The Philippines’ only pure-play high-speed fixed broadband operator, Converge Information and Communications Technology Solutions, Inc. (PSE: CNVRG) ended 2022 with 1,877,361 residential subscribers, an 11% increase from December 2021. Converge deployed approximately 312,000 new fiber-to-the-home (“FTTH”) ports during the last quarter of 2022, culminating in an end-of-year port count of approximately 7.9 million. As of December 31, 2022, Converge’s nationwide network reached more than 14.9 million homes, representing a 56.2% nationwide household coverage, already surpassing the Company’s accelerated target to cover approximately 55% of households in the Philippines by 2023, and making the Company’s FTTH network the broadest in the country by number of ports.
With approximately eight million ports now deployed across the nation, the Company sees various opportunities for subscriber growth in the coming years as it is positioned to connect unserved customers, supported by its expansion into the Visayas and Mindanao region. With successfully capturing a sizeable portion of the upper income segments, the Company now continues to expand its reach into the lower income segments via its foray into lower cost products such as prepaid fiber.
Robust FY2022 Financial Results Supported by Growing Residential Business, Expanding Enterprise Segment, and Proactive Cost Management
Residential and enterprise segments continue to deliver with revenues growing significantly by 27.4% and 26.4% respectively YoY.
Consolidated revenues grew by 27.3% from P26,479 million in FY2021 to P33,696 million in FY2022, in line with the Company’s YoY revenue growth guidance of 25-30%. Revenues from the residential business grew by 27.4% from P23,129 million in FY2021 to P29,462 million in FY2022, driven by a 11% YoY growth in subscriber base. On the other hand, enterprise revenues grew by 26.4% YoY, from P3,350 million to P4,233 million during the same period, mostly from the strong revenue growth in the small and medium enterprise (“SME”) and wholesale segments.
During the last three months of 2022, Converge garnered 32,464 net adds, marking a re-acceleration of subscriber growth for two consecutive quarters. The Company ended the year with an active residential subscriber count of 1,877,361 – 11.0% higher than December 31, 2021 residential subscriber base of 1,691,550. Monthly residential churn rate continued to decrease in the last quarter of the year to 1.75% – a second consecutive decrease from the all-time high of 2.49% in the second quarter of 2022, and 1.96% in the third quarter.
Across the board, enterprise subsegments continued to deliver solid growth in 2022. With over 33,000 customers as of December 31, 2022, the SME segment continued to lead growth with YoY revenues jumping by 91.4%, followed by wholesale segment increasing by 27.8% in the same period. Revenues from large enterprise customers, making up the largest subsegment, steadily grew in FY2022 by 14.4% YoY supported by the reopening of the economy and modular shift of various enterprises to an on-site work arrangement.
FY2022 EBITDA margin expansion to 57.3%, above management guidance of 55.0%, driven by growing scale and proactive cost management
Converge once again achieved a record annual EBITDA of P19,353 million in FY2022, representing an increase of 30.7% from the previous year. As a result, Converge was able to improve its consolidated EBITDA margin to 57.4% in FY2022, higher than the 55.9% in the prior year, and beating management guidance of 55.0%.
Compared with FY2021, network materials and supplies used decreased by 34.8%. Additionally, as a result of Converge drawing down on its international capacity from the Telstra Indefeasible Right of Use contract, bandwidth and leased line costs decreased by 17.7% YoY, resulting in a corresponding decrease in cost margin from 3.8% to 2.5% in the same period. With increased operating leverage, Converge was able to also reduce the cost margin of total personnel costs from 6.4% in FY2021 to 5.2% in FY2022.
Industry Leading ROIC and Strong Balance Sheet
With capital expenditures in FY2022 of P21.9 billion, Return on Invested Capital (“ROIC”) was maintained at industry leading levels. Converge recorded a 15.7% ROIC in FY2022. This strong performance is a result of the Company’s disciplined approach in deploying capital to expand its fiber network and constant monitoring of key capital efficiency indicators such as its port utilization ratios. Converge’s blended port utilization ratio as of December 31, 2022 was at 23.8%.
Due to Converge’s continuous port deployment and investments in the network, depreciation and amortization increased from P4,085 million in FY2021 by 60.4% to P6,557 million in FY2022. Net income after tax grew to P7,439 million in FY2022 from P7,158 million in FY2021, resulting in a net income margin of 22.1% for FY2022.
Converge has been able to maintain its strong balance sheet and cash flows with ample liquidity and gearing comfortably within bank covenants. The Company’s net debt position (as measured by total financial debt less cash and cash equivalents) increased from P26,881 as of September 30, 2022 to P28,008 million as of December 31, 2022. The Company did not avail of any new debt in 2H2022 but loan repayments brought the financial debt balance to P38,222 million as of December 31, 2022 from P38,669 million in September 31, 2022. The Company’s debt service coverage ratio (“DSCR”) was 3.9x and the net debt-to-total equity was at 0.8x, well within the required financial covenants from its debt facilities. Converge’s total undrawn debt facilities stood at P14.0Bn (~USD254 million) as of December 31, 2022. The weighted average cost of debt from drawn debt facilities remained at 5.0% as of December 2022, unchanged since June 2022.
Construction of Backbone Network Mostly Complete, Expansion into Visayas and Mindanao Areas to Continue
Almost 7,400 kilometers of fiber optic cable were added to the national backbone during 4Q2022. As of December 31, 2022, the Company’s fiber backbone now spans more than 140,000 kilometers long, 40% larger than the December 31, 2021 year-end length of 103,000 kilometers. Total fiber infrastructure, including last mile connections, spans 618,000 kilometers as of December 2022.
With the Company’s continued network backbone investment, Converge intends to focus on expansion into the underserved areas of Visayas and Mindanao. In the last three months of 2022, the Company soft launched in multiple cities and municipalities in Visayas and Mindanao (“VisMin”), including Negros Oriental, Compostella Valley, Surigao City, Digos City, Sta. Cruz, and Sarangani. In the same period, the Company deployed a total of 312,084 ports across the country, almost half of which were deployed in VisMin.
As a result of its expansion efforts into the VisMin region, gross adds contribution from said areas have been increasing in recent quarters. In the last quarter of 2022, Converge garnered a total of 129,945 gross adds nationwide, 18.5% of which were from the VisMin region, a significant increase from the 5.4% VisMin gross adds contribution in the same period last 2021.
Increased Speeds for Residential Plans
Beyond being the largest fiber network in the Philippines, Converge remains committed to offer the fastest and most reliable high-speed internet connectivity services in the country. Last November 11, 2022, Converge permanently increased the speeds for its residential base plans for free.
The FiberX Plan 1500’s speed was doubled, resulting in speeds of up to 200Mbps. Similarly, existing and potential subscribers of higher priced plans also experienced speed boosts. (1) A new FiberX Plan 2000 was introduced to offer 400Mbps, (2) FiberX Plan 2500’s speeds were also doubled from 300Mbps to 600Mbps, (3) FiberX Plan 3500’s 800Mbps speeds was maintained, and (4) finally, a 1Gbps plan was 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. 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.
Additionally, Converge launched different product offerings to serve various market segments. In the earlier part of 2022, the Company rolled out Converge Gamechanger, a gaming package that comes with top of the line gaming routers, geared specifically towards online Filipino gamers. The Company also launched XCLSV – a premium customer service package available to subscribers of higher speed post-paid plans such as FiberX Plan 3500 and above. XCSLV includes a dedicated support team and hotline to provide customers with a seamless customer service experience. Furthermore, the Company continues to explore products geared towards lower income segments, some of which would include prepaid fiber.
Significant Advancements in Network Performance as a Result of Continued Backbone Investment
Having one of the largest fiber networks in the country, Converge continues to invest in backbone improvements to ensure its customers receive only the fastest and highest quality fiber connectivity experience. Last year, the Company implemented the adoption of Artificial Intelligence (“AI”) technology into the conduct of its network operations. The integration of AI technology brings various organizational improvements covering repairmen dispatching, infrastructure and hardware overheating, and the notification of relevant internal network watchmen.
The Company’s network investments resulted in various improving operating metrics. The portion of service affecting tickets to total network tickets declined by almost 50% this 4Q2022. Additionally, with the inclusion of AI into the conduct of its network operations, the Company’s Mean Time to Escalate improved by 42%, allowing the Company to attend to network related problems quicker.
“We have been hard at work to improve our customers’ daily experience with reliability being one of our focus points. However, there are events that impact our infrastructure, such as environmental calamities which we cannot control. That is why we invest in these programs and equipment to ensure that our services are resilient and minimally impacted in the face of these disturbances if at all; as such, we have already begun to see our efforts come to fruition in the latter part of 2022,” said Converge Chief Network Transformation Officer, Paulo Martin Santos.
Best-In-Class Broadband Provider Topped Netflix’ ISP Speed Index and Ookla’s Best in Video Experience for the Year
Converge topped Netflix’s ISP Speed Index in 10 out of the 12 months for 2022 – a testament to the Company’s ability to deliver high-quality broadband service to its streaming customers. According to the Netflix ISP Speed Index in December 2022, Converge garnered a speed rate of 3.6 Mbps, with a full year average speed of 3.42 Mbps. This is a marked improvement from the preceding six months where Converge has consistently been logging 3.4 Mbps
“We have continually increased the bandwidth allowance of our customers to improve their experience and allow them to do more things, such as video streaming on multiple screens. So everyone in the household could binge on their favorite Netflix series at the same time without any problems,” shared Converge Chief Operations Officer Jesus Romero.
The ISP Speed Index is a measure of prime time Netflix performance on a particular ISP and not a measure of overall performance for other services or data that may travel across the specific ISP network. Faster Netflix performance generally means better picture quality, quicker start times, and fewer interruptions.
Also, the Company has been hailed as the winner of the Ookla Speedtest Award for Best ISP Video Experience in the Philippines for the second half of 2022 after it finished at the top with an overall 80.99 video score, reflective of the results of consumer-initiated scoring during a six-month period.
“Filipinos have spoken, and we have emerged as the ISP giving the superior video experience to them. This speaks for itself: our high speed, high capacity internet produces the best experience in streaming and consuming video content whether for gaming or entertainment. This is a mark of excellence in service for us,” said Dennis Anthony Uy, CEO and Co-Founder of Converge.
Awarding of Singapore FBO License to Widen Converge’s International Reach
Converge received the greenlight to provide international connectivity services in Singapore through its wholly-owned subsidiary, Converge ICT Singapore Pte. Ltd. (“Converge SG”) via the awarding of a Facilities-Based Operations (“FBO”) License.
The Infocomm Media Development Authority, statutory board under the Singapore Ministry of Communications, via a grant letter mentioned that Converge SG has been awarded an FBO license.
Converge SG can now start providing wholesale connectivity services and fiber optic cable capacity to customers such as other Internet Service Providers, data centers, enterprise customers in the Southeast Asian city state.
“The grant of an FBO license to our Singapore unit significantly bolsters the ability of the Converge Group to sell international wholesale connectivity and capacity services, as we can now directly service clients in Singapore to cater their growing needs for intra-Asia and Trans-Pacific connectivity requirements,” said Converge CEO Dennis Anthony H. Uy.
Through the said license, Converge will have the right to provide international connectivity services in Singapore including Ethernet-International Private Line service, Dedicated Internet Access service, Carrier Ethernet Network service, Internet Protocol Virtual Private Network services using Multiprotocol Label Switching, and sale and resale of submarine cable capacities.
Widened Array of Enterprise Services with Launch of First Philippine OTN Service Available Globally
Last November 19, 2022, Converge continued to expand the array of enterprise services offered with the launch of its first Optical Transport Network (“OTN”) services available globally. OTN is a Layer 1 technology that provides a secure, high bandwidth, reliable, and low latency network service that runs over the Company’s Dense Wavelength Division Multiplexing (“DWDM”) – the youngest and most modern network in the country.
Leveraging on OTN technology, this provides enterprise customers with a fast, stable, and secure way to send different traffic types such as IP, Ethernet, storage, digital video, and SDH, over the Company’s high-speed, low latency backbone network.
Continued development in customer service initiatives as evidenced by decreasing trouble ticket index, and installation lead times.
As an internet service provider, Converge remains committed to providing quality fiber internet connectivity, which includes providing world-class customer service. The Company’s continued investment in customer service have resulted in significant improving internal customer experience metrics. The trouble ticket index decreased from 0.26% in 3Q2022 to 0.22% for 4Q2022, registering a quarterly low for FY2022.
In view of improving internal business processes, Converge streamlined various back-office functions with the rollout of a Business Support System (“BSS”) and Operations Support System (“OSS”). The transition from legacy systems to OSS and BSS results in various organizational benefits across the value chain – some of which include more streamlined supplier and inventory management, easier trouble ticket tracking and management, more optimized service repairmen dispatching, and faster customer onboarding cycle times.
Converge continues to make strides in Sustainability in 2022
In the last three months of 2022, Converge worked on various sustainability initiatives in line with its Sustainability Commitment to better observe industry practices. Some of the key initiatives include:
- Launch of Child Online Safeguarding Policy to combat online threats targeting children and build effective prevention and control measures within Converge’s network. The policy was established to signify the Company’s commitment to act on negative impacts brought about by misuse and abuse of digital space, specifically targeting children.
- Creation of Energy Management Policy which states Converge’s commitment to ensure that it utilizes proper energy management strategies in the conduct of its operations in accordance with the Company’s Sustainability Commitment, ISO 50001 Standards, and any applicable local energy legislation.
- Became a member of the Private Sector Alliance for Disaster Resilient Societies which is a network of private sector entities led by the United Nations Office for Disaster Risk Reduction. The network commits to support and implement the Sendai Framework, which is a UN General Assembly endorsed framework that aims to prevents new and existing disaster risk through the reduction of hazard exposure and increased disaster risk preparedness.
- Publication of Commitment to Stakeholder Statement wherein Converge publicly stated its commitment to identify actual and potential impacts on stakeholders arising from its operations, and actively engage with stakeholders regarding these impacts and sustainability related decisions, actions, and performance. Additionally, the statement includes the Company’s commitment to adhere to AccountAbility principles as defined in the AA1000 AccountAbility Principles Standard (2018).
Additionally, Converge formally created a Chief Sustainability Officer role in early 2023, whose task is to oversee the implementation of the company’s sustainability commitment and roadmap, as well as compliance to sustainability reporting requirements. Also, the Company formally engaged a third party auditor to externally assure its upcoming 2022 Sustainability Report. Further details of such shall be disclosed in said report.
Earlier throughout the year, Converge continued to deliver on its Sustainability Commitment by undertaking various initiatives such as the following:
- Engagement with ESG rating agencies such as CDP, S&P, and Sustainalytics. As a means of being transparent with Converge’s key stakeholders, especially on ESG topics, the Company proactive engaged with various 3rd party ESG rating agencies. These agencies assess the Company’s exposure to various ESG related risks and initiatives the Company is undertaking to address them. Subsequently, these are made available to various institutional investors for their perusal.
- Establishment of Human Rights Policy to further elevate operational standards to adhere to best practices of ethics and integrity, pursuant to the United Nations Guiding Principles on Business and Human Rights, International Bill of Human Rights, and International Labor Organization’s declaration on fundamental principles and rights at work. The policy covers key topics such as child labor, human rights, human rights due diligence, and social justice.
- Establishment of Safety, Health, Environmental, and Security (“SHES”) Committee to further prevent workplace hazards and implement procedures to mitigate, reduce, or control SHES related risks.
Further details of the Company’s various Sustainability related initiatives will be disclosed in the Company’s upcoming 2022 Sustainability Report.
2023 Consolidated Outlook
With its targeted expansion in key growth areas in Visayas and Mindanao, the Company expects to spend approximately P12 billion -15 billion in capital expenditures in 2023, which will focus on port deployment in key expansion areas in Visayas and Mindanao, and modems to be installed with new subscribers. Other key capital expenditure initiatives in FY2023 will include investments into international subsea cables, and acquisition of core network equipment to further bolster the redundancy of our domestic fiber network.
Converge expects that strong demand from key expansion areas in the Visayas and Mindanao area, as well demand for new products such as its prepaid fiber broadband service, will result in continuous growth of its residential revenues by around 10% for FY2023. The Company also projects demand from enterprise customers to grow by around 25% for FY2023 as the economy reopens and enterprises further undertake a modular shift to an on-site work arrangement. On the back of continued growth from the residential and enterprise segments, consolidated revenue is expected to grow between 10% to 15% for FY2023.
Driven by prudent cost management and increased economies of scale, the Company believes that it will be able maintain industry leading EBITDA margins between 55% and 57% for FY2023. The Company also expects to maintain double-digit ROIC levels between 13% and 14% supported by its strategic network roll-out in key expansion areas.
As Converge enters its third financial year as a publicly listed company, with well-established financial operations and control processes, the Company would like to extend its appreciation to Mr. Matthias Vukovich, who after three fruitful years of providing advisory services to Converge has mutually agreed with the Company to conclude his consultancy contract which ends on March 31, 2023, in order to pursue new challenges.
Mr. Vukovich was engaged as consultant and advisor to assist the Company with its IPO process and immediate post-IPO programs. Three years after the Company’s IPO, Mr. Vukovich and the Company believe the objectives of his engagement has been fulfilled.
“I am bidding farewell to Converge with peace of mind knowing that the Company is well capitalized and on a trajectory of sustained growth, well equipped to handle the intricacies and complexities of being a listed company in the Philippine Stock Exchange,” said Mr. Vukovich.
“Grace and I would like to express our gratitude to Matthias for his valuable contributions to Converge. His advice and counsel were instrumental in bringing the Company public and providing guidance on post-IPO programs including last year’s inaugural bond and other financing activities to support the growth of our business. We wish him all the best in his future endeavors,” Mr. Uy said.
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