Overview
According to its prospectus, Converge is the largest high-speed fixed broadband operator in the Philippines, by high-speed residential fixed broadband subscriptions, with a 55% market share as of June 30, 2020, according to MPA (Media Partners Asia).
Converge also claims to be the fastest- growing fixed broadband operator in the Philippines, with its residential business capturing a 56.6% market share of new subscriptions from Jan. 1, 2018 to June 30, 2020 and its enterprise business growing at 3.6 times the market between 2016 and the last 12 months ended June 30, 2020, according to MPA (Media Partners Asia).
Further, Converge says it is the only pure-play high-speed fixed broadband provider, with an exclusive focus on serving the Philippine fixed broadband market, according toMPA (Media Partners Asia).
Vision and Purpose
Dennis Anthony H. Uy, the CEO, and Maria Grace Y. Uy, the president and chief resources officer (together, the “Founders”) established Converge with a vision—to build a business focused on providing high- speed fixed broadband to millions of unserved and underserved households and businesses across the Philippines.
The founders assembled a world-class team of like-minded professionals, and together, built Converge into an organization focused on becoming the market-leader in the high-speed fixed broadband market. This vision and focus is deeply ingrained in the organization, and is the foundation of its key competitive advantages, including the differentiated products and services that it offers and the extensive proprietary network that it builds and operates.
Differentiated offerings
Converge designs its broadband packages to address customers’ priorities for faster, more reliable internet at affordable prices.
It claims that the home broadband connections on its fiber network are 2.2 times faster and approximately 2.3 times more reliable than other providers, most of which still use legacy copper networks, according to MPA (Media Partners Asia).
Converge says:
“We believe that we were among the first in the market to provide unlimited data packages to our residential customers in 2016, and among the first to offer add-on bandwidth to our residential customers in 2018 with the introduction of our ‘10Mbps for P99’ package.
“In the June 2020 Residential Survey, we received a net promoter score (“NPS”) of +83 for advocacy, compared to an average NPS of +33 for the other operators. In the same survey, we also received a significantly higher score for customer loyalty and customer satisfaction. In addition, we had an average monthly residential churn rate of 0.6% in 2019 and 0.7% in the first half of 2020, which were lower than the industry baseline of approximately 1% to 2%, according to MPA (Media Partners Asia).”
Two businesses
Converge operates two businesses:
(i) residential business (“Residential Business”), which primarily offers high- speed fixed broadband internet services to residential customers; and
(ii) our enterprise business (“Enterprise Business”), which offers high-speed fixed broadband internet services, private data network solutions, cloud and colocation services and other connectivity solutions to enterprise customers of varying sizes, industries and types.
Proprietary network
Converge claims to own and operate the fastest-growing, end-to-end fiber network in the Philippines, which is also one of the newest in the country, according to MPA (Media Partners Asia).
With over 35,000 kilometers of fiber as of June 30, 2020, Converge’s network is among the most extensive in the country.
Its network is comprised of a fiber backbone that stretches from the northernmost tip of Luzon Island to its southernmost end, as well as a fiber distribution and last-mile network that covers over 200 cities and municipalities across Luzon (including Metro Manila), as of June 30, 2020.
Converge’s network reached approximately 4.1 million homes as of June 30, 2020. It consists of 100% high-speed technologies, by enabling fixed broadband connections utilizing fiber-to-the-home (“FTTH”) and hybrid fiber- coaxial (“HFC”) technologies.
In 2019, Converge began expanding its network beyond Luzon to the rest of the Philippines. “We believe that we are on track to substantially complete our primary nationwide backbone loop, which will connect Luzon, Visayas and Mindanao, by 2021,” the company claims.
Achievements
Revenues grew at a consolidated annual growth rate (CAGR) of 69% between 2016 and 2019 and at a year-on-year growth of 65% in the first half of 2020.
The Pro Forma Adjusted EBITDA margin was 51.0% in 2019 and 51.1%, in the first half of 2020, and its return on invested capital (“ROIC”) was 19.7% in 2019 and 18.6% in the first half of 2020 (annualized). “We have, thus, had industry leading growth, margins and ROIC metrics,” says Converge.
For the year ended Dec. 31, 2019, Converge reported P9,139.5 million ($183.3 million) of revenues and P4,665.2 million ($93.6 million) EBITDA on a pro forma and as adjusted basis. For the six months ended June 30, 2020, our revenues were P6,489.9 million ($130.2 million) with EBITDA of P3,313.8 million ($66.5 million).
Converge says it has a strong and conservatively levered balance sheet, “which we believe provides significant financial flexibility for future growth.”
Net debt (measured by total debt less cash and cash equivalents) of P1,527.4 million ($30.6 million) as of June 30, 2020, a net leverage (measured by net debt as of June 30, 2020 divided by EBITDA for the last 12 months ended June 30, 2020) of approximately 0.3 times, provides us with sufficient headroom to execute our capital expenditure plans.
As of June 30, 2020, Converge has secured up to P32,753 ($657 million) of long-term credit commitments from leading Philippine banks which we believe are on attractive terms, including at an average all-in interest rate of approximately 5% as of the date of this prospectus.
Recent developments
Secured proprietary access to 5Tbps of international bandwidth capacity on two major intra-Asia networks
In August 2020, Converge entered into an agreement with Telstra International Limited to purchase 5 Tbps of international bandwidth capacity, providing a 15-year indefeasible right of use (“IRU”) on two major intra-Asia networks for an attractive cost.
This 5 Tbps of bandwidth capacity is “seven times its current leased bandwidth capacity, and has been priced at an aggregate unit cost that is meaningfully lower compared to our average contracted lease costs at present. This IRU is subject to certain conditions.”
This transaction is consistent with Converge’s strategy of forming partnerships with global carriers to secure proprietary access to bandwidth capacity on certain key international network routes.
Going forward, Converge intends to continue to secure proprietary access to international bandwidth capacity through similar agreements with other international carriers, “which can provide us with significant cost savings.”
High-capacity backbone
In July 2020, Converge activated the Philippines’ first 400GB metro backbone utilizing industry-leading optical solutions from a United States-based networking systems, services, and software company.
This deployment provides the company with a programmable, dynamic setup of connections that increases adaptability and resiliency. The metro backbone can further be scaled to higher 800GB capacity to support future growth.
Secured term sheets for an additional P10 billion ($200.6 million) of long-term credit facilities with two major Philippine banks
In August 2020, Converge entered into term sheets with two Philippine banks for two long-term credit facilities with an aggregate amount of P10 billion ($200.6 million).
Each credit facility is for an unsecured, 7-year term loan of P5 billion ($100.3 million). Each loan will be available for drawdown for at least 12 months following the signing of the definitive facility agreement, and will have a term of seven years from the first drawdown date.
Interest would be payable quarterly in arrears and the principal would be payable in equal quarterly installments commencing after a grace period of two years from drawdown. Each loan bears interest equivalent to the BVAL benchmark rate prevailing at drawdown plus a spread.
Each term sheet contemplates an indicative interest rate (assuming drawdown at the date of the prospectus) of approximately 5% per annum.
As of the date of this Prospectus, the definitive facility agreements are being prepared and are yet to be executed.
A new normal has emerged due to COVID-19, driving a permanent paradigm shift in connectivity requirements
In response to COVID-19, the government implemented measures and regulations to mitigate the transmission of the disease. Metro Manila and other regions in the Philippines were placed under enhanced community quarantine (“ECQ”) which imposed strict stay-at-home measures with exceptions only for essential activities, such as access to basic necessities, food and health services.
The ECQ in Metro Manila was in effect from March 17, 2020 until May 15, 2020, and was later adjusted to the modified enhanced community quarantine (“MECQ”) from May 16, 2020 to May 31, 2020. On June 1, 2020, Metro Manila was placed under general community quarantine (“GCQ”) and was subsequently placed under MECQ again from August 4, 2020 to August 18, 2020. As of the date of this Prospectus, the quarantine classification of Metro Manila is GCQ.
COVID-19 has further accelerated the demand for fixed broadband and is driving a permanent paradigm shift in connectivity requirements, according to MPA (Media Partners Asia).
At the onset of COVID-19, approximately two-thirds of respondents of the Residential Survey reported a 30% or more increase in home internet usage, and approximately 45% of respondents reported a 30% or more increase in home internet spending.
The new normal and work from home
Over time, a new normal has begun to emerge, under which households are implementing back-up home connectivity arrangements as work- from-home (“WFH”) and online-learning arrangements set in as more long-term or permanent features of everyday life.
Over 80% respondents in the Enterprise Survey believe that WFH arrangements would remain important going forward, even after the lifting of mandatory stay-at-home orders, and over 70% of businesses surveyed are willing to subsidize their employees’ home broadband expenses in light of these ongoing WFH arrangements.
Under this new normal, MPA (Media Partners Asia) estimates that an average household could potentially require up to 480GB of internet data per month to function optimally, and according to MPA (Media Partners Asia), such requirement of a typical household can only be met through high-speed broadband with a minimum speeds of 25Mbps, which is what Converge’s entry-level fiber plan provides.
Strengths
Market leader in the Philippine high-speed fixed broadband market, a market with significant existing unserved demand and which is at an inflection point.
Converge says it is the largest high-speed fixed broadband operator in the Philippines, by high-speed residential fixed broadband subscriptions, with a 55% market share as of June 30, 2020, according to MPA (Media Partners Asia).
“We are also the fastest- growing fixed broadband operator in the Philippines, with our Residential Business capturing a 56.6% market share of new subscriptions from Jan. 1, 2018 to June 30, 2020.”
The Philippine fixed broadband market has significant connectivity needs that are currently underserved. This market has historically been served by two major operators that have been primarily focused on providing mobile connectivity.
Based on publicly-available data, mobile services represented approximately 62% of their total revenues for the year ended Dec. 31, 2019, compared to fixed broadband which accounts for approximately 27% of their total revenues, according to MPA (Media Partners Asia).
As of Dec. 31, 2019, these operators each had tens of millions of mobile customers to service and maintain, and 54% of these subscribers were still using 2G and 3G networks, compared to 49%, 37%, and 39% for Indonesia, Malaysia and Thailand, respectively, according to MPA (Media Partners Asia).
These operators will need to significantly upgrade their existing mobile networks to satisfy the growing bandwidth demands of their mobile customers, according to MPA (Media Partners Asia). We believe that these operators will continue to be focused on sustaining their core mobile business and serving their core mobile subscriber base.
Given this backdrop, investments in broadband infrastructure have been inadequate, with limited network coverage and legacy DSL technologies still being widely used, according to MPA (Media Partners Asia).
Fixed broadband penetration in the Philippines trails significantly behind that of regional peers, with penetration rates of only 14% overall and only 6% on high-speed broadband—the former compared to 59%, 44% and 38% for Vietnam, Thailand, and Malaysia, respectively, and the latter compared to 28%, 27% and 26% for Vietnam, Thailand, and Malaysia, respectively, as of Dec. 31, 2019, according to MPA (Media Partners Asia). This is despite the fact that 75% of Philippine households were able to afford fiber broadband at an entry price of approximately $30 (P1,500) per month (including 12% VAT), as of Dec. 31, 2019, according to MPA (Media Partners Asia).
As a result, Philippine consumers (i) experience slower internet speeds, with an average fixed broadband speed of only 24 Mbps, compared to 150 Mbps, 80 Mbps and 43 Mbps for Thailand, Malaysia and Vietnam, respectively and (ii) experience less reliable connections compared to such countries, as of March 2020, according to MPA (Media Partners Asia).
Growth drivers
This is despite the fact that the Philippines has very significant and rapidly growing demand for broadband connectivity, underpinned by the following drivers:
• The country’s large estimated population of 109 million with a median age of 25.7 (Dec. 31, 2020 estimate) is among the youngest and among the most internet-savvy in Asia, according to MPA (Media Partners Asia). Filipinos spend more time on the internet, at nearly 10 hours per day, and on social media, at nearly 4 hours per day, than in Indonesia, Thailand, Malaysia and Vietnam in 2019, according to MPA (Media Partners Asia). Furthermore, internet usage has shifted increasingly towards data consumption, with Filipinos estimated to have consumed 50% of their video content online in 2019, increasing from 20% in 2015, according to MPA (Media Partners Asia).
• The Philippines is home to a thriving technology-enabled services industry, including a world-class business process outsourcing (“BPO”) sector that ranks second in the world after India, for which connectivity is essential to meeting customers’ expectations, according to MPA (Media Partners Asia). This is fueling multi- sector growth such as in retail and financial services, and supporting rising disposable income per capita for its workers, according to MPA (Media Partners Asia).
• The Philippine overseas Filipino worker (“OFW”) population is the largest in Southeast Asia as of Dec. 31, 2019, which drives significant spending on high-speed and reliable connectivity in order to communicate and stay connected with family and friends, often utilizing data-heavy live video platforms, according to MPA (Media Partners Asia). OFW remittance to the Philippines, amounting to $30 billion or 8% of the country’s GDP in 2019, was more than that of any other Southeast Asian nation for the same period, both in absolute and per capita terms, according to MPA (Media Partners Asia).
• The need for high-speed fixed broadband has amplified following the onset of COVID-19, and the growth in demand has accelerated as the new social norms of social distancing and WFH have set in. According to the Residential Survey, approximately 66% and 43% of respondents, respectively, reported a 30% or more increase in home internet usage and spending during the ECQ period. In addition, according to the Enterprise Survey, over 80% and 70% of respondents, respectively, indicated that WFH would remain in place going forward, even after the end of the ECQ period, and that their businesses would be willing to cover their employees’ home internet expenses in light of WFH.
These supply-demand dynamics have given rise to significant unserved demand for fixed broadband services.
In 2019, unserved demand for residential fixed broadband is estimated to be as large as $4.2 billion in revenues, which is 4.3 times the fixed broadband market size of approximately $1 billion in revenues, according to MPA (Media Partners Asia).
The total addressable market is forecasted to grow by another $1.7 billion in revenues to reach $6.9 billion in revenues by year-end 2025, based on MPA (Media Partners Asia) estimates.
Converge believes the significant scale of such unserved demand serves as fertile ground for multiple operators in the market, especially Converge, to thrive, and provides a multi-year runway for these operators to grow rapidly.
Converge believes that the Philippine fixed broadband market is currently at an inflection point, with Converge, in particular, serving as a catalyst for market growth as it continues to lead efforts to address current unserved demand.
Broadband subscriptions have recently begun to increase significantly. Converge expects this trend to accelerate over the next five years, following the trajectory that other comparable Asian countries (such as Thailand) experienced in the last five years, according to MPA (Media Partners Asia).
In addition, the Philippines crossed the GDP per capita threshold of $3,000, which typically marks a turning point for consumption growth, according to MPA (Media Partners Asia).
Converge expects demand for broadband subscriptions to increase as supply continues to meet the significant latent demand. Fiber broadband penetration in the Philippines is expected to triple from an estimate of 9% for 2020 to 27% by 2025, according to MPA (Media Partners Asia).
Focused exclusively on the Philippine high-speed fixed broadband market as a pure-play fixed broadband operator
Converge claims to be the only pure-play fixed broadband provider with an exclusive focus on serving the Philippine fixed broadband market, according to MPA (Media Partners Asia).
Converge CEO Dennis Anthony H. Uy and President and Chief Resources Officer, Maria Grace Y. Uy, established and expanded Converge with a vision—to build a business dedicated to providing high-speed fixed broadband access to millions of unserved and underserved households and businesses across the Philippines.
The organization has been focused on understanding and serving the needs of fixed broadband customers.
“As a result, we believe that we are well-positioned to grow our subscriber base as we continue to expand our coverage and deepen our presence. Furthermore, we are not constrained by legacy infrastructure or dated service models, which we believe makes us more agile and adept at anticipating and addressing customer needs.”
This vision is supported and shared by Converge’s professional management team, who have an average of 28 years of relevant experience with major multinational companies such as Globe Telecom, NTT DOCOMO, IBM, General Electric, Morgan Stanley and PwC.
Under their stewardship, Converge has achieved significant scale: for 2019, Pro Forma Adjusted EBITDA was P4,665.2 million ($93.6 million) and for the six months ended June 30, 2020, EBITDA was P3,313.8 million ($66.5 million), respectively.
“We have also delivered market- leading revenue growth (CAGR of 69% from 2016 to 2019 and 65% year-on-year growth in the first half of 2020), profitability (51.0% Pro Forma Adjusted EBITDA margin for 2019 and 51.1% EBITDA margin for the six months ended June 30, 2020) and capital efficiency (19.7% and 18.6% ROIC for 2019 and for the six months ended June 30, 2020 (annualized), respectively). This compares favorably to the average of selected comparable peers in the industry with revenue growth of 4.8%3, EBITDA margin and ROIC for 2019 of 44.5% and 9.5%, respectively, and EBITDA margin and annualized ROIC of 43.2%, and 9.0%4 for the six months ended June 30, 2020, respectively, according to MPA (Media Partners Asia).”
“Our vision and exclusive focus on the fixed broadband market are deeply ingrained in our organization, which we believe permeates all aspects of our operations, including our network rollout, product and service offerings, sales and customer service.”
• Network Rollout: Converge’s rollout strategy is executed by experienced construction management company, MetroWorks ICT Construction, Inc. (“MetroWorks”). As a wholly-owned subsidiary of Converge, MetroWorks is fully icated to serving Converge as its sole customer. Through MetroWorks, we retain full visibility over our end-to-end network design and rollout functions that allows us to anticipate the needs of our customers, and tailor and execute our network rollout plans. For example, in anticipation of subscribers’ preference for faster internet speeds, since early 2018, Converge has strategically prioritized FTTH roll-outs and approximately 90% of the ports rolled out since early 2019 have been FTTH ports. FTTH is the latest available technology in the market that is capable of delivering fast internet speeds and is the more predominant type of network used in advanced markets.
• Product Offering: Converge designs its offerings to meet the evolving demands of our customers. In 2017, it launched our flagship entry-level FTTH product, FiberX 1500, which is tailored specifically for the middle-income Philippine household that forms the core of our target customer base. The FiberX 1500 plan provides maximum download speeds of 25Mbps with no data caps, at a price point of P1,500 per month (approximately $30, inclusive of VAT), which we believe optimally meets our target customers’ priorities for internet speed, connection reliability and value for money. The plan’s popularity is evident in its subscriber base, which has grown almost 19 times from approximately 25,000 as of Dec. 31, 2017 to approximately 465,000 as of June 30, 2020. “In addition, we believe that we were among the first in the market to remove data caps on residential packages in 2016 and among the first to introduce bandwidth add-ons for our residential subscribers in 2018.”
• Residential Sales: Converge employs a multi-channel (offline and online) sales strategy that is tailored to penetrate different sub-markets in the fixed broadband market. In particular, we have been uniquely able to attract new customers through word-of-mouth advocacy, including via our “Member-Get-Member” customer referral program. According to the Residential Survey, “we received an NPS of +83, compared to an average NPS of +33 for the other operators, with NPS being a measure of the likeliness that a subscriber will recommend its broadband provider to their family, friends and colleagues. According to the Residential Survey, 58% our existing customers first heard about us from word-of-mouth publicity, and 84% are likely to recommend Converge to others.”
• Residential Customer Service: The goal is to provide residential customers with a seamless experience across the customer journey from customer onboarding through installation, bill payment, and customer care. We are focused on leveraging technology and user-friendly online tools to improve the customer journey, which in turn reduces customer effort, increases customer satisfaction, reduces costs and enables scale. For example, Converge designed an online self-service portal, GoFiber.ph (formerly iConverge), which allows potential customers and subscribers to interact with us directly and apply, pay for, and manage, their subscription online. It recently launched our mobile application, Converge Xperience App, which is geared towards simplifying and enhancing our customers’ billing, status monitoring, and aftersales customer experience.
• Enterprise Solutions and Services: Converge employs sales strategies tailored to different classes of Enterprise Business customers. These include: (i) sales teams for Large Enterprises that are organized around a set of high-priority industry verticals such as BPO, financial services and retail that enable our account managers to gain a deeper understanding of industry-specific requirements and (ii) sales teams for our Corporate and SME sales teams that are more geographically focused, to be able to quickly attend to customers’ requirements at a local level. For example, Converge responded to a tender by a multilateral institution for direct internet access by designing a tailored solution that met the client’s needs and implementing such design within a tight timeline.
Superior offering rooted in a deep understanding of customers’ priorities
Converge believes that its deep understanding of customers’ needs and priorities is key to our success, which has translated into the significant growth of our residential customer and revenue base.
Its residential subscriber base grew tenfold, between 2016 and June 30, 2020 and its residential revenue base increased at a CAGR of 95% between 2016 and 2019 and at a year-on-year growth rate of 84% in the first half of 2020.
Converge believes that this growth was driven by our ability to attract high-quality subscribers from both sources—first-time fixed broadband users and subscribers switching from other operators—as well as maintaining high subscriber retention rates, while sustaining average revenue per user (“ARPUs”) at healthy levels.
The Residential Survey showed that “we outperformed other providers across the top criteria that customers consider in choosing operators and products: internet speed, connection reliability, perception of affordability and customer service.”
• Speed: Converge provides connections approximately 2.2 times faster than competitors, according to MPA (Media Partners Asia).
As of February 2020, “we were ranked by Netflix as the #1 internet service provider in terms of speed and performance during prime-time hours for 40 months consecutively.”
• Connection Reliability: “We provide connections that were approximately 2.3 times more reliable than our peers, according to MPA (Media Partners Asia). In addition, 67% of surveyed Converge subscribers rarely experienced any downtime, which is significantly higher than the experience of other operators’ customers.”
• Perception of Affordability: “Surveyed subscribers also perceived us to be more affordable. We received the highest rating of 8.3 out of 10 for affordability, which is 17% higher than other operators, according to MPA (Media Partners Asia).”
• Customer Service: “We believe that we provide superior customer service across the customer lifecycle and surveyed subscribers were more satisfied with our customer service than that of other operators, including higher satisfaction on installation time and faster resolution rate in resolving reported issues.”
“As a result, respondents of the Residential Survey rated us highest on key measures of satisfaction, loyalty and advocacy than those of our peers.
The company says respondents rated Converge highest for:
• Satisfaction, with an overall satisfaction rating that was 17% higher than those of other operators and a value-for-money perception rating that was 18% higher than those of other operators;
• Loyalty, with a likeliness of churning that is only one eighth that of other operators, and being the overwhelming choice for subscribers contemplating a switch, with 60% of respondents contemplating a switch indicating a preference to switch to Converge;
• Advocacy, with an NPS of +83, compared to an average NPS of +33 for other operators. In addition, 72% of non-Converge respondents indicated that they would subscribe to Converge once our service becomes available in their area.
“As a result of our service proposition, we have been able to (a) add customers quickly, (b) maintain low churn rates and (c) maintain a healthy ARPU level.”
• Subscriber growth: We continue to be the fastest-growing fixed broadband operator in the country, consistently capturing a majority market share of new residential fixed broadband subscriptions since 2018 (55% in 2018, 56% in 2019 and 58% in the first half of 2020), according to MPA (Media Partners Asia). This growth was primarily driven by our unique ability to attract customers who are subscribing to fixed broadband services for the first time, with these first-time subscribers comprising the majority of our new gross subscriber additions since 2018. Notably, in the first half of 2020 and for the month of July 2020, over approximately 82% and approximately 92%, respectively, of our gross subscriber additions in Metro Manila and South Luzon were first-time users of fixed broadband.
• Retention: Monthly residential churn rate was 0.6% in 2019 and 0.7% in the first half of 2020, compared to the industry baseline of approximately 1% to 2%, according to MPA (Media Partners Asia). “We believe that the low churn rate reflects our customers’ positive experience with our service and our ability to meet or exceed our customers’ expectations on product quality, value for money and customer service.”
• ARPU: Residential Business ARPU steadily increased from P1,191 in 2017 to P1,270 in the first half of 2020, primarily driven by (i) the increasing contribution of FTTH subscribers in our customer mix, as our FTTH subscribers generally have a higher ARPU than our HFC subscribers, and (ii) the upselling of premium packages, such as our FiberXtreme packages, or add-on products, such as our popular “10-for-99” product which allows our FiberX 1500 subscribers to add 10Mbps of bandwidth for an additional service fee of P99 per month.
An extensive and proprietary end-to-end fiber infrastructure, with in-house expertise in network rollout
Converge owns and operates a proprietary, end-to-end fiber network in the Philippines that extends from the backbone to the last mile.
Converge has invested significant capital, including an aggregate of approximately P26.7 billion ($535.6 million) in 2016 through June 30, 2020, in order to primarily build out its fiber network.
At over 35,000 kilometers in length as of June 30, 2020, and with an average age of fiber of 1.0 year as of June 30, 2020, Converge’s fiber network is among the most extensive and newest in the Philippines, according to MPA (Media Partners Asia).
The network is comprised of a fiber backbone that stretches from the northernmost tip of Luzon Island to its southernmost end with extensions to Visayas and Mindanao underway and on-track to be completed by 2021, as well as a fiber distribution and last-mile network that spans over 200 cities and municipalities across Luzon, including Metro Manila, the nation’s capital, as of June 30, 2020. Our network covered in aggregate approximately 4.1 million homes passed, covering 28% of households in Luzon (based on 14.4 million households in Luzon as of Dec. 31, 2018, according to MPA (Media Partners Asia) and 17% of households nationwide (based on 24.8 million households nationwide as of Dec. 31, 2019, according to MPA (Media Partners Asia).
As of June 30, 2020, our high-speed network, which is comprised of 87% FTTH and 13% HFC (based on the total length of our deployed network), is technologically superior to the broadband networks of the other operators, which are predominantly copper, according to MPA (Media Partners Asia).
Home broadband connections can offer speeds that are up to 100 times faster than those provided on the legacy copper networks of the other operators, according to MPA (Media Partners Asia).
Moreover, “we are building our nationwide backbone with ample capacity, with seven-way micro ducts each equipped with up to 144 fiber pairs, of which only two are anticipated to be utilized in the next five years. We believe that the additional capacity will accommodate future demand. In addition, we believe that our backbone is designed to be resilient, with a ring architecture and route diversity, allowing highly reliable connections. This enables us to provide a significant step-up in maximum speeds (up to 1 Gbps, 40 times more than that provided under our flagship entry-level fiber plan, FiberX 1500), while maintaining high connection reliability and without requiring a costly retrofit as we scale our network.”
MetroWorks
MetroWorks is core to Converge’s ability to build a proprietary end-to-end fiber infrastructure that differentiates us from other industry players, according to MPA (Media Partners Asia).
As a wholly-owned subsidiary of Converge, MetroWorks is fully dedicated to serving Converge as its sole customer.
Through MetroWorks, Converge retains full control over its end-to- end strategic network design and rollout planning functions.
“We believe MetroWorks is core to our ability to execute our network rollout at a faster pace and a lower cost than the industry, as well as to maintain strong quality control.”
Converge works directly with more than 100 full turnkey contractors (“FTK”) and semi-turnkey contractors (“STK”) to carry out construction of our nationwide fiber network, and we manage these contractors in-house. We employ among the latest and most specialized network construction technologies, including horizontal directional drilling (“HDD”) technology (to install cable underground through a vertical hole instead of digging a trench on the surface) and micro-trenching (“MT”) technology (to install cable underground by creating a trench that is generally not more than two inches wide and not more than two feet deep, minimizing any disturbance on the surface).
“We ensure quality controls through direct regular preventive maintenance and inspection of our fiber network and optoelectronic equipment. Most other industry players, at the moment, outsource such activities to FTK contractors.”
Well-positioned to serve a fast-growing and underserved enterprise market
The Philippine enterprise fixed broadband market is significant and fast-growing, underpinned by substantial and rapidly-growing demand for fixed broadband from Philippine businesses, particularly those in the services sector, where internet access is critical.
The country has a thriving services industry that contributed 61% of GDP in 2019, including a world-class BPO sector that is the second largest in the world after India, according to MPA (Media Partners Asia). These industries are growing at a rapid pace and have higher broadband demand than other industries, according to MPA (Media Partners Asia). Furthermore, to keep pace with the rise of the digital economy in the country, Philippine businesses are requiring more of their employees to be connected, and are procuring higher-bandwidth, higher-quality and more holistic connectivity solutions for their employees, according to MPA (Media Partners Asia).
Yet, across all enterprise segments, this demand remains underserved, according to MPA (Media Partners Asia).
For larger businesses with complex connectivity needs including the requirements for redundancy and back-up support, there is an undersupply of reliable alternative providers, with many areas in the Philippines serviced by only one or two enterprise operators, according to MPA (Media Partners Asia).
For smaller businesses with simpler connectivity requirements but for whom connectivity represents a critical need, many are unserved with more than two thirds of all MSMEs (microbusinesses and SMEs) not having access to fixed broadband in 2019, according to MPA (Media Partners Asia).
As a result, there is significant market opportunity to address underserved demand and in doing so, catalyze market growth, and therefore, MPA (Media Partners Asia) expects that the enterprise market would double from $788 million in revenues in 2019 to $1.5 billion in revenues in 2025.
“We believe that our enterprise platform is strategically structured to address this underserved demand, and enables us to effectively acquire, service and grow with our customers over time.”
• Acquiring new customers: Converge has organized its Enterprise Business around four main target customer groups: Large Enterprises, Corporates, SMEs, and Wholesale, and have tailored its customer acquisition strategy to uniquely address the needs of each customer group.
For Large Enterprise, Corporate and Wholesale segments, “we have domain and industry experts serving as key account managers dedicated to our customers. For our SMEs segment, we take an approach more similar to our Residential Business by providing them a suite of value-for-money connectivity options, all of which provide high-speed and high reliability connections, and come with dedicated 24-hour service desk and support teams and certain guaranteed service level agreements (SLAs).”
• Serving our customers: According to the Enterprise Survey, Converge has been able to deliver in areas that matter most for customers: Converge rates the highest in product quality (in terms of ability to meet SLAs) as well as customer service (in terms of ability to provide high-touch, personalized and responsive customer service).
Meanwhile, Converge also rates on par with its enterprise peers in terms of value for money, which underscores the strength of its product offering and the quality of its customer service.
• Growing with our customers: Through key account managers, “we build and nurture our relationships with enterprise customers over the long-term, and leveraging on the strength of such relationships, we seek to grow with our customers as their footprint and their workforce expand, and as their operations become increasingly complex. According to the Enterprise Survey, respondents indicated that they are extremely likely to recommend us to their colleagues (scoring us 9.2 out of 10, on average), which we believe highlights our ability to grow our wallet-share with our enterprise customers over time.”
As a result of Converge’s core strengths and the implementation of our strategies, our Enterprise Business has outpaced overall market growth by 3.6 times between 2016 and the last 12 months ended June 30, 2020, according to MPA (Media Partners Asia), resulting in market share (in terms of enterprise revenues) increasing from 3.6% as of Dec. 31, 2016 to 7.6% in June 30, 2020, according to MPA (Media Partners Asia). In addition, we have successfully grown our enterprise subscriber base at a CAGR of 33% between 2016 and 2019, and has continued to grow by 18% year-on-year in the first half of 2020, while maintaining healthy ARPUs. “We believe that as we continue to gain market share in the enterprise market, our credibility and brand recognition would strengthen, which in turn will drive more business referrals.”
Industry-leading growth, profitability and capital efficiency, combined with a healthy balance sheet
Converge claims to have a consistent track record of delivering profitable growth:
• Residential Business has delivered market-leading subscriber and revenue growth since 2016. Our residential subscriptions have increased by 10 times since 2016, from 73,633 subscribers as of December 31, 2016 to 731,563 subscribers as of June 30, 2020. As of June 30, 2020, we are the largest provider of high-speed residential fixed broadband services by number of subscriptions with a 55% market share, according to MPA (Media Partners Asia). The ARPU of our Residential Business has remained steady since 2017 and revenues from our Residential Business increased from P861.5 million in 2016 to P6,353.9 million ($127.5 million) in 2019 and P4,977.7 million ($99.9 million) in the first half of 2020, representing a CAGR of 95% between 2016 and 2019 and a year-on-year growth rate of 84% in the first half of 2020.
• Our Enterprise Business has also delivered market-leading growth between 2016 and the last 12 months ended June 30, 2020, over which period, we have outpaced overall market growth by 3.6 times, making us the fastest-growing enterprise broadband operator in the Philippines, according to MPA (Media Partners Asia). Enterprise revenues increased from P1,032.5 million in 2016 to P2,785.6 million ($55.9 million) in 2019 and P1,512.2 million ($30.3 million) in the first half of 2020, representing a CAGR of 39% between 2016 and 2019 (3.3 times market growth, according to MPA (Media Partners Asia) and a year-on-year growth rate of 23% in the first half of 2020 (10.1 times market growth, according to MPA (Media Partners Asia), solidifying our position as a top-three enterprise broadband operator in the Philippines, according to MPA (Media Partners Asia).
• Taken together, Converge revenues increased at a CAGR of 69% from P1,894 million in 2016 to P9,139.5 million ($183.3 million) in 2019, and achieved a year-on-year growth of 65% from P3,942.3 million in the first half of 2019 to P6,489.9 million ($130.2 million) in the first half of 2020. Our EBITDA grew from P893.7 million in 2016 to P4,665.2 million ($93.6 million) in 2019, on a pro forma and as adjusted basis, and to P3,313.8 million ($66.5 million) in the first half of 2020. We had Pro Forma Adjusted EBITDA margin of 51% in 2019 and EBITDA margin of 51.1% in the first half of 2020, which compared favorably to the average of selected comparable peers of 44.5% and 43.2% over the corresponding periods, according to MPA (Media Partners Asia).
In addition, “we have adopted a disciplined approach in deploying capital to expand our fiber network, focusing on capital efficiency to ensure consistently high ROIC. Our network rollout plans are based on anticipated demand in each geographical area, so that we can reasonably ensure that sufficient service take-up will occur soon after an area is ready for service.”
“We also tightly coordinate our sales activities with network deployment, deploying sales teams to areas just as fiber is about to be deployed. We also monitor the penetration of our homes passed and their ‘vintage’ – the month or period in which ports are rolled out and are subsequently utilized to provide services to our customers, and we believe that we have continuously become more efficient at matching the deployment of ports against take-up demand from our customers.
As of June 30, 2020, we have achieved port take-up rates approaching approximately 60% within three years and approximately 40% within 12 months, which are four times faster than the industry, according to MPA (Media Partners Asia). Notably, our latest vintages are seeing significantly faster subscriber take-up. For example, our 2019 vintage ports were taken-up by subscribers at a pace that is nearly twice as fast as the pace for our 2016 vintage ports.”
“As a result, we had an ROIC of 19.7% and 18.6% for the year ended Dec. 31, 2019 and for the six months ended June 30, 2020 (annualized), respectively, which was higher than the average of selected comparable peers ROIC of 9.5% and 9%, for 2019 and the first half of 2020 (annualized), respectively, according to MPA (Media Partners Asia).”
Converge claims to maintain a strong and conservatively levered balance sheet, “which we believe provides significant financial flexibility for future growth. Our net debt (as measured by total debt less cash and cash equivalents) of P1,527.4 million ($30.6 million) as of June 30, 2020, representing a net leverage (measured by net debt as of June 30, 2020 divided by EBITDA for the last 12 months ended June 30, 2020) of approximately 0.3 times, provides us with sufficient headroom to execute our capital expenditure plans. As of June 30, 2020, we have also secured up to P32,753.0 ($657 million) of long-term credit commitments from leading local banks with attractive terms, which we believe fully funds our capital expenditure plans for the next several years.”
Strategies
Build a nationwide high-speed fixed broadband network to maintain our market leadership position in the Philippines
“We believe that there is significant potential in the Philippine high-speed fixed broadband market and we will continue to aggressively pursue this attractive “blue-ocean” market opportunity by securing a first mover’s advantage in unserved and underserved areas on a nationwide basis.”
• “We are currently expanding our domestic backbone from Luzon to Visayas and Mindanao and we expect to provide nationwide backbone infrastructure coverage by 2021. Once completed, we believe that our domestic backbone will be the newest, most extensive all-fiber broadband backbone in the Philippines, which we believe will be a significant strategic advantage. Other operators have been renewing and expanding their domestic backbone on an incremental basis, and have to operate and manage legacy infrastructure resulting in greater complexity and cost. We are building our backbone with a highly scalable architecture.”
• “We are building our backbone network with ample capacity, with seven-way micro ducts each equipped with up to 144 fiber pairs, of which only two-way micro ducts are anticipated to be utilized in the next five years. In addition, we believe that our backbone is designed to be resilient and is built with redundancy, with a ring architecture and route diversity, allowing highly reliable connections.”
From the backbone, “we will continue to expand our distribution and last-mile networks to existing and new coverage areas.” “We have adopted a two-pronged strategy— ‘Go Deep’ and ‘Go National’—for our distribution and last-mile expansion.”
• Under “our ‘Go Deep’ strategy, we plan to deepen our penetration in existing coverage areas where we believe there remains significant potential to increase our customer base. There are approximately 14.4 million households in Luzon (as of Dec. 31, 2018, according to MPA (Media Partners Asia), of which we have only covered 28% as of June 30, 2020. We will continue to employ a disciplined and data and demand-driven approach in deploying capital, with our network rollout and sales teams performing coordinated analyses to assess the level of underserved demand within our coverage areas, and to identify key sub-localities where coverage gaps still exist.”
• Under “our ‘Go National’ strategy, we plan to expand into new coverage areas across the Philippine archipelago, first expanding into Cebu City in Visayas and strategically entering into other new markets and submarkets in Visayas and Mindanao as we complete our nationwide backbone. In the same disciplined manner in which we expanded into new locations in the past, we will apply a similar approach as we continue to evaluate opportunities to enter into new cities by performing data-driven capital efficiency analyses with the objective of meeting our internal ROIC hurdles for any network expansion into new cities. There are hundreds of attractive pockets of demand in Visayas and Mindanao, including Cebu City and Davao City, which are the second and third largest cities in the Philippines respectively. These regions are generally not well-served or not covered by other operators, making them highly attractive markets for Converge to expand into. We expect most new subscribers in these areas to be first- time high-speed fixed broadband subscribers.”
“We also plan to continue expanding our international connectivity and secure additional proprietary access to international subsea-cable infrastructure linking the Philippines with key regional hub markets. In August 2020, we entered into an agreement with Telstra International Limited to purchase 5 Tbps of international bandwidth capacity, providing a 15-year IRU on two major intra-Asia networks for an attractive cost. This 5 Tbps of bandwidth capacity is equivalent to approximately seven times our current leased bandwidth capacity, and has been priced at an aggregate unit cost that is meaningfully lower compared to our average contracted lease costs at present. This IRU is subject to certain conditions. We believe that the strategic position of the Philippines, which is centrally located between the key high-bandwidth markets of China, Southeast Asia, North Asia and the U.S., makes the archipelago an ideal gateway for subsea cable projects in the Asia-Pacific region.”
Drive strong network take-up by leveraging a proven customer acquisition strategy
“We plan to continue employing proven and effective customer acquisition strategies as we continue to expand our network on a nationwide basis in order to further grow our customer and revenue base, while maintaining strong profitability and ROIC.”
• Across “our existing network coverage areas, our sales team will continue to focus on executing our Go Deep strategy. In particular, our sales efforts will continue to be primarily focused on and targeted at driving further subscriber take-up of our inventory of available ports that are already built and ready for service. As of June 30, 2020, we have a stock of approximately 1.7 million of such available ports, which if fully taken-up by subscribers, would yield close to an additional 1.7 million customers without the need for further capital expenditure deployment. To that end, we have set-up a dedicated “SWAT task- force,” reporting directly to our Head of Residential Business and our Chief Strategy Officer, which is exclusively focused on driving utilization across our existing network, especially our older-vintage roll- outs. These efforts are supplemented by our marketing team who are continuing to execute bespoke marketing initiatives, such as on-the-ground marketing campaigns, targeted at specific submarkets or localities where there is a high concentration of available ports. We believe that any effort to drive subscriber take-up of available ports would be highly accretive to our ROIC.”
• As “we expand our network coverage into new areas, our sales team will continue to focus on executing our Go National strategy. We are continuing efforts to expand our sales and services organization beyond Luzon to Visayas and Mindanao in order to continue to acquire customers on a nationwide basis. Our customer acquisition teams are typically deployed months ahead of any new supply of port inventory becoming available in a new area—there, they will engage in pre-marketing or early-stage marketing to ensure that the new ports are taken-up rapidly soon after they become operational. Historically, we have been able to acquire customers with minimal marketing expense. Going forward, we will continue to be selective and efficient in our marketing spend as we work towards driving rapid take-up across new areas. We plan to execute bespoke on-the-ground branding efforts (e.g., out-of-home advertising in new coverage areas), supplemented with targeted digital marketing campaigns (e.g., by leveraging local social media influencers)—with the dual-goal of building brand awareness and driving word-of-mouth advocacy across new coverage areas.”
Across both existing and new coverage areas, “we intend to continue to leverage, and further refine our differentiated and multi-pronged approach to customer acquisition, which have proved to be highly effective to date.”
• In urban centers, “we will continue to focus on utilizing our tele-digital sales channels (e.g., our website, online portal, app and social media pages etc.) to drive new subscriptions, given their lower customer acquisition cost compared to other sales channels. As we continue our digital transformation, we aim to make subscribing even easier and more seamless for our customers, for example, by allowing customers to complete the end-to-end sign-up, onboarding and activation process online. We have seen a surge in online sign-ups since March 2020, in tandem with a broader, market-wide shift towards e-commerce, which trend has been significantly accelerated since the onset of COVID-19. Between the months of January to June 2020, the nationwide sales contribution from our tele-digital sales platform rose from 23.5% to 35.1%. We believe that leveraging our in-house sales team would also allow us to continue to take a more personalized, differentiated and targeted approach in customer acquisition, allowing us to continue to attract high-quality customers at lower customer acquisition costs.”
• In more regional areas, “we will continue to leverage on our third-party sales channels, as well as our business centers, to drive new subscriptions. We anticipate that we will be able to attract a steady supply of sales agents (who generally work with us on an exclusive basis) as we believe that our product offering and subscriber growth give them the opportunity and incentive to complete larger volumes of sales and earn a commensurate amount of service fees. We will continue to be selective in establishing partnerships with sales agencies by implementing stringent vetting processes and will continue to focus on maintaining strong relationships with sales agencies who deliver strong performance. Our third-party sales force will continue to be supplemented by the business centers that we operate and manage in- house. These business centers serve as “one-stop shops”, where in addition to subscribing to our broadband services, customers can pay their bills, request for additional services or obtain other technical assistance. These business centers tend to be popular among customers living in suburban areas or smaller cities who continue to prefer to transact in person.”
• Across all locations, “we also intend to capitalize on our growing reputation and brand recognition to further drive word-of-mouth advocacy. In particular, we will focus on acquiring subscribers under our customer referral program. According to the Residential Survey, a majority of our existing customers heard about us for the first time through word-of-mouth advocacy, and we believe that there is opportunity to further increase referrals made under our “Member-Get-Member” program. This is one of our lowest cost-acquisition channels and can be an effective strategy to promote a positive feedback loop to drive customer engagement and loyalty. Historically, we are have been uniquely able to attract new customers through word-of-mouth advocacy, with respondents in the Residential Survey rating us highest in terms of advocacy with a +83 NPS score, and with 72% of respondents indicating that they will switch to us once our services become available at their locations. We believe that we can further leverage the strength of our reputation and capitalize on our customers’ referrals and recommendations to drive subscriber additions in a cost-efficient way.”
“We describe below two examples of our strategy to drive take-up”:
• Pampanga: One of “our early successes in achieving rapid subscriber take-up was in Pampanga province in Central Luzon. Pampanga, our Founders’ hometown and our first headquarters, is primarily engaged in agriculture and is less affluent than Metro Manila, with approximately 600,000 households and average household income of approximately $548 in 2018, according to data from the Philippine Statistics Authority (“PSA data”). In 2017, we deployed approximately 20,000 ports and through the concerted efforts of our sales and marketing teams, we achieved 50% port utilization within the first 12 months of deployment. We believe that we can replicate this quick take-up leveraging on the customer acquisition strategies we have developed over the years.
• Bicol Region: “We have been able to achieve fast take-up rates even in among the most impoverished regions in the Philippines, such as in the Bicol Region, which according to PSA data, has the second lowest GDP per capita in the country. Within the Bicol Region, we recently rolled-out our fiber in the municipality of Daet, which, according to PSA data, has more than 20% of the population living below the poverty line. We deployed 8,000 fiber ports in Daet in the first half of 2019, on which we achieved a utilization ratio of 50% within the first eight months of rollout. We believe that we will be able to replicate or even surpass this rapid pace of take-up as we rollout in areas that are more affluent than our current coverage areas.”
Drive market-leading customer retention rates and residential ARPUs through improved product offerings and customer service
“We aim to maximize the revenue from our existing residential customer base and to improve overall ARPU through upselling and cross-selling efforts.”
• Migration to higher-ARPU packages: “We intend to continue to upsell higher speed broadband services to existing customers. We believe that there is a significant opportunity to move subscribers to higher speed packages, as approximately 90% of our FTTH residential subscribers as of June 30, 2020 are currently subscribed to our entry-level FTTH plan, FiberX 1500. We also intend to continue to migrate our existing HFC customers onto FTTH packages, with the latter being higher ARPU.”
• New product launches: “We will continue to seek to improve our product and service offering in anticipation of increasing customer expectations for faster, more reliable connections. We have been among the first to bring several key new products to the market, and we intend to continue to innovate”
• Differentiated pricing strategies: “We will continue to target different subscriber segments with differentiated pricing strategies. For example, we plan to introduce a “Time of Day” product that allows subscribers to modify their bandwidth (and corresponding price) to better match their actual usage patterns. As such, subscribers who require more bandwidth on certain times (e.g., during business hours under WFH arrangements) can upgrade their service for those particular times. We believe that in addition to enhancing ARPU, this initiative will increase customer satisfaction and loyalty.”
“We intend to continue to implement initiatives aimed at maintaining and improving customer service. In particular, we intend to intensify our digital transformation efforts, including efforts on”:
• Customer Onboarding: “We intend to further digitize our customer onboarding process and to further promote the use of our online self-service portals, enabling more customers to complete the end-to-end customer onboarding process tele-digitally.”
• Bill Payment: “We intend to further expand our payment options to include new digital payment channels to offer a frictionless experience to digitally-savvy customers.”
• After-sales Services: “We recently launched an after-sales mobile application, Converge Xperience, to provide customers with a convenient way to manage their accounts, ask for help, order new circuits or add-ons, pay their bills and access our knowledge base.”
• Customer Engagement: “We have commenced efforts to improve our digital and social media presence and engagement. We plan to actively engage with our subscribers on various social media channels and online forums.”
Further penetrate the enterprise market
Converge believes the enterprise market represents a significant growth opportunity for us and “we plan to further penetrate the enterprise market by continuing to ‘(i) leverage on our nationwide fiber network to provide expanded coverage for our enterprise clients; (ii) drive new enterprise subscriptions through our proven and differentiated sales and solutioning strategies; (iii) build customer satisfaction and loyalty by nurturing a long-term, symbiotic relationship with each enterprise client; and (iv) increase our share of wallet with our enterprise customers over time as their businesses grow and prosper, and their connectivity needs increase.’”
In tandem with its nationwide network rollout, “we are continuing to expand our network coverage for our Enterprise Business such that our services become accessible to an increasing pool of potential enterprise customers.”
According to Converge:
According to the Enterprise Survey, 88% of non-Converge enterprise respondents have indicated that their businesses would subscribe to our enterprise services if “we extended our network coverage to the locations where their businesses operate.”
To that end, “we are continuing to undertake a systematic effort to install our fiber or ‘fiberize’ the major commercial buildings key business hubs across the Philippines, in cooperation with some of the largest commercial real estate operators in the country.”
As of June 30, 2020, “we have signed agreements that allow us to fiberize hundreds of commercial buildings in Metro Manila, where the nation’s capital is located, where the majority of our Large Enterprise clients are headquartered. We also intend to collaborate with various strategic parties such as major commercial real estate developers and building owners to jointly roll out last-mile networks into their commercial properties as those properties are being developed.”
With an expanded network coverage, “we plan to grow our enterprise customer base by continuing to execute on our proven strategies in marketing, sales and solutioning, not only in urban metropolitan centers but also in other emerging business centers across the Philippines. We plan to continue to employ differentiated sales strategies tailored to different classes of Enterprise Business customers.”
For “our Large Enterprise segment, we plan to continue to strengthen existing and develop new industry verticals, prioritized based on market potential, within our sales organization.”
For “our Corporate and SME segment, we will continue to expand our geographically- focused sales organization, to be able to quickly attend to customers’ requirements and employ bespoke customer outreach programs as well as local sales blitzes at a district or even building level.”
“We will continue to focus on building long-term, symbiotic relationships with our customers in order to build customer satisfaction and loyalty. Historically, we have been able to strengthen our partnerships with our enterprise clients by delivering in areas that matter most to them: in the Enterprise Survey, we were rated highest in product quality (in terms of our ability to meet SLAs) and customer service (in terms of our ability to provide high-touch, personalized and responsive customer service). Going forward, we intend to further leverage the use of domain and industry experts as key account managers to serve as the single point of contact for our enterprise clients. Additionally, we plan to “consumerize” our Enterprise Business by streamlining the end-to-end enterprise customer journey, making each customer touch-point more seamless and straightforward. This will involve investing in technology to enable self-service processes for enterprise customers and will require automation and greater operational coordination to reduce variability in business processes.”