Telco operators’ risks and losses explained

We write to add context to a two-part report that the Inquirer published last Jan. 29-30, “Keeping a promise to end telco duopoly” and “Gov’t paves way for entry of 3rd telco player,” by Miguel Camus.  While the article endeavored to give readers a fair assessment of the local telco industry, we would like to provide more information and context about the business, capex and dividends.

An article published in January 2017 made reference to an academic research published last year by University of the Philippines professor emeritus Epictetus Patalinghug indicating that the telcos are earning below the average rate of returns compared to the top Philippine firms in other industries over a longer time horizon.  The study stated that “as telcos aggressively embark on increasing capital expenditures, they must be able to generate enough cash flow to sustain the needed investments in capital-intensive industries.  More significantly, high capital-intensive industries evidently require high margins to be viable.”

The study sheds light to what the Inquirer article referred to as “immense profits” being generated by existing telco operators supposedly since the turn of the century with Ebitda (earnings before interest, taxes, depreciation and amortization) margins of around 40 percent. In the case of Globe, the sustained profitability is necessary to fund high capital spending, averaging about 31 percent annually of gross service revenues—the highest in Asia next only to Chinese telco operators amid growing customer demand for bandwidth-intensive content and rapid shifts in technology. Adoption of latest technologies enables a telco operator like Globe to keep the industry at par with the rest of the world to support vital industries like BPOs and other sectors with large connectivity requirements that provide jobs to many Filipinos, create connected cities in rural areas especially public schools, initiate financial inclusion through mobile money, e-payment and e-commerce, and provide livelihood down to the barangay and sari-sari store level.

All over the world, telco operators are likely to keep their capital spending at high levels, given the need to build more connectivity, step up deployment of fiber optic cables, and prepare for the next wave of digitalization including 5G, artificial intelligence, and IoT or the Internet of Things.

We would also like to point out that before achieving profitability in more recent years, local telco operators faced a lot of challenges following the deregulation of the industry in the 1990s. Readers may not recall, but many telco operators who participated in the government’s then service area scheme suffered losses, ultimately forcing some players to go into financial rehabilitation due to the required fixed line rollout commitments in underdeveloped regions of the country; the Asian financial crisis that led to the surge in interest rates and the steep depreciation of the peso vis-à-vis the dollar which caused telco operators to be mired in massive debts with high interest; and the widespread cloning of IDD mobile calls and spurious postpaid line subscriptions that caused high levels of bad debts. These factors, later combined with the introduction of lower-yielding unlimited on-net services, contributed to the consolidation of mobile and landline operators in the sector.  Although today, there are still smaller telco players in the provinces that rely mostly on inbound international calls for their revenues. However, capex requirements, rapid technology changes, and the need to cope with market demands have kept these small telco players from expanding their services to other areas. On a related note, we would also like to clarify that the total capex of Globe from 2001-2016 reached P357.6 billion, not P377.6 billion as the article stated.

In relation to our dividend policy, Globe returns to its shareholders dividends equivalent to 75-90 percent of its prior year’s core net income.  Such policy was adopted as the company embarked on its network modernization program in 2011 where a substantial amount involving the legacy network was subject to accelerated depreciation.  Also, it is important to note that from 2007 to 2009, Globe declared special cash dividends per share of P50 to common shareholders, as part of its efforts to optimize its capital structure. Prior to the payout of the special cash dividends, the company’s gross debt to equity ratio was only at 0.69:1 while its net debt to equity ratio was at 0.43:1 as of Dec. 31, 2006. Had Globe not paid out the special cash dividends, the total amount paid out from 2000 to 2016 would have only been about P115 billion or 15 percent lower. As a publicly listed company, we believe that a sustainable organization should not only operate with sound financial performance but should equally provide adequate shareholder returns as well.

Moreover, we would like to point out that Globe major shareholders Singtel and Ayala Corp. remained committed to the company despite the many business risks and losses it suffered from 1992-1997 when it launched its mobile and landline businesses during the liberalization of the telco sector.

YOLY C. CRISANTO,

senior vice president,

corporate communications, Globe Telecom