The Philippines’ only pure-play high-speed fixed broadband operator, Converge Information and Communications Technology Solutions, Inc. (PSE: CNVRG) (“Converge”) ended 2Q2021 with 1,355,079 residential subscribers, 85% more than in 2Q2020 resulting in another record quarter for the Company. The completion of the initial phases of Converge’s domestic subsea cable network in the VisMin region in 2Q2020 resulted in the activation of an end-to-end nationwide backbone reaching from northern Luzon to Mindanao. This event represented another historic milestone in the mission of Converge to bring reliable and affordable, high-speed fiber internet to millions of households in the Philippines nationwide. As the fastest growing fixed broadband operator in the Philippines, the Company deployed a record 565,848 new fiber-to-the-home (“FTTH”) ports during the quarter, more than twice the number of FTTH ports deployed during the same quarter the previous year. As of June 30, 2021, Converge’s nationwide network reached more than 8.3 million homes, on track to reach the Company’s target to cover approximately 55% of households in the Philippines by 2025.
Strong Financial Performance – Industry-leading Trifecta with 81.5% YoY Revenue Growth from 1H2020 to 1H2021, 55.1% EBITDA Margin and 21.6% ROIC
Continued Strong Revenue Growth driven by our Residential Business
With strong and continued subscriber take-up, consolidated revenues grew by 81.5% from P6,490 million in 1H2020 to P11,781 million in 1H2021. Revenues from our residential business more than doubled from P4,978 million in 1H2020 to P10,212 million in the same period of 2021, driven by an 85% YoY growth in our subscriber base and increase of 7% in residential average monthly revenue per user (“ARPU”). On the other hand, enterprise revenues grew slightly by 3.8% YoY, from P1,512 million to P1,569 million, mostly from the growth in our small and medium enterprise (“SME”) customer base.
Residential subscribers grew to 1,355,079 as of June 30, 2021 from 731,563 as of June 30, 2020. During 2Q2021 and based on publicly available information, Converge captured 47% market share of fixed broadband net adds amongst the three largest broadband operators in the Philippines, representing an increase in fixed broadband market share from 21% in June 2020 to 29% in June 2021. Reflecting the high demand for fixed broadband connectivity services in the Philippines, we estimate that c. 95% of our new subscribers in 2Q2021 were first time fixed broadband users. Driven by continuous demand for our fiber plans including increased take-up of add-on plans and premium packages, our monthly residential blended ARPU also improved from P1,287 during 2Q2020 to P1,372 in 2Q2021. Despite a larger proportion of subscribers as of June 2021 subscribed to our base plan compared to June 2020, there was an increase in demand for our add-ons services and premium plans, specifically the higher capacity plans, 10-for-99 add-on, and our Time-of-Day plans.
Revenues from our enterprise business grew by 3.8% YoY. The successful launch of the Company’s SME product flexiBIZ earlier this year allowed us to almost double our SME customer base in 2Q2021 from the same period last year. Our overall enterprise customer base increased from 10,498 unique customers as of June 30, 2020 to 17,539 as of June 30, 2021.
Strong Profitability Growth in 1H2021 driven by Increased Scale and Cost Management Initiatives
Our continued prudence in the management of direct costs, such as our international bandwidth and leased line costs and increasing operating leverage contributed significantly to continuous EBITDA growth. Converge achieved yet again a record EBITDA of P6,494 million in 1H2021, representing an increase of 96.0% from 1H2020. As a result, Converge was able to improve its record consolidated EBITDA margin to 55.1% in 1H2021, higher than the 51.1% in the same period the year prior.
In September 2020, Converge started to draw down on its international capacity from the Telstra Indefeasible Right of Use (“IRU”) contract, reducing the need to lease additional international bandwidth capacity. This, together with prudent management of our other international lease agreements, resulted in a reduction of bandwidth and leased line costs from 9.8% of total revenues in 2Q2020 to 3.8% of total revenues in 2Q2021. These cost reductions outpaced the increase of other cost items such as personnel cost, which increased from P609 to P1,008 as a result of additional headcount and employee stock ownership plan recognition.
Net income after tax more than doubled from P1,259 million in 1H2020 to P3,252 million in 1H2021. This resulted in an increase of Net Income margins to 27.6% from 19.4%. Finance costs were lower in 1H2021 due to repayment of outstanding loans. In addition, with the Corporate Recovery and Tax Incentives for Enterprises (“CREATE”) bill signed into law, our effective corporate income tax rate was reduced to 23.0% during 1H2021.
Industry Leading ROIC and Strong Balance Sheet
Converge’s Return on Invested Capital (“ROIC”) improved to 21.6% in 1H2021 from 20.0% during FY2020. This industry-leading performance is a result of Converge’s record net profits in 2Q2021 and its consistently disciplined approach in deploying capital to expand its fiber network and tracking key capital efficiency indicators such as our port utilization ratios. Converge has been able to still maintain the blended port utilization ratio of 30% from March 2021 to June 2021, despite deploying almost 0.6 million FTTH ports during the quarter. As of June 30, 2021, the Company had achieved an average utilization of 39% on all FTTH ports deployed in the National Capital Region (“NCR”) in the month of June 2020 (12 months after deployment) and an average utilization of 53% on all FTTH ports deployed in NCR in the month of December 2019 (18 months after deployment).
Converge has been able to maintain its strong balance sheet and cash flows with ample liquidity and gearing comfortably within bank covenants, in spite of the drawdowns from available facilities to finance the significant network expansion done during the quarter. The Company’s net debt position (as measured by total financial debt less cash and cash equivalents) increased from P230 million as of March 31, 2021 to P6,339 million as of June 30, 2021 as the Company availed of a total of P2.9 billion in new debt offset by repayments and amortizations amounting to P1.8 billion. The Company’s debt service coverage ratio (“DSCR”) was 3.0x and the net debt position as a percentage of total equity was 20%, well above the required financial covenants from its debt facilities. Converge’s total undrawn debt facilities amounted to P22.5 million (~US$466 million) as of June 30, 2021. Our weighted average cost of debt from drawn debt facilities decreased from 5.3% in June 2020 to 4.8% in June 2021, reflecting a lower interest rate environment and increased strength of Converge’s credit profile. We believe that our long-term debt facilities with six commercial banks, together with the Company’s available cash and increasing operating cash flows, provide Converge with sufficient headroom to execute its capital expenditure plans in the mid-term.
Strong SME Demand in 2Q2021
The Company is seeing signs of recovery of the SME sector in the second quarter of the year. Converge’s SME customer base grew significantly in 2Q2021, arising from innovative product launch and improved sales and marketing initiatives. Converge pursued strategic, on-the-ground sales activities that increased client reach, covering commercial districts in cities and municipalities as well as covering the barangay level. After the introduction of the new SME product flexiBIZ in March 2021, SME customers grew from almost 8,800 as of March 30, 2021 to almost 13,900 by June 30, 2021. The flexiBIZ plan doubles the internet speeds during peak working hours of the day (7:00AM – 6:59PM) when the customer would need the bandwidth more. Along with the launch, the Company also organized and participated in various online webinars to promote the product and to introduce its features to a wide variety of audience. We expect revenue growth from SME to be further accelerated by our expansion in the VisMin area, where we see heightened demand for reliable fiber based connectivity services.
Early Inclusion in the Philippine Stock Exchange Index
On August 5, 2021, the Philippine Stock Exchange (“PSE”) announced that Converge will be included in the Philippine Stock Exchange Index (“PSEi”) effective August 16, 2021 after qualifying for early inclusion. The PSE approved amendments to its index management policy, one of which was that companies with trading history of six months (from previous requirement of 12 months) will be eligible for early inclusion, provided that the company’s market capitalization is ranked at least in the 25th position at the end of the review period, subject to meeting the free float and liquidity criteria. With the support of the investing public, the Company was able to meet all the necessary requirements for early inclusion, and was therefore added to the 30-company index, which serves as a barometer of the general state of the business climate in the country.
“This was a pleasant surprise to us as we are really just focused on delivering our commitment to reach the underserved and unserved areas in the country with world-class pure fiber broadband connectivity,” Converge CEO Dennis Anthony Uy said.
Completed Connecting Visayas and Mindanao to our Nationwide Backbone
Converge has completed the initial phases of our domestic subsea cable network to the VisMin region, which led to the activation of an end-to-end nationwide backbone – bringing better quality internet connectivity to more households in the country. More than 11,800 kilometers of fiber optic cable were added during the second quarter of the year, expanding our backbone and distribution network to almost 76,500 kilometers from about 64,600 kilometers laid down last quarter. By July 2021, our fiber backbone had reached 80,500 kilometers. With our network expansion, we were able to extend our coverage to an additional 53 cities and municipalities during 2Q2021, extending our services this quarter to new provinces, including Ilocos Norte, Cebu, and Davao, among others. The Information Technology and Business Process Association of the Philippines and the Department of Science and Technology-Information and Communications Technology Office recognized Cebu and Davao as centers of excellence for development of the IT-BPM industry. These provinces are in the top regions in the Philippines in terms of GDP. Central Visayas (Cebu) and Davao Region (Davao) are in the top five while Ilocos Region (Ilocos Norte) is eighth out of 17 regions based on 2020 GDP. As of June 30, 2021, the Company’s network has now reached over 400 cities and municipalities nationwide.
“We’ve already hit the ground running when we had our soft launch in Cebu last November. Considering that we’ve only been operating in Mandaue and Cebu cities on a limited basis, we’ve already signed on thousands of subscribers and established partnerships with SME and Enterprise clients,” said Converge CEO and Co-Founder Dennis Anthony Uy.
Converge is also set to start the construction of a data center in Cebu as it prepares to serve the surge in the data requirements in Visayas and Mindanao amid its aggressive expansion in central and southern Philippines. The rise of a new state-of-the-art data center in Cebu supports the recently unveiled strategic framework of the Department of Information and Communications Technology (“DICT”) for the country’s full and inclusive participation in the global digital economy which it called CHIP – Connect, Harness, Innovate and Protect – that would also serve as the driver of the Philippines’ digital transformation.
Continued Investment in Network Upgrades to Deliver Best Results
To respond to the increasing needs of the network and customers, Converge is preparing for a substantial network upgrade that will double the data transmission capacity of its metro backbone from the existing 400 Gigabit per second to 800 Gbps, in anticipation of the use of next-generation, hyperscale capacity applications over its fiber optic network. This aims to reduce latency and to allow for high-speed data transfers needed for next-generation technologies such as the Internet of Things and smart cities.
“Developments in cloud computing, big data, virtual reality, combined with the increasing demands on remote storage and streaming technology is creating massive demand on our network and data centers. We want to respond to the high-capacity needs of our network and customers, and to be able to accommodate any new-generation technologies they may have,” said Uy.
With customer satisfaction in mind, the Company continues to invest in technological improvements for better quality of service. This is evidenced by the consistent top ranking of Converge in the Netflix ISP Speed Index for the Philippines, which ranks internet service providers in terms of prime-time Netflix performance.
The global leader in internet testing and analysis Ookla recently verified Converge ICT Solutions Inc. as the most consistent fixed internet provider in six regions, including Metro Manila, based on the recent Ookla Speedtest Intelligence analysis for the second quarter of the year. The other regions with consistent Converge internet connectivity are Calabarzon (Cavite-Laguna-Batangas-Rizal-Quezon), Ilocos, Central Luzon, Bicol and the Cordillera Administrative Region.
Augmenting our International Subsea Cable Portfolio
In June 2021, Converge acquired the shares of Digitel Crossing, Inc. (“DCI”) and Asia Netcom Philippines Corporation (“ANPC”) previously owned by Digital Telecommunications Phils, Inc for US$7.5 million. DCI maintains and operates the cable landing stations in the Philippines for EAC and C2C cable systems, while ANPC owns the land assets where the EAC cable landing station is located. The EAC and C2C cable systems, in which Converge has an existing IRU, are owned and operated by Telstra. With the acquisition, the Company has secured strategic cable landing stations for the international subsea networks that it draws from. This allows Converge to ensure sufficient and cost effective international connectivity for its fast growing customer base.
In May 2021, Converge further secured its participation in the Bifrost Cable System with the signing of definitive agreements with Keppel Telecommunications & Transportation’s wholly-owned subsidiary, Keppel Midgard Holdings Pte. Ltd. (“KMH”). The agreement aims to grant Converge an IRU for one fiber pair on the main trunk of Bifrost Cable System, which directly connects Singapore to the west coast of North America. KMH and Converge will also jointly develop a branch on the Bifrost Cable System that will land in Davao, Philippines, with Converge also being granted an IRU on the entire Davao branch. The additional branch will significantly increase internet speeds and network diversity for businesses and consumers in the Philippines. Converge will invest over U.S.$100 million (around P5 billion) for the whole project.
Expected to be completed in 2024 and spanning over 15,000 km, the Bifrost Cable System is the world’s first subsea cable system that directly connects Singapore to the west coast of North America via Indonesia through the Java Sea and Celebes Sea. It will connect Singapore, Indonesia, the Philippines, Guam, and the west coast of North America. In line with Converge’s strategy to secure proprietary access to international bandwidth on certain key international routes, we plan to use the bandwidth on the Bifrost cable system to secure sustainable and cost-efficient international connectivity for Converge, while also exploring the possibility to re-sell international bandwidth to third parties through wholesale agreements.
Launch of Entertainment Service ”VISION”
In July 2021, Converge in partnership with Pacific Kabelnet Holding Co. Inc. (“PKN”), an affiliate cable company, launched its “VISION” branded entertainment service. This new entertainment add-on gives existing and new subscribers access to local and international television channels like USA Today News, USA Today Sports, Pocketwatch, and Ryan & friends, using Converge’s fiber network. For an affordable price of P99 per month for 65 channels and P299 per month for 82 channels, VISION comes with a set-to-box called Xperience Box, a full Android, all-in-one entertainment device, that allows Converge subscribers to enjoy multi-genre TV programs and shows in the comfort of their homes. This add-on product is aimed to support our ARPU, as well boost customer loyalty
Enabled via Wi-Fi and Bluetooth, the Vision Xperience Box does not require connectivity to any cable TV line and also allows easy connection to a mouse, gamepad, keypad, and other devices. This easy-to-set-up service comes with reliable security features and an enhanced artificial intelligence that provides a quick, one-click access to channels, Google apps, online games, and OTT apps like HBO Go, Amazon Prime, YouTube and Spotify.
“The Vision Xperience Box takes convenience up a notch through its voice-enabled remote for easy searches via Google Assistant and a digital interface that allows hassle-free connection to home theater systems or power amplifiers. Watching the most popular shows in the Philippines or abroad and accessing content through various apps have never been this effortless,” said Converge COO, Jesus C. Romero.
Continued Commitment to Improving Customer Experience
The Company continues to commit to providing a quality customer experience for both existing and potential new subscribers. Converge continues to be highly focused on enhancing the overall customer experience by strengthening our customer care functions and digitizing the journey of our customers.
In 2Q2021, Converge installed more than 93% of new NCR subscribers within seven days and 63% within one day of application, respectively. In addition, the Company continued to expand its contact agent team by adding almost 100 seats during the second quarter to cater to customer queries from the expanding subscriber base. The Answer Call Rates, which measures the number of voice calls that contact centers answered during the quarter divided by all of the voice calls received (during both peak and off-peak hours), further improved from 94% in 1Q2021 to more than 96% during 2Q2021.
During the third quarter of 2020, the Company rolled out its mobile application Converge Xperience App, which offers a convenient channel for its customers to review and pay their bills, and allows customers to log tickets online. As of June 30, 2021, more than 532,000 subscribers have registered in the application, representing almost 40% of residential subscribers as of the end of the period. Converge intends to continue refining and upgrading our mobile application using new technologies for innovation, which will provide new ways of customer engagement.
Last May 29, 2021, the Company launched the new Omnichannel Customer Relationship Management (“CRM”) system. This tool allows the Company’s contact agents to handle customer requests and complaints via various touchpoints, decreasing the effort required from the customer in raising his concerns and getting these addressed at the soonest possible time. It allows the Company to improve the proper distribution with faster response time to customer concerns from a single, universal system, in addition to being able to reach out to customers as the need arises. In this new platform, all the existing customer touchpoints such as calls, email, social media platforms, SMS and self service channels like ticket creation webforms, will flow through a single system to improve contact agent service levels.
Converge believes that “self-help” is a key factor to swiftly and efficiently address potential customer issues. As a new feature on our mobile application, registered subscribers can now monitor the health status of their routers, specifically the speed and temperature of the device. This allows the subscriber to detect possible causes of unreliable connectivity and provide first aid using step-by-step instructions presented in our mobile application.
Affirmed Commitment to Environmental, Social and Governance
Since the start of the year, Converge has been working on the Company’s Sustainability Framework that goes beyond compliance reporting. The framework will underscore our commitment to ensuring that the Company adheres to global standards in environmental, social, and governance best-practices. The Company has arranged workshops for our management to refine the materiality assessment, establish internal monitoring processes and identify Environmental, Social, and Governance (“ESG”) targets and strategies. These workshops promoted critical thinking in determining key pillars and crafting strategies relating to our sustainability framework. In addition, the Company has engaged with key stakeholders for consultations in identifying relevant metrics and targets to disclose. With these, Converge has finalized its Sustainability Commitment as guide in our day-to-day operations: “We empower the Filipino people and the nation through technology. We respect humanity and the environment as we create a prosperous nation and sustainable future for all.”
The Company also strengthened its Enterprise Risk and Business Continuity Management functions with seasoned talent in these areas, overseen by Ms. Grace Uy as the Chief Risk Officer. With the recent natural threats occurring, such as earthquakes, typhoons, floods, and imminent volcanic eruption, the Company continues to test and improve its business continuity practices. Our Board Risk Oversight Committee led by Gov. Amando Tetangco oversees the company’s Enterprise Risk Management system as well as our sustainability efforts.
Membership in Internet Watch Foundation
Converge joined the UK-based Internet Watch Foundation (“IWF”) in its fight to clamp down on internet sexual abuse against children anywhere in the world. Joining the ranks of global technology companies such as Facebook, Google, Apple, Twitter, and TikTok on the fight against online sexual abuse and exploitation of children, Converge was recently admitted as member of the online watchdog IWF which have already removed over 250,000 individual webpages of criminal content, mostly child sexual abuse images and videos.
As an IWF member, Converge will have access to this suite of IWF’s online tools. This includes a URL list, a master database of online child sexual abuse webpages for easier tagging and blocking, and an ‘Image Hash List’ an award-winning tool that’s essentially a database of codes representing the illicit content, which can then be matched with content on Converge’s network and removed. The latter tool may even help in preemptively detecting and blocking the upload of the criminal image or video onto the network. So far, Converge has removed nearly 10,000 sites that are deemed unsafe for children and will continue to closely monitor online activities within its network to make sure that no illegal activities are carried through its network.
Sustainability Initiatives
During the second quarter, the Company has done various initiatives in line with our Sustainability Commitment.
– Converge conducted good governance training workshops for employees, including Anti-Money Laundering, Information Security and Intellectual Property, and Anti-Bribery and Anti-Corruption
– Converge partnered with environmental group Abacan River and Angeles Watershed Advocacy Council, Inc. (“ARAW-ACI”) and the Angeles City local government unit for the planting of a total of 2,000 tree seedlings in Barangay Sapangbato.
– The Company also conducted vaccine education webinar to properly inform employees of the COVID disease and the benefits getting inoculated. Dr. Lulu Bravo from the University of the Philippines and Dr. Beverly Lorraine Ho from the Department of Health were the speakers during the webinar.
– In coordination with the Batangas Provincial Disaster Risk Reduction and Management Office, the Company provided high-speed fiber broadband connectivity to four evacuation centers in the province.
– The Company has provided a dedicated fiber connection to facilitate the vaccination program of the local government units of Angeles City in Pampanga and San Juan City in Metro Manila
– With the unrest of the Taal Volcano, Converge arranged outreach programs to provide food and connectivity to evacuees in partnership with the various local government units (“LGUs”) in Batangas. Converge turned over 1,000 each of 5-kilogram packs of rice and 5-liter purified water in slim containers for the affected families in the province. The Company also provided survival kits to its employees living within the proximity of the restive volcano.
