Brazil's Cielo sees competition gaining steam next year

Reuters

By Guillermo Parra-Bernal and Natalia Gómez

SAO PAULO, Nov 5 (Reuters) - Cielo SA, Brazil'slargest card payment processor, faces more competition next yearas the use of debit cards surges and rivals step up efforts togain market share without weighing down pricing, Chief ExecutiveOfficer Rômulo Dias said on Tuesday.

While the third quarter showed mild signs of competitionbetween Cielo and the merchant acquiring units of Itaú UnibancoHolding SA and Banco Santander Brasil SA that were reflected on lagged volumes, the fight for new clientswill intensify next year, Dias said on a call to discussquarterly earnings.

Itaú's Rede and Santander Brasil's GetNet merchant acquiringunits are becoming more aggressive in line with policies bytheir parent companies to expand fee income and get theirclients to spend more on financial services. Itaú is seeking tobridge Rede's gap with Cielo, especially in terms of newtechnologies, e-commerce and mobile payments.

"Santander Brasil continues with the same policy, and Redeis hiring more people to target consumer segments. More steps inthat direction is making the outlook a lot more challenging forall of us," Dias said.

Rede wants to grow market share primarily focused on animproved service, the use of stronger relationships andinnovative product offerings. In the opinion of Bank of AmericaMerrill Lynch analyst Jorg Friedemann, while "Rede's speech isbenign, we prefer to adopt a conservative stance on competitionrisk."

The analysts added that should Cielo's rivals step upefforts to gain market share, "the damage to Cielo could be muchhigher given the company's scale." A series of investment banks,including Bank of America, changed their targets andrecommendations on Cielo, most of them because of the threat ofcompetition to the company's profits.

Cielo has about 57 percent of the $400 billion-a-yearindustry, compared with Rede's 38 percent and the 5.5 percentowned by Santander Brasil's GetNet. Cielo's dominance hasdeclined marginally over the past year, from about 57.5 percent,according to industry figures compiled by Thomson Reuters.

Shares of Cielo fell from an all-time high, shedding as muchas 2.2 percent on Tuesday. The decline in the stock came even asthird-quarter net income beat analysts' expectations aftertransaction volumes surge and strict expense controls helpedoffset a jump in debt-servicing costs.

EBITDA MARGIN

The Barueri, Brazil-based company posted net income of 691.2million reais ($309 million) in the quarter. That was above netincome of 674 million reais expected in a Thomson Reuters pollof six analysts.

Cielo carried out 113.2 billion reais worth of transactionsin the quarter, driving net revenue 8.4 percent higher to 1.74billion reais. The poll expected revenue of 1.77 billion reais.

Earnings before interest, tax, depreciation andamortization, a gauge of operational performance known asEBITDA, totaled 929.7 million reais in the quarter. The pollexpected 959 million reais in EBITDA. One of the signs that competition is weighing down Cielo'sperformance is the decrease seen in the EBITDA margin, or EBITDAas a proportion of net revenue, to 53.5 percent at the end ofSeptember from 64 percent in the prior three months.

Dias said that the company has no plans to step upacquisitions and that its plan in Brazil is to grow organically.

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