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

Good morning, and welcome to the Virtual Second Quarter 2022 Analyst Briefing of Globe Telecom. We will begin the presentation with Mr. Ernest Cu, our President and Chief Executive Officer. And with that, we hand over the virtual floor to Mr. Cu.

Thank you, Jomari, and welcome to everyone this morning. I'm pleased to report that our mobile segment sustained its growth with second quarter revenue hitting PHP 27 billion. This is our fourth highest quarterly revenue to date back to prepandemic levels. Year-on-year, first half mobile revenue is at PHP 54 billion, a 3% improvement versus last year, entirely driven by growth in the mobile data service segment, which is at an all-time high. The 8% mobile data growth fully offset the continuing decline in mobile voice and SMS. On a brand basis, performance was driven by prepaid, especially GOMO, which utilizes data as a currency and is geared towards those who mainly use mobile data and would like to forgo traditional voice and SMS services. As evidenced by growing mobile data traffic of over 2 petabytes or 2 exabytes for the first half, mobile data has benefited from increased mobility and reopening of the economy. Mobile data ATPU likewise continues to grow and is now at 9.7 gigabytes per month, up 20% year-on-year and 8% quarter-on-quarter. Moving into the second half of the year. We are aware of the inflationary pressures the country is facing, but our focus has always been to provide our customers with relevant products and services that will provide the best value. The Home Broadband segment, on the other hand, continues to see a decline driven by the ongoing normalization of the fixed wireless segment. We expect we will stabilize this by year-end. However, despite the overall 26% decline in subscribers, Home Broadband revenue only declined by 5%. It was bolstered by the improving performance of our fixed wired segment, whose subscribers grew 28% and 29%, respectively. Fiber, in particular, continues to improve with subscribers and revenue more than double that of last year's. As of end of June, we have already rolled out over 1 million FTTH lines, improving our inventory and allowing us to compete better in the market. With that being said, while we believe that the home broadband market is still underserved, we also believe that the postpaid market is already nearing its saturation point. There is a segment of the market that is predominantly prepaid that are now in need of better speeds and more reliable connection that only fiber can provide. As such, as the first in the market, Globe is launching prepaid fiber to cater to the growing segment of digital Filipinos. We're introducing TMBayan Fiber WiFi as a first product for thriving Filipinos, enabling them to hang out, play games, generate TikTok videos, surf social media or more -- and more while -- all the while in the company of friends in the neighborhood. It's initially available in select areas nationwide. We believe this effort allows us to more efficiently utilize our existing capacities and increase the opportunities in this segment. This is given that the country has been predominantly and will always be a prepaid market. Am I going -- okay, sorry. Aside from mobile data, we are seeing great traction in corporate data services, which grew 21% year-on-year to PHP 8 billion and 8% quarter-on-quarter to PHP 4 billion, a new record high for the quarter. Core accounts continued to recover, growing 4% year-on-year driven by international lease circuits and Internet core services. As more business now adopting digitalization and hybrid setups, digital solutions remain more relevant than ever. ICT sustained its performance, improving by 86% year-on-year led by business application solutions, data center services, cloud solutions and cybersecurity. This ends my portion of our telco revenues. And I'll turn it over to Joel.

All right. Thank you, Ernest. To provide updates on our ongoing network rollout as of the first half of the year, Globe was able to build 572 new cell sites, upgraded over 6,000 mobile sites. And we installed over 900 5G [ sites. ] CapEx spend for the period is close to $1 billion, representing 56% of full year guidance of $1.7 billion. Data-related requirements continue to take up majority of the spend at 84%. Bolstered by our sustained network improvements, Globe achieved a consistency score of 79.44, making us once again the most consistent network for the second quarter of 2022 according to Ookla data. In addition, with a score of 93.11, Globe is leading in availability score, which identifies the network whose users spend the highest percent of their time on all technology. These metrics earned Globe the recognition of being the Philippines' most reliable mobile network, an elusive claim that only a few mobile operators in the world have managed to obtain. These metrics continue to speak to the intensive investment that we've made to improve customer experience on our network. Customers can rest assure that being on the Globe network would provide them with a consistent level of quality that is suited to their needs. That concludes my portion. And I now turn you over to Martha, who will provide updates on Mynt.

Thank you, Joel, and good morning, everyone. Moving on to fintech. GCash continues its growth momentum and journey towards financial inclusion. In the first half of 2022, 66 million Filipinos have now placed their trust on GCash. That's around 4 out of 5 adult Filipinos having a GCash account. We've seen higher user engagement now that things have started to normalize, further proof that we have become embedded in the everyday lives of Filipinos. With this, for the first half of the year, we have already reached PHP 3 trillion mark in GTV, almost matching our full year GTV reported a year ago. We've doubled down on our merchant acquisition efforts and partnerships, resulting in merchant and social seller base of more than 5 million. That's 1.9x larger than the same quarter last year, making GCash the largest digital ecosystem in the Philippines. We expanded our cash-in and cash-out outlets to 339,000, 5.7x higher year-on-year, still offering the most touch points for our users. And our mini program, GLife, now have 520 GLife merchants expanding into new categories like content, health, insurance and e-government. With all this, GCash continues to be the #1 finance app in the country. The GCash active user base is now at almost equal to Lazada and is 5x larger than the next e-wallet based on data from reputable third-party platform, data.ai. We continue our work on making financial services accessible, affordable and easy to understand, disrupting traditional banking offerings. For savings, 1 in 5 banked Filipinos in the country have a GSave account. As of Q2, we already have more than 3.3 million GSave accounts. For lending, we've disbursed more than PHP 40 billion worth of loans live to-date with our continued expansion into more relevant lending products like GLoan and GGives. Together with GCredit, we now have a total of 1 million active borrowers as of end of Q2. GInsure now has more than 24 product offerings from health to online shopping to vehicles and to pets as we partnered with more than 10 reputable names in the industry and selling more than 2 million policies today. For our investment marketplace, GInvest, we now have 7 local and global funds. Now around 1 out of 5 mutual fund investors are on GInvest platform. As of first half of 2022, we have 3.4 million registered investors on our platform. Whether in savings, investing, insurance and lending, we partner with and are trusted by the most innovative and biggest market players as we continue to pursue financial inclusion. The good performance has been driven by continuous innovation. The services which have disrupted the payment space have further undergone innovations. On pay bills, we've embedded protection, changing the way people buy insurance. Pay QR just got better with the introduction of GGives, which offers users seamless way to amortize their payments. Lastly, with GCash PO, or GCash Pera Outlet, we have also successfully transformed sari-sari stores into digital community hubs. But we don't just innovate for everyday consumers. We created new and exciting services for our merchant partners as well. With adtech, we have disrupted the way our business partners do promotions. We've optimized our ad spaces for better ad visibility and engagement. Our digital vouchering service reinvents the old check under the cap or scratch card promos and is now being enjoyed by the top FMCGs in the country. GCash Connect is the next big step of our B2B solutions. We provide first-in-industry game-changing identity solutions. The possibilities are endless with GCash Connect, where we can boost what a GCash digital profile can do. To further our vision towards financial inclusion, we are focusing on hyperlocalization via channel expansion and more localized marketing such as using local dialects as we expand into the regions. Through these efforts and partnerships with LGUs, we have made financial services available to tricycle drivers and wet market vendors. We've also given sari-sari store owners access to these services as well as additional livelihood opportunities, taking steps towards our vision of finance for all. Lastly, we're happy to announce that last Monday, we just launched GCash Jr. Now kids and teens aged 17 and below can get access to a safe and fun GCash interface with services and deals designed specifically for the youth. For the purpose of KYC, all they need to present is their student ID, birth certificate and of course, a selfie from a GCash-verified parent. In the next coming months, more features will be made available in GCash Jr., like GSave Jr. and other financial services for the youth that will further aid them in their financial journey. That ends my presentation. I'd now like to turn it over to Cholo for his portion.

Thank you, Martha. Good morning, everyone. We're excited to announce the consolidation of KonsultaMD with HealthNow and AIDE. This consolidation creates the largest health play -- healthtech play in the Philippines. Here and now, KonsultaMD dominates the share of voice being the most visible brand in the market. It's available in over 50,000 outlets nationwide and is leading on social media with over 53 million views on TikTok. KonsultaMD is promoted by over 600 KOLs and celebrities. KonsultaMD owns the mental health space in the Philippines, launching the very first mental health concert last October 2021. HealthNow and AIDE are associated with medicine delivery and home care. But their strengths are rooted in the proprietary technology and relationships with almost 3,000 health care providers across 48 specializations across the country. What each company brings to the table is complementary in terms of services, capabilities and talent, which will allow us to accelerate our position in the market as the biggest healthtech player in the Philippines. With the consolidation, we're excited to provide a more complete and seamless digital experience to everyone. This will be clearly seen with a superapp that we're targeting to launch in quarter 1 2023. This concludes my portion of the presentation, and I now turn you over to Carlo to discuss Globe's recent transactions.

Thank you, Cholo. As mentioned and as you see in our press release, Globe intends to sell over 7,000 towers in what potentially will be the largest tower sale and leaseback transaction in the country to date. The 7,000 towers are composed of 79% ground-based towers and 21% rooftop towers and are spread across the country with 66% of the towers being sold in Luzon, 19% in Visayas and the balance in Mindanao. These tower assets have been grouped into 3 unique distinct portfolios, which -- each being assigned to a specific tower company. Proceeds will be used to fund further capital expenditures as well as the debt servicing requirements of the company through 2023. As we've always said in the past, we have always supported the government's initiative with regards to their tower-sharing policy. And we have also expressed our intent to monetize our passive infrastructure, and this transaction allows us to do both. The transaction also enables us to be more efficient in terms of raising capital while also redeploying the capital from passive assets into active equipment. Additionally, this will strengthen our balance sheet and provide added flexibility as we seek to expand the digital ecosystem further. The chosen tower companies will also provide needed local and international experience and expertise on this front in terms of telco infrastructure, engineering, construction in order to further our operational efficiencies. With this, we also offer Globe's commitment to UN SDG No. 9, which highlights the role of infrastructure to innovation as crucial drivers of economic growth and development while also supporting Globe's mission to deliver a first-world network -- #FirstWorldNetwork to Filipinos. As a first milestone and a major milestone, yesterday, Globe and MIDC signed the tower sale and leaseback agreement for the first portfolio, consisting of 2,180 towers in Luzon with total proceeds of over PHP 26 billion. MIDC is a joint venture between MIESCOR, a Meralco subsidiary with deep experience in engineering, construction and facilities maintenance, and global infrastructure fund Stonepeak. The towers are to be leased back to Globe at a monthly lease rate of PHP 100,000 per month with an initial lease term of 15 years. The target first closing for this portfolio will occur sometime in September 2022 and with Globe expecting a pretax gain of over PHP 10 billion to be reported and recognized according to the timing of the transaction -- subsequent transaction closings. Additionally, Globe and Frontier Tower Associates Philippines signed the tower sale and leaseback agreement as well yesterday for the second portfolio consisting of 3,529 towers nationwide with total proceeds of PHP 45 billion. FTAP, as they're more popularly known in the industry, is owned by Pinnacle Towers, which is backed by global investment firm KKR. The target first closing of this portfolio will occur in late third quarter or early fourth quarter this year with Globe expecting pretax gain of over PHP 15 billion to be reported and recognized according to the timing of the subsequent closings. Additionally, as we mentioned, we do have one more portfolio. And Globe is in advanced discussions with another third-party tower company for the sale and leaseback of that portfolio, which consists of roughly 1,350 towers in Visayas and Mindanao. The signing of that portfolio and transactions will occur at the tail end of the third quarter or early fourth quarter with the target first close as well in the fourth quarter. Lastly, before we move on to our financials, as an update to the stock rights offer that we announced in June, the process for the offer is ongoing. And we continue to assess market conditions and work on getting necessary regulatory approvals. To summarize, Globe expects to raise around PHP 32 billion -- up to PHP 32 billion through the rights offer with the shares on offer to be issued out of the increase in the company's authorized stock, which was approved by the Globe Board and shareholders on April 2022. The increase in capital stock, the SRO and the subsequent listing of the shares on the Philippine Stock Exchange are subject to the relevant [ approvals. ] This concludes my portion. And I now turn you over to Rizza to discuss the company's financial highlights in more detail.

Thank you, Carlo, and good morning to everyone on the call. To summarize the earlier points, gross service revenue for the first half came in at a record high of PHP 79 billion, 4% higher year-on-year. Coupled with the operating expenses, which remained flat year-on-year, EBITDA improved by 8% to PHP 41 billion or 51% of service revenues. Reported net income stood close to PHP 20 billion for the period driven by the onetime gain related to the partial sale of our DC assets last March. Stripping out this onetime gain, normalized net income still improved by 4% year-on-year and 17% quarter-on-quarter. Normalized core net income also improved by 1% year-on-year and 16% quarter-on-quarter. Looking at our costs on my next slide. Total marketing and subsidy costs declined by PHP 1.3 billion, fully offsetting the slight increase in our other OpEx items. Staff costs for the first half grew by PHP 400 million or 5% year-on-year. Network costs is up PHP 47 million versus last year from increase in utilities, repairs and maintenance charges and administrative expenses. This was offset by a decline in lease expenses due to the short-term lease contracts that were reassessed and reclassified as capitalized leases. Provisions grew by PHP 480 million or 20% from higher trade provisions, while service and other expenses grew PHP 180 million or 2% from higher merchant discounts and bank charges, countered by lower cloud, advisory fees and other contracted services. On to the balance sheet. This remains healthy, especially after the transaction that Carlo just mentioned. But as of the first half, on the back of sound capital management and improving EBITDA, our gross debt level is currently at PHP 240 billion, while unrestricted cash level is at PHP 12 billion. In terms of our ratios, gross debt to equity and gross debt to EBITDA are at 1.9x and 2.6x, respectively. Debt service coverage ratio is at 4.1x, a slight decline versus end 2021 but still well within the minimal capital requirement and/or our credit ratios. We expect our recent capital-raising efforts to aid in maintaining the health of our balance sheet while also providing the company more flexibility. On this last slide of mine, I would like to reiterate our guidance for the year with revenue at mid-single-digit growth -- well, mid-single-digit growth and for our EBITDA margin, it will be still at 50%. So our guidance will not change. In terms of CapEx, guidance is still at USD 1.7 billion. But we know that the peso figure may increase due to the volatility of the FX rate. But whether or not the peso figure exceeds guidance, we believe that the full year 2022 will represent peak CapEx for the company. We are not prepared to give further guidance beyond 2022 CapEx. But reiterating that from our perspective, this will be peak spending after we had actually maximized the opportunities around ramping builds with -- despite the pandemic with easing of permitting and the fact that we've been able to scale all our vendors to actually speed up the builds over the past 2 years. This ends my portion of the presentation. And before we open the floor for questions, I'd like to give the stage back to our CEO, Ernest.

Yes. Thank you, Rizza. Just to summarize the results that we just reported to you. I'd just like to highlight that these results were done amidst a very challenging economic landscape in the country. Issues of inflation, issues of food security and mobility continue to be around us and COVID is still in the environment. The revenues that we presented to you, they are an all-time high for the quarter. The growth, as you know, was driven by sustained improvement in our mobile and corporate data services and is now supplemented by nontelco services, which I will speak about a little bit later. The EBITDA is also a record high, PHP 21 billion for the second quarter and PHP 41 billion for the total half of 2022 and maintaining EBITDA margins at 51%. The net income first half is close to PHP 20 billion, as Rizza mentioned, a lot of it due to the onetime gain of our DC assets, data center assets, which, by the way, if you recall, is with ST Telemedia Global Data Centres. And plans for those will be released to the public shortly. Given these results, our Board of Directors has approved a third quarterly cash dividend of PHP 27 per share. And we would also like to update the market with some of Globe's recent activities, and I think Cholo spoke about this, which is Konsulta, HealthNow and AIDE have announced that they are coming together to bring about the leading player in healthtech in the Philippines. Carlo spoke about the sale of 7,000 of our towers in the largest ever sale leaseback transaction in the Philippines and with more to come, hopefully, by the time we speak to you in the fourth -- in the third quarter about third quarter results. Carlo also spoke about the SRO, where Globe expects to raise up to PHP 32 billion. And again, we will issue further details about this as we go along. Now I'd like to discuss also the strategic shift to go beyond telco and how it's benefited the overall Globe Group. Nontelco revenues have now grown 118% year-on-year to almost PHP 2 billion and now contributes 2.4% of our gross service revenue. This is driven by growth across all our subsidiaries on the revenue side with ECPay and Asticom contributing the most followed by AdSpark and Yondu. Our joint ventures and affiliates are likewise contributing to our bottom line with our net share in equity earnings growing by 17%, owing to PHP 0.9 billion to -- sorry, to PHP 0.9 billion and contributing 3.8% of our income before tax. Our share in Mynt, in particular, continues to improve as GCash remains and is strengthening its position as the #1 finance app in the country. While some subsidiaries and affiliates are already visibly contributing to the group's performance, it doesn't end there. Fueled by our vision of seeing a Philippines that is admired, we are constantly looking for new ways to enrich and empower the lives of the Filipinos through digitalization. This could be through business solutions like loyalty and e-commerce platforms like RUSH, data-driven products and solutions provider like Inquiro or Kickstart's recent investment in all-in-one restaurant management system, Mosaic Systems -- or Mosaic Solutions rather. It could also be through edutech like online tutorial platform EdVenture or IT tech boot camp, KodeGo. Whether through fintech, adtech, healthtech, e-commerce or entertainment, we strive to bring value to the overall ecosystem. I now turn you over to Jomari. I think we're now going to start our Q&A portion.

Thank you, Ernest. Before we begin with the Q&A session, we would like to introduce the full management panel for this morning's briefing. Of course, we have Mr. Ernest Cu, our President and Chief Executive Officer; Ms. Rizza Maniego-Eala, Chief Finance Officer; Ms. Issa Guevarra-Cabreira, our Chief Commercial Officer; Atty. Froilan Castelo, General Counsel; Mr. Joel Agustin, Head of Network Planning and Engineering; Mr. Darius Delgado, Vice President of Consumer Mobile Business; Ms. Martha Sazon, President and CEO of Mynt; Mr. Cholo Tagaysay, CEO of KonsultaMD; and of course, Mr. Carlo Puno, Vice President of Financial Planning and Analysis. We'll now begin the question-and-answer session. Our first set of questions come from Hussaini of UBS, and I think this is for Carlo. The question reads, what is the leaseback rate of the towers? And are there any escalator clauses built in?

Thanks, Joms. So the lease rates are actually posted in, I believe, Slide 20 and 21. The escalation rates are at 3%, consistent with precedent.

Okay. Thank you. And there's also a follow-up question on towers again, Carlo. With the tower sales proceeds, what would be the company's net debt-to-EBITDA position?

So the proceeds of the towers, as I mentioned, would come in, in tranches depending on when subsequent closings happen. And the full impact of the proceeds will be felt on the final close. Our expectation is that net debt to EBITDA after all proceeds have come in will be around the 2x level, which is in line with [ industry. ]

Thank you for that. The next question, I believe, is for Darius. The question is, mobile revenues were up 1% Q-on-Q versus 3% for your competitor. Why a slower mobility-linked rebound for Globe in this case?

Thanks for that question. While we seemingly grew slower than competition in Q2, it's mainly because we had a great run or momentum starting in Q1, surpassing even our seasonally high numbers in Q4 of 2021. Moreover, we even posted higher than Q1 performance in Q2 on the back of all of our brands firing at all cylinders across channels versus Smart and PLDT's Q1 and Q2 numbers, which are even lower than their Q4 performance last year, as you would note. Lastly, we believe that mobile is basically a momentum game, where our momentum started earlier than that of competition such that by Q2, as also mentioned by Ernest, we are already at prepandemic revenue levels.

Thank you, Darius. The next set of questions come from -- the next question rather comes from Gilbert Lopez of Macquarie. I think this question is for Issa. What accounted for the unprecedented yearly and sequential drop in fixed wireless broadband that was not close to being made up for the yearly and sequential growth in wired broadband?

Thank you, Jomari, and thank you, Gilbert, for that question. As you may remember, in the beginning of the pandemic, our Home Prepaid WiFi or our wireless broadband business actually had a massive uptake as during the early days of the pandemic, customers bought it and needed it as their immediate connectivity and also, at the same time, at some point, using it as well as an interim connection as the fiber rollout was happening and as people were starting to subscribe to fiber as they learned that the pandemic was actually going to be for a much longer period than expected. And now that we are back to the new normal, what we are actually seeing is that the people have already acquired their fiber. And they have chosen actually a far more stable connectivity vis-à-vis a wireless solution. And with the normalization, again, mobility is coming back. And what we're seeing is the business will now start really normalizing more towards the fiber and, at the same time, towards the mobile business. And clearly, with the results that has been shared specific to our fiber business, we are seeing a massive, massive growth. In fact, we are one of the leading growth drivers in the fiber side of the broadband business. So clearly, it's just Globe pivoting to what the customer wants and always being ready to answer their needs.

Okay. Thank you for that, Issa. The next set of questions come from Arthur Pineda of Citi. The first question, I believe, is for Carlo, regarding towers again. Can we get clarity on the terms and impact of the tower sale? What are the leaseback terms and pricing? And what were the cost and depreciation linked to these towers?

Thanks, Arthur. Thanks, Joms. I think the leaseback terms and pricing are in my portion of the presentation. For the more granular details, I think we can connect with him off-line. Thank you, Jomari.

Okay. Thank you for that, Carlo. The follow-up question is also on towers. What is the motivation for selling the towers as the lease liabilities potentially match or exceed the cash we raised? Does this move actually serve to improve the balance sheet gearing?

So I believe we've mentioned in the presentation that asset monetization is actually a key lever for our capital leasing. And at these prices, I think at the purchase price that we got as well as the lease terms, the effective cost of this transaction is actually much more favorable than a similar instrument. It does improve our gearing ratios. And as I mentioned in the previous question, the expectation is that our net debt-to-EBITDA will actually bring us closer to industry levels once we receive all of the proceeds.

Okay. Thanks, Carlo. The next set of questions again come from Hussaini of UBS, and I believe this is for Darius. How would you characterize the mobile competition in the market, active but rational or elevated? What is a bigger risk to growth, third competitor or macro factors?

Again, thanks for that question, Hussaini. So just for overall context in terms of competitive intensity, we see competition further drive pricing. So Smart for one, while continuing to own unli, has moved to the high GB open access space versus content-specific GBs like they used before. TNT hypes value, affordability with recent [ e-com centered ] and lower denom PHP 10 offers, while DITO, on the other hand, has likewise moved to lower price, short validity data offers after they kept within high denom and long validity place for a long time with the intent to monetize their investments. During this period, however, we did not do any price adjustments as we wanted to deliver better services to our customers going beyond just connectivity offers, which we think are plain vanilla now. And we do all this with the consciousness of protecting total mobile industry value as well. I think for the most part then, the mobile market is relatively in between rational and price competitive or intensive. So net-net, I would say it's slightly elevated because of such competitive moves. That said, however, most of our performance is actually impacted by macroeconomic factors such as inflation more than competition. Our mobile brands remain strong in the market, and we're here for the long haul.

Indeed. Thank you, Darius. Next question is regarding broadband, and I believe this is for Issa. When should we expect to see growth normalization in fixed broadband segment of Globe? Globe is losing a bigger portion of home prepaid WiFi subscribers than adding fiber subs.