UPDATE 1-Expenses cause Brazil's Cielo to miss profit estimates

Tue Jan 28, 2014 6:01pm EST

By Guillermo Parra-Bernal and Aluísio Alves

SAO PAULO Jan 28 (Reuters) - Cielo SA, Brazil's largest card payment processor, missed profit estimates in the fourth quarter as a seasonal surge in marketing and sales expenses offset the impact of rising transaction volumes and higher financial income.

Barueri, Brazil-based Cielo said in a Wednesday regulatory filing that net income taking into account minority interests totaled 722.8 million reais ($297 million) in the quarter. The number, which is unaudited, came below an average profit estimate of 737 million reais in a Thomson Reuters poll of five analysts.

Profit rose 4.5 percent from the third quarter, and 16.2 percent from the same period of 2012, the filing said. Cielo agreed to pay shareholders a total 960 million reais in dividends, the filing added.

The results underscore the challenges facing Chief Executive Officer Rômulo Dias. He is contending with increased competition from incumbent rivals and newcomers, accounting changes that will make earnings-reporting more volatile, and eroding operational profit margins.

As a result of the higher expenses, earnings before interest, tax, depreciation and amortization fell below 50 percent of net revenue for the first time since the company went public. The indicator, a gauge of operational profitability known as EBITDA, posted a margin of 49.2 percent in the fourth quarter, compared with 53.5 percent in the prior three months.

EBITDA came in at 912.7 million reais, below the poll's 954 million reais estimate. The poll predicted an EBITDA margin of 51.8 percent for the fourth quarter.

Net revenue rose 6.6 percent on a quarterly basis to 1.85 billion reais, below the poll's estimate of 1.88 billion reais. The revenue gains were fueled by a 17 percent jump in transaction volumes for debit and credit cards. Revenue from merchant acquiring receivables rose 13 percent, the filing said.

Marketing and administrative expenses soared because of seasonal reasons, as predicted by the analysts in the poll. In the quarter, Cielo began booking fee revenue from interest-rate-free installments at the moment of the purchase, an accounting change that may make earnings more volatile going forward.

Sales, general and administrative expenses totaled 313.5 million reais in the quarter, a jump of 25.4 percent from the third quarter of last year, the filing said. Sales and marketing expenses led the rise with a 127 percent jump sequentially, while payroll costs rose 6.1 percent, Cielo said.

Management and investors will discuss results early on Wednesday at a conference call that might focus on competition issues, pricing and volume trends, and the impact of the soccer World Cup in June on revenue, according tot he poll.

Analysts said that Cielo might have lost customers to Itaú Unibanco Holding SA's Rede unit in the quarter.

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