The Profit Paradox of Millicom: Growth at Any Cost?

Millicom’s latest quarterly results are a study in contrasts. Revenue jumped 59.4% year over year to $2.18 billion, with Adjusted EBITDA crossing $1 billion for the first time in its history at $1.01 billion. However, net profit attributable to company owners plummeted 83.9% to just $109 million.

The company’s performance looks like a textbook example of growth hacking, where companies use acquisitions and expansion to boost top-line numbers regardless of profitability. Organic revenue growth was a mere 4.3% in the quarter and 4.2% for the first half, meaning most of the reported increase can be attributed to recent acquisitions in Colombia, Ecuador, and Uruguay.

Despite aggressive expansion, Millicom is managing to maintain its cash flow and reduce leverage. Equity free cash flow hit a quarterly record of $327 million, up 50.1% from last year, while leverage fell to 2.73x even after absorbing new acquisitions. Management has backed this signal with concrete action: they’ve declared a $3.00 per share dividend and raised their full-year equity free cash flow guidance from at least $900 million to around $1.1 billion.

Millicom’s growth story looks compelling, especially in the short term. The company’s ability to generate strong revenue and cash flow, even as it absorbs new acquisitions, is a testament to its financial acumen. However, the divergent numbers between EBITDA and net profit should give investors pause. Capital spending is climbing too quickly, up 51.2% in the quarter and 48.8% for the half – outpacing organic growth rate and running ahead of what it’s meant to fund.

Millicom’s acquisition spree has become a double-edged sword. While the company has successfully integrated its new markets, with Ecuador and Uruguay reaching margins and cash generation broadly in line with the Millicom average, Colombia and Chile are still showing early signs of improvement on the same path. However, the recent acquisition of Coltel in Colombia saw the company take on significant debt, a reminder that newly acquired portfolios need active management to avoid financial pitfalls.

The divergence between EBITDA and net profit is not unique to Millicom. Many companies in the industry have struggled with profitability in recent years due to factors like high capital spending, increasing competition, or changes in regulatory environments. Investors should be cautious of this trend and consider whether Millicom’s growth story justifies the potential long-term risks.

As Millicom continues to absorb new acquisitions and expand into new markets, it will need to carefully manage its capital spending, debt levels, and balance sheet. Investors would do well to keep a close eye on these developments, especially as they consider whether to ride out the short-term growth story or take profits now. With profitability hanging precariously in the balance, Millicom’s future will be shaped by its ability to navigate this profit paradox.