TIGO

Business Context and Reporting Period

Company: Millicom International Cellular S.A.
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: Millicom is a global mobile telecommunications operator focused on emerging markets in Central America, South America, Africa, and Asia. The company operates under the "Tigo" brand in most markets, utilizing a low-cost, prepaid-focused strategy. In October 2008, Millicom acquired Amnet Telecommunications Holding Limited, a provider of cable, broadband, and fixed telephony services in Central America, to expand its service offerings.

Key Financial Metrics

Subscriber Base: Total mobile subscribers reached 32.0 million (28.0 million attributable) as of December 31, 2008, representing a 38% increase year-over-year. Prepaid subscribers accounted for 96% of the total base.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 30% to $3.41 billion, driven primarily by a 38% growth in the subscriber base and the inclusion of Amnet revenues ($43 million) in the fourth quarter.
• Profitability Decline: Despite revenue growth, Net Profit attributable to equity holders decreased 26% to $518 million. This was primarily due to a significant increase in the effective tax rate (from 16% in 2007 to 39% in 2008) caused by the impairment of deferred tax assets in Colombia and a loss from discontinued operations ($22 million) compared to a gain in 2007 ($246 million from the sale of Paktel).
• Operating Profit: Operating profit increased 29% to $867 million, with operating margins remaining relatively stable at 25%.
• Capital Expenditures: Capital expenditures increased significantly to $1.44 billion (up from $1.06 billion in 2007), reflecting heavy investment in network expansion, particularly in Africa, and the acquisition of Amnet.
• Debt Levels: Total consolidated indebtedness rose to $2.16 billion, driven by new financing for the Amnet acquisition and operational expansion. Net debt increased from $660 million to $1.48 billion.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Strategy: Management expects continued growth in subscriber bases due to low mobile penetration in target markets. The strategy focuses on the "Triple A" approach: Affordability, Accessibility, and Availability. The company plans to expand broadband offerings and introduce new value-added services. No specific numerical guidance for 2009 was provided in the text.

Key Risks:

• Regulatory and Political Risk: Operations in emerging markets face risks of political instability, license revocation, and regulatory changes. A significant dispute exists with the government of Senegal regarding the revocation of the Sentel license, leading to arbitration proceedings.
• Economic Conditions: The global economic downturn and recession are expected to impact consumer spending, remittances (particularly in Central America), and commodity prices in operating regions.
• Currency Fluctuations: The company reported a net exchange loss of $56 million in 2008 (compared to a gain of $15 million in 2007) due to the strengthening of the US dollar against local currencies. The company does not generally hedge foreign currency exposure.
• Competition: Intense price competition and the entry of new operators in several markets (e.g., Sri Lanka, Honduras, Ghana) pose risks to market share and pricing power.

Unusual Items:

• Deferred Tax Impairment: A significant charge was recorded in 2008 due to the impairment of deferred tax assets in Colombia, as business conditions deteriorated following changes in interconnect rates.
• Discontinued Operations: The sale of Paktel (Pakistan) in 2007 resulted in a large one-time gain. In 2008, the operation in Sierra Leone was classified as discontinued, resulting in a loss.

Important Facts for Investor Verification

• Senegal License Dispute: Verify the status of the arbitration proceedings with the Republic of Senegal regarding the Sentel license, as a loss could result in the loss of a significant operation.
• Colombia Tax Position: Confirm the sustainability of the deferred tax asset impairment in Colombia and the impact of interconnect rate changes on future profitability in that market.
• Debt Maturity and Covenants: Review the maturity profile of the $2.16 billion debt, noting that Sentel GSM (Senegal) was in breach of debt covenants as of year-end, requiring waivers.
• Amnet Integration: Assess the integration progress and synergies realized from the $546 million Amnet acquisition, which was completed in October 2008.
• Currency Exposure: Monitor the impact of US dollar strength on reported earnings, given the company's significant debt denominated in USD and revenues in local currencies.