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

Good morning, and welcome to the Virtual Third Quarter 2020 Analyst briefing of Globe Telecom. Allow me to 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. Gil Genio, Chief Technology and Information Officer; Ms. Rizza Maniego-Eala, Chief Financial Officer; And Atty. Froilan Castelo, General Counsel. Mr. Cu will present the highlights of the company's performance for the third quarter 2020. To be followed by Ms. Maniego-Eala, who will present the financial results. Afterwards, we will open the Q&A session beginning with the questions sent by e-mail to investor relations team at globe.com.ph, prior to the start of the briefing, to be followed by additional questions also sent by e-mail during the course of the presentation. May we now request Mr. Cu for his presentation.

Thank you, Jomari, and good morning, and thank you as well to everyone for joining us today. I'll go through our financial performance for the past 3 quarters of 2020 at a high level, and then turn the floor over to our CFO, Rizza Maniego-Eala, to discuss the financials and operating results in more detail. Service revenues for the 9-month period came in at PHP 109.1 billion, a slight 1% contraction versus the same period last year, owing to the impact of the prolonged ECQ period from mid-March to May. In contrast, third quarter revenues showed a 3% growth versus the second quarter indicating continued revenue recovery as the economy opens up. EBITDA was lower, 3% year-on-year to PHP 56.3 billion, while third quarter EBITDA was relatively flat versus the second quarter. Year-to-date EBITDA margin of 52% remained in line with full year guidance, while third quarter EBITDA margin was slightly lower. Similarly, net income declined by 10% year-on-year and quarter-on-quarter. Net income contraction notwithstanding, we continue to beat our own estimates and are performing close to pre-ECQ levels going into the last few months of 2020. Owing to our performance this quarter, our Board of Directors saw it fit to declare fourth quarter dividends of PHP 31.33 per share, up from PHP 24.83 in the previous quarter. This brings total dividends for the year to PHP 108 per share or 64% of 2019 core net income. Moving on to the revenue components of the quarter. The mobile business comprising 71% of service revenue contributed PHP 77.3 billion, a 6% decline versus the same period last year, while the fixed line and home broadband segment rose 11% year-on-year, contributing PHP 30.9 billion. Consistent with the ongoing shift in concentration of data usage to the home, the broadband segment continues to drive the company's performance, growing 22% year-on-year. We continue to see great take-up of our fixed wireless service with subscribers now at 2.8 million, up 119% year-on-year. Fixed wired subscribers also saw a 7% growth year-on-year, bringing total home broadband subscribers to 3.5 million. 82% above the 1.9 million reported last year. On a quarterly basis, home broadband subscribers grew 21% versus the second quarter. The mobile data segment also posted growth, a modest 2% year-on-year, while the while mobile voice and SMS decline is 16% and 29%, respectively. Corporate data, on the other hand, contracted by 3% year-on-year, mostly due to the dip in second quarter from clients choosing to cut their lease line subscriptions during ECQ. On a more positive note, since the easing of ECQ going into GCQ for majority of the country last June 1, third quarter revenues improved versus the ECQ-impacted second quarter with all product segments growing. In particular, third quarter mobile revenues showed some reversal in the year to the trends which points to continued recovery of the business. Similar to the first half of 2020, data-related revenues for the 9-month period made up 75% of total service revenues, with mobile data contributing 49%, home broadband contributing 17% and corporate data contributing 9%. While mobile data revenue growth continued to be challenged, mobile data traffic, on other hand, is still on a rise with third quarter data traffic growing 12% quarter-on-quarter and 51% year-on-year to 656 petabytes. This brings total mobile data traffic for the period to 1,762 petabytes, a 47% growth versus the 1,200 petabytes last year. Monthly ARPU is now at 6.6 gigs per month, up 63% against the 4.1 gigs a month last year -- a month a year ago. This is up 15% against the 5.7 gig per month last quarter. The upswing in data consumption is a function of our -- offering our subscribers more relevant promotions that cater to their changing needs, coupled with more data users becoming more conscientious of their data consumption and spend. This is evidenced in the rapidly expanding data needs of Filipinos, which will only continue to grow as economy recovers. Heeding the call for improved telco services, Globe embarks on another network upgrade to improve voice and data experience of its customers. We have laid out the 3-pronged strategy, the first of which is to accelerate cell site builds to expand coverage and capacity. With the support of the Bayanihan to Recover as One or Bayanihan 2 Act, we have secured over 700 building and CFEI permits and are targeting to install at least 800 cell sites in the fourth quarter. The second strategy is to upgrade and equip all cell sites with 4G/LTE to improve coverage and speeds. We're also encouraging our customers to switch to LTE SIMs and devices to experience faster data speeds and improved data service. Earlier this month, we completed the removal of 3G SIMs for sale across our retail and distribution chains, a move we executed last year to facilitate the shift to 4G/LTE. Ahead of these aggressive upgrades and builds, we are already seeing significant network improvements, the fruit of our sustained efforts to upgrade network coverage and capacity. In fact, Opensignal, recently named Globe as one of the most improved telcos in the world in terms of video experience with a 32.7% improvement in June 2020 versus June of 2019. In other reports, we also cited an 82% -- an 84.2% improvement in download speeds as well as a 20.6% improvement in latency. In addition to our 4G/LTE upgrades, we are also strategically rolling out 5G in select cities across the country. To date, we have expanded 5G coverage to 11 cities within Metro Manila, and the service is now available to all our mobile subscribers. The third strategy is to fast-track the rollout of Fiber to the Home. As more and more Filipinos turn to the Internet not just for entertainment, but also for work and learning, the demand for data connectivity and capacity to a home continues to grow. To meet those needs, we are putting renewed focus on rolling out Fiber to the Home. As of September 2020, we have spent 189% more CapEx on our fiber rollout versus the full year 2019 spend. This translated to a 158% increase in fiber capacity lines versus fiscal year '19. With the pandemic, transforming data consumption patterns and consumer behavior, there is a need to accelerate our rollout even further, prompting us to significantly raise our rollout targets for this year, 3x more than our actual rollout in 2019. In addition to network upgrades, we also continue to provide relevant products and services to serve the changing needs of our customers. To complement our 5G rollout, Globe Postpaid started offering 5G devices at discounted prices. We've also been expanding our e-learning solutions in support of the country's online learning initiatives. Globe Prepaid now offers data promos tailor for students, which include 5G open access data plus additional allocation for GoLEARN apps like Wikipedia, Google Suites, YouTube Learning, Canva and more. In October, Globe won the bid for Quezon City's home-based learning program, which supports over 460,000 students from 160 Quezon City public schools. We also recently deployed the KonekTayo School Bus WiFi program, a service which deploys school buses with special antennas that will broadcast WiFi signal from 7:00 a.m. to 7:00 p.m. across select covered areas in Manila City for as low as PHP 15 per day. Before I end my report, I would also like to bring attention to Mynt, which has been forging ahead towards its goal of providing finance for all. According to a report by a third-party source App Annie, GCash, Mynt's fintech app, has reigned as the #1 finance app in terms of total downloads and active users, consistently dominating for all the months of 2020. As a matter of fact, at the end of September, GCash has more active users in the country than global lifestyle apps such as Netflix, Twitter, Grab and TikTok as well as being miles ahead of other wallet platforms. With over 10 million app downloads over the last 9 months, GCash is currently leading the revolution towards a cashless lifestyle that has become essential as we navigate through the new normal. With the pandemic accelerating, the shift towards the digital landscape, GCash aims not only to be a mobile wallet but a lifestyle app, offering essential service for every Filipino. Aside from payments, users can also buy load, get insured, save money, borrow money, buy game credits and even play games. In September this year, GCash launched GInsure in partnership with Singlife, which offers medical coverage for Dengue and COVID-19 for as low as PHP 300 a year, providing convenience and relevance to users today. Furthermore, GCash also recently launched [ GLight, ] where users can now find and interact with their favorite brands to play, shop and eat via mini programs embedded inside the app. With GCash, [ GLight ] can effectively help businesses create their digital presence without having them to build their own app and immediately accelerate adoption across GCash's over 26 million registered user base. Enabled by a financial scalable technology, GCash continuously strives to develop its platform to empower the Filipinos and the nation. With this, I end my portion of the presentation. I will now hand over the floor to Rizza.

Thank you, Ernest, and welcome again to everyone on the call. Let me now go through the details of our financial results for the first 9 months of the year. For the third quarter, service revenues came in at PHP 36.7 billion, 3% higher than the PHP 35.5 billion in the second quarter. We are pleased to note that we are seeing some revenue recovery in the third quarter consistent with the easing of enhanced community quarantine, or ECQ, in most parts of the country. OpEx and subsidy for the third quarter grew 7%, leaving EBITDA flat for the third quarter. And net income, however, posted a 10% decline quarter-on-quarter at PHP 4.4 billion, mostly due to higher nonoperating expenses. Recall though that in the second quarter, we booked a onetime gain related to a loan revaluation, making the period's increase in nonoperating expenses more pronounced. Core net income, which excludes nonrecurring items, remained flat for the period at PHP 4.5 billion. On a year-to-date basis, service revenues registered at PHP 109.1 billion, a 1% dip versus the previous year, similar to our first half results. We are happy to note that we've been able to keep the negative impact of the pandemic on our revenues to a minimum. At PHP 56.3 billion, 9-month EBITDA declined by 3% year-on-year bringing EBITDA margin to 52%, in line with our revised guidance of low 50s. Net income, likewise, took a hit, declining by 10% year-on-year to PHP 15.9 billion. Moving on to OpEx. We were able to keep our 9-month expenses relatively flat versus last year. Interconnect charges continued to decline year-on-year due to the non-imposition of interconnect charges on mobile voice and SMS transactions that began this year. Staff costs grew slightly by 1% year-on-year, mostly due to higher head count versus the same period last year, while quarter-on-quarter, there was a 4% decline. Subsidy costs saw a sharp increase year-on-year and quarter-on-quarter driven by the higher home prepaid WiFi acquisitions, while marketing and other advertising expenses were almost at par with last year, declining slightly by 1% from less marketing campaigns and promos. Network costs also rose year-on-year driven by higher repairs and maintenance charges due to increased preventive maintenance and communication equipment. Cushioning the growing network costs were lower lease charges and administrative expenses from a decline in interconnection and colocation facilities, lower electricity and power gen consumption, and significantly less travel and transportation expenses. On a quarter-on-quarter basis, network costs also grew as we see lease and utility charges picking up due to an increase in facilities and cell sites following the easing of ECQ in 2020. Provisions registered a 49% increase year-on-year mostly due to the onetime higher trade provisions booked last quarter. For the same reason, we see a significant decline in provisions in the third quarter. Service and other expenses posted a decline year-on-year from lower managed services, customer contract services and subscriber line installation services, and higher other income items versus last year. Sequentially, coming off the lockdown in the second quarter, service expenses are picking back up. Other expenses like spectrum fees also rose due to additional activated network sites during the period. Below EBITDA, depreciation charges continue to grow year-on-year and quarter-on-quarter from sustained CapEx investments. Nonoperating expenses declined year-on-year as this included a PHP 375 million onetime gain on a loan reevaluation. Sequentially, nonoperating expenses decreased for the same reason, plus slightly higher interest charges for the period. CapEx spend for the first 9 months came in at PHP 33.4 billion, with 81% spent for data-related requirements. With the majority of the country already in general community quarantine and the enactment of Bayanihan 2, which temporarily suspend some of the permits and clearances required for the construction of telco infrastructure, we have been ramping up our network build-out to respond to the clamor for better and faster Internet services. We are on track to spend the PHP 50 billion previously guided. And if time permits, even go above that as we try to catch up to our original targets for the year. Onto gearing, our balance sheet remains healthy with ample liquidity to service our current obligations. Debt service coverage ratio improved to 3.45x versus 3x. And despite a 22% increase in debt level to close to PHP 166 billion, we are still comfortably within our covenant ratios. Gross debt-to-equity is at 1.9x, while net debt-to-equity is at 1.5x. Gross debt-to-EBITDA is at 2.3x, while net debt-to-EBITDA is at 1.8x. As Ernest earlier mentioned, our Board of Directors recently approved the fourth quarterly cash dividend of PHP 31.33 per share. This is payable on December 3, 2020, to stockholders on record as of November 17. This concludes my report. We now open the floor for questions. Thank you.

Thank you, Rizza, for your presentation. Before we begin with the question-and-answer session, we would also like to acknowledge the presence of the following Globe Group executives who will be joining as panelists. They are Ms. Issa Cabreira, Globe Consumer Business Group Head; Ms. Martha Sazon, President and CEO of Mynt; and Ms. Yolly Crisanto, Chief Sustainability Officer, Senior Vice President and Head of Corporate Communications Group. In addition to the management panel, Mr. Cu may direct some of the questions to the panelists.

We'll now begin the question-and-answer session. Our first set of questions come from [ Janelle Bunagan ] of UBS. First question is, could you share some indications on trends for October in terms of wireless broadband? I.e., is it still elevated versus normal levels? And mobile top-ups, i.e., is it still growing?

Well, I think the fourth quarter is showing consistency with the statement we made that as the economy opens, Globe's subscribers tend to top-up more, use the mobile service more. So yes, indeed, there is a pickup that we are seeing, again, just like we did see in the third quarter, replicating itself in the fourth quarter. Wireless broadband revenues, particularly in the prepaid area, have continued to grow. Momentum has been stable, and top-ups are also increasing slightly. Because they are at a very high level to where we were beginning last year -- compared to last year.

Thank you for that, Ernest. The second question is, what is Globe's current 4G coverage in terms of phones? And how is it growing?

Maybe, Ernest, I can take that.

Go ahead, Rizza.

Smartphones in our network registered at about 80%. And 70% of that will be on 4G, and that's an 11% growth from last year.

Thank you, Rizza. The third question is any thoughts on Dito having completed their base station targets and recent announcement that they will be ready for a commercial launch by next year.

Well, I think it's consistent with the messaging that they've been putting out. One, I guess, as I've said in many of briefing, let's see what happens when they actually go commercial. The telco business is more than just a network, as we know, there's a bit of -- quite a bit of customer experience, distribution that also has to be built out. So I -- just like the rest of you, Globe is waiting and seeing how things evolve with them. And all I can say is we're ready for competition.

Okay. Thanks for that. The next question comes from Gio de la Rosa of Regis Partners. What prompted the increase in the fourth quarter dividend payout?

Rizza, do you want to cover that?

Okay. If you recall, our payout ratio in the first quarter was at 64%. And after the first few months of the pandemic, we decided to pull back the payback (sic) [ payout ] ratio to 60% just to conserve cash. But we did say that we would look towards the end of the year with a look back. And given the performance of the company, we had recommended to the Board to move the payout ratio back to 64%. So if you make the calculation, payout ratio is at 64% of last year's core net income.

Thank you, Rizza. The next set of questions come from [ Sevi Sevidal ] of BPI Securities. The first question is in light of the 40% figure of targeted home broadband customers upgraded to high-speed networks, could you talk about Globe's strategy of upselling in the broadband space in the near term. Would it be upgrading current value -- or current fixed wireless plans to higher-value packages? Or will we see an accelerated pace of migrating fixed wireless subscribers to fiber. And also any metrics you could share from year-to-date 2020?

Well, let me say that we don't have metrics yet. But there is an effort, quite aggressive one, to migrate consumers that are on the fixed wireless program who opt for higher speeds and higher capacity to move to fiber plans. We are cognizant and very aware of how consumers' needs a change in their homes. I think I mentioned in my talk that the home is not just a home anymore. Today, it's an office, it's a classroom and with probably with multiple students and multiple working individuals. So their needs have actually changed and actually accelerated in terms of the need for higher speed and higher capacity. Hence, I think the product for the future will be biased towards Fiber to the Home, which we have stated in this briefing, that we will be aggressively rolling out, and already are aggressively rolling out and we'll see that happening this year and into the next year as well.

Okay. Thank you, Ernest. The next question is, what are you seeing on the ground from the regulator and the towercos in terms of the common tower policy? Could you provide more color in terms of the trajectory of closing commercial agreements with towercos and the rollout of common towers?

Maybe Froi can comment first on the regulatory side. And then, Carlo, if I can call on you to give some color on discussions with towercos.

Yes. So thank you, Ernest. The IRR on the towerco has not yet been really been finalized in the sense that there are still many things that the DICT has to resolve. But just the same, I guess, just to -- for Ernest to pick up the topics that we are right now in conversation with several tower companies to answer to the requirement of this government. But just the same, we shall be complying with the rules and regulations of the DICT once it comes in its final form.

Carlo?

Yes, sir. On the commercial front, we are close with a handful of [ floor ] companies. But you have to remember that the negotiations are on a document that's [ 180 ] pages long. So it's not as simple. We have closed several commercial agreements, but the master lease agreement is something that we are working on. I think from a -- on the ground perspective, Globe is still the one pushing on this tower initiative. And hopefully, we are able to close some of these documents within the next few weeks.

I guess just to close out and kind of confirm the stand on this particular issue. Globe has always been a supporter of the common tower initiative. We feel it's a good way to defray the large CapEx budgets that telcos, in the Philippines, have to spend and allocate. So the more common towers that are built and allow us to co-locate, I think, is good for us. And so we're just hoping that the Bayanihan 2 Act as well will assist common tower companies and finally building the towers in the right places at the right time. And obviously, the commercials have to be right for Globe as well.

Okay. Thanks, Ernest, for that. Next question comes also from [ Sevi Sevidal ]. It's related also to number 2, could you share with us what you're seeing on the ground in terms of the improvement in the release of permits for constructing cell sites in light of the Bayanihan and other government initiatives. Are you seeing meaningful improvement at the LGU level?

The answer is yes. Quite a bit of improvement. We mentioned that we had acquired close to 715, if not more, by now, permits over a very short period of time since the release of the Bayanihan 2 Act. That's not saying, though, that there are still LGUs out there that are kind of saying that they may not, at this moment, apply to them and so on. But I guess after some realization and some support from ARTA themselves, we've been able to convince a lot of these LGUs to allow us to build and provide us the permits within a reasonable amount of fact. Bottom line is, yes, it's been a very helpful act and something we thank the government for.

Okay. Thank you, Ernest. The next set of questions come from Arthur Pineda of Citi. The first question is, what is driving the big jump in marketing expenses into 3Q '20? And should this level sustain into 4Q '20? This appears to have offset the benefit of declining provisions in 3Q '20.

Issa, would you like to cover that or would Albert like to cover that?

Ernest, you want...

Or...

Let me...

Yes, Albert. Why don't you...

So there was a series of product introductions that we did in the latter part of the second quarter to support what we were seeing in terms of lockdown. So a lot of new SKUs to address people's needs. And so there was a heightened need for communications into the marketplace around a lot of those particular SKUs, getting people to understand what was available. And so that was a premeditated effort to increase the level of awareness in the marketplace, specifically targeted for the third quarter.

And in addition, Albert, if I may, we've also made sure that we've driven our customers, especially our prepaid customers towards the digital channels. Specifically GCash, our GCash app and our GlobeOne app, seeing a significant increase in selling prepaid loans. So providing that accessibility and guiding our customers through the journey towards moving from brick-and-mortar towards using our digital channels was also a big investment for us during the period. And hopefully, that continues on. As we move through the opening up of mobility and the economy in the coming quarters.

Okay. Thank you, Albert and Issa. The next question from Citi is, given that Globe's network is very Huawei-centric, what are the contingencies in place if Huawei is not able to deliver LTE-A and 5G equipment into 2021 if they run out of relevant chipsets. What are the risks of network upgrade disruptions and increased network spending to compensate. Thank you.

The risk of disruption today is very, very low. We've done significant due diligence with both local management and headquarters staff of Huawei with respect to the supplies that they have committed to Globe. We have been reassured multiple times and have seen evidence that majority of the equipment we use is free from U.S. components as one, manufactured chips. And the chips that do rely on U.S. technology can be replicated in China with SMIC and others, particularly because they're not dependent on the 5- and 7-nanometer chips that are today in danger and only being manufactured by companies like TSMC. The smaller format chips or the newer chips of 5- and 7-nanometer, I think, are more critical to handsets than they are to base station equipment, which are much larger and can take the chips that are also larger in footprint. There is a slight penalty in power consumption. But we think it's not going to make that much of a difference considering that the equipment starting off already has very efficient power usage, as we've seen in the past. So for 2021, we do believe that our suppliers are secure. And again, hopeful that by that time, they would have found a solution to the manufacturing problem that they have today.

Thank you, Ernest. The next set of questions come from Kervin Sisayan of Macquarie. The first question relates to subsidy and marketing costs, which I believe was already answered earlier. The second question is mobile data revenue was up only 1% quarter-on-quarter, slower than voice in SMS. Can you discuss further what happened from ECQ to GCQ why mobile data revenue growth was slower versus SMS and voice?

Let me take that, Jomari. This, I believe, is a function of the additional allocation we provided to the customers during the ECQ period, as Albert mentioned earlier. And secondly, the impact of the new portfolio, which is Go and the Globe Go+ both Globe Prepaid and our TM portfolio, specific to easy Doble Data, which clearly naturally align to the needs, the increasing needs of the market today. So that's what's -- that's the explanation for that specifically. It's us giving more to the customers for the needs they have today.