YEARENDER: Intense competition among telecom companies expected to continue

MANILA, Philippines - Dominant carrier Philippine Long Distance Telephone Co. (PLDT) and Ayala-controlled Globe Telecom Inc. see no let up in the intense competition in the capital intensive telecommunications industry.

PLDT chairman Manuel V. Pangilinan expects intense competition to go beyond 2014 dragging the bottomline of telecom providers in the country.

“We expect competition to remain keen in the fourth quarter of the year, and possibly beyond 2014 as well,” Pangilinan said.

This prompted PLDT to slash its profit guidance for 2014 due also to the changing revenue-mix in the telecom industry.

The PLDT Group revised downwards by four percent its full-year profit guidance to P37 billion from P39.5 billion as competition is expected to “remain keen in the fourth quarter of the year, and possibly beyond 2014 as well.”

The company’s core net income slipped one percent to P28.6 million in the first nine months of the year from P28.8 billion in the same period last year. This was due to the P4.4-billion increase in cash operating expenses for repairs and maintenance as well as selling and promotions expenses and rent, the P2.1 billion higher provision for income tax, and the P300-million rise in subsidies to support initiatives to grow the data business and the postpaid subscribers.

PLDT’s reported net income likewise declined by three percent to P28 billion from P29 billion due to the P200-million decline in core net income, the P2.1-billion revenues from the discontinued operations of its business process outsourcing (BPO) business, the P400-million decline in foreign exchange and derivative losses as well as the P200-million impairment of transport network assets affected by network upgrade.

On the other hand, the company’s consolidated service revenues inched up by one percent to P122.9 billion from January to September this year compared to P121.6 billion in the same period last year.

Revenues from mobile Internet, wireless broadband, and fixed broadband jumped 19 percent to P30.8 billion from P25.9 billion while revenues from fixed line voice, domestic cellular voice and short messaging system (SMS) dropped three percent to P73.7 billion from P75.8 billion.

Likewise, revenues form national long distance fixed line and international cellular business fell seven percent to P18.4 billion from P19.9 billion.

Pangilinan said the shift in revenue mix in favor of mobile Internet as well as wireless and fixed broadband is not unique to the Philippines but is also happening in other countries.

“The shift that is happening in the telco business model not only happening here but the rest of the world,” he said.

He expects increased price-led competitive intensity in the prepaid cellular market, continued decline in inbound international revenues, the negative impact on SMS of the increasing popularity of messaging apps as well as higher operating expenses, will continue to exert downward pressure on profitability in the ensuing quarters.

For his part, Globe president Ernest Cu said the company continues to focus on improving customer experience to sustain the growth momentum of its earnings.

“We are pleased with our third quarter results which prove that our growth momentum remains intact despite the intensifying competition,” Cu said.

Globe recorded a 22-percent jump in core net income to P11.58 billion in the first nine months of 2014 from P9.53 billion in the same period in 2013 as service revenues grew eight percent to hit a historic high of P72.7 billion from P67.26 billion on the back of revenue increases across all segments.

Revenues from its mobile business went up by six percent to P57.57 billion; broadband business by 16 percent to P9.04 billion; fixed line data by 16 percent to P4 billion; and fixed line voice by seven percent to P2.09 billion.

The telco provider’s operating expenses and subsidy went up by 10 percent to P42.94 billion in the first nine months of the year from P38.96 billion translating to a 198 percent jumped in net income to P10.53 billion from P3.53 billion.

“Our strategy of focusing our efforts towards providing a differentiated customer experience has paved the way for our continued success. We have been consistently growing our mobile business with the solid customer base expansion and the strong demand for our mobile data services,” he added.

London-based Fitch Rating said revenues of both PLDT ad Globe would rise by a mid-single digit rate on the back of the fast-growing data services that would offset the stagnating voice as well as declining text and international businesses.

The rating agency sees the operating earnings before interest, taxes, depreciation, amortization, and rent or restructuring (EBITDAR) margins of PLDT to narrow to 47 percent for PLDT and to 44 percent for Globe.

The lower narrow EBITDAR could be traced to unlimited tariff offerings, cheaper data plans and higher handset subsidies.

Fitch said the capital expenditures of major players in the Philippine telecommunications industry is expected to hit around P60 billion next year from P58 billion this year.

The international credit rater said both PLDT and Globe would invest heavily to expand their fiber networks and at the same time cope with fast growing demand for data services.

Fitch pointed out that the higher capital expenditures of around 24 percent to 25 percent of revenues next year would translate to negative free cash flows for both PLDT and Globe.

It also took note of the higher dividend payment due to larger profitability that currently stands at 100 percent for PLDT and 85 percent for Globe.

As such, Fitch said the profitability of PLDT and Globe would likely decline next year.

“Profitability will also deteriorate as a lower-margin data service replaces higher-margin legacy services, including voice, text and international traffic,” Fitch said in the report.

Battle for subscribers heats up

Battle for subscribers continues to heat up with both PLDT and Globe offering customers “freebies” to lure them to shift to another network.

The PLDT Group had a subscriber base of 75 million as of end-September comprising of 69 million wireless subscribers as well as 3.7 million broadband subscribers and 2.2 million fixed line subscribers.

Wireless giant Smart Communications Inc. had 25.7 million subscribers as of end-September while Talk ‘N Text had 27.8 million, and Sun Cellular with 15.5 million.

Mobile internet usage surged 112 percent to 27,687 terabytes in the first nine months of 2014 from 13,030 terabytes in the same period in 2013 as 25 percent of cellular subscriber own smartphones.

The PLDT Group started offering “free internet” to all subscribers of Smart Communications Inc., Talk ‘N Text, and Sun Cellular last Sept. 26 up to Jan.5.

Pangilinan pointed out that the promo had an encouraging result with more than 50 percent of users being non-data users and over 10 percent being new subscribers.

“The pressure on revenues and margins is not coming from the free internet, broadband and data. Revenues on that side of the business has been growing significantly,” he clarified.

On the other hand, Globe’s subscriber base jumped 17 percent to 42.85 million as of end-September in 2014 from 36.52 million in the same period in 2013. Prepaid users grew 18 percent to 40.69 million while postpaid subscribers rose nine percent to 2.16 million.

Hours after the PLDT Group announced its “free internet” service, Globe revived its free Facebook offer that was initially launched in October of 2013. The initial promo was extended several times until April 2014.

Globe spearheaded the shift from unlimited time-based data plans to volume-based consumable plans to allow its customers to equally enjoy improved mobile data experience and ensure the most appropriate and affordable pricing for data plans.

Globe introduced the new GoSURF consumable data plans in April this year where Globe and For the last quarter of the year, she pointed out that Globe continues to strengthen its content play catering to various digital lifestyles, bundling its GoSURF data plans with exclusive content such as the National Basketball Association (NBA) League Pass.

With its groundbreaking partnership with the NBA, Globe is offering its prepaid, postpaid, and Tattoo customers access to the NBA League Pass, allowing them to watch NBA games live and on-demand through multiple devices.

Aside from sports, Globe also launched partnerships with premium content providers such as WattPad to give users access to books, stories and other pieces of literature as well as with leading local and international TV channels that enables Globe and TM customers to watch videos on their mobile phones for as low as P1.

Higher capex

Both PLDT and Globe are expected to shell out higher amount for capital expenditures in 2015 particularly for long term evolution (LTE) networks to provide faster internet connection to their subscribers.

PLDT president Napoleon Nazareno earlier said the company decided to increase its capital expenditures budget to P34.5 billion instead of P32 billion this year to enhance its 3G coverage in all cities and 92 percent of all municipalities; widen fiber optic cable network to 90,000 kilometers; fortify the northern and southern Luzon aerial fiber optic cable; expand its 4G network footprint; expand its fixed and mobile broadband packet core network; and roll-out fiber-to-the-home infrastructure.

“We expect higher capex levels for 2014, to be carried over into 2015 in light of the market’s continued appetite for data services. While we have already modernized and expanded our networks, we are accelerating our data capacity build-out due to the free internet promo as well as our TD-LTE build-out to meet increasing fixed wireless data demand,” Nazareno said.

Nazareno pointed out that the PLDT Group would be spending higher amount for 2015.

For his part, Cu said Globe is spending as much as $650 million for its capital expenditures for 2015 to boost the capacity of its network and provide faster Internet services to the company’s 43 million subscribers.

“The continuous investments that networks need to put on the ground to build more capacity and coverage and we are doing that. This year is about $650 million and a similar number will be put forth next year and a lot of it devoted to providing LTE capacity,” Cu said.

He pointed out that Globe would continue to invest to improve its network to cope with the growing demand for data.

“We will continue to invest in our network to make it better and better through the years,” he added.

Acquisitions, overseas expansions

The PLDT Group made its biggest foreign investment when it spent €333 million to acquire a 10 percent stake in Rocket Internet last Aug. 7. The stake of PLDT in Rocket Internet was diluted to 6.6 percent after the German firm went public but the value of the investments has gone up to €419 million.

Orlando Vea, chief wireless adviser of Smart, earlier said PLDT and Rocket Internet are presently developing a “proof of concept” that integrates Smart Money’s payment platform in selected Rocket e-commerce businesses in the Philippines including Zalora, EasyTaxi, and foodpanda would be launched in the Philippines.

Rocket Internet’s most prominent brands include leading Southeast Asian e-Commerce businesses Zalora and Lazada, as well as fast growing brands with strong positions in their markets such as Dafiti, Linio, Jumia, Namshi, Lamoda, Jabong, Westwing, Home24 and HelloFresh, in Latin America, Africa, Middle East, Russia, India and Europe.

Leading mobile money service Smart e-Money Inc. (SMI), a unit of PLDT’s Smart Communications Inc., has tied up with Zalora Philippines to launch MePay - a breakthrough electronic and mobile payments platform for the unbanked and uncarded.

Smart is looking at a 100 percent growth in the value of transactions handled by Smart eMoney that amounted to $4.5 billion in 2013.

Meanwhile, the plan of Globe to take over cash-strapped Bayan Telecommunications Holdings Inc. of the Lopez family suffered a setback after the Court of Appeals granted the temporary restraining order (TRO) sought by PLDT to stop the transaction.

The Pasig City regional trial court has approved the master restructuring agreement (MRA) between Globe and Bayantel. Under the transaction, Globe would acquire a 56.6 percent stake in Bayantel through the conversion of 69 percent of Bayantel’s total debt. In return, the outstanding principal debt of Bayantel would be reduced by 69 percent to $131.3 million from $423.3 million.

Globe is also exploring the possibility of expanding its operations within the Association of Southeast Asian Nations (ASEAN) region particularly in Myanmar to complement relatively strong economic growth within the region.

“We will look for white space within Asean and Asia on where to leverage the skills we’ve developed overtime and we do think we’ve developed a decent telco business here in the Philippines. We have a great team and we’re thinking of ways to leverage that further in emerging economies,” Cu said.