Globe Telecom, Inc. (GLO) Earnings Call Transcript

Good morning, and welcome to the Fourth Quarterly Analyst Briefing of Globe Telecom. Allow me to introduce our management panel for today's briefing. We have joining us today Mr. Ernest Cu, President and Chief Executive Officer; Ms. Rizza Maniego-Eala, Chief Finance Officer; Mr. Alberto de Larrazabal, Chief Commercial Officer; Ms. Issa Guevarra-Cabreira, Deputy Chief Commercial Officer; Atty. Froilan Castelo, General Counsel; Mr. Joel Agustin, Senior Vice President for Program Delivery; and Martha Sazon, President and CEO of Mynt. Mr. Cu will present highlights of the company's performance for the fourth quarter 2020, to be followed by Ms. Sazon who will discuss the latest developments concerning Mynt and GCash. Afterwards, Ms. Maniego-Eala will present the financial results and discuss the company's guidance for 2021. Afterwards, we will open the Q&A session, beginning with a question sent via e-mail to investorrelations@globe.com.ph prior to the start of the meeting -- 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, Carlo. Before I discuss the 2020 performance highlights, I'd like you to note that we are presenting a normalized view of our numbers. This, we feel, reflects our performance more accurately given the several one-off events that happened throughout the year, the details of which will be discussed by Rizza in her portion of the presentation. Service revenues for the year 2020 came in at about PHP 146.4 billion, a slight contraction of 2% year-on-year owing to the impact of the COVID-19 pandemic in the first half of the year. In contrast, we see fourth quarter revenues improving steadily, increasing by 2% versus 3Q 2020. As the economy continues to recover, we are optimistic of our continued growth in 2021, which we will provide more color later in the presentation. Coming off a decline in revenue, normalized EBITDA also posted a 2% decrease year-on-year to PHP 74.8 billion, translating to an EBITDA margin of 51%, at par with last year's margin level. Normalized net income for the year is at PHP 20.4 billion, an 8% decline year-on-year, while the fourth quarter normalized net income declined by 10% to PHP 3.9 billion. Decline in net income notwithstanding, I'm pleased to announce that our Board of Directors recently approved a quarterly cash dividend of PHP 27 per share. On an annualized basis, this represents 74% of full year 2020's core net income. Breaking down service revenues. The mobile segment contributed PHP 103.1 billion or 70% of service revenues for the year. The fixed line segment, on the other hand, and home broadband segment contributed PHP 42 billion. The main driver of performance is the home broadband segment, which grew 23% year-on-year to an all-time high of PHP 26.7 billion owing to the increased demand for broadband services as the pandemic prompted a shift in focus of all consumer activity into the home. Fixed wireless subscribers grew 15% year-on-year to 739,000, while fixed wireless subscribers grew 122% to surpass the 3 million mark. Total home broadband subscribers now stand close to 3.8 million, an 88% improvement versus last year and a 9% improvement versus the third quarter. Corporate data services, while growing 6% quarter-on-quarter, declined by 3% year-on-year as corporate clients were also similarly affected by the pandemic and the shift to work-from-home setup. This led to some slowdown in acquisitions throughout the year. Mobile data was likewise affected by the shift in data usage at home, slowing its momentum to end the year at 1% above last year's level. Sequentially, we are steadily seeing recovery with fourth quarter revenues up 6% versus the third quarter. As with past years, fixed line voice, mobile voice and SMS continued to decline year-on-year and quarter-on-quarter in favor of data services. Data-related revenues now account for 76% of overall service revenue with mobile data as the top contributor. Mobile data traffic is still seeing continued growth with fourth quarter data traffic at 756 petabytes, a 15% increase versus the previous quarter. Mobile data traffic for the year is at 2,517 petabytes, a 40% -- 48% rather rise over the 1,699 petabytes recorded in 2019. Combined with a slight decline in mobile data users year-on-year, monthly ATPU is now at 7.3 gigs per month, up more than 60% against the 4.5 gigs recorded a year ago and 10% up against the 6.6 gigabytes per month last quarter. The growing mobile data traffic is a function of additional data allocations we were offering customers as we took the opportunity to examine their needs and recalibrate our offerings to provide more relevant products and services during this time. One such example of our new offering is the SURF4ALL99, the first-of-its-kind data sharing promo, which offers 9 gigs of shareable data with up to 4 users regardless of whether they are postpaid, prepaid or even home prepaid Wi-Fi subscribers. We also continue to expand our e-learning initiatives, partnering with Microsoft Office 365 to provide a stable, reliable secure platform for our customers' digital learning needs. Last December, we unveiled our partnership with K-Pop group BLACKPINK to launch our latest campaign, Reinvent Your World. This aims to empower our customers to open themselves to new and exciting possibilities beyond connectivity. With this campaign, BLACKPINK officially joins the ranks of world-class Globe brand ambassadors, alongside 12-time, 8-division world champion, Manny Pacquiao. He also became a brand ambassador of Globe last November. Likewise, in December, we proudly took part in keeping a long-standing Christmas tradition alive of bringing the 2020 Metro Manila Film Festival to Filipino homes via streaming. Through GMovies and the video-on-demand platform, UPSTREAM, Filipinos in and out of the country alike were able to enjoy their favorite MMFF films. Being able to provide easy and legal access to content is part of Globe's advocacy against online content piracy. Aside from antipiracy, Globe also advocates for responsible digital citizenship through its Digital Thumbprint Program, which aims to educate the youth on the responsible use of technology, proper online behavior and cyber safety. To this end, Globe partnered with the National Privacy Commission to launch their own program for digital citizenship called Kabataan Digital. Apart from providing relevant products and services, we also endeavor to improve our customers' overall experience. Since the launch of our network upgrade, we have seen great results across our key -- our 3 key strategies. With the support of the Anti-Red Tape Authority or ARTA and the Bayanihan to Recover as One Act, we were able to secure the necessary permits to put up close to 1,300 new towers in 2020 as well as upgrade over 11,500 sites to 4G LTE. This has resulted in improved network experience for our customers, according to third-party mobile analytics provider, Ookla. A recent Ookla report shows a boost in Globe's overall consistency score to 60.82% from 56.83% and shows marked improvements over -- out of -- across 16 out of the 17 regions. With the recent easing of the permitting process, we are seizing the opportunity to further accelerate our builds in 2021. Our target is to put up 2,000 new sites, including in-building solutions and partnerships with independent tower companies. We have also been gaining traction in our fiber build, rolling out 275% more fiber lines in 2020. And we will continue to ramp up our investments all throughout 2021. This year, we are again increasing our target to roll out 2.5x more fiber lines than we did in 2020. Alongside our network transformation efforts, we are consistently expanding our 5G footprint, which is now available in 1,045 areas nationwide. Metro Manila in particular already has 80% 5G outdoor coverage. And in 2021, we'll continue to see 5G expansion across all key areas nationwide. Finally, I am pleased to announce that Globe was awarded in all 3 categories of 2019 ASEAN Corporate Governance Scorecard held virtually last January 29. Globe was given recognition as an ASEAN class publicly listed company, a distinction given to companies that score above 75% of the maximum attainable score of 130. Among the ASEAN asset class, Globe was further recognized as 1 of top 20 ASEAN publicly listed companies and 1 of top 3 publicly listed companies in the Philippines. We are honored to receive such recognition for our efforts as we believe corporate governance plays a significant role in our purpose, vision, mission and core values. This ends the portion of my presentation, and I will now turn you over to Martha who will discuss the developments in GCash and in Mynt. This is the first time we're actually including a formal section on GCash in our presentation, and we can expect Martha and GCash in these briefings. So now I'll turn you over to Martha.

Thank you, Ernest. Let me now discuss the recent developments in Mynt. So 2020 was a year of unparalleled growth and milestones for GCash. We completed our fundraising initiative for the year, bannered by an aggregate investment of $175 million from our existing shareholders and Bow Wave at a post-money valuation of close to $1 billion. The investments were completed in multiple tranches across the year with a capital infusion of Globe and are predating the Bow Wave investment. Negotiations for the fundraising were done and concluded early in 2020, even prior to the significant growth of Mynt and GCash during the course of the year. GCash led the shift towards digital adoption in the country, allowing for safe and convenient transactions amidst the various levels of quarantine. We have grown our registered base to over 33 million. Almost 1 in 3 Filipinos now have a GCash account. Active users are at 3.7x pre-pandemic. We are the #1 finance app in the country based on App Annie surveys and ahead of global social media and entertainment apps like Spotify, Viber and TikTok, among others. We also reached PHP 1 trillion gross transaction value in the early part of December 2020. Lastly, as we scale the user base, we commenced monetization initiatives, resulting in revenues at 4x of the previous year driven across all relevant use cases. This pandemic has also shown that with the massive digital adoption that's led by GCash, we are getting closer to our vision of finance for all. Lately, we have seen various social media posts showing that even fishermen are now using GCash and accept it as a payment -- as a form of payment for their day's catch. I will leave you with this image as I turn the floor over to Rizza for the financial performance of Globe.

Thank you, Martha, and good morning to everyone on the call. I will now go through the details of our financial results for the full year of 2020 and our guidance for 2021. We continue to see revenue recovery with fourth quarter service revenue at PHP 37 billion, up 2% versus the third quarter. On a year-to-date basis, service revenue is at PHP 146 billion, a slight 2% decline versus last year, in line with our guidance of low single-digit decline. Operating expenses, however, posted a 6% increase quarter-on-quarter, leading to a 3% decline in EBITDA and a 46% margin for the fourth quarter. However, on a year-on-year basis, we were able to keep operating expenses flat, resulting in just a 3% EBITDA decline and a 50% EBITDA margin for the year. NIAT also recorded declines of 38% and 16% quarter-on-quarter and year-on-year, respectively, mostly due to the heightened nonoperating expenses from onetime charges incurred during the fourth quarter, which I will discuss in more detail in my latter slides. Core NIAT, which excludes both nonrecurring items as well as ForEx and mark-to-market gains and losses, came in lower at PHP 3.9 billion for the fourth quarter and PHP 19.5 billion for the year, declining by 14% and 13%, respectively. Moving on to OpEx. Full year operating expenses remained flat versus 2019, while quarter-on-quarter, this rose by 6%. Most expense line items posted growth year-on-year with the exception of interconnect charges, which continues to decline following the non-imposition of interconnect rates on mobile and SMS. Services and other expense also declined largely due to the lower managed and customer contact services during the pandemic. Staff costs are up 3% year-on-year, in line with the increased head count versus 2019 and slightly offset by lower incentives for the year. Quarter-on-quarter likewise posted higher staff costs from an increase in head count as well as year-end bonuses booked at the tail end of 2020. Marketing and subsidy posted an 18% year-on-year growth on the back of increased promotional activities for the year. However, we were able to manage spending despite the holiday season, leading to marketing and subsidies declining by 6% sequentially. Network costs continue to grow both year-on-year and quarter-on-quarter as we constantly expand our network. Repairs, maintenance and leases continued (sic) [ contributed ] the most to the increase in network costs driven by increased cell site builds for the year. This was cushioned by lower utility and travel costs due to the implementation of work from home for a significant portion of the year. Provisions likewise increased last year mostly due to the onetime trade provisions booked in the second quarter to address the extended credit that we have given our customers during ECQ. Below EBITDA, depreciation charges continue to grow year-on-year from sustained CapEx investments. For nonoperating OpEx, there were 2 nonrecurring items in the fourth quarter that netted a 21% increase in nonoperating charges year-on-year and a 92% increase quarter-on-quarter, resulting in a 16% decline in NIAT for the year and a 38% decline in NIAT for the quarter. Let me now go into more detail about the nonrecurring items that were excluded in our calculation of normalized EBITDA and net income. The first was a net addition on operating expenses of around PHP 1.2 billion mostly from the additional provisions that we booked in the second quarter, as I had mentioned earlier. Excluding this, normalized EBITDA is at PHP 75 billion, a 2% decline versus 2019. This also reflects an EBITDA margin of 51% on a normalized basis. The second nonrecurring item under nonoperating charges is the deemed sale of our investment in Mynt following the infusion of capital by Bow Wave, which Martha also discussed earlier. This amounted to a PHP 2 billion gain, which cushioned the impact of the third nonrecurring item, which relates to the modernization of our network facilities. Last December, we booked a onetime impairment loss on the existing wired and wireless infrastructure amounting to PHP 4 billion as we replaced some of our legacy broadband lines with fiber technology and changed out 3G equipment to make way for LTE and 5G expansion. The impact of these 2 transactions was a net loss of around PHP 1.8 billion charged to our nonoperating expenses. Excluding these significant nonrecurring items, full year normalized net income declined by only 8% versus last year. For CapEx, we spent PHP 60.3 billion in 2020, majority of which was for data-related requirements as we continued to ramp up -- or as we continue to ramp up our network transformation efforts in response to the demand for better and faster data services most especially at the home. We are pleased to note that CapEx spend came in PHP 10 billion above our guidance of PHP 50 billion as we caught up to the pre-ECQ target of PHP 63 billion. Complementing our efforts is the support of the government and the Anti-Red Tape Authority or ARTA, which allowed us to secure over 1,800 permits for site builds and upgrades for 2020. Looking at our balance sheet. We remain comfortable with our debt and liquidity levels despite the heightened debt level of PHP 167 billion in 2020 versus 2019's PHP 136 billion. We are still within our debt covenants with gross debt to equity at 2x. And if you actually strip off our PHP 19.5 billion in cash, net debt to equity is at 1.8x. Gross debt-to-EBITDA is at 2.4x and stripping out for our cash is at 2.14x. Our Board of Directors recently approved the first quarterly cash dividend of PHP 27 per share. This is payable on March 11 to stockholders on record as of Feb 24. Before we end, my last slide is about providing guidance for 2021. Although the pandemic has negatively affected the business, we are optimistic about regaining the momentum we have lost as the economy continues to recover. Hence, we are guiding low to mid-single-digit growth in service revenues versus 2020 for this year. For EBITDA margin, we are keeping our guidance of 50% level as we believe we will be able to control our expenses and keep to these margin levels. For CapEx, our guidance is a spend of PHP 70 billion or around $1.4 billion as we undertake another ambitious network upgrade centered on improving the data quality and experience of our customers. Through the recent support of ARTA and Bayanihan 2 Act to speed up the permitting process for infrastructure builds, we aim to maximize these opportunities to accelerate our cell site builds, upgrade our existing sites with 4G and 5G technology and fast-track our fiber rollout to the home. Other items for consideration include an increase in depreciation charges corresponding to the elevated level of CapEx spending from our network upgrades. Following the asset impairment booked in the fourth quarter last year, we don't foresee any other significant asset impairment for 2021. Finally, we are also expecting lower share in equity losses of Mynt as we have begun to monetize their services. This concludes my report. We now open the floor for questions, beginning with the initial questions sent prior to the start of the briefing to be followed by additional questions sent during the course of the presentation. Thank you very much.

Thanks, Rizza. Before we begin with the Q&A session, we would like to acknowledge the presence of the following Globe group executives who will be joining us as panelists. They are Ms. Yolly Crisanto, Chief Sustainability Officer, Senior Vice President and Head of Corporate Communications; Mr. Tek Olaño, who is the Chief Financial Officer of Mynt. In addition to the management panel, Mr. Cu may direct some of the questions to these new panelists.

We will now begin the Q&A session. Our first set of questions come from Sevi Sevidal. The question is, May I ask management for color on cross-selling strategies for broadband? Would you say there's an active push to increase the number of postpaid mobile subs that also avail of broadband plans with Globe? The second question is, would you be able to provide commentary on data allocations for mobile? Should we expect the additional allocations to continue this year? Or should we expect a gradual wind-down?

Yes. Issa, maybe you can cover the commercial questions, please. Thank you.

Yes, Ernest. For the first question, there will always be an active push to be the service provider for Globe customers both in the home and mobile services. However, to be able to offer that, we need 2 things to happen. First, definitely our single view of the customer, which, thanks to our soon-to-be unified billing platform, is now coming closer for us to realize in the year. Second and most importantly is for us to have our network available in the right areas with the right technology. As Rizza has mentioned, we aim to bridge that network gap in 2021 with the help of the record level of CapEx that we are investing in the year. And of course, with the easing of the permitting process, we are seeing that the build process will be much, much faster for us to cover both the home and the mobile needs of our customers today. And Carlo, on the second question with regards to data allocations for mobile, we have done quite a bit of recalibration at the height of the pandemic back in 2020. And we've done that to remain relevant to our customers. For now, we believe that with the recent shift in customer behavior, the current promos and services that we have in allocations today are very much appropriate for their needs. But as we go along and as we always do, we will continue to monitor their needs, their usage behavior so that we will continue to be relevant as the world changes once again in 2021 for our customers.

Thanks, Issa. The next set of questions come from John Te of Bank of America. Regarding the big increase in cell tower buildout, can you remind us of the unit economics of the tower buildout? How much would it typically cost a typical ground-based tower and the hardware for each site? And how long would the payback period be especially in these urban areas? Regarding -- the second question, regarding the PHP 27 DPS in Q1, when annualized, it assumes a payout of 74% of 2020 income. Is this target payout ratio for 2021? And given the CapEx budget of $1.4 billion, does Globe expect to be free cash flow positive this year? What was Globe's free cash flow position in 2020? Finally, positive revenue outlook. What are the base case assumptions that you have for the new entrant? Ernest, you can...

Yes, okay. Joel will take the first question. Rizza can take the second. I'll take the third. Joel?

On the first question -- yes, thank you, Ernest. On the first question regarding the cell tower build, the typical or average cost of a tower build is around $125,000 depending on the location and the site circumstances, right? If the site is remote or it is going to be built on the hill, right? So -- and if it's -- and whether you are -- or this site is located in a typhoon path. So it is highly possible that the cost will go up, right, depending on the circumstances. Or if this situation is -- will work to our favor, then the cost will go down. On payback, it's quite variable and hard to look at on a per tower basis as we need to look at the build as a whole as a total portfolio given the need to consider coverage and capacity to ensure attractiveness of the service.

Joel, to clarify [Foreign Language] that the $125,000 is just for the tower, right?

That's correct, Ernest. That's for the tower.

That for the electronics and the transmission and tower requirements. So that's for the passive element, just the physical tower [ we provide ] itself. Rizza, on the dividend question?

Thanks, Ernest. Thank you for the questions. As we -- once that we relate to the market, a dividend discussion happens at the Board level every quarter. And yes, the payout ratio is 74% based on the PHP 27 declared yesterday. Our payout ratio for 2020 based on 2019 net income was at 64%. And I always stress that it is an active discussion every quarter between management and our Board with respect to dividends depending on the situation of the company's cash flows. If you recall last year, we actually lowered interyear the payout because of the pandemic with an option for a look back. Fortunately, our financials came in quite strong towards the second half of the year such that we were able to move the payout ratio back up to 64%. Now on the question on free cash flow positive, we've sent out our financials. I think shortly, you'll be able to calculate that. But suffice it to say we've been free cash flow positive since 2017. So 2017, 2018, 2019 and 2020 were FCF positive years. Now looking at FCFE, then yes, we've had to borrow to pay the dividend. It was only in 2019 where we were free cash flow to equity positive. And I think we've also communicated that with the guidance of our Board, we balance our capital structure. But net-net, I think it's been quite several years that we had to borrow to pay out dividends. And I think there was a third question on outlook, Carlo, before...

Look, yes, on -- Carlo, can you repeat the third question?

The third question is -- sorry, here. Is there -- the positive revenue outlook, what is the base case assumption that you have for the new entrant?

Well, actually, I'll take that. We have really not taken into account any competition coming from the third telco. We believe that based on our own experience, this will -- they will -- it will take likely more than a year probably to really take effect. They are just doing a test at the moment. They're launching in March. But take that with a grain of salt, we're seeing where they will end up vis-à-vis the requirements to -- for certain speed, for certain coverage. So expect us to react as we see and as we go through the process. That being said, I think the marketing plans remain aggressive. We acknowledge the momentum of the other incumbent telco. And I think the plans that we have in place to compete against the other player, I think, will bring us to the right level of competitiveness vis-à-vis the third telco coming in.

Thanks, Ernest. The last question from John Te was regarding the subscriber losses. Given churn was stable in the fourth quarter, do you think the low gross additions were mostly a function of low levels of mobility in the economy? Or was it cost -- competitive activity?

I'll take a stab at that, and then I'll pass it on to Issa. I think we mentioned in the previous briefing the Globe's base and the consumption patterns of the Globe base is highly sensitive to the economic closure and the pandemic effect. And I think we're seeing that as we go. Our activities for acquisition, particularly in the prepaid area, are very much dependent on ground activities. On the postpaid area, it's mainly driven by the stores and the amount of foot traffic going through the malls. As you know, we have a very -- we have a superior in-store experience that we have built throughout the years and are known for in the industry. But if customers can't experience that, obviously, it will be -- it could affect acquisitions. So yes. And the short answer is yes, it is affected by the economy slowing down and the economy closing up. Issa, would you like to add a few words to that?

Absolutely, Ernest. It's largely really the limited mobility back in quarter 4. But today, as we see the market opening up a little bit more with the expectation on the vaccine coming in, we are hopeful that once again, the demand and usage will come back hopefully to pre-pandemic levels. At the same time, we continue to stand by the importance of driving hard on share of wallet more than subscriber count. Clearly, subscriber count is important, but more importantly, it's share of wallet. And in a telco space such as ours where it is highly saturated, it's really about taking the share of wallet more than the SIM count. So it's going to be a tough battle in the current economics clearly for customers to be having multiple SIMs at the moment. So it's really vying for -- to be their primary SIM and making sure that when they need mobility as they need connectivity, it'll be a Globe SIM right there that they will be using once again if the economy comes back up again. So that's it.

Thanks, Issa. The next set of questions come from Diane Go from BDO. The first question is, Globe commits to PHP 70 billion of CapEx in 2021. May we get the breakdown of this CapEx spend? How much is targeted to be spent on tower builds, fiber rollout as well as 5G? The second question is, may we get the company's view on competition for both mobile and fixed broadband?

Rizza, do you have the breakdown on CapEx spend?

Yes, Ernest.

Okay, go ahead.

Well, we don't pretty much give a lot of breakdown on our CapEx. But suffice it to say 80% of the PHP 70 billion will be for our mobile -- or sorry, for our data-related build. So this is for both mobile and for broadband. But I think throughout this presentation, we did give you some highlights or some drivers. So we did mention 2,000 sites that we wanted to build, and Joel also gave you the sort of average cost per site. We also mentioned 100 -- 1 million, sorry, 1 million FTTH lines. So if you stack some of that data up and looking at 80% of the PHP 70 billion will be for data CapEx, that's all the data or all the drivers that we're able to share.

Our next question, Ernest, is from...

Yes. Issa, do you want to comment on that for -- it's a view on competition for both mobile and fixed broadband.

Sorry, I didn't get the question, Carlo. Can you say it again?

So the question is, can you comment on the competition on both mobile and the fixed broadband base?

Oh, okay. Well, currently, since last year, we've seen a very -- well, it's not -- it's very quiet if you ask me. The noise is really all marketing. But on the pricing front, we've found that it's quite rational at the moment. So the industry is stable. No price wars there going on, which is good, I think, overall, but a lot of marketing activity coming out of the other telco on that side. But as Ernest mentioned earlier, we are just as poised to battle for that very important share of wallet of the customers. So both on mobile and broadband but clearly also on the broadband side, we've got another player coming into the picture, Converge. Still remaining to be very geographic, very targeted in nature, nothing earth-shattering on the pricing front. So I think we're okay. It's going to be -- Globe is well underway and really committed to delivering against the revenue guidance. And hopefully, the rationale of the total industry and the pricing remains as it is -- as it had been last year. And hopefully, it continues in 2021. And as Ernest mentioned, let's see when the third player comes in, but maybe not this year, maybe in -- a year from now.

Yes. And I'd also like to add that the action also shifted quite a bit to the home broadband space, the fixed space, which was largely very quiet with regard to the 2 big telcos. But as the builds come -- become ready for service and become ready for sale, I think you'll expect heightened activity as capacity comes into the market. It will not be, you would say, as -- an open playing field for the new entrant, Converge. You will see PLDT, you will see Globe in the mix and, I think, in a major way given the number of lines that we have both projected to make available to the public. So I think there will be some action going on in fixed broadband in the next year -- I mean, this year. We're only in the first quarter. So expect some action there and some competitive activities in that area.

Thanks, Ernest. The next set of questions come from Arthur Pineda from Citibank. The first question is, can we get the flavor on the low to mid-single-digit revenue growth guidance? How is this split between mobile and fixed services? The second question is, what is the dividend outlook for full year 2021 as net debt to EBITDA has been rising and CapEx is expected to rise even further?