AMX vs Telefonica: A Darwinian commentary.

Posted on Tuesday, July 31, 2018

America Móvil and Telefonica are the two great competitors in Latin America, battling for supremacy in almost every major market. Both recently published their 2Q18 results so I did a quick comparison, hoping to see something illuminating.

They are not perfect analogs; 85% of AMX’s wireless subscribers and over 92% of its fixed line and pay TV subscribers are in the region vs 78% of Telefonica’s mobile subscribers and 65% of fixed line and pay TV.  However, they are as close to analogs as we can get in the region.

In 2Q18, AMX had 279.0M mobile subscribers and 83.4M fixed line and pay TV subscribers; Telefonica had 271.9M mobile subscribers and 66.6M fixed line and pay TV subscribers, so qualitatively if not exactly equal in size.

The Mexican company reported revenues of US$13.8B (MXN 257.3B) with an EBITDA margin of 28%. It declared a loss of US$12.7M, attributed mostly to currency fluctuations.

Telefonica reported revenues of US$14.8B (€12.1B) with an OBITDA margin of 35% (ask your accountant what the difference is to EBITDA) and a net profit of US$1.3B. It certainly looks like those European subscribers make a difference. That said, the company reported that Brazil’s EBITDA margin was just over 50%, higher than the group average, higher than that of Spain.

Both have their ‘Good times / Bad times’ in the region. America Móvil’s highest EBITDA margin in the region this quarter was in Colombia (40.8%) and its lowest was in Chile (17.9%). For Telefonica, its best was obviously in Brazil and the worst it reported was, unsurprisingly, in Venezuela (-6%). AMX either fortuitously or wisely stayed out of that mess. Setting Venezuela aside as a special situation, TEF’s worst performer was Mexico with an 18.6% OBITDA margin – qualitatively, at least, similar to AMX’s worst case.

There are certainly differences but neither clearly dominates the other, at least at the global level. America Móvil has more subscribers and has unusually high market share in Mexico and Colombia. But Telefonica has more revenue and more EBITDA, despite fewer subscribers.

Their stock price performance has moved back and forth, Telefonica having a harder time of it lately but not that much worse than AMX. See this Yahoo Finance chart.

Source: Yahoo Finance, 2018

I have only given the 2Q18 snapshot of Key Performance Indicators but if I looked at financial variables like earnings or EBITDA margins over time they would likely weave in and out like the stock market chart (which, at least theoretically, should reflect these underlying KPIs).

And yet I struggle to think of two companies, competing in the same market (essentially) that would be more different, from strategy to organizational structure to culture. I keep thinking that one of them has to show the way, that this approach is better than that approach, that this culture is better than that one.

But it does not work out that way.

Perhaps the best explanation is that companies have personalities, call it DNA maybe, that even transcends changes in CEO (because the Board picks candidates that reflect that DNA). America Móvil has had only one CEO, Daniel Hajj, so its DNA is its CEO. But the business environment changes. Sometimes the DNA is well adapted to the environment; sometimes it isn’t.

In a Darwinian sense, some DNA is adapted to some business climates and other DNA’s to others. When the environment suits AMX’s DNA, it does well. When the environment suits that of Telefoncia’s, it does well.

Darwin’s “survival of the fittest” suggests that one company’s DNA will be better adapted over the long run than the other’s. Over the past 15 years or so, neither one has clearly dominated the other.

Maybe the environment shifts every five years or so and so the ‘best’ company for Latin America also shifts.

A hypothesis that needs more study than one quarter, but interesting to think about.

 

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