Q3 2016 Millicom International Cellular SA Earnings Call
Oct 25, 2016 AM EDT
MIICF - Millicom International Cellular SA
Q3 2016 Millicom International Cellular SA Earnings Call
Oct 25, 2016 / 11:00AM GMT
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Corporate Participants
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* David Boyd
Millicom International Cellular S.A. - Interim Head of IR
* Mauricio Ramos
Millicom International Cellular S.A. - CEO
* Tim Pennington
Millicom International Cellular S.A. - CFO
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Conference Call Participants
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* Lena Osterberg
Carnegie Investment Bank AB - Analyst
* Andreas Joelsson
DNB Markets - Analyst
* Thomas Heath
Danske Bank - Analyst
* Michel Morin
Morgan Stanley - Analyst
* Johanna Ahlqvist
SEB Equities - Analyst
* Luigi Minerva
HSBC Global Research - Analyst
* Bill Miller
JM Hartwell - Analyst
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Presentation
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Operator [1]
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Good morning and good afternoon, ladies and gentlemen, and welcome to the Millicom financial results conference call. Today's presentation will be hosted by Chief Executive Officer, Mauricio Ramos, and Tim Pennington, Chief Financial Officer. (Operator Instructions).
I would now like to hand the call over to David Boyd, Millicom's Head of Investor Relations. Please go ahead, sir.
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David Boyd, Millicom International Cellular S.A. - Interim Head of IR [2]
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Thank you, and welcome, everyone, to our third quarter call. This will take the usual format and, as usual, the presentation can be found on our website. I'd just like to draw your attention, as always, to the Safe Harbor Statements. These apply to the presentation and the subsequent Q&A session.
With that, I will now hand over to Mauricio.
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [3]
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Good day to all, and welcome to our Q3 earnings call today, a little earlier than usual and, as always, Tim and I will host the call today. We will brief you on our quarterly results today, and update you on the meaningful progress we are making in our strategic journey. In summary, as always, the key messages today are summarized on this slide.
One, as expected, we see Q3 was a bit weak on revenue, but we have made even faster progress in the execution of our strategy to monetize data and build a fixed cable fiber infrastructure.
Indeed, in a nutshell, the twofold reconfiguration of both our revenue mix and our cost structure is coming together quite well. You will see in a minute that by now, almost 50% of our revenue mix is coming from our areas of key strategic focus; mobile data and cable, as you know. And the reconfiguration of our cost structure is yielding much stronger cash flow growth and margin than only 12 months ago.
So the third key message today is precisely that mobile data continued to grow above 20% year on year this quarter. And we added more LTE subscribers this quarter than ever before.
The fourth key message here is that, as anticipated, by Q3 we have now almost reached our full-year target of growing our cable [network] to almost 8 billion homes passed.
And the last key messages for today are simply that Heat, our long-term transformation project, is strongly on track. And lastly, that we're making no changes to our 2016 outlook.
So let's get on to some detail on Q3 subscribers. Q3 was very strong in subscriber intake in both mobile data and cable subscribers. In mobile, we added 1.4 million smartphone users but, more importantly, we added almost 700,000 LTE subscribers in Latin America during the quarter. I will talk about that in a minute in more detail.
Needless to say, strong smartphone and 4G adoption are the key building blocks for sustained high mobile data growth; hence, the relevance we put on this number.
In cable, we ramped up the pace of growth of the cable build. We built 180,000 HFC homes in the quarter. Of those we upgraded about 50,000 homes from copper to state-of-the-art HFC, and we also increased the total network footprint by about 130,000 additional homes.
And we continued to grow our DTH service, which is now launched in all countries in Latin America, with the exception of Paraguay. And as we will show you in more detail further on, we are filling the network with broadband and pay TV subscribers, up pretty strongly. So overall, pretty strong subscriber intake in the quarter in the areas of strategic focus.
Now on to summary of the Q3 financials on these slides. Four specific points I would like to make here.
One, as expected, we have slower service revenue growth, with 0.2% decline year on year this quarter. This is largely the short-term effect of the accelerated decline in the legacy voice and SMS businesses. We have talked about that often, and I will show you in a minute the progress we're making in reconfiguring our business into the high-growth mobile data and cable businesses.
But a couple of additional effects also had a short-term impact on the quarter, and Tim will expand on this. One, competition in Colombia remained exceedingly aggressive; and two, we stopped recognizing the revenues for the Guatemala camera surveillance contract. Without that specific effect, revenue growth would have been slightly positive, at 0.3%.
The second key number here is that our adjusted EBITDA grew strongly at 4%; healthy, even with Colombia and Guatemala in our numbers. Indeed, on proportionate basis, that is on the actual economics to us a Group, our service revenue growth was 1.5% positive, and EBITDA grew 7.2% in the quarter.
The last two points on this slide are about the increasing improvement in our margins and our cash flow. Remember that we set out this year to further increase our margins and our cash flow for the year, at the same time as we reconfigure the revenue mix.
So our adjusted EBITDA margin was again strong at 36.1%, increasing almost 200 basis points versus the same quarter last year. And our equity free cash flow was $130 million, which is an improvement of almost $50 million over the same quarter last year.
So all in all, less growth on the top line in the short term as we reconfigured our revenue mix, but very strong subscriber intake, and increasingly stronger margins and cash flow, just as we said we would at the beginning of the year.
Now, let me switch to an update on our long-term strategic journey which we deem very important. It first makes sense to recap that strategy in brief.
As you know, we have undertaken what we called a twofold reconfiguration of the business. On the revenue side, we're squarely focused on quickly building a high-growth mobile data and cable business to offset the decline of the legacy voice and SMS business. Once the inflection point is behind us, this strategy will leave us with a high-growth, data centric fixed-mobile business for the future. Our strategy is actually no more complicated than that.
On the cost side, we have now activated all four levers to reconfigure our cost structure. You know them all; synergy structure for Colombia, corporate cost reductions, operational leverage and Heat, our medium-term transformation and efficiency program. We aim to do two things with that; attain short-term practical cost savings, which we're getting, and to drive a long-term transformation of our business model, as we explained to you during our call the last quarter.
So let's now review our progress on this strategic journey. On the revenue side, the early results are now quite visible in the mix evolution. LatAm mobile data and cable, the areas of strategic focus, now represents 49% of the mix. That's almost half of the business by now and significantly up from just a year ago.
And, more importantly, these businesses continue to grow. Mobile data grew 21% year on year in the third quarter in LatAm, and cable continues to grow strongly. Growth was a little slower this quarter, at only 4.8% year on year, but the residential part of the business, which we call home, grew a healthy 8.3%.
The B2B segment had a short-term pickup. First, because we stopped recognizing the revenue of the Guatemala surveillance contract, as I explained earlier. Without this, cable would have grown 6.6% and fixed B2B would have been up 4.3%.
And second, because key B2B contracts were only signed after we closed the quarter. That's just the nature of the B2B business; it's lumpier than the residential business in the short term.
So let's now dig a little bit deeper now to our results on mobile data. Here's an update on mobile data along the lines of the very same KPIs that we have been showing you for a few quarters now. These are Q3 numbers year on year for LatAm. The key points here are on the bubbles.
One, the mobile data subscriber base is up 9% for an additional 1 million data users. Two, data consumption per subscriber is up 17.4% over a year ago. Average usage is now [standing at] 1.5 gigabit per month, per user. Three, mobile data ARPU is up 13.1%, on an organic basis, to $8.70 per month now.
The combination of this is that mobile data revenue is, indeed, up 21% for the Q year on year. So mobile data is growing strongly on all metrics here.
This following slide is a graphical depiction of our mobile data strategic journey, or affectively how we are monetizing data. Across the bottom of the page, and at the left side of the same, you can see that the name of the game here is to move the large existing mobile subscriber base into data usage, and then add the value chain into LTE and into a data-centric bundle. That's where that 700,000 gain on 4G users, or LTE users, is so important.
You have now heard us talk a few quarters indeed about our focus on LTE network rollout and subscriber adoption rates. Indeed, we have been allocating CapEx, not only more efficiently, but also more effectively, by focusing our CapEx spend in LTE rollouts, cable rollouts and IT transformation. That's the focus.
In Q3 alone, across our Latin American footprint we rolled out an additional 336 LTE sites. That an 11% increase in our LTE sites. Year to date, we have rolled out 1,087 LTE sites; that's a 47% increase in our LTE sites. On the top left of the page, you can actually see the results of this focused LTE rollout. We have been ramping up the rate at which we add LTE subs. In Q3, we added a record 679,000 LTE subs, and we now have nearly 2.6 million LTE subs in Latin America.
The strategic rationale is simple and obvious; data-centric LTE subscribers have significantly higher ARPU, and that's the point in the middle column in this page.
And the right-hand column is just as important; the price per gigabit which we need to maximize to sustain long-term revenue growth. Those of you have your calculators out on the last page will have figured out from that page that, yes, there is some per gigabit price erosion on additional usage. And that is more than okay, because additional usage and subscriber volume are, indeed, driving up ARPU. And that is the key to preserve long-term health of the data-centric mobile business that we are aiming to achieve for our future.
In postpaid, we do this by bundling voice and SMS with data. As you very well know, it's been done before elsewhere. In prepaid, this success that we're getting is all about our innovation roadmap, which you see on the bottom right and we have spoken about it here in the calls.
So let's move on now to home, where the progress is steady and further ramping up. The first step, and this will continue to be so as we have articulated often, is to build and increase the size of the key home network, the [fishing pond], if you will. Because we're building so much, it actually makes sense to give you a last 12-month view here.
During that period, we have now built 671,000 HFC homes and we're ramping up into the future the speed of that build. Of this, we upgraded about 250,000 homes from old copper into state-of-the-art HFC. And we, therefore, added over 400,000 net homes to the cable footprint. As you know, into next year we're ramping up the rate of our build.
The second step is to connect those homes and subscriber households. In the last 12 months, we have added 186,000 new HFC subscriber households.
The third step is to bundle services, pay TV and broadband, and our bundling ratio remains very strong at around 1.8 times. Indeed, driven by bundled homes connected in the last 12 whole months, we added over 0.5 million HFC cable revenue generating units and about 90,000 DTH RGUs.
Lastly, but most importantly, all of these combined is driving home revenue growth of over 8% year on year.
I said earlier that ours is a twofold reconfiguration, so let's move to the cost side where we continue to make steady progress. I have often highlighted, and I just did earlier, the four levers we pull, and we just introduced it to you last quarter, our medium-term program. So we'd rather focus your attention on the continued delivery of results that this reconfiguration is helping us attain.
On the left-hand side of this slide, you see that our adjusted EBITDA margin is up almost 200 basis points from Q3 last year, so we closed Q3 at 36.1%.
And two, on the right-hand side of this slide, as you can see, the operational cash flow margin is now up to 21.7% this quarter. The key point here is that this is possible by allocating capital with efficiency and also with efficacy; that is, by focusing on the areas of strategic focus.
This improvement in our cash flow is happening while we increased the investments in the last year on 1) LTE rollouts; 2) cable rollouts; and 3) a very focused IT transformation that is a key component of the Heat project.
So in summary, short-term revenue growth is low, and that should be, as we reconfigure the revenue mix. But our long-term strategic focus is delivering on all cylinders. Our mobile data and LTE subscriber intake is very strong and we are monetizing data with over 21% growth.
Our cable build is ahead of schedule and accelerating. And we are increasingly more efficient and our investments are increasingly more targeted, all in line with our strategic plan. And we are delivering increasingly stronger cash flows, which Tim will speak a little bit more about.
And with that, I will pass on to Tim for a deeper dive into our numbers.
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Tim Pennington, Millicom International Cellular S.A. - CFO [4]
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Thank you, Mauricio. I think it's true to say that Q3 was a tough quarter. We saw continuing turbulence in Colombia and some specific issues in Guatemala. That made financial progress difficult in the quarter.
That said, we started this year with two very clear objectives. The first was to transition the business to address the undoubted revenue opportunity that we have and, as you've just heard from Mauricio, we've made a lot of progress on that.
The second; to improve margins by reducing central costs, by getting Africa to operate in cash flow positive, by transforming the LatAm cost structure and so increasing the cash generation of the Group, we've also made progress. And I think you'll see evidence of all of these things in our Q3 numbers.
So we begin by looking at the financial metrics on which we based our 2016 guidance. We highlighted in the last quarter that service revenue growth was slower than we'd hoped for at the start of the year, our traditional voice and SMS declining at a faster rate as we increase the penetration of data into the base.
In Q3, the growth of mobile data and the residential cable business continued strongly. As Mauricio mentioned, B2B was lower, partially reflecting that we've stopped recognizing income in respect of the Guatemala surveillance contract.
Adjusted EBITDA growth was slower than previous quarters on the B2B, Guatemala and Colombia, and I'll address that in the coming slides. Throughout the year, though, we've been more focused on CapEx. Last quarter, we amended our guidance to around $1.1 billion for the full year and I expect us to land in that range. Our Q4 CapEx normally runs at north of $400 million.
So let's look at the LatAm performance, largely driven by Colombia and Guatemala this quarter. Let me start first on Colombia. A recent bank report has described 2016 as one of the most challenging years for the Colombian economy so far this century. A little dramatic, but it cited higher inflation and interest rates, lower oil prices, external shocks. This has all led to a weakening GDP growth. And we've seen this turbulence and we've seen turbulence as well in the mobile market, which has made this a tough year for our Colombian business.
However, in the face of this more difficult macro and tough mobile market, we've been focusing on preserving market share and, secondly, on preserving our margins. This has led us to shift our investment focus to the fixed side of the business and I think we've been broadly successful on that strategy.
So whilst adjusted EBITDA was lower in Q3 than last year, we saw underlying margin improvement of 110 basis points. In fact, just a note about last year; in the last year Q3 2015 EBITDA, we included a non-cash gain arising from the completion of the UNE acquisition program. So that just accounts for why there seems a big shift in EBITDA year on year.
In Guatemala, the numbers were distorted by the decision we took in Q3 to stop recognizing income from the surveillance contract. Whilst constructive conversations continue to be had with government, as of today, no invoices have been settled. Unfortunately, we're not the only ones in this situation, so we've had little choice but to stop recognizing income on this contract. And this accounted for around half of the decline in the service revenue and EBITDA.
The remaining fall reflects lower international incoming, added to falls in the traditional voice and SMS. Elsewhere in LatAm, we saw a good performance from Paraguay and Bolivia, offset by a slightly weaker performance in El Salvador and Honduras.
Turning to Africa, it's been another good quarter for Africa. If you recall, we set 2016 as the year we would return Africa to positive operating cash flow through margin improvement and focused investment. I think these numbers speak for themselves; our organic revenue growth, 11%, EBITDA, up nearly 4 percentage points at 28.5%, and an operating cash flow of nearly $100 million. We are delighted by this performance and, whilst CapEx will be higher in Q4, there is now no danger of us missing our OCF objective.
Now behind this performance is continued subscriber growth. Mobile data is growing at more than 30% per annum, B2B revenues have doubled, and our MFS is up nearly 30%. Also, the performance was broadly based; it was very satisfying to see Rwanda and Senegal both rebound strongly, whilst Ghana is having one of its best years in recent memories.
Mauricio highlighted our focus was twofold, so let me spend a minute on our progress on costs, and there's an awful lot going on. To remind you that our focus this year was to bring the corporate costs into line; to drive savings in Africa that would grow EBITDA; and whilst in LatAm, we've embarked on the medium-term transformation program, that's project Heat that Mauricio mentioned, which is designed to reposition our cost structure to the revenue lines of the future.
In Q3, our operating costs were 50 basis points lower than the same quarter last year, half of that saving coming from corporate, the other half from operations. And to note that our corporate costs are now running at a run rate of about $164 million, which is much more in line with our targets.
So let me turn to EBITDA and our usual EBITDA bridge here. Just a note on the adjustments we've made for adjusted EBITDA in the quarter. Essentially, we've removed the whole impact of the surveillance contract from Guatemala; that is in both Q3 2015 and Q3 2016. In addition, we've removed the non-cash PPA adjustment that I mentioned in Colombia.
We've covered most of the movements. LatAm was $10 million lower on an adjusted basis, most of it relating to Guatemala and Colombia, as mentioned. However, we did see continued margin improvement and this quarter, we nudged just above 36 percentage points, nearly 200 basis points higher than a year ago.
You will recall that we set a margin of 35% for the Group and this is the second quarter we've achieved this. There's still more to do, but satisfying progress all the same.
Okay, a quick wrap up now on the P&L, cash flow and net debt position at the yearend. On the P&L, interest is higher than last year, higher rates in Colombia and also higher levels of gross debt in Colombia. It's worth noting that our local currency debt is linked to CPI, which has been increasing.
The others and associates were affected by usual swings on FX and non-cash fair value adjustments, whilst our minorities were higher, as we started to see Colombia swing from negative net income to positive net income. And finally, just to remind you, the discontinued operation relates to the DRC, which was sold in April of this year.
Also the usual chart on cash flow; note that this is the year-to-date cash flow and, in summary, it is on track. In fact, in Q3 it was quite a strong quarter for our cash generation. Some of that is timing issues on CapEx, but certainly not all. In Q4, as I said, we'd expect a bigger CapEx spend, but we still expect to see a swing back on working capital. So overall, the cash flow is improving, equity free cash flow for the year now $167 million.
Finally net debt, which stands at $4.2 billion, about $140 million lower than at yearend. Spectrum purchase, M&A and dividends all occurred in the prior quarters. And this left us with leverage of 1.95 times on a consolidated basis and 2.30 times on a proportionate basis, slightly lower than Q2.
So to sum up, what is it that we, the management team, are focusing on? Firstly, the reconfiguration of the top line, building cable as fast as we can, and migrating the mobile base to data and 4G data at that.
Second, we're doing this in the context of strict cost discipline, with short-term cost reductions and longer-term cost transformation. And finally, as you've seen, this is starting to show an improvement in our cash generation. And with that, we will take your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Lena Osterberg, Carnegie.
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Lena Osterberg, Carnegie Investment Bank AB - Analyst [2]
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One question on -- I'm happy to see so much data subscribers getting on to the networks. So I was wondering if you could provide a little bit more statistics on what's the average data usage per subscriber per month. How has that evolved year over year? And also maybe on the price per gigabyte and also how that's changed from last year?
And then also, Tim, I think you mentioned that you are approaching your long-term target level for corporate costs. How much further do you think you can take them down?
And then also on Africa, you have the strategic review ongoing. Could you give some insight on how long you think that review will continue?
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [3]
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Thank you very much. Why don't I take the one on data and a little bit on Africa, and then I'll pass it over to Tim to [complement] and also address corporate costs.
On data, indeed we're very pleased and we've given you quite a bit of detail last quarter and this quarter on data usage per subscriber, which you can see on the slide is healthily up. On mobile it is about 1.5 gigabits per subscriber per month, which is a healthy use and it's going up steadily.
Importantly, that's going up and the volume of subscribers, as well as the usage per subscriber, is going up. You see that our data revenues are increasing as well, which is obviously very, very healthy. You can do some math and factor in too our [network] business and you will see that it's pretty healthy. We're happy to have some of that while retaining price discipline, because we play the game, as we should, price elasticity.
We want usage up, price a little bit down, but the net result [shows that] higher ARPU per subscriber increased with the volume of subscribers. In fact, we've been very, very disciplined and, as I said earlier, if we are able to continue to do this, then this business that we want to take with us into the future will be a healthy business.
Moving on to Africa before we talk about corporate costs, we're pretty pleased with our performance in Africa. As Tim said, we set out an objective for this year to turn the Company in Africa to be operating cash flow positive. We've accomplished and actually surpassed that, so we're happy to have delivered on that.
Effectively, what we've done is we've aligned the cost structure to the revenue base and we've done that by realigning our strategic focus on the [high] value customer base, deploying fiber in areas where it makes sense to take advantage of some B2B opportunities that are flourishing. And by monetizing our strong investment that had been done previously on the network. As you recall, this is what we've always called our Plan A. We felt pretty good now that we are definitely executing on track on it, that we can be pretty confident on it, going forward.
We will, as I said before, weigh any options that we may have strategically around any asset in Africa [at the answerability] to continue to execute on this Plan A. It's just the way we've always articulated we're going to focus on Africa.
Tim, I'll pass it over to you now.
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Tim Pennington, Millicom International Cellular S.A. - CFO [4]
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Thanks. On corporate costs, I think we've generally got them now back into the right sort of ballpark and they're round about 2.3%, 2.4% of revenues. I don't think there's any real magic as to what the right level is, but I feel this is a more sustainable level for the business, going forward.
I wouldn't want to promise that we've got a bit change to that run rate number than we've just published. I think that's probably getting the business to broadly where it ought to be. I don't think I'd add more than that. Is that [clear] Lena?
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Lena Osterberg, Carnegie Investment Bank AB - Analyst [5]
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You provide the data consumption for LatAm, but could you maybe say something -- I was thinking more about the [Group] or could you say something more specifically about Africa, just so we'd know what the potential is in Africa?
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Tim Pennington, Millicom International Cellular S.A. - CFO [6]
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Yes, Africa's at a much earlier stage, so the Group number, if you like, is almost the same -- I think probably is exactly the same as the number we have for LatAm, so it's early stage for Africa.
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Lena Osterberg, Carnegie Investment Bank AB - Analyst [7]
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Thank you.
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [8]
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Remember Africa's about 10% of the business so --
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Operator [9]
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Andreas Joelsson, DNB Bank.
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Andreas Joelsson, DNB Markets - Analyst [10]
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Just an accounting question on how you do your allocation of mobile revenues between the legacy and the new part being data, in terms of when you offer bundled offerings?
And secondly, if you could reiterate just how much you see Heat contributing in 2017?
And finally, on Colombia, your overlook, how do plan for the market development in 2017 when it comes to, for instance, competition, and how long can you continue to be disciplined without moving your prices in line with competition? Thank you.
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [11]
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Okay. There's three questions in there so, Tim, maybe I'll leave the accounting one to you and perhaps a little bit about Heat, and then I'll move on over to Colombia.
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Tim Pennington, Millicom International Cellular S.A. - CFO [12]
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Yes, let me just deal with the accounting one. Bear in mind, Andreas, we still have -- the majority of our customers are prepaid customers. To the extent we have postpaid customers they generally -- they're not bundled at this stage. That is an opportunity for us for the future. And to the extent we do have bundled and we do have some bundling, we just apply standard accounting allocations which is linking it to usage. So there's nothing unusual in that. But I would emphasize to you that we have very little of that allocation at this point in time.
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [13]
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And on Heat, which we have a very specific focus, I think the better update, since it's a project that we just announced last quarter, is to give you an idea of the things that are coming in line the fastest, or the soonest, if you will, because it is a medium-term transformation project.
And the three areas that we're making a lot of early progress on are IT transformation, which as I said earlier is one of the areas we want to focus our CapEx efficiency and efficacy, by now we have moved five of the Latin American businesses to our new [CVS] platform. This is a convergent platform with an OTT structure in place which obviously allows us to be the company that, from an IT point of view, is prepared for the future.
The second area where we're making a lot of early progress is launching managed service programs. That's outsourcing our network maintenance and monitoring and becoming a CapEx light company, if you will. We've already announced, I think over the last six months or so, that we have launched those programs in El Salvador, in Honduras, and we just did so in Colombia a couple of weeks ago.
And the third area where we're making a lot of progress on Heat early on is our 4PL supply chain initiative, which obviously yields effectively working capital savings on a lot of efficiencies across the system. That's up and running already for mobile, and the next stage for us is to move that on to cable.
Hope that gives you a little bit of flavor for what Heat is all about and the kind of initiatives that are coming into the system.
The Colombia question, again I'd rather tackle it from a big picture point of view, if you will, rather than timing on when things will turn around in Colombia. There's no doubt that the country is undergoing a quite difficult year at the macroeconomic level, Tim highlighted that in his prepared remarks, and that, indeed, is a short-term concern.
I think most people in Colombia are pretty positive about next year. But looking out strategically, I think when we think of Colombia we did construct our business in Colombia in effectively three business segments, because in Colombia is where our business is the most balanced, as Tim was indicating. It's about 50% mobile and about 50% fixed. So the three segments, if you want to think about them in that way, are worth spending a little time on.
The first is mobile where, indeed, we have a short-term headache, no doubt about that. The mobile market in Colombia, if you followed it closely, has as a whole decreased in nominal terms about 9% in the last 12 months. We've held market share and we will continue to do that by having a very focused, very digital based, very 4G based strategy.
But holding market share in a declining market in the short term it's nothing other than a false comfort. The fact remains in Colombia that the very dominant player in the market continues to aggressively undertake commercial and pricing practices that take advantage of that position. There should be clarity on that.
We are seeing price discrimination in the mobile pricing between geographic regions within the country. We're also seeing aggressive data pricing; they are transferring that dominance from the mobile voice segment to the mobile data segment. And the result of that you should know, and this is a matter of public record in Colombia, that we have now filed antitrust law suits and complaints against the dominant player and their behaviors in the Colombian market with the Colombian authorities.
And the role, of course, is to protect the long-term health of the market and consumers in the long term. The Colombian corporate is also reviewing pending legislation precisely aimed at preventing such abuse of a dominant position. In the meantime, of course, we will continue to hold market share, be very focused on mobile and duke it out until such a time as things, indeed, come back to health and normality.
But the second part of this is, the fixed part of the business is very robust and half of that is our B2B business. As I said earlier, we had some delays in signing contracts in Q3, but that's just a matter of timing because we have now signed those contracts.
Our B2B business in Colombia is growing healthily, as we use it, going forward, to provide skill and expertise to our B2B business everywhere else in the region. It's a fairly large business, a highly sophisticated business that we have in Colombia and we are beginning to see the benefits of extending that expertise into Central America. Of course, its growth will continue to benefit from that cable build as we are able to deploy more B2B business services also for an SME.
And the other half of the fixed business is the residential cable business. As you see growth there has been very strong; we're building, we're upgrading the old copper homes, we're increasing the size of the footprint, we've net HFC additions in Colombia, and subscribers are coming in with increasing outputs. So we're very bullish on the long-term prospects of our cable build in Colombia.
This year we also launched DTH in Colombia. A couple of weeks ago we launched our Netflix partnership there and we launched, or we're trying to launch, our next generation TV product next year in Colombia on the back of the deal that we did with Tigo earlier this year.
So overall, we're pretty bullish on the fixed market in Colombia and the reason is, as I've said often because it's important not to lose sight of the fixed opportunity in Colombia, it's a population of about 50 million inhabitants, so about 12 million homes depending on how you do the math. And as a result of that, our medium-term prospect of our cable plan in that country that should be around 8 million homes passed. And we currently are only at around 4.5 million, so meaningful opportunity there in a business that is growing. That's the full story on Colombia in a couple of minutes.
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Andreas Joelsson, DNB Markets - Analyst [14]
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Thank you very much. Thank you; it helped a lot.
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Operator [15]
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Thomas Heath, Danske Bank.
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Thomas Heath, Danske Bank - Analyst [16]
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Few questions, if I may? To follow up the good discussion on Colombia, if you could say something about the overall competitive climate in Guatemala? And also perhaps a little bit on the macro, given all the political terms that have been there, and what the outlook is for that second very large market?
Also for Guatemala, on dividends, you've changed the accounting or your procedures for upstreaming cash from the operating company. Just if you could help us understand how much minority payments we will have to Guatemala minorities in Q4?
And then thirdly, if there is anything new on licenses either in Q4 or next year if there is any license CapEx coming up? Thank you.
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [17]
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All right, let's go in order. I'll take the Guatemala competitive bigger picture situation, and Tim will have to help me out with the dividend, because it is, indeed, interesting, and we'll talk a little bit about licenses.
I've been giving long answers today, so I may just as well give you the full answer on Guatemala. In Guatemala, there is an element of simple macroeconomic matters. The government is extremely constrained fiscally. The investment climate is heavily influenced by the ongoing political turmoil there.
As a result of that, there is a big element of macro headwinds. And specifically, the constrained fiscal situation of the government is causing the effect on the surveillance contract that we discussed earlier. So that's the macro element in Guatemala, which is impacting results.
The second element is the reconfiguration of the revenue mix. That in Guatemala we're beginning to see as picking up. It's the decline of the legacy voice in SMS business, which in Guatemala has an element of additional impact which is the relatively important long distance voice business, that [is upsetting], and obviously complicates the decline of the legacy voice and SMS business.
Importantly, however, the cable growth in Guatemala is increasingly very strong, and so is our focus on B2B, which remains a very small part of the business there, around 10% only. And mobile data in Guatemala is growing very, very, very strong. So again, there's a reconfiguration of the revenue mix. So in Guatemala it is macro and revenue reconfiguration, not a competition issue, or not significantly a competition issue of this matter. And that's a meaningful difference with regards to Colombia.
Passing over to Tim, on the dividend.
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Tim Pennington, Millicom International Cellular S.A. - CFO [18]
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Yes, the dividend, we shouldn't expect to see any difference, actually, in the dividend. It's just a timing issue. We've moved from monthly upstreaming to an annual upstreaming. So there will be a timing difference, but that's all there is there.
And I think on licenses, on new spectrum, there's a little bit in the pipeline, Colombia, 4G 700, Guatemala 4G, but nothing is specific at this particular time, so we've got no visibility on real timing on any of those things. Probably unlikely to be 2016 at this stage, but we don't determine the timetable on those.
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [19]
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You know when it comes to license process, there's two distinct stages. One is the preparatory discussion, political conciliation around the process. And when the process is actually to launch formally, [in no country] are we on that second stage yet.
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Thomas Heath, Danske Bank - Analyst [20]
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Okay, that's very helpful. And on dividend payouts, should we expect the level of 2015, for the full year then, in dollar terms, because I believe the year before then was boosted a little bit by one off payments?
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Tim Pennington, Millicom International Cellular S.A. - CFO [21]
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Yes, it was. There was a special dividend from Guatemala that year. I think we basically said that we expect it to be around [120, 150] for this year, so I think that's the level we should see. The minority -- I'm sorry, I'm talking about the Group as a whole, minority dividends, there's shifting sand in our flows. Colombia has started to pay dividends, and we ceased sending money down to Africa. So generally, there's been some shifting sand around there. But around the [120, 150] I think is the expectation for the full year, for us.
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Thomas Heath, Danske Bank - Analyst [22]
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That's very helpful. Thank you.
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Operator [23]
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Michel Morin, Morgan Stanley.
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Michel Morin, Morgan Stanley - Analyst [24]
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Mauricio, I was wondering if you could update a little bit on the prices in Colombia around ETB. I know that you've stated publicly that it's something that you would be interested in looking at, at least. So if you can update us on where that entity is, in terms of their own process and your level of appetite at this stage? Thank you.
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [25]
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Sure. So from what we understand, the [Candia] and the management team at ETB is in the process of engaging with [Southside] Investment Bank, and as a result of that engagement, a more clear timeline would be put on the process. It's definitely is a mid to late 2017 moment, given there is a very organized, very structured process, and it's been put in place for effectively what is a privatization of that asset. So we continue to monitor, we continue to pay attention to how that process develops. But it is a little delayed from its initial timeline.
The asset itself, we publicly have said, is an asset that we would look at, with interest, although it's a plain old telephony asset, with all that that implies, in terms of copper. It does have some fiber build in interesting areas, around Bogota, or in Bogota, I should say. But 1 million or so fiber homes that are relatively low penetrated, and that is something that we'd like to do quite a bit of diligence on, and better understand how it fits our build prospects in Colombia.
As I said earlier, there's a lot of homes that can be built in Colombia, and it's a very good coverage [fiber] build. That's how we look at the asset, Michel.
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Michel Morin, Morgan Stanley - Analyst [26]
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Great, thank you very much. And then just on the underlying trends, Mauricio, just to make sure I understand. So is the situation on the mobile side still deteriorating at this point, or is there any sense of seeing some stabilization?
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [27]
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Well, I'm the eternal optimist and I think we've seen a little bit of stabilization. Don't know if it will stay there for long or not, but I tell you this, our market share is holding pretty strong, and we've found a way to protect our [cost growth] our margin in Colombia. And I can tell you quite clearly that we intend to duke it out, because the opportunity in Colombia is pretty strong.
We remain very committed, and I'm a strong believer that the situation undergoing there is not healthy for consumers, and it's not healthy for investment or for the market in the long term. So I will believe the authorities will take issue with it, and help resolve it, hopefully sooner rather than later.
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Michel Morin, Morgan Stanley - Analyst [28]
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And has the other competitor also filed any antitrust complaints, or are you the only one complaining?
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [29]
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They've been very vocal on the same issues; very, very vocal.
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Michel Morin, Morgan Stanley - Analyst [30]
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Great, okay. Thank you very much.
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Operator [31]
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Johanna Ahlqvist, SEB.
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Johanna Ahlqvist, SEB Equities - Analyst [32]
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Three questions, if I may? First of all, if you can comment anything on the situation in Tanzania, if things are as tough as it was in Q2?
And then if you can comment anything on ARPU development on the cable side, going forward, given the strong intake, if you expect some ARPU dilution or not?
And then thirdly, if I may, a detailed financial part, that how we should think about taxes and net financials for the full year 2016? Thank you.
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [33]
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There's a theme here with triple questions, so I'll take a note; Tanzania, cable ARPU and taxes. Tanzania, the competitive situation in Tanzania remains difficult. We're used to competition everywhere, but here's the key difference with regards to Tanzania. It's got a lot of volume growth still in the system. So it balances out the competition with meaningful pickup in subscriber intake and also the ability to continue to bring data subscribers. So that balances is out and that's why you see Tanzania continue to grow the revenue line.
And bear in mind that, as I said earlier, what we've done in Africa is basically align the cost structure to the revenue scale of the business, so that we now have leverage in the business.
Cable ARPU; if you've seen and done the math, we are actually not only holding household ARPU, but actually there's a pickup in ARPU in the last 12 months. And that is a result of reshaping some of the countries where the household ARPU is [I think] very, very low, including Colombia. So in the short term, medium term they're holding ARPU, but penetrations are still very, very low in these markets because, historically, specifically pay TV ARPU has been very low.
Going forward, indeed, as we build further and as we penetrate by definition into lower socioeconomic segments of the income distribution pyramid, and as the network penetration increases, then, of course, the ARPU on average will tend to trickle down a little bit, because it is a game of pairing products for the different socioeconomic segments.
I hope that gives you a lot of color there on how we evolved in the long term.
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Tim Pennington, Millicom International Cellular S.A. - CFO [34]
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I think on taxes we're not really expecting to see any significant difference in 2016. So our tax charge, I think we've said in the past, somewhere between $250 million/$300 million, and we're in line to get that. It's very difficult to pick that trend up from the quarter-on-quarter movements either on a cash or a P&L basis.
I think, having said that, we are wary of tax in the markets in which we operate. We have seen tax increase and, in fact, in Colombia there is an increase in the VAT, and specific taxes on communication, which haven't been implemented yet, but which will be implemented.
We saw the impact of the CESC tax in El Salvador. These are all taxes on our operations, which generally don't fall into the tax line, that hit us in volume terms in the revenue line or otherwise. So we are seeing some moves there which make us a bit more cautious going into 2017.
Johanna, is that sufficient for you?
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Johanna Ahlqvist, SEB Equities - Analyst [35]
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Yes. Thank you very much. Absolutely.
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Operator [36]
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Luigi Minerva, HSBC.
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Luigi Minerva, HSBC Global Research - Analyst [37]
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The first one is on the change that you are driving in mobile data with a, hopefully, higher contribution from new value-added services and data. I was wondering if that implies, necessarily, that your business has to become much more postpaid than prepaid.
And so consequently, what would be the impact on the cost of running the business in terms of promotions, handset subsidies? I appreciate every market is a bit different, but maybe you can take the two larger market as an example on how you would deliver this?
And my second question is really on the service revenue trend, which is probably the key concern. Again, many moving parts, macro, regulation, competition. Should we extrapolate what we are seeing and, therefore, expect further deterioration in the next two/three quarters? Or is there any reason to think that this is for this quarter is the trough? Thank you.
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [38]
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Thank you, Luigi. So on number one, and Tim feel free to jump in and contribute and help us out there, the change in mobile data, indeed, we were very pleased with the evolution that we're getting there, the traction that we have; as I said earlier, on LTE subscribers and data subscribers overall, the network build.
But as you can imagine, we're preparing the business, indeed, for a more data-centric opportunity and that has to do a lot with Heat. So whether it's postpaid or prepaid, we are preparing our business to be increasingly digital; not only in the way we deliver the service, but in the way we take care of our customers. So digital care, digital distribution, digital point of sales.
And you can expect that a lot of our innovation, going forward, as part of Heat, is going to be on those fronts, so that we provide digital care, digital distribution, more digital advertising and even more digital distribution channels. So that, regardless of whether it is postpaid or prepaid, our cost structure is in line with everything we do around digital.
Having said that, we do like and we do foresee a little bit more postpaid. But if you see a lot of the innovation that we're driving on prepaid, it's precisely to have our subscribers be more focused on digital consumption. We've talked the last quarters about [all-you-can] app. We've now launched that in El Salvador and we're pretty happy with the progress there.
If you recall, all-you-can app is basically an all-you-can-eat bundle of apps that our customers can select for a limited time. And that's a prepaid proposition which takes us out of the price sensitive, price per gigabit game that is so common on prepaid. It gives our customers choice on what they want and it allows us to price according to bandwidth consumption per app and eventually even do dynamic pricing.
And the early results in El Salvador are pretty exciting. We're getting pickup of around 10% in data usage and general ARPU when we introduce these kind of innovations. So the change in mobile data is about product, it's about delivery, it's about service, it's about distribution. It is all-encompassing and that's probably the more important big picture answer that I can give to you on that point.
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Tim Pennington, Millicom International Cellular S.A. - CFO [39]
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Mauricio, let me just add also on subsidies, which might be where you are coming from, Luigi, as well. Subsidies is not a big part of our market. Generally, the subsidies that we incur are on the B2B side and the only place where there's been significant subsidy was Colombia which, as you are aware, I won't repeat now because of the regulation there, has become a lot more complex as a market. We don't see that as impacting us substantially.
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [40]
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Good point. There's a lot more, while we are on the point here, there's a lot more postpaid in our business than you would think. If you look at our business as a whole, and you add the B2B, the cable which by definition are postpaid, and the fact that on mobile itself postpaid carries a larger share of the revenue, even though it doesn't on the actual number of subscribers, if you add all of those three things together, somewhere around 55%, and Tim can correct me, maybe a little bit higher than that, of our business is actually a subscription-based revenue, rather than a prepaid or transaction-based revenue. That's important for you to keep in mind.
Moving on to your very other important question on the bottoming out of the trend here on the revenue. It's a tough one. This I can tell you with all certainty; there is an inflection point, by definition, and we are now 50% of our business, as I showed earlier, is in high growth strategic areas that we want the business to keep for the long term because of high growth; mobile data and cable.
But I'd rather shy away from short-term predictions, whether it's going to be this quarter that we saw it bottom out, or next quarter or the quarter after that, because no doubt we're going to get it wrong. So our focus is and has been, rightly so I think, on the long-term journey that we're articulating to you and showing you how we consistently deliver results on that long-term journey. And we'll continue to execute on that strategy because the result that we're having over the last year are pretty consistent and pretty pleased with those.
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Luigi Minerva, HSBC Global Research - Analyst [41]
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Okay. Thank you very much.
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Operator [42]
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Bill Miller, Hartwell.
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Bill Miller, JM Hartwell - Analyst [43]
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Could you, since you're about to get to the 8 million homes passed, could you give us what number you think could be achieved in the next three to five years, given the maximum market share and what it will cost in CapEx to get there?
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [44]
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Thank you, Bill. I think our target number was 10 million. I think last quarter we moved it up to 12 million homes passed, so 8 million will go up to 12 million, medium term. We've ramped up the build significantly; I articulated that we're now doing somewhere around 700,000 run rate per year. We've cranked up the machine. We're building just about in every country, so we've got builds going on in almost all of our markets in Latin America. And we're shooting for a build of around 1 million a year. That's where we think where the machine is at full capacity. So that gives you an idea of how bullish and how big we think the opportunity is.
Now if you think of this in terms of the market available, I think I articulated the numbers for Colombia. But today, as a Group, in Latin America we passed somewhere around 26 million, which obviously, given that there is household formation in our market, if you fast forward a few years you can make that number 30 million. So 12 million out of 30 million gives you an idea that we would be aiming to cover somewhere around 40% of the homes available in our markets. I think that gives you an idea of the size of the build; 50% pickup, and yet we would only reach 40% of all the homes in our markets.
The cost of the build, and that's a great question because I've often made the point of comparison here, our ARPU per household is around, I could be off by a dollar or two here, because I'm speaking out of memory, but $25ish and I think we've shown these numbers before. But the cost of a build in Latin America we've often said is about $100 per home passed. So that's a little off the cost in a developed market and the reason for that is threefold.
The cost of a build is -- the economics of a build are determined by three things. One is the density and these are multi-dwelling units in highly populated urban areas that we're building. [Tagus Galba], Bogota, all those are very, very dense areas and obviously, the cost of the build is a function of its density.
The second element is simply the fact of the plant being aerial versus underground. And all the plant we build is aerial, which is a fraction of the cost of building an underground plant, like is the case in most developed markets.
And simply, lastly, the cost of labor. Labor is an important part of a cable build. It may be state-of-the-art fiber that we're building, but it is deployed with an intensive use of labor, and that is relatively cheaper in our markets.
All of those three things put together give you $100 per home passed and the math is easy to figure out that this will certainly be a very manageable CapEx spend within our cash flow profile and can certainly be financed out of our internally generated cash flow, like we've been doing this year.
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Bill Miller, JM Hartwell - Analyst [45]
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Great. Thanks very much.
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Operator [46]
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Thank you. We have no further time for any questions. I would like to hand the call back to Mauricio Ramos. Please go ahead.
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Mauricio Ramos, Millicom International Cellular S.A. - CEO [47]
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Well, thank you very much for your time and focus today. As I've said now often, we are very, very pleased with the progress we're making on our strategic journey. We are monetizing data, we are building cable, and the subscribers are coming in. Those two things together are allowing us to now confidently say that we are reconfiguring the revenue mix in our business and you've seen the early progress.
And the second part of our reconfiguration is also coming through quite well with a lot of cost cutting and long-term plans that further increase the profile of our cash flow. So we're very pleased with the progress we're making on the twofold reconfiguration, and we look forward to showing you more progress after our Q4 call.
Thank you very much for being with us today.
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Operator [48]
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This concludes Millicom's financial results conference call. Thank you for your participation, you may now disconnect.
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