Converge continues to deliver solid revenue growth and industry-leading profitability

The Philippines’ only pure-play high-speed fixed broadband operator, Converge Information and Communications Technology Solutions, Inc. (PSE: CNVRG) (“Converge”) ended September 2022 with 1,845,162 residential subscribers, a 16% increase from the same month last year. The Company deployed 411,320 new fiber-to-the-home (“FTTH”) ports during 3Q2022, increasing Converge’s nationwide network reach to more than 14.3 million homes passed as of September 30, 2022.

Converge continues to deliver solid revenue growth and industry-leading profitability

With more than 6.7 million fiber ports throughout the country, Converge has the largest fiber infrastructure network in the Philippines. In line with the Company’s mission to bring affordable high-speed fiber broadband connectivity to the unserved and underserved in the country, Converge achieved a 53.0% nationwide household coverage, on track to reach the Company’s accelerated target to cover approximately 55.0% of households in the Philippines by 2023.

Industry-leading Trifecta with 30.0% YoY Revenue Growth from 9M2021 to 9M2022, 59.0% EBITDA Margin and 16.6% ROIC

Residential Business Continues Growth

Consolidated revenues grew by 30.0% from P18,831 million in 9M2021 to ₱24,481 million in 9M2022 in line with management’s revised full-year annual guidance of 25-30% YoY revenue growth for FY2022. Revenues from our residential business grew by 30.5% from ₱16,374 million to ₱21,362 million during the same period, driven by a 16% YoY growth in our subscriber base. The monthly Average Revenue per User (“ARPU”) of the residential segment remained stable at ₱1,261 in 3Q2022. Enterprise revenue growth continued to accelerate, growing by 26.9% YoY, from ₱2,457 million to ₱3,119 million during the same period, with solid growth across all enterprise segments such as small and medium enterprise (“SME”), large enterprises, and wholesale.

Converge ended September 30, 2022, with 1,845,162 residential subscribers. Gross additions in Visayas and Mindanao (collectively referred to as “VisMin”) improved significantly as the Company continues its expansion in these key regions. In 3Q2022, 15.8% of gross adds came from VisMin, compared to only 5.0% in 2Q2021. This remains a key region for growth as the Company continues to expand its network into new cities and municipalities across VisMin.

Converge has reinstated advance payment requirements for new residential subscribers starting June 2022 in an effort to better manage churn. With this, average monthly churn has significantly improved from last quarter – down from 2.5% to 2.0%. The Company expects monthly churn rates to gradually trend back to around 1.5%levels. With improved churn and focus on subscriber growth, net residential subscriber additions in 3Q2022 more than doubled from last quarter to more than 28,000.

As the economy of the Philippines continues to recover from the impact of the Covid pandemic, revenues from our enterprise business continued their growth momentum at 29% YoY, marking the sixth consecutive quarter of accelerated quarterly revenue growth rates. The SME business continues to grow with a 68% increase in revenue in 3Q2022 on the back of a growing customer base.

Compared to September 30, 2021, SME customers grew by 77%, reaching more than 31,000 customers as of September 30, 2022. The large enterprise segment also grew significantly during the first half of the year with 17% revenue growth on the back of additional key customer wins across multiple industries. Similarly, the Company’s wholesale segment grew by 52% as we increasingly monetize capacity on our vast domestic fiber network and our international cables, with wholesale customers such as telecommunication carrier clients and international over-the-top media services (“OTTs”).

Expanded Profitability in 9M2022 driven by Increased Scale and Prudent Cost Management

Converge achieved an EBITDA of ₱14,445 million in 9M2022, 39% higher than the previous year. As a result, Converge’s consolidated EBITDA margin reached 59.0% in the first nine months of the year, higher than 55.1% in 9M2021. The Company achieved a slightly elevated EBITDA margin of 62.4% during 3Q2022, which was driven by enterprise revenue growth, reduced cost to serve and install, manpower cost improvements, the one-off effect of personnel benefit adjustments, and foreign exchange gains.

Network materials and supplies costs declined in 9M2022 compared to 9M2021, reducing the account’s cost margin from 8% to 4% of consolidated revenues. This was driven by a combination of fewer installations compared to 9M2021 and lower unit costs of our network materials and supplies as we continue to optimize our last-mile roll-out cost. This was offset by increases in Repairs and maintenance, Outside services, Promotions, and Personnel Costs (G&A).

Repairs and maintenance increased due to an increase in headcount for operations and maintenance to support subscriber line repairs and maintenance of our expanded network base. Costs of Outside services, on the other hand, increased as the Company boosted the number of contact agents to improve responsiveness. Promotions were intensified during the first nine months of the year as the Company related to brand enhancement activities in new areas across Visayas and Mindanao. Lastly, Personnel Costs (G&A) grew due to the increase in headcount to support the growing business and compensation expenses related to share option benefits.

Net income after tax grew from P5,198 million in 9M2021 to ₱6,107 million in 9M2022, resulting in Net Income margins of 25%. As expected, depreciation and amortization increased by 71% year-on-year due to the aggressive expansion of the Company’s fiber network infrastructure in the previous years. Depreciation and amortization margins grew from 14% to 19% from 9M2021 to 9M2022. Finance cost margins also grew from 2% to 5% due to bank drawdowns and the P10 billion bond issued during 2Q2022 – mainly used for the aforementioned infrastructure expansion.

Return on ₱ Capital (“ROIC”) remained high at 16.6% for the first nine months of 2022. Our high ROIC continues to be ₱ industry-leading levels as a result of Converge’s disciplined approach to deploying capital to expand its fiber network and tracking key capital efficiency indicators such as our port utilization ratios. Converge’s blended port utilization ratio as of September 30, 2022, was at 24.1%. Of the 9M2022 FTTH ports deployed, around 24% were rolled out in Visayas and Mindanao (“VisMin”) – from 20% last quarter, as we are actively expanding into these new markets, while continuously deepening our presence in Luzon.

Strong Balance Sheet, FX Management, and Cash Flows

Equipped with a strong balance sheet to navigate through a challenging macroeconomic environment, converge4 et debt position (as measured by total financial debt less cash and cash equivalents) was P26,881 million as of September 30, 2022. The Company did not draw any bank debt in 3Q2022 since liquidity is adequate for operational and capital expenditures paid for during the quarter. All outstanding bank debts have limited inflationary exposure since these are Philippine peso-denominated and are long-term fixed lines.

Overall, the Company’s disciplined foreign exchange management has limited our negative exposure to peso depreciation. Converge has P7.7 billion worth of USD currency cash reserves as of September 2022 to fund the foreign-denominated capital expenditures, allowing the Company to minimize any foreign exchange losses from currency depreciation.

With no additional debt and strong profitability growth, the Company’s leverage ratios improved during the quarter. Net debt to LTM EBITDA declined from 1.5x in 1H2022 to 1.4x in 9M2022. Debt service coverage ratio (“DSCR”) was at 4.0x in 9M2022, well within our strictest DSCR covenant of 1.2x.

Our weighted average cost of debt from outstanding debt facilities (bank loans and bonds) remains unchanged from the previous quarter of 5.0% as of September 2022, with average debt maturity of almost five years. This is significantly lower than the 5-year BVAL benchmark rate of 6.3% as of September 2022, highlighting the strength of our balance sheet in a market environment with rising interest rates.

Boosting Speeds of Residential Plans

Beyond being the largest fiber network in the Philippines, Converge is committed to offering the fastest high-speed internet connectivity services in the country. On November 11, 2022, Converge will be permanently increasing the speeds for its residential base plans for free. The fibers Plan 1500 will have speeds of up to 200Mbps, double its current capacity. Similarly, existing and potential subscribers of higher-priced plans will also experience speed boosts. (1) A new FiberX Plan 2000 will be introduced to offer 400Mbps, (2) FiberX Plan 2500’s speeds will also double from 300Mbps to 600Mbps, (3) FiberX Plan 3500 will maintain its 800Mbps speeds, and (4) finally, a 1Gbps plan will be introduced as FiberX Plan 7499.

As Converge has designed its network with significant built-in capacity, the announced speed increases come without any need for incremental capital expenditures for the Company.

According to Ookla, the Philippines’ fixed broadband download speed registered at 78.69 Mbps in September 2022, ranking fifth behind Singapore, Thailand, Malaysia, and Vietnam.

Sustained Growth Trajectory of Enterprise Business

The Company’s Enterprise business continued to accelerate revenue growth, with a 27% YoY growth from 9M2021 to 9M2022, exceeding management guidance of 20% YoY growth for FY2022. The small-medium enterprise segment (“SME”) remained a significant growth contributor amid the reopening of the economy. In 3Q2022, revenues from SMEs grew by 68% compared to 3Q2021. Also, the segment represented 22% of enterprise revenues compared to only 17% during the same comparable periods. SME customers reached 31,442 as of September 2022, 77% higher compared to September 2021.

The wholesale segment also contributed significant growth at 52% YoY from 3Q2021 to 3Q2022. The large Enterprises and Corporates segment remains to be the largest contributor at PHP758 million, representing 66% of enterprise revenues for the quarter. The segment grew steadily at 17% YoY as the Company secured key contracts in multiple industries, including financial services, logistics, and health services.

Elevating Customer Service through Digital Transformation and Accelerating Service Restoration After Natural Disasters

Streamlined Customer-Facing Processes

The Company remains steadfast in its commitment to ensuring that subscribers are provided with the best service with or without a calamity. One of the Company’s large-scale digitalization projects aims to improve back-end efficiency through automation. Benefits include streamlining product and promotions management and customer-journey digitalization. New products and promotions can be easily created with reduced back-end manual intervention. This would allow the Company to be constantly flexible amid the evolving needs of the customers. Also, the customer’s full journey from application to installation, billing, and after-sales can be better managed digitally.

Accelerated Service Recovery

Aside from our infrastructure redundancy projects, the Company has been implementing disaster preparedness activities given the number of typhoons that have and are still expected to hit the country. This aims to limit the impact of calamities on the Company’s infrastructure to ensure minimal service disruption. Generator sets were mobilized and fuel stocks were prepared in business centers and operation sites where these disasters are anticipated to hit. This allowed the Company to continue operations and provide relief services, such as charging stations and free WiFi in business centers. Also, the Company has repair and maintenance personnel ready to attend to network restoration if needed.

With these measures in place, restoration efforts were immediate when both Super Typhoon Karding (Noru) and Severe Tropical Storm Paeng (Nalgae) devastated multiple provinces throughout the country. More than 75% of residential subscribers affected by Super Typhoon Karding (Noru) were reconnected within 2 weeks, the remainder of which were reconnected after due to lack of commercial power. All of the affected enterprise customers were reconnected within 1 week.

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Severe Tropical Storm Paeng (Nalgae) had less impact on the Company’s infrastructure but restoration efforts were still fast. More than 80% of residential subscribers have been reconnected within one week and 100% of enterprise customers have been reconnected within 3 days. These were vast improvements in our restoration efforts after Super Typhoon Odette (Rai) where approximately 60% of affected residential customers were only reconnected after two months and enterprise customers were only restored fully after one month.

The Company will continue to improve its disaster preparedness and recovery programs to ensure service interruption is minimal in the event of a calamity, including network infrastructure redundancy. Converge is also employing natural catastrophe and climate modeling to better understand the potential risks and impacts of natural disasters and climate change, and how best to prepare for them.

To know more about Converge ICT Solutions, Inc. visit their official corporate website today.