Globe Telecom, Inc. (GLO) Earnings Call Transcript & Summary

Good morning, and welcome to the fourth quarter and full year 2019 analysts' briefing of Globe Telecom. Allow me introduce our management panel for today's briefing. We have Mr. Ernest Cu, President and Chief Executive Officer; Mr. Alberto de Larrazabal, Chief Commercial Officer; Mr. Genio, Chief Technology and Information Officer; Ms. Rizza Maniego-Eala, Chief Financial Officer; and Tony Froilan Castelo, General Accounting Officer. Mr. Cu will present the highlights of the company's performance, followed by Ms. Maniego-Eala to present the financial results, after which we will open the floor for the Q&A portion, beginning with our conference call participants and then our audience. May we now request Mr. Cu for his presentation.

Thank you, Jomari. Good morning to everyone here present in the audience and the ones in the call. Please allow me now to go through our performance of fiscal -- full year 2019, and then I will turn over the floor to Rizza, our CFO, to discuss our financial and operating results in greater detail. We are pleased to report that Globe completed another record-breaking year with service revenues now at PHP 149 billion, 12% higher than the previous year. This growth is owed to the sustained performance of our data-related businesses. Similarly, EBITDA is at a record PHP 76 billion, up 17% year-on-year and translates to a full year EBITDA margin of 51%. Driven by the robust performance of our top line, we closed the year with PHP 22.3 billion in net income, a 20% increase over 2018. On a quarterly basis, fourth quarter 2019 service revenue also reached record levels, ending at PHP 38.4 billion, 10% higher than the same quarter last year and up 2% versus the previous quarter. Fourth quarter EBITDA and net income ended the period at PHP 18.2 billion and PHP 4.2 billion (sic) [ PHP 4.6 billion ], respectively. Lastly, I'm also pleased to announce that our Board of Directors recently approved the first quarterly dividend distribution for 2020 at PHP 27 per share, details of which will be discussed by Rizza after my portion of the presentation. As mentioned, data continues to be the growth driver for the company with the all data related services growing year-on-year. Mobile data revenues, our fastest-growing data stream, reached PHP 71.8 billion, a 41% increase versus the previous year. Home broadband revenues also rose 17% to PHP 21.7 billion while corporate data revenues increased by 9% to PHP 12.8 billion. Our legacy businesses, consistent with past years, continued their decline as more and more traditional usage shifts to digital. On subscriber accounts, full year 2019 mobile subscribers ended the year at 94.2 million, down 3% versus the previous quarter as we now start to churn out nonactive users in our network. This is since the change in the prepaid load validity implemented in 2018. For postpaid, it's business as usual, with 2.7 million subscribers as of end 2019, a slight increase versus last quarter. Home broadband subscribers also grew both year-on-year and quarter-on-quarter to end the period at a little over 2 million subscribers. While both wired and fixed wireless segment exhibited growth, the 25% increase of subscribers was mostly driven by the fixed wireless segment. Diving deeper into our data-related products and services, the stream now accounts for 71% of total service revenues versus 61% in 2018, with mobile data taking up the bulk of the share at 48%. Home broadband and corporate data contributed 14% and 9%, respectively, of service revenue. Mobile data revenue growth continues to be driven by the increase in data usage among our subscribers. Mobile data traffic for the full year clocked in at 1,699 petabytes, a 78% increase versus just 956 terabytes recorded in 2018. Sequentially, mobile data traffic for the fourth quarter grew 15% to 499 terabytes. In terms of volume of usage per active subscriber, this translates to about 3.9 gigs per month, for the full year versus 2.4 gigs per month in 2018. On a quarterly basis, fourth quarter mobile data average usage surged to 4.5 gigabytes per month, 49% higher than the fourth quarter in 2018. On the user base, mobile data users grew mid-single digits against prior periods to end 2019 with 39.6 million. In order to support the growing data business, we've ramped up our network investments for the year, increasing not only capacity but improving overall experience as well. As of the end of December 2019, we put up 139% more cell sites versus our 2018 output. We also enhanced our existing towers by putting up 69% more base stations inside them compared to last year. Based on third-party speed test reports, our quarterly LTE average download speeds have improved, with the fourth quarter level showing a 15.8% improvement versus the same period last year, and average LTE upload speeds improving by 5.9%. Median network latency likewise reflected our improving network with levels dropping by 8.9% and versus last year. These performance gains were achieved despite the 58% increase in mobile data traffic over the same period. Let me now go through a few of the products and initiatives launched this past few months. Last December, in support of the emerging gaming community in the Philippines, Globe and Mineski opened a second eSports hub in Quezon City, with the aim of supporting and enabling this community. It is one of our key initiatives to support growth of the eSports industry, in line with our goal of bringing various forms of digital entertainment to our customers. Globe At Home also partnered with Victor Consunji Development Corporation in December to provide a built-in, high-speed home Internet connection for the [indiscernible] development. The partnership will also allow for these residents of [indiscernible] to an intelligent home through Globe connected home. We believe this is the next step to furthering the digital lifestyle of the Filipino. Also in December, Globe partnered with Cascadeo, an AWS senior consulting partner and managed service provider, in order to bring a complete suite of cloud-native products and services to the Philippine enterprise market. As an update to the implementation of the Number Portability Act, Globe, PLDT-Smart and Dito Telecommunity have recently put up a new joint venture and selected Syniverse to become its mobile number portability service provider. Finally, consistent with our mission to pioneer digital transformation in the Philippines, Globe has continuously made efforts to bring customers to access -- access to technology that goes beyond what is currently available. And so in 2019, we launched the 5G service of Globe At Home, and in 2020, we'll do the same for mobile. To start up, together with its partner Huawei, we'll be introducing the very first 5G mobile device in the country this February, after which updates on the rollout of the 5G service will be continuously provided throughout the course of the year. Before I end my portion of the presentation, allow me to give a short update on our mobile money initiative. Mynt, in its drive to create a cashless nation, continues to make waves in the industry through its GCash product, which is currently the #1 finance app in the Philippines' Google PlayStore. GCash now has 75,000 QR merchants and 400 partner billers in its network as well as 30,000 cash endpoints to allow for easy and convenient funding. It has also expanded its product portfolio to include ways to save, invest, borrow and even provide credit scoring, transforming itself from mere electronic money issuer to one that offers a full suite of financial services. GCash also launched a green initiative through GForest, where users are able to collect points from doing cashless transactions and payments and to use them to plant both virtual and real trees. Mynt has made significant strides in this space in 2019 with Globe and other shareholders continue supporting the company as it endeavors to build and develop a robust finance -- fintech ecosystem the country. This ends my portion of the presentation, and I'll hand over the floor to Rizza.

Thank you, Ernest, and welcome again to everyone in this room and on the call. Let me go through the details of our financial results for full year 2019. Keeping the momentum throughout all 4 quarters of 2019, we ended the year with a 12% increase in service revenues to PHP 149 billion. EBITDA for the year closed at PHP 76 billion, a 17% growth from 2018, owing to the strong revenue performance and successful tempering of operating expenses which grew only 8% year-on-year. EBITDA margin for the full year is at 51%, in line with our original guidance. Coupled with higher depreciation charges and nonoperating expenses, full year net income stood at PHP 22.3 billion, a 20% improvement versus 2018 levels. Excluding nonrecurring charges, foreign exchange and other mark-to-market items, core net income ended the year at PHP 22.5 billion. Let me now break down our operating expenses for the year. Consistent with the growing business, several expense items grew year-on-year with the exception of interconnect charges which posted a decline. This is due to the lower interconnection rates and also a decline in inter-network traffic for both mobile -- for both mobile voice and SMS. Staff costs were up PHP 2.2 billion year-on-year due to the increase in headcount. Marketing expenses also went up year-on-year due to higher spending for ads and promos as well as higher commissions from the increase in subscriber acquisitions relative to 2018. Under network costs, repairs and maintenance made up the bulk of the increase, followed by higher utility costs. This was an expected increase given the significant expansion of our network [indiscernible], as discussed by Ernest earlier. Other OpEx items grew by about PHP 2.9 billion, largely because of the increased service costs from IT managed and cloud services, slightly offset by lower advisory fees. Higher inventory solutions also includes -- also contributed to this increase. Taking in that -- the PHP 16.1 billion increase in revenue, full year 2019 EBITDA came in at PHP 76 billion, a 17% improvement versus 2018. Below EBITDA, depreciation expenses went up by about PHP 3.7 billion, consistent with the CapEx investments. Nonoperating expenses also posted close to PHP 2 billion increase from our share of equity losses from affiliates as well as few nonrecurring losses from investment transactions during the year. Higher interest expenses also contributed to the increase. The increased costs were fully covered by the PHP 10.9 billion EBITDA gain, placing net income at a robust PHP 22.3 billion, a 22% improvement year-on-year. Full year cash CapEx for 2019 came in at PHP 51 billion or around $990 million, 79% of which was spent on data-related requirements to keep up with the sustained demand for data. The balance of the PHP 63 billion CapEx guidance provided last year is expected to be settled within 2020, given some payment milestones have spilled over the calendar year, as expected and as mentioned in our previous quarter's briefing. Moving on to our gearing. Gross debt as of end 2019 stood at PHP 136 billion, slightly higher than the previous quarter level but still lower than the end 2018 level by 8%, helping to maintain ratios at comfortable levels. Gross debt-to-equity is at 1.68x, while gross debt-to-EBITDA is at 1.86x, both well within their respective covenants. Debt service coverage ratio for the period is close to 3x, lower than end 2018 level but still well above the minimum of 1.3x. Again, as Ernest mentioned earlier, our Board of Directors recently approved the first quarterly cash dividend of PHP 27 per share. This is payable on March 4 to stockholders on record as of February 17. In aggregate, this quarterly declaration comes up to a payout of about PHP 3.6 billion. Finally, I would like to provide our guidance numbers for 2020. While being cognizant of industry competition, we believe that we will be able to keep our performance momentum going as we see sustained demand from our data-related products -- or for our data-related products. Hence, we are guiding mid- to high single-digit growth in overall service revenues for 2020 versus 2019 levels. For EBITDA margin, we are also keeping to the same guidance of low 50s for the year as we continue with our efforts on cost transformation to maintain current profitability levels. As for our CapEx commitments, we are looking at the same level of PHP 63 billion or USD 1.2 billion in 2020. And similar to previous years, majority of the spending will be data-related, with allocations for deployments of LTE sites and high-speed broadband lines, increased network capacity and coverage, and modernization of fixed-line data infrastructure for corporate and transmission facilities. As with prior years, the team will be looking closely at this committed spend and we will update the market should there be any changes in the expectations. We would also like to note a few anticipated cost considerations for the year. First, we anticipate higher levels of interest expense from additional debt as we fund CapEx. Also, in relation, we anticipate an upswing in depreciation levels from the expanded asset base. And lastly, we also expect to recognize a similar amount for Globe's 2020 share in equity losses of Mynt as their expansion initiatives continue. This concludes my report. We now open the floor for questions. As we did in the past, we shall take questions from the conference facility first, followed by those who are here today. Thank you.

[Operator Instructions] Our first question, Rama from Daiwa.

A couple of questions from me, please. Firstly, could you give us an update on competition as well as new entrant details plans in terms of how far are they in terms of the network build-out and what you reckon would be their launch. Are they on track for this year? Or could it potentially slip into next year? The second one is with regards to the affiliate losses. Could you give us a little bit more color in terms of what is the driver for that as well as what would be the forward-looking guidance for this year and next, whether the losses will continue? The third one is with regards to CapEx. I do note that there's a spillage into this year, but this has been the case -- if I look at historically, your CapEx seems to be guiding, but then you seem to be underspending on that. So my question is the PHP 63 billion for this year, how far -- how much do you think -- what have you taken into account in terms of overall network rollout? And could it -- again, is it conservative? Or is it the maximum budget that you are looking at? I'll stop there for now.

Rama, could you repeat the second question, please?

The affiliate losses, what is driving that? And could these losses continue into this year?

Okay. First of all, on the competition, I'll turn over to Albert to give you a sense of what will come from now on. For the third player, you're asking me questions that we don't know. How many cell sites they're producing, how many -- how far they are now. That should be a question you should ask them, not us. So Albert, why don't you start by talking about competition and how you see the market in the Philippines right now?

Okay. Thank you, Ernest. The fourth quarter, I guess, amidst a generally -- financially competitive environment. This has its usual share of normal and tactical programs. Normally that's connected with the fourth quarter. So we saw some data allowances being provided for specific types of products, and we saw some device discounting, specifically on the broadband side, to be able to accelerate the acquisition and the affordability of the prepaid sector, specifically, to be able to get into the service. So this was generally something we saw across all players in the industry. It was not limited to one. No major pricing moves, however.

Rizza?

Okay. We won't use the mic anymore. So I'll take -- Rama, I'll take your second and third questions. So the second question was related to affiliate losses. So on Page 9 of our disclosure, you will see that our equity share from affiliates amounted to PHP 2.26 billion, and that's largely from our largest affiliate investment which would be in Mynt. And as I mentioned in my guidance, we expect this to be the same level for 2020. Then I'll move on to your question on CapEx. The numbers that we disclosed, as you know, is always cash CapEx. And it is quite hard to plan between what we avail or what we commit to our vendors and matching it with CapEx because it -- there is a time lag between making the order and actually making the payment. So generally, we would guide to the market what we see as actual cash payments. And so far, it's always been in line with availment amounts. And so that is the reason why we kind of have to adjust our numbers as we go along because, obviously, if we don't have to pay suppliers, then we don't do it. But by and large, you can put in the PHP 63 billion that we have guided for 2020 because that also includes some of the spillover payments that I also mentioned in my presentation that was supposed to be in our plan paid out in 2019. I hope those clarify your question.

Our next question, Arthur Pineda from Citi.

Two questions, please, for me. Firstly, can you just clarify what's driving the quarter-on-quarter decline in mobile subs for the fourth quarter? Second question I had is with regard to Mynt. Is it possible to disclose the financial position of Mynt in terms of the balance sheet? I'm just wondering if there's any recapitalization requirement coming, given that the cash burn seems to be quite significant.

Rizza, on churn?

Yes. Well, so for the mobile subs, we're down 3% Q-on-Q, and we're starting to see the normalization of mobile subscribers following the implementation of prepaid load validity last 2018. Now in our disclosure as well, you will see that churn rate for the quarter has spiked, and it's at -- for prepaid, Globe Prepaid is at 5% and TM is at 6.2%. At the moment, we are actually finalizing our algorithms to be able to give better guidance with respect to churn after the normalization of the new prepaid load expiry regulation, and given that we now have the numbers in place in our system. So during the first quarter results, we can give you better guidance on churn. But if you recall, before the change in the regulation, our prepaid churn was hovering on the 6.5%, 7% level. And I move on to the second question on Mynt's balance sheet. We -- in our disclosure as well, capital call for Mynt is at USD 70 million for 2019. We will not be able to share balance sheet data for Mynt. And if there would be any future capital calls, then we will disclose it at that time.

Understood. Just to clarify, with regard to the first point on the subs side, that change in sub-base then is mostly driven by the prepaid registration issue rather than any change in the competitive landscape. Is that the right way to look at it?

Yes, that's correct.

Our next question, Piyush from HSBC.

Two questions, please. Firstly, can you talk about more midterm network rollout objectives both in mobile and fixed wireless? And in that context, when do you expect CapEx intensity as a percentage of service revenue to moderate because it's churning out more than 30%. So when do you expect it to probably fall below 25%? That's first. Secondly, on Mynt, more on a strategy perspective. Would you -- given there could be more cash costs, would you like to maintain stake in Mynt or would probably even think of opportunities to upsize stake?

On the rollout, Gil can characterize that.

I'll take CapEx to revenue.

CapEx to revenue, Rizza can do, and I'll give you the 25%. So maybe from a midterm, I would say, over the next 3 to 5 years, what our outlook is. The reality of today and over the next 3 years, probably is that the demand for mobile data services, Internet, generally is way more than what the operators could support. It's a combination of different factors. You already have heard us talk about constraints, putting in sites and all of that. We partly overcome that with frequency. But at the end of the day, we do need a density of sites in the Philippines to support that. So as a result, we have to kind of like always double up with respect to the network investments in order to be able to catch up to the overall demand. It is unlikely in that period, when I think about 3 to 5 years, for CapEx to revenue to be below 25%. I think when you even look at, you would say, large markets like China, for example, they also have elevated CapEx to revenue, particularly with the advent of 5G, especially globally. But in the Philippines, just on 4G alone and trying to catch up with the demand, will probably mean that over the midterm, our CapEx will continue to be elevated. You've heard our CEO talk about how much more network investment and also actual physical sites we have put in, that's going to be a continuing trend going forward. And that's also the reason why our revenue growth is at double-digit numbers year-on-year. There is no real reason to be able to sustain this if we do not have an expectation of continued strong revenue growth going forward, driven again by overall traffic, which in the CEO portion, we showed a slide on the overall traffic growth trends as well. You probably may notice that we've talked about average mobile traffic per sub. That's still a little bit below what our regional peers have. So we have some ways to go before we get to, for example, the Thailand type of mobile data per subscriber type of an average. So net-net, over the next maybe 2, 3 years, certainly, our CapEx will continue to be elevated as we try to catch up with the demand. I mean, we cannot wait until, of course, all of the constraints -- physical constraints are done, but we're trying to do our best to put in the capacity for our subscribers. Rizza, do you want to add anything more on that?

Piyush, just to add to Gil's answer to your question. The team has really been dissecting this CapEx-to-revenue ratio and comparing our stats across the globe -- or with our peers. And a couple of things, right? On one hand, the thing is we're investing bulk of our revenues back into the network. On the second hand, when we look at comparables, we don't have permit issues that allows us to actually have better network config, or network configuration, optimizing radio equipment and all other necessary equipment to build out a network and support our traffic. We don't have power sharing -- or we did not have power sharing from the beginning which helped a lot of these other comparable or other peers. And we also don't have like support from the government in terms of a national backbone which many countries have. And so we struggle with the high CapEx-to-revenue ratio. We've dissected it, but at the end of it, when we calculate our return on invested capital, it is actually more than decent. And so with return on invested capital, or ROIC, as our benchmark then it's just a -- CapEx-to-revenue ratio is just another data point. So just wanted to share that, given that we did do a lot of homework on this CapEx-to-revenue ratio, and we're quite comfortable with this number. Again, on the basis that our ROIC is actually more than decent.

For with Mynt, we continue to be very bullish on the prospects of Mynt. We do realize that it will require significant capital moving forward to realize that full potential. We don't discount the possibility of a fund raise in the near future to help us with the burden of bringing this company to profitability. As you also know, Mynt today provides a lot of big services for free, but we all know that that is also not sustainable. But given the take-up rate and given the affinity for customers and the love for the convenience that the Mynt application provides, I think there will be quite a bit of room to be able to charge for their services in the near future. If you look at the services that we offer in comparable to what banks charge today, there's a lot of leeway and room to be able to charge a very modest amount. And given the volumes that we have, we think that there's enough use cases, very similar to what we do in telco with small charges, that will bring this company to a good revenue level. Again, it's still very early days. Today, adoption is the key. Habituation, the use of the app, more proliferation, more understanding of the complex products. To you, financial people here in the room, the services we're providing are quite simple, but if you look at for the average under-banked individual or unbanked individual, these are all very novel types of services they've never been exposed to, so it will take some time for the education to come to a fruition. But the signs are good, and we're very optimistic with regard to this product.

Our next question, Vida from JPMorgan.

I have 3 questions. First is on the dividend. My question is why has the dividend increased when leverage is elevated and also the free cash flows are already insufficient to cover existing dividend? My second question is on depreciation. I'm wondering if there is any accelerated depreciation in the fourth quarter, or should we be seeing this as our run rate right now? And third is on Mynt. What is your plan to monetize Mynt, and when can we expect seeing Mynt delivering earnings?