We'd Like to See America Movil Shift Its Emphasis to Free Cash Flow Generation

Director

Michael Hodel

America Movil’s dominant position in the Mexican wireless market provides a stable source of cash flow while its Brazilian business offers upside potential as consolidation produces a more rational competitive environment. In addition, the firm should benefit from rising demand for internet access and other data services across Latin America. That exposure comes with significant political, regulatory, and economic uncertainty, but we expect Movil’s strong competitive position in most of the markets it serves and its strong balance sheet will create value for shareholders.

The Mexican wireless business is Movil’s most important, accounting for about 25% of consolidated service revenue. Despite regulatory and competitive changes in recent years, Movil has remained the dominant Mexican wireless carrier with more than 60% market share. Wireless competition has subsided over the past couple of years, allowing prices to begin rising. We expect steady growth and some margin expansion in this business, but it is already extremely profitable. 

Movil also serves about half of the Mexican internet access market. Competitors are investing aggressively in fixed-line infrastructure, which has produced stiff price competition. Movil has aggressively upgraded its network to fiber, and we expect it will have an edge in bundling broadband with wireless, but this business, which accounts for about 10% of services revenue, isn’t attractive in its current competitive state. 

In Brazil, Movil’s second-largest market at about 20% of revenue, the firm has assembled a solid set of assets as the second-largest wireless carrier and largest cable company in the country. Economic weakness and a challenging competitive environment have limited the firm’s ability to earn attractive returns on these assets. The carve-up of Oi among Movil, TIM, and Vivo, has improved the competitive situation, allowing for price increases, a trend we expect will continue. 

The remainder of Movil’s business is primarily spread across other Latin American countries, the most significant of which is Colombia (about 8% of revenue), where the firm is also dominant in both the wireless and fixed-line markets.

Business Strategy & Outlook

While America Movil provides services in more than two dozen countries, Mexico, Brazil, and Colombia are its most important markets, providing about two-thirds of total revenue and profits. The firm’s operations in these three markets include extensive network assets that often provide efficient scale and cost advantages. Operations in most other countries have similar characteristics. On balance, we believe Movil carries a narrow moat. 

America Movil’s Mexican wireless business, Telcel, which generates about 25% of firmwide service revenue, dominates the market. Cost advantages in this business form a large portion of the basis for our narrow moat rating. The firm holds more than 60% market share, based on total customers, with wireless service revenue about 4 times that of its nearest rival (AT&T). Based on government data, Movil’s wireless network carries around 75% of the total data and phone traffic in Mexico. Relative scale of this magnitude creates a large cost advantage, as providing broad, high-quality wireless coverage and marketing services requires heavy fixed costs, best spread over as large a customer base as possible. Movil reported Mexican wireless adjusted operating income at 130% of the carrying value of net PP&E and spectrum assets, a figure likely understated as the firm lumps corporate costs into this segment. 

Movil isn’t as dominant in Mexico as it once was. The Mexican government amended its constitution in 2013 and enacted new legislation in 2014 to overhaul telecom regulation in the country. Regulatory changes prompted AT&T to acquire two subscale, struggling Mexican carriers in 2015. AT&T has built network coverage that rivals Telcel’s and also holds a similar spectrum position. However, the price wars that hit the market following regulatory reform hurt third-place carrier Telefonica particularly hard, prompting the firm to effectively exit the market in 2019 as a facilities-based operator. The Mexican wireless market has gradually recovered over the past couple years and Movil’s segment EBITDA margin rebounded to about 50% from a bottom of 37% in 2016 and 2017. 

In the Mexican fixed-line business, Movil’s Telmex subsidiary, which generates about 10% of firmwide revenue, has struggled to maintain its position in recent years. Segment disclosure isn’t great, but we don’t believe this business enjoys a moat. The firm is the only major traditional phone company in Mexico, but its network reach is limited to around 65% of the Mexican population. Two competitors, Groupo Televisa and Megacable, have aggressively expanded cable networks across the country. Newer entrant TotalPlay has also aggressively expanded its fiber network over the past five years. In many areas, customers can choose from three or four broadband providers, which has resulted in fierce price competition and poor returns on capital for all players. 

Regulatory pressure within Mexico remains a major limiting factor on our moat rating, an ESG risk that affects telecom carriers generally and dominant carriers like Movil in particular. Movil must allow competitors to access its passive infrastructure, including towers and rights of way, and certain other network elements. To comply with this regulation, Movil spun off its wireless towers as a new firm, Telesites, in 2015. In 2018, the IFT further issued criteria requiring Movil to carve out Telmex’s infrastructure into a legally distinct subsidiary to offer wholesale services to Telmex and other competitors. 

In Brazil, Movil has invested aggressively over the last two decades to enter and expand its presence in the market, which now provides a bit less than 20% of the firm’s revenue. We believe the firm has a solid competitive position in the country, combining a nationwide wireless business and strong fixed-line network, but economic weakness and the market’s structure have limited returns on capital. Movil is the largest cable company in the country and has about 21% share of the broadband market nationwide. The firm has enjoyed a network advantage over rivals, but heavy network investment at a multitude of small firms has eroded this position. Telefonica (Vivo) has also invested heavily to improve its network. Similar to Mexico, we believe the fixed-line market is in dire need of consolidation to allow carriers to earn acceptable returns on capital. 

Movil is the second-largest Brazilian wireless carrier, trailing only Vivo and holding a slight advantage over TIM. Movil, Vivo, and TIM recently carved up Oi’s wireless business, leaving only three major wireless carriers in the country. The Brazilian wireless market has historically been extremely competitive as carriers raced to secure market share. Wireless penetration stood at nearly 140% in 2015 as consumers regularly carried multiple carrier accounts to take advantage of whichever one was offering the best rates for certain types of calls. Since then, the market has gradually shifted, with more customers taking postpaid plans. Still, years of brutal competition have left the market accustomed to low prices. While pricing has been improving since the Oi transaction closed, we estimate that Movil still only generates about 70% as much revenue per Brazilian customer as it does in Mexico. 

Overall, Movil’s business in Brazil generates modest returns on capital. Outside of the acquisition of Nextel, revenue in the country have been stagnant in recent years, with declining fixed-line phone and television revenue offsetting wireless and broadband growth. The EBITDA margin has expanded somewhat, exceeding 40% recently versus 37% in 2019, but the business has also consistently invested around 20%-25% of revenue annually in its networks and spectrum licenses. Total operating income is equal to only about 12% of total net PP&E and spectrum assets, likely placing after-tax returns on capital in the midsingle digits. 

America Movil is the dominant wireless carrier in Colombia, a market that generates about 10% of its revenue and EBITDA, with nearly 55% market share. The firm also owns cable networks reaching about half the population. As in Mexico, this scale has enabled the firm to produce strong profitability. The combined Colombian fixed-line and wireless operation has produced consistent 43% EBITDA margins in recent years, with operating income equal to about 30%-35% of net PP&E and the value of spectrum. The Colombian wireless market has gotten more competitive, with new entrant WOM taking control of a small carrier in the market and expanding its presence. WOM has slowed Movil’s growth and modestly hit margins, but we believe Movil has the scale and broad assets needed to maintain its position. 

America Movil’s remaining operations are spread across several countries, primarily in Latin America. The firm is the largest wireless carrier in several of these markets, including Ecuador, Argentina, Nicaragua, and the Dominican Republic. Telkom Austria is the dominant phone company and wireless provider in its home country.

Narrow

Economic Moat

America Movil SAB de CV

Telmex is a Mexican telecommunications company headquartered in Mexico City that provides telecommunications products and services in Mexico, Argentina, Chile, Colombia, Brazil (Embratel), Ecuador, Peru, Venezuela and other countries in Latin America. Telmex is still the dominant fixed-line phone carrier in Mexico. In addition to traditional fixed-line telephone service, Telmex offers Internet access, data, hosted services and IPTV. Telmex owns 90 percent of the telephone lines in Mexico City and 80 percent of the lines in the country. Telmex is a wholly owned subsidiary of América Móvil.

Telmex

Telcel is a Mexican wireless telecommunications company, owned by América Móvil. Founded in 1989 and based in Mexico City, Telcel is the leading provider of wireless communications services in Mexico. As of December 31, 2006, Telcel's cellular network covered more than 63% of the geographical area of Mexico, including all major cities, and 90% of Mexico's population. Telcel holds concessions to operate a wireless network in all nine geographic regions in Mexico using both the 850 megahertz and 1900 megahertz radio spectrum. According to Cofetel (Comision Federal de Telecomunicaciones—Mexico's Federal Telecommunications Commission), as of July 2008, Telcel's subscribers represented an estimated 77.2% share of the Mexican wireless market. On August 2011, Telcel reported it has 66.9 million cellular subscribers.

Telcel

America Movil SAB de CV engages in the provision of telecommunications services. The firm operates through the following segments: Mexico Wireless, Mexico Fixed, Brazil, Colombia, Southern Cone (Argentina, Chile, Paraguay and Uruguay), Andean Region (Ecuador and Peru), Central America (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama), the Caribbean (the Dominican Republic and Puerto Rico) and Europe (Austria, Belarus, Bulgaria, Croatia, Macedonia, Serbia and Slovenia). Its products and services include wireless voice, wireless data and value-added services, fixed voice, fixed data, broadband and IT services, Pay TV and over-the-top (OTT) services. The company was founded on September 25, 2000 and is headquartered in Mexico City, Mexico.

Earnings data Q1 2024

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America Movil, S.A.B. de C.V. (NYSE:AMX ) Q3 2023 Earnings Conference Call October 18, 2023 11:00 AM ET Company Participants Daniela Lecuona - Head of Investor Relations Daniel Hajj Aboumrad - Chief Executive Officer Carlos Garcia Moreno - Chief Financial Officer Oscar Von Hauske - Chief Fixed Line Operations Officer Conference Call Participants Victor Tomita - Goldman Sachs Walter Piecyk - LightShed Marcelo Santos - JPMorgan John Ho - Mizuho Soomit Datta - New Street Research Cesar Medina - Morgan Stanley Alejandro Azar - GBM Phani Kanumuri - HSBC Andres Cardona - Citi Till Moewes - Schroders Jesus Romo - GlobalData Alejandro Lavin - Santander Operator Good morning.

America Movil, S.A.B. de C.V. (AMX) Q3 2023 Earnings Call Transcript

America Movil's third-quarter results were mixed, with constant currency service revenue and adjusted EBITDA showing some growth, but also some margin pressure. America Movil continues to build on its network advantages in Mexico, expanding ARPU on the back of increased 5G network utilization while continuing to grow homes passed with broadband. Brazil is performing better, including record EBITDA margin, as mobile competitors are behaving more rationally and broadband continues to grow.

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America Movil, S.A.B. de C.V. (NYSE:AMX ) Q2 2023 Earnings Conference Call July 12, 2023 11:00 AM ET Company Participants Daniela Lecuona - Head of Investor Relations Daniel Hajj - Chief Executive Officer Carlos Garcia Moreno - Chief Financial Officer Oscar Von Hauske - Chief Fixed Line Operations Officer Conference Call Participants Vitor Tomita - Goldman Sachs Leonardo Olmos - UBS Walter Piecyk - Lightshed Partners Fred Mendes - Bank of America Phani Kanumuri - HSBC Carlos de Legarreta - ITAU Chelsea Colon - Aegon Operator Good morning.

News for America Movil SAB de CV Stock (AMX)