Millicom's Q1 Results: Operational Triumphs Amid Revenue Headwinds

Millicom International Cellular S.A. (MLCMF) delivered a mixed bag in its Q1 2025 earnings report, showcasing robust operational momentum but struggling against headwinds like currency devaluation and macroeconomic pressures. While the company’s cost discipline and customer growth metrics shine, the revenue decline and lingering foreign exchange (FX) challenges demand a nuanced investment perspective.

Operational Gains: A Foundation of Strength

The quarter’s standout performance lies in Millicom’s ability to attract and retain customers. Post-pay net additions surged to 262,000, a 50,000 increase year-over-year (YoY), signaling strong demand for mobile services. Fixed-line services also turned a corner, with 62,000 Home net additions—a stark reversal from the 13,000 decline in Q1 2024. This growth, driven by investments in fiber infrastructure and node-by-node network upgrades in Central America, is critical as competition intensifies from rivals like América Móvil.

The operational improvements translated into better profitability. The OCF margin rose to 36.7%, a 2% expansion thanks to cost-saving measures from its 2024 restructuring program. Equity-free cash flow (EFCF) hit $135 million, a staggering $172 million improvement from Q1 2024, even as the quarter is typically the weakest for cash generation.

Revenue Stumbles: FX and Structural Challenges

Despite these positives, Millicom’s top line faltered. Service revenue dropped 6.6% to $1.29 billion, with nearly half of the decline attributed to the 40% devaluation of the Boliviano and weaker currencies in other markets. Organic service revenue growth, excluding FX impacts, was just 2%, with mobile growth slowing to 3.3% as tough YoY comparisons took hold.

B2B services, once a growth driver, fell 6.4% organically due to the absence of large legacy projects. Geographically, Nicaragua and Costa Rica reported service revenue declines, though Guatemala’s OCF surged 10% to $190 million, highlighting uneven regional performance.

Financial Health: Leverage Management and Dividend Risks

Millicom’s leverage ratio ended at 2.47x, edging toward its upper target of 2.5x. While the company aims to finish the year below this threshold, the rise in net debt by $101 million—driven by dividends and buybacks—adds a layer of caution. The proposed $3 per share annual dividend, though appealing to income investors, could strain cash flow if FX headwinds persist.

The 2025 EFCF target of $750 million appears achievable, as cost savings from restructuring offset FX and legal risks. However, Millicom must navigate potential rulings in regulatory disputes, such as its ongoing battle with the Colombian regulator over spectrum fees.

Management’s Outlook: Pragmatic Optimism

CEO Marcelo Benitez emphasized that Q1 results put Millicom “well on track” to meet annual targets, with node-by-node investments and broadband expansion driving future growth. CFO Bart Vanhaeren tempered expectations, noting that service revenue growth could accelerate in H2 2025 as one-off project comparisons ease and new initiatives—like fiber-to-the-home (FTTH) expansions—gain traction.

The push to extend debt maturities beyond five years and prioritize local currency borrowing aims to mitigate FX risks. Additionally, re-domiciling to Florida could enhance investor appeal, potentially boosting liquidity if Millicom is added to indices like the Russell 2000.

Risks and Considerations

• FX Volatility: The Boliviano’s devaluation alone cost Millicom millions. With Latin America’s currencies remaining unstable, further declines could pressure margins.
• Regulatory Uncertainty: Legal disputes, particularly in Colombia, pose earnings risks.
• Growth Sustainability: Mobile and B2B services need to rebound meaningfully to offset FX drag.

Conclusion: A Hold with Upside Potential

Millicom’s Q1 results reflect a company executing well on its operational strategy but battling macroeconomic headwinds. The $135 million EFCF and 36.7% OCF margin underscore its financial resilience, while Guatemala’s 10% OCF growth and Panama’s record 51.2% EBITDA margin highlight pockets of strength.

Investors should remain cautious but constructive. The $750 million full-year EFCF target is achievable if cost savings and regional initiatives offset FX losses. With a 2.47x leverage ratio within target and dividend flexibility, Millicom’s balance sheet remains robust.

However, the 6.6% service revenue decline and GuruFocus’s five “warning signs”—though unspecified—warrant vigilance. A hold rating is prudent, with a tilt toward buy if H2 growth accelerates and FX pressures ease. Millicom’s long-term value hinges on its ability to monetize fiber investments and navigate Latin America’s volatile economic landscape.

In short, Millicom is a story of operational excellence amid turbulence—a stock to watch closely but not chase blindly.