Business Context and Reporting Period
Company: América Móvil, S.A. de C.V.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2004
Accounting Basis: Mexican GAAP (with U.S. GAAP reconciliations provided)
Business Overview: América Móvil is the largest provider of wireless communications services in Latin America. As of December 31, 2004, the company operated in 11 countries with approximately 61.1 million wireless subscribers. The company's principal operations are in Mexico (via Telcel) and Brazil (via Telecom Americas/Claro), which combined represented 70% of operating revenues in 2004.
Key Financial Metrics (2004)
| Metric | 2004 (Mexican GAAP) | 2004 (U.S. GAAP) | 2003 (Mexican GAAP) |
|---|---|---|---|
| Operating Revenues | Ps. 134,747 million (U.S.$ 11,962 million) | Ps. 126,696 million (U.S.$ 11,247 million) | Ps. 90,401 million |
| Operating Income | Ps. 23,494 million (U.S.$ 2,086 million) | Ps. 22,279 million (U.S.$ 1,978 million) | Ps. 18,892 million |
| Net Income | Ps. 16,513 million (U.S.$ 1,466 million) | Ps. 16,663 million (U.S.$ 1,479 million) | Ps. 15,812 million |
| Operating Margin | 17.4% | 17.6% | 20.9% |
| Total Assets | Ps. 194,621 million (U.S.$ 17,277 million) | Ps. 208,166 million (U.S.$ 18,479 million) | Ps. 157,762 million |
| Total Debt | Ps. 61,460 million | Ps. 61,460 million | Ps. 51,872 million |
| Cash and Equivalents | Ps. 16,518 million (U.S.$ 1,466 million) | Ps. 16,518 million | Ps. 9,769 million |
| Capital Expenditures | Ps. 22,417 million | Ps. 22,417 million | Ps. 14,362 million |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased by 49.1% to Ps. 134.7 billion, driven by organic subscriber growth (39.3% increase to 61.1 million subscribers) and the full-year consolidation of acquisitions made in late 2003 (CTI, CTE, BCP).
- Margin Compression: Operating margin declined from 20.9% in 2003 to 17.4% in 2004. This was primarily due to increased subscriber acquisition costs (equipment subsidies and commissions) and higher commercial, administrative, and general expenses outpacing revenue growth.
- Profitability: Net income increased 4.4% to Ps. 16.5 billion. Despite margin pressure, higher revenues and significant foreign exchange gains (Ps. 2.4 billion) offset increased operating costs.
- Debt Refinancing: The company accessed international capital markets for the first time, issuing U.S.$2.1 billion in senior notes to refinance debt, extending the average life of indebtedness and reducing refinancing risk.
- Subscriber Mix: Mexico's share of total subscribers decreased to 47.2% (from 53.4% in 2003), while Brazil's share increased to 22.3%, reflecting faster growth in non-Mexican operations.
Guidance, Outlook, and Risks
Outlook and Capital Allocation
- Capital Expenditures: Budgeted for 2005 is approximately U.S.$2.4 billion (Ps. 27.0 billion), primarily for GSM network expansion in South America (55%), North America (32%), and Central America (13%).
- Dividends: In April 2005, shareholders approved a dividend of Ps. 0.21 per share, a significant increase from the Ps. 0.12 declared in 2004.
- Share Repurchases: Shareholders authorized an additional Ps. 5 billion for share repurchases, increasing the total reserve to Ps. 30 billion.
Key Risks and Contingencies
- Competition: Intensifying competition in Mexico and Brazil, particularly from Telefónica Móviles (which consolidated operations in several Latin American countries), is driving price reductions and increased marketing spend.
- Regulatory Risks:
- Mexico: Potential extension of "calling party pays" regulations to all mobile calls; ongoing antitrust proceedings by Cofeco regarding distributor practices; and potential new taxes on spectrum usage.
- Brazil: Regulatory hearings on cost-based interconnection fees for operators with significant market power.
- Legal Proceedings: Significant litigation includes antitrust claims in Mexico, interconnection fee disputes, and a patent infringement case in Brazil regarding caller ID technology (Lune Patent Case) where damages are currently indeterminable.
- Exchange Rate Risk: The company has significant U.S. dollar-denominated debt. A 10% depreciation of operating currencies against the U.S. dollar would result in a Ps. 1.9 billion increase in net debt.
Investor Verification Checklist
- Subscriber Quality: Verify the sustainability of the 39.3% subscriber growth rate and the impact of high churn rates (2.9% consolidated) on future revenue per user (ARPU).
- Margin Trends: Monitor the trajectory of operating margins in Brazil and Argentina, which reported operating losses in 2004 due to aggressive acquisition costs.
- Regulatory Exposure: Assess the potential financial impact of the "calling party pays" regulation extension in Mexico and the outcome of the Cofeco antitrust proceedings.
- Debt Profile: Review the maturity profile of the new U.S. dollar-denominated senior notes and the company's ability to service debt given the exposure to currency fluctuations.
- Acquisition Integration: Evaluate the performance of late-2003 acquisitions (CTI, CTE, BCP) now fully consolidated, specifically their contribution to EBITDA.