Globe allots $790 million for modernization

MANILA, Philippines - Ayala-owned Globe Telecom is undertaking a $790-million mobile network modernization and IT transformation program, its biggest and most significant investment in two decades, over the next two to three years.

This will result in Globe’s total capex increasing from $450 million this year to $800 million next year, and then back to over $500 million in the succeeding years.

Globe also announced that it will change its dividend pay-out policy to be at 75 percent to 90 percent of prior year’s core net income instead of reported net income. This will ensure that dividends will remain sustainable and yields competitive. The dividend policy change will take effect with the 2012 dividends, based on 2011 core net income.

About $500 million of the $700 million for mobile network modernization will be spent in 2012-2013. To finance this, Globe will raise additional debts amounting to $590 million in the next two years.

“We are in talks with banks, other financial institutions. Vendor-arranged financing is also being explored. The current plan is to raise $340 million from the local and $250 million from the offshore market,” Globe chief finance officer Albert de Larrazabal explained.

He pointed out that the program will generate $180 million in opex savings and about $210 million in capex savings over the next five years in addition to the expected revenue uplift.

But a significant decline in reported net income is expected to be realized in the next two to three years given the acceleration in depreciation of assets worth $388 million.

The massive network upgrade, which will begin rollout in December 2011, is aimed at significantly improving network quality and customer experience, increase capacity, drive down costs, as well as prepare the network to meet the needs of customers, De Larrazabal said..

Given the growing demand for bandwidth-heavy services, the modernization program will bring significant improvements to network capacity leading to improved reliability, ease of access and pervasive coverage, he added.

Globe president and CEO Ernest Cu said that this transformation effort will enable improved revenue growth prospects, savings in capital spend and operating expenses, as well as efficiencies resulting from synergies with a dedicated vendor partner - Huawei of China.

The program will entail a massive replanning of Globe’s entire network so that with a modernized network, customers can expect reduced incidence of dropped calls, on-time delivery of text messages, easier call connections, improved mobile browsing, among others, Cu added.

He revealed that the problems being faced by Globe’s network is largely due to the fact that while it is designed more for text messaging, the traffic profile has now shifted to voice and data, resulting in network congestion.

Cu said that upgrading the network will also prepare the company for the expected growth in voice and data traffic. Over the next five years, Globe is expecting a three- to 10-fold increase in voice and data throughput.

He said this modernization program will provide the capabilities to accommodate higher volumes of voice, SMS and data traffic resulting from a growing subscriber base and shifting user preferences.

Globe is at the same time, initiating a $90- million IT transformation project to create a streamlined and integrated information environment, in response to changing market and business demands. The system transformation effort is a comprehensive re-engineering of Globe’s IT systems over the next two years. This will result in convergent billings and more innovative product development, faster response to customer queries and service requests by stores and call centers.

Globe has awarded the network modernization to Huawei given its technical expertise and strong track record of success. For the IT systems upgrade, Globe has selected Amdocs as technology partner, given its extensive experience in business process transformation and access to leading edge technology. Globe expects to complete the definitive agreement with Amdocs by the first quarter of 2012.

The network and IT transformation programs are expected to generate savings in operating expenses and capital expenditures totaling to $180 million and $210 million, respectively, over the next five years, in addition to the revenue uplift driven by the network quality improvements and increased capacity. Since it will involve replacing network equipment and IT systems, Globe expects that assets with net book values estimated at $388 million will need to be decommissioned after modernization. This estimate is before any possible proceeds from resale and is still subject to actual site validation.

De Larrazabal explained that the net book values of these non-useable assets will impact Globe’s profitability through an acceleration of depreciation over its remaining useful life until such time when the new, replacement capex is ready for service. Owing to its exceptional and non-recurring nature, this accelerated depreciation will not be considered in the determination of core net income. It will likewise not compromise cash flows nor Globe’s ability to declare dividends, he added.

Meanwhile, Cu said that the project will also help lower the overall cost of delivering wireless services to Globe customers with the introduction of newer and more power-efficient equipment. Globe will also increase the use of ‘green’ solutions to be more environmentally responsible.

Globe expects to generate opex savings of about $170 million over the next five years from reduced power usage, efficiencies from increased fiber optic use, and lower maintenance costs; and $200 million in capex when compared to an incremental build effort, stemming from the economies of scale of this modernization initiative with a single vendor.

He added that the network modernization will give Globe the capability to upgrade to more advanced technologies such as LTE (long-term evolution), and shift to more flexible radio systems and an all-IP architecture. The use of fiber optics will be raised by 50 percent which will significantly increase capacity.

As for the IT transformation program, over the next five years, Globe expects to generate opex savings of about $10 million from lower hardware and software maintenance costs, and another $10 million from lower capex as a result of this initiative.

“Our network and IT modernization programs are key initiatives in transforming Globe into a customer-centric company, differentiated by superior customer experience. As we execute our programs, we will aim for a seamless transition in order to extend our gains and strengthen our position in this intensely competitive market,” Cu emphasized.