Cost-cutting Telefonica loses ground in Central America - Millicom and Digicel make gains in Q2 2009 as Spanish giant reigns in spending

The Spanish-owned Latin American mobile giant Telefonica continued to lose subscribers in Central America in the second quarter of 2009, according to new data from GSMA Intelligence. Total mobile connections at its Central America unit – which includes operations in Guatemala, El Salvador, Panama and Nicaragua – fell to 5.6 million in 2Q09, a third consecutive quarterly decline and a year-on-year increase of just 1.4 percent. Telefonica’s total connections across the four markets (including its PSTN and Internet businesses) declined to 6.1 million, representing a loss of almost 100,000 subscribers since the start of the year.

Telefonica attributes the declines to several cost-cutting initiatives introduced last year that saw it focus on cash flow generation and a reduction in commercial activities. Consequently, despite lower revenues in the first half of the year (down 5.5 percent year-on-year in constant currency to EUR288 million), the operator’s operating income (OIBDA) in Central America rose 12.5 percent year-on-year in constant currency to EUR120 million, while the OIBDA margin improved by 6.6 percentage points to 41.6 percent. The cost-cutting drive was also evident in Capex, which was reduced by 60.3 percent between 1H08 and 1H09.

However, as our 2Q09 data shows, the reduction in Telefonica’s connections base in the region has been accelerated by strong performances by its domestic incumbents, most notably Millicom’s Tigo, and new market entrant, Digicel. The most affected market was El Salvador, where Telefonica lost 72,800 connections (net) in 2Q09, ceding significant ground to Tigo and America Movil’s Claro. It was a similar picture in Guatemala (Telefonica’s largest market in the region) and Panama, where Telefonica reported less than 1 percent sequential connections growth and failed to capture a double- digit share of quarterly net additions in both markets. One positive was in Nicaragua, a duopoly mobile market, where second-placed Telefonica made up ground on America Movil by capturing a 56.8 percent share of net additions in 2Q09.

The dominant player in the region is Millicom, which is the clear market-leader in Central America’s three largest markets (Guatemala, Honduras and El Salvador). It continued to build its lead in 2Q09, taking the lion’s share of net additions in all three countries. Millicom’s standing in the region has been boosted recently by its US$510 million acquisition of local fixed- line and broadband provider Amnet, which is also active in the main Central American markets. Millicom is using the unit to bolster its fixed-line, corporate and Internet services business lines across the region.

Meanwhile, Digicel, the Caribbean-based mobile firm, has intensified competition via its recent launches in Honduras (November 2008) and Panama (December 2008). Combined with its existing market of El Salvador (where it launched in April 2007), Digicel had established a connections base of over 1.1 million in the region by 2Q09. It is doing especially well in Honduras, capturing a 36.5 percent market share of net additions in 2Q09 and currently growing its connections base by about 40 percent a quarter.

The other major player in the region is America Movil. The Mexico-based group has not seen its connections base decline to the levels recorded at Telefonica, but the operator appears to be deploying a similar strategy aimed at maintaining profitability and margins rather than building market share. Total mobile connections at America Movil’s Central America unit (which does not include Panama) rose 4.9 percent year-on-year to 9.3 million, but the growth rate was the lowest of all the operator group’s mobile subsidiaries (total group mobile growth was 15.1 percent). Fixed-line connections at the unit rose by just 3.2 percent to 2.3 million during the same period. However - like Telefonica - America Movil recorded a healthy margin, with 2Q09 earnings (EBITDA) of US$142 million equivalent to 43.1 percent of revenue.

Joss Gillet, Senior Analyst, GSMA Intelligence:

As we noted in our recent Cellular Telecom Crunchonomics report, any early decisions to heavily cut capital expenditure will see mobile operators quickly lose ground to competitors that are investing in quality and value-added services (VAS). In Central America, Telefonica cannot simply rely on a GSM network driven by voice-centric marketing propositions whilst its competitors are rapidly focusing on VAS opportunities. The fact that the operator has been reporting encouraging financial results in Central America is good news for now, but it will struggle to maintain its position in 2010 without investing further in its services proposition. For example, in El Salvador, Telefonica still has to launch its own WCDMA network to compete against the high-speed networks deployed by Claro and Tigo. If we consider that, on average, it takes up to 12 months to deploy a fully commercial WCDMA network with reasonable coverage, then Telefonica will not be competing in this space until late 2010. In this scenario, Telefonica could be lagging behind the competition by up to two years and will be forced to introduce its new services in a mature market. In the meantime, effective price per minute will keep falling and voice revenues (its core business) will do the same.