January 30, 2017 / 11:02 PM / a year ago

UPDATE 2-Brazil's Cielo misses profit estimates as costs, expenses rise

(Adds analyst comment)

SAO PAULO, Jan 30 (Reuters) - Cielo SA, Brazil’s largest payments solutions firm, missed fourth-quarter profit estimates after costs and expenses rose faster than revenue and transaction volumes faltered in the face of the country’s harshest recession on record.

Net income at Barueri, Brazil-based Cielo reached 1.064 billion reais ($340 million) last quarter, up 1.2 percent from the prior three months. The result was below a consensus estimate of 1.14 billion reais compiled by Thomson Reuters.

The numbers show how Cielo has struggled to sustain robust volume growth as Brazilian consumers and companies spend less and growing competition drives payment-processing fees lower. Receivable prepayment income, which fueled record profit last year, also began to feel the pinch of declining borrowing costs.

“We expect a slightly negative market reaction, as headwinds remain,” said Frederic de Mariz, an analyst with UBS Securities.

Chief Executive Eduardo Campozana Gouveia has focused on strict expense controls to stem the impact of aggressive competition and changes to Brazil’s payment industry rules. Cost and expense growth and capital spending targets were met last year, a sign budget discipline paid off.

Management will discuss results at a conference call with investors on Tuesday.

Net revenue rose 1.9 percent to 3.120 billion reais from the prior quarter, while the cost of rendered services plus operational expenses climbed a combined 2.4 percent in the same period. Financial expenses fell 7 percent in the quarter.

A widely followed ratio of cost performance remained stable at 41 percent of income in the fourth quarter. Financial transaction volumes for credit cards slipped 0.9 percent in the quarter.

Earnings before interest, tax, depreciation and amortization, a gauge of operational profit known as EBITDA, rose 1 percent to 1.395 billion reais, near an all-time high, although well below the consensus estimate of 1.656 billion reais.

Cielo’s income from prepayment of receivables, a key source of revenue for retailers and other companies that accept payments with cards, dropped 3.1 percent last quarter - more than expectations. Central bank policymakers have cut interest rates for three straight times since late last year to revive the struggling economy.

Such moves usually affect receivable prepayment income, which is pegged to market interest rates.

Shares fell 3.3 percent to 26.72 reais on Monday, extending losses to 3.8 percent this year.

$1 = 3.1255 reais Reporting by Guillermo Parra-Bernal; Editing by Andrew Hay and Peter Cooney

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