SECURITIES AND EXCHANGE COMMISSION
SEC FORM 17-C
CURRENT REPORT UNDER SECTION 17
OF THE SECURITIES REGULATION CODE
AND SRC RULE 17.2(c) THEREUNDER
1. May 11, 2023
Date of Report (Date of earliest event reported)
2. SEC Identification Number CS200716094
3. BIR Tax Identification No. 006-895-049-000
4. Converge Information and Communications Technology Solutions, Inc.
Exact name of issuer as specified in its charter
5. Metro Manila, Philippines
Province, country or other jurisdiction of
6. **** (SEC Use Only)
Industry Classification Code:
7. New Street Building, Mc Arthur Highway, Balibago, Angeles City, Pampanga 2009
Address of principal office Postal Code
8. (02) 8667-0888
Issuer's telephone number, including area code
Former name or former address, if changed since last report
10. Securities registered pursuant to Sections 8 and 12 of the SRC or Sections 4 and 8 of the
Title of Each Class Number of Shares of Common Stock
Outstanding and Amount of Debt Outstanding
Common Shares 7,266,573,061
Fixed Rate Bonds 10,000,000,000
11. Indicate the item numbers reported herein: Item 9. Other events
CONVERGE SUSTAINS GROWTH TREND WITH SOLID FINANCIAL RESULTS AND
INDUSTRY-LEADING RESIDENTIAL NET ADDS GROWTH IN THE FIRST QUARTER;
CONSOLIDATED REVENUES GREW YOY BY 11.5%, EBITDA MARGIN EXPANDED TO
59.9%, AND ROIC AT 15.0%
1Q2023 Key Highlights
- Converge’s consolidated revenues in 1Q2023 of P8.6 billion grew by 11.5% from1Q2022
- Pre-churn adjusted consolidated revenues grew to P8.6 billion, 2.7% higher than pre-churn adjusted fourth quarter consolidated revenue of P8.4 billion
- Residential revenues grew 8.6% YoY driven by net subscriber growth on both postpaidand prepaid
- Enterprise revenues reached P1.2Bn, a significant growth of 32.4% year-on-year, whichis the highest quarterly growth rate since the Company’s IPO in 2020
- EBITDA grew to a quarterly record of P5.2Bn with margins expanding to 59.9% for1Q2023
- 1Q2023 net income after tax improved by 10.3% to reach P2.2 billion from 1Q2022
- Residential subscriber net additions for the quarter reached a total of 42,141 on bothpostpaid and prepaid plans – sustained positive trend since 2Q2022
- Maintained strong ROIC of 15.0% during the quarter
MANILA, Philippines, May 11, 2023 – The Philippines’ only pure-play high-speed fixed broadband operator, Converge Information and Communications Technology Solutions, Inc. (PSE: CNVRG) (“Converge” or the “Company”) ended the first quarter of 2023 with 1,891,366 residential postpaid subscribers and 28,995 residential prepaid subscribers. The total quarterly net additions continued to increase from 4Q2022 with normalized quarterly revenues also growing.
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. This expansion is supported by extensive infrastructure and innovative plans.
Continuous Growth Supported by Growing Residential Subscriber Base and Overall Robust Enterprise Business
Residential business growth driven primarily by continued expansion of postpaid subscribers – leading the industry in net adds for the quarter. Enterprise revenue growth remains robust with highest YoY quarterly growth of 32.4% since the pandemic
Consolidated revenues grew by 11.5% from P7,748 million in 1Q2022 to P8,642 million in 1Q2023. Revenues from the residential business grew by 8.6% from P6,812 million in 1Q2022to P7,400 million in 1Q2023, driven by a 6% YoY growth in subscriber base. On the other hand, enterprise revenues grew by 32.8% YoY, from P935 million to P1,242 million during the same period, from the
strong overall revenue growth of all subsegments – small and medium enterprises (“SMEs”), large enterprise and corporates, and wholesale.
For comparability, residential revenues pre-churn adjustments have been growing quarter-on-quarter. The Company’s 4Q2022 pre-churn adjustment residential revenues amounted to P7,214 million, which increased to P7,371 million.
During the first three months of 2023, Converge garnered 43,000 net adds, continuing a quarter-on- quarter net adds growth. FiberX (or “postpaid”) remained the largest contributor of net adds with 28,792 – 10% higher than in 4Q of 26,252. The Surf2Sawa subsegment (or “prepaid”) contributed 14,208 net adds during 1Q2023. The Company ended the year with an active residential subscriber count of 1,920,361. Monthly residential churn rate was at 1.89% for the quarter. A monthly churn rate between 1.5% to 2.0% remains manageable.
Across the board, enterprise subsegments continued to deliver outstanding growth in 1Q2023. The SME segment continued to lead growth with YoY revenues increasing by 46%, followed by wholesale segment increasing by 37% in the same period. Revenues from large enterprise customers, making up the largest subsegment, grew by 24.5% YoY.
The SME customer base grew by 43% from 1Q2022 with the continued strong take-up of flexiBiz supported by our expansion to Visayas and Mindanao. For the large enterprise and corporates, the Company now services key companies in a wide range of industries throughout the country. As of March, Converge is providing connectivity services to almost all national government institutions,
100% of the ten largest business process outsourcing companies in the country, nine of the ten largest banks, and seven of the ten largest financial service institutions.
1Q2023 EBITDA margin expansion to 59.9% driven by growing scale, proactive cost management, and change in accounting recognition
Converge achieved a quarterly EBITDA of P5,172 million in 1Q2023, representing an increase of 13.5% from the previous year. As a result, Converge was able to improve its consolidated EBITDA margin to 59.9% in 1Q2023, higher than the 58.8% in 1Q2022.
Compared with 1Q2022, network materials and supplies costs decreased by 96.8%. This is due to an improved capability to properly segregate costs of network materials and supplies according to usage. As such, network materials and supplies used in 1Q2023 for last mile connections were deferred and amortized over the contract period with the subscriber. This partly contributed to the increase in EBITDA margin for the quarter. In 1Q2023, amount of deferred network materials and supplies was P187.7 million.
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 30.1% YoY, resulting in a corresponding decrease in cost margin from 3.3% to 2.1% over the same period. Amortization of deferred contract costs also declined by 17.3% due to the full recognition of the unamortized portion for churned accounts starting in the prior quarter. With increased operating leverage and transition to a managed services model in certain operating areas, Converge was able to also reduce the cost margin of total personnel costs from 6.9% in 1Q2022 to 5.2% in 1Q2023. Correspondingly, Managed Service Fees increased from 2.6% cost margin to 4.9% in the same comparative period.
Industry Leading ROIC and Strong Balance Sheet
Return on Invested Capital (“ROIC”) was maintained at industry leading levels with capital expenditures amounting to P3.0 billion in 1Q2023 – mostly attributable to the 488,365 new fiber ports deployed. Converge recorded a 15.0% ROIC during the quarter. This industry-leading performance is a result of the Company’s disciplined approach in deploying capital to expand its fiber network.
Due to Converge’s continuous port deployment and investments in the network, depreciation and amortization increased from P1,427.6 million in 1Q2022 to P1,560.1 million in 1Q2023. Net income
after tax grew to P2,172.2 million in 1Q2023 from P1,970.1 million in 1Q2022, resulting in a net income margin of 25.1% for 1Q2023.
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) decreased from P28,026 million as of December 31, 2022 to P26,602 million as of March 31, 2023. The Company repaid a portion of its financial debt, reducing the balance to P38,162 million as of March 31, 2023 from P38,240 million in December 31, 2022. The Company’s debt service coverage ratio (“DSCR”) was 3.9x and the net debt-to-total equity was at 0.7x, well within the required financial covenants from its debt facilities. The weighted average cost of debt from drawn debt facilities remained at 5.1% as of March 2023.
Change in Recognition/Estimates: Network Materials and Supplies Recognition and Inside Plant and Facilities Equipment Useful Life
As mentioned, starting 1Q2023, Converge has employed an improved capability to properly segregate costs of network materials and supplies according to usage. As such, network materials and supplies used in 1Q2023 for last mile connections were deferred and amortized over the contract period with the subscriber. In previous quarters, all Network Materials and Supplies are expensed outright. Starting 1Q2023, only incidental materials beyond standard installation costs paid for by customers are expensed outright.
Also, the estimated useful life of Inside Plant and Facilities Equipment was extended from five years to eight years. This was due to a significant portion of the asset class deemed useable beyond the original estimated five-year life. Upon reevaluation, the Company estimates eight years as a reasonable length of usage period for Inside Plant and Facilities Equipment. This translates to approximately 15% less depreciation in 2023.
With these revised policies, guidance for FY2023 EBITDA margin is raised to 56%-58%.
Upcoming Full Launch of Surf2Sawa
According to the Philippine Statistics Authority’s 2021 Family Income and Expenditure Survey, the country has approximately 26.4 million households with 70% at the lower income segments, which are still highly underpenetrated with reliable fixed broadband. As such, Converge has been working on different product types and brands to cater to this wider segment of the market while still maintaining the premium features offered to the current target addressable market of the FiberX brand.
The Company plans to fully launch the Surf2Sawa prepaid offering by June of this year to cater to the Class D2 market of approximately 9.3 million households. Surf2Sawa is a prepaid fiber-to-the-home plan with various top-up options, for as low as P50 per day up to P700 for a 30-day unlimited connectivity. The modem limits concurrent users to only six devices, unlike the postpaid FiberX plans with no such limitations.
The Company believes that this segment of the market remains underpenetrated with quality fixed connectivity. With more than eight million ports deployed across the country, Converge is well- positioned to capitalize on this opportunity with its expansive infrastructure.
Expanding Enterprise Reach and Product Offerings with the Awarded Singapore FBO License and Memorandum of Understanding with KT Corp.
As the Company’s enterprise business continues to grow, Converge is working on multiple projects to maintain and further build on the current momentum via a wider target market and enhanced product portfolio.
In January 2023, 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 Mr. 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.
In February 2023, Converge also signed a memorandum of understanding with KT Corp that aims to extend digital tools and innovations to enterprises in the Philippines, and to explore new digital transformation solutions for the evolving needs of ICT customers. This potential partnership will enable both companies to leverage each other’s expertise in information and communication technology for the delivery and development of enterprise-grade solutions.
KT Corporation is the leading telecommunications provider in South Korea that provides integrated wired and wireless communication solutions and services, spanning a wide range of industry use cases such as energy management, security and safety management, and financial technology, among others.
“As businesses continue to move their operations online, the demand is strong for cutting-edge enterprise solutions that would enable their different business processes. This potential partnership with KT will allow us to co-innovate and deliver advanced technologies suited for the needs of Philippine businesses, especially SMEs,” Converge President, Chief Risk Officer, and Chief Resource Officer Maria Grace Uy said.
Converge 2022 Sustainability Report
In early 2023, Converge formally created a Chief Sustainability Officer role whose task is to oversee the implementation of the company’s sustainability commitment and roadmap, as well as compliance to sustainability reporting requirements. Mr. Benjamin Azada was assigned this role concurrently as the Company’s Chief Strategy Officer. Under his direction, the Company’s has released its 2022 Sustainability Report (“SR”) and can be viewed on the Company’s website.
The 2022 SR is the Company’s first third-party audited sustainability disclosure, marking a significant milestone to its sustainability journey. The SR ís in accordance with the Global Reporting Initiative (GRI) Standards for the period from January 1 to December 31, 2022. The report is also aligned with AA1000 AccountAbility Principles of Inclusivity, Materiality, Responsiveness, and Impact, and includes disclosures recommended under the Telecommunications Sustainability Accounting Standard of the Sustainability Accounting Standards Board. For the first time, Converge has also reported information with reference to the recommendations of the Task Force on Climate-related Disclosures.
This press release may contain forward looking statements and information that are, by their nature, subject to significant risks, uncertainties, and assumptions. Many factors could make or cause the actual results, performance or achievements to be materially different from those expressed or implied in this release. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein.
For questions, please contact:
Owen Kieffer Ocampo
Vice President – Head of Investor Relations
Vice President – Head of Corporate Communications and Public Relations