VALUATION

INTRODUCTION
Converge ICT Solutions Inc. is the fastest-growing fiber internet and other
digital consumer-centric services provider in the country today. Products and
services offer to run through the first pure end-to-end fiber internet network in
the country. We are a premier provider of customer-focused
telecommunications and ICT solutions dedicated to equip, enable, and
empower our clients. We are also the largest high-speed fixed broadband
operator in the Philippines (with subscriptions of 55% market share as of June
30, 2020), the fastest-growing fixed broadband operator (with our residential
business capturing 56.6% market share of new subscriptions from January 1,
2018, to June 30, 2020), and our enterprise business growing at 3.6 times the
market between 2016 and the last 12 months ended June 30, 2020. We
design our broadband packages to address our customers’ priorities for
faster, more reliable internet at affordable prices. We believe we are the first
in the market to provide unlimited data packages in 2016, and among the first
to add-on bandwidth "10 Mbps for ₱99" package in 2018. 

INDUSTRY OVERVIEW

PHILIPPINE RESIDENTIAL BROADBAND MARKET

Fixed broadband penetration in the Philippines remains relatively low mainly

due to a limited number of fixed lines and the dominance of the mobile
platform despite declining prices in both fixed and mobile broadband, this type
of service is still not affordable for the majority of the population. Operators
have been pushing hard with competitive low entry-level packages, but the
market continues to struggle (Wood, 2019). As of December 31, 2019, Fixed
broadband and fiber penetration in the Philippines is 14% and 7%,
respectively, due to the lack of access to high-quality fixed broadband
networks. Consequently, the Philippines has one of the lowest internet speeds
and reliability (high latency and jitter) when compared to other ASEAN
markets.

KEY RESIDENTIAL BROADBAND PLAYERS IN THE PHILIPPINES 

COVID-19 significantly increased the demand for fixed broadband and the
driving force for connectivity requirements and expected to be viewed as a
utility as companies have work-from-home policies, schools and universities
have online classes under the new normal. An average household needs an
estimated 480GB internet data per month (According to MPA) to function
accordingly, and Converge can sustain such through high-speed broadband
with a minimum required speed of 25Mbps, which what our entry-level fiber
plan provides. Both the data usage and broadband speed required is
significantly higher than the services bundled in most offered by fixed wireless
providers currently.

Converge is the only major pure-play fixed broadband operator in the

Philippines, being the only telecommunications operator in the country that is
exclusively on the fixed broadband market. Other major telecommunications
operators derive a majority of their revenue from their mobile business.
Converge’s network is younger (~1.0 years old) and constitutes 100% high-
speed technology (fiber and HFC) compared to others. It is developed to
address future demand more quickly than industry, without the need for costly
retrofit or upgrades. According to Residential Survey, Converge is the
preferred residential fixed broadband operator as customers rated the
company as being highly satisfied, highly loyal, and had strong advocacy. 

COMPETITIVE ANALYSIS

COMPETITORS

PLDT: It has the most extensive fixed-line network among the country’s
operators and the largest fixed broadband subscriber base. It has the second-
largest mobile subscriber base (70.2 million subscribers as of June 2020 and
73.1 million subscribers as of December 2019) and owns four of the country’s
nine international submarine cable landing stations. Fixed broadband
contributed 33% of total revenue in 2019, compared to 55% contributed by
mobile, and has 2.1 million fixed wired broadband subscribers and 0.5 million
fixed wireless broadband subscribers (as of June 2020). 
Globe Telecom: It is the Philippines’ largest mobile operator (80.2 million
mobile subscribers as of June 2020 and 94.2 million mobile subscribers as of
December 2019). Mobile revenue contributed to 75% while home broadband
contributed to 15% of Globe’s total revenue in 2019. The company’s home
broadband business (comprises fixed wired and wireless services) had 2.9
million subscribers (as of June 2020), and the broadband strategy is focused
on fixed wireless, where they currently have 2.2 million fixed wireless
subscribers. 
SkyCable: It is the cable broadband subsidiary of ABS-CBN Corporation, the
Philippines’ largest media conglomerate. SkyCable was among the first cable
operators in the Philippines to upgrade its analog network to digital in a bid to
bundle cable TV and broadband services. SkyCable predominantly operates
on an HFC network and only began upgrading its network to provide Fiber
(FTTx) services in 2018. 

FINANCIAL ASPECT

We have had industry-leading growth, margins, and ROIC metrics. Converge

revenues grew at 69% (CAGR) between 2016 and 2019 and at a year-on-
year growth of 65% in the first half of 2020. The adjusted EBITDA margin was
51.0% in 2019 and 51.1% in the first half of 2020, and the return on invested
capital (ROIC) was 19.7% in 2019 and 18.6% in the first half of 2020
(annualized). For the year ended December 31, 2019, we reported ₱9,139.5
million (U.S.$183.3 million) of revenues and ₱4,665.2 million (U.S.$93.6
million) EBITDA on a pro forma and as adjusted basis. For the six months
ended June 30, 2020, our revenues were ₱6,489.9 million (U.S.$130.2
million) with an EBITDA of ₱3,313.8 million (U.S.$66.5 million). We also
maintain a secure and conservatively levered balance sheet, which we
believe provides significant financial flexibility for future growth. As of June 30,
2020, we have also secured up to ₱32,753.0 (U.S.$657.0 million) of long-term
credit commitments from leading Philippine banks that we believe are on
attractive terms, including at an average all-in interest rate of approximately
5%. 

STRENGTHS
 Converge’s fiber network enables the business to offer significantly
faster access speeds compared to the industry that is largely utilizing
legacy copper technology. The home broadband connections on fiber
networks are approximately 2.2 times faster and roughly 2.3 times
more reliable than other providers.
 Converge has gained a strong foothold in the enterprise market by
being a credible provider of network redundancy. Through its agility,
flexibility, and superior customer service, it aims to increase its share of
the wallet of enterprise customers over time.
 Converge entry-level plan offers a speed of 25 Mbps for PHP 1,500 per
month unlimited data plans that aim to address customers' priorities for
faster, more reliable internet at affordable prices.

WEAKNESSES
  The business coverage areas are limited. Currently, the service area
of Converge is only in Metro Manila and its immediate neighboring
cities such as Cavite, Rizal, Pampanga, Laguna, Tarlac, and
Zambales, with the farthest from Baguio up north and Batangas down
south.


OPPORTUNITIES
 Fiber broadband delivers significantly higher transmission capacity,
and minimal capital expenditure is required to upgrade fiber capacity,
making it more scalable when compared to 5G fixed wireless access
(FWA). Broadband services through mobile networks face several
challenges, including the issue of contention, whereby data speeds
suffer as the number of users sharing the network increases. 
 Due to COVID-19, demand for internet connectivity has increased and
may deem as part of the necessity accelerating the adoption of fixed
broadband. 
 Digital consumptions are now being a trend. Entertainment (CDs to
Netflix or Youtube), online games (Call of Duty, Mobile Legends), etc.,
results in the increasing importance of fixed broadband services and
the decreasing of traditional bundling of cable TV with fixed broadband
services.

THREATS
  The Philippine fixed broadband market will continue to benefit from
strong secular growth tailwinds that have created a multi-year runway
for multiple operators (not only Converge but also other operators) to
thrive and grow for the medium to long term.
 Converge needs to adapt to rapid technological changes thus needs
constant strategic planning.
PORTERS MODEL

INDUSTRY RIVALRIES - Strong Force

 The number of competitors in the industry in which Converge ICT
operates is very few. Most of these are very known to the market,
which means that every action of the firms in the industry will be
noticeable. This makes the rivalry among existing firms a weaker force
within the industry.
 Very few competitors have a large market share. This means that to
dominate the market, stepping up their game is necessary, and it will
make the competition obvious. This makes the rivalry among existing
firms a stronger force within the industry.
 The firms where Converge ICT operates have different strategies. This
results in a competition of what is the best strategy to capture more
buyers and dominate the market and makes the rivalry among existing
firms a strong force within the industry.
 Effective advertising is needed to make their product known. Converge
ICT, and its competitors put a lot of money into their advertisements to
reach more potential customers and have a larger market that means a
strong rivalry force within the industry.

NEW ENTRANTS - Weak Force

 The economies of scale are difficult to achieve in the industry in which
Converge ICT operates, which makes it easier for those producing
large capacities to have a cost advantage. It also makes production
costlier for new entrants. This makes the threats of new entrants a
weaker force.
 The firms in the industry sell differentiated products than standardized
products. The customers of the industry look for differences in these
products and compare them all the time. There is a strong emphasis on
advertising and customer services as well and makes the threat of new
entrants a weak force within this industry.
 The capital requirements within the industry are high, therefore, making
it difficult for new entrants to set up businesses as high expenditures
need to incur. Capital expenditure is also high because of high
Research and Development costs. All of these factors make the threat
of new entrants a weaker force within this industry.
 The government policies within the industry require strict licensing and
legal requirements to be fulfilled before a company can start selling.
Sometimes, it also takes too long for the process of registration to
finish, which makes it difficult for new entrants to join the industry,
therefore, making the threat of new entrants a weak force.

SUBSTITUTES AND COMPLIMENTS - Weak Force

  There are very few substitutes available for the products that are
produced in the industry in which Converge ICT operates. It is proven
that most of their customers are happy with their product and will less
 likely change to available substitutes making the threat of substitution a
weak force.
 The very few substitutes available are of high quality but are way more
expensive or less expensive but of low quality. Comparatively,
Converge ICT sells at a lower price than substitutes, with adequate
quality. In other words, buyers are less likely to switch to substitute
products. This means that the threat of substitute products is weak
within the industry.

SUPPLIER POWER - Weak Force

 The number of suppliers in which Converge ICT operates is way more
than the buyers. This means that the suppliers have less control over
prices because they need to agree to the deal of the buyers and make
the bargaining power of suppliers a weak force.
 The products that these suppliers provide are standardized, less
differentiated, and have low switching costs. This makes it easier for
buyers like PLDT Inc to switch suppliers and makes the bargaining
power of suppliers a weaker force.
 The industry in which Converge ICT operates has a significant impact
on its suppliers' businesses because the industry’s profits are
associated with that of the suppliers. These suppliers, therefore, have
to provide reasonable pricing. This makes the bargaining power of
suppliers a weaker force within the industry.

BUYER POWER - Weak Force

 Compared to the number of selling firms, the buyers in the industry
where Converge ICT operates has a lot of numbers which means that
the buyers have a few firms to choose from, and therefore, do not have
much control over prices. This makes the bargaining power of buyers a
weaker force within the industry.
 The quality of the products is essential to the buyers, and these buyers
make frequent purchases. This means that the buyers in the industry
are less price-sensitive and the bargaining power of buyers a weaker
force within the industry.