UPDATE 1-Brazil's Cielo sees costs per transaction easing next year

Wed Jul 30, 2014 12:06pm EDT

(Adds details, context, comments from CEO Dias, share performance)

By Guillermo Parra-Bernal

SAO PAULO, July 30 (Reuters) - Cielo SA, Brazil's largest card payment processor, expects still-robust volume growth and technology investments to help bring down costs per transaction next year, following a recent spike, executives said on Wednesday.

But shares of Cielo fell 2.6 percent to 43.10 reais, their biggest intraday tumble in more than two weeks, after its CEO did not lower the unit cost estimate for this year.

On a conference call to discuss second-quarter results, Chief Executive Officer Rômulo Dias said Cielo still expected unit transaction costs of 0.75 reais to 0.78 reais this year, but he expects them to end next year below that range.

"That's doable, that the actual number next year ends up slightly below our soft guidance for this year," he said.

Cielo's struggle with a surge in costs and expenses was the main reason the Barueri, Brazil, company missed second-quarter profit estimates on Tuesday. It is investing heavily in information technology, coping with rising wages and starting new projects to preserve its leadership in Brazil's $300-billion-a-year card industry.

Credit Suisse Securities analyst Victor Schabbel said concerns could arise if Cielo repeats the so-called soft guidance for unit transaction costs. The indicator rose to 0.73 reais in the second quarter from about 0.71 reais in the previous three months.

Schabbel said he expected costs per transaction to end this year at 0.72 reais to 0.74 reais.

Costs per transaction climbed 7.5 percent on a quarterly basis and 14.5 percent on an annual basis as maintenance and operating costs of the point-of-sale terminal base jumped. Sales, general and administrative expenses rose 27 percent on an annual basis, offsetting a 14 percent jump in net revenue.

"We reckon cost cutting could be a key driver of earnings expansion going forward," said analyst Eduardo Rosman of Grupo BTG Pactual in São Paulo.

NEW PHASE

Net income at Cielo fell 1.1 percent to 797 million reais ($357 million) in the quarter from the prior three months. Seven analysts polled by Reuters on average had expected 807 million reais.

The results may mark the start of a new cycle of headwinds for Cielo, whose stock has been a favorite among financial industry analysts for the past two years. Revenue, operational earnings and proceeds from prepayments fell short of expectations, while general and administrative expenses topped forecasts by a large margin.

Among the potential challenges, regulators could end the remaining exclusivity agreements in the sector, dampening future revenue sources. Concern is growing among analysts that expenses per transaction will keep rising and that competition from the payment processors controlled by lenders Itaú Unibanco Holding SA and Banco Santander Brasil SA will intensify next year. (Reporting by Guillermo Parra-Bernal; Editing by Jeffrey Benkoe and Lisa Von Ahn)