MB BUSINESS SPECIAL REPORT Philippine telecom sector hopes to recover after challenging year

he year 2016 was a horrible one for the local telecom industry but everything that dives down should come up sooner or later, as in the proverbial wheel of fortune – hence, the big players are betting on a better 2017.

The past 12 months was a race to the bottom – declining profits, huge capital spending and more depreciation costs for the country’s duopoly, the Philippine Long Distance Telephone Co. (PLDT) and Globe Telecom, Inc.

Both paid a hefty price for expanding and improving their networks, copurchasing San Miguel Corp. (SMC) telco assets, with its prized 700megahertz frequency, for R70 billion in the middle of this year.

PLDT sold off assets to meet the bill while Globe borrowed. And then both got entangled in the courts with the Philippine Competition Commission (PCC) when the latter sought to review the mega deal.

Anyway, throughout the squabble, the duopoly still managed to roll out their precious, newly acquired frequencies.

By the third week of this month, Globe hit its target of deploying 500 Long Term Evolution (LTE) sites on the 700 megahertz band (L700) to boost the country’s mobile internet service.

The bulk of the deployment was in Metro Manila and other highly-populated areas where most customers using LTEbased handsets are located.

Globe also activated 900 additional LTE sites using its additional spectrum allocation in the 2600 megahertz band. The telco is well on target to deploy 4,500 multiband, multi-mode software-defined radio station equipment to 95 percent of cities and municipalities in the country within a three-year period.

PLDT’s wireless subsidiary, Smart Communications Inc., also rolled out more LTE and 3G base stations in Metro Manila and Metro Cebu and intends to increase the number of its LTE base stations over six-fold in the next few months.

In Metro Davao, Smart tripled the number of its LTE base stations to boost coverage and capacity.

At the same time, it deployed lowband frequencies, specifically 850 Mhz and 700 Mhz, for its LTE service. Lowband frequencies cover a larger area and provide better indoor signals.

“Our digital transformation remains on track. We remain focused on initiatives where data and digital innovation will drive our growth,” PLDT Chairman and CEO Manuel V. Pangilinan said.

True, 2016 had been “particularly challenging” year, he acknowledged, a horrible one – an “annus horribilis.”

In the first nine months alone, PLDT’s consolidated revenues decreased two percent to R125.4 billion as net income plunged 37 percent to R15.8 billion.

For the entire 2016, Pangilinan said: “We expect Consolidated Core Income to amount to P28 billion due to the decline in Earnings Before Income Tax Depreciation and Amortization (EBITDA), increases in financing costs and depreciation due to higher capex, equity losses from the telco business acquired from SMC, offset by the net gain from the sale of PLDT’s 25 percent interest in Beacon Electric Assets Holdings.”

PLDT expects to end the year with normalized core profitability without exceptionals, a normalized core income and EBITDA of R60 billion – lower by R4 billion from the previous guidance.

“We are making the adjustment to our full year 2016 EBITDA because while data and broadband will keep posting steady growth, toll, cellular voice and SMS revenues will continue to wane.”

Nevertheless, “We will meet our guidance figures and achieve escape velocity from this take off point,” he confirmed last Dec. 23, 2016. “Next year, 2017, will be a tough year for wireless. But I’m optimistic on our fixed line and we’ll see double digit growth for our Home and Enterprise businesses.” And PLDT’s R48 Billion capex is on. “We continue to pursue our network improvement program for both mobile and fixed services for which we have set aside P48 billion this year,” according to Pangilinan. “This initiative has produced encouraging initial results and is laying a solid foundation for our efforts to build our data and digital businesses moving forward.”

“We’ve got a good grasp of the problem that beset us. The company suffered for the past few years. It’s now time to define the baseline business from where we could take off in 2017. We will do better than R20 billion core income and R60 billion EBITDA,” he added.

The country’s telecom competition is like a “live contest”, Pangilinan pointed out. “At the end of the day, you don’t know (what the outcome of the game will be). You only know when you win or when you lose the game.”

Competitor Globe Telecom, Inc. also suffered a 17 percent plunge in its net earnings, which was down to R11.7 billion for the first nine months of 2016 after the telco borrowed R641 million for its co-purchase of SMC’s telco assets and coughed out more depreciation charges for its sprawling network

Core net income went down eight percent even as data-related products boosted its consolidated service revenues seven percent to R89.1 billion for the first nine months of 2016 although consolidated service revenues went up seven percent to R89.1 billion.

Without Globe’s strategic purchase of SMC’s Vega Telecom, Inc., its normal net income would only be down two percent year-on-year.

The company’s R 37.5 billion consolidated EBITDA, up eight perccent, failed to offset the increase in depreciation, given the higher investments the telco made.

However, EBITDA margin stood at 42 percent, at par with last year’s margin and on track with the earlier full-year guidance of 40 percent.

“It’s a good EBITDA,” according to President and CEO Ernest L. Cu. “Our overall financial results remained strong and still on-track with our guidance for the year, marked by record-level subscriber acquisitions, churn improvements and increased data adoption.”

In terms of capex, Globe spent R26.6 billion in capital expenditures through the first nine months of the year to support the growing subscriber base and its aggressive data network expansion, in which 64 percent was spent for data-related initiatives. This also include spends on the deployments for LTE on 700MHz.

The telco has also announced additional capital expenditures of US$300 million for network expansion, for its mobile data (US$160 million), corporate data (US$50 million) and home broadband (US$90 million).

To date, Globe has a total of 29,860 base stations, with close to 19,000 base stations for 4G3, to support the service requirements of its customers.

But the coming Fire Rooster Year brings more cutthroat competition, especially in the data segment, as PLDT is expected to take a more aggressive approach.

The duopoly will likely slash data prices further and subsidize handsets more – alongside their accelerated 4th Generation (4G) rollout – to drive technology adoption in the predominantly pre-paid local market.

As a result, their EBITDA margin can go down from 40-41 percent in 2015 to 37-38 percent in 2017, as they compete fiercely and shift to lower-margin data services.

PLDT is more vulnerable to losing profits because it needs to spend more for marketing and handset subsidies to regain lost market share. In addition, the telco is more reliant on legacy services, deriving 53 percent of its first semester 2016 revenues from voice and messaging services versus competitor Globe’s 42 percent.

Analysts believe that Globe’s higher average revenue per user with its postpaid subscribers would allow the telco to monetize its data services better and enable it to gain market share. Its revenue growth can decline to the mid single-digits in 2017 to 2018, from 16.2 percent in 2015, but it will outpace that of PLDT’s low single-digit level.

Definitely, telcos will have to spend more as they expand into LTE networks and fiber infrastructure. Their capex could soar from R75 billion last year to R93 to R96 billion in 2017. Both PLDT and Globe target to rollout LTE in 90 to 95 percent of the country by 2018.

The fierce competition will be good for customers though of course, it may mean less cash in the service providers’ pockets.