Higher Expenses, Slower Brazilian Economy Lead to Missed Profits Estimate

Cielo S.A. reports preliminary financial results for the quarter ended December 31, 2014.

Brazil’s largest card payment processor, Cielo S.A. (CIEL3-BR), earned 1.8 percent less compared to the third quarter of 2014. The company missed fourth quarter 2014 analysts’ earnings estimates due to higher-than-expected expenses, and a slowdown in transactions from weaker consumer confidence in a slowing Brazilian economy.

Cielo’s increase in expenses was due to year-end seasonal activity and increased spending related to the creation of a joint venture with Banco de Brasil. The company’s operating margin (EBITDA margin) fell to 43.4 percent of revenue. Net income in the fourth quarter, at $803.01 million reals ($312.8 million USD), was below analysts’ forecasts.

This earnings release follows the earnings announcements from the following peers of Cielo S.A. – DH Corporation, MasterCard Incorporated Class A, Equifax Inc., FleetCor Technologies, Inc., Klabin S.A., Multiplus S.A., BRF SA and Fibria Celulose S.A. (DH-CA, MA-US, EFX-US, FLT-US, KLBN3-BR, MPLU3-BR, BRFS3-BR and FIBR3-BR).


  • Summary numbers: Revenues of BRL 2,128.70 million, Net Earnings of BRL 803.01 million, and Earnings per Share (EPS) of BRL 0.51.
  • Gross margins narrowed from 66.44% to 62.32% compared to the same quarter last year, operating (EBITDA) margins now 45.58% from 50.44%.
  • Change in operating cash flow of -3,304.40% compared to same quarter last year trailed change in earnings, earnings potentially benefiting from some unlocking of accruals.
  • Earnings rose compared to same quarter last year, despite decline in operating and pretax margins.
  • Earnings per Share (EPS) growth exceeded earnings growth.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

  2013-12-31 2014-03-31 2014-06-30 2014-09-30 2014-12-31
Relevant Numbers (Quarterly)          
Revenues (mil) 1844.27 1817.69 1840.73 1938.46 2128.7
Revenue Growth (%YOY) 14.75 17.53 14.72 11.48 15.42
Earnings (mil) 720.2 802.68 796.79 817.37 803.01
Earnings Growth (%YOY) 18.02 25.25 27.82 18.6 11.5
Net Margin (%) 39.05 44.16 43.29 42.17 37.72
EPS 0.46 0.51 0.51 0.52 0.51
Return on Equity (%) 91.61 94.45 91.54 87.65 77.52
Return on Assets (%) 22.63 24.18 23.87 23.93 19.74

Market Share Versus Profits

Companies sometimes focus on market share at the expense of profits or earnings growth.

Compared to the same quarter last year, CIEL3-BR’s change in revenue of 15.42% surpassed its change in earnings, which was 11.50%. This suggests perhaps that CIEL3-BR’s focus is on market share at the expense of bottom-line earnings. However, this change in revenue is better than its peer average, pointing to perhaps some longer lasting success at wrestling market share from its competitors, and helping Capital Cube look past its weaker earnings performance this period. Also, for comparison purposes, revenues changed by 9.81% and earnings by -1.76% in the quarter ended September 30, 2014.

Revenues Growth Versus Earnings Growth

Earnings Growth Analysis

The company’s earnings rose year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations. Gross margins went from 62.32% to 66.44% for the same period last year, while operating margins (EBITDA margins) went from 45.58% to 50.44% over the same time frame.

Gross Margin Versus EBITA Margin

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

CIEL3-BR’s decline in gross margins is compounded by issues on the balance sheet side. There has been deterioration in working capital levels. The company’s working capital days have risen to 140.76 days from 126.11 days for the same period last year.

Gross Margin Versus Working Capital Days

Cash Versus Earnings – Sustainable Performance?

Operating Cash Flow History

CIEL3-BR’s year-on-year change in operating cash flow of -3,304.40% trailed its change in earnings. This leads Capital Cube to question whether the earnings number might have been achieved from some unlocking of accruals. On a positive note, the increase in operating cash flow was better than the average announced thus far by its peer group.

Operating Cash Flow Growth Versus Earnings Growth


Despite a decline in operating (EBIT) margins as well as a decline in pretax margins, the company’s earnings rose.

EBIT Margin Versus PreTax Margin

Company Profile

Cielo SA provides merchant, payment processing, and credit and debit card services. The company operates through Credit Cards, which allows its customers to capture, transmission, processing, and settlement of transactions using credit cards. It is administrating payments and receipts related to the network of authorized establishments through gathering, transmission, processing of data and the settlement of manual and electronic transactions with credit and debit cards, as well as other payment methods. The company engages in the rental, installation and maintenance of electronic capture equipment; supporting issuers and merchants to reduce fraud; and the capture and transmission of transactions using pre-paid cards, private label cards, co-branded private label cards, and advances on merchant receivables. Cielo makes its network available for transactions with pre-paid cards, including Visa Buxx, Visa Gift, and Visa Travel Money and vouchers of varies brands, including Visa Vale, Ticket, and Sodexo. The company was founded on November 23, 1995 and is headquartered in Barueri, Brazil.

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