson:]

Yes, good afternoon. Andreas Joelsson from SEB. Just a more detailed question regarding mobile ARPU, you have cleaned up some subscribers in Latin America. And normally, that would have a positive impact, I guess, but it’s difficult to see. Could you say anything if that sort of should have a positive impact on ARPU by cleaning up from those subscribers? And secondly, regarding your mobile growth ambitions for 2017, should we see that entirely expected to be generated by existing customers?

[Hans-Holger Albrecht:]

Okay. On the mobile ARPU, you’re absolutely right that maintaining cleanup of the base, which should – is increasing the ARPU which actually happened in Q1 2013. But that has been very strongly offset by the MTR curves, and especially in Honduras where we moved from very attractive positive growth last year to slightly negative. So it’s impacted, it’s offset entirely this positive impact. If it comes to the growth on 2017 on the mobile side, it embeds as well as subscriber growth obviously. We believe there is still subscriber intake opportunities particularly when it comes to Africa driven by population growth, driven by organization growth and the kind of very young demographics here currently coming into a kind of mobile age, which has been actually a bit earlier than it is in other places. So it’s subscriber growth, but it’s the ARPU growth of – as well and it transitioned to a high-value customer. But to make – to answer the question directly, yes, there’s subscriber growth as well.

[Andreas Joelsson:]

Perfect. Thanks.

[Hans-Holger Albrecht:]

Thank you.

[Operator:]

Thank you. And the next question comes from Chris Grundberg from UBS. Please go ahead.

[Chris Grundberg:]

Thanks. Just a couple from me, first up, I wondered if you could comment a little further on the cost reductions and the savings you happen to make in the second half and specifically, a little bit more detail, what we should expect in terms of the group margin profile quarter-by-quarter for the year in terms of – and how really backend loaded that is likely to be? And then second question on Tanzania, I wondered if you can comment just in terms of your initial reactions or what you’ve seen specifically on the competitive reactions, the MTR reductions there and if possible, any comments around sort of the assets deal demand you might have seen there as well? That would be very helpful. Thanks.

[François-Xavier Roger:]

On the cost reduction, so we have indicated that we were targeting at a year-over-year savings on our current cost base of $100 million within three years. We will get some of it already this year, so we are working, we have started already the implementation phase, so which means that we will get some of the benefits already in Q3, Q4 which mean that if you look at our 40.5% EBITDA margin announced this quarter on what we had said for the full-year which we will be above 40% with the lower reductions than last year, which will basically mean that we expect to have an EBITDA margin which will be fairly close to where we were in Q1. And to get there, obviously, the cost reduction program will be a contributor, one of the contributor tools.

[Hans-Holger Albrecht:]

And if I may, one thing to the cost side because it’s important also to highlight. We are – for this year, we are in a bit of – in the transition year because we’re investing into new business areas. We’re building of course, a new infrastructure when it comes to the cable side. The roll out of MFS and to also – there’s always going to grow of course, number coming out.

[François-Xavier Roger:]

Because this year in particular is a different year. When it comes to Tanzania, the competitive pressure we have seen so far is limited. There is, of course, some movement on price and marketing. But when you talk to the GM so far, it’s nothing which we expect to have kind of significant impact at least at this stage. So it’s pretty much business as usual there.

[Chris Grundberg:]

And can you comment, I mean has that surprised you? Would you have expected some of the competitors to perhaps take advantage of this into our reductions or is this sort of what you expected given the quantum of the MTR reduction. I’d just be curious to what you thought.

[Hans-Holger Albrecht:]

It could have been spread at the same time. I mean when somebody moves across the other side, others move as well. So there is a kind of flexible response kind of report from both sides. But that will suffice. It’s fine. You could expect something else but it’s not there yet.

[Chris Grundberg:]

Great. Thank you.

[Operator:]

Thank you. The next question comes from Kevin Roe from Roe Equity Research. Please go ahead.

[Kevin Roe:]

Thank you. A couple of questions. On the EPM transaction, what approvals have you secured to date and what approvals are still outstanding? And I’ve read some press reports about EPM union protests. Is that a legitimate risk to the deal or maybe to new co after close and I have a couple of follow ups.

[Hans-Holger Albrecht:]

When it comes to the political landscape and the current situation with the union, it is of course a more public deal and a deal which attract a certain kind of political attention as well so that it goes completely quiet of course is unusual but there is nothing where we say is concerned, they are nothing which we deemed to be at this stage with to the deal. Most part is we have been speaking and to have been pretty supportive. And it’s more that kind of usual questions and answers that we have to give when it comes to merging two companies in terms of employees, and I was kind of saying head count numbers and how do you perform the business. So from our judgment and from the judgment of our local people as well, at this stage, there’s no indication that has any kind of risk on that side. In terms of approval, I’m going to hand over to François who has been in both involved in that one.

[François-Xavier Roger:]

The objective today is to sign transactions in the course of Q2 which is supposedly end of June so we expect finding to take place in the next couple of weeks, and I thought that there will be regulatory approval required at national level is not only with the city – that will take a couple of months and we expect to closing to have them in Q4, probably around November.

[Kevin Roe:]

Okay, that’s helpful. And switching to Central America, could you give us a sense of the revenue decline and EBITDA decline sequentially in Central America? How much of that was due to competitive forces versus the MTR regulatory impact?

[François-Xavier Roger:]

There was – more than everything to MTR impact. It’s not really competitive. It’s the MTR, and as I said, nothing more.

[Kevin Roe:]

Okay. And lastly, Bolivia jumped out at me. I think it’s been six years since Bolivia showed a decline in subscribers there. Any explanation behind that?

[François-Xavier Roger:]

There was a cleanup of the customer base with zero balance customers, so which is a purely one-off. So there is nothing essential there.

[Kevin Roe:]

Very good. Thanks, gentlemen.

[François-Xavier Roger:]

Thank you.

[Operator:]

Thank you. The next question comes from Anders Wennberg from Brummer. Please go ahead with your question.

[Anders Wennberg:]

Hello. Anders Wennberg from Brummer here. I have a few questions regarding the Mobile Financial Services. We had revenues $14 million last quarter, $16 million this quarter. I think you said in the Capital Markets Day that you had 30% month-on-month growth but it seems to be a bit slower than that. Can you help us explain a little bit the growth patterns Q-on-Q and month-on-month has slowed or was it a seasonally very strong Q4? And the second question is regarding the take rate and you say that in March, you had $500 million in transaction volume. If you divide that by the revenues, I get about 1.2% average take rate. As far as I remember from the Capital Markets Day, I think you said more like 2%, 3%, 4%, something like that. Am I missing something? Have I done my calculations wrong is actually the take rate of 1.2% and more reasonable EBIT to use in our calculations? Thank you.

[Hans-Holger Albrecht:]

Regarding MFS, there is some kind of seasonality and Q4 is traditionally much stronger so which explain and especially December, it’s much stronger and January is much weaker, which by the way doesn’t happen – happened even for mobile. So it’s purely a seasonal impact because the momentum that we find today is exactly the same as what we communicated to you a couple of weeks ago. Regarding the $500 million of transaction, the – first of all, the commission that we charge are different by country and different by type of transaction. If you do a cash transaction, it can go up to 3% to 4%. If you do a cashless transaction, it can be at 1% or even lower. So it’s a mix of different type of transaction plus promotional activities that we can do. So it’s a little bit difficult to calculate it the way you calculated it. But roughly speaking, it’s much more expensive for the consumer to do a cash transaction, the reason being that we have to remunerate the point of sale that cash is some are in or out, what if we do a cashless transaction, we charge far less but there is hardly any cost for us, so it’s a very high margin business.

[Anders Wennberg:]

Okay, thanks.

[Operator:]

Thank you. The next question comes from Soomit Datta from Newstreet Research. Please go ahead.

[Soomit Datta:]

Yes, hi there. Got a couple of questions, please, firstly on MFS I’ve heard that one of your competitors, I think Airtel, would introduce them Euro commission financial service products into the – into one or more markets, I haven’t sort of seen the detail on it but I just wondered whether you’d sort of been conscious of that? And if so, what risks you saw potentially for commission rates and on MFS going forward? And then secondly, please, quick question on the online businesses. I think last month you’ve said to expect revenues and debit or losses to be in the higher end of the range. The rhetoric in the press release is it’s slightly more balanced. I don’t know whether there’s a change in thinking on the guidance for that this year? Thank you.

[Hans-Holger Albrecht:]

Let’s start with the MFS side and the Euro commission from Airtel, I mean they are the starting point have has been as a service. So I think for them it’s the kind of ambition to buy market share and that will change our – also it doesn’t – we don’t believe it’s a kind of commission will coming up now. The MFS product is more complex, it depends really on manufacturers down to what kind of refinance what you have, what kind of education you have, how easy you make the whole transaction, so it’s not a price to a commission-driven business, it’s really the kind of service-driven business and therefore, we – at this stage, we take a very relax – what assets are doing there. When it comes to the e-commerce side, there is no change in guidance. It’s actually exactly the same as we always said. We – the $300 million in revenues we’re aiming for and the kind of losses between $125 million and $200 million depending on how fast we accelerate the business. And just to reiterate this point as well, the higher end, if you reach the higher end of the loss scale, it means that the business is doing very well and we have good opportunities to extend our market-leading position. And in terms of revenues, it’s not just to be very clear as well, we will see the acceleration coming now and stepping as what it did in the second half – second quarter and then the second half. When it comes to e-commerce side, because then we are postpaid and the first quarter is a seasonally weaker quarter after the Christmas season. So no change in terms of e-commerce

[Soomit Datta:]

Okay, thank you.

[Hans-Holger Albrecht:]

Thank you.

[Operator:]

Thank you. The next question comes from Bill Miller from Hartwell. Please go ahead with your question.

[Bill Miller:]

Good afternoon. If you were looking forward and looking at 50,017 projection, can you give us outsiders a way of benchmarking you as you go along so that we can gauge your progress in choosing this?

[Hans-Holger Albrecht:]

In terms of – I mean, the – in terms of external guidance or benchmarking, you can always look of course to companies like Virgin or you can look to American companies. I think the way we look at it is that each of the individual divisions until it’s had its own target. And that one we should – and we wanted to be measured against. So when we talk about the growth for the mobile side but we said they kind of seen a digit growth here. That’s the one we’re going to measure and same when it comes then on to cable and to MFS. And then when it comes to the kind of bundling and cost-saving opportunities, as you know, we haven’t factored them too much into the kind of budget targets. But they would come on top. But to have a kind of – one company which you would benchmark exactly against, I would.

[Bill Miller:]

That’s fine, but I was thinking of your – I was thinking of the internal deductions what – we look at you individually what kind of benchmarks that you look at for MFS for this year and next year, or standard growth rate that we expect that we see what you’re getting there in terms of the 2017 projections?

[Hans-Holger Albrecht:]

What we did is that in our – in the material that we provided in the Capital Market Day, so we give indeed targets for 2017 that’s for most of these KPIs we actually give as well an indication of the milestones per year in terms of revenues especially. So I think it’s relatively easy from that point to check each and every single year if where we are against that objective. For – and margin-wise, we didn’t give a target per year, but we gave it in intermediary steps as well, especially for 2014. So I think that you have a reasonable way to understand exactly where we have to be in 2013 in able to reach our target in 2014.

[Bill Miller:]

Great. Thanks.

[Operator:]

Thank you. The next question comes from Lena Osterberg from Carnegie. Please go ahead.

[Lena Osterberg:]

Yes, hello. I had a question on Mobile Financial Services. I was wondering where you see your ARPUs going longer term if you sort of benchmark yourself versus your most advanced markets and also some of your competitors, which have launched earlier. And also, what penetration rates do you see that you will reach longer term? And then also, I was wondering a little bit on the online. You’ve already said that seasonality impact revenues but is there also some sort of delayed launches. Should we expect more launches to come over the next quarters or will you reach your $100 million of revenues based on the launches you have made so far?

[François-Xavier Roger:]

Regarding the MFS ARPU, we are very happy to see that it’s growing fast. You could see that it has been growing fast in Q4 over Q3 and then Q1 over Q4, which is even better when taking into consideration the fact that we enroll a lot of new customers each and everything on quarter. So what we are very pleased with is the fact of not having any dilution in spite of a very strong growth. We have indicated during our Capital Market Day that we expect it to reach an ARPU of more than $2 by 2017. I personally believe that it’s even on the conservative side but let’s see of a standard what we established but we see that it’s moving really in the right direction quarter after quarter. So that’s very good. In terms of penetration rate, we are already with the 12% penetration in our market given that we launch in some market very recently, for example in Chad, we launched in December. So this included even in the 12%. We have indicated as well that we expect it to have a penetration rate above 50% in 2017, which once again maybe conservative if you look at country like Kenya where the penetration is even north of 80%, for example for the leading operator there. So which gives you an indication that there is probably a possibility into our markets to go even beyond that level. But the 50% that we gave as an indication was on average, which I think is a reasonable assumption for 2017 and which shows the ambition that we have was at the combination and in terms of revenue growth and margin growth both in terms of penetration and monetization on ARPU.

[Lena Osterberg:]

Could you maybe say something about your most advanced market where your ARPU levels are for customers who’ve been using the service for a while? So if you sort of exclude the dilutive effect?

[François-Xavier Roger:]

You – the, actually, it has a very positive impact in terms of – this is what you are relating to. The MFS user has a very positive impact in terms of churn on mobile. So we’ve reduced its churn tremendously. Is it what your question was about? I’m not sure to...

[Lena Osterberg:]

No. I’m just trying to understand there’s sort of an old MFS user which has been with you for a while in a more mature market, what sort of ARPU is that customer generating? Is it closer to $2 already or where are they today?

[François-Xavier Roger:]

They are at a high level because there is an increase in usage as well, which we will see with the probably increasing even with the GDP growth and it’s very much linked to GDP but we see the ARPU increasing largely as a consequence of increased usage by – especially by long-time users.

[Lena Osterberg:]

But you cannot share where the long-term users are currently?

[François-Xavier Roger:]

No.

[Lena Osterberg:]

No? Okay.

[Hans-Holger Albrecht:]

Of course, there is – there are big differences between countries depending on the purchasing power of the customers that we have. So it’s difficult to say that the most advanced market are necessarily the ones with the highest ARPU even for the long-term users because it’s exactly correlated to GDP as well or purchasing power in that case.

[Lena Osterberg:]

Okay. And then online, the $100 million of revenues, will that be generated with the existing launches or will you launch more ventures?

[François-Xavier Roger:]

The existing venture but there will be more coming in because we are almost launched – we are launching new projects almost every month. But obviously, I mean before they really contribute, it takes a little bit of time so the bulk of the revenues are with project that have already been marketed.

[Lena Osterberg:]

Can I just to ask one more question? It’s on voice revenue growth, I just saw communications revenues was down I think just a little bit more than 4%, but how much is voice revenue down?

[François-Xavier Roger:]

Voice revenue is down by a little bit more than 5% actually, if we take into consideration the regulatory impact in the quarter.

[Lena Osterberg:]

Okay, thank you.

[Operator:]

Thank you. The following question comes from Stephen Mead from Anchor Capital Advisors. Please go ahead.

[Stephen Mead:]

Yes, good morning. Going back to the long-term projections in terms of revenue growth, can you talk and you probably did it on the Capital Day, but in terms of the CapEx needs to support that kind of revenue growth, what does that look like in terms of what you need to spend on spectrum, what you need to spend on the effort in terms of online launches? Can you break that down a little bit into the components of what kind of capital requirements you have?

[Hans-Holger Albrecht:]

Yes. I think the first point as we said at the Capital Market Day is when we had a time of target of CapEx spends versus revenue of 15% to be achieved in the next coming year. And that is due to the fact that except for spectrum investments, we are probably this year, in the peak in terms of investments we have to do in the infrastructure. Second point, remember as well that a lot of the new services or many of the new services we are launching like online, when it comes to e-commerce, MSF, media – are not very CapEx-intensive business. They are more riding on the existing infrastructure so it’s not a big CapEx requirement. And therefore we feel very safe with the statement CapEx 50% of revenues which just to illustrate it doesn’t mean we have to save costs going forward. It’s just more of keep the level we have grown the – but revenue is growing faster than this.

[Stephen Mead:]

And then are you still maintaining throughout this period the same debt to EBITDA targets in terms of how far you would go, in terms of how large of an acquisition you would make and how much debt – how much leveraging of the balance sheet you would do to achieve the revenue growth targets?

[François-Xavier Roger:]

We are dedicated that we wanted to be at 1,000 debt to EBITDA which we have achieved at the end of last year. We have said that with the merger of the combined entity in Colombia with UNE, we expect it to be below 1.5 times in terms of net debt to EBITDA post-merger. And after that, we have said that well over the years that we did not want to have a net debt to EBITDA but above two or we wanted to be below two in case of addition on M&A activity with the ambition to come back to a more reasonable level probably around one.

[Stephen Mead:]

Okay. And then one other question, do you see the – in terms of what’s going on in some of the African nations in terms of the impact of competition on ARPU, when do you see sort of consolidation taking place in some of your markets?

[Hans-Holger Albrecht:]

Well, I think we always had the kind of philosophy that some markets are up for consolidation for Uganda for example, which has been very competitive and a lot of operators. Other markets we have – we operate in with operate with the situation. So it has to be market-on-market but our philosophy is where there is no consolidation opportunity we will look at and those markets which are most obviously, is the marketing. But it’s always, as you know, it takes two people to tango so consolidations I can see would impact us and it will take some time.

[Stephen Mead:]

All right, thank you.

[François-Xavier Roger:]

Thank you.

[Operator:]

Thank you. There are no questions at this time. I would like to hand the call back to Hans-Holger Albrecht. Please go ahead.

[Hans-Holger Albrecht:]

Yes, thank you, operator. And thanks everyone for listening in to this call. If there are any more questions, please don’t hesitate to call me or François or Justine. Otherwise, we hope to see you all again or listen to you again at the next conference call. Thanks and goodbye.

[Operator:]

Thank you. This concludes Millicom’s financial results conference call. Thank you for your participation. You may now disconnect.